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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____ to ____
Commission file number 1-4717
KANSAS CITY SOUTHERN INDUSTRIES, INC.
(Exact name of Company as specified in its charter)
Delaware 44-0663509
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
114 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code (816) 983-1303
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
Preferred Stock, Par Value $25 Per Share, 4%, NoncumulativeNew York Stock
Exchange
Common Stock, $.01 Per Share Par Value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Company Stock. The Company's common stock is listed on the New York Stock
Exchange under the symbol "KSU." As of February 28, 2001 58,299,805 shares
of common stock and 242,170 shares of voting preferred stock were
outstanding. On such date, the aggregate market value of the voting and
non-voting common and preferred stock held by non-affiliates of the Company
was $878,404,541 (amount computed based on closing prices of preferred and
common stock on New York Stock Exchange).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference
into Part of the Form 10-K as indicated:
Document Part of Form 10-K into which incorporated
- --------------------------------- -----------------------------------------
Company's Definitive Proxy Statement for the 2001 Parts I, III
Annual Meeting of Stockholders, which will be filed
no later than 120 days after December 31, 2000
KANSAS CITY SOUTHERN INDUSTRIES, INC.
2000 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART I
Item 1. Business................................................. 1
Item 2. Properties............................................... 14
Item 3. Legal Proceedings........................................ 18
Item 4. Submission of Matters to a Vote of Security Holders...... 18
Executive Officers of the Company........................ 19
PART II
Item 5. Market for the Company's Common Stock and
Related Stockholder Matters............................ 20
Item 6. Selected Financial Data.................................. 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 22
Item 7(A) Quantitative and Qualitative Disclosures About Market Risk 57
Item 8. Financial Statements and Supplementary Data.............. 59
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 111
PART III
Item 10. Directors and Executive Officers of the Company.......... 112
Item 11. Executive Compensation................................... 112
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................. 112
Item 13. Certain Relationships and Related Transactions........... 112
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................ 113
Signatures............................................... 121
ii
Part I
Item 1. Business
(a) GENERAL DEVELOPMENT OF COMPANY BUSINESS
Kansas City Southern Industries, Inc. ("Company" or "KCSI"), a Delaware
corporation organized in 1962, is a holding company with principal
operations in rail transportation. On June 14, 2000, KCSI's Board of
Directors approved the spin-off of Stilwell Financial Inc. ("Stilwell"),
the Company's then wholly-owned financial services subsidiary. On July 12,
2000, KCSI completed the spin-off of Stilwell through a special dividend of
Stilwell common stock distributed to KCSI common stockholders of record on
June 28, 2000 ("Spin-off").
As of the date of the Spin-off, Stilwell was comprised of Janus Capital
Corporation, an approximate 81.5% owned subsidiary; Berger LLC, an
approximate 88% owned subsidiary; Nelson Money Managers Plc, an 80% owned
subsidiary; DST Systems, Inc., an equity investment in which Stilwell holds
an approximate 32% interest; and miscellaneous other financial services
subsidiaries and equity investments.
The Spin-off occurred after the close of business of the New York Stock
Exchange on July 12, 2000, and each KCSI stockholder received two shares of
the common stock of Stilwell for every one share of KCSI common stock owned
on the record date. The total number of Stilwell shares distributed was
222,999,786.
On July 9, 1999, KCSI received a tax ruling from the Internal Revenue
Service ("IRS") which states that for United States federal income tax
purposes the Spin-off qualifies as a tax-free distribution under Section
355 of the Internal Revenue Code of 1986, as amended. Additionally, in
February 2000, the Company received a favorable supplementary tax ruling
from the IRS to the effect that the assumption of $125 million of KCSI
indebtedness by Stilwell would have no effect on the previously issued tax
ruling.
On July 12, 2000, KCSI completed a reverse stock split whereby every two
shares of KCSI common stock were converted into one share of KCSI common
stock. The Company's stockholders approved a one-for-two reverse stock
split in 1998 in contemplation of the Spin-off.
Also, in preparation for the Spin-off, the Company re-capitalized its debt
structure on January 11, 2000 as further described under Part II Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of this Form 10-K.
Other information set forth in response to Item 101 of Regulation S-K under
Part II Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, of this Form 10-K is incorporated by reference
in response to this Item 1.
(b) INDUSTRY SEGMENT FINANCIAL INFORMATION
KCSI supplies its various subsidiaries with managerial, legal, tax,
financial and accounting services, in addition to managing other
"non-operating" investments. Kansas City Southern Lines, Inc. ("KCSL"),
which was the direct parent of The Kansas City Southern Railway Company
("KCSR"), was merged into KCSI effective December 31, 2000. KCSI's
principal subsidiaries and affiliates, which following the Spin-off, are
reported under one business segment, include, among others:
Page 1
o KCSR, a wholly-owned subsidiary;
o Gateway Western Railway Company ("Gateway Western"), a wholly-owned
subsidiary;
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo
TFM"), an approximate 37% owned unconsolidated affiliate, which owns 80%
of the common stock of TFM, S.A. de C.V. ("TFM");
o Mexrail, Inc. ("Mexrail"), a 49% owned unconsolidated affiliate,
which wholly owns the Texas Mexican Railway Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate that leases locomotive and rail equipment
primarily to KCSR;
o Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of
which KCSR indirectly owns 50% of the common stock; and
o Panarail Tourism Company ("Panarail"), a 50% owned unconsolidated
affiliate
Other subsidiaries of the Company include:
o Trans-Serve, Inc., an owner of a railroad wood tie treating facility;
o PABTEX GP, LLC (formerly "Global Terminaling Services, Inc."),
located in Port Arthur, Texas with deep water access to the Gulf of
Mexico, an owner and operator of a bulk materials handling facility
which stores and transfers coal and petroleum coke from trucks and rail
cars to ships primarily for export;
o Mid-South Microwave, Inc., which owns and leases a 1,600 mile
industrial frequency microwave transmission system that is the primary
communications facility used by KCSR;
o Rice-Carden Corporation, owning and operating various industrial real
estate and spur rail trackage contiguous to the KCSR right-of-way;
o Southern Development Company, the owner of the executive office
building in downtown Kansas City, Missouri used by KCSI and KCSR;
o Wyandotte Garage Corporation, an owner and operator of a parking
facility located in downtown Kansas City, Missouri used by KCSI and
KCSR; and
o Transfin Insurance, Ltd., a single parent captive insurance company,
providing property and general liability coverage to KCSI and its
subsidiaries and affiliates.
Other information set forth in response to Item 101 of Regulation S-K under
Part II Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations of this Form 10-K and under Item 8, Financial
Statements and Supplementary Data of this Form 10-K, is incorporated by
reference in response to this Item 1.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
The information set forth in response to Item 101 of Regulation S-K under
Part II Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, of this Form 10-K is incorporated by reference
in response to this Item 1.
KCSI owns one of eight Class I railroads in the United States and, along
with the Company's subsidiaries and joint ventures, own and operate a rail
network comprised of approximately 6,000 miles of main and branch lines
that link key commercial and industrial markets in the United States and
Mexico. Through a strategic alliance with Canadian National Railway
Company ("CN") and Illinois Central Corporation ("IC") (together "CN/IC"),
the Company has created a contiguous rail network of approximately 25,000
miles of main and branch lines connecting Canada, the United States and
Mexico. Management believes that, as a result of the strategic position of
the railway, KCSI is poised to continue to benefit from the growing
north/south trade between the United States, Mexico and Canada promoted by
the implementation of NAFTA. The Company's rail network offers services to
companies in a wide range of markets including the coal, chemicals and
petroleum, paper and forest, agricultural and mineral, and intermodal and
automotive markets.
Page 2
The Company's principal subsidiary, KCSR, founded in 1887, operates a rail
network of approximately 2,700 miles of main and branch lines running on a
north/south axis from Kansas City, Missouri to the Gulf of Mexico and on an
east/west axis from Meridian, Mississippi to Dallas, Texas ("Meridian
Speedway"). In addition to KCSR, operations include Gateway Western, Grupo
TFM, and Mexrail, which wholly owns Tex Mex. Mexrail owns the northern
half of the rail bridge at Laredo which spans the Rio Grande River into
Mexico. TFM operates the southern half of the bridge. Gateway Western, a
regional rail carrier, operates approximately 400 route miles of main and
branch lines running from East St. Louis, Illinois to Kansas City. Grupo
TFM owns 80% of TFM, which operates a railroad of approximately 2,700 miles
of main and branch lines running from the U.S./Mexican border at Laredo,
Texas to Mexico City and serves three of the four major ports in Mexico.
Tex Mex operates approximately 150 miles of main and branch lines between
Laredo and the port city of Corpus Christi, Texas. The Company also owns
50% of the common stock of the Panama Canal Railway Company, which holds
the concession to operate a 47-mile railroad located adjacent to the Panama
Canal. That railroad is currently being reconstructed and is expected to
resume operations in 2001. The Company also owns 50% of Panarail, a joint
venture organized in 2000 to provide passenger rail service over PCRC's
rail lines.
5
KCSI's expanded rail network interconnects with all other Class I railroads
and provides customers with an effective alternative to other railroad
routes, giving direct access to Mexico and the southwestern United States
through less congested interchange hubs. Eastern railroads and their
customers can bypass the congested gateways at Chicago, Illinois; St.
Louis, Missouri; Memphis, Tennessee and New Orleans, Louisiana by
interchanging with KCSR at Meridian and Jackson, Mississippi and Gateway
Western at East St. Louis. Other railroads can also interconnect with the
Company's rail network via other gateways at Kansas City, Birmingham,
Alabama; Shreveport, Louisiana; Dallas; New Orleans; Beaumont, Texas; and
Laredo. The Company's rail network links directly to major trading centers
in northern Mexico through TFM at Laredo, where more than 50% of all rail
and truck traffic between the two countries crosses the border.
KCSI's rail network is further expanded through marketing agreements with
Norfolk Southern and I&M Rail Link. Marketing agreements with Norfolk
Southern allow the Company to gain incremental traffic between the
southeast and the southwest on the Meridian Speedway. A marketing
agreement with I&M Rail Link provides access to Minneapolis and Chicago and
to corn and other grain origination's in Iowa, Minnesota and Illinois.
RAIL NETWORK
Owned Network
KCSR owns and operates approximately 2,700 miles of main and branch lines
and 1,180 miles of other tracks in a nine-state region that includes
Missouri, Kansas, Arkansas, Oklahoma, Mississippi, Alabama, Tennessee,
Louisiana and Texas. KCSR has the shortest north/south rail route between
Kansas City and several key ports along the Gulf of Mexico in Louisiana,
Mississippi and Texas and an east/west rail route between Meridian and
Dallas. This geographic reach enables service to a customer base that
includes electric generating utilities and a wide range of companies in the
chemical and petroleum, agricultural and mineral, paper and forest, and
automotive and intermodal markets.
Gateway Western owns and operates approximately 400 miles of main and
branch lines linking Kansas City with East St. Louis and Springfield,
Illinois. In addition, Gateway Western has limited haulage rights between
Springfield and Chicago that allow Gateway Western to move traffic that
originates or terminates on its rail lines. Gateway Western provides
access to East St. Louis, and
Page 3
allows rail traffic to avoid the more congested and costly St. Louis terminal.
Like KCSR, Gateway Western serves customers in a wide range of industries.
KCSR and Gateway Western revenues and net income are dependent on providing
reliable service to customers at competitive rates, the general economic
conditions in the geographic region served and the ability to effectively
compete against alternative modes of surface transportation, such as
over-the-road truck transportation. The ability of KCSR and Gateway
Western to construct and maintain the roadway in order to provide safe and
efficient transportation service is important to the ongoing viability as a
rail carrier. Additionally, cost containment is important in maintaining a
competitive market position, particularly with respect to employee costs as
approximately 84% of KCSR and Gateway Western combined employees are
covered under various collective bargaining agreements.
Significant Investments
Mexrail
In 1995 the Company invested approximately $23 million to acquire a 49%
economic interest in Mexrail, which owns 100% of Tex Mex and certain other
assets. Tex Mex and TFM operate the international rail-traffic bridge at
Laredo spanning the Rio Grande River. Transportacion Maritima Mexicana,
S.A. de C.V. ("TMM"), the largest shareholder of Grupo TFM, owns the
remaining 51% of Mexrail. The bridge at Laredo is the most significant
entry point for rail traffic between Mexico and the United States. Tex Mex
also operates a 157-mile rail line extending from Laredo to Corpus
Christi. Tex Mex connects to KCSR through trackage rights between Corpus
Christi and Beaumont. These trackage rights were granted pursuant to a
1996 Surface Transportation Board ("STB") decision and have an initial term
of 99 years. Tex Mex provides a vital link between the Company's U.S.
operations through KCSR and its Mexican operations through TFM.
On March 12, 2001, Tex Mex purchased from The Union Pacific Railroad
Company ("UP") a line of railroad extending 84.5 miles between Rosenberg,
Texas and Victoria, Texas, and granted Tex Mex trackage sufficient to
integrate the line into the existing trackage rights. The purchase price
for the line of $9.2 million was determined through arbitration and the
acquisition also required the prior approval or exemption of the
transaction by the STB. By its Order entered on December 8, 2000, the STB
granted Tex Mex's Petition for Exemption and exempted the transaction from
this prior approval requirement. Once reconstruction of the line is
completed, Tex Mex will be able to shorten its existing route between
Corpus Christi and Houston by over 70 miles.
Grupo TFM
In 1997 the Company invested $298 million to obtain a 36.9% interest in
Grupo TFM. TMM and a TMM affiliate own 38.5% of Grupo TFM and the Mexican
government owns 24.6% of Grupo TFM. Grupo TFM owns 80% of the common stock
of TFM. The remaining 20% of TFM was retained by the Mexican government.
TFM is both a strategic and financial investment for KCSI. Strategically
the investment in TFM promotes the Company's NAFTA growth strategy whereby
the Company and its strategic partners can provide transportation services
between the heart of Mexico's industrial base, the U.S. and Canada. TFM
seeks to establish its railroad as the primary inland freight transporter
linking Mexico with the U.S. and Canadian markets along the NAFTA
corridor. TFM's strategy is to provide reliable customer service,
capitalize on foreign trade growth and convert truck tonnage to rail.
Under the concession awarded to Grupo TFM by the Mexican Government in
1996, TFM operates the Northeast Rail Lines, which are located along a
strategically significant corridor between Mexico and the U.S., and have as
their core routes a key portion of the shortest, most direct rail
passageway between Mexico City and the southern, midwestern and eastern
United States. These
Page 4
rail lines are the only rail lines which serve Nuevo Laredo, the largest rail
freight exchange point between the United States and Mexico. TFM's rail lines
connect the most populated and industrialized regions of Mexico with Mexico's
principal U.S. border railway gateway at Laredo. In addition, this rail system
serves three of Mexico's four primary seaports at Veracruz and Tampico on the
Gulf of Mexico and Lazaro Cardenas on the Pacific Ocean. TFM serves 15 Mexican
states and Mexico City, which together represent a majority of the country's
population and account for a majority of its estimated gross domestic product.
This route structure enables the Company to benefit from growing trade
resulting from the increasing integration of the North American economy
through NAFTA. Trade between Mexico and the United States has grown
significantly from 1993 through 2000. Through Tex Mex and KCSR, as well as
through interchanges with other major U.S. railroads, TFM provides its
customers with access to an extensive network through which they may
distribute their products throughout North America and overseas.
TFM operates 2,661 miles of main and branch lines and an additional 838
miles of sidings, spur tracks and main line under trackage rights. TFM has
the right to operate the rail lines, but does not own the land, roadway or
associated structures. Approximately 91% of the main line operated by TFM
consists of continuously welded rail. As of December 31, 2000, TFM owned
459 locomotives, owned or leased from affiliates 5,089 freight cars and
leased from non-affiliates 141 locomotives and 5,254 freight cars.
Financially, KCSI management believes TFM has growth potential. TFM's
operating strategy has been to increase productivity and maximize operating
efficiencies. With Mexico's economic progress, growth of NAFTA trade
between Mexico, the United States and Canada, and customer focused rail
service, the Company believes that the growth potential of TFM could be
significant.
Panama Canal Railway Company
The Panama Canal Railway is a north-south railroad traversing the Panama
isthmus between the Pacific and Atlantic Oceans. Its origins date back to
the late 1800's and the railway serves as a complement to the Panama Canal
shipping channel. The railroad is currently under reconstruction and is
expected to be complete by mid-2001 with commercial operations to begin
immediately thereafter. Management believes the prime potential and
opportunity of PCRC will be in the movement of traffic between the ports of
Balboa and Colon for shipping customers repositioning containers. PCRC has
had significant interest from both shipping companies and port terminal
operators. In addition, there has been interest in passenger traffic for
both commuter and pleasure/tourist travel (See below). While only 47 miles
long, the Company believes PCRC provides the Company with a unique
opportunity to participate in transoceanic shipments as a complement to the
existing Canal traffic.
In January 1998, the Republic of Panama awarded the PCRC, a joint venture
between KCSR and Mi-Jack Products, Inc. ("Mi-Jack"), the concession to
reconstruct and operate the Panama Canal Railway. As of December 31, 2000,
the Company has invested approximately $9.5 million toward the
reconstruction of the existing 47-mile railway which runs parallel to the
Panama Canal and, upon reconstruction, will provide international shippers
with a railway transportation medium to complement the Panama Canal. In
November 1999, the PCRC completed the financing arrangements for this
project with the International Finance Corporation ("IFC"), a member of
the World Bank Group.
Panarail Tourism Company
During 2000, the Company and Mi-Jack formed a joint venture designed to
operate and promote commuter and pleasure/tourist passenger service over
the PCRC. Panarail is expected to commence operations in 2001, immediately
following completion of the reconstruction of PCRC's tracks.
Expanded Network
Through a strategic alliance with CN/IC and marketing agreements with
Norfolk Southern and the I&M Rail Link, the Company has expanded the
domestic geographic reach beyond that covered by its owned network.
Strategic Alliance with Canadian National and Illinois Central.
In 1998 KCSR, CN and IC announced a 15-year strategic alliance aimed at
coordinating the marketing, operations and investment elements of
north-south rail freight transportation. The strategic alliance did not
require STB approval and was effective immediately. This alliance connects
Canadian markets, the major midwest U.S. markets of Detroit, Chicago,
Kansas City and St. Louis and the key southern markets of Memphis, Dallas
and Houston. It also provides U.S. and Canadian shippers with access to
Mexico's rail system through our connections with Tex Mex and TFM.
In addition to providing access to key north-south international and
domestic U.S. traffic corridors, the alliance with CN/IC is intended to
increase business primarily in the automotive and intermodal markets and
also in the chemical and petroleum and paper and forest products markets.
This alliance has provided opportunities for revenue growth and positioned
the Company as a key provider of rail service for NAFTA trade.
Under a separate agreement, KCSR and CN formed a management group made up
of representatives from both railroads to develop plans for the
construction of new facilities to support business development, including
investments in automotive, intermodal and transload facilities at Memphis,
Dallas, Kansas City and Chicago. This agreement also granted KCSR certain
trackage and haulage rights and granted CN and IC certain haulage rights.
Under the terms of this agreement, and through action taken by the STB, in
October 2000 KCSR gained access to six additional chemical customers in the
Geismar, Louisiana industrial area through haulage rights.
Marketing Agreements with Norfolk Southern.
In December 1997 KCSR entered into a three-year marketing agreement with
Norfolk Southern and Tex Mex which provides for additional traffic volume
along the east-west corridor between Meridian and Dallas by using
interchange points with Norfolk Southern. This agreement provides Norfolk
Southern run-through service with access to Dallas and the Mexican border
at Laredo while avoiding the congested rail gateways of Memphis and New
Orleans. This agreement will be automatically renewed for additional
three-year terms unless written notice of termination is given at least 90
days prior to the expiration of the then-current term. This agreement was
automatically renewed for an additional term of three years in December
2000.
In May 2000, KCSR entered into an agreement with Norfolk Southern under
which KCSR will provide haulage services for intermodal traffic between
Meridian and Dallas in exchange for fees from Norfolk Southern. Under this
agreement Norfolk Southern may quote rates and enter into transportation
service contracts with shippers and receivers covering this haulage
traffic. Unless renewed by Norfolk Southern, this agreement terminates on
December 31, 2003.
Page 6
This new marketing agreement with Norfolk Southern provides KCSR with
additional sources of intermodal business. The current arrangement
envisions approximately two trains per day running between the Company's
connection with Norfolk Southern at Meridian and the Burlington Northern
Santa Fe Corporation ("BNSF") connection at Dallas. The structure of the
agreement provides for lower gross revenue to KCSR, but improved operating
income since fuel and car hire expenses are the responsibility of Norfolk
Southern under the agreement. Management believes this business has
additional growth potential as Norfolk Southern seeks to shift its traffic
to southern gateways to increase its length of haul.
Marketing Agreement with I&M Rail Link.
In May 1997, KCSR entered into a marketing agreement with I&M Rail Link
which provides KCSR with access to Minneapolis, Minnesota and Chicago and
to origination's of corn and other grain in Iowa, Minnesota and Illinois.
Through this marketing agreement, KCSR receives and originates shipments of
grain products for delivery to 35 poultry industry feed mills on its
network. Grain is currently KCSR's largest export product to Mexico. This
agreement is terminable upon 90 days notice.
Haulage Rights.
As a result of the 1988 acquisition of the Missouri-Kansas-Texas Railroad
by UP, KCSR was granted (1) haulage rights between Council Bluffs, Iowa,
Omaha and Lincoln, Nebraska and Atchison and Topeka, Kansas on the one hand
and Kansas City, Missouri on the other hand, and (2) a joint rate agreement
for our grain traffic between Beaumont, Texas on the one hand and Houston
and Galveston, Texas on the other hand. KCSR has the right to convert
these haulage rights to trackage rights. KCSR's haulage rights require UP
to move KCSR traffic in UP trains; trackage rights would allow KCSR to
operate its trains over UP tracks. These rights have a term of 199 years.
Markets Served
The following table summarizes combined KCSR/Gateway Western revenue and
carload statistics by commodity category. Certain prior year amounts have
been reclassified to reflect changes in the business groups and to conform
to the current year presentation.
Carloads and
Revenues Intermodal Units
(in millions) (in thousands)
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
KCSR/Gateway Western
general commodities:
Chemical and petroleum $ 126.3 $132.7 $ 143.5 154.1 165.5 172.2
Paper and forest 132.9 131.0 138.9 192.4 202.9 212.8
Agricultural and mineral 94.3 95.6 99.9 132.0 141.0 141.5
------ ------ ------ ----- ----- -----
Total general commodities 353.5 359.3 382.3 478.5 509.4 526.5
Intermodal and automotive 63.0 60.6 48.1 269.3 233.9 187.1
Coal 105.0 117.4 117.9 184.2 200.8 205.3
------ ------ ------ ----- ----- -----
Carload revenues and carload
and intermodal units 521.5 537.3 548.3 932.0 944.1 918.9
===== ===== =====
Other rail-related revenues 41.6 49.1 48.5
------ ------ ------
Total KCSR/Gateway
Western revenues $ 563.1 $586.4 $ 596.8
======= ====== =======
Page 7
Chemicals and Petroleum
Chemical and petroleum products accounted for approximately 22.4% of
KCSR/Gateway Western combined total revenues in 2000. KCSR/Gateway Western
transport chemical and petroleum products via tank and hopper cars
primarily to markets in the southeast and northeast United States through
interchange with other rail carriers. Management expects certain product
revenues within this commodity group to improve in the future as a result
of access, which began on October 1, 2000 under the agreement with CN, to
additional chemical customers in the Geismar, Louisiana industrial corridor
(one of the largest concentrations of chemical suppliers in the world).
Paper and Forest
Paper and forest products accounted for approximately 23.6% of KCSR/Gateway
Western combined total revenues in 2000. The Company's rail lines run
through the heart of the southeastern U.S. timber-producing region.
Management believes that trees from this region tend to grow faster and
that forest products made from them are generally less expensive than those
from other regions. As a result, southern yellow pine products from the
southeast are increasingly being used at the expense of western producers
who have experienced capacity reductions because of public policy
considerations. KCSR/Gateway Western serve eleven paper mills directly
and six others indirectly through short-line connections. Customers
include International Paper Company, Georgia Pacific Corporation and
Riverwood International. Primary traffic includes pulp and paper, lumber,
panel products (plywood and oriented strand board), engineered wood
products, pulpwood, woodchips, raw fiber used in the production of paper,
pulp and paperboard, as well as metal, scrap and slab steel, waste and
military equipment. Slab steel products are used primarily in the
manufacture of drill pipe for the oil industry, and military equipment is
shipped to and from several military bases on the Company's rail lines
Agricultural and Mineral
Agricultural and mineral products accounted for approximately 16.7% of
KCSR/Gateway Western combined total revenues in 2000. Agricultural
products consist of domestic and export grain, food and related products.
Shipper demand for agricultural products is affected by competition among
sources of grain and grain products as well as price fluctuations in
international markets for key commodities. In the domestic grain business,
the Company's rail lines receive and originate shipments of grain and grain
products for delivery to feed mills serving the poultry industry. Through
the marketing agreement with I&M Rail Link, the Company's rail lines have
access to sources of corn and other grain in Iowa and other Midwestern
states. KCSR currently serves 35 feed mills along its rail lines
throughout Arkansas, Oklahoma, Texas, Louisiana, Mississippi and Alabama.
Export grain shipments include primarily wheat, soybean and corn
transported to the Gulf of Mexico for international destinations and to
Mexico via Laredo. Over the long term, grain shipments are expected to
increase as a result of the Company's strategic investments in Tex Mex and
TFM, given Mexico's reliance on grain imports. Food and related products
consist mainly of soybean meal, grain meal, oils and canned goods, sugar
and beer. Mineral shipments consist of a variety of products including
ores, clay, stone and cement.
Intermodal and Automotive
Intermodal products accounted for approximately 11.2% of KCSR/Gateway
Western combined total revenues in 2000. The intermodal freight business
consists of hauling freight containers or truck trailers by a combination
of water, rail and motor carriers, with rail carriers serving as the link
between the other modes of transportation. The Company's intermodal
business has grown significantly over the last seven years with intermodal
units increasing from 61,748 in 1993 to 247,604 in 2000 and intermodal
revenues increasing from $17 million to nearly $50 million during the same
period. Through our dedicated intermodal train service between Meridian
and Dallas, the Company competes directly with truck carriers along the
Interstate 20 corridor.
Page 8
The intermodal business is highly price and service driven as the trucking
industry maintains certain competitive advantages over the rail industry.
Trucks are not obligated to provide or maintain rights of way and do not
have to pay real estate taxes on their routes. In prior years, the
trucking industry diverted a substantial amount of freight from railroads
as truck operators' efficiency over long distances increased. In response
to these competitive pressures, railroad industry management sought avenues
to improve the competitiveness of rail traffic and forged numerous
alliances with truck companies in order to move more traffic by rail and
provide faster, safer and more efficient service to their customers. KCSR
has entered into agreements with several trucking companies for train
service in several corridors, but those services are concentrated between
Dallas and Meridian.
As KCSR/Gateway Western's intermodal revenues increased, margins on certain
intermodal business declined. In 1999 management addressed the declining
margins by increasing certain intermodal rates effective September 1, 1999
and by closing two underperforming intermodal facilities at Salisaw,
Oklahoma and Port Arthur, Texas on the north/south route. These actions
have helped to improve the profitability and operating efficiency of the
Company's intermodal business.
The strategic alliance with CN/IC and marketing agreements with Norfolk
Southern provide the Company the potential to further capitalize on the
growth potential of intermodal freight revenues, particularly for traffic
moving between points in the upper midwest and Canada to Kansas City,
Dallas and Mexico. Furthermore, the Company is in the process of
transforming the former Richards-Gebaur Airbase in Kansas City to a U.S.
customs pre-clearance processing facility, the Kansas City International
Freight Gateway ("IFG"), which is expected to handle and process large
volumes of domestic and international intermodal freight. Upon completion,
management expects this facility to provide additional opportunities for
intermodal revenue growth. Through an agreement with Mazda through the
Ford Motor Company Claycomo manufacturing facility located in Kansas City,
KCSR has developed an automotive distribution facility at the
Richards-Gebaur facility. This facility became operational in April 2000
for the movement of Mazda vehicles. Full intermodal and automotive
operations at the facility are expected to be in service in 2002, providing
KCSR with additional capacity in Kansas City.
The Company's automotive traffic consists primarily of vehicle parts moving
into Mexico from the northern sections of the United States and finished
vehicles moving from Mexico into the United States. CN/IC, Norfolk
Southern and TFM have a significant number of automotive production
facilities on their rail lines. The Company's rail network essentially
serves as the connecting bridge carrier for these movements of automotive
parts and finished vehicles. The Company has also recently transacted
with Ford to ship automotive parts from East St. Louis to Kansas City.
Coal
Coal historically has been one of the most stable sources of revenues and
is the largest single commodity handled by KCSR. In 2000, coal revenues
represented 18.6% of KCSR/Gateway Western combined total revenues.
Substantially all coal customers are under long term contracts, which
typically have an average contract term of approximately five years.
KCSR's most significant customer is SWEPCO, which is under contract until
2006. The Company delivers coal to nine electric generating plants,
including SWEPCO facilities in Flint Creek, Arkansas and Welsh, Texas,
Kansas City Power and Light plants in Kansas City and Amsterdam, Missouri,
an Empire District Electric Company plant near Pittsburg, Kansas and an
Entergy Gulf States plant in Mossville, Louisiana. SWEPCO and Entergy Gulf
States together comprised approximately 73% of KCSR/Gateway Western's total
coal revenues in 2000. The coal KCSR transports originates in the Powder
River Basin in Wyoming and is transferred to KCSR's rail lines at Kansas
City. KCSR also transports coal as an intermediate carrier for a Western
Farmers Electric Cooperative plant from
Page 9
Kansas City to Dequeen, Arkansas, where it interchanges with a short-line
carrier for delivery to the plant, and delivers lignite to an electric
generating plant at Monticello, Texas. In the fourth quarter of 1999, KCSR began
serving as a bridge carrier for coal deliveries to a Texas Utilities electric
generating plant in Martin Lake, Texas.
Other
Other rail-related revenues include a variety of miscellaneous services
provided to customers and interconnecting carriers and accounted for
approximately 7.4% of total combined KCSR/Gateway Western revenues in
2000. Major items in this category include railcar switching services,
demurrage (car retention penalties) and drayage (local truck transportation
services). Also included in this category are haulage services performed
for the benefit of BNSF under an agreement, which continues through 2004
and includes minimum volume commitments.
Railroad Industry Trends and Competition
The Company's rail operations compete against other railroads, many of
which are much larger and have significantly greater financial and other
resources. Since 1994, there has been significant consolidation among
major North American rail carriers, including the 1995 merger of Burlington
Northern, Inc. and Santa Fe Pacific Corporation ("BN/SF", collectively
"BNSF"), the 1995 merger of the UP and the Chicago and North Western
Transportation Company ("UP/CNW") and the 1996 merger of UP with Southern
Pacific Corporation ("SP"). Further Norfolk Southern and CSX purchased the
assets of Conrail in 1998 and the CN acquired the IC in June 1999. As a
result of this consolidation, the railroad industry is now dominated by a
few "mega-carriers." KCSI management believes that revenues were
negatively affected by the UP/CNW, UP/SP and BN/SF mergers, which led to
diversions of rail traffic away from KCSR's rail lines. The Company also
believes that KCSR revenues have been negatively impacted by the congestion
resulting from the purchase of Conrail's assets by Norfolk Southern and CSX
in 1998. Management regards the larger western railroads, in particular,
as significant competitors to the Company's operations and prospects
because of their substantial resources. Management believes, however, that
because of the Company's investments and strategic alliances, it is
positioned to attract additional rail traffic through our NAFTA Railway.
In late 1999, a merger was announced between BNSF and CN. Subsequent to
this announcement, the STB imposed a 15-month moratorium on Class 1
railroad merger activities, while it reviews and rewrites the rules
applicable to railroad consolidation. In July 2000, the STB's moratorium
was upheld by the United States Court of Appeals for the District of
Columbia. The moratorium, and more directly the new rules, will likely
have a substantial effect on future railroad merger activity. Subsequent
to the court's decision, BNSF and CN announced the termination of their
proposed merger.
Truck carriers have eroded the railroad industry's share of total
transportation revenues. Changing regulations, subsidized highway
improvement programs and favorable labor regulations have improved the
competitive position of trucks in the United States as an alternative mode
of surface transportation for many commodities. In the United States, the
truck industry generally is more cost and transit-time competitive than
railroads for distances of less than 300 miles. Intermodal traffic and
certain other traffic face highly price sensitive competition, particularly
from motor carriers. However, rail carriers, including KCSR, have placed
an emphasis on competing in the intermodal marketplace and working together
with motor carriers and other railroads to provide end-to-end
transportation of products, especially where the length of haul exceeds 500
miles. The Company is also subject to competition from barge lines and
other maritime shipping, which compete with the Company across certain
routes in its operating area. Mississippi and Missouri River barge
traffic, among others, compete with KCSR and its rail connections in the
transportation of bulk commodities such as grains, steel and petroleum
products.
Page 10
Increased competition has resulted in downward pressure on freight rates.
Competition with other railroads and other modes of transportation is
generally based on the rates charged, the quality and reliability of the
service provided and the quality of the carrier's equipment for certain
commodities.
Employees and Labor Relations
Approximately 84% of KCSR/Gateway Western employees are covered under
various collective bargaining agreements.
In 1996, national labor contracts governing the KCSR were negotiated with
all major railroad unions, including the United Transportation Union, the
Brotherhood of Locomotive Engineers, the Transportation Communications
International Union, the Brotherhood of Maintenance of Way Employees, and
the International Association of Machinists and Aerospace Workers. Formal
negotiations to enter into new agreements are in progress and the 1996
labor contracts will remain in effect until new agreements are reached.
The wage increase elements of these new agreements may have retroactive
application. The provisions of the various labor agreements generally
include periodic general wage increases, lump-sum payments to workers and
greater work rule flexibility, among other provisions. The Company is
currently exploring alternative compensation arrangements in lieu of cash
increases. Management does not expect that the negotiations or the
resulting labor agreements will have a material impact on our consolidated
results of operations, financial condition or cash flows.
Labor agreements related to former MidSouth employees covered by collective
bargaining agreements reopened for negotiations in 1996. These agreements
entail eighteen separate groups of employees and are not included in the
national labor contracts. KCSR management has reached new agreements with
all but one of these unions. While discussions with this one union are
ongoing, the Company does not anticipate that this process or the resulting
labor agreement will have a material impact on its consolidated results of
operations, financial condition or cash flows.
Most Gateway Western employees are covered by collective bargaining
agreements that extended through December 1999. Negotiations on those
agreements began in late 1999, and those agreements will remain in effect
until new agreements are reached. The Company does not anticipate that
this process or the resulting labor agreements will have a material impact
on its consolidated results of operations, financial condition or cash
flows.
KCSR, Gateway and other railroads continue to be affected by labor
regulations, which typically are more burdensome than those governing
non-rail industries, such as trucking competitors. The Railroad Retirement
Act requires up to a 23.75% contribution by railroad employers on eligible
wages, while the Social Security and Medicare Acts only require a 7.65%
employer contribution on similar wage bases. Other programs, such as the
Federal Employers' Liability Act (FELA), when compared to worker's
compensation laws, illustrate the competitive disadvantage placed upon the
rail industry by federal labor regulations.
Joint Venture Arrangements
Mexrail
The share purchase agreement dated as of October 5, 1995 between KCSI and
TMM which governs the investment in Mexrail provides, among other things,
that the Company has a right of first refusal if (1) TMM decides to sell
all or a portion of its Mexrail common stock, (2) TMM votes its Mexrail
common stock in favor of a merger or consolidation involving Mexrail or Tex
Mex or any plan to sell all or substantially all of the assets of Mexrail
or Tex Mex or (3) Mexrail decides to sell all
Page 11
or a portion of its Tex Mex common stock. The share purchase agreement also
gives the Company the right to appoint two of Mexrail's five directors and four
of Tex Mex's nine directors.
Grupo TFM
In December 1995, the Company entered into a joint venture agreement with
TMM. The purposes of the joint venture were, among others, to provide for
the formation of Grupo TFM, to provide for participation in the upcoming
privatization of the Mexican national railway system through Grupo TFM, and
to promote the movement of rail traffic over Tex Mex, TFM and KCSR. The
term of the joint venture agreement was automatically renewed for a term of
three years on December 1, 2000 and will automatically renew for additional
terms of three years each unless either TMM or the Company gives notice of
termination at least 90 days prior to the end of the then-current term. The
joint venture agreement may also terminate under certain circumstances
prior to the end of a term, including upon a change of control or
bankruptcy of either TMM or the Company or a material default by TMM or the
Company. Upon termination of the agreement, any joint venture assets that
are not held in KCSI's or TMM's name will be distributed proportionally to
TMM and KCSI. The joint venture does not have any material assets and
management believes that a termination of the joint venture agreement would
not have a material adverse effect on the Company or its interests in
Mexrail or Grupo TFM.
The Grupo TFM by-laws and the shareholders agreement dated May 1997,
between KCSI, Caymex Transportation, Inc., Grupo Servia, S.A. de C.V.
("Grupo Servia"), TMM and TMM Multimodal, S.A. de C.V., which governs our
investment in Grupo TFM (1) restrict each of the parties to the
shareholders agreement from directly or indirectly transferring any
interest in Grupo TFM or TFM to a competitor of the parties, Grupo TFM or
TFM without the prior written consent of each of the parties, (2) prohibit
any transfer of shares of Grupo TFM to any person other than an affiliate
without the prior consent of Grupo TFM's board of directors and (3) provide
that KCSI, Grupo Servia and TMM may not transfer control of any subsidiary
holding all or any portion of shares of Grupo TFM to a third party other
than an affiliate or another party to the shareholders agreement without
the consent of the other parties to the shareholders agreement. The Grupo
TFM by-laws grant the shareholders of Grupo TFM a right of first refusal to
acquire shares to be transferred by any other shareholder in proportion to
the number of shares held by each non-transferring shareholder, although
holders of preferred shares or shares with special or limited rights are
only entitled to acquire those shares and not ordinary shares. The
shareholders agreement requires that the boards of directors of Grupo TFM
and TFM be constituted to reflect the parties' relative ownership of the
ordinary voting common stock of Grupo TFM.
TFM holds the Concession to operate Mexico's Northeast Rail Lines for the
50 years beginning in June 1997 and, subject to certain conditions, has an
option to extend the Concession for an additional 50 years. The Concession
is subject to certain mandatory trackage rights and is only exclusive for
30 years. Additionally, the Mexican government may revoke exclusivity
after 20 years if it determines that there is insufficient competition and
may terminate the Concession as a result of certain conditions or events,
including (1) TFM's failure to meet its operating and financial obligations
with regard to the Concession under applicable Mexican law, (2) a statutory
appropriation by the Mexican government for reasons of public interest and
(3) liquidation or bankruptcy of TFM. TFM's assets and its rights under
the Concession may also be seized temporarily by the Mexican government.
In 1997, Grupo TFM paid approximately $1.4 billion to the Mexican
government as the purchase price for 80% of TFM. Grupo TFM funded a
significant portion of the purchase with capital contributions from TMM and
KCSI. Additionally, a portion of the purchase was funded through: (1)
senior secured term credit facilities ($325 million); (2) senior notes and
senior discount debentures ($400 million); and (3) proceeds from the sale
of 24.6% of Grupo TFM to the Mexican government (approximately $199 million
based on the then effective U.S. dollar/Mexican peso
Page 12
exchange rate). Additionally, Grupo TFM entered into a $150 million
revolving credit facility for general working capital purposes. The Mexican
government's interest in Grupo TFM is in the form of limited voting right
shares. KCSI, TMM and an affiliate of TMM, Grupo Servia, have a call option for
the Mexican government's interest in Grupo TFM which is exercisable, prior to
July 31, 2002, at the original amount (in U.S. dollars) paid by the Mexican
government plus interest based on one-year U.S. Treasury securities. In
addition, after the expiration of that call option, KCSI, TMM and Grupo Servia
have a right of first refusal to purchase the Mexican government's interest in
Grupo TFM if the Mexican government wishes to sell that interest to a third
party which is not a governmental entity. On or after October 31, 2003 the
Mexican government has the option to sell its 20% interest in TFM through a
public offering or to Grupo TFM at the initial share price paid by Grupo TFM
plus interest. In the event that Grupo TFM does not purchase the Mexican
government's 20% interest in TFM, the government may require TMM and KCSI, or
either TMM or KCSI, to purchase its interest. KCSI and TMM have cross
indemnities in the event the Mexican government requires only one of them to
purchase its interest. The cross indemnities allow the party required to
purchase the Mexican government's interest to require the other party to
purchase its pro rata portion of such interest. However, if KCSI were required
to purchase the Mexican government's interest in TFM and TMM could not meet its
obligations under the cross-indemnity, then KCSI would be obligated to pay the
total purchase price for the Mexican government's interest. TMM and KCSI are
currently in negotiations with the Mexican government that may lead to a
purchase of the Mexican government's interest in TFM at a discount from the
current option price. During the third quarter of 2000, Grupo TFM accomplished a
refinancing of approximately $285 million of its senior secured credit facility
through the issuance of a U.S. Commercial Paper Program backed by a letter of
credit. This refinancing provides the ability for Grupo TFM to pay limited
dividends with the consent of KCSI and TMM; however, none have been paid.
Panama Canal Railway Company
The financing for the Panama Canal Railway Company is comprised of a $5
million investment from the IFC and senior loans through the IFC in an
aggregate amount of up to $45 million. The investment of $5 million from
the IFC is comprised of non-voting preferred shares which pay a 10%
cumulative dividend. The preferred shares may be redeemed at the IFC's
option any year after 2008 at the lower of (1) a net cumulative internal
rate of return of 30% or (2) eight times earnings before interest, income
taxes, depreciation and amortization for the two years preceding the
redemption that is proportionate to the IFC's percentage ownership in
Panama Canal Railway Company. Under the terms of the concession, the
Company is, under certain limited conditions, a guarantor for up to $15
million of cash deficiencies associated with the reconstruction project
and, if Panama Canal Railway Company terminates the concession contract
without the IFC's consent, a guarantor for up to 50% of the outstanding
senior loans. Management expects the total cost of the reconstruction
project to be $75 million and does not expect its equity commitment to
exceed $16.5 million (excluding the guarantees described above).
Southern Capital
In 1996, KCSR and GATX Capital Corporation ("GATX") formed a 50-50 joint
venture-Southern Capital-to perform certain leasing and financing
activities. Southern Capital's operations are the acquisition of
locomotives and rolling stock and the leasing thereof to KCSR and other
rail entities. Concurrent with the formation of this joint venture, KCSR
entered into operating leases with Southern Capital for substantially all
the locomotives and rolling stock which KCSR contributed or sold to
Southern Capital at the time of formation of the joint venture. GATX
contributed cash in the joint venture transaction formation. In addition,
Southern Capital formerly managed a portfolio of non-rail loan assets
primarily in the amusement entertainment, construction and
Page 13
trucking industries which it sold in April 1999 to Textron Financial
Corporation, thereby leaving only the rail equipment related assets leased to
KCSR.
