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KANSAS CITY SOUTHERN INDUSTRIES, INC. HISTORY



Address:
114 West 11th Street
Kansas City, Missouri 64105
U.S.A.

Telephone: (815) 556-0303
Fax: (816) 556-0459

Website: www.kcsi.com
Public Company
Incorporated: 1887 as Kansas City Southern Railway Company
Employees: 4,080
Sales: $1.1 billion (1997)
Stock Exchanges: New York
Ticker Symbol: KSU
SICs: 4011 Railroads--Line Haul Operating; 7374 Data Processing & Preparation;
6282 Investment Advice; 6719 Holding Companies, Not Elsewhere Classified


COMPANY HISTORY:

Kansas City Southern Industries, Inc. (KCSI) controls a number of operations in
its transportation and financial services divisions. Kansas City Southern
Railway (KCSR) is KCSI's primary subsidiary, operating direct transportation
service over approximately 4,000 miles of track primarily in the central and
southern United States. As of the late 1990s, KCSI derived a substantial portion
of its revenues from its fund management subsidiaries Janus Capital Corporation
and Berger Associates, Inc., which together had assets of approximately $70
billion. KCSI also held 41 percent of DST Systems Inc., which supplied the
financial services industry with record-keeping and computer services.





Entrepreneurial Beginnings

KCSI was founded on January 8, 1887, by Arthur Edward Stilwell, a native New
Yorker and grandson of one of the builders of the Erie Canal. Stilwell's
original goal was to provide passenger service and transport for local
meat-packing houses and granaries. An astute entrepreneur--he was able to secure
initial funding for the railway in a matter of hours--he recognized that
considerable opportunity existed in the transport of coal, lead, and zinc from
southern mines. In just over six months, he raised $2.5 million and in 1891
extended the line southward to Fort Smith, Arkansas. Two years later, despite a
severe nationwide depression in the railroad industry, Stilwell secured $3
million in backing from a commodities broker in Amsterdam, the Netherlands, to
extend the line directly south to the Gulf of Mexico, where goods could then be
shipped to eastern markets by sea.





Stilwell's original intent was to extend the railroad to Shreveport, Louisiana,
and use the tracks of other lines to continue the journey to the Gulf. Noting
that coastal towns were periodically subject to violent hurricanes, Stilwell
changed his mind and decided to route his lines to Lake Sabine, a well-protected
body of water seven miles inland from the Gulf. He then built a port on the lake
and dug a canal to connect it to the Gulf. Port Arthur, named after Stilwell,
became the second largest grain port in the United States after New York City.



Stilwell left Kansas City Southern Railway Company in 1900, a year before oil
was discovered in Beaumont, Texas. He was replaced by Leonore F. Loree, who made
concerted but unsuccessful efforts in the late 1920s to merge the
Missouri-Kansas-Texas Railroad, the St. Louis Southwestern Railroad, or Cotton
Belt, and KCSR. Loree established KCSR's reputation as a well-run, professional
business. His sound financial and operating philosophy helped the company
weather the Great Depression of the 1930s, and in 1939 KCSR company purchased
the Louisiana and Arkansas Railway, extending its territory through Baton Rouge
to New Orleans, Louisiana, and westward to Dallas, Texas. KCSR's strength during
the Depression led General Motors in 1939 to choose the railroad to test the
first diesel-electric locomotive for passenger service in the United States.

Post-World War II Prosperity

A bitter battle ensued in 1944, when local businessmen wrested control of KCSR
from East Coast investors, demanding the resignation of then Chairman Charles P.
Couch. The nomination of William N. Deramus as president ushered in a new era
for the company, during which it focused on developing business in existing
territories that were experiencing a post-World War II industrial boom. By the
early 1950s KCSR was one of the most profitable railroads in the country.

Building on a solid base of well-maintained railways, Deramus was instrumental
in incorporating innovative technology to keep ahead of competition. He acquired
surplus World War II radio equipment, helping KCSR become a pioneer in the use
of microwave signals to control portions of the rail system from a centralized
location. During the 1950s KCSI also became an innovator in developing
computerized data processing systems to control the flow of paper work through
the system, an expertise it later applied to providing computerized accounting
systems for the railroad industry.

