FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number 1-4717
KANSAS CITY SOUTHERN INDUSTRIES, INC.
(Exact name of Company as specified in its charter)
Delaware 44-0663509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
114 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
(816) 983-1303
(Company's telephone number, including area code)
No Changes
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2001
- --------------------------------------------------------------------------------
Common Stock, $.01 per share par value 58,336,926 Shares
- --------------------------------------------------------------------------------
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
MARCH 31, 2001
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 2
Consolidated Condensed Balance Sheets -
March 31, 2001 and December 31, 2000 3
Consolidated Condensed Statements of Income -
Three Months Ended March 31, 2001 and 2000 4
Computation of Basic and Diluted Earnings per Common Share 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 2001 and 2000 5
Consolidated Condensed Statements of Changes in Stockholders' Equity -
Three Months Ended March 31, 2001 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Qualitative and Quantitative Disclosures About Market Risk 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
MARCH 31, 2001
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTRODUCTORY COMMENTS
The Consolidated Condensed Financial Statements included herein have been
prepared by Kansas City Southern Industries, Inc. ("Company" or "KCSI"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
enable a reasonable understanding of the information presented. These
Consolidated Condensed Financial Statements should be read in conjunction with
the financial statements and the notes thereto, as well as Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000 (as amended), and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this Form 10-Q. Results for the
three months ended March 31, 2001 are not necessarily indicative of the results
expected for the full year 2001.
As a result of the July 12, 2000 spin-off of Stilwell Financial Inc.
("Stilwell"), the Company's formerly wholly-owned financial services segment,
the accompanying Consolidated Condensed Financial Statements for the three
months ended March 31, 2000 reflects the results of operations and cash flows of
Stilwell as discontinued operations. Additionally, periods presented in the
accompanying Consolidated Condensed Financial Statements reflect a one-for-two
reverse stock split, which was completed on July 12, 2000 in conjunction with
the spin-off of Stilwell and had previously been approved by KCSI common
stockholders.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Millions)
March 31, December 31,
2001 2000
----------------- ----------------
(Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 28.6 $ 21.5
Accounts receivable, net 140.3 135.0
Inventories 31.8 34.0
Other current assets 23.7 25.9
------------ ------------
Total current assets 224.4 216.4
Investments held for operating purposes 364.4 358.2
Properties (net of $636.0 and $622.9 accumulated
depreciation and amortization, respectively) 1,326.8 1,327.8
Intangibles and Other Assets 40.8 42.1
------------ ------------
Total assets $ 1,956.4 $ 1,944.5
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year $ 38.7 $ 36.2
Accounts and wages payable 44.4 52.9
Accrued liabilities 164.3 159.9
------------ ------------
Total current liabilities 247.4 249.0
------------ ------------
Other Liabilities:
Long-term debt 643.0 638.4
Deferred income taxes 336.9 332.2
Other deferred credits 79.5 81.5
------------ ------------
Total other liabilities 1,059.4 1,052.1
------------ ------------
Stockholders' Equity:
Preferred stock 6.1 6.1
Common stock 0.6 0.6
Retained earnings 645.2 636.7
Accumulated other comprehensive loss (2.3) -
------------ ------------
Total stockholders' equity 649.6 643.4
------------ ------------
Total liabilities and stockholders' equity $ 1,956.4 $ 1,944.5
------------ ------------
See accompanying notes to consolidated condensed financial statements.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Millions, Except per Share Data)
(Unaudited)
Three Months
Ended March 31,
2001 2000
---------- ----------
Revenues $ 144.0 $ 148.9
Costs and expenses
Salaries, wages and benefits 49.1 51.2
Purchased services 15.2 15.5
Depreciation and amortization 14.4 14.2
Operating leases 12.2 12.7
Fuel 12.4 12.1
Casualties and insurance 14.6 6.1
Other 20.0 19.1
---------- ----------
Total costs and expenses 137.9 130.9
---------- ----------
Operating income 6.1 18.0
Equity in net earnings of unconsolidated affiliates:
Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V. 11.1 8.2
Other 0.1 0.6
Interest expense (15.2) (17.5)
Other, net 1.0 2.7
---------- ----------
Income from continuing operations before income taxes, extraordinary item
and cumulative effect of accounting change 3.1 12.0
Income tax provision (benefit) (3.2) 1.6
---------- ----------
Income from continuing operations before extraordinary item
and cumulative effect of accounting change 6.3 10.4
Income from discontinued operations (net of income taxes) - 188.7
---------- ----------
Income before extraordinary item and cumulative effect of accounting change 6.3 199.1
Extraordinary item, net of income taxes
Debt retirement costs - (5.9)
Cumulative effect of accounting change, net of income taxes (0.4) -
---------- ----------
Net income $ 5.9 $ 193.2
========== ==========
Per Share Data
Basic Earnings per Common share
Continuing operations $ 0.11 $ 0.18
Discontinued operations - 3.40
---------- ----------
Basic Earnings per Common share before extraordinary item
and cumulative effect of accounting change 0.11 3.58
Extraordinary item, net of income taxes - (0.10)
Cumulative effect of accounting change, net of income taxes (0.01) -
---------- ----------
Total Basic Earnings per Common share $ 0.10 $ 3.48
========== ==========
Diluted Earnings per Common share
Continuing operations $ 0.10 $ 0.18
Discontinued operations - 3.24
---------- ----------
Diluted Earnings per Common share before extraordinary item
and cumulative effect of accounting change 0.10 3.42
Extraordinary item, net of income taxes - (0.10)
Cumulative effect of accounting change, net of income taxes (0.00) -
---------- ----------
Total Diluted Earnings per Common share $ 0.10 $ 3.32
========== ==========
Weighted Average Common Shares Outstanding (in thousands)
Basic 58,257 55,543
Potential dilutive common shares 2,519 1,939
--------- ---------
Diluted 60,776 57,482
--------- ---------
Dividends Per Share:
Per Preferred share $ .25 $ .25
Per Common share - -
See accompanying notes to consolidated condensed financial statements.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Three Months
Ended March 31,
2001 2000
---------- ----------
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 5.9 $ 193.2
Adjustments to reconcile net income to net cash
from continuing operations
Income from discontinued operations - (188.7)
Depreciation and amortization 14.4 14.2
Deferred income taxes 4.8 5.0
Equity in undistributed earnings of unconsolidated
affiliates (11.2) (8.8)
Distributions from unconsolidated affiliates 3.0 -
Extraordinary items, net of tax - 4.6
Tax benefit realized upon exercise of stock options 2.8 5.6
Changes in working capital items:
Accounts receivable (5.3) 12.0
Inventories 2.2 1.2
Other current assets 2.2 2.3
Accounts and wages payable (8.5) (16.2)
Accrued liabilities 3.4 (34.7)
Other, net 0.1 -
---------- ----------
Net cash provided by (used for) operating activities of
continuing operations 13.8 (10.3)
---------- ----------
INVESTING ACTIVITIES:
Property acquisitions (13.9) (20.3)
Proceeds from disposal of property 0.5 1.3
Investment in and loans with affiliates (0.4) (1.7)
Other, net 0.2 1.1
---------- ----------
Net cash used for investing activities of
continuing operations (13.6) (19.6)
--------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 15.0 760.0
Repayment of long-term debt (7.9) (698.1)
Proceeds from stock plans 0.8 15.2
Debt issuance costs - (13.4)
Cash dividends paid (0.1) (4.7)
Other, net (0.9) (3.2)
--------- ----------
Net cash provided by financing
activities of continuing operations 6.9 55.8
--------- ----------
CASH AND EQUIVALENTS:
Net increase in cash and cash equivalents 7.1 25.9
At beginning of year 21.5 11.9
--------- ----------
At end of period $ 28.6 $ 37.8
========= ==========
See accompanying notes to consolidated condensed financial statements.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in millions, except share amounts)
(Unaudited)
Accumulated
other
$25 Par $.01 Par Retained comprehensive
Preferred stock Common stock Earnings income Total
--------------- ------------ -------- ------ -----
Balance at December 31, 2000 $ 6.1 $ 0.6 $ 636.7 $ - $ 643.4
Comprehensive income:
Net income 5.9
Cumulative effect of accounting change (0.9)
Change in fair market value of cash flow
hedge of unconsolidated affiliate (1.4)
Comprehensive income 3.6
Dividends (0.1) (0.1)
Options exercised and stock subscribed - - 2.7 - 2.7
------ ------ ------- ------- -------
Balance at March 31, 2001 $ 6.1 $ 0.6 $ 645.2 $ (2.3) $ 649.6
====== ====== ======= ======= =======
See accompanying notes to consolidated condensed financial statements.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the management of Kansas City Southern Industries, Inc.
("Company" or "KCSI"), the accompanying unaudited consolidated condensed
financial statements contain all adjustments (consisting of normal closing
procedures) necessary to present fairly the financial position of the
Company and its subsidiary companies as of March 31, 2001 and December 31,
2000, the results of operations for the three months ended March 31, 2001
and 2000, and cash flows for the three months ended March 31, 2001 and
2000.
2. The accompanying consolidated condensed financial statements have been
prepared consistently with accounting policies described in Note 2 to the
consolidated financial statements included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2000 (as amended). The results
of operations for the three months ended March 31, 2001 are not necessarily
indicative of the results to be expected for the full year 2001.
3. On June 14, 2000 KCSI's Board of Directors approved the spin-off of
Stilwell Financial Inc. ("Stilwell"), the Company's wholly-owned financial
services subsidiary. KCSI completed its spin-off of Stilwell on July 12,
2000 through a special dividend of Stilwell common stock distributed to
KCSI common stockholders of record on June 28, 2000 ("Spin-off").
