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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____ to ____
Commission file number 1-4717
KANSAS CITY SOUTHERN INDUSTRIES, INC.
(Exact name of Company as specified in its charter)
Delaware 44-0663509
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
114 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code (816) 983-1303
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
Preferred Stock, Par Value $25 Per Share, 4%, NoncumulativeNew York Stock
Exchange
Common Stock, $.01 Per Share Par Value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Company Stock. The Company's common stock is listed on the New York Stock
Exchange under the symbol "KSU." As of February 28, 2001 58,299,805 shares
of common stock and 242,170 shares of voting preferred stock were
outstanding. On such date, the aggregate market value of the voting and
non-voting common and preferred stock held by non-affiliates of the Company
was $878,404,541 (amount computed based on closing prices of preferred and
common stock on New York Stock Exchange).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference
into Part of the Form 10-K as indicated:
Document Part of Form 10-K into which incorporated
- --------------------------------- -----------------------------------------
Company's Definitive Proxy Statement for the 2001 Parts I, III
Annual Meeting of Stockholders, which will be filed
no later than 120 days after December 31, 2000
KANSAS CITY SOUTHERN INDUSTRIES, INC.
2000 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART I
Item 1. Business................................................. 1
Item 2. Properties............................................... 14
Item 3. Legal Proceedings........................................ 18
Item 4. Submission of Matters to a Vote of Security Holders...... 18
Executive Officers of the Company........................ 19
PART II
Item 5. Market for the Company's Common Stock and
Related Stockholder Matters............................ 20
Item 6. Selected Financial Data.................................. 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 22
Item 7(A) Quantitative and Qualitative Disclosures About Market Risk 57
Item 8. Financial Statements and Supplementary Data.............. 59
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 111
PART III
Item 10. Directors and Executive Officers of the Company.......... 112
Item 11. Executive Compensation................................... 112
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................. 112
Item 13. Certain Relationships and Related Transactions........... 112
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................ 113
Signatures............................................... 121
ii
Part I
Item 1. Business
(a) GENERAL DEVELOPMENT OF COMPANY BUSINESS
Kansas City Southern Industries, Inc. ("Company" or "KCSI"), a Delaware
corporation organized in 1962, is a holding company with principal
operations in rail transportation. On June 14, 2000, KCSI's Board of
Directors approved the spin-off of Stilwell Financial Inc. ("Stilwell"),
the Company's then wholly-owned financial services subsidiary. On July 12,
2000, KCSI completed the spin-off of Stilwell through a special dividend of
Stilwell common stock distributed to KCSI common stockholders of record on
June 28, 2000 ("Spin-off").
As of the date of the Spin-off, Stilwell was comprised of Janus Capital
Corporation, an approximate 81.5% owned subsidiary; Berger LLC, an
approximate 88% owned subsidiary; Nelson Money Managers Plc, an 80% owned
subsidiary; DST Systems, Inc., an equity investment in which Stilwell holds
an approximate 32% interest; and miscellaneous other financial services
subsidiaries and equity investments.
The Spin-off occurred after the close of business of the New York Stock
Exchange on July 12, 2000, and each KCSI stockholder received two shares of
the common stock of Stilwell for every one share of KCSI common stock owned
on the record date. The total number of Stilwell shares distributed was
222,999,786.
On July 9, 1999, KCSI received a tax ruling from the Internal Revenue
Service ("IRS") which states that for United States federal income tax
purposes the Spin-off qualifies as a tax-free distribution under Section
355 of the Internal Revenue Code of 1986, as amended. Additionally, in
February 2000, the Company received a favorable supplementary tax ruling
from the IRS to the effect that the assumption of $125 million of KCSI
indebtedness by Stilwell would have no effect on the previously issued tax
ruling.
On July 12, 2000, KCSI completed a reverse stock split whereby every two
shares of KCSI common stock were converted into one share of KCSI common
stock. The Company's stockholders approved a one-for-two reverse stock
split in 1998 in contemplation of the Spin-off.
Also, in preparation for the Spin-off, the Company re-capitalized its debt
structure on January 11, 2000 as further described under Part II Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of this Form 10-K.
Other information set forth in response to Item 101 of Regulation S-K under
Part II Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, of this Form 10-K is incorporated by reference
in response to this Item 1.
(b) INDUSTRY SEGMENT FINANCIAL INFORMATION
KCSI supplies its various subsidiaries with managerial, legal, tax,
financial and accounting services, in addition to managing other
"non-operating" investments. Kansas City Southern Lines, Inc. ("KCSL"),
which was the direct parent of The Kansas City Southern Railway Company
("KCSR"), was merged into KCSI effective December 31, 2000. KCSI's
principal subsidiaries and affiliates, which following the Spin-off, are
reported under one business segment, include, among others:
Page 1
o KCSR, a wholly-owned subsidiary;
o Gateway Western Railway Company ("Gateway Western"), a wholly-owned
subsidiary;
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo
TFM"), an approximate 37% owned unconsolidated affiliate, which owns 80%
of the common stock of TFM, S.A. de C.V. ("TFM");
o Mexrail, Inc. ("Mexrail"), a 49% owned unconsolidated affiliate,
which wholly owns the Texas Mexican Railway Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate that leases locomotive and rail equipment
primarily to KCSR;
o Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of
which KCSR indirectly owns 50% of the common stock; and
o Panarail Tourism Company ("Panarail"), a 50% owned unconsolidated
affiliate
Other subsidiaries of the Company include:
o Trans-Serve, Inc., an owner of a railroad wood tie treating facility;
o PABTEX GP, LLC (formerly "Global Terminaling Services, Inc."),
located in Port Arthur, Texas with deep water access to the Gulf of
Mexico, an owner and operator of a bulk materials handling facility
which stores and transfers coal and petroleum coke from trucks and rail
cars to ships primarily for export;
o Mid-South Microwave, Inc., which owns and leases a 1,600 mile
industrial frequency microwave transmission system that is the primary
communications facility used by KCSR;
o Rice-Carden Corporation, owning and operating various industrial real
estate and spur rail trackage contiguous to the KCSR right-of-way;
o Southern Development Company, the owner of the executive office
building in downtown Kansas City, Missouri used by KCSI and KCSR;
o Wyandotte Garage Corporation, an owner and operator of a parking
facility located in downtown Kansas City, Missouri used by KCSI and
KCSR; and
o Transfin Insurance, Ltd., a single parent captive insurance company,
providing property and general liability coverage to KCSI and its
subsidiaries and affiliates.
Other information set forth in response to Item 101 of Regulation S-K under
Part II Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations of this Form 10-K and under Item 8, Financial
Statements and Supplementary Data of this Form 10-K, is incorporated by
reference in response to this Item 1.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
The information set forth in response to Item 101 of Regulation S-K under
Part II Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, of this Form 10-K is incorporated by reference
in response to this Item 1.
KCSI owns one of eight Class I railroads in the United States and, along
with the Company's subsidiaries and joint ventures, own and operate a rail
network comprised of approximately 6,000 miles of main and branch lines
that link key commercial and industrial markets in the United States and
Mexico. Through a strategic alliance with Canadian National Railway
Company ("CN") and Illinois Central Corporation ("IC") (together "CN/IC"),
the Company has created a contiguous rail network of approximately 25,000
miles of main and branch lines connecting Canada, the United States and
Mexico. Management believes that, as a result of the strategic position of
the railway, KCSI is poised to continue to benefit from the growing
north/south trade between the United States, Mexico and Canada promoted by
the implementation of NAFTA. The Company's rail network offers services to
companies in a wide range of markets including the coal, chemicals and
petroleum, paper and forest, agricultural and mineral, and intermodal and
automotive markets.
Page 2
The Company's principal subsidiary, KCSR, founded in 1887, operates a rail
network of approximately 2,700 miles of main and branch lines running on a
north/south axis from Kansas City, Missouri to the Gulf of Mexico and on an
east/west axis from Meridian, Mississippi to Dallas, Texas ("Meridian
Speedway"). In addition to KCSR, operations include Gateway Western, Grupo
TFM, and Mexrail, which wholly owns Tex Mex. Mexrail owns the northern
half of the rail bridge at Laredo which spans the Rio Grande River into
Mexico. TFM operates the southern half of the bridge. Gateway Western, a
regional rail carrier, operates approximately 400 route miles of main and
branch lines running from East St. Louis, Illinois to Kansas City. Grupo
TFM owns 80% of TFM, which operates a railroad of approximately 2,700 miles
of main and branch lines running from the U.S./Mexican border at Laredo,
Texas to Mexico City and serves three of the four major ports in Mexico.
Tex Mex operates approximately 150 miles of main and branch lines between
Laredo and the port city of Corpus Christi, Texas. The Company also owns
50% of the common stock of the Panama Canal Railway Company, which holds
the concession to operate a 47-mile railroad located adjacent to the Panama
Canal. That railroad is currently being reconstructed and is expected to
resume operations in 2001. The Company also owns 50% of Panarail, a joint
venture organized in 2000 to provide passenger rail service over PCRC's
rail lines.
5
KCSI's expanded rail network interconnects with all other Class I railroads
and provides customers with an effective alternative to other railroad
routes, giving direct access to Mexico and the southwestern United States
through less congested interchange hubs. Eastern railroads and their
customers can bypass the congested gateways at Chicago, Illinois; St.
Louis, Missouri; Memphis, Tennessee and New Orleans, Louisiana by
interchanging with KCSR at Meridian and Jackson, Mississippi and Gateway
Western at East St. Louis. Other railroads can also interconnect with the
Company's rail network via other gateways at Kansas City, Birmingham,
Alabama; Shreveport, Louisiana; Dallas; New Orleans; Beaumont, Texas; and
Laredo. The Company's rail network links directly to major trading centers
in northern Mexico through TFM at Laredo, where more than 50% of all rail
and truck traffic between the two countries crosses the border.
KCSI's rail network is further expanded through marketing agreements with
Norfolk Southern and I&M Rail Link. Marketing agreements with Norfolk
Southern allow the Company to gain incremental traffic between the
southeast and the southwest on the Meridian Speedway. A marketing
agreement with I&M Rail Link provides access to Minneapolis and Chicago and
to corn and other grain origination's in Iowa, Minnesota and Illinois.
RAIL NETWORK
Owned Network
KCSR owns and operates approximately 2,700 miles of main and branch lines
and 1,180 miles of other tracks in a nine-state region that includes
Missouri, Kansas, Arkansas, Oklahoma, Mississippi, Alabama, Tennessee,
Louisiana and Texas. KCSR has the shortest north/south rail route between
Kansas City and several key ports along the Gulf of Mexico in Louisiana,
Mississippi and Texas and an east/west rail route between Meridian and
Dallas. This geographic reach enables service to a customer base that
includes electric generating utilities and a wide range of companies in the
chemical and petroleum, agricultural and mineral, paper and forest, and
automotive and intermodal markets.
Gateway Western owns and operates approximately 400 miles of main and
branch lines linking Kansas City with East St. Louis and Springfield,
Illinois. In addition, Gateway Western has limited haulage rights between
Springfield and Chicago that allow Gateway Western to move traffic that
originates or terminates on its rail lines. Gateway Western provides
access to East St. Louis, and
Page 3
allows rail traffic to avoid the more congested and costly St. Louis terminal.
Like KCSR, Gateway Western serves customers in a wide range of industries.
KCSR and Gateway Western revenues and net income are dependent on providing
reliable service to customers at competitive rates, the general economic
conditions in the geographic region served and the ability to effectively
compete against alternative modes of surface transportation, such as
over-the-road truck transportation. The ability of KCSR and Gateway
Western to construct and maintain the roadway in order to provide safe and
efficient transportation service is important to the ongoing viability as a
rail carrier. Additionally, cost containment is important in maintaining a
competitive market position, particularly with respect to employee costs as
approximately 84% of KCSR and Gateway Western combined employees are
covered under various collective bargaining agreements.
