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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number 1-4717
KANSAS CITY SOUTHERN
(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.)
427 WEST 12TH STREET, KANSAS CITY, MISSOURI 64105
(Address of principal executive offices) (Zip Code)
(816) 983-1303
(Company's telephone number, including area code)
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 31, 2002
- --------------------------------------------------------------------------------
COMMON STOCK, $.01 PER SHARE PAR VALUE 60,954,700 SHARES
- --------------------------------------------------------------------------------
KANSAS CITY SOUTHERN
FORM 10-Q
SEPTEMBER 30, 2002
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Introductory Comments 2
Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 2002 and 2001 4
Per Share Data 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2002 and 2001 5
Consolidated Statement of Changes in Stockholders' Equity -
Nine Months Ended September 30, 2002 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 16
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK 28
ITEM 4. CONTROLS AND PROCEDURES 28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
SIGNATURES 29
- ----------
KANSAS CITY SOUTHERN
FORM 10-Q
SEPTEMBER 30, 2002
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTRODUCTORY COMMENTS
The Consolidated Financial Statements included herein have been prepared by
Kansas City Southern (the "Company" or "KCS"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures are adequate to enable a reasonable understanding of the information
presented. These Consolidated Financial Statements should be read in conjunction
with the consolidated financial statements and the notes thereto, as well as
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 (as amended), and Management's Discussion and Analysis
of Financial Condition and Results of Operations included in this Form 10-Q.
Results for the three and nine months ended September 30, 2002 are not
necessarily indicative of the results expected for the full year 2002.
KANSAS CITY SOUTHERN
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
September 30, December 31,
2002 2001
------------------ ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 35.5 $ 24.7
Accounts receivable, net 112.3 130.0
Inventories 35.3 27.9
Other current assets 38.3 71.8
------------------ ------------------
Total current assets 221.4 254.4
------------------ ------------------
Investments 404.6 386.8
Properties (net of $686.5 and $660.0 accumulated
depreciation and amortization, respectively) 1,336.3 1,327.4
Goodwill 10.6 19.3
Other assets 22.8 23.0
------------------ ------------------
Total assets $ 1,995.7 $ 2,010.9
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year $ 10.0 $ 46.7
Accounts and wages payable 40.3 50.4
Accrued liabilities 153.9 150.0
------------------ ------------------
Total current liabilities 204.2 247.1
------------------ ------------------
Other Liabilities
Long-term debt 578.7 611.7
Deferred income taxes 374.3 370.2
Other liabilities and deferred credits 108.9 101.6
------------------ ------------------
Total other liabilities 1,061.9 1,083.5
------------------ ------------------
Stockholders' Equity
Preferred stock 6.1 6.1
Common stock 0.6 0.6
Retained earnings 725.8 676.5
Accumulated other comprehensive loss (2.9) (2.9)
------------------ ------------------
Total stockholders' equity 729.6 680.3
------------------ ------------------
Total liabilities and stockholders' equity $ 1,995.7 $ 2,010.9
================== ==================
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------------- ----------------------------------
2002 2001 2002 2001
---------------- ----------------- ----------------------------------
Revenues $ 137.6 $ 144.6 $ 418.0 $ 431.8
Costs and expenses
Compensation and benefits 51.2 48.7 147.1 145.4
Depreciation and amortization 15.8 14.7 45.3 43.6
Purchased services 15.9 15.4 43.5 41.8
Operating leases 12.4 12.6 37.1 38.1
Fuel 8.9 11.5 27.7 35.3
Casualties and insurance 6.9 6.1 22.0 28.4
Car hire 5.6 3.5 14.9 15.7
Other 14.7 16.1 46.3 48.5
---------------- ----------------- ----------------- ----------------
Total costs and expenses 131.4 128.6 383.9 396.8
Operating income 6.2 16.0 34.1 35.0
Equity in net earnings (losses) of unconsolidated
affiliates:
Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. 9.8 7.5 27.6 23.5
Other (0.7) (0.6) (1.9) (0.2)
Gain on sale of Mexrail, Inc. - - 4.4 -
Interest expense (11.5) (13.2) (33.3) (42.9)
Other income 6.5 0.9 15.3 3.0
---------------- ----------------- ----------------- -----------------
Income before income taxes, extraordinary item and
cumulative effect of accounting change 10.3 10.6 46.2 18.4
Income tax provision (benefit) (0.3) 1.6 6.7 (1.6)
---------------- ----------------- ----------------- -----------------
Income before extraordinary item and cumulative effect
of accounting change 10.6 9.0 39.5 20.0
Extraordinary item, net of income taxes - - (2.7) -
Cumulative effect of accounting change, net of income taxes - - - (0.4)
---------------- ----------------- ----------------- -----------------
Net income $ 10.6 $ 9.0 $ 36.8 $ 19.6
================ ================= ================= =================
PER SHARE DATA
Basic earnings per Common share
Income before extraordinary item and cumulative effect
of accounting change $ 0.17 $ 0.15 $ 0.65 $ 0.34
Extraordinary item, net of income taxes - - (0.04) -
Cumulative effect of accounting change, net of income
taxes - - - (0.01)
---------------- ----------------- ----------------- -----------------
Total basic earnings per Common share $ 0.17 $ 0.15 $ 0.61 $ 0.33
================ ================= ================= =================
Diluted earnings per Common share
Income before extraordinary item and cumulative effect
of accounting change $ 0.17 $ 0.15 $ 0.63 $ 0.33
Extraordinary item, net of income taxes - - (0.04) -
Cumulative effect of accounting change, net of income
taxes - - - (0.01)
---------------- ----------------- ----------------- -----------------
Total diluted earnings per Common share $ 0.17 $ 0.15 $ 0.59 $ 0.32
================ ================= ================= =================
Weighted average Common shares outstanding (in thousands)
Basic 60,481 58,656 60,123 58,442
Potential dilutive Common shares 1,972 2,515 2,090 2,492
---------------- ----------------- ----------------- -----------------
Diluted 62,453 61,171 62,213 60,934
================ ================= ================= =================
Dividends per Preferred share $ 0.25 $ 0.25 $ 0.75 $ 0.75
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
Nine Months
Ended September 30,
-------------------------------------
2002 2001
----------------- -----------------
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 36.8 $ 19.6
Adjustments to reconcile net income to net cash
Provided by operating activities
Depreciation and amortization 45.3 43.6
Deferred income taxes 1.7 14.9
Equity in undistributed earnings of unconsolidated affiliates (25.7) (23.3)
Distributions from unconsolidated affiliates - 3.0
Gain on sale of investments (9.3) -
Gain on sale of property (10.0) (3.5)
Tax benefit realized upon exercise of stock options 3.6 4.6
Changes in working capital items
Accounts receivable 18.7 (6.4)
Inventories (7.4) 5.2
Other current assets 35.8 7.6
Accounts and wages payable (10.3) (4.6)
Accrued liabilities 5.9 (26.0)
Other, net 8.9 (4.5)
---------------- ------------------
Net cash provided by operating activities 94.0 30.2
---------------- ------------------
INVESTING ACTIVITIES:
Property acquisitions (63.1) (42.2)
Proceeds from disposal of property 17.5 15.0
Investment in and loans to affiliates (4.0) (6.1)
Proceeds from sale of investments, net 31.7 -
Other, net (1.3) (0.8)
---------------- ------------------
Net cash used for investing activities (19.2) (34.1)
---------------- ------------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 200.0 35.0
Repayment of long-term debt (264.8) (24.8)
Debt issuance costs (5.5) (0.4)
Proceeds from stock plans 7.7 5.6
Cash dividends paid (0.2) (0.2)
Other, net (1.2) (5.9)
---------------- ------------------
Net cash provided by (used for) financing activities (64.0) 9.3
---------------- ------------------
CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents 10.8 5.4
At beginning of year 24.7 21.5
---------------- ------------------
At end of period $ 35.5 $ 26.9
================ ==================
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
Accumulated
$25 Par $.01 Par Other
Preferred Common Retained Comprehensive
stock Stock Earnings income (loss) Total
------------------ --------------- ----------------- ---------------- -----------------
Balance at December 31, 2001 $ 6.1 $ 0.6 $ 676.5 $ (2.9) $ 680.3
Comprehensive income:
Net income 36.8
Change in fair value of cash flow hedge (0.3)
Amortization of accumulated other
comprehensive income (loss) related
to interest rate swap 0.3
Comprehensive income 36.8
Dividends (0.2) (0.2)
Options exercised and stock subscribed 12.7 12.7
------------------ --------------- ----------------- ---------------- -----------------
Balance at September 30, 2002 $ 6.1 $ 0.6 $ 725.8 $ (2.9) $ 729.6
================== =============== ================= ================ =================
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND INTERIM FINANCIAL STATEMENTS. In the opinion of the
management of Kansas City Southern, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal closing
procedures) necessary to present fairly the financial position of the
Company and its subsidiary companies as of September 30, 2002 and December
31, 2001, the results of its operations for the three months and nine
months ended September 30, 2002 and 2001, its cash flows for the nine
months ended September 30, 2002 and 2001, and its changes in stockholders'
equity for the nine months ended September 30, 2002. The accompanying
consolidated financial statements have been prepared consistently with
accounting policies described in Note 2 to the consolidated financial
statements included in the Company's Annual Report on Form 10-K as of and
for the year ended December 31, 2001 (as amended). The results of
operations for the three and nine month periods ended September 30, 2002
are not necessarily indicative of the results to be expected for the full
year 2002. Certain comparative prior year amounts in the consolidated
financial statements have been reclassified to conform to the current
period presentation. These reclassifications did not impact net income.
2. EARNINGS PER SHARE DATA. The effect of stock options 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 three and nine months ended
September 30, 2002 and 2001, respectively (in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- --------------------------
2002 2001 2002 2001
------------- ------------ --------------------------
Basic shares 60,481 58,656 60,123 58,442
Effect of dilution: Stock options 1,972 2,515 2,090 2,492
------------- ------------ ------------ ------------
Diluted shares 62,453 61,171 62,213 60,934
============= ============ ============ ============
Shares excluded from diluted computation 175 79 83 44
------------- ------------ ------------ ------------
Shares were 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. Preferred dividends, which were not
material for the periods presented, are the only adjustments that affect
the numerator of the diluted earnings per share computation.
3. INVESTMENTS. Investments in unconsolidated affiliates and certain other
investments accounted for under the equity method generally include all
entities in which the Company or its subsidiaries have significant
influence, but not more than 50% voting control. Investments in
unconsolidated affiliates at September 30, 2002 include, among others,
equity interests in Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V.
("Grupo TFM"), Southern Capital Corporation, LLC ("Southern Capital"), and
the Panama Canal Railway Company ("PCRC").
The Company, our Mexican partner, Grupo TMM, S.A. ("Grupo TMM"), and
certain of Grupo TMM's affiliates entered into an agreement on February 27,
2002 with TFM, S.A. de C.V. ("TFM") to sell to TFM all of the common stock
of Mexrail, Inc., ("Mexrail") a former 49% unconsolidated affiliate of the
Company. Mexrail owns the northern half of the international railway bridge
at Laredo and all of the common stock of The Texas-Mexican Railway Company
("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
used 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's share of the proceeds
from the sale of Mexrail to TFM exceeded the carrying value of the
Company's investment in Mexrail by $11.2 million. The Company recognized a
$4.4 million gain on the sale of Mexrail to TFM in the first quarter of
2002, while the remaining $6.8 of excess proceeds was deferred and is being
amortized into net income over 20 years.
