FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number 1-4717
KANSAS CITY SOUTHERN
(Exact name of Company as specified in its charter)
DELAWARE 44-0663509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
427 WEST 12TH STREET, KANSAS CITY, MISSOURI 64105
(Address of principal executive offices) (Zip Code)
(816) 983-1303
(Company's telephone number, including area code)
NO CHANGES
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Company is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT APRIL 30, 2003
- --------------------------------------------------------------------------------
COMMON STOCK, $.01 PER SHARE PAR VALUE 61,645,382 SHARES
- --------------------------------------------------------------------------------
KANSAS CITY SOUTHERN
FORM 10-Q
MARCH 31, 2003
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Introductory Comments 2
Consolidated Balance Sheets -
March 31, 2003 and December 31, 2002 3
Consolidated Statements of Income -
Three Months Ended March 31, 2003 and 2002 4
Per Share Data 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2003 and 2002 5
Consolidated Statement of Changes in Stockholders' Equity -
Three Months Ended March 31, 2003 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
ITEM 4. CONTROLS AND PROCEDURES 25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURES 27
- ----------
KANSAS CITY SOUTHERN
FORM 10-Q
MARCH 31, 2003
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTRODUCTORY COMMENTS
The Consolidated Financial Statements included herein have been prepared by
Kansas City Southern (the "Company" or "KCS"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures are adequate to enable a reasonable understanding of the information
presented. These Consolidated Financial Statements should be read in conjunction
with the consolidated 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, 2002 and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this Form 10-Q. Results for the
three months ended March 31, 2003 are not necessarily indicative of the results
expected for the full year 2003.
2
KANSAS CITY SOUTHERN
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
March 31, December 31,
2003 2002
------------------ ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 64.0 $ 19.0
Accounts receivable, net 108.8 118.5
Inventories 36.3 34.2
Other current assets 19.0 44.5
------------------ ------------------
Total current assets 228.1 216.2
------------------ ------------------
Investments 430.3 423.1
Properties (net of $702.8 and $702.3 accumulated
depreciation and amortization, respectively) 1,339.8 1,337.4
Goodwill 10.6 10.6
Other assets 18.7 21.5
------------------ ------------------
Total assets $ 2,027.5 $ 2,008.8
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year $ 10.0 $ 10.0
Accounts and wages payable 44.1 47.7
Accrued liabilities 133.4 128.6
------------------ ------------------
Total current liabilities 187.5 186.3
------------------ ------------------
Other Liabilities
Long-term debt 571.7 572.6
Deferred income taxes 392.9 392.8
Other liabilities and deferred credits 103.7 104.2
------------------ ------------------
Total other liabilities 1,068.3 1,069.6
------------------ ------------------
Stockholders' Equity
Preferred stock 6.1 6.1
Common stock 0.6 0.6
Retained earnings 767.1 748.5
Accumulated other comprehensive loss (2.1) (2.3)
------------------ ------------------
Total stockholders' equity 771.7 752.9
------------------ ------------------
Total liabilities and stockholders' equity $ 2,027.5 $ 2,008.8
================== ==================
See accompanying notes to consolidated financial statements.
3
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months
Ended March 31,
---------------------------------------
2003 2002
------------------ ------------------
Revenues $ 140.2 $ 143.9
Costs and expenses
Compensation and benefits 50.5 49.4
Depreciation and amortization 15.9 14.9
Purchased services 15.1 14.0
Operating leases 14.3 13.5
Fuel 12.8 9.5
Casualties and insurance 8.1 7.9
Car hire 2.2 5.2
Other 14.5 16.1
------------------ ------------------
Total costs and expenses 133.4 130.5
------------------ ------------------
Operating income 6.8 13.4
Equity in net earnings of unconsolidated affiliates:
Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. 6.9 4.8
Other 0.1 0.1
Gain on sale of Mexrail, Inc. - 4.4
Interest expense (11.5) (11.3)
Other income 1.3 4.4
------------------ ------------------
Income before income taxes and cumulative effect of accounting change 3.6 15.8
Income tax provision (benefit) (1.1) 4.1
------------------ ------------------
Income before cumulative effect of accounting change 4.7 11.7
Cumulative effect of accounting change, net of income taxes of $5.6
million 8.9 -
------------------ ------------------
Net income $ 13.6 $ 11.7
================== ==================
PER SHARE DATA
Basic earnings per Common share
Income before cumulative effect of accounting change $ 0.08 $ 0.20
Cumulative effect of accounting change, net of income taxes 0.14 -
------------------ ------------------
Total basic earnings per Common share $ 0.22 $ 0.20
================== ==================
Diluted earnings per Common share
Income before cumulative effect of accounting change $ 0.08 $ 0.19
Cumulative effect of accounting change, net of income taxes 0.14 -
------------------ ------------------
Total diluted earnings per Common share $ 0.22 $ 0.19
================== ==================
Weighted average Common shares outstanding (in thousands)
Basic 61,427 59,777
Potential dilutive Common shares 1,436 2,065
------------------ ------------------
Diluted 62,863 61,842
================== ==================
Dividends per Preferred share $ .25 $ .25
See accompanying notes to consolidated financial statements.
4
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
Three Months
Ended March 31,
---------------------------------------
2003 2002
------------------ ------------------
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 13.6 $ 11.7
Adjustments to reconcile net income to net cash
Provided by operating activities
Depreciation and amortization 15.9 14.9
Deferred income taxes 7.0 1.0
Equity in undistributed earnings of unconsolidated affiliates (7.0) (4.9)
Gain on sale of Mexrail, Inc. - (4.4)
Gain on sale of property (1.3) (4.5)
Cumulative effect of accounting change (8.9) -
Tax benefit realized upon exercise of stock options 0.8 0.8
Changes in working capital items
Accounts receivable 9.6 (0.6)
Inventories (2.1) (0.4)
Other current assets 15.6 26.7
Accounts and wages payable (1.8) (8.7)
Accrued liabilities 7.9 5.1
Other, net (0.8) (0.5)
------------------ ------------------
Net cash provided by operating activities 48.5 36.2
------------------ ------------------
INVESTING ACTIVITIES:
Property acquisitions (12.1) (17.4)
Proceeds from disposal of property 7.5 9.3
Investment in and loans to affiliates - (1.8)
Proceeds from sale of Mexrail, Inc. - 31.4
Other, net 1.0 1.3
------------------ ------------------
Net cash provided by (used for) investing activities (3.6) 22.8
------------------ ------------------
FINANCING ACTIVITIES:
Repayment of long-term debt (0.8) (30.5)
Proceeds from stock plans 1.6 2.1
Cash dividends paid (0.1) (0.1)
Other, net (0.6) 1.6
------------------ ------------------
Net cash provided by (used for) financing activities 0.1 (26.9)
------------------ ------------------
CASH AND CASH EQUIVALENTS:
Net increase in cash and cash equivalents 45.0 32.1
At beginning of year 19.0 24.7
------------------ ------------------
At end of period $ 64.0 $ 56.8
================== ==================
See accompanying notes to consolidated financial statements.
5
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
Accumulated
$25 Par $.01 Par other
Preferred Common Retained comprehensive
stock stock earnings income (loss) Total
------------- -------------- --------------- -------------- -------------
Balance at December 31, 2002 $ 6.1 $ 0.6 $ 748.5 $ (2.3) $ 752.9
Comprehensive income:
Net income 13.6
Change in fair value of cash flow hedge (0.1)
Amortization of accumulated other
comprehensive income (loss) related
to Interest rate swap 0.3
Comprehensive income 13.8
Dividends (0.1) (0.1)
Options exercised and stock subscribed 5.1 5.1
------------- -------------- --------------- -------------- -------------
Balance at March 31, 2003 $ 6.1 $ 0.6 $ 767.1 $ (2.1) $ 771.7
============= ============== =============== ============== =============
See accompanying notes to consolidated financial statements.
6
KANSAS CITY SOUTHERN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND INTERIM FINANCIAL STATEMENTS. In the opinion of the
management of KCS, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal closing
procedures) necessary to present fairly the financial position of the
Company and its subsidiary companies as of March 31, 2003 and December 31,
2002, the results of its operations for the three months ended March 31,
2003 and 2002, its cash flows for the three months ended March 31, 2003 and
2002, and its changes in stockholders' equity for the three months ended
March 31, 2003. The accompanying consolidated financial statements have
been prepared consistently with accounting policies described in Note 2 to
the consolidated financial statements included in the Company's Annual
Report on Form 10-K as of and for the year ended December 31, 2002 except
as discussed herein in note 7. The results of operations for the three
month period ended March 31, 2003 are not necessarily indicative of the
results to be expected for the full year 2003. Certain comparative prior
year amounts in the consolidated financial statements have been
reclassified to conform to the current period presentation. These
reclassifications did not impact net income.
2. EARNINGS PER SHARE DATA. The effect of stock options to employees represent
the only difference between the weighted average shares used for the basic
earnings per share computation compared to the diluted earnings per share
computation. The following is a reconciliation from the weighted average
shares used for the basic earnings per share computation and the diluted
earnings per share computation for the three months ended March 31, 2003
and 2002, respectively (in thousands):
Three Months
Ended March 31,
--------------------------------
2003 2002
--------------- ---------------
Basic shares 61,427 59,777
Effect of dilution: Stock options 1,436 2,065
--------------- ---------------
Diluted shares 62,863 61,842
=============== ===============
Shares excluded from diluted computation 1,041 20
--------------- ---------------
Shares were excluded from the applicable periods diluted earnings per share
computation because the exercise prices were greater than the average
market price of the common shares. Preferred dividends, which were not
material for the periods presented, are the only adjustments that affect
the numerator of the diluted earnings per share computation.
3. INVESTMENTS. Investments in unconsolidated affiliates and certain other
investments accounted for under the equity method generally include all
entities in which the Company or its subsidiaries have significant
influence, but not more than 50% voting control. Investments in
unconsolidated affiliates at March 31, 2003 include, among others, equity
interests in Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V.
("Grupo TFM"), Southern Capital Corporation, LLC ("Southern Capital"), and
the Panama Canal Railway Company ("PCRC").