Significant Investments
Mexrail
In 1995 the Company invested approximately $23 million to acquire a 49%
economic interest in Mexrail, which owns 100% of Tex Mex and certain other
assets. Tex Mex and TFM operate the international rail-traffic bridge at
Laredo spanning the Rio Grande River. Transportacion Maritima Mexicana,
S.A. de C.V. ("TMM"), the largest shareholder of Grupo TFM, owns the
remaining 51% of Mexrail. The bridge at Laredo is the most significant
entry point for rail traffic between Mexico and the United States. Tex Mex
also operates a 157-mile rail line extending from Laredo to Corpus
Christi. Tex Mex connects to KCSR through trackage rights between Corpus
Christi and Beaumont. These trackage rights were granted pursuant to a
1996 Surface Transportation Board ("STB") decision and have an initial term
of 99 years. Tex Mex provides a vital link between the Company's U.S.
operations through KCSR and its Mexican operations through TFM.
On March 12, 2001, Tex Mex purchased from The Union Pacific Railroad
Company ("UP") a line of railroad extending 84.5 miles between Rosenberg,
Texas and Victoria, Texas, and granted Tex Mex trackage sufficient to
integrate the line into the existing trackage rights. The purchase price
for the line of $9.2 million was determined through arbitration and the
acquisition also required the prior approval or exemption of the
transaction by the STB. By its Order entered on December 8, 2000, the STB
granted Tex Mex's Petition for Exemption and exempted the transaction from
this prior approval requirement. Once reconstruction of the line is
completed, Tex Mex will be able to shorten its existing route between
Corpus Christi and Houston by over 70 miles.
Grupo TFM
In 1997 the Company invested $298 million to obtain a 36.9% interest in
Grupo TFM. TMM and a TMM affiliate own 38.5% of Grupo TFM and the Mexican
government owns 24.6% of Grupo TFM. Grupo TFM owns 80% of the common stock
of TFM. The remaining 20% of TFM was retained by the Mexican government.
TFM is both a strategic and financial investment for KCSI. Strategically
the investment in TFM promotes the Company's NAFTA growth strategy whereby
the Company and its strategic partners can provide transportation services
between the heart of Mexico's industrial base, the U.S. and Canada. TFM
seeks to establish its railroad as the primary inland freight transporter
linking Mexico with the U.S. and Canadian markets along the NAFTA
corridor. TFM's strategy is to provide reliable customer service,
capitalize on foreign trade growth and convert truck tonnage to rail.
Under the concession awarded to Grupo TFM by the Mexican Government in
1996, TFM operates the Northeast Rail Lines, which are located along a
strategically significant corridor between Mexico and the U.S., and have as
their core routes a key portion of the shortest, most direct rail
passageway between Mexico City and the southern, midwestern and eastern
United States. These
Page 4
rail lines are the only rail lines which serve Nuevo Laredo, the largest rail
freight exchange point between the United States and Mexico. TFM's rail lines
connect the most populated and industrialized regions of Mexico with Mexico's
principal U.S. border railway gateway at Laredo. In addition, this rail system
serves three of Mexico's four primary seaports at Veracruz and Tampico on the
Gulf of Mexico and Lazaro Cardenas on the Pacific Ocean. TFM serves 15 Mexican
states and Mexico City, which together represent a majority of the country's
population and account for a majority of its estimated gross domestic product.
This route structure enables the Company to benefit from growing trade
resulting from the increasing integration of the North American economy
through NAFTA. Trade between Mexico and the United States has grown
significantly from 1993 through 2000. Through Tex Mex and KCSR, as well as
through interchanges with other major U.S. railroads, TFM provides its
customers with access to an extensive network through which they may
distribute their products throughout North America and overseas.
TFM operates 2,661 miles of main and branch lines and an additional 838
miles of sidings, spur tracks and main line under trackage rights. TFM has
the right to operate the rail lines, but does not own the land, roadway or
associated structures. Approximately 91% of the main line operated by TFM
consists of continuously welded rail. As of December 31, 2000, TFM owned
459 locomotives, owned or leased from affiliates 5,089 freight cars and
leased from non-affiliates 141 locomotives and 5,254 freight cars.
Financially, KCSI management believes TFM has growth potential. TFM's
operating strategy has been to increase productivity and maximize operating
efficiencies. With Mexico's economic progress, growth of NAFTA trade
between Mexico, the United States and Canada, and customer focused rail
service, the Company believes that the growth potential of TFM could be
significant.
Panama Canal Railway Company
The Panama Canal Railway is a north-south railroad traversing the Panama
isthmus between the Pacific and Atlantic Oceans. Its origins date back to
the late 1800's and the railway serves as a complement to the Panama Canal
shipping channel. The railroad is currently under reconstruction and is
expected to be complete by mid-2001 with commercial operations to begin
immediately thereafter. Management believes the prime potential and
opportunity of PCRC will be in the movement of traffic between the ports of
Balboa and Colon for shipping customers repositioning containers. PCRC has
had significant interest from both shipping companies and port terminal
operators. In addition, there has been interest in passenger traffic for
both commuter and pleasure/tourist travel (See below). While only 47 miles
long, the Company believes PCRC provides the Company with a unique
opportunity to participate in transoceanic shipments as a complement to the
existing Canal traffic.
In January 1998, the Republic of Panama awarded the PCRC, a joint venture
between KCSR and Mi-Jack Products, Inc. ("Mi-Jack"), the concession to
reconstruct and operate the Panama Canal Railway. As of December 31, 2000,
the Company has invested approximately $9.5 million toward the
reconstruction of the existing 47-mile railway which runs parallel to the
Panama Canal and, upon reconstruction, will provide international shippers
with a railway transportation medium to complement the Panama Canal. In
November 1999, the PCRC completed the financing arrangements for this
project with the International Finance Corporation ("IFC"), a member of
the World Bank Group.
Panarail Tourism Company
During 2000, the Company and Mi-Jack formed a joint venture designed to
operate and promote commuter and pleasure/tourist passenger service over
the PCRC. Panarail is expected to commence operations in 2001, immediately
following completion of the reconstruction of PCRC's tracks.
Expanded Network
Through a strategic alliance with CN/IC and marketing agreements with
Norfolk Southern and the I&M Rail Link, the Company has expanded the
domestic geographic reach beyond that covered by its owned network.
Strategic Alliance with Canadian National and Illinois Central.
In 1998 KCSR, CN and IC announced a 15-year strategic alliance aimed at
coordinating the marketing, operations and investment elements of
north-south rail freight transportation. The strategic alliance did not
require STB approval and was effective immediately. This alliance connects
Canadian markets, the major midwest U.S. markets of Detroit, Chicago,
Kansas City and St. Louis and the key southern markets of Memphis, Dallas
and Houston. It also provides U.S. and Canadian shippers with access to
Mexico's rail system through our connections with Tex Mex and TFM.
In addition to providing access to key north-south international and
domestic U.S. traffic corridors, the alliance with CN/IC is intended to
increase business primarily in the automotive and intermodal markets and
also in the chemical and petroleum and paper and forest products markets.
This alliance has provided opportunities for revenue growth and positioned
the Company as a key provider of rail service for NAFTA trade.
Under a separate agreement, KCSR and CN formed a management group made up
of representatives from both railroads to develop plans for the
construction of new facilities to support business development, including
investments in automotive, intermodal and transload facilities at Memphis,
Dallas, Kansas City and Chicago. This agreement also granted KCSR certain
trackage and haulage rights and granted CN and IC certain haulage rights.
Under the terms of this agreement, and through action taken by the STB, in
October 2000 KCSR gained access to six additional chemical customers in the
Geismar, Louisiana industrial area through haulage rights.
Marketing Agreements with Norfolk Southern.
In December 1997 KCSR entered into a three-year marketing agreement with
Norfolk Southern and Tex Mex which provides for additional traffic volume
along the east-west corridor between Meridian and Dallas by using
interchange points with Norfolk Southern. This agreement provides Norfolk
Southern run-through service with access to Dallas and the Mexican border
at Laredo while avoiding the congested rail gateways of Memphis and New
Orleans. This agreement will be automatically renewed for additional
three-year terms unless written notice of termination is given at least 90
days prior to the expiration of the then-current term. This agreement was
automatically renewed for an additional term of three years in December
2000.
In May 2000, KCSR entered into an agreement with Norfolk Southern under
which KCSR will provide haulage services for intermodal traffic between
Meridian and Dallas in exchange for fees from Norfolk Southern. Under this
agreement Norfolk Southern may quote rates and enter into transportation
service contracts with shippers and receivers covering this haulage
traffic. Unless renewed by Norfolk Southern, this agreement terminates on
December 31, 2003.
Page 6
This new marketing agreement with Norfolk Southern provides KCSR with
additional sources of intermodal business. The current arrangement
envisions approximately two trains per day running between the Company's
connection with Norfolk Southern at Meridian and the Burlington Northern
Santa Fe Corporation ("BNSF") connection at Dallas. The structure of the
agreement provides for lower gross revenue to KCSR, but improved operating
income since fuel and car hire expenses are the responsibility of Norfolk
Southern under the agreement. Management believes this business has
additional growth potential as Norfolk Southern seeks to shift its traffic
to southern gateways to increase its length of haul.
Marketing Agreement with I&M Rail Link.
In May 1997, KCSR entered into a marketing agreement with I&M Rail Link
which provides KCSR with access to Minneapolis, Minnesota and Chicago and
to origination's of corn and other grain in Iowa, Minnesota and Illinois.
Through this marketing agreement, KCSR receives and originates shipments of
grain products for delivery to 35 poultry industry feed mills on its
network. Grain is currently KCSR's largest export product to Mexico. This
agreement is terminable upon 90 days notice.
Haulage Rights.
As a result of the 1988 acquisition of the Missouri-Kansas-Texas Railroad
by UP, KCSR was granted (1) haulage rights between Council Bluffs, Iowa,
Omaha and Lincoln, Nebraska and Atchison and Topeka, Kansas on the one hand
and Kansas City, Missouri on the other hand, and (2) a joint rate agreement
for our grain traffic between Beaumont, Texas on the one hand and Houston
and Galveston, Texas on the other hand. KCSR has the right to convert
these haulage rights to trackage rights. KCSR's haulage rights require UP
to move KCSR traffic in UP trains; trackage rights would allow KCSR to
operate its trains over UP tracks. These rights have a term of 199 years.
Markets Served
The following table summarizes combined KCSR/Gateway Western revenue and
carload statistics by commodity category. Certain prior year amounts have
been reclassified to reflect changes in the business groups and to conform
to the current year presentation.
Carloads and
Revenues Intermodal Units
(in millions) (in thousands)
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
KCSR/Gateway Western
general commodities:
Chemical and petroleum $ 126.3 $132.7 $ 143.5 154.1 165.5 172.2
Paper and forest 132.9 131.0 138.9 192.4 202.9 212.8
Agricultural and mineral 94.3 95.6 99.9 132.0 141.0 141.5
------ ------ ------ ----- ----- -----
Total general commodities 353.5 359.3 382.3 478.5 509.4 526.5
Intermodal and automotive 63.0 60.6 48.1 269.3 233.9 187.1
Coal 105.0 117.4 117.9 184.2 200.8 205.3
------ ------ ------ ----- ----- -----
Carload revenues and carload
and intermodal units 521.5 537.3 548.3 932.0 944.1 918.9
===== ===== =====
Other rail-related revenues 41.6 49.1 48.5
------ ------ ------
Total KCSR/Gateway
Western revenues $ 563.1 $586.4 $ 596.8
======= ====== =======
Page 7
Chemicals and Petroleum
Chemical and petroleum products accounted for approximately 22.4% of
KCSR/Gateway Western combined total revenues in 2000. KCSR/Gateway Western
transport chemical and petroleum products via tank and hopper cars
primarily to markets in the southeast and northeast United States through
interchange with other rail carriers. Management expects certain product
revenues within this commodity group to improve in the future as a result
of access, which began on October 1, 2000 under the agreement with CN, to
additional chemical customers in the Geismar, Louisiana industrial corridor
(one of the largest concentrations of chemical suppliers in the world).
