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, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____ to ____
Commission file number 1-4717
KANSAS CITY SOUTHERN INDUSTRIES, INC.
(Exact name of Company as specified in its charter)
Delaware 44-0663509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
114 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
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
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Preferred Stock, Par Value $25 Per Share, New York Stock Exchange
4%, Noncumulative
Common Stock, $.01 Per Share Par Value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
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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 8, 2002, 59,985,142 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 approximately $937.5
million (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 Parts I, III
Statement for the 2002 Annual
Meeting of Stockholders, which will
be filed no later than 120 days
after December 31, 2001
KANSAS CITY SOUTHERN INDUSTRIES, INC.
2001 FORM 10-K ANNUAL REPORT
Table of Contents
Page
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PART I
Item 1. Business..................................................... 1
Item 2. Properties................................................... 14
Item 3. Legal Proceedings............................................ 18
Item 4. Submission of Matters to a Vote of Security Holders.......... 18
Executive Officers of the Company............................ 18
PART II
Item 5. Market for the Company's Common Stock and
Related Stockholder Matters................................ 20
Item 6. Selected Financial Data...................................... 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 21
Item 7(A) Quantitative and Qualitative Disclosures About Market Risk... 56
Item 8. Financial Statements and Supplementary Data.................. 59
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 104
PART III
Item 10. Directors and Executive Officers of the Company.............. 105
Item 11. Executive Compensation....................................... 105
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 105
Item 13. Certain Relationships and Related Transactions............... 105
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 106
Signatures................................................... 113
ii
Part I
Item 1. Business
(a) GENERAL DEVELOPMENT OF COMPANY BUSINESS
Kansas City Southern Industries, Inc. ("KCSI" or the "Company") is a Delaware
corporation organized in 1962.
On June 14, 2000, KCSI's Board of Directors approved the spin-off of Stilwell
Financial Inc. ("Stilwell"), the Company's then wholly-owned financial 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"). 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. Under tax rulings received from the Internal
Revenue Service ("IRS"), the Spin-off qualifies as a tax-free distribution under
Section 355 of the Internal Revenue Code of 1986, as amended. Also 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 in 1998 in contemplation
of the Spin-off. The total number of KCSI shares outstanding immediately
following this reverse split was 55,749,947. 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.
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 is incorporated by reference in
response to this Item 1.
(b) INDUSTRY SEGMENT FINANCIAL INFORMATION
KCSI, as the holding company, supplies its various subsidiaries with managerial,
legal, tax, financial and accounting services, in addition to managing other
minor "non-operating" investments. KCSI's principal subsidiaries and affiliates,
which following the Spin-off are reported under one business segment, include
the following:
.. The Kansas City Southern Railway Company ("KCSR"), a wholly-owned
subsidiary;
.. Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), a
36.9% owned unconsolidated affiliate, which owns 80% of the common stock
of TFM, S.A. de C.V. ("TFM");
.. Mexrail, Inc. ("Mexrail"), a 49% owned unconsolidated affiliate, which
wholly owns The Texas-Mexican Railway Company ("Tex Mex");
.. Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate that leases locomotive and rail equipment to
KCSR;
.. Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of
which KCSR owns 50% of the common stock. PCRC owns all of the common stock
of Panarail Tourism Company ("Panarail").
Effective October 1, 2001, the Gateway Western Railway Company ("Gateway
Western") was merged into KCSR. Discussions of KCSR in this Form 10-K include
the operations and operating results of the former Gateway Western.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Recent Developments - Developments Concerning Dispute
with Grupo TMM" for a discussion of the sale of Mexrail to TFM in 2002.
Page 1
Other subsidiaries of the Company include:
.. Trans-Serve, Inc., an owner of a railroad wood tie treating facility;
.. PABTEX GP, LLC ( "Pabtex"), located in Port Arthur, Texas with deep-water
access to the Gulf of Mexico. Pabtex is an owner of a bulk materials
handling facility which stores and transfers petroleum coke from trucks
and rail cars to ships primarily for export;
.. Mid-South Microwave, Inc., which owns and leases a 1,600 mile industrial
frequency microwave transmission system that is the primary communications
facility used by KCSR;
.. Rice-Carden Corporation, which owns and operates various industrial real
estate and spur rail trackage contiguous to the KCSR right-of-way;
.. Wyandotte Garage Corporation, an owner and operator of a parking facility
located in downtown Kansas City, Missouri used by KCSI and KCSR; and
.. Transfin Insurance, Ltd., a single-parent captive insurance company,
providing property, general liability and certain other coverages 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" of this Form 10-K, is incorporated by reference in
response to this Item 1.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
The information set forth in response to Item 101 of Regulation S-K under Part
II Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", of this Form 10-K is incorporated by reference in
response to this Item 1.
The Company, along with its subsidiaries and affiliates, owns and operates a
uniquely positioned North American rail network strategically focused on the
growing north/south freight corridor that connects key commercial and industrial
markets in the central United States with major industrial cities in Mexico. The
Company's rail network (including KCSR, TFM and Tex Mex) is comprised of
approximately 6,000 miles of main and branch lines and interconnects with all
other Class I railroads. Our rail network 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. Through a
strategic alliance with Canadian National Railway Company ("CN") and Illinois
Central Corporation ("IC") (together "CN/IC"), the Company has created a
contiguous rail network of approximately 25,000 miles of main and branch lines
connecting Canada, the United States and Mexico. Management believes that, as a
result of the strategic position of our rail franchise, the Company is poised to
continue to benefit from the growing north/south trade between the United
States, Mexico and Canada promoted by the implementation of the North American
Free Trade Agreement ("NAFTA").
The Company's principal subsidiary, KCSR, founded in 1887, is one of eight Class
I railroads in the United States. KCSR owns and operates a rail network of
approximately 3,100 miles of main and branch lines running on a north/south axis
from Kansas City, Missouri to the Gulf of Mexico, on an east/west axis from East
St. Louis, Illinois to Kansas City and on an east/west axis from Meridian,
Mississippi to Dallas, Texas ("Meridian Speedway"). 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 East St. Louis. Other railroads
can also interconnect with the Company's rail network via other gateways at
Kansas City, Missouri; Birmingham, Alabama; Shreveport and New Orleans,
Louisiana; and Dallas, Beaumont and Laredo, Texas.
The Company's rail network links directly to major trading centers in Mexico
through our unconsolidated affiliates TFM and Tex Mex. The Company owns a 36.9%
interest in Grupo TFM, which owns 80% of TFM. TFM operates a railroad of
approximately 2,650 miles of main and branch lines running from the U.S./Mexico
border at Laredo to Mexico City and serves most of Mexico's principal industrial
cities and three of its four major shipping ports. Our principal international
gateway is at Laredo, where more than 50% of all rail and truck traffic between
the United States and Mexico crosses the border. At December 31, 2001, the
Company also owned a 49% interest in Mexrail, which wholly
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owns Tex Mex (See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments - Developments
Concerning Dispute with Grupo TMM" for a discussion of the sale of Mexrail to
TFM in 2002). Tex Mex owns and operates approximately 160 miles of main and
branch lines between Laredo and the port city of Corpus Christi, Texas. In
addition, Mexrail owns the northern half of the rail-bridge at Laredo, which
spans the Rio Grande River into Mexico. TFM owns and operates the southern half
of the bridge.
The Company also owns 50% of the common stock (or a 42% equity interest) of
PCRC, which holds the concession to operate a 47-mile railroad located adjacent
to the Panama Canal. Panarail operates a commuter and tourist railway service
over the lines of PCRC. Subsequent to the reconstruction of this rail line,
passenger service commenced during the third quarter of 2001 and freight service
started during the fourth quarter of 2001.
KCSI's rail network is further expanded through its strategic alliance with
CN/IC and marketing agreements with Norfolk Southern Railway Co. ("Norfolk
Southern") and I&M Rail Link, LLC ("I&M Rail Link"). The CN/IC alliance connects
Canadian markets with major midwestern and southern markets in the United States
as well as with major markets in Mexico through our connections with Tex Mex and
TFM. Marketing agreements with Norfolk Southern allow the Company to capitalize
on its Meridian Speedway to gain incremental traffic volume between the
southeast and the southwest. Our marketing agreement with I&M Rail Link provides
access to Minneapolis, Minnesota and Chicago and to originations of corn and
other grain in Iowa, Minnesota and Illinois.
RAIL NETWORK
Owned Network
KCSR owns and operates approximately 3,100 miles of main and branch lines and
1,340 miles of other tracks in a ten-state region that includes Missouri,
Kansas, Arkansas, Oklahoma, Mississippi, Alabama, Tennessee, Louisiana, Texas
and Illinois. KCSR has the shortest north/south rail route between Kansas City
and several key ports along the Gulf of Mexico in Louisiana, Mississippi and
Texas. KCSR's rail route also serves the east/west route between Meridian and
Dallas and the east/west route linking Kansas City with East St. Louis and
Springfield, Illinois. In addition, KCSR has limited haulage rights between
Springfield and Chicago that allow for shipments that originate or terminate on
the former Gateway Western's rail lines. These lines also provide access to East
St. Louis and allow rail traffic to avoid the more congested and costly St.
Louis terminal. This geographic reach enables service to a customer base that
includes electric generating utilities, which use coal, and a wide range of
companies in the chemical and petroleum, agricultural and mineral, paper and
forest, and automotive and intermodal markets.
KCSR 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 other
rail carriers and alternative modes of surface transportation, such as
over-the-road truck transportation. The ability of KCSR to construct and
maintain the roadway in order to provide safe and efficient transportation
service is important to its 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 85% of KCSR
employees are covered under various collective bargaining agreements.
Significant Investments
Grupo TFM- Overview
In December 1995, the Company entered into a joint venture agreement with
Transportacion Maritima Mexicana, S.A. de C.V. ("TMM"- now Grupo TMM as
described below). The purposes of the joint venture were, among others, to
provide for the formation of Grupo TFM, to provide for participation in the
privatization of the Mexican national railway system through Grupo TFM, and to
promote the movement of rail traffic over Tex Mex, TFM and KCSR. In 1997, the
Company invested $298 million to obtain a 36.9% interest in Grupo TFM. Grupo
TMM, S.A. de C.V. ("Grupo TMM"), which owns 38.5% of Grupo TFM, is the largest
shareholder of Grupo TFM and the Mexican government owns the remaining 24.6%.
(Note: See discussion below in " Grupo TFM - Joint Venture Arrangements" for a
discussion of the formation of Grupo TMM). Grupo TFM owns 80% of the common
stock of TFM. The remaining 20% of TFM was
Page 3
retained by the Mexican government. Grupo TMM and the Company maintain a call
option to purchase the Mexican government's 24.6% share of Grupo TFM on or prior
to July 31, 2002 as described further below in "Grupo TFM - Joint Venture
Arrangements". TFM is both a strategic and financial investment for KCSI.
Strategically our investment in TFM promotes the NAFTA growth strategy whereby
the Company and its strategic partners can provide transportation services
between the heart of Mexico's industrial base, the United States 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 strategy is to provide reliable customer service, capitalize on foreign
trade growth and convert truck tonnage to rail.
Under the concession awarded by the Mexican Government in 1996 (the
"Concession"), TFM operates the Northeast Rail Lines, which are located along a
strategically significant corridor between Mexico and the United States, and
have as their core routes a key portion of the shortest, most direct rail
passageways between Mexico City and the southern, midwestern and eastern United
States. These rail lines are the only ones which serve Nuevo Laredo, the largest
rail freight exchange point between the United 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, TFM
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 serves 15 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.
KCSI believes the Laredo gateway is the most important interchange point for
rail freight between the United States and Mexico. As a result, the Company
believes that TFM's routes are integral to Mexico's foreign trade.
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 2001. Through Tex Mex and KCSR, as well as through interchanges with
other major U.S. railroads, TFM provides its customers with access to an
extensive rail network through which they may distribute their products
throughout North America and overseas.
Financially, KCSI management believes TFM is an excellent long-term investment.
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 Canada, and customer focused rail service,
the Company believes that the growth potential of TFM could be significant.
TFM operates approximately 2,650 miles of main and branch lines and certain
additional sidings, spur tracks and main line under trackage rights. TFM has the
right to operate the rail lines, but does not own the land, roadway or
associated structures. Approximately 81% of the main line operated by TFM
consists of continuously welded rail. As of December 31, 2001, TFM owned 468
locomotives, owned or leased from affiliates 4,611 freight cars and leased from
non-affiliates 150 locomotives and 6,192 freight cars.
Grupo TFM - Joint Venture Arrangements
During December 2001, TMM announced that its largest shareholder, Grupo TMM,
filed a registration statement on Form F-4 with the Securities and Exchange
Commission ("SEC") which was declared effective December 13, 2001, to register
securities that would be issued in the proposed merger of TMM with Grupo TMM
(formerly Grupo Servia, S.A. de C.V. ("Grupo Servia")). The surviving entity in
the merger is known as Grupo TMM.
The term of the Grupo TFM joint venture agreement was renewed for a term of
three years on December 1, 2000 and will automatically renew for additional
terms of three years each unless either Grupo TMM or the Company gives notice of
termination at least 90 days prior to the end of the then-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
Grupo TMM or the Company or a material default by Grupo TMM or the Company. Upon
termination of the agreement, any joint venture assets that are not held in the
name of KCSI or Grupo TMM will be distributed proportionally to Grupo TMM and
KCSI. The joint venture does not have any material assets and management
believes that a termination of the joint venture agreement would not have a
material adverse effect on the Company or its interests in Mexrail or Grupo TFM.
Page 4
The shareholders agreement dated May 1997, between KCSI, Caymex Transportation,
Inc. (a wholly-owned subsidiary of the Company), Grupo Servia, TMM (Grupo Servia
and TMM are now Grupo TMM following merger during 2001) and TMM Multimodal, S.A.
de C.V. (a subsidiary of Grupo TMM that holds its interest in Grupo TFM), which
governs our investment in Grupo TFM (1) restricts each of the parties 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, and (2) provides that KCSI and
Grupo 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 of the
transferring party or another party to the shareholders agreement, without the
consent of the other parties to the shareholders agreement. The Grupo TFM bylaws
prohibit any transfer of shares of Grupo TFM to any person other than an
affiliate of the existing shareholders without the prior consent of Grupo TFM's
board of directors. In addition, 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 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 or (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
exchange rate). The Mexican government's interest in Grupo TFM is in the form of
limited voting right shares.
KCSI and Grupo TMM have a call option for the Mexican government's 24.6%
interest in Grupo TFM which is exercisable, on or 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. If the call option (or any portion
thereof) has not been exercised on or before that date, it will automatically
expire, although any unexercised portion of the call option with respect to any
of the original shareholders may be exercised pro rata by the other original
shareholders within a period of 15 days following the call option expiration
date. In addition, at any time prior to July 31, 2002, the call option will
terminate if not exercised within 30 days after receipt by the original
shareholders of notice from the Mexican government that (1) after July 31, 2000,
for two consecutive calendar six-month periods, TFM has met certain stipulated
financial goals, or (2) Grupo TFM shares become listed on any securities
exchange and, for a consecutive 10-day period, the closing trading price of such
shares exceeded by 20% the value that on those same dates would be equal to the
purchase price of the Mexican government's interest under the call option.
Following this 30-day period, any unexercised portion of the call option with
respect to any original shareholder may be exercised by the other original
shareholders within a period of 15 days. In addition, after the expiration of
that call option, the original shareholders 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 Mexican
governmental entity.
On or prior to July 31, 2002, it is the intention of KCSI, along with Grupo TMM,
to exercise their call option with respect to the purchase of the 24.6% interest
in Grupo TFM currently owned by the Mexican government. The purchase price will
be calculated by accreting the Mexican government's initial investment of
approximately $199 million from the date of the Mexican government's investment
through the date of the purchase, using the interest rate on one-year U.S.
Page 5
Treasury securities. Various financing alternatives are currently being
explored. One source of financing could include the use, as an offset to the
purchase price, of approximately $81 million due to TFM from the Mexican
government as a result of the reversion, during the first quarter of 2001, of a
portion of the Concession to the Mexican government by TFM that covers the
Hercules-Mariscala rail line, an approximate 18-mile portion of redundant track
in the vicinity of the city of Queretaro. TFM recorded income of approximately
$54 million (under accounting principles generally accepted in the United States
of America ("U.S. GAAP")) in connection with the reversion. The remainder of the
financing required to purchase the Mexican government's Grupo TFM shares is
expected to be raised either at TFM or by the Company and Grupo TMM,
respectively.
On or prior to October 31, 2003 the Mexican government may sell its 20% interest
in TFM through a public offering (with the consent of Grupo TFM if prior to
October 31, 2003). If, on October 31, 2003, the Mexican government has not sold
all of its capital stock in TFM, Grupo TFM is obligated to purchase the capital
stock at the initial share price paid by Grupo TFM plus interest. In the event
that Grupo TFM does not purchase the Mexican government's remaining interest in
TFM, Grupo TMM and KCSI, or either Grupo TMM or KCSI, are obligated to purchase
the Mexican government's interest. KCSI and Grupo 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 Grupo 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. If KCSI and Grupo TMM, or either
KCSI or Grupo TMM alone had been required to purchase the Mexican government's
20% interest in TFM as of December 31, 2001, the total purchase price would have
been approximately $518.8 million.
Mexrail
In 1995, the Company invested approximately $23 million to acquire a 49%
economic interest in Mexrail, which owns 100% of Tex Mex and certain other
assets, including the northern half of the international rail-bridge at Laredo
spanning the Rio Grande River. Grupo TMM owns the remaining 51% of Mexrail. (See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Recent Developments - Developments Concerning Dispute with Grupo
TMM" for a discussion of the sale of Mexrail to TFM in 2002). The bridge at
Laredo is the most significant entry point for rail traffic between Mexico and
the United States. Tex Mex operates a 160-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 rights sufficient to integrate the
line into the existing trackage rights. The line is not in service and will
require extensive reconstruction, which has not yet been scheduled. 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, Texas by over
70 miles.
The share purchase agreement dated as of October 5, 1995 between KCSI and Grupo
TMM which governs the investment in Mexrail provides, among other things, that
as long as the Company is a shareholder of Mexrail, it has a right of first
refusal with respect to Grupo TMM's Mexrail common stock if (1) Grupo TMM
decides to sell all or a portion of its Mexrail common stock, or (2) Grupo TMM
votes its Mexrail common stock in favor of a merger or consolidation involving
Mexrail or Tex Mex or any plan to sell all or substantially all of the assets of
Mexrail or Tex Mex. In addition, if Mexrail decides to sell all or a portion of
its Tex Mex common stock, as long as KCSI is a shareholder of Mexrail, KCSI has
a right of first refusal with respect to such 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. In the event that the
Company decides to sell all or a portion of its Mexrail common stock, Grupo TMM
Page 6
has the same rights of first refusal to purchase the Company's Mexrail common
stock as KCSI is granted with reference to Grupo TMM's Mexrail common stock in
the share purchase agreement.
Panama Canal Railway Company
In January 1998, the Republic of Panama awarded PCRC, a joint venture between
KCSR and Mi-Jack Products, Inc. ("Mi-Jack"), the concession to reconstruct and
operate the Panama Canal Railway. The Panama Canal Railway is a north-south
railroad traversing the Panama isthmus between the Pacific and Atlantic Oceans.
Its origin dates back to the late 1800's and the railway provides international
shippers with a railway transportation option to complement the Panama Canal
shipping channel. As of December 31, 2001, the Company has invested
approximately $15.5 million toward the reconstruction and operations of the
Panama Canal Railway. This investment is comprised of $12.9 million of equity
and $2.6 million of subordinated loans. The Panama Canal Railway became fully
operational on December 1, 2001 with the commencement of freight traffic.
Passenger service started during July 2001. Management believes the prime
potential and opportunity for this railroad to be in the movement of traffic
between the ports of Balboa and Colon for shipping customers repositioning of
containers. The Panama Canal Railway has significant interest from both shipping
companies and port terminal operators. In addition, there is demand for
passenger traffic for both commuter and pleasure/tourist travel. Panarail
operates and promotes commuter and tourist passenger service over the Panama
Canal Railway. While only 47 miles long, the Company believes the Panama Canal
Railway provides the Company with a unique opportunity to participate in
transoceanic shipments as a complement to the existing Canal traffic.
In November 1999, financing arrangements for PCRC were completed with the
International Finance Corporation ("IFC"), a member of the World Bank Group. The
financing is comprised of a $5 million investment by the IFC and senior loans
through the IFC in an aggregate amount of up to $45 million, as well as $4.8
million of equipment loans from Transamerica Corporation. The IFC's investment
of $5 million in PCRC 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 (2) eight times earnings before interest, income taxes,
depreciation and amortization for the two years preceding the redemption that is
proportionate to the IFC's percentage ownership in PCRC. Under the terms of the
concession, the Company is, under certain limited conditions, a guarantor for up
to $7.5 million of cash deficiencies associated with the completion of the
reconstruction project and operations of PCRC. Also if PCRC terminates the
concession contract without the IFC's consent, the Company is a guarantor for up
to 50% of the outstanding senior loans. In addition, the Company is a guarantor
for up to $2.4 million of the equipment loans from Transamerica Corporation. The
cost of the reconstruction, which is virtually complete, is expected to total
approximately $80 million. The Company projects that an additional $2.5 million,
which management expects would be in the form of a subordinated loan, could be
required under the cash deficiency guarantee. Excluding the impact of any loan
guarantees discussed above, the Company expects its total cash outlay for PCRC
to approximate $18.0 million ($12.9 million of equity and $5.1 million of
subordinated loans).
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 comprised of the acquisition of locomotives
and rolling stock and the leasing thereof to KCSR. Concurrent with the formation
of this joint venture, KCSR entered into operating leases with Southern Capital
for substantially all the locomotives and rolling stock that KCSR contributed or
sold to Southern Capital at the time of formation of the joint venture. GATX
contributed cash in the joint venture transaction formation. Southern Capital
formerly managed a portfolio of non-rail loan assets primarily in the amusement
entertainment, construction and trucking industries which it sold in April 1999
to Textron Financial Corporation, thereby leaving only the rail equipment
related assets that are leased to KCSR.
The purpose for the formation of Southern Capital was to partner a Class I
railroad in KCSR with an industry leader in the rail equipment financing in
GATX. Southern Capital provides the Company with access to equipment financing
alternatives.
Page 7
Expanded Network
Through our 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, Michigan, 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 a key provider of
rail service for NAFTA trade.
KCSR and CN formed a management group made up of senior management
representatives from both railroads to, among other things, 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.
Under a separate agreement, KCSR was granted certain trackage and haulage rights
and CN and IC were granted 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 that allows KCSR to increase its 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
was renewed in December 2000 for a term of three years and 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.
In May 2000, KCSR entered into an additional marketing agreement with Norfolk
Southern under which KCSR provides 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.
This agreement terminates on December 31, 2006.
The May 2000 marketing agreement with Norfolk Southern provides KCSR with
additional sources of intermodal business. Under the current arrangement,
approximately two trains per day run both east and west 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,
as a haulage arrangement, fuel and car hire expenses are the responsibility of
Norfolk Southern, not KCSR. 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 and Chicago and to originations of corn
and other 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 into Mexico. This agreement is terminable upon 90 days notice.
Page 8
Haulage Rights.
As a result of the 1988 acquisition of the Missouri-Kansas-Texas Railroad by UP,
KCSR was granted (1) haulage rights between Kansas City and each of Council
Bluffs, Iowa, Omaha and Lincoln, Nebraska and Atchison and Topeka, Kansas, and
(2) a joint rate agreement for our grain traffic between Beaumont and each of
Houston and Galveston, Texas. 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. In addition, KCSR has limited haulage
rights between Springfield and Chicago that allow for shipments that originate
or terminate on the former Gateway Western's rail lines.
Markets Served
The following table summarizes KCSR 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
------------------------------- ----------------------------
(dollars in millions) (in thousands)
2001 2000 1999 2001 2000 1999
--------- --------- --------- ------- ------- -------
General commodities:
Chemical and petroleum $ 123.8 $ 125.6 $ 131.9 146.0 154.1 165.5
Paper and forest 130.3 132.3 130.1 184.0 192.4 202.9
Agricultural and mineral 87.9 93.6 96.5 125.7 132.0 141.0
--------- --------- --------- ------- ------- -------
Total general commodities 342.0 351.5 358.5 455.7 478.5 509.4
Intermodal and automotive 66.0 62.1 58.7 291.1 269.3 233.9
Coal 118.7 105.0 117.4 202.3 184.2 200.8
--------- --------- --------- ------- ------- -------
Carload revenues and carload
and intermodal units 526.7 518.6 534.6 949.1 932.0 944.1
------- ------- -------
Other rail-related revenues 39.7 44.5 51.8
--------- --------- ---------
Total KCSR revenues $ 566.4 $ 563.1 $ 586.4
========= ========= =========
Chemicals and Petroleum
Chemical and petroleum products accounted for approximately 21.8% of KCSR
revenues in 2001. KCSR transports chemical and petroleum products via tank and
hopper cars primarily to markets in the southeast and northeast United States
through interchanges with other rail carriers. Primary traffic includes
plastics, petroleum and oils, petroleum coke, rubber, and miscellaneous
chemicals. Under the terms of the CN/IC strategic alliance, and through certain
actions taken by the STB, KCSR obtained access to six additional chemical
customers in the Geismar, Louisiana industrial corridor (one of the largest
concentrations of chemical suppliers in the world). This access began on October
1, 2000 and management believes it could provide additional competitive
opportunities for revenue growth as existing contracts with other rail carriers
expire for these customers.
Paper and Forest
Paper and forest products accounted for approximately 23.0% of 2001 KCSR
revenues. 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. The expiration of the Softwood Lumber agreement between
Canada and the United States and the ongoing trade dispute between Canada and
the United States has negatively impacted traffic handled in this commodity
group. Trade negotiations between the two countries continue and management is
hopeful that an agreement will be reached during 2002. KCSR serves 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
Page 9
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 15.5% of KCSR
revenues in 2001. 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 and automotive products accounted for approximately 11.7% of 2001
KCSR revenues. The intermodal freight business consists primarily 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 eight years with intermodal units increasing from 61,748 in 1993 to
256,429 in 2001 and intermodal revenues increasing from $17 million to $44
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.
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 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 railroads as truck operators'
efficiency over long distances increased. In response to these competitive
pressures, railroad industry management sought avenues to improve 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 their customers. KCSR has entered into agreements with
several trucking companies for train service in several corridors, but those
services are concentrated between Dallas and Meridian.
The strategic alliance with CN/IC and marketing agreements with Norfolk Southern
provide the Company the potential 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. Furthermore,
the Company is developing 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, when at full capacity, is expected to handle and
process large volumes of domestic and international intermodal freight. 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 IFG. This distribution facility became operational in April 2000 for
the movement of Mazda vehicles. Management believes that, as additional
opportunities arise, the IFG facility will be expanded to include additional
automotive and intermodal operations.
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.
Page 10
Coal
Coal historically has been one of the most stable sources of revenues and is the
largest single commodity handled by KCSR. In 2001, coal revenues represented
21.0% of total KCSR 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 Southwestern Electric Power
Company ("SWEPCO"- a subsidiary of American Electric Power, Inc.), which is
under contract through 2006. The Company, directly or indirectly, delivers coal
to nine electric generating plants, including the Flint Creek, Arkansas and
Welsh, Texas facilities of SWEPCO, 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 comprised approximately 64% of KCSR total coal revenues in 2001. 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 from 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. Management
expects that deliveries to one of our coal customers will cease in April 2002
upon expiration of the contract, which is not expected to be renewed. Further,
management expects coal revenues to decline in 2002 as a result of a contractual
rate reduction at SWEPCO, which took effect on January 1, 2002. The impact of
the rate reduction and the contract expiration is expected to result in an
approximate $20 million decline in 2002 coal revenues.
Other
Other rail-related revenues include a variety of miscellaneous services provided
to customers and interconnecting carriers and accounted for approximately 7.0%
of total KCSR revenues in 2001. 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 The Burlington Northern and Santa Fe Railway
Company ("BNSF") under an agreement, which continues through 2004 and includes
minimum volume commitments.
Railroad Industry
Overview
U.S. railroad companies are categorized by the STB into three types: Class I,
Class II (Regional) and Class III (Local). There are currently eight Class I
railroads in the United States, which can be further divided geographically by
eastern or western classification. The eastern railroads are CSX Corporation
("CSX"), Grand Trunk Western (owned by CN), IC (owned by CN) and Norfolk
Southern. The western railroads include BNSF, KCSR, Soo Line Railroad Company
(owned by Canadian Pacific Railway Company ("CP")) and the UP.
The STB and Regulation
The STB, an independent body administratively housed within the Department of
Transportation, is responsible for the economic regulation of railroads within
the United States. The STB's mission is to ensure that competitive, efficient
and safe transportation services are provided to meet the needs of shippers,
receivers and consumers.
The STB was created by an Act of Congress known as the ICC Termination Act of
1995 ("ICCTA"). Passage of the ICCTA represented a further step in the process
of streamlining and reforming the Federal economic regulatory oversight of the
railroad, trucking and bus industries that was initiated in the late 1970's and
early 1980's. The STB is authorized to have three members, each with a five-year
term of office. The STB Chairman is designated by the President from among the
STB's members.
The STB adjudicates disputes and regulates interstate surface transportation.
Railway transportation matters under the STB's jurisdiction in general include
railroad rate and service issues, rail restructuring transactions (mergers, line
sales, line construction and line abandonments) and railroad labor matters.
The U.S. railroad industry was significantly deregulated with the passage of The
Staggers Rail Act of 1980 (the "Staggers Act"). In enacting the Staggers Act,
Congress recognized that railroads faced intense competition from trucks and
other
Page 11
modes of transportation for most freight traffic and that prevailing regulation
prevented them from earning adequate revenues and competing effectively. Through
the Staggers Act, a new regulatory scheme allowing railroads to establish their
own routes, tailor their rates to market conditions and differentiate rates on
the basis of demand was put in place. The basic principle of the Staggers Act
was that reasonable rail rates should be a function of supply and demand. The
Staggers Act, among others things:
. allows railroads to price competing routes and services differently
to reflect relative demand;
. allows railroads to enter into confidential rate and service
contracts with shippers; and
. abolishes collective rate making except among railroads
participating in a joint-line movement.
The Staggers Act has had a positive effect on the U.S. rail industry. Lower rail
rates brought about by the Staggers Act have resulted in significant cost
savings for shippers and their customers. After decades of steady decline, the
rail market share of inter-city freight ton-miles bottomed out at 35.2% in 1978
and has trended slowly upward since then, reaching 40.6% in 1996 before falling
slightly in 1997 and 1998 and increasing to 41.0% in 2000.
New Merger Rules
On June 11, 2001, the STB issued new rules governing major railroad mergers and
consolidations involving two or more "Class I" railroads (railroads with annual
revenues of at least $250 million, as indexed for inflation). These new rules
substantially increase the burden on rail merger applicants to demonstrate that
a proposed transaction would be in the public interest. The new rules require
applicants to demonstrate that, among other things, a proposed transaction would
enhance competition where necessary to offset negative effects of the
transaction, such as competitive harm, and to address fully the impact of the
transaction on transportation service.
The STB recognized, however, that a merger between KCSR and another Class I
carrier would not necessarily raise the same concerns and risks as potential
mergers between larger Class I railroads. Accordingly, the STB decided that for
a merger proposal involving KCSR and another Class I railroad, the STB will
waive the application of the new rules and apply the rules previously in effect
unless it is persuaded that the new rules should apply.
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. Management regards the
larger western railroads (BNSF and UP), 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 rail franchise.
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 trucking industry generally is more cost
and transit-time competitive than railroads for short-haul distances. 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 each other 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
grain, steel and petroleum products.
Page 12
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.
Employees and Labor Relations
Labor relations in the U.S. railroad industry are subject to extensive
governmental regulation under the Railway Labor Act ("RLA"). Under the RLA,
national labor agreements are renegotiated when they become open for
modification, but their terms remain in effect until new agreements are reached.
Typically, neither management nor labor employees are permitted to take economic
action until extended procedures are exhausted. Existing national union
contracts with the railroads became amendable at the end of 1999. Included in
the contracts was a provision for wages to increase automatically in the year
following the contract term. These federal labor regulations are often more
burdensome and expensive than regulations governing other industries and may
place us at a competitive disadvantage relative to other non-rail industries,
such as trucking competitors, which are not subject to these regulations.
Railroad industry personnel are covered by the Railroad Retirement Act ("RRA")
instead of the Social Security Act. Employer contributions under RRA are
currently substantially higher than those under the Social Security Act and may
rise further because of the increasing proportion of retired employees receiving
benefits relative to the number of working employees. The RRA requires up to a
23.75% contribution by railroad employers on eligible wages (see below for a
discussion of changes to this rate effective in 2002), while the Social Security
and Medicare Acts only require a 7.65% employer contribution on similar wage
bases. Railroad industry personnel are also covered by the Federal Employers'
Liability Act ("FELA") rather than state workers' compensation systems. FELA is
a fault-based system with compensation for injuries settled by negotiation and
litigation, which can be expensive and time-consuming. By contrast, most other
industries are covered by state administered no-fault plans with standard
compensation schedules. The difference in the labor regulations for the rail
industry compared to the non-rail industries illustrates the competitive
disadvantage placed upon the rail industry by federal labor regulations.
