e424b4
Filed pursuant to Rule 424(b)(4)
File number 333-138831
PROSPECTUS
1,494,469 Shares
Kansas City Southern
COMMON STOCK
The selling stockholder identified in this prospectus is
selling 1,494,469 shares of our common stock. We will not
receive any proceeds from the sale of shares by the selling
stockholder.
Our common stock is listed on the New York Stock Exchange
under the trading symbol KSU. The last reported sale
price of our common stock on December 4, 2006, was
$26.77 per share.
Investing in our common stock involves risks. See
Risk Factors on beginning on page 4 of this
prospectus.
PRICE $26.65 A SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting
|
|
Proceeds to
|
|
|
|
|
Price to
|
|
Discounts and
|
|
Selling
|
|
|
|
|
Public
|
|
Commissions
|
|
Stockholder
|
|
|
Per Share
|
|
$26.6500
|
|
$0.8661
|
|
$25.7839
|
|
|
|
|
Total
|
|
$39,827,598.85
|
|
$1,294,359.60
|
|
$38,533,239.25
|
|
|
|
|
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Morgan Stanley & Co. Incorporated expects to deliver
the shares to purchasers on December 7, 2006.
MORGAN STANLEY
December 4, 2006
TABLE OF
CONTENTS
|
|
|
|
|
|
|
|
ii
|
|
|
|
|
1
|
|
|
|
|
4
|
|
|
|
|
16
|
|
|
|
|
16
|
|
|
|
|
16
|
|
|
|
|
17
|
|
|
|
|
18
|
|
|
|
|
21
|
|
|
|
|
24
|
|
|
|
|
25
|
|
|
|
|
25
|
|
|
|
|
26
|
|
You should rely only on the information contained or
incorporated by reference in this prospectus. We have not
authorized anyone to provide you with different information. You
should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the
front cover of this prospectus or the date of such information
as specified in this prospectus, if different.
i
FORWARD-LOOKING
STATEMENTS
This prospectus and the documents incorporated in this
prospectus by reference may contain forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended (the Securities Act) and
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act). In addition, management
may make forward-looking statements orally or in other writings,
including, but not limited to, in press releases, in the annual
report to shareholders and in our other filings with the
Securities and Exchange Commission (SEC). Readers
can identify these forward-looking statements by the use of such
verbs as expects, anticipates,
believes or similar verbs or conjugations of such
verbs. These statements involve a number of risks and
uncertainties. Actual results could materially differ from those
anticipated by such forward-looking statements. Such differences
could be caused by a number of factors or combination of factors
including, but not limited to, the factors identified below and
the factors discussed under the heading Risk
Factors. Readers are strongly encouraged to consider these
factors and the following factors when evaluating any
forward-looking statements concerning us:
|
|
|
|
|
fluctuations in the market price for our common stock;
|
|
|
|
our dividend policy and restrictions on our ability to pay
dividends on our common stock;
|
|
|
|
our high degree of leverage;
|
|
|
|
our potential need for and ability to obtain additional
financing;
|
|
|
|
our ability to successfully implement our business strategy,
including the strategy to convert customers from using trucking
services to rail transportation services;
|
|
|
|
the impact of competition, including competition from other rail
carriers and trucking companies in the United States and Mexico;
|
|
|
|
United States, Mexican and global economic, political and social
conditions;
|
|
|
|
the effects of the North American Free Trade Agreement, or
NAFTA, on the level of trade between the United States, Mexico
and Canada;
|
|
|
|
uncertainties regarding the litigation we face;
|
|
|
|
the effects of our employee training, technological improvements
and capital expenditures on labor productivity, operating
efficiencies and service reliability;
|
|
|
|
changes in legal or regulatory requirements in the United
States, Mexico or Canada;
|
|
|
|
our ability to generate sufficient cash to pay principal and
interest on our debt, meet our obligations and fund our other
liquidity needs;
|
|
|
|
the effects of adverse general economic conditions affecting
customer demand and the industries and geographic areas that
produce and consume the commodities we carry;
|
|
|
|
material adverse changes in economic and industry conditions,
both within the United States and Mexico and globally;
|
|
|
|
natural events such as severe weather, fire, floods, hurricanes,
earthquakes or other disruptions of our operating systems,
structures and equipment;
|
|
|
|
changes in fuel prices;
|
|
|
|
our ability to attract and retain qualified management personnel;
|
|
|
|
changes in labor costs and labor difficulties, including work
stoppages affecting either our operations or our customers
abilities to deliver goods to us for shipment;
|
|
|
|
the outcome of claims and litigation, including those related to
environmental contamination, personal injuries, and occupational
illnesses arising from hearing loss, repetitive motion and
exposure to asbestos and diesel fumes;
|
ii
|
|
|
|
|
acts of terrorism or risk of terrorist activities;
|
|
|
|
war or risk of war;
|
|
|
|
legislative, regulatory, or legal developments involving
taxation, including enactment of new foreign, federal or state
income or other tax rates, revisions of controlling authority,
and the outcome of tax claims and litigation.
|
Forward-looking statements speak only as of the date on which
they are made. We will not update any forward-looking statements
to reflect future events, developments, or other information. If
we do update one or more forward-looking statements, no
inference should be drawn that we will make additional updates
with respect thereto or with respect to other forward-looking
statements.
iii
PROSPECTUS
SUMMARY
This summary highlights selected information from this
prospectus and may not contain all of the information that may
be important to you. To understand the terms of the securities
being offered by this prospectus, you should read this entire
prospectus and the documents identified in this prospectus under
the caption Where You Can Find More Information,
including our consolidated financial statements and the notes to
those financial statements, before making an investment
decision. You should also carefully consider the information set
forth under Risk Factors. In addition, certain
statements include forward-looking information which involves
risks and uncertainties. See Forward-Looking
Statements.
Unless we have indicated otherwise, references in this
prospectus to KCS mean Kansas City Southern and
references to the Company, we,
us, our, and similar terms refer to KCS
and our consolidated subsidiaries.
KANSAS
CITY SOUTHERN
We are a holding company that owns and operates uniquely
positioned domestic and international rail operations in North
America that are strategically focused on the growing
north/south freight corridor connecting key commercial and
industrial markets in the Central and Southeastern United States
with major industrial cities in Mexico. The Kansas City Southern
Railway Company (KCSR), which was founded in 1887,
is one of seven Class I railroads. KCSR serves a ten-state
region in the Midwest and Southeast regions of the United States
and has the shortest north/south rail route between Kansas City,
Missouri and several key ports along the Gulf of Mexico in
Alabama, Louisiana, Mississippi and Texas.
We control and own all of the stock of Kansas City Southern de
México, S.A. de C.V. (KCSM), through our wholly
owned subsidiary, Grupo KCSM, S.A. de C.V., formerly known as
Grupo Transportación Ferroviaria Mexicana, S.A. de C.V., or
Grupo TFM (Grupo KCSM). Through its
50-year
concession from the Mexican government (the
Concession), KCSM operates a primary commercial
corridor of the Mexican railroad system and has as its core
route a key portion of the shortest, most direct rail passageway
between Mexico City and Laredo, Texas. KCSM serves most of
Mexicos principal industrial cities and three of its major
shipping ports. KCSMs rail lines are the only ones which
serve Nuevo Laredo, Mexico, the largest rail freight interchange
point between the United States and Mexico. Under the
Concession, KCSM has the right to control and operate the
southern half of the rail-bridge at Laredo, Texas, which spans
the Rio Grande River between the United States and Mexico.
We own, directly and indirectly, through our wholly-owned
subsidiaries, 100% of Mexrail, Inc. (Mexrail).
Mexrail owns 100% of The Texas Mexican Railway Company
(Tex-Mex). Tex-Mex operates a
157-mile
rail line extending from Laredo, Texas to the port city of
Corpus Christi, Texas, which connects the operations of KCSR
with KCSM. Tex-Mex connects with KCSM at the United
States/Mexico border at Laredo, Texas, and connects to KCSR
through trackage rights at Beaumont, Texas. Through our
ownership in Mexrail, we own the northern half of the
rail-bridge at Laredo, Texas. Laredo is a principal
international gateway through which more than 50% of all rail
and truck traffic between the United States and Mexico crosses
the border.
Our rail network (KCSR, KCSM and Tex-Mex) comprises
approximately 6,000 miles of main and branch lines
extending from the Midwest and Southeastern portions of the
United States south into Mexico and connects with most other
Class I railroads, providing shippers with an effective
alternative to other railroad routes and giving direct access to
Mexico and the Southeastern and Southwestern United States
through less congested interchange hubs.
We also own 50% of the stock of Panama Canal Railway Company
(PCRC), which holds the concession to operate a
47-mile
coast-to-coast
railroad located adjacent to the Panama Canal. The railroad
handles containers in freight service across the Isthmus of
Panama. Panarail Tourism Company (Panarail), a
wholly owned subsidiary of PCRC, operates commuter and tourist
railway services over the lines of PCRC.
Other subsidiaries and affiliates of KCS include the following:
|
|
|
|
|
Southern Capital Corporation, LLC (Southern
Capital), a 50% owned unconsolidated affiliate that leases
locomotives and rail equipment to KCSR;
|
1
|
|
|
|
|
Transfin Insurance, Ltd., a wholly-owned and consolidated
captive insurance company, providing property, general liability
and certain other insurance coverage to KCS and its subsidiaries
and affiliates;
|
|
|
|
Trans-Serve, Inc. (doing business as Superior Tie and
Timber ST&T), a wholly-owned
and consolidated operator of a railroad wood tie treatment
facility;
|
|
|
|
PABTEX GP, LLC (Pabtex), a wholly-owned and
consolidated owner of a bulk materials handling facility with
deep-water access to the Gulf of Mexico at Port Arthur, Texas
that stores and transfers petroleum coke and soda ash from
trucks and rail cars to ships, primarily for export; and
|
|
|
|
Meridian Speedway, LLC (MSLLC), a 90% owned
consolidated affiliate that owns the former KCSR rail line
between Meridian, Mississippi and Shreveport, Louisiana, which
is a portion of the KCSR rail line between Dallas, Texas and
Meridian known as the Meridian Speedway. Norfolk
Southern Corporation (NS) through its wholly-owned
subsidiary, The Alabama Great Southern Railroad Company, owns
the remaining 10% of MSLLC. KCS will ultimately own a 70%
interest and NS will ultimately own a 30% interest in MSLLC upon
the contribution of additional capital by NS to MSLLC.
|
KCS was organized in 1962 as Kansas City Southern Industries,
Inc. and in 2002 changed its name to Kansas City Southern. KCS,
as the holding company, supplies its various subsidiaries with
managerial, legal, tax, financial and accounting services, in
addition to managing other minor non-operating
investments.
KCS is incorporated in Delaware. Our principal executive offices
are located at 427 West 12th Street, Kansas City,
Missouri 64105. Our telephone number is
816-983-1303.
RECENT
DEVELOPMENTS
Sale of
KCSM Senior Notes
On November 21, 2006, KCSM sold $175.0 million in
aggregate principal amount of new 7.625% Senior Notes due 2013.
Proceeds from the sale were used to refinance
$146.0 million of the $150.0 million aggregate
principal amount outstanding of KCSMs 10.25% Senior Notes
due 2007 and to pay down $29.0 million of KCSMs term
loan facility.
Acquisition
of New Locomotives
On August 23, 2006, KCSR entered into an agreement with
Electro-Motive Diesel, Inc. to acquire 30 locomotives to be
delivered to KCSR from June 2007 through September 2007 at an
aggregate cost of approximately $61.4 million. On
August 14, 2006, KCSM entered into an agreement with
General Electric Company to acquire 30 locomotives to be
delivered to KCSM in December 2006 and January 2007 at an
aggregate cost of approximately $63.7 million. We intend to
finance these locomotives through equipment lease financing
consistent with past practice.
