SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
(AMENDMENT No. 1)
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
DECEMBER 16, 2003
KANSAS CITY SOUTHERN
(Exact name of company as specified in its charter)
DELAWARE 1-4717 44-0663509
(State or other jurisdiction (Commission file number) (IRS Employer
of incorporation) Identification Number)
427 WEST 12TH STREET, KANSAS CITY, MISSOURI 64105
(Address of principal executive offices) (Zip Code)
COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(816) 983 - 1303
NOT APPLICABLE
(Former name or former address if changed since last report)
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
EXHIBIT NO. DOCUMENT
(99) Additional Exhibits
99.1 Pro Forma Financial Information, including Pro Forma
Condensed Consolidated Balance Sheet As of September 30,
2003, Pro Forma Condensed Consolidated Income Statement for
the Nine Months Ended September 30, 2003 and Pro Forma
Condensed Consolidated Income Statement for the Year Ended
December 31, 2002.
ITEM 9. REGULATION FD DISCLOSURE
This amendment on Form 8-K/A is being filed to amend Kansas City Southern's
Current Report on Form 8-K filed on December 17, 2003, and Exhibit 99.1 thereto,
which contained a clerical error in labeling the Pro Forma Condensed
Consolidated Income Statement for the Six Months Ended June 30, 2003 (rather
than the Nine Months Ended September 30, 2003).
A copy of the corrected pro forma financial information including Pro Forma
Condensed Consolidated Balance Sheet As of September 30, 2003, Pro Forma
Condensed Consolidated Income Statement for the Nine Months Ended September 30,
2003 and Pro Forma Condensed Consolidated Income Statement for the Year Ended
December 31, 2002 is attached hereto as Exhibit 99.1.
The information included in this Current Report on Form 8-K/A, including Exhibit
99.1, is furnished pursuant to Item 9 and shall not be deemed to be "filed" for
the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise
subject to the liabilities of that Section.
SIGNATURE1
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
hereunto duly authorized.
Kansas City Southern
Date: December 19, 2003 By: /S/ LOUIS G. VAN HORN
---------------------------
Louis G. Van Horn
Vice President and Comptroller
EXHIBIT 99.1
KANSAS CITY SOUTHERN
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2003
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRO FORMA
KCS GRUPO TFM ADJUSTMENTS PRO
HISTORICAL HISTORICAL DEBIT CREDIT FORMA
ASSETS:
Current Assets:
Cash and cash equivalents $ 230.2 $ 8.4 $200.0 (4) $ 38.6
Accounts receivable, net 113.0 190.2 3.3 (11) 299.9
Inventories 36.2 16.2 52.4
Other current assets 18.0 8.5 26.5
----------- ------------ ---------- --------- ----------
TOTAL CURRENT ASSETS 397.4 223.3 - 203.3 417.4
----------- ------------ ---------- --------- ----------
Investments 433.8 7.0 386.1 (1) 54.7
Concession rights and related assets - 1,185.1 43.0 (2,7, 6.2 (2,3) 1,221.9
10)
Properties, net 1,348.9 652.3 2,001.2
Goodwill 10.6 - 10.6
Deferred income taxes and employees statutory profit
sharing - 200.0 200.0
Other assets 27.3 32.2 59.5
----------- ------------ ---------- ========= ==========
TOTAL ASSETS $2,218.0 $2,299.9 $ 43.0 $595.6 $3,965.3
=========== ============ ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Debt due within one year $ 10.0 $ 131.9 $ 141.9