Approximately 85% of KCSR employees are covered under various collective
bargaining agreements. Periodically, the collective bargaining agreements with
the various unions become eligible for renegotiation. 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. A new labor contract was reached with the
Brotherhood of Maintenance of Way Employees effective May 31, 2001. Formal
negotiations to enter into new agreements are in progress with the other unions
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. Unions representing former Gateway Western employees are operating
under 1994 contracts and are currently in negotiations to extend these
contracts, which will remain in effect until new agreements are reached. A new
agreement was reached with the Brotherhood of Locomotive Engineers of Gateway
Western effective December 31, 2001. Gateway Western was merged into KCSR on
October 1, 2001. Management has reached new agreements with all but one of the
unions relating to former MidSouth employees (MidSouth was merged into KCSR on
January 1, 1994). Discussions with this union are ongoing. 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. 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.
New Railroad Retirement Improvement Act
On December 21, 2001, the Railroad Retirement and Survivors' Improvement Act of
2001 was signed into law. This legislation liberalizes early retirement benefits
for employees with 30 years of service by reducing the full benefit age from 62
to 60, eliminates a cap on monthly retirement and disability benefits, lowers
the minimum service requirement from 10 years to 5 years of service, and
provides for increased benefits for surviving spouses. It also provides for the
investment of railroad retirement funds in non-governmental assets, adjustments
in the payroll tax rates paid by employees and employers, and the repeal of a
supplemental annuity work-hour tax. The new law provides for a 0.5%
Page 13
reduction in the employer contribution for payroll taxes in 2002 and a 1.9%
decline beginning in 2003. Beginning in 2004, the employer contribution will be
based on a formula and could range between 8.2% and 22.1%. The reductions in the
employer contribution under RRA and the repeal of the supplemental annuity
work-hour tax are expected to reduce fringe benefits expenses by approximately
$2.2 million in 2002. Additionally, the reduction in the retirement age from 62
to 60 is expected to result in increased employee attrition, leading to
additional potential cost savings since it is not anticipated that all employees
selecting early retirement will be replaced.
Insurance
KCSI maintains multiple insurance programs for its various subsidiaries
including rail liability and property, general liability, directors and officers
coverage, workers compensation coverage and various specialized coverages for
specific entities as needed. Coverage for KCSR is by far the most significant
part of the KCSI program. It includes liability coverage up to $250 million,
subject to a $3 million deductible and certain aggregate limitations, and
property coverage up to $200 million subject to a $2 million deductible and
certain aggregate limitations. We believe that our insurance program is in line
with industry norms given the size of the Company and provides adequate coverage
for potential losses.
Employees
As of December 31, 2001, the approximate number of employees of KCSI and its
consolidated subsidiaries was as follows:
KCSR 2,640
All other combined 55
-----
Total 2,695
=====
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.
KCSR
Certain KCSR property statistics follow:
2001 2000 1999
------- ------- -------
Route miles - main and branch line 3,103 3,103 3,158
Total track miles 4,444 4,444 4,499
Miles of welded rail in service 2,197 2,157 2,153
Main line welded rail (% of total) 59% 59% 59%
Cross ties replaced 233,489 355,444 346,686
Average Age (in years):
-----------------------
Wood ties in service 16.0 15.2 15.5
Rail in main and branch line 28.9 29.5 28.5
Road locomotives 23.6 22.9 22.0
All locomotives 24.5 23.8 22.9
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
Page 14
and truck maintenance buildings in Dallas, Texas totaling approximately 125,200
square feet. Other facilities owned by KCSR include a 21,000 square foot freight
car repair shop in Kansas City, Missouri and approximately 15,000 square feet of
office space in Baton Rouge, Louisiana. KCSR also has the support of a
locomotive repair facility recently constructed in Kansas City, Missouri. This
facility is owned and operated by General Electric Company ("GE") to repair and
maintain 50 AC 4400 locomotives manufactured by GE and leased by KCSR from
Southern Capital.
KCSR and KCSI executive offices are currently located in an eight-story office
building in downtown Kansas City, Missouri, which was previously leased from a
subsidiary of the Company. In June 2001, the Company entered into a 17-year
lease agreement for a new corporate headquarters building in downtown Kansas
City, Missouri. The lease agreement is subject to completion of the new
building, which is currently scheduled for April 2002. In June 2001, the Company
sold the current corporate headquarters building in anticipation of occupying
this new facility in the second quarter of 2002. The Company will remain in the
existing building until the new corporate office facilities are completed and
available for occupancy.
KCSR owns five intermodal facilities and has contracted with third parties to
operate these facilities. These facilities are located in Dallas; Kansas City;
Shreveport and New Orleans, Louisiana; and Jackson, Mississippi. KCSR is in the
process of constructing an automotive and intermodal facility at the former
Richards-Gebaur Airbase in Kansas City, Missouri. A portion of the automotive
facility became operational in April 2000 for the storage and movement of
automobiles. Intermodal and automotive operations at the facility may be further
expanded in the future as business opportunities arise. The Company is also
expanding the intermodal facilities in Kansas City, Dallas and Shreveport. The
various intermodal facilities include strip tracks, cranes and other equipment
used in facilitating the transfer and movement of trailers and containers. KCSR
also has two transload facilities: one in Spiro, Oklahoma and the other in
Jackson. A third transload facility is expected to open in Dallas during 2002.
Transload operations consist of train/truck shipments whereby the products
shipped are unloaded from the trailer, container or rail car and reloaded onto
the other mode of transportation. Transload is similar to intermodal, except
that intermodal shipments transfer the entire container or trailer and transload
shipments transfer only the product being shipped.
KCSR owns 16.6% 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 locomotives and rolling stock consisted of the following at
December 31:
2001 2000 1999
--------------- --------------- ---------------
Leased Owned Leased Owned Leased Owned
------ ----- ------ ----- ------ -----
Locomotives:
Road Units 304 122 324 122 324 126
Switch Units 52 4 55 9 59 10
Other -- 8 -- 8 -- 8
------ ----- ------ ----- ------ -----
Total 356 134 379 139 383 144
====== ===== ====== ===== ====== =====
Rolling Stock:
Box Cars 6,164 1,420 5,951 2,020 6,298 2,012
Gondolas 780 88 842 95 845 78
Hopper Cars 2,002 1,179 2,217 1,285 2,434 1,475
Flat Cars (Intermodal
and Other) 1,585 601 1,584 616 1,554 679
Tank Cars 44 43 46 55 33 55
Auto Rack 201 -- 201 -- 201 --
------ ----- ------ ----- ------ -----
Total 10,776 3,331 10,841 4,071 11,365 4,299
====== ===== ====== ===== ====== =====
As of December 31, 2001, KCSR's fleet consisted of 490 diesel locomotives, of
which 134 were owned, 334 leased from Southern Capital and 22 leased from
non-affiliates. KCSR's fleet of rolling stock consisted of 14,107 freight cars,
of which 3,331 were owned, 3,399 leased from Southern Capital and 7,377 leased
from non-affiliates.
Page 15
The owned equipment is subject to liens created under our senior secured credit
facilities, as well as liens created under certain conditional sales agreements,
capital leases, and equipment trust certificates. KCSR indebtedness with respect
to equipment trust certificates, conditional sales agreements and capital leases
totaled approximately $46.5 million at December 31, 2001.
Systems and Technology
Management Control System
The Company implemented a pilot version of its Management Control System ("MCS")
on the former Gateway Western (which was merged into KCSR effective October 1,
2001) in the first quarter of 2000 and had initially planned to begin
implementation on KCSR in April 2001. However, implementation of MCS was delayed
due to various factors, including personnel reductions that took place during
March 2001. While development of MCS is not yet complete, during November 2001,
a small functional part of MCS was installed relating to waybilling functions at
the Company's customer service center. Management expects to fully implement MCS
on KCSR in July 2002. Our proprietary MCS includes the following elements:
. a new waybill system;
. a new transportation system;
. a work queue management infrastructure;
. a service scheduling system; and
. EDI interfaces to the new systems.
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.
MCS is designed to provide better analytical tools for management to use in its
decision-making process. Management expects MCS to provide more accurate and
timely information on, among other things, terminal dwell time, car velocity
through terminals and priority of switching to meet schedules. A data warehouse
will provide the foundation for 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 and real-time decision support. 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 technology as it
becomes available. MCS can be further modified to connect customers with
additional 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. A later
enhancement of MCS is expected to also include revenue and car accounting
systems.
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 65% 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 35% 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 main line or heavy traffic areas with
Page 16
multiple routes. Each dispatcher 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.
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 160-mile rail line extending from Corpus
Christi to Laredo, and also has trackage rights (from UP) totaling approximately
360 miles between Corpus Christi and Beaumont, Texas. Additionally, on March 12,
2001 Mexrail purchased approximately 84.5 miles of track between Rosenberg and
Victoria, Texas. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments - Developments
Concerning Dispute with Grupo TMM" for a discussion of the sale of Mexrail to
TFM in 2002.
In early 1999, Tex Mex completed construction of a new rail yard in Laredo. This
rail yard consists of six tracks comprising approximately 9.3 miles. Although
groundwork for an additional ten tracks has been completed, construction on
those ten tracks has not yet begun. Capacity of the Laredo yard is approximately
800 freight cars and, upon completion of all tracks, is expected to be
approximately 2,000 freight cars.
Certain Tex Mex property statistics follow:
2001 2000 1999
---- ---- ----
Route miles - main and branch line 160 157 157
Total track miles (includes trackage rights) 608 533 533
Miles of welded rail in service 5 5 5
Main line welded rail (% of total) 3% 3% 3%
Grupo TFM
TFM operates approximately 2,650 miles of main and branch lines and certain
additional sidings, spur tracks and main line under trackage rights. TFM has the
right to operate the rail lines, but does not own the land, roadway or
associated structures. Approximately 81% of the main line operated by TFM
consists of continuously welded rail. As of December 31, 2001, TFM owned 468
locomotives, owned or leased from affiliates 4,611 freight cars and leased from
non-affiliates 150 locomotives and 6,192 freight 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, Mexico. TFM leases 140,354 square feet of office space in
Mexico City and owns a 115,157 square foot facility in Monterrey.
Panama Canal Railway Company/Panarail Tourism Company
PCRC, a joint venture in which the Company owns 50% of the common stock (or a
42% equity interest), holds the concession to operate a 47-mile railroad that
runs parallel to the Panama Canal. Reconstruction of the railroad was completed
during 2001 and both passenger and freight traffic commenced during 2001. PCRC
leases five locomotives and owns one locomotive. PCRC also owns 12 double stack
cars, 6 passenger cars and various other infrastructure improvements and
equipment. PCRC has operating intermodal terminal facilities at each end of its
railroad and has an approximate 15,000 square foot equipment maintenance
facility.
Other
The Company owns 1,025 acres of property located on the waterfront in the Port
Arthur, Texas area, which includes 22,000 linear feet of deep-water frontage and
three docks. Port Arthur is an uncongested port with direct access to the Gulf
of Mexico. Approximately 75% of this property is available for development.
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 owns a 70-acre bulk commodity handling facility in Port Arthur,
Texas.
Page 17
Mid-South Microwave, Inc. owns and operates a microwave system, which extends
essentially along the right-of-way of KCSR from Kansas City 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 and several former
railway buildings now being rented to non-affiliated companies, primarily as
warehouse space. The Company is an 80% owner of Wyandotte Garage Corporation,
which owns a parking facility in downtown Kansas City, Missouri. The facility is
located adjacent to the Company and KCSR executive offices, and consists of
1,147 parking spaces utilized by the employees of the Company and its
affiliates, as well as the general public. The Company sold an option providing
for the sale of the Company's ownership interest in Wyandotte Garage Corporation
to a third party, subject to various stipulations and agreements. The sale of
the Company's interest in this corporation is expected to occur during 2002
after the relocation of our corporate headquarters to the new facility currently
under construction.
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 - Note 11 - Commitments and Contingencies" of this Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the three-month
period ended December 31, 2001.
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, 2001. All executive officers are elected annually and serve at the
discretion of the Board of Directors. All of the executive officers have
employment agreements with the Company.
Name Age Position(s)
---- --- -----------
Michael R. Haverty 57 Chairman of the Board, President and Chief Executive Officer
Gerald K. Davies 57 Executive Vice President and Chief Operating Officer
Robert H. Berry 57 Senior Vice President and Chief Financial Officer
Albert W. Rees 56 Senior Vice President--Operations of KCSR
William J. Pinamont 40 Vice President and General Counsel
Warren K. Erdman 43 Vice President - Corporate Affairs
Paul J. Weyandt 49 Vice President and Treasurer
Louis G. Van Horn 43 Vice President and Comptroller
Jay M. Nadlman 41 Associate General Counsel and Corporate Secretary
The information set forth in the Company's Definitive Proxy Statement in the
description of the Board of Directors with respect to Mr. Haverty is
incorporated herein by reference.
Gerald K. Davies has served as Executive Vice President and Chief Operating
Officer of KCSI since July 18, 2000. Mr. Davies joined KCSR in January 1999 as
the Executive Vice President and Chief Operating Officer. Mr. Davies has
Page 18
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 through December 1996 and Vice President--Finance for
Bell Atlantic Meridian Systems from 1993 to 1995. Mr. Berry is a Certified
Public Accountant.
Albert W. Rees has served as a director of KCSR since May 1996. Since March
2001, he has served as Senior Vice President--Operations of KCSR. From January
1999 to March 2001, he served as Senior Vice President--International Operations
of KCSR. From June 1995 to January 1999, Mr. Rees served as Senior Vice
President--Operations of KCSR. Prior to joining KCSR, Mr. Rees was with The
Atchison, Topeka and Santa Fe Railway Company, serving as Vice
President--Quality Management from June 1991 to June 1995 and as Vice
President--Operations from June 1989 through May 1991. Mr. Rees also serves as a
director and chairman of the executive committee of each of the Kansas City
Terminal Railway Company and Tex Mex.
William J. Pinamont has served as Vice President and General Counsel of KCSI
since April 2001. He joined KCSR in December 2000 as Assistant Vice President
Risk Management. Prior to joining KCSI, Mr. Pinamont was Of Counsel at the law
firm Piper, Marbury, Rudnick & Wolfe, LLP from September 1999 to December 2000.
From July 1992 until June 1999, he served as Associate General Counsel for
Consolidated Rail Corporation.
Warren K. Erdman has served as Vice President--Corporate Affairs of KCSI since
April 15, 1997 and as Vice President--Corporate Affairs of KCSR since May 1997.
Prior to joining KCSI, Mr. Erdman served as Chief of Staff to United States
Senator Kit Bond of Missouri from 1987 to 1997.
Paul J. Weyandt has served as Vice and President and Treasurer of KCSI and of
KCSR since September 2001. Before joining KCSI, Mr. Weyandt was a consultant to
the Structured Finance Group of GE Capital Corporation from May 2001 to
September 2001. Prior to consulting, Mr. Weyandt spent 23 years with BNSF, most
recently as Assistant Vice President - Finance and Assistant Treasurer.
Louis G. Van Horn has served as Vice President and Comptroller of KCSI since May
1996. Mr. 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.
Jay M. Nadlman has served as Associate General Counsel and Corporate Secretary
of KCSI since April 1, 2001. Mr. Nadlman joined KCSI in December 1991 as a
General Attorney, and was promoted to Assistant General Counsel in 1997, serving
in that capacity until April 1, 2001. Mr. Nadlman has served as Associate
General Counsel and Secretary of KCSR since May 3, 2001, and as Assistant
General Counsel and Assistant Secretary from August 1997 to May 3, 2001. Prior
to joining KCSI, Mr. Nadlman served as an attorney with Union Pacific Railroad
Company from 1985 to 1991.
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.
Page 19
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 13 - Quarterly Financial Data
(Unaudited)" of this Form 10-K is incorporated by reference in response to this
Item 5.
The Company has not declared any cash dividends on its common stock during the
last two fiscal years and does not anticipate making any cash dividend payments
to common stockholders in the foreseeable future. Pursuant to the 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.
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"). 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. Also 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 in 1998 in contemplation of the
Spin-off. The total number of KCSI shares outstanding immediately following this
reverse split was 55,749,947.
As of March 8, 2002, there were 5,852 holders of the Company's common stock
based upon an accumulation of the registered stockholder listing.
Item 6. Selected Financial Data (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 Reports of
Independent Accountants thereon, included under Item 8, "Financial Statements
and Supplementary Data" of this Form 10-K and such data is qualified by
reference thereto. All years reflect the 1-for-2 reverse common stock split to
shareholders of record on June 28, 2000 paid July 12, 2000.
2001 2000 1999 1998 1997
----------- ----------- ------------ --------- -----------
Revenues $ 577.3 $ 572.2 $ 601.4 $ 613.5 $ 573.2
Income (loss) from continuing
operations $ 31.1(i) $ 25.4(ii) $ 10.2(iii) $ 38.0 $ (132.1)(iv)
Income (loss) from continuing
operations per common share:
Basic $ 0.53 $ 0.44 $ 0.18 $ 0.69 $ (2.46)
Diluted 0.51 0.43 0.17 0.67 (2.46)
Total assets(v) $ 2,010.9 $ 1,944.5 $ 2,672.0 $ 2,337.0 $ 2,109.9
Total debt $ 658.4 $ 674.6 $ 760.9 $ 836.3 $ 916.6
Cash dividends per
common share $ -- $ -- $ 0.32 $ 0.32 $ 0.30
Ratio of earnings to
fixed charges (vi) 1.1x 1.0x 1.2x(iii) 1.9x --(iv)
Page 20
(i) Income from continuing operations for the year ended December 31, 2001
excludes a charge for the cumulative effect of an accounting change of
$0.4 million (net of income taxes of $0.2 million). This charge
reflects the Company's adoption of Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" effective January 1, 2001.
(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) Income from continuing operations for the year ended December 31, 1999
includes unusual costs of $12.7 million ($7.9 million after-tax).
Excluding these unusual costs of $12.7 million, the ratio of earnings
to fixed charges for 1999 would have been 1.3x.
(iv) Includes restructuring, asset impairment and other charges of $178.0
million ($141.9 million after-tax). Due to these restructuring, asset
impairment and other charges of $178.0 million, the 1997 ratio coverage
was less than 1:1. The ratio of earnings to fixed charges would have
been 1:1 if a deficiency of $148.4 million would have been eliminated.
Excluding the restructuring, asset impairment and other charges of
$178.0 million, the ratio of earnings to fixed charges for 1997 would
have been 1.4x.
(v) The total assets presented herein as of December 31, 1999, 1998 and
1997 include the net assets of Stilwell as follows: $814.6 million,
$540.2 million, and $348.3 million, respectively. Due to the Spin-off
on July 12, 2000, the total assets as of December 31, 2001 and 2000 do
not include the net assets of Stilwell.
(vi) 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 the portion of rental expense which management believes is
representative of the interest component of rental expense.
The information set forth in response to Item 301 of Regulation S-K under Part
II Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations", of this Form 10-K is incorporated by reference in
partial response to this Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
The discussion set forth below, as well as other portions of this Form 10-K,
contains forward-looking comments that are not based upon historical
information. Such forward-looking comments are based upon information currently
available to management and management's perception thereof as of the date of
this Form 10-K. Readers can identify these forward-looking comments by the use
of such verbs as expects, anticipates, believes or similar verbs or conjugations
of such verbs. The actual results of operations of Kansas City Southern
Industries, Inc. ("KCSI" or the "Company") could materially differ from those
indicated in forward-looking comments. The differences could be caused by a
number of factors or combination of factors including, but not limited to, those
factors identified in the Company's Current Report on Form 8-K dated December
11, 2001, which is on file with the U.S. Securities and Exchange Commission
(File No.1-4717) and is hereby incorporated by reference herein. Readers are
strongly encouraged to consider these factors when evaluating any
forward-looking comments. The Company will not update any forward-looking
comments set forth in this Form 10-K.
The discussion herein is intended to clarify and focus on the Company's results
of operations, certain changes in its financial position, liquidity, capital
structure and business developments for the periods covered by the consolidated
financial statements included under Item 8 of this Form 10-K. This discussion
should be read in conjunction with these consolidated financial statements, the
related notes and the Reports 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
The Kansas City Southern Railway Company ("KCSR") reflect the results of KCSR
and Gateway Western as combined operating companies and exclude other KCSR
subsidiaries or affiliates. Note: Effective October 1, 2001, the Gateway Western
Railway Company ("Gateway Western") was merged into KCSR.
Page 21
General
Kansas City Southern Industries, Inc. ("KCSI" or the "Company") is a Delaware
corporation organized in 1962. KCSI is a holding company and its principal
subsidiaries and affiliates include the following:
.. The Kansas City Southern Railway Company ("KCSR"), a wholly-owned
subsidiary;
.. Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), a
36.9% owned unconsolidated affiliate, which owns 80% of the common stock
of TFM, S.A. de C.V. ("TFM");
.. Mexrail, Inc. ("Mexrail"), a 49% owned unconsolidated affiliate, which
wholly owns The Texas-Mexican Railway Company ("Tex Mex");
.. Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate that leases locomotive and rail equipment to
KCSR;
.. Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of
which KCSR owns 50% of the common stock. PCRC owns all of the common stock
of Panarail Tourism Company ("Panarail").
KCSI, as the holding company, supplies its various subsidiaries with managerial,
legal, tax, financial and accounting services, in addition to managing other
"non-operating" investments.
Effective October 1, 2001, the Gateway Western Railway Company ("Gateway
Western") was merged into KCSR. Discussions of KCSR in this Form 10-K include
the operations and operating results of Gateway Western.
See "Recent Developments - Developments Concerning Dispute with Grupo TMM" for a
discussion of the sale of Mexrail to TFM in 2002.
All per share information included in this Item 7 is presented on a diluted
basis unless specifically identified otherwise.
RECENT DEVELOPMENTS
The following items reflect significant developments, events or transactions
that have occurred during the year ended December 31, 2001 or in 2002 prior to
the Company's filing of this Form 10-K.
Developments Concerning Dispute with Grupo TMM. The Company and Grupo TMM, S.A.
de C.V. ("Grupo TMM") have resolved their previously announced dispute over
resolutions adopted at the Grupo TFM shareholders meetings held at the end of
last year authorizing, among other things, the payment of a dividend by Grupo
TFM and TFM's entry into a long-term lease with Mexrail, Inc. for the northern
half of the international railway bridge at Laredo, Texas. On March 26, 2002,
the 18th Civil Court of Mexico, D.F. issued an order declaring the Ordinary
General Meeting of Shareholders held on December 21, 2001, which adopted
resolutions authorizing the payment of a dividend, null and void. As a result of
that court order, the dividend payment declared to the parties to the lawsuit,
our subsidiary NAFTA Rail, S.A. de C.V. and Grupo TMM's subsidiary TMM
Multimodal, S.A. de C.V., has been determined to be null and void. In addition,
the dispute over the Mexrail-TFM bridge lease has been resolved by i) the
termination of that lease; ii) a judicial settlement between the parties and the
withdrawal from the action filed with the 14th Civil Court of Mexico, D.F.; and
iii) the Company's dismissal of the lawsuit it had filed in Delaware.
The Company, Grupo TMM, and certain of their affiliates entered into an
agreement on February 27, 2002 with TFM to sell to TFM all of the common stock
of Mexrail. Mexrail owns the northern half of the international railway bridge
at Laredo and all of the common stock of Tex Mex. The sale closed on March 27,
2002 and the Company received approximately $31.4 million for its 49% interest
in Mexrail. The Company intends to use the proceeds from the sale to reduce
debt. Although the Company no longer directly owns 49% of Mexrail, it retains an
indirect ownership through its ownership of Grupo TFM. The Company is currently
evaluating the accounting treatment for this transaction.
Changes to Mexican Tax Law. Effective January 1, 2002, Mexico implemented
changes in its income tax laws that could have an impact on Grupo TFM's future
operating results, a portion of which are recorded in the Company's earnings
under the equity method of accounting.
Page 22
The Mexican corporate income tax rate will be reduced from 35% to 32% in one
percent increments beginning in 2003, resulting in a 32% income tax rate in
2005. Accordingly, under accounting principles generally accepted in the United
States of America ("U.S. GAAP"), Grupo TFM's currently recorded deferred tax
asset will likely be reduced by approximately $3.9 million in 2002, resulting in
an impact of approximately $1.4 million to the Company. Additionally, the
ability to utilize tax credits resulting from the purchase of fuel to offset
non-income taxes has been repealed. Such credits will generally expire if not
utilized during 2002. Under the current environment, this could also have an
ongoing impact to TFM's fuel expense in 2002 and beyond. Management of TFM
believes that the new law's limitation of the use of the fuel tax credits by the
railroad industry was unintended and TFM management is working with other
Mexican railroads and the Mexican government to have this portion of the change
in law reversed. TFM expects, but cannot assure, that the outcome will be that
the use of such fuel tax credits will not be limited. If TFM management is not
successful in its efforts to have this portion of the change in law reversed, it
could have an adverse impact on the Company's equity earnings from Grupo TFM.
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 Bogalusa and the surrounding area allegedly
causing evacuations and injuries. Approximately 25,000 residents of Louisiana
and Mississippi (plaintiffs) have asserted claims to recover damages allegedly
caused by exposure to the released chemicals.
On October 29, 2001, KCSR and representatives for its excess insurance carriers
negotiated a settlement in principle with the Louisiana and Mississippi
plaintiffs for $22.3 million. The settlement is subject to the execution of a
Master Global Settlement Agreement ("MGSA") and releases by the parties. In
Louisiana, the Court will evaluate the MGSA at a fairness hearing and decide
whether the proposed settlement is fair for the class of plaintiffs. In
Mississippi, the plaintiffs are expected to individually execute release
instruments. Management expects that these events could occur by the end of the
third quarter of 2002.
At December 31, 2001, the Company had recorded a liability in its consolidated
financial statements of $22.3 million and an insurance receivable of $19.3
million related to the Bogalusa cases.
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. ("Stilwell" - a former wholly-owned financial services
subsidiary) as defendants. This lawsuit sought a declaration that the Company's
spin-off of Stilwell was a defacto liquidation of KCSI, alleged violation of
directors' fiduciary duties to the preferred shareholders and also sought a
declaration that the preferred shareholders were 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. On November 19,
2001, the New York State Supreme Court granted the Company's motion in its
entirety and dismissed this lawsuit.
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 June 28, 2001, KCSR
reached a final settlement with the 1,664 plaintiffs in the lawsuit filed in
Jefferson County, Texas. KCSR continues to vigorously defend the lawsuit filed
in Harris County, Texas and management believes the Company's probability of
liability for damages in this case to be remote.
New Railroad Retirement Improvement Act. On December 21, 2001, the Railroad
Retirement and Survivors' Improvement Act of 2001 was signed into law. This
legislation liberalizes early retirement benefits for employees with 30 years of
service by reducing the full benefit age from 62 to 60, eliminates a cap on
monthly retirement and disability benefits, lowers the minimum service
requirement from 10 years to 5 years of service, and provides for increased
benefits
Page 23
for surviving spouses. It also provides for the investment of railroad
retirement funds in non-governmental assets, adjustments in the payroll tax
rates paid by employees and employers, and the repeal of a supplemental annuity
work-hour tax. The new law provides for a 0.5% reduction in the employer
contribution for payroll taxes in 2002 and a 1.9% decline beginning in 2003.
Beginning in 2004, the employer contribution will be based on a formula and
could range between 8.2% and 22.1%. The reductions in the employer contribution
under RRA and the repeal of the supplemental annuity work-hour tax are expected
to reduce fringe benefits expenses by approximately $2.2 million in 2002.
Additionally, the reduction in the retirement age from 62 to 60 is expected to
result in increased employee attrition, leading to additional potential cost
savings since it is not anticipated that all employees selecting early
retirement will be replaced.
Proposed Mexican Rail Merger. Grupo Carso, S.A. de C.V. and Grupo Mexico, S.A.
de C.V. have announced their agreement to merge the Mexican main line railroads
Ferrosur, S.A. de C.V. ("Ferrosur") and Ferrocarril Mexicano, S.A. de C.V.
("Ferromex"). Ferrosur and Ferromex are two of the three main line railroads
created out of the privatization of the Mexican National Railway System. The
Company's affiliate, TFM, is the third. The proposed merger has been submitted
for approval to the Competition Commission, which must approve the transaction
before it may become effective. The Secretary of Communications is also
reviewing the proposed merger and will issue an opinion thereon. In addition,
the Competition Commission has announced that it has opened an investigation
into the possible monopolistic practices of Ferromex. Grupo TFM has announced
its intention to oppose the consolidation before the Mexican antitrust and
railroad regulatory authorities on the grounds that the proposed combination is
anti-competitive and violates the rules governing the privatization of the
Mexican National Railway System. The Company will support the efforts of our
affiliate to oppose the proposed consolidation.
Shelf Registration Statements and Public Securities Offerings. The Company filed
a Universal Shelf Registration Statement on Form S-3 (Registration No. 33-69648)
in September 1993, as amended in April 1996, for the offering of up to $500
million aggregate amount of securities (the "Initial Shelf"). The Securities and
Exchange Commission ("SEC") declared the Initial Shelf effective on April 22,
1996. The Company has carried forward $200 million aggregate amount of unsold
securities from the Initial Shelf to a Shelf Registration Statement filed on
Form S-3 (Registration No. 333-61006) on May 16, 2001, as amended on June 5,
2001, for the offering of up to $450 million aggregate amount of securities (the
"Second Shelf"). The SEC declared the Second Shelf effective on June 5, 2001.
Securities in the aggregate amount of $300 million remain available under the
Initial Shelf. To date, no securities have been issued thereunder.
On June 7, 2001, the Company announced plans for concurrent public offerings of
$115 million of mandatory convertible units and 4 million shares of the
Company's common stock under the Second Shelf. These offerings were independent
of each other and completion of one was not contingent upon the other.
Anticipated proceeds from these offerings were to be applied to reduce debt
under the Company's senior secured credit facility. However, on June 19, 2001,
the Company issued a press release stating that because of management's belief
that the Company's stock price did not properly reflect the valuation of the
Company, pursuing these offerings was not in the best interest of KCSI's current
shareholders. The Company, however, did not rule out an offering of its common
stock in the future should the Company determine that market conditions are
appropriate.
Waiver and Amendments for Credit Facility Covenants. Due to various factors,
including the impact on the operations of the Company of the U.S. economic
recession during 2001, the Company requested and received from lenders a waiver
from certain of the financial and coverage covenant provisions outlined in the
credit agreement for the Company's senior secured credit facility. This waiver
was granted on March 19, 2001 and was effective until May 15, 2001. In addition,
the Company requested an amendment to the applicable covenant provisions of the
credit agreement. The amendment, among other things, revised certain of the
covenant provisions (including financial and coverage provisions) through March
31, 2002 to provide the Company with time to strengthen its financial position
and pursue various financing alternatives. The lenders approved and executed the
amendment to the credit agreement on May 10, 2001. At December 31, 2001, the
Company had $397.5 million borrowed under this facility, comprised of $377.5
million of term debt and $20 million of revolving debt and was in compliance
with the applicable covenant provisions as amended.
Page 24
As discussed in "Developments Concerning Dispute with Grupo TMM" above, the
Company has resolved its dispute with Grupo TMM concerning certain actions taken
by Grupo TMM at Grupo TFM. Due to the uncertainty of the timing of this dispute
resolution and associated transactions, as well as the return on April 1, 2002
of the leverage ratio covenant provision to the original calculation under the
credit agreement, the Company obtained, as a precautionary measure, an
additional amendment to the credit agreement. This amendment revises the
leverage ratio covenant provision for the period April 1, 2002 through June 29,
2002. Management believes that the Company will be in full compliance with all
covenant provisions of the credit agreement at the end of the first quarter and
beyond.
Purchase of Additional Interest in Grupo TFM. On June 13, 2001, KCSI and its
partner, Grupo TMM (the surviving entity in the merger of Transportacion
Maritima Mexicana, S.A. de C.V. ("TMM") and Grupo Servia, S.A. de C.V. ("Grupo
Servia")) announced, subject to certain financing and other customary
conditions, their intention to exercise their call option and cause TFM to
purchase the 24.6% interest in Grupo TFM currently owned by the Mexican
government for approximately $249 million. This transaction was expected to
occur during the third quarter of 2001; however, due to the tragic events of
September 11, 2001, the timing of the transaction was delayed until market
conditions improved. Although, the form of the transaction may not occur as
originally planned, it is the intention of KCSI, along with Grupo TMM, to
exercise this call option for the Mexican government's 24.6% interest in Grupo
TFM prior to its expiration on July 31, 2002. The purchase price will be
calculated by accreting the Mexican government's initial investment of $199
million from the date of the Mexican government's investment through the date of
the purchase, using the interest rate on one-year U.S. Treasury securities.
Various financing alternatives are currently being explored. One source of
financing could include the use of approximately $81 million due to TFM from the
Mexican government as a result of the reversion, during the first quarter of
2001, of a portion of the concession to the Mexican government by TFM that
covers the Hercules-Mariscala rail line, an approximate 18-mile portion of
redundant track in the vicinity of the city of Queretaro. TFM recorded income of
approximately $54 million (under accounting principles generally accepted in the
United States of America ("U.S. GAAP")) in connection with this reversion. The
remainder of the financing required to purchase the Mexican government's Grupo
TFM shares is expected to be raised either at TFM or by the Company and Grupo
TMM, respectively. This transaction is expected to be completed when markets
become more favorable, but in any event on or prior to July 31, 2002. Although,
the Company intends to complete this transaction, there can be no assurance that
it will be able to do so.
New Rules Governing Major Railroad Mergers and Consolidations. On June 11, 2001,
the Surface Transportation Board ("STB") issued new rules governing major
railroad mergers and consolidation's involving two or more "Class I" railroads
(railroads with annual revenues of at least $250 million, as indexed for
inflation). These new rules substantially increase the burden on rail merger
applicants to demonstrate that a proposed transaction would be in the public
interest. The new rules require applicants to demonstrate that, among other
things, a proposed transaction would enhance competition where necessary to
offset negative effects of the transaction, such as competitive harm, and to
address fully the impact of the transaction on transportation service.
