SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____ to ____

Commission file number 1-4717

KANSAS CITY SOUTHERN INDUSTRIES, INC.
(Exact name of Company as specified in its charter)

Delaware 44-0663509
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

114 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)

Company's telephone number, including area code (816) 983-1303

Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
- -------------------------------------- ----------------
Preferred Stock, Par Value $25 Per
Share, 4%, Noncumulative New York Stock Exchange

Common Stock, $.01 Per Share Par Value New York Stock Exchange

Securities registered pursuant to Section 12 (g) of the Act: None
----

Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past
90 days. YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Company Stock. The Company's common stock is listed on the New York Stock
Exchange under the symbol "KSU." As of March 31, 2000, 111,399,354 shares of
common stock and 242,170 shares of voting preferred stock were outstanding. On
such date, the aggregate market value of the voting and non-voting common and
preferred stock held by non-affiliates of the Company was $9,577,014,534 (amount
computed based on closing prices of preferred and common stock on New York Stock
Exchange).

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference into
Part of the Form 10-K as indicated:

Document Part of Form 10-K into
which incorporated
- -------------------------------------------------- ---------------------------

Company's Definitive Proxy Statement for the 2000 Parts I, III
Annual Meeting of Stockholders, which will be filed
no later than 120 days after December 31, 1999

Page 12

KANSAS CITY SOUTHERN INDUSTRIES, INC.
1999 FORM 10-K ANNUAL REPORT

Table of Contents

Page

PART I

Item 1. Business............................................................ 1
Item 2. Properties.......................................................... 9
Item 3. Legal Proceedings................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................. 13
Executive Officers of the Company................................... 13

PART II

Item 5. Market for the Company's Common Stock and
Related Stockholder Matters....................................... 15
Item 6. Selected Financial Data............................................. 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 17
Item 7(A)Quantitative and Qualitative Disclosures About Market Risk.......... 72
Item 8. Financial Statements and Supplementary Data......................... 76
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...............................126

PART III

Item 10. Directors and Executive Officers of the Company.....................127
Item 11. Executive Compensation..............................................127
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................................127
Item 13. Certain Relationships and Related Transactions......................127

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................................128
Signatures..........................................................135

Part I

Item 1. Business

(a) GENERAL DEVELOPMENT OF COMPANY BUSINESS

The information set forth in response to Item 101 of Regulation S-K under Part
II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, of this Form 10-K is incorporated by reference in partial
response to this Item 1.

(b) INDUSTRY SEGMENT FINANCIAL INFORMATION

Kansas City Southern Industries, Inc. ("Company" or "KCSI") reports its
financial information in two business segments: Transportation and Financial
Services.

Transportation. Kansas City Southern Lines, Inc. ("KCSL"), a wholly-owned
subsidiary of the Company, is the holding company for Transportation segment
subsidiaries and affiliates. This segment includes, among others:

o The Kansas City Southern Railway Company ("KCSR"), a wholly-owned subsidiary;
o Gateway Western Railway Company ("Gateway Western"), a wholly-owned
subsidiary;
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), a 37%
owned affiliate, which owns 80% of the common stock of TFM, S.A. de C.V.
("TFM");
o Mexrail, Inc. ("Mexrail"), a 49% owned affiliate, which wholly owns the Texas
Mexican Railway Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned affiliate;
and
o Panama Canal Railway Company ("PCRC"), a 50% owned affiliate.

The businesses that comprise the Transportation segment operate a railroad
system that provides shippers with rail freight service in key commercial and
industrial markets of the United States and Mexico.

Financial Services. Stilwell Financial, Inc. ("Stilwell" - formerly FAM
Holdings, Inc.), a wholly-owned subsidiary of the Company, is the holding
company for subsidiaries and affiliates comprising the Financial Services
segment. The primary entities comprising the Financial Services segment are:

o Janus Capital Corporation ("Janus"), an approximate 82% owned subsidiary;
o Stilwell Management, Inc. ("SMI"), a wholly-owned subsidiary of Stilwell;
o Berger LLC ("Berger"), of which SMI owns 100% of the Berger preferred limited
liability company interests and approximately 86% of the Berger regular
limited liability company interests;
o Nelson Money Managers Plc ("Nelson"), an 80% owned subsidiary; and
o DST Systems Inc. ("DST"), an approximate 32% equity investment owned by SMI.

The businesses that comprise the Financial Services segment offer a variety of
asset management and related financial services to registered investment
companies, retail investors, institutions and individuals.

Separation of Business Segments

The Company intends to separate the Transportation and Financial Services
segments through a pro rata distribution of Stilwell common stock to KCSI
stockholders (the "Separation"). On July 9, 1999, the Company received a tax
ruling from the Internal Revenue Service ("IRS") to the effect that for United
States federal income tax purposes, the planned Separation qualifies as a
tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as
amended. Additionally, in February 2000, the Company received a favorable
supplementary tax ruling from the IRS to the effect that the assumption of $125
million of KCSI debt by Stilwell (in connection with the Company's
re-capitalization discussed below) would have no effect on the previously issued
tax ruling.

In contemplation of the Separation, the Company's stockholders approved a
one-for-two reverse stock split at a special stockholders' meeting held on July
15, 1998. The Company does not intend to effect this reverse stock split until
the Separation is completed. Additionally, effective July 1, 1999, KCSI
transferred to Stilwell KCSI's ownership interests in Janus, Berger, Nelson, DST
and certain other financial services-related assets and Stilwell assumed all of
KCSI's liabilities associated with the assets transferred. Also, as part of the
Separation, the Company re-capitalized its debt structure on January 11, 2000 as
further described under Part II Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, of this Form 10-K.

The information set forth in response to Item 101 of Regulation S-K relative to
financial information by industry segment for the three years ended December 31,
1999 under Part II Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, of this Form 10-K, and Item 8, Financial
Statements and Supplementary Data, at Note 14 - Industry Segments of this Form
10-K, is incorporated by reference in partial response to this Item 1.

Transportation

KCSL, along with its principal subsidiaries and joint ventures, owns and
operates a rail network comprised of approximately 6,000 miles of main and
branch lines that link key commercial and industrial markets in the United
States and Mexico. Together with its strategic alliance with the Canadian
National Railway Company ("CN") and Illinois Central Corporation ("IC")
(collectively "CN/IC") and other marketing agreements, KCSL's reach has been
expanded to comprise a contiguous rail network of approximately 25,000 miles of
main and branch lines connecting Canada, the United States and Mexico. The
Company believes that the economic growth within the United States, Mexico and
Canada is developing along a north/south axis and becoming more interconnected
and interdependent as a result of the implementation of the North American Free
Trade Agreement ("NAFTA"). In order to capitalize on the growing trade resulting
from NAFTA, KCSL has transformed itself from a regional rail carrier into an
extensive North American transportation network. During the mid-1990's, while
other railroad competitors concentrated on enlarging their share of the
east/west transcontinental traffic in the United States, KCSL aggressively
pursued acquisitions, joint ventures, strategic alliances and marketing
partnerships with other railroads to achieve its goal of creating the "NAFTA
Railway."

KCSL's rail network connects shippers in the midwestern and eastern United
States and Canada, including shippers utilizing Chicago and Kansas City -- the
two largest rail centers in the United

States -- with the largest industrial centers of Canada and Mexico, including
Toronto, Edmonton, Mexico City and Monterrey. KCSL's principal subsidiary, KCSR,
which traces its origins to 1887, operates a Class I Common Carrier railroad
system in the United States, from the Midwest to the Gulf of Mexico and on an
East-West axis from Meridian, Mississippi, to Dallas, Texas. KCSR offers the
shortest route between Kansas City and major port cities along the Gulf of
Mexico in Louisiana, Mississippi and Texas, with a customer base that includes
electric generating utilities and a wide range of companies in the chemical and
petroleum industries, agricultural and mineral industries, paper and forest
product industries, automotive product and intermodal industries, among others.
KCSR, in cooperation with Norfolk Southern Corporation ("Norfolk Southern"),
operates the most direct rail route, referred to as the "Meridian Speedway,"
linking the Atlanta, Georgia and Dallas, Texas gateways for traffic moving
between the rapidly-growing southeast and southwest regions of the United
States. The "Meridian Speedway" also provides eastern shippers and other U.S.
and Canadian railroads with an efficient connection to Mexican markets.

In addition to KCSR, KCSL's railroad system includes Gateway Western, a regional
common carrier system, which links Kansas City with East St. Louis and
Springfield, Illinois and provides key interchanges with the majority of other
Class I railroads. Like KCSR, Gateway Western serves customers in a wide range
of industries.

KCSR and Gateway Western revenues and net income are dependent on providing
reliable service to customers at competitive rates, the general economic
conditions in the geographic region served and the ability to effectively
compete against alternative modes of surface transportation, such as
over-the-road truck transportation. The ability of KCSR and Gateway Western to
construct and maintain the roadway in order to provide safe and efficient
transportation service is important to the ongoing viability as a rail carrier.
Additionally, cost containment is important in maintaining a competitive market
position, particularly with respect to employee costs as approximately 84% of
KCSR and Gateway Western combined employees are covered under various collective
bargaining agreements.

The Transportation segment also includes strategic joint venture interests in
Grupo TFM and Mexrail, which provide direct access to Mexico. Through these
joint ventures, which are operated in partnership with Transportacion Maritima
Mexicana, S.A. de C.V., KCSL has established a prominent position in the growing
Mexican market. TFM's route network provides the shortest connection to the
major industrial and population areas of Mexico from midwestern and eastern
points in the United States. TFM, which was privatized by the Mexican government
in June 1997, serves a majority of the Mexican states and Mexico City, which
represent a majority of the country's population and estimated gross domestic
product. Tex Mex connects with KCSR via trackage rights at Beaumont, Texas, with
TFM at Laredo, Texas, (the single largest rail freight transfer point between
the United States and Mexico), as well as with other U.S. Class I railroads at
various locations.

As a result of the CN/IC strategic alliance to promote NAFTA traffic, the
Company has gained access to customers in Detroit, Michigan and Canada as well
as more direct access to Chicago. This agreement also provides KCSR with access
to the port of Mobile, Alabama through haulage rights. Separate marketing
agreements with the Norfolk Southern and I&M Rail Link, LLC provide KCSL with
access to additional rail traffic to and from the eastern and upper midwestern
markets of the United States. KCSL's system, through its core network, strategic
alliances and marketing partnerships, interconnects with all Class I railroads
in North America.

Financial Services (Stilwell)

Stilwell includes Janus, Berger, Nelson and a 32% interest in DST. Janus and
Berger, each headquartered in Denver, Colorado, are investment advisors
registered with the Securities and Exchange Commission ("SEC"). Janus serves as
an investment advisor to the Janus Investment Funds ("Janus Funds"), Janus Aspen
Series ("Janus Aspen") and Janus World Funds Plc ("Janus World"), collectively
the "Janus Advised Funds". Additionally, Janus is the advisor or sub-advisor to
other investment companies and institutional and individual private accounts,
including pension, profit-sharing and other employee benefit plans, trusts,
estates, charitable organizations, endowments and foundations (referred to as
"Janus Sub-Advised Funds and Private Accounts"). Berger is also engaged in the
business of providing financial asset management services and products,
principally through a group of registered investment companies known as the
Berger Advised Funds. Berger also serves as investment advisor or sub-advisor to
other registered investment companies and separate accounts (referred to as
"Berger Sub-Advised Funds and Private Accounts"). Nelson, a United Kingdom
company, provides investment advice and investment management services primarily
to individuals who are retired or contemplating retirement. DST, together with
its subsidiaries and joint ventures, offers information processing and software
services and products through three operating segments: financial services,
output solutions and customer management. Additionally, DST holds certain
investments in equity securities, financial interests and real estate holdings.

JANUS

Janus derives its revenues and net income primarily from advisory services
provided to the Janus Advised Funds and other financial services firms and
private accounts. As of December 31, 1999, Janus had total assets under
management of $249.5 billion, of which $200.0 billion were in the Janus Advised
Funds. Janus primarily offers equity portfolios to investors, which comprised
approximately 95% of total assets under management for Janus at December 31,
1999. At that date, funds advised by Janus had approximately 4.1 million
shareowner accounts.

Pursuant to investment advisory agreements with each of the Janus Advised Funds
and the Janus Sub-Advised Funds and Private Accounts, Janus provides overall
investment management services. These agreements generally provide that Janus
will furnish continuous advice and recommendations concerning investments and
reinvestments in conformity with the investment objectives and restrictions of
the applicable fund or account.

Investment advisory fees are negotiated separately and subject to extreme market
pressures. These fees vary depending on the type of the fund or account and the
size of the assets managed, with fee rates above specified asset levels being
reduced. Fees from Private Accounts are generally computed on the basis of the
market value of the assets managed at the end of the preceding month and paid in
arrears on a monthly basis.

In order to perform its investment advisory functions, Janus conducts
fundamental investment research and valuation analysis. In general, Janus'
investment philosophy tends to focus on the earnings growth of individual
companies relative to their peers or the economy. For this reason, Janus'
proprietary analysis is geared to understanding the earnings potential of the
companies in which it invests. Further, Janus portfolios are constructed one
security at a time rather than in response to preset regional, country, economic
sector or industry diversification guidelines.

Emphasizing the proprietary work of Janus' own analysts, most research is
performed in-house. Research activities include, among others, review of
earnings reports, direct contacts with corporate management, analysis of
contracts with competitors and visits to individual companies.

The Janus Advised Funds and the Janus Sub-Advised Funds generally bear the
expenses associated with the operation of each fund and the issuance and
redemption of its securities, except that advertising, promotional and sales
expenses of the Janus Funds are assumed by Janus. Expenses include, among
others, investment advisory fees, shareowner servicing, transfer agent,
custodian fees and expenses, legal and auditing fees, and expenses of preparing,
printing and mailing prospectuses and shareowner reports.

Janus has four operating subsidiaries: Janus Service Corporation ("Janus
Service"), Janus Distributors, Inc. ("Janus Distributors") and Janus Capital
International Ltd. ("Janus International") and its subsidiary Janus
International (UK) Limited ("Janus UK").

o Pursuant to transfer agency agreements, which are subject to renewal
annually, Janus Service provides transfer agent recordkeeping,
administration and shareowner services to the Janus Advised Funds (except
Janus World) and their shareowners. Each fund pays Janus Service fees for
these services. To provide a consistent and reliable level of service,
Janus Service maintains a highly trained group of telephone representatives
and utilizes technology to provide immediate data to support call center
and shareowner processing operations. This approach includes the
utilization of sophisticated telecommunications systems, "intelligent"
workstation applications, document imaging, an automated work distributor
and an automated call management system. Additionally, Janus Service offers
investors access to their accounts, including the ability to perform
certain transactions, using touch tone telephones or via the Internet.
These customer service related enhancements provide Janus Service with
additional capacity to handle the high shareowner volume that can be
experienced during market volatility.

o Pursuant to a distribution agreement, Janus Distributors, a limited
registered broker-dealer with the SEC, serves as the distributor for the
Janus Advised Funds. Janus expends substantial resources in media
advertising and direct mail communications to its existing and potential
Janus Advised Funds' shareowners and in providing personnel and
telecommunications equipment to respond to inquiries via toll-free
telephone lines. Janus funds are also available through mutual fund
supermarkets and other third party distribution channels. Shareowner
accounting and servicing is handled by the mutual fund supermarket or
third party sponsor and Janus pays a fee to the respective sponsor equal to
a percentage of the assets under management acquired through such
distribution channels. Approximately 33%, 30% and 28% of total Janus
assets under management were generated through these third party
distribution channels as of December 31, 1999, 1998 and 1997, respectively.

o Janus International is an investment advisor registered with the SEC. Janus
International also provides marketing and client services for Janus World
outside of Europe.

o Janus UK, an England and Wales company, is an investment advisor for
certain non-U.S. customers, including Janus World, and is registered with
the United Kingdom's Investment Management Regulatory Organization Limited
("IMRO"). Janus UK also conducts securities trading from London and handles
marketing and client servicing for Janus World in Europe.

BERGER

Berger is an investment advisor to the Berger Advised Funds, which includes a
series of Berger mutual funds, as well as to the Berger Sub-Advised Funds and
Private Accounts. Additionally, Berger is a 50% owner in a joint venture with
the Bank of Ireland Asset Management (U.S.) Limited

("BIAM"). The joint venture, BBOI Worldwide LLC ("BBOI"), serves as the
investment advisor and sub-administrator to a series of funds, referred to as
the "Berger/BIAM Funds". Berger and BIAM have entered into an agreement to
dissolve BBOI, which is expected to take place prior to June 30, 2000.
Additionally, Berger owns 80% of Berger/Bay Isle LLC, which acts as the
investment advisor to privately managed separate accounts. As of December 31,
1999, Berger had approximately $6.6 billion of assets under management, of which
the Berger Advised Funds comprised $5.7 billion.

Berger derives its revenues and net income from advisory services provided to
the various funds and accounts. Berger's and BBOI's investment advisory fees are
negotiated separately with each fund. The investment advisory fees for these
funds vary depending on the type of fund, generally ranging from 0.70% to 0.90%
of average assets under management. Advisory fees for services provided to the
Berger Sub-Advised Funds and Private Accounts vary depending upon the type of
fund or account and, in some circumstances, size of assets managed, with fee
rates above specified asset levels being reduced.

Berger's principal method of securities evaluation is based on growth-style
investing, using a "bottoms-up" fundamental research and valuation analysis.
This growth-style approach toward equity investing requires the companies in
which Berger invests to have high relative earnings per share growth potential,
to participate in large and growing markets, to have strong management and to
have above average expected total returns. Certain Berger funds, however,
emphasize value-style investing, which focuses on companies that are out of
favor with markets or otherwise are believed to be undervalued (due to low
prices relative to assets, earnings and cash flows or to competitive advantages
not yet recognized by the market). Research is performed by Berger's internal
staff of research analysts, together with the various portfolio managers.
Primary research tools include, among others, financial publications, company
visits, corporate rating services and earnings releases.

Berger and BBOI generally pay most expenses incurred in connection with
providing investment management and advisory services to their respective funds.
All charges and expenses other than those specifically assumed by Berger and
BBOI are paid by the funds. Expenses paid by the funds include, among others,
investment advisory fees, shareowner servicing, transfer agent, custodian fees
and expenses, legal and auditing fees, and expenses of preparing, printing and
mailing prospectuses and shareowner reports.

Berger marketing efforts are balanced between institutional and retail
distribution opportunities. Certain of the Berger funds sold in retail markets
have approved distribution plans ("12b-1 Plans") pursuant to Rule 12b-1 under
the Investment Company Act of 1940. These 12b-1 Plans provide that Berger shall
engage in activities (e.g., advertising, marketing and promotion) that are
intended to result in sales of the shares of the funds.

The Berger Advised Funds and Berger/BIAM Funds have agreements with a trust
company to provide accounting, recordkeeping and pricing services, custody
services, transfer agency and other services. The trust company has engaged DST
as sub-agent to provide transfer agency and other services for the Berger
Advised Funds and Berger/BIAM Funds. Berger performs certain administrative and
recordkeeping services not otherwise performed by the trust company or its
sub-agent. Each Berger Fund pays Berger fees for these services, which are in
addition to the investment advisory fees paid.

Berger Distributors LLC serves as distributor of the Berger Advised Funds and
the Berger/BIAM Funds and is a limited registered broker-dealer. Berger
Distributors LLC continuously offers shares of the Berger funds and solicits
orders to purchase shares. Berger also utilizes mutual fund supermarket and
other third party distribution channels. Shareowner accounting and servicing is
handled by the mutual fund supermarket or third party sponsor and Berger pays a
fee to the respective sponsor equal to a percentage of the assets under
management acquired through

such distribution channels. Approximately 28%, 28% and 26% of total Berger
assets under management were generated through these third party distribution
channels as of December 31, 1999, 1998 and 1997, respectively.

NELSON

Nelson provides two distinct but interrelated services to individuals that
generally are retired or contemplating retirement: investment advice and
investment management. Clients are assigned a specific investment advisor, who
meets with each client individually and conducts an analysis of the client's
investment objectives and then recommends the development of a portfolio to meet
those objectives. Recommendations for the design and ongoing maintenance of the
portfolio structure are the responsibility of the investment advisor. The
selection and management of the instruments / securities which constitute the
portfolio are the responsibility of Nelson's investment management team.
Nelson's investment managers utilize a "top down" investment methodology in
structuring investment portfolios, beginning with an analysis of macroeconomic
and capital market conditions. Various analyses are performed by Nelson's
investment research staff to help construct an investment portfolio that adheres
to each client's objectives as well as Nelson's investment strategy. Through
continued investment in technology, Nelson has developed proprietary systems to
allow the investment managers to develop a balanced portfolio from a broad range
of investment instrument alternatives (e.g., fixed interest securities, tax free
corporate bonds, international and domestic securities, etc.).

For providing investment advice, Nelson receives an initial fee calculated as a
percentage of capital invested into each individual investment portfolio. Nelson
earns annual fees for the ongoing management and administration of each
investment portfolio. These fees are based on the type of investments and amount
of assets contained in each investor's portfolio. The fee schedules typically
provide lower incremental fees for assets under management above certain levels.

DST

DST operates throughout the United States, with operations in Kansas City,
Northern California and various locations on the East Coast, as well as
internationally in Canada, Europe, Africa and the Pacific Rim. DST has a single
class of common stock that is publicly traded on the New York Stock Exchange and
the Chicago Stock Exchange. Prior to November 1995, KCSI owned all of the stock
of DST. In November 1995, a public offering reduced KCSI's ownership interest in
DST to approximately 41%. In December 1998, a wholly-owned subsidiary of DST
merged with USCS International, Inc. The merger resulted in a reduction of
KCSI's ownership of DST to approximately 32%. KCSI reports DST as an equity
investment in the consolidated financial statements.

DST is organized into three operating segments: financial services, output
solutions and customer management.

DST's financial services segment serves primarily mutual funds, investment
managers, insurance companies, banks, brokers and financial planners. DST has
developed a number of proprietary software systems for use by the financial
services industry. Examples of such software systems include, among others,
mutual fund shareowner and unit trust accounting and recordkeeping systems, a
securities transfer system, a variety of portfolio accounting and investment
management systems and a workflow management system. DST provides full-service
shareowner accounting and recordkeeping to Berger, as well as remote services to
Janus.

DST's output solutions segment provides complete bill and statement processing
services and solutions, including electronic presentment, which include
generation of customized statements that are produced in automated facilities
designed to minimize turnaround time and mailing costs.

Output processing services and solutions are provided to customers of DST's
other segments as well as to other industries.

DST's customer management segment provides customer management and open billing
solutions to the video/broadband, direct broadcast satellite, wireless, and
wire-line and Internet-protocol telephony, internet and utility markets
worldwide.

DST also holds investments in equity securities with a market value of
approximately $1.3 billion at December 31, 1999, including investments in
Computer Sciences Corporation and State Street Corporation.

Employees. As of December 31, 1999, the approximate number of employees of KCSI
and its consolidated subsidiaries was as follows:

Transportation (KCSL):
KCSR 2,610
Gateway Western 241
Other 82
-----------

Total 2,933
-----------

Financial Services (Stilwell):
Janus 2,501
SMI 5
Berger LLC 71
Nelson 204
Other 17
-----------

Total 2,798
-----------

Total KCSI 5,731
===========

Item 2. Properties

In the opinion of management, the various facilities, office space and other
properties owned and/or leased by the Company (and its subsidiaries and
affiliates) are adequate for existing operating needs.

TRANSPORTATION (KCSL)

KCSR
KCSR owns and operates 2,756 miles of main and branch lines, and 1,179 miles of
other tracks, in a nine-state region that includes Missouri, Kansas, Arkansas,
Oklahoma, Mississippi, Alabama, Tennessee, Louisiana and Texas. Approximately
215 miles of main and branch lines and 85 miles of other tracks are operated by
KCSR under trackage rights and leases.

Kansas City Terminal Railway Company (of which KCSR is a partial owner with
other railroads) owns and operates approximately 80 miles of track, and operates
an additional eight miles of track under trackage rights in greater Kansas City,
Missouri. KCSR also leases for operating purposes certain short sections of
trackage owned by various other railroad companies and jointly owns certain
other facilities with these railroads.

KCSR and the Union Pacific Railroad ("UP") have a haulage and trackage rights
agreement, which gives KCSR access to Nebraska and Iowa, and additional routes
in Kansas, Missouri and Texas for movements of certain limited types of traffic.
The haulage rights require UP to move KCSR traffic in UP trains; the trackage
rights allow KCSR to operate its trains over UP tracks.

KCSR, in support of its transportation operations, owns and operates repair
shops, depots and office buildings along its right-of-way. A major facility, the
Deramus Yard, is located in Shreveport, Louisiana and includes a general office
building, locomotive repair shop, car repair shops, customer service center,
material warehouses and fueling facilities totaling approximately 227,000 square
feet. KCSR owns a 107,800 square foot facility in Pittsburg, Kansas that
previously was used as a diesel locomotive repair facility. This facility was
closed during 1999. KCSR also owns freight and truck maintenance buildings in
Dallas, Texas totaling approximately 125,200 square feet. KCSR and KCSI
executive offices are located in an eight-story office building in Kansas City,
Missouri, which is leased from a subsidiary of the Company. Other facilities
owned by KCSR include a 21,000 square foot freight car repair shop in Kansas
City, Missouri and approximately 15,000 square feet of office space in Baton
Rouge, Louisiana.

KCSR owns and operates six intermodal facilities. These facilities are located
in Dallas and Port Arthur, Texas; Kansas City, Missouri; Shreveport and New
Orleans, Louisiana; and Jackson, Mississippi. The facility in Port Arthur was
closed in first quarter 2000 due to a lower than expected level of traffic. KCSR
is currently in the process of constructing an automotive and intermodal
facility at the former Richards-Gebaur Airbase in Kansas City, Missouri. Certain
automotive operations are expected to begin at this facility in 2000. Full
automotive and intermodal operations at the facility are expected to be complete
in 2001 and will provide KCSR with additional capacity in Kansas City. The
various intermodal facilities include strip tracks, cranes and other equipment
used in facilitating the transfer and movement of trailers and containers.

KCSR's fleet of rolling stock consisted of the following at December 31:

1999 1998 1997
--------------------- ---------------------- ----------------------
Leased Owned Leased Owned Leased Owned

Locomotives:
Road Units 323 112 258 108 238 113
Switch Units 52 - 52 - 52 -
Other - 8 8 - 9 -
-------- ------- ------- -------- -------- -------

Total 375 120 318 108 299 113
======== ======= ======= ======== ======== =======

Rolling Stock:
Box Cars 6,289 2,011 6,634 2,023 7,168 2,027
Gondolas 713 66 748 56 819 61
Hopper Cars 2,384 1,357 2,660 1,185 2,680 1,198
Flat Cars (Intermodal
and Other) 1,553 675 1,617 676 1,249 554
Tank Cars 33 55 34 58 35 59
Auto Rack 201 - - - - -
Other Freight Cars - - - - 547 123
-------- ------- ------- -------- -------- -------

Total 11,173 4,164 11,693 3,998 12,498 4,022
======== ======= ======= ======== ======== =======

As of December 31, 1999, KCSR's fleet consisted of 495 diesel locomotives, of
which 120 were owned, 335 leased from affiliates and 40 leased from
non-affiliates. KCSR's fleet of rolling stock consisted of 15,337 freight cars,
of which 4,164 were owned, 3,181 leased from affiliates and 7,992 leased from
non-affiliates. A significant portion of the locomotives and rolling stock
leased from affiliates includes equipment leased through Southern Capital, a
joint venture with GATX Capital Corporation formed in October 1996. KCSR leased
50 new General Electric ("GE") 4400 AC locomotives from Southern Capital during
fourth quarter 1999.

Some of the owned equipment is subject to liens created under conditional sales
agreements, equipment trust certificates and leases in connection with the
original purchase or lease of such equipment. KCSR indebtedness with respect to
equipment trust certificates, conditional sales agreements and capital leases
totaled approximately $68.6 million at December 31, 1999.

Certain KCSR property statistics follow:

1999 1998 1997
-------- -------- -------
Route miles - main and branch line 2,756 2,756 2,845
Total track miles 3,935 3,931 4,036
Miles of welded rail in service 2,032 2,031 2,030
Main line welded rail (% of total) 64% 64% 63%
Cross ties replaced 275,384 255,591 332,440

Average Age (in years):
Wood ties in service 16.0 15.8 15.1
Rail in main and branch line 26.5 25.5 26.0
Road locomotives 21.7 23.3 22.1
All locomotives 22.5 23.9 22.8

Maintenance expenses for Way and Structure and Equipment (pursuant to regulatory
accounting rules, which include depreciation) for the three years ended December
31, 1999 and as a percent of KCSR revenues are as follows (dollars in millions):
11

KCSR Maintenance
Way and Structure Equipment
Percent of Percent of
Amount Revenue Amount Revenue

1999 $ 85.2 15.6% $ 129.4 23.7%
1998 82.4 14.9 118.3 21.4
1997 122.2* 23.6 112.3 21.7

* Way and structure expenses include $33.5 million related to asset
impairments. See Part II Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, of this Form 10-K for further
discussion.

Gateway Western
Gateway Western operates a 402 mile rail line extending from Kansas City,
Missouri to East St. Louis and Springfield, Illinois. Additionally, Gateway
Western has restricted haulage rights extending to Chicago, Illinois. Gateway
Western provides interchanges with various eastern rail carriers and access to
the St. Louis rail gateway. The Surface Transportation Board approved the
Company's acquisition of Gateway Western in May 1997.

Certain Gateway Western property statistics follow:

1999 1998 1997
-------- -------- -------

Route miles - main and branch line 402 402 402
Total track miles 564 564 564
Miles of welded rail in service 121 121 109
Main line welded rail (% of total) 40% 40% 39%

Mexrail
Mexrail, a 49% owned affiliate, owns 100% of the Tex Mex and certain other
assets, including the northern (U.S.) half of a rail traffic bridge at Laredo,
Texas spanning the Rio Grande River. TFM operates the southern half of the
bridge. This bridge is a significant entry point for rail traffic between Mexico
and the U.S. The Tex Mex operates a 157 mile rail line extending from Corpus
Christi to Laredo, Texas, and also has trackage rights (from UP) totaling
approximately 360 miles between Corpus Christi and Beaumont, Texas.

In early 1999, the Tex Mex completed Phase II of a new rail yard in Laredo,
Texas. Phase I of the project was completed in December 1998 and includes four
tracks comprising approximately 6.5 miles. Phase II of the project consists of
two new intermodal tracks totaling approximately 2.8 miles. Groundwork for an
additional ten tracks has been completed; however, construction on those ten
tracks has not yet begun. Current capacity of the yard is approximately 800
freight cars. Upon completion of all tracks, expected capacity will be
approximately 2,000 freight cars.

Certain Tex Mex property statistics follow:

1999 1998 1997
-------- -------- -------

Route miles - main and branch line 157 157 157
Total track miles 533 530 521
Miles of welded rail in service 5 5 5
Main line welded rail (% of total) 3% 3% 3%
Locomotives (average years) 25 25 25

Grupo TFM
Grupo TFM, an approximate 37% owned affiliate, owns 80% of the common stock of
TFM. TFM holds the concession to operate Mexico's "Northeast Rail Lines" for 50
years, with the option of a 50-year extension (subject to certain conditions).
TFM operates 2,661 miles of main line and an additional 838 miles of sidings and
spur tracks, and main line under trackage rights. TFM has the right to operate
the rail, but does not own the land, roadway or associated structures.
Approximately 91% of TFM's main line consists of continuously welded rail. 416
locomotives are owned by TFM and approximately 6,522 freight cars are either
owned by TFM or leased from affiliates. 98 locomotives and 4,960 freight cars
are leased from non-affiliates. Grupo TFM (through TFM) has office space at
which various operational, administrative, managerial and other activities are
performed. The primary facilities are located in Mexico City and Monterrey,
Mexico. TFM leases 140,354 square feet of office space in Mexico City and owns
an 115,157 square foot facility in Monterrey.

Panama Canal Railway Company
PCRC, a 50% owned joint venture, holds the concession to reconstruct and operate
a 47-mile railroad that runs parallel to the Panama Canal. Reconstruction of the
railroad commenced in early 2000 and is expected to be completed in mid-2001.
PCRC owns one locomotive and various other infrastructure improvements and
equipment.

Other Transportation
The Company is an 80% owner of Wyandotte Garage Corporation, which owns a
parking facility in downtown Kansas City, Missouri. The facility is located
adjacent to the Company and KCSR executive offices, and consists of 1,147
parking spaces utilized by the employees of the Company and its affiliates, as
well as the general public.

Trans-Serve, Inc. operates a railroad wood tie treating plant in Vivian,
Louisiana under an industrial revenue bond lease arrangement with an option to
purchase. This facility includes buildings totaling approximately 12,000 square
feet.

Global Terminaling Services, Inc. (formerly Pabtex, Inc.) owns a 70 acre coal
and petroleum coke bulk handling facility in Port Arthur, Texas.

Mid-South Microwave, Inc. owns and operates a microwave system, which extends
essentially along the right-of-way of KCSR from Kansas City, Missouri to Dallas,
Beaumont and Port Arthur, Texas and New Orleans, Louisiana. This system is
leased to KCSR.

Other subsidiaries of the Company own approximately 8,000 acres of land at
various points adjacent to the KCSR right-of-way. Other properties also include
a 354,000 square foot warehouse at Shreveport, Louisiana, a bulk handling
facility at Port Arthur, Texas, and several former railway buildings now being
rented to non-affiliated companies, primarily as warehouse space.

The Company owns 1,025 acres of property located on the waterfront in the Port
Arthur, Texas area, which includes 22,000 linear feet of deep-water frontage and
three docks. Port Arthur is an uncongested port with direct access to the Gulf
of Mexico. Approximately 75% of this property is available for development.

FINANCIAL SERVICES (STILWELL)

Janus
Janus leases from non-affiliates 455,400 square feet of office space in three
facilities for investment, administrative, marketing, information technology and
shareowner processing operations, and approximately 52,700 square feet for mail
processing and storage requirements. These corporate offices and mail processing
facilities are located in Denver, Colorado. Janus also has 1,200 square feet of
general office space in Aspen, Colorado. In September 1998, Janus opened an
investor service and data center in Austin, Texas and currently leases
approximately 170,200 square feet at this facility. Janus also leases 4,200
square feet of office space in Westport, Connecticut for development of Janus
World Funds Plc and 2,500 square feet of office space in London, England for
securities research and trading.

Berger
Berger leases approximately 29,800 square feet of office space in Denver,
Colorado from a non-affiliate for its administrative and corporate functions.

Nelson
Nelson leases 10,300 square feet of office space in Chester, England, the
location of its corporate headquarters, investment operations and one of its
marketing offices. During 1998, Nelson acquired additional office space adjacent
to its Chester location to accommodate expansion efforts. Also, Nelson leases
six branch marketing offices totaling approximately 13,800 square feet in the
following locations in the United Kingdom: London, Lichfield, Bath, Durham,
Stirling and York.

Stilwell Holding Company
The Stilwell holding company leases approximately 12,500 square feet of office
space in Kansas City, Missouri from a non-affiliate for its corporate functions.

Item 3. Legal Proceedings

The information set forth in response to Item 103 of Regulation S-K under Part
II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, "Other - Litigation and Environmental Matters" of this
Form 10-K is incorporated by reference in response to this Item 3. In addition,
see discussion in Part II Item 8, Financial Statements and Supplementary Data,
at Note 12 - Commitments and Contingencies of this Form 10-K.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the three month
period ended December 31, 1999.

Executive Officers of the Company

Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to paragraph
(b) of Item 401 of Regulation S-K, the following list is included as an
unnumbered Item in Part I of this Form 10-K in lieu of being included in KCSI's
Definitive Proxy Statement which will be filed no later than 120 days after
December 31, 1999. All executive officers are elected annually and serve at the
discretion of the Board of Directors (or in the case of Mr. T. H. Bailey, the
Janus Board of Directors). Certain of the executive officers have employment
agreements with the Company.

Name Age Position(s)
- ----------------------------------------------------------------------
L.H. Rowland 62 Chairman, President and
Chief Executive Officer of the Company
M.R. Haverty 55 Executive Vice President, Director
T.H. Bailey 62 Chairman, President and
Chief Executive Officer of
Janus Capital Corporation
P.S. Brown 63 Vice President, Associate General
Counsel and Assistant Secretary
R.P. Bruening 61 Vice President, General Counsel and
Corporate Secretary
D.R. Carpenter 53 Vice President - Finance
W.K. Erdman 41 Vice President - Corporate Affairs
A.P. McCarthy 53 Vice President and Treasurer
J.D. Monello 55 Vice President and Chief Financial Officer
L.G. Van Horn 41 Vice President and Comptroller

The information set forth in the Company's Definitive Proxy Statement in the
description of the Board of Directors with respect to Mr. Rowland and Mr.
Haverty is incorporated herein by reference.

Mr. Bailey has continuously served as Chairman, President and Chief Executive
Officer of Janus Capital Corporation since 1978.

Mr. Brown served as Vice President, Associate General Counsel and Assistant
Secretary from May 1993 to December 31, 1999.

Mr. Bruening has continuously served as Vice President, General Counsel and
Corporate Secretary since July 1995. From May 1982 to July 1995, he served as
Vice President and General Counsel.

Mr. Carpenter has continuously served as Vice President - Finance since November
1996. He was Vice President - Finance and Tax from May 1995 to November 1996. He
was Vice President - Tax from June 1993 to May 1995.

Mr. Erdman has continuously served as Vice President - Corporate Affairs since
April 1997. From January 1997 to April 1997 he served as Director - Corporate
Affairs. From 1987 to January 1997 he served as Chief of Staff for United States
Senator from Missouri, Christopher ("Kit") Bond.

Mr. McCarthy has continuously served as Vice President and Treasurer since May
1996. He was Treasurer from December 1989 to May 1996.

Mr. Monello has continuously served as Vice President and Chief Financial
Officer since March 1994.

Mr. Van Horn has continuously served as Vice President and Comptroller since May
1996. He was Comptroller from September 1992 to May 1996.

There are no arrangements or understandings between the executive officers and
any other person pursuant to which the executive officer was or is to be
selected as an officer of KCSI, except with respect to the executive officers
who have entered into employment agreements, which agreements designate the
position(s) to be held by the executive officer.

None of the above officers are related to one another by family.

15
Part II

Item 5. Market for the Company's Common Stock and Related Stockholder Matters

The information set forth in response to Item 201 of Regulation S-K on the cover
(page i) under the heading "Company Stock," and in Part II Item 8, Financial
Statements and Supplementary Data, at Note 15 - Quarterly Financial Data
(Unaudited) of this Form 10-K is incorporated by reference in partial response
to this Item 5.

Pursuant to a new credit agreement dated January 11, 2000 as described further
in Part II Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations of this Form 10-K, the Company is restricted from the
payment of cash dividends on the Company's common stock.

In contemplation of the separation of the Company's Transportation and Financial
Services segments ("Separation"), the Company's stockholders approved a
one-for-two reverse stock split at a special stockholders' meeting held on July
15, 1998. The Company does not intend to effect this reverse stock split until
the Separation is completed.

As of March 31, 2000, there were 6,012 holders of the Company's common stock
based upon an accumulation of the registered stockholder listing.

Item 6. Selected Financial Data
(in millions, except per share and ratio data)

The selected financial data below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included under Item 7 of this Form 10-K and the consolidated
financial statements and the related notes thereto, and the Report of
Independent Accountants thereon, included under Item 8 of this Form 10-K, and
such data is qualified by reference thereto.

1999 (i) 1998 (ii) 1997 (iii) 1996 (iv) 1995 (v)
---------- ----------- ---------- ----------- ----------

Revenues $ 1,813.7 $ 1,284.3 $ 1,058.3 $ 847.3 $ 775.2

Income (loss) from continuing
operations $ 323.3 $ 190.2 $ (14.1) $ 150.9 $ 236.7

Income (loss) from continuing operations per common share:
Basic $ 2.93 $ 1.74 $ (0.13) $ 1.33 $ 1.86
Diluted 2.79 1.66 (0.13) 1.31 1.80

Total assets $ 3,088.9 $ 2,619.7 $ 2,434.2 $ 2,084.1 $ 2,039.6

Long-term obligations $ 750.0 $ 825.6 $ 805.9 $ 637.5 $ 633.8

Cash dividends per
common share $ .16 $ .16 $ .15 $ .13 $ .10

Ratio of earnings to
fixed charges 7.07 4.44 (vi) 1.60 (vii) 3.30 6.14 (viii)

(i) Includes unusual costs and expenses of $12.7 million ($7.9 million after-
tax, or $0.07 per basic and diluted share) recorded by the Transportation
segment, reflecting, among others, amounts for facility and project
closures, employee separations, Separation related costs, labor and
personal injury related issues.

(ii) Includes a one-time non-cash charge of $36.0 million ($23.2 million
after-tax, or $0.21 per basic and diluted share) resulting from the merger
of a wholly-owned subsidiary of DST with USCS International, Inc. ("USCS").
DST accounted for the merger under the pooling of interests method. The
charge reflects the Company's reduced ownership of DST (from 41% to
approximately 32%), together with the Company's proportionate share of DST
and USCS fourth quarter merger-related charges. See Note 3 to the
consolidated financial statements in this Form 10-K

(iii)Includes $196.4 million ($158.1 million after-tax, or $1.47 per basic and
diluted share) of restructuring, asset impairment and other charges
recorded during fourth quarter 1997. The charges reflect: a $91.3 million
impairment of goodwill associated with KCSR's acquisition of MidSouth
Corporation in 1993; $38.5 million of long-lived assets held for disposal;
$9.2 million of impaired long-lived assets; approximately $27.1 million in
reserves related to termination of a union productivity fund and employee
separations; a $12.7 million impairment of goodwill associated with the
Company's investment in Berger; and $17.6 million of other reserves for
leases, contracts and other reorganization costs. See Notes 2 and 4 to the
consolidated financial statements in this Form 10-K.

(iv) Includes a one-time after-tax gain of $47.7 million (or $0.42 per basic
share, $0.41 per diluted share), representing the Company's proportionate
share of the one-time gain recognized by DST in connection with the merger
of The Continuum Company, Inc., formerly a DST unconsolidated equity
affiliate, with Computer Sciences Corporation in a tax-free share exchange.

(v) Reflects DST as an unconsolidated affiliate as of January 1, 1995 due to
the DST public offering and associated transactions completed in November
1995, which reduced the Company's ownership of DST to approximately 41%.
The public offering and associated transactions resulted in a $144.6
million after-tax gain (or $1.14 per basic share, $1.10 per diluted share)
to the Company.

(vi) Financial information from which the ratio of earnings to fixed charges was
computed for the year ended December 31, 1998 includes the one-time
non-cash charge resulting from the DST and USCS merger discussed in (ii)
above. If the ratio were computed to exclude this charge, the 1998 ratio of
earnings to fixed charges would have been 4.75.

(vii)Financial information from which the ratio of earnings to fixed charges
was computed for the year ended December 31, 1997 includes the
restructuring, asset impairment and other charges discussed in (iii) above.
If the ratio were computed to exclude these charges, the 1997 ratio of
earnings to fixed charges would have been 3.60.

(viii) Financial information from which the ratio of earnings to fixed charges
was computed for the year ended December 31, 1995 reflects DST as a
majority owned unconsolidated subsidiary through October 31, 1995, and an
unconsolidated 41% owned affiliate thereafter, in accordance with
applicable U.S. Securities and Exchange Commission rules and regulations.
If the ratio were computed to exclude the one-time pretax gain of $296.3
million associated with the November 1995 public offering and associated
transactions, the 1995 ratio of earnings to fixed charges would have been
3.04.

All years reflect the 3-for-1 common stock split to shareholders of record on
August 25, 1997, paid September 16, 1997.

The information set forth in response to Item 301 of Regulation S-K under Part
II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, of this Form 10-K is incorporated by reference in partial
response to this Item 6.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

OVERVIEW

The discussion set forth below, as well as other portions of this Form 10-K,
contains comments not based upon historical fact. Such forward-looking comments
are based upon information currently available to management and management's
perception thereof as of the date of this Form 10-K. Readers can identify these
forward-looking comments by the use of such verbs as expects, anticipates,
believes or similar verbs or conjugations of such verbs. The actual results of
operations of Kansas City Southern Industries, Inc. ("KCSI" or the "Company")
could materially differ from those indicated in forward-looking comments. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, those factors identified in the Company's Current
Report on Form 8-K/A dated June 3, 1997, which is on file with the U.S.
Securities and Exchange Commission (File No. 1-4717) and is hereby incorporated
by reference herein. Readers are strongly encouraged to consider these factors
when evaluating any forward-looking comments. The Company will not update any
forward-looking comments set forth in this Form 10-K.

The discussion herein is intended to clarify and focus on the Company's results
of operations, certain changes in its financial position, liquidity, capital
structure and business developments for the periods covered by the consolidated
financial statements included under Item 8 of this Form 10-K. As discussed
below, the Company is in discussions with the Staff of the Securities and
Exchange Commission as to whether or not Janus Capital Corporation should
continue to be classified as a consolidated subsidiary for financial reporting
purposes. The outcome of these discussions could result in the Company restating
certain of its consolidated financial statements to reflect Janus as a
majority-owned unconsolidated subsidiary accounted for under the equity method
for financial reporting purposes. This discussion should be read in conjunction
with these consolidated financial statements, the related notes and the Report
of Independent Accountants thereon, and is qualified by reference thereto.

KCSI, a Delaware corporation organized in 1962, is a diversified holding company
with principal operations in rail transportation and financial services. The
Company supplies its various subsidiaries with managerial, legal, tax, financial
and accounting services, in addition to managing other "non-operating" and more
passive investments.

On March 26, 1999, Standard and Poors (S&P) Financial Information Services
announced that it would add KCSI to its S&P 500 index. KCSI was added to the S&P
500 Railroads Industry group after the close of trading on April 1, 1999.
Management believes that the Company's addition to this index of leading U.S.
companies will have a positive long-term impact on KCSI stock and help build the
Company's shareholder base.

The Company's business activities by industry segment and principal subsidiary
companies follow:

o The Kansas City Southern Railway Company ("KCSR"), a wholly-owned subsidiary;
o Gateway Western Railway Company ("Gateway Western"), a wholly-owned
subsidiary;

o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), a 37%
owned affiliate, which owns 80% of the common stock of TFM, S.A. de C.V.
("TFM");
o Mexrail, Inc. ("Mexrail"), a 49% owned affiliate, which wholly owns the Texas
Mexican Railway Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned affiliate;
and
o Panama Canal Railway Company ("PCRC"), a 50% owned affiliate.

