-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KgwtBWXZlxjLepHmPil5a3+stLXhy7VxgflMcVop530UM2aLtDuKUwFuNdon/pIV VP5vcfEzeTOQzkKjXQodIA== 0000950137-07-002802.txt : 20070227 0000950137-07-002802.hdr.sgml : 20070227 20070226192408 ACCESSION NUMBER: 0000950137-07-002802 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070227 DATE AS OF CHANGE: 20070226 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KANSAS CITY SOUTHERN CENTRAL INDEX KEY: 0000054480 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 440663509 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04717 FILM NUMBER: 07650887 BUSINESS ADDRESS: STREET 1: 427 W 12TH STREET CITY: KANSAS CITY STATE: MO ZIP: 64105 BUSINESS PHONE: 8169831303 MAIL ADDRESS: STREET 1: PO BOX 219335 CITY: KANSAS CITY STATE: MO ZIP: 64121 FORMER COMPANY: FORMER CONFORMED NAME: KANSAS CITY SOUTHERN INDUSTRIES INC DATE OF NAME CHANGE: 19920703 10-K 1 c12119e10vk.htm ANNUAL REPORT e10vk
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2006
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number: 1-4717
 
KANSAS CITY SOUTHERN
(Exact name of registrant as specified in its charter)
 
         
Delaware
(State or other jurisdiction of
incorporation or organization)

427 West 12th Street
Kansas City, Missouri
(Address of principal executive offices)
    44-0663509
(I.R.S. Employer
Identification No.)

64105
(Zip Code)
 
816.983.1303
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Preferred Stock, Par Value $25 Per Share, 4%, Noncumulative   New York Stock Exchange
Common Stock, $.01 Per Share Par Value
  New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large Accelerated filer þ     Accelerated filer o     Non-accelerated Filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The aggregate market value of common stock held by non-affiliates of the registrant was $2.03 billion at June 30, 2006. There were 76,718,891 shares of $.01 par common stock outstanding at February 15, 2007.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Kansas City Southern’s Definitive Proxy Statement for the 2007 Annual Meeting of Stockholders which will be filed no later than 120 days after December 31, 2006, is incorporated by reference in Parts I and III.
 


 

 
KANSAS CITY SOUTHERN
2006 FORM 10-K ANNUAL REPORT
 
Table of Contents
 
                 
        Page
 
PART I
  Business   3
  Risk Factors   7
  Unresolved Staff Comments   19
  Properties   19
  Legal Proceedings   21
  Submission of Matters to a Vote of Security Holders   21
    Executive Officers of the Company   21
 
  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   23
  Selected Financial Data   25
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   27
  Quantitative and Qualitative Disclosures About Market Risk   53
  Financial Statements and Supplementary Data   55
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   111
  Controls and Procedures   111
  Other Information   111
 
  Directors, Executive Officers and Corporate Governance   111
  Executive Compensation   112
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   112
  Certain Relationships, Related Transactions, and Director Independence   113
  Principal Accountant Fees and Services   113
             
    PART IV    
  Exhibits and Financial Statement Schedules   113
  123
 Registration Rights Agreement
 Amended and Restated By-Laws
 Third Supplemental Indenture
 Second Supplemental Indenture
 Form of Restricted Shares Award and Performance Shares Award Agreement
 Kansas City Southern Annual Incentive Plan
 The 2005 Credit Agreement
 Amendment No. 1 and Waiver No. 1 to the 2005 Credit Agreement
 Computation of Ratio of Earnings to Fixed Charges
 Subsidiaries of the Company
 Consent of KPMG LLP
 Consent of PricewaterhouseCoopers
 Consent of KPMG Cardenas Dosal, S.C.
 Certification of Michael R. Haverty
 Certification of Patrick J. Ottensmeyer
 Section 1350 Certification of Michael R. Haverty
 Section 1350 Certification of Patrick J. Ottensmeyer


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Item 1.   Business
 
COMPANY OVERVIEW
 
Kansas City Southern (“KCS” or the “Company”), a Delaware corporation, is a holding company with 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 United States with major industrial cities in Mexico. KCS and its subsidiaries had approximately 6,470 employees on December 31, 2006. The Kansas City Southern Railway Company (“KCSR”), which was founded in 1887, is a U.S. Class I railroad. 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.
 
KCS controls and owns all of the stock of Kansas City Southern de México, S. de R.L. de C.V. (“KCSM”), through its wholly owned subsidiary, Grupo KCSM, S.A. de C.V. (“Grupo KCSM”), formerly known as Grupo Transportación Ferroviaria Mexicana, S.A. de C.V., or Grupo TFM. 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 Mexico’s principal industrial cities and three of its major shipping ports. KCSM’s rail lines are the only ones that 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.
 
The Company wholly owns, directly and indirectly, through its wholly-owned subsidiaries, Mexrail, Inc. (“Mexrail”) which, in turn, wholly owns 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 its ownership of Mexrail, the Company owns the northern half of the rail bridge at Laredo, Texas. Laredo is a principal international gateway through which more than half of all rail and truck traffic between the United States and Mexico crosses the border.
 
The KCS rail network (KCSR, KCSM and Tex-Mex) comprises approximately 6,000 miles of main and branch lines extending from the Midwest and Southeast portions of the United States south into Mexico and connects with other Class I railroads, providing shippers with an effective alternative to other railroad routes and giving direct access to Mexico and the Southeast and Southwest United States through less congested interchange hubs.
 
KCS also owns a fifty percent equity investment in 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:
 
  •  Meridian Speedway, LLC (“MSLLC”), a ninety percent owned consolidated affiliate that owns the former KCSR rail line between Meridian, Mississippi and Shreveport, Louisiana, which is the 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 ten percent of MSLLC. Ultimately KCS will own seventy percent and NS will own thirty percent of MSLLC upon the contribution of additional capital by NS to MSLLC;


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  •  PABTEX GP, LLC, 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;
 
  •  Trans-Serve, Inc. (doing business as Superior Tie and Timber), a wholly-owned and consolidated operator of a railroad wood tie treatment facility;
 
  •  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;
 
  •  Southern Capital Corporation, LLC (“Southern Capital”), a fifty percent owned unconsolidated affiliate that leases locomotives and rail equipment; and
 
  •  Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”), a twenty five percent owned unconsolidated affiliate that provides railroad services as well as ancillary services in the greater Mexico City area.
 
     
MARKETS SERVED

     
Chemical and Petroleum.  KCS transports chemical and petroleum products via tank and hopper cars to markets in the Southeast and Northeast United States and throughout Mexico through interchanges with other rail carriers. Primary traffic includes plastics, petroleum, oils, petroleum coke, rubber and miscellaneous chemicals.

     Forest Products and Metals.  KCS’ rail lines run through the heart of the Southeast United States timber-producing region. The Company believes that
  2006 Revenues
Business Mix
(GRAPH) 
forest products made from trees in this region are generally less expensive than those from other regions due to lower production costs. As a result, southern yellow pine products from the Southeast are increasingly being used at the expense of western producers that have experienced capacity reductions because of public policy considerations. KCSR serves paper mills directly and indirectly through short-line connections.
 
This product category includes metals, minerals and ores such as iron, steel, zinc and copper. The majority of metals, minerals and ores mined, and steel produced in Mexico are used for domestic consumption. The volume of Mexican steel exports fluctuates based on global market prices. Higher-end finished products such as steel coils used by Mexican manufacturers in automobiles, household appliances and other consumer goods are imported through Nuevo Laredo and through the seaports served by KCS’ rail lines. United States slab steel products are used primarily in the manufacture of drill pipe for the oil industry.
 
Agricultural and Mineral.  Agricultural products consist of grain, food and related products. Shipper demand for agricultural products is affected by competition among sources of grain and grain products, as well as price fluctuations in international markets for key commodities. In the United States, KCS’ rail lines receive and originate shipments of grain and grain products for delivery to feed mills serving the poultry industry. KCS currently serves feed mills along its rail lines throughout Arkansas, Oklahoma, Texas, Louisiana, Mississippi and Alabama. Through its marketing agreements, KCS has access to sources of corn and other grain in Iowa and other Midwest states. United States export grain shipments and Mexico import grain shipments include primarily corn, wheat, and soybeans transported to Mexico via Laredo and to the Gulf of Mexico for overseas destinations. Over the long term, export grain shipments to Mexico are expected to increase as a result of Mexico’s reliance on grain imports. Food and related products consist mainly of soybean meal, grain meal, oils and canned goods, sugar and beer. Mineral shipments consist of a variety of products including ores, clay, stone and cement.


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Intermodal and Automotive.  The intermodal freight business consists primarily of hauling freight containers or truck trailers from motor carriers and ocean liners, with rail carriers serving as long-distance haulers. The automotive business consists primarily of moving parts to assembly plants and finished vehicles to distribution centers for market consumption in North and South America.
 
Coal.  KCS hauls unit trains of coal for ten electric generating plants in the central United States from the Powder River Basin in Wyoming. Coal mined in the Midwest United States is transported in non-unit trains to industrial consumers such as paper mills and cement companies.
 
GOVERNMENT REGULATION
 
The Company’s United States operations are subject to federal, state and local laws and regulations generally applicable to all businesses. Rail operations are subject to the regulatory jurisdiction of the Surface Transportation Board (“STB”) of the U.S. Department of Transportation (“DOT”), the Federal Railroad Administration of the DOT, the Occupational Safety and Health Administration (“OSHA”), as well as other federal and state regulatory agencies. The STB has jurisdiction over disputes and complaints involving certain rates, routes and services, the sale or abandonment of rail lines, applications for line extensions and construction, and consolidation or merger with, or acquisition of control of, rail common carriers. DOT and OSHA each has jurisdiction under several federal statutes over a number of safety and health aspects of rail operations, including the transportation of hazardous materials. State agencies regulate some aspects of rail operations with respect to health and safety in areas not otherwise regulated by federal law.
 
KCS’ subsidiaries, as well as its competitors, are subject to extensive federal, state and local environmental regulations. These laws cover discharges to water, air emissions, toxic substances, and the generation, handling, storage, transportation and disposal of waste and hazardous materials. These regulations have the effect of increasing the costs, risks and liabilities associated with rail operations. Environmental risks are also inherent in rail operations, which frequently involve transporting chemicals and other hazardous materials.
 
Primary regulatory jurisdiction for the Company’s Mexican operations is overseen by the Secretary of Communications and Transportation (“SCT”). The SCT establishes regulations concerning railway safety and operations, and it is responsible for resolving disputes between railways and between railways and customers. In addition, KCSM must register its maximum rates with the SCT and make regular reports to the SCT on investment and traffic volumes.
 
The Mexican operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment through the establishment of standards for water discharge, water supply, emissions, noise pollution, hazardous substances and transportation and handling of hazardous and solid waste. The Mexican government may bring administrative and criminal proceedings and impose economic sanctions against companies that violate environmental laws, and temporarily or even permanently close non-complying facilities.
 
Noncompliance with applicable legal provisions may result in the imposition of fines, temporary or permanent shutdown of operations or other injunctive relief, criminal prosecution or the termination of the Concession. KCS believes that all facilities that it operates are in substantial compliance with applicable environmental laws, regulations and agency agreements. There are currently no material legal or administrative proceedings pending against the Company with respect to any environmental matters and management does not believe that continued compliance with environmental laws will have any material adverse effect on the Company’s financial condition or results of operations. KCS cannot predict the effect, if any, that the adoption of additional or more stringent environmental laws and regulations would have on the Company’s results of operations, cash flows or financial condition.
 
COMPETITION
 
The Company competes against other railroads, many of which are much larger and have significantly greater financial and other resources. Since 1994, there has been significant consolidation among major North American rail carriers. As a result, the railroad industry is now dominated by a few very large carriers.


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The larger western railroads (BNSF Railway Company and Union Pacific Railroad Company), in particular, are significant competitors to KCS because of their substantial resources. The ongoing impact of these mergers is uncertain. KCS believes that its investments and strategic alliances continue to position the Company to attract additional rail traffic throughout its rail network.
 
In November 2005, Ferrocarril Mexicano, S.A. de C.V. (“Ferromex”) acquired control of and merged with Ferrocarril del Sureste, S.A. de C.V. (“Ferrosur”), creating Mexico’s largest railway. The merger between Ferromex and Ferrosur has been declared illegal by the Mexican Antitrust Commission. Both Ferromex and Ferrosur have challenged this ruling. These merged operations are much larger than KCSM, and they serve most of the major ports and cities in Mexico and own fifty percent of FTVM, which serves all of the industries located within Mexico City.
 
The Company is subject to competition from motor carriers, barge lines and other maritime shipping, which compete across certain routes in operating areas. Truck carriers have eroded the railroad industry’s share of total transportation revenues. Intermodal traffic and certain other traffic face highly price sensitive competition, particularly from motor carriers. However, rail carriers, including KCS, have placed an emphasis on competing in the intermodal marketplace and working with motor carriers and each other to provide end-to-end transportation of products.
 
While deregulation of freight rates has enhanced the ability of railroads to compete with each other and with alternative modes of transportation, this increased competition has resulted in downward pressure on freight rates. Competition with other railroads and other modes of transportation is generally based on the rates charged, the quality and reliability of the service provided and the quality of the carrier’s equipment for certain commodities.
 
EMPLOYEES AND LABOR RELATIONS
 
Labor relations in the U.S. railroad industry are subject to extensive governmental regulation under the Railway Labor Act (“RLA”). Under the RLA, national labor agreements are renegotiated on an industry-wide scale when they become open for modification, but their terms remain in effect until new agreements are reached. Typically, neither management nor labor employees are permitted to take economic action until extended procedures are exhausted. Previously, these negotiations have not resulted in any extended work interruptions. Under the negotiating process which began on November 1, 1999, all unions reached new labor agreements with KCSR in 2005. Various collective bargaining agreements cover 81% of KCSR’s employees.
 
KCSM’s labor agreement covering approximately 75% of its employees was renewed in 2005 and is effective for a two-year term ending in July 2007. The compensation terms of the labor agreement are subject to renegotiation on an annual basis and all other terms are renegotiated every two years. These negotiations have not resulted in any strikes, boycotts or other significant disruptions of KCSM’s operations.
 
The response to Item 101 of Regulation S-K under Part II Item 7 of this Form 10-K, and the responses under Note 1 and Note 11 to the Consolidated Financial Statements in Item 8 of this Form 10-K are incorporated by reference in partial response to this Item 1. Refer to Item 2, “Properties”, for further discussion of the Company’s business.
 
AVAILABLE INFORMATION
 
KCS’ website (www.kcsouthern.com) provides at no cost the Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after electronic filing of these reports with the Securities and Exchange Commission. In addition, corporate governance guidelines, ethics and legal compliance policy, and the charters of the Audit Committee, the Finance Committee, the Nominating and Corporate Governance Committee and the Compensation and Organization Committee of the Board of Directors are available on the website. These guidelines, policies and charters are available in print without charge to any stockholder requesting them. Written requests may be made to the Corporate Secretary, P.O. Box 219335, Kansas City, Missouri 64121-9335 (or if by express delivery to 427 West 12th Street, Kansas City, Missouri 64105).


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Item 1A.   Risk Factors
 
Risks Related to an Investment in KCS’ Common Stock
 
The price of KCS’ common stock may fluctuate significantly, which may make it difficult for investors to resell common stock when they want to or at prices they find attractive.
 
The price of KCS’ common stock on the New York Stock Exchange (“NYSE”) constantly changes. The Company expects that the market price of its common stock will continue to fluctuate.
 
The Company’s stock price can fluctuate as a result of a variety of factors, many of which are beyond KCS’ control. These factors include, but are not limited to:
 
  •  quarterly variations in operating results;
 
  •  operating results that vary from the expectations of management, securities analysts, ratings agencies and investors;
 
  •  changes in expectations as to future financial performance, including financial estimates by securities analysts, ratings agencies and investors;
 
  •  developments generally affecting the railroad industry;
 
  •  announcements by KCS or its competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;
 
  •  the assertion or resolution of significant claims or proceedings against KCS;
 
  •  KCS’ dividend policy and restrictions on the payment of dividends;
 
  •  future sales of KCS’ 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, from time to time 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 KCS’ common stock.
 
KCS’ ability to pay dividends on its common stock is currently restricted, and KCS does not anticipate paying cash dividends on its common stock in the foreseeable future.
 
KCS has agreed, and may agree in the future, to restrictions on its ability to pay dividends on its common stock. In addition, to maintain its credit ratings, the Company may be limited in its ability to pay dividends on its common stock so that it can maintain an appropriate level of debt. During the first quarter of 2000, the board of directors suspended common stock dividends. KCS does not anticipate making any cash dividend payments to its common stockholders for the foreseeable future.
 
Holders of the Series C Preferred Stock and Series D Preferred Stock may have special voting rights if KCS fails to pay dividends on that preferred stock over a stated number of quarters.
 
Because of certain restrictions in the indentures governing notes issued by KCSR, KCS did not pay dividends on its Series C Preferred Stock or Series D Preferred Stock commencing on May 15, 2006, for the first quarter of 2006 until those dividend arrearages were made up in February 2007. 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 elect two of the authorized number of 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


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Series D Preferred Stock, as applicable, or set aside for payment. In addition, KCS will not be eligible to register future offerings of securities on Form S-3 or to avail itself of the other benefits available to companies that qualify as “well-known seasoned issuers” under SEC rules if KCS fails to pay dividends on its preferred stock. This could adversely affect KCS’ ability to access capital markets, and increase the cost of accessing capital markets, until the Company qualifies as a “well-known seasoned issuer.”
 
Sales of substantial amounts of KCS’ common stock in the public market could adversely affect the prevailing market price of the common stock.
 
As of December 31, 2006, there were 10,607,068 shares of common stock issued or reserved for issuance under the 1991 Amended and Restated Stock Option and Performance Award Plan and the Employee Stock Purchase Plan, 2,061,234 shares of common stock held by executive officers and directors outside those plans, and 20,389,113 shares of common stock reserved for issuance upon conversion of the outstanding shares of convertible preferred stock. Sales of common stock by employees upon exercise of their options, sales by 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 the outstanding preferred stock, or the perception that such sales could occur, may adversely affect the market price of KCS’ common stock.
 
KCS has provisions in its charter, bylaws and Rights Agreement that could deter, delay or prevent a third party from acquiring KCS and that could deprive an investor of an opportunity to obtain a takeover premium for shares of KCS’ common stock.
 
KCS has provisions in its charter and bylaws that may delay or prevent unsolicited takeover bids from third parties. These provisions may deprive KCS’ stockholders of an opportunity to sell their shares at a premium over prevailing market prices. For example, the 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 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 the 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 KCS’ outstanding stock entitled to vote in the election of directors. The bylaws provide that a stockholder must give the Company advance written notice of its intent to nominate a director or raise a matter at an annual meeting. In addition, the Company has adopted a Rights Agreement which under certain circumstances would significantly impair the ability of third parties to acquire control of KCS without prior approval of the board of directors.
 
Risks Related to KCS’ Business
 
KCS competes against other railroads and other transportation providers.
 
The Company’s 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 Ferromex in Mexico. Many of KCS’ rail competitors are much larger and have significantly greater financial and other resources than KCS. In addition, the Company is 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 carrier’s equipment for certain commodities. While KCS must build or acquire and maintain its infrastructure, truck carriers, maritime shippers and 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 the Company operates, or legislation or regulations that provide motor carriers with additional advantages,


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such as increased size of vehicles and reduced weight restrictions, could have a material adverse effect on results of operations, financial condition and liquidity.
 
A material part of KCS’ growth strategy is based upon the conversion of truck traffic to rail. There can be no assurance the Company will have the ability to convert traffic from truck to rail transport or that the customers already converted will be retained. If the railroad industry in general, and the Mexican operations in particular, are unable to preserve their competitive advantages vis-à-vis the trucking industry, projected revenue growth from the Mexican operations could be adversely affected. Additionally, the revenue growth attributable to the Mexican operations could be affected by, among other factors, KCS’ inability to grow its 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 United States border states by 1995 and full access to all United States highways by January 2000. However, the United States did not follow that timetable because of concerns over Mexico’s 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 United States 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 United States-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 United States 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 United States air quality of rules allowing Mexican carriers to transport beyond the 20-mile commercial zones along the United States-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 United States Clean Air Act. The Department of Transportation requested the United States Supreme Court to review the Court of Appeals ruling and, on December 15, 2003, the Supreme Court granted the Department of Transportation’s 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 Court’s ruling, the United States and Mexico must still complete negotiations on safety inspections before the border is opened. KCS 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 KCS’ 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 KCSM’s Concession from the Mexican government, the Company has 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 KCSM’s rail lines between Ramos Arizpe near Monterrey and the city of Queretaro that constitutes over 600 kilometers (360 miles) of KCSM’s main track. Using these trackage rights, Ferromex may be able to compete with KCSM over KCSM’s 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 Ferrosur and the “belt railroad” operated in the greater Mexico City area by FTVM, thereby providing Ferrosur with more efficient access to certain Mexico City industries. As a result of having to grant trackage rights to other railroads, KCSM loses the capacity of using a portion of its tracks at all times.


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Ferromex, the operator of the largest railway system in Mexico, is in close proximity to KCSM’s 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 United States border crossings west of the Nuevo Laredo-Laredo crossing, providing an alternative to KCSM’s routes for the transport of freight from those cities to the United States 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 and Puebla.
 
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 FTVM. 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, KCSM’s 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, the Company does not believe KCSM’s 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 KCS’ freight services less competitive, and KCS cannot assure that it would always be able to match these rate reductions. In recent years, KCS has experienced aggressive price competition from Ferromex in freight rates for agricultural products, which has adversely affected results of operations. KCS’ ability to respond to competitive pressures by decreasing rates without adversely affecting gross margins and operating results will depend on, among other things, the ability to reduce operating costs. KCS’ failure to respond to competitive pressures, and particularly rate competition, in a timely manner could have a material adverse effect on the Company’s 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 operations.
 
KCS’ business strategy, operations and growth rely significantly on agreements with other railroads and third parties.
 
Operation of KCS’ integrated rail network and its plans for growth and expansion rely significantly on agreements with other railroads and third parties, including joint ventures and other strategic alliances. KCS’ operations are dependent on interchange, trackage rights, haulage rights and marketing agreements with other railroads and third parties that enable KCS to exchange traffic and utilize trackage the Company does not own. KCS’ ability to provide comprehensive rail service to its customers depends in large part upon its ability to maintain these agreements with other railroads and third parties. The termination of, or the failure to renew, these agreements could adversely affect KCS’ business, financial condition and results of operations. KCS is also dependent in part upon the financial health and efficient performance of other railroads. For example, traffic moves over the UP’s lines via trackage rights, a significant portion of KCSR’s grain shipments originate with another rail carrier pursuant to marketing agreements with that carrier, and BNSF is KCS’ largest partner in the interchange of rail traffic. There can be no assurance that KCS 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 FTVM. Applicable law stipulates that Ferromex, Ferrosur and FTVM are required to grant to KCSM rights to use portions of their tracks. KCSM’s Concession classifies trackage rights as short trackage


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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 KCSM’s rail lines, the 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 KCSM’s appeal of the SCT’s trackage and haulage rights ruling, vacated the SCT ruling and ordered the SCT to issue a new ruling consistent with the Court’s opinion. The Company has 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. KCS cannot predict the ultimate outcome of these matters, or whether the rates KCSM is ultimately permitted to charge will be sufficient to adequately compensate it for the use of its tracks by Ferromex.
 
The Company is highly leveraged and has significant debt service obligations. KCS’ leverage could adversely affect its ability to fulfill obligations under various debt instruments and operate its business.
 
KCS’ level of debt could make it more difficult for it to borrow money in the future, may reduce the amount of money available to finance operations and other business activities, exposes the Company to the risk of increased interest rates, makes it more vulnerable to general economic downturns and adverse industry conditions, and could reduce flexibility in planning for, or responding to, changing business and economic conditions. KCS’ failure to comply with the financial and other restrictive covenants in its debt instruments, which, among other things, require KCS to maintain specified financial ratios and limit the 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 business or prospects. If the Company does not have enough cash to service its debt, meet other obligations and fund other liquidity needs, KCS may be required to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing all or part of the existing debt, or seeking additional equity capital. KCS cannot assure that any of these remedies, including obtaining appropriate waivers from its lenders, can be effected on commercially reasonable terms or at all. In addition, the terms of existing or future debt agreements may restrict the Company from adopting any of these alternatives.
 
The indebtedness of KCSM exposes it to risks of exchange rate fluctuations, because any devaluation of the peso would cause the cost of KCSM’s dollar-denominated debt to increase, and could place the Company at a competitive disadvantage in Mexico compared to Mexican competitors that have less debt and greater operating and financing flexibility than KCSM does.
 
KCS’ business is capital intensive.
 
The Company’s 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 equipment and rail system. KCS’ failure to make necessary capital expenditures to maintain its operations could impair its ability to serve existing customers or accommodate increases in traffic volumes.


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KCS has funded, and expects to continue to fund, capital expenditures with funds from operating cash flows, leases and, to a lesser extent, vendor financing. KCS may not be able to generate sufficient cash flows from its operations or obtain sufficient funds from external sources to fund capital expenditure requirements. If financing is available, it may not be obtainable on acceptable terms and within the limitations contained in the indentures and other agreements relating to KCS’ debt.
 
KCSM’s Concession from the Mexican government requires KCSM to make investments and undertake capital projects. If KCSM is unable to make such capital investments, KCSM’s business plan commitments with the Mexican government may be at risk, requiring KCSM to seek waivers of its business plan. There is no assurance that such waivers, if requested, would be granted by the SCT. 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. The Company cannot assure 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 KCS’ financial condition and results of operations. See “KCSM’s Mexican Concession is subject to revocation or termination in certain circumstances” below.
 
KCS’ business may be adversely affected by changes in general economic, weather or other conditions.
 
KCS’ operations may be adversely affected by changes in the economic conditions of the industries and geographic areas that produce and consume the freight that KCS transports. The relative strength or weakness of the United States and Mexican economies affect the businesses served by KCS. PCRC and Panarail are directly affected by the Panamanian local economy and trans-Pacific trade flows. KCS’ investments in Mexico and Panama expose the Company 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 KCS’ rail transportation operations. Conversely, when the economy has slowed, results have been less favorable. KCS’ revenues may be affected by prevailing economic conditions and, if an economic slowdown or recession occurs in key markets, the volume of rail shipments is likely to be reduced.
 
The Company’s operations may also be affected by natural disasters or adverse weather conditions. The Company operates in and along the Gulf Coast of the United States, and its facilities may be adversely affected by hurricanes and other extreme weather conditions. For example, hurricanes have adversely affected some of the Company’s 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 transported experience cyclical demand. KCS’ results of operations can be expected to reflect this cyclical demand because of the significant fixed costs inherent in railroad operations. Significant reductions in the volume of rail shipments due to economic, weather or other conditions could have a material adverse effect on KCS’ 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 KCS’ 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 operating results. Also, some of the products transported 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. KCS cannot assure that prices and demand for these products will not decline in the future, adversely affecting those industries and, in turn, the Company’s financial condition or results.


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KCS’ business is subject to regulation by international, federal, state and local regulatory agencies. KCS’ failure to comply with these regulations could have a material adverse effect on its operations.
 
KCS is subject to governmental regulation by international, federal, state and local regulatory agencies with respect to its 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. KCS’ failure to comply with applicable laws and regulations could have a material adverse effect on operations, including limitations on operating activities until compliance with applicable requirements is achieved. These government agencies may change the legislative or regulatory framework within which the Company operates without providing any recourse for any adverse effects on its business that occur as a result of such change. Additionally, some of the regulations require KCS to obtain and maintain various licenses, permits and other authorizations, and KCS cannot assure that it will continue to be able to do so.
 
The Company’s business is subject to environmental, health and safety laws and regulations that could require KCS to incur material costs or liabilities relating to environmental, health or safety compliance or remediation.
 
KCS’ 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 KCS’ facilities have not been in compliance with environmental, health and safety laws and regulations and there can be no assurances that KCS will always be in compliance with such laws and regulations in the future. The Company incurs, and expects 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 KCS to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on KCS’ 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, KCS 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 its business, KCS presently has 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 the Company’s best estimate of the probable future obligation for the remediation and settlement of these sites. Although the recorded liability includes the 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,


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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.
 
The 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 federal environmental 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 close non-complying facilities. KCSM is also subject to the laws of various jurisdictions and international conferences with respect to the discharge of materials into the environment and to environmental laws and regulations issued by the governments of each of the Mexican states in which KCSM’s facilities are located. The terms of KCSM’s Concession from the Mexican government also impose environmental compliance obligations on KCSM. The Company cannot predict the effect, if any, that the adoption of additional or more stringent environmental laws and regulations would have on KCSM’s results of operations, cash flows or financial condition.
 
KCS’ 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 KCS’ business, results of operations and financial condition.
 
KCS incurs substantial fuel costs in its railroad operations and these costs represent a significant portion of its transportation expenses. Significant price increases for fuel may have a material adverse effect on operating results. Fuel expense increased from 16% of consolidated operating costs during 2005 to 19% of consolidated operating costs during 2006. KCS has been able to pass the majority of these fuel cost increases on to customers in the form of fuel surcharges applied to customer billings. If KCS is unable to continue the existing fuel surcharge program for KCSR and expand the fuel surcharge program for KCSM, operating results could be materially adversely affected.
 
On January 26, 2007, the Surface Transportation Board (the “STB”) issued a decision finding that the assessment by railroads of fuel surcharges that are based on a percentage of the base rate charged is an unreasonable practice. Railroads have 90 days following January 26 to comply with the decision. KCS is in the process of reviewing the manner by which it assesses fuel surcharges in order to timely comply with the decision. KCS cannot predict with certainty the impact that any changes to its fuel surcharge program may have on its 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 the Company’s 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 KCS’ operating results, financial condition and cash flows.
 
KCS currently meets, and expects to continue to meet, fuel requirements for its 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


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and KCSM is unable to acquire diesel fuel from alternate sources on acceptable terms, the Mexican operations could be materially adversely affected.
 
The loss of key personnel could negatively affect business.
 
KCS’ success substantially depends on its ability to attract and retain key members of the senior management team and the principals of its foreign subsidiaries. Recruiting, motivating and retaining qualified management personnel, particularly those with expertise in the railroad industry, are vital to operations and success. There is substantial competition for qualified management personnel and there can be no assurance that KCS will always be able to attract or retain qualified personnel. Employment agreements with senior management are terminable at any time by either party. If KCS loses one or more of these key executives or principals, its ability to successfully implement its business plans and the value of its common stock could be materially adversely affected.
 
A majority of KCS’ employees belong to labor unions. Strikes or work stoppages could adversely affect operations.
 
The Company is a party to collective bargaining agreements with various labor unions in the United States and Mexico. As of December 31, 2006, approximately 81% of KCSR employees and approximately 75% of KCSM employees were covered by collective labor contracts. The Company 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 KCS’ 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 KCS’ control. KCS may, therefore, be subject to terms and conditions in industry-wide labor agreements that could have a material adverse affect on its 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, KCS could experience a significant disruption of its operations and higher ongoing labor costs. Although the U.S. Railway Labor Act imposes restrictions on the right of United States railway workers to strike, there is no law in Mexico imposing similar restrictions on the right of railway workers in that country to strike.
 
KCS faces possible catastrophic loss and liability, and its insurance may not be sufficient to cover its 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 KCS’ 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, KCS’ operations may be affected from time to time by natural disasters such as earthquakes, volcanoes, floods, hurricanes or other storms. The occurrence of a major natural disaster could have a material adverse effect on KCS’ operations and financial condition. The Company maintains insurance that is consistent with industry practice against the accident-related risks involved in the conduct of its 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 KCS’ 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, KCS may not be able to restore service without a significant interruption to operations and an adverse effect on KCS’ financial condition.


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KCS’ business may be affected by future acts of terrorism or war.
 
Terrorist attacks, such as an attack on the Company’s chemical transportation activities, any government response thereto and war or risk of war may adversely affect KCS’ results of operations, financial condition, and cash flows. These acts may also impact the Company’s ability to raise capital or its future business opportunities. KCS’ 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 KCS’ results of operations, financial condition, and cash flows. In addition, insurance premiums charged for some or all of the terrorism coverage currently maintained by KCS could increase dramatically or certain coverage may not be available in the future.
 
KCSM’s 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 KCSM’s 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 update the plan every five years. The SCT treats KCSM’s business plans confidentially. The SCT monitors KCSM’s 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 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 KCSM’s 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 coverage 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 SCT’s approval. The SCT may also terminate the Concession as a result of KCSM’s surrender of its rights under the Concession, or for reasons of public interest, by revocation or upon KCSM’s liquidation or bankruptcy. Revocation or termination of the Concession would prevent KCSM from operating its railroad and would materially adversely affect the Mexican operations and the ability to make payments on KCSM’s 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 the Company believes KCSM made capital expenditures exceeding the amounts


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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 KCSM’s arguments. 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 Magistrate’s 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 KCSM’s rail lines. The Mexican government may also temporarily seize control of KCSM’s 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 KCSM’s 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 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.
 
The Company’s ownership of KCSM and operations in Mexico subject it 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 the Mexican operations in particular. The national elections held on July 2, 2000, ended 71 years of rule by the Institutional Revolutionary 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. 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 the Mexican operations. KCS cannot predict the impact that this new political landscape will have on the Mexican economy. Furthermore, KCSM’s 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.
 
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 social and political situation in Mexico could adversely affect the Mexican economy, which in turn could have a material adverse effect on KCS’ business, financial condition and results of operation.
 
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 United States and Canadian investors. Any restrictive exchange control policy could adversely affect KCS’ ability to obtain dollars or to convert pesos into dollars for purposes of making interest and principal payments due on indebtedness, to the extent KCS may have to effect those conversions, and could adversely affect the Mexican economy or the Company’s investment in KCSM. This could have a material adverse effect on KCS’ business and financial condition.


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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.
 
Downturns in the United States economy or in trade between the United States and Mexico and fluctuations in the peso-dollar exchange rate would likely have adverse effects on KCS’ business and results of operations.
 
The level and timing of KCS’ Mexican business activity is heavily dependent upon the level of United States-Mexican trade and the effects of NAFTA on such trade. The Mexican operations depend on the United States 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 United States or Mexican economy or in trade between the United States and Mexico would likely have adverse effects on KCS’ business and results of operations. The Mexican operations depend on the United States 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 United States economy could have a material adverse effect on KCS’ results of operations and our ability to meet 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 United States-Mexican trade beyond the Company’s 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 KCSM’s 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 the ability to transfer pesos or to convert pesos into U.S. dollars for the purpose of making timely payments of interest and principal on the 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 the ability to transfer or convert pesos into U.S. dollars or other currencies for the purpose of making timely payments of the 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 KCS’ securities. Currency fluctuations are likely to continue to have an effect on KCS’ financial condition in future periods.
 
KCSM has identified possible discrepancies in data provided by its prior information system.
 
KCSM installed a new operational information system in 2006. Based on testing of the data provided by this system, including a comparison of such data to data provided by KCSM’s prior information system, it is possible that the data provided by KCSM’s prior information system may have contained discrepancies. There is uncertainty as to what effect, if any, these discrepancies could have on KCSM’s 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 KCS’ 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


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Index, as provided by Banco de Mexico, were 4.0% in 2006, 3.3% in 2005, 5.2% in 2004, 4.0% in 2003 and 5.7% in 2002. A substantial increase in the Mexican inflation rate would have the effect of increasing some of KCSM’s 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 KCSM’s results of operations.
 
Item 1B.   Unresolved Staff Comments
 
None.
 
Item 2.   Properties
 
Property information is provided for each of KCS’ two business segments, the United States (“U.S.”) and Mexico.
 
U.S. Segment.
 
Certain KCSR property statistics follow at December 31:
 
                         
    2006     2005     2004  
 
Route miles — main and branch line
    3,205       3,226       3,108  
Total track miles
    4,446       4,372       4,353  
Miles of welded rail in service
    2,321       2,320       2,322  
Main line welded rail percent
    72 %     72 %     61 %
Cross ties replaced
    427,590       340,033       292,843  
 
KCSR and Mexrail’s fleet of locomotives and rolling stock consisted of the following at December 31:
 
                                                 
    2006     2005     2004  
    Leased     Owned     Leased     Owned     Leased     Owned  
 
Locomotives
    272       348       331       315       279       239  
                                                 
Rolling stock:
                                               
Box cars
    5,386       1,356       5,401       1,323       5,204       1,307  
Gondolas
    1,037       176       1,093       185       720       83  
Hopper cars
    4,222       743       4,323       989       3,084       802  
Flat cars (intermodal and other)
    1,985       388       844       531       1,288       533  
Auto racks
    198             198             198        
Tank cars
    24       30       24       28       28       30  
Other
          3                          
                                                 
Total
    12,852       2,696       11,883       3,056       10,522       2,755  
                                                 
 
                         
Average age (in years):
  2006     2005     2004  
 
Road locomotives
    22.9       25.2       26.0  
All locomotives
    23.9       26.1       26.9  
 
KCSR, in support of its transportation operations, owns and operates repair shops, depots and office buildings along its right-of-way. A major facility, the Deramus Yard, is located in Shreveport, Louisiana and includes a general office building, locomotive repair shop, car repair shops, customer service center, material warehouses and fueling facilities totaling 227,000 square feet. Other facilities owned by KCSR include a 21,000 square foot freight car repair shop in Kansas City, Missouri and 15,000 square feet of office space in Baton Rouge, Louisiana. A locomotive repair facility in Kansas City is owned and operated by General


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Electric Company (“GE”) and is used to maintain and repair locomotives that were manufactured by GE and are leased by KCSR.
 
KCSR owns 16.6% of the Kansas City Terminal Railway Company, which owns and operates 80 miles of track, and operates an additional eight miles of track under trackage rights in greater Kansas City, Missouri. KCSR also leases, for operating purposes, certain short sections of trackage owned by various other railroad companies and jointly owns certain other facilities with these railroads.
 
Mexico Segment.
 
Certain KCSM track statistics at December 31, 2006, follow (in miles):
 
                         
    Under
    Track Usage
       
    Concession     Rights     Total  
 
Main track
    2,645       541       3,186  
Sidings under centralized traffic control
    116             116  
Spurs, yard tracks and other sidings
    481             481  
                         
Total
    3,242       541       3,783  
                         
 
All of KCSM’s track is standard gauge (56.5 inches) and is generally in good condition. Regarding the main track, 100% has 100 to 136-lbs. rail, 78% is continuously welded rail and 58% has concrete ties. Continuously welded rail reduces track maintenance and, in general, permits trains to travel at higher speeds. The Mexico City — Nuevo Laredo core route has 88% concrete ties and the portion of this route between Mexico City and Querétaro (a distance of 143 miles) has double track. KCSM has extended sidings on its tracks up to 10,000 feet, enabling longer trains to pass each other.
 
KCSM’s fleet of locomotives and rolling stock consisted of the following at December 31:
 
                                 
    2006     2005  
    Leased     Owned     Leased     Owned  
 
Locomotives
    113       344       75       323  
                                 
Rolling stock:
                               
Box cars
    1,068       1,166       1,278       1,187  
Gondolas
    2,520       1,817       2,922       1,824  
Hopper cars
    2,416       570       2,518       580  
Flat cars (intermodal and other)
    262       557       261       557  
Auto racks
    1,552             1,556        
Tank cars
    522       71       611       71  
Other
          65             55  
                                 
Total
    8,340       4,246       9,146       4,274  
                                 
 
Under its Concession from the Mexican government, KCSM has the right to operate the rail lines, but does not own the land, roadway or associated structures. The Concession requires KCSM to make investments and undertake capital projects, including capital projects described in a business plan filed every five years with the Mexican government. KCSM may defer capital expenditures with respect to its five-year business plan with the permission of the SCT. However, should the SCT not grant this permission, KCSM’s failure to comply with the commitments in its business plan could result in the Mexican government revoking the Concession.
 
The response to Item 102 of Regulation S-K under Item 1, “Business”, of this Form 10-K and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” is incorporated by reference in partial response to this Item 2.


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Item 3.   Legal Proceedings
 
The matters discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Provision for Environmental Remediation — Provision for Casualty Claims,” and — “Other — Litigation” are incorporated by reference in this Item 3.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
No matters were submitted to a vote of security holders during the three month period ended December 31, 2006.
 
Executive Officers of KCS and Subsidiaries.
 
All executive officers are elected annually and serve at the discretion of the Board of Directors. All of the executive officers have employment agreements with KCS and/or its subsidiaries. The mailing address of the principal executive officers is 427 W. 12th Street, Kansas City, Missouri 64105.
 
Michael R. Haverty — Chairman of the Board and Chief Executive Officer — 62 — The information in the Definitive Proxy Statement under the heading “The Board of Directors — Directors Serving Until the Annual Meeting of Stockholders in 2009” with respect to Mr. Haverty is incorporated by reference.
 
Arthur L. Shoener — KCS President and Chief Operating Officer — 60 — The information in the Definitive Proxy Statement in the description of “The Board of Directors — Directors Serving Until the Annual Meeting of Stockholders in 2008” with respect to Mr. Shoener is incorporated by reference.
 
Daniel W. Avramovich — Executive Vice President, Sales & Marketing — 55 — Joined KCS in May 2006 as Executive Vice President, Sales & Marketing. Prior to this, Mr. Avramovich served as President, Network Services — Americas for Exel plc from 2003 to 2006. From 2000 to 2003, he served as President, Exel Direct for Exel plc.
 
Patrick J. Ottensmeyer — Executive Vice President and Chief Financial Officer — 49 — Joined KCS in May 2006 as Executive Vice President and Chief Financial Officer. Prior to joining KCS, Mr. Ottensmeyer served as Financial Advisor/Chief Financial Officer from 2001 to May 2006 for Intranasal Therapeutics, Inc. From 2000 to 2001, he served as Corporate Vice President Finance and Treasurer for Dade-Behring Holdings, Inc. From 1993 to 1999, Mr. Ottensmeyer served as Vice President Finance and Treasurer at BNSF Railway.
 
Warren K. Erdman — Senior Vice President — Corporate Affairs — 48 — Served in this capacity since January 2006. Mr. Erdman served as Vice President - Corporate Affairs of KCS from April 1997 to December 2005, and as Vice President — Corporate Affairs of KCSR from May 1997 to December 2005. Prior to joining KCS, Mr. Erdman was Chief of Staff to United States Senator Kit Bond of Missouri from 1987 to 1997.
 
Jerry W. Heavin — Senior Vice President — International Engineering of KCSR — 55 — Served in this capacity since January 2005, and a director of KCSR since July 2002. Mr. Heavin served as Senior Vice President of Operations from July 2002 to December 2004. Mr. Heavin joined KCSR in September 2001 and served as Vice President of Engineering of KCSR until July 2002. Prior to joining KCSR, Mr. Heavin served as an independent engineering consultant from 1997 through August 2001.
 
Larry M. Lawrence — Senior Vice President and Assistant to Chairman — Strategies and Staff Studies — 44 — Served in this capacity since January 2006. Mr. Lawrence served as Assistant to CEO — Staff Studies and Planning of KCS from November 2001 until December 2005. Prior to joining KCS in 2001, Mr. Lawrence was a strategy consultant for 15 years with McKinsey, A. T. Kearney and KPMG.
 
Paul J. Weyandt — Senior Vice President — Finance and Treasurer — 53 — Served in this capacity since April 2005. He served as Vice President and Treasurer of KCS and of KCSR from September 2001 until March 2005. Before joining KCS, Mr. Weyandt was a consultant to the Structured Finance Group of


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GE Capital Corporation from May 2001 to September 2001. Prior to consulting, Mr. Weyandt spent 23 years with BNSF Railway, most recently as Assistant Vice President Finance and Assistant Treasurer.
 
William J. Wochner — Senior Vice President and Chief Legal Officer — 59 — Served in this capacity since February 2007. Served as Vice President and Interim General Counsel from December 2006 to January 2007. From September 2006 to December 2006, Mr. Wochner served as Vice President and Associate General Counsel. From March 2005 to September 2006, Mr. Wochner served as Vice President, Sales and Marketing/Contracts for KCSR. From February 1993 to March 2005, Mr. Wochner served as Vice President and General Solicitor of KCSR.
 
Richard M. Zuza — Senior Vice President — International Purchasing and Materials — 53 — Joined KCS in November 2005 as the Senior Vice President — International Purchasing and Materials. Prior to joining KCS, Mr. Zuza was Vice President of Procurement for Allstate Insurance Company from 1998 to 2005, Vice President of Purchasing for Gibson Greetings, Inc. for seven years and held a variety of purchasing positions with General Electric Company for 15 years.
 
Michael K. Borrows — Vice President — Financial Reporting and Tax — 39 — Joined KCS in June 2006 as Vice President — Financial Reporting and Tax. Prior to joining KCS, Mr. Borrows spent 11 years at BNSF Railway serving in a variety of financial roles, most recently as General Director Finance. Mr. Borrows is the Company’s Chief Accounting Officer.
 
There are no arrangements or understandings between the executive officers and any other person pursuant to which the executive officer was or is to be selected as an officer of KCS, except with respect to the executive officers who have entered into employment agreements designating the position(s) to be held by the executive officer.
 
None of the above officers is related to another, or to any of the directors of KCS, by family.


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Part II
 
Item 5.   Market for KCS’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information.
 
The Company’s Common Stock is traded on the New York Stock Exchange. The information set forth in response to Item 201 of Regulation S-K in Note 8 and Note 13 to the Consolidated Financial Statements in Item 8 of this Form 10-K is incorporated by reference in partial response to this Item 5.
 
Dividend Policy.
 
Common Stock.  KCS has not declared any cash dividends on its common stock during the last five fiscal years and it does not anticipate making any cash dividend payments to common stockholders in the foreseeable future. Pursuant to KCSR’s credit agreement, KCS is prohibited from the payment of cash dividends on its common stock.
 
Preferred Stock.  Kansas City Southern is restricted from paying dividends on its Series C Preferred Stock and Series D Preferred Stock when its coverage ratio (as defined in the indentures for KCSR’s 71/2% Senior Notes and 91/2% Senior Notes) is less than 2.0:1. It is the Company’s intention to pay timely dividends on all Preferred Stock in either cash or stock, depending upon the terms of the preferred stock, when dividend payments are not restricted under the covenants of our various debt agreements and the Company has adequate levels of liquidity. In the event that 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 the Series D Preferred Stock, as applicable, will be entitled to elect two of the authorized number of directors at the next annual stockholders’ meeting, and at each subsequent stockholders’ meeting until such time as all accumulated dividends are paid on the Series C Preferred Stock or the Series D Preferred Stock, as applicable, or set aside for payment.
 
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments” for a discussion of recent amendments to the indentures for KCSR’s 71/2% Senior Notes and 91/2% Senior Notes related to these dividend payments.
 
Holders.
 
There were 4,941 record holders of KCS common stock on February 15, 2007.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
See Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information about securities authorized for Issuance under KCS’ equity compensation plans.


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Performance Graph.
 
The following graph shows the changes in value over the five years ending December 31, 2006, of an assumed investment of $100 in: (i) KCS’ common stock; (ii) the stocks that comprise the Dow Jones Transportation Average Index1; and (iii) the stocks that comprise the S&P 500 Index2. The table following the graph shows the value of those investments on December 31 for each of the years indicated. The values for the assumed investments depicted on the graph and in the table have been calculated assuming that cash dividends are reinvested.
 
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
Among Kansas City Southern, the S & P 500 Index
and the Dow Jones Transportation Index
 
(GRAPH)
 
                                                             
      2001     2002     2003     2004     2005     2006
Kansas City Southern
      100.00         84.93         101.34         125.48         172.89         205.10  
S & P 500
      100.00         77.90         100.24         111.15         116.61         135.03  
Dow Jones Transportation Average
      100.00         102.66         132.37         170.34         189.53         204.43  
                                                             
 
 
1 The Dow Jones Transportation Average is an index prepared by Dow Jones & Co., Inc., an independent company.
2 The S&P 500 is an index prepared by Standard and Poor’s Corporation, an independent company. The S&P 500 Index reflects the change in weighted average market value for 500 companies whose shares are traded on the New York Stock Exchange, American Stock Exchange and the Nasdaq Stock Market.


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Item 6.   Selected Financial Data
 
The selected financial data below (in millions, except per share amounts) should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7 of this Form 10-K as well as the consolidated financial statements and the related notes and the Reports of Independent Registered Public Accounting Firms.
 
                                         
    2006     2005(i)     2004     2003     2002  
 
Revenues
  $ 1,659.7     $ 1,352.0     $ 639.5     $ 581.3     $ 566.2  
Equity in net earnings (losses) of unconsolidated affiliates
    7.3       2.9       (4.5 )     11.0       43.4  
Income before cumulative effect of accounting change and minority interest(ii)
    109.2       83.1       24.4       3.3       57.2  
Earnings per common share — income (loss) before cumulative effect of accounting change:
                                       
Basic
  $ 1.20     $ 1.21     $ 0.25     $ (0.04 )   $ 0.94  
Diluted
    1.08       1.10       0.25       (0.04 )     0.91  
Total assets
  $ 4,637.3     $ 4,423.6     $ 2,440.6     $ 2,152.9     $ 2,008.8  
Total debt obligations
    1,757.0       1,860.6       665.7       523.4       582.6  
Cash dividends per common share
  $     $     $     $     $  
 
 
(i) Amounts reflect the consolidation of Mexrail effective January 1, 2005, and KCSM effective April 1, 2005.
 
(ii) Income from continuing operations before cumulative effect of accounting change and minority interest for the years ended December 31, 2005, 2004, 2003 and 2002 include certain unusual operating expenses and other income as further described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.” These costs and other income include charges for casualty claims, costs related to the acquisitions of Grupo KCSM and Mexrail, hurricane related charges, costs related to the implementation of the Management Control System (“MCS”), benefits received from the settlement of certain legal and insurance claims, severance costs and expenses associated with legal verdicts against KCS, and gains recorded on the sale of operating and non-operating property and investments.
 
The response to Item 301 of Regulation S-K under Part II Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K is incorporated by reference in partial response to this Item 6.
 
 
The following tables present full year 2006 non-GAAP financial information previously disclosed by the Company on its website in conjunction with earnings releases, presentations and 8-K filings. The non-GAAP information presented, which management believes is useful, should be considered in addition to, but not as a substitute or preferable to, other information prepared and presented in accordance with GAAP. However, the information is included herein as reference because Management may use this information for comparability purposes when discussing the performance of the Company’s business and believes that the non-GAAP information provided is meaningful and can be particularly useful in assessing comparability of the Company’s performance for the years ended December 31, 2005 and 2006.
 
Summary Income Statement Information
 
Calculation of 2005 non-GAAP year to date earnings includes: (i) KCSM’s first quarter 2005 amounts prior to its consolidation on April 1, 2005 and (ii) excludes charges related to the acquisition and the write-off


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of deferred profit sharing in the second quarter of 2005, (iii) excludes the unusually large charge to Casualty and insurance reflecting a comprehensive study as well as the first time adoption of an actuarial approach for projecting expense related to certain casualty claims, and (iv) excludes the one-time non-cash gain as a result of the VAT settlement with the Mexican Government in the third quarter of 2005.
 
                         
    As Reported
    All
    Non-GAAP
 
    2005     Differences     2005  
 
Revenues
  $ 1,352.0       170.1     $ 1,522.1  
Depreciation and amortization
    127.7       18.4       146.1  
Casualties and insurance
    103.4       (34.8 )     68.6  
KCSM employees’ statutory profit sharing
    41.1       (35.1 )     6.0  
Other operating expenses
    1,017.5       105.8       1,123.3  
                         
Total operating expenses
    1,289.7       54.3       1,344.0  
                         
Operating income (loss)
    62.3       115.8       178.1  
VAT/Put settlement gain, net
    131.9       (131.9 )      
Other income (expense)
    (118.2 )     (29.2 )     (147.4 )
                         
Income before income taxes
    76.0       (45.3 )     30.7  
                         
Income tax (benefit)
    (7.1 )     17.8       10.7  
Minority interest
    17.8       (16.1 )     1.7  
                         
Net income
    100.9       (79.2 )     21.7  
                         
Preferred stock dividends
    9.5             9.5  
                         
Net income available to common shareholders
    91.4       (79.2 )     12.2  
                         
Diluted Shares
    92,747               77,002  
Diluted EPS
  $ 1.10             $ 0.16  
 
Calculation of Earnings Before Interest, Income Taxes, Depreciation and Amortization and Non-cash Equity Earnings from Unconsolidated Subsidiaries (a)
 
                 
    Non-GAAP
       
    2005     2006  
 
GAAP Net Income
  $ 100.9     $ 108.9  
All differences
    (79.2 )      
                 
Adjusted net income
    21.7       108.9  
Adjusted Income tax provision (benefit)
    10.7       45.4  
Interest expense
    163.6       167.2  
Loss in equity in earnings of unconsolidated subs — see (a) below
    (3.7 )     (7.3 )
Depreciation and amortization
    146.1       155.0  
                 
EBITDA
  $ 338.4     $ 469.2  
                 


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Calculation of interest expense to include first quarter KCSM interest
 
                 
    Non-GAAP
       
    2005     2006  
 
GAAP Interest Expense
  $ 133.5     $ 167.2  
All differences
    30.1        
                 
    $ 163.6     $ 167.2  
                 
EBITDA
  $ 338.4     $ 469.2  
                 
EBITDA Interest Coverage Ratio
    2.07       2.81  
                 
 
(a) For purpose of consistency, the Company uses the format of EBITDA specified in its bank covenants which also excludes non-cash earnings from unconsolidated subsidiaries.
 
Reconciliation of Free Cash Flow to Net Cash Provided by Operating Activities
 
                 
    2005     2006  
 
Free Cash Flow
  $ (119.4 )   $ 97.2  
Proceeds from issuance of long-term debt
    644.7       616.3  
Repayment of long-term debt
    (521.5 )     (658.5 )
Other financing activities
    (11.3 )     (7.1 )
                 
GAAP Net Increase (Decrease) in cash and cash equivalents
  $ (7.5 )   $ 47.9  
                 
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion is intended to clarify and focus on Kansas City Southern’s results of operations, certain changes in its financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included under Item 8 of this Form 10-K. This discussion should be read in conjunction with these consolidated financial statements, the related notes and the Reports of Independent Registered Public Accounting Firm thereon, and other information included in this report.
 
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Cautionary Information” for cautionary statements concerning forward-looking comments.
 
CORPORATE OVERVIEW
 
Kansas City Southern, a Delaware corporation, is a holding company with principal operations in rail transportation and its principal subsidiaries and affiliates including the following:
 
  •  The Kansas City Southern Railway Company (“KCSR”), a wholly-owned subsidiary;
 
  •  Mexrail, Inc. (“Mexrail”), a wholly-owned consolidated subsidiary; which, in turn, wholly owns The Texas Mexican Railway Company (“Tex-Mex”);
 
  •  Meridian Speedway, LLC (“MSLLC”), a ninety percent owned consolidated affiliate;
 
  •  Kansas City Southern de México, S. de R.L. de C.V. (“KCSM”). On April 1, 2005, KCS completed its acquisition of control of KCSM and as of that date, KCSM became a consolidated subsidiary of KCS. On September 12, 2005, the Company and its subsidiaries, Grupo KCSM, S.A. de C.V. (“Grupo KCSM”) and KCSM, along with the Mexican holding company Grupo TMM, S.A. (“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 VAT refund to KCSM and the purchase of the remaining shares of KCSM owned by the Mexican government. As a result of this settlement, KCS and its subsidiaries now wholly own Grupo KCSM and KCSM. For the first quarter of 2005, KCS accounted for its investment in KCSM on the equity basis of accounting.


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  •  Southern Capital Corporation, LLC (“Southern Capital”), a fifty percent owned unconsolidated affiliate that owns and leases locomotives and other rail equipment;
 
  •  Panama Canal Railway Company (“PCRC”), a fifty percent owned unconsolidated affiliate which owns all of the common stock of Panarail Tourism Company (“Panarail”).
 
  •  Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”), a twenty five percent owned unconsolidated affiliate that provides railroad services as well as ancillary services in the greater Mexico City area.
 
KCS, as the holding company, supplies its various subsidiaries with managerial, legal, tax, financial and accounting services, in addition to managing other “non-operating” investments.
 
EXECUTIVE SUMMARY
 
2006 Financial Overview.
 
The Company achieved consolidated net income of $108.9 million in 2006, as compared to net income of $100.9 million in 2005. The 2005 net income includes a non-recurring gain of $131.9 million related to the VAT/Put settlement. Excluding this non recurring item, net income increased $139.9 million over the prior year.
 
Operating income increased $242 million in 2006 to $304.3 million as compared to $62.3 million in 2005. The increase in operating income was driven primarily by increased revenues during the year. The Company achieved record revenues of $1,659.7 million in 2006, which was a 23% increase over revenues of $1,352 million in 2005. Revenue in 2006 included a full year of consolidated results. The revenue increase was primarily driven by price increases, new and expanding business in both the U.S. and Mexico, and by the continued integration of KCSM operations in the consolidated results. Revenue growth in 2006 was 9% over 2005, including pro forma KCSM revenue for the full year in 2005.
 
Cash flows from operations increased to $267.5 million in 2006 compared with $178.8 million in 2005, an increase of $88.7 million. Capital expenditures are a significant use of cash flows annually due to the capital intensive nature of railroad operations. Cash used for capital expenditures in 2006 was $241.8 million as compared to $275.7 million in 2005.
 
2007 Outlook.
 
Kansas City Southern expects to continue to integrate U.S. and Mexico operations and management with a focus on execution and realizing the full value of the network KCS has built. Consolidated revenue growth in 2007 is expected to be in line with 2005 — 2006 (including KCSM’s 2005 proforma results). Price increases and higher volume are expected to be key drivers of growth while KCS continues to position its network to increase length of haul and cross border traffic, where carload growth is expected to outpace economic growth and intermodal growth is expected to increase substantially.
 
With continued productivity increases in operations as well as the projected revenue growth, the full year operating ratio for 2007 is expected to fall below 80%; although, the Company believes seasonality of business will have an impact on the current quarter-over-quarter improvement trends in the first half of the year.
 
The Company believes that liquidity will continue to improve as will the Company’s key credit statistics with anticipated improvements in operating income, continued focus on working capital reduction and other balance sheet opportunities.
 
The Company projects cash capital expenditures to maintain the railroad and meet anticipated future demand will be approximately $270 million in 2007. KCS also plans to acquire 150 new locomotives through operating lease arrangements at a cost of about $300 million. It is currently projected that U.S. operations will take delivery of 60 locomotives and 90 locomotives will be used in Mexico.
 
Panama Canal Railway, an equity investment of KCS, is also expected to continue strong growth in volumes and cash flow.


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RECENT DEVELOPMENTS
 
Preferred Stock Dividends.  On January 12, 2007, the Company declared a cash dividend on the 4.25% Redeemable Cumulative Convertible Perpetual Preferred stock, series C (“Series C Preferred Stock”) and a stock dividend on the 5.125% Cumulative Convertible Perpetual Preferred Stock, Series D (“Series D Preferred Stock”) for dividends in arrears that were due May 15, 2006, August 15, 2006 and November 15, 2006, and the dividend payment due February 15, 2007. The dividend was paid February 15, 2007, to stockholders of record on February 5, 2007. The Company also declared a cash dividend on the 4%, noncumulative Preferred Stock, payable April 3, 2007, to stockholders of record on March 12, 2007.
 
Consent Solicitation.  On January 29, 2007, KCSR commenced a consent solicitation to amend the indentures under which KCSR’s 91/2% Senior Notes due 2008 (“91/2% Notes”) and 71/2% Senior Notes due 2009 (“71/2% Notes” and together with the 91/2% Notes, the “Notes”) were issued. The purpose of the consent solicitation was to (i) resolve an inconsistency in the inclusion of certain expenses, but not the income, of restricted subsidiaries in the calculation of the consolidated coverage ratio under the indentures, (ii) amend the definition of refinancing indebtedness to allow the inclusion of certain related premiums, interest, fees and expenses in permitted refinancing indebtedness and (iii) obtain waivers of any defaults arising from certain actions taken in the absence of such proposed amendments. On February 5, 2007, KCSR obtained the requisite consents from the holders of each series of Notes to amend their respective indentures as described above and executed supplemental indentures containing such amendments and waivers.
 
Credit Facility Waiver.  On January 31, 2007, KCS provided written notice to the lenders under the 2006 Credit Agreement of certain representation and other defaults under the 2006 Credit Agreement arising from the potential defaults which existed under the KCSR indentures as described above. These defaults limited KCSR’s access to the revolving credit facility. In its notice of default, the Company also requested that the lenders waive these defaults. On February 5, 2007 the Company received a waiver of such defaults from all of the lenders under the 2006 Credit Agreement. The Company is currently not in default of the 2006 Credit Agreement and has access to the revolving credit facility.
 
Claims Asserted under the TMM Acquisition Agreement.  As part of the acquisition of Grupo KCSM in 2005, KCS issued escrow notes to TMM totaling $47.0 million which are subject to reduction for certain potential losses related to incorrect representations and warranties or breaches of covenants in the Acquisition Agreement by TMM. On January 29, 2007, KCS advised TMM that KCS intended to assert claims for indemnification under the Acquisition Agreement related to representations and warranties made by TMM. On February 1, 2007, KCS received a notice from TMM indicating that TMM would seek damages from KCS under the Acquisition Agreement, aggregating approximately $43 million as well as other unspecified damages. The parties are obligated under the Acquisition Agreement to attempt to resolve their differences informally and, if not successful, then to submit them to binding arbitration.
 
RESULTS OF OPERATIONS
 
Year Ended December 31, 2006, Compared with the Year Ended December 31, 2005
 
Net Income.  Consolidated net income increased $139.9 million excluding the 2005 non-recurring VAT/Put settlement for the year ended December 31, 2006, compared to the same period in 2005. Including the $131.9 million VAT/Put settlement in 2005, consolidated net income increased $8 million. Operating income increased by $242.0 million primarily driven by targeted price increases and fuel surcharge, new and expanded existing business in both the U.S. and Mexico segments, and the integration of KCSM operations and a full year of consolidated operating results. Operating expenses increased by only 5% due to increased efficiencies from the integration of KCSM.


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The following summarizes the consolidated income statement components of KCS (in millions).
 
                                 
                Change  
    2006     2005     Dollars     Percent  
 
Revenues
  $ 1,659.7     $ 1,352.0     $ 307.7       23 %
Operating expenses
    1,355.4       1,289.7       65.7       5 %
                                 
Operating income
    304.3       62.3       242.0       388 %
Equity in net earnings of unconsolidated affiliates
    7.3       2.9       4.4       152 %
Interest expense
    (167.2 )     (133.5 )     (33.7 )     25 %
VAT/Put settlement gain, net
          131.9       (131.9 )     (100 )%
Other income
    10.2       12.4       (2.2 )     (18 )%
                                 
Income before income taxes and minority interest
    154.6       76.0       78.6       103 %
Income tax provision (benefit)
    45.4       (7.1 )     52.5       (739 )%
                                 
Income before minority interest
    109.2       83.1       26.1       31 %
Minority interest
    0.3       (17.8 )     18.1       (102 )%
                                 
Net income
  $ 108.9     $ 100.9     $ 8.0       8 %
                                 
 
U.S. Segment.
 
Revenues.  The following summarizes U.S. revenues (in millions) and carloads statistics (in thousands).  Certain prior period carloads and intermodal units have been reclassified to reflect changes in the business groups and to conform to the current period presentation.
 
                                                                 
    Revenues     Carloads and Intermodal Units  
                Change                 Change  
    2006     2005     Dollars     Percent     2006     2005     Units     Percent  
 
General commodities:
                                                               
Chemical and petroleum
  $ 173.5     $ 153.5     $ 20.0       13 %     158.8       155.7       3.1       2 %
Forest products and metals
    241.2       219.0       22.2       10 %     199.0       211.7       (12.7 )     (6 )%
Agricultural and mineral
    198.2       179.2       19.0       11 %     170.1       183.1       (13.0 )     (7 )%
                                                                 
Total general commodities
    612.9       551.7       61.2       11 %     527.9       550.5       (22.6 )     (4 )%
Intermodal and automotive
    74.8       76.6       (1.8 )     (2 )%     339.4       335.9       3.5       1 %
Coal
    141.0       122.3       18.7       15 %     255.9       233.4       22.5       10 %
                                                                 
Carload revenues, units and intermodal units
    828.7       750.6       78.1       10 %     1,123.2       1,119.8       3.4       0 %
                                                                 
Other revenue
    57.0       53.8       3.2       6 %                                
                                                                 
Total revenues
  $ 885.7     $ 804.4     $ 81.3       10 %                                
                                                                 
 
For the year ended December 31, 2006, revenues increased $81.3 million compared to the prior year. The U.S. segment experienced revenue increases in all commodity groups except for the intermodal and automotive business, which decreased slightly due to a decline in automotive business driven by lower output and short term plant shutdowns in 2006. Overall increases in the majority of the commodities were driven by targeted price improvements, including increased fuel surcharges. The following discussion provides an analysis of revenues by commodity group.
 
Chemical and Petroleum.  Revenues increased for all of the chemical and petroleum products for the year ended December 31, 2006, due to targeted rate increases in the petroleum, agricultural chemicals and industrial gases sectors, and increased traffic volumes. Pricing improvement and stronger economic conditions during 2006 accounted for a majority of the growth in revenue in the year, while growth in the third and fourth quarters also reflected the Gulf Coast refineries’ recovery from the past year’s hurricanes.


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Forest Products and Metals.  Revenues increased in forest products and metal commodities for the year ended December 31, 2006, primarily due to targeted rate increases. Decreases in volume can be attributed to the lumber and chip products due to rising mortgage rates. This volume decline was only partially offset by increases in volume from higher production in the metals, rolled paper and military products.
 
Agricultural and Mineral.  Revenues increased in all agricultural and mineral products for the year ended December 31, 2006, due to targeted rate adjustments and an increase in velocity over certain corridors and business sectors. Overall improvement in velocity of unit grain and mineral trains accounted for a majority of the revenue growth during 2006. Declining market conditions during the third and fourth quarters of the year accounted for the decline in volume with the primary decrease in export grain.
 
Intermodal and Automotive.  Revenues decreased in the intermodal and automotive business for the year ended December 31, 2006, due to declines in the automotive business from suspended production at an automotive plant for a majority of the year. This decrease was offset partially by increased revenues in the intermodal business which were driven by higher volumes from existing customers as well as the generation of new intermodal business.
 
Coal.  Revenues increased for the year ended December 31, 2006, as a result of higher traffic volumes at certain electric generating stations in order to rebuild inventory stockpiles. The ability to rebuild stockpiles has been made possible by improved efficiencies at the coal mines and increased velocity achieved by KCSR and origin carriers.
 
Operating Expenses.  For the year ended December 31, 2006, U.S. operating expenses increased $0.8 million. The following summarizes the Company’s U.S. operating expenses (in millions).
 
                                 
                Change  
    2006     2005     Dollars     Percent  
 
Compensation and benefits
  $ 264.3     $ 244.8     $ 19.5       8 %
Purchased services
    82.8       84.6       (1.8 )     (2 )%
Fuel
    140.8       123.8       17.0       14 %
Equipment costs
    82.7       68.9       13.8       20 %
Depreciation and amortization
    65.7       60.0       5.7       10 %
Casualties and insurance
    44.9       88.7       (43.8 )     (49 )%
Other
    78.9       88.5       (9.6 )     (11 )%
                                 
Total operating expenses
  $ 760.1     $ 759.3     $ 0.8       0 %
                                 
 
Compensation and benefits.  Compensation and benefits expense increased $19.5 million for the year ended December 31, 2006, compared to 2005 as the result of increased incentive compensation, annual salary increases, increase in management headcount, and an increase in stock based compensation. Incentive compensation is tied to the financial results of the Company and accounted for $9.3 million of the increase. Stock based compensation increased by $2.9 million partially as a result of the implementation of SFAS No. 123(R). Additionally, the remaining increase is the result of annual salary increases and certain increases in headcount.
 
Purchased services.  Purchased services expense decreased $1.8 million for the year ended December 31, 2006, compared to the same period in 2005. The decrease was primarily driven by decreases in legal costs, locomotive repair costs and rental income received on locomotives leased to Mexico operations on a short-term basis. The decreases were offset by increases in joint facilities expenses due to higher traffic and an increase in auto and truck repair expense.
 
Fuel.  Fuel expense increased $17.0 million for the year ended December 31, 2006, compared to 2005 primarily as a result of a 7.9% increase in the average price per gallon and a 7.2% increase in consumption.
 
Equipment costs.  Equipment costs increased $13.8 million for the year ended December 31, 2006, compared to 2005 as a result of entering into two new locomotive lease agreements for $14.8 million and new


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freight car leases for $4.5 million during the year. This increase was offset by a decrease in car hire expense due to a reduction in the use of non-KCSR freight cars.
 
Depreciation and amortization.  Depreciation and amortization expense increased $5.7 million for the year ended December 31, 2006, compared to 2005, primarily as a result of an increase in assets placed into service during the year. This increase was partially offset by an updated depreciation study which was completed during the year and resulted in a $3.0 million reduction in expense in the 4th quarter.
 
Casualties and insurance.  Casualties and insurance expense decreased $43.8 million for the year ended December 31, 2006, compared to 2005. During the third quarter of 2005, the Company recorded a $37.8 million pre-tax charge for personal injury liabilities based upon an actuarial study in 2005. The remaining decrease in 2006 was primarily driven by a lower number of incidence as well as a decrease in the severity of derailments during the year compared to the prior year.
 
Other.  Other expense decreased $9.6 million for the year ended December 31, 2006, compared to 2005 primarily due to a $13.9 million reimbursement from the Mexico segment for shared service expenses paid by the U.S. segment during 2006. This was offset by an increase of $6.7 million in materials and supplies primarily as a result of price increases in freight car wheels.
 
Mexico Segment.
 
KCS acquired a controlling interest in Grupo KCSM effective April 1, 2005. The 2005 results reflect charges and costs associated with the acquisition and integration, as well as the effect of valuation adjustments as required by purchase accounting. Since April 1, 2005, the financial results of Grupo KCSM have been consolidated into KCS. Prior to that date, the investment for Grupo KCSM was accounted for under the equity method. Although not consolidated prior to April 1, 2005, revenue and expense information below includes Grupo KCSM results for the 1st quarter of 2005 for comparative purposes. Accounting policies for Grupo KCSM prior to the acquisition were materially consistent with U.S. operations, however, certain adjustments have been made to the results presented for comparability.
 
Revenues.  Mexico’s revenues (in millions) and carloads statistics (in thousands) follow.
 
                                                                 
    Revenues     Carloads and Intermodal Units  
          Comparative
    Change           Comparative
    Change  
    2006     2005     Dollars     Percent     2006     2005     Units     Percent  
 
General commodities:
                                                               
Chemical and petroleum
  $ 145.9     $ 126.5     $ 19.4       15 %     102.0       97.0       5.0       5 %
Forest products and metals
    213.0       186.2       26.8       14 %     187.5       197.3       (9.8 )     (5 )%
Agricultural and mineral
    232.7       219.2       13.5       6 %     196.0       200.1       (4.1 )     (2 )%
                                                                 
Total general commodities
    591.6       531.9       59.7       11 %     485.5       494.4       (8.9 )     (2 )%
Intermodal and automotive
    162.4       173.0       (10.6 )     (6 )%     312.0       326.8       (14.8 )     (5 )%
                                                                 
Carload revenues, units and intermodal units
    754.0       704.9       49.1       7 %     797.5       821.2       (23.7 )     (3 )%
                                                                 
Other revenue
    20.0       12.7       7.3       57 %                                
                                                                 
Total revenues
  $ 774.0     $ 717.6     $ 56.4       8 %                                
                                                                 
 
Revenues for the year ended December 31, 2006 totaled $774.0 million compared to $717.6 million for the comparable year ended December 31, 2005, which represented an increase of $56.4 million. Revenues increased despite a decrease in carloads mainly due to a reduction in the movement in finished vehicles for exportation. The increase in 2006 was mainly attributable to targeted rate increases and fuel surcharge. Carloads are a standard measure used by KCS to determine the volume of traffic transported over its rail lines. Imports into Mexico from the U.S., Canada and overseas represented approximately 56.3% and 56.2% of total revenues in 2006 and 2005, respectively. Approximately 77.8% of total revenues in 2006 were attributable to international freight.


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Chemical and Petroleum Products.  Revenues rose $19.4 million in 2006 primarily due to price increases, fuel surcharge revenue and volume increases over the prior year. The volume recovery increase was largely attributable to Hurricanes Katrina and Rita which had adversely impacted the Gulf coast refineries. Volume recovery was seen in fuel oil, diesel, gasoline and pet coke during 2006.
 
Forest Products and Metals.  Revenues increased $26.8 million in 2006 compared to 2005, primarily due to price strategies, longer hauls and increased fuel surcharge. Targeted rate increases were implemented in 2006 for movements of steel slabs and steel coil imports. Increased revenue was seen from longer hauls to Laredo as a result of a customer’s relocation of its distribution center from Zacatecas to Tuxtepec. Increases in the number of cross border paper imports were seen during the year as well.
 