On September 28, 2006, KCSR and KCSM entered into a letter
of intent with General Electric Company to purchase an aggregate
of 80 locomotives to be delivered in late 2007 through August
2008 at an aggregate cost of approximately $160.8 million.
The letter of intent also provided KCSR and KCSM with an option
to acquire an additional aggregate of 40 locomotives. If such
option is exercised, the additional 40 locomotives would be
delivered in 2008. Each of KCSR and KCSM anticipates entering
into definitive agreements with General Electric Company in the
fourth quarter of 2007 with respect to these locomotives.
On November 29, 2006, KCSR entered into a letter of intent
with Electro-Motive Diesel, Inc. to acquire 70 locomotives
to be delivered to KCSR from October 2007 through April 2008 at
an aggregate cost of approximately $140.9 million.
2
THE
OFFERING
|
|
|
Selling stockholder |
|
Grupo TMM, S.A. (TMM or the selling
stockholder). |
|
Common stock offered by the selling stockholder |
|
1,494,469 shares |
|
Common stock to be outstanding after this offering |
|
75,834,470 shares(1) |
|
Use of proceeds |
|
We will not receive any proceeds from the sale of shares by the
selling stockholder. |
|
Risk factors |
|
Please read Risk Factors and other information
included in this prospectus for a discussion of factors you
should carefully consider before deciding to invest in shares of
our common stock. |
|
New York Stock Exchange symbol |
|
KSU |
|
Rights |
|
Each share of the common stock offered hereby is accompanied by
one Series A Preferred Stock Purchase Right, as described
in Description of KCS Common Stock
Anti-Takeover Provisions Rights Agreement. |
|
|
|
(1)
|
|
The number of shares outstanding
above excludes:
|
|
|
|
|
|
shares of common stock issuable upon the exercise of options
outstanding as of October 31, 2006 under our employee
benefit plans;
|
|
|
|
shares of common stock issuable upon the conversion of
convertible preferred stock outstanding as of October 31, 2006;
and
|
|
|
|
shares of common stock reserved for issuance under our employee
stock option plans or stock ownership plans in effect as of the
date of this prospectus.
|
3
RISK
FACTORS
Risks
Related to an Investment in Our Common Stock
The
price of our common stock may fluctuate significantly, which may
make it difficult for you to resell common stock when you want
to or at prices you find attractive.
The price of our common stock on the New York Stock Exchange
(NYSE) constantly changes. We expect that the market
price of our common stock will continue to fluctuate.
Our stock price can fluctuate as a result of a variety of
factors, many of which are beyond our control. These factors
include, but are not limited to:
|
|
|
|
|
quarterly variations in our operating results;
|
|
|
|
operating results that vary from the expectations of management,
securities analysts, ratings agencies and investors;
|
|
|
|
changes in expectations as to our future financial performance,
including financial estimates by securities analysts, ratings
agencies and investors;
|
|
|
|
developments generally affecting our industry;
|
|
|
|
announcements by us or our competitors of significant contracts,
acquisitions, joint marketing relationships, joint ventures or
capital commitments;
|
|
|
|
the assertion or resolution of significant claims or proceedings
against us;
|
|
|
|
our dividend policy and restrictions on the payment of dividends;
|
|
|
|
future sales of our equity or equity-linked securities;
|
|
|
|
the issuance of common stock in payment of dividends on
preferred stock or upon conversion of preferred stock; and
|
|
|
|
general domestic and international economic conditions.
|
In addition, the stock market in general has experienced extreme
volatility that has often been unrelated to the operating
performance of a particular company. These broad market
fluctuations may adversely affect the market price of our common
stock.
Our
ability to pay dividends is currently restricted, and we do not
anticipate paying cash dividends on our common stock in the
foreseeable future.
We have agreed, and may agree again, to restrictions on our
ability to pay dividends on our common stock. In addition, to
maintain our credit ratings, we may be limited in our ability to
pay dividends on our common stock so that we can maintain an
appropriate level of debt. During the first quarter of 2000, our
board of directors suspended our common stock dividends. We do
not anticipate making any cash dividend payments to our common
stockholders for the foreseeable future.
We
have not paid dividends on our Series C Preferred Stock or
Series D Preferred Stock since February 15,
2006.
Because of certain restrictions in the indentures governing
notes issued by KCSR, we have not paid dividends on our
Series C Preferred Stock or Series D Preferred Stock
since February 15, 2006 for the fourth quarter of 2005. If
dividends on the Series C Preferred Stock or Series D
Preferred Stock are in arrears for six consecutive quarters (or
an equivalent number of days in the aggregate, whether or not
consecutive) holders of the Series C Preferred Stock or
Series D Preferred Stock, as applicable, will be entitled
to vote for the election of two of the authorized directors at
the next annual stockholders meeting at which directors
are elected and at each subsequent stockholders meeting
until such time as all accumulated dividends are paid on the
Series C Preferred Stock or Series D Preferred Stock,
as applicable, or set aside for payment. In addition, we will
not be eligible to register future
4
offerings of securities on
Form S-3
or to avail ourselves of the other benefits available to
companies that qualify as well-known seasoned
issuers under SEC rules until we resume paying such
dividends and thereafter file our annual financial statements.
This could adversely affect our ability to access capital
markets, and increase the cost of accessing capital markets,
until we qualify as a well-known seasoned issuer.
We convened a special meeting of the holders of record of our
Series C Preferred Stock on March 30, 2006 to vote on
a proposed amendment to the terms of the Series C Preferred
Stock that would allow dividends on the Series C Preferred
Stock to be paid, at our option, in cash, in shares of KCS
common stock, or in any combination of cash and common stock.
While the special meeting was adjourned indefinitely due to the
absence of a quorum, there can be no assurance we will not
attempt to reconvene the meeting or take some other action to
amend the terms of the Series C Preferred Stock to, among
other things, allow us to pay dividends in shares of KCS common
stock or to induce conversion of our Series C Preferred
Stock. Any of these actions could result in immediate dilution
of the voting power and equity interests of holders of our
common stock, including purchasers in this offering.
Sales
of substantial amounts of our common stock in the public market
could adversely affect the prevailing market price of our common
stock.
As of September 30, 2006, we had 10,720,859 shares of
common stock issued or reserved for issuance under our 1991
Amended and Restated Stock Option and Performance Award Plan and
our Employee Stock Purchase Plan, 2,023,113 shares of
common stock held by executive officers and directors outside
those plans, and 20,389,050 shares of common stock reserved
for issuance upon conversion of our outstanding shares of
convertible preferred stock. Sales of common stock by employees
upon exercise of their options, sales by our executive officers
and directors subject to compliance with Rule 144 under the
Securities Act, and sales of common stock that may be issued
upon conversion of our outstanding preferred stock, or the
perception that such sales could occur, may adversely affect the
market price of our common stock.
We
have provisions in our charter, bylaws and Rights Agreement that
could deter, delay or prevent a third party from acquiring us
and that could deprive you of an opportunity to obtain a
takeover premium for shares of our 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 restated certificate of incorporation provides
for a classified board of directors. It further provides that
the vote of 70% of the shares entitled to vote in the election
of directors is required to amend our restated 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 restated 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 give us advance
written notice of its intent to nominate a director or raise a
matter at an annual meeting. In addition, we have adopted a
Rights Agreement 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.
Risks
Related to Our Business
We
compete against other railroads and other transportation
providers.
Our domestic and international operations are subject to
competition from other railroads, in particular the Union
Pacific Railroad Company (UP) and BNSF Railway
Company (BNSF) in the United States and Ferrocarril
Mexicano, S.A. de C.V. (Ferromex) in Mexico. Many of
our rail competitors are much larger and have significantly
greater financial and other resources than we do. In addition,
we are subject to competition from truck carriers and from barge
lines and other maritime shipping. Increased competition could
result 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 carriers equipment
for certain commodities. While we must build or acquire and
maintain our infrastructure, truck carriers, maritime shippers
and
5
barges are able to use public
rights-of-way.
The trucking industry has in the past provided effective rate
and service competition to the railroad industry. Trucking
requires substantially smaller capital investment and
maintenance expenditures than railroads and allows for more
frequent and flexible scheduling. Continuing competitive
pressures, any reduction in margins due to competitive
pressures, future improvements that increase the quality of
alternative modes of transportation in the locations in which we
operate, or legislation or regulations that provide motor
carriers with additional advantages, such as increased size of
vehicles and reduced weight restrictions, could have a material
adverse effect on our results of operations, financial condition
and liquidity.
A material part of our growth strategy is based upon the
conversion of truck traffic to rail. There can be no assurance
we will have the ability to convert traffic from truck to rail
transport or that we will retain the customers we have already
converted. If the railroad industry in general, and our Mexican
operations in particular, are unable to preserve their
competitive advantages vis-à-vis the trucking industry, our
projected revenue growth from our Mexican operations could be
adversely affected. Additionally, the revenue growth
attributable to our Mexican operations could be affected by,
among other factors, our inability to grow our existing customer
base, negative macroeconomic developments impacting the United
States or Mexican economies, and failure to capture additional
cargo transport market share from the shipping industry and
other railroads.
NAFTA called for Mexican trucks to have unrestricted access to
highways in U.S. border states by 1995 and full access to
all U.S. highways by January 2000. However, the
U.S. did not follow that timetable because of concerns over
Mexicos trucking safety standards. In February 2001, a
NAFTA tribunal ruled in an arbitration between the United States
and Mexico that the United States must allow Mexican trucks
to cross the border and operate on U.S. highways. On
March 14, 2002, as part of its agreement under NAFTA, the
U.S. Department of Transportation issued safety rules that
allow Mexican truckers to apply for operating authority to
transport goods beyond the
20-mile
commercial zones along the U.S.-Mexico border. These safety
rules require Mexican motor carriers seeking to operate in the
United States to, among other things, pass safety
inspections, obtain valid insurance with a U.S. registered
insurance company, conduct alcohol and drug testing for drivers
and obtain a U.S. Department of Transportation
identification number. Under the rules issued by the
U.S. Department of Transportation, it was expected that the
border would have been opened to Mexican motor carriers in 2002.
However, in January 2003, in response to a lawsuit filed in May
2002 by a coalition of environmental, consumer and labor groups,
the U.S. Court of Appeals for the Ninth Circuit issued a
ruling which held that the rules issued by the
U.S. Department of Transportation violated federal
environmental laws because the Department of Transportation
failed to adequately review the impact on U.S. air quality
of rules allowing Mexican carriers to transport beyond the
20-mile
commercial zones along the
U.S.-Mexico
border. The Court of Appeals ruling required the Department of
Transportation to provide an Environmental Impact Statement on
the Mexican truck plan and to certify compliance with the
U.S. Clean Air Act. The Department of Transportation
requested the U.S. Supreme Court to review the Court of
Appeals ruling and, on December 15, 2003, the Supreme Court
granted the Department of Transportations request. On
June 7, 2004, the Supreme Court unanimously overturned the
Court of Appeals ruling. Although the Department of
Transportation is no longer required to provide an Environmental
Impact Statement under the Supreme Courts ruling, the
United States and Mexico must still complete negotiations on
safety inspections before the border is opened. We cannot
predict when these negotiations will be completed. There can be
no assurance that truck transport between Mexico and the United
States will not increase substantially in the future if the
United States and Mexico complete the negotiations and the
border is opened. Any such increase in truck traffic could
affect our ability to continue converting traffic to rail from
truck transport because it may result in an expansion in the
availability, or an improvement in the quality, of the trucking
services offered by Mexican carriers.
