(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2003
For the fiscal year ended December 31, 2006 | ||
or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission file Delaware of 427 West Common Stock, $.01 Per Share Par Value No þ 15, 2007.For the transition period fromtonumbernumber: 1-4717Companyregistrant as specified in its charter)Delaware 44-0663509
(State or other jurisdiction
incorporation or organization)(I.R.S. EmployerIdentification No.)12th12th Street
Kansas City, Missouri64105(Address of principal executive offices) 44-0663509
(I.R.S. Employer
Identification No.)
64105
(Zip Code)Company’scode (816) 983-1303code)12 (b)12(b) of the Act:Title of each class each exchangeEach Exchange on which registered
Which RegisteredPreferred Stock, Par Value $25 Per Share, 4%, Noncumulative New York Stock Exchange New York Stock Exchange 12 (g)12(g) of the Act:Companyregistrant (1) has filed all reports required to be filed by Section 13 or 15 (d)15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Companyregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YESYes xþ NO Noo¨Company’sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. xoCompanyregistrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined inRule 12b-2 of the Exchange Act Act).12b-2) YES12b-2 of the Exchange Act). Yes xo NO No þ¨Company Stock. Company’s common stock is listed on the New York Stock Exchange under the symbol “KSU.” As of June 30, 2003, the aggregate market value of the voting and non-voting common stock held by non-affiliates of the Companyregistrant was approximately $742 million (amount computed based on closing prices$2.03 billion at June 30, 2006. There were 76,718,891 shares of $.01 par common stock on New York Stock Exchange). As ofoutstanding at February 27, 2004, 62,633,808 shares of common stock and 242,170 shares of voting preferred stock were outstanding.REFERENCE:PortionsREFERENCEthe following documents areStockholders which will be filed no later than 120 days after December 31, 2006, is incorporated herein by reference into Part of the Form 10-K as indicated:in Parts I and III.
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20062003 FORM 10-K ANNUAL REPORT
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PART I | |||||||||
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7 | |||||||||
19 | |||||||||
Properties | 19 | ||||||||
Legal Proceedings | 21 | ||||||||
21 | |||||||||
Executive Officers of the Company | |||||||||
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23 | |||||||||
25 | |||||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 | ||||||||
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55 | |||||||||
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 111 | ||||||||
111 | |||||||||
Other Information | 111 | ||||||||
111 | |||||||||
112 | |||||||||
Security Ownership of Certain Beneficial Owners and Management and Related | 112 | ||||||||
Certain Relationships, | 113 | ||||||||
113 | |||||||||
PART IV | |||||||||
Exhibits and Financial Statement Schedules | 113 | ||||||||
123 |
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Part I
Item 1. | Business |
KCS, along with its subsidiaries and affiliates, owns and operates a uniquely positioned North American rail networkAmerica that are strategically focused on the growing north/south freight corridor that connectsconnecting key commercial and industrial markets in the central United States with major industrial cities in Mexico. The Company’s principal subsidiary,KCS and its subsidiaries had approximately 6,470 employees on December 31, 2006. The Kansas City Southern Railway Company (“KCSR”), which was founded in 1887, is one of sevena U.S. Class I railroads in the United States (railroads with annual revenues of at least $272 million, as indexed for inflation).railroad. KCSR serves a ten-state region in the midwestMidwest and southern partsSoutheast regions of the United States and has the shortest north/south rail route between Kansas City, Missouri and several key ports along the Gulf of Mexico in Alabama, Louisiana, Mississippi and Texas.
The Company’s rail network also includes an equity investment in
TFM wholly-owns Mexrail, Inc. (“Mexrail”). Mexrail owns 100% of The Texas-Mexican Railway Company (“Tex-Mex”). Tex-Mex operates a 157-mile rail line extending from Laredo to Under the port city of Corpus Christi, Texas and connects the operations of KCSR with TFM. Tex-Mex connects with TFM at Laredo and connects to KCSR through trackage rights at Beaumont, Texas. TFM, through its concession with the Mexican government,Concession, KCSM has the right to control and operate the southern half of the rail-bridgerail bridge at Laredo, and, indirectly through its ownership of Mexrail, owns the northern half of the rail-bridge at Laredo,Texas, which spans the Rio Grande River between the United States and Mexico.
Together, the Company’s
KCS’s rail network is further expanded through marketing agreementsconnects with Norfolk Southern Railway Company (“Norfolk Southern”), The Burlington Northern and Santa Fe Railway Company (“BNSF”) and the Iowa, Chicago & Eastern Railroad Corporation (“IC&E” – formerly I&M Rail Link, LLC). Marketing agreements with Norfolk Southern allow the Company to capitalize on its east/west route from Meridian, Mississippi to Dallas, Texas (“Meridian Speedway”) to gain incremental traffic volume between the southeast and the southwest. The marketing alliance with BNSF was developed to promote cooperation, revenue growth and extend market reach for both railroads in the United States and Canada. It 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’s marketing agreement with IC&E provides access to Minneapolis, Minnesota and Chicago, Illinois and to the origination of corn and other grain traffic in Iowa, Minnesota and Illinois.
The Company’s rail network interconnects with all other Class I railroads, and providesproviding shippers with an effective alternative to other railroad routes and giving direct access to Mexico and the southeasternSoutheast and southwesternSouthwest United States through less congested interchange hubs.
The Company
PCRC.
• | Meridian Speedway, LLC (“MSLLC”), a ninety percent owned consolidated affiliate that owns the former KCSR rail line between Meridian, Mississippi and Shreveport, Louisiana, which is the portion of the KCSR rail line between Dallas, Texas and Meridian known as the “Meridian Speedway.” Norfolk Southern Corporation (“NS”) through its wholly-owned subsidiary, The Alabama Great Southern Railroad Company, owns the remaining ten percent of MSLLC. Ultimately KCS will own seventy percent and NS will own thirty percent of MSLLC upon the contribution of additional capital by NS to MSLLC; |
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KCS was organized in 1962 as Kansas City Southern Industries, Inc. and in 2002 formally changed its name to Kansas City Southern. KCS, as the holding company, supplies its various subsidiaries with managerial, legal, tax, financial and accounting services, in addition to managing other minor “non-operating” investments.
The information set forth in response to Item 101 of Regulation S-K under Part II Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-K is incorporated by reference in partial response to this Item 1.
RAIL NETWORK
Owned Network
KCSR owns and operates approximately 3,100 miles of main and branch lines and 1,250 miles of other tracks in a ten-state region that includes Missouri, Kansas, Arkansas, Oklahoma, Mississippi, Alabama, Tennessee, Louisiana,
• | PABTEX GP, LLC, a wholly-owned and consolidated owner of a bulk materials handling facility with deep-water access to the Gulf of Mexico at Port Arthur, Texas
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• | Trans-Serve, Inc. (doing business as Superior Tie and Timber), a wholly-owned and consolidated operator of a railroad wood tie treatment facility; | |
• | Transfin Insurance, Ltd., a wholly-owned and consolidated captive insurance company, providing property, general liability and certain other insurance coverage to KCS and its subsidiaries and affiliates; | |
• | Southern Capital Corporation, LLC (“Southern Capital”), a fifty percent owned unconsolidated affiliate that leases locomotives and rail equipment; and | |
• | Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”), a twenty five percent owned unconsolidated affiliate that provides railroad services as well as ancillary services in the greater Mexico City area. |
MARKETS SERVED Chemical and Petroleum. KCS transports chemical and petroleum products via tank and hopper cars to markets in the Southeast and Northeast United States and throughout Mexico through interchanges with other rail carriers. Primary traffic includes plastics, petroleum, oils, petroleum coke, rubber and miscellaneous chemicals. Forest Products and Metals. KCS’ rail lines run through the heart of the Southeast United States timber-producing region. The Company believes that | 2006 Revenues Business Mix ![]() |
industry.
Agricultural and mineral products accounted for approximately 18.9% of KCSR revenues in 2003. Agricultural products consist of domestic and export grain, food and related products. Shipper demand for agricultural products is affected by competition among sources of grain and grain products, as well as price fluctuations in international markets for key commodities. In the domestic grain business, the Company’sUnited States, KCS’ rail lines receive and originate shipments of grain and grain products for delivery to feed mills serving the poultry industry. Through the marketing agreement with IC&E, the Company’s rail lines have access to sources of corn and other grain in Iowa and other Midwestern states. KCSRKCS currently serves 35 feed mills along its rail lines throughout Arkansas, Oklahoma, Texas, Louisiana, Mississippi and Alabama. ExportThrough its marketing agreements, KCS has access to sources of corn and other grain in Iowa and other Midwest states. United States export grain shipments and Mexico import grain shipments include primarily corn, wheat, and soybeans transported to Mexico via Laredo and corn transported to the Gulf of Mexico for overseas destinations and to Mexico via Laredo.destinations. Over the long term, export grain shipments to Mexico are expected to increase as a result of the Company’s strategic investments in Tex-Mex and TFM, given Mexico’s reliance on grain imports. Food and related products consist mainly of soybean meal, grain meal, oils and canned goods, sugar and beer. Mineral shipments consist of a variety of products including ores, clay, stone and cement.
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Intermodal and automotive products accounted for approximately 10.3% of 2003 KCSR revenues. The intermodal freight business consists primarily of hauling freight containers or truck trailers by a combination of water, railfrom motor carriers and motor carriers,ocean liners, with rail carriers serving as the link between the other modes of transportation.long-distance haulers. The Company’s intermodalautomotive business has grown significantly over the last ten years with intermodal units increasing from 61,748 in 1993 to 303,507 in 2003 and intermodal revenues increasing from $17 million to $53 million during the same period. Through our dedicated intermodal train service between Meridian and Dallas, the Company competes directly with truck carriers along the Interstate 20 corridor.
The intermodal business is highly price and service driven as the trucking industry maintains certain competitive advantages over the rail industry. Trucks are not obligated to provide or maintain rights of way and do not have to pay real estate taxes on their routes. In prior years, the trucking industry diverted a substantial
amount of freight from railroads as truck operators’ efficiency over long distances increased. In response to these competitive pressures, railroad industry management sought avenues to improve the competitiveness of rail traffic and forged numerous alliances with truck companies in order to move more traffic by rail and provide faster, safer and more efficient service to their customers. KCSR has entered into agreements with several trucking companies for train service in several corridors, but those services are concentrated between Dallas and Meridian.
The strategic alliance with CN/IC and marketing agreements with Norfolk Southern provide the Company the opportunity to further capitalize on the growth potential of intermodal freight revenues, particularly for traffic moving between points in the upper Midwest and Canada to Kansas City, Dallas and Mexico. Furthermore, the Company is developing the former Richards-Gebaur Airbase in Kansas City as a U.S. customs pre-clearance processing facility, the Kansas City International Freight Gateway (“IFG”), which, when at full capacity, is expected to handle and process large volumes of domestic and international intermodal freight. Through an agreement with Mazda through the Ford Motor Company’s Claycomo manufacturing facility located in Kansas City, KCSR has developed an automotive loading and distribution facility at IFG. This loading and distribution facility became operational in April 2000 for the movement of Mazda vehicles. During 2003, the IFG served Ford through the loading and delivery of its new F-150 truck. Management believes that, as additional opportunities arise, the IFG facility will be expanded to include additional automotive and intermodal operations.
The Company’s automotive traffic consists primarily of vehiclemoving parts moving into Mexico from the northern sections of the United Statesto assembly plants and finished vehicles moving from Mexico into the United States. CN/IC, Norfolk Southernto distribution centers for market consumption in North and TFM have a numberSouth America.
Coal
Coal historically has been one of the most stable sources of revenues and is the largest single commodity handled by KCSR. In 2003, coal revenues represented 16.1% of total KCSR revenues. Substantially all coal customers are under long term contracts, which typically have an average contract term of approximately five years. KCSR’s most significant customer is Southwestern Electric Power Company (“SWEPCO”- a subsidiary of American Electric Power, Inc.), which is under contract through 2006. The Company, directly or indirectly, delivers coal to eightten electric generating plants includingin the Flint Creek, Arkansas and Welsh, Texas facilities of SWEPCO, Kansas City Power and Light plants in Kansas City and Amsterdam, Missouri, an Empire District Electric Company plant near Joplin, Missouri and an Entergy Gulfcentral United States plant in Mossville, Louisiana. KCSR transports coal that originates infrom the Powder River Basin in Wyoming and is transferred to KCSR’s rail lines at Kansas City. KCSR serves as a bridge carrier for coal deliveries to a Texas Utilities electric generating plant in Martin Lake, Texas. In addition, KCSR delivers lignite to an electric generating plant at Monticello, Texas. SWEPCO comprised approximately 61.7% of KCSR total coal revenues and 9.8% of KCS consolidated revenues in 2003.
Other
Other rail-related revenues include a variety of miscellaneous services provided to customers and interconnecting carriers and accounted for approximately 7.8% of total KCSR revenues in 2003. Major items in this category include railcar switching services, demurrage (car retention penalties) and drayage (local truck transportation services). This category also includes haulage services performed for the benefit of BNSF under an agreement that continues through 2004 and includes minimum volume commitments.
Railroad Industry
Overview
U.S. railroad companies are categorized by the STB into three types: Class I, Class II (Regional) and Class III (Local). Currently, there are seven Class I railroadsWyoming. Coal mined in the Midwest United States which can be further divided
geographically by eastern or western classification. is transported innon-unit trains to industrial consumers such as paper mills and cement companies.
The STB and Regulation
The STB, an independent body administratively housed withinof the U.S. Department of Transportation (“DOT”), the Federal Railroad Administration of the DOT, the Occupational Safety and Health Administration (“OSHA”), as well as other federal and state regulatory agencies. The STB has jurisdiction over disputes and complaints involving certain rates, routes and services, the sale or abandonment of rail lines, applications for line extensions and construction, and consolidation or merger with, or acquisition of control of, rail common carriers. DOT and OSHA each has jurisdiction under several federal statutes over a number of safety and health aspects of rail operations, including the transportation of hazardous materials. State agencies regulate some aspects of rail operations with respect to health and safety in areas not otherwise regulated by federal law.
The U.S. railroad industry was significantly deregulated with the passage of The Staggers Rail Act of 1980 (the “Staggers Act”). In enacting the Staggers Act, Congress recognized that railroads faced intense competition from trucks and other modes of transportation for most freight traffic and that prevailing regulation prevented them from earning adequate revenues and competing effectively. Through the Staggers Act, a new regulatory scheme allowing railroads to establish their own routes, tailor their rates to market conditions and differentiate rates on the basis of demand was put in place. The basic principle of the Staggers Act was that reasonable rail rates should be a function of supply and demand. The Staggers Act, among others things:
If it is determined that a railroad is not facing enough competition to hold down prices, the STB has the authority to investigate the actions of the railroad.
The Staggers Act has had a positiveany material adverse effect on the U.S. rail industry, competition, and savings to consumers. Lower rail rates brought about byCompany’s financial condition or results of operations. KCS cannot predict the Staggers Act have resulted in significant cost savings for shippers and their customers. After decadeseffect, if any, that the adoption of steady decline, the rail market share of inter-city freight ton-miles bottomed out at 35.2% in 1978 and has trended slowly upward since then, reaching 41.7% in 2001.
Railroad Consolidation
On June 11, 2001, the STB issued new rules governing major railroad mergers and consolidations involving twoadditional or more “Class I” railroads. These rules substantially increasestringent environmental laws and regulations would have on the burden on rail merger applicants to demonstrate that a proposed transaction would be in the public interest. Company’s results of operations, cash flows or financial condition.
The STB recognized, however, that a merger between KCSR and another Class I carrier would not necessarily raise the same concerns and risks as potential mergers between larger Class I railroads. Accordingly, the STB decided that for a merger proposal involving KCSR and another Class I railroad, the STB will waive the application of the new rules and apply the rules previously in effect unless it is persuaded that the new rules should apply.
Competition
The Company’s rail operations competeCompany competes against other railroads, many of which are much larger and have significantly greater financial and other resources. Since 1994, there has been significant consolidation among major North American rail carriers, including the 1995 merger of Burlington Northern, Inc. and Santa Fe Pacific Corporation (“BN/SF”, collectively “BNSF”), the 1995 merger of the UP and the Chicago and North Western Transportation Company (“UP/CNW”) and the 1996 merger of UP with Southern Pacific Corporation (“UP/SP”). Further, Norfolk Southern and CSX purchased the assets of Consolidated Rail Corporation (“Conrail”) in 1998 and the CN acquired the IC in June 1999. Most recently, in October 2001 CN completed its acquisition of Wisconsin Central.carriers. As a result, of this consolidation, the railroad industry is now dominated by a few “mega-carriers.” KCS management believes that its revenues were negatively affected by the UP/CNW, UP/SP and BN/SF mergers, which led to diversions of rail traffic away from KCSR’s rail lines. Management regards thevery large carriers.
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As of December 31, 2003, KCS and its subsidiaries had approximately 2,670 employees.
Approximately 84% of Previously, these negotiations have not resulted in any extended work interruptions. Under the negotiating process which began on November 1, 1999, all unions reached new labor agreements with KCSR employees are covered under variousin 2005. Various collective bargaining agreements. In 1996, nationalagreements cover 81% of KCSR’s employees.
the TCU in 2002 and signed during 2003. A new labor contract was reached with the BMWE effective May 2001 and a formal agreement with the BLE was reached during 2003. In some cases, the wage increase elements of these new agreements have retroactive application. The provisionsItem 2, “Properties”, for further discussion of the various labor agreements generally include periodic general wage increases, lump-sum payments to workers and greater work rule flexibility, among other provisions. Additionally, these agreements include provisions that employees under these contracts make contributions to cover a portion ofCompany’s business.
Railroad Retirement Act and Railroad Retirement Improvement Act
Railroad industry personnel are covered by the Railroad Retirement Act (“RRA”) instead of the Social Security Act. Employer contributions under the RRA are currently substantially higher than those under the Social Security Act and may rise further because of the increasing proportion of retired employees receiving benefits relative to the number of working employees. The RRA currently requires up to a 20.75% contribution by railroad employers on eligible wages while the Social Security and Medicare Acts only require a 7.65% employer contribution on similar wage bases. Railroad industry personnel are also covered by the Federal Employers’ Liability Act (“FELA”) rather than state workers’ compensation systems. FELA is a fault-based system with compensation for injuries settled by negotiation and litigation, which can be expensive and time-consuming. By contrast, most other industries are covered by state administered no-fault plans with standard compensation schedules. The difference in the labor regulations for the rail industry compared to the non-rail industries illustrates the competitive disadvantage placed upon the rail industry by federal labor regulations.
On December 21, 2001, the Railroad Retirement and Survivors’ Improvement Act of 2001 (“RRIA”) was signed into law. This legislation liberalizes early retirement benefits for employees with 30 years of service by reducing the full benefit age from 62 to 60, eliminates a cap on monthly retirement and disability benefits, lowers the minimum service requirement from 10 years to 5 years of service, and provides for increased benefits for surviving spouses. It also provides for the investment of railroad retirement funds in non-governmental assets, adjustments in the payroll tax rates paid by employees and employers, and the repeal of a supplemental annuity work-hour tax. The law also reduced the employer contribution for payroll taxes by 0.5% in 2002 and by an additional 1.4% in 2003. Beginning in 2004, the employer contribution will be based on a formula and could range between 8.2% and 22.1%. These reductions in the employer contributions under the RRA had a favorable impact on fringe benefits expenses during 2003. Additionally, the reduction in the retirement age from 62 to 60 is expected to result in increased employee attrition, leading to additional potential cost savings since it is not anticipated that all employees selecting early retirement will be replaced.
Insurance
KCS maintains multiple insurance programs for its various subsidiaries including rail liability and property, general liability, directors and officers’ coverage, workers compensation coverage and various specialized coverage for specific entities as needed. Coverage for KCSR is by far the most significant part of the KCS program. It includes liability coverage up to $250 million, subject to a $10 million deductible and certain aggregate limitations, and property coverage up to $200 million subject to a $5 million deductible ($10 million deductible in the event of flood or earthquake) and certain aggregate limitations. KCS management believes that the Company’s insurance program is in line with industry norms given its size and provides adequate coverage for potential losses.
Available Information
The Company’s Internet address is www.kcsi.com. Through this website, KCS makes available, free of charge, its Annual Reports onForm 10-K, Quarterly Reports onForm 10-Q and Current Reports onForm 8-K,
and amendments to those reports, as soon as reasonably practicable after electronic filing or furnishing of these reports with the Securities and Exchange Commission. In addition, the Company’s corporate governance guidelines, ethics and legal compliance policy, and the charters of the Audit Committee, the Finance Committee, the Nominating and Corporate Governance Committee and the Compensation and Organization Committee of the Company’s Board of Directors are available on the Company’s Internet website. These guidelines, policies and charters are available in print without charge to any stockholder who requestsrequesting them. Written requests may be made to the Corporate Secretary, of KCS, P.O. Box 219335, Kansas City, Missouri 6412164121-9335 (or if by federal express or other form of express delivery to 427 West 12th Street, Kansas City, Missouri 64105).
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KCSR —Certain KCSR property statistics follow:
2003 | 2002 | 2001 | |||||||
Route miles—main and branch line | 3,108 | 3,109 | 3,103 | ||||||
Total track miles | 4,351 | 4,359 | 4,444 | ||||||
Miles of welded rail in service | 2,309 | 2,261 | 2,197 | ||||||
Main line welded rail (%) | 61 | % | 61 | % | 59 | % | |||
Cross ties replaced | 280,226 | 232,993 | 233,489 | ||||||
Average Age(in years): | 2003 | 2002 | 2001 | ||||||
Wood ties in service | 16.7 | 16.0 | 16.0 | ||||||
Rail in main and branch line | 31.0 | 29.9 | 28.9 | ||||||
Road locomotives | 25.5 | 24.6 | 23.6 | ||||||
All locomotives | 26.5 | 25.6 | 24.5 |
KCSR’s fleet of locomotives and rolling stock consisted of the following at December 31:
2003 | 2002 | 2001 | ||||||||||
Leased | Owned | Leased | Owned | Leased | Owned | |||||||
Locomotives: | ||||||||||||
Road Units | 302 | 121 | 302 | 122 | 304 | 122 | ||||||
Switch Units | 52 | 4 | 52 | 4 | 52 | 4 | ||||||
Other | — | 8 | — | 8 | — | 8 | ||||||
Total | 354 | 133 | 354 | 134 | 356 | 134 | ||||||
Rolling Stock: | ||||||||||||
Box Cars | 5,252 | 1,354 | 5,358 | 1,366 | 6,164 | 1,420 | ||||||
Gondolas | 761 | 61 | 760 | 74 | 780 | 88 | ||||||
Hopper Cars | 2,746 | 805 | 2,614 | 966 | 2,002 | 1,179 | ||||||
Flat Cars (Intermodal | ||||||||||||
and Other) | 1,366 | 552 | 1,599 | 541 | 1,585 | 601 | ||||||
Tank Cars | 41 | 40 | 42 | 40 | 44 | 43 | ||||||
Auto Rack | 200 | — | 201 | — | 201 | — | ||||||
Total | 10,366 | 2,812 | 10,574 | 2,987 | 10,776 | 3,331 | ||||||
As of December 31, 2003, KCSR’s fleet consisted of 487 diesel locomotives, of which 133 were owned, 333 leased from Southern Capital and 21 leased from non-affiliates. KCSR’s fleet of rolling stock consisted of 13,178 freight cars, of which 2,812 were owned, 3,384 leased from Southern Capital and 6,982 leased from non-affiliates. The locomotives and freight cars leased from Southern Capital secure pass through certificates issued by Southern Capital during 2002.
The owned equipment is subject to liens created under senior secured credit facilities, as well as liens created under certain capital leases and equipment trust certificates. KCSR indebtedness with respect to equipment trust certificates and capital leases totaled approximately $19.1 million at December 31, 2003.
KCSR, in support of its transportation operations, owns and operates repair shops, depots and office buildings along its right-of-way. A major facility, the Deramus Yard, is located in Shreveport, Louisiana and includes a general office building, locomotive repair shop, car repair shops, customer service center, material warehouses and fueling facilities totaling approximately 227,000 square feet. KCSR owns a 107,800 square foot facility in Pittsburg, Kansas that previously was used as a diesel locomotive repair facility. This facility was closed during 1999 and is now being leased to an engineering and manufacturing company. KCSR also owns freight warehousing and office facilities in Dallas, Texas totaling approximately 150,000 square feet. Other facilities owned by KCSR include a 21,000 square foot freight car repair shop in Kansas City, Missouri and approximately 15,000 square feet of office space in Baton Rouge, Louisiana. KCSR also has the support of a locomotive repair facility in Kansas City. This facility is owned and operated by General Electric Company (“GE”) and is used to maintain and repair AC 4400 locomotives that were manufactured by GE and are leased by KCSR.
In June 2001, the Company entered into a 17-year lease agreement for a new corporate headquarters building in downtown Kansas City, Missouri. In April 2002, the Company moved its corporate offices into this building. The Company’s corporate offices had previously been located in another building in downtown Kansas City, which was leased from a subsidiary of the Company until the building was sold in June 2001.
KCSR owns six intermodal facilities and has contracted with third parties to operate these facilities. These facilities are located in Dallas; Kansas City; Shreveport and New Orleans, Louisiana; Jackson, Mississippi; and Salisaw, Oklahoma. During 2003, the Company expanded the capacity of its Dallas and Shreveport facilities through capital improvements. The Company has constructed an automobile facility and has plans to construct an intermodal facility at the former Richards-Gebaur Airbase in Kansas City, Missouri. A portion of the automotive facility became operational in April 2000 for the storage and movement of automobiles. Intermodal and automotive operations at the facility may be further expanded in the future as business opportunities arise. The various intermodal facilities include strip tracks, cranes and other equipment used in facilitating the transfer and movement of trailers and containers.
KCSR also has ten bulk transload facilities, including facilities in Kansas City; Spiro, Oklahoma; Jackson; Dallas; Sauget, Illinois; Lake Charles and Baton Rouge, Louisiana; Vicksburg, Mississippi; and Pittsburg and Port Arthur, Texas. Due to growth in transload traffic, KCSR expanded its Jackson facility in 2003. In 2003, KCSR opened the transload facility in Pittsburg and returned to service a 70-acre bulk commodity handling facility in Port Arthur. Transload operations consist of rail/truck shipments whereby the products shipped are unloaded from the trailer, container or rail car and reloaded onto the other mode of transportation. Transload is similar to intermodal, except that intermodal shipments transfer the entire container or trailer and transload shipments transfer only the product being shipped.
KCSR owns 16.6% of the Kansas City Terminal Railway Company, which owns and operates approximately 80 miles of track, and operates an additional eight miles of track under trackage rights in greater Kansas City, Missouri. KCSR also leases for operating purposes certain short sections of trackage owned by various other railroad companies and jointly owns certain other facilities with these railroads.
Grupo TFM
TFM operates approximately 2,650 miles of main and branch lines and certain additional sidings, spur tracks and main line under trackage rights. TFM has the right to operate the rail lines, but does not own the land, roadway or associated structures. Approximately 81% of the main line operated by TFM consists of continuously
welded rail. As of December 31, 2003, TFM owned 467 locomotives, owned or leased from affiliates 4,293 freight cars and leased from non-affiliates 150 locomotives and 7,683 freight cars. Grupo TFM (through TFM) has office space at which various operational, administrative, managerial and other activities are performed. The primary facilities are located in Mexico City and Monterrey, Mexico. TFM leases 94,915 square feet of office space in Mexico City and holds, under the Concession, a 115,157 square foot facility in Monterrey.
Panama Canal Railway Company
PCRC leases four locomotives and owns two locomotives. PCRC also owns 12 double stack cars, 6 passenger cars and various other infrastructure improvements and equipment. Under the concession, PCRC constructed and operates intermodal terminal facilities at each end of its railroad and an approximate 15,000 square foot equipment maintenance facility. All of this property and equipment is subject to liens securing PCRC debt as further described in Item 1, “Business—Rail Network—Significant Investments—Panama Canal Railway Company.”
Other
The Company owns 1,025 acres of property located on the waterfront in the Port Arthur, Texas area, which includes 22,000 linear feet of deep-water frontage and three docks. Port Arthur is an uncongested port with direct access to the Gulf of Mexico. Approximately 75% of this property is available for development.
Trans-Serve, Inc. operates a railroad wood tie treating plant in Vivian, Louisiana under an industrial revenue bond lease arrangement with an option to purchase. This facility includes buildings totaling approximately 12,000 square feet.
Pabtex GP LLP owns a 70-acre bulk commodity handling facility in Port Arthur, Texas.
KCSR owns a microwave system formerly owned and operated by Mid-South Microwave, Inc. prior to its merger into KCSR effective December 31, 2002. This system extends essentially along the right-of-way of KCSR from Kansas City to Dallas, Beaumont and Port Arthur and New Orleans.
Other subsidiaries of the Company own approximately 5,500 acres of land at various points adjacent to the KCSR right-of-way. Other properties owned include a 354,000 square foot warehouse at Shreveport and several former railway buildings now being rented to non-affiliated companies, primarily as warehouse space.
In the opinion of management, the various facilities, office space and other properties owned and/or leased by the Company and its subsidiaries are adequate for current operating needs.
The information set forth in response to Item 102 of Regulation S-K under Item 1, “Business”, of this Form 10-K and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” is incorporated by reference in partial response to this Item 2.
The information set forth in response to Item 103 of Regulation S-K under Part II Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other—Litigation—Other— Environmental Matters and—Recent Developments—Dispute over Acquisition Agreement” of this Form 10-K is incorporated by reference in response to this Item 3. In addition, see the discussion in Part II Item 8, “Financial Statements and Supplementary Data—Note 9—Commitments and Contingencies” of this Form 10-K.
No matters were submitted to a vote of security holders during the three-month period ended December 31, 2003.
Executive Officers of the CompanyAll executive officers are elected annually and serve at the discretion of the Board of Directors. All of the executive officers have employment agreements with the Company.Item 1A. Risk Factors Name• quarterly variations in operating results; Age
• operating results that vary from the expectations of management, securities analysts, ratings agencies and investors; Position(s)
• changes in expectations as to future financial performance, including financial estimates by securities analysts, ratings agencies and investors; Michael R. Haverty 59• developments generally affecting the railroad industry; Chairman• announcements by KCS or its competitors of the Board, President and Chief Executive Officersignificant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;Gerald K. Davies 59• the assertion or resolution of significant claims or proceedings against KCS; Executive Vice President• KCS’ dividend policy and Chief Operating Officerrestrictions on the payment of dividends;Ronald G. Russ 49• future sales of KCS’ equity or equity-linked securities; Executive Vice President• the issuance of common stock in payment of dividends on preferred stock or upon conversion of preferred stock; and Chief Financial OfficerJerry W. Heavin 52• Senior Vice President—Operations of KCSRLarry O. Stevenson40Senior Vice President—Salesgeneral domestic and Marketing of KCSRWarren K. Erdman45Vice President—Corporate AffairsPaul J. Weyandt51Vice President and TreasurerMark W. Osterberg53Vice President and ComptrollerJay M. Nadlman43Associate General Counsel and Corporate Secretaryinternational economic conditions.The information set forththe Company’s Definitive Proxy Statement in the description of The Board of Directors—Directors Serving Until the Annual Meeting of Stockholders in 2006 with respect to Mr. Haverty is incorporated herein by reference.Gerald K. Daviesgeneral has served as Executive Vice President and Chief Operating Officer of KCS since July 18, 2000. Mr. Davies joined KCSR in January 1999 as the Executive Vice President and Chief Operating Officer. Mr. Daviesexperienced extreme volatility that has served as a director of KCSR since November 1999. Prior to joining KCSR, Mr. Davies served as the Executive Vice President of Marketing with Canadian National Railway from 1993 through 1998. Mr. Davies held senior management positions with Burlington Northern Railway from 1976 to 1984 and 1991 to 1993, respectively, and with CSX Transportation from 1984 to 1991.Ronald G. Russ has served as Executive Vice President and Chief Financial Officer since January 16, 2003. Mr. Russ served as Senior Vice President and Chief Financial Officer from July 1, 2002 to January 15, 2003. Mr. Russ served as Executive Vice President and Chief Financial Officer of Wisconsin Central from 1999 to 2002. He served as Treasurer of Wisconsin Central from 1987 to 1993. From 1993 to 1999 he was Executive Manager and Chief Financial Officer for Tranz Rail Holdings Limited, an affiliate of Wisconsin Central in Wellington, New Zealand. He also served in various capacities with Soo Line Railroad and The Chicago, Milwaukee, St. Paul and Pacific Railroad Company, spanning a 26-year career in the railroad industry.Jerry W. Heavin has served as Senior Vice President of Operations and a director of KCSR since July 9, 2002. Mr. Heavin joined KCSR on September 1, 2001 and served as Vice President of Engineering of KCSR until July 8, 2002. Prior to joining KCSR, Mr. Heavin served as an independent engineering consultant from 1997 through August 2001. Mr. Heavin began his railroad career in 1970 with UP, serving in various capacities, including general superintendent transportation and chief engineer of facilities.Larry O. Stevenson has served as Senior Vice President of Marketing and Sales of KCSR since January 1, 2003. Mr. Stevenson served as Vice President—Paper and Forest Products of KCSR from September 1, 2000 to December 31, 2002 and General Director Customer Service of KCSR from February 14, 2000 to August 31, 2000. Prior to joining KCSR, Mr. Stevenson served in various capacities at Canadian National Railway from June 1983 to December 1999, most recently as Assistant Vice President of Sales.Warren K. Erdman has served as Vice President—Corporate Affairs of KCS since April 15, 1997 and as Vice President—Corporate Affairs of KCSR since May 1997. Prior to joining KCS, Mr. Erdman served as Chief of Staff to United States Senator Kit Bond of Missouri from 1987 to 1997.Paul J. Weyandt has served as Vice President and Treasurer of KCS and of KCSR since September 2001. Before joining KCS, Mr. Weyandt was a consultantoften been unrelated to the Structured Finance Groupoperating performance of GE Capital Corporation from May 2001a particular company. These broad market fluctuations may adversely affect the market price of KCS’ common stock.September 2001. Prior to consulting, Mr. Weyandt spent 23 years with BNSF, most recently as Assistant Vice President—Financepay dividends on its common stock is currently restricted, and Assistant Treasurer.Mark W. Osterberg has served as Vice President and Comptroller of KCS and KCSR since February 2004. Mr. Osterberg was a financial and business process consultant in 2002 and 2003. He was the Chief Financial Officer of Sun Country Airlines, Inc. from April 2000 to December 2001. Sun Country entered US bankruptcy proceeding in January 2002 and its trade name and selected assets were sold to a third party in 2002. Mr. Osterberg served as Chief Financial Officer of Norton Motorcycles Inc., a development stage enterprise, and its predecessor from December 1998 to February 2000. Prior to that he served as the Vice President—Chief Accounting Officer for Northwest Airlines Corporation for seven years. Mr. Osterberg was also employed by the Deloitte Haskins & Sells (now Deloitte) auditing firm for nine years.Jay M. Nadlman has served as Associate General Counsel and Corporate Secretary of KCS since April 1, 2001. Mr. Nadlman joined KCS in December 1991 as a General Attorney, and was promoted to Assistant General Counsel in 1997, serving in that capacity until April 1, 2001. Mr. Nadlman has served as Associate General Counsel and Secretary of KCSR since May 3, 2001 and as Assistant General Counsel and Assistant Secretary from August 1997 to May 3, 2001. Prior to joining KCS, Mr. Nadlman served as an attorney with the Union Pacific Railroad Company from 1985 to 1991.There are no arrangements or understandings between the executive officers and any other person pursuant to which the executive officer was or is to be selected as an officer of KCS, except with respect to the executive officers who have entered into employment agreements. These employment agreements designate the position(s) to be held by the executive officer.None of the above officers are related to one another by family.Part IIItem 5.Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesThe information set forth in response to Item 201 of Regulation S-K on the cover (page i) under the heading “Company Stock,” and in Part II Item 8, “Financial Statements and Supplementary Data, at Note 11—Quarterly Financial Data (Unaudited)” of this Form 10-K is incorporated by reference in partial response to this Item 5.The Company hasdoes not declared anyanticipate paying cash dividends on its common stock duringin the last two fiscal yearsforeseeable future.infor the foreseeable future. PursuantCompany’s amended and restated credit agreement,indentures governing notes issued by KCSR, KCS did not pay dividends on its Series C Preferred Stock or Series D Preferred Stock commencing on May 15, 2006, for the Company is prohibited from the paymentfirst quarter of cash2006 until those dividend arrearages were made up in February 2007. If dividends on the Company’s common stock.On May 5, 2003, the Company completed the sale of $200 million (400,000 shares) of 4.25% Redeemable Cumulative Convertible PerpetualSeries C Preferred Stock or Series C (“Convertible Preferred Stock”), with a liquidation preference of $500 per share in a private offering under Rule 144A to qualified institutional buyers. Net proceeds to the Company were $193 million after fees to the initial purchasers of $7 million and other expenses of the offering. Dividends on the ConvertibleD Preferred Stock will be cumulative and will be payable quarterly atare in arrears for six consecutive quarters (or an annual rateequivalent number of 4.25% ofdays in the liquidation preference, when, as and if declared by the Company’s Board of Directors. Accumulated unpaid dividends will cumulate dividends at the same rate as dividends cumulate on the Convertible Preferred Stock. Each share of the Convertible Preferred Stock will be convertible, under certain conditions, and subject to adjustment under certain conditions, into 33.4728 shares of the Company’s common stock. Conversion rights arise only upon the occurrence of the following: (i) the closing sale price of the Company’s common stock exceeds a specified level for a specified period; (ii) upon certain credit rating downgrades; (iii) upon the convertible preferred stock trading below a certain level for a specified period; (iv) upon notice of redemption; and (v) upon the occurrence of certain corporate transactions. Onaggregate, whether or after May 20, 2008, the Company will have the option to redeem any or all of the Convertible Preferred Stock, subject to certain conditions. Under certain circumstances, at the option of thenot consecutive) holders of the ConvertibleSeries C Preferred Stock the Company mayor Series D Preferred Stock, as applicable, will be requiredentitled to purchase shareselect two of the Convertibleauthorized number of directors at the next annual stockholders’ meeting at which directors are elected and at each subsequent stockholders’ meeting until such time as all accumulated dividends are paid on the Series C Preferred Stock from the holders. A portion of the proceeds from the sale of the Convertibleor
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On August, 1, 2003, KCS filed a Form S-3 Registration Statement with the SEC to register, for resale by the holders, the Convertible Preferred Stock and the common stock into which such preferred stock may be converted. On October 24, 2003, this Registration Statement, as amended, was declared effective by the SEC. KCS has filed, and will continue to file, post-effective amendments to this Registration Statement as required by applicable rules and regulations.payment. In addition, KCS will not receive any proceeds from the salebe eligible to register future offerings of securities onForm S-3 or to avail itself of the securitiesother benefits available to companies that qualify as “well-known seasoned issuers” under this Registration Statement,SEC rules if KCS fails to pay dividends on its preferred stock. This could adversely affect KCS’ ability to access capital markets, and increase the cost of accessing capital markets, until the Company qualifies as amended.
Asa “well-known seasoned issuer.”
The selected financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7 of this Form 10-K and the consolidated financial statements and the related notes thereto, and the Reports of Independent Accountants thereon, included under Item 8, “Financial Statements and Supplementary Data” of this Form 10-K and such data is qualified by reference thereto. All years reflect the 1-for-2 reverseKCS’ common stock split to shareholders of record on June 28, 2000 paid July 12, 2000.
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||
(in millions, except per share and ratio amounts) | ||||||||||||||||
Revenues | $ | 581.3 | $ | 566.2 | $ | 583.2 | $ | 578.7 | $ | 609.0 | ||||||
Equity in net earnings from unconsolidated affiliates—continuing operations | $ | 11.0 | $ | 43.4 | $ | 27.1 | $ | 22.1 | $ | 5.2 | ||||||
Income from continuing operations before cumulative effect of accounting change (a) | $ | 3.3 | $ | 57.2 | $ | 31.1 | $ | 16.7 | $ | 10.2 | ||||||
Earnings per common share—Income (loss) from continuing operations before cumulative effect of accounting change (a) | ||||||||||||||||
Basic | $ | (0.04 | ) | $ | 0.94 | $ | 0.53 | $ | 0.29 | $ | 0.18 | |||||
Diluted | (0.04 | ) | 0.91 | 0.51 | 0.28 | 0.17 | ||||||||||
Total assets ( b) | $ | 2,152.9 | $ | 2,008.8 | $ | 2,010.9 | $ | 1,944.5 | $ | 2,672.0 | ||||||
Long-term obligations | $ | 523.4 | $ | 582.6 | $ | 658.4 | $ | 674.6 | $ | 760.9 | ||||||
Cash dividends per common share | $ | — | $ | — | $ | — | $ | — | $ | 0.32 | ||||||
Ratio of earnings to fixed charges (c) | — | (d) | 1.3x | 1.1x | 1.0x | 1.2x |
The information set forth in response to Item 301 of Regulation S-K under Part II Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-K is incorporated by reference in partial response to this Item 6.
The following discussion 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 forpublic market could adversely affect the periods covered by the consolidated financial statements included under Item 8 of this Form 10-K. This discussion should be read in conjunction with these consolidated financial statements, the related notes and the Report of Independent Accountants thereon, and other information included in this report.
CORPORATE OVERVIEW
KCS, a Delaware corporation, is a holding company with principal operations in rail transportation and its principal subsidiaries and affiliates include the following:
EXECUTIVE SUMMARY
Overview
KCS operates under one reportable business segmentvote in the rail transportation industryelection of directors is required to amend the restated certificate of incorporation to increase the number of directors to more than eighteen, abolish cumulative voting for directors and KCSR,abolish the Company’s principal subsidiary, is the smallestclassification of the Class I railroads.board. The Company generates its revenues and cash flowssame vote requirement is imposed by providing its customersthe restated certificate of incorporation on certain transactions involving mergers, consolidations, sales or leases of assets with freight delivery services in both our regional area and throughout the United States, Mexico and Canada through connections with our affiliates and other Class I rail carriers. Our customers conduct business in a numberor to certain owners of different industries, including electric-generating utilities, chemical and petroleum products, paper and forest products, agriculture and mineral products, automotive products and intermodal traffic. The Company uses its cash flowsmore than 5% of KCS’ outstanding stock entitled to support its operations and to invest in its infrastructure. The rail industry is a capital-intensive industry and the Company’s capital expenditures are a significant use of cash each year. In 2003, the Company’s capital expenditures were approximately $79 million and are projected to be $108 million in 2004. A more detailed discussion of capital expenditures is foundvote in the “Liquidity and Capital Resources” section below.
Grupo TFM is an unconsolidated affiliate andelection of directors. The bylaws provide that a stockholder must give the Company uses the equity accounting methodadvance written notice of its intent to recognize its proportionate share of Grupo TFM’s earnings. TFM operatesnominate a strategically significant rail corridor between Mexico and the United States. KCS management believes that its investment in Grupo TFM isdirector or raise a strategic asset with substantial economic potential.
As further described below in “Recent Developments,” on April 20, 2003,matter at an annual meeting. In addition, the Company reached an agreement (the “Acquisition Agreement”) with its partner, Grupo TMM, S.A. (“Grupo TMM”) and otherhas adopted a Rights Agreement which under certain circumstances would significantly impair the ability of third parties to ultimately acquire control of TFM through the purchase of Grupo TMM’s shares of Grupo TFM (the “Acquisition”). However, Grupo TMM has advised the Company that it is unwilling to proceed with the Acquisition. The dispute over Grupo TMM’s unwillingness to proceed with the Acquisition is currently the subject of binding arbitration and the Company’s management cannot predict whether or not KCS will be able to complete the Acquisition. Additionally, there are several other uncertainties with respect to the Company’s investment in Grupo TFM as described further in “Recent Developments.” The Company is spending substantial time and financial resources to address these uncertainties as well as the disputed Acquisition and the ultimate resolution of these items could have a material affect on the Company’s results of operations, financial condition and cash flows.
2003 Analysis
In 2003, the Company experienced consolidated revenue growth of approximately 3% compared to 2002 resulting from volume growth, targeted rate increases and improved operating performance at KCSR due to the efficiencies gained as a resultwithout prior approval of the implementationboard of a newdirectors.
providers.
2004 Outlook
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Cautionary Information” for cautionary statements concerning forward-looking comments.
During 2004, KCSR expects to continue to take advantage of the economic recovery and focus on improving the Company’s domestic operations. Management expects overall KCSR revenues to increase in 2004 compared to 2003 as certain commodity segmentsinternational operations are expected to experience growth based on higher demand. Except as discussed herein, assuming normalized rail operations, management expects KCSR’s variable operating expenses to be proportionate with revenue activity with cost efficiencies expected as a result of the continued improvements realized from the utilization of MCS. Fuel prices will fluctuate subject to market conditions, which, in 2003, were substantially higher than in 2002. Management is concerned about the trend of fuel prices due to uncertainty in the foreign markets and, as a result, the Company participates in derivative contracts to mitigate these market risks. KCSR currently has approximately 13% of its budgeted fuel usage for 2004 hedged through purchase commitments and fuel swaps, both of which reduce the risk of the adverse impact of volatile fuel prices. Additionally, in 2004, KCSR will begin purchasing a significant portion of its fuel through a pipeline system. The use of this pipeline is expected to result in fuel cost savings during 2004. Insurance costs are expected to rise commensurate with market conditions.
During 2003, KCS retained the services of an international consulting engineering firm to undertake a depreciation study of the Company’s property, plant and equipment. This study, the results of which have been approved by the STB, indicates that, beginning in 2004, annual depreciation expense for KCSR will be reduced by approximately $13 million.
The Company is currently in the process of refinancing its existing senior secured credit facility as further described in “Recent Developments—Refinancing of Senior Secured Credit Facility.” KCS has received firm commitment letters from various banks and institutional investors committing to fully fund the new facility and KCS management expects to close this refinancing transaction prior to March 31, 2004. If, however, this transaction is not consummated on or prior to March 31, 2004, the Company may be in technical default of certain of its financial covenants under its existing credit facility.
The Company expects 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 Mexican peso or a change in Mexican inflation will have on the results of Grupo TFM. In addition, if a resolution is reached regarding the dispute over the agreement to acquire Grupo TMM’s interest in Grupo TFM and the transaction to place KCSR, TFM and Tex-Mex under common control is consummated, then the Company would report the results of operations of TFM and Tex-Mex as consolidated subsidiaries (See “Recent Developments—Proposed Acquisition of Grupo TFM from Grupo TMM”).
RISK FACTORS
The Company Faces Competition from Other Railroads and Other Transportation Providers. The Company is subject to competition from other railroads, manyin particular the Union Pacific Railroad Company (“UP”) and BNSF Railway Company (“BNSF”) in the United States and Ferromex in Mexico. Many of whichKCS’ rail competitors are much larger and have significantly greater financial and other resources.resources than KCS. In addition, the Company is subject to competition from truck carriers and from barge lines and other maritime shipping. Increased competition has resultedcould result in downward pressure on freight rates. Competition with other railroads and other modes of transportation is generally based on the rates charged, the quality and reliability of the service provided and the quality of the carrier’s equipment for certain commodities. While the CompanyKCS must build or acquire and maintain its infrastructure, truck carriers, and maritime shippers and barges are able to use publicrights-of-way. The trucking industry has in the past provided effective rate and service competition to the railroad industry. Trucking requires substantially smaller capital investment and maintenance expenditures than railroads and allows for more frequent and flexible scheduling. Continuing competitive pressures, and decliningany reduction in margins due to competitive pressures, future improvements that increase the quality of alternative modes of transportation in the locations in which the Company operates, or legislation or regulations that providesprovide motor carriers with additional advantages,
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The Company may be required
The Company may be unable to complete the Acquisition. KCS and Grupo TMM are currently in a dispute over the Acquisition Agreement. KCS has initiated binding arbitration with respect to the dispute and has filed pleadings and obtained rulings from the Delaware Court of Chancery to preserve the parties’ positions pending resolution of the dispute. However, thererail. There can be no assurance that the partiesCompany will resolve their disputes relatinghave the ability to the Acquisition Agreement,convert traffic from truck to rail transport or that the arbitratorscustomers already converted will be retained. If the railroad industry in general, and the Mexican operations in particular, are unable to preserve their competitive advantages vis-à-vis the trucking industry, projected revenue growth from the Mexican operations could be adversely affected. Additionally, the revenue growth attributable to the Mexican operations could be affected by, among other factors, KCS’ inability to grow its existing customer base, negative macroeconomic developments impacting the United States or Mexican economies, and failure to capture additional cargo transport market share from the courts will resolveshipping industry and other railroads.
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Iffreight rates for agricultural products, which has adversely affected results of operations. KCS’ ability to respond to competitive pressures by decreasing rates without adversely affecting gross margins and operating results will depend on, among other things, the Mexican government’s preliminary findingsability to reduce operating costs. KCS’ failure to respond to competitive pressures, and conclusions arising from its tax audit of TFM’s 1997 tax returns are sustained, itparticularly rate competition, in a timely manner could have a material adverse effect on the Company’s financial condition, results of operationscondition.
operations.
other railroads. For example, traffic moves over the UP’s lines via trackage rights, a significant portion of KCSR’s grain shipments originate with another rail carrier pursuant to marketing agreements with that carrier, and BNSF is KCS’ largest partner in the interchange of rail traffic. There can be no assurance that the CompanyKCS will not be materially adversely affected adversely by operational or financial difficulties of other railroads.
The Company’s Mexican and Panamanian Investments subject the Company
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The Company’ssignificant debt service obligations. KCS’ leverage could adversely affect its ability to fulfill obligations under various debt instruments and operate its business. The Company is leveraged and will have significant debt service obligations. In addition, Grupo TFM is also leveraged and the acquisition of a controlling interest in Grupo TFM would increase the Company’s consolidated indebtedness and leverage. The Company’s
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weakness of the United States economy as well as various international and regionalMexican economies also affectsaffect the businesses served. Grupo TFM,served by KCS. PCRC and Panarail are more directly affected by their respectivethe Panamanian local economy.economy and trans-Pacific trade flows. KCS’ investments in Mexico and Panama expose the Company to risks associated with operating in Mexico and Panama, including, among others, cultural differences, varying labor and operating practices, political risk and differences between the United States, Mexican and Panamanian economies. Historically, a stronger economy has resulted in improved results for KCS’ rail transportation operations. Conversely, when the economy has slowed, results have been less favorable. The Company’sKCS’ revenues may be affected by prevailing economic conditions and, if an economic slowdown or recession occurs in the Company’s key markets, the volume of rail shipments is likely to be reduced. Additionally, the
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agreements.by collective labor contracts. The Company may be subject to, among other things, strikes, work stoppages or work slowdowns as a result of disputes with regard to the terms ofunder these collective bargaining agreements and labor contracts or the Company’sKCS’ potential inability to negotiate acceptable contracts with these unions. Moreover,In the United States, because such agreements are generally negotiated on an industry-wide basis, determination of the terms and conditions of future labor agreements have been and could continue to be beyond our control and, as a result, the CompanyKCS’ control. KCS may, therefore, be subject to terms and conditions in amended or futureindustry-wide labor agreements that could have a material adverse affect on ourits results of operations, financial position and cash flows. If the unionized workers in the United States or Mexico were to engage in a strike, work stoppage or other slowdown, orif other employees were to become unionized, or if the terms and conditions in future labor agreements were renegotiated, the CompanyKCS could experience a significant disruption of its operations and higher ongoing labor costs.