A profitable partnership between Deramus and his son William N. Deramus III
began in 1955, when the young Deramus was president of the Chicago Great Western
and Katy Railway. The father-and-son team began a joint study of a proposed
propane line along the right-of-way of their respective railways. This led to a
key role for both entrepreneurs in building the Mid-America Pipeline (MAPCO),
which grew to become a major U.S. energy company. KCSR's small interest in MAPCO
ended, however, when shares in MAPCO were distributed as dividends to KCSI
stockholders in 1973 and later in 1982.

Diversification in the 1960s

In 1961 William N. Deramus III left his post at Chicago Great Western and joined
his father in senior management of Kansas City Southern. Their partnership
instituted a series of far-reaching transformations within the company,
centering on the incorporation of Kansas City Southern Industries as a holding
company, which in turn purchased Kansas City Southern Railway through a
two-for-one stock swap with its investors. "The prospects for significant growth
in the railroad industry are lacking," the younger Deramus told the
International Commerce Commission (ICC) in 1962, "and the interest of
shareholders can be better shared by diversification." At the time, this
transaction was the largest in a trend among railroads to diversify in an
attempt to remain viable in the face of growing competition from the trucking
and airline industries.

The new Kansas City Southern Industries began a series of acquisitions starting
in 1963 with the purchase of a 40 percent interest in Television Shares
Management Corp., a Chicago-based mutual funds manager that attracted KCSI in
part for its holdings in the electronics and aerospace industries. John
Hawkinson was appointed president, and the name of the acquisition was changed
to Supervised Investors Services Inc. (SIS).



As the volume of mutual fund transactions grew at SIS, Raymond P. Bammes and
others at KCSI capitalized on KCSR's experience in computerized data processing
to develop data management systems for mutual funds. A new company, DST Systems
Inc., was incorporated in 1968 to market these systems to the financial services
industry. In 1983 DST Systems Inc. went public, filing an initial public
offering of 1.38 million shares. All shares were sold, and KCSI retained
approximately an 86 percent interest. DST Systems grew to become one of the
cornerstones of KCSI's financial services division.

In 1966 KCSI ventured into the broadcast media industry, purchasing six
television and radio stations in Illinois and Missouri. The company acquired
KRCG-TV and KWOS-radio in Jefferson City, Missouri; KMOS-TV in Sedalia,
Missouri, for a purchase price of $3 million; and WEK-TV and WEEQ-TV in Peoria,
Illinois, for $3 million.

In 1969 a new member of KCSI's legal department, Irvine O. Hockaday, discovered
that Lee National Corporation had purchased 20 percent of KCSI stock and was
secretly trying to gain control of the company. KCSI sued Lee National for $40
million to prevent the takeover on grounds that Lee National was an investment
firm and was therefore barred from purchasing securities without prior
Securities and Exchange Commission (SEC) approval. Lee countersued with two
civil suits asking $110 million in damages; the company charged that KCSI
management was engaged in a conspiracy to thwart Lee's legal attempts to
participate in control of the company.

Ultimately, due to Hockaday's efforts, Lee National agreed in November 1970 to
transfer its 21.5 percent interest back to KCSI in exchange for $23 million in
cash, real estate, and other securities. Largely as a result of his handling of
the Lee National affair, Hockaday was named president and chief operating
officer of KCSI in 1971, replacing William N. Deramus III, who continued as
chairman and chief executive officer.

The late 1960s were difficult years for KCSR. In 1967 the railway terminated its
passenger service after three consecutive years of losses totaling over $7.2
million. KCSI had been expending the bulk of its energies in diversification
ventures and ignoring the needs of the railway. Furthermore, during an
industrywide probe of the effects of railroad diversification in 1971, the ICC's
Bureau of Enforcement proposed an investigation into KCSI's activities.

Among other things, the ICC alleged, "If there has not been a deliberate policy
to deprive the railroad of its non-operating assets and to drain off its
operating revenues, management, in pursuit of its independent enterprises, has
been so indifferent to the financial well-being of the railroad company as to
accomplish the same result." The ICC went on to accuse KCSI of wasting $9
million in the spinning off of its north Baton Rouge development project and the
transfer of most of the carrier's $44 million nonoperating assets to the holding
company. Another issue was the use of $9 million of the railroad's cash in the
purchase of Howe Coal Co. in the late 1960s, an investment that led to a $15.4
million write-off when the coal company became unprofitable. Despite these
setbacks, KCSI reported a net income of $12.8 million in 1971, up from $5.9
million a year earlier.