Through KCSMs Concession from the Mexican government, we
have the right to control and operate the southern half of the
rail-bridge at Laredo, Texas. Under the Concession, KCSM must
grant to Ferromex the right to operate over a north-south
portion of KCSMs rail lines between Ramos Arizpe near
Monterrey and the city of Queretaro that constitutes over
600 kilometers of KCSMs main track. Using these
trackage rights, Ferromex may be able to compete with KCSM over
KCSMs rail lines for traffic between Mexico City and the
United States. The Concession also requires KCSM to grant rights
to use certain portions of its tracks to Ferrocarril del
Sureste, S.A. de C.V. (Ferrosur) and the belt
railroad operated in the greater Mexico City area by the
Ferrocarril y Terminal del Valle de Mexico, S.A. de C.V.
(Ferrovalle), thereby providing Ferrosur with more
efficient access to certain
6
Mexico City industries. As a result of having to grant trackage
rights to other railroads, we incur additional maintenance costs
and lose the flexibility of using a portion of our tracks at all
times.
Ferromex, the operator of the largest railway system in Mexico,
is in close proximity to KCSMs rail lines. In particular,
KCSM has experienced and continues to experience competition
from Ferromex with respect to the transport of a variety of
products. The rail lines operated by Ferromex run from
Guadalajara and Mexico City to four U.S. border crossings
west of the Nuevo Laredo-Laredo crossing, providing an
alternative to KCSMs routes for the transport of freight
from those cities to the U.S. border. In addition, Ferromex
directly competes with KCSM in some areas of its service
territory, including Tampico, Saltillo, Monterrey and Mexico
City. Ferrosur competes directly with KCSM for traffic to and
from southeastern Mexico. Ferrosur, like KCSM, also services
Mexico City, Puebla and Veracruz.
In November 2005, Grupo México, the controlling shareholder
of Ferromex, acquired all of the shares of Ferrosur. The common
control of Ferromex and Ferrosur would give Grupo México
control over a nationwide railway system in Mexico and ownership
of 50% of the shares of Ferrovalle. The merger between Ferromex
and Ferrosur has been declared illegal by the Mexican Antitrust
Commission. Both Ferromex and Ferrosur have challenged this
ruling. There can be no assurance as to whether Grupo
México will be successful in challenging this ruling. If
Grupo México is successful in its appeal, KCSMs
competitive position may be harmed.
On August 3, 2006, the Mexican Antitrust Commission
announced an investigation into possible antitrust practices in
the provision of rail cargo services. The targets of that
investigation have not been identified, and while KCSM may be
required to provide information in connection with the
investigation, we do not believe KCSMs operations are the
subject of the inquiry, although there can be no assurance KCSM
is not or would not become a subject of the inquiry.
Rate reductions by competitors could make our freight services
less competitive, and we cannot assure you we would always be
able to match these rate reductions. In recent years, we have
experienced aggressive price competition from Ferromex in
freight rates for agricultural products, which has adversely
affected our results of operations. Our ability to respond to
competitive pressures by decreasing our rates without adversely
affecting our gross margins and operating results will depend
on, among other things, our ability to reduce our operating
costs. Our failure to respond to competitive pressures, and
particularly rate competition, in a timely manner could have a
material adverse effect on our financial condition.
In recent years, there has also been significant consolidation
among major North American rail carriers. The resulting merged
railroads could attempt to use their size and pricing power to
block other railroads access to efficient gateways and
routing options that are currently and have been historically
available. There can be no assurance that further consolidation
in the railroad industry, whether in the United States or
Mexico, will not have an adverse effect on our operations.
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. Our operations are 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. 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, or the failure to renew, these agreements could
adversely affect our business, financial condition and results
of operations. We are also dependent in part upon the financial
health and efficient performance of other railroads. For
example, much of Tex-Mexs traffic moves over the UPs
lines via trackage rights, a significant portion of our grain
shipments originate with another rail carrier pursuant to our
marketing agreement with that carrier, and BNSF is our largest
partner in the interchange of rail traffic. There can be no
assurance that we will not be materially adversely affected by
operational or financial difficulties of other railroads.
Pursuant to the Concession, KCSM is required to grant rights to
use portions of its tracks to Ferromex, Ferrosur and Ferrovalle.
Applicable law stipulates that Ferromex, Ferrosur and Ferrovalle
are required to grant to KCSM
7
rights to use portions of their tracks. KCSMs Concession
classifies trackage rights as short trackage rights and
long-distance trackage rights. Although all of these trackage
rights have been granted under the Concession, no railroad has
actually operated under the long-distance trackage rights
because the means of setting rates for usage and often related
terms of usage have not been agreed upon. Under the Mexican
railroad services law and regulations, the rates KCSM may charge
for the right to use its tracks must be agreed upon in writing
between KCSM and the party to which those rights are granted.
However, if KCSM cannot reach an agreement on rates with rail
carriers entitled to trackage rights on KCSMs rail lines,
the Mexican Ministry of Communications and Transportation
(SCT) is entitled to set the rates in accordance
with Mexican law and regulation, which rates may not adequately
compensate KCSM. KCSM and Ferromex have not been able to agree
upon the rates each of them is required to pay the other for
interline services and haulage and trackage rights. KCSM and
Ferromex are involved in civil, commercial and administrative
proceedings in connection with amounts payable to each other for
interline services, haulage and trackage rights. On
March 13, 2002, the SCT issued a ruling setting the rates
for trackage and haulage rights. On August 5, 2002, the SCT
issued a ruling setting the rates for interline and terminal
services. KCSM and Ferromex appealed both rulings to the Mexican
Supreme Court. KCSM and Ferromex also requested and obtained a
suspension of the effectiveness of the SCT rulings pending
resolution of the litigation. In February 2006, the Mexican
Supreme Court sustained KCSMs appeal of the SCTs
trackage and haulage rights ruling, vacated the SCT ruling and
ordered the SCT to issue a new ruling consistent with the
Courts opinion. We have not yet received the written
opinion of the Mexican Supreme Court on the February 2006
ruling, nor has the Court decided the interline and terminal
services appeal. On October 2, 2006, KCSM was served with a
claim by Ferromex asking for information concerning the
interline traffic between KCSM and Ferromex from January 1,
2002 to December 31, 2004. KCSM has filed an answer to this
claim. We cannot predict the ultimate outcome of these matters,
or whether the rates KCSM is ultimately permitted to charge will
be sufficient to compensate it.
We
are highly leveraged and have significant debt service
obligations. Our leverage could adversely affect our ability to
fulfill obligations under various debt instruments and operate
our business.
Our level of debt could make it more difficult for us to borrow
money in the future, reduces the amount of money available to
finance our operations and other business activities, exposes us
to the risk of increased interest rates, makes us more
vulnerable to general economic downturns and adverse industry
conditions, and could reduce our flexibility in planning for, or
responding to, changing business and economic conditions. 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. If we do not have
enough cash to service our debt, meet other obligations and fund
other liquidity needs, 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, including obtaining appropriate waivers
from our lenders, 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.
The indebtedness of KCSM exposes us to risks of exchange rate
fluctuations, because any devaluation of the peso would cause
the cost of KCSMs dollar-denominated debt to increase, and
could place us at a competitive disadvantage in Mexico compared
to our Mexican competitors that have less debt and greater
operating and financing flexibility than KCSM does.
Our
business is capital intensive.
Our business is capital intensive and requires substantial
ongoing expenditures for, among other things, additions and
improvements to roadway, structures and technology,
acquisitions, and maintenance and repair of our equipment and
rail system. Our failure to make necessary capital expenditures
to maintain our operations could impair our ability to serve our
existing customers or accommodate increases in traffic volumes.
We have funded, and expect to continue to fund, capital
expenditures with funds from operating cash flows, debt, leases
and, to a lesser extent, vendor financing. We may not be able to
generate sufficient cash flows from our operations or obtain
sufficient funds from external sources to fund our capital
expenditure requirements. If
8
financing is available, it may not be obtainable on terms
acceptable to us and within the limitations contained in the
indentures and other agreements relating to our debt.
KCSMs Concession from the Mexican government requires KCSM
to make investments and undertake capital projects, including
capital projects described in a business plan filed every five
years with the SCT. If KCSM is unable to make such capital
investments, KCSMs business plan commitments with the
Mexican government may be at risk, requiring KCSM to seek
waivers of its business plan, if possible. KCSM may defer
capital expenditures under its business plan with the permission
of the SCT. However, the SCT might not grant this permission,
and any failure by KCSM to comply with the capital investment
commitments in its business plan could result in sanctions
imposed by the SCT. We cannot assure you that the Mexican
government would grant any such permission or waiver. If such
permission or waiver is not obtained in any instance and KCSM is
sanctioned, its Concession might be at risk of revocation, which
would adversely affect our financial condition and results of
operations. See KCSMs Mexican Concession is subject
to revocation or termination in certain circumstances
below.
Our
business 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 we transport. The relative
strength or weakness of the United States and Mexican economies
affect the businesses served by us. PCRC and Panarail are
directly affected by the Panamanian local economy. Our
investments in Mexico and Panama expose us to risks associated
with operating in Mexico and Panama, including, among others,
cultural differences, varying labor and operating practices,
political risk and differences between the United States,
Mexican and Panamanian economies. 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.
Our operations may also be affected by natural disasters or
adverse weather conditions. We operate in and along the Gulf
Coast of the United States, and our facilities may be adversely
affected by hurricanes and other extreme weather conditions. For
example, hurricanes have adversely affected some of our shippers
located along the Gulf Coast and caused interruptions in the
flow of traffic within the southern United States and between
the United States and Mexico. As another example, a weak harvest
in the Midwest may substantially reduce the volume of business
handled for agricultural products customers. Many of the goods
and commodities we transport 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. 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, results of operations and cash flows.
The transportation industry is highly cyclical, generally
tracking the cycles of the world economy. Although
transportation markets are affected by general economic
conditions, there are numerous specific factors within each
particular market segment that may influence operating results.
Some of our customers do business in industries that are highly
cyclical, including the oil and gas, automotive, housing and
agricultural industries. Any downturn in these industries could
have a material adverse effect on our operating results. Also,
some of the products we transport have had a historical pattern
of price cyclicality which has typically been influenced by the
general economic environment and by industry capacity and
demand. For example, global steel and petrochemical prices have
decreased in the past. We cannot assure you that prices and
demand for these products will not decline in the future,
adversely affecting those industries and, in turn, our financial
condition or results.
Our
business is subject to regulation by international, federal,
state and local regulatory agencies. Our failure to comply with
these regulations could have a material adverse effect on our
operations.
We are subject to governmental regulation by international,
federal, state and local regulatory agencies with respect to our
railroad operations, as well as a variety of health, safety,
labor, environmental, and other matters. Government regulation
of the railroad industry is a significant determinant of the
competitiveness and profitability of railroads. Our failure to
comply with applicable laws and regulations could have a
material adverse effect on our
9
operations, including limitations on our operating activities
until compliance with applicable requirements is achieved. These
government agencies may change the legislative or regulatory
framework within which we operate without providing any recourse
for any adverse effects on our business that occur as a result
of such change. Additionally, some of the regulations require us
to obtain and maintain various licenses, permits and other
authorizations, and we cannot assure you that we will continue
to be able to do so.
Our
business is subject to environmental, health and safety laws and
regulations that could require us to incur material costs or
liabilities relating to environmental, health or safety
compliance or remediation.