As discussed in note 8 below, on July 29, 2002, TFM completed the purchase
of the Mexican government's 24.6% ownership of Grupo TFM for a purchase
price of $256.1 million, and the shares purchased are held as treasury
stock by TFM. This transaction results in an increase in the Company's
ownership percentage of Grupo TFM from 36.9% to approximately 46.6%.
Following this transaction, Grupo TMM (together with certain of its
affiliates) owns approximately
48.5% of Grupo TFM and the Mexican government owns an effective interest of
4.9% in Grupo TFM due to its 20% minority interest in TFM.
The Company is party to certain agreements with Grupo TMM covering the
Grupo TFM joint venture. These agreements contain "change in control"
provisions, provisions intended to preserve the Company's and Grupo TMM's
proportionate ownership of the joint venture, 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 and a
prohibition on transfers to competitors. Under certain circumstances, such
agreements could affect the Company's ownership percentage and rights in
these equity affiliates.
Condensed financial information of certain unconsolidated affiliates is
shown below. All amounts, including those for Grupo TFM, are presented
under U.S. GAAP. Mexrail financial results were consolidated into the
accounts of Grupo TFM effective April 1, 2002 and are not presented
separately. The amounts reflected herein for Grupo TFM do not include the
recognition of any recovery relating to the value of the Value Added Tax
("VAT") claim of Grupo TFM (See note 10). For purposes of recording equity
in earnings of unconsolidated affiliate and investment in unconsolidated
subsidiary, KCS has not recognized the value of the VAT credit certificate
pending completion of the legal process. Financial information of
immaterial unconsolidated affiliates has been omitted:
FINANCIAL CONDITION (DOLLARS IN MILLIONS):
September 30, 2002 December 31, 2001
-------------------------------- ---------------------------------------------
Southern Southern
PCRC Grupo TFM Capital Mexrail PCRC Grupo TFM Capital
-------- ------------ --------- --------- ---------- ------------- ---------
Current assets $ 5.1 $ 277.6 $ 13.0 $ 34.9 $ 3.6 $ 294.3 $ 2.5
Non-current assets 87.6 1,991.8 143.0 59.3 85.5 1,924.3 240.6
-------- ------------ --------- --------- ---------- ------------- ---------
Assets $ 92.7 $ 2,269.4 $ 156.0 $ 94.2 $ 89.1 $ 2,218.6 $ 243.1
======== ============ ========= ========= ========== ============= =========
Current liabilities $ 3.9 $ 128.0 $ 3.4 $ 42.8 $ 10.8 $ 350.8 $ 196.6
Non-current liabilities 71.9 1,049.9 104.0 27.5 55.3 593.8 -
Minority interest - 339.6 - - - 376.3 -
Equity of stockholders and partners 16.9 751.9 48.6 23.9 23.0 897.7 46.5
-------- ------------ --------- --------- ---------- ------------- ---------
Liabilities and equity $ 92.7 $ 2,269.4 $ 156.0 $ 94.2 $ 89.1 $ 2,218.6 $ 243.1
======== ============ ========= ========= ========== ============= =========
KCS's investment $ 15.0* $ 361.9 $ 24.3 $ 11.7 $ 13.9 $ 334.4 $ 23.2
-------- ------------ --------- --------- ---------- ------------- ---------
OPERATING RESULTS (DOLLARS IN MILLIONS):
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
2002 2001 2002** 2001
---------- ---------- ---------- ----------
Revenues:
Mexrail $ - $ 11.7 $ 13.3 $ 40.8
PCRC 0.9 - 2.5 -
Grupo TFM 175.3 168.1 519.1 496.0
Southern Capital 8.0 7.6 23.0 22.7
Operating costs and expenses:
Mexrail $ - $ 13.6 $ 13.3 $ 44.2
PCRC 2.5 0.9 8.5 1.8
Grupo TFM 132.1 123.6 384.3 323.1
Southern Capital 7.1 6.4 19.2 19.6
Net income (loss):
Mexrail $ - $ (0.7) $ 0.0 $ (1.5)
PCRC (2.2) (0.3) (6.0) (0.6)
Grupo TFM 23.1 20.1 71.1 63.6
Southern Capital 0.9 1.1 2.1 3.1
* Of this investment, approximately $9.0 million constitutes an investment in equity, while approximately $6.0 million is
comprised of notes receivable from PCRC.
** Results for Mexrail are through March, 2002 only. Consolidated with Grupo TFM effective April 1, 2002.
4. NONCASH INVESTING AND FINANCING ACTIVITIES. The Company initiated the
Thirteenth Offering of KCS common stock under the Employee Stock Purchase
Plan ("ESPP") during 2001. Stock subscribed under the Thirteenth Offering
will be issued to employees in 2003 and is being paid for through employee
payroll deductions in 2002. During the first nine months of 2002, the
Company has received approximately $2.4 million from payroll deductions
associated with the Thirteenth Offering of the ESPP. In the first quarter
of 2002, the Company issued approximately 611,107 shares of KCS common
stock under the Twelfth Offering of the ESPP. These shares, totaling a
purchase price of approximately $4.5 million, were subscribed and paid for
through employee payroll deductions in 2001.
5. DERIVATIVE FINANCIAL INSTRUMENTS. The Company adopted the provisions of
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("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 consolidated financial statements and represents the
ineffective portion of interest rate cap agreements that the Company held
at the time of adoption of SFAS 133. These interest rate cap agreements,
which expired during the first quarter of 2002, had a fair value of
approximately zero at December 31, 2001 and were completely charged off
during 2001. During the nine months ended September 30, 2002, the Company
did not record any adjustments to income for derivative transactions. The
Company does not currently have any derivative financial instruments
outstanding.
In addition, the Company records adjustments to its stockholders' equity
(accumulated other comprehensive income (loss)) for its portion of the
adjustment to the fair value of interest rate swap transactions to which
Southern Capital, a 50% owned unconsolidated affiliate, is a participant.
The Company also adjusts its investment in Southern Capital by the change
in the fair value of these derivative instruments. During the nine months
ended September 30, 2002, the Company recorded comprehensive income (loss)
of ($0.3) million related to an adjustment to the fair value of interest
rate swap transactions of Southern Capital.
In conjunction with the refinancing transaction discussed below in note 6,
Southern Capital terminated these interest rate swap transactions. As a
result, Southern Capital will amortize the balance of accumulated other
comprehensive income (loss) into interest expense over the former remaining
life of the interest rate swap transactions. This charge will impact
Southern Capital's interest expense by approximately $1.3 million in 2002,
$2.4 million in 2003 and $0.9 million in each of 2004, 2005 and 2006. The
Company is realizing the impact of this charge through a related reduction
in equity earnings from Southern Capital and will amortize its balance in
accumulated other comprehensive income (loss) to its investment in Southern
Capital. During the nine months ended September 30, 2002, the Company
recorded amortization of its balance in accumulated other comprehensive
income (loss) of $0.3 million.
6. DEBT REFINANCING. During the second quarter of 2002, the Company completed
several debt refinancing transactions as described below.
SENIOR NOTES On June 12, 2002, KCSR issued $200 million of 7 1/2% senior
notes due June 15, 2009 ("7 1/2% Notes") through a private offering
pursuant to Rule 144A under the Securities Act of 1933 in the United States
and Regulation S outside the United States ("Note Offering"). These notes
are general unsecured obligations of Kansas City Southern Railway Company
("KCSR"), are guaranteed by the Company and certain of its subsidiaries,
and contain certain covenants and restrictions customary for this type of
debt instrument and for borrowers with similar credit ratings.
Net proceeds from the Note Offering of $195.8 million, together with cash,
were used to repay term debt under the Company's senior secured credit
facility ("KCS Credit Facility") and certain other secured indebtedness of
the Company. Debt issuance costs related to the Note Offering of
approximately $4.4 million were deferred and are being amortized over the
seven-year term of the 7 1/2% Notes. See "New Credit Agreement" below.
KCS submitted a Form S-4 Registration Statement to the SEC on July 12,
2002, as amended on July 24, 2002, relative to an Exchange Offer for the
$200 million 7 1/2% senior notes due 2009. On July 30, 2002, the SEC
declared this Registration Statement effective thereby providing the
opportunity for holders of the initial 7 1/2% Senior Notes due 2009 to
exchange them for registered notes with substantially identical terms. All
of the 7 1/2% Senior Notes due 2009 were exchanged for
$200 million of registered notes due June 15, 2009. The registered notes
bear a fixed annual interest rate to be paid semi-annually on June 15 and
December 15 and are due June 15, 2009.
NEW CREDIT AGREEMENT
On June 12, 2002, in conjunction with the repayment of certain of the term
loans under the KCS Credit Facility using the net proceeds received from
the Note Offering, the Company amended and restated the KCS Credit Facility
(the amended and restated credit agreement is referred to as the New Credit
Agreement herein). The New Credit Agreement provides KCSR with a $150
million term loan ("Tranche B term loan"), which matures on June 12, 2008,
and a $100 million revolving credit facility ("Revolver"), which matures on
January 11, 2006. Letters of credit are also available under the Revolver
up to a limit of $15 million. The proceeds from future borrowings under the
Revolver may be used for working capital and for general corporate
purposes. The letters of credit may be used for general corporate purposes.
Borrowings under the New Credit Agreement are secured by substantially all
of the Company's assets and are guaranteed by the majority of its
subsidiaries.
The Tranche B term loan and the Revolver bear interest at the London
Interbank Offered Rate ("LIBOR") or an alternate base rate, as the Company
shall select, plus an applicable margin. The applicable margin for the
Tranche B term loan is 2% for LIBOR borrowings and 1% for alternate base
rate borrowings. The applicable margin for the Revolver is based on the
Company's leverage ratio (defined as the ratio of the Company's total debt
to consolidated EBITDA (earnings before interest, taxes, depreciation and
amortization, excluding the undistributed earnings of unconsolidated
affiliates) for the prior four fiscal quarters). Based on the Company's
leverage ratio as of September 30, 2002, the applicable margin was 2.25%
per annum for LIBOR borrowings and 1.25% per annum for alternate base rate
borrowings.
The New Credit Agreement also requires the payment to the lenders of a
commitment fee of 0.50% per annum on the average daily, unused amount of
the Revolver and Tranche B term loan. Additionally, a fee equal to a per
annum rate of 0.25% plus the applicable margin for LIBOR priced borrowings
under the Revolver will be paid on any letter of credit issued under the
Revolver.
The New Credit Agreement contains certain provisions, covenants and
restrictions customary for this type of debt and for borrowers with a
similar credit rating. These provisions include, among others, restrictions
on the Company's ability and its subsidiaries ability to 1) incur
additional debt or liens; 2) enter into sale and leaseback transactions; 3)
merge or consolidate with another entity; 4) sell assets; 5) enter into
certain transactions with affiliates; 6) make investments, loans, advances,
guarantees or acquisitions; 7) make certain restricted payments, including
dividends, or make certain payments on other indebtedness; and 8) make
capital expenditures. In addition, the Company is required to comply with
certain financial ratios, including minimum interest expense coverage and
leverage ratios. The New Credit Agreement also contains certain customary
events of default. These covenants, along with other provisions, could
restrict maximum utilization of the Revolver.