Another lawsuit was brought forward in 1971, challenging the merger of
Supervised Investors Services and Kemperco Inc. and asking payment of profits
made through the stock swap. The consolidation between SIS and Kemperco resulted
in Kemper Financial Services. One of the largest mutual fund managers in the
United States, it handled more than $30 billion in dividends.

Rejuvenating the Railway in the 1970s and 1980s

By 1973 KCSR was in worse shape than it had been in 1962. Neglect of the railway
division by KCSI was addressed when a civil engineer, Thomas S. Carter, was
appointed president of KCSR. Carter asked the KCSI board for $75 million to
improve rail beds, which he promptly received. The impetus for this massive
rehabilitation program was a 20-year contract to transport coal to power plants
in Louisiana and Texas. Continuing his renovation program using only money
generated by KCSI operations, Carter invested more than $200 million by 1978 to
make the 1,500-mile track one of the safest and most efficient in the nation. As
a result of the improved rail lines&mdash well as a new coal delivery
contract--coal tonnage grew from just above one percent of KCSR's cargo in 1973
to approximately 20 percent in 1982 and 33.1 percent in 1991.

KCSR's profits grew in the early 1980s, thanks to an increase in coal transport
and a favorable mix of other freight traffic yielding high revenues. Likewise,
DST and Pioneer Western Corp.--which marketed insurance and investment services
through its subsidiary, Western Reserve Life Insurance Co.--grew rapidly from
1975 to 1981, in part because of the expanding mutual funds industry. In 1983
the company bought a majority interest in Janus Capital Corp. and Janus
Management Corp., a Denver-based mutual funds company that managed nearly $120
million in assets for private accounts. Also in 1983 KCSI joined Telecom
Engineering to form LDX Group Inc., a telecommunications holding company formed
as an umbrella company for KCSI's erratically profitable broadcasting
subsidiary, LDX Network Inc.

In 1986 William N. Deramus IV became president of KCSR, and by the company's
centennial in 1987, the Deramus family boasted a 75-year history with the
railroad. That same year KCSI unsuccessfully bid $2.6 billion for Southern
Pacific Corp., a railway ten times the size of KCSR that was considering a
merger with Santa Fe Railway.

KCSI reported a net loss of $33 million in 1988, after paying $50 million to
settle lawsuits filed by Energy Transport Systems Inc., which was involved in a
project to build a coal slurry pipeline from Wyoming to Texas. The transport
company alleged that KCSR had conspired with other railroads to block
construction of the pipeline, which would have competed with KCSR's coal
transport business. In a separate but related suit, the court ordered KCSI to
pay $844 million in damages to the state of South Dakota. The U.S. Circuit Court
of Appeals later overturned the judgment and the matter was settled by mid-1989.



Export coal volume grew tremendously in 1989, and KCSR was poised to handle
overflow from eastern ports into ports on the Gulf of Mexico, notably Port
Arthur. The railroad acquired total ownership of the facilities in Port Arthur
in 1991. In April of that year, a nationwide labor dispute threatened the
railroad; a one-day strike ensued that was immediately halted by congressional
intervention. A National Mediations Board was installed to settle differences
and decreed that railroads could operate two-man crews, regardless of the number
of cars and length of trains. As a result of this determination, KCSR was able
to pare down the number of its train operators by one-third from 600 employees
to 400.

KCSI's strong showing in its financial services division in the late 1980s
reflected the booming growth of the mutual funds industry. When KCSI entered the
financial services market in 1962, managed assets were about $50 billion
nationwide. By the end of 1991 managed assets had grown to nearly $1.4 trillion.
Janus Capital Corp. sold about 10 percent of all growth funds in 1991, prompting
U.S. News & World Report to name it the top fund family in the United States.

KCSR's railroad tracks ran through a generally prosperous area of the Sun Belt
and benefited considerably from local traffic. In the early 1990s the company
had streamlined its railway operating procedures and, with total control of the
facilities, was poised to handle an increased volume of coal transport, its
primary moneymaker. KCSI had also tightened its financial services division,
paring off unprofitable ventures. The company had learned from its nonproductive
endeavors and planned to concentrate its energies in the areas in which it
excelled: transportation and financial services.

Prosperity in the 1990s

Janus Capital and Berger Associates enjoyed tremendous growth in the early
1990s, as investment in mutual funds continued to rise throughout the United
States. In 1992 revenues at Janus rose 134 percent, contributing a third of
KCSI's operating income. The following year the company's fund businesses
outstripped the railroad business for the first time in providing income for
KCSI. The fund management provided $112 million out of KCSI's total of $175
million in pretax income.