Agriculture and Mineral.  Revenues from agricultural products increased $13.5 million compared to 2005 primarily as a result of targeted rate increases and fuel surcharges. Volume increases in corn and sugar were partially offset by reductions in import shipments of soybeans, sorghum and wheat products. Revenues also grew due to an embargo on Ferromex lines. There was also increased activity during the last quarter of 2006 not expected to be imported through the U.S.-Mexico border. The fructose market increased and it is still growing without quotas on imports. The revenue increase has been favorable with movements of grain and products from U.S. origin to destinations on the KCSM lines. These increases were negatively affected by a reduction of volumes of sand and clay products, and lower traffic in route from Jaltipan to Queretaro, due to dwell times at Ferrovalle. Additionally revenues were also affected by the reduction in consumption of limestone in Lázaro Cárdenas during the second quarter 2006.
 
Intermodal and Automotive.  Intermodal revenue increased $7.8 million during 2006 compared to 2005, as a result of increased numbers of steamship carriers that call at the port of Lázaro Cárdenas and consistent transit times on Intermodal trains. Automotive revenue decreased $18.4 million in 2006 compared to 2005, as a result of a reduction in the movement of finished vehicles for exportation to the U.S. and Canadian markets. Additionally, the movements of importation of finished vehicles, as well as the domestic distribution of these vehicles, have declined due to the logistics of their transportation.
 
Operating Expenses.  The following summarizes Mexico operating expenses (in millions):
 
                                 
          Comparative     Change  
    2006     2005     Dollars     Percent  
 
Compensation and benefits
  $ 123.4     $ 124.4     $ (1.0 )     (1 )%
Purchased services
    131.0       145.5       (14.5 )     (10 )%
Fuel
    112.8       106.3       6.5       6 %
Equipment costs
    97.0       102.5       (5.5 )     (5 )%
Depreciation and amortization
    89.3       88.9       0.4       0 %
Casualties and insurance
    8.5       17.0       (8.5 )     (50 )%
KCSM employees’ statutory profit sharing
    5.9       41.6       (35.7 )     (86 )%
Other
    27.4       47.3       (19.9 )     (42 )%
                                 
Total operating expenses
  $ 595.3     $ 673.5     $ (78.2 )     (12 )%
                                 
 
Compensation and benefits.  For the year ended December 31, 2006, salaries, wages and employee benefits decreased $1.0 million compared to 2005. The decrease reflects a reduction in headcount and the depreciation effect of the Mexican peso against the U.S. dollar during 2006. This decrease was partially offset by the annual salaries increase and the increase in wages and fringe benefits resulting from labor negotiations in July 2006.
 
Purchased services.  Purchased services decreased $14.5 million in 2006 compared to 2005. Certain trackage rights that were not used during 2006 resulting in lower costs, amortization of deferred credits established in connection with the push down of purchase accounting, and additional capitalization of certain overhead costs, reduced purchased services during the year. These decreases were slightly offset by increases in management and professional fees during 2006.


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Fuel.  Fuel expenses increased $6.5 million in 2006 compared to 2005 primarily due to the volatility of fuel prices during 2006. KCSM’s average price per gallon for fuel increased 4.6% in 2006 as compared to the prior year.
 
Equipment cost.  Equipment cost decreased $5.5 million compared to 2005. This decrease was attributed mainly to a reduction in the use of non-KCSM freight cars as a result of velocity and operations improvement. This decrease was partially offset by the amortization of certain deferred charges and credits established in connection with the push down of purchase accounting related to the fair value of operating leases for freight cars.
 
Casualties and insurance.  During 2006, casualties and insurance decreased $8.5 million compared to 2005. This decrease was primarily the result of lower costs associated with derailments compared to activity that occurred during the second and third quarter of 2005.
 
Employees’ statutory profit sharing.  The $35.7 million decrease in employee statutory profit sharing expense for the year ended December 31, 2006 compared to 2005 was a result of four Supreme Court decisions in May of last year which denied the deductibility of NOL’s in a company’s profit sharing liability calculation. As a result of these court rulings the deferred profit sharing asset associated with these NOL’s was written down during 2005, which resulted in a non-cash charge to income of $35.6 million.
 
Other.  Other expenses decreased $19.9 million compared to December 31, 2005. This decrease primarily reflects lower bad debt expense as compared to 2005 of approximately $9.3 million, the recognition of transition cost of $2.0 million in 2005, a charge due to the revaluation of the inventory parts associated with the maintenance of the catenary line in the second quarter 2005 of $1.6 million and losses on sale of property prior to adoption of the group method of depreciation on April 1, 2005, partially offset by a $1.3 million increase in other leases.
 
Consolidated Non-Operating Expenses.
 
Consolidated Interest Expense.  Consolidated interest expense increased $33.7 million for the year ended December 31, 2006, driven primarily by the additional three months of KCSM interest expense. KCSM’s interest expense for the three months ended March 31, 2005, was $27.4 million. The remaining difference was due to higher average balances of and increased interest rates on floating rate debt in the current year.
 
Consolidated Debt Retirement Costs.  Consolidated debt retirement costs increased $0.4 million for the year ended December 31, 2006, compared to the year ended December 31, 2005. During the year ended December 31, 2006, KCSR entered into an amended and restated credit agreement and wrote off $2.2 million and KCSM refinanced its 10.25% senior notes and wrote off $2.6 million in unamortized debt issuance costs. For the year ended December 31, 2005, $4.4 million in unamortized debt issuance costs were written off in connection with the refinancing of KCSM’s 11.75% debentures and its first amended and restated credit agreement.
 
Foreign Exchange.  For the year ended December 31, 2006, the foreign exchange loss of $3.7 million compared to a gain of $3.5 million for the same period in 2005. During the year 2006 the U.S. dollar appreciated approximately 1.7% relative to the Mexican peso.
 
Equity in Net Earnings (Losses) of Unconsolidated Affiliates.  Equity in earnings from unconsolidated affiliates was $7.3 million for the year ended December 31, 2006, compared to $2.9 million for the year ended December 31, 2005. Significant components of this change follow:
 
  •  Equity in losses from the operations of PCRC was $1.0 million for the year ended December 31, 2006, compared to $1.7 million for the same period in 2005. The decrease in losses of $.7 million is the result of a 13.1% increase in volume.
 
  •  Equity in earnings of Southern Capital was $5.4 million for the year ended December 31, 2006, versus $2.8 million for the same period in 2005. The $2.6 million increase in earnings is the result of a reduction in depreciation expense as a majority of the locomotives owned by Southern Capital became fully depreciated during the year.


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  •  KCSM’s equity in earnings of FTVM was $2.9 million for the year ended December 31, 2006, compared to $2.9 million for the same period in 2005.
 
  •  Equity in losses of KCSM was $1.0 million for the year ended December 31, 2005.
 
Other Income.  Other income increased $5.4 million for the year ended December 31, 2006, due to the sale of land and other long term assets that were not associated with KCS’s railroad operations during 2006.
 
Consolidated Income Tax Provision (Benefit).  For the year ended December 31, 2006, KCS’ income tax expense was $45.4 million, a change of $52.5 million as compared to a $7.1 million benefit for the year ended December 31, 2005. The effective tax rate increased from (9.3%) to 29.4% for the years ended December 31, 2005 and 2006, respectively. This increase was primarily attributable to the absence of one-time items such as the non-taxable VAT/Put settlement which occurred in 2005 and the 2005 write-off of deferred profit sharing in Mexico.
 
Following the acquisition of control of Grupo KCSM in 2005, the Company has not provided U.S. federal income taxes on the undistributed earnings of Grupo KCSM since the Company intends to reinvest such earnings indefinitely outside of the United States.
 
Year Ended December 31, 2005, Compared with the Year Ended December 31, 2004
 
Net Income.  Consolidated net income for 2005 increased $76.5 million compared to 2004 primarily as a result of a $131.9 million gain resulting from the VAT/Put Settlement, partially offset by a reduction in operating income of $21.2 million. Additionally, consolidated net income increased due to a reduction in provision for income taxes of $30.7 million.
 
The reduction in consolidated operating income was driven primarily by an additional $37.8 million charge in 2005 to recognize additional costs related to occupational and personal injury claims determined as a result of the annual actuarial study, which was completed during the third quarter of 2005, and the write off of KCSM’s deferred tax asset related to statutory profit sharing. On a consolidated basis, both revenues and operating expenses were significantly impacted by the acquisitions completed during the year. In addition to the acquisitions, revenue growth for 2005 continued to be driven by increased volume, targeted rate increases and increased fuel surcharges to help offset rising fuel prices. Consolidated operating costs generally increased consistent with the volume increases, although price increases also impacted compensation and benefits and fuel expense.
 
The following table summarizes the consolidated income statement components of KCS (in millions).  Certain prior period amounts have been reclassified to reflect changes to the current period presentation.
 
                                 
                Change  
    2005     2004     Dollars     Percent  
 
Revenues
  $ 1,352.0     $ 639.5     $ 712.5       111 %
Operating expenses
    1,289.7       556.0       733.7       132 %
                                 
Operating income
    62.3       83.5       (21.2 )     (25 )%
Equity in net earnings (losses) of unconsolidated affiliates
    2.9       (4.5 )     7.4       (164 )%
Interest expense
    (133.5 )     (44.4 )     (89.1 )     201 %
VAT/Put settlement gain, net
    131.9             131.9        
Other income
    12.4       13.4       (1.0 )     (7 )%
                                 
Income before income taxes and minority interest
    76.0       48.0       28.0       58 %
Income tax provision (benefit)
    (7.1 )     23.6       (30.7 )     (130 )%
                                 
Income before minority interest
    83.1       24.4       58.7       241 %
Minority interest
    (17.8 )           (17.8 )      
                                 
Net income
  $ 100.9     $ 24.4     $ 76.5       314 %
                                 


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U.S. Segment.
 
Revenues.  The following table summarizes U.S. revenues, including the revenues and separate carload statistics of KCSR, and Mexrail, for the year ended December 31, 2005 (in millions). For the year ended December 31, 2004, the revenue and carload statistics are KCSR only. Certain prior period amounts have been reclassified to conform to the current period presentation.
 
                                                                 
    Revenues     Carloads and Intermodal Units  
                Change                 Change  
    2005     2004     Dollars     Percent     2005     2004     Units     Percent  
 
General commodities:
                                                               
Chemical and petroleum
  $ 153.5     $ 135.0     $ 18.5       14 %     155.7       147.9       7.8       5 %
Forest products and metals
    219.0       169.6       49.4       29 %     211.7       197.3       14.4       7 %
Agricultural and mineral
    179.2       125.2       54.0       43 %     183.1       149.4       33.7       23 %
                                                                 
Total general commodities
    551.7       429.8       121.9       28 %     550.5       494.6       55.9       11 %
Intermodal and automotive
    76.6       66.8       9.8       15 %     335.9       342.8       (6.9 )     (2 )%
Coal
    122.3       92.1       30.2       33 %     233.4       194.7       38.7       20 %
                                                                 
Carload revenues, units and intermodal units
    750.6       588.7       161.9       28 %     1,119.8       1,032.1       87.7       8 %
                                                                 
Other revenue
    53.8       50.8       3.0       6 %                                
                                                                 
Total revenues
  $ 804.4     $ 639.5     $ 164.9       26 %                                
                                                                 
 
For the year ended December 31, 2005, U.S. revenues increased $164.9 million. The Mexrail acquisition accounted for $73.3 million of the increase in revenues for the year ended December 31, 2005. U.S. revenue also experienced increases in all commodity groups due to a combination of higher carloadings, targeted price improvements and increased fuel surcharge revenue. Fuel surcharges increased to $52.0 million, which accounted for $35.3 million of the increase in revenues for the year ended December 31, 2005, compared to the same period in 2004. The following discussion provides an analysis of the segment’s revenues by commodity group. Pending completion of the ongoing effort to change the Tex-Mex mark and finalize its merger into KCS operations, carload data are presented based on the combination of the carloads for KCSR and Mexrail, without elimination for cars interchanged between the two roads.
 
Chemical and Petroleum.  For the year ended December 31, 2005, U.S. chemical and petroleum products experienced increases in revenues in all commodity groups with the exception of inorganic chemicals. These increases were attributed to higher production, certain targeted rate increases and fuel surcharges. These revenue increases were partially offset by the effects of plant and production shutdowns resulting from the hurricanes during the second half of 2005. The impact of the Mexrail consolidation increased revenues $12.1 million in the chemical and petroleum product commodities for the year ended December 31, 2005.
 
Forest Products and Metals.  For the year ended December 31, 2005, forest products and metals revenue for the U.S. segment experienced growth in all commodities compared to the same period in 2004. For the year to date period, these increases resulted primarily from certain targeted rate increases and fuel surcharges partially offset by the impact of hurricanes in the 3rd quarter of 2005. For the year ended December 31, 2005, the consolidation of Mexrail contributed $19.0 million to forest products and metals revenue.
 
Agricultural and Mineral.  U.S. revenues in the agricultural and mineral products business unit increased for the year ended December 31, 2005. The increases were primarily the result of targeted rate increases and fuel surcharges. Additionally, for the year ended December 31, 2005, all commodities, except grain, experienced increased traffic due to increased production. U.S. segment domestic grain carloads decreased, primarily due to a slowdown in equipment cycle times resulting in lower equipment availability for the year while the impact of local harvests moving to local feed mills reduced traffic in the third quarter of 2005 compared to the same period in 2004. Export grain carloads decreased primarily as a result of a decrease in gulf coast export traffic including the effects of hurricane weather in the gulf coast region. For the year ended


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December 31, 2005, the consolidation of Mexrail contributed $30.7 million to agricultural and mineral products revenue.
 
Intermodal and Automotive.  Revenue for the U.S. segment intermodal and automotive commodity group for the year ended December 31, 2005, increased $9.8 million compared to the same period in 2004. Excluding the impact of the acquisition of Mexrail, intermodal traffic declined for the year ended December 31, 2005. The declines were the result of changes in shipper traffic patterns as well as the effects of hurricane weather during the third quarter of 2005. Automotive traffic decreased as a result of decreased volumes from manufacturers for the year ended December 31, 2005. For the year ended December 31, 2005, the consolidation of Mexrail contributed $5.5 million to intermodal and automotive products revenue.
 
Coal.  Increases in U.S. segment coal revenues for the year ended December 31, 2005, compared to the same period in 2004 were due primarily to the addition of two new coal customers that were previously served by other railroads, certain targeted rate increases related to renegotiated contracts and overall increases in carloadings and traffic volumes at certain electric generating stations in response to demand. Mexrail has no significant coal revenues.
 
Operating Expenses.  For the year ended December 31, 2005, U.S. operating expenses increased $203.3 million (36.6%), when compared to the same period in 2004. Of this increase, $83.3 million was attributable to the consolidation of Mexrail’s operations for the year ended December 31, 2005. The following table summarizes U.S. operating expenses of KCSR and Mexrail for the year ended December 31, 2005 (in millions).  For the year ended December 31, 2004, the operating expenses are KCSR only.
 
                                 
                Change  
    2005     2004     Dollars     Percent  
 
Compensation and benefits
  $ 244.8     $ 213.0     $ 31.8       15 %
Purchased services
    84.6       62.3       22.3       36 %
Fuel
    123.8       66.4       57.4       86 %
Equipment costs
    68.9       50.4       18.5       37 %
Depreciation and amortization
    60.0       53.5       6.5       12 %
Casualties and insurance
    88.7       42.4       46.3       109 %
Other
    88.5       68.0       20.5       30 %
                                 
Total operating expenses
  $ 759.3     $ 556.0     $ 203.3       37 %
                                 
 
Compensation and benefits.  Increases in compensation and benefits expense for the year ended December 31, 2005, compared to the same period in 2004 were primarily the result of annual wage and salary rate increases which were effective July 1, 2004, as well as higher employee counts. For the year ended December 31, 2005, the consolidation of Mexrail added $19.4 million to compensation and benefits expense. The average headcount for the year ended December 31, 2005, was approximately 3,060 compared to approximately 2,740 for the same period in 2004, including an increase of employees as a result of the consolidation of Mexrail.
 
Purchased services.  Purchased services expense for the year ended December 31, 2005, increased compared to the same period in 2004, primarily as a result of the consolidation of Mexrail’s operations. Mexrail has historically contracted for services in the maintenance of equipment and way and structures. Accordingly, Mexrail contributed $19.7 million to purchased services expense for the year ended December 31, 2005.
 
Fuel.  Fuel expense increased for the year ended December 31, 2005, compared to the same period in 2004. This increase was the result of a 50.5% increase in the average price per gallon, as well as a 26.0% increase in consumption. For the year ended December 31, 2005, the consolidation of Mexrail added $11.9 million to fuel expense.
 
Equipment costs.  Equipment costs for the year ended December 31, 2005, increased compared to the same period in 2004. Of this increase, $15.2 million was related to the Mexrail acquisition for the year ended


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December 31, 2005. Excluding the impact of the Mexrail acquisition, equipment costs increased for the year ended December 31, 2005, primarily as a result of increased equipment lease costs related to higher traffic levels and demand.
 
Depreciation and amortization.  Depreciation and amortization expense for the year ended December 31, 2005, increased compared to the same period in 2004, primarily as a result of a higher asset base, partially offset by property retirements. For the year ended December 31, 2005, the consolidation of Mexrail added $3.5 million to depreciation and amortization expense.
 
Casualties and insurance.  During the third quarter of 2005, the Company recorded a $37.8 million pre-tax charge reflecting changes in its estimates for the cost of personal injury claims, which includes $7.5 million related to the Company’s first actuarial estimate of the cost of incurred but not reported occupational illness claims. The charge was recorded in “Casualties and Insurance” expense. The majority of the increases for FELA and third party claims are attributable to adverse experience versus the study, including an increase in the number of new claims and adverse developments in the dollar amount of claims and potential settlements for many significant prior claims. Increase related to occupational illness claims resulted primarily from a first time actuarial study. The Company is continuing its practice of accruing monthly for estimated claim costs at levels recommended by the actuarial study, and those accruals have been increased accordingly.
 
Mexico Segment.
 
KCS acquired a controlling interest in KCSM effective April 1, 2005. The nine month period ended December 31, 2005, results reflect charges and costs associated with the acquisition and integration, as well as the effect of valuation adjustments as required by purchase accounting. Management evaluates the results of its Mexico operations based on its operating performance during the current year and comparison to plan.
 
Revenues.  The following table summarizes consolidated Mexico revenues, including the revenues (in millions) and carloads statistics (in thousands), for the nine month periods ended December 31, 2005 and 2004. Although not consolidated in previous years, revenue recognition policies for the Mexico operations were consistent with those of U.S. operations in all material respects; therefore, commodity statistics are presented for purposes of comparison. Unaudited results for the nine months ended December 31, 2004 are presented for comparative purposes.
 
                                                                 
    Revenues     Carloads and Intermodal Units  
                Change                 Change  
    2005     2004     Dollars     Percent     2005     2004     Units     Percent  
 
General commodities:
                                                               
Chemical and petroleum
  $ 94.5     $ 94.7     $ (0.2 )     (0 )%     71.4       76.5       (5.1 )     (7 )%
Forest products and metals
    141.5       120.5       21.0       17 %     147.3       143.3       4.0       3 %
Agricultural and mineral
    168.9       158.6       10.3       6 %     152.4       162.1       (9.7 )     (6 )%
                                                                 
Total general commodities
    404.9       373.8       31.1       8 %     371.1       381.9       (10.8 )     (3 )%
Intermodal and automotive
    131.9       130.3       1.6       1 %     250.2       253.0       (2.8 )     (1 )%
                                                                 
Carload revenues, units and intermodal units
    536.8       504.1       32.7       6 %     621.3       634.9       (13.6 )     (2 )%
                                                                 
Other revenue
    10.8       6.4       4.4       69 %                                
                                                                 
Total revenues
  $ 547.6     $ 510.5     $ 37.1       7 %                                
                                                                 
 
Revenues for the nine months ended December 31, 2005, totaled $547.6 million compared to $510.5 million for the same period in 2004, an increase of $37.1 million. This increase was primarily attributable to the impact of fuel surcharges of $23.9 million which increased $21.5 million over the nine months ended December 31, 2004, and increases in other factors of $15.6 million.
 
Chemical and Petroleum.  Revenues from chemical and petrochemical products during the nine months ended December 31, 2005, decreased from the same period in 2004 primarily due to disruptions related to the


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impact of hurricanes offset by increases in Mexican domestic revenues for the same period, primarily related to the higher consumption of fuel products.
 
Forest Products and Metals.  Domestic revenues increased during the nine months ended December 31, 2005, as a result of an increase in the production volumes of construction materials such as billets, bar and wire. Steel slab and steel coils revenue decreased as a result of lower international traffic, related to reduced consumption by manufacturing industries offset in part by certain targeted rate increases and fuel surcharges.
 
Agriculture and Mineral.  Revenues from agriculture products increased during the nine months ended December 31, 2005, compared to the same periods in 2004. The increases were primarily the result of targeted rate increases and fuel surcharges. Volume increases were seen in corn and sugar partially offset by reductions in import shipments of soybeans, sorghum and wheat products during the same 2005 period.
 
Intermodal and Automotive.  Intermodal freight revenue increased $1.6 million for the nine month period ended December 31, 2005, compared to the same period in 2004. This increase was primarily attributable to the consolidation of steamship service at the port of Lázaro Cárdenas with the support of the port administration and Hutchinson Terminal. Automotive revenues for the nine month period ended December 31, 2005, decreased primarily as a consequence of lower domestic traffic offset by targeted increases in rates.
 
Operating Expenses.  Mexico operations reported operating expenses of $530.3 million in the nine months ended December 31, 2005. The following table summarizes operating expenses of KCSM for the nine months ended December 31 (in millions):
 
                                 
                Change  
    2005     2004     Dollars     Percent  
 
Compensation and benefits
  $ 95.6     $ 87.2     $ 8.4       10 %
Purchased services
    108.7       120.5       (11.8 )     (10 )%
Fuel
    83.1       65.3       17.8       27 %
Equipment costs
    80.9       66.9       14.0       21 %
Depreciation and amortization
    67.7       66.6       1.1       2 %
Casualties and insurance
    14.7       9.7       5.0       52 %
KCSM employees’ statutory profit sharing
    41.1       (2.1 )     43.2       (2,057 )%
Other
    38.5       23.8       14.7       62 %
                                 
Total operating expenses
  $ 530.3     $ 437.9     $ 92.4       21 %
                                 
 
Compensation and benefits.  Salary expenses increased $8.4 million for the nine months ended December 31, 2005 compared to the same period in 2004. The increase was largely attributable to the net effects of annual salary increases (4% in June 2005) and the increase in wages and fringe benefits as a result of our labor agreement revision in July 2005 (4.5% in wages and 2% in fringe benefits).
 
Purchased services.  Costs of purchased services decreased by $11.8 million for the nine months ended December 31, 2005 compared to the same period in 2004. Costs of purchased services consist primarily of expenses related to equipment maintenance, haulage, terminal services, security expenses and legal expenses. The decrease includes the effect of establishing a fair market value for locomotive maintenance agreements under purchase accounting of $4.9 million. As a result of the acquisition of Grupo KCSM, Management fee agreements were cancelled, resulting in a reduction of expenses. Additionally, lower legal costs related to the VAT refund claim and a lower cost of expatriates as a result of a personnel restructuring program contributed to the decrease.
 
Fuel.  Fuel expenses increased for the nine months ended December 31, 2005 compared to the same period in 2004 primarily due to the volatility of fuel prices during 2005 and higher fuel consumption compared to 2004.
 
Equipment cost.  Equipment cost increased for the nine months ended December 31, 2005 compared to the same period in 2004. The variance is attributable principally to an increase in the number of hours and


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number of movement miles in 2005 compared to 2004 for current traffic. Additionally the increase includes the effect of purchase accounting under which KCSM established a fair market value for all the operating leases for locomotives and freight cars. This, along with a higher number of freight cars leased for the nine months ended December 31, 2005 compared to 2004, resulted in higher rental expense.
 
Depreciation and amortization.  Depreciation and amortization expenses in 2005 increased for the nine months ended December 31, 2005 compared to the same period in 2004. This increase includes the effects of purchase accounting, whereby the book values of assets were adjusted upward based on a market value appraisal along with capital improvements to the lines resulting in additional depreciation and amortization. This increase was offset by the effect of changes in the estimated useful lives on properties, machinery and equipment resulting in a lower depreciation expense in 2005.
 
Casualties and insurance.  These expenses increased for the nine months ended December 31, 2005 compared to the same period ended in 2004. These increases were primarily the result of costs associated with derailments that occurred over the nine months ending in 2005. This increase was partially offset by a reduction in the insurance premiums compared to 2004.
 
Employees’ statutory profit sharing.  The increase in the employees’ statutory profit sharing for the nine months ended December 31, 2005 compared to the same period in 2004 was a result of recent Mexican Supreme Court decisions in May 2005 denying the deductibility of NOL’s in calculating the Company’s employees’ profit sharing liability. As part of purchase accounting, KCS valued the profit sharing NOL asset at zero as a result of the court rulings and wrote off the deferred profit sharing asset associated with these NOL’s. This resulted in a charge to income of $35.6 million.
 
Other.  For the nine months ended December 31, 2005, these expenses increased compared to the same period ended December 31, 2004. The increase was primarily due to the reduction in value of certain assets after purchase accounting as well as management’s decision to increase the allowance for doubtful customer accounts based upon current prospects for collection of certain customer accounts.
 
Consolidated Non-Operating Expenses.
 
Consolidated Interest Expense.  Consolidated interest expense increased $89.1 million for year ended December 31, 2005, when compared to the twelve months ended December 31, 2004. This increase was the result of higher floating interest rates incurred under the credit agreement, increased borrowings under the revolving credit facility, interest associated with the debt assumed as part of the locomotive acquisition from El-Mo and the addition of interest expense of $71.4 million for the nine months ended December 31, 2005, due to the acquisition of KCSM and $1.1 million for the twelve months ending December 31, 2005, due to the acquisition of Mexrail.
 
Consolidated Debt Retirement Costs.  Consolidated debt retirement costs increased $0.2 million for the year ended December 31, 2005, when compared to the same period in 2004. For the year ended December 31, 2005, $4.4 million in unamortized debt issuance costs were written off primarily in connection with the refinancing of KCSM’s 11.75% debentures and its First Amended and Restated Credit Agreement dated as of June 24, 2004. During the year ended December 31, 2004, KCS recorded $4.2 million of debt retirement costs resulting from the write-off of the unamortized balance of debt issuance costs associated with the previous credit facility.
 
Equity in Net Earnings (Losses) of Unconsolidated Affiliates.  For the year ended December 31, 2005, equity in earnings from other unconsolidated affiliates was $3.9 million compared to equity in losses from other unconsolidated affiliate of $2.1 million for the same period of 2004. Significant components of this change were as follows:
 
  •  For the year ended December 31, 2005, equity in losses from the operations of PCRC was $1.7 million, compared to $2.1 million for the same period in 2004.
 
  •  For the year ended December 31, 2005, equity in earnings of Southern Capital was $2.8 million, compared to $2.7 million, for the same period in 2004.


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  •  For the nine months ended December 31, 2005, KCSM’s equity in earnings of Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”) was $2.9 million.
 
For 2005, earnings for Southern Capital were $13.1 million compared to $11.8 million in 2004. This increase of $1.3 million was primarily the result of a gain recognized by Southern Capital for the sale of locomotives in 2005 of approximately $7.7 million as compared to $6.0 million in 2004. The sales of locomotives were to KCSR in the second quarters of 2005 and 2004, respectively. For purposes of recording its share of Southern Capital earnings, the Company has recorded its share of the gain as a reduction to the cost basis of the equipment acquired. As a result, the Company will recognize its equity in the gain over the remaining depreciable life of the locomotives as a reduction of depreciation expense.
 
Consolidated Income Tax Provision (Benefit).  For the year ended December 31, 2005, KCS’s income tax benefit was $7.1 million, a change of $30.7 million as compared to a $23.6 million expense for the year ended December 31, 2004. This change was primarily due to the complexities relating to Mexico taxes resulting in an effective income tax rate of (9.3%) and 49.1% for the years ended December 31, 2005 and 2004, respectively. The primary causes of the decrease in the consolidated effective rate were the VAT/Put Settlement, the utilization of U.S. tax credits enacted for the tax year 2005, a lower Mexican statutory tax rate of 30% as compared to U.S. statutory rate of 35%, and foreign exchange rate fluctuations and inflation. The VAT/Put Settlement gain was not taxable in Mexico and is not expected to be taxable for U.S. income tax purposes. The Company believes, based upon opinions of outside legal counsel and other factors, that the VAT/Put Settlement should not be taxable to KCS for U.S. income tax purposes. Such position has not been examined by taxing authorities and it is possible that this position could be challenged. The amount of such tax would be material; however the Company believes that it would have the right to indemnification under the terms of the Acquisition Agreement.
 
Following the acquisition of control of Grupo KCSM in 2005, the Company has not provided U.S. federal income taxes on the undistributed earnings of Grupo KCSM since the Company intends to reinvest such earnings indefinitely outside of the United States.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Overview
 
KCS’s primary uses of cash are to support operations; maintain and improve its railroad and information systems infrastructure; pay debt service and preferred stock dividends; acquire new and maintain existing locomotives, rolling stock and other equipment; and meet other obligations. See “Cash Flow Information and Contractual Obligations” below.
 
KCS has a Debt/Equity ratio of 52.6 percent. Its primary sources of liquidity are cash flows generated from operations, borrowings under its revolving credit facilities and access to debt and equity capital markets. Although KCS has had excellent access to capital markets, as a highly leveraged company, the financial terms under which funding is obtained often contain restrictive covenants. The covenants constrain financial flexibility by restricting or prohibiting certain actions, including the ability to incur debt, create or suffer to exist liens, make prepayments of particular debt, pay dividends, make capital investments, engage in transactions with stockholders and affiliates, issue capital stock, sell certain assets, and engage in mergers and consolidations or in sale-leaseback transactions. On December 31, 2006, total available liquidity (the unrestricted cash balance plus revolving credit facility availability) was $144 million.
 
As a result of KCS acquiring a controlling interest in Grupo KCSM and KCSM, both companies became subject to the terms and conditions of the indentures governing KCSR’s two senior notes issues. The restrictive covenants of these indentures limit the ability of Grupo KCSM and KCSM to incur additional debt for any purpose other than the refinancing of existing debt and certain new asset financing.
 
During 2006 KCS’ ability to access capital markets was affected by the late filing of the Company’s annual report on Form 10-K for the year ended December 31, 2005. This late filing also caused defaults under the Company’s credit agreements due to the Company’s failure to meet certain reporting requirements. Additionally, the Company’s ability to incur additional indebtedness and pay cash dividends was restricted by


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the Company’s failure to comply with certain financial ratios under its indentures and credit agreements. A consequence of the late filing of the Company’s annual report on Form 10-K for the year ended December 31, 2005 and its failure to pay dividends on preferred stock was that its ability to quickly access the public equity markets has been reduced significantly, since KCS did not qualify as a “well-known seasoned issuer” and also cannot utilize the short-form registration statement on Form S-3. KCS paid accrued and unpaid and current dividends on its outstanding 4% Preferred Stock, Series C Preferred Stock and Series D Preferred Stock on February 15, 2007, and believes it will become a well-known seasoned issuer and again be eligible to use short-form registration on Form S-3 on May 1, 2007, as described below in “Shelf Registration Statements and Public Securities Offerings.” KCS sought and obtained amendments and waivers for each of these defaults in 2006.
 
The Company believes, based on current expectations, that cash and other liquid assets, operating cash flows, access to capital markets, and other available financing resources will be sufficient to fund anticipated operating, capital and debt service requirements and other commitments through 2007. However, KCS’ operating cash flow and financing alternatives can be unexpectedly impacted by various factors, some of which are outside of its control. For example, if KCS was to experience a substantial reduction in revenues or a substantial increase in operating costs or other liabilities, its operating cash flows could be significantly reduced. Additionally, the Company is subject to economic factors surrounding capital markets and its ability to obtain financing under reasonable terms is subject to market conditions. Further, KCS’ cost of debt can be impacted by independent rating agencies, which assign debt ratings based on certain credit measurements such as interest coverage and leverage ratios.
 
As of December 31, 2006, Standard & Poor’s Rating Service (“S&P”) rated the senior secured debt as BB−, our senior unsecured debt as B− and the preferred stock as D. S&P also maintained a corporate rating on KCS of B and had a negative outlook. Moody’s Investor Service (“Moody’s”) rated the senior secured debt as Ba2, the senior unsecured debt as B3 and the preferred stock as Caa1. Moody’s also maintained a probability of default rating on KCS of B2 and had a stable outlook. On February 8, 2007, S&P changed the Company’s outlook from negative to stable and on February 16, 2007, they upgraded the rating on the preferred stock from D to CCC.
 
Long Term Debt and Credit Facility Activity.
 
On March 1, 2006, KCS, KCSR, and other KCS subsidiaries entered into a fourth waiver (the “Fourth Waiver”) of the credit agreement dated March 30, 2004 (the “2004 Credit Agreement”). Under the terms of the Fourth Waiver, which was to expire on April 30, 2006, the Lenders agreed to waive the requirement that KCS maintain a leverage ratio (as defined in the 2004 Credit Agreement) of not more than 5.00:1 for the quarter ended December 31, 2005, provided that such ratio did not exceed 5.50:1. The ratio did not exceed 5.50:1.
 
On March 31, 2006, KCSM failed to meet certain reporting requirements under the 2005 KCSM Credit Agreement and had not met the leverage ratio covenant at the end of 2005. These failures resulted in defaults under the 2005 KCSM Credit Agreement and limited KCSM’s access to the revolving credit facility. On April 7, 2006, KCSM entered into an amendment and waiver (“Amendment and Waiver”) to the 2005 KCSM Credit Agreement. The 2005 KCSM Credit Agreement was amended to (i) exclude certain payment obligations accrued under two locomotive maintenance agreements and under a track maintenance rehabilitation agreement from the definition of Indebtedness, (ii) eliminate certain minimum and multiple borrowing thresholds for peso borrowings under the revolving credit facility and (iii) eliminate the reporting requirement to provide unaudited consolidated financial statements for the fourth fiscal quarter. The Amendment and Waiver also waived certain reporting requirements, including the requirement of KCSM to provide audited consolidated financial statements 90 days after the end of the 2005 fiscal year, provided such reports were delivered by April 30, 2006, and compliance with the Consolidated Leverage Ratio obligations of Section 7.1(c) of the 2005 KCSM Credit Agreement for the four quarters ending December 31, 2005, if compliance therewith was calculated without giving effect to the amendment to the definition of “Indebtedness” in the Amendment and Waiver, provided that KCSM was in compliance therewith after giving effect to the Amendment and Waiver.


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KCSM is not currently in default under the 2005 KCSM Credit Agreement and currently has access to the revolving credit facility.
 
On April 7, 2006, KCS, KCSR and other KCS subsidiaries entered into a fifth waiver of the 2004 Credit Agreement (the “Fifth Waiver”). Under the terms of the Fifth Waiver, which was to expire on April 30, 2006, the Lenders agreed to waive the requirement of Section 5.03(b) that KCS furnish a copy of its 2005 annual audited financial statements by March 31, 2006, so long as KCS furnished such audited financial statements by April 30, 2006. The Company furnished such audited financial statements by that date.
 
On April 28, 2006, KCS, KCSR and the other subsidiary guarantors named therein entered into an amended and restated credit agreement (the “2006 Credit Agreement”), in an aggregate amount of $371.1 million with The Bank of Nova Scotia and other lenders named in the 2006 Credit Agreement. Proceeds from the 2006 Credit Agreement were used to refinance the 2004 Credit Agreement. The 2006 Credit Agreement consists of (a) a $125.0 million revolving credit facility with a letter of credit sublimit of $25.0 million and swing line advances of up to $15.0 million, and (b) a $246.1 million term loan facility. The maturity date for the revolving credit facility is April 28, 2011 and the maturity date of the term loan facility is April 28, 2013. The 2006 Credit Agreement contains covenants that restrict or prohibit certain actions, including, but not limited to, KCS’ ability to incur debt, create or suffer to exist liens, make prepayment of particular debt, pay dividends, make investments, engage in transactions with stockholders and affiliates, issue capital stock, sell certain assets, and engage in mergers and consolidations or in sale-leaseback transactions. In addition, KCS must meet certain consolidated interest coverage and leverage ratios. Failure to maintain compliance with the covenants could constitute a default which could accelerate the payment of any outstanding amounts under the 2006 Credit Agreement.
 
On October 23, 2006, pursuant to an offer to purchase dated such date, KCSM commenced a cash tender offer and consent solicitation for any and all outstanding $150.0 million aggregate principal amount of its 101/4% Senior Notes due 2007 (the “KCSM 2007 Senior Notes”). The consent solicitation expired on November 3, 2006. KCSM received consents in connection with the tender offer and consent solicitation from holders of over 97% of the KCSM 2007 Senior Notes to amend the indenture under which the KCSM 2007 Senior Notes were issued (the “2007 Indenture”), to eliminate substantially all of the restrictive covenants included in the 2007 Indenture. The supplemental indenture relating to the KCSM 2007 Senior Notes containing the proposed changes (the “2007 Supplemental Indenture”) became effective on November 21, 2006. The tender offer expired at midnight, New York City time, on November 20, 2006 and KCSM purchased tendered notes on November 21, 2006, in accordance with the terms of the tender offer.
 
On November 21, 2006 KCSM issued $175.0 million of new, unsecured, 75/8% senior notes due 2013 (the “KCSM 2013 Senior Notes”). Proceeds from the issuance were used to purchase the $146.0 million of tendered KCSM 2007 Senior Notes and repay $29.0 million of term loans under the 2005 KCSM Credit Agreement.
 
On January 29, 2007, the Company commenced a consent solicitation to amend the indentures under which KCSR’s 91/2% Senior Notes due 2008 (the “91/2% Notes”) and 71/2% Senior Notes due 2009 (the “71/2% Notes” and together with the 91/2% Notes, the “Notes”) were issued. The Company identified certain inconsistencies in the language of the indentures which prevented KCS from obtaining a coverage ratio of at least 2.00:1. The purpose of the consent solicitation was to (i) resolve an inconsistency in the inclusion of certain expenses, but not the income, of restricted subsidiaries in the calculation of the consolidated coverage ratio under the indentures, (ii) amend the definition of refinancing indebtedness to allow the inclusion of certain related premiums, interest, fees and expenses in permitted refinancing indebtedness and (iii) obtain waivers of any defaults arising from certain actions taken in the absence of such proposed amendments. On February 5, 2007, the Company obtained the requisite consents from the holders of each series of Notes to amend their respective indentures as described above and executed supplemental indentures containing such amendments and waivers.
 
On January 31, 2007, KCS provided written notice to the lenders under the 2006 Credit Agreement of certain representation and other defaults under the 2006 Credit Agreement arising from the potential defaults which existed under the KCSR indentures governing the Notes as described above. These defaults limited


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KCSR’s access to the revolving credit facility. In its notice of default, the Company also requested that the lenders waive these defaults. On February 5, 2007, the Company received a waiver of such defaults from all of the lenders under the 2006 Credit Agreement. The Company is currently not in default of the 2006 Credit Agreement and has access to the revolving credit facility.
 
Cash Flow Information and Contractual Obligations.
 
Summary cash flow data follows (in millions):
 
                         
    2006     2005     2004  
 
Cash flows provided by (used for):
                       
Operating activities
  $ 267.5     $ 178.8     $ 142.7  
Investing activities
    (166.0 )     (289.5 )     (376.8 )
Financing activities
    (53.6 )     103.2       137.3  
                         
Net increase (decrease) in cash and cash equivalents
    47.9       (7.5 )     (96.8 )
Cash and cash equivalents at beginning of year
    31.1       38.6       135.4  
                         
Cash and cash equivalents at end of year
  $ 79.0     $ 31.1     $ 38.6  
                         
 
During 2006, the consolidated cash position increased $47.9 million due to increased operating income which was partially offset by additional payments for the acquisition of Grupo KCSM and the refinancing and repayment of debt. During 2005, the consolidated cash position decreased $7.5 million due to an increased level of capital expenditures. The primary sources of cash were cash inflows from operating activities, the issuance and assumption of long-term debt, the issuance of preferred stock and borrowings under the revolving credit facilities. The primary uses of cash were for capital expenditures, investments in affiliates, repayment of long-term debt and the repurchase of KCS’ common stock.
 
KCS’ cash flow from operations has historically been positive and sufficient to fund operations, roadway capital expenditures, other capital improvements and debt service. External sources of cash (principally bank debt, public debt, preferred stock and leases) have been used to refinance existing indebtedness and to fund acquisitions, new investments and equipment additions.
 
Operating Cash Flows.  The following summarizes consolidated operating cash flow information (in millions):
 
                         
    2006     2005     2004  
 
Net income
  $ 108.9     $ 100.9     $ 24.4  
Depreciation and amortization
    155.0       127.7       53.5  
Equity in undistributed losses (earnings) of unconsolidated affiliates
    (7.3 )     (2.9 )     4.5  
VAT/put settlement gain
          (131.9 )      
Minority interest
    0.3       (17.8 )      
Distributions from unconsolidated affiliates
    4.5       8.3       8.8  
Deferred income taxes
    41.0       (17.3 )     35.9  
KCSM employees’ statutory profit sharing
    5.9       41.1        
Loss (gain) on sale of assets
    (7.8 )     1.0       (3.8 )
Changes in working capital items
    (24.5 )     45.9       1.3  
Other, net
    (8.5 )     23.8       18.1  
                         
Net cash flow provided by operating activities
  $ 267.5     $ 178.8     $ 142.7  
                         
 
Net operating cash flows for 2006 increased $88.7 million to $267.5 million compared to $178.8 million in 2005. This increase in operating cash flows was primarily attributable to better operating performance and the consolidation of KCSM for twelve months in 2006 as compared to nine months in 2005. The increase was partially offset by changes in working capital balances relating to the timing of payments and receipts.


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Net operating cash flows for 2005 increased $36.1 million to $178.8 million largely due to the consolidation of KCSM which was partially offset by changes in working capital relating to the timing of payments and receipts.
 
Investing Cash Flows.  Net investing cash outflows were $166.0 million and $289.5 million during 2006 and 2005, respectively. This $123.5 million decrease was related to decreased capital expenditures, increased property sales and the receipt of the MSLLC investment from NS.
 
Net investing cash outflows for 2005 decreased $87.3 million from 2004 due primarily to the investments in Mexrail and Grupo KCSM in 2004. During 2005, KCS capital expenditures increased $158.5 million, of which KCSM and Mexrail contributed $100.6 million.
 
Financing Cash Flows.  Financing cash inflows were derived from the issuance of long-term debt, including borrowings under the revolving credit facilities, the issuance of preferred stock and proceeds from the issuance of common stock under employee stock plans. Financing cash outflows were used for the repayment of debt, the repurchase of KCS’ common stock, the payment of dividends on KCS’ preferred stock and the payment of debt and preferred stock issuance costs. Financing cash flows for 2006, 2005, and 2004 were as follows:
 
  •  Financing cash outflows for 2006 were $53.6 million, resulting primarily from the repayment of short and long term debt, including amounts related to the Grupo KCSM acquisition, and the costs associated with refinancing debt. During 2006, KCS entered into a new $371.1 million amended and restated credit agreement and used the proceeds to repay all amounts outstanding under the previous credit agreement. KCS also borrowed a net amount of $27.5 million under the Tex-Mex RRIF loan, repaid a net amount of $2.0 million under the KCSR revolving credit facility and repaid other amounts. KCSM issued $175.0 million of 75/8% senior unsecured notes and used the proceeds to purchase $146.0 million of its 101/4% senior unsecured notes and repay $29.0 million under its term loan facility. KCSM also used cash on hand to repay all amounts outstanding under its revolving credit facility.
 
  •  Financing cash flows for 2005 were $103.2 million, resulting primarily from borrowings under the revolving credit facilities. During 2005 KCS issued $210.0 million of preferred stock and the net proceeds were used to repurchase 9.0 million shares of KCS common stock. KCS also assumed debt under a purchase agreement for 75 locomotives, of which $24.3 million was outstanding at year end, borrowed $21.7 million under the Tex-Mex RRIF loan, and had borrowings of $92.0 million outstanding at year end under the KCSR revolving credit facility. KCSM issued $460.0 million of 93/8% senior unsecured notes, and entered into a $106.0 million credit facility. The proceeds from these last two financings were used by KCSM to repay $443.5 million of senior discount debentures, $31.0 million under a bridge loan, the remaining balance of $67.5 million under the previous credit facility and the costs associated with the transactions.
 
  •  Financing cash flows for 2004 were $137.3 million, resulting primarily from borrowings under a new $350.0 million credit agreement consisting of a $250.0 million term loan facility and a $100.0 million revolving credit facility. KCS used $100.0 million of the term loan to fund a portion of the escrow account under the acquisition of Grupo KCSM.
 
  •  Proceeds from the sale of KCS common stock pursuant to employee stock plans were $8.6 million, $1.7 million and $7.4 million in 2006, 2005 and 2004, respectively.
 
  •  Payment of cash dividends were $4.3 million, $8.7 million and $8.7 million in 2006, 2005 and 2004, respectively. Dividends of approximately $0.2 million were paid each year on the 4.0% noncumulative preferred stock; approximately $2.1 million, $8.5 million and $8.5 million of dividends were paid in 2006, 2005 and 2004, respectively, on the Series C Preferred Stock; and approximately $2.0 million of dividends were paid in 2006 on the Series D Preferred Stock. Cumulative dividends in arrears were paid February 15, 2007. Refer to Note 16 to the Consolidated Financial Statements in Item 8 of this Form 10-K.


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Contractual Obligations.  The following table outlines the material obligations under long-term debt, operating lease and other contractual commitments on December 31, 2006 (in millions). Typically, payments for operating leases, other contractual obligations and interest on long-term debt are funded through operating cash flows. Principal payment obligations on long-term debt are typically refinanced by issuing new long-term debt. If operating cash flows are not sufficient, funds received from other sources, including borrowings under credit facilities and proceeds from property and other asset dispositions might also be available. These obligations are customary transactions similar to those entered into by others in the transportation industry. KCS anticipates refinancing certain parts of the long-term debt prior to maturity.
 
                                         
    Payments Due by Period        
          Less Than
    1-3
    3-5
       
    Total     1 Year     Years     Years     Thereafter  
 
                                         
Long-term debt (including interest and capital lease obligations)(i)
  $ 2,496.7     $ 243.4     $ 697.6     $ 351.0     $ 1,204.7  
Operating leases
    958.6       123.6       205.5       167.9       461.6  
Other contractual obligations(ii)
    508.7       89.3       130.6       94.8       194.0  
                                         
Total contractual obligations
  $ 3,964.0     $ 456.3     $ 1,033.7       613.7     $ 1,860.3  
                                         
 
 
(i) Includes current and long-term liability related to Grupo KCSM acquisition.
 
(ii) Other contractual obligations include purchase commitments and certain maintenance agreements.
 
In the normal course of business, the Company enters into long-term contractual requirements for future goods and services needed for the operations of the business. Such commitments are not in excess of expected requirements and are not reasonably likely to result in performance penalties or payments that would have a material adverse effect on the Company’s liquidity.
 
The Company is party to three utilization leases covering 888 railcars where car hire revenue as defined in the lease agreements is shared between the lessor and the Company. The leases expire at various times through 2011. Amounts that may be due to lessors under these utilization leases vary from month to month based on car hire rental with the minimum monthly cost to the Company being zero. Accordingly, the utilization leases have been excluded from contractual obligations above.
 
Off-Balance Sheet Arrangements.
 
As further described in Note 3 to the Consolidated Financial Statements in Item 8 of this Form 10-K, KCSR holds a fifty percent interest in Southern Capital. Southern Capital’s principal operations are the acquisition and leasing of equipment including locomotives, rolling stock and other railroad equipment. On June 25, 2002, Southern Capital partially refinanced the outstanding balance of certain debt through the issuance of 5.7% pass through trust certificates secured by all of the locomotives and rolling stock owned by Southern Capital and rental payments payable by KCSR under the operating leases of the equipment owned by Southern Capital. As Southern Capital is a fifty percent owned joint venture accounted for under the equity method, this debt is not reflected in KCS’ Consolidated Balance Sheets which are included in Item 8 of this Form 10-K.
 
PCRC, as described in Note 3, has the concession to reconstruct and operate the Panama Canal Railway. Under the terms of a loan agreement with International Finance Corporation (“IFC”) the Company is a guarantor for up to $4.4 million of associated debt. Also, if PCRC terminates the concession contract without the IFC’s consent, KCS is a guarantor for up to half of the outstanding senior loans. The Company is also a guarantor for up to $0.5 million of PCRC equipment loans and capital leases, and has issued two irrevocable letters of credit totaling approximately $2.0 million to fulfill the Company’s fifty percent guarantee of a approximately $4.0 million equipment loan.


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Capital Expenditures.
 
Capital improvements for roadway track structures have historically been funded with cash flows from operations. During 2005, however, KCS used borrowings under its revolving credit facility to fund an expanded capital expenditure program. KCS has historically used internally generated cash flows or leasing for equipment capital expenditures. The Southern Capital joint venture provides the ability to lease-finance railroad equipment, and therefore, KCS has increasingly used lease-financing alternatives for its locomotives and rolling stock.
 
The following summarizes cash capital expenditures by type for the consolidated operations for the year ended December 31, 2006, KCSR and Mexrail for the year ended 2005 and KCSM for the last nine months of 2005, and KCSR only for 2004 (in millions).
 
                         
    2006     2005     2004  
 
Track infrastructure
  $ 100.4     $ 190.1     $ 57.2  
Locomotives, freight cars and other equipment
    40.4       41.8       22.6  
Facilities and capacity projects
    70.7       1.7       27.4  
Information technology
    15.4       12.2       5.4  
Other
    14.9       29.9       4.6  
                         
Total capital expenditures
  $ 241.8     $ 275.7     $ 117.2  
                         
 
Internally generated cash flows are expected to be used to fund cash capital expenditures planned for 2007, currently estimated at $270 million.
 
Maintenance and Repairs.
 
KCSR and KCSM, like other railroads, are required to maintain their own property infrastructure. Portions of roadway and equipment maintenance costs are capitalized and other portions are expensed (as components of material and supplies, purchased services and others), as appropriate. Maintenance and capital improvement programs are in conformity with GAAP as well as with the standards recognized within the rail industry and related regulatory agencies. KCS expects to continue funding roadway and equipment maintenance expenditures with internally generated cash flows.
 
Capital Structure.
 
Components of the capital structure follow (in millions):
 
                 
    2006     2005  
 
Debt due within one year(i)
  $ 92.8     $ 116.3  
Long-term debt(ii)
    1,664.2       1,744.3  
                 
Total debt
    1,757.0       1,860.6  
Stockholders’ equity
    1,582.4       1,426.2  
                 
Total debt plus equity
  $ 3,339.4     $ 3,286.8  
                 
Debt ratio (total debt as a percent of total debt plus equity)
    52.6 %     56.6 %
 
(i) Includes current liability related to Grupo KCSM acquisition.
 
(ii) Includes long-term liability related to Grupo KCSM acquisition.
 
The consolidated debt ratio on December 31, 2006, improved 4.0 percentage points compared to December 31, 2005. Total consolidated debt decreased $103.6 million, primarily as a result of payments of $75.4 million of debt related to the Grupo KCSM acquisition and KCSM’s payments of $55.4 million on the revolver and term loans. These debt payments were offset by the issuance of $27.5 million on the Tex-Mex RRIF loan.


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Shelf Registration Statements and Public Securities Offerings.
 
KCS currently has three shelf registration statements on file with the SEC (“Initial Shelf” — Registration No. 33-69648; “Second Shelf” — Registration No. 333-61006; “Third Shelf” — Registration No. 333-130112). Securities in the aggregate amount of $300 million remain available under the Initial Shelf and securities in the aggregate amount of $450 million remain available under the Second Shelf. The Third Shelf was filed in accordance with the securities offering reform rules of the SEC that allow well known seasoned issuers to register an unspecified amount of different types of securities on an immediately effective Form S-3 registration statement. On December 9, 2005, the Company completed the sale and issuance of 210,000 shares of its Series D Preferred Stock pursuant to the Third Shelf. There remains an unspecified amount of securities available under the Third Shelf. To date, no securities have been issued under either the Initial Shelf or Second Shelf. As a consequence of the late filing of the 2005 Form 10-K, KCS is ineligible to use any of these shelf registration statements until it has timely filed all periodic reports required under Section 13(a) or Section 15(d) of the Exchange Act during the twelve calendar months and any portion of the month after the late Form 10-K filing was made. KCS was also ineligible to use the shelf registration statements during the period in which it failed to pay dividends on its 4% Preferred Stock, Series C Preferred Stock and Series D Preferred Stock. KCS paid the accrued and unpaid dividends and current dividends on the Series C Preferred Stock and Series D Preferred Stock on February 15, 2007. KCS believes it will be eligible to use the shelf registration statements commencing May 1, 2007, provided KCS continues to pay dividends on its preferred stock, timely files all periodic reports required under the Exchange Act and otherwise meets the requirements for short-form registration under Form S-3.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
KCS’ accounting and financial reporting policies are in conformity with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management believes that the following accounting policies and estimates are critical to an understanding of KCS’ historical and future performance. Management has discussed the development and selection of the following critical accounting estimates with the Audit Committee of KCS’ Board of Directors and the Audit Committee has reviewed the selection, application and disclosure of the Company’s critical accounting policies and estimates.
 
Depreciation of Property and Equipment.
 
The railroad industry is extremely capital intensive. Maintenance and the depreciation of operating assets constitute a substantial operating expense for KCS, as well as the railroad industry as a whole. The Company capitalizes costs relating to additions and replacements of property and equipment, including certain overhead costs representing the indirect costs associated with construction and improvement projects. Overhead factors are periodically reviewed and adjusted to reflect current costs using the full absorption method. All of these costs are depreciated using the group method consistent with industry standards and rules established by the STB. The cost of property and equipment normally retired, less salvage value, is charged to depreciation expense over the estimated life of the operating assets using group straight-line rates for financial statement purposes. The STB approves the depreciation rates used by KCSR (excluding the amortization of computer software) but not for KCSM. Both KCSR and KCSM periodically conduct studies of depreciation rates for properties and equipment and implements approved changes, as necessary, to depreciation rates. These studies take into consideration the historical retirement experience of similar assets, the current condition of the assets, current operations and potential changes in technology, estimated salvage value of the assets, and industry regulations. For all other consolidated subsidiaries, depreciation is derived based upon the asset value in excess of estimated salvage value using the straight-line method over the estimated useful lives of the assets for financial reporting purposes. Depreciation is based upon estimates of the useful lives of assets as well as their net salvage value at the end of their useful lives. Estimation of the useful lives of assets that are long-lived as


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well as their salvage value requires significant management judgment. Accordingly, management believes that accounting estimates related to depreciation expense are critical.
 
Currently, KCSR and KCSM depreciate operating assets, including road and structures, rolling stock and equipment, and capitalized leases generally over a range of 3 to 50 years depending upon the estimated life of the particular asset. In addition to the adjustment to rates as a result of the depreciation studies, certain other events could occur that would materially affect the Company’s estimates and assumptions related to depreciation. Unforeseen changes in operations or technology could substantially alter management’s assumptions regarding KCS’ ability to realize the return of its investment in operating assets and, therefore, affect the amount of depreciation expense to charge against both current and future revenues. Because depreciation expense is a function of analytical studies made of property, plant and equipment, subsequent studies could result in different estimates of useful lives and net salvage values. If future depreciation studies yield results indicating that the assets have shorter lives as a result of obsolescence, physical condition, changes in technology or changes in net salvage values, the estimate of depreciation expense could increase. Likewise, if future studies indicate that assets have longer lives, the estimate of depreciation expense could decrease.
 
KCSR Depreciation Review.  During the year ended December 31, 2006, KCSR engaged a civil engineering firm with expertise in railway property usage to conduct a study to evaluate depreciation rates for properties and equipment. The study centered on evaluating actual historical replacement patterns to assess future lives and indicated that KCSR was depreciating its property over shorter periods than the assets were actually used, as estimated by the study. The effect of this change in estimate was a $3.0 million decrease in depreciation expense for the year ended December 31, 2006.
 
KCSM Depreciation Review.  For the year ended December 31, 2005, KCSM adopted the group depreciation method for consistency with KCSR during 2005. Accordingly, changes were made to certain historical depreciation rates. Unlike KCSR, KCSM depreciation rates are not subject to the approval of the STB, accordingly, the changes to the depreciation rates were applied in 2005. During the year ended December 31, 2005, KCSM engaged a civil engineering firm with expertise in railway property usage to conduct an analysis of depreciation rates for properties and equipment. The analysis centered on evaluating actual historical replacement patterns to assess future lives and indicated that KCSM was depreciating its property over shorter periods than the assets were actually utilized. As a result, depreciation expense recorded in the fourth quarter of 2005 reflected an adjustment totaling $5.5 million, to reduce depreciation expense as recorded in the second and third quarters of 2005. Concession rights and related assets are amortized over the shorter of their remaining useful lives as determined by the KCSM depreciation review or the life of the Concession.
 
Provision for Environmental Remediation.
 
As further described in Note 11 to the Consolidated Financial Statements in Item 8 of this Form 10-K, the Company’s operations are subject to extensive federal, state and local environmental laws and regulations in the U.S. and Mexico. KCS conducts studies, as well as site surveys, to determine the extent of environmental damage and the necessary requirements to remediate this damage. These studies incorporate the analysis of internal environmental engineering staff and consultation with legal counsel. From these studies and surveys, a range of estimates of the costs involved is derived. These cost estimates are based on forecasts of the total future direct costs related to environmental remediation and change periodically as additional or better information becomes available as to the extent of site remediation required, if any. KCS accrues for the cost of remediation where the obligation is probable and such costs can be reasonably estimated.
 
Cost estimates can be influenced by advanced technologies related to the detection, appropriate remedial course of action and anticipated cost. Certain changes could occur that would materially affect management’s estimates and assumptions related to costs for environmental remediation. If KCS becomes subject to more stringent environmental remediation costs at known sites, discovers additional contamination, discovers previously unknown sites, or becomes subject to related personal or property damage, KCS could incur additional costs that could be significant in connection with its environmental remediation. Accordingly,


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management believes that estimates related to the accrual of environmental remediation liabilities are critical to KCS’ results of operations.
 
Environmental remediation expense was $3.1 million for the year ended December 31, 2006, and was included in purchased services expense on the consolidated statements of income. Additionally, as of December 31, 2006, KCS had a liability for environmental remediation of $7.8 million. This amount was derived from a range of reasonable estimates based upon the studies and site surveys described above and in accordance with SFAS 5.
 
Provision for Casualty Claims.
 
Due to the nature of railroad operations, claims related to personal injuries and third party liabilities resulting from crossing collisions and derailments, as well as claims related to personal property damage and other casualties, is a substantial expense to KCS. Claims are estimated and recorded for known reported occurrences as well as for incurred but not reported (“IBNR”) occurrences. Consistent with the general practice within the railroad industry, the estimated liability for these casualty expenses is actuarially determined on an undiscounted basis. In estimating the liability for casualty claims, KCS obtains an estimate from an independent third party actuarial firm, which calculates an estimate using historical experience and estimates of claim costs as well as numerous assumptions regarding factors relevant to the derivation of an estimate of future claim costs.
 
Personal injury and casualty claims are subject to a significant degree of uncertainty, especially estimates related to incurred but not reported personal injuries for which a party has yet to assert a claim. In deriving an estimate of the provision for casualty claims, management must make assumptions related to substantially uncertain matters (injury severity, claimant age and legal jurisdiction). Changes in the assumptions used for actuarial studies could have a material effect on the estimate of the provision for casualty claims. Management believes that the accounting estimate related to the liability for personal injuries and other casualty claims is critical to KCS’ results of operations. See also Note 11 to the Consolidated Financial Statements in Item 8 of this Form 10-K.
 
For the year ended December 31, 2006, casualty expense equaled $33.8 million and was included in casualties and insurance expense in the consolidated statements of income. Based on the methods described above and information available as of December 31, 2006, the liability for casualty claims was $114.4 million. For purposes of earnings sensitivity analysis, if the December 31, 2006 reserve were adjusted (increased or decreased) by 10%, casualty expense would change $11.4 million.
 
Provision for Income Taxes.
 
Deferred income taxes represent a substantial liability of KCS. For financial reporting purposes, management determines the current tax liability, as well as deferred tax assets and liabilities, in accordance with the liability method of accounting for income taxes as specified in Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes.” The provision for income taxes is the sum of income taxes both currently payable and deferred into the future. Currently payable income taxes represent the liability related to KCS’ U.S., state and Mexican income tax returns for the current year and anticipated tax payments resulting from income tax audits while the net deferred tax expense or benefit represents the change in the balance of deferred tax assets or liabilities as reported on the balance sheet. The changes in deferred tax assets and liabilities are determined based upon the changes in differences between the basis of assets and liabilities for financial reporting purposes and the basis of assets and liabilities for tax purposes as measured using the enacted tax rates that management estimates will be in effect when these differences reverse. In addition, the tax provision for Mexico is further complicated by the impacts of inflation as well as the exchange rate, both of which can have a significant impact on the calculation. In addition to estimating the future tax rates applicable to the reversal of tax differences, management must also make certain assumptions regarding whether tax differences are permanent or temporary. If the differences are temporary, management must estimate the timing of their reversal, and whether taxable operating income in future periods will be sufficient


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to fully recognize any gross deferred tax assets of KCS. Accordingly, management believes that the estimates related to the provision for income taxes is critical to the Company’s results of operations.
 
Other.
 
Derivative Instruments.  KCS does not engage in the trading of derivatives. Management’s objective for using derivative instruments is to manage fuel and currency risk to mitigate the impact of their fluctuations. KCS accounts for derivative transactions under Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” as amended, as set forth in Note 2 to the Consolidated Financial Statements in Item 8 of this Form 10-K. In general, the Company enters into derivative transactions in limited situations based on management’s assessment of current market conditions and perceived risks. Management intends to respond to evolving business and market conditions in order to manage risks and exposures associated with various operations, and in so doing, may enter into such transactions more frequently as deemed appropriate.
 
Fuel Derivative Transactions.  Fuel expense is a significant component of operating expenses. Fuel costs are affected by (i) traffic levels, (ii) efficiency of operations and equipment, and (iii) fuel market conditions. KCS enters into transactions, such as forward purchase commitments and commodity swap transactions from time to time, to stabilize the price for future fuel purchases and protect operating results against adverse fuel price fluctuations. These derivative instruments hedge against fluctuations in the price of No. 2 Gulf Coast Heating Oil, the commodity on which the Company’s diesel fuel prices are based. The use of certain risk management strategies enables risk to be reduced related to rising diesel fuel prices. On December 31, 2006, KCS was party to fuel swap agreements for 1.3 million gallons of fuel.
 
Foreign Exchange Matters.  KCSM uses the dollar as its functional currency. Earnings from KCSM included in results of operations reflect any transaction gains and losses that KCSM records in the process of translating certain transactions from pesos to dollars. KCS follows the requirements outlined in Statement of Financial Accounting Standards No. 52 “Foreign Currency Translation”, and related authoritative guidance. The Company continues to evaluate existing alternatives with respect to utilizing foreign currency instruments to hedge the dollar investment in KCSM as market conditions change or exchange rates fluctuate. As of December 31, 2006, KCSM did not have any outstanding forward contracts.
 
Litigation.  The Company is a party to various legal proceedings and administrative actions, all of which are of an ordinary, routine nature and incidental to its operations. Included in these proceedings are various tort claims brought by current and former employees for job related injuries and by third parties for injuries related to railroad operations. KCS aggressively defends these matters and has established liability reserves that management believes are adequate to cover expected costs. Although it is not possible to predict the outcome of any legal proceeding, in the opinion of the Company’s management, other than those proceedings described in detail below, such proceedings and actions should not, individually, or in the aggregate, have a material adverse effect on the Company’s financial condition.
 
Reinsurance Litigation.  As the Company has previously reported, insurance companies who provided insurance to the Company filed an action in federal court in Vermont (“the Reinsurance Litigation”) seeking a declaration that they have no obligation to indemnify the Company concerning a particular casualty claim. That claim, Kemp, et al v. The Kansas City Southern Railway Company, et al, in the Circuit Court of Jackson County, Missouri (“the Kemp Litigation”) went to trial in September 2006. The Company reached a settlement with the plaintiffs in the Kemp Litigation. The Company has also reached settlements with various parties, including several of the insurance companies involved in the Reinsurance Litigation, to indemnify the Company for a significant portion of the settlement. The Kemp settlement is fully reflected in the Company’s 2006 financial statements and the Company has no further risk associated with this litigation. The Company is however continuing the Reinsurance Litigation against certain other insurance companies, seeking to establish their obligation to indemnify the Company for their share of the settlement with Kemp.
 
Recent Accounting Pronouncements.  Refer to Note 2 to the Consolidated Financial Statements in Item 8 of this Form 10-K for information relative to recent accounting pronouncements.


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Cautionary Information.
 
The discussions set forth in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. 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 stockholders and in other filings with the Securities and Exchange Commission. 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 those discussed under Item 1A of this Form 10-K, “Risk Factors.” Readers are strongly encouraged to consider these factors and the following factors when evaluating any forward-looking statements concerning the Company:
 
  •  fluctuations in the market price for the Company’s common stock;
 
  •  KCS’ dividend policy and restrictions on its ability to pay dividends on its common stock;
 
  •  KCS’ high degree of leverage;
 
  •  The Company’s potential need for and ability to obtain additional financing;
 
  •  KCS’ ability to successfully implement its 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 among the United States, Mexico and Canada;
 
  •  uncertainties regarding the litigation KCS faces and any future claims and litigation;
 
  •  the effects of 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;
 
  •  KCS’ ability to generate sufficient cash to pay principal and interest on its debt, meet its obligations and fund its 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 KCS carries;
 
  •  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 the Company’s operating systems, structures and equipment or the ability of customers to produce or deliver their products;
 
  •  changes in fuel prices;
 
  •  KCS’ ability to attract and retain qualified management personnel;
 
  •  changes in labor costs and labor difficulties, including work stoppages affecting either operations or customers” abilities to deliver goods for shipment;


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  •  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;
 
  •  acts of terrorism or risk of terrorist activities;
 
  •  war or risk of war;
 
  •  political and economic conditions in Mexico; and the level of trade between the United States and Mexico;
 
  •  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. The Company will not update any forward-looking statements to reflect future events, developments, or other information. If KCS does update one or more forward-looking statements, no inference should be drawn that additional updates will be made regarding that statement or any other forward-looking statements.
 
Item 7A.   Quantitative and Qualitative Disclosures Concerning Market Risk
 
KCS utilizes various financial instruments that have certain inherent market risks, but these instruments have not been entered into for trading purposes. The following information, together with information included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 12 to the Consolidated Financial Statements in Item 8 of this Form 10-K, describe the key aspects of certain financial instruments that have market risk to KCS.
 
Interest Rate Sensitivity.  Floating-rate indebtedness totaled $381.6 million and $440.9 million at December 31, 2006 and 2005, respectively. Two credit agreements, each comprised of a revolving credit facility and a term loan facility, contain variable rate debt which accrues interest based on target interest indexes (London Interbank Offered Rate — “LIBOR” or an alternative base rate) plus an applicable spread, as set forth in each credit agreement. Given the balance of $381.6 million of variable rate debt at December 31, 2006, KCS is sensitive to fluctuations in interest rates. For example, a hypothetical 100 basis points increase in each of the respective target interest indexes would result in additional interest expense of $3.8 million on an annualized basis for the floating-rate instruments issued by the Company as of December 31, 2006.
 
Based upon the borrowing rates available to KCS and its subsidiaries for indebtedness with similar terms and average maturities, the fair value of the long-term debt was approximately $1,814.1 million at December 31, 2006, and $1,938.6 million at December 31, 2005.
 
Commodity Price Sensitivity.  As described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Other — Derivative Instruments” of this Form 10-K, KCS periodically participates in diesel fuel purchase commitment and swap transactions. At December 31, 2006, KCS was party to fuel swap agreements for 1.3 million gallons. Subsequent to December 31, 2006, KCS entered into fuel swap agreements for another 1.3 million gallons. The Company also holds fuel inventories for use in operations. These inventories are not material to KCS’ overall financial position. With the exception of the fuel currently hedged under fuel swap transactions for 2007, fuel costs are expected to mirror market conditions in 2007. KCS also cushions the impact of increased fuel costs through fuel surcharge revenues from customers. Assuming annual consumption of 145 million gallons, a $0.10 change in the price per gallon of fuel would cause a $14.5 million change in operating expenses.
 
Foreign Exchange Sensitivity.  KCSM uses the dollar as its functional currency. Earnings from KCSM included in the Company’s results of operations reflect revaluation gains and losses that KCSM records in the process of translating certain transactions from pesos to dollars. Therefore, the Company has exposure to fluctuations in the value of the peso. While not currently utilizing foreign currency instruments to hedge KCS’


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dollar investment in KCSM, existing alternatives are evaluated as market conditions and exchange rates fluctuate. For example, a hypothetical 10% increase in the US dollar to the Mexican peso exchange rate on net monetary assets of Ps.1,652.6 million would result in a translation loss of approximately $13.9 million and a 10% decrease in the exchange rate would result in a translation gain of approximately $17.0 million.
 
Inflation.  U.S. generally accepted accounting principles require the use of historical cost, which does not reflect the effects of inflation on the replacement cost of property. Due to the capital intensive nature of KCS’ business, the replacement cost of these assets would be substantially greater than the amounts reported under the historical cost basis.


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Item 8.   Financial Statements and Supplementary Data
 
Index to Financial Statements
 
         
    Page
 
  56
  57
  58
  59
  60
  61
  62
  63
Financial Statement Schedules:
   
 
All schedules are omitted because they are not applicable, are insignificant or the required information is shown in the consolidated financial statements or notes thereto. The consolidated financial statements of Grupo KCSM as of December 31, 2005 (successor) and 2004 (predecessor) for the nine months ended December 31, 2005 (successor), the three months ended March 31, 2005 (predecessor) and the year ended December 31, 2004 (predecessor) are incorporated by reference into this annual report.
 
Introductory Comments
 
The following Consolidated Financial Statements have been prepared by Kansas City Southern, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Beginning with the year ended December 31, 2005, these financial statements include the results of operations and cash flows of Mexrail and Grupo KCSM, which were consolidated on January 1, 2005, and April 1, 2005, respectively, as a result of the acquisition of a controlling interest in each entity as of these respective dates. Results for the years ended December 31, 2006 and 2005 are not indicative of the expected results for future periods.


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Management’s Report on Internal Control over Financial Reporting
 
The management of Kansas City Southern is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). KCS’ internal control over financial reporting was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.
 
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
 
Under the supervision and participation of the Company’s Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (commonly referred to as the COSO framework). Based on its evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006, based on the criteria outlined in the COSO framework.
 
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their attestation report, which immediately follows this report.


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders of
Kansas City Southern:
 
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Kansas City Southern and subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in “Internal Control — Integrated Framework” issued by COSO. Also, in our opinion, Kansas City Southern maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in “Internal Control — Integrated Framework” issued by COSO.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006, and our report dated February 26, 2007 expressed an unqualified opinion on those consolidated financial statements.
 
KPMG LLP
 
Kansas City, Missouri
February 26, 2007


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders of
Kansas City Southern:
 
We have audited the accompanying consolidated balance sheets of Kansas City Southern and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We 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 for the year ended December 31, 2004. The Company’s equity in loss of Grupo TFM was $2.4 million for the year ended December 31, 2004. The financial statements of Grupo TFM for the year ended December 31, 2004 were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Grupo TFM for the year ended December 31, 2004, is based solely on the report of other auditors.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, based on our audits, and the report of other auditors for 2004, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kansas City Southern and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.
 