Debt issuance costs related to the New Credit Agreement of approximately
$1.1 million were deferred and are being amortized over the respective term
of the loans. Extraordinary debt retirement costs associated with the
prepayment of certain term loans under the KCS Credit Facility using
proceeds from the Note Offering were approximately $4.3 million ($2.7
million, net of income taxes).
SOUTHERN CAPITAL
On June 25, 2002, Southern Capital refinanced the outstanding balance of
its bridge loan through the issuance of approximately $167.6 million of
pass through trust certificates and the sale of 50 locomotives. The pass
through trust certificates are secured by the sold locomotives, all of the
remaining locomotives and rolling stock owned by Southern Capital and
rental payments payable by KCSR under the sublease of the sold locomotives
and its leases of the equipment owned by Southern Capital. Payments of
interest and principal of the pass through trust certificates, which are
due semi-annually on June 30 and December 30 commencing on December 30,
2002 and ending on June 30, 2022, are insured under a financial guarantee
insurance policy by MBIA Insurance Corporation. KCSR leases or subleases
all of the equipment securing the pass through trust certificates.
7. COMMITMENTS AND CONTINGENCIES. The Company has had no significant changes
in its outstanding litigation or other commitments and contingencies from
that previously reported in Note 11 of the Company's Annual Report on Form
10-K for the year ended December 31, 2001. The following provides an update
of the Bogalusa cases.
BOGALUSA CASES. In July 1996, KCSR was named as one of twenty-seven
defendants in various lawsuits in Louisiana and Mississippi arising from
the explosion of a rail car loaded with chemicals in Bogalusa, Louisiana on
October 23, 1995. As a result of the explosion, nitrogen dioxide and oxides
of nitrogen were released into the atmosphere over parts of that town and
the surrounding area 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
plaintiffs for $22.3 million. The settlement was finalized with the
execution of a Master Global Settlement Agreement ("MGSA") in early 2002.
As of September 30, 2002, the Company had made $19.3 million of payments
under the MGSA and remitted the final payment of $3.0 million on October 1,
2002. Additionally the Company has collected approximately $16.3 million
from its excess insurance carriers for these cases and has an insurance
receivable of $ 3.0 million recorded at September 30, 2002 related to the
final payment. This is expected to be collected during the fourth quarter
of 2002.
8. PURCHASE OF MEXICAN GOVERNMENT'S OWNERSHIP OF GRUPO TFM. KCS and Grupo TMM
exercised their call option and, on July 29, 2002 completed the purchase of
the Mexican government's 24.6% ownership of Grupo TFM. The Mexican
government's ownership interest of Grupo TFM was purchased by TFM for a
purchase price of $256.1 million, utilizing a combination of proceeds from
an offering by TFM of debt securities, a credit from the Mexican government
for the reversion of certain rail facilities and other resources. This
transaction results in an increase in the Company's ownership percentage of
Grupo TFM from 36.9% to approximately 46.6%.
9. NEW ACCOUNTING PRONOUNCEMENT. Effective January 1, 2002, the Company
implemented Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 142 provides, among other
things, that goodwill with an indefinite life shall no longer be amortized,
but shall be evaluated for impairment on an annual basis. SFAS 142 also
requires separate presentation of goodwill on the balance sheet and
impairment losses are to be shown as a separate item on the income
statement. Additionally, changes in the carrying amount of goodwill should
be disclosed in the footnotes to the financial statements. SFAS 142 also
requires various transitional disclosures until all periods presented
reflect the provisions of SFAS 142. These transitional disclosures include
the presentation of net income and earnings per share information adjusted
to exclude amortization expense (including the related income tax effects)
for all periods presented. These transitional disclosures are presented in
the table below.
The Company has presented its goodwill as a separate line item in the
accompanying balance sheets. Additionally, the Company has performed its
transitional goodwill impairment test and determined that existing goodwill
is not impaired. During the nine months ended September 30, 2002, the
Company's goodwill decreased $8.5 million due to the sale of Mexrail to TFM
and $0.2 million due to the sale of Wyandotte Garage Corporation.
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ --------------------------
2002 2001 2002 2001
----------- ----------- ----------- ------------
(dollars in millions, except per share amounts)
Reported net income $ 10.6 $ 9.0 $ 36.8 $ 19.6
Add back: Goodwill amortization - 0.2 - 0.5
----------- ---------- ---------- -----------
Adjusted net income $ 10.6 $ 9.2 $ 36.8 $ 20.1
=========== ========== ========== ===========
Reported diluted earnings per share $ 0.17 $ 0.15 $ 0.59 $ 0.32
Add back: Goodwill amortization - 0.00 - 0.01
----------- ---------- ---------- -----------
Adjusted diluted earnings per share $ 0.17 $ 0.15 $ 0.59 $ 0.33
=========== ========== ========== ===========
10. FAVORABLE RULING IN VALUE ADDED TAX LAWSUIT. As previously announced in the
Company's Current Report on Form 8-K dated October 11, 2002, a three judge
panel of the Court of the First Circuit ("Federal Court") in Mexico City
unanimously ruled in favor of Grupo TFM in its VAT lawsuit. The claim dates
back to January 1997. By a unanimous decision, the three-judge panel of the
Federal Court found that the ruling by the Superior Court of Federal
Tribunal of Fiscal and Administrative Justice ("Fiscal Court") denying
TFM's claim had violated TFM's constitutional rights. The Federal Court
remanded the case back to the Fiscal Court with specific instructions to
vacate its prior decision and enter a new decision consistent with the
guidance provided by the Federal Court's ruling. The Federal Court ruling
requires the fiscal authorities to issue the VAT credit certificate only in
the name of the interested party, to issue the VAT credit
certificate only in strict accordance with the terms of the fiscal code,
and to deliver the VAT credit certificate only to the beneficiary. The new
decision of the Fiscal Court must be issued in accordance with the
guidelines of the Federal Court. The Company and Grupo TMM have been
advised that the Federal Court's order is not subject to appeal by the
Mexican government. However, the Fiscal Court's forthcoming decision may be
challenged by either of the parties if such party believes that the new
ruling does not comply with the order of the Federal Court. In addition, a
third party who can establish that its rights have been adversely and
improperly affected by the new ruling may seek to bring a claim against
TFM, but TFM management has indicated to the Company that it believes it
would prevail in any such action. The face value of the VAT credit
certificate at issue is approximately $206 million, and the amount of any
recovery will reflect that principal amount adjusted for inflation and
interest accruals from 1997 in accordance with Mexican Law. For the three
and nine months ended September 30, 2002, the amounts reported in the
Company's consolidated financial statements as equity in net earnings of
Grupo TFM of $9.8 million and $27.6 million, respectively, do not include
the recognition of any recovery relating to the value of the VAT credit
certificate which might be received. Based upon the language of the Federal
Court's order and the advice of legal counsel, Grupo TMM and the Company
remain optimistic about the ultimate outcome of this matter. However, the
Company's independent accountants and outside legal counsel have advised,
and management believes, that the recognition of any recovery relating to
the VAT credit certificate, including the timing and final amount thereof,
must await the conclusion of the legal process.
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION. In September 2000, KCSR
issued $200 million of 9 1/2% senior notes due 2008. In addition, as
discussed above in note 6, in June 2002, KCSR issued $200 million of 7 1/2%
senior notes due 2009. Both of these note issues are an unsecured
obligation of KCSR, however, they are also jointly and severally and fully
and unconditionally guaranteed on an unsecured senior basis by KCS and
certain of the subsidiaries (all of which are wholly-owned) within the KCS
consolidated group. For each of these note issues, KCS registered exchange
notes with the SEC that have substantially identical terms and associated
guarantees and all of the initial senior notes for each issue have been
exchanged for $200 million of registered exchange notes for each respective
note issue.
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 issuers of guaranteed securities 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 U.S. GAAP.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
Nine months ended September 30, 2002 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Revenues $ - $ 412.4 $ 20.7 $ 12.5 $ (27.6) $ 418.0
Costs and expenses 8.3 370.5 19.8 12.9 (27.6) 383.9
------------- ------------- ------------- ------------- -------------- -------------
Operating income (loss) (8.3) 41.9 0.9 (0.4) - 34.1
Equity in net earnings (losses)
of Unconsolidated affiliates and
subsidiaries 36.9 32.3 (0.1) 25.8 (69.2) 25.7
Gain on sale of Mexrail 4.4 4.4 - - (4.4) 4.4
Interest expense (0.3) (32.6) (0.4) (0.2) 0.2 (33.3)
Other income 5.0 2.6 7.5 0.4 (0.2) 15.3
------------- ------------- ------------- ------------- -------------- -------------
Income (loss) before
income taxes 37.7 48.6 7.9 25.6 (73.6) 46.2
Income tax provision (benefit) (1.8) 6.2 3.0 (0.7) - 6.7
------------- ------------- ------------- ------------- -------------- -------------
Income (loss) before
extraordinary item 39.5 42.4 4.9 26.3 (73.6) 39.5
Extraordinary item (2.7) (2.7) - - 2.7 (2.7)
------------- ------------- ------------- ------------- -------------- -------------
Net income $ 36.8 $ 39.7 $ 4.9 $ 26.3 $ (70.9) $ 36.8
============= ============= ============= ============= ============== =============
Nine months ended September 30, 2001 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Revenues $ - $ 422.4 $ 15.9 $ 13.0 $ (19.5) $ 431.8
Costs and expenses 9.8 379.5 14.1 12.9 (19.5) 396.8
------------- ------------- ------------- ------------- -------------- -------------
Operating income (loss) (9.8) 42.9 1.8 0.1 - 35.0
Equity in net earnings (losses)
of Unconsolidated affiliates
and subsidiaries 26.7 24.8 (0.1) 24.1 (52.2) 23.3
Interest expense (0.5) (43.8) (0.5) (0.3) 2.2 (42.9)
Other income 0.2 4.9 0.1 - (2.2) 3.0
------------- ------------- ------------- ------------- -------------- -------------
Income (loss) before
income taxes 16.6 28.8 1.3 23.9 (52.2) 18.4
Income tax provision (benefit) (3.4) 1.1 0.5 0.2 - (1.6)
Income (loss) before cumulative
effect of accounting change 20.0 27.7 0.8 23.7 (52.2) 20.0
------------- ------------- ------------- ------------- -------------- -------------
Cumulative effect of accounting
change, net of income taxes (0.4) (0.4) - - 0.4 (0.4)
------------- ------------- ------------- ------------- -------------- -------------
Net income $ 19.6 $ 27.3 $ 0.8 $ 23.7 $ (51.8) $ 19.6
============= ============= ============= ============= ============== =============
CONDENSED CONSOLIDATING BALANCE SHEETS
As of September 30, 2002 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
ASSETS
Current assets $ 46.2 $ 241.9 $ 28.2 $ 9.2 $ (104.1) $ 221.4
Investments 742.7 434.2 - 411.4 (1,183.7) 404.6
Properties, net 0.2 1,300.0 36.1 - - 1,336.3
Goodwill and other assets 1.6 31.7 1.5 2.2 (3.6) 33.4
------------- ------------- ------------- ------------- -------------- -------------
Total assets $ 790.7 $ 2,007.8 $ 65.8 $ 422.8 $ (1,291.4) $ 1,995.7
============= ============= ============= ============= ============== =============
LIABILITIES AND EQUITY
