SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
December 11, 2001
KANSAS CITY SOUTHERN INDUSTRIES, INC.
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(Exact name of company as specified in its charter)
DELAWARE 1-4717 44-0663509
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(State or other jurisdiction (Commission file (IRS Employer
of incorporation) number) Identification Number)
114 West 11th Street, Kansas City, Missouri 64105
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code:
(816) 983-1303
Not Applicable
(Former name or former address if changed since last report)
Item 5. Other Events
Provisions included in the Private Securities Litigation Reform Act of 1995
provide a "safe harbor" for forward-looking statements. Kansas City Southern
Industries, Inc. (the "Company") filed a Current Report on Form 8-K dated
November 12, 1996 (File No. 1-4717) and an amendment, Form 8-K/A dated June 3,
1997 (File No. 1-4717), which listed cautionary statements identifying
significant factors that could cause the Company's actual operating results to
materially differ from those projected in any forward-looking statements. The
cautionary statements included in Exhibit 99.1 to this Current Report on Form
8-K are intended to supersede those included in the previously filed Form 8-K
dated November 12, 1996 and its amendment on Form 8-K/A dated June 3, 1997. The
cautionary statements included as Exhibit 99.1 to this Current Report on Form
8-K reflect the Company's operations, which are principally in rail
transportation subsequent to the spin-off of Stilwell Financial Inc. in July
2000. These cautionary statements identify significant factors that could cause
the Company's actual operating results to materially differ from those projected
in any forward-looking statements, whether oral or written, made by, or on
behalf of, the Company.
Item 7. Financial Statements and Exhibits
(c) Exhibits
Exhibit No. Document
(99) Additional Exhibits
99.1 Cautionary statements for purposes of the "safe harbor"
provisions of the Private Securities Litigation Reform
Act of 1995 are attached hereto as Exhibit 99.1
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this Report to be signed on its behalf by the undersigned
hereunto duly authorized.
Kansas City Southern Industries, Inc.
Date: December 11, 2001 By: /s/ Louis G. Van Horn
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Louis G. Van Horn
Vice President and Comptroller
(Principal Accounting Officer)
EXHIBIT 99.1
CAUTIONARY STATEMENTS WITH RESPECT TO THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements when such statements are accompanied by
meaningful cautionary statements. The management of Kansas City Southern
Industries, Inc. ("Company" or "KCSI") may occasionally make forward-looking
statements and estimates (such as forecasts and projections) of the Company's
future performance or statements of management's plans and objectives. These
forward-looking statements may be contained in, among other things, filings with
the Securities and Exchange Commission and press releases made by the Company,
or may be made orally by the officers of the Company. Actual results of the
Company's operations could materially differ from those indicated in the
forward-looking statements. Therefore, no assurances can be given that the
estimates or comments indicated in such forward-looking statements will be
realized. Significant factors that could cause the Company's actual results to
differ from those indicated in the forward-looking statements include, but are
not limited to, the factors delineated below. Persons evaluating such
forward-looking comments should carefully consider the following factors, and
any amendments or supplements hereto, in addition to the other information
contained in the Company's public documents.
Effective October 1, 2001 the Gateway Western Railway Company ("Gateway
Western") was merged into The Kansas City Southern Railway Company ("KCSR").
Discussions of KCSR in the following should include consideration of the
operations and operating results of Gateway Western.