Although the U.S. Railway Labor Act imposes restrictions on the right of United States railway workers to strike, there is no law in Mexico imposing similar restrictions on the right of railway workers in that country to strike.
The Company May Be Subject to Various Claims and Lawsuits. The nature of the railroad business exposes the Company to the potential for various claims and litigation related to labor and employment, personal injury and property damage, environmental and other matters.financial condition. The Company maintains insurance (including self-insurance)that is consistent with the industry practice against the accident-related risks involved in the operationconduct of its business and business interruption due to natural disaster. However, this insurance is subject to a number of limitations on coverage, depending on the nature of the railroad. However, there can be no assurance that suchrisk insured against. This insurance wouldmay not be sufficient to cover the cost ofKCS’ damages suffered or that suchdamages to others, and this insurance willmay not continue to be available at commercially reasonable rates. Any material changesEven with insurance, if any catastrophic interruption of service occurs, KCS may not be able to current litigation trends could haverestore service without a materialsignificant interruption to operations and an adverse effect on the Company’s resultsKCS’ financial condition.
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The Company May Be Affected by Future Acts of Terrorismterrorism or War.war.
Refinancing Concession granted by the Mexican government. The Concession gives KCSM exclusive rights to provide freight transportation services over its rail lines for 30 years of Senior Secured Credit Facility. On March 1,the50-year Concession, subject to certain trackage rights. The SCT is principally responsible for regulating railroad services in Mexico. The SCT has broad powers to monitor KCSM’s compliance with the Concession and it can require KCSM to supply it with any technical, administrative and financial information it requests. KCSM must comply with the investment commitments established in its business plan, which forms an integral part of the Concession, and must update the plan every five years. The SCT treats KCSM’s business plans confidentially. The SCT monitors KCSM’s compliance with efficiency and safety standards established in the Concession. The SCT reviews, and may amend, these standards every five years.
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The Company is currently in the process of refinancing the Amended KCS Credit Facility, including the Revolving Credit Facility. Under the proposed termsnature of the new senior secured credit facility (“2004 KCS Credit Facility”), the Company expects to borrow $150 million under a new term loan due March 2008 (“2004 Term B Loan”). Additionally, the 2004 KCS Credit Facility provides for a new revolving credit facility, which expires in March 2007, with a maximum borrowing amount of $100 million (“2004 Revolving Credit Facility”). The Company does not anticipate any borrowing under the 2004 Revolving Credit Facility as of March 31, 2004. The
Companyinvestments made by KCSM. KCSM has received firm commitment letters from various banks and institutional investors committing to fully fund the new loans and agreeingresponded to the term sheet of the 2004 KCS Credit Facility. The commitments are subject only to proper documentation of the new facility. KCS management expects to close this refinancing transaction prior to March 31, 2004. If, however, the 2004 KCS Credit Facility is not consummated on or prior to March 31, 2004, the Company may beSCT by providing evidence in technical default of certainsupport of its existing financial covenants under the Amended KCS Credit Facility.
Prior to or at the same time as the completion of the refinancing transaction, management expects to use $60 million of cash on-hand to repay the existing Term B Loan.investments and explaining why it believes sanctions are not appropriate. The $150 million of proceeds from the 2004 Term B Loan is expected to be used for general corporate purposes, including financing a portion of the Acquisition, if it occurs. The remaining costs of the Acquisition are expected to be financed using a combination of cash on-hand, available liquidity under the 2004 Revolving Credit Facility or other capital market transactions. As further described below in “Recent Developments—Proposed Acquisition of Grupo TFM from Grupo TMM,” the CompanySCT has not yet determined whether it would exercise itsresponded to KCSM’s arguments. KCSM will have the right to pay upchallenge a negative ruling by the SCT before the Administrative Federal Court, and, if necessary, the right to $80 millionchallenge any negative ruling by the Administrative Federal Court before a Federal Magistrate’s Tribunal. However, if these proceedings are determined adversely to KCSM and sanctions are imposed, KCSM could be subject to fines, and could be subject to possible future revocation of the cash portionConcession if the SCT imposes sanctions on three additional occasions over the remaining term of the Acquisition purchase price by delivering upConcession.
Proposed Acquisition of Grupo TFM from Grupo TMM.On April 20, 2003, the Company entered into the Acquisition Agreement with Grupo TMM and other parties under which KCS ultimately would acquire control of TFM through the purchase of shares of common stock of Grupo TFM. Grupo TFM holds an 80% economic interest in TFM and all of the shares of stock with full voting rights of TFM. The remaining 20% economic interest in TFM is owned byland, roadway or associated structures. If the Mexican government legally terminates the Concession, it would own, control and manage such public domain assets used in the formoperation of shares with limited voting rights. KCSM’s rail lines. The Mexican government may also temporarily seize control of KCSM’s rail lines and its assets in the event of a natural disaster, war, significant public disturbances or imminent danger to the domestic peace or economy. In such a case, the SCT may restrict KCSM’s ability to exploit the Concession in such manner as the SCT deems necessary under the circumstances, but only for the duration of any of the foregoing events.
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Item 1B. | Unresolved Staff Comments |
Item 2. | Properties |
2006 | 2005 | 2004 | ||||||||||
Route miles — main and branch line | 3,205 | 3,226 | 3,108 | |||||||||
Total track miles | 4,446 | 4,372 | 4,353 | |||||||||
Miles of welded rail in service | 2,321 | 2,320 | 2,322 | |||||||||
Main line welded rail percent | 72 | % | 72 | % | 61 | % | ||||||
Cross ties replaced | 427,590 | 340,033 | 292,843 |
2006 | 2005 | 2004 | ||||||||||||||||||||||
Leased | Owned | Leased | Owned | Leased | Owned | |||||||||||||||||||
Locomotives | 272 | 348 | 331 | 315 | 279 | 239 | ||||||||||||||||||
Rolling stock: | ||||||||||||||||||||||||
Box cars | 5,386 | 1,356 | 5,401 | 1,323 | 5,204 | 1,307 | ||||||||||||||||||
Gondolas | 1,037 | 176 | 1,093 | 185 | 720 | 83 | ||||||||||||||||||
Hopper cars | 4,222 | 743 | 4,323 | 989 | 3,084 | 802 | ||||||||||||||||||
Flat cars (intermodal and other) | 1,985 | 388 | 844 | 531 | 1,288 | 533 | ||||||||||||||||||
Auto racks | 198 | — | 198 | — | 198 | — | ||||||||||||||||||
Tank cars | 24 | 30 | 24 | 28 | 28 | 30 | ||||||||||||||||||
Other | — | 3 | — | — | — | — | ||||||||||||||||||
Total | 12,852 | 2,696 | 11,883 | 3,056 | 10,522 | 2,755 | ||||||||||||||||||
Average age (in years): | 2006 | 2005 | 2004 | |||||||||
Road locomotives | 22.9 | 25.2 | 26.0 | |||||||||
All locomotives | 23.9 | 26.1 | 26.9 |
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Under | Track Usage | |||||||||||
Concession | Rights | Total | ||||||||||
Main track | 2,645 | 541 | 3,186 | |||||||||
Sidings under centralized traffic control | 116 | — | 116 | |||||||||
Spurs, yard tracks and other sidings | 481 | — | 481 | |||||||||
Total | 3,242 | 541 | 3,783 | |||||||||
2006 | 2005 | |||||||||||||||
Leased | Owned | Leased | Owned | |||||||||||||
Locomotives | 113 | 344 | 75 | 323 | ||||||||||||
Rolling stock: | ||||||||||||||||
Box cars | 1,068 | 1,166 | 1,278 | 1,187 | ||||||||||||
Gondolas | 2,520 | 1,817 | 2,922 | 1,824 | ||||||||||||
Hopper cars | 2,416 | 570 | 2,518 | 580 | ||||||||||||
Flat cars (intermodal and other) | 262 | 557 | 261 | 557 | ||||||||||||
Auto racks | 1,552 | — | 1,556 | — | ||||||||||||
Tank cars | 522 | 71 | 611 | 71 | ||||||||||||
Other | — | 65 | — | 55 | ||||||||||||
Total | 8,340 | 4,246 | 9,146 | 4,274 | ||||||||||||
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Item 3. | Legal Proceedings |
Item 4. | Submission of Matters to a Vote of Security Holders |
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Item 5. | Market for KCS’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The purpose of is incorporated by reference in partial response to this Item 5.
Underpay timely dividends on all Preferred Stock in either cash or stock, depending upon the terms of the Acquisition Agreement, KCS would acquire allpreferred stock, when dividend payments are not restricted under the covenants of our various debt agreements and the Company has adequate levels of liquidity. In the event that dividends on the Series C Preferred Stock or Series D Preferred Stock are in arrears for six consecutive quarters (or an equivalent number of days in the aggregate, whether or not consecutive), holders of the interestSeries C Preferred Stock or the Series D Preferred Stock, as applicable, will be entitled to elect two of Grupo TMM in Grupo TFMthe authorized number of directors at the next annual stockholders’ meeting, and at each subsequent stockholders’ meeting until such time as all accumulated dividends are paid on the Series C Preferred Stock or the Series D Preferred Stock, as applicable, or set aside for $200 million in cashpayment.
23
In connection with the Acquisition, KCS would enter into a consulting agreement with a consulting company organized by Jose Serrano, Chairman of the Board of Grupo TMM, Grupo TFM and TFM, pursuant to
which it would provide consulting services to KCS in connection with the portion of the business of KCS in Mexico for a period of three years. As consideration for these services, the consulting company would receive an annual fee of $600,000 per year and a grant of 2,100,000 shares of restricted stock of KCS. The restricted stock would vest over a period of time subject to certain conditions. The consulting agreement may be extended for an additional year at the option of KCS, upon delivery of an additional 525,000 shares of common stock. The consulting agreement also provides for up to an additional 1,350,000 common shares to be issued contingent upon the achievement of certain objectives. The restricted stock issued S & P 500 Index
2001 | 2002 | 2003 | 2004 | 2005 | 2006 | |||||||||||||||||||||||||
Kansas City Southern | 100.00 | 84.93 | 101.34 | 125.48 | 172.89 | 205.10 | ||||||||||||||||||||||||
S & P 500 | 100.00 | 77.90 | 100.24 | 111.15 | 116.61 | 135.03 | ||||||||||||||||||||||||
Dow Jones Transportation Average | 100.00 | 102.66 | 132.37 | 170.34 | 189.53 | 204.43 | ||||||||||||||||||||||||
24
Item 6. | Selected Financial Data |
Independent Registered Public Accounting Firms.
2006 | 2005(i) | 2004 | 2003 | 2002 | ||||||||||||||||
Revenues | $ | 1,659.7 | $ | 1,352.0 | $ | 639.5 | $ | 581.3 | $ | 566.2 | ||||||||||
Equity in net earnings (losses) of unconsolidated affiliates | 7.3 | 2.9 | (4.5 | ) | 11.0 | 43.4 | ||||||||||||||
Income before cumulative effect of accounting change and minority interest(ii) | 109.2 | 83.1 | 24.4 | 3.3 | 57.2 | |||||||||||||||
Earnings per common share — income (loss) before cumulative effect of accounting change: | ||||||||||||||||||||
Basic | $ | 1.20 | $ | 1.21 | $ | 0.25 | $ | (0.04 | ) | $ | 0.94 | |||||||||
Diluted | 1.08 | 1.10 | 0.25 | (0.04 | ) | 0.91 | ||||||||||||||
Total assets | $ | 4,637.3 | $ | 4,423.6 | $ | 2,440.6 | $ | 2,152.9 | $ | 2,008.8 | ||||||||||
Total debt obligations | 1,757.0 | 1,860.6 | 665.7 | 523.4 | 582.6 | |||||||||||||||
Cash dividends per common share | $ | — | $ | — | $ | — | $ | — | $ | — |
(i) | Amounts reflect the consolidation of Mexrail effective January 1, 2005, and KCSM effective April 1, 2005. | |
(ii) | Income from continuing operations before cumulative effect of accounting change and minority interest for the years ended December 31, 2005, 2004, 2003 and 2002 include certain unusual operating expenses and other income as further described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.” These costs and other income include charges for casualty claims, costs related to the acquisitions of Grupo KCSM and Mexrail, hurricane related charges, costs related to the implementation of the Management Control System (“MCS”), benefits received from the settlement of certain legal and insurance claims, severance costs and expenses associated with legal verdicts against KCS, and gains recorded on the sale of operating and non-operating property and investments. |
Dispute over Acquisition Agreement. In August 2003, Grupo TMM shareholders voted nota substitute or preferable to, approve the sale of Grupo TMM’s interests in Grupo TFM to KCS. Grupo TMM subsequently sent a notice to KCS claiming to terminate the Acquisition Agreement, because the Grupo TMM shareholders had failed to approve the Acquisition Agreement. KCS’s position has beenother information prepared and remains that the Acquisition Agreement does not provide that a negative shareholder vote by Grupo TMM shareholders is a basis for termination. KCS maintains that the Acquisition Agreement is still valid and remains in effect until at least December 31, 2004 (unless otherwise validly terminatedpresented in accordance with its terms).
KCS has taken actions to resolveGAAP. However, the information is included herein as reference because Management may use this dispute and to preserveinformation for comparability purposes when discussing the parties’ positions while it seeks to resolve the dispute. In August 2003, KCS initiated the dispute resolution process, which included an informal 60-day negotiation period between the parties. The parties were unable to resolve the dispute within that period of time. KCS filed a complaint in the Delaware Chancery Court alleging that Grupo TMM had breached the Acquisition Agreement and seeking a preliminary injunction requiring Grupo TMM not to take any action in violation of the terms of the Acquisition Agreement. KCS also filed in the Delaware Court of Chancery a motion for a preliminary injunction, which was granted, to preserve the parties’ positions while KCS seeks to resolve its dispute over Grupo TMM’s attempt to terminate the Acquisition Agreement.
On October 31, 2003, KCS initiated binding arbitration in accordance with the terms of the Acquisition Agreement. In its Arbitration Demand, KCS seeks a determination that the Acquisition Agreement is in full force and effect, specific performance of the Acquisition Agreement,Company’s business and damages for Grupo TMM’s breachbelieves that the non-GAAP information provided is meaningful and can be particularly useful in assessing comparability of the terms ofCompany’s performance for the Acquisition Agreement and failure to negotiate in good faith during the 60-day negotiation period. By the agreement of the parties, the arbitration has been bifurcated. The first stage of the arbitration only addressed the question of whether Grupo TMM’s purported negative shareholder vote gave Grupo TMM the right to terminate the Acquisition Agreement. On March 22, 2004, the Company announced that the panel of the American Arbitration Association International Center for Dispute Resolution hearing the dispute between the Company and Grupo TMM issued its interim award on March 19, 2004 finding that the Acquisition Agreement remains in force and is binding on KCS and Grupo TMM in accordance with its terms. The arbitration panel concluded that the rejection of the Acquisition Agreement by Grupo TMM’s shareholders did not authorize Grupo TMM’s purported termination of the Acquisition Agreement. The Company and Grupo TMM will now move on to the second phase of the arbitration, which will decide the remaining issues, including remedies and damages.
In connection with certain actions taken by Grupo TMM, KCS filed a motion to enforce injunction and hold Grupo TMM in contempt in the dispute between KCS and Grupo TMM over the Acquisition Agreement. In January 2004, the Delaware Court of Chancery issued a ruling, which held Grupo TMM in contempt of court for taking action inconsistent with the court’s previous order granting KCS’s motion for preliminary injunction. The court held that by Grupo TMM causing its subsidiary Grupo TFM to revoke powers of attorney requiring the signature of a KCS representative for transactions in excess of $2.5 million and in granting new powers of attorney to Grupo TMM directors, Jose Serrano and Mario Mohar to act on behalf of the company, Grupo TMM
violated provisions of the Acquisition Agreement. The previous order of the court required Grupo TMM to cause Grupo TFM to conduct its business in accordance with past practices and not to directly or indirectly amend its organizational documents. The court ordered Grupo TMM to take the actions necessary to revoke the new powers of attorney, to re-enact the original powers of attorney, and to pay KCS its costs and attorneys fees for bringing the motion for contempt.
As ofyears ended December 31, 2003, the Company has deferred approximately $9.3 million2005 and 2006.
25
As Reported | All | Non-GAAP | ||||||||||
2005 | Differences | 2005 | ||||||||||
Revenues | $ | 1,352.0 | 170.1 | $ | 1,522.1 | |||||||
Depreciation and amortization | 127.7 | 18.4 | 146.1 | |||||||||
Casualties and insurance | 103.4 | (34.8 | ) | 68.6 | ||||||||
KCSM employees’ statutory profit sharing | 41.1 | (35.1 | ) | 6.0 | ||||||||
Other operating expenses | 1,017.5 | 105.8 | 1,123.3 | |||||||||
Total operating expenses | 1,289.7 | 54.3 | 1,344.0 | |||||||||
Operating income (loss) | 62.3 | 115.8 | 178.1 | |||||||||
VAT/Put settlement gain, net | 131.9 | (131.9 | ) | — | ||||||||
Other income (expense) | (118.2 | ) | (29.2 | ) | (147.4 | ) | ||||||
Income before income taxes | 76.0 | (45.3 | ) | 30.7 | ||||||||
Income tax (benefit) | (7.1 | ) | 17.8 | 10.7 | ||||||||
Minority interest | 17.8 | (16.1 | ) | 1.7 | ||||||||
Net income | 100.9 | (79.2 | ) | 21.7 | ||||||||
Preferred stock dividends | 9.5 | — | 9.5 | |||||||||
Net income available to common shareholders | 91.4 | (79.2 | ) | 12.2 | ||||||||
Diluted Shares | 92,747 | 77,002 | ||||||||||
Diluted EPS | $ | 1.10 | $ | 0.16 |
Non-GAAP | ||||||||
2005 | 2006 | |||||||
GAAP Net Income | $ | 100.9 | $ | 108.9 | ||||
All differences | (79.2 | ) | — | |||||
Adjusted net income | 21.7 | 108.9 | ||||||
Adjusted Income tax provision (benefit) | 10.7 | 45.4 | ||||||
Interest expense | 163.6 | 167.2 | ||||||
Loss in equity in earnings of unconsolidated subs — see (a) below | (3.7 | ) | (7.3 | ) | ||||
Depreciation and amortization | 146.1 | 155.0 | ||||||
EBITDA | $ | 338.4 | $ | 469.2 | ||||
26
Non-GAAP | ||||||||
2005 | 2006 | |||||||
GAAP Interest Expense | $ | 133.5 | $ | 167.2 | ||||
All differences | 30.1 | — | ||||||
$ | 163.6 | $ | 167.2 | |||||
EBITDA | $ | 338.4 | $ | 469.2 | ||||
EBITDA Interest Coverage Ratio | 2.07 | 2.81 | ||||||
(a) | For purpose of consistency, the Company uses the format of EBITDA specified in its bank covenants which also excludes non-cash earnings from unconsolidated subsidiaries. |
2005 | 2006 | |||||||
Free Cash Flow | $ | (119.4 | ) | $ | 97.2 | |||
Proceeds from issuance of long-term debt | 644.7 | 616.3 | ||||||
Repayment of long-term debt | (521.5 | ) | (658.5 | ) | ||||
Other financing activities | (11.3 | ) | (7.1 | ) | ||||
GAAP Net Increase (Decrease) in cash and cash equivalents | $ | (7.5 | ) | $ | 47.9 | |||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
• | The Kansas City Southern Railway Company (“KCSR”), a wholly-owned subsidiary; | |
• | Mexrail, Inc. (“Mexrail”), a wholly-owned consolidated subsidiary; which, in turn, wholly owns The Texas Mexican Railway Company (“Tex-Mex”); | |
• | Meridian Speedway, LLC (“MSLLC”), a ninety percent owned consolidated affiliate; | |
• | Kansas City Southern de México, S. de R.L. de C.V. (“KCSM”). On April 1, 2005, KCS completed its acquisition of control of KCSM and as of that date, KCSM became a consolidated subsidiary of KCS. On September 12, 2005, the Company and its subsidiaries, Grupo KCSM, S.A. de C.V. (“Grupo KCSM”) and KCSM, along with the Mexican holding company Grupo TMM, S.A. (“TMM”), entered into a settlement agreement with the Mexican government resolving the controversies and disputes between the companies and the Mexican government concerning the payment of a VAT refund to KCSM and the purchase of the remaining shares of KCSM owned by the Mexican government. As a result of this settlement, KCS and its subsidiaries now wholly own Grupo KCSM and KCSM. For the first quarter of 2005, KCS accounted for its investment in KCSM on the equity basis of accounting. |
27
Mexican Government’s Put Rights With Respect to TFM Stock.The Mexican government has the right to compel the purchase of its 20% interest in TFM (referred to
• | Southern Capital Corporation, LLC (“Southern Capital”), a fifty percent owned unconsolidated affiliate that owns and leases locomotives and other rail equipment; | |
• | Panama Canal Railway Company (“PCRC”), a fifty percent owned unconsolidated affiliate which owns all of the common stock of Panarail Tourism Company (“Panarail”). | |
• | Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”), a twenty five percent owned unconsolidated affiliate that provides railroad services as well as ancillary services in the greater Mexico City area. |
Value Added Tax (“VAT”) Lawsuit and VAT Contingency Payment under the Acquisition Agreement.The VAT lawsuit (“VAT Claim”), which has been pending in the Mexican courts since 1997, arose out of the Mexican Treasury’s delivery of a VAT credit certificate to a Mexican governmental agency rather than to TFM. The facefull value of the VATnetwork KCS has built. Consolidated revenue growth in 2007 is expected to be in line with 2005 — 2006 (including KCSM’s 2005 proforma results). Price increases and higher volume are expected to be key drivers of growth while KCS continues to position its network to increase length of haul and cross border traffic, where carload growth is expected to outpace economic growth and intermodal growth is expected to increase substantially.
After several Mexican Fiscal Court and Mexican appellate court rulings during 2002 and 2003, on January 19, 2004, TFM received a Special Certificate from the Mexican Federal Treasury in the amount of $2.1 billion pesos discussed above. The Special Certificate represents the refund of the value added tax paid, and may90 locomotives will be used by TFMin Mexico.
28
not comply with the formalities required by the applicable tax legislation. The Tax Audit Summary also attached the Special Certificate pending resolution of the audit. TFM has advised that it has, within the time allowed by the Tax Audit Summary, contested the conclusions of the Mexican tax authorities, and it has filed a constitutional appeal against the Tax Audit Summary, alleging the process followed by the Mexican government violated TFM’s constitutional rights.TFM has also filed a complaint against the Mexican government, seeking to have the amount of the Special Certificate adjusted to reflect interest and penalties in accordance with Mexican law.
In addition, provided the Acquisition has occurred and neither KCS nor any of its subsidiaries has purchased the Mexican government’s TFM shares upon exercise of the Put, KCS will be obligated to pay to Grupo TMM an additional amount (referred to as the “VAT Contingency Payment”) of up to $180 million in cash in the event that the VAT Claim is successfully resolved and the amount received is greater than the purchase price of the Put. If the Acquisition is completed, KCS will assume Grupo TMM’s obligations to make any payment upon the exercise by the Mexican government of the Put and will indemnify Grupo TMM and its affiliates, and their respective officers, directors, employees and shareholders, against obligations or liabilities relating thereto.
Because TFM has not recognized its claim as an asset for financial accounting purposes, any recovery by TFM would likely be recognized by TFM as income thereby favorably impacting the Company’s recognition of its equity in earnings in Grupo TFM. The Company is presently unable to predict the amount or timing of any VAT refund recovery. For further information with respect to the VAT refund claim, see Note 3 in the Notes to KCS’s Consolidated Financial Statements in Item 8 of this Form 10-K.
Mexrail Transactions. On May 9, 2003, pursuant to the terms of a stock purchase agreement for KCS to acquire control of Mexrail (the “Stock Purchase Agreement”), KCS acquired from Grupo TMM (through its subsidiary TFM) 51% of the shares of Mexrail for approximately $32.7 million. KCS deposited the Mexrail shares into a voting trust pending resolution of KCS’s application to the STB seeking authority to exercise common control over Tex-Mex, KCSR and Gateway Eastern. The Stock Purchase Agreement provided TFM the right to repurchase all of the Mexrail stock acquired by12, 2007, the Company at any time for the purchase price paid by the Company, subject to any STB orders or directions. In August 2003, KCS receiveddeclared a demand from TFM to repurchase those Mexrail shares. In September 2003, the STB issued a decision finding no need to rulecash dividend on the transfer back to TFM of the 51% interest in Mexrail that KCS acquired. The repurchase of Mexrail by TFM closed on September 30, 2003 returning 100% ownership of Mexrail to TFM and the Stock Purchase Agreement automatically terminated. The repurchase price was $32.7 million; the same price KCS paid TFM in May 2003. The Stock Purchase Agreement, however, provided that in the event TFM reacquired the Mexrail shares from KCS, the parties to the Stock Purchase Agreement intended the terms and conditions of a February 27, 2002 stock purchase agreement under which TFM acquired the Mexrail shares, the Grupo TFM bylaws and the shareholders agreement dated May 1997 to become again valid and fully enforceable against the parties to such agreements.
Under the February 27, 2002 stock purchase agreement, KCS retained rights to prevent further sale or transfer of the stock or significant assets of Mexrail and Tex-Mex and the right to continue to participate in the corporate governance of Mexrail and Tex-Mex, which will remain U.S. corporations and subject to KCS’s super majority rights contained in Grupo TFM’s bylaws.
STB Review Status. KCS filed with the STB a Railroad Control Application, seeking permission to exercise common control over KCSR, Gateway Eastern and Tex-Mex. The STB issued its decision, effective June 13, 2003, finding that the transaction proposed in KCS’s application is a “minor transaction” under 49 CFR 1180.2(c), although KCS was required to supplement its application as discussed in the decision, to address some of the implications of KCS’s acquisition of control of TFM. The STB also outlined a procedural schedule for consideration of KCS’s application to exercise common control over KCSR, Gateway Eastern and Tex-Mex. The STB has issued an order suspending the procedural schedule pending a resolution of the uncertainties that now surround KCS’s efforts to acquire control of Tex-Mex, and requiring KCS to file status reports regarding developments in its efforts to acquire control of TFM and Tex-Mex.
Notice of Termination of Joint Venture Agreement.KCS acknowledged receipt from Grupo TMM of a notice to terminate the joint venture agreement between the parties entered into in 1995. Pursuant to such notice, the joint venture agreement terminated on December 1, 2003. The joint venture agreement between the parties provided that upon its termination, the joint venture would be liquidated and any assets held in the name of the joint venture would be distributed proportionally to KCS and Grupo TMM. There are no significant assets held by the joint venture and its termination has not had a material adverse effect on KCS.
4.25% Redeemable Cumulative Convertible Perpetual Preferred Stock. On May 5, 2003,stock, series C (“Series C Preferred Stock”) and a stock dividend on the Company completed the sale of $200 million of Redeemable5.125% Cumulative Convertible Perpetual Preferred Stock, Series CD (“ConvertibleSeries D Preferred Stock”) withfor dividends in arrears that were due May 15, 2006, August 15, 2006 and November 15, 2006, and the dividend payment due February 15, 2007. The dividend was paid February 15, 2007, to stockholders of record on February 5, 2007. The Company also declared a liquidation preference of $500 per share in a private offering. The Convertiblecash dividend on the 4%, noncumulative Preferred Stock, offering was made only by meanspayable April 3, 2007, to stockholders of an offering memorandum pursuantrecord on March 12, 2007.
A portion of the proceeds from the sale of the Convertible Preferred Stock has been used to repay debt. The remainder of the net proceeds from the offering of the Convertible Preferred Stock are expected to be used to pay a portion ofindemnification under the Acquisition or further reduce debt. IfAgreement related to representations and warranties made by TMM. On February 1, 2007, KCS received a notice from TMM indicating that TMM would seek damages from KCS under the Acquisition wereAgreement, aggregating approximately $43 million as well as other unspecified damages. The parties are obligated under the Acquisition Agreement to attempt to resolve their differences informally and, if not successful, then to be completed, the Company would explore alternative uses for the remainder of the net proceeds realized from the issuance of the Convertible Preferred Stock.
On August, 1, 2003, KCS filed a Form S-3 Registration Statement with the SECsubmit them to register for resale by the holders the Convertible Preferred Stock and the common stock into which such preferred stock may be converted. On October 24, 2003, this Registration Statement, as amended, was declared effective by the SEC. KCS has filed, and will continue to file, post-effective amendments to this Registration Statement as required by applicable rules and regulations. KCS will not receive any proceeds from the sale of the securities under this Registration Statement, as amended.
binding arbitration.
29
2003 | 2002 | 2001 | ||||||||||
(dollars in millions) | ||||||||||||
Revenues | $ | 581.3 | $ | 566.2 | $ | 583.2 | ||||||
Operating expenses | 552.2 | 518.2 | 527.8 | |||||||||
Operating income | 29.1 | 48.0 | 55.4 | |||||||||
Equity in net earnings of unconsolidated affiliates | 11.0 | 43.4 | 27.1 | |||||||||
Gain on sale of Mexrail | — | 4.4 | — | |||||||||
Interest expense | (46.4 | ) | (45.0 | ) | (52.8 | ) | ||||||
Debt retirement costs | — | (4.3 | ) | — | ||||||||
Other income | 6.8 | 17.6 | 4.2 | |||||||||
Income before income taxes | 0.5 | 64.1 | 33.9 | |||||||||
Income tax provision (benefit) | (2.8 | ) | 6.9 | 2.8 | ||||||||
Income before cumulative effect of accounting change | 3.3 | 57.2 | 31.1 | |||||||||
Cumulative effect of accounting change, net of income taxes | 8.9 | — | (0.4 | ) | ||||||||
Net income | $ | 12.2 | $ | 57.2 | $ | 30.7 | ||||||
millions).
Change | ||||||||||||||||
2006 | 2005 | Dollars | Percent | |||||||||||||
Revenues | $ | 1,659.7 | $ | 1,352.0 | $ | 307.7 | 23 | % | ||||||||
Operating expenses | 1,355.4 | 1,289.7 | 65.7 | 5 | % | |||||||||||
Operating income | 304.3 | 62.3 | 242.0 | 388 | % | |||||||||||
Equity in net earnings of unconsolidated affiliates | 7.3 | 2.9 | 4.4 | 152 | % | |||||||||||
Interest expense | (167.2 | ) | (133.5 | ) | (33.7 | ) | 25 | % | ||||||||
VAT/Put settlement gain, net | — | 131.9 | (131.9 | ) | (100 | )% | ||||||||||
Other income | 10.2 | 12.4 | (2.2 | ) | (18 | )% | ||||||||||
Income before income taxes and minority interest | 154.6 | 76.0 | 78.6 | 103 | % | |||||||||||
Income tax provision (benefit) | 45.4 | (7.1 | ) | 52.5 | (739 | )% | ||||||||||
Income before minority interest | 109.2 | 83.1 | 26.1 | 31 | % | |||||||||||
Minority interest | 0.3 | (17.8 | ) | 18.1 | (102 | )% | ||||||||||
Net income | $ | 108.9 | $ | 100.9 | $ | 8.0 | 8 | % | ||||||||
Revenues | Carloads and Intermodal Units | |||||||||||||||||||||||||||||||
Change | Change | |||||||||||||||||||||||||||||||
2006 | 2005 | Dollars | Percent | 2006 | 2005 | Units | Percent | |||||||||||||||||||||||||
General commodities: | ||||||||||||||||||||||||||||||||
Chemical and petroleum | $ | 173.5 | $ | 153.5 | $ | 20.0 | 13 | % | 158.8 | 155.7 | 3.1 | 2 | % | |||||||||||||||||||
Forest products and metals | 241.2 | 219.0 | 22.2 | 10 | % | 199.0 | 211.7 | (12.7 | ) | (6 | )% | |||||||||||||||||||||
Agricultural and mineral | 198.2 | 179.2 | 19.0 | 11 | % | 170.1 | 183.1 | (13.0 | ) | (7 | )% | |||||||||||||||||||||
Total general commodities | 612.9 | 551.7 | 61.2 | 11 | % | 527.9 | 550.5 | (22.6 | ) | (4 | )% | |||||||||||||||||||||
Intermodal and automotive | 74.8 | 76.6 | (1.8 | ) | (2 | )% | 339.4 | 335.9 | 3.5 | 1 | % | |||||||||||||||||||||
Coal | 141.0 | 122.3 | 18.7 | 15 | % | 255.9 | 233.4 | 22.5 | 10 | % | ||||||||||||||||||||||
Carload revenues, units and intermodal units | 828.7 | 750.6 | 78.1 | 10 | % | 1,123.2 | 1,119.8 | 3.4 | 0 | % | ||||||||||||||||||||||
Other revenue | 57.0 | 53.8 | 3.2 | 6 | % | |||||||||||||||||||||||||||
Total revenues | $ | 885.7 | $ | 804.4 | $ | 81.3 | 10 | % | ||||||||||||||||||||||||
Revenues | Carloads and Intermodal Units | ||||||||||||||
2003 | 2002 | 2001 | 2003 | 2002 | 2001 | ||||||||||
(dollars in millions) | (in thousands) | ||||||||||||||
General commodities: | |||||||||||||||
Chemical and petroleum | $ | 123.8 | $ | 130.7 | $ | 124.8 | 140.0 | 145.4 | 147.8 | ||||||
Paper and forest | 146.1 | 134.8 | 129.1 | 186.2 | 178.2 | 182.2 | |||||||||
Agricultural and mineral | 108.5 | 97.2 | 93.8 | 140.6 | 126.5 | 125.7 | |||||||||
Total general commodities | 378.4 | 362.7 | 347.7 | 466.8 | 450.1 | 455.7 | |||||||||
Intermodal and automotive | 59.1 | 59.9 | 69.1 | 310.5 | 287.4 | 299.8 | |||||||||
Coal | 92.7 | 101.2 | 118.7 | 191.4 | 210.0 | 202.3 | |||||||||
Carload revenues and carload | |||||||||||||||
and intermodal units | 530.2 | 523.8 | 535.5 | 968.7 | 947.5 | 957.8 | |||||||||
Other rail-related revenues | 45.1 | 37.9 | 39.4 | ||||||||||||
Total KCSR revenues | 575.3 | 561.7 | 574.9 | ||||||||||||
Other subsidiary revenues | 6.0 | 4.5 | 8.3 | ||||||||||||
Total consolidated revenues | $ | 581.3 | $ | 566.2 | $ | 583.2 | |||||||||
ended December 31, 2006, revenues increased $81.3 million compared to the prior year. The U.S. segment experienced revenue increases in all commodity groups except for the intermodal and automotive business, which decreased slightly due to a decline in automotive business driven by lower output and short term plant shutdowns in 2006. Overall increases in the majority of the commodities were driven by targeted price improvements, including increased fuel surcharges. The following tablediscussion provides an analysis of revenues by commodity group.
30
Change | ||||||||||||||||
2006 | 2005 | Dollars | Percent | |||||||||||||
Compensation and benefits | $ | 264.3 | $ | 244.8 | $ | 19.5 | 8 | % | ||||||||
Purchased services | 82.8 | 84.6 | (1.8 | ) | (2 | )% | ||||||||||
Fuel | 140.8 | 123.8 | 17.0 | 14 | % | |||||||||||
Equipment costs | 82.7 | 68.9 | 13.8 | 20 | % | |||||||||||
Depreciation and amortization | 65.7 | 60.0 | 5.7 | 10 | % | |||||||||||
Casualties and insurance | 44.9 | 88.7 | (43.8 | ) | (49 | )% | ||||||||||
Other | 78.9 | 88.5 | (9.6 | ) | (11 | )% | ||||||||||
Total operating expenses | $ | 760.1 | $ | 759.3 | $ | 0.8 | 0 | % | ||||||||
31
Revenues | Carloads and Intermodal Units | |||||||||||||||||||||||||||||||
Comparative | Change | Comparative | Change | |||||||||||||||||||||||||||||
2006 | 2005 | Dollars | Percent | 2006 | 2005 | Units | Percent | |||||||||||||||||||||||||
General commodities: | ||||||||||||||||||||||||||||||||
Chemical and petroleum | $ | 145.9 | $ | 126.5 | $ | 19.4 | 15 | % | 102.0 | 97.0 | 5.0 | 5 | % | |||||||||||||||||||
Forest products and metals | 213.0 | 186.2 | 26.8 | 14 | % | 187.5 | 197.3 | (9.8 | ) | (5 | )% | |||||||||||||||||||||
Agricultural and mineral | 232.7 | 219.2 | 13.5 | 6 | % | 196.0 | 200.1 | (4.1 | ) | (2 | )% | |||||||||||||||||||||
Total general commodities | 591.6 | 531.9 | 59.7 | 11 | % | 485.5 | 494.4 | (8.9 | ) | (2 | )% | |||||||||||||||||||||
Intermodal and automotive | 162.4 | 173.0 | (10.6 | ) | (6 | )% | 312.0 | 326.8 | (14.8 | ) | (5 | )% | ||||||||||||||||||||
Carload revenues, units and intermodal units | 754.0 | 704.9 | 49.1 | 7 | % | 797.5 | 821.2 | (23.7 | ) | (3 | )% | |||||||||||||||||||||
Other revenue | 20.0 | 12.7 | 7.3 | 57 | % | |||||||||||||||||||||||||||
Total revenues | $ | 774.0 | $ | 717.6 | $ | 56.4 | 8 | % | ||||||||||||||||||||||||
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Comparative | Change | |||||||||||||||
2006 | 2005 | Dollars | Percent | |||||||||||||
Compensation and benefits | $ | 123.4 | $ | 124.4 | $ | (1.0 | ) | (1 | )% | |||||||
Purchased services | 131.0 | 145.5 | (14.5 | ) | (10 | )% | ||||||||||
Fuel | 112.8 | 106.3 | 6.5 | 6 | % | |||||||||||
Equipment costs | 97.0 | 102.5 | (5.5 | ) | (5 | )% | ||||||||||
Depreciation and amortization | 89.3 | 88.9 | 0.4 | 0 | % | |||||||||||
Casualties and insurance | 8.5 | 17.0 | (8.5 | ) | (50 | )% | ||||||||||
KCSM employees’ statutory profit sharing | 5.9 | 41.6 | (35.7 | ) | (86 | )% | ||||||||||
Other | 27.4 | 47.3 | (19.9 | ) | (42 | )% | ||||||||||
Total operating expenses | $ | 595.3 | $ | 673.5 | $ | (78.2 | ) | (12 | )% | |||||||
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• | Equity in losses from the operations of PCRC was $1.0 million for the year ended December 31, 2006, compared to $1.7 million for the same period in 2005. The decrease in losses of $.7 million is the result of a 13.1% increase in volume. | |
• | Equity in earnings of Southern Capital was $5.4 million for the year ended December 31, 2006, versus $2.8 million for the same period in 2005. The $2.6 million increase in earnings is the result of a reduction in depreciation expense as a majority of the locomotives owned by Southern Capital became fully depreciated during the year. |
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• | KCSM’s equity in earnings of FTVM was $2.9 million for the year ended December 31, 2006, compared to $2.9 million for the same period in 2005. | |
• | Equity in losses of KCSM was $1.0 million for the year ended December 31, 2005. |
2003 | 2002 | 2001 | |||||||
(dollars in millions) | |||||||||
Compensation and benefits | $ | 197.8 | $ | 197.8 | $ | 192.9 | |||
Depreciation and amortization | 64.3 | 61.4 | 58.0 | ||||||
Purchased services | 63.5 | 59.6 | 57.0 | ||||||
Operating leases | 57.2 | 55.0 | 56.8 | ||||||
Casualties and insurance | 56.4 | 25.2 | 42.1 | ||||||
Fuel | 47.4 | 38.4 | 43.9 | ||||||
Car hire | 10.0 | 19.7 | 19.8 | ||||||
Other | 55.6 | 61.1 | 57.3 | ||||||
Total operating expenses | $ | 552.2 | $ | 518.2 | $ | 527.8 | |||
This increase was primarily attributable to the absence of one-time items such as the non-taxable VAT/Put settlement which occurred in 2005 and the 2005 write-off of deferred profit sharing in Mexico.
Change | ||||||||||||||||
2005 | 2004 | Dollars | Percent | |||||||||||||
Revenues | $ | 1,352.0 | $ | 639.5 | $ | 712.5 | 111 | % | ||||||||
Operating expenses | 1,289.7 | 556.0 | 733.7 | 132 | % | |||||||||||
Operating income | 62.3 | 83.5 | (21.2 | ) | (25 | )% | ||||||||||
Equity in net earnings (losses) of unconsolidated affiliates | 2.9 | (4.5 | ) | 7.4 | (164 | )% | ||||||||||
Interest expense | (133.5 | ) | (44.4 | ) | (89.1 | ) | 201 | % | ||||||||
VAT/Put settlement gain, net | 131.9 | — | 131.9 | — | ||||||||||||
Other income | 12.4 | 13.4 | (1.0 | ) | (7 | )% | ||||||||||
Income before income taxes and minority interest | 76.0 | 48.0 | 28.0 | 58 | % | |||||||||||
Income tax provision (benefit) | (7.1 | ) | 23.6 | (30.7 | ) | (130 | )% | |||||||||
Income before minority interest | 83.1 | 24.4 | 58.7 | 241 | % | |||||||||||
Minority interest | (17.8 | ) | — | (17.8 | ) | — | ||||||||||
Net income | $ | 100.9 | $ | 24.4 | $ | 76.5 | 314 | % | ||||||||
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Revenues | Carloads and Intermodal Units | |||||||||||||||||||||||||||||||
Change | Change | |||||||||||||||||||||||||||||||
2005 | 2004 | Dollars | Percent | 2005 | 2004 | Units | Percent | |||||||||||||||||||||||||
General commodities: | ||||||||||||||||||||||||||||||||
Chemical and petroleum | $ | 153.5 | $ | 135.0 | $ | 18.5 | 14 | % | 155.7 | 147.9 | 7.8 | 5 | % | |||||||||||||||||||
Forest products and metals | 219.0 | 169.6 | 49.4 | 29 | % | 211.7 | 197.3 | 14.4 | 7 | % | ||||||||||||||||||||||
Agricultural and mineral | 179.2 | 125.2 | 54.0 | 43 | % | 183.1 | 149.4 | 33.7 | 23 | % | ||||||||||||||||||||||
Total general commodities | 551.7 | 429.8 | 121.9 | 28 | % | 550.5 | 494.6 | 55.9 | 11 | % | ||||||||||||||||||||||
Intermodal and automotive | 76.6 | 66.8 | 9.8 | 15 | % | 335.9 | 342.8 | (6.9 | ) | (2 | )% | |||||||||||||||||||||
Coal | 122.3 | 92.1 | 30.2 | 33 | % | 233.4 | 194.7 | 38.7 | 20 | % | ||||||||||||||||||||||
Carload revenues, units and intermodal units | 750.6 | 588.7 | 161.9 | 28 | % | 1,119.8 | 1,032.1 | 87.7 | 8 | % | ||||||||||||||||||||||
Other revenue | 53.8 | 50.8 | 3.0 | 6 | % | |||||||||||||||||||||||||||
Total revenues | $ | 804.4 | $ | 639.5 | $ | 164.9 | 26 | % | ||||||||||||||||||||||||
Net income available to common shareholders declined $50.7 million to $6.3 million in 2003 compared to $57.0 million in 2002, due to the $45.0 million reduction in net income and a $5.7 million increase in preferred stock dividends. The increase in preferred stock dividends resulted from dividends earned related to the issuance of $200 million of Convertible Preferred Stock during 2003 (see “Recent Developments—Redeemable Cumulative Convertible Perpetual Preferred Stock” for further information). The Convertible Preferred Stock accumulates dividends at an annual rate of 4.25%, which equates to a total of $8.5 million in annual dividend payments. During 2003, approximately $5.7 million of dividends relating to the Convertible Preferred Stock were earned, thereby reducing the net income available to the common shareholders. The assumed conversion of the Convertible Preferred Stock would have had an anti-dilutive effect on the diluted earnings per share calculation, and thus, were excluded from the weighted average common shares used to calculate diluted earnings per share.
Revenues. Consolidated revenues for the year ended December 31, 20032005. U.S. revenue also experienced increases in all commodity groups due to a combination of higher carloadings, targeted price improvements and increased $15.1fuel surcharge revenue. Fuel surcharges increased to $52.0 million, which accounted for $35.3 million of the increase in revenues for the year ended December 31, 2005, compared to the same period in 2004. The following discussion provides an analysis of the segment’s revenues by commodity group. Pending completion of the ongoing effort to change the Tex-Mex mark and finalize its merger into KCS operations, carload data are presented based on the combination of the carloads for KCSR and Mexrail, without elimination for cars interchanged between the two roads.
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Change | ||||||||||||||||
2005 | 2004 | Dollars | Percent | |||||||||||||
Compensation and benefits | $ | 244.8 | $ | 213.0 | $ | 31.8 | 15 | % | ||||||||
Purchased services | 84.6 | 62.3 | 22.3 | 36 | % | |||||||||||
Fuel | 123.8 | 66.4 | 57.4 | 86 | % | |||||||||||
Equipment costs | 68.9 | 50.4 | 18.5 | 37 | % | |||||||||||
Depreciation and amortization | 60.0 | 53.5 | 6.5 | 12 | % | |||||||||||
Casualties and insurance | 88.7 | 42.4 | 46.3 | 109 | % | |||||||||||
Other | 88.5 | 68.0 | 20.5 | 30 | % | |||||||||||
Total operating expenses | $ | 759.3 | $ | 556.0 | $ | 203.3 | 37 | % | ||||||||
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Revenues | Carloads and Intermodal Units | |||||||||||||||||||||||||||||||
Change | Change | |||||||||||||||||||||||||||||||
2005 | 2004 | Dollars | Percent | 2005 | 2004 | Units | Percent | |||||||||||||||||||||||||
General commodities: | ||||||||||||||||||||||||||||||||
Chemical and petroleum | $ | 94.5 | $ | 94.7 | $ | (0.2 | ) | (0 | )% | 71.4 | 76.5 | (5.1 | ) | (7 | )% | |||||||||||||||||
Forest products and metals | 141.5 | 120.5 | 21.0 | 17 | % | 147.3 | 143.3 | 4.0 | 3 | % | ||||||||||||||||||||||
Agricultural and mineral | 168.9 | 158.6 | 10.3 | 6 | % | 152.4 | 162.1 | (9.7 | ) | (6 | )% | |||||||||||||||||||||
Total general commodities | 404.9 | 373.8 | 31.1 | 8 | % | 371.1 | 381.9 | (10.8 | ) | (3 | )% | |||||||||||||||||||||
Intermodal and automotive | 131.9 | 130.3 | 1.6 | 1 | % | 250.2 | 253.0 | (2.8 | ) | (1 | )% | |||||||||||||||||||||
Carload revenues, units and intermodal units | 536.8 | 504.1 | 32.7 | 6 | % | 621.3 | 634.9 | (13.6 | ) | (2 | )% | |||||||||||||||||||||
Other revenue | 10.8 | 6.4 | 4.4 | 69 | % | |||||||||||||||||||||||||||
Total revenues | $ | 547.6 | $ | 510.5 | $ | 37.1 | 7 | % | ||||||||||||||||||||||||
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Change | ||||||||||||||||
2005 | 2004 | Dollars | Percent | |||||||||||||
Compensation and benefits | $ | 95.6 | $ | 87.2 | $ | 8.4 | 10 | % | ||||||||
Purchased services | 108.7 | 120.5 | (11.8 | ) | (10 | )% | ||||||||||
Fuel | 83.1 | 65.3 | 17.8 | 27 | % | |||||||||||
Equipment costs | 80.9 | 66.9 | 14.0 | 21 | % | |||||||||||
Depreciation and amortization | 67.7 | 66.6 | 1.1 | 2 | % | |||||||||||
Casualties and insurance | 14.7 | 9.7 | 5.0 | 52 | % | |||||||||||
KCSM employees’ statutory profit sharing | 41.1 | (2.1 | ) | 43.2 | (2,057 | )% | ||||||||||
Other | 38.5 | 23.8 | 14.7 | 62 | % | |||||||||||
Total operating expenses | $ | 530.3 | $ | 437.9 | $ | 92.4 | 21 | % | ||||||||
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$1.5 million year over year primarily due to volume increases at the Company’s bulk petroleum coke facility and higher sales to third parties at the Company’s wood tie treating facility. These increases were partially offset by a reduction of other revenues due to the sale of the Wyandotte Garage Corporation (“WGC”) during August 2002. The following discussion provides an analysis of KCSR revenues by commodity group.
Chemical and Petroleum.2004. For the year ended December 31, 2003, chemical2005, $4.4 million in unamortized debt issuance costs were written off primarily in connection with the refinancing of KCSM’s 11.75% debentures and petroleum product revenues declined $6.9 million (5.3%) to $123.8 million compared to $130.7 million forits First Amended and Restated Credit Agreement dated as of June 24, 2004. During the year ended December 31, 2002, primarily as a result2004, KCS recorded $4.2 million of lower revenues for plastic product shipments in large part due todebt retirement costs resulting from the loss of a customer and lower production. Also contributing to lower revenues for the year ended December 31, 2003 compared to 2002 were declines in petroleum and agri-chemical product revenues. Petroleum revenues for 2003 dropped as a resultwrite-off of the adverse impactunamortized balance of high natural gas prices on petroleum production. Natural gas serves as both a feedstock and a source of energy for producers. Lower agri-chemical revenues resulted from changes in traffic mix. These declines in agri-chemical, petroleum and plastic product revenues were partially offset by higher revenues for gases, organic and inorganic products. Higher revenues for gases and organic products were primarily the result of production increases by certain customers, as well as targeted rate increases and longer hauls due to gateway changes. Higher revenues for inorganic products were primarily the result of increased access to production facilities in Geismar, Louisiana as well as new business previously shipped by other rail carriers, which resulted in higher traffic volume. Chemical and petroleum product revenue accounted for 21.5% and 23.3% of KCSR revenues for the years ended December 31, 2003 and 2002, respectively.