As of the date of the Spin-off, Stilwell was comprised of Janus Capital
Corporation, an approximate 81.5% owned subsidiary (as of July 12, 2000);
Berger LLC, an approximate 88% owned subsidiary; Nelson Money Managers Plc,
an 80% owned subsidiary; DST Systems, Inc., an equity investment in which
Stilwell held an approximate 32% interest; and miscellaneous other
financial services subsidiaries and equity investments.
The Spin-off occurred after the close of business of the New York Stock
Exchange on July 12, 2000, and each KCSI stockholder received two shares of
the common stock of Stilwell for every one share of KCSI common stock owned
on the record date. The total number of Stilwell shares distributed was
222,999,786.
Also on July 12, 2000, KCSI completed a reverse stock split whereby every
two shares of KCSI common stock was converted into one share of KCSI common
stock. All periods presented in the accompanying consolidated condensed
financial statements reflect this one-for-two reverse stock split, which
had previously been approved by KCSI common stockholders.
As a result of the Spin-off, the accompanying consolidated condensed
financial statements for the three month period ended March 31, 2000
reflect the results of operations and cash flows of Stilwell as
discontinued operations.
The following provides financial information of Stilwell for the
three-month period ended March 31, 2000 (in millions):
Revenues $ 545.1
Operating expenses 300.2
--------
Operating income 244.9
Equity in earnings of unconsolidated affiliates 18.8
Gain on litigation settlement 44.2
Gain on sale of Janus common stock 15.1
Interest expense and other, net 7.3
----------
Pretax income 330.3
Income tax provision 114.3
Minority interest in consolidated earnings 27.3
----------
Income from discontinued operations, net of income taxes $ 188.7
----------
The following discusses certain agreements between KCSI and certain Janus
stockholders. Subsequent to the Spin-off, these agreements and related
provisions apply to Stilwell through assignment or through the agreement of
Stilwell to meet KCSI's obligations under the agreements.
A stock purchase agreement with Thomas H. Bailey, the Chairman, President
and Chief Executive Officer of Janus Capital Corporation ("Janus"), and
another Janus stockholder (the "Janus Stock Purchase Agreement") and
certain
restriction agreements with other Janus minority stockholders contain,
among other provisions, mandatory put rights whereby under certain
circumstances, Stilwell would be required to purchase the minority
interests of such Janus minority stockholders at a fair market value
purchase price equal to fifteen times the net after-tax earnings of Janus
over the period indicated in the relevant agreement or in some
circumstances as determined by an independent appraisal. Under the Janus
Stock Purchase Agreement, termination of Mr. Bailey's employment could
require a purchase and sale of the Janus common stock held by him. If other
minority holders terminated their employment, some or all of their shares
also could be subject to mandatory purchase and sale provisions. Certain
other minority holders who continue their employment also could exercise
puts. The Janus Stock Purchase Agreement, and certain stock purchase
agreements and restriction agreements with other minority stockholders that
have not been assigned to Stilwell, also contain provisions whereby upon
the occurrence of a Change in Ownership (as defined in such agreements) of
KCSI (or Stilwell with respect to the Janus Stock Purchase Agreement),
Stilwell may be required to purchase such holders' Janus stock. The fair
market value price for such purchase or sale would be equal to fifteen
times the net after-tax earnings of Janus over the period indicated in the
relevant agreement or in some circumstances as determined by Janus' Stock
Option Committee or as determined by an independent appraisal.
The Janus Stock Purchase Agreement has been assigned to Stilwell and
Stilwell has assumed and agreed to discharge KCSI's obligations under that
agreement. However, KCSI is obligated as a guarantor of Stilwell's
obligations under that agreement. With respect to other restriction
agreements not assigned to Stilwell, Stilwell has agreed to perform all of
KCSI's obligations under these agreements and KCSI has agreed to transfer
all of its benefits and assets under these agreements to Stilwell. In
addition, Stilwell has agreed to indemnify KCSI for any and all losses
incurred with respect to the Janus Stock Purchase Agreement and all other
Janus minority stockholder agreements. However, if Stilwell were unable to
meet its obligations with respect to these agreements, KCSI would be
obligated to make the payments under these agreements.
On May 1, 2001, Stilwell announced that it completed its purchase of
600,000 shares of Janus common stock from Mr. Bailey under the terms and
conditions of the Janus Stock Purchase Agreement. With the closing of this
transaction, Mr. Bailey's ownership in Janus was reduced to approximately
6.2%.
If all of the mandatory purchase and sale provisions and all the puts under
all Janus minority stockholder agreements had been implemented as of March
31, 2001 (after giving effect to the completed purchase from Mr. Bailey as
discussed above), and in the event Stilwell was unable to meet its
obligation to purchase such shares, KCSI could have been ultimately
responsible for approximately $613 million at March 31, 2001. In the future
these amounts may be higher or lower depending on Janus' earnings, fair
market value and the timing of the exercise. Payment for the purchase of
the respective minority interests is to be made under the Janus Stock
Purchase Agreement within 120 days after receiving notification of exercise
of the put rights. Under the restriction agreements with certain other
Janus minority stockholders, payment for the purchase of the respective
minority interests is to be made 30 days after the later to occur of (i)
receiving notification of exercise of the put rights or (ii) determination
of the purchase price through the independent appraisal process.
If Stilwell were unable to meet its obligation with respect to a Change in
Ownership as of March 31, 2001, KCSI could have been ultimately responsible
for approximately $665 million at March 31, 2001 (after giving effect to
the completed purchase from Mr. Bailey as discussed above.)
4. The effect of stock options to employees represent the only difference
between the weighted average shares used for the basic earnings per share
computation compared to the diluted earnings per share computation. For the
three months ended March 31, 2001 and 2000, the total incremental shares
from assumed conversion of stock options included in the computation of
diluted earnings per share were 2,519,226 and 1,939,154, respectively. The
weighted average of options to purchase 33,654 and 6,414 shares were
excluded in the first quarter 2001 and 2000 computation, respectively,
because the exercise prices were greater than the average market price of
the common shares.
For the quarter ended March 31, 2000, potentially dilutive securities at
certain Stilwell related subsidiaries and affiliates also affected the
numerator of the diluted earnings per share calculation. These adjustments
totaled approximately $2.3 million for the three months ended March 31,
2000 and only affected the diluted earnings per share from discontinued
operations computation. Preferred dividends are the only adjustments that
affect the numerator of the diluted earnings per share from continuing
operations computation. Adjustments related to preferred dividends were not
material for the periods presented.
5. The Company's inventories primarily consist of materials and supplies
related to rail transportation.
6. Investments in unconsolidated affiliates and certain other investments
accounted for under the equity method generally include all entities in
which the Company or its subsidiaries have significant influence, but not
more than 50% voting control. Investments in unconsolidated affiliates at
March 31, 2001 include, among others, equity interests in Grupo
Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), Southern
Capital Corporation, LLC ("Southern Capital"), Mexrail, Inc. ("Mexrail"),
the Panama Canal Railway Company ("PCRC") and Panarail Tourism Company.
The Company is party to certain agreements with Transportacion Maritima
Mexicana, S.A. de C.V. ("TMM"), covering the Grupo TFM and Mexrail
ventures. TMM (together with certain of its affiliates) owns approximately
38.4% of Grupo TFM and 51% of Mexrail. These agreements contain "change in
control" provisions, provisions intended to preserve the Company's and
TMM's proportionate ownership of the ventures, and super majority
provisions with respect to voting on certain significant transactions. Such
agreements also provide a right of first refusal in the event that either
party initiates a divestiture of its equity interest in Grupo TFM or
Mexrail. Under certain circumstances, such agreements could affect the
Company's ownership percentage and rights in these equity affiliates.
Condensed financial information of certain unconsolidated affiliates is
shown below. Grupo TFM is presented on U.S. GAAP basis. Financial
information of immaterial unconsolidated affiliates has been omitted:
Financial Condition (dollars in millions):
March 31, 2001 December 31, 2000
----------------------------------------- --------------------------------------------
Southern Southern
Mexrail PCRC Grupo TFM Capital Mexrail PCRC Grupo TFM Capital
------- ---- ---------- ------- ------- ---- ---------- -------
Current assets $ 34.3 $ 1.4 $ 207.2 $ 2.8 $ 24.7 $ 7.1 $ 190.9 $ 0.2
Non-current assets 51.7 54.0 1,924.1 252.2 42.7 48.6 1,885.6 262.0
------- ------ ------------ ---------- -------- ------ ----------- --------
Assets $ 86.0 $ 55.4 $ 2,131.3 $ 255.0 $ 67.3 $ 55.7 $ 2,076.5 $ 262.2
======= ====== ============ ========= ======== ======= =========== ========
Current liabilities $ 51.8 $ 0.1 $ 73.9 $ 0.5 $ 32.2 $ 0.6 $ 80.5 $ 0.4
Non-current liabilities 6.1 37.1 841.5 214.8 6.7 37.1 817.8 212.5
Minority interest - - 364.7 - - - 357.2 -
Equity of stockholders
and partners 28.1 18.2 851.2 39.7 28.4 18.0 821.0 49.3
------- ------ ------------ -------- -------- ------- ----------- --------
Liabilities and
equity $ 86.0 $ 55.4 $ 2,131.3 $ 255.0 $ 67.3 $ 55.7 $ 2,076.5 $ 262.2
======= ====== ============ ========= ======== ======= =========== ========
KCSI's investment $ 13.0 $ 9.5 $ 317.1 $ 19.7 $ 13.3 $ 9.5 $ 306.0 $ 24.6
======= ====== ============ ========= ======== ======= =========== ========
Operating Results (dollars in millions):
Three Months
Ended March 31,
------------------------------
2001 2000
---------- -----------
Revenues:
Mexrail $ 14.6 $ 13.2
PCRC - -
Grupo TFM 156.1 146.7
Southern Capital 7.6 7.9
Operating costs and expenses:
Mexrail $ 15.3 $ 13.2
PCRC 0.4 0.2
Grupo TFM 70.3 106.3
Southern Capital 6.7 7.0
Net income (loss):
Mexrail $ (0.3) $ (0.2)
PCRC 0.0 (0.1)
Grupo TFM 30.2 19.9
Southern Capital 0.9 0.9
The decrease in Grupo TFM's operating expenses resulted from the
recognition by TFM of approximately $60 million of pre-tax income relating
to certain concession assets. This transaction resulted in a contribution
to the Company's income from continuing operations of approximately $9.1
million.