The purpose for the formation of Southern Capital is to partner a Class I
railroad in KCSR with an industry leader in the rail equipment financing in
GATX. Southern Capital provides the Company with access to equipment
financing alternatives.
Employees. As of December 31, 2000, the approximate number of employees of
KCSI and its consolidated subsidiaries was as follows:
KCSR 2,557
Gateway Western 230
Other 75
-----
Total 2,862
-----
Item 2. Properties
The information set forth in response to Item 102 of Regulation S-K under
Item 1, Business, of this Form 10-K and Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, is incorporated
by reference in response to this Item 2.
In the opinion of management, the various facilities, office space and
other properties owned and/or leased by the Company (and its subsidiaries
and affiliates) are adequate for existing operating needs.
KCSR
Certain KCSR property statistics follow:
2000 1999 1998
----- ----- -----
Route miles - main and branch line 2,701 2,756 2,756
Total track miles 3,880 3,935 3,931
Miles of welded rail in service 2,032 2,032 2,031
Main line welded rail (% of total) 64% 64% 64%
Cross ties replaced 318,687 275,384 255,591
Average Age (in years):
----------------------
Wood ties in service 15.5 16.0 15.8
Rail in main and branch line 27.5 26.5 25.5
Road locomotives 22.6 21.7 23.3
All locomotives 23.5 22.5 23.9
KCSR, in support of its transportation operations, owns and operates repair
shops, depots and office buildings along its right-of-way. A major
facility, the Deramus Yard, is located in Shreveport, Louisiana and
includes a general office building, locomotive repair shop, car repair
shops, customer service center, material warehouses and fueling facilities
totaling approximately 227,000 square feet. KCSR owns a 107,800 square
foot facility in Pittsburg, Kansas that previously was used as a diesel
locomotive repair facility. This facility was closed during 1999. KCSR
also owns freight and truck maintenance buildings in Dallas, Texas totaling
approximately 125,200 square feet. KCSR and KCSI executive offices are
located in an eight-story office building in Kansas City, Missouri, which
is leased from a subsidiary of the Company. Other facilities owned by KCSR
Page 14
include a 21,000 square foot freight car repair shop in Kansas City,
Missouri and approximately 15,000 square feet of office space in Baton
Rouge, Louisiana.
KCSR owns five intermodal facilities and has contracted with third parties
to operate these facilities. These facilities are located in Dallas,
Texas; Kansas City, Missouri; Shreveport and New Orleans, Louisiana; and
Jackson, Mississippi. KCSR is currently in the process of constructing an
automotive and intermodal facility at the former Richards-Gebaur Airbase in
Kansas City, Missouri. This facility became operational in April 2000 for
the movement of Mazda vehicles. Full intermodal and automotive operations
at the facility are expected to be complete in 2002, providing KCSR with
additional capacity in Kansas City. The various intermodal facilities
include strip tracks, cranes and other equipment used in facilitating the
transfer and movement of trailers and containers.
KCSR owns 8.3% of Kansas City Terminal Railway Company, which owns and
operates approximately 80 miles of track, and operates an additional eight
miles of track under trackage rights in greater Kansas City, Missouri.
KCSR also leases for operating purposes certain short sections of trackage
owned by various other railroad companies and jointly owns certain other
facilities with these railroads.
KCSR's fleet of rolling stock consisted of the following at December 31:
2000 1999 1998
Leased Owned Leased Owned Leased Owned
------ ------ ------ ------ ------ ------
Locomotives:
Road Units 323 108 323 112 258 108
Switch Units 52 - 52 - 52 -
Other - 8 - 8 8 -
------ ------ ------ ------ ------ ------
Total 375 116 375 120 318 108
====== ====== ====== ====== ====== ======
Rolling Stock:
Box Cars 5,942 2,019 6,289 2,011 6,634 2,023
Gondolas 704 78 713 66 748 56
Hopper Cars 2,197 1,171 2,384 1,357 2,660 1,185
Flat Cars (Intermodal
and Other) 1,584 613 1,553 675 1,617 676
Tank Cars 46 55 33 55 34 58
Auto Rack 201 - 201 - - -
------ ------ ------ ------ ------ ------
Total 10,674 3,936 11,173 4,164 11,693 3,998
====== ====== ====== ====== ====== ======
As of December 31, 2000, KCSR's fleet consisted of 491 diesel locomotives,
of which 116 were owned, 335 leased from affiliates and 40 leased from
non-affiliates. KCSR's fleet of rolling stock consisted of 14,610 freight
cars, of which 3,936 were owned, 3,269 leased from affiliates and 7,405
leased from non-affiliates. A significant portion of the locomotives and
rolling stock leased from affiliates includes equipment leased through
Southern Capital, a joint venture with GATX Capital Corporation formed in
October 1996.
Some of the owned equipment is subject to liens created under conditional
sales agreements, equipment trust certificates and leases in connection
with the original purchase or lease of such equipment. KCSR indebtedness
with respect to equipment trust certificates, conditional sales agreements
and capital leases totaled approximately $58.4 million at December 31,
2000.
Page 15
Systems and Technology
Management Control System Project
In April 1997 KCSR entered into an agreement with International Business
Machines Corporation ("IBM") to jointly develop a management control
system ("MCS") which includes the following elements:
o a new waybill system;
o a new transportation system;
o a work queue management infrastructure;
o a service scheduling system;
o enhanced revenue and car accounting systems; and
o EDI interfaces to the new systems.
The Company implemented MCS on Gateway Western in the first quarter of 2000
and plans to begin implementation on KCSR in April 2001. MCS is designed
to track individual shipments as they move across the rail system and
compare that movement to the service sold to the customer. If a shipment
falls behind schedule, MCS will automatically generate alerts and action
recommendations.
Management expects MCS to provide more accurate and timely information on
terminal dwell time, car velocity through terminals and priority of
switching to meet schedules. MCS is designed to provide better analytical
tools for management to make decisions based on more timely and accurate
information. A data warehouse will provide the foundation of an improved
decision support infrastructure. By making decisions based upon that
information, management intends to improve service quality and utilization
of locomotives, rolling stock, crews, yards, and line of road and thereby
reduce cycle times and costs. With the implementation of service
scheduling, MCS is expected to provide improved customer service through
improved advanced planning, real-time decision support and improved
measurements. By designing all new business processes around workflow
technology, management intends to more effectively follow key operating
statistics to measure productivity and improve performance across the
entire operation.
MCS is also expected to improve clerical and information technology group
efficiencies. Management believes that information technology and other
support groups will be able to reduce maintenance costs, increase their
flexibility to respond to new requests and improve productivity. By using a
layered design approach, MCS is expected to have the ability to extend to
new technologies as they become available. MCS can be modified to connect
customers with applications via the Internet and will be constructed to
support multiple railroads, permit modifications to accommodate the local
language requirements of the area and operate across multiple time zones.
Train Dispatching System
KCSR is currently operating on two types of train dispatching systems,
Direct Train Control ("DTC") and Centralized Traffic Control ("CTC").
DTC uses direct radio communication between dispatchers and engineers to
coordinate train movement. DTC is used on approximately 68% of KCSR's
track, including the track from Shreveport to Meridian and Shreveport to
New Orleans. CTC controls switches and signals in the field from the
dispatcher's desk top via microwave link. CTC is used on approximately 32%
of KCSR's track, including the track from Kansas City to Beaumont and
Shreveport to Dallas. CTC is normally utilized on heavy traffic areas with
single
Page 16
main line or heavy traffic areas with multiple routes. Each dispatcher currently
has an assigned territory displayed on high-resolution monitors driven by a
mini-mainframe in Shreveport with a remote station in Beaumont. KCSR implemented
a new dispatching computer system in May 1999, which has enhanced the overall
efficiency of train movements on the railroad system.
Gateway Western
Gateway Western operates an approximate 400 mile rail line extending from
Kansas City, Missouri to East St. Louis and Springfield, Illinois.
Additionally, Gateway Western has restricted haulage rights extending to
Chicago, Illinois. Gateway Western provides interchanges with various
eastern rail carriers and access to the St. Louis rail gateway.
Certain approximate Gateway Western property statistics follow:
2000 1999 1998
---- ---- ----
Route miles - main and branch line 402 402 402
Total track miles 564 564 564
Miles of welded rail in service 125 121 121
Main line welded rail (% of total main line) 42% 40% 40%
Mexrail
Mexrail, a 49% owned affiliate, owns 100% of the Tex Mex and certain other
assets, including the northern (U.S.) half of a rail traffic bridge at
Laredo, Texas spanning the Rio Grande River. TFM operates the southern
half of the bridge. This bridge is a significant entry point for rail
traffic between Mexico and the U.S. The Tex Mex operates a 157 mile rail
line extending from Corpus Christi to Laredo, Texas, and also has trackage
rights (from UP) totaling approximately 360 miles between Corpus Christi
and Beaumont, Texas.
In early 1999, Tex Mex completed Phase II of a new rail yard in Laredo.
Phase I of the project was completed in December 1998 and included four
tracks comprising approximately 6.5 miles. Phase II consisted of two new
intermodal tracks totaling approximately 2.8 miles. Although groundwork
for an additional ten tracks has been completed, construction on those ten
tracks has not yet begun. Capacity of the Laredo yard is currently
approximately 800 freight cars and, upon completion of all tracks, is
expected to be approximately 2,000 freight cars. Additionally, on March
12, 2001 Mexrail purchased approximately 84.5 miles of track between
Rosenberg and Victoria, Texas. See "Item 1 - Business - Significant
Investments- Mexrail" for additional information.
Certain Tex Mex property statistics follow:
2000 1999 1998
---- ---- ----
Route miles - main and branch line 157 157 157
Total track miles 533 533 530
Miles of welded rail in service 5 5 5
Main line welded rail (% of total) 3% 3% 3%
Grupo TFM
TFM operates 2,661 miles of main line and an additional 838 miles of
sidings and spur tracks, and main line under trackage rights. TFM has the
right to operate the rail, but does not own the land, roadway or associated
structures. Approximately 91% of TFM's main line consists of continuously
welded rail. As of December 31, 2000, TFM owned 459 locomotives, owned or
leased from affiliates 5,089 freight cars and leased from non-affiliates
141 locomotives and 5,254 freight cars. Grupo TFM (through TFM) has office
space at which various operational, administrative, managerial and other
activities are performed. The primary facilities are located in Mexico
City and Monterrey,
Page 17
Mexico. TFM leases 140,354 square feet of office space in Mexico City and owns
an 115,157 square foot facility in Monterrey.
Panama Canal Railway Company/Panarail Tourism Company
PCRC, a joint venture in which the Company owns 50% of the common stock,
holds the concession to reconstruct and operate a 47-mile railroad that
runs parallel to the Panama Canal. Reconstruction of the railroad
commenced in early 2000 and is expected to be complete in 2001. PCRC
leases five locomotives and owns one locomotive and various other
infrastructure improvements and equipment. Panarail currently owns 5
passenger cars.
Other
The Company owns 1,025 acres of property located on the waterfront in the
Port Arthur, Texas area, which includes 22,000 linear feet of deep-water
frontage and three docks. Port Arthur is an uncongested port with direct
access to the Gulf of Mexico. Approximately 75% of this property is
available for development.
Trans-Serve, Inc. operates a railroad wood tie treating plant in Vivian,
Louisiana under an industrial revenue bond lease arrangement with an option
to purchase. This facility includes buildings totaling approximately
12,000 square feet.
Pabtex GP LLP (formerly Global Terminaling Services, Inc.) owns a 70-acre
bulk commodity handling facility in Port Arthur, Texas.
Mid-South Microwave, Inc. owns and operates a microwave system, which
extends essentially along the right-of-way of KCSR from Kansas City,
Missouri to Dallas, Beaumont and Port Arthur, Texas and New Orleans,
Louisiana. This system is leased to KCSR.
Other subsidiaries of the Company own approximately 8,000 acres of land at
various points adjacent to the KCSR right-of-way. Other properties also
include a 354,000 square foot warehouse at Shreveport, Louisiana, a bulk
handling facility at Port Arthur, Texas, and several former railway
buildings now being rented to non-affiliated companies, primarily as
warehouse space. The Company is an 80% owner of Wyandotte Garage
Corporation, which owns a parking facility in downtown Kansas City,
Missouri. The facility is located adjacent to the Company and KCSR
executive offices, and consists of 1,147 parking spaces utilized by the
employees of the Company and its affiliates, as well as the general
public. The Company is in negotiations for the lease of new office space
in downtown Kansas City, Missouri for its principal executive offices.
Item 3. Legal Proceedings
The information set forth in response to Item 103 of Regulation S-K under
Part II Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, "Other - Litigation and Environmental Matters"
of this Form 10-K is incorporated by reference in response
to this Item 3. In addition, see discussion in Part II Item 8, Financial
Statements and Supplementary Data, at Note 11 - Commitments and
Contingencies of this Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
three-month period ended December 31, 2000.
Page 18
Executive Officers of the Company
Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to
paragraph (b) of Item 401 of Regulation S-K, the following list is included
as an unnumbered Item in Part I of this Form 10-K in lieu of being included
in KCSI's Definitive Proxy Statement which will be filed no later than 120
days after December 31, 2000. All executive officers are elected annually
and serve at the discretion of the Board of Directors. Certain of the
executive officers have employment agreements with the Company.
Name Age Position(s)
Michael R. Haverty 56 Chairman, President and Chief Executive
Officer
Gerald K. Davies 56 Executive Vice President and Chief Operating
Officer
Robert H. Berry 56 Senior Vice President and Chief Financial
Officer
Richard P. Bruening 62 Senior Vice President, General Counsel and
Corporate Secretary
Warren K. Erdman 42 Vice President - Corporate Affairs
Thomas G. King 44 Vice President and Treasurer
L.G. Van Horn 42 Vice President and Comptroller
The information set forth in the Company's Definitive Proxy Statement in
the description of the Board of Directors with respect to Mr. Haverty is
incorporated herein by reference.
Gerald K. Davies has served as Executive Vice President and Chief Operating
Officer of KCSI since July 18, 2000. Mr. Davies joined KCSR in January
1999 as the Executive Vice President and Chief Operating Officer. Mr.
Davies has served as a director of KCSR since November 1999. Prior to
joining KCSR, Mr. Davies served as the Executive Vice President of
Marketing with Canadian National Railway from 1993 through 1998. Mr.
Davies held senior management positions with Burlington Northern Railway
from 1976 to 1984 and 1991 to 1993, respectively, and with CSX
Transportation from 1984 to 1991.
Robert H. Berry has served as Senior Vice President and Chief Financial
Officer of KCSI since July 18, 2000. Mr. Berry has served as Senior Vice
President and Chief Financial Officer of KCSR since June 1997 and as a
director of KCSR since November 1999. Mr. Berry is also a director of
Grupo TFM. Prior to joining KCSR, Mr. Berry was employed by Northern
Telecom for 21 years in various senior financial positions, including Vice
President--Finance of NorTel Communications Systems, Inc. from 1995 to 1997
and Vice President--Finance for Bell Atlantic Meridian Systems from 1993 to
1995. Mr. Berry is a Certified Public Accountant.
Richard P. Bruening has served as Vice President and General Counsel of
KCSI since 1981 and Corporate Secretary of KCSI since July 1995. Mr.
Bruening's title of Vice President was changed to Senior Vice President on
July 18, 2000. From May 1982 to February 1992, he served as Vice President
and General Counsel of KCSR and has served as Senior Vice President and
General Counsel since February 1992. Mr. Bruening has also served as
Corporate Secretary of KCSR since July 1995 and as a director of KCSR since
September 1987. Mr. Bruening has announced that he will retire from the
Company and the aforementioned positions effective April 1, 2001.
Warren K. Erdman has served as Vice President--Corporate Affairs of KCSI
since April 15, 1997 and as Vice President--Corporate Affairs of KCSR since
May 1997. Prior to joining KCSI, Mr. Erdman served as Chief of Staff to
United States Senator Kit Bond of Missouri from 1987 to 1997.
Thomas G. King has served as Vice President and Treasurer of KCSI since
July 18, 2000 and as Vice President and Treasurer of KCSR since November
1999. Mr. King has also served as Vice President and Treasurer of KCS
Transportation Company since May 1997. Mr. King has served as Vice
President and Treasurer of Gateway Western since November 1999. Mr. King
served as
Page 19
Treasurer of Gateway Western from May 1997 to October 1999, and as Vice
President and Chief Financial Officer from December 1989 to May 1997.
Mr. King is a Certified Public Accountant.
Louis G. Van Horn has served as Vice President and Comptroller of KCSI
since May 1996. Mr. Van Horn has also served as Vice President and
Comptroller of KCSR since 1995. Mr. Van Horn was Comptroller of KCSI from
September 1992 to May 1996. From January 1992 to September 1992, Mr. Van
Horn served as Assistant Comptroller of KCSI. Mr. Van Horn is a Certified
Public Accountant.
There are no arrangements or understandings between the executive officers
and any other person pursuant to which the executive officer was or is to
be selected as an officer of KCSI, except with respect to the executive
officers who have entered into employment agreements, which agreements
designate the position(s) to be held by the executive officer.
None of the above officers are related to one another by family.
Part II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
The information set forth in response to Item 201 of Regulation S-K on the
cover (page i) under the heading "Company Stock," and in Part II Item 8,
Financial Statements and Supplementary Data, at Note 13 - Quarterly
Financial Data (Unaudited) of this Form 10-K is incorporated by reference
in response to this Item 5.
Pursuant to the credit agreement dated January 11, 2000 as described
further in Part II Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations of this Form 10-K, the
Company is restricted from the payment of cash dividends on the Company's
common stock.
On July 12, 2000, KCSI completed its spin-off of Stilwell through a special
dividend of Stilwell common stock distributed to KCSI common stockholders
of record on June 28, 2000 ("Spin-off"). The Spin-off occurred after the
close of business of the New York Stock Exchange on July 12, 2000, and each
KCSI stockholder received two shares of the common stock of Stilwell for
every one share of KCSI common stock owned on the record date. The total
number of Stilwell shares distributed was 222,999,786.
On July 12, 2000, KCSI completed a reverse stock split whereby every two
shares of KCSI common stock were converted into one share of KCSI common
stock. The Company's stockholders approved a one-for-two reverse stock
split in 1998 in contemplation of the Spin-off.
As of February 28, 2001, there were 5,469 holders of the Company's common
stock based upon an accumulation of the registered stockholder listing.
Page 20
Item 6. Selected Financial Data
(dollars in millions, except per share and ratio data)
The selected financial data below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included under Item 7 of this Form 10-K and the consolidated
financial statements and the related notes thereto, and the Report of
Independent Accountants thereon, included under Item 8 of this Form 10-K,
and such data is qualified by reference thereto. All years reflect the
1-for-2 common stock split to shareholders of record on June 28, 2000 paid
July 12, 2000.
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Revenues $ 572.2 $ 601.4 $ 613.5 $ 573.2(i) $517.7(i)
Income (loss) from
continuing operations $ 25.4(ii) $ 10.2(v) $ 38.0 $ (132.1)(iv) $ 16.3
Income (loss) from continuing
operations per common share:
Basic $ 0.44 $ 0.18 $ 0.69 $ (2.46) $ 0.28
Diluted 0.43 0.17 0.67 (2.46) 0.28
Total assets(vi) $1,944.5 $2,672.0 $2,337.0 $2,109.9 $1,770.7
Total debt $ 674.6 $ 760.9 $ 836.3 $ 916.6 $ 645.1
Cash dividends per
common share $ - $ 0.32 $ 0.32 $ 0.30 $ 0.26
Ratio of earnings to
fixed charges (iii) 1.0x 1.2x(v) 1.9x -(iv) 1.4x
(i) Includes Gateway Western as a wholly-owned unconsolidated affiliate
as of December 5, 1996 and as a wholly-owned consolidated subsidiary
effective January 1, 1997.
(ii) Income from continuing operations for the year ended December 31,
2000 excludes extraordinary items for debt retirement costs of $8.7
million (net of income taxes of $4.0 million). This amount includes
$1.7 million (net of income taxes of $0.1 million) related to Grupo TFM.
(iii) The ratio of earnings to fixed charges is computed by dividing
earnings by fixed charges. For this purpose "earnings" represent the
sum of (i) pretax income from continuing operations adjusted for income
(loss) from unconsolidated affiliates, (ii) fixed charges, and (iii)
distributed income from unconsolidated affiliated less (i) capitalized
interest, and (ii) fixed charges. Fixed charges consist of interest
expensed or capitalized, amortization of deferred debt issuance costs
and the portion of rental expense which management believes is
representative of the interest component of rental expense.
(iv) Includes restructuring, asset impairment and other charges of $178.0
million ($141.9 million after-tax). Due to these restructuring, asset
impairment and other charges of $178.0 million, the 1997 ratio coverage
was less than 1:1. The ratio of earnings to fixed charges would have
been 1:1 if a deficiency of $148.4 million would have been eliminated.
Excluding the $178.0 million, the ratio for 1997 would have been 1.4x.
(v) Includes unusual costs of $12.7 million ($7.9 million after-tax).
Excluding these unusual costs, the ratio of earnings to fixed charges
for 1999 would have been 1.3x.
(vi) The total assets presented herein include the net assets of Stillwell
as of December 31, 1996, 1997, 1998, and 1999 as follows: $234.8
million, $348.3 million, $540.2 million, and $814.6 million,
respectively. The total assets as of December 31, 2000 does not include
the net assets of Stillwell as a result of the Spin-off on July 12,
2000.
Page 21
The information set forth in response to Item 301 of Regulation S-K under
Part II Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, of this Form 10-K is incorporated by reference
in partial response to this Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
The discussions set forth below, as well as other portions of this Form
10-K, contain comments not based upon historical fact. Such
forward-looking comments are based upon information currently available to
management and management's perception thereof as of the date of this Form
10-K. Readers can identify these forward-looking comments by the use of
such verbs as expects, anticipates, believes or similar verbs or
conjugations of such verbs. The actual results of operations of Kansas
City Southern Industries, Inc. ("KCSI" or the "Company") could materially
differ from those indicated in forward-looking comments. The differences
could be caused by a number of factors or combination of factors including,
but not limited to, those factors identified in the "Risk Factors" section
of the Company's Registration Statement on Form S-4, as amended and
declared effective on March 15, 2001, which is on file with the U.S.
Securities and Exchange Commission (File No.333-54262) and which "Risk
Factors" section is hereby incorporated by reference herein. Readers are
strongly encouraged to consider these factors when evaluating any
forward-looking comments. The Company will not update any forward-looking
comments set forth in this Form 10-K.
The discussion herein is intended to clarify and focus on the Company's
results of operations, certain changes in its financial position,
liquidity, capital structure and business developments for the periods
covered by the consolidated financial statements included under Item 8 of
this Form 10-K. This discussion should be read in conjunction with these
consolidated financial statements, the related notes and the Report of
Independent Accountants thereon, and is qualified by reference thereto.
For purposes of this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," discussions for KCSR/Gateway Western
(as defined below) reflect the results of KCSR/Gateway Western combined
operating companies on a stand-alone basis and exclude other KCSR
subsidiaries or affiliates.
General
KCSI, a Delaware corporation organized in 1962, is a holding company with
principal operations in rail transportation. As discussed in "Recent
Developments", on July 12, 2000 KCSI completed its spin-off of Stilwell
Financial Inc. ("Stilwell"), the Company's formerly wholly-owned financial
services subsidiary.
KCSI supplies its various subsidiaries with managerial, legal, tax,
financial and accounting services, in addition to managing other
"non-operating" and more passive investments. Kansas City Southern Lines,
Inc. ("KCSL"), which was the direct parent of The Kansas City Southern
Railway Company ("KCSR"), was merged into KCSI effective December 31,
2000. KCSI's principal subsidiaries and affiliates include, among others:
o KCSR, a wholly-owned subsidiary;
o Gateway Western Railway Company ("Gateway Western"), a wholly-owned
subsidiary;
Page 22
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo
TFM"), an approximate 37% owned unconsolidated affiliate, which owns 80%
of the common stock of TFM, S.A. de C.V. ("TFM");
o Mexrail, Inc. ("Mexrail"), a 49% owned unconsolidated affiliate,
which wholly owns the Texas Mexican Railway Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate that leases locomotive and rail equipment
primarily to KCSR;
o Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of
which KCSR indirectly owns 50% of the common stock; and
o Panarail Tourism Company ("Panarail"), a 50% owned unconsolidated
affiliate.
All per share information included in this Item 7 is presented on a diluted
basis and reflects the one-for-two reverse stock split discussed below,
unless specifically identified otherwise.
RECENT DEVELOPMENTS
Spin-off of Stilwell Financial Inc. On June 14, 2000, KCSI's Board of
Directors approved the spin-off of Stilwell, the Company's then
wholly-owned financial services subsidiary. On July 12, 2000, KCSI
completed its spin-off of Stilwell through a special dividend of Stilwell
common stock distributed to KCSI common stockholders of record on June 28,
2000 ("Spin-off").
As of the date of the Spin-off, Stilwell was comprised of Janus Capital
Corporation, an approximate 81.5% owned subsidiary; Berger LLC, an
approximate 88% owned subsidiary; Nelson Money Managers Plc, an 80% owned
subsidiary; DST Systems, Inc., an equity investment in which Stilwell holds
an approximate 32% interest; and miscellaneous other financial services
subsidiaries and equity investments.
The Spin-off occurred after the close of business of the New York Stock
Exchange on July 12, 2000, and each KCSI stockholder received two shares of
the common stock of Stilwell for every one share of KCSI common stock owned
on the record date. The total number of Stilwell shares distributed was
222,999,786.
On July 9, 1999, KCSI received a tax ruling from the Internal Revenue
Service ("IRS") which states that for United States federal income tax
purposes the Spin-off qualifies as a tax-free distribution under Section
355 of the Internal Revenue Code of 1986, as amended. Additionally, in
February 2000, the Company received a favorable supplementary tax ruling
from the IRS to the effect that the assumption of $125 million of KCSI
indebtedness by Stilwell would have no effect on the previously issued tax
ruling.
KCSI Reverse Stock Split. On July 12, 2000, KCSI completed a reverse stock
split whereby every two shares of KCSI common stock were converted into one
share of KCSI common stock. KCSI common stockholders approved this reverse
stock split in 1998.
Purchase of Janus common stock by Stilwell
On January 26, 2001, Stilwell Financial Inc. announced that it expected to
acquire 600,000 shares of Janus Capital Corporation ("Janus") common stock
from Thomas H. Bailey, the Chairman, President and Chief Executive Officer
of Janus, through the exercise of put rights by Mr. Bailey. According to
Stilwell management, the purchase price for these shares is expected to
approximate $603 million and the purchase is expected to occur during the
second quarter of 2001. KCSI management believes, based on discussions
with Stilwell management, that Stilwell has adequate financial resources
available to fund this obligation. If Stilwell were unable to meet its
obligation to
Page 23
purchase the shares of Janus common stock from Mr. Bailey, the Company would be
required to purchase such shares. If the Company were required to purchase
those shares of Janus common stock, it would have a material effect on our
business, financial condition, results of operations and cash flows.
KCSI Elects New Chairman. On December 12, 2000, KCSI announced that
Michael R. Haverty was elected Chairman of the Board of Directors of KCSI
effective January 1, 2001. Mr. Haverty succeeded Landon H. Rowland, who
has resigned as Chairman, but remains on the Board of Directors. Mr.
Haverty retains his current titles of Chief Executive Officer and
President.
KCSI Adds New Director. On August 17, 2000, Byron G. Thompson was named as
a director of KCSI. Mr. Thompson has served as Chairman of the Board of
Country Club Bank, n.a., Kansas City since February 1985. Prior to that
time, Mr. Thompson served as Vice Chairman of Investment Banking at United
Missouri Bank of Kansas City and as a member of the Board of United
Missouri Bancshares, Inc.
Duncan Case Update. In 1998, a jury in Beauregard Parish, Louisiana
returned a verdict against KCSR in the amount of $16.3 million. This case
arose from a railroad crossing accident that occurred at Oretta, Louisiana
on September 11, 1994, in which three individuals were injured. Of the
three, one was injured fatally, one was rendered quadriplegic and the third
suffered less serious injuries.
Subsequent to the verdict, the trial court held that the plaintiffs were
entitled to interest on the judgment from the date the suit was filed,
dismissed the verdict against one defendant and reallocated the amount of
that verdict to the remaining defendants. The resulting total judgment
against KCSR, together with interest, was approximately $27.0 million as of
December 31, 1999.
On November 3, 1999, the Third Circuit Court of Appeals in Louisiana
affirmed the judgment. Subsequently KCSR sought and obtained review of the
case in the Supreme Court of Louisiana. On October 30, 2000 the Supreme
Court of Louisiana entered its order affirming in part and reversing in
part the judgment. The net effect of the Louisiana Supreme Court action
was to reduce the allocation of negligence to KCSR and reduce the judgment,
with interest, against KCSR from approximately $28 million to approximately
$14.2 million (approximately $9.7 million of damages and $4.5 million of
interest), which is in excess of KCSR's insurance coverage of $10 million
for this case. KCSR filed an application for rehearing in the Supreme
Court of Louisiana, which was denied on January 5, 2001. KCSR then sought
a stay of judgment in the Louisiana court. The Louisiana court denied the
stay application on January 12, 2001. KCSR reached an agreement as to the
payment structure of the judgment in this case and payment of the
settlement was made on March 7, 2001.
KCSR had previously recorded a liability of approximately $3.0 million for
this case. Based on the Supreme Court of Louisiana's decision, management
recorded an additional liability of $11.2 million and a receivable in the
amount of $7.0 million representing the amount of the insurance coverage.
This resulted in recording $4.2 million of net operating expense in the
accompanying consolidated financial statements for the year ended December
31, 2000.
Debt Refinancing and Re-capitalization of the Company's Debt Structure.
o During the third quarter of 2000, the Company completed a $200
million private offering of debt securities through its wholly owned
subsidiary, KCSR. The offering, completed pursuant to Rule 144A under
the Securities Act of 1933 in the United States and Regulation S outside
Page 24
the United States, consisted of 8-year Senior Unsecured Notes. The
Notes bear a fixed annual interest rate of 9.5% and are due on October
1, 2008. These Notes contain certain covenants typical of this type of
debt instrument. Net proceeds from the offering of $196.5 million were
used to refinance existing bank term debt, which was scheduled to mature
on January 11, 2001 (see below). Costs related to the issuance of these
notes of approximately $4.1 million were deferred and are being
amortized over the eight-year term of the Notes.
In connection with this refinancing, the Company reported an
extraordinary loss on the extinguishment of the bank term debt due
January 11, 2001. The extraordinary loss was $1.1 million (net of
income taxes of $0.7 million).
On January 25, 2001, the Company filed a Form S-4 Registration Statement
with the Securities and Exchange Commission ("SEC") registering exchange
notes under the Securities Act of 1933. The Company filed Amendment No.
1 to this Registration Statement and the SEC declared this Registration
Statement effective on March 15, 2001, thereby providing the opportunity
for holders of the initial Notes to exchange them for registered notes.
The registration exchange offer expires on April 16, 2001, unless
extended by the Company.
o Also during the third quarter of 2000, Grupo TFM accomplished a
refinancing of approximately $285 million of its Senior Secured Credit
Facility through the issuance of a U.S. Commercial Paper ("USCP")
program backed by a letter of credit. The USCP is a 2-year program for
up to a face value of $310 million. The average discount rate for the
first issuance was 6.54%. This refinancing provides the ability for
Grupo TFM to pay limited dividends.
As a result of this refinancing, Grupo TFM recorded approximately $9.2
million in pretax extraordinary debt retirement costs. KCSI reported
$1.7 million (net of income taxes of $0.1 million) as its proportionate
share of these costs as an extraordinary item.
o In preparation for the Spin-off, the Company re-capitalized its debt
structure in January 2000 through a series of transactions as follows:
Bond Tender and Other Debt Repayment. On December 6, 1999, KCSI
commenced offers to purchase and consent solicitations with respect to
any and all of the Company's outstanding 7.875% Notes due July 1, 2002,
6.625% Notes due March 1, 2005, 8.8% Debentures due July 1, 2022, and 7%
Debentures due December 15, 2025 (collectively "Debt Securities" or
"notes and debentures").
Approximately $398.4 million of the $400 million outstanding Debt
Securities were validly tendered and accepted by the Company. Total
consideration paid for the repurchase of these outstanding notes and
debentures was $401.2 million. Funding for the repurchase of these Debt
Securities and for the repayment of $264 million of borrowings under
then-existing revolving credit facilities was obtained from two new
credit facilities (the "KCS Credit Facility" and the "Stilwell Credit
Facility", or collectively "New Credit Facilities"), each of which was
entered into on January 11, 2000. These New Credit Facilities, as
described further below, provided for total commitments of $950
million.
The Company reported an extraordinary loss on the extinguishment of the
Company's notes and debentures of approximately $5.9 million (net of
income taxes of approximately $3.2 million).
KCS Credit Facility. The KCS Credit Facility provided for a total
commitment of $750 million, comprised of three separate term loans
totaling $600 million and a revolving credit facility available until
January 11, 2006 ("KCS Revolver"). The term loans are comprised of the
Page 25
following: $200 million, which was due January 11, 2001 prior to its
refinancing (see discussion above), $150 million due December 30, 2005
and $250 million due December 30, 2006. The availability under the KCS
Revolver was reduced from $150 million to $100 million on January 2,
2001. Letters of credit are also available under the KCS Revolver up to
a limit of $15 million. Borrowings under the KCS Credit Facility are
secured by substantially all of KCSI's assets and are guaranteed by the
majority of its subsidiaries.
On January 11, 2000, KCSR borrowed the full amount ($600 million) of the
term loans and used the proceeds to repurchase the Debt Securities,
retire other debt obligations and pay related fees and expenses. No
funds were initially borrowed under the KCS Revolver. Proceeds of
future borrowings under the KCS Revolver are to be used for working
capital and for other general corporate purposes. The letters of credit
under the KCS Revolver may be used for general corporate purposes.
Interest on the outstanding loans under the KCS Credit Facility shall
accrue at a rate per annum based on the London interbank offered rate
("LIBOR") or the prime rate, as the Company shall select. Following
completion of the refinancing of the January 11, 2001 term loan
discussed above, each remaining loan under the KCS Credit Facility shall
accrue interest at the selected rate plus an applicable margin. The
applicable margin is determined by the type of loan and the Company's
leverage ratio (defined as the ratio of the Company's total debt to
consolidated earnings before interest, taxes, depreciation and
amortization excluding the equity earnings of unconsolidated affiliates
for the prior four fiscal quarters). Based on the Company's current
leverage ratio, the term loan maturing in 2005 and all loans under the
KCS Revolver have an applicable margin of 2.50% per annum for LIBOR
priced loans and 1.50% per annum for prime rate priced loans. The term
loan maturing in 2006 currently has an applicable margin of 2.75% per
annum for LIBOR priced loans and 1.75% per annum for prime rate based
loans.
The KCS Credit Facility also requires the payment to the banks of a
commitment fee of 0.50% per annum on the average daily, unused amount of
the KCS Revolver. Additionally a fee equal to a per annum rate equal to
0.25% plus the applicable margin for LIBOR priced revolving loans will
be paid on any letter of credit issued under the KCS Credit Facility.
The term loans are subject to a mandatory prepayment with, among other
things:
o 100% of the net proceeds of (1) certain asset sales or other
dispositions of property, (2) the sale or issuance of certain
indebtedness or equity securities and (3) certain insurance
recoveries.
o 50% of excess cash flow (as defined in the KCS Credit Facilities)
The KCS Credit Facility contains certain covenants that, among others,
restrict the Company's ability to:
o incur additional indebtedness,
o incur additional liens,
o enter into sale and leaseback transactions,
o enter into certain transactions with affiliates,
o enter into agreements that restrict the ability to incur liens or pay
dividends,
o make investments, loans, advances, guarantees or acquisitions,
o make certain restricted payments and dividends,
o make other certain indebtedness, or
o make capital expenditures.
Page 26
In addition KCSI is required to comply with specific financial ratios,
including minimum interest expense coverage and leverage ratios. The
KCS Credit Facility also contains certain customary events of default.
These covenants, along with other provisions, could restrict maximum
utilization of the facility. The Company was in compliance with these
various provisions, including the financial covenants, as of December
31, 2000.
In accordance with a provision requiring the Company to manage its
interest rate risk through hedging activity, in 2000 the Company entered
into five separate interest rate cap agreements for an aggregate
notional amount of $200 million expiring on various dates in 2002. The
interest rate caps are linked to LIBOR. $100 million of the aggregate
notional amount provides a cap on the Company's interest rate of 7.25%
plus the applicable spread, while $100 million limits the interest rate
to 7% plus the applicable spread. Counterparties to the interest rate
cap agreements are major financial institutions who also participate in
the New Credit Facilities. The Company believes that the risk of credit
loss from counterparty non-performance is remote.
Issue costs relating to the KCS Credit Facility of approximately $17.6
million were deferred and are being amortized over the respective term
of the loans. In conjunction with the refinancing of the $200 million
term loan previously due January 11, 2001, approximately $1.8 million of
these deferred costs were immediately recognized. After consideration
of amortization and this $1.8 million write-off, the remaining balance
of these deferred costs was approximately $11.3 million at December 31,
2000.
As a result of the debt refinancing transactions discussed above,
extraordinary items totaled $8.7 million (net of income taxes of $4.0
million) for the year ended December 31, 2000.
Stilwell Credit Facility. On January 11, 2000, KCSI also arranged a new
$200 million 364-day senior unsecured competitive Advance/Revolving
Credit Facility ("Stilwell Credit Facility"). KCSI borrowed $125
million under this facility and used the proceeds to retire debt
obligations as discussed above. Stilwell assumed this credit facility,
including the $125 million borrowed thereunder, and upon completion of
the Spin-off, KCSI was released from all obligations thereunder.
Stilwell repaid the $125 million in March 2000.
Dividends Suspended for KCSI Common Stock. During the first quarter of
2000, the Company's Board of Directors announced that, based upon a review
of the Company's dividend policy in conjunction with the New Credit
Facilities discussed above and in light of the anticipated Spin-off, it
decided to suspend common stock dividends of KCSI under the then-existing
structure of the Company. This action complies with the terms and
covenants of the New Credit Facilities. It is not anticipated that KCSI
will make any cash dividend payments to its common stockholders for the
foreseeable future.
Expiration of the Capital Call Related to TFM. In conjunction with the
financing of TFM in 1997, the Company entered into a Capital Contribution
Agreement with Grupo TFM, TMM and the financing institutions of TFM. This
agreement extended for a three year period through June 30, 2000 and
outlined the terms whereby the Company could be responsible for
approximately $74 million of a capital call if certain performance
benchmarks outlined in the agreement were not met by TFM. In accordance
with its terms, the agreement has terminated.
New Compensation Program. In connection with the Spin-off, KCSI adopted a
new compensation program (the "Compensation Program") under which (1)
certain senior management employees were granted performance based KCSI
stock options and (2) all management employees and those directors of KCSI
who are not employees (the "Outside Directors") became eligible to
purchase a
Page 27
specified number of KCSI restricted shares and were granted a specified number
of KCSI stock options for each restricted share purchased.
The performance stock options have an exercise price of $5.75 per share,
which was the mean trading price of KCSI common stock on the New York Stock
Exchange (the "NYSE") on July 13, 2000. The performance stock options
vest and become exercisable in equal installments as KCSI's stock price
achieves certain thresholds and after one year following the grant date.
All performance thresholds have been met for these performance stock
options and all will be exercisable on July 13, 2001. These stock options
expire at the end of 10 years, subject to certain early termination
events. Vesting will accelerate in the event of death, disability, or a
KCSI board-approved change in control of KCSI.
The purchase price of the restricted shares, and the exercise price of the
stock options granted in connection with the purchase of restricted shares,
is based on the mean trading price of KCSI common stock on the NYSE on the
date the employee or Outside Director purchased restricted shares under the
Compensation Program. Each eligible employee and Outside Director was
allowed to purchase the restricted shares offered under the Compensation
Program on one date out of a selection of dates offered. With respect to
management employees, the number of shares available for purchase and the
number of options granted in connection with shares purchased were based on
the compensation level of the employees. Each Outside Director was granted
the right to purchase up to 3,000 restricted shares of KCSI, with two KCSI
stock options granted in connection with each restricted share purchased.
Shares purchased are restricted from sale and the options are not
exercisable for a period of three years for senior management and the
Outside Directors and two years for other management employees. KCSI
provided senior management and the Outside Directors with the option of
using a sixty-day interest-bearing full recourse note to purchase these
restricted shares. These loans accrued interest at 6.49% per annum and
were all fully repaid by September 11, 2000.
Management employees purchased 475,597 shares of KCSI restricted stock
under the Compensation Program and 910,697 stock options were granted in
connection with the purchase of those restricted shares. Outside Directors
purchased a total of 9,000 shares of KCSI restricted stock under the
Compensation Program and 18,000 KCSI stock options were granted in
connection with the purchase of those shares.
Burlington Northern Santa Fe Railway ("BNSF") and Canadian National Railway
("CN") Merger. In December 1999, BNSF and CN announced their intention to
combine the two railroad companies. In March 2000, however, this
combination was delayed when the STB issued a 15-month moratorium on
railroad mergers until the STB can adopt new rules governing merger
activities. In July 2000 the STB's moratorium was upheld by the United
States Court of Appeals for the District of Columbia. Subsequent to the
court's decision, BNSF and CN announced the termination of their proposed
merger.
Norfolk Southern Haulage and Marketing Agreement. In May 2000, KCSR and
Norfolk Southern entered into an agreement under which KCSR provides
haulage services for intermodal traffic between Meridian and Dallas and
receives fees for such services from Norfolk Southern. Under this
agreement, Norfolk Southern may quote rates and enter into transportation
service contracts with shippers and receivers covering this haulage traffic.
Page 28
SIGNIFICANT DEVELOPMENTS
In addition to the recent developments mentioned above, consolidated
operating results from 1998 to 2000 were affected by the following
significant developments.
Repurchase of Stock. During 1999, the Company repurchased 230,000 shares
of its common stock from The DST Systems, Inc. Employee Stock Ownership
Plan (the "DST ESOP") in a private transaction. The DST ESOP has
previously sold to the Company other shares of KCSI stock, which were part
of the DST ESOP's assets as a result of DST's participation in the
Company's employee stock ownership plan prior to DST's initial public
offering in 1995.
The shares were purchased at a price equal to the closing price per share
of KCSI's common stock on the New York Stock Exchange on February 24,
1999. The shares are held in treasury for use in connection with the
Company's various employee benefit plans.
These repurchases are part of the 33 million share repurchase plan that the
Board authorized through two programs - the 1995 program for 24 million
shares and the 1996 program for 9 million shares. Including this
transaction, the Company has repurchased a total of approximately 28.1
million shares under these programs. During 2000 and 1998, there were no
repurchases under these programs.