Paper and Forest.For the year ended December 31, 2003, paper and forest product revenue increased $11.3 million (8.4%) to $146.1 million versus $134.8 million for the year ended December 31, 2002, driven by higher revenues for pulp and paper, scrap paper, pulpwood/logs/chips and lumber/plywood products. Revenues for pulp and paper products as well as scrap paper increased primarily from higher production at KCSR’s paper mill customers and increased exports to Mexico. The increase in lumber and plywood product revenues resulted from continued strength in the housing and homebuilding industry due to sustained levels of housing starts. Increases in revenues for pulpwood/logs/chips resulted from higher production by certain customers and targeted rate increases. Partially offsetting these increases in paper and forest product revenues were lower military/other revenues as a result of the reduction of certain military training exercises, for which KCSR handles equipment transportation, due to the associated deployment of troops to the Middle East. Paper and forest product revenue accounted for 25.4% and 24.0% of KCSR revenues for the years ended December 31, 2003 and 2002, respectively.
Agricultural and Mineral.For the year ended December 31, 2003, agricultural and mineral product revenue increased $11.3 million (11.6%) to $108.5 million compared to $97.2 million for the year ended December 31, 2002. This increase resulted primarily from higher revenues for export grain, food products, ore and mineral products as well as stone, clay and glass products. These revenue increases were partially offset by a slight decline in domestic grain revenues for 2003 compared to 2002. This decline was primarily due to the effects of a relative decline in poultry production, reducing the demand for grain shipments to the Company’s poultry producing customers. The impact on domestic grain revenues of reduced poultry production was mostly offset by higher revenues associated with longer hauls gained as a result of a new contract with an existing customer. Increases in revenues for export grain reflected higher volumes of grain exports to Mexico. Food product revenues rose as a result of a new contract with an existing customer yielding increased carloads as well as longer hauls. Food product revenues also increased due to more beer shipments from Mexico into the United States and Canada. Ore and mineral product revenues increased due to higher demand from producers. Agricultural and mineral product revenues accounted for 18.9% and 17.3% of KCSR revenues for the years ended December 31, 2003 and 2002, respectively.
Intermodal and Automotive.For the year ended December 31, 2003, combined intermodal and automotive revenues declined $0.8 million (1.3%) to $59.1 million compared to $59.9 million for the year ended December 31, 2002, as a result of lower automotive revenues, which declined $3.7 million year over year. Automotive revenues declined as a result of the loss of certain automotive traffic in the third quarter of 2002 as well as the
negative effects of the sluggish economy on the automotive industry as a whole. These automotive revenue declines were partially offset by the favorable impact on revenues of new automotive parts traffic obtained in the first quarter of 2003. Intermodal revenues for the year ended December 31, 2003 increased $2.9 million as a result of higher intermodal traffic with other connecting railroads. Intermodal and automotive revenues accounted for 10.3% and 10.7% of KCSR revenues for the years ended December 31, 2003 and 2002, respectively.
Coal. For the year ended December 31, 2003, coal revenues declined $8.5 million (8.4%) to $92.7 million compared to $101.2 million for the year ended December 31, 2002, primarily due to a decline in tons shipped resulting from lower overall customer demand. A portion of the coal revenue decline related to the loss of a coal customer in April 2002, as well as to the impact of scheduled maintenance shutdowns in 2003, which where longer in duration compared to 2002. These factors, which led to a reduction in coal revenues, were partially offset by the impact of higher per-carload revenues as a result of the use of aluminum cars, which are capable of greater hauling capacity. Coal revenue accounted for 16.1% and 18.0% of KCSR revenues for the years ended December 31, 2003 and 2002, respectively.
Other.For the year ended December 31, 2003 other rail-related revenues increased $7.2 million (19.0%) to $45.1 million compared to $37.9 million for the year ended December 31, 2002. This increase was primarily the result of higher revenues for demurrage and other rail-related extra services, which resulted from improved operating efficienciesdebt issuance costs associated with the implementation of MCS in third quarter 2002. Haulage revenue also increased slightly for the year ended December 31, 2003 compared to 2002. Other rail-related revenues accounted for 7.8% and 6.7% of KCSR revenues for the years ended December 31, 2003 and 2002, respectively.
Operating Expenses. For the year ended December 31, 2003, consolidated operating expenses increased $34.0 million to $552.2 million compared to $518.2 million for the year ended December 31, 2002. As described further below, this increase resulted primarily from higher costs for casualties and insurance and for fuel, which increased $31.2 million and $9.0 million, respectively, year over year. These costs were partially offset by lower expenses related to car hire and certain other expenses arising from operating efficiencies realized through improved employee knowledge and effectiveness in using MCS. In 2002, certain costs and expenses were higher than normal due to the impact of the implementation of MCS and the related congestion. The expenses most affected by the MCS implementation were compensation and benefits, depreciation, purchased services and car hire. See further discussion below.
previous credit facility.
Depreciation and Amortization.For the year ended December 31, 2003, consolidated depreciation expense increased $2.9 million to $64.3 million compared to $61.4 million for the year ended December 31, 2002. This increase was primarily the result of the implementation of MCS in July of 2002, which was only depreciated for six months in 2002 compared to a full year in 2003. The remainder of the increase resulted from a net increase in the property, plant and equipment asset base.
Purchased Services.For the year ended December 31, 2003, purchased services expense increased $3.9 million to $63.5 million compared to $59.6 million for the year ended December 31, 2002. The year over year increase primarily resulted from increased legal expenses, an increase in track, bridge, locomotive and car repairs performed by third parties and a reduction in intermodal lift fee credits received from other railroads. These cost increases were partially offset by higher car repairs billed to others by KCSR and lower training expenses in 2003. Training costs in 2002 were higher than normal due to the training associated with the implementation of MCS. Legal fees in 2003 were higher than 2002 due to the impact of a $1.0 million legal settlement received in 2002 and insurance recovery credits of $4.0 million realized in 2002.
Operating Leases.Consolidated operating lease expense for the year ended December 31, 2003 was $57.2 million compared to $55.0 million for the year ended December 31, 2002. This $2.2 million increase in lease expense was partially related to a new lease for maintenance vehicles and work equipment, which in prior periods were owned by KCSR and partially as a result of a full year of lease payments in 2003 for the Company’s new corporate headquarters building. The Company began leasing this facility in the second quarter of 2002. These increases were partially offset by lower freight car equipment costs as a result of the expiration of leases that have not been renewed due to the continued improvements in fleet utilization.
Casualties and Insurance. For the year ended December 31, 2003, consolidated casualties and insurance expense increased $31.2 million to $56.4 million compared to $25.2 million for the year ended December 31, 2002. The year over year increase was primarily due to additional costs recorded during the fourth quarter of 2003 related to personal injury liability reserves. The Company’s process of establishing liability reserves for personal injury incidents is based upon an actuarial study by an independent outside actuary, a process followed by most large railroads. This adjustment to the personal injury liability reserves was based on this actuarial study and was required due to adverse development of prior year claims and the continuing tort litigious environment surrounding the railroad industry, particularly for occupational injury claims. Also contributing to the increase in 2003 was higher property and liability related insurance costs, as well as the receipt of $8.5 million in legal and insurance settlements in 2002, which reduced the comparable 2002 expense.
Fuel. Locomotive fuel costs for the year ended December 31, 2003 increased $9.0 million to $47.4 million compared to $38.4 million for the year ended December 31, 2002, due to an approximate 23% increase in the average cost per gallon of fuel. KCSR’s average fuel price was approximately $0.86 per gallon in 2003 compared to approximately $0.69 per gallon in 2002. Fuel consumption remained relatively unchanged year over year as a result of fuel conservation measures offsetting higher consumption due to increased carload volumes.
Car Hire.Car hire expense for the year ended December 31, 2003 decreased $9.7 million to $10.0 million compared to $19.7 million for the year ended December 31, 2002. This decline resulted from improved fleet utilization associated with the implementation of MCS as KCSR was operating more efficiently during 2003 than in 2002. The improvement in fleet utilization has led to an increase in the number of KCSR freight cars being used by other railroads as well as a reduction in the number of freight cars owned by other railroads on the Company’s rail line. In the last half of 2002, the congestion-related issues associated with the implementation of MCS substantially impacted 2002 car hire expense.
Other Expense. Consolidated other expense decreased $5.5 million to $55.6 million for the year ended December 31, 2003 compared to $61.1 million for the year ended December 31, 2002, primarily as a result of higher gains recorded on the sale of operating properties. For 2003, gains from operating property sales were $5.9 million compared to $3.2 million for 2002, an increase of $2.7 million. Also impacting the comparison was a decline in costs for materials and supplies, employee expenses and a reduction in miscellaneous taxes.
Operating Income and KCSR Operating Ratio.For the year ended December 31, 2003, consolidated operating income decreased $18.9 million to $29.1 million compared to $48.0 million for the year ended December 31, 2002. This decrease was the result of a $15.1 million increase in revenues offset by a $34.0 million increase in operating expenses (mostly casualty and fuel related as discussed above). The operating ratios (ratio of railway operating expenses to railway operating revenues) for KCSR were 89.7% and 89.2% for the years ended December 31, 2003 and 2002, respectively.
Equity in Net Earnings (Losses) of Unconsolidated Affiliates.For the year ended December 31, 2003,2005, equity in earnings from other unconsolidated affiliates was $3.9 million compared to equity in losses from other unconsolidated affiliate of $2.1 million for the same period of 2004. Significant components of this change were as follows:
• | For the year ended December 31, 2005, equity in losses from the operations of PCRC was $1.7 million, compared to $2.1 million for the same period in 2004. | |
• | For the year ended December 31, 2005, equity in earnings of Southern Capital was $2.8 million, compared to $2.7 million, for the same period in 2004. |
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• | For the nine months ended December 31, 2005, KCSM’s equity in earnings of Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”) was $2.9 million. |
Equity in earnings related to Grupo TFM decreased to $12.3 million for the year ended December 31, 2003 compared to $45.8 million for 2002. Revenues for Grupo TFM for the year ended December 31, 2003 decreased $13.6 million compared to the year ended December 31, 2002 while operating expenses (under accounting principles generally accepted in the United States of America—“U.S. GAAP”) were $17.2 million higher. Revenues for Grupo TFM were adversely affected by an 8% decline in automotive shipments year over year and the devaluation of the Mexican peso against the United States dollar on a year over year basis, which resulted in a reduction of revenues of approximately $34 million during 2003 versus 2002. Similar to KCSR, the increase in operating expenses at Grupo TFM was driven by higher fuel costs, which rose $13.8 million in 2003 versus 2002. Grupo TFM’s interest expense under U.S. GAAP in 2003 increased approximately $15.3 million compared to 2002 primarily as a result of increased debt costs related to the acquisition of the Mexican government’s ownership of Grupo TFM. Also contributing to the lower earnings of Grupo TFM was a $20.8 million increase in other expenses due to certain expenses associated with the VAT Claim. Additionally, for the year ended December 31, 2003, Grupo TFM’s results include a deferred tax benefit of $51.5 million (calculated under U.S. GAAP) compared to a deferred tax benefit of $91.5 million for the year ended December 31, 2002, resulting in an approximate $15.2 million reduction in the equity in net earnings recorded by the Company related to its proportionate ownership of Grupo TFM. This fluctuation was the result of numerous factors, including fluctuations in the foreign exchange rate of the Mexican peso and the United States dollar during 2003, as well as lower future Mexican corporate tax rates. These rate changes had the effect of reducing Grupo TFM’s deferred tax asset, thus reducing Grupo TFM’s deferred tax benefit. Grupo TFM’s deferred tax assets are the result of prior year net operating losses for income tax purposes. For the year ended December 31, 2003, fluctuations in the Mexican peso exchange rate also contributed to a $13.7 million exchange loss compared to an exchange loss of $17.4 million for the year ended December 31, 2002. The Company’s equity in net earnings of Grupo TFM was also impacted by the Company’s increased ownership of Grupo TFM to 46.6% from 36.9%, which the Company obtained indirectly in July 2002 as a result of the purchase by TFM of the Mexican government’s 24.6% ownership of Grupo TFM.
Results of the Company’s investment in Grupo TFM are reported under U.S. GAAP while Grupo TFM reports its financial results under International Financial Reporting Standards (“IFRS”). Because the Company is required to report its equity in net earnings in Grupo TFM under U.S. GAAP and Grupo TFM reports under IFRS, differences in deferred income tax calculations and the classification of certain operating expense categories occur. The deferred income tax calculations are significantly impacted by fluctuations in the relative value of the Mexican peso versus the U.S. dollar and the rate of Mexican inflation, and can result in significant variability in the amount of equity earnings reported by the Company.
Equity in net losses of the Company’s other unconsolidated affiliates for the year ended December 31, 2003 was $1.3 million compared to equity in net losses of $2.4 million for the year ended December 31, 2002. In 2003, losses associated with PCRC were $3.1 million compared to $3.8 million in 2002. PCRC is not operating at full capacity as initially planned due to the delay in completion of the port expansion at Balboa. These losses were offset by equity in net earnings from Southern Capital of $1.8 million and $1.4 million for the years ended December 31, 2003 and 2002, respectively.
Gain on Sale of Mexrail, Inc. Net income for the year ended December 31, 2002 includes a gain on the sale of the Company’s investment in Mexrail of $4.4 million (See “Recent Developments—Mexrail Transactions”).
Interest Expense. Consolidated interest expense increased $1.4 millioncomplexities relating to $46.4 million for the year ended December 31, 2003 compared to $45.0 million for the year ended December 31, 2002. Interest expense rose due to higher interest rates arising from a shift to more fixed rate debt in June 2002, partially offset by the impact of a lower debt balance. The Company’s debt balance declined $59.2 million during 2003 to $523.4 million at December 31, 2003 from $582.6 million at December 31, 2002.
Debt Retirement Costs. Net income for the year ended December 31, 2002 includes debt retirement costs of $4.3 million related to the debt refinancing during the second quarter of 2002.
Other Income. Other income for the year ended December 31, 2003 declined $10.8 million compared to 2002, primarily due to substantially lower gains on the sale of non-operating property compared to 2002 as well as the impact of the sale of WGC in 2002. Gains recorded on the sale of non-operating property were $0.3 million and $7.4 million for the years ended December 31, 2003 and 2002, respectively.
Income Tax Provision (Benefit). For the year ended December 31, 2003, the Company’s income tax provision (benefit) decreased $9.7 million to a $2.8 million benefit compared to a $6.9 million provision for the year ended December 31, 2002 due to a $63.6 million decline in income (loss) before income taxes. This resultedMexico taxes resulting in an effective income tax rate of (600.7)%(9.3%) and 11.3%49.1% for the years ended December 31, 20032005 and 2002,2004, respectively. ExclusiveThe primary causes of equity earningsthe decrease in Grupo TFM, the Company realized a pre-tax loss of $11.8 million in 2003 compared to pre-tax income of $18.3 million in 2002, resulting in a consolidated effective incomerate were the VAT/Put Settlement, the utilization of U.S. tax credits enacted for the tax year 2005, a lower Mexican statutory tax rate of 23.8% for 200330% as compared to 37.7%U.S. statutory rate of 35%, and foreign exchange rate fluctuations and inflation. The VAT/Put Settlement gain was not taxable in Mexico and is not expected to be taxable for 2002. This varianceU.S. income tax purposes. The Company believes, based upon opinions of outside legal counsel and other factors, that the VAT/Put Settlement should not be taxable to KCS for U.S. income tax purposes. Such position has not been examined by taxing authorities and it is possible that this position could be challenged. The amount of such tax would be material; however the Company believes that it would have the right to indemnification under the terms of the Acquisition Agreement.
Cumulative Effect of Accounting Change.The Company adopted the provisions of Statement of Financial Accounting Standards No. 143 “Accounting for Asset Retirement Obligations” (“SFAS 143”) effective January 1, 2003. mergers and consolidations or in sale-leaseback transactions. On December 31, 2006, total available liquidity (the unrestricted cash balance plus revolving credit facility availability) was $144 million.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2001
Net Income.For the year ended December 31, 2002, net income increased $26.5 million to $57.2 million (91¢ per diluted share) from $30.7 million (50¢ per diluted share) for the year ended December 31, 2001.2005. This increaselate filing also caused defaults under the Company’s credit agreements due to the Company’s failure to meet certain reporting requirements. Additionally, the Company’s ability to incur additional indebtedness and pay cash dividends was primarily restricted by
41
42
Revenues. Consolidated revenues forrepay $29.0 million of term loans under the year ended December 31, 2002 declined $17.0 million2005 KCSM Credit Agreement.
and price improvements in key traffic lanes. These revenue gains were partially offset by volume losses in certain commodities within these groups. KCS management believes that revenues for these commodity groups would have improved even further during 2002, but were adversely affected by lower carloadingsany defaults arising from congestion relatedcertain actions taken in the absence of such proposed amendments. On February 5, 2007, the Company obtained the requisite consents from the holders of each series of Notes to amend their respective indentures as described above and executed supplemental indentures containing such amendments and waivers.
Chemical and Petroleum.For the year ended December 31, 2002, chemical and petroleum product revenues increased $5.9 million (4.7%) to $130.7 million compared to $124.8 million for the year ended December 31, 2001. These revenue increases were the result of a combination of higher traffic volumes for certain commodities within this business group as well as targeted rate increases and longer hauls due to gateway changes. Higher revenues for gases and organic products were primarily the result of production increases by certain customers, as well as changes in traffic patterns and targeted rate increases. Higher revenues for inorganic products were primarily the result of increased access to production facilities in Geismar, Louisiana, as well as new business previously shipped by other rail carriers, which resulted in higher traffic volume. Increases in the production of PVC and plastic pellet products led to an increase in carloadings and higher revenues for plastic products. These increases were partially offset by volume related declines in agri-chemical and petroleum product revenues due to lower industrial production related to the continued slowdown in the U.S. economy. Chemical and petroleum products revenue accounted for 23.3% and 21.7% of KCSR revenues for the years ended December 31, 2002 and 2001, respectively.
Paper and Forest.For the year ended December 31, 2002, paper and forest product revenue increased $5.7 million (4.4%) to $134.8 million versus $129.1 million for the year ended December 31, 2001. Increases in revenues for pulp and paper, scrap paper and lumber/plywood were partially offset by lower revenues for pulpwood/logs/chips, scrap metal and military/other traffic. Increase in pulp and paper revenues resulted from higher traffic volumes as a result of production growth in the paper industry, while continued strength in the home building market and housing starts led to increases in lumber and plywood product revenues. These revenues were also higher due to certain rate increases and changes in traffic mix and length of haul. Declines in industrial production as a result of the slowdown in the U.S. economy led to lower carloadings and revenues for pulpwood, logs, and chip products as well as metal products. The decline in militaryrepresentation and other carload revenues is a reflection ofdefaults under the effect of a significant one-time military movement in 2001. Targeted rate increases and changes in traffic patterns for metal products and pulpwood, logs and chips partially offset the related revenue decline resulting from lower traffic volumes for these commodities. Paper and forest products revenue accounted for 24.0% and 22.5% of KCSR revenues for the years ended December 31, 2002 and 2001, respectively.
Agricultural and Mineral.For the year ended December 31, 2002, revenues for agricultural and mineral products increased $3.4 million (3.6%) to $97.2 million compared to $93.8 million for the year ended December 31, 2001, as a result of higher revenues across all major products in the agricultural and mineral commodity group. Domestic grain revenues increased as a result of certain rate increases and longer hauls partially offset by lower domestic demand. Export grain revenue increased slightly during 2002 versus 2001 on the strength of higher demand from Mexico and other export markets during the first half of 2002. This demand eased somewhat during the last half of 2002. Increases in revenue for stone, clay and glass product were primarily the result of higher production by two customers, targeted rate increases and longer hauls. Agricultural and mineral products revenue accounted for 17.3% and 16.3% of KCSR revenues for the years ended December 31, 2002 and 2001, respectively.
Intermodal and Automotive.For the year ended December 31, 2002, combined intermodal and automotive revenues decreased $9.2 million (13.3%) to $59.9 million compared to $69.1 million for the year ended December 31, 2001, primarily as a result of lower automotive revenues, which declined $12.3 million (57.0%) year over year. This decline in automotive revenues resulted from the loss of certain business in the third quarter of 2001 and the loss of a significant movement effective May 2002. Also contributing was the general decline in the domestic automobile industry as a result of weakness in the U.S. economy. These factors contributed to a 62.8% year over year decline in carload volumes for automotive traffic. For the year ended December 31, 2002,
intermodal revenues increased $3.1 million (6.6%) compared to 2001, as a result of increases in domestic carload traffic as well as international traffic moving to Mexico. Intermodal and automotive revenues accounted for 10.7% and 12.0% of KCSR revenues for the years ended December 31, 2002 and 2001, respectively.
Coal. For the year ended December 31, 2002, coal revenues declined $17.5 million (14.7%) to $101.2 million compared to $118.7 million for the year ended December 31, 2001. Coal revenues were significantly impacted by a rate reduction at the Company’s largest utility customer as well as the loss of a coal customer in April 2002 due to the expiration of a contract. These revenue declines were partially offset by a near 7% increase in net tons delivered in 2002 compared to 2001, resulting from higher demand at certain utility customers and the reopening of a utility plant in Kansas City, Missouri in the second quarter of 2001 that had been out of service since July of 1999. Coal revenue accounted for 18.0% and 20.6% of KCSR revenues for the years ended December 31, 2002 and 2001, respectively.
Other.For the year ended December 31, 2002, other rail-related revenues declined $1.5 million (3.8%) to $37.9 million compared to $39.4 million for the year ended December 31, 2001. This decline was primarily the result of declines in switching and demurrage revenues partially offset by increases in other revenues. Haulage revenues remained relatively unchanged in 2002 compared to 2001. Other rail-related revenues accounted for 6.7% and 6.9% of KCSR revenues for the years ended December 31, 2002 and 2001, respectively.
Operating Expenses. For the year ended December 31, 2002, consolidated operating expenses decreased $9.6 million to $518.2 million compared to $527.8 million for the year ended December 31, 2001, resulting from a $6.0 million decline in KCSR expenses coupled with a $3.6 million decline in expenses from other subsidiaries. This decrease was partially offset by the impact of higher costs associated with the implementation of MCS. The expenses most affected by the MCS implementation were compensation and benefits, depreciation, purchased services and car hire. See further discussion below.
Compensation and Benefits. For the year ended December 31, 2002, consolidated compensation and benefits expense increased $4.9 million to $197.8 million compared to $192.9 million for the year ended December 31, 2001. This increase was primarily the result of higher overtime and crew costs during the second half of 2002 related to the traffic congestion resulting from the third quarter 2002 implementation of MCS. Compensation and benefits expense in 2002 was also impacted by the implementation of an increase in certain union wages effective July 1, 2002, higher health insurance costs and a $1.3 million increase in expenses for the estimate of post employment benefits2006 Credit Agreement arising from the Company’s third party actuarial study. Additionally,potential defaults which existed under the increase in compensation and benefits was affected byKCSR indentures governing the impact of a $2.0 million reduction in retirement-based costs for certain union employees recorded in 2001, which reduced comparable 2001 expense.Notes as described above. These factors were partially offset by lower employee headcount, the automation of certain switch locomotive crew functions, a favorable adjustment relateddefaults limited
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Depreciation and Amortization.For the year ended December 31, 2002, consolidated depreciation expense increased $3.4 million to $61.4 million compared to $58.0 million for the year ended December 31, 2001. This increase was primarily the resultdefault of the implementation of MCS in July of 2002, which increased depreciation expense by $2.4 million in 2002. The remainder of the increase resulted from a net increase in the property, plant2006 Credit Agreement and equipment asset base.
Purchased Services.For the year ended December 31, 2002, purchased services expense increased $2.6 million to $59.6 million compared to $57.0 million for the year ended December 31, 2001. This increase was the result of higher environmental compliance costs and legal costs, higher locomotive and car repair costs contracted to third parties as well as an increase in other general purchased services. Also contributinghas access to the increase in purchased services expense were higher employee training costs associated with the implementation
of MCS and an increase to the reserve for environmental remediation related to a specific site. This increase in costs was partially mitigated by insurance and legal settlements totaling approximately $5.0 million.
revolving credit facility.
Casualties and Insurance. For the year ended December 31, 2002, consolidated casualties and insurance expense decreased $16.9 million to $25.2 million compared to $42.1 million for the year ended December 31, 2001 due primarily to lower derailment costs, and the receipt of insurance settlements in 2002, partially offset by higher insurance costs. In the first quarter of 2001, the Company incurred $8.5 million in costs related to several significant derailments as well as the settlement of a personal injury claim. Derailment costs for the year ended December 31, 2002 were more normalized compared to 2001. Also impacting the decrease in casualties and insurance expense was the receipt of $8.5 million in legal and insurance settlements during 2002. Expenses in 2002 for personal injury claims were slightly higher compared to 2001. The Company’s process of establishing liability reserves for these types of incidents is based upon an actuarial study by an independent outside actuary, a process followed by most large railroads.
Fuel. Locomotive fuel costs for the year ended December 31, 2002 decreased $5.5 million to $38.4 million compared to $43.9 million for the year ended December 31, 2001. This decrease was the combined result of an 8.8% decrease in the average cost per gallon of fuel and a 4.0% decline in fuel consumption due primarily to aggressive fuel conservation measures.
Car Hire.Car hire expense for the year ended December 31, 2002 was relatively unchanged, decreasing only $0.1 million to $19.7 million compared to $19.8 million for the year ended December 31, 2001. For the first half of 2002, car hire expense decreased approximately $2.9 million compared to the same period in 2001 as KCSR was operating a more efficient and well-controlled railroad. 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 KCSR’s operations in the first half of 2001. The resulting inefficiency led to congestion on KCSR’s rail lines during the first half of 2001, which contributed to an increase in the number of freight cars from other railroads on the Company’s rail line. For the second half of 2002, car hire expense increased $2.8 million compared to the second half of 2001. This increase was due to a higher number of freight cars from other railroads on the Company’s rail line as well as fewer KCSR freight cars on other railroads as a result of increased congestion resulting from the implementation of MCS in the third quarter of 2002.
Other Expense. Consolidated other expense increased $3.8 million to $61.1 million for the year ended December 31, 2002 compared to $57.3 million for the year ended December 31, 2001. Factors contributing to this increase included an increase in material and supply costs related to maintenance of way and equipment of $2.5 million, as well as a $2.6 million decline in gains recorded on the sale of operating assets by KCSR. The effect of these increases was partially offset by a decline in the cost of sales and other expenses incurred by certain subsidiaries.
Operating Income and KCSR Operating Ratio.For the year ended December 31, 2002, consolidated operating income decreased $7.4 million to $48.0 million compared to $55.4 million for the year ended December 31, 2001. This decrease was primarily the result of a $17.0 million decline in revenues partially offset by a $9.6 million decline in operating expenses. The operating ratio for KCSR was 89.2% and 88.2% for the years ended December 31, 2002 and 2001, respectively.
Equity in Net Earnings (Losses) of Unconsolidated Affiliates.For the year ended December 31, 2002, the Company recorded equity in earnings of unconsolidated affiliates of $43.4 million reflecting an increase of $16.3
million compared to $27.1 million for the year ended December 31, 2001. This increase was driven by an increase in equity in earnings from Grupo TFM of $17.3 million partially offset by a $1.0 million decline in equity in earnings from other unconsolidated affiliates.
Equity in earnings related to Grupo TFM increased to $45.8 million for the year ended December 31, 2002 compared to $28.5 million for 2001. For the year ended December 31, 2001, the Company’s equity in the earnings of Grupo TFM included the Company’s proportionate share ($9.1 million) of the income recorded by Grupo TFM related to the reversion of certain Concession assets to the Mexican government. Exclusive of this 2001 reversion income, equity in earnings of Grupo TFM for the year ended December 31, 2002 increased $26.4 million compared to the year ended December 31, 2001. Revenues for Grupo TFM for the year ended December 31, 2002 decreased $7.5 million compared to the year ended December 31, 2001 (exclusive of Mexrail’s results) while operating expenses (under U.S.GAAP) were $29.5 million lower (exclusive of the 2001 reversion income and Mexrail’s results). For the year ended December 31, 2002, Grupo TFM’s results include a deferred tax benefit of $91.5 million (calculated under U.S. GAAP) compared to a deferred tax expense of $10.9 million for the year ended December 31, 2001. This increase was the result of numerous factors, including a deferred tax expense recorded in 2001 related to the line reversion income, the weakening of the Mexican peso exchange rate and tax benefits derived from the impact of Mexican inflation in 2002. For the year ended December 31, 2002, fluctuations in the Mexican peso exchange rate also contributed to a $17.4 million exchange loss compared to an exchange gain of $2.8 million for the year ended December 31, 2001.
Equity in losses of the Company’s other unconsolidated affiliates for the year ended December 31, 2002 were $2.4 million compared to equity in losses of $1.4 million for the year ended December 31, 2001. In 2002, losses associated with PCRC were $3.8 million compared to $1.6 million in 2001. PCRC is not operating at full capacity as initially planned due to the delay in completion of the port expansion at Balboa. During 2001, losses were primarily related to the start-up of operations at PCRC. Additionally, the Company reported equity losses from Mexrail of $2.1 million in 2001 compared to essentially a break-even amount for 2002 prior to its sale to TFM. These losses were mitigated by equity earnings from Southern Capital of $1.4 million and $2.4 million for the years ended December 31, 2002 and 2001, respectively.
Gain on Sale of Mexrail, Inc. Net income for the year ended December 31, 2002 includes a gain on the sale of the Company’s investment in Mexrail, Inc. of $4.4 million.
Interest Expense. Consolidated interest expense declined $7.8 million to $45.0 million for the year ended December 31, 2002 compared to $52.8 million for the year ended December 31, 2001. This decrease was the result of lower effective interest rates for the first six months of 2002 as well as lower debt balances. The Company’s debt balance declined $75.8 million during 2002 from $658.4 million at December 31, 2001 to $582.6 million at December 31, 2002.
Debt Retirement Costs. Net income for the year ended December 31, 2002 includes debt retirement costs of $4.3 million related to the debt refinancing during the second quarter of 2002.
Other Income. Other items affecting net income for the year ended December 31, 2002 were gains totaling approximately $7.4 million related to the sale of certain non-operating properties at a subsidiary of the Company and a $4.9 million gain on the sale of WGC. These items account for the majority of the increase reported in other income for 2002 compared to 2001.
Income Tax Expense. For the year ended December 31, 2002, the Company’s income tax provision increased $4.1 million to $6.9 million compared to $2.8 million for the year ended December 31, 2001. This increase was primarily the result of gains on the sale of the Company’s investments in WGC and Mexrail, as well as gains realized on the sale of other non-operating assets. Lower interest costs for the year ended December 31, 2002 also contributed to the increase in the income tax provision. These factors, which led to an increase in the income tax provision, were partially offset by lower domestic operating income and resulted in an effective income tax rate of 11.3% and 8.3% for the years ended December 31, 2002 and 2001, respectively. Exclusive of
equity earnings in Grupo TFM, the consolidated effective income tax rate for the year ended December 31, 2002 was 37.7% compared to 51.8% for the year ended December 31, 2001. This variance in the effective tax rate was primarily the result of changes in associated book/tax temporary differences and certain non-taxable items. The Company intends to indefinitely reinvest the equity earnings from Grupo TFM and accordingly, the Company does not provide deferred income tax expense for the excess of its book basis over the tax basis of its investment in Grupo TFM.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information and Contractual ObligationsObligations.
2006 | 2005 | 2004 | ||||||||||
Cash flows provided by (used for): | ||||||||||||
Operating activities | $ | 267.5 | $ | 178.8 | $ | 142.7 | ||||||
Investing activities | (166.0 | ) | (289.5 | ) | (376.8 | ) | ||||||
Financing activities | (53.6 | ) | 103.2 | 137.3 | ||||||||
Net increase (decrease) in cash and cash equivalents | 47.9 | (7.5 | ) | (96.8 | ) | |||||||
Cash and cash equivalents at beginning of year | 31.1 | 38.6 | 135.4 | |||||||||
Cash and cash equivalents at end of year | $ | 79.0 | $ | 31.1 | $ | 38.6 | ||||||
2003 | 2002 | 2001 | ||||||||||
(dollars in millions) | ||||||||||||
Cash flows provided by (used for): | ||||||||||||
Operating activities | $ | 67.3 | $ | 95.7 | $ | 68.7 | ||||||
Investing activities | (83.6 | ) | (34.9 | ) | (55.7 | ) | ||||||
Financing activities | 132.7 | (66.5 | ) | (9.8 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | 116.4 | (5.7 | ) | 3.2 | ||||||||
Cash and cash equivalents at beginning of year | 19.0 | 24.7 | 21.5 | |||||||||
Cash and cash equivalents at end of year | $ | 135.4 | $ | 19.0 | $ | 24.7 | ||||||
During the year ended December 31, 2003, the Company’s consolidated cash position increased $47.9 million due to increased operating income which was partially offset by $116.4additional payments for the acquisition of Grupo KCSM and the refinancing and repayment of debt. During 2005, the consolidated cash position decreased $7.5 million from December 31, 2002.due to an increased level of capital expenditures. The primary sources of cash were as follows: the issuance of Convertible Preferred Stock; cash inflows from operating activities; proceeds fromactivities, the disposalissuance and assumption of property;long-term debt, the issuance of preferred stock and borrowings under the proceeds from employee stock plans.revolving credit facilities. The primary usersuses of cash were as follows:for capital expenditures, investments in and loans to affiliates;affiliates, repayment of debt; costs related tolong-term debt and the Acquisition; cash dividends paid; and property acquisitions.
Operating Cash Flows. The Company’srepurchase of KCS’ common stock.
2003 | 2002 | 2001 | ||||||||||
(dollars in millions) | ||||||||||||
Net income | $ | 12.2 | $ | 57.2 | $ | 30.7 | ||||||
Depreciation and amortization | 64.3 | 61.4 | 58.0 | |||||||||
Equity in undistributed earnings of unconsolidated affiliates | (11.0 | ) | (43.4 | ) | (27.1 | ) | ||||||
Distributions from unconsolidated affiliates | — | — | 3.0 | |||||||||
Deferred income taxes | (3.1 | ) | 21.8 | 30.4 | ||||||||
Gains on sales of properties and investments | (6.2 | ) | (20.1 | ) | (5.8 | ) | ||||||
Tax benefit realized upon exercise of stock options | 2.5 | 4.5 | 5.6 | |||||||||
Change in working capital items | 1.3 | 10.4 | (41.2 | ) | ||||||||
Other | 7.3 | 3.9 | 15.1 | |||||||||
Net cash flow from operating activities | $ | 67.3 | $ | 95.7 | $ | 68.7 | ||||||
(in millions):
2006 | 2005 | 2004 | ||||||||||
Net income | $ | 108.9 | $ | 100.9 | $ | 24.4 | ||||||
Depreciation and amortization | 155.0 | 127.7 | 53.5 | |||||||||
Equity in undistributed losses (earnings) of unconsolidated affiliates | (7.3 | ) | (2.9 | ) | 4.5 | |||||||
VAT/put settlement gain | — | (131.9 | ) | — | ||||||||
Minority interest | 0.3 | (17.8 | ) | — | ||||||||
Distributions from unconsolidated affiliates | 4.5 | 8.3 | 8.8 | |||||||||
Deferred income taxes | 41.0 | (17.3 | ) | 35.9 | ||||||||
KCSM employees’ statutory profit sharing | 5.9 | 41.1 | — | |||||||||
Loss (gain) on sale of assets | (7.8 | ) | 1.0 | (3.8 | ) | |||||||
Changes in working capital items | (24.5 | ) | 45.9 | 1.3 | ||||||||
Other, net | (8.5 | ) | 23.8 | 18.1 | ||||||||
Net cash flow provided by operating activities | $ | 267.5 | $ | 178.8 | $ | 142.7 | ||||||
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receipts.
Net investing cash outflows were $34.9 million and $55.7 million during the years ended December 31, 2002 and 2001, respectively. This variance of $20.8 million was primarily caused by an increase of $31.1 million of proceeds received from the sale of investments and a $3.8 million decrease in investment in and loans to affiliates. In the first quarter of 2002, the Company sold its 49% interest in Mexrail to TFM for approximately $31.4contributed $100.6 million. The proceeds from the sale exceeded the Company’s carrying value of Mexrail by $11.2 million. The Company recognized a gain of $4.4 million on the sale while the remaining $6.8 million in excess proceeds was deferred. The Company used the proceeds from the sale of Mexrail to reduce debt. These
Generally, operating cash flows and borrowings under lines of credit have been used to finance property acquisitions and investments in and loans to affiliates.
Financing Cash Flows. Financing cash outflows are used primarily for the repayment of debt while financing cash inflows are generated from proceedsderived from the issuance of long-term debt, including borrowings under the revolving credit facilities, the issuance of preferred stock and proceeds from the issuance of common stock under employee stock plans. During 2003, financingFinancing cash flowsoutflows were also generated throughused for the repayment of debt, the repurchase of KCS’ common stock, the payment of dividends on KCS’ preferred stock and the payment of debt and preferred stock issuance of the Convertible Preferred Stock with net proceeds of $193.0 million.costs. Financing cash flows for 2003, 2002,2006, 2005, and 20012004 were as follows:
• | Financing cash outflows for 2006 were $53.6 million, resulting primarily from the repayment of short and long term debt, including amounts related to the Grupo KCSM acquisition, and the costs associated with refinancing debt. During 2006, KCS entered into a new $371.1 million amended and restated credit agreement and used the proceeds to repay all amounts outstanding under the previous credit agreement. KCS also borrowed a net amount of $27.5 million under the Tex-Mex RRIF loan, repaid a net amount of $2.0 million under the KCSR revolving credit facility and repaid other amounts. KCSM issued $175.0 million of 75/8% senior unsecured notes and used the proceeds to purchase $146.0 million of its 101/4% senior unsecured notes and repay $29.0 million under its term loan facility. KCSM also used cash on hand to repay all amounts outstanding under its revolving credit facility. | |
• | Financing cash flows for 2005 were $103.2 million, resulting primarily from borrowings under the revolving credit facilities. During 2005 KCS issued $210.0 million of preferred stock and the net proceeds were used to repurchase 9.0 million shares of KCS common stock. KCS also assumed debt under a purchase agreement for 75 locomotives, of which $24.3 million was outstanding at year end, borrowed $21.7 million under the Tex-Mex RRIF loan, and had borrowings of $92.0 million outstanding at year end under the KCSR revolving credit facility. KCSM issued $460.0 million of 93/8% senior unsecured notes, and entered into a $106.0 million credit facility. The proceeds from these last two financings were used by KCSM to repay $443.5 million of senior discount debentures, $31.0 million under a bridge loan, the remaining balance of $67.5 million under the previous credit facility and the costs associated with the transactions. | |
• | Financing cash flows for 2004 were $137.3 million, resulting primarily from borrowings under a new $350.0 million credit agreement consisting of a $250.0 million term loan facility and a $100.0 million revolving credit facility. KCS used $100.0 million of the term loan to fund a portion of the escrow account under the acquisition of Grupo KCSM. | |
• | Proceeds from the sale of KCS common stock pursuant to employee stock plans were $8.6 million, $1.7 million and $7.4 million in 2006, 2005 and 2004, respectively. | |
• | Payment of cash dividends were $4.3 million, $8.7 million and $8.7 million in 2006, 2005 and 2004, respectively. Dividends of approximately $0.2 million were paid each year on the 4.0% noncumulative preferred stock; approximately $2.1 million, $8.5 million and $8.5 million of dividends were paid in 2006, 2005 and 2004, respectively, on the Series C Preferred Stock; and approximately $2.0 million of dividends were paid in 2006 on the Series D Preferred Stock. Cumulative dividends in arrears were paid February 15, 2007. Refer to Note 16 to the Consolidated Financial Statements in Item 8 of thisForm 10-K. |
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The following table outlines the Company’s material obligations under long-term debt, operating lease and other contractual commitments aton December 31, 2003.2006(in millions). Typically, payments for theseoperating leases, other contractual obligations and interest on long-term debt are funded through operating cash flows. Principal payment obligations on long-term debt are typically refinanced by issuing new long-term debt. If operating cash flows are not sufficient, funds received from other sources, including borrowings under credit facilities and proceeds from property and other asset dispositions might also be available. These obligations are customary transactions similar to those entered into by others in the transportation industry. The CompanyKCS anticipates refinancing certain parts of itsthe long-term debt prior to maturity.
Payments Due by Period | |||||||||||||||
Contractual Obligations | Total | Less than 1 Year | 2-3 Years | 4-5 Years | After 5 Years | ||||||||||
(dollars in millions) | |||||||||||||||
Long-term debt (including capital lease obligations) | $ | 523.4 | $ | 9.9 | $ | 17.0 | $ | 295.5 | $ | 201.0 | |||||
Operating leases | 402.8 | 56.2 | 91.5 | 71.5 | 183.6 | ||||||||||
Other contractual obligations(a) | 86.8 | 5.5 | 18.9 | 11.0 | 51.4 | ||||||||||
Total contractual obligations | $ | 1,013.0 | $ | 71.6 | $ | 127.4 | $ | 378.0 | $ | 436.0 | |||||
Payments Due by Period | ||||||||||||||||||||
Less Than | 1-3 | 3-5 | ||||||||||||||||||
Total | 1 Year | Years | Years | Thereafter | ||||||||||||||||
Long-term debt (including interest and capital lease obligations)(i) | $ | 2,496.7 | $ | 243.4 | $ | 697.6 | $ | 351.0 | $ | 1,204.7 | ||||||||||
Operating leases | 958.6 | 123.6 | 205.5 | 167.9 | 461.6 | |||||||||||||||
Other contractual obligations(ii) | 508.7 | 89.3 | 130.6 | 94.8 | 194.0 | |||||||||||||||
Total contractual obligations | $ | 3,964.0 | $ | 456.3 | $ | 1,033.7 | 613.7 | $ | 1,860.3 | |||||||||||
(i) | Includes current and long-term liability related to Grupo KCSM acquisition. | |
(ii) | Other contractual obligations |
Also,
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purchases of locomotives and rolling stock, while using internally generated cash flows or leasing for other equipment. Through itsequipment capital expenditures. The Southern Capital joint venture the Company hasprovides the ability to financelease-finance railroad equipment, and therefore, KCS has increasingly used lease-financing alternatives for its locomotives and rolling stock.
Capital Expenditure Category | 2003 | 2002 | 2001 | ||||||
(dollars in millions) | |||||||||
Track infrastructure | $ | 50.5 | $ | 40.2 | $ | 38.0 | |||
Locomotives, freight cars and other equipment | 14.0 | 14.9 | 14.2 | ||||||
Information technology | 3.1 | 5.8 | 10.0 | ||||||
Facilities and improvements | 4.7 | 14.8 | 1.5 | ||||||
Other | 6.7 | 4.1 | 2.3 | ||||||
Total capital expenditures | $ | 79.0 | $ | 79.8 | $ | 66.0 | |||
Mexrail for the year ended 2005 and KCSM for the last nine months of 2005, and KCSR only for 2004(in millions).
2006 | 2005 | 2004 | ||||||||||
Track infrastructure | $ | 100.4 | $ | 190.1 | $ | 57.2 | ||||||
Locomotives, freight cars and other equipment | 40.4 | 41.8 | 22.6 | |||||||||
Facilities and capacity projects | 70.7 | 1.7 | 27.4 | |||||||||
Information technology | 15.4 | 12.2 | 5.4 | |||||||||
Other | 14.9 | 29.9 | 4.6 | |||||||||
Total capital expenditures | $ | 241.8 | $ | 275.7 | $ | 117.2 | ||||||
KCSR,and KCSM, like allother railroads, isare required to maintain itstheir own property infrastructure. Portions of roadway and equipment maintenance costs are capitalized and other portions are expensed (as components of material and supplies, purchased services and others), as appropriate. Maintenance and capital improvement programs are in conformity with GAAP as well as with the Federal Railroad Administration’s track standards recognized within the rail industry and are accounted for in accordance with applicablerelated regulatory accounting rules. Managementagencies. KCS expects to continue to fundfunding roadway and equipment maintenance expenditures with internally generated cash flows. Maintenance expenses (exclusive of amounts capitalized) for way and structure (roadbed, rail, ties, bridges, etc.) and equipment (locomotives and rail cars) for the three years ended December 31, 2003, 2002 and 2001 respectively, as a percentage of KCSR revenues were as follows:
KCSR Maintenance | ||||||||||||
Way and Structure | Equipment | |||||||||||
Amount | Percent of Revenue | Amount | Percent of Revenue | |||||||||
(dollars in millions) | ||||||||||||
2003 | $ | 41.1 | 7.1 | % | $ | 42.5 | 7.3 | % | ||||
2002 | 43.6 | 7.7 | 48.2 | 8.5 | ||||||||
2001 | 43.9 | 7.5 | 44.8 | 7.7 |
2003 | 2002 | |||||||
(dollars in millions) | ||||||||
Debt due within one year | $ | 9.9 | $ | 10.0 | ||||
Long-term debt | 513.5 | 572.6 | ||||||
Total debt | 523.4 | 582.6 | ||||||
Stockholders’ equity | 963.7 | 752.9 | ||||||
Total debt plus equity | $ | 1,487.1 | $ | 1,335.5 | ||||
Total debt as a percent of total debt plus equity (“debt ratio”) | 35.2 | % | 43.6 | % | ||||
follow(in millions):
2006 | 2005 | |||||||
Debt due within one year(i) | $ | 92.8 | $ | 116.3 | ||||
Long-term debt(ii) | 1,664.2 | 1,744.3 | ||||||
Total debt | 1,757.0 | 1,860.6 | ||||||
Stockholders’ equity | 1,582.4 | 1,426.2 | ||||||
Total debt plus equity | $ | 3,339.4 | $ | 3,286.8 | ||||
Debt ratio(total debt as a percent of total debt plus equity) | 52.6 | % | 56.6 | % |
(i) | Includes current liability related to Grupo KCSM acquisition. | |
(ii) | Includes long-term liability related to Grupo KCSM acquisition. |
47
Amendment of Credit Agreement.During 2003, the Company received approval from its lenders for two separate amendments to certain provision As a consequence of the Amended KCS Credit Facility dated June 12, 2002. The Company requested the first amendment in order to provide flexibility in structuring the funding for the transaction to acquire the Mexican government’s interest in TFM as further discussed in “Recent Developments—Mexican Government’s Put Rights with Respect to TFM Stock.” The Company entered into a second amendment in which the lenderslate filing of the Amended2005Form 10-K, KCS Credit Facility specifically approved (i) the Company’s investment in further equity interestsis ineligible to use any of Grupo TFM and in equity interests representing 51% of Mexrail’s issued and outstanding capital stock and (ii) the usethese shelf registration statements until it has timely filed all periodic reports required under Section 13(a) or Section 15(d) of the Company’s cash to acquire Mexrail in connection withExchange Act during the proposed Acquisition.
Overall Liquidity
As part of the Amended KCS Credit Facility, the Company has financing available under the Revolving Credit Facility, which has a maximum borrowing amount of $100 milliontwelve calendar months and matures on January 11, 2006. As of December 31, 2003, no amounts had been borrowed under the Revolving Credit Facility. Further, no amounts have been borrowed under the Revolving Credit Facility during 2004. The Amended KCS Credit Facility contains, among other provisions, various financial covenants. The Company was in compliance with these provisions, including the financial covenants as of December 31, 2003. As a result of these financial covenants, the Company’s borrowings under the Revolving Credit Facility may be restricted.
On March 1, 2004, the Company repaid approximately $38.5 million of term debt (“Term B Loan”) under the Amended KCS Credit Facility using cash on-hand. After consideration of this repayment, the outstanding balance under the Term B Loan was $60 million. The Company is currently in the process of refinancing the Amended KCS Credit Facility, including the Revolving Credit Facility. Under the proposed terms of the new senior secured credit facility (“2004 KCS Credit Facility”), the Company expects to borrow $150 million under a new term loan due March 2008 (“2004 Term B Loan”). Additionally, the 2004 KCS Credit Facility provides for a new revolving credit facility, which expires in March 2007, with a maximum borrowing amount of $100 million (“2004 Revolving Credit Facility”). The Company does not anticipate any borrowing under the 2004 Revolving Credit Facility as of March 31, 2004. The Company has received firm commitment letters from various banks and institutional investors committing to fully fund the new loans and agreeing to the term sheet of the 2004 KCS Credit Facility. The commitments are subject only to proper documentation of the new facility. KCS management expects to close this refinancing transaction prior to March 31, 2004. If, however, the 2004 KCS Credit Facility is not consummated on or prior to March 31, 2004, the Company may be in technical default of certain of its existing financial covenants under the Amended KCS Credit Facility.
Prior to or at the same time as the completion of the refinancing transaction, management expects to use $60 million of cash on-hand to repay the existing Term B Loan. The $150 million of proceeds from the 2004 Term B Loan is expected to be used for general corporate purposes, including financing a portion of the Acquisition, ifmonth after the lateForm 10-K filing was made. KCS was also ineligible to use the shelf registration statements during the period in which it
occurs. The remaining costs of the Acquisition are expected to be financed using a combination of cash on-hand, available liquidity under the 2004 Revolving Credit Facility or other capital market transactions. As further described below in “Recent Developments—Proposed Acquisition of Grupo TFM from Grupo TMM,” the Company has not yet determined whether it would exercise its right failed to pay up to $80 million ofdividends on its 4% Preferred Stock, Series C Preferred Stock and Series D Preferred Stock. KCS paid the cash portion ofaccrued and unpaid dividends and current dividends on the Acquisition purchase price by delivering up to 6,400,000 common shares. Also see “Recent Developments—Dispute over Acquisition Agreement.” As a result of the refinancing transaction described above, the Company expects to report a charge to earnings in the first quarter of 2004 of approximately $4 million related to the write-off of existing deferred financing costs.
