FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 2001
- --------------------------------------------------------------------------------
Common Stock, $.01 per share par value 58,685,562 Shares
- --------------------------------------------------------------------------------
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
JUNE 30, 2001
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 2
Consolidated Condensed Balance Sheets -
June 30, 2001 and December 31, 2000 3
Consolidated Condensed Statements of Income
Three and Six Months Ended June 30, 2001 and 2000 4
Computation of Basic and Diluted Earnings per Common Share 4
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 2001 and 2000 5
Consolidated Condensed Statements of Changes in Stockholders' Equity -
Six Months Ended June 30, 2001 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Qualitative and Quantitative Disclosures About Market Risk 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
JUNE 30, 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 accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures are adequate to enable a reasonable understanding of the information
presented. These Consolidated 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 and six months ended June 30, 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 and
six months ended June 30, 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)
<c> <c>
June 30, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and equivalents $ 18.6 $ 21.5
Accounts receivable, net 136.3 135.0
Inventories 29.7 34.0
Other current assets 21.6 25.9
-------- ---------
Total current assets 206.2 216.4
Investments held for operating purposes 375.3 358.2
Properties (net of $650.1 and $622.9 accumulated
depreciation and amortization, respectively) 1,322.8 1,327.8
Intangibles and Other Assets 41.9 42.1
-------- ---------
Total assets $1,946.2 $ 1,944.5
-------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year $ 40.3 $ 36.2
Accounts and wages payable 46.0 52.9
Accrued liabilities 142.7 159.9
-------- ---------
Total current liabilities 229.0 249.0
-------- ---------
Other Liabilities:
Long-term debt 646.2 638.4
Deferred income taxes 343.0 332.2
Other deferred credits 72.7 81.5
-------- ---------
Total other liabilities 1,061.9 1,052.1
-------- ---------
Stockholders' Equity:
Preferred stock 6.1 6.1
Common stock 0.6 0.6
Retained earnings 650.5 636.7
Accumulated other comprehensive loss (1.9) -
--------- ---------
Total stockholders' equity 655.3 643.4
-------- ---------
Total liabilities and stockholders' equity $1,946.2 $ 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 Six Months
Ended June 30, Ended June 30,
-------------------------------- ----------------------------
2001 2000 2001 2000
-------------- ----------- ----------- -----------
Revenues $ 143.2 $ 144.4 $ 287.2 $ 293.3
Costs and expenses
Salaries, wages and benefits 47.6 47.8 96.7 99.0
Purchased services 16.5 14.7 31.7 30.2
Depreciation and amortization 14.5 14.3 28.9 28.6
Operating leases 12.2 12.4 24.4 25.1
Fuel 11.4 11.0 23.8 23.1
Casualties and insurance 7.8 7.1 22.4 13.2
Other 20.3 18.7 40.3 37.7
---------- ---------- ---------- ----------
Total costs and expenses 130.3 126.0 268.2 256.9
Operating Income 12.9 18.4 19.0 36.4
Equity in net earnings of unconsolidated affiliates:
Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V. 4.9 8.0 16.0 16.2
Other 0.3 1.2 0.4 1.8
Interest expense (14.5) (18.4) (29.7) (35.9)
Other, net 1.1 0.9 2.1 3.6
---------- ---------- ---------- ----------
Income from continuing operations before income taxes,
extraordinary item and cumulative effect of
accounting change 4.7 10.1 7.8 22.1
Income tax provision (benefit) - 1.3 (3.2) 2.9
---------- ---------- ---------- ----------
Income from continuing operations before extraordinary
item and cumulative effect of accounting change 4.7 8.8 11.0 19.2
Income from discontinued operations, net of income taxs - 151.7 - 340.4
---------- ---------- ---------- ----------
Income before extraordinary item and cumulative
effect of accounting change 4.7 160.5 11.0 359.6
Extraordinary item, net of income taxes
Debt retirement costs - - - (5.9)
Cumulative effect of accounting change, net of income taxes - - (0.4) -
---------- ---------- ----------- ----------
Net Income $ 4.7 $ 160.5 $ 10.6 $ 353.7
========== ========== =========== ==========
Per Share Data
Basic Earnings per Common share
Continuing operations $ 0.08 $ 0.16 $ 0.19 $ 0.34
Discontinued operations - 2.72 - 6.12
---------- ---------- ---------- ----------
Basic Earnings per Common share before extraordinary item
and cumulative effect of accounting change 0.08 2.88 0.19 6.46
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 $ 0.08 $ 2.88 $ 0.18 $ 6.36
========== ========== =========== ==========
Diluted Earnings per Common share
Continuing operations $ 0.08 $ 0.15 $ 0.18 $ 0.33
Discontinued operations - 2.59 - 5.82
---------- ---------- ---------- ----------
Diluted Earnings per Common share before extraordinary item
and cumulative effect of accounting change 0.08 2.74 0.18 6.15
Extraordinary item, net of income taxes - - - (0.10)
Cumulative effect of accounting change, net of income taxes - - (0.01) -
---------- ---------- ----------- ----------
Total Diluted Earnings per Common share $ 0.08 $ 2.74 $ 0.17 $ 6.05
========== ========== =========== ==========
Weighted Average Common Shares Outstanding (in thousands)
Basic 58,380 55,724 58,321 55,624
Dilutive potential common shares 2,536 1,890 2,528 1,915
---------- ---------- ---------- ----------
Diluted 60,916 57,614 60,849 57,539
Dividends Per Share:
Per Preferred share $ .25 $ .25 $ .50 $ .50
See accompanying notes to consolidated condensed financial statements.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Six Months
Ended June 30,
-----------------------------
2001 2000
------------- ----------
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 10.6 $ 353.7
Adjustments to reconcile net income to net cash
from continuing operations
Income from discontinued operations - (340.4)
Depreciation and amortization 28.9 28.6
Deferred income taxes 9.5 13.4
Equity in undistributed earnings of unconsolidated affiliates (16.4) (18.0)
Distributions from unconsolidated affiliates 3.0 -
Gain on sale of assets (3.1) (2.3)
Extraordinary item, net of tax - 4.6
Tax benefit realized upon exercise of stock options 3.4 6.3
Changes in working capital items:
Accounts receivable (1.3) 7.4
Inventories 4.3 6.4
Other current assets 5.2 1.8
Accounts and wages payable (6.9) (18.0)
Accrued liabilities (19.2) (11.4)
Other, net (3.2) 2.4
--------- ----------
Net cash provided by operating activities of
continuing operations 14.8 34.5
--------- ----------
INVESTING ACTIVITIES:
Property acquisitions (27.0) (54.5)
Proceeds from disposal of property 6.2 3.7
Investment in and loans with affiliates (5.5) (1.5)
Other, net (1.5) 0.7
--------- ----------
Net cash used for investing activities of
continuing operations (27.8) (51.6)
--------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 30.0 794.0
Repayment of long-term debt (18.2) (750.5)
Proceeds from stock plans 1.6 16.8
Debt issuance costs - (13.4)
Cash dividends paid (0.1) (4.8)
Other, net (3.2) (2.8)
--------- -----------
Net cash provided by financing
activities of continuing operations 10.1 39.3
--------- ----------
CASH AND EQUIVALENTS:
Net increase in cash provided by (used for) continuing operations (2.9) 22.2
At beginning of year 21.5 11.9
--------- ----------
At end of period $ 18.6 $ 34.1
========= ==========
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 Common Earnings income Total
stock stock
Balance at December 31, 2000 $ 6.1 $ 0.6 $ 636.7 $ - $ 643.4
Comprehensive income:
Net income 10.6
Cumulative effect of
accounting change (0.9)
Change in fair market value
of cash flow hedge of
unconsolidated affiliate (1.0)
Comprehensive income 8.7
Dividends (0.1) (0.1)
Options exercised and stock
subscribed - - 3.3 - 3.3
------- ------- ------- ------- -------
Balance at June 30, 2001 $ 6.1 $ 0.6 $ 650.5 $ (1.9) $ 655.3
------- ------- ------- ------- -------
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 June 30, 2001 and December 31,
2000, the results of operations for the three and six months ended June 30,
2001 and 2000, and cash flows for the six months ended June 30, 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 and six months ended June 30, 2001 are not
necessarily indicative of the results to be expected for the full year
2001. Certain 2000 information has been reclassified to conform to the
current period presentation.