Paper and Forest
Paper and forest products accounted for approximately 23.6% of KCSR/Gateway
Western combined total revenues in 2000. The Company's rail lines run
through the heart of the southeastern U.S. timber-producing region.
Management believes that trees from this region tend to grow faster and
that forest products made from them are generally less expensive than those
from other regions. As a result, southern yellow pine products from the
southeast are increasingly being used at the expense of western producers
who have experienced capacity reductions because of public policy
considerations. KCSR/Gateway Western serve eleven paper mills directly
and six others indirectly through short-line connections. Customers
include International Paper Company, Georgia Pacific Corporation and
Riverwood International. Primary traffic includes pulp and paper, lumber,
panel products (plywood and oriented strand board), engineered wood
products, pulpwood, woodchips, raw fiber used in the production of paper,
pulp and paperboard, as well as metal, scrap and slab steel, waste and
military equipment. Slab steel products are used primarily in the
manufacture of drill pipe for the oil industry, and military equipment is
shipped to and from several military bases on the Company's rail lines
Agricultural and Mineral
Agricultural and mineral products accounted for approximately 16.7% of
KCSR/Gateway Western combined total revenues in 2000. Agricultural
products consist of domestic and export grain, food and related products.
Shipper demand for agricultural products is affected by competition among
sources of grain and grain products as well as price fluctuations in
international markets for key commodities. In the domestic grain business,
the Company's rail lines receive and originate shipments of grain and grain
products for delivery to feed mills serving the poultry industry. Through
the marketing agreement with I&M Rail Link, the Company's rail lines have
access to sources of corn and other grain in Iowa and other Midwestern
states. KCSR currently serves 35 feed mills along its rail lines
throughout Arkansas, Oklahoma, Texas, Louisiana, Mississippi and Alabama.
Export grain shipments include primarily wheat, soybean and corn
transported to the Gulf of Mexico for international destinations and to
Mexico via Laredo. Over the long term, grain shipments are expected to
increase as a result of the Company's strategic investments in Tex Mex and
TFM, given Mexico's reliance on grain imports. Food and related products
consist mainly of soybean meal, grain meal, oils and canned goods, sugar
and beer. Mineral shipments consist of a variety of products including
ores, clay, stone and cement.
Intermodal and Automotive
Intermodal products accounted for approximately 11.2% of KCSR/Gateway
Western combined total revenues in 2000. The intermodal freight business
consists of hauling freight containers or truck trailers by a combination
of water, rail and motor carriers, with rail carriers serving as the link
between the other modes of transportation. The Company's intermodal
business has grown significantly over the last seven years with intermodal
units increasing from 61,748 in 1993 to 247,604 in 2000 and intermodal
revenues increasing from $17 million to nearly $50 million during the same
period. Through our dedicated intermodal train service between Meridian
and Dallas, the Company competes directly with truck carriers along the
Interstate 20 corridor.
Page 8
The intermodal business is highly price and service driven as the trucking
industry maintains certain competitive advantages over the rail industry.
Trucks are not obligated to provide or maintain rights of way and do not
have to pay real estate taxes on their routes. In prior years, the
trucking industry diverted a substantial amount of freight from railroads
as truck operators' efficiency over long distances increased. In response
to these competitive pressures, railroad industry management sought avenues
to improve the competitiveness of rail traffic and forged numerous
alliances with truck companies in order to move more traffic by rail and
provide faster, safer and more efficient service to their customers. KCSR
has entered into agreements with several trucking companies for train
service in several corridors, but those services are concentrated between
Dallas and Meridian.
As KCSR/Gateway Western's intermodal revenues increased, margins on certain
intermodal business declined. In 1999 management addressed the declining
margins by increasing certain intermodal rates effective September 1, 1999
and by closing two underperforming intermodal facilities at Salisaw,
Oklahoma and Port Arthur, Texas on the north/south route. These actions
have helped to improve the profitability and operating efficiency of the
Company's intermodal business.
The strategic alliance with CN/IC and marketing agreements with Norfolk
Southern provide the Company the potential to further capitalize on the
growth potential of intermodal freight revenues, particularly for traffic
moving between points in the upper midwest and Canada to Kansas City,
Dallas and Mexico. Furthermore, the Company is in the process of
transforming the former Richards-Gebaur Airbase in Kansas City to a U.S.
customs pre-clearance processing facility, the Kansas City International
Freight Gateway ("IFG"), which is expected to handle and process large
volumes of domestic and international intermodal freight. Upon completion,
management expects this facility to provide additional opportunities for
intermodal revenue growth. Through an agreement with Mazda through the
Ford Motor Company Claycomo manufacturing facility located in Kansas City,
KCSR has developed an automotive distribution facility at the
Richards-Gebaur facility. This facility became operational in April 2000
for the movement of Mazda vehicles. Full intermodal and automotive
operations at the facility are expected to be in service in 2002, providing
KCSR with additional capacity in Kansas City.
The Company's automotive traffic consists primarily of vehicle parts moving
into Mexico from the northern sections of the United States and finished
vehicles moving from Mexico into the United States. CN/IC, Norfolk
Southern and TFM have a significant number of automotive production
facilities on their rail lines. The Company's rail network essentially
serves as the connecting bridge carrier for these movements of automotive
parts and finished vehicles. The Company has also recently transacted
with Ford to ship automotive parts from East St. Louis to Kansas City.
Coal
Coal historically has been one of the most stable sources of revenues and
is the largest single commodity handled by KCSR. In 2000, coal revenues
represented 18.6% of KCSR/Gateway Western combined total revenues.
Substantially all coal customers are under long term contracts, which
typically have an average contract term of approximately five years.
KCSR's most significant customer is SWEPCO, which is under contract until
2006. The Company delivers coal to nine electric generating plants,
including SWEPCO facilities in Flint Creek, Arkansas and Welsh, Texas,
Kansas City Power and Light plants in Kansas City and Amsterdam, Missouri,
an Empire District Electric Company plant near Pittsburg, Kansas and an
Entergy Gulf States plant in Mossville, Louisiana. SWEPCO and Entergy Gulf
States together comprised approximately 73% of KCSR/Gateway Western's total
coal revenues in 2000. The coal KCSR transports originates in the Powder
River Basin in Wyoming and is transferred to KCSR's rail lines at Kansas
City. KCSR also transports coal as an intermediate carrier for a Western
Farmers Electric Cooperative plant from
Page 9
Kansas City to Dequeen, Arkansas, where it interchanges with a short-line
carrier for delivery to the plant, and delivers lignite to an electric
generating plant at Monticello, Texas. In the fourth quarter of 1999, KCSR began
serving as a bridge carrier for coal deliveries to a Texas Utilities electric
generating plant in Martin Lake, Texas.
Other
Other rail-related revenues include a variety of miscellaneous services
provided to customers and interconnecting carriers and accounted for
approximately 7.4% of total combined KCSR/Gateway Western revenues in
2000. Major items in this category include railcar switching services,
demurrage (car retention penalties) and drayage (local truck transportation
services). Also included in this category are haulage services performed
for the benefit of BNSF under an agreement, which continues through 2004
and includes minimum volume commitments.
Railroad Industry Trends and Competition
The Company's rail operations compete against other railroads, many of
which are much larger and have significantly greater financial and other
resources. Since 1994, there has been significant consolidation among
major North American rail carriers, including the 1995 merger of Burlington
Northern, Inc. and Santa Fe Pacific Corporation ("BN/SF", collectively
"BNSF"), the 1995 merger of the UP and the Chicago and North Western
Transportation Company ("UP/CNW") and the 1996 merger of UP with Southern
Pacific Corporation ("SP"). Further Norfolk Southern and CSX purchased the
assets of Conrail in 1998 and the CN acquired the IC in June 1999. As a
result of this consolidation, the railroad industry is now dominated by a
few "mega-carriers." KCSI management believes that revenues were
negatively affected by the UP/CNW, UP/SP and BN/SF mergers, which led to
diversions of rail traffic away from KCSR's rail lines. The Company also
believes that KCSR revenues have been negatively impacted by the congestion
resulting from the purchase of Conrail's assets by Norfolk Southern and CSX
in 1998. Management regards the larger western railroads, in particular,
as significant competitors to the Company's operations and prospects
because of their substantial resources. Management believes, however, that
because of the Company's investments and strategic alliances, it is
positioned to attract additional rail traffic through our NAFTA Railway.
In late 1999, a merger was announced between BNSF and CN. Subsequent to
this announcement, the STB imposed a 15-month moratorium on Class 1
railroad merger activities, while it reviews and rewrites the rules
applicable to railroad consolidation. In July 2000, the STB's moratorium
was upheld by the United States Court of Appeals for the District of
Columbia. The moratorium, and more directly the new rules, will likely
have a substantial effect on future railroad merger activity. Subsequent
to the court's decision, BNSF and CN announced the termination of their
proposed merger.
Truck carriers have eroded the railroad industry's share of total
transportation revenues. Changing regulations, subsidized highway
improvement programs and favorable labor regulations have improved the
competitive position of trucks in the United States as an alternative mode
of surface transportation for many commodities. In the United States, the
truck industry generally is more cost and transit-time competitive than
railroads for distances of less than 300 miles. Intermodal traffic and
certain other traffic face highly price sensitive competition, particularly
from motor carriers. However, rail carriers, including KCSR, have placed
an emphasis on competing in the intermodal marketplace and working together
with motor carriers and other railroads to provide end-to-end
transportation of products, especially where the length of haul exceeds 500
miles. The Company is also subject to competition from barge lines and
other maritime shipping, which compete with the Company across certain
routes in its operating area. Mississippi and Missouri River barge
traffic, among others, compete with KCSR and its rail connections in the
transportation of bulk commodities such as grains, steel and petroleum
products.
Page 10
Increased competition has resulted in downward pressure on freight rates.
Competition with other railroads and other modes of transportation is
generally based on the rates charged, the quality and reliability of the
service provided and the quality of the carrier's equipment for certain
commodities.
Employees and Labor Relations
Approximately 84% of KCSR/Gateway Western employees are covered under
various collective bargaining agreements.
In 1996, national labor contracts governing the KCSR were negotiated with
all major railroad unions, including the United Transportation Union, the
Brotherhood of Locomotive Engineers, the Transportation Communications
International Union, the Brotherhood of Maintenance of Way Employees, and
the International Association of Machinists and Aerospace Workers. Formal
negotiations to enter into new agreements are in progress and the 1996
labor contracts will remain in effect until new agreements are reached.
The wage increase elements of these new agreements may have retroactive
application. The provisions of the various labor agreements generally
include periodic general wage increases, lump-sum payments to workers and
greater work rule flexibility, among other provisions. The Company is
currently exploring alternative compensation arrangements in lieu of cash
increases. Management does not expect that the negotiations or the
resulting labor agreements will have a material impact on our consolidated
results of operations, financial condition or cash flows.
Labor agreements related to former MidSouth employees covered by collective
bargaining agreements reopened for negotiations in 1996. These agreements
entail eighteen separate groups of employees and are not included in the
national labor contracts. KCSR management has reached new agreements with
all but one of these unions. While discussions with this one union are
ongoing, the Company does not anticipate that this process or the resulting
labor agreement will have a material impact on its consolidated results of
operations, financial condition or cash flows.