Our operations are subject to extensive international, federal,
state and local environmental, health and safety laws and
regulations concerning, among other things, emissions to the
air, discharges to waters, the handling, storage, transportation
and disposal of waste and other materials, the cleanup of
hazardous material or petroleum releases, decommissioning of
underground storage tanks and noise pollution. Violations of
these laws and regulations can result in substantial penalties,
permit revocations, facility shutdowns and other civil and
criminal sanctions. From time to time, certain of our facilities
have not been in compliance with environmental, health and
safety laws and regulations and there can be no assurances that
we will always be in compliance with such laws and regulations
in the future. We incur, and expect to continue to incur,
environmental compliance costs, including, in particular, costs
necessary to maintain compliance with requirements governing
chemical and hazardous material shipping operations, refueling
operations and repair facilities. 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,
financial condition and cash flows.
In the operation of a railroad, it is possible that derailments,
explosions or other accidents may occur that could cause harm to
the environment or to human life or health. As a result, we may
incur costs in the future, which may be material, to address any
such harm, including costs relating to the performance of
clean-ups, natural resources damages and compensatory or
punitive damages relating to harm to property or individuals.
The U.S. Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA or Superfund)
and similar state laws (known as Superfund laws)
impose liability for the cost of remedial or removal actions,
natural resources damages and related costs at certain sites
identified as posing a threat to the environment or public
health. CERCLA imposes joint, strict and several liability on
the owners and operators of facilities in which hazardous waste
and other hazardous substances are deposited or from which they
are released or are likely to be released into the environment.
Liability may be imposed, without regard to fault or the
legality of the activity, on certain classes of persons,
including the current and certain prior owners or operators of a
site where hazardous substances have been released and persons
that arranged for the disposal or treatment of hazardous
substances. In addition, other potentially responsible parties,
adjacent landowners or other third parties may initiate cost
recovery actions or toxic tort litigation against sites subject
to CERCLA or similar state laws. Given the nature of our
business, we presently have environmental investigation and
remediation obligations at certain sites, including a former
foundry site in Alexandria, Louisiana, and will likely incur
such obligations at additional sites in the future. Liabilities
accrued for environmental costs represent our best estimate of
our probable future obligation for the remediation and
settlement of these sites. Although the recorded liability
includes our best estimate of all probable costs,
clean-up
costs can not be predicted with any certainty due to various
factors such as evolving environmental laws and regulations,
changes in technology, the extent of other parties
participation, developments in environmental surveys and
studies, and the extent of corrective action that may ultimately
be required.
Our Mexican operations are subject to Mexican federal and state
laws and regulations relating to the protection of the
environment. The primary environmental law in Mexico is the
General Law of Ecological Balance and Environmental
Protection (the Ecological Law). The Mexican
federal agency in charge of overseeing compliance with and
enforcement of the Ecological Law is the Ministry of
Environmental Protection and Natural Resources
(Semarnat). The regulations issued under the
Ecological Law and technical environmental requirements issued
by Semarnat have promulgated standards for, among other things,
water discharge, water supply, emissions, noise pollution,
hazardous substances and transportation and handling of
hazardous and solid waste. As part of its enforcement powers,
Semarnat is empowered to bring administrative and criminal
proceedings and impose economic sanctions against companies that
violate environmental laws, and temporarily or even permanently
10
close non-complying facilities. We are also subject to the laws
of various jurisdictions and international conferences with
respect to the discharge of materials into the environment. KCSM
is also subject to environmental laws and regulations issued by
the governments of each of the Mexican states in which
KCSMs facilities are located. The terms of KCSMs
Concession from the Mexican government also impose environmental
compliance obligations on KCSM. We cannot predict the effect, if
any, that the adoption of additional or more stringent
environmental laws and regulations would have on KCSMs
results of operations, cash flows or financial condition.
Our
business is vulnerable to rising fuel costs and disruptions in
fuel supplies. Any significant increase in the cost of fuel, or
severe disruption of fuel supplies, would have a material
adverse effect on our business, results of operations and
financial condition.
We incur substantial fuel costs in our railroad operations and
these costs represent a significant portion of our
transportation expenses. Significant price increases for fuel
may have a material adverse effect on our operating results.
Fuel expense increased from approximately 15% of our
consolidated operating costs during the first nine months of
2005 to approximately 19% of our consolidated operating costs
during the first nine months of 2006. We have been able to pass
approximately 75% of these fuel cost increases on to customers
in the form of fuel surcharges applied to our customer billings.
If we are unable to continue the existing fuel surcharge program
for KCSR and expand the fuel surcharge program for KCSM, our
operating results could be materially adversely affected.
The U.S. Surface Transportation Board (STB) is
currently evaluating potential changes in its standards for
regulating fuel surcharge programs in our industry. We cannot
predict the impact that any such changes may have on our
business.
Fuel costs are affected by traffic levels, efficiency of
operations and equipment, and petroleum market conditions. The
supply and cost of fuel are subject to market conditions and are
influenced by numerous factors beyond our control, including
general economic conditions, world markets, government programs
and regulations and competition. In addition, instability in the
Middle East and interruptions in domestic production and
refining due to hurricane damage may result in an increase in
fuel prices. Fuel prices and supplies 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, a disruption of oil imports,
weather events, war or otherwise, the resulting impact on fuel
prices could materially adversely affect our operating results,
financial condition and cash flows.
We currently meet, and expect to continue to meet, fuel
requirements for our Mexican operations almost exclusively
through purchases at market prices from Petroleos Mexicanos, the
national oil company of Mexico (PEMEX), a
government-owned entity exclusively responsible for the
distribution and sale of diesel fuel in Mexico. KCSM is party to
a fuel supply contract with PEMEX of indefinite duration. Either
party may terminate the contract upon 30 days written
notice to the other at any time. If the fuel contract is
terminated and we are unable to acquire diesel fuel from
alternate sources on acceptable terms, our Mexican operations
could be materially adversely affected.
The
loss of key personnel could negatively affect our
business.
Our success substantially depends on our ability to attract and
retain key members of our senior management team and the
principals of our foreign subsidiaries. Recruiting, motivating
and retaining qualified management personnel, particularly those
with expertise in the railroad industry, are vital to our
operations and success. There is substantial competition for
qualified management personnel and there can be no assurance
that we will always be able to attract or retain qualified
personnel. Our employment agreements with senior management are
terminable at any time by us or the executive. If we lose one or
more of these key executives or principals, our ability to
successfully implement our business plans and the value of our
common stock could be materially adversely affected.
11
A
majority of our employees belong to labor unions. Strikes or
work stoppages could adversely affect our
operations.
We are a party to collective bargaining agreements with various
labor unions in the United States and Mexico. As of
September 30, 2006, approximately 81% of KCSR employees and
approximately 74% of KCSM employees were covered by collective
labor contracts. We may be subject to, among other things,
strikes, work stoppages or work slowdowns as a result of
disputes under these collective bargaining agreements and labor
contracts or our potential inability to negotiate acceptable
contracts with these unions. In the United States, because such
agreements are generally negotiated on an industry-wide basis,
determination of the terms and conditions of labor agreements
have been and could continue to be beyond our control. We may,
therefore, be subject to terms and conditions in industry-wide
labor agreements that could have a material adverse affect on
our results of operations, financial position and cash flows. If
the unionized workers in the United States or Mexico were to
engage in a strike, work stoppage or other slowdown, if other
employees were to become unionized, or if the terms and
conditions in future labor agreements were renegotiated, we
could experience a significant disruption of our operations and
higher ongoing labor costs. Although the U.S. Railway Labor
Act imposes restrictions on the right of U.S. railway
workers to strike, there is no law in Mexico imposing similar
restrictions on the right of railway workers in that country to
strike.
We
face possible catastrophic loss and liability, and our insurance
may not be sufficient to cover our damages or damages to
others.
The operation of any railroad carries with it an inherent risk
of catastrophe, mechanical failure, collision and property loss.
In the course of our operations, spills or other environmental
mishaps, cargo loss or damage, business interruption due to
political developments, as well as labor disputes, strikes and
adverse weather conditions, could result in a loss of revenues
or increased liabilities and costs. Collisions, environmental
mishaps or other accidents can cause serious bodily injury,
death and extensive property damage, particularly when such
accidents occur in heavily populated areas. Additionally, our
operations may be affected from time to time by natural
disasters such as earthquakes, volcanoes, hurricanes or other
storms. The occurrence of a major natural disaster could have a
material adverse effect on our operations and our financial
condition. We have acquired insurance that is consistent with
industry practice against the accident-related risks involved in
the conduct of our business and business interruption due to
natural disaster. However, this insurance is subject to a number
of limitations on coverage, depending on the nature of the risk
insured against. This insurance may not be sufficient to cover
our damages or damages to others, and this insurance may not
continue to be available at commercially reasonable rates. Even
with insurance, if any catastrophic interruption of service
occurs, we may not be able to restore service without a
significant interruption to operations and an adverse effect on
our financial condition.
Our
business may be affected by future acts of terrorism or
war.
Terrorist attacks, such as those that occurred on
September 11, 2001, any government response thereto and war
or risk of war may adversely affect our results of operations,
financial condition, and cash flows. These acts may also impact
our ability to raise capital or our future business
opportunities. Our rail lines and facilities could be direct
targets or indirect casualties of acts of terror, which could
cause significant business interruption and result in increased
costs and liabilities and decreased revenues. These acts could
have a material adverse effect on our results of operations,
financial condition, and cash flows. In addition, insurance
premiums charged for some or all of the terrorism coverage
currently maintained by us could increase dramatically or
certain coverage may not be available in the future.
KCSMs
Mexican Concession is subject to revocation or termination in
certain circumstances.
KCSM operates under a
50-year
Concession granted by the Mexican government. The Concession
gives KCSM exclusive rights to provide freight transportation
services over its rail lines for 30 years of the
50-year
Concession, subject to certain trackage rights. The SCT is
principally responsible for regulating railroad services in
Mexico. The SCT has broad powers to monitor KCSMs
compliance with the Concession and it can require KCSM to supply
it with any technical, administrative and financial information
it requests. KCSM must comply with the investment commitments
established in its business plan, which forms an integral part
of the Concession, and must
12
update the plan every five years. SCT treats KCSMs
business plans confidentially, The SCT monitors KCSMs
compliance with efficiency and safety standards established in
the Concession. The SCT reviews, and may amend, these standards
every five years.
The Mexican railroad services law and regulations provide the
Mexican government certain rights in its relationship with KCSM
under the Concession, including the right to take over the
management of KCSM and its railroad in certain extraordinary
cases, such as imminent danger to national security. In the
past, the Mexican government has used such power with respect to
other privatized industries, including the telecommunications
industry, to ensure continued service during labor disputes. In
addition, under the Concession and the Mexican railroad services
law and regulations, the SCT, in consultation with the Mexican
Antitrust Commission, reserves the right to set tariffs if it
determines that effective competition does not exist. The
Mexican Antitrust Commission, however, has not published
guidelines regarding the factors that constitute a lack of
competition. It is therefore unclear under what particular
circumstances the Mexican Antitrust Commission would deem a lack
of competition to exist. If the SCT intervenes and sets tariffs,
the rates it sets may be too low to allow KCSM to operate
profitably.
The Concession is renewable for additional periods of up to
50 years, subject to certain conditions. The SCT may
terminate the Concession if, among other things, there is an
unjustified interruption in the operation of KCSMs rail
lines, KCSM charges tariffs higher than the tariffs it has
registered with the SCT, KCSM restricts the ability of other
Mexican rail operators to use its rail lines, KCSM fails to make
payments for damages caused during the performance of services,
KCSM fails to comply with any term or condition of the Mexican
railroad services law and regulations, KCSM fails to make the
capital investments required under its five-year business plan
filed with the SCT, or KCSM fails to maintain an obligations
compliance bond and insurance overage as specified in the
Mexican railroad services law and regulations. In addition, the
Concession would revoke automatically if KCSM changes its
nationality or assigns or creates any lien on the Concession
without the SCTs approval. The SCT may also terminate the
Concession as a result of KCSMs surrender of its rights
under the Concession, or for reasons of public interest, by
revocation or upon KCSMs liquidation or bankruptcy.