7. Noncash Investing and Financing Activities. In conjunction with the January
2000 refinancing of the Company's debt structure, KCSI borrowed $125
million under a $200 million 364-day senior unsecured competitive
advance/revolving credit facility to retire debt obligations. Stilwell
assumed this credit facility and repaid the $125 million in March 2000.
Upon such assumption, KCSI was released from all obligations, and Stilwell
became the sole obligor, under this credit facility. The Company's
indebtedness decreased as a result of the assumption of this indebtedness
by Stilwell.
The Company initiated the Twelfth Offering of KCSI common stock under the
Employee Stock Purchase Plan ("ESPP") during 2000. Stock subscribed under
the Twelfth Offering will be issued to employees in 2002 and is being paid
for through employee payroll deductions in 2001. During the first quarter
of 2001, the Company received approximately $1.0 million from payroll
deductions associated with this offering of the ESPP.
In the first quarter of 2000, the Company issued approximately 183,117
shares of KCSI common stock under the Eleventh Offering of the ESPP. These
shares, totaling a purchase price of approximately $6.3 million, were
subscribed and paid for through employee payroll deductions in 1999.
8. Derivative Instruments and Hedging Activities. In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"). SFAS 133 requires that derivatives be
recorded on the balance sheet as either assets or liabilities measured at
fair value. Changes in the fair value of derivatives are recorded either
through current earnings or as other comprehensive income, depending on the
type of hedge transaction. For fair value hedge transactions (changes in
the fair value of an asset, liability or an unrecognized firm commitment
are hedged), changes in the fair value of the derivative instrument will
generally be offset in the income statement by changes in the hedged item's
fair value. For cash flow hedge transactions (the variability of cash flows
related to a variable rate asset, liability or a forecasted transaction are
hedged), changes in the fair value of the derivative instrument will be
reported in other comprehensive income to the extent it offsets changes in
cash flows related to the variable rate asset, liability or forecasted
transaction, with the difference reported in current earnings. Gains and
losses on the derivative instrument reported in other comprehensive income
would be reclassified in earnings in the periods in which earnings are
impacted by the variability of the cash flow of the hedged item. The
ineffective portion of all hedge transactions will be recognized in current
period earnings.
The Company currently has five separate interest rate cap agreements for an
aggregate notional amount of $200 million designated as a cash flow hedge.
The Company's objective is to manage its interest rate risk through the use
of these interest rate caps or other such derivative instruments in
accordance with the provisions of its credit facilities (See Note 11).
These interest rate cap agreements are designed to hedge the Company's
exposure to movements in the London Inter-bank Offered Rate ("LIBOR") on
which the Company's variable rate interest is calculated. $100 million of
the aggregate notional amount provides a cap on the Company's LIBOR
interest rate of 7.25% plus the applicable spread, while $100 million
limits the LIBOR interest rate to 7% plus the applicable spread. By holding
these interest rate cap agreements, the Company is able to limit the risk
of rising interest rates on its variable rate debt.
KCSI adopted the provisions of SFAS 133 effective January 1, 2001. As a
result of this change in the method of accounting for derivative financial
instruments, the Company recorded an after-tax charge to earnings of $0.4
million in the first quarter of 2001. This charge is presented as a
cumulative effect of an accounting change in the accompanying financial
statements. This amount represents the ineffective portion of interest rate
cap agreements. The Company recorded an additional $0.1 million during the
first quarter for changes in the fair value of its interest rate cap
instruments from January 1, 2001 to March 31, 2001.
In addition, the Company recorded a reduction to its stockholders' equity
(accumulated other comprehensive income) of approximately $2.3 million for
its portion of the amount recorded by Southern Capital for the adjustment
to the fair value of interest rate swap transactions. The Company also
reduced its investment in Southern Capital by the same amount.
9. Registration of Senior Unsecured Notes. During the third quarter of 2000,
the Company completed a $200 million private offering of debt securities
through its wholly-owned subsidiary, KCSR. The offering, completed pursuant
to Rule 144A under the Securities Act of 1933 in the United States and
Regulation S outside the United States, consisted of 8-year Senior
Unsecured Notes ("Notes"). These Notes bear a fixed annual interest rate of
9.5% and are due on October 1, 2008.
On January 25, 2001, the Company filed a Form S-4 Registration Statement
with the Securities and Exchange Commission ("SEC") registering exchange
notes under the Securities Act of 1933. The Company filed Amendment No. 1
to this Registration Statement and the SEC declared this Registration
Statement, as amended, effective on March 15, 2001, thereby providing the
opportunity for holders of the initial Notes to exchange them for
registered notes. The registration exchange offer expired on April 16, 2001
and all of the original Notes were exchanged for $200 million of registered
notes.
10. Cost Reduction Plan. During the first quarter of 2001, KCSI announced a
cost reduction strategy designed to keep the Company competitive during the
existing economic slow-down. The cost reduction strategy resulted in a
reduction of approximately 5% of the Company's total workforce (both
management and union employees). Additionally, KCSI implemented a
voluntary, temporary salary reduction for middle and senior management and
temporarily suspended certain management benefits. The Company also delayed
the implementation of its new computer system, Management Control System
("MCS"), until economic conditions improve and appropriate training can be
administered without significant disruption to the operations of the
railroad. Further, the planned capital expenditures for 2001 have been
reduced by approximately $21 million. These capital reductions will not
affect the planned maintenance for the physical structure of the railroad,
but will limit the amount of discretionary expenditures for projects such
as capacity improvements. During the first quarter of 2001, the Company
recorded approximately $1.3 million of costs related to severance benefits
associated with the workforce reduction. As of March 31, 2001, the amount
of severance benefits paid and charged against the liability relating to
employees actually terminated was not material. It is anticipated that the
majority of these employees will be terminated in second quarter 2001.
11. Waiver for Bank Debt Covenants. Due to the impact of the recent economic
slow-down in the United States on the operations of the Company, the
Company requested and received from lenders a waiver from certain of the
financial and coverage covenant provisions outlined in the credit agreement
of the Company's $750 million Senior Secured Credit Facilities. This waiver
was granted from lenders of these credit facilities on March 19, 2001 and
is effective until May 15, 2001. In addition, the Company requested an
amendment to the applicable covenant provisions of the credit agreement.
The amendment temporarily revises certain of the covenant provisions
(including financial and coverage provisions) for a period of four quarters
to provide the Company with sufficient time to strengthen its financial
position and pursue various financing alternatives. The lenders approved
and executed the amendment to the credit agreement on May 10, 2001. At
March 31, 2001, the Company had $415 million borrowed under these
facilities, comprised of $400 million of term debt and $15 million under
the revolving credit facility.
12. Litigation. The Company has had no significant changes in its outstanding
litigation or other contingencies from that previously reported in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
The following provides a discussion of the Bogalusa cases and the
Jaroslawicz case.
Bogalusa Cases. In July 1996, KCSR was named as one of twenty-seven
defendants in various lawsuits in Louisiana and Mississippi arising from
the explosion of a rail car loaded with chemicals in Bogalusa, Louisiana on
October 23, 1995. As a result of the explosion, nitrogen dioxide and oxides
of nitrogen were released into the atmosphere over parts of that town and
the surrounding area allegedly causing evacuations and injuries.
Approximately 25,000 residents of Louisiana and Mississippi have asserted
claims to recover damages allegedly caused by exposure to the chemicals.
KCSR neither owned nor leased the rail car or the rails on which it was
located at the time of the explosion in Bogalusa. KCSR did, however, move
the rail car from Jackson to Vicksburg, Mississippi, where it was loaded
with chemicals, and back to Jackson where the car was tendered to the
Illinois Central Corporation ("IC"). The explosion occurred more than 15
days after the Company last transported the rail car. The car was loaded in
excess of its standard weight, but under the car's capacity, when it was
transported by the Company to interchange with the IC.
The trial of a group of twenty plaintiffs in the Mississippi lawsuits
arising from the chemical release resulted in a jury verdict and judgment
in favor of KCSR in June 1999. The jury found that KCSR was not negligent
and that the plaintiffs
had failed to prove that they were damaged. The trial of the Louisiana
class action is scheduled to commence on June 11, 2001. The trial of a
second group of Mississippi plaintiffs is scheduled for January of 2002.
KCSR believes the probability for damages in these cases to be remote. If
KCSR were to be found liable for punitive damages in these cases, such a
judgment could have a material adverse effect on the Company's results of
operations, financial position and cash flows.
Jaroslawicz Class Action. On October 3, 2000, a lawsuit was filed in the
New York State Supreme Court purporting to be a class action on behalf of
the Company's preferred shareholders, and naming the Company, its Board of
Directors and Stilwell as defendants. This lawsuit seeks a declaration that
the Company's Spin-off was a defacto liquidation of the Company, alleges
violation of Directors' fiduciary duties to the preferred shareholders and
also seeks a declaration that the preferred shareholders are entitled to
receive the par value of their shares and other relief. The Company filed a
motion to dismiss with prejudice in the New York Supreme Court on December
22, 2000; the plaintiff filed its brief in opposition to the motion to
dismiss on February 1, 2001, and the Company served reply papers on March
7, 2001. The motion to dismiss is now fully briefed and a ruling has not
been rendered. Management believes the suit to be groundless and will
continue to defend the matter vigorously.