3. On June 14, 2000 KCSI's Board of Directors approved the spin-off of
Stilwell Financial Inc. ("Stilwell"), the Company's formerly 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").
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 and six-month periods ended June 30,
2000 reflect the results of operations and cash flows of Stilwell as
discontinued operations.
The following provides financial information of Stilwell for the three and
six months ended June 30, 2000 (in millions):
Three months Six months
ended June 30, 2000 ended June 30, 2000
Revenues $ 563.0 $1,108.1
Operating expenses 307.2 607.4
------- --------
Operating income 255.8 500.7
Equity in earnings of unconsolidated
affiliates 15.8 34.6
Gain on litigation settlement - 44.2
Gain on sale of Janus common stock - 15.1
Interest expense and other, net 10.2 17.5
------- --------
Pretax income 281.8 612.1
Income tax provision 102.3 216.6
Minority interest in consolidated earnings 27.8 55.1
------- --------
Income from discontinued operations,
net of income taxes $ 151.7 $ 340.4
======== ========
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. KCSI believes, based on discussions
with Stilwell management, that Stilwell has adequate financial resources
available to fund any obligation under the mandatory purchase and sale
provisions and Change in Ownership provisions described below. 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 June
30, 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. 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 June 30, 2001, KCSI could have been ultimately responsible
for approximately $665 million.
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. The
total incremental shares from assumed conversion of stock options included
in the computation of diluted earnings per share were 2,535,350 and
2,527,288, respectively, for the three and six months ended June 30, 2001
and 1,890,109 and 1,914,631,
respectively, for the three and six months ended June 30, 2000. The
weighted average of options to purchase 20,000 and 26,827 shares of KCSI
common stock were excluded from the diluted earnings per share computation
for the three and six months ended June 30, 2001, respectively, because the
exercise prices were greater than the average market price of the common
shares. For each of the three and six-month periods ended June 30, 2000,
the weighted average of options to purchase 6,414 shares were excluded from
the respective diluted earnings per share computation because the exercise
prices were greater than the average market price of the common shares.
For the three and six months ended June 30, 2000, potentially dilutive
securities at certain Stilwell related subsidiaries and affiliates affected
the numerator of the diluted earnings per share calculation. These
adjustments totaled approximately $2.7 million and $5.0 million for the
three and six months ended June 30, 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
June 30, 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. KCSI owns approximately 36.9% of Grupo TFM and 49% of Mexrail.
TMM (together with certain of its affiliates) owns approximately 38.5% 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 as
furnished by those affiliates is shown below. All information (including
Grupo TFM) is presented on a U.S. GAAP basis. Financial information of
immaterial unconsolidated affiliates has been omitted:
Financial Condition (dollars in millions):
June 30, 2001 December 31, 2000
----------------------------------------- --------------------------------------------
Southern Southern
Mexrail PCRC Grupo TFM Capital Mexrail PCRC Grupo TFM Capital
------- ---- ---------- ------- ------- ---- ---------- -------
Current assets $ 43.4 $ 9.3 $ 246.1 $ 2.0 $ 24.6 $ 7.1 $ 190.9 $ 0.2
Non-current assets 51.9 67.7 1,914.5 249.5 42.7 48.6 1,885.6 262.0
------- ------ ------------ --------- -------- ------ ----------- --------
Assets $ 95.3 $ 77.0 $ 2,160.6 $ 251.5 $ 67.3 $ 55.7 $ 2,076.5 $ 262.2
======= ====== ============ ========= ======== ======= =========== ========
Current liabilities $ 61.9 $ 6.0 $ 73.6 $ - $ 32.2 $ 0.6 $ 80.5 $ 0.4
Non-current liabilities 5.8 42.2 854.2 205.8 6.7 37.1 817.8 212.5
Minority interest - - 368.3 - - - 357.2 -
Equity of stockholders
and partners 27.6 28.8 864.5 45.7 28.4 18.0 821.0 49.3
------- ------ ------------ -------- -------- ------- ----------- --------
Liabilities and
equity $ 95.3 $ 77.0 $ 2,160.6 $ 251.5 $ 67.3 $ 55.7 $ 2,076.5 $ 262.2
======= ====== ============ ========= ======== ======= =========== ========
KCSI's investment $ 12.7 $ 12.5 $ 319.2 $ 22.8 $ 13.3 $ 9.5 $ 306.0 $ 24.6
======= ====== ============ ========= ======== ======= =========== ========
Operating Results (dollars in millions):
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- ---------------------
2001 2000 2001 2000
-------------------- ---------------------
Revenues:
Mexrail $ 14.5 $ 13.7 $ 29.1 $ 26.9
PCRC 0.0 0.0 0.0 0.0
Grupo TFM 171.9 163.3 327.9 310.0
Southern Capital 7.5 7.6 15.1 15.5
Operating costs and expenses:
Mexrail $ 15.3 $ 12.9 $ 30.6 $ 26.1
PCRC 0.5 0.7 0.9 0.9
Grupo TFM 129.2 110.6 199.5 217.0
Southern Capital 6.5 6.9 13.2 13.9
Net income:
Mexrail $ (0.5) $ 0.3 $ (0.8) $ 0.1
PCRC (0.3) (0.6) (0.3) (0.7)
Grupo TFM 13.3 19.2 43.5 39.1
Southern Capital 1.1 0.7 2.0 1.6
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 six
months of 2001, the Company has received approximately $1.4 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 future
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
cap agreements. The Company recorded an additional $0.2 million charge
during the first six months for changes in the fair value of its interest
rate hedging instruments from January 1, 2001 to June 30, 2001. As of June
30, 2001, the interest rate cap asset had a fair value of less than $0.1
million.
In addition, through June 30, 2001, the Company has recorded a reduction to
its stockholders' equity (accumulated other comprehensive income) of
approximately $1.9 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 ("Senior Notes"). These Senior 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 Senior Notes to exchange them for registered
notes with substantially identical terms. The registration exchange offer
expired on April 16, 2001 and all of the original Senior 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 (excluding
Train and Engine personnel). 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.
11. Waiver for Bank Debt Covenants. Due to the impact of the 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 on March 19, 2001 and was effective until May 15, 2001. In
addition, the Company requested an amendment to the applicable covenant
provisions of the credit agreement. The amendment, among other things,
revised certain of the covenant provisions (including financial and
coverage provisions) through March 31, 2002 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 June 30, 2001, the Company had
$419 million borrowed under these facilities, comprised of $389 million of
term debt and $30 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 in January
2002. The trial of a second group of Mississippi plaintiffs is also
scheduled for January 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 Senior 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 accounting principles
generally accepted in the United States of America.