Accounts and wages payable and accrued liabilities 186.3 134.8 3.3 (1,11) 317.8
----------- ------------ ---------- ========= ==========
TOTAL CURRENT LIABILITIES 196.3 266.7 3.3 - 459.7
----------- ------------ ---------- ========= ==========
OTHER LIABILITIES:
Long-term debt 568.7 846.0 1,414.7
Deferred income taxes 393.9 - 14.1 (10) 408.0
Other deferred credits 92.9 36.3 6.2 (3) 123.0
----------- ------------ ---------- ========= ==========
TOTAL OTHER LIABILITIES 1,055.5 882.3 6.2 14.1 1,945.7
----------- ------------ ---------- ========= ==========
MINORITY INTEREST - 351.5 - 39.5 (16) 391.0
STOCKHOLDERS' EQUITY
Preferred stock 6.1 - - - 6.1
Redeemable cumulative convertible perpetual preferred
stock 0.4 - - - 0.4
Common / capital stock 0.6 807.0 807.0 (5) - 0.6
New issue, non-voting common, $. 01 par - - - 0.2 (6) 0.2
Treasury shares and effect on purchase of subsidiary
shares - (222.0) - 222.0 (5) -
Retained earnings 851.4 214.4 214.4 (5) - (6) 851.4
Capital Surplus 108.9 - - 202.5 (6) 311.4
Accumulated other compehensive loss (1.2) - (1.2)
----------- ------------ ---------- ========= ==========
Total stockholders' equity 966.2 799.4 1,021.4 424.7 1,168.9
----------- ------------ ---------- ========= ==========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,218.0 $2,299.9 $1,030.9 $478.3 $3,965.3
========= ============ ========== ========= ==========
See notes to proforma condensed consolidated financial statements.
KANSAS CITY SOUTHERN
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRO FORMA
KCS GRUPO TFM ADJUSTMENTS PRO
HISTORICAL HISTORICAL DEBIT CREDIT FORMA
REVENUES $ 432.8 $523.4 $956.2
Costs and expenses 348.8 355.1 2.6 (14) 706.5
Depreciation and amortization 48.1 65.1 0.9 (15) 114.1
---------- --------- --------- ----------
OPERATING INCOME 35.9 103.2 3.5 - 135.6
Equity in net earnings of unconsolidated affiliates:
Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. 6.2 - 6.2 (8) -
Other (1.0) - (1.0)
Interest expense (34.8) (83.4) (118.2)
Other income (expense) 4.8 (33.3) (28.5)
---------- --------- --------- ------- ----------
Income (loss) before income taxes, minority and accounting
change 11.1 (13.5) 9.7 - (12.1)
Income tax provision (benefit) 2.6 (30.4) (1.7) (10) - (29.5)
Minority interest - (3.4) 0.7 (16) (4.1)
---------- --------- --------- ------- ----------
INCOME BEFORE ACCOUNTING CHANGE 8.5 13.5 8.7 - 13.3
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX 8.9 - - - 8.9
---------- --------- --------- ------- ----------
NET INCOME 17.4 13.5 8.7 - 22.2
PREFERRED STOCK DIVIDENDS 4.7 1.7 (12) 6.4
---------- --------- --------- ------- ----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 12.7 $ 13.5 $ 10.4 $ - $ 15.8
---------- --------- --------- ------- ----------
BASIC EARNINGS PER COMMON SHARE:
INCOME BEFORE ACCOUNTING CHANGE $ 0.06 $ 0.09
========== ==========
NET INCOME $ 0.15 $ 0.20 (12)
========== ==========
Basic Weighted Average Common shares outstanding (IN THOUS) 61,607 79,607 (13)
---------- ----------
DILUTED EARNINGS PER COMMON SHARE:
INCOME BEFORE ACCOUNTING CHANGE $ 0.06 $ 0.09
========== ==========
NET INCOME $ 0.14 $ 0.20 (12)
========== ==========
Diluted Weighted Average Common shares outstanding (IN THOUS) 80,998 (13)
62,998
----------
See notes to proforma condensed consolidated financial statements.