The Company, our Mexican partner, Grupo TMM, S.A. ("Grupo TMM"), and
certain of Grupo TMM's affiliates entered into an agreement on February 27,
2002 with TFM, S.A. de C.V. ("TFM") to sell to TFM all of the common stock
of Mexrail, Inc. ("Mexrail"), a former 49% unconsolidated affiliate of the
Company. Mexrail owns the northern half of the international railway bridge
at Laredo and all of the common stock of The Texas-Mexican Railway Company
("Tex-Mex"). The sale closed on March 27, 2002 and the Company received
approximately $31.4 million for its 49% interest in Mexrail. The Company
used the proceeds from the sale to reduce debt. Although the Company no
longer directly owns 49% of Mexrail, it retains an indirect ownership
through its ownership of Grupo TFM. The Company's share of the proceeds
from the sale of Mexrail to TFM exceeded the carrying value of the
Company's investment in Mexrail by $11.2 million. The Company recognized a
$4.4 million gain on the sale of Mexrail to TFM in the first quarter of
2002, while the remaining $6.8 million of excess proceeds was deferred and
is being amortized into net income over 20 years (see note 10 - Subsequent
Events).
The Company is party to certain agreements with Grupo TMM covering the
Grupo TFM joint venture. These agreements contain "change in control"
provisions, provisions intended to preserve the Company's and Grupo TMM's
proportionate ownership of the joint venture, and super-majority provisions
with respect to voting on certain significant transactions. Such agreements
also provide a right of first refusal in the event that either party
initiates a divestiture of its equity
7
interest in Grupo TFM and a prohibition on transfers to competitors. Under
certain circumstances, such agreements could affect the Company's ownership
percentage and rights in these equity affiliates.
Condensed financial information of certain unconsolidated affiliates is
shown below. All amounts, including those for Grupo TFM, are presented
under U.S. GAAP. Financial information of immaterial unconsolidated
affiliates has been omitted:
FINANCIAL CONDITION (DOLLARS IN MILLIONS):
March 31, 2003 December 31, 2002
--------------------------------------- --------------------------------------
Southern Southern
PCRC Grupo TFM Capital PCRC Grupo TFM Capital
------------- ----------- ---------- ------------ ------------ -------------
Current assets $ 6.0 $ 268.1 $ 14.1 $ 2.7 $ 265.2 $ 5.5
Non-current assets 86.1 2,074.6 135.9 88.2 2,061.3 139.4
------------- ----------- ----------- ----------- ------------ ------------
Assets $ 92.1 $ 2,342.7 $ 150.0 $ 90.9 $ 2,326.5 $ 144.9
============= ========== ============ =========== ============ ============
Current liabilities $ 3.1 $ 172.6 $ 3.3 $ 5.1 $ 147.3 $ -
Non-current liabilities 75.0 1,017.5 95.0 70.8 1,045.3 95.1
Minority interest - 351.7 - - 348.0 -
Equity of stockholders and
partners 14.0 800.9 51.7 15.0 785.9 49.8
------------- ----------- ----------- ------------ ------------ -------------
Liabilities and equity $ 92.1 $ 2,342.7 $ 150.0 $ 90.9 $ 2,326.5 $ 144.9
============= =========== =========== ============ ============ =============
KCS's investment $ 7.0 $ 386.8 $ 25.8 $ 7.5 $ 380.1 $ 24.9
------------- ------------------------ ------------ ------------ -------------
OPERATING RESULTS (DOLLARS IN MILLIONS):
Three Months
Ended March 31,
----------------------------
2003 2002
---------- ----------
Revenues:
Grupo TFM $ 168.5 $ 170.8
Southern Capital 8.0 7.5
PCRC 2.4 1.0
Operating costs and expenses:
Grupo TFM $ 136.7 $ 135.0
Southern Capital 7.0 5.7
PCRC 3.2 2.9
Net income (loss):
Grupo TFM $ 15.0 $ 13.0
Southern Capital 1.0 1.9
PCRC (0.8) (1.8)
4. NONCASH INVESTING AND FINANCING ACTIVITIES. The Company initiated the
Fourteenth Offering of KCS common stock under the Employee Stock Purchase
Plan ("ESPP") during 2002. Stock subscribed under the Fourteenth Offering
will be issued to employees in 2004 and is being paid for through employee
payroll deductions in 2003. During the first three months of 2003, the
Company has received approximately $0.7 million from payroll deductions
associated with the Fourteenth Offering of the ESPP. In the first quarter
of 2003, the Company issued approximately 337,917 shares of KCS common
stock under the Thirteenth Offering of the ESPP. These shares, totaling a
purchase price of approximately $3.5 million, were subscribed and paid for
through employee payroll deductions in 2002.
5. DERIVATIVE FINANCIAL INSTRUMENTS. The Company does not engage in the
trading of derivatives. The Company's objective is to manage its fuel and
interest rate risk through the use of derivative instruments as deemed
appropriate. At March 31, 2003, the Company had four fuel swap agreements
for a notional amount of approximately 7.5 million gallons of fuel. Under
the terms of these swaps, the Company will receive a variable price based
upon an average of the spot prices calculated on a monthly basis as
reported through a petroleum price reporting service.
8
A summary of these swap agreements to which The Kansas City Southern
Railway Company ("KCSR") was a party as of March 31, 2003 is as follows:
Trade Date Notional Amount Fixed pay per gallon Expiration Date
-------------------- --------------------------- ----------------------- ---------------------
November 14, 2002 2.5 million gallons 62.5(cents) December 31, 2003
January 14, 2003 2.5 million gallons 73.8(cents) June 30, 2003
March 18, 2003 1.9 million gallons 65.0(cents) December 31, 2004
March 21, 2003 0.6 million gallons 64.0(cents) June 30, 2004
Additionally, in April of 2003, the Company entered into three additional
fuel swaps. A summary of these additional swap agreements is as follows:
Trade Date Notional Amount Fixed pay per gallon Expiration Date
-------------------- --------------------------- ----------------------- ----------------------
April 11, 2003 0.6 million gallons 67.8(cents) September 30, 2003
April 11, 2003 0.6 million gallons 68.7(cents) December 31, 2003
April 11, 2003 2.5 million gallons 66.0(cents) December 31, 2004
Cash settlements of these swaps occur on a monthly basis on the fifth
business day of the month following the month in which the settlement is
calculated. These swaps, combined with the Company's forward purchase
policies, are designed to hedge the Company's exposure to movements in the
price of No. 2 Gulf Coast Heating Oil on which the Company's diesel fuel
prices are determined. Using these risk management strategies, the Company
is able to limit its risk to rising diesel fuel prices. As of March 31,
2003, the fair market value of the swaps was $0.2 million. For the years
ended December 31, 2002 and 2001, KCSR consumed 55.3 million gallons and
57.6 million gallons of fuel, respectively.
6. STOCK PLANS. Proceeds received from the exercise of stock options or
subscriptions are credited to the appropriate capital accounts in the year
they are exercised.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123") in October 1995. This statement allows companies to continue
under the approach set forth in Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"), for recognizing
stock-based compensation expense in the financial statements, but
encourages companies to adopt the fair value method of accounting for
employee stock options. Under SFAS 123, companies must either record
compensation expense based on the estimated grant date fair value of stock
options granted or disclose the impact on net income as if they had adopted
the fair value method (for grants subsequent to December 31, 1994.) If KCS
had measured compensation cost for the KCS stock options granted to its
employees and shares subscribed by its employees under the KCS employee
stock purchase plan, under the fair value based method prescribed by SFAS
123, net income and earnings per share would have been as follows:
Three Months ended March 31,
----------------------------
2003 2002
----------- ---------------
NET INCOME (IN MILLIONS): $ 13.6 $ 11.7
As reported
Total stock-based compensation expense
determined under fair value method, net of
income taxes (0.5) (0.5)
----------- ---------------
Pro forma 13.1 $ 11.2
EARNINGS PER BASIC SHARE:
As reported $ 0.22 $ 0.20
Pro forma 0.21 $ 0.19
EARNINGS PER DILUTED SHARE:
As reported $ 0.22 $ 0.19
Pro forma 0.21 $ 0.18
7. COMMITMENTS AND CONTINGENCIES. The Company has had no significant changes
in its outstanding litigation or other commitments and contingencies from
that previously reported in Note 11 of the Company's Annual Report on Form
10-K for the year ended December 31, 2002. The following provides an update
of the Houston cases.
9
HOUSTON CASES. In August 2000, KCSR and certain of its affiliates were
added as defendants in lawsuits pending in Jefferson and Harris Counties,
Texas. These lawsuits allege damage to approximately 3,000 plaintiffs as a
result of an alleged toxic chemical release from a tank car in Houston,
Texas on August 21, 1998. Litigation involving the shipper and the
delivering carrier had been pending for some time, but KCSR, which handled
the car during the course of its transport, had not previously been named a
defendant. On June 28, 2001, KCSR reached a final settlement with the 1,664
plaintiffs in the lawsuit filed in Jefferson County, Texas. In 2002, KCSR
settled with virtually all of the plaintiffs in the lawsuit filed in the
164th Judicial District Court of Harris County, Texas, for approximately
$0.3 million. The remaining plaintiffs have indicated that they intend to
retain new counsel, yet to date, KCS has not received any notice of new
counsel entering the case.