KCSR Lease of 50 New Locomotives. During 1999, KCSR reached an agreement
with General Electric ("GE") for the purchase of 50 new GE 4400 AC
Locomotives. This agreement was subsequently assigned to Southern
Capital. The addition of these state-of-the-art locomotives has provided
operating cost reductions resulting from decreased maintenance costs and
improved fuel efficiency, better fleet utilization, increased hauling power
eliminating the need for certain helper service, and higher reliability and
efficiency resulting in fewer train delays and less congestion. Southern
Capital, through its existing variable rate credit lines, financed the
purchase of these new locomotives, and leases them to KCSR under operating
leases. Rates on these operating leases vary based on the Company's credit
rating. As a result of this transaction, 2000 operating lease expense
increased approximately $7.3 million compared to 1999. Delivery of these
locomotives was completed in December 1999.
Panama Canal Railway Company. In January 1998, the Republic of Panama
awarded KCSR and its joint venture partner, Mi-Jack Products, Inc., the
concession to reconstruct and operate the Panama Canal Railway. The
47-mile railroad runs parallel to the Panama Canal and, upon completion of
the reconstruction, will provide international shippers with an important
complement to the Panama Canal. In November 1999, PCRC completed the
financing arrangements for this project with the International Finance
Corporation ("IFC"), a member of the World Bank Group. The financing is
comprised of a $5 million investment from the IFC and senior loans in the
aggregate amounts of up to $45 million. The investment of $5 million from
the IFC is comprised of non-voting preferred shares, paying a 10%
cumulative dividend. The preferred shares may be redeemed at the option of
IFC any year after 2008 at the lower of i) a net cumulative internal rate
of return of 30%, or ii) eight-times earnings before interest, income
taxes, depreciation and amortization (average of two consecutive years)
calculated in proportion to the IFC's percentage ownership in PCRC. Under
certain limited conditions, the Company is a guarantor for up to $15
million of cash deficiencies associated with project completion.
Additionally, if the Company or its partner terminates the concession
contract without the consent of the IFC, the Company is a guarantor for up
to 50% of the outstanding senior loans. The total cost of the
reconstruction project is estimated to be $75 million with an equity
commitment from KCSR not to exceed $16.5 million (excluding the guarantees
described above). Reconstruction of PCRC's right-
Page 29
of-way is expected to be complete in 2001 with commercial operations to
begin immediately thereafter.
Access to Geismar, Louisiana Industrial Corridor. In 1999, the STB
unanimously approved the merger of CN and Illinois Central ("IC")
(collectively referred to as "CN/IC"). The STB issued its written approval
with an effective date of June 24, 1999, at which time the CN was permitted
to exercise control over IC's operations and assets. As part of this
approval, the STB imposed certain restrictions on the merger including a
condition requiring that the CN/IC grant KCSR access to three shippers in
the Geismar, Louisiana industrial area: Rubicon, Inc. ("Rubicon"), Uniroyal
Chemical Company, Inc. ("Uniroyal") and Vulcan Materials Company
("Vulcan"). These are in addition to the three Geismar shippers (BASF
Corporation -"BASF", Shell Chemical Company -"Shell", and Borden Chemical
and Plastics -"Borden") to which KCSR obtained access as a result of the
strategic alliance agreement with CN/IC discussed below. Access to these
six shippers began on October 1, 2000 and traffic immediately began to move
on KCSR's lines. Management believes that this access will provide
increasing revenue opportunities in the future.
Automotive and Intermodal facility at the former Richards-Gebaur Airbase.
During 1999, KCSR entered into a fifty-year lease with the City of Kansas
City, Missouri to establish the Kansas City International Freight Gateway
("IFG"), an automotive and intermodal facility at the former Richards-Gebaur
Airbase, which is located adjacent to KCSR's main rail line. The Federal
Aviation Administration ("FAA") officially approved the closure of the
existing airport in January 2000, and improvements began immediately.
Through an agreement with Mazda, KCSR developed an automotive distribution
facility to handle Mazda vehicles manufactured under an agreement with Ford
Motor Company at Ford's Claycomo facility, which is located in Kansas
City. This automotive facility became operational in April 2000 for the
movement of Mazda vehicles. Intermodal and expanded automotive operations
at the facility are expected to be complete in 2002.
The Company expects that the new facility will provide additional capacity
as well as a strategic opportunity to serve as an international trade
facility. The plan is for this facility to serve as a U.S. customs
pre-clearance processing facility for freight moving along the NAFTA
corridor. KCSR expects this to alleviate some of the congestion at the
borders, resulting in more fluid service to customers throughout the rail
industry.
KCSR expects to spend a total of approximately $20 million for site
improvements and infrastructure at this facility. KCSR is funding these
improvements using operating cash flows and existing credit lines. Lease
payments are expected to approximate $665,000 per year and will be adjusted
for inflation based on agreed-upon formulas. Management believes that with
the addition of this facility KCSR is positioned to increase its automotive
and intermodal revenue base by attracting additional NAFTA traffic.
Strategic Alliance with Canadian National and Illinois Central. In 1998,
KCSR, CN and IC announced a 15-year strategic alliance aimed at
coordinating the marketing, operations and investment elements of
north-south rail freight transportation. The alliance did not require STB
approval and was effective immediately. This alliance connects points in
Canada with the major U.S. Midwest markets of Detroit, Chicago, Kansas City
and St. Louis, as well as key Southern markets of Memphis, Dallas and
Houston. It also provides U.S. and Canadian shippers with access to
Mexico's rail system through connections with Tex Mex and TFM.
In addition to providing access to key north-south international and
domestic U.S. traffic corridors, the alliance with CN/IC is intended to
increase business primarily in the automotive and intermodal markets and
also in the chemical and petroleum and paper and forest products
Page 30
markets. This alliance has provided opportunities for revenue growth and
positioned KCSR as a key provider of rail service for NAFTA trade.
Under a separate access agreement, KCSR and CN formed a management group
made up of representatives from both railroads to develop plans for the
construction of new facilities to support business development, including
investments in automotive, intermodal and transload facilities at Memphis,
Dallas, Kansas City and Chicago. Under the terms of this access agreement,
KCSR extended the market area of its rail system in the Gulf area and
gained access through a haulage agreement to additional chemical customers
in the Geismar, Louisiana industrial area, one of the largest chemical
production areas in the world. Prior to this access agreement, the Company
received preliminary STB approval for construction of a nine-mile rail line
from KCSR's main line into the Geismar industrial area, which the chemical
manufacturers requested to be built to provide them with competitive rail
service. The agreement between KCSR and CN does not preclude the option of
the Geismar build-in by KCSR provided that it is able to obtain the
requisite approvals. During 1999, however, the Company wrote-off
approximately $3.6 million of costs related to the Geismar build-in that
had previously been capitalized.
Voluntary Coordination Agreement with the Norfolk Southern Railway Company
("Norfolk Southern"). In 1997, the Company entered into a three-year
marketing agreement with Norfolk Southern and Tex Mex that allows the
Company to capitalize on the east-west corridor between Meridian,
Mississippi and Dallas, Texas through incremental traffic volume gained
through interchange with Norfolk Southern. This agreement provides Norfolk
Southern run-through service with access to Dallas and Mexico while
avoiding the congested rail gateways of Memphis, Tennessee and New Orleans,
Louisiana.
Railroad Industry Trends and Competition. The Company's rail operations
compete against other railroads, many of which are much larger and have
significantly greater financial and other resources. Since 1994, there has
been significant consolidation among major North American rail carriers,
including the 1995 merger of Burlington Northern, Inc. and Santa Fe Pacific
Corporation ("BN/SF", collectively "BNSF"), the 1995 merger of the UP and
the Chicago and North Western Transportation Company ("UP/CNW") and the
1996 merger of UP with SP. Further Norfolk Southern and CSX purchased the
assets of Conrail in 1998 and CN acquired IC in June 1999. As a result of
this consolidation, the railroad industry is now dominated by a few
"mega-carriers." KCSI management believes that revenues were negatively
affected by the UP/CNW, UP/SP and BN/SF mergers, which led to diversions of
rail traffic away from KCSR's rail lines. The Company also believes that
KCSR revenues have been negatively impacted by the congestion resulting
from the purchase of Conrail's assets by Norfolk Southern and CSX in 1998.
Management regards the larger western railroads, in particular, as
significant competitors to the Company's operations and prospects because
of their substantial resources. The ongoing impact of these mergers is
uncertain. Management believes, however, that because of the Company's
investments and strategic alliances, it is positioned to attract additional
rail traffic through our NAFTA Railway.
In late 1999, a merger was announced between BNSF and CN. Subsequent to
this announcement, the STB imposed a 15-month moratorium on Class 1
railroad merger activities, while it reviews and rewrites the rules
applicable to railroad consolidation. In July 2000, the STB's moratorium
was upheld by the United States Court of Appeals for the District of
Columbia. The moratorium, and more directly the new rules, will likely
have a substantial effect on future railroad merger activity. Subsequent
to the court's decision, BNSF and CN announced the termination of their
proposed merger.
Truck carriers have eroded the railroad industry's share of total
transportation revenues. Changing regulations, subsidized highway
improvement programs and favorable labor regulations have improved the
competitive position of trucks in the United States as an alternative mode of
Page 31
surface transportation for many commodities. In the United States, the
truck industry generally is more cost and transit-time competitive than
railroads for distances of less than 300 miles. Intermodal traffic and
certain other traffic face highly price sensitive competition, particularly
from motor carriers. However, rail carriers, including KCSR, have placed
an emphasis on competing in the intermodal marketplace, working together
with motor carriers and other railroads to provide end-to-end
transportation of products, especially where the length of haul exceeds 500
miles. The Company is also subject to competition from barge lines and
other maritime shipping, which compete with the Company across certain
routes in its operating area. Mississippi and Missouri River barge
traffic, among others, compete with KCSR and its rail connections in the
transportation of bulk commodities such as grains, steel and petroleum
products.
Increased competition has resulted in downward pressure on freight rates.
Competition with other railroads and other modes of transportation is
generally based on the rates charged, the quality and reliability of the
service provided and the quality of the carrier's equipment for certain
commodities.
Employees and Labor Relations. Approximately 84% of KCSR and Gateway
Western employees are covered under various collective bargaining
agreements.
In 1996, national labor contracts governing KCSR were negotiated with all
major railroad unions, including the United Transportation Union, the
Brotherhood of Locomotive Engineers, the Transportation Communications
International Union, the Brotherhood of Maintenance of Way Employees, and
the International Association of Machinists and Aerospace Workers. Formal
negotiations to enter into new agreements are in progress and the 1996
labor contracts will remain in effect until new agreements are reached.
The wage increase elements of these new agreements may have retroactive
application. The provisions of the various labor agreements generally
include periodic general wage increases, lump-sum payments to workers and
greater work rule flexibility, among other provisions. The Company is
currently exploring alternative compensation arrangements in lieu of cash
increases. Management does not expect that the negotiations or the
resulting labor agreements will have a material impact on our consolidated
results of operations, financial condition or cash flows.
Labor agreements related to former MidSouth employees covered by collective
bargaining agreements reopened for negotiations in 1996. These agreements
entail eighteen separate groups of employees and are not included in the
national labor contracts. KCSR management has reached new agreements with
all but one of these unions. While discussions with this one union are
ongoing, the Company does not anticipate that this process or the resulting
labor agreement will have a material impact on its consolidated results of
operations, financial condition or cash flows.
Most Gateway Western employees are covered by collective bargaining
agreements that extended through December 1999. Negotiations on those
agreements began in late 1999, and those agreements will remain in effect
until new agreements are reached. The Company does not anticipate that
this process or the resulting labor agreements will have a material impact
on its consolidated results of operations, financial condition or cash
flows.
KCSR, Gateway and other railroads continue to be affected by labor
regulations, which typically are more burdensome than those governing
non-rail industries, such as trucking competitors. The Railroad Retirement
Act requires up to a 23.75% contribution by railroad employers on eligible
wages, while the Social Security and Medicare Acts only require a 7.65%
employer contribution on similar wage bases. Other programs, such as the
Federal Employers' Liability Act (FELA), when compared to worker's
compensation laws, vividly illustrate the competitive disadvantage placed
upon the rail industry by federal labor regulations.
Page 32
Safety and Quality Programs. KCSR is working hard to achieve its safety
vision of becoming the safest railway in North America. In 2000, KCSR
continued its progress toward this vision. The Federal Railroad
Administration ("FRA") Reportable Injury Performance improved by 17% in
2000 and the number of employee lost workdays improved by nearly 12%.
According to the preliminary data from the American Association of
Railroads, during 2000 KCSR had the best safety record among mid-tier
railroads and Gateway Western had the best safety record for small
railroads. KCSR and Gateway Western are both expected to receive the Gold
Harriman award, the highest recognition for safety in the industry.
The driving force for these improvements is strong leadership at the senior
field and corporate level and joint responsibility for the safety processes
by craft employees and managers. This leadership and joint responsibility
in safety are helping shape an improved safety culture at KCSR.
RESULTS OF OPERATIONS
For the year ended December 31, 2000, income from continuing operations
increased $15.2 million to $25.4 million (43 cents per share) from $10.2 million
(17 cents per share) for the year ended December 31, 1999. A $20.1 million
increase in equity earnings from Grupo TFM and a $10.6 million decrease in
the income tax provision for the year ended December 31, 2000 were
partially offset by a decline in U.S. operating income of $6.3 million and
an increase in interest expense of $8.4 million. Consolidated revenues
declined 4.9% while consolidated operating expenses declined 4.3% for the
year ended December 31, 2000 compared with 1999. Excluding the impact of
unusual costs and expenses experienced in the fourth quarter of 1999,
consolidated operating expenses for 2000 declined 1.9% compared to 1999.
Income from discontinued operations was $363.8 million ($6.14 per share)
for the year ended December 31, 2000 compared to $313.1 million ($5.40 per
share) in 1999 primarily due to higher average assets under management
coupled with improving operating margins period to period. Income from
discontinued operations for the year ended December 31, 2000 includes
results from Stilwell only through the date of the Spin-off (July 12,
2000). The Company reported extraordinary items of $8.7 million (net of
income taxes of $4 million) ($.15 per share) during the year ended December
31, 2000. See "Recent Developments - Debt Refinancing and
Re-capitalization of the Company's Debt Structure" for further discussion.
There were no extraordinary items reported during 1999. Net income of the
Company was $380.5 million ($6.42 per share) for the year ended December
31, 2000 compared to $323.3 million ($5.57 per share) for the year ended
December 31, 1999.
For the year ended December 31, 1999, income from continuing operations
decreased $27.8 million to $10.2 million (17 cents per share) from $38.0 million
(67 cents per share) for the year ended December 31, 1998. This decline in
income from continuing operations resulted primarily from a decline in U.S.
operating income, which fell $54.1 million as a result of a $12.1 million
(2.0%) decrease in revenues coupled with a $42.0 million (8.5%) increase in
operating expenses. Exclusive of $12.7 million of certain unusual costs
and expenses recorded in 1999, operating expenses rose $29.3 million and
operating income declined $41.4 million year to year. The decline in U.S.
operating income was partially offset by an increase in equity earnings
from unconsolidated affiliates of $8.1 million and a decrease in the income
tax provision of $20.1 million. Income from discontinued operations was
$313.1 million ($5.40 per share) for the year ended December 31, 1999
compared to $152.2 million ($2.65 per share) in 1998 primarily due to
higher average assets under management coupled with improving operating
margins period to period. Net income of the Company was $323.3 million
($5.57 per share) for the year ended December 31, 1999 compared to $190.2
million ($3.32 per share) for the year ended December 31, 1998.
Page 33
Continuing Operations
The discussion that follows addresses the results of operations of the
continuing operations of the Company. The revenue and expense information
presented herein for the combined KCSR/Gateway Western reflect the results
of KCSR/Gateway Western operating companies on a stand-alone basis. The
results of KCSR subsidiaries and affiliates are excluded. Certain prior
year amounts were reclassified to conform to the current year
presentation.
The following table summarizes the income statement components of the
continuing operations of the Company for the years ended December 31,
respectively (dollars in millions):
2000 1999 1998
-------- -------- --------
Revenues $ 572.2 $ 601.4 $ 613.5
Costs and expenses 514.4 537.3 495.3
-------- -------- --------
Operating income 57.8 64.1 118.2
Equity in net earnings (losses) of
unconsolidated affiliates 23.8 5.2 (2.9)
Interest expense (65.8) (57.4) (59.6)
Other, net 6.0 5.3 9.4
-------- -------- --------
Income from continuing operations
before income taxes 21.8 17.2 65.1
Income tax expense (benefit) (3.6) 7.0 27.1
-------- -------- --------
Income from continuing operations $ 25.4(i) $ 10.2 $ 38.0
(i) Income from continuing operations for the year ended 2000 excludes
extraordinary items for debt retirement costs of $8.7 million (net of
income taxes of $4.0 million). This amount includes $1.7 million (net of
income taxes of $0.1 million) related to Grupo TFM.
The following table summarizes the revenues and carload statistics of
KCSR/Gateway Western for the years ended December 31, respectively.
Certain prior year amounts have been reclassified to reflect changes in the
business groups and to conform to the current year presentation.
Carloads and
Revenues Intermodal Units
------------------- --------------------
(in millions) (in thousands)
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
KCSR/Gateway Western
general commodities:
Chemical and petroleum $ 126.3 $132.7 $ 143.5 154.1 165.5 172.2
Paper and forest 132.9 131.0 138.9 192.4 202.9 212.8
Agricultural and mineral 94.3 95.6 99.9 132.0 141.0 141.5
------ ------ ------- ------ ------ ------
Total general commodities 353.5 359.3 382.3 478.5 509.4 526.5
Intermodal and automotive 63.0 60.6 48.1 269.3 233.9 187.1
Coal 105.0 117.4 117.9 184.2 200.8 205.3
------ ------ ------- ------ ------ ------
Carload revenues and carload
and intermodal units 521.5 537.3 548.3 932.0 944.1 918.9
Other rail-related revenues 41.6 49.1 48.5
------ ------ -------
Total KCSR/Gateway
Western revenues $563.1 $586.4 $596.8
Other subsidiary revenues 9.1 15.0 16.7
------ ------ ------
Total consolidated
revenues $572.2 $601.4 $613.5
====== ====== ======
Page 34
The following table summarizes the costs and expenses of KCSR/Gateway
Western for the years ended December 31, respectively:
2000 1999 1998
------ ------ ------
Salaries, wages and benefits $191.9 $199.7 $184.8
Fuel 48.1 34.2 33.5
Material and supplies 30.5 35.1 36.3
Car hire 14.8 22.4 12.5
Purchased services 47.9 51.7 44.6
Casualties and insurance 34.0 30.6 29.1
Operating leases 55.6 50.4 53.9
Depreciation and amortization 52.1 52.3 52.9
Other 23.8 37.1 25.9
------ ------ ------
Total KCSR/Gateway Western 498.7 513.5 473.5
Other subsidiary costs and expenses 15.7 23.8 21.8
------ ------ ------
Total consolidated costs and expenses $514.4 $537.3 $495.3
Year Ended December 31, 2000 Compared with the Year Ended December 31, 1999
Income from Continuing Operations. For the year ended December 31,
2000, income from continuing operations increased $15.2 million to $25.4
million from $10.2 million for the year ended December 31, 1999. A $20.1
million increase in equity earnings from Grupo TFM and a $10.6 million
decrease in the income tax provision were partially offset by a decline in
U.S. operating income of $6.3 million and an increase in interest expense
of $8.4 million.
Revenues. Revenues totaled $572.2 million for the year ended December
31, 2000 versus $601.4 million in the comparable period in 1999. This
$29.2 million, or 4.9%, decrease resulted from lower combined KCSR/Gateway
Western revenues of approximately $23.3 million, as well as lower revenues
at other transportation companies due to demand driven declines. While
KCSR/Gateway Western experienced revenue growth in certain product sectors
including plastics, automotive, food products, paper and forest products
and metal/ scrap, most commodities declined due to demand driven traffic
declines. As the general economy slowed, industrial production and
manufacturing also retracted leading to a decline in demand for product
shipments. See detailed discussion of KCSR/Gateway Western revenues below.
Costs and Expenses. Costs and expenses decreased $22.9 million year to
year. Excluding $12.7 million of unusual costs and expenses recorded
during the fourth quarter of 1999, costs and expenses declined $10.2
million period to period. Operational efficiencies at KCSR and Gateway
Western led to decreases in salaries and wages, materials and supplies, car
hire, and purchased services expense. Also contributing to the decline in
operating expenses was the impact of gains on the sale of operating
property of approximately $3.4 million, as well as a $3.0 million revision
to the estimate of the allowance for doubtful accounts. This allowance was
revised based on the collection of approximately $1.8 million of a
receivable from an affiliate and agreement for payment of the remaining
amount. These expense reductions were offset by increases in fuel,
casualty and lease expense. See detailed discussion of KCSR/Gateway
Western costs and expenses below. Costs and expenses related to other
subsidiaries decreased $8.1 million year to year, due primarily to
volume-related declines partially offset by higher holding company costs
related mostly to the Spin-off.
Interest Expense. Interest expense for the year ended December 31, 2000
increased $8.4 million, or 14.6%, from the year ended December 31, 1999.
This increase was due to higher
Page 35
interest rates and the amortization of debt issuance costs associated with the
debt re-capitalization in January and September 2000 partially offset by lower
overall debt balances and a benefit related to the adjustment of interest
expense resulting from the settlement of certain income tax issues.
Income tax expense. For the year ended December 31, 2000, the income tax
benefit was $3.6 million compared to an income tax provision of $7.0
million for the year ended December 31, 1999. This variance in income tax
expense was due primarily to certain 2000 non-taxable items, the fact that
the Company did not provide deferred income tax expense on its equity
earnings from Grupo TFM, and the settlement of various prior year income
tax audit issues during 2000. During 2000, equity earnings from Grupo TFM
approximated 90% of the Company's income from continuing operations before
income taxes compared with approximately 9% in 1999. In as much as the
Company intends to indefinitely reinvest the equity earnings from Grupo
TFM, the Company did not provide deferred income tax expense during 2000
for the excess of its book basis over the tax basis of its investment in
Grupo TFM. The consolidated effective income tax rate for 2000 was (16.5%)
compared to 40.7% in 1999.
Unconsolidated Affiliates. The Company recorded $23.8 million of equity
earnings from unconsolidated affiliates for the year ended December 31,
2000 compared to $5.2 million for the year ended December 31, 1999. This
$18.6 million increase is primarily attributable to higher equity earnings
from Grupo TFM partially offset by a decline in equity earnings from
Southern Capital (relates to gain on sale of non-rail loan portfolio by
Southern Capital in 1999).
Equity earnings related to Grupo TFM increased $20.1 million to $21.6
million (exclusive of extraordinary item of $1.7 million related to Grupo
TFM - See "Recent Developments -Debt Refinancing and Re-capitalization of
the Company's Debt Structure") for the year ended December 31, 2000 from
$1.5 million for the year ended December 31, 1999. This increase resulted
from higher Grupo TFM's revenues and operating income, which improved 22.1%
and 37.2%, respectively. Continued revenue growth resulted from Grupo
TFM's strategic positioning in a growing Mexican economy and NAFTA
marketplace, as well as the ability for Grupo TFM to attract new business
through its marketing efforts. Grupo TFM's 2000 operating expenses rose
17.7% compared to the prior year primarily as a result of volume related
cost increases in salaries, wages and benefits, fuel, car hire and
operating leases, partially offset by lower materials and supplies
expense. In addition to volume related increases, fuel costs were driven
by higher prices and car hire was affected by congestion near the U.S. and
Mexican border. Grupo TFM's operating ratio improved to 74.0% for the year
ended December 31, 2000 versus 77.2% for the comparable 1999 period. Also
contributing to the increase in Grupo TFM equity earnings was the
fluctuation in deferred income taxes. Under accounting principles
generally accepted in the United States ("U.S. GAAP") the deferred tax
benefit for Grupo TFM was $13.2 million (excluding the impact of the
extraordinary item) for the year ended December 31, 2000 compared to a
deferred tax expense of $11.5 million in 1999.
Results of the Company's investment in Grupo TFM are reported using U.S.
GAAP. Because the Company is required to report its equity earnings
(losses) in Grupo TFM under U.S. GAAP and Grupo TFM reports under
International Accounting Standards, differences in deferred income tax
calculations and certain operating expense categories occur. The deferred
income tax calculations are significantly impacted by fluctuations in the
relative value of the Mexican peso versus the U.S. dollar and the rate of
Mexican inflation, and can result in significant variances in the amount of
equity earnings (losses) reported by the Company.
Combined KCSR/Gateway Western Operating Results. The following provides
a comparative analysis of the revenue and expense components of
KCSR/Gateway Western for the year ended December 31, 2000 versus the year
ended December 31, 1999:
Page 36
Revenues. Combined KCSR/Gateway Western revenues decreased
approximately $23.3 million as declines in coal, chemical and petroleum,
agriculture and minerals and haulage revenues were offset by increases in
paper and forest products and automotive revenues.
Chemical and Petroleum. For the year ended December 31, 2000, chemical
and petroleum product revenues decreased $6.4 million, or 4.8%, compared
with the year ended December 31, 1999, resulting primarily from lower
miscellaneous chemical and soda ash revenues. Miscellaneous chemical
revenues were 3.4% lower due to demand driven traffic declines while soda
ash revenues declined 65.2%, due to a merger within the chemical industry
and a new dedicated soda ash terminal opening on the railroad which
originates the soda ash, which diverted soda ash movements from KCSR.
Management expects soda ash revenues to remain weak. Chemical and
petroleum products accounted for 24.2% of total carload revenues for the
year ended December 31, 2000 versus 24.7% for the year ended December 31,
1999.
Paper and Forest. Paper and forest product revenues increased $1.9
million, or 1.5%, period to period as a result of increased revenues for
paper/pulp products, lumber products and metal/scrap products partially
offset by declines in pulpwood, logs and chips and military/other
products. Paper/pulp products increased due to the expansion of several
paper mills directly served by KCSR while lumber revenues improved due to a
1% increase in carloads and changes in length of haul. Higher metal/scrap
revenues resulted from an increase in steel shipments to the domestic oil
exploration industry, which uses steel for drilling pipe. Demand for
pulpwood, logs and chips declined due to market weakness while the decline
in military/other revenues resulted from higher 1999 revenues due to
National Guard movements in 1999 from Camp Shelby, Mississippi to Fort
Irving, California. Paper and forest products accounted for 25.5% and
24.4% of total carload revenues for the years ended December 31, 2000 and
1999, respectively.
Agricultural and Mineral. Agricultural and mineral product revenues
decreased $1.3 million, or 1.4%, for the year ended December 31, 2000
compared with the year ended December 31, 1999. This decline resulted
primarily from lower export grain revenues due to competitive pricing
pressures, weather-related operational problems and weakness in the export
market. During 2001, management expects a contraction in poultry industry
production to negatively impact the Company's domestic grain revenues as
KCSR serves approximately 35 poultry customers on its line. Agricultural
and mineral products accounted for 18.1% and 17.8% of total carload
revenues for the years ended December 31, 2000 and 1999, respectively.
Intermodal and Automotive. Intermodal and automotive revenues increased
$2.4 million, or 4.0%, for the year ended December 31, 2000 compared to the
year ended December 31, 1999. This improvement is comprised primarily of
an increase in automotive revenues, which increased 78.3% year to year,
partially offset by a decline in intermodal revenues. Automotive revenues
have increased due, in part, to our higher traffic levels for the movement
of automobile parts originating in the upper midwest of the United States
and terminating in Mexico. Also contributing to the increase in automotive
revenues was additional traffic handled by Gateway Western from Mexico,
Missouri to Kansas City and the Mazda traffic resulting from the opening of
the IFG. Intermodal revenues were affected by the fourth quarter 1999
closure of two intermodal facilities that were not meeting profit
expectations. These closures resulted in a loss of revenues, but also have
improved operating efficiency and profitability of this business sector.
Additionally, during the second quarter of 2000, we entered into a
marketing agreement with Norfolk Southern whereby we have agreed to perform
haulage services for Norfolk Southern from Meridian to Dallas for an agreed
upon haulage fee. Currently there are two trains operating per day with
the expectation that this will increase in the future. Some of this
haulage traffic has replaced previous carload intermodal traffic while some
of the traffic is incremental to us. A portion of the decline in
intermodal revenues results from the Norfolk Southern haulage traffic that
replaced existing intermodal
Page 37
revenues as KCSR is now receiving a smaller per unit haulage fee than the share
of revenue it received as part of the intermodal movement. This traffic,
however, is more profitable to KCSR as certain costs such as locomotives, fuel
and car hire are incurred and paid by Norfolk Southern. In the long term
intermodal revenues are expected to increase as a result of this haulage
agreement. Management expects that both intermodal and automotive revenues will
increase in 2001, primarily related to the relationships with Norfolk Southern
and CN/IC, continued growth of the Mazda business, as well as traffic recently
obtained with Ford to move automobiles from East St. Louis to Kansas City.
Intermodal and automotive revenues accounted for 12.1% and 11.3% of total
carload revenues for the years ended December 31, 2000 and 1999, respectively.
Coal. Coal revenues declined $12.4 million, or 10.6%, for the year ended
December 31, 2000 compared with the year ended December 31, 1999. Lower
unit coal revenues were attributable to an approximate 8% decline in tons
delivered coupled with a decline in revenue per carload due to changes in
length of haul as the Company's longest haul utility temporarily reduced it
coal deliveries in the second half of 2000. The decline in tons delivered
was primarily due to the Company's major coal customer ("SWEPCO"), which
reduced coal deliveries to decrease inventory stockpiles. Management
expects coal revenues to recover beginning in first quarter 2001 due to
increased shipments to SWEPCO and the re-opening of the KCPL Hawthorn plant
in mid 2001. Hawthorn has been out of service since January 1999 due to an
explosion at the Kansas City facility. Coal accounted for 20.1% and 21.8%
of total carload revenues for the year ended December 31, 2000 and 1999,
respectively.
Costs and Expenses. For the year ended December 31, 2000, combined
KCSR/Gateway Western operating costs and expenses declined $14.8 million
compared to 1999. Exclusive of $12.1 million of certain unusual costs and
expenses recorded during the fourth quarter of 1999 (see 1999-1998
discussion below), operating costs and expenses declined $2.7 million
period to period. Declines in salaries, wages and benefits, materials and
supplies, car hire and purchased services expense, arising primarily from
improved operations and the easing of congestion, were offset by casualties
expense related to the Duncan case, higher fuel costs, as well as higher
locomotive lease and maintenance costs. Also contributing to the decline
in operating expenses was the impact of gains on the sale of operating
property of approximately $4.0 million, as well as a $3.0 million revision
to the estimate of the allowance for doubtful accounts.
Salaries, Wages and Benefits. Salaries, wages and benefits expense for
the year ended December 31, 2000 decreased $7.8 million versus the
comparable 1999 period. Exclusive of $3.0 million of certain 1999 unusual
costs and expenses (see 1999-1998 discussion below), salaries, wages and
benefits declined $4.8 million. Wage increases to certain classes of union
employees were offset by reduced employee counts, lower overall overtime
costs, and the use of fewer relief train crews. Improvements in operating
efficiencies during 2000, as well as the absence of congestion-related
issues that existed during portions of 1999, contributed to the decline in
overtime and relief crew costs.
Fuel. For the year ended December 31, 2000, fuel expense increased
$13.9 million, or 40.6%, compared to the year ended December 31, 1999. An
increase in the average fuel price per gallon of approximately 64% was
somewhat offset by a decrease in fuel usage of approximately 14%. While
higher market prices have significantly impacted overall fuel costs,
improved fuel efficiency was achieved as a result of the lease of the 50
new fuel-efficient locomotives by KCSR in late 1999 and an aggressive fuel
conservation plan which began in mid-1999. Fuel costs represented
approximately 9.7% of combined KCSR/Gateway Western operating expenses
compared to 6.7% in 1999.
Car Hire. For the year ended December 31, 2000, car hire expense
declined $7.6 million, or 33.9%, compared to 1999. Improved operations and
the easing of congestion drove this
Page 38
improvement. During 1999, KCSR/Gateway Western experienced significant
congestion-related issues.
Purchased Services. For the year ended December 31, 2000, purchased
services expense declined $3.8 million compared to the year ended December
31, 1999. Increased purchased services expense as a result of maintenance
contracts for the 50 new leased locomotives was offset by a decline in
short-term locomotive leases and other purchased services (partially
related to Y2K contingency efforts in 1999).
Casualties and Insurance. For the year ended December 31, 2000
casualties and insurance expense increased $3.4 million compared with the
year ended December 31, 1999, reflecting $4.2 million in costs related to
the Duncan case (See"-Recent Developments") and higher personal injury-related
costs partially offset by lower derailment costs.
Operating Leases. For the year ended December 31, 2000, operating lease
expense increased $5.2 million, or 10.3%, compared to the year ended
December 31, 1999 primarily as a result of the 50 new GE 4400 AC
locomotives leased during fourth quarter 1999.
Depreciation and Amortization. Depreciation and amortization expense was
$52.1 million for the year ended December 31, 2000 compared to $52.3
million for the year ended December 31, 1999. Depreciation related to
property acquisitions was offset by property retirements and lower STB
approved depreciation rates. Depreciation and amortization expense is
expected to increase in 2001 due to the implementation of a new
transportation management control system ("MCS"), which is currently
scheduled for implementation in April 2001.
Operating Income and Operating Ratio. KCSR/Gateway Western operating
income for the year ended December 31, 2000 decreased $8.5 million, or
11.7%, to $64.4 million, resulting from a $23.3 million decrease in
revenues and a $14.8 million decrease in operating expenses. Excluding
$12.1 million of 1999 unusual costs and expenses, KCSR/Gateway Western
operating income for the year ended December 31, 2000 would have been $20.6
lower than 1999. The combined KCSR/Gateway Western operating ratio was
88.3% for the year ended December 31, 2000 compared to 85.2% (exclusive of
1999 unusual costs and expenses) for the year ended December 31, 1999.
Year Ended December 31, 1999 Compared with the Year Ended December 31, 1998
Income from Continuing Operations. For the year ended December 31, 1999,
income from continuing operations decreased $27.8 million (73.2%) compared
to the year ended December 31, 1998, primarily as a result of lower
revenues, higher operating expenses and a decline in other, net.
Revenues. Revenues declined $12.1 million, or 2.0%, for the year ended
December 31, 1999 versus 1998. Combined KCSR/Gateway Western revenues
decreased 1.7% primarily due to declines in chemical and petroleum, paper
and forest and agricultural and mineral revenues, partially offset by
increased intermodal and automotive revenues. Other transportation
businesses also reported lower revenues due to volume-related declines.
Costs and Expenses. Costs and expenses increased approximately 8.5%
primarily due to higher congestion-related costs at KCSR.
Interest Expense and Other, net. For the year ended December 31, 1999
interest expense decreased $2.2 million, or 3.7%, to $57.4 million from the
prior year due to a slight decrease in
Page 39
average debt balances resulting from net repayments. Other, net declined
$4.1 million for the year ended December 31, 1999 relating primarily to a 1998
receipt of interest ($2.8 million) related to a tax refund.
Income Tax Expense. Income tax expense decreased $20.1 million for the
year ended December 31, 1999 compared to 1998, primarily because of the
decline in income from continuing operations before income taxes of $47.9
million (73.6%). The effective tax rate for 1999 was 40.7% compared to
41.5% in 1998.
Unconsolidated Affiliates. For the year ended December 31, 1999, the
Company recorded $5.2 million of equity in net earnings from unconsolidated
affiliates versus equity in net losses of $2.9 million in 1998, an increase
of $8.1 million. This increase relates primarily to improvements in equity
earnings of Grupo TFM and Mexrail. Also contributing was an increase in
1999 equity earnings from Southern Capital related mostly to the gain on
the sale of its non-rail related loan portfolio in 1999.
Grupo TFM contributed equity earnings of $1.5 million to income from
continuing operations in 1999 compared to equity losses of $3.2 million in
1998. Exclusive of deferred income tax effects, Grupo TFM's contribution
to income from continuing operations (after giving effect to the impact of
associated KCSI interest expense) increased $19.4 million, indicative of
substantially improved operations and continued growth. This increase was
partially offset by a $16 million increase in our proportionate share of
Grupo TFM's deferred tax expense in 1999 versus 1998. Higher Grupo TFM
earnings resulted from a 21.6% increase in revenues and 56.3% increase in
operating income partially offset by an increase in deferred tax expense.
Reflecting this growth in revenues, operating expenses increased
approximately $50.1 million during 1999; however, the operating ratio
declined 5.0 percentage points to 77.2% from 82.2%, displaying Grupo TFM
management's continued emphasis on operating efficiency and cost control.
Volume-related increases in car hire expense and operating leases were
partially offset by an 8% decline in salaries and wages.
In 1999, Mexrail contributed equity earnings of $0.7 million compared to
equity losses of $2.0 million in 1998, an improvement of $2.7 million.
Mexrail revenues increased 3.8% while operating expenses declined
approximately 7.5%. The decrease in operating expenses resulted primarily
from a reorganization of certain business practices whereby the operations
were assumed by TFM. This change in the operations of Mexrail resulted in
certain efficiencies and a reduction in related costs.
Combined KCSR/Gateway Western Operating Results. The following provides
a comparative analysis of the revenue and expense components of
KCSR/Gateway Western for the year ended December 31, 1999 compared to the
year ended December 31, 1998.
Revenues. KCSR/Gateway Western 1999 revenues decreased $10.4 million
compared to 1998, resulting primarily from a decline in chemical and
petroleum, paper and forest and agricultural and mineral traffic, partially
offset by an increase in intermodal and automotive traffic. General
commodity carloads decreased 3.2%, resulting in a $23.0 million decline in
general commodity revenues, while intermodal units shipped increased 20.4%
leading to a $4.8 million increase in related revenues. Automotive
revenues increased $7.7 million year to year.
Chemicals and Petroleum. During 1999, chemical and petroleum revenues
declined $10.8 million, or 7.5%, compared with 1998, primarily as a result
of significant declines in miscellaneous chemical and soda ash revenues.
Miscellaneous chemical revenues declined $4.1 million due, in part, to the
expiration in late 1998 of the emergency service order in the Houston area
related to the UP/SP merger congestion, as well as a continuing decline in
demand because of domestic and international chemical market conditions and
competitive pricing pressures. Soda ash revenues fell 37% year to year
because of a decrease in export shipments due to a competitive disadvantage
Page 40
to another carrier. Also contributing to the decline were lower plastic
and petroleum revenues, which were impacted by competitive market pricing
and lower demand. Chemical and petroleum products accounted for 24.7% of
total 1999 carload revenues compared with 26.2% for 1998.
Paper and Forest. For the year ended December 31, 1999, paper and
forest product revenues decreased $7.9 million, or 5.7%, compared with
1998. An overall weakness in the paper, lumber and related chemical
markets led to volume declines in pulp/paper, scrap paper, and pulpwood,
logs and chips. Additionally, metal product revenues declined in 1999
compared to 1998, driven primarily by lower demand within the domestic oil
production market and lower demand for oil exploration drill pipe. These
declines were partially offset by higher revenues from military/other
shipments due to a National Guard move in 1999 from Camp Shelby,
Mississippi to Fort Irving, California. Paper and forest traffic comprised
24.4% of carload revenues during 1999 compared to 25.3% in 1998.
Agricultural and Mineral. Agricultural and mineral product revenues for
1999 decreased $4.3 million, or 4.3%, compared to 1998. Revenue declines
in export grain, food and related products, non-metallic ores and stone,
clay and glass products were partially offset by an increase in domestic
grain revenues. Declines in export grain resulted primarily from
competitive pricing and changes in length of haul. Declines in food
products, non-metallic ores and stone, clay and glass products were
primarily attributable to demand-related volume declines, and changes in
traffic mix and length of haul. Improvements in domestic grain revenues
were driven by higher corn shipments to meet the demands of the feed mills
located on KCSR's rail lines; however, during fourth quarter 1999, domestic
grain revenues declined approximately $1 million compared to fourth quarter
1998 because of a loss of market share due to a rail line build-in by UP to
a feed mill serviced by KCSR. Agricultural and mineral products accounted
for 17.8% of carload revenues in 1999 compared with 18.2% in 1998.
Intermodal and Automotive. Intermodal and automotive revenues for 1999
increased $12.5 million, or 26.0%, compared to 1998 revenues primarily due
to a $7.7 million increase in automotive revenue in 1999. The increase in
automotive traffic is due to the CN/IC strategic alliance on KCSR and
Norfolk Southern traffic forwarded to Gateway Western. Additionally,
intermodal units shipped increased approximately 20.4% year over year,
partially offset by a decrease in revenue per unit shipped. All of the
1999 intermodal revenue growth is attributable to container shipments,
which have a lower rate per unit shipped than trailers. As a result
revenues per intermodal unit shipped have declined. Container movements,
however, have more favorable profit margins due to their lower inherent
cost structure compared to trailers. Approximately $2.5 million of the
intermodal growth was related to CN/IC alliance traffic. Intermodal and
automotive revenues accounted for 11.3% of carload revenues in 1999
compared with 8.8% in 1998.
Coal. During the year ended December 31, 1999, KCSR experienced a slight
decline in coal revenues primarily because of (i) a decrease in demand
compared with 1998--a year in which KCSR reported record coal revenues, and
(ii) slower delivery times due to congestion arising from track maintenance
work on the north-south corridor. During the fourth quarter, however, coal
revenues improved, mostly offsetting the declines during the first nine
months of 1999 and resulting in year end 1999 coal revenues only slightly
lower than the 1998 record levels. The improvement noted during the fourth
quarter resulted from increased demand, as well as from faster delivery
times arising from the completion of the track maintenance work in
September 1999, which led to an easing of congestion and increased
capacity. Coal accounted for 21.8% of carload revenues during 1999
compared with 21.5% for 1998.
Costs and Expenses. For the year ended December 31, 1999, KCSR/Gateway
Western's costs and expenses increased $40.0 million (8.4%) versus
comparable 1998, primarily as a result of increases in salaries, wages and
related fringe benefits, fuel costs, car hire, and purchased
Page 41
services, partially offset by a decrease in operating leases and material and
supplies expense. A significant portion of the cost and expenses increase ($12.1
million) was comprised of unusual costs and expenses recorded during fourth
quarter 1999 relating to employee separations, labor and personal injury related
costs, write-off of costs associated with the Geismar project and costs
associated with the closure of an intermodal facility. The remainder of the
increase resulted primarily from system congestion and capacity issues arising
from track maintenance on the north-south corridor, which began in second
quarter 1999 and was completed at the end of the third quarter 1999. Also
contributing to capacity and congestion problems was the implementation of a new
dispatching system, turnover in certain experienced operations management
positions, unreliable and insufficient locomotive power, congestion arising from
eastern rail carriers, and several significant derailments.
Salaries, Wages and Benefits. Salaries, wages and benefits expense for
the year ended December 31, 1999 increased $14.9 million versus comparable
1998, an increase of 8.1%. This increase includes $3.0 million resulting
from certain unusual costs and expenses including employee separations and
union labor-related issues. The remaining increase was primarily
attributable to the congestion and capacity issues, which resulted in the
need for additional crews as well as overtime hours.