Most Gateway Western employees are covered by collective bargaining
agreements that extended through December 1999. Negotiations on those
agreements began in late 1999, and those agreements will remain in effect
until new agreements are reached. The Company does not anticipate that
this process or the resulting labor agreements will have a material impact
on its consolidated results of operations, financial condition or cash
flows.
KCSR, Gateway and other railroads continue to be affected by labor
regulations, which typically are more burdensome than those governing
non-rail industries, such as trucking competitors. The Railroad Retirement
Act requires up to a 23.75% contribution by railroad employers on eligible
wages, while the Social Security and Medicare Acts only require a 7.65%
employer contribution on similar wage bases. Other programs, such as the
Federal Employers' Liability Act (FELA), when compared to worker's
compensation laws, illustrate the competitive disadvantage placed upon the
rail industry by federal labor regulations.
Joint Venture Arrangements
Mexrail
The share purchase agreement dated as of October 5, 1995 between KCSI and
TMM which governs the investment in Mexrail provides, among other things,
that the Company has a right of first refusal if (1) TMM decides to sell
all or a portion of its Mexrail common stock, (2) TMM votes its Mexrail
common stock in favor of a merger or consolidation involving Mexrail or Tex
Mex or any plan to sell all or substantially all of the assets of Mexrail
or Tex Mex or (3) Mexrail decides to sell all
Page 11
or a portion of its Tex Mex common stock. The share purchase agreement also
gives the Company the right to appoint two of Mexrail's five directors and four
of Tex Mex's nine directors.
Grupo TFM
In December 1995, the Company entered into a joint venture agreement with
TMM. The purposes of the joint venture were, among others, to provide for
the formation of Grupo TFM, to provide for participation in the upcoming
privatization of the Mexican national railway system through Grupo TFM, and
to promote the movement of rail traffic over Tex Mex, TFM and KCSR. The
term of the joint venture agreement was automatically renewed for a term of
three years on December 1, 2000 and will automatically renew for additional
terms of three years each unless either TMM or the Company gives notice of
termination at least 90 days prior to the end of the then-current term. The
joint venture agreement may also terminate under certain circumstances
prior to the end of a term, including upon a change of control or
bankruptcy of either TMM or the Company or a material default by TMM or the
Company. Upon termination of the agreement, any joint venture assets that
are not held in KCSI's or TMM's name will be distributed proportionally to
TMM and KCSI. The joint venture does not have any material assets and
management believes that a termination of the joint venture agreement would
not have a material adverse effect on the Company or its interests in
Mexrail or Grupo TFM.
The Grupo TFM by-laws and the shareholders agreement dated May 1997,
between KCSI, Caymex Transportation, Inc., Grupo Servia, S.A. de C.V.
("Grupo Servia"), TMM and TMM Multimodal, S.A. de C.V., which governs our
investment in Grupo TFM (1) restrict each of the parties to the
shareholders agreement from directly or indirectly transferring any
interest in Grupo TFM or TFM to a competitor of the parties, Grupo TFM or
TFM without the prior written consent of each of the parties, (2) prohibit
any transfer of shares of Grupo TFM to any person other than an affiliate
without the prior consent of Grupo TFM's board of directors and (3) provide
that KCSI, Grupo Servia and TMM may not transfer control of any subsidiary
holding all or any portion of shares of Grupo TFM to a third party other
than an affiliate or another party to the shareholders agreement without
the consent of the other parties to the shareholders agreement. The Grupo
TFM by-laws grant the shareholders of Grupo TFM a right of first refusal to
acquire shares to be transferred by any other shareholder in proportion to
the number of shares held by each non-transferring shareholder, although
holders of preferred shares or shares with special or limited rights are
only entitled to acquire those shares and not ordinary shares. The
shareholders agreement requires that the boards of directors of Grupo TFM
and TFM be constituted to reflect the parties' relative ownership of the
ordinary voting common stock of Grupo TFM.
TFM holds the Concession to operate Mexico's Northeast Rail Lines for the
50 years beginning in June 1997 and, subject to certain conditions, has an
option to extend the Concession for an additional 50 years. The Concession
is subject to certain mandatory trackage rights and is only exclusive for
30 years. Additionally, the Mexican government may revoke exclusivity
after 20 years if it determines that there is insufficient competition and
may terminate the Concession as a result of certain conditions or events,
including (1) TFM's failure to meet its operating and financial obligations
with regard to the Concession under applicable Mexican law, (2) a statutory
appropriation by the Mexican government for reasons of public interest and
(3) liquidation or bankruptcy of TFM. TFM's assets and its rights under
the Concession may also be seized temporarily by the Mexican government.
In 1997, Grupo TFM paid approximately $1.4 billion to the Mexican
government as the purchase price for 80% of TFM. Grupo TFM funded a
significant portion of the purchase with capital contributions from TMM and
KCSI. Additionally, a portion of the purchase was funded through: (1)
senior secured term credit facilities ($325 million); (2) senior notes and
senior discount debentures ($400 million); and (3) proceeds from the sale
of 24.6% of Grupo TFM to the Mexican government (approximately $199 million
based on the then effective U.S. dollar/Mexican peso
Page 12
exchange rate). Additionally, Grupo TFM entered into a $150 million
revolving credit facility for general working capital purposes. The Mexican
government's interest in Grupo TFM is in the form of limited voting right
shares. KCSI, TMM and an affiliate of TMM, Grupo Servia, have a call option for
the Mexican government's interest in Grupo TFM which is exercisable, prior to
July 31, 2002, at the original amount (in U.S. dollars) paid by the Mexican
government plus interest based on one-year U.S. Treasury securities. In
addition, after the expiration of that call option, KCSI, TMM and Grupo Servia
have a right of first refusal to purchase the Mexican government's interest in
Grupo TFM if the Mexican government wishes to sell that interest to a third
party which is not a governmental entity. On or after October 31, 2003 the
Mexican government has the option to sell its 20% interest in TFM through a
public offering or to Grupo TFM at the initial share price paid by Grupo TFM
plus interest. In the event that Grupo TFM does not purchase the Mexican
government's 20% interest in TFM, the government may require TMM and KCSI, or
either TMM or KCSI, to purchase its interest. KCSI and TMM have cross
indemnities in the event the Mexican government requires only one of them to
purchase its interest. The cross indemnities allow the party required to
purchase the Mexican government's interest to require the other party to
purchase its pro rata portion of such interest. However, if KCSI were required
to purchase the Mexican government's interest in TFM and TMM could not meet its
obligations under the cross-indemnity, then KCSI would be obligated to pay the
total purchase price for the Mexican government's interest. TMM and KCSI are
currently in negotiations with the Mexican government that may lead to a
purchase of the Mexican government's interest in TFM at a discount from the
current option price. During the third quarter of 2000, Grupo TFM accomplished a
refinancing of approximately $285 million of its senior secured credit facility
through the issuance of a U.S. Commercial Paper Program backed by a letter of
credit. This refinancing provides the ability for Grupo TFM to pay limited
dividends with the consent of KCSI and TMM; however, none have been paid.
Panama Canal Railway Company
The financing for the Panama Canal Railway Company is comprised of a $5
million investment from the IFC and senior loans through the IFC in an
aggregate amount of up to $45 million. The investment of $5 million from
the IFC is comprised of non-voting preferred shares which pay a 10%
cumulative dividend. The preferred shares may be redeemed at the IFC's
option any year after 2008 at the lower of (1) a net cumulative internal
rate of return of 30% or (2) eight times earnings before interest, income
taxes, depreciation and amortization for the two years preceding the
redemption that is proportionate to the IFC's percentage ownership in
Panama Canal Railway Company. Under the terms of the concession, the
Company is, under certain limited conditions, a guarantor for up to $15
million of cash deficiencies associated with the reconstruction project
and, if Panama Canal Railway Company terminates the concession contract
without the IFC's consent, a guarantor for up to 50% of the outstanding
senior loans. Management expects the total cost of the reconstruction
project to be $75 million and does not expect its equity commitment to
exceed $16.5 million (excluding the guarantees described above).
Southern Capital
In 1996, KCSR and GATX Capital Corporation ("GATX") formed a 50-50 joint
venture-Southern Capital-to perform certain leasing and financing
activities. Southern Capital's operations are the acquisition of
locomotives and rolling stock and the leasing thereof to KCSR and other
rail entities. Concurrent with the formation of this joint venture, KCSR
entered into operating leases with Southern Capital for substantially all
the locomotives and rolling stock which KCSR contributed or sold to
Southern Capital at the time of formation of the joint venture. GATX
contributed cash in the joint venture transaction formation. In addition,
Southern Capital formerly managed a portfolio of non-rail loan assets
primarily in the amusement entertainment, construction and
Page 13
trucking industries which it sold in April 1999 to Textron Financial
Corporation, thereby leaving only the rail equipment related assets leased to
KCSR.
The purpose for the formation of Southern Capital is to partner a Class I
railroad in KCSR with an industry leader in the rail equipment financing in
GATX. Southern Capital provides the Company with access to equipment
financing alternatives.
Employees. As of December 31, 2000, the approximate number of employees of
KCSI and its consolidated subsidiaries was as follows:
KCSR 2,557
Gateway Western 230
Other 75
-----
Total 2,862
-----
Item 2. Properties
The information set forth in response to Item 102 of Regulation S-K under
Item 1, Business, of this Form 10-K and Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, is incorporated
by reference in response to this Item 2.
In the opinion of management, the various facilities, office space and
other properties owned and/or leased by the Company (and its subsidiaries
and affiliates) are adequate for existing operating needs.
KCSR
Certain KCSR property statistics follow:
2000 1999 1998
----- ----- -----
Route miles - main and branch line 2,701 2,756 2,756
Total track miles 3,880 3,935 3,931
Miles of welded rail in service 2,032 2,032 2,031
Main line welded rail (% of total) 64% 64% 64%
Cross ties replaced 318,687 275,384 255,591
Average Age (in years):
----------------------
Wood ties in service 15.5 16.0 15.8
Rail in main and branch line 27.5 26.5 25.5
Road locomotives 22.6 21.7 23.3
All locomotives 23.5 22.5 23.9
KCSR, in support of its transportation operations, owns and operates repair
shops, depots and office buildings along its right-of-way. A major
facility, the Deramus Yard, is located in Shreveport, Louisiana and
includes a general office building, locomotive repair shop, car repair
shops, customer service center, material warehouses and fueling facilities
totaling approximately 227,000 square feet. KCSR owns a 107,800 square
foot facility in Pittsburg, Kansas that previously was used as a diesel
locomotive repair facility. This facility was closed during 1999. KCSR
also owns freight and truck maintenance buildings in Dallas, Texas totaling
approximately 125,200 square feet. KCSR and KCSI executive offices are
located in an eight-story office building in Kansas City, Missouri, which
is leased from a subsidiary of the Company. Other facilities owned by KCSR
Page 14
include a 21,000 square foot freight car repair shop in Kansas City,
Missouri and approximately 15,000 square feet of office space in Baton
Rouge, Louisiana.
KCSR owns five intermodal facilities and has contracted with third parties
to operate these facilities. These facilities are located in Dallas,
Texas; Kansas City, Missouri; Shreveport and New Orleans, Louisiana; and
Jackson, Mississippi. KCSR is currently in the process of constructing an
automotive and intermodal facility at the former Richards-Gebaur Airbase in
Kansas City, Missouri. This facility became operational in April 2000 for
the movement of Mazda vehicles. Full intermodal and automotive operations
at the facility are expected to be complete in 2002, providing KCSR with
additional capacity in Kansas City. The various intermodal facilities
include strip tracks, cranes and other equipment used in facilitating the
transfer and movement of trailers and containers.
KCSR owns 8.3% of Kansas City Terminal Railway Company, which owns and
operates approximately 80 miles of track, and operates an additional eight
miles of track under trackage rights in greater Kansas City, Missouri.