As discussed in “Recent Developments—Mexican Government’s Put Rights with Respect to TFMSeries C Preferred Stock” Grupo TMM and KCS, or either Grupo TMM or KCS, could be required to purchase the Mexican government’s interest in TFM. If KCS and Grupo TMM, or either KCS or Grupo TMM individually had been required to purchase the Mexican government’s 20% interest in TFM, the total purchase price would have been approximately $467.7 million as of December 31, 2003. The Company is exploring various alternatives for financing this transaction. It is anticipated that this financing, if necessary, can be accomplished using the Company’s ability to access the capital markets. No commitments for such financing have been obtained at this time.
The Company believes, basedSeries D Preferred Stock 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 2004. Also, if necessary, managementFebruary 15, 2007. KCS believes it will be ableeligible to obtainuse the necessary financingshelf registration statements commencing May 1, 2007, provided KCS continues to fundpay dividends on its preferred stock, timely files all periodic reports required under the AcquisitionExchange Act and otherwise meets the purchase of the Mexican government’s 20% interest in TFM. The Company’s operating cash flows and financing alternatives, however, 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 financingrequirements for short-form registration under reasonable terms is subject to market conditions. Further, the Company’s cost of debt can be impacted by independent rating agencies, which assign debt ratings based on certain credit measurements such as interest coverage and leverage ratios. During 2003, both Standard Poor’s Rating Services and Moody’s Investors Service (“Moody’s”) downgraded the debt ratings of KCS. Moody’s also downgraded the Company’s debt ratings in 2004. These reductions in the Company’s debt ratings did not have any impact on the Company’s interest rates or financial covenant ratios, but could adversely impact borrowing costs in the future.
Form S-3.
The
critical accounting policies and estimates.
operating assets using compositegroup straight-line rates for financial statement purposes. The STB approves the depreciation rates used by KCSR (excluding the amortization of computer software). but not for KCSM. Both KCSR and KCSM periodically conductsconduct studies of depreciation rates for properties and equipment and implements approved changes, as necessary, to depreciation rates. These studies take into consideration the historical retirement experience of similar assets, the current condition of the assets, current operations and potential changes in technology, estimated salvage value of the assets, and industry regulations. For all other consolidated subsidiaries, depreciation is derived based upon the asset value in excess of estimated salvage value using the straight-line method over the estimated useful lives of the assets for financial reporting purposes. Depreciation is based upon estimates of the useful lives of assets as well as their net salvage value at the end of their useful lives. Estimation of the useful lives of assets that are long-lived as
48
For the years ended December 31, 2003, 2002,
Concession.
The
The CompanyMexico. KCS conducts studies, as well as site surveys, to determine the extent of environmental damage and the necessary requirements to remediate this damage. These studies incorporate the analysis of our internal environmental engineering staff and consultation with legal counsel. From these studies and surveys, a range of estimates of the costs involved is derived and a liability and related expense for environmental remediation is
recorded within this range. The Company’s recorded liabilities for these issues represent its best estimates (on an undiscounted basis) of remediation and restoration costs that may be required to comply with present laws and regulations.derived. These cost estimates are based on forecasts of the total future direct costs related to environmental remediation. These estimatesremediation and change periodically as additional or better information becomes available as to the extent of site remediation required, if any. In addition,KCS accrues for the cost of remediation where the obligation is probable and such costs can be reasonably estimated.
49
For
5.
See also Note 11 to the Consolidated Financial Statements in Item 8 of thisForm 10-K.
50
For the years ended December 31, 2003, 2002, and 2001, management made no material changes in its assumptions regarding the determination of the provision for income taxes. However, certain events could occur that would materially affect the Company’s estimates and assumptions regarding deferred taxes. Changes in current tax laws and applicable enacted tax rates could affect the valuation of deferred tax assets and liabilities, thereby impacting the Company’s income tax provision. Additionally, significant declines in taxable operating income could materially impact the realizable value of deferred tax assets.
As of December 31, 2003, the Company’s financial reporting basis exceeded the tax basis of its investment in Grupo TFM by $92.1 million. Management has not provided a deferred income tax liability for the income taxes, if any, that would become payable upon the realization of this basis difference because the Company considers Grupo TFM to be a foreign corporate joint venture and anticipates that Grupo TFM’s earnings will be permanently invested in Grupo TFM. Likewise the Company has no plans to realize this basis differential by a sale of its investment in Grupo TFM. If management were to change this assumption in determining its provision for deferred taxes, the impact on earnings could be significant. If the Company were to realize this basis difference in the future by a receipt of dividends or the sale of its investment in Grupo TFM, as of December 31, 2003, the Company could incur additional gross federal income taxes of approximately $32.2 million, which may be partially or fully offset by Mexican income taxes and could be available to reduce U.S. federal income taxes at such time.
For the year ended December 31, 2003, the Company’s income tax benefit was $2.8 million consisting of $0.3 million for the current tax provision and $3.1 million for the deferred tax benefit. Changes in management’s estimates and assumptions regarding the enacted tax rate applied to deferred tax assets and liabilities, the ability to realize the value of deferred tax assets, or the timing of the reversal of tax basis differences could potentially impact the provision for income taxes. Changes in these assumptions could potentially change the effective tax rate. A 10% change in the effective tax rate from 23.7% (exclusive of the equity in earnings of Grupo TFM—see “Results of Operations—Income Tax Provision (Benefit)”) to 33.7% would increase the current year income tax benefit approximately $1 million.
Equity in the earnings of unconsolidated affiliates is a significant component of the Company’s net income. For financial reporting purposes, the Company records equity in the net earnings of its unconsolidated affiliates in accordance with the provisions of Accounting Principles Board Opinion No. 18 “The Equity Method of
Accounting for Investments in Common Stock.”For the Company’s investment in Grupo TFM, the equity in net earnings recorded by the Company is materially impacted by estimates included in Grupo TFM’s tax computation. These estimates are dependent to a certain extent on changes in Mexican tax rates, fluctuations in the Mexican rate of inflation and changes in the exchange rate between the U.S. dollar and the Mexican peso. To determine the income tax provision (benefit) and the value of deferred tax assets and liabilities, Grupo TFM and KCS management must make assumptions and estimates related to material amounts into the future. Accordingly, management of the Company believes that the accounting estimate made by Grupo TFM and KCS management related to Grupo TFM’s provision for income taxes is a “critical accounting estimate” due to its significant impact on the Company’s results of operations.
For the year ended December 31, 2001, there were no material changes in the assumptions regarding the determination of the provision for income taxes for Grupo TFM. Effective January 1, 2002, Mexico implemented changes in its income tax laws that had an impact on the Company’s equity in Grupo TFM’s earnings reported under the equity method of accounting. Beginning in 2003, the Mexican corporate income tax rate is being reduced from 35% to 32% in one-percent increments. As a result of this change in tax rates, management’s assumptions and estimates related to the value of Grupo TFM’s net tax asset changed, and the value of Grupo TFM’s tax asset was reduced by approximately $7.6 million in the year ended December 31, 2002, resulting in an impact of approximately $2.8 million to the Company. The provision for income taxes and the value of Grupo TFM’s net deferred tax assets could be further impacted by changes in the rate of inflation in Mexico, provisions within Mexican tax law that provide for inflation indexation for tax purposes, as well as changes in the exchange rate between the U.S. dollar and the Mexican peso. Changes in these estimates could have a material impact on the Company’s equity in earnings of Grupo TFM.
OTHER
Significant Customer. Southwestern Electric Power Company (“SWEPCO”), a subsidiary of American Electric Power, Inc., is the Company’s only customer that accounted for more than 10% of revenues during the years ended December 31, 2002 and 2001, respectively. Revenues related to SWEPCO during these periods were $64.7 million and $75.9 million, respectively. During 2003, revenues related to SWEPCO were $57.2 million, representing approximately 9.8% of the Company’s revenues. KCSR coal revenues declined in 2002 as a result of a contractual rate reduction for SWEPCO, which became effective on January 1, 2002.
Management Control System.On July 14, 2002, the Company initiated the transition from its legacy operating system to a platform called 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, delivers work orders to yard and train crews to ensure that the service being provided reflects what was sold to the customer. The system also tracks individual shipments as they move across the rail system, compares that movement to the service sold to the customer and automatically reports the shipment’s status to the customer and to operations management. If a shipment falls behind schedule, MCS automatically generates alerts and action recommendations so that corrective action promptly can be initiated.
During the second half of 2002, the Company’s operating results were impacted by higher operating costs and some temporary traffic diversions caused by congestion directly related to the implementation of MCS. The MCS implementation slowed the railroad as employees learned to respond to the data discipline demanded by this new system. The initial difficulties experienced by office and field personnel in transitioning to this new platform led to the congestion issues and operating inefficiencies, which contributed to a decline in 2002 consolidated operating income. By mid-November 2002, however, the Company’s operations began to experience improved transit times and terminal activities as MCS capabilities began to be fully integrated into KCS management processes, and operations were virtually recovered by the end of 2002. Operating statistics, such as terminal dwell time, train velocity and cars on-line, significantly improved during 2003, confirming this recovery. See “Results of Operations” for further information.
In general, the Company enters into derivative transactions in limited situations based on management’s assessment of current market conditions and perceived risks. Management intends to respond to evolving business and market conditions in order to manage risks and exposures associated with the Company’s various operations, and in so doing, so, may enter into such transactions more frequently as deemed appropriate.
Fuel expense is a significant component of the Company’s operating expenses. Fuel costs are affected by (i) traffic levels, (ii) efficiency of operations and equipment, and (iii) fuel market conditions. To lock-in the price for future fuel purchases to protect the Company’s operating results against adverse fuel price fluctuations, from time to time, KCSRKCS enters into transactions, such as forward purchase commitments and commodity swap transactions.transactions from time to time, to stabilize the price for future fuel purchases and protect operating results against adverse fuel price fluctuations. These derivative instruments hedge against fluctuations in the price of No. 2 Gulf Coast Heating Oil, the commodity on which the Company’s diesel fuel prices are determined. Using thesebased. The use of certain risk management strategies the Company is ableenables risk to limit its riskbe reduced related to rising diesel fuel prices. These derivative transactions are correlatedOn December 31, 2006, KCS was party to market benchmarksfuel swap agreements for 1.3 million gallons of fuel.
Interest Rate Derivative Transactions
The Company did not participate in any interest rate derivative transactions during 2003 and had no interest rate hedge transactions outstanding as of December 31, 2003 and 2002. At December 31, 2001 the Company had five separate interest rate cap agreements for an aggregate notional amount of $200 million. These agreements expired during 2002.
Foreign Exchange Matters. In connection with the Company’s investment in Grupo TFM, matters arise with respect to financial accounting and reporting for foreign currency transactions and for translating foreign currency transactions into U.S. dollars. The CompanyKCS follows the requirements outlined in Statement of Financial Accounting Standards No. 52 “Foreign Currency Translation” (“SFAS 52”), and related authoritative guidance. Grupo TFM uses the U.S. dollar as its functional currency. Equity earnings (losses) from Grupo TFM included in the Company’s results of operations reflect the Company’s share of any such translation gains and losses that Grupo TFM records in the process of translating certain transactions from Mexican pesos to U.S. dollars. Results of the Company’s investment in Grupo TFM are reported under U.S. GAAP while Grupo TFM reports its financial results under IFRS. Because the Company is required to report its equity earnings (losses) in Grupo TFM under U.S. GAAP and Grupo TFM reports under IFRS, differences in deferred income tax calculations and the classification of certain operating expense categories occur.
The Company continues to evaluate existing alternatives with respect to utilizing foreign currency instruments to hedge its U.S.the dollar investment in Grupo TFMKCSM as market conditions change or exchange rates fluctuate. AtAs of December 31, 2003, 2002 and 2001, the Company had no2006, KCSM did not have any outstanding foreign currency hedging instruments.
forward contracts.
injuries related injury incidents or crossing accidents. The Company isto railroad operations. KCS aggressively defendingdefends these matters and has established liability reserves whichthat management believes are adequate to cover expected costs. Nevertheless, due to the inherent unpredictability of these matters, the Company could incur substantial costs above reserved amounts. The following provides an update on certain more significant cases. See “Recent Developments— Dispute over Acquisition Agreement” for discussion of dispute with TMM over the Acquisition.
Stilwell Tax Dispute. On November 19, 2002, Stilwell, now Janus Capital Group Inc., filed a Statement of Claim against KCS with the American Arbitration Association. This claim involves the entitlement to compensation expense deductions for federal income tax purposes, which are associated with the exercise of certain stock options issued by Stilwell (the “Substituted Options”) in connection with the Spin-off of Stilwell from KCS on July 12, 2000. Stilwell alleges that upon exercise of a Substituted Option, StilwellAlthough it is entitled to the associated compensation expense deductions. Stilwell bases its claim on a letter, dated August 17, 1999, addressed to Landon H. Rowland, Chairman, President and Chief Executive Officer of Kansas City Southern Industries, Inc. (the “Letter”), purporting to allow Stilwell to claim such deductions. The Letter was signed by the Vice President and Tax Counsel of Stilwell, who was also at the time the Senior Assistant Vice President and Tax Counsel of KCS, and by Landon H. Rowland, currently a director of KCS and the former non-executive Chairman of Janus Capital Group Inc., who was at that time a director and officer of both Stilwell and KCS.
Stilwell seeks a declaratory award and/or injunction ordering KCS to file and amend its tax returns for the tax year 2000 and subsequent years to reflect that KCS does not claim the associated compensation expense deductions and to indemnify Stilwell against any related taxes imposed upon Stilwell, which allegedly has taken, and plans to take, such deductions. On December 20, 2002, KCS filed an Objection to Stilwell’s Demand for Arbitration and Motion to Dismiss. KCS disputes the validity and enforceability of the Letter. KCS asserts, among other things, that a Private Letter Ruling issued by the Internal Revenue Service on July 9, 1999 provides that KCS subsidiaries are entitled to compensation expense deductions upon exercise of Substituted Options by their employees.
KCS has answered that the claims of Stilwell are without merit and intends to vigorously defend against them. Given the stage of the proceeding, KCS is unablepossible to predict the outcome but does not expect this matter to result in an adverse financial consequences that would be material to KCS’s net incomeof any legal proceeding, in the event, which it regards as unlikely, that it would not prevail.
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 resultopinion of the explosion, nitrogen dioxideCompany’s management, other than those proceedings described in detail below, such proceedings 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. A Master Global Settlement Agreement (“MGSA”) was signed in early 2002. During 2002, KCSR made all payments under the MGSA and collected $19.3 million from its excess insurance carriers. Court approval of the MGSA is expected in 2004 from the 22nd Judicial District Court of Washington Parish, Louisiana. KCSR also expects to receive releases from about 4,000 Mississippi plaintiffs in numerous cases pendingactions should not, individually, or in the First Judicial District Circuit Court of Hinds County, Mississippi.
Houston Cases.In August 2000, KCSR and certain of its affiliates were added as defendants in lawsuits pending in Jefferson and Harris Counties, Texas. These lawsuits allege damage to approximately 3,000 plaintiffs as a result of an alleged toxic chemical release from a tank car in Houston, Texas on August 21, 1998. Litigation involving the shipper and the delivering carrier had been pending for some time, but KCSR, which handled the car during the course of its transport, had not previously been named a defendant. On June 28, 2001, KCSR reached a final settlement with the 1,664 plaintiffs in the lawsuit filed in Jefferson County, Texas. In 2002, KCSR settled with virtually all of the plaintiffs in the lawsuit filed in the 164th Judicial District Court of Harris
County, Texas, for approximately $0.3 million. The remaining plaintiffs have indicated that they intend to retain new counsel, yet to date, KCS has not received any notice of new counsel entering the case.
Environmental Matters. As discussed above in “Critical Accounting Policies and Estimates,” the Company’s operations, as well as those of its competitors, are subject to extensive federal, state and local environmental laws and regulations. Certain laws and regulations can impose joint and several liability for cleanup and investigation costs, without regard to fault or legality of the original conduct, on current and predecessor owners and operators of a site, as well as those who generate, or arrange for the disposal of, hazardous substances. The Company does not foresee that compliance with the requirements imposed by the current environmental legislation will impair its competitive capability or result in any material additional capital expenditures, operating or maintenance costs. However, stricter environmental requirements relating to our business, which may be imposed in the future, could result in significant additional costs.
The risk of incurring environmental liability is inherent in the railroad industry. The Company’s operations involve the use and, as part of serving the petroleum and chemicals industry, transportation of hazardous materials. The Company has a professional team available to respond and handle environmental issues that might occur in the transport of such materials. The Company also is a partner in the Responsible Care® program and, as a result, has initiated certain additional environmental, health and safety practices. KCSR performs ongoing review and evaluation of the various environmental programs and issues within the Company’s operations, and, as necessary, takes actions to limit the Company’s exposure to environmental liabilities.
Although the Company is responsible for investigating and remediating contamination at several locations, based on currently available information, the Company does not expect any related liabilities, individually or collectively, toaggregate, have a material impact on its results of operations, financial position or cash flows. In the event that the Company becomes subject to more stringent cleanup requirements at these sites, discovers additional contamination, or becomes subject to related personal or property damage claims, the Company could incur material costs in connection with these sites.
KCSR has been named a Potential Responsible Party (PRP) in connection with a former foundry site in Alexandria, Louisiana. A small portion of this property was owned through a former subsidiary during the years 1924 to 1974 and leased to a small foundry operator. The foundry operator, Ruston Foundry, ceased operations in early 1990. The site is on the CERCLA National Priorities List of contaminated sites. The United States Environmental Protection Agency has completed a Record of Decision of the site. Management is in the process of negotiating a settlement with respect to this site and continues to evaluate its potential financial statement impact. Management’s has recorded its best estimate of potential liability of $1.9 million as of December 31, 2003 related to potential remediation costs at this site. Further evaluation is ongoing and any remaining exposure is not expected to have a materialadverse effect on the Company’s results of operations, financial condition, or cash flows.
In 1996,condition.
litigation. The Company records liabilitiesis however continuing the Reinsurance Litigation against certain other insurance companies, seeking to establish their obligation to indemnify the Company for remediation and restoration costs related to past activities whentheir share of the Company’s obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance activities to current operations are expensed as incurred. The Company’s recorded liabilitiessettlement with respect to these various environmental issues represent its best estimates of remediation and restoration costs that may be required to comply with present laws and regulations. Although these costs cannot be predicted with certainty,
management believes that the ultimate outcome of identified matters will not have a material adverse effect on the Company’s consolidated results of operations, financial condition or cash flows.
Kemp.
51
Regulatory Influence. In addition to the environmental agencies mentioned above, KCSR’s operations are regulated by the STB, various state regulatory agencies, and the Occupational Safety and Health Administration (“OSHA”). State agencies regulate some aspects of rail operations with respect to health and safety and in some instances, intrastate freight rates. OSHA has jurisdiction over certain health and safety features of railroad operations. The Company does not foresee that regulatory compliance under present statutes will impair its competitive capability or result in any material effect on its results of operations, financial condition or cash flows.
CAUTIONARY INFORMATION
whether the Company is fully successful in executing the Company’s business strategy, including capitalizing on NAFTA trade to generate traffic and increase revenues, exploiting the Company’s
| fluctuations in the market price for the Company’s common stock; | |
• | KCS’ dividend policy and | |
• | KCS’ high degree of leverage; | |
• | The Company’s potential need for and | |
• | KCS’ ability to successfully implement its business strategy, including the strategy to convert customers from using trucking services to rail transportation services; | |
• | the impact of competition, including competition from other rail carriers and | |
• | United States, Mexican and global economic, political and social conditions; | |
• | The effects of the North American Free Trade Agreement, or NAFTA, on the level of trade among the United States, Mexico and Canada; | |
• | uncertainties regarding the litigation KCS faces and any future claims and litigation; | |
• | the effects of employee training, technological improvements and capital expenditures on labor productivity, operating efficiencies and service reliability; | |
• | changes in legal or regulatory requirements in the United States, Mexico or Canada; | |
• | KCS’ ability to generate sufficient cash to pay principal and interest on its debt, meet its obligations and fund its other liquidity needs; | |
• | the effects of adverse general economic conditions affecting customer | |
• | material adverse changes in economic and industry conditions, both within the United States and Mexico and globally; | |
• | natural events such as severe weather, fire, floods, hurricanes, earthquakes or other disruptions of the Company’s operating systems, structures and equipment or the ability of customers to produce or deliver their products; | |
• | changes in fuel prices; | |
• | KCS’ ability to attract and retain qualified management personnel; | |
• | changes in labor costs and labor difficulties, including work stoppages affecting either operations or customers” abilities to deliver goods for shipment; |
52
• | the outcome of claims and litigation, including those related to environmental contamination, personal injuries, and occupational illnesses arising from hearing loss, repetitive motion and exposure to asbestos and diesel fumes; | |
• | acts of terrorism or risk of terrorist activities; | |
• | war or risk of war; | |
• | political and economic conditions in Mexico; and the level of trade between the United States and Mexico; | |
• | legislative, regulatory, or legal developments involving taxation, including enactment of new foreign, federal or state income or other tax rates, revisions of controlling authority, and the outcome of tax claims and litigation. |
date on which they are made. The Company will not update any forward-looking statements in this Annual Report to reflect future events, developments, or developments.other information. If the CompanyKCS does update one or more forward-looking statements, no inference should be drawn that the Company will make additional updates with respect theretowill be made regarding that statement or with respect toany other forward-looking statements.
Item 7A. | Quantitative and Qualitative Disclosures |
The Company
KCS.
The Company’s floating-rateSensitivity. Floating-rate indebtedness totaled $98.5$381.6 million and $149.3$440.9 million at December 31, 20032006 and 2002,2005, respectively. The Company’s variable rate debt,Two credit agreements, each comprised of a revolving credit facility and a term loan facility, contain variable rate debt which accrues interest based on target interest indexes (e.g., London(London Interbank Offered Rate—“LIBOR,” federal funds rate, etc.)Rate — “LIBOR” or an alternative base rate) plus an applicable spread, as set forth in theeach credit agreement. As a result of the 2002 refinancing of $200 million of variable rate debt with the 7½% Notes, the Company has been able to reduce its sensitivity to fluctuations in interest rates compared to previous years. However, givenGiven the balance of $98.5$381.6 million of variable rate debt at December 31, 2003, the Company2006, KCS is still sensitive to fluctuations in interest rates. For example, a hypothetical 100 basis points increase in each of the respective target interest indexes would result in additional interest expense of approximately $1.0$3.8 million on an annualized basis for the floating-rate instruments heldissued by the Company as of December 31, 2003.
2006.
2005.
Sensitivity.As described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other—Operations — Other — Derivative Instruments” of thisForm 10-K, the Company KCS periodically participates in diesel fuel purchase commitment and swap transactions. At December 31, 2003, the Company2006, KCS was a party to seven fuel swap agreements. Based on market prices atagreements for 1.3 million gallons. Subsequent to December 31, 2003, the Company would receive payments from the third party counterparty of approximately $0.9 million on the settlement date of the agreement, representing the excess of the current market price over the agreed upon swap price. If market prices of fuel dropped below the swap price, then2006, KCS would be obligated to pay an amount equal to the difference between the market price and the swap price for each gallon of fuel hedged. At December 31, 2002, the excess of payments to be received or savings to be realized over the market price related to diesel fuel purchase commitments andentered into fuel swap transactions approximated $1.8agreements for another 1.3 million and $0.6 million, respectively. A hypothetical 10% increase in the price of diesel fuel would have resulted in additional fuel expense of approximately $4.7 million for the year ended December 31, 2003.
At December 31, 2003, thegallons. The Company heldalso holds fuel inventories for use in normal operations. These inventories wereare not material to the Company’sKCS’ overall financial position. With the exception of the 13% of fuel currently hedged under fuel swap transactions for 2004,2007, fuel costs are expected to mirror market conditions in 2003.
2007. KCS also cushions the impact of increased fuel costs through fuel surcharge revenues from customers. Assuming annual consumption of 145 million gallons, a $0.10 change in the price per gallon of fuel would cause a $14.5 million change in operating expenses.
The Company owns a 46.6% interest in Grupo TFM, incorporated in Mexico. In connection with the Company’s investment in Grupo TFM, matters arise with respect to financial accounting and reporting for foreign currency transactions and for translating foreign currency transactions into U.S. dollars. Grupo TFMSensitivity. KCSM uses the U.S. dollar as its functional currency. Equity earnings (losses)Earnings from Grupo TFMKCSM included in the Company’s results of operations reflect the Company’s share of any such translationrevaluation gains and losses that Grupo TFMKCSM records in the process of translating certain transactions from Mexican pesos to U.S. dollars. Therefore, the Company has exposure to fluctuations in the value of the Mexican peso. While not currently utilizing foreign currency instruments to hedge the Company’s U.S. KCS’
53
54
Item 8. Financial Statements and Supplementary Data
Item 8. | Financial Statements and Supplementary Data |
Page | ||||
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56 | ||||
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57 | ||||
58 | ||||
59 | ||||
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61 | ||||
62 | ||||
63 | ||||
Financial Statement Schedules: |
Financial Statement Schedules:
The combined and consolidated financial statements of Grupo TFMKCSM as of December 31, 20032005 (successor) and 2004 (predecessor) for each of the three years in the periodnine months ended December 31, 20032005 (successor), the three months ended March 31, 2005 (predecessor) and the year ended December 31, 2004 (predecessor) are attached toincorporated by reference into this Form 10-K as Exhibit 99.1.
annual report.
The accompanying consolidated financial statements and related notes ofStatements have been prepared by Kansas City Southern, pursuant to the rules and its subsidiaries were prepared by management in conformityregulations of the Securities and Exchange Commission (“SEC”). Beginning with generally accepted accounting principles appropriate in the circumstances. In preparing theyear ended December 31, 2005, these financial statements management has made judgmentsinclude the results of operations and estimates basedcash flows of Mexrail and Grupo KCSM, which were consolidated on currently available information. Management is responsible for not onlyJanuary 1, 2005, and April 1, 2005, respectively, as a result of the financial information, but also all other informationacquisition of a controlling interest in this Annual Report on Form 10-K. Representations contained elsewhere in this Annual Report on Form 10-K are consistent with the consolidated financial statements and related notes thereto.
The Company’s financial statementseach entity as of andthese respective dates. Results for the years ended December 31, 2003, 20022006 and 2001 have been audited by its independent accountants, KPMG LLP. Management has made available to the independent accountants all2005 are not indicative of the Company’sexpected results for future periods.
55
The Company has a formalized system of15d-15(f). KCS’ internal accounting controlscontrol over financial reporting was designed to provide reasonable assurance that assets are safeguardedto the Company’s management and that itsBoard of Directors regarding the preparation and fair presentation of published financial records are reliable. Management monitorsstatements.
The Board of Directors pursues its oversight role in the area ofinternal control over financial reporting and internalas of December 31, 2006, has been audited by KPMG LLP, an independent registered public accounting control through its Audit Committee. This committee, composed solely of qualified non-management directors, meets regularly with the respective independent accountants, management and internal auditors to monitor the proper discharge of responsibilities relative to internal accounting controls and to evaluate the quality of external financial reporting. Both the independent accountants and internal auditors have full and free access tofirm, as stated in their attestation report, which immediately follows this committee.report.
56
Michael R. Haverty
Chairman, President & Chief Executive Officer
Ronald G. Russ
Executive Vice President & Chief Financial Officer
To the
57
accounting principles.
58
March 19, 2004
KANSAS CITY SOUTHERN
Dollars in Millions, Except Share and per Share Amounts
2003 | 2002 | 2001 | ||||||||||
Revenues | $ | 581.3 | $ | 566.2 | $ | 583.2 | ||||||
Operating expenses | ||||||||||||
Compensation and benefits | 197.8 | 197.8 | 192.9 | |||||||||
Depreciation and amortization | 64.3 | 61.4 | 58.0 | |||||||||
Purchased services | 63.5 | 59.6 | 57.0 | |||||||||
Operating leases | 57.2 | 55.0 | 56.8 | |||||||||
Casualties and insurance | 56.4 | 25.2 | 42.1 | |||||||||
Fuel | 47.4 | 38.4 | 43.9 | |||||||||
Car hire | 10.0 | 19.7 | 19.8 | |||||||||
Other | 55.6 | 61.1 | 57.3 | |||||||||
Total operating expenses | 552.2 | 518.2 | 527.8 | |||||||||
Operating income | 29.1 | 48.0 | 55.4 | |||||||||
Equity in net earnings (losses) of unconsolidated affiliates: | ||||||||||||
Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. | 12.3 | 45.8 | 28.5 | |||||||||
Other | (1.3 | ) | (2.4 | ) | (1.4 | ) | ||||||
Gain on sale of Mexrail, Inc. | — | 4.4 | — | |||||||||
Interest expense | (46.4 | ) | (45.0 | ) | (52.8 | ) | ||||||
Debt retirement costs | — | (4.3 | ) | — | ||||||||
Other income | 6.8 | 17.6 | 4.2 | |||||||||
Income before income taxes and cumulative effect of accounting change | 0.5 | 64.1 | 33.9 | |||||||||
Income tax provision (benefit) (Note 6) | (2.8 | ) | 6.9 | 2.8 | ||||||||
Income before cumulative effect of accounting change | 3.3 | 57.2 | 31.1 | |||||||||
Cumulative effect of accounting change, net of income taxes | 8.9 | — | (0.4 | ) | ||||||||
Net income | $ | 12.2 | $ | 57.2 | $ | 30.7 | ||||||
Preferred stock dividends | 5.9 | 0.2 | 0.2 | |||||||||
Net income available to common shareholders | $ | 6.3 | $ | 57.0 | $ | 30.5 | ||||||
Per Share Data | ||||||||||||
Basic earnings (loss) per common share | ||||||||||||
Basic earnings (loss) per share before cumulative effect of accounting change | $ | (0.04 | ) | $ | 0.94 | $ | 0.53 | |||||
Cumulative effect of accounting change, net of income taxes | 0.14 | — | (0.01 | ) | ||||||||
Total basic earnings per common share | $ | 0.10 | $ | 0.94 | $ | 0.52 | ||||||
Diluted earnings (loss) per common share | ||||||||||||
Diluted earnings (loss) per share before cumulative effect of accounting change | $ | (0.04 | ) | $ | 0.91 | $ | 0.51 | |||||
Cumulative effect of accounting change, net of income taxes | 0.14 | — | (0.01 | ) | ||||||||
Total diluted earnings per common share | $ | 0.10 | $ | 0.91 | $ | 0.50 | ||||||
Weighted average common shares outstanding (in thousands) | ||||||||||||
Basic | 61,725 | 60,336 | 58,598 | |||||||||
Potential dilutive common shares | — | 1,982 | 2,386 | |||||||||
Diluted | 61,725 | 62,318 | 60,984 | |||||||||
See accompanying notes to consolidated financial statements
KANSAS CITY SOUTHERN
CONSOLIDATED BALANCE SHEETS
at December 31
Dollars in Millions, Except Share and per Share Amounts
2003 | 2002 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 135.4 | $ | 19.0 | ||||
Accounts receivable, net (Note 4) | 108.2 | 114.9 | ||||||
Accounts receivable from related parties | 6.4 | 3.6 | ||||||
Inventories | 36.8 | 34.2 | ||||||
Other current assets (Note 4) | 21.3 | 44.5 | ||||||
Total current assets | 308.1 | 216.2 | ||||||
Investments (Note 3) | 442.7 | 423.1 | ||||||
Properties, net (Note 4) | 1,362.5 | 1,337.4 | ||||||
Goodwill | 10.6 | 10.6 | ||||||
Other assets | 29.0 | 21.5 | ||||||
Total assets | $ | 2,152.9 | $ | 2,008.8 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Debt due within one year (Note 5) | $ | 9.9 | $ | 10.0 | ||||
Accounts and wages payable | 45.5 | 47.7 | ||||||
Accrued liabilities (Note 4) | 119.4 | 128.6 | ||||||
Total current liabilities | 174.8 | 186.3 | ||||||
Other Liabilities: | ||||||||
Long-term debt (Note 5) | 513.5 | 572.6 | ||||||
Deferred income taxes (Note 6) | 391.5 | 392.8 | ||||||
Other noncurrent liabilities and deferred credits (Note 4) | 109.4 | 104.2 | ||||||
Commitments and contingencies (Notes 3,5,6,7,8,9,10) | ||||||||
Total other liabilities | 1,014.4 | 1,069.6 | ||||||
Stockholders’ Equity (Notes 2,7): | ||||||||
$25 par, 4% noncumulative, Preferred stock, 840,000 shares authorized, 649,736 shares issued, 242,170 shares outstanding | 6.1 | 6.1 | ||||||
$1 par, Cumulative Preferred stock, 400,000 shares authorized, issued and outstanding at December 31, 2003; 0 shares authorized, issued and outstanding at December 31, 2002 | 0.4 | — | ||||||
$.01 par, Common stock, 400,000,000 shares authorized; 73,369,116 shares issued; 62,175,621 and 61,103,015 shares outstanding at December 31, 2003 and 2002, respectively | 0.6 | 0.6 | ||||||
Paid in capital | 110.9 | — | ||||||
Retained earnings | 846.2 | 748.5 | ||||||
Accumulated other comprehensive loss | (0.5 | ) | (2.3 | ) | ||||
Total stockholders’ equity | 963.7 | 752.9 | ||||||
Total liabilities and stockholders’ equity | $ | 2,152.9 | $ | 2,008.8 | ||||
See accompanying notes to consolidated financial statements
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
Dollars in Millions
2003 | 2002 | 2001 | ||||||||||
CASH FLOWS PROVIDED BY (USED FOR): | ||||||||||||
OPERATING ACTIVITIES: | ||||||||||||
Net income | $ | 12.2 | $ | 57.2 | $ | 30.7 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||
Depreciation and amortization | 64.3 | 61.4 | 58.0 | |||||||||
Deferred income taxes | (3.1 | ) | 21.8 | 30.4 | ||||||||
Equity in undistributed earnings of unconsolidated affiliates | (11.0 | ) | (43.4 | ) | (27.1 | ) | ||||||
Distributions from unconsolidated affiliates | — | — | 3.0 | |||||||||
Gain on sale of assets | (6.2 | ) | (20.1 | ) | (5.8 | ) | ||||||
Cumulative effect of accounting change | (8.9 | ) | — | 0.4 | ||||||||
Tax benefit realized upon exercise of stock options | 2.5 | 4.5 | 5.6 | |||||||||
Changes in working capital items | ||||||||||||
Accounts receivable | 4.0 | 12.4 | 4.0 | |||||||||
Inventories | (2.5 | ) | (8.8 | ) | 6.1 | |||||||
Other current assets | 15.3 | 29.8 | (19.3 | ) | ||||||||
Accounts and wages payable | (2.8 | ) | (2.4 | ) | (5.1 | ) | ||||||
Accrued liabilities | (12.7 | ) | (20.6 | ) | (26.9 | ) | ||||||
Other, net | 16.2 | 3.9 | 14.7 | |||||||||
Net | 67.3 | 95.7 | 68.7 | |||||||||
INVESTING ACTIVITIES: | ||||||||||||
Property acquisitions | (79.0 | ) | (79.8 | ) | (66.0 | ) | ||||||
Proceeds from disposal of property | 12.4 | 18.1 | 18.1 | |||||||||
Investment in and loans to affiliates | (40.4 | ) | (4.4 | ) | (8.2 | ) | ||||||
Proceeds from sale of investments, net | 32.7 | 31.7 | 0.6 | |||||||||
Deferred costs related to acquisition of Grupo TFM | (9.3 | ) | — | — | ||||||||
Other, net | — | (0.5 | ) | (0.2 | ) | |||||||
Net | (83.6 | ) | (34.9 | ) | (55.7 | ) | ||||||
FINANCING ACTIVITIES: | ||||||||||||
Proceeds from issuance of long-term debt | — | 200.0 | 35.0 | |||||||||
Repayment of long-term debt | (59.2 | ) | (270.9 | ) | (51.3 | ) | ||||||
Net proceeds from issuance of preferred stock | 193.0 | — | — | |||||||||
Debt issuance costs | — | (5.7 | ) | (0.4 | ) | |||||||
Proceeds from stock plans | 5.3 | 10.3 | 8.9 | |||||||||
Cash dividends paid | (4.7 | ) | (0.2 | ) | (0.2 | ) | ||||||
Other, net | (1.7 | ) | — | (1.8 | ) | |||||||
Net | 132.7 | (66.5 | ) | (9.8 | ) | |||||||
CASH AND CASH EQUIVALENTS: | ||||||||||||
Net increase (decrease) in cash and cash equivalents | 116.4 | (5.7 | ) | 3.2 | ||||||||
At beginning of year | 19.0 | 24.7 | 21.5 | |||||||||
At end of period | $ | 135.4 | $ | 19.0 | $ | 24.7 | ||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||||||
Cash payments (refunds) | ||||||||||||
Interest | $ | 42.4 | $ | 45.5 | $ | 49.1 | ||||||
Income tax payments (refunds) | $ | (23.6 | ) | $ | (29.6 | ) | $ | (25.0 | ) |
2006 | 2005 | 2004 | ||||||||||
In millions, except share | ||||||||||||
and per share amounts | ||||||||||||
Revenues | $ | 1,659.7 | $ | 1,352.0 | $ | 639.5 | ||||||
Operating expenses: | ||||||||||||
Compensation and benefits | 387.7 | 340.4 | 213.0 | |||||||||
Depreciation and amortization | 155.0 | 127.7 | 53.5 | |||||||||
Purchased services | 215.2 | 195.1 | 62.3 | |||||||||
Casualties and insurance | 53.4 | 103.4 | 42.4 | |||||||||
Fuel | 253.6 | 206.9 | 66.4 | |||||||||
Equipment costs | 179.7 | 149.8 | 50.4 | |||||||||
KCSM employees’ statutory profit sharing | 5.9 | 41.1 | — | |||||||||
Other | 104.9 | 125.3 | 68.0 | |||||||||
Total operating expenses | 1,355.4 | 1,289.7 | 556.0 | |||||||||
Operating income | 304.3 | 62.3 | 83.5 | |||||||||
Equity in net earnings (losses) of unconsolidated affiliates | 7.3 | 2.9 | (4.5 | ) | ||||||||
Interest expense | (167.2 | ) | (133.5 | ) | (44.4 | ) | ||||||
Debt retirement costs | (4.8 | ) | (4.4 | ) | (4.2 | ) | ||||||
Foreign exchange gain (loss) | (3.7 | ) | 3.5 | — | ||||||||
VAT/Put settlement gain, net | — | 131.9 | — | |||||||||
Other income, net | 18.7 | 13.3 | 17.6 | |||||||||
Income before income taxes and minority interest | 154.6 | 76.0 | 48.0 | |||||||||
Income tax expense (benefit) | 45.4 | (7.1 | ) | 23.6 | ||||||||
Income before minority interest | 109.2 | 83.1 | 24.4 | |||||||||
Minority interest | 0.3 | (17.8 | ) | — | ||||||||
Net income | 108.9 | 100.9 | 24.4 | |||||||||
Preferred stock dividends | 19.5 | 9.5 | 8.7 | |||||||||
Net income available to common shareholders | $ | 89.4 | $ | 91.4 | $ | 15.7 | ||||||
Earnings per share: | ||||||||||||
Basic earnings per share | $ | 1.20 | $ | 1.21 | $ | 0.25 | ||||||
Diluted earnings per share | $ | 1.08 | $ | 1.10 | $ | 0.25 | ||||||
Average shares outstanding(in thousands): | ||||||||||||
Basic | 74,593 | 75,527 | 62,715 | |||||||||
Potential dilutive common shares | 17,793 | 17,220 | 1,268 | |||||||||
Diluted | 92,386 | 92,747 | 63,983 | |||||||||
59
KANSAS CITY SOUTHERN
2006 | 2005 | |||||||
In millions, except share amounts | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 79.0 | $ | 31.1 | ||||
Accounts receivable, net (Note 2) | 334.3 | 315.7 | ||||||
Restricted funds (Note 2) | 26.5 | — | ||||||
Inventories | 72.5 | 73.9 | ||||||
Other current assets (Note 5) | 93.7 | 46.1 | ||||||
Total current assets | 606.0 | 466.8 | ||||||
Investments (Note 3) | 64.9 | 60.3 | ||||||
Property and equipment, net (Note 5) | 2,452.2 | 2,298.3 | ||||||
Concession assets, net (Note 5) | 1,303.3 | 1,360.4 | ||||||
Deferred tax asset (Note 7) | 128.7 | 152.2 | ||||||
Other assets | 82.2 | 85.6 | ||||||
Total assets | $ | 4,637.3 | $ | 4,423.6 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Debt due within one year (Note 6) | $ | 41.9 | $ | 38.0 | ||||
Accounts and wages payable | 189.9 | 124.3 | ||||||
Current liability related to Grupo KCSM acquisition (Note 6) | 50.9 | 78.3 | ||||||
Accrued liabilities (Note 5) | 354.7 | 333.1 | ||||||
Total current liabilities | 637.4 | 573.7 | ||||||
Other liabilities | ||||||||
Long-term debt (Note 6) | 1,631.8 | 1,663.9 | ||||||
Long-term liability related to Grupo KCSM acquisition (Note 6) | 32.4 | 80.4 | ||||||
Deferred income taxes (Note 7) | 417.3 | 409.2 | ||||||
Other noncurrent liabilities and deferred credits | 235.7 | 270.2 | ||||||
Total other liabilities | 2,317.2 | 2,423.7 | ||||||
Minority interest | 100.3 | — | ||||||
Commitments and contingencies (Note 11) | — | — | ||||||
Stockholders’ equity (Notes 2,8): | ||||||||
$25 par, 4% noncumulative, preferred stock, 840,000 shares authorized, 649,736 shares issued, 242,170 shares outstanding | 6.1 | 6.1 | ||||||
Series C — redeemable cumulative convertible perpetual preferred stock, $1 par, 4.25%, 400,000 shares authorized, issued and outstanding | 0.4 | 0.4 | ||||||
Series D — cumulative convertible perpetual preferred stock, $1 par, 5.125%, 210,000 shares authorized, issued and outstanding | 0.2 | 0.2 | ||||||
$.01 par, common stock, 400,000,000 shares authorized; 92,863,585 and 91,369,116 shares issued at December 31, 2006 and 2005, respectively; 75,920,333 and 73,412,081 shares outstanding at December 31, 2006 and 2005, respectively | 0.7 | 0.7 | ||||||
Paid in capital | 523.0 | 473.1 | ||||||
Retained earnings | 1,050.7 | 946.1 | ||||||
Accumulated other comprehensive income (loss) | 1.3 | (0.4 | ) | |||||
Total stockholders’ equity | 1,582.4 | 1,426.2 | ||||||
Total liabilities and stockholders’ equity | $ | 4,637.3 | $ | 4,423.6 | ||||
60
KANSAS CITY SOUTHERN
2006 | 2005 | 2004 | ||||||||||
In millions | ||||||||||||
Operating activities: | ||||||||||||
Net income | $ | 108.9 | $ | 100.9 | $ | 24.4 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 155.0 | 127.7 | 53.5 | |||||||||
Deferred income taxes | 41.0 | (17.3 | ) | 35.9 | ||||||||
KCSM employees’ statutory profit sharing | 5.9 | 41.1 | — | |||||||||
Equity in undistributed losses (earnings) of unconsolidated affiliates | (7.3 | ) | (2.9 | ) | 4.5 | |||||||
VAT/Put settlement gain | — | (131.9 | ) | — | ||||||||
Minority interest | 0.3 | (17.8 | ) | — | ||||||||
Distributions from unconsolidated affiliates | 4.5 | 8.3 | 8.8 | |||||||||
Loss (gain) on sale of assets | (7.8 | ) | 1.0 | (3.8 | ) | |||||||
Changes in working capital items: | ||||||||||||
Accounts receivable | (18.6 | ) | 5.8 | (25.0 | ) | |||||||
Inventories | 0.4 | (0.8 | ) | (11.4 | ) | |||||||
Other current assets | (50.9 | ) | 15.7 | (2.2 | ) | |||||||
Accounts payable and accrued liabilities | 44.6 | 25.2 | 39.9 | |||||||||
Other, net | (8.5 | ) | 23.8 | 18.1 | ||||||||
Net cash provided by operating activities | 267.5 | 178.8 | 142.7 | |||||||||
Investing activities: | ||||||||||||
Capital expenditures | (241.8 | ) | (275.7 | ) | (117.2 | ) | ||||||
Proceeds from disposal of property | 30.0 | 6.3 | 4.9 | |||||||||
Contribution from NS for MSLLC (net of change in restricted contribution) | 76.5 | — | — | |||||||||
Property investments in MSLLC | (37.8 | ) | — | — | ||||||||
Investments in and loans to affiliates | (1.1 | ) | (10.5 | ) | (55.0 | ) | ||||||
Proceeds from sales of investments, net | 8.2 | (8.0 | ) | 0.5 | ||||||||
Acquisition costs | — | (10.1 | ) | (9.5 | ) | |||||||
Cash of Mexrail at date of acquisition | — | 3.0 | — | |||||||||
Cash of KCSM at date of acquisition | — | 5.5 | — | |||||||||
Change in other restricted cash | — | — | (200.0 | ) | ||||||||
Other, net | — | — | (0.5 | ) | ||||||||
Net cash used for investing activities | (166.0 | ) | (289.5 | ) | (376.8 | ) | ||||||
Financing activities: | ||||||||||||
Proceeds from issuance of long-term debt | 616.3 | 644.7 | 250.0 | |||||||||
Repayment of long-term debt | (658.5 | ) | (521.5 | ) | (107.6 | ) | ||||||
Net proceeds from issuance of preferred stock | — | 203.9 | — | |||||||||
Debt issuance costs | (15.9 | ) | (16.5 | ) | (3.8 | ) | ||||||
Proceeds from stock plans | 8.6 | 1.7 | 7.4 | |||||||||
Repurchase of common stock | — | (200.4 | ) | — | ||||||||
Excess tax benefit realized from options exercised | 0.2 | — | — | |||||||||
Dividends paid | (4.3 | ) | (8.7 | ) | (8.7 | ) | ||||||
Net cash provided by (used for) financing activities | (53.6 | ) | 103.2 | 137.3 | ||||||||
Cash and cash equivalents: | ||||||||||||
Net increase (decrease) during each year | 47.9 | (7.5 | ) | (96.8 | ) | |||||||
At beginning of year | 31.1 | 38.6 | 135.4 | |||||||||
At end of year | $ | 79.0 | $ | 31.1 | $ | 38.6 | ||||||
Supplemental cash flow information: | ||||||||||||
Cash payments (refunds): | ||||||||||||
Interest | $ | 163.5 | $ | 132.8 | $ | 42.1 | ||||||
Income tax refunds (net of payments) | (0.4 | ) | (1.6 | ) | (21.2 | ) |
61
$1 Par Cumulative | Accumulated | |||||||||||||||||||||||||||||||
$25 Par | Preferred Stock | $.01 par | Other | |||||||||||||||||||||||||||||
Preferred | Series C | Series D | Common | Paid in | Retained | Comprehensive | ||||||||||||||||||||||||||
Stock | 4.25% | 5.125% | Stock | Capital | Earnings | Income (Loss) | Total | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Balance at December 31, 2003 | $ | 6.1 | $ | 0.4 | $ | — | $ | 0.6 | $ | 110.9 | $ | 838.2 | $ | (0.5 | ) | $ | 955.7 | |||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||
Net income | 24.4 | 24.4 | ||||||||||||||||||||||||||||||
Fair value change of cash flow hedges | 0.2 | 0.2 | ||||||||||||||||||||||||||||||
Amortization of interest rate swap loss | 0.5 | 0.5 | ||||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | 24.4 | 0.7 | 25.1 | ||||||||||||||||||||||||
Dividends on $25 par preferred stock ($1.00/share) | (0.2 | ) | (0.2 | ) | ||||||||||||||||||||||||||||
Dividends on series C cumulative preferred stock ($21.25/share) | (8.5 | ) | (8.5 | ) | ||||||||||||||||||||||||||||
Options exercised and stock subscribed | 42.0 | 42.0 | ||||||||||||||||||||||||||||||
Stock plan shares issued from treasury | 2.4 | 2.4 | ||||||||||||||||||||||||||||||
Balance at December 31, 2004 | 6.1 | 0.4 | — | 0.6 | 155.3 | 853.9 | 0.2 | 1,016.5 | ||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||
Net income | 100.9 | 100.9 | ||||||||||||||||||||||||||||||
Fair value change of cash flow hedges | (1.1 | ) | (1.1 | ) | ||||||||||||||||||||||||||||
Amortization of interest rate swap loss | 0.5 | 0.5 | ||||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | 100.9 | (0.6 | ) | 100.3 | |||||||||||||||||||||||
Dividends on $25 par preferred stock ($1.00/share) | (0.2 | ) | (0.2 | ) | ||||||||||||||||||||||||||||
Dividends on series C cumulative preferred stock ($21.25/share) | (8.5 | ) | (8.5 | ) | ||||||||||||||||||||||||||||
Options exercised and stock subscribed | 8.3 | 8.3 | ||||||||||||||||||||||||||||||
Stock plan shares issued from treasury | 2.3 | 2.3 | ||||||||||||||||||||||||||||||
Share-based compensation | 1.5 | 1.5 | ||||||||||||||||||||||||||||||
Stock issued in acquisition of Grupo KCSM | 0.2 | 304.2 | 304.4 | |||||||||||||||||||||||||||||
Issuance of series D cumulative preferred stock | 0.2 | 201.8 | 202.0 | |||||||||||||||||||||||||||||
Repurchase of $.01 par common stock | (0.1 | ) | (200.3 | ) | (200.4 | ) | ||||||||||||||||||||||||||
Balance at December 31, 2005 | 6.1 | 0.4 | 0.2 | 0.7 | 473.1 | 946.1 | (0.4 | ) | 1,426.2 | |||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||
Net income | 108.9 | 108.9 | ||||||||||||||||||||||||||||||
Amortization of interest rate swaps | 0.4 | 0.4 | ||||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | 108.9 | 0.4 | 109.3 | ||||||||||||||||||||||||
Dividends on $25 par preferred stock ($1.00/share) | (0.2 | ) | (0.2 | ) | ||||||||||||||||||||||||||||
Dividends on series C cumulative preferred stock ($5.31/share) | (2.1 | ) | (2.1 | ) | ||||||||||||||||||||||||||||
Dividends on series D cumulative preferred stock ($9.40/share) | (2.0 | ) | (2.0 | ) | ||||||||||||||||||||||||||||
Stock issued for repayment of debt | 35.0 | 35.0 | ||||||||||||||||||||||||||||||
Options exercised and stock subscribed | 8.6 | 8.6 | ||||||||||||||||||||||||||||||
Tax benefit of share-based compensation | 2.0 | 2.0 | ||||||||||||||||||||||||||||||
Share-based compensation | 4.3 | 4.3 | ||||||||||||||||||||||||||||||
Adjustment to adopt FASB Statement No. 158, net of tax of $.8 million | 1.3 | 1.3 | ||||||||||||||||||||||||||||||
Balance at December 31, 2006 | $ | 6.1 | $ | 0.4 | $ | 0.2 | $ | 0.7 | $ | 523.0 | $ | 1,050.7 | $ | 1.3 | $ | 1,582.4 | ||||||||||||||||
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Note 1. Description of the Business
Note 1. | Description of the Business |
• | The Kansas City Southern Railway Company (“KCSR”), a wholly-owned consolidated subsidiary; | |
• | Mexrail, Inc. (“Mexrail”), a wholly-owned consolidated subsidiary; which wholly owns The Texas Mexican Railway Company (“Tex-Mex”); | |
• | Meridian Speedway, LLC (“MSLLC”), a ninety percent owned consolidated affiliate. | |
• | Combined with equity investments in: |
• | Southern Capital Corporation, LLC (“Southern Capital”), a fifty percent owned unconsolidated affiliate that owns and leases locomotives and other rail equipment; | |
• | Panama Canal Railway Company (“PCRC”), a fifty percent owned unconsolidated affiliate which owns all of the common stock of Panarail Tourism Company (“Panarail”). |
• | Grupo KCSM, S.A. de C.V. (“Grupo KCSM”), a wholly-owned subsidiary, formerly known as Grupo Transportación Ferroviaria Mexicana, S.A. de C.V., is KCS’ Mexican holding company which owns all but one share of Kansas City Southern de México, S. de R.L. de C.V. (“KCSM”). |
• | KCSM which is the principal operating subsidiary of Grupo KCSM operates under the rights granted by the Concession acquired from the Mexican government in 1997 (“the Concession”) as described below. | |
• | Arrendadora KCSM, S.A. de C.V. (“Arrendadora”), is wholly-owned by Grupo KCSM and KCSM and has as its only operation, the leasing to KCSM of the locomotives and freight cars acquired through the privatization and subsequently sold to Arrendadora by KCSM. | |
• | Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”), a twenty five percent owned unconsolidated affiliate that provides railroad services as well as ancillary services in the greater Mexico City area. |
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KCS, along with its principal subsidiaries and joint ventures, owns and operates ashortest, most direct rail network that links key commercial and industrial markets in the United States and Mexico. The Company also has a strategic alliance with the Canadian National Railway Company (“CN”) and Illinois Central Corporation (“IC”) (collectively “CN/IC”) and other marketing agreements, which provide the ability for the Company to expand its geographic reach.