Upon the completion of a public offering of DST common stock and associated
transactions in November 1995, the Company's ownership of DST was reduced from
100% to approximately 41%. As discussed below, the 1998 merger between a
wholly-owned subsidiary of DST and USCS International, Inc. ("USCS"), accounted
for by DST as a pooling of interests, reduced KCSI's ownership of DST to
approximately 32% and resulted in a one-time pretax non-cash charge of
approximately $36.0 million.

All per share information included in this Item 7 is presented on a diluted
basis, unless specifically identified otherwise.

RECENT DEVELOPMENTS

Planned Separation of the Company Business Segments. The Company announced its
intention to separate the Transportation and Financial Services segments through
a proposed dividend of the stock of Stilwell, a holding company for its
Financial Services businesses (the "Separation"). On July 12, 1999, the Company
announced that the Internal Revenue Service ("IRS") issued a favorable tax
ruling permitting the Company to separate its Financial Services segment from
its Transportation segment. Additionally, in February 2000, the Company received
a favorable supplementary tax ruling from the IRS to the effect that the
assumption of $125 million of KCSI debt by Stilwell (in connection with the
Company's re-capitalization discussed below) would have no effect on the
previously issued tax ruling. In contemplation of the Separation, the Company's
stockholders approved a one-for-two reverse stock split at a special
stockholders' meeting held on July 15, 1998. The Company will not effect the
reverse stock split until the Separation is completed.

On March 26, 1999, a number of Janus minority stockholders and employees of
Janus, including members of Janus' management, its chief executive officer, its
chief investment officer, portfolio managers and assistant portfolio managers
who own a material number of Janus shares, five of the six Janus directors and
others (the "Janus Minority Group") proposed that KCSI consider, in addition to
the Separation, a separate spin-off of Janus. Members of the Janus Minority
Group met with KCSI's Board of Directors ("Board") on June 23, 1999 and urged
the Board to consider their separate spin-off proposal.

The Janus Fund Trustees ("Trustees") expressed support on March 26, 1999 for the
proposal of the Janus Minority Group, indicating that, based on their
discussions with members of that group, the Trustees believed the proposal would
provide superior equity ownership opportunities for key Janus employees and
could help assure continuity of management for the Janus Funds. Stilwell
management assured the Trustees of their support for equity incentive
arrangements for key Janus personnel, but believed these incentives could be
achieved without a separate spin-off of Janus. The Trustees have continued to
express their support for equity incentive arrangements for the key Janus
personnel, but have indicated that they intend to remain neutral with respect to
the disagreements between Stilwell and the Janus Minority Group. The Trustees
have strongly encouraged the parties to resolve their disagreements as soon as
possible so that they would not be a distraction to the management of the Janus
Funds.

After considering the information presented by the Janus Minority Group and
information provided by Stilwell management regarding the advantages and
disadvantages of the two methods of achieving the Separation, KCSI's Board
decided that the Separation should go forward on the basis originally
contemplated. In arriving at this decision, KCSI's Board took into consideration
a number of factors, including that: i) a favorable tax ruling on the Separation
had been received from the IRS; ii) the presentation by the Janus Minority Group
was not persuasive, in the Board's view, as to the advantages of the alternative
proposal as compared to the Separation; iii) there was a lack of certainty that
a favorable tax ruling could be obtained in a timely manner, or at all, with
respect to the alternative proposal; and iv) the Separation was more consistent
with the strategic direction of Stilwell.

Stilwell Files a Registration Statement on Form 10 with the Securities and
Exchange Commission ("SEC"). On August 19, 1999, the Company reported that
Stilwell filed a Form 10 with the SEC in connection with KCSI's proposed
Separation. The filing includes an Information Statement that will be provided
to KCSI shareholders after the Form 10 becomes effective. The Company has
received comments from the SEC and has been involved in detailed discussions
with the SEC on such items. As part of this process, the Company filed Amendment
#1 to the Stilwell Form 10 on October 18, 1999, Amendment #2 on December 22,
1999 and Amendment #3 on January 19, 2000. The Stilwell Form 10 has not been
declared effective.

Re-capitalization of the Company's Debt Structure. In preparation for the
Separation, the Company re-capitalized its debt structure in January 2000
through a series of transactions as follows:

Bond Tender and Other Debt Repayment. On December 6, 1999, KCSI commenced offers
to purchase and consent solicitations with respect to any and all of the
Company's outstanding 7.875% Notes due July 1, 2002, 6.625% Notes due March 1,
2005, 8.8% Debentures due July 1, 2022, and 7% Debentures due December 15, 2025
(collectively "Debt Securities" or "notes and debentures").

Approximately $398.4 million of the $400 million outstanding Debt Securities
were validly tendered and accepted by the Company. Total consideration paid for
the repurchase of these outstanding notes and debentures was $401.2 million.
Funding for the repurchase of these Debt Securities and for the repayment of
$264 million of borrowings under then existing revolving credit facilities was
obtained from two new credit facilities (the "KCS Credit Facility" and the
"Stilwell Credit Facility", or collectively "New Credit Facilities"), each of
which was entered into on January 11, 2000. These New Credit Facilities, as
described further below, provide for total commitments of $950 million.

In first quarter 2000, the Company will report an extraordinary loss on the
extinguishment of the Company's notes and debentures of approximately $5.9
million, net of income taxes.

KCS Credit Facility. The KCS Credit Facility provides for a total commitment of
$750 million, comprised of three separate term loans totaling $600 million with
$200 million due January 11, 2001, $150 million due December 30, 2005 and $250
million due December 30, 2006 and a revolving credit facility available until
January 11, 2006 ("KCS Revolver"). The availability under the KCS Revolver will
initially be $150 million and will be reduced to $100 million on the later of
January 2, 2001 and the expiration date with respect to the Grupo TFM Capital
Contribution Agreement (see Grupo TFM below in "Significant Developments").
Letters of credit are also available under the KCS Revolver up to a limit of $90
million. Borrowings under the KCS Credit Facility are secured by substantially
all of the Transportation segment's assets.

On January 11, 2000, KCSR borrowed the full amount ($600 million) of the term
loans and used the proceeds to repurchase the Debt Securities, retire other debt
obligations and pay related fees and expenses. No funds were initially borrowed
under the KCS Revolver. Proceeds of future borrowings under the KCS Revolver are
to be used for working capital and for other general corporate purposes. The
letters of credit under the KCS Revolver are to be used to support obligations
in connection with the Grupo TFM Capital Contribution Agreement ($15 million may
be used for general corporate purposes).

Interest on the outstanding loans under the KCS Credit Facility shall accrue at
a rate per annum based on the London interbank offered rate ("LIBOR") or the
prime rate, as the Company shall select. Each loan shall accrue interest at the
selected rate plus the applicable margin, which will be determined by the type
of loan. Until the term loan maturing in 2001 is repaid in full, the term loans
maturing in 2001 and 2005 and all loans under the KCS Revolver will have an
applicable margin of 2.75% per annum for LIBOR priced loans and 1.75% per annum
for prime rate priced loans and the term loan maturing in 2006 will have an
applicable margin of 3.00% per annum for LIBOR priced loans and 2.00% per annum
for prime rate based loans. The interest rate with respect to the term loan
maturing in 2001 is also subject to 0.25% per annum interest rate increases
every three months until such term loan is paid in full, at which time, the
applicable margins for all other loans will be reduced and may fluctuate based
on the leverage ratio of the Company at that time.

The KCS Credit Facility requires the payment to the banks of a commitment fee of
0.50% per annum on the average daily, unused amount of the KCS Revolver.
Additionally a fee equal to a per annum rate equal to 0.25% plus the applicable
margin for LIBOR priced revolving loans will be paid on any letter of credit
issued under the KCS Credit Facility. The KCS Credit Facility contains certain
covenants, among others, as follows: i) restricts the payment of cash dividends
to common stockholders; ii) limits annual capital expenditures; iii) requires
hedging instruments with respect to at least 50% of the outstanding balances of
each of the term loans maturing in 2005 and 2006 to mitigate interest rate risk
associated with the new variable rate debt; and iv) provides leverage ratio and
interest coverage ratio requirements typical of this type of debt instrument.
These covenants, along with other provisions could restrict maximum utilization
of the facility. Issue costs relating to the KCS Credit Facility of
approximately $17.6 million were deferred and will be amortized over the
respective term of the loans.

In accordance with the provision requiring the Company to manage its interest
rate risk through hedging activity, in first quarter 2000 the Company entered
into five separate interest rate cap agreements for an aggregate notional amount
of $200 million expiring on various dates in 2002. The interest rate caps are
linked to LIBOR. $100 million of the aggregate notional amount provides a cap on
the Company's interest rate of 7.25% plus the applicable spread, while $100
million limits the interest rate to 7% plus the applicable spread.
Counterparties to the interest rate cap agreements are major financial
institutions who also participate in the New Credit Facilities. Credit loss from
counterparty non-performance is not anticipated.

Stilwell Credit Facility. On January 11, 2000, KCSI also arranged a new $200
million 364-day senior unsecured competitive Advance/Revolving Credit Facility
("Stilwell Credit Facility"). KCSI borrowed $125 million under this facility and
used the proceeds to retire debt obligations as discussed above. Stilwell has
assumed this credit facility, including the $125 million borrowed thereunder,
and upon completion of the Separation, KCSI will be released from all
obligations thereunder. Stilwell repaid the $125 million in March 2000.

Two borrowing options are available under the Stilwell Credit Facility: a
competitive advance option, which is uncommitted, and a committed revolving
credit option. Interest on the competitive advance option is based on rates
obtained from bids as selected by Stilwell in accordance with the lender's
standard competitive auction procedures. Interest on the revolving credit option
accrues based on the type of loan (e.g., Eurodollar, Swingline, etc.) with rates
computed using LIBOR plus 0.35% per annum or, alternatively, the highest of the
prime rate, the Federal Funds Effective Rate plus 0.005%, and the Base
Certificate of Deposit Rate plus 1%.

The Stilwell Credit Facility includes a facility fee of 0.15% per annum and a
utilization fee of 0.125% on the amount of the outstanding loans under the
facility for each day on which the aggregate utilization of the Stilwell Credit
Facility exceeds 33% of the aggregate commitments of the various lenders.
Additionally, the Stilwell Credit Facility contains, among other provisions,
various financial covenants, which could restrict maximum utilization of the
Stilwell Credit Facility. Stilwell may assign or delegate all or a portion of
its rights and obligations under the Stilwell Credit Facility to one or more of
its domestic subsidiaries.

Sale of Janus Stock. In first quarter 2000, Stilwell sold to Janus, for
treasury, 192,408 shares of Janus common stock and such shares will be available
for awards under Janus' recently adopted Long Term Incentive Plan. Janus has
agreed that for as long as it has available shares of Janus common stock for
grant under that plan, it will not award phantom stock, stock appreciation
rights or similar rights. The sale of these shares resulted in an after-tax gain
of approximately $15.7 million, and together with the issuance by Janus of
approximately 35,000 shares of restricted stock in first quarter 2000, reduced
Stilwell's ownership to approximately 81.5%.

Litigation Settlement. In January 2000, Stilwell received approximately $44
million in connection with the settlement of a legal dispute related to a former
equity investment. The settlement agreement resolves all outstanding issues
related to this former equity investment. In first quarter 2000, Stilwell will
recognize an after-tax gain of approximately $26 million as a result of this
settlement.

Dividends Suspended for KCSI Common Stock. During first quarter 2000, the
Company's Board announced that, based upon a review of the Company's dividend
policy in conjunction with the New Credit Facilities discussed above and in
light of the anticipated Separation, it decided to suspend the Common stock
dividend of KCSI under the existing structure of the Company. This

action complies with the terms and covenants of the New Credit Facilities.
Subsequent to the Separation, the separate Boards of KCSI and Stilwell will
determine the appropriate dividend policy for their respective companies.

Burlington Northern Santa Fe Railway and Canadian National Railway Merger. In
December 1999, The Burlington Northern and Santa Fe Railway Company ("BNSF") and
Canadian National Railway Company ("CN") announced their intention to combine
the two railroad companies. In March 2000, however, the Surface Transportation
Board ("STB") issued a 15-month moratorium on railroad mergers until the STB can
adopt new rules governing merger activities. This decision temporarily delays
the proposed combination of BNSF and CN. BNSF and CN have filed a motion of
appeal in an attempt to force the STB to review the BNSF-CN merger application.
KCSR management believes the STB's decision to suspend merger activities during
this 15-month period will allow the rail industry to focus on improving customer
service and operating efficiency rather than merger concerns. In the long term,
however, management believes a merger of BNSF and CN could have an adverse
impact on revenues through traffic diversions from the KCSR-CN/IC marketing
alliance (see below).

KCSR Purchase of 50 New Locomotives. During 1999, KCSR reached an agreement with
General Electric ("GE") for the purchase of 50 new GE 4400 AC Locomotives with
remote power capability. The addition of these state-of-the-art locomotives is
expected to have a favorable impact on operations as a result of, among other
things: retirement of older locomotives with significant ongoing maintenance
needs; decreased maintenance costs and improved fuel efficiency; better fleet
utilization; increased hauling power eliminating the need for certain helper
service; and higher reliability and efficiency resulting in fewer train delays
and less congestion. Southern Capital, through its existing variable rate credit
lines, financed the purchase of these new locomotives, and leases them to KCSR
under operating leases. Rates on these operating leases vary based on the
Company's credit rating. As a result of this transaction, operating lease
expense is expected to be approximately $7 million higher in 2000 compared to
1999. KCSR expects, however, associated operating cost reductions with these new
and more efficient AC locomotives. Delivery of these locomotives was completed
in December 1999.

Panama Canal Railway Company. In January 1998, the Republic of Panama awarded
KCSR and its joint venture partner, Mi-Jack Products, Inc., the concession to
reconstruct and operate the PCRC. The 47-mile railroad runs parallel to the
Panama Canal and, upon reconstruction, will provide international shippers with
an important complement to the Panama Canal. In November 1999, PCRC completed
the financing arrangements for this project with the International Finance
Corporation ("IFC"), a member of the World Bank Group. The financing is
comprised of a $5 million investment from the IFC and senior loans in the
aggregate amounts of up to $45 million. The investment of $5 million from the
IFC is comprised of non-voting preferred shares, paying a 10% cumulative
dividend. These preferred shares reduce the Company's ownership interest in PCRC
from 50% to 41.67%. The preferred shares are expected to be redeemed at the
option of IFC any year after 2008 at the lower of i) a net cumulative internal
rate of return of 30%, or ii) eight-times earnings before interest, income
taxes, depreciation and amortization (average of two consecutive years)
calculated in proportion to the IFC's percentage ownership in PCRC. Under
certain limited conditions, the Company is a guarantor for up to $15 million of
cash deficiencies associated with project completion. Additionally, if the
Company or its partner terminates the concession contract without the consent of
the IFC, the Company is a guarantor for up to 50% of the outstanding senior
loans. The total cost of the reconstruction project is estimated to be $75
million with an equity commitment from KCSR not to exceed $13 million.
Reconstruction of PCRC's right-of-way is expected to be complete in mid-2001
with commercial operations to begin immediately thereafter.

RESULTS OF OPERATIONS

SIGNIFICANT DEVELOPMENTS

In addition to the developments mentioned above, consolidated operating results
from 1997 to 1999 were affected by the following significant developments.

CONSOLIDATED KCSI

Repurchase of Stock. As disclosed in the Current Report on Form 8-K dated
February 25, 1999, the Company repurchased 460,000 shares of its common stock
from The DST Systems, Inc. Employee Stock Ownership Plan (the "DST ESOP") in a
private transaction. The DST ESOP has previously sold to the Company other
shares of KCSI stock, which were part of the DST ESOP's assets as a result of
DST's participation in the Company's employee stock ownership plan prior to
DST's initial public offering in 1995.

The shares were purchased at a price equal to the closing price per share of
KCSI's common stock on the New York Stock Exchange on February 24, 1999. The
shares are held in treasury for use in connection with the Company's various
employee benefit plans.

These repurchases are part of the 33 million share repurchase plan that the
Board authorized through two programs - the 1995 program for 24 million shares
and the 1996 program for 9 million shares. Including this transaction, the
Company has repurchased a total of approximately 28.1 million shares under these
programs.

During 1998, there were no repurchases under these programs. During 1997, the
Company purchased approximately 2.9 million shares at an aggregate cost of
approximately $50 million. A portion of the shares under the 1996 program were
repurchased through a forward stock purchase contract, which was completed
during 1997. See discussion in "Financial Instruments and Purchase Commitments"
below.

Stock Split and 20% Increase in Quarterly Common Stock Dividend. On July 29,
1997, the Board authorized a 3-for-1 split in the Company's common stock
effected in the form of a stock dividend. Amounts reported in this Form 10-K
reflect this stock split. The Board also voted to increase the quarterly
dividend 20% to $0.04 per share (post-split). Both dividends were paid on
September 16, 1997 to stockholders of record as of August 25, 1997. However, see
"Recent Developments" for a discussion of the suspension of dividends.

FINANCIAL SERVICES

Financial Services Companies Contributed to Stilwell Financial, Inc. In
preparation for the Separation, effective July 1, 1999, KCSI contributed to
Stilwell its ownership interests in Janus, Berger, Nelson and DST, as well as
certain other financial services-related assets, and Stilwell assumed all of
KCSI's liabilities associated with the assets transferred. It is contemplated
that Stilwell will be listed on the New York Stock Exchange and, at about the
time of the Separation, will begin trading under the symbol "SV".

DST Merger. On December 21, 1998, DST and USCS announced the completion of the
merger of USCS with a wholly-owned DST subsidiary. The merger, accounted for as
a pooling of interests by DST, expands DST's presence in the output solutions
and customer management software and

services industries. Under the terms of the merger, USCS became a wholly-owned
subsidiary of DST. DST issued approximately 13.8 million shares of its common
stock in the transaction.

The issuance of additional DST common shares reduced KCSI's ownership interest
from 41% to approximately 32%. Additionally, the Company recorded a one-time
pretax non-cash charge of approximately $36.0 million ($23.2 million after-tax,
or $0.21 per share), reflecting the Company's reduced ownership of DST and the
Company's proportionate share of DST and USCS fourth quarter merger-related
costs. KCSI accounts for its investment in DST under the equity method.

Berger LLC Formation and Ownership History. On September 30, 1999, Berger
Associates, Inc. ("BAI") assigned and transferred its operating assets and
business to its subsidiary, Berger LLC, a limited liability company. In
addition, BAI changed its name to Stilwell Management, Inc. ("SMI"). SMI owns
100% of the preferred limited liability company interests and approximately 86%
of the regular limited liability company interests in Berger. The remaining 14%
of regular limited liability company interests were issued to key SMI and Berger
employees, resulting in a non-cash compensation charge. Additionally, in late
1999 Stilwell contributed to SMI the approximate 32% investment in DST.

Prior to the change in corporate form discussed above, the Company owned 100% of
BAI. The Company increased its ownership in BAI to 100% during 1997 as a result
of BAI's purchase, for treasury, of common stock from minority shareholders and
the acquisition by KCSI of additional BAI shares from a minority shareholder
through the issuance of 330,000 shares of KCSI common stock. In connection with
these transactions, BAI granted options to acquire shares of its stock to
certain employees. All of the outstanding options were cancelled upon formation
of Berger. This transaction resulted in approximately $17.8 million of goodwill,
which is being amortized over 15 years. However, the Company recorded a $12.7
million impairment of goodwill associated with the investment in Berger. The
Company determined that a portion of the goodwill recorded in connection with
the Berger investment was not recoverable, primarily due to below-peer
performance and growth of the core Berger funds in 1996 and 1997. See discussion
in Note 4 to the consolidated financial statements.

The Company's 1994 acquisition of a controlling interest in BAI was completed
under a Stock Purchase Agreement ("Agreement") covering a five-year period
ending in October 1999. Pursuant to the Agreement, the Company was required to
make additional purchase price payments based upon BAI attaining certain
incremental levels of assets under management up to $10 billion by October 1999.
The Company paid $3.0 million under this Agreement in 1999. No payments were
made during 1998. In 1997, the Company made additional payments of $3.1 million.
These payments represent adjustments to the purchase price and the resulting
goodwill is being amortized over 15 years.

Acquisition of Nelson. On April 20, 1998, the Company completed its acquisition
of 80% of Nelson, an investment advisor and manager based in the United Kingdom
("UK"). Nelson offers planning based asset management services directly to
private clients. Nelson managed approximately $1.3 billion of assets as of
December 31, 1999. The acquisition, accounted for as a purchase, was completed
using a combination of cash, KCSI common stock and notes payable. The total
purchase price was approximately $33 million. The purchase price was in excess
of the fair market value of the net tangible and identifiable intangible assets
received and this excess was recorded as goodwill to be amortized over a period
of 20 years. Assuming the transaction had been completed January 1, 1998,
inclusion of Nelson's results on a pro forma basis, as of and for the year ended
December 31, 1998, would not have been material to the Company's consolidated
results of operations.

Berger Joint Venture. During 1996, Berger entered into a joint venture agreement
with Bank of Ireland Asset Management (U.S.) Limited ("BIAM"), a subsidiary of
Bank of Ireland, to develop and market a series of international and global
mutual funds, as well as manage various private accounts. The venture, named
BBOI Worldwide LLC ("BBOI"), is headquartered in Denver, Colorado. Berger
accounts for its 50% investment in BBOI under the equity method. Berger and BIAM
have entered into an agreement to dissolve BBOI. Contingent upon trustee and
shareowner approval, when BBOI is dissolved, Berger will become the advisor and
administrator to the series of funds referred to as the Berger/BIAM Funds. BIAM,
provided necessary approvals for assignment of advisory agreements are
completed, will become the advisor to BBOI's private accounts. The Company
expects the dissolution to be completed by June 30, 2000.

TRANSPORTATION

Negotiations to Purchase Mexican Government's Ownership Interest in TFM. On
January 28, 1999, the Company, along with other direct and indirect owners of
TFM, entered into a preliminary agreement with the Mexican Government
("Government"). As part of that agreement, an option was granted to the Company,
Transportacion Maritima Mexicana, S.A. de C.V. ("TMM") and Grupo Servia, S.A. de
C.V. ("Grupo Servia") to purchase all or a portion of the Government's 20%
ownership interest in TFM at a discount. The option, under the terms of the
preliminary agreement, has expired. However, management of TFM has advised the
Company that negotiations with the Government are continuing and TFM management
expects that the Government will extend the option.

Access to Geismar, Louisiana Industrial Corridor. At a voting conference held on
March 25, 1999, the STB unanimously approved the merger of CN and Illinois
Central ("IC") (collectively referred to as "CN/IC"). The STB issued its written
approval with an effective date of June 24, 1999, at which time the CN was
permitted to exercise control over IC's operations and assets. As part of this
approval, the STB imposed certain restrictions on the merger including a
condition requiring that the CN/IC grant KCSR access to three shippers in the
Geismar, Louisiana industrial area: Rubicon, Inc. ("Rubicon"), Uniroyal Chemical
Company, Inc. ("Uniroyal") and Vulcan Materials Company ("Vulcan"). These are in
addition to the three Geismar shippers (BASF Corporation -"BASF", Shell Chemical
Company -"Shell", and Borden Chemical and Plastics -"Borden") to which KCSR
obtained access as a result of the strategic alliance agreement with CN/IC
discussed below. Access to these six shippers begins October 1, 2000 and
management believes it will provide the Company with additional revenue
opportunities. See further discussion below with respect to the Marketing
Alliance with CN/IC.

Intermodal facility at the former Richards-Gebaur Airbase. During 1999, KCSR
entered into a fifty year lease with the City of Kansas City, Missouri to
establish an automotive and intermodal facility at the former Richards-Gebaur
Airbase, which is located adjacent to KCSR's main rail line. The Federal
Aviation Administration ("FAA") has officially approved the closure of the
existing airport, and improvements have commenced. KCSR expects to relocate its
Kansas City intermodal facility to Richards-Gebaur during 2001.

Management expects that the new facility will provide additional capacity as
well as a strategic opportunity to serve as an international trade facility.
Management plans for this facility to serve as a U.S. customs pre-clearance
processing facility for freight moving along the NAFTA corridor. This is
expected to alleviate some of the congestion at the borders, resulting in more
fluid service to KCSL's customers, as well as customers throughout the rail
industry.

KCSR expects to spend approximately $20 million for site improvements and
infrastructure at Richards-Gebaur. Management expects to fund these improvements
using operating cash flows and existing credit facilities. Lease payments are
expected to range between $400,000 and $700,000 per year and will be adjusted
for inflation based on agreed-upon formulas. Management believes that, with the
addition of this facility, KCSR is positioned to increase its automotive and
intermodal revenue base by attracting additional NAFTA traffic.

Transportation Restructuring, Asset Impairment and Other Charges. In connection
with the Company's review of its accounts for the year ended December 31, 1997
in accordance with established accounting policies, as well as a change in the
Company's methodology for evaluating the recoverability of goodwill during 1997
(as set forth in Note 2 to the consolidated financial statements), $196.4
million of restructuring, asset impairment and other charges were recorded
during fourth quarter 1997 (including approximately $18.4 million recorded by
the Financial Services segment relating to i) a goodwill impairment associated
with the Berger investment; ii) the impairment of a non-core investment; and
iii) a contract reserve). After consideration of related tax effects, the
Transportation segment's charges reduced its net income by $141.9 million, or
$1.32 per share. The charges included:

o A $91.3 million impairment of goodwill associated with KCSR's 1993
acquisition of MidSouth Corporation ("MidSouth"). In response to the
changing competitive and business environment in the rail industry, in 1997
the Company revised its accounting methodology for evaluating the
recoverability of intangibles from a business unit approach to analyzing
each of the Company's significant investment components. Based on this
analysis, the remaining purchase price in excess of fair value of the
MidSouth assets acquired was not recoverable.

o A $38.5 million charge representing long-lived assets held for disposal.
Certain branch lines on the MidSouth route and certain non-operating real
estate were designated for sale. During 1998, one of the branch lines was
sold for a pretax gain of approximately $2.9 million. In first quarter 2000
the other branch line was sold for a minimal pretax gain. A potential buyer
has been identified for the non-operating real estate and management is
currently negotiating this transaction.

o Approximately $27.1 million in reserves related to the termination of union
productivity fund and employee separations. The union productivity fund was
established in connection with prior collective bargaining agreements and
required KCSR to pay employees when reduced crew levels were used. The
termination of this fund resulted in a reduction of salaries and wages
expense for the year ended December 31, 1998 of approximately $4.8 million.
During 1998, approximately $23.1 million in cash payments reduced these
reserves and approximately $2.5 million of the reserves were reduced based
primarily on changes in the estimate of claims made relating to the union
productivity fund. During 1999, approximately $1.1 million of cash payments
were made relating to the union productivity fund and employee separations,
leaving a reserve of approximately $0.4 million at December 31, 1999.

o A $9.2 million impairment of assets at Global Terminaling Services, Inc.
(formerly Pabtex, Inc.) as a result of continued operating losses and a
decline in its customer base.

o Approximately $11.9 million of other charges and reserves related to
leases, contracts and other reorganization costs. Based on the Company's
review of its assets and liabilities, certain charges were recorded to
reflect recoverability and/or obligation as of December 31, 1997. During
1999 and 1998, approximately $2.2 and $6.6 million, respectively, in cash
payments were made leaving approximately $1.8 million accrued at December
31, 1999.

Marketing Alliance with Canadian National and Illinois Central. On April 16,
1998, KCSR, CN and IC announced a 15-year marketing alliance that offers
shippers new competitive options in a rail freight transportation network that
links key north-south continental freight markets. The marketing alliance did
not require STB approval and was effective immediately. This alliance connects
points in Canada with the major U.S. Midwest markets of Detroit, Chicago, Kansas
City and St. Louis, as well as key Southern markets of Memphis, Dallas and
Houston. It also provides shippers with access to Mexico's rail system through
TFM.

In addition to providing access to key north-south international and domestic
U.S. traffic corridors, the railways' seek to increase business in existing
markets, primarily automotive and intermodal, as well as in other key carload
markets, including those for chemical and forest products. Transportation
management expects this alliance to provide opportunities for revenue growth and
position the railway as a key provider of rail service to the NAFTA corridor.

Under a separate access agreement, CN and KCSR plan investments in automotive,
intermodal and transload facilities at Memphis, Dallas, Kansas City and Chicago
to capitalize on the growth potential represented by the marketing alliance.
Access to the proposed terminals would be assured for the 25-year life span of
the facilities, regardless of any change in corporate control. Under the terms
of this access agreement, KCSR would extend its rail system in the Gulf area
and, in October 2000, gain access to additional chemical customers in the
Geismar, Louisiana industrial area, one of the largest chemical production areas
in the world, through a haulage agreement. Management expects this access to
provide additional revenue opportunities for the Company. Prior to this access
agreement, the Company received preliminary STB approval for construction of a
nine-mile rail line from KCSR's main line into the Geismar industrial area,
which the chemical manufacturers requested to be built to provide them with
competitive rail service. The Company will continue to hold the option of the
Geismar build-in provided that it is able to obtain the requisite approvals.
During 1999, however, the Company wrote-off approximately $3.6 million of costs
related to the Geismar build-in that had previously been capitalized. See
discussion above in "Recent Developments" for the potential adverse impact that
the proposed merger of BNSF and CN could have on KCSR revenues as a result of
traffic diversions away from the KCSR-CN/IC alliance.

Voluntary Coordination Agreement with the Norfolk Southern Railway Company
("Norfolk Southern"). The Company entered into a Voluntary Coordination
marketing agreement with the Norfolk Southern that allows the Company to
capitalize on the east-west corridor between Meridian, Mississippi and Dallas,
Texas through incremental traffic volume gained through interchange with the
Norfolk Southern. This agreement provides the Norfolk Southern run-through
service with access to Dallas and Mexico while avoiding the congested rail
gateways of Memphis, Tennessee and New Orleans, Louisiana.

Grupo TFM. Grupo TFM, a joint venture of the Company and TMM, was awarded the
right to purchase 80% of the common stock of TFM for approximately 11.072
billion Mexican pesos (approximately $1.4 billion based on the U.S.
dollar/Mexican peso exchange rate on December 5, 1996). TFM holds the concession
to operate over Mexico's Northeast Rail Lines for 50 years, with the option of a
50-year extension (subject to certain conditions).

The remaining 20% of TFM was retained by the Government, which has the option of
selling its 20% interest through a public offering, or selling it to Grupo TFM
after October 31, 2003 at the initial share price paid by Grupo TFM plus
interest computed at the Mexican Base Rate (the Unidad de Inversiones (UDI)
published by Banco de Mexico). In the event that Grupo TFM does not purchase the
Government's 20% interest in TFM, the Government may require TMM and KCSI to

purchase the Government's holdings in proportion to each partner's respective
ownership interest in Grupo TFM (without regard to the Government's interest in
Grupo TFM - see below).

On January 31, 1997, Grupo TFM paid the first installment of the purchase price
(approximately $565 million based on the U.S. dollar/Mexican peso exchange rate)
to the Government, representing approximately 40% of the purchase price. Grupo
TFM funded this initial installment of the TFM purchase price through capital
contributions from TMM and the Company. The Company contributed approximately
$298 million to Grupo TFM, of which approximately $277 million was used by Grupo
TFM as part of the initial installment payment. The Company financed this
contribution using borrowings under existing lines of credit.

On June 23, 1997, Grupo TFM completed the purchase of 80% of TFM through the
payment of the remaining $835 million to the Government. This payment was funded
by Grupo TFM using a significant portion of the funds obtained from: (i) senior
secured term credit facilities ($325 million); (ii) senior notes and senior
discount debentures ($400 million); (iii) proceeds from the sale of 24.6% of
Grupo TFM to the Government (approximately $199 million based on the U.S.
dollar/Mexican peso exchange rate on June 23, 1997); and (iv) additional capital
contributions from TMM and the Company (approximately $1.4 million from each
partner). Additionally, Grupo TFM entered into a $150 million revolving credit
facility for general working capital purposes. The Government's interest in
Grupo TFM is in the form of limited voting right shares, and the purchase
agreement includes a call option for TMM and the Company, which is exercisable
at the original amount (in U.S. dollars) paid by the Government plus interest
based on one-year U.S. Treasury securities.

In first quarter 1997, the Company entered into two separate forward contracts -
$98 million in February 1997 and $100 million in March 1997 - to purchase
Mexican pesos in order to hedge against a portion of the Company's exposure to
fluctuations in the value of the Mexican peso versus the U.S. dollar. In April
1997, the Company realized a $3.8 million pretax gain in connection with these
contracts. This gain was deferred, and has been accounted for as a component of
the Company's investment in Grupo TFM. These contracts were intended to hedge
only a portion of the Company's exposure related to the final installment of the
purchase price and not any other transactions or balances.

Concurrent with the financing transactions, Grupo TFM, TMM and the Company
entered into a Capital Contribution Agreement ("Contribution Agreement") with
TFM, which includes a possible capital call of $150 million from TMM and the
Company if certain performance benchmarks, outlined in the agreement, are not
met. The Company would be responsible for approximately $74 million of the
capital call. The term of the Contribution Agreement is three years. In a
related agreement between Grupo TFM, TFM and the Government, among others, the
Government agreed to contribute up to $37.5 million of equity capital to Grupo
TFM if TMM and the Company were required to contribute under the capital call
provisions of the Contribution Agreement prior to July 16, 1998. The Government
also committed that if it had not made any contributions by July 16, 1998, it
would, up to July 31, 1999, make additional capital contributions to Grupo TFM
(of up to an aggregate amount of $37.5 million) on a proportionate basis with
TMM and the Company if capital contributions are required. During these periods,
no additional contributions from the Company were requested or made and,
therefore, the Government was not required to contribute any additional capital
to Grupo TFM under this related agreement. The commitment from the Government to
participate in a capital call has expired. The provisions of the Contribution
Agreement requiring a capital call from TMM and the Company expire in June 2000.
If a capital call occurs prior to June 2000, the provisions of the Contribution
Agreement automatically extend to June 2002. As of December 31, 1999 no
additional contributions from the Company have been requested or made.

At December 31, 1999, the Company's investment in Grupo TFM was approximately
$286.5 million. The Company's interest in Grupo TFM is approximately 37% (with
TMM and a TMM affiliate owning 38.4% and the Government owning the remaining
24.6%). The Company accounts for its investment in Grupo TFM under the equity
method.

See above for discussion of the Company's option to purchase a portion of the
Government's interest in TFM.

Gateway Western. The Company acquired beneficial ownership of the outstanding
stock of Gateway Western in December 1996. The stock acquired by the Company was
held in an independent voting trust until the Company received approval from the
STB on the acquisition effective May 5, 1997. The consideration paid for Gateway
Western (including various acquisition costs and liabilities) was approximately
$12.2 million, which exceeded the fair value of the underlying net assets by
approximately $12.1 million. The resulting intangible is being amortized over a
period of 40 years.

Because the Gateway Western stock was held in trust during first quarter 1997,
the Company accounted for Gateway Western under the equity method as a
wholly-owned unconsolidated subsidiary. Upon STB approval of the acquisition,
the Company consolidated Gateway Western in the Transportation segment.
Additionally, the Company restated first quarter 1997 to include Gateway Western
as a consolidated subsidiary as of January 1, 1997, and results of operations
for the year ended December 31, 1997 reflect this restatement.

Under a prior agreement with The Atchison, Topeka & Santa Fe Railway Company,
BNSF has the option to purchase the assets of Gateway Western (based on a fixed
formula in the agreement) through the year 2004.

Railroad Industry Trends and Competition. The Company's rail operations compete
against other railroads, many of which are much larger and have significantly
greater financial and other resources than KCSL. Since 1994, there has been
significant consolidation among major North American rail carriers, including
the merger of Burlington Northern, Inc. and Santa Fe Pacific Corporation
("BN/SF", collectively "BNSF"), the UP and the Chicago and North Western
Transportation Company ("UP/CNW") and the 1996 merger of UP with SP. Further, in
1997 CSX Corporation ("CSX") and Norfolk Southern completed negotiations to
purchase parts of Conrail, Inc. ("Conrail"), which was approved by the STB in
1998. In February 1998, CN announced its intention to acquire the IC, which
received STB approval effective in June 1999. Most recently, BNSF and CN
announced their intention to merge, subject to various regulatory approvals.
(Note: In March 2000, the STB issued a 15-month moratorium on railroad merger
activities, which has temporarily delayed the merger between BNSF and CN). As a
result of this consolidation, the industry is now dominated by a few
"mega-carriers". The Company believes that KCSR revenues were negatively
affected (primarily in 1996 and early 1997) by the UP/SP and BN/SF mergers as a
result of the increased competition, which led to diversions of rail traffic
away from KCSR lines. The Company also believes that KCSR revenues have been
negatively impacted by the congestion resulting from the Norfolk Southern and
CSX takeover of Conrail. KCSR management regards the larger western railroads,
in particular, as significant competitors to the Company's operations and
prospects because of their substantial resources. The ongoing impact to KCSR of
these mergers is uncertain. Management believes, however, that because of its
investments and strategic alliances, KCSL is positioned to attract additional
rail traffic through its "NAFTA Railway."

In addition to competition within the railroad industry, the Company's
Transportation segment is subject to competition from motor carriers, barge
lines and other maritime shipping, which compete with the Company across certain
routes in its operating area. Mississippi and Missouri

River barge traffic, among others, compete with KCSR in the transportation of
bulk commodities such as grains, steel and petroleum products. Additionally,
truck carriers have eroded the railroad industry's share of total transportation
revenues. Changing regulations, subsidized highway improvement programs and
favorable labor regulations have improved the competitive position of trucks in
the United States as an alternative mode of surface transportation for many
commodities. Low fuel prices disproportionately benefit trucking operations over
railroad companies, since locomotives are more fuel-efficient than trucks.
Conversely, trucking companies are more negatively affected in times of higher
fuel prices. Intermodal traffic and certain other traffic face highly price
sensitive competition, particularly from motor carriers. In the United States,
the truck industry frequently is more cost and transit-time competitive than
railroads, particularly for distances of less than 300 miles. However, rail
carriers, including KCSR, have placed an emphasis on competing in the intermodal
marketplace, working together to provide end-to-end transportation of products.

While deregulation of freight rates has enhanced the ability of railroads to
compete with each other and with alternative modes of transportation, this
increased competition has resulted in downward pressure on freight rates.
Competition with other railroads and other modes of transportation is generally
based on the rates charged, the quality and reliability of the service provided
and the quality of the carrier's equipment for certain commodities.

See "Union Labor Negotiations" below for a discussion of the impact of labor
issues and regulations on competition in the transportation industry.

Union Labor Negotiations. Approximately 83% of KCSR and 88% of Gateway Western
employees, respectively, are covered under various collective bargaining
agreements.

In 1996, national labor contracts governing the KCSR were negotiated with all
major railroad unions, including the United Transportation Union, the
Brotherhood of Locomotive Engineers, the Transportation Communications
International Union, the Brotherhood of Maintenance of Way Employees, and the
International Association of Machinists and Aerospace Workers. The provisions of
the various labor agreements, which extended to December 31, 1999, generally
include periodic general wage increases, lump-sum payments to workers, and
greater work rule flexibility, among other provisions. These agreements did not
have a material effect on the Company's consolidated results of operations,
financial position or cash flows. As a result of the operating efficiencies
gained by the existing agreements, management believes the Company is better
positioned to compete effectively with alternative forms of transportation.
Railroads continue, however, to be restricted by certain remaining restrictive
work rules and are thus prevented from achieving optimum productivity with
existing technology and systems. Formal negotiations have begun with all unions
on revising these agreements. Those agreements remain in effect until the new
agreements are reached. Management does not expect that this process or the
resulting labor agreements will have a material impact on its consolidated
results of operations, financial condition or cash flows.

Labor agreements related to former MidSouth employees covered by collective
bargaining agreements reopened for negotiations in 1996. These agreements entail
eighteen separate groups of employees and are not included in the national labor
contracts. KCSR management has reached new agreements with all but one of these
unions. While discussions with this one union are ongoing, the Company does not
anticipate that this process or the resulting labor agreement will have a
material impact on its consolidated results of operations, financial condition
or cash flows.

The majority of employees of the Gateway Western are covered by collective
bargaining agreements that extended through December 1999. Unions representing
machinists and electrical workers, however, are operating under 1994 contracts
and are currently in negotiations to extend these

contracts. Negotiations on the agreements that extend through December 1999
began in late 1999. The Company does not anticipate that this process or the
resulting labor agreements will have a material impact on its consolidated
results of operations, financial condition or cash flows.

KCSR, Gateway and other railroads continue to be affected by labor regulations,
which are more burdensome than those governing non-rail industries, such as
trucking competitors. The Railroad Retirement Act requires up to a 23.75%
contribution by railroad employers on eligible wages, while the Social Security
and Medicare Acts only require a 7.65% employer contribution on similar wage
bases. Other programs, such as The Federal Employees Liability Act (FELA), when
compared to worker's compensation laws, vividly illustrate the competitive
disadvantage placed upon the rail industry by federal labor regulations.

Safety and Quality Programs. KCSR is working hard to achieve its safety vision
of becoming the safest railway in North America. In 1999, KCSR made progress
toward this vision. The Federal Railroad Administration ("FRA") Reportable
Injury Performance improved by 10% and the number of Highway Rail Grade Crossing
Collisions decreased by 24%. While total derailments remained largely unchanged
from 1998, a series of strategic initiatives are underway to assist in enhancing
safety performance.

The driving force for these initiatives is strong leadership at the senior field
and corporate level within KCSR, and joint ownership of the safety processes by
craft employees and managers. This leadership and joint ownership in safety are
helping shape an improved safety culture at KCSR.

Some of the safety-related initiatives now underway at KCSR include:
o The development and communication of Division - Safety Action Plans that
direct human and financial resources to those areas crucial for success in
safety.
o Continued evolution of comprehensive training processes for craft and
management employees.
o The establishment of local safety committees inclusive of craft committee
representatives on the newly formed Senior Safety Leadership Council. This
council is chaired by KCSR's Chief Operations Officer and includes much of
the senior management team.
o Conducting system-wide safety assessments to review and enhance physical
plant, facilitate dialogue among KCSR personnel and involve management and
union leadership in enhancing the safety culture.
o Establishment of a series of recognition processes designed to reward
superior performance in safety and foster ownership of the safety
processes.
o Demonstrated commitment by KCSR as a Responsible Care(R) - Partner company
to meet and exceed the Chemical Manufacturer's Association's - Codes of
Management Practices.
o Development of a new Safety and Rules book through processes that involve
craft/management leaders writing and communicating the rules and
recommended work practices.
o Enhanced operational testing (behavior type auditing) of craft employees,
including coaching substandard performance and recognizing safe work
practices.
o Establishment of challenging goals and related funding to enhance highway
rail grade crossing safety.

INDUSTRY SEGMENT RESULTS

The Company's revenues, operating income and net income by industry segment are
as follows (in millions):
1999(i) 1998(ii) 1997(iii)
----------- ----------- -----------

Transportation $ 601.4 $ 613.5 $ 573.2
Financial Services 1,212.3 670.8 485.1
----------- ----------- -----------
Total $ 1,813.7 $ 1,284.3 $ 1,058.3
=========== =========== ===========

Operating Income (Loss)
Transportation $ 64.1 $ 113.9 $ (92.7)
Financial Services 518.3 280.6 199.2
----------- ----------- -----------
Total $ 582.4 $ 394.5 $ 106.5
=========== =========== ===========

Net Income (Loss)
Transportation $ 10.2 $ 38.0 $ (132.1)
Financial Services 313.1 152.2 118.0
----------- ----------- -----------
Total $ 323.3 $ 190.2 $ (14.1)
=========== =========== ===========

(i) Includes unusual costs and expenses of $12.7 million ($7.9 million
after-tax) recorded by the Transportation segment, reflecting, among
others, amounts for facility and project closures, employee separations,
Separation related costs, labor and personal injury related issues.

(ii) Includes a one-time non-cash charge of $36.0 million ($23.2 million
after-tax) resulting from the merger of a wholly-owned subsidiary of DST
with USCS. DST accounted for the merger under the pooling of interests
method. The charge reflects the Company's reduced ownership of DST (from
41% to approximately 32%), together with the Company's proportionate share
of DST and USCS fourth quarter merger-related charges. See Note 3 to the
consolidated financial statements in this Form 10-K.

(iii)Includes $196.4 million ($158.1 million after-tax, comprised of $141.9
million -Transportation segment and $16.2 million - Financial Services
segment) of restructuring, asset impairment and other charges recorded
during fourth quarter 1997. The charges reflect impairment of goodwill
associated with KCSR's 1993 acquisition of the MidSouth and the Company's
investment in Berger, long-lived assets held for disposal, impaired
long-lived assets, reserves related to termination of a union productivity
fund and employee separations, and other reserves for leases, contracts and
reorganization costs. See Notes 2 and 4 to the consolidated financial
statements in this Form 10-K.

Consolidated 1999 net income increased $133.1 million, or 70%, to $323.3
million, reflecting higher net income from the Financial Services segment
resulting from an 86% increase in average assets under management year to year
and the impact of the 1998 DST and USCS merger charges. Partially offsetting
this increase was a decline in net income from the Transportation segment
arising from lower revenues and higher costs and expenses, including $7.9
million (after-tax) of certain unusual costs and expenses. Consolidated revenues
and operating income improved 41% and 48%, respectively, as a result of higher
assets under management and improved operating margins from the Financial
Services segment.

Consolidated net income for 1998 increased to $190.2 million from a consolidated
net loss of $14.1 million in 1997. Exclusive of the 1998 and 1997 one-time
charges discussed in ii) and iii) above, consolidated net income grew $69.4
million, or 48%, to $213.4 million from $144.0 million in 1997, reflecting net
income improvements in both the Transportation and Financial Services segments.
Consolidated revenues for the year ended December 31, 1998 were $226 million
(21%) higher than 1997 as a result of increases in both segments. Operating
income (exclusive of 1997 restructuring, asset impairment and other charges)
increased $91.6 million (30%) year to year, driven by higher revenues as well as
improved consolidated operating margins.

A discussion of each business segment's results of operations follows.