Economy and weather - We may be adversely affected by changes in general
economic, weather or other conditions
Our operations may be adversely affected by changes in the economic conditions
of the industries and geographic areas that produce and consume the freight that
is transported by our primary subsidiary, The Kansas City Southern Railway
Company ("KCSR"). The relative strength or weakness of the United States economy
as well as various international and regional economies also affects the
businesses included in our operations. Our foreign unconsolidated affiliates,
Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"- a Mexican
equity investment) and Panama Canal Railway Company ("PCRC" - an equity
investment with operations in Panama) and PCRC's consolidated subsidiary,
Panarail Tourism Company ("PTC") are more directly affected by their respective
local economy. Historically, a stronger economy has resulted in improved results
for our rail transportation operations. Conversely, when the economy has slowed,
results have been less favorable. Our revenues may be affected by prevailing
economic conditions and, if an economic slowdown or recession occurs in our key
markets, the volume of rail shipments is likely to be reduced. Additionally, our
operations may be affected by adverse weather conditions. A weak harvest in the
midwest, for example, may substantially reduce the volume of business we
traditionally handle for our agricultural products customers. Additionally, many
of the goods and commodities we carry experience cyclical demand. Our results of
operations can be expected to reflect this cyclical demand because of the
significant fixed costs inherent in railroad operations. Our operations may also
be affected by natural disasters or terrorist acts. Significant reductions in
our volume of rail shipments due to economic, weather or other conditions could
have a material adverse effect on our business, financial condition and results
of operations.
Execution of Business Strategy--Our operating results and financial condition
will depend on execution of our business strategy. If we fail to execute our
business strategy, it may negatively impact our financial condition
Our operating results and financial condition will depend in large measure on
our ability to successfully execute our business strategy. Our business strategy
includes capitalizing on North America Free Trade Agreement ("NAFTA") trade to
generate traffic and increase revenues, exploiting our domestic opportunities,
establishing new and expanding existing strategic alliances and marketing
agreements, and providing superior customer service. Successful implementation
of this strategy depends on many factors, including factors beyond our control.
There can be no assurance that we will be able to implement our strategy on a
timely basis or at all or that, if implemented, such strategy will achieve the
desired results.
Significant Competition--We compete against other railroads, truck carriers and
other modes of transportation. If we are unable to compete successfully, it
could have a material adverse effect on our business, financial condition and
results of operations
Our rail operations compete against other railroads, many of which are much
larger and have significantly greater financial and other resources than us.
Since 1994, there has been significant consolidation among major North American
rail carriers. As a result of this consolidation, the railroad industry is now
dominated by a few "mega-carriers." We believe that our revenues were negatively
affected by the merger of Burlington Northern, Inc. and Santa Fe Pacific
Corporation (collectively "BNSF") in 1995 and the merger of the Union Pacific
Railroad Company ("UP") and the Southern Pacific Rail Corporation ("SP") in
1996, which both led to diversions of rail traffic away from our lines. We also
regard the larger western railroads (BNSF and UP), in particular, as significant
competitors to our operations and prospects because of their substantial
resources.
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 trucking industry generally is more cost
and transit-time competitive than railroads for short-haul distances. We are
also subject to competition from barge lines and other maritime shipping.
Mississippi and Missouri River barge traffic, among others, compete with us in
the transportation of bulk commodities such as grains, steel and petroleum
products.
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. Continuing
competitive pressures and declining margins could have a material adverse effect
on our business, financial condition and results of operations.
Dependence on Joint Venture Partners and Third Parties--Our business strategy,
operations and growth rely significantly on joint ventures and other strategic
alliances
Operation of our integrated rail network and our plans for growth and expansion
rely significantly on joint ventures and other strategic alliances. Two
strategically significant railroad companies, The Texas Mexican Railway Company
("Tex Mex") and TFM, S.A. de C.V. ("TFM"), are companies in which we hold a
minority interest through Mexrail, Inc. ("Mexrail") and Grupo TFM, respectively.
As a minority shareholder, we are
not in a position to control operations, strategies or financial decisions
without the concurrence of Transportacion Maritima Mexicana, S.A. de C.V.
("TMM"), the largest shareholder in each of Mexrail and Grupo TFM. In addition,
conflicts may arise between our business objectives and those of TMM. Resolution
of any such conflicts in our favor may be difficult or impossible given our
minority ownership position. We do maintain supermajority rights, which provide
us with the ability to block certain actions proposed by TMM at Grupo TFM. Our
interests in these companies are subject to restrictions on disposition.
