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, 19992000

[ ] 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 NewNoncumulativeNew 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, 111,399,354February 28, 2001 58,299,805 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$878,404,541 (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 20002001 Parts I, III
Annual Meeting of Stockholders, which will be filed
no later than 120 days after December 31, 19992000

Page 12

KANSAS CITY SOUTHERN INDUSTRIES, INC.
19992000 FORM 10-K ANNUAL REPORT

Table of Contents

Page

PART I

Item 1. Business............................................................Business................................................. 1
Item 2. Properties.......................................................... 9Properties............................................... 14
Item 3. Legal Proceedings................................................... 13Proceedings........................................ 18
Item 4. Submission of Matters to a Vote of Security Holders................. 13Holders...... 18
Executive Officers of the Company................................... 13Company........................ 19

PART II

Item 5. Market for the Company's Common Stock and
Related Stockholder Matters....................................... 15Matters............................ 20
Item 6. Selected Financial Data............................................. 15Data.................................. 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 17Operations................... 22
Item 7(A)Quantitative and Qualitative Disclosures About Market Risk.......... 72Risk 57
Item 8. Financial Statements and Supplementary Data......................... 76Data.............. 59
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...............................126Disclosure.................... 111

PART III

Item 10. Directors and Executive Officers of the Company.....................127Company.......... 112
Item 11. Executive Compensation..............................................127Compensation................................... 112
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................................127Management............................................. 112
Item 13. Certain Relationships and Related Transactions......................127Transactions........... 112

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................................128
Signatures..........................................................1358-K............................................ 113
Signatures............................................... 121

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 Delaware
corporation organized in 1962, is a holding company with principal
operations in rail transportation. On June 14, 2000, KCSI's Board of
Directors approved the spin-off of Stilwell Financial Inc. ("Stilwell"),
the Company's then wholly-owned subsidiaryfinancial services subsidiary. On July 12,
2000, KCSI completed the spin-off of Stilwell through a special dividend of
Stilwell common stock distributed to KCSI common stockholders of record on
June 28, 2000 ("Spin-off").

As of the Company, isdate of the holding company for Transportation segmentSpin-off, Stilwell was comprised of Janus Capital
Corporation, an approximate 81.5% owned subsidiary; Berger LLC, an
approximate 88% owned subsidiary; Nelson Money Managers Plc, an 80% owned
subsidiary; DST Systems, Inc., an equity investment in which Stilwell holds
an approximate 32% interest; and miscellaneous other financial services
subsidiaries and affiliates. This segment includes, among others:

oequity investments.

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%Spin-off occurred after the close of business of the New York Stock
Exchange on July 12, 2000, and each KCSI stockholder received two shares of
the common stock of TFM, S.A. de C.V.
("TFM");
o Mexrail, Inc. ("Mexrail"), a 49%Stilwell for every one share of KCSI common stock owned
affiliate, which wholly ownson 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.record date. 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 distributiontotal number of Stilwell common stock to KCSI
stockholders (the "Separation").shares distributed was
222,999,786.

On July 9, 1999, the CompanyKCSI received a tax ruling from the Internal Revenue
Service ("IRS") to the effectwhich states that for United States federal income tax
purposes the planned SeparationSpin-off 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
debtindebtedness by Stilwell (in connection with the Company's
re-capitalization discussed below) would have no effect on the previously issued tax
ruling.

In contemplationOn July 12, 2000, KCSI completed a reverse stock split whereby every two
shares of the Separation, theKCSI common stock were converted into one share of KCSI common
stock. 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 part1998 in contemplation of the Separation,Spin-off.

Also, in preparation for the Spin-off, 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.

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

(b) INDUSTRY SEGMENT FINANCIAL INFORMATION

KCSI supplies its various subsidiaries with managerial, legal, tax,
financial information by industry segment forand accounting services, in addition to managing other
"non-operating" investments. Kansas City Southern Lines, Inc. ("KCSL"),
which was the three years endeddirect parent of The Kansas City Southern Railway Company
("KCSR"), was merged into KCSI effective December 31, 19992000. KCSI's
principal subsidiaries and affiliates, which following the Spin-off, are
reported under one business segment, include, among others:

Page 1

o 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"), an approximate 37% owned unconsolidated affiliate, which owns 80%
of the common stock of TFM, S.A. de C.V. ("TFM");
o Mexrail, Inc. ("Mexrail"), a 49% owned unconsolidated affiliate,
which wholly owns the Texas Mexican Railway Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate that leases locomotive and rail equipment
primarily to KCSR;
o Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of
which KCSR indirectly owns 50% of the common stock; and
o Panarail Tourism Company ("Panarail"), a 50% owned unconsolidated
affiliate

Other subsidiaries of the Company include:
o Trans-Serve, Inc., an owner of a railroad wood tie treating facility;
o PABTEX GP, LLC (formerly "Global Terminaling Services, 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 KCSI and its
subsidiaries and affiliates.

Other 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 and under 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.

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

Transportation

KCSL,KCSI owns one of eight Class I railroads in the United States and, along
with its principalthe Company's subsidiaries and joint ventures, ownsown and operatesoperate 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 itsThrough a strategic alliance with the Canadian National Railway
Company ("CN") and Illinois Central Corporation ("IC") (collectively(together "CN/IC") and other marketing agreements, KCSL's reach,
the Company has been
expanded to comprisecreated a contiguous rail network of approximately 25,000
miles of main and branch lines connecting Canada, the United States and
Mexico. The
CompanyManagement believes that, as a result of the economic growth withinstrategic position of
the railway, KCSI is poised to continue to benefit from the growing
north/south trade between the United States, Mexico and Canada is developing alongpromoted by
the implementation of NAFTA. The Company's rail network offers services to
companies in a wide range of markets including the coal, chemicals and
petroleum, paper and forest, agricultural and mineral, and intermodal and
automotive markets.

Page 2

The Company's principal subsidiary, KCSR, founded in 1887, operates a rail
network of approximately 2,700 miles of main and branch lines running on 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 MidwestMissouri to the Gulf of Mexico and on an
East-Westeast/west axis from Meridian, Mississippi to Dallas, Texas ("Meridian
Speedway"). In addition to KCSR, operations include Gateway Western, Grupo
TFM, and Mexrail, which wholly owns Tex Mex. Mexrail owns the northern
half of the rail bridge at Laredo which spans the Rio Grande River into
Mexico. TFM operates the southern half of the bridge. Gateway Western, a
regional rail carrier, operates approximately 400 route miles of main and
branch lines running from East St. Louis, Illinois to Kansas City. Grupo
TFM owns 80% of TFM, which operates a railroad of approximately 2,700 miles
of main and branch lines running from the U.S./Mexican border at Laredo,
Texas to Mexico City and serves three of the four major ports in Mexico.
Tex Mex operates approximately 150 miles of main and branch lines between
Laredo and the port city of Corpus Christi, Texas. The Company also owns
50% of the common stock of the Panama Canal Railway Company, which holds
the concession to operate a 47-mile railroad located adjacent to the Panama
Canal. That railroad is currently being reconstructed and is expected to
resume operations in 2001. The Company also owns 50% of Panarail, a joint
venture organized in 2000 to provide passenger rail service over PCRC's
rail lines.
5
KCSI's expanded rail network interconnects with all other Class I railroads
and provides customers with an effective alternative to other railroad
routes, giving direct access to Mexico and the southwestern United States
through less congested interchange hubs. Eastern railroads and their
customers can bypass the congested gateways at Chicago, Illinois; St.
Louis, Missouri; Memphis, Tennessee and New Orleans, Louisiana by
interchanging with KCSR at Meridian and Jackson, Mississippi and Gateway
Western at East St. Louis. Other railroads can also interconnect with the
Company's rail network via other gateways at Kansas City, Birmingham,
Alabama; Shreveport, Louisiana; Dallas; New Orleans; Beaumont, Texas; and
Laredo. The Company's rail network links directly to major trading centers
in northern Mexico through TFM at Laredo, where more than 50% of all rail
and truck traffic between the two countries crosses the border.

KCSI's rail network is further expanded through marketing agreements with
Norfolk Southern and I&M Rail Link. Marketing agreements with Norfolk
Southern allow the Company to gain incremental traffic between the
southeast and the southwest on the Meridian Speedway. A marketing
agreement with I&M Rail Link provides access to Minneapolis and Chicago and
to corn and other grain origination's in Iowa, Minnesota and Illinois.

RAIL NETWORK

Owned Network

KCSR owns and operates approximately 2,700 miles of main and branch lines
and 1,180 miles of other tracks in a nine-state region that includes
Missouri, Kansas, Arkansas, Oklahoma, Mississippi, Alabama, Tennessee,
Louisiana and Texas. KCSR offershas the shortest north/south rail route between
Kansas City and major port citiesseveral key ports along the Gulf of Mexico in Louisiana,
Mississippi and Texas withand an east/west rail route between Meridian and
Dallas. This geographic reach enables service to 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,and
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 linksowns and operates approximately 400 miles of main and
branch lines linking Kansas City with East St. Louis and Springfield,
IllinoisIllinois. In addition, Gateway Western has limited haulage rights between
Springfield and Chicago that allow Gateway Western to move traffic that
originates or terminates on its rail lines. Gateway Western provides
key interchanges withaccess to East St. Louis, and

Page 3

allows rail traffic to avoid the majority of other
Class I railroads.more congested and costly St. Louis terminal.
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 interestsSignificant Investments

Mexrail
In 1995 the Company invested approximately $23 million to acquire a 49%
economic interest in
Grupo TFM and Mexrail, which provide direct access to Mexico. Through these
joint ventures, which are operated in partnership withowns 100% of Tex Mex and certain other
assets. Tex Mex and TFM operate the international rail-traffic bridge at
Laredo spanning the Rio Grande River. Transportacion Maritima Mexicana,
S.A. de C.V. ("TMM"), KCSL has establishedthe largest shareholder of Grupo TFM, owns the
remaining 51% of Mexrail. The bridge at Laredo is the most significant
entry point for rail traffic between Mexico and the United States. Tex Mex
also operates a prominent position157-mile rail line extending from Laredo to Corpus
Christi. Tex Mex connects to KCSR through trackage rights between Corpus
Christi and Beaumont. These trackage rights were granted pursuant to a
1996 Surface Transportation Board ("STB") decision and have an initial term
of 99 years. Tex Mex provides a vital link between the Company's U.S.
operations through KCSR and its Mexican operations through TFM.

On March 12, 2001, Tex Mex purchased from The Union Pacific Railroad
Company ("UP") a line of railroad extending 84.5 miles between Rosenberg,
Texas and Victoria, Texas, and granted Tex Mex trackage sufficient to
integrate the line into the existing trackage rights. The purchase price
for the line of $9.2 million was determined through arbitration and the
acquisition also required the prior approval or exemption of the
transaction by the STB. By its Order entered on December 8, 2000, the STB
granted Tex Mex's Petition for Exemption and exempted the transaction from
this prior approval requirement. Once reconstruction of the line is
completed, Tex Mex will be able to shorten its existing route between
Corpus Christi and Houston by over 70 miles.

Grupo TFM
In 1997 the Company invested $298 million to obtain a 36.9% interest in
Grupo TFM. TMM and a TMM affiliate own 38.5% of Grupo TFM and the growing
Mexican
market.government owns 24.6% of Grupo TFM. Grupo TFM owns 80% of the common stock
of TFM. The remaining 20% of TFM was retained by the Mexican government.
TFM is both a strategic and financial investment for KCSI. Strategically
the investment in TFM promotes the Company's NAFTA growth strategy whereby
the Company and its strategic partners can provide transportation services
between the heart of Mexico's industrial base, the U.S. and Canada. TFM
seeks to establish its railroad as the primary inland freight transporter
linking Mexico with the U.S. and Canadian markets along the NAFTA
corridor. TFM's route network providesstrategy is to provide reliable customer service,
capitalize on foreign trade growth and convert truck tonnage to rail.

Under the concession awarded to Grupo TFM by the Mexican Government in
1996, TFM operates the Northeast Rail Lines, which are located along a
strategically significant corridor between Mexico and the U.S., and have as
their core routes a key portion of the shortest, connection tomost direct rail
passageway between Mexico City and the major industrial and population areas of Mexico fromsouthern, midwestern and eastern
points inUnited States. These

Page 4

rail lines are the only rail lines which serve Nuevo Laredo, the largest rail
freight exchange point between the United States.States and Mexico. TFM's rail lines
connect the most populated and industrialized regions of Mexico with Mexico's
principal U.S. border railway gateway at Laredo. In addition, this rail system
serves three of Mexico's four primary seaports at Veracruz and Tampico on the
Gulf of Mexico and Lazaro Cardenas on the Pacific Ocean. TFM which was privatized by the Mexican government
in June 1997, serves a majority of the15 Mexican
states and Mexico City, which together represent a majority of the country's
population and account for a majority of its estimated gross domestic product.

This route structure enables the Company to benefit from growing trade
resulting from the increasing integration of the North American economy
through NAFTA. Trade between Mexico and the United States has grown
significantly from 1993 through 2000. Through Tex Mex connectsand KCSR, as well as
through interchanges with KCSR viaother major U.S. railroads, TFM provides its
customers with access to an extensive network through which they may
distribute their products throughout North America and overseas.

TFM operates 2,661 miles of main and branch lines and an additional 838
miles of sidings, spur tracks and main line under trackage rights at Beaumont, Texas, withrights. TFM at Laredo, Texas, (the single largesthas
the right to operate the rail lines, but does not own the land, roadway or
associated structures. Approximately 91% of the main line operated by TFM
consists of continuously welded rail. As of December 31, 2000, TFM owned
459 locomotives, owned or leased from affiliates 5,089 freight transfer pointcars and
leased from non-affiliates 141 locomotives and 5,254 freight cars.

Financially, KCSI management believes TFM has growth potential. TFM's
operating strategy has been to increase productivity and maximize operating
efficiencies. With Mexico's economic progress, growth of NAFTA trade
between Mexico, the United States and Mexico)Canada, and customer focused rail
service, the Company believes that the growth potential of TFM could be
significant.

Panama Canal Railway Company
The Panama Canal Railway is a north-south railroad traversing the Panama
isthmus between the Pacific and Atlantic Oceans. Its origins date back to
the late 1800's and the railway serves as a complement to the Panama Canal
shipping channel. The railroad is currently under reconstruction and is
expected to be complete by mid-2001 with commercial operations to begin
immediately thereafter. Management believes the prime potential and
opportunity of PCRC will be in the movement of traffic between the ports of
Balboa and Colon for shipping customers repositioning containers. PCRC has
had significant interest from both shipping companies and port terminal
operators. In addition, there has been interest in passenger traffic for
both commuter and pleasure/tourist travel (See below). While only 47 miles
long, the Company believes PCRC provides the Company with a unique
opportunity to participate in transoceanic shipments as a complement to the
existing Canal traffic.

In January 1998, the Republic of Panama awarded the PCRC, a joint venture
between KCSR and Mi-Jack Products, Inc. ("Mi-Jack"), the concession to
reconstruct and operate the Panama Canal Railway. As of December 31, 2000,
the Company has invested approximately $9.5 million toward the
reconstruction of the existing 47-mile railway which runs parallel to the
Panama Canal and, upon reconstruction, will provide international shippers
with a railway transportation medium to complement the Panama Canal. In
November 1999, the PCRC completed the financing arrangements for this
project with the International Finance Corporation ("IFC"), a member of
the World Bank Group.

Panarail Tourism Company

During 2000, the Company and Mi-Jack formed a joint venture designed to
operate and promote commuter and pleasure/tourist passenger service over
the PCRC. Panarail is expected to commence operations in 2001, immediately
following completion of the reconstruction of PCRC's tracks.

Expanded Network

Through a strategic alliance with CN/IC and marketing agreements with
Norfolk Southern and the I&M Rail Link, the Company has expanded the
domestic geographic reach beyond that covered by its owned network.

Strategic Alliance with Canadian National and Illinois Central.

In 1998 KCSR, CN and IC announced a 15-year strategic alliance aimed at
coordinating the marketing, operations and investment elements of
north-south rail freight transportation. The strategic alliance did not
require STB approval and was effective immediately. This alliance connects
Canadian markets, the major midwest U.S. markets of Detroit, Chicago,
Kansas City and St. Louis and the key southern markets of Memphis, Dallas
and Houston. It also provides U.S. and Canadian shippers with access to
Mexico's rail system through our connections with Tex Mex and TFM.

In addition to providing access to key north-south international and
domestic U.S. traffic corridors, the alliance with CN/IC is intended to
increase business primarily in the automotive and intermodal markets and
also in the chemical and petroleum and paper and forest products markets.
This alliance has provided opportunities for revenue growth and positioned
the Company as wella key provider of rail service for NAFTA trade.

Under a separate agreement, KCSR and CN formed a management group made up
of representatives from both railroads to develop plans for the
construction of new facilities to support business development, including
investments in automotive, intermodal and transload facilities at Memphis,
Dallas, Kansas City and Chicago. This agreement also granted KCSR certain
trackage and haulage rights and granted CN and IC certain haulage rights.
Under the terms of this agreement, and through action taken by the STB, in
October 2000 KCSR gained access to six additional chemical customers in the
Geismar, Louisiana industrial area through haulage rights.

Marketing Agreements with Norfolk Southern.

In December 1997 KCSR entered into a three-year marketing agreement with
Norfolk Southern and Tex Mex which provides for additional traffic volume
along the east-west corridor between Meridian and Dallas by using
interchange points with Norfolk Southern. This agreement provides Norfolk
Southern run-through service with access to Dallas and the Mexican border
at Laredo while avoiding the congested rail gateways of Memphis and New
Orleans. This agreement will be automatically renewed for additional
three-year terms unless written notice of termination is given at least 90
days prior to the expiration of the then-current term. This agreement was
automatically renewed for an additional term of three years in December
2000.

In May 2000, KCSR entered into an agreement with Norfolk Southern under
which KCSR will provide haulage services for intermodal traffic between
Meridian and Dallas in exchange for fees from Norfolk Southern. Under this
agreement Norfolk Southern may quote rates and enter into transportation
service contracts with shippers and receivers covering this haulage
traffic. Unless renewed by Norfolk Southern, this agreement terminates on
December 31, 2003.

Page 6

This new marketing agreement with Norfolk Southern provides KCSR with
additional sources of intermodal business. The current arrangement
envisions approximately two trains per day running between the Company's
connection with Norfolk Southern at Meridian and the Burlington Northern
Santa Fe Corporation ("BNSF") connection at Dallas. The structure of the
agreement provides for lower gross revenue to KCSR, but improved operating
income since fuel and car hire expenses are the responsibility of Norfolk
Southern under the agreement. Management believes this business has
additional growth potential as Norfolk Southern seeks to shift its traffic
to southern gateways to increase its length of haul.

Marketing Agreement with I&M Rail Link.

In May 1997, KCSR entered into a marketing agreement with I&M Rail Link
which provides KCSR with access to Minneapolis, Minnesota and Chicago and
to origination's of corn and other U.S. Class I railroads at
various locations.grain in Iowa, Minnesota and Illinois.
Through this marketing agreement, KCSR receives and originates shipments of
grain products for delivery to 35 poultry industry feed mills on its
network. Grain is currently KCSR's largest export product to Mexico. This
agreement is terminable upon 90 days notice.

Haulage Rights.

As a result of the CN/IC1988 acquisition of the Missouri-Kansas-Texas Railroad
by UP, KCSR was granted (1) haulage rights between Council Bluffs, Iowa,
Omaha and Lincoln, Nebraska and Atchison and Topeka, Kansas on the one hand
and Kansas City, Missouri on the other hand, and (2) a joint rate agreement
for our grain traffic between Beaumont, Texas on the one hand and Houston
and Galveston, Texas on the other hand. KCSR has the right to convert
these haulage rights to trackage rights. KCSR's haulage rights require UP
to move KCSR traffic in UP trains; trackage rights would allow KCSR to
operate its trains over UP tracks. These rights have a term of 199 years.

Markets Served

The following table summarizes combined KCSR/Gateway Western revenue and
carload statistics by commodity category. Certain prior year amounts have
been reclassified to reflect changes in the business groups and to conform
to the current year presentation.

Carloads and
Revenues Intermodal Units
(in millions) (in thousands)
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
KCSR/Gateway Western
general commodities:
Chemical and petroleum $ 126.3 $132.7 $ 143.5 154.1 165.5 172.2
Paper and forest 132.9 131.0 138.9 192.4 202.9 212.8
Agricultural and mineral 94.3 95.6 99.9 132.0 141.0 141.5
------ ------ ------ ----- ----- -----
Total general commodities 353.5 359.3 382.3 478.5 509.4 526.5
Intermodal and automotive 63.0 60.6 48.1 269.3 233.9 187.1
Coal 105.0 117.4 117.9 184.2 200.8 205.3
------ ------ ------ ----- ----- -----
Carload revenues and carload
and intermodal units 521.5 537.3 548.3 932.0 944.1 918.9
===== ===== =====
Other rail-related revenues 41.6 49.1 48.5
------ ------ ------
Total KCSR/Gateway
Western revenues $ 563.1 $586.4 $ 596.8
======= ====== =======

Page 7

Chemicals and Petroleum

Chemical and petroleum products accounted for approximately 22.4% of
KCSR/Gateway Western combined total revenues in 2000. KCSR/Gateway Western
transport chemical and petroleum products via tank and hopper cars
primarily to markets in the southeast and northeast United States through
interchange with other rail carriers. Management expects certain product
revenues within this commodity group to improve in the future as a result
of access, which began on October 1, 2000 under the agreement with CN, to
additional chemical customers in the Geismar, Louisiana industrial corridor
(one of the largest concentrations of chemical suppliers in the world).

Paper and Forest

Paper and forest products accounted for approximately 23.6% of KCSR/Gateway
Western combined total revenues in 2000. The Company's rail lines run
through the heart of the southeastern U.S. timber-producing region.
Management believes that trees from this region tend to grow faster and
that forest products made from them are generally less expensive than those
from other regions. As a result, 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/Gateway Western serve eleven paper mills directly
and six others indirectly through short-line connections. Customers
include International Paper Company, Georgia Pacific Corporation and
Riverwood International. Primary traffic includes pulp and paper, lumber,
panel products (plywood and oriented strand board), engineered wood
products, pulpwood, woodchips, raw fiber used in the production of paper,
pulp and paperboard, as well as metal, scrap and slab steel, waste and
military equipment. Slab steel products are used primarily in the
manufacture of drill pipe for the oil industry, and military equipment is
shipped to and from several military bases on the Company's rail lines

Agricultural and Mineral

Agricultural and mineral products accounted for approximately 16.7% of
KCSR/Gateway Western combined total revenues in 2000. 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 the domestic grain business,
the Company's rail lines receive and originate shipments of grain and grain
products for delivery to feed mills serving the poultry industry. Through
the marketing agreement with I&M Rail Link, the Company's rail lines have
access to sources of corn and other grain 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 to the Gulf of Mexico for international destinations and to
Mexico via Laredo. Over the long term, grain shipments are expected to
increase as a result of the Company's strategic investments in Tex Mex and
TFM, given Mexico's reliance on grain imports. Food and related products
consist mainly of soybean meal, grain meal, oils and canned goods, sugar
and beer. Mineral shipments consist of a variety of products including
ores, clay, stone and cement.

Intermodal and Automotive

Intermodal products accounted for approximately 11.2% of KCSR/Gateway
Western combined total revenues in 2000. 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. The Company's intermodal
business has grown significantly over the last seven years with intermodal
units increasing from 61,748 in 1993 to 247,604 in 2000 and intermodal
revenues increasing from $17 million to nearly $50 million during the same
period. Through our dedicated intermodal train service between Meridian
and Dallas, the Company competes directly with truck carriers along the
Interstate 20 corridor.

Page 8

As KCSR/Gateway Western's intermodal revenues increased, margins on certain
intermodal business declined. In 1999 management addressed the declining
margins by increasing certain intermodal rates effective September 1, 1999
and by closing two underperforming intermodal facilities at Salisaw,
Oklahoma and Port Arthur, Texas on the north/south route. These actions
have helped to improve the profitability and operating efficiency of the
Company's intermodal business.

The strategic alliance with CN/IC and marketing agreements with Norfolk
Southern provide the Company the potential to promotefurther 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. Furthermore, the Company is in the process of
transforming the former Richards-Gebaur Airbase in Kansas City to a U.S.
customs pre-clearance processing facility, the Kansas City International
Freight Gateway ("IFG"), which is expected to handle and process large
volumes of domestic and international intermodal freight. Upon completion,
management expects this facility to provide additional opportunities for
intermodal revenue growth. Through an agreement with Mazda through the
Ford Motor Company Claycomo manufacturing facility located in Kansas City,
KCSR has developed an automotive distribution facility at the
Richards-Gebaur facility. This facility became operational in April 2000
for the movement of Mazda vehicles. Full intermodal and automotive
operations at the facility are expected to be in service in 2002, providing
KCSR with additional capacity in Kansas City.

The Company's automotive traffic consists primarily of vehicle parts moving
into Mexico from the northern sections of the United States and finished
vehicles moving from Mexico into the United States. CN/IC, Norfolk
Southern and TFM have a significant number of automotive production
facilities on their rail lines. The Company's rail network essentially
serves as the connecting bridge carrier for these movements of automotive
parts and finished vehicles. The Company has also recently transacted
with Ford to ship automotive parts from East St. Louis to Kansas City.

Coal

Coal historically has been one of the most stable sources of revenues and
is the largest single commodity handled by KCSR. In 2000, coal revenues
represented 18.6% of KCSR/Gateway Western combined total revenues.
Substantially all coal customers are under long term contracts, which
typically have an average contract term of approximately five years.
KCSR's most significant customer is SWEPCO, which is under contract until
2006. The Company delivers coal to nine electric generating plants,
including SWEPCO facilities in Flint Creek, Arkansas and Welsh, Texas,
Kansas City Power and Light plants in Kansas City and Amsterdam, Missouri,
an Empire District Electric Company plant near Pittsburg, Kansas and an
Entergy Gulf States plant in Mossville, Louisiana. SWEPCO and Entergy Gulf
States together comprised approximately 73% of KCSR/Gateway Western's total
coal revenues in 2000. The coal KCSR transports originates in the Powder
River Basin in Wyoming and is transferred to KCSR's rail lines at Kansas
City. KCSR also transports coal as an intermediate carrier for a Western
Farmers Electric Cooperative plant from

Page 9

Kansas City to Dequeen, Arkansas, where it interchanges with a short-line
carrier for delivery to the plant, and delivers lignite to an electric
generating plant at Monticello, Texas. In the fourth quarter of 1999, KCSR began
serving as a bridge carrier for coal deliveries to a Texas Utilities electric
generating plant in Martin Lake, Texas.

Other

Other rail-related revenues include a variety of miscellaneous services
provided to customers and interconnecting carriers and accounted for
approximately 7.4% of total combined KCSR/Gateway Western revenues in
2000. Major items in this category include railcar switching services,
demurrage (car retention penalties) and drayage (local truck transportation
services). Also included in this category are haulage services performed
for the benefit of BNSF under an agreement, which continues through 2004
and includes minimum volume commitments.

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. Since 1994, there has been significant consolidation among
major North American rail carriers, including the 1995 merger of Burlington
Northern, Inc. and Santa Fe Pacific Corporation ("BN/SF", collectively
"BNSF"), the 1995 merger of the UP and the Chicago and North Western
Transportation Company ("UP/CNW") and the 1996 merger of UP with Southern
Pacific Corporation ("SP"). Further Norfolk Southern and CSX purchased the
assets of Conrail in 1998 and the CN acquired the IC in June 1999. As a
result of this consolidation, the railroad industry is now dominated by a
few "mega-carriers." KCSI management believes that revenues were
negatively affected by the UP/CNW, UP/SP and BN/SF mergers, which led to
diversions of rail traffic away from KCSR's rail lines. The Company also
believes that KCSR revenues have been negatively impacted by the congestion
resulting from the purchase of Conrail's assets by Norfolk Southern and CSX
in 1998. Management regards the larger western railroads, in particular,
as significant competitors to the Company's operations and prospects
because of their substantial resources. Management believes, however, that
because of the Company's investments and strategic alliances, it is
positioned to attract additional rail traffic through our NAFTA Railway.

In late 1999, a merger was announced between BNSF and CN. Subsequent to
this announcement, the STB imposed a 15-month moratorium on Class 1
railroad merger activities, while it reviews and rewrites the rules
applicable to railroad consolidation. In July 2000, the STB's moratorium
was upheld by the United States Court of Appeals for the District of
Columbia. The moratorium, and more directly the new rules, will likely
have a substantial effect on future railroad merger activity. Subsequent
to the court's decision, BNSF and CN announced the termination of their
proposed merger.

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. In the United States, the
truck industry generally is more cost and transit-time competitive than
railroads for distances of less than 300 miles. Intermodal traffic and
certain other traffic face highly price sensitive competition, particularly
from motor carriers. However, rail carriers, including KCSR, have placed
an emphasis on competing in the intermodal marketplace and working together
with motor carriers and other railroads to provide end-to-end
transportation of products, especially where the length of haul exceeds 500
miles. The Company is also subject to competition from 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 and its rail connections in the
transportation of bulk commodities such as grains, steel and petroleum
products.

Page 10

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.

Employees and Labor Relations

Approximately 84% of KCSR/Gateway Western employees 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. Formal
negotiations to enter into new agreements are in progress and the 1996
labor contracts will remain in effect until new agreements are reached.
The wage increase elements of these new agreements may have retroactive
application. The provisions of the various labor agreements generally
include periodic general wage increases, lump-sum payments to workers and
greater work rule flexibility, among other provisions. The Company is
currently exploring alternative compensation arrangements in lieu of cash
increases. Management does not expect that the negotiations or the
resulting labor agreements will have a material impact on our 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.

Most Gateway Western employees are covered by collective bargaining
agreements that extended through December 1999. Negotiations on those
agreements began in late 1999, and those agreements will remain in effect
until new agreements are reached. 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 typically 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 Employers' Liability Act (FELA), when compared to worker's
compensation laws, illustrate the competitive disadvantage placed upon the
rail industry by federal labor regulations.

Joint Venture Arrangements

Mexrail

The share purchase agreement dated as of October 5, 1995 between KCSI and
TMM which governs the investment in Mexrail provides, among other things,
that the Company has gained accessa right of first refusal if (1) TMM decides to customerssell
all or a portion of its Mexrail common stock, (2) TMM votes its Mexrail
common stock in Detroit, Michigan and Canada as well
as more direct accessfavor of a merger or consolidation involving Mexrail or Tex
Mex or any plan 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 withsell 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
sizesubstantially all of the assets managed,of Mexrail
or Tex Mex or (3) Mexrail decides to sell all

Page 11

or a portion of its Tex Mex common stock. The share purchase agreement also
gives the Company the right to appoint two of Mexrail's five directors and four
of Tex Mex's nine directors.

Grupo TFM

In December 1995, the Company entered into a joint venture agreement with
fee rates above specified asset levels being
reduced. Fees from Private Accounts are generally computed on the basisTMM. The purposes of the market valuejoint venture were, among others, to provide for
the formation of Grupo TFM, to provide for participation in the upcoming
privatization of the assets managedMexican national railway system through Grupo TFM, and
to promote the movement of rail traffic over Tex Mex, TFM and KCSR. The
term of the joint venture agreement was automatically renewed for a term of
three years on December 1, 2000 and will automatically renew for additional
terms of three years each unless either TMM or the Company gives notice of
termination at least 90 days prior to the end of the preceding monththen-current term. The
joint venture agreement may also terminate under certain circumstances
prior to the end of a term, including upon a change of control or
bankruptcy of either TMM or the Company or a material default by TMM or the
Company. Upon termination of the agreement, any joint venture assets that
are not held in KCSI's or TMM's name will be distributed proportionally to
TMM and paid in
arrears onKCSI. The joint venture does not have any material assets and
management believes that 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 focustermination of the joint venture agreement would
not have a material adverse effect on the earnings growth of individual
companies relative to their peersCompany or its interests in
Mexrail or Grupo TFM.

The Grupo TFM by-laws and the economy. For this reason, Janus'
proprietary analysis is geared to understanding the earnings potentialshareholders agreement dated May 1997,
between KCSI, Caymex Transportation, Inc., Grupo Servia, S.A. de C.V.
("Grupo Servia"), TMM and TMM Multimodal, S.A. de C.V., which governs our
investment in Grupo TFM (1) restrict each of the companiesparties to the
shareholders agreement from directly or indirectly transferring any
interest in Grupo TFM or TFM to a competitor of the parties, Grupo TFM or
TFM without the prior written consent of each of the parties, (2) prohibit
any transfer of shares of Grupo TFM to any person other than an affiliate
without the prior consent of Grupo TFM's board of directors and (3) provide
that KCSI, Grupo Servia and TMM may not transfer control of any subsidiary
holding all or any portion of shares of Grupo TFM to a third party other
than an affiliate or another party to the shareholders agreement without
the consent of the other parties to the shareholders agreement. The Grupo
TFM by-laws grant the shareholders of Grupo TFM a right of first refusal to
acquire shares to be transferred by any other shareholder in proportion to
the number of shares held by each non-transferring shareholder, although
holders of preferred shares or shares with special or limited rights are
only entitled to acquire those shares and not ordinary shares. The
shareholders agreement requires that the boards of directors of Grupo TFM
and TFM be constituted to reflect the parties' relative ownership of the
ordinary voting common stock of Grupo TFM.

TFM holds the Concession to operate Mexico's Northeast Rail Lines for the
50 years beginning in June 1997 and, subject to certain conditions, has an
option to extend the Concession for an additional 50 years. The Concession
is subject to certain mandatory trackage rights and is only exclusive for
30 years. Additionally, the Mexican government may revoke exclusivity
after 20 years if it determines that there is insufficient competition and
may terminate the Concession as a result of certain conditions or events,
including (1) TFM's failure to meet its operating and financial obligations
with regard to the Concession under applicable Mexican law, (2) a statutory
appropriation by the Mexican government for reasons of public interest and
(3) liquidation or bankruptcy of TFM. TFM's assets and its rights under
the Concession may also be seized temporarily by the Mexican government.