TRANSPORTATION (KCSL)

The following summarizes the income statement components of the Transportation
segment and provides a reconciliation to ongoing domestic Transportation
earnings:

1999 1998 1997
---------- ---------- ----------

Revenues $ 601.4 $ 613.5 $ 573.2
Costs and expenses 480.4 442.9 425.8
Depreciation and amortization 56.9 56.7 62.1
Restructuring, asset impairment
and other charges - - 178.0
---------- ---------- ----------
Operating income (loss) 64.1 113.9 (92.7)
Equity in net earnings (losses) of
unconsolidated affiliates 5.2 (2.9) (9.7)
Interest expense (57.4) (59.6) (53.3)
Other, net 5.3 13.7 5.0
---------- ---------- ----------
Pretax income (loss) 17.2 65.1 (150.7)
Income tax expense (benefit) 7.0 27.1 (18.6)
---------- ---------- ----------
Transportation net income (loss) 10.2 38.0 (132.1)

Restructuring, asset impairment and
other charges, net of income tax - - 141.9
Unusual costs and expenses,
net of income tax 7.9 - -
Grupo TFM earnings
and interest, net of income tax 10.9 14.3 17.6
---------- ---------- ----------

Ongoing domestic Transportation
earnings $ 29.0 $ 52.3 $ 27.4
========== ========== ==========

For the year ended December 31, 1999, ongoing domestic Transportation earnings
decreased $23.3 million (44.6%) compared to the year ended December 31, 1998
primarily as a result of lower revenues, higher operating expenses and a decline
in other, net. Transportation revenues declined $12.1 million, or 2.0%, for the
year ended December 31, 1999 versus 1998. KCSR revenues decreased 1.1% primarily
due to declines in chemical and petroleum, paper and forest and agricultural and
mineral traffic, partially offset by increased intermodal and automotive
traffic. Other transportation businesses, including Gateway Western, also
reported lower revenues due to volume-related declines. Ongoing operating
expenses increased approximately 5% primarily due to higher congestion-related
costs at KCSR, while ongoing other, net decreased approximately $5.5 million
primarily due to 1998 gains at KCSR (see below).

Ongoing domestic Transportation segment earnings increased $24.9 million, or
90.9%, to $52.3 million for the year ended December 31, 1998. This increase
resulted from higher revenues, which grew $40.3 million, or 7.0% (primarily from
a 6.5% increase in revenues at KCSR) and lower operating costs as a percentage
of revenue. The Transportation segment's operating income, exclusive of 1997
restructuring, asset impairment and other charges, increased 33.5% to $113.9
million from $85.3 million in 1997. This increase was driven by improved
operating margins as a result of a slower rate of growth in operating expenses
compared to revenues. Exclusive of depreciation and amortization and 1997
restructuring, asset impairment and other charges, the Transportation segment's
operating costs as a percentage of revenues decreased by more than 2% as a
result of cost containment efforts. The termination of the union productivity
fund resulted in savings of approximately $4.8 million during 1998. Depreciation
and amortization expenses declined $5.1 million, or 8.3%, chiefly due to the
reduction of amortization and depreciation

expense of approximately $5.6 million arising from the impairment of goodwill
and certain branch lines held for sale recorded during December 1997, partially
offset by increased depreciation from property additions. See "Significant
Developments" above for further discussion.

Interest Expense and Other, net
1999 interest expense decreased $2.2 million, or 3.7%, to $57.4 million due to a
slight decrease in average debt balances resulting from net repayments. During
2000, interest expense for the Transportation segment is expected to increase
due to higher interest rates associated with the debt refinancing, partially
offset by a related decrease in average debt balances. See "Recent Developments
- - Re-capitalization of the Company's Debt Structure" above. Other, net declined
$8.4 million for the year ended December 31, 1999 relating primarily to a 1998
gain on the sale of property ($2.9 million) and a 1998 receipt of interest ($2.8
million) related to a tax refund.

Interest expense for the year ended December 31, 1998 increased $6.3 million, or
11.8%, to $59.6 million. This increase resulted from the inclusion of a full
year's interest associated with the debt related to the Company's investment in
Grupo TFM, partially offset by a decrease in average debt balances due to net
repayments and a slight decrease in interest rates relating to the lines of
credit. Additionally during 1997, interest of $7.4 million was capitalized as
part of the investment in Grupo TFM until operations commenced (June 23, 1997).
Other, net increased $8.7 million to $13.7 million for the year ended December
31, 1998. Included in this increase is a gain of $2.9 million (pretax) from the
sale of a branch line and $2.8 million of interest related to a tax refund in
1998. Other non-operating real estate sales comprised the majority of the
remaining increase.

Income Taxes
Income tax expense decreased $20.1 million for the year ended December 31, 1999
compared to the same 1998 period, primarily because of the decline in pretax
income of $47.9 million (73.6%). The effective tax rate for 1999 was 40.7%
compared to 41.6% in 1998.

Income taxes increased $45.7 million from a 1997 benefit of $18.6 million to a
$27.1 million expense for the year ended December 31, 1998. This fluctuation
resulted primarily because of the restructuring, asset impairment and other
charges in 1997. Exclusive of these charges, income tax expense from year to
year increased by $9.6 million, or 54.8%, primarily due to higher operating
income in 1998.

KCSL Subsidiaries

Following is a detailed discussion of the primary subsidiaries and
unconsolidated affiliates comprising the Transportation segment. Results of less
significant subsidiaries have been omitted.

The Kansas City Southern Railway Company

The following discussion reflects the Kansas City Southern Railway operating
company on a stand-alone basis. The discussion excludes consideration of any
KCSR subsidiaries.

For the year ended December 31, 1999, KCSR contributed $26.8 million to the
Company's consolidated net income compared with $53.0 million for the year ended
December 31, 1998. Exclusive of $12.1 million ($7.5 million after-tax) of
unusual costs and expenses recorded during fourth quarter 1999 (see further
discussion below), KCSR contributed $34.3 million to the Company's consolidated
net income. The decrease in KCSR's contribution to net income was due to lower
operating margins arising from a 1.1% decline in revenues coupled with an
increase in operating costs and expenses (exclusive of these unusual costs) of
$22.1 million.

For the year ended December 31, 1998, KCSR's contribution to the Company's
consolidated net income increased $25.6 million to $53.0 million, compared to
$27.4 million (exclusive of restructuring, asset impairment and other charges)
in 1997. This increase was primarily due to a $33.8 million increase in
revenues, partially offset by a $4.0 million increase in variable and fixed
operating costs.

Revenues

The following summarizes revenues, carloads and net ton miles of KCSR by
commodity mix:

Carloads and
Revenues Intermodal Units Net Ton Miles
------------------------- ------------------------ -----------------------
(in millions) (in thousands) (in millions)
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- -------- ------- -------- -------- ------- ------- ------- -------

General commodities:
Chemical and petroleum $ 128.0 $ 138.3 $ 133.1 157.2 165.4 162.9 4,199 4,528 4,187
Paper and forest 104.0 108.8 106.4 165.8 172.5 175.8 3,062 3,129 3,054
Agricultural and mineral 92.8 94.7 85.0 129.9 130.8 119.6 4,641 4,614 3,971
Other 25.6 20.2 20.5 30.8 25.4 24.4 767 677 623
-------- ------- ------- ------ ------ ------- ------- ------- ------
Total general commodities 350.4 362.0 345.0 483.7 494.1 482.7 12,669 12,948 11,835
Intermodal 51.4 46.3 43.2 221.8 182.6 161.6 1,536 1,340 1,278
Coal 117.4 117.6 102.6 200.8 204.4 177.1 7,891 7,477 6,210
-------- ------- ------- ------ ------ ----- ------- ------- ------
Subtotal 519.2 525.9 490.8 906.3 881.1 821.4 22,096 21,765 19,323
Other 26.5 25.7 27.0 - - - - - -
-------- ------- ------- ------ ------ ------- ------- ------- ------
Total $ 545.7 $ 551.6 $ 517.8 906.3 881.1 821.4 22,096 21,765 19,323
======== ======= ======= ====== ====== ======= ======= ======= ======

1999 KCSR revenues decreased $5.9 million compared to 1998, resulting primarily
from a decline in chemical and petroleum, paper and forest and agricultural and
mineral traffic, partially offset by an increase in intermodal and automotive
traffic. General commodity carloads decreased 2.1%, resulting in an $11.6
million decline in general commodity revenues, while intermodal units shipped
increased 21.5% leading to a $5.1 million increase in related revenues.

KCSR revenues for 1998 were $551.6 million, a $33.8 million increase over 1997
as a result of higher revenues in all major commodity groups. 1998 coal revenues
increased $15.0 million, or 14.7%, compared to 1997 while intermodal revenues
were 7.3% higher. General commodities, led by an increase of 11.4% in
agricultural and mineral products revenues, improved $17.0 million, or nearly
5%. A portion of the increased revenues relate to traffic with Mexico, which
increased approximately 118% during 1998, resulting in an additional $10 million
of revenue. Also, increased carloads resulting from the CN/IC alliance
contributed to the higher revenues.

The following is a discussion of KCSR's major commodity groups.

Coal
KCSR transports significant amounts of high btu, low-sulfur coal which it
receives from the Powder River Basin in Wyoming via other rail carriers with
connecting rail lines in Kansas City. Coal is the largest single commodity
handled by KCSR and has historically been one of KCSR's most stable commodity
groups with recurring contractual revenues. The average length of contract for
KCSR coal customers is five years - the contract with Southwestern Electric
Power Company ("SWEPCO"), its largest customer, extends through 2006. KCSR
delivers coal to eight electric generating plants, including Kansas City Power
and Light ("KCP&L") plants in Kansas City and Amsterdam, Missouri, SWEPCO
facilities in Flint Creek, Arkansas and Welsh, Texas, an Empire District
Electric Company plant near Pittsburg, Kansas and an Entergy Gulf States plant
in Mossville, Louisiana. KCSR also transports coal as an intermediate carrier
for Western Farmers Electric Cooperative plant from Kansas City to Dequeen,
Arkansas, where it interchanges with a short-line carrier for delivery to

the plant. KCSR also delivers lignite to an electric generating plant at
Monticello, Texas ("TUMCO"). In fourth quarter 1999, KCSR began serving as a
bridge carrier for coal deliveries to a Texas Utilities electric generating
plant in Martin Lake, Texas. SWEPCO and Entergy Gulf States (formerly Gulf
States Utility Company) comprised approximately 80%, 81% and 82% of total coal
revenues generated by KCSR in 1999, 1998 and 1997, respectively.

During January 1999, the Kansas City Power and Light plant in Kansas City
(referred to as the Hawthorn plant) suffered a major casualty and is projected
to be out of service until July 2001. This extended outage is not expected to
have a material impact on overall coal revenues as this plant is a short haul
move and represented approximately 5% of total coal tons hauled by KCSR in 1998.
Further, some of the volume lost as a result of the temporary closure of
Hawthorn is being shipped to KCP&L's other plant in Amsterdam, Missouri - a
longer haul. Although, the volume of coal diverted to the Amsterdam plant is
less than that originally received at Hawthorn, the longer haul helps to offset
the lost revenue. This did not have a material impact on coal revenues during
1999.

During the first nine months of 1999, KCSR experienced a decline in coal
revenues primarily because of i) a decrease in demand compared with 1998 - a
year in which KCSR reported record coal revenues, and ii) slower delivery times
due to congestion arising from track maintenance work on the north-south
corridor. During the fourth quarter, however, coal revenues improved, mostly
offsetting these declines and resulting in year to date 1999 coal revenues only
slightly lower than the 1998 record levels. The improvement noted during the
fourth quarter resulted from increased demand, as well as from faster delivery
times arising from the completion of the track maintenance work in September
1999, which led to an easing of congestion and increased capacity. Coal
accounted for 22.6% of carload revenues during 1999 compared with 22.4% for
1998.

Coal movements generated $117.6 million of revenue during 1998, a 14.7% increase
over 1997. This 1998 increase resulted from higher unit coal traffic (increase
in carloads of nearly 16%) arising from several factors. 1) In 1998,
unseasonably warm weather resulted in a higher demand for electric power in
certain regions served by the KCSR and several utility customers requested more
coal to handle this increased demand. Additionally, in order to replenish
inventory levels depleted from this excess demand, several locations increased
their coal shipments. 2) During 1997, unit coal revenues were negatively
affected by unplanned outages (primarily during first and second quarters) at
several utilities served by KCSR, and first quarter weather problems which
affected carriers and the mines originating the coal. During 1998, the level of
unplanned outages declined and, thus, more unit coal trains were delivered to
customers. Additionally, although KCSR experienced certain weather-related
slow-downs due to flooding during fourth quarter 1998, it did not significantly
impact coal revenues. 3) 1998 results reflected a full year of revenues for a
utility customer not served by KCSR until after the first quarter of 1997. Coal
accounted for 22.4% of carload revenues during 1998 compared with 20.9% for
1997.

Chemicals and Petroleum
Chemical and petroleum products, which are serviced via tank and hopper cars
primarily to markets in the southeast and northeast United States through
interchange with other rail carriers, as a combined group represent the largest
commodity to KCSR in terms of revenue. Although 1999 was a disappointing year
for KCSR's chemical and petroleum business, management expects revenues in this
commodity group to grow in future years because of i) access to additional
chemical customers in Geismar, Louisiana, and ii) expanded access to chemical
shipments between the United States and Mexico through Tex Mex and TFM. The
Geismar industrial area is one of the largest concentrations of chemical
suppliers in the world. As a result of its marketing agreement with CN/IC, in
October 2000 KCSR is expected to gain access to the manufacturing facilities of
BASF, Shell and Borden in Geismar. Further, as a restriction imposed on the
merger of CN and IC, the STB granted KCSR access to three additional shippers
(Rubicon, Uniroyal and Vulcan) in Geismar effective October 2000. These six
chemical shippers in Geismar provide an opportunity

for KCSR to expand its rail service market share in this significant industrial
corridor. The Company also believes that by providing efficient, reliable rail
service for shipments between the United States and Mexico through Tex Mex and
TFM, there is an opportunity to convert to rail chemical and petroleum products
currently transported to and from Mexico by truck.

During 1999, chemical and petroleum revenues declined $10.3 million, or 7.4%,
compared with 1998, primarily as a result of significant declines in
miscellaneous chemical and soda ash revenues. Miscellaneous chemical revenues
declined $3.9 million due, in part, to the expiration in late 1998 of the
emergency service order in the Houston area related to the UP/SP merger
congestion, as well as a continuing decline in demand because of domestic and
international chemical market conditions and competitive pricing pressures. Soda
ash revenues fell 36.9% year to year because of a decrease in export shipments
due to a competitive disadvantage to another carrier. Management does not expect
soda ash revenues to return to past levels in the near future because of this
competitive disadvantage. Also contributing to the decline were lower plastic
and petroleum revenues, which were also impacted by competitive market pricing
and lower demand. Chemical and petroleum products accounted for 24.7% of total
1999 carload revenues compared with 26.3% for 1998.

Chemical and petroleum revenues increased $5.2 million to $138.3 million in 1998
compared to 1997. Increases in miscellaneous chemicals and soda ash carloads,
coupled with higher revenues per carload for plastic and petroleum products,
were offset by lower carloads for plastics, petroleum products and petroleum
coke. The higher revenues per carload for plastics and petroleum products
resulted from a combination of rate increases and length of hauls, while the
increased miscellaneous chemical and soda ash carloads arose from the strength
of these markets in 1998. Shipments of plastic products decreased as a result of
a reduced emphasis on low margin business, while petroleum and petroleum coke
carload declines were a result of economic turmoil overseas (primarily Asia)
affecting the export market. Chemical and petroleum products accounted for 26.3%
of total 1998 carload revenues compared with 27.1% for 1997.

Paper and Forest
KCSR's rail lines run through the heart of the southeastern U.S.
timber-producing region. Management believes that forest products from this
region tend to grow faster and are generally less expensive than forest products
from other regions. Southern yellow pine products from the southeast are
increasingly being used at the expense of western producers who have experienced
capacity reductions because of public policy considerations. KCSR serves eleven
paper mills directly (including International Paper Co. and Georgia Pacific,
Riverwood International, among others) and six others indirectly through
short-line connections. Primary traffic includes pulp and paper, lumber, panel
products (plywood and oriented strand board), engineered wood products,
pulpwood, woodchips and raw fiber used in the production of paper, pulp and
paperboard.

For the year ended December 31, 1999, paper and forest product revenues
decreased $4.8 million (4.4%) compared with 1998. An overall weakness in the
paper, lumber and related chemical markets led to volume declines in pulp/paper,
scrap paper, and pulpwood, logs and chips. Management believes, however, that
the weakness in these markets is subsiding and expects that demand will increase
in 2000. Further, management believes there is potential for an increase in
business to Mexico due to the high demand for woodpulp and scrap paper, and a
potential market for lumber and panel products as frame and panel construction
methods become more widely accepted in Mexico. Paper and forest traffic
comprised 20.0% of carload revenues during 1999 compared to 20.7% in 1998.

Paper and forest product revenues increased $2.4 million to $108.8 million for
1998, primarily as a result of increased carloads and revenues per carload for
pulp, paper and lumber products, offset by a reduction in pulpwood chip
shipments. Improved lumber shipments in 1998 resulted from the strong home
building and remodeling market, while pulp/paper increases were primarily a

result of paper mill expansions for several customers served by KCSR. Although
paper and forest revenues increased for 1998, fourth quarter carloads and
revenues decreased compared with fourth quarter of 1997. Paper and forest
traffic comprised 20.7% of carload revenues during 1998 compared to 21.7% in
1997.

Agricultural and Mineral
Agricultural products consist of domestic and export grain, food and related
products. Shipper demand for agricultural products is affected by competition
among sources of grain and grain products as well as price fluctuations in
international markets for key commodities. In its domestic grain business, KCSR
both receives and originates shipments of grain and grain products for delivery
to feed mills serving the poultry industry. Through the Company's marketing
agreement with I&M Rail Link, KCSR is able to access sources of grain and corn
in Iowa and other Midwestern states. KCSR currently serves 35 feed mills along
its rail lines throughout Arkansas, Oklahoma, Texas, Louisiana, Mississippi and
Alabama. Export grain shipments include primarily wheat, soybean and corn
transported over KCSR rail lines to the Gulf of Mexico for international
destinations, and to Mexico via Laredo, Texas. Over the long-term, KCSR expects
to continue to participate in the supply of carloads of grain to Mexico through
its strategic investments in Tex Mex and TFM because of Mexico's reliance on
grain imports to meet its minimum needs. Food and related products consist
mainly of soybean meal, grain meal, oils and canned goods, sugar and beer.
Mineral shipments consist primarily of ores, clay and cement.

Agricultural and mineral product revenues for 1999 decreased $1.9 million, or
2.0%, compared to 1998. Revenue declines in export grain, food and related
products, non-metallic ores and stone, clay and glass products were partially
offset by an increase in domestic grain revenues. Declines in export grain
resulted primarily from competitive pricing and changes in length of haul.
Declines in food products, non-metallic ores and stone, clay and glass products
were primarily attributable to demand-related volume declines, and changes in
traffic mix and length of haul. Improvements in domestic grain revenues were
driven by higher corn shipments to meet the demands of the feed mills located on
KCSR's rail lines; however, during fourth quarter 1999, domestic grain revenues
declined approximately $1 million because of a loss of market share due to a
rail line build-in by the UP to a feed mill serviced by KCSR. Management expects
a future decline in domestic grain revenues due to this competitive situation.
Agricultural and mineral products accounted for 17.9% of carload revenues in
1999 compared with 18.0% in 1998.

Agricultural and mineral product revenues for the year ended December 31, 1998
were $94.7 million, an increase of $9.7 million, or 11.4%, compared to 1997.
Increased carloads for most agricultural and mineral products, including
domestic and export grain, food, nonmetallic ores, cement, glass and stone
contributed to the increase. Higher revenues per carload, most notably in export
grain and food products, were partially offset by a reduction in revenues per
carload from domestic grain movements. Changes in revenues per carload were
primarily due to mix of traffic and changes in the length of haul. A portion of
the volume increase was attributable to increased traffic flow with Mexico.
Agricultural and mineral products comprised 18.0% of carload revenues in 1998
compared with 17.3% in 1997.

Intermodal
The intermodal freight business consists of hauling freight containers or truck
trailers by a combination of water, rail and motor carriers, with rail carriers
serving as the link between the other modes of transportation. KCSR increased
its share of the U.S. intermodal traffic through the 1993 acquisition of the
MidSouth, which extended the Company's east/west line running from Meridian
Mississippi to Shreveport, Louisiana and on to Dallas, Texas. Through its
dedicated intermodal train service between Meridian and Dallas, the Company
competes directly with truck carriers along the Interstate 20 corridor, offering
service times that are competitive with both truck and other rail carriers.

The intermodal business is highly price and service driven as the trucking
industry maintains certain competitive advantages over the rail industry. Trucks
are not obligated to provide or to maintain rights of way and do not have to pay
real estate taxes on their routes. In prior years, the trucking industry
diverted a substantial amount of freight from the railroads as truck operators'
efficiency over long distances increased. Because fuel costs constitute a larger
percentage of the trucking industry's costs, declining fuel prices
disproportionately benefit trucking operations as compared to railroad
operations, while rising fuel prices unfavorably affect trucking operations.
Changing regulations, subsidized highway improvement programs and favorable
labor regulations improved the competitive position of trucks as an alternative
mode of surface transportation for many commodities. In response to these
competitive pressures, railroad industry management sought avenues for improving
the competitiveness of rail traffic and forged numerous alliances with truck
companies in order to move more traffic by rail and provide faster, safer and
more efficient service to its customers. KCSR has entered into agreements with
several trucking companies for train service between Dallas and Meridian and has
streamlined its intermodal operations, making service competitive both in price
and service with trucking.

KCSR's intermodal business has grown significantly over the last several years
with intermodal units increasing from 61,748 in 1993 to 221,816 in 1999, and
intermodal revenues increasing from $17 million to $51 million during this same
period. As intermodal revenues increased so rapidly, margins on certain
intermodal business declined. In 1999, management addressed the declining
margins by increasing certain intermodal rates effective September 1, 1999 and
through the closure of two under-performing intermodal facilities on the
north-south route. Management expects these actions to improve the profitability
and operating efficiency of the intermodal business sector.

Through its strategic marketing alliance with the CN/IC and through various
marketing agreements with the Norfolk Southern, management expects to further
capitalize on the growth potential of intermodal freight revenues, particularly
for traffic moving between points in the upper Midwest and Canada to Kansas
City, Dallas and Mexico. Additionally, management anticipates that with the
carve-up of Conrail, Norfolk Southern and CSX Transportation will seek longer
hauls to their southern gateways. KCSR's interchange points at Birmingham and
Mobile, Alabama, as well as Meridian, Mississippi, will therefore provide the
opportunity for additional revenue growth as these eastern shippers seek
alternatives to traditional congested gateways. Furthermore, KCSR is in the
process of transforming the former Richards-Gebaur Airbase in Kansas City to a
U.S. customs pre-clearance processing facility, which is expected to handle and
process large volumes of domestic and international intermodal freight. Upon
completion, this facility is expected to provide additional opportunities for
intermodal revenue growth (See "Significant Developments").

Intermodal revenues for 1999 increased $5.1 million, or 11.0%, compared to 1998
revenues primarily due to an increase in intermodal units shipped of
approximately 21.5% year over year, partially offset by a decrease in revenue
per unit shipped. All of the 1999 revenue growth is attributable to container
shipments, which have a lower rate per unit shipped than trailers. As a result
revenues per intermodal unit shipped have declined. Container movements,
however, have more favorable profit margins due to their lower inherent cost
structure compared to trailers. Approximately $2.5 million of the intermodal
growth was related to CN/IC alliance traffic. Intermodal revenues accounted for
9.9% of carload revenues in 1999 compared with 8.8% in 1998.

During 1998, intermodal revenues increased $3.1 million, or 7.3%, over 1997
primarily as a result of higher unit shipments of approximately 13% year over
year, offset partially by a decrease in revenue per unit. Almost all of the 13%
volume growth related to containers. As discussed above, container shipments
have a lower rate per unit shipped than trailers and, as a result revenues per
unit shipped declined. Intermodal revenues accounted for 8.8% of carload
revenues in both 1998 and 1997.

Other
KCSR's remaining freight business consists of automotive products, metal, scrap
and slab steel, waste and military equipment. During 1999, automotive product
revenues of $5.9 million were nearly three times 1998 automotive product
revenues of $1.8 million. This increase was, in part, due to an agreement
reached with General Motors Corporation for automobile parts traffic originating
in the upper Midwest and terminating in Mexico. Management expects that i) as
the CN/IC strategic marketing alliance continues to mature and ii) following
completion of the facility at the former Richards-Gebaur Airbase, automotive
product revenues will continue to increase during the foreseeable future. Other
revenues accounted for 4.9% of carload revenues during 1999 compared to 3.8% and
4.2% for 1998 and 1997, respectively. During the year ended December 31, 1997,
KCSR accepted a minimal amount of diverted UP trains as a result of UP traffic
congestion, resulting in approximately $3.9 million in miscellaneous revenue.

Costs and Expenses

The following table summarizes KCSR's operating expenses (dollars in millions):

1999 1998 1997
--------- -------- ------

Salaries, wages and benefits $ 181.6 $ 168.9 $ 173.6
Fuel 32.6 31.9 34.7
Material and supplies 33.1 33.9 30.9
Car hire 19.8 9.8 3.6
Purchased services 47.0 38.1 35.5
Casualties and insurance 26.7 27.0 21.4
Operating leases 50.8 56.5 56.8
Depreciation and amortization 50.2 50.6 54.7
Restructuring, asset impairment and other charges - - 163.8
Other 34.1 25.0 26.5
--------- -------- --------
Total $ 475.9 $ 441.7 $ 601.5
========= ======== ========

General
For the year ended December 31, 1999, KCSR's costs and expenses increased $34.2
million (7.7%) versus comparable 1998, primarily as a result of increases in
salaries, wages and related fringe benefits, fuel costs, car hire, and purchased
services, partially offset by a decrease in operating leases. $12.1million of
the increase was comprised of unusual costs and expenses recorded during fourth
quarter 1999 relating to employee separations, labor and personal injury related
costs, write-off of costs associated with the Geismar project and costs
associated with the closure of an intermodal facility. The remainder of the
increase resulted primarily from system congestion and capacity issues arising
from track maintenance on the north-south corridor, which began in second
quarter 1999 and was completed at the end of the third quarter 1999. Also
contributing to capacity and congestion problems was the implementation of a new
dispatching system, turnover in certain experienced operations management
positions, unreliable and insufficient locomotive power, congestion arising from
eastern rail carriers, and several significant derailments.

For the year ended December 31, 1998, KCSR's costs and expenses increased $4.0
million over comparable 1997 (exclusive of 1997 restructuring, asset impairment
and other charges). Increases reported in materials and supplies, car hire,
purchased services, and casualties and insurance, were largely offset by
decreased salaries, wages and benefits, fuel costs and depreciation and
amortization. Salaries, wages and benefits and depreciation and amortization
expenses declined as expected primarily as a result of the 1997 restructuring,
asset impairment and other charges as discussed in the "Significant
Developments" above. Fuel costs decreased due to lower fuel prices partially
offset by higher usage. 1998 KCSR variable operating expenses declined 1.5% as a

percentage of revenues, exclusive of the 1997 restructuring, asset impairment
and other charges. These improvements related to the increase in revenues and
management's cost control initiatives.

Salaries, Wages and Benefits
Salaries, wages and benefits expense for the year ended December 31, 1999
increased $12.7 million versus comparable 1998, an increase of 7.5%. $3.0
million of the increase results from certain unusual costs and expenses
including employee separations and union labor-related issues. The remaining
increase was primarily attributable to the congestion and capacity issues, which
resulted in the need for additional crews as well as overtime hours.

For the year ended December 31, 1998, salaries, wages and benefits expense
decreased $4.7 million compared to 1997, mostly because of the termination of a
union productivity fund in December 1997, resulting in the elimination of pay
relating to reduced crews.

Fuel
For the year ended December 31, 1999, fuel expense increased approximately 2.2%
compared to 1998, as a result of a 1% increase in fuel usage coupled with a 1%
increase in the average fuel price per gallon. In 1999, fuel costs represented
approximately 6.9% of total operating expenses compared to 7.2% in 1998. Fuel
expenses in early 2000 are expected to continue to increase based on higher
market prices for fuel and comparable usage levels. Management believes,
however, that fuel efficiency will improve in 2000 as a result of the purchase
of the 50 new locomotives by KCSR in late 1999 as discussed in "Recent
Developments".

KCSR locomotive fuel usage represented 7.2% of KCSR operating expenses in 1998
(7.9% in 1997, exclusive of restructuring, asset impairment and other charges).
1998 fuel costs declined $2.8 million, or 8.1%, arising from a 15% decrease in
average fuel cost per gallon (primarily due to market driven factors) partially
offset by an increase in fuel usage of 9%.

Roadway Maintenance
Portions of roadway maintenance costs are capitalized and other portions
expensed (as components of material and supplies, purchased services and other),
as appropriate. Expenses aggregated $42, $40 and $47 million for 1999, 1998 and
1997, respectively. Maintenance and capital improvement programs are in
conformity with the FRA's track standards and are accounted for in accordance
with applicable regulatory accounting rules. Management expects to continue to
fund roadway maintenance expenditures with internally generated cash flows.

Purchased Services
For the year ended December 31, 1999, purchased services expense increased $8.9
million, or 23.4%, compared to the year ended December 31, 1998, primarily as a
result of short term locomotive needs (rents, maintenance) arising from the
congestion and capacity problems discussed above. As a result of KCSR's purchase
of 50 new locomotives discussed in "Recent Developments", these short-term
locomotive needs are expected to subside in 2000.

Purchased Services expenses were approximately $2.6 million higher in 1998
compared to 1997, primarily due to short-term locomotive requirements.

Car Hire
For the year ended December 31, 1999, expenses for car hire payable, net of
receivables, increased $10.0 million over 1998. A portion of the increase in car
hire expense was attributable to congestion-related issues, resulting in higher
payables to other railroads because more foreign cars were on KCSR's system for
a longer period. This congestion also affected car hire receivable as fewer KCSR
cars and trailers were being utilized by other railroads. The remaining increase
in car hire expense results from a change in equipment utilization. Similar to
1998, for certain equipment, KCSR has continued its transition to utilization
leases from fixed leases. Costs for utilization leases are recorded as car hire
expense, whereas fixed lease costs are recorded as operating lease expense.
Additionally, as certain fixed leases expire, KCSR is electing to use more
foreign cars rather than renew the lease. A portion of the increase in car hire
costs was offset by a decrease in related operating lease expenses as a result
of these changes in equipment utilization.

Expenses for car hire payable, net of receivables increased $6.2 million for the
year ended December 31, 1998 compared to 1997. This increase in net expense
resulted from a change in equipment utilization as discussed above (i.e. switch
from fixed leases to utilization leases; use of more foreign cars versus renewal
of lease), increased carloads, track congestion (primarily weather-related in
third and fourth quarter) and decreased amounts of car hire receivable,
primarily due to the easing of the UP congestion prevalent in 1997.

Casualties and Insurance
For the year ended December 31, 1999, casualties and insurance expense declined
slightly (approximately $0.3 million) compared with the year ended December 31,
1998. This decline reflects lower personal injury-related costs, substantially
offset by increased equipment damage costs resulting from derailments. A primary
objective of KCSR is to operate in the safest environment possible and efforts
are ongoing to improve its safety experience. See "Significant Developments -
Safety and Quality Programs".

1998 casualties and insurance expense increased $5.6 million, or 26.2%, over
1997, primarily as a result of a $3.7 million increase in derailment related
costs experienced during the latter half of 1998, as well as an increase in
personal injury related expenses.

Operating Leases
For the year ended December 31, 1999, operating lease expense decreased $5.7
million, or 10.1% compared to the year ended December 31, 1998, as a result of a
change in equipment utilization as discussed above regarding car hire expense.
In 2000, however, operating lease expense is expected to increase approximately
$7 million as a result of the 50 new GE 4400 AC locomotives leased during fourth
quarter 1999.

Operating lease costs did not materially change in 1998 compared to 1997.

Depreciation and amortization
1999 depreciation and amortization expense declined slightly compared to 1998.
This slight decline results from the retirement of certain operating equipment.
As these assets fully depreciate and are retired, they are being replaced, as
necessary, with equipment under operating leases. This decline was partially
offset by increased depreciation from property additions. Management expects
depreciation and amortization costs to increase in the second half of 2000 as a
result of the implementation of new operating information systems, which will
affect virtually all areas of the organization.

For the year ended December 31, 1998, KCSR depreciation and amortization expense
declined $4.1 million, or 7.5%, to $50.6 million. This decline resulted
primarily from the reduction of amortization and depreciation expense of
approximately $5.6 million associated with the impairment of goodwill, as well
as certain branch lines held for sale, recorded during December

1997, the effect of which was not realized until 1998. See discussion above in
"Significant Developments." This decline was partially offset by increased
depreciation from property additions.

Operating Income and Operating Ratio

KCSR's operating income for the year ended December 31, 1999 decreased $40.1
million (36.5%) to $69.8 million. This decline in operating income resulted from
a 1.1% decline in revenues coupled with a 7.7% increase in operating expenses.
Exclusive of $12.1 million of unusual operating costs and expenses, the
operating income declined $28.0 million, resulting in an operating ratio (a
common efficiency measurement among Class I railroads) of 84.8% for the year
ended December 31, 1999 compared to 79.9% for 1998. Although the operating ratio
for 1999 was disappointing, management expects, on a long-term basis, to
maintain the operating ratio below 80%, despite the substantial use of lease
financing for locomotives and rolling stock.

Exclusive of 1997 restructuring, asset impairment and other charges, KCSR's
operating income increased $28.6 million, or 33.5%, to $113.9 million in 1998
from $85.3 million in 1997. This improved operating income, which was driven by
increased revenues and the containment of operating expenses, resulted in a 1998
operating ratio of 79.9% compared with 83.4% in 1997 (exclusive of
restructuring, asset impairment and other charges).

KCSR Interest Expense and Other, net

For the year ended December 31, 1999, interest expense decreased $2.5 million,
or 7.0%, to $33.1 million from $35.6 million in 1998, reflecting a reduction of
the average debt balances as a result of debt repayments. Management expects
KCSR interest expense to increase substantially in 2000 based on the refinancing
of the Company's debt structure in January 2000. KCSR is the borrower under the
$750 million senior secured credit facility and will maintain all related debt
outstanding on its balance sheet. This increased debt balance coupled with
higher interest rates on the new facility will lead to higher interest expense
in 2000. See "Recent Developments", "Liquidity" and "Capital Structure" for
further discussion.

For the year ended December 31, 1998, interest expense decreased 6%, to $35.6
million from $37.9 million in 1997. This decrease primarily reflects the
reduction in average debt balances during the year as a result of debt
repayments.

Other, net declined $7.1 million for the year ended December 31, 1999 relating
primarily to a 1998 gain on the sale of property ($2.9 million) and a 1998
receipt of interest ($2.8 million) related to a tax refund. Other, net increased
$6.2 million for the year ended December 31, 1998 versus 1997, primarily because
of these 1998 items. Other non-operating real estate sales comprised the
majority of the remaining 1998 increase.

Gateway Western

Gateway Western contributed $0.3 million (including goodwill amortization
attributed to the investment) to the Company's 1999 net income, a $3.8 million
decrease compared to 1998. Freight revenues declined 10% to $40.7 million in
1999 from $45.2 million in 1998, attributable to lower revenue for all major
commodity groups. Decreases in revenue resulted from volume-related declines,
changes in traffic mix and competitive pricing pressures. Operating expenses
increased $1.4 million (3.8%) to $37.5 million, largely due to a derailment.
Lower revenues coupled with higher expenses led to an increase in Gateway's 1999
operating ratio to 92.1% from 79.9% in 1998.

For the year ended December 31, 1998, Gateway Western contributed $4.1 million
to the Company's net income, a $1.1 million increase (36.7%) over the $3.0
million contributed in 1997.

Freight revenues increased $2.5 million to $45.2 million from $42.7 million in
1997, while operating expenses increased about $0.9 million to $36.1 million.
These results helped lower Gateway Western's operating ratio to 79.9% for 1998
from 82.4% in 1997.

Unconsolidated Affiliates

During 1999, 1998 and 1997, the Transportation segment's unconsolidated
affiliates were comprised primarily of Grupo TFM, Mexrail and Southern Capital.
The PCRC is currently under reconstruction and projected to begin operations in
2001.

For the year ended December 31, 1999, the Transportation segment recorded equity
in net earnings of $5.2 million from unconsolidated affiliates versus equity in
net losses of $2.9 million in 1998, an increase of $8.1 million. This increase
relates primarily to improvements in equity earnings of Grupo TFM and Mexrail.
Also contributing was an increase in 1999 equity earnings from Southern Capital
related mostly to the gain on the sale of the loan portfolio in 1999.

In 1999, Grupo TFM contributed equity earnings of $1.5 million to the Company's
net income compared to equity losses of $3.2 million in 1998. Exclusive of
deferred income tax effects, Grupo TFM's contribution to the Company's net
income (including the impact of associated KCSI interest expense) increased
$19.4 million, indicative of substantially improved operations and continued
growth. This increase was partially offset by a $16 million increase in the
Company's proportionate share of Grupo TFM's deferred tax expense in 1999 versus
1998. Higher Grupo TFM earnings resulted from a 22% increase in revenues and 97%
increase in operating income partially offset by an increase in deferred tax
expense. Results of Grupo TFM are reported using U.S. generally accepted
accounting principles ("U.S. GAAP"). Because the Company is required to report
equity in Grupo TFM under U.S. GAAP and Grupo TFM reports under International
Accounting Standards, fluctuations in deferred income tax calculations occur
based on translation requirements and differences in accounting standards. The
deferred income tax calculations are significantly impacted by fluctuations in
the relative value of the Mexican peso versus the U.S. dollar and the rate of
Mexican inflation, and can result in significant variances in the amount of
equity earnings (losses) reported by the Company.

In 1999, Mexrail contributed equity earnings of $0.7 million compared to equity
losses of $2.0 million in 1998, an improvement of $2.7 million. Mexrail revenues
increased 3.2% while operating expenses declined approximately 6%. The decrease
in operating expenses resulted primarily from a reorganization of certain
business practices whereby the operations were assumed by TFM. This change in
the operations of Mexrail resulted in certain efficiencies and a reduction in
related costs.

For the year ended December 31, 1998, the Transportation segment recorded equity
in net losses of $2.9 million from unconsolidated affiliates compared to equity
in net losses of $9.7 million in 1997. The majority of this improvement related
to the operations of Grupo TFM. In 1998, equity in net losses for the Company's
investment in Grupo TFM were $3.2 million compared to equity in net losses of
$12.9 million in 1997 (for the period from June 23, 1997 to December 31, 1997).
This improvement was primarily attributable to higher revenues and operating
income at Grupo TFM, coupled with a higher tax benefit associated with the
devaluation of the peso (on a U.S. GAAP accounting basis) and one-time impact of
the write-off of a $10 million bridge loan fee in 1997. Equity in net losses
from Mexrail was $2.0 million in 1998 compared with equity in net earnings of
$0.9 million in 1997. Tex Mex revenues increased during the first three quarters
of 1998 as a result of an emergency service order imposed by the Surface
Transportation Board ("STB") in the Houston, Texas area relating to 1997and 1998
UP service issues; however, expenses associated with accommodating the increase
in traffic and congestion-related problems of the UP system offset this revenue
growth. In 1998, equity in net earnings from Southern Capital was $2.0 million
compared with $2.1 million in 1997.

Grupo TFM
Similar to KCSR, Grupo TFM's subsidiary, TFM, derives its freight revenues from
a wide variety of commodity movements, including chemical and petroleum,
automotive, food and grain, manufacturing industry, metals, minerals and ores
and intermodal. For the year ended December 31, 1999, Grupo TFM revenues
improved $93.2 million to $524.5 million from $431.3 million in 1998. Reflecting
this growth in revenues, operating expenses increased approximately $32.8
million during 1999; however, the operating ratio declined 8.9 percentage points
to 76.6% from 85.5%, displaying Grupo TFM management's continued emphasis on
operating efficiency and cost control. Volume-related increases in car hire
expense and operating leases were partially offset by an 8% decline in salaries
and wages. Grupo TFM management believes that operating efficiencies will
continue to improve and that expenses will continue to decline as a percentage
of revenues in 2000. Grupo TFM ultimately expects an operating ratio under 70%
through a combination of increasing revenues and cost containment.

For the year ended December 31, 1998, revenues improved to $431.3 million from
$206.4 million for the initial period of operations (June 23, 1997 - December
31, 1997) with average monthly revenues increasing approximately 8%. In
addition, during 1998 Grupo TFM management was able to successfully implement
cost reduction strategies while continuing to increase revenues, thus improving
operating income. Most notably, salaries and wages declined due to headcount
reductions while locomotive fuel expense decreased due to favorable fuel prices.
Evidence of these improvements was reflected in TFM's 1998 operating ratio,
which improved to 85.5% from approximately 94% for 1997.

Other Transportation-Related Affiliates and Holding Company Components

Other subsidiaries in the Transportation segment include:
o KCSL, a wholly-owned subsidiary of the Company, serving as a holding
company for Transportation-related entities;
o Trans-Serve, Inc., an owner of a railroad wood tie treating facility;
o Global Terminaling Services, Inc. ("GTS" - formerly "Pabtex, Inc."),
located in Port Arthur, Texas with deep water access to the Gulf of Mexico,
an owner and operator of a bulk materials handling facility which stores
and transfers coal and petroleum coke from trucks and rail cars to ships
primarily for export;
o Mid-South Microwave, Inc., which owns and leases a 1,600 mile industrial
frequency microwave transmission system that is the primary communications
facility used by KCSR;
o Rice-Carden Corporation., owning and operating various industrial real
estate and spur rail trackage contiguous to the KCSR right-of-way;
o Southern Development Company, the owner of the executive office building in
downtown Kansas City, Missouri used by KCSI and KCSR;
o Wyandotte Garage Corporation, an owner and operator of a parking facility
located in downtown Kansas City, Missouri used by KCSI and KCSR; and
o Transfin Insurance, Ltd., a single parent captive insurance company,
providing property and general liability coverage to KCSL and its
subsidiaries and affiliates.

1999 contributions to net income from other Transportation-related affiliates
and KCSL decreased approximately $3.7 million from 1998, reflecting $1.3 million
in higher expenses at KCSL and lower contributions from various Transportation
subsidiaries. Higher expenses at KCSL relate mostly to costs associated with the
Separation and other legal matters. Net income from GTS declined $2.0 million
during 1999 as a result of a 13% decline in revenues coupled with an 80%
increase in operating expenses. A significant portion of the increase in
operating expenses of GTS related to uncollectable accounts and legal fees.

1998 contributions to net income from other Transportation-related affiliates
and KCSL increased $10.0 million from 1997, primarily as a result of the asset
impairment charges recorded during fourth quarter 1997. Exclusive of these
charges, contributions to net income increased approximately $1.0 million.

TRANSPORTATION SEGMENT TRENDS and OUTLOOK

Management expects general commodities, intermodal and automotive traffic to be
largely dependent on economic trends within certain industries in the geographic
region served by the railroads comprising the NAFTA Railway. Transportation
management was disappointed with 1999 results, but believes the NAFTA Railway
continues to provide an attractive service for shippers. The Transportation
segment experienced several challenges during 1999, the most notable being a
congested rail system. Numerous actions were taken during fourth quarter to
alleviate congestion and address the cost structure of operations. Six new
sidings have recently been added on KCSR's north-south route between Kansas
City, Missouri and Beaumont, Texas, which has helped to improve capacity and
ease congestion. Also, as a result of the completion of the track maintenance
program in September 1999, the related congestion has subsided. Other actions
taken include management staff reductions, a new operations center and
dispatching system, centralized traffic control in the Shreveport yard area
(allows for more fluid traffic) and rate increases to boost contribution and
manage growth. Additionally, as mentioned previously, KCSR expects improved
locomotive efficiency with the addition of the 50 new GE 4400 AC locomotives
received during fourth quarter 1999. Further, management is placing an emphasis
on safety and training in 2000 to help improve the efficiency and effectiveness
of operations, as well as to reduce the number of derailments, accidents and
employee lost work days. These actions have already produced improvements in
operations and traffic flow in December 1999 and early 2000. Based on
anticipated traffic levels, the easing of congestion during fourth quarter 1999
and the expected results of these management initiatives, revenues for 2000 are
expected to increase compared with 1999 levels. Variable expenses are expected
to decline slightly as a percentage of revenues as a result of the easing of
congestion and management initiatives, except for fuel expenses, which are
expected to mirror market conditions.

The Company expects to continue to realize benefits from traffic with Mexico,
the CN/IC alliance and interchange traffic with Norfolk Southern. In the short
term, the CN/IC alliance is expected to provide additional revenue opportunities
for intermodal and automotive traffic, as well as access to additional chemical
customers in Geismar, Louisiana, one of the largest concentrations of chemical
suppliers in the world. However, management believes that, in the long term, a
proposed BN/CN merger could adversely impact revenues expected from CN/IC
alliance traffic.

The Company expects to record equity in net earnings from its investment in
Grupo TFM in 2000. Grupo TFM revenues have grown substantially since inception
(June 23, 1997) and are expected to continue to grow during 2000. Costs continue
to be reduced through operational efficiencies and are expected to be lower in
2000. These expected results for Grupo TFM are based on current projections for
the valuation of the peso for 2000. Management does not make any assurances as
to the impact that a change in the value of the peso or a change in Mexican
inflation will have on the results of Grupo TFM. See "Foreign Exchange Matters"
below and Item 7(A), Quantitative and Qualitative Disclosures About Market Risk,
of this Form 10-K for further information. Management also expects to record
equity in net earnings from its Southern Capital and Mexrail investments during
2000.