Our operations are also dependent on interchange, trackage rights, haulage
rights and marketing agreements with other railroads and third parties that
enable us to exchange traffic and utilize trackage we do not own. These
agreements extend our network and provide strategically important rail links to
Mexico, the northern midwest United States and Canada. Our ability to provide
comprehensive rail service to our customers depends in large part upon our
ability to maintain these agreements with other railroads and third parties. The
termination of these agreements could adversely affect our business, financial
condition and results of operations. There can be no assurance that these
agreements will be renewed after their expiration and the failure to renew any
of them could adversely affect our business, financial condition and results of
operations. In addition, we are dependent in part upon the financial health and
efficient performance of other railroads. For example, much of Tex Mex's traffic
moves over the UP's lines via trackage rights, and a significant portion of our
grain shipments originate with I&M Rail Link, LLC pursuant to our marketing
agreement with it. BNSF is our largest partner in the interchange of rail
traffic. There can be no assurance that we will not be materially affected
adversely by operational or financial difficulties of other railroads.
Dependence on Key Personnel--Our success will depend upon our ability to retain
and attract qualified management personnel
Our operations and the continued execution of our business strategy are
dependent upon the continued employment of our senior management team.
Recruiting, motivating and retaining qualified management personnel,
particularly those with expertise in the railroad industry, are vital to our
operations and ultimate success. There is substantial competition for qualified
management personnel and there can be no assurance that we will be able to
attract or retain qualified personnel. The loss of key personnel or the failure
to hire qualified personnel could materially adversely affect our business and
financial results.
Risks of Investments in Mexico--Our Mexican investment subjects us to political
and economic risks
We have invested approximately $300 million in Grupo TFM. Our investment in
Mexico involves a number of risks. The Mexican government exercises significant
influence over the Mexican economy and its actions could have a significant
impact on TFM. Our Mexican investment may also be adversely affected by currency
fluctuations, price instability, inflation, interest rates, regulations,
taxation, cultural differences, social instability, labor disputes and other
political, social and economic developments in or affecting Mexico. Moreover,
TFM's commercial success is heavily dependent on expected increases in
U.S.-Mexico trade and will be strongly influenced by the effect of NAFTA on such
trade. Downturns in either of the U.S. or Mexican economies or in trade between
the United States and Mexico would be likely to adversely impact TFM's business,
financial condition and results of operations. There can be no assurances that
the various risks associated with operating in Mexico can be effectively and
economically mitigated by TFM. Additionally, no assurances can be given that the
value of these investments will not become impaired.
TFM holds the concession to operate Mexico's Northeast Rail Lines (the
"Concession") for 50 years, beginning in 1997, and, subject to certain
conditions, has a 50-year extension option. 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. Revocation or termination of the
Concession would materially adversely affect TFM's operations and its ability to
make payments on its debt. Further, even though TFM would be entitled to
compensation for a statutory appropriation or temporary seizure, any such
compensation might be insufficient to cover TFM's losses. The loss of the
Concession would materially adversely impact TFM's business, financial condition
and results of operations which, in turn, would materially adversely impact the
value of and return on our investment in Grupo TFM and our ability to market our
U.S. operations on the basis of our access to Mexican locations.
Currently, Grupo TFM is limited in the amount of dividends it may pay because of
bond covenants. An absence of dividends from Grupo TFM will, or limited
dividends may, negatively impact our ability to obtain a current cash return on
our investment in Grupo TFM.
Risks of Investment in Panama-Our Panamanian investments subject us to political
and economic risk
We have entered into a joint venture with Mi-Jack Products, Inc. ("Mi-Jack" - a
private U.S. company located in Illinois), through which we own 50% of the
common stock of the Panama Canal Railway Company, which owns all of the common
stock of Panarail Tourism Company. We have invested approximately $12.5 million
in the PCRC and approximately $1 million in PTC. PCRC operates a railroad
between Panama City and Colon, Panama, while PTC operates a tourist and commuter
railway service in conjunction with and over the lines of the PCRC. Our
investments in PCRC and PTC have risks associated with operating in Panama,
including, among others, cultural differences, varying labor and operating
practices, political risk and differences between the U.S. and Panamanian
economies. There can be no assurances that the risks associated with operating
in Panama can be effectively and economically mitigated by PCRC or PTC.