Fuel. For the year ended December 31, 1999, fuel expense increased
approximately $0.7 million, or 2.1%, compared to 1998, as a result of a
1.0% increase in fuel usage coupled with a 1.0% increase in the average
fuel price per gallon. In 1999, fuel costs represented approximately 6.7%
of total operating expenses compared to 7.1% in 1998.
Car Hire. For the year ended December 31, 1999, expenses for car hire
payable, net of receivables, increased $9.9 million over 1998. A portion
of the increase in car hire expense was attributable to congestion-related
issues, resulting in higher payables to other railroads because more
foreign cars were on KCSR's system for a longer period. This congestion
also affected car hire receivables as fewer KCSR cars and trailers were
being utilized by other railroads. The remaining increase in car hire
expense resulted from a change in equipment utilization. Similar to 1998,
for certain equipment, KCSR continued its transition to utilization leases
from fixed leases. The cost of utilization leases are based upon usage or
utilization of the asset whereas fixed leases are reflected as costs
regardless of usage. Costs for utilization leases are recorded as car hire
expense, whereas fixed lease costs are recorded as operating lease
expense. Additionally, as certain fixed leases expire, KCSR is electing to
use more foreign cars rather than renew the leases. A portion of the
increase in car hire costs was offset by a decrease in related operating
lease expenses as a result of these changes in equipment utilization.
Purchased Services. For the year ended December 31, 1999, purchased
services expense increased $7.1 million, or 15.9%, compared to the year
ended December 31, 1998, primarily as a result of short-term locomotive
needs (rents, maintenance) arising from the congestion and capacity
problems discussed above.
Casualties and Insurance. For the year ended December 31, 1999,
casualties and insurance expense increased $1.5 million compared with the
year ended December 31, 1998. This increase reflects higher derailment
related expenses when compared to 1998, while overall personal
injury-related costs were essentially flat with the prior year. During
first quarter 1999 Gateway Western experienced a $1.4 million derailment,
which is unusually large given Gateway Western's prior operating history.
Operating Leases. For the year ended December 31, 1999, operating lease
expense decreased $3.5 million, or 6.5% compared to the year ended December
31, 1998, as a result of a change in equipment utilization as discussed
above regarding car hire expense.
Page 42
Depreciation and Amortization. Depreciation and amortization expense in
1999 declined slightly (1%) compared to 1998. This slight decline results
from the retirement of certain operating equipment. As these assets fully
depreciate and are retired, they are being replaced, as necessary, with
equipment under operating leases. This decline was partially offset by
increased depreciation from property additions.
Operating Income and Operating Ratio. Operating income for the year
ended December 31, 1999 decreased $50.4 million (40.9%) to $72.9 million.
This decline in operating income resulted from a 1.7% decline in revenues
coupled with a 8.5% increase in operating expenses. Exclusive of $12.1
million of unusual operating costs and expenses, operating income declined
$38.3 million, resulting in an operating ratio of 85.2% for the year ended
December 31, 1999 compared to 79.2% for 1998. Although the operating ratio
for 1999 was disappointing, our objective, on a long-term basis, is to
maintain the operating ratio below 80%, despite the substantial use of
lease financing for locomotives and rolling stock.
TRENDS and OUTLOOK
For the year ended December 31, 2000, the Company's results were favorably
affected by the ongoing results of the investment in Grupo TFM as well as
KCSR/Gateway Western's success in maintaining an effective operating cost
structure. Domestically, however, operating results were adversely
affected by competitive revenue pressures, higher fuel costs and higher
interest costs. Combined KCSR/Gateway Western 2000 revenues declined
approximately 4% compared to 1999, reflecting traffic erosion related to
the rail mergers, competitive pricing issues, demand driven traffic
declines, and an 11% decline in unit coal revenues resulting primarily from
a major coal customer reducing excess stockpiles. Interest expense rose
nearly 15% for the year ended December 31, 2000 compared to 1999 as a
result of higher interest rates and amortization of debt costs associated
with the January and September 2000 debt re-capitalization discussed
elsewhere, partially offset by lower overall debt balances and a benefit
related to the adjustment of interest expense resulting from the settlement
of certain tax issues. Operationally, KCSR/Gateway Western operated more
efficiently in 2000 than in 1999 as evidenced by lower operating expenses
(excluding fuel, casualty and operating leases) and certain improved
operating measures, such as increased train speeds, faster coal cycle
times, lower terminal dwell times, reduced overtime hours and the use of
fewer relief train crews. In spite of significantly higher diesel fuel
costs (which rose approximately 41% in 2000 compared to 1999), the Company
reduced operating expenses by approximately 4.3% during 2000, primarily due
to operational improvements and the easing of congestion at KCSR/Gateway
Western. Also contributing to the decline in 2000 operating expenses were
the following: (i) $12.7 million of unusual costs and expenses recorded
during 1999; (ii) the impact of gains on the sale of operating property of
approximately $3.4 million; and (iii) a $3.0 million revision to the
estimate of the allowance for doubtful accounts. This allowance was
revised based on the collection of approximately $1.8 million of a
receivable from an affiliate and agreement for payment of the remaining
amount. Grupo TFM results improved for the year ended December 31, 2000
due primarily to revenue growth and cost containment, as well as the impact
of fluctuations in the value of the peso and Mexican inflation on deferred
taxes under U.S. GAAP.
The current outlook for business in 2001 is as follows:
Management expects coal revenues to recover beginning in first quarter
2001. General freight, intermodal and automotive traffic, however, will be
largely dependent on the economic trends within certain industries in the
geographic region served by the railroads comprising the NAFTA Railway,
which have shown signs of weakness in early 2001. Variable costs and
expenses are expected to be proportionate with revenue activity, except for
fuel expenses, where prices are
Page 43
expected to mirror market conditions. Additionally, casualty and insurance costs
are expected to be impacted by several first quarter 2001 derailments.
In the short-term, competitive pricing issues, weakness in the chemical
markets and export grain markets, as well as the existing general economic
slowdown will present revenue challenges to the Company. However, in the
long-term, management believes that, with the Company's strategic partners
and marketing alliances, effective cost controls and system utilization
improvements (see discussion of expected implementation of MCS in Item 1 -
"Business"), the NAFTA Railway continues to provide an attractive service
for shippers and is well-positioned to take advantage of the continued
growth potential of NAFTA traffic; and
The Company expects to continue to participate in the earnings/losses from
equity investments in Grupo TFM, Southern Capital and Mexrail.
Additionally, beginning in 2001, the Company expects to participate in the
earnings/losses from the equity investment in PCRC. The Company's future
results could be impacted by a potential requirement to provide deferred
taxes on the difference between the Company's financial reporting basis and
income tax basis of its investment in Grupo TFM. See "Other -- Foreign
Corporate Joint Venture" below. Management makes no assurances as to the
impact that a change in the value of the peso or a change in Mexican
inflation will have on the results of Grupo TFM. See "Foreign Exchange
Matters" below and Item 7(A), Quantitative and Qualitative Disclosures
About Market Risk, of this Form 10-K for further information.
LIQUIDITY
Summary cash flow data is as follows for the years ended December 31, (in
millions):
2000 1999 1998
-------- -------- --------
Cash flows provided by (used for):
Operating activities $ 77.2 $ 178.0 $ 141.6
Investing activities (101.8) (97.2) (61.5)
Financing activities 34.2 (74.5) (79.4)
-------- -------- -------
Net increase in
cash and equivalents 9.6 6.3 0.7
Cash and equivalents at beginning of year 11.9 5.6 4.9
-------- -------- --------
Cash and equivalents at end of year $ 21.5 $ 11.9 $ 5.6
======== ======== ========
During the year ended December 31, 2000, the Company's consolidated cash
position increased $9.6 million from December 31, 1999, resulting primarily
from cash from operating activities, net proceeds from the issuance of
long-term debt and the issuance of common stock under employee stock plans,
partially offset by changes in working capital balances, property
acquisitions and debt issuance costs.
Operating Cash Flows. The Company's cash flow from operations has
historically been positive and sufficient to fund operations, KCSR/Gateway
Western roadway capital improvements, other capital improvements and debt
service. External sources of cash (principally bank debt, public
debt and sales of investments) have typically been used to fund
acquisitions, new investments, equipment additions and Company common stock
repurchases.
Page 44
The following table summarizes consolidated operating cash flow information
for the years ended December 31, respectively. Certain reclassifications
have been made to prior year amounts to conform to current year
presentation. (in millions)
2000 1999 1998
------ ------ ------
Net income $ 380.5 $ 323.3 $ 190.2
Income from discontinued operations (363.8) (313.1) (152.2)
Depreciation and amortization 56.1 56.9 56.7
Equity in undistributed (earnings) losses (23.8) (5.2) 2.9
Distributions from unconsolidated affiliates 5.0 - 5.0
Deferred income taxes 23.1 9.8 35.5
Transfer from Stilwell - 56.6 4.2
Gains on sales of assets (3.4) (0.6) (5.7)
Extraordinary items, net of tax 7.5 - -
Tax benefit realized upon exercise of
stock options 9.3 6.4 12.2
Change in working capital items (14.3) 49.7 (8.6)
Other 1.0 (5.8) 1.4
-------- -------- -------
Net operating cash flow $ 77.2 $ 178.0 $ 141.6
======== ======== ========
2000 net operating cash inflows of $77.2 million declined $100.8 million
compared to 1999 net operating cash inflows of $178.0 million. This
decline was mostly attributable to the 1999 receipt of a $56.6 million
transfer from Stilwell. Also contributing to the decline was the payment
during 2000 of certain accounts payable and accrued liabilities, including
accrued interest of approximately $11.4 million related to indebtedness, as
well as the decline in the contribution of domestic operations to income
from continuing operations.
Net operating cash inflows for the year ended December 31, 1999 were $178.0
million compared to net operating cash inflows of $141.6 million for the
year ended December 31, 1998. This $36.4 million improvement in 1999
operating cash flow was chiefly attributable to an increase in a transfer
from Stilwell somewhat offset by lower 1999 income from continuing
operations and lower deferred taxes. Also contributing was an increase in
current liabilities resulting from a 1998 payment of approximately $23
million related to the KCSR union productivity fund termination.
Investing Cash Flows. Net investing cash outflows were $101.8 million and
$97.2 million for the years ended December 31, 2000 and 1999,
respectively. The $4.6 million difference results from higher investments
in affiliates, partially offset by slightly lower capital expenditures and
an increase in funds received from property disposals. Additionally,
during 1999, Stilwell repaid $16.6 million of debt to the Company.
Net investing cash outflows were $97.2 million for the year ended December
31, 1999 compared to $61.5 million of net investing cash outflows during
1998. This $35.7 million difference for 1999 compared to 1998 results
primarily from higher capital expenditures.
Cash was used for property acquisitions of $104.5, $106.2, and $69.9
million in 2000, 1999 and 1998, respectively. Cash was (used for) provided
by investments in and loans with affiliates of ($4.2), $12.7 and ($0.7)
million in 2000, 1999 and 1998, respectively. Proceeds from the disposals
of property were $5.5, $2.8 and $8.4 million in 2000, 1999 and 1998,
respectively.
Generally, operating cash flows and borrowings under lines of credit have
been used to finance property acquisitions and investments in and loans
with affiliates.
Page 45
Financing Cash Flows. Financing cash flows were as follows:
o Borrowings of $1,052.0 million, $21.8 million and $151.7 million in
2000, 1999 and 1998, respectively. Proceeds from the issuance of debt
in 2000 were used for refinancing of debt in January and September
2000. Proceeds from the issuance of debt in 1999 were used for stock
repurchases. During 1998, proceeds from borrowings under existing lines
of credit were used to repay $100 million of 5.75% Notes which were due
on July 1, 1998. Other 1998 borrowings were used to fund the KCSR union
productivity fund termination ($23 million) and to provide for working
capital needs ($5 million).
o Repayment of indebtedness in the amounts of $1,015.4 million, $97.5
million and $232.0 million in 2000, 1999 and 1998, respectively.
Repayment of indebtedness is generally funded through operating cash
flows; however, in 2000 repayments included the refinancing of debt in
January and September 2000. Repayments in 1999 were partially funded
through a transfer from Stilwell, while 1998 repayments of $100 million
of notes as discussed above were funded under then-existing lines of
credit.
o Payment of debt issuance costs of $17.6 million and $4.2 million in
2000 and 1999, respectively.
o Repurchases of KCSI common stock during 1999 of $24.6 million were
funded with borrowings under existing lines of credit (as noted above)
and internally generated cash flows.
o Proceeds from stock plans of $17.9 million, $37.0 million and $17.9
million in 2000, 1999 and 1998, respectively.
o Payment of cash dividends of $4.8 million, $17.6 million and $17.8
million in 2000, 1999 and 1998, respectively.
CAPITAL STRUCTURE
Capital Requirements. Capital improvements for KCSR/Gateway Western
roadway track structure have historically been funded with cash flows from
operations. The Company has traditionally used Equipment Trust
Certificates for major purchases of locomotives and rolling stock, while
using internally generated cash flows or leasing for other equipment.
Through its Southern Capital joint venture, the Company has the ability to
finance railroad equipment, and therefore, has increasingly used
lease-financing alternatives for its locomotives and rolling stock.
Southern Capital was used to finance the purchase of the 50 new GE 4400 AC
locomotives in November 1999. These locomotives are being financed by KCSR
under operating leases with Southern Capital.
Capital programs are primarily financed through internally generated cash
flows. These internally generated cash flows were used to finance capital
expenditures (property acquisitions) of $104.5 million, $106.2 million and
$69.9 million in 2000, 1999 and 1998, respectively. Internally generated
cash flows and borrowings under existing lines of credit are expected to be
used to fund capital programs for 2001, currently estimated at
approximately $77 million, which include the following major items:
maintenance of way, maintenance of equipment, transportation, information
technology, administrative, marketing and development of the
Richards-Gebaur intermodal yard. In general, the Company estimates that
approximately two-thirds of its capital expenditures are maintenance
related.
Page 46
KCSR/Gateway Western Maintenance. KCSR and Gateway Western, like all
railroads, are required to maintain their own property infrastructure.
Portions of roadway and equipment maintenance costs are capitalized and
other portions expensed (as components of material and supplies, purchased
services and others), as appropriate. Maintenance and capital improvement
programs are in conformity with the Federal Railroad Administration's track
standards and are accounted for in accordance with applicable regulatory
accounting rules. Management expects to continue to fund roadway and
equipment maintenance expenditures with internally generated cash flows.
Maintenance expenses (exclusive of amounts capitalized) for way and
structure (roadbed, rail, ties, bridges, etc.) and equipment (locomotives
and rail cars) for the three years ended December 31, 2000, as a percentage
of KCSR/Gateway Western revenues are as follows:
KCSR/Gateway Western Maintenance
--------------------------------
Way and Structure Equipment
----------------- -----------------
Percent of Percent of
Amount Revenue Amount Revenue
2000 $39.8 7.1% $ 44.3 7.9%
1999 41.6 7.1 52.1 8.9
1998 44.5 7.5 47.9 8.0
Capital. Components of capital are shown as follows (in millions). For
purposes of this analysis, stockholders' equity for 1999 and 1998 (periods
prior to the Spin-off) exclude the net assets of Stilwell.
2000 1999 1998
-------- -------- --------
Debt due within one year $ 36.2 $ 10.9 $ 10.7
Long-term debt 638.4 750.0 825.6
-------- -------- --------
Total debt 674.6 760.9 836.3
Stockholders' equity (excludes the net
assets of Stilwell) 643.4 468.5 391.0
-------- -------- --------
Total debt plus equity $1,318.0 $1,229.4 $1,227.3
======== ======== ========
Total debt as a percent of
total debt plus equity ("debt ratio") 51.2% 61.9% 68.1%
-------- -------- --------
At December 31, 2000, the Company's consolidated debt ratio decreased 10.7
percentage points compared to December 31, 1999. Total debt decreased
$86.3 million as a result of the assumption of $125 million of debt by
Stilwell partially offset by net long-term borrowings. Stockholders'
equity increased $174.9 million as a result of 2000 income from continuing
operations of $25.4 million, the assumption of $125 million of debt by
Stilwell and the issuance of common stock under employee stock plans
partially offset by extraordinary items of $8.7 million and dividends. The
increase in stockholders' equity coupled with the decrease in debt resulted
in the decline in the debt ratio from December 31, 1999.
At December 31, 1999, the Company's consolidated debt ratio decreased 6.2
percentage points to 61.9% from 68.1% at December 31, 1998. Total debt
decreased $75.4 million as repayments exceeded borrowings. Stockholders'
equity increased $77.5 million primarily as a result of 1999 income from
continuing operations of $10.2 million, the issuance of common stock under
employee stock plans and a transfer from Stilwell, partially offset by
common stock repurchases of $24.6 million and dividends of $17.9. The increase
in stockholders' equity and the decrease in debt resulted in the decrease in the
debt ratio from December 31, 1998.
Page 47
Under the existing capital structure of KCSI at December 31, 2000,
management anticipates that the debt ratio will essentially remain flat
through 2001.
KCSI Credit Agreements. In January 2000, in conjunction with the
re-capitalization of the Company's debt structure, the Company entered into
new credit agreements as described above in "Recent Developments".
Overall Liquidity. The Company believes, based on current expectations,
that its operating cash flows and available financing resources are
sufficient to fund anticipated operating, capital and debt service
requirements and other commitments through 2001.
The Company has financing available through a revolving line of credit with
a maximum borrowing amount of $100 million (on January 2, 2001 the line of
credit was reduced from $150 million to $100 million). As of December 31,
2000 the full amount of this line of credit was available. The Company's
credit agreements contain, among other provisions, various financial
covenants. The Company was in compliance with these various provisions,
including the financial covenants, as of December 31, 2000. Because of
certain financial covenants contained in the credit agreements, however,
maximum utilization of the Company's available lines of credit may be
restricted.
The Company filed a Universal Registration Statement on Form S-3 (File No.
33-69648) in September 1993, as amended in April 1996, for the offering of
up to $500 million in aggregate amount of securities. The SEC declared
that registration statement effective on April 22, 1996; however, no
securities have been issued thereunder. The Company has not engaged an
underwriter for these securities and has no current plans to issue
securities under that registration statement. Subject to certain
restrictions under the KCS Credit Facilities (as discussed above in "Recent
Developments"), management expects that any net proceeds from the sale of
securities under that registration statement would be added to the general
funds of the Company and used principally for general corporate purposes,
including working capital, capital expenditures, and acquisitions of or
investments in businesses and assets.
In connection with the Company's debt restructuring in January 2000 (see
"Recent Developments") KCSR entered into senior secured credit facilities
providing financing of up to $750 million, including a $200 million term
loan due January 11, 2001 that was repaid with the proceeds from a private
offering of Notes. On January 25, 2001, the Company filed a Form S-4
Registration Statement with the SEC registering exchange notes under the
Securities Act of 1933. The Company filed Amendment No. 1 to this
Registration Statement and the SEC declared this Registration Statement
effective on March 15, 2001, thereby providing the opportunity for holders
of the initial Notes to exchange them for registered notes. The
registration exchange offer expires on April 16, 2001, unless extended by
the Company. These Notes bear a fixed annual interest rate of 9.5% and are
due on October 1, 2008.
In January 2000, KCSI borrowed $125 million under a $200 million 364-day
senior unsecured competitive advance/revolving credit facility to retire
other debt obligations. Stilwell assumed this credit facility and repaid
the $125 million in March 2000. Upon such assumption, KCSI was released
from all obligations, and Stilwell became the sole obligor, under this
credit facility. The Company's indebtedness decreased as a result of the
assumption of this indebtedness by Stilwell.
As discussed in Item 1 "Business-Joint Venture Arrangements -Grupo TFM,"
TMM and KCSI, or either TMM or KCSI, could be required to purchase the
Mexican government's interest in TFM. However, this provision is not
exercisable prior to October 31, 2003. Also, on or prior to July 31, 2002,
the Mexican government's interest in Grupo TFM may be called by TMM, an
affiliate of TMM, and KCSI, exercisable at the original amount (in U.S.
dollars) paid by the Mexican government plus interest based on one-year
U.S. Treasury securities.
Page 48
As discussed in "Recent Developments", in preparation for the Spin-off,
KCSI completed a re-capitalization of its debt structure in January 2000.
As part of the re-capitalization, the Company refinanced its public debt
and revolving credit facilities. KCSI management believes that the
resulting capital structure provides the necessary liquidity to meet
anticipated operating, capital and debt service requirements and other
commitments for 2001.
As discussed in "Recent Developments", if Stilwell were unable to meet its
obligations to purchase 600,000 shares of Janus common stock from Mr.
Bailey, the Company would be required to purchase those shares. According
to Stilwell management, the total purchase price for these shares is
expected to approximate $603 million. KCSI management believes, based on
discussions with Stilwell management, that Stilwell has adequate financial
resources available to fund this obligation. If the Company were required
to purchase these shares of Janus common stock, it would have a material
effect on our business, liquidity, financial condition, results of
operations and cash flows.
OTHER
Significant Customer. SWEPCO is the Company's only customer that accounted
for more than 10% of revenues during the years ended December 31, 2000,
1999 and 1998, respectively. Revenues related to SWEPCO during these
periods were $67.2 million, $75.9 million and $78.0 million, respectively.
Foreign Corporate Joint Venture. Grupo TFM provides deferred income taxes
for the difference between the financial reporting and income tax bases of
its assets and liabilities. The Company records its proportionate share of
these income taxes through our equity in Grupo TFM's earnings. As of
December 31, 2000, the Company had not provided deferred income taxes for
the temporary difference between the financial reporting basis and income
tax basis of its investment in Grupo TFM because Grupo TFM is a foreign
corporate joint venture that is considered permanent in duration, and the
Company does not expect the reversal of the temporary difference to occur
in the foreseeable future.
Certain corporate actions currently contemplated by TMM may result in a
change in Grupo TFM's status as a foreign corporate venture joint during
2001. If Grupo TFM were to no longer qualify as a foreign corporate joint
venture or if the temporary difference was expected to reverse in the
foreseeable future, the Company would be required to provide deferred
income taxes for the difference between the financial reporting basis and
income tax basis of its investment in Grupo TFM at the rate at which the
temporary difference would be expected to reverse.
Financial Instruments and Purchase Commitments. Fuel expense is a
significant component of the Company's operating expenses. Fuel costs are
affected by (i) traffic levels, (ii) efficiency of operations and
equipment, and (iii) fuel market conditions. Controlling fuel expenses is
a concern of management, and expense control remains a top priority. As a
result, the Company has established a program to hedge against fluctuations
in the price of its diesel fuel purchases to protect the Company's
operating results against adverse fluctuations in fuel prices. KCSR enters
into forward diesel fuel purchase commitments and commodity swap
transactions (fuel swaps or caps) as a means of fixing future fuel prices.
These transactions are accounted for as hedges and are correlated to market
benchmarks. Hedge positions are monitored to ensure that they will not
exceed actual fuel requirements in any period.
Page 49
At the end of 1997, the Company had purchase commitments for approximately
27% of expected 1998 diesel fuel usage, as well as fuel swaps for
approximately 37% of expected 1998 usage. As a result of actual fuel
prices remaining below both the purchase commitment price and the swap
price during 1998, the Company's fuel expense was approximately $4.0
million higher. The purchase commitments resulted in a higher cost of
approximately $1.7 million, while the Company made payments of
approximately $2.3 million related to the 1998 fuel swap transactions. At
December 31, 1998, the Company had purchase commitments and fuel swap
transactions for approximately 32% and 16%, respectively, of expected 1999
diesel fuel usage. In 1999, KCSR saved approximately $0.6 million as a
result of these purchase commitments. The fuel swap transactions resulted
in higher fuel expense of approximately $1 million. At December 31, 1999,
the Company had no outstanding purchase commitments for 2000 and had
entered into two diesel fuel cap transactions for a total of six million
gallons (approximately 10% of expected 2000 usage) at a cap price of $0.60
per gallon. These hedging instruments expired on March 31, 2000 and June
30, 2000. The Company received approximately $0.8 million during 2000
related to these diesel fuel cap transactions and recorded the proceeds as
a reduction of diesel fuel expenses. At December 31, 2000, KCSR had
purchase commitments for approximately 12.6% of budgeted gallons of fuel
for 2001. There are currently no diesel fuel cap or swap transactions.
In accordance with the provision of the New Credit Facility requiring the
Company to manage its interest rate risk through hedging activity, at
December 31, 2000 the Company has five separate interest rate cap
agreements for an aggregate notional amount of $200 million expiring on
various dates in 2002. The interest rate caps are linked to LIBOR. $100
million of the aggregate notional amount provides a cap on the Company's
interest rate of 7.25% plus the applicable spread, while $100 million
limits the interest rate to 7% plus the applicable spread. Counterparties
to the interest rate cap agreements are major financial institutions who
also participate in the New Credit Facilities. Credit loss from
counterparty non-performance is not anticipated.
These transactions are intended to mitigate the impact of rising fuel
prices and interest rates and are recorded using hedge accounting policies
as set forth in Note 2 to the consolidated financial statements of this
Form 10-K. In general, the Company enters into transactions such as those
discussed above in limited situations based on management's assessment of
current market conditions and perceived risks. Historically, the Company
has engaged in a limited number of such transactions and their impact has
been insignificant. However, the Company intends to respond to evolving
business and market conditions in order to manage risks and exposures
associated with the Company's various operations, and in doing so, may
enter into transactions similar to those discussed above.
Foreign Exchange Matters. In connection with the Company's investment in
Grupo TFM, matters arise with respect to financial accounting and reporting
for foreign currency transactions and for translating foreign currency
financial statements into U.S. dollars. The Company follows the
requirements outlined in Statement of Financial Accounting Standards No. 52
"Foreign Currency Translation" ("SFAS 52"), and related authoritative
guidance.
Prior to January 1, 1999, Mexico's economy was classified as "highly
inflationary" as defined in SFAS 52. Accordingly, under the highly
inflationary accounting guidance in SFAS 52, the U.S. dollar was used as
Grupo TFM's functional currency, and any gains or losses from translating
Grupo TFM's financial statements into U.S. dollars were included in the
determination of its net income (loss). Equity earnings (losses) from
Grupo TFM included in the Company's results of operations reflected the
Company's share of such translation gains and losses.
Effective January 1, 1999, the SEC staff declared that Mexico should no
longer be considered a highly inflationary economy. Accordingly, the
Company performed an analysis under the guidance of SFAS 52 to determine
whether the U.S. dollar or the Mexican peso should be used as the
Page 50
functional currency for financial accounting and reporting purposes for
periods subsequent to December 31, 1998. Based on the results of the
analysis, management believes the U.S. dollar to be the appropriate
functional currency for the Company's investment in Grupo TFM; therefore,
the financial accounting and reporting of the operating results of Grupo
TFM will be performed using the U.S. dollar as Grupo TFM's functional
currency.
Because the Company is required to report equity in Grupo TFM under GAAP
and Grupo TFM reports under International Accounting Standards,
fluctuations in deferred income tax calculations occur based on translation
requirements and differences in accounting standards. The deferred income
tax calculations are significantly impacted by fluctuations in the relative
value of the Mexican peso versus the U.S. dollar and the rate of Mexican
inflation, and can result in significant variances in the amount of equity
earnings (losses) reported by the Company.
The Company continues to evaluate existing alternatives with respect to
utilizing foreign currency instruments to hedge its U.S. dollar investment
in Grupo TFM as market conditions change or exchange rates fluctuate. At
December 31, 2000, 1999 and 1998, the Company had no outstanding foreign
currency hedging instruments.
Pensions and Other Postretirement Benefits. Statement of Financial
Accounting Standards No. 132 "Employers' Disclosure about Pensions and
Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88,
and 106" ("SFAS 132") was adopted by the Company in 1998. SFAS 132
establishes standardized disclosure requirements for pension and other
postretirement benefit plans, requires additional information on changes in
the benefit obligations and fair values of plan assets, and eliminates
certain disclosures that are no longer considered useful. The standard
does not change the measurement or recognition of pension or postretirement
benefit plans. The adoption of SFAS 132 did not have a material impact on
the Company's disclosures.
Internally Developed Software. In 1998, the Company adopted the guidance
outlined in American Institute of Certified Public Accountant's Statement
of Position 98-1 "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that
computer software costs incurred in the preliminary project stage, as well
as training and maintenance costs be expensed as incurred. This guidance
also requires that direct and indirect costs associated with the
application development stage of internal use software be capitalized until
such time that the software is substantially complete and ready for its
intended use. Capitalized costs are to be amortized on a straight-line
basis over the useful life of the software. The adoption of this guidance
did not have a material impact on the Company's results of operations,
financial position or cash flows.
Derivative Instruments. In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for
derivative financial instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 requires
that all derivatives be recorded on the balance sheet as either assets or
liabilities measured at fair value. Changes in the fair value of the
derivatives are recorded as either current earnings or other comprehensive
income, depending on the type of hedge transaction. The Company
implemented the provisions of SFAS 133 on January 1, 2001. For fair value
hedge transactions in which the Company would hedge changes in the fair
value of an asset, liability or an unrecognized firm commitment, changes in
the fair value of the derivative instrument will generally be offset in the
income statement by changes in the hedged item's fair value. For cash flow
hedge transactions in which the Company is hedging the variability of cash
flows related to a variable rate asset, liability or a forecasted
transaction,
Page 51
changes in the fair value of the derivative instrument will be reported in other
comprehensive income to the extent it offsets changes in cash flows related to
the variable rate asset, liability or forecasted transaction, with the
difference reported in current earnings. Gains and losses on the derivative
instrument reported in other comprehensive income will be reclassified in
earnings in the periods in which earnings are impacted by the variability of the
cash flow of the hedged item. The ineffective portion of all hedge transactions
will be recognized in current period earnings.
Based on fuel and interest rate hedging instruments outstanding at December
31, 2000, the impact of the implementation of SFAS 133 will result in a
charge of $0.6 million recorded as a cumulative effect of an accounting
change in the first quarter of 2001. This amount represents the
ineffective portion of interest rate hedging instruments. Additionally, a
$0.1 million charge will be recorded as a cumulative effect of an
accounting change to accumulated other comprehensive income during first
quarter 2001 related to the effective portion of fuel hedging instruments.
Litigation. The Company and its subsidiaries are involved as plaintiff or
defendant in various legal actions arising in the normal course of
business. While the ultimate outcome of the various legal proceedings
involving the Company and its subsidiaries cannot be predicted with
certainty, it is the opinion of management (after consultation with legal
counsel) that the Company's litigation reserves are adequate. The
following outlines four cases:
Duncan Case
In 1998, a jury in Beauregard Parish, Louisiana returned a verdict against
KCSR in the amount of $16.3 million. This case arose from a railroad
crossing accident that occurred at Oretta, Louisiana on September 11, 1994,
in which three individuals were injured. Of the three, one was injured
fatally, one was rendered quadriplegic and the third suffered less serious
injuries.
Subsequent to the verdict, the trial court held that the plaintiffs were
entitled to interest on the judgment from the date the suit was filed,
dismissed the verdict against one defendant and reallocated the amount of
that verdict to the remaining defendants. The resulting total judgment
against KCSR, together with interest, was approximately $27.0 million as of
December 31, 1999.
On November 3, 1999, the Third Circuit Court of Appeals in Louisiana
affirmed the judgment. Subsequently KCSR sought and obtained review of the
case in the Supreme Court of Louisiana. On October 30, 2000 the Supreme
Court of Louisiana entered its order affirming in part and reversing in
part the judgment. The net effect of the Louisiana Supreme Court action
was to reduce the allocation of negligence to KCSR and reduce the judgment,
with interest, against KCSR from approximately $28 million to approximately
$14.2 million (approximately $9.7 million of damages and $4.5 million of
interest), which is in excess of KCSR's insurance coverage of $10 million
for this case. KCSR filed an application for rehearing in the Supreme
Court of Louisiana which was denied on January 5, 2001. KCSR then sought a
stay of judgment in the Louisiana court. The Louisiana court denied the
stay application on January 12, 2001. KCSR reached an agreement as to the
payment structure of the judgment in this case and payment of the
settlement was made on March 7, 2001.
KCSR had previously recorded a liability of approximately $3.0 million for
this case. Based on the Supreme Court of Louisiana's decision, management
recorded an additional liability of $11.2 million and a receivable in the
amount of $7.0 million representing the amount of the insurance coverage.
This resulted in recording $4.2 million of net operating expense in the
accompanying consolidated financial statements for the year ended December
31, 2000.
Page 52
Bogalusa Cases
In July 1996, KCSR was named as one of twenty-seven defendants in various
lawsuits in Louisiana and Mississippi arising from the explosion of a rail
car loaded with chemicals in Bogalusa, Louisiana in October 1995. The
explosion released nitrogen dioxide and oxides of nitrogen into the
atmosphere over parts of Bogalusa and the surrounding area allegedly
causing evacuations and injuries. Approximately 25,000 residents of
Louisiana and Mississippi have asserted claims to recover damages allegedly
caused by exposure to the released chemicals.
KCSR neither owned nor leased the rail car or the rails on which it was
located at the time of the explosion in Bogalusa. KCSR did, however, move
the rail car from Jackson to Vicksburg, Mississippi, where it was loaded
with chemicals, and back to Jackson, where the car was tendered to the IC.
The explosion occurred more than 15 days after we last transported the rail
car. The car was loaded in excess of its standard weight, but under its
capacity, when it was transported to interchange with the IC.
The trial of a group of twenty plaintiffs in the Mississippi lawsuits
arising from the chemical release resulted in a jury verdict and judgment
in our favor in June 1999. The jury found that we were not negligent and
that the plaintiffs had failed to prove that they were damaged. The trial
of the Louisiana class action is scheduled to commence on June 11, 2001.
The trial of a second group of Mississippi plaintiffs is scheduled for
January 2002.
Management believes the probability of liability for damages in these cases
to be remote. If the Company were to be found liable for punitive damages
in these cases, such a judgment could have a material adverse effect on the
Company's results of operations, financial position and cash flows.
Houston Cases
In August 2000 KCSR and certain of its affiliates were added as defendants
in lawsuits pending in Jefferson and Harris Counties, Texas. These
lawsuits allege damage to approximately 3,000 plaintiffs as a result of an
alleged toxic chemical release from a tank car in Houston, Texas on August
21, 1998. Litigation involving the shipper and the delivering carrier had
been pending for some time, but KCSR, which handled the car during the
course of its transport, had not previously been named a defendant. On
information currently available, management believes the Company's
probability of liability for damages in these cases to be remote.
Jaroslawicz Class Action
On October 3, 2000, a lawsuit was filed in the New York State Supreme Court
purporting to be a class action on behalf of the Company's preferred
shareholders, and naming KCSI, its Board of Directors and Stilwell
Financial Inc. as defendants. This lawsuit seeks a declaration that the
Spin-off was a defacto liquidation of KCSI, alleges violation of directors'
fiduciary duties to the preferred shareholders and also seeks a declaration
that the preferred shareholders are entitled to receive the par value of
their shares and other relief. The Company filed a motion to dismiss with
prejudice in the New York State Supreme Court on December 22, 2000; the
plaintiff filed its brief in opposition to the motion to dismiss on
February 1, 2001, and the Company served reply papers on March 7, 2001.
The motion to dismiss is now fully briefed and a ruling has not been
rendered. Management believes the suit to be groundless and will continue
to defend the matter vigorously.
Environmental Matters. The Company's operations are subject to extensive
federal, state and local environmental laws and regulations concerning,
among other things, air emissions, water discharges, waste management,
hazardous substance transportation, handling and storage, decommissioning
of underground storage tanks, and soil and groundwater contamination. The
major environmental laws to which the Company is subject, include, among
others, the Federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA," also known
Page 53
as the Superfund law), the Toxic Substances Control Act, the Federal Water
Pollution Control Act, and the Hazardous Materials Transportation Act. CERCLA
can impose joint and several liability for cleanup and investigation costs,
without regard to fault or legality of the original conduct, on current and
predecessor owners and operators of a site, as well as those who generate, or
arrange for the disposal of, hazardous substances. The Company does not foresee
that compliance with the requirements imposed by the environmental legislation
will impair its competitive capability or result in any material additional
capital expenditures, operating or maintenance costs. As part of serving the
petroleum and chemicals industry, KCSR transports hazardous materials and has a
Shreveport, Louisiana-based hazardous materials emergency team available to
handle environmental issues that might occur in the transport of such materials.
Additionally, the Company performs ongoing review and evaluation of the various
environmental issues that arise in the Company's operations, and, as necessary,
takes actions to limit the Company's exposure to potential liability.
Because the Company transports and generates large quantities of hazardous
substances, and due to the fact that many of the Company's current and
former properties are or have been used for industrial purposes, the
Company is subject to potentially material liabilities relating to the
investigation and cleanup of contaminated properties and to claims alleging
personal injury or property damage as the result exposures to, or release
of, hazardous substances. Although the Company is responsible for
investigating and remediating contamination at several locations, and has
been identified as a potentially responsible party at several third party
locations to which waste may have been sent in the past, based on currently
available information, the Company does not expect any related liabilities,
individually or collectively, to have a material impact on its results of
operations, financial position or cash flows. In the event that the
Company becomes subject to more stringent cleanup requirements at these
sites, discovers new or more widespread contamination or become subject to
related personal or property damage claims, however, the Company could
incur material costs in connection with these sites.
The Company is responsible for investigating and remediating contamination
at several locations, which were formerly leased to industrial tenants.
For example, in North Baton Rouge, Louisiana, the Company is solely
responsible for investigating and remediating soil and groundwater
contamination at two contiguous properties, which were leased to third
parties. The Company is seeking recovery against one of these tenants,
Western Petrochemicals, Inc., which remains at the site. The second
tenant, Export Drum, Inc., is bankrupt. KCSR has established reserves that
management believes are adequate to address the costs expected to be
incurred at this site.
Similarly, in Port Arthur, Texas, KCSR is responsible for investigating,
remediating and closing property formerly leased to a company that
reconditioned drum storage containers. KCSR sued the former tenant and
other parties for a portion of the cleanup costs, and received
approximately $326,000 in a mediated settlement. KCSR has established
reserves that management believes are adequate to address additional costs
expected to be incurred at this site.
In connection with another similar property, a portion of which KCSR owned
and formerly leased to a tenant that conducted wood preservative treatment
operations, the Louisiana Department of Environmental Quality sought
recovery against KCSR in a matter captioned Louisiana Department of
Environmental Quality, Docket No. IAS 88-0001-A. This action was resolved
in KCSR's favor, and the operator of the plant, Joslyn Manufacturing
Company ("Joslyn"), is required to indemnify KCSR for any costs relating to
contamination it caused at the site pursuant to the former lease
agreement. Due to ongoing investigations at the site, including an EPA
investigation pursuant to CERCLA, either the EPA or the state may seek
additional cleanup and seek recovery of additional related costs. In
addition, if the site is added to the EPA's National Priority List, KCSR,
as the property owner, would likely be named a potentially responsible
party in any future EPA or related action. The Company believes that
Josyln's indemnity obligation to us would cover that
Page 54
eventuality. However, in the event that Josyln should become bankrupt or
otherwise fail to satisfy its indemnification obligations, KCSR could incur
substantial costs at this site.
In 1996, the Louisiana Department of Transportation ("LDOT") sued KCSR
and a number of other defendants in Louisiana state court to recover
cleanup costs incurred by LDOT while constructing Interstate Highway 49 at
Shreveport, Louisiana (Louisiana Department of Transportation v. The Kansas
City Southern Railway Company, et al., Case No. 417190-B in the First
Judicial District Court, Caddo Parish, Louisiana). The cleanup was
associated with an old oil refinery site, operated by the other named
defendants. KCSR's main line was adjacent to that site, and KCSR was
included in the suit because LDOT claims that a 1966 derailment on the
adjacent track released hazardous substances onto the site. Based on a number
of factors, including primarily the fact that the site appears to have been
primarily affected by refinery operations, which pre-dated the derailment,
management believes that our exposure at this site is limited.
In another proceeding, Louisiana Department of Environmental Quality,
Docket No. IE-0-91-0001, KCSR was named as a party in the alleged
contamination of Capitol Lake in Baton Rouge, Louisiana. During 1994, the
list of potentially responsible parties was significantly expanded to
include the State of Louisiana, and the City and Parish of Baton Rouge,
among others. Studies commissioned by KCSR indicate that contaminants
contained in the lake were not generated by KCSR. Management and counsel
do not believe this proceeding will have a material effect on KCSR.
KCSR is subject to potential liability in connection with a foundry site in
Alexandria, Louisiana that was once owned through a former subsidiary and
leased to a foundry operator. That operator, Ruston Foundry, is still
operating at the site and, management believes, is required to indemnify
KCSR for environmental liabilities pursuant to our former lease agreement.
The site is on the CERCLA National Priorities List, and potential cleanup
costs are substantial. KCSR does not possess sufficient information to
precisely assess its exposure, although, based on experience with such
matters, the existence of other potential defendants, and Ruston Foundry's
indemnification obligations, management does not expect costs associated
with this site to materially affect KCSR.
In addition to these matters, the Mississippi Department of Environmental
Quality ("MDEQ") initiated a demand on all railroads operating in
Mississippi to clean up their refueling facilities and investigate any soil
and groundwater impacts resulting from past refueling activities. KCSR has
six facilities located in Mississippi. KCSR has developed a plan, together
with the State of Mississippi, that management believes will satisfy the
MDEQ's initiative. Estimated costs to complete the studies and expected
remediation have been provided for in the consolidated financial statements
and are not expected to have a material impact on KCSR's consolidated
results of operations or financial position.
The Illinois Environmental Protection Agency ("IEPA") has sued Gateway
Western for alleged violations of state environmental laws relating to the
1997 spill of 18,000 gallons of methyl isobutyl carbinol from a tank car in
Gateway Western's East St. Louis yard. Remediation continues and progress
is reported to the IEPA on a quarterly basis and will continue until IEPA
clean-up standards have been achieved. The estimated costs for remediation
have been provided for in our consolidated financial statements. The
parties reached a tentative negotiated settlement of the lawsuit in
November 1998, which provides that Gateway Western pay a penalty and
further, that it fund a Supplemental Environmental Project in St. Claire
County, Illinois. The cleanup costs and the settlement of the lawsuit are
not expected to have a material impact on the Company's consolidated
results of operations, financial position or cash flows.
Finally, the Company is investigating and remediating contamination
associated with historical roundhouse and fueling operations at Gateway
Western yards located in East St. Louis, Illinois, Venice, Illinois, Kansas
City, Missouri and Mexico, Missouri. Also, in connection with a program
Page 55
begun in 1993 to remove all underground storage tanks from Gateway Western
properties, the Company is conducting investigation and cleanup activities
at several sites. Management does not expect costs relating to these
activities to materially affect the Company.
The Company has recorded liabilities with respect to various environmental
issues, which represent its best estimates of remediation and restoration
costs that may be required to comply with present laws and regulations. At
December 31, 2000, 1999 and 1998 these recorded liabilities were not
material. Although these costs cannot be predicted with certainty,
management believes that the ultimate outcome of identified matters will
not have a material adverse effect on the Company's consolidated results of
operations, financial condition or cash flows.