FINANCIAL SERVICES (STILWELL)

Revenues, operating income and net income for Stilwell (with subsidiary
information exclusive of holding company amortization and interest costs
attributed to the respective subsidiary) were as follows (in millions):

Year Ended December 31,
1999 1998 (i) 1997 (ii)
------------ -------------- --------------

Revenues:
Janus $1,155.3 $ 626.2 $ 450.1
SMI and Berger 40.0 33.5 34.9
Nelson 17.0 11.1 -
Other - - 0.1
------------- -------------- --------------

Total $1,212.3 $ 670.8 $ 485.1
============= ============== ==============

Operating Income (Loss):
Janus $ 539.5 $ 296.7 $ 226.6
SMI and Berger 2.9 4.9 3.8
Nelson (1.7) 1.1 -
Other (22.4) (22.1) (31.2)
------------- -------------- --------------

Total $ 518.3 $ 280.6 $ 199.2
============= ============== ==============

Net Income (Loss):
Janus $ 284.1 $ 164.0 $ 119.9
SMI and Berger 4.4 3.9 2.7
Nelson (1.4) 0.6 -
Other 26.0 (16.3) (4.6)
------------- -------------- --------------

Total $ 313.1 $ 152.2 $ 118.0
============= ============== ==============

(i) Includes a one-time non-cash charge of $36.0 million ($23.2 million
after-tax, or $0.21 per basic and diluted share) resulting from the
DST and USCS merger, which DST accounted for under the pooling of
interests method. The charge reflects the Company's reduced
ownership of DST (from 41% to approximately 32%), together with the
Company's proportionate share of DST and USCS fourth quarter
merger-related charges. See Note 3 to the consolidated financial
statements in this Form 10-K.

(ii) Includes $16.2 million (after-tax) of asset impairment and contract
reserve costs. See Note 4 to the consolidated financial statements
in this Form 10-K.

Assets under management as of December 31, 1999, 1998 and 1997 were as follows
(in billions):

1999 1998 1997
---- ---- ----

JANUS
Janus Advised Funds:
Janus Investment Funds (i) $ 171.8 $ 75.9 $ 48.7
Janus Aspen Series (ii) 17.4 6.2 3.3
Janus World Funds (iii) 1.4 0.1 -
Janus Money Market Funds 9.4 4.8 2.6
------------- -------------- --------------
Total Janus Advised Funds 200.0 87.0 54.6
Janus Sub-Advised Funds and
Private Accounts 49.5 21.3 13.2
------------- -------------- --------------

Total Janus 249.5 108.3 67.8
------------- -------------- --------------

BERGER
Berger Advised Funds 5.7 3.3 3.2
Berger/BIAM Funds 0.3 0.2 0.1
Berger Sub-Advised Funds and
Private Accounts 0.6 0.2 0.5
------------- -------------- --------------

Total Berger 6.6 3.7 3.8
------------- -------------- --------------

NELSON (iv) 1.3 1.1 -
------------- -------------- --------------

Total Assets Under Management $ 257.4 $ 113.1 $ 71.6
============= ============== ==============

(i) Excludes money market funds

(ii) The Janus Aspen Series consists of eleven portfolios offered through
variable annuity and variable life insurance contracts, and certain
qualified pension plans

(iii) Janus World Funds Plc ("Janus World Funds") is a group of
Ireland-domiciled funds introduced in December 1998

(iv) Acquired in April 1998

The Financial Services segment ("Stilwell") reported 1999 net income of $313.1
million, an increase of 106% compared to $152.2 million in 1998. Exclusive of
the one-time charges associated with the DST merger in 1998, net income was
$137.7 million (79%) higher than 1998. Revenues increased $541.5 million, or
81%, over 1998, leading to higher operating income. Efforts to maintain costs
consistent with the level of revenues resulted in an operating margin of 43%,
improved over the 42% in 1998. Total assets under management increased $144.3
billion (128%) during 1999, reaching $257.4 billion at December 31, 1999. Total
shareowner accounts exceeded 4.3 million as of December 31, 1999, a 43% increase
over 1998. Equity earnings from DST for the year ended December 31, 1999
increased 45% versus comparable 1998 (exclusive of fourth quarter merger-related
costs).

Stilwell contributed $152.2 million to the Company's consolidated net income in
1998 versus $118.0 million in 1997. Exclusive of the one-time items recorded in
both years as discussed in the "Significant Developments" section above, net
income was $41.2 million (31%) higher than 1997. Revenues increased $185.7
million, or 38%, over 1997, leading to higher operating income. While operating
income increased, efforts to ensure an adequate infrastructure to provide for
consistent, reliable and accurate service to investors caused a decrease in
operating margins in 1998, from

45% for the year ended December 31, 1997 to 42% for 1998. Total assets under
management increased $41.5 billion (58%) during 1998, reaching $113.1 billion at
December 31, 1998. Total shareowner accounts exceeded three million as of
December 31, 1998, a 12% increase over 1997.

Revenue and operating income increases during the period from 1997 to 1999 are
primarily attributable to Janus. These increases are a direct result of Janus'
growth in assets under management. Assets under management and shareowner
accounts have grown in recent years from a combination of new money investments
(i.e., fund sales) and market appreciation. Fund sales have risen in response to
marketing efforts, favorable fund performance, introduction and market reception
of new products, and the current popularity of no-load mutual funds. Market
appreciation has resulted from increases in investment values.

Following is a detailed discussion of the operating results of the primary
subsidiaries comprising the Financial Services segment.

JANUS CAPITAL CORPORATION

1999

In 1999, assets under management increased 130.5% to $249.5 billion from $108.3
billion, as a result of net sales of $56.3 billion and market appreciation of
$84.9 billion. Equity portfolios comprise 95% of all assets under management at
the end of 1999.

Excluding money market funds, 1999 net sales of Janus Investment Funds, Janus
Aspen Series and Janus World Funds were $42.2 billion and net sales of
subadvised and private accounts totaled $10.0 billion. Total Janus shareowner
accounts increased over 1.3 million, or 49%, to 4.1 million.

Investment management, shareholder servicing and fund administration revenue,
which is primarily based upon a percentage of assets under management, increased
$529.1 million, or 85% in 1999, to $1.2 billion as a result of the increase in
assets under management. Aggregate fee rates declined from 1997 to 1999.

Operating expenses increased 87% from $329.5 million to $615.8 million in 1999
as a result of the significant increase in assets under management, additional
employees, facilities and other infrastructure-related costs. Approximately 56%
of Janus' 1999 operating expenses consist of variable costs that generally
increase or decrease with fluctuations in management fee revenue. An additional
15% of operating expenses (principally advertising, promotion, sponsorships,
pension plan and other contributions) are discretionary on a short-term basis.

The following highlights changes in key expenses in 1999 from 1998:

o Employee compensation and benefits increased $144 million, or 91%,
primarily attributable to increased incentive and base compensation.
Additionally, Janus experienced significant overtime compensation, which
was required to manage the rapid growth in investor activity. Incentive
compensation increased due to the growth in management fee revenue and
achievement of investment and financial performance goals. For the twelve
months and thirty-six months ended December 31, 1999, over 99% of assets
under management were ranked within the first quartile of investment
performance as compared to their respective peer groups and over 97%
outperformed their respective index (as defined pursuant to compensation
agreements). Base compensation increased due to a 68% increase in full-time
employees from approximately 1,300 at the end of 1998 to approximately
2,200 at December 31, 1999.

o Fees paid to alliance and mutual fund supermarkets increased $77 million,
or 124%, due principally to the growth in assets under management being
distributed through these channels. Such assets increased from $32.3
billion at December 31, 1998 to $82.4 billion at December 31, 1999.

o Marketing, promotional and advertising expenditures increased 41% to $56.9
million. Janus continued to promote brand awareness through print,
television and radio media channels.

o Depreciation and amortization increased $9.8 million, or 141%, due to
continued infrastructure spending discussed below.

o Sales commissions paid in 1999 related to sales of certain fund shares,
known as B shares, in Janus World Funds. These payments increased by $29.5
million to $31.7 million from $2.2 million in 1998. Amortization of these
payments amounted to $8.1 million and $154,000 in 1999 and 1998,
respectively.

1998

In 1998, assets under management increased 59.7% to $108.3 billion as a result
of net sales of $13.4 billion and $27.1 billion in market appreciation.
Approximately $87.0 billion was invested in the Janus Advised Funds, with the
remainder held by the Janus Sub-Advised Funds and Private Accounts. Equity
portfolios comprised 94% of total assets under management at December 31, 1998.

Excluding money market funds, 1998 net sales of the Janus Advised Funds were
$11.3 billion and net sales of the Janus Sub-Advised Funds and Private Accounts
totaled $1.6 billion. Total Janus shareowner accounts increased 353,000, or 15%,
to 2.7 million.

Janus' revenues increased $176.1 million (39%) to $626.2 million in 1998, driven
by the significant growth in assets under management year to year.

Exclusive of the $2.2 and $2.6 million in amortization costs attributed to Janus
in 1997 and 1998, respectively, operating expenses increased 47% from $223.5
million in 1997 to $329.5 million in 1998. This increase reflects the
significant growth in assets under management and revenues, as well as Janus'
efforts to develop its infrastructure to ensure consistent quality of service.
Approximately 47% of Janus' 1998 operating expenses were variable (e.g.,
incentive compensation, mutual fund supermarket fees, etc.), 19% were
discretionary (principally marketing, pension plan contributions, etc.) and the
remainder fixed.

A brief discussion of key expense increases follows:

o Employee compensation and benefits increased $45 million, or 40%, in 1998
compared to 1997 due to an increased number of employees (including senior
investment management, marketing and administration employees, as well as
additional shareowner servicing and technology support personnel) and
incentive compensation. Incentive compensation increased principally due to
growth in assets under management combined with strong investment
performance. In particular, portfolio management incentive compensation
-- formulated to reward top investment performance -- approached its
highest possible rate in 1998 as a result of more than 93% of assets under
management ending 1998 in the top quartile of investment performance
compared to their respective peer groups (as defined pursuant to
compensation agreements).

o Alliance and mutual fund supermarket fees increased 65% in 1998 to $62.3
million. This increase was principally due to an increase in assets under
management being distributed through these channels, from $19.0 billion at
December 31, 1997 to $32.3 billion at December 31, 1998.

o Marketing, promotional and advertising expenditures increased $17.5 million
during 1998 to capitalize on generally favorable market conditions, to
respond to market volatility and to continue establishing the Janus brand.

o Depreciation and amortization increased $2.3 million in 1998 compared
to 1997 due to increased infrastructure spending as discussed below.

General

The growth in Janus' assets under management over the past several years is a
function of several factors including, among others: (i) market-leading,
exceptional investment performance for the one and three year periods and for
the life of fund for most mutual funds under management; (ii) strong equity
securities markets worldwide; (iii) a strong brand awareness; and (iv) effective
use of third party distribution channels for both retail and sub-advised
products.

Since 1996, Janus has introduced eight new domestic funds -- four in the Janus
Investment Funds and four in the Janus Aspen Series. Additionally, to continue
to achieve optimal results for investors, Janus closed two of its most popular
funds recently. With assets growing substantially during the year, Janus Twenty
Fund was closed in April 1999 and Janus Global Technology Fund was closed in
January 2000. In December 1999, Janus announced plans to open Janus Strategic
Value Fund, which opened in early 2000.

International, or offshore, operations increased assets under management by $1.4
billion in 1999, due to $1.1 billion in net sales and $337 million in market
appreciation. Most of this growth was in Janus World Funds, which is a group of
offshore multiclass funds introduced in December 1998 modeled after certain of
the Janus Investment Funds and domiciled in Dublin, Ireland. These operations
incurred an operating loss of $7.8 million (before taxes). Due to significant
expansion currently underway, such operations are not expected to generate a
profit in 2000. The majority of sales of the Janus World Funds were made into
the funds' class B shares, which require Janus to advance sales commissions to
various financial intermediaries. Janus paid $29.5 million in commissions during
1999. Amounts paid for commissions were not material in 1998. Continued growth
in these funds may impact liquidity and cash resources (see "Liquidity" below).

In 1999 and 1998, Janus invested more than $56 million and $37 million,
respectively, on infrastructure development to ensure uninterrupted service to
shareowners; to provide up-to-the-minute investment and securities trading data;
to improve operating efficiency; to integrate information systems; and to obtain
additional physical space for expansion. Net occupied lease space increased by
251,000 square feet during 1999 to 686,000 square feet, with commitments to
occupy an additional 67,000 square feet by March 2000. Infrastructure efforts in
1999 focused on the following:

o Increases in shareholder servicing capacity. Over 170,000 square feet was
added in Denver and Austin to accommodate additional telephone
representatives and shareholder processing personnel. Additions to
telephone infrastructure were made during 1999 that allow for over 2,600
concurrent investor service calls to be received versus approximately 1,600
at the start of 1999. Additionally, XpressLine, Janus' automated call
system, was expanded to handle 218,000 calls per day and 35,000 calls per
hour.

o Continued development and enhancement of Janus' web site. In 1999, features
were added to allow investors to execute most transactions (purchases,
redemptions and exchanges) on-line, to access account information on-line,
to select the preferred method of statement delivery (paper or electronic),
to allow a Janus Investor Services Representative to access copies of
shareholder statements to assist with investor questions, and to provide
information for institutional relationships. Capacity was expanded to
handle over 300,000 visits per day. Janus intends to maintain a 100% web
capacity reserve.

Infrastructure efforts in 1998 included the following:
o an enterprise-wide reporting system, producing more efficient and timely
management reporting and allowing full integration of portfolio management,
human resources, budgeting and financial systems;
o a second investor service and data center opened in Austin, Texas in 1998,
including redundant data and telephone connections to allow the facility to
operate in the event that Denver facilities and personnel become
unavailable;
o an upgrade of Janus' web site, providing shareowners the opportunity to
customize their personal Janus home page and to process most transactions
on-line; and
o improvements of physical facilities, producing a more efficient workspace
and allowing Janus to accommodate additional growth and technology.

SMI AND BERGER

1999

Berger reported 1999 net earnings of $4.4 million compared to $3.9 million in
1998, exclusive of $4.5 million in holding company amortization charges
attributed to the investment in Berger in 1999 and 1998. Total assets under
management held by the Berger funds as of December 31, 1999 increased to $6.6
billion, up 78% from the $3.7 billion as of December 31, 1998. This increase
resulted from market appreciation of $2.3 billion and net sales of $0.6 billion.
Total Berger shareowner accounts decreased approximately 13% during 1999,
primarily within Berger funds introduced prior to 1997 (e.g., Berger Growth Fund
- - formerly the Berger 100 Fund, Berger Growth & Income Fund). In contrast, the
number of accounts in the funds introduced since 1997 increased 56% year to
year. These fluctuations in shareowner accounts generally are indicative of
recent performance compared to peer groups.

Due to the increased level of assets under management throughout 1999, revenues
increased approximately 19% compared to 1998. Berger's 1999 operating expenses
increased approximately $8.5 million (30%) over 1998, resulting in lower
operating margins in 1999 versus 1998. This increase in expenses was primarily
due to higher salaries and wages costs in second and third quarters associated
with management realignment and a change in corporate structure (See
"Significant Developments" above). Without these reorganization costs, margins
improved approximately four percentage points. Higher costs also occurred in
third party distribution costs and investment performance-based incentive
compensation.

Berger recorded $2.3 million in equity earnings from its joint venture
investment, BBOI, for the year ended December 31, 1999 compared to $1.5 million
in 1998. This increase reflects continued growth in BBOI assets under
management, which totaled $943 million at December 31, 1999 versus $522 million
at December 31, 1998 (including, in both years, private accounts not reported in
Berger's total assets under management). However, see discussion in "Significant
Developments" regarding the planned dissolution of BBOI in the first half of
2000.

1998

Berger reported 1998 net earnings of $3.9 million compared to $4.4 million in
1997, exclusive of holding company amortization charges attributed to the
investment in Berger in both years and a 1997 one-time restructuring, asset
impairment and other charge of $2.7 million ($1.7 million after-tax) related to
a contract reserve. Total assets under management held by the Berger funds
decreased slightly to $3.7 billion as of December 31, 1998 versus $3.8 billion
as of December 31, 1997. This decrease was attributable to net redemptions of
$0.7 billion, substantially offset by market appreciation of $0.6 billion. While
total Berger shareowner accounts decreased approximately 13% during 1998,
primarily within the Berger Growth Fund, the number of accounts in the funds
introduced during 1997 and 1998 increased 88% year to year. These fluctuations
in shareowner accounts generally are indicative of shareowner reaction to recent
performance compared to peer groups.

As a result of fluctuations in the level of assets under management throughout
1998, revenues decreased approximately 4% in 1998 from 1997. Berger's 1998
operating expenses were essentially even with 1997. While reductions in
marketing costs resulted from a more targeted advertising program, these savings
were offset by higher salaries and wages resulting from an increased average
number of employees during 1998 versus 1997. Amortization expense attributed to
Berger declined by $0.9 million in 1998 due to reduced goodwill from the 1997
impairment discussed previously.

Berger recorded $1.5 million in equity earnings from its joint venture
investment, BBOI, for the year ended December 31, 1998 compared to $0.6 million
in 1997. This increase reflects continued growth in BBOI assets under
management, which totaled (including, in both years, private accounts not
reported in Berger's total assets under management) $522 million at December 31,
1998 versus $161 million at December 31, 1997.

General

During the period from 1997 to 1999, Berger introduced six new equity funds: the
Berger Mid Cap Value Fund; the Berger Small Cap Value Fund; the Berger Balanced
Fund; the Berger Mid Cap Growth Fund; the Berger Select Fund; and, most
recently, the Berger Information Technology Fund. These funds held approximately
$1.5 billion of assets under management at December 31, 1999, more than three
times the $493 million at December 31, 1998. The core Berger funds (i.e., those
introduced by Berger prior to 1997) gained more than $1.4 billion in assets
under management during 1999, reversing these funds' experience during 1998 and
1997.

In second quarter 1999, Berger appointed a new president and chief executive
officer and realigned the management of several of its advised funds, including
the Berger Growth Fund, the Berger Balanced Fund and the Berger Select Fund.
Berger believes these changes improve its opportunity for growth in the future.

At December 31, 1999 and 1998, approximately 28.0% and 27.6%, respectively, of
Berger's total assets under management were generated through mutual fund
"supermarkets" and other third party distribution channels.

NELSON MONEY MANAGERS PLC

1999

For the year ended December 31, 1999, Nelson reported a net loss of $1.4 million
compared to net income of $0.6 million for the period from acquisition to
December 31, 1998 (exclusive of holding company amortization costs attributed to
the investment in Nelson in both years). This decline resulted from Nelson's
efforts to expand its revenue base through the use of its proprietary investment
services in broader markets, as well as through brand-awareness and marketing
programs initiated late in second quarter 1999. Revenues, which are earned based
on a percentage of funds under management together with a fee on the client's
initial investment, were higher in 1999 compared to 1998 due to higher assets
under management and inclusive of a full year of Nelson revenues. Costs were
higher in 1999, indicative of Nelson's growth efforts. Specifically, increases
occurred in salaries and wages (reflecting growth in the number of employees),
administration costs (infrastructure and training efforts) and advertising
costs.

1998

Nelson contributed $0.6 million to consolidated net income in 1998 (exclusive of
the $1.3 million of holding company amortization charges attributed to the
investment in Nelson), reflecting the nine months of results since being
acquired by KCSI. Nelson revenues were $11.1 million for the period from
acquisition to year end 1998. Operating expenses, exclusive of amortization of
intangibles, totaled $9.9 million. The intangible amounts associated with the
acquisition of Nelson are being amortized over a 20 year period.

EQUITY IN EARNINGS OF DST

Equity earnings from DST totaled $44.4 million for 1999 versus $30.6 million in
1998 (exclusive of one-time fourth quarter merger-related charges). Improvements
in revenues, operating margins and DST's equity earnings of unconsolidated
affiliates contributed to this increase year to year, as did the required
capitalization of internal use software development costs totaling approximately
$20.9 million (DST's pretax total). Consolidated DST revenues increased 9.8%
over the prior year, reflecting higher financial services and output solutions
revenues. U.S. mutual fund shareowner accounts processed increased to 56.4
million compared to 49.8 million as of December 31, 1998.

Exclusive of the one-time fourth quarter merger-related charges resulting from
the DST and USCS merger, equity earnings from DST increased $6.3 million to
$30.6 million for the year ended December 31, 1998. This improvement over 1997
was attributable to revenue growth resulting from a 10.7% increase in mutual
fund shareowner accounts serviced (reaching 49.8 million at December 31, 1998),
improved international operating results and higher operating margins year to
year (15.1% versus 14.2% in 1997).

As discussed in the "Significant Developments" section above, fourth quarter and
year ended 1998 include a one-time $23.2 million (after-tax, $0.21 per share)
non-cash charge resulting from the merger of a wholly-owned subsidiary of DST
and USCS. This charge reflects the Company's reduced ownership of DST (from 41%
to approximately 32%), together with the Company's proportionate share of DST
and USCS fourth quarter merger-related costs.

INTEREST EXPENSE AND OTHER, NET

Fluctuations in interest expense from 1997 through 1999 reflect declining
average debt balances over the period. The affect on interest resulting from
these lower balances was partially offset by a

modest increase in charges on other interest-bearing balances during the three
year period. Interest expense in 1999 reflects this trend as the decline in
debt-related interest from 1998 exceeded the increase resulting from higher
average balances for other interest-bearing balances. Average debt balances in
1998 were lower than 1997 due to repayments of outstanding balances early in
1998; accordingly, 1998 interest expense declined from 1997. Interest expense in
1997 reflected borrowings in connection with KCSI common stock repurchases.

Other, net for full year 1999 increased $17.1 million compared to 1998,
exclusive of the $8.8 million (pretax) gain on the sale of Janus' 50% interest
in IDEX Management, Inc. ("IDEX"). Janus continues as sub-advisor to the five
portfolios in the IDEX group of mutual funds it served prior to the sale. This
increase year to year resulted from the following: i) realized gains by Janus
and Berger on the sale of short-term investments; ii) higher interest income
resulting from an increase in cash; iii) an increase in investment income; and
iv) gains resulting from the issuance of Janus shares to certain of its
employees. Other, net increased in 1998 versus 1997 as a result of the gain on
the sale of IDEX, partially offset by reduced 1998 other income recorded at the
Financial Services holding company level relating to a sales agreement with a
former affiliate.

STILWELL TRENDS and OUTLOOK

Future growth of Stilwell's revenues and operating income is largely dependent
on prevailing financial market conditions, relative performance of Janus, Berger
and Nelson products, introduction and market reception of new products, as well
as other factors, including changes in the stock and bond markets, increases in
the rate of return of alternative investments, increasing competition as the
number of mutual funds continues to grow, and changes in marketing and
distribution channels.

As a result of the rapid revenue growth during the last two years, Stilwell's
operating margins have been strong. Management expects that Stilwell will
experience margin pressures in the future as the various subsidiaries strive to
ensure that the operational and administrative infrastructure continues to meet
the high standards of quality and service historically provided to investors.
Additionally, a higher rate of growth in costs compared to revenues is expected
in connection with Nelson's efforts to expand its operations. Stilwell expects
to continue to participate in the earnings or losses from its DST investment.

LIQUIDITY

Summary cash flow data is as follows (in millions):
1999 1998 1997
----------- ----------- -------

Cash flows provided by (used for):
Operating activities $ 458.8 $ 255.6 $ 246.7
Investing activities (158.6) (113.6) (379.4)
Financing activities (108.2) (107.3) 173.2
------------ ------------ -----------
Net increase in
cash and equivalents 192.0 34.7 40.5
Cash and equivalents at beginning of year 144.1 109.4 68.9
----------- ----------- -----------

Cash and equivalents at end of year $ 336.1 $ 144.1 $ 109.4
=========== =========== ===========

During the year ended December 31, 1999, the Company's consolidated cash
position increased $192.0 million from December 31, 1998, resulting primarily
from net income and changes in working capital balances, partially offset by
property acquisitions and debt repayments.

Operating Cash Flows. The Company's cash flow from operations has historically
been positive and sufficient to fund operations, KCSR roadway capital
improvements, other capital improvements and debt service. External sources of
cash (principally negotiated bank debt, public debt and sales of investments)
have typically been used to fund acquisitions, new investments, equipment
additions and Company Common stock repurchases.

The following table summarizes consolidated operating cash flow information.
Certain reclassifications have been made to prior year information to conform to
current year presentation.

1999 1998 1997
----------- ----------- -----------
(in millions)

Net income (loss) $ 323.3 $ 190.2 $ (14.1)
Depreciation and amortization 92.3 73.5 75.2
Equity in undistributed earnings (51.6) (16.8) (15.0)
Reduction in ownership of DST - 29.7 -
Restructuring, asset impairment and
other charges - - 196.4
Deferred income taxes 21.6 23.2 (16.6)
Gains on sales of assets (0.7) (20.2) (6.9)
Minority interest in consolidated earnings 57.3 33.4 24.9
Deferred commissions (29.5) - -
Change in working capital items 43.5 (59.5) (7.4)
Other 2.6 2.1 10.2
----------- ----------- -----------

Net operating cash flow $ 458.8 $ 255.6 $ 246.7
=========== =========== ===========

Net operating cash inflows for the year ended December 31, 1999 were $458.8
million compared to net operating cash inflows of $255.6 million in the same
1998 period. This $203.2 million improvement was chiefly attributable to higher
1999 net income, increases in current liabilities resulting from infrastructure
growth and a 1998 payment of approximately $23 million related to the KCSR union
productivity fund termination. Partially offsetting this increase were payments
of deferred commissions in connection with Janus World Funds B share
arrangements and an increase in accounts receivable indicative of the revenue
growth.

1998 operating cash inflows increased by approximately $8.9 million from 1997.
This increase was largely attributable to higher ongoing net income
(approximately $69 million) and deferred tax expense (due to benefits booked in
1997 in connection with restructuring, asset impairment and other charges). The
increase was partially offset by the first quarter 1998 KCSR payment with
respect to the productivity fund liability, lower interest payable as a result
of reduced indebtedness during 1998 and declines in contract allowances and
prepaid freight charges due other railroads.

Investing Cash Flows. Net investing cash outflows were $158.6 million for the
year ended December 31, 1999 compared to $113.6 million of net investing cash
outflows during 1998. This $45.0 million difference results primarily from
higher capital expenditures - both in the Transportation and Financial Services
segments. These increases were partially offset by a decrease in funds used for
investment in affiliates.

Net investing cash outflows were $113.6 million during 1998 versus $379.4
million in 1997. This $265.8 million difference in cash outflows results mostly
from a decrease in funds used for investments in affiliates ($298 million
invested in Grupo TFM in 1997), offset partially by an increase in property
acquisitions.

Cash was used for property acquisitions of $157, $105, and $83 million in 1999,
1998 and 1997, respectively, and investments in and loans with affiliates of
$17, $25 and $304 million in 1999, 1998 and 1997, respectively. Included in the
1997 investments in affiliates was the Company's approximate $298 million
capital contribution to Grupo TFM.

Generally, operating cash flows and borrowings under lines of credit have been
used to finance property acquisitions and investments in and loans with
affiliates.

Financing Cash Flows. Financing cash flows were as follows:

o Borrowings of $22, $152 and $340 million in 1999, 1998 and 1997,
respectively. Proceeds from the issuance of debt in 1999 were used for
stock repurchases. During 1998, proceeds from borrowings under existing
lines of credit were used to repay $100 million of 5.75% Notes which were
due on July 1, 1998. Other 1998 borrowings were used to fund the KCSR union
productivity fund termination ($23 million), to fund a portion of the
Nelson acquisition ($24 million) and to provide for working capital needs
($5 million). 1997 debt proceeds were used to fund the $298 million Grupo
TFM capital contribution, repurchase Company common stock ($39 million) and
for additional investment in Berger ($3 million).
o Repayment of indebtedness in the amounts of $97, $239 and $110 million in
1999, 1998 and 1997, respectively, generally funded through operating cash
flows.
o Repurchases of Company common stock during 1999 ($25 million) and 1997 ($50
million), which were funded with borrowings under existing lines of credit
(as noted above) and internally generated cash flows.
o Distributions to minority stockholders of consolidated subsidiaries.
Amounts increased in both 1999 and 1998 compared to the previous year due
to higher net income on which distributions were based.
o Proceeds from stock plans of $43, $30 and $27million in 1999, 1998 and
1997, respectively.
o Payment of cash dividends of $18, $18 and $15 million in 1999, 1998 and
1997, respectively.

See discussion under "Financial Instruments and Purchase Commitments" for
information relative to certain anticipated 2000 cash expenditures. Also see
information under "Minority Purchase Agreements" for information relative to
other existing contingencies.

CAPITAL STRUCTURE

Capital Requirements. Capital improvements for KCSR roadway track structure have
historically been funded with cash flows from operations. The Company has
traditionally used Equipment Trust Certificates for major purchases of
locomotives and rolling stock, while using internally generated cash flows or
leasing for other equipment. Through its Southern Capital joint venture, KCSR
has the ability to finance railroad equipment, and therefore, has increasingly
used lease-financing alternatives for its locomotives and rolling stock.
Southern Capital was used to finance the purchase of the 50 new GE 4400 AC
locomotives in November 1999. These locomotives are being financed by KCSR under
operating leases with Southern Capital. Capital requirements for Janus, Berger,
Nelson, the holding company and other subsidiaries have been funded with cash
flows from operations and negotiated term financing.

Capital programs are primarily financed through internally generated cash flows.
These internally generated cash flows were used to finance capital expenditures
for the Transportation segment in 1999 ($106 million), 1998 ($70 million) and
1997 ($77 million). Internally generated cash flows and borrowings under
existing lines of credit are expected to be used to fund capital programs in the
Transportation segment for 2000, currently estimated at approximately $110
million.

Internally generated cash flows are expected to be used to fund Financial
Services segment capital programs in 2000.

During 1998, Janus opened a new facility in Austin, Texas as an Investor Service
and Processing Center for transfer agent operations, allowing for continuous
service in the event the Denver facility is unavailable. Also, in 1998 and 1997,
Janus upgraded and expanded its information technology and facilities
infrastructure. These efforts were generally funded with existing cash flows.

Capital. Components of capital are shown as follows (in millions):

1999 1998 1997
---------- ----------- -----------

Debt due within one year $ 10.9 $ 10.7 $ 110.7
Long-term debt 750.0 825.6 805.9
---------- ----------- -----------
Total debt 760.9 836.3 916.6

Stockholders' equity 1,283.1 931.2 698.3
---------- ----------- -----------

Total debt plus equity $ 2,044.0 $ 1,767.5 $ 1,614.9
========== =========== ===========

Total debt as a percent of
total debt plus equity ("debt ratio") 37.2% 47.3% 56.8%
---------- ----------- -----------

At December 31, 1999, the Company's consolidated debt ratio decreased 10.1
percentage points to 37.2% from 47.3% at December 31, 1998. Total debt decreased
$75.4 million as repayments exceeded borrowings. Stockholders' equity increased
$351.9 million primarily as a result of 1999 net income of $323.3 million and
$34.0 million in non-cash equity adjustments related to unrealized gains (net of
income tax) on "available for sale securities" largely held by DST. Other equity
activities during 1999 essentially offset one another. This increase in
stockholders' equity and the decrease in debt resulted in the decrease in the
debt ratio from December 31, 1998.

At December 31, 1998, the Company's consolidated debt ratio had decreased 9.5
percentage points to 47.3% compared to December 31, 1997. Total debt decreased
$80.3 million as repayments exceeded borrowings. Stockholders' equity increased
$232.9 million primarily as a result of $190.2 million in net income, $24.1
million in non-cash equity adjustments related to unrealized gains (net of tax)
on "available for sale" securities and stock options exercised of approximately
$30.1 million, partially offset by dividends of $17.9 million. This increase in
stockholders' equity coupled with the decrease in debt resulted in a decrease in
the debt ratio from December 31, 1997.

Under the current capital structure of KCSI, management anticipates that the
debt ratio will decrease during 2000 as a result of continued debt repayments
and profitable operations. Note, however, that unrealized gains on "available
for sale" securities, which are included net of deferred income taxes as
accumulated other comprehensive income in stockholders' equity, are contingent
on market conditions and thus, are subject to significant fluctuations in value.
Significant declines in the value of these securities would negatively impact
stockholders' equity and could increase the Company's debt ratio. Additionally,
upon completion of the proposed Separation, the capital structure of KCSI is
expected to change dramatically, resulting in an increase in the debt ratio.
Efforts to improve the capital structure of the Company following the Separation
were initiated with the re-capitalization of the Company's debt structure in
January 2000 as described in "Recent Developments". The pro forma debt ratio of
the Transportation segment on a stand-alone basis under this re-capitalized
structure approximates 54%, assuming the re-capitalization occurred at December
31, 1999.

Debt Securities Registration and Offerings. The SEC declared the Company's
Registration Statement on Form S-3 (File No. 33-69648) effective April 22, 1996,
registering $500 million in

securities. However, no securities have been issued. The securities may be
offered in the form of Common Stock, New Series Preferred Stock $1 par value,
Convertible Debt Securities or other Debt Securities (collectively, "the
Securities"). The Company has not engaged an underwriter for these Securities.
Management expects that any net proceeds from the sale of the Securities would
be added to the general funds of the Company and used principally for general
corporate purposes, including working capital, capital expenditures, and
acquisitions of or investments in businesses and assets. The Company believes
its operating cash flows and available financing resources are sufficient to
fund working capital and other requirements for 2000.

KCSI Credit Agreements. In January 2000, in conjunction with the
re-capitalization of the Company's debt structure, the Company entered into new
credit agreements as described above in "Recent Developments".

Minority Purchase Agreements. A stock purchase agreement with Thomas H. Bailey
("Mr. Bailey"), Janus' Chairman, President and Chief Executive Officer, and
another Janus stockholder (the "Janus Stock Purchase Agreement") and certain
restriction agreements with other Janus minority stockholders contain, among
other provisions, mandatory put rights whereby at the election of such minority
stockholders, KCSI would be required to purchase the minority interests of such
Janus minority stockholders at a purchase price equal to fifteen times the net
after-tax earnings over the period indicated in the relevant agreement, or in
some circumstances at a purchase price as determined by an independent
appraisal. Under the Janus Stock Purchase Agreement, termination of Mr. Bailey's
employment could require a purchase and sale of the Janus common stock held by
him. If other minority holders terminated their employment, some or all of their
shares also could be subject to mandatory purchase and sale obligations. Certain
other minority holders who continue their employment also could exercise puts.
If all of the mandatory purchase and sale provisions and all the puts under such
Janus minority stockholder agreements were implemented, KCSI would have been
required to pay approximately $789 million as of December 31, 1999, compared to
$447 and $337 million at December 31, 1998 and 1997, respectively. In the future
these amounts may be higher or lower depending on Janus' earnings, fair market
value and the timing of the exercise. Payment for the purchase of the respective
minority interests is to be made under the Janus Stock Purchase Agreement within
120 days after receiving notification of exercise of the put rights. Under the
restriction agreements with certain other Janus minority stockholders, payment
for the purchase of the respective minority interests is to be made 30 days
after the later to occur of (i) receiving notification of exercise of the put
rights or (ii) determination of the purchase price through the independent
appraisal process.

The Janus Stock Purchase Agreement and certain stock purchase agreements and
restriction agreements with other minority stockholders also contain provisions
whereby upon the occurrence of a Change in Ownership (as defined in such
agreements) of KCSI, KCSI may be required to purchase such holders' Janus stock
or, as to the stockholders that are parties to the Janus Stock Purchase
Agreement, at such holders' option, to sell its stock of Janus to such minority
stockholders. The price for such purchase or sale would be equal to fifteen
times the net after-tax earnings over the period indicated in the relevant
agreement, in some circumstances as determined by Janus' Stock Option Committee
or as determined by an independent appraisal. If KCSI had been required to
purchase the holders' Janus common stock after a Change in Ownership as of
December 31, 1999, the purchase price would have been approximately $899 million
(see additional information in Note 13 to the consolidated financial
statements).

KCSI would account for any such purchase as the acquisition of a minority
interest under Accounting Principles Board Opinion No. 16, Business
Combinations.

insufficient to fund its purchase obligations, KCSI had access to the capital
markets and, with respect to the Janus Stock Purchase Agreement, had 120 days to
raise additional sums.

Overall Liquidity. The Company believes it has adequate resources available -
including existing cash balances, sufficient lines of credit (within the
financial covenants referred to below), businesses which have historically been
positive cash flow generators and the $500 million Shelf Registration Statement
- - to meet anticipated operating, capital and debt service requirements and other
commitments in 2000.

The Company's cash and equivalents balance includes investments in money market
mutual funds that are managed by Janus. Janus' investments in its money market
mutual funds are generally used to fund operations and to pay dividends.

The Company's credit agreements contain, among other provisions, various
financial covenants. The Company was in compliance with these various
provisions, including the financial covenants, as of December 31, 1999. Because
of certain financial covenants contained in the credit agreements, however,
maximum utilization of the Company's available lines of credit may be
restricted.

As discussed above in "Significant Developments", Grupo TFM management is in
negotiations with the Mexican Government with respect to an option for the
Company and Grupo TFM to purchase the Mexican Government's 20% interest in TFM
at a discount. Management expects to use borrowings under the new KCS Credit
Facility to fund this transaction in the event it elects to exercise any option
that might be granted under these negotiations.

As discussed in "Significant Developments" above, TMM and the Company could be
required to purchase the Mexican Government's interest in TFM in proportion to
each partner's respective ownership interest in Grupo TFM (without regard to the
Mexican Government's interest in Grupo TFM); however, this provision is not
exercisable prior to October 31, 2003. Also, the Mexican Government's interest
in Grupo TFM may be called by TMM and the Company, exercisable at the original
amount (in U.S. dollars) paid by the Government plus interest based on one-year
U.S. Treasury securities. Additionally, the Company could be required to
contribute capital of up to approximately $74 million if Grupo TFM does not meet
certain performance benchmarks as outlined in the Contribution Agreement (See
"Significant Developments").

Pursuant to contractual agreement between KCSI and certain Janus minority
stockholders, Janus has distributed at least 90% of its net income to its
shareholders each year. The Company uses its portion (approximately 82%) of
these dividends in accordance with its strategic plans, which have included,
among others, repayment of indebtedness, repurchase of Company common stock and
investments in affiliates. Additionally, Janus' agreement with the Janus World
Funds includes an arrangement by which investor purchases of Janus World Funds
class B shares require a commission to be advanced by Janus. Advanced
commissions on the Janus World Funds class B shares were $29 million for the
year ended December 31, 1999.

As discussed previously, in preparation for the Separation, KCSI completed a
re-capitalization of the Company's debt structure in January 2000. As part of
the re-capitalization, KCSI refinanced its public debt and revolving credit
facilities. Management believes that the new capital structure provides the
necessary liquidity to meet anticipated operating, capital and debt service
requirements and other commitments for 2000.

OTHER

Janus Capital Corporation. In connection with its 1984 acquisition of an 80%
interest in Janus, KCSI entered into a stock purchase agreement with Thomas H.
Bailey ("Mr. Bailey"), Janus' Chairman, President and Chief Executive Officer
and owner of 12% of Janus common stock, and another Janus stockholder (the
"Janus Stock Purchase Agreement"). The Janus Stock Purchase Agreement, as
amended, provides that so long as Mr. Bailey is a holder of at least 5% of the
common stock of Janus and continues to be employed as President or Chairman of
the Board of Janus (or, if he does not serve as President, James P. Craig, III
serves as President and Chief Executive Officer or Co-Chief Executive Officer
with Mr. Bailey), Mr. Bailey shall continue to establish and implement policy
with respect to the investment advisory and portfolio management activity of
Janus. The agreement also provides that, in furtherance of such objective, so
long as both the ownership threshold and officer status conditions described
above are satisfied, KCSI will vote its shares of Janus common stock to elect
directors of Janus, at least the majority of whom are selected by Mr. Bailey,
subject to KCSI's approval, which approval may not be unreasonably withheld. The
agreement further provides that any change in management philosophy, style or
approach with respect to investment advisory and portfolio management policies
of Janus shall be mutually agreed upon by KCSI and Mr. Bailey.

KCSI does not believe Mr. Bailey's rights under the Janus Stock Purchase
Agreement are "substantive," within the meaning of Issue 96-16 of the Emerging
Issues Task Force ("EITF 96-16"), because KCSI can terminate those rights at any
time by removing Mr. Bailey as an officer of Janus. KCSI also believes that the
removal of Mr. Bailey would not result in significant harm to KCSI based on the
factors discussed below. Colorado law provides that removal of an officer of a
Colorado corporation may be done directly by its stockholders if the
corporation's bylaws so provide. While Janus' bylaws contain no such provision
currently, KCSI has the ability to cause Janus to amend its bylaws to include
such a provision. Under Colorado law, KCSI could take such action at an annual
meeting of stockholders or make a demand for a special meeting of stockholders.
Janus is required to hold a special stockholders' meeting upon demand from a
holder of more than 10% of its common stock and to give notice of the meeting to
all stockholders. If notice of the meeting is not given within 30 days of such a
demand, the District Court is empowered to summarily order the holding of the
meeting. As the holder of more than 80% of the common stock of Janus, KCSI has
the requisite votes to compel a meeting and to obtain approval of the required
actions at such a meeting.

KCSI has concluded, supported by an opinion of legal counsel, that it could
carry out the above steps to remove Mr. Bailey without breaching the Janus Stock
Purchase Agreement and that if Mr. Bailey were to challenge his removal by
instituting litigation, his sole remedy would be for damages and not injunctive
relief and that KCSI would likely prevail in that litigation.

Although KCSI has the ability to remove Mr. Bailey, it has no present plan or
intention to do so, as he is one of the persons regarded as most responsible for
the success of Janus. The consequences of any removal of Mr. Bailey would depend
upon the timing and circumstances of such removal. Mr. Bailey could be required
to sell, and KCSI could be required to purchase, his Janus common stock, unless
he were terminated for cause. Certain other Janus minority stockholders would
also be able, and, if they terminated employment, required, to sell to KCSI
their shares of Janus common stock. The amounts that KCSI would be required to
pay in the event of such purchase and sale transactions could be material. See
Note 12 to the consolidated financial statements. As of December 31, 1999, such
removal would have also resulted in acceleration of the vesting of a portion of
the shares of restricted Janus common stock held by other minority stockholders
having an approximate aggregate value of $16.3 million.

There may also be other consequences of removal that cannot be presently
identified or quantified. For example, Mr. Bailey's removal could result in the
loss of other valuable employees or clients of

Janus. The likelihood of occurrence and the effects of any such employee or
client departures cannot be predicted and may depend on the reasons for and
circumstances of Mr. Bailey's removal. However, KCSI believes that Janus would
be able in such a situation to retain or attract talented employees because: (i)
of Janus' prominence; (ii) Janus' compensation scale is at the upper end of its
peer group; (iii) some or all of Mr. Bailey's repurchased Janus stock could be
then available for sale or grants to other employees; and (iv) many key Janus
employees must continue to be employed at Janus to become vested in currently
unvested restricted stock valued in the aggregate (after considering additional
vesting that would occur upon the termination of Mr. Bailey) at approximately
$36 million as of December 31, 1999. In addition, notwithstanding any removal of
Mr. Bailey, KCSI would expect to continue its practice of encouraging autonomy
by its subsidiaries and their boards of directors so that management of Janus
would continue to have responsibility for Janus' day-to-day operations and
investment advisory and portfolio management policies and, because it would
continue that autonomy, KCSI would expect many current Janus employees to remain
with Janus.

With respect to clients, Janus' investment advisory contracts with its clients
are terminable upon 60 days' notice and in the event of a change in control of
Janus. Because of his rights under the Janus Stock Purchase Agreement, Mr.
Bailey's departure, whether by removal, resignation or death, might be regarded
as such a change in control. However, in view of Janus' investment record, KCSI
has concluded it is reasonable to expect that in such an event most of Janus'
clients would renew their investment advisory contracts. This conclusion is
reached because (i) Janus relies on a team approach to investment management and
development of investment expertise, (ii) Mr. Bailey has not served as a
portfolio manager for any Janus fund for several years, (iii) a succession plan
exists under which Mr. James P. Craig, III would succeed Mr. Bailey, and (iv)
Janus should be able to continue to attract talented portfolio managers. It is
reasonable to expect that Janus' clients' reaction will depend on the
circumstances, including, for example, how much of the Janus team remains in
place and what investment advisory alternatives are available.

The Janus Stock Purchase Agreement and other agreements provide for rights of
first refusal on the part of Janus minority stockholders, Janus and KCSI, with
respect to certain sales of Janus stock. These agreements also require KCSI to
purchase the shares of Janus minority stockholders in certain circumstances. In
addition, in the event of a Change in Ownership of KCSI, as defined in the Janus
Stock Purchase Agreement, KCSI may be required to sell its stock of Janus to the
stockholders who are parties to such agreement or to purchase such holders'
Janus stock. In the event Mr. Bailey was terminated for any reason within one
year following a Change in Ownership, he would be entitled to a severance
payment, amounting, at December 31, 1999, to approximately $2 million. Purchase
and sales transactions under these agreements are to be made based upon a
multiple of the net earnings of Janus and/or other fair market value
determinations, as defined therein. See Note 12 to the consolidated financial
statements.

Under the Investment Company Act of 1940, certain changes in ownership of Janus
may result in termination of investment advisory agreements with the mutual
funds and other accounts Janus manages, requiring approval of fund shareowners
and other account holders to obtain new agreements. Additionally, there are
Janus officers and directors that serve as officers and/or directors of certain
of the registered investment companies to which Janus acts as investment
advisor.

Year 2000. The Year 2000 discussion below contains forward-looking statements,
including those concerning the Company's plans and expected completion dates,
cost estimates, assessments of Year 2000 readiness for the Company as well as
for third parties, and the potential risks of any failure on the part of the
Company or third parties to be Year 2000 ready on a timely basis.
Forward-looking statements involve a number of risks and uncertainties that
could cause actual results to differ from those projected. See the "Overview"
section for additional information.

Current Status. KCSI and its subsidiaries experienced no material Year 2000
related issues when the date moved to January 1, 2000, nor have any issues
arisen as of the date of this Form 10-K. Although the initial transition to 2000
occurred without adverse effects, there still exists possible Year 2000 issues
for those applications, systems, processes and system hardware that have yet to
be used in live activities and transactions. The Company continues to evaluate
and pursue discussions with its various customers, partners and vendors with
respect to Year 2000 issues. No assurance can be made that such parties will be
Year 2000 ready. While the Company cannot fully determine the impact, the
inability of its computer systems to operate properly in 2000 could result in
significant difficulty in processing and completing fundamental transactions. In
such events, the Company's results of operations, financial position and cash
flows could be materially adversely affected.

General. Many existing computer programs and microprocessors that use only two
digits (rather than four) to identify a year could fail or create erroneous
results with respect to dates after December 31, 1999 if not corrected to read
all four digits. This computer program flaw is expected to affect all companies
and organizations, either directly or indirectly.