KANSAS CITY SOUTHERN
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRO FORMA
KCS GRUPO TFM ADJUSTMENTS PRO
HISTORICAL HISTORICAL DEBIT CREDIT FORMA
REVENUES $ 566.2 $712.1 $1,278.3
Costs and expenses 456.8 457.6 3.4 (14) 917.8
Depreciation and amortization 61.4 83.0 1.2 (15) 145.6
---------- ------- ---------- -------- ---------
OPERATING INCOME 48.0 171.5 4.6 - 214.9
Equity in net earnings of unconsolidated affiliates:
Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. 45.8 - 45.8 (8) -
Other (2.4) - (2.4)
Gain on sale of Mexrail, Inc. 4.4 - 4.4 (9) -
Interest expense (45.0) (95.8) (140.8)
Debt retirement costs (4.3) - (4.3)
Other income (expense) 17.6 (29.8) (12.2)
---------- ------- ---------- -------- ---------
Income before income taxes 64.1 45.9 54.8 - 55.2
Income tax provision (benefit) 6.9 (91.5) (3.0) (10) - (87.6)
---------- ------- ---------- -------- ---------
INCOME BEFORE MINORITY INTEREST 57.2 137.4 51.8 - 142.8
MINORITY INTEREST - (27.3) 17.0 (16) - (44.3)
---------- ------- ---------- -------- ---------
NET INCOME 57.2 110.1 68.8 - 98.5
PREFERRED STOCK DIVIDENDS 0.2 8.5 (12) 8.7
---------- ------- ---------- -------- ---------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 57.0 $110.1 $ 77.3 $ - $ 89.8
---------- ------- ---------- -------- ---------
BASIC EARNINGS PER COMMON SHARE $ 0.94 $ 1.15 (12)
========== =========
Basic Weighted Average Common shares outstanding (IN THOUS) 60,336 78,336 (13)
---------- ---------
DILUTED EARNINGS PER COMMON SHARE $ 0.91 $ 1.05 (12)
========== =========
Diluted Weighted Average Common shares outstanding (IN THOUS) 62,138 93,527 (13)
---------- ---------
See notes to proforma condensed consolidated financial statements.
KANSAS CITY SOUTHERN
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: REMOVAL OF THE EQUITY INVESTMENT IN GRUPO TFM & MEXRAIL
Pursuant to the Acquisition Agreement, Kansas City Southern (the "Company" or
"KCS") would acquire a controlling interest in Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V. ("Grupo TFM"), resulting in the full consolidation of
Grupo TFM's balance sheet into NAFTA Rail, successor to KCS. Accordingly, the
equity investment as of September 30, 2003 reflected on the Company's condensed
consolidated balance sheet would be eliminated.
On May 9, 2003, the Company closed on its 51% investment in Mexrail, Inc.
("Mexrail") for a total of $32.7 million. The Mexrail shares have been placed in
a voting trust while awaiting the approval of the Surface Transportation Board
("STB"). Since the acquisition of the controlling interest in Mexrail has not
been approved and Grupo TFM holds a right of repurchase, the Company and Grupo
TFM consider this investment in Mexrail as temporary. Accordingly, Grupo TFM
continues to consolidate the balance sheet and operating results of Mexrail
pending approval of the transaction.
NOTE 2: CREATION OF IDENTIFIABLE INTANGIBLE ASSETS
Additional identifiable intangibles or goodwill may result from the Grupo TFM
acquisition. The current value of the consideration to obtain a controlling
interest in Grupo TFM exceeds the current book value of the underlying net
assets of approximately $15.1 million, which is reflected on the condensed
consolidated pro forma balance sheet as an addition to concession assets. The
Company has not completed a fair value appraisal or any associated allocation of
excess purchase price to the fair value of tangible assets as of this date. At
the time those processes are completed, the allocation of the purchase price
could change and may include certain identifiable intangibles assets, such as
customer contracts, customer relationships or similar items. For purposes of
these pro forma financial statements the Company has assumed the difference in
value will be assigned to concession assets.