The STB recognized, however, that a merger between KCSR and another Class I
carrier would not necessarily raise the same concerns and risks as potential
mergers between larger Class I railroads. Accordingly, the STB decided that for
a merger proposal involving KCSR and another Class I railroad, the STB will
waive the application of the new rules and apply the rules previously in effect
unless it is persuaded that the new rules should apply.
New Corporate Headquarters. On June 26, 2001, the Company entered into a 17-year
lease agreement for a new corporate headquarters building in downtown Kansas
City, Missouri. The lease agreement is subject to completion of the new
building, which is currently scheduled for April 2002.
Additionally, in June 2001, the Company sold the building that currently serves
as its corporate headquarters in Kansas City, Missouri in anticipation of
occupying this new facility. The Company realized a net gain of approximately
$0.9 million from this sale. The Company will remain in the existing building
until the new corporate office building is completed and available for
occupancy. Further, in June 2001, the Company received $0.5 million for the sale
of an option providing the holder of the option the right to purchase the
Company's 80% ownership in the common stock of Wyandotte Garage Corporation, an
owner and operator of a parking facility located in downtown Kansas City,
Missouri adjacent to the Company's existing headquarters building. The amount
received for this option is nonrefundable and the
Page 25
option is exercisable upon the resolution of certain shareholder matters. The
$0.5 million gain received for the option has been deferred until completion of
the transaction or until the option expires. The sale of the Company's interest
in Wyandotte Garage Corporation is expected to occur during 2002 after
relocation to the new corporate headquarters facility.
Cost Reduction Plan. During the first quarter of 2001, KCSI announced a cost
reduction strategy designed to keep the Company competitive during the economic
slow-down existing at that time. The cost reduction strategy resulted in a
reduction of approximately 5% of the Company's total workforce (excluding train
and engine personnel). Additionally, KCSI implemented a voluntary, temporary
salary reduction for middle and senior management and temporarily suspended
certain management benefits. This voluntary, temporary salary reduction ended
December 31, 2001. As part of the cost reduction plan, the Company also delayed
the implementation of its new computer system, Management Control System
("MCS"). During November 2001, a small functional part of MCS was installed
relating to waybilling functions at the Company's customer service center.
Management expects to fully implement MCS in mid-2002. Further, 2001 planned
capital expenditures were reduced by approximately $16 million. These capital
reductions did not affect the planned maintenance for the physical structure of
the railroad, but limited the amount of discretionary expenditures for projects
such as capacity improvements. During the first quarter of 2001, the Company
recorded approximately $1.3 million of costs related to severance benefits
associated with the workforce reduction.
Implementation of Derivative Standard. 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 was amended by Statement of Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" and Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an amendment of SFAS 133." SFAS 133, as amended, requires
that derivatives be recorded on the balance sheet as either assets or
liabilities measured at fair value. Changes in the fair value of derivatives are
recorded either through current earnings or as other comprehensive income,
depending on the type of hedge transaction. For fair value hedge transactions
(changes in the fair value of an asset, liability or an unrecognized firm
commitment are hedged), 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 (the variability of cash flows
related to a variable rate asset, liability or a forecasted transaction are
hedged), 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 into
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.
The Company does not engage in the trading of derivatives. The Company's
objective is to manage its interest rate risk through the use of derivative
instruments in accordance with the provisions of its credit facility. At
December 31, 2001, the Company had five separate interest rate cap agreements
for an aggregate notional amount of $200 million, which were designated as cash
flow hedges. These interest rate cap agreements were designed to hedge the
Company's exposure to movements in the London Interbank Offered Rate ("LIBOR")
on which the Company's variable rate interest is calculated. $100 million of the
aggregate notional amount provided a cap on the Company's LIBOR based interest
rate of 7.25% plus the applicable spread, while $100 million limited the LIBOR
based interest rate to 7% plus the applicable spread. By holding these interest
rate cap agreements, the Company has been able to limit the risk of rising
interest rates on its variable rate debt. Three of these interest rate cap
agreements expired on February 10, 2002 and the remaining two expired on March
10, 2002. As of December 31, 2001, the Company did not have any other interest
rate cap agreements or interest rate hedging instruments.
KCSI adopted the provisions of SFAS 133 effective January 1, 2001. As a result
of this change in the method of accounting for derivative financial instruments,
the Company recorded an after-tax charge to earnings of $0.4 million in the
first quarter of 2001. This charge is presented as a cumulative effect of an
accounting change in the accompanying financial statements and represents the
ineffective portion of the interest rate cap agreements. The Company recorded an
additional $0.4 million charge during the year ended December 31, 2001 for
subsequent changes in the fair value of its
Page 26
interest rate hedging instruments. As of December 31, 2001, the interest rate
cap asset had a fair value of less than $0.1 million.
In addition, as of December 31, 2001 the Company recorded a reduction to its
stockholders' equity (accumulated other comprehensive loss) of approximately
$2.9 million for its portion of the amount recorded by Southern Capital for the
adjustment to the fair value of its interest rate swap transactions. The Company
also reduced its investment in Southern Capital by the same amount.
Purchase of Janus common stock by Stilwell. 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. 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 of KCSI or Stilwell, as
applicable (as defined in such agreements), KCSI may be required to purchase
such holders' Janus stock. The fair market value price for the purchase or sale
under the mandatory put rights or the Change in Ownership provisions 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.
In certain 2001 SEC filings, Stilwell disclosed that in March and April 2001,
Stilwell acquired 202,042 shares of Janus common stock from several minority
stockholders of Janus exercising their put rights under certain of the
agreements discussed above. On September 4, 2001, Janus purchased from employees
(other than Mr. Bailey) approximately 139,000 shares of Janus common stock. On
May 1, 2001, Stilwell announced that it completed the purchase of 600,000 shares
of Janus common stock from Mr. Bailey under the terms and conditions of the
Janus Stock Purchase Agreement. Additionally, on November 9, 2001, Stilwell
announced that it had completed the purchase of an additional 609,950 shares of
Janus common stock owned by Mr. Bailey and one other minority stockholder
through the exercise of put rights for a price of approximately $613 million.
Upon the completion of the purchase of 609,950 shares on November 9, 2001, KCSI
was relieved of its obligations to make any payments under the mandatory put
rights. There remain, however, potential obligations under the Change in
Ownership provisions under certain share restriction agreements. KCSI believes,
based on discussions with Stilwell management and as previously demonstrated by
Stilwell, that Stilwell has adequate financial resources available to fund any
obligation under the Change in Ownership provisions described above. However, if
Stilwell were somehow unable to meet its obligations with respect to these
agreements, KCSI would be obligated to make the payments under these agreements.
At December 31, 2001, KCSI could have been ultimately responsible for
approximately $63.6 million under the Change in Ownership provisions in the
event Stilwell was unable to meet its obligations.
SIGNIFICANT DEVELOPMENTS
In addition to the recent developments mentioned above, consolidated operating
results from 1999 through 2001 were affected by the following:
Spin-off of Stilwell Financial Inc. On June 14, 2000, KCSI's Board of Directors
approved the spin-off of Stilwell. 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"). 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. Under tax rulings received from the
Internal Revenue Service ("IRS"), the
Page 27
Spin-off qualifies as a tax-free distribution under Section 355 of the Internal
Revenue Code of 1986, as amended. Also 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 in 1998 in contemplation of the Spin-off. The
total number of KCSI shares outstanding immediately following this reverse split
was 55,749,947. In preparation for the Spin-off, the Company re-capitalized its
debt structure on January 11, 2000 as further described in "Debt Refinancing and
Re-capitalization of the Company's Debt Structure" below.
Duncan Case Settlement. 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. 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. On November 3, 1999, the Third Circuit
Court of Appeals in Louisiana affirmed the judgment. Subsequently KCSR 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).
This judgment was 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.
KCSR had previously recorded a liability of approximately $3.0 million for this
case. Based on the Supreme Court of Louisiana's decision, as of December 31,
2000, management recorded an additional liability of $11.2 million and also
recorded 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. The final installment on the $7.0 million receivable from the
insurance company was received by KCSR in June 2001.
Debt Refinancing and Re-capitalization of the Company's Debt Structure.
Registration of Senior Unsecured Notes. 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
the United States, consisted of 8-year senior unsecured notes ("Senior Notes").
Net proceeds from this offering of $196.5 million were used to refinance term
debt and reduce commitments under the KCS Credit Facility (as defined below).
The refinanced debt was scheduled to mature on January 11, 2001 (see below).
Costs related to the issuance of the Senior Notes were deferred and are being
amortized over the eight-year term of the Senior Notes. The remaining balance of
these deferred costs was approximately $3.8 million at December 31, 2001. In
connection with this refinancing, the Company reported an extraordinary loss of
$1.1 million (net of income taxes of $0.7 million).
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, as amended, effective on March 15, 2001, thereby
providing the opportunity for holders of the initial Senior Notes to exchange
them for registered notes with substantially identical terms. The registration
exchange offer expired on April 16, 2001 and all of the Senior Notes were
exchanged for $200 million of registered notes. These registered notes bear a
fixed annual interest rate of 9.5% and are due on October 1, 2008 and contain
certain covenants typical of this type of debt instrument.
Grupo TFM. 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
Page 28
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. The
Company reported $1.7 million (net of income taxes of $0.1 million) as its
proportionate share of these costs as an extraordinary item.
Re-capitalization of Debt Structure in anticipation of Spin-off. In preparation
for the 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-existing revolving credit facilities was obtained from two credit
facilities (the "KCS Credit Facility" and the "Stilwell Credit Facility",
or collectively the "Credit Facilities"), each of which was entered into on
January 11, 2000. The Credit Facilities provided for total commitments of
$950 million. The Company reported an extraordinary loss on the
extinguishment of the Company's notes and debentures of approximately $5.9
million (net of income taxes of approximately $3.2 million).
KCS Credit Facility. The KCS Credit Facility initially provided for total
commitments of $750 million comprised of three separate term loans totaling
$600 million and a revolving credit facility available until January 11,
2006 ("KCS Revolver"). 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. The term
loans were initially comprised of the following: $200 million due January
11, 2001, $150 million due December 30, 2005 and $250 million due December
29, 2006. The $200 million term loan due January 11, 2001 was refinanced
during the third quarter of 2000 as described above. Additionally, in
accordance with the terms of the KCS Credit Facility, the availability
under the 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. 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. Borrowings under the KCS Credit
Facility are secured by substantially all of KCSI's assets and are
guaranteed by the majority of its subsidiaries.
Interest on the outstanding loans under the KCS Credit Facility accrues at
a rate per annum based on the London Interbank Offered Rate ("LIBOR") or an
alternate base 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 accrues interest at the
selected rate plus an applicable margin. The applicable margin is
determined by the type of loan 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
2005 and all loans under the KCS Revolver have an applicable margin of
2.75% per annum for LIBOR priced loans and 1.75% per annum for alternate
base rate priced loans. The term loan maturing in 2006 currently has an
applicable margin of 3.00% per annum for LIBOR priced loans and 2.00% per
annum for alternate base rate priced loans.
The KCS Credit Facility also requires the payment to the lenders of a
commitment fee of 0.50% per annum on the average daily, unused amount of
each commitment. 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.
Page 29
The term loans are subject to a mandatory prepayment with, among other
things:
. 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.
. 50% of excess cash flow (as defined in the KCS Credit Facility)
The KCS Credit Facility contains certain covenants that, among others,
restrict the ability of the Company's subsidiaries, including KCSR, to
incur additional indebtedness, and restricts the Company's ability and its
subsidiaries' ability to:
. incur additional liens,
. enter into sale and leaseback transactions,
. merge or consolidate with another entity,
. sell assets,
. enter into certain transactions with affiliates,
. enter into agreements that restrict the ability to incur liens or,
with respect to KCSR and the Company's other subsidiaries, pay
dividends to the Company or another subsidiary of the Company,
. make investments, loans, advances, guarantees or acquisitions,
. make certain restricted payments, including dividends, or make certain
payments on other indebtedness, or
. make capital expenditures.
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 default. These
covenants, along with other provisions, could restrict maximum utilization
of the facility. As discussed above in "Recent Developments," the Company
received a waiver from certain of the financial and coverage covenant
provisions contained in the KCS Credit Facility. In addition, the Company
was granted an amendment to the credit agreement, which among other things,
revised certain of the covenant provisions (including financial and
coverage provisions) through March 31, 2002. The Company was in compliance
with the provisions of the KCS Credit Facility as so amended, including the
financial covenants, as of December 31, 2001. The Company has obtained an
additional amendment to the leverage ratio covenant provision of the KCS
Credit Facility for the period April 1, 2002 through June 29, 2002.
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. Additionally, $1.4 million in
fees were incurred related to the waiver for credit facility covenants
(discussed above). These fees have also been deferred and are being
amortized over the respective term of the loans. After consideration of
current year amortization, the remaining balance of these deferred costs
was approximately $10.4 million at December 31, 2001.
As a result of the debt refinancing transactions discussed above,
extraordinary items of $8.7 million (net of income taxes of $4.0 million)
were reported in the statement of income for the year ended December 31,
2000.
KCSI Elects Chairman and Adds Directors. On December 12, 2000, KCSI announced
that Michael R. Haverty was elected Chairman of the Board of Directors of KCSI
effective January 1, 2001. Mr. Haverty succeeded Landon H. Rowland, who resigned
as Chairman, but remains on the Board of Directors. Mr. Haverty retains his
current titles of Chief Executive Officer and President. On June 5, 2001, Rodney
E. Slater, former U.S. Secretary of Transportation and head of the Federal
Highway Administration, was named to our Board of Directors. Mr. Slater is
currently a partner in the public policy practice group of Patton Boggs LLP in
Washington D.C. On August 17, 2000, Byron G. Thompson was named as a director of
KCSI. Mr. Thompson has served as Chairman of the Board of Country Club Bank,
n.a., Kansas City since February 1985. Prior to that time, 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.
Page 30
Dividends Suspended for KCSI Common Stock. During the first quarter of 2000, the
Company's Board of Directors suspended common stock dividends of KCSI in
conjunction with the terms of the KCS Credit Facility discussed above. It is not
anticipated that KCSI will make any cash dividend payments to its common
stockholders for the foreseeable future.
Expiration of the Capital Call Related to TFM. In conjunction with the financing
of TFM in 1997, the Company entered into a Capital Contribution Agreement with
Grupo TFM, Grupo 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 terminated on June
30, 2000.
Restricted Share and Option Program. In connection with the Spin-off, KCSI
adopted a restricted share and option program (the "Option 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
were not employees (the "Outside Directors") became eligible to purchase a
specified number of KCSI restricted shares and were 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 vested and became
exercisable in equal installments as KCSI's stock price achieved certain
thresholds and after one year following the grant date. All performance
thresholds were met for these performance stock options and all became
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 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 Option
Program. Each eligible employee and Outside Director was allowed to purchase the
restricted shares offered under the Option Program on one date out of a
selection of dates offered. With respect to management employees, the number of
shares available for 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 from the date of grant
for senior management and the Outside Directors and two years from the date of
grant 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
Option 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 Option Program and 18,000 KCSI
stock options were granted in connection with the purchase of those shares.
Norfolk Southern Haulage and Marketing Agreement. In May 2000, KCSR and Norfolk
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 shippers and
receivers covering this haulage traffic.
KCSR Lease of 50 New Locomotives. During 1999, KCSR reached an agreement with
General Electric Company ("GE") for the purchase of 50 AC 4400 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, 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
Page 31
Capital, through its existing variable rate credit lines, financed the purchase
of these new locomotives, and leases them to KCSR under an operating lease.
Delivery of these locomotives was completed in December 1999.
Panama Canal Railway Company. In January 1998, the Republic of Panama awarded
PCRC, a joint venture between KCSR and Mi-Jack Products, Inc. ("Mi-Jack"), the
concession to reconstruct and operate the Panama Canal Railway. The Panama Canal
Railway is a north-south railroad traversing the Panama isthmus between the
Pacific and Atlantic Oceans. Its origin dates back to the late 1800's and the
railway provides international shippers with a railway transportation option to
complement the Panama Canal shipping channel. As of December 31, 2001, the
Company has invested approximately $15.5 million toward the reconstruction and
operations of the Panama Canal Railway. This investment is comprised of $12.9
million of equity and $2.6 million of subordinated loans. The Panama Canal
Railway became fully operational on December 1, 2001 with the commencement of
freight traffic. Passenger service started during July 2001. Management believes
the prime potential and opportunity of this railroad to be in the movement of
traffic between the ports of Balboa and Colon for shipping customers
repositioning of containers. The Panama Canal Railway has significant interest
from both shipping companies and port terminal operators. In addition, there is
demand for passenger traffic for both commuter and pleasure/tourist travel.
Panarail operates and promotes commuter and tourist passenger service over the
PCRC. While only 47 miles long, the Company believes the Panama Canal Railway
provides the Company with a unique opportunity to participate in transoceanic
shipments as a complement to the existing Canal traffic.
In November 1999, the financing arrangements for PCRC were completed with the
International Finance Corporation ("IFC"), a member of the World Bank Group. The
financing is comprised of a $5 million investment by the IFC and senior loans
through the IFC in an aggregate amount of up to $45 million, as well as $4.8
million of equipment loans from Transamerica Corporation. The IFC's investment
of $5 million in PCRC 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 (2) eight times earnings before interest, income taxes,
depreciation and amortization for the two years preceding the redemption that is
proportionate to the IFC's percentage ownership in PCRC. Under the terms of the
concession, the Company is, under certain limited conditions, a guarantor for up
to $7.5 million of cash deficiencies associated with the completion of the
reconstruction project and operations of PCRC. Also, if PCRC terminates the
concession contract without the IFC's consent, the Company is a guarantor for up
to 50% of the outstanding senior loans. In addition, the Company is a guarantor
for up to $2.4 million of the equipment loans from Transamerica Corporation. The
cost of the reconstruction, which is virtually complete, is expected to total
approximately $80 million. The Company projects that an additional $2.5 million,
which management expects would be in the form of a subordinated loan, could be
required under the cash deficiency guarantee. Excluding the impact of any loan
guarantees discussed above, the Company expects its total cash outlay to
approximate $18.0 million ($12.9 million of equity and $5.1 million of
subordinated loans).
Access to Geismar, Louisiana Industrial Corridor. In 1999, the STB unanimously
approved the merger of CN and 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
began on October 1, 2000 and traffic immediately began to move on KCSR's lines.
Management believes this access could provide additional competitive
opportunities for revenue growth as existing contracts with other rail carriers
expire for these customers.
Automotive and Intermodal facility at the former Richards-Gebaur Airbase. During
1999, KCSR entered into a fifty-year lease with the City of Kansas City,
Missouri to establish 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") officially approved the closure of the existing airport
in January 2000, and improvements began immediately. Through an agreement with
Mazda, KCSR developed an
Page 32
automotive distribution facility to handle Mazda vehicles manufactured under an
agreement with Ford Motor Company at Ford's Claycomo facility, which is located
near Kansas City, Missouri. This automotive facility became operational in April
2000 for the movement of Mazda vehicles. Management believes that, as additional
opportunities arise, the IFG facility will be expanded to include additional
automotive and intermodal operations.
The Company expects IFG will provide additional capacity as well as a strategic
opportunity to serve as an international trade facility. The plan is for this
facility to serve as a U.S. customs pre-clearance processing facility for
freight moving along the NAFTA corridor. KCSR expects this to alleviate some of
the congestion at the borders, resulting in more fluid service to customers
throughout the rail industry.
KCSR has spent approximately $15 million with respect to this facility and
expects to spend a total of approximately $20 million for site improvements and
infrastructure at this facility. KCSR has funded these improvements using
operating cash flows and existing credit lines. Lease payments are expected to
approximate $665,000 per year and are 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.
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 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 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 KCSR as a key provider of rail
service for NAFTA trade.
KCSR and CN formed a management group made up of senior management
representatives from both railroads to, among other things, 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.
Under a separate access agreement, KCSR was granted certain trackage and haulage
rights and CN and IC were granted certain haulage rights. Under the terms of
this access agreement, KCSR extended the market area of its rail system in the
Gulf area and gained 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. 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 agreement 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.
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. Management regards the larger western railroads
(BNSF and UP), in particular, as significant competitors to the Company's
operations and prospects because of their substantial resources.
Page 33
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 trucking industry generally is more cost
and transit-time competitive than railroads for short-haul distances. 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 each other 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, competes with KCSR
and its rail connections in the transportation of bulk commodities such as
grain, steel and petroleum 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 discussion of new rules governing major railroad mergers discussed in
"Recent Developments - New Rules Governing Major Railroad Mergers and
Consolidations."
Employees and Labor Relations. Labor relations in the U.S. railroad industry are
subject to extensive governmental regulation under the Railway Labor Act
("RLA"). Under the RLA, national labor agreements are renegotiated when they
become open for modification, but their terms remain in effect until new
agreements are reached. Typically, neither management nor labor employees are
permitted to take economic action until extended procedures are exhausted.
Existing national union contracts with the railroads became amendable at the end
of 1999. Included in the contracts was a provision for wages to increase
automatically in the year following the contract term. These federal labor
regulations are often more burdensome and expensive than regulations governing
other industries and may place us at a competitive disadvantage relative to
other non-rail industries, such as trucking competitors that are not subject to
these regulations.
Railroad industry personnel are covered by the Railroad Retirement Act ("RRA")
instead of the Social Security Act. Employer contributions under RRA are
currently substantially higher than those under the Social Security Act and may
rise further because of the increasing proportion of retired employees receiving
benefits relative to the number of working employees. The RRA 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. Railroad industry personnel are also covered by the Federal
Employers' Liability Act ("FELA") rather than state workers' compensation
systems. FELA is a fault-based system, with compensation for injuries settled by
negotiation and litigation, which can be expensive and time-consuming. By
contrast, most other industries are covered by state administered no-fault plans
with standard compensation schedules. The difference in the labor regulations
for the rail industry compared to the non-rail industries illustrates the
competitive disadvantage placed upon the rail industry by federal labor
regulations.
Approximately 85% of KCSR employees are covered under various collective
bargaining agreements. Periodically, the collective bargaining agreements with
the various unions become eligible for renegotiation. 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. A new labor contract was reached with the
Brotherhood of Maintenance of Way Employees effective May 31, 2001. Formal
negotiations to enter into new agreements are in progress with the other unions
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. Unions representing former Gateway Western employees are operating
under 1994 contracts and are currently in negotiations to extend these
contracts, which will remain in effect until new agreements are reached. A new
agreement was reached with the Brotherhood of Locomotive Engineers of Gateway
Western effective December 31, 2001. Gateway Western was merged into KCSR on
October 1, 2001. Management has reached new agreements with all but one of the
unions relating to former MidSouth employees (MidSouth was merged into KCSR on
January 1, 1994).
Page 34
Discussions with this union are ongoing. 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. 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.
See discussion of new laws affecting railroad retirement related issues in
"Recent Developments - New Railroad Retirement Improvement Act."
Safety and Quality Programs. KCSR's safety vision is to become the safest
railway in North America. In 2001, KCSR continued its progress toward this
vision by improving the Federal Railroad Administration ("FRA") Reportable
Injury Performance by 14%, by reducing the number of grade crossing accidents by
nearly 19% and the number of derailments by 5% compared to 2000. In 2000, KCSR
had the best safety record among mid-tier railroads and the former Gateway
Western had the best safety record for small railroads. KCSR and the former
Gateway Western both received the Gold Harriman award, the highest recognition
for safety in the industry for the year 2000 and management expects that KCSR
will also receive the Gold Harriman award for 2001.
The driving force for these improvements is strong leadership at the senior
field and corporate levels and joint responsibility for the safety processes by
craft employees and managers. This leadership and joint responsibility in safety
is helping shape an improved safety culture at KCSR. While casualties and
insurance expense increased for the year ended December 31, 2001 due to several
significant derailments in the first quarter and an increase to personal injury
reserves arising from the Company's annual actuarial study, management expects
that continued improvement in the Company's safety experience will lead to lower
employee and third party claims in the future.
The Company has started implementation of a remote control locomotive operating
system called Beltpack. This system allows a train engine employee to run
switching by remote control. The use of Beltpacks are expected to improve safety
and allow a decrease in the number of employees per train crew. The Company
expects to complete this implementation by September 2002.
RESULTS OF OPERATIONS
The following table details certain income statement components for the Company
for the years ended December 31, respectively, for use in the analysis below.
See the financial statements accompanying this Form 10-K for other captions not
presented within this table.
(dollars in millions)
2001 2000 1999
-------- -------- -------
Revenues $ 577.3 $ 572.2 $ 601.4
Costs and expenses 521.9 514.4 537.3
-------- -------- -------
Operating income 55.4 57.8 64.1
Equity in net earnings (losses) of
unconsolidated affiliates 27.1 23.8 5.2
Interest expense (52.8) (65.8) (57.4)
Other, net 4.2 6.0 5.3
-------- -------- -------
Income from continuing operations
before income taxes 33.9 21.8 17.2
Income tax expense (benefit) 2.8 (3.6) 7.0
-------- -------- -------
Income from continuing operations $ 31.1(i) $ 25.4(ii) $ 10.2
======== ======== =======
(i) Income from continuing operations for the year ended December 31, 2001
excludes a charge for the cumulative effect of an accounting change of
$0.4 million (net of income taxes of $0.2 million). This charge reflects
the Company's adoption of SFAS 133 effective January 1, 2001.
(ii) 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.
Page 35
The following table summarizes the revenues and carload statistics of KCSR 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
-------------------------- ---------------------
(dollars in millions) (in thousands)
2001 2000 1999 2001 2000 1999
-------- -------- -------- ----- ----- -----
General commodities:
Chemical and petroleum $ 123.8 $ 125.6 $ 131.9 146.0 154.1 165.5
Paper and forest 130.3 132.3 130.1 184.0 192.4 202.9
Agricultural and mineral 87.9 93.6 96.5 125.7 132.0 141.0
-------- -------- -------- ------ ------ ------
Total general commodities 342.0 351.5 358.5 455.7 478.5 509.4
Intermodal and automotive 66.0 62.1 58.7 291.1 269.3 233.9
Coal 118.7 105.0 117.4 202.3 184.2 200.8
-------- -------- -------- ------ ------ ------
Carload revenues and carload
and intermodal units 526.7 518.6 534.6 949.1 932.0 944.1
Other rail-related revenues 39.7 44.5 51.8
-------- -------- -------- ====== ====== ======
Total KCSR revenues 566.4 563.1 586.4
Other subsidiary revenues 10.9 9.1 15.0
-------- -------- --------
Total consolidated revenues $ 577.3 $ 572.2 $ 601.4
======== ======== ========
The following table summarizes consolidated costs and expenses for the years
ended December 31, respectively. Certain prior year amounts have been
reclassified to conform to the current year presentation:
(dollars in millions)
2001 2000 1999
-------- -------- --------
Salaries, wages and benefits $ 192.9 $ 197.8 $ 206.0
Depreciation and amortization 58.0 56.1 56.9
Purchased services 57.0 54.8 58.9
Operating leases 50.9 51.7 46.3
Fuel 43.9 48.1 34.2
Casualties and insurance 42.1 34.9 30.8
Car hire 19.8 14.8 22.4
Other 57.3 56.2 81.8
-------- -------- --------
Total consolidated costs and expenses $ 521.9 $ 514.4 $ 537.3
======== ======== ========
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000
Income from Continuing Operations. For the year ended December 31, 2001, income
from continuing operations increased $5.7 million to $31.1 million (51(cent) per
diluted share) from $25.4 million (43(cent) per diluted share) for the year
ended December 31, 2000. This increase was primarily a result of a $6.9 million
increase in equity earnings from Grupo TFM and a $13.0 million decline in
interest expense partially offset by a $2.4 million decrease in domestic
operating income, a $3.6 million decrease in equity earnings from other
unconsolidated affiliates, and an increase in the income tax provision of $6.4
million. Equity earnings for the year ended December 31, 2001 reflect the
Company's proportionate share ($9.1 million) of the income recorded by Grupo TFM
relating to the reversion of certain concession assets to the Mexican
government.
Revenues. Consolidated revenues for the year ended December 31, 2001 totaled
$577.3 million compared to $572.2 million for the year ended December 31, 2000.
This $5.1 million, or 0.9%, increase resulted from higher KCSR revenues of
approximately $3.3 million coupled with higher revenues from certain other
smaller subsidiaries. The following discussion provides an analysis of KCSR
revenues by commodity group.
Page 36
Chemical and Petroleum. For the year ended December 31, 2001, chemical and
petroleum product revenues decreased $1.8 million (1.4%) compared to the year
ended December 31, 2000. Higher revenues for plastic and inorganic chemical
products were offset by declines in most other chemical products. The increase
in revenues for plastic products resulted from a plant expansion by a customer
in late 2000. The decline in other chemical and petroleum products resulted
primarily from lower industrial production reflecting the impact of the slowdown
of the U.S. economy. These volume related revenue declines were somewhat
mitigated through certain price increases taken in 2001. The Company's
management believes that at such time that economic conditions improve, the
demand for chemical and petroleum products could increase resulting in higher
related revenues.
Paper and Forest. Revenues for paper and forest products decreased $2.0
million (1.5%) for the year ended December 31, 2001 compared to the year ended
December 31, 2000. As a result of the transfer of certain National Guard
personnel and related equipment to a military base near KCSR's rail lines,
military and other carloads increased $3.9 million for the year ended December
31, 2001. Additionally, for the year ended December 31, 2001, revenues for
pulpwood and logchips increased $1.6 million due to a fungus problem with
logchips during 2000 (which reduced 2000 revenues) that has since been resolved.
These increases for the year ended December 31, 2001 were offset by declines in
steel shipments and most other paper and forest product commodities.
Contributing to the decline in certain lumber product revenues was an ongoing
trade dispute between the United States and Canada relating to softwood lumber
producers, which has reduced certain lumber traffic between Canada and Mexico.
Negotiations between the United States and Canada are continuing in an effort to
resolve this trade dispute. Steel shipments declined due to the loss of certain
business and the timing of the receipt of steel shipments in 2001 compared to
2000. Additionally, a significant portion of our steel shipments relate to
drilling pipe for oil exploration. Drilling activity has declined due to the
reductions in the price of oil, thus resulting in less demand for drilling pipe.
The continued decline in the U.S. economy continues to affect the paper and
forest product industry significantly as the need for raw materials in related
manufacturing and production industries decreased during 2001. Certain price
increases during 2001 have partially offset related volume declines. Management
believes an improvement in the economic conditions could raise the demand for
paper and forest products resulting in an increase in related revenues.
Agricultural and Mineral. Agricultural and mineral product revenues
decreased $5.7 million (6.1%) for the year ended December 31, 2001 compared to
the year ended December 31, 2000. In 2001, domestic grain revenues decreased
$3.7 million compared to 2000 primarily due to a general decline in the
production of poultry in the United States, which has decreased demand for grain
deliveries to the Company's poultry producing customers. Additionally, during
the first half of 2001, flooding in Iowa and Minnesota forced a temporary shift
in the origination of some domestic grain shipments to Illinois and Indiana,
resulting in significantly shorter hauls for KCSR. Export grain increased $1.5
million (18.5%) compared to the year ended December 31, 2000, primarily as a
result of increased shipments of soybeans for export through the ports of
Beaumont, Texas and Reserve, Louisiana during the fourth quarter of 2001. Annual
declines in food products, ores and minerals and stone, clay and glass product
revenues resulted primarily from the ongoing decline in the U.S. and global
economies. Based on current expectations, management believes that the demand
for poultry will improve slightly in 2002, resulting in improved revenues for
domestic grain. Management believes an improvement in the economic conditions
could also raise the demand for other agriculture and mineral products resulting
in an increase in related revenues.
Intermodal and Automotive. For the year ended December 31, 2001, intermodal
and automotive revenues increased $3.9 million (6.3%) compared to the year ended
December 31, 2000 as a result of an increase in automotive revenues of $9.0
million partially offset by a decrease in intermodal revenues of $5.1 million.
Automotive revenues increased as a result of the following: (i) Mazda traffic
originating at the International Freight Gateway ("IFG") at the former
Richards-Gebaur airbase, located adjacent and connecting to KCSR's main line
near Kansas City, Missouri; and (ii) Ford business originating on the CSX in
Louisville and interchanged with the KCSR in East St. Louis. This Ford
automotive traffic was shipped to Kansas City via KCSR and interchanged with
Union Pacific Railroad for delivery to the western United States. During the
third quarter of 2001, KCSR lost this Ford business due to competitive pricing;
however, the Company's on-time performance for this Ford automotive traffic
approximated 98%, which management believes could lead to future business in the
automotive marketplace. Intermodal revenues for the year ended December 31, 2001
declined due to several factors, including (i) the impact of the slow-down in
the U.S. economy, which has caused related
Page 37
declines in demand; (ii) customer erosion due to service delays arising from
congestion experienced in the first quarter of 2001; and (iii) a marketing
agreement with Norfolk Southern, which provides that KCSR will perform haulage
services for Norfolk Southern from Meridian, Mississippi to Dallas, Texas for an
agreed upon haulage fee. This marketing agreement was entered into in May 2000
and became fully operational in June 2000. A portion of the decline in
intermodal revenues resulted from the Norfolk Southern haulage traffic that
replaced existing intermodal 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. The margins on this traffic are improved, however, because it has a
lower cost base to KCSR as certain costs such as fuel and car hire are incurred
and paid by Norfolk Southern. Management believes an improvement in economic
conditions could raise the demand for intermodal and automotive products
resulting in an increase in related revenues.
