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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number 1-4717
KANSAS CITY SOUTHERN
(Exact name of Company as specified in its charter)
DELAWARE 44-0663509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
427 WEST 12TH STREET, KANSAS CITY, MISSOURI 64105
(Address of principal executive offices) (Zip Code)
(816) 983-1303
(Company's telephone number, including area code)
NO CHANGES
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JULY 31, 2002
- --------------------------------------------------------------------------------
COMMON STOCK, $.01 PER SHARE PAR VALUE 60,328,300 SHARES
- --------------------------------------------------------------------------------
KANSAS CITY SOUTHERN
FORM 10-Q
JUNE 30, 2002
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Introductory Comments 2
Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001 3
Consolidated Statements of Income -
Three and Six Months Ended June 30, 2002 and 2001 4
Computation of Basic and Diluted Earnings per Common Share 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2002 and 2001 5
Consolidated Statement of Changes in Stockholders' Equity -
Six Months Ended June 30, 2002 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK 27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
SIGNATURES 28
- ----------
KANSAS CITY SOUTHERN
FORM 10-Q
JUNE 30, 2002
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTRODUCTORY COMMENTS
The Consolidated Financial Statements included herein have been prepared by
Kansas City Southern ("Company" or "KCS"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to enable a
reasonable understanding of the information presented. These Consolidated
Financial Statements should be read in conjunction with the financial statements
and the notes thereto, as well as Management's Discussion and Analysis of
Financial Condition and Results of Operations, included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001 (as amended), and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this Form 10-Q. Results for the three and six months
ended June 30, 2002 are not necessarily indicative of the results expected for
the full year 2002.
KANSAS CITY SOUTHERN
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
June 30, December 31,
2002 2001
------------------ ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 23.5 $ 24.7
Accounts receivable, net 131.5 130.0
Inventories 30.6 27.9
Other current assets 36.1 71.8
------------------ ------------------
Total current assets 221.7 254.4
------------------ ------------------
Investments 394.7 386.8
Properties (net of $682.9 and $660.2 accumulated
depreciation and amortization, respectively) 1,329.9 1,327.4
Goodwill 10.8 19.3
Other assets 22.4 23.0
------------------ ------------------
Total assets $ 1,979.5 $ 2,010.9
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year $ 10.3 $ 46.7
Accounts and wages payable 43.4 50.4
Accrued liabilities 161.9 160.4
------------------ ------------------
Total current liabilities 215.6 257.5
------------------ ------------------
Other Liabilities
Long-term debt 584.7 611.7
Deferred income taxes 368.0 370.2
Other deferred credits 98.5 91.2
------------------ ------------------
Total other liabilities 1,051.2 1,073.1
------------------ ------------------
Stockholders' Equity
Preferred stock 6.1 6.1
Common stock 0.6 0.6
Retained earnings 709.2 676.5
Accumulated other comprehensive loss (3.2) (2.9)
------------------ ------------------
Total stockholders' equity 712.7 680.3
------------------ ------------------
Total liabilities and stockholders' equity $ 1,979.5 $ 2,010.9
================== ==================
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------------- ----------------------------------
2002 2001 2002 2001
---------------- ----------------- ----------------- ----------------
Revenues $ 137.9 $ 143.2 $ 280.4 $ 287.2
Costs and expenses
Compensation and benefits 46.5 47.6 95.9 96.7
Depreciation and amortization 14.6 14.5 29.5 28.9
Purchased services 13.6 14.4 27.6 26.4
Operating leases 12.6 12.7 24.7 25.5
Fuel 9.3 11.4 18.8 23.8
Casualties and insurance 7.2 7.7 15.1 22.3
Car hire 4.1 5.7 9.3 12.2
Other 15.5 16.3 31.6 32.4
---------------- ----------------- ----------------- ----------------
Total costs and expenses 123.4 130.3 252.5 268.2
Operating income 14.5 12.9 27.9 19.0
Equity in net earnings (losses) of unconsolidated
affiliates:
Grupo Transportacion Ferroviaria Mexicana, S.A.
de C.V. 13.0 4.9 17.8 16.0
Other (1.3) 0.3 (1.2) 0.4
Gain on sale of Mexrail, Inc. - - 4.4 -
Interest expense (10.5) (14.5) (21.8) (29.7)
Other income 4.4 1.1 8.8 2.1
---------------- ----------------- ----------------- ----------------
Income before income taxes, extraordinary item and
cumulative effect of accounting changes 20.1 4.7 35.9 7.8
Income tax provision (benefit) 2.9 - 7.0 (3.2)
---------------- ----------------- ----------------- ----------------
Income before extraordinary item and cumulative effect
of accounting change 17.2 4.7 28.9 11.0
Extraordinary item, net of income taxes (2.7) - (2.7) -
Cumulative effect of accounting change, net of income taxes - - - (0.4)
---------------- ----------------- ----------------- ----------------
Net income $ 14.5 $ 4.7 $ 26.2 $ 10.6
================ ================= ================= ================
PER SHARE DATA
Basic earnings per Common share
Income before extraordinary item and cumulative effect
of accounting change $ 0.28 $ 0.08 $ 0.48 $ 0.19
Extraordinary item, net of income taxes (0.04 ) - (0.04) -
Cumulative effect of accounting change, net of income
taxes - - - (0.01)
---------------- ----------------- ----------------- ----------------
Total basic earnings per Common share $ 0.24 $ 0.08 $ 0.44 $ 0.18
================ ================= ================= ================
Diluted earnings per Common share
Income before extraordinary item and cumulative effect
of accounting change $ 0.27 $ 0.08 $ 0.46 $ 0.18
Extraordinary item, net of income taxes (0.04 ) - (0.04)
Cumulative effect of accounting change, net of income
taxes - - - (0.01)
---------------- ----------------- ----------------- ----------------
Total diluted earnings per Common share $ 0.23 $ 0.08 $ 0.42 $ 0.17
================ ================= ================= ================
Weighted average Common shares outstanding (in thousands)
Basic 60,095 58,380 59,918 58,321
Potential dilutive common shares 2,232 2,536 2,148 2,528
---------------- ----------------- ----------------- ----------------
Diluted 62,327 60,916 62,066 60,849
Dividends per Preferred share $ 0.25 $ 0.25 $ 0.50 $ 0.50
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
Six Months
Ended June 30,
---------------------------------------
2002 2001
------------------ ------------------
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 26.2 $ 10.6
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 29.5 28.9
Deferred income taxes (1.1) 9.5
Equity in undistributed earnings of unconsolidated affiliates (16.6) (16.4)
Distributions from unconsolidated affiliates - 3.0
Gain on sale of Mexrail, Inc. (4.4) -
Gain on sale of property (8.9) (3.1)
Tax benefit realized upon exercise of stock options 1.0 3.4
Changes in working capital items
Accounts receivable (2.4) (1.3)
Inventories (2.7) 4.3
Other current assets 34.6 5.2
Accounts and wages payable (8.8) (6.9)
Accrued liabilities 5.2 (19.2)
Other, net 9.0 (3.2)
------------------ ------------------
Net cash provided by operating activities 60.6 14.8
------------------ ------------------
INVESTING ACTIVITIES:
Property acquisitions (39.1) (27.0)
Proceeds from disposal of property 16.1 6.2
Investment in and loans to affiliates (3.5) (5.5)
Proceeds from sale of Mexrail, Inc. 31.4 -
Other, net 1.1 (1.5)
------------------ ------------------
Net cash provided by (used for) investing activities 6.0 (27.8)
------------------ ------------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 200.0 30.0
Repayment of long-term debt (263.4) (18.2)
Debt issuance costs (5.4) -
Proceeds from stock plans 3.7 1.6
Cash dividends paid (0.1) (0.1)
Other, net (2.6) (3.2)
------------------ ------------------
Net cash provided by (used for) financing activities (67.8) 10.1
------------------ ------------------
CASH AND CASH EQUIVALENTS:
Net decrease in cash and cash equivalents (1.2) (2.9)
At beginning of year 24.7 21.5
------------------ ------------------
At end of period $ 23.5 $ 18.6
================== ==================
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
Accumulated
$25 Par $.01 Par other
Preferred Common Retained comprehensive
stock Stock Earnings income (loss) Total
------------------ --------------- ----------------- ---------------- -----------------
Balance at December 31, 2001 $ 6.1 $ 0.6 $ 676.5 $ (2.9) $ 680.3
Comprehensive income:
Net income 26.2
Change in fair value of cash flow
hedge (0.3)
Comprehensive income 25.9
Dividends (0.1) (0.1)
Options exercised and stock subscribed 6.6 6.6
------------------ --------------- ----------------- ---------------- -----------------
Balance at June 30, 2002 $ 6.1 $ 0.6 $ 709.2 $ (3.2) $ 712.7
================== =============== ================= ================ =================
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND INTERIM FINANCIAL STATEMENTS. In the opinion of the
management of Kansas City Southern ("Company" or "KCS"), the accompanying
unaudited consolidated financial statements contain all adjustments (consisting
of normal closing procedures) necessary to present fairly the financial position
of the Company and its subsidiary companies as of June 30, 2002 and December 31,
2001, the results of its operations for the three months and six months ended
June 30, 2002 and 2001, its cash flows for the six months ended June 30, 2002
and 2001, and its changes in stockholders' equity for the six months ended June
30, 2002. The accompanying consolidated financial statements have been prepared
consistently with accounting policies described in Note 2 to the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001 (as amended). The results of operations for the
three and six month periods ended June 30, 2002 are not necessarily indicative
of the results to be expected for the full year 2002. Certain comparative prior
year amounts in the consolidated financial statements have been reclassified to
conform to the current period presentation.
2. EARNINGS PER SHARE DATA. The effect of stock options to employees represent
the only difference between the weighted average shares used for the basic
earnings per share computation compared to the diluted earnings per share
computation. The following is a reconciliation from the weighted average shares
used for the basic earnings per share computation and the diluted earnings per
share computation for the three and six months ended June 30, 2002 and 2001,
respectively (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- --------------------------
2002 2001 2002 2001
------------- ------------ ------------ ------------
Basic shares 60,095 58,380 59,918 58,321
Effect of dilution: Stock options 2,232 2,536 2,148 2,528
------------- ------------ ------------ ------------
Diluted shares 62,327 60,916 62,066 60,849
============= ============ ============ ============
Shares excluded from diluted computation 55 20 38 27
------------- ------------ ------------ ------------
Shares were excluded from the applicable periods diluted earnings per share
computation because the exercise prices were greater than the average market
price of the common shares. Preferred dividends are the only adjustments that
affect the numerator of the diluted earnings per share computation. Adjustments
related to preferred dividends were not material for the periods presented.
3. INVESTMENTS. Investments in unconsolidated affiliates and certain other
investments accounted for under the equity method generally include all entities
in which the Company or its subsidiaries have significant influence, but not
more than 50% voting control. Investments in unconsolidated affiliates at June
30, 2002 include, among others, equity interests in Grupo Transportacion
Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), Southern Capital Corporation,
LLC ("Southern Capital"), and the Panama Canal Railway Company ("PCRC").
The Company, our Mexican partner, Grupo TMM, S.A. de C.V. ("Grupo TMM"), and
certain of Grupo TMM's affiliates entered into an agreement on February 27, 2002
with TFM, S.A. de C.V. ("TFM") to sell to TFM all of the common stock of
Mexrail, Inc., ("Mexrail") a former 49% unconsolidated affiliate of the Company.