Regulatory Influence. In addition to the environmental agencies mentioned
above, KCSR operations are regulated by the STB, various state regulatory
agencies, and the Occupational Safety and Health Administration ("OSHA").
State agencies regulate some aspects of rail operations with respect to
health and safety and in some instances, intrastate freight rates. OSHA
has jurisdiction over certain health and safety features of railroad
operations.
The Company does not foresee that regulatory compliance under present
statutes will impair its competitive capability or result in any material
effect on results of operations.
Inflation. Inflation has not had a significant impact on the Company's
operations in the past three years. Recent increases in fuel prices,
however, impacted our operating results in 2000. During the two-year
period ended December 31, 1999, locomotive fuel expenses represented an
average of 6.9% of KCSR/Gateway Western's combined total operating costs
compared to 9.7% in 2000. Generally accepted accounting principles require
the use of historical costs. Replacement cost and related depreciation
expense of the Company's property would be substantially higher than the
historical costs reported. Any increase in expenses from these fixed
costs, coupled with variable cost increases due to significant inflation,
would be difficult to recover through price increases given the competitive
environments of the Company's principal subsidiaries. See "Foreign
Exchange Matters" above with respect to inflation in Mexico.
Page 56
Item 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company utilizes various financial instruments that entail certain
inherent market risks. Generally, these instruments have not been entered
into for trading purposes. The following information, together with
information included in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 11 to the Company's
consolidated financial statements in this Form 10-K, describe the key
aspects of certain financial instruments which have market risk to the
Company.
Interest Rate Sensitivity
The Company's floating-rate indebtedness totaled $400 million and $278
million at December 31, 2000 and 1999, respectively. The KCS Credit
Facilities, comprised of different tranches and types of indebtedness,
accrue interest based on target interest indexes (e.g., LIBOR, federal
funds rate, etc.) plus an applicable spread, as set forth in the respective
agreement. Due to the high percentage of variable rate debt associated
with the restructuring of the debt, the Company is more sensitive to
fluctuations in interest rates than in recent years.
A hypothetical 100 basis points increase in each of the respective target
interest indexes would result in additional interest expense of
approximately $2.9 million on an annualized basis for the floating-rate
instruments outstanding as of December 31, 2000. Assuming the $750 million
KCS Credit Facilities had been entered into on January 1, 1999 and the full
amount of these facilities were borrowed on that date and remained
outstanding throughout the year, a 100 basis points increase in interest
rates would have resulted in additional interest expense of approximately
$7 million in 1999.
Based upon the borrowing rates available to KCSI and its subsidiaries for
indebtedness with similar terms and average maturities the fair value of
long-term debt after consideration of the January 11, 2000 transaction was
approximately $685 million at December 31, 2000 and $766 million at
December 31, 1999. The fair value of long-term debt was $867 million at
December 31, 1998.
Certain provisions of the KCS Credit Facility require the Company to manage
its interest rate risk exposure through the use of hedging instruments for
a portion of its outstanding borrowings. Accordingly, in 2000 the Company
entered into five separate interest rate cap agreements for an aggregate
notional amount of $200 million expiring on various dates in 2002. The
interest rate caps are linked to LIBOR. $100 million of the aggregate
notional amount is limited to an interest rate of 7.25% plus the applicable
spread, while $100 million is limited to an interest rate of 7% plus the
applicable spread. Counterparties to the interest rate cap agreements are
major financial institutions who are also participants in the New Credit
Facilities. Credit loss from counterparty non-performance is not
anticipated. There were no interest rate cap or swap agreements in place
at December 31, 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Other- Financial
Instruments and Purchase Commitments" and "Derivative Instruments."
Commodity Price Sensitivity
KCSR has a program to hedge against fluctuations in the price of its diesel
fuel purchases. This program is primarily completed using various swap or
cap transactions. These transactions are typically based on the price of
heating oil #2, which the Company believes to produce a high correlation to
the price of diesel fuel. These transactions are generally settled monthly
in cash with the counterparty.
Page 57
Additionally, from time to time, KCSR enters into forward purchase
commitments for diesel fuel as a means of securing volumes at competitive
prices. These contracts normally require the Company to purchase defined
quantities of diesel fuel at prices established at the origination of the
contract.
At December 31, 2000 KCSR had purchase commitments for approximately 12.6%
of budgeted gallons of fuel for 2001 at an average price of $0.71 per
gallon. There were no diesel fuel cap transactions at December 31, 2000.
At December 31, 1999, the Company had no outstanding diesel fuel purchase
commitments for 2000. At December 31, 1999, the Company had two diesel
fuel cap transactions for a total of six million gallons (approximately 10%
of expected 2000 usage) at a cap price of $0.60 per gallon. These cap
transactions expired on March 31, 2000 and June 30, 2000. The contract
prices do not include taxes, transportation costs or other incremental fuel
handling costs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Other-Financial Instruments and
Purchase Commitments" and Derivative Instruments."
The unrecognized gain related to the diesel fuel purchase commitments
approximated $1.1 million at December 31, 2000 compared to an unrecognized
gain related to the diesel fuel cap transactions (based on the average
price of heating oil #2) of approximately $0.6 million at December 31,
1999.
At December 31, 2000, the Company held fuel inventories for use in normal
operations. These inventories were not material to the Company's overall
financial position. Fuel costs for 2001 are expected to continue to mirror
market conditions.
Foreign Exchange Sensitivity
The Company owns an approximate 37% interest in Grupo TFM, incorporated in
Mexico. In connection with this investment, matters arise with respect to
financial accounting and reporting for foreign currency transactions and
for translating foreign currency financial statements into U.S. dollars.
Therefore, the Company has exposure to fluctuations in the value of the
Mexican peso.
While not currently utilizing foreign currency instruments to hedge the
Company's U.S. dollar investment in Grupo TFM, the Company continues to
evaluate existing alternatives as market conditions and exchange rates
fluctuate.
Page 58
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
Management Report on Responsibility for Financial Reporting............ 60
Financial Statements:
Report of Independent Accountants................................... 61
Consolidated Statements of Income
for the three years ended December 31, 2000....................... 62
Consolidated Balance Sheets at December 31, 2000
1999 and 1998..................................................... 63
Consolidated Statements of Cash Flows for the three
years ended December 31, 2000..................................... 64
Consolidated Statements of Changes in Stockholders'
Equity for the three years ended December 31, 2000................ 65
Notes to Consolidated Financial Statements.......................... 66
Financial Statement Schedules:
All schedules are omitted because they are not applicable, are
insignificant or the required information is shown in the consolidated
financial statements or notes thereto.
Grupo TFM's Financial Statements for the years ended December 31, 2000,
1999 and 1998, which will be filed no later than 180 days after December
31, 2000, are hereby incorporated by reference.
Page 59
Management Report on Responsibility for Financial Reporting
The accompanying consolidated financial statements and related notes of
Kansas City Southern Industries, Inc. and its subsidiaries were prepared by
management in conformity with generally accepted accounting principles
appropriate in the circumstances. In preparing the financial statements,
management has made judgments and estimates based on currently available
information. Management is responsible for not only the financial
information, but also all other information in this Annual Report on Form
10-K. Representations contained elsewhere in this Annual Report on Form
10-K are consistent with the consolidated financial statements and related
notes thereto.
The Company's financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose selection was
ratified by the stockholders. Management has made available to
PricewaterhouseCoopers LLP all of the Company's financial records and
related data, as well as the minutes of shareholders' and directors'
meetings. Furthermore, management believes that all representations made
to PricewaterhouseCoopers LLP during its audit were valid and appropriate.
The Company has a formalized system of internal accounting controls
designed to provide reasonable assurance that assets are safeguarded and
that its financial records are reliable. Management monitors the system
for compliance, and the Company's internal auditors review and evaluate
both internal accounting and operating controls and recommend possible
improvements thereto. In addition, as part of their audit of the
consolidated financial statements, PricewaterhouseCoopers LLP, review and
test the internal accounting controls on a selective basis to establish the
extent of their reliance thereon in determining the nature, extent and
timing of audit tests to be applied. The internal audit staff coordinates
with PricewaterhouseCoopers LLP on the annual audit of the Company's
financial statements.
The Board of Directors pursues its oversight role in the area of financial
reporting and internal accounting control through its Audit Committee.
This committee, composed solely of qualified non-management directors,
meets regularly with PricewaterhouseCoopers LLP, management and internal
auditors to monitor the proper discharge of responsibilities relative to
internal accounting controls and to evaluate the quality of external
financial reporting. Both PricewaterhouseCoopers LLP and internal auditors
have full and free access to this committee.
/s/ Michael R. Haverty
Michael R. Haverty
Chairman, President & Chief Executive Officer
/s/ Robert H. Berry
Robert H. Berry
Senior Vice President & Chief Financial Officer
Page 60
Report of Independent Accountants
To the Board of Directors and Stockholders of
Kansas City Southern Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the
financial position of Kansas City Southern Industries, Inc. and its
subsidiaries at December 31, 2000, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Kansas City, Missouri
March 22, 2001
Page 61
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
Dollars in Millions, Except per Share Amounts
2000 1999 1998
--------- --------- --------
Revenues $ 572.2 $ 601.4 $ 613.5
Costs and expenses
Salaries, wages and benefits 197.8 206.0 190.7
Purchased services 59.8 64.0 58.4
Depreciation and amortization 56.1 56.9 56.7
Operating leases 48.9 44.0 48.0
Fuel 48.1 34.2 33.5
Other 103.7 132.2 108.0
--------- --------- --------
Total costs and expenses 514.4 537.3 495.3
--------- --------- --------
Operating income 57.8 64.1 118.2
Equity in net earnings (losses)
of unconsolidated affiliates:
Grupo TFM 21.6 1.5 (3.2)
Other 2.2 3.7 0.3
Interest expense (65.8) (57.4) (59.6)
Other, net 6.0 5.3 9.4
--------- --------- --------
Income from continuing operations before
income taxes 21.8 17.2 65.1
Income tax provision (benefit) (Note 8) (3.6) 7.0 27.1
Income from continuing operations 25.4 10.2 38.0
Income from discontinued operations,
(net of income taxes of $233.3,
$216.1 and 103.7, respectively) 363.8 313.1 152.2
--------- --------- --------
Income before extraordinary item 389.2 323.3 190.2
Extraordinary item, net of income taxes
Debt retirement costs - KCSI (7.0) - -
Debt retirement costs - Grupo TFM (1.7) - -
--------- --------- --------
Net income $ 380.5 $ 323.3 $ 190.2
========= ========= ========
Per Share Data (Note 2):
Basic earnings per share:
Continuing operations $ 0.44 $ 0.18 $ 0.69
Discontinued operations 6.42 5.68 2.78
--------- --------- --------
Basic earnings per share before
extraordinary item 6.86 5.86 3.47
Extraordinary item (.15) - -
--------- --------- --------
Total $ 6.71 $ 5.86 $ 3.47
========= ========= ========
Diluted earnings per share:
Continuing operations $ 0.43 $ 0.17 $ 0.67
Discontinued operations 6.14 5.40 2.65
Diluted earnings per share before
extraordinary item 6.57 5.57 3.32
Extraordinary item (.15) - -
--------- --------- --------
Total $ 6.42 $ 5.57 $ 3.32
========= ========= ========
Weighted average common shares outstanding (in thousands):
Basic 56,650 55,142 54,610
Dilutive potential common shares 1,740 1,883 1,920
--------- --------- --------
Diluted 58,390 57,025 56,530
Dividends per share
Preferred $ 1.00 $ $ 1.00 $ 1.00
Common $ - $ .32 $ .32
See accompanying notes to consolidated financial statements.
Page 62
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
at December 31
Dollars in Millions, Except per Share Amounts
2000 1999 1998
------- ------- -------
ASSETS
Current Assets:
Cash and equivalents $ 21.5 $ 11.9 $ 5.6
Accounts receivable, net (Note 6) 135.0 132.2 131.8
Inventories 34.0 40.5 47.0
Other current assets (Note 6) 25.9 23.9 25.8
------- ------- -------
Total current assets 216.4 208.5 210.2
Investments held for operating purposes (Notes 3, 5) 358.2 337.1 327.9
Properties, net (Note 6) 1,327.8 1,277.4 1,229.3
Intangibles and Other Assets, net 42.1 34.4 29.4
Net Assets of Discontinued Operations (Note 3) - 814.6 540.2
------- ------- -------
Total assets $ 1,944.5 $ 2,672.0 $ 2,337.0
========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year (Note 7) $ 36.2 $ 10.9 $ 10.7
Accounts and wages payable 52.9 74.8 64.1
Accrued liabilities (Note 6) 159.9 168.5 133.7
------- ------- -------
Total current liabilities 249.0 254.2 208.5
------- ------- -------
Other Liabilities:
Long-term debt (Note 7) 638.4 750.0 825.6
Deferred income taxes (Note 8) 332.2 297.4 285.2
Other deferred credits 81.5 87.3 86.5
Commitments and contingencies
(Notes 3, 7, 8, 11, 12)
------- ------- -------
Total other liabilities 1,052.1 1,134.7 1,197.3
------- ------- -------
Stockholders' Equity (Notes 2, 3, 4, 7, 9):
$25 par, 4% noncumulative, Preferred stock 6.1 6.1 6.1
$.01 par, Common stock 0.6 1.1 1.1
Retained earnings 636.7 1,167.0 849.1
Accumulated other comprehensive income - 108.9 74.9
------- ------- -------
Total stockholders' equity 643.4 1,283.1 931.2
------- ------- -------
Total liabilities and stockholders' equity $ 1,944.5 $ 2,672.0 $ 2,337.0
========= ========= =========
See accompanying notes to consolidated financial statements.
Page 63
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
Dollars in Millions
2000 1999 1998
-------- -------- --------
CASH FLOWS PROVIDED BY (USED FOR):
Operating Activities:
Net income $ 380.5 $ 323.3 $ 190.2
Adjustments to net income:
Income from discontinued operations (363.8) (313.1) (152.2)
Depreciation and amortization 56.1 56.9 56.7
Deferred income taxes 23.1 9.8 35.5
Equity in undistributed earnings of
unconsolidated affiliates (23.8) (5.2) 2.9
Distributions from unconsolidated affiliates 5.0 - 5.0
Transfer from Stillwell Financial Inc. - 56.6 4.2
Gain on sale of assets (3.4) (0.6) (5.7)
Tax benefit associated with exercised
stock options 9.3 6.4 12.2
Extraordinary item, net of tax 7.5 - -
Changes in working capital items:
Accounts receivable (2.8) (0.4) (8.5)
Inventories 6.5 6.5 (8.6)
Other current assets 4.2 (2.1) (2.9)
Accounts and wages payable (15.7) 4.5 4.6
Accrued liabilities (6.5) 41.2 6.8
Other, net 1.0 (5.8) 1.4
-------- -------- --------
Net 77.2 178.0 141.6
-------- -------- --------
Investing Activities:
Property acquisitions (104.5) (106.2) (69.9)
Proceeds from disposal of property 5.5 2.8 8.4
Investments in and loans with affiliates (4.2) 12.7 (0.7)
Other, net 1.4 (6.5) 0.7
-------- -------- --------
Net (101.8) (97.2) (61.5)
-------- -------- --------
Financing Activities:
Proceeds from issuance of long-term debt 1,052.0 21.8 151.7
Repayment of long-term debt (1,015.4) (97.5) (232.0)
Debt issue costs (17.6) (4.2) -
Proceeds from stock plans 17.9 37.0 17.9
Stock repurchased - (24.6) -
Cash dividends paid (4.8) (17.6) (17.8)
Other, net 2.1 10.6 0.8
-------- -------- --------
Net 34.2 (74.5) (79.4)
-------- -------- --------
Cash and Equivalents:
Net increase 9.6 6.3 0.7
At beginning of year 11.9 5.6 4.9
-------- -------- --------
At end of year (Note 4) $ 21.5 $ 11.9 $ 5.6
========= ========= =========
See accompanying notes to consolidated financial statements.
Page 64
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars in Millions, Except per Share Amounts
$1 Par Accumulated
$25 Par Series B $.01 Par other Shares
Preferred Preferred Common Retained Comprehensive held
Stock stock stock earnings income In trust Total
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 $ 6.1 $ 1.0 $ 1.1 $ 839.3 $ 50.8 $(200.0) $ 698.3
Comprehensive income:
Net income 190.2
Net unrealized gain on
investments 24.3
Less: Reclassification
adjustment for gains
included in net income (0.2)
Comprehensive income 214.3
Dividends (17.7) (17.7)
Stock plan shares issued from treasury 3.0 3.0
Stock issued in acquisition 3.2 3.2
Options exercised and stock 30.1 30.1
subscribed
Termination of shares held in trust (1.0) (199.0) 200.0
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1998 6.1 1.1 849.1 74.9 931.2
Comprehensive income:
Net income 323.3
Net unrealized gain on
investments 39.3
Less: Reclassification
adjustment for gains
included in net income (4.4)
Foreign currency translation
adjustment (0.9)
Comprehensive income 357.3
Dividends (17.9) (17.9)
Stock repurchased (24.6) (24.6)
Options exercised and stock subscribed 37.1 37.1
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1999 6.1 1.1 1,167.0 108.9 1,283.1
Comprehensive income:
Net income 380.5
Net unrealized gain on
investments 5.9
Less: Reclassification
adjustment for gains (1.1)
included in net income
Foreign currency
translation adjustment (2.6)
Comprehensive income 382.7
Spin-off of Stillwell (954.1) (111.1) (1,065.2)
Financial Inc.
1-for-2 reverse stock split (0.5) 0.5
Dividends (0.2) (0.2)
Stock plan shares issued 6.3 6.3
from treasury
Options exercised and stock subscribed 36.7 36.7
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2000 $ 6.1 $ $ 0.6 $ 636.7 $ $ $ 643.4
======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
Page 65
KANSAS CITY SOUTHERN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of the Business
Kansas City Southern Industries, Inc. ("Company" or "KCSI"'), a Delaware
Corporation organized in 1962, is a holding company with principal
operations in rail transportation. On July 12, 2000 KCSI completed its
spin-off of Stilwell Financial Inc. ("Stilwell"), the Company's former
wholly-owned financial services subsidiary.
Spin-off of Stilwell and related events
On June 14, 2000 KCSI's Board of Directors approved the spin-off of
Stilwell. KCSI completed its spin-off of Stilwell through a special
dividend of Stilwell common stock distributed to KCSI common stockholders
of record on June 28, 2000 ("Spin-off").
As of the date of the spin-off, Stilwell was comprised of Janus Capital
Corporation, an approximate 81.5% owned subsidiary; Berger LLC, an
approximate 88% owned subsidiary; Nelson Money Managers Plc, an 80% owned
subsidiary; DST Systems, Inc., an equity investment in which Stilwell holds
an approximate 32% interest; and miscellaneous other financial services
subsidiaries and equity investments.
The Spin-off occurred after the close of business of the New York Stock
Exchange on July 12, 2000, and each KCSI stockholder received two shares of
the common stock of Stilwell for every one share of KCSI common stock owned
on the record date. The total number of Stilwell shares distributed was
222,999,786.
As previously disclosed, on July 9, 1999, KCSI received a tax ruling from
the Internal Revenue Service ("IRS") which states that for United States
federal income tax purposes the Spin-off qualifies as a tax-free
distribution under Section 355 of the Internal Revenue Code of 1986, as
amended. Additionally, in February 2000, the Company received a favorable
supplementary tax ruling from the IRS to the effect that the assumption of
$125 million of KCSI indebtedness by Stilwell (in connection with the
Company's re-capitalization of its debt structure as discussed in Note 7)
would have no effect on the previously issued tax ruling.
Also on July 12, 2000, KCSI completed a reverse stock split whereby every
two shares of KCSI common stock was converted into one share of KCSI common
stock. All periods presented in the accompanying consolidated financial
statements reflect this one-for-two reverse stock split, which had
previously been approved by KCSI common stockholders.
As a result of the Spin-off, the accompanying consolidated financial
statements for the year ended December 31, 2000 reflect the results of
operations and cash flows of Stilwell as discontinued operations through
the date of the Spin-off (July 12, 2000). Effective with the Spin-off, the
net assets of Stilwell have been removed from the consolidated balance
sheet. The accompanying consolidated financial statements as of December
31, 1999 and 1998, and for the years ended December 31, 1999 and 1998
reflect the financial position, results of operations and cash flows of
Stilwell as discontinued operations. See Note 3.
Prior to the Spin-off, KCSI and Stilwell entered into various agreements
for the purpose of governing certain of the limited ongoing relationships
between KCSI and Stilwell during a transitional period following the
Spin-off, including an intercompany agreement, a contribution agreement and
a tax disaffiliation agreement.
Page 66
Nature of operations. The Company is the holding company for all of the
subsidiaries comprising the transportation operations. KCSI's principal
subsidiaries and affiliates include:
o The Kansas City Southern Railway Company ("KCSR"), a
wholly-owned subsidiary of KCSI;
o Gateway Western Railway Company ("Gateway Western"), a
wholly-owned subsidiary of KCSR;
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V.
("Grupo TFM"), an approximate 37% owned unconsolidated affiliate of
KCSR. Grupo TFM owns 80% of the common stock of TFM, S.A. de C.V.
("TFM");
o Mexrail, Inc. ("Mexrail"), a 49% owned unconsolidated
affiliate of KCSR. Mexrail wholly owns The Texas Mexican Railway
Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"),
a 50% owned unconsolidated affiliate of KCSR; and
o Panama Canal Railway Company ("PCRC"), an
unconsolidated affiliate of which KCSR owns 50% of the common stock.
KCSI, along with its principal subsidiaries and joint ventures, owns and
operates a rail network of approximately 6,000 miles of main and branch
lines that link key commercial and industrial markets in the United States
and Mexico. A strategic alliance with the Canadian National Railway
Company ("CN") and Illinois Central Corporation ("IC") (collectively
"CN/IC") and other marketing agreements have expanded its reach to
comprise a contiguous rail network of approximately 25,000 miles of main
and branch lines connecting Canada, the United States and Mexico.
KCSI's rail network connects shippers in the midwestern and eastern regions
of the United States and Canada, including shippers utilizing Chicago and
Kansas City--the two largest rail centers in the United States--with the
largest industrial centers of Canada and Mexico, including Toronto,
Edmonton, Mexico City and Monterrey. KCSI's rail system, through its core
network, strategic alliances and marketing partnerships, interconnects with
all Class I railroads in North America.
A summary of the Company's principal subsidiaries and affiliates is as
follows:
Consolidated Rail Operations
The Kansas City Southern Railway Company. KCSR operates a Class I Common
Carrier railroad system in the United States, on a North-South axis from
the Midwest to the Gulf of Mexico and on an East-West axis from Meridian,
Mississippi to Dallas, Texas. KCSR, which traces its origins to 1887,
offers the shortest route between Kansas City and major port cities along
the Gulf of Mexico in Louisiana, Mississippi and Texas. KCSR's customer
base includes electric generating utilities and a wide range of companies
in the chemical and petroleum industries, agricultural and mineral
industries, paper and forest product industries, and intermodal and
automotive product industries, among others. KCSR, in conjunction with the
Norfolk Southern Corporation ("Norfolk Southern"), operates the most
direct rail route (referred to as the "Meridian Speedway"), between the
Atlanta, Georgia and Dallas, Texas rail gateways for rail traffic moving
between the southeast and southwest regions of the United States. The
"Meridian Speedway" also provides eastern shippers and other U.S. and
Canadian railroads with an efficient connection to Mexican markets.
Gateway Western Railway Company. Gateway Western, a wholly-owned subsidiary
of KCSR, operates a regional common carrier system which links Kansas City
with East St. Louis and Springfield, Illinois (with limited haulage rights
between Springfield and Chicago, Illinois). Gateway
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Western provides key interchanges with the majority of other Class I railroads
and like KCSR, serves customers in a wide range of industries.
Southwestern Electric Power Company ("SWEPCO") is the Company's only
customer which accounted for more than 10% of revenues during the years
ended December 31, 2000, 1999 and 1998, respectively. Revenues related to
SWEPCO during these periods were $67.2, $75.9, $78.0 million, respectively.
KCSR and Gateway Western operations are subject to the regulatory
jurisdiction of the Surface Transportation Board ("STB") within the
Department of Transportation, various state regulatory agencies, and the
Occupational Safety and Health Administration ("OSHA"). The STB has
jurisdiction over interstate rates, routes, service, issuance of guarantee
of securities, extension or abandonment of rail lines, and consolidation,
merger or acquisition of control of rail common carriers. States regulate
some aspects of rail operations with respect to health and safety and, in
some instances, intrastate freight rates. OSHA has jurisdiction over
certain health and safety features of railroad operations.
Unconsolidated Affiliates
Grupo TFM. Grupo TFM was formed in June 1996 to participate in the
privatization of the Mexican railroad system. In December 1996, the
Mexican Government awarded Grupo TFM the right to acquire an 80% interest
(representing 100% of the unrestricted voting rights) in TFM for
approximately 11.072 billion Mexican pesos (approximately $1.4 billion
based on the U.S. dollar/Mexican peso exchange rate on the award date).
TFM holds a 50-year concession (with the option of a 50-year extension
subject to certain conditions) to operate approximately 2,700 miles of
track which directly link Mexico City and Monterrey (as well as Guadalajara
through trackage rights) with the ports of Lazaro Cardenas, Veracruz and
Tampico and the Mexican/United States border crossings of Nuevo
Laredo-Laredo, Texas and Matamoros-Brownsville, Texas. TFM's route network
provides the shortest connection to the major industrial and population
areas of Mexico from midwestern and eastern points in the United States.
TFM interchanges traffic with Tex Mex and the Union Pacific Railroad
("UP") at Laredo, Texas.
On June 23, 1997, Grupo TFM completed the acquisition of its 80% interest
in TFM and began to record TFM's results of operations under the equity
method of accounting. The Company accounts for its investment in Grupo TFM
using the equity method of accounting. As of December 31, 2000, the
Company owned 36.9% of Grupo TFM.
Mexrail, Inc. In November 1995, the Company purchased a 49% interest in
Mexrail, which owns 100% of Tex Mex. Tex Mex and TFM operate the
international rail traffic bridge at Laredo spanning the Rio Grande River.
This bridge is a significant entry point for rail traffic between Mexico
and the United States. Tex Mex also is comprised of a 521-mile rail
network between Laredo and Beaumont, Texas (including 157 owned miles from
Laredo to Corpus Christi, Texas and 364 miles, via trackage rights, from
Corpus Christi to Houston and Beaumont, Texas). Tex Mex connects with KCSR
via trackage rights at Beaumont, Texas, with TFM at Laredo, Texas (the
single largest rail freight transfer point between the United States and
Mexico), as well as with other Class I railroads at various locations. The
Company accounts for its investment in Mexrail using the equity method of
accounting.
Through Grupo TFM and Mexrail, both operated in partnership with
Transportacion Maritima Mexicana, S.A. de C.V. ("TMM"), the Company has
established a prominent position in the Mexican transportation market.
Southern Capital Corporation, LLC. In October 1996, the Company and GATX
Capital Corporation ("GATX") completed the transactions for the formation
and financing of a joint venture-Southern
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Capital-to perform certain leasing and financing activities. Southern Capital's
principal operations are the acquisition of locomotives and rolling stock and
the leasing thereof to the Company and other rail entities. The Company holds a
50% interest in Southern Capital, which it accounts for using the equity method
of accounting.
Panama Canal Railway Company. In January 1998, the Republic of Panama
awarded KCSR and its joint venture partner, Mi-Jack Products, Inc.
("Mi-Jack"), the concession to reconstruct and operate the Panama Canal
Railway Company ("PCRC"). The 47-mile railroad runs parallel to the
Panama Canal and, upon reconstruction, will provide international shippers
with an important complement to the Panama Canal. Reconstruction of PCRC's
right-of-way is expected to be complete in 2001 with commercial operations
to begin immediately thereafter. The Company owns 50% of the common stock
of PCRC, which it accounts for using the equity method of accounting.
Panarail Tourism Company. During 2000, the Company and Mi-Jack formed a
joint venture designed to operate and promote commuter and pleasure/tourist
passenger service over the PCRC. Panarail is expected to commence
operations in 2001, immediately following completion of the reconstruction
of PCRC's tracks.
Other operations. The Company operates various entities in support of or
as an adjunct to its principal rail subsidiaries/investments including: a
petroleum coke bulk transfer facility, a captive insurance company, a cross
tie and timber treating facility, a parking garage and various pieces of
real estate adjacent to KCSR's right of way.
Note 2. Significant Accounting Policies
Basis of Presentation. Use of the term "Company" as described in these
Notes to Consolidated Financial Statements means Kansas City Southern
Industries, Inc. and all of its consolidated subsidiary companies.
Significant accounting and reporting policies are described below. Certain
prior year amounts have been reclassified to conform to the current year
presentation.
As a result of the Spin-off, the accompanying consolidated financial
statements for each of the applicable periods presented reflect the
financial position, results of operations and cash flows of Stilwell as
discontinued operations.
Use of Estimates. The accounting and financial reporting policies of the
Company conform with accounting principles generally accepted in the United
States ("U.S. GAAP"). The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation. The accompanying consolidated financial
statements are presented using the accrual basis of accounting and
generally include the Company and its majority owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
The equity method of accounting is used for all entities in which the
Company or its subsidiaries have significant influence, but not more than
50% voting interest; the cost method of accounting is generally used for
investments of less than 20% voting interest.
Revenue Recognition. The Company recognizes freight revenue based upon the
percentage of completion of a commodity movement. Other revenues, in
general, are recognized when the product is shipped, as services are
performed or contractual obligations fulfilled.
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Cash Equivalents. Short-term liquid investments with an initial maturity
of generally three months or less are considered cash equivalents.
Inventories. Materials and supplies inventories are valued at average cost.
Properties and Depreciation. Properties are stated at cost. Additions and
renewals constituting a unit of property are capitalized and all properties
are depreciated over the estimated remaining life of such assets. Ordinary
maintenance and repairs are charged to expense as incurred.
The cost of transportation equipment and road property normally retired,
less salvage value, is charged to accumulated depreciation. The cost of
industrial and other property retired, and the cost of transportation
property abnormally retired, together with accumulated depreciation
thereon, are eliminated from the property accounts and the related gains or
losses are reflected in net income.
Depreciation is computed using composite straight-line rates for financial
statement purposes. The Surface Transportation Board ("STB") approves the
depreciation rates used by KCSR. KCSR evaluates depreciation rates for
properties and equipment and implements approved rates. Periodic revisions
of rates have not had a material effect on operating results. Depreciation
for other consolidated subsidiaries is computed based on the asset value in
excess of estimated salvage value using the straight-line method over the
estimated useful lives of the assets. Accelerated depreciation is used for
income tax purposes. The ranges of annual depreciation rates for financial
statement purposes are:
Road and structures 1% - 20%
Rolling stock and equipment 1% - 24%
Other equipment 1% - 33%
Capitalized leases 3% - 20%
Long-lived assets. In accordance with Statement of Financial Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of ("SFAS 121"), the Company periodically evaluates
the recoverability of its operating properties. The measurement of
possible impairment is based primarily on the ability to recover the
carrying value of the asset from expected future operating cash flows of
the assets on a discounted basis.
Intangibles. Intangibles principally represent the excess of cost over the
fair value of net underlying assets of acquired companies using purchase
accounting and are amortized using the straight-line method (principally
over 40 years). On a periodic basis, the Company reviews the
recoverability of goodwill and other intangibles by comparing the related
carrying value to its fair value.
Changes of Interest in Subsidiaries and Equity Investees. A change of the
Company's interest in a subsidiary or equity investee resulting from the
sale of the subsidiary's or equity investee's stock is generally recorded
as a gain or loss in the Company's net income in the period that the change
of interest occurs. If an issuance of stock by the subsidiary or affiliate
is from treasury shares on which gains have been previously recognized,
however, KCSI will record the gain directly to its equity and not include
the gain in net income. A change of interest in a subsidiary or equity
investee resulting from a subsidiary's or equity investee's purchase of its
stock increases the Company's ownership percentage of the subsidiary or
equity investee. The Company records this type of transaction under the
purchase method of accounting, whereby any excess of fair market value over
the net tangible and identifiable intangible assets is recorded as
goodwill.
Page 70
Computer Software Costs. Costs incurred in conjunction with the purchase
or development of computer software for internal use are accounted for in
accordance with American Institute of Certified Public Accountant's
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which was adopted by
the Company in 1998. Costs incurred in the preliminary project stage, as
well as training and maintenance costs, are expensed as incurred. Direct
and indirect costs associated with the application development stage of
internal use software are capitalized until such time that the software is
substantially complete and ready for its intended use. Capitalized costs
are amortized on a straight line basis over the useful life of the
software. As of December 31, 2000, approximately $49 million has been
capitalized for a new transportation operating system expected to be
implemented in April 2001.
Derivative Financial Instruments. The Company follows the requirements
outlined in Statement of Financial Accounting Standards No. 52 "Foreign
Currency Translation" ("SFAS 52"), and related authoritative guidance.
Accordingly, gains and losses related to hedges of the Company's investment
in Grupo TFM were deferred and recognized as adjustments to the carrying
amount of the investment when the hedged transaction occurred.
Any gains and losses qualifying as hedges of existing assets or liabilities
are included in the carrying amounts of those assets or liabilities and are
ultimately recognized in income as part of those carrying amounts. Any
gains or losses on derivative contracts that do not qualify as hedges are
recognized currently as other income. Gains and losses on hedges are
reflected in operating activities in the statement of cash flows. See New
Accounting Pronouncement below.
See Note 11 for additional information with respect to derivative financial
instruments and purchase commitments.
Fair Value of Financial Instruments. Statement of Financial Accounting
Standards No. 107 "Disclosures About Fair Value of Financial Instruments"
("SFAS 107") requires an entity to disclose the fair value of its financial
instruments. The Company's financial instruments include cash and cash
equivalents, accounts receivable, lease and contract receivables, accounts
payable and long-term debt. In accordance with SFAS 107, lease financing
and contracts that are accounted for under Statement of Financial
Accounting Standards No. 13 "Accounting for Leases," are excluded from fair
value presentation.
The carrying value of the Company's cash equivalents approximate their fair
values due to their short-term nature. Carrying value approximates fair
value for all financial instruments with six months or less to re-pricing
or maturity and for financial instruments with variable interest rates.
The Company approximates the fair value of long-term debt based upon
borrowing rates available at the reporting date for indebtedness with
similar terms and average maturities.
Income Taxes. Deferred income tax effects of transactions reported in
different periods for financial reporting and income tax return purposes
are recorded under the liability method of accounting for income taxes.
This method gives consideration to the future tax consequences of the
deferred income tax items and immediately recognizes changes in income tax
laws upon enactment. The income statement effect is generally derived from
changes in deferred income taxes on the balance sheet.
Treasury Stock. The excess of par over cost of the Preferred shares held
in Treasury is credited to capital surplus. Common shares held in Treasury
are accounted for as if they were retired and the excess of cost over par
value of such shares is charged to capital surplus, if available, then to
retained earnings.
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Stock Plans. Proceeds received from the exercise of stock options or
subscriptions are credited to the appropriate capital accounts in the year
they are exercised.
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") in October 1995. This statement allows
companies to continue under the approach set forth in Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"),
for recognizing stock-based compensation expense in the financial
statements, but encourages companies to adopt the fair value method of
accounting for employee stock options. The Company has elected to retain
its accounting approach under APB 25, and has presented the applicable pro
forma disclosures in Note 9 to the consolidated financial statements
pursuant to the requirements of SFAS 123.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an Interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 was issued to clarify the application
of APB 25 with respect to, among other issues: i) the definition of
employee; ii) the criteria for determining whether a plan qualifies as a
non-compensatory plan; iii) the accounting consequences of modifications to
the terms of a previous fixed stock option grant; and iv) the accounting
for an exchange of stock compensation awards in a business combination. FIN
44 also addresses the treatment of stock options in the case of spin-off
transactions and other equity restructuring. The adoption of FIN 44 during
the third quarter of 2000 did not have a material impact on the Company's
results of operations, financial position or cash flows. Additionally,
the provisions of FIN 44 relating to spin-off transactions are consistent
with those of the Emerging Issues Task Force of the Financial Accounting
Standards Board ("EITF") in its Issue No. 90-9, "Changes to Fixed
Employee Stock Option Plans as a Result of Equity Restructuring" ("EITF
90-9"), and, therefore, FIN 44 did not result in any changes in the
Company's accounting for stock transactions relating to the Spin-off. See
Note 1.
All shares held in the Employee Stock Ownership Plan ("ESOP") are treated
as outstanding for purposes of computing the Company's earnings per share.
See additional information on the ESOP in Note 10.
Earnings Per Share. Basic earnings per share is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed giving effect to all dilutive potential common shares that were
outstanding during the period (i.e., the denominator used in the basic
calculation is increased to include the number of additional common shares
that would have been outstanding if the dilutive potential shares had been
issued). SFAS 128 requires the Company to present basic and diluted per
share amounts for income (loss) from continuing operations and for net
income (loss) on the face of the statements of income.
The effect of stock options to employees represent the only difference
between the weighted average shares used for the basic computation compared
to the diluted computation. The total incremental shares from assumed
conversion of stock options included in the computation of diluted earnings
per share were 1,739,982, 1,883,286 and 1,920,167 for the years ended
December 31, 2000, 1999 and 1998, respectively. The weighted average of
options to purchase 18,207, 44,438 and 137,170 shares in 2000, 1999 and
1998, respectively, were excluded from the diluted earnings per share
computation because the exercise prices were greater than the respective
average market price of the common shares.
The only adjustments that currently affect the numerator of the Company's
diluted earnings per share computation include preferred dividends and
potentially dilutive securities at certain subsidiaries and affiliates.
Adjustments related to potentially dilutive securities totaled $5.4, $4.8
and $2.3 million for the years ended December 31, 2000, 1999 and 1998,
respectively. These adjustments relate to securities at certain Stilwell
subsidiaries and affiliates and affect the diluted
Page 72
earnings per share from discontinued operations computation in the applicable
periods presented. Preferred dividends are the only adjustments that affect the
numerator of the diluted earnings per share from continuing operations
computation. Adjustments related to preferred dividends were not material for
the periods presented.
Stockholders' Equity. Information regarding the Company's capital stock at
December 31, 2000, 1999 and 1998 follows:
Shares Shares
Authorized Issued
----------- -----------
$25 Par, 4% noncumulative, Preferred stock 840,000 649,736
$1 Par, Preferred stock 2,000,000 None
$1 Par, Series A, Preferred stock 150,000 None
$1 Par, Series B convertible, Preferred stock 1,000,000 None
$.01 Par, Common stock 400,000,000 73,369,116
The Company's stockholders approved a one-for-two reverse stock split at a
special stockholders' meeting held on July 15, 1998. On July 12, 2000,
KCSI completed a reverse stock split whereby every two shares of KCSI
common stock were converted into one share of KCSI common stock. All share
and per share data reflect this split. See Note 1.
Shares outstanding are as follows at December 31, (in thousands):
2000 1999 1998
------ ------ ------
$25 Par, 4% noncumulative, Preferred stock 242 242 242
$.01 Par, Common stock 58,140 55,287 54,908
Comprehensive Income. The Company's other comprehensive income consists
primarily of its proportionate share of unrealized gains and losses
relating to investments held by certain subsidiaries and affiliates of
Stilwell (discontinued operations) as "available for sale" securities as
defined by Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The
Company records its proportionate share of any unrealized gains or losses
related to these investments, net of deferred income taxes, in
stockholders' equity as accumulated other comprehensive income. The
unrealized gain related to these investments increased $5.9 million, $39.3
million and $24.3 million, net of deferred taxes for the years ended
December 31, 2000, 1999 and 1998, respectively. Subsequent to the Spin-off
the Company does not expect to hold investments that are accounted for as
"available for sale" securities.
Postretirement benefits. The Company provides certain medical, life and
other postretirement benefits to certain retirees. The costs of such
benefits are expensed over the estimated period of employment.
Environmental liabilities. The Company records liabilities for remediation
and restoration costs related to past activities when the Company's
obligation is probable and the costs can be reasonably estimated. Costs of
ongoing compliance activities to current operations are expensed as
incurred. As of December 31, 2000, 1999 and 1998, liabilities for
environmental remediation are not material.
New Accounting Pronouncements.
Statement of Financial Accounting Standards No. 133. In June 1998, the
FASB issued Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for
derivative financial instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 requires
that all derivatives be recorded on the balance sheet as
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either assets or liabilities measured at fair value. Changes in the fair value
of the derivatives are recorded as either current earnings or other
comprehensive income, depending on the type of hedge transaction. The Company
implemented the provisions of SFAS 133 on January 1, 2001. For fair value hedge
transactions in which the Company would hedge changes in the fair value of an
asset, liability or an unrecognized firm commitment, changes in the fair value
of the derivative instrument would generally be offset in the income statement
by changes in the hedged item's fair value. For cash flow hedge transactions in
which the Company hedges the variability of cash flows related to a variable
rate asset, liability or a forecasted transaction, changes in the fair value of
the derivative instrument will be reported in other comprehensive income to the
extent it offsets changes in cash flows related to the variable rate asset,
liability or forecasted transaction, with the difference reported in current
earnings. Gains and losses on the derivative instrument reported in other
comprehensive income will be reclassified to earnings in the periods in which
earnings are impacted by the variability of the cash flow of the hedged item.
The ineffective portion of all hedge transactions will be recognized in the
current period.
Based on fuel and interest rate hedging instruments outstanding at December
31, 2000, the impact of the implementation of SFAS 133 will result in a
charge of $0.6 million recorded as a cumulative effect of an accounting
change in the first quarter of 2001. This amount represents the
ineffective portion of interest rate hedging instruments. Additionally, a
$0.1 million charge will be recorded as a cumulative effect of an
accounting change to accumulated other comprehensive income during first
quarter 2001 related to the effective portion of fuel hedging
instruments.
EITF Issue No. 99-19. The Emerging Issues Task Force of the FASB issued
EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as
an Agent" ("EITF 90-19"). EITF 99-19 provides guidance as to whether a
company should report revenue based on (a) the gross amount billed to a
customer because it has earned revenue from the sale of the goods or
services or (b) the net amount retained because it has earned a commission
or a fee. The adoption of EITF 99-19 did not change the Company's method
for recording its revenues.
Note 3. Acquisitions and Dispositions
Spin-off of Stilwell. On July 12, 2000, KCSI completed the Spin-off. See
Note 1.