KCSR also leases for operating purposes certain short sections of trackage
owned by various other railroad companies and jointly owns certain other
facilities with these railroads.
KCSR's fleet of rolling stock consisted of the following at December 31:
2000 1999 1998
Leased Owned Leased Owned Leased Owned
------ ------ ------ ------ ------ ------
Locomotives:
Road Units 323 108 323 112 258 108
Switch Units 52 - 52 - 52 -
Other - 8 - 8 8 -
------ ------ ------ ------ ------ ------
Total 375 116 375 120 318 108
====== ====== ====== ====== ====== ======
Rolling Stock:
Box Cars 5,942 2,019 6,289 2,011 6,634 2,023
Gondolas 704 78 713 66 748 56
Hopper Cars 2,197 1,171 2,384 1,357 2,660 1,185
Flat Cars (Intermodal
and Other) 1,584 613 1,553 675 1,617 676
Tank Cars 46 55 33 55 34 58
Auto Rack 201 - 201 - - -
------ ------ ------ ------ ------ ------
Total 10,674 3,936 11,173 4,164 11,693 3,998
====== ====== ====== ====== ====== ======
As of December 31, 2000, KCSR's fleet consisted of 491 diesel locomotives,
of which 116 were owned, 335 leased from affiliates and 40 leased from
non-affiliates. KCSR's fleet of rolling stock consisted of 14,610 freight
cars, of which 3,936 were owned, 3,269 leased from affiliates and 7,405
leased from non-affiliates. A significant portion of the locomotives and
rolling stock leased from affiliates includes equipment leased through
Southern Capital, a joint venture with GATX Capital Corporation formed in
October 1996.
Some of the owned equipment is subject to liens created under conditional
sales agreements, equipment trust certificates and leases in connection
with the original purchase or lease of such equipment. KCSR indebtedness
with respect to equipment trust certificates, conditional sales agreements
and capital leases totaled approximately $58.4 million at December 31,
2000.
Page 15
Systems and Technology
Management Control System Project
In April 1997 KCSR entered into an agreement with International Business
Machines Corporation ("IBM") to jointly develop a management control
system ("MCS") which includes the following elements:
o a new waybill system;
o a new transportation system;
o a work queue management infrastructure;
o a service scheduling system;
o enhanced revenue and car accounting systems; and
o EDI interfaces to the new systems.
The Company implemented MCS on Gateway Western in the first quarter of 2000
and plans to begin implementation on KCSR in April 2001. MCS is designed
to track individual shipments as they move across the rail system and
compare that movement to the service sold to the customer. If a shipment
falls behind schedule, MCS will automatically generate alerts and action
recommendations.
Management expects MCS to provide more accurate and timely information on
terminal dwell time, car velocity through terminals and priority of
switching to meet schedules. MCS is designed to provide better analytical
tools for management to make decisions based on more timely and accurate
information. A data warehouse will provide the foundation of an improved
decision support infrastructure. By making decisions based upon that
information, management intends to improve service quality and utilization
of locomotives, rolling stock, crews, yards, and line of road and thereby
reduce cycle times and costs. With the implementation of service
scheduling, MCS is expected to provide improved customer service through
improved advanced planning, real-time decision support and improved
measurements. By designing all new business processes around workflow
technology, management intends to more effectively follow key operating
statistics to measure productivity and improve performance across the
entire operation.
MCS is also expected to improve clerical and information technology group
efficiencies. Management believes that information technology and other
support groups will be able to reduce maintenance costs, increase their
flexibility to respond to new requests and improve productivity. By using a
layered design approach, MCS is expected to have the ability to extend to
new technologies as they become available. MCS can be modified to connect
customers with applications via the Internet and will be constructed to
support multiple railroads, permit modifications to accommodate the local
language requirements of the area and operate across multiple time zones.
Train Dispatching System
KCSR is currently operating on two types of train dispatching systems,
Direct Train Control ("DTC") and Centralized Traffic Control ("CTC").
DTC uses direct radio communication between dispatchers and engineers to
coordinate train movement. DTC is used on approximately 68% of KCSR's
track, including the track from Shreveport to Meridian and Shreveport to
New Orleans. CTC controls switches and signals in the field from the
dispatcher's desk top via microwave link. CTC is used on approximately 32%
of KCSR's track, including the track from Kansas City to Beaumont and
Shreveport to Dallas. CTC is normally utilized on heavy traffic areas with
single
Page 16
main line or heavy traffic areas with multiple routes. Each dispatcher currently
has an assigned territory displayed on high-resolution monitors driven by a
mini-mainframe in Shreveport with a remote station in Beaumont. KCSR implemented
a new dispatching computer system in May 1999, which has enhanced the overall
efficiency of train movements on the railroad system.
Gateway Western
Gateway Western operates an approximate 400 mile rail line extending from
Kansas City, Missouri to East St. Louis and Springfield, Illinois.
Additionally, Gateway Western has restricted haulage rights extending to
Chicago, Illinois. Gateway Western provides interchanges with various
eastern rail carriers and access to the St. Louis rail gateway.
Certain approximate Gateway Western property statistics follow:
2000 1999 1998
---- ---- ----
Route miles - main and branch line 402 402 402
Total track miles 564 564 564
Miles of welded rail in service 125 121 121
Main line welded rail (% of total main line) 42% 40% 40%
Mexrail
Mexrail, a 49% owned affiliate, owns 100% of the Tex Mex and certain other
assets, including the northern (U.S.) half of a rail traffic bridge at
Laredo, Texas spanning the Rio Grande River. TFM operates the southern
half of the bridge. This bridge is a significant entry point for rail
traffic between Mexico and the U.S. The Tex Mex operates a 157 mile rail
line extending from Corpus Christi to Laredo, Texas, and also has trackage
rights (from UP) totaling approximately 360 miles between Corpus Christi
and Beaumont, Texas.
In early 1999, Tex Mex completed Phase II of a new rail yard in Laredo.
Phase I of the project was completed in December 1998 and included four
tracks comprising approximately 6.5 miles. Phase II consisted of two new
intermodal tracks totaling approximately 2.8 miles. Although groundwork
for an additional ten tracks has been completed, construction on those ten
tracks has not yet begun. Capacity of the Laredo yard is currently
approximately 800 freight cars and, upon completion of all tracks, is
expected to be approximately 2,000 freight cars. Additionally, on March
12, 2001 Mexrail purchased approximately 84.5 miles of track between
Rosenberg and Victoria, Texas. See "Item 1 - Business - Significant
Investments- Mexrail" for additional information.
Certain Tex Mex property statistics follow:
2000 1999 1998
---- ---- ----
Route miles - main and branch line 157 157 157
Total track miles 533 533 530
Miles of welded rail in service 5 5 5
Main line welded rail (% of total) 3% 3% 3%
Grupo TFM
TFM operates 2,661 miles of main line and an additional 838 miles of
sidings and spur tracks, and main line under trackage rights. TFM has the
right to operate the rail, but does not own the land, roadway or associated
structures. Approximately 91% of TFM's main line consists of continuously
welded rail. As of December 31, 2000, TFM owned 459 locomotives, owned or
leased from affiliates 5,089 freight cars and leased from non-affiliates
141 locomotives and 5,254 freight cars. Grupo TFM (through TFM) has office
space at which various operational, administrative, managerial and other
activities are performed. The primary facilities are located in Mexico
City and Monterrey,
Page 17
Mexico. TFM leases 140,354 square feet of office space in Mexico City and owns
an 115,157 square foot facility in Monterrey.
Panama Canal Railway Company/Panarail Tourism Company
PCRC, a joint venture in which the Company owns 50% of the common stock,
holds the concession to reconstruct and operate a 47-mile railroad that
runs parallel to the Panama Canal. Reconstruction of the railroad
commenced in early 2000 and is expected to be complete in 2001. PCRC
leases five locomotives and owns one locomotive and various other
infrastructure improvements and equipment. Panarail currently owns 5
passenger cars.
Other
The Company owns 1,025 acres of property located on the waterfront in the
Port Arthur, Texas area, which includes 22,000 linear feet of deep-water
frontage and three docks. Port Arthur is an uncongested port with direct
access to the Gulf of Mexico. Approximately 75% of this property is
available for development.
Trans-Serve, Inc. operates a railroad wood tie treating plant in Vivian,
Louisiana under an industrial revenue bond lease arrangement with an option
to purchase. This facility includes buildings totaling approximately
12,000 square feet.
Pabtex GP LLP (formerly Global Terminaling Services, Inc.) owns a 70-acre
bulk commodity handling facility in Port Arthur, Texas.
Mid-South Microwave, Inc. owns and operates a microwave system, which
extends essentially along the right-of-way of KCSR from Kansas City,
Missouri to Dallas, Beaumont and Port Arthur, Texas and New Orleans,
Louisiana. This system is leased to KCSR.
Other subsidiaries of the Company own approximately 8,000 acres of land at
various points adjacent to the KCSR right-of-way. Other properties also
include a 354,000 square foot warehouse at Shreveport, Louisiana, a bulk
handling facility at Port Arthur, Texas, and several former railway
buildings now being rented to non-affiliated companies, primarily as
warehouse space. The Company is an 80% owner of Wyandotte Garage
Corporation, which owns a parking facility in downtown Kansas City,
Missouri. The facility is located adjacent to the Company and KCSR
executive offices, and consists of 1,147 parking spaces utilized by the
employees of the Company and its affiliates, as well as the general
public. The Company is in negotiations for the lease of new office space
in downtown Kansas City, Missouri for its principal executive offices.
Item 3. Legal Proceedings
The information set forth in response to Item 103 of Regulation S-K under
Part II Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, "Other - Litigation and Environmental Matters"
of this Form 10-K is incorporated by reference in response
to this Item 3. In addition, see discussion in Part II Item 8, Financial
Statements and Supplementary Data, at Note 11 - Commitments and
Contingencies of this Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
three-month period ended December 31, 2000.
Page 18
Executive Officers of the Company
Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to
paragraph (b) of Item 401 of Regulation S-K, the following list is included
as an unnumbered Item in Part I of this Form 10-K in lieu of being included
in KCSI's Definitive Proxy Statement which will be filed no later than 120
days after December 31, 2000. All executive officers are elected annually
and serve at the discretion of the Board of Directors. Certain of the
executive officers have employment agreements with the Company.
Name Age Position(s)
Michael R. Haverty 56 Chairman, President and Chief Executive
Officer
Gerald K. Davies 56 Executive Vice President and Chief Operating
Officer
Robert H. Berry 56 Senior Vice President and Chief Financial
Officer
Richard P. Bruening 62 Senior Vice President, General Counsel and
Corporate Secretary
Warren K. Erdman 42 Vice President - Corporate Affairs
Thomas G. King 44 Vice President and Treasurer
L.G. Van Horn 42 Vice President and Comptroller
The information set forth in the Company's Definitive Proxy Statement in
the description of the Board of Directors with respect to Mr. Haverty is
incorporated herein by reference.
Gerald K. Davies has served as Executive Vice President and Chief Operating
Officer of KCSI since July 18, 2000. Mr. Davies joined KCSR in January
1999 as the Executive Vice President and Chief Operating Officer. Mr.
Davies has served as a director of KCSR since November 1999. Prior to
joining KCSR, Mr. Davies served as the Executive Vice President of
Marketing with Canadian National Railway from 1993 through 1998. Mr.
Davies held senior management positions with Burlington Northern Railway
from 1976 to 1984 and 1991 to 1993, respectively, and with CSX
Transportation from 1984 to 1991.