Current liabilities $ 8.8 $ 274.4 $ 7.0 $ 18.1 $ (104.1) $ 204.2
Long-term debt 1.3 575.7 1.7 - - 578.7
Payable to affiliates 10.1 - 0.6 - (10.7) -
Deferred income taxes 9.6 362.5 4.9 1.2 (3.9) 374.3
Other liabilities 31.3 58.9 3.7 15.0 - 108.9
Stockholders' equity 729.6 736.3 47.9 388.5 (1,172.7) 729.6
------------- ------------- ------------- ------------- -------------- -------------
Total liabilities and
equity $ 790.7 $ 2,007.8 $ 65.8 $ 422.8 $ (1,291.4) $ 1,995.7
============= ============= ============= ============= ============== =============
As of December 31, 2001 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
ASSETS
Current assets $ 25.5 $ 223.4 $ 22.0 $ 6.6 $ (23.1) $ 254.4
Investments 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
Goodwill 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 $ 3.8 $ (23.1) $ 247.1
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 10.4 - 101.6
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
============= ============= ============= ============= ============== =============
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2002 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Net cash flows provided by (used
for) operating activities: $ (14.1) $ 106.1 $ (6.6) $ 8.2 $ 0.4 $ 94.0
------------- ------------- ------------- ------------- -------------- -------------
Investing activities:
Property acquisitions - (61.4) (1.7) - - (63.1)
Proceeds from disposal of
property - 8.7 8.8 - - 17.5
Investments in and loans to
affiliates - - - (9.3) 5.3 (4.0)
Proceeds from sale of
investments 1.4 31.4 - - (1.1) 31.7
Other, net - 0.3 - (2.2) 0.6 (1.3)
------------- ------------- ------------- ------------- -------------- -------------
Net 1.4 (21.0) 7.1 (11.5) 4.8 (19.2)
------------- ------------- ------------- ------------- -------------- -------------
Financing activities:
Proceeds from issuance of
long-term debt - 200.0 - - - 200.0
Repayment of long-term debt (0.4) (263.2) (1.0) (0.2) - (264.8)
Proceeds from loans from
affiliates 7.3 - 0.1 - (7.4) -
Repayment of loans from
affiliates (2.0) - - - 2.0 -
Debt issuance costs - (5.5) - - - (5.5)
Proceeds from stock plans 7.7 - - - - 7.7
Cash dividends paid (0.2) - - - - (0.2)
Other, net - (6.2) 0.2 4.6 0.2 (1.2)
------------- ------------- ------------- ------------- -------------- -------------
Net 12.4 (74.9) (0.7) 4.4 (5.2) (64.0)
------------- ------------- ------------- ------------- -------------- -------------
Cash and cash equivalents:
Net increase (decrease) (0.3) 10.2 (0.2) 1.1 - 10.8
At beginning of period 1.3 23.2 - 0.2 - 24.7
------------- ------------- ------------- ------------- -------------- -------------
At end of period $ 1.0 $ 33.4 $ (0.2) $ 1.3 $ - $ 35.5
============= ============= ============= ============= ============== =============
Nine months ended September 30, 2001 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Net cash flows provided by (used
for) operating activities: $ (7.7) $ 34.8 $ (3.6) $ 5.5 $ 1.2 $ 30.2
------------- ------------- ------------- ------------- -------------- -------------
Investing activities:
Property acquisitions - (41.3) (0.9) - - (42.2)
Proceeds from disposal of
property - 11.5 3.5 - - 15.0
Investments in and loans to
affiliates - (2.0) - (7.3) 3.2 (6.1)
Proceeds from sale of
investments - - - - - -
Other, net - (2.2) 1.7 - (0.3) (0.8)
------------- ------------- ------------- ------------- -------------- -------------
Net - (34.0) 4.3 (7.3) 2.9 (34.1)
------------- ------------- ------------- ------------- -------------- -------------
Financing activities:
Proceeds from issuance of
long-term debt - 35.0 - - - 35.0
Repayment of long-term debt - (23.6) (1.0) (0.2) - (24.8)
Proceeds from loans from
affiliates 1.7 - - - (1.7) -
Debt issuance costs - (0.4) - - - (0.4)
Proceeds from stock plans 5.6 - - - - 5.6
Cash dividends paid (0.2) - - - - (0.2)
Other, net (0.3) (5.6) 0.3 2.1 (2.4) (5.9)
------------- ------------- ------------- ------------- -------------- -------------
Net 6.8 5.4 (0.7) 1.9 (4.1) 9.3
------------- ------------- ------------- ------------- -------------- -------------
Cash and cash equivalents:
Net increase (decrease) (0.9) 6.2 - 0.1 - 5.4
At beginning of period 1.5 19.4 0.1 0.5 - 21.5
------------- ------------- ------------- ------------- -------------- -------------
At end of period $ 0.6 $ 25.6 $ 0.1 $ 0.6 $ - $ 26.9
============= ============= ============= ============= ============== =============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
THE DISCUSSION SET FORTH BELOW, AS WELL AS OTHER PORTIONS OF THIS FORM 10-Q,
CONTAINS 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-Q. 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 ("KCS"
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 FORWARD-LOOKING COMMENTS.
THE COMPANY WILL NOT UPDATE ANY FORWARD-LOOKING COMMENTS SET FORTH IN THIS FORM
10-Q.
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 1 OF THIS FORM 10-Q. THIS DISCUSSION
SHOULD BE READ IN CONJUNCTION WITH THESE CONSOLIDATED FINANCIAL STATEMENTS AND
THE RELATED NOTES THERETO, AND IS QUALIFIED BY REFERENCE THERETO.
GENERAL
KCS is a Delaware corporation. KCS, formerly named Kansas City Southern
Industries, Inc., is a holding company and its principal subsidiaries and
affiliates include the following:
o The Kansas City Southern Railway Company ("KCSR"), a wholly-owned
subsidiary;
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), a
46.6% owned unconsolidated affiliate, which owns 80% of the common stock of
TFM, S.A. de C.V. ("TFM"). TFM wholly owns Mexrail, Inc. ("Mexrail").
Mexrail owns 100% of The Texas-Mexican Railway Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate that leases locomotive and rail equipment to KCSR;
o 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").
KCS, as the holding company, supplies its various subsidiaries with managerial,
legal, tax, financial and accounting services, in addition to managing other
"non-operating" investments.
RECENT DEVELOPMENTS
FAVORABLE RULING IN VALUE ADDED TAX LAWSUIT. As previously announced in the
Company's Current Report on Form 8-K dated October 11, 2002, a three judge panel
of the Court of the First Circuit ("Federal Court") in Mexico City unanimously
ruled in favor of Grupo TFM in its VAT lawsuit. The claim dates back to January
1997. By a unanimous decision, the three-judge panel of the Federal Court found
that the ruling by the Superior Court of Federal Tribunal of Fiscal and
Administrative Justice ("Fiscal Court") denying TFM's claim had violated TFM's
constitutional rights. The Federal Court remanded the case back to the Fiscal
Court with specific instructions to vacate its prior decision and enter a new
decision consistent with the guidance provided by the Federal Court's ruling.
The Federal Court ruling requires the fiscal authorities to issue the VAT credit
certificate only in the name of the interested party, to issue the VAT credit
certificate only in strict accordance with the terms of the fiscal code, and to
deliver the VAT credit certificate only to the beneficiary. The new decision of
the Fiscal Court must be issued in accordance with the guidelines of the Federal
Court. The Company and Grupo TMM have been advised that the Federal Court's
order is not subject to appeal by the Mexican government. However, the Fiscal
Court's forthcoming decision may be challenged by either of the parties if such
party believes that the new ruling does not comply with the order of the Federal
Court. In addition, a third party who can establish that its rights have been
adversely and improperly affected by the new ruling may seek to bring a claim
against TFM, but TFM management has indicated to the Company that it believes it
would prevail in any such action. The face value of the VAT credit certificate
at issue is approximately $206 million, and the amount of any recovery will
reflect that principal amount adjusted for inflation and interest accruals from
1997 in accordance with Mexican Law. For the three
and nine months ended September 30, 2002, the amounts reported in the Company's
consolidated financial statements as equity in net earnings of Grupo TFM of $9.8
million and $27.6 million, respectively, do not include the recognition of any
recovery relating to the value of the VAT credit certificate which might be
received. Based upon the language of the Federal Court's order and the advice of
legal counsel, Grupo TMM and the Company remain optimistic about the ultimate
outcome of this matter. However, the Company's independent accountants and
outside legal counsel have advised, and management believes, that the
recognition of any recovery relating to the VAT credit certificate, including
the timing and final amount thereof, must await the conclusion of the legal
process.
PURCHASE OF MEXICAN GOVERNMENT'S OWNERSHIP OF GRUPO TFM. KCS and Grupo TMM
exercised their call option and, on July 29, 2002, completed the purchase of the
Mexican government's 24.6% ownership of Grupo TFM. The Mexican government's
ownership interest of Grupo TFM was purchased by TFM for a purchase price of
$256.1 million, utilizing a combination of proceeds from an offering by TFM of
debt securities, a credit from the Mexican government for the reversion of
certain rail facilities and other resources. This transaction resulted in an
increase in the Company's ownership percentage of Grupo TFM from 36.9% to
approximately 46.6%.
DEBT REFINANCING. During the second quarter of 2002, the Company completed
several debt refinancing transactions as described below.
SENIOR NOTES
On June 12, 2002, KCSR issued $200 million of 7 1/2% senior notes due June 15,
2009 ("7 1/2% Notes") through a private offering pursuant to Rule 144A under the
Securities Act of 1933 in the United States and Regulation S outside the United
States ("Note Offering"). These notes are general unsecured obligations of KCSR,
are guaranteed by the Company and certain of its subsidiaries, and contain
certain covenants and restrictions customary for this type of debt instrument
and for borrowers with similar credit ratings.
Net proceeds from the Note Offering of $195.8 million, together with cash, were
used to repay term debt under the Company's senior secured credit facility ("KCS
Credit Facility") and certain other secured indebtedness of the Company. Debt
issuance costs related to the Note Offering of approximately $4.4 million were
deferred and are being amortized over the seven-year term of the 7 1/2% Notes.
See "New Credit Agreement" below.
KCS submitted a Form S-4 Registration Statement to the SEC on July 12, 2002, as
amended on July 24, 2002, relative to an Exchange Offer for the $200 million 7
1/2% senior notes due 2009. On July 30, 2002, the SEC declared this Registration
Statement effective thereby providing the opportunity for holders of the initial
7 1/2% Senior Notes due 2009 to exchange them for registered notes with
substantially identical terms. All of the 7 1/2% Senior Notes due 2009 were
exchanged for $200 million of registered notes due June 15, 2009. The registered
notes bear a fixed annual interest rate to be paid semi-annually on June 15 and
December 15 and are due June 15, 2009.
NEW CREDIT AGREEMENT
On June 12, 2002, in conjunction with the repayment of certain of the term loans
under the Company's senior secured credit facility ("KCS Credit Facility") using
the net proceeds received from the Note Offering, the Company amended and
restated the KCS Credit Facility (the amended and restated credit agreement is
referred to as the New Credit Agreement herein). The New Credit Agreement
provides KCSR with a $150 million term loan ("Tranche B term loan"), which
matures on June 12, 2008, and a $100 million revolving credit facility
("Revolver"), which matures on January 11, 2006. Letters of credit are also
available under the Revolver up to a limit of $15 million. The proceeds from
future borrowings under the Revolver may be used for working capital and for
general corporate purposes. The letters of credit may be used for general
corporate purposes. Borrowings under the New Credit Agreement are secured by
substantially all of the Company's assets and are guaranteed by the majority of
its subsidiaries.