KCS’s rail network, including its joint ventures, strategic alliances and marketing agreements, connects shippers in the midwestern and eastern regions of the United States, including shippers utilizing Chicago, Illinois and Kansas City, Missouri—the two largest rail centers in the United States—with the largest industrial centers of Canada and Mexico, including Toronto, Edmonton,passageway between Mexico City and Monterrey. KCS’s rail system, through its core network, strategic alliances and marketing agreements, interconnects with all Class I railroads in North America.
KCSR, which owns and operates one of seven Class I railroads (railroads with annual revenues of at least $272.0 million) in the United States, is comprised of approximately 3,100 miles of main and branch lines and approximately 1,250 miles of other tracks in a ten-state region that includes Missouri, Kansas, Arkansas, Oklahoma, Mississippi, Alabama, Tennessee, Louisiana,Laredo, Texas and Illinois. KCSR, which traces its origins to 1887, offers the shortest north/south rail route between Kansas City and several key ports along the Gulf of Mexico in Louisiana, Mississippi and Texas. Additionally, KCSR, in conjunction with the Norfolk Southern Railway Company (“Norfolk Southern”), operates the most direct rail route (referred to as the “Meridian Speedway”), between the Atlanta, Georgia and Dallas, Texas rail gateways, for rail traffic moving between the southeast and southwest regions of the United States. The Meridian Speedway also provides eastern shippers and other U.S. and Canadian railroads with an efficient connection to Mexican markets. KCSR’s rail route also serves the east/west route linking Kansas City with East St. Louis and Springfield, Illinois. Further, KCSR has limited haulage rights between Springfield and Chicago that allow for shipments that originate or terminate on the former Gateway Western’s rail lines. These lines also provide access to East St. Louis and allow rail traffic to avoid the St. Louis, Missouri terminal. KCSR’s geographic reach enables service to a customer base that includes, among others, electric generating utilities, which use coal, and a wide range of companies in the chemical and petroleum, agricultural and mineral, paper and forest, and automotive and intermodal markets.
The Company’s rail network links directly to major trading centers in Mexico through TFM and Tex-Mex. TFM operates a railroad of approximately 2,650 miles of main and branch lines running from the U.S./Mexican border at Laredo, Texas to Mexico City and servesserve most of Mexico’s principal industrial cities and three of its major shipping ports. TFM also ownsKCSM has the right to use, but does not own, all track and buildings that are necessary for the rail lines’ operation. The Company is obligated to maintain the right of Mexrail, whichway, track structure, buildings and related maintenance facilities to the operational standards specified in turn wholly-owns Tex-Mex. Tex-Mex operates approximately 160 milesthe concession agreement and to return the assets in that condition at the end of mainthe Concession period. KCSM is required to pay the Mexican government a concession duty equal to 0.5% of gross revenues during the first 15 years of the concession period and branch lines between Laredo1.25% of such revenues during the remainder of the period.
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Note 2. Significant Accounting Policies
The company evaluates less than majority owned investments for consolidation pursuant to FASB Interpretation No. 46 (Revised 2003). The Company currently does not have any less than majority owned investments requiring consolidation.Note 2. Significant Accounting Policies 50%fifty percent voting interest; and the cost method of accounting is generally used for investments of less than 20%twenty percent voting interest.withto accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management reviews its estimates, including those related to the recoverability and useful lives of assets, as well as liabilities for litigation, environmental remediation, casualty claims, and income taxes. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates.
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Inventories. Materials
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other income were $0.3 million and $7.4 million in 2003 and 2002, respectively. Gains or losses recognized on the sale of non-operating propertiesproperty reflected in other income wereare not significantmaterial for the periods presented.
Depreciation is computed using group straight-line rates for financial statement purposes. The Surface Transportation Board (“STB”) approves the depreciation rates used by KCSR. KCSR periodically evaluatesrailway property usage to conduct a study to evaluate depreciation rates for properties and equipmentequipment. The study centered on evaluating actual historical replacement patterns to assess future lives and implements approvedindicated that KCSR was depreciating its property over shorter periods than the assets were actually used, as estimated by the study. The effect of this change in estimate was a $3.0 million decrease in depreciation expense for the year ended December 31, 2006.
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Accelerated depreciation
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Long-lived assets.its intended use. Capitalized costs are amortized on a straight-line basis over the useful life of the software.
Casualty Claims.Casualty claims in excess of self-insurance levels are insured up to certain coverage amounts, depending on the type of claim. The Company’s casualty liability reserve is based on a study by There were no assets requiring an independent third party actuarial firm performed on an undiscounted basis. The reserve is based on claims filed and an estimate of claims incurred but not yet reported. While the ultimate amount of claims incurred is dependent on various factors, it is management’s opinion that the recorded liability is a reasonable estimate of aggregate future claims. Adjustments to the liability will be reflected as operating expenses in the period in which the adjustments are known. For other occupational injury claims, an assessment is made on a case-by-case basis and a liability is established when management determines that it is probable and reasonably estimable.
Computer Software Costs.Costs incurred in conjunction with the purchase or development of computer software for internal use are capitalized. Costs incurred in the preliminary project stage, as well as training and maintenance costs, are expensed as incurred. Direct and indirect costs associated with the application development stage of internal use software are capitalized until such time that the software is substantially complete and ready for its intended use. Capitalized costs are amortized on a straight-line basis over the useful life of the software. As ofimpairment adjustment at December 31, 2003 and 2002, a total of approximately $59.7 million and $58.0 million, respectively, was capitalized (including a total of approximately $5.9 million of capitalized interest costs for each of 2003 and 2002, respectively) for the transportation operating system, management control system (“MCS”), which was implemented in July, 2002.
Goodwill and other intangible assets. 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. The transitional disclosures are presented in the table below. During the year ended December 31, 2002, the Company’s goodwill decreased primarily due to the sale of Mexrail to TFM.
Reported net income Add back: Goodwill amortization Adjusted net income Reported diluted earnings per share—net income Add back: Goodwill amortization Adjusted diluted earnings per share—net income Year Ended December 31, 2003 2002 2001 $ 12.2 $ 57.2 $ 30.7 — — 0.6 $ 12.2 $ 57.2 $ 31.3 $ 0.10 $ 0.91 $ 0.50 — — 0.01 $ 0.10 $ 0.91 $ 0.51
2006.
debt as described in Note 6.
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KCS adopted therecognition provisions of SFAS 133, as amended, effective123 to share-based employee compensation prior to January 1, 2001. As a result2006:
2005 | 2004 | |||||||
Net income (in millions): | ||||||||
As reported | $ | 100.9 | $ | 24.4 | ||||
Additional stock-based compensation expense determined under fair value method, net of income taxes | (0.8 | ) | (1.6 | ) | ||||
Pro forma | $ | 100.1 | $ | 22.8 | ||||
Earnings per basic share: | ||||||||
As reported | $ | 1.21 | $ | 0.25 | ||||
Pro forma | 1.20 | 0.22 | ||||||
Earnings per diluted share: | ||||||||
As reported | $ | 1.10 | $ | 0.25 | ||||
Pro forma | 1.07 | 0.22 |
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Net income(in millions): As reported Total stock-based compensation expense determined under fair value method, net of income taxes Pro forma Earnings per Basic share: As reported Pro forma Earnings per Diluted share: As reported Pro formaTFM providesKCSM on April 1, 2005, Grupo KCSM provided deferred income taxes for the difference between the financial reporting and income tax bases of its assets and liabilities. The Company recordsKCS recorded its proportionate share of these income taxes through its equity in Grupo TFM’sKCSM’s earnings. AsSince April 1, 2005, Grupo KCSM income taxes are reflected in the consolidated results. Although KCSM has generated book profits, it has incurred tax losses due primarily to the accelerated tax amortization of December 31, 2003,the concession rights. The Company has recognized a deferred income tax asset for the resulting net operating loss carryforwards. Management anticipates that such net operating loss carryforwards will be realized given the long carryforward period (through the year 2046) for amortization of the Concession, as well as the fact that KCSM expects to generate taxable income in the future. The Company’s tax projections take into consideration certain assumptions, some of which are under its control and others which are not. Key assumptions include inflation rates, currency fluctuations and future revenue growth. If the assumptions are not correct, a valuation allowance would have to be recognized on the deferred tax asset.haddid not provided deferredprovide U.S. federal income taxes for the temporary difference between the financial reporting basis and income tax basis of its investment in Grupo TFMKCSM because Grupo TFM isKCSM was a foreign corporate joint venture that iswas considered permanent in duration, and the Company doesdid not expect the reversal of the temporary difference to occur in the foreseeable future.Changes Following the acquisition of Interestcontrol of Grupo KCSM in Subsidiaries and Equity Investees.A change2005, the Company has not provided U.S. federal income taxes on the undistributed earnings of Grupo KCSM since the Company intends to reinvest such earnings indefinitely outside of the Company’s interest in a subsidiary or equity investee resulting from the sale of the subsidiary’s or equity investee’s stock is generally recorded as a gain or loss in the Company’s net income in the period that the change of interest occurs. If anissuance of stock by the subsidiary or affiliate is from treasury shares on which gains have been previously recognized, however, KCS will record the gain directly to its equity and not include the gain in net income. A change of interest in a subsidiary or equity investee resulting from a subsidiary’s or equity investee’s purchase of its stock increases the Company’s ownership percentage of the subsidiary or equity investee. The Company records this type of transaction under the purchase method of accounting, whereby any excess of fair market value over the net tangible and identifiable intangible assets is recorded as goodwill.Treasury Stock.The excess of par over cost of the preferred shares held in Treasury is credited to paid in capital. Common shares held in Treasury are accounted for as if they were retired and the excess of cost over par value of such shares is charged to paid in capital.Stock Plans. Proceeds received from the exercise of stock options or subscriptions are credited to the appropriate stockholders’ equity accounts in the year exercised.Pursuant to Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), compensation expense is recognized ratably over the option vesting period to the extent that an option exercise price is less than the market price of the stock at the date of grant. Because KCS’s practice is to set the option exercise price equal to the market price of the stock at date of grant, no compensation expense is recognized for financial reporting purposes.The FASB issued Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”) in October 1995. This statement allows companies to continue under the approach set forth in APB 25 for recognizing stock-based compensation expense in the financial statements, but encourages companies to adopt the fair value method of accounting for employee stock options. Under SFAS 123, companies must either record compensation expense based on the estimated grant date fair value of stock options granted or disclose the impact on net income as if they had adopted the fair value method (for grants subsequent to December 31, 1994). If KCS had measured compensation cost for the KCS stock options granted to its employees and shares subscribed by its employees under the KCS employee stock purchase plan, under the fair value based method prescribed by SFAS 123, net income andUnited States.share would have been as follows: 2003 2002 2001 $ 12.2 $ 57.2 $ 30.7 (1.8 ) (1.7 ) (4.0 ) 10.4 55.5 26.7 $ 0.10 $ 0.94 $ 0.52 0.07 0.92 0.45 $ 0.10 $ 0.91 $ 0.50 0.07 0.88 0.43 All shares held in the Employee Stock Ownership Plan (“ESOP”) are treated as outstanding for purposes of computing the Company’s earnings per share. See additional information on the ESOP in Note 8.Earnings Per Share. Basic earnings percommon share is computed by dividing income available to common shareholders by the weighted-averageweighted average number of common shares outstanding for the period. Diluted earnings per share reflectsreflect the potential dilution that could occur if convertible securities and stock options were converted into common stock or exercised.stock based awards were exercised or earned. The following is a reconciliation fromreconciles the weighted average shares used for the basic earnings per share computation to the shares used for the diluted earnings per share computation for the three years endedat December 31 2003 (in(in thousands):. 2006 2005 2004 Basic shares 74,593 75,527 62,715 Additional weighted average shares attributable to convertible securities and stock options: $9.0 million VAT/Put settlement payment due to JSIB — 110 — $47.0 million escrow note 1,667 1,439 — VAT/Put settlement contingency payment 1,418 918 — Convertible preferred stock 13,389 13,389 — Stock options 1,266 1,358 1,268 Nonvested shares 53 6 — Diluted shares 92,386 92,747 63,983
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2003 | 2002 | 2001 | ||||
Basic shares | 61,725 | 60,336 | 58,598 | |||
Dilutive effect of stock options | — | 1,982 | 2,386 | |||
Dilutive effect of convertible preferred stock | — | — | — | |||
Diluted shares | 61,725 | 62,318 | 60,984 | |||
Shares excluded from diluted computation | 261 | 321 | 97 | |||
For the year ended December 31, 2003, 8,926,080 potential
2006 | 2005 | 2004 | ||||||||||
Stock options where the exercise price is greater than the average market price of common shares | — | 1 | 361 | |||||||||
Convertible preferred stock series C which are anti-dilutive | — | — | 13,389 | |||||||||
Convertible preferred stock series D which are anti-dilutive | 7,000 | 486 | — |
The only adjustment that currently affects the numerator of the Company’s diluted earnings per share computation is preferred dividends. During 2003, preferred dividends of $5.9 million were deducted from net income to calculate basic earnings per share. Additionally, because the potentially dilutive shares relating to the Convertible Preferred Stock were anti-dilutive, these convertible preferred dividends ($5.7 million earned during 2003) were also deducted from net income to calculate diluted earnings per share. Preferred dividends deducted from net income (in each of 2002 and 2001 were $0.2 million related to the $25 par, 4% noncumulative preferred stock.
millions):
2006 | 2005 | 2004 | ||||||||||
Net income available to common shareholders for purposes of computing basic earnings per share | $ | 89.4 | $ | 91.4 | $ | 15.7 | ||||||
Effect of dividends on conversion of convertible preferred stock | 8.5 | 8.5 | — | |||||||||
Effect of interest expense on conversion of $47.0 million escrow note | 1.4 | 1.1 | — | |||||||||
Effect of interest expense on conversion of note payable to TMM for VAT/Put settlement | 0.8 | 0.6 | — | |||||||||
Net income available to common shareholders for purposes of computing diluted earnings per share | $ | 100.1 | $ | 101.6 | $ | 15.7 | ||||||
Environmental liabilities.The Company records liabilities for remediation and restoration costs related to past activities when the Company’s obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance activities related to current operations are expensed as incurred.
New Accounting Pronouncements.
KCS adopted Statement of In June 2006, the Financial Accounting Standard No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). Under SFAS 143, the fair value of a liability for an asset retirement obligation must be recognized in the period in which it is incurred if a reasonable estimate of the fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. KCSR, along with other Class I railroads, depreciates track structure (rail, ties, and other track material) in accordance with regulations promulgated by the STB. These regulations require KCSR to depreciate track structure to a net salvage value (gross estimated salvage value less estimated costs to remove the track structure at the end of its useful life). For certain track structure such as ties, with little or no gross salvage value, this practice ultimately results in depreciating an asset below a value of zero, and thus, in effect, results in recording a liability. Under the requirements of SFAS 143, in the absence of a legal obligation to remove the track structure, such accounting
practice is prohibited. The Company adopted the provisions of SFAS 143 in the first quarter of 2003, and, as a result, reviewed its depreciation of track structures to determine instances where the depreciation of removal costs has resulted or would be expected (based on the current depreciation rate) to result in the depreciation of an asset below zero when considering net salvage value. As a result of this review, the Company estimated the excess depreciation recorded on such assets and recorded this amount as a reduction in accumulated depreciation of $14.5 million and as a cumulative effect of an accounting change of $8.9 million (net of taxes of $5.6 million) as required by SFAS 143 in the first quarter of 2003. Additionally, depreciation rates applied to certain track structure elements that were previously yielding a negative salvage value have been modified to comply with the provisions of SFAS 143. For the year ended December 31, 2003, this resulted in a reduction in depreciation expense of approximately $1.4 million.
A summary of the pro forma net income and earnings per share had SFAS 143 been applied retroactively is as follows:
2003 | 2002 | 2001 | ||||||||
Net income(in millions) | ||||||||||
As reported | $ | 12.2 | $ | 57.2 | $ | 30.7 | ||||
Pro forma | $ | 3.3 | $ | 58.6 | $ | 32.0 | ||||
Earnings per Basic share: | ||||||||||
As reported | $ | 0.10 | $ | 0.94 | $ | 0.52 | ||||
Pro forma | $ | (0.04 | ) | $ | 0.97 | $ | 0.54 | |||
Earnings per Diluted share: | ||||||||||
As reported | $ | 0.10 | $ | 0.91 | $ | 0.50 | ||||
Pro forma | $ | (0.04 | ) | $ | 0.94 | $ | 0.52 |
FIN 45
In November 2002, the FASBStandards Board issued Interpretation 48“Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 45, “Guarantor’s109, Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“Income Taxes”(“FIN 45”48”). FIN 45 provides guidance on,which clarifies the accounting for uncertainties in income taxes. FIN 48 prescribes a recognition threshold and disclosure requirements relating to the issuance of certain types of guarantees and requires the guarantor to recognize at the inception of a guarantee a liabilitymeasurement attribute for the fair value of the potential obligation. The provisions for the initialfinancial statement recognition and measurement of guaranteesa tax position taken or expected to be taken in a tax return. The Interpretation requires that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.
FIN 46 (revised)
In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), “Consolidationchange in accounting principle recorded as an adjustment to opening retained earnings. The estimated impact of Variable Interest Entities” (“FIN 46R”). FIN 46R, clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” to certain variable interest entities by providing guidance on how a business entity should evaluate whether it has controlling financial interest in an entity through means other than voting rights and how the entity should be consolidated. FIN 46R replaces Interpretation No. 46 “Consolidation of Variable Interest Entities,” which was issued in January 2003. The Company adopted FIN 46R effective for the year ended December 31, 2003. The Company performed an assessment of its equity method investments in Southern Capital and PCRC for any potential impact this interpretation may have on its accounting for these entities as equity investments. The adoption of FIN 46R had no48 is subject to change due to potential changes in interpretation of FIN 48 by the FASB and other regulatory bodies. The Company is still monitoring this standard and evaluating the impact of adopting FIN 48; however, does not anticipate adoption will have a material impact on the Company’s accountingconsolidated Financial Statements.
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Significant Customer.Southwestern Electric Power Company132(R)” (“SWEPCO”SFAS 158”), which required the recognition of the overfunded or underfunded status of a subsidiary of American Electric Power, Inc., isdefined benefit postretirement plan in the Company’s only customer that accounted for more than 10% of revenues during the years endedbalance sheet on December 31, 2002 and 2001, respectively. Revenues related2006. Additionally, the pronouncement eliminates the option for the Company to SWEPCO during these periods were $64.7 million and $75.9 million, respectively. During 2003, revenues relateduse a measurement date prior to SWEPCO were $57.2 million, representing approximately 9.8% of the Company’s revenues.
fiscal year end effective December 31, 2008. The Company adopted SFAS 158 effective December 31, 2006, which did not result in a significant impact to the Consolidated Financial Statements.
Note 3. | Investments |
Percentage | ||||||||||||
Ownership at | Carrying Value | |||||||||||
Company | December 31, 2006 | 2006 | 2005 | |||||||||
Southern Capital | 50 | % | $ | 29.2 | $ | 27.9 | ||||||
PCRC | 50 | % | 18.3 | 18.1 | ||||||||
FTVM | 25 | % | 13.9 | 10.9 | ||||||||
Other | 3.5 | 3.4 | ||||||||||
Total | $ | 64.9 | $ | 60.3 | ||||||||
Company Name | Percentage Ownership as of December 31, 2003 | Carrying Value | |||||||
2003 | 2002 | ||||||||
Grupo TFM | 46.6 | % | $ | 392.1 | $ | 380.1 | |||
Southern Capital | 50 | % | 28.0 | 24.9 | |||||
PCRC | 50 | %(a) | 4.5 | 7.5 | |||||
Other | 18.1 | 10.6 | |||||||
$ | 442.7 | $ | 423.1 | ||||||
GRUPO TFM
In June 1996, the Company and Transportacion Maritima Mexicana, S.A. de C.V. (“TMM”—now Grupo TMM ) formed Grupo TFM to participate in the privatization of the Mexican railroad system. In December 1996, the Mexican government awarded Grupo TFM the right to acquire an 80% interest (representing 100% of the shares with unrestricted voting rights) in TFM for approximately 11.072 billion Mexican pesos (approximately $1.4 billion based on the U.S. dollar/Mexican peso exchange rate on the award date). TFM holds a 50-year concession (with the option of a 50-year extension subject to certain conditions) to operate approximately 2,650 miles of track that directly links Mexico City and Monterrey (as well as Guadalajara through trackage rights) with the ports of Lazaro Cardenas, Veracruz and Tampico and the Mexican/United States border crossings of Nuevo Laredo-Laredo, Texas and Matamoros-Brownsville, Texas. TFM’s route network provides a connection to the major industrial and population areas of Mexico from the United States. TFM interchanges traffic with Tex-Mex and the Union Pacific Railroad Company (“UP”) at Laredo, Texas.
The Company and Grupo TMM exercised their call option and, on July 29, 2002, completed the purchase of the Mexican government’s 24.6% ownership of Grupo TFM. The Mexican government’s ownership interest of Grupo TFM was purchased by TFM for a purchase price of $256.1 million, utilizing a combination of proceeds from an offering by TFM of debt securities, a credit from the Mexican government for the reversion of certain rail facilities and other resources. This transaction resulted in an increase in the Company’s ownership percentage of Grupo TFM from 36.9% to approximately 46.6%. The purchase price was calculated by accreting the Mexican government’s initial investment of approximately $199 million from the date of the Mexican government’s investment through the date of the purchase, using the interest rate on one-year U.S. Treasury securities.
At December 31, 2003, the Company’s investment in Grupo TFM was approximately $392.1 million. The Company’s interest in Grupo TFM is approximately 46.6%, with Grupo TMM owning approximately 48.5% and the remaining 4.9% is owned indirectly by the Mexican government through its 20% ownership of TFM. The Company has a management services agreement with Grupo TFM to provide certain consulting and management services. As of December 31, 2003 and 2002, $1.3 million and $2.4 million, respectively, is reflected as an account receivable in the Company’s consolidated balance sheet related to this management service agreement. Total management fees billed to Grupo TFM were $1.3 million, $1.2 million and $1.2 million for the years ended December 31, 2003, 2002 and 2001, respectively. The Company accounts for its investment in Grupo TFM under the equity method. Additionally, the Company has an account receivable of $4.9 million and $0.8 million as of December 31, 2003 and 2002, respectively, from Tex-Mex related to certain materials and services provided in the normal course of operations. Total amounts billed to Tex-Mex were $4.7 million, $1.9 million and $1.4 million for the years ended December 31, 2003, 2002 and 2001, respectively.
The Company is party to certain agreements with Grupo TMM covering Grupo TFM, which contains “change of control” provisions, provisions intended to preserve the Company’s and Grupo TMM’s proportionate ownership of the 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.
The May 1997 shareholders agreement between KCS and Grupo TMM and certain affiliates (1) restricted each of the parties to the shareholders agreement from directly or indirectly transferring any interest in Grupo TFM or TFM to a competitor of Grupo TFM or TFM without the prior written consent of each of the parties, and (2) provided that KCS and Grupo TMM may not transfer control of any subsidiary holding all or any portion of shares of Grupo TFM to a third party, other than an affiliate of the transferring party or another party to the shareholders agreement, without the consent of the other parties to the shareholders agreement. The shareholders agreement required that the boards of directors of Grupo TFM and TFM be constituted to reflect the parties’ relative ownership of the ordinary voting common stock of Grupo TFM.
Proposed Acquisition of Grupo TFM from Grupo TMM.On April 20, 2003, the Company entered into an agreement with Grupo TMM and other parties (the “Acquisition Agreement”), under which KCS ultimately would acquire control of TFM through the purchase of shares of common stock of Grupo TFM (the “Acquisition”). Grupo TFM holds an 80% economic interest in TFM and all of the shares of stock with full voting rights of TFM. The remaining 20% economic interest in TFM is owned by the Mexican government in the form of shares with limited voting rights. KCS currently owns a 46.6% economic interest in Grupo TFM and 49.0% of the shares of common stock of Grupo TFM entitled to full voting rights. The Acquisition Agreement and other related agreements were designed to, following KCS shareholder approval and regulatory approval, place KCSR, Tex-Mex, Gateway Eastern Railway Company (“Gateway Eastern”) and TFM, under the common control of a single transportation holding company, NAFTA Rail, to be headquartered in Kansas City, Missouri. As part of the Acquisition, subject to KCS shareholder approval, KCS is expected to change its name to NAFTA Rail. See “Dispute over Acquisition Agreement” below.
Upon the terms and subject to the conditions of the Acquisition Agreement, TMM Multimodal, S.A. de C.V., a subsidiary of Grupo TMM, would receive 18 million shares of Class A Convertible Common Stock of the Company, representing, at the time of the Acquisition Agreement, approximately 22% (20% voting, 2% subject to voting restrictions) of the Company, $200 million in cash (with the option to pay up to $80 million of the $200 million cash component due at closing to Grupo TMM with up to 6.4 million additional shares of Company stock) and a potential incentive payment of between $100 million and $180 million based on the resolution of certain future contingencies related to the value added tax lawsuit and the purchase of the Mexican government’s interest in TFM. See “Value Added Tax (“VAT”) Lawsuit and VAT Contingency Payment under the Acquisition Agreement” below.
In connection with the Acquisition, KCS would enter into a consulting agreement with a consulting company organized by Jose Serrano, Chairman of the Board of Grupo TMM, Grupo TFM and TFM, pursuant to which it would provide consulting services to KCS in connection with the portion of the business of KCS in Mexico for a period of three years. As consideration for these services, the consulting company would receive an annual fee of $600,000 per year and a grant of 2,100,000 shares of restricted stock of KCS. The restricted stock would vest over a period of time subject to certain conditions. The consulting agreement may be extended for an additional year at the option of KCS, upon delivery of an additional 525,000 shares of common stock. The consulting agreement also provides for up to an additional 1,350,000 common shares to be issued contingent upon the achievement of certain objectives. The restricted stock issued and the cash fee would likely be accounted for as compensation expense in the consolidated financial statements of KCS.
The common control of KCSR and Tex-Mex under NAFTA Rail requires approval of the United States Department of Justice (“Department of Justice”) and the Surface Transportation Board (“STB”) in the
United States. Additionally, the acquisition of Grupo TFM shares by NAFTA Rail requires the approval of Mexico’s Competition Commission and the Mexican National Foreign Investments Commission in Mexico.
KCS’s solicitation for permission as a foreign investor to control TFM, through Grupo TFM, was filed with the Mexican National Foreign Investments Commission on April 25, 2003. On August 27, 2003, KCS announced that it received notice from the Mexican National Foreign Investments Commission of that Commission’s decision to close the proceeding with respect to KCS’s application to acquire control of Grupo TFM and, through Grupo TFM, of TFM, without prejudice to refile in the event the dispute is resolved between KCS and Grupo TMM over whether the Acquisition Agreement remains in effect.
KCS’s Notification with respect to the acquisition of the Grupo TFM shares was filed with the Mexican Competition Commission on April 21, 2003. KCS has received formal written notice that the Mexican Competition Commission has approved the proposed consolidation, without conditions. On September 26, 2003, KCS announced this approval was extended for an additional 180 days. As a procedural matter, the Executive Secretary of the Mexican Competition Commission declined to provide an additional extension, consistent with past practice. KCS intends to seek renewed authority at the appropriate time.
On August 1, 2003, the Company announced that the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR”) for the proposed Acquisition had expired without a formal request from the Department of Justice for additional information of documentary material, allowing KCS and Grupo TMM to consummate the transaction without any further delays that could have resulted from requests for additional information by the Department of Justice under U.S. antitrust laws. Under the HSR process, the Department of Justice had thirty days after notice was filed to issue a “second request” asking for various documents and information from the HSR parties. The waiting period officially expired on July 31, 2003, without action by the Department of Justice.
As of December 31, 2003, costs of approximately $9.3 million related to the Acquisition have been deferred and are reported as “other assets” in the accompanying consolidated balance sheets.
KCS and Grupo TMM are in dispute over Grupo TMM’s attempt to terminate the Acquisition Agreement as discussed below.
Dispute over Acquisition Agreement. On August 18, 2003, Grupo TMM shareholders voted not to approve the sale of Grupo TMM’s interests in Grupo TFM to KCS. On August 23, 2003, Grupo TMM sent a notice to KCS claiming to terminate the Acquisition Agreement because the Grupo TMM shareholders had failed to approve the Acquisition Agreement.
On August 29, 2003, KCS delivered to Grupo TMM a formal Notice of Dispute, pursuant to the Acquisition Agreement. This initiated an informal 60-day negotiation period between the parties. The parties were unable to resolve the dispute within that period of time. On August 29, 2003, KCS filed a complaint in the Delaware Chancery Court alleging that Grupo TMM had breached the Acquisition Agreement and seeking a preliminary injunction requiring Grupo TMM not to take any action in violation of the terms of the Acquisition Agreement. KCS’s position has been and remains that the Acquisition Agreement does not provide that a negative shareholder vote by Grupo TMM shareholders is a basis for termination. KCS maintains that the Acquisition Agreement is still valid and remains in effect until at least December 31, 2004 (unless otherwise validly terminated in accordance with its terms).
On September 2, 2003, the Company filed in the Delaware Court of Chancery a motion for a preliminary injunction to preserve the parties’ positions while KCS seeks to resolve its dispute over Grupo TMM’s attempt to terminate the Acquisition Agreement. On October 28, 2003, Chancellor William B. Chandler III of the Delaware Court of Chancery entered a written order granting KCS’s motion seeking a preliminary injunction to preserve the parties’ positions pending resolution of KCS’s dispute with Grupo TMM.
On October 31, 2003, KCS initiated binding arbitration in accordance with the terms of the Acquisition Agreement by serving an Arbitration Demand on Grupo TMM and the American Arbitration Association. In its Arbitration Demand, KCS seeks a determination that the Acquisition Agreement is in full force and effect, specific performance of the Acquisition Agreement, and damages for Grupo TMM’s breach of the terms of the Acquisition Agreement and failure to negotiate in good faith during the 60-day negotiation period. By the agreement of the parties, the arbitration has been bifurcated. The first stage of the arbitration only addressed the question of whether Grupo TMM’s purported negative shareholder vote gave Grupo TMM the right to terminate the Acquisition Agreement. On March 22, 2004, the Company announced that the panel of the American Arbitration Association International Center for Dispute Resolution hearing the dispute between the Company and Grupo TMM issued its interim award on March 19, 2004 finding that the Acquisition Agreement remains in force and is binding on KCS and Grupo TMM in accordance with its terms. The arbitration panel concluded that the rejection of the Acquisition Agreement by Grupo TMM’s shareholders did not authorize Grupo TMM’s purported termination of the Acquisition Agreement. The Company and Grupo TMM will now move on to the second phase of the arbitration, which will decide the remaining issues, including remedies and damages.
On January 6, 2004, KCS announced that in a ruling by the Delaware Court of Chancery regarding a motion to enforce injunction and hold Grupo TMM in contempt in the dispute between KCS and Grupo TMM over the Acquisition Agreement, the court held Grupo TMM in contempt of court for taking actions inconsistent with the court’s October 28, 2003 order discussed above. The court held that by Grupo TMM causing its subsidiary Grupo TFM to revoke powers of attorney requiring the signature of a KCS representative for transactions in excess of $2.5 million and in granting new powers of attorney to Grupo TMM directors, Jose Serrano and Mario Mohar to act on behalf of the company, Grupo TMM violated provisions of the Acquisition Agreement. The previous order of the court required Grupo TMM to cause Grupo TFM to conduct its business in accordance with past practices and not to directly or indirectly amend its organizational documents. The court ordered Grupo TMM to take the actions necessary to revoke the new powers of attorney, to re-enact the original powers of attorney, and to pay KCS its costs and attorneys fees for bringing the motion for contempt.
Mexican Government’s Put Rights With Respect to TFM Stock.The Mexican government has the right to compel the purchase of its 20% interest in TFM (referred to as the “Put”) by Grupo TFM following notification by the Mexican government in accordance with the terms of the applicable agreements. Upon exercise of the Put, Grupo TFM would be obligated to purchase the TFM capital stock at the initial share price paid by Grupo TFM adjusted for interest and inflation. Prior to October 30, 2003, Grupo TFM filed suit in the Federal District Court of Mexico City seeking, among other things, a declaratory judgment interpreting whether Grupo TFM was obligated to honor its obligation under the Put Agreement, as the Mexican government had not made any effort to sell the TFM shares subject to the Put prior to October 31, 2003. In its suit, Grupo TFM named Grupo TMM and KCS as additional interested parties. The Mexican government has provided Grupo TFM with notice of its intention to sell its interest in TFM. Grupo TFM has responded to the Mexican government’s notice reaffirming its right and interest in purchasing the Mexican government’s remaining interest in TFM, but also advising the Mexican government that it would not take any action until its lawsuit seeking a declaratory judgment was resolved. Grupo TFM has received an injunction, which blocks the Mexican government from exercising the Put. Following the resolution of the lawsuit in Mexico or the lifting of this injunction, in the event that Grupo TFM does not purchase the Mexican government’s 20% interest in TFM, Grupo TMM and KCS, or either of Grupo TMM or KCS alone, would, following notification by the Mexican government in accordance with the terms of the applicable agreements, be obligated to purchase the Mexican government’s remaining interest in TFM. Based upon public disclosures made by Grupo TMM, it is not in a position to make this purchase. If the Acquisition is completed prior to the purchase of the Mexican government’s interest in TFM, KCS will be solely responsible for purchasing the Mexican government’s 20% interest in TFM. If KCS had been required to purchase this interest as of December 31, 2003, the total purchase price would have been approximately $467.7 million.
Value Added Tax (“VAT”) Lawsuit and VAT Contingency Payment under the Acquisition Agreement.The VAT lawsuit (“VAT Claim”), which has been pending in the Mexican courts since 1997, arose out of the Mexican Treasury’s delivery of a VAT credit certificate to a Mexican governmental agency rather than to TFM. The face value of the VAT credit at issue is 2,111,111,790 pesos or approximately $192 million in U.S. dollars, based on current exchange rates. The amount of any recovery would, in accordance with Mexican law, reflect the face value of the VAT credit adjusted for inflation and interest accruals from 1997, with certain limitations.
In September 2002, the Mexican appellate court issued a judgment in favor of TFM on the VAT Claim, vacating a prior judgment of the Mexican Fiscal Court and remanding the case to the Fiscal Court with specific instructions to enter a new decision consistent with the guidance provided by the Mexican appellate court’s ruling. The Mexican appellate court’s ruling required the fiscal authorities to issue the VAT credit certificate only in the name of TFM. On December 6, 2002, the upper chamber of the Fiscal Court issued a ruling denying TFM’s right to receive a VAT refund from the Mexican Federal Government. In June 2003, the Mexican appellate court issued a judgment in favor of TFM against the ruling of the Fiscal Court. The judgment granted TFM constitutional protection against the ruling of the Fiscal Court issued on December 6, 2002 denying TFM’s right to receive the VAT refund. The judgment ordered the Fiscal Court to vacate its December 6, 2002 resolution and to issue a new resolution following the guidelines of the Mexican appellate court’s judgment. The Mexican appellate court found that the VAT refund certificate had not been delivered to TFM, and confirmed the Fiscal Court’s determination that TFM has the right to receive the VAT refund certificate. The Mexican appellate court’s ruling states that the Treasury’s decision denying delivery of the VAT refund certificate to TFM violated the law, and it instructs that the VAT reimbursement certificate be issued to TFM on the terms established by Article 22 of the Federal Fiscal Code in effect at that time. As a result of the Mexican appellate court’s ruling, the case was remanded to the Mexican Fiscal Court. On August 14, 2003, Grupo TMM announced that in a public session held August 13, the Mexican Fiscal Court issued a resolution regarding TFM’s VAT Claim vacating its previous resolution of December 6, 2002, and, in strict compliance with the ruling issued on June 11, 2003 by the Mexican appellate court, resolved that TFM has proved its case, and that a “ficta denial” occurred, declaring such denial null and void as ordered by the Mexican appellate court. On October 3, 2003, Grupo TMM announced that the Tax Attorney of the Mexican government had filed for a review of the ruling.
TFM received, on January 19, 2004, a Special Certificate from the Mexican Federal Treasury in the amount of 2.1 billion pesos as discussed above. The Special Certificate represents the refund of the value added tax paid and may be used by TFM to satisfy any tax liabilities due. The Special Certificate has the same face amount as the VAT refund claimed by TFM. TFM was served on January 20, 2004 with an official letter notifying TFM of the Mexican Government’s findings and conclusions arising from its tax audit of TFM’s 1997 tax returns (“Tax Audit Summary”). In the Tax Audit Summary, the Mexican government notified TFM of its preliminary conclusion that the documentation provided by TFM in support of the VAT refund and TFM’s basis in the concession title, locomotives and rail equipment, and capital leases purchased by TFM’s predecessor in interest, Ferrocarril del Noreste, S.A. de C.V., prior to Grupo TFM’s purchase of 80% of the shares of TFM, do not comply with the formalities required by the applicable tax legislation. If sustained, the conclusions of the Tax Audit Summary would prevent TFM from depreciating the concession title, locomotives and rail equipment, and capital leases that represent the majority of the value of the assets owned by TFM. The Tax Audit Summary also seized the Special Certificate received by TFM on January 19, 2004 from the Mexican Federal Treasury in the amount of 2,111,111,790 pesos, pending resolution of the audit, as a potential asset to be used to satisfy any tax obligations owed by TFM as a result of the audit. TFM has advised that it has, within the time allowed by the Tax Audit Summary, contested the conclusions of the Mexican tax authorities, and it has filed a constitutional appeal against the Tax Audit Summary, alleging that the process followed by the Mexican government violated TFM’s constitutional rights. TFM has also filed a complaint seeking an order that would require the Mexican government to issue a new Special Certificate in the amount of the original VAT refunded, adjusted to reflect interest and penalties from 1997 in accordance with applicable Mexican law and regulations.
In addition, provided the Acquisition has occurred and neither KCS nor any of its subsidiaries has purchased the Mexican government’s TFM shares upon exercise of the Put, KCS will be obligated to pay to Grupo TMM an
additional amount (referred to as the “VAT Contingency Payment”) of up to $180 million in cash in the event that the VAT Claim is successfully resolved and the amount received is greater than the purchase price of the Put. If the Acquisition is completed, KCS will assume Grupo TMM’s obligations to make any payment upon the exercise by the Mexican government of the Put and will indemnify Grupo TMM and its affiliates, and their respective officers, directors, employees and shareholders, against obligations or liabilities relating thereto.
Because TFM has not recognized its claim as an asset for financial accounting purposes, any recovery by TFM would likely be recognized by TFM as income thereby favorably impacting the Company’s recognition of its equity in earnings in Grupo TFM. The Company is presently unable to predict the amount or timing of any VAT refund recovery.
Mexrail Transactions. On May 9, 2003, pursuant to the terms of a stock purchase agreement for KCS to acquire control of Mexrail (the “Stock Purchase Agreement”), KCS acquired from Grupo TMM (through its subsidiary TFM) 51% of the shares of Mexrail for approximately $32.7 million. KCS deposited the Mexrail shares into a voting trust pending resolution of KCS’s application to the STB seeking authority to exercise common control over Tex-Mex, KCSR and Gateway Eastern. The Stock Purchase Agreement provided TFM the right to repurchase all of the Mexrail stock acquired by the Company at any time for the purchase price paid by the Company, subject to any STB orders or directions. In August 2003, KCS received a demand from TFM to repurchase those Mexrail shares. In September 2003, the STB issued a decision finding no need to rule on the transfer back to TFM of the 51% interest in Mexrail that KCS acquired. The repurchase of Mexrail by TFM closed on September 30, 2003 returning 100% ownership of Mexrail to TFM and the Stock Purchase Agreement automatically terminated. The repurchase price was $32.7 million; the same price KCS paid TFM in May 2003. The Stock Purchase Agreement, however, provided that in the event TFM reacquired the Mexrail shares from KCS, the parties to the Stock Purchase Agreement intended the terms and conditions of a February 27, 2002 stock purchase agreement under which TFM acquired the Mexrail shares, the Grupo TFM bylaws and the shareholders agreement dated May 1997 to become again valid and fully enforceable against the parties to such agreements.
On February 27, 2002, KCS, Grupo TMM, and certain of Grupo TMM’s affiliates entered into a stock purchase agreement with TFM to sell to TFM all of the common stock of Mexrail. Under the February 27, 2002 stock purchase agreement, KCS retained rights to prevent further sale or transfer of the stock or significant assets of Mexrail and Tex-Mex and the right to continue to participate in the corporate governance of Mexrail and Tex-Mex, which will remain U.S. corporations and subject to KCS’s super majority rights contained in Grupo TFM’s bylaws.
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 million of excess proceeds was deferred and is being amortized over 20 years.
STB Review Status. KCS filed with the STB on May 13, 2003 a Railroad Control Application, seeking permission to exercise common control over KCSR, Gateway Eastern and Tex-Mex. On June 9, 2003, the STB issued its decision, effective June 13, 2003, finding that the transaction proposed in KCS’s application is a “minor transaction” under 49 CFR 1180.2(c), although KCS was required to supplement its application as discussed in the decision, to address some of the implications of KCS’s acquisition of control of TFM. KCS filed the supplement on June 23, 2003, as required by the decision. The STB also outlined a procedural schedule for consideration of KCS’s application to exercise common control over KCSR, Gateway Eastern and Tex-Mex. The STB decision set October 17, 2003 as the date by which it would issue its final decision on the merits of the application. On September 23, 2003, the STB entered an order asking all interested parties to file comments by
September 30, 2003 addressing whether “in light of recent developments” the STB should continue with the procedural schedule, which called for a decision on the merits to be issued by October 17, 2003. On September 30, 2003, KCS filed comments with the STB suggesting that STB precedent establishes that the STB has sufficient jurisdiction to rule on control applications even where closing on the underlying transaction has been put in doubt. In the alternative, KCS argued that the matter should be held in abeyance, rather than dismissed, until the arbitration is completed. On October 8, 2003, the STB issued an order suspending the procedural schedule pending a resolution of the uncertainties that surround KCS’s efforts to acquire control of Tex-Mex, and requiring KCS to file status reports regarding developments in its efforts to acquire control of TFM and Tex-Mex. In accordance with the STB’s order, KCS filed its first status report on November 3, 2003, and a follow-up status report was filed on February 2, 2004.
SOUTHERN CAPITAL
Concurrent with the formation of this joint venture, the Company entered into operating leases with Southern Capital for substantially all the locomotives and rolling stock contributed or sold to Southern Capital at rental rates which management believes reflected market conditions at that time.
During 2001,recorded gains of $7.7 million and $6.0 million, respectively, related to the sale of locomotives to KCSR, but Southern Capital refinancedrecorded no such gains in 2006. For purposes of recording its five-year credit facility, which was scheduledshare of Southern Capital earnings, the Company has recorded its share of the gains as a reduction to mature on October 19, 2001, withthe cost basis of the equipment acquired. As a one-year bridge loan for $201 million. result, the Company will recognize its equity in the gains over the remaining depreciable life of the locomotives as a reduction of depreciation expense.
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In January 1998,
As of December 31, 2003, the
In November 1999,
rights to use portions of their tracks.
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December 31, 2003 | ||||||||||
Grupo TFM | Southern Capital | PCRC | ||||||||
Investment in unconsolidated affiliates | $ | 392.1 | $ | 28.0 | $ | 4.5 | ||||
Equity in net assets of unconsolidated affiliates | 378.9 | 28.0 | 4.5 | |||||||
Financial Condition: | ||||||||||
Current assets | $ | 225.7 | $ | 5.0 | $ | 3.6 | ||||
Non-current assets | 2,111.8 | 127.3 | 84.2 | |||||||
Assets | $ | 2,337.5 | $ | 132.3 | $ | 87.8 | ||||
Current liabilities | $ | 362.7 | $ | 1.2 | $ | 9.9 | ||||
Non-current liabilities | 806.7 | 75.0 | 68.9 | |||||||
Minority interest | 354.9 | — | — | |||||||
Equity of stockholders and partners | 813.2 | 56.1 | 9.0 | |||||||
Liabilities and equity | $ | 2,337.5 | $ | 132.3 | $ | 87.8 | ||||
Operating results: | ||||||||||
Revenues | $ | 698.5 | $ | 31.3 | $ | 7.7 | ||||
Costs and expenses | $ | 591.0 | $ | 27.6 | $ | 13.8 | ||||
Net income (loss) | $ | 27.3 | $ | 3.6 | $ | (6.1 | ) | |||
Investment in unconsolidated affiliates Equity in net assets of unconsolidated affiliates Financial Condition: Current assets Non-current assets Assets Current liabilities Non-current liabilities Minority interest Equity of stockholders and partners Liabilities and equity Operating results: Revenues Costs and expenses Net income (loss) December 31, 2002 Grupo
TFM Southern
Capital PCRC $ 380.1 $ 24.9 $ 7.5 366.0 24.9 7.5 $ 265.2 $ 5.5 $ 8.8 2,061.3 139.4 83.3 $ 2,326.5 $ 144.9 $ 92.1 $ 147.3 $ — $ 4.0 1,045.3 95.1 73.1 348.0 — — 785.9 49.8 15.0 $ 2,326.5 $ 144.9 $ 92.1 $ 712.1 $ 31.0 $ 5.0 $ 553.0 $ 26.4 $ 12.9 $ 110.2 $ 2.7 $ (7.9 )
December 31, 2001 | ||||||||||||||
Grupo TFM | Southern Capital | Mexrail | PCRC | |||||||||||
Operating results: | ||||||||||||||
Revenues | $ | 667.8 | $ | 30.2 | $ | 55.0 | $ | 1.8 | ||||||
Costs and expenses | $ | 457.7 | $ | 25.5 | $ | 58.2 | $ | 3.2 | ||||||
Net income | $ | 76.7 | $ | 4.8 | $ | (2.0 | ) | $ | (2.0 | ) | ||||
The Company, Grupo TFM, and certain of their affiliates entered into an agreement on February 27, 2002 with TFM
As of and for the Year ended December 31, 2006 Southern FTVM Capital PCRC Investment in unconsolidated affiliates $ 13.9 $ 29.2 $ 18.3 Equity in net assets of unconsolidated affiliates 12.6 29.2 (0.3 ) Current assets $ 46.4 $ 2.4 $ 5.4 Other assets 33.9 87.1 78.7 Assets $ 80.3 $ 89.5 $ 84.1 Current liabilities $ 13.5 $ — $ 14.6 Long-term liabilities 16.5 31.1 70.0 Equity of stockholders and partners 50.3 58.4 (0.5 ) Liabilities and equity $ 80.3 $ 89.5 $ 84.1 Revenues $ 60.5 $ 18.1 $ 19.0 Expenses 45.7 7.4 20.9 Net income (loss) $ 14.8 $ 10.7 $ (1.9 )
As of and for the | ||||||||||||
Nine Months | As of and for the | |||||||||||
Ended | Year Ended | |||||||||||
December 31, 2005 | December 31, 2005 | |||||||||||
Southern | ||||||||||||
FTVM | Capital | PCRC | ||||||||||
Investment in unconsolidated affiliates | $ | 10.9 | $ | 27.9 | $ | 18.1 | ||||||
Equity in net assets of unconsolidated affiliates | 9.6 | 27.9 | 0.6 | |||||||||
Financial condition: | ||||||||||||
Current assets | $ | 35.4 | $ | 5.2 | $ | 5.2 | ||||||
Other assets | 28.1 | 92.8 | 81.5 | |||||||||
Assets | $ | 63.5 | $ | 98.0 | $ | 86.7 | ||||||
Current liabilities | $ | 9.3 | $ | 1.0 | $ | 13.9 | ||||||
Long-term liabilities | 15.8 | 41.2 | 71.5 | |||||||||
Equity of stockholders and partners | 38.4 | 55.8 | 1.3 | |||||||||
Liabilities and equity | $ | 63.5 | $ | 98.0 | $ | 86.7 | ||||||
Operating results: | ||||||||||||
Revenues | $ | 55.3 | $ | 27.4 | $ | 17.5 | ||||||
Expenses | 45.9 | 14.3 | 21.0 | |||||||||
Net income (loss) | $ | 9.4 | $ | 13.1 | $ | (3.5 | ) | |||||
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As of and for the Year Ended December 31, 2004 Grupo Southern Mexrail KCSM Capital PCRC Investment in unconsolidated affiliates $ 30.0 $ 389.6 $ 29.1 $ 13.4 Equity in net assets of unconsolidated affiliates 27.1 375.0 29.1 2.4 Current assets $ 29.8 $ 252.7 $ 2.3 $ 4.2 Other assets 71.2 1,982.3 113.5 83.4 Assets $ 101.0 $ 2,235.0 $ 115.8 $ 87.6 Current liabilities 47.3 211.5 1.2 10.7 Long-term liabilities 0.7 865.4 56.5 72.2 Minority interest — 353.3 — — Equity of stockholders and partners 53.0 804.8 58.1 4.7 Liabilities and equity $ 101.0 $ 2,235.0 $ 115.8 $ 87.6 Revenues $ 66.5 $ 701.8 $ 29.0 $ 10.1 Expenses 74.4 710.1 17.2 14.3 Net income (loss) $ (7.9 ) $ (8.3 ) $ 11.8 $ (4.2 )
The effects of foreign currency transactions and capitalized interest prior to June 23, 1997, which are not recorded on Grupo TFM’s books, result in the difference between the carrying amount of the Company’s investment in Grupo TFM and the underlying equity in net assets. Additionally, the purchase by TFM of the Mexican government’s former 24.6% interest in Grupo TFM resulted in a reduction of Grupo TFM’s stockholder’s equity as the purchased shares from the Mexican government were recorded as treasury shares at Grupo TFM. The Company invested no funds in this transaction, however, and, therefore, it did not have an impact on the Company’s investment in Grupo TFM. As a result, the difference between the Company’s equity in net assets of Grupo TFM and its underlying investment arising as a result of this transaction is being amortized against the Company’s equity in earnings from Grupo TFM over a 33 year period, which was the estimate of the average remaining useful life of Grupo TFM’s concession assets.