Revocation or termination of the Concession would prevent KCSM
from operating its railroad and would materially adversely
affect our Mexican operations and ability to make payments on
KCSMs debt. If the Concession is revoked by the SCT, KCSM
would receive no revenue, and its interest in its rail lines and
all other fixtures covered by the Concession, as well as all
improvements made by it, would revert to the Mexican government.
In April 2006, the SCT initiated sanction proceedings against
KCSM, claiming that KCSM had failed to make the minimum capital
investments projected for 2004 and 2005 under its five-year
business plan filed with the SCT. Although we believe KCSM made
capital expenditures exceeding the amounts projected in its
business plan for 2004 and 2005, the SCT has objected to the
nature of the investments made by KCSM. KCSM has responded to
the SCT by providing evidence in support of its investments and
explaining why it believes sanctions are not appropriate. The
SCT has not yet responded to KCSMs arguments. KCSM has
further filed a request to amend its capital expenditure plan
for 2006. KCSM will have the right to challenge a negative
ruling by the SCT before the Administrative Federal Court, and,
if necessary, the right to challenge any negative ruling by the
Administrative Federal Court before a Federal Magistrates
Tribunal. However, if these proceedings are determined adversely
to KCSM and sanctions are imposed, KCSM could be subject to
fines, and could be subject to possible future revocation of the
Concession if the SCT imposes sanctions on three additional
occasions over the remaining term of the Concession.
Under the Concession, KCSM has the right to operate its rail
lines, but it does not own the land, roadway or associated
structures. If the Mexican government legally terminates the
Concession, it would own, control and manage such public domain
assets used in the operation of KCSMs rail lines. The
Mexican government may also temporarily seize control of
KCSMs rail lines and its assets in the event of a natural
disaster, war, significant public disturbances or imminent
danger to the domestic peace or economy. In such a case, the SCT
may restrict KCSMs ability to exploit the Concession in
such manner as the SCT deems necessary under the circumstances,
but only for the duration of any of the foregoing events.
Mexican law requires that the Mexican government pay
compensation if it effects a statutory appropriation for reasons
of the public interest. With respect to a temporary seizure due
to any cause other than international war, the Mexican railroad
services law and regulations provide that the Mexican government
will indemnify an affected
13
concessionaire for an amount equal to damages caused and losses
suffered. However, these payments may not be sufficient to
compensate KCSM for its losses and may not be timely made.
Our
ownership of KCSM and operations in Mexico subject us to
economic and political risks.
The Mexican government has exercised, and continues to exercise,
significant influence over the Mexican economy. Accordingly,
Mexican governmental actions concerning the economy and
state-owned enterprises could have a significant impact on
Mexican private sector entities in general and on our Mexican
operations in particular. The national elections held on
July 2, 2000 ended 71 years of rule by the
Institutional Revolutionary Party with the election of President
Vicente Fox Quesada, a member of the National Action Party, and
resulted in the increased representation of opposition parties
in the Mexican Congress and in mayoral and gubernatorial
positions. National elections were again held on July 2,
2006 which were disputed by the losing presidential candidate
and his supporters (see Political developments
in Mexico may adversely affect our business, financial condition
and results of operations). Although there have not yet
been any material adverse repercussions resulting from this
political change, multiparty rule is still relatively new in
Mexico and could result in economic or political conditions that
could materially and adversely affect our Mexican operations. We
cannot predict the impact that this new political landscape will
have on the Mexican economy. Furthermore, our financial
condition, results of operations and prospects may be affected
by currency fluctuations, inflation, interest rates, regulation,
taxation, social instability and other political, social and
economic developments in or affecting Mexico.
The Mexican economy in the past has suffered balance of payment
deficits and shortages in foreign exchange reserves. There are
currently no exchange controls in Mexico. However, Mexico has
imposed foreign exchange controls in the past. Pursuant to the
provisions of NAFTA, if Mexico experiences serious balance of
payment difficulties or the threat of such difficulties in the
future, Mexico would have the right to impose foreign exchange
controls on investments made in Mexico, including those made by
U.S. and Canadian investors. Any restrictive exchange control
policy could adversely affect our ability to obtain dollars or
to convert pesos into dollars for purposes of making interest
and principal payments due on indebtedness, to the extent we may
have to effect those conversions, and could adversely affect the
Mexican economy or our investment in KCSM. This could have a
material adverse effect on our business and financial condition.
Securities of companies in emerging market countries tend to be
influenced by economic and market conditions in other emerging
market countries. Some emerging market countries, including
Argentina and Brazil, have experienced significant economic
downturns and market volatility in the past. These events have
had an adverse effect on the economic conditions and securities
markets of other emerging market countries, including Mexico.
Political
developments in Mexico may adversely affect our business,
financial condition and results of operations.
Presidential and federal congressional elections in Mexico were
held in July 2006. In a closely held and contested presidential
race, Felipe Calderón defeated Andrés Manuel
López Obrador. Following the initial results of the
election that declared Calderón the winner, López
Obrador challenged the results to the electoral court. The
electoral court recognized certain flaws in the electoral
process but confirmed the initial results. Following the
electoral courts decision, supporters of López
Obrador began large scale protests and López Obrador
promised to form another government, separate from that of
Calderón. This scenario could lead to further friction
among political parties and the executive branch officers, which
could potentially cause political and economic instability.
While Calderón is from the same political party as his
predecessor, Vicente Fox, nonetheless, there could be
significant changes in laws, public policies and government
programs, which could have an adverse effect on our business,
financial condition and results of operation.
Mexican national politicians are currently focused on certain
regional political and social tension, and reforms regarding
fiscal and labor policies, gas, electricity, social security and
oil have not been and may not be approved. The effects on the
social and political situation in Mexico could adversely affect
the Mexican economy, which in turn could have a material adverse
effect on our business, financial condition and results of
operation.
14
Downturns
in the U.S. economy or in trade between the United States
and Mexico and fluctuations in the peso-dollar exchange rate
would likely have adverse effects on our business and results of
operations.
The level and timing of our Mexican business activity is heavily
dependent upon the level of
U.S.-Mexican
trade and the effects of NAFTA on such trade. Our Mexican
operations depend on the U.S. and Mexican markets for the
products KCSM transports, the relative position of Mexico and
the United States in these markets at any given time, and
tariffs or other barriers to trade. Downturns in the
U.S. or Mexican economy or in trade between the U.S. and
Mexico would likely have adverse effects on our business and
results of operations. Our Mexican operations depend on the U.S.
and Mexican markets for the products KCSM transports, the
relative position of Mexico and the United States in these
markets at any given time, and tariffs or other barriers to
trade. Any future downturn in the U.S. economy could have a
material adverse effect on KCSMs results of operations and
its ability to meet its debt service obligations.
Also, fluctuations in the peso-dollar exchange rate could lead
to shifts in the types and volumes of Mexican imports and
exports. Although a decrease in the level of exports of some of
the commodities that KCSM transports to the United
States may be offset by a subsequent increase in imports of
other commodities KCSM hauls into Mexico and vice versa, any
offsetting increase might not occur on a timely basis, if at
all. Future developments in
U.S.-Mexican
trade beyond our control may result in a reduction of freight
volumes or in an unfavorable shift in the mix of products and
commodities KCSM carries.
Any devaluation of the peso would cause the peso cost of
KCSMs dollar-denominated debt to increase, adversely
affecting its ability to make payments on its indebtedness.
Severe devaluation or depreciation of the peso may result in
disruption of the international foreign exchange markets and may
limit our ability to transfer pesos or to convert pesos into
U.S. dollars for the purpose of making timely payments of
interest and principal on our non-peso denominated indebtedness.
Although the Mexican government currently does not restrict, and
for many years has not restricted, the right or ability of
Mexican or foreign persons or entities to convert pesos into
U.S. dollars or to transfer foreign currencies out of
Mexico, the Mexican government could, as in the past, institute
restrictive exchange rate policies that could limit our ability
to transfer or convert pesos into U.S. dollars or other
currencies for the purpose of making timely payments of our
U.S. dollar-denominated debt and contractual commitments.
Devaluation or depreciation of the peso against the
U.S. dollar may also adversely affect U.S. dollar
prices for our securities. Currency fluctuations are likely to
continue to have an effect on our financial condition in future
periods.
KCSM
has identified possible discrepancies in data provided by its
prior information system.
KCSM recently installed a new operational information system.
Based on preliminary testing of the data provided by this
system, including a comparison of such data to data provided by
KCSMs prior information system, it is possible that the
data provided by KCSMs prior information system may have
contained discrepancies. We have not yet determined what effect,
if any, these discrepancies could have on KCSMs financial
condition or results of operations, however there can be no
assurance that the effect will not be material.
Mexico
may experience high levels of inflation in the future which
could adversely affect our results of operations.
Mexico has a history of high levels of inflation, and may
experience high inflation in the future. During most of the
1980s and during the mid- and
late-1990s,
Mexico experienced periods of high levels of inflation. The
annual rates of inflation for the last five years, as measured
by changes in the National Consumer Price Index, as provided by
Banco de Mexico, were 3.3% in 2005, 5.2% in 2004, 4.0% in 2003,
5.7% in 2002 and 4.4% in 2001. A substantial increase in the
Mexican inflation rate would have the effect of increasing some
of KCSMs costs, which could adversely affect its results
of operations and financial condition. High levels of inflation
may also affect the balance of trade between Mexico and the
United States, and other countries, which could adversely affect
KCSMs results of operations.
15
INFORMATION
WITH RESPECT TO KANSAS CITY SOUTHERN
Information with respect to KCS that is called for in
Item 11(d) of
Form S-1
regarding the market price of our common stock can be found in
Common Stock Price Range below. All other
information required by Item 11 of
Form S-1
is incorporated by reference to certain documents filed by us
with the SEC. See Where You Can Find More
Information below.
USE OF
PROCEEDS
All of the shares of common stock offered hereby are being sold
by the selling stockholder. We will not receive any proceeds
from the sale of shares in this offering.
COMMON
STOCK PRICE RANGE
Our common stock is listed on the NYSE under the symbol KSU. The
following table sets forth the high and low closing sales prices
of our common stock, as reported by the NYSE, for each of the
periods listed.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal 2004
|
|
$
|
17.75
|
|
|
$
|
12.67
|
|
First Quarter
|
|
|
15.27
|
|
|
|
13.39
|
|
Second Quarter
|
|
|
15.50
|
|
|
|
12.67
|
|
Third Quarter
|
|
|
15.43
|
|
|
|
13.46
|
|
Fourth Quarter
|
|
|
17.75
|
|
|
|
15.45
|
|
Fiscal 2005
|
|
$
|
25.56
|
|
|
$
|
16.09
|
|
First Quarter
|
|
|
20.03
|
|
|
|
16.09
|
|
Second Quarter
|
|
|
20.71
|
|
|
|
18.60
|
|
Third Quarter
|
|
|
23.31
|
|
|
|
19.72
|
|
Fourth Quarter
|
|
|
25.56
|
|
|
|
20.81
|
|
Fiscal 2006
|
|
$
|
30.00
|
|
|
$
|
22.32
|
|
First Quarter
|
|
|
26.17
|
|
|
|
22.32
|
|
Second Quarter
|
|
|
27.75
|
|
|
|
23.46
|
|
Third Quarter
|
|
|
28.41
|
|
|
|
23.24
|
|
Fourth Quarter (October 1
through November 30)
|
|
|
30.00
|
|
|
|
26.49
|
|
The last reported closing price of our common stock on the NYSE
on December 4, 2006 was $26.77 per share. As of
November 15, 2006, there were 4,443 holders of record
of our common stock.