Summarized financial information of the discontinued Stilwell businesses is
as follows (in millions):
For the year ended
December 31,
------------------
1/1/00-
7/12/00 1999 1998
-------- -------- --------
Revenues $1,187.9 $1,212.3 $ 670.8
Operating expenses 646.2 694.0 390.2
-------- -------- --------
Operating income 541.7 518.3 280.6
Equity in earnings of unconsolidated
affiliates 37.0 46.7 25.8
Reduction in ownership of DST - - (29.7)
Gain on litigation settlement 44.2 - -
Gain on sale of Janus common stock 15.1 - -
Interest expense and other, net 18.6 21.5 12.6
-------- -------- --------
Pretax income 656.6 586.5 289.3
Income tax provision 233.3 216.1 103.7
Minority interest in consolidated earnings 59.5 57.3 33.4
-------- -------- --------
Income from discontinued
operations, net of income taxes $363.8 $313.1 $152.2
======== ======== ========
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December 31,
--------------------
1999 1998
-------- --------
Current assets $ 525.0 $ 259.3
Total assets 1,231.5 822.9
Current liabilities 162.5 71.1
Total liabilities 359.6 248.4
Minority interest 57.3 34.3
Net assets of discontinued operations 814.6 540.2
The following discusses certain agreements between KCSI and certain
Janus stockholders. Subsequent to the Spin-off, these agreements and
related provisions apply to Stilwell through assignment or through the
agreement of Stilwell to meet KCSI's obligations under the agreements.
A stock purchase agreement with Thomas H. Bailey, the Chairman, President
and Chief Executive Officer of Janus Capital Corporation ("Janus"), and
another Janus stockholder (the "Janus Stock Purchase Agreement") and
certain restriction agreements with other Janus minority stockholders
contain, among other provisions, mandatory put rights whereby under certain
circumstances, Stilwell would be required to purchase the minority
interests of such Janus minority stockholders at a fair market value
purchase price equal to fifteen times the net after-tax earnings of Janus
over the period indicated in the relevant agreement or in some
circumstances as determined by an independent appraisal. Under the Janus
Stock Purchase Agreement, termination of Mr. Bailey's employment could
require a purchase and sale of the Janus common stock held by him. If
other minority holders terminated their employment, some or all of their
shares also could be subject to mandatory purchase and sale provisions.
Certain other minority holders who continue their employment also could
exercise puts. The Janus Stock Purchase Agreement, and certain stock
purchase agreements and restriction agreements with other minority
stockholders that have not been assigned to Stilwell, also contain
provisions whereby upon the occurrence of a Change in Ownership (as defined
in such agreements) of KCSI (or Stilwell with respect to the Janus Stock
Purchase Agreement), Stilwell may be required to purchase such holders'
Janus stock. The fair market value price for such purchase or sale would
be equal to fifteen times the net after-tax earnings of Janus over the
period indicated in the relevant agreement or in some circumstances as
determined by Janus' Stock Option Committee or as determined by an
independent appraisal.
The Janus Stock Purchase Agreement has been assigned to Stilwell and
Stilwell has assumed and agreed to discharge KCSI's obligations under that
agreement. However, KCSI is obligated as a guarantor of Stilwell's
obligations under that agreement. With respect to other restriction
agreements not assigned to Stilwell, Stilwell has agreed to perform all of
KCSI's obligations under these agreements and KCSI has agreed to transfer
all of its benefits and assets under these agreements to Stilwell. In
addition, Stilwell has agreed to indemnify KCSI for any and all losses
incurred with respect to the Janus Stock Purchase Agreement and all other
Janus minority stockholder agreements. However, if Stilwell were unable to
meet its obligations with respect to these agreements, KCSI would be
obligated to make the payments under these agreements.
On January 26, 2001, Stilwell announced that it expected to purchase
600,000 shares of Janus common stock from Mr. Bailey under the terms and
conditions of the Janus Stock Purchase Agreement. According to Stilwell
management, the purchase price for these shares is expected to approximate
$603 million and the purchase is expected to occur during the second
quarter of 2001. KCSI believes, based on discussions with Stilwell
management, that Stilwell has adequate financial resources available to
fund this obligation. If Stilwell were unable to meet its obligation to
purchase the shares of Janus common stock from Mr. Bailey KCSI would be
required to purchase such shares. If KCSI were required to purchase those
shares of Janus common stock, it would have a material effect on the
Company's business, financial condition, results of operations and cash
flows.
Page 75
If all of the mandatory purchase and sale provisions and all the puts under
all Janus minority stockholder agreements had been implemented as of
December 31, 2000 (including those for Mr. Bailey as discussed above), and
Stilwell had been obligated to purchase such shares, Stilwell management
has indicated that Stilwell would have been required to pay approximately
$1.42 billion as of December 31, 2000 (of which KCSI could have been
ultimately responsible for approximately $1.25 billion at December 31,
2000, in the event Stilwell was unable to meet its obligations). These
amounts totaled approximately $789 million at December 31, 1999 and
approximately $447 million as of December 31, 1998. After giving effect to
the expected purchase from Mr. Bailey and the completed purchase of certain
shares from several minority stockholders, Stilwell would have been
required to pay approximately $616 million assuming exercises as of
December 31, 2000. In the future these amounts may be higher or lower
depending on Janus' earnings, fair market value and the timing of the
exercise. Payment for the purchase of the respective minority interests is
to be made under the Janus Stock Purchase Agreement within 120 days after
receiving notification of exercise of the put rights. Under the
restriction agreements with certain other Janus minority stockholders,
payment for the purchase of the respective minority interests is to be made
30 days after the later to occur of (i) receiving notification of exercise
of the put rights or (ii) determination of the purchase price through the
independent appraisal process.
Stilwell management has indicated that if Stilwell had been required to
purchase the holders' Janus common stock (including the stock from Mr.
Bailey as discussed above) after a Change in Ownership as of December 31,
2000 and 1999, the purchase price would have been approximately $1.67
billion and $899 million, respectively. KCSI could have been ultimately
responsible for approximately $1.31 billion at December 31, 2000 in the
event Stilwell was unable to meet its obligations. After giving effect to
the expected purchase from Mr. Bailey and the completed purchase of certain
shares from several minority stockholders, Stilwell would have been
required to pay approximately $871 million assuming exercises as of
December 31, 2000.
The Janus Stock Purchase Agreement, as amended, provides that so long as
Mr. Bailey is a holder of at least 5% of the common stock of Janus and
continues to be employed as President or Chairman of the Board of Janus
(or, if he does not serve as President, James P. Craig, III serves as
President and Chief Executive Officer or Co-Chief Executive Officer with
Mr. Bailey), Mr. Bailey shall continue to establish and implement policy
with respect to the investment advisory and portfolio management activity
of Janus. The agreement also provides that, in furtherance of such
objective, so long as both the ownership threshold and officer status
conditions described above are satisfied Stilwell will vote its shares of
Janus common stock to elect directors of Janus, at least the majority of
whom are selected by Mr. Bailey, subject to Stilwell's approval, which
approval may not be unreasonably withheld. The agreement further provides
that any change in management philosophy, style or approach with respect to
investment advisory and portfolio management policies of Janus shall be
mutually agreed upon by Stilwell and Mr. Bailey.
On September 25, 2000, Mr. Craig left Janus to manage money for a new
charitable foundation established by Mr. Craig and his wife. Mr. Craig had
previously been identified as the successor to Mr. Bailey in the event that
Mr. Bailey left Janus. Mr. Craig's responsibilities were assumed by
Janus's Executive Investment Committee, a group formed by Mr. Craig over a
year ago and comprised of several portfolio managers and Mr. Bailey.
Stilwell has indicated that a revised succession plan has not yet been
developed.
Stilwell does not believe Mr. Bailey's rights under the Janus Stock
Purchase Agreement are "substantive," within the meaning of Issue No.
96-16 of the Emerging Issues Task Force ("EITF 96-16"), of the FASB,
because Stilwell can terminate those rights at any time by removing Mr.
Bailey as an officer of Janus. Stilwell also believes that the removal of
Mr. Bailey would not result in significant harm to Stilwell based on the
factors discussed below. Colorado law provides that removal of an officer
of a Colorado corporation may be done directly by its stockholders if the
corporation's bylaws so provide. While Janus' bylaws contain no such
provision currently, Stilwell
Page 76
has indicated it has the ability to cause Janus to amend its bylaws to include
such a provision. Under Colorado law, Stilwell has indicated it could take such
action at an annual meeting of stockholders or make a demand for a special
meeting of stockholders. Janus is required to hold a special stockholders'
meeting upon demand from a holder of more than 10% of its common stock and to
give notice of the meeting to all stockholders. If notice of the meeting is not
given within 30 days of such a demand, the District Court is empowered to
summarily order the holding of the meeting. As the holder of more than 80% of
the common stock of Janus, Stilwell has stated that it has the requisite votes
to compel a meeting and to obtain approval of the required actions at such a
meeting.
KCSI has concluded, supported by an opinion of legal counsel rendered to
Stilwell, that Stilwell could carry out the above steps to remove Mr.
Bailey without breaching the Janus Stock Purchase Agreement and that if Mr.
Bailey were to challenge his removal by instituting litigation, his sole
remedy would be for damages and not injunctive relief and that Stilwell
would likely prevail in that litigation.
Although Stilwell has the ability to remove Mr. Bailey, Stilwell has
indicated that there is no present plan or intention to do so, as he is one
of the persons regarded as most responsible for the success of Janus. The
consequences of any removal of Mr. Bailey would depend upon the timing and
circumstances of such removal. Mr. Bailey could be required to sell, and
Stilwell could be required to purchase, his Janus common stock, unless he
were terminated for cause. Certain other Janus minority stockholders would
also be able, and, if they terminated employment, required, to sell to
Stilwell their shares of Janus common stock. The amounts that Stilwell, or
if Stilwell were unable to meet its obligations to purchase such shares,
KCSI, would be required to pay in the event of such purchase and sale
transactions could be material. As of December 31, 2000, such removal
would have also resulted in acceleration of the vesting of a portion of the
shares of restricted Janus common stock held by other minority stockholders
having an approximate aggregate value of $44.8 million.
There may also be other consequences of removal that cannot be presently
identified or quantified. For example, Mr. Bailey's removal could result in
the loss of other valuable employees or clients of Janus. The likelihood
of occurrence and the effects of any such employee or client departures
cannot be predicted and may depend on the reasons for and circumstances of
Mr. Bailey's removal. However, Stilwell believes that Janus would be able
in such a situation to retain or attract talented employees because: (i) of
Janus' prominence; (ii) Janus' compensation scale is at the upper end of
its peer group; (iii) some or all of Mr. Bailey's repurchased Janus stock
could be then available for sale or grants to other employees; and (iv)
many key Janus employees must continue to be employed at Janus to become
vested in currently unvested restricted stock valued in the aggregate
(after considering additional vesting that would occur upon the termination
of Mr. Bailey) at approximately $86.2 million as of December 31, 2000. In
addition, notwithstanding any removal of Mr. Bailey, Stilwell would expect
to continue its practice of encouraging autonomy by its subsidiaries and
their boards of directors so that management of Janus would continue to
have responsibility for Janus' day-to-day operations and investment
advisory and portfolio management policies and, because it would continue
that autonomy, Stilwell would expect many current Janus employees to remain
with Janus.
With respect to clients, Janus' investment advisory contracts with its
clients are terminable upon 60 days' notice and in the event of a change in
control of Janus. Because of his rights under the Janus Stock Purchase
Agreement, Mr. Bailey's departure, whether by removal, resignation or
death, might be regarded as such a change in control. However, in view of
Janus' investment record, Stilwell has concluded it is reasonable to expect
that in such an event most of Janus' clients would renew their investment
advisory contracts, requiring approval of fund shareowners and other
advisory clients to obtain new agreements. This conclusion is reached
because (i) Janus relies on a team approach to investment management and
development of investment expertise, (ii)
Page 77
Mr. Bailey has not served as a portfolio manager for any Janus fund for several
years and (iii) Janus should be able to continue to attract talented portfolio
managers. It is reasonable to expect that Janus' clients' reaction will depend
on the circumstances, including, for example, how much of the Janus team remains
in place and what investment advisory alternatives are available.
The Janus Stock Purchase Agreement and other agreements provide for rights
of first refusal on the part of Janus minority stockholders, Janus,
Stilwell and KCSI, with respect to certain sales of Janus stock. These
agreements also require Stilwell or KCSI to purchase the shares of Janus
minority stockholders in certain circumstances. In addition, in the event
of a Change in Ownership of Stilwell, as defined in the Janus Stock
Purchase Agreement, Stilwell may be required to sell its stock of Janus to
the stockholders who are parties to such agreement or to purchase such
holders' Janus stock. In the event Mr. Bailey was terminated for any
reason within one year following a Change in Ownership, he would be
entitled to a severance payment, amounting, at December 31, 2000, to
approximately $2 million. Purchase and sales transactions under these
agreements are to be made based upon a multiple of the net earnings of
Janus and/or other fair market value determinations, as defined therein.
Panama Canal Railway Company. In January 1998, the Republic of Panama
awarded KCSR and its joint venture partner, Mi-Jack Products, Inc., the
concession to reconstruct and operate the PCRC. The 47-mile railroad runs
parallel to the Panama Canal and, upon reconstruction, will provide
international shippers with an important complement to the Panama Canal.
In November 1999, PCRC completed the financing arrangements for this
project with the International Finance Corporation ("IFC"), a member of
the World Bank Group. The financing is comprised of a $5 million
investment from the IFC and senior loans with IFC in the aggregate amounts
of up to $45 million. The investment of $5 million from the IFC is
comprised of non-voting preferred shares, paying a 10% cumulative dividend.
The preferred shares may be redeemed at the option of IFC any year after
2008 at the lower of i) a net cumulative internal rate of return of 30%, or
ii) eight-times the average of two consecutive years of earnings before
interest, taxes, depreciation and amortization, determined in accordance
with International Accounting Standards calculated in proportion to the
IFC's percentage ownership in PCRC. Under certain limited conditions, the
Company is a guarantor for up to $15 million of cash deficiencies
associated with project completion. Additionally, if the Company or its
partner terminate the concession contract without the consent of the IFC,
the Company is a guarantor for up to 50% of the outstanding senior loans.
The total cost of the reconstruction project is estimated to be $75 million
with an equity commitment from KCSR not to exceed $16.5 million.
Reconstruction of PCRC's right-of-way is expected to be complete in 2001
with commercial operations to begin immediately thereafter.
Note 4. Supplemental Cash Flow Disclosures
Supplemental Disclosures of Cash Flow Information.
2000 1999 1998
-------- -------- --------
Cash payments (refunds) (in millions):
Interest (includes $0.7, $1.5 and $7.9 million,
respectively, related to Stilwell) $ 72.4 $ 64.2 $ 74.2
Income taxes (includes $195.9, $142.9 and
$83.1 million, respectively, related to Stilwell) 143.1 143.3 83.2
Page 78
Non-cash Investing and Financing Activities.
The Company initiated the Twelfth Offering of KCSI common stock under the
Employee Stock Purchase Plan ("ESPP") during 2000. Stock subscribed under
the Twelfth Offering will be issued to employees in 2002 and paid for
through employee payroll deductions in 2001. The Company did not initiate
an offering of KCSI common stock under the ESPP during 1999. In connection
with the Eleventh Offering of the ESPP (initiated in 1998), in 1999 the
Company received approximately $6.3 million from employee payroll
deductions for the purchase of KCSI common stock. This stock was issued to
employees in January 2000.
During 1998, the Company issued 113,589 shares of KCSI common stock,
respectively, under various offerings of the ESPP. These shares, totaling
a purchase price of $3.0 million in 1998 were subscribed and paid for
through employee payroll deductions in years preceding the issuance of
stock.
During 1999 and 1998, the Company's Board of Directors declared a quarterly
dividend totaling approximately $4.6 and $4.4 million, respectively,
payable in January of the following year. The dividend declaration reduced
retained earnings and established a liability at the end of each respective
year. No cash outlay occurred until the subsequent year. During early
2000, the Company's Board of Directors announced that, based upon a review
of the Company's dividend policy in conjunction with the KCS Credit
Facilities discussed in Note 7 and in light of the anticipated Spin-off, it
decided to suspend common stock dividends of KCSI under the then-existing
structure of the Company. This action complies with the terms and
covenants of the KCS Credit Facility. It is not anticipated that KCSI will
make any cash dividend payments to its common stockholders for the
foreseeable future.
In January 2000, KCSI borrowed $125 million under a $200 million 364-day
senior unsecured competitive advance/revolving credit facility (the
"Stilwell Credit Facility") to retire debt obligations as discussed in
Note 7. Stilwell assumed this credit facility and repaid the $125 million
in March 2000. Upon such assumption, KCSI was released from all
obligations, and Stilwell became the sole obligor, under the Stilwell
Credit Facility. The Company's indebtedness decreased as a result of the
assumption of this indebtedness by Stilwell.
In 2000, 1999 and 1998, the Company capitalized approximately $9 million,
$4 million and $3 million of costs related to capital projects for which no
cash outlay had yet occurred. These costs were included in accrued
liabilities at December 31, 2000, 1999 and 1998, respectively.
Note 5. Investments
Investments held for operating purposes, which include investments in
unconsolidated affiliates, are as follows (in millions):
Percentage
Ownership
Company Name December 31, 2000 Carrying Value
- ---------------- ----------------- ----------------------------
2000 1999 1998
-------- -------- --------
Grupo TFM 37% $ 306.0 $ 286.5 $ 285.1
Southern Capital 50% 24.6 28.1 24.6
Mexrail 49% 13.3 13.7 13.0
Other 14.3 8.8 5.2
-------- -------- --------
Total $ 358.2 $ 337.1 $ 327.9
======== ======== ========
Page 79
Grupo TFM. In June 1996, the Company and TMM formed Grupo TFM to
participate in the privatization of the Mexican rail industry. On December
6, 1996, Grupo TFM, TMM and the Company announced that the Mexican
Government had awarded to Grupo TFM the right to purchase 80% of the common
stock of TFM for approximately 11.072 billion Mexican pesos (approximately
$1.4 billion based on the U.S. dollar/Mexican peso exchange rate on the
award date). TFM holds the concession to operate Mexico's "Northeast Rail
Lines" for 50 years, with the option of a 50-year extension (subject to
certain conditions).
TFM is a strategically important rail link to Mexico and the NAFTA
corridor. TFM's rail lines are estimated to transport approximately 40% of
Mexico's rail cargo and are located next to primary north/south truck
routes. They directly link Mexico City and Monterrey, as well as
Guadalajara (through trackage rights), with the ports of Lazaro Cardenas,
Veracruz, Tampico, and the cities of Matamoros and Nuevo Laredo. Nuevo
Laredo is a primary transportation gateway between Mexico and the United
States. TFM connects in Laredo, Texas to the UP and Tex Mex. Tex Mex
links with KCSR at Beaumont, Texas through trackage rights. With the KCSR
and Tex Mex interchange at Beaumont, and through KCSR's connections with
major rail carriers at various other points, the Company has developed a
NAFTA rail system to participate in the economic integration of the North
American marketplace.
On January 31, 1997, Grupo TFM paid the first installment of the purchase
price (approximately $565 million based on the U.S. dollar/Mexican peso
exchange rate) to the Government, representing approximately 40% of the
purchase price. Grupo TFM funded the initial installment of the TFM
purchase price through capital contributions from TMM and the Company. The
Company contributed approximately $298 million to Grupo TFM, of which
approximately $277 million was used by Grupo TFM as part of the initial
installment payment. The Company financed this contribution using
borrowings under then-existing lines of credit.
On June 23, 1997, Grupo TFM completed the purchase of 80% of TFM through
the payment of the remaining $835 million to the Government. This payment
was funded by Grupo TFM using a significant portion of the funds obtained
from: (i) senior secured term credit facilities ($325 million); (ii) senior
notes and senior discount debentures ($400 million); (iii) proceeds from
the sale of 24.6% of Grupo TFM to the Government (approximately $199
million based on the U.S. dollar/Mexican peso exchange rate on June 23,
1997); and (iv) additional capital contributions from TMM and the Company
(approximately $1.4 million from each partner). Additionally, Grupo TFM
entered into a $150 million revolving credit facility for general working
capital purposes. The Government's interest in Grupo TFM is in the form of
limited voting right shares, and the purchase agreement includes a call
option for TMM and the Company, which is exercisable at the original amount
(in U.S. dollars) paid by the Government plus interest based on one-year
U.S. Treasury securities.
On or after October 31, 2003, the Mexican government has the option to sell
its 20% interest in TFM (1) through a public offering or (2) to Grupo TFM
at the initial share price paid by Grupo TFM plus interest computed at the
Mexican Base Rate (the Unidades de Inversion ("UDI") published by Banco
de Mexico). In the event that Grupo TFM does not purchase the Mexican
government's 20% interest in TFM, the Mexican government may require the
Company and TMM, or either the Company or TMM alone, to purchase its
interest. The Company and TMM have cross indemnities in the event the
Mexican government requires only the Company or TMM to purchase its
interest. The cross indemnities allow the party required to purchase the
Mexican government's interest to require the other party to purchase its
pro rata portion of such interest. However, if the Company were required
to purchase the Mexican government's interest in TFM and TMM could not meet
its obligations under the cross-indemnity, then the Company would be
obligated to pay the total purchase price for the Mexican government's
interest.
Page 80
In April 1997, the Company realized a $3.8 million pretax gain in
connection with forward contracts entered into in first quarter 1997. This
gain was deferred, and has been accounted for as a component of the
Company's investment in Grupo TFM. These forward contracts were intended to
hedge only a portion of the Company's exposure to foreign currency risk
related to the final installment of the purchase price and not any other
transactions or balances.
The Company and its subsidiary, KCSR, paid certain expenses on behalf of
Grupo TFM during 1997. In addition, the Company has a management services
agreement with Grupo TFM to provide certain consulting and management services.
At December 31, 2000, $2.4 million is reflected as an account receivable in the
Company's consolidated balance sheet.
At December 31, 2000, the Company's investment in Grupo TFM was
approximately $306.0 million. The Company's interest in Grupo TFM is
approximately 36.9% (with TMM and a TMM affiliate owning 38.5% and the
Mexican Government owning the remaining 24.6%). The Company accounts for
its investment in Grupo TFM under the equity method.
Southern Capital. In 1996, the Company and GATX completed the transaction
for the formation and financing of a joint venture, Southern Capital, to
perform certain leasing and financing activities. Concurrent with the
formation of this joint venture, the Company entered into operating leases
with Southern Capital for substantially all the locomotives and rolling
stock contributed or sold to Southern Capital at rental rates which
management believes reflect market conditions. KCSR paid Southern Capital
$27.3, $27.0, and $25.1 million under these operating leases in 2000, 1999
and 1998, respectively. In connection with the formation of Southern
Capital, the Company received cash that exceeded the net book value of
assets contributed to the joint venture by approximately $44.1 million.
Accordingly, this excess fair value over book value is being recognized as
a reduction in lease rental expense over the terms of the leases
(approximately $5.8, $5.6 and $4.4 million in 2000, 1999 and 1998,
respectively). During 2000 and 1998, the Company received a dividend of
$5.0 million from Southern Capital. No dividends were received from
Southern Capital during 1999.
Additionally, prior to the sale of the loan portfolio (discussed below),
the Company entered into agreements with Southern Capital to manage the
loan portfolio assets held by Southern Capital, as well as to perform
general administrative and accounting functions for the joint venture.
Payments under these agreements were approximately $0.1, $0.5 and $1.7
million in 2000, 1999 and 1998, respectively. GATX also entered into an
agreement to manage the rail portfolio assets, as well as to perform
certain general and administrative services.
In April 1999, Southern Capital sold its loan portfolio assets (comprised
primarily of finance receivables in the amusement and other non-rail
transportation industries) to Textron Financial Corporation. The purchase
price for these assets approximated $52.8 million resulting in a gain of
approximately $2.7 million. The proceeds from the sale were used to reduce
outstanding indebtedness of the joint venture as mandated by its loan
agreement.
Mexrail, Inc. In November 1995, the Company purchased a 49% interest in
Mexrail, which owns 100% of Tex Mex. Tex Mex and TFM operate the
international rail traffic bridge at Laredo spanning the Rio Grande River.
This bridge is a significant entry point for rail traffic between Mexico
and the United States. Tex Mex also is comprised of a 521-mile rail
network between Laredo and Beaumont, Texas (including 157 owned miles from
Laredo to Corpus Christi, Texas and 364 miles, via trackage rights, from
Corpus Christi to Houston and Beaumont, Texas). Tex Mex connects with KCSR
via trackage rights at Beaumont, Texas, with TFM at Laredo, Texas (the
single largest rail freight transfer point between the United States and
Mexico), as well as with other Class I railroads at various locations. The
Company accounts for its investment in Mexrail using the equity method of
accounting.
Page 81
Other. Other investments are comprised primarily of PCRC. The Company's
investment in PCRC was $9.5 million, $4.5 and $0.9 million at December 31,
2000, 1999 and 1998, respectively. See Note 3.
Financial Information. Combined financial information of all
unconsolidated affiliates that the Company and its subsidiaries account for
under the equity method follows. Amounts shown for Grupo TFM are reflected
on a U.S. GAAP basis. (dollars in millions)
December 31, 2000
------------------------------------------
Grupo Southern
TFM Capital Mexrail Other Total
-------- -------- -------- -------- --------
Investment in unconsolidated affiliates $ 306.0 $ 24.6 $ 13.3 $ 9.8 $ 353.7
Equity in net assets of unconsolidated affiliates 303.0 24.6 14.0 8.9 350.5
Dividends and distributions received
from Unconsolidated affiliates -- 5.0 -- -- 5.0
Financial Condition:
Current assets $ 190.9 $ 1.2 $ 23.4 $ 4.8 $ 220.3
Non-current assets
1,885.6 375.0 43.8 51.1 2,355.5
-------- -------- -------- -------- -------
Assets $ 2,076.5 $ 376.2 $ 67.2 $ 55.9 $2,575.8
========= ======== ======== ======== ========
Current liabilities $ 80.5 $ 114.6 $ 38.7 $ 0.2 $ 234.0
Non-current liabilities 817.8 212.5 -- 33.5 1,063.8
Minority interest 357.2 -- -- -- 357.2
Equity of stockholders and partners 821.0 49.1 28.5 22.2 920.8
-------- -------- -------- -------- -------
Liabilities and equity $ 2,076.5 $ 376.2 $ 67.2 $ 55.9 $2,575.8
Operating results:
Revenues $ 640.5 $ 31.1 $ 57.6 $ 0.8 $ 730.0
-------- -------- -------- -------- -------
Costs and expenses $ 476.3 $ 27.1 $ 57.6 $ 0.6 $ 561.6
-------- -------- -------- -------- -------
Net income $ 44.8 $ 4.0 $ - $ 0.2 $ 49.0
-------- -------- -------- -------- -------
December 31, 1999
------------------------------------------
Grupo Southern
TFM Capital Mexrail Other Total
-------- -------- -------- -------- --------
Investment in unconsolidated affiliates $ 286.5 $ 28.1 $ 13.7 $ 4.5 $ 332.8
Equity in net assets of unconsolidated affiliates 283.2 28.1 14.0 4.1 329.4
Financial Condition:
Current assets $ 134.4 $ 0.1 $ 23.1 $ 5.4 163.0
Non-current assets 1,905.7 274.5 43.6 12.3 2,236.1
-------- -------- -------- -------- --------
Assets $2,040.1 $ 274.6 $ 66.7 $ 17.7 $2,399.1
========= ======== ======== ======== ========
Current liabilities $ 255.9 $ -- $ 32.7 $ 1.7 $ 290.3
Non-current liabilities 672.9 218.4 5.5 5.8 902.6
Minority interest 343.9 -- -- -- 343.9
Equity of stockholders and partners 767.4 56.2 28.5 10.2 862.3
-------- -------- -------- -------- --------
Liabilities and equity $2,040.1 $274.6 $ 66.7 $ 17.7 $2,399.1
========= ======== ======== ======== ========
Operating results:
Revenues $ 524.5 $ 26.0 $ 50.0 $ 0.9 $ 601.4
-------- -------- -------- -------- --------
Costs and expenses $ 404.8 $ 22.3 $ 48.3 $ 0.8 $ 476.2
-------- -------- -------- -------- --------
Net income $ 4.1 $ 7.0 $ 1.6 $ 0.1 $ 12.8
-------- -------- -------- -------- --------
Page 82
December 31, 1998
------------------------------------------
Grupo Southern
TFM Capital Mexrail Other Total
-------- -------- -------- -------- --------
Investment in unconsolidated affiliates $ 285.1 $ 24.6 $ 13.0 $ 0.8 $ 323.5
Equity in net assets of unconsolidated affiliates 281.7 24.6 13.2 3.0 322.5
Dividends and distributions received
from unconsolidated affiliates -- 5.0 -- -- 5.0
Financial Condition:
Current assets $ 109.9 $ 1.6 $ 23.3 $ 1.6 $ 136.4
Non-current assets 1,974.7 228.6 47.3 6.0 2,256.6
-------- -------- -------- -------- --------
Assets $2,084.6 $ 230.2 $ 70.6 $ 7.6 $2,393.0
======== ======== ======== ======== ========
Current liabilities $ 233.9 $ 0.1 $ 25.1 $ 0.1 $ 259.2
Non-current liabilities 745.0 180.9 18.5 1.0 945.4
Minority interest 342.4 -- -- -- 342.4
Equity of stockholders and partners 763.3 49.2 27.0 6.5 846.0
-------- -------- -------- -------- --------
Liabilities and equity $2,084.6 $ 230.2 $ 70.6 $ 7.6 $2,393.0
======== ======== ======== ======== ========
Operating results:
Revenues $ 431.3 $ 31.1 $ 48.2 $ 0.8 $ 511.4
-------- -------- -------- -------- --------
Costs and expenses $ 354.7 $ 27.1 $ 52.2 $ 0.4 $ 434.4
-------- -------- -------- -------- --------
Net income (loss) $ (7.3) $ 4.0 $ (2.4) $ 0.3 $ (5.4)
-------- -------- -------- -------- --------
Generally, the difference between the carrying amount of the Company's
investment in unconsolidated affiliates and the underlying equity in net
assets is attributable to certain equity investments whose carrying amounts
have been reduced to zero, and report a net deficit. With respect to the
Company's investment in Grupo TFM, the effects of foreign currency
transactions and capitalized interest prior to June 23, 1997, which are not
recorded on the investee's books, also result in these differences.
The deferred income tax calculations for Grupo TFM are significantly
impacted by fluctuations in the relative value of the Mexican peso versus
the U.S. dollar and the rate of Mexican inflation, and can result in
significant variances in the amount of equity earnings (losses) reported by
the Company.
Note 6. Other Balance Sheet Captions
Accounts Receivable. Accounts receivable include the following allowances
(in millions):
2000 1999 1998
-------- -------- --------
Accounts receivable $ 140.2 $ 140.2 $ 137.6
Allowance for doubtful accounts (5.2) (8.0) (5.8)
-------- -------- --------
Accounts receivable, net $ 135.0 $ 132.2 $ 131.8
======== ======== ========
Doubtful accounts expense $ (0.6) 1.7 $ 0.9
-------- -------- --------
page 83
Other Current Assets. Other current assets include the following items (in
millions):
2000 1999 1998
-------- -------- --------
Deferred income taxes $ 9.3 $ 8.7 $ 14.7
Receivable - Duncan case (Note 11) 7.0 - -
Prepaid expenses 1.0 2.5 2.2
Other 8.6 12.7 8.9
-------- -------- --------
Total $ 25.9 $ 23.9 $ 25.8
Properties. Properties and related accumulated depreciation and
amortization are summarized below (in millions):
2000 1999 1998
-------- -------- --------
Properties, at cost
Road properties $1,394.8 $1,367.9 $1,321.1
Equipment 295.5 279.8 283.1
Equipment under capital leases 6.7 6.7 6.7
Other 32.4 54.5 55.2
-------- -------- --------
Total 1,729.4 1,708.9 1,666.1
Accumulated depreciation and
amortization 622.9 578.0 535.0
-------- -------- --------
Total 1,106.5 1,130.9 1,131.1
Construction in progress 221.3 146.5 98.2
-------- -------- --------
Net Properties $1,327.8 $1,277.4 $1,229.3
======== ======== ========
Accrued Liabilities. Accrued liabilities include the following items (in
millions):
2000 1999 1998
-------- -------- --------
Claims reserves $ 45.7 $ 35.7 $ 34.8
Prepaid freight charges due
other railroads 24.5 25.1 30.4
Duncan case liability (Note 11) 14.2 - -
Car hire per diem 12.1 13.5 12.1
Vacation accrual 8.5 8.0 7.9
Other non-income related taxes 5.3 6.2 3.9
Federal income taxes payable (receivable)3.5 4.8 (7.2)
Interest payable 7.4 12.5 1.3
Other 38.7 62.7 50.5
-------- -------- --------
Total $ 159.9 $ 168.5 $ 133.7
======== ======== ========
Page 84
Note 7. Long-Term Debt
Indebtedness Outstanding. Long-term debt and pertinent provisions follow
(in millions):
2000 1999 1998
KCSI
Competitive Advance & Revolving Credit
Facilities, Rates: Below Prime $ - $ 250.0 $ 315.0
Notes and Debentures, due July
2002 to December 2025 1.6 400.0 400.0
Rates: 6.625% to 8.80%
Unamortized discount - (2.1) (2.4)
KCSR
Term Loans, variable interest rates
9.20% to 9.45% due December 2005
to December 2006 400.0 - -
Senior Notes, 9.5% interest rate, due
October 1, 2008 200.0 - -
Equipment Trust Certificates 8.56% to 9.68%
due serially to December 15, 2006 54.9 64.7 74.4
Capital Lease Obligations, 7.15% to 9.00%,
due serially to September 30, 2009 3.5 3.9 4.4
Gateway Western
Revolving Credit Facility, variable interest rate
(7.31% and 5.52% at December 31, 1999
and 1998 respectively) - 28.0 28.0
Term Loans with State of Illinois, 3% to 5%
due serially to 2017. 5.3 5.8 6.1
Other
Industrial Revenue Bond 4.0 5.0 5.0
Mortgage Note 5.3 5.6 5.8
-------- -------- --------
Total 674.6 760.9 836.3
Less: debt due within one year 36.2 10.9 10.7
-------- -------- --------
Long-term debt $ 638.4 $ 750.0 $ 825.6
======== ======== ========
Debt Refinancing and Re-capitalization of the Company's Debt Structure.
o During the third quarter of 2000, the Company completed a $200
million private offering of debt securities through its wholly owned
subsidiary, KCSR. The offering, completed pursuant to Rule 144A under
the Securities Act of 1933 in the United States and Regulation S outside
the United States, consisted of 8-year Senior Unsecured Notes. The
Notes bear a fixed annual interest rate of 9.5% and are due on October
1, 2008. These Notes contain certain covenants typical of this type of
debt instrument similar to those described below for the KCS Credit
Facility. Net proceeds from the offering of $196.5 million were used to
refinance existing bank term debt, which was scheduled to mature on
January 11, 2001 (see below). Costs related to the issuance of these
notes of approximately $4.1 million were deferred and are being
amortized over the eight-year term of the Notes.
Page 85
In connection with this refinancing, the Company reported an
extraordinary loss on the extinguishment of the bank term debt due
January 11, 2001. The extraordinary loss was $1.1 million (net of
income taxes of $0.7 million).
On January 25, 2001, the Company filed a Form S-4 Registration Statement
with the Securities and Exchange Commission ("SEC") registering exchange
notes under the Securities Act of 1933. The Company filed Amendment No.
1 to this Registration Statement and the SEC declared this Registration
Statement effective on March 15, 2001, thereby providing the opportunity
for holders of the initial Notes to exchange them for registered notes.
The registration exchange offer expires on April 16, 2001, unless
extended by the Company.
o Also during the third quarter of 2000, Grupo TFM accomplished a
refinancing of approximately $285 million of its Senior Secured Credit
Facility through the issuance of a U.S. Commercial Paper ("USCP")
program backed by a letter of credit. The USCP is a 2-year program for
up to a face value of $310 million. The average discount rate for the
first issuance was 6.54%. This refinancing provides the ability for
Grupo TFM to pay limited dividends.
As a result of this refinancing, Grupo TFM recorded approximately $9.2
million in pretax extraordinary debt retirement costs. KCSI reported
$1.7 million (net of income taxes of $0.1 million) as its proportionate
share of these costs as an extraordinary item.
o In preparation for the Spin-off, the Company re-capitalized its debt
structure in January 2000 through a series of transactions as follows:
Bond Tender and Other Debt Repayment. On December 6, 1999, KCSI
commenced offers to purchase and consent solicitations with respect to
any and all of the Company's outstanding 7.875% Notes due July 1, 2002,
6.625% Notes due March 1, 2005, 8.8% Debentures due July 1, 2022, and 7%
Debentures due December 15, 2025 (collectively "Debt Securities" or
"notes and debentures").
Approximately $398.4 million of the $400 million outstanding Debt
Securities were validly tendered and accepted by the Company. Total
consideration paid for the repurchase of these outstanding notes and
debentures was $401.2 million. Funding for the repurchase of these Debt
Securities and for the repayment of $264 million of borrowings under
then-existing revolving credit facilities was obtained from two new
credit facilities (the "KCS Credit Facility" and the "Stilwell Credit
Facility", or collectively "New Credit Facilities"), each of which was
entered into on January 11, 2000. These New Credit Facilities, as
described further below, provided for total commitments of $950
million.
The Company reported an extraordinary loss on the extinguishment of the
Company's notes and debentures of approximately $5.9 million (net of
income taxes of approximately $3.2 million).
KCS Credit Facility. The KCS Credit Facility provided for a total
commitment of $750 million, comprised of three separate term loans
totaling $600 million and a revolving credit facility available until
January 11, 2006 ("KCS Revolver"). The term loans are comprised of the
following: $200 million, which was due January 11, 2001 prior to its
refinancing (see discussion above), $150 million due December 30, 2005
and $250 million due December 30, 2006. The availability under the KCS
Revolver was reduced from $150 million to $100 million on January 2,
2001. Letters of credit are also available under the KCS Revolver up to
a limit of $15 million. Borrowings under the KCS Credit Facility are
secured by substantially all of KCSI's assets and guaranteed by a
majority of its subsidiaries.
Page 86
On January 11, 2000, KCSR borrowed the full amount ($600 million) of the
term loans and used the proceeds to repurchase the Debt Securities,
retire other debt obligations and pay related fees and expenses. No
funds were initially borrowed under the KCS Revolver. Proceeds of
future borrowings under the KCS Revolver are to be used for working
capital and for other general corporate purposes. The letters of credit
under the KCS Revolver may be used for general corporate purposes.
At December 31, 2000, the Company had financing available through the
KCS Revolver of $150 million, subject to any limitations within existing
financial covenants. This availability was reduced to $100 million on
January 2, 2001 as described above.
Interest on the outstanding loans under the KCS Credit Facility shall
accrue at a rate per annum based on the London interbank offered rate
("LIBOR") or the prime rate, as the Company shall select. Following
completion of the refinancing of the January 11, 2001 term loan
discussed above, each remaining loan under the KCS Credit Facility shall
accrue interest at the selected rate plus an applicable margin. The
applicable margin is determined by the type of loan and the Company's
leverage ratio (defined as the ratio of the Company's total debt to
consolidated earnings before interest, taxes, depreciation and
amortization excluding the equity earnings of unconsolidated affiliates
for the prior four fiscal quarters). Based on the Company's current
leverage ratio, the term loan maturing in 2005 and all loans under the
KCS Revolver have an applicable margin of 2.50% per annum for LIBOR
priced loans and 1.50% per annum for prime rate priced loans. The term
loan maturing in 2006 currently has an applicable margin of 2.75% per
annum for LIBOR priced loans and 1.75% per annum for prime rate based
loans.
The KCS Credit Facility also requires the payment to the banks of a
commitment fee of 0.50% per annum on the average daily, unused amount of
the KCS Revolver. Additionally a fee equal to a per annum rate equal to
0.25% plus the applicable margin for LIBOR priced revolving loans will
be paid on any letter of credit issued under the KCS Credit Facility.
The term loans are subject to a mandatory prepayment with, among other
things:
o 100% of the net proceeds of (1) certain asset sales or other
dispositions of property, (2) the sale or issuance of certain
indebtedness or equity securities and (3) certain insurance
recoveries.
o 50% of excess cash flow (as defined in the KCS Credit Facility)
The KCS Credit Facility contains certain covenants that, among others,
restrict the Company's ability to:
o incur additional indebtedness,
o incur additional liens,
o enter into sale and leaseback transactions,
o enter into certain transactions with affiliates,
o enter into agreements that restrict the ability to incur liens or pay
dividends,
o make investments, loans, advances, guarantees or acquisitions,
o make certain restricted payments and dividends,
o make other certain indebtedness, or
o make capital expenditures.
Page 87
In addition KCSI is required to comply with specific financial ratios
including minimum interest expense coverage and leverage ratios. The
KCS Credit Facility also contains certain customary events of default.
These covenants, along with other provisions, could restrict maximum
utilization of the facility. The Company was in compliance with these
various provisions, including the financial covenants, as of December
31, 2000.
In accordance with a provision requiring the Company to manage its
interest rate risk through hedging activity, in 2000 the Company entered
into five separate interest rate cap agreements for an aggregate
notional amount of $200 million expiring on various dates in 2002. The
interest rate caps are linked to LIBOR. $100 million of the aggregate
notional amount provides a cap on the Company's interest rate of 7.25%
plus the applicable spread, while $100 million limits the interest rate
to 7% plus the applicable spread. Counterparties to the interest rate
cap agreements are major financial institutions who participate in the
New Credit Facilities. The Company believes that credit loss from
counterparty non-performance is remote.
Issue costs relating to the KCS Credit Facility of approximately $17.6
million were deferred and are being amortized over the respective term
of the loans. In conjunction with the refinancing of the $200 million
term loan previously due January 11, 2001, approximately $1.8 million of
these deferred costs were immediately recognized. After consideration
of amortization and this $1.8 million write-off, the remaining balance
of these deferred costs was approximately $11.3 million at December 31,
2000.
As a result of the debt refinancing transactions discussed above,
extraordinary items totaled $8.7 million (net of income taxes of $4.0
million) for the year ended December 31, 2000.
Stilwell Credit Facility. On January 11, 2000, KCSI also arranged a new
$200 million 364-day senior unsecured competitive Advance/Revolving
Credit Facility ("Stilwell Credit Facility"). KCSI borrowed $125
million under this facility and used the proceeds to retire debt
obligations as discussed above. Stilwell assumed this credit facility,
including the $125 million borrowed thereunder, and upon completion of
the Spin-off, KCSI was released from all obligations thereunder.
Stilwell repaid the $125 million in March 2000.
Public Debt Transactions. As discussed above, in January 2000, the Company
re-capitalized its debt structure through the tender of its outstanding
Notes and Debentures. Following completion of this transaction,
approximately $1.6 million of the Company's public debt remained
outstanding. During February 2001, however, exchange notes for the $200 million
Senior Notes due October 1, 2008 were registered with the SEC as described
further above. During 1998, $100 million of 5.75% Notes, which matured on
July 1, 1998, were repaid using borrowings under existing lines of credit.
KCSR Indebtedness. KCSR has purchased rolling stock under conditional
sales agreements, equipment trust certificates and capitalized lease
obligations. The equipment has been pledged as collateral for the related
indebtedness.