Mexrail owns the northern half of the international railway bridge at Laredo and
all of the common stock of The Texas-Mexican Railway Company ("Tex Mex"). The
sale closed on March 27, 2002 and the Company received approximately $31.4
million for its 49% interest in Mexrail. The Company used the proceeds from the
sale to reduce debt. Although the Company no longer directly owns 49% of
Mexrail, it retains an indirect ownership through its ownership of Grupo TFM.
The proceeds from the sale of Mexrail to TFM exceeded the carrying value of the
Company's investment in Mexrail by $11.2 million. The Company recognized a $4.4
million gain on the sale of Mexrail to TFM in the first quarter of 2002, while
the remaining $6.8 of excess proceeds has been deferred.
Following the purchase of the Mexican government's 24.6% interest in Grupo TFM
as discussed in note 9 below, KCS owns approximately 46.6% of Grupo TFM while
Grupo TMM (together with certain of its affiliates) owns approximately 48.5% of
Grupo TFM. The Mexican government owns an effective interest of 4.9% in Grupo
TFM due to its 20% interest
in TFM, which purchased the Grupo TFM shares from the Mexican government. The
Company is party to certain agreements with Grupo TMM covering the Grupo TFM
joint venture. These agreements contain "change in control" provisions,
provisions intended to preserve the Company's and Grupo TMM's proportionate
ownership of the joint venture, and super majority provisions with respect to
voting on certain significant transactions. Such agreements also provide a right
of first refusal in the event that either party initiates a divestiture of its
equity interest in Grupo TFM. Under certain circumstances, such agreements could
affect the Company's ownership percentage and rights in these equity affiliates.
Condensed financial information of certain unconsolidated affiliates is shown
below. All amounts, including those for Grupo TFM, are presented under
accounting principles generally accepted in the United States of America ("U.S.
GAAP"). Mexrail financial results were consolidated into the accounts of Grupo
TFM effective April 1, 2002 and are not presented separately . Financial
information of immaterial unconsolidated affiliates has been omitted:
FINANCIAL CONDITION (DOLLARS IN MILLIONS):
June 30, 2002 December 31, 2001
------------------------------- ---------------------------------------------
Southern Southern
PCRC Grupo TFM Capital Mexrail PCRC Grupo TFM Capital
-------- ------------ --------- ---------- --------- ------------- ----------
Current assets $ 7.8 $ 447.0 $ 8.2 $ 34.9 $ 3.6 $ 294.3 $ 2.5
Non-current assets 88.1 2,052.4 146.3 59.3 85.5 1,924.3 240.6
-------- ------------ --------- ---------- --------- ------------- ----------
Assets $ 95.9 $ 2,499.4 $ 154.5 $ 94.2 $ 89.1 $ 2,218.6 $ 243.1
======== ============ ========= ========== ========= ============= ==========
Current liabilities $ 7.6 $ 377.9 $ 0.1 $ 42.8 $ 10.8 $ 350.8 $ 196.6
Non-current liabilities 69.1 808.2 107.4 27.5 55.3 593.8 -
Minority interest - 383.9 - - - 376.3 -
Equity of stockholders and partners 19.2 929.4 47.0 23.9 23.0 897.7 46.5
-------- ---------------------- ---------- --------- ------------- ----------
Liabilities and equity $ 95.9 $ 2,499.4 $ 154.5 $ 94.2 $ 89.1 $ 2,218.6 $ 243.1
======== ============ ========= ========== ========= ============= ==========
KCS's investment $ 15.7 $ 349.4 $ 23.5 $ 11.7 $ 13.9 $ 334.4 $ 23.2
-------- ------------ --------- ---------- --------- ------------- ----------
OPERATING RESULTS (DOLLARS IN MILLIONS):
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues:
Mexrail $ - $ 14.5 $ 13.3 $ 29.1
PCRC 0.6 - 1.6 -
Grupo TFM 186.3 171.9 343.8 327.9
Southern Capital 7.5 7.5 15.0 15.1
Operating costs and expenses:
Mexrail $ - $ 15.3 $ 13.3 $ 30.6
PCRC 3.1 0.5 6.0 0.9
Grupo TFM 130.2 129.2 252.2 199.5
Southern Capital 6.4 6.5 12.1 13.2
Net income (loss):
Mexrail $ - $ (0.5) $ 0.0 $ (0.8)
PCRC (2.0) (0.3) (3.8) (0.3)
Grupo TFM 35.0 13.3 48.0 43.5
Southern Capital (0.7) 1.1 1.2 2.0
4. NONCASH INVESTING AND FINANCING ACTIVITIES. The Company initiated the
Thirteenth Offering of KCS common stock under the Employee Stock Purchase Plan
("ESPP") during 2001. Stock subscribed under the Thirteenth Offering will be
issued to employees in 2003 and is being paid for through employee payroll
deductions in 2002. During the first six months of 2002, the Company has
received approximately $1.9 million from payroll deductions associated with the
Thirteenth Offering of the ESPP. In the first quarter of 2002, the Company
issued approximately 611,107 shares of KCS common stock under the Twelfth
Offering of the ESPP. These shares, totaling a purchase price of approximately
$4.5 million, were subscribed and paid for through employee payroll deductions
in 2001. During the first quarter of 2001, the Company received approximately
$1.0 million associated with the Twelfth Offering of the ESPP.
5. DERIVATIVE FINANCIAL INSTRUMENTS. The Company adopted the provisions of
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") effective January 1, 2001. As a
result of this change in the method of accounting for derivative financial
instruments, the Company recorded an after-tax charge to earnings of $0.4
million in the first quarter of 2001. This charge is presented as a cumulative
effect of an accounting change in the accompanying consolidated financial
statements and represents the ineffective portion of interest rate cap
agreements that the Company held at the time of adoption of SFAS 133. These
interest rate cap agreements, which expired during the first quarter of 2002,
had a fair value of approximately zero at December 31, 2001 and were completely
charged off during 2001. During the six months ended June 30, 2002, the Company
did not record any adjustments to income for derivative transactions. The
Company does not currently have any derivative financial instruments
outstanding.
In addition, the Company records adjustments to its stockholders' equity
(accumulated other comprehensive income (loss)) for its portion of the
adjustment to the fair value of interest rate swap transactions to which
Southern Capital, a 50% owned unconsolidated affiliate, is a participant. The
Company also adjusts its investment in Southern Capital by the change in the
fair value of these derivative instruments. During the six months ended June 30,
2002, the Company recorded comprehensive income (loss) of ($0.3) million related
to an adjustment to the fair value of interest rate swap transactions of
Southern Capital.
In conjunction with the refinancing transaction discussed below in note 7,
Southern Capital terminated these interest rate swap transactions. As a result,
Southern Capital will amortize the balance of accumulated other comprehensive
income (loss) into interest expense over the former remaining life of the
interest rate swap transactions. This charge will impact Southern Capital's
interest expense by approximately $1.3 million in 2002, $2.4 million in 2003 and
$0.9 million in each of 2004, 2005 and 2006. The Company will realize the impact
of this charge through a related reduction in equity earnings from Southern
Capital and will amortize its balance in accumulated other comprehensive income
(loss) to its investment in Southern Capital.
6. IMPLEMENTATION OF NEW TRANSPORTATION COMPUTER SYSTEM. On July 14, 2002, the
Company implemented its new Management Control System ("MCS") on The Kansas City
Southern Railway Company ("KCSR"). This state-of-the-art system is designed to
provide better analytical tools for management to use in its decision-making
processes. MCS, among other things, provides tracking of individual shipments
across our rail system and compares that movement to the service sold to the
customer. If a shipment falls behind schedule, MCS automatically generates
alerts and action recommendations. The Company's depreciation expense is
expected to increase by approximately $4.8 million per annum ($2.4 million in
2002) as a result of the implementation of MCS.
7. DEBT REFINANCING. During the second quarter of 2002, the Company was party
to several debt refinancing transactions as described below.
SENIOR NOTES
On June 12, 2002, KCSR issued $200 million of 7 1/2% senior notes due June 15,
2009 ("7 1/2% Notes") through a private offering pursuant to Rule 144A under the
Securities Act of 1933 in the United States and Regulation S outside the United
States ("Note Offering"). The 7 1/2% Notes bear a fixed annual interest rate to
be paid semi-annually on June 15 and December 15. These notes are general
unsecured obligations of KCSR, are guaranteed by the Company and certain of its
subsidiaries and contain certain covenants and restrictions customary for this
type of debt instrument and for borrowers with similar credit ratings.
Net proceeds from the Note Offering of $195.8 million, together with cash, were
used to repay term debt under the Company's senior secured credit facility ("KCS
Credit Facility") and certain other secured indebtedness of the Company. Debt
issuance costs related to the Note Offering of approximately $4.3 million were
deferred and are being amortized over the seven-year term of the 7 1/2% Notes.
See "New Credit Agreement" below.
NEW CREDIT AGREEMENT
On June 12, 2002, in conjunction with the repayment of certain of the term loans
under the KCS Credit Facility using the net proceeds received from the Note
Offering, the Company amended and restated the KCS Credit Facility (the amended
and restated credit agreement is referred to as the New Credit Agreement
herein). The New Credit Agreement provides KCSR with a $150 million term loan
("Tranche B term loan"), which matures on June 12, 2008, and a $100 million
revolving credit facility ("Revolver"), which matures on January 11, 2006.
Letters of credit are also available under the Revolver up to a limit of $15
million. The proceeds from future borrowings under the Revolver may be used for
working capital and for general corporate purposes. The letters of credit may be
used for general corporate purposes. Borrowings under the New Credit Agreement
are secured by substantially all of the Company's assets and are guaranteed by
the majority of its subsidiaries.
The Tranche B term loan and the Revolver bear interest at the London Interbank
Offered Rate ("LIBOR") or an alternate base rate, as the Company shall select,
plus an applicable margin. The applicable margin for the Tranche B term loan is
2% for LIBOR borrowings and 1% for alternate base rate borrowings. The
applicable margin for the Revolver is based on the Company's leverage ratio
(defined as the ratio of the Company's total debt to consolidated EBITDA
(earnings before interest, taxes, depreciation and amortization, excluding the
undistributed earnings of unconsolidated affiliates) for the prior four fiscal
quarters). Based on the Company's leverage ratio as of June 30, 2002, the
applicable margin was 2.25% per annum for LIBOR borrowings and 1.25% per annum
for alternate base rate borrowings.
The New Credit Agreement also requires the payment to the lenders of a
commitment fee of 0.50% per annum on the average daily, unused amount of the
Revolver and Tranche B term loan. Additionally, a fee equal to a per annum rate
of 0.25% plus the applicable margin for LIBOR priced borrowings under the
Revolver will be paid on any letter of credit issued under the Revolver.
The New Credit Agreement contains certain provisions, covenants and restrictions
customary for this type of debt and for borrowers with a similar credit rating.
These provisions include, among others, restrictions on the Company's ability
and its subsidiaries ability to 1) incur additional debt or liens; 2) enter into
sale and leaseback transactions; 3) merge or consolidate with another entity; 4)
sell assets; 5) enter into certain transactions with affiliates; 6) make
investments, loans, advances, guarantees or acquisitions; 7) make certain
restricted payments, including dividends, or make certain payments on other
indebtedness; or 8) make capital expenditures. In addition, the Company is
required to comply with certain financial ratios, including minimum interest
expense coverage and leverage ratios. The New Credit Agreement also contains
certain customary events of default. These covenants, along with other
provisions, could restrict maximum utilization of the Revolver.
Debt issuance costs related to the New Credit Agreement of approximately $1.1
million were deferred and are being amortized over the respective term of the
loans. Extraordinary debt retirement costs associated with the prepayment of
certain term loans under the KCS Credit Facility using proceeds from the Note
Offering were approximately $4.3 million ($2.7 million, net of income taxes).