13. Condensed Consolidating Financial Information. In September 2000, KCSR
issued $200 million of 9.5% Senior Notes due 2008. These notes are
unsecured obligations of KCSR, however, they are also jointly and severally
and fully and unconditionally guaranteed on an unsecured senior basis by
KCSI and certain of the subsidiaries (all of which are wholly-owned) within
the KCSI consolidated group. KCSI has registered exchange notes with the
SEC that have substantially identical terms and associated guarantees and
all of the initial Senior Notes have been exchanged for $200 million of
registered exchange notes.
The accompanying condensed consolidating financial information has been
prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial
statements of guarantors and issuers of guaranteed securities registered or
being registered." This information is not intended to present the
financial position, results of operations and cash flows of the individual
companies or groups of companies in accordance with generally accepted
accounting principles.
Condensed Consolidating Statements of Income
Three months ended March 31, 2001 (dollars in millions)
-------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
Revenues $ _ $ 130.2 $ 16.2 $ 5.5 $ (7.9) $ 144.0
Costs and expenses 2.4 125.2 12.6 5.6 (7.9) 137.9
-------- -------- -------- -------- -------- --------
Operating income (loss) (2.4) 5.0 3.6 (0.1) - 6.1
Equity in net earnings of
Unconsolidated affiliates and
Subsidiaries 8.0 12.5 - 11.6 (20.9) 11.2
Interest expense (0.2) (14.8) (0.8) (0.1) 0.7 (15.2)
Other, net - 1.7 - - (0.7) 1.0
-------- -------- -------- -------- -------- --------
Income from continuing
operations before income taxes 5.4 4.4 2.8 11.4 (20.9) 3.1
Income tax provision (benefit) (0.9) (3.5) 1.1 0.1 - (3.2)
-------- -------- -------- -------- -------- --------
Income before cumulative effect
of Accounting change 6.3 7.9 1.7 11.3 (20.9) 6.3
-------- -------- -------- -------- -------- --------
Cumulative effect of
accounting Change,
net of income taxes (0.4) (0.4) - - 0.4 (0.4)
-------- -------- -------- -------- -------- --------
Net income $ 5.9 $ 7.5 $ 1.7 $ 11.3 $ (20.5) $ 5.9
======== ======== ======== ======== ======== ========
Three months ended March 31, 2000 (dollars in millions)
-------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
Revenues $ _ $ 135.4 $ 16.5 $ 2.4 $ (5.4) $ 148.9
Costs and expenses 3.4 116.8 13.9 2.2 (5.4) 130.9
-------- -------- -------- -------- -------- --------
Operating income (loss) (3.4) 18.6 2.6 0.2 - 18.0
Equity in net earnings of
unconsolidated affiliates and
subsidiaries 12.1 8.7 - 8.6 (20.6) 8.8
Interest expense (2.4) (17.0) (1.0) (0.7) 3.6 (17.5)
Other, net 3.2 3.1 - - (3.6) 2.7
-------- -------- -------- -------- -------- --------
Income from continuing
operations before income taxes 9.5 13.4 1.6 8.1 (20.6) 12.0
Income tax provision (benefit) (0.9) 1.5 0.6 0.4 - 1.6
-------- -------- -------- -------- -------- --------
Income from continuing
operations 10.4 11.9 1.0 7.7 (20.6) 10.4
Income from discontinued
operations 188.7 - - 188.7 (188.7) 188.7
-------- -------- -------- -------- -------- --------
Income before extraordinary
items 199.1 11.9 1.0 196.4 (209.3) 199.1
Extraordinary items, net of
income taxes (5.9) - - - - (5.9)
-------- -------- -------- -------- -------- --------
Net income $ 193.2 $ 11.9 $ 1.0 $ 196.4 $ (209.3) $ 193.2
======== ========= ======== ========= ========= ========
Condensed Consolidating Balance Sheet
As of March 31, 2001 (dollars in millions)
-------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
ASSETS:
Current assets $ 5.3 $ 186.2 $ 35.6 $ 10.1 $ (12.8) $ 224.4
Investments held for
operating purposes and
investments in subsidiaries 671.6 447.3 0.7 353.1 (1,108.3) 364.4
Properties, net 0.4 1,230.3 94.1 2.0 -- 1,326.8
Intangibles and other
assets 0.3 28.3 14.1 0.1 (2.0) 40.8
-------- -------- -------- -------- -------- --------
Total assets $ 677.6 $1,892.1 $ 144.5 $ 365.3 $(1,123.1) $ 1,956.4
======== ========= ======== ========= =========== =========
LIABILITIES AND EQUITY:
Current liabilities $ 7.6 $ 214.3 $ 23.0 $ 15.2 $ (12.7) $ 247.4
Long-term debt 1.6 629.0 7.4 5.0 -- 643.0
Payable to affiliates 5.8 -- 32.9 -- (38.7) --
Deferred income taxes 7.8 316.7 10.1 4.3 (2.0) 336.9
Other liabilities 5.2 67.4 7.1 -- (0.2) 79.5
Stockholders equity 649.6 664.7 64.0 340.8 (1,069.5) 649.6
-------- -------- -------- -------- -------- --------
Total liabilities and
Equity $ 677.6 $1,892.1 $ 144.5 $ 365.3 $(1,123.1) $ 1,956.4
======== ========= ======== ========= ========= ==========
As of December 31, 2000 (dollars in millions)
-------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
ASSETS:
Current assets $ 16.9 $ 179.7 $ 32.6 $ 10.1 $ (22.9) $ 216.4
Investments held for
operating purposes and
investments in subsidiaries 666.3 445.0 0.7 343.8 (1,097.6) 358.2
Properties, net 0.3 1,230.1 95.2 2.2 -- 1,327.8
Intangibles and other assets 0.2 29.1 14.5 0.3 (2.0) 42.1
-------- -------- -------- --------- ----------- ---------
Total assets $ 683.7 $1,883.9 $ 143.0 $ 356.4 $(1,122.5) $ 1,944.5
======== ========= ======== ========= =========== =========
LIABILITIES AND EQUITY:
Current liabilities $ 21.8 $ 221.1 $ 21.2 $ 7.8 $ (22.9) $ 249.0
Long-term debt 1.6 624.0 7.7 5.1 -- 638.4
Payable to affiliates 3.4 -- 32.8 -- (36.2) --
Deferred income taxes 7.2 313.4 9.7 3.9 (2.0) 332.2
Other liabilities 6.3 65.8 9.4 -- -- 81.5
Stockholders equity 643.4 659.6 62.2 339.6 (1,061.4) 643.4
-------- -------- -------- -------- -------- --------
Total liabilities and
Equity $ 683.7 $1,883.9 $ 143.0 $ 356.4 $(1,122.5) $ 1,944.5
======== ========= ======== ========= ========= ==========
Condensed Consolidating Statements of Cash Flows
Three months ended March 31, 2001 (dollars in millions)
-------------------------------------------------------------------------------------
Subsidiary Guarantor Non-Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
Net cash flows provided by (used
for) operating activities: $ (2.9) $ 11.3 $ 5.6 $ 0.3 $ (0.5) $ 13.8
-------- --------- --------- --------- --------- --------
Investing activities:
Property acquisitions - (13.2) (0.7) - - (13.9)
Investments in and loans to
affiliates - - - (2.8) 2.4 (0.4)
Other, net - 0.2 0.7 - (0.2) 0.7
-------- --------- --------- --------- --------- --------
Net - (13.0) - (2.8) 2.2 (13.6)
-------- --------- --------- --------- --------- --------
Financing activities:
Proceeds from issuance of
long-term debt - 15.0 - - - 15.0
Repayment of long-term debt - (7.5) (0.4) - - (7.9)
Proceeds from loans from
affiliates 2.4 - - - (2.4) -
Proceeds from stock plans 0.8 - - - - 0.8
Cash dividends paid (0.1) - - - (0.1)
Other, net (1.3) 2.5 (2.0) - (0.1) (0.9)
-------- --------- --------- --------- --------- --------
Net 1.8 10.0 (2.4) - (2.5) 6.9
-------- --------- --------- --------- --------- --------
Cash and equivalents:
Net increase (decrease) (1.1) 8.3 3.2 (2.5) (0.8) 7.1
At beginning of period 1.5 17.4 2.1 0.5 - 21.5
-------- --------- --------- --------- --------- --------
At end of period $ 0.4 $ 25.7 $ 5.3 $ (2.0) $ (0.8) $ 28.6
========= ========= ========= ========== ========= ========
Three months ended March 31, 2000 (dollars in millions)
-------------------------------------------------------------------------------------
Subsidiary Guarantor Non-Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
Net cash flows provided by (used
for) operating activities: $ (11.0) $ (0.4) $ 3.3 $ (2.3) $ 0.1 $ (10.3)
-------- --------- --------- ---------- --------- -----------
Investing activities:
Property acquisitions - (19.2) (1.1) - - (20.3)
Investments in and loans to
affiliates (22.6) - - - 20.9 (1.7)
Repayment of loans to
affiliates 530.7 - - - (530.7) -
Other, net - (3.4) 0.6 0.2 5.0 2.4
-------- --------- --------- ---------- --------- -----------
Net 508.1 (22.6) (0.5) 0.2 (504.8) (19.6)
-------- --------- --------- ---------- --------- -----------
Financing activities:
Proceeds from issuance of
long-term debt 125.0 635.0 - - - 760.0
Repayment of long-term debt (648.3) (21.4) (28.4) - - (698.1)
Proceeds from loans from
affiliates 37.4 - 27.4 - (64.8) -
Repayment of loans from
affiliates - (572.3) - - 572.3 -
Debt issuance costs - (13.4) - - - (13.4)
Proceeds from stock plans 15.2 - - - - 15.2
Cash dividends paid (4.7) - - - - (4.7)
Other, net (0.1) (2.8) 0.4 2.1 (2.8) (3.2)
-------- -------- --------- ---------- --------- -----------
Net 475.5) 25.1 (0.6) 2.1 504.7 55.8
-------- -------- --------- ---------- --------- -----------
Cash and equivalents:
Net increase 21.6 2.1 2.2 - - 25.9
At beginning of period 5.2 4.2 2.2 0.3 - 11.9
-------- -------- --------- ---------- --------- -----------
At end of period $ 26.8 $ 6.3 $ 4.4 $ 0.3 $ - $ 37.8
======== ========= ========= ========= ========== ==========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The discussions set forth below, as well as other portions of this Form 10-Q,
contain comments not based upon historical fact. Such forward-looking comments
are based upon information currently available to management and management's
perception thereof as of the date of this Form 10-Q. Readers can identify these
forward-looking comments by the use of such verbs as expects, anticipates,
believes or similar verbs or conjugations of such verbs. The actual results of
operations of Kansas City Southern Industries, Inc. ("KCSI" or the "Company")
could materially differ from those indicated in forward-looking comments. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, those factors identified in the "Risk Factors"
section of the Company's Registration Statement on Form S-4, as amended and
declared effective on March 15, 2001, which is on file with the U.S. Securities
and Exchange Commission (File No. 333-54262) and which "Risk Factors" section is
hereby incorporated by reference herein. Readers are strongly encouraged to
consider these factors when evaluating any forward-looking comments. The Company
will not update any forward-looking comments set forth in this Form 10-Q.