16
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
consolidated capitalization as of September 30, 2006.
This table should be read in conjunction with our financial
information incorporated by reference in this prospectus. All
dollar values are stated in millions.
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
Cash and Cash Equivalents
|
|
$
|
64.20
|
|
|
|
|
|
|
Debt due within one year
|
|
|
186.20
|
|
Long-term
debt(1)
|
|
|
1,490.50
|
|
Stockholders Equity:
|
|
|
|
|
$25 par, 4% Noncumulative,
Preferred stock
|
|
|
6.10
|
|
$1 par, 4.25% Series C
Cumulative Convertible Preferred stock
|
|
|
0.40
|
|
$1 par, 5.125% Series D
Cumulative Convertible Preferred stock
|
|
|
0.20
|
|
$.01 par, Common stock
|
|
|
0.70
|
|
Paid in capital
|
|
|
522.60
|
|
Retained earnings, net of
accumulated other comprehensive loss
|
|
|
999.70
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
3,206.40
|
|
|
|
|
|
|
|
|
|
(1)
|
|
On November 21, 2006, KCSM
sold $175.0 million in aggregate principal amount of new
7.625% Senior Notes due 2013. Proceeds from the sale were used
to refinance $146.0 million of the $150.0 million
aggregate principal amount outstanding of KCSMs 10.25%
Senior Notes due 2007 and to pay down $29.0 million of
KCSMs term loan facility.
|
17
DESCRIPTION
OF KCS COMMON STOCK
The description of our common stock set forth below is not
complete and is qualified by reference to our restated
certificate of incorporation and bylaws. Copies of our restated
certificate of incorporation and bylaws are available from us
upon request. These documents have also been filed with the SEC.
Please read Where You Can Find More Information.
Authorized
Capital Stock
Under our restated certificate of incorporation, KCS is
authorized to issue (i) 400,000,000 shares of common
stock, par value $0.01 per share,
(ii) 840,000 shares of 4% Noncumulative, Preferred
Stock, par value $25.00 per share (4% Preferred
Stock), and (iii) 2,000,000 shares of New
Series Preferred Stock, par value $1.00 per share
(New Series Preferred Stock), of which
150,000 shares are designated as New Series Preferred
Stock, Series A (Series A Preferred
Stock), 1,000,000 shares are designated as
Series B Convertible Preferred Stock (Series B
Preferred Stock), 400,000 shares are designated as
4.25% Redeemable Cumulative Convertible Perpetual Preferred
Stock, Series C (Series C Preferred Stock)
and 210,000 shares are designated as
51/8%
Cumulative Convertible Perpetual Preferred Stock, Series D
(Series D Preferred Stock). As of
October 31, 2006, 75,834,470 shares of common stock
were issued and outstanding (excluding 17,029,115 treasury
shares), 242,170 shares of 4% Preferred Stock were issued
and outstanding, 400,000 shares of Series C Preferred
Stock were issued and outstanding, 210,000 shares of
Series D Preferred Stock were issued and outstanding and no
other shares of New Series Preferred Stock were
outstanding. The issued and outstanding shares of common stock,
4% Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock are duly authorized, validly
issued, fully paid and non-assessable. Our common stock and 4%
Preferred Stock are listed on the NYSE.
Common
Stock
Holders of common stock are entitled to receive dividends when,
as and if declared by the board of directors out of funds
legally available for the payment of dividends, provided that,
if any shares of New Series Preferred Stock or 4% Preferred
Stock are outstanding, no dividends or other distributions may
be made with respect to the common stock unless full required
dividends on the shares of New Series Preferred Stock and
4% Preferred Stock have been paid, including accumulated
dividends in the case of any series of New Series Preferred
Stock designated to receive cumulative dividends.
We have not declared any cash dividends on our common stock
during the last five fiscal years and do not anticipate making
any cash dividend payments to common stockholders in the
foreseeable future. The agreements governing our term loan,
revolving credit facility and debt securities impose
restrictions on our ability to pay cash dividends on our common
stock. In addition, we are currently unable to pay dividends on
our common stock for the reasons described in
Failure to Pay Cash Dividends on Certain of Our Preferred
Stock, below.
Holders of common stock are entitled to one vote per share
multiplied by the number of directors to be elected in an
election of directors, which may be cast cumulatively, and to
one vote per share on any other matter, voting as a single
class. In the event of the voluntary or involuntary dissolution,
liquidation or winding up of KCS, holders of common stock are
entitled to receive pro rata, after satisfaction in full of the
prior rights of creditors (including holders of KCSs
indebtedness) and holders of New Series Preferred Stock and
4% Preferred Stock, all the remaining assets of KCS available
for distribution. The issuance of additional shares of New
Series Preferred Stock or 4% Preferred Stock may result in
a dilution in the voting power and relative equity interests of
the holders of common stock and would subject the common stock
to the prior dividend and liquidation rights of the additional
New Series Preferred Stock and 4% Preferred Stock issued.
The issuance of common stock in payment of dividends on or upon
conversion of our Series C Preferred Stock or Series D
Preferred Stock could also result in dilution in the voting
power and relative equity interests of the holders of our common
stock. The common stock is not redeemable and has no preemptive
rights.
Voting
Rights of Preferred Stock
In certain instances, holders of New Series Preferred Stock or
4%Preferred Stock have special class voting rights. Holders of
4% Preferred Stock are entitled to one vote per share multiplied
by the number of directors to be
18
elected in an election of directors, which may be cast
cumulatively, and to one vote per share on other matters.
Holders of 4% Preferred Stock vote as a single class with the
holders of common stock and any series of New Series Preferred
Stock having voting rights; however, whenever dividends are in
arrears on the 4% Preferred Stock for six quarters, the holders
of 4% Preferred Stock have the right to vote as a class to elect
two directors at the next annual stockholders meeting at
which directors are elected and at each subsequent
stockholders meeting until such time as dividends have
been paid on the 4% Preferred Stock for four consecutive
quarters. The vote of the holders of two-thirds of the 4%
Preferred Stock voting together as a class is required for any
amendment to KCSs restated certificate of incorporation
which would materially and adversely alter or change the powers,
preferences or special rights of the 4% Preferred Stock.
Whenever dividends on the Series C Preferred Stock or
Series D Preferred Stock are in arrears for
six consecutive quarters (or an equivalent number of days
in the aggregate, whether or not consecutive) holders of the
Series C Preferred Stock or Series D Preferred Stock,
as applicable, will be entitled to vote for the election of two
of the authorized directors at the next annual
stockholders meeting at which directors are elected and at
each subsequent stockholders meeting until such time as
all accumulated dividends are paid on the Series C
Preferred Stock or Series D Preferred Stock, as applicable,
or set aside for payment. The vote of holders of two-thirds of
the Series C Preferred Stock or Series D Preferred
Stock, voting as a class, is required for any amendment to
KCSs restated certificate of incorporation which would
materially and adversely alter or change the powers, preferences
or special rights of the Series C Preferred Stock or
Series D Preferred Stock, as applicable.
Failure
to Pay Cash Dividends on Certain of Our Preferred
Stock
Following completion of the preparation of our 2005 financial
statements, we determined that our Consolidated Coverage Ratio
for the last twelve months (as defined in the indentures for
KCSRs
71/2% Senior
Notes and
91/2% Senior
Notes) was less than 2.0:1. As a result, pursuant to the terms
of each KCSR indenture, we were restricted from paying cash
dividends on our Series C Preferred Stock and Series D
Preferred Stock since February 15, 2006 for the fourth
quarter of 2005. Based on our financial results for the quarter
ended September 30, 2006, our Consolidated Coverage Ratio
for the last twelve months will be greater than 2.0:1, and as of
November 15, 2006, we believe we will no longer be
restricted from paying such dividends. As of November 9,
2006, the aggregate amount of dividends in arrears on the
Series C Preferred Stock and Series D Preferred Stock
was $10.3 million.
Unpaid dividends on our Series C Preferred Stock and
Series D Preferred Stock will accumulate until such time as
they are paid. Whenever dividends on the Series C Preferred
Stock or Series D Preferred Stock are in arrears for six
consecutive quarters (or an equivalent number of days in the
aggregate, whether or not consecutive) holders of the
Series C Preferred Stock or Series D Preferred Stock,
as applicable, will be entitled to vote for the election of two
of the authorized directors as described in Voting
Rights of Preferred Stock above.
Anti-Takeover
Provisions
Classified
Board of Directors
Our restated certificate of incorporation provides that our
board of directors will be divided into three classes as nearly
equal in number as possible. Each class of directors serves for
a term of three years and such terms commence in three
consecutive years so that one class of directors is elected at
the annual stockholders meeting each year. Our restated
certificate of incorporation also provides that the vote of 70%
of the shares entitled to vote in the election of directors is
required to amend the restated 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
restated certificate of incorporation on certain transactions
involving mergers, consolidations, sales or leases of assets
having a fair market value of $2 million or more, with or
to certain owners of more than 5% of our stock entitled to vote
in the election of directors, unless our board of directors has
approved a memorandum of understanding with any such owner prior
to its becoming such a 5% stockholder. These provisions could
have the effect of delaying, deferring or preventing a change in
control of KCS.
19
Rights
Agreement
Pursuant to our Rights Agreement dated as of September 29,
2005, our board of directors declared a dividend distribution of
one Series A Preferred Stock purchase right
(Right) for each share of KCS common stock
outstanding on October 12, 2005 and each share of common
stock issued between that date and the Expiration
Date, as defined in the Rights Agreement. Each Right
entitles the registered holder to purchase from KCS
1/1,000
of a share of Series A Preferred Stock, or in some
circumstances, shares of KCS common stock, or other securities,
cash or other assets, as provided in the Rights Agreement, at a
purchase price of $100 per share.
The Rights, which are automatically attached to KCS common
stock, are not exercisable or transferable apart from KCS common
stock until the tenth business day following the earlier to
occur of (unless extended by our board of directors and subject
to the earlier redemption or expiration of the Rights):
|
|
|
|
|
a public announcement that a person or group of affiliated or
associated persons has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding
shares of our common stock (or 13% in the case that the
independent directors consider such person an adverse
person) (each an Acquiring Person); or
|
|
|
|
the commencement of a tender offer or exchange offer that would
result in a person or a group becoming an Acquiring Person.
|
Until exercised, holders of the Rights will have no rights as a
stockholder of KCS, including, without limitation, the right to
vote or receive dividends. In connection with certain business
combinations resulting in the acquisition of KCS or dispositions
of more than 50% of our assets or earnings power, each Right
shall thereafter have the right to receive, upon the exercise of
the Right at the then current exercise price of the Right, that
number of shares of the highest priority voting securities of
the acquiring company (or certain of its affiliates) that at the
time of such transaction would have a market value of two times
the exercise price of the Right. The Rights expire on
October 11, 2010, unless earlier redeemed by us.
At any time prior to the final expiration date of the Rights
Agreement or the tenth business day after the first date after
the public announcement that an Acquiring Person has acquired
beneficial ownership of 15% (or 13% in some instances) or more
of the outstanding shares of KCS common stock, we may redeem the
Rights in whole, but not in part, at a price of $0.0025 per
Right. In addition, our right of redemption may be reinstated
following an inadvertent trigger of the Rights (as determined by
our board of directors) if an acquiring person reduces its
beneficial ownership to 10% or less of the outstanding shares of
our common stock in a transaction or series of transactions not
involving us.