8. NEW ACCOUNTING PRONOUNCEMENTS. In June 2001, the FASB issued Statement No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
is effective for fiscal years beginning after June 15, 2002. Under SFAS
143, the fair value of a liability for an asset retirement obligation must
be recognized in the period in which it is incurred if a reasonable
estimate of the fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived
asset. KCSR, along with other Class I railroads, depreciates track
structure (rail, ties, and other track material) in accordance with
regulations promulgated by the Surface Transportation Board ("STB"). These
regulations require KCSR to depreciate track structure to a net salvage
value (gross estimated salvage value less estimated costs to remove the
track structure at the end of its useful life). For certain track structure
such as ties, with little or no gross salvage value, this practice
ultimately results in depreciating an asset below zero, and thus, in
effect, results in a liability. Under the requirements of SFAS 143, in the
absence of a legal obligation to remove the track structure, such
accounting practice is prohibited. The Company adopted the provisions of
SFAS 143 in the first quarter of 2003, and, as a result, reviewed its
depreciation of track structures to determine instances where the
depreciation of removal costs has resulted or would be expected (based on
the current depreciation rate) to result in the depreciation of an asset
below zero when considering net salvage value. As a result of this review,
the Company has estimated the excess depreciation recorded on such assets
and has recorded this amount as a reduction in accumulated depreciation of
$14.5 million and as a cumulative effect of an accounting change of $8.9
million (net of taxes of $5.6 million) as required by SFAS 143 in the first
quarter of 2003. Additionally, depreciation rates applied to certain track
structure elements that were previously yielding a negative salvage value
have been modified to comply with the provisions of SFAS 143. For the three
months ended March 31, 2003, this resulted in a reduction in depreciation
expense of approximately $0.3 million. Management currently estimates the
net effect of the adoption of SFAS 143 on full year depreciation expense to
be approximately $1.4 million.
A summary of the pro forma net income and earnings per share had SFAS 143
been applied retroactively is as follows:
Three Months Ended March 31,
-------------------------------------
2003 2002
------------------ ------------------
NET INCOME (IN MILLIONS)
As reported $ 13.6 $ 11.7
Pro forma $ 4.7 $ 11.9
EARNINGS PER BASIC SHARE:
As reported $ 0.22 $ 0.20
Pro forma $ 0.08 $ 0.20
EARNINGS PER DILUTED SHARE:
As reported $ 0.22 $ 0.19
Pro forma $ 0.08 $ 0.19
In December 2002, the FASB issued Statement No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123" ("SFAS 148"). SFAS 148 provides two additional
transition methods for entities that adopt the method of accounting for
stock-based compensation as defined in SFAS 123. Additionally, SFAS 148
amends the disclosure requirements of SFAS 123 to require disclosures in
interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method on results
of operations. The Company is currently evaluating the provisions of this
new accounting pronouncement and does not expect this pronouncement, if
adopted, to have a material impact on its consolidated results of
operations, financial position, or cash flows. See note 6 for interim
disclosures required under SFAS 148.
10
9. CONDENSED CONSOLIDATING FINANCIAL INFORMATION. In September 2000, KCSR
issued $200 million of 9 1/2% senior notes due 2008. In addition, in June
2002, KCSR issued $200 million of 7 1/2% senior notes due 2009. Both of
these note issues are unsecured obligations of KCSR, however, they are also
jointly and severally and fully and unconditionally guaranteed on an
unsecured senior basis by KCS and certain of the subsidiaries (all of which
are wholly-owned) within the KCS consolidated group. For each of these note
issues, KCS registered exchange notes with the SEC that have substantially
identical terms and associated guarantees and all of the initial senior
notes for each issue have been exchanged for $200 million of registered
exchange notes for each respective note issue.
The accompanying condensed consolidating financial information has been
prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial
statements of guarantors and issuers of guaranteed securities registered or
being registered." This information is not intended to present the
financial position, results of operations and cash flows of the individual
companies or groups of companies in accordance with U.S. GAAP.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
Three months ended March 31, 2003 (dollars in millions)
----------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
----------- ------------- ------------- ------------- -------------- -------------
Revenues $ - $ 138.7 $ 4.8 $ 6.9 $ (10.2) $ 140.2
Costs and expenses 2.3 129.5 4.7 7.1 (10.2) 133.4
----------- ------------- ------------- ------------- -------------- -------------
Operating income (loss) (2.3) 9.2 0.1 (0.2) - 6.8
Equity in net earnings (losses)
of unconsolidated affiliates and
subsidiaries 6.3 7.0 - 6.9 (13.2) 7.0
Interest expense (0.2) (11.2) (0.1) - - (11.5)
Other income 0.1 1.0 - 0.2 - 1.3
----------- ------------- ------------- ------------- -------------- -------------
Income (loss) before
income taxes and cumulative
effect of accounting change 3.9 6.0 - 6.9 (13.2) 3.6
Income tax provision (benefit) (0.8) (0.3) - - - (1.1)
----------- ------------- ------------- ------------- -------------- -------------
Income (loss) before cumulative
effect of accounting change 4.7 6.3 - 6.9 (13.2) 4.7
Cumulative effect of accounting
change, net of income taxes 8.9 8.9 - - (8.9) 8.9
----------- ------------- ------------- ------------- -------------- -------------
Net income (loss) $ 13.6 $ 15.2 $ - $ 6.9 $ (22.1) $ 13.6
=========== ============= ============= ============= ============== =============
Three months ended March 31, 2002 (dollars in millions)
----------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
----------- ------------- ------------- ------------- -------------- -------------
Revenues $ - $ 142.4 $ 3.9 $ 3.7 $ (6.1) $ 143.9
Costs and expenses 2.2 125.3 5.4 3.7 (6.1) 130.5
----------- ------------- ------------- ------------- -------------- -------------
Operating income (loss) (2.2) 17.1 (1.5) - - 13.4
Equity in net earnings (losses)
of unconsolidated affiliates and
Subsidiaries 8.9 4.7 - 4.9 (13.6) 4.9
Gain on Sale of Mexrail 4.4 4.4 - - (4.4) 4.4
Interest expense (0.3) (10.8) (0.2) (0.1) 0.1 (11.3)
Other income 0.1 4.3 0.1 - (0.1) 4.4
----------- ------------- ------------- ------------- -------------- -------------
Income (loss) before
income taxes 10.9 19.7 (1.6) 4.8 (18.0) 15.8
Income tax provision (benefit) (0.8) 5.5 (0.6) - - 4.1
----------- ------------- ------------- ------------- -------------- -------------
Net income $ 11.7 $ 14.2 $ (1.0) $ 4.8 $ (18.0) $ 11.7
=========== ============= ============= ============= ============== =============
11
CONDENSED CONSOLIDATING BALANCE SHEETS
As of March 31, 2003 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
ASSETS
Current assets $ 64.8 $ 247.7 $ 15.6 $ 1.9 $ (101.9) $ 228.1
Investments 784.4 419.2 - 463.8 (1,237.1) 430.3
Properties, net 0.2 1335.6 4.0 - - 1,339.8
Goodwill and other assets 2.9 28.9 1.5 5.8 (9.8) 29.3
------------- ------------- ------------- ------------- -------------- -------------
Total assets $ 852.3 $ 2,031.4 $ 21.1 $ 471.5 $ (1,348.8) $ 2,027.5
============= ============= ============= ============= ============== =============
LIABILITIES AND EQUITY
Current liabilities $ 3.2 $ 251.8 $ 6.9 $ 26.5 $ (100.9) $ 187.5
Long-term debt 1.2 568.7 1.8 - - 571.7
Payable to affiliates 37.0 - 0.5 - (37.5) -
Deferred income taxes 7.8 392.1 0.3 2.5 (9.8) 392.9
Other liabilities 31.5 43.6 4.1 25.5 (1.0) 103.7
Stockholders' equity 771.6 775.2 7.5 417.0 (1,199.6) 771.7
------------- ------------- ------------- ------------- -------------- -------------
Total liabilities and
equity $ 852.3 $ 2,031.4 $ 21.1 $ 471.5 $ (1,348.8) $ 2,027.5
============= ============= ============= ============= ============== =============
As of December 31, 2002 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
ASSETS
Current assets $ 43.3 $ 234.7 $ 17.6 $ 13.0 $ (92.4) $ 216.2
Investments 769.1 412.1 - 432.5 (1,190.6) 423.1
Properties, net 0.2 1,333.2 3.9 0.1 - 1,337.4
Goodwill and other assets 1.6 30.5 1.7 8.1 (9.8) 32.1
------------- ------------- ------------- ------------- -------------- -------------
Total assets $ 814.2 $ 2,010.5 $ 23.2 $ 453.7 $ (1,292.8) $ 2,008.8
============= ============= ============= ============= ============== =============
LIABILITIES AND EQUITY
Current liabilities $ 7.2 $ 245.3 $ 9.1 $ 16.2 $ (91.5) $ 186.3
Long-term debt 1.2 569.6 1.8 - - 572.6
Payable to affiliates 12.8 - 0.6 - (13.4) -
Deferred income taxes 8.6 391.1 0.3 2.6 (9.8) 392.8
Other liabilities 31.5 44.7 4.0 25.1 (1.1) 104.2
Stockholders' equity 752.9 759.8 7.4 409.8 (1,177.0) 752.9
------------- ------------- ------------- ------------- -------------- -------------
Total liabilities and
equity $ 814.2 $ 2,010.5 $ 23.2 $ 453.7 $ (1,292.8) $ 2,008.8
============= ============= ============= ============= ============== =============
12
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Three months ended March 31, 2003 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Net cash flows provided by (used
for) operating activities: $ (21.0) $ 50.3 $ (1.5) $ 21.4 $ (0.7) $ 48.5
------------- ------------- ------------- ------------- -------------- -------------
Investing activities:
Property acquisitions - (12.0) (0.1) - - (12.1)
Proceeds from disposal of
property - 7.5 - - - 7.5
Investments in and loans to
affiliates - - - (24.2) 24.2 -
Proceeds from sale of
investments - - - - - -
Other, net (2.3) 0.1 0.1 2.4 0.7 1.0
------------- ------------- ------------- ------------- -------------- -------------
Net (2.3) (4.4) - (21.8) 24.9 (3.6)
------------- ------------- ------------- ------------- -------------- -------------
Financing activities:
Proceeds from issuance of
long-term debt - - - - - -
Repayment of long-term debt - (0.8) - - - (0.8)
Proceeds from loans from
affiliates 24.2 - - - (24.2) -
Repayment of loans from
affiliates - - - - - -
Proceeds from stock plans 1.6 - - - - 1.6
Cash dividends paid (0.1) - - - - (0.1)
Other, net (1.5) 0.4 0.1 0.4 - (0.6)
------------- ------------- ------------- ------------- -------------- -------------
Net 24.2 (0.4) 0.1 0.4 (24.2) 0.1
------------- ------------- ------------- ------------- -------------- -------------
Cash and cash equivalents:
Net increase (decrease) 0.9 45.5 (1.4) - - 45.0
At beginning of period (10.8) 17.4 11.8 0.6 - 19.0
------------- ------------- ------------- ------------- -------------- -------------
At end of period $ (9.9) $ 62.9 $ 10.4 $ 0.6 $ - $ 64.0
============= ============= ============= ============= ============== =============
Three months ended March 31, 2002 (dollars in millions)
------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------- ------------- ------------- ------------- -------------- -------------
Net cash flows provided by (used
for) operating activities: $ (10.5) $ 39.3 $ (0.9) $ 8.2 $ 0.1 $ 36.2
------------- ------------- ------------- ------------- -------------- -------------
Investing activities:
Property acquisitions - (17.3) (0.1) - - (17.4)
Proceeds from disposal of
property - 9.3 - - - 9.3
Investments in and loans to
affiliates - - - (9.1) 7.3 (1.8)
Proceeds from sale of
investments - 31.4 - - - 31.4
Other, net (0.1) 0.8 0.7 - (0.1) 1.3
------------- ------------- ------------- ------------- -------------- -------------
Net (0.1) 24.2 0.6 (9.1) 7.2 22.8
------------- ------------- ------------- ------------- -------------- -------------
Financing activities:
Proceeds from issuance of
long-term debt - - - - - -
Repayment of long-term debt - (30.4) - (0.1) - (30.5)
Proceeds from loans from
affiliates 7.3 - - - (7.3) -
Proceeds from stock plans 2.1 - - - - 2.1
Cash dividends paid (0.1) - - - - (0.1)
Other, net 0.4 - 0.1 1.1 - 1.6
------------- ------------- ------------- ------------- -------------- -------------
Net 9.7 (30.4) 0.1 1.0 (7.3) (26.9)
------------- ------------- ------------- ------------- -------------- -------------
Cash and cash equivalents:
Net increase (decrease) (0.9) 33.1 (0.2) 0.1 - 32.1
At beginning of period 1.3 23.2 - 0.2 - 24.7
------------- ------------- ------------- ------------- -------------- -------------
At end of period $ 0.4 $ 56.3 $ (0.2) $ 0.3 $ - $ 56.8
============= ============= ============= ============= ============== =============