Condensed Consolidating Statements of Income
Six months ended June 30, 2001 (dollars in millions)
(unaudited)
-------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
Revenues $ - $ 260.6 $ 31.4 $ 9.6 $ (14.4) $ 287.2
Costs and expenses 6.2 240.7 26.1 9.6 (14.4) 268.2
------ -------- -------- ------- --------- --------
Operating income (loss) (6.2) 19.9 5.3 - - 19.0
Equity in net earnings of
unconsolidated affiliates and
subsidiaries 15.4 19.0 (0.1) 17.1 (35.0) 16.4
Interest expense (0.4) (28.9) (1.7) (0.2) 1.5 (29.7)
Other, net - 3.3 0.3 - (1.5) 2.1
------ -------- -------- ------- --------- --------
Income from continuing
operations before
income taxes 8.8 13.3 3.8 16.9 (35.0) 7.8
Income tax provision (benefit) (2.2) (2.8) 1.5 0.3 - (3.2)
------ -------- -------- ------- --------- --------
Income before cumulative effect
of accounting change 11.0 16.1 2.3 16.6 (35.0) 11.0
Cumulative effect of accounting
change, net of income taxes (0.4) (0.4) - - 0.4 (0.4)
------ -------- -------- ------- --------- --------
Net income $10.6 $ 15.7 $ 2.3 $ 16.6 $ (34.6) $ 10.6
======= ======== ======== ========= ========= ========
Six months ended June 30, 2000 (dollars in millions)
(unaudited)
-------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
Revenues $ - $ 267.7 $ 31.8 $ 4.1 $ (10.3) $ 293.3
Costs and expenses 6.9 228.5 28.0 3.8 (10.3) 256.9
------ -------- -------- ------- --------- --------
Operating income (loss) (6.9) 39.2 3.8 0.3 - 36.4
Equity in net earnings of
Unconsolidated affiliates and
Subsidiaries 22.9 17.5 0.1 16.9 (39.4) 18.0
Interest expense (2.9) (35.5) (2.1) (0.9) 5.5 (35.9)
Other, net 4.1 4.6 0.4 - (5.5) 3.6
------ -------- -------- ------- --------- --------
Income from continuing
operations before income
taxes 17.2 25.8 2.2 16.3 (39.4) 22.1
Income tax provision (benefit) (2.0) 3.1 0.9 0.9 - 2.9
------ -------- -------- ------- --------- --------
Income from continuing
operations 19.2 22.7 1.3 15.4 (39.4) 19.2
Income from discontinued
operations 340.4 - - 340.4 (340.4) 340.4
------ -------- -------- ------- --------- --------
Income before extraordinary
items 359.6 22.7 1.3 355.8 (379.8) 359.6
Extraordinary items, net of
income taxes (5.9) - - - - (5.9)
------ -------- -------- ------- --------- --------
Net income $353.7 $ 22.7 $ 1.3 $ 355.8 $ (379.8) $ 353.7
======= ======== ======== ========= ========= ========
Condensed Consolidating Balance Sheet
As of June 30, 2001 (dollars in millions) (unaudited)
-------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
ASSETS:
Current assets $ 4.9 $ 173.7 $ 33.4 $ 6.0 $ (11.8) $ 206.2
Investments held for
operating purposes and
investments in Subsidiaries 679.0 456.3 0.6 363.5 (1,124.1) 375.3
Properties, net 0.3 1,228.8 91.7 2.0 -- 1,322.8
Intangibles and other
assets 0.5 29.2 13.2 0.1 (1.1) 41.9
------- --------- -------- --------- ---------- ---------
Total assets $684.7 $ 1,888.0 $ 138.9 $ 371.6 $(1,137.0) $ 1,946.2
======= ========= ======== ========= ========== =========
LIABILITIES AND EQUITY:
Current liabilities $ 8.5 $ 200.6 $ 17.7 $ 14.0 $ (11.8) $ 229.0
Long-term debt 1.6 632.4 7.3 4.9 -- 646.2
Payable to affiliates 5.2 -- 33.0 -- (38.2) --
Deferred income taxes 9.1 320.3 10.0 4.7 (1.1) 343.0
Other liabilities 5.0 61.3 6.4 -- -- 72.7
Stockholders' equity 655.3 673.4 64.5 348.0 (1,085.9) 655.3
------- --------- -------- --------- ---------- ---------
Total liabilities and
equity $684.7 $ 1,888.0 $ 138.9 $ 371.6 $(1,137.0) $ 1,946.2
======= ========= ======== ========= ========== =========
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
Six months ended June 30, 2001 (dollars in millions)(unaudited)
-------------------------------------------------------------------------------------
Subsidiary Guarantor Non-Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
Net cash flows provided by (used
for) operating activities: $ (4.5) $ 12.5 $ 1.3 $ 2.1 $ 3.4 $ 14.8
-------- -------- -------- -------- -------- --------
Investing activities:
Property acquisitions - (25.6) (1.4) - - (27.0)
Investments in and loans to
affiliates - - - (7.2) 1.7 (5.5)
Other, net - 1.5 4.6 - (1.4) 4.7
-------- -------- -------- -------- -------- --------
Net - (24.1) 3.2 (7.2) 0.3 (27.8)
-------- -------- -------- -------- -------- --------
Financing activities:
Proceeds from issuance of
long-term debt - 30.0 - - - 30.0
Repayment of long-term debt - (16.6) (1.4) (0.2) - (18.2)
Proceeds from loans from
affiliates 1.5 - - - (1.5) -
Proceeds from stock plans 1.6 - - - 1.6
Cash dividends paid (0.1) - - - - (0.1)
Other, net - (2.3) (1.0) 2.3 (2.2) (3.2)
-------- -------- -------- -------- -------- --------
Net 3.0 11.1 (2.4) 2.1 (3.7) 10.1
-------- -------- -------- -------- -------- --------
Cash and equivalents:
Net increase (decrease) (1.5) (0.5) 2.1 (3.0) - (2.9)
At beginning of period 1.5 17.4 2.1 0.5 - 21.5
-------- -------- -------- -------- -------- --------
At end of period $ - $ 16.9 $ 4.2 $ (2.5) $ - $ 18.6
======== ======== ======== ========= ========= ========
Six months ended June 30, 2000 (dollars in millions)
(unaudited)
-------------------------------------------------------------------------------------
Subsidiary Guarantor Non-Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
Net cash flows provided by (used
for) operating activities: $ (9.1) $ 38.3 $ 5.6 $ 10.7 $ (11.0) $ 34.5
-------- -------- -------- -------- -------- --------
Investing activities:
Property acquisitions - (52.0) (2.5) - - (54.5)
Investments in and loans to
affiliates (29.7) - - (1.7) 29.9 (1.5)
Repayment of loans to
affiliates 544.8 - - - (544.8) -
Other, net (0.3) 2.9 0.7 (0.2) 1.3 4.4
-------- -------- -------- -------- -------- --------
Net 514.8 (49.1) (1.8) (1.9) (513.6) (51.6)
======== ======== ======== ======== ======== ========
Financing activities:
Proceeds from issuance of
long-term debt 125.0 669.0 - - - 794.0
Repayment of long-term debt (648.4) (72.6) (29.5) - - (750.5)
Proceeds from loans from
affiliates - 46.2 32.7 - (78.9) -
affiliates - (577.6) - - 577.6 -
Proceeds from stock plans 16.8 - - - - 16.8
Cash dividends paid (4.8) (14.0) (4.8) (8.7) 27.5 (4.8)
Other, net 0.6 (2.9) 0.7 0.1) (1.1) (2.8)
Net (510.8) 34.7 (0.9) (8.8) 525.1 39.3
-------- -------- -------- -------- -------- --------
Cash and equivalents:
Net increase (5.1) 23.9 2.9 - 0.5 22.2
At beginning of period
5.2 4.2 2.2 0.3 - 11.9
-------- --------- -------- -------- -------- -------
At end of period $ 0.1 $ 28.1 $ 5.1 $ 0.3 $ 0.5 $ 34.1
======== ========= ======== ======== ======== =======
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 (Registration No. 333-54262) and those factors
identified in the "Risk Factors" section of the Company's Registration Statement
on Form S-3, as amended and declared effective on June 5, 2001, which is on file
with the SEC (Registration No. 333-61006) and which "Risk Factors" sections are
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
Shelf Registration Statements and Public Securities Offerings. The Company has
carried forward $200 million aggregate amount of unsold securities from the
Initial Shelf (defined below) to a Shelf Registration Statement filed on Form
S-3 (Registration No. 333-61006) on May 16, 2001 (the "Second Shelf") for the
offering of up to $450 million aggregate amount of securities. The SEC declared
the Second Shelf effective on June 5, 2001. The Company filed a
Universal Shelf Registration Statement on Form S-3 (Registration No. 33-69648),
(the "Initial Shelf") in September 1993, as amended in April 1996, for the
offering of up to $500 million aggregate amount of securities. The SEC declared
the Initial Shelf effective on April 22, 1996; however, no securities have been
issued thereunder. Securities in the aggregate amount of $300 million remain
available under the Initial Shelf.
On June 7, 2001, the Company announced plans for concurrent public offerings of
$115 million of mandatory convertible units and 4 million shares of the
Company's common stock under the Second Shelf. These offerings were independent
of each other and completion of one was not contingent on the other. Anticipated
proceeds from these offerings were to be applied to reduce existing bank debt.
However, on June 19, 2001, the Company issued a press release stating that
because of management's belief that the current stock price did not properly
reflect the valuation of the Company, pursuing these offerings would not be in
the best interest of KCSI's current shareholders. In response to numerous
inquiries, on June 29, 2001, the Company clarified its position concerning the
stock offerings by announcing that it has not ruled out going forward with the
common stock offering should the Company determine market conditions are
appropriate. The Company also indicated that it does not expect to make a
mandatory convertible unit offering in the foreseeable future.