Under certain circumstances, the Rights Agreement could
significantly impair the ability of third parties to acquire
control of us without prior approval of our board of directors.
20
SELLING
STOCKHOLDER
The following table sets forth certain information regarding the
KCS common stock held by the selling stockholder as of
December 4, 2006. Shares of the common stock offered under
this prospectus are being offered for the account of the selling
stockholder.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Beneficially Owned
|
|
Name of Selling
|
|
Beneficially Owned
|
|
|
Offered by Selling
|
|
|
After
Offering(1)
|
|
Stockholder
|
|
as of December 4, 2006
|
|
|
Stockholder
|
|
|
Number
|
|
|
Percent
|
|
|
Grupo TMM, S.A.
|
|
|
1,494,469
|
|
|
|
1,494,469
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
(1)
|
|
Because the selling stockholder may
sell all or a portion of the common stock being offered pursuant
to this prospectus, the number of shares of KCS common stock
that will be owned by the selling stockholder upon termination
of this offering cannot be determined at this time. For the
foregoing calculations, we have assumed a sale of all of the
shares of common stock offered by the selling stockholder under
this prospectus.
|
KCSs
Relationship with the Selling Stockholder
In 1995, KCS entered into a joint venture agreement with the
selling stockholder to, among other things, provide for
participation in the privatization of the Mexican national
railway system and to promote the movement of rail traffic over
rail lines operated by Tex-Mex, KCSM, and KCSR. Since 1997,
subsidiaries of KCS and the selling stockholder have owned,
along with Mexican governmental agencies, interests in Grupo
KCSM, pursuant to the joint venture agreement (which terminated
on December 1, 2003) and other agreements entered into
between KCS and the selling stockholder.
On April 20, 2003, KCS and the selling stockholder entered
into an agreement for the acquisition by KCS of control of KCSM
(the Original Acquisition Agreement). The Original
Acquisition Agreement was not consummated due to disputes
arising between the parties which led to litigation and
arbitration. On December 15, 2004, KCS and the selling
stockholder entered into an amended and restated acquisition
agreement (the Acquisition Agreement) amending and
restating the Original Acquisition Agreement. Under the terms of
the Acquisition Agreement, on April 1, 2005, we acquired
all of the selling stockholders interest in Grupo KCSM.
The consideration payable pursuant to the Acquisition Agreement
consisted of: (1) 18,000,000 shares of KCS common
stock, (2) $200 million in cash and (3) any
amount due on certain indemnity escrow notes. In addition, the
Acquisition Agreement provided that if there was a final
resolution of the VAT claim and Put (as described below), then
we would be obligated to pay, pursuant to the terms of the
Acquisition Agreement, up to $110 million, payable in a
combination of cash, KCS common stock and a note convertible
into KCS common stock.
On September 12, 2005, the Company and its subsidiaries,
KCSM and Grupo KCSM, along with TMM, entered into a settlement
agreement with the Mexican government, resolving the
controversies and disputes between the companies and the Mexican
government concerning the payment of a value added tax
(VAT) refund to KCSM and the obligation
(Put) to purchase the remaining shares of KCSM owned
by the Mexican government (the VAT/Put Settlement).
As a result of the VAT/Put Settlement, KCS and its subsidiaries
now own 100% of Grupo KCSM and KCSM. The potential obligation of
KCS, Grupo KCSM and TMM to acquire the Mexican governments
remaining 20% ownership of KCSM has been eliminated, and the
legal obligation of the Mexican government to issue the VAT
refund to KCSM has been satisfied. Pursuant to the settlement
agreement, there was no cash exchanged between the parties to
the settlement agreement. In addition, the parties entered into
mutual releases of all existing and potential claims relating to
the VAT refund and the Put obligation, and entered into an
agreement to dismiss all of the existing litigation between the
parties.
As a result of the final resolution of the VAT claim and Put
obligation, KCS was required to make a contingent payment of
$110.0 million to TMM in accordance with the terms of the
Acquisition Agreement in a combination of stock, notes and cash.
In addition, a contingent payment of $9.0 million to Jose
F. Serrano International Business, S.A. de C.V.
(JSIB) also became payable upon final resolution of
the VAT claim and Put obligation. On March 13, 2006, in
settlement of the $110.0 million obligation to TMM, KCS
paid TMM $35.0 million in cash, issued
1,494,469 shares of KCS common stock at the volume weighted
average price of $23.4197 per share to TMM, as
21
determined in accordance with the Acquisition Agreement, and
issued a five year note to TMM in the original principal amount
of $40.0 million. The note is subject to reduction for
certain payments made by us and may at our option be paid in KCS
common stock in accordance with an agreed upon market formula.
The number of shares of KCS common stock which may be issued in
payment of such note has not yet been determined. Also on
March 13, 2006, in settlement of the $9.0 million
obligation to JSIB, KCS paid $9.0 million in cash to JSIB.
In connection with the Acquisition Agreement, we issued three
notes in the original aggregate principal amount of
$47.0 million to TMM (the Indemnity Escrow
Notes) that are being held in escrow and are subject to
reduction in accordance with the terms of the Acquisition
Agreement and an Indemnity Escrow Agreement. The Indemnity
Escrow Notes, as adjusted, are payable on April 1, 2007. We
may at our option pay any amounts due under the Indemnity Escrow
Notes in KCS common stock in accordance with an agreed upon
market formula. The number of shares of KCS common stock which
may be issued in payment of the Indemnity Escrow Notes has not
yet been determined.
In connection with the Acquisition Agreement, KCS and TMM or
their respective affiliates entered into a stockholders
agreement, a registration rights agreement, a marketing and
services agreement and a consulting agreement, each of which is
summarized below. In addition, the parties entered into certain
other agreements, including releases and escrow arrangements.
KCS, TMM and certain other principal stockholders entered into a
stockholders agreement, dated December 15, 2004,
which became effective on April 1, 2005. The stockholders
agreement originally included standstill provisions, transfer
restrictions and voting provisions with respect to the shares of
KCS common stock owned by TMM and its affiliates, and the grant
to TMM of limited preemptive rights with respect to KCS common
stock. Except as otherwise provided, the transfer restrictions
contained in the stockholders agreement generally
terminated upon the earliest to occur of (1) a Change of
Control of KCS (as defined therein); and (2) the first date
TMM and its affiliates beneficially owned in the aggregate less
than 15% of the outstanding voting securities of KCS for at
least 30 consecutive days. Otherwise, the
stockholders agreement generally terminates on the
earliest to occur of (1) the first date TMM and its
affiliates have, for at least 30 consecutive days, beneficially
owned in the aggregate less than 40% of the voting securities of
KCS initially acquired pursuant to the Acquisition Agreement,
and (2) the termination of the stockholders agreement
by the parties in writing and approved by the KCS Board of
Directors. A number of these restrictions terminated when
TMMs beneficial ownership was reduced below 15% of the
outstanding voting securities of KCS and when TMM beneficially
owned in the aggregate less than 40% of the voting securities of
KCS initially acquired pursuant to the Acquisition Agreement.
TMM Logistics, S.A. de C.V. (TMM Logistics and
together with its subsidiaries, affiliates and joint venture
companies, the Parent Group), KCSM and KCSR entered
into a marketing and services agreement, dated December 2004,
which provides, among other things, that (1) except as
otherwise provided, upon the request of any member of the Parent
Group, KCSM will provide certain intermodal services to any
member of the Parent Group on terms which are no less favorable
than the terms for like volumes and services provided to third
or fourth party logistics companies; (2) the Parent Group
will have the right to be the exclusive provider of certain
freight services over KCSMs rail system within Mexico, and
that the KCS Group (as defined therein) will not sell, market or
otherwise provide such services through any other person over
KCSMs rail system within Mexico; (3) to the extent
that KCSM determines to utilize a third party to operate its
intermodal terminals within Mexico or to provide other services
of the type which are the subject of the marketing and services
agreement, the Parent Group may be preferred to operate such
intermodal terminals or to provide such services over any
unrelated third party, subject to certain conditions; and
(4) the Parent Group will have the right to make a bid for
the provision of certain transportation logistics services, if
KCSM and its subsidiaries and affiliates determine to have such
services provided by any unaffiliated third party in Mexico. The
initial term of the marketing and services agreement is
five years from April 1, 2005, subject to automatic
renewals and subject to earlier termination.
KCS and JSIB entered into a consulting agreement, dated as of
December 15, 2004 and effective as of April 1, 2005,
that calls for JSIB to provide certain consulting services to
the KCS board of directors related to the maintenance, fostering
and promotion of a positive relationship between us
and/or our
affiliates and high-ranking officials of those branches of the
Mexican government that have an impact on the Mexican railroad
industry or our rail network operations. Jose Serrano Segovia is
required under the terms of the consulting agreement to be
22
personally involved in the provision of services by JSIB. Jose
Serrano Segovia is the current Chairman of the Board of
Directors of TMM and certain of its subsidiaries. The consulting
agreement has a term of three years beginning on the first
business day following April 1, 2005, and is subject to
earlier termination. Subject to the terms and conditions of the
consulting agreement, we are obligated to pay JSIB an annual fee
of $3.0 million. In addition, on the final resolution of
the VAT claim and Put, KCS paid $9.0 million as
consideration for JSIBs services in connection with the
resolution of the VAT claim and Put.
In connection with the acquisition transaction, we and the
selling stockholder are parties to a registration rights
agreement under which we granted registration rights relating to
the KCS common stock being offered under this prospectus. The
selling stockholder entered into a letter agreement with us on
August 30, 2006, which modified the terms of the
registration rights agreement. Pursuant to the letter agreement,
the selling stockholder has agreed to pay, in addition to all
selling expenses and underwriting fees incurred in the offer and
sale of the selling stockholders common stock, all
reasonable costs and expenses related to the preparation, filing
and amendment of the registration statement of which this
prospectus is a part. Pursuant to the letter agreement, the
selling stockholder also agreed to engage an underwriter
satisfactory to us for the purpose of disposing of the selling
stockholders common stock upon the declaration of
effectiveness of the registration statement, and to dispose of
the common stock through a public offering to persons who are
eligible to file reports pursuant to
Rule 13d-1(c)
under the Exchange Act, within a period of 60 days
following the declaration of effectiveness of the registration
statement. Pursuant to the registration rights agreement, as
amended by the letter agreement, we filed a registration
statement on
Form S-1
with the SEC on November 20, 2006, of which this prospectus
is a part, with respect to the sale of the selling
stockholders common stock. Because the selling stockholder
may dispose of all or a portion of the selling
stockholders common stock, we cannot estimate the number
of shares of common stock that will be held by the selling
stockholder upon the termination of any such disposition.
23
UNDERWRITING
Under the terms and subject to the conditions contained in an
underwriting agreement dated the date of this prospectus, Morgan
Stanley & Co. Incorporated (Morgan Stanley)
has agreed to purchase, and the selling stockholder has agreed
to sell to Morgan Stanley, 1,494,469 shares of our common
stock.
Morgan Stanley is offering the common stock subject to its
acceptance of the shares from the selling stockholder. The
underwriting agreement provides that the obligation of Morgan
Stanley to pay for and accept delivery of the common stock
offered by this prospectus is subject to the approval of certain
legal matters by its counsel and to certain other conditions.
Morgan Stanley is obligated to take and pay for all of the
common stock offered by this prospectus if any such shares are
taken. Morgan Stanley initially proposes to offer the shares of
common stock directly to the public at the public offering price
listed on the cover page of this prospectus.