Coal. For the year ended December 31, 2001, coal revenue increased $13.7
million (13.0%) compared to the year ended December 31, 2000. These increases
were primarily the result of higher demand from coal customers replenishing
depleted stockpiles and to satisfy weather-related demands as a result of hot
weather conditions in the summer months. Net tons of unit coal shipped increased
approximately 9.3% for 2001. Also contributing to the increase was the return of
the Kansas City Power and Light Hawthorn plant to production in the second
quarter of 2001. The Hawthorn plant had been out of service since January 1999
due to an explosion at the Kansas City facility. See "Trends and Outlook" for
discussion of expected decline in coal revenues during 2002.
Other. For the year ended December 31, 2001, other rail-related revenues
declined $4.8 million, comprised mostly of declines in switching and demurrage
revenues of $2.9 million and $2.2 million, respectively, partially offset by an
increase in haulage revenues of $0.5 million. Declines in switching and
demurrage revenues related primarily to volume declines reflecting the weak
economy. Demurrage revenues also declined due to more efficient fleet
utilization resulting from a well operating railroad.
Costs and Expenses. Consolidated operating expenses increased $7.5 million
(1.5%) to $521.9 million for the year ended December 31, 2001 compared to $514.4
for the year ended December 31, 2000 as a result of higher KCSR expenses of $2.3
million and higher expenses at certain other subsidiaries of $5.2 million.
Salaries, Wages and Benefits. For the year ended December 31, 2001,
consolidated salaries, wages and fringe benefits expense declined $4.9 million
compared to the year ended December 31, 2000, resulting from a $5.6 million
reduction in costs for salaries and wages partially offset by an increase in
fringe benefits expense of $0.7 million. This variance results primarily from a
$4.2 million reduction of salaries, wages and fringe benefits at KCSR resulting
from a reduction in employee headcount arising from the workforce reduction
discussed in "Recent Developments - Cost Reduction Plan" and lower costs
associated with overtime due to improved operating efficiency. Fringe benefit
costs were higher because of an approximate 17% increase in health insurance
costs and an increase in unemployment insurance partially offset by a decline in
expenses associated with stock option exercises and a $2.0 million reduction in
retirement-based costs for certain union employees. The decline in salaries,
wages and fringe benefits expense was partially offset by the one-time severance
costs of approximately $1.3 million associated with the workforce reduction.
Depreciation and Amortization. Consolidated depreciation and amortization
expense for the year ended December 31, 2001 increased $1.9 million compared to
the year ended December 31, 2000. This increase was primarily the result of an
increase in KCSR's asset base partially offset by property retirements and lower
STB approved depreciation rates. Depreciation and amortization expense is
expected to increase by approximately $2.3 million in 2002 due to the
implementation of MCS, which is currently scheduled for implementation on KCSR
in mid-2002.
Purchased Services. For the year ended December 31, 2001, purchased
services expense increased $2.2 million compared to the year ended December 31,
2000. This variance is comprised of a $0.2 million decline in purchased services
for KCSR offset by a $2.4 million increase in purchased services for other
subsidiaries. The decline in purchased services for KCSR resulted from lower
costs related to intermodal lift services and lower environmental compliance
costs. The decline in intermodal lift services was the result of a decline in
the number of trailers handled at terminals combined with an increase in lift
charges billed to others. These declines in costs were partially offset by
higher costs for locomotive and car repairs contracted to third parties as well
as higher professional fees related to
Page 38
casualty claims. The increase in purchased services related to other
subsidiaries consists mostly of higher holding company costs and higher legal
costs at a subsidiary related to the settlement of a lawsuit.
Operating Leases. For the year ended December 31, 2001, consolidated
operating lease expense decreased $0.8 million compared to the year ended
December 31, 2000. This decline was primarily the result of lower KCSR operating
lease costs due to the expiration of certain leases for rolling stock that have
not been renewed due to better fleet utilization. Lease expense is expected to
increase in 2002 as a result of costs associated with the lease for the
Company's new corporate headquarters building. Management expects to begin
leasing this new facility in April 2002 for an annual lease payment of
approximately $2.5 million. The net increase in lease expense is expected to
approximate $1.9 million in 2002.
Fuel. Fuel costs for the year ended December 31, 2001 decreased $4.2
million compared to the year ended December 31, 2000. This decrease was
primarily the result of a 9.0% decline in the average price per gallon coupled
with only a slight increase in fuel usage in 2001 compared to 2000. Fuel costs
represented approximately 8.8% of total KCSR costs and expenses for the year
ended December 31, 2001.
Casualties and Insurance. For the year ended December 31, 2001, casualties
and insurance expense increased $7.2 million compared to the year ended December
31, 2000 primarily as a result of higher casualties and insurance costs at KCSR
of $6.6 million. Excluding the impact of the Duncan case settlement (See
"Significant Developments - Duncan Case Settlement") in 2000, KCSR casualties
and insurance costs would have increased $10.8 million. This resulted from an
$8.5 million increase in higher derailment costs related to several significant
first quarter 2001 derailments and higher personal injury costs associated with
third party claims. Also contributing to the fluctuation in casualties and
insurance expense was an increase in the personal injury reserve of
approximately $5.7 million arising from the Company's annual actuarial study.
During 2001, the Company changed its approach towards employee and third party
personal injury liabilities by aggressively pursuing settlement of open claims.
The Company's approach for many years prior to 2001 had been to challenge
claimants and prolong litigation, thereby, in some cases management believes,
increasing the long-term costs of the incident. This change in approach towards
claim settlement led to substantial payments to claimants in 2001 approximating
$44 million for current and prior year casualty incidents, including the Duncan
case discussed earlier. The Company's process of establishment of liability
reserves for these types of incidents is based upon an actuarial study by an
independent outside actuary, a process followed by most large railroads. The
significant change in settlement philosophy in 2001 led to the need to establish
additional reserves for personal injury liabilities as indicated by the annual
actuarial study. While the current year change in approach led to an increase in
reserves associated with personal injury casualty expense, management believes
this approach will ultimately lead to a decline in required reserves and
operating costs in the future.
Car Hire. For the year ended December 31, 2001, car hire expense increased
$5.0 million compared to the year ended December 31, 2000. An unusual number of
significant first quarter 2001 derailments (as discussed in casualties and
insurance), as well as the effects of the economic slowdown, line washouts and
flooding had an adverse impact on the efficiency of the Company's U.S.
operations during the first quarter and early second quarter of 2001. The
resulting inefficiency led to congestion on KCSR. This congestion contributed to
an increase in the number of freight cars from other railroads on the Company's
rail line, as well as a lower number of KCSR freight cars being used by other
railroads, resulting in an increase in car hire expense in 2001 compared to
2000. Also contributing to the increase in car hire expense was the larger
number of auto rack cars being used in 2001 compared to 2000 to serve the
related increase in automotive traffic. Partially offsetting these effects were
more efficient operations in the third and fourth quarters of 2001, which led to
a decline in the number of freight cars and trailers from other railroads and
third parties on the Company's rail line. As operations continued to improve
throughout the second half of 2001, car hire costs also continued to improve,
declining 37.7% compared to the first half of 2001.
Other. Other operating expenses increased $1.1 million year to year as a
result of several factors. The Company recorded higher expenses associated with
its petroleum coke bulk handling facility of approximately $3.2 million
resulting from a $1.1 million expense related to a legal settlement and higher
terminal operating costs. Additionally, in 2000, the Company recorded a $3.0
million reduction to the allowance for doubtful accounts due to the collection
of an outstanding receivable, which reduced other operating expenses in 2000.
These variances resulting in increases to other
Page 39
2001 operating expenses were partially offset by a decline in materials and
supplies expense of approximately $3.0 million. Additionally, in 2001 the
Company recorded $5.8 million of gains on the sale of operating property
compared to $3.4 million in 2000.
Operating Income and KCSR Operating Ratio. Consolidated operating income
for the year ended December 31, 2001 decreased $2.4 million, or 4.2%, to $55.4
million compared to $57.8 million for the year ended December 31, 2000. This
decrease resulted from a $7.5 million increase in operating expenses partially
offset by a $5.1 million increase in revenues. The operating income and
operating ratio for KCSR improved to $67.0 million and 88.2%, respectively, for
the year ended December 31, 2001 compared to $66.0 million and 88.3%,
respectively, for the year ended December 31, 2000.
Interest Expense. Consolidated interest expense for the year ended December 31,
2001 declined $13.0 million compared to the year ended December 31, 2000
primarily as a result of lower interest rates (LIBOR) on variable rate debt, a
lower average debt balance and lower amortization related to debt issue costs.
Also contributing to the decline in interest expense was $4.2 million of
capitalized interest recorded in 2001 relating to MCS. On a comparative basis,
interest expense in 2001 increased as a result of a $2.4 million benefit related
to an adjustment to interest expense due to the settlement of certain income tax
issues for 2001 compared to a $5.5 million benefit for similar items in 2000.
Income Tax Expense. For the year ended December 31, 2001, the Company's income
tax provision was $2.8 million compared to an income tax benefit of $3.6 million
for the year ended December 31, 2000. Exclusive of equity earnings from Grupo
TFM, the consolidated effective income tax rate for 2001 was 51.8%. In 2000, the
comparable effective tax rate was negative. This variance in the income tax
provision and effective tax rate was primarily the result of an increase in the
Company's domestic operating results and changes in associated book/tax
temporary differences and certain non-taxable items. Also contributing to this
variance was a lower settlement amount during 2001 compared to 2000 relating to
various income tax audit issues. Exclusive of equity earnings from Grupo TFM for
the years ended December 31, 2001 and 2000, the Company recognized pre-tax
income of $5.4 million for the year ended December 31, 2001 compared to pre-tax
income of $0.2 million for the year ended December 31, 2000. The Company intends
to indefinitely reinvest the equity earnings from Grupo TFM and accordingly, the
Company does not provide deferred income tax expense for the excess of its book
basis over the tax basis of its investment in Grupo TFM.
Equity in Net Earnings (Losses) of Unconsolidated Affiliates. For the year ended
December 31, 2001, the Company recorded equity earnings of $27.1 million
compared to equity earnings of $23.8 million for the year ended December 31,
2000. This increase is primarily the result of higher equity earnings from Grupo
TFM of $6.9 million and an increase in equity earnings from Southern Capital of
$1.0 million. These increases were partially offset by a $2.3 million decline in
equity earnings from Mexrail and equity losses of $1.6 million recorded from
PCRC relating mostly to costs associated with the start-up of the business.
Equity earnings related to Grupo TFM increased to $28.5 million for the year
ended December 31, 2001 from $21.6 million (exclusive of the 2000 extraordinary
item of $1.7 million related to debt issuance costs for Grupo TFM discussed
below) for the year ended December 31, 2000. During the year ended December 31,
2001, TFM recorded approximately $54 million in pre-tax income related to the
reversion of certain concession assets to the Mexican government. The Company's
equity earnings for the year ended December 31, 2001 reflect it's proportionate
share of this income of approximately $9.1 million. Grupo TFM's revenues
increased 4.2% to $667.8 million for the year ended December 31, 2001 from
$640.6 for the year ended December 31, 2000. These higher revenues were
partially offset by an approximate 9.5% increase in operating expenses
(exclusive of the income related to the reversion of certain concession assets
to the Mexican government discussed above as well as other gains/losses recorded
on the sales of other operating assets) resulting in a year to year decline in
ongoing operating income of approximately 10.3%. Under accounting principles
generally accepted in the United States of America ("U.S. GAAP"), the deferred
tax expense for Grupo TFM was $10.9 million for the year ended December 31, 2001
compared to a deferred tax benefit of $13.2 million (excluding the impact of the
extraordinary item) for the year ended December 31, 2000.
Results of the Company's investment in Grupo TFM are reported under U.S. GAAP
while Grupo TFM reports its financial results under International Accounting
Standards ("IAS"). Because the Company is required to report its equity
Page 40
earnings (losses) in Grupo TFM under U.S. GAAP and Grupo TFM reports under IAS,
differences in deferred income tax calculations and the classification of
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 variability in the amount of equity earnings (losses) reported by
the Company.
Income from Discontinued Operations. Net income for the year ended December 31,
2000 includes income from discontinued operations (Stilwell) of $363.8 million.
As a result of the spin-off of Stilwell effective July 12, 2000, the Company did
not report income from discontinued operations during the year ended December
31, 2001.
Cumulative Effect of Accounting Change and Extraordinary Items. As a result of
the implementation of SFAS 133 discussed in "Recent Developments- Implementation
of Derivative Standard," the Company recorded an after-tax charge to earnings of
$0.4 million in the first quarter of 2001. This charge is presented as a
cumulative effect of an accounting change in the accompanying consolidated
statements of income for the year ended December 31, 2001. Also, as discussed in
"Significant Developments - Debt Refinancing and Re-capitalization of the
Company's Debt Structure", the Company and Grupo TFM refinanced certain debt
during the year ended December 31, 2000. Debt retirement costs arising from all
debt refinancing transactions completed in 2000 totaled $8.7 million (15(cent)
per diluted share) and are presented as extraordinary items in the accompanying
consolidated financial statements for the year ended December 31, 2000.
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 KCSR revenues of approximately $23.3 million,
as well as lower revenues at other transportation companies due to demand driven
declines. While KCSR 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
decreased leading to a decline in demand for product shipments. The following
discussion provides an analysis of KCSR revenues by commodity group.
Chemical and Petroleum. For the year ended December 31, 2000, chemical and
petroleum product revenues decreased $6.3 million, or 4.8%, compared with the
year ended December 31, 1999, resulting primarily from lower organic and
agri-chemical revenues. Organic revenues declined 15.9% due to a merger within
the chemical industry and a new dedicated soda ash terminal opening on the
competitor railroad which originates the soda ash, which diverted soda ash
movements from KCSR.
Paper and Forest. Paper and forest product revenues increased $2.2 million,
or 1.7%, 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.
Agricultural and Mineral. Agricultural and mineral product revenues
decreased $2.9 million, or 3.0%, for the year ended December 31, 2000 compared
with the year ended December 31, 1999. This decline resulted primarily from
lower
Page 41
export grain revenues due to competitive pricing pressures, weather-related
operational problems and weakness in the export market.
Intermodal and Automotive. Intermodal and automotive revenues increased
$3.4 million, or 5.8%, for the year ended December 31, 2000 compared to the year
ended December 31, 1999. This improvement was comprised primarily of an increase
in automotive revenues, which increased 67.6% year to year, partially offset by
a 3.2% decline in intermodal revenues. Automotive revenues increased due, in
part, to 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 KCSR 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
improved operating efficiency and profitability of this business sector.
Additionally, during the second quarter of 2000, the Company entered into a
marketing agreement with Norfolk Southern whereby the Company agreed to perform
haulage services for Norfolk Southern from Meridian to Dallas for an agreed upon
haulage fee. Some of this haulage traffic replaced previous carload intermodal
traffic while some of the traffic was incremental to KCSR. A portion of the
decline in intermodal revenues resulted from the Norfolk Southern haulage
traffic that replaced existing intermodal revenues, as KCSR received 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 fuel and car hire are incurred and paid by Norfolk
Southern.
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 its coal deliveries in
the second half of 2000. The decline in tons delivered was primarily due to the
actions of one of the Company's major coal customers, which reduced coal
deliveries to decrease inventory stockpiles.
Costs and Expenses. The Company's consolidated 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 led to
decreases in salaries and wages, materials and supplies, car hire, and purchased
services expense. These expense reductions were offset by increases in fuel,
casualty and lease expense. Costs and expenses related to subsidiaries other
than KCSR decreased $8.1 million year to year, due primarily to volume-related
declines and the revision to the estimate of the allowance for doubtful accounts
discussed in "Other" below.
Salaries, Wages and Benefits. Consolidated salaries, wages and benefits
expense for the year ended December 31, 2000 decreased $8.2 million versus the
comparable 1999 period. This decline resulted primarily from lower KCSR
salaries, wages and benefits expense of $7.8 million. Exclusive of $3.0 million
of certain 1999 unusual costs and expenses, KCSR 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.
Depreciation and Amortization. Consolidated depreciation and amortization
expense was $56.1 million for the year ended December 31, 2000 compared to $56.9
million for the year ended December 31, 1999. Depreciation related to property
acquisitions was offset by property retirements and lower STB approved
depreciation rates.
Purchased Services. For the year ended December 31, 2000, purchased
services expense declined $4.1 million compared to the year ended December 31,
1999, primarily due to lower KCSR costs of $3.8 million. The decrease in KCSR
purchased services expense resulted from lower costs associated with short-term
locomotive leases and other purchased services (partially related to Year 2000
contingency efforts in 1999) partially offset by higher costs associated with
maintenance contracts for the 50 new leased locomotives.
Page 42
Operating Leases. For the year ended December 31, 2000, consolidated
operating lease expense increased $5.4 million compared to the year ended
December 31, 1999 primarily as a result of the 50 new GE AC 4400 locomotives
leased by KCSR during fourth quarter 1999.
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
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 KCSR operating expenses in 2000 compared
to 6.7% in 1999.
Casualties and Insurance. For the year ended December 31, 2000,
consolidated casualties and insurance expense increased $4.1 million compared
with the year ended December 31, 1999. This variance resulted primarily from an
increase in KCSR related expenses of $3.4 million, reflecting $4.2 million in
costs related to the Duncan case (See "Significant Developments-Duncan Case
Settlement") and higher personal injury-related costs partially offset by lower
derailment costs.
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 improvement. During 1999, KCSR experienced significant
congestion-related issues.
Other. For the year ended December 31, 2000, other operating expenses
declined $25.6 million, or 31.3%, compared to the year ended December 31, 1999.
This significant decline resulted from several factors as follows: 1) a
reduction in materials and supplies expense of approximately $4.8 million
related mostly to lower costs associated with locomotives and related repairs
due to the lease of the 50 AC 4400 locomotives in December 1999; 2) a $1.9
million decline in property and franchise taxes; 3) a $3.0 million revision to
the estimate of the allowance for doubtful accounts at the holding company. 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;
4) an approximate $2.0 million reduction in costs associated with third party
sales from the Company's tie producing facility; and 5) the impact of gains on
the sale of operating property, which were approximately $3.4 million in 2000
compared to an approximate $0.6 million gain in 1999. Also in 1999, there was an
approximate $5.6 million loss associated with the write-off of certain operating
assets. Also contributing to the decline were lower costs at various other
subsidiaries and higher holding company costs in 1999 relating mostly to
spin-off related and legal matters.
Operating Income and Operating Ratio. Consolidated operating income for the
year ended December 31, 2000 decreased $6.3 million, or 9.8%, to $57.8 million,
resulting from a $29.2 million decrease in revenues and a $22.9 million decrease
in operating expenses. Excluding $12.7 million of 1999 unusual costs and
expenses, consolidated operating income for the year ended December 31, 2000
would have been $19.0 million lower than 1999. KCSR's operating income declined
$8.4 million to $66.0 million for the year ended 2000 compared to $74.4 million
for the year ended 1999. Exclusive of $12.1 million of 1999 unusual costs and
expenses, KCSR operating income declined $20.5 million. KCSR's 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.
Interest Expense. The Company's consolidated 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 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 Company's income
tax benefit was $3.6 million compared to an income tax provision of $7.0 million
for the year ended December 31, 1999. Exclusive of equity earnings from Grupo
TFM, the consolidated effective income tax rate for 2000 was (1,800%) compared
to 44.6% in 1999. This variance in the income tax provision and effective rate
was primarily the result of a decrease in the
Page 43
Company's domestic operating results and changes in associated book/tax
temporary differences and certain non-taxable items. Also contributing to this
variance was the settlement of various prior year income tax audit issues during
2000. Exclusive of equity earnings from Grupo TFM for the years ended December
31, 2000 and 1999, the Company recognized pre-tax income of $0.2 million for the
year ended December 31, 2000 compared to pre-tax income of $15.7 million for the
year ended December 31, 1999. The Company intends to indefinitely reinvest the
equity earnings from Grupo TFM and accordingly, the Company does not provide
deferred income tax expense for the excess of its book basis over the tax basis
of its investment in Grupo TFM.
Equity in Net Earnings (Losses) of 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 was 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
"Significant 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
fluctuations in deferred income taxes and higher Grupo TFM revenues and
operating income, which improved 22.1% and 42.2%, respectively (exclusive of
gains/losses on sales of operating property in 2000 and 1999). 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 13.4%
(exclusive of gains/losses on sales of operating property in 2000 and 1999)
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. Under IAS, Grupo TFM's
operating ratio improved to 74.0% for the year ended December 31, 2000 versus
76.6% for the comparable 1999 period. Also contributing to the increase in Grupo
TFM equity earnings was the fluctuation in deferred income taxes. Under 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.
Income from Discontinued Operations. Net income for the year ended December 31,
2000 and 1999 includes income from discontinued operations (Stilwell) of $363.8
million and $313.1 million, respectively. This increase was primarily due to
higher average assets under management in 2000 coupled with improving margins
period to period.
Extraordinary Items. As discussed in "Significant Developments - Debt
Refinancing and Re-capitalization of the Company's Debt Structure", the Company
and Grupo TFM refinanced certain debt during the year ended December 31, 2000.
Debt retirement costs arising from all debt refinancing transactions completed
in 2000 totaled $8.7 million (15(cent) per diluted share) and are presented as
extraordinary items in the accompanying consolidated financial statements for
the year ended December 31, 2000. There were no extraordinary items reported
during 1999.
TRENDS AND OUTLOOK
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview" for cautionary statements concerning forward-looking
comments.
For the year ended December 31, 2001, the Company's domestic operating results
were adversely affected by the recession of the U.S. economy during 2001 and
competitive revenue pressures; however, the Company was encouraged by its
operating results for the fourth quarter of 2001. Domestically, KCSR's fourth
quarter revenues increased approximately 8% versus the fourth quarter of 2000.
While certain 2001 costs such as car hire and casualties and insurance were
higher compared to 2000, KCSR's cost structure has continued to benefit from
cost reduction actions taken in March 2001 and the synergies of an efficient and
well-operating railroad. Improvements in the cost structure
Page 44
were evident during the second, third and fourth quarters of 2001 as operations
became more fluid and efficient. Fuel costs declined each quarter in 2001 due to
lower market prices for diesel fuel. Car hire costs also showed continued
improvement, declining approximately 36.9% in the fourth quarter of 2001
compared to the first quarter of 2001. Higher casualty costs for 2001 were
driven by an unusually large number of significant first quarter 2001
derailments and are not indicative of an ongoing trend. Additionally, despite
lower variable interest rates, interest costs continue to have a significant
impact on the domestic operating results of the Company. Grupo TFM continues to
provide significant value as part of the Company's NAFTA rail network. Revenues
for Grupo TFM increased 4% for the year ended 2001 and the Company's equity
earnings increased 32% for the year ended 2001.
For 2002, the Company will focus on protecting its revenue base in a down
economy while continuing to provide quality service to its customers. The
Company will also strive to further reduce its costs and corporate debt.
Management expects KCSR coal revenues to decline in 2002 as a result of a
contractual rate reduction at SWEPCO, as well as the loss of certain business
due to the expiration of a contract that is not expected to be renewed. The
impact of the rate reduction and contract expiration is expected to result in an
approximate $20 million decline in 2002 coal revenues. Management believes,
however, that total revenues for 2002 will essentially remain flat compared to
2001 as anticipated declines in coal revenues are expected to be offset by
higher revenues in other commodity groups through new business and targeted rate
increases.
Except as outlined herein, variable costs and expenses are expected to be
proportionate with revenue activity, assuming normalized rail operations. Fuel
costs are expected to mirror market conditions, which management believes will
be lower in 2002 compared to 2001. KCSR, however, currently has approximately
49% of its budgeted fuel usage for 2002 under purchase commitments, which lock
in a specific price and effectively should reduce fuel expense in 2002 compared
to 2001. Casualty expenses are expected to decline as a result of our continued
focus and success with employee safety and aggressive settlement approach. As is
the case with most industries, insurance expense is expected to increase as the
insurance industry responds to the September 11, 2001 terrorist attack and
health care costs are expected to be higher in 2002, although these increases
are expected to be reduced by lower costs associated with railroad retirement
issues as described in "Recent Developments - New Railroad Retirement Act."
Depreciation expense is expected to rise subsequent to the implementation of MCS
currently scheduled for mid-year 2002. Operating leases are expected to remain
relatively flat resulting from declines due to better equipment utilization
offset by an increase related to the Company's new corporate headquarters, which
is expected to be available for occupancy in April 2002.
Management believes its railroad franchise is well positioned to benefit from an
economic recovery. KCSR is currently operating efficiently and management
believes the Company's cost structure is well controlled. Given these factors,
management believes that meaningful revenue growth arising from an economic
recovery would result in improved profitability.
The Company expects to continue to participate in the earnings/losses from its
equity investments in Grupo TFM (including the results of Mexrail following
completion of the sale to TFM), Southern Capital, and PCRC. Due to the
variability of factors affecting the Mexican economy, management can make 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 "Other - Foreign
Exchange Matters" and Item 7(A), "Quantitative and Qualitative Disclosures About
Market Risk" for further information. The Company and its partner, Grupo TMM,
are continuing to pursue the purchase of the Mexican government's 24.6%
ownership in Grupo TFM. It is the intention of KCSI to exercise, along with
Grupo TMM, their call option with respect to the Mexican government's 24.6%
interest in Grupo TFM on or prior to July 31, 2002. However, there can be no
assurances that the Company and Grupo TMM will be able to complete this
transaction prior to the expiration of the call option. The Company commenced
operations in Panama in July 2001. Management believes that PCRC should provide
the Company with opportunities for future earnings growth beginning in the early
part of 2003.
Page 45
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information And Contractual Obligations
Summary cash flow data is as follows for the years ended December 31,
respectively (dollars in millions):
2001 2000 1999
------- -------- --------
Cash flows provided by (used for):
Operating activities $ 76.1 $ 77.2 $ 178.0
Investing activities (55.7) (101.8) (97.2)
Financing activities (17.2) 34.2 (74.5)
------- -------- --------
Net increase in
cash and equivalents 3.2 9.6 6.3
Cash and equivalents at beginning of year 21.5 11.9 5.6
------- -------- --------
Cash and equivalents at end of year $ 24.7 $ 21.5 $ 11.9
======= ======== ========
During the year ended December 31, 2001, the Company's consolidated cash
position increased $3.2 million from December 31, 2000. This increase resulted
primarily from operating cash flows, proceeds from the disposal of property and
the issuance of common stock under employee stock plans, partially offset by
property acquisitions, investments in and loans to affiliates and the net
repayment of long-term debt.
Operating Cash Flows. The Company's cash flow from operations has historically
been positive and sufficient to fund operations, as well as KCSR roadway capital
improvements, other capital improvements and debt service. External sources of
cash (principally bank debt and public debt) have been used to refinance
existing indebtedness and to fund acquisitions, new investments, equipment
additions and Company common stock repurchases.
The following table summarizes consolidated operating cash flow information for
the years ended December 31, respectively (dollars in millions):
2001 2000 1999
------- -------- --------
Net income $ 30.7 $ 380.5 $ 323.3
Income from discontinued operations -- (363.8) (313.1)
Depreciation and amortization 58.0 56.1 56.9
Equity in undistributed (earnings) losses (27.1) (23.8) (5.2)
Distributions from unconsolidated affiliates 3.0 5.0 --
Deferred income taxes 30.4 23.1 9.8
Transfer from Stilwell -- -- 56.6
Gains on sales of assets (5.8) (3.4) (0.6)
Extraordinary items, net of tax -- 7.5 --
Tax benefit realized upon exercise of stock
options 5.6 9.3 6.4
Change in working capital items (33.3) (14.3) 49.7
Other 14.6 1.0 (5.8)
------- -------- --------
Net operating cash flow $ 76.1 $ 77.2 $ 178.0
======= ======== ========
Net operating cash inflows were $76.1 million and $77.2 million for the years
ended December 31, 2001 and 2000, respectively. This $1.1 million decrease in
operating cash flows was primarily attributable to changes in working capital
balances relating primarily to casualty payments and variances in the current
tax liability, lower cash flows related to the tax benefit associated with the
exercise of stock options, an increase in income from continuing operations and
fluctuations in certain non-cash adjustments to net income.
Net operating cash inflows in 2000 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
Page 46
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.
Investing Cash Flows. Net investing cash outflows were $55.7 million and $101.8
million during the years ended December 31, 2001 and 2000, respectively. This
variance of $46.1 million results primarily from a $38.5 million decline in 2001
capital expenditures and a $12.6 million increase in funds received from
property dispositions, partially offset by an increase in investments in and
loans to affiliates of $4.0 million. During the third quarter of 2001, the
Company entered into a sale/leaseback transaction whereby it sold 446 boxcars to
a third party for approximately $7.8 million. The Company realized a $4.7
million gain on this transaction, which has been deferred and will be recognized
ratably over the lease term. The proceeds received from the sale of these
boxcars are included as funds received from property dispositions in the
accompanying cash flow statement and were used to reduce the Company's
outstanding debt.
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 an increase in investments in and loans to affiliates of $0.3
million (which includes the impact of repayment of $16.6 million from Stilwell
during 1999), partially offset by a decrease in capital expenditures of $1.7
million and a $2.7 million increase in funds received from property disposals.
Cash used for property acquisitions was $66.0, $104.5, and $106.2 million in
2001, 2000 and 1999, respectively. Cash (used for) provided by investments in
and loans to affiliates was ($8.2), ($4.2) and $12.7 million in 2001, 2000 and
1999, respectively. Proceeds from the disposals of property were $18.1, $5.5 and
$2.8 million in 2001, 2000 and 1999, respectively.
Generally, operating cash flows and borrowings under lines of credit have been
used to finance property acquisitions and investments in and loans to
affiliates.
Financing Cash Flows. Financing cash outflows are used primarily for the
repayment of debt while financing cash inflows are generated from proceeds from
the issuance of long-term debt and proceeds from the issuance of common stock
under stock plans. Also included in financing cash flows are fluctuations in
long-term liability accounts including long-term personal injury reserves.
Financing cash flows for 2001, 2000 and 1999 were as follows:
.. Borrowings of $35.0, $1,052.0 and $21.8 million in 2001, 2000 and 1999,
respectively. Borrowings in 2001 (from KCS Revolver) were used to make
payments on the term debt. Proceeds from the issuance of debt in 2000 were
used for refinancing debt in January and September 2000. Proceeds from the
issuance of debt in 1999 were used for stock repurchases.
.. Repayment of indebtedness in the amounts of $51.3, $1,015.4 and $97.5
million in 2001, 2000 and 1999, respectively. Repayment of indebtedness is
generally funded through operating cash flows and proceeds from the
disposals of property. In 2001, the repayment of indebtedness was funded
through borrowings under the KCS Revolver, as well as operating cash flows
and proceeds from the disposals of property. In 2000, repayments of debt
included the refinancing of debt in January and September 2000. Repayments
in 1999 were partially funded through a transfer from Stilwell.
.. Payment of debt issuance costs of $0.4, $17.6 and $4.2 million in 2001,
2000 and 1999, respectively. During the year ended December 31, 2000, the
Company paid $17.6 million of debt issuance costs including $13.4 million
associated with the January 2000 restructuring of the Company's debt and
approximately $4.2 million associated with the $200 million offering of
debt securities in the third quarter of 2000. Amounts paid in 1999 also
related to the January 2000 debt restructuring.
.. Repurchases of KCSI common stock during 1999 of $24.6 million were funded
with borrowings under existing lines of credit and internally generated
cash flows.
Page 47
.. Proceeds from the sale of KCSI common stock pursuant to stock plans of
$8.9, $17.9 and $37.0 million in 2001, 2000 and 1999, respectively.
.. Payment of cash dividends of $0.2, $4.8 and $17.6 million in 2001, 2000 and
1999, respectively.
.. Net payments of long-term casualty claims of $8.3, ($1.5) and ($6.0)
million in 2001, 2000 and 1999, respectively.
Contractual Obligations. The following table outlines the Company's obligations
for payments under its capital leases, debt obligations and operating leases for
the periods indicated. Typically, payments for these obligations are expected to
be funded through operating cash flows. If operating cash flows are not
sufficient, funds received from other sources, including property dispositions
and employee stock plans, might also be available. Additionally, the Company
anticipates refinancing certain of its long-term debt maturing in 2006 and 2008
prior to maturity (dollars in millions).
Capital Leases Operating Leases
------------------------------- -------------------------------------
Minimum Net Long-
Lease Less Present Term Total Southern
Payments Interest Value Debt Debt Capital Third Party Total
-------- -------- ----- ---- ---- ------- ----------- -----
2002 $ 0.7 $ 0.2 $ 0.5 $ 46.2 $ 46.7 $ 34.1 $ 21.1 $ 55.2
2003 0.7 0.1 0.6 49.2 49.8 34.1 19.7 53.8
2004 0.6 0.2 0.4 40.9 41.3 34.1 15.6 49.7
2005 0.5 0.1 0.4 50.0 50.4 28.3 13.7 42.0
2006 0.4 0.1 0.3 264.0 264.3 24.3 6.4 30.7
Later years 0.9 0.1 0.8 205.1 205.9 180.4 54.1 234.5
------ ------ ------ -------- -------- -------- -------- --------
Total $ 3.8 $ 0.8 $ 3.0 $ 655.4 $ 658.4 $ 335.3 $ 130.6 $ 465.9
====== ====== ====== ======== ======== ======== ======== ========
Capital Expenditure Requirements
Capital improvements for KCSR roadway track structures have historically been
funded with cash flows from operations and external debt. 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 AC
4400 locomotives in November and December 1999. These locomotives are being
financed by KCSR under an operating lease with Southern Capital.