NOTE 3: RECOGNITION OF THE DEFERRED GAIN ON THE SALE OF MEXRAIL
On April 1, 2002, the Company sold its 49% interest in Mexrail to TFM for $31.4
million resulting in a pre-tax gain of $4.4 million, which was reported in the
Company's Consolidated Statement of Income for the year ended December 31, 2002.
In addition, the transaction resulted in the recognition of a deferred gain, of
which $6.2 million remained unamortized as of September 30, 2003. Assuming the
transaction contemplated had occurred on September 30, 2003, the remaining
unamortized gain on the April 2002 Mexrail transaction would be eliminated from
the Company's long-term liabilities and reflected with an offsetting adjustment
to concession assets as part of the transaction. Also see notes 2 and 9.
NOTE 4: TRANSACTION FINANCING
As described above, part of the transaction consideration includes a payment of
$200 million. This payment may be made by the Company, at its option, in a
combination of additional common stock issuance to TMM and cash. For purposes of
these pro forma financial statements the Company has assumed that the entire
payment of $200 million will be made in cash with a combination of the net
proceeds of the sale of 4.25% Redeemable Cumulative Convertible Perpetual
Preferred Stock ("Convertible Preferred Stock") of approximately $193.0 million,
completed in April 2003, and $7.0 million of the Company's available cash. The
pro forma financial statements presented herein reflect the effect of these
transactions. Also see note 6.
The Convertible Preferred Stock is redeemable at the option of a holder only in
the event of a "fundamental change", which is defined as "any transaction or
event (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization or
otherwise) in connection with which all or substantially all of the Company's
Common stock is exchanged for, converted into, acquired for or constitutes
solely the right to receive common stock that is not listed on a United States
national securities exchange or approved for quotation on the Nasdaq National
Market or similar system. The practical effect of this provision is to limit the
Company's ability to eliminate a holder's ability to convert the Convertible
Preferred Stock into common shares of publicly traded security through a merger
or consolidation transaction. In no other circumstances is the Company
potentially obligated to redeem the Convertible Preferred Stock for cash.
Accordingly, since the Company is in a position to control a "fundamental
change" the Convertible Preferred Stock is classified as permanent equity
capital.
NOTE 5: ELIMINATION OF GRUPO TFM STOCKHOLDERS' EQUITY
As a result of NAFTA Rail obtaining a controlling interest in Grupo TFM, its
assets and liabilities would be consolidated with NAFTA Rail. Accordingly, Grupo
TFM's stockholders' equity amounts would be eliminated in the consolidation
process.
NOTE 6: ISSUANCE OF NEW SECURITIES
As noted above, TMM will receive as consideration for the transaction 18 million
shares of NAFTA Rail. This pro forma adjustment reflects the addition to
stockholders' equity of a total of $202.7 million of equity based upon 18
million common shares as part of the initial agreement and assuming a stock
price of $11.26 per share. The assumed stock price was derived by averaging the
closing price of the Company's common stock five days before and five days after
the announcement of the transaction on April 21, 2003. The total allocation of
the new capital is $0.2 million, which is comprised of 18 million shares of new
non-voting common stock with a par value of $.01 per share and $202.5 million,
which is reflected as capital surplus representing the value of the stock issued
in excess of par.
In April 2003, the Company issued 400,000 shares of $1.00 par value 4.25%
Convertible Preferred Stock resulting in net proceeds of approximately $193.0
million (net of fees of approximately $7.0 million). This transaction is
reflected in the accompanying Registrant historical consolidated balance sheet
as of September 30, 2003 as new capital of $0.4 million and capital surplus of
$192.6 million.