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2006, the Company adopted the fair value method of accounting for stock-based compensation as required by Statement of Financial Accounting Standards No. 123R, “Share Based Payment.”
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Kansas City Southern and subsidiaries internal control over financial reporting as of December 31, 2006, based on criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
 
KPMG LLP
 
Kansas City, Missouri
February 26, 2007


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Kansas City Southern
 
Years ended December 31
 
                         
    2006     2005     2004  
    In millions, except share
 
    and per share amounts  
 
Revenues
  $ 1,659.7     $ 1,352.0     $ 639.5  
                         
Operating expenses:
                       
Compensation and benefits
    387.7       340.4       213.0  
Depreciation and amortization
    155.0       127.7       53.5  
Purchased services
    215.2       195.1       62.3  
Casualties and insurance
    53.4       103.4       42.4  
Fuel
    253.6       206.9       66.4  
Equipment costs
    179.7       149.8       50.4  
KCSM employees’ statutory profit sharing
    5.9       41.1        
Other
    104.9       125.3       68.0  
                         
Total operating expenses
    1,355.4       1,289.7       556.0  
                         
Operating income
    304.3       62.3       83.5  
Equity in net earnings (losses) of unconsolidated affiliates
    7.3       2.9       (4.5 )
Interest expense
    (167.2 )     (133.5 )     (44.4 )
Debt retirement costs
    (4.8 )     (4.4 )     (4.2 )
Foreign exchange gain (loss)
    (3.7 )     3.5        
VAT/Put settlement gain, net
          131.9        
Other income, net
    18.7       13.3       17.6  
                         
Income before income taxes and minority interest
    154.6       76.0       48.0  
Income tax expense (benefit)
    45.4       (7.1 )     23.6  
                         
Income before minority interest
    109.2       83.1       24.4  
Minority interest
    0.3       (17.8 )      
                         
Net income
    108.9       100.9       24.4  
Preferred stock dividends
    19.5       9.5       8.7  
                         
Net income available to common shareholders
  $ 89.4     $ 91.4     $ 15.7  
                         
Earnings per share:
                       
Basic earnings per share
  $ 1.20     $ 1.21     $ 0.25  
                         
Diluted earnings per share
  $ 1.08     $ 1.10     $ 0.25  
                         
Average shares outstanding (in thousands):
                       
Basic
    74,593       75,527       62,715  
Potential dilutive common shares
    17,793       17,220       1,268  
                         
Diluted
    92,386       92,747       63,983  
                         
 
See accompanying notes to consolidated financial statements.


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Kansas City Southern
 
December 31
 
                 
    2006     2005  
    In millions, except share amounts  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 79.0     $ 31.1  
Accounts receivable, net (Note 2)
    334.3       315.7  
Restricted funds (Note 2)
    26.5        
Inventories
    72.5       73.9  
Other current assets (Note 5)
    93.7       46.1  
                 
Total current assets
    606.0       466.8  
Investments (Note 3)
    64.9       60.3  
Property and equipment, net (Note 5)
    2,452.2       2,298.3  
Concession assets, net (Note 5)
    1,303.3       1,360.4  
Deferred tax asset (Note 7)
    128.7       152.2  
Other assets
    82.2       85.6  
                 
Total assets
  $ 4,637.3     $ 4,423.6  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Debt due within one year (Note 6)
  $ 41.9     $ 38.0  
Accounts and wages payable
    189.9       124.3  
Current liability related to Grupo KCSM acquisition (Note 6)
    50.9       78.3  
Accrued liabilities (Note 5)
    354.7       333.1  
                 
Total current liabilities
    637.4       573.7  
                 
Other liabilities
               
Long-term debt (Note 6)
    1,631.8       1,663.9  
Long-term liability related to Grupo KCSM acquisition (Note 6)
    32.4       80.4  
Deferred income taxes (Note 7)
    417.3       409.2  
Other noncurrent liabilities and deferred credits
    235.7       270.2  
                 
Total other liabilities
    2,317.2       2,423.7  
                 
Minority interest
    100.3        
Commitments and contingencies (Note 11)
           
                 
Stockholders’ equity (Notes 2,8):
               
$25 par, 4% noncumulative, preferred stock, 840,000 shares authorized, 649,736 shares issued, 242,170 shares outstanding
    6.1       6.1  
Series C — redeemable cumulative convertible perpetual preferred stock, $1 par, 4.25%, 400,000 shares authorized, issued and outstanding
    0.4       0.4  
Series D — cumulative convertible perpetual preferred stock, $1 par, 5.125%, 210,000 shares authorized, issued and outstanding
    0.2       0.2  
$.01 par, common stock, 400,000,000 shares authorized; 92,863,585 and 91,369,116 shares issued at December 31, 2006 and 2005, respectively; 75,920,333 and 73,412,081 shares outstanding at December 31, 2006 and 2005, respectively
    0.7       0.7  
Paid in capital
    523.0       473.1  
Retained earnings
    1,050.7       946.1  
Accumulated other comprehensive income (loss)
    1.3       (0.4 )
                 
Total stockholders’ equity
    1,582.4       1,426.2  
                 
Total liabilities and stockholders’ equity
  $ 4,637.3     $ 4,423.6  
                 
 
See accompanying notes to consolidated financial statements.


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Kansas City Southern
 
Years ended December 31
 
                         
    2006     2005     2004  
    In millions  
 
Operating activities:
                       
Net income
  $ 108.9     $ 100.9     $ 24.4  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    155.0       127.7       53.5  
Deferred income taxes
    41.0       (17.3 )     35.9  
KCSM employees’ statutory profit sharing
    5.9       41.1        
Equity in undistributed losses (earnings) of unconsolidated affiliates
    (7.3 )     (2.9 )     4.5  
VAT/Put settlement gain
          (131.9 )      
Minority interest
    0.3       (17.8 )      
Distributions from unconsolidated affiliates
    4.5       8.3       8.8  
Loss (gain) on sale of assets
    (7.8 )     1.0       (3.8 )
Changes in working capital items:
                       
Accounts receivable
    (18.6 )     5.8       (25.0 )
Inventories
    0.4       (0.8 )     (11.4 )
Other current assets
    (50.9 )     15.7       (2.2 )
Accounts payable and accrued liabilities
    44.6       25.2       39.9  
Other, net
    (8.5 )     23.8       18.1  
                         
Net cash provided by operating activities
    267.5       178.8       142.7  
                         
Investing activities:
                       
Capital expenditures
    (241.8 )     (275.7 )     (117.2 )
Proceeds from disposal of property
    30.0       6.3       4.9  
Contribution from NS for MSLLC (net of change in restricted contribution)
    76.5              
Property investments in MSLLC
    (37.8 )            
Investments in and loans to affiliates
    (1.1 )     (10.5 )     (55.0 )
Proceeds from sales of investments, net
    8.2       (8.0 )     0.5  
Acquisition costs
          (10.1 )     (9.5 )
Cash of Mexrail at date of acquisition
          3.0        
Cash of KCSM at date of acquisition
          5.5        
Change in other restricted cash
                (200.0 )
Other, net
                (0.5 )
                         
Net cash used for investing activities
    (166.0 )     (289.5 )     (376.8 )
                         
Financing activities:
                       
Proceeds from issuance of long-term debt
    616.3       644.7       250.0  
Repayment of long-term debt
    (658.5 )     (521.5 )     (107.6 )
Net proceeds from issuance of preferred stock
          203.9        
Debt issuance costs
    (15.9 )     (16.5 )     (3.8 )
Proceeds from stock plans
    8.6       1.7       7.4  
Repurchase of common stock
          (200.4 )      
Excess tax benefit realized from options exercised
    0.2              
Dividends paid
    (4.3 )     (8.7 )     (8.7 )
                         
Net cash provided by (used for) financing activities
    (53.6 )     103.2       137.3  
                         
Cash and cash equivalents:
                       
Net increase (decrease) during each year
    47.9       (7.5 )     (96.8 )
At beginning of year
    31.1       38.6       135.4  
                         
At end of year
  $ 79.0     $ 31.1     $ 38.6  
                         
Supplemental cash flow information:
                       
Cash payments (refunds):
                       
Interest
  $ 163.5     $ 132.8     $ 42.1  
Income tax refunds (net of payments)
    (0.4 )     (1.6 )     (21.2 )
 
See accompanying notes to consolidated financial statements.


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Kansas City Southern
 
 
                                                                 
          $1 Par Cumulative
                      Accumulated
       
    $25 Par
    Preferred Stock     $.01 par
                Other
       
    Preferred
    Series C
    Series D
    Common
    Paid in
    Retained
    Comprehensive
       
    Stock     4.25%     5.125%     Stock     Capital     Earnings     Income (Loss)     Total  
    (In millions)  
 
Balance at December 31, 2003
  $ 6.1     $ 0.4     $     $ 0.6     $ 110.9     $ 838.2     $ (0.5 )   $ 955.7  
                                                                 
Comprehensive income:
                                                               
Net income
                                            24.4               24.4  
Fair value change of cash flow hedges
                                                    0.2       0.2  
Amortization of interest rate swap loss
                                                    0.5       0.5  
                                                                 
Comprehensive income
                                  24.4       0.7       25.1  
Dividends on $25 par preferred stock ($1.00/share)
                                            (0.2 )             (0.2 )
Dividends on series C cumulative preferred stock ($21.25/share)
                                            (8.5 )             (8.5 )
Options exercised and stock subscribed
                                    42.0                       42.0  
Stock plan shares issued from treasury
                                    2.4                       2.4  
                                                                 
Balance at December 31, 2004
    6.1       0.4             0.6       155.3       853.9       0.2       1,016.5  
                                                                 
Comprehensive income:
                                                               
Net income
                                            100.9               100.9  
Fair value change of cash flow hedges
                                                    (1.1 )     (1.1 )
Amortization of interest rate swap loss
                                                    0.5       0.5  
                                                                 
Comprehensive income
                                  100.9       (0.6 )     100.3  
Dividends on $25 par preferred stock ($1.00/share)
                                            (0.2 )             (0.2 )
Dividends on series C cumulative preferred stock ($21.25/share)
                                            (8.5 )             (8.5 )
Options exercised and stock subscribed
                                    8.3                       8.3  
Stock plan shares issued from treasury
                                    2.3                       2.3  
Share-based compensation
                                    1.5                       1.5  
Stock issued in acquisition of Grupo KCSM
                            0.2       304.2                       304.4  
Issuance of series D cumulative preferred stock
                    0.2               201.8                       202.0  
Repurchase of $.01 par common stock
                            (0.1 )     (200.3 )                     (200.4 )
                                                                 
Balance at December 31, 2005
    6.1       0.4       0.2       0.7       473.1       946.1       (0.4 )     1,426.2  
                                                                 
Comprehensive income:
                                                               
Net income
                                            108.9               108.9  
Amortization of interest rate swaps
                                                    0.4       0.4  
                                                                 
Comprehensive income
                                  108.9       0.4       109.3  
Dividends on $25 par preferred stock ($1.00/share)
                                            (0.2 )             (0.2 )
Dividends on series C cumulative preferred stock ($5.31/share)
                                            (2.1 )             (2.1 )
Dividends on series D cumulative preferred stock ($9.40/share)
                                            (2.0 )             (2.0 )
Stock issued for repayment of debt
                                    35.0                       35.0  
Options exercised and stock subscribed
                                    8.6                       8.6  
Tax benefit of share-based compensation
                                    2.0                       2.0  
Share-based compensation
                                    4.3                       4.3  
Adjustment to adopt FASB Statement No. 158, net of tax of $.8 million
                                                    1.3       1.3  
                                                                 
Balance at December 31, 2006
  $ 6.1     $ 0.4     $ 0.2     $ 0.7     $ 523.0     $ 1,050.7     $ 1.3     $ 1,582.4  
                                                                 
 
See accompanying notes to consolidated financial statements.


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Kansas City Southern
 
 
Note 1.   Description of the Business
 
Kansas City Southern (“KCS” or the “Company”), a Delaware corporation, was initially organized in 1962 as Kansas City Southern Industries, Inc. In 2002, the Company formally changed its name to Kansas City Southern. KCS is a holding company with principal operations in rail transportation.
 
Until the second quarter of 2005, KCS operated under one reportable business segment in the rail transportation industry. Beginning in the second quarter of 2005, with the acquisition of a controlling interest in Grupo KCSM, KCS began operating under two reportable business segments, which are defined geographically as United States (U.S.) and Mexico. In both the U.S. and the Mexico segments, the Company generates revenues and cash flows by providing its customers with freight delivery services both within its regions, and throughout North America through connections with other Class I rail carriers. KCS’ customers conduct business in a number of different industries, including electric-generating utilities, chemical and petroleum products, paper and forest products, agriculture and mineral products, automotive products and intermodal transportation.
 
KCS’ principal geographic business segments include the following:
 
U.S. Segment.
 
  •  The Kansas City Southern Railway Company (“KCSR”), a wholly-owned consolidated subsidiary;
 
  •  Mexrail, Inc. (“Mexrail”), a wholly-owned consolidated subsidiary; which wholly owns The Texas Mexican Railway Company (“Tex-Mex”);
 
  •  Meridian Speedway, LLC (“MSLLC”), a ninety percent owned consolidated affiliate.
 
  •  Combined with equity investments in:
 
  •  Southern Capital Corporation, LLC (“Southern Capital”), a fifty percent owned unconsolidated affiliate that owns and leases locomotives and other rail equipment;
 
  •  Panama Canal Railway Company (“PCRC”), a fifty percent owned unconsolidated affiliate which owns all of the common stock of Panarail Tourism Company (“Panarail”).
 
Mexico Segment.
 
  •  Grupo KCSM, S.A. de C.V. (“Grupo KCSM”), a wholly-owned subsidiary, formerly known as Grupo Transportación Ferroviaria Mexicana, S.A. de C.V., is KCS’ Mexican holding company which owns all but one share of Kansas City Southern de México, S. de R.L. de C.V. (“KCSM”).
 
  •  KCSM which is the principal operating subsidiary of Grupo KCSM operates under the rights granted by the Concession acquired from the Mexican government in 1997 (“the Concession”) as described below.
 
  •  Arrendadora KCSM, S.A. de C.V. (“Arrendadora”), is wholly-owned by Grupo KCSM and KCSM and has as its only operation, the leasing to KCSM of the locomotives and freight cars acquired through the privatization and subsequently sold to Arrendadora by KCSM.
 
  •  Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”), a twenty five percent owned unconsolidated affiliate that provides railroad services as well as ancillary services in the greater Mexico City area.
 
KCS completed its acquisition of control of Grupo KCSM on April 1, 2005, and Grupo KCSM became a consolidated subsidiary of KCS. On September 12, 2005, the Company and its subsidiaries, Grupo KCSM and KCSM, along with the Mexican holding company Grupo TMM, S.A. (“TMM”), entered into a settlement


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

agreement with the Mexican government resolving the controversies and disputes between the companies and the Mexican government concerning the payment of a VAT refund to KCSM and the purchase of the remaining shares of KCSM owned by the Mexican government. As a result of this settlement, KCS wholly owns Grupo KCSM and KCSM. Grupo KCSM and KCSM constituted 53% of consolidated assets at December 31, 2006 and 47% of 2006 consolidated revenues.
 
The KCSM Concession.  KCSM holds a Concession from the Mexican government until June 2047 (exclusive through 2027, subject to certain trackage rights) which is renewable under certain conditions for additional periods of up to 50 years. The Concession is to provide freight transportation services over rail lines which are a primary commercial corridor of the Mexican railroad system. These lines include the shortest, most direct rail passageway between Mexico City and Laredo, Texas and serve most of Mexico’s principal industrial cities and three of its major shipping ports. KCSM has the right to use, but does not own, all track and buildings that are necessary for the rail lines’ operation. The Company is obligated to maintain the right of way, track structure, buildings and related maintenance facilities to the operational standards specified in the concession agreement and to return the assets in that condition at the end of the Concession period. KCSM is required to pay the Mexican government a concession duty equal to 0.5% of gross revenues during the first 15 years of the concession period and 1.25% of such revenues during the remainder of the period.
 
Under the Concession and Mexican law, the Company may freely set rates unless the Mexican government determines that there is no effective competition in Mexico’s rail industry. KCSM is required to provide railroad services to all users on a fair and non-discriminatory basis and in accordance with efficiency and safety standards approved periodically by the Mexican government. In the event that rates charged are higher than the registered rates, KCSM must reimburse customers with interest, and risk the revocation of the Concession.
 
Mexican railroad services law and regulations and the Concession establish several circumstances under which the Concession will terminate: revocation by the Mexican government, statutory appropriation, or KCSM’s voluntary surrender of its rights or liquidation or bankruptcy. The Concession requires the undertaking of capital projects, including those described in a business plan filed every five years with the Mexican government. KCSM filed its second business plan with the Mexican government in 2003 in which KCSM committed to certain minimal investment and capital improvement goals, which may be waived by the Mexican government upon application for relief for good cause. Mexico may also revoke KCSM’s exclusivity after 2017 if it determines that there is insufficient competition.
 
In the event that the Concession is revoked by the Mexican government, KCSM will receive no compensation. Rail lines and all other fixtures covered by the Concession, as well as all improvements, will revert to the Mexican government. All other property not covered by the Concession, including all locomotives and railcars otherwise acquired, will remain KCSM’s property. The Mexican government will have the right to cause the Company to lease all service-related assets to it for a term of at least one year, automatically renewable for additional one-year terms up to five years. The Mexican government must exercise this right within four months after revocation of the Concession. The Mexican government may also temporarily seize the rail lines and assets used in operating the rail lines in the event of a natural disaster, war, significant public disturbances, or imminent danger to the domestic peace or economy for the duration of any of the foregoing events. Further, Mexican law requires that the Mexican government pay KCSM compensation equal to damages caused and losses suffered if it effects a statutory appropriation for reasons of the public interest. These payments may not be sufficient to compensate the Company for its losses and may not be timely made.
 
Employees and Labor Relations.  Labor relations in the U.S. railroad industry are subject to extensive governmental regulation under the Railway Labor Act (“RLA”). Under the RLA, national labor agreements are renegotiated when they become open for modification, but their terms remain in effect until new agreements are reached. Typically, neither management nor labor employees are permitted to take economic


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

action until extended procedures are exhausted. Various collective bargaining agreements cover approximately 81% of KCSR employees.
 
Under the negotiating process for new collective bargaining agreements which began on November 1, 1999, all U.S. unions reached new labor agreements with KCSR in 2005. Wages, health and welfare benefits, work rules and other issues have been negotiated on an industry-wide scale. Previously, these negotiations, which can take place over significant periods of time, have not resulted in any extended work interruptions. The existing agreements will remain in effect until new agreements are reached or the RLA’s procedures are exhausted. Until new agreements are reached, the current agreements provide for periodic wage adjustments.
 
A labor agreement covering approximately 75% of KCSM’s total employees was renewed in 2005 and is effective through July 2007. The compensation terms of the labor agreement are subject to renegotiation on an annual basis and all other terms are renegotiated every two years. These negotiations have not resulted in any strikes, boycotts or other material disruptions at KCSM.
 
Note 2.   Significant Accounting Policies
 
Principles of Consolidation.  The accompanying consolidated financial statements are presented using the accrual basis of accounting and include the Company and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation.
 
The equity method of accounting is used for all entities in which the Company or its subsidiaries have significant influence, but not more than fifty percent voting interest; and the cost method of accounting is generally used for investments of less than twenty percent voting interest. The company evaluates less than majority owned investments for consolidation pursuant to FASB Interpretation No. 46 (Revised 2003). The Company currently does not have any less than majority owned investments requiring consolidation.
 
Goodwill and Other Intangible Assets.  Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. As of December 31, 2006 and 2005, the goodwill balance was $10.6 million which is included in other assets in the Consolidated Balance Sheet. In accordance with Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets”, goodwill and intangible assets with indefinite useful lives are not amortized, but are reviewed at least annually for impairment. An impairment loss would be recognized to the extent that the carrying amount exceeds the assets’ fair value. Intangible assets with estimable useful lives are amortized on a straight-line basis over their respective useful lives. The Company performed its annual impairment test for goodwill as of September 30, 2006 and there was no indication that goodwill was impaired.
 
Use of Estimates.  The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management reviews its estimates, including those related to the recoverability and useful lives of assets, as well as liabilities for litigation, environmental remediation, casualty claims, and income taxes. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates.
 
Currency Translation.  For tax purposes, Grupo KCSM and its subsidiaries are required to maintain their books and records in Mexican pesos. For financial reporting purposes, Grupo KCSM and its subsidiaries maintain records in U.S. dollars, which is the functional currency. The dollar is the currency that reflects the economic substance of the underlying events and circumstances relevant to the entity (i.e., historical cost convention). Monetary assets and liabilities denominated in pesos are translated into dollars using current exchange rates. The difference between the exchange rate on the date of the transaction and the exchange rate


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

on the settlement date, or balance sheet date if not settled, is included in the income statement as other income.
 
Revenue Recognition.  The Company recognizes freight revenue based upon the percentage of completion of a commodity movement as a shipment moves from origin to destination, with the related expense recognized as incurred. Other revenues, in general, are recognized when the product is shipped, as services are performed or contractual obligations fulfilled.
 
Cash Equivalents.  Short-term liquid investments with an initial maturity of three months or less are classified as cash equivalents.
 
Accounts Receivable, net.  Accounts receivable are net of an allowance for uncollectible accounts as determined by historical experience and adjusted for economic uncertainties or known trends. Accounts are charged to the allowance when a customer enters bankruptcy, when an account has been transferred to a collection agent or submitted for legal action, or when a customer is significantly past due and all available means of collection have been exhausted. At December 31, 2006 and 2005, the allowance for doubtful accounts was $31.4 million and $24.1 million, respectively. Bad debt expense was $10.8 million and $15.2 million for the year ended December 31, 2006 and 2005, respectively.
 
Restricted Funds — JSIB Consulting.  In connection with KCS’ acquisition of the controlling interest in Grupo KCSM, KCS entered into a consulting agreement with José F. Serrano International Business, S.A. de C.V. (“JSIB”), a consulting company controlled by Jose Serrano, Chairman of the Board of TMM, which became effective April 1, 2005. Under this agreement, JSIB will provide consulting services to KCS in connection with its Mexico business for a period of three years. As consideration for these services, JSIB receives an annual fee of $3.0 million. The consulting agreement required KCS to deposit the total amount of annual fees payable under the agreement ($9.0 million) in cash to be held and released in accordance with the consulting agreement. On January 12, 2006, the first $3.0 million annual fee was released from the escrow account. Accordingly the balance in restricted funds was $6.0 million on December 31, 2006, of which $3.0 million was included in current assets and $3.0 million was included in other assets. JSIB directs the investment of the escrow fund and all gains and losses in the fund accrue to JSIB’s benefit.
 
Restricted Funds — MSLLC.  On December 1, 2005, KCS and KCSR entered into a transaction agreement with Norfolk Southern Corporation (“NS”) and its wholly-owned subsidiary, The Alabama Great Southern Railroad Company (“AGS”), providing for the formation of a limited liability company between the parties relating to the ownership and improvement of the KCSR rail line between Meridian, Mississippi and Shreveport, Louisiana, which is the portion of the KCSR rail line between Dallas, Texas and Meridian known as the “Meridian Speedway”.
 
In connection with the formation of MSLLC, NS, through AGS, contributed $100.0 million to MSLLC, representing the initial NS investment in the joint venture. MSLLC commenced operations on May 1, 2006. NS’ initial investment, $76.5 million was distributed to KCS as reimbursement for capital expenditures incurred and paid by KCS for MSLLC during 2006. KCS has classified the remaining balance of $23.5 million, as funds restricted for payment of MSLLC capital assets at December 31, 2006. Substantially all of these funds will be used for capital improvements on the Meridian Speedway. NS has a binding commitment to fund additional cash contributions of $200 million, subject to the terms of the agreement, reflecting an ultimate ownership of 30% in MSLLC, once funded.
 
Inventories.  Inventories consisting of diesel fuel, items to be used in the maintenance of rolling stock and items to be used in the maintenance or construction of road property, are valued at the lower of average cost or market.
 
Derivative Instruments.  Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended, requires that derivatives be recorded on the balance


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

sheet as either assets or liabilities measured at fair value. Changes in the fair value of derivatives are recorded either through current earnings or as other comprehensive income, depending on hedge designation. Gains and losses on derivative instruments classified as cash flow hedges are reported in other comprehensive income and are reclassified into earnings in the periods in which earnings are impacted by the variability of the cash flow of the hedged item. The ineffective portion of all hedge transactions is recognized in current period earnings.
 
Properties and Depreciation.  Properties are stated at cost less accumulated depreciation. Additions and renewals, including those on leased assets that increase the life or utility of the asset, are capitalized and all properties are depreciated over the estimated remaining life or lease term of such assets, whichever is shorter. The Company capitalizes certain overhead costs representing the indirect costs associated with construction and improvement projects using the full absorption method. Overhead factors are periodically reviewed and adjusted to reflect current costs. Depreciation for railway operating assets is derived using the group-life method. This method classifies similar assets by equipment or road type and depreciates these assets as a whole. Repairs and maintenance costs are charged to expense as incurred.
 
The ranges of annual depreciation rates for financial statement purposes are: road and structures — 1% to 4%, rolling stock and equipment — 2% to 14%, computer software — 8% to 14%, and capitalized leases — 3% to 7%.
 
The cost of transportation equipment and road property normally retired, less salvage value, is charged to accumulated depreciation. The cost of industrial and other property retired, and the cost of transportation property abnormally retired, together with accumulated depreciation thereon, is eliminated from the property accounts and the related gains or losses are reflected in net income. Gains or losses recognized on the sale of non-operating property reflected in other income are not material for the periods presented.
 
KCSR Depreciation Review.  During the year ended December 31, 2006, KCSR engaged a civil engineering firm with expertise in railway property usage to conduct a study to evaluate depreciation rates for properties and equipment. The study centered on evaluating actual historical replacement patterns to assess future lives and indicated that KCSR was depreciating its property over shorter periods than the assets were actually used, as estimated by the study. The effect of this change in estimate was a $3.0 million decrease in depreciation expense for the year ended December 31, 2006.
 
KCSM Depreciation Review.  For the year ended December 31, 2005, KCSM adopted the group depreciation method for consistency with KCSR. Accordingly, changes were made to certain historical depreciation rates. During the year ended December 31, 2005, KCSM engaged a civil engineering firm with expertise in railway property usage to conduct an analysis of depreciation rates for properties and equipment. The analysis centered on evaluating actual historical replacement patterns to assess future lives and indicated that KCSM was depreciating its property over shorter periods than actually utilized. As a result, depreciation expense recorded in the fourth quarter of 2005 reflected an adjustment totaling $5.5 million to reduce depreciation expense recorded in the second and third quarters of 2005. Concession rights and related assets are amortized over the shorter of their remaining useful lives as determined by the KCSM depreciation review or the life of the Concession.
 
Concession Rights and Related Assets.  Costs incurred by the Company to acquire the Concession rights and related assets were capitalized and are amortized over the estimated useful lives of the related assets and rights acquired. Concession replacements and improvements are stated at cost. Major repairs and track rehabilitation are capitalized. Amortization is calculated using the straight-line method based on the estimated useful lives of the respective improvements, or the term of the Concession if shorter.
 
Computer Software Costs.  Costs incurred in conjunction with the purchase or development of computer software for internal use are capitalized. Costs incurred in the preliminary project stage, as well as training and maintenance costs, are expensed as incurred. Direct and indirect costs associated with the application


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

development stage of internal use software are capitalized until such time that the software is substantially complete and ready for its intended use. Capitalized costs are amortized on a straight-line basis over the useful life of the software.
 
Long-Lived Assets.  The Company evaluates the recoverability of its properties when there is an indication that an asset value has been impaired. The measurement of possible impairment is based primarily on the ability to recover the carrying value of the asset from expected future operating cash flows related to the assets on an undiscounted basis. There were no assets requiring an impairment adjustment at December 31, 2006.
 
Fair Value of Financial Instruments.  The Company’s financial instruments include cash and cash equivalents, accounts receivable, lease and contract receivables, accounts payable and long-term debt as described in Note 6.
 
The financial statement carrying value of the Company’s cash equivalents approximates fair value due to their short-term nature. Carrying value approximates fair value for all financial instruments with six months or less to re-pricing or maturity and for financial instruments with variable interest rates. The Company estimates the fair value of long-term debt based upon borrowing rates available at the reporting date for indebtedness with similar terms and average maturities. Based upon the borrowing rates currently available to the Company and its subsidiaries for indebtedness with similar terms and average maturities, the fair value of long-term debt was $1,814.1 million and $1,938.6 million at December 31, 2006 and 2005, respectively. The financial statement carrying value was $1,757.0 million and $1,860.6 million at December 31, 2006 and 2005, respectively.
 
Environmental Liabilities.  The Company records liabilities for remediation and restoration costs related to past activities when the Company’s obligation is probable and the costs can be reasonably estimated. Costs of future expenditures for environmental remediation are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. Costs of ongoing compliance activities related to current operations are expensed as incurred.
 
Casualty Claims.  Casualty claims in excess of self-insurance levels are insured up to certain coverage amounts, depending on the type of claim and year of occurrence. The Company’s casualty liability reserve is based on a study by an independent third party actuarial firm performed on an undiscounted basis. The reserve is based on claims filed and an estimate of claims incurred but not yet reported. While the ultimate amount of claims incurred is dependent on various factors, it is management’s opinion that the recorded liability is a reasonable estimate of aggregate future claims. Adjustments to the liability will be reflected as operating expenses in the period in which the adjustments are known. Legal fees related to casualty claims are recorded in operating expense in the period incurred.
 
Pension and Other Postretirement Benefits.  The Company provides certain medical, life and other postretirement benefits to certain active employees and retirees. The Company uses third party actuaries to assist in estimating liabilities and expenses for pension and other post retirement benefits. Estimate amounts are based on current and historical information, current information and estimates regarding future events and circumstances. Significant assumptions used in the valuation of pension and other postretirement liabilities include the expected return on plan assets (if funded), discount rate, rate of increase in compensation levels and the health care cost trend rate.
 
KCSM Employees’ Statutory Profit Sharing.  KCSM is subject to employee statutory profit sharing requirements under Mexican law and calculates profit sharing liability as 10% of KCSM net taxable income, adjusted as prescribed by the Mexican income tax law. In calculating its net taxable income for statutory profit sharing purposes, KCSM previously deducted NOL carryforwards. The application of NOL carryforwards can result in a deferred profit sharing asset for a given period rather than a profit sharing liability. Due to decisions by the Mexican Supreme Court in 2005 declaring that NOLs from previous years may not be deducted, KCSM


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

changed the method of calculating its statutory profit sharing liability. KCSM no longer deducts NOLs from prior years when calculating employee statutory profit sharing. This change required KCSM to write off its deferred tax assets related to statutory profit sharing resulting in a charge to operating expenses of $35.6 million in 2005, after purchase accounting adjustments.
 
Share-Based Compensation.  Effective January 1, 2006, the Company accounts for all share-based compensation in accordance with the fair value recognition provisions of Statement of Financial Accounting Standards No. 123R (Revised) “Share-Based Payments” (“SFAS 123R”). Under this method, compensation expense is measured at grant date based on the then fair value of the award and is recognized over the requisite service period in which the award is earned. The Company has elected to adopt SFAS 123R on a modified prospective basis, which requires that all new awards and modified awards after the effective date and any unvested awards at the effective date are recognized as compensation cost ratably over the option vesting period. SFAS 123R requires forfeitures to be estimated at the time of the grant and revised, if necessary, in subsequent periods should actual forfeitures differ from those estimates. In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior years have not been restated to reflect, and do not include, the impact of SFAS 123R.
 
Prior to the adoption of SFAS 123R, the Company accounted for share-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and followed the pro forma disclosure requirements set forth in Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”). Under this method, compensation expense was recognized ratably over the option vesting period if an option exercise price was less than the market price of the stock at the date of grant. KCS’ practice was to set the option exercise price equal to the market price of the stock at the date of grant; therefore, no compensation expense was recognized for financial reporting purposes.
 
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to share-based employee compensation prior to January 1, 2006:
 
                 
    2005     2004  
 
Net income (in millions):
               
As reported
  $ 100.9     $ 24.4  
Additional stock-based compensation expense determined under fair value method, net of income taxes
    (0.8 )     (1.6 )
                 
Pro forma
  $ 100.1     $ 22.8  
                 
Earnings per basic share:
               
As reported
  $ 1.21     $ 0.25  
Pro forma
    1.20       0.22  
Earnings per diluted share:
               
As reported
  $ 1.10     $ 0.25  
Pro forma
    1.07       0.22  
 
All shares held in the Employee Stock Ownership Plan (“ESOP”) are treated as outstanding for purposes of computing the Company’s earnings per share. See additional information in Note 9.
 
The Company issues treasury stock to settle share-based awards. The Company does not intend to repurchase any shares in 2007 to provide shares to issue as share-based awards; however, management continually evaluates the appropriateness of the level of shares outstanding.


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

 
Income Taxes.  Deferred income tax effects of transactions reported in different periods for financial reporting and income tax return purposes are recorded under the liability method of accounting for income taxes. This method gives consideration to the future tax consequences of the deferred income tax items and immediately recognizes changes in income tax laws upon enactment.
 
Prior to the acquisition of a controlling interest in Grupo KCSM on April 1, 2005, Grupo KCSM provided deferred income taxes for the difference between the financial reporting and income tax bases of its assets and liabilities. KCS recorded its proportionate share of these income taxes through its equity in Grupo KCSM’s earnings. Since April 1, 2005, Grupo KCSM income taxes are reflected in the consolidated results. Although KCSM has generated book profits, it has incurred tax losses due primarily to the accelerated tax amortization of the concession rights. The Company has recognized a deferred income tax asset for the resulting net operating loss carryforwards. Management anticipates that such net operating loss carryforwards will be realized given the long carryforward period (through the year 2046) for amortization of the Concession, as well as the fact that KCSM expects to generate taxable income in the future. The Company’s tax projections take into consideration certain assumptions, some of which are under its control and others which are not. Key assumptions include inflation rates, currency fluctuations and future revenue growth. If the assumptions are not correct, a valuation allowance would have to be recognized on the deferred tax asset.
 
Prior to the acquisition of a controlling interest in Grupo KCSM on April 1, 2005, the Company did not provide U.S. federal income taxes for the temporary difference between the financial reporting basis and income tax basis of its investment in Grupo KCSM because Grupo KCSM was a foreign corporate joint venture that was considered permanent in duration, and the Company did not expect the reversal of the temporary difference to occur in the foreseeable future. Following the acquisition of control of Grupo KCSM in 2005, the Company has not provided U.S. federal income taxes on the undistributed earnings of Grupo KCSM since the Company intends to reinvest such earnings indefinitely outside of the United States.
 
Earnings Per Share.  Basic earnings per common share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if convertible securities were converted into common stock or stock based awards were exercised or earned. The following reconciles the weighted average shares used for the basic earnings per share computation to the shares used for the diluted earnings per share computation at December 31 (in thousands).
 
                         
    2006     2005     2004  
 
Basic shares
    74,593       75,527       62,715  
Additional weighted average shares attributable to convertible securities and stock options:
                       
$9.0 million VAT/Put settlement payment due to JSIB
          110        
$47.0 million escrow note
    1,667       1,439        
VAT/Put settlement contingency payment
    1,418       918        
Convertible preferred stock
    13,389       13,389        
Stock options
    1,266       1,358       1,268  
Nonvested shares
    53       6        
                         
Diluted shares
    92,386       92,747       63,983  
                         


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

Potentially dilutive shares excluded from the calculation (in thousands):
 
                         
    2006     2005     2004  
 
Stock options where the exercise price is greater than the average market price of common shares
          1       361  
Convertible preferred stock series C which are anti-dilutive
                13,389  
Convertible preferred stock series D which are anti-dilutive
    7,000       486        
 
The following reconciles net income available to common shareholders for purposes of basic earnings per share to that for purposes of diluted earnings per share (in millions):
 
                         
    2006     2005     2004  
 
Net income available to common shareholders for purposes of computing basic earnings per share
  $ 89.4     $ 91.4     $ 15.7  
Effect of dividends on conversion of convertible preferred stock
    8.5       8.5        
Effect of interest expense on conversion of $47.0 million escrow note
    1.4       1.1        
Effect of interest expense on conversion of note payable to TMM for VAT/Put settlement
    0.8       0.6        
                         
Net income available to common shareholders for purposes of computing diluted earnings per share
  $ 100.1     $ 101.6     $ 15.7  
                         
 
New Accounting Pronouncements.
 
FIN 48.  In June 2006, the Financial Accounting Standards Board issued Interpretation 48 Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109, Accounting for Income Taxes(“FIN 48”), which clarifies the accounting for uncertainties in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation requires that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.
 
The provisions of FIN 48 are effective beginning January 1, 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The estimated impact of the adoption of FIN 48 is subject to change due to potential changes in interpretation of FIN 48 by the FASB and other regulatory bodies. The Company is still monitoring this standard and evaluating the impact of adopting FIN 48; however, does not anticipate adoption will have a material impact on the Company’s consolidated Financial Statements.
 
EITF 06-3.  In June 2006, the Financial Accounting Standards Board ratified Emerging Issues Task Force Issue No. 06-3 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation).” This standard allows companies to present in their statements of operations any taxes assessed by a governmental authority that are directly imposed on revenue-producing transactions between a seller and a customer, such as sales, use, value-added and some excise taxes, on either a gross (included in revenues and costs) or a net (excluded from revenues) basis. This standard will be effective for the Company in interim periods and fiscal years beginning after December 15, 2006. The Company presents these transactions on a net basis and intends to continue this presentation in the future, therefore the adoption of this standard will have no impact on its financial statements.
 
SFAS 158.  In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

Plans — an Amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”), which required the recognition of the overfunded or underfunded status of a defined benefit postretirement plan in the Company’s balance sheet on December 31, 2006. Additionally, the pronouncement eliminates the option for the Company to use a measurement date prior to the Company’s fiscal year end effective December 31, 2008. The Company adopted SFAS 158 effective December 31, 2006, which did not result in a significant impact to the Consolidated Financial Statements.
 
Note 3.   Investments
 
Investments, including investments in unconsolidated affiliates, follow (in millions):
 
                         
    Percentage
             
    Ownership at
    Carrying Value  
Company
  December 31, 2006     2006     2005  
 
Southern Capital
    50 %   $ 29.2     $ 27.9  
PCRC
    50 %     18.3       18.1  
FTVM
    25 %     13.9       10.9  
Other
            3.5       3.4  
                         
Total
          $ 64.9     $ 60.3  
                         
 
Southern Capital.
 
In 1996, the Company and GATX Capital Corporation (“GATX”) completed a transaction for the formation and financing of a joint venture, Southern Capital. Southern Capital’s principal operations are the acquisition of locomotives, rolling stock and other railroad equipment and the leasing thereof. The Company holds a fifty percent interest in Southern Capital, which it accounts for using the equity method of accounting.
 
KCSR paid Southern Capital $26.5 million, $30.1 million and $32.5 million in 2006, 2005 and 2004, respectively, under operating leases. In connection with the formation of Southern Capital, the Company received cash that exceeded the net book value of assets contributed to the joint venture by $44.1 million. Accordingly, this excess fair value over book value is being recognized as a reduction in lease rental expense over the terms of the leases equal to $2.7 million, $3.6 million and $4.4 million in 2006, 2005 and 2004, respectively. In 2006, 2005 and 2004, the Company received cash dividends of $4.5 million, $8.3 million and $8.8 million, respectively, from Southern Capital.
 
During 2005 and 2004, Southern Capital recorded gains of $7.7 million and $6.0 million, respectively, related to the sale of locomotives to KCSR, but Southern Capital recorded no such gains in 2006. For purposes of recording its share of Southern Capital earnings, the Company has recorded its share of the gains as a reduction to the cost basis of the equipment acquired. As a result, the Company will recognize its equity in the gains over the remaining depreciable life of the locomotives as a reduction of depreciation expense.
 
On June 5, 2002, Southern Capital refinanced the outstanding balance of a bridge loan through the issuance of approximately $167.6 million of 5.7% pass through trust certificates and proceeds from the sale of 50 locomotives. Of this amount, $104.0 million was secured by all of the locomotives and rolling stock owned by Southern Capital (other than the 50 locomotives, which were sold, as discussed below) and rental payments payable by KCSR under the operating and financing leases of the equipment owned by Southern Capital. Payments of interest and principal of the pass through trust certificates, which are due semi-annually through 2022, are insured under a financial guarantee insurance policy by MBIA Insurance Corporation (“MBIA”). KCSR leases or subleases all of the equipment securing the pass through certificates.
 
The remaining amount of pass through trust certificates, approximately $63.6 million, was assigned to General Electric Corporation, the buyer of the 50 locomotives, and is secured by the sold locomotives and


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

rental payments payable by KCSR under the sublease. Southern Capital does not have the option, nor is it obligated to repurchase or redeem the lease receivable or related equipment on or prior to the expiration of the lease agreement entered into with KCSR at the time of the sale. Southern Capital does not guarantee the lease payments of KCSR and has no obligation to make such payments if KCSR should fail to do so. In the event of default by KCSR, MBIA guarantees the outstanding debt and may seize the collateralized assets, or find a third party lessee to continue making the rental payments to satisfy the debt requirements.
 
Panama Canal Railway Company.
 
PCRC, a joint venture company owed equally by KCS and Mi-Jack Products, Inc., has the concession from the Republic of Panama to reconstruct and operate the Panama Canal Railway, a 47-mile railroad located adjacent to the Panama Canal that provides international shippers with a railway transportation option to complement the Panama Canal. The Panama Canal Railway is a north-south railroad traversing the Panama isthmus between the Pacific and Atlantic Oceans. Panarail operates and promotes commuter and tourist passenger service over the Panama Canal Railway.
 
The Company has invested $31.5 million ($12.9 million of equity and $18.6 million of subordinated loans) toward the reconstruction and operations of the Panama Canal Railway as of December 31, 2006. The loans carry a 10% interest rate and are payable on demand, subject to certain restrictions.
 
PCRC completed the financing for the reconstruction project with the International Finance Corporation (“IFC”), a member of the World Bank Group. Under the terms of the loan agreement with IFC, the Company is a guarantor for up to $4.4 million of the associated debt. Also if PCRC terminates the concession contract without the IFC’s consent, the Company is a guarantor for up to half of the outstanding senior loans. The Company is also a guarantor for up to $0.5 million of the equipment loans and capital leases, and has issued two irrevocable letters of credit totaling approximately $2.0 million to fulfill the Company’s fifty percent guarantee of approximately $4.0 million equipment loan.
 
Ferrocarril y Terminal del Valle de México, S.A. de C.V. (Mexico Valley Railway and Terminal or “FTVM”).
 
FTVM provides railroad services as well as ancillary services, including those related to interconnection, switching and haulage services in the greater Mexico City area. KCSM holds 25% of the share capital of FTVM. The other shareholders of FTVM, each holding a 25% interest, are Ferrocarril Mexicano, S.A. de C.V. (“Ferromex”), Ferrocarril del Sureste, S.A. de C.V. (“Ferrosur”) and the Mexican government.
 
Pursuant to the concession, KCSM is required to grant rights to use portions of its track to Ferromex, Ferrosur and FTVM, and these companies are required to grant KCSM the rights to use portions of their tracks.
 
Financial Information.
 
Financial information of unconsolidated affiliates that the Company accounted for under the equity method is presented below (in millions). Amounts, including those for Grupo KCSM, are presented under U.S. GAAP. Certain prior year amounts have been reclassified to reflect amounts from applicable audited financial statements.
 


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

                         
    As of and for the Year ended
 
    December 31, 2006  
          Southern        
    FTVM     Capital     PCRC  
 
Investment in unconsolidated affiliates
  $ 13.9     $ 29.2     $ 18.3  
Equity in net assets of unconsolidated affiliates
    12.6       29.2       (0.3 )
Financial condition:
                       
Current assets
  $ 46.4     $ 2.4     $ 5.4  
Other assets
    33.9       87.1       78.7  
                         
Assets
  $ 80.3     $ 89.5     $ 84.1  
                         
Current liabilities
  $ 13.5     $     $ 14.6  
Long-term liabilities
    16.5       31.1       70.0  
Equity of stockholders and partners
    50.3       58.4       (0.5 )
                         
Liabilities and equity
  $ 80.3     $ 89.5     $ 84.1  
                         
Operating results:
                       
Revenues
  $ 60.5     $ 18.1     $ 19.0  
Expenses
    45.7       7.4       20.9  
                         
Net income (loss)
  $ 14.8     $ 10.7     $ (1.9 )
                         

 
                         
    As of and for the
       
    Nine Months
    As of and for the
 
    Ended
    Year Ended
 
    December 31, 2005     December 31, 2005  
          Southern
       
    FTVM     Capital     PCRC  
 
Investment in unconsolidated affiliates
  $ 10.9     $ 27.9     $ 18.1  
Equity in net assets of unconsolidated affiliates
    9.6       27.9       0.6  
Financial condition:
                       
Current assets
  $ 35.4     $ 5.2     $ 5.2  
Other assets
    28.1       92.8       81.5  
                         
Assets
  $ 63.5     $ 98.0     $ 86.7  
                         
Current liabilities
  $ 9.3     $ 1.0     $ 13.9  
Long-term liabilities
    15.8       41.2       71.5  
Equity of stockholders and partners
    38.4       55.8       1.3  
                         
Liabilities and equity
  $ 63.5     $ 98.0     $ 86.7  
                         
Operating results:
                       
Revenues
  $ 55.3     $ 27.4     $ 17.5  
Expenses
    45.9       14.3       21.0  
                         
Net income (loss)
  $ 9.4     $ 13.1     $ (3.5 )
                         
 

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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

                                 
    As of and for the Year Ended
 
    December 31, 2004  
          Grupo
    Southern
       
    Mexrail     KCSM     Capital     PCRC  
 
Investment in unconsolidated affiliates
  $ 30.0     $ 389.6     $ 29.1     $ 13.4  
Equity in net assets of unconsolidated affiliates
    27.1       375.0       29.1       2.4  
Financial condition:
                               
Current assets
  $ 29.8     $ 252.7     $ 2.3     $ 4.2  
Other assets
    71.2       1,982.3       113.5       83.4  
                                 
Assets
  $ 101.0     $ 2,235.0     $ 115.8     $ 87.6  
                                 
Current liabilities
    47.3       211.5       1.2       10.7  
Long-term liabilities
    0.7       865.4       56.5       72.2  
Minority interest
          353.3              
Equity of stockholders and partners
    53.0       804.8       58.1       4.7  
                                 
Liabilities and equity
  $ 101.0     $ 2,235.0     $ 115.8     $ 87.6  
                                 
Operating results:
                               
Revenues
  $ 66.5     $ 701.8     $ 29.0     $ 10.1  
Expenses
    74.4       710.1       17.2       14.3  
                                 
Net income (loss)
  $ (7.9 )   $ (8.3 )   $ 11.8     $ (4.2 )
                                 

 
KCSM purchased all of the shares of Mexrail from TMM and KCS on March 27, 2002. Accordingly for the period from January 1, 2004, through July 31, 2004, the results of Mexrail are consolidated into the results of Grupo KCSM.
 
Note 4.   Acquisitions
 
In accordance with Statement of Financial Accounting Standards No. 141 “Business Combinations”, the Company allocates the purchase price of its acquisitions to the tangible and intangible assets and liabilities of the acquired entity based on their fair values. The excess of the purchase price over the fair value is recorded as goodwill. The fair values assigned to assets acquired and liabilities are based on valuations prepared by independent third party appraisal firms, published market prices and management estimates.
 
Acquisition of Controlling Interest in Grupo KCSM.
 
April 1, 2005 — Acquisition Agreement.  In furtherance of the Company’s strategy for expansion into Mexico, on December 15, 2004, the Company entered into the Amended and Restated Acquisition Agreement (the “Acquisition Agreement”) with TMM and other parties under which KCS would acquire control of KCSM through the purchase of shares of common stock of Grupo KCSM. At the time, Grupo KCSM held an 80% interest in KCSM and all of the shares of stock with full voting rights of KCSM. The remaining 20% economic interest in KCSM was owned by the Mexican government in the form of shares with limited voting rights.
 
Under the terms of the Acquisition Agreement, KCS acquired all of TMM’s 48.5% effective interest in Grupo KCSM on April 1, 2005, in exchange for $200.0 million in cash, 18 million shares of KCS common stock, and two-year promissory notes in the aggregate amount of $47.0 million (the “Escrow Notes”), as well as $27.5 million in transaction costs for a total purchase price of $594.4 million. The $47.0 million Escrow Notes are subject to reduction pursuant to the indemnification provisions of the Acquisition Agreement for

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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

certain potential losses related to incorrect representations and warranties, or breaches of covenants in the Acquisition Agreement or claims relating thereto, or under other conditions specified in the Indemnity Escrow Agreement.
 
In exchange for the purchase price of $594.4 million, KCS acquired 48.5% of Grupo KCSM (or 38.8% of KCSM). On a preliminary basis, the excess of purchase price over the historical book value of the assets resulted in a net increase in the basis of the assets of $199.6 million. As a result of the ongoing valuation of certain assets and liabilities, during the fourth quarter of 2005, Grupo KCSM and KCSM recognized changes to the preliminary allocation of purchase price, which was pushed down by KCS. In addition, the KCS purchase price was increased $4.4 million, relating primarily to an increase in the estimates for severance and relocation costs.
 
In connection with the evaluation of the fair values of the assets and liabilities of Grupo KCSM, certain assets were identified as having little or no value to KCS as the acquiring company. Because KCS acquired only 48.5% of Grupo KCSM (or 38.8% of KCSM) in this transaction, the allocation of the excess purchase price over book value of net assets was limited to the acquired percentage. Accordingly, a reduction in the assets of Grupo KCSM was limited to the acquired percentage and any residual was charged to expense. Grupo KCSM operating expenses for the year ended December 31, 2005 included $39.5 million relating to decreases in the basis of certain assets, the most significant of which was the write off of a deferred employee profit sharing asset of $35.6 million as a result of legal rulings in Mexico.
 
September 12, 2005, Completion of VAT/Put Settlement.  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 own 100% of Grupo KCSM and KCSM; the potential obligation of KCS, Grupo KCSM and TMM to acquire the Mexican government’s remaining 20% ownership of KCSM was eliminated; and the legal obligation of the Mexican government to issue the VAT refund to KCSM was satisfied. 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.
 
The VAT/Put Settlement had two separate impacts — first, the resolution of a pre-acquisition contingency related to the April 1, 2005, transaction and second, KCSM’s acquisition of the minority interest held by the Mexican government.
 
Resolution of Pre-Acquisition Contingencies.
 
Both the VAT refund claim and the Mexican government’s put rights were pre-acquisition contingencies. Accordingly, the impact of the acquired asset and the resulting liability was reflected as adjustments to the preliminary purchase accounting described above. Because there was no market for Grupo KCSM stock, management assessed the fair value of the government’s shares acquired in the settlement to be properly estimated as the pro rata equivalent of the fair value of Grupo KCSM stock paid to TMM under the Acquisition Agreement. Based on this assessment, the fair value of the Mexican government’s shares was determined to be $305.5 million.
 
Under the terms of the Acquisition Agreement, KCS acquired TMM’s 51% interest in the VAT refund claim as settled. Accordingly, the preliminary purchase accounting for the Grupo KCSM acquisition was adjusted to reflect as an asset the fair value of the acquisition of TMM’s proportionate share of the VAT refund claim of $155.8 million.


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

 
In accordance with the Acquisition Agreement, a contingent payment of an additional purchase price of $110.0 million became payable to TMM as a result of the final resolution of the VAT Claim and Put, which was to be settled in three parts: (i) $35.0 million in stock (shares determined based on the VWAP 20 days prior to the final resolution of the VAT Claim and Put, as defined in the Acquisition Agreement); (ii) $35.0 million in cash at time of final resolution of the VAT Claim and Put, as defined in the Acquisition Agreement; and (iii) up to an additional $40.0 million in stock (shares to be determined in accordance with the provisions of the Acquisition Agreement) payable no more than five years from the final closing date (April 1, 2005). The liability was non-interest bearing, therefore it was recorded at its present value based on a 5.0% discount rate, consistent with the stated rate of similar interest bearing notes in the Acquisition Agreement.
 
The remaining fair value of the Mexican government’s shares obtained in the VAT/Put Settlement, $149.7 million, was attributable to the previously existing 49% KCS interest in Grupo KCSM and was recorded as nonoperating income and was presented net of applicable legal, consulting and other fees of $17.8 million including, $9.0 million payable to JSIB, which became payable on final resolution of the VAT Claim and Put. The VAT/Put settlement gain was not taxable in Mexico. The Company believes, based upon opinions of outside legal counsel and other factors, that the VAT/Put Settlement should not be taxable to KCS for U.S. income tax purposes. Such position has not been examined by the taxing authority and it is possible that this position could be challenged. The amount of such tax would be material; however the Company believes that it would have the right to indemnification under the terms of the Acquisition Agreement.
 
KCSM Acquisition of Mexican Government Shares.
 
In connection with the VAT/Put Settlement, the acquisition of the Mexican government’s interest was accounted for as a purchase. The aggregate carrying value of $375.6 million for the Mexican government shares (23.9% effective ownership — consisting of minority interest of $256.9 million and the Association in Participation Agreement with a book value of $118.7 million) exceeded the estimated fair value of this interest of $305.5 million representing the purchase price.
 
Purchase Price Allocation.
 
The allocation of the purchase price was finalized in 2006. Final adjustments to the purchase price allocation did not materially change the initial allocation or financial results during the year. Settlement of severance and relocation was substantially completed during the year ended December 31, 2006.
 
Significant components of the allocation of the excess of the purchase price over the carrying value of the net assets acquired, including both the April 1, 2005, and the September 12, 2005, acquisitions, follow (in millions):
 
         
Increase in current assets
  $ 10.6  
Decrease in property and equipment
    (29.0 )
Increase in concession assets
    271.3  
Increase in deferred income taxes
    (81.9 )
Increase in other assets
    83.6  
Increase in current liabilities
    (15.3 )
Increase in long-term liabilities
    (111.5 )
         
Total
  $ 127.8  
         
 
In addition, the existing excess in the carrying value of the Company’s investment over the book value of Grupo KCSM ($13.7 million) was recorded as an addition to property, plant and equipment, and Concession assets.


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

 
The following table summarizes the recorded fair values of the assets acquired and liabilities assumed at the dates of acquisition as adjusted for the above impacts (in millions):
 
         
Current assets
  $ 268.8  
Property and equipment
    532.6  
Concession rights
    1,383.1  
Other assets
    219.0  
         
Total assets acquired
  $ 2,403.5  
         
Current liabilities
  $ 288.3  
Long-term debt
    802.6  
Other liabilities
    128.2  
         
Total liabilities acquired
  $ 1,219.1  
         
 
Acquisition of Mexrail.
 
On August 16, 2004, KCS, TMM and KCSM entered into a new Stock Purchase Agreement. Pursuant to the terms of that agreement, KCS purchased from KCSM 51% of the outstanding shares of Mexrail, a wholly-owned subsidiary of KCSM, for $32.7 million and placed those shares into trust pending approval of the Surface Transportation Board (“STB”) to exercise common control over KCSR, the Gateway Eastern Railway Company (“Gateway Eastern”) and Tex-Mex. On November 29, 2004, the STB approved the Company’s application for authority to control KCSR, Gateway Eastern and Tex-Mex. The shares representing 51% ownership of Mexrail were transferred by the trustee to KCS, and KCS assumed control, on January 1, 2005.
 
The aggregate purchase price was $57.4 million including $32.7 million of cash with the remaining amount consisting of net receivables and payables with Mexrail and Grupo KCSM. The acquisition of Mexrail links KCSR physically to KCSM.
 
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition on January 1, 2005 (in millions):
 
         
Current assets
  $ 37.8  
Property and equipment
    108.2  
Other assets
    0.3  
         
Total assets acquired
  $ 146.3  
         
Current liabilities
  $ 59.7  
Other liabilities
    29.3  
         
Total liabilities acquired
  $ 89.0  
         
 
The allocation of the purchase price above reflected the final adjustments to the fair values of assets and liabilities of Mexrail. All severance reserves recorded for the Mexrail acquisition were expended prior to December 31, 2005.


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

 
Pro Forma Earnings.  The following table reflects the pro forma financial results for the twelve months ended December 31, 2005, as though the Grupo KCSM acquisition had occurred on January 1, 2005 (unaudited, in millions except share and per share data):
 
                                 
    KCS and Mexrail
    Grupo KCSM
             
    Historical and
    Three Months
             
    Grupo KCSM
    Ended
             
    Since April 1,
    March 31,
    Pro Forma
       
    2005     2005     Adjustments     Pro Forma  
 
Revenues
  $ 1,352.0     $ 170.1     $     $ 1,522.1  
Net income (loss)
    100.9       0.1       (150.1 )     (49.1 )
Income (loss) from continuing operations available to common shareholders
    91.4       0.1       (150.1 )     (58.6 )
                                 
Earnings (loss) per common share:
                               
Basic
  $ 1.21                     $ (0.74 )
                                 
Diluted
    1.10                       (0.74 )
                                 
Weighted average common shares outstanding(in thousands):
                               
Basic
    75,527               3,750       79,277  
                                 
Diluted
    92,747               (13,470 )     79,277  
                                 
 
For purposes of comparison, pro forma earnings were reduced by the $131.9 million non-recurring, non-cash gain on the VAT/Put settlement.
 
Note 5.   Other Balance Sheet Captions
 
Other Current Assets.  Other current assets included the following items at December 31 (in millions):
 
                 
    2006     2005  
 
Prepaid expenses
  $ 16.4     $ 10.1  
Deferred income taxes
    7.6       10.0  
Deferred charge related to favorable railcar leases
    11.3       11.3  
Assets held for sale
    47.9        
Other
    10.5       14.7  
                 
Other current assets, net
  $ 93.7     $ 46.1  
                 


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

Property and Equipment.  Property and equipment and related accumulated depreciation are summarized below at December 31 (in millions):
 
                 
    2006     2005  
 
Road properties
  $ 2,118.4     $ 1,982.5  
Equipment
    468.4       388.0  
Concession improvements
    324.3       296.1  
Computer software
    76.1       71.8  
Locomotives sale-leaseback
          32.5  
Other
    38.9       166.7  
                 
Total
    3,026.1       2,937.6  
Accumulated depreciation
    897.0       820.4  
                 
Net property and equipment
    2,129.1       2,117.2  
Construction in progress
    323.1       181.1  
                 
Property and equipment, net
  $ 2,452.2     $ 2,298.3  
                 
 
Depreciation of property and equipment totaled $93.8 million, $82.5 million, and $53.3 million, respectively, for 2006, 2005, and 2004.
 
Overhead Capitalization.  KCS capitalizes certain overhead costs representing the indirect costs associated with construction and improvement projects. Overhead factors are periodically reviewed and adjusted to reflect current costs.
 
Concession Assets.  As discussed in Note 1, the Mexican government granted KCSM the Concession to operate the northeast rail lines in Mexico. Concession assets and related amortization are summarized below at December 31 (in millions):
 
                 
    2006     2005  
 
Road properties
  $ 1,231.4     $ 1,227.6  
Land
    135.3       132.8  
Other
    32.3       41.2  
                 
Total
    1,399.0       1,401.6  
Accumulated amortization
    95.7       41.2  
                 
Concession assets, net
  $ 1,303.3     $ 1,360.4  
                 
 
Amortization of concession assets totaled $60.4 million and $44.9 million for 2006 and 2005.


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

 
Accrued Liabilities.  Accrued liabilities included the following items at December 31 (in millions):
 
                 
    2006     2005  
 
Interest payable
  $ 16.7     $ 17.9  
Vacation accrual
    13.2       12.6  
Car hire per diem
    27.2       28.1  
Prepaid freight charges due other railroads
    37.2       36.9  
Claim reserves
    88.9       55.1  
Deferred credits related to unfavorable locomotive leases and maintenance contracts
    9.7       9.7  
Property and other taxes
    32.4       24.8  
Other
    129.4       148.0  
                 
Accrued liabilities
  $ 354.7     $ 333.1  
                 
 
Note 6.   Long-Term Debt
 
Indebtedness Outstanding.  Long-term debt follows at December 31 (in millions):
 
                 
    2006     2005  
 
KCS
               
Debt obligations related to Grupo KCSM acquisition
  $ 83.3     $ 158.7  
Other debt obligations
    0.2       0.2  
KCSR
               
Revolving credit facility, variable interest rate, 6.850% at December 31, 2006, due 2011
    90.0       92.0  
Term loans, variable interest rate, 7.070% at December 31, 2006, due 2013
    244.9       246.8  
91/2% senior notes, due 2008
    200.0       200.0  
71/2% senior notes, due 2009
    200.0       200.0  
Capital lease obligations, 8.00%, due serially to 2009
    0.8       1.1  
Other debt obligations(iii)
    12.7       32.0  
Tex-Mex
               
RRIF loan, 4.29%, due serially to 2030
    49.2       21.7  
KCSM
               
Revolving credit facility, variable interest rate, due 2008
          26.1  
Term loans, variable interest rate, 7.475% at December 31, 2006, due 2008
    46.7       76.0  
101/4% senior notes, due 2007
    4.0       150.0  
121/2% senior notes, due 2012
    178.6       178.3  
93/8% senior notes, due 2012
    460.0       460.0  
75/8% senior notes, due 2013
    175.0        
Capital lease obligations, due serially to 2011
    1.0       1.3  
Fair market adjustment related to purchase accounting
    10.6       16.4  
                 
Total
    1,757.0       1,860.6  
Less: Debt due within one year(i)(ii)
    92.8       116.3  
                 
Long-term debt
  $ 1,664.2     $ 1,744.3  
                 
 
 
  (i)  Includes $1.9 million and $4.2 million at December 31, 2006 and 2005, respectively, of adjustments to reflect the fair value of the liabilities assumed in 2005.
 
 (ii)  Includes current liability related to Grupo KCSM acquisition.
 
(iii)  In January 2006, $24.3 million of debt was repaid with locomotives through a non-cash transaction.


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

 
KCS Debt.
 
Debt Obligations Related to Grupo KCSM Acquisition.  In connection with the acquisition of Grupo KCSM and the settlement of the VAT/Put, the Company recorded a $110.0 million liability payable to TMM in 2005. The liability was non-interest bearing, therefore it was recorded at its present value based on a 5% discount rate. At December 31, 2005, the Company recorded a current liability of $69.3 million to be settled upon final resolution of the Vat/Put, and $31.6 million as a non-current liability to be settled in 5 years.
 
On March 13, 2006, in settlement of the $110.0 million obligation, KCS paid $35 million in cash, issued 1,494,469 shares of KCS common stock at the volume weighted average price (“VWAP”) of $23.4197, as determined by the acquisition agreement, and issued a $40 million five-year non-interest bearing note. At December 31, 2006 the Company recorded a non-current liability of $32.4 million which will accrete at 5% annually until April 1, 2010 when payment of $40.0 million will be due.
 
Also, as part of the acquisition in 2005, KCS issued escrow notes totaling $47.0 million which are subject to reduction for certain potential losses related to breaches of certain representations, warranties or covenants in the acquisition agreement by TMM. The escrow notes are due April 1, 2007, and accrue interest at a stated rate of 5.0%. The principal and interest is payable in cash or in stock (shares to be determined based on the VWAP 20 days prior to settlement) at the Company’s discretion. At December 31, 2006 and 2005, the Company included $50.9 million as a current liability and $48.8 million as a non-current liability on the balance sheet, respectively.
 
At December 31, 2005, the Company recorded a $9.0 million one time incentive payment to JSIB, payable upon final resolution of the VAT/Put claim. On March 13, 2006, the Company paid $9.0 million in cash to JSIB.
 
KCSR Debt.
 
Revolving Credit Facility and Term Loans.  On March 30, 2004, KCSR entered into a credit agreement (the 2004 Credit Agreement”) which was amended during 2004 and 2005 to result in a $125 million revolving credit facility maturing on March 30, 2007, and a $250 million term loan facility maturing on March 30, 2008. The amended term loan facility bore interest at the London Interbank Offered Rate (“LIBOR”) plus 150 basis points. The amended revolving credit facility bore interest at the LIBOR plus a spread based on the Company’s leverage ratio as defined in the 2004 Credit Agreement. As of December 31, 2005, advances under the revolving credit facility totaled $92.0 million and the term loan’s balance was $246.8 million. Revolver availability as of December 31, 2005 was $33.0 million.
 
On April 28, 2006, KCS, KCSR and the other subsidiary guarantors named therein entered into an amended and restated credit agreement (the “2006 Credit Agreement”), in an aggregate amount of $371.1 million with The Bank of Nova Scotia and other lenders named in the 2006 Credit Agreement. Proceeds from the 2006 Credit Agreement were used to refinance the 2004 Credit Agreement. The 2006 Credit Agreement consists of (a) a $125.0 million revolving credit facility with a letter of credit sublimit of $25.0 million and swing line advances of up to $15.0 million, and (b) a $246.1 million term loan facility. The revolving credit facility bears interest at either LIBOR, or an alternate base rate, plus a spread based on the Company’s leverage ratio as defined in the 2006 Credit Agreement. The term loan facility bears interest at either LIBOR plus 175 basis points or the alternative base rate plus 75 basis points. The maturity date for the revolving credit facility is April 28, 2011 and the maturity date of the term loan facility is April 28, 2013. The 2006 Credit Agreement contains covenants that restrict or prohibit certain actions, including, but not limited to, KCS’ ability to incur debt, create or suffer to exist liens, make prepayment of particular debt, pay dividends, make investments, engage in transactions with stockholders and affiliates, issue capital stock, sell certain assets, and engage in mergers and consolidations or in sale-leaseback transactions. In addition, KCS must meet certain consolidated interest coverage and leverage ratios. Failure to maintain compliance with the


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

covenants could constitute a default which could accelerate the payment of any outstanding amounts under the 2006 Credit Agreement. Borrowings under the Credit Agreement are secured by substantially all of the Company’s domestic assets and are guaranteed by the majority of its domestic subsidiaries. As of December 31, 2006, advances under the revolving credit facility totaled $90.0 million and the term loans’ balance was $244.9 million. Revolver availability as of December 31, 2006 was $35.0 million.
 
On January 31, 2007, KCS provided written notice to the lenders under the 2006 Credit Agreement of certain representation and other defaults under the 2006 Credit Agreement arising from the potential defaults which existed under the KCSR indentures governing the Notes as described below. These defaults limited KCSR’s access to the revolving credit facility. In its notice of default, the Company also requested that the lenders waive these defaults. On February 5, 2007 the Company received a waiver of such defaults from all of the lenders under the 2006 Credit Agreement. The Company is currently not in default of the 2006 Credit Agreement and has access to the revolving credit facility.
 
Senior Notes.  KCSR has outstanding $200.0 million of 91/2% senior unsecured notes issued during the third quarter of 2000 and due October 1, 2008, and $200.0 million of 71/2% senior unsecured notes issued in June of 2002 and due June 12, 2009. These senior unsecured notes bear interest at a fixed annual rate which is paid semi-annually. These senior notes are general unsecured obligations of KCSR but are guaranteed by KCS and certain of its domestic subsidiaries.
 
Consent Solicitation.  On January 29, 2007, the Company commenced a consent solicitation to amend the indentures under which KCSR’s 91/2% Senior Notes due 2008 (the “91/2% Notes”) and 71/2% Senior Notes due 2009 (the “71/2% Notes” and together with the 91/2% Notes, the “Notes”) were issued. The purpose of the consent solicitation was to (i) resolve an inconsistency in the inclusion of certain expenses, but not the income, of restricted subsidiaries in the calculation of the consolidated coverage ratio under the indentures, (ii) amend the definition of refinancing indebtedness to allow the inclusion of certain related premiums, interest, fees and expenses in permitted refinancing indebtedness and (iii) obtain waivers of any defaults arising from certain actions taken in the absence of such proposed amendments. On February 5, 2007, the Company obtained the requisite consents from the holders of each series of Notes to amend their respective indentures as described above and executed supplemental indentures containing such amendments and waivers.
 
Tex-Mex Debt.
 
RRIF Loan Agreement.  On June 28, 2005, Tex-Mex entered into an agreement with Federal Railroad Administration (“FRA”) to borrow $50 million to be used for infrastructure improvements which are expected to increase efficiency and capacity in order to accommodate growing freight rail traffic related to the NAFTA corridor. At December 31, 2005, Tex-Mex had borrowed a net amount of $21.7 million under the loan agreement. Tex-Mex drew down the remaining $28.2 million during 2006. The note bears interest at 4.29% annually and the principal balance amortizes quarterly with a final maturity of July 13, 2030. The loan was made under the Railroad Rehabilitation and Improvement Financing (“RRIF”) Program administered by the FRA. The loan is guaranteed by Mexrail, which has issued a Pledge Agreement in favor of the lender equal to the gross revenues earned by Mexrail on per-car fees on traffic crossing the International Rail Bridge in Laredo, Texas.
 
On February 16, 2007, Tex-Mex and the FRA entered into amendment No. 1 and waiver No. 1 to the loan agreement, the purpose of which was to eliminate the obligation of Tex-Mex to provide audited annual financial statements to the FRA and to waive Tex-Mex’s failure to do so since entering into the loan agreement. To induce the FRA to agree to such amendment and waiver, the Company has agreed to provide the FRA with its audited annual financial statements and unaudited quarterly statements and has also agreed to guaranty the scheduled principal payment installments due to the FRA from Tex-Mex under the loan agreement on a rolling five-year basis.


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

 
KCSM Debt.
 
Revolving Credit Facility and Term Loans.  On October 24, 2005, KCSM entered into a credit agreement (the “2005 KCSM Credit Agreement”) in an aggregate amount of $106.0 million, with a maturity of October 28, 2008. The 2005 KCSM Credit Agreement consisted of a $30.0 million revolving credit facility and a $76.0 million term loan facility secured by the locomotives and rail cars owned by KCSM’s subsidiary, Arrendadora. For dollar loans the facilities bear interest at LIBOR plus a spread based on KCSM’s leverage ratio as defined under the 2005 KCSM Credit Agreement. For peso loans the facilities bear interest at the TIIE rate plus a spread based on KCSM’s leverage ratio. Proceeds from the facilities were used primarily to pay down debt and for general corporate purposes. At December 31, 2005, advances under the revolving credit facility totaled $26.1 million, with $3.9 million remaining available under the facility. At December 31, 2006 there were no advances outstanding under the revolving credit facility and KCSM had $30.0 million of availability. On November 21, 2006, KCSM paid down $29.0 million of the term loan facility from the proceeds of its 75/8% senior notes offering. At December 31, 2006 and 2005, the term loans’ balance was $46.7 million and $76.0 million, respectively. The 2005 KCSM Credit Agreement contains covenants and restrictions similar to those in KCSR’s 2006 Credit Agreement.
 
On April 7, 2006, KCSM entered into an amendment and waiver (“Amendment and Waiver”) related to the 2005 KCSM Credit Agreement. The 2005 KCSM Credit Agreement was amended to (i) exclude certain payment obligations accrued under two locomotive maintenance agreements and under a track maintenance rehabilitation agreement from the definition of Indebtedness, (ii) eliminate certain minimum and multiple borrowing thresholds for peso borrowings under the revolving credit facility and (iii) eliminate the reporting requirement to provide unaudited consolidated financial statements for the fourth fiscal quarter. The Amendment and Waiver also waived certain reporting requirements, including the requirement of KCSM to provide audited consolidated financial statements 90 days after the end of the 2005 fiscal year, provided such reports were delivered by April 30, 2006, and compliance with the Consolidated Leverage Ratio obligations of Section 7.1(c) of the 2005 KCSM Credit Agreement for the four quarters ending December 31, 2005, if compliance therewith was calculated without giving effect to the amendment to the definition of “Indebtedness” in the Amendment and Waiver, provided that KCSM was in compliance therewith after giving effect to the Amendment and Waiver. KCSM is not currently in default of the 2005 KCSM Credit Agreement and currently has access to the revolving credit facility.
 
101/4% Senior Notes.  As of December 31, 2005, KCSM had outstanding $150.0 million of 101/4% unsecured senior notes issued in 1997 and due June 15, 2007 (the “KCSM 2007 Senior Notes”). On October 23, 2006, pursuant to an offer to purchase dated such date, KCSM commenced a cash tender offer and consent solicitation for any and all outstanding $150.0 million aggregate principal amount of the KCSM 2007 Senior Notes. The consent solicitation expired on November 3, 2006. KCSM received consents in connection with the tender offer and consent solicitation from holders of over 97% of the KCSM 2007 Senior Notes to amend the indenture under which the KCSM 2007 Senior Notes were issued (the “2007 Indenture”), to eliminate substantially all of the restrictive covenants included in the 2007 Indenture. The supplemental indenture relating to the KCSM 2007 Senior Notes containing the proposed changes (the “2007 Supplemental Indenture”) became effective on November 21, 2006. The tender offer expired at midnight, New York City time, on November 20, 2006 and KCSM purchased tendered notes on November 21, 2006, in accordance with the terms of the tender offer from proceeds received through the issuance of new 75/8% senior unsecured notes. On December 31, 2006, there was $4.0 million of KCSM 2007 Senior Notes outstanding.
 
121/2% Senior Notes.  KCSM has outstanding $178.6 million of 121/2% senior unsecured notes issued in June 2002 and due June 15, 2012, which are redeemable at any time in the event of certain changes in Mexican tax law and at KCSM’s option after June 14, 2007, subject to certain limitations, at the following redemption prices (expressed in percentages of principal amount), plus any unpaid interest: 2007 — 106.250%, 2008 — 104.167%, 2009 — 102.083% and thereafter — 100.000%.


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

 
93/8% Senior Notes.  KCSM has outstanding $460.0 million of 93/8% senior unsecured notes issued on April 19, 2005, and due May 1, 2012. The notes are redeemable at KCSM’s option at the following redemption prices (expressed in percentages of principal amount), plus any unpaid interest: 2009 — 104.688%, 2010 — 102.344% and thereafter — 100.000%. Subject to certain conditions, up to 35% of the principal of the notes is redeemable prior to May 1, 2008. In addition, the notes are redeemable, in whole but not in part, at KCSM’s option at their principal amount in the event of certain changes in the Mexican withholding tax rate.
 