SOUTHERN CAPITAL
On June 25, 2002, Southern Capital refinanced the outstanding balance of its
one-year bridge loan through the issuance of approximately $167.6 million of
pass through trust certificates and the sale of 50 locomotives. The pass through
trust certificates are secured by the sold locomotives, all of the remaining
locomotives and rolling stock owned by Southern Capital and rental payments
payable by KCSR under the sublease of the sold locomotives and its leases of the
equipment owned by Southern Capital. Payments of interest and principal of the
pass through trust certificates, which are due semi-annually on June 30 and
December 30 commencing on December 30, 2002 and ending on June 30, 2022, are
insured under a financial guarantee insurance policy by MBIA Insurance
Corporation. KCSR leases or subleases all of the equipment securing the pass
through trust certificates.
8. COMMITMENTS AND CONTINGENCIES. The Company has had no significant changes in
its outstanding litigation or other commitments and contingencies from that
previously reported in Note 11 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2001 in the Notes to Consolidated Financial
Statements. The following provides an update of the Bogalusa cases.
BOGALUSA CASES. In July 1996, KCSR was named as one of twenty-seven defendants
in various lawsuits in Louisiana and Mississippi arising from the explosion of a
rail car loaded with chemicals in Bogalusa, Louisiana on October 23, 1995. As a
result of the explosion, nitrogen dioxide and oxides of nitrogen were released
into the atmosphere over parts of that town and the surrounding area allegedly
causing evacuations and injuries. Approximately 25,000 residents of Louisiana
and Mississippi (plaintiffs) have asserted claims to recover damages allegedly
caused by exposure to the released chemicals. On October 29, 2001, KCSR and
representatives for its excess insurance carriers negotiated a settlement in
principle with the plaintiffs for $22.3 million. The settlement was finalized
with the execution of a Master Global Settlement Agreement
("MSGA") in early 2002. On April 1, 2002, the first payment of approximately
$11.1 million was made under the terms of the MSGA, reducing the liability at
June 30, 2002 to approximately $11.2 million. An additional payment of $8.0
million was made on July 1, 2002, leaving a remaining liability of $3.0 million.
The final payment of $3.0 million is expected to occur on October 1, 2002. The
Company also has recorded an insurance receivable of $11.2 million at June 30,
2002 related to the Bogalusa cases.
9. PURCHASE OF MEXICAN GOVERNMENT'S OWNERSHIP OF GRUPO TFM. KCS and Grupo TMM
have exercised their call option and, on July 29, 2002, completed the purchase
of the Mexican government's 24.6% ownership of Grupo TFM. The Mexican
government's ownership interest of Grupo TFM was purchased by TFM for a purchase
price of $256.1 million, utilizing a combination of proceeds from an offering by
TFM of debt securities, a credit from the Mexican government for the reversion
of certain rail facilities and other resources. This transaction results in an
increase in the Company's ownership percentage of Grupo TFM from 36.9% to
approximately 46.6%.
10. NEW ACCOUNTING PRONOUNCEMENT. Effective January 1, 2002, the Company
implemented Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 142 provides, among other things,
that goodwill with an indefinite life shall no longer be amortized, but shall be
evaluated for impairment on an annual basis. SFAS 142 also requires separate
presentation of goodwill on the balance sheet and impairment losses are to be
shown as a separate item on the income statement. Additionally, changes in the
carrying amount of goodwill should be disclosed in the footnotes to the
financial statements. SFAS 142 also requires various transitional disclosures
until all periods presented reflect the provisions of SFAS 142. These
transitional disclosures include the presentation of net income and earnings per
share information adjusted to exclude amortization expense (including the
related income tax effects) for all periods presented. These transitional
disclosures are presented in the table below.
The Company has presented its goodwill as a separate line item on the
accompanying balance sheets. Additionally, the Company has performed its
transitional goodwill impairment test and determined that existing goodwill is
not impaired. During the six months ended June 30, 2002, the Company's goodwill
decreased $8.5 million due to the sale of Mexrail to TFM.
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- --------------------------
2002 2001 2002 2001
------------ ----------- ----------- ------------
(dollars in millions, except per share amounts)
Reported net income $ 14.5 $ 4.7 $ 26.2 $ 10.6
Add back: Goodwill amortization - 0.2 - 0.3
----------- ---------- ---------- -----------
Adjusted net income $ 14.5 $ 4.9 $ 26.2 $ 10.9
=========== ========== ========== ===========
Reported diluted earnings per share $ 0.23 $ 0.08 $ 0.42 $ 0.17
Add back: Goodwill amortization - 0.00 - 0.01
----------- ---------- ---------- -----------
Adjusted diluted earnings per share $ 0.23 $ 0.08 $ 0.42 $ 0.18
=========== ========== ========== ===========
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION. In September 2000, KCSR
issued $200 million of 9 1/2% senior notes due 2008. In addition, as discussed
above in note 7, KCSR issued $200 million of 7 1/2% senior notes due 2009. Each
of these note issues is an unsecured obligations of KCSR, however, they are also
jointly and severally and fully and unconditionally guaranteed on an unsecured
senior basis by KCS and certain of the subsidiaries (all of which are
wholly-owned) within the KCS consolidated group. For the 9 1/2% senior notes due
2008, KCS registered exchange notes with the SEC that have substantially
identical terms and associated guarantees and all of the initial senior notes
due 2008 were exchanged for $200 million of registered exchange notes. KCS
submitted a Form S-4 Registration Statement to the SEC on July 12, 2002, as
amended on July 24, 2002, relative to an exchange offer for the $200 million 7
1/2% senior notes due 2009. On July 30, 2002, the SEC declared this Registration
Statement effective and the exchange offer is expected to be completed during
the third quarter of 2002.
The accompanying condensed consolidating financial information has been prepared
and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial statements of
guarantors and issuers of guaranteed securities registered or being registered."
This information is not intended to present the financial position, results of
operations and cash flows of the individual companies or groups of companies in
accordance with U.S. GAAP.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
Six months ended June 30, 2002 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Revenues $ - $ 276.4 $ 13.4 $ 7.9 $ (17.3) $ 280.4
Costs and expenses 5.7 241.8 14.1 8.2 (17.3) 252.5
------------- ------------- ------------- ------------- -------------- -------------
Operating income (loss) (5.7) 34.6 (0.7) (0.3) - 27.9
Equity in net earnings (losses)
of unconsolidated affiliates and
subsidiaries 28.3 22.0 (0.1) 16.6 (50.2) 16.6
Gain on sale of Mexrail 4.4 4.4 - - (4.4) 4.4
Interest expense (0.3) (21.0) (0.3) (0.2) - (21.8)
Other income 0.1 1.6 7.0 0.3 (0.2) 8.8
------------- ------------- ------------- ------------- -------------- -------------
Income (loss) before
income taxes 26.8 41.6 5.9 16.4 (54.8) 35.9
Income tax provision (benefit) (2.1) 7.3 2.2 (0.4) - 7.0
------------- ------------- ------------- ------------- -------------- -------------
Income (loss) before
extraordinary item 28.9 34.3 3.7 16.8 (54.8) 28.9
Extraordinary item (2.7) (2.7) - - 2.7 (2.7)
------------- ------------- ------------- ------------- -------------- -------------
Net income $ 26.2 $ 31.6 $ 3.7 $ 16.8 $ (52.1) $ 26.2
============= ============= ============= ============= ============== =============
Six months ended June 30, 2001 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Revenues $ - $ 280.0 $ 11.9 $ 9.6 $ (14.3) $ 287.2
Costs and expenses 6.2 256.5 10.2 9.6 (14.3) 268.2
------------- ------------- ------------- ------------- -------------- -------------
Operating income (loss) (6.2) 23.5 1.7 - - 19.0
Equity in net earnings (losses)
of unconsolidated affiliates and
subsidiaries 15.4 17.5 (0.1) 17.1 (33.5) 16.4
Interest expense (0.4) (30.3) (0.3) (0.2) 1.5 (29.7)
Other income - 3.6 - - (1.5) 2.1
------------- ------------- ------------- ------------- -------------- -------------
Income (loss) before
income taxes 8.8 14.3 1.3 16.9 (33.5) 7.8
Income tax provision (benefit) (2.2) (1.8) 0.5 0.3 - (3.2)
Income (loss) before cumulative
effect of accounting change 11.0 16.1 0.8 16.6 (33.5) 11.0
------------- ------------- ------------- ------------- -------------- -------------
Cumulative effect of accounting
change, net of income taxes (0.4) (0.4) - - 0.4 (0.4)
------------- ------------- ------------- ------------- -------------- -------------
Net income $ 10.6 $ 15.7 $ 0.8 $ 16.6 $ (33.1) $ 10.6
============= ============= ============= ============= ============== =============
CONDENSED CONSOLIDATING BALANCE SHEETS
As of June 30, 2002 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
ASSETS
Current assets $ 38.0 $ 226.8 $ 29.3 $ 17.6 $ (90.0) $ 221.7
Investments 731.2 423.5 - 402.9 (1,162.9) 394.7
Properties, net 0.2 1,291.8 36.2 1.7 - 1,329.9
Goodwill and other assets 1.8 32.0 0.8 0.1 (1.5) 33.2
------------- ------------- ------------- ------------- -------------- -------------
Total assets $ 771.2 $ 1,974.1 $ 66.3 $ 422.3 $ (1,254.4) $ 1,979.5
============= ============= ============= ============= ============== =============
LIABILITIES AND EQUITY
Current liabilities $ 4.5 $ 250.1 $ 8.6 $ 42.4 $ (90.0) $ 215.6
Long-term debt 1.3 577.1 1.8 4.5 - 584.7
Payable to affiliates 11.7 - 0.6 - (12.3) -
Deferred income taxes 9.5 356.1 4.9 (1.0) (1.5) 368.0
Other liabilities 31.5 63.2 3.7 0.1 - 98.5
Stockholders' equity 712.7 727.6 46.7 376.3 (1,150.6) 712.7
------------- ------------- ------------- ------------- -------------- -------------
Total liabilities and
equity $ 771.2 $ 1,974.1 $ 66.3 $ 422.3 $ (1,254.4) $ 1,979.5
============= ============= ============= ============= ============== =============
As of December 31, 2001 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
ASSETS
Current assets $ 25.5 $ 223.4 $ 22.0 $ 6.6 $ (23.1) $ 254.4
Investments 701.4 413.6 - 376.4 (1,104.6) 386.8
Properties, net 0.3 1,287.1 38.2 1.8 - 1,327.4
Goodwill and other assets 1.7 40.4 1.7 0.1 (1.6) 42.3
------------- ------------- ------------- ------------- -------------- -------------
Total assets $ 728.9 $ 1,964.5 $ 61.9 $ 384.9 $ (1,129.3) $ 2,010.9
============= ============= ============= ============= ============== =============
LIABILITIES AND EQUITY
Current liabilities $ 7.2 $ 252.3 $ 6.9 $ 14.2 $ (23.1) $ 257.5
Long-term debt 1.3 602.9 2.8 4.7 - 611.7
Payable to affiliates 4.8 - 0.6 - (5.4) -
Deferred income taxes 9.5 350.9 5.2 6.2 (1.6) 370.2
Other liabilities 25.8 62.0 3.4 - - 91.2
Stockholders' equity 680.3 696.4 43.0 359.8 (1,099.2) 680.3
------------- ------------- ------------- ------------- -------------- -------------
Total liabilities and
equity $ 728.9 $ 1,964.5 $ 61.9 $ 384.9 $ (1,129.3) $ 2,010.9
============= ============= ============= ============= ============== =============