Other Agreements, Guarantees, Provisions and Restrictions. The Company has
debt agreements containing restrictions on subsidiary indebtedness,
advances and transfers of assets, and sale and leaseback transactions, as
well as requiring compliance with various financial covenants. At December
31, 2000, the Company was in compliance with the provisions and
restrictions of these agreements. Because of certain financial covenants
contained in the credit agreements, however, maximum utilization of the
Company's available lines of credit may be restricted.
Page 88
Leases and Debt Maturities. The Company and its subsidiaries lease
transportation equipment, as well as office and other operating facilities
under various capital and operating leases. Rental expenses under
operating leases were $48.9, $44.0 and $48.0 million for the years 2000,
1999 and 1998, respectively.
Minimum annual payments and present value thereof under existing capital
leases, other debt maturities, and minimum annual rental commitments under
noncancellable operating leases are as follows (in millions):
Capital Leases Operating Leases
Minimum Net
Lease Less Present Other Total
Payments Interest Value Debt Debt Affiliates Third Party Total
----- ----- ----- ----- ----- ----- ----- -----
2001 $ 0.8 $ 0.3 $ 0.5 $ 35.7 $ 36.2 $ 35.0 $ 17.8 $ 52.8
2002 0.7 0.2 0.5 45.9 46.4 35.0 13.3 48.3
2003 0.8 0.2 0.6 49.7 50.3 35.0 11.7 46.7
2004 0.6 0.1 0.5 40.7 41.2 31.6 6.3 37.9
2005 0.5 0.1 0.4 49.0 49.4 27.0 4.9 31.9
Later years 1.2 0.2 1.0 450.1 451.1 195.3 20.9 216.2
----- ----- ----- ----- ----- ----- ----- -----
Total $ 4.6 $ 1.1 $ 3.5 $671.1 $674.6 $358.9 $ 74.9 $433.8
===== ===== ===== ===== ===== ===== ===== =====
Fair Value of Long-Term Debt. Based upon the borrowing rates currently
available to the Company and its subsidiaries for indebtedness with similar
terms and average maturities, the fair value of long-term debt (after
consideration of the January 11, 2000 transaction) was approximately $685
and $766 million at December 31, 2000 and 1999, respectively. The fair
value of long-term debt was $867 million at December 31, 1998.
Note 8. Income Taxes
Under the liability method of accounting for income taxes specified by
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," the provision for income tax expense is the sum of income taxes
currently payable and deferred income taxes. Currently payable income
taxes represents the amounts expected to be reported on the Company's
income tax return, and deferred tax expense or benefit represents the
change in deferred taxes. Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
basis of assets and liabilities as measured by the enacted tax rates that
will be in effect when these differences reverse.
Tax Expense. Income tax provision (benefit) attributable to continuing
operations consists of the following components (in millions):
2000 1999 1998
-------- -------- --------
Current
Federal $ (26.7) $ (3.4) $ (8.5)
State and local (0.2) 0.6 0.1
Foreign withholding taxes 0.2 - -
-------- -------- --------
Total current (26.7) (2.8) (8.4)
-------- -------- --------
Deferred
Federal 23.4 9.4 30.7
State and local (0.3) 0.4 4.8
-------- -------- --------
Total deferred 23.1 9.8 35.5
-------- -------- --------
Total income tax provision (benefit)$ (3.6) $ 7.0 $ 27.1
======== ======== ========
Page 89
The federal and state deferred tax liabilities (assets) attributable to
continuing operations at December 31 are as follows (in millions):
2000 1999 1998
Liabilities:
Depreciation $ 351.0 $ 333.3 $ 312.7
Other, net 6.3 (1.4) 1.4
-------- -------- --------
Gross deferred tax liabilities 357.3 331.9 314.1
-------- -------- --------
Assets:
NOL and AMT credit carryovers (8.8) (2.3) (6.6)
Book reserves not currently deductible
for tax (22.3) (33.2) (25.6)
Vacation accrual (2.5) (2.9) (2.6)
Other, net (0.8) (4.8) (8.8)
-------- -------- --------
Gross deferred tax assets (34.4) (43.2) (43.6)
-------- -------- --------
Net deferred tax liability $ 322.9 $ 288.7 $ 270.5
======== ======== ========
Based upon the Company's history of operating income and its expectations
for the future, management has determined that operating income of the
Company will, more likely than not, be sufficient to recognize fully the
gross deferred tax assets set forth above.
Tax Rates. Differences between the Company's effective income tax rates
applicable to continuing operations and the U.S. federal income tax
statutory rates of 35% are as follows (in millions):
2000 1999 1998
-------- -------- --------
Income tax provision using the
statutory rate in effect $ 7.6 $ 5.6 $ 22.8
Tax effect of:
Earnings of equity investees (7.2) (0.7) 1.5
Research and development tax credit (0.5) - -
1990-1992 IRS exam settlement (3.3) - -
Other, net 0.1 1.1 (2.1)
-------- -------- --------
Federal income tax provision (benefit) (3.3) 6.0 22.2
State and local income tax expense (0.5) 1.0 4.9
Foreign withholding taxes 0.2 - -
-------- -------- --------
Total $ (3.6) $ 7.0 $ 27.1
======== ======== ========
Effective tax rate (16.5)% 40.7% 41.5%
======== ======== ========
Temporary Difference Attributable to Grupo TFM Investment. At December 31,
2000, the Company's book basis exceeded the tax basis of its investment in
Grupo TFM by $5.2 million. The Company has not provided a deferred income
tax liability for the income taxes, if any, which might become payable on
the realization of this basis difference because the Company intends to
indefinitely reinvest in Grupo TFM the financial statement earnings which
gave rise to the basis differential. Moreover, the Company has no other
plans to realize this basis differential by a sale of its investment in
Grupo TFM. If the Company were to realize this basis difference in the
future by a receipt of dividends or the sale of its interest in Grupo TFM,
the Company would incur gross federal income taxes of $1.8 million, which
might be partially or fully offset by Mexican income taxes and could be
available to reduce such federal income taxes at such time.
Tax Carryovers. At December 31, 1999, the Company had $3.4 million of
alternative minimum tax credit carryover generated by MidSouth prior to
acquisition by the Company.
Page 90
The amount of federal NOL carryover generated by MidSouth and Gateway
Western prior to acquisition was $67.8 million. The Company utilized
approximately $1.5 and $25.0 million of these NOL's in 2000 and 1998,
respectively. The Company did not utilize any NOL's during 1999. $32.6
million of the NOL carryover was utilized in pre-1998 years leaving
approximately $8.7 million of carryover available at December 31, 2000,
with expiration dates beginning in the year 2008. The use of
preacquisition net operating losses and tax credit carryovers is subject to
limitations imposed by the Internal Revenue Code. The Company does not
anticipate that these limitations will affect utilization of the carryovers
prior to their expiration.
Tax Examinations. The IRS is currently in the process of examining the
consolidated federal income tax returns for the years 1993 through 1996.
For years prior to 1993, the statute of limitations has closed. In
addition, other taxing authorities are currently examining the years 1994
through 1999 and have proposed additional tax assessments for which the
Company believes it has recorded adequate reserves.
Since most of these asserted tax deficiencies represent temporary
differences, subsequent payments of taxes will not require additional
charges to income tax expense. In addition, accruals have been made for
interest (net of tax benefit) for estimated settlement of the proposed tax
assessments. Thus, management believes that final settlement of these
matters will not have a material adverse effect on the Company's
consolidated results of operations or financial condition.
As noted in the rate reconciliation above, the Company relieved $3.3
million of income taxes previously accrued as a result of the favorable
resolution of the federal tax examination for the years 1990-1992.
Note 9. Stockholders' Equity
Reverse Stock Split. On July 12, 2000, KCSI completed a reverse stock
split whereby every two shares of KCSI common stock was converted into one
share of KCSI common stock. All periods presented in the accompanying
consolidated financial statements reflect this one-for-two reverse stock
split, which had previously been approved by KCSI common stockholders.
Pro Forma Fair Value Information for Stock-Based Compensation Plans. Under
FAS 123, companies must either record compensation expense based on the
estimated grant date fair value of stock options granted or disclose the
impact on net income as if they had adopted the fair value method (for
grants subsequent to December 31, 1994.) If KCSI had measured compensation
cost for the KCSI stock options granted to its employees and shares
subscribed by its employees under the KCSI employee stock purchase plan, under
the fair value based method prescribed by FAS 123, net income and earnings per
share would have been as follows:
2000 1999 1998
-------- -------- --------
Net income (loss) (in millions):
As reported $ 380.5 $ 323.3 $ 190.2
Pro Forma 375.8 318.0 179.0
Earnings (loss) per Basic share:
As reported $ 6.71 $ 5.86 $ 3.47
Pro Forma 6.63 5.76 3.28
Earnings (loss) per Diluted share:
As reported $ 6.42 $ 5.57 $ 3.32
Pro Forma 6.37 5.48 3.16
Page 91
Stock Option Plans. During 1998, various existing Employee Stock Option
Plans were combined and amended as the Kansas City Southern Industries,
Inc. 1991 Amended and Restated Stock Option and Performance Award Plan (as
amended and restated effective July 15, 1998). The Plan provides for the
granting of options to purchase up to 20.6 million shares of the Company's
common stock by officers and other designated employees. Options granted
under this Plan have been granted at 100% of the average market price of
the Company's stock on the date of grant and generally may not be exercised
sooner than one year or longer than ten years following the date of the
grant, except that options outstanding with limited rights ("LRs") or
limited stock appreciation rights ("LSARs"), become immediately exercisable
upon certain defined circumstances constituting a change in control of the
Company. The Plans include provisions for stock appreciation rights, LRs
and LSARs. All outstanding options include LRs, except for options granted
to non-employee Directors.
For purposes of computing the pro forma effects of option grants under the
fair value accounting method prescribed by SFAS 123, the fair value of each
option grant is estimated on the date of grant using a version of the
Black-Scholes option pricing model. The following assumptions were used
for the various grants depending on the date of grant, nature of vesting
and term of option:
2000 1999 1998
------------ ------------ ------------
Dividend Yield 0% .25% to .36% .34% to .56%
Expected Volatility 34% to 50% 42% to 43% 30% to 42%
Risk-free Interest 5.92% to 6.24% 4.67% to 5.75% 4.74% to 5.64%
Expected Life 3 years 3 years 3 years
Effect of Spin-off on Existing Stock Options
FIN 44 address the issues surrounding fixed stock option plans resulting
from an equity restructuring, including spin-offs. This guidance indicates
that changes to fixed stock option grants made to restore the option
holder's economic position as a result of a spin-off do not result in
additional compensation expense if certain criteria are met as follows: i)
aggregate intrinsic value (difference between the market value per share
and exercise price) of the options immediately after the change is not
greater than the aggregate intrinsic value of the options immediately
before the change; ii) the ratio of the exercise price per option to the
market value per share is not reduced; and iii) the vesting provisions and
option period of the original option grant remain the same.
As part of the Spin-off, generally holders of an option to purchase one
share of KCSI common stock received options to purchase two shares of
Stilwell common stock. The option exercise price for the KCSI and Stilwell
stock options was prorated based on the market value for KCSI common stock
and Stilwell common stock on the date of the Spin-off. The exercise prices
for periods subsequent to the Spin-off have accordingly been reduced to
reflect this amount. See below.
The changes made to the Company's fixed stock option grants as a result of
the Spin-off resulted in the option holder having the same economic
position both before and after the Spin-off. In accordance with the
provisions of FIN 44, the Company, therefore, did not record additional
compensation expense.
Summary of Company's Stock Option Plans
A summary of the status of the Company's stock option plans as of December
31, 2000, 1999 and 1998, and changes during the years then ended, is
presented below. The number of shares presented, the weighted average
exercise price and the weighted average fair value of options
Page 92
granted have been restated to reflect the reverse stock split on July 12, 2000
described further above. However, the weighted average exercise price and the
weighted average fair value of options have not been restated to reflect
the impact of the Spin-off for periods prior to the Spin-off.
7/13/2000-12/31/2000 1/1/2000 - 7/12/2000
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- --------- ---------
Outstanding at beginning of period 4,165,692 $1.26 4,280,581 $33.94
Exercised (2,469,667) 0.76 (394,803) 47.14
Canceled/Expired (388,686) 4.82 (1,800) 89.13
Granted 5,554,697 5.81 281,714 142.08
--------- ---------
Outstanding at end of period 6,862,036 4.92 4,165,692 39.98
========= =========
Exercisable at December 31 1,355,464 $1.41
Weighted-Average Fair Value of
options granted during the period $1.54 $ 49.88
1999 1998
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- --------- ---------
Outstanding at January 1 4,713,971 $30.70 4,946,291 $ 24.24
Exercised (636,482) 31.82 (800,415) 26.14
Canceled/Expired (42,266) 85.78 (20,467) 43.50
Granted 245,358 99.46 588,562 79.24
--------- ---------
Outstanding at December 31 4,280,581 33.94 4,713,971 30.70
========= =========
Exercisable at December 31 3,834,393 $ 27.06 4,111,391 $ 24.02
Weighted-Average Fair Value of
options granted during the year $ 33.28 $ 24.62
The following table summarizes information about stock options outstanding
at December 31, 2000:
OUTSTANDING EXERCISABLE
----------- -----------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Shares Remaining Exercise Shares Exercise
Prices Outstanding Contractual Life Price Exercisable Price
- ---------- ----------- ---------------- -------- ----------- ---------
$.20 - 1 728,052 4.1 years $ 0.85 728,052 $ 0.85
1 - 2 326,383 6.2 1.33 326,383 1.33
2 - 4 320,875 7.9 2.79 283,161 2.77
4 - 7 5,390,150 9.5 5.75 17,868 4.17
7 - 9 96,576 9.7 8.21 - -
--------- ---------
.20 - 9 6,862,036 8.7 4.92 1,355,464 1.41
========= =========
Shares available for future grants under the stock option plan are 7,078,232.
Page 93
Stock Purchase Plan. The ESPP, established in 1977, provides to
substantially all full-time employees of the Company, certain subsidiaries
and certain other affiliated entities, the right to subscribe to an
aggregate of 11.4 million shares of common stock. The purchase price for
shares under any stock offering is to be 85% of the average market price on
either the exercise date or the offering date, whichever is lower, but in
no event less than the par value of the shares. At December 31, 2000,
there were approximately 5.1 million shares available for future offerings.
The following table summarizes activity related to the various ESPP
offerings:
Date Shares Shares Date
Initiated Subscribed Price Issued Issued
--------- ---------- ----- ------ ------
Twelfth Offering 2000 705,797 $7.31 - 2002
Eleventh Offering 1998 106,913 71.94 94,149 1999/2000
Tenth Offering 1996 125,540 26.70 116,567 1997/1998
For purposes of computing the pro forma effects of employees' purchase
rights under the fair value accounting method prescribed by SFAS 123, the
fair value of the Twelfth and Eleventh Offering under the ESPP is estimated
on the date of grant using a version of the Black-Scholes option pricing
model. The following weighted-average assumptions were used for the
Twelfth and Eleventh Offerings, respectively: i) dividend yield of 0.00%
and .95%; ii) expected volatility of 38% and 42%; iii) risk-free interest
rate of 5.77% and 4.63%; and iv) expected life of one year. The
weighted-average fair value of purchase rights granted under the Twelfth
and Eleventh Offerings of the ESPP were $2.19 and $21.52, respectively.
There were no offerings in 1999.
New Compensation Program. In connection with the Spin-off, KCSI adopted a
new compensation program (the "Compensation Program") under which (1)
certain senior management employees were granted performance based KCSI
stock options and (2) all management employees and those directors of KCSI
who are not employees (the "Outside Directors") became eligible to
purchase a specified number of KCSI restricted shares and were granted a
specified number of KCSI stock options for each restricted share
purchased.
The performance stock options have an exercise price of $5.75 per share,
which was the mean trading price of KCSI common stock on the New York Stock
Exchange (the "NYSE") on July 13, 2000. The performance stock options
vest and become exercisable in equal installments as KCSI's stock price
achieves certain thresholds and after one year following the grant date.
All performance thresholds have been met for these performance stock
options and all will be exercisable on July 13, 2001. These stock options
expire at the end of 10 years, subject to certain early termination
events. Vesting will accelerate in the event of death, disability, or a
KCSI board-approved change in control of KCSI.
The purchase price of the restricted shares, and the exercise price of the
stock options granted in connection with the purchase of restricted shares,
is based on the mean trading price of KCSI common stock on the NYSE on the
date the employee or Outside Director purchased restricted shares under the
Compensation Program. Each eligible employee and Outside Director was
allowed to purchase the restricted shares offered under the Compensation
Program on one date out of a selection of dates offered. With respect to
management employees, the number of shares available for purchase and the
number of options granted in connection with shares purchased were based on
the compensation level of the employees. Each Outside Director was granted
the right to purchase up to 3,000 restricted shares of KCSI, with two KCSI
stock options granted in connection with each restricted share purchased.
Shares purchased are restricted from sale and the options are not
exercisable for a period of three years for senior management and the
Outside Directors and two years for other management employees. KCSI
provided senior management and the Outside Directors with the option of
using a sixty-day interest-bearing full recourse note to
Page 94
purchase these restricted shares. These loans accrued interest at 6.49% per
annum and were all fully repaid by September 11, 2000.
Management employees purchased 475,597 shares of KCSI restricted stock
under the Compensation Program and 910,697 stock options were granted in
connection with the purchase of those restricted shares. Outside Directors
purchased a total of 9,000 shares of KCSI restricted stock under the
Compensation Program and 18,000 KCSI stock options were granted in
connection with the purchase of those shares.
Employee Plan Funding Trust ("EPFT" or "Trust"). Effective September 30,
1998, the Company terminated the EPFT, which was established by KCSI as a
grantor trust for the purpose of holding shares of Series B Preferred stock
for the benefit of various KCSI employee benefit plans, including the ESOP,
Stock Option Plans and ESPP (collectively, "Benefit Plans"). The EPFT was
administered by an independent bank trustee ("Trustee") and included in the
Company's consolidated financial statements.
In accordance with the Agreement to terminate the EPFT, the Company
received 872,362 shares of Series B Preferred stock in full repayment of
the indebtedness from the Trust. In addition, the remaining 127,638 shares
of Series B Preferred stock were converted by the Trustee into KCSI common
stock, at the rate of 6 to 1, resulting in the issuance to the EPFT of
765,828 shares of such common stock. The Trustee then transferred this
common stock to KCSI and the Company has set these shares aside for use in
connection with the KCSI Stock Option and Performance Award Plan, as
amended and restated effective July 15, 1998. Following the foregoing
transactions, the EPFT was terminated. The impact of the termination of
the EPFT on the Company's consolidated condensed financial statements was a
reclassification among the components of the stockholder's equity accounts,
with no change in the consolidated assets and liabilities of the
Company.
Treasury Stock. Shares of common stock in Treasury at December 31, 2000
totaled 15,221,844 compared with 18,082,201 at December 31, 1999 and
18,461,663 at December 31, 1998. The Company issued shares of common stock
from Treasury - 2,375,760 in 2000, 609,462 in 1999 and 831,675 in 1998 - to
fund the exercise of options and subscriptions under various employee stock
option and purchase plans. In 2000 the Company issued 484,597 of
restricted stock in connection with the New Compensation Program (see
above). In 1998, approximately 33,500 shares were issued in conjunction
with the acquisition of a subsidiary of Stilwell. Treasury stock
previously acquired had been accounted for as if retired. The 765,828
shares received in connection with the termination of the EPFT were added
to Treasury stock during 1998. The Company repurchased 230,000 in 1999.
Shares repurchased during 2000 and 1998 were not material.
Note 10. Profit Sharing and Other Postretirement Benefits
The Company maintains various plans for the benefit of its employees as
described below. The Company's employee benefit expense for these plans
aggregated $2.3, $4.2 and $3.4 million in 2000, 1999 and 1998,
respectively.
Profit Sharing. Qualified profit sharing plans are maintained for most
employees not included in collective bargaining agreements. Contributions
for the Company and its subsidiaries are made at the discretion of the
Boards of Directors in amounts not to exceed the maximum allowable for
federal income tax purposes. During 2000, the Company combined the Profit
Sharing Plan and the Company's 401(k) Plan into the KCSI Profit Sharing and
401(k) Plan. This allows employees to direct their profit sharing accounts
into selected investments.
Page 95
401(k) Plan. The Company's 401(k) plan permits participants to make
contributions by salary reduction pursuant to section 401(k) of the
Internal Revenue Code. The Company matches contributions up to a maximum
of 3% of compensation. During 2000, the Company combined the Profit
Sharing Plan and the Company's 401(k) Plan into the KCSI Profit Sharing and
401(k) Plan.
Employee Stock Ownership Plan. KCSI established the ESOP for employees not
covered by collective bargaining agreements. KCSI contributions to the
ESOP are based on a percentage (determined by the Compensation Committee of
the Board of Directors) of wages earned by eligible employees.
Other Postretirement Benefits. The Company and several of its subsidiaries
provide certain medical, life and other postretirement benefits other than
pensions to its retirees. With the exception of the Gateway Western plans,
which are discussed below, the medical and life plans are available to
employees not covered under collective bargaining arrangements, who have
attained age 60 and rendered ten years of service. Individuals employed as
of December 31, 1992 were excluded from a specific service requirement.
The medical plan is contributory and provides benefits for retirees, their
covered dependents and beneficiaries. Benefit expense begins to accrue at
age 40. The medical plan was amended effective January 1, 1993 to provide
for annual adjustment of retiree contributions, and also contains,
depending on the plan coverage selected, certain deductibles, co-payments,
coinsurance and coordination with Medicare. The life insurance plan is
non-contributory and covers retirees only. The Company's policy, in most
cases, is to fund benefits payable under these plans as the obligations
become due. However, certain plan assets (e.g., money market funds) do
exist with respect to life insurance benefits.
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 132 "Employers' Disclosure about Pensions and Other
Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and
106" ("SFAS 132"). SFAS 132 establishes standardized disclosure
requirements for pension and other postretirement benefit plans, requires
additional information on changes in the benefit obligations and fair
values of plan assets, and eliminates certain disclosures that are no
longer considered useful. The standard does not change the measurement or
recognition of pension or postretirement benefit plans.
Reconciliation of the accumulated postretirement benefit obligation, change
in plan assets and funded status, respectively, at December 31 follows (in
millions):
2000 1999 1998
Accumulated postretirement
benefit obligation at beginning of year $ 14.6 $ 13.2 $ 13.5
Service cost 0.3 0.4 0.4
Interest cost 1.1 0.9 0.9
Actuarial and other (gain) loss (1.8) 1.2 (0.5)
Benefits paid (i) (1.1) (1.1) (1.1)
Accumulated postretirement -------- -------- --------
benefit obligation at end of year 13.1 14.6 13.2
-------- -------- --------
Fair value of plan assets
at beginning of year 1.3 1.4 1.3
Actual return on plan assets 0.1 0.1 0.2
Benefits paid (i) (0.2) (0.2) (0.1)
-------- -------- --------
Fair value of plan assets
at end of year 1.2 1.3 1.4
-------- -------- --------
Funded status and accrued
benefit cost $ 11.9 $ 13.3 $ 11.8
======== ======== ========
Page 96
(i) Benefits paid for the reconciliation of accumulated postretirement
benefit obligation include both medical and life insurance benefits,
whereas benefits paid for the fair value of plan assets reconciliation
include only life insurance benefits. Plan assets relate only to the life
insurance benefits. Medical benefits are funded as obligations become due.
Net periodic postretirement benefit cost included the following components
(in millions):
2000 1999 1998
-------- -------- --------
Service cost $ 0.3 $ 0.4 $ 0.4
Interest cost 1.1 0.9 0.9
Expected return on plan assets (0.1) (0.1) (0.1)
-------- -------- --------
Net periodic postretirement
benefit cost $ 1.3 $ 1.2 $ 1.2
======== ======== ========
The Company's health care costs, excluding Gateway Western and certain
former employees of the MidSouth, are limited to the increase in the
Consumer Price Index ("CPI") with a maximum annual increase of 5%.
Accordingly, health care costs in excess of the CPI limit will be borne by
the plan participants, and therefore assumptions regarding health care cost
trend rates are not applicable.
The following assumptions were used to determine the postretirement
obligations and costs for the years ended December 31:
2000 1999 1998
-------- -------- --------
Annual increase in the CPI 3.00% 3.00% 2.50%
Expected rate of return on life
insurance plan assets 6.50 6.50 6.50
Discount rate 7.50 8.00 6.75
Salary increase 3.00 4.00 4.00
Gateway Western's benefit plans are slightly different from those of the
Company and other subsidiaries. Gateway Western provides contributory
health, dental and life insurance benefits to substantially all of its
active and retired employees, including those covered by collective
bargaining agreements. Effective January 1, 1998, existing Gateway Western
management employees converted to the Company's benefit plans. In 2000,
the assumed annual rate of increase in health care costs for non-management
Gateway Western employees was 10%, decreasing over six years to 5.5% in
2007 and thereafter. An increase or decrease in the assumed health care
cost trend rates by one percent in 2000, 1999 and 1998 would not have a
significant impact on the accumulated postretirement benefit obligation.
The effect of this change on the aggregate of the service and interest cost
components of the net periodic postretirement benefit is not significant.
Note 11. Commitments and Contingencies
Litigation. In the opinion of management, claims or lawsuits incidental to
the business of the Company and its subsidiaries have been adequately
provided for in the consolidated financial statements.
Duncan Case
In 1998, a jury in Beauregard Parish, Louisiana returned a verdict against
KCSR in the amount of $16.3 million. This case arose from a railroad
crossing accident that occurred at Oretta, Louisiana
Page 97
on September 11, 1994, in which three individuals were injured. Of the three,
one was injured fatally, one was rendered quadriplegic and the third suffered
less serious injuries.
Subsequent to the verdict, the trial court held that the plaintiffs were
entitled to interest on the judgment from the date the suit was filed, dismissed
the verdict against one defendant and reallocated the amount of that verdict to
the remaining defendants. The resulting total judgment against KCSR, together
with interest, was approximately $27.0 million as of December 31, 1999.
On November 3, 1999, the Third Circuit Court of Appeals in Louisiana
affirmed the judgment. Subsequently KCSR sought and obtained review of the
case in the Supreme Court of Louisiana. On October 30, 2000 the Supreme
Court of Louisiana entered its order affirming in part and reversing in
part the judgment. The net effect of the Louisiana Supreme Court action
was to reduce the allocation of negligence to KCSR and reduce the judgment,
with interest, against KCSR from approximately $28 million to approximately
$14.2 million (approximately $9.7 million of damages and $4.5 million of
interest), which is in excess of KCSR's insurance coverage of $10 million
for this case. KCSR filed an application for rehearing in the Supreme
Court of Louisiana which was denied on January 5, 2001. KCSR then sought a
stay of judgment in the Louisiana court. The Louisiana court denied the
stay application on January 12, 2001. KCSR reached an agreement as to the
payment structure of the judgment in this case and payment of the
settlement was made on March 7, 2001.
KCSR had previously recorded a liability of approximately $3.0 million for
this case. Based on the Supreme Court of Louisiana's decision, management
recorded an additional liability of $11.2 million and a receivable in the
amount of $7.0 million representing the amount of the insurance coverage.
This resulted in recording $4.2 million of net operating expense in the
accompanying consolidated financial statements for the year ended December
31, 2000.
Bogalusa Cases
In July 1996, KCSR was named as one of twenty-seven defendants in various
lawsuits in Louisiana and Mississippi arising from the explosion of a rail
car loaded with chemicals in Bogalusa, Louisiana in October 1995. The
explosion released nitrogen dioxide and oxides of nitrogen into the
atmosphere over parts of Bogalusa and the surrounding area allegedly
causing evacuations and injuries. Approximately 25,000 residents of
Louisiana and Mississippi have asserted claims to recover damages allegedly
caused by exposure to the released chemicals.
KCSR neither owned nor leased the rail car or the rails on which it was
located at the time of the explosion in Bogalusa. KCSR did, however, move
the rail car from Jackson to Vicksburg, Mississippi, where it was loaded
with chemicals, and back to Jackson, where the car was tendered to the IC.
The explosion occurred more than 15 days after we last transported the rail
car. The car was loaded in excess of its standard weight, but under its
capacity, when it was transported to interchange with the IC.
The trial of a group of twenty plaintiffs in the Mississippi lawsuits
arising from the chemical release resulted in a jury verdict and judgment
in our favor in June 1999. The jury found that we were not negligent and
that the plaintiffs had failed to prove that they were damaged. The trial
of the Louisiana class action is scheduled to commence on June 11, 2001.
The trial of a second group of Mississippi plaintiffs is scheduled for
January 2002.
Management believes the probability of liability for damages in these cases
to be remote. If the Company were to be found liable for punitive damages
in these cases, such a judgment could have a material adverse effect on the
Company's results of operations, financial position and cash flows.
Page 98
Houston Cases
In August 2000 KCSR and certain of its affiliates were added as defendants
in lawsuits pending in Jefferson and Harris Counties, Texas. These
lawsuits allege damage to approximately 3,000 plaintiffs as a result of an
alleged toxic chemical release from a tank car in Houston, Texas on August
21, 1998. Litigation involving the shipper and the delivering carrier had
been pending for some time, but KCSR, which handled the car during the
course of its transport, had not previously been named a defendant. On
information currently available, management believes the Company's
probability of liability for damages in these cases to be remote.
Jaroslawicz Class Action
On October 3, 2000, a lawsuit was filed in the New York State Supreme Court
purporting to be a class action on behalf of the Company's preferred
shareholders, and naming KCSI, its Board of Directors and Stilwell
Financial Inc. as defendants. This lawsuit seeks a declaration that the
Spin-off was a defacto liquidation of KCSI, alleges violation of directors'
fiduciary duties to the preferred shareholders and also seeks a declaration
that the preferred shareholders are entitled to receive the par value of
their shares and other relief. The Company filed a motion to dismiss with
prejudice in the New York State Supreme Court on December 22, 2000; the
plaintiff filed its brief in opposition to the motion to dismiss on
February 1, 2001, and the Company served reply papers on March 7, 2001.
The motion to dismiss is now fully briefed and a ruling has not been
rendered. Management believes the suit to be groundless and will continue
to defend the matter vigorously.
Diesel Fuel Commitments and Hedging Activities. Fuel expense is a
significant component of the Company's operating expenses. Fuel costs are
affected by (i) traffic levels, (ii) efficiency of operations and
equipment, and (iii) fuel market conditions. Controlling fuel expenses is
a concern of management, and expense control remains a top priority. As a
result, the Company has established a program to hedge against fluctuations
in the price of its diesel fuel purchases to protect the Company's
operating results against adverse fluctuations in fuel prices. KCSR enters
into forward diesel fuel purchase commitments and commodity swap
transactions (fuel swaps or caps) as a means of fixing future fuel prices.
These transactions are accounted for as hedges and are correlated to market
benchmarks. Hedge positions are monitored to ensure that they will not
exceed actual fuel requirements in any period.
At the end of 1997, the Company had purchase commitments for approximately
27% of expected 1998 diesel fuel usage, as well as fuel swaps for
approximately 37% of expected 1998 usage. As a result of actual fuel
prices remaining below both the purchase commitment price and the swap
price during 1998, the Company's fuel expense was approximately $4.0
million higher. The purchase commitments resulted in a higher cost of
approximately $1.7 million, while the Company made payments of
approximately $2.3 million related to the 1998 fuel swap transactions. At
December 31, 1998, the Company had purchase commitments and fuel swap
transactions for approximately 32% and 16%, respectively, of expected 1999
diesel fuel usage. In 1999, KCSR saved approximately $0.6 million as a
result of these purchase commitments. The fuel swap transactions resulted
in higher fuel expense of approximately $1 million. At December 31, 1999,
the Company had no outstanding purchase commitments for 2000 and had
entered into two diesel fuel cap transactions for a total of six million
gallons (approximately 10% of expected 2000 usage) at a cap price of $0.60
per gallon. These hedging instruments expired on March 31, 2000 and June
30, 2000. The Company received approximately $0.8 million during 2000
related to these diesel fuel cap transactions and recorded the proceeds as
a reduction of diesel fuel expenses. At December 31, 2000, KCSR had
purchase commitments for approximately 12.6% of budgeted gallons of fuel
for 2001. There are currently no diesel fuel cap or swap transactions.
See Note 2.
In accordance with the provision of the KCS Credit Facilities requiring the
Company to manage its interest rate risk through hedging activity, at
December 31, 2000 the Company has five separate
Page 99
interest rate cap agreements for an aggregate notional amount of $200 million
expiring on various dates in 2002. The interest rate caps are linked to LIBOR.
$100 million of the aggregate notional amount provides a cap on the Company's
interest rate of 7.25% plus the applicable spread, while $100 million limits the
interest rate to 7% plus the applicable spread. Counterparties to the interest
rate cap agreements are major financial institutions who also participate in the
New Credit Facilities. Credit loss from counterparty non-performance is not
anticipated. See Note 2.
Foreign Exchange Matters. In connection with the Company's investment in Grupo
TFM, matters arise with respect to financial accounting and reporting for
foreign currency transactions and for translating foreign currency financial
statements into U.S. dollars. The Company follows the requirements outlined in
Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation" ("SFAS 52"), and related authoritative guidance. In 1997, the
Company entered into foreign currency contracts in order to reduce the impact of
fluctuations in the value of the Mexican peso on its investment in Grupo TFM.
These contracts were intended to hedge only a portion of the Company's exposure
related to the final installment of the purchase price and not any other
transactions or balances. In April 1997, the Company recorded a gain in
connection with these contracts and such gain was deferred and has been
accounted for as a component of the Company's investment in Grupo TFM.
Prior to January 1, 1999, Mexico's economy was classified as "highly
inflationary" as defined in SFAS 52. Accordingly, under the highly
inflationary accounting guidance in SFAS 52, the U.S. dollar was used as
Grupo TFM's functional currency, and any gains or losses from translating
Grupo TFM's financial statements into U.S. dollars were included in the
determination of its net income (loss). Equity earnings (losses) from
Grupo TFM included in the Company's results of operations reflected the
Company's share of such translation gains and losses.
Effective January 1, 1999, the SEC staff declared that Mexico should no
longer be considered a highly inflationary economy. Accordingly, the
Company performed an analysis under the guidance of SFAS 52 to determine
whether the U.S. dollar or the Mexican peso should be used as the
functional currency for financial accounting and reporting purposes for
periods subsequent to December 31, 1998. Based on the results of the
analysis, management believes the U.S. dollar to
be the appropriate functional currency for the Company's investment in
Grupo TFM; therefore, the financial accounting and reporting of the
operating results of Grupo TFM will be performed using the U.S. dollar as
Grupo TFM's functional currency.
Because the Company is required to report equity in Grupo TFM under GAAP
and Grupo TFM reports under International Accounting Standards,
fluctuations in deferred income tax calculations occur based on translation
requirements and differences in accounting standards. The deferred income
tax calculations are significantly impacted by fluctuations in the relative
value of the Mexican peso versus the U.S. dollar and the rate of Mexican
inflation, and can result in significant variances in the amount of equity
earnings (losses) reported by the Company.
The Company continues to evaluate existing alternatives with respect to
utilizing foreign currency instruments to hedge its U.S. dollar investment
in Grupo TFM as market conditions change or exchange rates fluctuate. At
December 31, 2000, 1999 and 1998, the Company had no outstanding foreign
currency hedging instruments.
Environmental Liabilities. The Company's transportation operations are
subject to extensive regulation under environmental protection laws and its
land holdings have been used for transportation purposes or leased to third
parties for commercial and industrial purposes. The Company records
liabilities for remediation and restoration costs related to past
activities when the
Company's obligation is probable and the costs can be reasonably
estimated. Costs of ongoing compliance activities to current operations
are expensed as incurred.
Page 100
The Company's recorded liabilities for these issues represent its best
estimates (on an undiscounted basis) of remediation and restoration costs
that may be required to comply with present laws and regulations. At
December 31, 2000, 1999 and 1998 these recorded liabilities were not
material. Although these costs cannot be predicted with certainty,
management believes that the ultimate outcome of identified matters will
not have a material adverse effect on the Company's consolidated results of
operations or financial condition.
Panama Canal Railway Company. In January 1998, the Republic of Panama
awarded KCSR and its joint venture partner, Mi-Jack Products, Inc., the
concession to reconstruct and operate the PCRC. The 47-mile railroad runs
parallel to the Panama Canal and, upon reconstruction, will provide
international shippers with an important complement to the Panama Canal.
Under certain limited conditions, the Company is a guarantor for up to $15
million of cash deficiencies associated with project completion.
Additionally, if the Company or its partner terminate the concession
contract without the consent of the IFC, the Company is a guarantor for up
to 50% of the outstanding senior loans. The total cost of the
reconstruction project is estimated to be $75 million with an equity
commitment from KCSR not to exceed $16.5 million. See Note 3.
Automotive and Intermodal Facility at the Former Richards-Gebaur Airbase.
In conjunction with the construction of an intermodal and automotive
facility at the former Richards-Gebaur airbase in Kansas City, Missouri,
KCSR expects to spend approximately $20 million for site improvements and
infrastructure. Additionally, KCSR has negotiated a lease arrangement with
the City of Kansas City, Missouri for a period of fifty years. Lease
payments are expected to approximate $665,000 per year and will be adjusted
for inflation based on agreed-upon formulas.
Note 12. Control
Subsidiaries and Affiliates. The Company is party to certain agreements
with TMM covering the Grupo TFM and Mexrail ventures, which contain
"change of control" provisions, provisions intended to preserve Company's
and TMM's proportionate ownership of the ventures, and super majority
provisions with respect to voting on certain significant transactions.
Such agreements also provide a right of first refusal in the event that
either party initiates a divestiture of its equity interest in Grupo TFM or
Mexrail. Under certain circumstances, such agreements could affect the
Company's ownership percentage and rights in these equity affiliates.
Employees. The Company and certain of its subsidiaries have entered into
agreements with employees whereby, upon defined circumstances constituting
a change in control of the Company or subsidiary, certain stock options
become exercisable, certain benefit entitlements are automatically funded
and such employees are entitled to specified cash payments upon termination
of employment.
Assets. The Company and certain of its subsidiaries have established
trusts to provide for the funding of corporate commitments and entitlements
of officers, directors, employees and others in the event of a specified
change in control of the Company or subsidiary. Assets held in such trusts
at December 31, 2000 were not material. Depending upon the circumstances at
the time of any such change in control, the most significant factor of
which would be the highest price paid for KCSI common stock by a party
seeking to control the Company, funding of the Company's trusts could be
very substantial.
Debt. Certain loan agreements and debt instruments entered into or
guaranteed by the Company and its subsidiaries provide for default in the
event of a specified change in control of the Company or particular
subsidiaries of the Company.
Page 101
Stockholder Rights Plan. On September 19, 1995, the Board of Directors of
the Company declared a dividend distribution of one Right for each
outstanding share of the Company's common stock, $.01 par value per share
(the "Common stock"), to the stockholders of record on October 12, 1995.
Each Right entitles the registered holder to purchase from the Company
1/1,000th of a share of Series A Preferred Stock (the "Preferred Stock")
or in some circumstances, Common stock, other securities, cash or other
assets as the case may be, at a price of $210 per share, subject to
adjustment.
The Rights, which are automatically attached to the Common stock, are not
exercisable or transferable apart from the Common stock until the tenth
calendar day following the earlier to occur of (unless extended by the
Board of Directors and subject to the earlier redemption or expiration of
the Rights): (i) the date of a public announcement that an acquiring person
acquired, or obtained the right to acquire, beneficial ownership of 20
percent or more of the outstanding shares of the Common stock of the
Company (or 15 percent in the case that such person is considered an
"adverse person"), or (ii) the commencement or announcement of an
intention to make a tender offer or exchange offer that would result in an
acquiring person beneficially owning 20 percent or more of such outstanding
shares of Common stock of the Company (or 15 percent in the case that such
person is considered an "adverse person"). Until exercised, the Right
will have no rights as a stockholder of the Company, including, without
limitation, the right to vote or to receive dividends. In connection with
certain business combinations resulting in the acquisition of the Company
or dispositions of more than 50% of Company assets or earnings power, each
Right shall thereafter have the right to receive, upon the exercise thereof
at the then current exercise price of the Right, that number of shares of
the highest priority voting securities of the acquiring company (or certain
of its affiliates) that at the time of such transaction would have a market
value of two times the exercise price of the Right. The Rights expire on
October 12, 2005, unless earlier redeemed by the Company as described
below.
At any time prior to the tenth calendar day after the first date after the
public announcement that an acquiring person has acquired beneficial
ownership of 20 percent (or 15 percent in some instances) or more of the
outstanding shares of the Common stock of the Company, the Company may
redeem the Rights in whole, but not in part, at a price of $0.005 per
Right. In addition, the Company's right of redemption may be reinstated
following an inadvertent trigger of the Rights (as determined by the Board)
if an acquiring person reduces its beneficial ownership to 10 percent or
less of the outstanding shares of Common stock of the Company in a
transaction or series of transactions not involving the Company.
The Series A Preferred shares purchasable upon exercise of the Rights will
have a cumulative quarterly dividend rate set by the Board of Directors or
equal to 1,000 times the dividend declared on the Common stock for such
quarter. Each share will have the voting rights of one vote on all matters
voted at a meeting of the stockholders for each 1/1,000th share of
preferred stock held by such stockholder. In the event of any merger,
consolidation or other transaction in which the common shares are
exchanged, each Series A Preferred share will be entitled to receive an
amount equal to 1,000 times the amount to be received per common share. In
the event of a liquidation, the holders of Series A Preferred shares will
be entitled to receive $1,000 per share or an amount per share equal to
1,000 times the aggregate amount to be distributed per share to holders of
Common stock. The shares will not be redeemable. The vote of holders of a
majority of the Series A Preferred shares, voting together as a class, will
be required for any amendment to the Company's Certificate of Incorporation
that would materially and adversely alter or change the powers, preferences
or special rights of such shares.
Page 102
Note 13. Quarterly Financial Data (Unaudited)
(in millions, except per share amounts):
Spin-off of Stilwell
The quarterly information presented herein for the first quarter of 2000
and each 1999 quarter differs from that presented in the Company's Form
10-Q filings for the applicable quarter as a result of the classification
of Stilwell as a discontinued operation and the reverse stock split.
Restatement of Financial Statements. The Company restated its consolidated
statements of income for the three months ended September 30, 2000 to
present the $4.2 million attributed to interest in the Duncan Case judgment
in "Cost and Expenses". This amount had previously been classified as
"Interest Expense". These revisions had no impact on income from
continuing operations, net income, earnings per share or on total
shareholders' equity as previously reported.
Reverse Stock Split. On July 12, 2000, KCSI completed a reverse stock
split of its common shares whereby every two shares of KCSI common stock
was converted into one share of KCSI common stock. The quarterly Per Share
Data presented for 2000 and 1999 herein reflects this reverse stock split
for all period presented. Additionally, the range of stock prices for
common stock reflect this reverse stock split for all periods presented and
the Spin-off for periods subsequent to July 12, 2000.