The Company depends upon its computer and other systems and the computers and
other systems of third parties to conduct and manage the Company's
Transportation and Financial Services businesses. These Year 2000 related issues
may also adversely affect the operations and financial performance of one or
more of the Company's customers and suppliers. As a result, the failure of the
Company, its customers or suppliers to operate properly in Year 2000 could have
a material adverse impact on the Company's results of operations, financial
position and cash flows. The Company is unable to assess the extent or duration
of that impact at this time, but they could be substantial.

To prepare for Year 2000, the Company and its key subsidiaries formed project
teams comprised of employees and third party consultants to identify and resolve
the numerous issues surrounding the Year 2000. The areas in which the project
teams focused most of their efforts are information technology ("IT") systems,
non-IT systems, and third party issues.

IT Systems. In both the Transportation and Financial Services segments, the
IT systems (including mission critical and significant non-critical
operating, accounting and supporting systems) and underlying hardware and
software have operated in 2000 and no material failures or problems have
arisen.

Non-IT Systems. All equipment that contains an internal clock or embedded
micro-processor (e.g., personal computers, software, telephone systems,
locomotives, signal and communications systems, etc.) has been analyzed for
Year 2000 readiness and replacement and upgrades of this type of equipment
are completed.

Third Party Systems. Because both segments of the Company depend heavily on
third party systems in the operation of their businesses, significant third
party relationships were evaluated to determine the status of their Year
2000 readiness and the potential impact on the Company's operations if
those significant third parties fail to become Year 2000 ready.

The Transportation companies worked with the Association of American
Railroads ("AAR") and other AAR-member railroads to coordinate the testing
and certification of the systems administered by the AAR. Similarly, the
Financial Services entities participated in various industry-wide efforts
(e.g., trading and account maintenance, trade execution, confirmation,
etc.) and were required to periodically report to the SEC their progress
with respect to Year 2000 preparedness. Transactions and other activities
have been successfully performed in 2000 for certain third party entities.
The Company will continue to monitor its third party relationships for Year
2000 issues.

Testing and Documentation Procedures. All material modifications to IT and
non-IT systems were documented and maintained by the project teams for purposes
of tracking the Year 2000 project and as a part of the Company's due diligence
process.

Year 2000 Risks. While there have been no material problems during Year 2000 as
of the date of this Form 10-K, the Company continues to evaluate the principal
risks associated with its IT and non-IT systems, as well as third party systems
if they were not to operate properly in the Year 2000.

Based on work performed and information received, the Company believes its key
suppliers, customers and other significant third party relationships were and
continue to be prepared for the Year 2000 in all material respects; however,
management of the Company makes no assurances that all such parties are Year
2000 ready. In the event that the Company or key third parties experience Year
2000 difficulties, the Company's results of operations, financial position and
cash flows could be materially adversely affected. The Company has no basis to
form an estimate of costs or lost revenues at this time.

Contingency Plans. The Company and its subsidiaries have identified alternative
plans in the event that the Year 2000 project does not meet anticipated needs.
The Company has made alternative arrangements in the event that critical
suppliers, customers, utility providers and other significant third parties
experience Year 2000 difficulties.

Year 2000 Costs. Through December 31, 1999, the Company has spent approximately
$21 million ($8 million by Transportation; $13 million by Financial Services) in
connection with ensuring that all Company and subsidiary computer programs are
compatible with Year 2000 requirements. In addition, the Company anticipates
future spending of less than $1 million in connection with this process.
Accounting principles require all costs associated with Year 2000 issues to be
expensed as incurred. A portion of these costs will not result in an increase in
expense because existing employees and equipment are being used to complete the
project.

Financial Instruments and Purchase Commitments. During 1995, the Company entered
into a forward stock purchase contract as a means of securing a potentially
favorable price for the repurchase of six million shares of its common stock.
During 1997, the Company purchased 2.4 million shares under this contract at an
aggregate cost of $39 million (including transaction premium).

In accordance with the provision of the New Credit Facilities requiring the
Company to manage its interest rate risk through hedging activity, in first
quarter 2000 the Company entered into five separate interest rate cap agreements
for an aggregate notional amount of $200 million expiring on various dates in
2002. The interest rate caps are linked to LIBOR. $100 million of the aggregate
notional amount provides a cap on the Company's interest rate of 7.25% plus the
applicable spread, while $100 million limits the interest rate to 7% plus the
applicable spread. Counterparties to the interest rate cap agreements are major
financial institutions who also participate in the New Credit Facilities. Credit
loss from counterparty non-performance is not anticipated.

Fuel costs are affected by traffic levels, efficiency of operations and
equipment, and petroleum market conditions. Controlling fuel expenses is a
concern of management, and expense savings remains a top priority. To that end,
from time to time KCSR enters into forward diesel fuel purchase commitments and
hedge transactions (fuel swaps or caps) as a means of securing volumes and
prices. Hedge transactions are correlated to market benchmarks and hedge
positions are monitored to ensure that they will not exceed actual fuel
requirements in any period. There were no fuel swap or cap transactions during
1997 and minimal purchase commitments were negotiated for 1997. However, at the
end of 1997, the Company had purchase commitments for

approximately 27% of expected 1998 diesel fuel usage, as well as fuel swaps for
approximately 37% of expected 1998 usage. As a result of actual fuel prices
remaining below both the purchase commitment price and the swap price during
1998, the Company's fuel expense was approximately $4.0 million higher. The
purchase commitments resulted in a higher cost of approximately $1.7 million,
while the Company made payments of approximately $2.3 million related to the
1998 fuel swap transactions. At December 31, 1998, the Company had purchase
commitments and fuel swap transactions for approximately 32% and 16%,
respectively, of expected 1999 diesel fuel usage. In 1999, KCSR saved
approximately $0.6 million as a result of these purchase commitments. The fuel
swap transactions resulted in higher fuel expense of approximately $1 million.

At December 31, 1999, the Company had no outstanding purchase commitments for
2000 and had entered into two diesel fuel cap transactions for a total of six
million gallons (approximately 10% of expected 2000 usage) at a cap price of
$0.60 per gallon. The caps are effective January 1, 2000 through June 30, 2000.

These transactions are intended to mitigate the impact of rising fuel prices and
are recorded using hedge accounting policies as set forth in Note 2 to the
consolidated financial statements of this Form 10-K. In general, the Company
enters into transactions such as those discussed above in limited situations
based on management's assessment of current market conditions and perceived
risks. Historically, the Company has engaged in a limited number of such
transactions and their impact has been insignificant. However, the Company
intends to respond to evolving business and market conditions in order to manage
risks and exposures associated with the Company's various operations, and in
doing so, may enter into transactions similar to those discussed above.

Foreign Exchange Matters. In connection with the Company's investment in Grupo
TFM (Mexico), Nelson (United Kingdom) and Janus Capital International (UK)
Limited ("Janus UK"), operating in the United Kingdom, matters arise with
respect to financial accounting and reporting for foreign currency transactions
and for translating foreign currency financial statements into U.S. dollars. The
Company follows the requirements outlined in Statement of Financial Accounting
Standards No. 52 "Foreign Currency Translation" ("SFAS 52"), and related
authoritative guidance.

The purchase price paid by Grupo TFM for 80% of the common stock of TFM was
fixed in Mexican pesos; accordingly, the Company was exposed to fluctuations in
the U.S. dollar/Mexican peso exchange rate. In the event that the proceeds from
the various financing arrangements did not provide funds sufficient for Grupo
TFM to complete the purchase of TFM, the Company may have been required to make
additional capital contributions to Grupo TFM. Accordingly, in order to hedge a
portion of the Company's exposure to fluctuations in the value of the Mexican
peso versus the U.S. dollar, the Company entered into two separate forward
contracts to purchase Mexican pesos - $98 million in February 1997 and $100
million in March 1997. In April 1997, the Company realized a $3.8 million pretax
gain in connection with these contracts. This gain was deferred and has been
accounted for as a component of the Company's investment in Grupo TFM. These
contracts were intended to hedge only a portion of the Company's exposure
related to the final installment of the purchase price and not any other
transactions or balances.

Prior to January 1, 1999, Mexico's economy was classified as "highly
inflationary" as defined in SFAS 52. Accordingly, under the highly inflationary
accounting guidance in SFAS 52, the U.S. dollar was used as Grupo TFM's
functional currency, and any gains or losses from translating Grupo TFM's
financial statements into U.S. dollars were included in the determination of its
net income (loss). Equity earnings (losses) from Grupo TFM included in the
Company's results of operations reflected the Company's share of such
translation gains and losses.

Effective January 1, 1999, the SEC staff declared that Mexico should no longer
be considered a highly inflationary economy. Accordingly, the Company performed
an analysis under the guidance of SFAS 52 to determine whether the U.S. dollar
or the Mexican peso should be used as the functional currency for financial
accounting and reporting purposes for periods subsequent to December 31, 1998.
Based on the results of the analysis, management believes the U.S. dollar to be
the appropriate functional currency for the Company's investment in Grupo TFM;
therefore, the financial accounting and reporting of the operating results of
Grupo TFM will remain consistent with prior periods.

Because the Company is required to report equity in Grupo TFM under GAAP and
Grupo TFM reports under International Accounting Standards, fluctuations in
deferred income tax calculations occur based on translation requirements and
differences in accounting standards. The deferred income tax calculations are
significantly impacted by fluctuations in the relative value of the Mexican peso
versus the U.S. dollar and the rate of Mexican inflation, and can result in
significant variances in the amount of equity earnings (losses) reported by the
Company.

Nelson and Janus UK operate principally in the United Kingdom and their
financial statements are presented using the British pound as the functional
currency. Any gains or losses arising from transactions not denominated in the
British pound are recorded as a foreign currency gain or loss and included in
the results of operations of Nelson and Janus UK. The translation of the
respective company's financial statements from the British pound into the U.S.
dollar results in an adjustment to stockholders' equity as a cumulative
translation adjustment. At December 31, 1999 and 1998, the cumulative
translation adjustments were not material.

The Company continues to evaluate existing alternatives with respect to
utilizing foreign currency instruments to hedge its U.S. dollar investment in
Grupo TFM, and Nelson as market conditions change or exchange rates fluctuate.
At December 31, 1999 and 1998, the Company had no outstanding foreign currency
hedging instruments.

Pensions and Other Postretirement Benefits. Statement of Financial Accounting
Standards No. 132 "Employers' Disclosure about Pensions and Other Postretirement
Benefits - an amendment of FASB Statements No. 87, 88, and 106" ("SFAS 132") was
adopted by the Company in 1998 and prior year information has been included
pursuant to SFAS 132. SFAS 132 establishes standardized disclosure requirements
for pension and other postretirement benefit plans, requires additional
information on changes in the benefit obligations and fair values of plan
assets, and eliminates certain disclosures that are no longer considered useful.
The standard does not change the measurement or recognition of pension or
postretirement benefit plans. The adoption of SFAS 132 did not have a material
impact on the Company's disclosures.

Segment Disclosures. In 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the manner in which public business enterprises report information about
operating segments in annual financial statements and requires disclosure of
selected information about operating segments in interim financial reports
issued to shareholders. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS 131 did not have a material impact on the Company's
disclosures. Segment financial information is included in Note 1 and Note 14 to
the consolidated financial statements included under Item 8 of this Form 10-K
and prior year information has been restated according to the provisions of SFAS
131.

Comprehensive Income. Effective January 1, 1998, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" ("SFAS 130"), which establishes standards for reporting
and disclosure of comprehensive income and its components in the financial
statements. Prior year information has been included pursuant to

SFAS 130. The Company's other comprehensive income consists primarily of
unrealized gains and losses relating to investments held by DST and accounted
for as "available for sale" securities as defined by SFAS 115. The Company
records its proportionate share of any unrealized gains or losses related to
these investments, net of deferred income taxes, in stockholders' equity as
accumulated other comprehensive income. The unrealized gain related to these
investments increased $63.8 million, $39.5 million, and $42.6 million ($38.4
million, $24.3 million, and $26.1 million, net of deferred taxes) for the years
ended December 31, 1999, 1998 and 1997, respectively.

Minority Rights. In EITF 96-16, the Financial Accounting Standards Board
("FASB") reached a consensus that substantive minority rights which provide a
minority stockholder with the right to effectively control significant decisions
in the ordinary course of an investee's business could impact whether the
majority stockholder should consolidate the investee. After evaluation of the
rights of the minority stockholders of its consolidated subsidiaries and in
particular the contractual rights of Mr. Bailey described in "Other - Janus
Capital Corporation", KCSI management concluded that application of EITF 96-16
did not affect the Company's consolidated financial statements. This conclusion
with respect to Janus is currently under discussion with the Staff of the SEC
and, accordingly, is subject to change. Upon resolution of this matter, the
Company expects to file an amendment to this Form 10-K. If the consolidation of
Janus is discontinued, the Company will restate certain of its financial
statements. If Janus continues to be consolidated, the amendment is expected to
include an opinion of counsel supporting consolidation. See Notes 12 and 13 to
the consolidated financial statements.

Internally Developed Software. In 1998, the Company adopted the guidance
outlined in American Institute of Certified Public Accountant's Statement of
Position 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that computer
software costs incurred in the preliminary project stage, as well as training
and maintenance costs be expensed as incurred. This guidance also requires that
direct and indirect costs associated with the application development stage of
internal use software be capitalized until such time that the software is
substantially complete and ready for its intended use. Capitalized costs are to
be amortized on a straight-line basis over the useful life of the software. The
adoption of this guidance did not have a material impact on the Company's
results of operations, financial position or cash flows.

Derivative Instruments. In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative financial instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
recognition of all derivatives as either assets or liabilities measured at fair
value. The FASB amended SFAS 133 to require adoption for all fiscal quarters of
fiscal years beginning after June 15, 2000 and to preclude retroactive
applications prior to adoption. The Company expects adoption of SFAS 133 by the
required date. The adoption of SFAS 133 is not expected to have a material
impact on the Company's results of operations, financial position or cash flows.

Litigation. The Company and its subsidiaries are involved as plaintiff or
defendant in various legal actions arising in the normal course of business.
While the ultimate outcome of the various legal proceedings involving the
Company and its subsidiaries cannot be predicted with certainty, it is the
opinion of management (after consultation with legal counsel) that the Company's
litigation reserves are adequate and that these legal actions currently are not
material to the Company's consolidated results of operations, financial position
or cash flows. The following outlines two significant ongoing cases:

Duncan Case
In 1998, a jury in Beauregard Parish, Louisiana returned a verdict against KCSR
in the amount of $16.3 million. The Louisiana state case arose from a railroad
crossing accident which occurred at

Oretta, Louisiana on September 11, 1994, in which three individuals were
injured. Of the three, one was injured fatally, one was rendered quadriplegic
and the third suffered less serious injuries.

Subsequent to the verdict, the trial court held that the plaintiffs were
entitled to interest on the judgment from the date the suit was filed, dismissed
the verdict against one defendant and reallocated the amount of that verdict to
the remaining defendants. The resulting total judgment against KCSR, together
with interest, was $27.0 million as of December 31, 1999.

On November 3, 1999, the Third Circuit Court of Appeals in Louisiana affirmed
the judgment. Review is now being sought in the Louisiana Supreme Court. On
March 24, 2000, the Louisiana Supreme Court granted KCSR's Application for a
Writ of Review regarding this case. Independent trial counsel has expressed
confidence to KCSR management that the Louisiana Supreme Court will set aside
the district court and court of appeals judgments in this case. KCSR management
believes it has meritorious defenses and that it will ultimately prevail in
appeal to the Louisiana Supreme Court. If the verdict were to stand, however,
the judgment and interest are in excess of existing insurance coverage and could
have an adverse effect on the Company's consolidated results of operations,
financial position and cash flows.

Bogalusa Cases
In July 1996, KCSR was named as one of twenty-seven defendants in various
lawsuits in Louisiana and Mississippi arising from the explosion of a rail car
loaded with chemicals in Bogalusa, Louisiana on October 23, 1995. As a result of
the explosion, nitrogen dioxide and oxides of nitrogen were released into the
atmosphere over parts of that town and the surrounding area causing evacuations
and injuries. Approximately 25,000 residents of Louisiana and Mississippi have
asserted claims to recover damages allegedly caused by exposure to the
chemicals.

KCSR neither owned nor leased the rail car or the rails on which it was located
at the time of the explosion in Bogalusa. KCSR did, however, move the rail car
from Jackson to Vicksburg, Mississippi, where it was loaded with chemicals, and
back to Jackson where the car was tendered to the IC. The explosion occurred
more than 15 days after the Company last transported the rail car. The car was
loaded in excess of its standard weight, but under the car's capacity, when it
was transported by the Company to interchange with the IC.

The trial of a group of twenty plaintiffs in the Mississippi lawsuits arising
from the chemical release resulted in a jury verdict and judgment in favor of
KCSR in June 1999. The jury found that KCSR was not negligent and that the
plaintiffs had failed to prove that they were damaged. The trial of the
Louisiana class action is scheduled to commence on June 11, 2001. No date has
been scheduled for the trial of the additional plaintiffs in Mississippi.

KCSR believes that its exposure to liability in these cases is remote. If KCSR
were to be found liable for punitive damages in these cases, such a judgment
could have a material adverse effect on the results of operations, financial
position and cash flows of the Company.

Environmental Matters. Certain of the Company's subsidiaries are subject to
extensive regulation under environmental protection laws concerning, among other
things, discharges to waters and the generation, handling, storage,
transportation and disposal of waste and other materials where environmental
risks are inherent. In particular, the Company is subject to various laws and
certain legislation including, among others, the Federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA," also known as
the Superfund law), the Toxic Substances Control Act, the Federal Water
Pollution Control Act, and the Hazardous Materials Transportation Act. This
legislation generally imposes joint and several liability for clean up and
enforcement costs, without regard to fault or legality of the original conduct,
on current and predecessor owners and operators of a site. The Company does not
foresee that compliance with the requirements imposed by the environmental
legislation will impair its competitive capability or

result in any material additional capital expenditures, operating or maintenance
costs. As part of serving the petroleum and chemicals industry, KCSR transports
hazardous materials and has a Shreveport, Louisiana-based hazardous materials
emergency team available to handle environmental issues that might occur in the
transport of such materials. Additionally, the Company performs ongoing review
and evaluation of the various environmental issues that arise in the Company's
operations, and, as necessary, takes actions to limit the Company's exposure to
potential liability.

In November 1997, representatives of KCSR and the United States Environmental
Protection Agency ("EPA") met at the site of two, contiguous pieces of property
in North Baton Rouge, Louisiana, abandoned leaseholds of Western Petrochemicals
and Export Drum. These properties had been the subjects of voluntary clean up
prior to the EPA's involvement. The site visit prompted KCSR to obtain from the
EPA, through the Freedom of Information Act, a "Preliminary Assessment Report"
concerning the properties, dated January, 1995, and directing a "Site
Investigation." The EPA's November 1997 visit to the site was the start of that
"Site Investigation." During the November 1997 site visit, the EPA indicated it
intended to recover, through litigation, all of its investigation and
remediation costs. At KCSR's request, the EPA agreed informally to suspend its
investigation pending an exchange of information and negotiation of KCSR's
participation in the "Site Investigation." Based upon advice subsequently
received from the Inactive and Abandoned Sites Division of the Louisiana
Department of Environmental Quality ("LADEQ"), KCSR will be allowed to undertake
the investigation and remediation of the site, pursuant to the LADEQ's
guidelines and oversight. As a result of the EPA's and LADEQ's involvement, and
the investigation and remediation of the sites pursuant to LADEQ's oversight and
guidelines, the ultimate costs to KCSR are expected to be higher than originally
anticipated. The expected costs have been provided for in the Company's
consolidated financial statements and completion of the site remediation
(scheduled to begin in March 2000) is not expected to have a material impact on
the Company's consolidated results of operations, financial position or cash
flows.

In another proceeding, KCSR is responsible for the clean up and closure of a
facility in Port Arthur, Texas formerly leased by "Port Drum" for the
reconditioning of drums. A comprehensive environmental sampling of this site
indicated contamination of the soils and shallow groundwater with heavy metals
and petroleum. KCSR filed a lawsuit against "Port Drum" and other potentially
responsible parties, which was mediated and settled in favor of KCSR. The terms
of this settlement provided for "Port Drum" and its principals to contribute
significant funds toward the cost of cleanup but provided that KCSR complete the
investigations, remediation and demolition of the facility. KCSR submitted to
the Texas Natural Resource Conservation Commission ("TNRCC") the final
risk-based closure and post-closure plan for this site. TNRCC has responded to
the KCSR plan and is requiring that a treatability study be performed prior to
approval of the closure plan. KCSR expects to complete this study in the first
half of 2000. TNRCC final approval, as well as implementation is expected in
2000. Estimated costs to complete the study, remediation, closure and
post-closure monitoring of the facility, beyond those funds provided by "Port
Drum", have been provided for in the Company's consolidated financial statements
and completion is not expected to have a material impact on the Company's
consolidated results of operations, financial position or cash flows.

As previously reported, KCSR has been named as a "potentially responsible party"
by the Louisiana Department of Environmental Quality in a state environmental
proceeding, Louisiana Department of Environmental Quality, Docket No. IAS
88-0001-A, involving a location near Bossier City, Louisiana, which was the site
of a wood preservative treatment plant (Lincoln Creosoting). KCSR is a former
owner of part of the land in question. This matter was the subject of a trial in
the U.S. District Court in Shreveport, Louisiana that was concluded in July
1993. The court found that Joslyn Manufacturing Company ("Joslyn"), an operator
of the plant, was and is required to indemnify KCSR for damages arising out of
plant operations. (KCSR's potential liability is as a

property owner rather than as a generator or transporter of contaminants.) The
case was appealed to the U.S. Court of Appeals for the Fifth Circuit, which
Court affirmed the U.S. District Court ruling in favor of KCSR.

In early 1994, the EPA added the Lincoln Creosoting site to its CERCLA national
priority list. Since Joslyn has performed major remedial work at this site, and
KCSR has been held to be entitled to indemnity for such costs by the Federal
District and Appeals Courts, it would appear that KCSR should not incur
significant remedial liability. At this time, it is not possible to evaluate the
potential consequences of further remediation at the site.

The Louisiana Department of Transportation ("LDOT") has sued KCSR and a number
of other defendants in Louisiana state court to recover clean-up costs incurred
by LDOT while constructing Interstate Highway 49 at Shreveport, Louisiana
(Louisiana Department of Transportation v. The Kansas City Southern Railway
Company, et al., Case No. 417190-B in the First Judicial District Court, Caddo
Parish, Louisiana). The clean up was associated with an old oil refinery site,
operated by the other named defendants. KCSR's main line was adjacent to that
site, and KCSR was included in the suit because LDOT claims that a 1966
derailment on the adjacent track released hazardous substances onto the site.
However, there is evidence that the derailment occurred on the side of the track
opposite from the refinery site. Furthermore, there appears to be no
relationship between the lading on the derailed train and any contaminants
identified at the site. Therefore, management believes that the Company's
exposure is limited.

In another proceeding, Louisiana Department of Environmental Quality, Docket No.
IE-0-91-0001, KCSR was named as a party in the alleged contamination of Capitol
Lake in Baton Rouge, Louisiana. During 1994, the list of potentially responsible
parties was significantly expanded to include the State of Louisiana, and the
City and Parish of Baton Rouge, among others. Studies commissioned by KCSR
indicate that contaminants contained in the lake were not generated by KCSR.
Management and counsel do not believe this proceeding will have a material
effect on the Company.

In the Ilada Superfund Site located in East Cape Girardeau, Ill., KCSR was cited
for furnishing one carload of used oil to this petroleum recycling facility.
Counsel advises that KCSR's liability, if any, should fall within the "de
minimus" provisions of the Superfund law, representing minimal exposure.

The Mississippi Department of Environmental Quality ("MDEQ") initiated a demand
on all railroads operating in Mississippi to clean up their refueling facilities
and investigate any soil and groundwater impacts resulting from past refueling
activities. KCSR has six facilities located in Mississippi. KCSR has developed a
plan, together with the State of Mississippi, that will satisfy the MDEQ's
initiative. Estimated costs to complete the studies and expected remediation
have been provided for in the Company's consolidated financial statements and
the resolution is not expected to have a material impact on the Company's
consolidated results of operations or financial position.

The Illinois Environmental Protection Agency ("IEPA") has sued the Gateway
Western for alleged violations of state environmental laws relating to the 1997
spill of methyl isobutyl carbinol in the East St. Louis yard. During switching
operations a tank car carrying this chemical was punctured and approximately
18,000 gallons were released. Emergency clean up and removal of liquids and
contaminated soils occurred within two weeks and remaining residues of carbinol
in the soil and shallow groundwater were confined almost entirely to the Gateway
Western property. Remediation continues and progress is reported to the IEPA on
a quarterly basis and will continue until IEPA clean-up standards have been
achieved. Remediation is expected to be complete in 2000 and estimated costs
have been provided for in the Company's consolidated financial statements. The
parties reached a tentative negotiated settlement of the lawsuit in November
1998, which provides

that the Gateway Western pay a penalty and further, that it fund a Supplemental
Environmental Project in St. Claire County, Illinois. The clean up costs and the
settlement of the lawsuit are not expected to have a material impact on the
Company's consolidated results of operations, financial position or cash flows.

The Company has recorded liabilities with respect to various environmental
issues, which represent its best estimates of remediation and restoration costs
that may be required to comply with present laws and regulations. At December
31, 1999, these recorded liabilities were not material. Although these costs
cannot be predicted with certainty, management believes that the ultimate
outcome of identified matters will not have a material adverse effect on the
Company's consolidated results of operations, financial condition or cash flows.

Regulatory Influence. In addition to the environmental agencies mentioned above,
KCSR operations are regulated by the STB, various state regulatory agencies, and
the Occupational Safety and Health Administration ("OSHA"). State agencies
regulate some aspects of rail operations with respect to health and safety and
in some instances, intrastate freight rates. OSHA has jurisdiction over certain
health and safety features of railroad operations.

KCSR expects its railroad operations to be subject to future requirements
regulating exhaust emissions from diesel locomotives that may increase its
operating costs. During 1995 the EPA issued proposed regulations applicable to
locomotive engines. These regulations, which were issued as final in early 1998,
will be effective in stages for new or remanufactured locomotive engines
installed after 2000. KCSR has reviewed these new regulations and management
does not expect that compliance with these regulations will have a material
impact on the Company's results of operations.

Virtually all aspects of Stilwell's business is subject to various laws and
regulations. Applicable laws include the Investment Company Act of 1940, the
Investment Advisers Act of 1940, the Securities Act of 1933, the Securities and
Exchange Act of 1934, Employee Retirement Income Security Act of 1974, as
amended and various other state securities and related laws (including laws in
the United Kingdom). Applicable regulations include, but are not limited to, in
the United States, the rules and regulations of the SEC, the Department of
Labor, securities exchanges and the National Association of Securities Dealers,
and in the United Kingdom, the Investment Management Regulatory Organization
Limited, the Personal Investment Authority and the Financial Services Authority.

The Company does not foresee that regulatory compliance under present statutes
will impair its competitive capability or result in any material effect on
results of operations.

Inflation. Inflation has not had a significant impact on the Company's
operations in the past three years. Generally accepted accounting principles
require the use of historical costs. Replacement cost and related depreciation
expense of the Company's property would be substantially higher than the
historical costs reported. Any increase in expenses from these fixed costs,
coupled with variable cost increases due to significant inflation, would be
difficult to recover through price increases given the competitive environments
of the Company's principal subsidiaries. See "Foreign Exchange Matters" above
with respect to inflation in Mexico.

Item 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company utilizes various financial instruments that entail certain inherent
market risks. Generally, these instruments have not been entered into for
trading purposes. The following information, together with information included
in Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 12 to the Company's consolidated financial
statements in this Form 10-K, describe the key aspects of certain financial
instruments which have market risk to the Company.

Interest Rate Sensitivity
The Company's interest sensitive liabilities include its long-term fixed and
floating-rate debt obligations. As discussed in "Recent Developments" in Item 7
above, on December 6, 1999, KCSI commenced offers to purchase and consent
solicitations with respect to any and all of the Company's outstanding 7.875%
Notes due July 1, 2002, 6.625% Notes due March 1, 2005, 8.8% Debentures due July
1, 2022, and 7% Debentures due December 15, 2025 (collectively "Debt Securities"
or "notes and debentures"). Approximately $398.4 million of the $400 million
outstanding Debt Securities were validly tendered and accepted by the Company.
Total consideration paid for the repurchase of these outstanding notes and
debentures was $401.2 million. Funding for the repurchase of these Debt
Securities and for the repayment of $264 million of borrowings under existing
revolving credit facilities was obtained from two new credit facilities ("KCS
Credit Facility" and "Stilwell Credit Facility" - collectively "New Credit
Facilities") each of which was entered into on January 11, 2000. Accordingly,
the Company's ongoing interest exposure under fixed rate debt obligations is not
material.

At December 31, 1999, the Company's floating-rate indebtedness totaled $278
million. However, as discussed above, the Company funded the payment of $665
million to retire the Debt Securities and repay amounts outstanding on other
floating-rate indebtedness with borrowings under the New Credit Facilities. The
New Credit Facilities, comprised of different tranches and types of
indebtedness, charge interest based on target interest indexes (e.g., LIBOR,
federal funds rate, etc.) plus a defined amount of basis points ("applicable
spread"), as set forth in the respective agreement. Due to the high percentage
of variable rate debt associated with the restructuring of the Company's debt,
the Company will be more sensitive to fluctuations in interest rates than in
recent years.

A hypothetical 100 basis points increase in each of the respective target
interest indexes would result in additional interest expense of approximately $7
million on an annualized basis for the floating-rate instruments assumed to be
outstanding as of December 31, 1999 given the January 11, 2000 transaction. In
1998, a 100 basis points increase in interest rates would have resulted in
additional interest expense of approximately $3.4 million.

Certain provisions of the KCS Credit Facility require the Company to manage its
interest rate risk exposure through the use of hedging instruments for a portion
of its outstanding borrowings. Accordingly, in first quarter 2000 the Company
entered into five separate interest rate cap agreements for an aggregate
notional amount of $200 million expiring on various dates in 2002. The interest
rate caps are linked to LIBOR. $100 million of the aggregate notional amount is
limited to an interest rate of 7.25% plus the applicable spread, while $100
million is limited to an interest rate of 7% plus the applicable spread.
Counterparties to the interest rate cap agreements are major financial
institutions who are also participants in the New Credit Facilities. Credit loss
from counterparty non-performance is not anticipated. There were no interest
rate cap or swap agreements in place at December 31, 1998.

Based upon the borrowing rates currently available to the Company and its
subsidiaries for indebtedness with similar terms and average maturities, the
fair value of long-term debt after consideration of the January 11, 2000
transaction was approximately $766 million at December 31, 1999. The fair value
of long-term debt was $867 million at December 31, 1998.

Commodity Price Sensitivity
KCSR has a program to hedge against fluctuations in the price of its diesel fuel
purchases. This program is primarily completed using various swap or cap
transactions. These transactions are typically based on the price of heating oil
#2, which the Company believes to produce a high correlation to the price of
diesel fuel. These transactions are generally settled monthly in cash with the
counterparty.

Additionally, from time to time, KCSR enters into forward purchase commitments
for diesel fuel as a means of securing volumes at competitive prices. These
contracts normally require the Company to purchase defined quantities of diesel
fuel at prices established at the origination of the contract.

At the end of 1999, the Company had no outstanding diesel fuel purchase
commitments for 2000. At December 31, 1999, the Company had entered into two
diesel fuel cap transactions for a total of six million gallons (approximately
10% of expected 2000 usage) at a cap price of $0.60 per gallon. The caps are
effective January 1, 2000 through June 30, 2000. At December 31, 1998, the
Company had forward diesel fuel purchase commitments for approximately 21
million gallons at a weighted average price of $0.45 per gallon, as well as 10
million gallons under fuel swap agreements with a weighted average price of
$0.44 per gallon. The contract prices do not include taxes, transportation costs
or other incremental fuel handling costs.

The unrecognized gain related to the diesel fuel caps based on the average price
of heating oil #2 approximated $0.6 million at December 31, 1999, compared to a
$1.2 million unrecognized loss related to diesel fuel swaps at December 31,
1998.

At December 31, 1999, the Company held fuel inventories for use in normal
operations. These inventories were not material to the Company's overall
financial position. However, fuel costs in early 2000 are expected to continue
to increase based on higher market prices for fuel.

Foreign Exchange Sensitivity
The Company owns an approximate 37% interest in Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V. ("Grupo TFM"), incorporated in Mexico and an 80% interest
in Nelson Money Managers Plc ("Nelson"), a United Kingdom based financial
services corporation. Also, Janus owns 100% of Janus Capital International (UK)
Limited ("Janus UK"), a United Kingdom based company. In connection with these
investments, matters arise with respect to financial accounting and reporting
for foreign currency transactions and for translating foreign currency financial
statements into U.S. dollars. Therefore, the Company has exposure to
fluctuations in the value of the Mexican peso and the British pound.

Prior to January 1, 1999, Mexico's economy was classified as "highly
inflationary" as defined in Statement of Financial Accounting Standards No. 52
"Foreign Currency Translation" ("SFAS 52"). Accordingly, under the highly
inflationary accounting guidance in SFAS 52, the U.S. dollar was used as Grupo
TFM's functional currency, and any gains or losses from translating Grupo TFM's
financial statements into U.S. dollars were included in the determination of its
net income (loss). Equity earnings (losses) from Grupo TFM included in the
Company's results of operations reflected the Company's share of such
translation gains and losses.

Effective January 1, 1999, the Securities and Exchange Commission ("SEC") staff
declared that Mexico should no longer be considered a highly inflationary
economy. Accordingly, the Company performed an analysis under the guidance of
SFAS 52 to determine whether the U.S. dollar or the

Mexican peso should be used as the functional currency for financial accounting
and reporting purposes for periods subsequent to December 31, 1998. Based on the
results of the analysis, management believes the U.S. dollar to be the
appropriate functional currency for the Company's investment in Grupo TFM;
therefore, the financial accounting and reporting of the operating results of
Grupo TFM will remain consistent with prior periods.

With respect to Nelson and Janus UK, as the relative price of the British pound
fluctuates versus the U.S. dollar, the Company's proportionate share of the
earnings or losses of these companies are affected. The following table provides
an example of the potential impact of a 10% change in the price of the British
pound assuming that each of these United Kingdom companies has earnings of
(Pound) 1,000 and using its ownership interest at December 31, 1999. The British
pound is the functional currency.

Janus UK Nelson

Assumed Earnings (Pound) 1,000 (Pound) 1,000
Exchange Rate (to U.S. $) (Pound) 0.5 to $1 (Pound)0.5 to $1
-------------------- ---------------------

Converted U.S. Dollars $ 2,000 $ 2,000
Ownership Percentage 100% 80%
-------------------- ---------------------

Assumed Earnings $ 2,000 $ 1,600
-------------------- ---------------------

Assumed 10% increase in Exchange Rate (Pound) 0.55 to $1 (Pound) 0.55 to $1
-------------------- ---------------------

Converted to U.S. Dollars $ 1,818 $ 1,818
Ownership Percentage 100% 80%
-------------------- ---------------------

Assumed Earnings $ 1,818 $ 1,454
-------------------- ---------------------

Effect of 10% increase in Exchange Rate $ (182) $ (146)
==================== =====================

The impact of changes in exchange rates on the balance sheet are reflected in a
cumulative translation adjustment account as a part of accumulated other
comprehensive income and do not affect earnings.

While not currently utilizing foreign currency instruments to hedge its U.S.
dollar investments in Grupo TFM, Nelson and Janus UK, the Company continues to
evaluate existing alternatives as market conditions and exchange rates
fluctuate.

Available for Sale Investment Sensitivity
Both Janus and Berger have invested a portion of their net income in certain of
their respective (non-money market) advised funds. These investments are
generally classified as available for sale securities pursuant to Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." Accordingly, these investments are carried in the
Company's consolidated financial statements at fair market value and are subject
to the investment performance of the underlying sponsored fund. Any unrealized
gain or loss is recognized upon the sale of the investment.

Additionally, DST, a 32% owned equity investment, holds available for sale
investments that may affect the Company's consolidated financial statements.
Similarly to the Janus and Berger securities, any changes to the market value of
the DST available for sale investments are reflected, net of tax, in DST's
"accumulated other comprehensive income" component of its equity. Accordingly,
the Company records its proportionate share of this amount as part of the
investment in DST. While these changes in market value do not result in any
impact to the Company's

consolidated results of operations currently, upon disposition by DST of these
investments, the Company will record its proportionate share of the gain or loss
as a component of equity earnings.

Equity Price Sensitivity
As noted above, the Company owns 32% of DST, a publicly traded company. While
changes in the market price of DST are not reflected in the Company's
consolidated results of operation or financial position, they may affect the
perceived value of the Company's common stock. Specifically, the DST market
value at any given point in time multiplied by the Company's ownership
percentage provides an amount, which when divided by the outstanding number of
KCSI common shares, derives a per share "value" presumably attributable to the
Company's investment in DST. Fluctuations in this "value" as a result of changes
in the DST market price may affect the Company's stock price.

The revenues earned by Janus, Berger and Nelson are dependent on the underlying
assets under management in the funds to which investment advisory services are
provided. The portfolio of investments included in these various funds includes
combinations of equity, bond and other types of securities. Fluctuations in the
value of these various securities are common and are generated by numerous
factors, including, among others, market volatility, the overall economy,
inflation, changes in investor strategies, availability of alternative
investment vehicles, and others. Accordingly, declines in any one or a
combination of these factors, or other factors not separately identified, may
reduce the value of investment securities and, in turn, the underlying assets
under management on which Financial Services revenues are earned.

Item 8. Financial Statements and Supplementary Data

Index to Financial Statements
Page

Management Report on Responsibility for Financial Reporting................ 77

Financial Statements:

Report of Independent Accountants..................................... 77
Consolidated Statements of Operations and Comprehensive
Income for the three years ended December 31, 1999.................. 78
Consolidated Balance Sheets at December 31, 1999
1998 and 1997....................................................... 79
Consolidated Statements of Cash Flows for the three
years ended December 31, 1999....................................... 80
Consolidated Statements of Changes in Stockholders'
Equity for the three years ended December 31, 1999.................. 81
Notes to Consolidated Financial Statements............................ 82

Financial Statement Schedules:

All schedules are omitted because they are not applicable, insignificant or
the required information is shown in the consolidated financial statements
or notes thereto.

The consolidated financial statements and related notes, together with the
Report of Independent Accountants, of DST Systems, Inc. (an approximate 32%
owned affiliate of the Company accounted for under the equity method) for
the year ended December 31, 1999, which are included in the DST Systems,
Inc. Annual Report on Form 10-K for the year ended December 31, 1999
(Commission File No. 1-14036) have been incorporated by reference in this
Form 10-K as Exhibit 99.1.

Management Report on Responsibility for Financial Reporting

The accompanying consolidated financial statements and related notes of Kansas
City Southern Industries, Inc. and its subsidiaries were prepared by management
in conformity with generally accepted accounting principles appropriate in the
circumstances. In preparing the financial statements, management has made
judgments and estimates based on currently available information. Management is
responsible for not only the financial information, but also all other
information in this Annual Report on Form 10-K. Representations contained
elsewhere in this Annual Report on Form 10-K are consistent with the
consolidated financial statements and related notes thereto.

The Company has a formalized system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded and that its financial
records are reliable. Management monitors the system for compliance, and the
Company's internal auditors measure its effectiveness and recommend possible
improvements thereto. In addition, as part of their audit of the consolidated
financial statements, the Company's independent accountants, who are selected by
the stockholders, review and test the internal accounting controls on a
selective basis to establish the extent of their reliance thereon in determining
the nature, extent and timing of audit tests to be applied.

The Board of Directors pursues its oversight role in the area of financial
reporting and internal accounting control through its Audit Committee. This
committee, composed solely of non-management directors, meets regularly with the
independent accountants, management and internal auditors to monitor the proper
discharge of responsibilities relative to internal accounting controls and to
evaluate the quality of external financial reporting.

Report of Independent Accountants

To the Board of Directors and Stockholders of
Kansas City Southern Industries, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, of changes in
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Kansas City Southern Industries, Inc. and its
subsidiaries at December 31, 1999, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

As discussed in Note 2 to the consolidated financial statements, effective
December 31, 1997 the Company changed its method of evaluating the
recoverability of goodwill. We concur with the change in accounting.

/s/PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Kansas City, Missouri
March 16, 2000

KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
Years Ended December 31
Dollars in Millions, Except per Share Amounts

1999 1998 1997
------------ ------------ ------------

Revenues $ 1,813.7 $ 1,284.3 $ 1,058.3

Costs and expenses 1,139.0 816.3 680.2
Depreciation and amortization 92.3 73.5 75.2
Restructuring, asset impairment
and other charges 196.4
------------ ------------ ------------
Operating income 582.4 394.5 106.5

Equity in net earnings (losses) of unconsolidated
affiliates (Notes 3, 6, 13):
DST Systems, Inc. 44.4 24.3 24.3
Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V. 1.5 (3.2) (12.9)
Other 6.0 1.8 3.8
Interest expense (63.3) (66.1) (63.7)
Reduction in ownership of DST Systems, Inc. (29.7)
Other, net 32.7 32.8 21.2
------------ ------------ ------------
Pretax income 603.7 354.4 79.2

Income tax provision (Note 9) 223.1 130.8 68.4
Minority interest in consolidated
earnings (Notes 12, 13) 57.3 33.4 24.9
------------ ------------ ------------

Net income (loss) 323.3 190.2 (14.1)

Other comprehensive income, net of income tax:
Unrealized gain on securities 38.4 24.3 26.1
Less: reclassification adjustment for
gains included in net income (4.4) (0.2) (0.2)
------------ ------------ ------------
Comprehensive income $ 357.3 $ 214.3 $ 11.8
============ ============ =============

Per Share Data (Note 2):

Basic earnings (loss) per share $ 2.93 $ 1.74 $ (0.13)
============ ============ =============

Diluted earnings (loss) per share $ 2.79 $ 1.66 $ (0.13)
============ ============ =============

Weighted average common shares outstanding (in thousands):
Basic 110,283 109,219 107,602
Dilutive potential common shares 3,767 3,840
------------ ------------ ------------
Diluted 114,050 113,059 107,602
============ ============ ============

Dividends per share
Preferred $ 1.00 $ 1.00 $ 1.00
Common $ .16 $ .16 $ .15

See accompanying notes to consolidated financial statements.

KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
at December 31
Dollars in Millions, Except per Share Amounts

1999 1998 1997
------------ ------------ ------------
ASSETS

Current Assets:
Cash and equivalents $ 336.1 $ 144.1 $ 109.4
Investments in advised funds (Note 7) 23.9 32.2 24.4
Accounts receivable, net (Note 7) 287.9 208.4 177.0
Inventories 40.5 47.0 38.4
Other current assets (Note 7) 45.1 37.8 23.9
------------ ------------ ------------

Total current assets 733.5 469.5 373.1

Investments held for operating purposes (Notes 3, 6) 811.2 707.1 683.5

Properties, net (Notes 4, 7) 1,347.8 1,266.7 1,227.2

Intangibles and Other Assets, net (Notes 3, 4, 7) 196.4 176.4 150.4
------------ ------------ ------------

Total assets $ 3,088.9 $ 2,619.7 $ 2,434.2
============ ============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Debt due within one year (Note 8) $ 10.9 $ 10.7 $ 110.7
Accounts and wages payable 199.1 125.8 109.0
Accrued liabilities (Notes 4, 7) 206.7 159.7 217.8
------------ ------------ ------------

Total current liabilities 416.7 296.2 437.5
------------ ------------ ------------

Other Liabilities:
Long-term debt (Note 8) 750.0 825.6 805.9
Deferred income taxes (Note 9) 449.2 403.6 332.2
Other deferred credits 132.6 128.8 132.1
Commitments and contingencies
(Notes 3, 8, 9, 12, 13)

Total other liabilities 1,331.8 1,358.0 1,270.2
------------ ------------ ------------

Minority Interest in consolidated
subsidiaries (Notes 12, 13) 57.3 34.3 28.2
------------ ------------ ------------

Stockholders' Equity (Notes 2, 5, 8, 10):
$25 par, 4% noncumulative, Preferred stock 6.1 6.1 6.1
$1 par, Series B convertible,
Preferred stock 1.0
$.01 par, Common stock 1.1 1.1 1.1
Retained earnings 1,167.0 849.1 839.3
Accumulated other comprehensive income 108.9 74.9 50.8
Shares held in trust (200.0)
------------ ------------ ------------

Total stockholders' equity 1,283.1 931.2 698.3
------------ ------------ ------------

Total liabilities and stockholders' equity $ 3,088.9 $ 2,619.7 $ 2,434.2
============ ============ ============

See accompanying notes to consolidated financial statements.

KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
Dollars in Millions

1999 1998 1997
------------ ------------ ------

CASH FLOWS PROVIDED BY (USED FOR):
Operating Activities:
Net income (loss) $ 323.3 $ 190.2 $ (14.1)
Adjustments to net income (loss):
Depreciation and amortization 92.3 73.5 75.2
Deferred income taxes 21.6 23.2 (16.6)
Equity in undistributed earnings of
unconsolidated affiliates (51.6) (16.8) (15.0)
Minority interest in consolidated earnings 57.3 33.4 24.9
Reduction in ownership of DST 29.7
Restructuring, asset impairment and other charges 196.4
Gain on sale of assets (0.7) (20.2) (6.9)
Employee benefit and deferred compensation
expenses not requiring operating cash 5.2 3.8 8.7
Deferred commissions (29.5)
Changes in working capital items:
Accounts receivable (79.5) (29.9) (29.0)
Inventories 6.5 (8.6) 2.5
Accounts and wages payable 66.1 19.6 (3.1)
Accrued liabilities 53.5 (32.4) 24.4
Other current assets (3.1) (8.2) (2.2)
Other, net (2.6) (1.7) 1.5
-------- -------- --------
Net 458.8 255.6 246.7
-------- -------- --------

Investing Activities:
Property acquisitions (156.7) (104.9) (82.6)
Proceeds from disposal of property 3.0 8.2 7.4
Investments in and loans with affiliates (17.3) (25.3) (303.5)
Net sales (purchases) of investments in
advised funds 16.6 (2.2) (5.0)
Proceeds from disposal of other investments 10.4 0.3
Other, net (4.2) 0.2 4.0
-------- -------- --------
Net (158.6) (113.6) (379.4)
-------- -------- --------

Financing Activities:
Proceeds from issuance of long-term debt 21.8 151.7 339.5
Repayment of long-term debt (97.5) (238.6) (110.1)
Proceeds from stock plans 43.4 30.1 26.6
Stock repurchased (24.6) (50.2)
Distributions to minority stockholders of
consolidated subsidiaries (37.8) (32.8) (12.9)
Cash dividends paid (17.6) (17.8) (15.2)
Other, net 4.1 0.1 (4.5)
-------- -------- --------
Net (108.2) (107.3) 173.2
-------- -------- --------

Cash and Equivalents:
Net increase 192.0 34.7 40.5
At beginning of year 144.1 109.4 68.9
-------- -------- --------
At end of year (Note 5) $ 336.1 $ 144.1 $ 109.4
======== ======== ========

See accompanying notes to consolidated financial statements.

KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars in Millions, Except per Share Amounts

$1 Par Accumulated
$25 Par Series B $.01 Par other Shares
Preferred Preferred Common Retained comprehensive held
stock stock stock earnings income in trust Total
----- ----- ----- -------- ------ -------- -----

Balance at
December 31, 1996 $ 6.1 $ 1.0 $ 0.4 $ 883.3 $ 24.9 $ (200.0) $ 715.7

Net loss (14.1) (14.1)
Dividends (16.0) (16.0)
Stock repurchased (50.2) (50.2)
3-for-1 stock split 0.7 (0.7) -
Stock plan shares
issued from treasury 3.1 3.1
Stock issued in
acquisition (Note 3) 10.1 10.1
Options exercised
and stock subscribed 23.8 23.8
Other comprehensive income
25.9 25.9
------- ------- ------- ------- -------- -------- ---------

Balance at
December 31, 1997 6.1 1.0 1.1 839.3 50.8 (200.0) 698.3

Net income 190.2 190.2
Dividends (17.7) (17.7)
Stock plan shares
issued from treasury 3.0 3.0
Stock issued in
acquisition (Note 3) 3.2 3.2
Options exercised
and stock subscribed 30.1 30.1
Termination of shares held
in trust (Note 10) (1.0) (199.0) 200.0 -
Other comprehensive income
24.1 24.1
------- ------- ------- ------- -------- -------- ---------

Balance at
December 31, 1998 6.1 - 1.1 849.1 74.9 - 931.2

Net income 323.3 323.3
Dividends (17.9) (17.9)
Stock repurchased (24.6) (24.6)
Options exercised and
stock subscribed 37.1 37.1
Other comprehensive income
34.0 34.0
------- ------- ------- ------- -------- -------- ---------

Balance at
December 31, 1999 $ 6.1 $ - $ 1.1 $ 1,167.0 $ 108.9 $ - $ 1,283.1
======= ======= ======= ======== ======== ======== ===========

See accompanying notes to consolidated financial statements.

KANSAS CITY SOUTHERN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Description of the Business

Kansas City Southern Industries, Inc. ("Company" or "KCSI") is a diversified
company which reports its financial information in two business segments:
Transportation and Financial Services. The Transportation segment, through its
principal subsidiaries and joint ventures, owns and operates a rail network of
approximately 6,000 miles of main and branch lines that link the key commercial
and industrial markets of the United States and Mexico. The businesses
comprising the Financial Services segment offer a variety of asset management
and related financial services to registered investment companies, retail
investors, institutions and individuals. Note 14 provides condensed segment
financial information.

Tax Ruling for Separation. On July 9, 1999, KCSI received a tax ruling from the
Internal Revenue Service ("IRS") to the effect that for United States federal
income tax purposes, the planned separation of the Financial Services segment
from KCSI through a pro-rata distribution of Stilwell Financial, Inc.
("Stilwell") common stock to KCSI stockholders (the "Separation") qualifies as a
tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as
amended. Additionally, in February 2000, the Company received a favorable
supplementary tax ruling from the IRS to the effect that the assumption of $125
million of KCSI debt by Stilwell (in connection with the Company's
re-capitalization of its debt structure as discussed in Note 16) would have no
effect on the previously issued tax ruling.

TRANSPORTATION
Kansas City Southern Lines, Inc. ("KCSL"), a wholly-owned subsidiary of the
Company, is the holding company for Transportation segment subsidiaries and
affiliates. This segment includes, among others:

o The Kansas City Southern Railway Company ("KCSR"), a wholly-owned subsidiary;
o Gateway Western Railway Company ("Gateway Western"), a wholly-owned
subsidiary;
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), a 37%
owned affiliate, which owns 80% of the common stock of TFM, S.A. de C.V.
("TFM");
o Mexrail, Inc. ("Mexrail"), a 49% owned affiliate, which wholly owns the Texas
Mexican Railway Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned affiliate
and
o Panama Canal Railway Company ("PCRC"), a 50% owned affiliate.

KCSL, along with its principal subsidiaries and joint ventures, owns and
operates a rail network of approximately 6,000 miles of main and branch lines
that link key commercial and industrial markets in the United States and Mexico.
Its strategic alliance with the Canadian National Railway Company and Illinois
Central Corporation and other marketing agreements has expanded its reach to
comprise a contiguous rail network of approximately 25,000 miles of main and
branch lines connecting Canada, the United States and Mexico.

KCSL's rail network connects shippers in the midwestern and eastern United
States and Canada, including shippers utilizing Chicago and Kansas City -- the
two largest rail centers in the United States -- with the largest industrial
centers of Canada and Mexico, including Toronto, Edmonton, Mexico City and
Monterrey. KCSL's system, through its core network, strategic alliances and
marketing partnerships, interconnects with all Class I railroads in North
America.

KCSL's principal subsidiaries and investments are as follows:

o KCSR, which traces its origins to 1887, operates a Class I Common Carrier
railroad system in the United States, from the Midwest to the Gulf of
Mexico and on an East-West axis from Meridian, Mississippi to Dallas,
Texas. KCSR offers the shortest route between Kansas City and major port
cities along the Gulf of Mexico in Louisiana, Mississippi and Texas, and
its customer base includes electric generating utilities and a wide range
of companies in the chemical and petroleum industries, agricultural and
mineral industries, paper and forest product industries, automotive
product and intermodal industries, among others. KCSR, in conjunction with
the Norfolk Southern Corporation, operates the most direct rail route,
referred to as the "Meridian Speedway", linking the Atlanta and Dallas
gateways for traffic moving between the rapidly-growing southeast and
southwest regions of the United States. The "Meridian Speedway" also
provides eastern shippers and other U.S. and Canadian railroads with an
efficient connection to Mexican markets.

o Gateway Western, a regional common carrier system which links Kansas City
with East St. Louis and Springfield, Illinois, provides key interchanges
with the majority of other Class I railroads. Like KCSR, Gateway Western
serves customers in a wide range of industries.

o Strategic joint venture interests include Grupo TFM and Mexrail, which
provide KCSL with direct access to Mexico. Through Grupo TFM and Mexrail,
operated in partnership with Transportacion Maritima Mexicana, S.A. de C.V.
("TMM"), KCSL has established a prominent position in the Mexican market.
TFM's route network provides the shortest connection to the major
industrial and population areas of Mexico from midwestern and eastern
points in the United States. TFM was privatized by the Mexican government
in June 1997. Tex Mex connects with KCSR via trackage rights at Beaumont,
Texas, with TFM at Laredo, Texas, (the single largest rail freight transfer
point between the United States and Mexico), as well as with other U.S.
Class I railroads at various locations.

KCSR and Gateway Western revenues and net income are dependent on providing
reliable service to customers at competitive rates, the general economic
conditions in the geographic region served and the ability to effectively
compete against alternative modes of surface transportation, such as
over-the-road truck transportation. The ability of KCSR and Gateway Western to
construct and maintain the roadway in order to provide safe and efficient
transportation service is important to the ongoing viability as a rail carrier.
Additionally, the containment of costs and expenses is important in maintaining
a competitive market position, particularly with respect to employee costs as
approximately 84% of KCSR and Gateway Western combined employees are covered
under various collective bargaining agreements.

FINANCIAL SERVICES

On January 23, 1998, KCSI formed Stilwell (formerly FAM Holdings, Inc.) as a
wholly-owned holding company for the group of businesses and investments
comprising the Financial Services segment of KCSI. The primary entities
comprising this segment are as follows: Janus, approximately 82% owned; Stilwell
Management, Inc. ("SMI"), wholly-owned; Berger LLC ("Berger"), of which SMI owns
100% of Berger preferred limited liability company interests and approximately
86% of the Berger regular limited liability company interests; Nelson Money
Managers Plc ("Nelson"), 80% owned; and DST Systems, Inc. ("DST"), an equity
investment in which SMI owns an approximate 32% interest. KCSI transferred to
Stilwell KCSI's ownership interests in Janus, Berger, Nelson, DST and certain
other financial services-related assets and Stilwell assumed all of KCSI's
liabilities associated with the assets transferred effective July 1, 1999.
Additionally, in December 1999, Stilwell contributed to SMI the investment in
DST.

A summary of Stilwell's principal operations/investments follows:

o Janus and Berger provide investment management, advisory, distribution and
transfer agent services primarily to U.S. based mutual funds, pension plans
and other institutional and private account investors. Janus also offers
mutual fund products to international markets through the Janus World Funds
plc ("Janus World Funds"). Janus assets under management at December 31,
1999, 1998 and 1997 were $249.5, $108.3 and $67.8 billion, respectively.
Berger assets under management totaled $6.6, $3.7 and $3.8 billion as of
December 31, 1999, 1998 and 1997, respectively.

Janus and Berger revenues and operating income are generally derived as a
percentage of average assets under management, and a decline in the U.S.
and/or international financial markets, or an increase in the rate of
return of alternative investments could negatively affect results. In
addition, the mutual fund industry, in general, faces significant
competition as the number of mutual funds continues to increase, marketing
and distribution channels become more creative and complex, and investors
place greater emphasis on published fund recommendations and investment
category rankings.

o Nelson, operating in the United Kingdom, provides investment advice and
investment management services primarily to individuals who are retired or
are contemplating retirement. Nelson revenues are earned based on an
initial fee calculated as a percentage of capital invested into each
individual investment portfolio, as well as from an annual fee based on the
level of assets under management for the ongoing management and
administration of each investment portfolio. Declines in international
financial markets or a decline of the price of the British pound relative
to the U.S. dollar could negatively affect the amount of earnings reported
for Nelson in the consolidated financial statements.

o DST, together with its subsidiaries and joint ventures, offers information
processing and software services and products through three operating
segments: financial services, output solutions and customer management.
Additionally, DST holds certain investments in equity securities, financial
interests and real estate holdings. DST operates throughout the United
States, with operations in Kansas City, Missouri, Northern California and
various locations on the east coast, among others, and internationally
in Canada, Europe, Africa and the Pacific Rim. DST has a single class of
common stock, which is publicly traded on the New York Stock Exchange and
the Chicago Stock Exchange. See Note 3 for additional information.

The earnings of DST are dependent in part upon the further growth of mutual
fund and other industries, DST's ability to continue to adapt its
technology to meet client needs and demands for the latest technology and
various other factors including, but not limited to, reliance on processing
facilities; future international sales; continued equity in earnings from
joint ventures; and competition from other third party providers of similar
services and products as well as from in-house providers.

Note 2. Significant Accounting Policies

Basis of Presentation. Use of the term "Company" as described in these Notes to
Consolidated Financial Statements means Kansas City Southern Industries, Inc.
and all of its consolidated subsidiary companies. Significant accounting and
reporting policies are described below. Certain prior year amounts have been
reclassified to conform to the current year presentation.

Use of Estimates. The accounting and financial reporting policies of the Company
conform with accounting principles generally accepted in the United States
("U.S. GAAP"). The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and

assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Principles of Consolidation. The consolidated financial statements generally
include all majority owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.

In Issue No. 96-16, the Emerging Issues Task Force ("EITF 96-16") of the FASB,
reached a consensus that substantive minority rights which provide a minority
shareholder with the right to effectively control significant decisions in the
ordinary course of an investee's business could impact whether the majority
shareholder should consolidate the investee. Management evaluated the rights of
the minority shareholders of its consolidated subsidiaries. Application of EITF
96-16 did not affect the Company's consolidated financial statements. This
conclusion with respect to Janus is currently under discussion with the Staff of
the SEC and, accordingly, is subject to change. See Notes 12 and 13 to the
consolidated financial statements.

Revenue Recognition. Revenue is recognized by the Company's consolidated
railroad operations based upon the percentage of completion of a commodity
movement. Investment management fees are recognized by Janus, Berger and Nelson
primarily as a percentage of assets under management. Other revenues, in
general, are recognized when the product is shipped, as services are performed
or contractual obligations fulfilled.

Cash Equivalents. Short-term liquid investments with an initial maturity of
generally three months or less are considered cash equivalents, including
investments in money market mutual funds that are managed by Janus. Janus'
investments in its money market mutual funds are generally used to fund
operations and to pay dividends. Pursuant to contractual agreements between KCSI
and certain Janus minority stockholders, Janus has distributed at least 90% of
its net income to its stockholders each year.

Inventories. Materials and supplies inventories for transportation operations
are valued at average cost.

Properties and Depreciation. Properties are stated at cost. Additions and
renewals constituting a unit of property are capitalized and all properties are
depreciated over the estimated remaining life of such assets. Ordinary
maintenance and repairs are charged to expense as incurred.

The cost of transportation equipment and road property normally retired, less
salvage value, is charged to accumulated depreciation. Conversely, the cost of
industrial and other property retired, and the cost of transportation property
abnormally retired, together with accumulated depreciation thereon, are
eliminated from the property accounts and the related gains or losses are
reflected in net income.

Depreciation for transportation operations is computed using composite
straight-line rates for financial statement purposes. The Surface Transportation
Board ("STB") approves the depreciation rates used by KCSR. KCSR evaluates
depreciation rates for properties and equipment and implements approved rates.
Periodic revisions of rates have not had a material effect on operating results.
Unit depreciation methods, employing both accelerated and straight-line rates,
are employed in other business segments. Accelerated depreciation is used for
income tax purposes. The ranges of annual depreciation rates for financial
statement purposes are:

Transportation
Road and structures 1% - 20%
Rolling stock and equipment 1% - 24%
Other equipment 1% - 33%
Capitalized leases 3% - 20%

The Company adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121") effective January 1, 1996. SFAS 121 provides
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill, as well as for long-lived assets and
certain identifiable intangibles which are to be disposed. If events or changes
in circumstances of a long-lived asset indicate that the carrying amount of an
asset may not be recoverable, the Company must estimate the future cash flows
expected to result from the use of the asset and its eventual disposition. If
the sum of the expected future cash flows (undiscounted and without interest) is
lower than the carrying amount of the asset, an impairment loss must be
recognized to the extent that the carrying amount of the asset exceeds its fair
value. The adoption of SFAS 121 did not have a material effect on the Company's
financial position or results of operations. However, see Note 4 below with
respect to certain KCSR assets held for disposal and certain other impaired
assets.

Investments. The equity method of accounting is used for all entities in which
the Company or its subsidiaries have significant influence, but not more than
50% voting control interest; the cost method of accounting is generally used for
investments of less than 20% voting control interest.

Pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"), investments
classified as "available for sale" are reported at fair value, with unrealized
gains and losses excluded from earnings and reported, net of deferred income
taxes, in accumulated other comprehensive income. Investments classified as
"trading" securities are reported at fair value, with unrealized gains and
losses included in net income.

Investments in advised funds are comprised of shares of certain mutual funds
advised by Janus and Berger. Realized gains and losses are determined using the
first-in, first-out method.

Advertising, Marketing and Promotion. The Company expenses all advertising as
incurred. Direct response advertising for which future economic benefits are
probable and specifically attributable to the advertising is not material.
Berger has marketing agreements with various related mutual funds pursuant to
Rule 12b-1 under the Investment Company Act of 1940 ("12b-1 Plan") pursuant to
which certain 12b-1 fees are collected. Under these agreements, which are
approved or renewed on an annual basis by the boards of directors of the
respective mutual funds, Berger must engage in activities that are intended to
result in sales in the funds. Any fees not spent must be returned to the funds.
Berger collected 12b-1 Plan fees of $8.6, $6.9 and $7.6 million for the years
ended December 31, 1999, 1998 and 1997, respectively.

Intangibles. Intangibles principally represent the excess of cost over the fair
value of net underlying assets of acquired companies using purchase accounting
and are amortized using the straight-line method over periods ranging from 5 to
40 years.

On an annual basis, the Company reviews the recoverability of goodwill by
comparing the carrying value of the recoverability of the associated goodwill to
its fair value. In response to changes in the competitive and business
environment in the rail industry, the Company revised its methodology for
evaluating goodwill recoverability effective December 31, 1997. The change in
this method of measurement relates to the level at which assets are grouped from
the business unit level to the investment component level. At the same time,
there were changes in the estimates of future cash

flows used to measure goodwill recoverability. The effect of the change in
method of applying the accounting principle is inseparable from the changes in
estimate. Accordingly, the combined effects have been reported in the
accompanying consolidated financial statements as a change in estimate. The
Company believes that the revised methodology represents a preferable method of
accounting because it more closely links the fair value estimates to the asset
whose recoverability is being evaluated. The policy change did not impact the
Company's Financial Services businesses as their goodwill has always been
evaluated on an investment component basis.

As a result of the changes discussed above, the Company determined that the
aggregate carrying value of the goodwill and other intangible assets associated
with the 1993 MidSouth Corporation ("MidSouth") purchase exceeded their fair
value. Accordingly, the Company recorded an impairment loss of $91.3 million in
the fourth quarter of 1997. Due to the fact that the change in accounting is
inseparable from the change in estimates, the pro forma effects of retroactive
application cannot be determined.

Deferred Commissions. Commissions paid to financial intermediaries on sales of
certain Janus World Funds shares ("B shares") are recorded as deferred
commissions in the accompanying consolidated financial statements. These
deferred commissions are amortized using the sum-of-the-years digits methodology
over four years, or when the B shares are redeemed, if earlier. Early withdrawal
charges received by Janus from redemption of the B shares within four years of
purchase reduce the unamortized deferred commission balance. Payments of
deferred commissions during 1999 were $29.5 million and associated amortization
expense for the year then ended totaled $8.1 million. Payments of deferred
commissions and associated amortization expense were not material in 1998.

Changes of Interest in Subsidiaries and Equity Investees. A change of the
Company's interest in a subsidiary or equity investee resulting from the sale of
the subsidiary's or equity investee's stock is generally recorded as a gain or
loss in the Company's net income in the period that the change of interest
occurs. If an issuance of stock by the subsidiary or affiliate is from treasury
shares on which gains have been previously recognized, however, KCSI will record
the gain directly to its equity and not include the gain in net income. The net
gain recorded by the Company (included in the Other, net component in the
Statements of Operations) for the year ended December 31, 1999 totaled $6.2
million. Gains for the years ended December 31, 1998 and 1997 were not material.
A change of interest in a subsidiary or equity investee resulting from a
subsidiary's or equity investee's purchase of its stock increases the Company's
ownership percentage of the subsidiary or equity investee. The Company records
this type of transaction under the purchase method of accounting, whereby any
excess of fair market value over the net tangible and identifiable intangible
assets is recorded as goodwill.

Computer Software Costs. Costs incurred in conjunction with the purchase or
development of computer software for internal use are accounted for in
accordance with American Institute of Certified Public Accountant's Statement of
Position 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"), which was adopted by the Company in
1998. Costs incurred in the preliminary project stage, as well as training and
maintenance costs, are expensed as incurred. Direct and indirect costs
associated with the application development stage of internal use software are
capitalized until such time that the software is substantially complete and
ready for its intended use. Capitalized costs are amortized on a straight line
basis over the useful life of the software.

Derivative Financial Instruments. In 1997, the Company entered into foreign
currency contracts in order to reduce the impact of fluctuations in the value of
the Mexican peso on its investment in Grupo TFM. These contracts were intended
to hedge only a portion of the Company's exposure related to the final
installment of the purchase price and not any other transactions or balances.
The Company follows the requirements outlined in Statement of Financial
Accounting Standards

No. 52 "Foreign Currency Translation" ("SFAS 52"), and related authoritative
guidance. Accordingly, gains and losses related to hedges of the Company's
investment in Grupo TFM were deferred and recognized as adjustments to the
carrying amount of the investment when the hedged transaction occurred.

Any gains and losses qualifying as hedges of existing assets or liabilities are
included in the carrying amounts of those assets or liabilities and are
ultimately recognized in income as part of those carrying amounts. Any gains or
losses on derivative contracts that do not qualify as hedges are recognized
currently as other income. Gains and losses on hedges are reflected in operating
activities in the statement of cash flows.

See Note 12 for additional information with respect to derivative financial
instruments and purchase commitments.

Fair Value of Financial Instruments. Statement of Financial Accounting Standards
No. 107 "Disclosures About Fair Value of Financial Instruments" ("FAS 107")
requires an entity to disclose the fair value of its financial instruments. The
Company's financial instruments include cash and cash equivalents, investments
in advised funds, accounts receivable and payable and long-term debt.

The carrying value of the Company's cash equivalents and accounts receivable and
payable approximate their fair values due to their short-term nature. The
carrying value of the Company's investments designated as "available for sale"
and "trading" equals their fair value, which is based upon quoted prices in
active markets. The Company approximates the fair value of long-term debt based
upon borrowing rates available at the reporting date for indebtedness with
similar terms and average maturities.

Income Taxes. Deferred income tax effects of transactions reported in different
periods for financial reporting and income tax return purposes are recorded
under the liability method of accounting for income taxes. This method gives
consideration to the future tax consequences of the deferred income tax items
and immediately recognizes changes in income tax laws upon enactment. The income
statement effect is generally derived from changes in deferred income taxes on
the balance sheet.

Treasury Stock. The excess of par over cost of the Preferred shares held in
Treasury is credited to capital surplus. Common shares held in Treasury are
accounted for as if they were retired and the excess of cost over par value of
such shares is charged to capital surplus, if available, then to retained
earnings.

Stock Plans. Proceeds received from the exercise of stock options or
subscriptions are credited to the appropriate capital accounts in the year they
are exercised.

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123") in October 1995. This statement allows companies to continue under the
approach set forth in Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB 25"), for recognizing stock-based compensation
expense in the financial statements, but encourages companies to adopt the fair
value method of accounting for employee stock options. The Company has elected
to retain its accounting approach under APB 25, and has presented the applicable
pro forma disclosures in Note 10 to the consolidated financial statements
pursuant to the requirements of SFAS 123.

All shares held in the Employee Stock Ownership Plan ("ESOP") are treated as
outstanding for purposes of computing the Company's earnings per share. See
additional information on the ESOP in Note 11.

Earnings Per Share. The Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share" ("SFAS 128") in 1997. The statement
specifies the computation, presentation and disclosure requirements for earnings
per share. The statement requires the computation of earnings per share under
two methods: "basic" and "diluted." Basic earnings per share is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed giving effect to all dilutive potential common shares that were
outstanding during the period (i.e., the denominator used in the basic
calculation is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential shares had been issued).
SFAS 128 requires the Company to present basic and diluted per share amounts for
income (loss) from continuing operations and for net income (loss) on the face
of the statements of operations.

The effect of stock options to employees represent the only difference between
the weighted average shares used for the basic computation compared to the
diluted computation. The total incremental shares from assumed conversion of
stock options included in the computation of diluted earnings per share were
3,766,571 and 3,840,333 for the years ended December 31, 1999 and 1998,
respectively. Because of the net loss in 1997, all options were anti-dilutive
for the year ended December 31, 1997. The weighted average of options to
purchase 88,875 and 274,340 shares in 1999 and 1998, respectively, were excluded
from the diluted earnings per share computation because the exercise prices were
greater than the respective average market price of the common shares.

The only adjustments that currently affect the numerator of the Company's
diluted earnings per share computation include preferred dividends and
potentially dilutive securities at subsidiaries and affiliates. These
adjustments totaled $4.8 and $2.3 million for the years ended December 31, 1999
and 1998, respectively. Adjustments for the year ended December 31, 1997 were
not material.

Stockholders' Equity. Information regarding the Company's capital stock at
December 31, 1999 and 1998 follows:
Shares Shares
Authorized Issued

$25 Par, 4% noncumulative, Preferred stock 840,000 649,736
$1 Par, Preferred stock 2,000,000 None
$1 Par, Series A, Preferred stock 150,000 None
$1 Par, Series B convertible, Preferred stock 1,000,000 None
$.01 Par, Common stock 400,000,000 146,738,232

In 1997, there were 1,000,000 shares issued of $1 Par, Series B convertible,
Preferred stock and 145,206,576 shares issued of $.01 Par, Common stock. Other
1997 shares authorized and issued were the same as those in 1999 and 1998.

On July 29, 1997, the Company's Board of Directors authorized a 3-for-1 split in
the Company's common stock effected in the form of a stock dividend. All share
and per share data reflect this split.

The Company's stockholders approved a one-for-two reverse stock split at a
special stockholders' meeting held on July 15, 1998. The Company will not effect
this reverse stock split until a Separation is completed. See Note 1.

Shares outstanding are as follows at December 31, (in thousands):

1999 1998 1997
---- ---- -----

$25 Par, 4% noncumulative, Preferred stock 242 242 242
$.01 Par, Common stock 110,574 109,815 108,084

Retained earnings include equity in unremitted earnings of unconsolidated
affiliates of $143.4, $97.5 and $90.4 million at December 31, 1999, 1998 and
1997, respectively.

Employee Plan Funding Trust. The Company's $1 Par Series B convertible Preferred
stock ("Series B Preferred stock"), issued in 1993, had a $200 per share
liquidation preference and was convertible to common stock at a ratio of twelve
to one. Effective September 30, 1998, the Company terminated the Employee Plan
Funding Trust ("EPFT" or "Trust"), which was established as a grantor trust for
the purpose of holding these shares of Series B Preferred stock for the benefit
of various KCSI employee benefit plans.

In accordance with the Agreement to terminate the EPFT, the Company received
872,362 shares of Series B Preferred stock in full repayment of the indebtedness
from the Trust ($178.7 million plus accrued interest). In addition, the
remaining 127,638 shares of Series B Preferred stock were converted into KCSI
Common stock, resulting in the issuance to the EPFT of 1,531,656 shares of such
Common stock. This Common stock was then transferred to KCSI and the Company has
set these shares aside for use in connection with the KCSI Stock Option and
Performance Award Plan, as amended and restated effective July 15, 1998. As a
result of the termination of the Trust, the Series B Preferred stock is no
longer issued or outstanding and the converted Common stock has been included in
the shares issued above.

Statement of Financial Accounting Standards No. 130. Effective January 1, 1998,
the Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"), which
establishes standards for reporting and disclosure of comprehensive income and
its components in the financial statements. Prior year information has been
included pursuant to SFAS 130. The Company's other comprehensive income consists
primarily of its proportionate share of unrealized gains and losses relating to
investments held by DST as "available for sale" securities as defined by SFAS
115. The unrealized gain related to these investments increased $63.8 million,
$39.5 million and $42.6 million ($38.4 million, $24.3 million and $26.1 million,
net of deferred taxes) for the years ended December 31, 1999, 1998 and 1997,
respectively.

New Accounting Pronouncements. The following accounting pronouncement is not yet
effective, but may have an impact on the Company's consolidated financial
statements upon adoption.

Statement of Financial Accounting Standards No. 133. In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative financial instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires recognition
of all derivatives as either assets or liabilities measured at fair value.
Initially, the effective date of SFAS 133 was for all fiscal quarters for fiscal
years beginning after June 15, 1999; however, in June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133", which deferred the
effective date of SFAS 133 for one year so that it will be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Company
is reviewing the provisions of SFAS 133 and

expects adoption by the required date. The adoption of SFAS 133 with respect to
existing hedge transactions is not expected to have a material impact on the
Company's results of operations, financial position or cash flows.

Note 3. Acquisitions and Dispositions

DST Transactions. On December 21, 1998, DST and USCS International, Inc.
("USCS") announced the completion of the merger of USCS with a wholly-owned DST
subsidiary. The merger, accounted for as a pooling of interests by DST, expands
DST's presence in the output solutions and customer management software and
services industries. Under the terms of the merger, USCS became a wholly-owned
subsidiary of DST. DST issued approximately 13.8 million shares of its common
stock in the transaction.

The issuance of additional DST common shares reduced KCSI's ownership interest
from 41% to approximately 32%. Additionally, the Company recorded a one-time
non-cash charge of approximately $36.0 million pretax ($23.2 million after-tax),
reflecting the Company's reduced ownership of DST and the Company's
proportionate share of DST and USCS fourth quarter merger-related costs. KCSI
accounts for its DST investment under the equity method.

Acquisition of Nelson. On April 20, 1998, the Company completed its acquisition
of 80% of Nelson, an investment advisor and manager based in the United Kingdom
("UK"). Nelson has six offices throughout the UK and offers planning based asset
management services directly to private clients. Nelson managed approximately
$1.3 billion of assets as of December 31, 1999. The acquisition, accounted for
as a purchase, was completed using a combination of cash, KCSI common stock
(67,000 shares valued at $3.2 million) and notes payable ($4.9 million, payable
by March 31, 2005 and bearing interest at 7 percent). The total purchase price
was approximately $33 million. The purchase price was in excess of the fair
market value of the net tangible and identifiable intangible assets received and
this excess was recorded as goodwill to be amortized over a period of 20 years.
Assuming the transaction had been completed January 1, 1998, inclusion of
Nelson's results on a pro forma basis, as of and for the year ended December 31,
1998, would not have been material to the Company's consolidated results of
operations.

Grupo TFM. In June 1996, the Company and TMM formed Grupo TFM to participate in
the privatization of the Mexican rail industry.

On December 6, 1996, Grupo TFM, TMM and the Company announced that the Mexican
Government ("Government") had awarded to Grupo TFM the right to purchase 80% of
the common stock of TFM for approximately 11.072 billion Mexican pesos
(approximately $1.4 billion based on the U.S. dollar/Mexican peso exchange rate
on the award date). TFM holds the concession to operate Mexico's "Northeast Rail
Lines" for 50 years, with the option of a 50 year extension (subject to certain
conditions).

The Northeast Rail Lines are a strategically important rail link to Mexico and
the North American Free Trade Agreement ("NAFTA") corridor. The lines are
estimated to transport approximately 40% of Mexico's rail cargo and are located
next to primary north/south truck routes. The Northeast Rail Lines directly link
Mexico City and Monterrey, as well as Guadalajara (through trackage rights),
with the ports of Lazaro Cardenas, Veracruz, Tampico, and the cities of
Matamoros and Nuevo Laredo. Nuevo Laredo is a primary transportation gateway
between Mexico and the United States. The Northeast Rail Lines connect in
Laredo, Texas to the Union Pacific Railroad and the Tex Mex. The Tex Mex links
with KCSR at Beaumont, Texas through trackage rights. With the KCSR and Tex Mex
interchange at Beaumont, and through KCSR's connections with major rail carriers
at various other points, KCSR has developed a NAFTA rail system to participate
in the economic integration of the North American marketplace.

On January 31, 1997, Grupo TFM paid the first installment of the purchase price
(approximately $565 million based on the U.S. dollar/Mexican peso exchange rate)
to the Government, representing approximately 40% of the purchase price. Grupo
TFM funded the initial installment of the TFM purchase price through capital
contributions from TMM and the Company. The Company contributed approximately
$298 million to Grupo TFM, of which approximately $277 million was used by Grupo
TFM as part of the initial installment payment. The Company financed this
contribution using borrowings under existing lines of credit.

On January 28, 1999, the Company, along with other direct and indirect owners of
TFM, entered into a preliminary agreement with the Government. As part of that
agreement, an option was granted to the Company, TMM and Grupo Servia, S.A. de
C.V. ("Grupo Servia") to purchase all or a portion of the Government's 20%
ownership interest in TFM at a discount. The option, under the terms of the
preliminary agreement, has expired. However, management of TFM has advised the
Company that negotiations with the Government are continuing and TFM management
expects that the Government will extend the option.

Gateway Western Acquisition. In May 1997, the STB approved the Company's
acquisition of Gateway Western, a regional rail carrier with operations from
Kansas City, Missouri to East St. Louis and Springfield, Illinois and haulage
rights between Springfield and Chicago, from the Southern Pacific Rail
Corporation. Prior to the STB approval -- from acquisition in December 1996
through May 1997 -- the Company's investment in Gateway Western was treated as a
majority-owned unconsolidated subsidiary accounted for under the equity method.
Upon approval from the STB, the assets, liabilities, revenues and expenses were
included in the Company's consolidated financial statements. The consideration
paid for Gateway Western (including various acquisition costs and liabilities)
was approximately $12.2 million, which exceeded the fair value of the underlying
net assets by approximately $12.1 million. The resulting intangible is being
amortized over a period of 40 years.

Under a prior agreement with The Atchison, Topeka & Santa Fe Railway Company,
Burlington Northern Santa Fe Corporation has the option of purchasing the assets
of Gateway Western (based on a fixed formula in the agreement) through the year
2004.

Berger Ownership Interest. On September 30, 1999, Berger Associates, Inc.
("BAI") assigned and transferred its operating assets and business to its
subsidiary, Berger LLC, a limited liability company. In addition, BAI changed
its name to Stilwell Management, Inc. ("SMI"). SMI owns 100% of the preferred
limited liability company interests and approximately 86% of the regular limited
liability company interest in Berger. The remaining 14% of regular limited
liability company interests were issued to key SMI and Berger LLC employees,
resulting in a non-cash compensation charge.

Prior to the change in corporate form discussed above, the Company owned 100% of
BAI. The Company increased its ownership in BAI to 100% during 1997 as a result
of BAI's purchase, for treasury, of common stock from minority shareholders and
the acquisition by KCSI of additional BAI shares from a minority shareholder
through the issuance of 330,000 shares of KCSI common stock valued at
approximately $10.1 million. In connection with these transactions, BAI granted
options to acquire shares of its stock to certain employees. At December 31,
1998, the Company's ownership would have been diluted to approximately 91% if
all of the outstanding options had been exercised. These transactions resulted
in approximately $17.8 million of goodwill, which is being amortized over 15
years. However, see discussion of impairment of a portion of this goodwill in
Note 4. All of the outstanding options were cancelled upon formation of Berger.

The Company's 1994 acquisition of a controlling interest in BAI was completed
under a Stock Purchase Agreement ("Agreement") covering a five-year period
ending in October 1999. Pursuant to the Agreement, the Company was required to
make additional purchase price payments based upon BAI attaining certain
incremental levels of assets under management up to $10 billion by October 1999.
The Company paid $3.0 million under this Agreement in 1999. No payments were
made during 1998. In 1997, the Company made additional payments of $3.1 million,
resulting in adjustments to the purchase price. The goodwill amounts are
amortized over 15 years.

Note 4. Restructuring, Asset Impairment and Other Charges

As discussed in Note 2, in response to changes in the competitive and business
environment in the rail industry, the Company revised its methodology for
evaluating goodwill recoverability effective December 31, 1997. As a result of
this revised methodology (as well as certain changes in estimate), the Company
determined that the aggregate carrying value of the goodwill and other
intangible assets associated with the 1993 MidSouth purchase exceeded their fair
value (measured by reference to the net present value of future cash flows).
Accordingly, the Company recorded an impairment loss of $91.3 million in 1997.

In connection with the review of its intangible assets, the Company determined
that the carrying value of the goodwill associated with Berger exceeded its fair
value (measured by reference to various valuation techniques commonly used in
the investment management industry) as a result of below-peer performance and
growth of the core Berger funds. Accordingly, the Company recorded an impairment
loss of $12.7 million.

During the fourth quarter of 1997, Transportation management committed to
dispose, as soon as practicable, certain under-performing branch lines acquired
in connection with the 1993 MidSouth purchase, as well as certain of the
Company's non-operating real estate. Accordingly, in accordance with SFAS 121,
the Company recognized losses aggregating $38.5 million which represented the
excess of carrying value over fair value less cost to sell. Results of
operations related to these assets included in the accompanying consolidated
financial statements cannot be separately identified. During 1998, one of the
branch lines was sold for a pretax gain of approximately $2.9 million. In first
quarter 2000, the other branch line was sold for a minimal pretax gain. A
potential buyer has been identified for the non-operating real estate and
management is currently negotiating this transaction.

In accordance with SFAS 121, the Company periodically evaluates the
recoverability of its operating properties. As a result of continuing operating
losses and a further decline in the customer base of the Transportation
segment's bulk coke handling facility (Global Terminaling Services, Inc. -
formerly Pabtex, Inc.) the Company determined that the long-lived assets related
thereto may not be fully recoverable. Accordingly, the Company recognized an
impairment loss of $9.2 million in 1997 representing the excess of carrying
value over fair value.

Additionally, in 1997 the Company recorded expenses aggregating $44.7 million
related to restructuring and other costs. This amount included approximately
$27.1 related to the termination of a union productivity fund (which required
KCSR to pay certain employees when reduced crew levels were used) and employee
separations, as well as $17.6 million of other costs related to reserves for
leases, contracts, impaired investments and other reorganization costs. During
1998, approximately $31.1 million of cash payments were made and approximately
$2.5 million of the reserves were reduced based primarily on changes in the
estimate of claims made relating to the union productivity fund. During 1999,
approximately $4.3 million of cash payments were made reducing the accrual for
these reserves to approximately $2.2 million at December 31, 1999.

Note 5. Supplemental Cash Flow Disclosures

Supplemental Disclosures of Cash Flow Information.

1999 1998 1997
---------- ---------- ----------

Cash payments (in millions):
Interest $ 47.0 $ 74.2 $ 64.5
Income taxes 143.3 83.2 65.3

Supplemental Schedule of Non-cash Investing and Financing Activities. The
Company did not initiate an offering of KCSI Common stock under the Employee
Stock Purchase Plan ("ESPP") during 1999. During 1998 and 1997, the Company
issued 227,178 and 245,550 shares of KCSI Common stock, respectively, under
various offerings of the ESPP. These shares, totaling a purchase price of $3.0
and $3.1 million in 1998 and 1997, respectively, were subscribed and paid for
through employee payroll deductions in years preceding the issuance of stock.

In connection with the Eleventh Offering of the ESPP (initiated in 1998), the
Company received in 1999 approximately $6.3 million from employee payroll
deductions for the purchase of KCSI Common stock. This stock was issued to
employees in January 2000.

During 1999, 1998 and 1997, the Company's Board of Directors declared a
quarterly dividend totaling approximately $4.6, $4.4, and $4.5 million,
respectively, payable in January of the following year. The dividend declaration
reduced retained earnings and established a liability at the end of each
respective year. No cash outlay occurred until the subsequent year.

Note 6. Investments

Investments held for operating purposes, which include investments in
unconsolidated affiliates, are as follows (in millions):
Percentage
Ownership
Company Name December 31, 1999 Carrying Value
- --------------------------------- ----------------- ---------------------------------------

1999 1998 1997
----------- ----------- -----------
DST (a) 32% $ 470.2 $ 376.0 $ 345.3
Grupo TFM 37% 286.5 285.1 288.2
Southern Capital 50% 28.1 24.6 27.6
Mexrail 49% 13.7 13.0 14.9
Other 12.7 11.2 10.5
Market valuation allowances - (2.8) (3.0)
----------- ----------- -----------
Total (b) $ 811.2 $ 707.1 $ 683.5
=========== =========== ===========

(a) On December 21, 1998, DST and USCS announced the completion of the merger
of USCS with a wholly-owned DST subsidiary. Under the terms of the merger,
accounted for as a pooling of interests by DST, USCS became a wholly-owned
subsidiary of DST. DST issued approximately 13.8 million shares of its
common stock in the transaction, resulting in a reduction of KCSI's
ownership interest from 41% to approximately 32%. (See Note 3). Fair market
value at December 31, 1999 (using DST's New York Stock Exchange closing
market price) was approximately $1,547.7 million.

(b) Fair market value is not readily determinable for investments other than
noted above, and in the opinion of management, market value approximates
carrying value

Additionally, DST holds investments in the common stock of State Street
Corporation and Computer Sciences Corporation, among others, which are accounted
for as "available for sale" securities as defined by SFAS 115. The Company
records its proportionate share of any unrealized DST gains or losses related to
these investments, net of deferred taxes, in accumulated other comprehensive
income.

Transactions With and Between Unconsolidated Affiliates. The Company and its
subsidiary, KCSR, paid certain expenses on behalf of Grupo TFM during 1997. In
addition, the Company has a management services agreement with Grupo TFM to
provide certain consulting and management services. At December 31, 1999, $3.0
million is reflected as an account receivable in the Company's consolidated
balance sheet.

In connection with the October 1996 formation of the Southern Capital joint
venture, KCSR entered into operating leases with Southern Capital for
locomotives and rolling stock at rental rates management believes reflect
market. KCSR paid Southern Capital $27.0, $25.1 and $23.5 million under these
operating leases in 1999, 1998 and 1997, respectively. Additionally, prior to
the sale of the loan portfolio by Southern Capital, Southern Group, Inc. (a
former subsidiary of KCSR - merged into KCSR in 1999) entered into a contract
with Southern Capital to manage the loan portfolio assets held by Southern
Capital, as well as to perform general administrative and accounting functions
for the joint venture. Payments under this contract were not material in 1999.
Payments under this contract were approximately $1.7 million in both 1998 and
1997.

Together, Janus and Berger incurred approximately $7.3, $5.5 and $5.3 million
during 1999, 1998 and 1997, respectively, in expenses associated with various
services provided by DST and its subsidiaries and affiliates.

Janus recorded $8.9 and $7.1 million in revenues for the years ended December
31, 1998 and 1997, respectively, representing management fees earned from IDEX
Management, Inc. ("IDEX"). IDEX was a 50% owned investment of Janus prior to
disposition during second quarter 1998. Janus recognized an $8.8 million pretax
gain in connection with this disposition.

In first quarter 1999, the Company repurchased KCSI common stock owned by DST's
Employee Stock Ownership Plan. In total, 460,000 shares were repurchased for
approximately $21.8 million.

Financial Information. Combined financial information of all unconsolidated
affiliates that the Company and its subsidiaries account for under the equity
method follows. Note that information relating to DST (i.e., the equity in net
assets of unconsolidated affiliates, financial condition and operating results)
has been restated to combine the historical results of DST and USCS as a result
of their merger on December 21, 1998. All amounts are in millions.

DECEMBER 31, 1999
Grupo
DST TFM (i) Other Total
----------- ----------- ----------- ----------

Investment in unconsolidated affiliates $ 470.2 $ 286.5 $ 45.0 $ 801.7

Equity in net assets of
unconsolidated affiliates 470.2 283.9 41.4 795.5

Dividends and distributions received
from unconsolidated affiliates - - 0.3 0.3

Financial Condition:
Current assets $ 464.5 $ 134.4 $ 35.8 $ 634.7
Non-current assets 1,861.8 1,905.7 319.1 4,086.6
----------- ----------- ---------- -----------
Assets $ 2,326.3 $ 2,040.1 $ 354.9 $ 4,721.3
=========== =========== ========== ===========

Current liabilities $ 285.8 $ 255.9 $ 42.1 $ 583.8
Non-current liabilities 576.9 672.9 230.0 1,479.8
Minority interest - 343.9 - 343.9
Equity of stockholders and partners 1,463.6 767.4 82.8 2,313.8
----------- ----------- ---------- -----------
Liabilities and equity $ 2,326.3 $ 2,040.1 $ 354.9 $ 4,721.3
=========== =========== ========== ===========

Operating results:
Revenues $ 1,203.3 $ 524.5 $ 87.8 $ 1,815.6
----------- ----------- ---------- -----------
Costs and expenses $ 1,003.6 $ 401.7 $ 77.7 $ 1,483.0
----------- ----------- ---------- -----------
Net income $ 138.1 $ 4.1 $ 13.3 $ 155.5
----------- ----------- ---------- -----------

DECEMBER 31, 1998
Grupo
DST TFM (i) Other Total
----------- ----------- ----------- -----------

Investment in unconsolidated affiliates $ 376.0 $ 285.1 $ 38.6 $ 699.7

Equity in net assets of
unconsolidated affiliates 376.0 282.4 34.6 693.0

Dividends and distributions received
from unconsolidated affiliates - - 6.1 6.1

Financial Condition:
Current assets $ 375.8 $ 109.9 $ 33.1 $ 518.8
Non-current assets 1,521.2 1,974.7 277.0 3,772.9
----------- ----------- ---------- -----------
Assets $ 1,897.0 $ 2,084.6 $ 310.1 $ 4,291.7
=========== =========== ========== ===========

Current liabilities $ 268.6 $ 233.9 $ 48.6 $ 551.1
Non-current liabilities 461.4 745.0 191.7 1,398.1
Minority interest 0.8 342.4 - 343.2
Equity of stockholders and partners 1,166.2 763.3 69.8 1,999.3
----------- ----------- ---------- -----------
Liabilities and equity $ 1,897.0 $ 2,084.6 $ 310.1 $ 4,291.7
=========== =========== ========== ===========

Operating results:
Revenues $ 1,096.1 $ 431.3 $ 87.7 $ 1,615.1
----------- ----------- ---------- -----------
Costs and expenses $ 976.6 $ 368.8 $ 85.4 $ 1,430.8
----------- ----------- ---------- -----------
Net income (loss) $ 71.6 $ (7.3) $ 2.4 $ 66.7
----------- ----------- ---------- -----------

DECEMBER 31, 1997
Grupo
DST TFM (i) Other Total
----------- ----------- ----------- -----------

Investment in unconsolidated affiliates $ 345.3 $ 288.2 $ 44.6 $ 678.1

Equity in net assets of
unconsolidated affiliates 300.1 285.1 39.6 624.8

Dividends and distributions received
from unconsolidated affiliates - - 0.2 0.2

Financial Condition:
Current assets $ 345.3 $ 114.7 $ 29.9 $ 489.9
Non-current assets 1,203.2 1,990.4 255.1 3,448.7
----------- ----------- ---------- -----------
Assets $ 1,548.5 $ 2,105.1 $ 285.0 $ 3,938.6
=========== =========== ========== ===========

Current liabilities $ 212.0 $ 158.5 $ 13.2 $ 383.7
Non-current liabilities 404.2 830.6 191.7 1,426.5
Minority interest 1.4 345.4 - 346.8
Equity of stockholders and partners 930.9 770.6 80.1 1,781.6
----------- ----------- ---------- -----------
Liabilities and equity $ 1,548.5 $ 2,105.1 $ 285.0 $ 3,938.6
=========== =========== ========== ===========

Operating results:
Revenues $ 950.0 $ 206.4 $ 83.2 $ 1,239.6
----------- ----------- ---------- -----------
Costs and expenses $ 823.1 $ 190.5 $ 61.4 $ 1,075.0
----------- ----------- ---------- -----------
Net income (loss) $ 79.4 $ (36.5) $ 5.9 $ 48.8
----------- ----------- ---------- -----------

(i) Grupo TFM is presented on a U.S. GAAP basis.