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Six months ended June 30, 2002 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Net cash flows provided by (used
for) operating activities: $ (11.0) $ 69.1 $ (7.5) $ 9.9 $ 0.1 $ 60.6
------------- ------------- ------------- ------------- -------------- -------------
Investing activities:
Property acquisitions - (38.1) (1.0) - - (39.1)
Proceeds from disposal of
property 7.7 8.4 16.1
Investments in and loans to
affiliates - - - (10.3) 6.8 (3.5)
Proceeds from sale of
investments - 31.4 - - - 31.4
Other, net - 0.4 0.7 - - 1.1
------------- ------------- ------------- ------------- -------------- -------------
Net - 1.4 8.1 (10.3) 6.8 6.0
------------- ------------- ------------- ------------- -------------- -------------
Financing activities:
Proceeds from issuance of
long-term debt - 200.0 - - - 200.0
Repayment of long-term debt (0.4) (261.8) (1.0) (0.2) - (263.4)
Proceeds from loans from
affiliates 7.3 - 0.1 - (7.4) -
Repayment of loans from
affiliates (0.5) - - - 0.5 -
Debt issuance costs - (5.4) (5.4)
Proceeds from stock plans 3.7 - - - - 3.7
Cash dividends paid (0.1) - - - - (0.1)
Other, net - (2.9) 0.3 - - (2.6)
------------- ------------- ------------- ------------- -------------- -------------
Net 10.0 (70.1) (0.6) (0.2) (6.9) (67.8)
------------- ------------- ------------- ------------- -------------- -------------
Cash and cash equivalents:
Net increase (decrease) (1.0) 0.4 - (0.6) - (1.2)
At beginning of period 1.3 23.2 - 0.2 - 24.7
------------- ------------- ------------- ------------- -------------- -------------
At end of period $ 0.3 $ 23.6 $ - $ (0.4) $ - $ 23.5
============= ============= ============= ============= ============== =============
Six months ended June 30, 2001 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Net cash flows provided by (used
for) operating activities: $ (4.5) $ 15.6 $ 0.3 $ 2.1 $ 1.3 $ 14.8
------------- ------------- ------------- ------------- -------------- -------------
Investing activities:
Property acquisitions - (26.3) (0.7) - - (27.0)
Proceeds from disposal of
property - 3.0 3.2 - - 6.2
Investments in and loans to
affiliates - (2.0) - (7.2) 3.7 (5.5)
Proceeds from sale of
investments - - - - - -
Other, net - (1.3) 1.2 - (1.4) (1.5)
------------- ------------- ------------- ------------- -------------- -------------
Net - (26.6) 3.7 (7.2) 2.3 (27.8)
------------- ------------- ------------- ------------- -------------- -------------
Financing activities:
Proceeds from issuance of
long-term debt - 30.0 - - - 30.0
Repayment of long-term debt - (17.0) (1.0) (0.2) - (18.2)
Proceeds from loans from
affiliates 1.5 - - - (1.5) -
Proceeds from stock plans 1.6 - - - - 1.6
Cash dividends paid (0.1) - - - - (0.1)
Other, net - (3.4) - 2.3 (2.1) (3.2)
------------- ------------- ------------- ------------- -------------- -------------
Net 3.0 9.6 (1.0) 2.1 (3.6) 10.1
------------- ------------- ------------- ------------- -------------- -------------
Cash and cash equivalents:
Net increase (decrease) (1.5) (1.4) 3.0 (3.0) - (2.9)
At beginning of period 1.5 19.2 0.3 0.5 - 21.5
------------- ------------- ------------- ------------- -------------- -------------
At end of period $ - $ 17.8 $ 3.3 $ (2.5) $ - $ 18.6
============= ============= ============= ============= ============== =============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
THE DISCUSSION SET FORTH BELOW, AS WELL AS OTHER PORTIONS OF THIS FORM 10-Q,
CONTAINS FORWARD-LOOKING COMMENTS THAT ARE NOT BASED UPON HISTORICAL
INFORMATION. SUCH FORWARD-LOOKING COMMENTS ARE BASED UPON INFORMATION CURRENTLY
AVAILABLE TO MANAGEMENT AND MANAGEMENT'S PERCEPTION THEREOF AS OF THE DATE OF
THIS FORM 10-Q. READERS CAN IDENTIFY THESE FORWARD-LOOKING COMMENTS BY THE USE
OF SUCH VERBS AS EXPECTS, ANTICIPATES, BELIEVES OR SIMILAR VERBS OR CONJUGATIONS
OF SUCH VERBS. THE ACTUAL RESULTS OF OPERATIONS OF KANSAS CITY SOUTHERN ("KCS"
OR THE "COMPANY") COULD MATERIALLY DIFFER FROM THOSE INDICATED IN
FORWARD-LOOKING COMMENTS. THE DIFFERENCES COULD BE CAUSED BY A NUMBER OF FACTORS
OR COMBINATION OF FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE FACTORS
IDENTIFIED IN THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED DECEMBER 11, 2001,
WHICH IS ON FILE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION (FILE NO.
1-4717) AND IS HEREBY INCORPORATED BY REFERENCE HEREIN. READERS ARE STRONGLY
ENCOURAGED TO CONSIDER THESE FACTORS WHEN EVALUATING FORWARD-LOOKING COMMENTS.
THE COMPANY WILL NOT UPDATE ANY FORWARD-LOOKING COMMENTS SET FORTH IN THIS FORM
10-Q.
THE DISCUSSION HEREIN IS INTENDED TO CLARIFY AND FOCUS ON THE COMPANY'S RESULTS
OF OPERATIONS, CERTAIN CHANGES IN ITS FINANCIAL POSITION, LIQUIDITY, CAPITAL
STRUCTURE AND BUSINESS DEVELOPMENTS FOR THE PERIODS COVERED BY THE CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS INCLUDED UNDER ITEM 1 OF THIS FORM 10-Q. THIS
DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THESE CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO, AND IS QUALIFIED BY
REFERENCE THERETO.
GENERAL
KCS is a Delaware corporation. KCS, formerly named Kansas City Southern
Industries, Inc., is a holding company and its principal subsidiaries and
affiliates include the following:
o The Kansas City Southern Railway Company ("KCSR"), a wholly-owned
subsidiary;
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), a
36.9% (46.6% effective July 29, 2002- see Recent Developments - Purchase of
Mexican government's ownership of Grupo TFM below) owned unconsolidated
affiliate, which owns 80% of the common stock of TFM, S.A. de C.V. ("TFM").
TFM wholly owns Mexrail, Inc. ("Mexrail"). Mexrail owns 100% of The
Texas-Mexican Railway Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate that leases locomotive and rail equipment to KCSR;
o Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of which
KCSR owns 50% of the common stock. PCRC owns all of the common stock of
Panarail Tourism Company ("Panarail").
KCS, as the holding company, supplies its various subsidiaries with managerial,
legal, tax, financial and accounting services, in addition to managing other
"non-operating" investments.
RECENT DEVELOPMENTS
PURCHASE OF MEXICAN GOVERNMENT'S OWNERSHIP OF GRUPO TFM. KCS and Grupo TMM have
exercised their call option and, on July 29, 2002, completed the purchase of the
Mexican government's 24.6% ownership of Grupo TFM. The Mexican government's
ownership interest of Grupo TFM was purchased by TFM for a purchase price of
$256.1 million, utilizing a combination of proceeds from an offering by TFM of
debt securities, a credit from the Mexican government for the reversion of
certain rail facilities and other resources. This transaction results in an
increase in the Company's ownership percentage of Grupo TFM from 36.9% to
approximately 46.6%.
DEBT REFINANCING. During the second quarter of 2002, the Company was party to
several debt refinancing transactions as described below.
SENIOR NOTES
On June 12, 2002, KCSR issued $200 million of 7 1/2% senior notes due June 15,
2009 ("7 1/2% Notes") through a private offering pursuant to Rule 144A under the
Securities Act of 1933 in the United States and Regulation S outside the United
States ("Note Offering"). The 7 1/2% Notes bear a fixed annual interest rate,
with interest to be paid semi-annually on June
15 and December 15. These notes are general unsecured obligations of KCSR, are
guaranteed by the Company and certain of its subsidiaries and contain certain
covenants and restrictions customary for this type of debt instrument and for
borrowers with similar credit ratings.
Net proceeds from the Note Offering of $195.8 million, together with cash, were
used to repay term debt under the KCS Credit Facility and certain other secured
indebtedness of the Company. Debt issuance costs related to the Note Offering of
approximately $4.3 million were deferred and are being amortized over the
seven-year term of the 7 1/2% Notes. See "New Credit Agreement" below.
NEW CREDIT AGREEMENT
On June 12, 2002, in conjunction with the repayment of certain of the term loans
under the Company's senior secured credit facility ("KCS Credit Facility") using
the net proceeds received from the Note Offering, the Company amended and
restated the KCS Credit Facility (the amended and restated credit agreement is
referred to as the New Credit Agreement herein). The New Credit Agreement
provides KCSR with a $150 million term loan ("Tranche B term loan"), which
matures on June 12, 2008, and a $100 million revolving credit facility
("Revolver"), which matures on January 11, 2006. Letters of credit are also
available under the Revolver up to a limit of $15 million. The proceeds from
future borrowings under the Revolver may be used for working capital and for
general corporate purposes. The letters of credit may be used for general
corporate purposes. Borrowings under the New Credit Agreement are secured by
substantially all of the Company's assets and are guaranteed by the majority of
its subsidiaries.
The Tranche B term loan and the Revolver bear interest at the London Interbank
Offered Rate ("LIBOR") or an alternate base rate, as the Company shall select,
plus an applicable margin. The applicable margin for the Tranche B term loan is
2% for LIBOR borrowings and 1% for alternate base rate borrowings. The
applicable margin for the Revolver is based on the Company's leverage ratio
(defined as the ratio of the Company's total debt to consolidated EBITDA
(earnings before interest, taxes, depreciation and amortization, excluding the
undistributed earnings of unconsolidated affiliates) for the prior four fiscal
quarters). Based on the Company's leverage ratio as of June 30, 2002, the
applicable margin was 2.25% per annum for LIBOR borrowings and 1.25% per annum
for alternate base rate borrowings.
The New Credit Agreement also requires the payment to the lenders of a
commitment fee of 0.50% per annum on the average daily, unused amount of the
Revolver and Tranche B term loan. Additionally, a fee equal to a per annum rate
of 0.25% plus the applicable margin for LIBOR priced borrowings under the
Revolver will be paid on any letter of credit issued under the Revolver.
The New Credit Agreement contains certain provisions, covenants and restrictions
customary for this type of debt and for borrowers with a similar credit rating.
These provisions include, among others, restrictions on the Company's ability
and its subsidiaries ability to 1) incur additional debt or liens; 2) enter into
sale and leaseback transactions; 3) merge or consolidate with another entity; 4)
sell assets; 5) enter into certain transactions with affiliates; 6) make
investments, loans, advances, guarantees or acquisitions; 7) make certain
restricted payments, including dividends, or make certain payments on other
indebtedness; or 8) make capital expenditures. In addition, the Company is
required to comply with certain financial ratios, including minimum interest
expense coverage and leverage ratios. The New Credit Agreement also contains
certain customary events of default. These covenants, along with other
provisions, could restrict maximum utilization of the Revolver.
Debt issuance costs related to the New Credit Agreement of approximately $1.1
million were deferred and are being amortized over the respective term of the
loans. Extraordinary debt retirement costs associated with the prepayment of
certain term loans under the KCS Credit Facility using proceeds from the Note
Offering were approximately $4.3 million ($2.7 million, net of income taxes).