The discussion herein is intended to clarify and focus on the Company's results
of operations, certain changes in its financial position, liquidity, capital
structure and business developments for the periods covered by the consolidated
condensed financial statements included under Item 1 of this Form 10-Q. This
discussion should be read in conjunction with these consolidated condensed
financial statements and the related notes thereto, and is qualified by
reference thereto.
KCSI, a Delaware corporation organized in 1962, is a holding company with
principal operations in rail transportation. On July 12, 2000, KCSI completed
its spin-off of Stilwell Financial Inc. ("Stilwell"), the Company's formerly
wholly-owned financial services subsidiary.
KCSI supplies its various subsidiaries with managerial, legal, tax, financial
and accounting services, in addition to managing other "non-operating" and more
passive investments. KCSI's principal subsidiaries and affiliates include, among
others:
o The Kansas City Southern Railway Company ("KCSR"), a wholly-owned
subsidiary;
o Gateway Western Railway Company ("Gateway Western"), a wholly-owned
subsidiary;
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), an
approximate 37% owned unconsolidated affiliate, which owns 80% of the
common stock of TFM, S.A. de C.V. ("TFM");
o Mexrail, Inc. ("Mexrail"), a 49% owned unconsolidated affiliate, which
wholly owns the Texas Mexican Railway Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate that leases locomotive and rail equipment
primarily to KCSR;
o Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of which
KCSR indirectly owns 50% of the common stock; and
o Panarail Tourism Company ("Panarail"), a 50% owned unconsolidated
affiliate.
Unless specifically indicated otherwise, all per share information included
herein is presented on a diluted basis and reflects the one-for-two reverse
stock split that occurred on July 12, 2000 in conjunction with the spin-of of
Stilwell.
RECENT DEVELOPMENTS
Registration of Senior Unsecured Notes. During the third quarter of 2000, the
Company completed a $200 million private offering of debt securities through its
wholly-owned subsidiary, KCSR. The offering, completed pursuant to Rule 144A
under the Securities Act of 1933 in the United States and Regulation S outside
the United States, consisted of 8-year Senior Unsecured Notes ("Notes"). These
Notes bear a fixed annual interest rate of 9.5% and are due on October 1, 2008.
On January 25, 2001, the Company filed a Form S-4 Registration Statement with
the Securities and Exchange Commission ("SEC") registering exchange notes under
the Securities Act of 1933. The Company filed Amendment No. 1 to this
Registration Statement and the SEC declared this Registration Statement, as
amended, effective on March 15, 2001, thereby providing the opportunity for
holders of the initial Notes to exchange them for registered notes. The
registration exchange offer expired on April 16, 2001 and all of the original
Notes were exchanged for $200 million of registered notes.
Cost Reduction Plan. During the first quarter of 2001, KCSI announced a cost
reduction strategy designed to keep the Company competitive during the existing
economic slow-down. The cost reduction strategy resulted in a reduction of
approximately 5% of the Company's total workforce (both management and union
employees). Additionally, KCSI implemented a voluntary, temporary salary
reduction for middle and senior management and temporarily suspended certain
management benefits. The Company also delayed the implementation of its new
computer system, Management Control System ("MCS"), until economic conditions
improve and appropriate training can be administered without significant
disruption to the operations of the railroad. Further, the planned capital
expenditures for 2001 have been reduced by approximately $21 million. These
capital reductions will not affect the planned maintenance for the physical
structure of the railroad, but will limit the amount of discretionary
expenditures for projects such as capacity improvements. During the first
quarter of 2001, the Company recorded approximately $1.3 million of costs
related to severance benefits associated with the workforce reduction. As of
March 31, 2001, the amount of severance benefits paid and charged against the
liability relating to employees actually terminated was not material. It is
anticipated that the majority of these employees will be terminated during
second quarter 2001.
Waiver for Bank Debt Covenants. Due to the impact of the recent economic
slow-down in the United States on the operations of the Company, the Company
requested and received from lenders a waiver from certain of the financial and
coverage covenant provisions outlined in the credit agreement of the Company's
$750 million Senior Secured Credit Facilities. This waiver was granted from
lenders of these credit facilities on March 19, 2001 and is effective until May
15, 2001. In addition, the Company requested an amendment to the applicable
covenant provisions of the credit agreement. The amendment temporarily revises
certain of the covenant provisions (including financial and coverage
provisions) for a period of four quarters to provide the Company with sufficient
time to strengthen its financial position and pursue various financing
alternatives. The lenders approved and executed the amendment to the credit
agreement on May 10, 2001. At March 31, 2001, the Company had $415 million
borrowed under these facilities, comprised of $400 million of term debt and $15
million under the revolving credit facility.
Implementation of Derivative Standard. In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires that derivatives be recorded on the balance sheet as either
assets or liabilities measured at fair value. Changes in the fair value of
derivatives are recorded either through current earnings or as other
comprehensive income, depending on the type of hedge transaction. For fair value
hedge transactions (changes in the fair value of an asset, liability or an
unrecognized firm commitment are hedged), changes in the fair value of the
derivative instrument will generally be offset in the income statement by
changes in the hedged item's fair value. For cash flow hedge transactions (the
variability of cash flows related to a variable rate asset, liability or a
forecasted transaction are hedged), changes in the fair value of the derivative
instrument will be reported in other comprehensive income to the extent it
offsets changes in cash flows related to the variable rate asset, liability or
forecasted transaction, with the difference reported in current earnings. Gains
and losses on the derivative instrument reported in other comprehensive income
would be reclassified in earnings in the periods in which earnings are impacted
by the variability of the cash flow of the hedged item. The ineffective portion
of all hedge transactions will be recognized in current period earnings.
The Company currently has five separate interest rate cap agreements for an
aggregate notional amount of $200 million designated as a cash flow hedge. The
Company's objective is to manage its interest rate risk through the use of these
interest rate caps or other such derivative instruments in accordance with the
provisions of its credit facilities. These interest rate cap agreements are
designed to hedge the Company's exposure to movements in the London Inter-bank
Offered Rate ("LIBOR") on which the Company's variable rate interest is
calculated. $100 million of the aggregate notional amount provides a cap on the
Company's LIBOR interest rate of 7.25% plus the applicable spread, while $100
million limits the LIBOR interest rate to 7% plus the applicable spread. By
holding these interest rate cap agreements, the Company is able to limit the
risk of rising interest rates on its variable rate debt.
KCSI adopted the provisions of SFAS 133 effective January 1, 2001. As a result
of this change in the method of accounting for derivative financial instruments,
the Company recorded an after-tax charge to earnings of $0.4 million in the
first quarter of 2001. This charge is presented as a cumulative effect of an
accounting change in the accompanying financial statements. This amount
represents the ineffective portion of interest rate hedging instruments. The
Company recorded an additional $0.1 million during the first quarter for changes
in the fair value of its interest rate hedging instruments from January 1, 2001
to March 31, 2001.
In addition, the Company recorded a reduction to its stockholders' equity
(accumulated other comprehensive loss) of approximately $2.3 million for its
portion of the amount recorded by Southern Capital for the adjustment to the
fair value of interest rate swap transactions. The Company also reduced its
investment in Southern Capital by the same amount.
RESULTS OF OPERATIONS
The Company reported income from continuing operations of $6.3 million, or $0.10
per share, for the first quarter of 2001 compared to income from continuing
operations of $10.4 million, or $0.18 per share, for the first quarter of 2000.