75/8% Senior Notes.  On November 21, 2006, KCSM issued $175.0 million of new 75/8% senior unsecured notes due December 1, 2013. Proceeds from the issuance were used to purchase $146.0 million of tendered KCSM 2007 Senior Notes and repay $29.0 million of term loans under the 2005 KCSM Credit Agreement. The notes are redeemable at KCSM’s option after November 30, 2010, subject to certain limitations, at the following redemption prices (expressed in percentages of principal amount), plus any unpaid interest: 2010 — 103.813%, 2011 — 101.906% and 2012 — 100.000%. Subject to certain conditions, up to 35% of the principal of the notes is redeemable prior to December 1, 2009. In addition, the notes are redeemable, in whole but not in part, at KCSM’s option at their principal amount in the event of certain changes in the Mexican withholding tax rate.
 
All of KCSM’s senior notes above are denominated in dollars and are unsecured, unsubordinated obligations, rank pari passu in right of payment with KCSM’s existing and future unsecured, unsubordinated obligations, are senior in right of payment to KCSM’s future subordinated indebtedness, and other than the 101/4% Senior Notes, are not guaranteed by Grupo KCSM.
 
Other Debt Provisions.
 
Other Agreements, Guarantees, Provisions and Restrictions.  The Company has debt agreements customary for these types of debt instruments and for borrowers with similar credit ratings containing restrictions on subsidiary indebtedness, advances and transfers of assets, and sale and leaseback transactions, as well as requiring compliance with various financial covenants. Because of certain financial covenants contained in the debt agreements, however, maximum utilization of the Company’s available line of credit may be restricted.
 
Change in Control Provisions.  Certain loan agreements and debt instruments entered into or guaranteed by the Company and its subsidiaries provide for default in the event of a specified change in control of the Company or particular subsidiaries of the Company.


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

Leases and Debt Maturities.
 
The Company leases transportation equipment, as well as office and other operating facilities under various capital and operating leases. Rental expenses under operating leases were $136.8 million, $103.0 million, and $57.7 million for the years ended December 31, 2006, 2005, and 2004, respectively. Contingent rentals and sublease rentals were not significant. Minimum annual payments and present value thereof under existing capital leases, other debt maturities and minimum annual rental commitments under non-cancelable operating leases follow (in millions):
 
                                                                 
          Capital Leases                          
    Long-
    Minimum
          Net
          Operating Leases  
    Term
    Lease
    Less
    Present
    Total
    Southern
    Third
       
Years
  Debt     Payments     Interest     Value     Debt     Capital     Party     Total  
 
2007(i)
  $ 92.2     $ 0.7     $ 0.1     $ 0.6     $ 92.8     $ 18.8     $ 104.8     $ 123.6  
2008
    230.7       0.7       0.1       0.6       231.3       19.2       90.4       109.6  
2009
    204.1       0.5             0.5       204.6       17.0       78.9       95.9  
2010
    3.9       0.1             0.1       4.0       18.0       73.6       91.6  
2011
    126.4                         126.4       13.0       63.3       76.3  
Thereafter(ii)
    1,097.9                         1,097.9       94.8       366.8       461.6  
                                                                 
Total
  $ 1,755.2     $ 2.0     $ 0.2     $ 1.8     $ 1,757.0     $ 180.8     $ 777.8     $ 958.6  
                                                                 
 
 
(i) Includes current liability related to Grupo KCSM acquisition.
 
(ii) Includes long-term liability related to Grupo KCSM acquisition.
 
In the normal course of business, the Company enters into long-term contractual requirements for future goods and services needed for the operations of the business. Such commitments are not in excess of expected requirements and are not reasonably likely to result in performance penalties or payments that would have a material adverse effect on the Company’s liquidity.
 
Note 7.   Income Taxes
 
Current income tax expense represents the amounts expected to be reported on the Company’s income tax return, and deferred tax expense or benefit represents the change in net deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Valuation allowances are used to reduce deferred tax assets to the amount considered likely to be realized.


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

 
Tax Expense.  Income tax provision (benefit) consists of the following components (in millions):
 
                         
    2006     2005     2004  
 
Current:
                       
Federal
  $ 4.0     $ 11.2     $ (12.4 )
State and local
    0.4       (1.3 )     0.1  
Foreign
          0.3        
                         
Total current
    4.4       10.2       (12.3 )
                         
Deferred:
                       
Federal
    12.7       (17.8 )     33.8  
State and local
    7.2       1.4       2.1  
Foreign
    21.1       (0.9 )      
                         
Total deferred
    41.0       (17.3 )     35.9  
                         
Total income tax expense (benefit)
  $ 45.4     $ (7.1 )   $ 23.6  
                         
 
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities follow at December 31 (in millions):
 
                 
    2006     2005  
 
Liabilities:
               
Depreciation
  $ 571.2     $ 565.2  
Investments
    13.4       16.2  
Concession rights
    256.7       277.5  
Other, net
    5.6       5.6  
                 
Gross deferred tax liabilities
    846.9       864.5  
                 
Assets:
               
Loss carryovers
    (480.7 )     (491.3 )
Book reserves not currently deductible for tax
    (48.3 )     (57.4 )
Inventories and provisions
    (33.1 )     (70.9 )
Vacation accrual
    (3.8 )     (3.5 )
Other, net
    (9.8 )     (3.9 )
                 
Gross deferred tax assets before valuation allowance
    (575.7 )     (627.0 )
Valuation allowance on loss carryovers
    9.8       9.5  
                 
Gross deferred tax assets
    (565.9 )     (617.5 )
                 
Net deferred tax liability
  $ 281.0     $ 247.0  
                 


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

Tax Rates.  Differences between the Company’s effective income tax rates and the U.S. federal income tax statutory rates of 35% follow (in millions):
 
                         
    2006     2005     2004  
 
Income tax provision using the Statutory rate in effect
  $ 54.1     $ 26.7     $ 16.8  
Tax effect of:
                       
Earnings (losses) of equity investees
    (0.6 )     0.3       1.8  
State and local income tax provision
    3.9       0.1       2.8  
Tax credits
    (1.8 )     (2.4 )      
Change in tax contingency
    (2.8 )            
Foreign exchange, tax rate and indexation adjustments
    (4.9 )     4.3        
Write off of deferred profit sharing
          10.1        
VAT/Put settlement
          (42.3 )      
Difference between U.S. and foreign tax rate
    (3.1 )     (3.9 )      
Foreign asset tax
          0.3        
Other, net(i)
    0.6       (0.3 )     2.2  
                         
Income tax expense (benefit)
  $ 45.4     $ (7.1 )   $ 23.6  
                         
Effective tax rate
    29.4 %     (9.3 )%     49.1 %
 
 
(i) 2004 includes certain adjustments of prior year provision estimates resulting in a $1.1 million increase in tax expense.
 
Difference Attributable to KCSM Investment.  At December 31, 2006, the Company’s book basis exceeded the tax basis of its investment in KCSM by $563 million. The Company has not provided a deferred income tax liability for the income taxes, if any, which might become payable on the realization of this basis difference because the Company intends to indefinitely reinvest in KCSM the financial accounting earnings which gave rise to the basis differential. Moreover, the Company has no other plans to realize this basis differential by a sale of its investment in KCSM. If the Company were to realize this basis difference in the future by a receipt of dividends or the sale of its interest in KCSM, as of December 31, 2006, the Company would incur gross federal income taxes of $197.1 million, which might be partially offset by Mexican income taxes.
 
Prior to the acquisition of a controlling interest in Grupo KCSM on April 1, 2005, Grupo KCSM provided deferred income taxes for the difference between the financial reporting and income tax bases of its assets and liabilities. KCS recorded its proportionate share of these income taxes through its equity in Grupo KCSM’s earnings. Since April 1, 2005, Grupo KCSM income taxes are reflected in the consolidated results. Although KCSM has generated book profits, it has incurred tax losses due primarily to the accelerated tax amortization of the Concession rights. The Company has recognized a deferred income tax asset for the resulting net operating loss carryforwards. Management anticipates that such net operating loss carryforwards will be realized given the expiration dates (through the year 2046) of the loss carryforwards, as well as the fact that KCSM expects to generate taxable income in the future. Management’s tax projections take into consideration certain assumptions, some of which are under their control and others which are not. Key assumptions include inflation rates, currency fluctuations and future revenue growth. If management’s assumptions are not correct, a valuation allowance may have to be recognized on the deferred tax asset.
 
As described in Note 4, 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


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

KCSM owned by the Mexican government (the “VAT/Put Settlement”). All Mexican income taxes on the VAT were paid as part of the VAT/Put Settlement. The Company believes, based upon opinions of outside legal counsel and other factors, that the VAT/Put Settlement is not taxable to KCS for U.S. income tax purposes.
 
Tax Carryovers.  In the year ended December 31, 2005, the Company generated both U.S. federal and state net operating losses. The losses are carried forward 20 years for federal and from 5 to 20 years for state.
 
Both the federal and state loss carryovers are analyzed each year to determine the likelihood of realization. The U.S. federal loss carryover at December 31, 2006, is $137.8 million and will expire beginning in 2008. The Company believes the federal loss carryover will be realized.
 
The state loss carryovers arise from both combined and separately filed tax filings from as early as 1991. The loss carryovers may expire as early as December 31, 2007, and as late as December 31, 2026. The state loss carryover at December 31, 2006, is $527.9 million ($16.0 million of tax), of which it is expected that $203.6 million ($6.2 million of tax) will be realized. Management believes that state loss carryovers, net of the valuation allowance, will be ultimately realized.
 
The Mexico federal loss carryovers at December 31, 2006, are $1.5 billion (Mexican pesos of Ps16.2 billion) and will expire as early as 2015 and as late as 2046. The Company believes the Mexican loss carryovers will be realized.
 
Internal Revenue Service Reviews.  The IRS is currently reviewing the consolidated federal income tax returns for the years 1997 through 2002. A current income tax liability has been accrued for the anticipated outcome. The Company believes that adequate provision has been made for any adjustment (taxes and interest) that may be assessed for all open years. The federal statute of limitations has closed for years prior to 1997.
 
Note 8.   Stockholders’ Equity
 
Information regarding the Company’s capital stock at December 31 follows:
 
                         
    Shares
             
    Authorized
    Shares Issued  
    2006 and 2005     2006     2005  
 
$25 par, 4% noncumulative, preferred stock
    840,000       649,736       649,736  
$1 par, preferred stock
    2,000,000              
$1 par, series A, preferred stock
    150,000              
$1 par, series B convertible, preferred stock
    1,000,000              
$1 par, series C redeemable cumulative convertible perpetual preferred stock
    400,000       400,000       400,000  
$1 par, series D cumulative convertible perpetual preferred stock
    210,000       210,000       210,000  
$.01 par, common stock
    400,000,000       92,863,585       91,369,116  
 
Shares outstanding at December 31:
 
                 
    2006     2005  
 
$25 par, 4% noncumulative, preferred stock
    242,170       242,170  
$1 par, series C redeemable cumulative convertible perpetual preferred stock
    400,000       400,000  
$1 par, series D cumulative convertible perpetual preferred stock
    210,000       210,000  
$.01 par, common stock
    75,920,333       73,412,081  


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

Treasury Stock.  Shares of common stock in Treasury and related activity follow:
 
                         
    2006     2005     2004  
 
Balance at beginning of year
    17,957,035       10,098,912       11,193,495  
Shares purchased
          9,000,000        
Shares issued to fund stock option exercises
    (617,107 )     (528,758 )     (889,803 )
Employee stock purchase plan shares issued
    (109,644 )     (205,928 )     (197,780 )
Nonvested shares issued
    (428,143 )     (442,632 )     (7,000 )
Nonvested shares forfeited
    141,111       35,441        
                         
Balance at end of year
    16,943,252       17,957,035       10,098,912  
                         
 
Series C Redeemable Cumulative Convertible Perpetual Preferred Stock.  On May 5, 2003, the Company completed the sale of $200 million of Redeemable Cumulative Convertible Perpetual Preferred Stock (“Series C Preferred Stock”) with a liquidation preference of $500 per share in a private offering. Dividends on the Series C Preferred Stock are cumulative and payable quarterly at an annual rate of 4.25% of the liquidation preference, as declared by the Company’s Board of Directors. Each share of Series C Preferred Stock is convertible into 33.4728 shares of the Company’s common stock. After May 19, 2008, the Company may redeem any or all of the Series C Preferred Stock, subject to certain conditions. The Company may be required to redeem the Series C Preferred Stock from the holders at their option only if substantially all of the Company’s common stock is exchanged for or converted into common stock that is not listed on a U.S. national securities exchange or the NASDAQ National Market (a “fundamental change”). The practical effect of this provision is to limit the Company’s ability to eliminate a holder’s ability to convert the Series C Preferred Stock into common shares of a publicly traded company through a merger or consolidation transaction. Accordingly, since the Company is in a position to control whether the Company experiences a fundamental change, the Series C Preferred Stock is classified as permanent equity capital.
 
Series D Cumulative Convertible Perpetual Preferred Stock.  On December 9, 2005, KCS completed the sale and issuance of 210,000 shares of its 5.125% Series D Convertible Preferred Stock, par value $1.00 per share (“Series D Preferred Stock”). Each share of Series D Preferred Stock is convertible into 33.3333 shares of KCS common stock, subject to certain adjustments. Dividends on the Series D Preferred Stock are cumulative and payable quarterly in any combination of cash and KCS common stock, as declared by the KCS Board of Directors, at the rate of 5.125% per annum of the liquidation preference of $1,000. The Series D Preferred Stock ranks senior to the common stock and to each class or series of KCS capital stock that has terms that provide that such class or series will rank junior to the Series D Preferred Stock. After February 19, 2011, KCS may convert all of the Series D Preferred Stock into common stock at the then prevailing conversion rate, but only if the closing sale price of the common stock multiplied by the conversion rate then in effect equals or exceeds 130% of the liquidation preference for 20 trading days during any consecutive 30 trading day period, and if KCS has paid all accumulated and unpaid dividends on the dividend payment date immediately preceding the forced conversion date.
 
Upon certain designated events (a “fundamental change”), holders of the Series D Preferred Stock may, subject to legally available funds, require KCS to redeem any or all of the shares, which KCS may pay in either cash, in shares of KCS stock or any combination thereof, at KCS’ option. Since KCS has the ability in this event to pay the redemption price in KCS common stock (which is not required to be registered), the Series D Preferred Stock is classified as permanent equity capital. The number of shares to be issued would be based upon the value of KCS common stock at that time but in no event will the number of shares issued on the occurrence of a fundamental change exceed 52.5 million shares.
 
On December 12, 2005, the Company used substantially all of the proceeds from the Series D Preferred Stock offering to repurchase 9,000,000 shares of KCS common stock issued to TMM in April 2005 in


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

connection with the acquisition of KCSM. All of the 9,000,000 shares were purchased at a price of $22.25 per share or $200.3 million. The Company does not have a formal program for the repurchase of any additional shares of its equity securities.
 
Dividend Restrictions.  Following completion of the preparation of the 2005 financial statements of KCS, the Company determined that its Consolidated Coverage Ratio (as defined in the indentures for KCSR’s 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, the Company was unable to pay cash dividends on its Series C Preferred Stock and dividends in cash or shares of KCS common stock on its Series D Preferred Stock. The dividends accumulate until such ratio increases to at least 2.0:1. See Note 16 for further discussion.
 
Stockholder Rights Plan.  On September 27, 2005, the Board of Directors of the Company declared a dividend distribution of one right for each outstanding share of the Company’s common stock to stockholders of record as of the close of business on October 12, 2005, replacing a previous Rights Agreement that expired on October 12, 2005. Each right entitles the stockholder to purchase from the Company one one-thousandth of a share of Series A Preferred Stock (or in certain circumstances, common stock, other securities, cash or other assets), at a price of $100 per share (both shares and price are subject to adjustment periodically to prevent dilution). The rights are traded with the Company’s common stock.
 
The Rights Plan has certain anti-takeover provisions that may cause substantial dilution to a person or group that attempts to acquire the Company without the approval of the Board of Directors. The Rights Plan will not interfere with any offer for all of the outstanding common stock that has the approval of the Independent Directors. The rights will become excercisable after a non-approved person or group has acquired, or a tender offer is made for, 15% or more of the common stock of the Company (13% or more in the case of certain acquisitions by “Adverse Persons”). Right holders (other than the acquiring person or group) may then exercise their rights at the then current purchase price, and receive the number of shares of Preferred Stock (or in certain circumstances, common stock) having a market value of two times the purchase price of the rights. Additionally, if the Company is thereafter merged into another entity, or if more than 50% of the Company’s consolidated assets or earning power is sold or transferred, holders of the rights may exercise their rights at the then current purchase price and receive common stock of the acquirer equal to two times the purchase price of the rights. KCS may redeem the rights for $0.0025 per right until a triggering acquisition. The rights expire October 11, 2010.
 
Change in Control Provisions.  The Company and certain of its subsidiaries have entered into agreements with employees whereby, upon defined circumstances constituting a change in control of the Company or subsidiary, certain stock options become exercisable, certain benefit entitlements are automatically funded and such employees are entitled to specified cash payments upon termination of employment.
 
The Company and certain of its subsidiaries have established trusts to provide for the funding of corporate commitments and entitlements of officers, directors, employees and others in the event of a specified change in control of the Company or subsidiary. Assets held in such trusts on December 31, 2006, were not material. Depending upon the circumstances at the time of any such change in control, the most significant factor of which would be the highest price paid for KCS common stock by a party seeking to control the Company, funding of the Company’s trusts could be substantial.
 
Note 9.   Share-Based Compensation
 
Stock Option Plan.  The Kansas City Southern 1991 Amended and Restated Stock Option and Performance Award Plan (as amended and restated effective May 5, 2004) (the “Plan”) provides for the granting of options to purchase up to 16.0 million shares of the Company’s common stock by officers and other designated employees. Options have been granted under the Plan at 100% of the average market price of the Company’s stock on the date of grant and generally have a 5 year cliff vesting period and are exercisable


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

over the 10 year contractual term, except that options outstanding with limited rights (“LRs”) or limited stock appreciation rights (“LSARs”), become immediately exercisable upon certain defined circumstances constituting a change in control of the Company. The Plan includes provisions for stock appreciation rights, LRs and LSARs. All outstanding options include LSARs, except for options granted to non-employee Directors prior to 1999. The grant date fair value, less estimated forfeitures, is recorded to expense on a straight-line basis over the vesting period.
 
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average assumptions used were as follows:
 
                         
    2006     2005     2004  
 
Expected dividend yield
    0 %     0 %     0 %
Expected volatility
    37.84 %     26.78 %     29.66 %
Risk-free interest rate
    4.96 %     3.41 %     2.75 %
Expected term (years)
    6.83       5.50       3.43  
Fair value at grant date
  $ 12.62     $ 3.98     $ 3.64  
 
The Company has not historically paid dividends to common shareholders. The expected volatility is based on the historical volatility of the Company’s stock price over a term equal to the estimated life of the options. The risk-free interest rate is determined based on the U.S. Treasury rates approximating the expected life of the options granted, which represents the period of time the awards are expected to be outstanding and is based on the historical experience of similar awards.
 
The following table summarizes activity under the stock option plan:
 
                                 
          Weighted-
    Weighted-
       
          Average
    Average
       
          Exercise
    Remaining
    Aggregate
 
    Number of
    Price
    Contractual
    Intrinsic
 
    Shares     per Share     Term     Value  
                In years     In millions  
 
Options outstanding at December 31, 2003
    4,612,863     $ 7.36                  
Granted
    590,247       14.67                  
Exercised
    (894,832 )     5.64                  
Forfeited or expired
    (115,536 )     12.27                  
                                 
Options outstanding at December 31, 2004
    4,192,742       8.62                  
Granted
    104,200       17.51                  
Exercised
    (554,869 )     6.88                  
Forfeited or expired
    (34,680 )     10.54                  
                                 
Options outstanding at December 31, 2005
    3,707,393       9.11                  
Granted
    90,800       26.03                  
Exercised
    (627,907 )     10.83                  
Forfeited or expired
    (229,954 )     12.77                  
                                 
Options outstanding at December 31, 2006
    2,940,332     $ 8.98       4.59     $ 58.8  
                                 
Vested and expected to vest at December 31, 2006
    2,929,307     $ 8.94       4.57     $ 58.7  
                                 
Exercisable at December 31, 2006
    2,499,144     $ 7.74       4.16     $ 53.1  
                                 
 
Compensation expense of $0.6 million was recognized for stock option awards for the year ended December 31, 2006. The total income tax benefit recognized in the income statement for stock options was


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

$0.2 million. As described in Note 2, no compensation expense was recognized for the years ended December 31, 2005 and 2004 as the Company accounted for share-based compensation in accordance with APB 25 prior to the adoption of SFAS 123R on the modified prospective basis on January 1, 2006.
 
Additional information regarding stock option exercises appears in the table below (in millions):
 
                         
    2006     2005     2004  
 
Aggregate grant-date fair value of stock options vested
  $ 0.7     $ 2.1     $ 1.1  
Intrinsic value of stock options exercised
    11.4       9.7       10.8  
Cash received from option exercises
    6.7       3.8       5.0  
Excess tax benefit realized from option exercises
    0.2              
 
As of December 31, 2006, $1.4 million of unrecognized compensation cost relating to nonvested stock options is expected to be recognized over a weighted-average period of 1.47 years. At December 31, 2006, there were 2,693,217 shares available for future grants under the Plan.
 
Nonvested Stock.  The Kansas City Southern 1991 Amended and Restated Stock Option and Performance Award Plan provides for the granting of nonvested stock awards to officers and other designated employees. The grant date fair value is based on the average market price of the stock on the date of the grant. These awards are subject to forfeiture if employment terminates during the vesting period, which is generally five year cliff vesting for employees and one year for directors. The grant date fair value of nonvested shares, less estimated forfeitures, is recorded to compensation expense on a straight-line basis over the vesting period.
 
A summary of nonvested stock activity is as follows:
 
                         
          Weighted-
       
          Average Grant
    Aggregate
 
    Number of
    Date
    Intrinsic
 
    Shares     Fair Value     Value  
                In millions  
 
Nonvested stock at December 31, 2004
        $          
Granted
    435,032       20.64          
Vested
    (7,440 )     18.56          
Forfeited
    (35,441 )     21.88          
                         
Nonvested stock at December 31, 2005
    392,151       20.57          
Granted
    421,002       25.73          
Vested
    (58,469 )     20.17          
Forfeited
    (141,111 )     22.33          
                         
Nonvested stock at December 31, 2006
    613,573     $ 23.74     $ 17.8  
                         
 
Compensation cost on nonvested stock was $3.1 million and $1.5 million for the years ended December 31, 2006 and 2005, respectively. The total income tax benefit recognized in the income statement for nonvested stock awards was $1.1 million and $0.5 million for the years ended December 31, 2006 and 2005, respectively.
 
As of December 31, 2006, $11.0 million of unrecognized compensation costs related to nonvested stock is expected to be recognized over a weighted — average period of 2.07 years. The fair value (at vest date) of shares vested during the year ended December 31, 2006, was $1.2 million.
 
Employee Stock Purchase Plan.  The Employee Stock Purchase Plan (“ESPP”), established in 1977, provides substantially all full-time employees of the Company, certain subsidiaries and certain other affiliated entities, with the right to subscribe to an aggregate of 11.4 million shares of common stock. Employees may


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

elect to withhold an amount from payroll on the offering date in exchange for rights to purchase a fixed number of designated shares of the Company’s common stock. For offerings under the Eighteenth, Seventeenth and Sixteenth Offerings, the purchase prices for shares was equal to 90% of the average market price on either the exercise date or the offering date, whichever is lower. Under SFAS 123R, both the 10% discount in grant price and the 90% share option are valued to derive the award’s fair value. The awards vest and the expense is recognized ratably over one year. The following table summarizes activity related to the various ESPP offerings:
 
                                                         
    Offering Date     Exercise Date     Received
 
          Purchase
    Shares
          Purchase
    Shares
    from
 
    Date     Price     Subscribed     Date Issued     Price     Issued     Employees(i)  
                                        (In millions)  
 
Eighteenth offering
    October 31, 2006     $ 25.97       101,737           $           $  
Seventeenth offering
    October 31, 2005       20.10       140,867       January 31, 2007       20.10       114,554       2.3  
Sixteenth offering
    October 29, 2004       15.14       119,384       January 24, 2006       15.14       109,062       1.7  
 
 
(i) Represents amounts received from employees through payroll deductions for share purchases under applicable offering.
 
The fair value of the ESPP stock purchase rights is estimated on the date of grant using the Black-Scholes option pricing model. The weighted average assumptions used were as follows:
 
                         
    Eighteenth
    Seventeenth
    Sixteenth
 
    Offering     Offering     Offering  
 
Expected dividends
    0 %     0 %     0 %
Expected volatility
    32 %     28 %     27 %
Risk free interest rate
    4.99 %     4.15 %     2.85 %
Expected life (years)
    1       1       1  
Fair value at grant date
  $ 7.15     $ 5.12     $ 2.96  
 
Compensation expense of $0.6 million was recognized for ESPP option awards for the year ended December 31, 2006. At December 31, 2006, there were 4.1 million remaining shares available for future ESPP offerings.
 
Note 10.   Profit Sharing and Other Postretirement Benefits
 
Health and Welfare.  Certain U.S. employees that have met age and service requirements are eligible for life insurance coverage and medical benefits during retirement. The retiree medical plan is contributory and provides benefits to retirees, their covered dependents and beneficiaries. The plan provides for annual adjustments to retiree contributions, and also contains, depending on the coverage selected, certain deductibles, co-payments, co-insurance, and coordination with Medicare. Certain management employees also maintain their status under a collective bargaining agreement, which permits them access to post-retirement medical under the multiemployer plan described below. The life insurance plan is non-contributory and covers retirees only. The Company’s policy, in most cases, is to fund benefits payable under these plans as the obligations become due. However, certain plan assets (money market funds held in a life insurance company) exist with respect to life insurance benefits.
 
KCSM Union Pension.  Under the provisions of a bargaining agreement for covered employees in Mexico, the Company provides a substantive pension benefit in the form of a lump-sum post-retirement payment to retirees who leave the Company after age 60. The benefit to retirees is based on a statutory termination indemnity calculation under Mexico law which is based on the retiree’s salary at the time of retirement and the number of years of credited service. The Company’s practice is to fund benefits under this program as the obligations become due.


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

 
The Company uses December 31 as the measurement date for its pension and post-retirement benefit obligations.
 
Net Periodic Benefit Cost, Plan Obligations and Funded Status
 
Components of the net cost (benefit) for these plans were as follows for the years ended December 31 (in millions):
 
                                         
    Health and Welfare     Pension  
    2006     2005     2004     2006     2005(i)  
 
Service cost
  $ 0.1     $ 0.1     $ 0.2     $ 1.7     $ 1.1  
Interest cost
    0.5       0.5       0.6       1.0       0.6  
Expected return on plan assets
                             
Actuarial (gain) loss (ii)
    (0.7 )     0.1       (1.0 )     (2.6 )     0.7  
Prior service credit (iii)
    (0.3 )                        
                                         
Net periodic cost (benefit) recognized
  $ (0.4 )   $ 0.7     $ (0.2 )   $ 0.1     $ 2.4  
                                         
 
 
(i) The obligation related to the KCSM pension was acquired with the change in control and consolidation of KCSM beginning April 1, 2005. The pension cost presented for 2005 represents an estimated cost for the nine month period from April 1, 2005 through December 31, 2005. Prior to April 1, 2005, KCSM was accounted for as an equity method investee. The pension obligation was established during the finalization of purchase accounting (see Note 4). The pension costs since the date of acquisition have been included in the results for the year ended December 31, 2006.
 
(ii) Net benefit costs above do not include a component for the amortization of actuarial gains or losses as the Company’s policy is to recognize such gains and losses immediately.
 
(iii) During 2005, the Company revised its medical plan to exclude prescription drug coverage available under Medicare part D. This negative plan amendment generated an unrecognized prior service benefit of $2.3 million which is being amortized over the estimated remaining life of the affected participants of 9.5 years.


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

 
The following table reconciles the change in the benefit obligation, fair value of plan assets, change in the funded status, and the accrued benefit cost as of and for each of the years ended December 31 (in millions):
 
                                 
    Health and Welfare     Pension  
    2006     2005     2006     2005(i)  
 
Benefit obligation at beginning of year
  $ 8.6     $ 9.1     $ 12.4     $ 10.0  
Obligation from acquisition of Mexrail
          2.0              
Plan amendment
          (2.3 )            
Service cost
    0.1       0.1       1.7       1.1  
Interest cost
    0.5       0.5       1.0       0.6  
Actuarial (gain) loss
    (0.7 )     0.1       (2.6 )     0.7  
Benefits paid, net of retiree contributions(ii)
    (1.3 )     (0.9 )     (0.4 )      
                                 
Benefit obligation at end of year
    7.2       8.6       12.1       12.4  
                                 
Fair value of plan assets at beginning of year
    0.7       0.8                  
Actual return on plan assets
    (0.1 )     0.1                  
Benefits paid, net of contributions (ii)
    (0.1 )     (0.2 )                
                                 
Fair value of plan assets at end of year
    0.5       0.7                  
                                 
Funded status
    (6.7 )     (7.9 )     (12.1 )     (12.4 )
Unrecognized prior service benefit (iii)
          (2.3 )            
                                 
Accrued benefit cost
  $ (6.7 )   $ (10.2 )   $ (12.1 )   $ (12.4 )
                                 
 
 
(i) The obligation related to the KCSM pension was acquired with the change in control and consolidation of KCSM beginning April 1, 2005. The beginning obligation presented for 2005 represents the obligation as of the acquisition on April 1, 2005 and the 2005 activity as presented is for the nine month period ended December 31, 2005.
 
(ii) Benefits paid for the reconciliation of the benefit obligation include both medical and life insurance benefits, whereas benefits paid from the reconciliation of the funded status include only life insurance benefits. Plan assets relate only to life insurance benefits. Medical benefits are funded as obligations become due.
 
(iii) The Company adopted the provisions of SFAS 158 for the year ended December 31, 2006. Accordingly, the unrecognized prior service benefit related to the plan amendment in 2005 ($2.1 million at December 31, 2006) was reclassified from liabilities and has been included as a component of accumulated other comprehensive income.
 
Assumptions
 
The assumptions used to determine benefit obligations and costs are selected based on current and expected market conditions. Discount rates are selected based on low risk government bonds with cash flows approximating the timing of expected benefit payments. The Mexico bond market is utilized for the KCSM pension obligation and the U.S. bond market is utilized for the U.S. health and welfare obligation. The expected rate of return on life insurance plan assets is determined using historical and forward looking returns for similar investments over the period that the benefits are expected to be paid.


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

 
Weighted average assumptions used to determine benefit obligations were as follows for the years ended December 31:
 
                                 
    Health and Welfare     Pension  
    2006     2005     2006     2005  
 
Discount rate
    5.75 %     5.40 %     8.00 %     8.00 %
Rate of compensation increase
    n/a       n/a       5.00 %     5.50 %
 
Weighted average assumptions used to determine net benefit cost for the periods were as follows for the years ended December 31:
 
                                 
    Health and Welfare     Pension  
    2006     2005     2006     2005  
 
Discount rate
    5.40 %     5.65 %     8.00 %     8.00 %
Expected long-term rate of return on plan assets
    3.00 %     6.25 %     n/a       n/a  
Rate of compensation increase
    n/a       n/a       5.00 %     5.50 %
 
The Company’s health care costs, excluding former Gateway Western and MidSouth participants, are limited to the increase in the Consumer Price Index (“CPI”) with a maximum annual increase of 5%. Accordingly, health care costs in excess of the CPI limit will be borne by the plan participants, and therefore assumptions regarding health care cost trends are not applicable. The following table presents the assumed health care cost trends related to Gateway Western and Midsouth participants:
 
                         
    2006     2005     2004  
 
Health care trend rate for next year
    9.00 %     10.00 %     10.25 %
Ultimate trend rate
    5.00 %     5.00 %     5.25 %
Year that rate reaches ultimate rate
    2010       2010       2009  
 
Cash Flows
 
The following table represents benefit payments expected to be paid, which reflect expected future service, as appropriate, for each of the next five years and the aggregate five years thereafter (in millions):
 
                 
    Health and
       
Year
  Welfare     Pension  
 
2007
  $ 0.9     $ 1.0  
2008
    0.9       0.3  
2009
    0.9       0.4  
2010
    0.8       0.5  
2011
    0.8       0.7  
2012 — 2016
    3.5       8.9  
 
Multi-Employer Plan.  Under collective bargaining agreements, KCSR participates in a multi-employer benefit plan, which provides certain post-retirement health care and life insurance benefits to eligible union employees and certain retirees. Premiums under this plan are expensed as incurred and were $2.6 million, $2.6 million, and $1.9 million for the years ended December 31, 2006, 2005 and 2004, respectively. Based on existing rates, premium amounts are not expected to change substantially in 2007 as compared to 2006.
 
401(k) and Profit Sharing Plan.  The Company sponsors the KCS 401(k) and Profit Sharing Plan (the “401(k) plan”), whereby participants can choose to make contributions in the form of salary deductions pursuant to section 401(k) of the Internal Revenue Code. The Company matches 401(k) contributions up to a


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

maximum of 5% of compensation. For the years ended December 31, 2006, 2005 and 2004, the Company expensed $1.5 million, $1.4 million, and $1.2 million, respectively, related to the KCS 401(k) and Profit Sharing Plan.
 
Note 11.   Commitments and Contingencies
 
Litigation.  The Company is a party to various legal proceedings and administrative actions, all of which are of an ordinary, routine nature and incidental to its operations. Included in these proceedings are various tort claims brought by current and former employees for job related injuries and by third parties for injuries related to railroad operations. KCS aggressively defends these matters and has established liability reserves which management believes are adequate to cover expected costs. Although it is not possible to predict the outcome of any legal proceeding, in the opinion of management, other than those proceedings described in detail below, such proceedings and actions should not, individually, or in the aggregate, have a material adverse effect on the Company’s financial condition. However, a material adverse outcome in one or more of these proceedings could have a material adverse impact on the operating results of a particular period.
 
Reinsurance Litigation.  As previously disclosed in the Company’s quarterly reports on Form 10-Q, insurance companies who provided insurance to the Company filed an action in federal court in Vermont (“Reinsurance Litigation”) seeking a declaration that they have no obligation to indemnify the Company concerning a particular casualty claim. That claim, styled Kemp, et al v. The Kansas City Southern Railway Company, et al, was filed in the Circuit Court of Jackson County, Missouri (“Kemp Litigation”) and went to trial in September 2006. The Company reached a settlement with the plaintiffs in the Kemp Litigation. The Company also reached settlements with various parties, including several of the insurance companies involved in the Reinsurance Litigation, to indemnify the Company for a significant portion of the settlement. The Kemp settlement is fully reflected in the Company’s financial statements and the Company has no further risk associated with this litigation. The Company is, however, continuing the Reinsurance Litigation against certain other insurance companies, seeking to establish their obligation to indemnify the Company for their share of the settlement with Kemp.
 
Environmental Liabilities.  The Company’s U.S. operations are subject to extensive federal, state and local environmental laws and regulations. The major U.S. environmental laws to which the Company is subject include, among others, the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA,” also known as the Superfund law), the Toxic Substances Control Act, the Federal Water Pollution Control Act, and the Hazardous Materials Transportation Act. CERCLA can impose joint and several liabilities for cleanup and investigation costs, without regard to fault or legality of the original conduct, on current and predecessor owners and operators of a site, as well as those who generate, or arrange for the disposal of, hazardous substances. The Company does not believe that compliance with the requirements imposed by the environmental legislation will impair its competitive capability or result in any material additional capital expenditures, operating or maintenance costs. The Company is, however, subject to environmental remediation costs as described below.
 
The Mexican operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment through the establishment of standards for water discharge, water supply, emissions, noise pollution, hazardous substances and transportation and handling of hazardous and solid waste. The Mexican government may bring administrative and criminal proceedings and impose economic sanctions against companies that violate environmental laws, and temporarily or even permanently close non-complying facilities.
 
The risk of incurring environmental liability is inherent in the railroad industry. As part of serving the petroleum and chemicals industry, the Company transports hazardous materials and has a professional team available to respond and handle environmental issues that might occur in the transport of such materials. Additionally, the Company is a partner in the Responsible Care® program and, as a result, has initiated certain


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

additional environmental, health and safety programs. The Company performs ongoing reviews and evaluations of the various environmental programs and issues within the Company’s operations, and, as necessary, takes actions intended to limit the Company’s exposure to potential liability.
 
The Company owns property that is, or has been, used for industrial purposes. Use of these properties may subject the Company to potentially material liabilities relating to the investigation and cleanup of contaminants, claims alleging personal injury, or property damage as the result of exposures to, or release of, hazardous substances. Although the Company is responsible for investigating and remediating contamination at several locations, based on currently available information, the Company does not expect any related liabilities, individually or collectively, to have a material impact on its results of operations, financial position or cash flows. Should the Company become subject to more stringent cleanup requirements at these sites, discover additional contamination, or become subject to related personal or property damage claims, the Company could incur material costs in connection with these sites.
 
The Company records liabilities for remediation and restoration costs related to past activities when the Company’s obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance activities to current operations are expensed as incurred. The Company’s recorded liabilities for these issues represent its best estimates (on an undiscounted basis) of remediation and restoration costs that may be required to comply with present laws and regulations. Although these costs cannot be predicted with certainty, management believes that the ultimate outcome of identified matters will not have a material adverse effect on the Company’s consolidated results of operations, financial condition or cash flows.
 
Environmental remediation expense was $3.1 million for the year ended December 31, 2006, and was included in purchased services expense on the consolidated statements of income. Additionally, as of December 31, 2006, KCS had a liability for environmental remediation of $7.8 million. This amount was derived from a range of reasonable estimates based upon the studies and site surveys described above and in accordance with SFAS 5.
 
Casualty Claim Reserves.  The Company’s casualty and liability reserve for its U.S. business segment is based on a study by an independent third party actuarial firm performed on an undiscounted basis. The reserve is based on claims filed and an estimate of claims incurred but not yet reported. While the ultimate amount of claims incurred is dependent on various factors, it is management’s opinion that the recorded liability is a reasonable estimate of aggregate future claims. Adjustments to the liability are reflected as operating expenses in the period in which the adjustments are known. Casualty claims in excess of self-insurance levels are insured up to certain coverage amounts, depending on the type of claim and year of occurrence. The activity in the reserve follows (in millions):
 
                 
    2006     2005  
 
Balance at beginning of year
  $ 103.9     $ 52.8  
Liability acquired in the Mexrail acquisition
          13.9  
Accruals, net (includes the impact of actuarial studies)
    35.0       57.6  
Payments
    (21.5 )     (20.4 )
                 
Balance at end of year
  $ 117.4     $ 103.9  
                 
 
Based on an updated study of casualty reserves for data through November 30, 2006 and the settlement of the Kemp case; the reserves for FELA, third party, and occupational illness claims are reflected in the table above for the year ended December 31, 2006. The changes to the reserve in the current year reflect the Kemp settlements and favorable loss experience in 2006.
 
During the third quarter of 2005, the Company initiated a new comprehensive actuarial study of all of its casualty reserves. Based on that study, the reserves for FELA, third-party and occupational illness claims were


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Notes to Consolidated Financial Statements — (Continued)

increased, resulting in a charge to third quarter operating income of $37.8 million. The charge reflects the impact of higher settlements for major FELA and third-party claims and significant increases in the frequency of these claims in 2004 and 2005. In addition, the charge includes reserves for occupational illness including asbestos-related claims that were established on an actuarial basis for the first time.
 
Based on the results of the actuarial study, reserves for FELA and third-party claims were increased $30.3 million. The majority of these increases are attributable to adverse experience occurring since the previous year’s study, including an increase in the number of new claims and adverse development in the dollar amount of potential settlements for many significant prior claims.
 
Management believes that its previous reserve estimates for those prior claims were reasonable based on the information available at the time. The Company is continuing its practice of accruing monthly for estimated claim costs at levels recommended by the actuarial study and evaluation of recent known trends, and those accruals have been increased accordingly.
 
Disputes Relating to Payments for the Use of Trackage and Haulage Rights and Interline Services.  KCSM and Ferromex both initiated administrative proceedings seeking a determination by the Secretaria de Communicaciones y Transportes (“Secretariat of Communications and Transports” or “SCT”) of the rates that the companies should pay each other in connection with the use of trackage and haulage rights and interline and terminal services. The SCT, on March 13, 2002, issued rulings 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 and, following trial and appellate court decisions, the Mexican Supreme Court on February 24, 2006, sustained KCSM’s appeal of the SCT’s trackage and haulage rights ruling, vacating the ruling and ordering the SCT to issue a new ruling consistent with the Court’s opinion. KCSM has not yet received the written opinion of the Mexican Supreme Court relating to the decision nor has the Mexican Supreme Court decided the interline and terminal services appeal. The Company believes that even if the rates set in 2002 become effective, there will be no material adverse effect on KCS’ results of operations. On October 2, 2006, KCS was served with a claim raised by Ferromex in which Ferromex asked for information concerning the interline traffic between KCSM and Ferromex, from January 1, 2002, through December 31, 2004, and an answer to this claim has been filed.
 
Disputes Relating to the Scope of the Mandatory Trackage Rights.  The SCT issued rulings determining Ferromex’s trackage rights in Monterrey in 2002. KCSM and Ferromex both appealed the SCT’s rulings. KCSM obtained a favorable ruling at the administrative federal court level. Ferromex appealed the ruling. The case was remanded to the Administrative Federal Court with the instructions to consider additional arguments before issuing its ruling. KCSM is still awaiting that ruling, but does not expect the ruling to have a material adverse effect on its financial condition or results of operations.
 
Claims Asserted under the TMM Acquisition Agreement.  As part of the acquisition of Grupo KCSM in 2005, KCS issued escrow notes totaling $47.0 million which are subject to reduction for certain potential losses related to incorrect representations and warranties or breaches of covenants in the Acquisition Agreement by TMM. On January 29, 2007, KCS advised TMM that KCS intended to assert claims for indemnification under the acquisition agreement related to representations and warranties made by TMM. On February 1, 2007, KCS received notice from TMM indicating that TMM would seek damages from KCS under the Acquisition Agreement, aggregating approximately $43 million as well as other unspecified damages. The parties are obligated under the Acquisition Agreement to attempt to resolve their differences informally and, if not successful, then to submit them to binding arbitration.
 
Acquisitions of Locomotives.  KCSM entered into an agreement with General Electric Company (“GE”) on August 14, 2006, to acquire 30 locomotives at a cost of approximately $63.7 million. Of the 30 locomotives, KCSM has taken legal possession of 22 as of December 31, 2006 with the remainder to be completed and delivered in the first quarter of 2007. The 22 locomotives where legal possession has been


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

taken have been recorded as assets held for sale at year-end. Upon completion and delivery of all 30 units, the Company will enter into a sale-leaseback transaction with the locomotives.
 
On August 25, 2006, KCSR entered into an agreement with Electro-Motive Diesel, Inc. (“EMD”) to acquire 30 locomotives to be delivered June 2007 through September 2007 at a total cost of $61.5 million. The Company intends to finance the acquisitions with equipment lease financings treated as operating leases.
 
Letters of Intent.  KCSR and KCSM entered into a letter of intent with GE on September 28, 2006, to acquire 80 locomotives to be delivered in late 2007 through August 2008 at an aggregate cost of approximately $160.8 million. KCSR intends to acquire 30 of these locomotives and KCSM intends to acquire the other 50. The letter of intent also provides KCSR and KCSM with an option to acquire an additional aggregate 40 locomotives for delivery in 2008. KCSR and KCSM each anticipates entering into purchase agreements with GE in the first quarter of 2007 with respect to the 80 locomotives. KCSR and KCSM entered into a letter of intent with EMD on November 29, 2006, to acquire 70 locomotives for delivery in October 2007 through April 2008 at an aggregate cost of approximately $140.9 million. KCSR intends to acquire 30 of these locomotives and KCSM intends to acquire the other 40. The Company intends to finance the acquisitions with equipment lease financings treated as operating leases.
 
Panama Canal Railway Company.  Under certain limited conditions, the Company is a guarantor for up to $5.6 million of cash deficiencies associated with the operations of PCRC. In addition, the Company is a guarantor for up to $3.0 million of equipment loans. Further, if the Company or its partner terminates the concession contract without the consent of IFC, the Company is a guarantor for up to half of the outstanding senior loans. See Note 3.
 
Note 12.   Derivative Instruments
 
The Company does not engage in the trading of derivatives. The Company’s objective for using derivative instruments is to manage fuel price risk and currency fluctuations. In general, the Company enters into derivative transactions in limited situations based on management’s assessment of current market conditions and perceived risks. However, management intends to respond to evolving business and market conditions and in doing so, may enter into such transactions more frequently as deemed appropriate.
 
Fuel Derivative Transactions.  The Company was a party to fuel swap agreements for 1.3 million gallons of fuel on December 31, 2006. Fuel hedging transactions, including fuel swaps as well as forward purchase commitments, resulted in a decrease in fuel expense of $0.7 million, $2.4 million and $3.0 million in 2006, 2005 and 2004, respectively. Subsequent to December 31, 2006, KCS entered into fuel swap agreements for 1.3 million gallons.
 
Foreign Exchange Contracts.  The purpose of KCSM’s foreign exchange contracts is to limit the risks arising from exchange rate fluctuations in its Mexican peso-denominated monetary assets and liabilities. Management determines the nature and quantity of any hedging transactions based upon net asset exposure and market conditions. On December 31, 2006, KCSM had one peso call option outstanding in the notational amount of $1.7 million based on an exchange rate per dollar of 14.50 Mexican pesos. The option expires May 30, 2007. On December 31, 2005, KCSM had two Mexican peso call options in the notational amounts of $1.2 million and $1.7 million, based on the average exchange rate of 13.00 and 12.50 pesos per dollar, respectively. These options expired on September 6 and May 30, 2006, respectively.
 
Foreign Currency Balances.  At December 31, 2006, KCSM had monetary assets and liabilities denominated in Mexican pesos of Ps2,304 million and Ps651 million, respectively. At December 31, 2005, KCSM had monetary assets and liabilities denominated in Mexican pesos of Ps1,088 million and Ps549 million, respectively. At December 31, 2006 and 2005, the exchange rate was 10.82 pesos per dollar and 10.64 pesos per dollar, respectively.


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

 
Note 13.   Quarterly Financial Data (Unaudited)
 
                                 
    Fourth     Third     Second     First  
    In millions, except per share amounts  
 
2006
                               
Revenues
  $ 442.4     $ 415.7     $ 413.1     $ 388.4  
Operating income
    88.2       77.3       77.5       61.3  
Net income
    40.6       31.3       24.1       12.9  
Per share data:
                               
Basic earnings per common share
  $ 0.48     $ 0.35     $ 0.26     $ 0.11  
Diluted earnings per common share
    0.41       0.32       0.24       0.11  
Dividends per share:
                               
$25 par preferred stock
  $ 0.25     $ 0.25     $ 0.25     $ 0.25  
$1 par series C preferred stock
                      5.31  
$1 par series D preferred stock
                      9.40  
Stock price ranges:
                               
$25 par preferred:
                               
 — High
  $ 23.65     $ 23.50     $ 23.75     $ 23.50  
 — Low
    22.75       22.25       22.00       22.00  
Common:
                               
 — High
  $ 30.00     $ 28.41     $ 27.75     $ 26.17  
 — Low
    26.49       23.24       23.46       22.32  
2005
                               
Revenues
  $ 388.1     $ 384.6     $ 381.1     $ 198.2  
Operating income (loss)
    47.7       (1.9 )     (8.3 )     24.8  
Net income (loss)
    5.2       112.7       (25.1 )     8.1  
Per share data:
                               
Basic earnings (loss) per common share
  $ 0.03     $ 1.35     $ (0.33 )   $ 0.09  
Diluted earnings (loss) per common share
    0.03       1.14       (0.33 )     0.09  
Dividends per share:
                               
$25 par preferred stock
  $ 0.25     $ 0.25     $ 0.25     $ 0.25  
$1 par series C preferred stock(i)
    5.31       5.31       5.31       5.31  
$1 par series D preferred stock
                       
Stock price ranges:
                               
$25 par preferred:
                               
 — High
  $ 23.50     $ 23.50     $ 23.50     $ 24.00  
 — Low
    22.00       22.60       22.00       21.45  
Common:
                               
 — High
  $ 25.71     $ 23.44     $ 21.00     $ 20.34  
 — Low
    20.55       19.47       18.45       16.05  
 
 
(i) The addition of four quarters of dividends on the $1 Par Preferred Stock Series C do not total the annual amount of $21.25, due to rounding.


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

 
Note 14.   Condensed Consolidating Financial Information
 
As discussed in Note 6, KCSR has outstanding $200 million of 91/2% Notes due 2008 and $200 million of 71/2% Notes due 2009. These notes are unsecured obligations of KCSR, however, they are also jointly and severally and fully and unconditionally guaranteed on an unsecured senior basis by KCS and certain wholly-owned domestic subsidiaries. For each of these note issues, KCSR registered exchange notes with the SEC that have substantially identical terms and associated guarantees and all of the initial senior notes for each issue have been exchanged for $200 million of registered exchange notes for each respective note issue.
 
The accompanying condensed consolidating financial information (in millions) has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantors and affiliates whose securities collateralize an issue registered or being registered.” This condensed information is not intended to present the financial position, results of operations and cash flows of the individual companies or groups of companies in accordance with U.S. GAAP.
 
Condensed Consolidating Statements of Income
 
                                                 
    2006  
                Guarantor
    Non-Guarantor
    Consolidating
    Consolidated
 
    Parent     KCSR     Subsidiaries     Subsidiaries     Adjustments     KCS  
 
Revenues
  $     $ 789.3     $ 10.0     $ 881.3     $ (20.9 )   $ 1,659.7  
Operating expenses
    16.7       631.7       19.5       708.4       (20.9 )     1,355.4  
                                                 
Operating income (loss)
    (16.7 )     157.6       (9.5 )     172.9             304.3  
Equity in net earnings (losses) of unconsolidated affiliates
    130.2       (1.7 )           4.9       (126.1 )     7.3  
Interest expense
    (5.7 )     (65.1 )     (1.7 )     (96.1 )     1.4       (167.2 )
Debt retirement costs
          (2.2 )           (2.6 )           (4.8 )
Foreign exchange loss
                      (3.7 )           (3.7 )
Other income
    0.7       10.7             8.7       (1.4 )     18.7  
                                                 
Income (loss) before income taxes and minority interest
    108.5       99.3       (11.2 )     84.1       (126.1 )     154.6  
Income tax expense (benefit)
    (0.7 )     32.1       (4.3 )     18.3             45.4  
Minority interest
    0.3                               0.3  
                                                 
Net income (loss)
  $ 108.9     $ 67.2     $ (6.9 )   $ 65.8     $ (126.1 )   $ 108.9  
                                                 
 


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

                                                 
    2005  
                Guarantor
    Non-Guarantor
    Consolidating
    Consolidated
 
    Parent     KCSR     Subsidiaries     Subsidiaries     Adjustments     KCS  
 
Revenues
  $     $ 725.9     $ 21.9     $ 637.1     $ (32.9 )   $ 1,352.0  
Operating expenses
    19.1       650.7       22.9       629.9       (32.9 )     1,289.7  
                                                 
Operating income (loss)
    (19.1 )     75.2       (1.0 )     7.2             62.3  
Equity in net earnings (losses) of unconsolidated affiliates
    127.1       1.6             (4.1 )     (121.7 )     2.9  
Interest income (expense)
    (5.7 )     (58.5 )     2.4       (73.3 )     1.6       (133.5 )
Debt retirement costs
                      (4.4 )           (4.4 )
Foreign exchange gain
                      3.5             3.5  
VAT/Put settlement gain (loss), net
    (9.0 )                 140.9             131.9  
Other income
    2.2       6.3       0.1       6.3       (1.6 )     13.3  
                                                 
Income before income taxes and minority interest
    95.5       24.6       1.5       76.1       (121.7 )     76.0  
Income tax expense (benefit)
    (5.4 )     1.7       0.2       (3.6 )           (7.1 )
Minority interest
                      (17.8 )           (17.8 )
                                                 
Net income
  $ 100.9     $ 22.9     $ 1.3     $ 97.5     $ (121.7 )   $ 100.9  
                                                 

 
                                                 
    2004  
                Guarantor
    Non-Guarantor
    Consolidating
    Consolidated
 
    Parent     KCSR     Subsidiaries     Subsidiaries     Adjustments     KCS  
 
Revenues
  $     $ 635.2     $ 20.5     $ 14.1     $ (30.3 )   $ 639.5  
Operating expenses
    14.7       529.0       19.1       23.5       (30.3 )     556.0  
                                                 
Operating income (loss)
    (14.7 )     106.2       1.4       (9.4 )           83.5  
Equity in net earnings (losses) of unconsolidated affiliates
    35.1       (0.8 )           (3.9 )     (34.9 )     (4.5 )
Interest expense
    (0.8 )     (43.6 )     (0.4 )           0.4       (44.4 )
Other income
    0.3       16.3             1.4       (0.4 )     17.6  
Debt retirement costs
          (4.2 )                       (4.2 )
                                                 
Income (loss) before income taxes
    19.9       73.9       1.0       (11.9 )     (34.9 )     48.0  
Income tax expense (benefit)
    (4.5 )     31.0       0.4       (3.3 )           23.6  
                                                 
Net income (loss)
  $ 24.4     $ 42.9     $ 0.6     $ (8.6 )   $ (34.9 )   $ 24.4  
                                                 

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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Balance Sheets
 
                                                 
    December 31, 2006  
                Guarantor
    Non-Guarantor
    Consolidating
    Consolidated
 
    Parent     KCSR     Subsidiaries     Subsidiaries     Adjustments     KCS  
 
Assets:
                                               
Current assets
  $ 4.8     $ 253.4     $ 4.8     $ 355.8     $ (12.8 )   $ 606.0  
Investments held for operating purposes and affiliate investment
    1,952.3       429.9             450.8       (2,768.1 )     64.9  
Property and equipment, net
    0.6       1,163.7       227.9       1,060.5       (0.5 )     2,452.2  
Concession assets, net
                      1,303.3             1,303.3  
Other assets
    5.0       31.4             174.5             210.9  
                                                 
Total assets
  $ 1,962.7     $ 1,878.4     $ 232.7     $ 3,344.9     $ (2,781.4 )   $ 4,637.3  
                                                 
Liabilities and equity:
                                               
Current liabilities
  $ 353.4     $ (229.5 )   $ 140.1     $ 386.1     $ (12.7 )   $ 637.4  
Long-term debt
    0.2       733.4       0.6       897.6             1,631.8  
Payables to affiliates
    32.4                               32.4  
Deferred income taxes
    (10.4 )     361.0       76.5       (9.8 )           417.3  
Other liabilities
    4.7       94.5       13.0       123.8       (0.3 )     235.7  
Minority interest
          31.4             100.3       (31.4 )     100.3  
Stockholders’ equity
    1,582.4       887.6       2.5       1,846.9       (2,737.0 )     1,582.4  
                                                 
Total liabilities and equity
  $ 1,962.7     $ 1,878.4     $ 232.7     $ 3,344.9     $ (2,781.4 )   $ 4,637.3  
                                                 
 
                                                 
    December 31, 2005  
                Guarantor
    Non-Guarantor
    Consolidating
    Consolidated
 
    Parent     KCSR     Subsidiaries     Subsidiaries     Adjustments     KCS  
 
Assets:
                                               
Current assets
  $ 2.4     $ 476.1     $ 20.3     $ 233.3     $ (265.3 )   $ 466.8  
Investments held for operating purposes and affiliate investment
    1,715.4       435.8             464.2       (2,555.1 )     60.3  
Property and equipment, net
    0.1       1,334.0       239.3       724.9             2,298.3  
Concession assets, net
                      1,360.4             1,360.4  
Other assets
    10.9       19.6       5.3       218.0       (16.0 )     237.8  
                                                 
Total assets
  $ 1,728.8     $ 2,265.5     $ 264.9     $ 3,000.8     $ (2,836.4 )   $ 4,423.6  
                                                 
Liabilities and equity:
                                               
Current liabilities
  $ 202.2     $ 141.0     $ 240.2     $ 257.8     $ (267.5 )   $ 573.7  
Long-term debt
    0.2       738.1       0.6       925.0             1,663.9  
Payables to affiliates
    98.1             0.7       26.6       (45.0 )     80.4  
Deferred income taxes
    (3.5 )     424.6       (0.5 )     4.5       (15.9 )     409.2  
Other liabilities
    5.6       110.5       14.6       139.5             270.2  
Stockholders’ equity
    1,426.2       851.3       9.3       1,647.4       (2,508.0 )     1,426.2  
                                                 
Total liabilities and equity
  $ 1,728.8     $ 2,265.5     $ 264.9     $ 3,000.8     $ (2,836.4 )   $ 4,423.6  
                                                 


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

Condensed Consolidating Statements of Cash Flows
 
                                                 
    2006  
                Guarantor
    Non-Guarantor
    Consolidating
    Consolidated
 
    Parent     KCSR     Subsidiaries     Subsidiaries     Adjustments     KCS  
 
Operating activities:
                                               
Excluding intercompany activity
  $ (148.7 )   $ 225.4     $ 81.5     $ 128.0     $ (18.7 )   $ 267.5  
Intercompany activity
    187.7       (145.3 )     (80.5 )     19.4       18.7        
                                                 
Net cash provided
    39.0       80.1       1.0       147.4             267.5  
                                                 
Investing activities:
                                               
Capital expenditures
          (93.1 )           (148.7 )           (241.8 )
Proceeds from disposal of property
          26.9             3.1             30.0  
Contribution from NS for MSLLC (net of change in restricted contribution)
                      79.5             79.5  
Property investments in MSLLC
                      (37.8 )           (37.8 )
Other restricted cash
                      (3.0 )           (3.0 )
Proceeds from sales of investments, net
          8.2                         8.2  
Investments in and loans to affiliates
                      (1.1 )           (1.1 )
                                                 
Net cash used
          (58.0 )           (108.0 )           (166.0 )
                                                 
Financing activities:
                                               
Proceeds from issuance of long- term debt
          410.2             206.1             616.3  
Repayment of long-term debt
    (44.0 )     (409.3 )     (0.1 )     (205.1 )           (658.5 )
Debt issuance costs
          (7.5 )           (8.4 )           (15.9 )
Proceeds from stock plans
    8.6                               8.6  
Dividends paid
    (4.3 )                             (4.3 )
Excess tax benefit realized from options exercised
    .2                               .2  
                                                 
Net cash used
    (39.5 )     (6.6 )     (0.1 )     (7.4 )           (53.6 )
                                                 
Cash and cash equivalents:
                                               
Net increase (decrease)
    (0.5 )     15.5       0.9       32.0             47.9  
At beginning of year
    0.7       20.7       (0.9 )     10.6             31.1  
                                                 
At end of year
  $ 0.2     $ 36.2     $     $ 42.6     $     $ 79.0  
                                                 
 


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

                                                 
    2005  
                Guarantor
    Non-Guarantor
    Consolidating
    Consolidated
 
    Parent     KCSR     Subsidiaries     Subsidiaries     Adjustments     KCS  
 
Operating activities:
                                               
Excluding intercompany activity
  $ (1.1 )   $ 107.4     $ 11.3     $ 61.2     $     $ 178.8  
Intercompany activity
    17.3       (14.9 )     (8.9 )     6.5              
                                                 
Net cash provided
    16.2       92.5       2.4       67.7             178.8  
                                                 
Investing activities:
                                               
Capital expenditures
          (170.9 )     (3.5 )     (101.3 )           (275.7 )
Proceeds from disposal of property
          5.7             0.6             6.3  
Proceeds from investment sales
          (8.0 )                       (8.0 )
Investments in and loans to affiliates
    (9.9 )     (16.3 )           8.0       7.7       (10.5 )
Acquisition costs
    (10.1 )                             (10.1 )
Cash of Mexrail at acquisition
                      3.0             3.0  
Cash of KCSM at acquisition
                      5.5             5.5  
Repayment of loans to affiliates
          10.1             4.2       (14.3 )      
                                                 
Net cash used
    (20.0 )     (179.4 )     (3.5 )     (80.0 )     (6.6 )     (289.5 )
                                                 
Financing activities:
                                               
Proceeds from issuance of long- term debt
          20.3             624.4             644.7  
Repayment of long-term debt
    (1.0 )     62.7             (583.2 )           (521.5 )
Capital contribution
                      5.5       (5.5 )      
Proceeds of loans from affiliates
    5.2                         (5.2 )      
Repayment of loans from affiliates
    (6.7 )                 (10.6 )     17.3        
Debt issuance costs
          (2.9 )           (13.6 )           (16.5 )
Proceeds from stock plans
    1.7                               1.7  
Repurchase of common stock
    (200.4 )                             (200.4 )
Issuance of preferred stock, net proceeds
    203.9                               203.9  
Dividends paid
    (8.7 )                             (8.7 )
                                                 
Net cash provided (used)
    (6.0 )     80.1             22.5       6.6       103.2  
                                                 
Cash and cash equivalents:
                                               
Net increase (decrease)
    (9.8 )     (6.8 )     (1.1 )     10.2             (7.5 )
At beginning of year
    10.5       27.5       0.2       0.4             38.6  
                                                 
At end of year
  $ 0.7     $ 20.7     $ (0.9 )   $ 10.6     $     $ 31.1  
                                                 

 

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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

                                                 
    2004  
                Guarantor
    Non-Guarantor
    Consolidating
    Consolidated
 
    Parent     KCSR     Subsidiaries     Subsidiaries     Adjustments     KCS  
 
Operating activities:
                                               
Excluding intercompany activity
  $ (11.5 )   $ 156.2     $ 1.9     $ (3.9 )   $     $ 142.7  
Intercompany activity
    236.6       (239.7 )     (0.2 )     3.3              
                                                 
Net cash provided (used)
    225.1       (83.5 )     1.7       (0.6 )           142.7  
                                                 
Investing activities:
                                               
Capital expenditures
          (116.7 )     (0.5 )                 (117.2 )
Proceeds from disposal of property
          4.9                         4.9  
Other restricted cash
    (200.0 )                             (200.0 )
Investments in and loans to affiliates
    (41.7 )     (10.5 )           (9.3 )     6.5       (55.0 )
Proceeds from investment sales
    0.4                   0.1             0.5  
Repayment of loans to affiliates
                      8.8       (8.8 )      
Other, net
    (9.6 )     (0.4 )                       (10.0 )
                                                 
Net cash used
    (250.9 )     (122.7 )     (0.5 )     (0.4 )     (2.3 )     (376.8 )
                                                 
Financing activities:
                                               
Proceeds from issuance of long- term debt
          250.0                         250.0  
Repayment of long-term debt
          (106.6 )     (1.0 )                 (107.6 )
Proceeds of loans from affiliates
    6.5                         (6.5 )      
Repayment of loans from affiliates
    (8.8 )                       8.8        
Debt issuance costs
          (3.8 )                       (3.8 )
Proceeds from stock plans
    7.4                               7.4  
Dividends paid
    (8.7 )                             (8.7 )
                                                 
Net cash provided (used)
    (3.6 )     139.6       (1.0 )           2.3       137.3  
                                                 
Cash and cash equivalents:
                                               
Net increase (decrease)
    (29.4 )     (66.6 )     0.2       (1.0 )           (96.8 )
At beginning of year
    39.9       94.0       0.1       1.4             135.4  
                                                 
At end of year
  $ 10.5     $ 27.4     $ 0.3     $ 0.4     $     $ 38.6  
                                                 

 
Note 15.   Segment Reporting
 
The accompanying segment reporting information (in millions) has been prepared and presented pursuant to Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Operating units are defined as either U.S. or Mexico segments. Appropriate eliminations of revenue and reclassifications of operating revenues and expenses have been recorded in deriving

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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

consolidated data. The U.S. segment consists primarily of KCSR and Tex-Mex. The Mexico segment consists of Grupo KCSM, KCSM and Arrendadora.
 
                                 
    2006  
    U.S.     Mexico     Elimination     Consolidated  
 
Revenue
  $ 885.7     $ 774.0     $     $ 1,659.7  
                                 
Operating expenses:
                               
Compensation and benefits
    264.3       123.4             387.7  
Purchased services
    82.8       131.0       1.4       215.2  
Fuel
    140.8       112.8             253.6  
Equipment costs
    82.7       97.0             179.7  
Depreciation and amortization
    65.7       89.3             155.0  
Casualties and insurance
    44.9       8.5             53.4  
KCSM employees’ statutory profit sharing
          5.9             5.9  
Other
    78.9       27.4       (1.4 )     104.9  
                                 
Total operating expenses
    760.1       595.3             1,355.4  
                                 
Operating income
  $ 125.6     $ 178.7     $     $ 304.3  
                                 
Income before income taxes and minority interest
  $ 133.5     $ 87.2     $ (66.1 )   $ 154.6  
                                 
Total assets
  $ 3,464.7     $ 2,465.4     $ (1,292.8 )   $ 4,637.3  
Total liabilities
    1,750.6       1,204.0             2,954.6  
Capital expenditures
    125.7       116.1             241.8  
 
                                 
    2005  
    U.S.     Mexico     Elimination     Consolidated  
 
Revenue
  $ 804.4     $ 547.6     $     $ 1,352.0  
                                 
Operating expenses:
                               
Compensation and benefits
    244.8       95.6             340.4  
Purchased services
    84.6       108.7       1.8       195.1  
Fuel
    123.8       83.1             206.9  
Equipment costs
    68.9       80.9             149.8  
Depreciation and amortization
    60.0       67.7             127.7  
Casualties and insurance
    88.7       14.7             103.4  
KCSM employees’ statutory profit sharing
          41.1             41.1  
Other
    88.5       38.6       (1.8 )     125.3  
                                 
Total operating expenses
    759.3       530.4             1,289.7  
                                 
Operating income
  $ 45.1     $ 17.2     $     $ 62.3  
                                 
Income before income taxes and minority interest
  $ 90.0     $ 85.4     $ (99.4 )   $ 76.0  
                                 
Total assets
  $ 3,271.2     $ 2,418.3     $ (1,265.9 )   $ 4,423.6  
Total liabilities
    1,849.4       1,215.5       (67.5 )     2,997.4  
Capital expenditures
    203.7       72.0             275.7  


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Kansas City Southern
 
Notes to Consolidated Financial Statements — (Continued)

Note 16.   Subsequent Events

 
Preferred Stock Dividends.  On January 12, 2007, the Company declared a cash dividend on the Series C Preferred Stock and a stock dividend on the Series D Preferred Stock for dividends in arrears that were due May 15, 2006, August 15, 2006 and November 15, 2006, and the dividend payment due February 15, 2007. The dividends were paid on February 15, 2007, to stockholders of record on February 5, 2007. The Company also declared a cash dividend on the 4%, noncumulative Preferred Stock, payable April 3, 2007, to stockholders of record on March 12, 2007.
 
Consent Solicitation.  On January 29, 2007, KCSR commenced a consent solicitation to amend the indentures under which KCSR’s 91/2% Senior Notes due 2008 (“91/2% Notes”) and 71/2% Senior Notes due 2009 (“71/2% Notes”) were issued. The purpose of the consent solicitation was to (i) resolve an inconsistency in the inclusion of certain expenses, but not the income, of restricted subsidiaries in the calculation of the consolidated coverage ratio under the indentures, (ii) amend the definition of refinancing indebtedness to allow the inclusion of certain related premiums, interest, fees and expenses in permitted refinancing indebtedness and (iii) obtain waivers of any defaults arising from certain actions taken in the absence of such proposed amendments. On February 5, 2007, KCSR obtained the requisite consents from the holders of each series of Notes to amend their respective indentures as described above and executed supplemental indentures containing such amendments and waivers.
 
Credit Facility Waiver.  On January 31, 2007, KCS provided written notice to the lenders under the 2006 Credit Agreement of certain representation and other defaults under the 2006 Credit Agreement arising from the potential defaults which existed under KCSR indentures as described above. These defaults limited KCSR’s access to the revolving credit facility. In its notice of default, the Company also requested that the lenders waive these defaults. On February 5, 2007 the Company received a waiver of such defaults from all of the lenders under the 2006 Credit Agreement. The Company is currently not in default of the 2006 Credit Agreement and has access to the revolving credit facility.


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Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.  Controls and Procedures
 
(a) Disclosure Controls and Procedures
 
The Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the fiscal year for which this annual report on Form 10-K is filed. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the current disclosure controls and procedures are effective to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
 
(b) Changes in Internal Control over Financial Reporting
 
There have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter (the fourth quarter in the case of an annual report) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
(c) Internal Control over Financial Reporting
 
The report of management on the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) is included as “Management’s Report on Internal Control over Financial Reporting” in Item 8.
 
KPMG LLP, the independent registered public accounting firm that audited the Company’s financial statements contained herein, has issued an attestation report on management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. The attestation report is included in Item 8.
 
 
None.
 
Part III
 
The Company has incorporated by reference certain responses to the Items of this Part III pursuant to Rule 12b-23 under the Exchange Act and General Instruction G(3) to Form 10-K. The Company’s definitive proxy statement for the annual meeting of stockholders scheduled for May 3, 2007 (“Proxy Statement”), will be filed no later than 120 days after December 31, 2006.
 
Item 10.   Directors, Executive Officers and Corporate Governance
 
(a) Directors of the Company
 
The sections of the Company’s definitive proxy statement for the 2007 annual meeting of stockholders entitled “Proposal 1 — Election of Two Directors” and “The Board of Directors” are incorporated by reference in partial response to this Item 10.


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(b) Executive Officers of the Company
 
See “Executive Officers of KCS and Subsidiaries” in Part I, Item 4 of this annual report incorporated by reference herein for information about the executive officers of the Company.
 
(c) Audit Committee and Audit Committee Financial Experts
 
The section of the Company’s definitive proxy statement for the 2007 annual meeting of stockholders entitled “Board Committees — The Audit Committee” is incorporated by reference in partial response to this Item 10.
 
(d) Compliance with Section 16(a) of the Exchange Act
 
The response to Item 405 of Regulation S-K under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive proxy statement for the 2007 annual meeting of stockholders is incorporated by reference in partial response to this Item 10.
 
(e) Code of Ethics
 
The Company has adopted a Code of Business Conduct and Ethics (“Code of Ethics”) that applies to directors, officers (including, among others, the principal executive officer, principal financial officer and principal accounting officer) and employees. The Company has posted its Code of Ethics on its website (www.kcsouthern.com) and will post on its website any amendments to, or waivers from, a provision of its Code of Ethics that applies to the Company’s principal executive officer, principal financial officer or principal accounting officer as required by applicable rules and regulations. The Code of Ethics is available, in print, upon written request to the Corporate Secretary, P.O. Box 219335, Kansas City, Missouri 64121-9335.
 
(f) Annual Certification to the New York Stock Exchange
 
KCS’ common stock is listed on the New York Stock Exchange (“NYSE”). As a result, the Chief Executive Officer is required to make annually, and he made on May 22, 2006, a CEO’s Annual Certification to the New York Stock Exchange in accordance with Section 303A.12 of the NYSE Listed Company Manual stating that he was not aware of any violations by KCS of the NYSE corporate governance listing standards.
 
Item 11.   Executive Compensation
 
The sections of the Company’s definitive proxy statement for the 2007 annual meeting of stockholders entitled “Non-Management Director Compensation,” “Compensation Committee Report,” “Compensation Discussion and Analysis,” “Management Compensation Tables,” and “Board Committees — The Compensation Committee — Compensation Committee Interlocks and Insider Participation” are incorporated by reference in response to this Item 11.
 
Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The section of the Company’s definitive proxy statement for the 2007 annual meeting of stockholders entitled “Beneficial Ownership” is incorporated by reference in partial response to this Item 12.


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Equity Compensation Plan Information.
 
The following table provides information as of December 31, 2006, about the common stock that may be issued upon the exercise of options, warrants and rights, as well as shares remaining available for future issuance under the Company’s existing equity compensation plans.
 
                         
                Number of Securities
 
                Remaining Available
 
    Number of Securities
          for Future Issuance
 
    to be Issued
    Weighted-Average
    Under Equity Compensation
 
    Upon Exercise of
    Exercise Price of
    Plans — Excluding
 
    Outstanding Options,
    Outstanding Options,
    Securities Reflected in
 
Plan Category
  Warrants and Rights     Warrants and Rights     the First Column(i)  
 
Equity compensation plans:
                       
Approved by security holders
    2,940,332     $ 8.98       6,895,114  
Not approved by security holders
                 
                         
Total
    2,940,332     $ 8.98       6,895,114  
                         
 
 
(i) Includes 4,201,897 shares available for issuance under the Employee Stock Purchase Plan and 2,693,217 shares available for issuance under the 1991 Plan as awards in the form of Nonvested Shares, Bonus Shares, Performance Units or Performance Shares or issued upon the exercise of Options (including ISOs), stock appreciation rights or limited stock appreciation rights awarded under the 1991 Plan.
 