In 1997, Grupo TFM paid approximately $1.4 billion to the Mexican
government as the purchase price for 80% of TFM. Grupo TFM funded a
significant portion of the purchase with capital contributions from TMM and
KCSI. Additionally, a portion of the purchase was funded through: (1)
senior secured term credit facilities ($325 million); (2) senior notes and
senior discount debentures ($400 million); and (3) proceeds from the sale
of 24.6% of Grupo TFM to the Mexican government (approximately $199 million
based on the then effective U.S. dollar/Mexican peso

Page 12

exchange rate). Additionally, Grupo TFM entered into a $150 million
revolving credit facility for general working capital purposes. The Mexican
government's interest in Grupo TFM is in the form of limited voting right
shares. KCSI, TMM and an affiliate of TMM, Grupo Servia, have a call option for
the Mexican government's interest in Grupo TFM which it invests. Further, Janus portfoliosis exercisable, prior to
July 31, 2002, at the original amount (in U.S. dollars) paid by the Mexican
government plus interest based on one-year U.S. Treasury securities. In
addition, after the expiration of that call option, KCSI, TMM and Grupo Servia
have a right of first refusal to purchase the Mexican government's interest in
Grupo TFM if the Mexican government wishes to sell that interest to a third
party which is not a governmental entity. On or after October 31, 2003 the
Mexican government has the option to sell its 20% interest in TFM through a
public offering or to Grupo TFM at the initial share price paid by Grupo TFM
plus interest. In the event that Grupo TFM does not purchase the Mexican
government's 20% interest in TFM, the government may require TMM and KCSI, or
either TMM or KCSI, to purchase its interest. KCSI and TMM have cross
indemnities in the event the Mexican government requires only one of them to
purchase its interest. The cross indemnities allow the party required to
purchase the Mexican government's interest to require the other party to
purchase its pro rata portion of such interest. However, if KCSI were required
to purchase the Mexican government's interest in TFM and TMM could not meet its
obligations under the cross-indemnity, then KCSI would be obligated to pay the
total purchase price for the Mexican government's interest. TMM and KCSI are
constructed one
securitycurrently in negotiations with the Mexican government that may lead to a
purchase of the Mexican government's interest in TFM at a time rather thandiscount from the
current option price. During the third quarter of 2000, Grupo TFM accomplished a
refinancing of approximately $285 million of its senior secured credit facility
through the issuance of a U.S. Commercial Paper Program backed by a letter of
credit. This refinancing provides the ability for Grupo TFM to pay limited
dividends with the consent of KCSI and TMM; however, none have been paid.

Panama Canal Railway Company

The financing for the Panama Canal Railway Company is comprised of a $5
million investment from the IFC and senior loans through the IFC in responsean
aggregate amount of up to preset regional, country, economic
sector$45 million. The investment of $5 million from
the IFC is comprised of non-voting preferred shares which pay a 10%
cumulative dividend. The preferred shares may be redeemed at the IFC's
option any year after 2008 at the lower of (1) a net cumulative internal
rate of return of 30% or industry diversification guidelines.

Emphasizing(2) eight times earnings before interest, income
taxes, depreciation and amortization for the proprietary worktwo years preceding the
redemption that is proportionate to the IFC's percentage ownership in
Panama Canal Railway Company. Under the terms of Janus' own analysts, most researchthe concession, the
Company is, performed in-house. Research activities include, among others, reviewunder certain limited conditions, a guarantor for up to $15
million 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
expensescash deficiencies associated with the operationreconstruction project
and, if Panama Canal Railway Company terminates the concession contract
without the IFC's consent, a guarantor for up to 50% of each fundthe outstanding
senior loans. Management expects the total cost of the reconstruction
project to be $75 million and does not expect its equity commitment to
exceed $16.5 million (excluding the guarantees described above).

Southern Capital

In 1996, KCSR and GATX Capital Corporation ("GATX") formed a 50-50 joint
venture-Southern Capital-to perform certain leasing and financing
activities. Southern Capital's operations are the acquisition of
locomotives and rolling stock and the issuanceleasing thereof to KCSR and redemptionother
rail entities. Concurrent with the formation of its securities, except that advertising, promotionalthis joint venture, KCSR
entered into operating leases with Southern Capital for substantially all
the locomotives and sales
expensesrolling stock which KCSR contributed or sold to
Southern Capital at the time of formation of the Janus Funds are assumed by Janus. Expenses include, among
others, investment advisory fees, shareowner servicing, transfer agent,
custodian feesjoint venture. GATX
contributed cash in the joint venture transaction formation. In addition,
Southern Capital formerly managed a portfolio of non-rail loan assets
primarily in the amusement entertainment, construction and

expenses, legal and auditing fees, and expensesPage 13

trucking industries which it sold in April 1999 to Textron Financial
Corporation, thereby leaving only the rail equipment related assets leased to
KCSR.

The purpose for the formation 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 JanusSouthern Capital International Ltd. ("Janus International") and its subsidiary Janus
International (UK) Limited ("Janus UK").

o Pursuantis to transfer agency agreements, which are subject to renewal
annually, Janus Servicepartner a Class I
railroad in KCSR with an industry leader in the rail equipment financing in
GATX. Southern Capital 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
investorsCompany with 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.financing alternatives.

Employees. As of December 31, 1999,2000, 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
===========
9KCSR 2,557
Gateway Western 230
Other 75
-----
Total 2,862
-----

Item 2. Properties

The information set forth in response to Item 102 of Regulation S-K under
Item 1, Business, of this Form 10-K and Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, is incorporated
by reference in response to this Item 2.

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

Certain 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.property statistics follow:

2000 1999 1998
----- ----- -----
Route miles - main and branch line 2,701 2,756 2,756
Total track miles 3,880 3,935 3,931
Miles of welded rail in service 2,032 2,032 2,031
Main line welded rail (% of total) 64% 64% 64%
Cross ties replaced 318,687 275,384 255,591

Average Age (in years):
----------------------
Wood ties in service 15.5 16.0 15.8
Rail in main and branch line 27.5 26.5 25.5
Road locomotives 22.6 21.7 23.3
All locomotives 23.5 22.5 23.9

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

Page 14
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 five intermodal facilities and operates six intermodalhas contracted with third parties
to operate these 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. CertainThis facility became operational in April 2000 for
the movement of Mazda vehicles. Full intermodal and 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 provide2002, providing 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 owns 8.3% of Kansas City Terminal Railway Company, which 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's fleet of rolling stock consisted of the following at December 31:
1999 1998 1997
--------------------- ---------------------- ----------------------
Leased Owned Leased Owned Leased Owned

2000 1999 1998
Leased Owned Leased Owned Leased Owned
------ ------ ------ ------ ------ ------
Locomotives:
Road Units 323 108 323 112 258 108 238 113
Switch Units 52 - 52 - 52 -
Other - 8 - 8 8 -
9 -
-------- ------- ------- -------- -------- ------------- ------ ------ ------ ------ ------
Total 375 116 375 120 318 108
299 113
======== ======= ======= ======== ======== ============= ====== ====== ====== ====== ======
Rolling Stock:
Box Cars 5,942 2,019 6,289 2,011 6,634 2,023
7,168 2,027
Gondolas 704 78 713 66 748 56
819 61
Hopper Cars 2,197 1,171 2,384 1,357 2,660 1,185 2,680 1,198
Flat Cars (Intermodal
and Other) 1,584 613 1,553 675 1,617 676
1,249 554
Tank Cars 46 55 33 55 34 58
35 59
Auto Rack 201 - 201 - - -
-
Other Freight Cars - - - - 547 123
-------- ------- ------- -------- -------- ------------- ------ ------ ------ ------ ------
Total 10,674 3,936 11,173 4,164 11,693 3,998
12,498 4,022
======== ======= ======= ======== ======== ============= ====== ====== ====== ====== ======

As of December 31, 1999,2000, KCSR's fleet consisted of 495491 diesel locomotives,
of which 120116 were owned, 335 leased from affiliates and 40 leased from
non-affiliates. KCSR's fleet of rolling stock consisted of 15,33714,610 freight
cars, of which 4,1643,936 were owned, 3,1813,269 leased from affiliates and 7,9927,405
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$58.4 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.
2000.

Page 15

Systems and Technology

Management Control System Project

In April 1997 KCSR entered into an agreement with International Business
Machines Corporation ("IBM") to jointly develop a management control
system ("MCS") which includes the following elements:

o a new waybill system;

o a new transportation system;

o a work queue management infrastructure;

o a service scheduling system;

o enhanced revenue and car accounting systems; and

o EDI interfaces to the new systems.

The Company implemented MCS on Gateway Western in the first quarter of 2000
and plans to begin implementation on KCSR in April 2001. MCS is designed
to track individual shipments as they move across the rail system and
compare that movement to the service sold to the customer. If a shipment
falls behind schedule, MCS will automatically generate alerts and action
recommendations.

Management expects MCS to provide more accurate and timely information on
terminal dwell time, car velocity through terminals and priority of
switching to meet schedules. MCS is designed to provide better analytical
tools for management to make decisions based on more timely and accurate
information. A data warehouse will provide the foundation of an improved
decision support infrastructure. By making decisions based upon that
information, management intends to improve service quality and utilization
of locomotives, rolling stock, crews, yards, and line of road and thereby
reduce cycle times and costs. With the implementation of service
scheduling, MCS is expected to provide improved customer service through
improved advanced planning, real-time decision support and improved
measurements. By designing all new business processes around workflow
technology, management intends to more effectively follow key operating
statistics to measure productivity and improve performance across the
entire operation.

MCS is also expected to improve clerical and information technology group
efficiencies. Management believes that information technology and other
support groups will be able to reduce maintenance costs, increase their
flexibility to respond to new requests and improve productivity. By using a
layered design approach, MCS is expected to have the ability to extend to
new technologies as they become available. MCS can be modified to connect
customers with applications via the Internet and will be constructed to
support multiple railroads, permit modifications to accommodate the local
language requirements of the area and operate across multiple time zones.

Train Dispatching System

KCSR is currently operating on two types of train dispatching systems,
Direct Train Control ("DTC") and Centralized Traffic Control ("CTC").
DTC uses direct radio communication between dispatchers and engineers to
coordinate train movement. DTC is used on approximately 68% of KCSR's
track, including the track from Shreveport to Meridian and Shreveport to
New Orleans. CTC controls switches and signals in the field from the
dispatcher's desk top via microwave link. CTC is used on approximately 32%
of KCSR's track, including the track from Kansas City to Beaumont and
Shreveport to Dallas. CTC is normally utilized on heavy traffic areas with
single

Page 16

main line or heavy traffic areas with multiple routes. Each dispatcher currently
has an assigned territory displayed on high-resolution monitors driven by a
mini-mainframe in Shreveport with a remote station in Beaumont. KCSR implemented
a new dispatching computer system in May 1999, which has enhanced the overall
efficiency of train movements on the railroad system.

Gateway Western

Gateway Western operates a 402an approximate 400 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 approximate Gateway Western property statistics follow:
1999 1998 1997
-------- -------- -------

2000 1999 1998
---- ---- ----
Route miles - main and branch line 402 402 402
Total track miles 564 564 564
Miles of welded rail in service 125 121 121 109
Main line welded rail (% of total)total main line) 42% 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.Laredo.
Phase I of the project was completed in December 1998 and includesincluded four
tracks comprising approximately 6.5 miles. Phase II of the project consistsconsisted of two new
intermodal tracks totaling approximately 2.8 miles. GroundworkAlthough groundwork
for an additional ten tracks has been completed; however,completed, construction on those ten
tracks has not yet begun. Current capacityCapacity of the Laredo yard is currently
approximately 800 freight cars. Uponcars and, upon completion of all tracks, is
expected capacity willto be approximately 2,000 freight cars. Additionally, on March
12, 2001 Mexrail purchased approximately 84.5 miles of track between
Rosenberg and Victoria, Texas. See "Item 1 - Business - Significant
Investments- Mexrail" for additional information.

Certain Tex Mex property statistics follow:
1999 1998 1997
-------- -------- -------

2000 1999 1998
---- ---- ----
Route miles - main and branch line 157 157 157
Total track miles 533 533 530 521
Miles of welded rail in service 5 5 5
Main line welded rail in service 5 5 5
Main line welded rail (% of total) 3% 3% 3% Locomotives (average years) 25 25 253%

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. 416As of December 31, 2000, TFM owned 459 locomotives, are owned by TFM and approximately 6,522 freight cars are either
owned by TFM or
leased from affiliates. 98affiliates 5,089 freight cars and leased from non-affiliates
141 locomotives and 4,9605,254 freight cars
are leased from non-affiliates.cars. 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,

Page 17
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/Panarail Tourism Company

PCRC, a 50% owned joint venture in which the Company owns 50% of the common stock,
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 completedcomplete in mid-2001.2001. PCRC
leases five locomotives and owns one locomotive and various other
infrastructure improvements and equipment. Panarail currently owns 5
passenger cars.

Other Transportation

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 80% owner of Wyandotte Garage Corporation, which owns a
parking facility in downtown Kansas City, Missouri. The facility is located
adjacentuncongested port with direct
access to the Company and KCSR executive offices, and consistsGulf of 1,147
parking spaces utilized by the employeesMexico. Approximately 75% of the Company and its affiliates, as
well as the general public.this property is
available for development.

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.

Pabtex GP LLP (formerly Global Terminaling Services, Inc. (formerly Pabtex, Inc.) owns a 70 acre coal
and petroleum coke70-acre
bulk commodity 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 access80% owner of Wyandotte Garage
Corporation, which owns a parking facility in downtown Kansas City,
Missouri. The facility is located adjacent to the GulfCompany and KCSR
executive offices, and consists of Mexico. Approximately 75%1,147 parking spaces utilized by the
employees of this propertythe Company and its affiliates, as well as the general
public. The Company is availablein negotiations for development.

FINANCIAL SERVICES (STILWELL)

Janus
Janus leases from non-affiliates 455,400 square feetthe lease of new 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 indowntown Kansas City, Missouri from a non-affiliate for its corporate functions.principal executive offices.

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 1211 - 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 monththree-month period ended December 31, 1999.2000.

Page 18

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, 1999.2000. 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).Directors. Certain of the
executive officers have employment agreements with the Company.
14

Name Age Position(s)
- ----------------------------------------------------------------------
L.H. Rowland 62 Chairman, President and
Chief Executive Officer of the Company
M.R. Haverty 55 Executive Vice President, Director
T.H. Bailey 62 Chairman, President and
Chief Executive Officer of
Janus Capital Corporation
P.S. Brown 63 Vice President, Associate General
Counsel and Assistant Secretary
R.P. Bruening 61 Vice President, General Counsel and
Corporate Secretary
D.R. Carpenter 53 Vice President - Finance
W.K. Erdman 41 Vice President - Corporate Affairs
A.P. McCarthy 53 Vice President and Treasurer
J.D. Monello 55 Vice President and Chief Financial Officer
L.G. Van Horn 41
Name Age Position(s)
Michael R. Haverty 56 Chairman, President and Chief Executive
Officer
Gerald K. Davies 56 Executive Vice President and Chief Operating
Officer
Robert H. Berry 56 Senior Vice President and Chief Financial
Officer
Richard P. Bruening 62 Senior Vice President, General Counsel and
Corporate Secretary
Warren K. Erdman 42 Vice President - Corporate Affairs
Thomas G. King 44 Vice President and Treasurer
L.G. Van Horn 42 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. BaileyGerald K. Davies has continuously served as Chairman,Executive Vice President and Chief ExecutiveOperating
Officer of Janus Capital CorporationKCSI since 1978.July 18, 2000. Mr. BrownDavies joined KCSR in January
1999 as the Executive Vice President and Chief Operating Officer. Mr.
Davies has served as a director of KCSR since November 1999. Prior to
joining KCSR, Mr. Davies served as the Executive Vice President of
Marketing with Canadian National Railway from 1993 through 1998. Mr.
Davies held senior management positions with Burlington Northern Railway
from 1976 to 1984 and 1991 to 1993, respectively, and with CSX
Transportation from 1984 to 1991.

Robert H. Berry has served as Senior Vice President and Chief Financial
Officer of KCSI since July 18, 2000. Mr. Berry has served as Senior Vice
President and Chief Financial Officer of KCSR since June 1997 and as a
director of KCSR since November 1999. Mr. Berry is also a director of
Grupo TFM. Prior to joining KCSR, Mr. Berry was employed by Northern
Telecom for 21 years in various senior financial positions, including Vice
President--Finance of NorTel Communications Systems, Inc. from 1995 to 1997
and Vice President--Finance for Bell Atlantic Meridian Systems from 1993 to
1995. Mr. Berry is a Certified Public Accountant.

Richard P. Bruening has served as Vice President Associateand General Counsel and Assistant
Secretary from May 1993 to December 31, 1999.

Mr. Bruening has continuously served as Vice President, General Counselof
KCSI since 1981 and Corporate Secretary of KCSI since July 1995. Mr.
Bruening's title of Vice President was changed to Senior Vice President on
July 18, 2000. From May 1982 to July 1995,February 1992, he served as Vice President
and General Counsel.Counsel of KCSR and has served as Senior Vice President and
General Counsel since February 1992. Mr. CarpenterBruening has continuouslyalso served as
Corporate Secretary of KCSR since July 1995 and as a director of KCSR since
September 1987. Mr. Bruening has announced that he will retire from the
Company and the aforementioned positions effective April 1, 2001.

Warren K. Erdman has served as Vice President - FinancePresident--Corporate Affairs of KCSI
since November
1996. He was Vice President - FinanceApril 15, 1997 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 - CorporatePresident--Corporate Affairs of KCSR since
AprilMay 1997. From January 1997Prior to April 1997 he served as Director - Corporate
Affairs. From 1987 to January 1997 hejoining KCSI, Mr. Erdman served as Chief of Staff forto
United States Senator Kit Bond of Missouri from Missouri, Christopher ("Kit") Bond.

Mr. McCarthy1987 to 1997.

Thomas G. King has continuously served as Vice President and Treasurer of KCSI since
July 18, 2000 and as Vice President and Treasurer of KCSR since November
1999. Mr. King has also served as Vice President and Treasurer of KCS
Transportation Company since May 1996. He was1997. Mr. King has served as Vice
President and Treasurer of Gateway Western since November 1999. Mr. King
served as

Page 19

Treasurer of Gateway Western from December 1989May 1997 to May 1996.

Mr. Monello has continuously servedOctober 1999, and as Vice
President and Chief Financial Officer since March 1994.from December 1989 to May 1997.
Mr. King is a Certified Public Accountant.

Louis G. Van Horn has continuously served as Vice President and Comptroller of KCSI
since May 1996. HeMr. Van Horn has also served as Vice President and
Comptroller of KCSR since 1995. Mr. Van Horn was Comptroller of KCSI from
September 1992 to May 1996. From January 1992 to September 1992, Mr. Van
Horn served as Assistant Comptroller of KCSI. Mr. Van Horn is a Certified
Public Accountant.

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 1513 - Quarterly
Financial Data (Unaudited) of this Form 10-K is incorporated by reference
in partial response to this Item 5.

Pursuant to a newthe 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 contemplationOn July 12, 2000, KCSI completed its spin-off of Stilwell through a special
dividend of Stilwell common stock distributed to KCSI common stockholders
of record on June 28, 2000 ("Spin-off"). The Spin-off occurred after the
close of business of the separationNew York Stock Exchange on July 12, 2000, and each
KCSI stockholder received two shares of the Company's Transportation and Financial
Services segments ("Separation"),common stock of Stilwell for
every one share of KCSI common stock owned on the record date. The total
number of Stilwell shares distributed was 222,999,786.

On July 12, 2000, KCSI completed a reverse stock split whereby every two
shares of KCSI common stock were converted into one share of KCSI common
stock. 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 untilin 1998 in contemplation of the Separation is completed.Spin-off.

As of March 31, 2000,February 28, 2001, there were 6,0125,469 holders of the Company's common
stock based upon an accumulation of the registered stockholder listing.

Page 20
Item 6. Selected Financial Data
(in(dollars 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. All years reflect the
1-for-2 common stock split to shareholders of record on June 28, 2000 paid
July 12, 2000.

1999 (i) 1998 (ii) 1997 (iii) 1996 (iv) 1995 (v)
---------- ----------- ---------- ----------- ----------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Revenues $ 1,813.7572.2 $ 1,284.3601.4 $ 1,058.3613.5 $ 847.3 $ 775.2573.2(i) $517.7(i)

Income (loss) from
continuing operations $ 323.325.4(ii) $ 190.210.2(v) $ (14.1)38.0 $ 150.9(132.1)(iv) $ 236.716.3

Income (loss) from continuing
operations per common share:
Basic $ 2.930.44 $ 1.740.18 $ (0.13)0.69 $ 1.33(2.46) $ 1.860.28
Diluted 2.79 1.66 (0.13) 1.31 1.800.43 0.17 0.67 (2.46) 0.28

Total assetsassets(vi) $1,944.5 $2,672.0 $2,337.0 $2,109.9 $1,770.7

Total debt $ 3,088.9674.6 $ 2,619.7760.9 $ 2,434.2836.3 $ 2,084.1916.6 $ 2,039.6

Long-term obligations $ 750.0 $ 825.6 $ 805.9 $ 637.5 $ 633.8645.1

Cash dividends per
common share $ .16- $ .160.32 $ .150.32 $ .130.30 $ .100.26

Ratio of earnings to
fixed charges 7.07 4.44 (vi) 1.60 (vii) 3.30 6.14 (viii)(iii) 1.0x 1.2x(v) 1.9x -(iv) 1.4x

(i) Includes unusualGateway Western as a wholly-owned unconsolidated affiliate
as of December 5, 1996 and as a wholly-owned consolidated subsidiary
effective January 1, 1997.

(ii) Income from continuing operations for the year ended December 31,
2000 excludes extraordinary items for debt retirement costs of $8.7
million (net of income taxes of $4.0 million). This amount includes
$1.7 million (net of income taxes of $0.1 million) related to Grupo TFM.

(iii) The ratio of earnings to fixed charges is computed by dividing
earnings by fixed charges. For this purpose "earnings" represent the
sum of (i) pretax income from continuing operations adjusted for income
(loss) from unconsolidated affiliates, (ii) fixed charges, and (iii)
distributed income from unconsolidated affiliated less (i) capitalized
interest, and (ii) fixed charges. Fixed charges consist of interest
expensed or capitalized, amortization of deferred debt issuance costs
and expensesthe portion of $12.7 million ($7.9 million after-
tax, or $0.07 per basic and diluted share) recorded byrental expense which management believes is
representative of the Transportation
segment, reflecting, among others, amounts for facility and project
closures, employee separations, Separation related costs, labor and
personal injury related issues.

(ii)interest component of rental expense.

(iv) 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 $91.3of $178.0
million impairment of goodwill associated with KCSR's acquisition of MidSouth
Corporation in 1993; $38.5($141.9 million of long-lived assets held for disposal;
$9.2 million of impaired long-lived assets; approximately $27.1 million in
reserves relatedafter-tax). Due to termination of a union productivity fund and employee
separations; a $12.7 millionthese restructuring, asset
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 tocharges of $178.0 million, 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
of1997 ratio coverage
was less than 1:1. 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 which1:1 if a deficiency of $148.4 million would have been eliminated.
Excluding the $178.0 million, the ratio for 1997 would have been 1.4x.

(v) Includes unusual costs of $12.7 million ($7.9 million after-tax).
Excluding these unusual costs, 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 charges1999 would have been 3.60.

(viii) Financial information from which1.3x.

(vi) The total assets presented herein include the rationet assets of earnings to fixed charges
was computed for the year endedStillwell
as of December 31, 1995 reflects DST1996, 1997, 1998, and 1999 as follows: $234.8
million, $348.3 million, $540.2 million, and $814.6 million,
respectively. The total assets as of December 31, 2000 does not include
the net assets of Stillwell 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.
Ifresult of 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 recordSpin-off on August 25, 1997, paid September 16, 1997.July 12,
2000.

Page 21

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 discussiondiscussions set forth below, as well as other portions of this Form
10-K, containscontain 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 "Risk Factors" section
of the Company's Current
ReportRegistration Statement on Form 8-K/A dated June 3, 1997,S-4, as amended and
declared effective on March 15, 2001, which is on file with the U.S.
Securities and Exchange Commission (File No. 1-4717)No.333-54262) and which "Risk
Factors" section 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.
For purposes of this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," discussions for KCSR/Gateway Western
(as defined below) reflect the results of KCSR/Gateway Western combined
operating companies on a stand-alone basis and exclude other KCSR
subsidiaries or affiliates.

General

KCSI, a Delaware corporation organized in 1962, is a diversified holding company with
principal operations in rail transportation andtransportation. As discussed in "Recent
Developments", on July 12, 2000 KCSI completed its spin-off of Stilwell
Financial Inc. ("Stilwell"), the Company's formerly wholly-owned financial
services. The
Companyservices subsidiary.

KCSI supplies its various subsidiaries with managerial, legal, tax,
financial and accounting services, in addition to managing other
"non-operating" and more passive investments. On March 26, 1999, Standard and Poors (S&P) Financial Information Services
announced that it would add KCSI to its S&P 500 index. KCSI was added to the S&P
500 Railroads Industry group after the close of trading on April 1, 1999.
Management believes that the Company's addition to this index of leading U.S.
companies will have a positive long-term impact on KCSI stock and help build the
Company's shareholder base.

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

Transportation. Kansas City Southern Lines,
Inc. ("KCSL"), a wholly-owned
subsidiarywhich was the direct parent 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"), was merged into KCSI effective December 31,
2000. KCSI's principal subsidiaries and affiliates include, among others:

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

Page 22
18
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo
TFM"), aan approximate 37% owned unconsolidated affiliate, which owns 80%
of the common stock of TFM, S.A. de C.V. ("TFM");
o Mexrail, Inc. ("Mexrail"), a 49% owned unconsolidated affiliate,
which wholly owns the Texas Mexican Railway Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
affiliate;unconsolidated affiliate that leases locomotive and rail equipment
primarily to KCSR;
o Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of
which KCSR indirectly owns 50% of the common stock; and
o Panarail Tourism Company ("Panarail"), a 50% owned unconsolidated
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.

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 and reflects the one-for-two reverse stock split discussed below,
unless specifically identified otherwise.

RECENT DEVELOPMENTS

Planned SeparationSpin-off of Stilwell Financial Inc. On June 14, 2000, KCSI's Board of
Directors approved the spin-off of Stilwell, the Company's then
wholly-owned financial services subsidiary. On July 12, 2000, KCSI
completed its spin-off of Stilwell through a special dividend of Stilwell
common stock distributed to KCSI common stockholders of record on June 28,
2000 ("Spin-off").

As of the Company Business Segments.date of the Spin-off, Stilwell was comprised of Janus Capital
Corporation, an approximate 81.5% owned subsidiary; Berger LLC, an
approximate 88% owned subsidiary; Nelson Money Managers Plc, an 80% owned
subsidiary; DST Systems, Inc., an equity investment in which Stilwell holds
an approximate 32% interest; and miscellaneous other financial services
subsidiaries and equity investments.

The Company announced its
intention to separateSpin-off occurred after the Transportationclose of business of the New York Stock
Exchange on July 12, 2000, and Financial Services segments through
a proposed dividendeach KCSI stockholder received two shares of
the common stock of Stilwell a holding company for its
Financial Services businesses (the "Separation").every one share of KCSI common stock owned
on the record date. The total number of Stilwell shares distributed was
222,999,786.

On July 12,9, 1999, the Company
announced thatKCSI received a tax ruling from the Internal Revenue
Service ("IRS") issuedwhich states that for United States federal income tax
purposes the Spin-off qualifies as a favorable tax
ruling permittingtax-free distribution under Section
355 of the Company to separate its Financial Services segment from
its Transportation segment.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
debtindebtedness 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 approvedKCSI Reverse Stock Split. On July 12, 2000, KCSI completed a one-for-two reverse stock
split at a special
stockholders' meeting held on July 15, 1998. The Company will not effect thewhereby every two shares of KCSI common stock were converted into one
share of KCSI common stock. KCSI common stockholders approved this reverse
stock split until the Separation is completed.

On March 26, 1999, a numberin 1998.

Purchase of Janus minority stockholders and employeescommon stock by Stilwell

On January 26, 2001, Stilwell Financial Inc. announced that it expected to
acquire 600,000 shares of Janus including membersCapital Corporation ("Janus") common stock
from Thomas H. Bailey, the Chairman, President and Chief Executive Officer
of Janus'Janus, through the exercise of put rights by Mr. Bailey. According to
Stilwell management, the purchase price for these shares is expected to
approximate $603 million and the purchase is expected to occur during the
second quarter of 2001. KCSI management believes, based on discussions
with Stilwell management, that Stilwell has adequate financial resources
available to fund this obligation. If Stilwell were unable to meet its
chief executive officer, its
chief investment officer, portfolio managers and assistant portfolio managers
who ownobligation to

Page 23

purchase the shares of Janus common stock from Mr. Bailey, the Company would be
required to purchase such shares. If the Company were required to purchase
those shares of Janus common stock, it would have a material numbereffect on our
business, financial condition, results of Janus shares, fiveoperations and cash flows.

KCSI Elects New Chairman. On December 12, 2000, KCSI announced that
Michael R. Haverty was elected Chairman 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")of KCSI
effective January 1, 2001. Mr. Haverty succeeded Landon H. Rowland, who
has resigned as Chairman, but remains 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
proposalof Directors. Mr.
Haverty retains his current titles of Chief Executive Officer and
President.

KCSI Adds New Director. On August 17, 2000, Byron G. Thompson was named as
a director of KCSI. Mr. Thompson has served as Chairman of the Janus Minority Group, indicatingBoard of
Country Club Bank, n.a., Kansas City since February 1985. Prior to that
basedtime, Mr. Thompson served as Vice Chairman of Investment Banking at United
Missouri Bank of Kansas City and as a member of the Board of United
Missouri Bancshares, Inc.

Duncan Case Update. In 1998, a jury in Beauregard Parish, Louisiana
returned a verdict against KCSR in the amount of $16.3 million. This case
arose from a railroad crossing accident that occurred at Oretta, Louisiana
on their
discussions with membersSeptember 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 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 respectverdict to the disagreements between Stilwellremaining defendants. The resulting total judgment
against KCSR, together with interest, was approximately $27.0 million as of
December 31, 1999.

On November 3, 1999, the Third Circuit Court of Appeals in Louisiana
affirmed the judgment. Subsequently KCSR sought 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 managementobtained review of the
Janus
Funds.

After consideringcase in the information presented bySupreme Court of Louisiana. On October 30, 2000 the Janus Minority GroupSupreme
Court of Louisiana entered its order affirming in part and information provided by Stilwell management regardingreversing in
part the advantages and
disadvantagesjudgment. The net effect of the two methodsLouisiana Supreme Court action
was to reduce the allocation of achievingnegligence to KCSR and reduce the Separation, KCSI's Board
decided that the Separation should go forward on the basis originally
contemplated. In arriving atjudgment,
with interest, against KCSR from approximately $28 million to approximately
$14.2 million (approximately $9.7 million of damages and $4.5 million of
interest), which is in excess of KCSR's insurance coverage of $10 million
for 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,case. KCSR filed an application for rehearing in the Board's view,Supreme
Court of Louisiana, which was denied on January 5, 2001. KCSR then sought
a stay of judgment in the Louisiana court. The Louisiana court denied the
stay application on January 12, 2001. KCSR reached an agreement as to the
advantagespayment structure of the alternative
proposal as comparedjudgment in this case and payment of the
settlement was made on March 7, 2001.

KCSR had previously recorded a liability of approximately $3.0 million for
this case. Based on the Supreme Court of Louisiana's decision, management
recorded an additional liability of $11.2 million and a receivable in the
amount of $7.0 million representing the amount of the insurance coverage.
This resulted in recording $4.2 million of net operating expense in the
accompanying consolidated financial statements for the year ended December
31, 2000.

Debt Refinancing and Re-capitalization of the Company's Debt Structure.

o During the third quarter of 2000, the Company completed a $200
million private offering of debt securities through its wholly owned
subsidiary, KCSR. The offering, completed pursuant to Rule 144A under
the Securities Act of 1933 in the United States and Regulation S outside

Page 24

the United States, consisted of 8-year Senior Unsecured Notes. The
Notes bear a fixed annual interest rate of 9.5% and are due on October
1, 2008. These Notes contain certain covenants typical of this type of
debt instrument. Net proceeds from the offering of $196.5 million were
used to refinance existing bank term debt, which was scheduled to mature
on January 11, 2001 (see below). Costs related to the Separation; iii) thereissuance of these
notes of approximately $4.1 million were deferred and are being
amortized over the eight-year term of the Notes.

In connection with this refinancing, the Company reported an
extraordinary loss on the extinguishment of the bank term debt due
January 11, 2001. The extraordinary loss was $1.1 million (net of
income taxes of $0.7 million).

On January 25, 2001, the Company filed 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 aForm S-4 Registration Statement on Form 10
with the Securities and Exchange Commission ("SEC"). On August 19, 1999, registering exchange
notes under the Company reported that
Stilwell filed a Form 10 with the SEC in connection with KCSI's proposed
Separation.Securities Act of 1933. 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 #1No.
1 to this Registration Statement and the Stilwell Form 10SEC declared this Registration
Statement effective 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-capitalizationMarch 15, 2001, thereby providing the opportunity
for holders of the Company's Debt Structure.initial Notes to exchange them for registered notes.
The registration exchange offer expires on April 16, 2001, unless
extended by the Company.

o Also during the third quarter of 2000, Grupo TFM accomplished a
refinancing of approximately $285 million of its Senior Secured Credit
Facility through the issuance of a U.S. Commercial Paper ("USCP")
program backed by a letter of credit. The USCP is a 2-year program for
up to a face value of $310 million. The average discount rate for the
first issuance was 6.54%. This refinancing provides the ability for
Grupo TFM to pay limited dividends.

As a result of this refinancing, Grupo TFM recorded approximately $9.2
million in pretax extraordinary debt retirement costs. KCSI reported
$1.7 million (net of income taxes of $0.1 million) as its proportionate
share of these costs as an extraordinary item.

o In preparation for the Separation,Spin-off, 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 existingthen-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, provideprovided for total commitments of $950
million.