Holders of the Convertible Preferred Stock are entitled to receive any dividends
declared by the Company's board of directors at the rate of 4.25% per annum,
payable quarterly in arrears on February 15, May 15, August 15 and November 15
of each year, commencing August 15, 2003. The dividends are cumulative from the
date of initial issuance and accumulated but unpaid dividends cumulate dividends
at the annual rate of 4.25%. In addition, the Company will also pay "special
dividends" if it fails to comply with certain obligations under a registration
rights agreement. A holder may convert its Convertible Preferred Stock into
shares of the Company's Common Stock only under certain circumstances, relating
to: (i) the trading price of the Company's Common Stock; (ii) a credit rating
downgrade; (iii) the trading price per share of the Convertible Preferred Stock;
(iv) redemption of the Convertible Preferred Stock; and (v) the occurrence of
certain corporate transactions.
The conversion rate may be adjusted upon the occurrence of certain events.
Subject to certain conditions, on or after May 20, 2008, the Company will have
the option to redeem some or all of the shares of Convertible Preferred Stock at
a redemption price of 100% of the liquidation preference, plus accumulated and
unpaid dividends, if any, to the redemption date. In the event of a "fundamental
change," the Company may be required to purchase shares of the Convertible
Preferred Stock at the option of the holder at a price equal to 100% of the
liquidation preference plus any accumulated and unpaid dividends, including
special dividends, if any, to, but excluding, the purchase date.
The Company may elect to pay the purchase price in cash, Common Stock, or a
combination of cash and Common Stock. If the Company elects to pay all or a
portion of the purchase price in shares of Common Stock, the Common Stock will
be valued at a specified discount. The Company agreed to file with the
Securities and Exchange Commission a shelf registration statement with respect
to the resale of the Convertible Preferred Stock and the Common Stock issuable
upon conversion of the Convertible Preferred Stock and to keep the shelf
registration statement effective for a specified period of time. In addition,
the Company will be required to pay to holders of the Convertible Preferred
Stock liquidated damages in the form of special dividends or liquidated damages
payments, as applicable, if the Company fails to register the Convertible
Preferred Stock and the Common Stock issuable upon conversion of the Convertible
Preferred Stock within, and to keep such registration statement effective
during, the specified time periods.
NOTE 7: ELIMINATION OF EQUITY BASIS DIFFERENCE IN GRUPO TFM
The calculation of the Company's net equity in Grupo TFM's underlying net assets
utilizing the Company's current ownership percentage of approximately 46.6% as
compared to the amount recorded as an investment as of September 30, 2003 of
approximately $386.1 million results in a basis difference of approximately
$13.8 million. This difference in basis results from a number of factors the
most significant of which is the changing ownership interest in Grupo TFM which
produced a difference in investment basis that occurred when TFM acquired the
Mexican Government's 24.6% interest in Grupo TFM during 2002. This basis
difference would have been amortized over time, however, due to the contemplated
transaction wherein the Company will obtain a controlling interest in Grupo TFM,
the remaining basis difference will be recognized at the date of the
transaction. The pro forma financial statements as stated herein recognize the
elimination of this basis difference as an addition to concession assets on the
condensed consolidated balance sheet. See Note 2.
NOTE 8: ELIMINATION OF EQUITY EARNINGS FROM GRUPO TFM
Assuming the contemplated transaction would have been consummated on January 1,
2002 or January 1, 2003 as applicable, the Company would have consolidated
earnings of Grupo TFM and accordingly, the equity in earnings of Grupo TFM would
be eliminated.
NOTE 9: ELIMINATION OF THE GAIN ON THE SALE OF MEXRAIL
In April 2002, the Company sold to Grupo TFM its 49% interest in Mexrail for
$31.4 million. Assuming the contemplated transaction would have occurred as of
January 1, 2002, the sale of Mexrail to Grupo TFM would not have occurred and
accordingly, the associated gain would not have been recorded. The income
statement as of and for the year ended December 31, 2002 for Grupo TFM has been
restated to reflect Mexrail as a consolidated subsidiary effective January 1,
2002.