Generally, the difference between the carrying amount of the Company's
investment in unconsolidated affiliates and the underlying equity in net assets
is attributable to certain equity investments whose carrying amounts have been
reduced to zero, and report a net deficit. For 1997, the difference between the
Company's investment in DST and the underlying equity in net assets is
attributable to the effects of restating DST's financial statements for the
merger of a DST wholly-owned subsidiary with USCS. In addition, with respect to
the Company's investment in Grupo TFM, the effects of foreign currency
transactions and capitalized interest prior to June 23, 1997, which are not
recorded on the investee's books, also result in these differences.

The deferred income tax calculations for Grupo TFM are significantly impacted by
fluctuations in the relative value of the Mexican peso versus the U.S. dollar
and the rate of Mexican inflation, and can result in significant variances in
the amount of equity earnings (losses) reported by the Company.

Other. Interest income on cash and equivalents and investments in advised funds
was $15.6, $8.1 and $7.9 million in 1999, 1998 and 1997, respectively.

Note 7. Other Balance Sheet Captions

Investments in Advised Funds. Information with respect to investments in advised
funds is summarized as follows (in millions):

1999 1998 1997
----------- ----------- ----------

Available for sale:
Cost basis $ 22.2 $ 23.9 $ 19.6
Gross unrealized gains 2.0 5.4 2.0
Gross unrealized losses (0.3) - -
----------- ----------- -----------
Sub-total 23.9 29.3 21.6
----------- ----------- ----------
Trading:
Cost basis - 3.2 2.1
Gross unrealized gains - - 0.7
Gross unrealized losses - (0.3) -
----------- ----------- -----------
Sub-total - 2.9 2.8
----------- ----------- ----------
Total $ 23.9 $ 32.2 $ 24.4
=========== =========== ==========

Gross realized gains totaled $5.3 million for the year ended December 31, 1999.
Gross realized gains were not material to the Company's consolidated results of
operations for 1998 and 1997.

Accounts Receivable. Accounts receivable include the following allowances (in
millions):

1999 1998 1997
----------- ----------- ----------

Accounts receivable $ 294.4 $ 214.2 $ 181.9
Allowance for doubtful accounts (6.5) (5.8) (4.9)
------------ ----------- ----------

Accounts receivable, net $ 287.9 $ 208.4 $ 177.0
=========== =========== ==========

Doubtful accounts expense $ 1.7 $ 0.9 $ 1.6
----------- ----------- ----------

Janus and Berger earn fees from the various registered investment companies for
which each company act as investment advisor. Accounts receivable include
amounts due from these investment companies. The table below summarizes this
related party activity as of and for the years ended December 31 (in millions):

1999 1998 1997
----------- ----------- ----------

Investment management and
shareowner servicing fees $ 1,024.7 $ 558.4 $ 403.0
Accounts receivable from
registered investment companies 129.3 59.1 41.6

Other Current Assets. Other current assets include the following items (in millions):

1999 1998 1997
----------- ----------- ----------

Deferred income taxes $ 8.4 $ 14.8 $ 10.1
Other 36.7 23.0 13.8
----------- ----------- ----------

Total $ 45.1 $ 37.8 $ 23.9
=========== =========== ==========

Properties. Properties and related accumulated depreciation and amortization are summarized below (in
millions):
1999 1998 1997
------------ ----------- ----------

Properties, at cost
Transportation
Road properties $ 1,454.7 $ 1,381.4 $ 1,306.4
Equipment, including $6.7, $6.7 and
$15.4 financed under capital leases 346.2 327.7 294.6
Other 54.5 55.1 106.2
Financial Services, including $0, $0
and $1.4 equipment financed under
capital leases 115.7 69.6 38.6
----------- ----------- ----------

Total 1,971.1 1,833.8 1,745.8
----------- ------------ ----------

Accumulated depreciation and amortization
Transportation
Road properties 422.8 384.9 346.2
Equipment, including $3.7, $3.5
and $10.8 for capital leases 134.1 127.6 116.8
Other 21.1 22.4 26.4
Financial Services
including $0, $0 and $1.4
for equipment capital leases 45.3 32.2 29.2
----------- ----------- ----------

Total 623.3 567.1 518.6
----------- ----------- ----------

Net Properties $ 1,347.8 $ 1,266.7 $ 1,227.2
=========== =========== ==========

As discussed in Note 4, effective December 31, 1997, the Company recorded a
charge representing long-lived assets held for disposal and impairment of assets
in accordance with SFAS 121.

100

Intangibles and Other Assets. Intangibles and other assets include the following items (in millions):
1999 1998 1997
----------- ----------- ----------

Identifiable intangibles $ 59.0 $ 59.0 $ 59.0
Goodwill 134.1 116.2 82.2
Accumulated amortization (34.5) (24.2) (18.1)
----------- ----------- ----------
Net 158.6 151.0 123.1
Other assets 37.8 25.4 27.3
----------- ----------- ----------

Total $ 196.4 $ 176.4 $ 150.4
=========== =========== ==========

Identifiable intangible assets include, among others, investment advisory
relationships and shareowner lists, as well as existing distribution
arrangements. Included in goodwill is approximately $13.4 million relating to
the DST investment. This goodwill resulted from DST stock repurchases. See Notes
2 and 5.

As discussed in Note 2, effective December 31, 1997, the Company changed its
method of evaluating the recoverability of goodwill. Also, see Note 4 for
discussion of goodwill impairment recorded during fourth quarter 1997.

Accrued Liabilities. Accrued liabilities include the following items (in
millions):

1999 1998 1997
----------- ----------- ----------

Prepaid freight charges due
other railroads $ 25.1 $ 30.4 $ 38.6
Current interest payable
on indebtedness 12.5 13.2 17.2
Contract allowances 12.6 12.7 20.2
Productivity Fund liability - - 24.2
Other 156.5 103.4 117.6
----------- ----------- ----------

Total $ 206.7 $ 159.7 $ 217.8
=========== =========== ==========

See Note 4 for discussion of reserves established in 1997 for restructuring and
other charges.

Note 8. Long-Term Debt

Indebtedness Outstanding. Long-term debt and pertinent provisions follow (in millions):

1999 1998 1997
----------- ----------- ----------

KCSI
Competitive Advance & Revolving Credit
Facilities, through May 2002 $ 250.0 $ 315.0 $ 282.0
Rates: Below Prime
Notes and Debentures, due July
2002 to December 2025 400.0 400.0 500.0
Unamortized discount (2.1) (2.4) (2.7)
Rates: 6.625% to 8.80%

101

KCSR
Equipment trust indebtedness, due
serially to June 2009 68.6 78.8 88.9
Rates: 7.15% to 9.68%

Other
Working capital lines 28.0 28.0 31.0
Rates: Below Prime
Subordinated and senior notes, secured term
loans and industrial revenue bonds, due
May 2004 to February 2018 16.4 16.9 17.4
Rates: 3.0% to 7.89%
Total 760.9 836.3 916.6
Less: debt due within one year 10.9 10.7 110.7
----------- ----------- ----------
Long-term debt $ 750.0 $ 825.6 $ 805.9
=========== =========== ==========

Re-capitalization of the Company's Debt Structure. In preparation for the
Separation, the Company re-capitalized its debt structure in January 2000
through the tender of its outstanding Notes and Debentures (as defined below)
and the repayment of other credit facilities. Funding for the repurchase of the
Notes and Debentures and for the repayment of borrowings under existing
revolving credit facilities was obtained through two new credit facilities. See
Note 16.

KCSI Credit Agreements. The Company's lines of credit at December 31, 1999 follow (in millions):

Facility
Lines of Credit Fee Total Unused
- -------------------------------------------------------------- --------- -----------

KCSI .07 to .25% $ 540.0 $ 290.0
KCSR .1875% 20.0 20.0
Gateway Western .1875% 40.0 12.0

Total $ 600.0 $ 322.0
========= ==========

At December 31, 1999, the Company had financing available through its various
lines of credit with a maximum borrowing amount of $600 million (which includes
$55 million of uncommitted facilities). The Company had borrowings of $278
million under its various lines of credit at December 31, 1999, leaving $322
million available for use, subject to any limitations within existing financial
covenants. Among other provisions, the agreements limit subsidiary indebtedness
and sale of assets, and require certain coverage ratios to be maintained. As of
December 31, 1999, the Company was in compliance with all covenants of these
agreements. The Company's credit agreements are described further below.

On May 5, 1995, the Company established a credit agreement in the amount of $400
million, comprised of a $300 million five-year facility and a $100 million
364-day facility. The $300 million facility was renewed in May 1997, extending
through May 2002, while the $100 million facility has generally been renewed
annually. In second quarter 1999, the $100 million facility was renewed with a
total available amount of $75 million. Proceeds of these facilities have
generally been used for general corporate purposes. The agreements contain a
facility fee ranging from .07-.25% per annum and interest rates below prime.

In May 1998, the Company established an additional $100 million 364-day credit
agreement assumable by the Financial Services segment upon separation of the
Company's two segments. This facility was renewed in second quarter 1999.
Proceeds have been used to repay Company debt and for general corporate
purposes. This agreement contains a facility fee of .15% and interest rates
below prime.

102

At December 31, 1999, the Company also had various other lines of credit
totaling $125 million. These additional lines, which are available for general
corporate purposes, have interest rates below prime and terms of less than one
year.

As discussed in Note 3, in January 1997, the Company made an approximate $298
million capital contribution to Grupo TFM, of which approximately $277 million
was used by Grupo TFM for the purchase of TFM. This payment was funded using
borrowings under the Company's lines of credit.

Public Debt Transactions. As discussed above, in January 2000, the Company
re-capitalized its debt structure through the tender of its outstanding Notes
and Debentures. Following completion of this transaction, approximately $1.6
million of the Company's public debt remains outstanding.

During 1998, $100 million of 5.75% Notes, which matured on July 1, 1998, were
repaid using borrowings under existing lines of credit.

Public indebtedness of the Company at December 31, 1999 includes: $100 million
of 7.875% Notes due 2002; $100 million of 6.625% Notes due in 2005; $100 million
of 8.8% Debentures due 2022; and $100 million of 7% Debentures due 2025. The
various Notes are not redeemable prior to their respective maturities. The 8.8%
Debentures are redeemable on or after July 1, 2002 at a premium of 104.04%,
which declines to par on or after July 1, 2012. The 7% Debentures are redeemable
at the option of the Company, at any time, in whole or in part, at a redemption
price equal to the greater of (a) 100% of the principal amount of such
Debentures or (b) the sum of the present values of the remaining scheduled
payments of principal and interest thereon discounted to the date of redemption
on a semiannual basis at the Treasury Rate (as defined in the Debentures
agreement) plus 20 basis points, and in each case accrued interest thereon to
the date of redemption.

These various debt transactions were issued at a total discount of $4.1 million.
This discount is being amortized over the respective debt maturities on a
straight-line basis, which is not materially different from the interest method.
Deferred debt issue costs incurred in connection with these various transactions
(totaling approximately $4.8 million) are also being amortized on a
straight-line basis over the respective debt maturities.

KCSR Indebtedness. KCSR has purchased rolling stock under conditional sales
agreements, equipment trust certificates and capitalized lease obligations. The
equipment has been pledged as collateral for the related indebtedness.

Credit Facility for Janus. The Company has provided a credit facility to Janus
for use by Janus for general corporate purposes, effectively reducing the amount
of credit facilities available for the Company's other purposes.

Other Agreements, Guarantees, Provisions and Restrictions. The Company has debt
agreements containing restrictions on subsidiary indebtedness, advances and
transfers of assets, and sale and leaseback transactions, as well as requiring
compliance with various financial covenants. At December 31, 1999, the Company
was in compliance with the provisions and restrictions of these agreements.
Because of certain financial covenants contained in the credit agreements,
however, maximum utilization of the Company's available lines of credit may be
restricted. See Note 16 for a discussion of certain covenants and restrictions
relating to the two new credit facilities, including a restriction on the
payment of cash dividends to common stockholders.

103

Leases and Debt Maturities. The Company and its subsidiaries lease
transportation equipment, as well as office and other operating facilities under
various capital and operating leases. Rental expenses under operating leases
were $70, $70 and $64 million for the years 1999, 1998 and 1997, respectively.

Concurrent with the formation of the Southern Capital joint venture in 1996,
KCSR entered into operating leases with Southern Capital for the majority of the
rail equipment acquired by or contributed to Southern Capital. In connection
with this transaction, the Company received cash that exceeded the net book
value of assets contributed to the joint venture by approximately $44.1 million.
Accordingly, this excess fair value over book value is being recognized over the
terms of the leases (approximately $5.6, $4.4 and $4.9 million in 1999, 1998 and
1997, respectively).

Minimum annual payments and present value thereof under existing capital leases,
other debt maturities, and minimum annual rental commitments under
noncancellable operating leases are as follows (in millions):

Capital Leases Operating Leases
Minimum Net
Lease Less Present Other Total
Payments Interest Value Debt Debt Affiliates Third Party Total
-------- -------- ----- ---- ---- ---------- ----------- -----

2000 $ 0.7 $ 0.3 $ 0.4 $ 10.5 $ 10.9 $ 34.3 $ 39.4 $ 73.7
2001 0.8 0.3 0.5 12.3 12.8 34.3 30.3 64.6
2002 0.7 0.2 0.5 112.3 112.8 34.3 25.9 60.2
2003 0.8 0.2 0.6 15.8 16.4 34.3 20.2 54.5
2004 0.6 0.1 0.5 12.3 12.8 31.3 10.0 41.3
Later years 1.7 0.3 1.4 593.8 595.2 215.0 37.5 252.5
-------- --------- --------- --------- -------- -------- -------- -------

Total $ 5.3 $ 1.4 $ 3.9 $ 757.0 $ 760.9 $ 383.5 $ 163.3 $ 546.8
======== ========= ========= ========= ======== ======== ======== =======

Fair Value of Long-Term Debt. Based upon the borrowing rates currently available
to the Company and its subsidiaries for indebtedness with similar terms and
average maturities, the fair value of long-term debt was approximately $766,
$867 and $947 million at December 31, 1999, 1998 and 1997, respectively.

Note 9. Income Taxes

Under the liability method of accounting for income taxes specified by Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes," the
provision for income tax expense is the sum of income taxes currently payable
and deferred income taxes. Currently payable income taxes represents the amounts
expected to be reported on the Company's income tax return, and deferred tax
expense or benefit represents the change in deferred taxes. Deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities as measured by the enacted tax
rates that will be in effect when these differences reverse.

The following summarizes pretax income (loss) for the years ended December 31,
(in millions):

1999 1998 1997
----------- ----------- ----------

Domestic $ 605.8 $ 357.5 $ 91.8
International (2.1) (3.1) (12.6)
----------- ----------- ----------
Total $ 603.7 $ 354.4 $ 79.2
=========== =========== ==========

104

Tax Expense. Income tax expense (benefit) attributable to continuing operations consists of the following
components (in millions):
1999 1998 1997
----------- ----------- ----------

Current
Federal $ 179.2 $ 91.6 $ 73.4
State and local 22.3 16.0 11.6
----------- ----------- ----------
Total current 201.5 107.6 85.0
----------- ----------- ----------
Deferred
Federal 18.7 20.8 (14.1)
State and local 2.9 2.4 (2.5)
----------- ----------- -----------
Total deferred 21.6 23.2 (16.6)
----------- ----------- ----------

Total income tax provision $ 223.1 $ 130.8 $ 68.4
=========== =========== ==========

The federal and state deferred tax liabilities (assets) recorded on the Consolidated Balance Sheets at
December 31 follow (in millions):
1999 1998 1997
----------- ----------- ----------

Liabilities:
Depreciation $ 350.3 $ 345.2 $ 306.6
Equity, unconsolidated affiliates 151.6 119.5 106.8
Other, net 5.7 0.4 0.4
----------- ----------- ----------
Gross deferred tax liabilities 507.6 465.1 413.8
----------- ----------- ----------

Assets:
NOL and AMT credit carryovers (2.4) (11.2) (11.2)
Book reserves not currently deductible
for tax (42.1) (38.0) (57.8)
Deferred compensation and other
employee benefits (16.6) (14.5) (13.3)
Deferred revenue (0.6) (2.2) (2.9)
Vacation accrual (4.9) (4.3) (3.3)
Other, net (0.2) (6.1) (3.2)
----------- ----------- ----------
Gross deferred tax assets (66.8) (76.3) (91.7)
----------- ----------- ----------
Net deferred tax liability $ 440.8 $ 388.8 $ 322.1
=========== =========== ==========

Based upon the Company's history of operating income and its expectations for
the future, management has determined that operating income of the Company will,
more likely than not, be sufficient to recognize fully the gross deferred tax
assets set forth above.

Tax Rates. Differences between the Company's effective income tax rates
applicable to continuing operations and the U.S. federal income tax statutory
rates of 35% are as follows (in millions):

1999 1998 1997
----------- ----------- ----------

Income tax expense using the
statutory rate in effect $ 211.3 $ 124.0 $ 27.7
Tax effect of:
Earnings of equity investees (12.6) (6.3) (7.0)
Goodwill Impairment (see Note 4) 35.0
Other, net (0.8) (5.3) 3.6
----------- ----------- ----------
Federal income tax expense 197.9 112.4 59.3
State and local income tax expense 25.2 18.4 9.1
----------- ----------- ----------

Total $ 223.1 $ 130.8 $ 68.4
=========== =========== ==========

Effective tax rate 37.0% 36.9% 86.4%
=========== =========== ==========

105

Tax Carryovers. At December 31, 1998, the Company had $4.0 million of
alternative minimum tax credit carryover generated by MidSouth and Gateway
Western prior to acquisition by the Company. This credit was utilized completely
for the year ended December 31, 1999 resulting in no carryover to future years.

The amount of federal NOL carryover generated by MidSouth and Gateway Western
prior to acquisition was $67.8 million. The Company utilized approximately $4.5,
$25.0, and $0.7 million of these NOL's in 1999, 1998 and 1997, respectively.
$31.9 million of the NOL carryover was utilized in pre-1997 years leaving
approximately $5.7 million of carryover available at December 31, 1999, with
expiration dates beginning in the year 2008. The remaining NOL is attributed to
the Gateway Western. The use of preacquisition net operating losses and tax
credit carryovers is subject to limitations imposed by the Internal Revenue
Code. The Company does not anticipate that these limitations will affect
utilization of the carryovers prior to their expiration.

Unremitted Earnings of U.S. Unconsolidated Affiliates. In connection with the
initial public offering of DST in fourth quarter 1995, the Company began
providing deferred income taxes for unremitted earnings of qualifying U.S.
unconsolidated affiliates net of the 80% dividends received deduction provided
under current tax law. As of December 31, 1999, the cumulative amount of
unremitted earnings qualifying for this deduction aggregated $165.8 million.
These amounts would become taxable to the Company if distributed by the
affiliates as dividends, in which case the Company would be entitled to the
dividends received deduction for 80% of the dividends; alternatively, these
earnings could be realized by the sale of the affiliates' stock, which would
give rise to income tax at the federal capital gains rate and state ordinary
income tax rates, to the extent the stock sales proceeds exceeded the Company's
income tax basis. Deferred income taxes provided on unremitted earnings of U.S.
unconsolidated affiliates aggregated $13.3, $9.7 and $8.6 million as of December
31, 1999, 1998 and 1997, respectively.

Tax Examinations. The IRS is currently in the process of examining the
consolidated federal income tax returns for the years 1993 through 1996. For
years prior to 1990, the statute of limitations has closed. In addition, other
taxing authorities are currently examining the years 1990 through 1998 and have
proposed additional tax assessments for which the Company believes it has
recorded adequate reserves.

Since most of these asserted tax deficiencies represent temporary differences,
subsequent payments of taxes will not require additional charges to income tax
expense. In addition, accruals have been made for interest (net of tax benefit)
for estimated settlement of the proposed tax assessments. Thus, management
believes that final settlement of these matters will not have a material adverse
effect on the Company's consolidated results of operations or financial
condition.

Note 10. Stockholders' Equity

Pro Forma Fair Value Information for Stock-Based Compensation Plans. At December
31, 1999, the Company had several stock-based compensation plans, which are
described separately below. The Company applies APB 25 and related
interpretations in accounting for its plans, and accordingly, no compensation
cost has been recognized for the Company's fixed stock option plans or the ESPP
programs. Had compensation cost for the Company's stock-based compensation plans
been determined in accordance with the fair value accounting method prescribed
by SFAS 123 for options issued after December 31, 1994, the Company's net income
(loss) and earnings (loss) per share would have been reduced to the pro forma
amounts indicated below:

106

1999 1998 1997
--------- -------- ---------

Net income (loss) (in millions):
As reported $ 323.3 $ 190.2 $ (14.1)
Pro Forma 318.0 179.0 (21.1)

Earnings (loss) per Basic share:
As reported $ 2.93 $ 1.74 $ (0.13)
Pro Forma 2.88 1.64 (0.20)

Earnings (loss) per Diluted share:
As reported $ 2.79 $ 1.66 $ (0.13)
Pro Forma 2.74 1.58 (0.20)

Stock Option Plans. During 1998, various existing Employee Stock Option Plans
were combined and amended as the Kansas City Southern Industries, Inc. 1991
Amended and Restated Stock Option and Performance Award Plan (as amended and
restated effective July 15, 1998). The Plan provides for the granting of options
to purchase up to 26.0 million shares of the Company's common stock by officers
and other designated employees. Such options have been granted at 100% of the
average market price of the Company's stock on the date of grant and generally
may not be exercised sooner than one year or longer than ten years following the
date of the grant, except that options outstanding with limited rights ("LRs")
or limited stock appreciation rights ("LSARs"), become immediately exercisable
upon certain defined circumstances constituting a change in control of the
Company. The Plans include provisions for stock appreciation rights, LRs and
LSARs. All outstanding options include LRs, except for options granted to
non-employee Directors.

For purposes of computing the pro forma effects of option grants under the fair
value accounting method prescribed by SFAS 123, the fair value of each option
grant is estimated on the date of grant using a version of the Black-Scholes
option pricing model. The following assumptions were used for the various grants
depending on the date of grant, nature of vesting and term of option:

1999 1998 1997
-------------- -------------- --------------

Dividend Yield .25% to .36% .34% to .56% .47% to .82%
Expected Volatility 42% to 43% 30% to 42% 24% to 31%
Risk-free Interest Rate 4.67% to 5.75% 4.74% to 5.64% 5.73% to 6.57%
Expected Life 3 years 3 years 3 years

A summary of the status of the Company's stock option plans as of December 31,
1999, 1998 and 1997, and changes during the years then ended, is presented
below:

1999 1998 1997
--------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ----- ----------- ----- ----------- -----

Outstanding at January 1 9,427,942 $15.35 9,892,581 $12.12 10,384,149 $10.83
Exercised (1,272,964 15.91 (1,600,829) 13.07 (1,874,639) 10.33
Canceled/Expired (84,532) 42.89 (40,933) 21.75 (401,634) 15.40
Granted 490,71 49.73 1,177,123 39.62 1,784,705 18.51
---------- ----------- ----------

Outstanding at December 31 8,561,162 16.97 9,427,942 15.35 9,892,581 12.12
========== =========== ==========

Exercisable at December 31 7,668,785 8,222,782 8,028,475

Weighted-Average Fair Value of options
granted during the year $16.64 $ 12.31 $ 4.72

107

The following table summarizes the information about stock options outstanding
at December 31, 1999:
OUTSTANDING EXERCISABLE
------------------------------------------------- ----------------------------
Weighted- Weighted- Weighted-
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/99 Contractual Life Price at 12/31/99 Price
- --------- ----------- ---------------- --------- ----------- --------

$ 2 - 10 2,717,708 2.0 years $ 4.85 2,717,708 $ 4.85
10 - 15 853,669 5.9 13.03 853,669 13.03
15 - 20 3,061,272 6.3 15.69 3,055,872 15.69
20 - 30 688,668 9.3 23.96 688,668 23.96
30 - 40 875 8.4 31.32 875 31.32
40 - 50 1,083,470 9.9 43.48 351,993 42.56
50 - 60 155,500 10.0 59.85 - -
--------- ----------

2 - 60 8,561,162 5.6 16.97 7,668,785 13.53
========= ==========

Shares available for future grants at December 31, 1999 aggregated 8,859,773.

Stock Purchase Plan. The ESPP, established in 1977, provides to substantially
all full-time employees of the Company, certain subsidiaries and certain other
affiliated entities, the right to subscribe to an aggregate of 22.8 million
shares of common stock. The purchase price for shares under any stock offering
is to be 85% of the average market price on either the exercise date or the
offering date, whichever is lower, but in no event less than the par value of
the shares. At December 31, 1999, there were approximately 11.6 million shares
available for future offerings.

The following table summarizes activity related to the various ESPP offerings:

Date Shares Shares Date
Initiated Subscribed Price Issued Issued

Eleventh Offering 1998 213,825 $35.97 188,297 1999/2000
Tenth Offering 1996 251,079 13.35 233,133 1997/1998
Ninth Offering 1995 291,411 12.73 247,729 1996/1997

For purposes of computing the pro forma effects of employees' purchase rights
under the fair value accounting method prescribed by SFAS 123, the fair value of
the Eleventh Offering under the ESPP is estimated on the date of grant using a
version of the Black-Scholes option pricing model. The following
weighted-average assumptions were used: i) dividend yield of .95%; ii) expected
volatility of 42%; iii) risk-free interest rate of 4.63%; and iv) expected life
of one year. The weighted-average fair value of purchase rights granted under
the Eleventh Offering of the ESPP was $10.76. There were no offerings in 1999 or
1997.

Forward Stock Purchase Contract. During 1995, the Company entered into a forward
stock purchase contract ("the contract") as a means of securing a potentially
favorable price for the repurchase of six million shares of its common stock in
connection with the stock repurchase program authorized by the Company's Board
of Directors on April 24, 1995. During 1999 and 1998, no shares were purchased
under this arrangement. During 1997, the Company purchased 2.4 million shares
under this arrangement at an aggregate price of $39 million (including
transaction premium). The contract contained provisions which allowed the
Company to elect a net cash or net share settlement in lieu of physical
settlement of the shares; however, all shares were physically settled. The
transaction was recorded in the consolidated financial statements upon
settlement of the contract in accordance with the accounting policies described
in Note 2.

108

Employee Plan Funding Trust ("EPFT" or "Trust"). Effective September 30, 1998,
the Company terminated the EPFT, which was established by KCSI as a grantor
trust for the purpose of holding shares of Series B Preferred stock for the
benefit of various KCSI employee benefit plans, including the ESOP, Stock Option
Plans and ESPP (collectively, "Benefit Plans"). The EPFT was administered by an
independent bank trustee ("Trustee") and included in the Company's consolidated
financial statements.

In accordance with the Agreement to terminate the EPFT, the Company received
872,362 shares of Series B Preferred stock in full repayment of the indebtedness
from the Trust. In addition, the remaining 127,638 shares of Series B Preferred
stock were converted by the Trustee into KCSI Common stock, at the rate of 12 to
1, resulting in the issuance to the EPFT of 1,531,656 shares of such Common
stock. The Trustee then transferred this Common stock to KCSI and the Company
has set these shares aside for use in connection with the KCSI Stock Option and
Performance Award Plan, as amended and restated effective July 15, 1998.
Following the foregoing transactions, the EPFT was terminated. The impact of the
termination of the EPFT on the Company's consolidated condensed financial
statements was a reclassification among the components of the stockholder's
equity accounts, with no change in the consolidated assets and liabilities of
the Company.

Treasury Stock. Shares of common stock in Treasury at December 31, 1999 totaled
36,164,402, compared with 36,923,325 at December 31, 1998 and 37,122,195 at
December 31, 1997. The Company issued shares of common stock from Treasury -
1,218,923 in 1999, 1,663,349 in 1998 and 2,031,162 in 1997 - to fund the
exercise of options and subscriptions under various employee stock option and
purchase plans. In 1998, approximately 67,000 shares were issued in conjunction
with the acquisition of Nelson. Treasury stock previously acquired had been
accounted for as if retired. The 1,531,656 shares received in connection with
the termination of the EPFT were added to Treasury stock during 1998. The
Company purchased shares as follows: 460,000 in 1999 and 2,863,983 in 1997.
Shares purchased during 1998 were not material.

Janus Restricted Stock. During 1998, Janus granted 125,900 restricted shares of
Janus' common stock to certain Janus employees pursuant to a restricted stock
agreement ("Restricted Stock Agreement"). The restricted stock was recorded at
fair market value (approximately $28.9 million) at the time of grant as a
separate component of Janus' stockholders' equity. The restricted stock fully
vests at the end of 10 years. The Restricted Stock Agreement also includes an
accelerated vesting provision whereby the vesting rate will be accelerated to
20% of the shares in any one year if certain specific investment performance
goals are met (to be effective on January 1st of the following year). The
employee must be employed at the time of any vesting to receive the applicable
shares. Janus records compensation expense based on the applicable vesting rate,
which was 20% in 1999 and 1998 based on attainment of investment performance
goals. In accordance with generally accepted accounting principles, the impact
of the Janus amortization charges in 1999 and beyond will be reduced by gain
recognition at the holding company level, reflecting the Company's reduced
ownership of Janus upon vesting by the restricted stockholders.

During 1999, Janus granted 33,000 shares of Janus common stock to certain Janus
employees pursuant to the Restricted Stock Agreement. The restricted stock was
recorded at fair market value (approximately $10.8 million) at the time of grant
as a separate component of Janus' stockholders' equity. Similar to the 1998
grant, the Restricted Stock Agreement includes an accelerated vesting provision
whereby the vesting rate accelerates to 20% of the shares in any one year if
certain specific investment performance goals are met (to be effective on
January 1st of the following year). Janus records compensation expense based on
the applicable vesting rate, currently at 20% based on attainment of investment
performance goals.

The shares made available for the restricted stock grant were obtained through
the purchase of 35,000 shares of Janus stock from an existing minority owner. In
connection with this

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transaction, the Company recorded approximately $9.5 million of goodwill, which
is being amortized over a period of 15 years.

Because this 1999 issuance was from Janus' treasury shares on which previous
gains have been recognized, the Company will record any gains upon vesting
directly to stockholders' equity. See Note 2.

Note 11. Profit Sharing and Other Postretirement Benefits

The Company maintains various plans for the benefit of its employees as
described below. The Company's employee benefit expense for these plans
aggregated $7.5, $7.7 and $6.3 million in 1999, 1998 and 1997, respectively.

Profit Sharing. Qualified profit sharing plans are maintained for most employees
not included in collective bargaining agreements. Contributions for the Company
and its subsidiaries are made at the discretion of the Boards of Directors in
amounts not to exceed the maximum allowable for federal income tax purposes.

401(k) Plan. The Company's 401(k) plan permits participants to make
contributions by salary reduction pursuant to section 401(k) of the Internal
Revenue Code. The Company matches contributions up to a maximum of 3% of
compensation.

Employee Stock Ownership Plan. KCSI established the ESOP for employees not
covered by collective bargaining agreements. KCSI contributions to the ESOP are
based on a percentage (determined by the Compensation Committee of the Board of
Directors) of wages earned by eligible employees.

Other Postretirement Benefits. The Company adopted Statement of Financial
Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("SFAS 106"), effective January 1, 1993. The Company and
several of its subsidiaries provide certain medical, life and other
postretirement benefits other than pensions to its retirees. With the exception
of the Gateway Western plans, which are discussed below, the medical and life
plans are available to employees not covered under collective bargaining
arrangements, who have attained age 60 and rendered ten years of service.
Individuals employed as of December 31, 1992 were excluded from a specific
service requirement. The medical plan is contributory and provides benefits for
retirees, their covered dependents and beneficiaries. Benefit expense begins to
accrue at age 40. The medical plan was amended effective January 1, 1993 to
provide for annual adjustment of retiree contributions, and also contains,
depending on the plan coverage selected, certain deductibles, co-payments,
coinsurance and coordination with Medicare. The life insurance plan is
non-contributory and covers retirees only. The Company's policy, in most cases,
is to fund benefits payable under these plans as the obligations become due.
However, certain plan assets (e.g., money market funds) do exist with respect to
life insurance benefits.

During 1998, the Company adopted Statement of Financial Accounting Standards No.
132 "Employers' Disclosure about Pensions and Other Postretirement Benefits - an
amendment of FASB Statements No. 87, 88, and 106" ("SFAS 132") and prior year
information has been included pursuant to SFAS 132. SFAS 132 establishes
standardized disclosure requirements for pension and other postretirement
benefit plans, requires additional information on changes in the benefit
obligations and fair values of plan assets, and eliminates certain disclosures
that are no longer considered useful. The standard does not change the
measurement or recognition of pension or postretirement benefit plans.

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Reconciliation of the accumulated postretirement benefit obligation, change in
plan assets and funded status, respectively, at December 31 follows (in
millions):

1999 1998 1997
---------- ---------- ----------

Accumulated postretirement
benefit obligation at beginning of year $ 14.7 $ 14.5 $ 14.5
Service cost 0.4 0.4 0.6
Interest cost 1.0 1.0 1.2
Amortization of transition obligation 0.1
Actuarial and other (gain) loss 1.8 (0.1) (0.6)
Benefits paid (i) (1.1) (1.1) (1.3)
----------- ----------- ----------
Accumulated postretirement
benefit obligation at end of year 16.8 14.7 14.5
----------- ----------- ----------

Fair value of plan assets
at beginning of year 1.4 1.3 1.3
Actual return on plan assets 0.1 0.2 0.1
Benefits paid (i) (0.2) (0.1) (0.1)
----------- ----------- ----------
Fair value of plan assets
at end of year 1.3 1.4 1.3
----------- ----------- ----------

Funded status and accrued
benefit cost $ 15.5 $ 13.3 $ 13.2
=========== =========== ==========

(i) Benefits paid for the reconciliation of accumulated postretirement
benefit obligation include both medical and life insurance benefits,
whereas benefits paid for the fair value of plan assets reconciliation
include only life insurance benefits. Plan assets relate only to the
life insurance benefits. Medical benefits are funded as obligations
become due.

Net periodic postretirement benefit cost included the following components (in
millions):

1999 1998 1997
----------- ----------- ----------

Service cost $ 0.4 $ 0.4 $ 0.6
Interest cost 1.0 1.0 1.2
Amortization of unrecognized
transition obligation 0.1
Expected return on plan assets (0.1) (0.1) (0.1)
----------- ----------- ----------

Net periodic postretirement
benefit cost $ 1.3 $ 1.3 $ 1.8
=========== =========== ==========

The Company's health care costs, excluding Gateway Western and certain former
employees of the MidSouth, are limited to the increase in the Consumer Price
Index ("CPI") with a maximum annual increase of 5%. Accordingly, health care
costs in excess of the CPI limit will be borne by the plan participants, and
therefore assumptions regarding health care cost trend rates are not applicable.

111

The following assumptions were used to determine the postretirement obligations
and costs for the years ended December 31:
1999 1998 1997
---------- ---------- ----------

Annual increase in the CPI 3.00% 2.50% 3.00%
Expected rate of return on life
insurance plan assets 6.50 6.50 6.50
Discount rate 8.00 6.75 7.25
Salary increase 4.00 4.00 4.00

Gateway Western's benefit plans are slightly different from those of the Company
and other subsidiaries. Gateway Western provides contributory health, dental and
life insurance benefits to substantially all of its active and retired
employees, including those covered by collective bargaining agreements.
Effective January 1, 1998, existing Gateway Western management employees
converted to the Company's benefit plans. In 1999, the assumed annual rate of
increase in health care costs for the non-management Gateway Western employees
choosing a preferred provider organization was 7.5% and 6.5% for those choosing
the health maintenance organization option, decreasing over two years to 6.5%
and 5.5%, respectively, to remain level thereafter. For certain former employees
of the MidSouth, the assumed annual rate of an increase in health care costs is
12% currently, decreasing over six years to 6% to remain level thereafter.

The health care cost trend rate assumption has an effect on the Gateway Western
amounts represented, as well as certain former employees of the MidSouth. An
increase or decrease in the assumed health care cost trend rates by one percent
in 1999, 1998 and 1997 would not have a significant impact on the accumulated
postretirement benefit obligation. The effect of this change on the aggregate of
the service and interest cost components of the net periodic postretirement
benefit is not significant.

Note 12. Commitments and Contingencies

Minority Purchase Agreements. A stock purchase agreement with Thomas H. Bailey
("Mr. Bailey"), Janus' Chairman, President and Chief Executive Officer and owner
of 12% of Janus common stock, and another Janus stockholder (the "Janus Stock
Purchase Agreement") and certain restriction agreements with other Janus
minority stockholders contain, among other provisions, mandatory put rights
whereby at the election of such minority stockholders, KCSI would be required to
purchase the minority interests of such Janus minority stockholders at a
purchase price equal to fifteen times the net after-tax earnings over the period
indicated in the relevant agreement, or in some circumstances at a purchase
price as determined by an independent appraisal. Under the Janus Stock Purchase
Agreement, termination of Mr. Bailey's employment could require a purchase and
sale of the Janus common stock held by him. If other minority holders terminated
their employment, some or all of their shares also could be subject to mandatory
purchase and sale obligations. Certain other minority holders who continue their
employment also could exercise puts. If all of the mandatory purchase and sale
provisions and all the puts under such Janus minority stockholder agreements
were implemented, KCSI would have been required to pay approximately $789
million as of December 31, 1999, compared to $447 and $337 million at December
31, 1998 and 1997, respectively. In the future these amounts may be higher or
lower depending on Janus' earnings, fair market value and the timing of the
exercise. Payment for the purchase of the respective minority interests is to be
made under the Janus Stock Purchase Agreement within 120 days after receiving
notification of exercise of the put rights. Under the restriction agreements
with certain other Janus minority stockholders, payment for the purchase of the
respective minority interests is to be made 30 days after the later to occur of
(i) receiving notification of exercise of the put rights or (ii) determination
of the purchase price through the independent appraisal process.

112

The Janus Stock Purchase Agreement and certain stock purchase agreements and
restriction agreements with other minority stockholders also contain provisions
whereby upon the occurrence of a Change in Ownership (as defined in such
agreements) of KCSI, KCSI may be required to purchase such holders' Janus stock
or, as to the stockholders that are parties to the Janus Stock Purchase
Agreement, at such holders' option, to sell its stock of Janus to such minority
stockholders. The price for such purchase or sale would be equal to fifteen
times the net after-tax earnings over the period indicated in the relevant
agreement, or in some circumstances as determined by Janus' Stock Option
Committee or as determined by an independent appraisal. If KCSI had been
required to purchase the holders' Janus common stock after a Change in Ownership
as of December 31, 1999, the purchase price would have been approximately $899
million (see additional information in Note 13).

KCSI would account for any such purchase as the acquisition of a minority
interest under Accounting Principles Board Opinion No. 16, Business
Combinations.

As of March 31, 2000, KCSI, through Stilwell, had $200 million in credit
facilities available, owned securities with a market value in excess of $1.3
billion and had cash balances at the Stilwell holding company level in excess of
$147.5 million. To the extent that these resources were insufficient to fund its
purchase obligations, KCSI had access to the capital markets and, with respect
to the Janus Stock Purchase Agreement, had 120 days to raise additional sums.

Litigation. In the opinion of management, claims or lawsuits incidental to the
business of the Company and its subsidiaries have been adequately provided for
in the consolidated financial statements.

Duncan Case. In 1998, a jury in Beauregard Parish, Louisiana returned a verdict
against KCSR in the amount of $16.3 million. The Louisiana state case arose from
a railroad crossing accident which occurred at Oretta, Louisiana on September
11, 1994, in which three individuals were injured. Of the three, one was injured
fatally, one was rendered quadriplegic and the third suffered less serious
injuries.

Bogalusa Cases. In July 1996, KCSR was named as one of twenty-seven defendants
in various lawsuits in Louisiana and Mississippi arising from the explosion of a
rail car loaded with chemicals in Bogalusa, Louisiana on October 23, 1995. As a
result of the explosion, nitrogen dioxide and oxides of nitrogen were released
into the atmosphere over parts of that town and the surrounding area causing
evacuations and injuries. Approximately 25,000 residents of Louisiana and
Mississippi have asserted claims to recover damages allegedly caused by exposure
to the chemicals.

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KCSR believes that its exposure to liability in these cases is remote. If KCSR
were to be found liable for punitive damages in these cases, such a judgment
could have a material adverse effect on the Company's results of operations,
financial position and cash flows.

Diesel Fuel Commitments and Hedging Activities. From time to time, KCSR enters
into forward purchase commitments and hedge transactions (fuel swaps or caps)
for diesel fuel as a means of securing volumes and reducing overall cost.
Forward purchase commitment contracts normally require KCSR to purchase certain
quantities of diesel fuel at defined prices established at the origination of
the contract. Hedge transactions are correlated to market benchmarks and hedge
positions are monitored to ensure that they will not exceed actual fuel
requirements in any period.

There were no fuel swap or cap transactions during 1997 and minimal purchase
commitments were negotiated for 1997. However, at the end of 1997, the Company
had purchase commitments for approximately 27% of expected 1998 diesel fuel
usage, as well as fuel swaps for approximately 37% of expected 1998 usage. As a
result of actual fuel prices remaining below both the purchase commitment price
and the swap price during 1998, the Company's fuel expense was approximately
$4.0 million higher. The purchase commitments resulted in a higher cost of
approximately $1.7 million, while the Company made payments of approximately
$2.3 million related to the 1998 fuel swap transactions. At December 31, 1998,
the Company had purchase commitments and fuel swap transactions for
approximately 32% and 16%, respectively, of expected 1999 diesel fuel usage. In
1999, KCSR saved approximately $0.6 million as a result of these purchase
commitments. The fuel swap transactions resulted in higher fuel expense of
approximately $1 million.

At the end of 1999, the Company had no outstanding purchase commitments for
2000. At December 31, 1999, the Company had entered into two diesel fuel cap
transactions for a total of six million gallons (approximately 10% of expected
2000 usage) at a cap price of $0.60 per gallon. The caps are effective January
1, 2000 through June 30, 2000.

Foreign Exchange Matters. As discussed in Note 2, in connection with the
Company's investment in Grupo TFM, a Mexican company, Nelson, an 80% owned
United Kingdom company, and Janus Capital International (UK) Limited ("Janus
UK"), an indirect wholly-owned subsidiary of Janus based in the United Kingdom,
the Company follows the requirements outlined in SFAS 52 (and related
authoritative guidance) with respect to financial accounting and reporting for
foreign currency transactions and for translating foreign currency financial
statements from the entity's functional currency into U.S. dollars.

The purchase price paid by Grupo TFM for 80% of the common stock of TFM was
fixed in Mexican pesos; accordingly, the U.S. dollar equivalent fluctuated as
the U.S. dollar/Mexican peso exchange rate changed. The Company's capital
contribution (approximately $298 million U.S.) to Grupo TFM

114

in connection with the initial installment of the TFM purchase price was made
based on the U.S. dollar/Mexican peso exchange rate on January 31, 1997.

Grupo TFM paid the remaining 60% of the purchase price in Mexican pesos on June
23, 1997. As discussed above, the final installment was funded using proceeds
from Grupo TFM debt financing and the sale of 24.6% of Grupo TFM to the Mexican
Government. In the event that the proceeds from these arrangements would not
have provided funds sufficient for Grupo TFM to make the final installment of
the purchase price, the Company may have been required to make additional
capital contributions. Accordingly, in order to hedge a portion of the Company's
exposure to fluctuations in the value of the Mexican peso versus the U.S.
dollar, the Company entered into two separate forward contracts to purchase
Mexican pesos - $98 million in February 1997 and $100 million in March 1997. In
April 1997, the Company realized a $3.8 million pretax gain in connection with
these contracts. This gain was deferred until the final installment of the TFM
purchase price was made in June 1997, at which time, it was accounted for as a
component of the Company's investment in Grupo TFM. These contracts were
intended to hedge only a portion of the Company's exposure related to the final
installment of the purchase price and not any other transactions or balances.

During 1997 and 1998, Mexico's economy was classified as "highly inflationary"
as defined in SFAS 52. Accordingly, under the highly inflationary accounting
guidance in SFAS 52, the U.S. dollar was used as Grupo TFM's functional
currency, and any gains or losses from translating Grupo TFM's financial
statements into U.S. dollars were included in the determination of its net
income (loss). Equity earnings (losses) from Grupo TFM included in the Company's
results of operations reflected the Company's share of such translation gains
and losses.

Nelson's and Janus UK's principal operations are in the United Kingdom and,
therefore, the financial statements for each company are accounted for using the
British pound as the functional currency. Any gains or losses arising from
transactions not denominated in the British pound are recorded as a foreign
currency gain or loss and included in the results of operations of Nelson and
Janus UK. The translation of these financial statements from the British pound
into the U.S. dollar results in an adjustment to stockholders' equity as a
cumulative translation adjustment. At December 31, 1999 and 1998, the cumulative
translation adjustment was not material.

The Company continues to evaluate existing alternatives with respect to
utilizing foreign currency instruments to hedge its U.S. dollar investment in
Grupo TFM and Nelson as market conditions change or exchange rates fluctuate. At
December 31, 1999, the Company had no outstanding foreign currency hedging
instruments.

Environmental Liabilities. The Company's transportation operations are subject
to extensive regulation under environmental protection laws and its land
holdings have been used for transportation purposes or leased to third parties
for commercial and industrial purposes. The Company records liabilities for
remediation and restoration costs related to past activities when the Company's
obligation is probable and the costs can be reasonably estimated. Costs of
ongoing compliance activities to current operations are expensed as incurred.

115

The Company's recorded liabilities for these issues represent its best estimates
(on an undiscounted basis) of remediation and restoration costs that may be
required to comply with present laws and regulations. At December 31, 1999, 1998
and 1997 these recorded liabilities were not material. Although these costs
cannot be predicted with certainty, management believes that the ultimate
outcome of identified matters will not have a material adverse effect on the
Company's consolidated results of operations or financial condition.