The Company has no knowledge of any arrangement the operation of which may at a subsequent date result in a change of control of the Company.
 
Item 13.   Certain Relationships and Related Transactions, and Director Independence
 
The sections of the Company’s definitive proxy statement for the 2007 annual meeting of stockholders entitled “Insider Disclosures,” “The Board of Directors — Non-Management Director Independence” and “Board Committees — The Compensation Committee — Compensation Committee Interlocks and Insider Participation” are incorporated by reference in response to this Item 13.
 
Item 14.   Principal Accountant Fees and Services
 
The sections of the Company’s definitive proxy statement for the 2007 annual meeting of stockholders entitled “Board Committees — the Audit Committee” and “Independent Registered Public Accounting Firm” are incorporated by reference in response to this Item 14.
 
Part IV
 
Item 15.   Exhibits and Financial Statement Schedules
 
(a)   List of Documents filed as part of this Report
 
(1) Financial Statements
 
The financial statements and related notes, together with the report of KPMG LLP appear in Part II Item 8, Financial Statements and Supplementary Data, of this Form 10-K.
 
(2) Financial Statement Schedules
 
The schedules and exhibits for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission appear in Part II Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.


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(3) List of Exhibits
 
(a) Exhibits
 
The Company has attached or incorporated by reference herein certain exhibits as specified below pursuant to Rule 12b-32 under the Exchange Act.
 
         
Exhibit
 
Description
 
    (2)     Plan of acquisition, reorganization, arrangement, liquidation or succession
  2 .1   Amended and Restated Acquisition Agreement, dated as of December 15, 2004, by and among KCS, KARA Sub, Inc., KCS Investment I, Ltd., KCS Acquisition Subsidiary, Inc., Caymex Transportation, Inc., Grupo TMM, S.A., TMM Holdings, S.A. de C.V., TMM Multimodal, S.A. de C.V. and Grupo Transportación Ferroviaria Mexicana, S.A. de C.V. (currently known as Grupo KCSM, S.A. de C.V. (“Grupo KCSM”)) (the “Amended Acquisition Agreement”), filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 21, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 2.1.
  2 .2   Stockholders’ Agreement by and among KCS, Grupo TMM, S.A., TMM Holdings, S.A. de C.V., TMM Multimodal, S.A. de C.V. and certain stockholders of Grupo TMM, S.A (the “Stockholders’ Agreement”), filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 21, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 2.2.
  2 .3   Registration Rights Agreement by and among KCS, Grupo TMM, S.A., TMM Multimodal, S.A. de C.V. and certain stockholders of Grupo TMM, S.A. (the “Acquisition Registration Rights Agreement”), filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on December 21, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 2.3.
  2 .4   Consulting Agreement by and between KCS and José F. Serrano International Business, S.A. de C.V. (the “Consulting Agreement”), filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on December 21, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 2.4.
  2 .5   Marketing and Services Agreement by and among KCSR, TMM Logistics, S.A. de C.V. and TFM, S.A. de C.V. (currently known as Kansas City Southern de México, S. de R.L. de C.V. (“KCSM”)) (the “Marketing and Services Agreement”), filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on December 21, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 2.5.
  2 .6   Rights Agreement, dated as of September 29, 2005, by and between KCS and UMB Bank, n.a. (the “2005 Rights Agreement”), filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 3, 2005 (File No. 1-4717), is incorporated herein by reference as Exhibit 2.6.
  2 .7   Registration Rights Agreement, dated November 21, 2006, among Kansas City Southern de México, S.A. de C.V. (currently known as Kansas City Southern de México, S. de R.L. de C.V. (“KCSM”)), Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, BBVA Securities Inc., BMO Capital Markets Corp., and Scotia Capital (USA) Inc. (the “2006 Registration Rights Agreement”), filed as Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on November 28, 2006 (File No. 1-4717), is incorporated herein by reference as Exhibit 2.7.
    (3)     Articles of Incorporation and Bylaws
        Articles of Incorporation
  3 .1   Exhibit 3.1 to the Company’s Registration Statement on Form S-4 originally filed July 12, 2002 (Registration No. 333-92360), as amended and declared effective on July 30, 2002 (the “2002 S-4 Registration Statement”), Restated Certificate of Incorporation, is incorporated herein by reference as Exhibit 3.1.
        Bylaws
  3 .2   The Amended and Restated By-Laws of Kansas City Southern, as amended on January 18, 2007, are attached to this Form 10-K as Exhibit 3.2.
    (4)     Instruments Defining the Right of Security Holders, Including Indentures
  4 .1   The Fourth, Seventh, Eighth, Eleventh, Twelfth, Thirteenth, Fourteenth, Fifteenth and Sixteenth paragraphs of the Company’s Restated Certificate of Incorporation. (See Exhibit 3.1).


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Exhibit
 
Description
 
  4 .2   Article I, Sections 1, 3 and 11 of Article II, Article V and Article VIII of the Company’s Bylaws. (See Exhibit 3.2).
  4 .3   Indenture, dated July 1, 1992, between Kansas City Southern and The Chase Manhattan Bank (the “1992 Indenture”) filed as Exhibit 4 to the Company’s Shelf Registration of $300 million of Debt Securities on Form S-3 filed June 19, 1992 (Registration No. 33-47198) and as Exhibit 4(a) to the Company’s Form S-3 filed March 29, 2003 (Registration No. 33-60192) registering $200 million of Debt Securities, is incorporated herein by reference as Exhibit 4.3.
  4 .3.1   Supplemental Indenture, dated December 17, 1999, with respect to the 7% Debentures Due December 15, 2025 issued pursuant to the 1992 Indenture, filed as Exhibit 4.5.4 to the Company’s Form 10-K for the fiscal year ended December 31, 1999 (File No 1-4717), is incorporated herein by reference as Exhibit 4.3.1.
  4 .4   Indenture, dated as of September 27, 2000, among the Company, The Kansas City Southern Railway Company (“KCSR”), certain other subsidiaries of the Company and The Bank of New York, as Trustee (the “2000 Indenture”), filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-4 originally filed on January 25, 2001 (Registration No. 333-54262), as amended and declared effective on March 15, 2001 (the “2001 S-4 Registration Statement”), is incorporated herein by reference as Exhibit 4.4.
  4 .4.1   Supplemental Indenture, dated as of January 29, 2001, to the 2000 Indenture, among the Company, KCSR, certain other subsidiaries of the Company and The Bank of New York, as trustee, filed as Exhibit 4.1.1 to the Company’s 2001 S-4 Registration Statement (Registration No. 333-54262), is incorporated herein by reference as Exhibit 4.4.1.
  4 .4.2   Second Supplemental Indenture, dated as of June 10, 2005, to the 2000 Indenture, among the Company, KCSR, and certain other subsidiaries of the Company and The Bank of New York, as Trustee, filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2005 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.4.2.
  4 .4.3   Third Supplemental Indenture, dated as of February 5, 2007, to the 2000 Indenture, among the Company, KCSR, certain other subsidiaries of the Company and the Bank of New York Trust Company, N.A., as Trustee, is attached to this Form 10-K as Exhibit 4.4.3
  4 .4.4   Form of Exchange Note (included as Exhibit B to Exhibit 4.4 of this Form 10-K).
  4 .5   Exchange and Registration Rights Agreement, dated as of September 27, 2000, among the Company, KCSR, and certain other subsidiaries of the Company, filed as Exhibit 4.3 to the Company’s 2001 S-4 Registration Statement (Registration No. 333-54262), is incorporated herein by reference as Exhibit 4.5.
  4 .6   The Indenture, dated June 12, 2002, among KCSR, the Company and certain subsidiaries of the Company, and U.S. Bank National Association, as Trustee (the “June 12, 2002 Indenture”), filed as Exhibit 4.1 to the 2002 S-4 Registration Statement (Registration No. 333-92360), is incorporated herein by reference as Exhibit 4.6.
  4 .6.1   Form of Face of Exchange Note, included as Exhibit B to Exhibit 4.7 and filed as Exhibit 4.2 to the 2002 S-4 Registration Statement (Registration No. 333-92360), is incorporated herein by reference as Exhibit 4.6.1.
  4 .6.2   Supplemental Indenture, dated June 10, 2005, to the June 12, 2002 Indenture among the Company, KCSR, and certain other subsidiaries of the Company, and U.S. Bank National Association, as Trustee, filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2005, is incorporated herein by reference as Exhibit 4.6.2.
  4 .6.3   Second Supplemental Indenture, dated as of February 5, 2007, to the June 12, 2002 Indenture among the Company, KCSR, and certain other subsidiaries of the Company, and U.S. Bank National Association, as Trustee, is attached to this Form 10-K as Exhibit 4.6.3.
  4 .7   Certificate of Designations of 4.25% Redeemable Cumulative Convertible Perpetual Preferred Stock, Series C, filed as Exhibit 3.1(b) to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2003 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.7.

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Exhibit
 
Description
 
  4 .8   Registration Rights Agreement dated May 5, 2003 among KCS, Morgan Stanley & Co. Incorporated and Deutsche Bank Securities Inc., filed as Exhibit 4.5 to the Company’s Registration Statement on Form S-3 originally filed on August 1, 2003 (Registration No. 333-107573), as amended and declared effective on October 24, 2003 (the “2003 S-3 Registration Statement”), is incorporated herein by reference as Exhibit 4.8.
  4 .9   Certificate of Designations of 5.125% Cumulative Convertible Perpetual Preferred Stock, Series D, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on December 15, 2005 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.9.
  4 .10   Indenture, dated as of June 16, 1997, among KCSM, Grupo TFM, S.A. de C.V.(currently known as Grupo KCSM, S.A. de C.V. (“Grupo KCSM”)), as guarantor, The Bank of New York, as trustee, and Bankers Trust Luxembourg, S.A., as a Paying Agent, covering up to $150,000,000 of TFM’s 10.25% Senior Notes due 2007 (the “1997 Indenture”), filed as Exhibit 4.10 to the Company’s Registration Statement on Form S-1 originally filed on November 20, 2006 (Registration No. 333-138831), as amended and declared effective on December 4, 2006 (the “2006 S-1 Registration Statement”), is incorporated herein by reference as Exhibit 4.10.
  4 .10.1   First Supplemental Indenture, dated as of May 21, 2002, among KCSM, Grupo KCSM, as guarantor, The Bank of New York, as trustee, and Deutsche Bank Luxembourg S.A., as the paying agent, to the 1997 Indenture, filed as Exhibit 4.11 to 2006 S-1 Registration Statement (Registration No. 333-138831), is incorporated herein by reference as Exhibit 4.10.1.
  4 .10.2   Second Supplemental Indenture, dated November 21, 2006, among Kansas City Southern de México, S.A. de C.V., as issuer, The Bank of New York, as trustee, Deutsche Bank Luxembourg S.A., as paying agent and Grupo KCSM, S.A. de C.V., as guarantor, to the 1997 Indenture, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 28, 2006 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.10.2.
  4 .11   Indenture, dated as of June 13, 2002, between TFM and The Bank of New York, as Trustee, covering up to $180,000,000 of TFM’s 12.50% Senior Notes due 2012 (the “June 13, 2002 Indenture”), filed as Exhibit 4.12 to the 2006 S-1 Registration Statement (Registration No. 333-138831), is incorporated herein by reference as Exhibit 4.11.
  4 .12   Indenture, dated as of April 19, 2005, between TFM and The Bank of Nova Scotia Trust Company of New York, covering up to $460,000,000 of TFM’s 93/8% Senior Notes due 2012 (the “2005 Indenture”), filed as Exhibit 4.13 to the 2006 S-1 Registration Statement (Registration No. 333-138831), is incorporated herein by reference as Exhibit 4.12.
  4 .13   Indenture, dated November 21, 2006, between Kansas City Southern de Mexico, S.A. de C.V. and U.S. Bank National Association, as trustee and paying agent (the “2006 Indenture”), filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on November 28, 2006 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.13.
   (10)     Material Contracts
  10 .1   Form of Officer Indemnification Agreement attached as Exhibit 10.1 to the Company’s Form 10-K for the fiscal year ended December 31, 2001 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.1.
  10 .2   Form of Director Indemnification Agreement attached as Exhibit 10.2 to the Company’s Form 10-K for the fiscal year ended December 31, 2001 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.2.
  10 .3   Description of the Company’s 1991 incentive compensation plan, filed as Exhibit 10.4 to the Company’s Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.3.
  10 .4   Directors Deferred Fee Plan, adopted August 20, 1982, as amended and restated effective January 1, 2005, filed as Exhibit 10.7 to the Company’s Form 10-K for the fiscal year ended December 31, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.4.

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Exhibit
 
Description
 
  10 .5   Kansas City Southern 1991 Amended and Restated Stock Option and Performance Award Plan, as amended and restated effective as of May 5, 2005 (the “Amended 1991 Plan”), filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on May 11, 2005 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.5.
  10 .5.1   Form of Non-Qualified Stock Option Award Agreement for employees under the Amended 1991 Plan, filed as Exhibit 10.8.2 to the Company’s Form 10-K for the fiscal year ended December 31, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.5.1.
  10 .5.2   Form of Non-Qualified Stock Option Award Agreement for Directors under the Amended 1991 Plan, filed as Exhibit 10.8.3 to the Company’s Form 10-K for the fiscal year ended December 31, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.5.2.
  10 .5.3   Form of Non-Qualified Stock Option Award agreement for employees under the Amended 1991 Plan (referencing threshold dates), filed as Exhibit 10.8.4 to the Company’s Form 10-K for the fiscal year ended December 31, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.5.3.
  10 .5.4   Form of Restricted Shares Award and Performance Shares Award Agreement under the Amended 1991 Plan, is attached to this Form 10-K as Exhibit 10.5.4.
  10 .5.5   Form of Restricted Shares Award Agreement (graded vesting) under the Amended 1991 Plan, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on May 11, 2005 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.5.5.
  10 .5.6   Form of Restricted Shares Award Agreement (cliff vesting) under the Amended 1991 Plan, filed as Exhibit 10.1 to the Company’s Form 8-K filed on March 18, 2005 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.5.6.
  10 .5.7   Form of Restricted Shares Award Agreement under the Amended 1991 Plan (applicable to restricted shares to be purchased), filed as Exhibit 10.8.7 to the Company’s Form 10-K for the fiscal year ended December 31, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.5.7.
  10 .6   Kansas City Southern 401(k) and Profit Sharing Plan (as amended and restated, effective April 1, 2002) (the “Amended 401(k) and Profit Sharing Plan”), filed as Exhibit 10.10.1 to the Company’s Form 10-K for the fiscal year ended December 31, 2002 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.6.
  10 .6.1   First Amendment to the Amended 401(k) and Profit Sharing Plan, effective January 1, 2003, filed as Exhibit 10.10.2 to the Company’s Form 10-K for the fiscal year ended December 31, 2002 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.6.1.
  10 .6.2   Amendment to the Amended 401(k) and Profit Sharing Plan, dated June 30, 2003 and effective as of January 1, 2001, filed as Exhibit 10.10.3 to the Company’s Form 10-K for the fiscal year ended December 31, 2003 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.6.2.
  10 .6.3   Amendment to the Amended 401(k) and Profit Sharing Plan, dated December 3, 2003 and effective as of January 1, 2003, filed as Exhibit 10.10.4 to the Company’s Form 10-K for the fiscal year ended December 31, 2003 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.6.3.
  10 .7   Assignment, Consent and Acceptance Agreement, dated August 10, 1999, by and among the Company, DST Systems, Inc. and Stilwell Financial Inc., filed as Exhibit 10.10 to the Company’s 2001 S-4 Registration Statement (Registration No. 333-54262), is incorporated herein by reference as Exhibit 10.7.
  10 .8   Employment Agreement, as amended and restated January 1, 2001, by and among the Company, KCSR and Michael R. Haverty, filed as Exhibit 10.12 to the Company’s Form 10-K for the fiscal year ended December 31, 2001 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.8.
  10 .9   Employment Agreement, dated January 1, 2005, between KCSR and Arthur L. Shoener, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed on February 14, 2005 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.9.
  10 .10   Employment Agreement, dated May 15, 2006, between KCSR and Patrick J. Ottensmeyer, attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on June 12, 2006 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.10.

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Exhibit
 
Description
 
  10 .11   Employment Agreement, dated May 15, 2006, between KCSR, KCS and Daniel W. Avramovich, attached as Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on June 12, 2006 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.11.
  10 .12   Employment Agreement, dated June 7, 2006, between KCSR and Michael K. Borrows, attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed September 15, 2006 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.12.
  10 .13   Kansas City Southern Executive Plan, as amended and restated January 1, 2005, filed as Exhibit 10.17 to the Company’s Form 10-K for the fiscal year ended December 31, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.13.
  10 .14   The Kansas City Southern Annual Incentive Plan, as approved by the Company’s Compensation Committee on January 17, 2007, is attached to this Form 10-K as Exhibit 10.14.
  10 .15   Security Agreement dated March 30, 2004 from KCS, KCSR and certain other subsidiaries of KCS to The Bank of Nova Scotia as Collateral Agent, filed as Exhibit 10.19.1 to the Company’s Form 10-K for the fiscal year ended December 31, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.15.
  10 .15.1   Amendment No. 1 to the Security Agreement among KCSR, KCS, the subsidiary guarantors, the lenders party thereto and The Bank of Nova Scotia, dated as of December 22, 2004, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 29, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.15.1.
  10 .15.2   Amended and Restated Credit Agreement, dated April 28, 2006 among KCSR, KCS, the subsidiary guarantors, the lenders party thereto, The Bank of Nova Scotia, Morgan Stanley Senior Funding, Inc., Harris Bank, N.A., LaSalle Bank National Association and Bank of Tokyo-Mitsubishi UFJ Trust Company, and Scotia Capital, filed as Exhibit 10.1 to the Company’s Form 10-Q for the period ended March 31, 2006 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.15.2.
  10 .16   The 1992 Indenture. (See Exhibit 4.3).
  10 .16.1   The Supplemental Indenture, dated as of December 17, 1999, to the 1992 Indenture. (See Exhibit 4.3.1).
  10 .17   The 2000 Indenture. (See Exhibit 4.4).
  10 .17.1   The Supplemental Indenture, dated as of January 29, 2001, to the 2000 Indenture. (See Exhibit 4.4.1).
  10 .17.2   The Second Supplemental Indenture, dated as of June 10, 2005, to the 2000 Indenture. (See Exhibit 4.4.2).
  10 .17.3   The Third Supplemental Indenture, dated as of February 5, 2007, to the 2000 Indenture. (See Exhibit 4.4.3).
  10 .18   Intercompany Agreement, dated as of August 16, 1999, between the Company and Stilwell Financial Inc., filed as Exhibit 10.23 to the Company’s 2001 S-4 Registration Statement (Registration No. 333-54262), is incorporated herein by reference as Exhibit 10.18.
  10 .19   Tax Disaffiliation Agreement, dated as of August 16, 1999, between the Company and Stilwell Financial Inc., filed Exhibit 10.24 to the Company’s 2001 S-4 Registration Statement (Registration No. 333-54262), is incorporated herein by reference as Exhibit 10.19.
  10 .20   Lease Agreement, as amended, between The Kansas City Southern Railway Company and Broadway Square Partners LLP dated June 26, 2001, filed as Exhibit 10.34 to the Company’s Form 10-K for the fiscal year ended December 31, 2001 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.20.
  10 .21   The June 12, 2002 Indenture. (See Exhibit 4.6).
  10 .21.2   The Supplemental Indenture, dated as of June 10, 2005, to the June 12, 2002 Indenture. (See Exhibit 4.6.2).
  10 .21.3   The Second Supplemental Indenture, dated as of February 5, 2007, to the June 12, 2002 Indenture (See Exhibit 4.6.3).

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Exhibit
 
Description
 
  10 .22   Agreement to Forego Compensation between A. Edward Allinson and the Company, fully executed on March 30, 2001; Loan Agreement between A. Edward Allinson and the Company fully executed on September 18, 2001; and the Promissory Note executed by the Trustees of The A. Edward Allinson Irrevocable Trust Agreement dated, June 4, 2001, Courtney Ann Arnot, A. Edward Allinson III and Bradford J. Allinson, Trustees, as Maker, and the Company, as Holder, filed as Exhibit 10.36 to the Company’s Form 10-K for the fiscal year ended December 31, 2002 (File No. 1-4717), are incorporated herein by reference as Exhibit 10.22.
  10 .23   Agreement to Forego Compensation between Michael G. Fitt and the Company, fully executed on March 30, 2001; Loan Agreement between Michael G. Fitt and the Company, fully executed on September 7, 2001; and the Promissory Note executed by the Trustees of The Michael G. and Doreen E. Fitt Irrevocable Insurance Trust, Anne E. Skyes, Colin M-D. Fitt and Ian D.G. Fitt, Trustees, as Maker, and the Company, as Holder, filed as Exhibit 10.37 to the Company’s Form 10-K for the fiscal year ended December 31, 2002 (File No. 1-4717), are incorporated herein by reference as Exhibit 10.23.
  10 .24   Kansas City Southern Employee Stock Ownership Plan (as amended and restated, effective April 1, 2002) (the “Amended Employee Stock Ownership Plan”), filed as Exhibit 10.38 to the Company’s Form 10-K for the fiscal year ended December 31, 2002 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.24.
  10 .24.1   Amendment to the Amended Employee Stock Ownership Plan, dated June 30, 2003 and effective as of January 1, 2001, filed as Exhibit 10.38.2 to the Company’s Form 10-K for the fiscal year ended December 31, 2003 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.24.1.
  10 .24.2   Amendment to the Amended Employee Stock Ownership Plan, dated December 3, 2003 and effective as of January 1, 2003, filed as Exhibit 10.38.3 to the Company’s Form 10-K for the fiscal year ended December 31, 2003 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.24.2.
  10 .25   Placement Agreement, dated April 29, 2003, by and among the Company, Morgan Stanley & Co. Incorporated and Deutsche Bank Securities Inc., filed as Exhibit 10 to the Company’s Form 10-Q for the period ended June 30, 2003 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.25.
  10 .26   The Amended Acquisition Agreement. (See Exhibit 2.1).
  10 .27   The Stockholders’ Agreement. (See Exhibit 2.2).
  10 .28   The Acquisition Registration Rights Agreement. (See Exhibit 2.3).
  10 .29   The Consulting Agreement. (See Exhibit 2.4).
  10 .30   The Marketing and Services Agreement. (See Exhibit 2.5).
  10 .31   The 2005 Rights Agreement. (See Exhibit 2.6).
  10 .32   Form of Indemnity Escrow Note (as defined in the Amended Acquisition Agreement), filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December 21, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.32.
  10 .33   Form of VAT Escrow Note (as defined in the Amended Acquisition Agreement), filed as Exhibit 10.7 to the Company’s Current Report on Form 8-K filed December 21, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.33.
  10 .34   Closing Escrow Agreement by and among KCS, KARA Sub, Inc., KCS Investment I, Ltd., KCS Acquisition Subsidiary, Inc., Caymex Transportation, Inc., Grupo TMM, S.A., TMM Holdings, S.A. de C.V., TMM Multimodal, S.A. de C.V. and The Bank of Nova Scotia Trust Company of New York, filed as Exhibit 10.8 to the Company’s Current Report on Form 8-K filed December 21, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.34.
  10 .35   Indemnity Escrow Agreement by and among KCS, KARA Sub, Inc., KCS Investment I, Ltd., Caymex Transportation, Inc., Grupo TMM, S.A., TMM Multimodal, S.A. de C.V. and The Bank of Nova Scotia Trust Company of New York, filed as Exhibit 10.9 to the Company’s Current Report on Form 8-K filed December 21, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.35.

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Exhibit
 
Description
 
  10 .36   VAT Escrow Agreement by and among KCS, KARA Sub, Inc., KCS Investment I, Ltd., KCS Acquisition Subsidiary, Inc., Caymex Transportation, Inc., Grupo TMM, S.A., TMM Holdings, S.A. de C.V., TMM Multimodal, S.A. de C.V. and The Bank of Nova Scotia Trust Company of New York, filed as Exhibit 10.10 to the Company’s Current Report on Form 8-K filed December 21, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.36.
  10 .37   Consulting Compensation Escrow Agreement by and among KCS, Jose F. Serrano International Business, S.A. de C.V. and The Bank of Nova Scotia Trust Company of New York, filed as Exhibit 10.11 to the Company’s Current Report on Form 8-K filed December 21, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.37.
  10 .38   Agreement of Assignment and Assumption of Rights, and Agency Agreement with Undisclosed Principal, Duties and Obligations, filed as Exhibit 10.12 to the Company’s Current Report on Form 8-K filed December 21, 2004 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.38.
  10 .39   Underwriting Agreement, dated December 5, 2005, between the Company and Morgan Stanley & Co. Incorporated, filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K, filed December 6, 2005 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.39.
  10 .40   Underwriting Agreement, dated December 5, 2005, among the Company, Grupo TMM, S.A. and Morgan Stanley & Co. Incorporated, filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K, filed December 6, 2005 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.40.
  10 .41   Transaction Agreement, dated December 1, 2005, among the Company, KCSR, Norfolk Southern Corporation and The Alabama Great Southern Railroad Company (the “Transaction Agreement”), filed as Exhibit 10.46 to the Company’s Form 10-K for the fiscal year ended December 31, 2005 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.41.
  10 .41.1   Amendment No. 1 to the Transaction Agreement dated as of January 17, 2006, filed as Exhibit 10.47 to the Company’s Form 10-K for the fiscal year ended December 31, 2005 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.41.1.
  10 .41.2   Amendment No. 2 to the Transaction Agreement dated as of May 1, 2006, filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2006 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.41.2.
  10 .42   Participation Agreement, dated as of December 20, 2005, among KCSR, KCSR Trust 2005-1 (acting through Wilmington Trust Company, as owner trustee) (“2005 Trust”), GS Leasing (KCSR 2005-1) LLC, Wells Fargo Bank Northwest, National Association, Export Development Canada, and KfW, filed as Exhibit 10.48 to the Company’s Form 10-K for the fiscal year ended December 31, 2005 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.42.
  10 .43   Equipment and Lease Agreement, dated as of December 20, 2005, by and between KCSR and the 2005 Trust, filed as Exhibit 10.49 to the Company’s Form 10-K for the fiscal year ended December 31, 2005 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.43.
  10 .44   Participation Agreement, dated as of August 2, 2006, among KCSR, KCSR Trust 2006-1 (acting through Wilmington Trust Company, as owner trustee) (“2006 Trust”), HSH Nordbank AG, New York Branch, Wells Fargo Bank Northwest, National Association, and DVB Bank AG, filed as Exhibit 10.4 to the Company’s Form 10-Q for the period ended September 30, 2006 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.44.
  10 .45   Equipment and Lease Agreement, dated as of August 2, 2006, by and between KCSR and the 2006 Trust, filed as Exhibit 10.4 to the Company’s Form 10-Q for the period ended September 30, 2006 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.45.
  10 .46   Limited Liability Company Agreement of Meridian Speedway, LLC by and between the Alabama Great Southern Railroad Company and Kansas City Southern dated May 1, 2006, filed as Exhibit 10.3 to the Company’s Form 10-Q for the period ended March 31, 2006, (File No. 1-4717), is incorporated herein by reference as Exhibit 10.46.

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Exhibit
 
Description
 
  10 .47   Underwriting Agreement, dated December 4, 2006, among the Company, Morgan Stanley & Co. Incorporated, and Grupo TMM, S.A., filed as Exhibit 1.1 to the Company’s Current Report on Form 8-K, filed December 5, 2006 (File No. 1-4717), is incorporated herein by reference as Exhibit 10.47.
  10 .48   The 1997 Indenture. (See Exhibit 4.10).
  10 .48.1   The First Supplemental Indenture, dated as of May 21, 2002, to the 1997 Indenture. (See Exhibit 4.10.1).
  10 .48.2   The Second Supplemental Indenture, dated November 21, 2006, to the 1997 Indenture. (See Exhibit 4.10.2).
  10 .49   The June 13, 2002 Indenture. (See Exhibit 4.11).
  10 .51   The 2006 Indenture. (See Exhibit 4.13).
  10 .52   The 2006 Registration Rights Agreement. (See Exhibit 2.7).
  10 .53   Credit Agreement, dated October 24, 2005, among the Company, as borrower, Arrendadora TFM, S.A. de C.V., as guarantor, Bank of America, N.A. as administrative agent, BBVA Bancomer, as collateral agent, and BBVA Securities, Inc. and Banc of America Securities, LLC as arrangers (the “2005 Credit Agreement”), filed as Exhibit 10.9 to KCSM’s Registration Statement on Form S-4 originally filed on November 8, 2005 (Registration No. 333-129566), is attached to this Form 10-K as Exhibit 10.53.
  10 .53.1   Amendment No. 1 and Waiver No. 1, dated April 7, 2006, to the 2005 Credit Agreement, filed as Exhibit 10.10 to KCSM’s Form 10-K for the fiscal year ended December 31, 2005, is attached to this Form 10-K as Exhibit 10.53.1.
  10 .54   Lease Agreement between KCSR and Louisiana Southern Railroad, Inc., dated September 25, 2005, filed as Exhibit 10.5 to the Company’s Form 10-Q for the period ended June 30, 2005, is incorporated herein by reference as Exhibit 10.54.
  10 .55   Lease Agreement between KCSR and Alabama Southern Railroad, Inc., dated September 25, 2005, filed as Exhibit 10.6 to the Company’s Form 10-Q for the period ended June 30, 2005, is incorporated herein by reference as Exhibit 10.55.
  10 .56   Lease Agreement between KCSR and Arkansas Southern Railroad, Inc., dated September 25, 2005, filed as Exhibit 10.7 to the Company’s Form 10-Q for the period ended June 30, 2005, is incorporated herein by reference as Exhibit 10.56.
  10 .57   Lease Agreement between KCSR and Arkansas Southern Railroad, Inc., dated September 25, 2005, filed as Exhibit 10.8 to the Company’s Form 10-Q for the period ended June 30, 2005, is incorporated herein by reference as Exhibit 10.57.
  10 .58   Lease Agreement between KCSR and Louisiana Southern Railroad, Inc., dated September 25, 2005, filed as Exhibit 10.9 to the Company’s Form 10-Q for the period ended June 30, 2005, is incorporated herein by reference as Exhibit 10.58.
   (12)     Statements Re Computation of Ratios
  12 .1   The Computation of Ratio of Earnings to Fixed Charges prepared pursuant to Item 601(b)(12) of Regulation S-K is attached to this Form 10-K as Exhibit 12.1.
   (21)     Subsidiaries of the Company
  21 .1   The list of the Subsidiaries of the Company prepared pursuant to Item 601(b)(21) of Regulation S-K is attached to this Form 10-K as Exhibit 21.1.
   (23)     Consents of Experts and Counsel
  23 .1   Consent of KPMG LLP is attached to this Form 10-K as Exhibit 23.1.
  23 .2   Consent of PricewaterhouseCoopers is attached to this Form 10-K as Exhibit 23.2.
  23 .3   Consent of KPMG Cárdenas Dosal, S.C. is attached to this Form 10-K as Exhibit 23.3.
   (24)     Power of Attorney (included on the signature page)
  31 .1   Certification of Michael R. Haverty, Chief Executive Officer of the Company, is attached to this Form 10-K as Exhibit 31.1.

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Exhibit
 
Description
 
  31 .2   Certification of Patrick J. Ottensmeyer, Chief Financial Officer of the Company, is attached to this Form 10-K as Exhibit 31.2.
   (32)     Section 1350 Certifications
  32 .1   Certification pursuant to 18 U.S.C. Section 1350 of Michael R. Haverty, Chief Executive Officer of the Company, is attached to this Form 10-K as Exhibit 32.1.
  32 .2   Certification pursuant to 18 U.S.C. Section 1350 of Patrick J. Ottensmeyer, Chief Financial Officer of the Company, is attached to this Form 10-K as Exhibit 32.2.
   (99)     Additional Exhibits 
  99 .1   The consolidated balance sheet of Grupo TFM, S.A. de C.V. and subsidiaries as of December 31, 2004 and 2005 and the related consolidated statements of income, cash flows and changes in stockholders’ equity for the two years in the period ended December 31, 2004, and the consolidated statements of income, cash flows and changes in stockholders’ equity for the three months ended March 31, 2005 (“Predecessor”) and the nine months ended December 31, 2005 (“Successor”) including the notes thereto and the reports of the independent registered public accounting firms thereon, attached to the 2006 S-1 Registration Statement (Registration No. 333-138831) as Exhibit 99.1, is incorporated herein by reference as Exhibit 99.1.

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Kansas City Southern
 
  By: 
/s/  Michael R. Haverty
Michael R. Haverty
Chairman of the Board and
Chief Executive Officer and Director
February 26, 2007
 
POWER OF ATTORNEY
 
Know all people by these presents, that each person whose signature appears below constitutes and appoints Michael R. Haverty and Patrick J. Ottensmeyer, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he or she might or could do in person, hereby confirming all that said attorneys-in-fact and agents or either of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on February 26, 2007.
 
         
Signature
 
Capacity
 
/s/  Michael R. Haverty

Michael R. Haverty
  Chairman of the Board and
Chief Executive Officer and Director
     
/s/  Arthur L. Shoener

Arthur L. Shoener
  KCS President and
Chief Operating Officer and Director
     
/s/  Patrick J. Ottensmeyer

Patrick J. Ottensmeyer
  Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
     
/s/  Michael K. Borrows

Michael K. Borrows
  Vice President Financial Reporting and Tax
(Principal Accounting Officer)
     
/s/  A. Edward Allinson

A. Edward Allinson
  Director
     
/s/  Robert J. Druten

Robert J. Druten
  Director
     
/s/  James R. Jones

James R. Jones
  Director


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Signature
 
Capacity
 
/s/  Thomas A. McDonnell

Thomas A. McDonnell
  Director
     
/s/  Karen L. Pletz

Karen L. Pletz
  Director
     
/s/  Rodney E. Slater

Rodney E. Slater
  Director


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Table of Contents

Kansas City Southern
 
2006 Form 10-K Annual Report
 
Index to Exhibits
 
 
                 
        Regulation S-K
        Item 601(b)
Exhibit
 
Document
 
Exhibit
 
  2 .7   Registration Rights Agreement     2  
  3 .2   Amended and Restated By-Laws of Kansas City Southern     3  
  4 .4.3   Third Supplemental Indenture to the 2000 Indenture     4  
  4 .6.3   Second Supplemental Indenture to the June 12, 2002 Indenture     4  
  10 .5.4   Form of Restricted Shares Award and Performance Shares Award Agreement under the Amended 1991 Plan     10  
  10 .14   Kansas City Southern Annual Incentive Plan     10  
  10 .53   The 2005 Credit Agreement     10  
  10 .53.1   Amendment No. 1 and Waiver No. 1, dated April 7, 2006, to the 2005 Credit Agreement     10  
  12 .1   Computation of Ratio of Earnings to Fixed Charges     12  
  21 .1   Subsidiaries of the Company     21  
  23 .1   Consent of KPMG LLP     23  
  23 .2   Consent of PricewaterhouseCoopers     23  
  23 .3   Consent of KPMG Cárdenas Dosal, S.C.     23  
  31 .1   Certification of Michael R. Haverty pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
    31  
  31 .2   Certification of Patrick J. Ottensmeyer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002     31  
  32 .1   Certification of Michael R. Haverty pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.     32  
  32 .2   Certification of Patrick J. Ottensmeyer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     32  
 
 
The above exhibits are not included in this Form 10-K, but are
on file with the Securities and Exchange Commission


125

EX-2.7 2 c12119exv2w7.htm REGISTRATION RIGHTS AGREEMENT exv2w7
 

Exhibit 2.7
KANSAS CITY SOUTHERN de MÉXICO, S.A. de C.V.
U.S. $175,000,000 75/8% Senior Notes Due 2013
REGISTRATION RIGHTS AGREEMENT
November 21, 2006
Morgan Stanley & Co. Incorporated
Banc of America Securities LLC
BBVA Securities Inc.
BMO Capital Markets Corp.
Scotia Capital (USA) Inc.
as Placement Agents
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
     Kansas City Southern de México, S.A. de C.V., a sociedad anónima de capital variable organized under the laws of the United Mexican States (the “Company”), proposes to issue and sell to Morgan Stanley & Co., Banc of America Securities LLC, BBVA Securities Inc., BMO Capital Markets Corp. and Scotia Capital (USA) Inc. (the “Placement Agents”) U.S.$175,000,000 principal amount of its 75/8% Senior Notes Due 2013 (the “Securities”), upon the terms set forth in the Placement Agreement between the Company and the Placement Agents dated November 13, 2006 (the “Placement Agreement”) relating to the initial placement (the “Initial Placement”) of the Securities. To induce the Placement Agents to enter into the Placement Agreement and to satisfy a condition to your obligations thereunder, the Company agrees with you for your benefit and the benefit of the holders from time to time of the Securities (including the Placement Agents) (each a “Holder” and, collectively, the “Holders”), as follows:
     1. Definitions. Capitalized terms used herein without definition shall have their respective meanings set forth in the Placement Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings:
     “Act” shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder.
     “Affiliate” shall have the meaning specified in Rule 405 under the Act and the terms “controlling” and “controlled” shall have meanings correlative thereto.
     “Broker-Dealer” shall mean any broker or dealer registered as such under the Exchange Act.

 


 

     “Business Day” shall mean any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions or trust companies are authorized or obligated by law to close in New York City.
     “Closing Date” shall mean the date of the first issuance of the Securities.
     “Commission” shall mean the Securities and Exchange Commission.
     “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder.
     “Exchange Offer Registration Period” shall mean the one-year period following the consummation of the Registered Exchange Offer, exclusive of any period during which any stop order shall be in effect suspending the effectiveness of the Exchange Offer Registration Statement.
     “Exchange Offer Registration Statement” shall mean a registration statement of the Company on an appropriate form under the Act with respect to the Registered Exchange Offer, all amendments and supplements to such registration statement, including post-effective amendments thereto, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein.
     “Exchanging Dealer” shall mean any Holder (which may include the Placement Agents) that is a Broker-Dealer and elects to exchange for New Securities any Securities that it acquired for its own account as a result of market-making activities or other trading activities (but not directly from the Company or any Affiliate of the Company) for New Securities.
     “Final Memorandum” shall mean the offering memorandum, dated November 21, 2006, relating to the Securities, including any and all exhibits and appendices thereto and any information incorporated by reference therein as of such date.
     “Holder” shall have the meaning set forth in the preamble hereto.
     “Indenture” shall mean the Indenture relating to the Securities, dated as of November 21, 2006, among the Company, U.S. Bank National Association, as trustee and paying agent, as the same may be amended from time to time in accordance with the terms thereof.
     “Initial Placement” shall have the meaning set forth in the preamble.
     “Losses” shall have the meaning set forth in Section 6(d) hereof.
     “Majority Holders” shall mean, on any date, Holders of a majority of the aggregate principal amount of outstanding Securities registered under a Registration Statement.
     “Managing Underwriters” shall mean the investment bank or investment banks and manager or managers that administer an underwritten offering, if any, under a Registration Statement.

2


 

     “NASD Rules” shall mean the Conduct Rules and the By-Laws of the National Association of Securities Dealers, Inc.
     “New Securities” shall mean debt securities of the Company identical in all material respects to the Securities (except that the transfer restrictions shall be modified or eliminated, as appropriate) to be issued under the New Securities Indenture.
     “New Securities Indenture” shall mean an indenture between the Company and the New Securities Trustee, identical in all material respects to the Indenture (except that the transfer restrictions shall be modified or eliminated, as appropriate), which may be the Indenture if in the terms thereof appropriate provision is made for the New Securities.
     “New Securities Trustee” shall mean a bank or trust company reasonably satisfactory to the Placement Agents, as trustee with respect to the New Securities under the New Securities Indenture.
     “Prospectus” shall mean the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A under the Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Securities or the New Securities covered by such Registration Statement, and all amendments and supplements thereto, including any and all exhibits thereto and any information incorporated by reference therein.
     “Registered Exchange Offer” shall mean the proposed offer of the Company to issue and deliver to the Holders of the Securities that are not prohibited by any law or policy of the Commission from participating in such offer, in exchange for the Securities, a like aggregate principal amount of the New Securities.
     “Registrable Securities” shall mean (i) Securities other than those that have been (A) registered under a Registration Statement and exchanged or otherwise disposed of in accordance therewith or (B) distributed to the public pursuant to Rule 144 under the Act or any successor rule or regulation thereto that may be adopted by the Commission and (ii) any New Securities, the resale of which by the Holder thereof requires compliance with the prospectus delivery requirements of the Act.
     “Registration Default Damages” shall have the meaning set forth in Section 8 hereof.
     “Registration Statement” shall mean any Exchange Offer Registration Statement or Shelf Registration Statement that covers any of the Securities or the New Securities pursuant to the provisions of this Agreement, any amendments and supplements to such registration statement, including post-effective amendments (in each case including the Prospectus contained therein), all exhibits thereto and all material incorporated by reference therein.
     “Securities” shall have the meaning set forth in the preamble hereto.
     “Shelf Registration” shall mean a registration effected pursuant to Section 3 hereof.

3


 

     “Shelf Registration Period” has the meaning set forth in Section 3(b)(ii) hereof.
     “Shelf Registration Statement” shall mean a “shelf” registration statement of the Company pursuant to the provisions of Section 3 hereof which covers some or all of the Securities or New Securities, as applicable, on an appropriate form under Rule 415 under the Act, or any similar rule that may be adopted by the Commission, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein.
     “Trustee” shall mean the trustee with respect to the Securities under the Indenture.
     “Trust Indenture Act” shall mean the Trust Indenture Act of 1939, as amended, and the rules and regulations of the Commission promulgated thereunder.
     “underwriter” shall mean any underwriter of Securities in connection with an offering thereof under a Shelf Registration Statement.
     2. Registered Exchange Offer. (a) To the extent not prohibited by any applicable law or applicable interpretation of the staff of the Commission, the Company shall as promptly as practicable prepare and file with the Commission the Exchange Offer Registration Statement with respect to the Registered Exchange Offer. The Company shall use its reasonable best efforts to cause the Exchange Offer Registration Statement to become effective under the Act and to complete the Registered Exchange Offer within 270 days of the Closing Date.
     (b) Upon the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Registered Exchange Offer, it being the objective of such Registered Exchange Offer to enable each Holder electing to exchange Securities for New Securities (assuming that such Holder is not an Affiliate of the Company, acquires the New Securities in the ordinary course of such Holder’s business, has no arrangements with any person to participate in the distribution of the New Securities and is not prohibited by any law or policy of the Commission from participating in the Registered Exchange Offer) to trade such New Securities from and after their receipt without any limitations or restrictions under the Act and without material restrictions under the securities laws of a substantial proportion of the several states of the United States.
     (c) In connection with the Registered Exchange Offer, the Company shall:
     (i) mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents;
     (ii) keep the Registered Exchange Offer open for not less than 20 Business Days and use its reasonable best efforts to keep the Registered Exchange Offer open for not more than 40 Business Days after the date notice thereof is mailed to the Holders (or, in each case, longer if required by applicable law);

4


 

     (iii) use its reasonable best efforts to keep the Exchange Offer Registration Statement continuously effective under the Act, supplemented and amended as required, under the Act to ensure that it is available for sales of New Securities by Exchanging Dealers during the Exchange Offer Registration Period;
     (iv) utilize the services of a depositary for the Registered Exchange Offer with an address in the Borough of Manhattan in New York City, which may be the Trustee, the New Securities Trustee or an Affiliate of either of them;
     (v) permit Holders to withdraw tendered Securities (in accordance with the procedures set forth in the Exchange Offer Registration Statement) at any time prior to the close of business, New York time, on the last Business Day on which the Registered Exchange Offer is open;
     (vi) prior to effectiveness of the Exchange Offer Registration Statement, provide a supplemental letter to the Commission (A) stating that the Company is conducting the Registered Exchange Offer in reliance on the position of the Commission in Exxon Capital Holdings Corporation (pub. avail. May 13, 1988), Morgan Stanley and Co., Inc. (pub. avail. June 5, 1991); and (B) including a representation that the Company has not entered into any arrangement or understanding with any person to distribute the New Securities to be received in the Registered Exchange Offer and that, to the best of the Company’s information and belief, each Holder participating in the Registered Exchange Offer is acquiring the New Securities in the ordinary course of business and has no arrangement or understanding with any person to participate in the distribution of the New Securities; and
     (vii) comply in all material respects with all applicable laws.
     (d) As soon as practicable after the close of the Registered Exchange Offer, the Company shall:
     (i) accept for exchange all Securities tendered and not validly withdrawn pursuant to the Registered Exchange Offer;
     (ii) deliver or cause to be delivered to the Trustee for cancellation in accordance with Section 4(s) all Securities so accepted for exchange; and
     (iii) cause the New Securities Trustee promptly to authenticate and deliver to each Holder of Securities a principal amount of New Securities equal to the principal amount of the Securities of such Holder so accepted for exchange.
     (e) Each Holder hereby acknowledges and agrees that any Broker-Dealer and any such Holder using the Registered Exchange Offer to participate in a distribution of the New Securities (i) could not under Commission policy as in effect on the date of this Agreement rely on the position of the Commission in Exxon Capital Holdings Corporation (pub. avail. May 13, 1988) and Morgan Stanley and Co., Inc. (pub. avail. June 5, 1991), as interpreted in the Commission’s letter to Shearman & Sterling dated July 2, 1993 and similar no-action letters and (ii) must comply with the registration and prospectus delivery requirements of the Act in connection with

5


 

any secondary resale transaction, which must be covered by an effective registration statement containing the selling security holder information required by Item 507 or 508, as applicable, of Regulation S-K under the Act if the resales are of New Securities obtained by such Holder in exchange for Securities acquired by such Holder directly from the Company or one of its Affiliates. Accordingly, each Holder participating in the Registered Exchange Offer shall be required to represent to the Company that:
     (i) any New Securities to be received by such Holder will be acquired in the ordinary course of business;
     (ii) at the time of the consummation of the Registered Exchange Offer, such Holder will have no arrangement or understanding with any person to participate in the distribution of the Securities or the New Securities within the meaning of the Act; and
     (iii) such Holder is not an Affiliate of the Company;
and to make such other representations as may be necessary under applicable Commission rules, regulations or interpretations to render the use of the Form S-4 or other appropriate form under the Act available.
     (f) If, in the reasonable opinion of the Placement Agents, it is not eligible to participate in the Registered Exchange Offer with respect to the exchange of Securities constituting any portion of an unsold allotment, at the request of the Placement Agents, the Company shall issue and deliver to the Placement Agents or the person purchasing New Securities registered under a Shelf Registration Statement as contemplated by Section 3 hereof from the Placement Agents, in exchange for such Securities, a like principal amount of New Securities. The Company shall use its reasonable best efforts to cause the CUSIP Service Bureau to issue the same CUSIP number for such New Securities as for New Securities issued pursuant to the Registered Exchange Offer.
     3. Shelf Registration. (a) If (i) due to any change in law or applicable interpretations thereof by the Commission’s staff, the Company determines upon advice of its outside counsel that it is not permitted to effect the Registered Exchange Offer as contemplated by Section 2 hereof; (ii) for any other reason the Registered Exchange Offer is not consummated within 270 days of the date hereof; (iii) any Holder (other than the Placement Agents) is not eligible to participate in the Registered Exchange Offer other than by reason of such Holder being an Affiliate of the Company; (iv) based on their reasonable opinion, the Placement Agents so requests with respect to Securities that are not eligible to be exchanged for New Securities in the Registered Exchange Offer that are held by them following consummation of the Registered Exchange Offer, such request being in writing and delivered to the Company; or (v) in the case that the Placement Agents participate in the Registered Exchange Offer or acquires New Securities pursuant to Section 2(f) hereof, in their reasonable opinion the Placement Agents do not receive freely tradeable New Securities in exchange for Securities constituting any portion of an unsold allotment (it being understood that (A) the requirement that the Placement Agents deliver a Prospectus containing the information required by Item 507 or 508 of Regulation S-K under the Act in connection with sales of New Securities acquired in exchange for such Securities shall result in such New Securities being not “freely tradeable” and (B) the requirement that an Exchanging Dealer deliver a Prospectus in connection with sales of New

6


 

Securities acquired in the Registered Exchange Offer in exchange for Securities acquired as a result of market-making activities or other trading activities shall not result in such New Securities being not “freely tradeable”), the Company shall effect a Shelf Registration Statement in accordance with subsection (b) below.
     (b) (i) The Company shall as promptly as practicable file with the Commission and shall use its reasonable best efforts to cause to be declared effective under the Act within 270 days after the Closing Date, a Shelf Registration Statement relating to the offer and sale of the Securities or the New Securities, as applicable, by the Holders thereof from time to time in accordance with the methods of distribution elected by such Holders and set forth in such Shelf Registration Statement; provided, however, that no Holder (other than the Placement Agents) shall be entitled to have the Securities held by it covered by such Shelf Registration Statement unless such Holder agrees in writing to be bound by all of the provisions of this Agreement applicable to such Holder (it being understood that Holders who would have received freely transferable Securities pursuant to the Registered Exchange Offer had they not (A) failed to duly tender their Securities for exchange pursuant to the Registered Exchange Offer (other than the Placement Agents in connection with Securities held by them constituting any portion of an unsold allotment), or otherwise failed to comply with the requirements of the Registered Exchange Offer as provided in Section 2 hereof or (B) failed to furnish to the Company such information as the Company may request in accordance with Section 4(o) in connection with a Shelf Registration Statement, shall not retain any rights under this Agreement, including any right to have Securities owned by them included in any Shelf Registration Statement); and provided further that, with respect to New Securities received by the Placement Agents in exchange for Securities constituting any portion of an unsold allotment, the Company may, if permitted by current interpretations by the Commission’s staff, file a post-effective amendment to the Exchange Offer Registration Statement containing the information required by Item 507 or 508 of Regulation S-K of the Act, as applicable, in satisfaction of its obligations under this subsection with respect thereto, and any such Exchange Offer Registration Statement, as so amended, shall be referred to herein as, and governed by the provisions herein applicable to, a Shelf Registration Statement.
          (ii) The Company shall, except as permitted under Section 4(k)(ii), keep the Shelf Registration Statement continuously effective, supplemented and amended as required by the Act, in order to permit the Prospectus forming part thereof to be usable by Holders for a period (the “Shelf Registration Period”) from the date the Shelf Registration Statement is declared effective by the Commission until (A) the second anniversary thereof or (B) the earlier date upon which all the Securities or New Securities, as applicable, covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement.
          (iii) The Company shall cause the Shelf Registration Statement and the related Prospectus and any amendment or supplement thereto, as of the effective date of the Shelf Registration Statement or such amendment or supplement, (A) to comply in all material respects with the applicable requirements of the Act; and (B) not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein (in the case of the Prospectus, in the light of the circumstances under which they were made) not misleading.

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     4. Additional Registration Procedures. In connection with any Shelf Registration Statement and, to the extent applicable, any Exchange Offer Registration Statement, the following provisions shall apply.
     (a) The Company shall:
     (i) furnish to the Placement Agents and to counsel for the Majority Holders, not less than five Business Days prior to the filing thereof with the Commission, a copy of any Exchange Offer Registration Statement and any Shelf Registration Statement, and each amendment thereof and each amendment or supplement, if any, to the Prospectus included therein (including all documents incorporated by reference therein after the initial filing) and shall use its reasonable best efforts to reflect in each such document, when so filed with the Commission, such comments as the Placement Agents may reasonably propose;
     (ii) include the information set forth in Annex A hereto on the facing page of the Exchange Offer Registration Statement, in Annex B hereto in the forepart of the Exchange Offer Registration Statement in a section setting forth details of the Exchange Offer, in Annex C hereto in the underwriting or plan of distribution section of the Prospectus contained in the Exchange Offer Registration Statement, and in Annex D hereto in the letter of transmittal delivered pursuant to the Registered Exchange Offer;
     (iii) if requested by the Placement Agents, include the information required by Item 507 or 508 of Regulation S-K, as applicable, in the Prospectus contained in the Exchange Offer Registration Statement; and
     (iv) in the case of a Shelf Registration Statement, include the names of the Holders that propose to sell Securities pursuant to the Shelf Registration Statement as selling security holders.
     (b) The Company shall ensure that:
     (i) any Registration Statement and any amendment thereto and any Prospectus forming part thereof and any amendment or supplement thereto complies in all material respects with the Act; and
     (ii) any Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.
     (c) The Company shall advise the Placement Agents, the Holders of Securities covered by any Shelf Registration Statement and any Exchanging Dealer under any Exchange Offer Registration Statement that has provided in writing to the Company a telephone or facsimile number and address for notices, and, if requested by any Placement Agent or any such Holder or Exchanging Dealer, shall confirm such advice in writing (which notice pursuant to clauses (ii)-(v) hereof shall be accompanied by an instruction to suspend the use of the Prospectus until the Company shall have remedied the basis for such suspension):

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     (i) when a Registration Statement and any amendment thereto has been filed with the Commission and when the Registration Statement or any post-effective amendment thereto has become effective;
     (ii) of any request by the Commission for any amendment or supplement to the Registration Statement or the Prospectus or for additional information;
     (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose;
     (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of the securities included therein for sale in any jurisdiction or the institution or threatening of any proceeding for such purpose; and
     (v) of the happening of any event that requires any change in the Registration Statement or the Prospectus so that, as of such date, they (A) do not contain any untrue statement of a material fact and (B) do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in the light of the circumstances under which they were made) not misleading.
     (d) The Company shall use its reasonable best efforts to prevent the issuance of any order suspending the effectiveness of any Registration Statement or the qualification of the securities therein for sale in any jurisdiction and, if issued, to obtain as soon as possible the withdrawal thereof.
     (e) The Company shall furnish to each Holder of Securities covered by any Shelf Registration Statement, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including all material incorporated therein by reference, and, if the Holder so requests in writing, all exhibits thereto (including exhibits incorporated by reference therein).
     (f) The Company shall, during the Shelf Registration Period, deliver to each Holder of Securities covered by any Shelf Registration Statement, without charge, as many copies of the Prospectus (including the Preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request. The Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of Securities in connection with the offering and sale of the Securities covered by the Prospectus, or any amendment or supplement thereto, included in the Shelf Registration Statement.
     (g) The Company shall furnish to each Exchanging Dealer which so requests, without charge, at least one copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including all material incorporated by reference therein, and, if the Exchanging Dealer so requests in writing, all exhibits thereto (including exhibits incorporated by reference therein).

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     (h) The Company shall promptly deliver to the Placement Agents, each Exchanging Dealer and each other person required to deliver a Prospectus during the Exchange Offer Registration Period, without charge, as many copies of the Prospectus included in such Exchange Offer Registration Statement and any amendment or supplement thereto as any such person may reasonably request. The Company consents to the use of the Prospectus or any amendment or supplement thereto by the Placement Agents, any Exchanging Dealer and any such other person that may be required to deliver a Prospectus following the Registered Exchange Offer in connection with the offering and sale of the New Securities covered by the Prospectus, or any amendment or supplement thereto, included in the Exchange Offer Registration Statement.
     (i) Prior to the Registered Exchange Offer or any other offering of Securities pursuant to any Registration Statement, the Company shall arrange, if necessary, for the qualification of the Securities or the New Securities for sale under the laws of such jurisdictions as any Holder shall reasonably request and shall maintain such qualification in effect so long as required; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to service of process in suits in any such jurisdiction where it is not then so subject.
     (j) The Company shall cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing New Securities or Securities to be issued or sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as Holders may request at least two Business Days prior to such sale of Securities or New Securities.
     (k) (i) Upon the occurrence of any event contemplated by subsections (c)(ii) through (v) above, the Company shall promptly prepare a post-effective amendment to the applicable Registration Statement or an amendment or supplement to the related Prospectus or file any other required document so that, as thereafter delivered, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. In such circumstances, the period of effectiveness of the Exchange Offer Registration Statement provided for in Section 2 shall be extended by the number of days from and including the date of the giving of a notice of suspension pursuant to Section 4(c) to and including the date when the Placement Agents, the Holders of the Securities and any known Exchanging Dealer shall have received such amended or supplemented Prospectus pursuant to this Section.
     (ii) Upon the happening of any event of the kind described in subsection (c)(v) hereof, or the determination by the Company that, in its reasonable judgment and upon written advice of counsel, the continued effectiveness and use of the Shelf Registration Statement would require the disclosure of confidential information or interfere with any financing, acquisition, reorganization or other material transaction involving the Company, such Holder will forthwith discontinue disposition of Securities or New Securities pursuant to a Registration Statement until such Holder’s receipt of the copies of the supplemented or amended Prospectus contemplated by subsection(f) hereof (or a notice from the Company that such Holder may resume use of the existing Prospectus), and, if so directed by the Company, such Holder will deliver to the Company (at the

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Company’s expense) all copies in its possession, other than permanent file copies then in such Holder’s possession, of the Prospectus covering such Securities current at the time of receipt of such notice. If the Company shall give any such notice to suspend the disposition of Securities pursuant to a Registration Statement, the Company shall extend the period during which the Registration Statement shall be maintained effective pursuant to this Agreement by the number of days during the period from and including the date of the giving of such notice to and including the date when the Holders shall have (A) received copies of the supplemented or amended Prospectus necessary to resume such dispositions or (B) a notice permitting use of the existing Prospectus. The Company may give any such notice only twice during any 365-day period and any such suspensions may not exceed 30 days for each suspension and there may not be more than two suspensions in effect during any 365-day period.
     (l) Not later than the effective date of any Registration Statement, the Company shall provide a CUSIP number for the Securities or the New Securities, as the case may be, registered under such Registration Statement and provide the Trustee with printed certificates for such Securities or New Securities, in a form eligible for deposit with The Depository Trust Company.
     (m) The Company shall comply with all applicable rules and regulations of the Commission and shall make generally available to its security holders an earnings statement satisfying the provisions of Section 11(a) of the Act as soon as practicable after the effective date of the applicable Registration Statement and in any event no later than 90 days after the end of a 12-month period (or 180 days, if such period is a fiscal year) beginning with the first month of the Company’s first fiscal quarter commencing after the effective date of the applicable Registration Statement.
     (n) The Company shall cause the New Securities Indenture to be qualified under the Trust Indenture Act in a timely manner.
     (o) The Company may require each Holder of Securities to be sold pursuant to any Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of such securities as the Company may from time to time reasonably require for inclusion in such Registration Statement. The Company may exclude from such Shelf Registration Statement the Securities of any Holder that fails to furnish such information within a reasonable time after receiving such request.
     (p) In the case of any Shelf Registration Statement, the Company shall enter into customary agreements (including, if requested, an underwriting agreement in customary form) and take all other appropriate actions in order to expedite or facilitate the registration or the disposition of the Securities, and in connection therewith, if an underwriting agreement is entered into, cause the same to contain indemnification provisions and procedures no less favorable than those set forth in Section 6 hereof.
     (q) In the case of any Shelf Registration Statement, the Company shall:
     (i) make reasonably available for inspection by the Holders of Securities to be registered thereunder, any underwriter participating in any disposition pursuant to such

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Registration Statement, and any attorney, accountant or other agent retained by the Holders or any such underwriter all relevant financial and other records and pertinent corporate documents of the Company and its subsidiaries; provided, however, that, if any such records, documents or other information are related to pending or proposed acquisitions or dispositions, or otherwise related to matters reasonably considered by the Company to constitute sensitive or proprietary information, the Company need not provide such records, documents or information unless the foregoing parties enter into a confidentiality agreement in customary form and reasonably acceptable to such parties and the Company;
     (ii) cause the Company’s officers, directors, employees, accountants and auditors to supply all relevant information reasonably requested by the Holders or any such underwriter, legal counsel, accountant or agent in connection with any such Registration Statement as is customary for similar due diligence examinations; provided, however, that such information may not be used for any other purpose than due diligence and provided further, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by the Holders or any such underwriter, legal counsel, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality;
     (iii) make such representations and warranties to the Holders of Securities registered thereunder and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Placement Agreement;
     (iv) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Managing Underwriters, if any) addressed to each selling Holder and the underwriters, if any, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Holders and underwriters;
     (v) obtain comfort letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each selling Holder of Securities registered thereunder and the underwriters, if any, provided that such letters need not be addressed to any Holder to whom, in the reasonable opinion of the Company’s independent public accountants, addressing such letter is not permissible under applicable accounting standards), in customary form and covering matters of the type customarily covered in comfort letters in connection with primary underwritten offerings;

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     (vi) deliver such documents and certificates as may be reasonably requested by the Majority Holders or the Managing Underwriters, if any, including those to evidence compliance with Section 4(k) and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company; and
     (vii) if reasonably requested by any Holder of Registrable Securities covered by a Registration Statement, (A) promptly incorporate in a Prospectus supplement or post-effective amendment such information with respect to such Holder as such Holder reasonably requests to be included therein and (B) make all required filings of such Prospectus supplement or such post-effective amendment as soon as the Company has received notification of the matters to be incorporated in such filing.
The actions set forth in clauses (iii), (iv), (v) and (vi) of this paragraph (q) shall be performed at (i) the effectiveness of such Registration Statement and each post-effective amendment thereto and (ii) each closing under any underwriting or similar agreement as and to the extent required thereunder.
     (r) In the case of any Exchange Offer Registration Statement, the Company shall:
     (i) make reasonably available for inspection by the Placement Agents, and any legal counsel, accountant or other agent retained by the Placement Agents, all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries; provided, however, that, if any such records, documents or other information related to pending or proposed acquisitions or dispositions, or otherwise related to matters reasonably acceptable to such parties and the Company to constitute sensitive or proprietary information, the Company need not provide such records, documents or information unless the foregoing parties enter into a confidentiality agreement in customary form and reasonably acceptable to such parties and the Company;
     (ii) cause the Company’s officers, directors, employees, accountants and auditors to supply all relevant information reasonably requested by the Placement Agents or any such attorney, accountant or agent in connection with any such Registration Statement as is customary for similar due diligence examinations; provided, however, that such information may not be used for any purpose other than due diligence and provided, further, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by the Placement Agents or any such attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public through a third party without an accompanying obligation of confidentiality;
     (iii) make such representations and warranties to the Placement Agents, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Placement Agreement;

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     (iv) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Placement Agents and their counsel, addressed to the Placement Agents, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by the Placement Agents or their counsel;
     (v) obtain comfort letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to the Placement Agents, in customary form and covering matters of the type customarily covered in comfort letters in connection with primary underwritten offerings, or if requested by the Placement Agents or their counsel in lieu of a comfort letter, an agreed-upon procedures letter under Statement on Auditing Standards No. 35, covering matters requested by the Placement Agents or their counsel; and
     (vi) deliver such documents and certificates as may be reasonably requested by the Placement Agents or their counsel, including those to evidence compliance with Section 4(k) and with conditions customarily contained in underwriting agreements;
     provided, however that the Company will be required to perform the foregoing actions set forth in clauses (i) through (vi) only upon the reasonable request by the Placement Agents to the Company or the reasonable request in writing to the Company by one or more broker-dealers who certify to the Placement Agents and the Company in writing that they anticipate they will receive New Securities for their own account in the Exchange Offer for Securities that were acquired by such broker-dealer as a result of market-making or other trading activities, and, based on the position of the Commission as described in Section 2(e), will be required to satisfy the prospectus delivery obligation under the Act in connection with the resale of such New Securities; and provided further, that the Company will not be required to amend or supplement the Prospectus contained in the Exchange Offer Registration Statement for a period exceeding the Exchange Offer Registration Period, and such broker-dealers shall not be authorized by the Company to deliver and shall not deliver such Prospectus after such period in connection with resales contemplated in this subsection (r); and provided, further, that the Company will be obligated to deal only with one entity representing such broker-dealers, which shall be Morgan Stanley & Co. Incorporated, unless it elects not to act as such representative, and to pay the reasonable fees and expenses of only one counsel representing such broker-dealers, which shall be the counsel to the Placement Agents, unless such counsel elects not to so act, and to cause to be delivered only one, if any, comfort letter with respect to the Prospectus in the form existing on the expiration of the Exchange Offer and with respect to each subsequent amendment or supplement, if any, effected during the period specified above.
     The foregoing actions set forth in clauses (iii), (iv), (v) and (vi) of this Section shall be performed at the close of the Registered Exchange Offer and the effective date of any post-effective amendment to the Exchange Offer Registration Statement.

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     (s) If a Registered Exchange Offer is to be consummated, upon delivery of the Securities by Holders to the Company (or to such other person as directed by the Company) in exchange for the New Securities, the Company shall mark, or cause to be marked, on the Securities so exchanged that such Securities are being cancelled in exchange for the New Securities. In no event shall the Securities be marked as paid or otherwise satisfied.
     (t) The Company shall use its best reasonable efforts to confirm that the ratings issued to the Securities prior to their initial sale will apply to the Securities or the New Securities, as the case may be, covered by a Registration Statement.
     (u) In the event that any Broker-Dealer shall underwrite any Securities or participate as a member of an underwriting syndicate or selling group or “assist in the distribution” (within the meaning of the NASD Rules) thereof, whether as a Holder of such Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, the Company shall assist such Broker-Dealer in complying with the NASD Rules.
     (v) The Company shall use its reasonable best efforts to take all other steps necessary to effect the registration of the Securities or the New Securities, as the case may be, covered by a Registration Statement.
     5. Registration Expenses. The Company shall bear all expenses incurred in connection with the performance of its obligations under Sections 2, 3 and 4 hereof and, in the event of any Shelf Registration Statement, will reimburse the Holders for the reasonable fees and disbursements of one firm or counsel (which shall initially be Shearman & Sterling LLP, but which may, with the written consent of the Placement Agents, be another nationally recognized law firm experienced in securities matters designated by the Majority Holders) to act as counsel for the Holders in connection therewith, and, in the case of any Exchange Offer Registration Statement, will reimburse the Placement Agents for the reasonable fees and disbursements of counsel acting in connection therewith. Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder’s Securities pursuant to the Shelf Registration Statement.
     6. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Holder of Securities or New Securities, as the case may be, covered by any Registration Statement, the Placement Agents and, with respect to any Prospectus delivery as contemplated in Section 4(h) hereof, each Exchanging Dealer, the directors, officers, employees and agents of each such Holder, the Placement Agents or Exchanging Dealer and each person who controls any such Holder, the Placement Agents or Exchanging Dealer within the meaning of either the Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement as originally filed or in any amendment thereof, including all documents incorporated by reference therein or in any preliminary Prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make

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the statements therein (in the case of any preliminary Prospectus or the Prospectus, in the light of the circumstances under which they were made) not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of the party claiming indemnification specifically for inclusion therein; provided further, however, that with respect to any untrue statement or omission of a material fact made in any preliminary Prospectus, the indemnity agreement contained in this Section shall not inure to the benefit of any Holder from whom the person asserting any such loss, claim, damage or liability purchased the Securities or New Securities, as the case may be, to the extent that any such loss, claim, damage or liability of such Holder occurs under the circumstance where it shall have been determined by a court of competent jurisdiction by final and nonappealable judgment that (i) the untrue statement or omission of a material fact contained in the preliminary Prospectus was corrected in the Prospectus, (ii) the Company had previously furnished copies of the Prospectus to such Holder prior to the written confirmation of the sale of such Securities or New Securities and (iii) such loss, claim, damage or liability results from the fact that there was not sent or given to such person at or prior to the written confirmation of the sale of such Securities or New Securities, as the case may be, to such person, a copy of the Prospectus; and provided further, however, that the Company shall not be liable to an indemnified party with respect to any Prospectus or Registration Statement or any amendment or supplement to any thereof to the extent that any such loss, claim, damage, liability or action of such indemnified party arises out of, or is based upon, (i) the use of any Registration Statement during a period when a stop order has been issued by the Commission in respect thereof or (ii) the use of the Prospectus during a period when the use of the Prospectus has been suspended in accordance with the instructions of the Company because of the discovery of any untrue statement or omission of a material fact therein, provided that all Holders of Securities or New Securities received prior written notice of such stop order or suspension and such indemnified party, knowingly and voluntarily continued to use such Prospectus or Registration Statement. This indemnity agreement shall be in addition to any liability which the Company may otherwise have.
     The Company also agrees to indemnify as provided in this Section 6(a) or contribute as provided in Section 6(d) hereof to Losses of each underwriter, if any, of Securities or New Securities, as the case may be, registered under a Shelf Registration Statement, their directors, officers, employees or agents and each person who controls such underwriter on substantially the same basis as that of the indemnification of the Placement Agents and the selling Holders provided in this Section 6(a) and shall, if requested by any Holder, enter into an underwriting agreement reflecting such agreement, as provided in Section 4(p) hereof.
     (b) Each Holder of securities covered by a Registration Statement (including the Placement Agents, but only if such Placement Agent is a Holder, in such capacity) severally and not jointly agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who signs such Registration Statement and each person who controls the Company within the meaning of either the Act or the Exchange Act, to the same extent as the foregoing indemnity from the Company to each such Holder, but only with reference to written information

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relating to such Holder furnished to the Company by or on behalf of such Holder specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which any such Holder may otherwise have.
     (c) Promptly after receipt by an indemnified party under this Section 6 or notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel (including local counsel) of the indemnifying party’s choice at the indemnifying party’s expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel, other than local counsel if not appointed by the indemnifying party, retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party’s election to appoint counsel (including local counsel) to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest; (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party; (iii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action; or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding.
     (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section is unavailable to or insufficient to hold harmless an indemnified party for any reason, then each applicable indemnifying party shall have a joint and several obligation to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively “Losses”) to which such indemnified party may be subject in such proportion as is appropriate to reflect the relative benefits received by such indemnifying party, on the one hand, and such indemnified party, on the other hand, from the Initial Placement and the Registration Statement which resulted in such

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Losses; provided, however, that in no case shall the Placement Agents be responsible, in the aggregate, for any amount in excess of the purchase discount or commission applicable to such Security, or in the case of a New Security, applicable to the Security that was exchangeable into such New Security, nor shall any Holder be responsible, in the aggregate for any amount in excess of the amount by which the total price at which Registrable Securities were sold by such Holder exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of any untrue or alleged untrue statement or omission or alleged omission which resulted in such Losses, nor shall any underwriter be responsible for any amount in excess of the underwriting discount or commission applicable to the securities purchased by such underwriter under the Registration Statement which resulted in such Losses. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the indemnifying party and the indemnified party shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of such indemnifying party, on the one hand, and such indemnified party, on the other hand, in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company shall be deemed to be equal to the sum of (i) the total net proceeds from the Initial Placement (before deducting expenses) as set forth on the cover page of the Final Memorandum and (ii) the total amount of additional interest which the Company was not required to pay as a result of registering the securities covered by the Registration Statement which resulted in such Losses. Benefits received by the Placement Agents shall be deemed to be equal to the total purchase discounts and commissions, and benefits received by any other Holders shall be deemed to be equal to the value of receiving Securities or New Securities, as applicable, registered under the Act. Benefits received by any underwriter shall be deemed to be equal to the total underwriting discounts and commissions, as set forth on the cover page of the Prospectus forming a part of the Registration Statement which resulted in such Losses. Relative fault shall be determined by reference to, among other things, whether any untrue or any alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information provided by the indemnifying party, on the one hand, or by the indemnified party, on the other hand, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contribution were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section, each person who controls a Holder within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of such Holder shall have the same rights to contribution as such Holder, and each person who controls the Company within the meaning of either the Act or the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d).
     (e) The provisions of this Section will remain in full force and effect, regardless of any investigation made by or on behalf of any Holder or the Company or any of the officers, directors or controlling persons referred to in this Section hereof, and will survive the sale by a Holder of securities covered by a Registration Statement.