13
10. SUBSEQUENT EVENTS.
KCS AND TMM AGREE TO PLACE TFM, THE TEXAS MEXICAN RAILWAY COMPANY AND THE
KANSAS CITY SOUTHERN RAILWAY COMPANY UNDER COMMON CONTROL. On April 21,
2003, the Company and Grupo TMM, S.A. ("Grupo TMM") announced a series of
agreements that have been approved by their respective boards of directors,
that will, following shareholder and regulatory approval, place KCSR,
Tex-Mex, and TFM, under the common control of a single transportation
holding company, NAFTA Rail, to be headquartered in Kansas City, Missouri.
As part of the transaction, subject to shareholder approval, KCS will
change its name to NAFTA Rail.
The common control of KCSR and Tex-Mex under NAFTA Rail requires approval
of the STB in the United States. Additionally, the acquisition of Grupo TFM
shares by NAFTA Rail requires the approval of the Antitrust Commission and
the Foreign Investment Commission in Mexico. Upon consummation of the
transactions contemplated by the series of agreements referred to above,
Mr. Michael R. Haverty, Chairman, President and Chief Executive Officer of
KCS, will serve as Chairman, President, and Chief Executive Officer of
NAFTA Rail. Mr. Jose Serrano, Chairman of the Board and Chief Executive
Officer of Grupo TMM, will serve as Vice Chairman of NAFTA Rail and
Chairman of TFM. Also joining the NAFTA Rail board of directors will be Mr.
Javier Segovia, President of Grupo TMM. The remainder of the 10-person
board will be made up of existing KCS directors. Mr. Mario Mohar will
remain as General Director of TFM.
Upon the terms and subject to the conditions of the agreement to acquire
Grupo TFM, TMM Multimodal, S.A. de C.V., a subsidiary of Grupo TMM, will
receive 18 million shares of Class A Common Stock of the Company,
representing, at the time of the agreement, approximately 22 percent (20%
voting, 2% subject to voting restrictions) of the Company, $200 million in
cash (with the option to pay up to $80 million of the $200 million cash
component due at close to Grupo TMM with up to 6.4 million additional
shares of Company stock) and a potential incentive payment of between $100
million and $180 million based on the resolution of certain future
contingencies. Grupo TFM owns 80 percent of the common stock of TFM and all
the shares entitled to full voting rights. The Mexican Government owns the
remaining 20% of TFM.
Upon the terms and subject to the conditions of the agreement to acquire
Tex-Mex, on May 9, 2003, the Company acquired from TFM 51% of the
outstanding stock of Mexrail, Inc. ("Mexrail"), a wholly-owned subsidiary
of TFM, for $32.7 million. Tex-Mex is a wholly-owned subsidiary of Mexrail.
In addition, the Company has an exclusive option until December 31, 2005 to
purchase the remaining outstanding shares of Mexrail as of the date of the
exercise of the option. The Company has deposited the initial purchased
shares of Mexrail into an irrevocable voting trust pending obtaining
approval by the STB of KCS's request to acquire control of Tex-Mex. TFM has
a right to repurchase all of the Mexrail stock acquired by the Company at
any time for the purchase price paid by the Company, subject to any STB
orders or directions. Upon any such repurchase, the agreement automatically
terminates. If not exercised within two years of the date of the agreement,
TFM's repurchase right expires. KCSR will remain headquartered in Kansas
City, Missouri; Tex-Mex in Laredo, Texas; and TFM in Mexico City.
KANSAS CITY SOUTHERN RECEIVES APPROVAL OF AMENDMENT OF CREDIT AGREEMENT. On
April 3, 2003, the Company received approval of the Company's request for
an amendment to certain provisions under its Amended and Restated Credit
Agreement from more than 96 percent of the lenders under the agreement. As
discussed in the Company's 2002 Annual Report on Form 10-K for the year
ended December 31, 2002 as filed with the Securities and Exchange
Commission, Grupo TMM and KCS, or either Grupo TMM or KCS, could be
required to purchase the Mexican government's interest in TFM after October
31, 2003. The Company requested an amendment to its Amended and Restated
Credit Agreement dated June 12, 2002, in order to provide flexibility in
structuring the funding for this transaction. On April 28, the Company
entered into a second amendment to its Amended and Restated Credit
Agreement under which 93 percent of the lenders specifically approved the
Company's investment in further equity interests of Grupo TFM, in equity
interests representing 51% of Mexrail's issued and outstanding capital
stock and the use of the Company's cash to acquire Mexrail, in connection
with the proposed transactions to place KCSR, Tex-Mex and TFM under common
control.
KCS SELLS SHARES OF REDEEMABLE CUMULATIVE CONVERTIBLE PERPETUAL PREFERRED
STOCK. On May 5, 2003, the Company completed the sale of $200 million of
Redeemable Cumulative Convertible Perpetual Preferred Stock with a
liquidation preference of $500 per share in a private offering. The
convertible preferred stock offering was made only by means of an offering
memorandum pursuant to Rule 144A. Dividends on the convertible preferred
stock will be cumulative and will be payable quarterly at an annual rate of
4.25% of the liquidation preference, when, as and if declared by the
Company's
14
board of directors. Accumulated unpaid dividends will cumulate dividends at
the same rate as dividends cumulate on the convertible preferred stock.
Each share of the convertible preferred stock will be convertible, under
certain conditions, and subject to adjustment under certain conditions,
into 33.4728 shares of the Company's common stock. On or after May 20,
2008, the Company will have the option to redeem any or all of the
preferred stock, subject to certain conditions. Under certain
circumstances, at the option of the holders of the preferred stock, the
Company may be required to purchase shares of the convertible preferred
stock from the holders.
The net proceeds from the offering of the convertible preferred stock are
expected to be used to pay a portion of the purchase price for the proposed
acquisition of a controlling interest of Grupo TFM. The preferred stock,
and the common stock to be issued on the conversion of the preferred stock,
have not been registered under the Securities Act of 1933, as amended, and
may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
THE DISCUSSION SET FORTH BELOW, AS WELL AS OTHER PORTIONS OF THIS FORM
10-Q, CONTAINS FORWARD-LOOKING COMMENTS THAT ARE NOT BASED UPON HISTORICAL
INFORMATION. SUCH FORWARD-LOOKING COMMENTS ARE BASED UPON INFORMATION
CURRENTLY AVAILABLE TO MANAGEMENT AND MANAGEMENT'S PERCEPTION THEREOF AS OF
THE DATE OF THIS FORM 10-Q. READERS CAN IDENTIFY THESE FORWARD-LOOKING
COMMENTS BY THE USE OF SUCH VERBS AS EXPECTS, ANTICIPATES, BELIEVES OR
SIMILAR VERBS OR CONJUGATIONS OF SUCH VERBS. THE ACTUAL RESULTS OF
OPERATIONS OF KANSAS CITY SOUTHERN ("KCS" OR THE "COMPANY") COULD
MATERIALLY DIFFER FROM THOSE INDICATED IN FORWARD-LOOKING COMMENTS. THE
DIFFERENCES COULD BE CAUSED BY A NUMBER OF FACTORS OR COMBINATION OF
FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE FACTORS IDENTIFIED IN THE
COMPANY'S CURRENT REPORT ON FORM 8-K DATED DECEMBER 11, 2001, WHICH IS ON
FILE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION (FILE NO. 1-4717) AND
IS HEREBY INCORPORATED BY REFERENCE HEREIN. READERS ARE STRONGLY ENCOURAGED
TO CONSIDER THESE FACTORS WHEN EVALUATING FORWARD-LOOKING COMMENTS. THE
COMPANY WILL NOT UPDATE ANY FORWARD-LOOKING COMMENTS SET FORTH IN THIS FORM
10-Q.
THE DISCUSSION HEREIN IS INTENDED TO CLARIFY AND FOCUS ON THE COMPANY'S
RESULTS OF OPERATIONS, CERTAIN CHANGES IN ITS FINANCIAL POSITION,
LIQUIDITY, CAPITAL STRUCTURE AND BUSINESS DEVELOPMENTS FOR THE PERIODS
COVERED BY THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED UNDER ITEM 1 OF
THIS FORM 10-Q. THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THESE
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO, AND IS
QUALIFIED BY REFERENCE THERETO.