Additionally, no assurances can be given that the value of our investments in
PCRC and PTC will not become impaired. Further, we are, under certain limited
conditions, a guarantor for up to $15 million of cash deficiencies associated
with PCRC and, if PCRC terminates the concession contract without the consent of
the International Finance Corporation, a guarantor for up to 50% of the
outstanding senior loans of PCRC. The senior loans had an outstanding balance of
approximately $45 million at September 30, 2001.
Additional Capital Investment in TFM--We may be required to make additional
investments in TFM
On or after October 31, 2003, the Mexican government has the option to sell its
20% interest in TFM (1) through a public offering or (2) to Grupo TFM at the
initial share price paid by Grupo TFM plus interest computed at the Mexican Base
Rate (the Unidades de Inversion ("UDI") published by Banco de Mexico). In the
event that Grupo TFM does not purchase the Mexican government's 20% interest in
TFM, the Mexican government may require TMM and us, or either TMM or us alone,
to purchase its interest. We and TMM have cross indemnities in the event the
Mexican government requires only one of us 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 we were required to purchase the Mexican government's
interest in TFM and TMM could not meet its obligations under the
cross-indemnity, then we would be obligated to pay the total purchase price for
the Mexican government's interest. If we and
TMM, or either us or TMM alone, had been required to purchase the Mexican
government's 20% interest in TFM as of September 30, 2001, the total purchase
price would have been approximately $496 million.
Fuel Costs and Shortages--We are vulnerable to increases in fuel costs and
decreases in fuel supplies. Any significant increase in the cost of fuel, or
severe disruption of fuel supplies, could have a material adverse effect on our
business, results of operations and financial condition
We incur substantial fuel costs in our railroad operations. During the
three-year period ended December 31, 2000, locomotive fuel expenses represented
an average of 7.9% of KCSR's total operating costs. Fuel costs are affected by
traffic levels, efficiency of operations and equipment, and petroleum market
conditions. The supply and cost of fuel is subject to market conditions and is
influenced by numerous factors beyond our control, including general economic
conditions, world markets, government programs and regulations and competition.
Fuel prices increased significantly in 2000 and represented 9.7% of total KCSR
operating costs in 2000 and approximately 9.3% of total KCSR operating costs for
the nine months ending September 30, 2001. We attempt to minimize the effects of
fuel price fluctuations through forward purchase contracts, but cannot guarantee
that those arrangements will be beneficial to us. Any significant increase in
the cost of fuel could have a material adverse effect on our business, results
of operations and financial condition. Our operations, as well as those of our
competitors, could also be affected by any limitation in the fuel supply or by
any imposition of mandatory allocation or rationing regulations. In the event of
a severe disruption of fuel supplies resulting from supply shortages, political
unrest, war or otherwise, the operations of rail and truck carriers, including
us, could be adversely affected.
Concentration of Client Base--One of our coal customers accounts for
approximately 12%-13% of KCSR's total revenues
Southwestern Electric Power Company ("SWEPCO"), our largest coal customer,
accounted for approximately 64% of our coal revenues and 12% of KCSR's total
revenues for the year ending December 31, 2000 and approximately 13% of KCSR's
total revenues for the nine months ended September 30, 2001. The loss of all or
a significant part of SWEPCO's business or a service outage at one or more of
SWEPCO's facilities could materially adversely effect our financial condition
and results of operations.
Labor Relations; Reliance on Unionized Labor--We are subject to extensive
railroad industry regulation and rely upon unionized labor
Labor relations in the U.S. railroad industry are subject to extensive
governmental regulation under the Railway Labor Act ("RLA"). Railroad industry
personnel are covered by the Railroad Retirement Act ("RRA") instead of the
Social Security Act and by the Federal Employers' Liability Act ("FELA") rather
than state workers' compensation systems. These federal labor regulations are
often more burdensome and expensive than regulations governing other industries
and may place us at a competitive disadvantage relative to other industries that
are not subject to these regulations.