The deferred income tax calculations for Grupo TFM are significantly impacted by fluctuations in the relative value of the Mexican peso versus the U.S. dollar and the rate of Mexican inflation, and can result in significant variability in the amount of equity earnings (losses) reported by the Company.
Foreign Exchange Matters.KCSM.
Note 4. | Acquisitions |
guidance.intangible assets and liabilities of the acquired entity based on their fair values. The excess of the purchase price over the fair value is recorded as goodwill. The fair values assigned to assets acquired and liabilities are based on valuations prepared by independent third party appraisal firms, published market prices and management estimates.
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the previously existing 49% KCS interest in Grupo KCSM and was recorded as nonoperating income and was presented net of applicable legal, consulting and other fees of $17.8 million including, $9.0 million payable to JSIB, which became payable on final resolution of the VAT Claim and Put. The VAT/Put settlement gain was not taxable in Mexico. The Company continuesbelieves, based upon opinions of outside legal counsel and other factors, that the VAT/Put Settlement should not be taxable to evaluate existing alternativesKCS for U.S. income tax purposes. Such position has not been examined by the taxing authority and it is possible that this position could be challenged. The amount of such tax would be material; however the Company believes that it would have the right to indemnification under the terms of the Acquisition Agreement.
ResultsSeptember 12, 2005, acquisitions, follow(in millions):
Increase in current assets | $ | 10.6 | ||
Decrease in property and equipment | (29.0 | ) | ||
Increase in concession assets | 271.3 | |||
Increase in deferred income taxes | (81.9 | ) | ||
Increase in other assets | 83.6 | |||
Increase in current liabilities | (15.3 | ) | ||
Increase in long-term liabilities | (111.5 | ) | ||
Total | $ | 127.8 | ||
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Current assets | $ | 268.8 | ||
Property and equipment | 532.6 | |||
Concession rights | 1,383.1 | |||
Other assets | 219.0 | |||
Total assets acquired | $ | 2,403.5 | ||
Current liabilities | $ | 288.3 | ||
Long-term debt | 802.6 | |||
Other liabilities | 128.2 | |||
Total liabilities acquired | $ | 1,219.1 | ||
Current assets | $ | 37.8 | ||
Property and equipment | 108.2 | |||
Other assets | 0.3 | |||
Total assets acquired | $ | 146.3 | ||
Current liabilities | $ | 59.7 | ||
Other liabilities | 29.3 | |||
Total liabilities acquired | $ | 89.0 | ||
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KCS and Mexrail | Grupo KCSM | |||||||||||||||
Historical and | Three Months | |||||||||||||||
Grupo KCSM | Ended | |||||||||||||||
Since April 1, | March 31, | Pro Forma | ||||||||||||||
2005 | 2005 | Adjustments | Pro Forma | |||||||||||||
Revenues | $ | 1,352.0 | $ | 170.1 | $ | — | $ | 1,522.1 | ||||||||
Net income (loss) | 100.9 | 0.1 | (150.1 | ) | (49.1 | ) | ||||||||||
Income (loss) from continuing operations available to common shareholders | 91.4 | 0.1 | (150.1 | ) | (58.6 | ) | ||||||||||
Earnings (loss) per common share: | ||||||||||||||||
Basic | $ | 1.21 | $ | (0.74 | ) | |||||||||||
Diluted | 1.10 | (0.74 | ) | |||||||||||||
Weighted average common shares outstanding(in thousands): | ||||||||||||||||
Basic | 75,527 | 3,750 | 79,277 | |||||||||||||
Diluted | 92,747 | (13,470 | ) | 79,277 | ||||||||||||
Note 4. Note 5. Other Balance Sheet Captions Balance Sheet CaptionsAccounts Receivable. Accounts receivable includeCurrent Assets. Other current assets included the following items at December 31(in millions): 2006 2005 Prepaid expenses $ 16.4 $ 10.1 Deferred income taxes 7.6 10.0 Deferred charge related to favorable railcar leases 11.3 11.3 Assets held for sale 47.9 — Other 10.5 14.7 Other current assets, net $ 93.7 $ 46.1
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2003 | 2002 | |||||||
Accounts receivable | $ | 125.0 | $ | 127.5 | ||||
Allowance for doubtful accounts | (10.4 | ) | (9.0 | ) | ||||
Accounts receivable, net | $ | 114.6 | $ | 118.5 | ||||
Bad debt expense | $ | 1.9 | $ | 0.5 | ||||
Other Current Assets. Other current assets include the following items(in millions):
2003 | 2002 | |||||
Deferred income taxes | $ | 10.3 | $ | 18.7 | ||
Federal income taxes receivable | — | 16.6 | ||||
Prepaid expenses | 2.9 | 3.8 | ||||
Other | 8.1 | 5.4 | ||||
Total | $ | 21.3 | $ | 44.5 | ||
2006 | 2005 | |||||||
Road properties | $ | 2,118.4 | $ | 1,982.5 | ||||
Equipment | 468.4 | 388.0 | ||||||
Concession improvements | 324.3 | 296.1 | ||||||
Computer software | 76.1 | 71.8 | ||||||
Locomotives sale-leaseback | — | 32.5 | ||||||
Other | 38.9 | 166.7 | ||||||
Total | 3,026.1 | 2,937.6 | ||||||
Accumulated depreciation | 897.0 | 820.4 | ||||||
Net property and equipment | 2,129.1 | 2,117.2 | ||||||
Construction in progress | 323.1 | 181.1 | ||||||
Property and equipment, net | $ | 2,452.2 | $ | 2,298.3 | ||||
2006 | 2005 | |||||||
Road properties | $ | 1,231.4 | $ | 1,227.6 | ||||
Land | 135.3 | 132.8 | ||||||
Other | 32.3 | 41.2 | ||||||
Total | 1,399.0 | 1,401.6 | ||||||
Accumulated amortization | 95.7 | 41.2 | ||||||
Concession assets, net | $ | 1,303.3 | $ | 1,360.4 | ||||
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2003 | 2002 | |||||
Properties, at cost | ||||||
Road properties | $ | 1,663.3 | $ | 1,606.4 | ||
Equipment | 275.1 | 280.5 | ||||
Computer software | 64.6 | 62.4 | ||||
Equipment under capital leases | 6.6 | 6.6 | ||||
Other | 8.7 | 8.4 | ||||
Total | 2,018.3 | 1,964.3 | ||||
Accumulated depreciation and amortization | 734.3 | 702.3 | ||||
Total | 1,284.0 | 1,262.0 | ||||
Construction in progress | 78.5 | 75.4 | ||||
Net Properties | $ | 1,362.5 | $ | 1,337.4 | ||
For
Accrued Liabilities. Accrued liabilities include the following items (in millions):
2003 | 2002 | |||||
Claims reserves | $ | 34.4 | $ | 35.3 | ||
Prepaid freight charges due other railroads | 19.7 | 24.5 | ||||
Car hire per diem | 9.0 | 11.5 | ||||
Vacation accrual | 7.8 | 7.8 | ||||
Property and other taxes | 5.2 | 4.4 | ||||
Interest payable | 6.6 | 6.4 | ||||
Other | 36.7 | 38.7 | ||||
Total | $ | 119.4 | $ | 128.6 | ||
Other Noncurrent Liabilities and Deferred Credits. Other noncurrent liabilities and deferred credits include the following items (in millions):
2003 | 2002 | |||||
Claims reserves | $ | 36.6 | $ | 25.1 | ||
Accrued employee benefits | 9.0 | 8.8 | ||||
Deferred gain on sale of equipment to Southern Capital | 13.7 | 18.7 | ||||
Deferred gain on sale of Mexrail | 6.1 | 6.5 | ||||
Other | 44.0 | 45.1 | ||||
Total | $ | 109.4 | $ | 104.2 | ||
Note 5. Long-Term Debt
Indebtedness Outstanding.Long-term debt and pertinent provisions follow(in millions):
2006 | 2005 | |||||||
Interest payable | $ | 16.7 | $ | 17.9 | ||||
Vacation accrual | 13.2 | 12.6 | ||||||
Car hire per diem | 27.2 | 28.1 | ||||||
Prepaid freight charges due other railroads | 37.2 | 36.9 | ||||||
Claim reserves | 88.9 | 55.1 | ||||||
Deferred credits related to unfavorable locomotive leases and maintenance contracts | 9.7 | 9.7 | ||||||
Property and other taxes | 32.4 | 24.8 | ||||||
Other | 129.4 | 148.0 | ||||||
Accrued liabilities | $ | 354.7 | $ | 333.1 | ||||
Note 6. | Long-Term Debt |
2006 | 2005 | |||||||
KCS | ||||||||
Debt obligations related to Grupo KCSM acquisition | $ | 83.3 | $ | 158.7 | ||||
Other debt obligations | 0.2 | 0.2 | ||||||
KCSR | ||||||||
Revolving credit facility, variable interest rate, 6.850% at December 31, 2006, due 2011 | 90.0 | 92.0 | ||||||
Term loans, variable interest rate, 7.070% at December 31, 2006, due 2013 | 244.9 | 246.8 | ||||||
91/2% senior notes, due 2008 | 200.0 | 200.0 | ||||||
71/2% senior notes, due 2009 | 200.0 | 200.0 | ||||||
Capital lease obligations, 8.00%, due serially to 2009 | 0.8 | 1.1 | ||||||
Other debt obligations(iii) | 12.7 | 32.0 | ||||||
Tex-Mex | ||||||||
RRIF loan, 4.29%, due serially to 2030 | 49.2 | 21.7 | ||||||
KCSM | ||||||||
Revolving credit facility, variable interest rate, due 2008 | — | 26.1 | ||||||
Term loans, variable interest rate, 7.475% at December 31, 2006, due 2008 | 46.7 | 76.0 | ||||||
101/4% senior notes, due 2007 | 4.0 | 150.0 | ||||||
121/2% senior notes, due 2012 | 178.6 | 178.3 | ||||||
93/8% senior notes, due 2012 | 460.0 | 460.0 | ||||||
75/8% senior notes, due 2013 | 175.0 | — | ||||||
Capital lease obligations, due serially to 2011 | 1.0 | 1.3 | ||||||
Fair market adjustment related to purchase accounting | 10.6 | 16.4 | ||||||
Total | 1,757.0 | 1,860.6 | ||||||
Less: Debt due within one year(i)(ii) | 92.8 | 116.3 | ||||||
Long-term debt | $ | 1,664.2 | $ | 1,744.3 | ||||
(i) | Includes $1.9 million and $4.2 million at December 31, 2006 and 2005, respectively, of adjustments to reflect the fair value of the liabilities assumed in 2005. |
(ii) | Includes current liability related to Grupo KCSM acquisition. |
(iii) | In January 2006, $24.3 million of debt was repaid with locomotives through a non-cash transaction. |
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2003 | 2002 | |||||
KCS | $ | 1.3 | $ | 1.3 | ||
KCSR | ||||||
Borrowings pursuant to Amended KCS Credit Facility | ||||||
Revolving Credit Facility, variable interest rate at December 31, 2003— 4.03%, due January 2006 | — | — | ||||
Term Loans, variable interest rate at December 31, 2003 — 3.67%, due | 98.5 | 149.2 | ||||
7½% Senior Notes, due June 15, 2009 | 200.0 | 200.0 | ||||
9½% Senior Notes, due October 1, 2008 | 200.0 | 200.0 | ||||
Equipment Trust Certificates, 8.56% to 9.23%, due serially to | 17.1 | 23.5 | ||||
Capital Lease Obligations, 7.15% to 9.00%, due serially to September 30, 2009 | 1.9 | 2.5 | ||||
Term Loans with State of Illinois, 3% to 5%, due serially to 2009 | 2.8 | 3.3 | ||||
OTHER | 1.8 | 2.8 | ||||
Total | 523.4 | 582.6 | ||||
Less: debt due within one year | 9.9 | 10.0 | ||||
Long-term debt | $ | 513.5 | $ | 572.6 | ||
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The Tranche B term loan As of December 31, 2006, advances under the revolving credit facility totaled $90.0 million and the Revolving Credit Facility 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 Revolving Credit Facility 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 ratioloans’ balance was $244.9 million. Revolver availability as of December 31, 2003, the applicable margin2006 was 2.25% per annum for LIBOR borrowings and 1.25% per annum for alternate base rate borrowings.
The Amended$35.0 million.
The Amended KCS Credit Facility contains certain provisions, covenants and restrictions customary for this type of debt and for borrowers with a similar credit rating. These provisions include, among others, restrictions on the Company’s ability and its subsidiaries ability to (1) incur additional debt or liens; (2) enter into sale and leaseback transactions; (3) merge or consolidate with another entity; (4) sell assets; (5) enter into certain transactions with affiliates; (6) make investments, loans, advances, guarantees or acquisitions; (7) make certain restricted payments, including dividends, or make certain payments on other indebtedness; and (8) make capital expenditures. In addition, the Company is required to comply with certain financial ratios, including minimum interest expense coverage and leverage ratios. The Amended KCS Credit Facility also contains certain customary events of default. These covenants, along with other provisions, could restrict maximum utilization of the Revolving Credit Facility.
Refinancing of Amended KCS Credit Facility. On March 1, 2004, the Company repaid approximately $38.5 million of term debt (“Term B Loan”) under the Amended KCS Credit Facility using cash on-hand. After consideration of this repayment, the outstanding balance under the Term B Loan was $60 million.
Agreement. The Company is currently not in the process of refinancing the Amended KCS Credit Facility, including the Revolving Credit Facility. Under the proposed termsdefault of the new senior secured credit facility (“2004 KCS2006 Credit Facility”),Agreement and has access to the Company expects to borrow $150 million under a new term loan due March 2008 (“2004 Term B Loan”). Additionally, the 2004 KCS Credit Facility provides for a new revolving credit facility, which expires in March 2007, with a maximum borrowing amountfacility.
As a result of the refinancing transaction described above, the Company expects to report a charge to earnings in the firstthird quarter of 2004 of approximately $4 million related to the write-off of existing deferred costs.
7½% Senior Notes. In June 2002, KCSR issued $2002000 and due October 1, 2008, and $200.0 million of 7½71/2% senior unsecured notes issued in June of 2002 and due June 15, 2009 (“7½% Notes”). Net proceeds from the 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.12, 2009. These registeredsenior unsecured notes bear interest at a fixed annual interest rate to bewhich is paid semi-annually on June 15 and December 15 and are due June 15, 2009.semi-annually. These registeredsenior notes are general unsecured obligations of KCSR but are guaranteed by the CompanyKCS and certain of its domestic subsidiaries.
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9½% Senior Notes. During the third quarter of 2000, KCSR completed a $200 million offering of 8-year senior unsecured notes (“9½% Notes”). Net proceeds from this offering of $196.5 million were used to refinance term debt and reduce commitments under the KCS Credit Facility. The refinanced debt was scheduled to mature on January 11, 2001. These registered notes bear a fixed annual interest rate and are due on October 1, 2008. These registered 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.
Debt issuance costs related to indebtedness have been deferred and are being amortized over the respective term of the loans.
Leases and Debt Maturities. The Company and its subsidiaries lease transportation equipment, as well as office and other operating facilities under various capital and operating leases. Rental expenses under operating leases were $57.2 million, $55.0 million and $56.8 million for the years 2003, 2002 and 2001, respectively. Minimum annual payments and present value thereof under existing capital leases, other debt maturities, and minimum annual rental commitments under noncancellable operating leases are as follows(dollars in millions):
Capital Leases | Operating Leases | |||||||||||||||||||||||
Long- Term | Minimum Lease Payments | Less Interest | Net Present Value | Total Debt | Southern Capital | Third Party | Total | |||||||||||||||||
2004 | $ | 9.5 | $ | 0.6 | $ | 0.2 | $ | 0.4 | $ | 9.9 | $ | 29.2 | $ | 27.0 | $ | 56.2 | ||||||||
2005 | 8.7 | 0.5 | 0.1 | 0.4 | 9.1 | 25.5 | 22.4 | 47.9 | ||||||||||||||||
2006 | 7.6 | 0.4 | 0.1 | 0.3 | 7.9 | 22.3 | 21.3 | 43.6 | ||||||||||||||||
2007 | 48.0 | 0.3 | — | 0.3 | 48.3 | 18.5 | 19.1 | 37.6 | ||||||||||||||||
2008 | 246.9 | 0.3 | — | 0.3 | 247.2 | 18.5 | 15.4 | 33.9 | ||||||||||||||||
Later years | 200.8 | 0.2 | — | 0.2 | 201.0 | 138.0 | 45.6 | 183.6 | ||||||||||||||||
Total | $ | 521.5 | $ | 2.3 | $ | 0.4 | $ | 1.9 | $ | 523.4 | $ | 252.0 | $ | 150.8 | $ | 402.8 | ||||||||
KCSR Indebtedness. KCSR has purchased locomotives and rolling stock under equipment trust certificates and capitalized lease obligations. The equipment, which has been pledged as collateral for the related indebtedness, has an original cost of $134.7 million and a net book value of $65.9 million.
Other Agreements, Guarantees, Provisions and Restrictions. The Company has debt agreementsratings containing restrictions on subsidiary indebtedness, advances and transfers of assets, and sale and leaseback transactions, as well as requiring compliance with various financial covenants. At December 31, 2003, the Company was in compliance with the provisions and restrictions of these agreements. Because of certain financial covenants contained in the debt agreements, however, maximum utilization of the Company’s available line of credit may be restricted.
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Note 6. Income Taxes
Capital Leases | ||||||||||||||||||||||||||||||||
Long- | Minimum | Net | Operating Leases | |||||||||||||||||||||||||||||
Term | Lease | Less | Present | Total | Southern | Third | ||||||||||||||||||||||||||
Years | Debt | Payments | Interest | Value | Debt | Capital | Party | Total | ||||||||||||||||||||||||
2007(i) | $ | 92.2 | $ | 0.7 | $ | 0.1 | $ | 0.6 | $ | 92.8 | $ | 18.8 | $ | 104.8 | $ | 123.6 | ||||||||||||||||
2008 | 230.7 | 0.7 | 0.1 | 0.6 | 231.3 | 19.2 | 90.4 | 109.6 | ||||||||||||||||||||||||
2009 | 204.1 | 0.5 | — | 0.5 | 204.6 | 17.0 | 78.9 | 95.9 | ||||||||||||||||||||||||
2010 | 3.9 | 0.1 | — | 0.1 | 4.0 | 18.0 | 73.6 | 91.6 | ||||||||||||||||||||||||
2011 | 126.4 | — | — | — | 126.4 | 13.0 | 63.3 | 76.3 | ||||||||||||||||||||||||
Thereafter(ii) | 1,097.9 | — | — | — | 1,097.9 | 94.8 | 366.8 | 461.6 | ||||||||||||||||||||||||
Total | $ | 1,755.2 | $ | 2.0 | $ | 0.2 | $ | 1.8 | $ | 1,757.0 | $ | 180.8 | $ | 777.8 | $ | 958.6 | ||||||||||||||||
(i) | Includes current liability related to Grupo KCSM acquisition. | |
(ii) | Includes long-term liability related to Grupo KCSM acquisition. |
Note 7. | Income Taxes |
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2003 | 2002 | 2001 | ||||||||||
Current | ||||||||||||
Federal | $ | — | $ | (15.3 | ) | $ | (26.6 | ) | ||||
State and local | 0.3 | 0.4 | (1.1 | ) | ||||||||
Foreign withholding taxes | — | — | 0.1 | |||||||||
Total current | 0.3 | (14.9 | ) | (27.6 | ) | |||||||
Deferred | ||||||||||||
Federal | (4.1 | ) | 20.8 | 29.5 | ||||||||
State and local | 1.0 | 1.0 | 0.9 | |||||||||
Total deferred | (3.1 | ) | 21.8 | 30.4 | ||||||||
Total income tax provision (benefit) | $ | (2.8 | ) | $ | 6.9 | $ | 2.8 | |||||
2006 | 2005 | 2004 | ||||||||||
Current: | ||||||||||||
Federal | $ | 4.0 | $ | 11.2 | $ | (12.4 | ) | |||||
State and local | 0.4 | (1.3 | ) | 0.1 | ||||||||
Foreign | — | 0.3 | — | |||||||||
Total current | 4.4 | 10.2 | (12.3 | ) | ||||||||
Deferred: | ||||||||||||
Federal | 12.7 | (17.8 | ) | 33.8 | ||||||||
State and local | 7.2 | 1.4 | 2.1 | |||||||||
Foreign | 21.1 | (0.9 | ) | — | ||||||||
Total deferred | 41.0 | (17.3 | ) | 35.9 | ||||||||
Total income tax expense (benefit) | $ | 45.4 | $ | (7.1 | ) | $ | 23.6 | |||||
2006 | 2005 | |||||||
Liabilities: | ||||||||
Depreciation | $ | 571.2 | $ | 565.2 | ||||
Investments | 13.4 | 16.2 | ||||||
Concession rights | 256.7 | 277.5 | ||||||
Other, net | 5.6 | 5.6 | ||||||
Gross deferred tax liabilities | 846.9 | 864.5 | ||||||
Assets: | ||||||||
Loss carryovers | (480.7 | ) | (491.3 | ) | ||||
Book reserves not currently deductible for tax | (48.3 | ) | (57.4 | ) | ||||
Inventories and provisions | (33.1 | ) | (70.9 | ) | ||||
Vacation accrual | (3.8 | ) | (3.5 | ) | ||||
Other, net | (9.8 | ) | (3.9 | ) | ||||
Gross deferred tax assets before valuation allowance | (575.7 | ) | (627.0 | ) | ||||
Valuation allowance on loss carryovers | 9.8 | 9.5 | ||||||
Gross deferred tax assets | (565.9 | ) | (617.5 | ) | ||||
Net deferred tax liability | $ | 281.0 | $ | 247.0 | ||||
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2003 | 2002 | |||||||
Liabilities: | ||||||||
Depreciation | $ | 449.2 | $ | 415.4 | ||||
Other, net | 2.6 | — | ||||||
Gross deferred tax liabilities | 451.8 | 415.4 | ||||||
Assets: | ||||||||
NOL carryovers | (23.9 | ) | (8.8 | ) | ||||
Book reserves not currently deductible for tax | (26.8 | ) | (27.2 | ) | ||||
Vacation accrual | (2.7 | ) | (2.8 | ) | ||||
Investments | (12.6 | ) | (1.2 | ) | ||||
Other, net | (4.6 | ) | (1.3 | ) | ||||
Gross deferred tax assets | (70.6 | ) | (41.3 | ) | ||||
Net deferred tax liability | $ | 381.2 | $ | 374.1 | ||||
Based upon the Company’s history of operating income and its expectations for the future, management has determined that operating income of the Company will, more likely than not, be sufficient
Income tax provision using the Statutory rate in effect Tax effect of Earnings of equity investees Other, net Federal income tax provision (benefit) State and local income tax provision (benefit) Foreign withholding taxes Total tax expense (benefit) Effective tax rateare as followsfollow(in millions): 2003 2002 2001 $ 0.2 $ 21.4 $ 11.9 (4.3 ) (15.0 ) (9.4 ) 0.5 (0.9 ) 0.4 (3.6 ) 5.5 2.9 0.8 1.4 (0.2 ) — — 0.1 $ (2.8 ) $ 6.9 $ 2.8 (600.7 )% 11.3 % 8.3 % 2006 2005 2004 Income tax provision using the Statutory rate in effect $ 54.1 $ 26.7 $ 16.8 Tax effect of: Earnings (losses) of equity investees (0.6 ) 0.3 1.8 State and local income tax provision 3.9 0.1 2.8 Tax credits (1.8 ) (2.4 ) — Change in tax contingency (2.8 ) — — Foreign exchange, tax rate and indexation adjustments (4.9 ) 4.3 — Write off of deferred profit sharing — 10.1 — VAT/Put settlement — (42.3 ) — Difference between U.S. and foreign tax rate (3.1 ) (3.9 ) — Foreign asset tax — 0.3 — Other, net(i) 0.6 (0.3 ) 2.2 Income tax expense (benefit) $ 45.4 $ (7.1 ) $ 23.6 Effective tax rate 29.4 % (9.3 )% 49.1 % (i) 2004 includes certain adjustments of prior year provision estimates resulting in a $1.1 million increase in tax expense. Grupo TFMKCSM Investment.At December 31, 2003,2006, the Company’s book basis exceeded the tax basis of its investment in Grupo TFMKCSM by $92.1$563 million. The Company has not provided a deferred income tax liability for the income taxes, if any, which might become payable on the realization of this basis difference because the Company intends to indefinitely reinvest in Grupo TFMKCSM the financial accounting earnings which gave rise to the basis differential. Moreover, the Company has no other plans to realize this basis differential by a sale of its investment in Grupo TFM.KCSM. If the Company were to realize this basis difference in the future by a receipt of dividends or the sale of its interest in Grupo TFM,KCSM, as of December 31, 20032006, the Company would incur gross federal income taxes of $32.2$197.1 million, which might be partially or fully offset by Mexican income taxes and could be availabletaxes.reduce federalthe acquisition of a controlling interest in Grupo KCSM on April 1, 2005, Grupo KCSM provided deferred income taxes at such time.Tax Carryovers.for the difference between the financial reporting and income tax bases of its assets and liabilities. KCS recorded its proportionate share of these income taxes through its equity in Grupo KCSM’s earnings. Since April 1, 2005, Grupo KCSM income taxes are reflected in the consolidated results. Although KCSM has generated book profits, it has incurred tax losses due primarily to the accelerated tax amortization of the Concession rights. The remaining amount of federalCompany has recognized a deferred income tax asset for the resulting net operating loss (NOL) carryover generated by MidSouthcarryforwards. Management anticipates that such net operating loss carryforwards will be realized given the expiration dates (through the year 2046) of the loss carryforwards, as well as the fact that KCSM expects to generate taxable income in the future. Management’s tax projections take into consideration certain assumptions, some of which are under their control and Gateway Western priorothers which are not. Key assumptions include inflation rates, currency fluctuations and future revenue growth. If management’s assumptions are not correct, a valuation allowance may have to acquisitionbe recognized on the deferred tax asset.
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Additionally, in 2003, 2002 and 2001,2005, the Company generated both U.S. federal and state NOL’s.net operating losses. The 2002 and 2001 federal NOL’s werelosses are carried back to 2000 and 1999 respectively, whereas the state NOL’s have been carried forward. Theforward 20 years for federal and state NOL’s created in 2003 will be carried forward upfrom 5 to 20 years. years for state.
Tax Examinations. Management believes that state loss carryovers, net of the valuation allowance, will be ultimately realized.
Note 7. Stockholders’ Equity
$25 Par, 4% noncumulative, Preferred stock $1 Par, Preferred stock $1 Par, Series A, Preferred stock $1 Par, Series B convertible, Preferred stock $1 Par, Redeemable Cumulative Convertible Perpetual Preferred Stock $.01 Par, Common stockStockholders’ Equity.Note 8. Stockholders’ Equity 2003 and 2002 follows: Shares
Authorized Shares
Issued 840,000 649,736 2,000,000 None 150,000 None 1,000,000 None 400,000 400,000 400,000,000 73,369,116 Shares Authorized Shares Issued 2006 and 2005 2006 2005 $25 par, 4% noncumulative, preferred stock 840,000 649,736 649,736 $1 par, preferred stock 2,000,000 — — $1 par, series A, preferred stock 150,000 — — $1 par, series B convertible, preferred stock 1,000,000 — — $1 par, series C redeemable cumulative convertible perpetual preferred stock 400,000 400,000 400,000 $1 par, series D cumulative convertible perpetual preferred stock 210,000 210,000 210,000 $.01 par, common stock 400,000,000 92,863,585 91,369,116 2006 2005 $25 par, 4% noncumulative, preferred stock 242,170 242,170 $1 par, series C redeemable cumulative convertible perpetual preferred stock 400,000 400,000 $1 par, series D cumulative convertible perpetual preferred stock 210,000 210,000 $.01 par, common stock 75,920,333 73,412,081
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2003 | 2002 | |||
$25 Par, 4% noncumulative, Preferred stock | 242,170 | 242,170 | ||
$1 Par, Redeemable Cumulative Convertible Perpetual Preferred Stock | 400,000 | — | ||
$.01 Par, Common stock | 62,175,621 | 61,103,015 |
For purposes of computing the pro forma effects of option grants under the fair value accounting method prescribed by SFAS 123, the fair value of each option grant is estimated on the date of grant using a version of the Black-Scholes option pricing model. The following assumptions were used for the various grants depending on the date of grant, nature of vesting and term of option:
2003 | 2002 | 2001 | ||||
Dividend Yield | 0% | 0% | 0% | |||
Expected Volatility | 35% to 41% | 35% to 38% | 35% to 40% | |||
Risk-free Interest Rate | 1.68% to 2.30% | 2.16% to 3.88% | 2.98% to 4.84% | |||
Expected Life | 3 years | 3 years | 3 years |
Summary of Company’s Stock Option Plans. A summary of the status of the Company’s stock option plans as of December 31, 2003, 2002 and 2001 and changes during the years then ended is presented below.
2003 | 2002 | 2001 | ||||||||||||||||
Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | |||||||||||||
Outstanding at January 1 | 4,845,226 | $ | 6.35 | 5,821,315 | $ | 5.44 | 6,862,036 | $ | 4.92 | |||||||||
Exercised | (769,782 | ) | 4.60 | (1,265,418 | ) | 4.87 | (1,128,838 | ) | 3.71 | |||||||||
Canceled/Expired | (114,582 | ) | 10.67 | (144,388 | ) | 6.15 | (105,537 | ) | 4.79 | |||||||||
Granted | 652,001 | 12.15 | 433,717 | 14.25 | 193,654 | 13.37 | ||||||||||||
Outstanding at December 31 | 4,612,863 | $ | 7.36 | 4,845,226 | $ | 6.35 | 5,821,315 | $ | 5.44 | |||||||||
Exercisable at December 31 | 3,807,886 | $ | 6.30 | 3,784,417 | $ | 5.63 | 4,803,942 | $ | 5.13 | |||||||||
Weighted-average fair value of options granted during the period | $ | 4.86 | $ | 3.97 | $ | 4.18 |
The following table summarizes information about stock options outstanding at December 31, 2003:
OUTSTANDING | EXERCISABLE | ||||||||||||
Range of Exercise Prices | Shares Outstanding | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Shares Exercisable | Weighted- Average Exercise Price | ||||||||
$.20 –1 | 122,752 | 1.6 | years | $ | 0.88 | 122,752 | $ | 0.88 | |||||
1 – 2 | 127,255 | 3.4 | 1.34 | 127,255 | 1.34 | ||||||||
2 – 4 | 89,799 | 4.9 | 2.75 | 89,799 | 2.75 | ||||||||
4 – 7 | 3,000,785 | 6.5 | 5.77 | 3,000,785 | 5.77 | ||||||||
7 – 10 | 95,072 | 6.7 | 8.23 | 95,072 | 8.23 | ||||||||
10 – 13 | 85,000 | 7.5 | 12.62 | 85,000 | 12.62 | ||||||||
13 – 17 | 1,092,200 | 8.8 | 13.07 | 287,223 | 15.02 | ||||||||
.20 –17 | 4,612,863 | 6.8 | $ | 7.36 | 3,807,886 | $ | 6.30 | ||||||
At December 31, 2003, shares available for future grants under the stock option plan were 1,261,987.
Stock Purchase Plan. The Employee Stock Purchase Plan (“ESPP”), established in 1977, provides substantially all full-time employees of the Company, certain subsidiaries and certain other affiliated entities, with the right to subscribe to an aggregate of 11.4 million shares of common stock. The purchase price for shares under any stock offering is to be 85% of the average market price on either the exercise date or the offering date, whichever is lower, but in no event less than the par value of the shares.
The following table summarizes activity related to the various ESPP offerings:
Date Initiated | Shares Subscribed | Price | Shares Issued | Date Issued | Received from Employees* | ||||||||
(in millions) | |||||||||||||
Fifteenth Offering | 2003 | 242,589 | $11.28 | — | — | $ | — | ||||||
Fourteenth Offering | 2002 | 248,379 | $9.27–$12.29 | 197,734 | 2003/2004 | 2.4 | |||||||
Thirteenth Offering | 2001 | 402,902 | $10.24–$10.57 | 338,004 | 2002/2003 | 3.5 |
At December 31, 2003, there were approximately 4.3 million shares available for future ESPP offerings.
For purposes of computing the pro forma effects of employees’ purchase rights under the fair value accounting method prescribed by SFAS 123, the fair value of the offerings under the ESPP is estimated on the date of grant using a version of the Black-Scholes option pricing model. The following weighted-average assumptions were used for the Fifteenth, Fourteenth, and Thirteenth Offerings, respectively: i) dividend yield of 0.00%, 0.00% and 0.00%; ii) expected volatility of 35%, 36%, and 38%, iii) risk-free interest rate of 1.26%, 2.22%, and 2.98% ; and iv) expected life of one year. The weighted-average fair value of purchase rights granted under the Fifteenth, Fourteenth and Thirteenth Offerings of the ESPP were $2.95, $3.00, and $3.00, respectively.
related activity follow:at December 31, 2003 totaled 11,193,495 compared with 12,266,101 at December 31, 2002 and 14,125,949 at December 31, 2001. The Company issued shares of common stock from Treasury—1,072,606 in 2003, 1,859,848 in 2002, and 1,095,895 in 2001—to fund the exercise of options and subscriptions under various employee stock option and purchase plans. Shares repurchased during 2003, 2002 and 2001 were not material. 2006 2005 2004 Balance at beginning of year 17,957,035 10,098,912 11,193,495 Shares purchased — 9,000,000 — Shares issued to fund stock option exercises (617,107 ) (528,758 ) (889,803 ) Employee stock purchase plan shares issued (109,644 ) (205,928 ) (197,780 ) Nonvested shares issued (428,143 ) (442,632 ) (7,000 ) Nonvested shares forfeited 141,111 35,441 — Balance at end of year 16,943,252 17,957,035 10,098,912 ConvertibleSeries C Preferred Stock”) with a liquidation preference of $500 per share in a private offering. The Convertible Preferred Stock offering was made only by means of an offering memorandum pursuant to Rule 144A. Dividends on the ConvertibleSeries C Preferred Stock are cumulative and are payable quarterly at an annual rate of 4.25% of the liquidation preference, when, as and if declared by the Company’s boardBoard of directors. Accumulated unpaid dividends will cumulate dividends at the same rate as dividends cumulate on the Convertible Preferred Stock.Directors. Each share of the ConvertibleSeries C Preferred Stock will beis convertible under certain conditions, and subject to adjustment under certain conditions, into 33.4728 shares of the Company’s common stock. On or afterAfter May 20,19, 2008, the Company will have the option tomay redeem any or all of the ConvertibleSeries C Preferred Stock, subject to certain conditions. Under certain circumstances, at the option of the holders of the Convertible Preferred Stock, theThe Company may be required to purchase shares ofredeem the ConvertibleSeries C Preferred Stock from the holders. The Convertible Preferred Stock is redeemableholders at thetheir option of a holder only in the event of a “fundamental change,” which is defined as “any transaction or event (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise) in connection with which all orif substantially all of the Company’s common stock is exchanged for or converted into acquired for or constitutes solely the right to receive common stock that is not listed on a United StatesU.S. national securities exchange or approved for quotation on the NasdaqNASDAQ National Market or similar system.(a “fundamental change”). The practical effect of this provision is to limit the Company’s ability to eliminate a holder’s ability to convert the ConvertibleSeries C Preferred Stock into common shares of a publicly traded securitycompany through a merger or consolidation transaction. In no other circumstances is the Company potentially obligated to redeem the Convertible Preferred Stock for cash. Accordingly, since the Company is in a position to control whether the Company experiences a “fundamentalfundamental change,” the ConvertibleSeries C Preferred Stock is classified as permanent equity capital.A portionnetliquidation preference of $1,000. The Series D Preferred Stock ranks senior to the common stock and to each class or series of KCS capital stock that has terms that provide that such class or series will rank junior to the Series D Preferred Stock. After February 19, 2011, KCS may convert all of the Series D Preferred Stock into common stock at the then prevailing conversion rate, but only if the closing sale price of the common stock multiplied by the conversion rate then in effect equals or exceeds 130% of the liquidation preference for 20 trading days during any consecutive 30 trading day period, and if KCS has paid all accumulated and unpaid dividends on the dividend payment date immediately preceding the forced conversion date.ConvertibleSeries D Preferred Stock has been usedoffering to reduce debt. The remainderrepurchase 9,000,000 shares of the net proceeds are expectedKCS common stock issued to be usedTMM in April 2005 in
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On August, 1, 2003, KCS filed a Form S-3 Registration Statement with the SECCompany was unable to register for resale by the holders the Convertiblepay cash dividends on its Series C Preferred Stock and thedividends in cash or shares of KCS common stock into whichon its Series D Preferred Stock. The dividends accumulate until such preferred stock may be converted. On October 24, 2003, this Registration Statement, as amended, was declared effective by the SEC. KCS has filed, and will continueratio increases to file, post effective amendments to this Registration Statement as required by applicable rules and regulations. KCS will not receive any proceeds from the sale of the securities under this Registration Statement, as amended.
at least 2.0:1. See Note 16 for further discussion.
adjustment periodically to prevent dilution). The rights are traded with the Company’s common stock.
At any time prior to the tenth calendar day after the first date after the public announcement that an acquiring person has acquired beneficial ownership of 20 percent (or 15 percent in some instances)is thereafter merged into another entity, or if more than 50% of the outstanding sharesCompany’s consolidated assets or earning power is sold or transferred, holders of the rights may exercise their rights at the then current purchase price and receive common stock of the Company,acquirer equal to two times the Companypurchase price of the rights. KCS may redeem the Rightsrights for $0.0025 per right until a triggering acquisition. The rights expire October 11, 2010.
The Series A Preferred shares purchasable upon exercise of the Rights will have a cumulative quarterly dividend rate set by the Board of Directors or equal to 1,000 times the dividend declared on the common stock for such quarter. Each share will have the voting rights of one vote on all matters voted at a meeting of the stockholders for each 1/1,000th share of preferred stock held by such stockholder. In the event of any merger, consolidation or other transaction in which the common shares are exchanged, each Series A Preferred share will be entitled to receive an amount equal to 1,000 times the amount to be received per common share. In the event of a liquidation, the holders of Series A Preferred shares will be entitled to receive $1,000 per share or an amount per share equal to 1,000 times the aggregate amount to be distributed per share to holders of common stock. The shares will not be redeemable. The vote of holders of a majority of the Series A Preferred shares, voting together as a class, will be required for any amendment to the Company’s Certificate of Incorporation that would materially and adversely alter or change the powers, preferences or special rights of such shares.
Change In Control Provisions.The Company and certain of its subsidiaries have entered into agreements with employees whereby, upon defined circumstances constituting a change in control of the Company or subsidiary, certain stock options become exercisable, certain benefit entitlements are automatically funded and such employees are entitled to specified cash payments upon termination of employment.
would be the highest price paid for KCS common stock by a party seeking to control the Company, funding of the Company’s trusts could be substantial.
Note 9. | Share-Based Compensation |
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2006 | 2005 | 2004 | ||||||||||
Expected dividend yield | 0 | % | 0 | % | 0 | % | ||||||
Expected volatility | 37.84 | % | 26.78 | % | 29.66 | % | ||||||
Risk-free interest rate | 4.96 | % | 3.41 | % | 2.75 | % | ||||||
Expected term(years) | 6.83 | 5.50 | 3.43 | |||||||||
Fair value at grant date | $ | 12.62 | $ | 3.98 | $ | 3.64 |
Weighted- | Weighted- | |||||||||||||||
Average | Average | |||||||||||||||
Exercise | Remaining | Aggregate | ||||||||||||||
Number of | Price | Contractual | Intrinsic | |||||||||||||
Shares | per Share | Term | Value | |||||||||||||
In years | In millions | |||||||||||||||
Options outstanding at December 31, 2003 | 4,612,863 | $ | 7.36 | |||||||||||||
Granted | 590,247 | 14.67 | ||||||||||||||
Exercised | (894,832 | ) | 5.64 | |||||||||||||
Forfeited or expired | (115,536 | ) | 12.27 | |||||||||||||
Options outstanding at December 31, 2004 | 4,192,742 | 8.62 | ||||||||||||||
Granted | 104,200 | 17.51 | ||||||||||||||
Exercised | (554,869 | ) | 6.88 | |||||||||||||
Forfeited or expired | (34,680 | ) | 10.54 | |||||||||||||
Options outstanding at December 31, 2005 | 3,707,393 | 9.11 | ||||||||||||||
Granted | 90,800 | 26.03 | ||||||||||||||
Exercised | (627,907 | ) | 10.83 | |||||||||||||
Forfeited or expired | (229,954 | ) | 12.77 | |||||||||||||
Options outstanding at December 31, 2006 | 2,940,332 | $ | 8.98 | 4.59 | $ | 58.8 | ||||||||||
Vested and expected to vest at December 31, 2006 | 2,929,307 | $ | 8.94 | 4.57 | $ | 58.7 | ||||||||||
Exercisable at December 31, 2006 | 2,499,144 | $ | 7.74 | 4.16 | $ | 53.1 | ||||||||||
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2006 | 2005 | 2004 | ||||||||||
Aggregate grant-date fair value of stock options vested | $ | 0.7 | $ | 2.1 | $ | 1.1 | ||||||
Intrinsic value of stock options exercised | 11.4 | 9.7 | 10.8 | |||||||||
Cash received from option exercises | 6.7 | 3.8 | 5.0 | |||||||||
Excess tax benefit realized from option exercises | 0.2 | — | — |
Weighted- | ||||||||||||
Average Grant | Aggregate | |||||||||||
Number of | Date | Intrinsic | ||||||||||
Shares | Fair Value | Value | ||||||||||
In millions | ||||||||||||
Nonvested stock at December 31, 2004 | — | $ | — | |||||||||
Granted | 435,032 | 20.64 | ||||||||||
Vested | (7,440 | ) | 18.56 | |||||||||
Forfeited | (35,441 | ) | 21.88 | |||||||||
Nonvested stock at December 31, 2005 | 392,151 | 20.57 | ||||||||||
Granted | 421,002 | 25.73 | ||||||||||
Vested | (58,469 | ) | 20.17 | |||||||||
Forfeited | (141,111 | ) | 22.33 | |||||||||
Nonvested stock at December 31, 2006 | 613,573 | $ | 23.74 | $ | 17.8 | |||||||
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Offering Date | Exercise Date | Received | ||||||||||||||||||||||||||
Purchase | Shares | Purchase | Shares | from | ||||||||||||||||||||||||
Date | Price | Subscribed | Date Issued | Price | Issued | Employees(i) | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Eighteenth offering | October 31, 2006 | $ | 25.97 | 101,737 | — | $ | — | — | $ | — | ||||||||||||||||||
Seventeenth offering | October 31, 2005 | 20.10 | 140,867 | January 31, 2007 | 20.10 | 114,554 | 2.3 | |||||||||||||||||||||
Sixteenth offering | October 29, 2004 | 15.14 | 119,384 | January 24, 2006 | 15.14 | 109,062 | 1.7 |
(i) | Represents amounts received from employees through payroll deductions for share purchases under applicable offering. |
Eighteenth | Seventeenth | Sixteenth | ||||||||||
Offering | Offering | Offering | ||||||||||
Expected dividends | 0 | % | 0 | % | 0 | % | ||||||
Expected volatility | 32 | % | 28 | % | 27 | % | ||||||
Risk free interest rate | 4.99 | % | 4.15 | % | 2.85 | % | ||||||
Expected life(years) | 1 | 1 | 1 | |||||||||
Fair value at grant date | $ | 7.15 | $ | 5.12 | $ | 2.96 |
Note 10. |
Welfare. Certain U.S. employees that have met age and service requirements are eligible for life insurance coverage and medical benefits during retirement. The Company maintains various plans for the benefit of its employees as described below. For the years ended December 31, 2003, 2002 and 2001, the Company expensed $0.9 million, $0.4 million and $0.9 million, respectively, related to the 401(k) and Profit Sharing Plan. During 2003, 2002 and 2001, the Company did not recognize any expenses relative to profit sharing or the ESOP.
401(k) and Profit Sharing Plan. During 2000, the Company combined the Profit Sharing Plan and the 401(k) Plan into the KCS 401(k) and Profit Sharing Plan (the “401(k) Plan”). The 401(k) Plan permits participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code and also allows employees to direct their profit sharing accounts into selected investments. The Company matched employee 401(k) contributions up to a maximum of 5% of compensation in 2003 and 3% of compensation during 2002 and 2001. Qualified profit sharing plans are maintained for most employees not included in collective bargaining agreements. Contributions for the Company and its subsidiaries are made at the discretion of the Board of Directors of KCS in amounts not to exceed the maximum allowable for federal income tax purposes.
Employee Stock Ownership Plan. KCS established the ESOP for employees not covered by collective bargaining agreements. KCS contributions to the ESOP are based on a percentage of wages earned by eligible employees. Contributions and percentages are determined by the Compensation and Organization Committee of the Board of Directors.