SOUTHERN CAPITAL
On June 25, 2002, Southern Capital refinanced the outstanding balance of its
one-year bridge loan through the issuance of approximately $167.6 million of
pass through trust certificates and the sale of 50 locomotives. The pass through
trust certificates are secured by the sold locomotives, all of the remaining
locomotives and rolling stock owned by Southern Capital and rental payments
payable by KCSR under the sublease of the sold locomotives and its leases of the
equipment owned by Southern Capital. Payments of interest and principal of the
pass through trust certificates, which are due semi-annually on June 30 and
December 30 commencing on December 30, 2002 and ending on June 30, 2022, are
insured under a financial guarantee insurance policy by MBIA Insurance
Corporation. KCSR leases or subleases all of the equipment securing the pass
through trust certificates.
IMPLEMENTATION OF NEW TRANSPORTATION COMPUTER SYSTEM. On July 14, 2002, the
Company implemented its new Management Control System ("MCS") on KCSR. This
state-of-the-art system is designed to provide better analytical tools for
management to use in its decision-making processes. MCS, among other things,
provides tracking of individual shipments across our rail system and compares
that movement to the service sold to the customer. If a shipment falls behind
schedule, MCS automatically generates alerts and action recommendations. The
Company's depreciation expense is expected to increase by approximately $4.8
million per annum ($2.4 million in 2002) as a result of the implementation of
MCS.
SALE OF MEXRAIL, INC. TO TFM. The Company, Grupo TMM, and certain of Grupo TMM's
affiliates entered into an agreement on February 27, 2002 with TFM to sell to
TFM all of the common stock of Mexrail. Mexrail owns the northern half of the
international railway bridge at Laredo, Texas and all of the common stock of the
Tex Mex. The sale closed on March 27, 2002 and the Company received
approximately $31.4 million for its 49% interest in Mexrail. The Company used
the proceeds from the sale of Mexrail to reduce debt. Although the Company no
longer directly owns 49% of Mexrail, it retains an indirect ownership through
its ownership of Grupo TFM. The proceeds from the sale of Mexrail to TFM
exceeded the carrying value of the Company's investment in Mexrail by $11.2
million. The Company recognized a $4.4 million gain on the sale of Mexrail to
TFM in the first quarter of 2002, while the remaining $6.8 of excess proceeds
has been deferred.
COMPANY CHANGES NAME TO KANSAS CITY SOUTHERN. On May 2, 2002, at the Annual
Meeting of Stockholders, the shareholders of the Company approved a proposal to
amend the Certificate of Incorporation to change the name of the Company from
"Kansas City Southern Industries, Inc." to "Kansas City Southern." The name
change became effective on May 2, 2002 following the filing of the amended
Certificate of Incorporation with the Secretary of State of the State of
Delaware. The name change reflects the change in the Company's business and
holdings following the spin-off of Stilwell Financial Inc. on July 12, 2000. By
dropping "Industries, Inc." from the name, KCS will maintain the identification
in the marketplace of the Company and KCSR, while emphasizing our focus on
transportation rather than a variety of industries. The name change does not
require a change in the security ticker symbol of KSU on the New York Stock
Exchange.
CHANGES TO MEXICAN TAX LAW. As discussed in the Company's Annual Report on Form
10-K for the year ended December 31, 2001, as amended by Amendment No. 1 on Form
10-K/A ("2001 Form 10-K"), effective January 1, 2002, Mexico implemented changes
in its income tax laws. One of these changes reduced the Mexican corporate
income tax rate from 35% to 32% in one-percent increments beginning in 2003,
resulting in a 32% income tax rate in 2005. Accordingly, under accounting
principles generally accepted in the United States of America ("U.S. GAAP"),
Grupo TFM recorded the impact of this rate change during the first quarter of
2002. After consideration of minority interest, the impact of this rate change
did not have a significant impact on the Company's equity in earnings of Grupo
TFM for the first quarter of 2002.
KCSR AND THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY ("BNSF") FORM
MARKETING ALLIANCE. On April 22, 2002, KCSR and BNSF entered into a marketing
agreement forming a comprehensive joint marketing alliance to promote
cooperation, revenue growth and extend market reach for both railroads in the
United States and Canada. The marketing alliance is also designed to improve
operating efficiencies for both KCSR and BNSF in key market areas, as well as
provide customers with expanded service options. KCSR and BNSF will coordinate
marketing and operational initiatives in a number of target markets. Plans are
being developed to enhance competitive options for shippers in the West Lake and
West Lake Charles, Louisiana, region. Similarly, KCSR and BNSF will also
coordinate operations to provide improved and extended service options for grain
customers. The marketing alliance is expected to allow the two railroads to be
more responsive to shippers' requests for rates and service, whenever mutually
advantageous. Coal and unit train operations are excluded from the marketing
alliance, as well as any points where KCSR and BNSF are the only direct rail
competitors. Movements to and from Mexico by either party are also excluded.
Management believes this new marketing alliance will provide important
opportunities to grow KCSR's revenue base, particularly in the chemical, grain
and forest product markets, and provide both participants with expanded access
to important markets and provide shippers with enhanced options and competitive
alternatives.
RESULTS OF OPERATIONS
The following table summarizes the income statement components of the Company
for the three and six months ended June 30, respectively, for use in the
analysis below. See consolidated statements of income accompanying this Form
10-Q for other captions not presented in this table (IN MILLIONS):
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
---------------- -------------- --------------- ---------------
Revenues $ 137.9 $ 143.2 $ 280.4 $ 287.2
Costs and expenses 123.4 130.3 252.5 268.2
---------------- -------------- --------------- ---------------
Operating income 14.5 12.9 27.9 19.0
Equity in net earnings (losses) of unconsolidated
affiliates 11.7 5.2 16.6 16.4
Gain on sale of Mexrail, Inc. - - 4.4 -
Interest expense (10.5) (14.5) (21.8) (29.7)
Other income 4.4 1.1 8.8 2.1
---------------- -------------- --------------- ---------------
Income before income taxes, extraordinary item, and
cumulative effect of accounting change 20.1 4.7 35.9 7.8
Income tax provision (benefit) 2.9 - 7.0 (3.2)
---------------- -------------- --------------- ---------------
Income before extraordinary item and cumulative effect
of accounting change 17.2 4.7 28.9 11.0
Extraordinary item, net of income taxes (2.7) - (2.7) -
Cumulative effect of accounting change, net of income
taxes - - - (0.4)
---------------- -------------- --------------- ---------------
Net income $ 14.5 $ 4.7 $ 26.2 $ 10.6
================ ============== =============== ===============
The following table summarizes the revenues and carload statistics of KCSR for
the three and six months ended June 30, 2002 and 2001, respectively. Certain
prior period amounts have been reclassified to reflect changes in the business
groups and to conform to the current period presentation.
Carloads and
Revenues Intermodal Units
-------------------------------------------- -------------------------------------------
(IN MILLIONS) (IN THOUSANDS)
Three months Six months Three months Six months
ended June 30, ended June 30, ended June 30, ended June 30,
-------------------------------------------- --------------------- ---------------------
2002 2001 2002 2001 2002 2001 2002 2001
----------- ---------- ---------- ---------- ----------- --------- ---------- ----------
General commodities:
Chemical and petroleum $ 33.8 $ 30.8 $ 65.7 $ 63.4 37.8 36.7 73.7 77.9
Paper and forest 34.1 31.8 66.1 61.9 45.0 45.2 88.9 89.7
Agricultural and mineral 22.5 20.9 46.3 42.2 31.4 31.0 64.4 61.9
----------- ---------- ---------- ---------- ----------- --------- ---------- ----------
Total general commodities 90.4 83.5 178.1 167.5 114.2 112.9 227.0 229.5
Intermodal and automotive 15.1 18.0 29.3 36.6 71.3 73.5 138.3 150.3
Coal 21.5 28.2 50.3 55.9 46.6 48.2 105.1 94.7
----------- ---------- ---------- ---------- ----------- --------- ---------- ----------
Carload revenues and carload
and intermodal units 127.0 129.7 257.7 260.0 232.1 234.6 470.4 474.5
Other rail-related revenues 9.3 10.5 19.0 20.4 =========== ========= ========== ==========
----------- ---------- ---------- ----------
Total KCSR revenues 136.3 140.2 276.7 280.4
Other subsidiary revenues 1.6 3.0 3.7 6.8
----------- ---------- ---------- ----------
Total consolidated
revenues $ 137.9 $ 143.2 $ 280.4 $ 287.2
=========== ========== ========== ==========
The following table summarizes KCS consolidated costs and expenses for the three
and six months ended June 30, 2002 and 2001, respectively. Certain prior year
amounts have been reclassified for conform to the current year presentation.
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Compensation and benefits $ 46.5 $ 47.6 $ 95.9 $ 96.7
Depreciation and amortization 14.6 14.5 29.5 28.9
Purchased services 13.6 14.4 27.6 26.4
Operating leases 12.6 12.7 24.7 25.5
Fuel 9.3 11.4 18.8 23.8
Casualties and insurance 7.2 7.7 15.1 22.3
Car hire 4.1 5.7 9.3 12.2
Other 15.5 16.3 31.6 32.4
--------------- --------------- --------------- ---------------
Total consolidated costs and expenses $ 123.4 $ 130.3 $ 252.5 $ 268.2
=============== =============== =============== ===============
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001
NET INCOME. Net income for the three months ended June 30, 2002 was $14.5
million (23(cent) per diluted share) compared to $4.7 million (8(cent) per
diluted share) for the three months ended June 30, 2001. This $9.8 million
quarter to quarter increase was primarily the result of a $6.9 million decline
in consolidated operating expenses, a $4.0 million decrease in interest expense,
a $3.3 million increase in other income and an $8.1 million increase in equity
in earnings from Grupo TFM. These factors leading to an increase in net income
were partially reduced by a $5.3 million decline in consolidated revenue, a $1.6
million decrease in equity in earnings (losses) from other unconsolidated
affiliates and a $2.9 million increase in the income tax provision.
Additionally, net income for the quarter ended June 30, 2002 includes
extraordinary debt retirement costs of $2.7 million (after-tax) associated with
the early retirement of term debt in June 2002.
REVENUES. Consolidated revenues for the three months ended June 30, 2002 were
$137.9 million compared to $143.2 million for the same period in 2001. Revenue
from KCSR declined $3.9 million compared to the same period in 2001 due to lower
coal and automotive revenue, partially offset by an increase in chemical and
petroleum products, agriculture and minerals, paper and forest products and
intermodal revenue. Additionally, revenue from other subsidiaries decreased
approximately $1.4 million from the same period in 2001 primarily due to demand
driven volume declines. The following discussion provides an analysis of KCSR
revenues by commodity group.
CHEMICAL AND PETROLEUM PRODUCTS. Revenues for chemical and petroleum
products for the three months ended June 30, 2002 increased $3.0 million
compared to the same period in 2001. This increase resulted from a combination
of higher traffic volumes for most commodities in this business group, coupled
with targeted rate increases and longer hauls due to gateway changes. Traffic
volume increases for gases, petroleum and plastic products resulted mostly from
increased production at certain customer facilities. The increase in revenue for
inorganic products was mostly due to increased access to production facilities
in Geismar, Louisiana as well as new business previously shipped by other rail
carriers. These increases were partially offset by a decrease in agriculture
chemical revenues primarily as a result of production decreases by certain
customers.