Approximately 84% of the employees of KCSR are covered under various collective
bargaining agreements. Periodically, the collective bargaining agreements with
the various unions become eligible for renegotiation. In 1996, national labor
contracts governing 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. A new labor
contract was reached with the Brotherhood of Maintenance of Way Employees
effective May 31, 2001. Formal negotiations to enter into new agreements are in
progress with the remaining unions and the 1996 labor contracts will remain in
effect until new agreements are reached. Unions representing certain former
Gateway Western employees are operating under 1994 contracts and are currently
in negotiations to extend these contracts. We have reached new agreements with
all but one union representing former employees of MidSouth Corporation, which
was merged into KCSR on January 1, 1994. Discussions with this union are
ongoing.
We may be subject to work stoppages in the future as a result of labor disputes
and may be subject to terms and conditions in amended or future labor agreements
that could have a material adverse affect on our results of operations,
financial position and cash flows. Moreover, because such agreements are
generally negotiated on an industry-wide basis, determination of the terms and
conditions of future labor agreements could be beyond our control. Railroads
continue to be restricted by certain remaining restrictive work rules and are
thus prevented from achieving optimum productivity with existing technology and
systems.
Regulation - We are subject to regulation by federal, state and local regulatory
agencies. Our failure to comply with various federal, state and local
regulations could have a material adverse effect on our business, financial
conditions and results of operations
In addition to safety, health and other regulations, generally our U.S. rail
subsidiaries, like other rail common carriers, are subject to regulation by the
Surface Transportation Board, the Federal Railroad Administration, the
Occupational Safety and Health Administration, state departments of
transportation and other state and local regulatory agencies. Government
regulation of the railroad industry is a significant determinant of the
competitiveness and profitability of railroads. While deregulation of rates and
services in the United States has substantially increased the flexibility of
railroads to respond to market forces, the deregulated environment has also
resulted in highly competitive rates. Material noncompliance by us with these
various regulatory requirements or changes in regulation of the industry through
legislative, administrative, judicial or other action could have a material
adverse effect on our business, financial condition and results of operations,
including limitations on our operating activities until compliance with
applicable requirements is completed.
Environmental - Environmental liabilities could require us to incur material
costs and temporarily suspend any operations that are found to violate
environmental laws
Our operations are subject to extensive federal, state and local environmental
laws and regulations concerning, among other things, emissions to the air,
discharges to waters, waste management, hazardous substance transportation,
handling and storage, decommissioning of underground storage tanks and soil and
groundwater contamination. Those laws and regulations can (1) impose substantial
fines and criminal sanctions for violations, (2) require us to upgrade equipment
or make operational changes to limit pollution emissions or decrease the
likelihood of accidental hazardous substance releases, or (3) temporarily
prohibit us from conducting operations if those operations violate applicable
requirements. We incur, and expect to continue to incur, significant
environmental compliance costs, including, in particular, costs necessary to
maintain compliance with requirements governing our chemical and hazardous
material shipping operations, our refueling operations and our repair
facilities.
Many of our current and former properties are or have been used for industrial
purposes, including, for example, hazardous material storage, waste disposal and
treatment, foundry operations, drum reconditioning services and chemical
treatment of wood products. Accordingly, we also are subject to potentially
material
liabilities relating to the investigation and cleanup of contaminated
properties, and to claims alleging personal injury or property damage as the
result of exposures to, or releases of, hazardous substances. Such liabilities
could relate to properties that we owned or operated in the past, as well as any
of our currently owned or operated properties. Such liabilities also could
relate to third-party sites to which we or our predecessors sent waste for
treatment or disposal, or which otherwise were affected by our operations. For
example, we are conducting investigation and cleanup activities at several
properties which we own or which we or our predecessors owned or operated in the
past. We also are investigating and remediating several third-party sites that
were affected by spills from our rail car operations and have been identified as
a potentially responsible party at several third-party disposal sites to which
we sent waste and other materials in the past. In addition, we are a defendant
in a class action lawsuit alleging personal injuries and property damage from a
chemical rail car explosion in 1995.