Other Postretirement Benefits. The Company provides certain medical, life and other postretirement benefits other than pensions to its retirees. The medical and life plans are available to employees not covered under collective bargaining arrangements, who have attained age 60 and rendered ten years of service. Individuals employed as of December 31, 1992 were excluded from a specific service requirement. Theretiree medical plan is contributory and provides benefits forto retirees, their covered dependents and beneficiaries. The medical plan provides for an annual adjustment ofadjustments to retiree contributions, and also contains, depending on the plan coverage selected, certain deductibles, co-payments, coinsuranceco-insurance, and coordination with Medicare. Certain management employees also maintain their status under a collective bargaining agreement, which permits them access to post-retirement medical under the multiemployer plan described below. The life insurance plan is non-contributory and covers retirees only. The Company’s policy, in most cases, is to fund benefits payable under these plans as the obligations become due. However, certain plan assets (money market funds held in a life insurance company) exist with respect to life insurance benefits. A life insurance company holds these assets and
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Health and Welfare | Pension | |||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005(i) | ||||||||||||||||
Service cost | $ | 0.1 | $ | 0.1 | $ | 0.2 | $ | 1.7 | $ | 1.1 | ||||||||||
Interest cost | 0.5 | 0.5 | 0.6 | 1.0 | 0.6 | |||||||||||||||
Expected return on plan assets | — | — | — | — | — | |||||||||||||||
Actuarial (gain) loss (ii) | (0.7 | ) | 0.1 | (1.0 | ) | (2.6 | ) | 0.7 | ||||||||||||
Prior service credit (iii) | (0.3 | ) | — | — | — | — | ||||||||||||||
Net periodic cost (benefit) recognized | $ | (0.4 | ) | $ | 0.7 | $ | (0.2 | ) | $ | 0.1 | $ | 2.4 | ||||||||
(i) | The obligation related to the KCSM pension was acquired with the change in control and consolidation of KCSM beginning April 1, 2005. The pension cost presented for 2005 represents an estimated cost for the nine month period from April 1, 2005 through December 31, 2005. Prior to April 1, 2005, KCSM was accounted for as an equity method investee. The pension obligation was established during the finalization of purchase accounting (see Note 4). The pension costs since the date of acquisition have been included in the results for the year ended December 31, 2006. | |
(ii) | Net benefit costs above do not include a component for the amortization of actuarial gains or losses as the Company’s policy is to recognize such gains and losses immediately. | |
(iii) | During 2005, the Company revised its medical plan to exclude prescription drug coverage available under Medicare part D. This negative plan amendment generated an unrecognized prior service benefit of $2.3 million which is being amortized over the estimated remaining life of the affected participants of 9.5 years. |
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2003 | 2002 | |||||
Annual increase in CPI | 2.25 | % | 2.50 | % | ||
Expected rate of return on life insurance plan assets | 6.50 | 6.50 | ||||
Discount rate | 6.00 | 6.50 | ||||
Salary increase | 3.00 | 3.00 |
Health and Welfare | Pension | |||||||||||||||
2006 | 2005 | 2006 | 2005(i) | |||||||||||||
Benefit obligation at beginning of year | $ | 8.6 | $ | 9.1 | $ | 12.4 | $ | 10.0 | ||||||||
Obligation from acquisition of Mexrail | — | 2.0 | — | — | ||||||||||||
Plan amendment | — | (2.3 | ) | — | — | |||||||||||
Service cost | 0.1 | 0.1 | 1.7 | 1.1 | ||||||||||||
Interest cost | 0.5 | 0.5 | 1.0 | 0.6 | ||||||||||||
Actuarial (gain) loss | (0.7 | ) | 0.1 | (2.6 | ) | 0.7 | ||||||||||
Benefits paid, net of retiree contributions(ii) | (1.3 | ) | (0.9 | ) | (0.4 | ) | — | |||||||||
Benefit obligation at end of year | 7.2 | 8.6 | 12.1 | 12.4 | ||||||||||||
Fair value of plan assets at beginning of year | 0.7 | 0.8 | ||||||||||||||
Actual return on plan assets | (0.1 | ) | 0.1 | |||||||||||||
Benefits paid, net of contributions (ii) | (0.1 | ) | (0.2 | ) | ||||||||||||
Fair value of plan assets at end of year | 0.5 | 0.7 | ||||||||||||||
Funded status | (6.7 | ) | (7.9 | ) | (12.1 | ) | (12.4 | ) | ||||||||
Unrecognized prior service benefit (iii) | — | (2.3 | ) | — | — | |||||||||||
Accrued benefit cost | $ | (6.7 | ) | $ | (10.2 | ) | $ | (12.1 | ) | $ | (12.4 | ) | ||||
(i) | The obligation related to the KCSM pension was acquired with the change in control and consolidation of KCSM beginning April 1, 2005. The beginning obligation presented for 2005 represents the obligation as of the acquisition on April 1, 2005 and the 2005 activity as presented is for the nine month period ended December 31, 2005. | |
(ii) | Benefits paid for the reconciliation of the benefit obligation include both medical and life insurance benefits, whereas benefits paid from the reconciliation of the funded status include only life insurance benefits. Plan assets relate only to life insurance benefits. Medical benefits are funded as obligations become due. | |
(iii) | The Company adopted the provisions of SFAS 158 for the year ended December 31, 2006. Accordingly, the unrecognized prior service benefit related to the plan amendment in 2005 ($2.1 million at December 31, 2006) was reclassified from liabilities and has been included as a component of accumulated other comprehensive income. |
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Health and Welfare | Pension | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Discount rate | 5.75 | % | 5.40 | % | 8.00 | % | 8.00 | % | ||||||||
Rate of compensation increase | n/a | n/a | 5.00 | % | 5.50 | % |
Health and Welfare | Pension | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Discount rate | 5.40 | % | 5.65 | % | 8.00 | % | 8.00 | % | ||||||||
Expected long-term rate of return on plan assets | 3.00 | % | 6.25 | % | n/a | n/a | ||||||||||
Rate of compensation increase | n/a | n/a | 5.00 | % | 5.50 | % |
During 2001, the Company reduced its liability and recorded a reduction of operating expenses by approximately $2.0 million in connection with the transfer of union employees formerly covered by the Gateway Western plan to a multi-employer sponsored union plan, which effectively eliminated the Company’s postretirement liability for this group of employees. This reduced the number of former Gateway Western employees or retirees covered under Gateway Western’s benefit plan. The Gateway Western benefit plans are slightly different from those of the Company and other subsidiaries. Gateway Western provides contributory health, dental and life insurance benefits to these remaining employees and retirees. In 2001, the assumed annual rate of increase in health care costs for Gateway Western employees and retirees under this plan was 10%, decreasing over six years to 5.5% in 2008 and thereafter. An increase or decrease infollowing table presents the assumed health care cost trend rates by one percent in 2003, 2002trends related to Gateway Western and 2001 would not have a significant impact onMidsouth participants:
2006 | 2005 | 2004 | ||||||||||
Health care trend rate for next year | 9.00 | % | 10.00 | % | 10.25 | % | ||||||
Ultimate trend rate | 5.00 | % | 5.00 | % | 5.25 | % | ||||||
Year that rate reaches ultimate rate | 2010 | 2010 | 2009 |
A reconciliation of the accumulated postretirement benefit obligation, change in plan assets and funded status, respectively, at December 31 followsfive years thereafter(in millions):
Health and | ||||||||
Year | Welfare | Pension | ||||||
2007 | $ | 0.9 | $ | 1.0 | ||||
2008 | 0.9 | 0.3 | ||||||
2009 | 0.9 | 0.4 | ||||||
2010 | 0.8 | 0.5 | ||||||
2011 | 0.8 | 0.7 | ||||||
2012 — 2016 | 3.5 | 8.9 |
2003 | 2002 | |||||||
Accumulated postretirement benefit obligation at beginning of year | $ | 10.0 | $ | 9.1 | ||||
Service cost | 0.2 | 0.2 | ||||||
Interest cost | 0.6 | 0.6 | ||||||
Actuarial and other (gain) loss | (2.3 | ) | 1.0 | |||||
Benefits paid (i) | (0.9 | ) | (0.9 | ) | ||||
Accumulated postretirement benefit obligation at end of year | 7.6 | 10.0 | ||||||
Fair value of plan assets at beginning of year | 1.0 | 1.0 | ||||||
Actual return on plan assets | 0.1 | 0.1 | ||||||
Benefits paid (i) | (0.1 | ) | (0.1 | ) | ||||
Fair value of plan assets at end of year | 1.0 | 1.0 | ||||||
Funded status and accrued benefit cost | $ | (6.6 | ) | $ | (9.0 | ) | ||
Net periodic postretirement benefit cost included the following components (in millions):
2003 | 2002 | 2001 | |||||||||
Service cost | $ | 0.2 | $ | 0.2 | $ | 0.2 | |||||
Interest cost | 0.6 | 0.6 | 0.8 | ||||||||
Expected return on plan assets | — | (0.1 | ) | (0.1 | ) | ||||||
Net periodic postretirement benefit cost | $ | 0.8 | $ | 0.7 | $ | 0.9 | |||||
During 2001 a post-retirement benefit for directors was eliminated, resulting in a reduction of the related liability of approximately $1.4 million.
Under collective bargaining agreements, KCSR participates in a multi-employer benefit plan, which provides certain post-retirement health care and life insurance benefits to eligible union employees and certain retirees. Premiums under this plan are expensed as incurred and were $1.7$2.6 million, $1.0$2.6 million, and $0.8$1.9 million for 2003, 2002the years ended December 31, 2006, 2005 and 2001,2004, respectively. Based on existing rates, premium amounts are not expected to change substantially in 20042007 as compared to 2003.2006.
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Note 9. Commitments and Contingencies
Company concerning a particular casualty claim. That claim, styled settlement with Kemp. The Company is, however, subject to environmental remediation costs as described below.Note 11. Commitments and Contingencies and its subsidiaries are involved as plaintiff or defendant in various legal actions arising in the normal course of business. While the ultimate outcome of theis a party to various legal proceedings involvingand administrative actions, all of which are of an ordinary, routine nature and incidental to its operations. Included in these proceedings are various tort claims brought by current and former employees for job related injuries and by third parties for injuries related to railroad operations. KCS aggressively defends these matters and has established liability reserves which management believes are adequate to cover expected costs. Although it is not possible to predict the outcome of any legal proceeding, in the opinion of management, other than those proceedings described in detail below, such proceedings and actions should not, individually, or in the aggregate, have a material adverse effect on the Company’s financial condition. However, a material adverse outcome in one or more of these proceedings could have a material adverse impact on the operating results of a particular period.and its subsidiaries cannot be predicted with certainty, it is management’s opinionfiled an action in federal court in Vermont (“Reinsurance Litigation”) seeking a declaration that they have no obligation to indemnify the estimated liabilities related to the Company’s litigation are adequate.Bogalusa CasesKemp, et al v. The Kansas City Southern Railway Company, et alIn 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. A Master Global Settlement Agreement (“MGSA”) was signed in early 2002. During 2002, KCSR made all payments under this agreement and collected $19.3 million from its excess insurance carriers. Court approval of the MGSA is expected in 2004 from the 22nd Judicial District Court of Washington Parish, Louisiana. KCSR also expects to receive releases from about 4,000 Mississippi plaintiffs in numerous cases pendingfiled in the First Judicial District Circuit Court of HindsJackson County, Mississippi.Houston CasesIn August 2000, KCSRMissouri (“Kemp Litigation”) and certain of its affiliates were added as defendantswent to trial in lawsuits pending in Jefferson and Harris Counties, Texas. These lawsuits allege damage to approximately 3,000 plaintiffs as a result of an alleged toxic chemical release from a tank car in Houston, Texas on August 21, 1998. Litigation involving the shipper and the delivering carrier had been pending for some time, but KCSR, which handled the car during the course of its transport, had not previously been named a defendant. On June 28, 2001, KCSRSeptember 2006. The Company reached a final settlement with the 1,664 plaintiffs in the lawsuit filed in Jefferson County, Texas. In 2002, KCSR settled with virtually all of the plaintiffs in the lawsuit filedKemp Litigation. The Company also reached settlements with various parties, including several of the insurance companies involved in the 164th Judicial District CourtReinsurance Litigation, to indemnify the Company for a significant portion of Harris County, Texas, for approximately $0.3 million.the settlement. The remaining plaintiffs have indicated that they intend to retain new counsel, yet to date, KCSKemp settlement is fully reflected in the Company’s financial statements and the Company has not received any notice of new counsel entering the case.Stilwell Tax DisputeOn November 19, 2002, Stilwell Financial, Inc. (“Stilwell”), now Janus Capital Group Inc., filed a Statement of Claim against KCS with the American Arbitration Association. This claim involves the entitlement to compensation expense deductions for federal income tax purposes which areno further risk associated with this litigation. The Company is, however, continuing the exercise ofReinsurance Litigation against certain stock options issued by Stilwell (the “Substituted Options”) in connection with the Spin-off of Stilwell from KCS on July 12, 2000. Stilwell alleges that upon exercise of a Substituted Option, Stilwell is entitledother insurance companies, seeking to the associated compensation expense deductions. Stilwell bases its claim on a letter, dated August 17, 1999, addressed to Landon H. Rowland, Chairman, President and Chief Executive Officer of Kansas City Southern Industries, Inc. (the “Letter”), purporting to allow Stilwell to claim such deductions. The Letter was signed by the Vice President and Tax Counsel of Stilwell, who was also at the time the Senior Assistant Vice President and Tax Counsel of KCS, and by Landon H. Rowland, currently a director of KCS and the former non-executive Chairman of Janus Capital Group Inc., who was at that time a director and officer of both Stilwell and KCS.Stilwell seeks a declaratory award and/or injunction ordering KCS to file and amend its tax returns for the tax year 2000 and subsequent years to reflect that KCS does not claim the associated compensation expense deductions andestablish their obligation to indemnify Stilwell against any related taxes imposed upon Stilwell, which allegedly has taken, and plans to take, such deductions. On December 20, 2002, KCS filed an Objection to Stilwell’s Demandthe Company forArbitration and Motion to Dismiss. KCS disputes the validity and enforceability their share of the Letter. KCS asserts, among other things, that a Private Letter Ruling issued by the Internal Revenue Service on July 9, 1999 provides that KCS subsidiaries are entitled to compensation expense deductions upon exercise of Substituted Options by their employees.KCS has answered that the claims of Stilwell are without merit and intends to vigorously defend against them. Given the stage of the proceeding, KCS is unable to predict the outcome, but does not expect this matter to result in any material adverse financial consequences to KCS’s net income in the event, which it regards as unlikely, that it would not prevail.liabilityliabilities for cleanup and investigation costs, without regard to fault or legality of the original conduct, on current and predecessor owners and operators of a site, as well as those who generate, or arrange for the disposal of, hazardous substances. The Company does not foreseebelieve that compliance with the requirements imposed by the environmental legislation will impair its competitive capability or result in any material additional capital expenditures, operating or maintenance costs.KCSRthe Company transports hazardous materials and has a professional team available to respond and handle environmental issues that might occur in the transport of such materials. Additionally, the Company is a partner in the Responsible Care® program and, as a result, has initiated certain
98
2006 | 2005 | |||||||
Balance at beginning of year | $ | 103.9 | $ | 52.8 | ||||
Liability acquired in the Mexrail acquisition | — | 13.9 | ||||||
Accruals, net (includes the impact of actuarial studies) | 35.0 | 57.6 | ||||||
Payments | (21.5 | ) | (20.4 | ) | ||||
Balance at end of year | $ | 117.4 | $ | 103.9 | ||||
99
100
Note 10. Derivative Instruments and Purchase Commitments
Derivative Instruments.
Note 12. | Derivative Instruments |
At December 31, 2003 the The Company was a party to seven fuel swap agreements for a notional amount of approximately 9.8 million gallons of fuel. Under the terms of these swaps, the Company receives a variable price based upon an average of the spot prices calculated on a monthly basis as reported through a petroleum price reporting service and pays a fixed price determined at the time the Company enters into the swap transaction. The variable price the Company is receiving is approximately equal to the price the Company is paying in the market for locomotive fuel. By entering into these swap transactions, the Company is able to fix the cost of fuel for the notional amount of gallons hedged.
A summary of the swap agreements to which KCSR was a party as of December 31, 2003 follows:
| ||||||
|
Cash settlements of these swaps occur on a monthly basis on the fifth business day of the month following the month in which the settlement is calculated. As of December 31, 2003, the fair market value of the benefit of the swaps was $0.9 million. For the years ended December 31, 2003, 2002 and 2001, KCSR consumed 55.4 million, 55.3 million and 57.61.3 million gallons of fuel respectively.
on December 31, 2006. Fuel hedging transactions, including fuel swaps as well as forward purchase commitments, resulted in a decrease in fuel expense of $1.1$0.7 million, $2.4 million and $0.4$3.0 million in 20032006, 2005 and 2002,2004, respectively. Fuel purchase commitments resulted in an increase in fuel expense of $0.4 million in 2001.
Interest Rate Derivative Transactions
The Company did not participate in any interest rate derivative transactions during 2003 and had no interest rate hedge transactions outstanding as ofSubsequent to December 31, 20032006, KCS entered into fuel swap agreements for 1.3 million gallons.
Southern Capital
In addition, the Company records adjustments to its stockholders’ equity (accumulated other comprehensive income (loss)) for its portion$1.7 million based on an exchange rate per dollar of the adjustment to the fair value of derivative transactions to which Southern Capital was a participant.14.50 Mexican pesos. The Company also adjusts its investment in Southern Capital by the changeoption expires May 30, 2007. On December 31, 2005, KCSM had two Mexican peso call options in the fair value of these derivative instruments. For the years ended December 31, 2002 and 2001, the Company recorded a reduction to its stockholders equity (accumulated other comprehensive loss) of approximately $0.3 million and $2.9 million, respectively, for its portion of the amount recorded by Southern Capital for the adjustment to the fair value of its interest rate swap transactions. The Company also reduced its investment in Southern Capital by the same amount.
During 2002, in conjunction with the refinancing of its debt, Southern Capital terminated these interest rate swap transactions. As a result, Southern Capital is amortizing the balance of accumulated other comprehensive income (loss) into interest expense over the former remaining life of the interest rate swap transactions. The Company is recording the impact of this charge through a related reduction in equity earnings from Southern Capital and is amortizing the related accumulated other comprehensive income (loss) balance to its investment in Southern Capital. During the years ended December 31, 2003 and 2002, the Company recorded related amortizationnotational amounts of $1.2 million and $0.7$1.7 million, based on the average exchange rate of 13.00 and 12.50 pesos per dollar, respectively.
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(in millions, except per share amounts):
2003 | ||||||||||||||||
Fourth Quarter | Third Quarter | Second Quarter | First Quarter | |||||||||||||
Revenues | $ | 148.5 | $ | 146.3 | $ | 146.3 | $ | 140.2 | ||||||||
Operating expenses | 139.1 | 115.2 | 116.1 | 117.5 | ||||||||||||
Depreciation and amortization | 16.2 | 16.2 | 16.0 | 15.9 | ||||||||||||
Operating income (loss) | (6.8 | ) | 14.9 | 14.2 | 6.8 | |||||||||||
Equity in net earnings (losses) of unconsolidated affiliates | ||||||||||||||||
Grupo TFM | 6.1 | 1.6 | (2.3 | ) | 6.9 | |||||||||||
Other | (0.3 | ) | (0.9 | ) | (0.2 | ) | 0.1 | |||||||||
Interest expense | (11.6 | ) | (11.6 | ) | (11.7 | ) | (11.5 | ) | ||||||||
Other income | 2.0 | 2.0 | 1.5 | 1.3 | ||||||||||||
Income (loss) before income taxes and cumulative effect | (10.6 | ) | 6.0 | 1.5 | 3.6 | |||||||||||
Income taxes provision (benefit) | (5.4 | ) | 1.7 | 2.0 | (1.1 | ) | ||||||||||
Income (loss) before cumulative effect of accounting change | (5.2 | ) | 4.3 | (0.5 | ) | 4.7 | ||||||||||
Cumulative effect of accounting change | — | — | — | 8.9 | ||||||||||||
Net income (loss) | $ | (5.2 | ) | $ | 4.3 | $ | (0.5 | ) | $ | 13.6 | ||||||
Per Share Data (i) | ||||||||||||||||
Total basic earnings (loss) per common share | $ | (0.10 | ) | $ | 0.02 | $ | (0.03 | ) | $ | 0.22 | ||||||
Total diluted earnings (loss) per common share | $ | (0.10 | ) | $ | 0.02 | $ | (0.03 | ) | $ | 0.22 | ||||||
Dividends per share: $25 par preferred stock | $ | 0.25 | $ | 0.25 | $ | 0.25 | $ | 0.25 | ||||||||
Dividends per share: $1 Par Convertible Preferred Stock | $ | 5.32 | $ | 5.90 | $ | — | $ | — | ||||||||
Stock Price Ranges: | ||||||||||||||||
Preferred—High | $ | 20.00 | $ | 20.25 | $ | 20.00 | $ | 20.50 | ||||||||
—Low | $ | 18.50 | $ | 18.75 | $ | 16.90 | $ | 17.25 | ||||||||
Common—High | $ | 14.97 | $ | 13.37 | $ | 12.78 | $ | 13.02 | ||||||||
—Low | $ | 10.95 | $ | 10.60 | $ | 10.70 | $ | 10.65 |
Note 13. | Quarterly Financial Data (Unaudited) |
Fourth | Third | Second | First | |||||||||||||
In millions, except per share amounts | ||||||||||||||||
2006 | ||||||||||||||||
Revenues | $ | 442.4 | $ | 415.7 | $ | 413.1 | $ | 388.4 | ||||||||
Operating income | 88.2 | 77.3 | 77.5 | 61.3 | ||||||||||||
Net income | 40.6 | 31.3 | 24.1 | 12.9 | ||||||||||||
Per share data: | ||||||||||||||||
Basic earnings per common share | $ | 0.48 | $ | 0.35 | $ | 0.26 | $ | 0.11 | ||||||||
Diluted earnings per common share | 0.41 | 0.32 | 0.24 | 0.11 | ||||||||||||
Dividends per share: | ||||||||||||||||
$25 par preferred stock | $ | 0.25 | $ | 0.25 | $ | 0.25 | $ | 0.25 | ||||||||
$1 par series C preferred stock | — | — | — | 5.31 | ||||||||||||
$1 par series D preferred stock | — | — | — | 9.40 | ||||||||||||
Stock price ranges: | ||||||||||||||||
$25 par preferred: | ||||||||||||||||
— High | $ | 23.65 | $ | 23.50 | $ | 23.75 | $ | 23.50 | ||||||||
— Low | 22.75 | 22.25 | 22.00 | 22.00 | ||||||||||||
Common: | ||||||||||||||||
— High | $ | 30.00 | $ | 28.41 | $ | 27.75 | $ | 26.17 | ||||||||
— Low | 26.49 | 23.24 | 23.46 | 22.32 | ||||||||||||
2005 | ||||||||||||||||
Revenues | $ | 388.1 | $ | 384.6 | $ | 381.1 | $ | 198.2 | ||||||||
Operating income (loss) | 47.7 | (1.9 | ) | (8.3 | ) | 24.8 | ||||||||||
Net income (loss) | 5.2 | 112.7 | (25.1 | ) | 8.1 | |||||||||||
Per share data: | ||||||||||||||||
Basic earnings (loss) per common share | $ | 0.03 | $ | 1.35 | $ | (0.33 | ) | $ | 0.09 | |||||||
Diluted earnings (loss) per common share | 0.03 | 1.14 | (0.33 | ) | 0.09 | |||||||||||
Dividends per share: | ||||||||||||||||
$25 par preferred stock | $ | 0.25 | $ | 0.25 | $ | 0.25 | $ | 0.25 | ||||||||
$1 par series C preferred stock(i) | 5.31 | 5.31 | 5.31 | 5.31 | ||||||||||||
$1 par series D preferred stock | — | — | — | — | ||||||||||||
Stock price ranges: | ||||||||||||||||
$25 par preferred: | ||||||||||||||||
— High | $ | 23.50 | $ | 23.50 | $ | 23.50 | $ | 24.00 | ||||||||
— Low | 22.00 | 22.60 | 22.00 | 21.45 | ||||||||||||
Common: | ||||||||||||||||
— High | $ | 25.71 | $ | 23.44 | $ | 21.00 | $ | 20.34 | ||||||||
— Low | 20.55 | 19.47 | 18.45 | 16.05 |
(i) | The |
102
2002 | ||||||||||||||||
Fourth Quarter | Third Quarter | Second Quarter | First Quarter | |||||||||||||
Revenues | $ | 144.2 | $ | 138.9 | $ | 139.2 | $ | 143.9 | ||||||||
Operating expenses | 114.2 | 116.9 | 110.1 | 115.6 | ||||||||||||
Depreciation and amortization | 16.1 | 15.8 | 14.6 | 14.9 | ||||||||||||
Operating income | 13.9 | 6.2 | 14.5 | 13.4 | ||||||||||||
Equity in net earnings (losses) of unconsolidated affiliates | 18.2 | 9.8 | 13.0 | 4.8 | ||||||||||||
Other | (0.5 | ) | (0.7 | ) | (1.3 | ) | 0.1 | |||||||||
Gain on sale of Mexrail, Inc. | — | — | — | 4.4 | ||||||||||||
Interest expense | (11.7 | ) | (11.5 | ) | (10.5 | ) | (11.3 | ) | ||||||||
Debt retirement costs | — | — | (4.3 | ) | — | |||||||||||
Other income | 2.3 | 6.5 | 4.4 | 4.4 | ||||||||||||
Income from operations before income taxes | 22.2 | 10.3 | 15.8 | 15.8 | ||||||||||||
Income taxes provision (benefit) | 1.8 | (0.3 | ) | 1.3 | 4.1 | |||||||||||
Net income | $ | 20.4 | $ | 10.6 | $ | 14.5 | $ | 11.7 | ||||||||
Per Share Data | ||||||||||||||||
Total basic earnings per common share | $ | 0.33 | $ | 0.17 | $ | 0.24 | $ | 0.20 | ||||||||
Total diluted earnings per common share | $ | 0.32 | $ | 0.17 | $ | 0.23 | $ | 0.19 | ||||||||
Dividends per share: $25 par preferred stock | $ | 0.25 | $ | 0.25 | $ | 0.25 | $ | 0.25 | ||||||||
Stock Price Ranges: | ||||||||||||||||
Preferred—High | $ | 20.00 | $ | 19.85 | $ | 20.75 | $ | 19.50 | ||||||||
—Low | $ | 18.00 | $ | 16.25 | $ | 19.45 | $ | 17.95 | ||||||||
Common—High | $ | 15.00 | $ | 17.35 | $ | 17.00 | $ | 15.99 | ||||||||
—Low | $ | 12.00 | $ | 12.75 | $ | 14.96 | $ | 12.75 |
Note 12. Condensed Consolidating Financial Information
Note 14. | Condensed Consolidating Financial Information |
2006 | ||||||||||||||||||||||||
Guarantor | Non-Guarantor | Consolidating | Consolidated | |||||||||||||||||||||
Parent | KCSR | Subsidiaries | Subsidiaries | Adjustments | KCS | |||||||||||||||||||
Revenues | $ | — | $ | 789.3 | $ | 10.0 | $ | 881.3 | $ | (20.9 | ) | $ | 1,659.7 | |||||||||||
Operating expenses | 16.7 | 631.7 | 19.5 | 708.4 | (20.9 | ) | 1,355.4 | |||||||||||||||||
Operating income (loss) | (16.7 | ) | 157.6 | (9.5 | ) | 172.9 | — | 304.3 | ||||||||||||||||
Equity in net earnings (losses) of unconsolidated affiliates | 130.2 | (1.7 | ) | — | 4.9 | (126.1 | ) | 7.3 | ||||||||||||||||
Interest expense | (5.7 | ) | (65.1 | ) | (1.7 | ) | (96.1 | ) | 1.4 | (167.2 | ) | |||||||||||||
Debt retirement costs | — | (2.2 | ) | — | (2.6 | ) | — | (4.8 | ) | |||||||||||||||
Foreign exchange loss | — | — | — | (3.7 | ) | — | (3.7 | ) | ||||||||||||||||
Other income | 0.7 | 10.7 | — | 8.7 | (1.4 | ) | 18.7 | |||||||||||||||||
Income (loss) before income taxes and minority interest | 108.5 | 99.3 | (11.2 | ) | 84.1 | (126.1 | ) | 154.6 | ||||||||||||||||
Income tax expense (benefit) | (0.7 | ) | 32.1 | (4.3 | ) | 18.3 | — | 45.4 | ||||||||||||||||
Minority interest | 0.3 | — | — | — | — | 0.3 | ||||||||||||||||||
Net income (loss) | $ | 108.9 | $ | 67.2 | $ | (6.9 | ) | $ | 65.8 | $ | (126.1 | ) | $ | 108.9 | ||||||||||
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December 31, 2003 | ||||||||||||||||||||||||
Parent | KCSR | Guarantor Subsidiaries | Non- Guarantor | Consolidating Adjustments | Consolidated KCS | |||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Revenues | $ | — | $ | 575.0 | $ | 21.5 | $ | 15.4 | $ | (30.6 | ) | $ | 581.3 | |||||||||||
Operating expenses | 13.5 | 517.7 | 20.9 | 30.7 | (30.6 | ) | 552.2 | |||||||||||||||||
Operating income (loss) | (13.5 | ) | 57.3 | 0.6 | (15.3 | ) | — | 29.1 | ||||||||||||||||
Equity in net earnings (losses) of unconsolidated affiliates and subsidiaries | 12.5 | 11.7 | — | 11.1 | (24.3 | ) | 11.0 | |||||||||||||||||
Interest expense | (0.6 | ) | (45.8 | ) | (0.5 | ) | — | 0.5 | (46.4 | ) | ||||||||||||||
Other income | 0.1 | 5.9 | 0.1 | 1.2 | (0.5 | ) | 6.8 | |||||||||||||||||
Income (loss) before income taxes | (1.5 | ) | 29.1 | 0.2 | (3.0 | ) | (24.3 | ) | 0.5 | |||||||||||||||
Income tax provision (benefit) | (4.8 | ) | 7.2 | 0.1 | (5.3 | ) | — | (2.8 | ) | |||||||||||||||
Income before cumulative effect of accounting change | 3.3 | 21.9 | 0.1 | 2.3 | (24.3 | ) | 3.3 | |||||||||||||||||
Cumulative effect of accounting change, net of income taxes | 8.9 | 8.9 | — | — | (8.9 | ) | 8.9 | |||||||||||||||||
Net income | $ | 12.2 | $ | 30.8 | $ | 0.1 | $ | 2.3 | $ | (33.2 | ) | $ | 12.2 | |||||||||||
December 31, 2002 | ||||||||||||||||||||||||
Parent | KCSR | Guarantor Subsidiaries | Non- Guarantor | Consolidating Adjustments | Consolidated KCS | |||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Revenues | $ | — | $ | 567.4 | $ | 18.1 | $ | 38.3 | $ | (57.6 | ) | $ | 566.2 | |||||||||||
Operating expenses | 10.8 | 506.4 | 19.5 | 39.1 | (57.6 | ) | 518.2 | |||||||||||||||||
Operating income (loss) | (10.8 | ) | 61.0 | (1.4 | ) | (0.8 | ) | — | 48.0 | |||||||||||||||
Equity in net earnings (losses) of unconsolidated affiliates and subsidiaries | 61.5 | 45.6 | — | 43.6 | (107.3 | ) | 43.4 | |||||||||||||||||
Gain on sale of Mexrail | — | 4.4 | — | — | — | 4.4 | ||||||||||||||||||
Interest expense | (0.4 | ) | (44.1 | ) | (0.4 | ) | (0.1 | ) | — | (45.0 | ) | |||||||||||||
Debt retirement costs | — | (4.3 | ) | — | — | — | (4.3 | ) | ||||||||||||||||
Other income | 3.9 | 11.0 | 2.0 | 0.7 | — | 17.6 | ||||||||||||||||||
Income (loss) before income taxes | 54.2 | 73.6 | 0.2 | 43.4 | (107.3 | ) | 64.1 | |||||||||||||||||
Income tax provision (benefit) | (3.0 | ) | 10.6 | 0.1 | (0.8 | ) | — | 6.9 | ||||||||||||||||
Net income | $ | 57.2 | $ | 63.0 | $ | 0.1 | $ | 44.2 | $ | (107.3 | ) | $ | 57.2 | |||||||||||
Revenues Operating expenses Operating income (loss) Equity in net earnings (losses) of unconsolidated affiliates and subsidiaries Interest expense Other income Income (loss) before income taxes Income tax provision (benefit) Income (loss) before cumulative effect of accounting change Cumulative effect of accounting change, net of income taxes Net income December 31, 2001 Parent KCSR Guarantor
Subsidiaries Non-
Guarantor
Subsidiaries Consolidating
Adjustments Consolidated
KCS (dollars in millions) $ — $ 580.3 $ 12.3 $ 20.1 $ (29.5 ) $ 583.2 13.6 511.4 13.1 19.2 (29.5 ) 527.8 (13.6 ) 68.9 (0.8 ) 0.9 — 55.4 39.2 26.8 — 29.4 (68.3 ) 27.1 1.3 (55.2 ) (0.5 ) (0.4 ) 2.0 (52.8 ) 0.2 6.0 — — (2.0 ) 4.2 27.1 46.5 (1.3 ) 29.9 (68.3 ) 33.9 (4.0 ) 6.7 (0.5 ) 0.6 — 2.8 31.1 39.8 (0.8 ) 29.3 (68.3 ) 31.1 (0.4 ) (0.4 ) — — 0.4 (0.4 ) $ 30.7 $ 39.4 $ (0.8 ) $ 29.3 $ (67.9 ) $ 30.7
2005 Guarantor Non-Guarantor Consolidating Consolidated Parent KCSR Subsidiaries Subsidiaries Adjustments KCS Revenues $ — $ 725.9 $ 21.9 $ 637.1 $ (32.9 ) $ 1,352.0 Operating expenses 19.1 650.7 22.9 629.9 (32.9 ) 1,289.7 Operating income (loss) (19.1 ) 75.2 (1.0 ) 7.2 — 62.3 Equity in net earnings (losses) of unconsolidated affiliates 127.1 1.6 — (4.1 ) (121.7 ) 2.9 Interest income (expense) (5.7 ) (58.5 ) 2.4 (73.3 ) 1.6 (133.5 ) Debt retirement costs — — — (4.4 ) — (4.4 ) Foreign exchange gain — — — 3.5 — 3.5 VAT/Put settlement gain (loss), net (9.0 ) — — 140.9 — 131.9 Other income 2.2 6.3 0.1 6.3 (1.6 ) 13.3 Income before income taxes and minority interest 95.5 24.6 1.5 76.1 (121.7 ) 76.0 Income tax expense (benefit) (5.4 ) 1.7 0.2 (3.6 ) — (7.1 ) Minority interest — — — (17.8 ) — (17.8 ) Net income $ 100.9 $ 22.9 $ 1.3 $ 97.5 $ (121.7 ) $ 100.9
2004 | ||||||||||||||||||||||||
Guarantor | Non-Guarantor | Consolidating | Consolidated | |||||||||||||||||||||
Parent | KCSR | Subsidiaries | Subsidiaries | Adjustments | KCS | |||||||||||||||||||
Revenues | $ | — | $ | 635.2 | $ | 20.5 | $ | 14.1 | $ | (30.3 | ) | $ | 639.5 | |||||||||||
Operating expenses | 14.7 | 529.0 | 19.1 | 23.5 | (30.3 | ) | 556.0 | |||||||||||||||||
Operating income (loss) | (14.7 | ) | 106.2 | 1.4 | (9.4 | ) | — | 83.5 | ||||||||||||||||
Equity in net earnings (losses) of unconsolidated affiliates | 35.1 | (0.8 | ) | — | (3.9 | ) | (34.9 | ) | (4.5 | ) | ||||||||||||||
Interest expense | (0.8 | ) | (43.6 | ) | (0.4 | ) | — | 0.4 | (44.4 | ) | ||||||||||||||
Other income | 0.3 | 16.3 | — | 1.4 | (0.4 | ) | 17.6 | |||||||||||||||||
Debt retirement costs | — | (4.2 | ) | — | — | — | (4.2 | ) | ||||||||||||||||
Income (loss) before income taxes | 19.9 | 73.9 | 1.0 | (11.9 | ) | (34.9 | ) | 48.0 | ||||||||||||||||
Income tax expense (benefit) | (4.5 | ) | 31.0 | 0.4 | (3.3 | ) | — | 23.6 | ||||||||||||||||
Net income (loss) | $ | 24.4 | $ | 42.9 | $ | 0.6 | $ | (8.6 | ) | $ | (34.9 | ) | $ | 24.4 | ||||||||||
104
December 31, 2006 | ||||||||||||||||||||||||
Guarantor | Non-Guarantor | Consolidating | Consolidated | |||||||||||||||||||||
Parent | KCSR | Subsidiaries | Subsidiaries | Adjustments | KCS | |||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Current assets | $ | 4.8 | $ | 253.4 | $ | 4.8 | $ | 355.8 | $ | (12.8 | ) | $ | 606.0 | |||||||||||
Investments held for operating purposes and affiliate investment | 1,952.3 | 429.9 | — | 450.8 | (2,768.1 | ) | 64.9 | |||||||||||||||||
Property and equipment, net | 0.6 | 1,163.7 | 227.9 | 1,060.5 | (0.5 | ) | 2,452.2 | |||||||||||||||||
Concession assets, net | — | — | — | 1,303.3 | — | 1,303.3 | ||||||||||||||||||
Other assets | 5.0 | 31.4 | — | 174.5 | — | 210.9 | ||||||||||||||||||
Total assets | $ | 1,962.7 | $ | 1,878.4 | $ | 232.7 | $ | 3,344.9 | $ | (2,781.4 | ) | $ | 4,637.3 | |||||||||||
Liabilities and equity: | ||||||||||||||||||||||||
Current liabilities | $ | 353.4 | $ | (229.5 | ) | $ | 140.1 | $ | 386.1 | $ | (12.7 | ) | $ | 637.4 | ||||||||||
Long-term debt | 0.2 | 733.4 | 0.6 | 897.6 | — | 1,631.8 | ||||||||||||||||||
Payables to affiliates | 32.4 | — | — | — | — | 32.4 | ||||||||||||||||||
Deferred income taxes | (10.4 | ) | 361.0 | 76.5 | (9.8 | ) | — | 417.3 | ||||||||||||||||
Other liabilities | 4.7 | 94.5 | 13.0 | 123.8 | (0.3 | ) | 235.7 | |||||||||||||||||
Minority interest | — | 31.4 | — | 100.3 | (31.4 | ) | 100.3 | |||||||||||||||||
Stockholders’ equity | 1,582.4 | 887.6 | 2.5 | 1,846.9 | (2,737.0 | ) | 1,582.4 | |||||||||||||||||
Total liabilities and equity | $ | 1,962.7 | $ | 1,878.4 | $ | 232.7 | $ | 3,344.9 | $ | (2,781.4 | ) | $ | 4,637.3 | |||||||||||
December 31, 2005 | ||||||||||||||||||||||||
Guarantor | Non-Guarantor | Consolidating | Consolidated | |||||||||||||||||||||
Parent | KCSR | Subsidiaries | Subsidiaries | Adjustments | KCS | |||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Current assets | $ | 2.4 | $ | 476.1 | $ | 20.3 | $ | 233.3 | $ | (265.3 | ) | $ | 466.8 | |||||||||||
Investments held for operating purposes and affiliate investment | 1,715.4 | 435.8 | — | 464.2 | (2,555.1 | ) | 60.3 | |||||||||||||||||
Property and equipment, net | 0.1 | 1,334.0 | 239.3 | 724.9 | — | 2,298.3 | ||||||||||||||||||
Concession assets, net | — | — | — | 1,360.4 | — | 1,360.4 | ||||||||||||||||||
Other assets | 10.9 | 19.6 | 5.3 | 218.0 | (16.0 | ) | 237.8 | |||||||||||||||||
Total assets | $ | 1,728.8 | $ | 2,265.5 | $ | 264.9 | $ | 3,000.8 | $ | (2,836.4 | ) | $ | 4,423.6 | |||||||||||
Liabilities and equity: | ||||||||||||||||||||||||
Current liabilities | $ | 202.2 | $ | 141.0 | $ | 240.2 | $ | 257.8 | $ | (267.5 | ) | $ | 573.7 | |||||||||||
Long-term debt | 0.2 | 738.1 | 0.6 | 925.0 | — | 1,663.9 | ||||||||||||||||||
Payables to affiliates | 98.1 | — | 0.7 | 26.6 | (45.0 | ) | 80.4 | |||||||||||||||||
Deferred income taxes | (3.5 | ) | 424.6 | (0.5 | ) | 4.5 | (15.9 | ) | 409.2 | |||||||||||||||
Other liabilities | 5.6 | 110.5 | 14.6 | 139.5 | — | 270.2 | ||||||||||||||||||
Stockholders’ equity | 1,426.2 | 851.3 | 9.3 | 1,647.4 | (2,508.0 | ) | 1,426.2 | |||||||||||||||||
Total liabilities and equity | $ | 1,728.8 | $ | 2,265.5 | $ | 264.9 | $ | 3,000.8 | $ | (2,836.4 | ) | $ | 4,423.6 | |||||||||||
105
As of December 31, 2003 | |||||||||||||||||||
Parent | KCSR | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Consolidating Adjustments | Consolidated KCS | ||||||||||||||
(dollars in millions) | |||||||||||||||||||
ASSETS | |||||||||||||||||||
Current assets | $ | 221.9 | $ | 285.3 | $ | 11.7 | $ | 15.1 | $ | (225.9 | ) | $ | 308.1 | ||||||
Investments held for operating purposes and investments in subsidiaries | 801.4 | 431.1 | — | 452.4 | (1,242.2 | ) | 442.7 | ||||||||||||
Properties, net | 0.2 | 1,358.5 | 3.8 | — | — | 1,362.5 | |||||||||||||
Goodwill and other assets | 11.0 | 28.6 | 1.7 | 11.3 | (13.0 | ) | 39.6 | ||||||||||||
Total assets | $ | 1,034.5 | $ | 2,103.5 | $ | 17.2 | $ | 478.8 | $ | (1,481.1 | ) | $ | 2,152.9 | ||||||
LIABILITIES AND EQUITY | |||||||||||||||||||
Current liabilities | $ | 14.8 | $ | 346.7 | $ | 3.8 | $ | 35.4 | $ | (225.9 | ) | $ | 174.8 | ||||||
Long-term debt | 1.3 | 511.5 | 0.7 | — | — | 513.5 | |||||||||||||
Payable to affiliates | 19.5 | — | 0.7 | — | (20.2 | ) | — | ||||||||||||
Deferred income taxes | 3.3 | 398.5 | 0.2 | 2.5 | (13.0 | ) | 391.5 | ||||||||||||
Other liabilities | 31.9 | 54.4 | 4.3 | 18.8 | — | 109.4 | |||||||||||||
Stockholders’ equity | 963.7 | 792.4 | 7.5 | 422.1 | (1,222.0 | ) | 963.7 | ||||||||||||
Total liabilities and equity | $ | 1,034.5 | $ | 2,103.5 | $ | 17.2 | $ | 478.8 | $ | (1,481.1 | ) | $ | 2,152.9 | ||||||
Non- Guarantor ASSETS Current assets Investments held for operating purposes and investments in subsidiaries Properties, net Goodwill and other assets Total assets LIABILITIES AND EQUITY Current liabilities Long-term debt Payable to affiliates Deferred income taxes Other liabilities Stockholders’ equity Total liabilities and equity As of December 31, 2002 Parent KCSR Guarantor
Subsidiaries
Subsidiaries Consolidating
Adjustments Consolidated
KCS (dollars in millions) $ 43.3 $ 234.7 $ 17.6 $ 13.0 $ (92.4 ) $ 216.2 769.1 412.1 — 432.5 (1,190.6 ) 423.1 0.2 1,333.2 3.9 0.1 — 1,337.4 1.6 30.5 1.7 8.1 (9.8 ) 32.1 $ 814.2 $ 2,010.5 $ 23.2 $ 453.7 $ (1,292.8 ) $ 2,008.8 $ 7.2 $ 245.3 $ 9.1 $ 16.2 $ (91.5 ) $ 186.3 1.2 569.6 1.8 — — 572.6 12.8 — 0.6 — (13.4 ) — 8.6 391.1 0.3 2.6 (9.8 ) 392.8 31.5 44.7 4.0 25.1 (1.1 ) 104.2 752.9 759.8 7.4 409.8 (1,177.0 ) 752.9 $ 814.2 $ 2,010.5 $ 23.2 $ 453.7 $ (1,292.8 ) $ 2,008.8
2006 | ||||||||||||||||||||||||
Guarantor | Non-Guarantor | Consolidating | Consolidated | |||||||||||||||||||||
Parent | KCSR | Subsidiaries | Subsidiaries | Adjustments | KCS | |||||||||||||||||||
Operating activities: | ||||||||||||||||||||||||
Excluding intercompany activity | $ | (148.7 | ) | $ | 225.4 | $ | 81.5 | $ | 128.0 | $ | (18.7 | ) | $ | 267.5 | ||||||||||
Intercompany activity | 187.7 | (145.3 | ) | (80.5 | ) | 19.4 | 18.7 | — | ||||||||||||||||
Net cash provided | 39.0 | 80.1 | 1.0 | 147.4 | — | 267.5 | ||||||||||||||||||
Investing activities: | ||||||||||||||||||||||||
Capital expenditures | — | (93.1 | ) | — | (148.7 | ) | — | (241.8 | ) | |||||||||||||||
Proceeds from disposal of property | — | 26.9 | — | 3.1 | — | 30.0 | ||||||||||||||||||
Contribution from NS for MSLLC (net of change in restricted contribution) | — | — | — | 79.5 | — | 79.5 | ||||||||||||||||||
Property investments in MSLLC | — | — | — | (37.8 | ) | — | (37.8 | ) | ||||||||||||||||
Other restricted cash | — | — | — | (3.0 | ) | — | (3.0 | ) | ||||||||||||||||
Proceeds from sales of investments, net | — | 8.2 | — | — | — | 8.2 | ||||||||||||||||||
Investments in and loans to affiliates | — | — | — | (1.1 | ) | — | (1.1 | ) | ||||||||||||||||
Net cash used | — | (58.0 | ) | — | (108.0 | ) | — | (166.0 | ) | |||||||||||||||
Financing activities: | ||||||||||||||||||||||||
Proceeds from issuance of long- term debt | — | 410.2 | — | 206.1 | — | 616.3 | ||||||||||||||||||
Repayment of long-term debt | (44.0 | ) | (409.3 | ) | (0.1 | ) | (205.1 | ) | — | (658.5 | ) | |||||||||||||
Debt issuance costs | — | (7.5 | ) | — | (8.4 | ) | — | (15.9 | ) | |||||||||||||||
Proceeds from stock plans | 8.6 | — | — | — | — | 8.6 | ||||||||||||||||||
Dividends paid | (4.3 | ) | — | — | — | — | (4.3 | ) | ||||||||||||||||
Excess tax benefit realized from options exercised | .2 | — | — | — | — | .2 | ||||||||||||||||||
Net cash used | (39.5 | ) | (6.6 | ) | (0.1 | ) | (7.4 | ) | — | (53.6 | ) | |||||||||||||
Cash and cash equivalents: | ||||||||||||||||||||||||
Net increase (decrease) | (0.5 | ) | 15.5 | 0.9 | 32.0 | — | 47.9 | |||||||||||||||||
At beginning of year | 0.7 | 20.7 | (0.9 | ) | 10.6 | — | 31.1 | |||||||||||||||||
At end of year | $ | 0.2 | $ | 36.2 | $ | — | $ | 42.6 | $ | — | $ | 79.0 | ||||||||||||
106
December 31, 2003 | ||||||||||||||||||||||||
Parent | KCSR | Guarantor Subsidiaries | Non- Guarantor | Consolidating Adjustments | Consolidated KCS | |||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Net cash flows provided by (used for) operating activities: | $ | (130.9 | ) | $ | 210.3 | $ | (10.3 | ) | $ | 3.2 | $ | (5.0 | ) | $ | 67.3 | |||||||||
Investing activities: | ||||||||||||||||||||||||
Property acquisitions | — | (78.6 | ) | (0.4 | ) | — | — | (79.0 | ) | |||||||||||||||
Proceeds from disposal of property | — | 12.4 | — | — | — | 12.4 | ||||||||||||||||||
Investments in and loans to affiliates | (41.8 | ) | (6.1 | ) | — | (28.6 | ) | 36.1 | (40.4 | ) | ||||||||||||||
Proceeds from sale of investments | 32.7 | — | — | — | — | 32.7 | ||||||||||||||||||
Repayment of loans to affiliates | — | — | — | 20.7 | (20.7 | ) | — | |||||||||||||||||
Other, net | (9.3 | ) | (1.8 | ) | (0.1 | ) | (3.2 | ) | 5.1 | (9.3 | ) | |||||||||||||
Net | (18.4 | ) | (74.1 | ) | (0.5 | ) | (11.1 | ) | 20.5 | (83.6 | ) | |||||||||||||
Financing activities: | ||||||||||||||||||||||||
Proceeds from issuance of long-term debt | — | — | — | — | — | — | ||||||||||||||||||
Repayment of long-term debt | — | (58.2 | ) | (1.0 | ) | — | — | (59.2 | ) | |||||||||||||||
Proceeds of loans from affiliates | 27.4 | — | — | — | (27.4 | ) | — | |||||||||||||||||
Repayment of loans from affiliates | (20.7 | ) | — | — | — | 20.7 | — | |||||||||||||||||
Issuance of preferred stock, net | 193.0 | — | — | — | — | 193.0 | ||||||||||||||||||
Proceeds from stock plans | 5.1 | 0.2 | — | — | — | 5.3 | ||||||||||||||||||
Cash dividends paid | (4.7 | ) | — | — | — | — | (4.7 | ) | ||||||||||||||||
Other, net | — | (1.7 | ) | — | 8.8 | (8.8 | ) | (1.7 | ) | |||||||||||||||
Net | 200.1 | (59.7 | ) | (1.0 | ) | 8.8 | (15.5 | ) | 132.7 | |||||||||||||||
Cash and cash equivalents: | ||||||||||||||||||||||||
Net increase (decrease) | 50.8 | 76.5 | (11.8 | ) | 0.9 | — | 116.4 | |||||||||||||||||
At beginning of period | (10.8 | ) | 17.5 | 11.8 | 0.5 | — | 19.0 | |||||||||||||||||
At end of period | $ | 40.0 | $ | 94.0 | $ | — | $ | 1.4 | $ | — | $ | 135.4 | ||||||||||||
Non- Guarantor Net cash flows provided by (used for) operating activities Investing activities: Property acquisitions Proceeds from disposal of property Investments in and loans to affiliates Proceeds from sale of investments Other, net Net Financing activities: Proceeds from issuance of long-term debt Repayment of long-term debt Proceeds of loans from affiliates Debt issuance costs Proceeds from stock plans Cash dividends paid Other, net Net Cash and cash equivalents: Net increase (decrease) At beginning of period At end of period December 31, 2002 Parent KCSR Guarantor
Subsidiaries
Subsidiaries Consolidating
Adjustments Consolidated
KCS (dollars in millions) $ (27.9 ) $ 99.6 $ 13.3 $ 18.7 $ (8.0 ) $ 95.7 — (79.1 ) (0.7 ) — — (79.8 ) — 18.1 — — — 18.1 (3.0 ) — — (13.0 ) 11.6 (4.4 ) 1.4 31.3 — — (1.0 ) 31.7 — (1.0 ) — (8.1 ) 8.6 (0.5 ) (1.6 ) (30.7 ) (0.7 ) (21.1 ) 19.2 (34.9 ) — 200.0 — — — 200.0 (0.4 ) (269.3 ) (1.0 ) (0.2 ) — (270.9 ) 8.0 — 0.2 — (8.2 ) — — (5.7 ) — — — (5.7 ) 10.0 0.3 — — — 10.3 (0.2 ) — — — — (0.2 ) — — — 3.0 (3.0 ) — 17.4 (74.7 ) (0.8 ) 2.8 (11.2 ) (66.5 ) (12.1 ) (5.8 ) 11.8 0.4 — (5.7 ) 1.3 23.2 — 0.2 — 24.7 $ (10.8 ) $ 17.4 $ 11.8 $ 0.6 $ — $ 19.0
Non- Guarantor Net cash flows provided by (used for) operating activities Investing activities: Property acquisitions Proceeds from disposal of property Investments in and loans to affiliates Proceeds from sale of investments Other, net Net Financing activities: Proceeds from issuance of long- Repayment of long-term debt Proceeds of loans from affiliates Debt issuance costs Proceeds from stock plans Cash dividends paid Other, net Net Cash and cash equivalents: Net increase (decrease) At beginning of period At end of period December 31, 2001 Parent KCSR Guarantor
Subsidiaries
Subsidiaries Consolidating
Adjustments Consolidated
KCS (dollars in millions) $ (10.0 ) $ 74.2 $ (3.9 ) $ 7.1 $ 1.3 $ 68.7 — (65.7 ) (0.2 ) (0.1 ) — (66.0 ) — 14.8 3.3 — — 18.1 — (2.6 ) — (9.0 ) 3.4 (8.2 ) — — 0.6 — — 0.6 — — 0.5 — (0.7 ) (0.2 ) — (53.5 ) 4.2 (9.1 ) 2.7 (55.7 )
term debt — 35.0 — — — 35.0 — (50.0 ) (1.0 ) (0.3 ) — (51.3 ) 1.4 — 0.6 — (2.0 ) — — (0.4 ) — — — (0.4 ) 8.9 — — — — 8.9 (0.2 ) — — — — (0.2 ) (0.3 ) (1.5 ) — 2.0 (2.0 ) (1.8 ) 9.8 (16.9 ) (0.4 ) 1.7 (4.0 ) (9.8 ) (0.2 ) 3.8 (0.1 ) (0.3 ) — 3.2 1.5 19.4 0.1 0.5 — 21.5 $ 1.3 $ 23.2 $ — $ 0.2 $ — $ 24.7
2005 Guarantor Non-Guarantor Consolidating Consolidated Parent KCSR Subsidiaries Subsidiaries Adjustments KCS Excluding intercompany activity $ (1.1 ) $ 107.4 $ 11.3 $ 61.2 $ — $ 178.8 Intercompany activity 17.3 (14.9 ) (8.9 ) 6.5 — — Net cash provided 16.2 92.5 2.4 67.7 — 178.8 Capital expenditures — (170.9 ) (3.5 ) (101.3 ) — (275.7 ) Proceeds from disposal of property — 5.7 — 0.6 — 6.3 Proceeds from investment sales — (8.0 ) — — — (8.0 ) Investments in and loans to affiliates (9.9 ) (16.3 ) — 8.0 7.7 (10.5 ) Acquisition costs (10.1 ) — — — — (10.1 ) Cash of Mexrail at acquisition — — — 3.0 — 3.0 Cash of KCSM at acquisition — — — 5.5 — 5.5 Repayment of loans to affiliates — 10.1 — 4.2 (14.3 ) — Net cash used (20.0 ) (179.4 ) (3.5 ) (80.0 ) (6.6 ) (289.5 ) Proceeds from issuance of long- term debt — 20.3 — 624.4 — 644.7 Repayment of long-term debt (1.0 ) 62.7 — (583.2 ) — (521.5 ) Capital contribution — — — 5.5 (5.5 ) — Proceeds of loans from affiliates 5.2 — — — (5.2 ) — Repayment of loans from affiliates (6.7 ) — — (10.6 ) 17.3 — Debt issuance costs — (2.9 ) — (13.6 ) — (16.5 ) Proceeds from stock plans 1.7 — — — — 1.7 Repurchase of common stock (200.4 ) — — — — (200.4 ) Issuance of preferred stock, net proceeds 203.9 — — — — 203.9 Dividends paid (8.7 ) — — — — (8.7 ) Net cash provided (used) (6.0 ) 80.1 — 22.5 6.6 103.2 Net increase (decrease) (9.8 ) (6.8 ) (1.1 ) 10.2 — (7.5 ) At beginning of year 10.5 27.5 0.2 0.4 — 38.6 At end of year $ 0.7 $ 20.7 $ (0.9 ) $ 10.6 $ — $ 31.1
107
2004 Guarantor Non-Guarantor Consolidating Consolidated Parent KCSR Subsidiaries Subsidiaries Adjustments KCS Excluding intercompany activity $ (11.5 ) $ 156.2 $ 1.9 $ (3.9 ) $ — $ 142.7 Intercompany activity 236.6 (239.7 ) (0.2 ) 3.3 — — Net cash provided (used) 225.1 (83.5 ) 1.7 (0.6 ) — 142.7 Capital expenditures — (116.7 ) (0.5 ) — — (117.2 ) Proceeds from disposal of property — 4.9 — — — 4.9 Other restricted cash (200.0 ) — — — — (200.0 ) Investments in and loans to affiliates (41.7 ) (10.5 ) — (9.3 ) 6.5 (55.0 ) Proceeds from investment sales 0.4 — — 0.1 — 0.5 Repayment of loans to affiliates — — — 8.8 (8.8 ) — Other, net (9.6 ) (0.4 ) — — — (10.0 ) Net cash used (250.9 ) (122.7 ) (0.5 ) (0.4 ) (2.3 ) (376.8 ) Proceeds from issuance of long- term debt — 250.0 — — — 250.0 Repayment of long-term debt — (106.6 ) (1.0 ) — — (107.6 ) Proceeds of loans from affiliates 6.5 — — — (6.5 ) — Repayment of loans from affiliates (8.8 ) — — — 8.8 — Debt issuance costs — (3.8 ) — — — (3.8 ) Proceeds from stock plans 7.4 — — — — 7.4 Dividends paid (8.7 ) — — — — (8.7 ) Net cash provided (used) (3.6 ) 139.6 (1.0 ) — 2.3 137.3 Net increase (decrease) (29.4 ) (66.6 ) 0.2 (1.0 ) — (96.8 ) At beginning of year 39.9 94.0 0.1 1.4 — 135.4 At end of year $ 10.5 $ 27.4 $ 0.3 $ 0.4 $ — $ 38.6
Segment Reporting |
There were no disagreements with accountants on accounting108
2006 | ||||||||||||||||
U.S. | �� | Mexico | Elimination | Consolidated | ||||||||||||
Revenue | $ | 885.7 | $ | 774.0 | $ | — | $ | 1,659.7 | ||||||||
Operating expenses: | ||||||||||||||||
Compensation and benefits | 264.3 | 123.4 | — | 387.7 | ||||||||||||
Purchased services | 82.8 | 131.0 | 1.4 | 215.2 | ||||||||||||
Fuel | 140.8 | 112.8 | — | 253.6 | ||||||||||||
Equipment costs | 82.7 | 97.0 | — | 179.7 | ||||||||||||
Depreciation and amortization | 65.7 | 89.3 | — | 155.0 | ||||||||||||
Casualties and insurance | 44.9 | 8.5 | — | 53.4 | ||||||||||||
KCSM employees’ statutory profit sharing | — | 5.9 | — | 5.9 | ||||||||||||
Other | 78.9 | 27.4 | (1.4 | ) | 104.9 | |||||||||||
Total operating expenses | 760.1 | 595.3 | — | 1,355.4 | ||||||||||||
Operating income | $ | 125.6 | $ | 178.7 | $ | — | $ | 304.3 | ||||||||
Income before income taxes and minority interest | $ | 133.5 | $ | 87.2 | $ | (66.1 | ) | $ | 154.6 | |||||||
Total assets | $ | 3,464.7 | $ | 2,465.4 | $ | (1,292.8 | ) | $ | 4,637.3 | |||||||
Total liabilities | 1,750.6 | 1,204.0 | — | 2,954.6 | ||||||||||||
Capital expenditures | 125.7 | 116.1 | — | 241.8 |
2005 | ||||||||||||||||
U.S. | Mexico | Elimination | Consolidated | |||||||||||||
Revenue | $ | 804.4 | $ | 547.6 | $ | — | $ | 1,352.0 | ||||||||
Operating expenses: | ||||||||||||||||
Compensation and benefits | 244.8 | 95.6 | — | 340.4 | ||||||||||||
Purchased services | 84.6 | 108.7 | 1.8 | 195.1 | ||||||||||||
Fuel | 123.8 | 83.1 | — | 206.9 | ||||||||||||
Equipment costs | 68.9 | 80.9 | — | 149.8 | ||||||||||||
Depreciation and amortization | 60.0 | 67.7 | — | 127.7 | ||||||||||||
Casualties and insurance | 88.7 | 14.7 | — | 103.4 | ||||||||||||
KCSM employees’ statutory profit sharing | — | 41.1 | — | 41.1 | ||||||||||||
Other | 88.5 | 38.6 | (1.8 | ) | 125.3 | |||||||||||
Total operating expenses | 759.3 | 530.4 | — | 1,289.7 | ||||||||||||
Operating income | $ | 45.1 | $ | 17.2 | $ | — | $ | 62.3 | ||||||||
Income before income taxes and minority interest | $ | 90.0 | $ | 85.4 | $ | (99.4 | ) | $ | 76.0 | |||||||
Total assets | $ | 3,271.2 | $ | 2,418.3 | $ | (1,265.9 | ) | $ | 4,423.6 | |||||||
Total liabilities | 1,849.4 | 1,215.5 | (67.5 | ) | 2,997.4 | |||||||||||
Capital expenditures | 203.7 | 72.0 | — | 275.7 |
109
Subsequent Events |
110
disclosures.