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     7. Underwritten Registrations. (a) If any of the Securities or New Securities, as the case may be, covered by any Shelf Registration Statement are to be sold in an underwritten offering, the Managing Underwriters shall be selected by the Majority Holders.
     (b) No person may participate in any underwritten offering pursuant to any Shelf Registration Statement, unless such person (i) agrees to sell such person’s Securities or New Securities, as the case may be, on the basis reasonably provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements.
     8. Registration Defaults. If any of the following events shall occur, then the Company shall pay liquidated damages (the “Registration Default Damages”) to the Holders of Securities in respect of the Securities as follows:
     (a) if on or prior to the 270th day of following the Closing Date, neither the Registered Exchange Offer has been completed nor the Shelf Registration Statement has been declared effective, then Registration Default Damages shall accrue on the Registrable Securities at a rate of .25% per annum and shall be payable in accordance with the interest payment provisions of the Securities; or
     (b) if any Registration Statement required by this Agreement has been declared effective but ceases to be effective at any time at which it is required to be effective under this Agreement, then commencing on the day the Registration Statement ceases to be effective, Registration Default Damages shall accrue on the Registrable Securities at a rate of .25% per annum and shall be payable in accordance with the interest payment provisions of the Securities;
provided, however, that (i) upon completion of the Registered Exchange Offer or the effectiveness of the Shelf Registration Statement (in the case of paragraph (a) above), or (ii) upon the effectiveness of the Registration Statement which had ceased to remain effective (in the case of paragraph (b) above), Registration Default Damages shall cease to accrue.
     9. No Inconsistent Agreements. The Company has not entered into, and agrees not to enter into, any agreement with respect to its securities that is inconsistent with the rights granted to the Holders herein or that otherwise conflicts with the provisions hereof.
     10. Amendments and Waivers. The provisions of this Agreement may not be amended, qualified, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Holders of a majority of the aggregate principal amount of the Registrable Securities outstanding; provided that, with respect to any matter that directly or indirectly affects the rights of the Placement Agents hereunder, the Company shall obtain the written consent of the Placement Agents against which such amendment, qualification, supplement, waiver or consent is to be effective; provided, further, that no amendment, qualification, supplement, waiver or consent with respect to Section 8 hereof shall be effective as against any Holder of Registered

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Securities unless consented to in writing by such Holder; and provided further that the provisions of this Section 10 may not be amended, qualified, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Placement Agents and each Holder. Notwithstanding the foregoing (except the foregoing provisos), a waiver or consent to departure from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose Securities or New Securities, as the case may be, are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by the Majority Holders, determined on the basis of Securities or New Securities, as the case may be, being sold rather than registered under such Registration Statement.
     11. Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telex, telecopier or air courier guaranteeing overnight delivery:
     (a) if to a Holder, at the most current address given by such holder to the Company in accordance with the provisions of this Section 11, which address initially is, with respect to each Holder, the address of such Holder maintained by the Registrar under the Indenture;
     (b) if to the Placement Agents, initially at the address or addresses set forth in the Placement Agreement; and
     (c) if to the Company, initially at its address set forth in the Placement Agreement.
     All such notices and communications shall be deemed to have been duly given when received.
     The Placement Agents or the Company by notice to the other parties may designate additional or different addresses for subsequent notices or communications.
     12. Remedies. Each Holder, in addition to being entitled to exercise all rights provided to it herein, in the Indenture or in the Placement Agreement or granted by law, including recovery of liquidated or other damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive in any action for specific performance the defense that a remedy at law would be adequate.
     13. Successors. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns, including, without the need for an express assignment or any consent by the Company thereto, subsequent Holders of Securities and the New Securities. The Company hereby agrees to extend the benefits of this Agreement to any Holder of Securities and the New Securities, and any such Holder may specifically enforce the provisions of this Agreement as if an original party hereto.

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     14. Jurisdiction. Each of the parties hereto agrees that any suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby may be instituted in any State or U.S. federal court in The City of New York and County of New York, and waives any objection which it may now or hereafter have to the laying of venue of any such proceeding, and irrevocably submits to the jurisdiction of such courts in any suit, action or proceeding. The Company hereby appoints CT Corporation System, 111 Eighth Avenue, New York, New York 10011, as its authorized agent (the “Authorized Agent”) upon whom process may be served in any suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated herein which may be instituted in any State or U.S. federal court in The City of New York and County of New York, by any Holder or the Placement Agents, the directors, officers, employees and agents of any Holder or the Placement Agents, or by any person who controls any Holder or the Placement Agents, and expressly accepts the jurisdiction of any such court in respect of any such suit, action or proceeding. The Company hereby represents and warrants that the Authorized Agent has accepted such appointment and has agreed to act as said agent for service of process, and the Company agrees to take any and all action, including the filing of any and all documents that may be necessary to continue such appointment in full force and effect as aforesaid. Service of process upon the Authorized Agent shall be deemed, in every respect, effective service of process upon the Company. The Company further agrees to take any and all action, including the execution and filing of any and all such documents and instruments, as may be necessary to continue such designation and appointment in full force and effect so long as any of the Securities shall be outstanding. To the extent that the Company may acquire any immunity from jurisdiction of any court or from any legal process (whether through service of notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, it hereby irrevocably waives such immunity in respect of this Agreement, to the fullest extent permitted by law.
     15. Currency. Each reference in this Agreement to U.S. dollars (the “relevant currency”) is of the essence. To the fullest extent permitted by law, the obligation of the Company in respect of any amount due under this Agreement will, notwithstanding any payment in any other currency (whether pursuant to a judgment or otherwise), be discharged only to the extent of the amount in the relevant currency that the party entitled to receive such payment may, in accordance with its normal procedures, purchase with the sum paid in such other currency (after any premium and costs of exchange) on the Business Day immediately following the day on which such party receives such payment. If the amount in the relevant currency that may be so purchased for any reason falls short of the amount originally due, the Company will pay such additional amounts, in the relevant currency, as may be necessary to compensate for the shortfall. Any obligation of the Company not discharged by such payment will, to the fullest extent permitted by applicable law, be due as a separate and independent obligation and, until discharged as provided herein, will continue in full force and effect.
     16. Waiver of Immunity. To the extent that the Company has or hereafter may acquire any immunity (sovereign or otherwise) from any legal action, suit or proceeding, from jurisdiction of any court or from set-off or any legal process (whether service or notice, attachment in aid or otherwise) with respect to itself or any of its property, the Company hereby irrevocably waives and agrees not to plead or claim such immunity in respect of its obligations under this Agreement.

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     17. Third Party Beneficiary. The Holders shall be third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Placement Agents, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder.
     18. Counterparts. This Agreement may be signed in one or more counterparts, each of which shall constitute an original and all of which together shall constitute one and the same agreement.
     19. Headings. The section headings used herein are for convenience only and shall not affect the construction hereof.
     20. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed in the State of New York.
     21. Severability. In the event that any one of more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected thereby, it being intended that all of the rights and privileges of the parties shall be enforceable to the fullest extent permitted by law.
     22. Securities Held by the Company, etc. Whenever the consent or approval of Holders of a specified percentage of principal amount of Securities or New Securities is required hereunder, Securities or New Securities, as applicable, held by the Company or its Affiliates (other than subsequent Holders of Securities or New Securities if such subsequent Holders are deemed to be Affiliates solely by reason of their holdings of such Securities or New Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage.

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     If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this letter and your acceptance shall represent a binding agreement between the Company and the Placement Agents.
             
    Very truly yours,    
 
           
    KANSAS CITY SOUTHERN de
          MÉXICO, S.A. de C.V.
   
 
           
 
  By:        
 
     
 
Name:
   
 
      Title:    
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.

Morgan Stanley & Co. Incorporated
Banc of America Securities LLC
BBVA Securities Inc.
BMO Capital Markets Corp.
Scotia Capital (USA) Inc.
By: Morgan Stanley & Co. Incorporated
         
By:
       
 
 
 
Name:
   
 
  Title:    
 
       
By: Banc of America Securities LLC    
 
       
By:
       
 
 
 
Name:
   
 
  Title:    

 


 

ANNEX A
     Each broker-dealer that receives new securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such new securities. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new securities received in exchange for securities where such securities were acquired by such broker-dealer as a result of market-making activities or other trading activities. The company has agreed that, starting on the expiration date and ending on the close of business one year after the expiration date, it will make this prospectus available to any broker-dealer for use in connection with any such resale. See “Plan of Distribution”.

 


 

ANNEX B
     Each broker-dealer that receives new securities for its own account in exchange for securities, where such securities were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such new securities. See “Plan of Distribution”.

 


 

ANNEX C
PLAN OF DISTRIBUTION
     Each broker-dealer that receives new securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such new securities. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new securities received in exchange for securities where such securities were acquired as a result of market-making activities or other trading activities. The company has agreed that, starting on the expiration date and ending on the close of business one year after the expiration date, it will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale.
     The company will not receive any proceeds from any sale of new securities by brokers-dealers. New securities received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the new securities or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such new securities. Any broker-dealer that resells new securities that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such new securities may be deemed to be an “underwriter” within the meaning of the Act and any profit of any such resale of new securities and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Act.
     For a period of one year after the expiration date, the company will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The company has agreed to pay all expenses incident to the Exchange offer (including the expenses of one counsel for the holder of the securities) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the securities (including any broker-dealers) against certain liabilities, including liabilities under the Act.
[If applicable, add information required by Regulation S-K Items 507 and/or 508.]

 


 

ANNEX D
Rider A
PLEASE FILL IN YOUR NAME AND ADDRESS BELOW IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
         
Name:
       
 
 
 
   
 
       
Address:
       
 
 
 
   
 
       
 
 
 
   
Rider B
If the undersigned is not a Broker-Dealer, the undersigned represents that it acquired the New Securities in the ordinary course of its business, it is not engaged in, and does not intend to engage in, a distribution of New Securities and it has no arrangements or understandings with any person to participate in a distribution of the New Securities nor will it have any such arrangements or understandings upon consummation of the Exchange Offer. If the undersigned is a Broker-Dealer that will receive New Securities for its own account in exchange for Securities, it represents that the Securities to be exchanged for New Securities were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus in connection with any resale of such New Securities; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an “underwriter” within the meaning of the Act.

 

EX-3.2 3 c12119exv3w2.htm AMENDED AND RESTATED BY-LAWS exv3w2
 

EXHIBIT 3.2
BY-LAWS
OF
KANSAS CITY SOUTHERN
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
As amended and restated to January 18, 2007
ARTICLE I
MEETINGS OF STOCKHOLDERS
     Section 1. Place of Meetings. Meetings of stockholders for any purpose may be held at such time and place, within or without the State of Delaware, as shall be designated by the Board of Directors and stated in the notice of the meeting.
     Section 2. Annual Meetings. The annual meeting of the stockholders, at which they shall elect directors and transact such other business as may properly be brought before the meeting, shall be held on the first Thursday of May in each year unless the Board of Directors shall designate some other date therefor.
     To be properly brought before the meeting, business must be either (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before the meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, such a stockholder’s notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 45 days nor more than 90 days prior to the meeting; provided, however, that in the event that the meeting is designated by the Board of Directors to be held at a date other than the first Thursday in May and less than 60 days’ notice or prior public disclosure of the date of the meeting is given or made to stockholders, to be timely, the notice by the stockholder must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. A stockholder’s notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address of the stockholder proposing such business, (iii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the stockholder and the name and address of record under which such stock is held and (iv) any material interest of the stockholder in such business.
     Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this

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Section 2 of Article I; provided, however, that nothing in this Section 2 of Article I shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting.
     The Chairman of the annual meeting shall have the power to determine whether or not business was properly brought before the meeting in accordance with the provisions of this Section 2 of Article I, and, if the Chairman should determine that any such business was not properly brought before the meeting, the Chairman shall so declare to the meeting and any such business shall not be transacted.
     Section 3. Notice of Annual Meetings. Written notice of each annual meeting of the stockholders stating the place, day and hour of the meeting, shall be given to each stockholder entitled to vote thereat, at least ten (10) days before the date of the meeting.
     Section 4. Quorum. Except as otherwise required by statute, by the Certificate of Incorporation or by these By-Laws, the presence, in person or by proxy, of stockholders holding a majority in number of shares of the stock issued and outstanding and entitled to vote, shall constitute a quorum at all meetings of the stockholders. If, at any such meeting, such quorum shall not be present or represented, the stockholders present in person or by proxy shall have power to adjourn the meeting from time to time without notice other than announcement at the meeting until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present in person or by proxy, any business may be transacted which might have been transacted at the meeting as originally noticed.
     Section 5. Voting. Each holder of shares of common stock and preferred stock shall be entitled to vote on the basis of one vote for each voting share held by him, except as provided in the Certificate of Incorporation and except that in elections for directors when the holders of the preferred stock do not have the right, voting as a class, to elect two directors, each holder of voting shares shall be entitled to as many votes as shall equal the number of shares which he is entitled to vote, multiplied by the number of directors to be elected and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or any two or more of them, as he may see fit.
     Section 6. List of Stockholders Entitled to Vote. The Board of Directors shall cause the officer who has charge of the stock ledger of the corporation to prepare and make, at least ten (10) days before every election of directors, a complete list of the stockholders entitled to vote at said election, arranged in alphabetical order, showing the address of and the number of shares of common stock and preferred stock registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the election, either at a place within the city where the election is to be held, and which place be specified, at the place where said meeting, or, if not specified, at the place where said meeting is to be held, and the list shall be produced and kept at the time and place of election during the whole time thereof, and subject to the inspection of any stockholder who may be present.
     Section 7. Inspectors. For each meeting of stockholders there may be appointed by the Board of Directors or by the Chairman of the meeting three (3) inspectors of election. If any inspector shall fail or be unable to serve as inspector or for any reason be unable to complete his duties, an alternate inspector shall be appointed by the Board of Directors or the Chairman

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of the meeting. The inspectors of election shall examine and canvass the proxies and ballots, and make and submit a signed report of the votes cast at the meeting, which shall be entered at large upon the records.
     Section 8. Inspectors’ Oath. An inspector, before he enters on the duties of his office, shall take and subscribe an oath substantially in the following form before any officer authorized by law to administer oaths:
“I do solemnly swear that I will execute the duties of an inspector of the election now to be held with strict impartiality and according to the best of my ability.”
     Section 9. Special Meeting. Special meetings of the stockholders for any purpose or purposes may be called at any time by the Chairman of the Board of Directors or the Chief Executive Officer, or at the request in writing of a majority of the Board of Directors, by giving ten (10) days written notice thereof to the stockholders. Business transacted at any special meeting of the stockholders shall be limited to the purpose stated in the notice.
     Section 10. Organization. The Chairman of the Board of Directors, and in his absence the Chief Executive Officer, the President or one of the Vice Presidents, shall call meetings of the stockholders to order and act as Chairman of such meeting. In the absence of all these officers, the Board of Directors may appoint a Chairman of the meeting. The Secretary of the Corporation shall act as secretary at all meetings of the stockholders; but the Board of Directors may designate an Assistant Secretary for that purpose before the meeting and, if no such designation shall have been made, then such designation may be made by the Chairman of the meeting. The conduct of any meeting of the stockholders shall be governed by such rules, regulations and procedures as the Chairman of the meeting, in his sole and exclusive discretion shall determine.
     Section 11. Stockholder Nomination of Directors.
     (a) Any stockholder who meets the requirements of this section may submit a director candidate nomination for consideration by the Nominating and Corporate Governance Committee by complying with the requirements of this section, including: (i) the nomination must be made for an election to be held at a meeting of stockholders at which directors are otherwise to be elected; (ii) the stockholder must be a record owner on the record date for that meeting, and at the meeting, of securities representing at least two percent (2%) of the securities entitled to be voted at the meeting for election of directors; (iii) the stockholder must deliver a timely written nomination notice to the office of the Corporate Secretary, providing the information required by this section; and (iv) the nominee must meet the minimum qualifications for Directors established by the Board.
     (b) To be timely for an annual meeting, a stockholder’s nomination notice must be received by the Corporate Secretary’s office not later than the 90th day, nor earlier than the 150th day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that if the date of the annual meeting is to be more than 30 days before, or more than 60 days after, such anniversary date, notice by the stockholder to be timely must be delivered not earlier than the 150th day prior to such annual meeting and not later than the 15th day following the day on which public announcement of the date of such annual meeting was first made by the Corporation.

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     (c) To be timely for a special stockholders’ meeting at which directors will be elected, a stockholder’s nomination notice must be received by the Corporate Secretary’s office not later than the close of business on the 15th day following the day on which the Corporation shall first publicly announce the date of the special meeting.
     (d) For purposes of these Bylaws, “public announcement” shall mean disclosure (i) in any press release distributed by the Corporation, (ii) published by the Corporation on its website or (iii) included in a document publicly filed by the Corporation with the Securities and Exchange Commission.
     (e) The stockholder’s nomination notice shall include as to each person whom the stockholder proposes to nominate (i) all information relating to such person as shall be required to be disclosed in solicitations of proxies for election of directors, or as otherwise required, pursuant to applicable rules of the Securities and Exchange Commission or the New York Stock Exchange; (ii) the nominee’s written consent to be named in the proxy statement, to serve as a director and to comply with the Corporation’s rules, guidelines and policies applicable to Directors; (iii) the name and address of the stockholder and the telephone number(s) at which the Corporation will be able to reach the stockholder and the nominee during normal business hours; (iv) the class and number of shares of the Corporation which are owned beneficially and of record by the stockholder; (v) a fully completed Director’s Questionnaire on the form supplied by the Corporation, executed by the nominee; and (vi) such other information as the Nominating and Corporate Governance Committee shall reasonably deem relevant, to be provided within such time limits as shall reasonably be imposed by the Nominating and Corporate Governance Committee.
     (f) Notwithstanding the foregoing, or anything else in these Bylaws to the contrary no nominee from a stockholder will be considered who was previously submitted for election to the Board of Directors and failed to receive at least 25% of the votes cast at such election, until a period of three years has passed from the date of such election.
ARTICLE II
BOARD OF DIRECTORS
     Section 1. General Powers. The general management of the business and affairs and all the corporate powers of the Corporation shall be vested in and exercised by its Board of Directors which shall exercise all of the powers of the Corporation except such as are by statute, or by the Certificate of Incorporation or by these By-Laws, conferred upon or reserved to the stockholders. The directors shall act only as a Board and the individual directors shall have no power as such.
     Section 2. Number, Term and Qualifications. The number of directors shall not be less than three nor more than eighteen, the exact number of directors to be determined from time to time by resolution adopted by a majority of the whole Board, and such exact number shall be eighteen until otherwise determined by resolution adopted by a majority of the whole Board. Directors need not be stockholders.

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     The Board of Directors shall be divided into three classes as nearly equal in number as possible. At each annual meeting of stockholders, successors to directors of the class whose terms then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting of stockholders. When the number of directors is changed, any newly created directorships or any decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as possible. Notwithstanding the foregoing, whenever the holders of the preferred stock shall have the right, voting as a class, to elect two directors at the next annual meeting of stockholders, the terms of all directors shall expire at the next annual meeting of stockholders, and then and thereafter all directors shall be elected for a term of one year expiring at the succeeding annual meeting.
     No person who has attained the age of 72 shall be eligible to be nominated or to serve as a member of the Board of Directors, but any person who shall attain the age of 72 during the term of directorship to which he was elected shall be eligible to serve the remainder of such term.
     Section 3. Election of Directors. Directors shall be elected at the annual meetings of stockholders by ballot in the manner provided in these By-Laws and the Certificate of Incorporation.
     Section 4. Newly Created Directorships and Vacancies. Newly created directorships and vacancies which shall occur in the Board of Directors because of death, resignation, disqualification or any other cause, may be filled by a majority of the directors then in office, though less than a quorum, pursuant to Section 223 of the General Corporation Law of Delaware. Such directors may, by resolution, eliminate any vacant directorship thereby reducing the size of the whole Board of Directors but in no event shall the size of the Board of Directors be reduced to less than three directors. No decrease in the Board of Directors shall shorten the term of any incumbent directors.
     Section 5. Resignations. Any director of the Corporation may resign at any time by giving written notice to the Chairman of the Board of Directors or, in his absence, the Presiding Director. Such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein. Unless otherwise provided therein, the acceptance of such resignation shall not be necessary to make it effective.
     Section 6. Organization. The Board of Directors shall hold its organizational meeting as soon as practicable after the Annual Meeting of Stockholders. The Chairman of the Board of Directors, or in his absence the Presiding Director, or in the absence of both of them, a director elected by the remaining directors, shall preside at all meetings of the Board of Directors.
     Section 7. Place of Meetings. The Board of Directors may hold its meetings, both regular and special, at such place or places, within or without the State of Delaware as determined by the Board of Directors.
     Section 8. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such times and at such places as shall from time to time be determined by the Board of Directors.

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     Section 9. Special Meetings. Special meetings of the Board of Directors may be called at the request of the Chairman of the Board of Directors, the Executive Committee, or of the Chief Executive Officer, or of any three members of the Board of Directors. Notice of the time and place of such meeting shall be given either by mail to each director at least three (3) days before such meeting or personally, by telephone, or by telegram to each director at least twelve (12) hours before such meeting.
     Section 10. Quorum. A majority of the Board of Directors at a meeting duly assembled shall be necessary to constitute a quorum for the transaction of business except as otherwise provided by statute, by the Certificate of Incorporation or by these By-Laws. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of the directors present may adjourn the meeting from time to time until a quorum be present, without notice other than by announcement at the meeting.
     Section 11. Report to Stockholders. The Chief Executive Officer shall make a report or statement of the affairs of the Corporation at each regular annual meeting of the stockholders.
     Section 12. Compensation. The directors may receive reasonable fees to be determined from time to time by the Board of Directors for services actually performed in attending meetings and for other services actually performed and the expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board of Directors. A director who is, at the same time, an officer or employee of the Corporation or of any subsidiary or affiliate, shall not be entitled to receive any compensation or fee for service as a director or as a member of any committee of the Board of Directors.
     Section 13. Consent of Directors in Lieu of Meeting. Unless otherwise restricted by the Certificate of Incorporation or By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or Directors or Committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or Committee.
ARTICLE III
COMMITTEES
     Section 1. Executive Committee: Organization and Powers. There shall be an Executive Committee to consist of the Chairman of the Board of Directors, the Chief Executive Officer and two (2) or more non-officer directors, the number of which being fixed from time to time by resolution adopted by a majority vote of the whole Board of Directors. The Board of Directors shall elect the members of the Executive Committee by vote of a majority of the whole Board of Directors and one member of the Executive Committee shall be elected as Chairman

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by the vote of a majority of the whole Board of Directors. The members of the Executive Committee shall be elected annually at the Board’s organizational meeting or as soon as thereafter as possible.
     When the Board of Directors is not in session, the Executive Committee shall have and may exercise all the powers of the Board of Directors in the management of the business and affairs of the Corporation in all cases in which specific directions shall not have been given by the Board of Directors including, but not limited to, the power to declare dividends on the common and preferred stock of the Corporation, and to authorize the seal of the Corporation to be affixed to all papers which may require it. The members of the Executive Committee shall act only as a committee and individual members shall have no power as such.
     Section 2. Compensation and Organization Committee: Organization and Powers. There shall be a Compensation and Organization Committee to consist of three (3) or more non-employee directors, the number of which being fixed from time to time by resolution adopted by a majority vote of the whole Board of Directors, a majority of whom shall be independent. The Board of Directors shall elect the members of the Compensation and Organization Committee by vote of a majority of the whole Board of Directors, and one member of the Compensation and Organization Committee shall be elected its Chairman by the vote of a majority of the whole Board of Directors. The members of the Compensation and Organization committee shall be elected annually at the Board’s organizational meeting or as soon thereafter as possible.
     The Compensation and Organization Committee shall have the power: to authorize and determine all salaries for the officers and supervisory employees of the Corporation and subsidiary companies as may be prescribed from time to time by resolution adopted by the Board of Directors; to administer the incentive compensation plans of the Corporation, The Kansas City Southern Railway Company and the other subsidiaries of the Corporation in accordance with the powers and authority granted in such plans; and to determine any incentive allowances to be made to officers and staff of the Corporation and its subsidiaries. The Compensation and Organization Committee shall have the power to administer the Employee Stock Purchase Plan of the Corporation under which eligible employees of the Corporation and its subsidiaries and affiliates are permitted to subscribe to and to purchase shares of the Corporation common stock through payroll deductions.
     The Compensation and Organization Committee shall have full power: to act as the Stock Option Plan Committee to construe and interpret any stock option plan or similar plan of the Corporation and all options, stock appreciation rights and limited rights granted under this plan or any other plan; to determine the terms and provisions of the respective option agreements, including such terms and provisions as, in the judgement of the Committee, are necessary or desirable to qualify any of the options as “incentive stock options”; to establish and amend rules for its administration; to grant options, stock appreciation rights and limited rights under any stock option plan of the Corporation; to determine and designate the recipients of options, stock appreciation rights and limited rights; to determine and designate the dates that options, stock appreciation rights and limited rights are granted; to determine and designate the number of shares subject to options, stock appreciation rights and limited rights; to determine and designate the option prices and option periods; and to correct any defect or supply any omission or reconcile any inconsistency in any stock option plan of the Corporation or in any option, stock appreciation right or limited right to the extent the Committee deems

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desirable to carry any stock option plan or any option, stock appreciation right or limited right into effect.
     The Compensation and Organization Committee shall also have the power: to review the consolidated earnings of the Corporation and to make recommendations to the Board of Directors with respect to the allocation of funds to the Corporation’s Profit Sharing Plan; and to review the results of the investment program of the Profit Sharing Plan and make reports thereof to the Board of Directors.
     The Compensation and Organization Committee shall also have the power and duty to initiate, review and approve succession plans and major organizational plans and changes within the Corporation and its subsidiaries.
     Section 3. Audit Committee: Organization and Powers. There shall be an Audit Committee to consist of three (3) or more directors who meet the requirements of the New York Stock Exchange and the Securities and Exchange Commission, the number of which being fixed from time to time by resolution adopted by a majority vote of the whole Board of Directors. The Board of Directors shall elect the members of the Audit Committee by vote of a majority of the whole Board of Directors and one member of the Audit Committee shall be elected as Chairman by a vote of a majority of the whole Board of Directors. The members of the Audit Committee shall be appointed by the Board of Directors to serve staggered three-year terms.
     The Audit Committee shall have the power and the duty to meet with and consider suggestions from members of management and of the Corporation’s internal audit staff, as well as with the Corporation’s independent accountants, concerning the financial operations of the Corporation. The Audit Committee shall additionally have the power to review audited financial statements of the Corporation and consider and recommend the employment of, and approve the fee arrangement with, independent accountants for both audit functions and for advisory and other consulting services.
     Section 4. Nominating and Corporate Governance Committee: Organization and Powers. There shall be a Nominating and Corporate Governance Committee consisting of three (3) or more directors, the number of which being fixed from time to time by resolution adopted by a majority vote of the whole Board of Directors. Each member of this Committee shall be affirmatively determined by a majority vote of the whole Board of Directors to qualify as independent under the New York Stock Exchange listing standards then in effect. The members of the Nominating and Corporate Governance Committee shall be elected and vacancies filled by the vote of a majority of the whole Board of Directors, and one member of the Nominating and Corporate Governance Committee shall be elected its Chairman by the vote of a majority of the whole Board of Directors. The members of the Nominating and Corporate Governance Committee shall be elected by the Board of Directors to serve staggered three-year terms.
     The primary purposes of this Committee shall be to (i) identify and recommend to the Board of Directors qualified nominees for election to the Board of Directors (whether for election by the stockholders or by the Board of Directors) and (ii) to advise the Board of Directors with respect to the establishment, implementation and evaluation of corporate governance guidelines applicable to the Company. The Committee shall prepare and present

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to the Board of Directors for approval a written charter setting forth in more detail the duties and responsibilities of the Committee.
     Section 5. Finance Committee: Organization and Powers. There shall be a Finance Committee consisting of three (3) or more directors, the number of which shall be fixed from time to time by resolution adopted by a majority vote of the whole Board of Directors, and a majority of the Committee shall be non-officer directors. The Board of Directors shall elect the members of the Finance Committee by vote of a majority of the whole Board of Directors and one member of the Finance Committee shall be elected as Chairman by the vote of a majority of the whole Board of Directors. The members of the Finance Committee shall be elected annually at the Board’s organizational meeting or as soon thereafter as possible.
     The Finance Committee shall have the power and duty to review and oversee the capital structure of the Corporation and its subsidiaries and to make recommendations relating thereto to the Board of Directors.
     Section 6. Rules, Records, Reports and Charters. The Committees may make and adopt such rules and regulations governing their proceedings as they may deem proper and which are consistent with the statutes of the State of Delaware, the Certificate of Incorporation and By-Laws. Each Committee shall adopt a charter, to be approved by the Board of Directors and reviewed annually. In addition to the authority, duties and obligations expressly set forth in these Bylaws, the Committees shall have such authority, duties and obligations as shall be set forth in their respective Charters, as approved by the Board of Directors. The Committees shall keep a full and accurate record of all their acts and proceedings and report the same from time to time to the Board of Directors.
     Section 7. Meetings. Regular meetings of the committees shall be held at such times and at such places as from time to time may be fixed by the committees. Special meetings of the committees may be held at such other times as may in the judgement of the Chairman or, he being absent, in the judgement of a member, be necessary. Notice of regular meetings need not be given. Notice of special meetings shall be given to each member by mail not less than three (3) days before the meeting or personally, by telephone or telegram to each member not less than twelve (12) hours before the meeting, unless the Chairman of the committee, or a member acting in that capacity in his absence, shall deem a shorter notice expedient.
     Section 8. Quorum. A majority of members of a committee shall constitute a quorum for the transaction of business and the act of a majority of those present shall be the act of the committee (except with respect to the Compensation and Organization Committee, in which any act of the Compensation and Organization Committee when acting as the Stock Option Plan Committee under any stock option plan, must be authorized and approved by at least (3) members).
     Section 9. Subcommittees. A committee may appoint such subcommittees as it shall deem necessary.
     Section 10. Vacancies. Any vacancy in a committee shall be filled by a majority of the whole Board of Directors.

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     Section 11. Substitute Members. Whenever at any time a member of any committee shall be absent from a meeting of that committee and it shall be necessary in order to constitute a quorum or, for other reason, it may be deemed expedient or desirable, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously designate a director (subject to the eligibility requirements set forth in Sections 2, 3, and 4 above) to serve and act in his stead; and in the event that the absence of a committee member shall be prolonged, such substitute member may, subject to the approval of the committee, continue to act for the term of its duration. A director so designated shall rank as a duly qualified member of the committee during incumbency, and shall be entitled to participate in its deliberations with the same force and effect as if elected in the manner herein elsewhere provided.
     Section 12. Compensation. Subject to the provisions of Section 12 of Article II of these By-Laws, each member of any committee may receive a reasonable fee to be fixed by the Board of Directors for services actually performed in attending meetings, and for other services actually performed, and shall receive expenses of attendance, if any actually incurred by him for attendance at any meeting of the committee.
ARTICLE IV
OFFICERS, AGENTS AND EMPLOYEES
     Section 1. Election of Officers. The Board of Directors at its annual organizational meeting, shall elect a Chairman of the Board of Directors, Chief Executive Officer and President of the Corporation. The same person may be elected to fulfill more than one of these positions. If the same person serves as Chairman of the Board of Directors and Chief Executive Officer, the Board of Directors shall elect a non-officer director to serve as Presiding Director. The Presiding Director shall, in the absence of the Chairman of the Board of Directors, serve as Chairman of the meetings of the Board of Directors and shall have such other authority and responsibilities as set forth in the Corporate Governance Guidelines of the Corporation approved by the Board of Directors. The Chief Executive Officer shall be a member of the Board of Directors. The Board of Directors may elect a Chief Operating Officer.
     Section 2. Vice Presidents. The Board of Directors may, in its discretion, appoint one or more additional Vice Presidents.
     Section 3. Other Officers. The Board of Directors shall appoint a Secretary, a Treasurer, a General Counsel and Comptroller. The Board of Directors may also appoint one or more Assistant Secretaries, and one or more Assistant Treasurers.
     Section 4. Powers, Duties and Responsibilities. The powers, duties and responsibilities of the officers and employees of the Corporation, which are not prescribed by statute, by the Certificate of Incorporation or by these By-Laws, shall be defined in rules or regulations which may be adopted and from time to time modified or changed by the Board of Directors.
     Section 5. Vacancies. The Board of Directors shall, as soon as practicable, fill any vacancy in the office of Chairman of the Board of Directors, Chief Executive Officer or

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President. Any vacancy in any other office may be filled temporarily by the Chairman of the Board of Directors or the Chief Executive Officer or in case of their temporary incapacity or absence, the President, may make an appointment pro tem and confer on such appointee full power and authority to act in place of any of said officers or appointees so temporarily incapacitated or absent; but such appointment shall be subject to change by the Board of Directors or by the Executive Committee at any regular or special meeting.
     Section 6. Absence from Duty. No officer or employee of the Corporation shall be absent from duty without the consent of the Chief Executive Officer, the President or the head of the department in which he is employed.
     Section 7. Resignations. Any officer may resign at any time by giving written notice to the Chief Executive Officer, President or to the Secretary of the Corporation. Such resignation shall take effect at the date of the receipt of such notice, or at any later time specified therein and, unless otherwise provided therein, the acceptance of such resignation shall not be necessary to make it effective.
     Section 8. Removals. All officers and agents of the Corporation shall be subject to removal at any time by the affirmative vote of a majority of the members of the Board of Directors present at any meeting. All officers and employees not appointed by the Board of Directors shall hold their offices at the discretion of the Executive Committee or of the officer appointing them.
     Section 9. Term of Office. The officers of the Corporation shall hold office for one year and until their successors shall have been duly elected or appointed and qualified, or until they shall die, resign or be removed.
     Section 10. Salaries. The salaries of officers elected or appointed by the Board of Directors or by the Executive Committee, shall be fixed by the Compensation and Organization Committee. The salaries of all other officers and employees shall be fixed by the Chief Executive Officer, or by the President or heads of departments subject to the approval of the Chief Executive Officer; and the compensation of all officers and employees shall be subject to the control of the Board of Directors or of the Compensation and Organization Committee.
     No special compensation shall be paid to any officer or employee unless authorized by the Board of Directors, the Executive Committee or the Compensation and Organization Committee.
CHAIRMAN OF THE BOARD OF DIRECTORS
     Section 11. Duties. The Chairman of the Board of Directors shall preside at all meetings of the Stockholders and the Board of Directors at which he is present and perform such other duties as the Board of Directors may prescribe. In his absence, the President shall discharge the duties of the Chairman of the Board of Directors.
CHAIRMAN OF THE EXECUTIVE COMMITTEE
     Section 12. Duties. The Chairman of the Executive Committee shall preside at all meetings of the Executive Committee. In the absence of the Chairman of the Executive

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Committee, his duties shall be discharged by another member of the Executive Committee selected by the majority vote of the Executive Committee.
CHIEF EXECUTIVE OFFICER
     Section 13. General Powers and Duties. The Chief Executive Officer shall have the general care, supervision and control of the Corporation’s business and operation in all departments under control of the Board of Directors. The Chief Executive Officer shall have such other powers and perform such other duties as the Board of Directors may from time to time prescribe and shall perform such other duties as are incidental to the office of the Chief Executive Officer.
     Section 14. Appointments. Except as otherwise provided by statute, the Certificate of Incorporation, or these By-Laws, the Chief Executive Officer may appoint such additional officers and may employ such persons as he shall deem necessary for the proper management of the business and property of the Corporation.
PRESIDENT
     Section 15. General Powers and Duties. The President shall be the ranking officer in the affairs of the Corporation next below the Chief Executive Officer. In the absence or incapacity of the Chief Executive Officer, the President shall discharge the duties and responsibilities of the Chief Executive Officer. The President shall have such powers and perform such duties as shall from time to time be conferred and prescribed by the Chief Executive Officer, the Board of Directors, or the Executive Committee.
VICE PRESIDENTS
     Section 16. Powers and Duties. The Vice Presidents shall have such powers and perform such duties as shall from time to time be conferred and prescribed by the Board of Directors or by the Executive Committee.
SECRETARY
     Section 17. Duties. The Secretary, or, in his absence, an Assistant Secretary, shall attend all meetings of the stockholders, of the Board of Directors and of the Executive Committee, and shall record their proceedings. He shall report to the Board of Directors and the Executive Committee and through the respective Chairman.
     Section 18. Notice of Meetings. The Secretary shall give due notice of all meetings of the stockholders and of the Board of Directors and of the Executive Committee, where such notice is required by law, by the Certificate of Incorporation, by these By-Laws, by the Board of Directors or by the Executive Committee.
     Section 19. Custody of Seal, Etc. The Secretary shall be custodian of the seal of the Corporation and of its records, and of such papers and documents as may be committed to his care by the Board of Directors or of the Executive Committee. He shall have power to affix the seal of the Corporation to instruments to which the same is authorized to be affixed by the Board of Directors or by the Executive Committee, and shall have power to attest the same.

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He shall perform such other duties as may be assigned to him by the Chairman of the Board of Directors, the Chief Executive Officer, the President, the Board of Directors or the Executive Committee, or as may be prescribed in the rules or regulations to be adopted by the Board of Directors.
     Section 20. Duties of Assistant Secretaries. The Assistant Secretary or Secretaries shall perform such duties as may be assigned to him or them by the Board of Directors or by the Executive Committee, the Chief Executive Officer or the President, or as may be prescribed in the rules or regulations, if any, to be adopted by the Board of Directors or the Executive Committee; and, when authorized by the Board of Directors or by the Executive Committee, he or they shall have the power to affix the corporate seal to instruments and to attest the same, and to sign the certificates of stock of the Corporation.
TREASURER
     Section 21. Duties. The Treasurer, either in person or through competent and faithful assistants, shall receive, keep and disburse all moneys, belonging or coming to the Corporation; he shall keep regular, true and full accounts of all receipts and disbursements, and make detailed reports of the same to the Chief Executive Officer and President and, as requested or when required, to the Board of Directors, Audit Committee, Finance Committee or to the Executive Committee.
     Section 22. Other Duties. The Treasurer shall perform such other duties in connection with the administration of the financial affairs of the Corporation as the Board of Directors or the Executive Committee shall assign to him or as may be prescribed in the rules or regulations to be adopted by the Board of Directors or the Executive Committee. The Treasurer shall give bond in such amount as shall be required by the Board of Directors or by the Executive Committee. Any Assistant Treasurer appointed pursuant to the provisions of these By-Laws shall also give bond in such amount as shall be required by the Board of Directors or by the Executive Committee.
GENERAL COUNSEL
     Section 23. Duties. The General Counsel shall render such legal services and perform such duties as the Board of Directors, Executive Committee, Chairman of the Board of Directors, Chief Executive Officer, President or other elected or appointed officer may request from time to time.
COMPTROLLER
     Section 24. Duties. The Comptroller shall have charge of the Accounting Department. He shall have the supervision and management of all accounts of the Corporation, and shall prescribe, enforce and maintain the system of bookkeeping, and the books, blanks, etc., for keeping the accounts of the Corporation. He shall have the cooperation of all departments. He shall keep regular sets of books, showing a complete record of the general business transactions of the Corporation, and for that purpose shall receive from the Treasurer, Assistant Treasurers and agents of the Corporation such daily or other reports of receipts and disbursements as he may require.

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     Section 25. Custody of Contracts. The Comptroller shall have the custody of all written contracts and other similar written instruments to which the Corporation is a party.
     Section 26. Statements by Comptroller. The Comptroller shall render such statements of the affairs of the Corporation, shown by his books and records, as may be required for the information of the Board of Directors or of the Executive Committee, and shall by proper distribution and classification of the accounts under his charge, be prepared to furnish such reports as may be required by the Chairman of the Board of Directors, the Chief Executive Officer, the President, the Board of Directors, and the Executive Committee, or any state or federal official.
ARTICLE V
CERTIFICATE OF STOCK
     Section 1. Provision for Issue, Transfer and Registration. The Board of Directors shall provide for the issue, transfer and registration of the capital stock of the Corporation in the City of New York or elsewhere, and for that purpose may appoint the necessary officers, transfer agents and registrars of transfers.
     Section 2. Uncertificated Stock; Certificates of Stock. The shares of common stock and preferred stock of the Corporation shall be represented by certificates, unless and until the officers of the Corporation provide for the issuance of some or all of any or all classes or series of such stock to be issued as uncertificated shares. Every holder of stock in the Corporation represented by a certificate shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the Chief Executive Officer, the President or a Vice President and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned.
     Section 3. Facsimile Signatures of Certificates. The signature of any officer, transfer agent, or registrar on a certificate for shares of the Corporation may be facsimile. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been used on, any such certificate or certificates shall cease to be such officer, transfer agent or registrar of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer, transfer agent or registrar of the Corporation. Record shall be kept by the Transfer Agent of the number of each certificate, the date thereof, the name of the person owning the shares represented thereby, and the number of shares. Every certificate surrendered to the Corporation for transfer or exchange shall be canceled by perforation or otherwise with the date of cancellation indicated thereon.
     Section 4. Transfer of Stock. Transfer of stock of the capital stock of the Corporation shall be made only on the books of the Corporation by the holder thereof, or by his attorney thereunto authorized by a power of attorney duly executed and filed with the Transfer Agent of the Corporation, and on surrender for cancellation of the certificate or certificates for such shares represented by certificates. A person in whose name shares of stock stand on the

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books of the Corporation and no one else shall be deemed the owner thereof as regards the Corporation.
     Section 5. Registrar and Transfer Agent. The Corporation shall at all times maintain a registrar, which shall in every case be a bank or trust company, and a transfer agent, to be appointed by the Board of Directors, in accordance with the requirements of the New York Stock Exchange, and registration and transfer of the Corporation’s stock certificates shall be in accordance with the rules and regulations of said stock exchange. The Board of Directors may also make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of shares of the capital stock of the Corporation.
     Section 6. Closing of Transfer Books; Record Date. The Board of Directors may close the stock transfer books of the Corporation for a period not more than sixty (60) days nor less than ten (10) days preceding the date of any meeting of stockholders or the date for payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect. In lieu of closing the stock transfer books as aforesaid, the Board of Directors may fix in advance a date, not more than sixty (60) days nor less than ten (10) days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting, and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock and, in such case, such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, as the case may be notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid.
ARTICLE VI
SEAL
     Section 1. The authorized seal shall have inscribed thereon the name of the Corporation, the year of incorporation and the name of the state of incorporation. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise applied.
ARTICLE VII
FISCAL YEAR
     Section 1. The fiscal year of the Corporation shall commence on the first day of January of each year.

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ARTICLE VIII
NOTICES
     Section 1. Form of Notice. Where notice, other than by publication, is required to be given by Delaware law, the Certificate of Incorporation or By-Laws, notice to directors and stockholders shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such directors or stockholders at such address as appears on the books of the Corporation. Notice by mail shall be deemed to be given at the time when the same shall be mailed. Notice to directors may also be given personally, by telephone, by telegram or in such other manner as may be provided in these By-Laws.
     Section 2. Waiver of Notice. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated herein, shall be deemed equivalent thereto.
ARTICLE IX
INDEMNIFICATION, AMENDMENTS AND MISCELLANEOUS
     Section 1. Indemnification. Each person who, at any time is, or shall have been, a director, officer, employee or agent of the Corporation, and is threatened to be or is made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is, or was, a director, officer, employee or agent of the Corporation, or served at the request of the Corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified against expense (including attorneys’ fees), judgment, fines and amounts paid in settlement actually and reasonably incurred by him in connection with any such action, suit or proceeding to the full extent provided under Section 145 of the General Corporation Law of the State of Delaware. The foregoing right of indemnification shall in no way be exclusive of any other rights of indemnification to which any such director, officer, employee or agent may be entitled, under any By-Law, agreement, vote of stockholders or disinterested directors or otherwise.
     Section 2. Amendments. These By-Laws may be altered, amended or repealed by a vote of a majority of the whole Board of Directors at any meeting of the Board of Directors. The Board of Directors in its discretion may, but need not, submit any proposed alteration, amendment or repeal of the By-Laws to the stockholders at any regular or special meeting of the stockholders for their adoption or rejection; provided notice of the proposed alteration, amendment or repeal be contained in the notice of such stockholders’ meeting.
     Section 3. Proxies. Unless otherwise provided by resolution of the Board of Directors, the Chief Executive Officer or, in his absence or disability, the President, from time to time in the name and on behalf of the Corporation: may appoint an attorney or attorneys, agent or agents of the Corporation (who may be or include himself), in the name and on behalf of the Corporation to cast the votes which the Corporation may be entitled to cast as a stockholder or

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otherwise in any other corporation any of whose stock or other securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporations or to consent in writing to any action by such other corporation; may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent; and may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal all such written proxies or other instruments as may be necessary or proper to evidence the appointment of such attorneys and agents.

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EX-4.43 4 c12119exv4w43.htm THIRD SUPPLEMENTAL INDENTURE exv4w43
 

Exhibit 4.4.3
THIRD SUPPLEMENTAL INDENTURE
     THIRD SUPPLEMENTAL INDENTURE (this “Third Supplemental Indenture”) dated as of February 5, 2007, between THE KANSAS CITY SOUTHERN RAILWAY COMPANY, a corporation duly organized and existing under the laws of the State of Missouri, and the successor by merger to each of Gateway Western Railway Company, KCS Transportation Company, Mid-South Microwave, Inc., and Rice-Carden Corporation (the “Company”), KANSAS CITY SOUTHERN (formerly known as Kansas City Southern Industries, Inc., (the “Parent”), and GATEWAY EASTERN RAILWAY COMPANY, PABTEX, L.P., SOUTHERN DEVELOPMENT COMPANY, SOUTHERN INDUSTRIAL SERVICES, INC., and TRANS-SERVE, INC. (together with the Parent, the “Note Guarantors”), and THE BANK OF NEW YORK, a New York banking corporation, as trustee under the indenture referred to below (the “Trustee”).
W I T N E S S E T H:
     WHEREAS, the Company and the Note Guarantors have heretofore executed and delivered to the Trustee an Indenture (the “Indenture”) dated as of September 27, 2000, and supplemented by a Supplemental Indenture (the “First Supplemental Indenture”) dated as of January 29, 2001 and a Second Supplemental Indenture (the “Second Supplemental Indenture”) dated as of June 10, 2005 providing for the issuance of an aggregate principal amount of up to $300,000,000 of 91/2% Senior Notes due 2008 (the “Securities”); and
     WHEREAS, Section 9.02 of the Indenture provides that, with the written consent of the Holders of a majority in aggregate principal amount of the outstanding Securities (the “Requisite Consents”), the Company, the Note Guarantors and the Trustee may amend the Indenture;
     WHEREAS, Section 6.04 of the Indenture provides that, with the Requisite Consents, the Holders may waive existing Defaults as defined under the Indenture;
     WHEREAS, the Company has completed a consent solicitation (the “Consent Solicitation”) whereby the Company has obtained the Requisite Consents to amend certain sections of the Indenture (the “Amendments”) and waive certain Defaults under the Indenture occurring on or prior to the effectiveness of the Amendments and any and all rights as a consequence thereof to cause the acceleration of principal due and payable (the “Waivers”);
     WHEREAS, in connection with the Consent Solicitation, Holders that delivered a valid consent on a timely basis (the “Consenting Holders”) are entitled to receive a cash fee (the “Cash Fee”) with respect to the Securities in respect of which they have validly consented if the conditions to the Consent Solicitation are met;
     WHEREAS, the Company, the Note Guarantors, and the Trustee are entering into this Third Supplemental Indenture in order to set forth the Amendments; and
     WHEREAS, this Third Supplemental Indenture has been duly authorized by all necessary corporate action on the part of the Company, the Note Guarantors and the Trustee.

 


 

     NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Company, the Note Guarantors and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Securities that the Waivers shall become effective and binding upon the effectiveness of the Amendments, which shall read as follows:
ARTICLE 1
AMENDMENT OF THE INDENTURE
     Section 1.01. Amendment to Section 1.01 of the Indenture. The Company, the Note Guarantors and the Trustee hereby agree to amend Section 1.01, and Section 1.01 is hereby amended by:
     (a) Adding the following language at the end of the definition of Consolidated Interest Expense:
PROVIDED, that Consolidated Interest Expense shall exclude the interest expense of any Restricted Subsidiary in the same proportion as the net income of that Restricted Subsidiary is excluded from Consolidated Net Income.
(b) Adding to the definition of Refinancing Indebtedness the following italicized words:
     “Refinancing Indebtedness” means Indebtedness that is Incurred to refund, refinance, replace, renew, repay or extend (including pursuant to any defeasance or discharge mechanism) any Indebtedness of the Parent or any Restricted Subsidiary existing on the Closing Date or Incurred in compliance with this Indenture (including Indebtedness of the Parent that Refinances Refinancing Indebtedness) including any premiums, accrued interest, fees and expenses related to such refinancing, replacement, renewal, repayment or extension; provided, however, that (a) the Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being Refinanced, (b) the Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being refinanced, (c) such Refinancing Indebtedness is Incurred in an aggregate principal amount (or if issued with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if issued with original issue discount, the aggregate accreted value) then outstanding of the Indebtedness being Refinanced plus any premiums, accrued interest, fees and expenses related to such refinancing, replacement, renewal, repayment or extension and (d) if the Indebtedness being refinanced is subordinated in right of payment to the Securities, such Refinancing Indebtedness is subordinated in right of payment to the Securities at least to the same extent as the Indebtedness being Refinanced; provided further, however, that Refinancing Indebtedness shall not include (i) Indebtedness of a Restricted Subsidiary that Refinances Indebtedness of the Company or (ii) Indebtedness of the Parent or a Restricted Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary.

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ARTICLE 2
MISCELLANEOUS
     2.01. Ratification of Indenture, Supplemental Indentures Part of Indenture. Except as expressly amended hereby, the Indenture, the First Supplemental Indenture, and the Second Supplemental Indenture are in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. Upon the execution and delivery of this Third Supplemental Indenture by the Company, the Note Guarantors and the Trustee, the Indenture shall be supplemented in accordance herewith, this Third Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Securities heretofore or hereafter authenticated and delivered shall be bound hereby.
     Notwithstanding the foregoing, the Amendments set forth herein will have no effect, and this Third Supplemental Indenture shall be null and void, if the Cash Fee is not paid to the Consenting Holders in accordance with the terms and conditions of the Consent Solicitation.
     2.02. Governing Law. THIS THIRD SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
     2.03. Trustee Makes No Representation. The Trustee makes no representation as to the validity or sufficiency of this Third Supplemental Indenture.
     2.04. Severability Clause. In case any provision of this Third Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
     2.04. Counterparts. The parties may sign any number of copies of this Third Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement.
     2.05. Definitions, Effect of Headings. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Indenture. The section headings herein are for convenience only and shall not effect the construction thereof.
     IN WITNESS WHEREOF, the parties hereto have caused this Third Supplemental Indenture to be duly executed as of the date first above written.
         
    THE KANSAS CITY SOUTHERN RAILWAY COMPANY
 
       
 
  By:   /s/ Patrick J. Ottensmeyer
 
       
    Patrick J. Ottensmeyer
    Executive Vice President and Chief Financial Officer

-3-


 

         
    THE KANSAS CITY SOUTHERN
 
       
 
  By:   /s/ Patrick J. Ottensmeyer
 
       
    Patrick J. Ottensmeyer
    Executive Vice President and Chief Financial Officer
 
       
    GATEWAY EASTERN RAILWAY COMPANY
 
       
 
  By:   /s/ Paul J. Weyandt
 
       
    Paul J. Weyandt
    Vice President and Treasurer
 
       
    PABTEX L.P.
 
       
 
  By:   PABTEX GP, LLC, its general partner
 
       
 
  By:         Southern Industrial Services, Inc., its sole member
         
 
       
 
  By:   /s/ Patrick J. Ottensmeyer
 
       
    Patrick J. Ottensmeyer
    Vice President and Treasurer
         
 
       
    SOUTHERN DEVELOPMENT COMPANY
 
       
 
  By:   /s/ Patrick J. Ottensmeyer
 
       
    Patrick J. Ottensmeyer
    Vice President and Treasurer
 
       
    SOUTHERN INDUSTRIAL SERVICES, INC.
 
       
 
  By:   Patrick J. Ottensmeyer
 
       
    Patrick J. Ottensmeyer
    Vice President and Treasurer
 
       
    TRANS-SERVE, INC.
 
       
 
  By:   /s/ Patrick J. Ottensmeyer
 
       
    Patrick J. Ottensmeyer
    Vice President and Treasurer
 
       
    THE BANK OF NEW YORK
 
       
 
  By:   /s/ Mary A. Callahan
 
       
    Mary A. Callahan
    Vice President — Corporate Trust Administration

-4-

EX-4.63 5 c12119exv4w63.htm SECOND SUPPLEMENTAL INDENTURE exv4w63
 

Exhibit 4.6.3
SECOND SUPPLEMENTAL INDENTURE
     SECOND SUPPLEMENTAL INDENTURE (this “Second Supplemental Indenture”) dated as of February 5, 2007, between THE KANSAS CITY SOUTHERN RAILWAY COMPANY, a corporation duly organized and existing under the laws of the State of Missouri, and the successor by merger to each of Mid-South Microwave, Inc., and Rice-Carden Corporation (the “Company”), KANSAS CITY SOUTHERN (the “Parent”), and GATEWAY EASTERN RAILWAY COMPANY, PABTEX GP, LLC, PABTEX, L.P., SIS BULK HOLDING, INC., SOUTHERN DEVELOPMENT COMPANY, SOUTHERN INDUSTRIAL SERVICES, INC., and TRANS-SERVE, INC. (together with the Parent, the “Note Guarantors”), and U.S. BANK NATIONAL ASSOCIATION, a national banking corporation, as trustee under the indenture referred to below (the “Trustee”).
W I T N E S S E T H:
     WHEREAS, the Company and the Note Guarantors have heretofore executed and delivered to the Trustee an Indenture (the “Indenture”) dated as of June 12, 2002, and supplemented by a Supplemental Indenture (the “First Supplemental Indenture”) dated as of June 10, 2005, providing for the issuance of an unlimited principal amount of 71/2% Senior Notes due 2009 (the “Securities”); and
     WHEREAS, Section 9.02 of the Indenture provides that, with the written consent of the Holders of a majority in aggregate principal amount of the outstanding Securities (the “Requisite Consents”), the Company, the Note Guarantors and the Trustee may amend the Indenture;
     WHEREAS, Section 6.04 of the Indenture provides that, with the Requisite Consents, the Holders may waive existing Defaults as defined under the Indenture;
     WHEREAS, the Company has completed a consent solicitation (the “Consent Solicitation”) whereby the Company has obtained the Requisite Consents to amend certain sections of the Indenture (the “Amendments”) and waive certain Defaults under the Indenture occurring on or prior to the effectiveness of the Amendments and any and all rights to cause the acceleration of principal due and payable (the “Waivers”);
     WHEREAS, the Company has completed a consent solicitation (the “Consent Solicitation”) whereby the Company has obtained the Requisite Consents to amend certain sections of the Indenture (the “Amendments”);
     WHEREAS, in connection with the Consent Solicitation, Holders that delivered a valid consent on a timely basis (the “Consenting Holders”) are entitled to receive a cash fee (the “Cash Fee”) with respect to the Securities in respect of which they have validly consented if the conditions to the Consent Solicitation are met;
     WHEREAS, the Company, the Note Guarantors, and the Trustee are entering into this Second Supplemental Indenture in order to set forth the Amendments; and
     WHEREAS, this Second Supplemental Indenture has been duly authorized by all necessary corporate action on the part of the Company, the Note Guarantors and the Trustee.

 


 

     NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Company, the Note Guarantors and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Securities that the Waivers shall become effective and binding upon the effectiveness of the Amendments, which shall read as follows:
ARTICLE 1
AMENDMENT OF THE INDENTURE
     Section 1.01. Amendment to Section 1.01 of the Indenture. The Company, the Note Guarantors and the Trustee hereby agree to amend Section 1.01, and Section 1.01 is hereby amended by:
     (a) Adding the following language at the end of the definition of Consolidated Interest Expense:
PROVIDED, that Consolidated Interest Expense shall exclude the interest expense of any Restricted Subsidiary in the same proportion as the net income of that Restricted Subsidiary is excluded from Consolidated Net Income.
     (b) Adding to the definition of Refinancing Indebtedness the following italicized words:
     “Refinancing Indebtedness” means Indebtedness that is Incurred to refund, refinance, replace, renew, repay or extend (including pursuant to any defeasance or discharge mechanism) any Indebtedness of the Parent or any Restricted Subsidiary existing on the Closing Date or Incurred in compliance with this Indenture (including Indebtedness of the Parent that Refinances Refinancing Indebtedness) including any premiums, accrued interest, fees and expenses related to such refinancing, replacement, renewal, repayment or extension; provided, however, that (a) the Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being Refinanced, (b) the Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being refinanced, (c) such Refinancing Indebtedness is Incurred in an aggregate principal amount (or if issued with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if issued with original issue discount, the aggregate accreted value) then outstanding of the Indebtedness being Refinanced plus any premiums, accrued interest, fees and expenses related to such refinancing, replacement, renewal, repayment or extension and (d) if the Indebtedness being refinanced is subordinated in right of payment to the Securities, such Refinancing Indebtedness is subordinated in right of payment to the Securities at least to the same extent as the Indebtedness being Refinanced; provided further, however, that Refinancing Indebtedness shall not include (i) Indebtedness of a Restricted Subsidiary that Refinances Indebtedness of the Company or (ii) Indebtedness of the Parent or a Restricted Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary.

- 2 -


 

ARTICLE 2
MISCELLANEOUS
     2.01. Ratification of Indenture, Supplemental Indentures Part of Indenture. Except as expressly amended hereby, the Indenture and the First Supplemental Indenture are in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. Upon the execution and delivery of this Second Supplemental Indenture by the Company, the Note Guarantors and the Trustee, the Indenture shall be supplemented in accordance herewith, this Second Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Securities heretofore or hereafter authenticated and delivered shall be bound hereby.
     Notwithstanding the foregoing, the Amendments set forth herein will have no effect, and this Second Supplemental Indenture shall be null and void, if the Cash Fee is not paid to the Consenting Holders in accordance with the terms and conditions of the Consent Solicitation.
     2.02. Governing Law. THIS SECOND SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
     2.03. Trustee Makes No Representation. The Trustee makes no representation as to the validity or sufficiency of this Second Supplemental Indenture.
     2.04. Severability Clause. In case any provision of this Second Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
     2.04. Counterparts. The parties may sign any number of copies of this Second Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement.
     2.05. Definitions, Effect of Headings. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Indenture. The section headings herein are for convenience only and shall not effect the construction thereof.
     IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed as of the date first above written.
         
 
  THE KANSAS CITY SOUTHERN RAILWAY COMPANY
 
       
 
  By:   Patrick J. Ottensmeyer
 
       
    Patrick J. Ottensmeyer
    Executive Vice President and Chief Financial Officer

- 3 -


 

         
    THE KANSAS CITY SOUTHERN
 
       
 
  By:   /s/ Patrick J. Ottensmeyer
 
       
    Patrick J. Ottensmeyer
    Executive Vice President and Chief Financial Officer
 
       
    GATEWAY EASTERN RAILWAY COMPANY
 
       
 
  By:   /s/ Paul J. Weyandt
 
       
    Paul J. Weyandt
    Vice President and Treasurer
 
       
    PABTEX GP, LLC
 
       
 
  By:        Southern Industrial Services, Inc., its sole member
         
 
  By:   Patrick J. Ottensmeyer
 
       
    Patrick J. Ottensmeyer
    Vice President and Treasurer
         
    PABTEX L.P.
 
       
 
  By:        PABTEX GP, LLC, its general partner
 
       
 
  By:        Southern Industrial Services, Inc., its sole member
         
 
  By:   /s/ Patrick J. Ottensmeyer
 
       
    Patrick J. Ottensmeyer
    Vice President and Treasurer
         
    SIS BULK HOLDING, INC.
 
       
 
  By:   /s/ Patrick J. Ottensmeyer
 
       
    Patrick J. Ottensmeyer
    Vice President and Treasurer
 
       
    SOUTHERN DEVELOPMENT COMPANY
 
       
 
  By:   /s/ Patrick J. Ottensmeyer
 
       
    Patrick J. Ottensmeyer
    Vice President and Treasurer

- 4 -


 

         
 
       
    SOUTHERN INDUSTRIAL SERVICES, INC.
 
       
 
  By:   /s/ Patrick J. Ottensmeyer
 
       
    Patrick J. Ottensmeyer
    Vice President and Treasurer
 
       
    TRANS-SERVE, INC.
 
       
 
  By:   /s/ Patrick J. Ottensmeyer
 
       
    Patrick J. Ottensmeyer
    Vice President and Treasurer
 
       
    U.S. BANK NATIONAL ASSOCIATION
 
       
 
  By:   Richard Prokosch
 
       
    Richard Prokosch
    Vice President — Account Manager

- 5 -

EX-10.5.4 6 c12119exv10w5w4.htm FORM OF RESTRICTED SHARES AWARD AND PERFORMANCE SHARES AWARD AGREEMENT exv10w5w4
 

EXHIBIT 10.5.4
KANSAS CITY SOUTHERN
1991 AMENDED AND RESTATED STOCK OPTION
AND PERFORMANCE AWARD PLAN
(As Amended and Restated Effective as of May 5, 2005)
RESTRICTED SHARES AWARD AND PERFORMANCE SHARES AWARD AGREEMENT
     By this Agreement, Kansas City Southern, a Delaware corporation (the “Company”), awards to you, [Name], an employee of the Company or of a Subsidiary, as Grantee, the number of Restricted Shares of the Company’s Common Stock, $.01 par value, set forth below (“Restricted Shares”), and the number of Performance Shares set forth below for each specified Performance Period, which Performance Shares represent a conditional right to receive a number of shares of the Company’s Common Stock, $.01 par value, determined by the satisfaction of target performance goals for a applicable Performance Period (“Performance Shares”). This Award of Restricted Shares and this Award of target Performance Shares are subject to the terms and conditions set forth below and in the attached Exhibit A hereto and in the Kansas City Southern 1991 Amended and Restated Stock Option and Performance Award Plan (As Amended and Restated Effective as of May 5, 2005), as may from time to time be amended (the “Plan”), all of which are an integral part of this Agreement.
RESTRICTED SHARES
     
     Grant Date
  [Date]
     Period of Restriction
  3 Years, ending on [Date]
     Number of Restricted Shares
  [No. of Shares]
TARGET PERFORMANCE SHARES
     
     Grant Date
  [Date]
     Vesting Date
  [Date]
     Number of Target Performance Shares
   
     and CorrespondingPerformance Periods:
   
     
          [No. of Shares]
  [Beginning Date and Ending Date or Calendar Year]
          [No. of Shares]
  [Beginning Date and Ending Date or Calendar Year]
          [No. of Shares]
  [Beginning Date and Ending Date or Calendar Year]
     The Awards evidenced by this Agreement shall not be effective until you have indicated your acceptance of this Agreement by signing one copy of this Agreement in the space provided below and returning it to the Corporate Secretary’s Office, in the envelope provided, within ten (10) days after your receipt of this Agreement from the Company. You should retain one copy of this Agreement for your records.
         
    Kansas City Southern
 
       
 
  By:    
 
       
    Name and Title:
ACCEPTED AND AGREED:
     
 
[Name of Grantee]
   
[Address]
   
[City, State, Zip]
   
Dated:                                        , 200___
   

 


 

EXHIBIT A
to
RESTRICTED SHARES AWARD AND PERFORMANCE SHARES AWARD AGREEMENT
     You receive two Awards under this Agreement: an Award of Restricted Shares and an Award of Performance Shares. This Exhibit A of this Agreement consists of three sections. The first section applies to your Award of Restricted Shares. The second section applies to your Award of Performance Shares. The third section contains provisions that apply to both your Award of Restricted Shares and your Award of Performance Shares. This Exhibit A of this Agreement also includes the attached Schedule of Performance Goals
Restricted Shares Award
     1. Payment. The Restricted Shares are awarded to you without requirement of payment.
     2. Transfer Restrictions. Until the restrictions lapse, the Restricted Shares may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by you, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable; provided that the designation of a beneficiary pursuant to Article 11 of the Plan shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance. Certificates will be transferred to you only as provided in paragraph 3 of this Restricted Shares Award section.
     3. Certificates. You will receive certificates for the number of your Restricted Shares with respect to which the restrictions have lapsed. Until the restrictions lapse, your Restricted Shares either will be evidenced by certificates held by or on behalf of the Company (in which case you will sign and deliver to the Company a stock power relating to the Restricted Shares so that the Company may cancel the Restricted Shares in the event of forfeiture), or the Restricted Shares will be reflected in a book-entry form or other account maintained by the Company, as determined by the Company.
     4. Rights as Stockholder. During the Period of Restriction you will have all of the rights of a stockholder of the Company with respect to the Restricted Shares subject to the provisions of paragraph 2 of this Restricted Shares Award Section.
     5. Lapse of Restrictions Other than Upon Retirement or Disability. The Restricted Shares will vest and no longer be subject to restrictions upon the first of the following events to occur:
          (a) The end of the Period of Restriction, provided your Termination of Affiliation does not occur prior to that date; or
          (b) Your Termination of Affiliation due to your death; or
          (c) A Change in Control.
     6. Lapse of Restrictions Upon Retirement or Disability. If, prior to the occurrence of any of the events specified in paragraph 5 of this Restricted Shares Award section, you have a Termination of Affiliation due to your Retirement or due to your Disability, then upon such Termination of Affiliation, for every consecutive 12-month period of employment completed beginning on the Restricted Shares Grant Date and ending on the date of such Termination of

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Affiliation, one third (1/3) of the number of your Restricted Shares will vest and no longer be subject to restrictions.
     7. Acceleration of Vesting. The Committee may at any time or times in its discretion accelerate the vesting of some or all of your Restricted Shares by specifying a date, other than what is provided in this Agreement, on which the Period of Restriction ends and such Shares will no longer be subject to restrictions. Any such Shares that are then vested under this paragraph 7 will not be forfeited under paragraph 8 of this Restricted Shares Award section.
     8. Forfeiture. If you have a Termination of Affiliation prior to any of the events specified in paragraph 5 and paragraph 6 of this Restricted Shares Award section, then you will forfeit all of your Restricted Shares upon such Termination of Affiliation. If you have a Termination of Affiliation due to your Retirement or due to your Disability under the provisions of paragraph 6 of this Restricted Shares Award section, then you will forfeit that number of your Restricted Shares that are not vested under the provisions of paragraph 6 of this Restricted Shares Award section. All of your rights to and interest in any Restricted Shares that are forfeited under this paragraph 8 will terminate upon forfeiture. You agree to immediately repay to the Company all dividends, if any, paid in cash or in stock with respect to your forfeited Restricted Shares.
Performance Shares Award
     1. Payment. The Performance Shares are awarded to you without requirement of payment by you.
     2. Transfer Restrictions. The Performance Shares are rights that may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by you, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable; provided that the designation of a beneficiary pursuant to Article 11 of the Plan shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance.
     3. Number of Shares Earned. Your Award of Performance Shares specifies a number of Performance Shares awarded with respect to each of three different Performance Periods. The number of Performance Shares designated for a Performance Period represents a target number of Shares to be earned if the Company performance goals (the “Performance Goals”) are met during the Performance Period. As of the last day of each Performance Period, the Committee will determine, in accordance with this paragraph 3, the number of Shares, if any, earned by you with respect to that Performance Period. The earned Shares will be paid as provided in paragraph 7 of this Performance Shares Award section subject to satisfaction of the vesting requirements and forfeiture provisions of paragraph 4 and paragraph 11 of this Performance Shares Award section. The number of Shares earned by you for a Performance Period will equal the percentage determined under this paragraph 3 (the “Applicable Percentage”) multiplied by the number of Performance Shares awarded to you for the Performance Period. The Committee will determine the Applicable Percentage as soon as practicable after the audited financial statements are received for the final year of the Performance Period, or for the Performance Period year if only one year. To determine the Applicable Percentage, the Committee will compare the Company’s actual performance for the Performance Period to the Performance Goals for the Performance Period as set forth on the schedule of Performance Goals attached to this Exhibit A (the “Schedule”). The Schedule describes and defines three levels of Performance Goals: Threshold, Target and Maximum. The Schedule also specifies the Applicable Percentage for each Performance Period if the actual performance for the Performance Period is at

3


 

Threshold, Target or Maximum. If the actual performance is between Threshold and Target, then the Applicable Percentage will be prorated between the specified Applicable Percentage for Threshold and the specified Applicable Percentage for Target. If the actual performance is between Target and Maximum, then the Applicable Percentage will be prorated between the specified Applicable Percentage for Target and the specified Applicable Percentage for Maximum. If the actual performance is below Threshold, then the Applicable Percentage will be 0%. If the actual performance is above Maximum, then the Applicable Percentage will be 200%.
     4. Vesting. The number of Shares earned as determined under paragraph 3 of this Performance Shares Award section will be paid to you only if you become vested in the Shares. You will become vested in the Shares on the Vesting Date provided you do not have a Termination of Affiliation prior to the Vesting Date except as otherwise provided in paragraph 5 and paragraph 6 of this Performance Shares Award section, and subject to any other forfeiture of Shares under paragraph 10 of this Performance Shares Award section. If you have a Termination of Affiliation prior to the Vesting Date, then except as provided in paragraph 5 and paragraph 6 of this Performance Shares Award section, you will forfeit all Performance Shares, and will have no right to earn or receive payment of any Shares under this Agreement.
     5. Termination of Affiliation Due to Disability or Retirement. If you have a Termination of Affiliation prior to the Vesting Date due to Disability or Retirement, then upon such Termination of Affiliation: (a) you will become vested in Shares earned, as determined under paragraph 3 of this Performance Shares Award section, with respect to all Performance Periods completed as of the date of your Termination of Affiliation; and (b) you will forfeit all Performance Shares awarded to you with respect to any Performance Period that is uncompleted as of the date of your Termination of Affiliation and you will have no right to earn or receive payment of any Shares with respect to any Performance Period that is uncompleted as of the date of your Termination of Affiliation.
     6. Termination of Affiliation Due to Change in Control or Death. If you have a Termination of Affiliation prior to the Vesting Date due to a Change in Control or due to your death, then upon such Termination of Affiliation: (a) you will become vested in Shares earned, as determined under paragraph 3 of this Performance Shares Award section, with respect to all Performance Periods completed as of the date of your Termination of Affiliation; and (b) with respect to any Performance Period that is uncompleted as of the date of your Termination of Affiliation, you will be deemed to have earned a number of Shares determined under paragraph 3 of this Performance Shares Award section as if the Performance Goals were at Target, subject to any adjustment by the Committee under the last sentence of paragraph 3.
     7. Payment of Shares. Except as provided in the following sentence, the Shares, if any, earned by you under this Agreement, and not forfeited under this Agreement, will be paid to you, or your beneficiary if you are deceased, by issuing certificates to you or your beneficiary for the number of Shares earned as soon as practicable after the latest to occur of (a) the Vesting Date, or (b) the determination of the number of all Shares, if any, earned by you under this Agreement with respect to all Performance Periods. Notwithstanding the preceding sentence, in the event of vesting prior to the Vesting Date under the provisions of paragraph 5 or paragraph 6 of this Performance Shares Award section, then the Shares, if any, earned by you for a Performance Period will be paid to you or your beneficiary as soon as practicable after the latest to occur of (a) your Termination of Affiliation, or (b) the determination of the number of Shares, if any, earned by you under this Agreement with respect to all Performance Periods.

4


 

     8. Deferral of Payment of Shares. You may elect to defer the time your earned Shares are otherwise to be paid under paragraph 7 of this Performance Shares Award section in accordance with the provisions of a deferral policy established by the Committee at any time or times. Any such deferral policy established by the Committee may be amended from time to time. If you make an authorized election to defer the payment of earned Shares pursuant to such a policy, and if the Company declares a dividend payable to shareholders of record as of a date during such period of deferral, then the Company will pay to you a cash amount equal to the dividend amount (a “dividend equivalent payment”) you would have received with respect to such deferred Shares had the payment of such Shares not been deferred and had you been the owner of such Shares on the record and payment dates of such dividend. Any dividend equivalent payment to be made to you under the preceding sentence will be made on the payment date of the dividend.
     9. Rights as Stockholder. Prior to the time you receive a payment of Shares under this Agreement, you will have no rights of a stockholder of the Company with respect to your Performance Shares or any Shares which may be or have been earned by you. Accordingly, with respect to the Performance Shares or any unearned or earned but unpaid Shares, in addition to the restrictions under paragraph 2 of this Performance Shares Award section, you will not have the right to vote, you will not receive or be entitled to receive cash or non-cash dividends, and you will not have any other beneficial rights as a shareholder of the Company. The provisions of this paragraph 9 do not affect your right, if any, to receive dividend equivalent payments under paragraph 8 of this Performance Shares Award section.
     10. Acceleration of Vesting Date. The Committee may at any time or times in its discretion accelerate the Vesting Date. The Committee will accelerate the Vesting Date by specifying an earlier Vesting Date. Acceleration of the Vesting Date under this paragraph 10 will not result in an earlier payment of any Shares.
     11. Additional Forfeiture Provision and Repayment Obligation. Notwithstanding any provisions of this Agreement to the contrary, if the Committee determines that you have engaged in Gross Misconduct as defined in this paragraph 11, then: (a) you will immediately forfeit all Performance Shares awarded to you, and all earned or unearned Shares, for all Performance Periods under this Agreement, and you will have no right to receive payment of any Shares under this Agreement and (b) you will repay to the Company a number of Shares, or a dollar amount equal to the current Fair Market Value of a number of Shares, equal to the number of Shares previously paid to you under this Agreement. For purposes of this paragraph 11, Gross Misconduct means intentional conduct in disregard of the Company’s expectations of someone in your position with the Company that has caused significant financial harm to the Company, whether occurring before or after your Termination of Affiliation.
Provisions Applicable to Both Restricted Shares Award and Performance Shares Award
     1. Plan Governs. The Restricted Shares Award and the Performance Shares Award and this Agreement are subject to the terms and conditions of the Plan. The Plan is incorporated in this Agreement by this reference. All capitalized terms used in this Agreement have the meaning set forth in the Plan unless otherwise defined in this Agreement. By executing this Agreement, you acknowledge receipt of a copy of the Plan and the prospectus covering the Plan and you acknowledge that the Award is subject to all the terms and provisions of the Plan. You further agree to accept as binding, conclusive and final all decisions and interpretations by the Plan Committee with respect to any questions arising under the Plan.