Although we have recorded liabilities for estimated environmental remediation
and other environmental costs, actual expenditures or liabilities could exceed
estimated amounts and could have a material adverse effect on our consolidated
results of operations or financial position. New laws and regulations, stricter
enforcement of existing requirements, new spills, releases or violations or the
discovery of previously unknown contamination could require us to incur costs or
become the basis for new or increased liabilities that could have a material
adverse effect on our business, results of operations or financial condition.
Possible Catastrophic Loss and Liability; Service Interruption--We may suffer a
catastrophe, collision, property loss or service interruption
The operation of any railroad carries with it an inherent risk of catastrophe,
collision and property loss. In the course of train operations, service
interruptions, derailments, spills, explosions, leaks, other environmental
events, cargo loss or damage and business interruption resulting from adverse
weather conditions or natural phenomena could result in loss of revenues,
increased liabilities or increased costs. Significant environmental mishaps can
cause serious bodily injury, death and extensive property damage, particularly
when such accidents occur in heavily populated areas. We maintain insurance
(including self-insurance) consistent with industry practice against
accident-related risks involved in the operation of our business. However, there
can be no assurance that such insurance would be sufficient to cover the cost of
damages suffered by us or damages to others or that such insurance will continue
to be available at commercially reasonable rates. Moreover, our insurance
coverage for events occurring prior to 1996 did not extend to punitive damage
awards, which are increasingly being levied in civil cases related to
environmental accidents. Further, there can be no assurance that any accident or
natural disaster would not cause a significant interruption in our operations or
materially adversely affect our business, financial condition and results of
operations.
Impact of Utility Deregulation on Coal Shipments--Utility industry deregulation
may reduce our coal freight revenues or margins
Historically, coal has been an important commodity handled by us. In 2000 coal
revenues comprised approximately 20% of KCSR's total carload revenues, all of
which result from deliveries to utility customers. The utility industry is
undergoing a process of deregulation which will likely cause utilities to become
more competitive and thus more aggressive in negotiating with coal
transportation companies to reduce costs. This could create downward pressure on
utility coal transportation rates and increase service requirements.
Additionally, there can be no assurance that negotiated coal transportation
rates will remain at current levels in the future. Continuing competitive
pressures, lower coal transportation rates and declining margins could have a
material adverse effect on our business, financial condition and results of
operations.
Utilities will also have greater flexibility in selling electricity to, and
buying electricity from, other regional markets. This could have a material
adverse effect on our utility customers if such customers are not able to
compete effectively with new utility companies that enter their respective
markets. As a result, the pattern of coal shipments in a particular market may
shift to an alternative utility company that does not use us to deliver its coal
requirements. While we are working to help our utility customers remain
competitive in this evolving environment, changes in the pattern of coal
movements could have a material adverse impact on our business, financial
condition and results of operations.
Substantial Leverage--Our substantial leverage could adversely affect our
ability to fulfill our obligations under our various debt instruments and
operate our business
We are highly leveraged and will have significant debt service obligations. As
of September 30, 2001, we had total debt of approximately $684.8 million
(excluding unused commitments) and total stockholders' equity of approximately
$665.0 million, giving us a total debt to equity ratio of 1.03 to 1.00. Our
interest expense for the nine months ended September 30, 2001 was $42.9 million.
In addition, we may incur additional debt from time to time to finance
acquisitions, investments or capital expenditures or for other purposes, subject
to the restrictions contained in our various credit agreements.