Purchase of Additional Interest in Grupo TFM. On June 13, 2001, KCSI and
Transportacion Maritima Mexicana, S.A. de C.V. ("TMM") announced, subject to
certain financing and other customary conditions, their intention to exercise
their call and cause TFM to purchase the 24.6% interest in Grupo TFM currently
owned by the Mexican government for approximately $249 million. The purchase
price will be calculated by accreting the Mexican government's initial
investment of $200 million from the date of the Mexican government's investment
through the date of the purchase by TFM, using an interest rate on one-year U.S.
Treasuries. Approximately $81 million of the purchase price will be offset with
amounts due to TFM as a result of the reversion of a portion of the concession
to the Mexican government by TFM that covers the Hercules-Mariscala rail line.
The remainder of the funds required to purchase the Mexican government's Grupo
TFM shares are anticipated to be raised at TFM. This transaction is expected to
be completed in the third quarter of 2001.
Change in Certifying Accountant. On June 20, 2001, the Company notified the
accounting firm of PricewaterhouseCoopers LLP ("PWC"), the Company's principal
accountant during the two most recent fiscal years, that PWC had been replaced
as the Company's principal accountant. Additionally on June 20, 2001, the
Company engaged the accounting firm of KPMG LLP ("KPMG") as its principal
accountant for the current fiscal year.
For the two most recent fiscal years, the reports of PWC on the Company's
financial statements contained no adverse opinion or disclaimer of opinion and
were not qualified as to uncertainty, audit scope or accounting principle. The
decision to change certifying accountants was discussed by the Company's Audit
Committee and approved by the Chairman of the Audit Committee. The selection of
KPMG was made after the completion of a competitive proposal process, which
involved all five major accounting firms and began in April 2001.
New Rules Governing Major Railroad Mergers and Consolidations. On June 11, 2001,
the Surface Transportation Board ("STB") issued new rules governing major
railroad mergers and consolidations involving two or more "Class I" railroads
(railroads with annual revenues of at least $250 million, as indexed for
inflation). These new rules substantially increase the burden on rail merger
applicants to demonstrate that a proposed transaction would be in the public
interest. The new rules require applicants to demonstrate that, among other
things, a proposed transaction would enhance competition where necessary to
offset negative effects of the transaction, such as competitive harm, and to
address fully the impact of the transaction on transportation service.
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.
KCSI names former U.S. Secretary of Transportation Rodney E. Slater to its
Board of Directors. On June 5, 2001, the Company announced that Rodney E.
Slater, former U.S. Secretary of Transportation and head of the Federal
Highway Administration, was named to the Company's Board of Directors. Mr.
Slater is currently a partner in the public policy practice group of Patton
Boggs LLP in Washington, D.C.
KCSI enters into lease for new Corporate Headquarters. On June 26, 2001, the
Company entered into a 15-year lease agreement for its new corporate
headquarters building in downtown Kansas City, Missouri. The lease agreement is
subject to completion of the building, which is currently expected to be in
April 2002.
Additionally, in June 2001, the Company sold the building that currently serves
as its corporate headquarters in Kansas City, Missouri in anticipation of
occupying these new facilities in the second quarter of 2002. The Company
realized a net gain of approximately $0.9 million from this sale. The Company
will remain in the existing building until the new corporate office facilities
are completed and available for occupancy. Further, in June 2001, the Company
received $0.5 million for the sale of an option providing the holder of the
option the right to purchase the Company's 80% ownership in the common stock of
Wyandotte Garage Corporation, an owner and operator of a parking facility
located in downtown Kansas City, Missouri adjacent to the Company's existing
headquarters building. The amount received for this option is nonrefundable and
the option is exercisable upon the resolution of certain shareholder matters.
The $0.5 million received for the option has been deferred until completion of
the transaction or until the option expires.
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 with
substantially identical terms. 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 (excluding Train and Engine
personnel). 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.
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 on March
19, 2001 and was effective until May 15, 2001. In addition, the Company
requested an amendment to the applicable covenant provisions of the credit
agreement. The amendment, among other things, revised certain of the covenant
provisions (including financial and coverage provisions) through March 31, 2002
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 June 30, 2001, the Company
had $419 million borrowed under these facilities, comprised of $389 million of
term debt and $30 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 $0.2 million charge during the first six months
for changes in the fair value of its interest rate hedging instruments from
January 1, 2001 to June 30, 2001. As of June 30, 2001, the interest rate cap
asset had a fair value of less than $0.1 million.
In addition, through June 30, 2001, the Company recorded a reduction to its
stockholders' equity (accumulated other comprehensive loss) of approximately
$1.9 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 $4.7 million (8(cent)
per diluted share) for the second quarter of 2001 compared to income from
continuing operations of $8.8 million (15(cent) per diluted share) for the
second quarter of 2000. This $4.1 million quarter to quarter variance resulted
from declines in domestic operating income and equity earnings from Grupo TFM of
$5.5 million and $3.1 million, respectively, partially offset by a $3.9 million
decrease in interest expense and lower income taxes of $1.3 million. The
Company's consolidated second quarter 2001 revenues declined $1.2 million and
operating expenses rose $4.3 million compared to the second quarter of 2000. The
Company reported net income of $4.7 million (8(cent) per diluted share) for the
second quarter of 2001 compared to net income of $160.5 million ($2.74 per
diluted share) for the second quarter of 2000 primarily as a result of income
from the discontinued operations of Stilwell of $151.7 million recorded for the
second 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
second quarter of 2001.
For the six months ended June 30, 2001, income from continuing operations was
$11.0 million (18(cent) per diluted share) compared to $19.2 million (33(cent)
per diluted share) for the six months ended June 30, 2000. This $8.2 million
period to period decline was primarily due to a $17.4 million decrease in
domestic operating income, a $1.6 million decline in equity earnings from
unconsolidated affiliates and a $1.5 million decrease in other, net, partially
offset by a decrease in interest expense of $6.2 million and lower income taxes
of $6.1 million for the current six-month period. For the first six months of
2001, KCSI's consolidated revenues declined 2% and consolidated operating
expenses were 4% higher compared with the same 2000 period. Equity earnings from
Grupo TFM remained relatively flat period to period. The Company's equity
earnings for the six months ended June 30, 2001 reflect the Company's
proportionate share ($9.1
million) of the income recorded by Grupo TFM relating to the reversion of
certain concession assets to the Mexican government.