15d-15(f) under the Exchange Act) is included as “Management’s Report on Internal Control over Financial Reporting” in Item 8.
Item 10. | Directors, |
111
The information set forth in response to Item 401 of Regulation S-K under
(c)
(d)
Item 11. | Executive Compensation |
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The section of |
The information set forth in response to Item 403 of Regulation S-K under the heading “Principal Stockholders and Stock Owned Beneficially by Directors and Certain Executive Officers” in the Company’s Proxy Statementdefinitive proxy statement for the 2007 annual meeting of stockholders entitled “Beneficial Ownership” is incorporated herein by reference in partial response to this Item 12.
112
(a) | (b) | (c) | |||||
Plan category | Number of securities to be outstanding options, | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)(1) | ||||
Equity compensation plans approved by security holders | 4,612,863 | $ | 7.36 | 6,092,779 | |||
Equity compensation plans not approved by security holders | 0 | 0 | 0 | ||||
Total | 4,612,863 | $ | 7.36 | 6,092,779 | |||
Number of Securities | ||||||||||||
Remaining Available | ||||||||||||
Number of Securities | for Future Issuance | |||||||||||
to be Issued | Weighted-Average | Under Equity Compensation | ||||||||||
Upon Exercise of | Exercise Price of | Plans — Excluding | ||||||||||
Outstanding Options, | Outstanding Options, | Securities Reflected in | ||||||||||
Plan Category | Warrants and Rights | Warrants and Rights | the First Column(i) | |||||||||
Equity compensation plans: | ||||||||||||
Approved by security holders | 2,940,332 | $ | 8.98 | 6,895,114 | ||||||||
Not approved by security holders | — | — | — | |||||||||
Total | 2,940,332 | $ | 8.98 | 6,895,114 | ||||||||
(i) | Includes |
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Item 14. | Principal Accountant Fees and Services |
Information concerning principal accounting fees and services under
Item 15. | Exhibits and Financial Statement Schedules |
(a) | List of Documents filed as part of this Report |
113
Exhibit | Description | |||
(2) | Plan of acquisition, reorganization, arrangement, liquidation or succession | |||
2 | .1 | Amended and Restated Acquisition Agreement, dated as of December 15, 2004, by and among KCS, KARA Sub, Inc., KCS Investment I, Ltd., KCS Acquisition Subsidiary, Inc., Caymex Transportation, Inc., Grupo TMM, S.A., TMM Holdings, S.A. de C.V., TMM Multimodal, S.A. de C.V. and Grupo Transportación Ferroviaria Mexicana, S.A. de C.V. (currently known as Grupo KCSM, S.A. de C.V. (“Grupo KCSM”)) (the “Amended Acquisition Agreement”), filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K filed on December 21, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 2.1. | ||
2 | .2 | Stockholders’ Agreement by and among KCS, Grupo TMM, S.A., TMM Holdings, S.A. de C.V., TMM Multimodal, S.A. de C.V. and certain stockholders of Grupo TMM, S.A (the “Stockholders’ Agreement”), filed as Exhibit 10.3 to the Company’s Current Report onForm 8-K filed on December 21, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 2.2. | ||
2 | .3 | Registration Rights Agreement by and among KCS, Grupo TMM, S.A., TMM Multimodal, S.A. de C.V. and certain stockholders of Grupo TMM, S.A. (the “Acquisition Registration Rights Agreement”), filed as Exhibit 10.4 to the Company’s Current Report onForm 8-K filed on December 21, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 2.3. | ||
2 | .4 | Consulting Agreement by and between KCS and José F. Serrano International Business, S.A. de C.V. (the “Consulting Agreement”), filed as Exhibit 10.5 to the Company’s Current Report onForm 8-K filed on December 21, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 2.4. | ||
2 | .5 | Marketing and Services Agreement by and among KCSR, TMM Logistics, S.A. de C.V. and TFM, S.A. de C.V. (currently known as Kansas City Southern de México, S. de R.L. de C.V. (“KCSM”)) (the “Marketing and Services Agreement”), filed as Exhibit 10.6 to the Company’s Current Report onForm 8-K filed on December 21, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 2.5. | ||
2 | .6 | Rights Agreement, dated as of September 29, 2005, by and between KCS and UMB Bank, n.a. (the “2005 Rights Agreement”), filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K filed on October 3, 2005 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 2.6. | ||
2 | .7 | Registration Rights Agreement, dated November 21, 2006, among Kansas City Southern de México, S.A. de C.V. (currently known as Kansas City Southern de México, S. de R.L. de C.V. (“KCSM”)), Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, BBVA Securities Inc., BMO Capital Markets Corp., and Scotia Capital (USA) Inc. (the “2006 Registration Rights Agreement”), filed as Exhibit 4.3 to the Company’s Current Report onForm 8-K filed on November 28, 2006 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 2.7. | ||
(3) | Articles of Incorporation and Bylaws | |||
Articles of Incorporation | ||||
3 | .1 | Exhibit 3.1 to the Company’s Registration Statement onForm S-4 originally filed July 12, 2002 (RegistrationNo. 333-92360), as amended and declared effective on July 30, 2002 (the “2002S-4 Registration Statement”), Restated Certificate of Incorporation, is incorporated herein by reference as Exhibit 3.1. | ||
Bylaws | ||||
3 | .2 | The Amended and Restated By-Laws of Kansas City Southern, as amended on January 18, 2007, are attached to thisForm 10-K as Exhibit 3.2. | ||
(4) | Instruments Defining the Right of Security Holders, Including Indentures | |||
4 | .1 | The Fourth, Seventh, Eighth, Eleventh, Twelfth, Thirteenth, Fourteenth, Fifteenth and Sixteenth paragraphs of the Company’s Restated Certificate of Incorporation. (See Exhibit 3.1). |
114
Exhibit | Description | |||
4 | .2 | Article I, Sections 1, 3 and 11 of Article II, Article V and Article VIII of the Company’s Bylaws. (See Exhibit 3.2). | ||
4 | .3 | Indenture, dated July 1, 1992, between Kansas City Southern and The Chase Manhattan Bank (the “1992 Indenture”) filed as Exhibit 4 to the Company’s Shelf Registration of $300 million of Debt Securities onForm S-3 filed June 19, 1992 (RegistrationNo. 33-47198) and as Exhibit 4(a) to the Company’sForm S-3 filed March 29, 2003 (RegistrationNo. 33-60192) registering $200 million of Debt Securities, is incorporated herein by reference as Exhibit 4.3. | ||
4 | .3.1 | Supplemental Indenture, dated December 17, 1999, with respect to the 7% Debentures Due December 15, 2025 issued pursuant to the 1992 Indenture, filed as Exhibit 4.5.4 to the Company’sForm 10-K for the fiscal year ended December 31, 1999 (File No 1-4717), is incorporated herein by reference as Exhibit 4.3.1. | ||
4 | .4 | Indenture, dated as of September 27, 2000, among the Company, The Kansas City Southern Railway Company (“KCSR”), certain other subsidiaries of the Company and The Bank of New York, as Trustee (the “2000 Indenture”), filed as Exhibit 4.1 to the Company’s Registration Statement onForm S-4 originally filed on January 25, 2001 (RegistrationNo. 333-54262), as amended and declared effective on March 15, 2001 (the “2001S-4 Registration Statement”), is incorporated herein by reference as Exhibit 4.4. | ||
4 | .4.1 | Supplemental Indenture, dated as of January 29, 2001, to the 2000 Indenture, among the Company, KCSR, certain other subsidiaries of the Company and The Bank of New York, as trustee, filed as Exhibit 4.1.1 to the Company’s 2001S-4 Registration Statement (RegistrationNo. 333-54262), is incorporated herein by reference as Exhibit 4.4.1. | ||
4 | .4.2 | Second Supplemental Indenture, dated as of June 10, 2005, to the 2000 Indenture, among the Company, KCSR, and certain other subsidiaries of the Company and The Bank of New York, as Trustee, filed as Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q for the period ended June 30, 2005 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 4.4.2. | ||
4 | .4.3 | Third Supplemental Indenture, dated as of February 5, 2007, to the 2000 Indenture, among the Company, KCSR, certain other subsidiaries of the Company and the Bank of New York Trust Company, N.A., as Trustee, is attached to thisForm 10-K as Exhibit 4.4.3 | ||
4 | .4.4 | Form of Exchange Note (included as Exhibit B to Exhibit 4.4 of thisForm 10-K). | ||
4 | .5 | Exchange and Registration Rights Agreement, dated as of September 27, 2000, among the Company, KCSR, and certain other subsidiaries of the Company, filed as Exhibit 4.3 to the Company’s 2001S-4 Registration Statement (RegistrationNo. 333-54262), is incorporated herein by reference as Exhibit 4.5. | ||
4 | .6 | The Indenture, dated June 12, 2002, among KCSR, the Company and certain subsidiaries of the Company, and U.S. Bank National Association, as Trustee (the “June 12, 2002 Indenture”), filed as Exhibit 4.1 to the 2002S-4 Registration Statement (RegistrationNo. 333-92360), is incorporated herein by reference as Exhibit 4.6. | ||
4 | .6.1 | Form of Face of Exchange Note, included as Exhibit B to Exhibit 4.7 and filed as Exhibit 4.2 to the 2002S-4 Registration Statement (RegistrationNo. 333-92360), is incorporated herein by reference as Exhibit 4.6.1. | ||
4 | .6.2 | Supplemental Indenture, dated June 10, 2005, to the June 12, 2002 Indenture among the Company, KCSR, and certain other subsidiaries of the Company, and U.S. Bank National Association, as Trustee, filed as Exhibit 10.2 to the Company’s Quarterly Report onForm 10-Q for the period ended June 30, 2005, is incorporated herein by reference as Exhibit 4.6.2. | ||
4 | .6.3 | Second Supplemental Indenture, dated as of February 5, 2007, to the June 12, 2002 Indenture among the Company, KCSR, and certain other subsidiaries of the Company, and U.S. Bank National Association, as Trustee, is attached to thisForm 10-K as Exhibit 4.6.3. | ||
4 | .7 | Certificate of Designations of 4.25% Redeemable Cumulative Convertible Perpetual Preferred Stock, Series C, filed as Exhibit 3.1(b) to the Company’s Quarterly Report onForm 10-Q for the period ended March 31, 2003 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 4.7. |
115
Exhibit | Description | |||
4 | .8 | Registration Rights Agreement dated May 5, 2003 among KCS, Morgan Stanley & Co. Incorporated and Deutsche Bank Securities Inc., filed as Exhibit 4.5 to the Company’s Registration Statement onForm S-3 originally filed on August 1, 2003 (RegistrationNo. 333-107573), as amended and declared effective on October 24, 2003 (the “2003S-3 Registration Statement”), is incorporated herein by reference as Exhibit 4.8. | ||
4 | .9 | Certificate of Designations of 5.125% Cumulative Convertible Perpetual Preferred Stock, Series D, filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K, filed on December 15, 2005 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 4.9. | ||
4 | .10 | Indenture, dated as of June 16, 1997, among KCSM, Grupo TFM, S.A. de C.V.(currently known as Grupo KCSM, S.A. de C.V. (“Grupo KCSM”)), as guarantor, The Bank of New York, as trustee, and Bankers Trust Luxembourg, S.A., as a Paying Agent, covering up to $150,000,000 of TFM’s 10.25% Senior Notes due 2007 (the “1997 Indenture”), filed as Exhibit 4.10 to the Company’s Registration Statement onForm S-1 originally filed on November 20, 2006 (RegistrationNo. 333-138831), as amended and declared effective on December 4, 2006 (the “2006S-1 Registration Statement”), is incorporated herein by reference as Exhibit 4.10. | ||
4 | .10.1 | First Supplemental Indenture, dated as of May 21, 2002, among KCSM, Grupo KCSM, as guarantor, The Bank of New York, as trustee, and Deutsche Bank Luxembourg S.A., as the paying agent, to the 1997 Indenture, filed as Exhibit 4.11 to 2006S-1 Registration Statement (RegistrationNo. 333-138831), is incorporated herein by reference as Exhibit 4.10.1. | ||
4 | .10.2 | Second Supplemental Indenture, dated November 21, 2006, among Kansas City Southern de México, S.A. de C.V., as issuer, The Bank of New York, as trustee, Deutsche Bank Luxembourg S.A., as paying agent and Grupo KCSM, S.A. de C.V., as guarantor, to the 1997 Indenture, filed as Exhibit 4.1 to the Company’s Current Report onForm 8-K filed on November 28, 2006 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 4.10.2. | ||
4 | .11 | Indenture, dated as of June 13, 2002, between TFM and The Bank of New York, as Trustee, covering up to $180,000,000 of TFM’s 12.50% Senior Notes due 2012 (the “June 13, 2002 Indenture”), filed as Exhibit 4.12 to the 2006S-1 Registration Statement (RegistrationNo. 333-138831), is incorporated herein by reference as Exhibit 4.11. | ||
4 | .12 | Indenture, dated as of April 19, 2005, between TFM and The Bank of Nova Scotia Trust Company of New York, covering up to $460,000,000 of TFM’s 93/8% Senior Notes due 2012 (the “2005 Indenture”), filed as Exhibit 4.13 to the 2006S-1 Registration Statement (RegistrationNo. 333-138831), is incorporated herein by reference as Exhibit 4.12. | ||
4 | .13 | Indenture, dated November 21, 2006, between Kansas City Southern de Mexico, S.A. de C.V. and U.S. Bank National Association, as trustee and paying agent (the “2006 Indenture”), filed as Exhibit 4.2 to the Company’s Current Report onForm 8-K filed on November 28, 2006 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 4.13. | ||
(10) | Material Contracts | |||
10 | .1 | Form of Officer Indemnification Agreement attached as Exhibit 10.1 to the Company’sForm 10-K for the fiscal year ended December 31, 2001 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.1. | ||
10 | .2 | Form of Director Indemnification Agreement attached as Exhibit 10.2 to the Company’sForm 10-K for the fiscal year ended December 31, 2001 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.2. | ||
10 | .3 | Description of the Company’s 1991 incentive compensation plan, filed as Exhibit 10.4 to the Company’sForm 10-K for the fiscal year ended December 31, 1990 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.3. | ||
10 | .4 | Directors Deferred Fee Plan, adopted August 20, 1982, as amended and restated effective January 1, 2005, filed as Exhibit 10.7 to the Company’sForm 10-K for the fiscal year ended December 31, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.4. |
116
(Inapplicable)
Exhibit | Description | |||
10 | .5 | Kansas City Southern 1991 Amended and Restated Stock Option and Performance Award Plan, as amended and restated effective as of May 5, 2005 (the “Amended 1991 Plan”), filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K, filed on May 11, 2005 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.5. | ||
10 | .5.1 | Form of Non-Qualified Stock Option Award Agreement for employees under the Amended 1991 Plan, filed as Exhibit 10.8.2 to the Company’sForm 10-K for the fiscal year ended December 31, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.5.1. | ||
10 | .5.2 | Form of Non-Qualified Stock Option Award Agreement for Directors under the Amended 1991 Plan, filed as Exhibit 10.8.3 to the Company’sForm 10-K for the fiscal year ended December 31, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.5.2. | ||
10 | .5.3 | Form of Non-Qualified Stock Option Award agreement for employees under the Amended 1991 Plan (referencing threshold dates), filed as Exhibit 10.8.4 to the Company’sForm 10-K for the fiscal year ended December 31, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.5.3. | ||
10 | .5.4 | Form of Restricted Shares Award and Performance Shares Award Agreement under the Amended 1991 Plan, is attached to thisForm 10-K as Exhibit 10.5.4. | ||
10 | .5.5 | Form of Restricted Shares Award Agreement (graded vesting) under the Amended 1991 Plan, filed as Exhibit 10.2 to the Company’s Current Report onForm 8-K, filed on May 11, 2005 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.5.5. | ||
10 | .5.6 | Form of Restricted Shares Award Agreement (cliff vesting) under the Amended 1991 Plan, filed as Exhibit 10.1 to the Company’sForm 8-K filed on March 18, 2005 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.5.6. | ||
10 | .5.7 | Form of Restricted Shares Award Agreement under the Amended 1991 Plan (applicable to restricted shares to be purchased), filed as Exhibit 10.8.7 to the Company’sForm 10-K for the fiscal year ended December 31, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.5.7. | ||
10 | .6 | Kansas City Southern 401(k) and Profit Sharing Plan (as amended and restated, effective April 1, 2002) (the “Amended 401(k) and Profit Sharing Plan”), filed as Exhibit 10.10.1 to the Company’sForm 10-K for the fiscal year ended December 31, 2002 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.6. | ||
10 | .6.1 | First Amendment to the Amended 401(k) and Profit Sharing Plan, effective January 1, 2003, filed as Exhibit 10.10.2 to the Company’sForm 10-K for the fiscal year ended December 31, 2002 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.6.1. | ||
10 | .6.2 | Amendment to the Amended 401(k) and Profit Sharing Plan, dated June 30, 2003 and effective as of January 1, 2001, filed as Exhibit 10.10.3 to the Company’sForm 10-K for the fiscal year ended December 31, 2003 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.6.2. | ||
10 | .6.3 | Amendment to the Amended 401(k) and Profit Sharing Plan, dated December 3, 2003 and effective as of January 1, 2003, filed as Exhibit 10.10.4 to the Company’sForm 10-K for the fiscal year ended December 31, 2003 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.6.3. | ||
10 | .7 | Assignment, Consent and Acceptance Agreement, dated August 10, 1999, by and among the Company, DST Systems, Inc. and Stilwell Financial Inc., filed as Exhibit 10.10 to the Company’s 2001S-4 Registration Statement (RegistrationNo. 333-54262), is incorporated herein by reference as Exhibit 10.7. | ||
10 | .8 | Employment Agreement, as amended and restated January 1, 2001, by and among the Company, KCSR and Michael R. Haverty, filed as Exhibit 10.12 to the Company’sForm 10-K for the fiscal year ended December 31, 2001 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.8. | ||
10 | .9 | Employment Agreement, dated January 1, 2005, between KCSR and Arthur L. Shoener, filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K/A filed on February 14, 2005 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.9. | ||
10 | .10 | Employment Agreement, dated May 15, 2006, between KCSR and Patrick J. Ottensmeyer, attached as Exhibit 10.1 to the Company’s Current Report onForm 8-K, filed on June 12, 2006 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.10. |
117
(Inapplicable)
(Inapplicable)
Exhibit | Description | |||
10 | .11 | Employment Agreement, dated May 15, 2006, between KCSR, KCS and Daniel W. Avramovich, attached as Exhibit 10.2 to the Company’s Current Report onForm 8-K, filed on June 12, 2006 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.11. | ||
10 | .12 | Employment Agreement, dated June 7, 2006, between KCSR and Michael K. Borrows, attached as Exhibit 10.1 to the Company’s Current Report onForm 8-K, filed September 15, 2006 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.12. | ||
10 | .13 | Kansas City Southern Executive Plan, as amended and restated January 1, 2005, filed as Exhibit 10.17 to the Company’sForm 10-K for the fiscal year ended December 31, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.13. | ||
10 | .14 | The Kansas City Southern Annual Incentive Plan, as approved by the Company’s Compensation Committee on January 17, 2007, is attached to thisForm 10-K as Exhibit 10.14. | ||
10 | .15 | Security Agreement dated March 30, 2004 from KCS, KCSR and certain other subsidiaries of KCS to The Bank of Nova Scotia as Collateral Agent, filed as Exhibit 10.19.1 to the Company’sForm 10-K for the fiscal year ended December 31, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.15. | ||
10 | .15.1 | Amendment No. 1 to the Security Agreement among KCSR, KCS, the subsidiary guarantors, the lenders party thereto and The Bank of Nova Scotia, dated as of December 22, 2004, filed as Exhibit 10.1 to the Company’s Current Report onForm 8-K filed on December 29, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.15.1. | ||
10 | .15.2 | Amended and Restated Credit Agreement, dated April 28, 2006 among KCSR, KCS, the subsidiary guarantors, the lenders party thereto, The Bank of Nova Scotia, Morgan Stanley Senior Funding, Inc., Harris Bank, N.A., LaSalle Bank National Association and Bank of Tokyo-Mitsubishi UFJ Trust Company, and Scotia Capital, filed as Exhibit 10.1 to the Company’sForm 10-Q for the period ended March 31, 2006 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.15.2. | ||
10 | .16 | The 1992 Indenture. (See Exhibit 4.3). | ||
10 | .16.1 | The Supplemental Indenture, dated as of December 17, 1999, to the 1992 Indenture. (See Exhibit 4.3.1). | ||
10 | .17 | The 2000 Indenture. (See Exhibit 4.4). | ||
10 | .17.1 | The Supplemental Indenture, dated as of January 29, 2001, to the 2000 Indenture. (See Exhibit 4.4.1). | ||
10 | .17.2 | The Second Supplemental Indenture, dated as of June 10, 2005, to the 2000 Indenture. (See Exhibit 4.4.2). | ||
10 | .17.3 | The Third Supplemental Indenture, dated as of February 5, 2007, to the 2000 Indenture. (See Exhibit 4.4.3). | ||
10 | .18 | Intercompany Agreement, dated as of August 16, 1999, between the Company and Stilwell Financial Inc., filed as Exhibit 10.23 to the Company’s 2001S-4 Registration Statement (RegistrationNo. 333-54262), is incorporated herein by reference as Exhibit 10.18. | ||
10 | .19 | Tax Disaffiliation Agreement, dated as of August 16, 1999, between the Company and Stilwell Financial Inc., filed Exhibit 10.24 to the Company’s 2001S-4 Registration Statement (RegistrationNo. 333-54262), is incorporated herein by reference as Exhibit 10.19. | ||
10 | .20 | Lease Agreement, as amended, between The Kansas City Southern Railway Company and Broadway Square Partners LLP dated June 26, 2001, filed as Exhibit 10.34 to the Company’sForm 10-K for the fiscal year ended December 31, 2001 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.20. | ||
10 | .21 | The June 12, 2002 Indenture. (See Exhibit 4.6). | ||
10 | .21.2 | The Supplemental Indenture, dated as of June 10, 2005, to the June 12, 2002 Indenture. (See Exhibit 4.6.2). | ||
10 | .21.3 | The Second Supplemental Indenture, dated as of February 5, 2007, to the June 12, 2002 Indenture (See Exhibit 4.6.3). |
118
(Inapplicable)
Exhibit | Description | |||
10 | .22 | Agreement to Forego Compensation between A. Edward Allinson and the Company, fully executed on March 30, 2001; Loan Agreement between A. Edward Allinson and the Company fully executed on September 18, 2001; and the Promissory Note executed by the Trustees of The A. Edward Allinson Irrevocable Trust Agreement dated, June 4, 2001, Courtney Ann Arnot, A. Edward Allinson III and Bradford J. Allinson, Trustees, as Maker, and the Company, as Holder, filed as Exhibit 10.36 to the Company’sForm 10-K for the fiscal year ended December 31, 2002 (FileNo. 1-4717), are incorporated herein by reference as Exhibit 10.22. | ||
10 | .23 | Agreement to Forego Compensation between Michael G. Fitt and the Company, fully executed on March 30, 2001; Loan Agreement between Michael G. Fitt and the Company, fully executed on September 7, 2001; and the Promissory Note executed by the Trustees of The Michael G. and Doreen E. Fitt Irrevocable Insurance Trust, Anne E. Skyes, Colin M-D. Fitt and Ian D.G. Fitt, Trustees, as Maker, and the Company, as Holder, filed as Exhibit 10.37 to the Company’sForm 10-K for the fiscal year ended December 31, 2002 (FileNo. 1-4717), are incorporated herein by reference as Exhibit 10.23. | ||
10 | .24 | Kansas City Southern Employee Stock Ownership Plan (as amended and restated, effective April 1, 2002) (the “Amended Employee Stock Ownership Plan”), filed as Exhibit 10.38 to the Company’sForm 10-K for the fiscal year ended December 31, 2002 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.24. | ||
10 | .24.1 | Amendment to the Amended Employee Stock Ownership Plan, dated June 30, 2003 and effective as of January 1, 2001, filed as Exhibit 10.38.2 to the Company’sForm 10-K for the fiscal year ended December 31, 2003 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.24.1. | ||
10 | .24.2 | Amendment to the Amended Employee Stock Ownership Plan, dated December 3, 2003 and effective as of January 1, 2003, filed as Exhibit 10.38.3 to the Company’sForm 10-K for the fiscal year ended December 31, 2003 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.24.2. | ||
10 | .25 | Placement Agreement, dated April 29, 2003, by and among the Company, Morgan Stanley & Co. Incorporated and Deutsche Bank Securities Inc., filed as Exhibit 10 to the Company’sForm 10-Q for the period ended June 30, 2003 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.25. | ||
10 | .26 | The Amended Acquisition Agreement. (See Exhibit 2.1). | ||
10 | .27 | The Stockholders’ Agreement. (See Exhibit 2.2). | ||
10 | .28 | The Acquisition Registration Rights Agreement. (See Exhibit 2.3). | ||
10 | .29 | The Consulting Agreement. (See Exhibit 2.4). | ||
10 | .30 | The Marketing and Services Agreement. (See Exhibit 2.5). | ||
10 | .31 | The 2005 Rights Agreement. (See Exhibit 2.6). | ||
10 | .32 | Form of Indemnity Escrow Note (as defined in the Amended Acquisition Agreement), filed as Exhibit 10.2 to the Company’s Current Report onForm 8-K filed December 21, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.32. | ||
10 | .33 | Form of VAT Escrow Note (as defined in the Amended Acquisition Agreement), filed as Exhibit 10.7 to the Company’s Current Report onForm 8-K filed December 21, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.33. | ||
10 | .34 | Closing Escrow Agreement by and among KCS, KARA Sub, Inc., KCS Investment I, Ltd., KCS Acquisition Subsidiary, Inc., Caymex Transportation, Inc., Grupo TMM, S.A., TMM Holdings, S.A. de C.V., TMM Multimodal, S.A. de C.V. and The Bank of Nova Scotia Trust Company of New York, filed as Exhibit 10.8 to the Company’s Current Report onForm 8-K filed December 21, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.34. | ||
10 | .35 | Indemnity Escrow Agreement by and among KCS, KARA Sub, Inc., KCS Investment I, Ltd., Caymex Transportation, Inc., Grupo TMM, S.A., TMM Multimodal, S.A. de C.V. and The Bank of Nova Scotia Trust Company of New York, filed as Exhibit 10.9 to the Company’s Current Report onForm 8-K filed December 21, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.35. |
119
(Inapplicable)
(Inapplicable)
Exhibit | Description | |||
10 | .36 | VAT Escrow Agreement by and among KCS, KARA Sub, Inc., KCS Investment I, Ltd., KCS Acquisition Subsidiary, Inc., Caymex Transportation, Inc., Grupo TMM, S.A., TMM Holdings, S.A. de C.V., TMM Multimodal, S.A. de C.V. and The Bank of Nova Scotia Trust Company of New York, filed as Exhibit 10.10 to the Company’s Current Report onForm 8-K filed December 21, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.36. | ||
10 | .37 | Consulting Compensation Escrow Agreement by and among KCS, Jose F. Serrano International Business, S.A. de C.V. and The Bank of Nova Scotia Trust Company of New York, filed as Exhibit 10.11 to the Company’s Current Report onForm 8-K filed December 21, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.37. | ||
10 | .38 | Agreement of Assignment and Assumption of Rights, and Agency Agreement with Undisclosed Principal, Duties and Obligations, filed as Exhibit 10.12 to the Company’s Current Report onForm 8-K filed December 21, 2004 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.38. | ||
10 | .39 | Underwriting Agreement, dated December 5, 2005, between the Company and Morgan Stanley & Co. Incorporated, filed as Exhibit 99.2 to the Company’s Current Report onForm 8-K, filed December 6, 2005 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.39. | ||
10 | .40 | Underwriting Agreement, dated December 5, 2005, among the Company, Grupo TMM, S.A. and Morgan Stanley & Co. Incorporated, filed as Exhibit 99.3 to the Company’s Current Report onForm 8-K, filed December 6, 2005 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.40. | ||
10 | .41 | Transaction Agreement, dated December 1, 2005, among the Company, KCSR, Norfolk Southern Corporation and The Alabama Great Southern Railroad Company (the “Transaction Agreement”), filed as Exhibit 10.46 to the Company’sForm 10-K for the fiscal year ended December 31, 2005 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.41. | ||
10 | .41.1 | Amendment No. 1 to the Transaction Agreement dated as of January 17, 2006, filed as Exhibit 10.47 to the Company’sForm 10-K for the fiscal year ended December 31, 2005 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.41.1. | ||
10 | .41.2 | Amendment No. 2 to the Transaction Agreement dated as of May 1, 2006, filed as Exhibit 10.2 to the Company’s Quarterly Report onForm 10-Q for the period ended March 31, 2006 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.41.2. | ||
10 | .42 | Participation Agreement, dated as of December 20, 2005, among KCSR, KCSRTrust 2005-1 (acting through Wilmington Trust Company, as owner trustee) (“2005 Trust”), GS Leasing (KCSR2005-1) LLC, Wells Fargo Bank Northwest, National Association, Export Development Canada, and KfW, filed as Exhibit 10.48 to the Company’sForm 10-K for the fiscal year ended December 31, 2005 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.42. | ||
10 | .43 | Equipment and Lease Agreement, dated as of December 20, 2005, by and between KCSR and the 2005 Trust, filed as Exhibit 10.49 to the Company’sForm 10-K for the fiscal year ended December 31, 2005 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.43. | ||
10 | .44 | Participation Agreement, dated as of August 2, 2006, among KCSR, KCSRTrust 2006-1 (acting through Wilmington Trust Company, as owner trustee) (“2006 Trust”), HSH Nordbank AG, New York Branch, Wells Fargo Bank Northwest, National Association, and DVB Bank AG, filed as Exhibit 10.4 to the Company’sForm 10-Q for the period ended September 30, 2006 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.44. | ||
10 | .45 | Equipment and Lease Agreement, dated as of August 2, 2006, by and between KCSR and the 2006 Trust, filed as Exhibit 10.4 to the Company’sForm 10-Q for the period ended September 30, 2006 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.45. | ||
10 | .46 | Limited Liability Company Agreement of Meridian Speedway, LLC by and between the Alabama Great Southern Railroad Company and Kansas City Southern dated May 1, 2006, filed as Exhibit 10.3 to the Company’sForm 10-Q for the period ended March 31, 2006, (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.46. |
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The Company furnished a Current Report on Form 8-K, dated October 8, 2003, under Items 7 and 9 of such form, reporting the announcement of the date, time and other relevant information regarding the Company’s third quarter presentation and conference call of its financial results for the three and nine months ended September 30, 2003.
Exhibit | Description | |||
10 | .47 | Underwriting Agreement, dated December 4, 2006, among the Company, Morgan Stanley & Co. Incorporated, and Grupo TMM, S.A., filed as Exhibit 1.1 to the Company’s Current Report onForm 8-K, filed December 5, 2006 (FileNo. 1-4717), is incorporated herein by reference as Exhibit 10.47. | ||
10 | .48 | The 1997 Indenture. (See Exhibit 4.10). | ||
10 | .48.1 | The First Supplemental Indenture, dated as of May 21, 2002, to the 1997 Indenture. (See Exhibit 4.10.1). | ||
10 | .48.2 | The Second Supplemental Indenture, dated November 21, 2006, to the 1997 Indenture. (See Exhibit 4.10.2). | ||
10 | .49 | The June 13, 2002 Indenture. (See Exhibit 4.11). | ||
10 | .51 | The 2006 Indenture. (See Exhibit 4.13). | ||
10 | .52 | The 2006 Registration Rights Agreement. (See Exhibit 2.7). | ||
10 | .53 | Credit Agreement, dated October 24, 2005, among the Company, as borrower, Arrendadora TFM, S.A. de C.V., as guarantor, Bank of America, N.A. as administrative agent, BBVA Bancomer, as collateral agent, and BBVA Securities, Inc. and Banc of America Securities, LLC as arrangers (the “2005 Credit Agreement”), filed as Exhibit 10.9 to KCSM’s Registration Statement onForm S-4 originally filed on November 8, 2005 (RegistrationNo. 333-129566), is attached to thisForm 10-K as Exhibit 10.53. | ||
10 | .53.1 | Amendment No. 1 and Waiver No. 1, dated April 7, 2006, to the 2005 Credit Agreement, filed as Exhibit 10.10 to KCSM’sForm 10-K for the fiscal year ended December 31, 2005, is attached to thisForm 10-K as Exhibit 10.53.1. | ||
10 | .54 | Lease Agreement between KCSR and Louisiana Southern Railroad, Inc., dated September 25, 2005, filed as Exhibit 10.5 to the Company’sForm 10-Q for the period ended June 30, 2005, is incorporated herein by reference as Exhibit 10.54. | ||
10 | .55 | Lease Agreement between KCSR and Alabama Southern Railroad, Inc., dated September 25, 2005, filed as Exhibit 10.6 to the Company’sForm 10-Q for the period ended June 30, 2005, is incorporated herein by reference as Exhibit 10.55. | ||
10 | .56 | Lease Agreement between KCSR and Arkansas Southern Railroad, Inc., dated September 25, 2005, filed as Exhibit 10.7 to the Company’sForm 10-Q for the period ended June 30, 2005, is incorporated herein by reference as Exhibit 10.56. | ||
10 | .57 | Lease Agreement between KCSR and Arkansas Southern Railroad, Inc., dated September 25, 2005, filed as Exhibit 10.8 to the Company’sForm 10-Q for the period ended June 30, 2005, is incorporated herein by reference as Exhibit 10.57. | ||
10 | .58 | Lease Agreement between KCSR and Louisiana Southern Railroad, Inc., dated September 25, 2005, filed as Exhibit 10.9 to the Company’sForm 10-Q for the period ended June 30, 2005, is incorporated herein by reference as Exhibit 10.58. | ||
(12) | Statements Re Computation of Ratios | |||
12 | .1 | The Computation of Ratio of Earnings to Fixed Charges prepared pursuant to Item 601(b)(12) ofRegulation S-K is attached to thisForm 10-K as Exhibit 12.1. | ||
(21) | Subsidiaries of the Company | |||
21 | .1 | The list of the Subsidiaries of the Company prepared pursuant to Item 601(b)(21) ofRegulation S-K is attached to thisForm 10-K as Exhibit 21.1. | ||
(23) | Consents of Experts and Counsel | |||
23 | .1 | Consent of KPMG LLP is attached to thisForm 10-K as Exhibit 23.1. | ||
23 | .2 | Consent of PricewaterhouseCoopers is attached to thisForm 10-K as Exhibit 23.2. | ||
23 | .3 | Consent of KPMG Cárdenas Dosal, S.C. is attached to thisForm 10-K as Exhibit 23.3. | ||
(24) | Power of Attorney (included on the signature page) | |||
31 | .1 | Certification of Michael R. Haverty, Chief Executive Officer of the Company, is attached to thisForm 10-K as Exhibit 31.1. |
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The Company furnished a Current Report on Form 8-K, dated October 9, 2003, under Items 7 and 9 of such form, reporting the announcement that it accepted the decision of the Surface Transportation Board to suspend the procedural schedule involving KCS’s request to gain regulatory approval of the control of The Texas-Mexican Railway Company, a wholly owned subsidiary of Mexrail, Inc.
The Company filed a Current Report on Form 8-K, dated October 23, 2003, under Items 5 and 7 of such form, reporting the announcement that Chancellor William B. Chandler III of the Court of Chancery of the State of Delaware had, in a ruling from the bench, stated his intention to grant KCS’s motion seeking a preliminary injunction to preserve the status quo pending resolution of KCS’s dispute with Grupo TMM, S.A., and its subsidiaries TMM Holdings, S.A. de C.V. and TMM Multimodal, S.A. de C.V.
Exhibit | Description | |||
31 | .2 | Certification of Patrick J. Ottensmeyer, Chief Financial Officer of the Company, is attached to thisForm 10-K as Exhibit 31.2. | ||
(32) | Section 1350 Certifications | |||
32 | .1 | Certification pursuant to 18 U.S.C. Section 1350 of Michael R. Haverty, Chief Executive Officer of the Company, is attached to thisForm 10-K as Exhibit 32.1. | ||
32 | .2 | Certification pursuant to 18 U.S.C. Section 1350 of Patrick J. Ottensmeyer, Chief Financial Officer of the Company, is attached to thisForm 10-K as Exhibit 32.2. | ||
(99) | Additional Exhibits | |||
99 | .1 | The consolidated balance sheet of Grupo TFM, S.A. de C.V. and subsidiaries as of December 31, 2004 and 2005 and the related consolidated statements of income, cash flows and changes in stockholders’ equity for the two years in the period ended December 31, 2004, and the consolidated statements of income, cash flows and changes in stockholders’ equity for the three months ended March 31, 2005 (“Predecessor”) and the nine months ended December 31, 2005 (“Successor”) including the notes thereto and the reports of the independent registered public accounting firms thereon, attached to the 2006S-1 Registration Statement (RegistrationNo. 333-138831) as Exhibit 99.1, is incorporated herein by reference as Exhibit 99.1. |
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The Company furnished a Current Report on Form 8-K, dated October 27, 2003, under Items 7 and 9 of such form, reporting the announcement that its registration statement on Form S-3 relating to the resale of its 4.25% Redeemable Cumulative Convertible Perpetual Preferred Stock, Series C, and the underlying common stock, by the selling security holders of these securities had been declared effective by the Securities and Exchange Commission.
The Company furnished a Current Report on Form 8-K, dated November 3, 2003, under Items 7 and 12 of such form, reporting the announcement of KCS’s third quarter and year to date 2003 earnings and operating results.
The Company furnished a Current Report on Form 8-K, dated December 16, 2003, under Items 7 and 9 of such form, reporting pro forma financial information of the Company that was included in the Post-Effective Amendment No. 3 to the Company’s registration statement on Form S-3 filed December 16, 2003 (“Post-Effective Amendment No. 3”) and included Pro Forma Condensed Consolidated Balance Sheet As of September 30, 2003, Pro Forma Condensed Consolidated Income Statement for the Six Months Ended June 30, 2003 and Pro Forma Condensed Consolidated Income Statement for the Year Ended December 31, 2002. The Company also furnished information included in the Post-Effective Amendment No. 3 relating to the Company’s Computation of Ratio of Earnings to Fixed Charges.
The Company furnished a Current Report on Form 8-K/A dated December 19, 2003, under Items 7 and 9 of such form, to amend the Company’s Current Report on Form 8-K filed on December 17, 2003, and Exhibit 99.1 thereto, which contained a clerical error in labeling the Pro Forma Condensed Consolidated Income Statement for the Six Months Ended June 30, 2003 (rather than the Nine Months Ended September 30, 2003).
By: | /s/ | |
|
March 29, 2004
|
| |||
Signature | Capacity | |||
/s/ Michael R. Haverty
| Chairman Chief Executive Officer and Director | |||
| ||||
/s/ Arthur L. Shoener Arthur L. Shoener | KCS President and Chief Operating Officer and Director | |||
/s/ Patrick J. Ottensmeyer
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||
/s/ Michael K. Borrows
| Vice President Financial Reporting and (Principal Accounting Officer) | |||
/s/ A. Edward Allinson
| Director | |||
/s/ Robert J. Druten
| Director | |||
/s/ James R. Jones James R. Jones | Director |
123
Signature | Capacity | |||
/
| Director | |||
/s/ Karen L. Pletz
| Director | |||
| ||||
/s/ Rodney E. Slater | ||||
| ||||
| Director |
124
KANSAS CITY SOUTHERN
Regulation S-K | ||||||||
Item 601(b) | ||||||||
Exhibit | Document | Exhibit | ||||||
2 | .7 | Registration Rights Agreement | 2 | |||||
3 | .2 | Amended and Restated By-Laws of Kansas City Southern | 3 | |||||
4 | .4.3 | Third Supplemental Indenture to the 2000 Indenture | 4 | |||||
4 | .6.3 | Second Supplemental Indenture to the June 12, 2002 Indenture | 4 | |||||
10 | .5.4 | Form of Restricted Shares Award and Performance Shares Award Agreement under the Amended 1991 Plan | 10 | |||||
10 | .14 | Kansas City Southern Annual Incentive Plan | 10 | |||||
10 | .53 | The 2005 Credit Agreement | 10 | |||||
10 | .53.1 | Amendment No. 1 and Waiver No. 1, dated April 7, 2006, to the 2005 Credit Agreement | 10 | |||||
12 | .1 | Computation of Ratio of Earnings to Fixed Charges | 12 | |||||
21 | .1 | Subsidiaries of the Company | 21 | |||||
23 | .1 | Consent of KPMG LLP | 23 | |||||
23 | .2 | Consent of PricewaterhouseCoopers | 23 | |||||
23 | .3 | Consent of KPMG Cárdenas Dosal, S.C. | 23 | |||||
31 | .1 | Certification of Michael R. Haverty pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 31 | |||||
31 | .2 | �� | Certification of Patrick J. Ottensmeyer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 31 | ||||
32 | .1 | Certification of Michael R. Haverty pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002. | 32 | |||||
32 | .2 | Certification of Patrick J. Ottensmeyer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 32 |
125
INDEX TO EXHIBITS
Exhibit No. | Document | Regulation S-K Item 601(b) Exhibit No. | ||
3.2 | The By-Laws of Kansas City Southern, as amended and restated to March 8, 2004 | 3 | ||
10.10.3 | Amendment to the Kansas City Southern 401(k) and Profit Sharing Plan (As Amended and Restated Effective April 1, 2002), dated June 30, 2003 and effective as of January 1, 2001 | 10 | ||
10.10.4 | Amendment to the Kansas City Southern 401(k) and Profit Sharing Plan (As Amended and Restated Effective April 1, 2002), dated December 3, 2003 and effective as of January 1, 2001 | 10 | ||
10.18 | Employment Agreement dated as of February 9, 2004 by and among the Company, KCSR and Mark W. Osterberg | 10 | ||
10.38.2 | Amendment to the Kansas City Southern Employee Stock Ownership Plan (As Amended and Restated Effective April 1, 2002), dated June 30, 2003 and effective as of January 1, 2001 | 10 | ||
10.38.3 | Amendment to the Kansas City Southern Employee Stock Ownership Plan (As Amended and Restated Effective April 1, 2002), dated December 3, 2003 and effective as of January 1, 2003 | 10 | ||
12.1 | Computation of Ratio of Earnings to Fixed Charges | 12 | ||
21.1 | Subsidiaries of the Company | 21 | ||
23.1 | Consents of Independent Accountants | 23 | ||
31.1 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002—Michael R. Haverty | 31 | ||
31.2 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002—Ronald G. Russ | 31 | ||
32.1 | Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002—Michael R. Haverty and Ronald G. Russ | 32 | ||
99.1 | Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. combined and consolidated financial statements as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003 | 99 |
119