Internally generated cash flows and borrowings under existing lines of credit
were used to finance capital expenditures (property acquisitions) of $66.0
million, $104.5 million and $106.2 million in 2001, 2000 and 1999, respectively.
Internally generated cash flows and borrowings under the existing line of credit
are expected to be used to fund capital programs for 2002, currently estimated
at approximately $67 million.
KCSR Maintenance
KCSR, like all railroads, is required to maintain its own property
infrastructure. Portions of roadway and equipment maintenance costs are
capitalized and other portions are 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 each of the three years ended December 31, 2001, as a percentage
of KCSR revenues is as follows (dollars in millions):
Page 48
KCSR Maintenance
-----------------------------------------------
Way and Structure Equipment
----------------------- --------------------
Percent of Percent of
Amount Revenue Amount Revenue
-------- ---------- -------- ---------
2001 $ 43.9 7.8% $ 44.8 7.9%
2000 39.8 7.1 44.3 7.9
1999 41.6 7.1 52.1 8.9
Capital Structure
Components of the Company's capital structure are as follows (dollars in
millions). For purposes of this analysis, stockholders' equity for 1999 (prior
to the Spin-off) excludes the net assets of Stilwell.
2001 2000 1999
---------- ---------- ----------
Debt due within one year $ 46.7 $ 36.2 $ 10.9
Long-term debt 611.7 638.4 750.0
---------- ---------- ----------
Total debt 658.4 674.6 760.9
Stockholders' equity (excludes the net
assets of Stilwell) 680.3 643.4 468.5
---------- ---------- ----------
Total debt plus equity $ 1,338.7 $ 1,318.0 $ 1,229.4
========== ========== ==========
Total debt as a percent of
total debt plus equity ("debt ratio") 49.2% 51.2% 61.9%
========== ========== ==========
The Company's consolidated debt ratio as of December 31, 2001 decreased 2.0
percentage points compared to December 31, 2000. Total debt decreased $16.2
million as a result of net repayments of long-term borrowings. Stockholders'
equity increased $36.9 million as a result of 2001 net income of $30.7 million,
and the issuance of common stock under employee stock plans partially offset by
dividends and a reduction of equity related to accumulated comprehensive income
arising from a SFAS 133 adjustment at Southern Capital. The increase in
stockholders' equity coupled with the decrease in debt resulted in the decline
in the debt ratio from December 31, 2000.
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.
Under the existing capital structure of KCSI at December 31, 2001, management
anticipates that the ratio of debt to total capitalization will decline slightly
during 2002. The Company is currently exploring alternatives to refinance its
existing debt.
KCSI Credit Agreement. In January 2000, in conjunction with the
re-capitalization of the Company's debt structure, the Company entered into a
credit agreement as described above in "Significant Developments - Debt
Refinancing and Re-capitalization of the Company's Debt Structure."
Registration of Senior Unsecured Notes. During the third quarter of 2000, the
Company completed a $200 million private offering of debt securities. On January
25, 2001, the Company filed a Form S-4 Registration Statement with the SEC as
described above in "Significant Developments - Debt Refinancing and
Re-capitalization of the Company's Debt Structure."
Page 49
Overall Liquidity
The Company has financing available under the KCS Revolver with a maximum
borrowing amount of $100 million. As of December 31, 2001, $80.0 million was
available under the KCS Revolver. The KCS Credit Facility contains, among other
provisions, various financial covenants. As discussed in "Recent Developments -
Waiver and Amendments for Credit Facility Covenants", the Company requested and
received from lenders of the KCS Credit Facility a waiver from certain of its
financial and coverage covenants. In addition, an amendment to the KCS Credit
Facility dated May 10, 2001 provided for, among other things, a temporary
revision of certain of the financial and coverage covenant provisions through
March 31, 2002. The Company has obtained an additional amendment to the leverage
ratio covenant provision of the KCS Credit Facility for the period April 1, 2002
through June 29, 2002. As a result of certain financial covenants contained in
the credit agreement, maximum utilization of the Company's available line of
credit may be restricted. The Company presently expects that it will achieve
compliance with the financial and coverage ratios under the KCS Credit Facility,
as amended. The Company is currently evaluating various alternatives for its
existing debt under the KCS Credit Facility and will pursue all measures within
its control to ensure that it will be in compliance with the financial and
coverage ratios under the provisions of the KCS Credit Facility. If, however,
the Company is unable to meet the provisions of its financial and coverage
ratios (which would result in a violation of its covenants), the Company would
pursue negotiations with its lenders to cure any covenant violation, which would
likely result in additional costs including, among others, interest, bank and
other fees, which could be significant. There can be no assurance that the
lenders would grant a waiver or otherwise amend the financial and coverage
ratios under the KCS Credit Facility.
In connection with the Company's debt restructuring in January 2000, KCSR
entered into the KCS Credit Facility providing financing of up to $750 million.
This financing included a $200 million term loan due January 11, 2001 that was
repaid with the proceeds from the private offering of Senior Notes. In addition,
borrowing capacity under the KCS Revolver was reduced from $150 million to $100
million effective January 2, 2001 (see "Significant Developments - Debt
Refinancing and Re-capitalization of the Company's Debt Structure").
As discussed in "Recent Developments - Shelf Registration Statements and Public
Securities Offerings," the Company filed the Initial Shelf on Form S-3
(Registration 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 the Initial Shelf effective on April 22, 1996; however, no securities
have been issued thereunder. The Company has carried forward $200 million
aggregate amount of unsold securities from the Initial Shelf to the Second Shelf
filed on Form S-3 (Registration No. 333-61006) on May 16, 2001 for the offering
of up to $450 million in aggregate amount of securities. The SEC declared the
Second Shelf effective on June 5, 2001. Securities in the aggregate amount of
$300 million remain available under the Initial Shelf. The Company has not
engaged an underwriter for the remaining securities under the Initial Shelf and
currently has no plans to issue any of the remaining securities under the
Initial Shelf.
On June 7, 2001, the Company announced plans for concurrent public offerings of
$115 million of mandatory convertible units and 4 million shares of the
Company's common stock under the Second Shelf. These offerings were independent
of each other and completion of one was not contingent upon the other.
Anticipated proceeds from these offerings were to be used to reduce existing
debt under the KCS Credit Facility. However, on June 19, 2001, the Company
issued a press release stating that because of management's belief that the
Company's stock price did not properly reflect the valuation of the Company,
pursuing these offerings was not in the best interest of KCSI's current
shareholders. Securities in the aggregate amount of $450 million remain
available under the Second Shelf and the Company did not rule out an offering of
its common stock in the future should the Company determine that market
conditions are appropriate.
As discussed in Item 1, "Business - Joint Venture Arrangements - Grupo TFM,"
Grupo TMM and KCSI, or either Grupo 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 without the consent of Grupo TFM.
As discussed in "Recent Developments - Purchase of Additional Interest in Grupo
TFM," KCSI and Grupo TMM have a call option exercisable on or prior to July 31,
2002 to purchase the 24.6% interest in Grupo TFM currently owned by the Mexican
government. This transaction was expected to occur during the third quarter of
2001; however, due to the tragic events of September 11, 2001, the timing of the
transaction was delayed until market conditions improved. Although, the form of
the transaction may not occur as originally planned, it is the Company's
intention to exercise this call option on
Page 50
or prior to its expiration on July 31, 2002. The purchase price will be
calculated by accreting the Mexican government's initial investment of $199
million from the date of the Mexican government's investment through the date of
the purchase, using the interest rate on one-year U.S. Treasury securities.
Various financing alternatives are currently being explored. One source of
financing could include the use of approximately $81 million due to TFM from the
Mexican government as a result of the reversion, during the first quarter of
2001, of a portion of the Concession to the Mexican government by TFM that
covers the Hercules-Mariscala rail line. The remainder of the financing required
to purchase the Mexican government's Grupo TFM shares is expected to be raised
either at TFM or by the Company and Grupo TMM, respectively. This transaction is
expected to be completed when markets become more favorable, but on or prior to
July 31, 2002. However, there can be no assurances that the Company and Grupo
TMM will be able to complete this transaction prior to the expiration of the
call option.
During 2001, Southern Capital, a 50% owned unconsolidated affiliate that
provides KCSR with access to equipment financing alternatives, refinanced its
five-year credit facility, which was scheduled to mature on October 19, 2001,
with a one-year bridge loan for $201 million. There was $196 million borrowed
under the bridge loan as of December 31, 2001. Southern Capital is currently in
the process of evaluating financing alternatives to refinance the bridge loan
with long-term debt. A refinancing transaction is expected to occur during the
second quarter of 2002. See "Contractual Obligations" above for KCSR's minimum
lease commitments to Southern Capital.
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 "Recent Developments - Purchase of Janus common stock by
Stilwell," if Stilwell were unable to meet its obligations to purchase shares of
Janus common stock from certain minority stockholders upon the occurrence of a
Change in Ownership of KCSI, the Company would be required to purchase those
shares. Based on discussions with Stilwell management, the amount for which KCSI
could be ultimately responsible for the shares subject to the Change in
Ownership provisions approximates $63.6 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.
The Company believes, based on current expectations, that its cash and other
liquid assets, operating cash flows, access to capital markets, borrowing
capacity, and other available financing resources are sufficient to fund
anticipated operating, capital and debt service requirements and other
commitments through 2002. However, the Company's operating cash flows and
financing alternatives can be impacted by various factors, some of which are
outside of the Company's control. For example, if the Company were to experience
a substantial reduction in revenues or a substantial increase in operating costs
or other liabilities, its operating cash flows could be significantly reduced.
Additionally, the Company is subject to economic factors surrounding capital
markets and the Company's ability to obtain financing under reasonable terms is
subject to market conditions. Further, the Company's cost of debt can be
impacted by independent rating agencies, which assign debt ratings based on
certain credit measurements such as interest coverage and leverage ratios.
OTHER
Critical Accounting Policies. In response to the SEC's Release No. 33-8040,
"Cautionary Advice Regarding Disclosure About Critical Accounting Policies," the
Company has identified certain key accounting policies on which our financial
condition and results of operations are dependent. These key accounting policies
most often involve complex matters or are based on subjective judgments or
decisions. In the opinion of management, the Company's most critical accounting
policies are those related to revenue recognition, casualty claims and property
and depreciation. These accounting
Page 51
policies are outlined in Item 8, "Financial Statements and Supplementary Data -
Note 2 - Significant Accounting Policies."
Significant Customer. Southwestern Electric Power Company ("SWEPCO") is the
Company's only customer that accounted for more than 10% of revenues during the
years ended December 31, 2001, 2000 and 1999, respectively. SWEPCO is a
subsidiary of American Electric Power, Inc. ("AEP"). Revenues related to SWEPCO
during these periods were $75.9, $67.2 and $75.9 million, respectively.
Management expects KCSR coal revenues to decline in 2002 as a result of a
contractual rate reduction for SWEPCO, which became effective on January 1,
2002.
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,
2001, 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
and 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. The Company does not expect the reversal of
the temporary difference to occur in the foreseeable future. At December 31,
2001, the Company's book basis exceeded the tax basis of its investment in Grupo
TFM by $33.6 million. If the Company were to realize this basis difference in
the future by a repatriation of dividends or the sale of its interest in Grupo
TFM, at December 31, 2001, the Company would have incurred gross federal income
taxes of $11.8 million, which might be partially or fully offset by Mexican
income taxes, which could be available to reduce federal income taxes at such
time.
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 top priority of management. As
a result, from time to time, the Company will enter into transactions 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.
Commodity swap or cap transactions are accounted for as hedges under SFAS 133
and are correlated to market benchmarks. Positions are monitored to ensure that
they will not exceed actual fuel requirements in any period.
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 while the fuel swap transactions resulted in higher
fuel expense of approximately $1 million. 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.
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, 1999, the Company did not have any outstanding
purchase commitments for 2000. At December 31, 2000, KCSR had purchase
commitments for approximately 12.6% of budgeted gallons of fuel for 2001, which
resulted in higher fuel expense of approximately $0.4 million in 2001. There
were no fuel swap or cap transactions outstanding at December 31, 2000. At
December 31, 2001, KCSR had purchase commitments for approximately 39% of its
budgeted gallons of fuel for 2002. On January 14, 2002, KCSR entered into an
additional fuel purchase commitment. As a result, KCSR currently has purchase
commitments for approximately 49% of its budgeted gallons of fuel for 2002.
There are currently no diesel fuel cap or swap transactions outstanding.
In accordance with the provision of the KCS Credit Facility requiring the
Company to manage its interest rate risk through hedging activity, at December
31, 2001 the Company had five separate interest rate cap agreements for an
aggregate notional amount of $200 million. Three of these interest rate cap
agreements expired on February 10, 2002 while the remaining two expired on March
10, 2002. The interest rate caps were linked to LIBOR. $100 million of the
aggregate notional amount provided a cap on the Company's interest rate of 7.25%
plus the applicable spread, while $100 million limited the interest rate to 7%
plus the applicable spread. Counterparties to the interest rate cap agreements
were major financial institutions that also participate in the KCS Credit
Facility. As of December 31, 2001, the Company
Page 52
did not have any other interest rate cap agreements or interest rate hedging
instruments. See "Recent Developments - Implementation of Derivative Standard"
for discussion of these interest rate cap transactions.
These diesel fuel and interest rate transactions are intended to mitigate the
impact of rising fuel prices and interest rates and, if applicable, are recorded
using the accounting policies as set forth in Item 8, "Financial Statements and
Supplementary Data - Note 2- Significant Accounting Policies" 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.
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 be performed using the U.S. dollar as Grupo TFM's functional
currency.
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, 2001, 2000 and 1999, the Company had no outstanding foreign currency hedging
instruments.
Results of the Company's investment in Grupo TFM are reported under U.S. GAAP
while Grupo TFM reports its financial results under IAS. Because the Company is
required to report its equity earnings (losses) in Grupo TFM under U.S. GAAP and
Grupo TFM reports under IAS, differences in deferred income tax calculations and
the classification of 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 variability in the amount of
equity earnings (losses) reported by the Company.
New Accounting Pronouncements. In July 2001, the FASB issued Statement No. 141,
"Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 is effective for any business
combination initiated after June 30, 2001 and requires purchase method
accounting. Under SFAS 142, goodwill with an indefinite life will no longer be
amortized; however, both goodwill and other intangible assets will be subject to
annual impairment testing. SFAS 142 is effective for fiscal years beginning
after December 31, 2001. In June 2001, the FASB issued Statement No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 is
effective for fiscal years beginning after June 15, 2002. Under SFAS 143, the
fair value of a liability for an asset retirement obligation must be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. In October 2001, the FASB issued
Statement No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets"
("SFAS 144"). Under SFAS 144, an impairment loss is recognized if the carrying
amount of a long-lived asset is not
Page 53
recoverable from its undiscounted cash flows. The impairment loss is equal to
the difference between the carrying amount and fair value of the asset. The
Company is currently evaluating the provisions of these new accounting
pronouncements and does not expect the adoption of these pronouncements to have
a material impact on its consolidated 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
management's opinion (after consultation with legal counsel) that the Company's
litigation reserves are adequate. See "Recent Developments - Jaroslawicz Class
Action" and "Significant Developments - Duncan Case Settlement" for a discussion
of the dismissal and settlement of those cases, respectively. Additionally, see
"Recent Developments- Bogalusa Cases" and "Recent Developments - Houston Cases"
for a discussion of the ongoing proceedings in those cases.
The Company also is a defendant in various matters brought primarily by current
and former employees and third parties for job related injury incidents or
crossing accidents. In addition, the Company is subject to claims alleging
hearing loss as a result of alleged elevated noise levels in connection with our
current and former operations. The Company is aggressively defending these
matters and has established liability reserves which management believes are
adequate to cover expected costs. Nevertheless, due to the inherent
unpredictability of these matters, the Company could incur substantial costs
above reserved amounts.
Environmental Matters. The Company's operations are subject to extensive
federal, state and local environmental laws and regulations. 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 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.
However, stricter environmental requirements relating to the Company's business,
which may be imposed in the future, could result in significant additional
costs.
The risk of incurring environmental liability is inherent in the railroad
industry. The Company's operations involve the use and, as part of serving the
petroleum and chemicals industry, transportation of hazardous materials. The
Company has a professional team available to respond and handle environmental
issues that might occur in the transport of such materials. Additionally, the
Company is a partner in the Responsible Care(R) environmental program and, as a
result, has initiated certain additional environmental and safety practices.
KCSR performs ongoing reviews and evaluations of the various environmental
programs and issues within the Company's operations, and, as necessary, takes
actions to limit the Company's exposure to potential liability.
In addition, the Company owns property that is, or has been, used for industrial
purposes. Use of these properties may subject the Company to potentially
material liabilities relating to the investigation and cleanup of contaminants,
claims alleging personal injury, or property damage as the result of exposures
to, or release of, hazardous substances. Although the Company is responsible for
investigating and remediating contamination at several locations, 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 additional contamination, or becomes subject to related personal or
property damage claims, 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 in the petrochemical
and drum-recycling business. The Company has sought recovery from these tenants,
Page 54
one of which has filed for bankruptcy. KCSR has established reserves that
management believes are adequate to address the costs expected to be incurred at
this site.
In Port Arthur, Texas, KCSR is responsible for investigating and remediating
property formerly leased to a company that reconditioned 55-gallon drums. The
Company received some recovery from this tenant to cover a portion of remedial
costs. KCSR has established reserves that management believes are adequate to
address additional costs expected to be incurred 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 contamination in the
area of a former oil refinery site, operated by Crystal Refinery. KCSR's main
line was adjacent to that site. LDOT claims that a 1966 derailment contributed
to the contamination at this site. However, KCSR management believes that KCSR's
liability exposure with respect to this site is limited.
In another proceeding, in 1991 the Louisiana Department of Environmental Quality
named KCSR as a party in the alleged contamination of Capitol Lake in Baton
Rouge, Louisiana, a portion of which sits on KCSR's property. During 1994, the
list of potentially responsible parties, which includes at least one other
industrial operator on the lake, was expanded to include the State of Louisiana,
and the City and Parish of Baton Rouge, among others. Investigation of the site
by the Louisiana Department of Environmental Quality, as well as evaluation of
remedial options, is ongoing at this time. Depending on the remedial measures
required, the ultimate costs to address contamination of lake sediments could be
substantial. Nevertheless, studies commissioned by KCSR indicate that
contaminants contained in the lake were not generated by KCSR. Management
currently does not believe this matter will have a material effect on KCSR.
KCSR may be subject to potential liability in connection with a former foundry
site in Alexandria, Louisiana. The property was once owned through a former
subsidiary and leased to a foundry operator. The foundry operator, Ruston
Foundry, ceased operations in early 1990. The site is on the CERCLA National
Priorities List of contaminated sites. The United States Environmental
Protection Agency has recently completed a Remedial Investigation of the site,
and the remedial activities that may be required have not yet been selected.
Accordingly, KCSR does not currently possess sufficient information to assess
its exposure with respect to clean-up costs at this site.
The Company is presently 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. 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, 2001, 2000 and 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.
The Company does not foresee that regulatory compliance under present statutes
will impair its competitive capability or result in any material effect on its
results of operations.
Inflation. Inflation has not had a significant impact on the Company's
operations in the past three years. Increases in fuel prices, however, impacted
our operating results in 2001 and 2000. During the two-year period ended
December 31, 1999, locomotive fuel expenses represented an average of 6.9% of
KCSR's total costs and expenses compared to 9.7% in
Page 55
2000 and 8.8% in 2001. U.S. GAAP requires 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 have 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 Item 8, "Financial Statements and Supplementary Data
- Note 11" 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 $397.5 million and $400 million
at December 31, 2001 and 2000, respectively. The KCS Credit Facility, comprised
of different tranches and types of indebtedness, accrues interest based on
target interest indexes (e.g., LIBOR, federal funds rate, etc.) plus an
applicable spread, as set forth in the credit agreement. Due to the high
percentage of variable rate debt associated with the restructuring of the debt
in 2000, the Company is currently 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
$4.0 million on an annualized basis for the floating-rate instruments
outstanding as of December 31, 2001. A 100 basis points increase in interest
rates would have resulted in additional interest expense of approximately $2.9
million (after consideration of approximately $1.1 million reflecting the impact
of interest rate caps in effect) in 2000.
Based upon the borrowing rates available to KCSI and its subsidiaries for
indebtedness with similar terms and average maturities, the fair value of the
Company's long-term debt was approximately $681 million at December 31, 2001 and
$685 million at December 31, 2000.
The Company's objective is to manage its interest rate risk through the use of
derivative instruments in accordance with the provisions of its credit facility.
In 2000, the Company entered into five separate interest rate cap agreements for
an aggregate notional amount of $200 million, which were designated as cash flow
hedges. These interest rate cap agreements were designed to hedge the Company's
exposure to movements in the London Interbank Offered Rate ("LIBOR") on which
the Company's variable rate interest is calculated. $100 million of the
aggregate notional amount provided a cap on the Company's LIBOR based interest
rate of 7.25% plus the applicable spread, while $100 million limited the LIBOR
based interest rate to 7% plus the applicable spread. By holding these interest
rate cap agreements, the Company has been able to limit the risk of rising
interest rates on its variable rate debt.
Three of these interest rate cap agreements expired on February 10, 2002 and the
remaining two expired on March 10, 2002. As of December 31, 2001, the Company
did not have any other interest rate cap agreements or interest rate hedging
instruments.
KCSI adopted the provisions of SFAS 133 effective January 1, 2001. As a result
of this change in the method of accounting for derivative financial instruments,
the Company recorded an after-tax charge to earnings of $0.4 million in the
first quarter of 2001. This charge is presented as a cumulative effect of an
accounting change in the accompanying financial statements and represents the
ineffective portion of the interest rate cap agreements. The Company recorded an
additional $0.4 million charge during the year ended December 31, 2001 for
subsequent changes in the fair value of its interest rate hedging instruments.
As of December 31, 2001, the interest rate cap asset had a fair value of less
than $0.1 million.
Page 56
In addition, as of December 31, 2001 the Company recorded a reduction to its
stockholders' equity (accumulated other comprehensive loss) of approximately
$2.9 million for its portion of the amount recorded by Southern Capital for the
adjustment to the fair value of its interest rate swap transactions. The Company
also reduced its investment in Southern Capital by the same amount.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments - Implementation of Derivative Standard" and
"Other - Financial Instruments and Purchase Commitments."
Commodity Price Sensitivity
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 top
priority of management. As a result, from time to time, the Company will enter
into transactions 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. Forward purchase commitments are used to secure fuel
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. Commodity swap or cap transactions are accounted
for as hedges under SFAS 133 and 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. Positions are monitored to ensure that they will not exceed actual
fuel requirements in any period.
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 while the fuel swap transactions resulted in higher
fuel expense of approximately $1 million. 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 contract prices for these diesel fuel cap transactions did not include
taxes, transportation costs or other incremental fuel handling costs. These
diesel fuel cap instruments expired on March 31, 2000 and June 30, 2000 and the
Company received approximately $0.8 million during 2000 related to these
transactions and recorded the proceeds as a reduction of diesel fuel expenses.
At December 31, 1999, the Company did not have any outstanding purchase
commitments for 2000. At December 31, 2000, KCSR had purchase commitments for
approximately 12.6% of budgeted gallons of fuel for 2001, which resulted in
higher fuel expense of approximately $0.4 million in 2001. There were no fuel
swap or cap transactions outstanding at December 31, 2000. At December 31, 2001,
KCSR had purchase commitments for approximately 39% of its budgeted gallons of
fuel for 2002. On January 14, 2002, KCSR entered into an additional fuel
purchase commitment. As a result, KCSR currently has purchase commitments for
approximately 49% of its budgeted gallons of fuel for 2002 at an average price
per gallon of $0.66. There are currently no diesel fuel cap or swap transactions
outstanding. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Financial Instruments and Purchase Commitments."
The excess of payments to be made related to the diesel fuel purchase
commitments over current market prices for diesel fuel purchase commitments
approximated $2.6 million at December 31, 2001. The excess of current market
prices for diesel fuel purchase commitments over the payments to be made under
such commitments approximated $1.1 million at December 31, 2000.
At December 31, 2001, the Company held fuel inventories for use in normal
operations. These inventories were not material to the Company's overall
financial position. With the exception of the 49% of fuel currently under
forward purchase commitments for 2002, fuel costs are expected to mirror market
conditions in 2002.
Page 57
Foreign Exchange Sensitivity
The Company owns a 36.9% 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:
Reports of Independent Accountants.................................. 61
Consolidated Statements of Income
for the three years ended December 31, 2001....................... 62
Consolidated Balance Sheets at December 31, 2001,
2000 and 1999..................................................... 63
Consolidated Statements of Cash Flows for the three
years ended December 31, 2001..................................... 64
Consolidated Statements of Changes in Stockholders'
Equity for the three years ended December 31, 2001................ 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.
The consolidated financial statements of Grupo TFM as of December 31, 2001
and for each of the three years in the period ended December 31, 2001 are
attached to this Form 10-K as Exhibit 99.1.
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 as of and for the year ended December 31,
2001 have been audited by our independent accountants, KPMG LLP. The Company's
financial statements as of and for the years ended December 31, 2000 and 1999
were audited by our previous independent accountants, PricewaterhouseCoopers
LLP. Management has made available to the independent accountants 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 its independent accountants during their audits 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, the independent
accountants, 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 the independent accountants 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 the respective 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. Both the independent accountants 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.
We have audited the accompanying consolidated balance sheet of Kansas City
Southern Industries, Inc. and subsidiaries as of December 31, 2001, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. We did
not audit the financial statements of Grupo Transportacion Ferroviaria Mexicana,
S.A. de C.V. (Grupo TFM), a 36.9% owned investee company. The Company's
investment in Grupo TFM at December 31, 2001 was $334.4 million and its equity
in earnings of Grupo TFM was $28.5 million for the year 2001. The financial
statements of Grupo TFM were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Grupo TFM, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Kansas City Southern Industries,
Inc. and subsidiaries as of December 31, 2001, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/KPMG LLP
KPMG LLP
Kansas City, Missouri
March 28, 2002
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 as of December 31,
2000 and 1999 and the related consolidated statements of income, of changes in
stockholders' equity and of cash flows for each of the two years in the period
ended December 31, 2000 present fairly, in all material respects, the financial
position of Kansas City Southern Industries, Inc. and its subsidiaries at
December 31, 2000 and 1999 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
2001 2000 1999
---------- ---------- ----------
Revenues $ 577.3 $ 572.2 $ 601.4
Costs and expenses
Salaries, wages and benefits 192.9 197.8 206.0
Depreciation and amortization 58.0 56.1 56.9
Purchased services 57.0 54.8 58.9
Operating leases 50.9 51.7 46.3
Fuel 43.9 48.1 34.2
Casualties and insurance 42.1 34.9 30.8
Car hire 19.8 14.8 22.4
Other 57.3 56.2 81.8
---------- ---------- ----------
Total costs and expenses 521.9 514.4 537.3
---------- ---------- ----------
Operating income 55.4 57.8 64.1
Equity in net earnings (losses) of unconsolidated affiliates:
Grupo TFM 28.5 21.6 1.5
Other (1.4) 2.2 3.7
Interest expense (52.8) (65.8) (57.4)
Other, net 4.2 6.0 5.3
---------- ---------- ----------
Income from continuing operations before income taxes 33.9 21.8 17.2
Income tax provision (benefit) (Note 8) 2.8 (3.6) 7.0
---------- ---------- ----------
Income from continuing operations 31.1 25.4 10.2
Income from discontinued operations, (net of income
taxes of $0.0, $233.3 and $216.1, respectively) -- 363.8 313.1
---------- ---------- ----------
Income before extraordinary item and cumulative effect
of accounting change 31.1 389.2 323.3
Extraordinary item, net of income taxes
Debt retirement costs - KCSI -- (7.0) --
Debt retirement costs - Grupo TFM -- (1.7) --
Cumulative effect of accounting change (0.4) -- --
---------- ---------- ----------
Net income $ 30.7 $ 380.5 $ 323.3
========== ========== ==========
Per Share Data (Note 2):
Basic earnings per share:
Continuing operations $ 0.53 $ 0.44 $ 0.18
Discontinued operations -- 6.42 5.68
---------- ---------- ----------
Basic earnings per share before extraordinary item
and cumulative effect of accounting change 0.53 6.86 5.86
Extraordinary item -- (.15) --
Cumulative effect of accounting change (0.01) -- --
---------- ---------- ----------
Total $ 0.52 $ 6.71 $ 5.86
========== ========== ==========
Diluted earnings per share:
Continuing operations $ 0.51 $ 0.43 $ 0.17
Discontinued operations -- 6.14 5.40
---------- ---------- ----------
Diluted earnings per share before extraordinary item
and cumulative effect of accounting change 0.51 6.57 5.57
Extraordinary item -- (.15) --
Cumulative effect of accounting change (0.01) -- --
---------- ---------- ----------
Total $ 0.50 $ 6.42 $ 5.57
========== ========== ==========
Weighted average common shares outstanding (in thousands):
Basic 58,598 56,650 55,142
Dilutive potential common shares 2,386 1,740 1,883
---------- ---------- ----------
Diluted 60,984 58,390 57,025
========== ========== ==========
Dividends per share
Preferred $ 1.00 $ 1.00 $ 1.00
Common $ -- $ -- $ .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
2001 2000 1999
-------- -------- --------
ASSETS
Current Assets:
Cash and equivalents $ 24.7 $ 21.5 $ 11.9
Accounts receivable, net (Note 6) 130.0 135.0 132.2
Inventories 27.9 34.0 40.5
Other current assets (Note 6) 71.8 25.9 23.9
-------- -------- --------
Total current assets 254.4 216.4 208.5
Investments held for operating purposes (Notes 3, 5) 386.8 358.2 337.1
Properties, net (Note 6) 1,327.4 1,327.8 1,277.4
Intangibles and Other Assets, net 42.3 42.1 34.4
Net Assets of Discontinued Operations (Note 3) -- -- 814.6
-------- -------- --------
Total assets $2,010.9 $1,944.5 $2,672.0
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year (Note 7) $ 46.7 $ 36.2 $ 10.9
Accounts and wages payable 50.4 52.9 74.8
Accrued liabilities (Note 6) 160.4 159.9 168.5
-------- -------- --------
Total current liabilities 257.5 249.0 254.2
-------- -------- --------
Other Liabilities:
Long-term debt (Note 7) 611.7 638.4 750.0
Deferred income taxes (Note 8) 370.2 332.2 297.4
Other deferred credits 91.2 81.5 87.3
Commitments and contingencies
(Notes 3, 7, 8, 11, 12)
-------- -------- --------
Total other liabilities 1,073.1 1,052.1 1,134.7
-------- -------- --------
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 0.6 1.1
Retained earnings 676.5 636.7 1,167.0
Accumulated other comprehensive income (loss) (2.9) -- 108.9
-------- -------- --------
Total stockholders' equity 680.3 643.4 1,283.1
-------- -------- --------
Total liabilities and stockholders' equity $2,010.9 $1,944.5 $2,672.0
======== ======== ========
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
2001 2000 1999
------- -------- --------
CASH FLOWS PROVIDED BY (USED FOR):
Operating Activities:
Net income $ 30.7 $ 380.5 $ 323.3
Adjustments to net income:
Income from discontinued operations -- (363.8) (313.1)
Depreciation and amortization 58.0 56.1 56.9
Deferred income taxes 30.4 23.1 9.8
Equity in undistributed earnings of
unconsolidated affiliates (27.1) (23.8) (5.2)
Distributions from unconsolidated affiliates 3.0 5.0 --
Transfer from Stilwell Financial Inc. -- -- 56.6
Gain on sale of assets (5.8) (3.4) (0.6)
Tax benefit associated with exercised
stock options 5.6 9.3 6.4
Extraordinary item, net of tax -- 7.5 --
Changes in working capital items:
Accounts receivable 4.0 (2.8) (0.4)
Inventories 6.1 6.5 6.5
Other current assets (19.3) 4.2 (2.1)
Accounts and wages payable (5.1) (15.7) 4.5
Accrued liabilities (19.0) (6.5) 41.2
Other, net 14.6 1.0 (5.8)
------- -------- --------
Net 76.1 77.2 178.0
------- -------- --------
Investing Activities:
Property acquisitions (66.0) (104.5) (106.2)
Proceeds from disposal of property 18.1 5.5 2.8
Investments in and loans to affiliates (8.2) (4.2) 12.7
Other, net 0.4 1.4 (6.5)
------- -------- --------
Net (55.7) (101.8) (97.2)
------- -------- --------
Financing Activities:
Proceeds from issuance of long-term debt 35.0 1,052.0 21.8
Repayment of long-term debt (51.3) (1,015.4) (97.5)
Debt issue costs (0.4) (17.6) (4.2)
Proceeds from stock plans 8.9 17.9 37.0
Stock repurchased -- -- (24.6)
Cash dividends paid (0.2) (4.8) (17.6)
Other, net (9.2) 2.1 10.6
------- -------- --------
Net (17.2) 34.2 (74.5)
------- -------- --------
Cash and Equivalents:
Net increase 3.2 9.6 6.3
At beginning of year 21.5 11.9 5.6
------- -------- --------
At end of year (Note 4) $ 24.7 $ 21.5 $ 11.9
======= ======== ========
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
Accumulated
$25 Par $.01 Par other
Preferred Common Retained comprehensive
stock stock earnings income (loss) Total
---------- ---------- ---------- -------------- ----------
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
included in net income (1.1)
Foreign currency translation
adjustment (2.6)
Comprehensive income 382.7
Spin-off of Stilwell Financial Inc. (954.1) (111.1) (1,065.2)
1-for-2 reverse stock split (0.5) 0.5
Dividends (0.2) (0.2)
Stock plan shares issued from treasury 6.3 6.3
Options exercised and stock subscribed 36.7 36.7
---------- ---------- ---------- -------------- ----------
Balance at December 31, 2000 6.1 0.6 636.7 -- 643.4
Comprehensive income:
Net income 30.7
Cumulative effect of accounting change (0.9)
Change in fair market value of cash
flow hedge of unconsolidated affiliate (2.0)
Comprehensive income 27.8
Dividends (0.2) (0.2)
Options exercised and stock subscribed 9.3 9.3
---------- ---------- ---------- -------------- ----------
Balance at December 31, 2001 $ 6.1 $ 0.6 $ 676.5 $ (2.9) $ 680.3
========== ========== ========== ============== ==========
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" - a former wholly-owned financial services
subsidiary) through a special dividend of Stilwell common stock distributed to
KCSI common stockholders of record on June 28, 2000 ("Spin-off"). See Note 3.