The Company reported a cumulative effect of an accounting change of $0.4 million
(after tax) in the first six months of 2001 as a result of the implementation of
SFAS 133 discussed above. In the first six months of 2000, the Company completed
a debt refinancing whereby it retired approximately $400 million of its debt
securities prior to maturity. Accordingly, the Company recorded debt retirement
costs of approximately $5.9 million, after tax (10(cent) per diluted share) in
the first six months of 2000, which is presented as an extraordinary item in the
accompanying consolidated condensed statements of income. The Company reported
net income of $10.6 million (17(cent) per diluted share) for the first six
months of 2001 compared to net income of $353.7 million ($6.05 per diluted
share) for the first six months of 2000. This decrease was primarily the result
of income from the discontinued operations of Stilwell of $340.4 million
recorded for the first six months 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 first six months of 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 and six-month periods ended June 30,
2001 and June 30, 2000, respectively (in millions):
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
2001 2000 2001 2000
------ ------ ------ ------
Revenues $143.2 $144.4 $287.2 $293.3
Costs and expenses 130.3 126.0 268.2 256.9
------ ------ ------ ------
Operating income 12.9 18.4 19.0 36.4
Equity in net earnings of
unconsolidated affiliates 5.2 9.2 16.4 18.0
Interest expense (14.5) (18.4) (29.7) (35.9)
Other, net 1.1 0.9 2.1 3.6
------ ------ ------ ------
Income from continuing operations
before income taxes 4.7 10.1 7.8 22.1
Income tax provision (benefit) - 1.3 (3.2) 2.9
------ ------ ------ ------
Income from continuing operations $ 4.7 $ 8.8 $ 11.0 $ 19.2
------ ------ ------ ------
The following table summarizes the revenues and carload statistics of
KCSR/Gateway for the three and six-month periods ended June 30, 2001 and June
30, 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 Six months Three months Six months
ended June 30, ended June 30, ended June 30, ended June 30,
-------------------- ------------------ ------------------ ---------------
2001 2000 2001 2000 2001 2000 2001 2000
-------- ------- -------- ------- -------- -------- ------- -------
General commodities:
Chemical and petroleum $30.5 $32.3 $62.8 $64.2 36.2 38.4 77.0 78.2
Paper and forest 32.1 33.8 62.5 67.5 45.7 49.7 90.6 100.1
Agricultural and mineral 20.9 23.3 42.2 47.9 31.0 33.2 61.9 68.3
-------- ------- -------- ------- -------- -------- ------- -------
Total general commodities 83.5 89.4 167.5 179.6 112.9 121.3 229.5 246.6
Intermodal and automotive 18.0 15.5 36.6 30.7 73.5 63.6 150.3 121.3
Coal 28.2 26.0 55.9 55.2 48.2 46.5 94.7 94.5
-------- ------- -------- ------- -------- -------- ------- -------
Carload revenues and carload
and intermodal units 129.7 130.9 260.0 265.5 234.6 231.4 474.5 462.4
Other rail-related revenues 10.5 11.1 20.4 22.9 ======== ======== ======= =======
Total KCSR/Gateway
Western revenues 140.2 142.0 280.4 288.4
Other subsidiary revenues 3.0 2.4 6.8 4.9
-------- ------- -------- -------
Total consolidated
revenues $143.2 $144.4 $287.2 $293.3
-------- ------- -------- -------
The following table summarizes the costs and expenses of KCSR/Gateway Western
for the three and six-month periods ended June 30, 2001 and June 30, 2000
respectively.
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
2001 2000 2001 2000
-------- ------ -------- ------
Salaries, wages and benefits $ 46.4 $ 46.4 $ 94.0 $ 96.1
Fuel 11.4 11.0 23.8 23.1
Operating leases 13.9 14.2 27.3 28.6
Depreciation and amortization 13.6 13.2 27.0 26.4
Purchased services 12.5 12.0 23.5 24.9
Casualties and insurance 7.4 6.7 21.8 12.7
Materials and supplies 7.3 7.8 14.6 16.1
Car Hire 5.7 4.2 12.2 6.9
Other 6.9 6.0 12.6 12.5
------- ------ ------- ------
Total KCSR/Gateway Western
costs and expenses 125.1 121.5 256.8 247.3
Other expenses 5.2 4.5 11.4 9.6
------- ------ ------- ------
Total KCSI expenses $ 130.3 $126.0 $ 268.2 $256.9
======= ====== ======= ======
Three Months Ended June 30, 2001 Compared With Three Months Ended June 30, 2000
Income from Continuing Operations. The Company reported income from continuing
operations of $4.7 million for the three months ended June 30, 2001 compared
with $8.8 million for the three months ended June 30, 2000. This $4.1 million
variance resulted primarily from declines in domestic operating income and
equity earnings from Grupo TFM of $5.5 million and $3.1 million, respectively,
partially offset by a $3.9 million decrease in interest expense and lower income
taxes of $1.3 million.
Revenues. Consolidated revenues for the second quarter of 2001 totaled $143.2
million compared to $144.4 million in the second quarter of 2000. This $1.2
million decline resulted primarily from lower KCSR/Gateway Western revenues of
approximately $1.8 million partially offset by higher revenues from certain
other smaller subsidiaries. Coal and automotive revenues increased 8.5% and
171.7%, respectively, for the second quarter of 2001 compared to the second
quarter of 2000. These increases were offset by lower second quarter 2001
revenues for paper and forest product, chemical and petroleum product and
agriculture and mineral product revenues, which declined approximately 5%, 6%
and 10%, respectively, compared to the second quarter of 2000.
Operating Expenses. Consolidated operating expenses increased $4.3 million
(3.4%) to $130.3 million for the second quarter of 2001 compared to $126.0
million in second quarter 2000 primarily as a result of higher KCSR/Gateway
Western expenses of $3.6 million and higher expenses at certain other smaller
subsidiaries. Quarter to quarter increases in fringe benefit costs ($1.0
million) and car hire costs ($1.5 million) were the primary causes for the
higher KCSR/Gateway Western expenses. Smaller increases for fuel, purchased
services, casualties and insurance and other employee expenses were mostly
offset by declines in salaries and wages expense and materials and supplies
expense. The Company's consolidated expenses for the second quarter also include
an approximate $0.9 million non-recurring gain on the sale of certain operating
real estate and an approximate $1.1 million expense related to a litigation
settlement at a subsidiary.
Interest Expense. Interest expense for the second quarter of 2001 declined $3.9
million (21.2%) from the second quarter of 2000 as a result of lower interest
rates on variable rate debt (variable rate debt approximates $419 million at
June 30, 2001) and lower amortization related to debt issue costs.
Unconsolidated Affiliates. The Company recorded equity earnings of $5.2 million
for the second quarter of 2001 compared to $9.2 million for the second quarter
of 2000. The decline is primarily the result of lower equity earnings from Grupo
TFM, which decreased $3.1 million quarter to quarter. Grupo TFM revenues
improved 5.3% to $171.9 million in the second quarter of 2001 compared to $163.3
million in the second quarter of 2000. These improvements in revenues were
offset by an approximate 16.8% increase in operating expenses related primarily
to salaries and wages, fringe benefits, fuel, car hire and lease costs. These
higher expenses led to a decline in Grupo TFM operating income of approximately
19% quarter to quarter. The operating ratio as reported by Grupo TFM was 74.6%
for second quarter 2001 compared to 67.7% for second quarter 2000. Additionally,
second quarter 2001 results include a $2.9 million deferred tax provision
(calculated under U.S. generally accepted accounting principles - "U.S. GAAP")
compared to a deferred tax benefit of $3.2 million in the second quarter of
2000. The Company reports its equity in Grupo TFM under U.S. GAAP while Grupo
TFM reports its financial results under International Accounting Standards.
Combined KCSR/Gateway Western Operating Results. The following provides a
comparative analysis of the revenue and expense components of KCSR/Gateway
Western operating companies for the quarter ended June 30, 2001 versus the
quarter ended June 30, 2000:
Revenues
Combined KCSR and Gateway Western revenues decreased approximately $1.8 million
quarter to quarter as increases in automotive and coal revenues were offset by
decreases in chemical and petroleum product, paper and forest product and
agricultural and mineral product revenues.
Chemical and petroleum products. For the three months ended June 30, 2001,
chemical and petroleum product revenues decreased $1.8 million (5.6%) compared
to the same period in 2000. Higher revenue for plastic products was offset by
declines in most other chemical products. The increase in revenues for plastic
products resulted from a plant expansion by a customer in late 2000. The decline
in other chemical and petroleum products resulted primarily from lower industry
production reflecting the continuing impact of the slowdown of the U.S. economy.
These volume related revenue declines were somewhat mitigated through certain
price increases in the second quarter of 2001. Management believes an
improvement in the economic conditions could increase demand for chemical and
petroleum products resulting in an increase in related revenues.
Paper and forest products. Paper and forest product revenues decreased $1.7
million (5.0%) compared to the same period in 2000. Military and other carloads
increased $1.3 million (89.4%) quarter to quarter due to the transfer of
certain National Guard personnel and related equipment to a military base near
our rail lines. This increase was offset by declines in most other paper and
forest product commodities. The continued decline in the growth of the U.S.
economy has affected the paper and forest product industry significantly as the
need for raw materials in related manufacturing and production industries has
decreased. Price increases during the second quarter of 2001 have partially
offset related volume declines. Management believes an improvement in the
economic conditions could increase demand for paper and forest products
resulting in an increase in related revenues.
Agricultural and mineral products. Agricultural and mineral product revenues
decreased $2.4 million (10.3%) compared to the same period in 2000. This decline
was primarily the result of lower domestic grain shipments and shorter hauls. A
general decline in the production of poultry in the United States has decreased
demand for grain deliveries to the Company's chicken producing customers.