GENERAL
KCS, a Delaware corporation, is a holding company with principal
subsidiaries and affiliates including the following:
o The Kansas City Southern Railway Company ("KCSR"), a wholly-owned
subsidiary;
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"),
a 46.6% owned unconsolidated affiliate, which owns 80% of the common
stock of TFM, S.A. de C.V. ("TFM"). TFM wholly-owns Mexrail, Inc.
("Mexrail"). Mexrail owns 100% of The Texas-Mexican Railway Company
("Tex-Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate that leases locomotive and rail equipment to
KCSR;
o Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of
which KCSR owns 50% of the common stock. PCRC owns all of the common
stock of Panarail Tourism Company ("Panarail").
KCS, as the holding company, supplies its various subsidiaries with
managerial, legal, tax, financial and accounting services, in addition to
managing other "non-operating" investments.
15
RECENT DEVELOPMENTS
KCS AND TMM ANNOUNCE AGREEMENTS PLACING TFM, THE TEXAS MEXICAN RAILWAY
COMPANY AND THE KANSAS CITY SOUTHERN RAILWAY COMPANY UNDER COMMON CONTROL.
On April 21, 2003, the Company and Grupo TMM, S.A. ("Grupo TMM") announced
a series of agreements that have been approved by their respective boards
of directors, that will, following shareholder and regulatory approval,
place KCSR, Tex-Mex, and TFM, under the common control of a single
transportation holding company, NAFTA Rail, to be headquartered in Kansas
City, Missouri. As part of the transaction, subject to shareholder
approval, KCS will change its name to NAFTA Rail.
The common control of KCSR and Tex-Mex under NAFTA Rail requires approval
of the STB in the United States. Additionally, the acquisition of Grupo TFM
shares by NAFTA Rail requires the approval of the Antitrust Commission and
the Foreign Investment Commission in Mexico. Upon consummation of the
transactions contemplated by the series of agreements referred to above,
Mr. Michael R. Haverty, Chairman, President and Chief Executive Officer of
KCS, will serve as Chairman, President, and Chief Executive Officer of
NAFTA Rail. Mr. Jose Serrano, Chairman of the Board and Chief Executive
Officer of Grupo TMM, will serve as Vice Chairman of NAFTA Rail and
Chairman of TFM. Also joining the NAFTA Rail board of directors will be Mr.
Javier Segovia, President of Grupo TMM. The remainder of the 10-person
board will be made up of existing KCS directors. Mr. Mario Mohar will
remain as General Director of TFM.
Upon the terms and subject to the conditions of the agreement to acquire
Grupo TFM, TMM Multimodal, S.A. de C.V., a subsidiary of Grupo TMM, will
receive 18 million shares of Class A Common Stock of the Company,
representing, at the time of the agreement, approximately 22 percent (20%
voting, 2% subject to voting restrictions) of the Company, $200 million in
cash (with the option to pay up to $80 million of the $200 million cash
component due at close to Grupo TMM with up to 6.4 million additional
shares of Company stock) and a potential incentive payment of between $100
million and $180 million based on the resolution of certain future
contingencies. Grupo TFM owns 80 percent of the common stock of TFM and all
the shares entitled to full voting rights. The Mexican Government owns the
remaining 20% of TFM.
Upon the terms and subject to the conditions of the agreement to acquire
Tex-Mex, on May 9, 2003, the Company acquired from TFM 51% of the
outstanding stock of Mexrail, Inc. ("Mexrail"), a wholly-owned subsidiary
of TFM, for $32.7 million. Tex-Mex is a wholly-owned subsidiary of Mexrail.
In addition, the Company has an exclusive option until December 31, 2005 to
purchase the remaining outstanding shares of Mexrail as of the date of the
exercise of the option. The Company deposited the initial purchased shares
of Mexrail into an irrevocable voting trust pending obtaining approval by
the STB of KCS's request to acquire control of Tex-Mex. TFM has a right to
repurchase all of the Mexrail stock acquired by the Company at any time for
the purchase price paid by the Company, subject to any STB orders or
directions. Upon any such repurchase, the agreement automatically
terminates. If not exercised within two years of the date of the agreement,
TFM's repurchase right expires. KCSR will remain headquartered in Kansas
City, Missouri; Tex-Mex in Laredo, Texas; and TFM in Mexico City.
THOMAS A. MCDONNELL NAMED TO BOARD OF DIRECTORS. On March 19, 2003, the
Company announced that Thomas A. McDonnell, President and Chief Executive
Officer of DST Systems, Inc. had been named to its board of directors. Mr.
McDonnell began his career with Kansas City Southern Railway in 1968. In
1969, he moved to DST Systems, Inc. From 1983 to October 1995, he served as
a director of Kansas City Southern Industries, Inc. (now KCS). From
December 1989 through October 1995, he served as a director of The Kansas
City Southern Railway Company. From September 1983 through October 1995, he
served as executive vice president of Kansas City Southern Industries, Inc.
(now KCS).
KANSAS CITY SOUTHERN RECEIVES APPROVAL OF AMENDMENT OF CREDIT AGREEMENT. On
April 3, 2003 the Company received approval of the Company's request for an
amendment to certain provisions under its Amended and Restated Credit
Agreement from more than 96 percent of the lenders under the agreement. As
discussed in the Company's 2002 Annual Report on Form 10-K for the year
ended December 31, 2002 as filed with the Securities and Exchange
Commission, Grupo TMM and KCS, or either Grupo TMM or KCS, could be
required to purchase the Mexican government's interest in TFM after October
31, 2003. The Company requested an amendment to its Amended and Restated
Credit Agreement dated June 12, 2002, in order to provide flexibility in
structuring the funding for this transaction. On April 28, the Company
entered into a second amendment to its Amended and Restated Credit
Agreement under which 93 percent of the lenders specifically approved the
Company's investment in further equity interests of Grupo TFM, in equity
interests representing 51% of Mexrail's issued and outstanding capital
stock and the use of the Company's cash to acquire Mexrail, in connection
with the proposed transactions to place KCSR, Tex-Mex and TFM under common
control.
16
KCS SELLS SHARES OF REDEEMABLE CUMULATIVE CONVERTIBLE PERPETUAL PREFERRED
STOCK. On May 5, 2003, the Company completed the sale of $200 million of
Redeemable Cumulative Convertible Perpetual Preferred Stock with a
liquidation preference of $500 per share in a private offering. The
convertible preferred stock offering was made only by means of an offering
memorandum pursuant to Rule 144A. Dividends on the convertible preferred
stock will be cumulative and will be payable quarterly at an annual rate of
4.25% of the liquidation preference, when, as and if declared by the
Company's board of directors. Accumulated unpaid dividends will cumulate
dividends at the same rate as dividends cumulate on the convertible
preferred stock. Each share of the convertible preferred stock will be
convertible, under certain conditions, and subject to adjustment under
certain conditions, into 33.4728 shares of the Company's common stock. On
or after May 20, 2008, the Company will have the option to redeem any or
all of the preferred stock, subject to certain conditions. Under certain
circumstances, at the option of the holders of the preferred stock, the
Company may be required to purchase shares of the convertible preferred
stock from the holders.
The net proceeds from the offering of the convertible preferred stock are
expected to be used to pay a portion of the purchase price for the proposed
acquisition of a controlling interest of Grupo TFM. The preferred stock,
and the common stock to be issued on the conversion of the preferred stock,
have not been registered under the Securities Act of 1933, as amended, and
may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements.
RESULTS OF OPERATIONS
The following table summarizes the income statement components of the
Company for the three months ended March 31, 2003 and 2002 respectively,
for use in the analysis below. Certain prior period amounts have been
reclassified to conform to the current period presentation (IN MILLIONS):
Three Months
Ended March 31,
---------------------------
2003 2002
------------- -------------
Revenues $ 140.2 $ 143.9
Costs and expenses 133.4 130.5
------------- -------------
Operating income 6.8 13.4
Equity in net earnings (losses) of
unconsolidated 7.0 4.9
affiliates
Gain on sale of Mexrail, Inc. - 4.4
Interest expense (11.5) (11.3)
Other income 1.3 4.4
------------- -------------
Income before income taxes and
cumulative effect of accounting change 3.6 15.8
Income tax provision (benefit) (1.1) 4.1
------------- -------------
Income before cumulative effect of accounting
change 4.7 11.7
Cumulative effect of accounting change, net
of income taxes 8.9 -
------------- -------------
Net income $ 13.6 $ 11.7
============= =============
17
The following table summarizes consolidated KCS revenues, including the revenues
and carload statistics of KCSR, for the three months ended March 31, 2003 and
2002, respectively. Certain prior period amounts have been reclassified to
reflect changes in the business groups and to conform to the current period
presentation.
Carloads and
Revenues Intermodal Units
------------------------------- -------------------------------
(IN MILLIONS) (IN THOUSANDS)
Three months Three months
ended March 31, ended March 31,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- --------------- -------------- --------------
General commodities:
Chemical and petroleum $ 31.2 $ 31.9 36.0 35.9
Paper and forest 33.9 32.0 44.8 43.8
Agricultural and mineral 25.1 25.2 33.5 33.0
-------------- --------------- -------------- --------------
Total general commodities 90.2 89.1 114.3 112.7
Intermodal and automotive 13.5 15.0 71.8 69.5
Coal 24.3 28.8 47.1 58.5
-------------- --------------- -------------- --------------
Carload revenues and carload
and intermodal units 128.0 132.9 233.2 240.7
============== ==============
Other rail-related revenues 10.8 8.9
-------------- ---------------
Total KCSR revenues 138.8 141.8
Other subsidiary revenues 1.4 2.1
-------------- ---------------
Total consolidated revenues $ 140.2 $ 143.9
============== ===============
The following table summarizes KCS's consolidated costs and expenses for the
three months ended March 31, 2003 and 2002, respectively. Certain prior period
amounts have been reclassified to conform to the current year presentation.