This $4.1 million quarter to quarter decline results primarily from a $4.9
million decrease in revenues, a $7.0 million increase in operating expenses, and
a $1.7 million decline in other, net, partially offset by $2.9 million in higher
equity earnings from Grupo TFM, a $2.3 million decrease in interest expense and
lower income taxes of $4.8 million. The Company reported a cumulative effect of
an accounting change of $0.4 million (after-tax) in the first quarter of 2001 as
a result of the implementation of SFAS 133 discussed above. In the first quarter
of 2000, the Company completed a debt refinancing whereby it retired
approximately $400 million in debt prior to its maturity. Accordingly, the
Company recorded debt retirement costs of approximately $5.9 million, after-tax
($0.10 per diluted share) in the first quarter of 2000, which is presented as an
extraordinary item in the accompanying financial statements. The Company
reported net income of $5.9 million ($0.10 per share) in the first quarter of
2001 compared to $193.2 million ($3.32 per share) in the same quarter of 2000,
primarily as a result of income from the discontinued operations of Stilwell of
$188.7 million recorded for the first quarter of 2000. As a result of the
spin-off of Stilwell effective July 12, 2000, the Company did not report income
from discontinued operations for the three months ended March 31, 2001.
CONTINUING OPERATIONS
The discussion that follows addresses the results of operations of the
continuing operations of the Company. The revenue and expense information
presented herein for the combined KCSR/Gateway Western reflects the results of
KCSR/Gateway Western operating companies on a stand-alone basis. The results of
KCSR subsidiaries and affiliates are excluded.
The following table summarizes the income statement components of the continuing
operations of the Company for the three months ended March 31, 2001 and 2000,
respectively, (in millions):
Three Months
Ended March 31,
2001 2000
Revenues $ 144.0 $ 148.9
Costs and expenses 137.9 130.9
--------- ----------
Operating income 6.1 18.0
Equity in net earnings of
unconsolidated affiliates: 11.2 8.8
Interest expense (15.2) (17.5)
Other, net 1.0 2.7
--------- ----------
Income from continuing operations
before income taxes 3.1 12.0
Income tax provision (benefit) (3.2) 1.6
--------- ----------
Income from continuing operations $ 6.3 $ 10.4
--------- ------------
The following table summarizes the revenues and carload statistics of
KCSR/Gateway Western for the three months ended March 31, 2001 and 2000,
respectively. Certain prior period amounts have been reclassified to reflect
changes in the business groups and to conform to the current period
presentation.
Carloads and
Revenues Intermodal Units
(in millions) (in thousands)
Three months Three months
ended March 31, ended March 31,
----------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ---------- -----------
General commodities:
Chemical and petroleum $ 32.3 $ 31.8 40.8 39.8
Paper and forest 30.4 33.7 44.9 50.4
Agriculture and mineral 21.3 24.5 30.9 35.1
----------- ---------- ---------- -----------
Total general commodities 84.0 90.0 116.6 125.3
Intermodal and Automotive 18.6 15.2 76.8 57.7
Coal 27.6 29.2 46.5 48.0
---------- ---------- ---------- -----------
Carload revenues and carload
and intermodal units 130.2 134.4 239.9 231.0
---------- -----------
Other rail-related revenues 9.9 11.9
----------- ----------
Total KCSR/Gateway
Western revenues 140.1 146.3
Other subsidiary revenues 3.9 2.6
----------- ----------
Total consolidated revenues $ 144.0 $ 148.9
=========== ==========
The following table summarizes the costs and expenses of KCSR/Gateway Western
for the three months ended March 31, 2001 and 2000 respectively:
Three Months
Ended March 31,
--------------------------
2001 2000
----------- -----------
Salaries, wages and benefits $ 47.5 $ 49.7
Fuel 12.4 12.1
Operating leases 13.4 14.4
Depreciation and amortization 13.4 13.2
Purchased services 11.0 12.9
Casualties and insurance 14.5 6.0
Materials and supplies 7.3 8.3
Car Hire 6.5 2.7
Other 5.7 6.5
--------- ---------
Total KCSR/Gateway Western costs and expenses 131.7 125.8
Other subsidiary costs and expenses 6.2 5.1
--------- ---------
Total KCSI costs and expenses $ 137.9 $ 130.9
========= =========
Three Months Ended March 31, 2001 Compared With Three Months Ended March 31,
2000
Income from Continuing Operations. The Company reported income from continuing
operations of $6.3 million for the first quarter of 2001 compared to income from
continuing operations of $10.4 million for the first quarter of 2000. This $4.1
million quarter to quarter decline results primarily from a $4.9 million
decrease in revenues, a $7.0 million increase in operating expenses, and a $1.7
million decline in other, net, partially offset by $2.9 million in higher equity
earnings from Grupo TFM, a $2.3 million decrease in interest expense and lower
income taxes of $4.8 million.
Revenues. Revenues totaled $144.0 million for the first quarter of 2001 versus
$148.9 million in the first quarter of 2000. This $4.9 million (3.3%) decrease
resulted from lower KCSR/Gateway Western revenues of approximately $6.2 million
partially offset by higher revenues from other smaller subsidiaries. While
revenue growth occurred for plastics (34.0%), petroleum (4.3%) and automotive
(147.4%) traffic, lower revenues were noted for most other commodities served by
KCSR/Gateway Western resulting from a decline in carload volumes primarily due
to decreased demand related to the continued general slowdown in the U.S.
economy. Also contributing to the decline was a change in the mix of traffic and
a shorter average length of haul.
Operating Expenses. Operating expenses increased $7.0 million (5.3%) to $137.9
million in the first quarter of 2001 compared to $130.9 million in the first
quarter of 2000. This resulted from a $5.9 million increase in KCSR/Gateway
Western expenses and higher expenses at other smaller subsidiaries commensurate
with higher revenues. The increase in KCSR/Gateway Western operating expenses is
attributable to higher casualty and insurance costs, higher costs associated
with the usage of rail cars from other rail carriers (car hire) and higher fuel
costs. These cost increases were partially offset by cost declines for fringe
benefits, materials and supplies and purchased services. The Company's operating
expenses also include approximately $1.3 million of one-time costs related to
severance benefits for the workforce reduction discussed in "Recent
Developments."
Interest Expense. Interest expense for the three months ended March 31, 2001
decreased $2.3 million (13.1%) from the prior year quarter as a result of
slightly lower interest rates and lower amortization related to debt issue
costs.
Income tax expense. For the three months ended March 31, 2001, the income tax
benefit was $3.2 million compared to an income tax provision of $1.6 million for
the three months ended March 31, 2000. This variance in income tax expense
resulted primarily from the fact that the Company does not provide deferred
income tax expense on its equity earnings from Grupo TFM. During the first
quarter of 2001, equity earnings from Grupo TFM were three times higher than the
total income from continuing operations before income taxes compared to
approximately 73% for the same 2000 period. In as much as the Company intends to
indefinitely reinvest the equity earnings from Grupo TFM, the Company does not
provide deferred income tax expense for the excess of its book basis over the
tax basis of its investment in Grupo TFM. Excluding equity earnings of Grupo
TFM, the consolidated effective income tax rate for the three months ended March
31, 2001 was (40.0%) compared to 42.1% for the first quarter of 2000.
Unconsolidated Affiliates. The Company recorded equity earnings of $11.2 million
from unconsolidated affiliates for the three months ended March 31, 2001
compared to $8.8 million for the three months ended March 31, 2000. This
increase is attributable to higher equity earnings from Grupo TFM, which
increased $2.9 million quarter to quarter. This increase resulted from the
recognition by TFM of approximately $60 million of pre-tax income relating to
certain concession assets. This transaction resulted in a contribution to the
Company's income from continuing operations of approximately $9.1 million. Grupo
TFM revenues improved 6% to $156.1 million in the first quarter of 2001 compared
to $146.7 million in the first quarter of 2000. These higher revenues were
offset by an approximate 16.4% increase in operating expenses (exclusive of the
income received related to the disposition of the concession assets) due
primarily to higher fuel, car hire and lease costs, and other variable costs
related to increased traffic volumes. These higher expenses led to a decline in
ongoing operating income of 20% quarter to quarter. The first quarter 2001
operating ratio increased to 79.8% versus 72.7% in the same 2000 period.
Additionally, first quarter 2001 results include a $1.5 million deferred tax
benefit (calculated under U.S. generally accepted accounting principles -"U.S.
GAAP") compared to a deferred tax benefit of $15.6 million in the first quarter
of 2000, which was caused by fluctuations in the peso exchange rate and
inflation. The Company reports its equity in Grupo TFM under U.S. GAAP while
Grupo TFM reports under International Accounting Standards.
Combined KCSR/Gateway Western Operating Results. The following provides a
comparative analysis of the revenue and expense components of the combined
KCSR/Gateway Western operating companies for the quarter ended March 31, 2001
versus the quarter ended March 31, 2000:
Revenues
Combined KCSR/Gateway Western revenues decreased approximately $6.2 million
quarter to quarter as declines in most commodities were partially offset by
higher plastics, petroleum and intermodal and automotive revenues.
Chemical and petroleum products. For the three months ended March 31, 2001,
chemical and petroleum product revenues increased $0.5 million, or 1.6%,
compared with the same 2000 period. Higher plastics and petroleum product
revenues were mostly offset by declines in other chemical products. The increase
in plastics revenues results from a plant expansion by a customer in late 2000,
while the increase in petroleum products relates to higher petroleum coke
movements through our bulk storage facility in Port Arthur, Texas. The decline
in other chemical products relates mostly to lower demand as a result of the
sluggish U.S. economy. Chemical and petroleum products accounted for 24.8% and
23.7% of total carload revenues for the three months ended March 31, 2001 and
2000, respectively.
Paper and forest products. Paper and forest product revenues decreased $3.3
million, or 9.8%, quarter to quarter primarily due to a demand driven decline in
carloads across the industry. The continued slow-down in the U.S. economy has
affected the paper and forest product industry particularly hard as the need for
raw materials in the related manufacturing and production industries has
decreased. Wet weather in the southeast region of the United States has also
contributed to the decline due to a disruption in logging activities. Management
believes that when economic conditions improve there will be an increased demand
for paper and forest products resulting in an increase in related revenues.
Paper and forest products accounted for 23.3% and 25.1% of total carload
revenues for the three months ended March 31, 2001 and 2000, respectively.