In first quarter 2000, theThe Company will reportreported an extraordinary loss on the extinguishment of the
Company's notes and debentures of approximately $5.9 million net(net of
income taxes.taxes of approximately $3.2 million).

KCS Credit Facility. The KCS Credit Facility providesprovided 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 term loans are comprised of the

Page 25

following: $200 million, which was due January 11, 2001 prior to its
refinancing (see discussion above), $150 million due December 30, 2005
and $250 million due December 30, 2006. The availability under the KCS
Revolver will
initially bewas reduced from $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").2001. Letters of credit are also available under the KCS Revolver up to
a limit of $90$15 million. Borrowings under the KCS Credit Facility are
secured by substantially all of KCSI's assets and are guaranteed by the
Transportation segment's assets.majority of its subsidiaries.

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).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. EachFollowing
completion of the refinancing of the January 11, 2001 term loan
discussed above, each remaining loan under the KCS Credit Facility shall
accrue interest at the selected rate plus thean applicable margin. The
applicable margin which will beis determined by the type of loan. Untilloan and the Company's
leverage ratio (defined as the ratio of the Company's total debt to
consolidated earnings before interest, taxes, depreciation and
amortization excluding the equity earnings of unconsolidated affiliates
for the prior four fiscal quarters). Based on the Company's current
leverage ratio, 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 2.50% per annum for LIBOR
priced loans and 1.50% per annum for prime rate priced loans. The term
loan maturing in 2006 currently has 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 also 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 term loans are subject to a mandatory prepayment with, among other
things:

o 100% of the net proceeds of (1) certain asset sales or other
dispositions of property, (2) the sale or issuance of certain
indebtedness or equity securities and (3) certain insurance
recoveries.
o 50% of excess cash flow (as defined in the KCS Credit Facilities)

The KCS Credit Facility contains certain covenants that, among others,
as follows: i) restrictsrestrict the paymentCompany's ability to:

o incur additional indebtedness,
o incur additional liens,
o enter into sale and leaseback transactions,
o enter into certain transactions with affiliates,
o enter into agreements that restrict the ability to incur liens or pay
dividends,
o make investments, loans, advances, guarantees or acquisitions,
o make certain restricted payments and dividends,
o make other certain indebtedness, or
o make capital expenditures.

Page 26

In addition KCSI is required to comply with specific financial ratios,
including minimum interest expense coverage and leverage ratios. The
KCS Credit Facility also contains certain customary events 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.default.
These covenants, along with other provisions, could restrict maximum
utilization of the facility. Issue costs relating toThe Company was in compliance with these
various provisions, including the KCS Credit Facilityfinancial covenants, as of approximately $17.6 million were deferred and will be amortized over the
respective term of the loans.

21December
31, 2000.

In accordance with thea 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. CreditThe Company believes that the risk of credit
loss from counterparty non-performance is not anticipated.remote.

Issue costs relating to the KCS Credit Facility of approximately $17.6
million were deferred and are being amortized over the respective term
of the loans. In conjunction with the refinancing of the $200 million
term loan previously due January 11, 2001, approximately $1.8 million of
these deferred costs were immediately recognized. After consideration
of amortization and this $1.8 million write-off, the remaining balance
of these deferred costs was approximately $11.3 million at December 31,
2000.

As a result of the debt refinancing transactions discussed above,
extraordinary items totaled $8.7 million (net of income taxes of $4.0
million) for the year ended December 31, 2000.

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,Spin-off, KCSI will bewas 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 the first quarter of
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,Spin-off, it
decided to suspend the Commoncommon stock dividenddividends of KCSI under the existingthen-existing
structure of the Company. This22 action complies with the terms and
covenants of the New Credit Facilities. SubsequentIt is not anticipated that KCSI
will make any cash dividend payments to its common stockholders for the
Separation,foreseeable future.

Expiration of the separate BoardsCapital Call Related to TFM. In conjunction with the
financing of TFM in 1997, the Company entered into a Capital Contribution
Agreement with Grupo TFM, TMM and the financing institutions of TFM. This
agreement extended for a three year period through June 30, 2000 and
outlined the terms whereby the Company could be responsible for
approximately $74 million of a capital call if certain performance
benchmarks outlined in the agreement were not met by TFM. In accordance
with its terms, the agreement has terminated.

New Compensation Program. In connection with the Spin-off, KCSI adopted a
new compensation program (the "Compensation Program") under which (1)
certain senior management employees were granted performance based KCSI
stock options and (2) all management employees and those directors of KCSI
who are not employees (the "Outside Directors") became eligible to
purchase a

Page 27

specified number of KCSI restricted shares and Stilwellwere granted a specified number
of KCSI stock options for each restricted share purchased.

The performance stock options have an exercise price of $5.75 per share,
which was the mean trading price of KCSI common stock on the New York Stock
Exchange (the "NYSE") on July 13, 2000. The performance stock options
vest and become exercisable in equal installments as KCSI's stock price
achieves certain thresholds and after one year following the grant date.
All performance thresholds have been met for these performance stock
options and all will determinebe exercisable on July 13, 2001. These stock options
expire at the appropriate dividend policyend of 10 years, subject to certain early termination
events. Vesting will accelerate in the event of death, disability, or a
KCSI board-approved change in control of KCSI.

The purchase price of the restricted shares, and the exercise price of the
stock options granted in connection with the purchase of restricted shares,
is based on the mean trading price of KCSI common stock on the NYSE on the
date the employee or Outside Director purchased restricted shares under the
Compensation Program. Each eligible employee and Outside Director was
allowed to purchase the restricted shares offered under the Compensation
Program on one date out of a selection of dates offered. With respect to
management employees, the number of shares available for their respective companies.purchase and the
number of options granted in connection with shares purchased were based on
the compensation level of the employees. Each Outside Director was granted
the right to purchase up to 3,000 restricted shares of KCSI, with two KCSI
stock options granted in connection with each restricted share purchased.
Shares purchased are restricted from sale and the options are not
exercisable for a period of three years for senior management and the
Outside Directors and two years for other management employees. KCSI
provided senior management and the Outside Directors with the option of
using a sixty-day interest-bearing full recourse note to purchase these
restricted shares. These loans accrued interest at 6.49% per annum and
were all fully repaid by September 11, 2000.

Management employees purchased 475,597 shares of KCSI restricted stock
under the Compensation Program and 910,697 stock options were granted in
connection with the purchase of those restricted shares. Outside Directors
purchased a total of 9,000 shares of KCSI restricted stock under the
Compensation Program and 18,000 KCSI stock options were granted in
connection with the purchase of those shares.

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") Merger. In December 1999, BNSF and CN announced their intention to
combine the two railroad companies. In March 2000, however, this
combination was delayed when the Surface Transportation
Board ("STB")STB issued a 15-month moratorium on
railroad mergers until the STB can adopt new rules governing merger
activities. ThisIn July 2000 the STB's moratorium was upheld by the United
States Court of Appeals for the District of Columbia. Subsequent to the
court's decision, temporarily delays
the proposed combination of BNSF and CN. BNSF and CN have filed a motionannounced the termination of appeal in an attempt to force the STB to review the BNSF-CN merger application.their proposed
merger.

Norfolk Southern Haulage and Marketing Agreement. In May 2000, 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 reachedNorfolk Southern entered into an agreement under which KCSR provides
haulage services for intermodal traffic between Meridian and Dallas and
receives fees for such services from Norfolk Southern. Under this
agreement, Norfolk Southern may quote rates and enter into transportation
service contracts 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 costsshippers 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 ofreceivers covering 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.haulage traffic.

Page 28
23

RESULTS OF OPERATIONS
SIGNIFICANT DEVELOPMENTS

In addition to the recent developments mentioned above, consolidated
operating results from 19971998 to 19992000 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,During 1999, the Company repurchased 460,000230,000 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 2000 and 1998, there were no
repurchases under these programs.

KCSR Lease of 50 New Locomotives. During 1997,1999, KCSR reached an agreement
with General Electric ("GE") for the Company purchasedpurchase of 50 new GE 4400 AC
Locomotives. This agreement was subsequently assigned to Southern
Capital. The addition of these state-of-the-art locomotives has provided
operating cost reductions resulting from 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, 2000 operating lease expense
increased approximately 2.9$7.3 million shares at an aggregate costcompared to 1999. Delivery of approximately $50 million. A portion of the shares under the 1996 program were
repurchased through a forward stock purchase contract, whichthese
locomotives was completed during 1997. See discussion in "Financial InstrumentsDecember 1999.

Panama Canal Railway Company. In January 1998, the Republic of Panama
awarded KCSR and Purchase Commitments"
below.

Stock Splitits joint venture partner, Mi-Jack Products, Inc., the
concession to reconstruct and 20% Increase in Quarterly Common Stock Dividend. On July 29,
1997,operate the Board authorized a 3-for-1 split inPanama Canal Railway. The
47-mile railroad runs parallel to 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, NelsonPanama Canal 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 theupon completion of
the mergerreconstruction, 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 USCS withthe World Bank Group. The financing is
comprised of a wholly-owned DST subsidiary. The merger, accounted for as
a pooling of interests by DST, expands DST's presence$5 million investment from the IFC and senior loans in the
output solutionsaggregate 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. The preferred shares may 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 customer management software and

services industries.amortization (average of two consecutive years)
calculated in proportion to the IFC's percentage ownership in PCRC. Under
certain limited conditions, the termsCompany 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 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,IFC, the Company recordedis 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 accountsguarantor 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
businessup
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. All50% 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.senior loans. The Company determined that a portiontotal cost 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
goodwillreconstruction project 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 goodwillestimated to be amortized over a period$75 million with an equity
commitment from KCSR not to exceed $16.5 million (excluding the guarantees
described above). Reconstruction 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.PCRC's right-

Page 29
25

Berger Joint Venture. During 1996, Berger entered into a joint venture agreement
with Bank of Ireland Asset Management (U.S.) Limited ("BIAM"), a subsidiary of
Bank of Ireland, to develop and market a series of international and global
mutual funds, as well as manage various private accounts. The venture, named
BBOI Worldwide LLC ("BBOI"),
of-way 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 dissolutionexpected to be completed by June 30, 2000.

TRANSPORTATION

Negotiationscomplete in 2001 with commercial operations 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.begin immediately thereafter.

Access to Geismar, Louisiana Industrial Corridor. At a voting conference held on
March 25,In 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 beginsbegan on October 1, 2000 and managementtraffic immediately began to move
on KCSR's lines. Management believes itthat this access will provide
increasing revenue opportunities in the Company with additional revenue
opportunities. See further discussion below with respect to the Marketing
Alliance with CN/IC.future.

Automotive and Intermodal facility at the former Richards-Gebaur Airbase.
During 1999, KCSR entered into a fifty yearfifty-year lease with the City of Kansas
City, Missouri to establish the Kansas City International Freight Gateway
("IFG"), 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 in January 2000, and improvements have commenced.began immediately.
Through an agreement with Mazda, KCSR expects to relocate its
Kansas City intermodaldeveloped an automotive distribution
facility to Richards-Gebaur during 2001.

Managementhandle Mazda vehicles manufactured under an agreement with Ford
Motor Company at Ford's Claycomo facility, which is located in Kansas
City. This automotive facility became operational in April 2000 for the
movement of Mazda vehicles. Intermodal and expanded automotive operations
at the facility are expected to be complete in 2002.

The Company expects that the new facility will provide additional capacity
as well as a strategic opportunity to serve as an international trade
facility. Management plansThe plan is for this facility to serve as a U.S. customs
pre-clearance processing facility for freight moving along the NAFTA
corridor. This is
expectedKCSR expects this 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 a total of approximately $20 million for site
improvements and infrastructure at Richards-Gebaur. Management expects to fundthis facility. KCSR is funding these
improvements using operating cash flows and existing credit facilities.lines. Lease
payments are expected to range between $400,000 and $700,000approximate $665,000 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.

MarketingStrategic Alliance with Canadian National and Illinois Central. On April 16,In 1998,
KCSR, CN and IC announced a 15-year strategic alliance aimed at
coordinating the marketing, alliance that offers
shippers new competitive options in aoperations and investment elements of
north-south rail freight transportation network that
links key north-south continental freight markets.transportation. 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 U.S. and Canadian shippers with access to
Mexico's rail system through connections with Tex Mex and TFM.

In addition to providing access to key north-south international and
domestic U.S. traffic corridors, the railways' seekalliance with CN/IC is intended to
increase business primarily in existing
markets, primarilythe automotive and intermodal as well asmarkets and
also in other key carload
markets, including those forthe chemical and petroleum and paper and forest products. Transportation
management expects thisproducts

Page 30

markets. This alliance to providehas provided opportunities for revenue growth and
position the railwaypositioned KCSR as a key provider of rail service to thefor NAFTA corridor.trade.

Under a separate access agreement, KCSR and CN and KCSR planformed a management group
made up of representatives from both railroads to develop plans for the
construction of new facilities to support business development, including
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.Chicago. Under the terms of this access agreement,
KCSR would extendextended the market area of its rail system in the Gulf area and
in October 2000, gaingained access through a haulage agreement 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.world. 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 holdagreement between KCSR and CN does not preclude the option of
the Geismar build-in by KCSR 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"). TheIn 1997, the Company entered into a Voluntary Coordinationthree-year
marketing agreement with the Norfolk Southern and Tex Mex 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.

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. Since 1994, there has
been significant consolidation among major North American rail carriers,
including the 1995 merger of Burlington Northern, Inc. and Santa Fe Pacific
Corporation ("BN/SF", collectively "BNSF"), the 1995 merger of the UP and
the Chicago and North Western Transportation Company ("UP/CNW") and the
1996 merger of UP with SP. Further Norfolk Southern and CSX purchased the
assets of Conrail in 1998 and CN acquired IC in June 1999. As a result of
this consolidation, the railroad industry is now dominated by a few
"mega-carriers." KCSI management believes that revenues were negatively
affected by the UP/CNW, UP/SP and BN/SF mergers, which led to diversions of
rail traffic away from KCSR's rail lines. The Company also believes that
KCSR revenues have been negatively impacted by the congestion resulting
from the purchase of Conrail's assets by Norfolk Southern and CSX in 1998.
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 of these mergers is
uncertain. Management believes, however, that because of the Company's
investments and strategic alliances, it is positioned to attract additional
rail traffic through our NAFTA Railway.

Page 31

surface transportation for many commodities. In the United States, the
truck industry generally is more cost and transit-time competitive than
railroads for distances of less than 300 miles. Intermodal traffic and
certain other traffic face highly price sensitive competition, particularly
from motor carriers. However, rail carriers, including KCSR, have placed
an emphasis on competing in the intermodal marketplace, working together
with motor carriers and other railroads to provide end-to-end
transportation of products, especially where the length of haul exceeds 500
miles. The Company is also subject to competition from 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 and its rail connections in the
transportation of bulk commodities such as grains, steel and petroleum
products.

Employees and Labor Relations. Approximately 84% of KCSR and Gateway
Western employees are covered under various collective bargaining
agreements.

In 1996, national labor contracts governing 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. Formal
negotiations to enter into new agreements are in progress and the 1996
labor contracts will remain in effect until new agreements are reached.
The wage increase elements of these new agreements may have retroactive
application. The provisions of the various labor agreements generally
include periodic general wage increases, lump-sum payments to workers and
greater work rule flexibility, among other provisions. The Company is
currently exploring alternative compensation arrangements in lieu of cash
increases. Management does not expect that the negotiations or the
resulting labor agreements will have a material impact on our consolidated
results of operations, financial condition or cash flows.

KCSR, Gateway and other railroads continue to be affected by labor
regulations, which typically 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 Employers' Liability Act (FELA), when compared to worker's
compensation laws, vividly illustrate the competitive disadvantage placed
upon the rail industry by federal labor regulations.

Page 32

Safety and Quality Programs. KCSR is working hard to achieve its safety
vision of becoming the safest railway in North America. In 2000, KCSR
continued its progress toward this vision. The Federal Railroad
Administration ("FRA") Reportable Injury Performance improved by 17% in
2000 and the number of employee lost workdays improved by nearly 12%.
According to the preliminary data from the American Association of
Railroads, during 2000 KCSR had the best safety record among mid-tier
railroads and Gateway Western had the best safety record for small
railroads. KCSR and Gateway Western are both expected to receive the Gold
Harriman award, the highest recognition for safety in the industry.

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

RESULTS OF OPERATIONS

For the year ended December 31, 2000, income from continuing operations
increased $15.2 million to $25.4 million (43 cents per share) from $10.2 million
(17 cents per share) for the year ended December 31, 1999. A $20.1 million
increase in equity earnings from Grupo TFM and a $10.6 million decrease in
the income tax provision for the year ended December 31, 2000 were
partially offset by a decline in U.S. operating income of $6.3 million and
an increase in interest expense of $8.4 million. Consolidated revenues
declined 4.9% while consolidated operating expenses declined 4.3% for the
year ended December 31, 2000 compared with 1999. Excluding the impact of
unusual costs and expenses experienced in the fourth quarter of 1999,
consolidated operating expenses for 2000 declined 1.9% compared to 1999.
Income from discontinued operations was $363.8 million ($6.14 per share)
for the year ended December 31, 2000 compared to $313.1 million ($5.40 per
share) in 1999 primarily due to higher average assets under management
coupled with improving operating margins period to period. Income from
discontinued operations for the year ended December 31, 2000 includes
results from Stilwell only through the date of the Spin-off (July 12,
2000). The Company reported extraordinary items of $8.7 million (net of
income taxes of $4 million) ($.15 per share) during the year ended December
31, 2000. See "Recent Developments - Debt Refinancing and
Re-capitalization of the Company's Debt Structure" for further discussion.
There were no extraordinary items reported during 1999. Net income of the
Company was $380.5 million ($6.42 per share) for the year ended December
31, 2000 compared to $323.3 million ($5.57 per share) for the year ended
December 31, 1999.

For the year ended December 31, 1999, income from continuing operations
decreased $27.8 million to $10.2 million (17 cents per share) from $38.0 million
(67 cents per share) for the year ended December 31, 1998. This decline in
income from continuing operations resulted primarily from a decline in U.S.
operating income, which fell $54.1 million as a result of a $12.1 million
(2.0%) decrease in revenues coupled with a $42.0 million (8.5%) increase in
operating expenses. Exclusive of $12.7 million of certain unusual costs
and expenses recorded in 1999, operating expenses rose $29.3 million and
operating income declined $41.4 million year to year. The decline in U.S.
operating income was partially offset by an increase in equity earnings
from unconsolidated affiliates of $8.1 million and a decrease in the income
tax provision of $20.1 million. Income from discontinued operations was
$313.1 million ($5.40 per share) for the year ended December 31, 1999
compared to $152.2 million ($2.65 per share) in 1998 primarily due to
higher average assets under management coupled with improving operating
margins period to period. Net income of the Company was $323.3 million
($5.57 per share) for the year ended December 31, 1999 compared to $190.2
million ($3.32 per share) for the year ended December 31, 1998.

Page 33

Continuing Operations

The discussion that follows addresses the results of operations of the
continuing operations of the Company. The revenue and expense information
presented herein for the combined KCSR/Gateway Western reflect the results
of KCSR/Gateway Western operating companies on a stand-alone basis. The
results of KCSR subsidiaries and affiliates are excluded. Certain prior
year amounts were reclassified to conform to the current year
presentation.

The following table summarizes the income statement components of the
continuing operations of the Company for the years ended December 31,
respectively (dollars in millions):

2000 1999 1998
-------- -------- --------
Revenues $ 572.2 $ 601.4 $ 613.5
Costs and expenses 514.4 537.3 495.3
-------- -------- --------
Operating income 57.8 64.1 118.2
Equity in net earnings (losses) of
unconsolidated affiliates 23.8 5.2 (2.9)
Interest expense (65.8) (57.4) (59.6)
Other, net 6.0 5.3 9.4
-------- -------- --------
Income from continuing operations
before income taxes 21.8 17.2 65.1
Income tax expense (benefit) (3.6) 7.0 27.1
-------- -------- --------
Income from continuing operations $ 25.4(i) $ 10.2 $ 38.0

(i) Income from continuing operations for the year ended 2000 excludes
extraordinary items for debt retirement costs of $8.7 million (net of
income taxes of $4.0 million). This amount includes $1.7 million (net of
income taxes of $0.1 million) related to Grupo TFM.

The following table summarizes the revenues and carload statistics of
KCSR/Gateway Western for the years ended December 31, respectively.
Certain prior year amounts have been reclassified to reflect changes in the
business groups and to conform to the current year presentation.

Carloads and
Revenues Intermodal Units
------------------- --------------------
(in millions) (in thousands)
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
KCSR/Gateway Western
general commodities:
Chemical and petroleum $ 126.3 $132.7 $ 143.5 154.1 165.5 172.2
Paper and forest 132.9 131.0 138.9 192.4 202.9 212.8
Agricultural and mineral 94.3 95.6 99.9 132.0 141.0 141.5
------ ------ ------- ------ ------ ------
Total general commodities 353.5 359.3 382.3 478.5 509.4 526.5
Intermodal and automotive 63.0 60.6 48.1 269.3 233.9 187.1
Coal 105.0 117.4 117.9 184.2 200.8 205.3
------ ------ ------- ------ ------ ------
Carload revenues and carload
and intermodal units 521.5 537.3 548.3 932.0 944.1 918.9
Other rail-related revenues 41.6 49.1 48.5
------ ------ -------
Total KCSR/Gateway
Western revenues $563.1 $586.4 $596.8
Other subsidiary revenues 9.1 15.0 16.7
------ ------ ------
Total consolidated
revenues $572.2 $601.4 $613.5
====== ====== ======

Page 34

The following table summarizes the costs and expenses of KCSR/Gateway
Western for the years ended December 31, respectively:

2000 1999 1998
------ ------ ------
Salaries, wages and benefits $191.9 $199.7 $184.8
Fuel 48.1 34.2 33.5
Material and supplies 30.5 35.1 36.3
Car hire 14.8 22.4 12.5
Purchased services 47.9 51.7 44.6
Casualties and insurance 34.0 30.6 29.1
Operating leases 55.6 50.4 53.9
Depreciation and amortization 52.1 52.3 52.9
Other 23.8 37.1 25.9
------ ------ ------
Total KCSR/Gateway Western 498.7 513.5 473.5
Other subsidiary costs and expenses 15.7 23.8 21.8
------ ------ ------
Total consolidated costs and expenses $514.4 $537.3 $495.3

Year Ended December 31, 2000 Compared with the Year Ended December 31, 1999

Income from Continuing Operations. For the year ended December 31,
2000, income from continuing operations increased $15.2 million to $25.4
million from $10.2 million for the year ended December 31, 1999. A $20.1
million increase in equity earnings from Grupo TFM and a $10.6 million
decrease in the income tax provision were partially offset by a decline in
U.S. operating income of $6.3 million and an increase in interest expense
of $8.4 million.

Revenues. Revenues totaled $572.2 million for the year ended December
31, 2000 versus $601.4 million in the comparable period in 1999. This
$29.2 million, or 4.9%, decrease resulted from lower combined KCSR/Gateway
Western revenues of approximately $23.3 million, as well as lower revenues
at other transportation companies due to demand driven declines. While
KCSR/Gateway Western experienced revenue growth in certain product sectors
including plastics, automotive, food products, paper and forest products
and metal/ scrap, most commodities declined due to demand driven traffic
declines. As the general economy slowed, industrial production and
manufacturing also retracted leading to a decline in demand for product
shipments. See detailed discussion of KCSR/Gateway Western revenues below.

Costs and Expenses. Costs and expenses decreased $22.9 million year to
year. Excluding $12.7 million of unusual costs and expenses recorded
during the fourth quarter of 1999, costs and expenses declined $10.2
million period to period. Operational efficiencies at KCSR and Gateway
Western led to decreases in salaries and wages, materials and supplies, car
hire, and purchased services expense. Also contributing to the decline in
operating expenses was the impact of gains on the sale of operating
property of approximately $3.4 million, as well as a $3.0 million revision
to the estimate of the allowance for doubtful accounts. This allowance was
revised based on the collection of approximately $1.8 million of a
receivable from an affiliate and agreement for payment of the remaining
amount. These expense reductions were offset by increases in fuel,
casualty and lease expense. See detailed discussion of KCSR/Gateway
Western costs and expenses below. Costs and expenses related to other
subsidiaries decreased $8.1 million year to year, due primarily to
volume-related declines partially offset by higher holding company costs
related mostly to the Spin-off.

Interest Expense. Interest expense for the year ended December 31, 2000
increased $8.4 million, or 14.6%, from the year ended December 31, 1999.
This increase was due to higher

Page 35

interest rates and the amortization of debt issuance costs associated with the
debt re-capitalization in January and September 2000 partially offset by lower
overall debt balances and a benefit related to the adjustment of interest
expense resulting from the settlement of certain income tax issues.

Income tax expense. For the year ended December 31, 2000, the income tax
benefit was $3.6 million compared to an income tax provision of $7.0
million for the year ended December 31, 1999. This variance in income tax
expense was due primarily to certain 2000 non-taxable items, the fact that
the Company did not provide deferred income tax expense on its equity
earnings from Grupo TFM, and the settlement of various prior year income
tax audit issues during 2000. During 2000, equity earnings from Grupo TFM
approximated 90% of the Company's income from continuing operations before
income taxes compared with approximately 9% in 1999. In as much as the
Company intends to indefinitely reinvest the equity earnings from Grupo
TFM, the Company did not provide deferred income tax expense during 2000
for the excess of its book basis over the tax basis of its investment in
Grupo TFM. The consolidated effective income tax rate for 2000 was (16.5%)
compared to 40.7% in 1999.

Unconsolidated Affiliates. The Company recorded $23.8 million of equity
earnings from unconsolidated affiliates for the year ended December 31,
2000 compared to $5.2 million for the year ended December 31, 1999. This
$18.6 million increase is primarily attributable to higher equity earnings
from Grupo TFM partially offset by a decline in equity earnings from
Southern Capital (relates to gain on sale of non-rail loan portfolio by
Southern Capital in 1999).

Equity earnings related to Grupo TFM increased $20.1 million to $21.6
million (exclusive of extraordinary item of $1.7 million related to Grupo
TFM - See "Recent Developments -Debt Refinancing and Re-capitalization of
the Company's Debt Structure") for the year ended December 31, 2000 from
$1.5 million for the year ended December 31, 1999. This increase resulted
from higher Grupo TFM's revenues and operating income, which improved 22.1%
and 37.2%, respectively. Continued revenue growth resulted from Grupo
TFM's strategic positioning in a growing Mexican economy and NAFTA
marketplace, as well as the ability for Grupo TFM to attract new business
through its marketing efforts. Grupo TFM's 2000 operating expenses rose
17.7% compared to the prior year primarily as a result of volume related
cost increases in salaries, wages and benefits, fuel, car hire and
operating leases, partially offset by lower materials and supplies
expense. In addition to volume related increases, fuel costs were driven
by higher prices and car hire was affected by congestion near the U.S. and
Mexican border. Grupo TFM's operating ratio improved to 74.0% for the year
ended December 31, 2000 versus 77.2% for the comparable 1999 period. Also
contributing to the increase in Grupo TFM equity earnings was the
fluctuation in deferred income taxes. Under accounting principles
generally accepted in the United States ("U.S. GAAP") the deferred tax
benefit for Grupo TFM was $13.2 million (excluding the impact of the
extraordinary item) for the year ended December 31, 2000 compared to a
deferred tax expense of $11.5 million in 1999.

Results of the Company's investment in Grupo TFM are reported using U.S.
GAAP. Because the Company is required to report its equity earnings
(losses) in Grupo TFM under U.S. GAAP and Grupo TFM reports under
International Accounting Standards, differences in deferred income tax
calculations and certain operating expense categories occur. 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.

Combined KCSR/Gateway Western Operating Results. The following provides
a comparative analysis of the revenue and expense components of
KCSR/Gateway Western for the year ended December 31, 2000 versus the year
ended December 31, 1999:

Page 36

Revenues. Combined KCSR/Gateway Western revenues decreased
approximately $23.3 million as declines in coal, chemical and petroleum,
agriculture and minerals and haulage revenues were offset by increases in
paper and forest products and automotive revenues.

Chemical and Petroleum. For the year ended December 31, 2000, chemical
and petroleum product revenues decreased $6.4 million, or 4.8%, compared
with the year ended December 31, 1999, resulting primarily from lower
miscellaneous chemical and soda ash revenues. Miscellaneous chemical
revenues were 3.4% lower due to demand driven traffic declines while soda
ash revenues declined 65.2%, due to a merger within the chemical industry
and a new dedicated soda ash terminal opening on the railroad which
originates the soda ash, which diverted soda ash movements from KCSR.
Management expects soda ash revenues to remain weak. Chemical and
petroleum products accounted for 24.2% of total carload revenues for the
year ended December 31, 2000 versus 24.7% for the year ended December 31,
1999.

Paper and Forest. Paper and forest product revenues increased $1.9
million, or 1.5%, period to period as a result of increased revenues for
paper/pulp products, lumber products and metal/scrap products partially
offset by declines in pulpwood, logs and chips and military/other
products. Paper/pulp products increased due to the expansion of several
paper mills directly served by KCSR while lumber revenues improved due to a
1% increase in carloads and changes in length of haul. Higher metal/scrap
revenues resulted from an increase in steel shipments to the domestic oil
exploration industry, which uses steel for drilling pipe. Demand for
pulpwood, logs and chips declined due to market weakness while the decline
in military/other revenues resulted from higher 1999 revenues due to
National Guard movements in 1999 from Camp Shelby, Mississippi to Fort
Irving, California. Paper and forest products accounted for 25.5% and
24.4% of total carload revenues for the years ended December 31, 2000 and
1999, respectively.

Agricultural and Mineral. Agricultural and mineral product revenues
decreased $1.3 million, or 1.4%, for the year ended December 31, 2000
compared with the year ended December 31, 1999. This decline resulted
primarily from lower export grain revenues due to competitive pricing
pressures, weather-related operational problems and weakness in the export
market. During 2001, management expects a contraction in poultry industry
production to negatively impact the Company's domestic grain revenues as
KCSR serves approximately 35 poultry customers on its line. Agricultural
and mineral products accounted for 18.1% and 17.8% of total carload
revenues for the years ended December 31, 2000 and 1999, respectively.

Intermodal and Automotive. Intermodal and automotive revenues increased
$2.4 million, or 4.0%, for the year ended December 31, 2000 compared to the
year ended December 31, 1999. This improvement is comprised primarily of
an increase in automotive revenues, which increased 78.3% year to year,
partially offset by a decline in intermodal revenues. Automotive revenues
have increased due, in part, to our higher traffic levels for the movement
of automobile parts originating in the upper midwest of the United States
and terminating in Mexico. Also contributing to the increase in automotive
revenues was additional traffic handled by Gateway Western from Mexico,
Missouri to Kansas City and the Mazda traffic resulting from the opening of
the IFG. Intermodal revenues were affected by the fourth quarter 1999
closure of two intermodal facilities that were not meeting profit
expectations. These closures resulted in a loss of revenues, but also have
improved operating efficiency and profitability of this business sector.
Additionally, during the second quarter of 2000, we entered into a
marketing agreement with Norfolk Southern whereby we have agreed to perform
haulage services for Norfolk Southern from Meridian to Dallas for an agreed
upon haulage fee. Currently there are two trains operating per day with
the expectation that this will increase in the future. Some of this
haulage traffic has replaced previous carload intermodal traffic while some
of the traffic is incremental to us. A portion of the decline in
intermodal revenues results from the Norfolk Southern haulage traffic that
replaced existing intermodal

Page 37

revenues as KCSR is now receiving a smaller per unit haulage fee than the share
of revenue it received as part of the intermodal movement. This traffic,
however, is more profitable to KCSR as certain costs such as locomotives, fuel
and car hire are incurred and paid by Norfolk Southern. In the long term
intermodal revenues are expected to increase as a result of this haulage
agreement. Management expects that both intermodal and automotive revenues will
increase in 2001, primarily related to the relationships with Norfolk Southern
and CN/IC, continued growth of the Mazda business, as well as traffic recently
obtained with Ford to move automobiles from East St. Louis to Kansas City.
Intermodal and automotive revenues accounted for 12.1% and 11.3% of total
carload revenues for the years ended December 31, 2000 and 1999, respectively.

Coal. Coal revenues declined $12.4 million, or 10.6%, for the year ended
December 31, 2000 compared with the year ended December 31, 1999. Lower
unit coal revenues were attributable to an approximate 8% decline in tons
delivered coupled with a decline in revenue per carload due to changes in
length of haul as the Company's longest haul utility temporarily reduced it
coal deliveries in the second half of 2000. The decline in tons delivered
was primarily due to the Company's major coal customer ("SWEPCO"), which
reduced coal deliveries to decrease inventory stockpiles. Management
expects coal revenues to recover beginning in first quarter 2001 due to
increased shipments to SWEPCO and the re-opening of the KCPL Hawthorn plant
in mid 2001. Hawthorn has been out of service since January 1999 due to an
explosion at the Kansas City facility. Coal accounted for 20.1% and 21.8%
of total carload revenues for the year ended December 31, 2000 and 1999,
respectively.

Costs and Expenses. For the year ended December 31, 2000, combined
KCSR/Gateway Western operating costs and expenses declined $14.8 million
compared to 1999. Exclusive of $12.1 million of certain unusual costs and
expenses recorded during the fourth quarter of 1999 (see 1999-1998
discussion below), operating costs and expenses declined $2.7 million
period to period. Declines in salaries, wages and benefits, materials and
supplies, car hire and purchased services expense, arising primarily from
improved operations and the easing of congestion, were offset by casualties
expense related to the Duncan case, higher fuel costs, as well as higher
locomotive lease and maintenance costs. Also contributing to the decline
in operating expenses was the impact of gains on the sale of operating
property of approximately $4.0 million, as well as a $3.0 million revision
to the estimate of the allowance for doubtful accounts.