Our high level of debt could have important consequences, including the
following:
o we may have difficulty borrowing money in the future for working capital,
capital expenditures or other purposes;
o we will need to use a large portion of the money earned by us and our
subsidiaries to pay principal and interest on our debt, which will reduce
the amount of money available to us to finance our operations and other
business activities;
o some of our debt has a variable rate of interest, which exposes us to
the risk of increased interest rates;
o we have a much higher level of debt than some of our
competitors, which may put us at a competitive disadvantage;
o our debt level makes us more vulnerable to general economic downturns
and adverse industry conditions;
o our debt level could reduce our flexibility in planning for, or
responding to, changing business and economic conditions, including
increased competition in the railroad industry;
o our level of debt may prevent us from raising the funds necessary to
repurchase all of certain senior notes that could be tendered to us upo
the occurrence of a change of control, which would constitute an event
of default; and
o our failure to comply with the financial and other restrictive covenants
in our debt instruments, which, among other things, require us to
maintain specified financial ratios and limit our ability to incur debt
and sell assets, could result in an event of default that, if not cured or
waived, could have a material adverse effect on our business or prospects.
Ability to Service Debt--Servicing our debt requires a significant amount of
cash, and our ability to generate cash depends on many factors beyond our
control
We expect to obtain the money to make payments on and to refinance our debt and
to fund working capital, capital expenditures and other general corporate
requirements in part from our operations and the operations of our subsidiaries.
Our ability to generate cash is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. We cannot be certain that the cash earned by us and our subsidiaries
will be sufficient to allow us to pay principal and interest on our debt and
meet our other obligations or to fund our other liquidity needs. If we do not
have enough cash we may be required to take actions such as reducing or delaying
capital expenditures, selling assets, restructuring or refinancing all or part
of our existing debt or seeking additional equity capital. We cannot assure you
that any of these remedies can be effected on commercially reasonable terms or
at all. In addition, the terms of existing or future debt agreements may
restrict us from adopting any of these alternatives.
Additional Borrowing Capacity--Despite our substantial leverage, we will be able
to incur more debt, which may intensify the risks associated with our
substantial leverage, including our ability to service our debt
Our existing credit agreements and certain of our other debt instruments permit
us, subject to certain conditions, to incur a significant amount of additional
debt. In addition, as of September 30, 2001, we had $65 million remaining
available under our revolving credit facility. If we incur additional debt, the
risks associated with our substantial leverage, including our ability to service
our debt, could intensify.
Restrictive Covenants in our Debt Instruments--Restrictions imposed by certain
of our debt instruments may limit our ability to finance future operations or
capital needs or engage in other business activities that may be in our interest
Certain of our debt instruments impose, and the terms of any future debt may
impose, operating and other restrictions on us. These restrictions affect, and
in many respects limit or prohibit, among other things, our ability to:
o incur additional debt;
o pay dividends or make distributions;
o repurchase equity interests;
o redeem subordinated debt;
o make other restricted payments, including, without imitation,
investments;
o sell or otherwise dispose of assets, including capital stock of
subsidiaries;
o create liens;
o enter into agreements that restrict dividends from subsidiaries;
o merge or consolidate; and
o enter into transactions with affiliates.
In addition, certain of our term debt instruments include other and more
restrictive covenants that prohibit us from prepaying our other debt while debt
under these term debt instruments is outstanding. There are also certain
financial and operating results that we must achieve as well as maintaining
compliance with specified financial ratios. Our ability to comply with these
ratios may be affected by events beyond our control.
These restrictions could (i) limit our ability to plan for or react to market
conditions or meet capital needs or otherwise restrict our activities or
business plans and (ii) adversely affect our ability to finance our operations,
acquisitions, investments or other capital needs or to engage in other business
activities that would be in our interest. A breach of any of these restrictive
covenants or our inability to comply with the required financial ratios could
result in default under certain of these debt instruments and cause acceleration
of principal and interest payments and allow termination of further financing
commitments. If we are unable to repay the borrowings when due, the lenders
under these debt instruments would have the right to proceed against the
collateral granted to them to secure the debt. There can be no assurance that we
would be able to secure the necessary funds to meet the acceleration provisions
in an event of default.