5


 

     2. Tax Withholding. As of any date that a Required Withholding liability occurs, you must remit the minimum amount necessary to satisfy the Required Withholding. The Committee may require you to satisfy the Required Withholding by any (or a combination) of the following means: (a) a cash payment; (b) withholding from compensation otherwise payable to you; (c) authorizing the Company to withhold from any of your Restricted Shares that are no longer subject to forfeiture or from any Shares payable to you a number of Shares having a Fair Market Value less than or equal to the Required Withholding; or (d) delivering to the Company Mature Shares having a Fair Market Value less than or equal to the amount of the Required Withholding. The Committee may, but is not required to, approve your irrevocable election made prior to the time the Required Withholding liability occurs to have the Company withhold from any of your Restricted Shares that are no longer subject to forfeiture or from any Shares payable to you, a number of Shares having a Fair Market Value less than or equal to the Required Withholding. The Company will not deliver certificates for Shares to you under this Agreement unless you remit (or in appropriate cases agree to remit) the Required Withholding as described above.
     3. No Right to Employment. Nothing in this Agreement shall interfere with or limit in any way the right of the Company or a Subsidiary to terminate your employment or service at any time, nor confer upon you the right to continue in the employ of the Company or a Subsidiary.
     4. Notices. Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Secretary. Any notice to be given to you shall be addressed to you at the address listed in the Company’s records. By written notice referencing this paragraph of this Agreement, either party may designate a different address for notices. Any notice under this Agreement to the Company shall become effective upon receipt by the Company. Any notice under this Agreement to you will be deemed to have been delivered to you when delivered in person or when deposited in the United States mail, addressed to you at your address on the shareholder records of the Company, or such other address as you have designated under this paragraph.
     5. Tax Consultation. Your signature on this Agreement means that you agree to consult with any tax consultants you think advisable in connection with your Restricted Shares Award and your Performance Shares Award and this Agreement, and you acknowledge that you are not relying, and will not rely, on the Company or any Subsidiary for any tax advice.
     6. Amendment. The Company reserves the right to amend the Plan at any time. The Committee reserves the right to amend this Agreement at any time.
     7. Severability. If any part of this Agreement is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate any part of this Agreement not declared to be unlawful or invalid. Any part so declared unlawful or invalid shall, if possible, be construed in a manner which gives effect to the terms of such part to the fullest extent possible while remaining lawful and valid.
     8. Applicable Law. This Agreement shall be governed by the laws of the State of Delaware other than its laws respecting choice of law.
     9. Headings. Headings are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.

6


 

SCHEDULE OF PERFORMANCE GOALS
                 
                Earned Percentage of
Performance Level   Operating Ratio (50%)   EBITDA (25%)   ROCE (25%)   Incentive Target
2007
               
Threshold
  79.99%   $500 million   7.9%   50%
Target
  79.8%   $549 million   8.6%   100%
Maximum
  78.5%   $649 million   10.1%   200%
 
               
2008
               
Threshold
  Better of 2007 Operating Ratio Target (79.8%) or 2007 Actual Operating Ratio   Better of 2007 EBITDA Target ($549 million) or 2007 Actual EBITDA   Better of 2007 ROCE Target (8.6%) or 2007 Actual ROCE   0%
Target
  78.5%   $649 million   10.1%   100%
Maximum
  76.8%   $776 million   11.7%   200%
 
               
2009
               
Threshold
  Better of 2008 Operating Ratio Target (78.5%) or 2008 Actual Operating Ratio   Better of 2008 EBITDA Target ($649 million) or 2008 Actual EBITDA   Better of 2008 ROCE Target (10.1%) or 2008 Actual ROCE   0%
Target
  76.8%   $776 million   11.7%   100%
Maximum
  75.4%   $921 million   13.4%   200%

7


 

Illustrative Example
If actual performance is between performance levels, the Applicable Percentage will be prorated between such performance levels. The following example illustrates the method of such proration.
Assume that in the year 2007 the actual Operating Ratio was 79.6%, actual EBITDA was $551 million and actual ROCE was 8.8%. The difference between the 2007 Target Operating Ratio and the actual 2007 Operating Ratio is .2, representing 15.4% of the difference between the 2007 Target Operating Ratio and the 2007 Maximum Operating Ratio (i.e., .2/(79.8-78.5)). Thus, the Operating Ratio earned percentage before weighting would be 115%. The difference between the 2007 Target EBITDA and the actual 2007 EBITDA would be $2 million, representing 2% of the difference between the 2007 Target EBITDA and the 2007 Maximum EBITDA (i.e., 2/(649-549)). Thus, the EBITDA earned percentage before weighting would be 102%. The difference between the 2007 Target ROCE and the actual 2007 ROCE would be .2, representing 13% of the difference between the 2007 Target ROCE and the 2007 Maximum ROCE (i.e., .2/(10.1-8.6)). Thus, the ROCE earned percentage before weighting would be 113%. Finally, each metric would be multiplied by the appropriate weighting factor and the weighted earned percentages would be added together to determine the earned percentage. In this example the weighted earned percentage would be 111.25%, as demonstrated in the table below:
                     
                    Earned
    Operating Ratio   EBITDA   ROCE   Percentage
A. 2007 Actual
  78.6%   $551 million   8.8%    
 
                   
B. 2007 Target
  79.6%   $549 million   8.6%    
 
                   
C. 2007 Difference
  .2%   $2 million   .2%    
 
                   
D. Difference between 2007 Target Goal and 2007 Maximum Goal
  79.8%-78.5%=1.3%   $649 million — $549 million = $100 million   10.1%-8.6%=1.5%    
 
                   
E. Quotient of C divided by D
  15%   2%   13%    
 
                   
F. Unweighted Earned
Percentage [Target Earned
Percentage (i.e., 100%) plus E]
  115%   102%   113%    
 
                   
G. Weighting Factor
  50%   25%   25%    
 
                   
H. Weighted Earned Percentage (Product of F times G)
  57.5%   25.5%   28.25       111.25%

8

EX-10.14 7 c12119exv10w14.htm KANSAS CITY SOUTHERN ANNUAL INCENTIVE PLAN exv10w14
 

EXHIBIT 10.14
KANSAS CITY SOUTHERN ANNUAL INCENTIVE PLAN
1.   PURPOSE. The purpose of the Plan is to provide management employees of the Employer with annual incentive compensation based on the level of achievement of financial and other performance criteria. The Plan is intended to focus the interests of these employees on the key measures of the Company’s success and to reward these employees for achieving the key measures of the Company’s success. This Plan is not intended to be a performance-based plan for purposes of Section 162(m) of the Code.
 
2.   DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below:
(a) “Award” shall mean a cash payment for a Performance Year paid to a Participant on account of his or her participation in the Plan.
(b) “Board” shall mean the Board of Directors of the Company.
(c) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, including applicable regulations and rulings thereunder and any successor provisions thereto.
(d) “Committee” shall mean the Compensation and Organization Committee of the Board (or any successor committee).
(e) “Company” shall mean Kansas City Southern, and any successor thereto which adopts the Plan.
(f) “Disability” shall mean a disability as defined under the Employer’s applicable long-term disability program.
(g) “Eligible Employee” shall mean an individual who is employed by an Employer in active service and who is not represented by a union or other collective bargaining organization.
(h) “Employer” shall mean the Company and any affiliate of the Company that elects to participate and be an Employer under the Plan with the consent of the Company.
(i) “Leave” shall mean an absence from work with the approval of the applicable Employer. Leaves include absences for short-term disability, family leaves of absence and other approved leaves of absence.
(j) “Maximum Award” shall mean an Award level that may be paid if the maximum level of the Performance Goal(s) is achieved in the Performance Year.

 


 

(k) “Participant” shall mean, with respect to any Performance Year, any Eligible Employee who is selected to participate in the Plan in accordance with Section 3 of the Plan.
(l) “Performance Goal” shall mean the pre-established performance goal(s) established under the Plan for each Performance Year as described in Section 4 of the Plan.
(m) “Performance Measures” shall mean one or more of the following criteria, on which Performance Goals may be based: revenues, net income, pre-tax income, operating income, earnings per share, earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation and amortization (EBITDA), cash flow, return on equity, return on capital, return on assets, operating ratio, and capital expenditures; provided, that the Committee shall have the authority to use Performance Measures other than those herein specified as it deems appropriate in its sole discretion.
(n) “Performance Year” shall mean the calendar year of the Company in which a Participant provides services on account of which the Award is made.
(o) “Plan” shall mean the Kansas City Southern Annual Incentive Plan, as set forth herein, as from time to time amended.
(p) “Proration Fraction” shall mean a fraction, the numerator of which is the number of days in the Performance Year the individual was an Eligible Employee, and the denominator of which is 365.
(q) “Target Award” shall mean an Award level that may be paid if the target level of the Performance Goal(s) is achieved in the Performance Year.
(r) “Threshold Award” shall mean an Award level that may be paid if the threshold level of the Performance Goal(s) is achieved in the Performance Year.
3.   ELIGIBILITY and PARTICIPATION.
(a) In General. An Eligible Employee of an Employer will become a Participant for a Performance Year if he or she is selected by the Company, subject to the approval of the Committee, as eligible to participate in the Plan. Participants will be determined at the beginning of each Performance Year, and participation in the Plan during one Performance Year does not guarantee continued participation in future Performance Years. The Company, subject to the approval of the Committee, may add Participants during the course of a Performance Year as it deems appropriate in its sole discretion. A Participant must be

2


 

employed by an Employer on the last business day of a Performance Year in order to be eligible to receive an Award, except as provided in Section 3(b) below.
(b) Prorations for Partial Year. A Participant who is not an Eligible Employee for an entire Performance Year may receive an Award for any portion of the Performance Year that he or she is an Eligible Employee, subject to Section 5 of the Plan and the following:
  1)   New Hires, Transfers. A Participant who becomes an Eligible Employee on account of being hired or transferred during a Performance Year will be eligible for a prorated Award for such Performance Year. The amount of the prorated Award shall be equal to the full amount of the Award otherwise determined under Section 4 of the Plan, multiplied by the Proration Fraction.
 
  2)   Death or Disability. A Participant who has a termination of employment during a Performance Year on account of death or Disability will be eligible for a prorated Award for such Performance Year. The amount of the prorated Award shall be equal to the full amount of the Award for such individual for the Performance Year in which the death or Disability occurs, multiplied by the Proration Fraction. With respect to the calculation of an Award for purposes of this provision, the Participant’s rate of base salary in effect for the last full payroll period of his or her employment shall be used.
Notwithstanding the foregoing, the Committee may, in its discretion, based upon the recommendation of the Company, determine that a Participant who is added during the course of a Performance Year will be eligible for an Award for the Performance Year that is not a prorated Award and that therefore is not multiplied by the Proration Fraction.
(c) Leaves. A Participant who is on Leave for an aggregate of more than three (3) months during a Performance Year will not be eligible for an Award for such Performance Year.
4.   DETERMINATION OF AWARDS.
(a) Establishment of Performance Goal. The Company shall establish objective Performance Goals for each Award after the beginning of each Performance Year subject to the approval of the Committee. The Performance Goals may be based upon the performance of the Company, the Employer, or any operating unit level, division or function thereof, and may be applied either alone or relative to the performance of other businesses or individuals (including industry or general market indices),

3


 

based on one or more of the Performance Measures. Performance Goals may be expressed as whole dollar amounts, percentages or growth rates. Performance Goals will be determined each year by the senior management of the Company, with consultation from other third party sources, and are subject to the approval of the Committee. Performance Goals will be set for each Performance Measure as follows: threshold, target and maximum. No Award will be made under a Performance Measure if results are below the threshold level.
(b) Establishment of Awards. The Company shall also establish, subject to the approval of the Committee, the Threshold Award, the Target Award and the Maximum Award payable to a Participant if the Performance Goal(s) is achieved. The payment of any Award shall be subject to achievement of the applicable Performance Goals and certification by the President of the Company to the degree to which each of the Performance Goals have been attained. The Committee will consider such certification in its determination hereunder of whether an Award shall be paid. Threshold Awards, Target Awards and Maximum Awards will be expressed as a percentage of a participant’s base salary and correspond to salary grades. Target Award percentages will be determined each year by the senior management of the Company, with consultation from other third party sources, and are subject to the approval of the Committee. For purposes of determining the amount of an Award, the Participant’s rate of base salary in effect for the last full payroll period of the Performance Year to which the Award pertains shall be used.
(c) Maximum Individual Award. The maximum amount of any Maximum Award to a Participant for any Performance Year shall be the lesser of $2,000,000 or 200 percent of a Participant’s Target Award for a Performance Year. Threshold Award amounts will be 50% of the potential Target Award amount (multiplied by the Performance Measure weighting).
(d) Adjustments to Awards. The Committee may, in its discretion, modify the amount of any Award based on such criteria as it shall determine, including, but not limited to, financial results, individual performance, safety performance, business unit and site accomplishments, and other factors tied to the success of the Company or any of its business units. The Committee shall retain the discretion to adjust any Award downward. There is no obligation of uniformity of treatment of Participants under the Plan.
(e) Determination of Attainment of Performance Goals. The Committee may determine in its sole discretion how results will be calculated related to the Performance Measures selected for a particular Performance Year. In determining results for a Performance Year, the Committee may approve adjustments in the calculations to reflect extraordinary, unusual or non-recurring items.

4


 

5.   PAYMENT OF AWARDS.
(a) Time of Payment. An Award shall be paid to a Participant in cash as soon as practicable after the Committee has certified in writing that the Performance Goal(s) for the Performance Year have been achieved; provided, however, in no event will the Award with respect to a Performance Year be paid to a Participant later than the 15th day of the third month following the end of such Performance Year. No absolute right to any Award shall be considered as having accrued to any Participant prior to the payment of the Award. Awards payable to other Participants who have had a termination of employment on account of death or Disability during the Performance Year shall be payable in accordance with Section 3(b) of the Plan and at the same time other Participants receive Awards under the Plan.
(b) Termination of Employment Other Than on Account of Death or Disability. A Participant who has a termination of employment other than on account of death or Disability prior to the last day of a Performance Year shall not be paid any Award for such Performance Year.
(c) Termination of Employment on Account of Death or Disability. A Participant who has a termination of employment on account of death or Disability after the end of the Performance Year but prior to the payment date for Awards for such Performance Year shall be paid the full amount of any Award for such Performance Year, determined under Section 4 of the Plan (in addition to any amount determined under Section 3(b) for the Performance Year in which the termination of employment on account of death or Disability occurs). If the Participant dies prior to receiving payment of an Award, any Award payable under the Plan to such Participant shall be paid to the Participant’s estate.
(d) Withholding. Awards are subject to withholding for applicable federal, state and local taxes.
6.   PLAN ADMINISTRATION.
(a) Administration. The Plan shall be administered by the Committee. The Committee shall have full discretionary authority to establish the rules and regulations relating to the Plan, to interpret the Plan and those rules and regulations, to determine the Awards and the Performance Measures applicable to each Award, to approve all Awards, to decide the facts in any case arising under the Plan, and to make all other determinations and to take all other actions necessary or appropriate for the proper administration of the Plan. In making any determinations under or referred to in the Plan, the Committee shall be entitled to rely on opinions, reports or statements of employees of the Company and of counsel, public accountants, and other professional or expert persons. The Committee’s

5


 

administration of the Plan, including all such rules and regulations, interpretations, selections, determinations, approvals, decisions, delegations, amendments, terminations and other actions, shall be final and binding on the Company and its stockholders and all employees, including Participants and their beneficiaries. No member of the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Award.
(b) Delegation. Except to the extent prohibited by applicable law or the applicable rules of a stock exchange, the Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members, and may delegate all or any part of its responsibilities and powers for administering the Plan to one or more persons as the Committee deems appropriate, and at any time may revoke any such allocation or delegation.
7.   AMENDMENT OR TERMINATION OF PLAN. The Committee may amend (in whole or in part) or terminate the Plan at any time, effective at such date as the Committee may determine. The Company also may amend (in whole or in part) or terminate the Plan at any time effective as of such date as the Company may determine, provided, however, any such amendment of the Plan by the Company is subject to the approval of the Committee.
 
8.   MISCELLANEOUS PROVISIONS.
(a) Awards Not Transferable. A Participant’s right and interest under the Plan may not be assigned or transferred. Any attempted assignment or transfer shall be null and void and shall extinguish, in the Committee’s sole discretion, the Company’s obligation under the Plan to pay Awards with respect to the Participant.
(b) Effect of Awards on Other Compensation.
  1)   Awards shall not be considered eligible pay under other plans, benefit arrangements or fringe benefit arrangements of the Company, unless otherwise provided under the terms of other plans.
 
  2)   To the extent provided in the applicable benefit plan or benefit arrangement of an Employer, amounts payable as Awards will be reduced in accordance with the Participant’s compensation reduction election, if any, in effect under other plans at the time the Award is paid.
(c) No Employment Rights. This Plan is not a contract between the Employer and any employee or Participant. Neither the Plan, nor any action taken hereunder, shall be construed as giving to any Participant the right to be retained in the employ of the Employer. Nothing in the Plan

6


 

shall limit or affect in any manner or degree the normal and usual powers of management, exercised by the officers and the Board or any committee of the Board, to change the duties or the character of employment of any employee or to remove an individual from the employment of the Employer at any time, all of which rights and powers are expressly reserved.
(d) Unfunded Plan. The Plan shall be unfunded. No Employer shall be required to establish any special or separate fund, or to make any other segregation of assets, to assure payment of Awards. Awards shall be paid solely from the general assets of the Participant’s Employer, to the extent the payments are attributable to services for the Employer. To the extent any person acquires a right to receive payments from an Employer under the Plan, the right is no greater than the right of any other unsecured general creditor.
(e) Applicable Law. The Plan shall be governed by the laws of the State of Missouri and applicable federal law.

7

EX-10.53 8 c12119exv10w53.htm THE 2005 CREDIT AGREEMENT exv10w53
 

EXHIBIT 10.53
 
US$106,000,000
CREDIT AGREEMENT
Dated as of October 24, 2005
among
TFM, S.A. DE C.V.,
as Borrower,
ARRENDADORA TFM, S.A. DE C.V.,
as Guarantor,
CERTAIN LENDERS
BANK OF AMERICA, N.A.,
as Administrative Agent,
and
BBVA BANCOMER, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO
FINANCIERO BBVA BANCOMER,
as Collateral Agent
 
BBVA SECURITIES INC.
and
BANC OF AMERICA SECURITIES LLC,
as Arrangers
 

 


 

TABLE OF CONTENTS
         
    Page  
ARTICLE I. DEFINITIONS
    1  
 
       
SECTION 1.1 Certain Defined Terms
    1  
SECTION 1.2 Other Interpretive Provisions
    22  
SECTION 1.3 Exchange Rates; Currency Equivalents
    22  
 
       
ARTICLE II. LOANS, ETC.
    23  
 
       
SECTION 2.1 The Loans
    23  
SECTION 2.2 Notes
    24  
SECTION 2.3 Borrowings and Continuations
    24  
SECTION 2.4 Several Obligations; Remedies Independent
    25  
SECTION 2.5 Repayment
    25  
SECTION 2.6 Optional Prepayments
    25  
SECTION 2.7 Optional Reduction of Revolving Commitments
    26  
SECTION 2.8 Mandatory Prepayments
    26  
SECTION 2.9 Interest
    27  
SECTION 2.10 Computation of Interest
    28  
SECTION 2.11 Inability to Determine Interest Rate
    28  
SECTION 2.12 Fees
    28  
SECTION 2.13 Pro Rata Treatment and Payments
    29  
SECTION 2.14 Set-Off, Sharing of Payments, Etc.
    30  
 
       
ARTICLE III. YIELD PROTECTION, ETC.
    31  
 
       
SECTION 3.1 Taxes
    31  
SECTION 3.2 Illegality
    33  
SECTION 3.3 Additional Costs
    33  
SECTION 3.4 Funding Losses
    34  
SECTION 3.5 Change of Lending Office
    35  
SECTION 3.6 Replacement of Lenders
    35  
 
       
ARTICLE IV. CONDITIONS PRECEDENT
    36  
 
       
SECTION 4.1 Conditions to Initial Funding
    36  
SECTION 4.2 Conditions Precedent to Each Loan
    37  
SECTION 4.3 Satisfaction of Conditions Precedent
    38  
 
       
ARTICLE V. REPRESENTATIONS AND WARRANTIES
    38  
 
       
SECTION 5.1 Status and Licensing
    38  
SECTION 5.2 Corporate Power and Authority; Enforceable Obligations
    39  
SECTION 5.3 Compliance with Law and Other Instruments
    39  
SECTION 5.4 Litigation and Environmental Matters
    39  
SECTION 5.5 Governmental Approvals
    40  
SECTION 5.6 Financial Information
    40  
SECTION 5.7 Taxes, Assessments and Fees
    40  
SECTION 5.8 Investment Company Act
    40  
Credit Agreement i

 


 

         
    Page  
SECTION 5.9 Accuracy of Information
    41  
SECTION 5.10 Absence of Default
    41  
SECTION 5.11 Ranking; Recourse; Liens
    41  
SECTION 5.12 Withholding Tax
    41  
SECTION 5.13 Proper Form
    42  
SECTION 5.14 Choice of Law
    42  
SECTION 5.15 Immunity
    42  
SECTION 5.16 Status of Concession
    42  
SECTION 5.17 Property
    43  
SECTION 5.18 Subsidiaries
    43  
SECTION 5.19 Federal Regulations
    43  
SECTION 5.20 Labor Matters
    43  
SECTION 5.21 Arrendadora Pledges
    43  
SECTION 5.22 Existing Indebtedness
    44  
 
       
ARTICLE VI. AFFIRMATIVE COVENANTS
    44  
 
       
SECTION 6.1 Senior Obligations
    44  
SECTION 6.2 Reporting Requirements
    44  
SECTION 6.3 Use of Proceeds
    46  
SECTION 6.4 Conduct of Business and Maintenance of Existence
    46  
SECTION 6.5 Maintenance of Government Approvals
    46  
SECTION 6.6 Compliance with Laws and Other Instruments
    47  
SECTION 6.7 Maintenance of Property; Insurance
    47  
SECTION 6.8 Maintenance of Books and Records and Inspection Rights
    47  
SECTION 6.9 Payment of Obligations
    47  
SECTION 6.10 Environmental Laws
    47  
SECTION 6.11 Filings
    48  
SECTION 6.12 Payment of 10.25% Notes Due June 15, 2007
    48  
SECTION 6.13 Additional Guarantors
    48  
 
       
ARTICLE VII. NEGATIVE COVENANTS
    49  
 
       
SECTION 7.1 Financial Covenants
    49  
SECTION 7.2 Margin Regulations
    49  
SECTION 7.3 Limitation on Restricted Payments
    49  
SECTION 7.4 Limitation on Investments
    50  
SECTION 7.5 Optional Payments and Modifications of Certain Debt Instruments
    50  
SECTION 7.6 Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries
    51  
SECTION 7.7 Limitation on Transactions with Affiliates
    51  
SECTION 7.8 Limitation on Liens
    51  
SECTION 7.9 Limitation on Indebtedness
    53  
SECTION 7.10 Limitation on Sale-Leaseback Transactions
    54  
SECTION 7.11 Limitation on Asset Sales
    54  
SECTION 7.12 Consolidation. Merger and Sale of Assets
    55  
SECTION 7.13 Lines of Business
    56  
 
       
ARTICLE VIII. EVENTS OF DEFAULT
    56  
Credit Agreement ii

 


 

         
    Page  
SECTION 8.1 Events of Default
    56  
SECTION 8.2 Remedies
    58  
 
       
ARTICLE IX. GUARANTEE
    58  
 
       
SECTION 9.1 Guarantees
    58  
SECTION 9.2 Guarantees Unconditional
    59  
SECTION 9.3 Discharge OW yupon Payment in Full; Reinstatement In Certain Circumstances
    60  
SECTION 9.4 Waiver by the Guarantors
    60  
SECTION 9.5 Subrogation
    60  
SECTION 9.6 Stay of Acceleration
    61  
 
       
ARTICLE X. THE AGENTS
    61  
 
       
SECTION 10.1 Appointment and Authority
    61  
SECTION 10.2 Rights as a Lender
    61  
SECTION 10.3 Exculpatory Provisions
    61  
SECTION 10.4 Reliance by the Agents
    62  
SECTION 10.5 Delegation of Duties
    62  
SECTION 10.6 Resignation of an Agent
    63  
SECTION 10.7 Non-Reliance on Agents and Other Lenders
    63  
SECTION 10.8 No Other Duties, Etc.
    63  
SECTION 10.9 Administrative Agent May File Proofs of Claim
    63  
SECTION 10.10 Collateral and Guarantee Matters
    64  
 
       
ARTICLE XI. MISCELLANEOUS
    64  
 
       
SECTION 11.1 Financial Data
    64  
SECTION 11.2 Expenses; Indemnity; Damage Waiver
    65  
SECTION 11.3 Amendments and Waivers, Etc.
    66  
SECTION 11.4 Governing Law
    67  
SECTION 11.5 Notices; Effectiveness; Electronic Communication
    67  
SECTION 11.6 Table of Contents; Headings
    69  
SECTION 11.7 Survival
    69  
SECTION 11.8 Successors and Assigns
    70  
SECTION 11.9 Interest Rate Limitation
    72  
SECTION 11.10 Submission to Jurisdiction; Venue; Service; Waiver of Jury Trial
    73  
SECTION 11.11 Judgment Currency
    74  
SECTION 11.12 Execution in Counterparts
    75  
SECTION 11.13 Waiver of Immunities
    75  
SECTION 11.14 Severability
    75  
SECTION 11.15 Treatment of Certain Information; Confidentiality
    75  
SECTION 11.16 No Waiver; Remedies
    76  
SECTION 11.17 Entire Agreement
    76  
SECTION 11.18 USA PATRIOT Act
    76  
Credit Agreement iii

 


 

     
Annex 1
  Commitments
Schedule 5.11 (b)
  Existing Liens
Schedule 5.17(c)
  Insurance Coverage
Schedule 5.18
  Subsidiaries
Schedule 5.22
  Existing Indebtedness
Schedule 7.4
  Existing Investments
Schedule 7.6
  Existing Encumbrances or Restrictions
Schedule 11.5
  Administrative Agent’s Office; Addresses for Notices
Exhibit A
  Form of Dollar Loan Note
Exhibit B
  Form of Tranche A2 Loan Note
Exhibit C
  Form of Amended and Restated Pledge Without Transfer of Possession Agreement
Exhibit D
  Form of Amended and Restated Supplemental Pledge Without Transfer of Possession Agreement
Exhibit E
  Form of Opinion of New York Counsel to the Loan Parties
Exhibit F
  Form of Opinion of Mexican Counsel to the Loan Parties
Exhibit G
  Form of Notice of Borrowing/Continuation
Exhibit H
  Form of Assignment and Assumption
Exhibit I
  Form of Accession Agreement
Credit Agreement iv

 


 

CREDIT AGREEMENT
     This CREDIT AGREEMENT (this “Agreement”), is entered into as of October 24, 2005, among TFM, S.A. de C.V., a corporation with variable capital (sociedad anonima de capital variable) organized under the laws of Mexico (the “Borrower”), Arrendadora TFM, S.A. de C.V., a corporation with variable capital (sociedad anonima de capital variable) organized under the laws of the Mexico (“Arrendadora”), each of the lenders that is a signatory hereto under the caption “LENDERS” on the signature pages hereto and each other Person that becomes a “Lender” after the date hereof pursuant to Section 11.8(b) (each a “Lender”), Bank of America, N.A., as the administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the “Administrative Agent”), and BBVA Bancomer, S.A., Institución de Banca Multiple, Grupo Financiero BBVA Bancomer, as the collateral agent for the Beneficiaries (as defined below) (in such capacity, together with its successors in such capacity, the “Collateral Agent”).
RECITALS
     WHEREAS, the Borrower has requested that the Lenders make available to the Borrower loans in an aggregate principal amount up to but not to exceed US$106,000,000 to be used by the Borrower (a) to pay all amounts outstanding under the Bridge Loan Agreement, dated as of September 15, 2005 (the “Bridge Loan Agreement”), among the Borrower, Arrendadora, Bank of America (as defined below) and BBVA Bancomer (as defined below), (b) to pay all remaining amounts outstanding under the US$186,428,570.80 First Amended and Restated Credit Agreement, dated as of June 24, 2004 (the “Existing Credit Agreement”), among the Borrower, JPMorgan Chase Bank, N.A., as Administrative Agent, and certain banks that are parties thereto, and (c) for other general corporate purposes;
     WHEREAS, the Lenders are willing to make the loans hereunder to the Borrower upon and subject to all of the terms and conditions hereinafter set forth; and
     WHEREAS, in order to induce the Lenders to make the loans contemplated herein, (a) Arrendadora has agreed to guaranty the Borrower’s obligations under this Agreement and provide certain collateral to secure the Borrower’s obligations under this Agreement and (b) the parties have agreed that the obligations of the Borrower under this Agreement shall at all times be guaranteed by Subsidiaries (as defined below) of the Borrower that represent, in the aggregate, at least 90% of the total assets of the Borrower and its Consolidated Subsidiaries (as defined below), Consolidated EBITDA (as defined below) and Consolidated Net Income (as defined below).
     NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
     SECTION 1.1 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings:

Credit Agreement 1


 

     “Accession Agreement” shall have the meaning set forth in Section 6.13.
     “Additional Amounts” shall have the meaning set forth in Section 3.1(a).
     “Administration Fee Letter” shall have the meaning set forth in Section 2.12(a).
     “Administrative Agent” shall have the meaning set forth in the introduction hereto.
     “Administrative Agent’s Office” shall mean, with respect to any currency, the Administrative Agent’s address and, as appropriate, account as set forth on Schedule 11.5 with respect to such currency, or such other address or account with respect to such currency as the Administrative Agent may from time to time notify the Borrower and the Lenders.
     “Administrative Questionnaire” shall mean an Administrative Questionnaire in a form supplied by the Administrative Agent.
     “Affected Party” shall have the meaning set forth in Section 3.3(a).
     “Affiliate” shall mean, as applied to any Person, any other Person directly or indirectly Controlling, Controlled by, or under direct or indirect common Control with, such Person.
     “Agent” shall mean either the Administrative Agent or the Collateral Agent.
     “Agreement” shall have the meaning set forth in the introduction hereto.
     “Applicable Law” shall mean, as to any Person, any law, treaty, statute, rule, decree, order or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its Property or to which such Person or any of its Property is subject.
     “Applicable Margin” shall mean the percentages per annum below for Dollar Loans or Tranche A2 Loans, as the case may be, based upon the Consolidated Leverage Ratio as set forth in the most recent certificate of a Responsible Officer of the Borrower delivered pursuant to Section 6.2(d):
                 
Consolidated    
Leverage Ratio   Applicable Margin
    Dollar Loans   Tranche A 2 Loans
> 4.0x
    2.75 %     2.500 %
> 3.00x to ³ 4.00x
    2.125 %     1.875 %
£ 3.0x
    1.750 %     1.500 %
     Any increase or decrease in the Applicable Margin resulting from a change in the Consolidated Leverage Ratio shall become effective as of the first Business Day immediately following the date a certificate of a Responsible Officer of the Borrower (together with the accompanying financial statements) mentioned herein is delivered pursuant to Section 6.2(d) (the “Adjustment Date”) and shall remain in effect until the next change to be effected pursuant to

Credit Agreement 2


 

this clause; provided that if such certificate (together with the accompanying financial statements) is not delivered when due in accordance with Section 6.2(d), then, until the first Business Day following the date on which such certificate (together with the accompanying financial statements) is delivered, the Applicable Margin for each Dollar Loan and Tranche A2 Loan shall be the highest rate for each such Dollar Loan and Tranche A2 Loan set forth in the table above. The Applicable Margin in effect until the first Adjustment Date to occur after the Initial Borrowing Date shall be (a) for Dollar Loans, 2.750%, and (b) for Tranche A2 Loans, 2.500%.
     “Approved Fund” shall mean any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
     “Arrangement Fee Letter” shall have the meaning set forth in Section 2.12(b).
     “Arrangers” shall mean, collectively, BBVA Securities Inc. and Banc of America Securities LLC, or any respective successor Person.
     “Arrendadora” shall mean Arrendadora TFM, S.A. de CV. or any successor Person.
     “Arrendadora Internacional Litigation” shall mean the commercial litigation initiated by Arrendadora Internacional, S.A. (en Liquidación) against Ferrocarriles Nacionales de Mdxico, docket 3/2004 of the First District Court of Civil Affairs with residence at the Federal District, to which the Borrower along with other parties have been made parties, pursuant to which Arrendadora Internacional, S.A. (en Liquidación) is disputing the title ownership of the locomotives intended to be pledged under the Supplemental Arrendadora Pledge.
     “Arrendadora Pledge” shall mean the amended and restated pledge without transfer of possession (prenda sin transmisión de posesión) subject to condition precedent (condición suspensiva), in respect of the locomotives and railroad cars owned by Arrendadora, granted by Arrendadora in favor of the Collateral Agent for the benefit of the Beneficiaries, substantially in the form of Exhibit C hereto.
     “Arrendadora Pledges” shall mean the collective reference to the Arrendadora Pledge and the Supplemental Arrendadora Pledge.
     “Asset Sale” shall mean, with respect to any Person, any sale, transfer or other disposition (including by way of merger, consolidation or sale-leaseback transaction) in one transaction or a series of related transactions of (a) all or any of the Equity Interests of any Subsidiary of such Person, (b) all or substantially all of the Property of an operating unit or business of such Person or (c) any other Property of such Person.
     “Assignee Group” shall mean two or more Eligible Assignees that are Affiliates of one another or two or more Approved Funds managed by the same investment advisor.
     “Assignment and Assumption” means an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by

Credit Agreement 3


 

Section 11.8(b)), and accepted by the Administrative Agent, in substantially the form of Exhibit H or any other form approved by the Administrative Agent.
     “Attributable Debt” shall mean, with respect to any Person in respect of a sale-leaseback transaction, as at the time of determination, the present value (discounted at the interest rate assumed in making calculations in accordance with GAAP) of the total obligations of such Person, as lessee, for rental payments during the remaining term of the lease included in such sale-leaseback transaction (including any period for which such lease has been extended).
     “Bank of America” shall mean Bank of America, N.A, or any successor Person.
     “Base Rate” shall mean for any day a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by the Administrative Agent as its “prime rate.” Any change in such rate announced by the Administrative Agent shall take effect at the opening of business on the day specified in the public announcement of such change.
     “BBVA” shall mean Banco Bilbao Vizcaya Argentaria S.A., or any successor Person.
     “BBVA Bancomer” shall mean BBVA Bancomer, S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer, or any successor Person.
     “Beneficiaries” shall mean the Lenders, the Administrative Agent, the Collateral Agent and any other Person (other than a Loan Party, any Affiliate thereof or a customer of a Loan Party), subject to Section 11.8(e), that has a right to receive any payment from a Loan Party under the Loan Documents.
     “Borrower” shall have the meaning set forth in the introduction hereto.
     “Borrower Materials” shall have the meaning set forth in Section 6.2.
     “Borrowing Date” shall mean the date of the making of any Loan hereunder.
     “Bridge Loan Agreement” shall have the meaning set forth in the Recitals.
     “Business Day” shall mean any day other than a Saturday or a Sunday or a day on which banking institutions are authorized or required to close in New York, New York, or in Mexico City, Mexico, and, with respect only to any determination of Eurocurrency Rate, that is also a day on which dealings in Dollar deposits are carried out in the London interbank market.
     “Capital Expenditures” shall mean, with respect to any Person, for any period, the sum of, without duplication, (a) all expenditures made by such Person during such period for equipment, fixed assets, real property or improvements, or for replacements or substitutions therefor or additions thereto, that have been or should be, in accordance with GAAP, reflected as additions to property, plant or equipment in the consolidated statements of cash flows of such Period for such period plus (b) the aggregate amount of all Capitalized Lease Obligations assumed or incurred by such Person during such period.

Credit Agreement 4


 

     “Capitalized Lease” shall mean, as applied to any Person, any lease of any Property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person.
     “Capitalized Lease Obligations” of any Person shall mean all rental obligations in respect of Capitalized Leases, in each case taken at the amount thereof accounted for as indebtedness in accordance with GAAP.
     “Change of Control” shall mean such time as:
     (a) KCS ceases to (i) be the ultimate “beneficial owner” (as defined in Rule l3d-3 under the Exchange Act and including by reason of any change in the ultimate “beneficial ownership” of the Equity Interests of Grupo TFM) of Voting Stock representing more than 50.0% of the total voting power of the total Voting Stock of Grupo TFM on a fully diluted basis or (ii) have the power to direct or cause the direction of the management and policies of Grupo TFM;
     (b) Grupo TFM ceases to (i) own all but one share of the outstanding Voting Stock of the Borrower, other than as a result of one or more primary offerings of Voting Stock of the Borrower having, in the aggregate, voting power equal to or less than 35% of the total voting power of the Voting Stock of the Borrower, so long as Grupo TFM shall remain the beneficial owner of at least 65% of the outstanding Voting Stock of the Borrower or (ii) have the power to direct or cause the direction of the management and policies of the Borrower, in each case other than as a result of a merger of the Borrower and Grupo TFM expressly permitted under this Agreement; or
     (c) the Borrower ceases to (i) own at least 98% of the Voting Stock of Arrendadora or (ii) have the power to direct or cause the direction of the management and policies of Arrendadora, other than as a result of a merger of Arrendadora into TFM permitted under this Agreement.
     “Collateral Agency Fee Letter” shall have the meaning set fort in Section 2.12(c).
     “Collateral Agent” shall have the meaning set forth in the introduction hereto.
     “Commitment Fee” shall have the meaning set forth in Section 2.12(d).
     “Commitment Fee Payment Date” shall mean the last Business Day of each March, June, September and December.
     “Commitment Period” shall mean the Tranche A Commitment Period or the Tranche B Commitment Period, as the context shall require.
     “Commitments” shall mean, collectively, the Tranche Al Commitments, the Tranche A2 Commitments and the Tranche B Commitments.

Credit Agreement 5


 

     “Concession Title” shall mean the Borrower’s right, for a period of 30 years, to be the exclusive provider (subject to certain trackage rights) of freight transportation services over the Northeast Rail Lines and for an additional 20 years to be a non-exclusive provider of such services over the Northeast Rail Lines, granted by the Mexican government pursuant to the Concession Title, subject in all cases to the terms and conditions of the Concession Title, as in effect on June 23, 1997 and as amended on February 12, 2001.
     “Consolidated EBIT” shall mean, for any period, the Consolidated Net Income of the Borrower and its Consolidated Subsidiaries for such period, increased by interest expense and provision for taxes based on income and without giving effect to (a) any extraordinary gains or losses (or other gains or losses resulting from the sale of Property or from other activities not relating to the normal business of such Persons), (b) non-cash items relating to statutory profit sharing, in each case as otherwise reflected in Consolidated Net Income and (c) to the extent taken into account in Consolidated Net Income, any amounts attributable to minority interest.
     “Consolidated EBITDA” shall mean, for any period, Consolidated EBIT adjusted by adding thereto the amount of all amortization and depreciation, in each case that were deducted in arriving at Consolidated EBIT for such period.
     “Consolidated Fixed Charge Coverage Ratio” shall mean, as of the last day of any fiscal quarter of the Borrower, the ratio of (a) Consolidated EBITDA of the Borrower for the preceding four fiscal quarters ending on such day to (b) Consolidated Fixed Charges of the Borrower for such period.
     “Consolidated Fixed Charges” shall mean, for any period, the sum, without duplication, of (a) Consolidated Interest Expense of the Borrower for such period, (b) the amount of all Capital Expenditures made by the Borrower and its Consolidated Subsidiaries during such period, (c) all cash payments in respect of income or asset taxes made by the Borrower and its Consolidated Subsidiaries during such period (net of any cash refunds actually received during such period), (d) the scheduled principal amount of all amortization payments on all Consolidated Indebtedness (including without limitation the principal component of all Capitalized Lease Obligations) of the Borrower and its Consolidated Subsidiaries for such period (it being understood that (i) scheduled principal amortizations of Indebtedness that are refinanced, to the extent permitted in this Agreement, to be payable on or after the Final Maturity Date shall not be included in the calculation of Consolidated Fixed Charges and (ii) scheduled principal amortizations of the Bridge Loan Agreement and the Existing Credit Agreement that are refinanced by this Agreement shall not be included in the calculation of Consolidated Fixed Charges), (e) all cash dividend payments made by the Borrower and (f) the amount of postings of cash collateral and other payments under Swap Agreements of the Borrower and its Consolidated Subsidiaries outstanding at the end of such period.
     “Consolidated Indebtedness” shall mean, as at any date of determination, the aggregate stated balance sheet amount of all Indebtedness (including all Capitalized Lease Obligations) of the Borrower and its Consolidated Subsidiaries on a consolidated basis as determined in accordance with GAAP and without giving effect to any revaluation to reflect the market value of such Indebtedness made in accordance with purchase accounting principles under GAAP.

Credit Agreement 6


 

     “Consolidated Interest Coverage Ratio” shall mean, as of the last day of any fiscal quarter of the Borrower, the ratio of (a) Consolidated EBITDA of the Borrower for the preceding four fiscal quarters ending on such day to (b) Consolidated Interest Expense of the Borrower for such period.
     “Consolidated Interest Expense” shall mean, for any period, the total consolidated interest expense of the Borrower and its Consolidated Subsidiaries for such period (calculated without regard to any limitations on the payment thereof) plus, without limitation, that portion of Capitalized Lease Obligations of the Borrower and its Consolidated Subsidiaries representing the interest factor for such period and, in any event, (i) including (without duplication) withholding or similar taxes paid by the Borrower and its Consolidated Subsidiaries arising from, or in connection with, the payment of interest, fees and any other amounts but (ii) excluding the amortization of any other deferred financing costs incurred in connection with this Agreement and any other permitted Indebtedness.
     “Consolidated Leverage Ratio” shall mean, on any date, the ratio of (a) Consolidated Indebtedness on such date to (b) Consolidated EBITDA for the period of four fiscal quarters most recently ended.
     “Consolidated Net Income” shall mean, for any period, the consolidated net after tax income of the Borrower and its Consolidated Subsidiaries, determined in accordance with GAAP.
     “Consolidated Subsidiaries” shall mean, as to any Person, all Subsidiaries of such Person which are consolidated with such Person for financial reporting purposes in accordance with GAAP.
     “Control” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.
     “Debt Service” shall mean, for any period, the sum, without duplication, of (a) interest expense of the Borrower and its Consolidated Subsidiaries paid during such period and (b) principal paid by the Borrower and its Consolidated Subsidiaries during such period, in each case in respect of Indebtedness to Persons other than Affiliates of the Borrower.
     “Default” shall mean any of the events specified in Section 8.1, whether or not any requirement for the giving of notice or lapse of time or both has been satisfied.
     “Default Rate” shall mean a rate per annum equal to 2.0% plus (A) in the case of Dollar Loans, the Eurocurrency Rate for the relevant Dollar Interest Period (or, to the extent that Section 2.11 is applicable, the Base Rate) plus the relevant Applicable Margin, (B) in the case of Tranche A2 Loans or interest thereon, the THE Rate for the relevant Tranche A2 Interest Period plus the relevant Applicable Margin or (c) in the case of fees or other amounts payable hereunder, Eurocurrency Rate for a Dollar Interest Period equal to one day plus the relevant Applicable Margin.

Credit Agreement 7


 

     “Defaulting Lender” shall mean any Lender that (a) has failed to fund any portion of the Loans required to be funded by it hereunder within one Business Day of the date required to be funded by it hereunder, (b) has otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within one Business Day of the date when due, unless the subject of a good faith dispute, or (c) has been deemed insolvent or become the subject of a bankruptcy or insolvency proceeding.
     “Dollar Equivalent” shall mean with respect to an amount of Pesos on any date, the Dollar amount which would result from the conversion of such Peso amount into Dollars on such date, as reasonably determined by Administrative Agent using the Exchange Rate determined in respect of the most recent Revaluation Date.
     “Dollar Interest Payment Date” shall mean, (a) as to any Dollar Loan having a Dollar Interest Period of three months or less, the last day of such Dollar Interest Period, (b) as to any Dollar Loan having a Dollar Interest Period longer than three months, each day that is three months, or a whole multiple thereof, after the first day of such Dollar Interest Period and the last day of such Dollar Interest Period, and (c) as to any Dollar Loan being repaid or prepaid on any date, the date of any such repayment or prepayment.
     “Dollar Interest Period” shall mean, with respect to any Dollar Loans, (a) initially the period commencing on and including the Borrowing Date with respect to such Dollar Loan and ending on but excluding the numerically corresponding day in the calendar month one, two, three or six months thereafter, as selected by the Borrower in its Notice of Borrowing/Continuation for such Dollar Loans, and (b) thereafter, each period commencing on and including the last day of the immediately preceding Dollar Interest Period and ending on but excluding the date one, two, three or six months thereafter, as selected by the Borrower by its Notice of Borrowing/Continuation in accordance with Section 2.3 (it being understood that, if such notice is not received by the Administrative Agent in accordance with this clause (b), the Dollar Interest Period for any Dollar Loans will have a Dollar Interest Period for such Dollar Loans of one month); provided that (i) if any Dollar Interest Period would otherwise end on a day which is not a Business Day, such Dollar Interest Period shall be extended to the immediately succeeding Business Day unless the result of such extension would be to carry such Dollar Interest Period into another calendar month in which event such Dollar Interest Period shall end on the immediately preceding Business Day, (ii) if any Dollar Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Dollar Interest Period) shall end on the last Business Day of such calendar month that would be the end of such Dollar Interest Period and (iii) if any Dollar Interest Period for any Dollar Loans would otherwise (but for this clause (iii)) extend beyond the Final Maturity Date, then such Dollar Interest Period shall end on the Final Maturity Date.
     “Dollar Lenders” shall mean, collectively, Lenders that have made Tranche A1 Loans or Tranche B Loans or that have outstanding Tranche Al Commitments or Tranche B Commitments.
     “Dollar Loans” shall mean, collectively, the Tranche Al Loans and the Tranche B Loans.

Credit Agreement 8


 

     “Dollars” and “US$” shall mean the lawful currency of the United States of America.
     “Effective Date” shall mean the date on which the Administrative Agent shall have received counterparts of this Agreement executed by all parties hereto.
     “Eligible Assignee” shall mean (a) a Lender; (b) an Affiliate of a Lender; (c) an Approved Fund; and (d) any other Person (other than a natural person) approved by (i) the Administrative Agent and (ii) unless an Event of Default has occurred and is continuing, the Borrower (each such approval not to be unreasonably withheld or delayed); provided that notwithstanding the foregoing, “Eligible Assignee” shall not include a Loan Party or any of the Loan Parties’ Affiliates or Subsidiaries; provided, further, that, unless an Event of Default has occurred and is continuing, an “Eligible Assignee” shall be (A) a Mexican Financial Institution or (B) a non-Mexican Person that is registered with Hacienda for purposes of Article 195(1) or Article 196(11) of the Mexican Income Tax Law (Ley del Impuesto Sobre la Renta) or any successor provision thereof and is a resident of (or has its principal office, if acting through a branch or an agency, in) a country that has entered into a treaty for the avoidance of double taxation with Mexico, which treaty is in effect.
     “Environmental Laws” shall mean any and all federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, technical standards (normas técnicas), requirements of any Governmental Authority or other Applicable Law regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or at any time hereafter in effect.
     “Environmental Liability” shall mean any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower, any other Loan Party or any of their respective Subsidiaries directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.
     “Equity Interests” shall mean shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person.
     “Eurocurrency Liabilities” shall mean, with respect to any Lender, the full reserve requirement percentage imposed in respect of “Eurocurrency Liabilities,” as such term is defined in Regulation D (or any successor provision) (including any marginal, emergency, supplemental, special or other reserves) of the Board of Governors of the Federal Reserve System, that such Lender in its sole discretion determines to be applicable to such Lender for each day during a Dollar Interest Period.
     “Eurocurrency Rate” shall mean, for any Dollar Interest Period with respect to a Dollar Loan, the rate per annum equal to the British Bankers Association LIBOR Rate (“BBA LIBOR”), as published by Reuters (or other commercially available source providing quotations of BBA

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LIBOR as designated by the Administrative Agent from time to time) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Dollar Interest Period, for deposits in Dollars (for delivery on the first day of such Dollar Interest Period) with a term equivalent to such Dollar Interest Period. If such rate is not available at such time for any reason, then the “Eurocurrency Rate” for such Dollar Interest Period shall be the rate per annum determined by the Administrative Agent to be the rate at which deposits in Dollars for delivery on the first day of such Dollar Interest Period in immediately available funds in the approximate amount of the Dollar Loan being made or continued and with a term equivalent to such Dollar Interest Period would be offered by Bank of America’s London Branch (or other Bank of America branch or Affiliate) to major banks in the London or other offshore interbank market for such currency at their request at approximately 11:00 a.m. (London Time) two Business Days prior to the commencement of such Dollar Interest Period.
     “Event of Default” shall have the meaning set forth in Section 8.1.
     “Excess Cash Flow” shall mean, for any fiscal year ending on or after December 31, 2006, (a) the sum, without duplication, of (i) Consolidated EBITDA for such period, (ii) the change (positive or negative), if any, in working capital (excluding any non-cash effect of the sale or other disposition of the Borrower’s Equity Interest in Mexrail), from the opening of business on the first day, to the close of business on the last day, of such period, (iii) interest income of the Borrower and its Consolidated Subsidiaries received in cash during such period, (iv) any ordinary course operating income received in cash during such period determined on a consolidated basis for the Borrower and its Consolidated Subsidiaries that is not otherwise reflected in Consolidated EBITDA, but is otherwise treated as income of the Borrower and its Consolidated Subsidiaries during such period in accordance with GAAP, (v) any extraordinary income of the Borrower and its Consolidated Subsidiaries received in cash and otherwise treated as income during such period in accordance with GAAP; and (vi) the excess, if any, of the aggregate unrestricted cash balances (including Temporary Cash Investments) of the Borrower and its Consolidated Subsidiaries over the Minimum Cash Balance, at close of business on the last day prior to the beginning of such period (excluding cash balances resulting from Asset Sales which are being held for reinvestment in accordance with Section 2.8(a)) minus (b) the sum, without duplication, of (i) Capital Expenditures made by the Borrower and its Consolidated Subsidiaries permitted pursuant to Section 7.1 (d) made during such period, (ii) taxes and mandatory profit sharing paid by the Borrower and its Consolidated Subsidiaries on a consolidated basis during such period, (iii) any ordinary course operating expenses paid in cash during such period determined on a consolidated basis for the Borrower and its Consolidated Subsidiaries that are not otherwise reflected in Consolidated EBITDA, but are otherwise treated as expenses during such period in accordance with GAAP, (iv) any extraordinary expenses of the Borrower and its Consolidated Subsidiaries that are not otherwise reflected in Consolidated EBITDA, but are otherwise treated as expenses and paid in cash during such period in accordance with GAAP, and (v) Debt Service for such period.
     “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
     “Exchange Rate” for a currency shall mean the rate determined by the Administrative Agent to be the rate quoted by the Administrative Agent as the spot rate for the purchase by the Administrative Agent of such currency with another currency through its principal foreign

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exchange trading office at approximately 11:00 a.m. on the date two Business Days prior to the date as of which the foreign exchange computation is made; provided that the Administrative Agent may obtain such spot rate from another financial institution designated by the Administrative Agent if it does not have as of the date of determination a spot buying rate for any such currency.
     “Excluded Taxes” shall have the meaning set forth in Section 3.1(a).
     “Existing Credit Agreement” shall have the meaning set forth in the Recitals.
     “Federal Funds Rate” shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to Bank of America on such day on such transactions as determined by the Administrative Agent.
     “Fee Letters” shall mean the Arrangement Fee Letter, the Administration Fee Letter and the Collateral Agency Fee Letter.
     “Final Maturity Date” shall mean the third anniversary of the Initial Borrowing Date.
     “Financial Statements” shall have the meaning set forth in Section 5.6(a).
     “Fund” shall mean any Person (other than a natural person) that is (or will be) employed in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of business.
     “GAAP” shall mean the generally accepted accounting principles as in effect from time to time in the United States of America.
     “Governmental Authority” shall mean any branch of power (whether administrative, legislative or judicial) of any state, any nation or government, any state or other political or administrative subdivision thereof, any central bank (or similar monetary or regulatory authority) and any entity exercising executive, legislative, judicial, regulatory or administrative authority of or pertaining to government.
     “Grupo TFM” shall mean Grupo Transportaci6n Ferroviaria Mexicana, S.A. de C.V., a corporation with variable capital (sociedad anónima de capital variable) organized under the laws of Mexico, or any successor Person.
     “Guarantee” shall mean any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing (whether pursuant to a guaranty, a fianza civil, an aval or otherwise) any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or

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advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services (unless such purchase arrangements are on arm’s length terms and are entered into in the ordinary course of business), to take-or-pay, or to maintain financial statement conditions or otherwise) or (b) entered into for purposes of assuring in any other manner the holder of such Indebtedness of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part); provided that the term “Guarantee” shall not include endorsements for collection or deposit in the ordinary course of business or obligations arising, in the ordinary course of business, from contracting for interline railroad services. The term “Guarantee” used as a verb has a corresponding meaning.
     “Guaranteed Obligations” shall have the meaning set forth in Section 9.1(a).
     “Guarantors” shall mean Arrendadora and such other Subsidiaries as may from time to time accede to this Agreement as Guarantors pursuant to Section 6.13.
     “Hacienda” shall mean the Secretaría de Hacienda y Crédito Público (Ministry of Finance and Public Credit) of Mexico.
     “Hazardous Materials” shall mean all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos-containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law.
     “IFRS” shall mean the accounting principles known as the “International Financial Reporting Standards” issued by the International Accounting Standards Board, as in effect from time to time.
     “Indebtedness” shall mean, with respect to any Person at any date of determination (without duplication):
     (a) all indebtedness of such Person for borrowed money;
     (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments;
     (c) all obligations, contingent or otherwise, of such Person in respect of acceptances, letters of credit, financial guaranty insurance policies or similar instruments;
     (d) all obligations of such Person for the deferred purchase price of Property or services (other than current trade payables incurred in the ordinary course of such Person’s business);
     (e) all obligations of such Person as lessee under Capitalized Leases (but not operating leases);

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     (f) all Guarantees of such Person in respect of obligations of the kind referred to in clauses a through U and N of this definition;
     (g) all Indebtedness of other Persons secured by a Lien on any Property of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of such Indebtedness shall be the lesser of (i) the fair market value of such Property at such date of determination and (ii) the amount of such Indebtedness; and
     (h) to the extent not otherwise included in this definition, net obligations to make payments under Swap Agreements.
     The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation; provided that, in the case of clause h above, the amount of Indebtedness shall be the mark-to-market amount of such obligations at such date.
     “Indemnitee” shall have the meaning set forth in Section 11.2(b).
     “Information” shall have the meaning set forth in Section 11.15.
     “Initial Borrowing Date” shall mean the date of the making of the initial Loans under this Agreement, which shall be the date specified by the Borrower in its initial Notice of Borrowing/Continuation as the date of borrowing of the initial Loans, subject to satisfaction of the conditions set forth herein.
     “Interest Period” shall mean Dollar Interest Period and/or Tranche A2 Interest Period, as applicable.
     “Investment” shall mean any advance, loan, extension of credit (by way of guaranty or otherwise) or capital contribution to, or purchase of any Equity Interest, bonds, notes, debentures or other debt securities or any Property constituting a business unit of, or any other investment in, any Person.
     “KCS” shall mean Kansas City Southern, a Delaware corporation, or any successor Person.
     “Lender” shall have the meaning set forth in the introduction hereto or any successor Person.
     “Lending Office” shall mean, with respect to any Lender, (a) initially, the office of such Lender designated below its signature and (b) thereafter, such other office of such Lender (or a branch thereof) as such Lender may, with the consent of the Administrative Agent, designate as the office through which it will perform its obligations under this Agreement.
     “Lien” shall mean any mortgage, pledge, hypothecation, assignment, deposit arrangement, security trust (fideicomiso de garantía), encumbrance, lien (statutory or other), preference, priority or other security agreement or preferential arrangement of any kind or nature

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whatsoever (including any conditional sale or other title retention agreement, or any other contractual or statutory arrangement or provision having substantially the same economic, financial or operational effect as any of the foregoing), including, without limitation, any device (including, without limitation, a foreign trust or joint venture) for the purpose of setting aside funds for facilitating payments to any person or group of persons.
     “Loan Documents” shall mean, collectively, this Agreement, the Notes, the Arrendadora Pledges, the Fee Letters, each Accession Agreement, the Commitment Letter dated as of September 6, 2005, among the Borrower, the Arrangers, the Administrative Agent and the Collateral Agent, and any other agreements, documents and instruments executed and delivered in connection with the transactions contemplated hereby and thereby.
     “Loan Parties” shall mean, collectively, the Borrower, Arrendadora and each of the other Guarantors existing from time to time.
     “Loans” shall mean, collectively, the Dollar Loans and the Tranche A2 Loans.
     “Majority Lenders” shall mean, on any date, Lenders holding more than 50% of the sum of (a) all undrawn Commitments on such date and (b) all Loans outstanding on such date, as determined by the Administrative Agent by converting Tranche A2 Loans into Dollars based on the Dollar Equivalent thereof.
     “Material Adverse Effect” shall mean a material adverse effect on (a) the business, operations, Property, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole or (b) the validity or enforceability of any of the Loan Documents or the rights or remedies of either Agent or the Lenders hereunder or thereunder.
     “Mexican Financial Institution” shall mean an institución de banca múltiple or an institución de banca de desarrollo organized or created, as appropriate, and existing pursuant to and in accordance with the laws of Mexico and authorized to engage in the business of banking by Hacienda.
     “Mexico” shall mean the Estados Unidos Mexicanos (United Mexican States).
     “Mexrail” shall mean Mexrail, Inc., a Delaware corporation, or any successor Person.
     “Minimum Cash Balance” shall mean cash and Temporary Cash Investments of the Borrower and its Consolidated Subsidiaries in an aggregate amount of US$40,000,000 (or the equivalent thereof in other currencies).
     “Moody’s” shall mean Moody’s Investors Service, Inc. and any successor Person.
     “Net Cash Proceeds” shall mean, with respect to any event, (a) the proceeds, in the form of cash or cash equivalents, received in respect of such event, including (i) any cash or cash equivalents received in respect of non-cash proceeds, but only as and when received and any amount eliminated from any reserve referred to in clause iv below but only as and when eliminated, (ii) in the case of a casualty, insurance proceeds and (iii) in the case of a condemnation or similar event, condemnation awards and similar payments, net of (b) the sum of

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(i) all reasonable fees and out-of-pocket expenses (including fees and expenses of counsel and investment bankers) paid by the Borrower and its Subsidiaries to third parties (other than Affiliates) in connection with such event, (ii) in the case of an Asset Sale (or a casualty or other damage or condemnation or similar proceeding), the amount of all payments required to be made by the Borrower and its Subsidiaries as a result of such event to repay Indebtedness (other than Loans hereunder) secured by such Property or otherwise subject to mandatory prepayment as a result of such event, (iii) the amount of all taxes paid by the Borrower and its Subsidiaries, and (iv) the amount of any reserves established by the Borrower and its Subsidiaries to fund contingent liabilities reasonably estimated to be payable, in each case during the year that such event occurred or the next succeeding year and that are directly attributable to such event (as determined reasonably and in good faith by the chief financial officer of the Borrower).
     “Non-Excluded Taxes” shall have the meaning set forth in Section 3.1(a).
     “Notes” shall have the meaning set forth in Section 2.2.
     “Northeast Rail Lines” shall mean that portion of the Mexican Railroad system that is the subject of the Concession Title.
     “Notice of Borrowing/Continuation” shall have the meaning set forth in Section 2.3 and shall be substantially in the form of Exhibit G.
     “Obligations” shall mean all of the obligations and liabilities of the Borrower to the Lenders and the Agents under or in connection with this Agreement and the other Loan Documents (as any of the foregoing may from time to time be respectively amended, modified, substituted, extended or renewed), direct or indirect, absolute or contingent, due or to become due, now or hereafter existing.
     “Other Taxes” shall mean any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement.
     “Overnight Rate” shall mean, for any day, (a) with respect to any amount denominated in Dollars, the greater of (i) the Federal Funds Rate and (ii) an overnight rate determined by the Administrative Agent, in accordance with banking industry rules on interbank compensation, and (b) with respect to any amount denominated in Pesos, the rate of interest per annum at which overnight deposits in Pesos, in an amount approximately equal to the amount with respect to which such rate is being determined, would be offered for such day by a branch or Affiliate of Bank of America in the applicable offshore interbank market for such currency to major banks in such interbank market.
     “Participant” shall have the meaning set forth in Section 11.8(d).
     “Payee” shall have the meaning set forth in Section 3.1(a).
     “Permitted Liens” shall mean:

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     (a) Liens for taxes, assessments, governmental charges or claims with respect to amounts not yet delinquent or that are being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made;
     (b) statutory and common law Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other similar Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made;
     (c) Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security;
     (d) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligations, surety and appeal bonds, government contracts, performance and return-of-money bonds and other obligations of a similar nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money);
     (e) easements, rights-of-way, municipal and zoning ordinances and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of the business;
     (f) licenses, leases or subleases granted to others that do not materially interfere with the ordinary course of the business;
     (g) Liens arising from the rendering of a final judgment or order that does not give rise to an Event of Default;
     (h) Liens securing reimbursement obligations with respect to commercial or trade letters of credit that encumber documents and other Property relating to such letters of credit and the products and proceeds thereof,
     (i) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the import of goods; and
     (j) Liens encumbering customary initial deposits and margin deposits, and other customary Liens on cash and cash deposits, in each case, securing Indebtedness under Swap Agreements designed solely to protect from fluctuations in interest rates, currencies or the price of commodities.
     “Person” shall mean any individual, corporation, company, voluntary association, partnership, limited liability company, joint venture, trust, unincorporated organization, Governmental Authority or other entity of whatever nature.

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     “Peso Equivalent” shall mean with respect to an amount of Dollars on any date, the Peso amount which would result from the conversion of such Dollar amount into Pesos on such date, as determined by Administration Agent using the Exchange Rate determined in respect of the most recent Revaluation Date.
     “Pesos” and “MXP$” shall mean the lawful currency of Mexico.
     “Platform” shall have the meaning set forth in Section 6.2.
     “Prepayment Event” shall mean any of the following events: (a) any Asset Sale described in Section 7.11 (f) but only to the extent that, in any fiscal year of the Borrower, the aggregate Net Cash Proceeds from all such Asset Sales exceed US$10,000,000; (b) any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or similar proceedings of, any Property of the Borrower or any Subsidiary, but only to the extent that, in any fiscal year of the Borrower, the aggregate Net Cash Proceeds from any such occurrence exceed US$10,000,000; or (c) the incurrence by the Borrower or any Subsidiary of any Indebtedness permitted under Section 7.9(g).
     “Process Agent” shall have the meaning set forth in Section 11.10(c).
     “Property” of any Person shall mean any property, asset, general intangible or receivable, or interest therein, of such Person, including any accounts receivable.
     “Reinvestment Notice” shall mean a written notice executed by a Responsible Officer of the Borrower stating that no Event of Default has occurred and is continuing and that the Borrower (directly or indirectly through a Subsidiary) intends and expects to use all or a specified portion of the Net Cash Proceeds of a Prepayment Event described in clause (a) or (b) of the definition thereof to acquire or repair assets useful in the business of the Borrower or any of its Subsidiaries.
     “Reinvestment Prepayment Date” shall mean with respect to any Prepayment Event described in clause (a) or (b) of the definition thereof, the earlier of (a) the date occurring 180 days after such Prepayment Event and (b) the date on which the Borrower or its relevant Subsidiary shall have determined not to, or shall have otherwise ceased to, acquire or repair assets useful in the Borrower’s (or such Subsidiary’s) business with all or any portion of the Net Cash Proceeds of such Prepayment Event.
     “Related Parties” shall mean, with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents and advisors of such Person and of such Person’s Affiliates.
     “Responsible Officer” of a Person shall mean the Chairman, Chief Executive Officer, Chief Financial Officer, President, any Executive Director, Director, Vice President, Treasurer or Assistant Treasurer of such Person, in each case authorized to the extent required by a board resolution or shareholder meeting; provided that such officer is then authorized to bind such Person.

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     “Restricted Payment” means any payment or distribution by a Person, directly or indirectly, whether in cash or other Property or in obligations of such Person: (a) of any dividends or other distribution on its Equity Interest or any interest on capital, excluding any dividends, distributions or interest paid solely in such Person’s common stock other than mandatorily redeemable common stock (and excluding any dividend by the Borrower, to Grupo TFM, of the Equity Interests of Grupo TFM held by the Borrower), (b) in respect of the purchase, acquisition, redemption, retirement, defeasance or other acquisition for value of any of its Equity Interest or any warrants, rights or options to acquire such Equity Interest, now or hereafter outstanding, (c) in respect of the return of any capital to its stockholders as such, (d) in connection with any distribution or exchange of Property to or with its stockholders as such in respect of its Equity Interest, warrants, rights, options, obligations or securities or (e) in return of any irrevocable equity contributions.
     “Revaluation Date” shall mean (a) each Borrowing Date and (b) such additional dates as the Administrative Agent shall determine or the Majority Lenders shall require.
     “Revolving Commitments” shall mean, collectively, the Tranche Al Commitments and the Tranche A2 Commitments.
     “Revolving Lenders” shall mean, collectively, Tranche Al Lenders and Tranche A2 Lenders.
     “Revolving Loans” shall mean, collectively, the Tranche Al Loans and the Tranche A2 Loans.
     “RFM” shall have the meaning set forth in Section 6.11.
     “RPPC” shall have the meaning set forth in Section 6.11.
     “Senior Notes” shall mean, collectively: (a) the Borrower’s 10 1/4% Senior Notes due 2007 issued pursuant to the indenture, dated as of June 1997, among Grupo TFM, the Borrower and The Bank of New York, (b) the Borrower’s 12 1/2% Senior Notes due 2012 issued pursuant to the indenture, dated as of June 13, 2002, between the Borrower and The Bank of New York and (c) the Borrower’s 9 3/8% Senior Notes due 2012 issued pursuant to the indenture, dated as of April 19, 2005, between the Borrower and The Bank of Nova Scotia Trust Company of New York.
     “Senior Notes Indentures” shall mean, collectively, the indentures referred to in the definition of Senior Notes.
     “S&P” shall mean Standard & Poor’s Ratings Group, or any successor Person.
     “Sharing Percentage” shall mean, as to any Lender as of any date, the percentage which the aggregate principal amount of such Lender’s Loans and undrawn Commitments constitutes of the aggregate principal amount of all Loans and undrawn Commitments, as determined by the Administrative Agent by converting Tranche A2 Loans and undrawn Tranche A2 Commitments into Dollars based on the Dollar Equivalent thereof.