Salaries, Wages and Benefits. Salaries, wages and benefits expense for
the year ended December 31, 2000 decreased $7.8 million versus the
comparable 1999 period. Exclusive of $3.0 million of certain 1999 unusual
costs and expenses (see 1999-1998 discussion below), salaries, wages and
benefits declined $4.8 million. Wage increases to certain classes of union
employees were offset by reduced employee counts, lower overall overtime
costs, and the use of fewer relief train crews. Improvements in operating
efficiencies during 2000, as well as the absence of congestion-related
issues that existed during portions of 1999, contributed to the decline in
overtime and relief crew costs.

Fuel. For the year ended December 31, 2000, fuel expense increased
$13.9 million, or 40.6%, compared to the year ended December 31, 1999. An
increase in the average fuel price per gallon of approximately 64% was
somewhat offset by a decrease in fuel usage of approximately 14%. While
higher market prices have significantly impacted overall fuel costs,
improved fuel efficiency was achieved as a result of the lease of the 50
new fuel-efficient locomotives by KCSR in late 1999 and an aggressive fuel
conservation plan which began in mid-1999. Fuel costs represented
approximately 9.7% of combined KCSR/Gateway Western operating expenses
compared to 6.7% in 1999.

Car Hire. For the year ended December 31, 2000, car hire expense
declined $7.6 million, or 33.9%, compared to 1999. Improved operations and
the easing of congestion drove this

Page 38

improvement. During 1999, KCSR/Gateway Western experienced significant
congestion-related issues.

Purchased Services. For the year ended December 31, 2000, purchased
services expense declined $3.8 million compared to the year ended December
31, 1999. Increased purchased services expense as a result of maintenance
contracts for the 50 new leased locomotives was offset by a decline in
short-term locomotive leases and other purchased services (partially
related to Y2K contingency efforts in 1999).

Casualties and Insurance. For the year ended December 31, 2000
casualties and insurance expense increased $3.4 million compared with the
year ended December 31, 1999, reflecting $4.2 million in costs related to
the Duncan case (See"-Recent Developments") and higher personal injury-related
costs partially offset by lower derailment costs.

Operating Leases. For the year ended December 31, 2000, operating lease
expense increased $5.2 million, or 10.3%, compared to the year ended
December 31, 1999 primarily as a result of the 50 new GE 4400 AC
locomotives leased during fourth quarter 1999.

Depreciation and Amortization. Depreciation and amortization expense was
$52.1 million for the year ended December 31, 2000 compared to $52.3
million for the year ended December 31, 1999. Depreciation related to
property acquisitions was offset by property retirements and lower STB
approved depreciation rates. Depreciation and amortization expense is
expected to increase in 2001 due to the implementation of a new
transportation management control system ("MCS"), which is currently
scheduled for implementation in April 2001.

Operating Income and Operating Ratio. KCSR/Gateway Western operating
income for the year ended December 31, 2000 decreased $8.5 million, or
11.7%, to $64.4 million, resulting from a $23.3 million decrease in
revenues and a $14.8 million decrease in operating expenses. Excluding
$12.1 million of 1999 unusual costs and expenses, KCSR/Gateway Western
operating income for the year ended December 31, 2000 would have been $20.6
lower than 1999. The combined KCSR/Gateway Western operating ratio was
88.3% for the year ended December 31, 2000 compared to 85.2% (exclusive of
1999 unusual costs and expenses) for the year ended December 31, 1999.

Year Ended December 31, 1999 Compared with the Year Ended December 31, 1998

Income from Continuing Operations. For the year ended December 31, 1999,
income from continuing operations decreased $27.8 million (73.2%) compared
to the year ended December 31, 1998, primarily as a result of lower
revenues, higher operating expenses and a decline in other, net.

Revenues. Revenues declined $12.1 million, or 2.0%, for the year ended
December 31, 1999 versus 1998. Combined KCSR/Gateway Western revenues
decreased 1.7% primarily due to declines in chemical and petroleum, paper
and forest and agricultural and mineral revenues, partially offset by
increased intermodal and automotive revenues. Other transportation
businesses also reported lower revenues due to volume-related declines.

Costs and Expenses. Costs and expenses increased approximately 8.5%
primarily due to higher congestion-related costs at KCSR.

Interest Expense and Other, net. For the year ended December 31, 1999
interest expense decreased $2.2 million, or 3.7%, to $57.4 million from the
prior year due to a slight decrease in

Page 39

average debt balances resulting from net repayments. Other, net declined
$4.1 million for the year ended December 31, 1999 relating primarily to a 1998
receipt of interest ($2.8 million) related to a tax refund.

Income Tax Expense. Income tax expense decreased $20.1 million for the
year ended December 31, 1999 compared to 1998, primarily because of the
decline in income from continuing operations before income taxes of $47.9
million (73.6%). The effective tax rate for 1999 was 40.7% compared to
41.5% in 1998.

Unconsolidated Affiliates. For the year ended December 31, 1999, the
Company recorded $5.2 million of equity in net earnings 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 its non-rail related loan portfolio in 1999.

Grupo TFM contributed equity earnings of $1.5 million to income from
continuing operations in 1999 compared to equity losses of $3.2 million in
1998. Exclusive of deferred income tax effects, Grupo TFM's contribution
to income from continuing operations (after giving effect to 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 our proportionate share of
Grupo TFM's deferred tax expense in 1999 versus 1998. Higher Grupo TFM
earnings resulted from a 21.6% increase in revenues and 56.3% increase in
operating income partially offset by an increase in deferred tax expense.
Reflecting this growth in revenues, operating expenses increased
approximately $50.1 million during 1999; however, the operating ratio
declined 5.0 percentage points to 77.2% from 82.2%, 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.

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 3.8% while operating expenses declined
approximately 7.5%. 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.

Revenues. KCSR/Gateway Western 1999 revenues decreased $10.4 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 3.2%, resulting in a $23.0 million decline in
general commodity revenues, while intermodal units shipped increased 20.4%
leading to a $4.8 million increase in related revenues. Automotive
revenues increased $7.7 million year to year.

Chemicals and Petroleum. During 1999, chemical and petroleum revenues
declined $10.8 million, or 7.5%, compared with 1998, primarily as a result
of significant declines in miscellaneous chemical and soda ash revenues.
Miscellaneous chemical revenues declined $4.1 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 37% year to year
because of a decrease in export shipments due to a competitive disadvantage

Page 40

to another carrier. Also contributing to the decline were lower plastic
and petroleum revenues, which were impacted by competitive market pricing
and lower demand. Chemical and petroleum products accounted for 24.7% of
total 1999 carload revenues compared with 26.2% for 1998.

Paper and Forest. For the year ended December 31, 1999, paper and
forest product revenues decreased $7.9 million, or 5.7%, 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. Additionally, metal product revenues declined in 1999
compared to 1998, driven primarily by lower demand within the domestic oil
production market and lower demand for oil exploration drill pipe. These
declines were partially offset by higher revenues from military/other
shipments due to a National Guard move in 1999 from Camp Shelby,
Mississippi to Fort Irving, California. Paper and forest traffic comprised
24.4% of carload revenues during 1999 compared to 25.3% in 1998.

Agricultural and Mineral. Agricultural and mineral product revenues for
1999 decreased $4.3 million, or 4.3%, 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 compared to fourth quarter
1998 because of a loss of market share due to a rail line build-in by UP to
a feed mill serviced by KCSR. Agricultural and mineral products accounted
for 17.8% of carload revenues in 1999 compared with 18.2% in 1998.

Intermodal and Automotive. Intermodal and automotive revenues for 1999
increased $12.5 million, or 26.0%, compared to 1998 revenues primarily due
to a $7.7 million increase in automotive revenue in 1999. The increase in
automotive traffic is due to the CN/IC strategic alliance on KCSR and
Norfolk Southern traffic forwarded to Gateway Western. Additionally,
intermodal units shipped increased approximately 20.4% year over year,
partially offset by a decrease in revenue per unit shipped. All of the
1999 intermodal 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 and
automotive revenues accounted for 11.3% of carload revenues in 1999
compared with 8.8% in 1998.

Coal. During the year ended December 31, 1999, KCSR experienced a slight
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 the declines during the first nine
months of 1999 and resulting in year end 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 21.8% of carload revenues during 1999
compared with 21.5% for 1998.

Costs and Expenses. For the year ended December 31, 1999, KCSR/Gateway
Western's costs and expenses increased $40.0 million (8.4%) versus
comparable 1998, primarily as a result of increases in salaries, wages and
related fringe benefits, fuel costs, car hire, and purchased

Page 41

services, partially offset by a decrease in operating leases and material and
supplies expense. A significant portion of the cost and expenses increase ($12.1
million) 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.

Salaries, Wages and Benefits. Salaries, wages and benefits expense for
the year ended December 31, 1999 increased $14.9 million versus comparable
1998, an increase of 8.1%. This increase includes $3.0 million resulting
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.

Fuel. For the year ended December 31, 1999, fuel expense increased
approximately $0.7 million, or 2.1%, compared to 1998, as a result of a
1.0% increase in fuel usage coupled with a 1.0% increase in the average
fuel price per gallon. In 1999, fuel costs represented approximately 6.7%
of total operating expenses compared to 7.1% in 1998.

Car Hire. For the year ended December 31, 1999, expenses for car hire
payable, net of receivables, increased $9.9 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 receivables as fewer KCSR cars and trailers were
being utilized by other railroads. The remaining increase in car hire
expense resulted from a change in equipment utilization. Similar to 1998,
for certain equipment, KCSR continued its transition to utilization leases
from fixed leases. The cost of utilization leases are based upon usage or
utilization of the asset whereas fixed leases are reflected as costs
regardless of usage. 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 leases. 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.

Purchased Services. For the year ended December 31, 1999, purchased
services expense increased $7.1 million, or 15.9%, 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.

Casualties and Insurance. For the year ended December 31, 1999,
casualties and insurance expense increased $1.5 million compared with the
year ended December 31, 1998. This increase reflects higher derailment
related expenses when compared to 1998, while overall personal
injury-related costs were essentially flat with the prior year. During
first quarter 1999 Gateway Western experienced a $1.4 million derailment,
which is unusually large given Gateway Western's prior operating history.

Operating Leases. For the year ended December 31, 1999, operating lease
expense decreased $3.5 million, or 6.5% compared to the year ended December
31, 1998, as a result of a change in equipment utilization as discussed
above regarding car hire expense.

Page 42

Depreciation and Amortization. Depreciation and amortization expense in
1999 declined slightly (1%) 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.

Operating Income and Operating Ratio. Operating income for the year
ended December 31, 1999 decreased $50.4 million (40.9%) to $72.9 million.
This decline in operating income resulted from a 1.7% decline in revenues
coupled with a 8.5% increase in operating expenses. Exclusive of $12.1
million of unusual operating costs and expenses, operating income declined
$38.3 million, resulting in an operating ratio of 85.2% for the year ended
December 31, 1999 compared to 79.2% for 1998. Although the operating ratio
for 1999 was disappointing, our objective, on a long-term basis, is to
maintain the operating ratio below 80%, despite the substantial use of
lease financing for locomotives and rolling stock.

TRENDS and OUTLOOK

For the year ended December 31, 2000, the Company's results were favorably
affected by the ongoing results of the investment in Grupo TFM as well as
KCSR/Gateway Western's success in maintaining an effective operating cost
structure. Domestically, however, operating results were adversely
affected by competitive revenue pressures, higher fuel costs and higher
interest costs. Combined KCSR/Gateway Western 2000 revenues declined
approximately 4% compared to 1999, reflecting traffic erosion related to
the rail mergers, competitive pricing issues, demand driven traffic
declines, and an 11% decline in unit coal revenues resulting primarily from
a major coal customer reducing excess stockpiles. Interest expense rose
nearly 15% for the year ended December 31, 2000 compared to 1999 as a
result of higher interest rates and amortization of debt costs associated
with the January and September 2000 debt re-capitalization discussed
elsewhere, partially offset by lower overall debt balances and a benefit
related to the adjustment of interest expense resulting from the settlement
of certain tax issues. Operationally, KCSR/Gateway Western operated more
efficiently in 2000 than in 1999 as evidenced by lower operating expenses
(excluding fuel, casualty and operating leases) and certain improved
operating measures, such as increased train speeds, faster coal cycle
times, lower terminal dwell times, reduced overtime hours and the use of
fewer relief train crews. In spite of significantly higher diesel fuel
costs (which rose approximately 41% in 2000 compared to 1999), the Company
reduced operating expenses by approximately 4.3% during 2000, primarily due
to operational improvements and the easing of congestion at KCSR/Gateway
Western. Also contributing to the decline in 2000 operating expenses were
the following: (i) $12.7 million of unusual costs and expenses recorded
during 1999; (ii) the impact of gains on the sale of operating property of
approximately $3.4 million; and (iii) a $3.0 million revision to the
estimate of the allowance for doubtful accounts. This allowance was
revised based on the collection of approximately $1.8 million of a
receivable from an affiliate and agreement for payment of the remaining
amount. Grupo TFM results improved for the year ended December 31, 2000
due primarily to revenue growth and cost containment, as well as the impact
of fluctuations in the value of the peso and Mexican inflation on deferred
taxes under U.S. GAAP.

The current outlook for business in 2001 is as follows:

Management expects coal revenues to recover beginning in first quarter
2001. General freight, intermodal and automotive traffic, however, will be
largely dependent on the economic trends within certain industries in the
geographic region served by the railroads comprising the NAFTA Railway,
which have shown signs of weakness in early 2001. Variable costs and
expenses are expected to be proportionate with revenue activity, except for
fuel expenses, where prices are

Page 43

expected to mirror market conditions. Additionally, casualty and insurance costs
are expected to be impacted by several first quarter 2001 derailments.

In the short-term, competitive pricing issues, weakness in the chemical
markets and export grain markets, as well as the existing general economic
slowdown will present revenue challenges to the Company. However, in the
long-term, management believes that, with the Company's strategic partners
and marketing alliances, effective cost controls and system utilization
improvements (see discussion of expected implementation of MCS in Item 1 -
"Business"), the NAFTA Railway continues to provide an attractive service
for shippers and is well-positioned to take advantage of the continued
growth potential of NAFTA traffic; and

The Company expects to continue to participate in the earnings/losses from
equity investments in Grupo TFM, Southern Capital and Mexrail.
Additionally, beginning in 2001, the Company expects to participate in the
earnings/losses from the equity investment in PCRC. The Company's future
results could be impacted by a potential requirement to provide deferred
taxes on the difference between the Company's financial reporting basis and
income tax basis of its investment in Grupo TFM. See "Other -- Foreign
Corporate Joint Venture" below. Management makes no 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.

LIQUIDITY

Summary cash flow data is as follows for the years ended December 31, (in
millions):

2000 1999 1998
-------- -------- --------
Cash flows provided by (used for):
Operating activities $ 77.2 $ 178.0 $ 141.6
Investing activities (101.8) (97.2) (61.5)
Financing activities 34.2 (74.5) (79.4)
-------- -------- -------
Net increase in
cash and equivalents 9.6 6.3 0.7
Cash and equivalents at beginning of year 11.9 5.6 4.9
-------- -------- --------
Cash and equivalents at end of year $ 21.5 $ 11.9 $ 5.6
======== ======== ========

During the year ended December 31, 2000, the Company's consolidated cash
position increased $9.6 million from December 31, 1999, resulting primarily
from cash from operating activities, net proceeds from the issuance of
long-term debt and the issuance of common stock under employee stock plans,
partially offset by changes in working capital balances, property
acquisitions and debt issuance costs.

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

Page 44

The following table summarizes consolidated operating cash flow information
for the years ended December 31, respectively. Certain reclassifications
have been made to prior year amounts to conform to current year
presentation. (in millions)

2000 1999 1998
------ ------ ------

Net income $ 380.5 $ 323.3 $ 190.2
Income from discontinued operations (363.8) (313.1) (152.2)
Depreciation and amortization 56.1 56.9 56.7
Equity in undistributed (earnings) losses (23.8) (5.2) 2.9
Distributions from unconsolidated affiliates 5.0 - 5.0
Deferred income taxes 23.1 9.8 35.5
Transfer from Stilwell - 56.6 4.2
Gains on sales of assets (3.4) (0.6) (5.7)
Extraordinary items, net of tax 7.5 - -
Tax benefit realized upon exercise of
stock options 9.3 6.4 12.2
Change in working capital items (14.3) 49.7 (8.6)
Other 1.0 (5.8) 1.4
-------- -------- -------
Net operating cash flow $ 77.2 $ 178.0 $ 141.6
======== ======== ========

2000 net operating cash inflows of $77.2 million declined $100.8 million
compared to 1999 net operating cash inflows of $178.0 million. This
decline was mostly attributable to the 1999 receipt of a $56.6 million
transfer from Stilwell. Also contributing to the decline was the payment
during 2000 of certain accounts payable and accrued liabilities, including
accrued interest of approximately $11.4 million related to indebtedness, as
well as the decline in the contribution of domestic operations to income
from continuing operations.

Net operating cash inflows for the year ended December 31, 1999 were $178.0
million compared to net operating cash inflows of $141.6 million for the
year ended December 31, 1998. This $36.4 million improvement in 1999
operating cash flow was chiefly attributable to an increase in a transfer
from Stilwell somewhat offset by lower 1999 income from continuing
operations and lower deferred taxes. Also contributing was an increase in
current liabilities resulting from a 1998 payment of approximately $23
million related to the KCSR union productivity fund termination.

Investing Cash Flows. Net investing cash outflows were $101.8 million and
$97.2 million for the years ended December 31, 2000 and 1999,
respectively. The $4.6 million difference results from higher investments
in affiliates, partially offset by slightly lower capital expenditures and
an increase in funds received from property disposals. Additionally,
during 1999, Stilwell repaid $16.6 million of debt to the Company.

Net investing cash outflows were $97.2 million for the year ended December
31, 1999 compared to $61.5 million of net investing cash outflows during
1998. This $35.7 million difference for 1999 compared to 1998 results
primarily from higher capital expenditures.

Cash was used for property acquisitions of $104.5, $106.2, and $69.9
million in 2000, 1999 and 1998, respectively. Cash was (used for) provided
by investments in and loans with affiliates of ($4.2), $12.7 and ($0.7)
million in 2000, 1999 and 1998, respectively. Proceeds from the disposals
of property were $5.5, $2.8 and $8.4 million in 2000, 1999 and 1998,
respectively.

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

Page 45

Financing Cash Flows. Financing cash flows were as follows:

o Borrowings of $1,052.0 million, $21.8 million and $151.7 million in
2000, 1999 and 1998, respectively. Proceeds from the issuance of debt
in 2000 were used for refinancing of debt in January and September
2000. 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) and to provide for working
capital needs ($5 million).

o Repayment of indebtedness in the amounts of $1,015.4 million, $97.5
million and $232.0 million in 2000, 1999 and 1998, respectively.
Repayment of indebtedness is generally funded through operating cash
flows; however, in 2000 repayments included the refinancing of debt in
January and September 2000. Repayments in 1999 were partially funded
through a transfer from Stilwell, while 1998 repayments of $100 million
of notes as discussed above were funded under then-existing lines of
credit.

o Payment of debt issuance costs of $17.6 million and $4.2 million in
2000 and 1999, respectively.

o Repurchases of KCSI common stock during 1999 of $24.6 million were
funded with borrowings under existing lines of credit (as noted above)
and internally generated cash flows.

o Proceeds from stock plans of $17.9 million, $37.0 million and $17.9
million in 2000, 1999 and 1998, respectively.

o Payment of cash dividends of $4.8 million, $17.6 million and $17.8
million in 2000, 1999 and 1998, respectively.

CAPITAL STRUCTURE

Capital Requirements. Capital improvements for KCSR/Gateway Western
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, the Company 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 programs are primarily financed through internally generated cash
flows. These internally generated cash flows were used to finance capital
expenditures (property acquisitions) of $104.5 million, $106.2 million and
$69.9 million in 2000, 1999 and 1998, respectively. Internally generated
cash flows and borrowings under existing lines of credit are expected to be
used to fund capital programs for 2001, currently estimated at
approximately $77 million, which include the following major items:
maintenance of way, maintenance of equipment, transportation, information
technology, administrative, marketing and development of the
Richards-Gebaur intermodal yard. In general, the Company estimates that
approximately two-thirds of its capital expenditures are maintenance
related.

Page 46

KCSR/Gateway Western Maintenance. KCSR and Gateway Western, like all
railroads, are required to maintain their own property infrastructure.
Portions of roadway and equipment maintenance costs are capitalized and
other portions expensed (as components of material and supplies, purchased
services and others), as appropriate. Maintenance and capital improvement
programs are in conformity with the Federal Railroad Administration's track
standards and are accounted for in accordance with applicable regulatory
accounting rules. Management expects to continue to fund roadway and
equipment maintenance expenditures with internally generated cash flows.
Maintenance expenses (exclusive of amounts capitalized) for way and
structure (roadbed, rail, ties, bridges, etc.) and equipment (locomotives
and rail cars) for the three years ended December 31, 2000, as a percentage
of KCSR/Gateway Western revenues are as follows:

KCSR/Gateway Western Maintenance
--------------------------------
Way and Structure Equipment
----------------- -----------------
Percent of Percent of
Amount Revenue Amount Revenue
2000 $39.8 7.1% $ 44.3 7.9%
1999 41.6 7.1 52.1 8.9
1998 44.5 7.5 47.9 8.0

Capital. Components of capital are shown as follows (in millions). For
purposes of this analysis, stockholders' equity for 1999 and 1998 (periods
prior to the Spin-off) exclude the net assets of Stilwell.

2000 1999 1998
-------- -------- --------
Debt due within one year $ 36.2 $ 10.9 $ 10.7
Long-term debt 638.4 750.0 825.6
-------- -------- --------
Total debt 674.6 760.9 836.3

Stockholders' equity (excludes the net
assets of Stilwell) 643.4 468.5 391.0
-------- -------- --------
Total debt plus equity $1,318.0 $1,229.4 $1,227.3
======== ======== ========
Total debt as a percent of
total debt plus equity ("debt ratio") 51.2% 61.9% 68.1%
-------- -------- --------
At December 31, 2000, the Company's consolidated debt ratio decreased 10.7
percentage points compared to December 31, 1999. Total debt decreased
$86.3 million as a result of the assumption of $125 million of debt by
Stilwell partially offset by net long-term borrowings. Stockholders'
equity increased $174.9 million as a result of 2000 income from continuing
operations of $25.4 million, the assumption of $125 million of debt by
Stilwell and the issuance of common stock under employee stock plans
partially offset by extraordinary items of $8.7 million and dividends. The
increase in stockholders' equity coupled with the decrease in debt resulted
in the decline in the debt ratio from December 31, 1999.

At December 31, 1999, the Company's consolidated debt ratio decreased 6.2
percentage points to 61.9% from 68.1% at December 31, 1998. Total debt
decreased $75.4 million as repayments exceeded borrowings. Stockholders'
equity increased $77.5 million primarily as a result of 1999 income from
continuing operations of $10.2 million, the issuance of common stock under
employee stock plans and a transfer from Stilwell, partially offset by
common stock repurchases of $24.6 million and dividends of $17.9. The increase
in stockholders' equity and the decrease in debt resulted in the decrease in the
debt ratio from December 31, 1998.

Page 47

Under the existing capital structure of KCSI at December 31, 2000,
management anticipates that the debt ratio will essentially remain flat
through 2001.

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".

Overall Liquidity. The Company believes, based on current expectations,
that its operating cash flows and available financing resources are
sufficient to fund anticipated operating, capital and debt service
requirements and other commitments through 2001.

The Company has financing available through a revolving line of credit with
a maximum borrowing amount of $100 million (on January 2, 2001 the line of
credit was reduced from $150 million to $100 million). As of December 31,
2000 the full amount of this line of credit was available. 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, 2000. Because of
certain financial covenants contained in the credit agreements, however,
maximum utilization of the Company's available lines of credit may be
restricted.

The Company filed a Universal Registration Statement on Form S-3 (File No.
33-69648) in September 1993, as amended in April 1996, for the offering of
up to $500 million in aggregate amount of securities. The SEC declared
that registration statement effective on April 22, 1996; however, no
securities have been issued thereunder. The Company has not engaged an
underwriter for these securities and has no current plans to issue
securities under that registration statement. Subject to certain
restrictions under the KCS Credit Facilities (as discussed above in "Recent
Developments"), management expects that any net proceeds from the sale of
securities under that registration statement would be added to the general
funds of the Company and used principally for general corporate purposes,
including working capital, capital expenditures, and acquisitions of or
investments in businesses and assets.

In connection with the Company's debt restructuring in January 2000 (see
"Recent Developments") KCSR entered into senior secured credit facilities
providing financing of up to $750 million, including a $200 million term
loan due January 11, 2001 that was repaid with the proceeds from a private
offering of Notes. On January 25, 2001, the Company filed a Form S-4
Registration Statement with the SEC registering exchange notes under the
Securities Act of 1933. The Company filed Amendment No. 1 to this
Registration Statement and the SEC declared this Registration Statement
effective on March 15, 2001, thereby providing the opportunity for holders
of the initial Notes to exchange them for registered notes. The
registration exchange offer expires on April 16, 2001, unless extended by
the Company. These Notes bear a fixed annual interest rate of 9.5% and are
due on October 1, 2008.

In January 2000, KCSI borrowed $125 million under a $200 million 364-day
senior unsecured competitive advance/revolving credit facility to retire
other debt obligations. Stilwell assumed this credit facility and repaid
the $125 million in March 2000. Upon such assumption, KCSI was released
from all obligations, and Stilwell became the sole obligor, under this
credit facility. The Company's indebtedness decreased as a result of the
assumption of this indebtedness by Stilwell.

As discussed in Item 1 "Business-Joint Venture Arrangements -Grupo TFM,"
TMM and KCSI, or either TMM or KCSI, could be required to purchase the
Mexican government's interest in TFM. However, this provision is not
exercisable prior to October 31, 2003. Also, on or prior to July 31, 2002,
the Mexican government's interest in Grupo TFM may be called by TMM, an
affiliate of TMM, and KCSI, exercisable at the original amount (in U.S.
dollars) paid by the Mexican government plus interest based on one-year
U.S. Treasury securities.

Page 48

As discussed in "Recent Developments", in preparation for the Spin-off,
KCSI completed a re-capitalization of its debt structure in January 2000.
As part of the re-capitalization, the Company refinanced its public debt
and revolving credit facilities. KCSI management believes that the
resulting capital structure provides the necessary liquidity to meet
anticipated operating, capital and debt service requirements and other
commitments for 2001.

As discussed in "Recent Developments", if Stilwell were unable to meet its
obligations to purchase 600,000 shares of Janus common stock from Mr.
Bailey, the Company would be required to purchase those shares. According
to Stilwell management, the total purchase price for these shares is
expected to approximate $603 million. KCSI management believes, based on
discussions with Stilwell management, that Stilwell has adequate financial
resources available to fund this obligation. If the Company were required
to purchase these shares of Janus common stock, it would have a material
effect on our business, liquidity, financial condition, results of
operations and cash flows.

OTHER

Significant Customer. SWEPCO is the Company's only customer that accounted
for more than 10% of revenues during the years ended December 31, 2000,
1999 and 1998, respectively. Revenues related to SWEPCO during these
periods were $67.2 million, $75.9 million and $78.0 million, respectively.

Foreign Corporate Joint Venture. Grupo TFM provides deferred income taxes
for the difference between the financial reporting and income tax bases of
its assets and liabilities. The Company records its proportionate share of
these income taxes through our equity in Grupo TFM's earnings. As of
December 31, 2000, the Company had not provided deferred income taxes for
the temporary difference between the financial reporting basis and income
tax basis of its investment in Grupo TFM because Grupo TFM is a foreign
corporate joint venture that is considered permanent in duration, and the
Company does not expect the reversal of the temporary difference to occur
in the foreseeable future.

Certain corporate actions currently contemplated by TMM may result in a
change in Grupo TFM's status as a foreign corporate venture joint during
2001. If Grupo TFM were to no longer qualify as a foreign corporate joint
venture or if the temporary difference was expected to reverse in the
foreseeable future, the Company would be required to provide deferred
income taxes for the difference between the financial reporting basis and
income tax basis of its investment in Grupo TFM at the rate at which the
temporary difference would be expected to reverse.

Financial Instruments and Purchase Commitments. Fuel expense is a
significant component of the Company's operating expenses. Fuel costs are
affected by (i) traffic levels, (ii) efficiency of operations and
equipment, and (iii) fuel market conditions. Controlling fuel expenses is
a concern of management, and expense control remains a top priority. As a
result, the Company has established a program to hedge against fluctuations
in the price of its diesel fuel purchases to protect the Company's
operating results against adverse fluctuations in fuel prices. KCSR enters
into forward diesel fuel purchase commitments and commodity swap
transactions (fuel swaps or caps) as a means of fixing future fuel prices.
These transactions are accounted for as hedges and are correlated to market
benchmarks. Hedge positions are monitored to ensure that they will not
exceed actual fuel requirements in any period.

Page 49

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. These hedging instruments expired on March 31, 2000 and June
30, 2000. The Company received approximately $0.8 million during 2000
related to these diesel fuel cap transactions and recorded the proceeds as
a reduction of diesel fuel expenses. At December 31, 2000, KCSR had
purchase commitments for approximately 12.6% of budgeted gallons of fuel
for 2001. There are currently no diesel fuel cap or swap transactions.

In accordance with the provision of the New Credit Facility requiring the
Company to manage its interest rate risk through hedging activity, at
December 31, 2000 the Company has 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.

These transactions are intended to mitigate the impact of rising fuel
prices and interest rates 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, 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.

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.

Page 50

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 be performed using the U.S. dollar as Grupo TFM's functional
currency.

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.

The Company continues to evaluate existing alternatives with respect to
utilizing foreign currency instruments to hedge its U.S. dollar investment
in Grupo TFM as market conditions change or exchange rates fluctuate. At
December 31, 2000, 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. 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.

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 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. SFAS 133 requires
that all derivatives be recorded on the balance sheet as either assets or
liabilities measured at fair value. Changes in the fair value of the
derivatives are recorded as either current earnings or other comprehensive
income, depending on the type of hedge transaction. The Company
implemented the provisions of SFAS 133 on January 1, 2001. For fair value
hedge transactions in which the Company would hedge changes in the fair
value of an asset, liability or an unrecognized firm commitment, changes in
the fair value of the derivative instrument will generally be offset in the
income statement by changes in the hedged item's fair value. For cash flow
hedge transactions in which the Company is hedging the variability of cash
flows related to a variable rate asset, liability or a forecasted
transaction,

Page 51

changes in the fair value of the derivative instrument will be reported in other
comprehensive income to the extent it offsets changes in cash flows related to
the variable rate asset, liability or forecasted transaction, with the
difference reported in current earnings. Gains and losses on the derivative
instrument reported in other comprehensive income will be reclassified in
earnings in the periods in which earnings are impacted by the variability of the
cash flow of the hedged item. The ineffective portion of all hedge transactions
will be recognized in current period earnings.

Based on fuel and interest rate hedging instruments outstanding at December
31, 2000, the impact of the implementation of SFAS 133 will result in a
charge of $0.6 million recorded as a cumulative effect of an accounting
change in the first quarter of 2001. This amount represents the
ineffective portion of interest rate hedging instruments. Additionally, a
$0.1 million charge will be recorded as a cumulative effect of an
accounting change to accumulated other comprehensive income during first
quarter 2001 related to the effective portion of fuel hedging instruments.

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. The
following outlines four cases:

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

On November 3, 1999, the Third Circuit Court of Appeals in Louisiana
affirmed the judgment. Subsequently KCSR sought and obtained review of the
case in the Supreme Court of Louisiana. On October 30, 2000 the Supreme
Court of Louisiana entered its order affirming in part and reversing in
part the judgment. The net effect of the Louisiana Supreme Court action
was to reduce the allocation of negligence to KCSR and reduce the judgment,
with interest, against KCSR from approximately $28 million to approximately
$14.2 million (approximately $9.7 million of damages and $4.5 million of
interest), which is in excess of KCSR's insurance coverage of $10 million
for this case. KCSR filed an application for rehearing in the Supreme
Court of Louisiana which was denied on January 5, 2001. KCSR then sought a
stay of judgment in the Louisiana court. The Louisiana court denied the
stay application on January 12, 2001. KCSR reached an agreement as to the
payment structure of the judgment in this case and payment of the
settlement was made on March 7, 2001.

Page 52

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 in October 1995. The
explosion released nitrogen dioxide and oxides of nitrogen into the
atmosphere over parts of Bogalusa and the surrounding area allegedly
causing evacuations and injuries. Approximately 25,000 residents of
Louisiana and Mississippi have asserted claims to recover damages allegedly
caused by exposure to the released 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 we last transported the rail
car. The car was loaded in excess of its standard weight, but under its
capacity, when it was transported 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 our favor in June 1999. The jury found that we were 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.
The trial of a second group of Mississippi plaintiffs is scheduled for
January 2002.

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

Houston Cases
In August 2000 KCSR and certain of its affiliates were added as defendants
in lawsuits pending in Jefferson and Harris Counties, Texas. These
lawsuits allege damage to approximately 3,000 plaintiffs as a result of an
alleged toxic chemical release from a tank car in Houston, Texas on August
21, 1998. Litigation involving the shipper and the delivering carrier had
been pending for some time, but KCSR, which handled the car during the
course of its transport, had not previously been named a defendant. On
information currently available, management believes the Company's
probability of liability for damages in these cases to be remote.

Jaroslawicz Class Action
On October 3, 2000, a lawsuit was filed in the New York State Supreme Court
purporting to be a class action on behalf of the Company's preferred
shareholders, and naming KCSI, its Board of Directors and Stilwell
Financial Inc. as defendants. This lawsuit seeks a declaration that the
Spin-off was a defacto liquidation of KCSI, alleges violation of directors'
fiduciary duties to the preferred shareholders and also seeks a declaration
that the preferred shareholders are entitled to receive the par value of
their shares and other relief. The Company filed a motion to dismiss with
prejudice in the New York State Supreme Court on December 22, 2000; the
plaintiff filed its brief in opposition to the motion to dismiss on
February 1, 2001, and the Company served reply papers on March 7, 2001.
The motion to dismiss is now fully briefed and a ruling has not been
rendered. Management believes the suit to be groundless and will continue
to defend the matter vigorously.