Agricultural and mineral products. Agricultural and mineral product revenues for
the first quarter of 2001 declined 13.1% compared with the first quarter of 2000
primarily as a result of lower domestic grain shipments. A general decrease in
the consumption of poultry in the United States has led to less demand for
delivery of grain to our chicken producing customers. Additionally, because of
the flooding in the upper midwest of the U.S. coupled with pricing pressures,
grain has been originating in Illinois and Indiana rather than Iowa and
Minnesota. This results in a much shorter haul for the Company's grain
shipments. Management believes, however, that agriculture and mineral product
revenues could improve during the remainder of 2001 due to a better market for
exports to Mexico, as well as an improving poultry industry due to certain
highly publicized animal diseases currently affecting beef production.
Agriculture and mineral products accounted for 16.4% of total carload revenues
for the first quarter of 2001 compared to 18.2% for the first quarter of 2000.
Intermodal and automotive. Intermodal and automotive revenues increased $3.4
million, or 22.4%, for the quarter ended March 31, 2001 compared to the quarter
ended March 31, 2000. This improvement is comprised primarily of an increase in
automotive revenues, which increased $4.2 million period to period, partially
offset by a $0.8 million decline in total intermodal revenues. Automotive
revenues have increased as a result of the following: (i) Mazda traffic
originating at the International Freight Gateway ("IFG") at the former
Richards-Gebaur airbase, which is located adjacent to and connects to KCSR's
main line; and (ii) Ford business originating from the CSX in Louisville and
interchanged with the Gateway Western in East St. Louis. This Ford automotive
traffic is shipped to Kansas City via Gateway Western and interchanged with
Union Pacific Railroad for delivery to the western part of the United States.
Intermodal revenues have been affected by a marketing agreement with Norfolk
Southern, which was entered into during the second quarter of 2000. This
marketing agreement provides that KCSR will perform haulage services for Norfolk
Southern from Meridian to Dallas for an agreed upon haulage fee. Some of this
haulage traffic has replaced previous carload intermodal traffic while some of
the traffic is incremental to KCSR. A portion of the decline in intermodal
revenues results from the Norfolk Southern haulage traffic that replaced
existing intermodal revenues as KCSR is now receiving a smaller per unit haulage
fee than the share of revenue it received as part of the intermodal movement.
This traffic, however, has a lower cost base to KCSR as certain costs such as
locomotives, fuel and car hire are incurred and paid by Norfolk Southern. In the
long term intermodal revenues are expected to increase as a result of this
haulage agreement. Management expects that both intermodal and automotive
revenues will increase in 2001, primarily related to the relationships with
Norfolk Southern and CN/IC and continued growth of the Mazda and Ford business.
The early success of IFG is also expected to draw interest from additional car
manufacturers as KCSR creates the image of being a quality transportation
service provider in the automotive industry. Intermodal and automotive revenues
accounted for 14.3% and 11.3% of total carload revenues for the quarters ended
March 31, 2001 and 2000, respectively.
Coal. Coal revenues declined $1.6 million, or 5.5%, for the three months ended
March 31, 2001 compared with the three months ended March 31, 2000. Lower coal
revenues were attributable to an approximate 5% decline in tons delivered
coupled with a decline in revenue per carload due to a shorter average length of
haul. Management expects coal revenues to improve during the remainder of 2001
as a result of coal customers replenishing stockpiles, as well as the scheduled
re-opening of the KCPL Hawthorn plant in June 2001. Hawthorn has been out of
service since January 1999 due to an explosion at the Kansas City facility. Coal
accounted for 21.2% and 21.7% of total carload revenues for the three months
ended March 31, 2001 and 2000, respectively.
Costs and Expenses
For the quarter ended March 31, 2001, KCSR/Gateway Western operating expenses
increased $5.9 million compared to the quarter ended March 31, 2000. This
increase was largely due to higher casualty/insurance, car hire and fuel costs,
partially offset by lower costs for salaries and wages, materials and supplies,
purchased services and operating leases.
Salaries, Wages and Benefits. Salaries, wages and benefits expense for the three
months ended March 31, 2001 decreased $2.2 million, or 4.4%, versus the
comparable 2000 period. This decrease resulted from reduced employee counts,
lower overall overtime costs, and the use of fewer relief crews coupled with
lower fringe benefits. Fringe benefits were lower in the first quarter of 2001
because of a decline in stock option exercises compared to the first quarter of
2000, as well as reductions in retirement-based costs for certain union
employees. These declines were partially offset by the one-time severance costs
of approximately $1.3 million associated with the workforce reduction discussed
in "Recent Developments."
Fuel. For the three months ended March 31, 2001, fuel expense increased $0.3
million, or 2.5%, compared to the same 2000 quarter. Despite an 11% decline in
usage, fuel costs increased quarter to quarter due to a 15% increase in the
average price per gallon. Fuel costs represented approximately 9.4% of total
KCSR/Gateway Western operating expenses for first the quarter of 2001 compared
to 9.6% in the same 2000 period.
Operating Leases. For the three months ended March 31, 2001, operating lease
expense decreased $1.0 million, or 6.9%, compared to the first quarter of 2000
as a result of the expiration of certain leases that have not been renewed due
to better fleet utilization.
Depreciation and Amortization. Depreciation and amortization expense was $13.4
for the first quarter of 2001 compared to $13.2 million for the first quarter of
2000. This increase results from increases in the asset base offset by property
retirements and lower STB approved depreciation rates.
Purchased Services. For the three months ended March 31, 2001, purchased
services expense decreased $1.9 million compared with the same period in 2000.
This decline resulted from lower expenses related to intermodal lift services
arising from a decline in trailers handled at terminals coupled with an increase
in lift charges billed to others. Also contributing to the decline were lower
legal fees and other general purchased services.
Casualties and Insurance. For the quarter ended March 31, 2001, casualties and
insurance expense increased $8.5 million compared with the quarter ended March
31, 2000, as a result of several significant derailments and the settlement of a
significant personal injury claim. Derailment expense in the first quarter of
2001 nearly exceeded the amount of derailment expense for the entire year of
2000. These derailments had a residual effect on our service levels due to
mainline downtime, which resulted in some operating inefficiencies. Management
believes that the significant increase in derailment expense is not reflective
of the well-maintained physical plant of KCSR and Gateway Western.
Car Hire. For the first quarter of 2001, car hire expense (car hire payable, net
of receivables) increased $3.8 million, or 140.7%, compared to the first quarter
of 2000. An unusual number of significant first quarter 2001 derailments (see
casualty and insurance above) coupled with the effects of the economic slowdown
and line shut downs due to washouts and flooding had an impact on the efficiency
of the Company's U.S. operations during the first quarter of 2001 and led to
some service delays. As a result, first quarter 2001 car hire costs increased
primarily because of a higher number of freight cars from other railroads on the
Company's rail line. Also contributing to the increase in car hire expense was a
higher number of auto rack cars used related to our increased automotive traffic
as well as a decline in the number of KCSR cars offline and being used by other
railroads due to lower industry-wide traffic volumes.
Operating Income and Operating Ratio. Operating income for the three months
ended March 31, 2001 decreased $12.1 million, or 59%, compared to the same
three-month period in 2000. This decline in operating income resulted from a
4.2% decrease in revenues and a 4.7% increase in operating expenses. These
factors also resulted in a combined KCSR/Gateway Western operating ratio of
94.0% in the first quarter of 2001 compared to 86.0% in the first quarter of
2000.
TRENDS AND OUTLOOK
The Company's first quarter 2001 diluted earnings per share from continuing
operations decreased 44% compared to its diluted earnings per share from
continuing operations for the first quarter of 2000. KCSI's first quarter 2001
results have been favorably affected by the results of the investment in Grupo
TFM. Domestically, however, the Company's operating results have been adversely
affected by the current economic environment and competitive revenue pressures,
as well as higher casualty and higher car hire costs. High fuel and interest
costs have also affected the operating results of the Company. Combined
KCSR/Gateway Western revenues declined approximately 4.2% during the first
quarter of 2001 compared to the same 2000 period, reflecting the continued
impact of the sluggish U.S. economy and competitive pricing issues. Higher
operating costs resulted primarily from an $8.5 million increase in casualty
costs and higher car hire costs.
A current outlook for the Company's businesses for the remainder of 2001 is as
follows (refer to the first paragraph of "Overview" section of this Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, regarding forward-looking comments):
Management expects that general commodities traffic and revenues will
continue to be largely dependent on the economic trends within certain
industries in the geographic region served by the railroads comprising the
NAFTA Railway, as well as economic trends within the United States.
Intermodal and automotive revenues are expected to continue to increase
based on continued growth of automotive traffic, which is relatively new to
the Company's traffic mix. Based on anticipated traffic levels, revenue for
general freight for the remainder of 2001 is expected to increase slightly
compared to 2000. Coal revenue is also expected to improve during 2001,
with a return to more normalized volumes based on the level of existing
stockpiles and underlying demand and the return of the KCPL Hawthorn plant.
Variable costs and expenses are expected to be at levels proportionate with
revenue activity assuming normalized rail operations, except for fuel
expenses, which are expected to mirror market conditions.
The service issues caused mostly by first quarter 2001 derailments had an
adverse impact on our first quarter operating results. Management is
addressing these service issues and believes that the second quarter 2001
operations will show improvement. In the short-term, the U.S. economic
slow-down is expected to continue to present revenue challenges. In
response to this, management implemented a cost reduction strategy in the
first quarter of 2001 to address this slow-down and keep the Company
competitive. In the longer term, management believes that, with the current
cost structure, the NAFTA Railway provides an attractive service for
shippers and is positioned to take advantage of the continued growth
potential of NAFTA traffic.