PAPER AND FOREST PRODUCTS. Paper and forest product revenues increased
$2.3 million for the three months ended June 30, 2002 compared to the same
period in 2001. The increase in pulp/paper product revenue was partially the
result of production growth in the paper industry. Increases in revenues for
lumber and plywood products reflect strength in the home building market and an
increase in housing starts. The revenue increase for paper and forest products
was also due to targeted rate increases and longer hauls. These increases were
partially offset by decreases in scrap paper, pulpwood and wood chip products
and metal and scarp products. Decreases in pulpwood, logs and chips product were
primarily the result of declines in industrial production as a result of the
continued slowdown of the U.S. economy.
AGRICULTURAL AND MINERALS. Revenues for agricultural and mineral
shipments increased $1.6 million for the three months ended June 30, 2002
compared to the three months ended June 30, 2001. This increase resulted from
higher revenues for domestic and export grain, ores and minerals and stone, clay
and glass products, partially offset by declines in food product revenues.
Export grain revenues increased due to higher demand from Mexico and other
export markets.
Higher revenues for domestic grain, ores and minerals and stone, clay and glass
products resulted from certain rate increases and longer hauls. These increases
were partially offset by a decline in food product revenues due to lower demand
for soybean meal due to a soft market for domestic poultry.
INTERMODAL AND AUTOMOTIVE. Intermodal and automotive revenues decreased
$2.9 million for the three months ended June 30, 2002 compared to the same
period in 2001. This decrease was primarily the result of nearly a 70% decline
in carload volume for automotive traffic. This traffic decline was mostly due to
the impact of the weakness in the U.S. economy on the automotive industry, as
well as the loss of certain Ford business in the third quarter of 2001 due to
competitive pricing from another railroad. The decline in automotive revenue was
partially offset by a 17% increase in intermodal revenue. A 10% increase in
intermodal carloads resulted from higher demand for domestic intermodal traffic,
as well as an increase in intermodal traffic to Mexico.
COAL. Coal revenues decreased $6.7 million for the second quarter of 2002
compared to the second quarter of 2001. Coal revenues were significantly
impacted by a rate reduction for KCSR's largest customer, Southwestern Electric
Power Company ("SWEPCO" - a wholly owned subsidiary of American Electric Power
Company, Inc.), which took effect on January 1, 2002. Additionally, the loss of
a coal customer in April 2002 due to the expiration of a contract as well as
lower volumes at certain customers resulted in a 3% decline in total coal volume
for the three months ended June 30, 2002 compared to the same period in 2001.
OTHER. Other rail related revenues decreased $1.2 million for the three
months ended June 30, 2002 compared to the same period in 2001 primarily due to
decreases in switching and demurrage revenue partially offset by higher haulage
revenues.
COSTS AND EXPENSES. Consolidated costs and expenses decreased $6.9 million for
the three months ended June 30, 2002 compared to the same period in 2001
primarily as a result of lower KCSR expenses of $5.6 million and lower expenses
at certain other subsidiaries of $1.3 million.
COMPENSATION AND BENEFITS. Consolidated compensation and benefits expense
for the three months ended June 30, 2002 decreased $1.1 million to $46.5 million
compared to $47.6 for the same period in 2001. The decrease in compensation and
benefits expense was the result of a 3.8% reduction in employee counts, lower
overtime costs, the automation of certain locomotive operations and the use of
fewer relief crews due to improved operating efficiency. Fringe benefit costs
remained relatively flat quarter to quarter as an increase in health and welfare
costs was offset by lower costs associated with railroad retirement taxes.
Additionally, compensation costs were impacted by a favorable adjustment related
to an accrual for retroactive wage increases to union employees, which were not
provided for in the recently completed national labor union contract.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and amortization
expense was $14.6 million for the three months ended June 30, 2002 compared to
$14.5 million for the same period in 2001. This $0.1 million increase resulted
from a higher asset base partially offset by property retirements. Depreciation
and amortization expense is expected to increase by approximately $2.4 million
during the remainder of 2002 due to the implementation of MCS, which occurred on
July 14, 2002.
PURCHASED SERVICES. For the three months ended June 30, 2002,
consolidated purchased services expense decreased $0.8 million compared with the
same period in 2001 primarily as a result of the impact of a $1.8 million
insurance settlement partially offset by higher purchases services related to
equipment and right of way maintenance.
OPERATING LEASES. For the three months ended June 30, 2002, consolidated
operating lease expense remained relatively flat compared to the second quarter
of 2001. Lower costs resulting from the expiration of certain leases that have
not been renewed due to continued improvements in fleet utilization were
somewhat mitigated by an increase in operating leases as a result of costs
associated with the lease for the Company's new corporate headquarters building.
The Company began leasing this new facility in April 2002. The annual lease
payment is expected to be approximately $2.5 million.
FUEL. For the three months ended June 30, 2002, fuel expense decreased
$2.1 million or 18.4% to $9.3 million compared to $11.4 million in the same
period in 2001. This decrease in fuel expense was the result of a 14% decrease
in the average price per gallon as well as a 5% decrease in fuel usage.
CASUALTIES AND INSURANCE. For the three months ended June 30, 2002,
consolidated casualties and insurance expense decreased $0.5 million compared to
the three months ended June 30, 2001. This reduction was primarily due to
slightly higher expenses associated with derailments and third party personal
injury claims offset by the impact of a $1.4 million insurance settlement
agreement in the second quarter of 2002.
CAR HIRE. Car hire expense for the three months ended June 30, 2002
decreased $1.6 million compared to the same period in 2001. This decrease
resulted from a decrease in the number of freight cars from other railroads on
the Company's rail line partially mitigated by fewer KCSR freight cars being
used by other railroads during the second quarter of 2002. Some of this decline
in 2002 was a result of higher costs in 2001 related to the impact of congestion
on the railroad during the first half of 2001. Additionally, as a result of
reduced automotive transport, fewer auto rack cars were being used during the
second quarter of 2002 compared to the same period in 2001.
OPERATING INCOME AND KCSR OPERATING RATIO. Consolidated operating income
for the three months ended June 30, 2002 increased $1.6 million to $14.5 million
compared to $12.9 million for the same period in 2001. This increase resulted
from an $6.9 million decrease in operating expenses partially offset by a $5.3
million decrease in revenues. The operating ratio for KCSR improved to 86.5% for
the quarter ended June 30, 2002 compared to 88.1% for the quarter ended June 30,
2001.
INTEREST EXPENSE. Consolidated interest expense for the three months ended June
30, 2002 declined $4.0 million (28%) compared to the same period in 2001. This
decrease was primarily the result of lower interest rates on variable rate debt
and lower average debt balances. The Company's total debt has been reduced $91.5
million over the last twelve months to $595.0 million at June 30, 2002 compared
to $686.5 million at June 30, 2001.
OTHER INCOME. For the three months ended June 30, 2002, the Company's other
income increased $3.3 million compared to the prior year quarter primarily as a
result of a $3.5 million gain recorded on the sale of certain non-operating
property at a subsidiary.
INCOME TAX EXPENSE. For the three months ended June 30, 2002, the Company's
income tax provision was $2.9 million compared to an income tax provision of
zero for the prior year quarter. This increase in income tax expense resulted
primarily from an increase in the Company's domestic operating income and gains
recorded on the sale of certain non-operating property. As the Company intends
to indefinitely reinvest the equity earnings from Grupo TFM, the Company does
not provide deferred income tax expense for the excess of its book basis over
the tax basis of its investment in Grupo TFM. Excluding equity earnings of Grupo
TFM, the consolidated effective income tax rate for the three months ended June
30, 2002 was 40.8%.
EQUITY IN NET EARNINGS (LOSSES) OF UNCONSOLIDATED AFFILIATES. For the quarter
ended June 30, 2002, the Company recorded equity in net earnings of
unconsolidated affiliates of $11.7 million compared to $5.2 million for the
quarter ended June 30, 2001. This $6.5 million increase resulted from an $8.1
million increase in equity in earnings from Grupo TFM partially offset by a
decline in equity in earnings (losses) related to Southern Capital and PCRC of
$0.9 million and $1.0 million, respectively. Southern Capital's equity in
earnings declined due mostly to the impact of the refinancing transaction
discussed above in "Recent Developments" and the sale/leaseback of 50
locomotives, which resulted in a loss. Also impacting this increase was Mexrail,
which contributed equity in losses of $0.3 million in the second quarter of
2001. Mexrail was sold in March 2002 to TFM.
Exclusive of the results from Mexrail, which was consolidated into Grupo TFM
effective April 1, 2002, second quarter 2002 Grupo TFM revenues improved 1%
compared to the second quarter of 2001 and operating expenses decreased 8%
(under U.S. GAAP). Second quarter 2002 results for Grupo TFM include a $27.8
million deferred tax benefit (calculated under U.S. GAAP) compared to a deferred
tax expense of $2.9 million in the same period in 2001. This variance was caused
by a weakening of the peso exchange rate as well as tax benefits derived from
the impact of Mexican inflation. The fluctuation in the peso exchange rate also
contributed to an $18.4 million exchange loss for the second quarter of 2002
compared to an exchange gain of $1.1 million in the same period of 2001.
The Company reports its equity in Grupo TFM under U.S. GAAP while Grupo TFM
reports under International Accounting Standards ("IAS"). Because the Company is
required to report its equity in earnings (losses) in Grupo TFM under U.S. GAAP
and Grupo TFM reports under IAS, differences in deferred income tax calculations
and the classification of certain operating expense categories occur. The
deferred tax calculations are significantly impacted by fluctuations in the
relative
value of the Mexican peso compared to the U.S. dollar and the rate of Mexican
inflation, and result in significant variability in the amount of equity in
earnings (losses) reported by the Company.
EXTRAORDINARY ITEM. During the quarter ended June 30, 2002, the Company
refinanced approximately $200 million of term debt and other secured
indebtedness using the proceeds received from the Note Offering discussed above
in "Recent Developments - Debt Refinancing". KCS reported an extraordinary
charge of $2.7 million (after-tax) related to this refinancing transaction.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001
NET INCOME. For the six months ended June 30, 2002, net income increased $15.6
million to $26.2 million (42(cent) per diluted share) from $10.6 million
(17(cent) per diluted share) for the six months ended June 30, 2001. This
increase resulted primarily from a $15.7 million decline in operating expenses,
a $1.8 million increase in equity in net earnings of Grupo TFM, a $7.9 million
decrease in interest expense, a $6.7 million increase in other income and a $4.4
million gain realized on the sale of Mexrail to TFM. These increases were
partially offset by a $6.8 million decline in consolidated revenue, a $1.6
million decline in equity earnings (losses) from other unconsolidated affiliates
and a $10.2 million increase in the income tax provision. Additionally, net
income for the year to date 2002 includes extraordinary debt retirement costs of
$2.7 million (after-tax) associated with the early retirement of term debt in
June 2002. Net income for year to date 2001 includes a $0.4 million charge
relating to the implementation of Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133").
REVENUES. Consolidated revenues for the six months ended June 30, 2002 were
$280.4 million compared to $287.2 million for the six months ended June 30,
2001. Revenue from KCSR declined $3.7 million compared to the six months ended
June 30, 2001 primarily due to lower coal and automotive revenue, partially
offset by increases in chemical and petroleum products, agricultural and
minerals, paper and forest products and intermodal revenue. Additionally,
revenue from other subsidiaries declined approximately $3.1 million from the
same period in 2001 primarily as a result of demand driven volume declines. The
following discussion provides an analysis of KCSR revenues by commodity group.