Page 103
2000
-------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
Restated
Revenues $ 134.8 $ 144.1 $ 144.4 $ 148.9
Costs and expenses 114.2 115.8 111.7 116.6
Depreciation and amortization 13.7 13.8 14.3 14.3
-------- -------- -------- --------
Operating income 6.9 14.5 18.4 18.0
-------- -------- -------- --------
Equity in net earnings (losses)
of unconsolidated affiliates:
Grupo TFM 2.8 2.6 8.0 8.2
Other (1.1) 1.5 1.2 0.6
Interest expense (11.6) (18.3) (18.4) (17.5)
Other, net 1.2 1.2 0.9 2.7
-------- -------- -------- --------
Income from continuing operations
before income taxes (1.8) 1.5 10.1 12.0
Income taxes provision (benefit) (5.4) (1.1) 1.3 1.6
-------- -------- -------- --------
Income from continuing operations 3.6 2.6 8.8 10.4
Income from discontinued
operations, net of income taxes - 23.4 151.7 188.7
-------- -------- -------- --------
Income before extraordinary item 3.6 26.0 160.5 199.1
Extraordinary items, net of income taxes
Debt retirement costs - KCSI - (1.1) - (5.9)
Debt retirement costs - Grupo TFM - (1.7) - -
-------- -------- -------- --------
Net income 3.6 23.2 160.5 193.2
======== ======== ======== ========
Per Share Data (i)
Basic Earnings per Common share
Continuing operations $ 0.06 $ 0.05 $ 0.16 $ 0.18
Discontinued operations - 0.40 2.72 3.40
-------- -------- -------- --------
Basic Earnings per Common share
before extraordinary item 0.06 0.45 2.88 3.58
Extraordinary item, net of
income taxes - (0.05) - (0.10)
-------- -------- -------- --------
Total Basic Earnings per
Common share $ 0.06 $ 0.40 $ 2.88 $ 3.48
======== ======== ======== ========
Diluted Earnings per Common share
Continuing operations $ 0.06 $ 0.05 $ 0.15 $ 0.18
Discontinued operations - 0.39 2.59 3.24
-------- -------- -------- --------
Diluted Earnings per Common share
before extraordinary item 0.06 0.44 2.74 3.42
Extraordinary item, net of
income taxes - (0.05) - (0.10)
-------- -------- -------- --------
Total Diluted Earnings per
Common share $ 0.06 $ 0.39 $ 2.74 $ 3.32
======== ======== ======== ========
Dividends per share:
Preferred $ 0.25 $ 0.25 $ 0.25 $ 0.25
Common $ - $ - $ - $ -
Stock Price Ranges:
Preferred - High $ 20.88 $ 20.00 $ 19.50 $ 16.00
- Low 20.31 18.63 14.75 14.25
Common - High 10.31 191.50 177.75 187.75
- Low 7.36 5.13 117.75 127.75
(i) The accumulation of 2000's four quarters for Basic and Diluted
earnings (loss) per share data does not total the respective earnings per
share for the year ended December 31, 2000 due to rounding and the impact
of the timing of the Spin-off related to changes in weighted average
shares.
Page 104
1999
-------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
Revenues $ 151.7 $ 149.1 $ 148.7 $ 151.9
Costs and expenses 132.4 120.2 114.6 113.2
Depreciation and amortization 13.9 14.3 14.4 14.3
-------- -------- -------- --------
Operating income 5.4 14.6 19.7 24.4
Equity in net earnings (losses)
of unconsolidated affiliates:
Grupo TFM (3.3) 3.8 0.5 0.5
Other 0.2 1.3 1.6 0.6
Interest expense (14.1) (14.7) (14.6) (14.0)
Other, net 2.1 1.3 1.0 0.9
-------- -------- -------- --------
Income from continuing operations
before income taxes (9.7) 6.3 8.2 12.4
Income taxes provision (benefit) (2.5) 1.7 3.0 4.8
-------- -------- -------- --------
Income from continuing operations (7.2) 4.6 5.2 7.6
Income from discontinued
operations, net of income taxes 98.5 82.7 70.9 61.0
-------- -------- -------- --------
Net income $ 91.3 $ 87.3 $ 76.1 $ 68.6
======== ======== ======== ========
Per Share Data (i)
Basic Earnings per Common share
Continuing operations $ (0.13) $ 0.08 $ 0.09 $ 0.14
Discontinued operations 1.78 1.50 1.29 1.11
-------- -------- -------- --------
Total Basic Earnings per
Common share $ 1.65 $ 1.58 $ 1.38 $ 1.25
======== ======== ======== ========
Diluted Earnings per Common share
Continuing operations $ (0.13) $ 0.08 $ 0.09 $ 0.13
Discontinued operations 1.78 1.43 1.22 1.06
-------- -------- -------- --------
Total Diluted Earnings per
Common share $ 1.65 $ 1.51 $ 1.31 $ 1.19
======== ======== ======== ========
Dividends per share:
Preferred $ 0.25 $ 0.25 $ 0.25 $ 0.25
Common $ 0.08 $ 0.08 $ 0.08 $ 0.08
Stock Price Ranges:
Preferred - High $ 16.00 $ 16.25 $ 16.50 $ 16.25
- Low 14.00 13.50 13.75 14.88
Common - High 150.00 131.88 132.88 114.75
- Low 75.00 86.63 100.50 86.63
(i) The accumulation of 1999's four quarters for Diluted earnings
(loss) per share data does not total the respective earnings per share for
the year ended December 31, 1999 due to share repurchases and the
anti-dilutive nature of options in the fourth quarter 1999 calculation.
Page 105
Note 14. Condensed Consolidating Financial Information
As discussed in Note 7, in September 2000 KCSR issued $200 million 9.5%
Senior Notes due 2008. These notes are unsecured obligations of KCSR,
however, they are also jointly and severally and fully and unconditionally
guaranteed on an unsecured senior basis by KCSI and certain of the
subsidiaries (all of which are wholly-owned) within the KCSI consolidated
group. KCSI has registered exchange notes with substantially identical
terms and associated guarantees with the SEC.
The accompanying condensed consolidating financial information has been
prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial
statements of guarantors and affiliates whose securities collateralize an
issue registered or being registered." This information is not intended
to present the financial position, results of operations and cash flows of
the individual companies or groups of companies in accordance with
generally accepted accounting principles.
Condensed Consolidating Statements of Income
December 31, 2000 (dollars in millions)
------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
Revenues............. $ -- $521.9 $ 61.6 $ 11.0 $ (22.3) $ 572.2
Costs and expenses... 10.0 465.1 51.0 10.6 (22.3) 514.4
------- ------- ------- ------- ------- -------
Operating income
(loss)............. (10.0) 56.8 10.6 0.4 -- 57.8
Equity in net
earnings (losses) of
unconsolidated
affiliates and
subsidiaries...... 31.3 28.2 -- 22.9 (58.6) 23.8
Interest expense..... (2.6) (65.1) (4.2) (1.1) 7.2 (65.8)
Other, net........... 4.0 8.7 0.5 -- (7.2) 6.0
------- ------- ------- ------- ------- -------
Income (loss) from
continuing operations
before income taxes.. 22.7 28.6 6.9 22.2 (58.6) 21.8
Income tax provision
(benefit)............ (2.7) (0.9) (1.3) 1.3 -- (3.6)
------- ------- ------- ------- ------- -------
Income (loss) from
continuing operations 25.4 29.5 8.2 20.9 (58.6) 25.4
Income (loss) from
discontinued
operations.........363.8 -- -- 363.8 (363.8) 363.8
------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary items.. 389.2 29.5 8.2 384.7 (422.4) 389.2
Extraordinary items,
net of income taxes (8.7) (1.1) -- (1.7) 2.8 (8.7)
------- ------- ------- ------- ------- ------- --
Net income (loss)....$ 380.5 $ 28.4 $ 8.2 $ 383.0 $ (419.6) $ 380.5
======= ======= ======= ======= ======== =======
Page 106
December 31, 1999 (dollars in millions)
----------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
Revenues.............. $ -- $ 544.9 $ 73.4 $ 10.3 $ (27.2) $ 601.4
Costs and expenses.... 12.7 474.3 66.9 10.6 (27.2) 537.3
------- ------- ------- ------- ------- -------
Operating income(loss) (12.7) 70.6 6.5 (0.3) -- 64.1
Equity in net
earnings (losses) of
unconsolidated
affiliates and
subsidiaries....... 18.0 (5.0) -- 2.0 (9.8) 5.2
Interest expense...... (48.7) (35.2) (2.9) (19.3) 48.7 (57.4)
Other, net............ 49.8 3.4 0.7 0.1 (48.7) 5.3
------- ------- ------- ------- ------- -------
Income (loss) from
continuing operations
before income taxes.. 6.4 33.8 4.3 (17.5) (9.8) 17.2
Income tax provision
(benefit)............. (3.8) 15.8 1.6 (6.6) -- 7.0
------- ------- ------- ------- ------ -------
Income (loss) from
continuing operations 10.2 18.0 2.7 (10.9) (9.8) 10.2
Income (loss) from
discontinued
operations.......... 313.1 -- -- 313.1 ( 313.1) 313.1
------- ------- ------- ------- ------ -------
Income (loss) before
extraordinary items 323.3 18.0 2.7 302.2 (322.9) 323.3
Extraordinary items,
net of income taxes -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Net income (loss)... $ 323.3 $ 18.0 $ 2.7 $ 302.2 $ (322.9) $ 323.3
December 31, 1998 (dollars in millions)
----------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
Revenues............ $ -- $ 549.9 $ 87.4 $ 11.1 $ (34.9) $ 613.5
Costs and expenses.. 11.0 436.1 72.1 11.0 (34.9) 495.3
------- ------- ------- ------- ------- -------
Operating income
(loss)........... (11.0) 113.8 15.3 0.1 -- 118.2
Equity in net
earnings (losses) of
unconsolidated
affiliates and
subsidiaries....... 48.1 (5.5) 0.2 (2.9) (42.8) (2.9)
Interest expense...... (53.5) (37.7) (3.0) (19.0) 53.6 (59.6)
Other, net............ 50.2 3.6 2.0 3.9 (50.3) 9.4
------- ------- ------- ------- ------- -------
Income (loss) from
continuing operations
before income taxes. 33.8 74.2 14.5 (17.9) (39.5) 65.1
Income tax provision
(benefit)............. (4.2) 31.8 5.6 (6.1) -- 27.1
------- ------- ------- ------- ------- -------
Income (loss) from
continuing operations 38.0 42.4 8.9 (11.8) (39.5) 38.0
Income (loss) from
discontinued
operations.......... 152.2 -- -- 152.2 (152.2) 152.2
------- ------- ------- ------- ------- -------
Income (loss) before
extraordinary items 190.2 42.4 8.9 140.4 (191.7) 190.2
Extraordinary items,
net of income taxes -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Net income (loss) $ 190.2 $ 42.4 $ 8.9 $ 140.4 $ (191.7) $ 190.2
======= ======= ======= ======= ======== ========
Page 107
Condensed Consolidating Balance Sheets
December 31, 2000 (dollars in millions)
---------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
ASSETS:
Current assets... $16.9 $ 179.7 $ 32.6 $ 10.1 $ (22.9) $ 216.4
Investments held
for Operating
purposes and
investments in
subsidiaries... 666.3 445.0 0.7 343.8 (1,097.6) 358.2
Properties, net.. 0.3 1,230.1 95.2 2.2 -- 1,327.8
Intangibles and
other assets 0.2 29.1 14.5 0.3 (2.0) 42.1
------- ------- ------- ------- ------- -------
Total assets.. $ 683.7 $1,883.9 $ 143.0 $ 356.4 $(1,122.5) $1,944.5
======= ======= ======= ======= ======== ========
LIABILITIES AND
EQUITY:
Current liabilities $ 21.8 $ 221.1 $ 21.2 $ 7.8 $ (22.9) $ 249.0
Long-term debt... 1.6 624.0 7.7 5.1 -- 638.4
Payable to
affiliates....... 3.4 -- 32.8 -- (36.2) --
Deferred income taxes 7.2 313.4 9.7 3.9 (2.0) 332.2
Other Liabilities 6.3 65.8 9.4 -- -- 81.5
Stockholders equity 643.4 659.6 62.2 339.6 (1,061.4) 643.4
------- ------- ------- ------- ------- -------
Total liabilities
and equity..... $ 683.7 $1,883.9 $ 143.0 $ 356.4 $(1,122.5) $ 1,944.5
======= ======= ======= ======= ======== ========
December 31, 1999 (dollars in millions)
---------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
ASSETS:
Current assets... $ 9.9 $ 165.6 $ 34.9 $ 19.4 $ (21.3) $ 208.5
Investments held
for Operating
purposes and
investments in
subsidiaries... 1,148.0 55.7 0.7 290.4 (1,157.7) 337.1
Properties, net.. 0.4 1,180.6 93.8 2.6 -- 1,277.4
Intangibles and
other assets 8.0 14.1 14.7 0.2 (2.6) 34.4
Net assets of
discontinued
operations..... 814.6 -- -- 814.6 (814.6) 814.6
------- ------- ------- ------- ------- -------
Total assets.. $1,980.9 $ 1,416.0 $ 144.1 $ 1,127.2 $ (1,996.2) $ 2,672.0
======= ======= ======= ======= ======== ========
LIABILITIES AND
EQUITY:
Current liabilities $ 34.7 $ 202.7 $ 26.4 $ 11.7 $ (21.3) $ 254.2
Long-term debt... 647.8 58.6 38.3 5.3 -- 750.0
Payable to
affiliates....... 3.9 394.2 4.5 335.7 (738.3) --
Deferred income taxes 4.9 280.9 12.6 1.6 (2.6) 297.4
Other Liabilities 6.5 71.8 9.0 -- -- 87.3
Stockholders
equity 1,283.1 407.8 53.3 772.9 (1,234.0) 1,283.1
------- ------- ------- ------- ------- -------
Total liabilities
and equity. $1,980.9 $1,416.0 $ 144.1 $ 1,127.2 $(1,996.2) $2,672.0
======= ======= ======= ======= ======== ========
Page 108
December 31, 1998 (dollars in millions)
---------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
ASSETS:
Current assets... $ 4.6 $ 173.7 $ 32.3 $ 12.4 $ (12.8) $ 210.2
Investments held
for operating
purposes and
investments in
subsidiaries ...1,125.4 76.0 0.5 307.4 (1,181.4) 327.9
Properties, net.. 0.4 1,124.0 90.7 14.2 -- 1,229.3
Intangibles and
other assets.... 5.2 13.6 16.6 1.5 (7.5) 29.4
Net assets of
discontinued
operations...... 540.2 -- -- 540.2 (540.2) 540.2
------- ------- ------- ------- ------- -------
Total assets. $1,675.8 $1,387.3 $ 140.1 $ 875.7 $(1,741.9) $2,337.0
======= ======= ======= ======= ======== ========
LIABILITIES AND
EQUITY:
Current
liabilities..... $ 21.4 $ 189.9 $ 19.6 $ 9.7 $ (32.1) $ 208.5
Long-term debt... 712.5 68.6 38.8 5.7 -- 825.6
Payable to
affiliates...... 3.8 403.6 5.6 318.8 (731.8) --
Deferred income taxes -- 265.2 15.7 8.9 (4.6) 285.2
Other Liabilities 6.8 70.0 10.1 3.0 (3.4) 86.5
Stockholders equity 931.3 390.0 50.3 529.6 (970.0) 931.2
------- ------- ------- ------- ------- -------
Total liabilities
and equity...$1,675.8 $1,387.3 $ 140.1 $ 875.7 $(1,741.9) $2,337.0
======= ======= ======= ======= ======== ========
Condensed Consolidating Statements of Cash Flows
December 31, 2000 (dollars in millions)
----------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
Net cash flows
provided by (used
for) operating
activities:......... $ 3.5 $ 80.4 $ 7.0 $ 13.7 $ (27.4) $ 77.2
Investing activities:
Property
acquisitions..... -- (97.9) (6.6) -- -- (104.5)
Investments in and
loans to affiliates (43.0) 5.6 -- (4.6) 37.8 (4.2)
Repayment of loans
to affiliates..... 544.8 -- -- -- (544.8) --
Other, net....... 1.1 (3.1) 0.7 -- 8.2 6.9
------- ------- ------- ------- ------- -------
Net........... 502.9 (95.4) (5.9) (4.6) (498.8) (101.8)
------- ------- ------- ------- ------- -------
Financing activities:
Proceeds from
issuance of
long-term debt.. 125.0 927.0 -- -- -- 1,052.0
Repayment of
long-term debt (648.3) (337.1) (29.5) (0.2) (0.3) (1,015.4)
Proceeds from loans
from affiliates... -- 46.2 32.9 -- (79.1) --
Repayment of loans
from affiliates.... -- (577.6) -- -- 577.6 --
Debt issuance costs -- (17.6) -- -- -- (17.6)
Proceeds from
stock plans.... 17.9 -- -- -- -- 17.9
Stock repurchased -- -- -- -- -- --
Cash dividends paid (4.8) (15.2) (4.8) (8.7) 28.7 (4.8)
Other, net........ 0.1 2.5 0.2 -- (0.7) 2.1
------- ------- ------- ------- ------- -------
Net........... (510.1) 28.2 (1.2) (8.9) 526.2 34.2
------- ------- ------- ------- ------- -------
Cash and equivalents:
Net increase
(decrease)....... (3.7) 13.2 (0.1) 0.2 -- 9.6
At beginning of
period 5.2 4.2 2.2 0.3 -- 11.9
------- ------- ------- ------- ------- -------
At end of year... $ 1.5 $ 17.4 $ 2.1 $ 0.5 $ -- $ 21.5
======= ====== ======= ======= ======= ========
Page 109
December 31, 1999 (dollars in millions)
---------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
Net cash flows provided
by (used for) operating
activities: $ 21.3 $ 137.1 $ 10.2 $ 0.6 $ 8.8 $ 178.0
Investing activities:
Property acquisitions -- (97.8) (8.4) -- -- (106.2)
Investments in and
loans to affiliates.. (3.9) 0.1 -- -- (0.1) (3.9)
Repayment of loans
to affiliates 55.6 -- -- -- (39.0) 16.6
Other, net........ 0.3 2.0 0.7 0.1 (6.8) (3.7)
------- ------- ------- ------- ------- -------
Net............ 52.0 (95.7) (7.7) 0.1 (45.9) (97.2)
------- ------- ------- ------- ------- -------
Financing activities:
Proceeds from issuance
of long-term debt.... 21.8 -- -- -- -- 21.8
Repayment of long-term
debt................. (86.8) (10.2) (0.3) (0.2) -- (97.5)
Proceeds from loans
from affiliates...... -- -- -- -- -- --
Repayment of loans
from affiliates...... -- (37.1) (1.6) (1.9) 40.6 --
Debt issuance costs (4.2) -- -- -- -- (4.2)
Proceeds from
stock plans......... 37.0 -- -- -- -- 37.0
Stock repurchased..... (24.6) -- -- -- -- (24.6)
Cash dividends paid (17.6) -- -- -- -- (17.6)
Other, net........ 6.1 6.7 (0.9) (1.8) 0.5 10.6
------- ------- ------- ------- ------- -------
Net............ (68.3) (40.6) (2.8) (3.9) 41.1 (74.5)
------- ------- ------- ------- ------- -------
Cash and equivalents:
Net increase (decrease) 5.0 0.8 (0.3) (3.2) 4.0 6.3
At beginning of year 0.2 3.4 2.5 3.5 (4.0) 5.6
------- ------- ------- ------- ------- -------
At end of year...... $ 5.2 $ 4.2 $ 2.2 $ 0.3 $ -- $ 11.9
====== ======= ======= ======= ======== ========
December 31, 1998 (dollars in millions)
---------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
Net cash flows provided
by (used for) operating
activities:.......... $ 30.0 $ 86.0 $ 19.9 $ 8.5 $ (2.8) $ 141.6
Investing activities:
Property acquisitions -- (64.3) (5.4) (0.2) -- (69.9)
Investments in and
loans to affiliates -- -- (0.7) -- -- (0.7)
Repayment of loans
to affiliates 34.9 -- -- -- (34.9) --
Other, net........ (0.9) 6.6 2.5 0.9 -- 9.1
------- ------- ------- ------- ------- -------
Net............ 34.0 (57.7) (3.6) 0.7 (34.9) (61.5)
------- ------- ------- ------- ------- -------
Financing activities:
Proceeds from issuance
of long-term debt 146.7 5.0 -- -- -- 151.7
Repayment of long-term
debt............... (213.5) (15.2) (3.1) (0.2) -- (232.0)
Proceeds from loans
from affiliates..... -- 13.0 -- -- (13.0) --
Repayment of loans
from affiliates..... -- (37.6) (0.2) (9.5) 47.3 --
Debt issuance costs... -- -- -- -- -- --
Proceeds from stock
plans............. 17.9 -- -- -- -- 17.9
Stock repurchased.. -- -- -- -- -- --
Cash dividends paid (17.8) -- (22.5) -- 22.5 (17.8)
Other, net........ 2.6 8.9 (0.7) -- (10.0) 0.8
------- ------- ------- ------- ------- -------
Net............ (64.1) (25.9) (26.5) (9.7) 46.8 (79.4)
------- ------- ------- ------- ------- -------
Cash and equivalents:
Net increase(decrease) (0.1) 2.4 (10.2) (0.5) 9.1 0.7
At beginning of year 0.3 1.0 12.7 4.0 (13.1) 4.9
------- ------- ------- ------- ------- -------
At end of year.... $ 0.2 $ 3.4 $ 2.5 $ 3.5 $ (4.0) $ 5.6
Page 110
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Page 111
Part III
The Company has incorporated by reference certain responses to the Items of
this Part III pursuant to Rule 12b-23 under the Exchange Act and General
Instruction G(3) to Form 10-K. The Company's definitive proxy statement
for the annual meeting of stockholders scheduled for May 3, 2001 ("Proxy
Statement") will be filed no later than 120 days after December 31, 2000.
Item 10. Directors and Executive Officers of the Company
(a) Directors of the Company
The information set forth in response to Item 401 of Regulation S-K under
the heading "Proposal 1 - Election of Three Directors" and "The Board of
Directors" in the Company's Proxy Statement is incorporated herein by
reference in partial response to this Item 10.
(b) Executive Officers of the Company
The information set forth in response to Item 401 of Regulation S-K under
"Executive Officers of the Company," an unnumbered Item in Part I
(immediately following Item 4, Submission of Matters to a Vote of Security
Holders), of this Form 10-K is incorporated herein by reference in partial
response to this Item 10.
(c) Compliance with Section 16(a) of the Exchange Act
The information set forth in response to Item 405 of Regulation S-K under
the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's Proxy Statement is incorporated herein by reference in
partial response to this Item 10.
Item 11. Executive Compensation
The information set forth in response to Item 402 of Regulation S-K under
"Management Compensation" and "The Board of Directors -- Compensation of
Directors" in the Company's Proxy Statement, (other than the Compensation
and Organization Committee Report on Executive Compensation and the Stock
Performance Graph), is incorporated by reference in response to this Item
11.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth in response to Item 403 of Regulation S-K under
the heading "Principal Stockholders and Stock Owned Beneficially by
Directors and Certain Executive Officers" in the Company's Proxy Statement
is hereby incorporated by reference in response to this Item 12.
The Company has no knowledge of any arrangement the operation of which may
at a subsequent date result in a change of control of the Company.
Item 13. Certain Relationships and Related Transactions
The information set forth in response to Item 404 of Regulation S-K under
the heading "Certain Relationships and Related Transactions" in the
Company's Proxy Statement is incorporated by reference in response to this
Item 13.
Page 112
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of Documents filed as part of this Report
(1) Financial Statements
The financial statements and related notes, together with the report of
PricewaterhouseCoopers LLP dated March 22, 2001, appear in Part II Item 8,
Financial Statements and Supplementary Data, of this Form 10-K.
(2) Financial Statement Schedules
The schedules and exhibits for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission appear in
Part II Item 8, Financial Statements and Supplementary Data, under the
Index to Financial Statements of this Form 10-K.
(3) List of Exhibits
(a) Exhibits
The Company has incorporated by reference herein certain exhibits as
specified below pursuant to Rule 12b-32 under the Exchange Act.
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
(Inapplicable)
(3) Articles of Incorporation and Bylaws
Articles of Incorporation
3.1 Exhibit 3.1 to the Company's Registration Statement on Form S-4
originally filed January 25, 2001 (Commission File No. 333-54262), as
amended and declared effective on March 15, 2001 (the "S-4
Registration Statement"), Restated Certificate of Incorporation, as
amended, is hereby incorporated by reference as Exhibit 3.1
Bylaws
3.2 Exhibit 3.6 to the Company's Form 10-K for the fiscal year ended
December 31, 1998 (Commission File No. 1-4717), The Company's By-Laws,
as amended and restated September 17, 1998, is hereby incorporated by
reference as Exhibit 3.2
(4) Instruments Defining the Right of Security Holders, Including Indentures
4.1 The Fourth, Seventh, Eighth, Eleventh, Twelfth, Thirteenth,
Fourteenth, Fifteenth and Sixteenth paragraphs of Exhibit 3.1
hereto are incorporated by reference as Exhibit 4.1
4.2 Article I, Sections 1, 3 and 11 of Article II, Article V and Article
VIII of Exhibit 3.2 hereto are incorporated by reference as
Exhibit 4.2
Page 113
4.3 The Indenture, dated July 1, 1992 between the Company and The
Chase Manhattan Bank (the "1992 Indenture") which is attached as
Exhibit 4 to the Company's Shelf Registration of $300 million of Debt
Securities on Form S-3 filed June 19, 1992 (Commission File No.
33-47198) and as Exhibit 4(a) to the Company's Form S-3 filed March
29, 1993 (Commission File No. 33-60192) registering $200 million of
Debt Securities, is hereby incorporated by reference as Exhibit 4.3
4.3.1 Exhibit 4.5.1 to the Company's Form 10-K for the fiscal year
ended December 31, 1999 (Commission File No. 1-4717),
Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 7.875% Notes Due July 1, 2002
issued pursuant to the 1992 Indenture, is hereby incorporated
by reference as Exhibit 4.3.1
4.3.2 Exhibit 4.5.2 to the Company's Form 10-K for the fiscal year
ended December 31, 1999 (Commission File No. 1-4717),
Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 6.625% Notes Due March 1, 2005
issued pursuant to the 1992 Indenture, is hereby incorporated
by reference as Exhibit 4.3.2
4.3.3 Exhibit 4.5.3 to the Company's Form 10-K for the fiscal year
ended December 31, 1999 (Commission File No. 1-4717),
Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 8.8% Debentures Due July 1, 2022
issued pursuant to the 1992 Indenture, is hereby incorporated
by reference as Exhibit 4.3.3
4.3.4 Exhibit 4.5.4 to the Company's Form 10-K for the fiscal year
ended December 31, 1999 (Commission File No. 1-4717),
Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 7% Debentures Due December 15,
2025 issued pursuant to the 1992 Indenture, is hereby
incorporated by reference as Exhibit 4.3.4
4.4 Exhibit 99 to the Company's Form 8-A dated October 24, 1995
(Commission File No. 1-4717), which is the Stockholder Rights
Agreement by and between the Company and Harris Trust and Savings
Bank dated as of September 19, 1995, is hereby incorporated by
reference as Exhibit 4.4
4.5 Exhibit 4.1 to the Company's S-4 Registration Statement (Commission
File No.333-54262), the Indenture, dated as of September 27, 2000,
among the Company, The Kansas City Southern Railway Company
("KCSR"), certain other subsidiaries of the Company and The Bank
of New York, as trustee (the "2000 Indenture"), is hereby
incorporated by reference as Exhibit 4.5
4.5.1 Exhibit 4.1.1 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Supplemental Indenture, dated
as of January 29, 2001, to the 2000 Indenture, among the
Company, KCSR, certain other subsidiaries of the Company and
The Bank of New York, as trustee, is hereby incorporated by
reference as Exhibit 4.5.1
4.6 Form of Exchange Note (included as Exhibit B to Exhibit 4.5.1 hereto)
Page 114
4.7 Exhibit 4.3 to the Company's S-4 Registration Statement (Commission
File No. 333-54262), the Exchange and Registration Rights Agreement,
dated as of September 27, 2000, among the Company, KCSR,
certain other subsidiaries of the Company, is hereby
incorporated by reference as Exhibit 4.7
(9) Voting Trust Agreement
(Inapplicable)
(10) Material Contracts
10.1 Exhibit I to the Company's Form 10-K for the fiscal year ended
December 31, 1987 (Commission File No. 1-4717), The Director
Indemnification Agreement, is hereby incorporated by reference
as Exhibit 10.1
10.2 Exhibit B to the Company's Definitive Proxy Statement for 1987
Annual Stockholder Meeting dated April 6, 1987, The Director
Indemnification Agreement, is hereby incorporated by reference
as Exhibit 10.2
10.3 The 1992 Indenture (See Exhibit 4.3)
10.3.1 Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 7.875% Notes Due July 1, 2002 issued
pursuant to the 1992 Indenture (See Exhibit 4.3.1)
10.3.2Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 6.625% Notes Due March 1, 2005
issued pursuant to the 1992 Indenture (See Exhibit 4.3.2)
10.3.3Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 8.8% Debentures Due July 1, 2022
issued pursuant to the 1992 Indenture (See Exhibit 4.3.3)
10.3.4Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 7% Debentures Due December 15,
2025 issued pursuant to the 1992 Indenture (See Exhibit 4.3.4)
10.4 Exhibit H to the Company's Form 10-K for the fiscal year ended
December 31, 1987 (Commission File No. 1-4717), The Officer
Indemnification Agreement, is hereby incorporated by reference
as Exhibit 10.4
10.5 Exhibit 10.1 to the Company's Form 10-Q for the period ended
March 31, 1997 (Commission File No. 1-4717), The Kansas City
Southern Railway Company Directors' Deferred Fee Plan as
adopted August 20, 1982 and the amendment thereto effective
March 19, 1997 to such plan, is hereby incorporated by
reference as Exhibit 10.5
10.6 Exhibit 10.4 to the Company's Form 10-K for the fiscal year
ended December 31, 1990 (Commission File No. 1-4717),
Description of the Company's 1991 incentive compensation plan,
is hereby incorporated by reference as Exhibit 10.6
10.7 Exhibit 10.18 to the Company's Form 10-K for the year ended
December 31, 1996 (Commission File No. 1-4717), Directors
Deferred Fee Plan, adopted August 20, 1982, amended and
restated February 1, 1997, is hereby incorporated by reference
as Exhibit 10.7
Page 115
10.8 Exhibit 10.1 to the Company's Form 10-Q for the quarterly
period ended June 30, 1999 (Commission File No. 1-4717), Kansas
City Southern Industries, Inc. 1991 Amended and Restated Stock
Option and Performance Award Plan, as amended and restated
effective as of May 6, 1999, is hereby incorporated by
reference as Exhibit 10.8
10.9 Exhibit 10.8 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Tax Disaffiliation Agreement,
dated October 23, 1995, by and between the Company and DST
Systems, Inc., is hereby incorporated by reference as Exhibit
10.9
10.10 Exhibit 4.8 to the Company's Form S-8 filed on December 14,
2000 (Commission File No. 333-51854), the Kansas City Southern
Industries, Inc. 401(k) and Profit Sharing Plan, is hereby
incorporated by reference as Exhibit 10.10
10.11 Exhibit 10.10 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), the Assignment, Consent and
Acceptance Agreement, dated August 10, 1999, by and among the
Company, DST Systems, Inc. and Stilwell Financial, Inc., is
hereby incorporated by reference as Exhibit 10.11
10.12 Exhibit 10.15 to the Company's Form 10-K for the year ended
December 31, 1998 (Commission File No. 1-4717), Employment
Agreement, as amended and restated January 1, 1999, by and
among the Company, KCSR and Michael R. Haverty, is hereby
incorporated by reference as Exhibit 10.12
10.13 Exhibit 10.14 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Employment Agreement, dated
January 1, 1999, by and among the Company, KCSR and Gerald K.
Davies, is hereby incorporated by reference as Exhibit 10.13
10.14 Exhibit 10.15 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Employment Agreement, as
amended and restated January 1, 1999, by and among the Company,
Kansas City Southern Lines, Inc. and Robert H. Berry, is hereby
incorporated by reference as Exhibit 10.14
10.15 Exhibit 10.16 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Employment Agreement, as
amended and restated January 1, 1999, by and among the Company,
Kansas City Southern Lines, Inc. and Richard P. Bruening, is
hereby incorporated by reference as Exhibit 10.15
10.16 Exhibit 10.17 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Employment Agreement, as
amended and restated January 1, 1999, by and among the Company,
Kansas City Southern Lines, Inc. and Louis G. Van Horn, is
hereby incorporated by reference as Exhibit 10.16
10.17 Exhibit 10.18 to the Company's Form 10-K for the year ended
December 31, 1998 (Commission File No. 1-4717), Kansas City
Southern Industries, Inc. Executive Plan, as amended and
restated effective November 17, 1998, is hereby incorporated by
reference as Exhibit 10.17
Page 116
10.18 Exhibit 10.19 to the Company's Form 10-K/A for the year ended
December 31, 1998 (Commission File No. 1-4717), Stock Purchase
Agreement, dated April 13, 1984, by and among Kansas City
Southern Industries, Inc., Thomas H. Bailey, William C. Mangus,
Bernard E. Niedermeyer III, Michael Stolper, and Jack R.
Thompson is hereby incorporated by reference as Exhibit 10.18
10.18.1 Exhibit 10.19.1
to the Company's Form 10-K/A for the year ended December 31,
1998 (Commission File No. 1-4717), Amendment to Stock Purchase
Agreement, dated January 4, 1985, by and among Kansas City
Southern Industries, Inc., Thomas H. Bailey, Bernard E.
Niedermeyer III, Michael Stolper, and Jack R. Thompson is
hereby incorporated by reference as Exhibit 10.18.1
10.18.2 Exhibit 10.19.2
to the Company's Form 10-K/A for the year ended December 31,
1998 (Commission File No. 1-4717), Second Amendment to Stock
Purchase Agreement, dated March 18, 1988, by and among Kansas
City Southern Industries, Inc., Thomas H. Bailey, Michael
Stolper, and Jack R. Thompson is hereby incorporated by
reference as Exhibit 10.18.2
10.18.3 Exhibit 10.19.3
to the Company's Form 10-K/A for the year ended December 31,
1998 (Commission File No. 1-4717), Third Amendment to Stock
Purchase Agreement, dated February 5, 1990, by and among Kansas
City Southern Industries, Inc., Thomas H. Bailey, Michael
Stolper, and Jack R. Thompson is hereby incorporated by
reference as Exhibit 10.18.3
10.18.4 Exhibit 10.19.4
to the Company's Form 10-K/A for the year ended December 31,
1998 (Commission File No. 1-4717), Fourth Amendment to Stock
Purchase Agreement, dated January 1, 1991, by and among Kansas
City Southern Industries, Inc., Thomas H. Bailey, Michael
Stolper, and Jack R. Thompson is hereby incorporated by
reference as Exhibit 10.18.4
10.18.5 Exhibit 10.19.5
to the Company's Form 10-K/A for the year ended December 31,
1998 (Commission File No. 1-4717), Assignment and Assumption
Agreement and Fifth Amendment to Stock Purchase Agreement,
dated November 19, 1999, by and among Kansas City Southern
Industries, Inc., Stilwell Financial, Inc., Thomas H. Bailey
and Michael Stolper is hereby incorporated by reference as
Exhibit 10.18.5
10.19 Exhibit 10.19 to the Company's Form 10-K for the year ended
December 31, 1999 (Commission File No. 1-4717), Credit
Agreement dated as of January 11, 2000 among Kansas City
Southern Industries, Inc., The Kansas City Southern Railway
Company and the lenders named therein (the "Credit Agreement"),
is hereby incorporated by reference as Exhibit 10.19
10.19.1 Exhibit 10.20.1
to the Company's S-4 Registration Statement (Commission File
No. 333-54262), First Amendment to the Credit Agreement, dated
as of June 30, 2000, among the Company, KCSR, the lenders
parties thereto and The Chase Manhattan Bank, as administrative
agent, collateral agent, issuing bank and swingline lender, is
hereby incorporated by reference as Exhibit 10.19.1
10.20 Exhibit 10.20 to Company's Form 10-K for the year ended
December 31, 1999 (Commission File No. 1-4717), 364-day
Competitive Advance and Revolving Credit Facility Agreement
dated as of January 11, 2000 among Kansas City Southern
Industries, Inc. and the lenders named therein (the "Revolving
Credit Facility"), is hereby incorporated by reference as
Exhibit 10.20
Page 117
10.21 Exhibit 10.21 to Company's Form 10-K for the year ended
December 31, 1999 (Commission File No. 1-4717), Assignment,
Assumption and Amendment Agreement dated as of January 11,
2000, among Kansas City Southern Industries, Inc., Stilwell
Financial, Inc. and The Chase Manhattan Bank, as agent for the
lenders named in the Revolving Credit Facility, is hereby
incorporated by reference as Exhibit 10.21
10.22 The 2000 Indenture (See Exhibit 4.5)
10.23 Supplemental Indenture, dated as of January 29, 2001, to the
2000 Indenture (See Exhibit 4.5.1)
10.24 Exhibit 10.23 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Intercompany Agreement, dated
as of August 16, 1999, between the Company and Stilwell
Financial Inc., is hereby incorporated by reference as Exhibit
10.24
10.25 Exhibit 10.24 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Tax Disaffiliation Agreement,
dated as of August 16, 1999, between the Company and Stilwell
Financial Inc., is hereby incorporated by reference as Exhibit
10.25
10.26 Exhibit 10.25 to the Company's S-4 Registration Statement
(Commission File No. 333- 54262), Pledge Agreement, dated as of
January 11, 2000, among the Company, KCSR, the subsidiary
pledgors party thereto and The Chase Manhattan Bank, as
Collateral Agent (the "Pledge Agreement"), is hereby
incorporated by reference as Exhibit 10.26
10.27 Exhibit 10.26 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Guarantee Agreement, dated as
of January 11, 2000, among the Company, the subsidiary
guarantors party thereto and The Chase Manhattan Bank, as
Collateral Agent (the "Guarantee Agreement"), is hereby
incorporated by reference as Exhibit 10.27
10.28 Exhibit 10.27 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Security Agreement, dated as
of January 11, 2000, among the Company, KCSR, the subsidiary
guarantors party thereto and The Chase Manhattan Bank, as
Collateral Agent (the "Security Agreement"), is hereby
incorporated by reference as Exhibit 10.28
10.29 Exhibit 10.28 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Indemnity, Subrogation and
Contribution Agreement, dated as of January 11, 2000, among the
Company, KCSR, the subsidiary guarantors party thereto and The
Chase Manhattan Bank, as Collateral Agent (the "Indemnity,
Subrogation and Contribution Agreement"), is hereby
incorporated by reference as Exhibit 10.29
10.30 Exhibit 10.29 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Supplement No. 1, dated as of
January 29, 2001, to the Pledge Agreement, among PABTEX GP,
LLC, SIS Bulk Holding, Inc. and The Chase Manhattan Bank, as
Collateral Agent, is hereby incorporated by reference as
Exhibit 10.30
Page 118
10.31 Exhibit 10.30 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Supplement No. 1, dated as of
January 29, 2001, to the Guarantee Agreement, among PABTEX GP,
LLC, SIS Bulk Holding, Inc. and The Chase Manhattan Bank, as
Collateral Agent, is hereby incorporated by reference as
Exhibit 10.31
10.32 Exhibit 10.31 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Supplement No. 1, dated as of
January 29, 2001, to the Security Agreement, among PABTEX GP,
LLC, SIS Bulk Holding, Inc. and The Chase Manhattan Bank, as
Collateral Agent, is hereby incorporated by reference as
Exhibit 10.32
10.33 Exhibit 10.32 to the Company's S-4 Registration Statement
(Commission File No. 333-54262), Supplement No. 1, dated as of
January 29, 2001, to the Indemnity, Subrogation and
Contribution Agreement, among PABTEX GP, LLC, SIS Bulk Holding,
Inc. and The Chase Manhattan Bank, as Collateral Agent, is
hereby incorporated by reference as Exhibit 10.33
(11) Statement Re Computation of Per Share Earnings
(Inapplicable)
(12) Statements Re Computation of Ratios
12.1 The Computation of Ratio of Earnings to Fixed Charges prepared
pursuant to Item 601(b)(12) of Regulation S-K is attached to
this Form 10-K as Exhibit 12.1
(13) Annual Report to Security Holders, Form 10-Q or Quarterly Report to
Security Holders
(Inapplicable)
(16) Letter Re Change in Certifying Accountant
(Inapplicable)
(18) Letter Re Change in Accounting Principles
(Inapplicable)
(21) Subsidiaries of the Company
21.1 The list of the Subsidiaries of the Company prepared pursuant
to Item 601(b)(21) of Regulation S-K is attached to this Form
10-K as Exhibit 21.1
(22) Published Report Regarding Matters Submitted to Vote of Security
Holders (Inapplicable)
(23) Consents of Experts and Counsel
23.1 The Consent of Independent Accountants prepared pursuant to
Item 601(b)(23) of Regulation S-K is attached to this Form 10-K
as Exhibit 23.1
(24) Power of Attorney
(Inapplicable)
(28) Information from Reports Furnished to State Insurance Regulatory
Authorities (Inapplicable)
Page 119
(99) Additional Exhibits
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on October 4, 2000,
under Item 5 of such form, reporting the announcement of the
completion of a previously announced $200 million debt securities
private offering.
The Company furnished a Current Report on Form 8-K dated October 25,
2000 reporting its third quarter and year to date 2000 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 January 24,
2001 reporting its fourth quarter and year to date 2000 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/A dated January 24,
2001 revising its reported fourth quarter and year to date 2000
operating results. The information included in this Current Report
on Form 8-K was furnished pursuant to Item 9 and shall not be deemed
to be filed.
Page 120
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Kansas City Southern Industries, Inc.
March 23, 2001 By: /s/ M.R. Haverty
M.R. Haverty
Chairman, President,
Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Company and in the capacities indicated on March 23, 2001.
Signature Capacity
/s/ M.R. Haverty Chairman, President, Chief Executive
M.R. Haverty Officer and Director
/s/ G.K. Davies Executive Vice President
G.K Davies
/s/ R.H. Berry Senior Vice President and Chief
R.H. Berry Financial Officer (Principal Financial
Officer)
/s/ L.G. Van Horn Vice President and Comptroller
L.G. Van Horn (Principal Accounting Officer)
/s/ A.E. Allinson Director
A.E. Allinson
/s/ M.G. Fitt Director
M.G. Fitt
/s/ J.R. Jones Director
J.R. Jones
/s/ L.H. Rowland Director
L.H. Rowland
/s/ B.G. Thompson Director
B.G. Thompson
Page 121
KANSAS CITY SOUTHERN INDUSTRIES, INC.
2000 FORM 10-K ANNUAL REPORT
INDEX TO EXHIBITS
Regulation S-K
Exhibit Item 601(b)
No. Document Exhibit No.
12.1 Computation of Ratio of Earnings to Fixed Charges 12
21.1 Subsidiaries of the Company 21
23.1 Consent of Independent Accountants 23
Page 122