KCSI's principal subsidiaries and affiliates, which following the Spin-off, are
reported under one business segment, include the following:
.. The Kansas City Southern Railway Company ("KCSR"), a wholly-owned
subsidiary of KCSI;
.. Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), a
36.9% owned unconsolidated affiliate of KCSR. Grupo TFM owns 80% of the
common stock of TFM, S.A. de C.V. ("TFM");
.. Mexrail, Inc. ("Mexrail"), a 49% owned unconsolidated affiliate of KCSR.
Mexrail wholly owns The Texas-Mexican Railway Company ("Tex Mex");
.. Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate of KCSR that leases locomotive and rail equipment
primarily to KCSR;
.. Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of which
KCSR indirectly owns 50% of the common stock. PCRC wholly-owns Panarail
Tourism Company ("Panarail").
KCSI, along with its principal subsidiaries and joint ventures, owns and
operates a rail network that links key commercial and industrial markets in the
United States and Mexico. The Company also has a strategic alliance with the
Canadian National Railway Company ("CN") and Illinois Central Corporation ("IC")
(collectively "CN/IC") and other marketing agreements, which provide the ability
for the Company to expand its geographic reach.
KCSI's rail network connects shippers in the midwestern and eastern regions of
the United States, including shippers utilizing Chicago, Illinois and Kansas
City, Missouri--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 agreements, interconnects with all Class I
railroads in North America.
KCSR, which owns and operates one of eight Class I railroad systems in the
United States, is comprised of approximately 3,100 miles of main and branch
lines and approximately 1,340 miles of other tracks in a ten-state region that
includes Missouri, Kansas, Arkansas, Oklahoma, Mississippi, Alabama, Tennessee,
Louisiana, Texas and Illinois. KCSR, which traces its origins to 1887, offers
the shortest north/south rail route between Kansas City and several key ports
along the Gulf of Mexico in Louisiana, Mississippi and Texas. Additionally,
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. KCSR's rail route
also serves the east/west route linking Kansas City with East St. Louis and
Springfield, Illinois. Further, KCSR has limited haulage rights between
Springfield and Chicago that allow for shipments that originate or terminate on
the former Gateway Western's rail lines. These lines also provide access to East
St. Louis and allows rail traffic to avoid the more congested and costly St.
Louis, Missouri terminal. KCSR's geographic reach enables service to a customer
base that includes, among others, electric generating utilities, which use coal,
and a wide range of companies in the chemical and petroleum, agricultural and
mineral, paper and forest, and automotive and intermodal markets.
Page 66
Southwestern Electric Power Company ("SWEPCO"), which is a subsidiary of
American Electric Power, Inc. ("AEP"), is the Company's only customer which
accounted for more than 10% of revenues during the years ended December 31,
2001, 2000 and 1999, respectively. Revenues related to SWEPCO during these
periods were $75.9, $67.2, and $75.9 million, respectively.
The Company's rail network links directly to major trading centers in Mexico,
through our unconsolidated affiliates TFM and Tex Mex. The Company owns a 36.9%
interest in Grupo TFM, which owns 80% of TFM. TFM operates a railroad of
approximately 2,650 miles of main and branch lines running from the U.S./Mexican
border at Laredo, Texas to Mexico City and serves most of Mexico's principal
industrial cities and three of its four major shipping ports. Our principal
international gateway is at Laredo where more than 50% of all rail and truck
traffic between the United States and Mexico crosses the border. The Company
also owns a 49% interest in Mexrail, which owns Tex Mex. Tex Mex operates
approximately 160 miles of main and branch lines between Laredo and the port
city of Corpus Christi, Texas. In addition, Mexrail owns the northern half of
the rail-bridge at Laredo, which spans the Rio Grande River into Mexico. TFM
owns and operates the southern half of the bridge. See Note 15 for discussion of
subsequent events with respect to Grupo TFM and Mexrail.
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 subsidiaries and unconsolidated affiliates.
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 of
America ("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. Management reviews
its estimates, including those related to the recoverability and useful lives of
assets as well as liabilities for litigation, environmental remediation,
casualty claims, income taxes and postretirement benefits. Changes in facts and
circumstances may result in revised estimates. Actual results could differ from
those estimates.
Principles of Consolidation. The accompanying consolidated financial statements
are presented using the accrual basis of accounting and 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.
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 the lower of
average cost or market.
Page 67
Properties and Depreciation. Properties are stated at cost. Additions and
renewals, including those on leased assets that increase the life of the asset
or utility and constitute a unit of property are capitalized and all properties
are depreciated over the estimated remaining life or leased life of such assets,
whichever is shorter. 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.
Gains or losses recognized on the sale or disposal of operating properties that
were reflected in operating income were $5.8, $3.4 and ($5.0) million in 2001,
2000 and 1999, respectively. Gains or losses recognized on the sale of
non-operating properties reflected in other, net were not significant in 2001,
2000 and 1999, respectively.
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 Accounting
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. See "New Accounting Pronouncements" below.
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. See "New
Accounting Pronouncements" below.
Casualty Claims. Casualty claims in excess of self-insurance levels are insured
up to certain coverage amounts, depending on the type of claim. The Company's
process for establishing its liability reserves is based on an actuarial study
by an independent third party actuary. It is based on claims filed and an
estimate of claims incurred but not yet reported. While the ultimate amount of
claims incurred is dependent on various factors, it is management's opinion that
the recorded liability is adequate to provide for the payment of future claims.
Adjustments to the liability will be reflected as operating expenses in the
period in which the adjustments are known.
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, 2001,
approximately $55 million has been capitalized (including approximately $4.2
million of interest costs capitalized in 2001) for a management control system
("MCS"), which is expected to be implemented in mid-2002.
Page 68
Derivative Financial 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 was amended by Statement of Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 and Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of SFAS 133." SFAS 133 requires that derivatives be
recorded on the balance sheet as either assets or liabilities measured at fair
value. Changes in the fair value of derivatives are recorded either through
current earnings or as other comprehensive income, depending on the type of
hedge transaction. For fair value hedge transactions (changes in the fair value
of an asset, liability or an unrecognized firm commitment are hedged), 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 (the variability of cash flows related to a variable rate asset,
liability or a forecasted transaction are hedged), 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 into 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.
The Company does not engage in the trading of derivatives. The Company's
objective is to manage its interest rate risk through the use of derivative
instruments in accordance with the provisions of its senior secured credit
facility. At December 31, 2001, the Company had five separate interest rate cap
agreements for an aggregate notional amount of $200 million, which were
designated as cash flow hedges. These interest rate cap agreements were designed
to hedge the Company's exposure to movements in the London Interbank Offered
Rate ("LIBOR") on which the Company's variable rate interest is calculated. $100
million of the aggregate notional amount provided a cap on the Company's LIBOR
based interest rate of 7.25% plus the applicable spread, while $100 million
limited the LIBOR based interest rate to 7% plus the applicable spread. By
holding these interest rate cap agreements, the Company has been able to limit
the risk of rising interest rates on its variable rate debt. Three of these
interest rate cap agreements expired on February 10, 2002 and the remaining two
expired on March 10, 2002. As of December 31, 2001, the Company did not have any
other interest rate cap agreements or interest rate hedging instruments.
KCSI adopted the provisions of SFAS 133 effective January 1, 2001. As a result
of this change in the method of accounting for derivative financial instruments,
the Company recorded an after-tax charge to earnings of $0.4 million in the
first quarter of 2001. This charge is presented as a cumulative effect of an
accounting change in the accompanying financial statements and represents the
ineffective portion of the interest rate cap agreements. The Company recorded an
additional $0.4 million charge during the year ended December 31, 2001 for
subsequent changes in the fair value of its interest rate hedging instruments.
As of December 31, 2001, the interest rate cap asset had a fair value of less
than $0.1 million.
In addition, as of December 31, 2001 the Company recorded a reduction to its
stockholders' equity (accumulated other comprehensive loss) of approximately
$2.9 million for its portion of the amount recorded by Southern Capital for the
adjustment to the fair value of its interest rate swap transactions. The Company
also reduced its investment in Southern Capital by the same amount.
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
Page 69
upon borrowing rates available at the reporting date for indebtedness with
similar terms and average maturities. Based upon the borrowing rates currently
available to the Company and its subsidiaries for indebtedness with similar
terms and average maturities, the fair value of long-term debt was approximately
$681, $685, and $766 million at December 31, 2001, 2000 and 1999, respectively.
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.
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, 2001, 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.
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.
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 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.
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).
Page 70
The effect of stock options issued to employees represent the only difference
between the weighted average shares used for the basic earnings per share
computation compared to the diluted earnings per share computation. The
following is a reconciliation from the weighted average shares used for the
basic earnings per share computation and the diluted earnings per share
computation for the years ended December 31, 2001, 2000 and 1999, respectively
(in thousands):
2001 2000 1999
------ ------ ------
Basic shares 58,598 56,650 55,142
Effect of Dilution:
Stock Options 2,386 1,740 1,883
------ ------ ------
Diluted Shares 60,984 58,390 57,025
====== ====== ======
Excluded from Diluted Computation* 97 18 44
------ ------ ------
* Excluded from the applicable periods diluted earnings per share computation
because the exercise prices were greater than the 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 and $4.8
million for the years ended December 31, 2000 and 1999, respectively. These
adjustments relate to securities at certain Stilwell subsidiaries and affiliates
and affect the diluted 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, 2001, 2000 and 1999 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 the 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.
Shares outstanding are as follows at December 31, (in thousands):
2001 2000 1999
------ ------ ------
$25 Par, 4% noncumulative, Preferred stock 242 242 242
$.01 Par, Common stock 59,243 58,140 55,287
Comprehensive Income. In 2001, the Company's other comprehensive income (loss)
consists of its proportionate share of the amount recorded by Southern Capital
for the adjustment to the fair value of its interest rate swap transactions. In
2000 and 1999, 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 recorded 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 and
Page 71
$39.3 million, net of deferred taxes, for the years ended December 31, 2000 and
1999, 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,
2001, 2000 and 1999, liabilities for environmental remediation were not
material.
New Accounting Pronouncements. In July 2001, the FASB issued Statement No. 141,
"Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). SFAS 141 is effective for any business
combination initiated after June 30, 2001 and requires purchase method
accounting. Under SFAS 142, goodwill with an indefinite life will no longer be
amortized; however, both goodwill and other intangible assets will be subject to
annual impairment testing. SFAS 142 is effective for fiscal years beginning
after December 31, 2001. In June 2001, the FASB issued Statement No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 is
effective for fiscal years beginning after June 15, 2002. Under SFAS 143, the
fair value of a liability for an asset retirement obligation must be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. In October 2001, the FASB issued
Statement No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets"
("SFAS 144"). Under SFAS 144, an impairment loss is recognized if the carrying
amount of a long-lived asset is not recoverable from its undiscounted cash
flows. The impairment loss is equal to the difference between the carrying
amount and fair value of the asset.
Note 3. Acquisitions and Dispositions
-------------------------------------
Spin-off of Stilwell. On July 12, 2000, KCSI completed the Spin-off, which was
approved by KCSI's Board of Directors on June 14, 2000. 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. Under tax rulings received from the Internal
Revenue Service ("IRS"), the Spin-off qualifies as a tax-free distribution under
Section 355 of the Internal Revenue Code of 1986, as amended. Also 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 in 1998 in contemplation
of the Spin-off. The total number of KCSI shares outstanding immediately
following this reverse split was 55,749,947. In preparation for the Spin-off,
the Company re-capitalized its debt structure on January 11, 2000 as described
in Note 7.
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 were
removed from the consolidated balance sheet. The accompanying consolidated
financial statements as of December 31, 1999 and for the year ended December 31,
1999 reflect the financial position, results of operations and cash flows of
Stilwell as discontinued operations.
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 72
Summarized financial information of the discontinued Stilwell businesses is as
follows (in millions):
December 31,
1999
----------
Current assets $ 525.0
Total assets 1,231.5
Current liabilities 162.5
Total liabilities 359.6
Minority interest 57.3
Net assets of discontinued operations 814.6
1/1/00- Year ended
7/12/00 12/31/1999
---------- ----------
Revenues $ 1,187.9 $ 1,212.3
Operating expenses 646.2 694.0
---------- ----------
Operating income 541.7 518.3
Equity in earnings of unconsolidated affiliates 37.0 46.7
Reduction in ownership of DST -- --
Gain on litigation settlement 44.2 --
Gain on sale of Janus common stock 15.1 --
Interest expense and other, net 18.6 21.5
---------- ----------
Pretax income 656.6 586.5
Income tax provision 233.3 216.1
Minority interest in consolidated earnings 59.5 57.3
---------- ----------
Income from discontinued
operations, net of income taxes $ 363.8 $ 313.1
========== ==========
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. 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 of KCSI or Stilwell, as applicable (as defined in such agreements),
Stilwell may be required to purchase such holders' Janus stock. The fair market
value price for the purchase or sale under the mandatory put rights or the
Change in Ownership provisions 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.
In certain 2001 SEC filings, Stilwell disclosed that in March and April 2001,
Stilwell acquired 202,042 shares of Janus common stock from several minority
stockholders of Janus exercising their put rights under certain of the
agreements discussed above. On September 4, 2001, Janus purchased from employees
(other than Mr. Bailey) approximately 139,000 shares of Janus common stock. On
May 1, 2001, Stilwell announced that it completed the purchase of 600,000 shares
of Janus common stock from Mr. Bailey under the terms and conditions of the
Janus Stock Purchase Agreement.
Page 73
Additionally, on November 9, 2001, Stilwell announced that it had completed the
purchase of an additional 609,950 shares of Janus common stock owned by Mr.
Bailey and one other minority stockholder through the exercise of put rights for
a price of approximately $613 million. Upon the completion of the purchase of
609,950 shares on November 9, 2001, KCSI was relieved of its obligations to make
any payments under the mandatory put rights. There remain, however, potential
obligations under the Change in Ownership provisions under certain share
restriction agreements. KCSI believes, based on discussions with Stilwell
management and as previously demonstrated by Stilwell, that Stilwell has
adequate financial resources available to fund any obligation under the Change
in Ownership provisions described above. However, if Stilwell were somehow
unable to meet its obligations with respect to these agreements, KCSI would be
obligated to make the payments under these agreements. At December 31, 2001,
KCSI could have been ultimately responsible for approximately $63.6 million
under the Change in Ownership provisions in the event Stilwell was unable to
meet its obligations.
Note 4. Supplemental Cash Flow Disclosures
-------------------------------------------
Supplemental Disclosures of Cash Flow Information.
2001 2000 1999
------- -------- --------
Cash payments (refunds) (in millions):
Interest (includes $0.0, $0.7 and $1.5 million,
respectively, related to Stilwell) $ 49.1 $ 72.4 $ 64.2
Income taxes (includes $0.0, $195.9 and
$142.9 million, respectively, related to Stilwell) $ (25.0) $ 143.1 $ 143.3
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 was issued to employees in January 2002 and was paid for
through employee payroll deductions in 2001. The Company received approximately
$4.5 million from payroll deductions associated with this offering of the ESPP.
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.
In conjunction with the January 2000 refinancing of the Company's debt
structure, KCSI borrowed $125 million under a $200 million 364-day senior
unsecured competitive advance/revolving credit facility to retire 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.
During 1999, the Company's Board of Directors declared a quarterly dividend
totaling approximately $4.6 million payable in January of 2000. The dividend
declaration reduced retained earnings and established a liability at the end of
1999. No cash outlay occurred until 2000. During the first quarter of 2000, the
Company's Board of Directors suspended common stock dividends of KCSI in
conjunction with the terms of the KCS Credit Facility discussed above. It is not
anticipated that KCSI will make any cash dividend payments to its common
stockholders for the foreseeable future.
In 2001, 2000 and 1999, the Company capitalized approximately $4, $9 and $4
million, respectively, of costs related to capital projects for which no cash
outlay had yet occurred. These costs were included in accounts payable and
accrued liabilities at December 31, 2001, 2000 and 1999, respectively.
Page 74
Note 5. Investments
-------------------
See Note 15 for discussion of subsequent events with respect to Grupo TFM and
Mexrail. Investments, including investments in unconsolidated affiliates, are as
follows (in millions):
Percentage
Ownership
Company Name December 31, 2001 Carrying Value
---------------------- ----------------- -----------------------------------
2001 2000 1999
-------- -------- --------
Grupo TFM 36.9% $ 334.4 $ 306.0 $ 286.5
Southern Capital 50% 23.2 24.6 28.1
Mexrail 49% 11.7 13.3 13.7
PCRC 50%* 11.0 9.9 4.5
Other 6.5 4.4 4.3
-------- -------- --------
Total $ 386.8 $ 358.2 $ 337.1
======== ======== ========
* The Company owns 50% of the outstanding voting common stock of PCRC.
Grupo TFM. In June 1996, the Company and Transportacion Maritima Mexicana, S.A.
de C.V. ("TMM" - now Grupo TMM - see below) formed Grupo TFM 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 2,650 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.
During December 2001, the Company's partner in Grupo TFM and Mexrail, TMM
announced that its largest shareholder, Grupo TMM S.A. de C.V. ("Grupo TMM"),
filed a registration statement on Form F-4 with the Securities and Exchange
Commission ("SEC"), which was declared effective December 13, 2001, to register
securities that would be issued in the proposed merger of TMM with Grupo TMM
(formerly Grupo Servia, S.A. de C.V. ("Grupo Servia")). The surviving entity in
the merger is known as Grupo TMM.
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 Mexican government, representing approximately 40% of the purchase price.
Grupo TFM funded the initial installment of the TFM purchase price through
capital contributions from Grupo 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 then-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 Mexican 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 Mexican government (approximately $199 million based on the
U.S. dollar/Mexican peso exchange rate on June 23, 1997); and (iv) additional
capital contributions from Grupo 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 Mexican
government's interest in Grupo TFM is in the form of limited voting right
shares.
KCSI and Grupo TMM have a call option for the Mexican government's 24.6%
interest in Grupo TFM which is exercisable on or prior to July 31, 2002 at the
original amount (in U.S. dollars) paid by the Mexican government plus
Page 75
interest based on one-year U.S. Treasury securities (see below). In addition,
after the expiration of that call option, KCSI and Grupo TMM 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
Mexican governmental entity.
On or before July 31, 2002, it is the intention of KCSI, along with Grupo TMM,
to exercise their call option with respect to the purchase of the 24.6% interest
in Grupo TFM currently owned by the Mexican government. The purchase price will
be calculated by accreting the Mexican government's initial investment of
approximately $199 million from the date of the Mexican government's investment
through the date of the purchase, using the interest rate on one-year U.S.
Treasury securities. Various financing alternatives are currently being
explored. One source of financing could include the use of approximately $81
million due to TFM from the Mexican government as a result of the reversion,
during the first quarter of 2001, of a portion of the Concession to the Mexican
government by TFM that covers the Hercules-Mariscala rail line, an approximate
18-mile portion of redundant track in the vicinity of the city of Queretaro. TFM
recorded income of approximately $54 million (under U.S. GAAP) in connection
with the reversion. The remainder of the financing required to purchase the
Mexican government's Grupo TFM shares is expected to be raised either at TFM or
by the Company and Grupo TMM, respectively. This transaction has been delayed
pending improved market conditions and is expected to be completed when markets
become more favorable, but on or prior to July 31, 2002. However, there can be
no assurances that the Company and Grupo TMM will be able to complete this
transaction prior to the expiration of the call option on July 31, 2002.
On or prior to October 31, 2003 the Mexican government may sell its 20% interest
in TFM through a public offering (with the consent of Grupo TFM if prior to
October 31, 2003). If, on October 31, 2003, the Mexican government has not sold
all of its capital stock in TFM, Grupo TFM is obligated to purchase the capital
stock at the initial share price paid by Grupo TFM plus interest. In the event
that Grupo TFM does not purchase the Mexican government's remaining interest in
TFM, Grupo TMM and KCSI, or either Grupo TMM or KCSI, are obligated to purchase
the Mexican government's interest. KCSI and Grupo 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 Grupo 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. If KCSI and Grupo TMM, or either
KCSI or Grupo TMM alone had been required to purchase the Mexican government's
20% interest in TFM as of December 31, 2001, the total purchase price would have
been approximately $518.8 million.
At December 31, 2001, the Company's investment in Grupo TFM was approximately
$334.4 million. The Company's interest in Grupo TFM is 36.9% (with Grupo TMM
owning 38.5% and the Mexican Government owning the remaining 24.6%). The Company
has a management services agreement with Grupo TFM to provide certain consulting
and management services. At December 31, 2001, $3.6 million is reflected as an
account receivable in the Company's consolidated balance sheet. The Company
accounts for its investment in Grupo TFM under the equity method.
Mexrail, Inc. In November 1995, the Company purchased a 49% interest in Mexrail,
which owns 100% of Tex Mex. Mexrail owns the northern half of the international
rail traffic bridge at Laredo spanning the Rio Grande River and TFM owns and
operates the southern half of the bridge. This bridge is a significant entry
point for rail traffic between Mexico and the United States. Tex Mex is
comprised of a 524-mile rail network between Laredo and Beaumont, Texas
(including 160 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, with TFM at Laredo (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.
Southern Capital. In 1996, the Company and GATX Capital Corporation ("GATX")
completed a transaction for the formation and financing of a joint venture,
Southern 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. The Company holds a 50% interest
in Southern Capital, which it accounts for using the equity method of
accounting. 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
Page 76
management believes reflected market conditions at that time. KCSR paid Southern
Capital $28.8, $27.3, and $27.0 million under these operating leases in 2001,
2000 and 1999, respectively. In connection with the formation of Southern
Capital, 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 as a reduction in
lease rental expense over the terms of the leases (approximately $4.4, $5.8 and
$5.6 million in 2001, 2000 and 1999, respectively). During 2001 and 2000, the
Company received dividends of $3.0 million and $5.0 million, respectively, 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 not material in 2001, 2000 and 1999, 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 sale were used to reduce outstanding
indebtedness of the joint venture as mandated by its loan agreement.
During 2001, Southern Capital refinanced its five-year credit facility, which
was scheduled to mature on October 19, 2001, with a one-year bridge loan for
$201 million. There was $196 million borrowed under the bridge loan as of
December 31, 2001. Southern Capital is currently evaluating financing
alternatives to refinance the bridge loan with long-term debt.
Panama Canal Railway Company. 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. The Panama
Canal Railway is a 47-mile north-south railroad traversing the Panama isthmus
between the Pacific and Atlantic Oceans. As of December 31, 2001, the Company
has invested approximately $15.5 million toward the reconstruction and
operations of the Panama Canal Railway. This investment is comprised of $12.9
million of equity and $2.6 million of subordinated loans. The Panama Canal
Railway became fully operational on December 1, 2001 with the commencement of
freight traffic. Passenger service started during July 2001. Panarail operates
and promotes commuter and tourist passenger service over the Panama Canal
Railway. The Company owns 50% of the common stock of PCRC, which it accounts for
using the equity method of accounting.
In November 1999, the financing arrangements for PCRC were completed with the
International Finance Corporation ("IFC"), a member of the World Bank Group. The
financing is comprised of a $5 million investment by the IFC and senior loans
through the IFC in an aggregate amount of up to $45 million, as well as $4.8
million of equipment loans from Transamerica Corporation. The IFC's investment
of $5 million in PCRC 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 (2) eight times earnings before interest, income taxes,
depreciation and amortization for the two years preceding the redemption that is
proportionate to the IFC's percentage ownership in PCRC. Under the terms of the
concession, the Company is, under certain limited conditions, a guarantor for up
to $7.5 million of cash deficiencies associated with the completion of the
reconstruction project and operations of PCRC. Also if PCRC terminates the
concession contract without the IFC's consent, the Company is a guarantor for up
to 50% of the outstanding senior loans. In addition, the Company is a guarantor
for up to $2.4 million of the equipment loans from Transamerica Corporation. The
cost of the reconstruction, which is virtually complete, is expected to total
approximately $80 million. The Company projects that an additional $2.5 million,
which management expects would be in the form of a subordinated loan, could be
required under the cash deficiency guarantee. Excluding the impact of any loan
guarantees discussed above, the Company expects its total cash outlay to
approximate $18.0 million ($12.9 million of equity and $5.1 million of
subordinated loans).
Page 77
Financial Information. Combined financial information of all unconsolidated
affiliates that the Company and its subsidiaries account for under the equity
method follows. Totals do not include certain cost based investments included on
the balance sheet. All amounts, including those for Grupo TFM, are presented
under U.S. GAAP. Certain prior year amounts have been reclassified to reflect
amounts from applicable audited financial statements (dollars in millions).
December 31, 2001
-----------------------------------------------------------------------------
Grupo Southern
TFM Capital Mexrail PCRC Other Total
--------- ------------ ------------ ------------ ------------ ------------
Investment in unconsolidated affiliates $ 334.4 $ 23.2 $ 11.7 $ 11.0 $ (0.8) $ 379.5
Equity in net assets of unconsolidated
affiliates 331.3 23.2 12.0 11.0 (0.8) 376.7
Dividends and distributions received from
unconsolidated affiliates -- 3.0 -- -- -- 3.0
Financial Condition:
Current assets $ 294.3 $ 2.5 $ 34.9 $ 3.4 $ 0.1 $ 335.2
Non-current assets 1,924.3 240.6 59.3 88.9 -- 2,313.1
--------- --------- --------- --------- --------- ---------
Assets $ 2,218.6 $ 243.1 $ 94.2 $ 92.3 $ 0.1 $ 2,648.3
========= ========= ========= ========= ========= =========
Current liabilities $ 350.8 $ 196.6 $ 42.8 $ 8.1 $ 0.2 $ 598.5
Non-current liabilities 593.8 -- 27.5 62.2 0.9 684.4
Minority interest 376.3 -- -- -- -- 376.3
Equity of stockholders and partners 897.7 46.5 23.9 22.0 (1.0) 989.1
--------- --------- --------- --------- --------- ---------
Liabilities and equity $ 2,218.6 $ 243.1 $ 94.2 $ 92.3 $ 0.1 $ 2,648.3
========= ========= ========= ========= ========= =========
Operating results:
Revenues $ 667.8 $ 30.2 $ 55.0 $ 0.6 $ -- $ 753.6
--------- --------- --------- --------- --------- ---------
Costs and expenses $ 457.7 $ 25.5 $ 58.2 $ 2.8 $ 0.2 $ 544.4
--------- --------- --------- --------- --------- ---------
Net income $ 76.7 $ 4.8 $ (2.0) $ (2.2) $ (0.2) $ 77.1
--------- --------- --------- --------- --------- ---------
December 31, 2000
-------------------------------------------------------------------------------
Grupo Southern
TFM Capital Mexrail PCRC Other Total
--------- ------------ ------------ ------------ ------------ ------------
Investment in unconsolidated affiliates $ 306.0 $ 24.6 $ 13.3 $ 9.9 $ (0.1) $ 353.7
Equity in net assets of unconsolidated
affiliates 303.0 24.6 13.9 7.9 -- 349.4
Dividends and distributions received from
unconsolidated affiliates -- 5.0 -- -- -- 5.0
Financial Condition:
Current assets $ 190.9 $ 0.2 $ 24.7 $ 7.1 $ 0.9 $ 223.8
Non-current assets 1,885.6 262.0 42.7 49.4 0.3 2,240.0
--------- --------- --------- --------- --------- ---------
Assets $ 2,076.5 $ 262.2 $ 67.4 $ 56.5 $ 1.2 $ 2,463.8
========= ========= ========= ========= ========= =========
Current liabilities $ 80.5 $ 0.4 $ 32.2 $ 0.6 $ 0.1 $ 113.8
Non-current liabilities 817.8 212.5 6.8 37.0 0.8 1,074.9
Minority interest 357.2 -- -- -- -- 357.2
Equity of stockholders and partners 821.0 49.3 28.4 18.9 0.3 917.9
--------- --------- --------- --------- --------- ---------
Liabilities and equity $ 2,076.5 $ 262.2 $ 67.4 $ 56.5 $ 1.2 $ 2,463.8
========= ========= ========= ========= ========= =========
Operating results:
Revenues $ 640.5 $ 30.8 $ 56.5 $ 0.3 $ -- $ 728.1
--------- --------- --------- --------- --------- ---------
Costs and expenses $ 493.7 $ 27.7 $ 57.7 $ 1.2 $ -- $ 580.3
--------- --------- --------- --------- --------- ---------
Net income $ 44.8 $ 3.2 $ (0.1) $ (0.9) $ 0.1 $ 47.1
--------- --------- --------- --------- --------- ---------
Page 78
December 31, 1999
---------------------------------------------------------------------------
Grupo Southern
TFM Capital Mexrail PCRC Other Total
---------- ---------- ---------- ---------- ---------- ----------
Investment in unconsolidated affiliates $ 286.5 $ 28.1 $ 13.7 $ 4.5 $ -- $ 332.8
Equity in net assets of unconsolidated
affiliates 286.4 28.1 14.0 4.0 0.1 332.6
Financial Condition:
Current assets $ 134.4 $ 0.1 $ 20.4 $ 4.4 $ 1.0 $ 160.3
Non-current assets 1,916.5 274.5 43.6 12.0 0.4 2,247.0
---------- ---------- ---------- ---------- ---------- ----------
Assets $ 2,050.9 $ 274.6 $ 64.0 $ 16.4 $ 1.4 $ 2,407.3
========== ========== ========== ========== ========== ==========
Current liabilities $ 255.7 $ -- $ 29.3 $ 1.6 $ 0.1 $ 286.7
Non-current liabilities 672.9 218.4 6.2 5.1 0.9 903.5
Minority interest 346.1 -- -- -- -- 346.1
Equity of stockholders and partners 776.2 56.2 28.5 9.7 0.4 871.0
---------- ---------- ---------- ---------- ---------- ----------
Liabilities and equity $ 2,050.9 $ 274.6 $ 64.0 $ 16.4 $ 1.4 $ 2,407.3
========== ========== ========== ========== ========== ==========
Operating results:
Revenues $ 524.5 $ 26.0 $ 50.0 $ 0.6 $ 0.3 $ 601.4
---------- ---------- ---------- ---------- ---------- ----------
Costs and expenses $ 409.7 $ 22.3 $ 48.3 $ 0.6 $ 0.1 $ 481.0
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 1.6 $ 7.0 $ 1.6 $ -- $ 0.1 $ 10.3
---------- ---------- ---------- ---------- ---------- ----------
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. 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 variability in
the amount of equity earnings (losses) reported by the Company.
Note 6. Other Balance Sheet Captions
------------------------------------
Accounts Receivable. Accounts receivable include the following allowances (in
millions):
2001 2000 1999
-------- -------- --------
Accounts receivable $ 140.4 $ 140.2 $ 140.2
Allowance for doubtful accounts (10.4) (5.2) (8.0)
-------- -------- --------
Accounts receivable, net $ 130.0 $ 135.0 $ 132.2
======== ======== ========
Doubtful accounts expense $ 1.7 $ (0.6) $ 1.7
-------- -------- --------
Page 79
Other Current Assets. Other current assets include the following items (in
millions):
2001 2000 1999
---------- ---------- ----------
Deferred income taxes $ 16.0 $ 9.3 $ 8.7
Federal income taxes receivable 27.6 -- --
Receivable - Duncan case (Note 11) -- 7.0 --
Receivable - Bogalusa case (Note 11) 19.3 -- --
Prepaid expenses 2.9 1.0 2.5
Other 6.0 8.6 12.7
---------- ---------- ----------
Total $ 71.8 $ 25.9 $ 23.9
========== ========== ==========
Properties. Properties and related accumulated depreciation and amortization are
summarized below (in millions):
2001 2000 1999
---------- ---------- ----------
Properties, at cost
Road properties $ 1,520.4 $ 1,394.8 $ 1,367.9
Equipment 289.2 295.5 279.8
Equipment under capital leases 6.6 6.7 6.7
Other 28.8 32.4 54.5
---------- ---------- ----------
Total 1,845.0 1,729.4 1,708.9
Accumulated depreciation and
amortization 660.2 622.9 578.0
---------- ---------- ----------
Total 1,184.8 1,106.5 1,130.9
Construction in progress 142.6 221.3 146.5
---------- ---------- ----------
Net Properties $ 1,327.4 $ 1,327.8 $ 1,277.4
========== ========== ==========
Accrued Liabilities. Accrued liabilities include the following items (in
millions):
2001 2000 1999
---------- ---------- ----------
Claims reserves $ 30.1 $ 45.7 $ 35.7
Prepaid freight charges due other railroads 21.2 24.5 25.1
Duncan case liability (Note 11) -- 14.2 --
Bogalusa case liability (Note 11) 22.3 -- --
Car hire per diem 12.0 12.1 13.5
Vacation accrual 8.0 8.5 8.0
Other non-income related taxes 4.1 5.3 6.2
Federal income taxes payable -- 3.5 4.8
Interest payable 10.1 7.4 12.5
Other 52.6 38.7 62.7
---------- ---------- ----------
Total $ 160.4 $ 159.9 $ 168.5
========== ========== ==========
Page 80
Note 7. Long-Term Debt
----------------------
Indebtedness Outstanding. Long-term debt and pertinent provisions follow (in
millions):
2001 2000 1999
---------- ---------- ----------
KCSI
Competitive Advance & Revolving Credit
Facilities, Rates: below prime $ -- $ -- $ 250.0
Notes and Debentures, due July
2002 to December 2025 1.6 1.6 400.0
Rates: 6.625% to 8.80%
Unamortized discount -- -- (2.1)
KCSR
Revolving Credit Facility, variable interest rate
4.85%, due January 2006 20.0 -- --
Term Loans, variable interest rates
5.13% to 5.38%, due December 2005
to December 2006 377.5 400.0 --
Senior Notes, 9.5% interest rate, due
October 1, 2008 200.0 200.0 --
Equipment Trust Certificates, 8.56% to 9.68%,
due serially to December 15, 2006 43.5 54.9 64.7
Capital Lease Obligations, 7.15% to 9.00%,
due serially to September 30, 2009 3.0 3.5 3.9
Revolving Credit Facility, variable interest rate
(7.31% at December 31, 1999) -- -- 28.0
Term Loans with State of Illinois, 3% to 5%
due serially to 2009 3.9 4.4 4.9
Other
Industrial Revenue Bond 3.0 4.0 5.0
Mortgate Note 5.1 5.3 5.6
Term Loans with State of Illinois, 3%, due
serially to 2018 0.8 0.9 0.9
---------- ---------- ----------
Total 658.4 674.6 760.9
Less: debt due within one year 46.7 36.2 10.9
---------- ---------- ----------
Long-term debt $ 611.7 $ 638.4 $ 750.0
========== ========== ==========
Debt Refinancing and Re-capitalization of the Company's Debt Structure.