Environmental Matters. The Company's operations are subject to extensive
federal, state and local environmental laws and regulations concerning,
among other things, air emissions, water discharges, waste management,
hazardous substance transportation, handling and storage, decommissioning
of underground storage tanks, and soil and groundwater contamination. The
major environmental laws to which the Company is subject, include, among
others, the Federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA," also known

Page 53

as the Superfund law), the Toxic Substances Control Act, the Federal Water
Pollution Control Act, and the Hazardous Materials Transportation Act. CERCLA
can impose joint and several liability for cleanup and investigation costs,
without regard to fault or legality of the original conduct, on current and
predecessor owners and operators of a site, as well as those who generate, or
arrange for the disposal of, hazardous substances. 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.

Because the Company transports and generates large quantities of hazardous
substances, and due to the fact that many of the Company's current and
former properties are or have been used for industrial purposes, the
Company is subject to potentially material liabilities relating to the
investigation and cleanup of contaminated properties and to claims alleging
personal injury or property damage as the result exposures to, or release
of, hazardous substances. Although the Company is responsible for
investigating and remediating contamination at several locations, and has
been identified as a potentially responsible party at several third party
locations to which waste may have been sent in the past, based on currently
available information, the Company does not expect any related liabilities,
individually or collectively, to have a material impact on its results of
operations, financial position or cash flows. In the event that the
Company becomes subject to more stringent cleanup requirements at these
sites, discovers new or more widespread contamination or become subject to
related personal or property damage claims, however, the Company could
incur material costs in connection with these sites.

The Company is responsible for investigating and remediating contamination
at several locations, which were formerly leased to industrial tenants.
For example, in North Baton Rouge, Louisiana, the Company is solely
responsible for investigating and remediating soil and groundwater
contamination at two contiguous properties, which were leased to third
parties. The Company is seeking recovery against one of these tenants,
Western Petrochemicals, Inc., which remains at the site. The second
tenant, Export Drum, Inc., is bankrupt. KCSR has established reserves that
management believes are adequate to address the costs expected to be
incurred at this site.

Similarly, in Port Arthur, Texas, KCSR is responsible for investigating,
remediating and closing property formerly leased to a company that
reconditioned drum storage containers. KCSR sued the former tenant and
other parties for a portion of the cleanup costs, and received
approximately $326,000 in a mediated settlement. KCSR has established
reserves that management believes are adequate to address additional costs
expected to be incurred at this site.

In connection with another similar property, a portion of which KCSR owned
and formerly leased to a tenant that conducted wood preservative treatment
operations, the Louisiana Department of Environmental Quality sought
recovery against KCSR in a matter captioned Louisiana Department of
Environmental Quality, Docket No. IAS 88-0001-A. This action was resolved
in KCSR's favor, and the operator of the plant, Joslyn Manufacturing
Company ("Joslyn"), is required to indemnify KCSR for any costs relating to
contamination it caused at the site pursuant to the former lease
agreement. Due to ongoing investigations at the site, including an EPA
investigation pursuant to CERCLA, either the EPA or the state may seek
additional cleanup and seek recovery of additional related costs. In
addition, if the site is added to the EPA's National Priority List, KCSR,
as the property owner, would likely be named a potentially responsible
party in any future EPA or related action. The Company believes that
Josyln's indemnity obligation to us would cover that

Page 54

eventuality. However, in the event that Josyln should become bankrupt or
otherwise fail to satisfy its indemnification obligations, KCSR could incur
substantial costs at this site.

In 1996, the Louisiana Department of Transportation ("LDOT") sued KCSR
and a number of other defendants in Louisiana state court to recover
cleanup 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 cleanup 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. Based on a number
of factors, including primarily the fact that the site appears to have been
primarily affected by refinery operations, which pre-dated the derailment,
management believes that our exposure at this site 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 KCSR.

KCSR is subject to potential liability in connection with a foundry site in
Alexandria, Louisiana that was once owned through a former subsidiary and
leased to a foundry operator. That operator, Ruston Foundry, is still
operating at the site and, management believes, is required to indemnify
KCSR for environmental liabilities pursuant to our former lease agreement.
The site is on the CERCLA National Priorities List, and potential cleanup
costs are substantial. KCSR does not possess sufficient information to
precisely assess its exposure, although, based on experience with such
matters, the existence of other potential defendants, and Ruston Foundry's
indemnification obligations, management does not expect costs associated
with this site to materially affect KCSR.

In addition to these matters, 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 management believes will satisfy the
MDEQ's initiative. Estimated costs to complete the studies and expected
remediation have been provided for in the consolidated financial statements
and are not expected to have a material impact on KCSR's consolidated
results of operations or financial position.

The Illinois Environmental Protection Agency ("IEPA") has sued Gateway
Western for alleged violations of state environmental laws relating to the
1997 spill of 18,000 gallons of methyl isobutyl carbinol from a tank car in
Gateway Western's East St. Louis yard. Remediation continues and progress
is reported to the IEPA on a quarterly basis and will continue until IEPA
clean-up standards have been achieved. The estimated costs for remediation
have been provided for in our consolidated financial statements. The
parties reached a tentative negotiated settlement of the lawsuit in
November 1998, which provides that Gateway Western pay a penalty and
further, that it fund a Supplemental Environmental Project in St. Claire
County, Illinois. The cleanup 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.

Finally, the Company is investigating and remediating contamination
associated with historical roundhouse and fueling operations at Gateway
Western yards located in East St. Louis, Illinois, Venice, Illinois, Kansas
City, Missouri and Mexico, Missouri. Also, in connection with a program

Page 55

begun in 1993 to remove all underground storage tanks from Gateway Western
properties, the Company is conducting investigation and cleanup activities
at several sites. Management does not expect costs relating to these
activities to materially affect the Company.

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, 2000, 1999 and 1998 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.

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. Recent increases in fuel prices,
however, impacted our operating results in 2000. During the two-year
period ended December 31, 1999, locomotive fuel expenses represented an
average of 6.9% of KCSR/Gateway Western's combined total operating costs
compared to 9.7% in 2000. 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.

Page 56

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 11 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 floating-rate indebtedness totaled $400 million and $278
million at December 31, 2000 and 1999, respectively. The KCS Credit
Facilities, comprised of different tranches and types of indebtedness,
accrue interest based on target interest indexes (e.g., LIBOR, federal
funds rate, etc.) plus an applicable spread, as set forth in the respective
agreement. Due to the high percentage of variable rate debt associated
with the restructuring of the debt, the Company is 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 $2.9 million on an annualized basis for the floating-rate
instruments outstanding as of December 31, 2000. Assuming the $750 million
KCS Credit Facilities had been entered into on January 1, 1999 and the full
amount of these facilities were borrowed on that date and remained
outstanding throughout the year, a 100 basis points increase in interest
rates would have resulted in additional interest expense of approximately
$7 million in 1999.

Based upon the borrowing rates available to KCSI 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 $685 million at December 31, 2000 and $766 million at
December 31, 1999. The fair value of long-term debt was $867 million at
December 31, 1998.

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 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, 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Other- Financial
Instruments and Purchase Commitments" and "Derivative Instruments."

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.

Page 57

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 December 31, 2000 KCSR had purchase commitments for approximately 12.6%
of budgeted gallons of fuel for 2001 at an average price of $0.71 per
gallon. There were no diesel fuel cap transactions at December 31, 2000.
At December 31, 1999, the Company had no outstanding diesel fuel purchase
commitments for 2000. At December 31, 1999, the Company had 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. These cap
transactions expired on March 31, 2000 and June 30, 2000. The contract
prices do not include taxes, transportation costs or other incremental fuel
handling costs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Other-Financial Instruments and
Purchase Commitments" and Derivative Instruments."

The unrecognized gain related to the diesel fuel purchase commitments
approximated $1.1 million at December 31, 2000 compared to an unrecognized
gain related to the diesel fuel cap transactions (based on the average
price of heating oil #2) of approximately $0.6 million at December 31,
1999.

At December 31, 2000, the Company held fuel inventories for use in normal
operations. These inventories were not material to the Company's overall
financial position. Fuel costs for 2001 are expected to continue to mirror
market conditions.

Foreign Exchange Sensitivity
The Company owns an approximate 37% interest in Grupo TFM, incorporated in
Mexico. In connection with this investment, 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.

While not currently utilizing foreign currency instruments to hedge the
Company's U.S. dollar investment in Grupo TFM, the Company continues to
evaluate existing alternatives as market conditions and exchange rates
fluctuate.

Page 58

Item 8. Financial Statements and Supplementary Data

Index to Financial Statements
Page

Management Report on Responsibility for Financial Reporting............ 60

Financial Statements:

Report of Independent Accountants................................... 61
Consolidated Statements of Income
for the three years ended December 31, 2000....................... 62
Consolidated Balance Sheets at December 31, 2000
1999 and 1998..................................................... 63
Consolidated Statements of Cash Flows for the three
years ended December 31, 2000..................................... 64
Consolidated Statements of Changes in Stockholders'
Equity for the three years ended December 31, 2000................ 65
Notes to Consolidated Financial Statements.......................... 66

Financial Statement Schedules:

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

Grupo TFM's Financial Statements for the years ended December 31, 2000,
1999 and 1998, which will be filed no later than 180 days after December
31, 2000, are hereby incorporated by reference.

Page 59

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's financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose selection was
ratified by the stockholders. Management has made available to
PricewaterhouseCoopers LLP all of the Company's financial records and
related data, as well as the minutes of shareholders' and directors'
meetings. Furthermore, management believes that all representations made
to PricewaterhouseCoopers LLP during its audit were valid and appropriate.

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 review and evaluate
both internal accounting and operating controls and recommend possible
improvements thereto. In addition, as part of their audit of the
consolidated financial statements, PricewaterhouseCoopers LLP, 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 internal audit staff coordinates
with PricewaterhouseCoopers LLP on the annual audit of the Company's
financial statements.

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 qualified non-management directors,
meets regularly with PricewaterhouseCoopers LLP, 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. Both PricewaterhouseCoopers LLP and internal auditors
have full and free access to this committee.

/s/ Michael R. Haverty
Michael R. Haverty
Chairman, President & Chief Executive Officer

/s/ Robert H. Berry
Robert H. Berry
Senior Vice President & Chief Financial Officer

Page 60

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 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, 2000, 1999 and 1998, 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 of America.
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 of America, 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 our opinion.

/s/PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Kansas City, Missouri
March 22, 2001

Page 61

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

2000 1999 1998
--------- --------- --------
Revenues $ 572.2 $ 601.4 $ 613.5
Costs and expenses
Salaries, wages and benefits 197.8 206.0 190.7
Purchased services 59.8 64.0 58.4
Depreciation and amortization 56.1 56.9 56.7
Operating leases 48.9 44.0 48.0
Fuel 48.1 34.2 33.5
Other 103.7 132.2 108.0
--------- --------- --------
Total costs and expenses 514.4 537.3 495.3
--------- --------- --------

Operating income 57.8 64.1 118.2

Equity in net earnings (losses)
of unconsolidated affiliates:
Grupo TFM 21.6 1.5 (3.2)
Other 2.2 3.7 0.3
Interest expense (65.8) (57.4) (59.6)
Other, net 6.0 5.3 9.4
--------- --------- --------
Income from continuing operations before
income taxes 21.8 17.2 65.1

Income tax provision (benefit) (Note 8) (3.6) 7.0 27.1

Income from continuing operations 25.4 10.2 38.0

Income from discontinued operations,
(net of income taxes of $233.3,
$216.1 and 103.7, respectively) 363.8 313.1 152.2
--------- --------- --------
Income before extraordinary item 389.2 323.3 190.2

Extraordinary item, net of income taxes
Debt retirement costs - KCSI (7.0) - -
Debt retirement costs - Grupo TFM (1.7) - -
--------- --------- --------
Net income $ 380.5 $ 323.3 $ 190.2
========= ========= ========
Per Share Data (Note 2):
Basic earnings per share:
Continuing operations $ 0.44 $ 0.18 $ 0.69
Discontinued operations 6.42 5.68 2.78
--------- --------- --------
Basic earnings per share before
extraordinary item 6.86 5.86 3.47
Extraordinary item (.15) - -
--------- --------- --------
Total $ 6.71 $ 5.86 $ 3.47
========= ========= ========
Diluted earnings per share:
Continuing operations $ 0.43 $ 0.17 $ 0.67
Discontinued operations 6.14 5.40 2.65
Diluted earnings per share before
extraordinary item 6.57 5.57 3.32
Extraordinary item (.15) - -
--------- --------- --------
Total $ 6.42 $ 5.57 $ 3.32
========= ========= ========

Weighted average common shares outstanding (in thousands):
Basic 56,650 55,142 54,610
Dilutive potential common shares 1,740 1,883 1,920
--------- --------- --------
Diluted 58,390 57,025 56,530

Dividends per share
Preferred $ 1.00 $ $ 1.00 $ 1.00
Common $ - $ .32 $ .32
See accompanying notes to consolidated financial statements.

Page 62

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

2000 1999 1998
------- ------- -------
ASSETS

Current Assets:
Cash and equivalents $ 21.5 $ 11.9 $ 5.6
Accounts receivable, net (Note 6) 135.0 132.2 131.8
Inventories 34.0 40.5 47.0
Other current assets (Note 6) 25.9 23.9 25.8
------- ------- -------
Total current assets 216.4 208.5 210.2

Investments held for operating purposes (Notes 3, 5) 358.2 337.1 327.9

Properties, net (Note 6) 1,327.8 1,277.4 1,229.3

Intangibles and Other Assets, net 42.1 34.4 29.4

Net Assets of Discontinued Operations (Note 3) - 814.6 540.2
------- ------- -------
Total assets $ 1,944.5 $ 2,672.0 $ 2,337.0
========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Debt due within one year (Note 7) $ 36.2 $ 10.9 $ 10.7
Accounts and wages payable 52.9 74.8 64.1
Accrued liabilities (Note 6) 159.9 168.5 133.7
------- ------- -------
Total current liabilities 249.0 254.2 208.5
------- ------- -------

Other Liabilities:
Long-term debt (Note 7) 638.4 750.0 825.6
Deferred income taxes (Note 8) 332.2 297.4 285.2
Other deferred credits 81.5 87.3 86.5
Commitments and contingencies
(Notes 3, 7, 8, 11, 12)
------- ------- -------
Total other liabilities 1,052.1 1,134.7 1,197.3
------- ------- -------

Stockholders' Equity (Notes 2, 3, 4, 7, 9):
$25 par, 4% noncumulative, Preferred stock 6.1 6.1 6.1
$.01 par, Common stock 0.6 1.1 1.1
Retained earnings 636.7 1,167.0 849.1
Accumulated other comprehensive income - 108.9 74.9
------- ------- -------
Total stockholders' equity 643.4 1,283.1 931.2
------- ------- -------
Total liabilities and stockholders' equity $ 1,944.5 $ 2,672.0 $ 2,337.0
========= ========= =========

See accompanying notes to consolidated financial statements.

Page 63

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

2000 1999 1998
-------- -------- --------
CASH FLOWS PROVIDED BY (USED FOR):

Operating Activities:

Net income $ 380.5 $ 323.3 $ 190.2
Adjustments to net income:
Income from discontinued operations (363.8) (313.1) (152.2)
Depreciation and amortization 56.1 56.9 56.7
Deferred income taxes 23.1 9.8 35.5
Equity in undistributed earnings of
unconsolidated affiliates (23.8) (5.2) 2.9
Distributions from unconsolidated affiliates 5.0 - 5.0
Transfer from Stillwell Financial Inc. - 56.6 4.2
Gain on sale of assets (3.4) (0.6) (5.7)
Tax benefit associated with exercised
stock options 9.3 6.4 12.2
Extraordinary item, net of tax 7.5 - -
Changes in working capital items:
Accounts receivable (2.8) (0.4) (8.5)
Inventories 6.5 6.5 (8.6)
Other current assets 4.2 (2.1) (2.9)
Accounts and wages payable (15.7) 4.5 4.6
Accrued liabilities (6.5) 41.2 6.8
Other, net 1.0 (5.8) 1.4
-------- -------- --------
Net 77.2 178.0 141.6
-------- -------- --------

Investing Activities:
Property acquisitions (104.5) (106.2) (69.9)
Proceeds from disposal of property 5.5 2.8 8.4
Investments in and loans with affiliates (4.2) 12.7 (0.7)
Other, net 1.4 (6.5) 0.7
-------- -------- --------
Net (101.8) (97.2) (61.5)
-------- -------- --------
Financing Activities:
Proceeds from issuance of long-term debt 1,052.0 21.8 151.7
Repayment of long-term debt (1,015.4) (97.5) (232.0)
Debt issue costs (17.6) (4.2) -
Proceeds from stock plans 17.9 37.0 17.9
Stock repurchased - (24.6) -
Cash dividends paid (4.8) (17.6) (17.8)
Other, net 2.1 10.6 0.8
-------- -------- --------
Net 34.2 (74.5) (79.4)
-------- -------- --------

Cash and Equivalents:
Net increase 9.6 6.3 0.7
At beginning of year 11.9 5.6 4.9
-------- -------- --------
At end of year (Note 4) $ 21.5 $ 11.9 $ 5.6
========= ========= =========

See accompanying notes to consolidated financial statements.

Page 64

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, 1997 $ 6.1 $ 1.0 $ 1.1 $ 839.3 $ 50.8 $(200.0) $ 698.3
Comprehensive income:
Net income 190.2
Net unrealized gain on
investments 24.3
Less: Reclassification
adjustment for gains
included in net income (0.2)
Comprehensive income 214.3
Dividends (17.7) (17.7)
Stock plan shares issued from treasury 3.0 3.0
Stock issued in acquisition 3.2 3.2
Options exercised and stock 30.1 30.1
subscribed
Termination of shares held in trust (1.0) (199.0) 200.0
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1998 6.1 1.1 849.1 74.9 931.2
Comprehensive income:
Net income 323.3
Net unrealized gain on
investments 39.3
Less: Reclassification
adjustment for gains
included in net income (4.4)
Foreign currency translation
adjustment (0.9)
Comprehensive income 357.3
Dividends (17.9) (17.9)
Stock repurchased (24.6) (24.6)
Options exercised and stock subscribed 37.1 37.1
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1999 6.1 1.1 1,167.0 108.9 1,283.1

Comprehensive income:
Net income 380.5
Net unrealized gain on
investments 5.9
Less: Reclassification
adjustment for gains (1.1)
included in net income
Foreign currency
translation adjustment (2.6)
Comprehensive income 382.7
Spin-off of Stillwell (954.1) (111.1) (1,065.2)
Financial Inc.
1-for-2 reverse stock split (0.5) 0.5
Dividends (0.2) (0.2)
Stock plan shares issued 6.3 6.3
from treasury
Options exercised and stock subscribed 36.7 36.7
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2000 $ 6.1 $ $ 0.6 $ 636.7 $ $ $ 643.4
======== ======== ======== ======== ======== ======== ========

See accompanying notes to consolidated financial statements.

Page 65

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

Note 1. Description of the Business

Kansas City Southern Industries, Inc. ("Company" or "KCSI"'), a Delaware
Corporation organized in 1962, is a holding company with principal
operations in rail transportation. On July 12, 2000 KCSI completed its
spin-off of Stilwell Financial Inc. ("Stilwell"), the Company's former
wholly-owned financial services subsidiary.

Spin-off of Stilwell and related events

On June 14, 2000 KCSI's Board of Directors approved the spin-off of
Stilwell. KCSI completed its spin-off of Stilwell through a special
dividend of Stilwell common stock distributed to KCSI common stockholders
of record on June 28, 2000 ("Spin-off").

As of the date of the spin-off, Stilwell was comprised of Janus Capital
Corporation, an approximate 81.5% owned subsidiary; Berger LLC, an
approximate 88% owned subsidiary; Nelson Money Managers Plc, an 80% owned
subsidiary; DST Systems, Inc., an equity investment in which Stilwell holds
an approximate 32% interest; and miscellaneous other financial services
subsidiaries and equity investments.

The Spin-off occurred after the close of business of the New York Stock
Exchange on July 12, 2000, and each KCSI stockholder received two shares of
the common stock of Stilwell for every one share of KCSI common stock owned
on the record date. The total number of Stilwell shares distributed was
222,999,786.

As previously disclosed, on July 9, 1999, KCSI received a tax ruling from
the Internal Revenue Service ("IRS") which states that for United States
federal income tax purposes the Spin-off 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 indebtedness by Stilwell (in connection with the
Company's re-capitalization of its debt structure as discussed in Note 7)
would have no effect on the previously issued tax ruling.

Also on July 12, 2000, KCSI completed a reverse stock split whereby every
two shares of KCSI common stock was converted into one share of KCSI common
stock. All periods presented in the accompanying consolidated financial
statements reflect this one-for-two reverse stock split, which had
previously been approved by KCSI common stockholders.

As a result of the Spin-off, the accompanying consolidated financial
statements for the year ended December 31, 2000 reflect the results of
operations and cash flows of Stilwell as discontinued operations through
the date of the Spin-off (July 12, 2000). Effective with the Spin-off, the
net assets of Stilwell have been removed from the consolidated balance
sheet. The accompanying consolidated financial statements as of December
31, 1999 and 1998, and for the years ended December 31, 1999 and 1998
reflect the financial position, results of operations and cash flows of
Stilwell as discontinued operations. See Note 3.

Prior to the Spin-off, KCSI and Stilwell entered into various agreements
for the purpose of governing certain of the limited ongoing relationships
between KCSI and Stilwell during a transitional period following the
Spin-off, including an intercompany agreement, a contribution agreement and
a tax disaffiliation agreement.

Page 66

Nature of operations. The Company is the holding company for all of the
subsidiaries comprising the transportation operations. KCSI's principal
subsidiaries and affiliates include:

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

o Gateway Western Railway Company ("Gateway Western"), a
wholly-owned subsidiary of KCSR;

o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V.
("Grupo TFM"), an approximate 37% owned unconsolidated affiliate of
KCSR. Grupo TFM owns 80% of the common stock of TFM, S.A. de C.V.
("TFM");

o Mexrail, Inc. ("Mexrail"), a 49% owned unconsolidated
affiliate of KCSR. Mexrail wholly owns The Texas Mexican Railway
Company ("Tex Mex");

o Southern Capital Corporation, LLC ("Southern Capital"),
a 50% owned unconsolidated affiliate of KCSR; and

o Panama Canal Railway Company ("PCRC"), an
unconsolidated affiliate of which KCSR owns 50% of the common stock.

KCSI, 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. A strategic alliance with the Canadian National Railway
Company ("CN") and Illinois Central Corporation ("IC") (collectively
"CN/IC") and other marketing agreements have 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.

KCSI's rail network connects shippers in the midwestern and eastern regions
of the 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. KCSI's rail system, through its core
network, strategic alliances and marketing partnerships, interconnects with
all Class I railroads in North America.

A summary of the Company's principal subsidiaries and affiliates is as
follows:

Consolidated Rail Operations

The Kansas City Southern Railway Company. KCSR operates a Class I Common
Carrier railroad system in the United States, on a North-South axis from
the Midwest to the Gulf of Mexico and on an East-West axis from Meridian,
Mississippi to Dallas, Texas. KCSR, which traces its origins to 1887,
offers the shortest route between Kansas City and major port cities along
the Gulf of Mexico in Louisiana, Mississippi and Texas. KCSR's 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, and intermodal and
automotive product industries, among others. KCSR, in conjunction with the
Norfolk Southern Corporation ("Norfolk Southern"), operates the most
direct rail route (referred to as the "Meridian Speedway"), between the
Atlanta, Georgia and Dallas, Texas rail gateways for rail traffic moving
between the 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.

Gateway Western Railway Company. Gateway Western, a wholly-owned subsidiary
of KCSR, operates a regional common carrier system which links Kansas City
with East St. Louis and Springfield, Illinois (with limited haulage rights
between Springfield and Chicago, Illinois). Gateway

Page 67

Western provides key interchanges with the majority of other Class I railroads
and like KCSR, serves customers in a wide range of industries.

Southwestern Electric Power Company ("SWEPCO") is the Company's only
customer which accounted for more than 10% of revenues during the years
ended December 31, 2000, 1999 and 1998, respectively. Revenues related to
SWEPCO during these periods were $67.2, $75.9, $78.0 million, respectively.

KCSR and Gateway Western operations are subject to the regulatory
jurisdiction of the Surface Transportation Board ("STB") within the
Department of Transportation, various state regulatory agencies, and the
Occupational Safety and Health Administration ("OSHA"). The STB has
jurisdiction over interstate rates, routes, service, issuance of guarantee
of securities, extension or abandonment of rail lines, and consolidation,
merger or acquisition of control of rail common carriers. States 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.

Unconsolidated Affiliates

Grupo TFM. Grupo TFM was formed in June 1996 to participate in the
privatization of the Mexican railroad system. In December 1996, the
Mexican Government awarded Grupo TFM the right to acquire an 80% interest
(representing 100% of the unrestricted voting rights) in 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 a 50-year concession (with the option of a 50-year extension
subject to certain conditions) to operate approximately 2,700 miles of
track which directly link Mexico City and Monterrey (as well as Guadalajara
through trackage rights) with the ports of Lazaro Cardenas, Veracruz and
Tampico and the Mexican/United States border crossings of Nuevo
Laredo-Laredo, Texas and Matamoros-Brownsville, Texas. 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 interchanges traffic with Tex Mex and the Union Pacific Railroad
("UP") at Laredo, Texas.

On June 23, 1997, Grupo TFM completed the acquisition of its 80% interest
in TFM and began to record TFM's results of operations under the equity
method of accounting. The Company accounts for its investment in Grupo TFM
using the equity method of accounting. As of December 31, 2000, the
Company owned 36.9% of Grupo TFM.

Mexrail, Inc. In November 1995, the Company purchased a 49% interest in
Mexrail, which owns 100% of Tex Mex. Tex Mex and TFM operate the
international rail traffic bridge at Laredo spanning the Rio Grande River.
This bridge is a significant entry point for rail traffic between Mexico
and the United States. Tex Mex also is comprised of a 521-mile rail
network between Laredo and Beaumont, Texas (including 157 owned miles from
Laredo to Corpus Christi, Texas and 364 miles, via trackage rights, from
Corpus Christi to Houston and Beaumont, Texas). 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 Class I railroads at various locations. The
Company accounts for its investment in Mexrail using the equity method of
accounting.

Through Grupo TFM and Mexrail, both operated in partnership with
Transportacion Maritima Mexicana, S.A. de C.V. ("TMM"), the Company has
established a prominent position in the Mexican transportation market.

Southern Capital Corporation, LLC. In October 1996, the Company and GATX
Capital Corporation ("GATX") completed the transactions for the formation
and financing of a joint venture-Southern

Page 68

Capital-to perform certain leasing and financing activities. Southern Capital's
principal operations are the acquisition of locomotives and rolling stock and
the leasing thereof to the Company and other rail entities. The Company holds a
50% interest in Southern Capital, which it accounts for using the equity method
of accounting.

Panama Canal Railway Company. In January 1998, the Republic of Panama
awarded KCSR and its joint venture partner, Mi-Jack Products, Inc.
("Mi-Jack"), the concession to reconstruct and operate the Panama Canal
Railway Company ("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. Reconstruction of PCRC's
right-of-way is expected to be complete in 2001 with commercial operations
to begin immediately thereafter. The Company owns 50% of the common stock
of PCRC, which it accounts for using the equity method of accounting.

Panarail Tourism Company. During 2000, the Company and Mi-Jack formed a
joint venture designed to operate and promote commuter and pleasure/tourist
passenger service over the PCRC. Panarail is expected to commence
operations in 2001, immediately following completion of the reconstruction
of PCRC's tracks.

Other operations. The Company operates various entities in support of or
as an adjunct to its principal rail subsidiaries/investments including: a
petroleum coke bulk transfer facility, a captive insurance company, a cross
tie and timber treating facility, a parking garage and various pieces of
real estate adjacent to KCSR's right of way.

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.

As a result of the Spin-off, the accompanying consolidated financial
statements for each of the applicable periods presented reflect the
financial position, results of operations and cash flows of Stilwell as
discontinued operations.

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 accompanying consolidated financial
statements are presented using the accrual basis of accounting and
generally include the Company and its majority owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.

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

Revenue Recognition. The Company recognizes freight revenue based upon the
percentage of completion of a commodity movement. Other revenues, in
general, are recognized when the product is shipped, as services are
performed or contractual obligations fulfilled.

Page 69

Cash Equivalents. Short-term liquid investments with an initial maturity
of generally three months or less are considered cash equivalents.

Inventories. Materials and supplies inventories 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. 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 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. Depreciation
for other consolidated subsidiaries is computed based on the asset value in
excess of estimated salvage value using the straight-line method over the
estimated useful lives of the assets. Accelerated depreciation is used for
income tax purposes. The ranges of annual depreciation rates for financial
statement purposes are:

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

Long-lived assets. In accordance with Statement of Financial Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of ("SFAS 121"), the Company periodically evaluates
the recoverability of its operating properties. The measurement of
possible impairment is based primarily on the ability to recover the
carrying value of the asset from expected future operating cash flows of
the assets on a discounted basis.

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 (principally
over 40 years). On a periodic basis, the Company reviews the
recoverability of goodwill and other intangibles by comparing the related
carrying value to its fair value.

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. 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.

Page 70

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. As of December 31, 2000, approximately $49 million has been
capitalized for a new transportation operating system expected to be
implemented in April 2001.

Derivative Financial Instruments. 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 New
Accounting Pronouncement below.

See Note 11 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"
("SFAS 107") requires an entity to disclose the fair value of its financial
instruments. The Company's financial instruments include cash and cash
equivalents, accounts receivable, lease and contract receivables, accounts
payable and long-term debt. In accordance with SFAS 107, lease financing
and contracts that are accounted for under Statement of Financial
Accounting Standards No. 13 "Accounting for Leases," are excluded from fair
value presentation.

The carrying value of the Company's cash equivalents approximate their fair
values due to their short-term nature. Carrying value approximates fair
value for all financial instruments with six months or less to re-pricing
or maturity and for financial instruments with variable interest rates.
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.

Page 71

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 ("FASB") issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") in October 1995. This statement allows
companies to continue under the approach set forth in Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"),
for recognizing stock-based compensation expense in the financial
statements, but encourages companies to adopt the fair value method of
accounting for employee stock options. The Company has elected to retain
its accounting approach under APB 25, and has presented the applicable pro
forma disclosures in Note 9 to the consolidated financial statements
pursuant to the requirements of SFAS 123.

In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an Interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 was issued to clarify the application
of APB 25 with respect to, among other issues: i) the definition of
employee; ii) the criteria for determining whether a plan qualifies as a
non-compensatory plan; iii) the accounting consequences of modifications to
the terms of a previous fixed stock option grant; and iv) the accounting
for an exchange of stock compensation awards in a business combination. FIN
44 also addresses the treatment of stock options in the case of spin-off
transactions and other equity restructuring. The adoption of FIN 44 during
the third quarter of 2000 did not have a material impact on the Company's
results of operations, financial position or cash flows. Additionally,
the provisions of FIN 44 relating to spin-off transactions are consistent
with those of the Emerging Issues Task Force of the Financial Accounting
Standards Board ("EITF") in its Issue No. 90-9, "Changes to Fixed
Employee Stock Option Plans as a Result of Equity Restructuring" ("EITF
90-9"), and, therefore, FIN 44 did not result in any changes in the
Company's accounting for stock transactions relating to the Spin-off. See
Note 1.

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 10.

Earnings Per Share. 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 income.

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 1,739,982, 1,883,286 and 1,920,167 for the years ended
December 31, 2000, 1999 and 1998, respectively. The weighted average of
options to purchase 18,207, 44,438 and 137,170 shares in 2000, 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 certain subsidiaries and affiliates.
Adjustments related to potentially dilutive securities totaled $5.4, $4.8
and $2.3 million for the years ended December 31, 2000, 1999 and 1998,
respectively. These adjustments relate to securities at certain Stilwell
subsidiaries and affiliates and affect the diluted

Page 72

earnings per share from discontinued operations computation in the applicable
periods presented. Preferred dividends are the only adjustments that affect the
numerator of the diluted earnings per share from continuing operations
computation. Adjustments related to preferred dividends were not material for
the periods presented.

Stockholders' Equity. Information regarding the Company's capital stock at
December 31, 2000, 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 73,369,116

The Company's stockholders approved a one-for-two reverse stock split at a
special stockholders' meeting held on July 15, 1998. On July 12, 2000,
KCSI completed a reverse stock split whereby every two shares of KCSI
common stock were converted into one share of KCSI common stock. All share
and per share data reflect this split. See Note 1.

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

2000 1999 1998
------ ------ ------
$25 Par, 4% noncumulative, Preferred stock 242 242 242
$.01 Par, Common stock 58,140 55,287 54,908

Comprehensive Income. The Company's other comprehensive income consists
primarily of its proportionate share of unrealized gains and losses
relating to investments held by certain subsidiaries and affiliates of
Stilwell (discontinued operations) as "available for sale" securities as
defined by Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The
Company records its proportionate share of any unrealized gains or losses
related to these investments, net of deferred income taxes, in
stockholders' equity as accumulated other comprehensive income. The
unrealized gain related to these investments increased $5.9 million, $39.3
million and $24.3 million, net of deferred taxes for the years ended
December 31, 2000, 1999 and 1998, respectively. Subsequent to the Spin-off
the Company does not expect to hold investments that are accounted for as
"available for sale" securities.

Postretirement benefits. The Company provides certain medical, life and
other postretirement benefits to certain retirees. The costs of such
benefits are expensed over the estimated period of employment.

Environmental liabilities. 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. As of December 31, 2000, 1999 and 1998, liabilities for
environmental remediation are not material.