Robert H. Berry has served as Senior Vice President and Chief Financial
Officer of KCSI since July 18, 2000. Mr. Berry has served as Senior Vice
President and Chief Financial Officer of KCSR since June 1997 and as a
director of KCSR since November 1999. Mr. Berry is also a director of
Grupo TFM. Prior to joining KCSR, Mr. Berry was employed by Northern
Telecom for 21 years in various senior financial positions, including Vice
President--Finance of NorTel Communications Systems, Inc. from 1995 to 1997
and Vice President--Finance for Bell Atlantic Meridian Systems from 1993 to
1995. Mr. Berry is a Certified Public Accountant.
Richard P. Bruening has served as Vice President and General Counsel of
KCSI since 1981 and Corporate Secretary of KCSI since July 1995. Mr.
Bruening's title of Vice President was changed to Senior Vice President on
July 18, 2000. From May 1982 to February 1992, he served as Vice President
and General Counsel of KCSR and has served as Senior Vice President and
General Counsel since February 1992. Mr. Bruening has also served as
Corporate Secretary of KCSR since July 1995 and as a director of KCSR since
September 1987. Mr. Bruening has announced that he will retire from the
Company and the aforementioned positions effective April 1, 2001.
Warren K. Erdman has served as Vice President--Corporate Affairs of KCSI
since April 15, 1997 and as Vice President--Corporate Affairs of KCSR since
May 1997. Prior to joining KCSI, Mr. Erdman served as Chief of Staff to
United States Senator Kit Bond of Missouri from 1987 to 1997.
Thomas G. King has served as Vice President and Treasurer of KCSI since
July 18, 2000 and as Vice President and Treasurer of KCSR since November
1999. Mr. King has also served as Vice President and Treasurer of KCS
Transportation Company since May 1997. Mr. King has served as Vice
President and Treasurer of Gateway Western since November 1999. Mr. King
served as
Page 19
Treasurer of Gateway Western from May 1997 to October 1999, and as Vice
President and Chief Financial Officer from December 1989 to May 1997.
Mr. King is a Certified Public Accountant.
Louis G. Van Horn has served as Vice President and Comptroller of KCSI
since May 1996. Mr. Van Horn has also served as Vice President and
Comptroller of KCSR since 1995. Mr. Van Horn was Comptroller of KCSI from
September 1992 to May 1996. From January 1992 to September 1992, Mr. Van
Horn served as Assistant Comptroller of KCSI. Mr. Van Horn is a Certified
Public Accountant.
There are no arrangements or understandings between the executive officers
and any other person pursuant to which the executive officer was or is to
be selected as an officer of KCSI, except with respect to the executive
officers who have entered into employment agreements, which agreements
designate the position(s) to be held by the executive officer.
None of the above officers are related to one another by family.
Part II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
The information set forth in response to Item 201 of Regulation S-K on the
cover (page i) under the heading "Company Stock," and in Part II Item 8,
Financial Statements and Supplementary Data, at Note 13 - Quarterly
Financial Data (Unaudited) of this Form 10-K is incorporated by reference
in response to this Item 5.
Pursuant to the credit agreement dated January 11, 2000 as described
further in Part II Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations of this Form 10-K, the
Company is restricted from the payment of cash dividends on the Company's
common stock.
On July 12, 2000, KCSI completed its spin-off of Stilwell through a special
dividend of Stilwell common stock distributed to KCSI common stockholders
of record on June 28, 2000 ("Spin-off"). The Spin-off occurred after the
close of business of the New York Stock Exchange on July 12, 2000, and each
KCSI stockholder received two shares of the common stock of Stilwell for
every one share of KCSI common stock owned on the record date. The total
number of Stilwell shares distributed was 222,999,786.
On July 12, 2000, KCSI completed a reverse stock split whereby every two
shares of KCSI common stock were converted into one share of KCSI common
stock. The Company's stockholders approved a one-for-two reverse stock
split in 1998 in contemplation of the Spin-off.
As of February 28, 2001, there were 5,469 holders of the Company's common
stock based upon an accumulation of the registered stockholder listing.
Page 20
Item 6. Selected Financial Data
(dollars in millions, except per share and ratio data)
The selected financial data below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations included under Item 7 of this Form 10-K and the consolidated
financial statements and the related notes thereto, and the Report of
Independent Accountants thereon, included under Item 8 of this Form 10-K,
and such data is qualified by reference thereto. All years reflect the
1-for-2 common stock split to shareholders of record on June 28, 2000 paid
July 12, 2000.
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Revenues $ 572.2 $ 601.4 $ 613.5 $ 573.2(i) $517.7(i)
Income (loss) from
continuing operations $ 25.4(ii) $ 10.2(v) $ 38.0 $ (132.1)(iv) $ 16.3
Income (loss) from continuing
operations per common share:
Basic $ 0.44 $ 0.18 $ 0.69 $ (2.46) $ 0.28
Diluted 0.43 0.17 0.67 (2.46) 0.28
Total assets(vi) $1,944.5 $2,672.0 $2,337.0 $2,109.9 $1,770.7
Total debt $ 674.6 $ 760.9 $ 836.3 $ 916.6 $ 645.1
Cash dividends per
common share $ - $ 0.32 $ 0.32 $ 0.30 $ 0.26
Ratio of earnings to
fixed charges (iii) 1.0x 1.2x(v) 1.9x -(iv) 1.4x
(i) Includes Gateway Western as a wholly-owned unconsolidated affiliate
as of December 5, 1996 and as a wholly-owned consolidated subsidiary
effective January 1, 1997.
(ii) Income from continuing operations for the year ended December 31,
2000 excludes extraordinary items for debt retirement costs of $8.7
million (net of income taxes of $4.0 million). This amount includes
$1.7 million (net of income taxes of $0.1 million) related to Grupo TFM.
(iii) The ratio of earnings to fixed charges is computed by dividing
earnings by fixed charges. For this purpose "earnings" represent the
sum of (i) pretax income from continuing operations adjusted for income
(loss) from unconsolidated affiliates, (ii) fixed charges, and (iii)
distributed income from unconsolidated affiliated less (i) capitalized
interest, and (ii) fixed charges. Fixed charges consist of interest
expensed or capitalized, amortization of deferred debt issuance costs
and the portion of rental expense which management believes is
representative of the interest component of rental expense.
(iv) Includes restructuring, asset impairment and other charges of $178.0
million ($141.9 million after-tax). Due to these restructuring, asset
impairment and other charges of $178.0 million, the 1997 ratio coverage
was less than 1:1. The ratio of earnings to fixed charges would have
been 1:1 if a deficiency of $148.4 million would have been eliminated.
Excluding the $178.0 million, the ratio for 1997 would have been 1.4x.
(v) Includes unusual costs of $12.7 million ($7.9 million after-tax).
Excluding these unusual costs, the ratio of earnings to fixed charges
for 1999 would have been 1.3x.
(vi) The total assets presented herein include the net assets of Stillwell
as of December 31, 1996, 1997, 1998, and 1999 as follows: $234.8
million, $348.3 million, $540.2 million, and $814.6 million,
respectively. The total assets as of December 31, 2000 does not include
the net assets of Stillwell as a result of the Spin-off on July 12,
2000.
Page 21
The information set forth in response to Item 301 of Regulation S-K under
Part II Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, of this Form 10-K is incorporated by reference
in partial response to this Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
The discussions set forth below, as well as other portions of this Form
10-K, contain comments not based upon historical fact. Such
forward-looking comments are based upon information currently available to
management and management's perception thereof as of the date of this Form
10-K. Readers can identify these forward-looking comments by the use of
such verbs as expects, anticipates, believes or similar verbs or
conjugations of such verbs. The actual results of operations of Kansas
City Southern Industries, Inc. ("KCSI" or the "Company") could materially
differ from those indicated in forward-looking comments. The differences
could be caused by a number of factors or combination of factors including,
but not limited to, those factors identified in the "Risk Factors" section
of the Company's Registration Statement on Form S-4, as amended and
declared effective on March 15, 2001, which is on file with the U.S.
Securities and Exchange Commission (File No.333-54262) and which "Risk
Factors" section is hereby incorporated by reference herein. Readers are
strongly encouraged to consider these factors when evaluating any
forward-looking comments. The Company will not update any forward-looking
comments set forth in this Form 10-K.
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 8 of
this Form 10-K. This discussion should be read in conjunction with these
consolidated financial statements, the related notes and the Report of
Independent Accountants thereon, and is qualified by reference thereto.
For purposes of this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," discussions for KCSR/Gateway Western
(as defined below) reflect the results of KCSR/Gateway Western combined
operating companies on a stand-alone basis and exclude other KCSR
subsidiaries or affiliates.
General
KCSI, a Delaware corporation organized in 1962, is a holding company with
principal operations in rail transportation. As discussed in "Recent
Developments", on July 12, 2000 KCSI completed its spin-off of Stilwell
Financial Inc. ("Stilwell"), the Company's formerly wholly-owned financial
services subsidiary.
KCSI supplies its various subsidiaries with managerial, legal, tax,
financial and accounting services, in addition to managing other
"non-operating" and more passive investments. Kansas City Southern Lines,
Inc. ("KCSL"), which was the direct parent of The Kansas City Southern
Railway Company ("KCSR"), was merged into KCSI effective December 31,
2000. KCSI's principal subsidiaries and affiliates include, among others:
o KCSR, a wholly-owned subsidiary;
o Gateway Western Railway Company ("Gateway Western"), a wholly-owned
subsidiary;
Page 22
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo
TFM"), an approximate 37% owned unconsolidated affiliate, which owns 80%
of the common stock of TFM, S.A. de C.V. ("TFM");
o Mexrail, Inc. ("Mexrail"), a 49% owned unconsolidated affiliate,
which wholly owns the Texas Mexican Railway Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate that leases locomotive and rail equipment
primarily to KCSR;
o Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of
which KCSR indirectly owns 50% of the common stock; and
o Panarail Tourism Company ("Panarail"), a 50% owned unconsolidated
affiliate.
All per share information included in this Item 7 is presented on a diluted
basis and reflects the one-for-two reverse stock split discussed below,
unless specifically identified otherwise.
RECENT DEVELOPMENTS
Spin-off of Stilwell Financial Inc. On June 14, 2000, KCSI's Board of
Directors approved the spin-off of Stilwell, the Company's then
wholly-owned financial services subsidiary. On July 12, 2000, KCSI
completed its spin-off of Stilwell through a special dividend of Stilwell
common stock distributed to KCSI common stockholders of record on June 28,
2000 ("Spin-off").
As of the date of the Spin-off, Stilwell was comprised of Janus Capital
Corporation, an approximate 81.5% owned subsidiary; Berger LLC, an
approximate 88% owned subsidiary; Nelson Money Managers Plc, an 80% owned
subsidiary; DST Systems, Inc., an equity investment in which Stilwell holds
an approximate 32% interest; and miscellaneous other financial services
subsidiaries and equity investments.
The Spin-off occurred after the close of business of the New York Stock
Exchange on July 12, 2000, and each KCSI stockholder received two shares of
the common stock of Stilwell for every one share of KCSI common stock owned
on the record date. The total number of Stilwell shares distributed was
222,999,786.
On July 9, 1999, KCSI received a tax ruling from the Internal Revenue
Service ("IRS") which states that for United States federal income tax
purposes the Spin-off qualifies as a tax-free distribution under Section
355 of the Internal Revenue Code of 1986, as amended. Additionally, in
February 2000, the Company received a favorable supplementary tax ruling
from the IRS to the effect that the assumption of $125 million of KCSI
indebtedness by Stilwell would have no effect on the previously issued tax
ruling.
KCSI Reverse Stock Split. On July 12, 2000, KCSI completed a reverse stock
split whereby every two shares of KCSI common stock were converted into one
share of KCSI common stock. KCSI common stockholders approved this reverse
stock split in 1998.