Registration of Senior Unsecured Notes. 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
the United States, consisted of 8-year senior unsecured notes ("Senior Notes").
Net proceeds from this offering of $196.5 million were used to refinance term
debt and reduce commitments under the KCS Credit Facility (as defined below).
The refinanced debt was scheduled to mature on January 11, 2001 (see below).
Costs related to the issuance of the Senior Notes were deferred and are being
amortized over the eight-year term of the Senior Notes. The remaining balance of
these deferred costs was approximately $3.8 million at December 31, 2001. In
connection with this refinancing, the Company reported an extraordinary loss of
$1.1 million (net of income taxes of $0.7 million).
Page 81
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, as amended, effective on March 15, 2001, thereby
providing the opportunity for holders of the initial Senior Notes to exchange
them for registered notes with substantially identical terms. The registration
exchange offer expired on April 16, 2001 and all of the Senior Notes were
exchanged for $200 million of registered notes. These registered notes bear a
fixed annual interest rate of 9.5% and are due on October 1, 2008 and contain
certain covenants typical of this type of debt instrument.
Grupo TFM. 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 Grupo TFM with the ability 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.
Re-capitalization of Debt Structure in anticipation of Spin-off. In preparation
for the 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-existing revolving credit facilities was obtained from two credit
facilities (the "KCS Credit Facility" and the "Stilwell Credit Facility",
or collectively the "Credit Facilities"), each of which was entered into on
January 11, 2000. The Credit Facilities, as described further below,
initially provided for total commitments of $950 million. The Company
reported an extraordinary loss on the extinguishment of the Company's notes
and debentures of approximately $5.9 million (net of income taxes of
approximately $3.2 million).
KCS Credit Facility. The KCS Credit Facility initially provided for total
commitments of $750 million comprised of three separate term loans totaling
$600 million and a revolving credit facility available until January 11,
2006 ("KCS Revolver"). 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. The term
loans were initially comprised of the following: $200 million due January
11, 2001, $150 million due December 30, 2005 and $250 million due December
29, 2006. The $200 million term loan due January 11, 2001 was refinanced
during the third quarter of 2000 as described further above. Additionally,
in accordance with the terms of the KCS Credit Facility, the availability
under the 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. 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. Borrowings under the KCS Credit
Facility are secured by substantially all of KCSI's assets and are
guaranteed by the majority of its subsidiaries.
Interest on the outstanding loans under the KCS Credit Facility accrues at
a rate per annum based on the London Interbank Offered Rate ("LIBOR") or an
alternate base 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 accrues interest at the
selected rate plus an applicable margin. The applicable margin is
determined by the type of loan and the Company's leverage ratio (defined as
the ratio of the Company's total debt to consolidated
Page 82
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 2005 and all loans under the KCS Revolver have an applicable margin of 2.75%
per annum for LIBOR priced loans and 1.75% per annum for alternate base rate
priced loans. The term loan maturing in 2006 currently has an applicable margin
of 3.0% per annum for LIBOR priced loans and 2.0% per annum for alternate base
rate loans.
The KCS Credit Facility also requires the payment to the lenders of a commitment
fee of 0.50% per annum on the average daily, unused amount of each commitment.
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:
.. 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.
.. 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 subsidiaries, including KCSR, to incur additional indebtedness,
and restricts the Company's ability and its subsidiaries' ability to:
.. incur additional liens,
.. enter into sale and leaseback transactions,
.. merge or consolidate with another entity,
.. sell assets,
.. enter into certain transactions with affiliates,
.. enter into agreements that restrict the ability to incur liens or, with
respect to KCSR and the Company's other subsidiaries, pay dividends to the
Company or another subsidiary of the Company,
.. make investments, loans, advances, guarantees or acquisitions,
.. make certain restricted payments, including dividends, or make certain
payments on other indebtedness, or
.. make capital expenditures.
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 default. These covenants,
along with other provisions, could restrict maximum utilization of the facility.
As discussed below, the Company received a waiver from certain of the financial
and coverage covenant provisions contained in the KCS Credit Facility and was
granted an amendment to the credit agreement through March 31, 2002. The Company
was in compliance with the provisions of the KCS Credit Facility, as so amended,
including the financial covenants, as of December 31, 2001.
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. Additionally, $1.4 million in fees were incurred related
to the waiver for credit facility covenants (discussed below). These fees have
also been deferred and are being amortized over the respective term of the
loans. After consideration of current year amortization, the remaining balance
of these deferred costs was approximately $10.4 million at December 31, 2001.
As a result of the debt refinancing transactions discussed above, extraordinary
items of $8.7 million (net of income taxes of $4.0 million) were reported in the
statement of income for the year ended December 31, 2000.
Page 83
Stilwell Credit Facility. On January 11, 2000, KCSI also arranged a new $200
million 364-day senior unsecured competitive Advance/Revolving Credit Facility,
the Stilwell Credit Facility. KCSI borrowed $125 million under this facility and
used the proceeds to retire debt obligations as discussed above. Stilwell
assumed this credit facility, including the $125 million borrowed thereunder,
and upon completion of the Spin-off, KCSI was released from all obligations
thereunder. Stilwell repaid the $125 million in March 2000.
Waiver and Amendments for Credit Facility Covenants. Due to various factors,
including the impact on the operations of the Company of the U.S. economic
recession during 2001, the Company requested and received from lenders a waiver
from certain of the financial and coverage covenant provisions in the KCS Credit
Facility. This waiver was granted on March 19, 2001 and was effective until May
15, 2001. In addition, the Company requested an amendment to the applicable
covenant provisions of the KCS Credit Facility. The amendment, among other
things, revised certain of the covenant provisions (including financial and
coverage provisions) through March 31, 2002 to provide the Company with time to
strengthen its financial position and pursue various financing alternatives. The
lenders approved and executed the amendment to the credit agreement on May 10,
2001. At December 31, 2001, the Company had $397.5 million borrowed under this
facility, comprised of $377.5 million of term debt and $20 million under the KCS
Revolver and was in compliance with the applicable covenant provisions, as
amended. The Company has obtained an additional amendment to the leverage ratio
covenant provision of the KCS Credit Facility for the period April 1, 2002
through June 29, 2002. As a result of certain financial covenants contained in
the credit agreement, maximum utilization of the Company's available line of
credit may be restricted.
The Company presently expects that it will achieve compliance with the financial
and coverage ratios under the KCS Credit Facility, as amended. The Company is
currently evaluating various alternatives for its existing debt under the KCS
Credit Facility and will pursue all measures within its control to ensure that
it will be in compliance with the financial and coverage ratios under the
provisions of the KCS Credit Facility. If, however, the Company is unable to
meet the provisions of its financial and coverage ratios (which would result in
a violation of its covenants), the Company would pursue negotiations with its
lenders to cure any covenant violation, which would likely result in additional
costs including, among others, interest, bank and other fees, which could be
significant.
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 $50.9, $51.6, and $46.3 million for the years 2001, 2000, and 1999,
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 (dollars in millions):
Capital Lease Operating Leases
------------------------------------ ------------------------------------
Minimum Net
Lease Less Present Other Total
Payments Interest Value Debt Debt Affiliates Third Party Total
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
2002 $ 0.7 $ 0.2 $ 0.5 $ 46.2 $ 46.7 $ 34.1 $ 21.1 $ 55.2
2003 0.7 0.1 0.6 49.2 49.8 34.1 19.7 53.8
2004 0.6 0.2 0.4 40.9 41.3 34.1 15.6 49.7
2005 0.5 0.1 0.4 50.0 50.4 28.3 13.7 42.0
2006 0.4 0.1 0.3 264.0 264.3 24.3 6.4 30.7
Later years 0.9 0.1 0.8 205.1 205.9 180.4 54.1 234.5
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 3.8 $ 0.8 $ 3.0 $ 655.4 $ 658.4 $ 335.3 $ 130.6 $ 465.9
========== ========== ========== ========== ========== ========== ========== ==========
KCSR Indebtedness. KCSR has purchased locomotives and rolling stock under
conditional sales agreements, equipment trust certificates and capitalized lease
obligations. The equipment, which has been pledged as collateral for the related
indebtedness, has an original cost of $134.7 million and a net book value of
$78.8 million.
Page 84
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, 2001, the Company
was in compliance with the provisions and restrictions of these agreements.
Because of certain financial covenants contained in the debt agreements,
however, maximum utilization of the Company's available line of credit may be
restricted.
Note 8. Income Taxes
--------------------
Under the liability method of accounting for income taxes specified by Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes," the
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.
Tax Expense. Income tax provision (benefit) attributable to continuing
operations consists of the following components (in millions):
2001 2000 1999
---------- ---------- ----------
Current
Federal $ (26.6) $ (26.7) $ (3.4)
State and local (1.1) (0.2) 0.6
Foreign withholding taxes 0.1 0.2 --
---------- ---------- ----------
Total current (27.6) (26.7) (2.8)
---------- ---------- ----------
Deferred
Federal 29.5 23.4 9.4
State and local 0.9 (0.3) 0.4
---------- ---------- ----------
Total deferred 30.4 23.1 9.8
---------- ---------- ----------
Total income tax provision (benefit) $ 2.8 $ (3.6) $ 7.0
========== ========== ==========
The federal and state deferred tax liabilities (assets) attributable to
continuing operations at December 31 are as follows (in millions):
2001 2000 1999
---------- ---------- ----------
Liabilities:
Depreciation $ 380.7 $ 351.0 $ 333.3
Other, net 10.0 6.3 (1.4)
---------- ---------- ----------
Gross deferred tax liabilities 390.7 357.3 331.9
---------- ---------- ----------
Assets:
NOL and AMT credit carryovers (3.4) (8.8) (2.3)
Book reserves not currently deductible
for tax (30.0) (22.3) (33.2)
Vacation accrual (3.1) (2.5) (2.9)
Other, net -- (0.8) (4.8)
---------- ---------- ----------
Gross deferred tax assets (36.5) (34.4) (43.2)
---------- ---------- ----------
Net deferred tax liability $ 354.2 $ 322.9 $ 288.7
========== ========== ==========
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.
Page 85
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):
2001 2000 1999
------- ------- -------
Income tax provision using the
statutory rate in effect $ 11.9 $ 7.6 $ 5.6
Tax effect of:
Earnings of equity investees (9.4) (7.2) (0.7)
Other, net 0.4 (3.7) 1.1
------- ------- -------
Federal income tax provision (benefit) 2.9 (3.3) 6.0
State and local income tax provision (0.2) (0.5) 1.0
Foreign withholding taxes 0.1 0.2 --
------- ------- -------
Total $ 2.8 $ (3.6) $ 7.0
======= ======= =======
Effective tax rate 8.3% (16.5)% 40.7%
======= ======= =======
Temporary Difference Attributable to Grupo TFM Investment. At December 31, 2001,
the Company's book basis exceeded the tax basis of its investment in Grupo TFM
by $33.6 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, as of December 31, 2001 the Company would
incur gross federal income taxes of $11.8 million, which might be partially or
fully offset by Mexican income taxes and could be available to reduce federal
income taxes at such time.
Tax Carryovers. At December 31, 2000, the Company had $3.4 million of
alternative minimum tax credit carryover generated by MidSouth prior to
acquisition by the Company. This was fully utilized on the 2000 tax return filed
in 2001. The amount of federal NOL carryover generated by MidSouth and Gateway
Western prior to acquisition was $67.8 million. The Company utilized
approximately $1.5 million of these NOL's in 2000. $57.6 million of the NOL
carryover was utilized in pre-1998 years leaving approximately $8.7 million of
carryover available at December 31, 2001, with expiration dates beginning in the
year 2008. The use of preacquisition net operating losses and tax credit
carryovers is subject to limitations imposed by the Internal Revenue Code. The
Company does not anticipate that these limitations will affect utilization of
the carryovers prior to their expiration.
Tax Examinations. 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 1993, the statute of limitations has closed. In addition, other
taxing authorities are currently examining the years 1994 through 1999 and have
proposed additional tax assessments for which the Company believes it has
recorded adequate reserves. Since most of these asserted tax deficiencies
represent temporary differences, subsequent payments of taxes will not require
additional charges to income tax expense. In addition, accruals have been made
for interest (net of tax benefit) for estimated settlement of the proposed tax
assessments. Thus, management believes that final settlement of these matters
will not have a material adverse effect on the Company's consolidated results of
operations or financial condition.
Note 9. Stockholders' Equity
----------------------------
Reverse Stock Split. All periods presented in the accompanying consolidated
financial statements reflect the one-for-two reverse stock split completed on
July 12, 2000 in conjunction with the Spin-off. See Note 3.
Pro Forma Fair Value Information for Stock-Based Compensation Plans. Under SFAS
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, 1994.) If KCSI had measured compensation cost for the KCSI stock
options granted to its employees and shares subscribed by its employees
Page 86
under the KCSI employee stock purchase plan, under the fair value based method
prescribed by SFAS 123, net income and earnings per share would have been as
follows:
2001 2000 1999
------- -------- --------
Net income (loss) (in millions):
As reported $ 30.7 $ 380.5 $ 323.3
Pro forma 26.7 375.8 318.0
Earnings (loss) per Basic share:
As reported $ 0.52 $ 6.71 $ 5.86
Pro forma 0.45 6.63 5.76
Earnings (loss) per Diluted share:
As reported $ 0.50 $ 6.42 $ 5.57
Pro forma 0.43 6.37 5.48
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 February 27, 2001). The Plan provides for the granting of
options to purchase up to 16.0 million shares of the Company's common stock by
officers and other designated employees. Options 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 Plan includes 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:
2001 2000 1999
-------------- -------------- --------------
Dividend Yield 0% 0% .25% to .36%
Expected Volatility 35% to 40% 34% to 50% 42% to 43%
Risk-free Interest Rate 2.98% to 4.84% 5.92% to 6.24% 4.67% to 5.75%
Expected Life 3 years 3 years 3 years
Effect of Spin-off on Existing Stock Options. FASB Interpretation No. 44,
"Accounting for Certain Transactions involving Stock Compensation" ("FIN 44")
addresses 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. The changes
made to the Company's fixed stock option grants as a result of the Spin-off in
2000 resulted in the option holder having the same economic position both
immediately before and immediately after the Spin-off. In accordance with the
provisions of FIN 44, the Company, therefore, did not record additional
compensation expense in 2000.
Page 87
Summary of Company's Stock Option Plans. A summary of the status of the
Company's stock option plans as of December 31, 2001, 2000 and 1999, 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 granted have been restated to reflect the reverse stock split on July
12, 2000. 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.
2001 7/13/2000-12/31/2000
----------------------- -----------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
--------- ---------- --------- ----------
Outstanding at beginning of period 6,862,036 $ 4.92 4,165,692 $ 1.26
Exercised (1,128,838) 3.71 (2,469,667) 0.76
Canceled/Expired (105,537) 4.79 (388,686) 4.82
Granted 193,654 13.37 5,554,697 5.81
--------- ---------
Outstanding at end of period 5,821,315 $ 5.44 6,862,036 $ 4.92
--------- ---------
Exercisable at December 31 4,803,942 $ 5.13 1,355,464 $ 1.41
Weighted-Average fair value of
options granted during the period $ 4.18 $ 1.54
1/1/2000 - 7/12/2000 1999
----------------------- ----------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
--------- ------- --------- ---------
Outstanding at January 1 4,280,581 $ 33.94 4,713,971 $ 30.70
Exercised (394,803) 47.14 (636,482) 31.82
Canceled/Expired (1,800) 89.13 (42,266) 85.78
Granted 281,714 142.08 245,358 99.46
--------- ---------
Outstanding at end of period 4,165,692 39.98 4,280,581 33.94
--------- ---------
Exercisable at December 31 3,834,393 $ 27.06
Weighted-Average fair value of
options granted during the year $ 49.88 $ 33.28
The following table summarizes information about stock options outstanding at
December 31, 2001:
OUTSTANDING EXERCISABLE
------------------------------------------- ----------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Shares Remaining Exercise Shares Exercise
Price Outstanding Contractual Life Price Exercisable Prices
---------- ----------- ---------------- -------- ----------- --------
$.20 - 1 397,614 3.1 years $ 0.84 397,614 $ 0.84
1 - 2 224,593 5.2 1.33 224,593 1.33
2 - 4 201,974 6.9 2.81 164,974 2.77
4 - 7 4,709,109 8.5 5.76 3,899,261 5.75
7 - 10 105,668 8.7 8.36 90,059 8.29
10 - 13 85,000 9.5 12.62 -- --
13 - 17 97,357 9.4 14.38 27,441 14.34
----------- ----------
..20 - 17 5,821,315 8.0 $ 5.44 4,803,942 $ 5.13
=========== ==========
At December 31, 2001, shares available for future grants under the stock option
plan were 2,035,011.
Page 88
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 11.4 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, 2001, there were approximately 4.6 million shares
available for future offerings.
The following table summarizes activity related to the various ESPP offerings:
Date Shares Shares Date
Initiated Subscribed Price Issued Issued
--------- ---------- ---------- ------- ----------
Thirteenth Offering 2001 402,902 $ 10.57 -- 2003
Twelfth Offering 2000 705,797 $ 7.31 615,335 2001/2002
Eleventh Offering 1998 106,913 $ 71.94 94,149 1999/2000
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 for the Thirteenth, Twelfth and Eleventh
Offerings, respectively: i) dividend yield of 0.00%, 0.00% and 0.95%; ii)
expected volatility of 38%, 38% and 42%; iii) risk-free interest rate of 2.98%,
5.77% and 4.63%; and iv) expected life of one year. The weighted-average fair
value of purchase rights granted under the Thirteenth, Twelfth and Eleventh
Offerings of the ESPP were $3.00, $2.19 and $21.52, respectively. There were no
offerings in 1999.
Restricted Share and Option Program. In connection with the Spin-off, KCSI
adopted a restricted share and option program (the "Option 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
were not employees (the "Outside Directors") became eligible to purchase a
specified number of KCSI restricted shares and were 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 vested and became
exercisable in equal installments as KCSI's stock price achieved certain
thresholds and after one year following the grant date. All performance
thresholds were met for these performance stock options and all became
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 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 Option
Program. Each eligible employee and Outside Director was allowed to purchase the
restricted shares offered under the Option Program on one date out of a
selection of dates offered. With respect to management employees, the number of
shares available for 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
Option 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 Option Program and 18,000 KCSI
stock options were granted in connection with the purchase of those shares.
Page 89
Treasury Stock. Shares of common stock in Treasury at December 31, 2001 totaled
14,125,949 compared with 15,221,844 at December 31, 2000 and 18,082,201 at
December 31, 1999. The Company issued shares of common stock from Treasury -
1,095,895 in 2001, 2,375,760 in 2000 and 609,462 in 1999 - 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 Restricted Share and Option Program (see above). Treasury stock
previously acquired had been accounted for as if retired. The Company
repurchased 230,000 in 1999. Shares repurchased during 2001 and 2000 were not
material.
Note 10. Profit Sharing and Other Postretirement Benefits
---------------------------------------------------------
The Company maintains various plans for the benefit of its employees as
described below. During 2001, there were no accruals recorded for contributions
into the Profit Sharing or Employee Stock Ownership Plan for the plan year ended
December 31, 2001. The Company expensed approximately $0.9 million with respect
to the 401(k) plan in 2001. The Company's employee benefit expense for these
plans aggregated $2.3 and $4.2 million in 2000 and 1999, 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 401(k) and Profit Sharing Plan. This allows employees
to direct their profit sharing accounts into selected investments. There were no
profit sharing contributions made during 2001.
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 401(k) and Profit Sharing 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 of wages earned by eligible employees. Contributions and
percentages are determined by the Compensation Committee of the Board of
Directors. There were no contributions to the ESOP plan during 2001.
Other Postretirement Benefits. The Company and several of its subsidiaries
provide certain medical, life and other postretirement benefits other than
pensions to its retirees. 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.
The following assumptions were used to determine postretirement
obligations/costs for the years ended December 31:
2001 2000 1999
---- ---- ----
Annual increase in the CPI 2.00% 3.00% 3.00%
Expected rate of return on life
insurance plan assets 6.50 6.50 6.50
Discount rate 7.00 7.50 8.00
Salary increase 3.00 3.00 4.00
Page 90
A reconciliation of the accumulated postretirement benefit obligation, change in
plan assets and funded status, respectively, at December 31 follows (in
millions):
2001 2000 1999
------- ------- -------
Accumulated postretirement
benefit obligation at beginning of year $ 13.1 $ 14.6 $ 13.2
Service cost 0.2 0.3 0.4
Interest cost 0.8 1.1 0.9
Plan terminations/amendments (3.4) -- --
Actuarial and other (gain) loss (0.6) (1.8) 1.2
Benefits paid (i) (1.0) (1.1) (1.1)
------- ------- -------
Accumulated postretirement
benefit obligation at end of year 9.1 13.1 14.6
------- ------- -------
Fair value of plan assets
at beginning of year 1.2 1.3 1.4
Actual return on plan assets -- 0.1 0.1
Benefits paid (i) (0.2) (0.2) (0.2)
------- ------- -------
Fair value of plan assets
at end of year 1.0 1.2 1.3
------- ------- -------
Funded status and accrued
benefit cost $ (8.1) $ (11.9) $ (13.3)
======= ======= =======
(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):
2001 2000 1999
------- ------- -------
Service cost $ 0.2 $ 0.3 $ 0.4
Interest cost 0.8 1.1 0.9
Expected return on plan assets (0.1) (0.1) (0.1)
------- ------- -------
Net periodic postretirement
benefit cost $ 0.9 $ 1.3 $ 1.2
======= ======= =======
The Company's health care costs, excluding former Gateway Western employees 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.
During 2001, the Company reduced its liability and recorded a reduction of
operating expenses by approximately $2.0 million in connection with the transfer
of union employees formerly covered by the Gateway Western plan to a
multi-employer sponsored union plan, which effectively eliminated the Company's
postretirement liability for this group of employees. This reduced the number of
former Gateway Western employees or retirees covered under Gateway Western's
benefit plan. The Gateway Western benefit plans are slightly different from
those of the Company and other subsidiaries. Gateway Western provides
contributory health, dental and life insurance benefits to these remaining
employees and retirees. In 2001, the assumed annual rate of increase in health
care costs for Gateway Western employees and retirees under this plan was 10%,
decreasing over six years to 5.5% in 2008 and thereafter. An increase or
decrease in the assumed health care cost trend rates by one percent in 2001,
2000 and 1999 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.
Page 91
During 2001 a post-retirement benefit for directors was eliminated, resulting in
a reduction of the related liability of approximately $1.4 million. This plan
termination, as well as the transfer of Gateway Western union employees to a
multi-employer sponsored union plan are reflected in the reconciliation above as
plan terminations/amendments.
Under collective bargaining agreements, KCSR participates in a multi-employer
benefit plan, which provides certain post-retirement health care and life
insurance benefits to eligible union employees and certain retirees. Premiums
under this plan are expensed as incurred and were $0.8, $0.5 and $0.4 million
for 2001, 2000 and 1999, respectively.
Note 11. Commitments and Contingencies
--------------------------------------
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
management's opinion that the Company's litigation reserves are adequate.
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 Bogalusa and the surrounding area allegedly causing
evacuations and injuries. Approximately 25,000 residents of Louisiana and
Mississippi (plaintiffs) have asserted claims to recover damages allegedly
caused by exposure to the released chemicals.
On October 29, 2001, KCSR and representatives for its excess insurance carriers
negotiated a settlement in principle with the Louisiana and Mississippi
plaintiffs for $22.3 million. The settlement is subject to the execution of a
Master Global Settlement Agreement ("MGSA") and releases by the parties. In
Louisiana, the Court will evaluate the MGSA at a fairness hearing and decide
whether the proposed settlement is fair for the class of plaintiffs. In
Mississippi, the plaintiffs are expected to individually execute release
instruments. Management expects that these events could occur by the end of the
third quarter of 2002.
At December 31, 2001, the Company had recorded a liability in its consolidated
financial statements of $22.3 million and an insurance receivable of $19.3
million related to the Bogalusa cases.
Duncan Case Settlement
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. 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. On November 3, 1999, the Third Circuit Court of Appeals in
Louisiana affirmed the judgment. Subsequently, KCSR 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). This
judgment was 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 92
KCSR had previously recorded a liability of approximately $3.0 million for this
case. Based on the Supreme Court of Louisiana's decision, as of December 31,
2000, management recorded an additional liability of $11.2 million and also
recorded 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. The final installment on the $7.0 million receivable from the
insurance company was received by KCSR in June 2001.
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 as
defendants. This lawsuit sought a declaration that the Company's Spin-off was a
defacto liquidation of KCSI, alleged violation of directors' fiduciary duties to
the preferred shareholders and also sought a declaration that the preferred
shareholders were 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. On November 19, 2001, the New York State Supreme
Court granted the Company's motion in its entirety and dismissed this lawsuit.
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 June 28, 2001, KCSR reached a
final settlement with the 1,664 plaintiffs in the lawsuit filed in Jefferson
County, Texas. KCSR continues to vigorously defend the lawsuit filed in Harris
County, Texas and management believes the Company's probability of liability for
damages in this case to be remote.
Diesel Fuel Commitments and Hedging Activities. 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 top priority of management. As
a result, from time to time, the Company will enter into transactions 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.
Forward purchase commitments are used to secure fuel 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. Commodity swap or cap transactions are accounted for as hedges under
SFAS 133 and 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.
Positions are monitored to ensure that they will not exceed actual fuel
requirements in any period.
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 fuel costs were reduced by approximately $0.6
million as a result of these purchase commitments while the fuel swap
transactions resulted in higher fuel expense of approximately $1 million. 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. 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 fuel expense. At December 31, 1999, the Company did not have any
outstanding purchase commitments for 2000. At December 31, 2000, KCSR had
purchase commitments for approximately 12.6% of budgeted gallons of fuel for
2001, which resulted in higher fuel expense of approximately $0.4 million in
2001. There were no fuel swap or cap transactions outstanding at December 31,
2000. At December 31, 2001, KCSR had purchase commitments for approximately 39%
of its budgeted gallons of fuel for 2002. On January 14, 2002, KCSR entered into
an additional fuel purchase commitment. As a result, KCSR currently has purchase
commitments for approximately 49% of its budgeted gallons of fuel for 2002 at an
average price per gallon of $0.66. There are currently no diesel fuel cap or
swap transactions outstanding.
Page 93
In accordance with the provision of the KCS Credit Facility requiring the
Company to manage its interest rate risk through hedging activity, at December
31, 2001 the Company had five separate interest rate cap agreements for an
aggregate notional amount of $200 million. Three of these interest rate cap
agreements expired on February 10, 2002 while the remaining two expired on March
10, 2002. The interest rate caps were linked to LIBOR. $100 million of the
aggregate notional amount provided a cap on the Company's interest rate of 7.25%
plus the applicable spread, while $100 million limited the interest rate to 7%
plus the applicable spread. Counterparties to the interest rate cap agreements
were major financial institutions who also participate in the KCS Credit
Facility. As of December 31, 2001, the Company did not have any other interest
rate cap agreements or interest rate hedging instruments. See Note 2.
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. 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. In April 1997, the Company recorded a gain in
connection with these contracts and such gain was deferred and has been
accounted for as a component of the Company's investment in Grupo TFM.
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 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 U.S. GAAP
and Grupo TFM reports under International Accounting Standards, fluctuations in
deferred income tax calculations occur based on translation requirements and
differences in accounting standards. The deferred income tax calculations are
significantly impacted by fluctuations in the relative value of the Mexican peso
versus the U.S. dollar and the rate of Mexican inflation, and can result in
significant variability 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, 2001, 2000 and 1999, the Company had no outstanding foreign currency hedging
instruments.
Environmental Liabilities. The Company's operations are subject to extensive
federal, state and local environmental laws and regulations. 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 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.
The risk of incurring environmental liability is inherent
Page 94
in the railroad industry. As part of serving the petroleum and chemicals
industry, KCSR transports hazardous materials and has a professional team
available to respond and handle environmental issues that might occur in the
transport of such materials. Additionally, the Company is a Responsible Care(R)
partner and has initiated practices under this environmental program. KCSR
performs ongoing reviews and evaluations of the various environmental programs
and issues within the Company's operations, and, as necessary, takes actions to
limit the Company's exposure to potential liability.
The Company owns property that is, or has been, used for industrial purposes.
Use of these properties may subject the Company to potentially material
liabilities relating to the investigation and cleanup of contaminants, claims
alleging personal injury, or property damage as the result of exposures to, or
release of, hazardous substances. Although the Company is responsible for
investigating and remediating contamination at several locations, 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 additional contamination, or becomes subject to related personal or
property damage claims, the Company could incur material costs in connection
with these sites.
The Company records liabilities for remediation and restoration costs related to
past activities when the Company's obligation is probable and the costs can be
reasonably estimated. Costs of ongoing compliance activities to current
operations are expensed as incurred. The Company's recorded liabilities for
these issues represent its best estimates (on an undiscounted basis) of
remediation and restoration costs that may be required to comply with present
laws and regulations. At December 31, 2001, 2000 and 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 or financial condition.
Panama Canal Railway Company. Under certain limited conditions, the Company is a
guarantor for up to $7.5 million of cash deficiencies associated with project
completion and operations of PCRC. In addition, the Company is a guarantor for
up to $2.4 million of notes for the purchase of rail and passenger cars.
Further, 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. See Note 5.
Note 12. Control
----------------
Subsidiaries and Affiliates. The Company is party to certain agreements with
Grupo TMM covering the Grupo TFM and Mexrail ventures, which contain "change of
control" provisions, provisions intended to preserve the Company's and Grupo
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, 2001 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.
Page 95
Debt. Certain loan agreements and debt instruments entered into or guaranteed by
the Company and its subsidiaries provide for default in the event of a specified
change in control of the Company or particular subsidiaries of the Company.
Stockholder Rights Plan. On September 19, 1995, the Board of Directors of the
Company declared a dividend distribution of one Right for each outstanding share
of the Company's common stock, $.01 par value per share (the "Common stock"), to
the stockholders of record on October 12, 1995. Each Right entitles the
registered holder to purchase from the Company 1/1,000th of a share of Series A
Preferred Stock (the "Preferred Stock") or in some circumstances, Common stock,
other securities, cash or other assets as the case may be, at a price of $210
per share, subject to adjustment.
The Rights, which are automatically attached to the Common stock, are not
exercisable or transferable apart from the Common stock until the tenth calendar
day following the earlier to occur of (unless extended by the Board of Directors
and subject to the earlier redemption or expiration of the Rights): (i) the date
of a public announcement that an acquiring person acquired, or obtained the
right to acquire, beneficial ownership of 20 percent or more of the outstanding
shares of the Common stock of the Company (or 15 percent in the case that such
person is considered an "adverse person"), or (ii) the commencement or
announcement of an intention to make a tender offer or exchange offer that would
result in an acquiring person beneficially owning 20 percent or more of such
outstanding shares of Common stock of the Company (or 15 percent in the case
that such person is considered an "adverse person"). Until exercised, the Rights
will have no rights as a stockholder of the Company, including, without
limitation, the right to vote or to receive dividends. In connection with
certain business combinations resulting in the acquisition of the Company or
dispositions of more than 50% of Company assets or earnings power, each Right
shall thereafter have the right to receive, upon the exercise thereof at the
then current exercise price of the Right, that number of shares of the highest
priority voting securities of the acquiring company (or certain of its
affiliates) that at the time of such transaction would have a market value of
two times the exercise price of the Right. The Rights expire on October 12,
2005, unless earlier redeemed by the Company as described below.