Additionally, flooding in Iowa and Minnesota forced a temporary shift in the
origination of some domestic grain shipments to Illinois and Indiana, which
resulted in significantly shorter hauls for KCSR.
Intermodal and automotive. Intermodal and automotive revenues increased $2.5
million (16.1%) for the quarter ended June 30, 2001 compared to the quarter
ended June 30, 2000. This improvement is comprised primarily of an increase in
automotive revenues, which increased $4.8 million quarter to quarter, partially
offset by a $2.3 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 near Kansas City; and (ii) Ford business originating on 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. Second quarter 2001 intermodal revenues declined due to several
factors including i) the impact of the slow-down in the U.S. economy, which has
caused related declines in demand; ii) customer erosion due to service delays
arising from congestion experienced in the first quarter of 2001; and iii) a
marketing agreement with Norfolk Southern, which provides that KCSR will perform
haulage services for Norfolk Southern from Meridian, Mississippi to Dallas,
Texas for an agreed upon haulage fee. This marketing agreement was entered into
in May 2000, but was not fully operational until June 2000. 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 also has a lower cost base to KCSR as certain
costs such as fuel and car hire are incurred and paid by Norfolk Southern.
Coal. Coal revenues increased $2.2 million (8.5%) for the three months ended
June 30, 2001 compared to the three months ended June 30, 2000, primarily as a
result of higher demand from coal customers replenishing their stockpiles due to
lower inventory levels. Additionally, coal revenues were impacted by an increase
in electricity generation by coal customers as a result of hot weather
conditions in the latter part of the second quarter. Also contributing to the
increase was the return of Kansas City Power and Light's Hawthorn plant to
production in June 2001. The Hawthorn plant had been out of service since
January 1999 due to an explosion at the Kansas City facility.
Costs and Expenses
General. For the three months ended June 30, 2001, KCSR/Gateway Western
operating costs increased $3.6 million from the same three-month period in 2000.
Increases in fringe benefit costs ($1.0 million) and car hire costs ($1.5
million) were the primary causes for the higher KCSR/Gateway Western expenses.
Smaller increases for fuel, purchased services, casualties and insurance and
other employee expenses were primarily offset by declines in salaries and wages
expense and materials and supplies expense.
Salaries, Wages and Benefits. Salaries, wages and benefits expense were $46.4
million for both the three months ended June 30, 2001 and June 30, 2000,
respectively. A decrease of approximately $1.0 million in salaries and wages as
a result of an overall reduction in the number of full-time employees was offset
by an increase of $1.0 million in fringe benefit costs as a result of higher
health costs, which rose approximately 15%.
Fuel. Fuel costs for the three months ended June 30, 2001 increased $0.4 million
(4.0%) compared to the three months ended June 30, 2000. Higher market prices,
which resulted in a 6% increase in the average price per gallon, more than
offset a 2% decline in fuel usage. Fuel costs represented approximately 9.1% of
total operating expenses for each of the three-month periods ended June 30, 2001
and 2000.
Operating Leases. For the three months ended June 30, 2001, operating lease
expense decreased $0.3 million (2.1%) compared to the three months ended June
30, 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 $13.6
million for the three-month period ended June 30, 2001 compared to $13.2 million
for the three month period ended June 30, 2000. This increase results from
increases in the asset base partially offset by property retirements and lower
STB approved depreciation rates.
Purchased Services. For the three months ended June 30, 2001, purchased services
expense increased $0.5 million compared with the same period in 2000. This
increase resulted from higher professional fees related to casualty claims.
Casualties and Insurance. For the three months ended June 30, 2001, casualties
and insurance expense increased $0.7 million (10.4%) compared with the three
months ended June 30, 2000 primarily as a result of higher freight losses
associated with derailments and higher personal injury costs associated with a
third party claim. Casualties and insurance expenses decreased significantly in
the second quarter of 2001 compared to the first quarter of 2001 as a result of
fewer derailments, which management believes is more representative of the
well-maintained physical plant of KCSR and Gateway Western.
Car Hire. For the three months ended June 30, 2001, car hire expense, (car hire
payable, net of receivables), increased $1.5 million (35.7%) compared to the
three months ended June 30, 2000. This increase resulted primarily due to a
higher number of freight cars from other railroads on the Company's rail line
coupled with a lower number of KCSR freight cars offline being used by other
railroads. Contributing to the higher number of freight cars on line was the
larger number of auto rack cars being used to serve the increase in automotive
traffic. As operations became more fluid in the second quarter of 2001, car hire
costs showed improvement, declining approximately 12.6% compared to the first
quarter of 2001.
Operating Income and Operating Ratio. Operating income for KCSR/Gateway Western
for the three months ended June 30, 2001 decreased $5.4 million, or 26.3%,
compared to the same three-month period in 2000. This decline in operating
income resulted from a 1.3% decrease in revenues and a 3.0% increase in
operating expenses. These factors also resulted in a combined KCSR/Gateway
Western operating ratio of 88.1% in the second quarter of 2001 compared to 84.9%
in the second quarter of 2000.
Six Months Ended June 30, 2001 Compared With The Six Months Ended
June 30, 2000
Income from Continuing Operations. The Company reported income from continuing
operations of $11.0 million for the six months ended June 30, 2001 compared with
$19.2 million for the six months ended June 30, 2000. This $8.2 million period
to period decline was primarily due to a $17.4 million decrease in domestic
operating income, a $1.6 million decline in equity earnings from unconsolidated
affiliates and a $1.5 million decrease in other, net partially offset by a
decrease in interest expense of $6.2 million and lower income taxes of $6.1
million for the current six-month period.
Revenues. Consolidated revenues for year to date 2001 totaled $287.2 million
compared to $293.3 million in the same period in 2000. This $6.1 million decline
resulted from lower KCSR/Gateway Western revenues of approximately $8.0 million
partially offset by higher revenues from certain other smaller subsidiaries.
Coal and automotive revenues increased 1.1% and 159.4% respectively, for the six
months ended June 30, 2001 compared to the six months ended June 30, 2000. These
increases were offset by lower year to date 2001 revenues for chemical and
petroleum product, agriculture and mineral product, and paper and forest product
revenues, which declined 2.2%, 11.9% and 7.4%, respectively.
Operating Expenses. Consolidated operating expenses increased $11.3 million
(4.4%) to $268.2 million for the six months ended June 30, 2001 compared to
$256.9 million in the same period in 2000, resulting from higher
KCSR/Gateway Western expenses of $9.5 million and higher expenses at certain
other smaller subsidiaries. The increase in KCSR/Gateway expenses was
attributable to higher costs for casualty and insurance, car hire and fuel.
These increases were partially offset by lower year to date costs for salaries
and wages, fringe benefits, materials and supplies, purchased services and
operating leases. The Company's consolidated expenses for year to date 2001 also
include approximately $1.3 million of one-time costs related to severance
benefits for the workforce reduction discussed in "Recent Developments", an
approximate $0.9 million non-recurring gain on the sale of certain operating
real estate and an approximate $1.1 million expense related to a litigation
settlement at a subsidiary.
Interest Expense. Interest expense for the first half of 2001 declined $6.2
million compared to the same period in 2000 as a result of lower interest rates
on variable rate debt and lower amortization related to debt issue costs.
Income tax expense. For the six months ended June 30, 2001, the income tax
benefit was $3.2 million compared to an income tax provision of $2.9 million for
the six months ended June 30, 2000. The variance in income tax expense is
primarily the result of a decline in the Company's domestic operating results
and changes in associated book/tax temporary differences and certain non-taxable
items. Exclusive of equity earnings from Grupo TFM for each of the respective
periods, the Company recognized a pre-tax loss of $8.2 million for the six
months ended June 30, 2001 compared to pre-tax income of $5.9 million for the
six months ended June 30, 2000. 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.