NOTE 10: PROVISION FOR INCOME TAXES / DEFERRED INCOME TAXES
The pro forma condensed consolidated income statement reflects the income tax
impacts of the pro forma adjustments utilizing an income tax rate of 38.25%, but
excluding any consideration of the equity earnings of Grupo TFM, since the
Company has not previously provided a tax provision on these amounts.
In addition, the recognition of additional identifiable intangible assets in the
form of concession assets creates an additional deferred tax liability
associated with those assets. The pro forma condensed consolidated balance sheet
as of September 30, 2003 recognizes the deferred tax liability of approximately
$14.1 million using the tax rate noted above.
NOTE 11: CONSOLIDATION ELIMINATIONS
These pro forma adjustments reflect the elimination of intercompany amounts
between the Company, Grupo TFM and Mexrail, assuming the three entities were
consolidated for financial reporting purposes.
NOTE 12: COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share for the purposes of the pro forma condensed
consolidated income statement reflect pro forma consolidated net income, less
dividends on the Company's $25 par preferred stock of approximately $242,000
annually, less dividends on the Company's $.01 par redeemable cumulative
convertible perpetual preferred stock of approximately $8.5 million annually,
divided by the weighted average outstanding shares as described in note 13
below.
Diluted earnings per share for the purposes of the pro forma consolidated
condensed income statement reflect pro forma consolidated net income, less
dividends on the Company's $25 par preferred stock of approximately $242,000
annually, divided by the weighted average diluted outstanding shares as
described in note 13 below.
The assumed conversion of the Company's $1.00 par Convertible Preferred Stock
(convertible into 13,389,121 common shares). would have been anti-dilutive to
the pro forma diluted earnings per share computations in each of the periods.
Accordingly, conversion of preferred shares into common shares was not assumed
and these shares were not included in the pro forma diluted earnings per share
computations.Total preferred dividends, however, were subtracted from net income
in the computation of the pro forma diluted earnings per share.
NOTE 13: WEIGHTED AVERAGE SHARES OUTSTANDING
The weighted average basic shares outstanding are calculated beginning with
Company historical average basic shares of (60,336,000 for the year ended
December 31, 2002 and 61,607,000 for the nine months ended September 30, 2003),
plus 18,000,000 assumed shares to be issued as described in the note 6 above.
The weighted average diluted shares outstanding are calculated beginning with
Company historical average diluted shares of (62,138,000 for the year ended
December 31, 2002 and 62,998,000 for the nine months ended September 30, 2003)
plus 18,000,000 assumed shares to be issued as described in the note 6 above,
but excluding the 13,389,121 shares assuming full conversion of the redeemable
cumulative convertible perpetual preferred stock into common utilizing a
conversion rate of 33.4728 for each share of preferred to common. As stated in
Note 12 above, the inclusion of the 13,389,121 shares would have had an
anti-dilutive effect on the computations of pro forma dilutive earnings per
share.
NOTE 14: CONSULTING AGREEMENT
In connection with the transaction, the Company intends to enter into a
consulting agreement with a consulting firm ("Consultant") controlled by Jose
Serrano Segovia with an initial term of three years. In consideration of
services provided, Consultant will receive an annual fee of $0.6 million in
cash, plus up to 2.1 million shares of restricted common stock of the Company.
The restricted stock vests based upon the achievement of certain events as
defined in the consulting agreement and or ratably over the term of the
agreement in certain circumstances. The pro forma condensed consolidated
financial statements herein reflect the effect of these transactions as follows.
The restricted stock will be accounted for as compensation expense based upon
the assumed fair market value at date of vesting and expensed in the period the
stock vests.
The annual fee is reflected as additional operating costs and expenses of $0.6
million for the year ended December 31, 2002 and $0.5 million for the nine
months ended September 30, 2003. An initial 750,000 shares of restricted stock
vest ratably over the term of the agreement. For purposes of the pro forma
statements of income the Company has assumed a calculated value of stock based
upon the stock price of $11.26 as noted above. The resulting amount is reflected
as compensation expense and amortized on a straight line basis over three years.