New Accounting Pronouncements.
Statement of Financial Accounting Standards No. 133. 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. SFAS 133 requires
that all derivatives be recorded on the balance sheet as

Page 73

either assets or liabilities measured at fair value. Changes in the fair value
of the derivatives are recorded as either current earnings or other
comprehensive income, depending on the type of hedge transaction. The Company
implemented the provisions of SFAS 133 on January 1, 2001. For fair value hedge
transactions in which the Company would hedge changes in the fair value of an
asset, liability or an unrecognized firm commitment, changes in the fair value
of the derivative instrument would generally be offset in the income statement
by changes in the hedged item's fair value. For cash flow hedge transactions in
which the Company hedges the variability of cash flows related to a variable
rate asset, liability or a forecasted transaction, changes in the fair value of
the derivative instrument will be reported in other comprehensive income to the
extent it offsets changes in cash flows related to the variable rate asset,
liability or forecasted transaction, with the difference reported in current
earnings. Gains and losses on the derivative instrument reported in other
comprehensive income will be reclassified to earnings in the periods in which
earnings are impacted by the variability of the cash flow of the hedged item.
The ineffective portion of all hedge transactions will be recognized in the
current period.

EITF Issue No. 99-19. The Emerging Issues Task Force of the FASB issued
EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as
an Agent" ("EITF 90-19"). EITF 99-19 provides guidance as to whether a
company should report revenue based on (a) the gross amount billed to a
customer because it has earned revenue from the sale of the goods or
services or (b) the net amount retained because it has earned a commission
or a fee. The adoption of EITF 99-19 did not change the Company's method
for recording its revenues.

Note 3. Acquisitions and Dispositions

Spin-off of Stilwell. On July 12, 2000, KCSI completed the Spin-off. See
Note 1.

Summarized financial information of the discontinued Stilwell businesses is
as follows (in millions):

For the year ended
December 31,
------------------
1/1/00-
7/12/00 1999 1998
-------- -------- --------
Revenues $1,187.9 $1,212.3 $ 670.8
Operating expenses 646.2 694.0 390.2
-------- -------- --------
Operating income 541.7 518.3 280.6
Equity in earnings of unconsolidated
affiliates 37.0 46.7 25.8
Reduction in ownership of DST - - (29.7)
Gain on litigation settlement 44.2 - -
Gain on sale of Janus common stock 15.1 - -
Interest expense and other, net 18.6 21.5 12.6
-------- -------- --------
Pretax income 656.6 586.5 289.3
Income tax provision 233.3 216.1 103.7
Minority interest in consolidated earnings 59.5 57.3 33.4
-------- -------- --------
Income from discontinued
operations, net of income taxes $363.8 $313.1 $152.2
======== ======== ========

Page 74

December 31,
--------------------
1999 1998
-------- --------
Current assets $ 525.0 $ 259.3
Total assets 1,231.5 822.9
Current liabilities 162.5 71.1
Total liabilities 359.6 248.4
Minority interest 57.3 34.3
Net assets of discontinued operations 814.6 540.2

The following discusses certain agreements between KCSI and certain
Janus stockholders. Subsequent to the Spin-off, these agreements and
related provisions apply to Stilwell through assignment or through the
agreement of Stilwell to meet KCSI's obligations under the agreements.

A stock purchase agreement with Thomas H. Bailey, the Chairman, President
and Chief Executive Officer of Janus Capital Corporation ("Janus"), 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 under certain
circumstances, Stilwell would be required to purchase the minority
interests of such Janus minority stockholders at a fair market value
purchase price equal to fifteen times the net after-tax earnings of Janus
over the period indicated in the relevant agreement or in some
circumstances 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 provisions.
Certain other minority holders who continue their employment also could
exercise puts. The Janus Stock Purchase Agreement, and certain stock
purchase agreements and restriction agreements with other minority
stockholders that have not been assigned to Stilwell, also contain
provisions whereby upon the occurrence of a Change in Ownership (as defined
in such agreements) of KCSI (or Stilwell with respect to the Janus Stock
Purchase Agreement), Stilwell may be required to purchase such holders'
Janus stock. The fair market value price for such purchase or sale would
be equal to fifteen times the net after-tax earnings of Janus 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.

The Janus Stock Purchase Agreement has been assigned to Stilwell and
Stilwell has assumed and agreed to discharge KCSI's obligations under that
agreement. However, KCSI is obligated as a guarantor of Stilwell's
obligations under that agreement. With respect to other restriction
agreements not assigned to Stilwell, Stilwell has agreed to perform all of
KCSI's obligations under these agreements and KCSI has agreed to transfer
all of its benefits and assets under these agreements to Stilwell. In
addition, Stilwell has agreed to indemnify KCSI for any and all losses
incurred with respect to the Janus Stock Purchase Agreement and all other
Janus minority stockholder agreements. However, if Stilwell were unable to
meet its obligations with respect to these agreements, KCSI would be
obligated to make the payments under these agreements.

On January 26, 2001, Stilwell announced that it expected to purchase
600,000 shares of Janus common stock from Mr. Bailey under the terms and
conditions of the Janus Stock Purchase Agreement. According to Stilwell
management, the purchase price for these shares is expected to approximate
$603 million and the purchase is expected to occur during the second
quarter of 2001. KCSI believes, based on discussions with Stilwell
management, that Stilwell has adequate financial resources available to
fund this obligation. If Stilwell were unable to meet its obligation to
purchase the shares of Janus common stock from Mr. Bailey KCSI would be
required to purchase such shares. If KCSI were required to purchase those
shares of Janus common stock, it would have a material effect on the
Company's business, financial condition, results of operations and cash
flows.

Page 75

If all of the mandatory purchase and sale provisions and all the puts under
all Janus minority stockholder agreements had been implemented as of
December 31, 2000 (including those for Mr. Bailey as discussed above), and
Stilwell had been obligated to purchase such shares, Stilwell management
has indicated that Stilwell would have been required to pay approximately
$1.42 billion as of December 31, 2000 (of which KCSI could have been
ultimately responsible for approximately $1.25 billion at December 31,
2000, in the event Stilwell was unable to meet its obligations). These
amounts totaled approximately $789 million at December 31, 1999 and
approximately $447 million as of December 31, 1998. After giving effect to
the expected purchase from Mr. Bailey and the completed purchase of certain
shares from several minority stockholders, Stilwell would have been
required to pay approximately $616 million assuming exercises as of
December 31, 2000. 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.

Stilwell management has indicated that if Stilwell had been required to
purchase the holders' Janus common stock (including the stock from Mr.
Bailey as discussed above) after a Change in Ownership as of December 31,
2000 and 1999, the purchase price would have been approximately $1.67
billion and $899 million, respectively. KCSI could have been ultimately
responsible for approximately $1.31 billion at December 31, 2000 in the
event Stilwell was unable to meet its obligations. After giving effect to
the expected purchase from Mr. Bailey and the completed purchase of certain
shares from several minority stockholders, Stilwell would have been
required to pay approximately $871 million assuming exercises as of
December 31, 2000.

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 Stilwell 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 Stilwell'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 Stilwell and Mr. Bailey.

On September 25, 2000, Mr. Craig left Janus to manage money for a new
charitable foundation established by Mr. Craig and his wife. Mr. Craig had
previously been identified as the successor to Mr. Bailey in the event that
Mr. Bailey left Janus. Mr. Craig's responsibilities were assumed by
Janus's Executive Investment Committee, a group formed by Mr. Craig over a
year ago and comprised of several portfolio managers and Mr. Bailey.
Stilwell has indicated that a revised succession plan has not yet been
developed.

Stilwell does not believe Mr. Bailey's rights under the Janus Stock
Purchase Agreement are "substantive," within the meaning of Issue No.
96-16 of the Emerging Issues Task Force ("EITF 96-16"), of the FASB,
because Stilwell can terminate those rights at any time by removing Mr.
Bailey as an officer of Janus. Stilwell also believes that the removal of
Mr. Bailey would not result in significant harm to Stilwell 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, Stilwell

Page 76

has indicated it has the ability to cause Janus to amend its bylaws to include
such a provision. Under Colorado law, Stilwell has indicated it 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, Stilwell has stated that it 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 rendered to
Stilwell, that Stilwell 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 Stilwell
would likely prevail in that litigation.

Although Stilwell has the ability to remove Mr. Bailey, Stilwell has
indicated that there is 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
Stilwell 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
Stilwell their shares of Janus common stock. The amounts that Stilwell, or
if Stilwell were unable to meet its obligations to purchase such shares,
KCSI, would be required to pay in the event of such purchase and sale
transactions could be material. As of December 31, 2000, 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 $44.8 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, Stilwell 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 $86.2 million as of December 31, 2000. In
addition, notwithstanding any removal of Mr. Bailey, Stilwell 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, Stilwell would expect many current Janus employees to remain
with Janus.

Page 77

Mr. Bailey has not served as a portfolio manager for any Janus fund for several
years and (iii) 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,
Stilwell and KCSI, with respect to certain sales of Janus stock. These
agreements also require Stilwell or KCSI to purchase the shares of Janus
minority stockholders in certain circumstances. In addition, in the event
of a Change in Ownership of Stilwell, as defined in the Janus Stock
Purchase Agreement, Stilwell 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, 2000, 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.

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 with IFC 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.
The preferred shares may 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 the average of two consecutive years of earnings before
interest, taxes, depreciation and amortization, determined in accordance
with International Accounting Standards 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 $16.5 million.
Reconstruction of PCRC's right-of-way is expected to be complete in 2001
with commercial operations to begin immediately thereafter.

Note 4. Supplemental Cash Flow Disclosures

Supplemental Disclosures of Cash Flow Information.

2000 1999 1998
-------- -------- --------
Cash payments (refunds) (in millions):
Interest (includes $0.7, $1.5 and $7.9 million,
respectively, related to Stilwell) $ 72.4 $ 64.2 $ 74.2

Income taxes (includes $195.9, $142.9 and
$83.1 million, respectively, related to Stilwell) 143.1 143.3 83.2

Page 78

Non-cash Investing and Financing Activities.

The Company initiated the Twelfth Offering of KCSI common stock under the
Employee Stock Purchase Plan ("ESPP") during 2000. Stock subscribed under
the Twelfth Offering will be issued to employees in 2002 and paid for
through employee payroll deductions in 2001. The Company did not initiate
an offering of KCSI common stock under the ESPP during 1999. In connection
with the Eleventh Offering of the ESPP (initiated in 1998), in 1999 the
Company received 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 1998, the Company issued 113,589 shares of KCSI common stock,
respectively, under various offerings of the ESPP. These shares, totaling
a purchase price of $3.0 million in 1998 were subscribed and paid for
through employee payroll deductions in years preceding the issuance of
stock.

During 1999 and 1998, the Company's Board of Directors declared a quarterly
dividend totaling approximately $4.6 and $4.4 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. During early
2000, the Company's Board of Directors announced that, based upon a review
of the Company's dividend policy in conjunction with the KCS Credit
Facilities discussed in Note 7 and in light of the anticipated Spin-off, it
decided to suspend common stock dividends of KCSI under the then-existing
structure of the Company. This action complies with the terms and
covenants of the KCS Credit Facility. It is not anticipated that KCSI will
make any cash dividend payments to its common stockholders for the
foreseeable future.

In January 2000, KCSI borrowed $125 million under a $200 million 364-day
senior unsecured competitive advance/revolving credit facility (the
"Stilwell Credit Facility") to retire debt obligations as discussed in
Note 7. Stilwell assumed this credit facility and repaid the $125 million
in March 2000. Upon such assumption, KCSI was released from all
obligations, and Stilwell became the sole obligor, under the Stilwell
Credit Facility. The Company's indebtedness decreased as a result of the
assumption of this indebtedness by Stilwell.

In 2000, 1999 and 1998, the Company capitalized approximately $9 million,
$4 million and $3 million of costs related to capital projects for which no
cash outlay had yet occurred. These costs were included in accrued
liabilities at December 31, 2000, 1999 and 1998, respectively.

Note 5. Investments

Investments held for operating purposes, which include investments in
unconsolidated affiliates, are as follows (in millions):

Percentage
Ownership
Company Name December 31, 2000 Carrying Value
- ---------------- ----------------- ----------------------------
2000 1999 1998
-------- -------- --------
Grupo TFM 37% $ 306.0 $ 286.5 $ 285.1
Southern Capital 50% 24.6 28.1 24.6
Mexrail 49% 13.3 13.7 13.0
Other 14.3 8.8 5.2
-------- -------- --------
Total $ 358.2 $ 337.1 $ 327.9
======== ======== ========

Page 79

Grupo TFM. In June 1996, the Company and TMM wasformed 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 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 December 5, 1996)the
award date). TFM holds the concession to operate over Mexico's Northeast"Northeast Rail
LinesLines" for 50 years, with the option of a 50-year extension (subject to
certain conditions).

The remaining 20%TFM is a strategically important rail link to Mexico and the NAFTA
corridor. TFM's rail lines are estimated to transport approximately 40% of
Mexico's rail cargo and are located next to primary north/south truck
routes. They 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. 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% interestconnects 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 regardLaredo, Texas to the Government's interestUP and Tex Mex. 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, the Company has developed a
NAFTA rail system to participate in Grupo TFM - see below).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 thisthe 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 existingthen-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.

On or after October 31, 2003, the Mexican government has the option to sell
its 20% interest in TFM (1) through a public offering or (2) to Grupo TFM
at the initial share price paid by Grupo TFM plus interest computed at the
Mexican Base Rate (the Unidades de Inversion ("UDI") published by Banco
de Mexico). In first quarter 1997,the event that Grupo TFM does not purchase the Mexican
government's 20% interest in TFM, the Mexican government may require the
Company entered into two separate forward contracts -
$98 million in February 1997 and $100 million in March 1997 -TMM, or either the Company or TMM alone, to purchase its
interest. The Company and TMM have cross indemnities in the event the
Mexican pesos in ordergovernment requires only the Company or TMM to hedge against apurchase its
interest. The cross indemnities allow the party required to purchase the
Mexican government's interest to require the other party to purchase its
pro rata portion of such interest. However, if the Company's exposureCompany were required
to fluctuations in the value ofpurchase the Mexican peso versusgovernment's interest in TFM and TMM could not meet
its obligations under the U.S. dollar.cross-indemnity, then the Company would be
obligated to pay the total purchase price for the Mexican government's
interest.

Page 80

In April 1997, the Company realized a $3.8 million pretax gain in
connection with these
contracts.forward contracts entered into in first quarter 1997. This
gain was deferred, and has been accounted for as a component of the
Company's investment in Grupo TFM. These forward contracts were intended to
hedge only a portion of the Company's exposure to foreign currency risk
related to the final installment of the purchase price and not any other
transactions or balances.

Concurrent with the financing transactions,The Company and its subsidiary, KCSR, paid certain expenses on behalf of
Grupo TFM TMM andduring 1997. In addition, the Company entered intohas a Capital Contribution Agreement ("Contribution Agreement")management services
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 TFMto provide certain consulting 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.

29management services.
At December 31, 1999,2000, $2.4 million is reflected as an account receivable in the
Company's consolidated balance sheet.

At December 31, 2000, the Company's investment in Grupo TFM was
approximately $286.5$306.0 million. The Company's interest in Grupo TFM is
approximately 37%36.9% (with TMM and a TMM affiliate owning 38.4%38.5% and the
Mexican 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 bySouthern Capital. In 1996, the Company was
heldand GATX completed the transaction
for the formation and financing of a joint venture, Southern Capital, to
perform certain leasing and financing activities. Concurrent with the
formation of this joint venture, the Company entered into operating leases
with Southern Capital for substantially all the locomotives and rolling
stock contributed or sold to Southern Capital at rental rates which
management believes reflect market conditions. KCSR paid Southern Capital
$27.3, $27.0, and $25.1 million under these operating leases in an independent voting trust until2000, 1999
and 1998, respectively. In connection with the formation of Southern
Capital, the Company received approvalcash 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 as
a reduction in lease rental expense over the terms of the leases
(approximately $5.8, $5.6 and $4.4 million in 2000, 1999 and 1998,
respectively). During 2000 and 1998, the Company received a dividend of
$5.0 million from Southern Capital. No dividends were received from
Southern Capital during 1999.

Additionally, prior to the sale of the loan portfolio (discussed below),
the Company entered into agreements 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 these agreements were approximately $0.1, $0.5 and $1.7
million in 2000, 1999 and 1998, respectively. GATX also entered into an
agreement to manage the rail portfolio assets, as well as to perform
certain general and administrative services.

In April 1999, Southern Capital sold its loan portfolio assets (comprised
primarily of finance receivables in the amusement and other non-rail
transportation industries) to Textron Financial Corporation. The purchase
price for these assets approximated $52.8 million resulting in a gain of
approximately $2.7 million. The proceeds 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 valuesale were used to reduce
outstanding indebtedness of the underlying net assetsjoint venture as mandated 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,its loan
agreement.

Mexrail, Inc. In November 1995, the Company accountedpurchased a 49% interest in
Mexrail, which owns 100% of Tex Mex. Tex Mex and TFM operate the
international rail traffic bridge at Laredo spanning the Rio Grande River.
This bridge is a significant entry point for Gateway Westernrail traffic between Mexico
and the United States. Tex Mex also is comprised of a 521-mile rail
network between Laredo and Beaumont, Texas (including 157 owned miles from
Laredo to Corpus Christi, Texas and 364 miles, via trackage rights, from
Corpus Christi to Houston and Beaumont, Texas). 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 Class I railroads at various locations. The
Company accounts for its investment in Mexrail using the equity method of
accounting.

Page 81

Other. Other investments are comprised primarily of PCRC. The Company's
investment in PCRC was $9.5 million, $4.5 and $0.9 million at December 31,
2000, 1999 and 1998, respectively. See Note 3.

Financial Information. Combined financial information of all
unconsolidated affiliates that the Company and its subsidiaries account for
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 operationsfollows. Amounts shown 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 (basedGrupo TFM are reflected
on a fixed
formulaU.S. GAAP basis. (dollars 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 RESULTSmillions)

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

December 31, 2000
------------------------------------------
Grupo Southern
TFM Capital Mexrail Other Total
-------- -------- -------- -------- --------
Investment in unconsolidated affiliates $ 306.0 $ 24.6 $ 13.3 $ 9.8 $ 353.7

Equity in net assets of unconsolidated affiliates 303.0 24.6 14.0 8.9 350.5

Dividends and distributions received
from Unconsolidated affiliates -- 5.0 -- -- 5.0

Financial Condition:
Current assets $ 190.9 $ 1.2 $ 23.4 $ 4.8 $ 220.3
Non-current assets
1,885.6 375.0 43.8 51.1 2,355.5
-------- -------- -------- -------- -------
Assets $ 2,076.5 $ 376.2 $ 67.2 $ 55.9 $2,575.8
========= ======== ======== ======== ========

Current liabilities $ 80.5 $ 114.6 $ 38.7 $ 0.2 $ 234.0
Non-current liabilities 817.8 212.5 -- 33.5 1,063.8
Minority interest 357.2 -- -- -- 357.2
Equity of stockholders and partners 821.0 49.1 28.5 22.2 920.8
-------- -------- -------- -------- -------
Liabilities and equity $ 2,076.5 $ 376.2 $ 67.2 $ 55.9 $2,575.8

Operating results:
Revenues $ 640.5 $ 31.1 $ 57.6 $ 0.8 $ 730.0
-------- -------- -------- -------- -------
Costs and expenses $ 476.3 $ 27.1 $ 57.6 $ 0.6 $ 561.6
-------- -------- -------- -------- -------
Net income $ 44.8 $ 4.0 $ - $ 0.2 $ 49.0
-------- -------- -------- -------- -------

December 31, 1999
------------------------------------------
Grupo Southern
TFM Capital Mexrail Other Total
-------- -------- -------- -------- --------
Investment in unconsolidated affiliates $ 286.5 $ 28.1 $ 13.7 $ 4.5 $ 332.8

Equity in net assets of unconsolidated affiliates 283.2 28.1 14.0 4.1 329.4

Financial Condition:
Current assets $ 134.4 $ 0.1 $ 23.1 $ 5.4 163.0
Non-current assets 1,905.7 274.5 43.6 12.3 2,236.1
-------- -------- -------- -------- --------
Assets $2,040.1 $ 274.6 $ 66.7 $ 17.7 $2,399.1
========= ======== ======== ======== ========

Current liabilities $ 255.9 $ -- $ 32.7 $ 1.7 $ 290.3
Non-current liabilities 672.9 218.4 5.5 5.8 902.6
Minority interest 343.9 -- -- -- 343.9
Equity of stockholders and partners 767.4 56.2 28.5 10.2 862.3
-------- -------- -------- -------- --------
Liabilities and equity $2,040.1 $274.6 $ 66.7 $ 17.7 $2,399.1
========= ======== ======== ======== ========

Operating results:
Revenues $ 524.5 $ 26.0 $ 50.0 $ 0.9 $ 601.4
-------- -------- -------- -------- --------
Costs and expenses $ 613.5404.8 $ 573.222.3 $ 48.3 $ 0.8 $ 476.2
-------- -------- -------- -------- --------
Net income $ 4.1 $ 7.0 $ 1.6 $ 0.1 $ 12.8
-------- -------- -------- -------- --------

Page 82

December 31, 1998
------------------------------------------
Grupo Southern
TFM Capital Mexrail Other Total
-------- -------- -------- -------- --------

Investment in unconsolidated affiliates $ 285.1 $ 24.6 $ 13.0 $ 0.8 $ 323.5

Equity in net assets of unconsolidated affiliates 281.7 24.6 13.2 3.0 322.5

Dividends and distributions received
from unconsolidated affiliates -- 5.0 -- -- 5.0

Financial Services 1,212.3 670.8 485.1
----------- ----------- -----------
TotalCondition:
Current assets $ 1,813.7109.9 $ 1,284.31.6 $ 1,058.3
=========== =========== ===========23.3 $ 1.6 $ 136.4
Non-current assets 1,974.7 228.6 47.3 6.0 2,256.6
-------- -------- -------- -------- --------
Assets $2,084.6 $ 230.2 $ 70.6 $ 7.6 $2,393.0
======== ======== ======== ======== ========

Current liabilities $ 233.9 $ 0.1 $ 25.1 $ 0.1 $ 259.2
Non-current liabilities 745.0 180.9 18.5 1.0 945.4
Minority interest 342.4 -- -- -- 342.4
Equity of stockholders and partners 763.3 49.2 27.0 6.5 846.0
-------- -------- -------- -------- --------
Liabilities and equity $2,084.6 $ 230.2 $ 70.6 $ 7.6 $2,393.0
======== ======== ======== ======== ========
Operating Income (Loss)
Transportationresults:
Revenues $ 64.1431.3 $ 113.931.1 $ (92.7)
Financial Services 518.3 280.6 199.2
----------- ----------- -----------
Total48.2 $ 582.40.8 $ 394.5511.4
-------- -------- -------- -------- --------
Costs and expenses $ 106.5
=========== =========== ===========354.7 $ 27.1 $ 52.2 $ 0.4 $ 434.4
-------- -------- -------- -------- --------
Net Income (Loss)
Transportationincome (loss) $ 10.2(7.3) $ 38.04.0 $ (132.1)
Financial Services 313.1 152.2 118.0
----------- ----------- -----------
Total(2.4) $ 323.30.3 $ 190.2 $ (14.1)
=========== =========== ===========(5.4)
-------- -------- -------- -------- --------

(i) Includes unusual costs and expensesGenerally, the difference between the carrying amount 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 yearunconsolidated affiliates and the impact of the 1998 DST and USCS merger charges. Partially offsetting
this increase was a declineunderlying equity in net
income from the Transportation segment
arising from lower revenuesassets is attributable to certain equity investments whose carrying amounts
have been reduced to zero, 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, asreport 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 relateddeficit. With respect to the
Company's investment in Grupo TFM, partially offset by a decrease in average debt balances duethe effects of foreign currency
transactions and capitalized interest prior to net
repayments and a slight decrease in interest rates relating to the lines of
credit. Additionally duringJune 23, 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 expenseswhich are not
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 ainvestee's books, also 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.

Intermodaldifferences.

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 calculationsfor 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.

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 wherebyNote 6. Other Balance Sheet Captions

Accounts Receivable. Accounts receivable include 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 followsfollowing allowances
(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 31,2000 1999 1998
and 1997 were as follows
(in billions)-------- -------- --------
Accounts receivable $ 140.2 $ 140.2 $ 137.6
Allowance for doubtful accounts (5.2) (8.0) (5.8)
-------- -------- --------
Accounts receivable, net $ 135.0 $ 132.2 $ 131.8
======== ======== ========
Doubtful accounts expense $ (0.6) 1.7 $ 0.9
-------- -------- --------

page 83

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

1999 1998 1997
---- ---- ----
JANUS
Janus Advised Funds:
Janus Investment Funds (i)2000 1999 1998
-------- -------- --------
Deferred income taxes $ 171.89.3 $ 75.98.7 $ 48.7
Janus Aspen Series (ii) 17.414.7
Receivable - Duncan case (Note 11) 7.0 - -
Prepaid expenses 1.0 2.5 2.2
Other 8.6 12.7 8.9
-------- -------- --------
Total $ 25.9 $ 23.9 $ 25.8

Properties. Properties and related accumulated depreciation and
amortization are summarized below (in millions):

2000 1999 1998
-------- -------- --------
Properties, at cost
Road properties $1,394.8 $1,367.9 $1,321.1
Equipment 295.5 279.8 283.1
Equipment under capital leases 6.7 6.7 6.7
Other 32.4 54.5 55.2
-------- -------- --------
Total 1,729.4 1,708.9 1,666.1
Accumulated depreciation and
amortization 622.9 578.0 535.0
-------- -------- --------
Total 1,106.5 1,130.9 1,131.1
Construction in progress 221.3 146.5 98.2
-------- -------- --------
Net Properties $1,327.8 $1,277.4 $1,229.3
======== ======== ========

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

2000 1999 1998
-------- -------- --------
Claims reserves $ 45.7 $ 35.7 $ 34.8
Prepaid freight charges due
other railroads 24.5 25.1 30.4
Duncan case liability (Note 11) 14.2 - -
Car hire per diem 12.1 13.5 12.1
Vacation accrual 8.5 8.0 7.9
Other non-income related taxes 5.3 6.2 3.3
Janus World Funds (iii) 1.4 0.13.9
Federal income taxes payable (receivable)3.5 4.8 (7.2)
Interest payable 7.4 12.5 1.3
Other 38.7 62.7 50.5
-------- -------- --------
Total $ 159.9 $ 168.5 $ 133.7
======== ======== ========

Page 84

Note 7. Long-Term Debt

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

2000 1999 1998
KCSI
Competitive Advance & Revolving Credit
Facilities, Rates: Below Prime $ - Janus Money Market Funds 9.4 4.8 2.6
------------- -------------- --------------$ 250.0 $ 315.0
Notes and Debentures, due July
2002 to December 2025 1.6 400.0 400.0
Rates: 6.625% to 8.80%
Unamortized discount - (2.1) (2.4)

KCSR
Term Loans, variable interest rates
9.20% to 9.45% due December 2005
to December 2006 400.0 - -
Senior Notes, 9.5% interest rate, due
October 1, 2008 200.0 - -
Equipment Trust Certificates 8.56% to 9.68%
due serially to December 15, 2006 54.9 64.7 74.4
Capital Lease Obligations, 7.15% to 9.00%,
due serially to September 30, 2009 3.5 3.9 4.4

Gateway Western
Revolving Credit Facility, variable interest rate
(7.31% and 5.52% at December 31, 1999
and 1998 respectively) - 28.0 28.0
Term Loans with State of Illinois, 3% to 5%
due serially to 2017. 5.3 5.8 6.1

Other
Industrial Revenue Bond 4.0 5.0 5.0
Mortgage Note 5.3 5.6 5.8
-------- -------- --------
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 Management674.6 760.9 836.3
Less: debt due within one year 36.2 10.9 10.7
-------- -------- --------
Long-term debt $ 257.4638.4 $ 113.1750.0 $ 71.6
============= ============== ==============825.6
======== ======== ========

(i) Excludes money market funds

(ii)Debt Refinancing and Re-capitalization of the Company's Debt Structure.

o During the third quarter of 2000, the Company completed a $200
million private offering of debt securities through its wholly owned
subsidiary, KCSR. The Janus Aspen Series consistsoffering, completed pursuant to Rule 144A under
the Securities Act of eleven portfolios offered1933 in the United States and Regulation S outside
the United States, consisted of 8-year Senior Unsecured Notes. The
Notes bear a fixed annual interest rate of 9.5% and are due on October
1, 2008. These Notes contain certain covenants typical of this type of
debt instrument similar to those described below for the KCS Credit
Facility. Net proceeds from the offering of $196.5 million were used to
refinance existing bank term debt, which was scheduled to mature on
January 11, 2001 (see below). Costs related to the issuance of these
notes of approximately $4.1 million were deferred and are being
amortized over the eight-year term of the Notes.

Page 85

On January 25, 2001, the Company filed a Form S-4 Registration Statement
with the Securities and Exchange Commission ("SEC") registering exchange
notes under the Securities Act of 1933. The Company filed Amendment No.
1 to this Registration Statement and the SEC declared this Registration
Statement effective on March 15, 2001, thereby providing the opportunity
for holders of the initial Notes to exchange them for registered notes.
The registration exchange offer expires on April 16, 2001, unless
extended by the Company.

o Also during the third quarter of 2000, Grupo TFM accomplished a
refinancing of approximately $285 million of its Senior Secured Credit
Facility through variable annuity and variable life insurance contracts, and certain
qualified pension plans

(iii) Janus World Funds Plcthe issuance of a U.S. Commercial Paper ("Janus World Funds"USCP")
program backed by a letter of credit. The USCP is a group2-year program for
up to a face value of Ireland-domiciled funds introduced in December 1998

(iv) Acquired in April 1998$310 million. 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 DSTaverage discount rate for the
year ended December 31, 1999
increased 45% versus comparable 1998 (exclusive of fourth quarter merger-related
costs)first issuance was 6.54%. Stilwell contributed $152.2 millionThis refinancing provides the ability for
Grupo TFM 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.pay limited dividends.

As a result of fluctuations in the level of assets under management throughout
1998, revenues decreasedthis refinancing, Grupo TFM recorded 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$9.2
million in 1998 due to reduced goodwill from the 1997
impairment discussed previously.

Berger recorded $1.5pretax extraordinary debt retirement costs. KCSI reported
$1.7 million in equity earnings from(net of income taxes of $0.1 million) as 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 trendcosts 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 inflowsextraordinary item.

o In preparation 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 ofSpin-off, the Company following the Separation
were initiated with the re-capitalization of the Company'sre-capitalized its debt
structure in January 2000 through a series of transactions 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.

Pensionsfollows:

Bond Tender 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.Debt Repayment. 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
existingthen-existing revolving credit facilities was obtained from two new
credit facilities ("KCS(the "KCS Credit Facility" and the "Stilwell Credit
Facility" -, or collectively "New Credit Facilities"), each of which was
entered into on January 11, 2000. Accordingly,These New Credit Facilities, as
described further below, provided for total commitments of $950
million.

The Company reported an extraordinary loss on the extinguishment of the
Company's ongoing interest exposurenotes and debentures of approximately $5.9 million (net of
income taxes of approximately $3.2 million).

KCS Credit Facility. The KCS Credit Facility provided for a total
commitment of $750 million, comprised of three separate term loans
totaling $600 million and a revolving credit facility available until
January 11, 2006 ("KCS Revolver"). The term loans are comprised of the
following: $200 million, which was due January 11, 2001 prior to its
refinancing (see discussion above), $150 million due December 30, 2005
and $250 million due December 30, 2006. The availability under fixed ratethe KCS
Revolver was reduced from $150 million to $100 million on January 2,
2001. Letters of credit are also available under the KCS Revolver up to
a limit of $15 million. Borrowings under the KCS Credit Facility are
secured by substantially all of KCSI's assets and guaranteed by a
majority of its subsidiaries.

Page 86

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 is not
material.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 may be used for general corporate purposes.

At December 31, 1999,2000, the Company had financing available through the
KCS Revolver of $150 million, subject to any limitations within existing
financial covenants. This availability was reduced to $100 million on
January 2, 2001 as described above.

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. Following
completion of the refinancing of the January 11, 2001 term loan
discussed above, each remaining loan under the KCS Credit Facility shall
accrue interest at the selected rate plus an applicable margin. The
applicable margin is determined by the type of loan and the Company's
floating-rate indebtedness totaled $278
million. However,leverage ratio (defined 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 restructuringratio of the Company's total debt to
consolidated earnings before interest, taxes, depreciation and
amortization excluding the Companyequity earnings of unconsolidated affiliates
for the prior four fiscal quarters). Based on the Company's current
leverage ratio, the term loan maturing in 2005 and all loans under the
KCS Revolver have an applicable margin of 2.50% per annum for LIBOR
priced loans and 1.50% per annum for prime rate priced loans. The term
loan maturing in 2006 currently has an applicable margin of 2.75% per
annum for LIBOR priced loans and 1.75% per annum for prime rate based
loans.

The KCS Credit Facility also 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 more sensitivepaid on any letter of credit issued under the KCS Credit Facility.

The term loans are subject to fluctuations in interest rates than in
recent years.

A hypothetical 100 basis points increase in eacha mandatory prepayment with, among other
things:

o 100% of the respective target
interest indexes would resultnet proceeds of (1) certain asset sales or other
dispositions of property, (2) the sale or issuance of certain
indebtedness or equity securities and (3) certain insurance
recoveries.
o 50% of excess cash flow (as defined in the KCS Credit Facility)

The KCS Credit Facility contains certain covenants that, among others,
restrict the Company's ability to:

Page 87

In addition KCSI is required to comply with specific financial ratios
including minimum interest expense coverage and leverage ratios. The
KCS Credit Facility also contains certain customary events of approximately $7
million on an annualized basis fordefault.
These covenants, along with other provisions, could restrict maximum
utilization of the floating-rate instruments assumed to be
outstandingfacility. The Company was in compliance with these
various provisions, including the financial covenants, as of December
31, 1999 given the January 11, 2000 transaction.2000.

In 1998,accordance with 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 requireprovision requiring the Company to manage its
interest rate risk exposure through the use of hedging instruments for a portion
of its outstanding borrowings. Accordingly,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 is
limited to anprovides a cap on the Company's interest rate of 7.25%
plus the applicable spread, while $100 million is limited to anlimits the interest rate
ofto 7% plus the applicable spread. Counterparties to the interest rate
cap agreements are major financial institutions who are also participantsparticipate in the
New Credit Facilities. CreditThe Company believes that 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 availableremote.