Although DST Systems suffered some setbacks in the early 1990s, it held a strong
position in its area of expertise and was expanding its services. DST's
operating income dropped 33 percent in 1992 after losing Vanguard as a customer.
The mutual fund leader had accounted for 10 percent of DST's business, and the
company had to scramble for new accounts to make up the loss. DST was the leader
in providing third-party services to the mutual fund industry in 1993, holding
40 percent of the market. The company was moving into new service areas in an
attempt to supply all of the back-office needs of the mutual fund industry. To
offer portfolio accounting and stock transfer services, DST entered into joint
ventures with Kemper Financial and State Street Boston. It also moved into new
industries by adding a subsidiary called Vantage Computer Systems to provide
record keeping and custom software to the life and property insurance industry.
Its 50 percent-owned Argus Health Systems used DST computers to process medical
claims.

The success of its financial asset management segment allowed KCSI to invest in
improvements to its railroad segment. Between 1987 and 1993 the company spent
$500 million to modernize track and facilities and to purchase modern diesel
locomotives. In 1992 KCSI purchased MidSouth Corp. for $220 million. The
acquisition added approximately 1,200 miles of track in Mississippi and Alabama,
almost doubling the size of the railroad. More importantly, it extended KCSR's
line from Dallas to Birmingham, Alabama, complementing its traditional
north-south line between New Orleans and Kansas City. The extension strengthened
KCSR's position in the lucrative chemical hauling and intermodal segments.

Throughout the early and mid-1990s, KCSI debated splitting up the company to
concentrate on either the railroad or the financial asset management segments.
The trend toward diversification in the 1960s had led KCSI into the unusual
combination of industries, and an equally strong trend in the 1990s toward
divestiture and single-industry companies encouraged KCSI to sell one off. Plans
to sell the railroad accelerated in 1993, and the company reached an agreement
to sell with Illinois Central in July 1994. Three months later, however, the
deal fell through and debate about the company's structure continued.

In 1995 KCSI sold 51 percent of DST to the public. The money gained in the
initial public offering helped reduce the company's debt ratio.

In 1997 KCSI teamed with Transportacion Maritima Mexicana S.A. de C.V. (TMM) to
bid on Mexico's northeast railroad concession. At $1.4 billion, the KCSI/TMM bid
won the 50-year concession to operate the northeast line of Ferrocarriles
Nacionales de Mexico. With the addition of this line, KCSR linked lines
stretching from Chicago to Mexico City, forming what was being called "The Nafta
Railroad."

In 1998 both the railroad and the financial asset management segments of KCSI
were healthy. Plans to divide the two segments continued, although KCSI was then
working on spinning off the financial asset management segment rather than the
railroad.



Principal Subsidiaries: Kansas City Southern Railway Company; Carland, Inc.;
Berger Associates, Inc. (87%); Janus Capital Corporation (83%); DST Systems Inc.
(41%).

FURTHER READING:

 * Boland, John, "On the Right Track," Barron's, November 19, 1979.
 * Dubashi, Jagannath, "Throwback," Financial World, July 20, 1993, pp. 24-25.
 * Fink, Ronald, "If It Ain't Broke...," Financial World, August 2, 1994, pp.
   26-27.
 * Gross, Lisa, "Who Needs a Merger?," Forbes, September 13, 1982.
 * Haverty, Mike, "Mexico's Railway Privatization; KCS Maps 'The NAFTA
   Railroad,"' Railway Age, January 1997, pp. 49-51.
 * Jaffe, Thomas, "Fundamental Analysis 101," Forbes, August 14, 1995, p. 175.
 * "Kansas City Southern to Record Loss for '88," Wall Street Journal, January
   5, 1989.
 * LaMonica, Paul R., "Last Train to Fundville," Financial World, April 8, 1996,
   pp. 30-33.
 * Malone, Frank, "A Lean Little Road with a PIP of a Program," Railway Age,
   June 25, 1979.
 * O'Hanlon, James, "The Little Railroad That Went Astray," Forbes, July 24,
   1978.
 * "On a Fast Track," Barron's, April 26, 1982.
 * Shedd, Tom, "Rail-Oriented Traffic Base Helps As KCS Seeks to Stay
   Independent," Modern Railroads, February 1984.

Source: International Directory of Company Histories, Vol. 26. St. James Press,
1999.

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