The following table shows the per share and total underwriting
discounts and commissions to be paid to Morgan Stanley by the
selling stockholder.
|
|
|
|
|
Paid by the Selling
Stockholder
|
|
Total
|
|
|
Per Share
|
|
$
|
0.8661
|
|
Total
|
|
$
|
1,294,359.60
|
|
The expenses of this offering payable by the selling
stockholder, not including the underwriting discounts and
commissions, are estimated at $1,267,000. We are not paying any
of the expenses of this offering.
Our common stock is listed on the NYSE under the symbol
KSU.
In order to facilitate the offering of the common stock, Morgan
Stanley may engage in transactions that stabilize, maintain or
otherwise affect the price of our common stock. Specifically,
Morgan Stanley may sell more shares than it is obligated to
purchase under the underwriting agreement, creating a short
position. Morgan Stanley must close out any short position by
purchasing shares in the open market. A short position may be
created if Morgan Stanley is concerned that there may be
downward pressure on the price of our common stock in the open
market after pricing that could adversely affect investors who
purchase in the offering. As an additional means of facilitating
the offering, Morgan Stanley may bid for, and purchase, common
stock in the open market to stabilize the price of our common
stock. These activities may raise or maintain the market price
of our common stock above independent market levels or prevent
or retard a decline in the market price of our common stock.
Morgan Stanley is not required to engage in these activities and
may end any of these activities at any time.
Purchases to cover a short position and stabilizing transactions
may have the effect of preventing or retarding a decline in the
market price of our common stock and may stabilize, maintain or
otherwise affect the market price of our common stock. As a
result, the price of our common stock may be higher than the
price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued at any time.
These transactions may be effected on the NYSE, in the
over-the-counter
market or otherwise.
From time to time, Morgan Stanley and its affiliates have
provided, and may continue to provide, investment banking,
commercial banking and capital raising services to us for fees
and commissions that we believe are customary. An affiliate of
Morgan Stanley is a lender under our term loan and revolving
credit facility, Morgan Stanley was the dealer manager for the
tender offer by KCSM for the 10.25% Senior Notes due 2007, and
Morgan Stanley was a placement agent for the issuance of
KCSMs 7.625% Senior Notes due 2013. Morgan Stanley has
also acted as an underwriter or placement agent of our and
KCSMs securities. Morgan Stanley and its affiliates have
received customary cash commissions and fees in connection with
these services.
Morgan Stanley or its affiliates may from time to time hold some
of our and KCSMs securities through ordinary trading or
market-making activities.
We and the selling stockholder have agreed to indemnify Morgan
Stanley against certain liabilities, including liabilities under
the Securities Act.
24
LEGAL
MATTERS
The validity of our common stock offered in this offering and
other legal matters related to this offering have been passed
upon for us as to U.S. law by Sonnenschein Nath &
Rosenthal LLP. Legal matters related to this offering have been
passed upon for us as to Mexican law by White & Case,
S.C. Legal matters relating to this offering have been passed
upon for the selling stockholder as to U. S. law by
Haynes & Boone, LLP, and as to Mexican law by
Haynes & Boone, S.C. Legal matters related to this
offering have been passed upon for the underwriter as to
U.S. law by Shearman & Sterling LLP.
EXPERTS
The consolidated financial statements of Kansas City Southern as
of December 31, 2005, and 2004, and for each of the years
in the three-year period ended December 31, 2005, and
managements assessment of the effectiveness of internal
controls over financial reporting as of December 31, 2005
have been incorporated in this prospectus by reference to our
annual report on
Form 10-K
for the year ended December 31, 2005, in reliance upon the
reports of KPMG LLP, an independent registered public accounting
firm, incorporated by reference in this prospectus, and upon the
authority of said firm as experts in accounting and auditing.
The audit report of KPMG LLP covering the consolidated financial
statements of Kansas City Southern indicates that KPMG LLP did
not audit the financial statements of Grupo Transportación
Ferroviaria Mexicana, S.A. de C.V. (Grupo TFM and currently
known as Grupo KCSM), a 46.6% owned investee company, as of
December 31, 2004 and for the years ended December 31,
2004 and 2003 which were audited by other auditors whose reports
have been furnished to KPMG LLP, and the KPMG LLP opinion on the
consolidated financial statements, insofar as it relates to the
amounts included for Grupo TFM as of December 31, 2004 and
for the years ended December 31, 2004 and 2003, is based
solely on the reports of other auditors.
The audit report dated April 7, 2006, on managements
assessment of the effectiveness of internal control over
financial reporting and the effectiveness of internal control
over financial reporting as of December 31, 2005, expresses
an opinion that Kansas City Southern did not maintain effective
internal control over financial reporting as of
December 31, 2005 because of the effect of a material
weakness on the achievement of the objectives of the control
criteria and contains an explanatory paragraph that states that
the Company lacked sufficient personnel with adequate expertise
in accounting for income taxes, effective reconciliation
procedures related to income tax accounts and sufficient
oversight of the income tax accounting function by management.
As a result, the Company restated the opening retained earnings
balance for the year ended December 31, 2003 in connection
with issuing the 2005 consolidated financial statements to
reflect the correction of errors in the accounting for income
taxes. Additionally, a material misstatement was identified in
the income tax provision in the 2005 consolidated financial
statements.
The audit report dated April 7, 2006, on managements
assessment of the effectiveness of internal control over
financial reporting and the effectiveness of internal control
over financial reporting as of December 31, 2005, contains
an explanatory paragraph that states the Company acquired
control of Grupo TFM (currently known as Grupo KCSM) and its
subsidiary, Kansas City Southern de Mexico, S.A. de C.V. (KCSM)
on April 1, 2005, and management excluded from its
assessment of the effectiveness of the Companys internal
control over financial reporting as of December 31, 2005
Grupo TFMs and KCSMs internal control over financial
reporting which represents 53% of the Companys
consolidated total assets and 41% of the Companys
consolidated total revenues included in the consolidated
financial statements of the Company and its subsidiaries as of
and for the year ended December 31, 2005. KPMG LLPs
audit of internal control over financial reporting of the
Company also excluded an evaluation of the internal control over
financial reporting of Grupo TFM and KCSM.
The audit report dated April 7, 2006, on the consolidated
financial statements contains an explanatory paragraph stating
that effective January 1, 2003, the Company adopted
Statement of Financial Accounting Standards No. 143,
Accounting for Asset Retirement
Obligations. The audit report also contains an
explanatory paragraph indicating that the Company restated its
balance sheet as of December 31, 2004 and its statement of
stockholders equity for the years ended December 31,
2004 and 2003.
25
The consolidated financial statements of Grupo TFM (currently
known as Grupo KCSM) and subsidiaries as of December 31,
2005, and the related consolidated statements of operations,
changes in stockholders equity and cash flows for the
three months ended March 31, 2005 (Predecessor)
and the nine months ended December 31, 2005
(Successor) have been audited by KPMG Cárdenas
Dosal, S.C., an independent registered public accounting firm,
incorporated by reference in this prospectus, and upon the
authority of said firm as experts in accounting and auditing.
The audit report dated on April 7, 2006, on the
consolidated financial statements of Grupo TFM contains an
explanatory paragraph stating that due to the acquisition of
control of Grupo TFM by Kansas City Southern on April 1,
2005, the accompanying consolidated financial statements after
March 31, 2005 (Successor) are presented on a
different cost basis than for the periods before the change in
control and therefore are not comparable to the consolidated
financial statements for the years ended December 31, 2004
and 2003 (Predecessor). Grupo TFMs financial
statements are separated between Successor and
Predecessor periods to reflect Grupo TFMs
results and financial position before and after the change in
control.
The consolidated financial statements of Grupo TFM (currently
known as Grupo KCSM) and subsidiaries as of December 31,
2004 and for each of the two years ended December 31, 2004
incorporated in this registration statement by reference to the
Annual Report of Kansas City Southern on Form 10-K for the year
ended December 31, 2005 have been so incorporated in
reliance on the report of PricewaterhouseCoopers, S.C., an
independent registered public accounting firm, given upon the
authority of said firm as experts in auditing and accounting.
WHERE YOU
CAN FIND MORE INFORMATION
We file annual, quarterly and other reports, proxy statements
and other information with the SEC under the Exchange Act. You
may read and copy any materials we file with the SEC at the
SECs public reference room at 100 F Street,
N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330
for further information on the public reference room. Our SEC
filings are also available to the public through the SECs
website at
http://www.sec.gov.
General information about us, including our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
as well as any amendments and exhibits to those reports, are
available free of charge though our website at
http://www.kcsi.com as soon as reasonably practicable after we
file them with, or furnish them to, the SEC. Information on our
website is not incorporated into this prospectus or our other
securities filings and is not a part of this prospectus.
In addition, our reports and other information concerning us can
be inspected at the New York Stock Exchange, 20 Broad
Street, New York, New York 10005, where our common
stock is listed.
The SEC allows us to incorporate by reference certain
information we file with it, which means that we can disclose
important information to you by referring you to those
documents. The information incorporated by reference is
considered to be part of this prospectus. The following
documents we filed with the SEC under the Exchange Act are
incorporated herein by reference:
(a) Our annual report on
Form 10-K
for our fiscal year ended December 31, 2005, as filed with
the SEC on April 7, 2006;
(b) Our quarterly report on
Form 10-Q
for the quarter ended March 31, 2006, as filed with the SEC
on May 9, 2006; our quarterly report on
Form 10-Q
for the quarter ended June 30, 2006, as filed with the SEC
on August 8, 2006; and our quarterly report on
Form 10-Q
for the quarter ended September 30, 2006, as filed with the
SEC on November 9, 2006.
(c) Our current reports on
Form 8-K
dated January 11, 2006, as filed with the SEC on
January 13, 2006; dated March 17, 2006, as filed with
the SEC on March 17, 2006 (but excluding information in
such report that was furnished to, and not filed with, the SEC);
dated March 17, 2006, as filed with the SEC on
March 23, 2006; dated April 28, 2006, as filed with
the SEC on May 4, 2006; dated May 1, 2006, as filed
with the SEC on May 5, 2006; dated May 16, 2006, as
filed with the SEC on May 17, 2006; dated May 12,
2006, as filed with the SEC on May 18, 2006; dated
June 7, 2006, as filed with the SEC on June 12, 2006;
dated June 13, 2006, as filed with the SEC on June 19,
2006; dated August 11, 2006, as filed with the SEC on
August 17, 2006; dated September 11, 2006, as filed
with the SEC on September 15, 2006; dated October 23,
2006, as filed with the
26
SEC on October 25, 2006; dated November 6, 2006, as
filed with the SEC on November 7, 2006; dated
November 13, 2006, as filed with the SEC on
November 14, 2006; dated November 16, 2006, as filed
with the SEC on November 17, 2006; and dated November 21,
2006, as filed with the SEC on November 28, 2006.
(d) Our Notice of Annual Meeting and Proxy Statement filed
with the SEC on April 11, 2006.
We will provide without charge to each person, including a
beneficial owner, to whom a prospectus is delivered, upon
written or oral request a copy of any or all of the reports or
documents that have been incorporated by reference in this
prospectus. Requests for these reports or documents should be
directed to Brian P. Banks, Associate General Counsel and
Assistant Secretary, at 427 West 12th Street, Kansas
City, Missouri 64105, telephone number:
(816) 983-1370;
email address brian.p.banks@kcsr.com. We will not send exhibits
to these filings unless we have specifically incorporated the
exhibit by reference into the filing.
We have filed a registration statement with the SEC under the
Securities Act that registers the issuance and sale of the
securities offered by this prospectus. The registration
statement, including the attached exhibits, contains additional
relevant information about us. The rules and regulations of the
SEC allow us to omit some information included in the
registration statement from this prospectus.
27