Issue costs relating to the CompanyKCS Credit Facility of approximately $17.6
million were deferred and its
subsidiaries for indebtednessare being amortized over the respective term
of the loans. In conjunction with similar terms and average maturities, the fair valuerefinancing of long-term debt afterthe $200 million
term loan previously due January 11, 2001, approximately $1.8 million of
these deferred costs were immediately recognized. After consideration
of amortization and this $1.8 million write-off, the January 11, 2000
transactionremaining balance
of these deferred costs was approximately $766$11.3 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 portfoliodebt refinancing transactions discussed above,
extraordinary items totaled $8.7 million (net of investments included in these various funds includes
combinationsincome taxes 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)$4.0
million) 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

Stilwell Credit Facility. On January 11, 2000, KCSI 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 hasarranged 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.new
$200 million 364-day senior unsecured competitive Advance/Revolving
Credit Facility ("Company" or "KCSI"Stilwell Credit Facility") 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 ofborrowed $125
million of KCSIunder this facility and used the proceeds to retire debt
by Stilwell (in connection with the Company's
re-capitalization of its debt structureobligations 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 andabove. Stilwell assumed all of KCSI's
liabilities associated withthis credit facility,
including 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$125 million borrowed thereunder, 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.

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.

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 inSpin-off, KCSI was released from all obligations thereunder.
Stilwell repaid 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 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$125 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.

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
95

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
----------- ----------- ---------- -----------
97

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
----------- ----------- ----------
99

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 remainsremained
outstanding. During February 2001, however, exchange notes for the $200 million
Senior Notes due October 1, 2008 were registered with the SEC as described
further above. 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, 1999,2000, 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.Page 88
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$48.9, $44.0 and $64$48.0 million for the years 2000,
1999 and 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----- ----- ----- ----- ----- -----
2001 $ 0.70.8 $ 0.3 $ 0.40.5 $ 10.535.7 $ 10.936.2 $ 34.335.0 $ 39.417.8 $ 73.7
2001 0.8 0.3 0.5 12.3 12.8 34.3 30.3 64.652.8
2002 0.7 0.2 0.5 112.3 112.8 34.3 25.9 60.245.9 46.4 35.0 13.3 48.3
2003 0.8 0.2 0.6 15.8 16.4 34.3 20.2 54.549.7 50.3 35.0 11.7 46.7
2004 0.6 0.1 0.5 12.3 12.8 31.3 10.0 41.340.7 41.2 31.6 6.3 37.9
2005 0.5 0.1 0.4 49.0 49.4 27.0 4.9 31.9
Later years 1.7 0.3 1.4 593.8 595.2 215.0 37.5 252.5
-------- --------- --------- --------- -------- -------- -------- -------1.2 0.2 1.0 450.1 451.1 195.3 20.9 216.2
----- ----- ----- ----- ----- ----- ----- -----
Total $ 5.34.6 $ 1.41.1 $ 3.93.5 $671.1 $674.6 $358.9 $ 757.0 $ 760.9 $ 383.5 $ 163.3 $ 546.8
======== ========= ========= ========= ======== ======== ======== =======74.9 $433.8
===== ===== ===== ===== ===== ===== ===== =====

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 (after
consideration of the January 11, 2000 transaction) was approximately $766,
$867$685
and $947$766 million at December 31, 2000 and 1999, 1998 and 1997, respectively. The fair
value of long-term debt was $867 million at December 31, 1998.

Note 9.8. Income Taxes

Under the liability method of accounting for income taxes specified by
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," the 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 expenseTax Expense. Income tax provision (benefit) attributable to continuing
operations consists of the following components (in millions):
1999 1998 1997
----------- ----------- ----------

2000 1999 1998
-------- -------- --------
Current
Federal $ 179.2(26.7) $ 91.6(3.4) $ 73.4(8.5)
State and local 22.3 16.0 11.6
----------- ----------- ----------(0.2) 0.6 0.1
Foreign withholding taxes 0.2 - -
-------- -------- --------
Total current 201.5 107.6 85.0
----------- ----------- ----------(26.7) (2.8) (8.4)
-------- -------- --------
Deferred
Federal 18.7 20.8 (14.1)23.4 9.4 30.7
State and local 2.9 2.4 (2.5)
----------- ----------- -----------(0.3) 0.4 4.8
-------- -------- --------
Total deferred 21.6 23.2 (16.6)
----------- ----------- ----------23.1 9.8 35.5
-------- -------- --------
Total income tax provision (benefit)$ 223.1(3.6) $ 130.87.0 $ 68.4
=========== =========== ==========27.1
======== ======== ========

The federal and state deferred tax liabilities (assets) recorded on the Consolidated Balance Sheets at
December 31 followPage 89

The federal and state deferred tax liabilities (assets) attributable to
continuing operations at December 31 are as follows (in millions):
1999 1998 1997
----------- ----------- ----------

2000 1999 1998
Liabilities:
Depreciation $ 350.3351.0 $ 345.2333.3 $ 306.6
Equity, unconsolidated affiliates 151.6 119.5 106.8312.7
Other, net 5.7 0.4 0.4
----------- ----------- ----------6.3 (1.4) 1.4
-------- -------- --------
Gross deferred tax liabilities 507.6 465.1 413.8
----------- ----------- ----------357.3 331.9 314.1
-------- -------- --------
Assets:
NOL and AMT credit carryovers (2.4) (11.2) (11.2)(8.8) (2.3) (6.6)
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)(22.3) (33.2) (25.6)
Vacation accrual (4.9) (4.3) (3.3)(2.5) (2.9) (2.6)
Other, net (0.2) (6.1) (3.2)
----------- ----------- ----------(0.8) (4.8) (8.8)
-------- -------- --------
Gross deferred tax assets (66.8) (76.3) (91.7)
----------- ----------- ----------(34.4) (43.2) (43.6)
-------- -------- --------
Net deferred tax liability $ 440.8322.9 $ 388.8288.7 $ 322.1
=========== =========== ==========270.5
======== ======== ========

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
----------- ----------- ----------

2000 1999 1998
-------- -------- --------
Income tax expenseprovision using the
statutory rate in effect $ 211.37.6 $ 124.05.6 $ 27.722.8
Tax effect of:
Earnings of equity investees (12.6) (6.3) (7.0)
Goodwill Impairment (see Note 4) 35.0(7.2) (0.7) 1.5
Research and development tax credit (0.5) - -
1990-1992 IRS exam settlement (3.3) - -
Other, net (0.8) (5.3) 3.6
----------- ----------- ----------0.1 1.1 (2.1)
-------- -------- --------
Federal income tax expense 197.9 112.4 59.3provision (benefit) (3.3) 6.0 22.2
State and local income tax expense 25.2 18.4 9.1
----------- ----------- ----------(0.5) 1.0 4.9
Foreign withholding taxes 0.2 - -
-------- -------- --------
Total $ 223.1(3.6) $ 130.87.0 $ 68.4
=========== =========== ==========27.1
======== ======== ========
Effective tax rate 37.0% 36.9% 86.4%
=========== =========== ==========(16.5)% 40.7% 41.5%
======== ======== ========

105Temporary Difference Attributable to Grupo TFM Investment. At December 31,
2000, the Company's book basis exceeded the tax basis of its investment in
Grupo TFM by $5.2 million. The Company has not provided a deferred income
tax liability for the income taxes, if any, which might become payable on
the realization of this basis difference because the Company intends to
indefinitely reinvest in Grupo TFM the financial statement earnings which
gave rise to the basis differential. Moreover, the Company has no other
plans to realize this basis differential by a sale of its investment in
Grupo TFM. If the Company were to realize this basis difference in the
future by a receipt of dividends or the sale of its interest in Grupo TFM,
the Company would incur gross federal income taxes of $1.8 million, which
might be partially or fully offset by Mexican income taxes and could be
available to reduce such federal income taxes at such time.

Tax Carryovers. At December 31, 1998,1999, the Company had $4.0$3.4 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.Page 90

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,$1.5 and $25.0 and $0.7 million of these NOL's in 1999,2000 and 1998,
and 1997, respectively. $31.9The Company did not utilize any NOL's during 1999. $32.6
million of the NOL carryover was utilized in pre-1997pre-1998 years leaving
approximately $5.7$8.7 million of carryover available at December 31, 1999,2000,
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 1990,1993, the statute of limitations has closed. In
addition, other taxing authorities are currently examining the years 19901994
through 19981999 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.

As noted in the rate reconciliation above, the Company relieved $3.3
million of income taxes previously accrued as a result of the favorable
resolution of the federal tax examination for the years 1990-1992.

Note 10.9. Stockholders' Equity

Reverse Stock Split. On July 12, 2000, KCSI completed a reverse stock
split whereby every two shares of KCSI common stock was converted into one
share of KCSI common stock. All periods presented in the accompanying
consolidated financial statements reflect this one-for-two reverse stock
split, which had previously been approved by KCSI common stockholders.

Pro Forma Fair Value Information for Stock-Based Compensation Plans. AtUnder
FAS 123, companies must either record compensation expense based on the
estimated grant date fair value of stock options granted or disclose the
impact on net income as if they had adopted the fair value method (for
grants subsequent to December 31, 1999, the Company1994.) If KCSI 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. Hadmeasured compensation
cost for the Company's stock-based compensation plans
been determined in accordance withKCSI stock options granted to its employees and shares
subscribed by its employees under the KCSI employee stock purchase plan, under
the fair value accountingbased method prescribed by SFASFAS 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:as follows:

2000 1999 1998
-------- -------- --------
Net income (loss) (in millions):
As reported $ 380.5 $ 323.3 $ 190.2
Pro Forma 375.8 318.0 179.0

Earnings (loss) per Basic share:
As reported $ 6.71 $ 5.86 $ 3.47
Pro Forma 6.63 5.76 3.28

Earnings (loss) per Diluted share:
As reported $ 6.42 $ 5.57 $ 3.32
Pro Forma 6.37 5.48 3.16

Page 91
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 26.020.6 million shares of the Company's
common stock by officers and other designated employees. Such optionsOptions granted
under this Plan 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 RateFor 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:

2000 1999 1998
------------ ------------ ------------
Dividend Yield 0% .25% to .36% .34% to .56%
Expected Volatility 34% to 50% 42% to 43% 30% to 42%
Risk-free Interest 5.92% to 6.24% 4.67% to 5.75% 4.74% to 5.64% 5.73% to 6.57%
Expected Life 3 years 3 years 3 years

Effect of Spin-off on Existing Stock Options

FIN 44 address the issues surrounding fixed stock option plans resulting
from an equity restructuring, including spin-offs. This guidance indicates
that changes to fixed stock option grants made to restore the option
holder's economic position as a result of a spin-off do not result in
additional compensation expense if certain criteria are met as follows: i)
aggregate intrinsic value (difference between the market value per share
and exercise price) of the options immediately after the change is not
greater than the aggregate intrinsic value of the options immediately
before the change; ii) the ratio of the exercise price per option to the
market value per share is not reduced; and iii) the vesting provisions and
option period of the original option grant remain the same.

As part of the Spin-off, generally holders of an option to purchase one
share of KCSI common stock received options to purchase two shares of
Stilwell common stock. The option exercise price for the KCSI and Stilwell
stock options was prorated based on the market value for KCSI common stock
and Stilwell common stock on the date of the Spin-off. The exercise prices
for periods subsequent to the Spin-off have accordingly been reduced to
reflect this amount. See below.

The changes made to the Company's fixed stock option grants as a result of
the Spin-off resulted in the option holder having the same economic
position both before and after the Spin-off. In accordance with the
provisions of FIN 44, the Company, therefore, did not record additional
compensation expense.

Summary of Company's Stock Option Plans

A summary of the status of the Company's stock option plans as of December
31, 2000, 1999 and 1998, and changes during the years then ended, is
presented below. The number of shares presented, the weighted average
exercise price and the weighted average fair value of options

Page 92

granted have been restated to reflect the reverse stock split on July 12, 2000
described further above. However, the weighted average exercise price and the
weighted average fair value of options have not been restated to reflect
the impact of the Spin-off for periods prior to the Spin-off.

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-

7/13/2000-12/31/2000 1/1/2000 - 7/12/2000
Weighted- Weighted-
Average Average Average
Exercise
Exercise Exercise
Shares Price Shares Price
--------- --------- --------- ---------
Outstanding at beginning of period 4,165,692 $1.26 4,280,581 $33.94
Exercised (2,469,667) 0.76 (394,803) 47.14
Canceled/Expired (388,686) 4.82 (1,800) 89.13
Granted 5,554,697 5.81 281,714 142.08
--------- ---------
Outstanding at end of period 6,862,036 4.92 4,165,692 39.98
========= =========
Exercisable at December 31 1,355,464 $1.41

Weighted-Average Fair Value of
options granted during the period $1.54 $ 49.88

1999 1998
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price ------------ ----- ----------- ----- ----------- -----
Shares Price
--------- --------- --------- ---------
Outstanding at January 1 9,427,942 $15.35 9,892,581 $12.12 10,384,149 $10.834,713,971 $30.70 4,946,291 $ 24.24
Exercised (1,272,964 15.91 (1,600,829) 13.07 (1,874,639) 10.33(636,482) 31.82 (800,415) 26.14
Canceled/Expired (84,532) 42.89 (40,933) 21.75 (401,634) 15.40(42,266) 85.78 (20,467) 43.50
Granted 490,71 49.73 1,177,123 39.62 1,784,705 18.51
---------- ----------- ----------245,358 99.46 588,562 79.24
--------- ---------
Outstanding at December 31 8,561,162 16.97 9,427,942 15.35 9,892,581 12.12
========== =========== ==========4,280,581 33.94 4,713,971 30.70
========= =========
Exercisable at December 31 7,668,785 8,222,782 8,028,4753,834,393 $ 27.06 4,111,391 $ 24.02

Weighted-Average Fair Value of
options granted during the year $16.64 $ 12.3133.28 $ 4.7224.62

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 13.53The following table summarizes information about stock options outstanding
at December 31, 2000:
OUTSTANDING EXERCISABLE
----------- -----------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Shares Remaining Exercise Shares Exercise
Prices Outstanding Contractual Life Price Exercisable Price
- ---------- ----------- ---------------- -------- ----------- ---------
$.20 - 1 728,052 4.1 years $ 0.85 728,052 $ 0.85
1 - 2 326,383 6.2 1.33 326,383 1.33
2 - 4 320,875 7.9 2.79 283,161 2.77
4 - 7 5,390,150 9.5 5.75 17,868 4.17
7 - 9 96,576 9.7 8.21 - -
--------- ---------
.20 - 9 6,862,036 8.7 4.92 1,355,464 1.41
========= ========= ==========

Shares available for future grants at December 31, 1999 aggregated 8,859,773.under the stock option plan are 7,078,232.

Page 93

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 22.811.4 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, 1999,2000,
there were approximately 11.65.1 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 13.35 233,133The following table summarizes activity related to the various ESPP
offerings:

Date Shares Shares Date
Initiated Subscribed Price Issued Issued
--------- ---------- ----- ------ ------
Twelfth Offering 2000 705,797 $7.31 - 2002
Eleventh Offering 1998 106,913 71.94 94,149 1999/2000
Tenth Offering 1996 125,540 26.70 116,567 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 Twelfth and 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:used for the
Twelfth and Eleventh Offerings, respectively: i) dividend yield of 0.00%
and .95%; ii) expected volatility of 38% and 42%; iii) risk-free interest
rate of 5.77% and 4.63%; and iv) expected life of one year. The
weighted-average fair value of purchase rights granted under the Twelfth
and Eleventh OfferingOfferings of the ESPP was $10.76.were $2.19 and $21.52, respectively.
There were no offerings in 19991999.

The performance stock options have an exercise price of $5.75 per share,
which was the mean trading price of KCSI common stock on the New York Stock
Exchange (the "NYSE") on July 13, 2000. The performance stock options
vest and become exercisable in equal installments as KCSI's stock price
achieves certain thresholds and after one year following the grant date.
All performance thresholds have been met for these performance stock
options and all will be exercisable on July 13, 2001. These stock options
expire at the end of 10 years, subject to certain early termination
events. Vesting will accelerate in the event of death, disability, or 1997.

Forward Stock Purchase Contract. During 1995,a
KCSI board-approved change in control of KCSI.

The purchase price of the Company entered into a forwardrestricted shares, and the exercise price of the
stock purchase contract ("the contract") as a means of securing a potentially
favorable price for the repurchase of six million shares of its common stockoptions granted in connection with the purchase of restricted shares,
is based on the mean trading price of KCSI common stock repurchase program authorized byon the Company's Board
of DirectorsNYSE on April 24, 1995. During 1999 and 1998, no shares werethe
date the employee or Outside Director purchased under this arrangement. During 1997, the Company purchased 2.4 millionrestricted shares under this arrangement at an aggregate pricethe
Compensation Program. Each eligible employee and Outside Director was
allowed to purchase the restricted shares offered under the Compensation
Program on one date out of $39 million (including
transaction premium). The contract contained provisions which alloweda selection of dates offered. With respect to
management employees, the Company to elect a net cash or net share settlementnumber of shares available for purchase and the
number of options granted in lieu of physical
settlementconnection with shares purchased were based on
the compensation level of the shares; however, allemployees. Each Outside Director was granted
the right to purchase up to 3,000 restricted shares were physically settled. The
transaction was recordedof KCSI, with two KCSI
stock options granted in connection with each restricted share purchased.
Shares purchased are restricted from sale and the consolidated financial statements upon
settlementoptions are not
exercisable for a period of three years for senior management and the
contract in accordanceOutside Directors and two years for other management employees. KCSI
provided senior management and the Outside Directors with the accounting policies describedoption of
using a sixty-day interest-bearing full recourse note to

Page 94

purchase these restricted shares. These loans accrued interest at 6.49% per
annum and were all fully repaid by September 11, 2000.

Management employees purchased 475,597 shares of KCSI restricted stock
under the Compensation Program and 910,697 stock options were granted in
Note 2.

108connection with the purchase of those restricted shares. Outside Directors
purchased a total of 9,000 shares of KCSI restricted stock under the
Compensation Program and 18,000 KCSI stock options were granted in
connection with the purchase of those shares.

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 Commoncommon
stock, at the rate of 126 to 1, resulting in the issuance to the EPFT of
1,531,656765,828 shares of such Commoncommon stock. The Trustee then transferred this
Commoncommon 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, 19992000
totaled 36,164,402,15,221,844 compared with 36,923,32518,082,201 at December 31, 19981999 and
37,122,19518,461,663 at December 31, 1997.1998. The Company issued shares of common stock
from Treasury - 1,218,9232,375,760 in 2000, 609,462 in 1999 1,663,349and 831,675 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 2000 the Company issued 484,597 of
restricted stock in connection with the New Compensation Program (see
above). In 1998, approximately 67,00033,500 shares were issued in conjunction
with the acquisition of Nelson.a subsidiary of Stilwell. Treasury stock
previously acquired had been accounted for as if retired. The 1,531,656765,828
shares received in connection with the termination of the EPFT were added
to Treasury stock during 1998. The Company purchased shares as follows: 460,000repurchased 230,000 in 19991999.
Shares repurchased during 2000 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

109

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 11.10. 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$2.3, $4.2 and $6.3$3.4 million in 2000, 1999 1998 and 1997,1998,
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. During 2000, the Company combined the Profit
Sharing Plan and the Company's 401(k) Plan into the KCSI Profit Sharing and
401(k) Plan. This allows employees to direct their profit sharing accounts
into selected investments.

Page 95
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. During 2000, the Company combined the Profit
Sharing Plan and the Company's 401(k) Plan into the KCSI Profit Sharing and
401(k) Plan.

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.

110

Reconciliation of the accumulated postretirement benefit obligation, change
in plan assets and funded status, respectively, at December 31 follows (in
millions):
1999 1998 1997
---------- ---------- ----------

2000 1999 1998

Accumulated postretirement
benefit obligation at beginning of year $ 14.714.6 $ 14.513.2 $ 14.513.5
Service cost 0.3 0.4 0.4
0.6
Interest cost 1.0 1.0 1.2
Amortization of transition obligation 0.11.1 0.9 0.9
Actuarial and other (gain) loss 1.8 (0.1) (0.6)(1.8) 1.2 (0.5)
Benefits paid (i) (1.1) (1.1) (1.3)
----------- ----------- ----------(1.1)
Accumulated postretirement -------- -------- --------
benefit obligation at end of year 16.8 14.7 14.5
----------- ----------- ----------13.1 14.6 13.2
-------- -------- --------
Fair value of plan assets
at beginning of year 1.3 1.4 1.3 1.3
Actual return on plan assets 0.1 0.1 0.2 0.1
Benefits paid (i) (0.2) (0.2) (0.1)
(0.1)
----------- ----------- ------------------ -------- --------
Fair value of plan assets
at end of year 1.2 1.3 1.4
1.3
----------- ----------- ------------------ -------- --------
Funded status and accrued
benefit cost $ 15.511.9 $ 13.3 $ 13.2
=========== =========== ==========11.8
======== ======== ========

Page 96

(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
=========== =========== ==========
Net periodic postretirement benefit cost included the following components
(in millions):

2000 1999 1998
-------- -------- --------
Service cost $ 0.3 $ 0.4 $ 0.4
Interest cost 1.1 0.9 0.9
Expected return on plan assets (0.1) (0.1) (0.1)
-------- -------- --------
Net periodic postretirement
benefit cost $ 1.3 $ 1.2 $ 1.2
======== ======== ========

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
---------- ---------- ----------
The following assumptions were used to determine the postretirement
obligations and costs for the years ended December 31:
2000 1999 1998
-------- -------- --------
Annual increase in the CPI 3.00% 3.00% 2.50% 3.00%
Expected rate of return on life
insurance plan assets 6.50 6.50 6.50
Discount rate 7.50 8.00 6.75 7.25
Salary increase 3.00 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 1999,2000,
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%10%, 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 level5.5% in
2007 and 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 2000, 1999 1998 and 19971998 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 12.11. 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.Case
In 1998, a jury in Beauregard Parish, Louisiana returned a verdict against
KCSR in the amount of $16.3 million. The Louisiana stateThis case arose from a railroad
crossing accident whichthat occurred at Oretta, Louisiana

Page 97

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.

On November 3, 1999, the Third Circuit Court of Appeals in Louisiana
affirmed the judgment. Review is now beingSubsequently KCSR sought and obtained review of the
case in the Supreme Court of Louisiana. On October 30, 2000 the Supreme
Court of Louisiana Supreme Court. On
March 24, 2000,entered its order affirming in part and reversing in
part the judgment. The net effect of the Louisiana Supreme Court granted KCSR's Application for a
Writaction
was to reduce the allocation of Review regarding this case. Independent trial counsel has expressed
confidencenegligence to KCSR management thatand reduce the Louisiana Supreme Court will set aside
the district courtjudgment,
with interest, against KCSR from approximately $28 million to approximately
$14.2 million (approximately $9.7 million of damages and court$4.5 million of
appeals judgmentsinterest), which is in excess of KCSR's insurance coverage of $10 million
for this case. KCSR management
believes it has meritorious defenses and that it will ultimately prevailfiled an application for rehearing in appealthe Supreme
Court of Louisiana which was denied on January 5, 2001. KCSR then sought a
stay of judgment in the Louisiana court. The Louisiana court denied the
stay application on January 12, 2001. KCSR reached an agreement as to the
Louisiana Supreme Court. If the verdict were to stand, however,payment structure of the judgment in this case and interest are in excesspayment of existing insurance coverage and could
have an adverse effectthe
settlement was made on March 7, 2001.

KCSR had previously recorded a liability of approximately $3.0 million for
this case. Based on the Company'sSupreme Court of Louisiana's decision, management
recorded an additional liability of $11.2 million and a receivable in the
amount of $7.0 million representing the amount of the insurance coverage.
This resulted in recording $4.2 million of net operating expense in the
accompanying consolidated results of operations,
financial position and cash flows.statements for the year ended December
31, 2000.

Bogalusa Cases.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 onin October 23, 1995. As a
result of theThe
explosion released nitrogen dioxide and oxides of nitrogen were released
into the
atmosphere over parts of that townBogalusa and the surrounding area allegedly
causing evacuations and injuries. Approximately 25,000 residents of
Louisiana and Mississippi have asserted claims to recover damages allegedly
caused by exposure to the released chemicals.113

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 Companywe last transported the rail
car. The car was loaded in excess of its standard weight, but under the car'sits
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 our favor of
KCSR in June 1999. The jury found that KCSR waswe were 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
beenThe trial of a second group of Mississippi plaintiffs is scheduled for
January 2002.

Management believes the trialprobability of the additional plaintiffs in Mississippi.

KCSR believes that its exposure to liability for damages in these cases
isto be remote. If KCSRthe Company 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.

Page 98

Diesel Fuel Commitments and Hedging Activities. From timeFuel expense is a
significant component of the Company's operating expenses. Fuel costs are
affected by (i) traffic levels, (ii) efficiency of operations and
equipment, and (iii) fuel market conditions. Controlling fuel expenses is
a concern of management, and expense control remains a top priority. As a
result, the Company has established a program to time,hedge against fluctuations
in the price of its diesel fuel purchases to protect the Company's
operating results against adverse fluctuations in fuel prices. KCSR enters
into forward diesel fuel purchase commitments and hedgecommodity swap
transactions (fuel swaps or caps) for diesel fuel as a means of securing volumesfixing future fuel prices.
These transactions are accounted for as hedges 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 hedgebenchmarks. 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, atAt 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 ofDecember 31, 1999,
the Company had no outstanding purchase commitments for 2000. At December 31, 1999, the Company2000 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,These hedging instruments expired on March 31, 2000 throughand June
30, 2000. The Company received approximately $0.8 million during 2000
related to these diesel fuel cap transactions and recorded the proceeds as
a reduction of diesel fuel expenses. At December 31, 2000, KCSR had
purchase commitments for approximately 12.6% of budgeted gallons of fuel
for 2001. There are currently no diesel fuel cap or swap transactions.
See Note 2.

In accordance with the provision of the KCS Credit Facilities requiring the
Company to manage its interest rate risk through hedging activity, at
December 31, 2000 the Company has five separate

Page 99

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. See Note 2.

Foreign Exchange Matters. As discussed in Note 2, inIn 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)matters arise 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%Company follows the requirements outlined in
Statement 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.Financial Accounting Standards No. 52 "Foreign Currency
Translation" ("SFAS 52") 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.related authoritative guidance. 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,1997, the
Company may have been required to make additional
capital contributions. Accordingly,entered into foreign currency contracts in order to hedge a portionreduce the impact 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'son 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. DuringIn April 1997, the Company recorded a gain in
connection with these contracts and 1998,such gain was deferred and has been
accounted for as a component of the Company's investment in Grupo TFM.

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.

Nelson's and Janus UK's principal operations are in the United Kingdom and,
therefore, the financial statements for each company are accounted forbe performed 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 resultsas
Grupo TFM's functional currency.

Because the Company is required to report equity in an adjustment to stockholders'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
as a
cumulative translation adjustment. At December 31, 1999 and 1998,earnings (losses) reported by the cumulative
translation adjustment was not material.Company.

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, 2000, 1999 and 1998, 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.

Page 100
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, 2000, 1999 1998
and 19971998 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$16.5 million. Reconstruction of PCRC's right-of-way is expected to be complete in mid-2001
with commercial operations to begin immediately thereafter.See Note 3.

Automotive and 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 $700,000approximate $665,000 per year and will be adjusted
for inflation based on agreed-upon formulas.

Note 13.12. 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, 19992000 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.

Page 101
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"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,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,stock, are not
exercisable or transferable apart from the Common Stockstock 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 Stockstock 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 Stockstock 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 Stockstock 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 Stockstock 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 Stockstock 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.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.

Page 102
119
Note 13. Quarterly Financial Data (Unaudited)
(in millions, except per share amounts):

Spin-off of Stilwell
The quarterly information presented herein for the first quarter of 2000
and each 1999 quarter differs from that presented in the Company's Form
10-Q filings for the applicable quarter as a result of the classification
of Stilwell as a discontinued operation and the reverse stock split.

Restatement of Financial Statements. The Company restated its consolidated
statements of income for the three months ended September 30, 2000 to
present the $4.2 million attributed to interest in the Duncan Case judgment
in "Cost and Expenses". This amount had previously been classified as
"Interest Expense". These revisions had no impact on income from
continuing operations, net income, earnings per share or on total
shareholders' equity as previously reported.

Reverse Stock Split. On July 12, 2000, KCSI completed a reverse stock
split of its common shares whereby every two shares of KCSI common stock
was converted into one share of KCSI common stock. The quarterly Per Share
Data presented for 2000 and 1999 herein reflects this reverse stock split
for all period presented. Additionally, the range of stock prices for
common stock reflect this reverse stock split for all periods presented and
the Spin-off for periods subsequent to July 12, 2000.

Page 103

2000
-------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
Restated

Revenues $ 134.8 $ 144.1 $ 144.4 $ 148.9
Costs and expenses 114.2 115.8 111.7 116.6
Depreciation and amortization 13.7 13.8 14.3 14.3
-------- -------- -------- --------
Operating income 6.9 14.5 18.4 18.0
-------- -------- -------- --------
Equity in net earnings (losses)
of unconsolidated affiliates:
Grupo TFM 2.8 2.6 8.0 8.2
Other (1.1) 1.5 1.2 0.6
Interest expense (11.6) (18.3) (18.4) (17.5)
Other, net 1.2 1.2 0.9 2.7
-------- -------- -------- --------
Income from continuing operations
before income taxes (1.8) 1.5 10.1 12.0
Income taxes provision (benefit) (5.4) (1.1) 1.3 1.6
-------- -------- -------- --------
Income from continuing operations 3.6 2.6 8.8 10.4
Income from discontinued
operations, net of income taxes - 23.4 151.7 188.7
-------- -------- -------- --------
Income before extraordinary item 3.6 26.0 160.5 199.1

Extraordinary items, net of income taxes
Debt retirement costs - KCSI - (1.1) - (5.9)
Debt retirement costs - Grupo TFM - (1.7) - -
-------- -------- -------- --------
Net income 3.6 23.2 160.5 193.2
======== ======== ======== ========
Per Share Data (i)
Basic Earnings per Common share
Continuing operations $ 0.06 $ 0.05 $ 0.16 $ 0.18
Discontinued operations - 0.40 2.72 3.40
-------- -------- -------- --------
Basic Earnings per Common share
before extraordinary item 0.06 0.45 2.88 3.58
Extraordinary item, net of
income taxes - (0.05) - (0.10)
-------- -------- -------- --------
Total Basic Earnings per
Common share $ 0.06 $ 0.40 $ 2.88 $ 3.48
======== ======== ======== ========
Diluted Earnings per Common share
Continuing operations $ 0.06 $ 0.05 $ 0.15 $ 0.18
Discontinued operations - 0.39 2.59 3.24
-------- -------- -------- --------
Diluted Earnings per Common share
before extraordinary item 0.06 0.44 2.74 3.42
Extraordinary item, net of
income taxes - (0.05) - (0.10)
-------- -------- -------- --------
Total Diluted Earnings per
Common share $ 0.06 $ 0.39 $ 2.74 $ 3.32
======== ======== ======== ========
Dividends per share:
Preferred $ 0.25 $ 0.25 $ 0.25 $ 0.25
Common $ - $ - $ - $ -
Stock Price Ranges:
Preferred - High $ 20.88 $ 20.00 $ 19.50 $ 16.00
- Low 20.31 18.63 14.75 14.25

Common - High 10.31 191.50 177.75 187.75
- Low 7.36 5.13 117.75 127.75

(i) The accumulation of 2000's four quarters for Basic and Diluted
earnings (loss) per share data does not total the respective earnings per
share for the year ended December 31, 2000 due to rounding and the impact
of the timing of the Spin-off related to changes in weighted average
shares.

Page 104

1999
-------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter

Revenues $ 151.7 $ 149.1 $ 148.7 $ 151.9
Costs and expenses 132.4 120.2 114.6 113.2
Depreciation and amortization 13.9 14.3 14.4 14.3
-------- -------- -------- --------
Operating income 5.4 14.6 19.7 24.4

Equity in net earnings (losses)
of unconsolidated affiliates:
Grupo TFM (3.3) 3.8 0.5 0.5
Other 0.2 1.3 1.6 0.6
Interest expense (14.1) (14.7) (14.6) (14.0)
Other, net 2.1 1.3 1.0 0.9
-------- -------- -------- --------
Income from continuing operations
before income taxes (9.7) 6.3 8.2 12.4
Income taxes provision (benefit) (2.5) 1.7 3.0 4.8
-------- -------- -------- --------
Income from continuing operations (7.2) 4.6 5.2 7.6
Income from discontinued
operations, net of income taxes 98.5 82.7 70.9 61.0
-------- -------- -------- --------
Net income $ 91.3 $ 87.3 $ 76.1 $ 68.6
======== ======== ======== ========
Per Share Data (i)
Basic Earnings per Common share
Continuing operations $ (0.13) $ 0.08 $ 0.09 $ 0.14
Discontinued operations 1.78 1.50 1.29 1.11
-------- -------- -------- --------
Total Basic Earnings per
Common share $ 1.65 $ 1.58 $ 1.38 $ 1.25
======== ======== ======== ========
Diluted Earnings per Common share
Continuing operations $ (0.13) $ 0.08 $ 0.09 $ 0.13
Discontinued operations 1.78 1.43 1.22 1.06
-------- -------- -------- --------
Total Diluted Earnings per
Common share $ 1.65 $ 1.51 $ 1.31 $ 1.19
======== ======== ======== ========
Dividends per share:
Preferred $ 0.25 $ 0.25 $ 0.25 $ 0.25
Common $ 0.08 $ 0.08 $ 0.08 $ 0.08

Stock Price Ranges:
Preferred - High $ 16.00 $ 16.25 $ 16.50 $ 16.25
- Low 14.00 13.50 13.75 14.88

Common - High 150.00 131.88 132.88 114.75
- Low 75.00 86.63 100.50 86.63

(i) The accumulation of 1999's four quarters for Diluted earnings
(loss) per share data does not total the respective earnings per share for
the year ended December 31, 1999 due to share repurchases and the
anti-dilutive nature of options in the fourth quarter 1999 calculation.