The Tranche B term loan and the Revolver bear interest at the London Interbank
Offered Rate ("LIBOR") or an alternate base rate, as the Company shall select,
plus an applicable margin. The applicable margin for the Tranche B term loan is
2% for LIBOR borrowings and 1% for alternate base rate borrowings. The
applicable margin for the Revolver is based on the Company's leverage ratio
(defined as the ratio of the Company's total debt to consolidated EBITDA
(earnings before interest, taxes, depreciation and amortization, excluding the
undistributed earnings of unconsolidated affiliates) for the prior four fiscal
quarters). Based on the Company's leverage ratio as of September 30, 2002, the
applicable margin was 2.25% per annum for LIBOR borrowings and 1.25% per annum
for alternate base rate borrowings.
The New Credit Agreement also requires the payment to the lenders of a
commitment fee of 0.50% per annum on the average daily, unused amount of the
Revolver and Tranche B term loan. Additionally, a fee equal to a per annum rate
of 0.25% plus the applicable margin for LIBOR priced borrowings under the
Revolver will be paid on any letter of credit issued under the Revolver.
The New Credit Agreement contains certain provisions, covenants and restrictions
customary for this type of debt and for borrowers with a similar credit rating.
These provisions include, among others, restrictions on the Company's ability
and its subsidiaries ability to 1) incur additional debt or liens; 2) enter into
sale and leaseback transactions; 3) merge or consolidate with another entity; 4)
sell assets; 5) enter into certain transactions with affiliates; 6) make
investments, loans, advances, guarantees or acquisitions; 7) make certain
restricted payments, including dividends, or make certain payments on other
indebtedness; and 8) make capital expenditures. In addition, the Company is
required to comply with certain financial ratios, including minimum interest
expense coverage and leverage ratios. The New Credit Agreement also contains
certain customary events of default. These covenants, along with other
provisions, could restrict maximum utilization of the Revolver.
Debt issuance costs related to the New Credit Agreement of approximately $1.1
million were deferred and are being amortized over the respective term of the
loans. Extraordinary debt retirement costs associated with the prepayment of
certain term loans under the KCS Credit Facility using proceeds from the Note
Offering were approximately $4.3 million ($2.7 million, net of income taxes).
SOUTHERN CAPITAL
On June 25, 2002, Southern Capital refinanced the outstanding balance of its
bridge loan through the issuance of approximately $167.6 million of pass through
trust certificates and the sale of 50 locomotives. The pass through trust
certificates are secured by the sold locomotives, all of the remaining
locomotives and rolling stock owned by Southern Capital and rental payments
payable by KCSR under the sublease of the sold locomotives and its leases of the
equipment owned by Southern Capital. Payments of interest and principal of the
pass through trust certificates, which are due semi-annually on June 30 and
December 30 commencing on December 30, 2002 and ending on June 30, 2022, are
insured under a financial guarantee insurance policy by MBIA Insurance
Corporation. KCSR leases or subleases all of the equipment securing the pass
through trust certificates.
IMPLEMENTATION OF NEW TRANSPORTATION COMPUTER SYSTEM. On July 14, 2002, the
Company initiated a switch-over from its legacy system operating platform to a
Management Control System ("MCS") on KCSR. This state-of-the-art system is
designed to provide better analytical tools for management to use in its
decision-making processes. MCS, among other things, provides tracking of
individual shipments across our rail system and compares that movement to the
service sold to the customer. If a shipment falls behind schedule, MCS
automatically generates alerts and action recommendations. The Company's
depreciation expense is expected to increase by approximately $4.8 million per
annum ($2.4 million in 2002) as a result of the implementation of MCS.
As previously announced, the Company's third quarter and year to date results
were impacted by higher operating costs and some temporary traffic diversions
caused by congestion directly related to the implementation of MCS. The MCS
implementation slowed the railroad as employees learned to respond to the data
discipline demanded by this new system. Although management believes that the
issues with the implementation of MCS have been largely resolved, the initial
difficulties experienced by office and field personnel in transitioning to this
new platform led to the congestion issues and operating inefficiencies during
the third quarter 2002, which contributed to a decline in consolidated operating
income. See Results of Operations below for a discussion of the impact on third
quarter operations.
SALE OF MEXRAIL, INC. TO TFM. The Company, Grupo TMM, and certain of Grupo TMM's
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, Texas and all of the common stock of the
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 used
the proceeds from the sale of Mexrail 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's proportionate share of the proceeds
from the sale of Mexrail to TFM exceeded the carrying value of the Company's
investment in Mexrail by $11.2 million. The Company recognized a $4.4 million
gain on the sale of Mexrail to TFM in the first quarter of 2002, while the
remaining $6.8 of excess proceeds was deferred and is being amortized over 20
years.
COMPANY CHANGES NAME TO KANSAS CITY SOUTHERN. On May 2, 2002, at the Annual
Meeting of Stockholders, the shareholders of the Company approved a proposal to
amend the Certificate of Incorporation to change the name of the Company from
"Kansas City Southern Industries, Inc." to "Kansas City Southern." The name
change became effective on May 2, 2002 following the filing of the amended
Certificate of Incorporation with the Secretary of State of the State of
Delaware. The name change reflects the change in the Company's business and
holdings following the spin-off of Stilwell Financial Inc. on July 12, 2000. By
dropping "Industries, Inc." from the name, KCS will maintain the identification
in the marketplace of the Company and KCSR, while emphasizing our focus on
transportation rather than a variety of industries. The name change does not
require a change in the security ticker symbol of KSU on the New York Stock
Exchange.
CHANGES TO MEXICAN TAX LAW. As discussed in the Company's Annual Report on Form
10-K for the year ended December 31, 2001, as amended by Amendment No. 1 on Form
10-K/A ("2001 Form 10-K"), effective January 1, 2002, Mexico implemented changes
in its income tax laws. One of these changes reduced the Mexican corporate
income tax rate 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 recorded the impact of this rate change during the first quarter of
2002. After consideration of minority interest, the impact of this rate change
did not have a significant impact on the Company's equity in earnings of Grupo
TFM for the first quarter of 2002.
KCSR AND THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY ("BNSF") FORM
MARKETING ALLIANCE. On April 22, 2002, KCSR and BNSF entered into a marketing
agreement forming a comprehensive joint marketing alliance to promote
cooperation, revenue growth and extend market reach for both railroads in the
United States and Canada. The marketing alliance is also designed to improve
operating efficiencies for both KCSR and BNSF in key market areas, as well as
provide customers with expanded service options. KCSR and BNSF will coordinate
marketing and operational initiatives in a number of target markets. Similarly,
KCSR and BNSF will also coordinate operations to provide improved and extended
service options for grain customers. The marketing alliance is expected to allow
the two railroads to be more responsive to shippers' requests for rates and
service, whenever mutually advantageous. Coal and unit train operations are
excluded from the marketing alliance, as well as any points where KCSR and BNSF
are the only direct rail competitors. Movements to and from Mexico by either
party are also excluded. Management believes this new marketing alliance will
provide important opportunities to grow KCSR's revenue base, particularly in the
chemical, grain and forest product markets, and provide both participants with
expanded access to important markets and provide shippers with enhanced options
and competitive alternatives.
RESULTS OF OPERATIONS
The following table summarizes the income statement components of the Company
for the three and nine months ended September 30, 2002 and 2001 respectively,
for use in the analysis below. See consolidated statements of income
accompanying this Form 10-Q for other captions not presented in this table (IN
MILLIONS):
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
---------------- -------------- --------------- ---------------
Revenues $ 137.6 $ 144.6 $ 418.0 $ 431.8
Costs and expenses 131.4 128.6 383.9 396.8
---------------- -------------- --------------- ---------------
Operating income 6.2 16.0 34.1 35.0
Equity in net earnings (losses) of unconsolidated
affiliates 9.1 6.9 25.7 23.3
Gain on sale of Mexrail, Inc. - - 4.4 -
Interest expense (11.5) (13.2) (33.3) (42.9)
Other income 6.5 0.9 15.3 3.0
---------------- -------------- --------------- ---------------
Income before income taxes, extraordinary item, and
cumulative effect of accounting change 10.3 10.6 46.2 18.4
Income tax provision (benefit) (0.3) 1.6 6.7 (1.6)
---------------- -------------- --------------- ---------------
Income before extraordinary item and cumulative effect
of accounting change 10.6 9.0 39.5 20.0
Extraordinary item, net of income taxes - - (2.7) -
Cumulative effect of accounting change, net of income
taxes - - - (0.4)
---------------- -------------- --------------- ---------------
Net income $ 10.6 $ 9.0 $ 36.8 $ 19.6
================ ============== =============== ===============
The following table summarizes the revenues and carload statistics of KCSR for
the three and nine months ended September 30, 2002 and 2001, respectively.
Certain prior period amounts have been reclassified to reflect changes in the
business groups and to conform to the current period presentation.
Carloads and
Revenues Intermodal Units
-------------------------------------------- -------------------------------------------
(IN MILLIONS) (IN THOUSANDS)
Three months Nine months Three months Nine months
ended September 30, ended September 30, ended September 30, ended September 30,
----------- ---------- ----------- --------- ---------- ---------- --------- -----------
2002 2001 2002 2001 2002 2001 2002 2001
----------- ---------- ----------- --------- ---------- ---------- --------- -----------
General commodities:
Chemical and petroleum $ 32.4 $ 30.4 $ 98.1 $ 93.8 35.6 34.0 109.3 111.8
Paper and forest 34.7 34.6 100.8 96.4 46.0 47.4 134.8 137.2
Agricultural and mineral 20.8 22.3 67.2 64.5 29.1 31.6 93.5 93.4
----------- ---------- ----------- --------- ---------- ---------- ---------- ----------
Total general commodities 87.9 87.3 266.1 254.7 110.7 113.0 337.6 342.4
Intermodal and automotive 14.0 14.3 43.3 50.9 75.3 70.4 213.6 220.7
Coal 24.4 31.1 74.7 87.0 50.2 53.3 155.4 148.0
----------- ---------- ----------- -------- ----------- --------- ----------- ---------
Carload revenues and carload
and intermodal units 126.3 132.7 384.1 392.6 236.2 236.7 706.6 711.1
Other rail-related revenues 10.0 10.0 28.8 30.4 ========== ========== ========== ==========
----------- ---------- ----------- ---------
Total KCSR revenues 136.3 142.7 412.9 423.0
Other subsidiary revenues 1.3 1.9 5.1 8.8
----------- ---------- ----------- ---------
Total consolidated
revenues $ 137.6 $ 144.6 $ 418.0 $ 431.8
=========== ========== =========== =========
The following table summarizes KCS's consolidated costs and expenses for the
three and nine months ended September 30, 2002 and 2001, respectively. Certain
prior period amounts have been reclassified to conform to the current year
presentation.