Unconsolidated Affiliates. The Company recorded equity earnings of $16.4 million
for the six months ended June 30, 2001 compared to $18.0 for the six months
ended June 30, 2000. This decline is primarily the result of lower equity
earnings from Mexrail, which decreased $1.0 million compared to the same period
in 2000. Equity earnings from Grupo TFM were $16.0 million in the first half of
2001 compared to $16.2 million in the same period in 2000. Grupo TFM revenues
increased 5.8% to $327.9 million for the six months ended June 30, 2001 from
$310.0 for the six months ended June 30, 2000. These higher revenues were offset
by an approximate 16.6% increase in operating expenses (exclusive of the income
related to the reversion of certain concession assets discussed below) resulting
in a 19.5% decline in ongoing operating income from period to period. During the
first quarter of 2001, TFM recorded approximately $60.0 million in pre-tax
income relating to the reversion of certain concession assets to the Mexican
Government. The Company's year to date equity earnings from Grupo TFM reflect
our proportionate share of this income of approximately $9.1 million. Under U.S.
GAAP, the deferred tax provision was $24.6 million for the six months ended June
30, 2001 compared to a deferred tax benefit of $18.8 million for the same period
in 2000. The Company reports its equity in Grupo TFM under U.S. GAAP while Grupo
TFM reports its financial results under International Accounting Standards.
Combined KCSR/Gateway Western Operating Results. The following provides a
comparative analysis of the revenue and expense components of KCSR/Gateway
Western operating companies for the six months ended June 30, 2001 versus the
six months ended June 30, 2000:
Revenues
Combined KCSR/Gateway Western revenues for the first half of 2001 declined
approximately $8.0 million compared to the same period in 2000 as increases in
automotive and coal revenues were offset by decreases in chemical and petroleum
product, paper and forest product and agricultural and mineral product revenues.
Chemical and petroleum products. For the six months ended June 30, 2001,
chemical and petroleum product revenues decreased $1.4 million (2.2%) compared
to the same period in 2000. Similar to the second quarter of 2001, an increase
in revenue for plastic products (due to a plant expansion) was offset by
declines in most other chemical products. The decline in other chemical and
petroleum products resulted primarily from lower industry production reflecting
the continuing impact of the slowdown of the U.S. economy. Volume related
revenue declines were somewhat mitigated through certain price increases in the
second quarter of 2001. Chemical and petroleum product revenue accounted for
24.2% of total carload revenues for each of the six months ended June 30, 2001
and 2000.
Paper and forest products. Paper and forest product revenues for the six months
ended June 30, 2001 decreased $5.0 million (7.4%) compared to the same period in
2000. As further discussed in the second quarter analysis, an increase in
military and other carload revenues of $1.4 million (39.5%) period to period
were offset by declines in most other paper and forest products due to the
continued slowdown of the U.S. economy. Additionally, as discussed in the second
quarter analysis, certain pricing increases have mitigated some of the demand
driven volume declines. Paper and forest product revenue accounted for 24.0% and
25.4% of total carload revenues for the six months ended June 30, 2001 and 2000,
respectively.
Agricultural and mineral products. Agricultural and mineral product revenues for
the six months ended June 30, 2001 decreased $5.7 million (11.9%) compared to
the six months ended June 30, 2000. Similar to the second quarter of 2001
discussed above, this decline was primarily the result of lower domestic grain
shipments and shorter hauls. Agricultural and mineral products accounted for
16.2% and 18.0% of total carload revenues for the six months ended June 30, 2001
and 2000, respectively.
Intermodal and Automotive. Intermodal and automotive revenues increased $5.9
million (19.2%) for the first six months of 2001 compared to the same period in
2000. Similar to the second quarter trends discussed above, this improvement
consisted of an increase in automotive revenues partially offset by a decline in
intermodal revenues. Automotive revenues for the six months ended June 30, 2001
increased $9.0 million period to period while intermodal revenues declined $3.1
million. Intermodal and automotive revenues accounted for 14.1% and 11.6% of
total carload revenues for the six months ended June 30, 2001 and 2000,
respectively.
Coal. Coal revenues increased $0.7 million (1.3%) for the six months ended June
30, 2001 compared to the same period 2000. Higher coal revenues were attributed
primarily to coal customers replenishing stockpiles and due to an increase in
electricity generation by coal customers in late second quarter of 2001. Coal
revenues accounted for 21.5% and 20.8% of total carload revenues for the six
months ended June 30, 2001 and 2000, respectively.
Costs and Expenses
General. For the six months ended June 30, 2001, KCSR/Gateway Western operating
costs increased $9.5 million from the same six-month period in 2000, primarily
as a result of higher costs for casualty and insurance, care hire and fuel.
These increases were partially offset by declines in salaries wages and
benefits, operating leases, purchased services, and materials and supplies.
Salaries, Wages and Benefits. Salaries, wages and benefits expense for the six
months ended June 30, 2001 decreased $2.1 million compared to the six months
ended June 30, 2000 primarily as a result of reduced employee counts, lower
overall overtime costs, and the use of fewer relief crews coupled with lower
fringe benefits. Fringe benefit costs were lower period to period because of a
decline in stock option exercises and reductions in retirement-based costs for
certain union employees partially offset by higher health insurance costs. These
declines were also 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 six months ended June 30, 2001, fuel expense increased $0.7
million (3.0%) compared to the same period in 2000. An approximate 7% decrease
in fuel usage was more than offset by an increase of nearly 11% in the average
cost per gallon period to period. Fuel costs represented approximately 9.2% and
9.3% of total operating expenses for the six month periods ended June 30, 2001
and 2000, respectively.
Operating Leases. For the six months ended June 30, 2001, operating lease
expense decreased $1.3 million compared to the same period in 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 $27.0
million for the first half of 2001 compared to $26.4 million for the same period
in 2000. This increase resulted primarily from increases in the asset base
partially offset by property retirements and lower STB approved depreciation
rates. Depreciation and amortization expense represented 10.5% and 10.7% of
total operating expenses for the first six months of 2001 and 2000,
respectively.
Purchased Services. For the first half of 2001, purchased services expense
decreased $1.4 million compared to the same period in 2000. Much of this decline
was attributable to fewer intermodal lift services arising from a decline in
trailers handled at terminals coupled with an increase in lift charges billed to
others. Additionally, lower environmental compliance costs and other general
purchased services costs contributed to the decline period to period.
Casualties and insurance. Casualties and insurance expense rose $9.1 million for
the first six months of 2001 compared to the first six months of 2000.
Approximately $8.5 million of this increase related to several significant
derailments and the settlement of a significant personal injury claim in the
first quarter of 2001. These first quarter derailments had a residual effect on
our service levels due to mainline downtime, which resulted in some congestion
and operating inefficiencies during the first quarter and early second quarter
2001. 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 half of 2001, car hire expense increased $5.3 million
compared to the same period in 2000. As discussed above, an unusual number of
significant first quarter 2001 derailments coupled with the effects of the
economic slowdown, line washouts and flooding had an impact on the efficiency of
the Company's U.S. operations during the first quarter and early second quarter
of 2001, which led to some congestion. The effects of this congestion and
certain other factors discussed above in the second quarter analysis contributed
to the period to period increase in car hire expense.
Operating Income and Operating Ratio. KCSR/Gateway Western operating income for
the first six months of 2001 decreased $17.5 million, or 42.6%, to $23.6
million, resulting from a $8.0 million decrease in revenues coupled with a $9.5
million increase in operating expenses. These factors also resulted in a
combined KCSR/Gateway Western operating ratio of 91.1% for the six months ended
June 30, 2001 compared to 85.5% for the same period in 2000.
TRENDS AND OUTLOOK
The Company's second quarter and year to date 2001 diluted earnings per share
from continuing operations ($.08 and $.18, respectively) decreased 47% and 45%,
respectively, compared to the quarter and year to date periods ended June 30,
2000 ($.15 and $.33, respectively). The Company's year to date 2001 domestic
operating results have been adversely affected by the decline in growth of the
U.S. economy and competitive revenue pressures, as well as higher casualty and
car hire costs. However, as operations became more fluid in the second quarter
of 2001, car hire showed improvement, declining approximately 12.6% compared to
the first quarter of 2001. Higher casualty costs were driven by an unusually
large number of first quarter 2001 derailments and are not indicative of an
ongoing trend. Additionally, despite improved fuel efficiency and lower variable
interest rates, fuel prices and interest costs continue to impact the domestic
operating results of the Company.