CHEMICAL AND PETROLEUM PRODUCTS. Revenues for chemical and petroleum
products increased $2.3 million for the six months ended June 30, 2002 compared
to the same period in 2001. Similar to the second quarter of 2002, higher
revenues for gases were primarily the result of production increases by certain
customers and revenue increases for plastics resulted mostly from increased
production in PVC and plastic pellet products. Higher revenues for inorganic
products resulted primarily from increased access to facilities in Geismar,
Louisiana as well as additional traffic previously shipped by other rail
carriers. These increases were somewhat mitigated by decreases in petroleum and
agricultural chemicals product due to lower industrial production as a result of
the continued slowdown of the U.S. economy. Chemical and petroleum products
revenue accounted for 25.5% and 24.4% of total carload revenues for the six
months ended June 30, 2002 and 2001, respectively.
PAPER AND FOREST PRODUCTS. Paper and forest product revenue increased
$4.2 million for the six months ended June 30, 2002 compared to the same period
in 2001. Increases in pulp/paper product, lumber/plywood and military and other
carloads were partially offset by decreases in scrap paper, pulpwood/logs/chips,
and metal and scrap product. As in the second quarter of 2002, increases in
pulp/paper partially resulted from growth in industry production while higher
lumber and plywood product revenues reflect strength in the home building market
and an increase in housing starts. A portion of these higher revenues can also
be attributed to targeted rate increases and longer hauls. Decreases in scrap
paper, pulpwood/logs and wood chip products and metal and scrap products were
due to declines in industrial production as a result of the continued slowdown
of the U.S. economy. Paper and forest product revenue accounted for 25.6% and
23.8% of total carload revenues for the six months ended June 30, 2002 and 2001,
respectively.
AGRICULTURAL AND MINERAL PRODUCTS. Agricultural and mineral product
revenues increased $4.1 million for the six months ended June 30, 2002 compared
to the same period in 2001. This increase resulted mostly from increases in the
domestic and export grain and food product markets partially offset by lower
revenues for ores and minerals. Higher demand for export grain and food products
coupled with increases in certain rates and length of haul led to the increase
in related revenue. Demand has also increased for domestic grain shipments to
poultry producers resulting from an increase in consumer consumption.
Agricultural and mineral products accounted for 18.0% and 16.2% of total carload
revenues for the first six months of 2002 and 2001, respectively.
INTERMODAL AND AUTOMOTIVE. Intermodal and automotive revenues decreased
$7.3 million for the six months ended June 30, 2002 compared to the same period
in 2001, resulting primarily from a 60% decline in automotive carloads. This was
mostly due to loss of certain Ford business in the third quarter of 2001 due to
competitive pricing from another railroad, as well as the impact of the weakness
in the U.S. economy on the automotive industry. The decline in automotive
revenue was partially offset by an increase in intermodal revenue of 5% driven
by higher traffic volumes and certain rate increases. The increase in intermodal
traffic resulted from domestic carloads, as well as shipments moving to Mexico.
Intermodal and automotive product revenues accounted for 11.4% of total carload
revenues for the quarter ended June 30, 2002 compared to 14.1% for the same
period of 2001
COAL. Coal revenues decreased $5.6 million for the six months ended June
30, 2002 compared to the same period in 2001. As in the second quarter of 2002,
coal revenues for the six months ended June 30, 2002 were significantly impacted
by a rate reduction for SWEPCO business and the loss of a coal customer in April
2002 due to the expiration of a contract. Reductions related to these items was
partially mitigated by volume increases related to the June 2001 re-opening of a
utility plant in Kansas City that has been out of service since July 1999. Coal
revenues accounted for 19.5% and 21.5% of total carload revenues for the six
months ended June 30, 2002 and 2001, respectively.
OTHER. Other rail related revenues decreased $1.4 million for year to
date 2002 compared to year to date 2001 primarily due to a decline in switching
and demurrage revenues, partially offset by higher haulage and other revenue.
COSTS AND EXPENSES. Consolidated costs and expenses decreased $15.7 million for
the six months ended June 30, 2002 compared to the six months ended same period
in 2001 primarily as a result of lower KCSR expenses of $15.0 million and lower
expenses at certain other subsidiaries of $0.7 million.
COMPENSATION AND BENEFITS. Consolidated compensation and benefits expense
for the six months ended June 30, 2002 decreased $0.8 million to $95.9 million
compared to $96.7 for the same period in 2001. Similar to the second quarter, a
$3.4 million decrease in compensation expense resulted from a reduction in
employee counts, lower overtime costs, the automation of certain locomotive
operations and the use of fewer relief crews as a result of improved operating
efficiency. Also contributing to this decline was a favorable adjustment related
to an accrual for retroactive wage increases to union employees, which was not
provided for in the national labor union contract. Additionally, costs for
compensation and benefits for the first six months of 2001 include $1.3 million
associated with a workforce reduction. Partially offsetting the decline in
compensation costs were higher fringe benefits, which resulted mostly from the
impact of a $2.0 million reduction in retirement-based costs for certain union
employees recorded in 2001. Additionally, higher costs for health and welfare
were mitigated by lower railroad retirement taxes.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and amortization
expense was $29.5 million for the six months ended June 30, 2002 compared to
$28.9 million for the six months ended June 30, 2001. This $0.6 million increase
resulted from a higher asset base partially offset by property retirements.
Depreciation and amortization expense is expected to increase by approximately
$2.4 million in the second half of 2002 compared to 2001 due to the
implementation of MCS.
PURCHASED SERVICES. Consolidated purchased services expense for the six
months ended June 30, 2002, increased $1.2 million to $27.6 compared with $26.4
million for the same period in 2001. This increase resulted from higher costs
for locomotive and car repairs contracted to third parties as well as other
general purchased services, partially offset by an insurance settlement of $1.8
million.
OPERATING LEASES. Consolidated operating lease expense for the six months
ended June 30, 2002, decreased $0.8 million to $24.7 million compared to $25.5
million for the same period in 2001. This decrease was the result of the
expiration of certain leases that have not been renewed due to continued
improvements in fleet utilization. This decrease was somewhat mitigated by
increases in costs associated with the lease for the Company's new corporate
headquarters building discussed above.
FUEL. For the six months ended June 30, 2002, fuel expense decreased $5.0
million to $18.8 million compared to $23.8 million for the six months ended June
30, 2001. This decrease in fuel expense was the result of a 20.6% decrease in
the average price per gallon in addition to a 0.6% decrease in fuel usage.
CASUALTIES AND INSURANCE. For the six months ended June 30, 2002,
casualties and insurance expense decreased $7.2 million compared to the six
months ended June 30, 2001. The Company encountered approximately $8.5 million
in
increased costs related to several significant derailments and the settlement of
a significant personal injury claim in the first quarter of 2001. This reduction
also reflects the impact of a $1.4 million insurance settlement in the second
quarter of 2002.
CAR HIRE. Car hire expense for the first six months of 2002 decreased
$2.9 million compared to the same period of 2001. During the first six months of
2002, KCSR was operating a more efficient and well-controlled railroad compared
to the first six months of 2001, leading to an improvement in car utilization
and reduction of car hire costs. In early 2001, an unusual number of significant
derailments (as discussed in casualties and insurance), as well as the effects
of line washouts and flooding had a significant adverse impact on the efficiency
of the Company's U.S. operations during the first six months of 2001. The
resulting inefficiency led to congestion on KCSR, which contributed to an
increase in the number of freight cars from other railroads on the Company's
rail line during the first six months of 2001.
OPERATING INCOME AND KCSR OPERATING RATIO. Consolidated operating income
for the six months ended June 30, 2002 increased $8.9 million to $27.9 million
compared to $19.0 million for the same period in 2001. This increase resulted
from an $15.7 million decrease in operating expenses partially offset by a $6.8
million decrease in revenues. The operating ratio for KCSR improved to 86.9% for
the six months ended June 30, 2002 compared to 91.1% for the same period in
2001.
INTEREST EXPENSE. Consolidated interest expense for the six months ended June
30, 2002 declined $7.9 million compared to the six months ended June 30, 2001.
This decrease was primarily the result of lower interest rates on variable rate
debt as well as a lower average debt balance.
OTHER INCOME. For the six months ended June 30, 2002, the Company's other income
increased $6.7 million compared to the prior year quarter primarily as a result
of $6.8 million in gains recorded on the sale of certain non-operating property
during year to date 2002.
INCOME TAX EXPENSE. For the six months ended June 30, 2002, the Company's income
tax provision was $7.0 million compared to an income tax benefit of $3.2 million
for the same period in 2001. This increase in income tax expense resulted
primarily from an increase in the Company's domestic operating income and gains
recorded on the sale of the Company's investment in Mexrail as well as certain
non-operating property. As the Company intends to indefinitely reinvest the
equity earnings from Grupo TFM, the Company does not provide deferred income tax
expense for the excess of its book basis over the tax basis of its investment in
Grupo TFM. Excluding equity earnings of Grupo TFM, the consolidated effective
income tax rate for the six months ended June 30, 2002 was 38.7% compared to
(39.0%) for the same period in 2001.
EQUITY IN NET EARNINGS (LOSSES) OF UNCONSOLIDATED AFFILIATES. For the six months
ended June 30, 2002, the Company recorded equity in net earnings of
unconsolidated affiliates of $16.6 million compared to $16.4 million in the same
period of 2001. A $1.8 million increase in equity in earnings from Grupo TFM and
a $0.6 million improvement in equity earnings related to Mexrail were mostly
offset by $1.8 million and $0.4 million declines related to PCRC and Southern
Capital, respectively, as discussed above in the second quarter.
In 2001, equity in earnings reflected the Company's proportionate share ($9.1
million) of the income recorded by Grupo TFM relating to the reversion of
certain concession assets to the Mexican government. Exclusive of this 2001
reversion income, the Company's year to date 2002 equity in earnings from Grupo
TFM increased $10.9 million compared to the same period in 2001. Exclusive of
Mexrail's results for the year to date 2002, Grupo TFM's revenue improved nearly
1% compared to the same period in 2001 and operating expenses (under U.S. GAAP)
were 5% lower (exclusive of the 2001 reversion income). For the six months ended
June 30, 2002, Grupo TFM's results included a $31.3 million deferred tax benefit
(calculated under U.S. GAAP) compared to a deferred tax expense of $24.6 million
in the same period in 2001. This variance was caused by several factors,
including a deferred tax expense recorded in 2001 related to the income from the
line reversion, the weakening of the peso exchange rate, as well as tax benefits
derived from the impact of Mexican inflation in 2002. The fluctuation in the
peso exchange rate also contributed to a $17.6 million exchange loss for year to
date 2002 compared to an exchange gain of $4.2 million for the same period in
2001.
EXTRAORDINARY ITEM, NET OF INCOME TAXES. In the accompanying consolidated
financial statements for the six months ended June 30, 2002, KCS reported an
extraordinary charge of $2.7 million (after-tax) related to the debt refinancing
transaction discussed above in "Recent Developments - Debt Refinancing".
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. The Company adopted the provisions of
SFAS 133 effective January 1, 2001. As a result of this change in the method of
accounting for derivative financial instruments, the Company recorded an
after-tax charge to earnings of $0.4 million in the first quarter of 2001. This
charge is presented as a cumulative effect of an accounting change in the
accompanying consolidated financial statements.
TRENDS AND OUTLOOK
The Company has been able to improve its profitability and pay down debt despite
the continued economic distress in North America and its impact on revenue.