At any time prior to the tenth calendar day after the first date after the
public announcement that an acquiring person has acquired beneficial ownership
of 20 percent (or 15 percent in some instances) or more of the outstanding
shares of the Common stock of the Company, the Company may redeem the Rights in
whole, but not in part, at a price of $0.005 per Right. In addition, the
Company's right of redemption may be reinstated following an inadvertent trigger
of the Rights (as determined by the Board) if an acquiring person reduces its
beneficial ownership to 10 percent or less of the outstanding shares of Common
stock of the Company in a transaction or series of transactions not involving
the Company.
The Series A Preferred shares purchasable upon exercise of the Rights will have
a cumulative quarterly dividend rate set by the Board of Directors or equal to
1,000 times the dividend declared on the Common stock for such quarter. Each
share will have the voting rights of one vote on all matters voted at a meeting
of the stockholders for each 1/1,000th share of preferred stock held by such
stockholder. In the event of any merger, consolidation or other transaction in
which the common shares are exchanged, each Series A Preferred share will be
entitled to receive an amount equal to 1,000 times the amount to be received per
common share. In the event of a liquidation, the holders of Series A Preferred
shares will be entitled to receive $1,000 per share or an amount per share equal
to 1,000 times the aggregate amount to be distributed per share to holders of
Common stock. The shares will not be redeemable. The vote of holders of a
majority of the Series A Preferred shares, voting together as a class, will be
required for any amendment to the Company's Certificate of Incorporation that
would materially and adversely alter or change the powers, preferences or
special rights of such shares.
Page 96
Note 13. Quarterly Financial Data (Unaudited)
---------------------------------------------
(in millions, except per share amounts):
Reverse Stock Split. The quarterly Per Share Data presented for 2000 herein
reflects the reverse stock split paid in July 2000 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 97
2001
----------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues $ 145.5 $ 144.6 $ 143.2 $ 144.0
Costs and expenses 110.7 113.9 115.8 123.5
Depreciation and amortization 14.4 14.7 14.5 14.4
------- -------- -------- --------
Operating income 20.4 16.0 12.9 6.1
Equity in net earnings (losses)
of unconsolidated affiliates:
Grupo TFM 5.0 7.5 4.9 11.1
Other (1.2) (0.6) 0.3 0.1
Interest expense (9.9) (13.2) (14.5) (15.2)
Other, net 1.2 0.9 1.1 1.0
------- -------- -------- --------
Income from continuing operations
before income taxes 15.5 10.6 4.7 3.1
Income taxes provision (benefit) 4.4 1.6 -- (3.2)
------- -------- -------- --------
Income from continuing operations 11.1 9.0 4.7 6.3
Cumulative effect of accounting change,
net of income taxes -- -- -- (0.4)
------- -------- -------- --------
Net income $ 11.1 $ 9.0 $ 4.7 $ 5.9
======= ======== ======== ========
Per Share Data (i)
Basic Earnings per Common share
Continuing operations $ 0.19 $ 0.15 $ 0.08 $ 0.11
Cumulative effect of accounting change, net
of income taxes -- -- -- (0.01)
------- -------- -------- --------
Total Basic Earnings per Common share $ 0.19 $ 0.15 $ 0.08 $ 0.10
======= ======== ======== ========
Diluted Earnings per Common share
Continuing operations $ 0.18 $ 0.15 $ 0.08 $ 0.10
Cumulative effect of accounting change, net
of income taxes -- -- -- (0.00)
------- -------- -------- --------
Total Diluted Earnings per Common share $ 0.18 $ 0.15 $ 0.08 $ 0.10
======= ======== ======== ========
Dividends per share:
Preferred $ 0.25 $ 0.25 $ 0.25 $ 0.25
Common $ -- $ -- $ -- $ --
Stock Price Ranges:
Preferred - High $ 19.00 $ 21.00 $ 21.00 $ 20.95
- Low $ 16.50 $ 17.95 $ 20.63 $ 20.00
Common - High $ 15.40 $ 16.10 $ 16.75 $ 15.50
- Low $ 10.92 $ 10.25 $ 12.10 $ 9.00
(i) The accumulation of 2001's four quarters for Diluted earnings per share data
does not total the respective earnings per share for the year ended December 31,
2001 due to rounding.
Page 98
2000
------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- -------- --------
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 (loss) 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 99
Note 14. Condensed 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 KCSR, however, they are
also jointly and severally and fully and unconditionally guaranteed on an
unsecured senior basis by KCSI and certain of its subsidiaries (all of which are
wholly-owned). KCSI 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 not intended to present the financial
position, results of operations and cash flows of the individual companies or
groups of companies in accordance with generally accepted accounting principles.
Certain prior year information has been reclassified to reflect the merger of
Gateway Western with KCSR in 2001.
Condensed Consolidating Statements of Income
December 31, 2001 (dollars in millions)
---------------------------------------------------------------------------------
Non-
----
Subsidiary Guarantor Guarantor Consolidating Consolidated
---------- --------- --------- ------------- ------------
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
---------- ---------- ---------- ---------- ---------- ---------
Revenues $ -- $ 565.6 $ 21.1 $ 20.1 $ (29.5) $ 577.3
Costs and expenses 13.6 500.9 17.7 19.2 (29.5) 521.9
---------- ---------- ---------- ---------- ---------- ---------
Operating income (loss) (13.6) 64.7 3.4 0.9 -- 55.4
Equity in net earnings (losses)of
unconsolidated affiliates and
subsidiaries 39.2 29.6 (0.1) 29.4 (71.0) 27.1
Interest expense 1.3 (55.1) (0.6) (0.4) 2.0 (52.8)
Other, net 0.3 5.9 -- -- (2.0) 4.2
---------- ---------- ---------- ---------- ---------- ---------
Income (loss) before income taxes
and cumulative effect of accounting
change 27.2 45.1 2.7 29.9 (71.0) 33.9
Income tax provision (benefit) (4.0) 5.2 1.0 0.6 -- 2.8
---------- ---------- ---------- ---------- ---------- ---------
Income (loss) before cumulative
effect of accounting change 31.2 39.9 1.7 29.3 (71.0) 31.1
Cumulative effect of accounting
change (0.4) (0.4) -- -- 0.4 (0.4)
---------- ---------- ---------- ---------- ---------- ---------
Net income (loss) $ 30.8 $ 39.5 $ 1.7 $ 29.3 $ (70.6) $ 30.7
========== ========== ========== ========== ========== =========
December 31, 2000 (dollars in millions)
--------------------------------------------------------------------------------
Non-
----
Subsidiary Guarantor Guarantor Consolidating Consolidated
---------- --------- --------- --------------------------
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
-------- ---------- ------------ ------------ ---------- ----------
Revenues $ -- $ 562.4 $ 21.1 $ 11.0 $ (22.3) $ 572.2
Costs and expenses 10.0 498.3 17.8 10.6 (22.3) 514.4
-------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) (10.0) 64.1 3.3 0.4 -- 57.8
Equity in net earnings (losses) of
unconsolidated affiliates and
subsidiaries 31.3 22.0 -- 22.9 (52.4) 23.8
Interest expense (2.6) (68.6) (0.7) (1.1) 7.2 (65.8)
Other, net 4.0 9.0 0.2 -- (7.2) 6.0
-------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations before income taxes 22.7 26.5 2.8 22.2 (52.4) 21.8
Income tax provision (benefit) (2.7) (2.8) 0.6 1.3 -- (3.6)
-------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations 25.4 29.3 2.2 20.9 (52.4) 25.4
Income (loss) from discontinued
operations 363.8 -- -- 363.8 (363.8) 363.8
-------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item 389.2 29.3 2.2 384.7 (416.2) 389.2
Extraordinary items, net of income taxes (8.7) (1.1) -- (1.7) 2.8 (8.7)
-------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $ 380.5 $ 28.2 $ 2.2 $ 383.0 $ (413.4) $ 380.5
======== ========== ========== ========== ========== ==========
Page 100
December 31, 1999 (dollars in millions)
--------------------------------------------------------------------------------
Non-
----
Subsidiary Guarantor Guarantor Consolidating Consolidated
---------- --------- --------- ------------- ------------
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
-------- ---------- ---------- ---------- ---------- ----------
Revenues $ -- $ 585.2 $ 32.9 $ 10.3 $ (27.0) $ 601.4
Costs and expenses 12.7 511.9 29.1 10.6 (27.0) 537.3
-------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) (12.7) 73.3 3.8 (0.3) -- 64.1
Equity in net earnings (losses) of
unconsolidated affiliates and
subsidiaries 18.0 (5.0) 0.2 2.0 (10.0) 5.2
Interest expense (48.7) (37.3) (0.8) (19.3) 48.7 (57.4)
Other, net 49.8 4.0 0.1 0.1 (48.7) 5.3
-------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations before income taxes 6.4 35.0 3.3 (17.5) (10.0) 17.2
Income tax provision (benefit) (3.8) 16.4 1.0 (6.6) -- 7.0
-------- ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing
operations 10.2 18.6 2.3 (10.9) (10.0) 10.2
Income (loss) from discontinued
operations 313.1 -- -- 313.1 (313.1) 313.1
-------- ---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item 323.3 18.6 2.3 302.2 (323.1) 323.3
Extraordinary items, net of income taxes -- -- -- -- -- --
-------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $ 323.3 $ 18.6 $ 2.3 $ 302.2 $ (323.1) $ 323.3
======== ========== ========== ========== ========== ==========
Condensed Consolidating Balance Sheets
December 31, 2001 (dollars in millions)
---------------------------------------------------------------------------
Non-
----
Subsidiary Guarantor Guarantor Consolidating Consolidated
---------- --------- --------- ------------- ------------
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
-------- ---------- ---------- ---------- ---------- ----------
ASSETS:
Current assets $ 25.5 $ 223.4 $ 22.0 $ 6.6 $ (23.1) $ 254.4
Investments held for
operating purposes and
investments in subsidiaries 701.4 413.6 -- 376.4 (1,104.6) 386.8
Properties, net 0.3 1,287.1 38.2 1.8 -- 1,327.4
Intangibles and other assets 1.7 40.4 1.7 0.1 (1.6) 42.3
-------- ---------- ---------- ---------- ---------- ----------
Total assets $ 728.9 $ 1,964.5 $ 61.9 $ 384.9 $ (1,129.3) $ 2,010.9
======== ========== ========== ========== ========== ==========
LIABILITIES AND EQUITY:
Current liabilities $ 7.2 $ 252.3 $ 6.9 $ 14.2 $ (23.1) $ 257.5
Long-term debt 1.3 602.9 2.8 4.7 -- 611.7
Payable to affiliates 4.8 -- 0.6 -- (5.4) --
Deferred income taxes 9.5 350.9 5.2 6.2 (1.6) 370.2
Other liabilities 25.8 62.0 3.4 -- -- 91.2
Stockholders equity 680.3 696.4 43.0 359.8 (1,099.2) 680.3
-------- ---------- ---------- ---------- ---------- ----------
Total liabilities and equity $ 728.9 $ 1,964.5 $ 61.9 $ 384.9 $ (1,129.3) $ 2,010.9
======== ========== ========== ========== ========== ==========
Page 101
December 31, 2000 (dollars in millions)
---------------------------------------------------------------------------
Non-
----
Subsidiary Guarantor Guarantor Consolidating Consolidated
---------- --------- --------- ------------- ------------
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
-------- ---------- ------------ ------------ ----------- ----------
ASSETS:
Current assets $ 16.9 $ 199.7 $ 14.6 $ 10.1 $ (24.9) $ 216.4
Investments held for
operating purposes and
investments in subsidiaries 666.3 392.2 0.6 343.8 (1,044.7) 358.2
Properties, net 0.3 1,282.7 42.6 2.2 -- 1,327.8
Intangibles and other assets 0.2 41.2 2.3 0.3 (1.9) 42.1
-------- ---------- ---------- ---------- ---------- ----------
Total assets $ 683.7 $ 1,915.8 $ 60.1 $ 356.4 $ (1,071.5) $ 1,944.5
======== ========== ========== ========== ========== ==========
LIABILITIES AND EQUITY:
Current liabilities $ 21.8 $ 237.5 $ 7.2 $ 7.8 $ (25.3) $ 249.0
Long-term debt 1.6 627.9 3.8 5.1 -- 638.4
Payable to affiliates 3.4 -- -- -- (3.4) --
Deferred income taxes 7.2 318.2 4.8 3.9 (1.9) 332.2
Other liabilities 6.3 72.7 2.5 -- -- 81.5
Stockholders equity 643.4 659.5 41.8 339.6 (1,040.9) 643.4
-------- ---------- ---------- ---------- ---------- ----------
Total liabilities and equity $ 683.7 $ 1,915.8 $ 60.1 $ 356.4 $ (1,071.5) $ 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 $ 190.7 $ 10.8 $ 19.4 $ (22.3) $ 208.5
Investments held for
operating purposes and
investments in subsidiaries 1,148.0 41.5 0.6 290.4 (1,143.4) 337.1
Properties, net 0.4 1,231.0 43.4 2.6 -- 1,277.4
Intangibles and other assets 8.0 26.6 2.3 0.2 (2.7) 34.4
Net assets of discontinued
operations 814.6 -- -- 814.6 (814.6) 814.6
-------- ---------- ---------- ---------- ---------- ----------
Total assets $1,980.9 $ 1,489.8 $ 57.1 $ 1,127.2 $ (1,983.0) $ 2,672.0
======== ========== ========== ========== ========== ==========
LIABILITIES AND EQUITY:
Current liabilities $ 34.7 $ 225.1 $ 4.1 $ 11.7 $ (21.4) $ 254.2
Long-term debt 647.8 90.9 6.0 5.3 -- 750.0
Payable to affiliates 3.9 398.9 1.5 335.7 (740.0) --
Deferred income taxes 4.9 288.4 5.1 1.6 (2.6) 297.4
Other liabilities 6.5 78.6 2.2 -- -- 87.3
Stockholders equity 1,283.1 407.9 38.2 772.9 (1,219.0) 1,283.1
-------- ---------- ---------- ---------- ---------- ----------
Total liabilities and equity $1,980.9 $ 1,489.8 $ 57.1 $ 1,127.2 $ (1,983.0) $ 2,672.0
======== ========== ========== ========== ========== ==========
Page 102
Condensed Consolidating Statements of Cash Flows
December 31, 2001 (dollars in millions)
------------------------------------------------------------------------------
Non-
----
Subsidiary Guarantor Guarantor Consolidating Consolidated
---------- --------- --------- ------------- ------------
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
-------- ---------- ------------ ------------ ----------- ------------
Net cash flows provided by (used for)
Operating activities: $ (10.0) $ 82.0 $ (2.7) $ 7.1 $ (0.3) $ 76.1
-------- ---------- ---------- ---------- ---------- ----------
Investing activities:
Property acquisitions -- (64.5) (1.4) (0.1) -- (66.0)
Investments in and loans to
affiliates -- (2.5) (0.1) (9.0) 3.4 (8.2)
Repayment of loans to
affiliates -- -- -- -- -- --
Other, net -- 13.7 4.1 -- 0.7 18.5
-------- ---------- ---------- ---------- ---------- ----------
Net -- (53.3) 2.6 (9.1) 4.1 (55.7)
-------- ---------- ---------- ---------- ---------- ----------
Financing activities:
Proceeds from issuance of long-
term debt -- 35.0 -- -- -- 35.0
Repayment of long-term debt -- (50.0) (1.0) (0.3) -- (51.3)
Proceeds from loans from
affiliates 1.4 -- 0.6 -- (2.0) --
Repayment of loans from
affiliates -- -- -- -- -- --
Debt issuance costs -- (0.4) -- -- -- (0.4)
Proceeds from stock plans 8.9 -- -- -- -- 8.9
Stock repurchased -- -- -- -- -- --
Cash dividends paid (0.2) -- -- -- -- (0.2)
Other, net (0.3) (9.5) 0.4 2.0 (1.8) (9.2)
-------- ---------- ---------- ---------- ---------- ----------
Net 9.8 (24.9) -- 1.7 (3.8) (17.2)
-------- ---------- ---------- ---------- ---------- ----------
Cash and equivalents:
Net increase (decrease) (0.2) 3.8 (0.1) (0.3) -- 3.2
At beginning of period 1.5 19.4 0.1 0.5 -- 21.5
-------- ---------- ---------- ---------- ---------- ----------
At end of year $ 1.3 $ 23.2 $ -- $ 0.2 $ -- $ 24.7
======== ========== ========== ========== ========== ==========
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 $ 85.4 $ 2.8 $ 13.7 $ (28.2) $ 77.2
-------- ---------- ---------- ---------- ---------- ---------
Investing activities:
Property acquisitions -- (102.5) (2.0) -- -- (104.5)
Investments in and loans to
affiliates (43.0) -- -- (4.6) 43.4 (4.2)
Repayment of loans to
affiliates 544.8 -- -- -- (544.8) --
Other, net 1.1 3.6 -- -- 2.2 6.9
-------- ---------- ---------- ---------- ---------- ---------
Net 502.9 (98.9) (2.0) (4.6) (499.2) (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) (365.7) (1.2) (0.2) -- (1,015.4)
Proceeds from loans from
affiliates -- 74.2 3.8 -- (78.0) --
Repayment of loans from
affiliates -- (577.6) -- -- 577.6 --
Debt issuance costs -- (17.6) -- -- -- (17.6)
Proceeds from stock plans 17.9 -- -- -- -- 17.9
Stock repurchased -- -- -- -- -- --
Cash dividends paid (4.8) (15.3) (4.3) (8.7) 28.3 (4.8)
Other, net 0.1 2.3 0.2 -- (0.5) 2.1
-------- ---------- ---------- ---------- ---------- ---------
Net (510.1) 27.3 (1.5) (8.9) 527.4 34.2
-------- ---------- ---------- ---------- ---------- ---------
Cash and equivalents:
Net increase (decrease) (3.7) 13.8 (0.7) 0.2 -- 9.6
At beginning of period 5.2 5.6 0.8 0.3 -- 11.9
-------- ---------- ---------- ---------- ---------- ----------
At end of year $ 1.5 $ 19.4 $ 0.1 $ 0.5 $ -- $ 21.5
======== ========== ========== ========== ========== ==========
Page 103
December 31, 1999 (dollars in millions)
--------------------------------------------------------------------------------
Non-
----
Subsidiary Guarantor Guarantor Consolidating Consolidated
---------- --------- --------- ------------- ------------
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
-------- ---------- ------------ ------------ ------------- ------------
Net cash flows provided by (used
for) Operating activities: $ 21.3 $ 142.9 $ 2.4 $ 0.6 $ 10.8 $ 178.0
-------- ---------- ---------- ---------- ---------- ----------
Investing activities:
Property acquisitions -- (104.7) (1.5) -- -- (106.2)
Investments in and loans to
affiliates (3.9) -- -- -- -- (3.9)
Repayment of loans to
affiliates 55.6 -- -- -- (39.0) 16.6
Other, net 0.3 4.2 0.7 0.1 (9.0) (3.7)
-------- ---------- ---------- ---------- ---------- ----------
Net 52.0 (100.5) (0.8) 0.1 (48.0) (97.2)
-------- ---------- ---------- ---------- ---------- ----------
Financing activities:
Proceeds from issuance of long-
term debt 21.8 -- -- -- -- 21.8
Repayment of long-term debt (86.8) (10.5) -- (0.2) -- (97.5)
Proceeds from loans from
affiliates -- -- -- -- -- --
Repayment of loans from
affiliates -- (38.3) -- (1.9) 40.2 --
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 6.9 (1.5) (1.8) 0.9 10.6
-------- ---------- ---------- ---------- ---------- ----------
Net (68.3) (41.9) (1.5) (3.9) 41.1 (74.5)
-------- ---------- ---------- ---------- ---------- ----------
Cash and equivalents:
Net increase (decrease) 5.0 0.5 0.1 (3.2) 3.9 6.3
At beginning of year 0.2 5.1 0.7 3.5 (3.9) 5.6
-------- ---------- ---------- ---------- ---------- ----------
At end of year $ 5.2 $ 5.6 $ 0.8 $ 0.3 $ -- $ 11.9
======== ========== ========== ========== ========== ==========
Note 15. Subsequent Events
---------------------------
The Company and Grupo TMM have resolved their previously announced dispute over
resolutions adopted at the Grupo TFM shareholders meetings held at the end of
last year authorizing, among other things, the payment of a dividend by Grupo
TFM and TFM's entry into a long-term lease with Mexrail for the northern half of
the international railway bridge at Laredo, Texas. On March 26, 2002, the 18th
Civil Court of Mexico, D.F. issued an order declaring the Ordinary General
Meeting of Shareholders held on December 21, 2001, which adopted resolutions
authorizing the payment of a dividend, null and void. As a result of that court
order, the dividend payment declared to the parties to the lawsuit, our
subsidiary NAFTA Rail, S.A. de C.V. and Grupo TMM's subsidiary TMM Multimodal,
S.A. de C.V., has been determined to be null and void. In addition, the dispute
over the Mexrail-TFM bridge lease has been resolved by i) the termination of
that lease; ii) a judicial settlement between the parties and the withdrawal
from the action filed with the 14th Civil Court of Mexico, D.F.; and iii) the
Company's dismissal of the lawsuit it had filed in Delaware.
The Company, Grupo TMM, and certain of their affiliates entered into an
agreement on February 27, 2002 with TFM to sell to TFM all of the common stock
of Mexrail. Mexrail owns the northern half of the international railway bridge
at Laredo and all of the common stock of Tex Mex. The sale closed on March 27,
2002 and the Company received approximately $31.4 million for its 49% interest
in Mexrail. The Company intends to use the proceeds from the sale to reduce
debt. Although the Company no longer directly owns 49% of Mexrail, it retains an
indirect ownership through its ownership of Grupo TFM. The Company is currently
evaluating the accounting treatment for this transaction.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
The information regarding the Company's Change in and Disagreements with
Accountants on Accounting and Financial Disclosures is set forth under Item 4 of
the Company's Form 8-K dated June 20, 2001, which is hereby incorporated by
reference.
Page 104
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 May 3, 2001 ("Proxy Statement") will be
filed no later than 120 days after December 31, 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 Two Directors" and "The Board of Directors" in
the Company's Proxy Statement is incorporated herein by reference in partial
response to this Item 10.
(b) Executive Officers of the Company
The information set forth in response to Item 401 of Regulation S-K under
"Executive Officers of the Company," an unnumbered Item in Part I (immediately
following Item 4, Submission of Matters to a Vote of Security Holders), of this
Form 10-K is incorporated herein by reference in partial response to this Item
10.
(c) Compliance with Section 16(a) of the Exchange Act
The information set forth in response to Item 405 of Regulation S-K under the
heading "Section 16(a) 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 "The Board of Directors -- Compensation of
Directors" in the Company's Proxy Statement, (other than the Compensation and
Organization Committee Report on Executive Compensation and the Stock
Performance Graph), is incorporated by reference in response to this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth in response to Item 403 of Regulation S-K under the
heading "Principal Stockholders and Stock Owned Beneficially by Directors and
Certain Executive Officers" in the Company's Proxy Statement is hereby
incorporated by reference in response to this Item 12.
The Company has no knowledge of any arrangement the operation of which may at a
subsequent date result in a change of control of the Company.
Item 13. Certain Relationships and Related Transactions
The information set forth in response to Item 404 of Regulation S-K under the
heading "Compensation Committee Interlocks and Insider Participation; Certain
Relationships and Related Transactions" in the Company's Proxy Statement is
incorporated by reference in response to this Item 13.
Page 105
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 KPMG LLP
dated February 25, 2002 and the report of PricewaterhouseCoopers LLP dated March
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 3.1 to the Company's Registration Statement on Form
S-4 originally filed January 25, 2001 (Registration No.
333-54262), as amended and declared effective on March 15,
2001 (the "S-4 Registration Statement"), Restated Certificate
of Incorporation, as amended, is hereby incorporated by
reference as Exhibit 3.1
Bylaws
------
3.2 Exhibit 3.2 to the Company's Form 10-Q for the quarter ended
March 31, 2001 (Commission File No. 1-4717), The Company's
By-Laws, as amended and restated to May 2, 2001, is hereby
incorporated by reference as Exhibit 3.2
(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, 3 and 11 of Article II, Article V and
Article VIII of Exhibit 3.2 hereto are incorporated by
reference as Exhibit 4.2
Page 106
4.3 The Indenture, dated July 1, 1992 between the Company and The
Chase Manhattan Bank (the "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
(Registration No. 33-47198) and as Exhibit 4(a) to the
Company's Form S-3 filed March 29, 1993 (Registration No.
33-60192) registering $200 million of Debt Securities, is
hereby incorporated by reference as Exhibit 4.3
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 1992
Indenture with respect to the 7.875% Notes Due July 1, 2002
issued pursuant to the 1992 Indenture, is hereby incorporated
by reference as Exhibit 4.3.1
4.3.2 Exhibit 4.5.2 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 1992
Indenture with respect to the 6.625% Notes Due March 1, 2005
issued pursuant to the 1992 Indenture, is hereby incorporated
by reference as Exhibit 4.3.2
4.3.3 Exhibit 4.5.3 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 1992
Indenture with respect to the 8.8% Debentures Due July 1, 2022
issued pursuant to the 1992 Indenture, is hereby incorporated
by reference as Exhibit 4.3.3
4.3.4 Exhibit 4.5.4 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 1992
Indenture with respect to the 7% Debentures Due December 15,
2025 issued pursuant to the 1992 Indenture, is hereby
incorporated by reference as Exhibit 4.3.4
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
(Registration 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
(Registration 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)
4.7 Exhibit 4.3 to the Company's S-4 Registration Statement
(Registration 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)
Page 107
(10) Material Contracts
10.1 Form of Officer Indemnification Agreement is attached hereto
as Exhibit 10.1
10.2 Form of Director Indemnification Agreement is attached hereto
as Exhibit 10.2
10.3 The 1992 Indenture (See Exhibit 4.3)
10.4.1 Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 7.875% Notes Due July 1, 2002
issued pursuant to the 1992 Indenture (See Exhibit 4.3.1)
10.4.2 Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 6.625% Notes Due March 1, 2005
issued pursuant to the 1992 Indenture (See Exhibit 4.3.2)
10.4.3 Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 8.8% Debentures Due July 1, 2022
issued pursuant to the 1992 Indenture (See Exhibit 4.3.3)
10.4.4 Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 7% Debentures Due December 15,
2025 issued pursuant to the 1992 Indenture (See Exhibit 4.3.4)
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
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 10.18 to the Company's Form 10-K/A 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 10.7
10.8 Exhibit 4.4 to the Company's Form S-8 filed April 4, 2001
(Registration No. 333-58250), Kansas City Southern Industries,
Inc. 1991 Amended and Restated Stock Option and Performance
Award Plan, as amended and restated effective as of February
27, 2001, is hereby incorporated by reference as Exhibit 10.8
10.9 Exhibit 10.8 to the Company's S-4 Registration Statement
(Registration No. 333-54262), Tax Disaffiliation Agreement,
dated October 23, 1995, by and between the Company and DST
Systems, Inc., is hereby incorporated by reference as Exhibit
10.9
10.10 Exhibit 4.8 to the Company's Form S-8 filed on December 14,
2000 (Registration 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
(Registration 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 Employment Agreement, as amended and restated January 1, 2001,
by and among the Company, KCSR and Michael R. Haverty, is
attached hereto as Exhibit 10.12
Page 108
10.13 Exhibit 10.14 to the Company's S-4 Registration Statement
(Registration 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
10.13.1 Amendment to Employment Agreement, dated as of January 1,
2001, by and among the Company, KCSR and Gerald K. Davies is
attached hereto as Exhibit 10.13.1
10.14 Employment Agreement, as amended and restated January 1, 2001,
by and between the Company and Robert H. Berry, is attached
hereto as Exhibit 10.14
10.15 Employment Agreement, as amended and restated effective as of
January 1, 2001, between the Company, KCSR and Albert W. Rees
is attached hereto as Exhibit 10.15
10.16 Employment Agreement dated as of August 1, 2001, as amended by
the Amendment to Employment Agreement dated as of August 1,
2001, by and among the Company, KCSR and William J. Pinamont,
is attached hereto 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
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. 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
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 10.18.5
Page 109
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 hereby incorporated by reference as Exhibit
10.19
10.19.1 Exhibit 10.20.1 to the Company's S-4 Registration Statement
(Registration 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 hereby incorporated by reference as
Exhibit 10.20
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 Revolving Credit Facility, is hereby
incorporated by reference as Exhibit 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
(Registration No. 333-54262), Intercompany Agreement, dated as
of August 16, 1999, between the Company and Stilwell Financial
Inc., is hereby incorporated by reference as Exhibit 10.24
10.25 Exhibit 10.24 to the Company's S-4 Registration Statement
(Registration 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
(Registration 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
(Registration 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
(Registration 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
(Registration 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
Page 110
10.30 Exhibit 10.29 to the Company's S-4 Registration Statement
(Registration 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
10.31 Exhibit 10.30 to the Company's S-4 Registration Statement
(Registration 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
(Registration 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
(Registration 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
10.34 Lease Agreement, as amended, between The Kansas City Southern
Railway Company and Broadway Square Partners LLP dated June
26, 2001 is attached hereto as Exhibit 10.34
(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
16.1 The information set forth under Item 4 and Exhibit 16.1 of the
Company's Form 8-K dated June 20, 2001 (Commission File No.
1-4717) prepared pursuant to Item 304 (a) of Regulation S-K is
hereby incorporated by reference as Exhibit 16.1
(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)
Page 111
(23) Consents of Experts and Counsel
23.1 The Consents of Independent Accountants prepared pursuant to
Item 601(b)(23) of Regulation S-K are attached to this Form
10-K as Exhibit 23.1
(24) Power of Attorney
(Inapplicable)
(99) Additional Exhibits
99.1 The consolidated financial statements of Grupo Transportacion
Ferroviaria Mexicana, S.A. de C.V. (including the notes
thereto and the Report of Independent Accountants thereon) as
of December 31, 2001 and 2000 and for each of the three years
in the period ended December 31, 2001 as listed under Item
14(a)(2) herein, are hereby included in this Form 10-K as
Exhibit 99.1
(b) Reports on Form 8-K
The Company furnished a Current Report on Form 8-K dated October 10,
2001 announcing the date of its third quarter 2001 earnings release and
conference call. 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.
The Company furnished a Current Report on Form 8-K dated October 31,
2001 reporting its third quarter 2001 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.
The Company filed a Current Report on Form 8-K on December 11, 2001,
under Item 5 of such form, providing cautionary statements for purposes
of the "safe harbor" provisions of the Private Securities Legislation
Reform Act of 1995.
The Company furnished a Current Report on Form 8-K dated January 7, 2002
announcing the date of its fourth quarter and year end earnings release
and conference call. 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.
The Company filed a Current Report on Form 8-K on January 15, 2002,
under Item 5 of such form, announcing that Mexican courts have agreed to
hear the legal actions initiated by a subsidiary of the Company
challenging certain resolutions adopted by Grupo TFM.
The Company furnished a Current Report on Form 8-K dated January 31,
2002 reporting its fourth quarter and year to date 2001 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 112
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Kansas City Southern Industries, Inc.
March 28, 2002 By: /s/ M.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 March 28, 2002.
Signature Capacity
--------- --------
/s/ M.R. Haverty Chairman, President, Chief Executive
---------------------------------- Officer and Director
M.R. Haverty
/s/ G.K. Davies Executive Vice President
----------------------------------
G.K Davies
/s/ R.H. Berry Senior Vice President and Chief Financial
---------------------------------- Officer
R.H. Berry (Principal Financial Officer)
/s/ L.G. Van Horn Vice President and Comptroller
---------------------------------- (Principal Accounting Officer)
L.G. Van Horn
/s/ A.E. Allinson Director
----------------------------------
A.E. Allinson
/s/ M.G. Fitt Director
----------------------------------
M.G. Fitt
/s/ J.R. Jones Director
----------------------------------
J.R. Jones
/s/ L.H. Rowland Director
----------------------------------
L.H. Rowland
/s/ B.G. Thompson Director
----------------------------------
B.G. Thompson
/s/ R.E. Slater Director
----------------------------------
R.E. Slater
Page 113
KANSAS CITY SOUTHERN INDUSTRIES, INC.
2001 FORM 10-K ANNUAL REPORT
INDEX TO EXHIBITS
Regulation S-K
Exhibit Item 601(b)
No. Document Exhibit No.
------ -------- --------------
10.1 Form of Officer Indemnification Agreement 10
10.2 Form of Director Indemnification Agreement 10
10.12 Employment Agreement, as amended and restated January 1, 2001, by
and among the Company, KCSR and Michael R. Haverty 10
10.13.1 Amendment to Employment Agreement, dated as of January 1, 2001, by
and among the Company, KCSR and Gerald K. Davies 10
10.14 Employment Agreement, as amended and restated January 1, 2001, by
and between the Company and Robert H. Berry 10
10.15 Employment Agreement, as amended and restated effective as of
January 1, 2001 between the Company, KCSR and Albert W. Rees 10
10.16 Employment Agreement dated as of August 1, 2001, as amended by the
Amendment to Employment Agreement, dated as of August, 1, 2001, by
and among the Company, KCSR and William J. Pinamont 10
10.34 Lease Agreement, as amended, between The Kansas City Southern Railway
Company and Broadway Square Partners LLP, dated June 26, 2001 10
12.1 Computation of Ratio of Earnings to Fixed Charges 12
21.1 Subsidiaries of the Company 21
23.1 Consents of Independent Accountants 23
99.1 Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. consolidated
financial statements as of December 31, 2001 and 2000 and for each of the
three years in the period ended December 31, 2001 99
-----------------------------
Page 114