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):
The Company's revenue base has not rebounded as quickly as management had
anticipated. However, the Company's cost structure is beginning to realize
some of the benefits expected from the cost reduction strategy implemented at
the end of the first quarter of 2001. Freight revenues continue to suffer the
effects of the economic slowdown, particularly in the paper and forest
products and certain chemical markets, which have typically shown a strong
correlation with the strength of the economy. Management expects these
revenues to improve as economic conditions improve. Agriculture and mineral
product revenues have also suffered due mostly to declining demand for
domestic grain for the poultry industry. Despite lower coal revenues for the
first quarter of 2001, coal revenue for the six months ended June 30, 2001
increased $0.7 million (1.3%) as a result of increasing demand from utility
customers to replenish stockpiles and to meet production demands resulting
from current weather conditions. The Company has expanded service to the auto
industry as evidenced by a 159% increase in related revenue for the year to
date compared to the same period in 2000. In the short-term, however, the
U.S. economic slowdown is expected to present revenue challenges.
Despite higher expenses for the six months ended June 30, 2001 compared to
the same prior year period, the Company's cost structure is improving. The
Company's consolidated expenses have declined $7.6 million from $137.9
million in the first quarter of 2001 to $130.3 million in the second quarter.
For the remainder of 2001, management expects variable costs and expenses to
be at levels proportionate with revenue activity assuming normalized rail
operations, except for fuel expenses, which are expected to mirror market
conditions.
The congestion caused mostly by first quarter 2001 derailments had an adverse
impact on the Company's year to date operating results. Management has
addressed the congestion-related issues and believes that operations will
continue to show improvement in the second half of 2001. In the longer term,
management continues to believe 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. PCRC is
expected to begin freight operations during the latter part of the third
quarter of 2001, while passenger service commenced in July 2001.
The Company, and it's partner, Transportation Maritima Mexican, S.A. de C.V.,
have announced their intention to exercise a call and cause TFM to purchase
the 24.6% interest in Grupo TFM currently owned by the Mexican government.
The funds required to purchase the Mexican government's Grupo TFM shares are
anticipated to be raised at TFM. Management believes this is an opportunity
to add value to a key component of the Company's NAFTA franchise.
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):
Six Months
Ended June 30,
--------------------
2001 2000
------- -------
Cash flows provided by (used for):
Operating activities $ 14.8 $ 34.5
Investing activities (27.8) (51.6)
Financing activities 10.1 39.3
------- -------
Cash and equivalents:
Net increase (decrease) (2.9) 22.2
At beginning of year 21.5 11.9
------- -------
At end of period $ 18.6 $ 34.1
======= =======
During the six months ended June 30, 2001, the Company's consolidated cash
position decreased $2.9 million from December 31, 2000. This decrease resulted
mostly from cash used for property acquisitions and investments in affiliates
partially offset by net proceeds from the issuance of long-term debt. Net
operating cash inflows were $14.8 million and $34.5 million for the six months
ended June 30, 2001 and 2000, respectively. This $19.7 million decrease in
operating cash flows was attributable to changes in working capital balances,
lower income from continuing operations, and lower cash flows related to the tax
benefit associated with the exercise of stock options.
Net investing cash outflows were $27.8 million and $51.6 million during the six
months ended June 30, 2001 and 2000, respectively. This $23.8 million difference
results primarily from lower year to date 2001 capital expenditures, partially
offset by higher investments in affiliates and an increase in funds received
from property dispositions.
During the six months ended June 30, 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 $10.1 million
for the six months ended June 30, 2001 compared with net financing cash inflows
of $39.3 million during the comparable 2000 period. This difference was
primarily due to $11.8 million of net long-term borrowings and $1.6 million of
proceeds from stock plans during the first six months of 2001 compared to $43.5
million of net borrowings and proceeds from stock plans of $16.8 million during
the first six months of 2000. The Company paid only $0.1 million of dividends
during the six months ended June 30, 2001 compared to $4.8 million for the same
2000 period. Additionally, during the six months ended June 30, 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 June 30, 2001, $70 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 through March 31, 2002 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.
As discussed in "Recent Developments", the Company has carried forward $200
million aggregate amount of unsold securities from the Initial Shelf to the
Second Shelf filed on Form S-3 (Registration No. 333-61006) on May 16, 2001 for
the offering of up to $450 million in aggregate amount of securities. The SEC
declared the Second Shelf effective on June 5, 2001. The Company filed the
Initial Shelf on Form S-3 (Registration No. 33-69648) in September 1993, as
amended in April 1996, for the offering of up to $500 million in aggregate
amount of securities. The SEC declared the Initial Shelf effective on April 22,
1996; however, no securities have been issued thereunder. Securities in the
aggregate amount of $300 million remain available under the Initial Shelf. The
Company has not engaged an underwriter for those remaining securities and has no
plans to issue any of the remaining securities under the Initial Shelf. Subject
to certain restrictions under the KCS Credit Facilities, the Company expects
that any net proceeds from the sale of securities under the Initial Shelf would
be added to our general funds and used principally for general corporate
purposes, including working capital, capital expenditures, and acquisitions of
or investments in businesses and assets.
On June 7, 2001, the Company announced plans for concurrent public offerings of
$115 million of mandatory convertible units and 4 million shares of the
Company's common stock under the Second Shelf. These offerings were independent
of each other and completion of one was not contingent on the other. Anticipated
proceeds from these offerings were to be used to reduce existing bank debt.
However, on June 19, 2001, the Company issued a press release stating that
because of management's belief that the current stock price did not properly
reflect the valuation of the Company, pursuing these offerings would not be in
the best interest of KCSI's current shareholders. In response to numerous
inquiries, on June 29, 2001, the Company clarified its position concerning the
offerings by announcing that it has not ruled out going forward
with the common stock offering should the Company determine market conditions
are appropriate. The Company also indicated that it does not expect to make a
mandatory convertible unit offering in the foreseeable future.
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 June 30, 2001 and December 31, 2000, respectively. The Company's debt
increased $11.9 million from December 31, 2000 to $686.5 million at June 30,
2001 as a result of net long-term borrowings. This increase in debt was offset
by an increase in the Company's stockholders' equity, which also increased $11.9
million from December 31, 2000 to $655.3 million at June 30, 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.
Other
New Accounting Pronouncements. In July 2001, the Financial Accounting Standards
Board ("FASB") issued Statement No. 141, "Business Combinations", ("SFAS 141")
and Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 141"). SFAS
141 will become effective for business combinations initiated after June 30,
2001 and requires purchase method accounting. Under SFAS 142, goodwill with an
indefinite life will no longer be amortized; however, both goodwill and other
intangible assets will need to be tested annually for impairment. The goodwill
and intangible assets statement will be effective for fiscal years beginning
after December 31, 2001. The Company is currently evaluating the impact, if any,
that adoption of these provisions will have on its financial statements.
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 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated June 5, 2001 under
Item 5 of such form announcing that former U. S. Secretary of
Transportation Rodney E. Slater had been named to its Board of Directors
and that it planned concurrent public offerings of $115 million of
mandatory convertible units and 4 million shares of its common stock.
The Company filed a Current Report on Form 8-K dated June 13, 2001 under
Item 5 of such form announcing that Transportacion Ferroviaria Mexicana,
S.A. de C.V. ("TFM") will acquire the Mexican government's 24.6% ownership
of Grupo TFM.
The Company filed a Current Report on Form 8-K dated June 18, 2001 under
Item 5 of such form announcing the filing, pursuant to Rule 415 under the
Securities Act of 1933 (the "Act"), of a registration statement on Form
S-3, which was declared effective on June 5, 2001 and the filing of a
Preliminary Prospectus Supplement relating to the offering of 4,600,000 of
the Company's Mandatory Convertible Units and a Preliminary Prospectus
Supplement relating to the offering of 4,000,000 shares of the Company's
common stock.
The Company filed a Current Report on Form 8-K dated June 20, 2001 under
Item 4 of such form announcing changes in the Company's Certifying
Accountant and Disagreements with Accountants on Accounting and Financial
Disclosure.
The Company filed a Current Report on Form 8-K dated June 29, 2001 under
Item 5 of such form clarifying its position concerning a previously
announced offering of its common stock.
The Company furnished a Current Report on Form 8-K dated July 10, 2001
announcing the date of its second 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 July 25, 2001
reporting its second 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 August 9, 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)