Three Months
Ended March 31,
-------------------------------
2003 2002
--------------- ---------------
Compensation and benefits $ 50.5 $ 49.4
Depreciation and amortization 15.9 14.9
Purchased services 15.1 14.0
Operating leases 14.3 13.5
Fuel 12.8 9.5
Casualties and insurance 8.1 7.9
Car hire 2.2 5.2
Other 14.5 16.1
--------------- ---------------
Total consolidated costs and expenses $ 133.4 $ 130.5
=============== ===============
NET INCOME. Net income for the three months ended March 31, 2003 was $13.6
million (22(cent) per diluted share) compared to $11.7 million (19(cent) per
diluted share) for the three months ended March 31, 2002. This $1.9 million
quarter to quarter increase in net income was primarily the result of the
cumulative effect of a change in accounting principle of $8.9 million, (net of
income taxes of $5.6 million), a $5.2 million quarter to quarter decrease in
income taxes and a $2.1 million quarter to quarter increase in equity in
earnings from Grupo TFM. These factors, which led to an increase in net income
were partially offset by a $3.7 million decrease in consolidated revenues, a
$3.1 million decline in other income, a $2.9 million increase in consolidated
operating expenses, and a $0.2 million increase in interest expense. The quarter
to quarter increase in net income was also partially reduced by the effect of
the $4.4 million gain on the sale of Mexrail to TFM in the first quarter of
2002.
REVENUES. Consolidated revenues for the three months ended March 31, 2003
declined $3.7 million to $140.2 compared to $143.9 for the three months ended
March 31, 2002. For the quarter ended March 31, 2003, KCSR experienced revenue
declines in coal, plastic products, and automotive products. These declines were
primarily driven by the continued effects of the slow economy, the loss of
certain customers, continued declines in production in certain business
18
segments as well as the effects of the war in Iraq. KCSR did, however,
experience increases in revenues for the paper and forest products commodity
group as well as intermodal traffic primarily as a result of higher carloadings
and intermodal units as well as certain targeted price improvements. The
following discussion provides an analysis of KCSR revenues by commodity group
for the quarter ended March 31, 2003.
CHEMICAL AND PETROLEUM PRODUCTS. Revenues for the three months ended
March 31, 2003 decreased $0.7 million (2.3%) compared to the three months ended
March 31, 2002. Higher revenues for industrial gases and inorganic products were
offset by declines in revenues for plastics products while revenues for organic
products remained relatively flat. Increases in revenues for industrial gases
were driven by increases in manufacturing production, as well as plant
expansions while increases in revenues from inorganic products also resulted
from increases in production. Agri-chemical products revenues were adversely
affected by reduced production. Revenues from petroleum products were relatively
flat as increases in certain commodity carloadings were offset by the relatively
lower revenues per carload associated with these commodities. Additionally,
revenues from petroleum products continue to be affected by the slow economy, as
well as continued high prices associated with petroleum products and the related
effects upon demand and production. Chemical and petroleum products revenue
accounted for 24.4% and 24.0% of carload revenues for the three months ended
March 31, 2003 and 2002, respectively.
PAPER AND FOREST PRODUCTS. Revenues for paper and forest products for the
three months ended March 31, 2003 increased $1.9 million (6.1%) compared to the
three months ended March 31, 2002. Increases in revenues from pulp and paper
products and lumber and plywood products were partially reduced by declines in
pulpwood, logs, chips, military and other carload revenue. Pulp and paper
products revenue increased primarily as a result of strong demand from paper
mills served by KCSR in spite of continued weakness in the U.S. economy. Lumber
and plywood products revenue continued to increase as a result of continued
strength in the housing and homebuilding industry. Decreases in pulpwood, logs
and chips product revenue resulted from declines in production, while military
and other carload revenues were adversely affected by the war in Iraq as certain
military training exercises, for which KCSR handles equipment transportation,
were cancelled due to the associated military buildup and deployment of troops
to the Middle East. Paper and forest products revenue accounted for 26.5% and
24.1% of carload revenues for the three months ended March 31, 2003 and 2002,
respectively.
AGRICULTURAL AND MINERAL PRODUCTS.Revenues for agricultural and mineral
products for the three months ended March 31, 2003 of $25.1 million were
relatively unchanged compared to $25.2 million for the three months ended March
31, 2002. Increases in revenues for export grain and ores and mineral products
were primarily offset by decreases in revenues for domestic grain, food products
and for stone, clay and glass products. Revenues from export grain increased as
a result of increased shipments of grain to Mexico. Revenue increases for ores
and mineral products resulted from increased demand from producers. Decreases in
domestic grain products were the result of continued general declines in poultry
production, which has decreased demand for grain shipments to the Company's
poultry producing customers. Revenue for food products declined slightly as a
result of reduced production by poultry producers. Agricultural and mineral
products revenue accounted for 19.6% and 19.0% of carload revenues for the three
months ended March 31, 2003 and 2002, respectively.
INTERMODAL AND AUTOMOTIVE. Intermodal and automotive revenues declined
$1.5 million (9.7%) for the three months ended March 31, 2003 compared to the
three months ended March 31, 2002. Automotive revenues declined $2.3 million
(66%) as the impact of the loss of certain Ford and General Motors traffic in
the second quarter of 2002 was fully realized in the first quarter of 2003. This
loss was partially mitigated by the effect of revenues associated with parts
traffic obtained during the three months ended March 31, 2003. Intermodal
revenues increased $0.9 million for the three months ended March 31, 2003 as a
result of increased traffic. Intermodal and automotive product revenue accounted
for 10.6% and 11.3% of carload revenues for the three months ended March 31,
2003 and 2002, respectively.
COAL. Coal revenues decreased $4.5 million (15.7%) for the three months
ended March 31, 2003 compared to the three months ended March 31, 2002. This
decline in coal revenues was the result of the loss of a coal customer in April
of 2002, as well as a 15.5% decline in net tons shipped due to lower customer
demand. Additionally, coal revenues were impacted by scheduled cyclical
maintenance outages at several of KCSR's electric utility customers, which, by
comparison, were longer in duration than the maintenance outages during the
first quarter of 2002. In addition, most of the utilities were building
inventory stockpiles in the first quarter of 2002 but have been reducing these
stockpiles inventory thus far in 2003. The impact of these declines in coal
revenue was partially offset by higher per-carload revenues. Coal revenue
accounted for 18.9% and 21.7% of carload revenues for the three months ended
March 31, 2003 and 2002, respectively.
19
OTHER. Other rail related revenues increased $1.9 million (21.4%) for the
three months ended March 31, 2003 compared to the three months ended March 31,
2002. This increase was primarily the result of an increase in demurrage revenue
of $1.3 million, partially as a result of improved operating efficiencies
obtained through the implementation of the Company's transportation operating
platform, Management Control System ("MCS"), as well as smaller increases in
haulage and other rail revenues.
COSTS AND EXPENSES. Consolidated costs and expenses for the three months ended
March 31, 2003 increased $2.9 million (2.2%) compared to the three months ended
March 31, 2002. This increase was the result of higher operating expenses at
KCSR of approximately $5.7 million, partially offset by lower operating expenses
at certain other subsidiaries of $2.8 million. Operating expenses for the first
quarter were most significantly impacted by increases in fuel costs. See further
discussion below for a more comprehensive discussion of operating expenses.
COMPENSATION AND BENEFITS. Consolidated compensation and benefits expense
increased $1.1 million to $50.5 million for the three months ended March 31,
2003 compared to $49.4 million for the three months ended March 31, 2002
primarily as a result of the implementation of an increase in certain union
wages in the third quarter of 2002 as well as higher health insurance related
costs.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and amortization
expense was $15.9 million for the three months ended March 31, 2003 compared to
$14.9 million for the three months ended March 31, 2002. This $1.0 million
increase was primarily the result of amortization of previously capitalized
costs upon implementation of MCS during the third quarter of 2002.
PURCHASED SERVICES. Consolidated purchased services expense for the three
months ended March 31, 2003 was $15.1 million compared to $14.0 million for the
three months ended March 31, 2002. This $1.1 million increase was a result of
higher car and locomotive repairs performed by outside parties, as well as
increased legal expenses related to the settlement of certain casualty claims in
the first three months of 2003. Additionally, KCSR incurred additional lift fees
related to increased intermodal traffic.
OPERATING LEASES. For the three months ended March 31, 2003, consolidated
operating lease expense was $14.3 million compared to $13.5 million for the
three months ended March 31, 2002. This $0.8 million increase was primarily the
result of additional lease expense associated with the lease for the Company's
new corporate headquarters building. The Company began leasing this facility in
the second quarter of 2002.
FUEL. Consolidated fuel expense for the three months ended March 31, 2002
increased $3.3 million to $12.8 million compared to $9.5 million for the three
months ended March 31, 2002. This quarter to quarter increase was the result of
a 42% increase in the average price per gallon, partially mitigated by a 6%
decrease in fuel consumption, as well as a $1.3 million fuel cost savings
resulting from the Company's fuel hedging program. Fuel cost represented
approximately 9.5% of operating costs and expenses for the three months ended
March 31, 2003 compared to 7.3% of operating costs and expenses for the three
months ended March 31, 2002.
CASUALTIES AND INSURANCE. Consolidated casualties and insurance expense
was relatively unchanged at $8.1 million for the three months ended March 31,
2003 compared to $7.9 million for the three months ended March 31, 2002.
CAR HIRE. Consolidated car hire expense for the three months ended March
31, 2003 was $2.2 million compared to $5.2 million for the three months ended
March 31, 2002. This $3.0 million decrease was the result of a reduction of
freight cars from other railroads on the Company's rail line combined with an
increase in the number of KCSR freight cars being used by other railroads due to
improved fleet utilization resulting from MCS, which also reduced utilization
lease payments.
OTHER EXPENSE. Consolidated other expense for the three months ended
March 31, 2003 was $14.5 million compared to $16.1 million for the three months
ended March 31, 2002. This $1.6 million decline in other expense was primarily
the result of lower costs of sales related to the Company's tie treating
facility, as well as lower materials and supplies expense incurred by the
Company's other subsidiaries.