Panama Canal Railway Company. In January 1998, the Republic of Panama awarded
KCSR and its joint venture partner, Mi-Jack Products, Inc., the concession to
reconstruct and operate the PCRC. The 47-mile railroad runs parallel to the
Panama Canal and, upon reconstruction, will provide international shippers with
an important complement to the Panama Canal. In November 1999, PCRC completed
the financing arrangements for this project with the International Finance
Corporation ("IFC"), a member of the World Bank Group. The financing is
comprised of a $5 million investment from the IFC and senior loans in the
aggregate amounts of up to $45 million. The investment of $5 million from the
IFC is comprised of non-voting preferred shares, paying a 10% cumulative
dividend. These preferred shares reduce the Company's ownership interest in PCRC
from 50% to 41.67%. The preferred shares are expected to be redeemed at the
option of IFC any year after 2008 at the lower of i) a net cumulative internal
rate of return of 30%, or ii) eight-times EBITDA (average of two consecutive
years) calculated in proportion to the IFC's percentage ownership in PCRC. Under
certain limited conditions, the Company is a guarantor for up to $15 million of
cash deficiencies associated with project completion. Additionally, if the
Company or its partner terminate the concession contract without the consent of
the IFC, the Company is a guarantor for up to 50% of the outstanding senior
loans. The total cost of the reconstruction project is estimated to be $75
million with an equity commitment from KCSR not to exceed $13 million.
Reconstruction of PCRC's right-of-way is expected to be complete in mid-2001
with commercial operations to begin immediately thereafter.

Intermodal and Automotive Facility at the Former Richards-Gebaur Airbase. In
conjunction with the construction of an intermodal and automotive facility at
the former Richards-Gebaur airbase in Kansas City, Missouri, KCSR expects to
spend approximately $20 million for site improvements and infrastructure.
Additionally, KCSR has negotiated a lease arrangement with the City of Kansas
City, Missouri for a period of fifty years. Lease payments are expected to range
between $400,000 and $700,000 per year and will be adjusted for inflation based
on agreed-upon formulas.

Note 13. Control

Subsidiaries and Affiliates. The Janus Stock Purchase Agreement, as amended,
provides that so long as Mr. Bailey is a holder of at least 5% of the common
stock of Janus and continues to be employed as President or Chairman of the
Board of Janus (or, if he does not serve as President, James P. Craig, III
serves as President and Chief Executive Officer or Co-Chief Executive Officer
with Mr. Bailey), Mr. Bailey shall continue to establish and implement policy
with respect to the investment advisory and portfolio management activity of
Janus. The agreement also provides that, in furtherance of such objective, so
long as both the ownership threshold and officer status conditions described
above are satisfied, KCSI will vote its shares of Janus common stock to elect
directors of Janus, at least the majority of whom are selected by Mr. Bailey,
subject to KCSI's approval, which approval may not be unreasonably withheld. The
agreement further provides that any change in management philosophy, style or
approach with respect to investment advisory and portfolio management policies
of Janus shall be mutually agreed upon by KCSI and Mr. Bailey.

KCSI does not believe Mr. Bailey's rights under the Janus Stock Purchase
Agreement are "substantive," within the meaning of EITF 96-16, because KCSI can
terminate those rights at any time by removing Mr. Bailey as an officer of
Janus. KCSI also believes that the removal of Mr.

116

Bailey would not result in significant harm to KCSI based on the factors
discussed below. Colorado law provides that removal of an officer of a Colorado
corporation may be done directly by its stockholders if the corporation's bylaws
so provide. While Janus' bylaws contain no such provision currently, KCSI has
the ability to cause Janus to amend its bylaws to include such a provision.
Under Colorado law, KCSI could take such action at an annual meeting of
stockholders or make a demand for a special meeting of stockholders. Janus is
required to hold a special stockholders' meeting upon demand from a holder of
more than 10% of its common stock and to give notice of the meeting to all
stockholders. If notice of the meeting is not given within 30 days of such a
demand, the District Court is empowered to summarily order the holding of the
meeting. As the holder of more than 80% of the common stock of Janus, KCSI has
the requisite votes to compel a meeting and to obtain approval of the required
actions at such a meeting.

Although KCSI has the ability to remove Mr. Bailey, it has no present plan or
intention to do so, as he is one of the persons regarded as most responsible for
the success of Janus. The consequences of any removal of Mr. Bailey would depend
upon the timing and circumstances of such removal. Mr. Bailey could be required
to sell, and KCSI could be required to purchase, his Janus common stock, unless
he were terminated for cause. Certain other Janus minority stockholders would
also be able, and, if they terminated employment, required, to sell to KCSI
their shares of Janus common stock. The amounts that KCSI would be required to
pay in the event of such purchase and sale transactions could be material. See
Note 12. As of December 31, 1999, such removal would have also resulted in
acceleration of the vesting of a portion of the shares of restricted Janus
common stock held by other minority stockholders having an approximate aggregate
value of $16.3 million.

There may also be other consequences of removal that cannot be presently
identified or quantified. For example, Mr. Bailey's removal could result in the
loss of other valuable employees or clients of Janus. The likelihood of
occurrence and the effects of any such employee or client departures cannot be
predicted and may depend on the reasons for and circumstances of Mr. Bailey's
removal. However, KCSI believes that Janus would be able in such a situation to
retain or attract talented employees because: (i) of Janus' prominence; (ii)
Janus' compensation scale is at the upper end of its peer group; (iii) some or
all of Mr. Bailey's repurchased Janus stock could be then available for sale or
grants to other employees; and (iv) many key Janus employees must continue to be
employed at Janus to become vested in currently unvested restricted stock valued
in the aggregate (after considering additional vesting that would occur upon the
termination of Mr. Bailey) at approximately $36 million as of December 31, 1999.
In addition, notwithstanding any removal of Mr. Bailey, KCSI would expect to
continue its practice of encouraging autonomy by its subsidiaries and their
boards of directors so that management of Janus would continue to have
responsibility for Janus' day-to-day operations and investment advisory and
portfolio management policies and, because it would continue that autonomy, KCSI
would expect many current Janus employees to remain with Janus.

117

succession plan exists under which Mr. James P. Craig, III would succeed Mr.
Bailey, and (iv) Janus should be able to continue to attract talented portfolio
managers. It is reasonable to expect that Janus' clients' reaction will depend
on the circumstances, including, for example, how much of the Janus team remains
in place and what investment advisory alternatives are available.

Under the Investment Company Act of 1940, certain changes in ownership of Janus
or Berger may result in termination of their respective investment advisory
agreements with the mutual funds and other accounts they manage, requiring
approval of fund shareowners and other account holders to obtain new agreements.
Additionally, there are Janus and Berger officers and directors that serve as
officers and/or directors of certain of the registered investment companies to
which Janus and Berger act as investment advisors.

The Company is party to certain agreements with TMM covering the Grupo TFM and
Mexrail ventures, which contain "change of control" provisions, provisions
intended to preserve Company's and TMM's proportionate ownership of the
ventures, and super majority provisions with respect to voting on certain
significant transactions. Such agreements also provide a right of first refusal
in the event that either party initiates a divestiture of its equity interest in
Grupo TFM or Mexrail. Under certain circumstances, such agreements could affect
the Company's ownership percentage and rights in these equity affiliates.

Employees. The Company and certain of its subsidiaries have entered into
agreements with employees whereby, upon defined circumstances constituting a
change in control of the Company or subsidiary, certain stock options become
exercisable, certain benefit entitlements are automatically funded and such
employees are entitled to specified cash payments upon termination of
employment.

Assets. The Company and certain of its subsidiaries have established trusts to
provide for the funding of corporate commitments and entitlements of officers,
directors, employees and others in the event of a specified change in control of
the Company or subsidiary. Assets held in such trusts at December 31, 1999 were
not material. Depending upon the circumstances at the time of any such change in
control, the most significant factor of which would be the highest price paid
for KCSI common stock by a party seeking to control the Company, funding of the
Company's trusts could be very substantial.

Debt. Certain loan agreements and debt instruments entered into or guaranteed by
the Company and its subsidiaries provide for default in the event of a specified
change in control of the Company or particular subsidiaries of the Company.

118

Stockholder Rights Plan. On September 19, 1995, the Board of Directors of the
Company declared a dividend distribution of one Right for each outstanding share
of the Company's common stock, $.01 par value per share (the "Common Stock"), to
the stockholders of record on October 12, 1995. Each Right entitles the
registered holder to purchase from the Company 1/1,000th of a share of Series A
Preferred Stock (the "Preferred Stock") or in some circumstances, Common Stock,
other securities, cash or other assets as the case may be, at a price of $210
per share, subject to adjustment.

The Rights, which are automatically attached to the Common Stock, are not
exercisable or transferable apart from the Common Stock until the tenth calendar
day following the earlier to occur of (unless extended by the Board of Directors
and subject to the earlier redemption or expiration of the Rights): (i) the date
of a public announcement that an acquiring person acquired, or obtained the
right to acquire, beneficial ownership of 20 percent or more of the outstanding
shares of the Common Stock of the Company (or 15 percent in the case that such
person is considered an "adverse person"), or (ii) the commencement or
announcement of an intention to make a tender offer or exchange offer that would
result in an acquiring person beneficially owning 20 percent or more of such
outstanding shares of Common Stock of the Company (or 15 percent in the case
that such person is considered an "adverse person"). Until exercised, the Right
will have no rights as a stockholder of the Company, including, without
limitation, the right to vote or to receive dividends. In connection with
certain business combinations resulting in the acquisition of the Company or
dispositions of more than 50% of Company assets or earnings power, each Right
shall thereafter have the right to receive, upon the exercise thereof at the
then current exercise price of the Right, that number of shares of the highest
priority voting securities of the acquiring company (or certain of its
affiliates) that at the time of such transaction would have a market value of
two times the exercise price of the Right. The Rights expire on October 12,
2005, unless earlier redeemed by the Company as described below.

At any time prior to the tenth calendar day after the first date after the
public announcement that an acquiring person has acquired beneficial ownership
of 20 percent (or 15 percent in some instances) or more of the outstanding
shares of the Common Stock of the Company, the Company may redeem the Rights in
whole, but not in part, at a price of $0.005 per Right. In addition, the
Company's right of redemption may be reinstated following an inadvertent trigger
of the Rights (as determined by the Board) if an acquiring person reduces its
beneficial ownership to 10 percent or less of the outstanding shares of Common
Stock of the Company in a transaction or series of transactions not involving
the Company.

The Series A Preferred shares purchasable upon exercise of the Rights will have
a cumulative quarterly dividend rate set by the Board of Directors or equal to
1,000 times the dividend declared on the Common Stock for such quarter. Each
share will have the voting rights of one vote on all matters voted at a meeting
of the stockholders for each 1/1,000th share of preferred stock held by such
stockholder. In the event of any merger, consolidation or other transaction in
which the common shares are exchanged, each Series A Preferred share will be
entitled to receive an amount equal to 1,000 times the amount to be received per
common share. In the event of a liquidation, the holders of Series A Preferred
shares will be entitled to receive $1,000 per share or an amount per share equal
to 1,000 times the aggregate amount to be distributed per share to holders of
Common Stock. The shares will not be redeemable. The vote of holders of a
majority of the Series A Preferred shares, voting together as a class, will be
required for any amendment to the Company's Certificate of Incorporation that
would materially and adversely alter or change the powers, preferences or
special rights of such shares.

119

Note 14. Industry Segments

In 1998, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the manner in
which public business enterprises report information about operating segments in
annual financial statements and requires disclosure of selected information
about operating segments in interim financial reports issued to shareholders.
SFAS 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. The adoption of SFAS 131 did not
have a material impact on the disclosures of the Company. Prior year information
is reflected pursuant to SFAS 131. Sales between the Transportation and
Financial Services segments were not material in 1999, 1998 or 1997. Certain
amounts in prior years' segment information have been reclassified to conform to
the current year presentation. Also, the information reflects the Kansas City
Southern Railway operating company on a stand-alone basis. The discussion
excludes consideration of any KCSR subsidiaries. See Note 1 for a description of
each segment.

120

Segment Financial Information, dollars in millions, years ended December 31,

FINANCIAL
TRANSPORTATION SERVICES KCSI
KCSR Other Consolidated Consolidated Consolidated

1999
Revenues $ 545.7 $ 55.7 $ 601.4 $1,212.3 $1,813.7
Costs and expenses 425.7 54.7 480.4 658.6 1,139.0
Depreciation and amortization 50.2 6.7 56.9 35.4 92.3
-------- --------- --------- -------- ---------
Operating income (loss) 69.8 (5.7) 64.1 518.3 582.4

Equity in net earnings of
unconsolidated affiliates 2.9 2.3 5.2 46.7 51.9
Interest expense (33.1) (24.3) (57.4) (5.9) (63.3)
Other, net 3.6 1.7 5.3 27.4 32.7
-------- --------- --------- -------- ---------
Pretax income (loss) 43.2 (26.0) 17.2 586.5 603.7

Income taxes (benefit) 16.4 (9.4) 7.0 216.1 223.1
Minority interest - - - 57.3 57.3
------- -------- -------- -------- ---------
Net income (loss) $ 26.8 $ (16.6) $ 10.2 $ 313.1 $ 323.3
======== ========= ========= ======== =========

Capital expenditures $ 97.8 $ 8.4 $ 106.2 $ 50.5 $ 156.7
======== ========= ========= ======== =========

1998
Revenues $ 551.6 $ 61.9 $ 613.5 $ 670.8 $1,284.3
Costs and expenses 391.1 51.8 442.9 373.4 816.3
Depreciation and amortization 50.6 6.1 56.7 16.8 73.5
-------- --------- --------- -------- ---------
Operating income 109.9 4.0 113.9 280.6 394.5

Equity in net earnings (losses) of
unconsolidated affiliates 2.0 (4.9) (2.9) 25.8 22.9
Interest expense (35.6) (24.0) (59.6) (6.5) (66.1)
Reduction in ownership of DST - - - (29.7) (29.7)
Other, net 10.7 3.0 13.7 19.1 32.8
-------- --------- --------- -------- ---------
Pretax income (loss) 87.0 (21.9) 65.1 289.3 354.4

Income taxes (benefit) 34.0 (6.9) 27.1 103.7 130.8
Minority interest - - - 33.4 33.4
------- -------- -------- -------- ---------
Net income (loss) $ 53.0 $ (15.0) $ 38.0 $ 152.2 $ 190.2
======== ========= ========= ======== =========

Capital expenditures $ 64.5 $ 5.4 $ 69.9 $ 35.0 $ 104.9
======== ========= ========= ======== =========

1997
Revenues $ 517.8 $ 55.4 $ 573.2 $ 485.1 $ 1,058.3
Costs and expenses 383.0 42.8 425.8 254.4 680.2
Depreciation and amortization 54.7 7.4 62.1 13.1 75.2
Restructuring, asset impairment
and other charges 163.8 14.2 178.0 18.4 196.4
-------- --------- --------- -------- ---------
Operating income (loss) (83.7) (9.0) (92.7) 199.2 106.5

Equity in net earnings (losses)
of unconsolidated affiliates 2.1 (11.8) (9.7) 24.9 15.2
Interest expense (37.9) (15.4) (53.3) (10.4) (63.7)
Other, net 4.5 0.5 5.0 16.2 21.2
-------- --------- --------- -------- ---------
Pretax income (loss) (115.0) (35.7) (150.7) 229.9 79.2

Income taxes (benefit) (9.5) (9.1) (18.6) 87.0 68.4
Minority interest - - - 24.9 24.9
------- -------- -------- -------- ---------
Net income (loss) $ (105.5) $ (26.6) $ (132.1) $ 118.0 $ (14.1)
======== ========= ========= ======== =========

Capital expenditures $ 67.6 $ 9.2 $ 76.8 $ 5.8 $ 82.6
======== ========= ========= ======== =========

121

Segment Financial Information, dollars in millions, at December 31,

FINANCIAL
TRANSPORTATION SERVICES KCSI
KCSR Other Consolidated Consolidated Consolidated

1999
ASSETS
Current assets $ 165.6 $ 42.9 $ 208.5 $ 525.0 $ 733.5
Investments 33.0 304.1 337.1 474.1 811.2
Properties, net 1,180.6 96.8 1,277.4 70.4 1,347.8
Intangible assets, net 5.2 29.2 34.4 162.0 196.4
-------- --------- --------- -------- ---------
Total $1,384.4 $ 473.0 $ 1,857.4 $1,231.5 $ 3,088.9
======== ========= ========= ======== =========

LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities $ 203.3 $ 50.9 $ 254.2 $ 162.5 $ 416.7
Long-term debt 424.4 325.6 750.0 - 750.0
Deferred income taxes 280.9 16.5 297.4 151.8 449.2
Other 71.7 15.6 87.3 102.6 189.9
Net worth 404.1 64.4 468.5 814.6 1,283.1
-------- --------- --------- -------- ---------
Total $1,384.4 $ 473.0 $ 1,857.4 $1,231.5 $ 3,088.9
======== ========= ========= ======== =========

1998
ASSETS
Current assets $ 173.3 $ 36.9 $ 210.2 $ 259.3 $ 469.5
Investments 28.2 299.7 327.9 379.2 707.1
Properties, net 1,135.2 94.1 1,229.3 37.4 1,266.7
Intangible assets, net 5.2 24.2 29.4 147.0 176.4
-------- --------- --------- -------- ---------
Total $1,341.9 $ 454.9 $ 1,796.8 $ 822.9 $ 2,619.7
======== ========= ========= ======== =========

LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities $ 174.5 $ 50.6 $ 225.1 $ 71.1 $ 296.2
Long-term debt 445.5 363.5 809.0 16.6 825.6
Deferred income taxes 272.7 12.5 285.2 118.4 403.6
Other 73.1 13.4 86.5 76.6 163.1
Net worth 376.1 14.9 391.0 540.2 931.2
-------- --------- --------- -------- ---------
Total $1,341.9 $ 454.9 $ 1,796.8 $ 822.9 $ 2,619.7
======== ========= ========= ======== =========

1997
ASSETS
Current assets $ 159.7 $ 19.2 $ 178.9 $ 194.2 $ 373.1
Investments 31.1 304.3 335.4 348.1 683.5
Properties, net 1,123.9 93.9 1,217.8 9.4 1,227.2
Intangible assets, net 6.5 23.0 29.5 120.9 150.4
-------- --------- --------- -------- ---------
Total $1,321.2 $ 440.4 $ 1,761.6 $ 672.6 $ 2,434.2
======== ========= ========= ======== =========

LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities $ 254.0 $ 120.1 $ 374.1 $ 63.4 $ 437.5
Long-term debt 442.4 279.4 721.8 84.1 805.9
Deferred income taxes 232.8 (7.6) 225.2 107.0 332.2
Other 76.6 13.9 90.5 69.8 160.3
Net worth 315.4 34.6 350.0 348.3 698.3
-------- --------- --------- -------- ---------
Total $1,321.2 $ 440.4 $ 1,761.6 $ 672.6 $ 2,434.2
======== ========= ========= ======== =========

122

Note 15. Quarterly Financial Data (Unaudited)

(in millions, except per share amounts):
1999

Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------

Revenues $ 537.3 $ 460.3 $ 430.9 $ 385.2
Costs and expenses 334.3 288.8 273.4 242.5
Depreciation and amortization 24.8 24.1 22.3 21.1
---------- ----------- ----------- -----------
Operating income 178.2 147.4 135.2 121.6

Equity in net earnings (losses) of unconsolidated affiliates:
DST 12.0 10.9 10.8 10.7
Grupo TFM (3.3) 3.8 0.5 0.5
Other 0.8 2.0 2.1 1.1
Interest expense (17.6) (15.4) (15.3) (15.0)
Other, net 11.0 10.6 5.3 5.8
---------- ----------- ----------- -----------
Pretax income 181.1 159.3 138.6 124.7

Income taxes 71.1 57.3 49.8 44.9
Minority interest 18.7 14.7 12.7 11.2
---------- ----------- ----------- -----------
Net income 91.3 87.3 76.1 68.6

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities 34.1 (12.3) 17.4 (0.8)
Less: reclassification adjustment for
gains included in net income (0.4) (3.3) (0.4) (0.3)
---------- ----------- ----------- -----------

Comprehensive income $ 125.0 $ 71.7 $ 93.1 $ 67.5
========== =========== =========== ===========

Earnings per share:
Basic $ 0.83 $ 0.79 $ 0.69 $ 0.62
========== =========== ========== ===========

Diluted $ 0.78 $ 0.75 $ 0.66 $ 0.60
========== =========== ========== ===========

Dividends per share:
Preferred $ .25 $ .25 $ .25 $ .25
Common $ .04 $ .04 $ .04 $ .04

Stock Price Ranges:
Preferred - High $ 16.000 $ 16.250 $ 16.500 $ 16.250
- Low 14.000 13.500 13.750 14.875

Common - High 75.000 65.938 66.438 57.375
- Low 37.500 43.313 50.250 43.313

123

Fourth quarter 1998 includes a one-time pretax non-cash charge of approximately
36.0 million ($23.2 million after-tax, or $0.21 per share) arising from the
merger of a wholly-owned DST subsidiary with USCS. This charge reflects the
Company's reduced ownership of DST (from 41% to approximately 32%), together
with the Company's proportionate share of DST and USCS fourth quarter related
merger costs. See detail discussion in Notes 3 and 6.

(in millions, except per share amounts):
1998

Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------

Revenues $ 331.8 $ 334.2 $ 322.6 $ 295.7
Costs and expenses 217.4 210.1 200.3 188.5
Depreciation and amortization 20.1 18.7 17.9 16.8
---------- ----------- ----------- -----------
Operating income 94.3 105.4 104.4 90.4

Equity in net earnings (losses) of unconsolidated affiliates:
DST 1.6 7.7 7.5 7.5
Grupo TFM 0.2 1.8 (2.1) (3.1)
Other 0.1 0.8 0.5 0.4
Interest expense (15.4) (17.1) (16.2) (17.4)
Reduction in ownership of DST (29.7) - - -
Other, net 6.8 4.2 15.2 6.6
---------- ----------- ----------- -----------
Pretax income 57.9 102.8 109.3 84.4

Income taxes 20.2 38.2 40.9 31.5
Minority interest 7.6 9.4 9.7 6.7
---------- ----------- ----------- -----------
Net income 30.1 55.2 58.7 46.2

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities 8.2 (27.0) 13.0 30.1
Less: reclassification adjustment for
(gains) losses included in net income - - - (0.2)
----------- ----------- ----------- -----------

Comprehensive income $ 38.3 $ 28.2 $ 71.7 $ 76.1
========== =========== =========== ===========

Earnings per share:
Basic $ 0.27 $ 0.50 $ 0.54 $ 0.43
========== =========== =========== ===========

Diluted $ 0.25 $ 0.49 $ 0.51 $ 0.41
========== =========== =========== ===========

Dividends per share:
Preferred $ .25 $ .25 $ .25 $ .25
Common $ .04 $ .04 $ .04 $ .04

Stock Price Ranges:
Preferred - High $ 17.000 $ 17.750 $ 18.000 $ 18.000
- Low 14.000 15.250 16.000 16.625

Common - High 49.563 57.438 49.813 46.000
- Low 23.000 29.000 39.625 26.250

124

Note 16. Subsequent Events

Re-capitalization of the Company's Debt Structure. In preparation for the
Separation, the Company re-capitalized its debt structure in January 2000
through a series of transactions as follows:

In first quarter 2000, the Company will report an extraordinary loss on the
extinguishment of the Company's notes and debentures of approximately $5.9
million, net of income taxes.

KCS Credit Facility. The KCS Credit Facility provides for a total commitment of
$750 million, comprised of three separate term loans totaling $600 million with
$200 million due January 11, 2001, $150 million due December 30, 2005 and $250
million due December 30, 2006 and a revolving credit facility available until
January 11, 2006 ("KCS Revolver"). The availability under the KCS Revolver will
initially be $150 million and will be reduced to $100 million on the later of
January 2, 2001 and the expiration date with respect to the Grupo TFM Capital
Contribution Agreement. Letters of credit are also available under the KCS
Revolver up to a limit of $90 million. Borrowings under the KCS Credit Facility
are secured by substantially all of the Transportation segment's assets.

125

126

Dividends Suspended for KCSI Common Stock. During first quarter 2000, the
Company's Board of Directors announced that, based upon a review of the
Company's dividend policy in conjunction with the New Credit Facilities
discussed above and in light of the anticipated Separation, it decided to
suspend the Common stock dividend of KCSI under the existing structure of the
Company. This complies with the terms and covenants of the New Credit
Facilities. Subsequent to the Separation, the separate Boards of KCSI and
Stilwell will determine the appropriate dividend policy for their respective
companies.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

127

Part III

The Company has incorporated by reference certain responses to the Items of this
Part III pursuant to Rule 12b-23 under the Exchange Act and General Instruction
G(3) to Form 10-K. The Company's definitive proxy statement for the annual
meeting of stockholders scheduled for June 15, 2000 ("Proxy Statement") will be
filed no later than 120 days after December 31, 1999.

Item 10. Directors and Executive Officers of the Company

(a) Directors of the Company

The information set forth in response to Item 401 of Regulation S-K under the
heading "Proposal 1 - Election of Two Directors" and "The Board of Directors" in
the Company's Proxy Statement is incorporated herein by reference in partial
response to this Item 10.

(b) Executive Officers of the Company

The information set forth in response to Item 401 of Regulation S-K under
"Executive Officers of the Company," an unnumbered Item in Part I (immediately
following Item 4, Submission of Matters to a Vote of Security Holders), of this
Form 10-K is incorporated herein by reference in partial response to this Item
10.

The information set forth in response to Item 405 of Regulation S-K under the
heading "Section 16(a) of Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement is incorporated herein by reference in partial
response to this Item 10.

Item 11. Executive Compensation

The information set forth in response to Item 402 of Regulation S-K under
"Management Compensation" and "Compensation of Directors" in the Company's Proxy
Statement, (other than The Compensation and Organization Committee Report on
Executive Compensation and the Stock Performance Graph), is incorporated by
reference in response to this Item 11.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information set forth in response to Item 403 of Regulation S-K under the
heading "Principal Stockholders and Stock Owned Beneficially by Directors and
Certain Executive Officers" in the Company's Proxy Statement is hereby
incorporated by reference in response to this Item 12.

The Company has no knowledge of any arrangement the operation of which may at a
subsequent date result in a change of control of the Company.

Item 13. Certain Relationships and Related Transactions

None

128
Part IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) List of Documents filed as part of this Report

(1) Financial Statements

The financial statements and related notes, together with the report of
PricewaterhouseCoopers LLP dated March 16, 2000, appear in Part II Item 8,
Financial Statements and Supplementary Data, of this Form 10-K.

(2) Financial Statement Schedules

The schedules and exhibits for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission appear in Part
II Item 8, Financial Statements and Supplementary Data, under the Index to
Financial Statements of this Form 10-K.

(3) List of Exhibits

(a) Exhibits

The Company has incorporated by reference herein certain exhibits as specified
below pursuant to Rule 12b-32 under the Exchange Act.

(2) Plan of acquisition, reorganization, arrangement, liquidation or succession
(Inapplicable)

(3) Articles of Incorporation and Bylaws

Articles of Incorporation

3.1 Exhibit 4 to Company's Registration Statement on Form S-8
originally filed September 19, 1986 (Commission File No.
33-8880), Certificate of Incorporation as amended through May
14, 1985, is hereby incorporated by reference as Exhibit 3.1

3.2 Exhibit 4.1 to Company's Current Report on Form 8-K dated
October 1, 1993 (Commission File No. 1-4717), Certificate of
Designation dated September 29, 1993 Establishing Series B
Convertible Preferred Stock, par value $1.00, is hereby
incorporated by reference as Exhibit 3.2

3.3 Exhibit 3.1 to Company's Form 10-K for the fiscal year ended
December 31, 1994 (Commission File No. 1-4717), Amendment to
Company's Certificate of Incorporation to set par value for
common stock and increase the number of authorized common
shares dated May 6, 1994, is hereby incorporated by reference
as Exhibit 3.3

3.4 Exhibit 3.4 to Company's Form 10-K for the fiscal year ended
December 31, 1996 (Commission File No. 1-4717), Amended
Certificate of Designation Establishing the New Series A
Preferred Stock, par value $1.00, dated November 7, 1995, is
hereby incorporated by reference as Exhibit 3.4

129

3.5 Exhibit 3.5 to Company's Form 10-K for the fiscal year ended
December 31, 1996 (Commission File No. 1-4717), The
Certificate of Amendment dated May 12, 1987 of the Company's
Certificate of Incorporation adding the Sixteenth paragraph,
is hereby incorporated by reference as Exhibit 3.5

Bylaws

3.6 Exhibit 3.6 to Company's Form 10-K for the fiscal year ended
December 31, 1998 (Commission File No. 1-4717), The Company's
By-Laws, as amended and restated September 17, 1998, is hereby
incorporated by reference as Exhibit 3.6

(4) Instruments Defining the Right of Security Holders, Including Indentures

4.1 The Fourth, Seventh, Eighth, Twelfth, Thirteenth, Fifteenth
and Sixteenth paragraphs of Exhibit 3.1 hereto are
incorporated by reference as Exhibit 4.1

4.2 Article I, Sections 1,3 and 11 of Article II, Article V and
Article VIII of Exhibit 3.6 hereto are incorporated by
reference as Exhibit 4.2

4.3 The Certificate of Designation dated September 29, 1993
establishing Series B Convertible Preferred Stock, par value
$1.00, which is attached hereto as Exhibit 3.2, is
incorporated by reference as Exhibit 4.3

4.4 The Amended Certificate of Designation dated November 7, 1995
establishing the New Series A Preferred Stock, par value
$1.00, which is attached hereto as Exhibit 3.4, is
incorporated by reference as Exhibit 4.4

4.5 The Indenture, dated July 1, 1992 between the Company and The
Chase Manhattan Bank (the "Indenture") which is attached as
Exhibit 4 to Company's Shelf Registration of $300 million of
Debt Securities on Form S-3 filed June 19, 1992 (Commission
File No. 33-47198) and as Exhibit 4(a) to the Company's Form
S-3 filed March 29, 1993 (Commission File No. 33-60192)
registering $200 million of Debt Securities, is hereby
incorporated by reference as Exhibit 4.5

4.5.1 Supplemental Indenture dated December 17, 1999 to the
Indenture between the Company and The Chase Manhattan Bank
dated July 1, 1992 (the "Indenture") with respect to the
7.875% Notes Due July 1, 2002 issued pursuant to the
Indenture, is attached to this Form 10-K as Exhibit 4.5.1

4.5.2 Supplemental Indenture dated December 17, 1999 to the
Indenture dated July 1, 1992 with respect to the 6.625% Notes
Due March 1, 2005 issued pursuant to the Indenture, is
attached to this Form 10-K as Exhibit 4.5.2

4.5.3 Supplemental Indenture dated December 17, 1999 to the
Indenture dated July 1, 1992 with respect to the 8.8%
Debentures Due July 1, 2022 issued pursuant to the Indenture,
is attached to this Form 10-K as Exhibit 4.5.3

4.5.4 Supplemental Indenture dated December 17, 1999 to the
Indenture dated July 1, 1992 with respect to the 7% Debentures
Due December 15, 2025 issued pursuant to the Indenture, is
attached to this Form 10-K as Exhibit 4.5.4

130

4.6 Exhibit 99 to Company's Form 8-A dated October 24, 1995
(Commission File No. 1-4717), which is the Stockholder Rights
Agreement by and between the Company and Harris Trust and
Savings Bank dated as of September 19, 1995, is hereby
incorporated by reference as Exhibit 4.6

(9) Voting Trust Agreement
(Inapplicable)

(10) Material Contracts

10.1 Exhibit I to Company's Form 10-K for the fiscal year ended
December 31, 1987 (Commission File No. 1-4717), The Director
Indemnification Agreement, is hereby incorporated by reference
as Exhibit 10.1

10.2 Exhibit B to Company's Definitive Proxy Statement for 1987
Annual Stockholder Meeting dated April 6, 1987, The Director
Indemnification Agreement, is hereby incorporated by reference
as Exhibit 10.2

10.3 The Indenture, dated July 1, 1992, to a $300 million Shelf
Registration of Debt Securities and to a $200 million Medium
Term Notes Registration of Debt Securities, which is
incorporated by reference as Exhibit 4.5 hereto, is hereby
incorporated by reference as Exhibit 10.3

10.3.1 Supplemental Indenture dated December 17, 1999 to the
Indenture between the Company and The Chase Manhattan Bank
dated July 1, 1992 (the "Indenture") with respect to the
7.875% Notes Due July 1, 2002 issued pursuant to the
Indenture, which is attached to this Form 10-K as Exhibit
4.5.1 is hereby incorporated by reference as Exhibit 10.3.1

10.3.2 Supplemental Indenture dated December 17, 1999 to the
Indenture dated July 1, 1992 with respect to the 6.625% Notes
Due March 1, 2005 issued pursuant to the Indenture, which is
attached to this Form 10-K as Exhibit 4.5.2 is hereby
incorporated by reference as Exhibit 10.3.2

10.3.3 Supplemental Indenture dated December 17, 1999 to the
Indenture dated July 1, 1992 with respect to the 8.8%
Debentures Due July 1, 2022 issued pursuant to the Indenture,
which is attached to this Form 10-K as Exhibit 4.5.3 is hereby
incorporated by reference as Exhibit 10.3.3

10.3.4 Supplemental Indenture dated December 17, 1999 to the
Indenture dated July 1, 1992 with respect to the 7% Debentures
Due December 15, 2025 issued pursuant to the Indenture, which
is attached to this Form 10-K as Exhibit 4.5.4 is hereby
incorporated by reference as Exhibit 10.23

10.4 Exhibit H to Company's Form 10-K for the fiscal year ended
December 31, 1987 (Commission File No. 1-4717), The Officer
Indemnification Agreement, is hereby incorporated by reference
as Exhibit 10.4

10.5 Exhibit 10.1 to Company's Form 10-Q for the period ended March
31, 1997 (Commission File No. 1-4717), The Kansas City
Southern Railway Company Directors' Deferred Fee Plan as
adopted August 20, 1982 and the amendment thereto effective
March 19, 1997 to such plan, is hereby incorporated by
reference as Exhibit 10.5
131

10.6 Exhibit 10.4 to Company's Form 10-K for the fiscal year ended
December 31, 1990 (Commission File No. 1-4717), Description of
the Company's 1991 incentive compensation plan, is hereby
incorporated by reference as Exhibit 10.6

10.7 Exhibit 10.1 to the Company's Form 10-Q for the quarterly
period ended June 30, 1997 (Commission File No. 1-4717),
Five-Year Competitive Advance and Revolving Credit Facility
Agreement dated May 2, 1997, by and between the Company and
the lenders named therein, is hereby incorporated by reference
as Exhibit 10.7

10.8 Exhibit 10.4 in the DST Systems, Inc. Registration Statement
on Form S-1 dated October 30, 1995, as amended (Registration
No. 33-96526), Tax Disaffiliation Agreement, dated October 23,
1995, by and between the Company and DST Systems, Inc., is
hereby incorporated by reference as Exhibit 10.8

10.9 Exhibit 10.6 to the DST Systems, Inc. Annual Report on Form
10-K for the year ended December 31, 1995 (Commission File No.
1-14036), the 1995 Restatement of The Employee Stock Ownership
Plan and Trust Agreement, is hereby incorporated by reference
as Exhibit 10.9

10.10 Exhibit 4.1 to the DST Systems, Inc. Registration Statement on
Form S-1 dated October 30, 1995, as amended (Registration No.
33-96526), The Registration Rights Agreement dated October 24,
1995 by and between DST Systems, Inc. and the Company, is
hereby incorporated by reference as Exhibit 10.10

10.10.1 Exhibit 4.15.1 to the DST Systems, Inc. Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 (Commission File
No. 1-14036), First Amendment to Registration Rights
Agreement, dated June 30, 1999, by and between DST Systems,
Inc. and the Company, is hereby incorporated by reference as
Exhibit 10.10.1

10.10.2 Exhibit 4.15.2 to the DST Systems, Inc. Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 (Commission File
No. 1-14036), Assignment, Consent and Acceptance Agreement,
dated August 10, 1999, by and between DST Systems, Inc., the
Company and Stilwell Financial, Inc., is hereby incorporated
by reference as Exhibit 10.10.2

10.11 Exhibit 10.18 to Company's Form 10-K for the year ended
December 31, 1996 (Commission File No. 1-4717), Directors
Deferred Fee Plan, adopted August 20, 1982, amended and
restated February 1, 1997, is hereby incorporated by reference
as Exhibit 10.11

10.12 Exhibit 10.1 to the Company's Form 10-Q for the quarterly
period ended June 30, 1999 (Commission File No. 1-4717),
Kansas City Southern Industries, Inc. 1991 Amended and
Restated Stock Option and Performance Award Plan, as amended
and restated effective as of May 6, 1999, is hereby
incorporated by reference as Exhibit 10.12

10.13 Exhibit 10.20 to Company's Form 10-K for the year ended
December 31, 1997 (Commission File No. 1-4717), Employment
Agreement, as amended and restated September 18, 1997, by and
between the Company and Landon H. Rowland is hereby
incorporated by reference as Exhibit 10.13

132

10.14 Exhibit 10.15 to Company's Form 10-K for the year ended
December 31, 1998 (Commission File No. 1-4717), Employment
Agreement, as amended and restated January 1, 1999, by and
between the Company, The Kansas City Southern Railway Company
and Michael R. Haverty, is hereby incorporated by reference as
Exhibit 10.14

10.15 Exhibit 10.16 to Company's Form 10-K for the year ended
December 31, 1998 (Commission File No. 1-4717), Employment
Agreement, as amended and restated January 1, 1999, by and
between the Company and Joseph D. Monello is hereby
incorporated by reference as Exhibit 10.15

10.16 Exhibit 10.17 to Company's Form 10-K for the year ended
December 31, 1998 (Commission File No. 1-4717), Employment
Agreement, as amended and restated January 1, 1999, by and
between the Company and Danny R. Carpenter is hereby
incorporated by reference as Exhibit 10.16

10.17 Exhibit 10.18 to Company's Form 10-K for the year ended
December 31, 1998 (Commission File No. 1-4717), Kansas City
Southern Industries, Inc. Executive Plan, as amended and
restated effective November 17, 1998, is hereby incorporated
by reference as Exhibit 10.17

10.18 Exhibit 10.19 to Company's Form 10-K/A for the year ended
December 31, 1998 (Commission File No. 1-4717), Stock Purchase
Agreement, dated April 13, 1984, by and among Kansas City
Southern Industries, Inc., Thomas H. Bailey, William C.
Mangus, Bernard E. Niedermeyer III, Michael Stolper, and Jack
R.Thompson is hereby incorporated by reference as
Exhibit 10.18

10.18.1 Exhibit 10.19.1 to Company's Form 10-K/A for the year ended
December 31, 1998 (Commission File No. 1-4717), Amendment to
Stock Purchase Agreement, dated January 4, 1985, by and among
Kansas City Southern Industries, Inc., Thomas H. Bailey,
Bernard E. Niedermeyer III, Michael Stolper, and Jack R.
Thompson is hereby incorporated by reference as
Exhibit 10.18.1

10.18.2 Exhibit 10.19.2 to Company's Form 10-K/A for the year ended
December 31, 1998 (Commission File No. 1-4717), Second
Amendment to Stock Purchase Agreement, dated March 18, 1988,
by and among Kansas City Southern Industries, Inc., Thomas H.
Bailey, Michael Stolper, and Jack R. Thompson is hereby
incorporated by reference as Exhibit 10.18.2

10.18.3 Exhibit 10.19.3 to Company's Form 10-K/A for the year ended
December 31, 1998 (Commission File No. 1-4717), Third
Amendment to Stock Purchase Agreement, dated February 5, 1990,
by and among Kansas City Southern Industries, Inc., Thomas H.
Bailey, Michael Stolper, and Jack R. Thompson is hereby
incorporated by reference as Exhibit 10.18.3

10.18.4 Exhibit 10.19.4 to Company's Form 10-K/A for the year ended
December 31, 1998 (Commission File No. 1-4717), Fourth
Amendment to Stock Purchase Agreement, dated January 1, 1991,
by and among Kansas City Southern Industries, Inc., Thomas H.
Bailey, Michael Stolper, and Jack R. Thompson is hereby
incorporated by reference as Exhibit 10.18.4

133

10.18.5 Exhibit 10.19.5 to Company's Form 10-K/A for the year ended
December 31, 1998 (Commission File No. 1-4717), Assignment and
Assumption Agreement and Fifth Amendment to Stock Purchase
Agreement, dated November 19, 1999, by and among Kansas City
Southern Industries, Inc., Stilwell Financial, Inc., Thomas
H. Bailey and Michael Stolper is hereby incorporated by
reference as Exhibit 10.19.5

10.19 Credit Agreement dated as of January 11, 2000 among Kansas
City Southern Industries, Inc., The Kansas City Southern
Railway Company and the lenders named therein, is attached to
this Form 10-K as Exhibit 10.19

10.20 364-day Competitive Advance and Revolving Credit Facility
Agreement dated as of January 11, 2000 among Kansas City
Southern Industries, Inc. and the lenders named therein, is
attached to this Form 10-K as Exhibit 10.20

10.21 Assignment, Assumption and Amendment Agreement dated as of
January 11, 2000, among Kansas City Southern Industries, Inc.,
Stilwell Financial, Inc. and The Chase Manhattan Bank, as
agent for the lenders named in the 364-day Competitive
Advance and Revolving Credit Facility Agreement, which is
attached to this Form 10-K as Exhibit 10.20, is attached to
this Form 10-K as Exhibit 10.21

(11) Statement Re Computation of Per Share Earnings
(Inapplicable)

(12) Statements Re Computation of Ratios

12.1 The Computation of Ratio of Earnings to Fixed Charges prepared
pursuant to Item 601(b)(12) of Regulation S-K is attached to
this Form 10-K as Exhibit 12.1

(13) Annual Report to Security Holders, Form 10-Q or Quarterly Report to
Security Holders
(Inapplicable)

(16) Letter Re Change in Certifying Accountant
(Inapplicable)

(18) Letter Re Change in Accounting Principles
(Inapplicable)

(21) Subsidiaries of the Company

21.1 The list of the Subsidiaries of the Company prepared pursuant
to Item 601(b)(21) of Regulation S-K is attached to this Form
10-K as Exhibit 21.1

(22) Published Report Regarding Matters Submitted to Vote of Security Holders
(Inapplicable)

(23) Consents of Experts and Counsel

23.1 The Consent of Independent Accountants prepared pursuant to
Item 601(b)(23) of Regulation S-K is attached to this Form
10-K as Exhibit 23.1

(24) Power of Attorney
(Inapplicable)

134

(27) Financial Data Schedule

27.1 The Financial Data Schedule prepared pursuant to Item
601(b)(27) of Regulation S-K is attached to this Form 10-K as
Exhibit 27.1

(28) Information from Reports Furnished to State Insurance Regulatory
Authorities
(Inapplicable)

(99) Additional Exhibits

99.1 The consolidated financial statements of DST Systems, Inc.
(including the notes thereto and the Report of Independent
Accountants thereon) set forth under Item 8 of the DST
Systems, Inc. Annual Report on Form 10-K for the year ended
December 31, 1999 (Commission File No. 1-14036), as listed
under Item 14(a)(2) herein, are hereby incorporated by
reference as Exhibit 99.1

(b) Reports on Form 8-K

The Company filed a Current Report on Form 8-K dated December 6, 1999,
reporting the commencement of cash tender offers and consent
solicitations for the Company's outstanding $400 million in Notes and
Debentures. The Form 8-K also reported that the Company received tenders
and requisite consents from the holders of more than a majority of the
outstanding aggregate principal amount of each series of its Notes and
Debentures.

The Company filed a Current Report on Form 8-K dated January 10, 2000,
reporting the setting of the purchase price and total consideration for
the bond consents, as well as the successful completion of the bond
tenders and solicitations.

The Company filed a Current Report on Form 8-K dated January 10, 2000,
reporting the status of the separation of Stilwell from the Company.

135

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

Kansas City Southern Industries, Inc.

April 13, 2000 By: /s/ L.H. Rowland
---------------------------
L.H. Rowland
Chairman, President,
Chief Executive
Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities indicated on April 13, 2000.

Signature Capacity

/s/ L.H. Rowland Chairman, President, Chief Executive Officer
- ------------------------------
L.H. Rowland and Director

/s/ M.R. Haverty Executive Vice President and Director
- ------------------------------
M.R. Haverty

/s/ J.D. Monello Vice President and Chief Financial Officer
- ------------------------------
J.D. Monello (Principal Financial Officer)

/s/ L.G. Van Horn Vice President and Comptroller
- ------------------------------
L.G. Van Horn (Principal Accounting Officer)

/s/ A.E. Allinson Director
- ------------------------------
A.E. Allinson

/s/ P.F. Balser Director
- ------------------------------
P.F. Balser

/s/ J.E. Barnes Director
- ------------------------------
J.E. Barnes

/s/ M.G. Fitt Director
- ------------------------------
M.G. Fitt

/s/ J.R. Jones Director
- ------------------------------
J.R. Jones

/s/ J.F. Serrano Director
- ------------------------------
J.F. Serrano

/s/ M.I. Sosland Director
- ------------------------------
M.I. Sosland

136

KANSAS CITY SOUTHERN INDUSTRIES, INC.
1999 FORM 10-K ANNUAL REPORT
INDEX TO EXHIBITS

Regulation S-K
Exhibit Item 601(b)
No. Document Exhibit No.
- ------- ------------------------------------------------------ -----------

4.5.1 Supplemental Indenture dated December 17, 1999
with respect to the 7.875% Notes Due July 1, 2002 4

4.5.2 Supplemental Indenture dated December 17, 1999
with respect to the 6.625% Notes Due March 1, 2005 4

4.5.3 Supplemental Indenture dated December 17, 1999
with respect to the 8.8% Debentures Due July 1, 2022 4

4.5.4 Supplemental Indenture dated December 17, 1999 with
respect to the 7% Debentures Due December 15, 2025 4

10.19 Credit Agreement dated as of January 11, 2000 among
Kansas City Southern Industries, Inc., The Kansas
City Southern Railway Company and the lenders
named therein 10

10.20 364-day Competitive Advance and Revolving Credit Facility
Agreement dated as of January 11, 2000 among Kansas City
Southern Industries, Inc. and the lenders named therein 10

10.21 Assignment, Assumption and Amendment Agreement dated
as of January 11, 2000, among Kansas City Southern
Industries, Inc., Stilwell Financial, Inc. and The Chase
Manhattan Bank 10

12.1 Computation of Ratio of Earnings to Fixed Charges 12

21.1 Subsidiaries of the Company 21

23.1 Consent of Independent Accountants 23

27.1 Financial Data Schedule 27

-----------------------------