The additional compensation expense is approximately $2.8 million for the year
ended December 31, 2002 and approximately $2.1 million for the nine months ended
September 30, 2003. The Company recognizes that the prospective accounting for
these shares will result in variable accounting treatment and the resulting
expense will be dependent upon the Company's stock price at the actual time the
stock vests. Since the Company cannot predict the future price of the Company's
stock, the pro forma adjustments assume the stock price as noted above.
The consulting agreement provides for additional vesting of restricted stock
totaling 1,350,000 shares, in increments of 525,000, 125,000 and 700,000 shares
depending on the achievement of certain events ("contingent shares"). These
events include the completion of an agreement with TFM labor unions and events
related to the VAT tax issue. While the Company cannot predict the ultimate
timing of achievement of these events and thus pro forma their effect on the
adjusted financial statements, the Company would intend to record compensation
expense at the time and in the quarter or annual period in which these shares
vest, at then fair value as determined by the Company's stock price. No
adjustments for these contingent shares has been made in the attached pro forma
financial statements due to the uncertainty of their realization and vesting.
The calculated value of the restricted stock is approximately $15.2 million
based upon the stock price of $11.26 as noted above. The actual impact to the
Company's financial statements related to the restricted stock is dependant upon
the price of the Company's stock at the time the restricted stock vests and
which the Company cannot predict. A $1.00 per share change, either higher or
lower, in the Company's stock price at the time the restricted stock vests could
result in higher or lower compensation expense of approximately $1.4 million,
assuming all 1.35 million shares vested at the same time.
NOTE 15: AMORTIZATION OF IDENTIFIABLE INTANGIBLES - CONCESSION ASSETS
The transactions as described above result in a net addition to concession
assets of approximately $24.2 million plus $15.0 million of deferred income tax
impact described in Note 10 above. For purposes of the pro forma income
statements presented herein, this balance is amortized over the remaining
amortizable life of the concession assets of 33 years. This results in
additional amortization expense of approximately $1.2 million for the year ended
December 31, 2002 and approximately $0.9 million for the nine months ended
September 30, 2003.
NOTE 16: MINORITY INTEREST
As previously reported, TFM repurchased the Mexican Government's 24.6% interest
in Grupo TFM in June 2002. Since the purchase of the Mexican Government 24.6%
interest was completed by Grupo TFM's subsidiary TFM and the fact that the
Mexican Government also continues to maintain a 20% minority interest in TFM,
the Mexican Government retained an indirect 4.9448% minority interest in Grupo
TFM through its ownership of TFM. The pro forma adjusting entries to minority
interest reflect the continuing indirect minority ownership in Grupo TFM by the
Mexican Government for the periods indicated. For the pro forma condensed
consolidated balance sheet as of September 30, 2003 an additional $39.5 million
of minority interest was added to the pro forma balances representing 4.9448% of
Grupo TFM's net assets. For the pro forma condensed consolidated income
statements, the amount of minority interest in Grupo TFM's US GAAP net income
was computed for the periods presented resulting in approximately $17.0 million
for the year ended December 31, 2002 and $0.7 million for the nine months ended
September 30, 2003.
NOTE 17: VAT RELATED MATTERS
The impact of any settlement of the VAT dispute between TFM and the Mexican
Government on the Company's consolidated financial statements of will be
dependent upon the timing and amount of any such settlement.
It is expected that the value of any consideration received from the Mexican
Government from the settlement of the VAT dispute will be recorded as income by
TFM and Grupo TFM, net of related income taxes. If a binding agreement is
reached before the consummation of the Acquisition, the Company would record its
proportionate share of any such gain through its equity in earnings of Grupo
TFM, based upon its existing ownership of 46.6%. If the Acquisition is
subsequently consummated, the proceeds from any settlement received and retained
by TFM, including the impacts of any additional consideration as may become
payable as discussed below, would impact the Company's allocation of the
purchase price to assets acquired and liabilities assumed, likely impacting
amounts otherwise allocable to long-lived assets, including intangibles, as
presented herein.