20
OPERATING INCOME AND KCS OPERATING RATIO. Consolidated operating income
for the three months ended March 31, 2003 decreased $6.6 million to $6.8 million
compared to $13.4 million for the same period in 2002. This decrease was the
result of a $3.7 million decline in revenue combined with a $2.9 million
increase in operating expenses. For the three months ended March 31, 2003, the
consolidated operating ratio for KCS was 95.1% compared to 90.7% for the three
months ended March 31, 2002.
INTEREST EXPENSE. Consolidated interest expense for the three months ended March
31, 2003 increased $0.2 million to $11.5 million compared to $11.3 million for
the three months ended March 31, 2002. This increase in interest expense was the
result of higher interest rates due to a shift to more fixed rate debt in June
2002, partially offset by the impact of lower debt balances. Consolidated debt
balances declined $46.2 million from $627.9 million at March 31, 2002 to $581.7
million at March 31, 2003.
OTHER INCOME. The Company's other income for the three months ended March 31,
2003 was $1.3 million compared to $4.4 million for the three months ended March
31, 2002. This $3.1 million decrease was primarily the result of the impact of
gains of $3.3 million recorded on the sale of non-operating property during the
first quarter of 2002. During the three months ended March 31, 2003, there were
no significant gains on the sale of non-operating property.
INCOME TAX EXPENSE. The consolidated income tax benefit for the three months
ended March 31, 2003 was $1.1 million compared to a consolidated income tax
expense of $4.1 million for the same period in 2002. This decrease in income tax
expense was primarily the result of reduced domestic operating income, higher
interest costs as well as the income tax effect of a one-time gain on the sale
of Mexrail recorded in the first quarter of 2002.
EQUITY IN NET EARNINGS (LOSSES) OF UNCONSOLIDATED AFFILIATES. The Company
recorded equity in earnings of unconsolidated affiliates of $7.0 million
compared to $4.9 million for the same period in 2002. This quarter to quarter
increase was the result of a $2.1 million increase in equity in net earnings
from Grupo TFM. Included within this increase is the impact of the Company's
increased ownership of Grupo TFM to 46.6% from 36.9%, which the Company obtained
indirectly through the purchase by TFM of the Mexican government's former 24.6%
of Grupo TFM in July 2002. For the three months ended March 31, 2003, Grupo
TFM's revenues declined approximately 1% while operating expenses increased
approximately 1% compared to the same period in 2002. Results for the first
quarter of 2003 for Grupo TFM include a $23.0 million deferred income tax
benefit (calculated under accounting principles generally accepted in the United
States of America - "U.S. GAAP") compared to a deferred income tax benefit of
$5.3 million in the first quarter of 2002. This variance was the result of
fluctuations in the peso exchange rate and tax benefits derived from the impact
of inflation in Mexico. The Company reports its equity in Grupo TFM under U.S.
GAAP while Grupo TFM reports under International Accounting Standards ("IAS").
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. The Company adopted the provisions of
SFAS 143 effective January 1, 2003. As a result, the Company changed its method
of accounting for removal costs of certain track structure assets and recorded a
one time benefit of $8.9 million (net of income taxes of $5.6 million) for the
first quarter of 2003. This change is reported as a cumulative effect of an
accounting change in the accompanying consolidated financial statements.
TRENDS AND OUTLOOK
While certain commodity segments experienced revenue growth during the first
quarter of 2003, overall revenues continued to be adversely affected by the slow
economy. Additionally, for the first quarter of 2003, the Company's operating
costs increased primarily as a result of higher fuel costs. As a result of the
continuing sluggish economy coupled with higher fuel and certain other operating
costs, the Company's domestic operating income for the first quarter of 2003
decreased $6.6 million compared to the first quarter of 2002. Fuel expense
increased as a result of a 42% rise in the average price per gallon due to
market conditions, partially offset by a 6% reduction in fuel usage. The impact
of higher fuel costs on operating expenses was partially offset by lower car
hire costs due to a reduction of third party freight cars on the Company's rail
line, coupled with improvements in fleet utilization. Additionally, for the
first quarter of 2003, net income was favorably affected by a one-time benefit
of $8.9 million (net of income taxes of $5.6 million), related to the cumulative
effect resulting from a required change in the method of accounting for removal
costs of certain railroad track structures. These factors contributed to the
Company's first quarter 2003 diluted earnings per share, which increased 16% to
22(cent) per diluted share from 19(cent) per diluted share for the first quarter
of 2002.
21
For the first quarter of 2003, Grupo TFM continued to contribute to the
Company's net income as equity in earnings of Grupo TFM increased $2.1 million
from $4.8 million in the first quarter of 2002 to $6.9 million for the first
quarter of 2003. This increase was partially the result of the Company's
increased ownership from 36.9% to 46.6%, which the Company obtained indirectly
through the purchase by TFM of the Mexican government's former 24.6% ownership
of Grupo TFM in July 2002.
A current outlook for the Company's businesses for the remainder of 2003 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)
For the remainder of 2003, management will continue to focus on improving
domestic operations. As discussed in "Recent Developments - KCS and TMM Announce
Agreements Placing TFM, The Texas Mexican Railway Company, and The Kansas City
Southern Railway Company Under Common Control," management has announced a
series of agreements that have been approved by the respective boards of
directors of the Company and Grupo TMM, that will, following shareholder and
regulatory approval, place KCSR, Tex-Mex, and TFM under the common control of a
single transportation holding company, NAFTA Rail, to be headquartered in Kansas
City, Missouri. Management expects common control of these three railroads,
which are already physically linked in an end-to-end configuration, to improve
operating efficiency and give shippers in the NAFTA trade corridor a strong
transportation alternative.
Management expects overall KCSR revenues to increase slightly for the remainder
of 2003 compared to the same period in 2002. Except as discussed herein,
assuming normalized rail operations, management expects KCSR's variable costs
and expenses to be proportionate with revenue activity. Fuel prices will
fluctuate subject to market conditions. To mitigate the market risk associated
with fuel, KCSR currently has approximately 26% of its remaining budgeted fuel
usage hedged for 2003 through purchase commitments as well as fuel swaps, both
of which reduce the risk of the adverse impact of rising fuel prices. Insurance
costs are expected to rise commensurate with market conditions and depreciation
expense is expected to be higher compared to the prior year as a result of the
implementation of MCS.
The Company expects to continue to participate in the earnings/losses from its
equity investments in Grupo TFM, Southern Capital and PCRC. Due to the
variability of factors affecting the Mexican economy, management can make no
assurances as to the impact that a change in the value of the peso or a change
in Mexican inflation will have on the results of Grupo TFM. In addition, upon
consummation of the transactions to place KCSR, TFM and Tex-Mex under common
control, if it occurs, the Company expects to consolidate the results of
operations of TFM and Tex-Mex into its consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data for the Company is as follows (IN MILLIONS):
Three Months
Ended March 31,
-------------------------------
2003 2002
------------- -------------
Cash flows provided by (used for):
Operating activities $ 48.5 $ 36.2
Investing activities (3.6) 22.8
Financing activities 0.1 (26.9)
------------- -------------
Cash and cash equivalents:
Net increase 45.0 32.1
At beginning of year 19.0 24.7
------------- -------------
At end of period $ 64.0 $ 56.8
============= =============
During the three months ended March 31, 2003, the Company's consolidated cash
position increased $45.0 million from December 31, 2002, primarily as a result
of operating cash inflows and the proceeds from employee stock plans. These
increases were partially offset by debt repayments and property acquisitions.
Net operating cash inflows were $48.5 million and $36.2 million for the three
months ended March 31, 2003 and 2002, respectively. The $12.3 million increase
22
in operating cash flows was primarily attributable to changes in working capital
balances, resulting mainly from the timing of payments and receipts.
Net investing cash inflows (outflows) were ($3.6) million and $22.8 million for
the three months ended March 31, 2003 and 2002, respectively. This $26.4 million
decrease was primarily a result of proceeds received from the sale of Mexrail of
$31.4 million during the first quarter of 2002, as well as a $1.8 million
quarter to quarter decrease in proceeds received from the disposal of property.
These changes in investing cash outflows were partially offset by a $5.2 million
quarter to quarter decrease in capital expenditures and a $1.8 million decline
in investments in and loans to affiliates.
For the first three months of 2003, net financing cash inflows were $0.1 million
compared to net financing cash outflows of $26.9 million for the first three
months of 2002. This difference was primarily due to net repayments of long-term
debt of $0.9 million during the first three months of 2003 compared to net
repayments of long-term debt of $30.5 million during the first three months of
2002.
Management expects cash flows from operations to be positive throughout the
remainder of 2003 as a result of operating income, which has historically
resulted in positive operating cash flows. Investing activities are projected to
use significant amounts of cash for capital expenditures and investments in
subsidiaries pending regulatory approval of the acquisition of Grupo TMM's
interest in Grupo TFM. Future roadway improvement projects will continue to be
primarily funded by operating cash flows or, secondarily, through borrowings
under the Company's line of credit.
The Company's consolidated ratio of debt to total capitalization was 43.0% and
43.6% at March 31, 2003 and December 31, 2002, respectively. The Company's debt
decreased $0.9 million from $582.6 million at December 31, 2002 to $581.7
million at March 31, 2003 as a result of net repayments of long-term debt. This
decrease in debt was coupled with an increase in the Company's stockholders'
equity of $18.3 million to $771.7 million at March 31, 2003. This increase was
due primarily to net income of $13.6 million and the issuance of common stock
under employee stock plans. Management anticipates that the ratio of debt to
total capitalization will decrease in the short-term based on the issuance of
the $200 million of Redeemable Cumulative Convertible Perpetual Preferred Stock.
In addition to operating cash flows, the Company has financing available under a
senior secured revolving credit facility ("Credit Facility") with a maximum
borrowing amount of $100 million. As of March 31, 2003, all $100 million was
available under the Credit Facility. The Amended and Restated Credit Agreement
contains, among other provisions, various financial covenants. As a result of
certain financial covenants contained in the Amended and Restated Credit
Agreement, maximum utilization of the Company's Credit Facility may be
restricted.