Minority Purchase Agreements--In the event of a change in ownership of KCSI, we
may be required to purchase stock of Janus Capital Corporation, a subsidiary of
Stilwell, from certain minority stockholders of Janus Capital Corporation. The
amounts to purchase this stock could be material
We would be required under certain agreements with minority stockholders of
Janus Capital Corporation ("Janus") to purchase their shares of Janus common
stock in the event of a Change in Ownership of KCSI (as defined in such
agreements). Stilwell Financial Inc. ("Stilwell" - a former subsidiary of KCSI)
has agreed to assume any and all liabilities arising from these minority
stockholder agreements; however if Stilwell were unable to meet its obligations
with respect to these agreements, KCSI would be required to purchase these
shares of Janus common stock. KCSI believes, based on discussions with Stilwell
management, that Stilwell has adequate financial resources available to fund
these obligations. If we were required to purchase those shares of Janus common
stock under these minority stockholder agreements, it could have a material
adverse effect on our business, financial condition, results of operations and
cash flows.
Spin-off Tax Ruling--If KCSI is required to recognize gain on its distribution
of Stilwell common stock, it could have a negative impact on KCSI's financial
condition and deter potential combinations that could benefit KCSI
On July 9, 1999, KCSI received a tax ruling from the IRS to the effect that, for
United States federal income tax purposes, the spin-off of Stilwell, which was
completed on July 12, 2000, qualifies as a tax-free distribution under Section
355 of the Internal Revenue Code of 1986, as amended (the "Code"). Additionally,
in February 2000, KCSI 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. However, KCSI
may nevertheless be required to recognize gain on its distribution of Stilwell
common stock to KCSI stockholders if such distribution is part of a plan (or
series of related transactions) pursuant to which one or more persons acquire
directly or indirectly a 50% or greater equity interest in KCSI or Stilwell.
Moreover, if one or more persons acquire such a 50% equity interest during the
four-year period
that begins two years before the distribution and ends two years after the
distribution, then the acquisition may be treated as pursuant to such a plan
unless it is established that the distribution and the acquisition are not
pursuant to a plan or series of related transactions. On August 2, 2001, the
Treasury Department issued Regulations providing guidance on whether a
distribution and acquisition are pursuant to a plan or a series of related
transactions. The potential negative impact on KCSI's financial condition if it
is required to recognize gain on its distribution of Stilwell common stock may
deter potential combinations that could benefit KCSI.
Antitakeover Considerations--We have provisions in our charter and bylaws that
could deter, delay or prevent a third party from acquiring us and which could
deprive our stockholders of an opportunity to obtain a takeover premium for
their shares of common stock
We have provisions in our charter and bylaws that may delay or prevent
unsolicited takeover bids from third parties. These provisions may deprive our
stockholders of an opportunity to sell their shares at a premium over prevailing
market prices. For example, our certificate of incorporation provides for a
classified board of directors. It further provides that a vote of 70% of the
shares entitled to vote in the election of directors is required to amend our
certificate of incorporation to increase the number of directors to more than
eighteen, abolish cumulative voting for directors and abolish the classification
of the board. The same vote requirement is imposed by our certificate of
incorporation on certain transactions involving mergers, consolidations, sales
or leases of assets with or to certain owners of more than 5% of our outstanding
stock entitled to vote in the election of directors. Our bylaws provide that a
stockholder must provide us with advance written notice of its intent to
nominate a director or raise a matter at an annual meeting. In addition, we have
adopted a stockholders' rights plan which, under certain circumstances, would
significantly impair the ability of third parties to acquire control of us
without prior approval of our board of directors.
Miscellaneous
In addition to the factors discussed above, there may be other factors that
could cause actual results to differ materially from those indicated in the
forward-looking comments. Other factors include, but are not limited to, changes
in management strategies, objectives and business approaches; changes in lines
of business; material litigation involving us; and changes in the political,
regulatory or economic environments in the United States, Mexico, Panama and
other countries where we or our unconsolidated affiliates currently operate or
may operate in the future.