If the VAT dispute were settled following the consummation of the Acquisition,
the Company would record in income its proportionate share of any such gain
through its consolidation of the operating results of Grupo TFM, based upon its
pre-acquisition ownership interest of 46.6%. The portion of any gain
attributable to the acquired interest of TMM would likely constitute a
pre-acquisition contingency and not impact the Company's operating results, but
rather would be considered in the allocation of the purchase price to assets
acquired and liabilities assumed, likely reducing amounts otherwise allocable to
long-lived assets, including intangibles, as presented herein.
Pursuant to the terms of the Acquisition, if the value of the consideration
received by TFM in connection with the settlement of the VAT dispute exceeds the
amount payable pursuant to the Put Agreement in place between the Mexican
Government, Grupo TFM, TMM and the Company, whereby the Mexican Government may
put its ownership in TFM to the other parties, additional amounts will be
payable by the Company or TFM to TMM, depending on the amount of such excess.
Such payment would range from $100 million to $180 million. Any such payment
would constitute additional consideration for the purchase of TMM's interest in
Grupo TFM and as such would likely increase amounts allocable to long-lived
assets, including intangibles, as presented herein.
NOTE 18: CONSIDERATION OF THE MEXICAN GOVERNMENT'S PUT RIGHTS REGARDING ITS 20%
MINORITY INTEREST IN TFM
The provisions of the "Put Agreement" obligate Grupo TFM or the Registrant to
purchase the Mexican Government's 20% minority interest in TFM under certain
conditions. As disclosed in the Registrant's Form 10-K for the year ended
December 31, 2002 and its most recently filed Form 10-Q for the period ended
September 30, 2003, the total estimated purchase price of the Mexican
Government's minority interest was approximately $485 million and $469 million,
respectively. The calculation of the purchase price is dependent upon
inflationary factors of the Mexican economy and foreign exchange rate factors,
which the Registrant can not predict. While the Registrant along with Grupo TFM
are currently exploring financing alternatives, the source and cost any such
financing for this obligation is not reasonably determinable at this time . In
addition, the acquisition of the Mexican Government's interest and funding of
this obligation could be affected by the outcome and settlement of TFM's VAT
dispute with the Mexican Government.
Due to the uncertainties noted above, the accompanying pro forma financial
statements do not reflect the impact of the acquisition of additional shares of
TFM which could arise under the Put Agreement. If, following the consummation of
the acquisition of Grupo TFM shares from TMM, the Registrant acquires the
remaining shares of TFM held by the Mexican Government pursuant to the Put
Agreement, the accompanying pro forma financial statements would be generally
impacted as follows. The excess of the purchase price over the carrying value of
minority interest would be allocated to the assets and liabilities of GTFM,
based upon their fair values, with the likely impact being an increase to
recorded amounts for long-lived assets, including intangibles, as presented
herein. Additionally, the minority interest in earnings of Grupo TFM would be
eliminated from the pro forma income statement, offset by the costs of any debt
financing incurred to finance the purchase and any increases in depreciation or
amortization expense relating the application of purchase accounting.
NOTE 19: SUBSEQUENT EVENTS
KCS and TMM are in dispute over TMM's attempt to terminate the agreement entered
into on April 20, 2003 by KCS and TMM and other parties under which KCS would
acquire control of TFM. On August 29, 2003, KCS received a demand by TFM to
repurchase from KCS shares of Mexrail sold to KCS in May 2003. On September 23,
2003, the STB issued a decision finding no need to rule on the transfer back to
TFM of the 51% interest in Mexrail that KCS acquired on May 9, 2003. On
September 30, 2003, TFM repurchased, for $32.7 million, the Mexrail shares from
KCS at the price KCS paid TFM in May 2003.