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Compensation and benefits $ 51.2 $ 48.7 $ 147.1 $ 145.4
Depreciation and amortization 15.8 14.7 45.3 43.6
Purchased services 15.9 15.4 43.5 41.8
Operating leases 12.4 12.6 37.1 38.1
Fuel 8.9 11.5 27.7 35.3
Casualties and insurance 6.9 6.1 22.0 28.4
Car hire 5.6 3.5 14.9 15.7
Other 14.7 16.1 46.3 48.5
--------------- --------------- --------------- ---------------
Total consolidated costs and expenses $ 131.4 $ 128.6 $ 383.9 $ 396.8
=============== =============== =============== ===============
NET INCOME. Net income for the three months ended September 30, 2002 was $10.6
million (17(cent) per diluted share) compared to $9.0 million (15(cent) per
diluted share) for the three months ended September 30, 2001. This $1.6 million
quarter to quarter increase was primarily the result of a $5.6 million increase
in other income, $2.3 million increase in equity in earnings from Grupo TFM, a
$1.9 million reduction in the provision (benefit) for income taxes, and a $1.7
million decrease in interest expense. These factors, which led to an increase in
net income were partially mitigated by a $7.0 million decline in consolidated
revenue, a $2.8 million increase in consolidated operating expenses and a $0.1
million increase in losses associated with other unconsolidated affiliates (PCRC
and Southern Capital).
For the nine months ended September 30, 2002, net income increased $17.2 million
to $36.8 million (59(cent) per diluted share) from $19.6 million (32(cent) per
diluted share) for the nine months ended September 30, 2001. This increase was
primarily the result of a $12.9 million decline in consolidated operating
expenses, a $12.3 million increase in other income, a $9.6 million decrease in
interest expense, a $4.4 million gain realized on the sale of Mexrail to TFM,
and a $4.1 million increase in equity in net earnings of Grupo TFM. This year to
date increase was partially offset by a $13.8 million decline in consolidated
revenue, an $8.3 million increase in the provision for income taxes, and a $1.7
million decline in equity in net earnings (losses) of other unconsolidated
affiliates. Additionally, net income for the nine months ended September 30,
2002 includes extraordinary debt retirement costs of $2.7 million (after-tax)
associated with the early retirement of term debt in June 2002. Net income for
the nine months ended September 30, 2001 includes a $0.4 million charge relating
to the
implementation of Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
REVENUES. Consolidated revenues for the three and nine months ended September
30, 2002 declined $7.0 million and $13.8 million to $137.6 million and $418.0
million, respectively, compared to $144.6 million and $431.8 million for the
three and nine months ended September 30, 2001, respectively. During the third
quarter of 2002, KCSR experienced revenue growth in several commodity groups,
including chemical and petroleum products, certain forest products and
intermodal traffic compared to the third quarter of 2001, continuing the
positive revenue trends noted for these commodities during the first half of
2002 and in spite of the MCS related difficulties encountered this quarter. The
increase in revenue for these shipments was driven by volume gains, increased
length of haul and price improvements in key traffic lanes. KCS management
believes that revenues for these commodities as well as certain other traffic
would have improved even further during the quarter, but were adversely affected
by lower carloadings arising from MCS related congestion. These quarter to
quarter revenue improvements were offset by comparatively lower revenues for
coal, automotive and grain business. As a result, third quarter 2002 revenues
for KCSR were $6.4 million lower than the comparable prior year quarter. For the
nine months ended September 30, 2002, revenue from KCSR declined $10.1 million
compared to the nine months ended September 30, 2001, primarily as a result of
lower coal and automotive revenues as well as MCS related issues in the third
quarter. These declines were partially offset by revenue increases in chemical
and petroleum products, agriculture and minerals, paper and forest products and
intermodal and haulage services. The following discussion provides an analysis
of KCSR revenues by commodity group for the quarter and year to date ended
September 30, 2002.
CHEMICAL AND PETROLEUM PRODUCTS. Revenues for chemical and petroleum
products for the three and nine months ended September 30, 2002 increased $2.0
million (6.6%) and $4.3 million (4.6%), respectively, compared to the same
periods in 2001. These increases resulted from a combination of higher traffic
volumes for certain commodities in this business group, together with targeted
rate increases and longer hauls due to gateway changes. Higher revenues for
gases and organic product for the three and nine months ended September 30, 2002
were primarily the result of production increases by certain customers.
Increased inorganic revenues were the result of increased access to production
facilities in Geismar, Louisiana as well as new business previously shipped by
other rail carriers. Increases in the production of PVC and plastic pellet
products yielded higher plastics product revenue for the three and nine months
ended September 30, 2002 compared to the same periods in 2001. These quarterly
and year to date increases were partially offset by decreases in agrichemical
and petroleum product revenue as a result of lower industrial production due to
the continued slowdown in the U.S. economy. Chemical and petroleum products
revenue accounted for 25.7% and 22.9% of carload revenues for the three months
ended September 30, 2002 and 2001, respectively, and 25.6% and 23.9% of carload
revenues for the nine months ended September 30, 2002 and 2001, respectively.
PAPER AND FOREST PRODUCTS. Revenues for paper and forest products for the
three and nine months ended September 30, 2002 increased $0.1 million (0.3%) and
$4.4 million (4.6%) compared to the same periods in 2001. For the three months
ended September 30, 2002, higher revenues in pulp and paper, lumber and plywood
and metal/scrap were mostly offset by revenue declines in pulpwood/logs/chips,
and military/other carloads. For the nine months ended September 30, 2002,
increases in revenues for pulp and paper and lumber/plywood were partially
mitigated by decreases in all other paper and forest products revenues. The
increases in pulp and paper product revenues for the quarter and year to date
were the result of production growth in the paper industry. Increases in
revenues for lumber and plywood products reflect continued strength in the home
building market and an increase in housing starts. Lower revenues for pulpwood,
logs and chips products and metal and scrap products for the three and nine
months ended September 30, 2002 were primarily the result of declines in
industrial production as a result of the continued slowdown of the U.S. economy.
These decreases were partially offset by targeted rate increases. Paper and
forest products revenue accounted for 27.4% and 26.1% of carload revenues for
the three months ended September 30, 2002 and 2001, respectively, and 26.2% and
24.6% of carload revenues for the nine months ended September 30, 2002 and 2001,
respectively.
AGRICULTURAL AND MINERAL PRODUCTS. Revenues for agricultural and mineral
products decreased $1.5 million for the three months ended September 30, 2002
compared to the same period in 2001. For the nine months ended September 30,
2002, however, revenues for this commodity group increased $2.7 million compared
to the same period in 2001. For the three months ended September 30, 2002,
increases in revenues for food products and stone, clay and glass products
partially mitigated revenue declines in all other agricultural and mineral
products. For the nine months ended September 30, 2002, increases in revenues
for domestic and export grain, food, and stone, clay and glass products were
partially offset by declines in revenues for ores and minerals products. Revenue
increases for domestic grain resulting from certain rate increases and longer
hauls were partially offset by lower domestic demand. For the nine months ended
September 30, 2002, export grain increased over the same period in 2001
primarily as a result of higher demand from Mexico and other
export markets in the first quarter of 2002. Increases in revenue for stone,
clay and glass product were primarily the result of higher production by two
customers as well as targeted rate increases and longer hauls. Agricultural and
mineral products revenue accounted for 16.5% and 16.8% of carload revenues for
the three months ended September 30, 2002 and 2001, respectively, and 17.5% and
16.4% of carload revenues for the nine months ended September 30, 2002 and 2001,
respectively.
INTERMODAL AND AUTOMOTIVE. Intermodal and automotive revenues combined
decreased $0.3 million and $7.6 million for the three and nine months ended
September 30, 2002, respectively, compared to the same periods in 2001.
Automotive revenues declined $1.6 million and $10.0 million for the three and
nine months ended September 30, 2002, respectively, compared to the same periods
in 2001. These declines were a result of the loss of certain Ford business in
the third quarter of 2001 due to competitive pricing from another railroad as
well as the impact of the continued weakness of the U.S. economy on the
automotive industry resulting in a 65.4% and 61.0% decline in carload volumes
for the three and nine-month periods ended September 30, 2002, respectively, for
automotive traffic. Intermodal revenues increased $1.3 million and $2.4 million
for the three and nine months ended September 30, 2002, respectively, compared
to the same periods in 2001. Both the quarter to quarter and year to date
increases were the result of increases in domestic carloads as well as
international traffic moving to Mexico. Intermodal and automotive revenue
accounted for 11.1% and 10.8% of carload revenues for the three months ended
September 30, 2002 and 2001, respectively, and 11.3% and 13.0% of carload
revenues for the nine months ended September 30, 2002 and 2001, respectively.
COAL. Coal revenues decreased $6.7 million and $12.3 million for the
three and nine month periods ended September 30, 2002, respectively, compared to
the same periods in 2001. Coal revenues for both periods were significantly
impacted by a rate reduction at our largest utility customer and the loss of a
coal customer in April 2002 due to the expiration of a contract. The effect of
these revenue declines were partially mitigated by increases in year-to-date
carload volume due to higher demand at certain utility customers and as a result
of the re-opening of a utility plant in Kansas City that had been out of service
since July of 1999. Coal revenue accounted for 19.3% and 23.4% of carload
revenues for the quarters ended September 30, 2002 and 2001, respectively, and
19.4% and 22.2% of carload revenues for the nine months ended September 30, 2002
and 2001, respectively.
OTHER. Other rail related revenues remained relatively flat for the three
months ended September 30, 2002, and decreased $1.6 million for the nine months
ended September 30, 2002, compared to the same periods in 2001. These
fluctuations were primarily due to higher haulage and other revenues partially
offset by declines in switching and demurrage revenues.
COSTS AND EXPENSES. Consolidated costs and expenses increased $2.8 million for
the three months ended September 30, 2002 and decreased $12.9 million for the
nine months ended September 30, 2002 compared to the same periods in 2001. The
quarter to quarter increase was primarily the result of higher KCSR expenses of
$5.8 million and lower expenses at certain other subsidiaries of $3.0 million.
The year to date decrease was primarily the result of lower KCSR expenses of
$9.1 million partially offset by lower expenses at certain other subsidiaries of
$3.8 million. Third quarter and year to date costs were impacted by higher costs
associated with the implementation of MCS. The categories most affected were
compensation and benefits, depreciation, purchased services, and car hire. See
further discussion below.
COMPENSATION AND BENEFITS. Consolidated compensation and benefits expense
increased $2.5 million and $1.7 million for the three and nine month periods
ended September 30, 2002, respectively, compared to the same periods in 2001.
The quarterly and year to date increases resulted primarily from higher overtime
and crew costs as a result of congestion related to the implementation of MCS in
the third quarter of 2002. Additionally, compensation costs were impacted by the
implementation of an increase in certain union wages in the third quarter of
2002 as well as higher health insurance related costs. These increases were
partially offset by declines arising from lower employee counts, the automation
of certain locomotive crew functions, a favorable adjustment related to an
accrual for retroactive wage increases to union employees, which was not
provided for in the national labor union contract and lower railroad retirement
taxes. The year to date increase in compensation and benefits expense was also
affected by the impact of a $2.0 million reduction in retirement-based costs for
certain union employees recorded in the first quarter of 2001. Additionally, the
year to date increase was partially mitigated by the effect of workforce
reduction costs of $1.3 million also recorded in the first quarter of 2001.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and amortization
expense was $15.8 million and $45.3 million for the three and nine months ended
September 30, 2002, respectively, compared to $14.7 million and $43.6 million
for the three and nine months ended September 30, 2001, respectively. The
increase in depreciation expense for both the quarter and year to date periods
resulted primarily from the implementation of MCS, which increased depreciation
expense by $1.2 million. (See "Recent Developments" above.)