Purchase of Janus common stock by Stilwell
On January 26, 2001, Stilwell Financial Inc. announced that it expected to
acquire 600,000 shares of Janus Capital Corporation ("Janus") common stock
from Thomas H. Bailey, the Chairman, President and Chief Executive Officer
of Janus, through the exercise of put rights by Mr. Bailey. According to
Stilwell management, the purchase price for these shares is expected to
approximate $603 million and the purchase is expected to occur during the
second quarter of 2001. KCSI management believes, based on discussions
with Stilwell management, that Stilwell has adequate financial resources
available to fund this obligation. If Stilwell were unable to meet its
obligation to
Page 23
purchase the shares of Janus common stock from Mr. Bailey, the Company would be
required to purchase such shares. If the Company were required to purchase
those shares of Janus common stock, it would have a material effect on our
business, financial condition, results of operations and cash flows.
KCSI Elects New Chairman. On December 12, 2000, KCSI announced that
Michael R. Haverty was elected Chairman of the Board of Directors of KCSI
effective January 1, 2001. Mr. Haverty succeeded Landon H. Rowland, who
has resigned as Chairman, but remains on the Board of Directors. Mr.
Haverty retains his current titles of Chief Executive Officer and
President.
KCSI Adds New Director. On August 17, 2000, Byron G. Thompson was named as
a director of KCSI. Mr. Thompson has served as Chairman of the Board of
Country Club Bank, n.a., Kansas City since February 1985. Prior to that
time, Mr. Thompson served as Vice Chairman of Investment Banking at United
Missouri Bank of Kansas City and as a member of the Board of United
Missouri Bancshares, Inc.
Duncan Case Update. In 1998, a jury in Beauregard Parish, Louisiana
returned a verdict against KCSR in the amount of $16.3 million. This case
arose from a railroad crossing accident that occurred at Oretta, Louisiana
on September 11, 1994, in which three individuals were injured. Of the
three, one was injured fatally, one was rendered quadriplegic and the third
suffered less serious injuries.
Subsequent to the verdict, the trial court held that the plaintiffs were
entitled to interest on the judgment from the date the suit was filed,
dismissed the verdict against one defendant and reallocated the amount of
that verdict to the remaining defendants. The resulting total judgment
against KCSR, together with interest, was approximately $27.0 million as of
December 31, 1999.
On November 3, 1999, the Third Circuit Court of Appeals in Louisiana
affirmed the judgment. Subsequently KCSR sought and obtained review of the
case in the Supreme Court of Louisiana. On October 30, 2000 the Supreme
Court of Louisiana entered its order affirming in part and reversing in
part the judgment. The net effect of the Louisiana Supreme Court action
was to reduce the allocation of negligence to KCSR and reduce the judgment,
with interest, against KCSR from approximately $28 million to approximately
$14.2 million (approximately $9.7 million of damages and $4.5 million of
interest), which is in excess of KCSR's insurance coverage of $10 million
for this case. KCSR filed an application for rehearing in the Supreme
Court of Louisiana, which was denied on January 5, 2001. KCSR then sought
a stay of judgment in the Louisiana court. The Louisiana court denied the
stay application on January 12, 2001. KCSR reached an agreement as to the
payment structure of the judgment in this case and payment of the
settlement was made on March 7, 2001.
KCSR had previously recorded a liability of approximately $3.0 million for
this case. Based on the Supreme Court of Louisiana's decision, management
recorded an additional liability of $11.2 million and a receivable in the
amount of $7.0 million representing the amount of the insurance coverage.
This resulted in recording $4.2 million of net operating expense in the
accompanying consolidated financial statements for the year ended December
31, 2000.
Debt Refinancing and Re-capitalization of the Company's Debt Structure.
o During the third quarter of 2000, the Company completed a $200
million private offering of debt securities through its wholly owned
subsidiary, KCSR. The offering, completed pursuant to Rule 144A under
the Securities Act of 1933 in the United States and Regulation S outside
Page 24
the United States, consisted of 8-year Senior Unsecured Notes. The
Notes bear a fixed annual interest rate of 9.5% and are due on October
1, 2008. These Notes contain certain covenants typical of this type of
debt instrument. Net proceeds from the offering of $196.5 million were
used to refinance existing bank term debt, which was scheduled to mature
on January 11, 2001 (see below). Costs related to the issuance of these
notes of approximately $4.1 million were deferred and are being
amortized over the eight-year term of the Notes.
In connection with this refinancing, the Company reported an
extraordinary loss on the extinguishment of the bank term debt due
January 11, 2001. The extraordinary loss was $1.1 million (net of
income taxes of $0.7 million).
On January 25, 2001, the Company filed a Form S-4 Registration Statement
with the Securities and Exchange Commission ("SEC") registering exchange
notes under the Securities Act of 1933. The Company filed Amendment No.
1 to this Registration Statement and the SEC declared this Registration
Statement effective on March 15, 2001, thereby providing the opportunity
for holders of the initial Notes to exchange them for registered notes.
The registration exchange offer expires on April 16, 2001, unless
extended by the Company.
o Also during the third quarter of 2000, Grupo TFM accomplished a
refinancing of approximately $285 million of its Senior Secured Credit
Facility through the issuance of a U.S. Commercial Paper ("USCP")
program backed by a letter of credit. The USCP is a 2-year program for
up to a face value of $310 million. The average discount rate for the
first issuance was 6.54%. This refinancing provides the ability for
Grupo TFM to pay limited dividends.
As a result of this refinancing, Grupo TFM recorded approximately $9.2
million in pretax extraordinary debt retirement costs. KCSI reported
$1.7 million (net of income taxes of $0.1 million) as its proportionate
share of these costs as an extraordinary item.
o In preparation for the Spin-off, the Company re-capitalized its debt
structure in January 2000 through a series of transactions as follows:
Bond Tender and Other Debt Repayment. On December 6, 1999, KCSI
commenced offers to purchase and consent solicitations with respect to
any and all of the Company's outstanding 7.875% Notes due July 1, 2002,
6.625% Notes due March 1, 2005, 8.8% Debentures due July 1, 2022, and 7%
Debentures due December 15, 2025 (collectively "Debt Securities" or
"notes and debentures").
Approximately $398.4 million of the $400 million outstanding Debt
Securities were validly tendered and accepted by the Company. Total
consideration paid for the repurchase of these outstanding notes and
debentures was $401.2 million. Funding for the repurchase of these Debt
Securities and for the repayment of $264 million of borrowings under
then-existing revolving credit facilities was obtained from two new
credit facilities (the "KCS Credit Facility" and the "Stilwell Credit
Facility", or collectively "New Credit Facilities"), each of which was
entered into on January 11, 2000. These New Credit Facilities, as
described further below, provided for total commitments of $950
million.
The Company reported an extraordinary loss on the extinguishment of the
Company's notes and debentures of approximately $5.9 million (net of
income taxes of approximately $3.2 million).
KCS Credit Facility. The KCS Credit Facility provided for a total
commitment of $750 million, comprised of three separate term loans
totaling $600 million and a revolving credit facility available until
January 11, 2006 ("KCS Revolver"). The term loans are comprised of the
Page 25
following: $200 million, which was due January 11, 2001 prior to its
refinancing (see discussion above), $150 million due December 30, 2005
and $250 million due December 30, 2006. The availability under the KCS
Revolver was reduced from $150 million to $100 million on January 2,
2001. Letters of credit are also available under the KCS Revolver up to
a limit of $15 million. Borrowings under the KCS Credit Facility are
secured by substantially all of KCSI's assets and are guaranteed by the
majority of its subsidiaries.
On January 11, 2000, KCSR borrowed the full amount ($600 million) of the
term loans and used the proceeds to repurchase the Debt Securities,
retire other debt obligations and pay related fees and expenses. No
funds were initially borrowed under the KCS Revolver. Proceeds of
future borrowings under the KCS Revolver are to be used for working
capital and for other general corporate purposes. The letters of credit
under the KCS Revolver may be used for general corporate purposes.
Interest on the outstanding loans under the KCS Credit Facility shall
accrue at a rate per annum based on the London interbank offered rate
("LIBOR") or the prime rate, as the Company shall select. Following
completion of the refinancing of the January 11, 2001 term loan
discussed above, each remaining loan under the KCS Credit Facility shall
accrue interest at the selected rate plus an applicable margin. The
applicable margin is determined by the type of loan and the Company's
leverage ratio (defined as the ratio of the Company's total debt to
consolidated earnings before interest, taxes, depreciation and
amortization excluding the equity earnings of unconsolidated affiliates
for the prior four fiscal quarters). Based on the Company's current
leverage ratio, the term loan maturing in 2005 and all loans under the
KCS Revolver have an applicable margin of 2.50% per annum for LIBOR
priced loans and 1.50% per annum for prime rate priced loans. The term
loan maturing in 2006 currently has an applicable margin of 2.75% per
annum for LIBOR priced loans and 1.75% per annum for prime rate based
loans.
The KCS Credit Facility also requires the payment to the banks of a
commitment fee of 0.50% per annum on the average daily, unused amount of
the KCS Revolver. Additionally a fee equal to a per annum rate equal to
0.25% plus the applicable margin for LIBOR priced revolving loans will
be paid on any letter of credit issued under the KCS Credit Facility.
The term loans are subject to a mandatory prepayment with, among other
things:
o 100% of the net proceeds of (1) certain asset sales or other
dispositions of property, (2) the sale or issuance of certain
indebtedness or equity securities and (3) certain insurance
recoveries.
o 50% of excess cash flow (as defined in the KCS Credit Facilities)
The KCS Credit Facility contains certain covenants that, among others,
restrict the Company's ability to:
o incur additional indebtedness,
o incur additional liens,
o enter into sale and leaseback transactions,
o enter into certain transactions with affiliates,
o enter into agreements that restrict the ability to incur liens or pay
dividends,
o make investments, loans, advances, guarantees or acquisitions,
o make certain restricted payments and dividends,
o make other certain indebtedness, or
o make capital expenditures.
Page 26
In addition KCSI is required to comply with specific financial ratios,
including minimum interest expense coverage and leverage ratios. The
KCS Credit Facility also contains certain customary events of default.
These covenants, along with other provisions, could restrict maximum
utilization of the facility. The Company was in compliance with these
various provisions, including the financial covenants, as of December
31, 2000.
In accordance with a provision requiring the Company to manage its
interest rate risk through hedging activity, in 2000 the Company entered
into five separate interest rate cap agreements for an aggregate
notional amount of $200 million expiring on various dates in 2002. The
interest rate caps are linked to LIBOR. $100 million of the aggregate
notional amount provides a cap on the Company's interest rate of 7.25%
plus the applicable spread, while $100 million limits the interest rate
to 7% plus the applicable spread. Counterparties to the interest rate
cap agreements are major financial institutions who also participate in
the New Credit Facilities. The Company believes that the risk of credit
loss from counterparty non-performance is remote.
Issue costs relating to the KCS Credit Facility of approximately $17.6
million were deferred and are being amortized over the respective term
of the loans. In conjunction with the refinancing of the $200 million
term loan previously due January 11, 2001, approximately $1.8 million of
these deferred costs were immediately recognized. After consideration
of amortization and this $1.8 million write-off, the remaining balance
of these deferred costs was approximately $11.3 million at December 31,
2000.
As a result of the debt refinancing transactions discussed above,
extraordinary items totaled $8.7 million (net of income taxes of $4.0
million) for the year ended December 31, 2000.
Stilwell Credit Facility. On January 11, 2000, KCSI also arranged a new
$200 million 364-day senior unsecured competitive Advance/Revolving
Credit Facility ("Stilwell Credit Facility"). KCSI borrowed $125
million under this facility and used the proceeds to retire debt
obligations as discussed above. Stilwell assumed this credit facility,
including the $125 million borrowed thereunder, and upon completion of
the Spin-off, KCSI was released from all obligations thereunder.
Stilwell repaid the $125 million in March 2000.