The Company expects to continue to participate in the earnings/losses from
its equity investments in Grupo TFM, Southern Capital, Mexrail and PCRC.
Due to the variability of factors affecting the Mexican economy, management
can make no assurances as to the impact that a change in the value of the
peso or a change in Mexican inflation will have on the results of Grupo
TFM.
LIQUIDITY AND CAPITAL RESOURCES
Unless otherwise indicated, the discussion that follows addresses the liquidity
and capital of the continuing operations of the Company.
Summary cash flow data for the continuing operations of the Company is as
follows (in millions):
Three Months
Ended March 31
-----------------------------
2001 2000
------------ -----------
Cash flows provided by (used for):
Operating activities $ 13.8 $ (10.3)
Investing activities (13.6) (19.6)
Financing activities 6.9 55.8
--------- ----------
Cash and equivalents:
Net increase 7.1 25.9
At beginning of year 21.5 11.9
--------- ----------
At end of period $ 28.6 $ 37.8
========= ==========
During the three months ended March 31, 2001, the Company's consolidated cash
position increased $7.1 million from December 31, 2000. This increase resulted
mostly from the net proceeds from the issuance of long-term debt. Net operating
cash inflows (outflows) were $13.8 million and ($10.3) million for the three
months ended March 31, 2001 and 2000, respectively. This $24.1 million increase
in operating cash flows was mostly attributable to changes in working capital
balances, comprised chiefly of certain accounts payable and accrued liability
payments made during first quarter 2000.
Net investing cash outflows were $13.6 million and $19.6 million during the
three months ended March 31, 2001 and 2000, respectively. This $6.0 million
difference results primarily from lower year to date 2001 capital expenditures
and lower investments in affiliates, partially offset by a decrease in funds
received from property dispositions.
During the first quarter of 2001, financing cash outflows were used primarily
for the repayment of debt while financing cash inflows were generated from
proceeds from issuance of long-term debt and proceeds from the issuance of
common stock under stock plans. Net financing cash inflows were $6.9 million for
the three months ended March 31, 2001 compared with net financing cash outflows
of $55.8 million during the comparable 2000 period. This difference was
primarily due to $7.1 million of net long-term borrowings and $0.8 million of
proceeds from stock plans during the first quarter of 2001 compared to $61.9
million of net borrowings and proceeds from stock plans of $15.2 million during
the first quarter of 2000. The Company paid only $0.1 million of dividends
during the first quarter of 2001 compared to $4.7 million for the first quarter
of 2000. Additionally, during the first quarter of 2000, the Company paid $13.4
million of debt issuance costs associated with the January 2000 restructuring of
the Company's debt.
Cash flows from operations are expected to be slightly positive during the
remainder of 2001 arising from operating income, which has historically resulted
in positive operating cash flows. Investing activities will continue to use
significant amounts of cash. Future roadway improvement projects will be
primarily funded by operating cash flows or, secondarily, through borrowings
under existing lines of credit.
In addition to operating cash flows, the Company has financing available through
its various lines of credit with a maximum borrowing amount of $100 million. As
of March 31, 2001, $85 million was available under these lines of
credit. These credit agreements contain, among other provisions, various
financial covenants. As discussed in "Recent Developments", the Company
requested and received from lenders of its credit facilities a waiver from
certain of its financial and coverage covenants. In addition, an amendment to
the credit agreement was executed on May 10, 2001. This amendment temporarily
revises certain of the financial and coverage covenant provisions for a period
of four quarters to provide the Company with sufficient time to strengthen its
financial position and pursue various financing alternatives. As a result of
certain financial covenants contained in the credit agreements, maximum
utilization of the Company's available lines of credit may be restricted.
In connection with the Company's debt restructuring in January 2000, KCSR
entered into senior secured credit facilities ("KCS Credit Facilities")
providing financing of up to $750 million, including a $200 million term loan
due January 11, 2001 that was repaid with the proceeds from the private offering
of Notes (see "Recent Developments"). On January 25, 2001, the Company filed a
Form S-4 Registration Statement with the SEC registering exchange notes under
the Securities Act of 1933. The Company filed Amendment No. 1 to this
Registration Statement and the SEC declared this Registration Statement, as
amended, effective on March 15, 2001, thereby providing the opportunity for
holders of the initial Notes to exchange them for registered notes. The
registration exchange offer expired on April 16, 2001 and all of the initial
Notes were exchanged for $200 million of registered notes.
The Company filed a Universal Registration Statement on Form S-3 (File No.
33-69648) in September 1993, as amended in April 1996, for the offering of up to
$500 million in aggregate amount of securities. The SEC declared that
registration statement effective on April 22, 1996; however, no securities have
been issued thereunder. Subject to certain restrictions under the KCS Credit
Facilities, management expects that any net proceeds from the sale of securities
under that registration statement would be added to the general funds of the
Company and used principally for general corporate purposes, including working
capital, capital expenditures, and acquisitions of or investments in businesses
and assets.
In January 2000, KCSI borrowed $125 million under a $200 million 364-day senior
unsecured competitive advance/revolving credit facility to retire other debt
obligations. Stilwell assumed this credit facility and repaid the $125 million
in March 2000. Upon such assumption, KCSI was released from all obligations, and
Stilwell became the sole obligor, under this credit facility. The Company's
indebtedness decreased as a result of the assumption of this indebtedness by
Stilwell.
The Company believes, based on current expectations, that its operating cash
flows and available financing resources are sufficient to fund anticipated
operating, capital and debt service requirements and other commitments through
2001. The Company is currently exploring financing alternatives to reduce its
existing term bank debt.
The Company's consolidated ratio of debt to total capitalization was 51.2% at
both March 31, 2001 and December 31, 2000, respectively. The Company's debt
increased $7.1 million from December 31, 2000 to $681.7 million at March 31,
2001 as a result of net long-term borrowings. This increase in debt was mostly
offset by an increase in the Company's stockholders' equity, which increased
$6.2 million from December 31, 2000 to $649.6 million at March 31, 2001. This
increase was due primarily to net income and the issuance of common stock under
the stock plans. Management anticipates that the ratio of debt to total
capitalization will remain flat during the remainder of 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company has had no significant changes in its Quantitative and Qualitative
Disclosures About Market Risk from that previously reported in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Part I, Item 1. Financial Statements, Note 12 to the Consolidated Condensed
Financial Statements of this Form 10-Q is hereby incorporated herein by
reference.
Item 4. Submission of Matters to a Vote of Security Holders
a) The Company held its 2001 Annual Meeting of Stockholders ("Annual
Meeting") on May 3, 2001. A total of 53,446,594 shares of the Common
Stock, $.01 per share par value, and Preferred Stock, par value $25.00
per share, or 91.3% of the outstanding voting stock on the record date
(58,542,732 shares), was represented at the Annual Meeting, thereby
constituting a quorum. These shares voted together as a single class.
c) Proxies for the meeting were solicited pursuant to Regulation 14A; there
was no solicitation in opposition to management's nominees for directors
as listed in such Proxy Statement and all such nominees were elected.
The only matter voted upon at the Annual Meeting was the election of
three directors. The voting for the election of directors was as
follows:
Total
Shares
----------------
Election of Three Directors
(i) A. Edward Allinson
For 53,242,839
Against -
Withheld 600,583
----------------
Total 53,843,422
================
(ii) James R. Jones
For 52,168,970
Against -
Withheld 600,583
----------------
Total 52,769,553
================
ii) Landon H. Rowland
For 53,126,225
Against -
Withheld 600,583
----------------
Total 53,726,808
================
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(3) Articles of Incorporation and Bylaws
Articles of Incorporation
3.1 Exhibit 3.1 to the Company's Registration Statement on Form S-4
originally filed January 25, 2001 (Commission File No. 333-54262), as
amended and declared effective on March 15, 2001 (the "S-4
Registration Statement"), Restated Certificate of Incorporation, as
amended, is hereby incorporated by reference as Exhibit 3.1
Bylaws
3.2 By-laws of Kansas City Southern Industries, Inc., as amended and restated
to May 2, 2001, is attached to this Form 10-Q as Exhibit 3.2
(4) Instruments Defining the Right of Security Holders, Including Indentures
4.1 Exhibit 4.1 to the Company's Registration Statement (Commission File
No. 333-54262), the Indenture, dated as of September 27, 2000, among
the Company, The Kansas City Southern Railway Company, certain other
subsidiaries of the Company and The Bank of New York, as trustee (the
"2000 Indenture"), is hereby incorporated by reference as Exhibit 4.1
(10) Material Contracts
10.1 Second Amendment to the Credit Agreement (dated as of January 11,
2000) dated as of May 10, 2001, among Kansas City Southern Industries,
Inc. The Kansas City Southern Railway Company, the Lenders party
hereto and The Chase Manhattan Bank, as administrative agent,
collateral agent, issuing bank and swingline lender is attached to
this Form 10-Q as Exhibit 10.1
b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated March 26, 2001
under Item 5 of such form announcing the implementation of a cost
reduction plan.
The Company furnished a Current Report on Form 8-K dated April 4, 2001
announcing the date of its first quarter 2001 earnings release and
conference call. The information included in this Current Report on Form
8-K was furnished pursuant to Item 9 and shall not be deemed to be
filed.
The Company furnished a Current Report on Form 8-K dated April 25, 2001
reporting its first quarter 2001 operating results. The information
included in this Current Report on Form 8-K was furnished pursuant to
Item 9 and shall not be deemed to be filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized and in the capacities indicated on May 14, 2001.
Kansas City Southern Industries, Inc.
/s/ Robert H. Berry
-------------------------------------
Robert H. Berry
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Louis G. Van Horn
-------------------------------------
Louis G. Van Horn
Vice President and Comptroller
(Principal Accounting Officer)