PURCHASED SERVICES. Consolidated purchased services expense for the three
and nine months ended September 30, 2002 increased $0.5 million and $1.7
million, respectively, to $15.9 million and $43.5 million compared to $15.4
million and $41.8 million for the same periods in 2001. The quarter to quarter
increase was primarily the result of higher environmental and legal costs as
well as higher costs associated with employee training related to the
implementation of MCS. This increase was partially mitigated by a $1.0 million
legal settlement received during the third quarter 2002, in addition to the
higher costs described for the third quarter. Year to date purchased service
costs were also impacted by higher locomotive and car repair costs contracted to
third parties as well as other general purchased services. These year to date
increases were partially mitigated by insurance and legal settlements totaling
approximately $2.9 million.
OPERATING LEASES. Consolidated operating lease expense for the three and
nine months ended September 30, 2002 decreased $0.2 million and $1.0 million
respectively to $12.4 million and $37.1 million compared to $12.6 million and
$38.1 million for the same periods in 2001. Both the quarter and year to date
decreases were the result of the expiration of certain leases that have not been
renewed due to continued changes in fleet utilization. These decreases were
somewhat mitigated by increases in costs associated with the lease for the
Company's new corporate headquarters building.
FUEL. Consolidated fuel expense for the three and nine months ended
September 30, 2002 decreased $2.6 million and $7.6 million, respectively, to
$8.9 million and $27.7 million compared to $11.5 million and $35.3 million for
the same periods in 2001. The $2.6 million quarter to quarter decrease was the
result of a 13.1% decrease in the average cost per gallon of fuel combined with
a 10.4% decline in fuel consumption. The $7.6 million year to date decrease in
fuel expense was the result of an 18.3% decrease in the average cost per gallon
of fuel combined with a 3.9% decline in fuel consumption.
CASUALTIES AND INSURANCE. Consolidated casualties and insurance expense
for the three months ended September 30, 2002 increased $0.8 million compared to
the same period in 2001. This quarter to quarter increase was primarily the
result of costs associated with derailments that occurred in the third quarter
of 2002, partially mitigated by the receipt of a legal settlement of $1.5
million. For the nine months ended September 30, 2002, consolidated casualties
and insurance expense declined $6.4 million. During the first quarter of 2001,
the Company incurred approximately $8.5 million in increased costs related to
several significant derailments and the settlement of a significant personal
injury claim. In 2002, derailment and claims costs have been normalized compared
to 2001. The year to date reduction also reflects the impact of a $1.4 million
insurance settlement received in the second quarter of 2002.
CAR HIRE. Consolidated car hire expense for the three months ended
September 30, 2002 increased $2.1 million to $5.6 million compared to $3.5
million for the same period in 2001. This increase was due to a higher number of
freight cars from other railroads on the Company's rail line as a result of
increased congestion resulting from the implementation of MCS (see "Recent
Developments" above), partially mitigated by a greater number of KCSR freight
cars being used by other railroads. For the nine months ended September 30,
2002, consolidated car hire expense decreased $0.8 million to $14.9 million
compared to $15.7 million for the same period in 2001. For the first and second
quarters of 2002, KCSR's railway operations were more efficient and less
congested than the third quarter because of the MCS related congestion.
Additionally, KCSR's operations during the first six months of 2002 were more
efficient than the first half of 2001 when an unusual number of derailments,
line washouts and floods had a significant adverse effect upon the Company's
domestic operations. Accordingly, these factors led to an overall decline in car
hire costs for the nine months ended September 30, 2002 compared to the same
period in 2001.
OPERATING INCOME AND KCSR OPERATING RATIO. Consolidated operating income
for the three months ended September 30, 2002 decreased $9.8 million to $6.2
million compared to $16.0 million for the same period in 2001. This decrease was
the result of a $7.0 million decline in revenue combined with a $2.8 million
increase in operating expenses. For the three months ended September 30, 2002,
the operating ratio for KCSR was 94.2% compared to 85.9% for the same period in
2001. Consolidated operating income for the nine months ended September 30, 2002
decreased $0.9 million to $34.1 million compared to $35.0 million for the same
period in 2001. This decrease was the result of a $13.8 million decline in
revenue partially mitigated by a $12.9 million decline in operating expenses.
For both the nine months ended September 30, 2002 and 2001, the operating ratio
for KCSR was 89.3%.
INTEREST EXPENSE. Consolidated interest expense for the three and nine months
ended September 30, 2002 declined $1.7 million (12.9%) and $9.6 million (22.4%),
respectively, compared to the same periods in 2001. These decreases were the
result of lower interest rates combined with lower debt balances, as debt
balances declined $96.1 million from $684.8 million at September 30, 2001 to
$588.7 million at September 30, 2002.
OTHER INCOME. For the three and nine months ended September 30, 2002, the
Company's other income increased $5.6 million and $12.3 million, respectively,
compared to the same periods in 2001. The quarter to quarter increase was
primarily the result of an approximate $4.9 gain on the sale of the Company's
interest in Wyandotte Garage Corporation. Additionally, other income for the
nine months ended September 30, 2002 includes a total gain of approximately $7.3
million on the sale of certain non-operating properties. During the nine months
ended September 30, 2001, there were no significant gains on the sale of
non-operating property.
INCOME TAX EXPENSE. For the three months ended September 30, 2002, the Company
reported an income tax benefit of $0.3 million compared to an income tax
provision of $1.6 for the same period in 2001. This decrease in income tax
expense was primarily the result of a decrease in the Company's domestic
operating income partially offset by the gain recorded on the sale of the
Company's investment in Wyandotte Garage Corporation and lower interest costs.
For the nine months ended September 30, 2002, the Company's income tax provision
was $6.7 million compared to an income tax benefit of $1.6 million for the same
period in 2001. This increase was primarily the result of gains on the sale of
the Company's investments in Mexrail and Wyandotte Garage Corporation as well as
the sale of other non-operating assets combined with lower interest costs
compared to the same period in 2001. These factors, which led to an increase in
income tax expense, were partially offset by lower domestic operating income.
EQUITY IN NET EARNINGS (LOSSES) OF UNCONSOLIDATED AFFILIATES. For the three
months ended September 30, 2002, the Company recorded equity in net earnings of
unconsolidated affiliates of $9.1 million compared to $6.9 million for the same
period in 2001. This $2.2 million quarter to quarter increase resulted primarily
from a $2.3 million increase in equity in earnings from Grupo TFM. Exclusive of
the results from Mexrail, which was consolidated into Grupo TFM effective April
1, 2002, third quarter 2002 Grupo TFM revenues declined approximately 3%
compared to the third quarter of 2001 and operating expenses decreased
approximately 4% (under U.S. GAAP). Third quarter 2002 results for Grupo TFM
include a $14.2 million deferred tax benefit (calculated under U.S. GAAP)
compared to a deferred tax benefit of $12.0 million in the same period in 2001.
This variance was caused primarily by fluctuations in the peso exchange rate and
tax benefits derived from the impact of inflation in Mexico. The Company reports
its equity in Grupo TFM under U.S. GAAP while Grupo TFM reports under
International Accounting Standards ("IAS"). Because the Company is required to
report its equity in 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. Additionally, as
discussed in "Recent Developments" above, the Company's equity in earnings of
Grupo TFM does not include the recognition of the value of the VAT credit
certificate.
Equity in losses from other unconsolidated affiliates were $0.7 million for the
third quarter of 2002 compared to $0.6 million for the third quarter of 2001.
For both periods, losses from the operations of the Panama Canal Railway Company
("PCRC") were partially offset by earnings from Southern Capital Corporation
("Southern Capital"). PCRC is currently not operating at full capacity due to
delays in the completion of expansion at the port of Balboa in Panama. The
Balboa port expansion is expected to be complete by the summer of 2003, at which
time the revenues of PCRC are anticipated to increase, which is expected to
improve the financial performance of PCRC.
For the nine months ended September 30, 2002, the Company recorded equity in net
earnings of unconsolidated affiliates of $25.7 million compared to $23.3 million
in the same period of 2001. Equity in earnings from Grupo TFM increased
approximately $4.1 million compared to the same period in 2001. In 2001,
however, equity in earnings from Grupo TFM reflected the Company's proportionate
share ($9.1 million) of the income recorded by Grupo TFM related to the
reversion of certain concession assets to the Mexican government. Exclusive of
this 2001 income, the Company's year to date 2002 equity in earnings from Grupo
TFM increased $13.2 compared to the same period in 2001. Exclusive of Mexrail's
results for the nine months ended September 30, 2002, Grupo TFM's revenues were
essentially unchanged compared to the same period in 2001, while operating
expenses (under U.S. GAAP) were almost 5% lower (exclusive of the 2001 reversion
income.) For the nine months ended September 30, 2002, Grupo TFM's results
include a $44.6 million deferred tax benefit (calculated under U.S. GAAP)
compared to a deferred tax expense of $12.6 million in the same period in 2001.
This variance was caused by several factors, including a deferred tax expense
recorded in 2001 related to the income from the line reversion, the weakening of
the peso exchange rate, as well as tax benefits derived from the impact of
Mexican
inflation in 2002. The fluctuation in the peso exchange rate also contributed to
a $14.4 million exchange loss for the year to date 2002 compared to an exchange
loss of $3.0 million for the same period in 2001.
Equity in losses from the Company's other unconsolidated affiliates increased to
$1.9 million for the nine months ended September 30, 2002 compared to $0.2
million for the same period in 2001. In 2002, losses associated with PCRC were
$2.9 million compared to $1.0 million in 2001. As mentioned above, PCRC is not
operating at full capacity as initially planned due to the delay in completion
of the port expansion at Balboa. During 2001, losses were primarily related to
the start-up of operations at PCRC. Additionally, the Company reported equity
losses from Mexrail of $0.7 million in 2001 compared to essentially a break-even
amount for 2002 prior to its sale to TFM. These losses were offset by equity
earnings from Southern Capital of $1.0 million and $1.5 million for the nine
months ended September 30, 2002 and 2001, respectively.
EXTRAORDINARY ITEM, NET OF INCOME TAXES. In the accompanying consolidated
financial statements for the nine months ended September 30, 2002, KCS reported
an extraordinary charge of $2.7 million (after-tax) related to the debt
refinancing transaction discussed above in "Recent Developments - Debt
Refinancing".
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. The Company 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 consolidated financial statements.
TRENDS AND OUTLOOK
During the first half of 2002, the Company was able to improve its profitability
and reduce its debt despite the continued economic slowdown in North America.
While consolidated revenue for the first half of 2002 declined 2.4% primarily as
a result of the slowdown in the U.S. economy and reduced coal revenues, efforts
to maintain the Company's cost structure proved effective as operating income
for the first half of 2002 increased compared to the same periods in 2001. In
the third quarter of 2002, however, the Company's progress toward improving
profitability was impacted by congestion throughout the Company's U.S. rail
network and reduced operating efficiency primarily as a result of the
implementation of MCS (See "Recent Developments" above). In the third quarter of
2002, increased congestion caused some customer service delays and resulted in
higher expenses for certain categories including car hire, regular and overtime
wages, certain equipment charges and other MCS implementation related expenses.