The Company filed a Universal Shelf Registration Statement on Form S-3 ("Initial
Shelf" - Registration No. 33-69648) in September 1993, as amended in April 1996,
for the offering of up to $500 million in aggregate amount of securities. The
SEC declared the Initial Shelf effective on April 22, 1996; however, no
securities have been issued thereunder. The Company has carried forward $200
million aggregate amount of unsold securities from the Initial Shelf to a Shelf
Registration Statement filed on Form S-3 ("Second Shelf" - Registration No.
333-61006) on May 16, 2001 for the offering of up to $450 million in aggregate
amount of securities. The SEC declared the Second Shelf effective on June 5,
2001. Securities in the aggregate amount of $300 million remain available under
the Initial Shelf and securities in the aggregate amount of $450 million remain
available under the Second Shelf. To date, no securities have been issued under
either the Initial Shelf or Second Shelf.
As discussed in the 2002 Form 10-K, Grupo TMM and KCS, or either Grupo TMM or
KCS, could be required to purchase the Mexican government's interest in TFM.
However, this provision is not exercisable prior to October 31, 2003 without the
consent of Grupo TFM. If KCS and Grupo TMM, or either KCS or Grupo TMM alone had
been required to purchase the Mexican government's 20% interest in TFM, the
total purchase price would have been approximately $478 million as of March 31,
2003. The Company is exploring various alternatives for financing this
transaction. It is anticipated that this financing, if necessary, can be
accomplished using the Company's ability to access the capital markets. No
commitments for such financing have been obtained at this time. As discussed in
"Recent Developments - Kansas City Southern Receives Approval of Amendment of
Credit Agreement," the Company's lenders amended the Company's Amended and
Restated Credit Agreement dated June 12, 2002 as Grupo TMM and KCS, or either
Grupo TMM or KCS could be required to purchase the Mexican government's interest
in TFM after October 31, 2003. On April 3, 2003, the Company announced that more
than 96% of the lenders under its Amended and Restated Credit Agreement dated
June 12, 2002 approved the Company's request. The Company requested the
amendment to
23
existing financial covenants in its Amended and Restated Credit Agreement in
order to provide flexibility in structuring the funding for this transaction.
The Company sought this amendment in order to maintain its current cash position
while analyzing financing alternatives. On April 28, the Company entered into a
second amendment to its Amended and Restated Credit Agreement under which 96
percent of the lenders specifically approved the Company's investment in further
equity interests of Grupo TFM, in equity interests representing 51% of Mexrail's
issued and outstanding capital stock and the use of the Company's cash to
acquire Mexrail, in connection with the proposed transactions to place KCSR,
Tex-Mex and TFM under common control.
The Company believes, based on current expectations, that its cash and other
liquid assets, operating cash flows, access to capital markets, borrowing
capacity, and other available financing resources are sufficient to fund
anticipated operating, capital and debt service requirements and other
commitments through 2003. However, the Company's operating cash flows and
financing alternatives can be impacted by various factors, some of which are
outside of the Company's control. For example, if the Company were to experience
a substantial reduction in revenues or a substantial increase in operating costs
or other liabilities, its operating cash flows could be significantly reduced.
Additionally, the Company is subject to economic factors surrounding capital
markets and the Company's ability to obtain financing under reasonable terms is
subject to market conditions. Further, the Company's cost of debt relative to
potential future debt financing transactions could be impacted by independent
rating agencies, which assign debt ratings based on certain credit measurements
such as interest coverage and leverage ratios.
OTHER
NEW ACCOUNTING PRONOUNCEMENTS. In June 2001, the FASB issued Statement No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 is
effective for fiscal years beginning after June 15, 2002. Under SFAS 143, the
fair value of a liability for an asset retirement obligation must be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. KCSR, along with other Class I
railroads, depreciates track structure (rail, ties, and other track material) in
accordance with regulations promulgated by the Surface Transportation Board
("STB"). These regulations require KCSR to depreciate track structure to a net
salvage value (gross estimated salvage value less estimated costs to remove the
track structure at the end of its useful life). For certain track structure such
as ties, with little or no gross salvage value, this practice ultimately results
in depreciating an asset below zero, and thus, in effect, results in a
liability. Under the requirements of SFAS 143, in the absence of a legal
obligation to remove the track structure, such accounting practice is
prohibited. The Company adopted the provisions of SFAS 143 in the first quarter
of 2003, and, as a result, reviewed its depreciation of track structures to
determine instances where the depreciation of removal costs has resulted or
would be expected (based on the current depreciation rate) to result in the
depreciation of an asset below zero when considering net salvage value. As a
result of this review, the Company has estimated the excess depreciation
recorded on such assets and has recorded this amount as a reduction in
accumulated depreciation of $14.5 million and as a cumulative effect of an
accounting change of $8.9 million (net of taxes of $5.6 million) as required by
SFAS 143 in the first quarter of 2003. Additionally, depreciation rates applied
to certain track structure elements that were previously yielding a negative
salvage value have been modified to comply with the provisions of SFAS 143. For
the three months ended March 31, 2003, this resulted in a decrease in
depreciation expense of approximately $0.3 million. Management currently
estimates the net effect of the adoption of SFAS 143 on full year depreciation
expense to be approximately $1.4 million.
In December 2002, the FASB issued Statement No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123" ("SFAS 148"). SFAS 148 provides two additional transition methods for
entities that adopt the method of accounting for stock-based compensation as
defined in FASB Statement No. 123. Additionally, the statement amends the
disclosure requirements of Statement 123 to require disclosures in interim
financial statements regarding the method of accounting for stock-based employee
compensation and the effect of the method on results of operations. The Company
is currently evaluating the provisions of this new accounting pronouncement and
does not expect this pronouncement, if adopted, to have a material impact on its
consolidated results of operations, financial position, or cash flows.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no significant changes in the Company's Quantitative and
Qualitative Disclosures About Market Risk from that previously reported in the
Annual Report on Form 10-K for the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have reviewed
and evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), as of a date within
ninety days before the filing of this Quarterly Report on Form 10-Q. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's current disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms, and include controls and procedures
designed to ensure that information required to be disclosed by the Company in
such reports is accumulated and communicated to the Company's management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
There have not been any significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation. There were no significant deficiencies or material
weaknesses in the internal controls, and therefore no corrective actions were
taken.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Part I, Item 1. Financial Statements, note 7 to the Consolidated Financial
Statements of this Form 10-Q is hereby incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Company held its 2003 Annual Meeting of Stockholders ("Annual
Meeting") on May 1, 2003. A total of 56,120,518 shares of the Common
stock, $.01 per share par value, and Preferred stock, par value $25.00
per share, or 90.9% of the outstanding voting stock on the record date
(61,738,162 shares), was represented at the Annual Meeting, thereby
constituting a quorum. These shares voted together as a single class.
25
b) Proxies for the meeting were solicited pursuant to Regulation 14A; there
was no solicitation in opposition to management's nominees for directors
as listed in such Proxy Statement and all such nominees were elected.
The voting for the election of directors was as follows:
Total
Shares
------------------
Election of Three Directors
(i) Michael G. Fitt
For 55,074,947
Against -
Withheld 1,196,566
-----------------
Total 56,271,513
=================
(ii) Michael R. Haverty
For 54,995,381
Against -
Withheld 1,196,566
-----------------
Total 56,191,947
=================
(iii) Thomas A. McDonnell
For 54,701,529
Against -
Withheld 1,196,566
-----------------
Total 55,898,095
=================
c) Listed below are the other matters voted on at the Company's Annual
Meeting. These matters are fully described in the Company's Definitive
Proxy Statement. The voting was as follows:
Total
Shares
-----------------
Reapproval of Section 18.7 (Performance Measures)
of KCS's 1991 Amended and Restated Stock Option
and Performance Award Plan (as amended and
restated effective as of November 7, 2002) for
Purposes of Internal Revenue Code Section 162(m).
For 47,649,262
Against 8,250,946
Withheld 220,310
-----------------
Total 56,120,518
=================
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
(3)(I) Articles of Incorporation
Exhibit 3.1(a) Restated Articles of Incorporation, incorporated
herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4 originally filed July 12,
2002 (Registration Statement No. 333-92360), as amended and
declared effective on July 30, 2002
Exhibit 3.1(b) Certificate of Designations
26
(4) Instruments Defining the Rights of Security Holders, Including Indentures
Exhibit 4.1 See Exhibit 3.1(b)
(10) Material Contracts
Exhibit 10.1 Acquisition Agreement, dated as of April 20, 2003, by and
among the Company, KARA Sub, Inc., Grupo TMM, S.A., TMM
Holdings, S.A. de C.V. and TMM Multimodal, S.A. de C.V.
Exhibit 10.2 Stock Purchase Agreement, dated as of April 20, 2003, by and
among the Company, Grupo TMM, S.A. and TFM, S.A. de C.V.
Exhibit 10.3 First Amendment dated as of April 3, 2003 to the Amended and
Restated Credit Agreement dated as of June 12, 2002, among
the Company, KCSR and the lenders party thereto (the "Credit
Agreement")
Exhibit 10.4 Second Amendment dated as of April 28, 2003 to the Credit
Agreement
(99) Additional Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K
The Company furnished a Current Report on Form 8-K dated January 7, 2003
announcing its fourth quarter 2002 meeting, 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 January 30,
2003 reporting its fourth quarter 2002 operating results. The
information included in this Current Report on Form 8-K was furnished
pursuant to Item 9 and shall not be deemed to be filed.
The Company filed a Current Report on Form 8-K dated March 19, 2003
announcing that Thomas A. McDonnell has been named to its Board of
Directors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized and in the capacities indicated on May 13, 2003.
Kansas City Southern
/S/ RONALD G. RUSS
------------------------------------------------------
Ronald G. Russ
Executive 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)
27
CERTIFICATIONS
I, Michael R. Haverty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kansas City Southern;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/S/ MICHAEL R. HAVERTY
Michael R. Haverty
Chairman, President and Chief Executive Officer
28
CERTIFICATIONS
I, Ronald G. Russ, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kansas City Southern;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003
/S/ RONALD G. RUSS
----------------------------------------------------
Ronald G. Russ
Executive Vice President and Chief Financial Officer
29