Dividends Suspended for KCSI Common Stock. During the first quarter of
2000, the Company's Board of Directors announced that, based upon a review
of the Company's dividend policy in conjunction with the New Credit
Facilities discussed above and in light of the anticipated Spin-off, it
decided to suspend common stock dividends of KCSI under the then-existing
structure of the Company. This action complies with the terms and
covenants of the New Credit Facilities. It is not anticipated that KCSI
will make any cash dividend payments to its common stockholders for the
foreseeable future.
Expiration of the Capital Call Related to TFM. In conjunction with the
financing of TFM in 1997, the Company entered into a Capital Contribution
Agreement with Grupo TFM, TMM and the financing institutions of TFM. This
agreement extended for a three year period through June 30, 2000 and
outlined the terms whereby the Company could be responsible for
approximately $74 million of a capital call if certain performance
benchmarks outlined in the agreement were not met by TFM. In accordance
with its terms, the agreement has terminated.
New Compensation Program. In connection with the Spin-off, KCSI adopted a
new compensation program (the "Compensation Program") under which (1)
certain senior management employees were granted performance based KCSI
stock options and (2) all management employees and those directors of KCSI
who are not employees (the "Outside Directors") became eligible to
purchase a
Page 27
specified number of KCSI restricted shares and were granted a specified number
of KCSI stock options for each restricted share purchased.
The performance stock options have an exercise price of $5.75 per share,
which was the mean trading price of KCSI common stock on the New York Stock
Exchange (the "NYSE") on July 13, 2000. The performance stock options
vest and become exercisable in equal installments as KCSI's stock price
achieves certain thresholds and after one year following the grant date.
All performance thresholds have been met for these performance stock
options and all will be exercisable on July 13, 2001. These stock options
expire at the end of 10 years, subject to certain early termination
events. Vesting will accelerate in the event of death, disability, or a
KCSI board-approved change in control of KCSI.
The purchase price of the restricted shares, and the exercise price of the
stock options granted in connection with the purchase of restricted shares,
is based on the mean trading price of KCSI common stock on the NYSE on the
date the employee or Outside Director purchased restricted shares under the
Compensation Program. Each eligible employee and Outside Director was
allowed to purchase the restricted shares offered under the Compensation
Program on one date out of a selection of dates offered. With respect to
management employees, the number of shares available for purchase and the
number of options granted in connection with shares purchased were based on
the compensation level of the employees. Each Outside Director was granted
the right to purchase up to 3,000 restricted shares of KCSI, with two KCSI
stock options granted in connection with each restricted share purchased.
Shares purchased are restricted from sale and the options are not
exercisable for a period of three years for senior management and the
Outside Directors and two years for other management employees. KCSI
provided senior management and the Outside Directors with the option of
using a sixty-day interest-bearing full recourse note to purchase these
restricted shares. These loans accrued interest at 6.49% per annum and
were all fully repaid by September 11, 2000.
Management employees purchased 475,597 shares of KCSI restricted stock
under the Compensation Program and 910,697 stock options were granted in
connection with the purchase of those restricted shares. Outside Directors
purchased a total of 9,000 shares of KCSI restricted stock under the
Compensation Program and 18,000 KCSI stock options were granted in
connection with the purchase of those shares.
Burlington Northern Santa Fe Railway ("BNSF") and Canadian National Railway
("CN") Merger. In December 1999, BNSF and CN announced their intention to
combine the two railroad companies. In March 2000, however, this
combination was delayed when the STB issued a 15-month moratorium on
railroad mergers until the STB can adopt new rules governing merger
activities. In July 2000 the STB's moratorium was upheld by the United
States Court of Appeals for the District of Columbia. Subsequent to the
court's decision, BNSF and CN announced the termination of their proposed
merger.
Norfolk Southern Haulage and Marketing Agreement. In May 2000, KCSR and
Norfolk Southern entered into an agreement under which KCSR provides
haulage services for intermodal traffic between Meridian and Dallas and
receives fees for such services from Norfolk Southern. Under this
agreement, Norfolk Southern may quote rates and enter into transportation
service contracts with shippers and receivers covering this haulage traffic.
Page 28
SIGNIFICANT DEVELOPMENTS
In addition to the recent developments mentioned above, consolidated
operating results from 1998 to 2000 were affected by the following
significant developments.
Repurchase of Stock. During 1999, the Company repurchased 230,000 shares
of its common stock from The DST Systems, Inc. Employee Stock Ownership
Plan (the "DST ESOP") in a private transaction. The DST ESOP has
previously sold to the Company other shares of KCSI stock, which were part
of the DST ESOP's assets as a result of DST's participation in the
Company's employee stock ownership plan prior to DST's initial public
offering in 1995.
The shares were purchased at a price equal to the closing price per share
of KCSI's common stock on the New York Stock Exchange on February 24,
1999. The shares are held in treasury for use in connection with the
Company's various employee benefit plans.
These repurchases are part of the 33 million share repurchase plan that the
Board authorized through two programs - the 1995 program for 24 million
shares and the 1996 program for 9 million shares. Including this
transaction, the Company has repurchased a total of approximately 28.1
million shares under these programs. During 2000 and 1998, there were no
repurchases under these programs.
KCSR Lease of 50 New Locomotives. During 1999, KCSR reached an agreement
with General Electric ("GE") for the purchase of 50 new GE 4400 AC
Locomotives. This agreement was subsequently assigned to Southern
Capital. The addition of these state-of-the-art locomotives has provided
operating cost reductions resulting from decreased maintenance costs and
improved fuel efficiency, better fleet utilization, increased hauling power
eliminating the need for certain helper service, and higher reliability and
efficiency resulting in fewer train delays and less congestion. Southern
Capital, through its existing variable rate credit lines, financed the
purchase of these new locomotives, and leases them to KCSR under operating
leases. Rates on these operating leases vary based on the Company's credit
rating. As a result of this transaction, 2000 operating lease expense
increased approximately $7.3 million compared to 1999. Delivery of these
locomotives was completed in December 1999.
Panama Canal Railway Company. In January 1998, the Republic of Panama
awarded KCSR and its joint venture partner, Mi-Jack Products, Inc., the
concession to reconstruct and operate the Panama Canal Railway. The
47-mile railroad runs parallel to the Panama Canal and, upon completion of
the reconstruction, will provide international shippers with an important
complement to the Panama Canal. In November 1999, PCRC completed the
financing arrangements for this project with the International Finance
Corporation ("IFC"), a member of the World Bank Group. The financing is
comprised of a $5 million investment from the IFC and senior loans in the
aggregate amounts of up to $45 million. The investment of $5 million from
the IFC is comprised of non-voting preferred shares, paying a 10%
cumulative dividend. The preferred shares may be redeemed at the option of
IFC any year after 2008 at the lower of i) a net cumulative internal rate
of return of 30%, or ii) eight-times earnings before interest, income
taxes, depreciation and amortization (average of two consecutive years)
calculated in proportion to the IFC's percentage ownership in PCRC. Under
certain limited conditions, the Company is a guarantor for up to $15
million of cash deficiencies associated with project completion.
Additionally, if the Company or its partner terminates the concession
contract without the consent of the IFC, the Company is a guarantor for up
to 50% of the outstanding senior loans. The total cost of the
reconstruction project is estimated to be $75 million with an equity
commitment from KCSR not to exceed $16.5 million (excluding the guarantees
described above). Reconstruction of PCRC's right-
Page 29
of-way is expected to be complete in 2001 with commercial operations to
begin immediately thereafter.
Access to Geismar, Louisiana Industrial Corridor. In 1999, the STB
unanimously approved the merger of CN and Illinois Central ("IC")
(collectively referred to as "CN/IC"). The STB issued its written approval
with an effective date of June 24, 1999, at which time the CN was permitted
to exercise control over IC's operations and assets. As part of this
approval, the STB imposed certain restrictions on the merger including a
condition requiring that the CN/IC grant KCSR access to three shippers in
the Geismar, Louisiana industrial area: Rubicon, Inc. ("Rubicon"), Uniroyal
Chemical Company, Inc. ("Uniroyal") and Vulcan Materials Company
("Vulcan"). These are in addition to the three Geismar shippers (BASF
Corporation -"BASF", Shell Chemical Company -"Shell", and Borden Chemical
and Plastics -"Borden") to which KCSR obtained access as a result of the
strategic alliance agreement with CN/IC discussed below. Access to these
six shippers began on October 1, 2000 and traffic immediately began to move
on KCSR's lines. Management believes that this access will provide
increasing revenue opportunities in the future.
Automotive and Intermodal facility at the former Richards-Gebaur Airbase.
During 1999, KCSR entered into a fifty-year lease with the City of Kansas
City, Missouri to establish the Kansas City International Freight Gateway
("IFG"), an automotive and intermodal facility at the former Richards-Gebaur
Airbase, which is located adjacent to KCSR's main rail line. The Federal
Aviation Administration ("FAA") officially approved the closure of the
existing airport in January 2000, and improvements began immediately.
Through an agreement with Mazda, KCSR developed an automotive distribution
facility to handle Mazda vehicles manufactured under an agreement with Ford
Motor Company at Ford's Claycomo facility, which is located in Kansas
City. This automotive facility became operational in April 2000 for the
movement of Mazda vehicles. Intermodal and expanded automotive operations
at the facility are expected to be complete in 2002.
The Company expects that the new facility will provide additional capacity
as well as a strategic opportunity to serve as an international trade
facility. The plan is for this facility to serve as a U.S. customs
pre-clearance processing facility for freight moving along the NAFTA
corridor. KCSR expects this to alleviate some of the congestion at the
borders, resulting in more fluid service to customers throughout the rail
industry.
KCSR expects to spend a total of approximately $20 million for site
improvements and infrastructure at this facility. KCSR is funding these
improvements using operating cash flows and existing credit lines. Lease
payments are expected to approximate $665,000 per year and will be adjusted
for inflation based on agreed-upon formulas. Management believes that with
the addition of this facility KCSR is positioned to increase its automotive
and intermodal revenue base by attracting additional NAFTA traffic.
Strategic Alliance with Canadian National and Illinois Central. In 1998,
KCSR, CN and IC announced a 15-year strategic alliance aimed at
coordinating the marketing, operations and investment elements of
north-south rail freight transportation. The alliance did not require STB
approval and was effective immediately. This alliance connects points in
Canada with the major U.S. Midwest markets of Detroit, Chicago, Kansas City
and St. Louis, as well as key Southern markets of Memphis, Dallas and
Houston. It also provides U.S. and Canadian shippers with access to
Mexico's rail system through connections with Tex Mex and TFM.
In addition to providing access to key north-south international and
domestic U.S. traffic corridors, the alliance with CN/IC is intended to
increase business primarily in the automotive and intermodal markets and
also in the chemical and petroleum and paper and forest products
Page 30
markets. This alliance has provided opportunities for revenue growth and
positioned KCSR as a key provider of rail service for NAFTA trade.
Under a separate access agreement, KCSR and CN formed a management group
made up of representatives from both railroads to develop plans for the
construction of new facilities to support business development, including
investments in automotive, intermodal and transload facilities at Memphis,
Dallas, Kansas City and Chicago. Under the terms of this access agreement,
KCSR extended the market area of its rail system in the Gulf area and
gained access through a haulage agreement to additional chemical customers
in the Geismar, Louisiana industrial area, one of the largest chemical
production areas in the world. Prior to this access agreement, the Company
received preliminary STB approval for construction of a nine-mile rail line
from KCSR's main line into the Geismar industrial area, which the chemical
manufacturers requested to be built to provide them with competitive rail
service. The agreement between KCSR and CN does not preclude the option of
the Geismar build-in by KCSR provided that it is able to obtain the
requisite approvals. During 1999, however, the Company wrote-off
approximately $3.6 million of costs related to the Geismar build-in that
had previously been capitalized.
Voluntary Coordination Agreement