These congestion related factors also contributed to lower revenues for the
third quarter, which also declined due to the continued impact of the economic
slowdown and lower coal revenues arising from a contractual rate reduction at
one of the Company's major coal customers. These factors also contributed to the
Company's year to date results as operating income for the year to date fell 2%
compared to the same period in 2001. While the Company's third quarter and year
to date operations were negatively impacted by the implementation of MCS, the
Company began to experience an improvement in operations in the month of
September, with less congestion and more efficient train movements.
Additionally, other factors contributed to an improvement in third quarter and
year to date net income compared to 2001 periods. Equity in net earnings from
Grupo TFM improved 30.6% quarter to quarter and 191.6% year to date (after
adjusting for the Company's $9.1 million share of the income recorded by Grupo
TFM related to the reversion of certain concession assets to the Mexican
government during 2001). Interest costs for the quarter and year to date periods
continued to decline compared to prior year periods as a result of lower debt
balances and lower interest rates. Further, during 2002, the Company realized
gains on the sale of certain investments and assets. In the first quarter of
2002, the Company realized a gain of $4.4 million on the sale of its investment
in Mexrail to TFM and in the third quarter of 2002, the Company realized a gain
of $4.9 million on the sale of its investment in Wyandotte Garage Corporation.
For the nine months ended September 30, 2002, the Company realized additional
gains of approximately $7.3 million on the sale of other non-operating assets.
During the nine months ended September 30, 2001, there were no significant gains
on the sale of non-operating property. The Company's third quarter 2002 diluted
earnings per share increased 13.3% compared to the same period in 2001 while the
Company's year to date 2002 diluted earnings per share increased 84.4% compared
to the same period in 2001.
The Company's investment in Grupo TFM continues to contribute to the Company's
net income. Equity in earnings from Grupo TFM increased $2.3 million in the
third quarter of 2002 and $13.2 million (exclusive of $9.1 million related to
the reversion of certain concession assets to the Mexican government) for year
to date 2002 compared to the respective periods in 2001. The Company's increased
ownership percentage of Grupo TFM resulting from the purchase of the Mexican
government's ownership of Grupo TFM partially contributed to these period to
period increases, and is expected to increase equity earnings from Grupo TFM in
future periods.
The Company reduced its debt balance by approximately $69.7 million during the
first nine months of 2002 and $96.1 million over the last twelve months
resulting in a debt balance of $588.7 million at September 30, 2002.
A current outlook for the Company's businesses for the remainder of 2002 is as
follows (refer to the first paragraph of "Overview" section of this Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, regarding forward-looking comments):
As previously discussed, management expects coal revenues for the fourth quarter
of 2002 to decline compared to the fourth quarter of 2001, as a result of a
contractual rate reduction at SWEPCO, as well as the loss of business due to the
expiration of a contract that was not renewed.
Except as outlined herein, variable costs and expenses are expected to be
proportionate with revenue activity, assuming normalized rail operations. Fuel
prices are expected to fluctuate subject to market conditions. To mitigate the
market risk associated with fuel, the Company currently has approximately 40% of
its remaining budgeted fuel usage for 2002 under purchase commitments, which
lock in a specific price. Casualty expenses are expected to be lower in the
fourth quarter of 2002 compared to the fourth quarter of 2001 based on the
Company's continued focus and success on safety issues and the claim settlement
approach implemented during 2001. Insurance costs are expected to rise as the
insurance industry continues to respond to the September 11, 2001 terrorist
attacks and health care costs are also expected to be higher in 2002 based on
the market trends. These increases are expected to be offset by declines in
certain railroad retirement costs as described further in "Recent Developments -
New Railroad Retirement Improvement Act" of the Company's 2001 Form 10-K.
Depreciation expense is expected to increase for the fourth quarter of 2002 due
to the implementation of MCS while operating lease expense is expected to remain
relatively flat.
The Company expects to continue to participate in the earnings/losses from its
equity investments in Grupo 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.
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data for the Company is as follows (IN MILLIONS):
Nine Months
Ended September 30,
-------------------------------
2002 2001
------------- -------------
Cash flows provided by (used for):
Operating activities $ 94.0 $ 30.2
Investing activities (19.2) (34.1)
Financing activities (64.0) 9.3
------------- -------------
Cash and cash equivalents:
Net (decrease) increase 10.8 5.4
At beginning of year 24.7 21.5
------------- -------------
At end of period $ 35.5 $ 26.9
============= =============
During the nine months ended September 30, 2002, the Company's consolidated cash
position increased $10.8 million from December 31, 2001, primarily as a result
of operating cash inflows, proceeds from the sale of certain investments
(Mexrail and Wyandotte) and from the sale of certain non-operating property, and
proceeds from the issuance of long-term debt. These increases were partially
mitigated by debt repayments and property acquisitions. Net operating cash
inflows were $94.0 million and $30.2 million for the nine months ended September
30, 2002 and 2001, respectively. The $63.8 million increase in operating cash
flows was primarily attributable to higher net income and changes in working
capital balances, comprised mainly of the receipt of income tax refunds during
the first nine months of 2002 and the timing of payments and receipts.
Net investing cash outflows were $19.2 million and $34.1 million for the nine
months ended September 30, 2002 and 2001, respectively. This $14.9 million
difference was driven by proceeds received from the sale of certain Company
investments of $31.7 million and a $2.5 million increase in proceeds received
from the disposal of property. These cash inflows were partially offset by a
$20.9 million increase in capital expenditures period to period.
For the nine months ended September 30, 2002, financing cash outflows were used
primarily to repay long-term debt and to fund debt issuance costs associated
with the $200 million Note Offering in June 2002. Cash inflows were generated
from proceeds from the Note Offering and from the issuance of common stock under
employee stock plans. For the first nine months of 2002, net financing cash
outflows were $64.0 million compared to net financing cash inflows of $9.3
million for the first nine months of 2001. This difference was primarily due to
net repayments of long-term debt of $64.8 million during the first nine months
of 2002 compared to net borrowings of $10.2 million during the first nine months
of 2001.
Management expects cash flows from operations to be positive throughout the
remainder of 2002 as a result of operating income, which has historically
resulted in positive operating cash flows. Investing activities are projected to
use significant amounts of cash for capital expenditures. Future roadway
improvement projects will continue to be primarily funded by operating cash
flows or, secondarily, through borrowings under the Company's line of credit.
The Company's consolidated ratio of debt to total capitalization was 44.7% and
49.2% at September 30, 2002 and December 31, 2001, respectively. The Company's
debt decreased $69.7 million from $658.4 million at December 31, 2001 to $588.7
million at September 30, 2002 as a result of net repayments of long-term debt.
This decrease in debt was coupled with an increase in the Company's
stockholders' equity of $49.3 million to $729.6 million at September 30, 2002.
This increase was due primarily to net income of $36.8 million and the issuance
of common stock under employee stock plans. Management anticipates that the
ratio of debt to total capitalization will continue to decline slightly during
the remainder of 2002 as debt continues to be reduced and equity increases.
In addition to operating cash flows, the Company has financing available under a
Revolver with a maximum borrowing amount of $100 million. As of September 30,
2002, all $100 million was available under the Revolver. The New Credit
Agreement contains, among other provisions, various financial covenants. As a
result of certain financial covenants contained in the credit agreement, maximum
utilization of the Company's Revolver may be restricted. The Company was in full
compliance with all covenant provisions of the credit agreement at September 30,
2002 and expects to be in compliance at the end of 2002 and for the foreseeable
future. See "Recent Developments - Debt Refinancing".
As discussed in "Recent Developments- Debt Refinancing", on June 12, 2002, KCSR
used the net proceeds from the Note Offering of $195.8 million, together with
cash, to repay term debt under the KCS Credit Facility and certain other secured
indebtedness of the Company. The 7 1/2% Notes are general unsecured obligations
of KCSR, are guaranteed by the Company and certain of its subsidiaries, and
contain certain covenants and restrictions customary for this type of debt
instrument and for borrowers with similar credit ratings.
The Company filed a Universal Shelf Registration Statement on Form S-3 ("Initial
Shelf" - 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 a Shelf
Registration Statement filed on Form S-3 ("Second Shelf" - 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 and securities in the aggregate amount of $450 million remain
available under the Second Shelf. To date, no securities have been issued under
either the Initial Shelf or Second Shelf.
As discussed in the 2001 Form 10-K, Grupo TMM and KCS, or either Grupo TMM or
KCS, 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. If KCS and Grupo TMM, or either KCS or Grupo TMM alone had
been required to purchase the Mexican government's 20% interest in TFM as of
September 30, 2002, the total purchase price would have been approximately
$485.7 million.
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 relative to
potential future debt financing transactions could be impacted by independent
rating agencies, which assign debt ratings based on certain credit measurements
such as interest coverage and leverage ratios.
OTHER
NEW ACCOUNTING PRONOUNCEMENT. In April 2002, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections ("SFAS 145"). SFAS 145, among other things,
rescinds Statement of Accounting Standards No. 4, "Reporting Gains and Losses
from Extinguishment of Debt ("SFAS 4"), which provided that gains and losses
from the extinguishment of debt were to be reported as extraordinary items in
the statement of income. The provisions of SFAS 145 relating to the rescission
of SFAS 4 are effective for fiscal years beginning after May 15, 2002. The
Company has reviewed the provisions of SFAS 145 and determined that, upon
adoption, all items currently reported as extraordinary items in the Company's
Consolidated Statements of Income will be reclassified to a separate line item
presented above `income before income taxes'. The related income taxes, which
were previously presented net with the extraordinary item, will be presented as
a component of the income tax provision. The Company may elect to adopt the
provisions of SFAS 145 before its required effective date.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no significant changes in the Company's Quantitative and
Qualitative Disclosures About Market Risk from that previously reported in the
Annual Report on Form 10-K for the year ended December 31, 2001.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including the Chief Executive Officer and the Chief
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Part I, Item 1. Financial Statements, Note 7 to the Consolidated Condensed
Financial Statements of this Form 10-Q is hereby incorporated herein by
reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
(3) Articles of Incorporation and Bylaws
BYLAWS
3.2 Bylaws of Kansas City Southern, as amended and restated to September
24, 2002, is attached to this Form 10-Q as Exhibit 3.2.
(99) Additional exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K
The Company furnished a Current Report on Form 8-K dated July 11, 2002
under Item 5 of such form, announcing that the Company had adopted
Financial Accounting Standards No. 142.
The Company furnished a Current Report on Form 8-K dated July 3, 2002
announcing its second quarter meeting, 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 July 25, 2002
reporting its second quarter 2002 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 furnished a Current Report on Form 8-K dated September 25,
2002 announcing its third quarter earnings will be impacted by
implementation of its new transportation management system. 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized and in the capacities indicated on November 12, 2002.
Kansas City Southern
/S/ RONALD G. RUSS
------------------------------------------------------
Ronald G. Russ
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/S/ LOUIS G. VAN HORN
------------------------------------------------------
Louis G. Van Horn
Vice President and Comptroller
(Principal Accounting Officer)
CERTIFICATION
I, Michael R. Haverty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kansas City Southern;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/S/ MICHAEL R. HAVERTY
-----------------------------------
Michael R. Haverty
Chairman, President and Chief Executive Officer
CERTIFICATION
I, Ronald G. Russ, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kansas City Southern;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/S/ RONALD G. RUSS
--------------------------------------------
Ronald G. Russ
Senior Vice President and Chief Financial Officer