Consolidated revenue for the second quarter and year to date 2002 periods
declined 3.7% and 2.4%, respectively, due mostly to the impact of the slow U.S.
economy and reduced coal revenues, which occurred as a result of a contractual
rate decline and the expiration of a contract (See analysis of Coal revenues
above). Efforts to maintain the Company's cost structure, however, have proven
effective as operating income for both second quarter and year to date 2002 has
increased compared to the same periods in 2001, despite these revenue declines
in both periods. Operating income for the second quarter 2002 rose 12.4%
compared to the second quarter of 2001. Operating income rose 46.8% to $27.9
million for year to date 2002 compared to $19.0 million for the same period last
year. The Company's second quarter and year to date 2002 diluted earnings per
share increased 188% and 147%, respectively, compared to the same periods in
2001.
The Company's investment in Grupo TFM continues to contribute to the Company's
net income. Equity in earnings from Grupo TFM increased $8.1 million in the
second quarter of 2002 and $10.9 million (exclusive of $9.1 million related to
the reversion of certain concession assets to the Mexican government) for year
to date 2002 compared to the respective periods in 2001. We believe the
additional ownership interest in Grupo TFM obtained from the purchase of the
Mexican government's 24.6% interest in Grupo TFM will provide the opportunity
for profitability growth.
The Company reduced its debt balance by approximately $33 million during the
second quarter of 2002 and by $92 million during the course of the last twelve
months, resulting in a debt balance of $595.0 million at June 30, 2002. In June
2002, KCSR issued $200 million of 7 1/2% senior notes due in 2009. This debt
offering will provide stability for the current and future capital structure.
A current outlook for the Company's businesses for the remainder of 2002 is as
follows (refer to the first paragraph of "Overview" section of this Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, regarding forward-looking comments):
As previously discussed, management expects coal revenues for the remainder of
2002 to decline as a result of a contractual rate reduction at SWEPCO, as well
as the loss of business due to the expiration of a contract that was not
renewed. Management believes that total revenues for the remainder of 2002 will
decline approximately 1% compared to the second half of 2001 as coal revenue
declines are expected to be only partially offset by higher revenues in other
commodity groups through new business and targeted rate increases.
Except as outlined herein, variable costs and expenses are expected to be
proportionate with revenue activity, assuming normalized rail operations. Fuel
prices are expected to fluctuate subject to market conditions. To mitigate the
market risk associated with fuel, the Company currently has approximately 40% of
its remaining budgeted fuel usage for 2002 under purchase commitments, which
lock in a specific price. Casualty expenses are expected to be lower in the
remainder of 2002 compared to 2001 based on the Company's continued focus and
success on safety issues and the settlement approach implemented during 2001.
Insurance costs are expected to rise as the insurance industry continues to
respond to the September 11, 2001 terrorist attacks and health care costs are
also expected to be higher in 2002 based on the market trends. These increases
are expected to be offset by declines in certain railroad retirement costs as
described further in "Recent Developments - New Railroad Retirement Improvement
Act" of the Company's 2001 Form 10-K. Depreciation expense is expected to
increase for the remainder of 2002 following the implementation of MCS and
operating lease expense is expected to remain relatively flat.
The Company expects to continue to participate in the earnings/losses from its
equity investments in Grupo TFM, Southern Capital and PCRC. Due to the
variability of factors affecting the Mexican economy, management can make no
assurances as to the impact that a change in the value of the peso or a change
in Mexican inflation will have on the results of Grupo TFM.
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data for the Company is as follows (IN MILLIONS):
Six Months
Ended June 30,
-------------------------------
2002 2001
------------- -------------
Cash flows provided by (used for):
Operating activities $ 60.6 $ 14.8
Investing activities 6.0 (27.8)
Financing activities (67.8) 10.1
------------- -------------
Cash and cash equivalents:
Net decrease (1.2) (2.9)
At beginning of year 24.7 21.5
------------- -------------
At end of period $ 23.5 $ 18.6
============= =============
During the six months ended June 30, 2002, the Company's consolidated cash
position decreased $1.2 million from December 31, 2001, primarily as a result of
debt repayments and property acquisitions mostly mitigated by the proceeds
received from the sale of Mexrail, proceeds received from the sale of certain
non-operating property and operating cash flows. Net operating cash inflows were
$60.6 million and $14.8 million for the six months ended June 30, 2002 and 2001,
respectively. The $45.8 million increase in operating cash flows was primarily
attributable to higher net income and changes in working capital balances,
comprised mainly of the receipt of income tax refunds during the first six
months of 2002.
Net investing cash inflows (outflows) were $6.0 million and ($27.8) million for
the six months ended June 30, 2002 and 2001, respectively. This $33.8 million
difference was driven by proceeds received from the sale of the Company's
investment in Mexrail of $31.4 million and a $9.9 million increase in proceeds
received from the disposal of property sale of other assets in the first six
months of 2002. These cash inflows were partially offset by a $12.1 million
increase in capital expenditures.
For the six months ended June 30, 2002, financing cash outflows were used
primarily to repay long-term debt and to fund debt issuance costs associated
with the $200 million note offering. Cash inflows were generated from proceeds
from the note offering and from the issuance of common stock under employee
stock plans. For the first six months of 2002, net financing cash outflows were
$67.8 million compared to net financing cash inflows of $10.1 million for the
first six months of 2001. This difference was primarily due to net repayments of
long-term debt of $63.4 million during the first six months of 2002 compared to
net borrowings of $11.8 million during the first six months of 2001.
Management expects cash flows from operations to be positive throughout the
remainder of 2002 as a result of operating income, which has historically
resulted in positive operating cash flows. Investing activities are projected to
use significant amounts of cash for capital expenditures. Future roadway
improvement projects will continue to be primarily funded by operating cash
flows or, secondarily, through borrowings under the Company's line of credit.
The Company's consolidated ratio of debt to total capitalization was 45.5% and
49.2% at June 30, 2002 and December 31, 2001, respectively. The Company's debt
decreased $63.4 million from December 31, 2001 to $595.0 million at June 30,
2002 as a result of the net repayment of long-term debt. This decrease in debt
was coupled with an increase in the Company's stockholders' equity of $32.4
million to $712.7 million at June 30, 2002. This increase was due primarily to
net income of $26.2 million and the issuance of common stock under employee
stock plans. Management anticipates that the ratio of debt to total
capitalization will continue to decline slightly during the remainder of 2002 as
debt continues to be reduced and equity increases.
In addition to operating cash flows, the Company has financing available under
Revolver with a maximum borrowing amount of $100 million. As of June 30, 2002,
all $100 million was available under the Revolver. The New Credit Agreement
contains, among other provisions, various financial covenants. As a result of
certain financial covenants contained in the credit agreement, maximum
utilization of the Company's Revolver may be restricted. The Company was in full
compliance with all covenant provisions of the credit agreement at June 30, 2002
and expects to be in compliance at the end of the third quarter and for the
foreseeable future. See "Recent Developments - Debt Refinancing".
As discussed in "Recent Developments- Debt Refinancing", on June 12, 2002, KCSR
used the net proceeds from the Note Offering of $195.8 million, together with
cash, to repay term debt under the KCS Credit Facility and certain other secured
indebtedness of the Company. The 7 1/2% Notes are general unsecured obligations
of KCSR, are guaranteed by the Company and certain of its subsidiaries and
contain certain covenants and restrictions customary for this type of debt
instrument and for borrowers with similar credit ratings.
The Company filed a Universal Shelf Registration Statement on Form S-3 ("Initial
Shelf" - Registration No. 33-69648) in September 1993, as amended in April 1996,
for the offering of up to $500 million in aggregate amount of securities. The
SEC declared the Initial Shelf effective on April 22, 1996; however, no
securities have been issued thereunder. The Company has carried forward $200
million aggregate amount of unsold securities from the Initial Shelf to a Shelf
Registration Statement filed on Form S-3 ("Second Shelf" - Registration No.
333-61006) on May 16, 2001 for the offering of up to $450 million in aggregate
amount of securities. The SEC declared the Second Shelf effective on June 5,
2001. Securities in the aggregate amount of $300 million remain available under
the Initial Shelf and securities in the aggregate amount of $450 million remain
available under the Second Shelf. To date, no securities have been issued under
either the Initial Shelf or Second Shelf.
As discussed in the 2001 Form 10-K, Grupo TMM and KCS, or either Grupo TMM or
KCS, could be required to purchase the Mexican government's interest in TFM.
However, this provision is not exercisable prior to October 31, 2003 without the
consent of Grupo TFM. If KCS and Grupo TMM, or either KCS or Grupo TMM alone had
been required to purchase the Mexican government's 20% interest in TFM as of
June 30, 2002, the total purchase price would have been approximately $491.2
million.
The Company believes, based on current expectations, that its cash and other
liquid assets, operating cash flows, access to capital markets, borrowing
capacity, and other available financing resources are sufficient to fund
anticipated operating, capital and debt service requirements and other
commitments through 2002. However, the Company's operating cash flows and
financing alternatives can be impacted by various factors, some of which are
outside of the Company's control. For example, if the Company were to experience
a substantial reduction in revenues or a substantial increase in operating costs
or other liabilities, its operating cash flows could be significantly reduced.
Additionally, the Company is subject to economic factors surrounding capital
markets and the Company's ability to obtain financing under reasonable terms is
subject to market conditions. Further, the Company's cost of debt relative to
potential future debt financing transactions could be impacted by independent
rating agencies, which assign debt ratings based on certain credit measurements
such as interest coverage and leverage ratios.
OTHER
NEW ACCOUNTING PRONOUNCEMENT. In April 2002, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections ("SFAS 145"). SFAS 145, among other things,
rescinds Statement of Accounting Standards No. 4, "Reporting Gains and Losses
from Extinguishment of Debt ("SFAS 4"), which provided that gains and losses
from the extinguishment of debt were to be reported as extraordinary items in
the statement of income. The provisions of SFAS 145 relating to the rescission
of SFAS 4 are effective for fiscal years beginning after May 15, 2002. The
Company has reviewed the provisions of SFAS 145 and determined that, upon
adoption, all items currently reported as extraordinary items in the Company's
Consolidated Statements of Income will be reclassified to a separate line item
presented above `income before income taxes'. The related income taxes, which
were previously presented net with the extraordinary item, will be presented as
a component of the income tax provision. The Company may elect to adopt the
provisions of SFAS 145 before its required effective date.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no significant changes in the Company's Quantitative and
Qualitative Disclosures About Market Risk from that previously reported in the
Annual Report on Form 10-K for the year ended December 31, 2001.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Part I, Item 1. Financial Statements, Note 8 to the Consolidated Condensed
Financial Statements of this Form 10-Q is hereby incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information regarding the Company's 2002 Annual Meeting of Stockholders held on
May 2, 2002 is included in Form 10-Q for the three months ended March 31, 2002
and is hereby incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K
The Company furnished a Current Report on Form 8-K dated April 10, 2002
announcing the date of its first quarter 2002 earnings release and
conference call. The information included in this Current Report on Form
8-K was furnished pursuant to Item 9 and shall not be deemed to be
filed.
The Company furnished a Current Report on Form 8-K dated April 25, 2002
reporting its first quarter 2002 operating results. The information
included in this Current Report on Form 8-K was furnished pursuant to
Item 9 and shall not be deemed to be filed.
The Company furnished a Current Report on Form 8-K dated June 5, 2002
under Item 5 of such form, announcing that the Company had priced $200
million of senior unsecured noted due 2009 at par with a coupon of 7
1/2%.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized and in the capacities indicated on August 13, 2002.
Kansas City Southern
/S/ RONALD G. RUSS
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Ronald G. Russ
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/S/ LOUIS G. VAN HORN
--------------------------------------------------
Louis G. Van Horn
Vice President and Comptroller
(Principal Accounting Officer)