Page 105

Note 14. Industry Segments

In 1998, the Company adopted the provisionsCondensed Consolidating Financial Information

As discussed in Note 7, in September 2000 KCSR issued $200 million 9.5%
Senior Notes due 2008. These notes are unsecured obligations of Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments ofKCSR,
however, they are also jointly and severally and fully and unconditionally
guaranteed on an Enterpriseunsecured senior basis by KCSI 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 disclosurescertain of the
Company. Prior yearsubsidiaries (all of which are wholly-owned) within the KCSI consolidated
group. KCSI has registered exchange notes with substantially identical
terms and associated guarantees with the SEC.

The accompanying condensed consolidating financial information has been
prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial
statements of guarantors and affiliates whose securities collateralize an
issue registered or being registered." This information is reflected pursuantnot intended
to SFAS 131. Sales betweenpresent the Transportationfinancial position, results of operations and Financial Services segments were not materialcash flows of
the individual companies or groups of companies 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 considerationaccordance with
generally accepted accounting principles.

Condensed Consolidating Statements of any KCSR subsidiaries. See Note 1 for a description of
each segment.

120Income

Segment Financial Information, dollars in millions, years ended
December 31, FINANCIAL
TRANSPORTATION SERVICES KCSI
KCSR Other Consolidated Consolidated Consolidated2000 (dollars in millions)
------------------------------------------------------------------------ 1999
Revenues
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI

Revenues............. $ 545.7-- $521.9 $ 55.761.6 $ 601.4 $1,212.3 $1,813.711.0 $ (22.3) $ 572.2
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
-------- --------- --------- -------- ---------expenses... 10.0 465.1 51.0 10.6 (22.3) 514.4
------- ------- ------- ------- ------- -------
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............. (10.0) 56.8 10.6 0.4 -- 57.8
Equity in net
earnings (losses) of
unconsolidated
affiliates 2.0 (4.9) (2.9) 25.8and
subsidiaries...... 31.3 28.2 -- 22.9 (58.6) 23.8
Interest expense (35.6) (24.0) (59.6) (6.5) (66.1)
Reduction in ownershipexpense..... (2.6) (65.1) (4.2) (1.1) 7.2 (65.8)
Other, net........... 4.0 8.7 0.5 -- (7.2) 6.0
------- ------- ------- ------- ------- -------
Income (loss) from
continuing operations
before income taxes.. 22.7 28.6 6.9 22.2 (58.6) 21.8
Income tax provision
(benefit)............ (2.7) (0.9) (1.3) 1.3 -- (3.6)
------- ------- ------- ------- ------- -------
Income (loss) from
continuing operations 25.4 29.5 8.2 20.9 (58.6) 25.4

Income (loss) from
discontinued
operations.........363.8 -- -- 363.8 (363.8) 363.8
------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary items.. 389.2 29.5 8.2 384.7 (422.4) 389.2

Extraordinary items,
net 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(8.7) (1.1) -- (1.7) 2.8 (8.7)
------- -------- -------- -------- ---------------- ------- ------- ------- ------- --
Net income (loss)....$ 53.0380.5 $ (15.0)28.4 $ 38.08.2 $ 152.2383.0 $ 190.2(419.6) $ 380.5
======= ======= ======= ======= ======== ========= ========= ======== =========

Capital expenditures=======

Page 106

December 31, 1999 (dollars in millions)
----------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI

Revenues.............. $ 64.5-- $ 5.4544.9 $ 69.973.4 $ 35.010.3 $ 104.9
======== ========= ========= ======== =========

1997
Revenues(27.2) $ 517.8 $ 55.4 $ 573.2 $ 485.1 $ 1,058.3601.4
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
-------- --------- --------- -------- ---------expenses.... 12.7 474.3 66.9 10.6 (27.2) 537.3
------- ------- ------- ------- ------- -------
Operating income (loss) (83.7) (9.0) (92.7) 199.2 106.5income(loss) (12.7) 70.6 6.5 (0.3) -- 64.1

Equity in net
earnings (losses) of
unconsolidated
affiliates 2.1 (11.8) (9.7) 24.9 15.2and
subsidiaries....... 18.0 (5.0) -- 2.0 (9.8) 5.2
Interest expense (37.9) (15.4) (53.3) (10.4) (63.7)expense...... (48.7) (35.2) (2.9) (19.3) 48.7 (57.4)
Other, net............ 49.8 3.4 0.7 0.1 (48.7) 5.3
------- ------- ------- ------- ------- -------
Income (loss) from
continuing operations
before income taxes.. 6.4 33.8 4.3 (17.5) (9.8) 17.2

Income tax provision
(benefit)............. (3.8) 15.8 1.6 (6.6) -- 7.0
------- ------- ------- ------- ------ -------
Income (loss) from
continuing operations 10.2 18.0 2.7 (10.9) (9.8) 10.2

Income (loss) from
discontinued
operations.......... 313.1 -- -- 313.1 ( 313.1) 313.1
------- ------- ------- ------- ------ -------
Income (loss) before
extraordinary items 323.3 18.0 2.7 302.2 (322.9) 323.3
Extraordinary items,
net 4.5 0.5 5.0 16.2 21.2
-------- --------- --------- -------- ---------
Pretaxof 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)323.3 $ (26.6)18.0 $ (132.1)2.7 $ 118.0302.2 $ (14.1)
======== ========= ========= ======== =========

Capital expenditures(322.9) $ 67.6 $ 9.2 $ 76.8 $ 5.8 $ 82.6
======== ========= ========= ======== =========
121

Segment Financial Information, dollars in millions, at323.3

December 31, FINANCIAL
TRANSPORTATION SERVICES1998 (dollars in millions)
----------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
KCSR Other Consolidated Consolidated Consolidated

1999
ASSETS
Current assetsRevenues............ $ 165.6-- $ 42.9549.9 $ 208.587.4 $ 525.011.1 $ 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(34.9) $ 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 $ 385.2613.5
Costs and expenses 334.3 288.8 273.4 242.5
Depreciation and amortization 24.8 24.1 22.3 21.1
---------- ----------- ----------- -----------expenses.. 11.0 436.1 72.1 11.0 (34.9) 495.3
------- ------- ------- ------- ------- -------
Operating income
178.2 147.4 135.2 121.6(loss)........... (11.0) 113.8 15.3 0.1 -- 118.2
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 0.5affiliates and
subsidiaries....... 48.1 (5.5) 0.2 (2.9) (42.8) (2.9)
Interest expense...... (53.5) (37.7) (3.0) (19.0) 53.6 (59.6)
Other, 0.8net............ 50.2 3.6 2.0 2.1 1.1
Interest expense (17.6) (15.4) (15.3) (15.0)
Other,3.9 (50.3) 9.4
------- ------- ------- ------- ------- -------
Income (loss) from
continuing operations
before income taxes. 33.8 74.2 14.5 (17.9) (39.5) 65.1
Income tax provision
(benefit)............. (4.2) 31.8 5.6 (6.1) -- 27.1
------- ------- ------- ------- ------- -------
Income (loss) from
continuing operations 38.0 42.4 8.9 (11.8) (39.5) 38.0

Income (loss) from
discontinued
operations.......... 152.2 -- -- 152.2 (152.2) 152.2
------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary items 190.2 42.4 8.9 140.4 (191.7) 190.2
Extraordinary items,
net 11.0 10.6 5.3 5.8
---------- ----------- ----------- -----------
Pretaxof 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 $ 125.0190.2 $ 71.742.4 $ 93.18.9 $ 67.5
========== =========== =========== ===========

Earnings per share:
Basic140.4 $ 0.83(191.7) $ 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 43.313190.2
======= ======= ======= ======= ======== ========

Page 107
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.
Condensed Consolidating Balance Sheets

(in millions, except per share amounts):
1998

Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- ---------- Revenues

December 31, 2000 (dollars in millions)
---------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
ASSETS:
Current assets... $16.9 $ 331.8179.7 $ 334.232.6 $ 322.610.1 $ 295.7
Costs(22.9) $ 216.4
Investments held
for Operating
purposes and
expenses 217.4 210.1 200.3 188.5
Depreciationinvestments in
subsidiaries... 666.3 445.0 0.7 343.8 (1,097.6) 358.2
Properties, net.. 0.3 1,230.1 95.2 2.2 -- 1,327.8
Intangibles and
amortization 20.1 18.7other assets 0.2 29.1 14.5 0.3 (2.0) 42.1
------- ------- ------- ------- ------- -------
Total assets.. $ 683.7 $1,883.9 $ 143.0 $ 356.4 $(1,122.5) $1,944.5
======= ======= ======= ======= ======== ========

LIABILITIES AND
EQUITY:
Current liabilities $ 21.8 $ 221.1 $ 21.2 $ 7.8 $ (22.9) $ 249.0
Long-term debt... 1.6 624.0 7.7 5.1 -- 638.4
Payable to
affiliates....... 3.4 -- 32.8 -- (36.2) --
Deferred income taxes 7.2 313.4 9.7 3.9 (2.0) 332.2
Other Liabilities 6.3 65.8 9.4 -- -- 81.5
Stockholders equity 643.4 659.6 62.2 339.6 (1,061.4) 643.4
------- ------- ------- ------- ------- -------
Total liabilities
and equity..... $ 683.7 $1,883.9 $ 143.0 $ 356.4 $(1,122.5) $ 1,944.5
======= ======= ======= ======= ======== ========

December 31, 1999 (dollars in millions)
---------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI

ASSETS:
Current assets... $ 9.9 $ 165.6 $ 34.9 $ 19.4 $ (21.3) $ 208.5
Investments held
for Operating
purposes and
investments in
subsidiaries... 1,148.0 55.7 0.7 290.4 (1,157.7) 337.1
Properties, net.. 0.4 1,180.6 93.8 2.6 -- 1,277.4
Intangibles and
other assets 8.0 14.1 14.7 0.2 (2.6) 34.4
Net assets of
discontinued
operations..... 814.6 -- -- 814.6 (814.6) 814.6
------- ------- ------- ------- ------- -------
Total assets.. $1,980.9 $ 1,416.0 $ 144.1 $ 1,127.2 $ (1,996.2) $ 2,672.0
======= ======= ======= ======= ======== ========

LIABILITIES AND
EQUITY:
Current liabilities $ 34.7 $ 202.7 $ 26.4 $ 11.7 $ (21.3) $ 254.2
Long-term debt... 647.8 58.6 38.3 5.3 -- 750.0
Payable to
affiliates....... 3.9 394.2 4.5 335.7 (738.3) --
Deferred income taxes 4.9 280.9 12.6 1.6 (2.6) 297.4
Other Liabilities 6.5 71.8 9.0 -- -- 87.3
Stockholders
equity 1,283.1 407.8 53.3 772.9 (1,234.0) 1,283.1
------- ------- ------- ------- ------- -------
Total liabilities
and equity. $1,980.9 $1,416.0 $ 144.1 $ 1,127.2 $(1,996.2) $2,672.0
======= ======= ======= ======= ======== ========

Page 108

December 31, 1998 (dollars in millions)
---------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
ASSETS:
Current assets... $ 4.6 $ 173.7 $ 32.3 $ 12.4 $ (12.8) $ 210.2
Investments held
for operating
purposes and
investments in
subsidiaries ...1,125.4 76.0 0.5 307.4 (1,181.4) 327.9
Properties, net.. 0.4 1,124.0 90.7 14.2 -- 1,229.3
Intangibles and
other assets.... 5.2 13.6 16.6 1.5 (7.5) 29.4
Net assets of
discontinued
operations...... 540.2 -- -- 540.2 (540.2) 540.2
------- ------- ------- ------- ------- -------
Total assets. $1,675.8 $1,387.3 $ 140.1 $ 875.7 $(1,741.9) $2,337.0
======= ======= ======= ======= ======== ========

LIABILITIES AND
EQUITY:
Current
liabilities..... $ 21.4 $ 189.9 $ 19.6 $ 9.7 $ (32.1) $ 208.5
Long-term debt... 712.5 68.6 38.8 5.7 -- 825.6
Payable to
affiliates...... 3.8 403.6 5.6 318.8 (731.8) --
Deferred income taxes -- 265.2 15.7 8.9 (4.6) 285.2
Other Liabilities 6.8 70.0 10.1 3.0 (3.4) 86.5
Stockholders equity 931.3 390.0 50.3 529.6 (970.0) 931.2
------- ------- ------- ------- ------- -------
Total liabilities
and equity...$1,675.8 $1,387.3 $ 140.1 $ 875.7 $(1,741.9) $2,337.0
======= ======= ======= ======= ======== ========

Condensed Consolidating Statements of Cash Flows

December 31, 2000 (dollars in millions)
----------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI

Net cash flows
provided by (used
for) operating
activities:......... $ 3.5 $ 80.4 $ 7.0 $ 13.7 $ (27.4) $ 77.2
Investing activities:
Property
acquisitions..... -- (97.9) (6.6) -- -- (104.5)
Investments in and
loans to affiliates (43.0) 5.6 -- (4.6) 37.8 (4.2)
Repayment of loans
to affiliates..... 544.8 -- -- -- (544.8) --
Other, net....... 1.1 (3.1) 0.7 -- 8.2 6.9
------- ------- ------- ------- ------- -------
Net........... 502.9 (95.4) (5.9) (4.6) (498.8) (101.8)
------- ------- ------- ------- ------- -------
Financing activities:
Proceeds from
issuance of
long-term debt.. 125.0 927.0 -- -- -- 1,052.0
Repayment of
long-term debt (648.3) (337.1) (29.5) (0.2) (0.3) (1,015.4)
Proceeds from loans
from affiliates... -- 46.2 32.9 -- (79.1) --
Repayment of loans
from affiliates.... -- (577.6) -- -- 577.6 --
Debt issuance costs -- (17.6) -- -- -- (17.6)
Proceeds from
stock plans.... 17.9 16.8
---------- ----------- ----------- -----------
Operating income 94.3 105.4 104.4 90.4

Equity-- -- -- -- 17.9
Stock repurchased -- -- -- -- -- --
Cash dividends paid (4.8) (15.2) (4.8) (8.7) 28.7 (4.8)
Other, net........ 0.1 2.5 0.2 -- (0.7) 2.1
------- ------- ------- ------- ------- -------
Net........... (510.1) 28.2 (1.2) (8.9) 526.2 34.2
------- ------- ------- ------- ------- -------
Cash and equivalents:
Net increase
(decrease)....... (3.7) 13.2 (0.1) 0.2 -- 9.6
At beginning of
period 5.2 4.2 2.2 0.3 -- 11.9
------- ------- ------- ------- ------- -------
At end of year... $ 1.5 $ 17.4 $ 2.1 $ 0.5 $ -- $ 21.5
======= ====== ======= ======= ======= ========

Page 109

December 31, 1999 (dollars in net earnings (losses)millions)
---------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI

Net cash flows provided
by (used for) operating
activities: $ 21.3 $ 137.1 $ 10.2 $ 0.6 $ 8.8 $ 178.0
Investing activities:
Property acquisitions -- (97.8) (8.4) -- -- (106.2)
Investments in and
loans to affiliates.. (3.9) 0.1 -- -- (0.1) (3.9)
Repayment of unconsolidated affiliates:
DST 1.6 7.7 7.5 7.5
Grupo TFMloans
to affiliates 55.6 -- -- -- (39.0) 16.6
Other, net........ 0.3 2.0 0.7 0.1 (6.8) (3.7)
------- ------- ------- ------- ------- -------
Net............ 52.0 (95.7) (7.7) 0.1 (45.9) (97.2)
------- ------- ------- ------- ------- -------

Financing activities:
Proceeds from issuance
of long-term debt.... 21.8 -- -- -- -- 21.8
Repayment of long-term
debt................. (86.8) (10.2) (0.3) (0.2) -- (97.5)
Proceeds from loans
from affiliates...... -- -- -- -- -- --
Repayment of loans
from affiliates...... -- (37.1) (1.6) (1.9) 40.6 --
Debt issuance costs (4.2) -- -- -- -- (4.2)
Proceeds from
stock plans......... 37.0 -- -- -- -- 37.0
Stock repurchased..... (24.6) -- -- -- -- (24.6)
Cash dividends paid (17.6) -- -- -- -- (17.6)
Other, net........ 6.1 6.7 (0.9) (1.8) 0.5 10.6
------- ------- ------- ------- ------- -------
Net............ (68.3) (40.6) (2.8) (3.9) 41.1 (74.5)
------- ------- ------- ------- ------- -------
Cash and equivalents:
Net increase (decrease) 5.0 0.8 (0.3) (3.2) 4.0 6.3
At beginning of year 0.2 1.8 (2.1)3.4 2.5 3.5 (4.0) 5.6
------- ------- ------- ------- ------- -------

At end of year...... $ 5.2 $ 4.2 $ 2.2 $ 0.3 $ -- $ 11.9
====== ======= ======= ======= ======== ========

December 31, 1998 (dollars in millions)
---------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI

Net cash flows provided
by (used for) operating
activities:.......... $ 30.0 $ 86.0 $ 19.9 $ 8.5 $ (2.8) $ 141.6
Investing activities:
Property acquisitions -- (64.3) (5.4) (0.2) -- (69.9)
Investments in and
loans to affiliates -- -- (0.7) -- -- (0.7)
Repayment of loans
to affiliates 34.9 -- -- -- (34.9) --
Other, net........ (0.9) 6.6 2.5 0.9 -- 9.1
------- ------- ------- ------- ------- -------
Net............ 34.0 (57.7) (3.6) 0.7 (34.9) (61.5)
------- ------- ------- ------- ------- -------
Financing activities:
Proceeds from issuance
of long-term debt 146.7 5.0 -- -- -- 151.7
Repayment of long-term
debt............... (213.5) (15.2) (3.1) (0.2) -- (232.0)
Proceeds from loans
from affiliates..... -- 13.0 -- -- (13.0) --
Repayment of loans
from affiliates..... -- (37.6) (0.2) (9.5) 47.3 --
Debt issuance costs... -- -- -- -- -- --
Proceeds from stock
plans............. 17.9 -- -- -- -- 17.9
Stock repurchased.. -- -- -- -- -- --
Cash dividends paid (17.8) -- (22.5) -- 22.5 (17.8)
Other, 0.1net........ 2.6 8.9 (0.7) -- (10.0) 0.8
0.5 0.4
Interest expense (15.4) (17.1) (16.2) (17.4)
Reduction in ownership------- ------- ------- ------- ------- -------
Net............ (64.1) (25.9) (26.5) (9.7) 46.8 (79.4)
------- ------- ------- ------- ------- -------
Cash and equivalents:
Net increase(decrease) (0.1) 2.4 (10.2) (0.5) 9.1 0.7
At beginning 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), netyear 0.3 1.0 12.7 4.0 (13.1) 4.9
------- ------- ------- ------- ------- -------
At end 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 incomeyear.... $ 38.30.2 $ 28.23.4 $ 71.72.5 $ 76.1
========== =========== =========== ===========

Earnings per share:
Basic3.5 $ 0.27(4.0) $ 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 26.2505.6

Page 110
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:

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. 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.

125

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.

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.

Page 111
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, 2000May 3, 2001 ("Proxy
Statement") will be filed no later than 120 days after December 31, 1999.2000.

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 TwoThree 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"The Board of Directors -- Compensation of
Directors" in the Company's Proxy Statement, (other than Thethe 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

NoneThe information set forth in response to Item 404 of Regulation S-K under
the heading "Certain Relationships and Related Transactions" in the
Company's Proxy Statement is incorporated by reference in response to this
Item 13.

Page 112
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, 2000,22, 2001, 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 43.1 to the Company's Registration Statement on Form S-8S-4
originally filed September 19, 1986January 25, 2001 (Commission File No. 33-8880)333-54262), as
amended and declared effective on March 15, 2001 (the "S-4
Registration Statement"), Restated 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

3.63.2 Exhibit 3.6 to the 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 3.63.2

(4) Instruments Defining the Right of Security Holders, Including Indentures

4.1 The Fourth, Seventh, Eighth, Eleventh, Twelfth, Thirteenth,
Fourteenth, Fifteenth and Sixteenth paragraphs of Exhibit 3.1
hereto are incorporated by reference as Exhibit 4.1

4.2 Article I, Sections 1,31, 3 and 11 of Article II, Article V and Article
VIII of Exhibit 3.63.2 hereto are incorporated by reference as
Exhibit 4.2

Page 113
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""1992 Indenture") which is attached as
Exhibit 4 to the 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 4.54.3

4.3.1 Exhibit 4.5.1 to the Company's Form 10-K for the fiscal year
ended December 31, 1999 (Commission File No. 1-4717),
Supplemental Indenture dated December 17, 1999 to the Indenture between the Company and The Chase Manhattan Bank
dated July 1, 1992
(the "Indenture")Indenture with respect to the 7.875% Notes Due July 1, 2002
issued pursuant to the 1992 Indenture, is attachedhereby incorporated
by reference as Exhibit 4.3.1

4.3.2 Exhibit 4.5.2 to thisthe Company's Form 10-K as Exhibit 4.5.1

4.5.2for the fiscal year
ended December 31, 1999 (Commission File No. 1-4717),
Supplemental Indenture dated December 17, 1999 to the 1992
Indenture dated July 1, 1992 with respect to the 6.625% Notes Due March 1, 2005
issued pursuant to the 1992 Indenture, is attachedhereby incorporated
by reference as Exhibit 4.3.2

4.3.3 Exhibit 4.5.3 to thisthe Company's Form 10-K as Exhibit 4.5.2

4.5.3for the fiscal year
ended December 31, 1999 (Commission File No. 1-4717),
Supplemental Indenture dated December 17, 1999 to the 1992
Indenture dated July 1, 1992 with respect to the 8.8% Debentures Due July 1, 2022
issued pursuant to the 1992 Indenture, is attachedhereby incorporated
by reference as Exhibit 4.3.3

4.3.4 Exhibit 4.5.4 to thisthe Company's Form 10-K as Exhibit 4.5.3

4.5.4for the fiscal year
ended December 31, 1999 (Commission File No. 1-4717),
Supplemental Indenture dated December 17, 1999 to the 1992
Indenture dated July 1, 1992 with respect to the 7% Debentures Due December 15,
2025 issued pursuant to the 1992 Indenture, is attached to this Form 10-Khereby
incorporated by reference as Exhibit 4.5.4

130

4.64.3.4

4.4 Exhibit 99 to the 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 4.4

4.5 Exhibit 4.1 to the Company's S-4 Registration Statement (Commission
File No.333-54262), the Indenture, dated as of September 27, 2000,
among the Company, The Kansas City Southern Railway Company
("KCSR"), certain other subsidiaries of the Company and The Bank
of New York, as trustee (the "2000 Indenture"), is hereby
incorporated by reference as Exhibit 4.5

4.5.1 Exhibit 4.1.1 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Supplemental Indenture, dated
as of January 29, 2001, to the 2000 Indenture, among the
Company, KCSR, certain other subsidiaries of the Company and
The Bank of New York, as trustee, is hereby incorporated by
reference as Exhibit 4.5.1

4.6 Form of Exchange Note (included as Exhibit B to Exhibit 4.5.1 hereto)

Page 114

4.7 Exhibit 4.3 to the Company's S-4 Registration Statement (Commission
File No. 333-54262), the Exchange and Registration Rights Agreement,
dated as of September 27, 2000, among the Company, KCSR,
certain other subsidiaries of the Company, is hereby
incorporated by reference as Exhibit 4.7

(9) Voting Trust Agreement
(Inapplicable)

(10) Material Contracts

10.1 Exhibit I to the 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 the 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 1992 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(See Exhibit 4.5 hereto, is hereby
incorporated by reference as Exhibit 10.34.3)

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")Indenture with respect to the 7.875% Notes Due July 1, 2002 issued
pursuant to the 1992 Indenture which is attached to this Form 10-K as(See Exhibit 4.5.1 is hereby incorporated by reference as Exhibit 10.3.1

10.3.2 Supplemental4.3.1)

10.3.2Supplemental Indenture dated December 17, 1999 to the 1992
Indenture dated July 1, 1992 with respect to the 6.625% Notes Due March 1, 2005
issued pursuant to the 1992 Indenture which is
attached to this Form 10-K as(See Exhibit 4.5.2 is hereby
incorporated by reference as Exhibit 10.3.2

10.3.3 Supplemental4.3.2)

10.3.3Supplemental Indenture dated December 17, 1999 to the 1992
Indenture dated July 1, 1992 with respect to the 8.8% Debentures Due July 1, 2022
issued pursuant to the 1992 Indenture which is attached to this Form 10-K as(See Exhibit 4.5.3 is hereby
incorporated by reference as Exhibit 10.3.3

10.3.4 Supplemental4.3.3)

10.3.4Supplemental Indenture dated December 17, 1999 to the 1992
Indenture dated July 1, 1992 with respect to the 7% Debentures Due December 15,
2025 issued pursuant to the 1992 Indenture which
is attached to this Form 10-K as(See Exhibit 4.5.4 is hereby
incorporated by reference as Exhibit 10.234.3.4)

10.4 Exhibit H to the 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 the 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 the 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 10.110.18 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

10.1210.7

Page 115

10.8 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

10.1310.8

10.9 Exhibit 10.2010.8 to the Company's Form 10-K for the year ended
December 31, 1997S-4 Registration Statement
(Commission File No. 1-4717)333-54262), EmploymentTax Disaffiliation Agreement,
as amended and restated September 18, 1997,dated October 23, 1995, by and between the Company and Landon H. RowlandDST
Systems, Inc., is hereby incorporated by reference as Exhibit
10.13

132

10.1410.9

10.10 Exhibit 4.8 to the Company's Form S-8 filed on December 14,
2000 (Commission File No. 333-51854), the Kansas City Southern
Industries, Inc. 401(k) and Profit Sharing Plan, is hereby
incorporated by reference as Exhibit 10.10

10.11 Exhibit 10.10 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), the Assignment, Consent and
Acceptance Agreement, dated August 10, 1999, by and among the
Company, DST Systems, Inc. and Stilwell Financial, Inc., is
hereby incorporated by reference as Exhibit 10.11

10.12 Exhibit 10.15 to the 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
betweenamong the Company, TheKCSR and Michael R. Haverty, is hereby
incorporated by reference as Exhibit 10.12

10.13 Exhibit 10.14 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Employment Agreement, dated
January 1, 1999, by and among the Company, KCSR and Gerald K.
Davies, is hereby incorporated by reference as Exhibit 10.13

10.14 Exhibit 10.15 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Employment Agreement, as
amended and restated January 1, 1999, by and among the Company,
Kansas City Southern Railway CompanyLines, Inc. and Michael R. Haverty,Robert H. Berry, is hereby
incorporated by reference as Exhibit 10.14

10.15 Exhibit 10.16 to the Company's Form 10-K for the year ended
December 31, 1998S-4 Registration Statement
(Commission File No. 1-4717)333-54262), Employment Agreement, as
amended and restated January 1, 1999, by and betweenamong the Company,
Kansas City Southern Lines, Inc. and Joseph D. MonelloRichard P. Bruening, is
hereby incorporated by reference as Exhibit 10.15

10.16 Exhibit 10.17 to the Company's Form 10-K for the year ended
December 31, 1998S-4 Registration Statement
(Commission File No. 1-4717)333-54262), Employment Agreement, as
amended and restated January 1, 1999, by and betweenamong the Company,
Kansas City Southern Lines, Inc. and Danny R. CarpenterLouis G. Van Horn, is
hereby incorporated by reference as Exhibit 10.16

10.17 Exhibit 10.18 to the 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

Page 116

10.18 Exhibit 10.19 to the 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.ThompsonR.
Thompson is hereby incorporated by reference as Exhibit 10.18

10.18.1 Exhibit 10.19.1
to the 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 the 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 the 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 the 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 the 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 10.19.510.18.5

10.19 Exhibit 10.19 to the Company's Form 10-K for the year ended
December 31, 1999 (Commission File No. 1-4717), 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 (the "Credit Agreement"),
is attached to
this Form 10-Khereby incorporated by reference as Exhibit 10.19

10.19.1 Exhibit 10.20.1
to the Company's S-4 Registration Statement (Commission File
No. 333-54262), First Amendment to the Credit Agreement, dated
as of June 30, 2000, among the Company, KCSR, the lenders
parties thereto and The Chase Manhattan Bank, as administrative
agent, collateral agent, issuing bank and swingline lender, is
hereby incorporated by reference as Exhibit 10.19.1

10.20 Exhibit 10.20 to Company's Form 10-K for the year ended
December 31, 1999 (Commission File No. 1-4717), 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 (the "Revolving
Credit Facility"), is attached to this Form 10-Khereby incorporated by reference as
Exhibit 10.20

Page 117
10.21 Exhibit 10.21 to Company's Form 10-K for the year ended
December 31, 1999 (Commission File No. 1-4717), 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-Khereby
incorporated by reference as Exhibit 10.20,10.21

10.22 The 2000 Indenture (See Exhibit 4.5)

10.23 Supplemental Indenture, dated as of January 29, 2001, to the
2000 Indenture (See Exhibit 4.5.1)

10.24 Exhibit 10.23 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Intercompany Agreement, dated
as of August 16, 1999, between the Company and Stilwell
Financial Inc., is attached to
this Form 10-Khereby incorporated by reference as Exhibit
10.2110.24

10.25 Exhibit 10.24 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Tax Disaffiliation Agreement,
dated as of August 16, 1999, between the Company and Stilwell
Financial Inc., is hereby incorporated by reference as Exhibit
10.25

10.26 Exhibit 10.25 to the Company's S-4 Registration Statement
(Commission File No. 333- 54262), Pledge Agreement, dated as of
January 11, 2000, among the Company, KCSR, the subsidiary
pledgors party thereto and The Chase Manhattan Bank, as
Collateral Agent (the "Pledge Agreement"), is hereby
incorporated by reference as Exhibit 10.26

10.27 Exhibit 10.26 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Guarantee Agreement, dated as
of January 11, 2000, among the Company, the subsidiary
guarantors party thereto and The Chase Manhattan Bank, as
Collateral Agent (the "Guarantee Agreement"), is hereby
incorporated by reference as Exhibit 10.27

10.28 Exhibit 10.27 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Security Agreement, dated as
of January 11, 2000, among the Company, KCSR, the subsidiary
guarantors party thereto and The Chase Manhattan Bank, as
Collateral Agent (the "Security Agreement"), is hereby
incorporated by reference as Exhibit 10.28

10.29 Exhibit 10.28 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Indemnity, Subrogation and
Contribution Agreement, dated as of January 11, 2000, among the
Company, KCSR, the subsidiary guarantors party thereto and The
Chase Manhattan Bank, as Collateral Agent (the "Indemnity,
Subrogation and Contribution Agreement"), is hereby
incorporated by reference as Exhibit 10.29

10.30 Exhibit 10.29 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Supplement No. 1, dated as of
January 29, 2001, to the Pledge Agreement, among PABTEX GP,
LLC, SIS Bulk Holding, Inc. and The Chase Manhattan Bank, as
Collateral Agent, is hereby incorporated by reference as
Exhibit 10.30

Page 118

10.31 Exhibit 10.30 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Supplement No. 1, dated as of
January 29, 2001, to the Guarantee Agreement, among PABTEX GP,
LLC, SIS Bulk Holding, Inc. and The Chase Manhattan Bank, as
Collateral Agent, is hereby incorporated by reference as
Exhibit 10.31

10.32 Exhibit 10.31 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Supplement No. 1, dated as of
January 29, 2001, to the Security Agreement, among PABTEX GP,
LLC, SIS Bulk Holding, Inc. and The Chase Manhattan Bank, as
Collateral Agent, is hereby incorporated by reference as
Exhibit 10.32

10.33 Exhibit 10.32 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Supplement No. 1, dated as of
January 29, 2001, to the Indemnity, Subrogation and
Contribution Agreement, among PABTEX GP, LLC, SIS Bulk Holding,
Inc. and The Chase Manhattan Bank, as Collateral Agent, is
hereby incorporated by reference as Exhibit 10.33

(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)

Page 119

(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,on October 4, 2000,
under Item 5 of such form, reporting the commencementannouncement of cash tender offers and consent
solicitations for the
Company's outstanding $400completion of a previously announced $200 million in Notes and
Debentures.debt securities
private offering.

The Company furnished a Current Report on Form 8-K also reported that the Company received tendersdated October 25,
2000 reporting its third quarter and requisite consents from the holders of more than a majority of the
outstanding aggregate principal amount of each series of its Notesyear to date 2000 operating
results. The information included in this Current Report on Form 8-K
was furnished pursuant to Item 9 and Debentures.shall not be deemed to be filed.

The Company filedfurnished a Current Report on Form 8-K dated January 10,24,
2001 reporting its fourth quarter and year to date 2000 reporting the setting of the purchase priceoperating
results. The information included in this Current Report on Form 8-K
was furnished pursuant to Item 9 and total consideration for
the bond consents, as well as the successful completion of the bond
tenders and solicitations.shall not be deemed to be filed.

The Company filedfurnished a Current Report on Form 8-K8-K/A dated January 10,24,
2001 revising its reported fourth quarter and year to date 2000
reporting the status of the separation of Stilwell from the Company.operating results. The information included in this Current Report
on Form 8-K was furnished pursuant to Item 9 and shall not be deemed
to be filed.

Page 120

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, 2000March 23, 2001 By: /s/ L.H. Rowland
---------------------------
L.H. RowlandM.R. Haverty
M.R. Haverty
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.March 23, 2001.

Signature Capacity

/s/ L.H. RowlandM.R. Haverty Chairman, President, Chief Executive
M.R. Haverty Officer
- ------------------------------
L.H. Rowland and Director

/s/ M.R. HavertyG.K. Davies Executive Vice President
and Director
- ------------------------------
M.R. HavertyG.K Davies

/s/ J.D. MonelloR.H. Berry Senior Vice President and Chief
R.H. Berry 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. SerranoL.H. Rowland Director
- ------------------------------
J.F. SerranoL.H. Rowland

/s/ M.I. SoslandB.G. Thompson Director
- ------------------------------
M.I. SoslandB.G. Thompson

Page 121

136

KANSAS CITY SOUTHERN INDUSTRIES, INC.
19992000 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

-----------------------------

Page 122