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     “Subsidiary” shall mean, with respect to any Person, any corporation, association or other entity of which more than 50% of the voting power of the outstanding Voting Stock is owned, directly or indirectly, by such Person or by such Person and/or one or more other Subsidiaries of such Person.
     “Supplemental Arrendadora Pledge” shall mean the amended and restated pledge without transfer of possession (prenda sin transmisión de posesión) subject to condition precedent (condición suspensiva), substantially in the form of Exhibit D hereto, in respect of certain locomotives owned by Arrendadora and identified therein (which are subject to the Arrendadora Internacional Litigation), granted by Arrendadora in favor of the Collateral Agent for the benefit of the Beneficiaries.
     “Swap Agreement” means any agreement with respect to any swap, forward, future or derivative transaction or option or similar agreement involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions.
     “Taxes” shall mean any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority.
     “Temporary Cash Investments” shall mean any of the following: (a) direct obligations of the United States of America or any agency thereof or obligations fully and unconditionally guaranteed by the United States of America or any agency thereof, (b) time deposit accounts, certificates of deposit and money market deposits denominated and payable in Dollars maturing within 180 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of US$200,000,000 (or the foreign currency equivalent thereof) and has outstanding long-term Dollar-denominated debt which is rated “A” (or such similar equivalent rating) or higher by S&P or Moody’s; (c) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (a) above entered into with a bank meeting the qualifications described in clause (b) above; (d) commercial paper denominated and payable in Dollars, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Borrower) organized and in existence under the laws of the United States of America or any state thereof with a rating at the time as of which any investment therein is made of “P-1” (or higher) according to Moody’s or “A-1” (or higher) according to S&P; (e) securities with maturities of six months or less from the date of acquisition issued or fully and unconditionally guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least “A” by S&P or Moody’s; (f) Certificados de la Tesoreria de la Federacidn (fetes) or Bonos de Desarrollo del Gobierno Federal (Bondes) or any other debt securities issued by the government of Mexico directly and maturing not more than 180 days after the acquisition thereof; (g) Investments in money market funds substantially all of whose assets are comprised of securities of the types described in clauses (a) through (f) above; (h) demand deposit accounts with U.S. banks (or Mexican banks specified in clause i of this definition) maintained in the ordinary course of business; and (i) certificates of deposit, bank

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promissory notes and bankers’ acceptances denominated in Pesos, maturing not more than 180 days after the acquisition thereof and issued or guaranteed by any one of the five largest banks (based on assets as of the immediately preceding December 3 1) organized under the laws of Mexico and which are not under intervention by the Instituto para la Proteccion del Ahorro Bancario or any successor thereto.
     “TILE Rate” shall mean, for each Tranche A2 Interest Period with respect to Tranche A2 Loans, the Equilibrium Interbank Interest Rate (Tasa de Interes Interbancaria de Equilibrio) for a period of 28 days as published by Banco de México in the Diario Official de la Federación on the first Business Day, or of most recent publication, prior to the commencement of the relevant Tranche A2 Interest Period, or if such day is not a Business Day, on the immediately preceding Business Day on which there was such a quote. In the event the THE Rate shall cease to be published, the “THE Rate” shall mean any rate specified by the Banco de Mexico as the substitute rate therefor.
     “Tranche” shall mean the Tranche Al Loans, the Tranche A2 Loans or the Tranche B Loans, as the context shall require.
     “Tranche A Commitment Period” shall mean the period from and including the Effective Date to the earlier of (a) with respect to the Tranche A 1 Commitments or the Tranche A2 Commitments, the date the Borrower specifies as the date of termination of such Commitments pursuant to Section 2.7, and (b) the Business Day preceding the Final Maturity Date.
     “Tranche A1 Commitment” shall mean, as to any Lender, the commitment of such Lender, on and subject to the terms and conditions of this Agreement, to make Tranche A1 Loans to the Borrower pursuant to Section 2.1 (a) in a principal amount up to but not exceeding the amount specified opposite its name on Annex 1 under “Tranche A1 Commitments.”
     “Tranche A1 Lender” shall mean any Lender having a Tranche A1 Commitment.
     “Tranche A1 Loan” shall have the meaning set forth in Section 2.1(a).
     “Tranche Al Revolving Percentage” shall mean, as to any TrancheAl Lender, the percentage which such Tranche A1 Lender’s Tranche A1 Commitment is of the aggregate amount of Tranche A1 Commitments of all Tranche A1 Lenders.
     “Tranche A2 Commitment” shall mean, as to any Lender, the commitment of such Lender, on and subject to the terms and conditions of this Agreement, to make Tranche A2 Loans to the Borrower pursuant to Section 2.1(b) in a principal amount up to but not exceeding the amount specified opposite its name on Annex 1 under “Tranche A2 Commitments.”
     “Tranche A2 Interest Payment Date” shall mean (a) the last day of each Tranche A2 Interest Period and (b) the date of any repayment or prepayment made in respect of any Tranche A2 Loan.
     “Tranche A2 Interest Period” shall mean, with respect to any Tranche A2 Loan, (a) initially, the period commencing on and including the Borrowing Date with respect to such Tranche A2 Loan and ending on but excluding the date 28 days thereafter and (b) thereafter,

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each period commencing on and including the last day of the immediately preceding Tranche A2 Interest Period and ending on but excluding the date 28 days thereafter; provided that: (i) if any Tranche A2 Interest Period would otherwise end on a day which is not a Business Day, such Tranche A2 Interest Period shall end on the immediately succeeding Business Day, and (ii) if any Tranche A2 Interest Period for any Tranche A2 Loan would otherwise (but for this clause (ii)) extend beyond the Final Maturity Date, then such Tranche A2 Interest Period shall end on the Final Maturity Date
     “Tranche A2 Lender” shall mean any Lender having a Tranche A2 Commitment.
     “Tranche A2 Loan” shall have the meaning set forth in Section 2.1(b).
     “Tranche A2 Revolving Percentage” shall mean, as to any Tranche A2 Lender, the percentage which such Tranche A2 Lender’s Tranche A2 Commitment is of the aggregate amount of Tranche A2 Commitments of all Tranche A2 Lenders.
     “Tranche B Borrowing Date “ shall have the meaning set forth in Section 2.1(c).
     “Tranche B Commitment” shall mean, as to any Lender, the commitment of such Lender, on and subject to the terms and conditions of this Agreement, to make Tranche B Loans to the Borrower pursuant to Section 2.1(c) in a principal amount up to but not exceeding the amount specified opposite its name on Annex 1 under “Tranche B Commitments.”
     “Tranche B Commitment Period” shall mean the period from and including the Effective Date to the date five Business Days following the Effective Date.
     “Tranche B Lender” shall mean any Lender with a Tranche B Commitment.
     “Tranche B Loan” shall have the meaning set forth in Section 2.1(c).
     “Tranche B Principal Payment Date” shall mean April 28, 2007 and the 28th day of each July, October, January and April thereafter; provided that if any such date is not a Business Day, then such Tranche B Payment Date shall be the next Business Day unless such next Business Day would fall in another calendar month, in which case such Tranche B Payment Date shall be the immediately preceding Business Day.
     “Tranche Majority Lenders” shall mean, with respect to any Lenders holding any Tranche of Loans on any date, those Lenders whose Commitments with respect to such Tranche represent more than 50% of the aggregate Commitments of such Tranche (or, after all of such Commitments have terminated, those Lenders whose Loans in such Tranche represent more than 50% of all Loans of such Tranche).
     “Voting Stock” shall mean, with respect to any Person, capital stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person.
     “Wholly Owned” shall mean, with respect to any Person, a Subsidiary of such Person all of the outstanding Equity Interests of which (other than any director’s qualifying shares or any

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minimum statutorily required shares under Mexican law) are owned by such Person or one or more Wholly Owned Subsidiaries of such Person.
     SECTION 1.2 Other Interpretive Provisions. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the Notes or any certificate or other document made or delivered pursuant hereto.
     (b) Unless otherwise expressly provided herein, references to agreements (including this Agreement) and other documents shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent that such amendments and other modifications are not prohibited by this Agreement, the Notes or the Arrendadora Pledges.
     (c) Accounting terms not defined herein shall have the meanings customarily given in accordance with GAAP as in effect on the Effective Date. All ratios and computations shall be computed in conformity with GAAP applied on a consistent basis in Dollars.
     (d) The term “including” is not limiting and means “including without limitation.”
     (e) The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, Annex, Schedule and Exhibit references are to this Agreement unless otherwise specified.
     (f) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.
     (g) The terms “may” and “might” and similar terms used with respect to the taking of an action by any Person shall reflect that such action is optional and not required to be taken by such Person.
     (h) In this Agreement, in the computation of periods of time from a specified date to a later specified date, unless otherwise specified, the word “from” means “from and including” and the words “to” and “until” each mean “to but excluding.” Periods of days referred to in this Agreement shall be counted in calendar days unless Business Days are expressly prescribed.
     (i) The Loan Documents are the result of negotiations among and have been reviewed by counsel to each of the parties, and are the products of all such parties. Accordingly, they shall not be construed against any Person merely because of any such Person’s involvement in their preparation.
     SECTION 1.3 Exchange Rates; Currency Equivalents. (a) The Administrative Agent shall determine the Exchange Rates as of each Revaluation Date to be used for calculating Dollar Equivalent amounts of Tranche A2 Loans and Peso Equivalent amounts of Tranche A2 Commitments. Such Exchange Rates shall become effective as of such Revaluation Date and shall be the Exchange Rates employed in converting any amounts between the applicable currencies until the next Revaluation Date to occur. Except for purposes of financial statements delivered by Loan Parties hereunder or calculating financial covenants hereunder or except as otherwise provided herein, the applicable amount of any currency (other than Dollars) for

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purposes of the Loan Documents shall be such Dollar Equivalent amount as so determined by the Administrative Agent.
     (b) Wherever in this Agreement in connection with a Tranche A2 Commitment or prepayment of a Tranche A2 Loan, an amount, such as a required minimum or multiple amount, is expressed in Dollars, such amount shall be the Peso Equivalent of such Dollar amount (rounded to the nearest unit of Pesos, with 0.5 of a unit being rounded upward), as determined by the Administrative Agent.
ARTICLE II.
LOANS, ETC.
     SECTION 2.1 The Loans. (a) The Tranche Al Loans. Subject to the terms and conditions set forth herein, each Tranche Al Lender severally agrees to make revolving loans in Dollars (collectively, the “Tranche A1 Loans”) to the Borrower from time to time during the Tranche A Commitment Period in such Tranche A1 Lender’s Tranche A1 Revolving Percentage of such aggregate amounts as the Borrower may from time to time request under the Tranche Al Loans; provided that (i) the aggregate amount of Tranche A1 Loans requested by the Borrower to be made on a Borrowing Date must be in a minimum of US$5,000,000 and integral multiples of US$1,000,000 in excess thereof and (ii) no Tranche Al Lender shall be permitted or required to make any Tranche A1 Loan if after giving effect to such Tranche A1 Loans: (A) the sum of (1) the principal amount under all Tranche Al Loans outstanding and (2) the Dollar Equivalent of the principal amount under all Tranche A2 Loans outstanding would exceed an amount equal to (x) US$30,000,000 minus (y) the amount of all reductions of Revolving Commitments made in accordance with Section 2.7; (B) the principal amount under all Tranche Al Loans outstanding would exceed an amount equal to (x) US$19,521,000 minus (y) the amount of all reductions of Tranche Al Commitments made in accordance with Section 2.7; (C) there would be more than six distinct Interest Periods applicable to Revolving Loans; or (D) outstanding Tranche Al Loans of such Tranche Al Lender would exceed its Tranche Al Commitment. Subject to the foregoing, Tranche A1 Loans may be repaid and reborrowed from time to time.
     (b) The Tranche A2 Loans. Subject to the terms and conditions set forth herein, each Tranche A2 Lender severally agrees to make revolving loans in Pesos (collectively, the “Tranche A2 Loans”) to the Borrower from time to time during the Tranche A Commitment Period in such Tranche A2 Lender’s Tranche A2 Revolving Percentage of the Peso Equivalent of such aggregate amounts as the Borrower may from time to time request under the Tranche A2 Loans; provided that (i) the aggregate amount of Tranche A2 Loans requested by the Borrower to be made on a Borrowing Date must be in a minimum of the MXP$50,000,000 and integral multiples of MXP$10,000,000 in excess thereof and (ii) no Tranche A2 Lender shall be permitted or required to make any Tranche A2 Loan if after giving effect to such Tranche A2 Loans, (A) the sum of (1) the principal amount under all Tranche A1 Loans outstanding and (2) the Dollar Equivalent of the principal amount under all Tranche A2 Loans outstanding would exceed an amount equal to (x) US$30,000,000 minus (y) the amount of all reductions of Revolving Commitments made in accordance with Section 2.7; (B) the principal amount under all Tranche A2 Loans outstanding would exceed an amount equal to (x) the Peso Equivalent of US$10,479,000 minus (y) the amount of all reductions in Tranche A2 Commitments made in accordance with Section 2.7; (C) there would be more than six distinct Interest Periods

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applicable to Revolving Loans; or (D) outstanding Tranche A2 Loans of such Tranche A2 Lender would exceed its Tranche A2 Commitment. Subject to the foregoing, Tranche A2 Loans may be repaid and reborrowed from time to time.
     (c) The Tranche B Loans. Subject to the terms and conditions set forth herein, each Tranche B Lender severally agrees to make a term loan in Dollars (its “Tranche B Loan”) to the Borrower on any one Business Day (the “Tranche B Borrowing Date”) during the Tranche B Commitment Period in an aggregate principal amount outstanding not to exceed the Tranche B Commitment of such Tranche B Lender and, as to all Tranche B Lenders, in an aggregate principal amount not to exceed US$76,000,000. The Tranche B Loans may, at the Borrower’s election pursuant to the applicable Notice of Borrowing/Continuation, have at any time up to three distinct Dollar Interest Periods, each such Dollar Interest Period being applied to such portion of the Tranche B Loans as the Borrower shall designate in its Notice of Borrowing/Continuation for the Tranche B Loans. Any amounts not borrowed on the Tranche B Borrowing Date with respect to the Tranche B Loans may not be borrowed thereafter and any available amounts not requested to be borrowed under the Tranche B Loans prior to the termination of the Tranche B Commitment Period shall result in the pro rata irrevocable termination of an equivalent amount of the Tranche B Commitments on the earlier of (i) the date on which the Administrative Agent receives the Notice of Borrowing/Continuation with respect to the Tranche B Loans or (ii) the termination of the Tranche B Commitment Period.
     SECTION 2.2 Notes. The Loans made by each Lender shall be evidenced by promissory notes which qualify as pagarés under Mexican law, issued by the Borrower and guaranteed (por aval) by the then existing Guarantors (subject to Section 6.13) substantially in the form of Exhibit A (for Dollar Loans) and Exhibit B (for Tranche A2 Loans) (each a “Note”), delivered to the Administrative Agent on behalf of each of the Lenders on or before the Initial Borrowing Date, appropriately completed, representing the full amount of each such Lender’s Tranche A1 Commitment, Tranche A2 Commitment or Tranche B Commitment, as the case may be; provided that in case of conflict between the terms of this Agreement and any such Note, the terms of this Agreement shall prevail and the Lenders shall not be entitled to claim amounts due under the Notes in excess of amounts due under this Agreement.
     SECTION 2.3 Borrowings and Continuations. The Borrower shall give the Administrative Agent irrevocable notice of a request for the borrowing of any Loans hereunder, or the continuation of Dollar Loans hereunder, substantially in the form of Exhibit G (which notice must be received by the Administrative Agent prior to 12:00 noon, New York City time, at least three Business Days prior to the requested Borrowing Date for a Loan or, in the case of continuation of Dollar Loans, at least three Business Days prior to the end of the then current Dollar Interest Period for such Dollar Loans), specifying (a) the Tranche under which the Loans are to be made or continued, (b) the aggregate amount of the Loans to be borrowed or continued, (c) the requested Borrowing Date (or, as applicable, date of continuation, which shall be the Dollar Interest Payment Date for such Dollar Loans) and (d) with respect to Dollar Loans, the Dollar Interest Period applicable to each portion of such Dollar Loans (the “Notice of Borrowing/Continuation”). Each borrowing or continuation of Dollar Loans shall be in a principal amount of US$5,000,000 and integral multiples of US$1,000,000. Each borrowing of Tranche A2 Loans shall be in a principal amount of MXP$50,000,000 and integral multiples of MXP$10,000,000 in excess thereof. Upon receipt of a Notice of Borrowing/Continuation, the

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Administrative Agent shall promptly notify each Lender that has a Commitment with respect to the relevant Tranche of the amount of each Loan to be made or Dollar Loan to be continued by such Lender and the other relevant terms thereof. Not later than 1:00 p.m., New York City time, on the relevant Borrowing Date each such Lender shall make available to the Administrative Agent an amount in immediately available funds in Dollars or Pesos, as applicable, equal to the Loan to be made by such Lender, at the applicable Administrative Agent’s Office. Unless the Administrative Agent determines that any applicable condition specified in Article IV has not been satisfied, the Administrative Agent shall credit the amounts so received, in like funds, to the account of the Borrower maintained with the Administrative Agent in New York City, in the case of Dollar Loans, or in Mexico City, in the case of Tranche A2 Loans. In furtherance of the foregoing, the Borrower hereby irrevocably authorizes the Administrative Agent to apply such amounts as the Borrower shall direct in the Notice of Borrowing/Continuation.
     SECTION 2.4 Several Obligations; Remedies Independent. The obligations of the Lenders hereunder to make Loans and to make payments pursuant to Section 11.2(c) are several and not joint. The failure of any Lender to make any Loan or to make any payment under Section 11.2(c) on any date required hereunder shall not relieve any other Lender of its corresponding obligation to do so on such date, and no Lender shall be responsible for the failure of any other Lender to so make its Loan or to make its payment under Section 11.2(c). The amounts payable by the Borrower at any time hereunder and under the Notes to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its individual rights arising out of this Agreement and the Notes independently of any other Lender, and it shall not be necessary for any other Lender or either Agent to consent to, or be joined as an additional party in, any proceedings to recover the payment of any overdue amounts.
     SECTION 2.5 Repayment. (a) Revolving Loans. The Borrower agrees to pay to the Administrative Agent for the account of each Revolving Lender the full principal amount of the outstanding Revolving Loans on the Final Maturity Date.
     (b) Tranche B Loans. The Borrower agrees to pay to the Administrative Agent for the account of each Tranche B Lender the full principal amount of the Tranche B Loans in seven equal consecutive quarterly installments, one payable on each Tranche B Principal Payment Date; provided that on the Final Maturity Date the then aggregate unpaid principal amount of the outstanding Tranche B Loans shall be paid in full.
     SECTION 2.6 Optional Prepayments. (a) The Borrower may, without penalty or premium but subject to the indemnity provisions of Section 3.4, prepay all or a portion of the Loans, upon at least three Business Days’ prior irrevocable notice to the Administrative Agent specifying the Loans to be prepaid, their Tranche and their corresponding Borrowing Date and the date and amount of the prepayment; provided that each partial prepayment of any Tranche shall be in the minimum amount of US$5,000,000 or MXP$50,000,000 with respect to Dollar Loans or Tranche A2 Loans, respectively, and integral multiples of US$ 1,000,000 or MXP$10,000,000 in excess thereof with respect to Dollar Loans or Tranche A2 Loans, respectively. Upon receipt of a notice of prepayment, the Administrative Agent shall promptly give notice thereof to each Lender holding a Loan to be prepaid. If such notice of prepayment is given by the Borrower, the Borrower shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with

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accrued interest to, and any other amounts then due on, each such date on the amount prepaid. Each optional prepayment shall be applied pro rata to the Loans made on the Borrowing Date and under the Tranche being prepaid in accordance with Section 2.13(a) and (with respect to Tranche B Loans) to the installments of principal pro rata across the remaining scheduled amortizations. Any Tranche B Loan prepaid may not be reborrowed.
     SECTION 2.7 Optional Reduction of Revolving Commitments. (a) The Borrower may from time to time during the Tranche A Commitment Period, on at least three Business Days’ prior written notice received by the Administrative Agent (which shall promptly give notice thereof to each Tranche A 1 Lender or Tranche A2 Lender, as applicable), permanently reduce (i) the amount of the Tranche Al Commitments to an amount not less than the aggregate principal amount of all outstanding Tranche Al Loans (after giving effect to any payment or prepayment thereof) and/or (ii) the amount of the Tranche A2 Commitments to an amount not less than the aggregate principal amount of all outstanding Tranche A2 Loans (after giving effect to any payment or prepayment thereof). Any such reduction of Tranche A l Commitments or Tranche A2 Commitments shall be in the minimum amount of US$5,000,000 or MXP$50,000,000, respectively, and integral multiples of US$1,000,000 or MXP$10,000,000, respectively, in excess thereof. The Borrower may at any time on like notice during the Tranche A Commitment Period terminate the Tranche Al Commitments and/or the Tranche A2 Commitments, as the case may be, upon payment in full of the entire principal amount then outstanding of the Tranche Al Loans and/or Tranche A2 Loans, as the case may be, together with all accrued and unpaid interest thereon and all other amounts payable by the Borrower in connection therewith.
     (b) All reductions of Revolving Commitments shall be pro rata among the Tranche A1 Lenders or the Tranche A2 Lenders, as applicable, according to their Tranche A1 Revolving Percentages or Tranche A2 Revolving Percentages, as applicable.
     SECTION 2.8 Mandatory Prepayments. (a) If on any date the Borrower or any its Subsidiaries shall receive Net Cash Proceeds from any Prepayment Event, the Borrower shall promptly, and in any event within ten Business Days, make a prepayment of the Loans in an aggregate amount equal to 100% of such Net Cash Proceeds; provided that the Borrower shall not be required to prepay the Loans as a result of a Prepayment Event under clause (a) or (b) of the definition thereof if (and to the extent in excess of the Prepayment Threshold Amount), for any fiscal year of the Borrower with respect to such Net Cash Proceeds received by the Borrower or any of its Subsidiaries from any of the events described in clause (a) or (b), respectively, of such definition that are in excess of US$ 1,000,000 (with amounts under each such clause (a) and clause (b) being separately calculated as in excess of US$1,000,000 (each, the “Prepayment Threshold Amount”)), the Borrower shall have delivered to the Administrative Agent a Reinvestment Notice prior to the date on which a prepayment would otherwise be required under this Section 2.8(a). If the Borrower delivers a Reinvestment Notice pursuant to the proviso to the immediately preceding sentence, such Net Cash Proceeds may be applied for the purposes set forth in such Reinvestment Notice and, if not so applied by the Reinvestment Prepayment Date with respect to the relevant Prepayment Event, shall be applied on such date to prepay the loans in accordance with clause (c) below, until such outstanding Loans are repaid in full.

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     (b) Following the end of each fiscal year of the Borrower ended on or after December 31, 2006, the Borrower shall prepay the Loans in an aggregate amount equal to 50% of Excess Cash Flow for such fiscal year. Each prepayment pursuant to this clause (b) shall be made on or before the date 30 days after the date on which financial statements are delivered pursuant to Section 6.2(a) with respect to the fiscal year for which Excess Cash Flow is being calculated (and in any event within 120 days after the end of such fiscal year); provided that if the last day of a Dollar Interest Period shall occur after the date such financial statements are so delivered but prior to the date 30 days thereafter, the Borrower shall prepay the Loans on such last day of such Dollar Interest Period.
     (c) Amounts to be applied in connection with prepayments made pursuant to clauses (a) and (b) shall be applied (i) first to the Tranche B Loans in the inverse order of maturity of the installments of principal thereof and (ii) second, once all amounts due under the Tranche B Loans have been paid in full, to reduce permanently the Tranche Al Commitments and the Tranche A2 Commitments, pro rata. After giving effect to such Commitment reductions, if the aggregate amount of Tranche Al Loans outstanding would exceed the then amount of the Tranche Al Commitments or if the aggregate amount of Tranche A2 Loans outstanding would exceed the then amount of the Tranche A2 Commitments, the Borrower shall repay each such excess amount promptly (and, in any event, within ten Business Days) after the event giving rise to such reduction of the Revolving Commitments.
     (d) Each prepayment of Loans under this Section 2.8 shall be made together with accrued interest to the date of such prepayment on the amount so prepaid and any other amounts due pursuant to Section 3.4. Any amount prepaid under this Section 2.8 may not be reborrowed.
     SECTION 2.9 Interest. (a) Dollar Loans. The Borrower shall pay to the Administrative Agent for the account of each Dollar Lender interest on the unpaid principal amount of the Dollar Loans for each day during each Dollar Interest Period for each such Dollar Loan until the date on which such Dollar Loans are paid in full at a rate per annum equal to Eurocurrency Rate determined for such Dollar Interest Period plus the relevant Applicable Margin.
     (b) Tranche A2 Loans. The Borrower shall pay to the Administrative Agent for the account of each Tranche A2 Lender interest on the unpaid principal amount of the Tranche A2 Loans for each day during each Tranche A2 Interest Period for each such Tranche A2 Loan until the date on which such Tranche A2 Loans are paid in full at a rate per annum equal to the THE Rate determined for such Tranche A2 Interest Period plus the relevant Applicable Margin.
     (c) If all or a portion of (i) the principal amount of any Loan, (ii) any interest payable on the principal amount of any Loan (to the extent permitted by Applicable Law) or (iii) any fee payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to the Default Rate from the date of such non-payment until paid in full and shall be payable on demand.
     (d) Except as otherwise provided in clause (c), interest shall be payable in arrears on (i) in the case of Dollar Loans, each Dollar Interest Payment Date for the applicable Dollar Loan

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or (ii) in the case of Tranche A2 Loans, each Tranche A2 Interest Payment Date for the applicable Tranche A2 Loan.
     SECTION 2.10 Computation of Interest. (a) Interest in respect of the Loans shall be calculated on the basis of a 360-day year for the actual days elapsed; provided that if interest with respect to any Dollar Loan shall apply at the Base Rate in accordance with this Agreement, such interest shall be calculated on the basis of a 365/366-day year for the actual days elapsed. The Administrative Agent shall, as soon as practicable, notify the Borrower and the Lenders of each determination of Eurocurrency Rate or the TILE Rate; provided that any failure to do so shall not relieve the Borrower of any liability hereunder.
     (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Borrower or any Lender, deliver to the Borrower or such Lender, as the case may be, a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to Section 2.9(a) and (b).
     SECTION 2.11 Inability to Determine Interest Rate. (a) In the event that the Administrative Agent shall have reasonably determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the interbank eurodollar market, adequate means do not exist for ascertaining the Eurocurrency Rate applicable pursuant to Section 2.9(a), for any requested Dollar Interest Period, the Administrative Agent shall forthwith give notice by facsimile of such determination to the Borrower and each Dollar Lender at least one day prior to the last day of the current Dollar Interest Period. Thereafter, the obligation of the Lenders to make or maintain Dollar Loans shall be suspended until the Administrative Agent (upon the instruction of the Majority Lenders) revokes such notice. Upon receipt of such notice, the Borrower may revoke any pending request for the making or continuation of a Dollar Loan or, failing that, such Dollar Loan requested or continued by the Borrower will bear interest at the Base Rate plus the Applicable Margin.
     SECTION 2.12 Fees. (a) Administration Fee. The Borrower agrees to pay to the Administrative Agent, for its account, all fees in such amount and in such manner as shall have been agreed to by the Administrative Agent and the Borrower in a separate fee letter (the “Administration Fee Letter”).
     (b) Arrangement Fees. The Borrower agrees to pay to Banc of America Securities LLC and BBVA Securities Inc., for their account, all fees in such amount and in such manner as shall have been agreed to among the Arrangers and the Borrower in a separate fee letter dated as of September 6, 2005 (the “Arrangement Fee Letter”).
     (c) Collateral Agency. The Borrower agrees to pay to the Collateral Agent, for its account, all fees in such amount and in such manner as shall have been agreed to by the Collateral Agent and the Borrower in a separate fee letter (the “Collateral Agency Fee Letter”).
     (d) Commitment Fee.(i) (i) The Borrower agrees to pay to the Administrative Agent, for the account of each Revolving Lender with a Revolving Commitment, a commitment fee on the

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daily average unused portion of such Lender’s Tranche A1 Commitment and/or Tranche A2 Commitment for the period from and including the Effective Date to but excluding the last day of the Tranche A Commitment Period applicable to the Tranche Al Commitments or the Tranche A2 Commitments, as the case may be (the “Commitment Fee”) at a rate per annum determined based on the aggregate level of disbursements under Tranche Al Loans and the Dollar Equivalent of the disbursements under Tranche A2 Loans in accordance with the table below:
         
Aggregate outstanding    
Revolving Loans   Commitment Fee Rate
> US$20,000,000
    0.50 %
³ US$10,000,000 to £ US$20,000,000
    0.75 %
< US$10,000,000
    1.00 %
     (ii) The Commitment Fee shall be payable in arrears on each Commitment Fee Payment Date, for the period then ending for which such Commitment Fee shall not have been theretofore paid. The Commitment Fee shall be computed for the actual number of days elapsed on the basis of a year of 360 days.
     SECTION 2.13 Pro Rata Treatment and Payments. (a) Except as otherwise provided herein, (i) each payment by the Borrower on account of principal of the Loans shall be made pro rata to the Lenders according to the respective outstanding principal amounts of the Loans then due and payable, converting the amount of all Tranche A2 Loans for purposes of any such pro rata calculations into Dollars based on the Dollar Equivalent thereof, and (ii) each payment of interest on the Loans shall be made for the account of the Lenders pro rata in accordance with the respective amounts of interest on the Loans then due and payable to them.
     (b) Payments of principal and interest in respect of Dollar Loans and payments of fees shall be made in Dollars. Payments of principal and interest in respect of Tranche A2 Loans shall be made in Pesos, and payments of other amounts shall be made in Dollars. All payments to be made by the Borrower shall be made without condition or deduction for any counterclaim, defense, recoupment or set-off. Except as otherwise expressly provided herein, all payments by the Borrower hereunder shall be made to the Administrative Agent, for the account of the respective Lenders to which such payment is owed, at the applicable Administrative Agent’s Office and in immediately available funds, and shall be made not later than 2:00 p.m., New York City time, on the date specified herein. The Administrative Agent shall distribute such payments to the Lender or Lenders entitled to receive the same promptly upon receipt in like funds as received. All payments received by the Administrative Agent after 2:00 p.m., New York City time, shall be deemed received on the next succeeding Business Day and any applicable interest or fee shall continue to accrue. If any payment on a Loan becomes due and payable on a day other than a Business Day therefor, the maturity thereof shall be extended to the next succeeding Business Day for such Loan (and such extension of time shall be reflected in computing interest or fees, as the case may be) unless, with respect to Dollar Loans, the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day.
     (c) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Loan that such Lender will not make available to the Administrative

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Agent such Lender’s share of such Loan, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with Section 2.1 and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Loan available to the Administrative Agent, then the applicable Lender and the Borrower, upon receipt of notice from the Administrative Agent of such failure, severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount in immediately available funds with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of a payment to be made by such Lender, the Overnight Rate and (ii) in the case of a payment to be made by the Borrower, the interest rate applicable to the Loans. If the Borrower and such Lender shall pay such interest to the Administrative Agent for the same or an overlapping period, the Administrative Agent shall promptly remit to the Borrower the amount of such interest paid by the Borrower for such period. If such Lender pays its share of the applicable Commitment to the Administrative Agent, then the amount so paid shall constitute such Lender’s Loan included in such Commitment. Any payment by the Borrower shall be without prejudice to any claim the Borrower may have against a Lender that shall have failed to make such payment to the Administrative Agent.
     (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender, in immediately available funds with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the Overnight Rate.
     (e) Except as otherwise set forth herein, all payments made under this Agreement or any other Loan Document shall be applied first (in each case on a pro rata basis to the recipients thereof based upon the amounts then owed to them) to pay fees and expenses due to the Beneficiaries under the Loan Documents, then to pay accrued and unpaid interest on the Loans, then to pay principal of the Loans and then to pay any and all other amounts payable to the Beneficiaries under the Loan Documents.
     SECTION 2.14 Set-Off, Sharing of Payments, Etc. (a) Without limiting any of the obligations of the Loan Parties or the rights of any Beneficiary under the Loan Documents, if the Borrower shall fail to pay when due (whether at stated maturity, by acceleration or otherwise) any amount payable by it hereunder or under any other Loan Document, then (to the extent not in violation of an Applicable Law) each Beneficiary may, without prior notice to any Loan Party (which notice is expressly waived by it to the fullest extent permitted by Applicable Law), set off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final, in any currency, matured or unmatured) at any time held or any other Indebtedness owing by such Beneficiary or any of its Affiliates (in each case, including any branch or agency thereof) to or for the credit or account of the Borrower or any other Loan Party.

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Each Beneficiary shall promptly provide written notice of any such set-off by it to the Borrower and the Administrative Agent; provided that failure by such Beneficiary to provide such notice shall not give the Borrower any cause of action or right to damages or affect the validity of such set-off and application.
     (b) If, other than as expressly provided elsewhere herein, any Beneficiary shall obtain on account of the Obligations owing to it hereunder or in respect of its Loans any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its share of payments on account of the Obligations obtained by all the Beneficiaries, such Beneficiary shall forthwith (i) notify the Administrative Agent of such fact, and (ii) purchase from the other Beneficiaries such participations in such amounts made by them as shall be necessary to cause such purchasing Beneficiary to share the excess payment ratably with each of them; provided, that if all or any portion of such excess payment is thereafter recovered from the purchasing Beneficiary, such purchase shall to that extent be rescinded and each other Beneficiary shall repay to the purchasing Beneficiary the purchase price paid therefor, without interest. The provisions of this Section 2.14(b) shall not be construed to apply to (A) any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or (B) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans. The Administrative Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased pursuant to this Section 2.14 and will in each case notify the Lenders and the Borrower following any such purchases.
     Each Loan Party consents to the foregoing and agrees, to the extent it may effectively do so under Applicable Law, that any Beneficiary acquiring a participation pursuant to the foregoing arrangements may exercise against such Loan Party rights of setoff permitted hereunder and counterclaim with respect to such participation as fully as if such Beneficiary were a direct creditor of such Loan Party in the amount of such participation.
ARTICLE III.
YIELD PROTECTION, ETC.
     SECTION 3.1 Taxes. (a) All payments made by each Loan Party under this Agreement and any Notes shall be made free and clear of, and without deduction for or on account of, any present or future Taxes, including Other Taxes (but excluding any tax imposed on or measured by the net income or net profits or capital (or any franchise or similar tax imposed in lieu thereof) of a beneficiary of such payment (each a “Payee”) pursuant to the laws of the jurisdiction (or any political subdivision thereof) in which it is organized or the jurisdiction (or any political subdivision thereof) in which the Lending Office of such Lender is located and any withholding taxes to the extent imposed by reason of any Payee, that is not a Mexican Financial Institution, or its assignees or participants, if any, failing to make reasonable commercial efforts, consisting of timely making any necessary filing and taking related action, to maintain its registration for the purposes of Article 195(1) or Article 196(11) of the Mexican Income Tax Law (Ley del Impuesto Sobre la Renta) or any successor provision with Hacienda (collectively, the “Excluded Taxes”)). If any such Taxes that are not Excluded Taxes (“Non-Excluded Taxes”) are required to be withheld from any amounts payable to any Payee hereunder (subject to the right of such Loan Party to contest any such requirement in good faith, so long as

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proper reserves are maintained and each Payee hereunder is paid the full amounts payable hereunder including any additional amounts payable), such Loan Party shall pay such Non-Excluded Taxes, including Other Taxes, to the appropriate taxing authority, and the amounts payable to each such Payee shall be increased by such additional amounts (the “Additional Amounts”) necessary to yield to such Payee (after payment of all Non-Excluded Taxes, Other Taxes and Additional Amounts, including any of the foregoing levied on Additional Amounts) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement in the absence of such payments or deductions; provided that no such Additional Amounts shall be payable in respect of any Taxes that would not have been imposed but for a failure by a Payee to provide the documents required by Section 3.1(c) strictly pursuant to the terms of, and only in the circumstances specified in, Section 3.1(c), in excess of the Additional Amounts that would have been payable had such documents been provided. In addition, such Loan Party shall pay any Other Taxes to the relevant Governmental Authority in accordance with Applicable Law. Whenever any Non-Excluded Tax or Other Tax is payable by a Loan Party, as promptly as possible thereafter, such Loan Party shall send to the Administrative Agent, for the account of such Payee, a certified copy by a Responsible Officer of such Loan Party of a stamped filed receipt showing payment thereof or such other document reasonably satisfactory to such Payee showing payment thereof. If such Loan Party fails to pay any Non-Excluded Taxes or Other Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, such Loan Party shall indemnify the affected Payee for any incremental taxes, interest, penalties, loss, liability, claim or expense (including legal fees and expenses) that may become payable by any such Payee as a result of any such failure. This indemnity and agreement shall survive termination of the Agreement and payment of the Loans.
     (b) Each Loan Party shall indemnify the Administrative Agent and each Payee, within 10 days after written demand therefor, for the full amount of any Non-Excluded Taxes or Other Taxes paid by the Administrative Agent or such Payee on or with respect to any payment by or on account of any obligation of such Loan Party hereunder (including Non-Excluded Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Non-Excluded Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to such Loan Party by a Payee, or by the Administrative Agent on its own behalf or on behalf of a Payee, shall be conclusive absent manifest error.
     (c) Each Payee that is not a Mexican Financial Institution shall from time to time, at the request of the Borrower or the Administrative Agent, furnish to the Borrower or the Administrative Agent, as the case may be, such documentation required under Applicable Law as may be required to establish any available exemption from, or reduction in the amount of, otherwise applicable Non-Excluded Taxes; provided that (i) such documentation is consistent with Applicable Law and (ii) such documentation would not, in the judgment of such Payee, require such Payee to disclose any confidential or proprietary information or otherwise be disadvantageous to such Payee; provided that a documentation shall not be considered disadvantageous solely by virtue of administrative inconvenience to such Payee. The Borrower and the Administrative Agent shall be entitled to rely upon the accuracy of any such documentation furnished to it by any Payee that is not a Mexican Financial Institution and shall

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have no obligation to indemnify such Payee for any incremental taxes, interest or penalties that may become payable by such Payee solely as a result of any inaccuracy contained therein or the Payee’s failure to furnish such documentation.
     SECTION 3.2 Illegality. Notwithstanding any other provisions herein, if any Applicable Law or any change therein or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain a Loan as contemplated by this Agreement, then such Lender may give notice thereof to each of the Borrower and the Administrative Agent and, upon the giving of such notice (a) the Commitments of such Lender hereunder to make further Loans shall forthwith be canceled (with, unless the Borrower replaces such Lender in accordance with Section 3.6 within ten Business Days following such notice, a corresponding reduction of the aggregate amount of the Commitments under the Tranche of the canceled Commitment) and/or (b) if such Applicable Law shall so mandate, such Lender’s Loan shall be prepaid in full by the Borrower, together with accrued and unpaid interest thereon and all other amounts payable by the Borrower under this Agreement, on or before such date as shall be mandated by such Applicable Law (such prepayment not being shared as described in Section 2.13 with any Lenders not so affected); provided that if it is lawful for such Lender to maintain its Loan through the last day of the then current Dollar Interest Period or Tranche A2 Interest Period, as the case may be, such payment shall be made on such date.
     SECTION 3.3 Additional Costs. (a) If, after the Effective Date, and as a result of the adoption of any law, regulation, treaty or official directive or request (whether or not having the force of law) or any change therein or any introduction thereof (which such change or introduction is publicly announced through official governmental, regulatory or other customary means after the Effective Date) or compliance therewith by the Borrower, the Administrative Agent or any Lender (or any corporation Controlling such Lender) including those relating to taxation, reserves, special deposit, cash ratio, liquidity, capital adequacy or Eurocurrency Liabilities, if applicable or other requirement or any other form of banking or monetary requirements or controls, any of the following shall occur:
     (i) the cost to any Lender of maintaining its Loans is increased by an amount determined by such Lender to be material; or
     (ii) any amount receivable by any Lender is reduced by an amount determined by such Lender to be material as a result of maintaining its Loans; or
     (iii) the rate of return on such Lender’s (or its Controlling corporation’s) capital is reduced as a consequence of its obligations hereunder below that which such Lender could have achieved but for such adoption, change or introduction (taking into consideration such Lender’s or such corporation’s policies with respect to capital adequacy) by an amount deemed by such Lender to be material;
in the case of each of clauses (i), (ii) and (iii) other than any increase in or incurrence of cost, reduction in yield or other return or additional payment resulting from Excluded Taxes, then and in each such case:

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     (A) such Lender or the Administrative Agent (an “Affected Party”) shall notify the Borrower through the Administrative Agent in writing of such event promptly upon its becoming aware of the event entitling it to make a claim; and
     (B) within a reasonable period (not exceeding 15 Business Days) following any demand from time to time by such Affected Party through the Administrative Agent (with a copy contemporaneously sent to the Borrower), the Borrower shall pay to the Administrative Agent, for the account of such Affected Party, such amount as shall compensate such Affected Party for such increased cost, reduced amount receivable or reduction in rate of return (excluding anticipated profits unrelated to those measured by the Applicable Margin, the Default Rate, if applicable, and the Commitment Fee). The certificate of such Affected Party specifying the amount of such compensation shall be conclusive save in the case of manifest error.
     (b) If an Affected Party shall request compensation under this Section 3.3, such Affected Party shall furnish to the Borrower a statement setting forth the basis for requesting such compensation.
     (c) The covenants and agreements set forth in this Section 3.3 shall survive the termination of this Agreement and the payment of the outstanding Loans. Failure or delay on the part of any Affected Party to demand compensation pursuant to this Section 3.3 shall not constitute a waiver of such Affected Party’s right to demand compensation; provided that the Borrower shall not be required to compensate an Affected Party, as applicable, pursuant to this Section 3.3 for any increased costs or reductions incurred more than 180 days prior to the date that such Affected Party notifies the Borrower of the event giving rise to such increased costs or reductions and of such Affected Party’s intention to claim compensation therefor; and provided further that, if the event giving rise to such increased costs or reduction is retroactive, then the 180 day period referred to above shall be extended to include the period of retroactive effect thereof.
     SECTION 3.4 Funding Losses. The Borrower agrees to indemnify each Lender and to hold such Lender harmless from any actual loss or expense (excluding loss of profit) which such Lender may sustain or incur as a consequence of (a) default by the Borrower in payment when due (by acceleration or otherwise) of the principal amount of or interest on the Loans of such Lender, (b) default by the Borrower in making a borrowing of Loans or any prepayment after the Borrower has given a notice in accordance with Section 2.3 or 22-6 and (c) the making by the Borrower of a prepayment of the Loans on a day which is not the last day of a Dollar Interest Period (with respect to Dollar Loans) or Tranche A2 Interest Period (with respect to Tranche A2 Loans) (whether or not the Administrative Agent or such Lender has previously consented to such prepayment), including any such loss or expense arising from interest or fees payable by such Lender to lenders of funds obtained by it in order to maintain its Loans hereunder as set forth in a certificate of such Lender delivered to the Borrower through the Administrative Agent. This covenant shall survive termination of this Agreement and payment of the Loans.

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     SECTION 3.5 Change of Lending Office. Each Lender that is not a Mexican Financial Institution agrees that, upon the occurrence of any event giving rise to the operation of Section 3.1(a) (other than the imposition of the Mexican withholding taxes expected, based upon the identity and place of residence of each Lender on the Effective Date, or the Mexican withholding taxes applicable to interest payments made to an Eligible Assignee), 33.22 or 31(a) as to it and upon request by the Borrower, it will use its commercially reasonable efforts to avoid or minimize the consequences of such event if such action shall not, in the judgment of such Lender, as the case may be, be illegal or economically or otherwise disadvantageous to it. If such Lender is entitled to compensation for the events specified under Section 3.1 (other than as set forth in the preceding sentence) or 31(a), or the Borrower is required to make a prepayment as a result of the operation of Section 3.2, such Lender shall use commercially reasonable efforts for a period of 30 days to designate a different Lending Office for any Obligation affected by such event if such designation will avoid the need for, or reduce the amount of, such compensation (except as set forth in the preceding sentence) and will not, in the sole opinion of such Lender, result in any economic, legal or regulatory or other disadvantage to such Lender or any of its Affiliates.
     SECTION 3.6 Replacement of Lenders. The Borrower shall be permitted, at its sole expense and effort, to replace with a replacement financial institution or Eligible Assignee any Lender (a) that requests reimbursement for amounts owing pursuant to Section 3.1(a) (but only if such Lender is (i) not a Mexican Financial Institution and (ii) a financial institution not registered with Hacienda for purposes of Article 195(1) or Article 196(11) of the Mexican Income Tax Law (Ley del Impuesto Sobre la Renta) or any successor provision thereof and not a resident of (or, if acting through a branch or agency, does not have its principal office in) a country with which Mexico has entered into a treaty for the avoidance of double taxation) or 11W, (b) to which the Borrower is required to make a prepayment or commitment reduction as a result of the operation of Section 3.2, (c) that defaults in its obligation to make its Loan hereunder or (d) that fails to consent to an election, consent, amendment, waiver or other modification to this Agreement or other Loan Document requiring more Lenders than the Majority Lenders’ consent and such election, consent, amendment, waiver or other modification is otherwise consented to by Lenders holding more than 66 2/3% of the sum of (i) all undrawn Commitments on such date and (ii) all Loans outstanding on such date, as determined by the Administrative Agent by converting Tranche A2 Loans into Dollars based on the Dollar Equivalent thereof without giving effect to the Loans and undrawn Commitments attributable to such Lender; provided that (A) such replacement does not conflict with any Applicable Law, (B) no Default or Event of Default shall have occurred and be continuing at the time of such replacement, (C) prior to any such replacement, such Lender shall have taken no action under Section 3.5 which has eliminated the continued need for payment of amounts owing pursuant to Section 3.1(a) or 31(a) or the operation of Section 3.2, (D) the replacement financial institution shall purchase, at par, the Loans and other amounts (including accrued and unpaid interest) owing to such replaced Lender on or prior to the date of replacement, (E) the Borrower shall be liable to such replaced Lender under Section 3.4 if the Loans owing to such replaced Lender shall be purchased other than on the last day of a Dollar Interest Period or Tranche A2 Interest Period, as the case may be, relating to such Loans, (F) the replacement financial institution, if not already a Lender, shall be reasonably satisfactory to the Administrative Agent, (G) the replaced Lender shall be obligated to make such replacement without recourse in accordance with the provisions of Section 11.8 (provided that the Borrower shall be obligated to pay the registration and processing fee referred

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to therein), (H) until such time as such replacement shall be consummated, the Borrower shall pay all additional amounts (if any) required pursuant to Section 3.1 (a) or 3d(a), as the case may be, and (I) any such replacement shall not be deemed to be a waiver of any rights that the Borrower, either Agent or any other Lender shall have against the replaced Lender.
ARTICLE IV.
CONDITIONS PRECEDENT
     SECTION 4.1 Conditions to Initial Funding. The obligation of each Lender to make the Loans requested to be made by it on the Initial Borrowing Date is subject to the occurrence of the Effective Date and satisfaction of the following conditions precedent (in addition to the conditions set forth in Section 4.2), written notice of which satisfaction will be given by the Administrative Agent to the Borrower:
     (a) The Administrative Agent shall have received the following, each of which shall be originals or telecopies (followed promptly by originals) unless otherwise specified, each properly executed by a Responsible Officer of the signing Loan Party and each in form and substance satisfactory to the Administrative Agent and each of the Lenders and in sufficient number of copies for distribution to all Lenders:
     (i) Agreement. Duly executed Notes for each of the Lenders, dated the Initial Borrowing Date, issued in accordance with this Agreement;
     (ii) Arrendadora Pledges. Each of the Arrendadora Pledges duly executed and delivered by Arrendadora before a Mexican Public Notary;
     (iii) Opinion of Counsel to the Loan Parties. An opinion, dated the Initial Borrowing Date, of each of White & Case LLP and White & Case, S.C., special U.S. counsel and special Mexican counsel, respectively, to the Loan Parties, in substantially the form of Exhibits E and F, addressed to the Agents and each Lender;
     (iv) Opinion of Counsel to the Administrative Age. An opinion, dated the Initial Borrowing Date, of each of Mayer, Brown, Rowe & Maw LLP and Ritch Mueller, S.C., special U.S. counsel and special Mexican counsel, respectively, to the Administrative Agent;
     (v) Governmental and Third-Party Approvals. Copies of all necessary orders, consents, approvals (including authorizations from any central bank), licenses, permissions, registrations and validations of, or notices to or filings with, and exemptions by, any Governmental Authority, and all third-party consents and approvals, required for the execution, delivery, performance or carrying out by the Borrower and Arrendadora of the provisions of the Loan Documents, and for the validity or enforceability of the obligations incurred hereunder or thereunder, which shall be in full force and effect;
     (vi) Organizational Documents. The following organizational documents: (A) a copy duly certified by a Mexican Public Notary, in Spanish, of the estatutos sociales of the Borrower and Arrendadora as in effect as of the Effective Date and the Initial Borrowing Date and further certified by the Secretary or Alternate Secretary of the Board

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of Directors of each of the Borrower and Arrendadora, as to effectiveness; (B) an incumbency certificate designating the officers of the Borrower and Arrendadora (together with their specimen signatures) who are authorized to execute any document in connection with the transactions contemplated by the Loan Documents and certifying that the resolutions and powers-of-attorney contemplated in the following clauses (C) and (D) have not been modified, revoked or rescinded as of the date of such certificate; (C) copies notarized by a Mexican Public Notary of resolutions of the shareholders of the Borrower and Arrendadora certified by the Secretary of the Board of Directors of the Borrower or Arrendadora, as the case may be, or a Responsible Officer of the Borrower or Arrendadora, as the case may be, authorizing the execution, delivery and performance of the Loan Documents to which it is a party and the designation of the Process Agent as its agent for service of process; and (D) copies duly certified by a Mexican Public Notary and by the Secretary or Alternate Secretary of the Board of Directors of each of Arrendadora and the Borrower, of the powers-of-attorney granted to officers of the Borrower and Arrendadora authorizing the execution of each Loan Document and to the Process Agent to act as agent for service of process;
     (vii) Concession Title. A copy of the Concession Title together with a certificate, dated the Initial Borrowing Date, of the Secretary of the Board of Directors of the Borrower or any Responsible Officer of the Borrower stating that the Concession Title is in full force and effect and further that the Borrower is in material compliance with all terms and conditions applicable thereunder or pursuant to Applicable Law;
     (viii) Financial Statements. (A) Audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries for fiscal year 2004 and (B) unaudited interim consolidated financial statements of the Borrower and its Consolidated Subsidiaries for the six months ended after the date of the latest applicable financial statements delivered pursuant to clause (A) of this clause through June 30, 2005;
     (ix) Process Agent Acceptance. A letter from the Process Agent accepting its appointment as agent for each Loan Party.
     (b) Representations and Warranties. The representations and warranties of the Borrower and Arrendadora contained in each of the Loan Documents shall be true and correct in all material respects on and as of the Initial Borrowing Date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date) with the same effect as if made on and as of such date, and each of the Borrower and Arrendadora shall have delivered to the Administrative Agent a certificate of a Responsible Officer to that effect.
     (c) No Event of Default. No Default or Event of Default shall have occurred and be continuing on the Initial Borrowing Date or shall result from the making of any Loan hereunder on such date or the use of the proceeds thereof, and each of the Borrower and Arrendadora shall have delivered to the Administrative Agent a certificate of a Responsible Officer to that effect.
     SECTION 4.2 Conditions Precedent to Each Loan. The obligation of each Lender to make any Loan requested to be made by it on any date during the Commitment Period is subject

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to the satisfaction of the following conditions precedent (in addition to the conditions precedent set forth in Section 4.1):
     (a) Notice of Borrowing/Continuation; Notes. The Administrative Agent shall have received a Notice of Borrowing/Continuation as required by Section 2.3.
     (b) Representations and Warranties. The representations and warranties of the Borrower and each Guarantor contained in each of the Loan Documents (other than any such representation or warranty which, by its term, speaks as of a particular date) shall be true and correct in all material respects on and as of each Borrowing Date, before and after giving effect to the making of the relevant Loans on such Borrowing Date and to the application of the proceeds thereof, with the same effect as if made on and as of such date.
     (c) No Default or Event of Default. No Default or Event of Default shall have occurred and be continuing on any Borrowing Date or shall result from the making of the requested Loans on such date or the use of the proceeds thereof.
     (d) Payment of Fees and Expenses. The Administrative Agent shall have received evidence of payment of the fees and expenses then due and payable under Section 11.2 and of any and all stamp taxes or similar taxes payable on or before the Initial Borrowing Date in connection with the transactions contemplated by the Loan Documents, including legal fees of special U.S. and Mexican counsel to the Administrative Agent (all of which fees, expenses and taxes the Borrower authorizes the Administrative Agent to deduct from proceeds of the Loans).
     The borrowing of any Loans by the Borrower hereunder on each Borrowing Date shall constitute a representation and warranty by the Borrower as of such Borrowing Date that the conditions contained in clauses (b) and (c) have been satisfied.
     SECTION 4.3 Satisfaction of Conditions Precedent. Without limiting the generality of the provisions of Section 10.4, for purposes of determining compliance with the conditions specified in Sections 4.1 and 4.2, each Lender shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received notice from such Lender prior to the proposed Borrowing Date specifying its objection thereto.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
     In order to induce the Lenders and the Agents to enter into this Agreement, each of the Loan Parties makes the following representations and warranties to the Lenders and the Agents as of the Effective Date, each Borrowing Date and (with respect to any Subsidiary that becomes a Guarantor pursuant to Section 6.13) as of the execution date of the relevant Accession Agreement, all of which shall survive the execution and delivery of this Agreement:
     SECTION 5.1 Status and Licensing. Each Loan Party is a corporation with variable capital (sociedad anónima de capital variable) duly organized and validly existing under the laws of Mexico. Each Loan Party has the power and authority to own its Property and to transact

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the business in which it is engaged and is duly qualified or licensed as a foreign corporation in each jurisdiction in which such qualification or license is required, unless failure so to have such power and authority or to qualify or be licensed could not reasonably be expected to have a Material Adverse Effect.
     SECTION 5.2 Corporate Power and Authority; Enforceable Obligations. (a) Each Loan Party has the corporate power to execute, deliver and perform the terms and provisions of the Loan Documents to which it is a party, and has taken all necessary corporate action required by its estatutos sociales to authorize the execution, delivery and performance of the Loan Documents to which it is a party.
     (b) Each Loan Document to which such Loan Party is a party has been duly authorized, executed and delivered by such Loan Party.
     (c) Each of the Loan Documents to which such Loan Party is a party constitutes, and each Note when executed and delivered by it for value received will constitute, legal, valid and binding obligations of such Loan Party enforceable in accordance with their respective terms except to the extent that the enforceability thereof may be limited by applicable bankruptcy, concurso mercantil, quiebra, insolvency, reorganization, moratorium or other similar laws generally affecting creditors’ rights and by equitable principles (regardless of whether enforcement is sought in equity or at law); provided that the assets subject to the pledge set forth in the Supplemental Arrendadora Pledge are subject to the outcome of the Arrendadora Internacional Litigation to the extent that, until the parties to such litigation have reached an agreement or a judgment in connection with such litigation has been obtained and complied with, title to such collateral will not be clearly vested in Arrendadora.
     SECTION 5.3 Compliance with Law and Other Instruments. Neither the execution, delivery or performance by each Loan Party of the Loan Documents to which it is a party in accordance with their respective terms, nor the consummation of the transactions herein or therein contemplated, nor compliance with the terms and provisions hereof or thereof, (a) will contravene such Loan Party’s charter or by-laws (estatutos sociales) (or other equivalent organizational documents) or (b) will contravene any Applicable Law to which such Loan Party is subject or any judgment, decree, order or permit applicable to such Loan Party, or (c) will conflict with or will result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any Property of such Loan Party, KCS pursuant to the terms of any indenture, mortgage, deed of trust, agreement or other instrument (other than those permitted or required by this Agreement, including, without limitation, Permitted Liens) to which such Loan Party is a party or bound or to which it may be subject, except in each case under clause (b) or (c) where such conflict, breach, default or violation could not reasonably be expected to have a Material Adverse Effect.
     SECTION 5.4 Litigation and Environmental Matters. Other than the Arrendadora Internacional Litigation, there are no actions, suits or proceedings pending or, to the best knowledge of the Loan Parties, threatened against any Loan Party or affecting the Property of any Loan Party before any court, tribunal or other Governmental Authority: (a) with respect to any Loan Document, (b) which individually or in the aggregate could reasonably be expected to

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have a Material Adverse Effect or (c) which seeks the revocation or expropriation of the Concession Title. Except with respect to any matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, each Loan Party (i) has not failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has not become subject to any Environmental Liability, (iii) has not received notice of any claim with respect to any Environmental Liability or (iv) knows of no basis for any Environmental Liability. None of the Loan Parties is in default with respect to any Applicable Law which could reasonably be expected to have a Material Adverse Effect.
     SECTION 5.5 Governmental Approvals. No order, permission, consent, approval, license, authorization, registration or validation of, or notice to or filing with, or exemption by, any Governmental Authority is required to authorize, or is required in connection with, the execution, delivery and performance by each Loan Party of any Loan Document to which it is a party or the taking of any action by each Loan Party hereby or thereby contemplated, or, if any of the foregoing are required, they have been obtained and are in full force and effect.
     SECTION 5.6 Financial Information. (a) The audited financial statements and the unaudited financial statements delivered in accordance with Section 4.1(a)(viii) (the “Financial Statements”), including in each case the related schedules and notes, fairly present the financial condition of the Borrower and its Consolidated Subsidiaries as of the dates of such statements and the results of their operations for the periods therein stated and have been prepared in accordance with IFRS (with respect to the financial statements dated December 31, 2004) and with GAAP (with respect to the financial statements for the six months ended June 30, 2005), consistently applied throughout the periods involved (unless and to the extent otherwise stated therein).
     (b) Except as disclosed in this Agreement or in the Financial Statements, there are no liabilities or obligations with respect to the Borrower and its Subsidiaries of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due) and the Borrower is not aware of any basis for the assertion against it or its Subsidiaries of any liability or obligation of any nature that is not fully disclosed in the Financial Statements which, in either case, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
     (c) Since December 31, 2004, there has been no development or event that has had or could reasonably be expected to have a Material Adverse Effect.
     SECTION 5.7 Taxes, Assessments and Fees. Each Loan Party has timely filed all tax returns and reports required to have been filed and has paid all taxes due by it except such taxes as are being contested in good faith by appropriate proceedings for which adequate (in the good faith judgment of such Loan Party) reserves have been made (in accordance with GAAP) or such taxes the failure of which to pay could not reasonably be expected to have a Material Adverse Effect.
     SECTION 5.8 Investment Company Act. None of the Loan Parties is an “investment company” required to be registered under the Investment Company Act of 1940, as amended.

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     SECTION 5.9 Accuracy of Information. All written information supplied by the Loan Parties to the Arrangers, either Agent and/or the Lenders relating to the Loan Parties, taken as a whole, was true and accurate in all material respects as of the date supplied, and did not as of such date, and does not, in each case taken as a whole, omit to state any material information necessary to make the information therein contained, in light of the circumstances under which such information was supplied, not misleading. It is understood that: (a) no representation or warranty is made concerning the forecasts, estimates, pro forma information, projections and statements as to anticipated future performance or conditions, and the assumptions on which they were based, contained in any such information, reports, financial statements, exhibits or schedules, except that as of the date such forecasts, estimates, pro forma information, projections and statements were generated, (i) such forecasts, estimates, pro forma information, projections and statements were based on the good faith assumptions of the management of the Borrower and (ii) such assumptions were believed by such management to be reasonable and (b) such forecasts, estimates, pro forma information and statements, and the assumption on which they were based, may or may not prove to be correct.
     SECTION 5.10 Absence of Default. No Default or Event of Default has occurred and is continuing.
     SECTION 5.11 Ranking; Recourse; Liens.(a) (a) The Obligations of each Loan Party hereunder and under the other Loan Documents to which it is a party are and will at all times be unconditional general obligations of such Loan Party, and rank and will at all times rank at least pari passu in right of payment with all its other senior unsecured Indebtedness, except for obligations accorded preference by mandatory provisions of law. There is no Lien upon or with respect to any of the present Property or Indebtedness of any Loan Party or its respective Subsidiaries other than Liens permitted or required by this Agreement, including, without limitation, Permitted Liens.
     (b) Attached as Schedule 5.1 IN is a complete and accurate list of all Liens of each Loan Party securing Indebtedness in an amount equal to or greater than US$5,000,000 (or its equivalent in other currencies) existing on the Effective Date, showing as of the Effective Date the lienholder thereof, the principal amount of the obligations secured thereby and a brief description of the Property subject thereto.
     SECTION 5.12 Withholding Tax. As of the Effective Date, there is no tax, levy, impost, deduction, charge or withholding imposed, levied or made by or in Mexico or any political subdivision or taxing authority thereof or therein either (a) on or by virtue of the execution or delivery of the Loan Documents or (b) on any payment to be made pursuant to the Loan Documents to any Person, except that payments of interest under this Agreement or the Notes and fees payable hereunder and under the Fee Letters will be subject to a Mexican withholding tax at a rate of 4.9% so long as the Payee, that is not a Mexican Financial Institution, (i) is a foreign commercial bank or other financial institution registered with Hacienda for purposes of Article 195(I) of the Mexican Income Tax Law (Ley del Impuesto Sobre la Renta), the regulations thereunder and any administrative rules issued thereunder and (ii) is a resident for tax purposes of (or its principal place of business, if lending through a branch or agency, is located in) a country with which Mexico has entered into a treaty for the avoidance of double taxation. As of the Effective Date, each Loan Party is permitted under Applicable Law, to make

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all payments pursuant to the Loan Documents free and clear of all Taxes imposed, levied or made by or in Mexico or any political subdivision or taxing authority thereof, as provided in each Loan Document, without any liability to be borne by the payee in connection with such Mexican withholding tax to the extent that the Loan Party making such payment has complied with its obligations in Section 3.1 of this Agreement to pay to the appropriate Mexican authorities applicable Taxes required to be paid by such Loan Party.
     SECTION 5.13 Proper Form. The Loan Documents are (or, in the case of any Note, will be, upon the issuance thereof in accordance herewith) in proper legal form for the enforcement thereof in Mexico, against each Loan Party; provided that, if any legal proceedings are brought in a court of Mexico for the enforcement against a Loan Party, of this Agreement, the Fee Letters or any other Loan Document, a Spanish translation of such document prepared by a translator approved by the Mexican court would have to be approved by such court after such Loan Party has been given the opportunity to be heard with respect to the accuracy of the translation, and proceedings would thereafter be based on the translated documents. To ensure the legality, validity, enforceability or admissibility in evidence of this Agreement, the Fee Letters or any other Loan Document in Mexico it is not necessary that this Agreement, the Fee Letters or any other Loan Document be filed or recorded with any Governmental Authority in Mexico or be notarized, or that any stamp or similar tax be paid on or in respect of this Agreement, the Fee Letters or any other Loan Document; provided that the Arrendadora Pledges must be executed before a Mexican Public Notary and registered as described in Section 6.11.
     SECTION 5.14 Choice of Law. In any action or proceeding involving a Loan Party arising out of or relating to any Loan Document in any court of Mexico, the Lenders and the Agents would be entitled to the recognition and effectiveness of the choice of law provisions of Section 11.4.
     SECTION 5.15 Immunity. Each Loan Party is subject to suit in Mexico and neither any Loan Party nor its Property has any right of immunity, on the grounds of sovereignty or otherwise, from any legal action, suit or proceeding, set-off or counterclaim, the jurisdiction of any competent court and service of process, attachment or execution in Mexico with respect to its obligations, liabilities, or any other matter under or arising out of or in connection with any Loan Document, and to the extent that such Loan Party or its Property may have or may hereafter become entitled to any such right of immunity it has effectively waived such right under Section 11.13; provided that the Concession Title may not be transferred to any Person without the prior consent of Mexico. The waiver by each Loan Party described in the immediately preceding sentence is a legal, valid and binding obligation thereof. The foregoing waiver is intended to be effective to the fullest extent now or hereafter permitted by the Applicable Law of any jurisdiction in which any suit, action or proceeding with respect to any Loan Document may be commenced. The performance of the Loan Documents by the Loan Parties constitutes private and commercial acts rather than governmental or public acts.
     SECTION 5.16 Status of Concession. The Concession Title is in full force and effect and no proceeding or, to the best knowledge of the Borrower, investigation seeking the termination or revocation of the Concession Title has been initiated pursuant to a notice sent to the Borrower.

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     SECTION 5.17 Property. (a) Each Loan Party has good title to, or valid leasehold interests in, all its real and personal property material to its business, except for (i) minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes and that could not reasonably be expected to have a Material Adverse Effect and (ii) title to the locomotives covered by the Supplemental Arrendadora Pledge, which is subject to the outcome of the Arrendadora Internacional Litigation.
     (b) Each Loan Party owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by it does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.
     (c) As of the Effective Date, each Loan Party maintains insurance with respect to all Property material to the conduct of its business and Schedule 5.17(c) contains an accurate description of such insurance coverage, insured amounts and the name of each insurance company with which each such insurance is maintained.
     SECTION 5.18 Subsidiaries. The Subsidiaries listed on Schedule 5.18 hereto constitute the only Subsidiaries of each Loan Party as at the Effective Date.
     SECTION 5.19 Federal Regulations. No part of the proceeds of any Loan will be used for “buying” or “carrying” any “margin stock” within the respective meanings of each of the quoted terms under Regulation U as now and from time to time hereafter in effect or for any purpose that violates the provisions of the Regulations of the Board of Governors of the Federal Reserve System. If requested by any Lender or Agent, the Borrower will furnish to the Agents and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1, as applicable, referred to in Regulation U.
     SECTION 5.20 Labor Matters. Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect: (a) there are no strikes or other labor disputes against any Loan Party pending or, to the knowledge of the Loan Parties, threatened; (b) hours worked by and payment made to employees of the Loan Parties have not been in violation of any Applicable Law dealing with such matters; and (c) all payments due from any Loan Party on account of employee health and welfare insurance have been paid or accrued as a liability on the financial statements of such Loan Party.
     SECTION 5.21 Arrendadora Pledges. Subject to the conditions provided in each of the Arrendadora Pledges, each of the Arrendadora Pledges creates a valid, enforceable and, when the requirements set forth in Section 6.11 have been satisfied, perfected, security interest in the collateral purported to be covered thereby in favor of the Collateral Agent, acting on behalf and for the benefit of the Beneficiaries; provided that the Supplemental Arrendadora Pledge is subject to the outcome of the Arrendadora Internacional Litigation in respect of collateral covered by the Supplemental Arrendadora Pledge to the extent that, until the parties to such litigation have reached an agreement or a judgment in connection with such litigation has been obtained and complied with, title to such collateral will not be clearly vested in Arrendadora. The Liens created by each of the Arrendadora Pledges are enforceable as security for the obligations

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secured thereunder in accordance with their respective terms and (with respect to the Supplemental Arrendadora Pledge) subject to the outcome of the Arrendadora Internacional Litigation.
     SECTION 5.22 Existing Indebtedness. Attached as Schedule 5.22 is a complete and accurate list of all existing Indebtedness of each Loan Party in excess of US$ 1,000,000 as of the Effective Date.
ARTICLE VI.
AFFIRMATIVE COVENANTS
     Each of the Loan Parties covenants and agrees that, until the payment in full of all Obligations, and so long as any Commitment is outstanding:
     SECTION 6.1 Senior Obligations. Each Loan Party shall ensure that its obligations under this Agreement and the Notes shall at all times rank at least pari passu in right of payment with all its other present and future direct, indirect and unsubordinated Indebtedness of such Loan Party, except for obligations accorded preference by mandatory provisions of law or expressly permitted under this Agreement.
     SECTION 6.2 Reporting Requirements. The Borrower shall provide to the Administrative Agent, in sufficient copies for distribution by the Administrative Agent to all Lenders:
     (a) as soon as available, and in any case within 90 days of the end of each fiscal year of the Borrower, beginning with fiscal year 2005, the consolidated annual financial statements of the Borrower and its Consolidated Subsidiaries audited and reported on in accordance with GAAP consistently applied (except as otherwise discussed in the notes to such financial statements), with the opinion thereon of internationally recognized independent public accountants, which financial statements shall present fairly in accordance with GAAP the financial condition of the Borrower and its Consolidated Subsidiaries as at the end of the relevant fiscal year and the results of the operations of the Borrower and its Consolidated Subsidiaries for such fiscal year; provided that for so long as the Borrower files a Form 10-K with the Securities and Exchange Commission, the furnishing by the Borrower to the Administrative Agent of such Form 10-K for each fiscal year of the Borrower shall satisfy the Borrower’s obligation to provide the financial statements contemplated in this clause (a);
     (b) as soon as available, and in any case within 45 days of the end of each fiscal quarter of the Borrower, beginning with the fiscal quarter ending on September 30, 2005, the unaudited consolidated financial statements of the Borrower and its Consolidated Subsidiaries in respect of such fiscal quarter prepared in accordance with GAAP, consistently applied (except as otherwise discussed in the notes to such financial statements), which financial statements shall present fairly in accordance with GAAP (subject to absence of footnotes), the financial condition of the Borrower and its Consolidated Subsidiaries as at the end of the relevant fiscal quarter of each fiscal year and the results of the operations of the Borrower and its Consolidated Subsidiaries for such fiscal quarter; provided that for so long as the Borrower files a Form 10-Q with the Securities and Exchange Commission, the furnishing by the Borrower to the

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Administrative Agent of such Form 10-Q for each fiscal quarter of the Borrower shall satisfy the Borrower’s obligation to provide the financial statements contemplated in this clause (b);
     (c) no later than March 31 of each year, updated financial projections of the Borrower for each three-year period beginning on January 1 of each fiscal year commencing with such projections for the period starting on January l, 2006, in the same format previously delivered to the Lenders;
     (d) concurrently with the delivery of the financial statements pursuant to clauses (a) and (b) above, a certificate of a Responsible Officer of the Borrower (i) certifying that, to the best of such Responsible Officer’s knowledge, no Default then exists or, if any Default then exists, specifying the nature and period of existence thereof and what action has been taken or is proposed to be taken with respect thereto, and (ii) providing all information and calculations necessary for determining compliance with the covenants contained in Section 7.1;
     (e) copies of such other financial reports filed by any Loan Party with any Governmental Authority (including any Mexican or other securities exchange) and which are publicly available which the Administrative Agent (or any Lender through the Administrative Agent) may from time to time reasonably request; provided that the information will be furnished in Spanish unless information is provided publicly in English;
     (f) promptly (and, in any event, within five Business Days) after a Responsible Officer of the Borrower obtains knowledge of any Default or Event of Default, a certificate signed by a Responsible Officer of the Borrower, describing such Default or Event of Default and the steps that the Borrower proposes to take in connection therewith;
     (g) promptly (and, in any event, within five Business Days) after a Responsible Officer of the Borrower obtains knowledge thereof, notice of any litigation, claim, investigation, arbitration or other proceeding pending or, to such Responsible Officer’s knowledge, threatened in writing against any Loan Party: (i) that could give rise to a Lien on any of its Properties, other than Permitted Liens, or (ii) that could reasonably be expected to have a Material Adverse Effect;
     (h) promptly (and, in any event, within five Business Days) after a Responsible Officer of the Borrower obtains knowledge thereof, notice of any other event or development that could reasonably be expected to have a Material Adverse Effect and the actions proposed to be taken with respect thereto; and
     (i) from time to time, as soon as reasonably practicable, such other information with respect to the Loan Parties, the Loan Documents and/or the transactions contemplated hereby or thereby as any Lender (through the Administrative Agent) or either Agent may reasonably request.
     The Borrower hereby acknowledges that (a) the Administrative Agent and/or the Arrangers will make available to the Lenders materials and/or information provided by or on behalf of the Borrower hereunder (collectively, “Borrower Materials”) by posting the Borrower Materials on IntraLinks or another similar electronic system (the “Platform”) and (b) certain of the Lenders may be “public-side” Lenders (i.e., Lenders that do not wish to receive material nonpublic information with respect to the Borrower or its securities) (each, a “Public Lender”).

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The Borrower hereby agrees that (i) all Borrower Materials that are to be made available to Public Lenders shall be clearly and conspicuously marked “PUBLIC” which, at a minimum, shall mean that the word “PUBLIC” shall appear prominently on the first page thereof; (ii) by marking Borrower Materials “PUBLIC,” the Borrower shall be deemed to have authorized the Administrative Agent, the Arrangers and the Lenders to treat such Borrower Materials as not containing any material non-public information with respect to the Borrower or its respective securities for purposes of United States Federal and state securities laws (provided that to the extent such Borrower Materials constitute Information, they shall be treated as set forth in Section 11.15); (iii) all Borrower Materials marked “PUBLIC” are permitted to be made available through a portion of the Platform designated “Public Investor;” and (iv) the Administrative Agent and the Arrangers shall be entitled to treat any Borrower Materials that are not marked “PUBLIC” as being suitable only for posting on a portion of the Platform not designated “Public Investor.”
     SECTION 6.3 Use of Proceeds. The Borrower shall use the proceeds of the Loans solely for (a) the payment of all amounts outstanding under the Bridge Loan Agreement (the amount necessary for which payment the Borrower hereby authorizes the Administrative Agent to deduct from the proceeds of the Loans made hereunder and to, on behalf of the Borrower, pay to each lender under the Bridge Loan Agreement), (b) the payment of all remaining amounts outstanding under the Existing Credit Agreement and (c) other general corporate purposes.
     SECTION 6.4 Conduct of Business and Maintenance of Existence. Each Loan Party shall (and shall cause its respective Subsidiaries to) (a) continue to engage in business of the same general type as now conducted by it or authorized by its estatutos sociales or by the Concession Title and preserve, renew and keep in full force and effect its corporate existence, subject to any merger or consolidation permitted under Section 7.12, and (b) take all reasonable action to obtain and maintain all rights, privileges, authorizations and franchises necessary or desirable for the conduct of its business (including, without limitation, the Concession Title) and comply with all contractual obligations (including the terms of such Concession Title) binding on it or its Property except where the failure to maintain any such rights, privileges, authorizations or franchises or to comply with contractual obligations, in the aggregate, could not reasonably be expected to have a Material Adverse Effect.
     SECTION 6.5 Maintenance of Government Approvals. Each Loan Party shall (and shall cause its respective Subsidiaries to) maintain in full force and effect all material governmental licenses, consents, approvals, permits and authorizations which may be necessary or appropriate under any Applicable Law for the conduct of its business (including the Concession Title), for the execution, delivery and performance of this Agreement and the other Loan Documents by each Loan Party and for the validity or enforceability against it hereof and thereof, and take all necessary governmental and administrative action in Mexico to make all payments to be made by it hereunder and thereunder. The Loan Parties shall file all applications necessary for, and shall use their best efforts to obtain, any additional authorization as soon as possible after determination that such authorization or approval is required for any Loan Party to perform its obligations hereunder or under the other Loan Documents, including, but not limited to, any filings necessary to obtain payment in Dollars in respect of any amounts owing hereunder or under the other Loan Documents.

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     SECTION 6.6 Compliance with Laws and Other Instruments. Each Loan Party shall (and shall cause its respective Subsidiaries to) comply in all material respects with (a) all Applicable Law (including, without limitation, all applicable Mexican railroad regulations (including the filing of documents, the fulfillment of investment requirements and the performance of services as required in the Concession Title and Applicable Law)) and (b) any of the terms, covenants, conditions or provisions of any indenture, mortgage, deed of trust, agreement or other instrument to which such Loan Party (or any Subsidiary of such Loan Party) is a party or by which it is bound or to which it may be subject, except, in each case, where the necessity of compliance therewith is contested in good faith by appropriate proceedings or where failure to comply could not reasonably be expected to have a Material Adverse Effect.
     SECTION 6.7 Maintenance of Property; Insurance. Each Loan Party shall (and shall cause its respective Subsidiaries to) (a) keep and maintain all Property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and maintain insurance with respect to all such Property with financially sound, responsible and reputable insurance companies in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning and/or operating properties similar to those owned and/or operated by such Loan Party or such Subsidiary, as the case may be, in the same general areas in which such Loan Party or such Subsidiary owns and/or operates its properties.
     SECTION 6.8 Maintenance of Books and Records and Inspection Rights. Each Loan Party shall maintain books, accounts and records in accordance with GAAP. Each Loan Party shall, and shall cause each of its respective Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable prior written notice, to visit and inspect its properties (at the sole risk of the Administrative Agent or such Lender, as the case may be, with respect to personal injuries that may occur during any such inspection), to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all during business hours of such Loan Party or such Subsidiary, as often as reasonably requested.
     SECTION 6.9 Payment of Obligations. Each Loan Party shall (and shall cause its Subsidiaries to) pay their obligations, including tax liabilities, that, if not paid, could reasonably be expected to result in a Material Adverse Effect before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings and such contest effectively suspends collection of the contested obligation and the enforcement of any Lien securing such obligation, (b) such Loan Party or any such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect.
     SECTION 6.10 Environmental Laws. Each Loan Party shall (and shall cause its respective Subsidiaries to) (a) comply in all material respects with, and ensure compliance in all material respects by all tenants and subtenants, if any, with, all applicable Environmental Laws, and obtain and comply in all material respects with and maintain, and ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all licenses, approvals, consents, notifications, authorizations, registrations or permits required by applicable Environmental Laws, and (b) conduct and complete all investigations, studies, sampling and

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testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws, except in each case where the necessity of compliance therewith is contested in good faith by appropriate proceedings or where failure to comply could not reasonably be expected to have a Material Adverse Effect.
     SECTION 6.11 Filings. The Borrower shall deliver to the Administrative Agent: (a) within 15 calendar days following the Initial Borrowing Date, evidence satisfactory to the Administrative Agent that each of the Arrendadora Pledges has been filed for registration with the Public Registry of Property and Commerce (Registro Publico de Propriedad y Comercio) (the “RPPC”) of the corporate domicile of Arrendadora, and with the Mexican Rail Registry (Registro Ferroviario Mexicano) (the “RFM”), (b) within 15 Business Days after such filing with the RFM, evidence satisfactory to the Administrative Agent of the final registration of each of the Arrendadora Pledges with the RFM and (c) within 120 calendar days after such filing with the RPPC, the relevant first deed (primer testimonio) duly recorded with the RPPC and a lien certificate from the RPPC showing such lien as duly recorded. All fees, costs, rights, and expenses related to the execution, filing and registration of the Arrendadora Pledges shall be paid by the Borrower.
     SECTION 6.12 Payment of 10.25% Notes Due June 15, 2007. The Borrower shall cause all outstanding amounts (including all related transaction fees and expenses) with respect to its 10.25% Notes Due June 15, 2007 issued under an Indenture dated as of June 16, 1997, among the Borrower, Grupo TFM and The Bank of New York, as trustee (the “Note Trustee”) to be on deposit in escrow with the Note Trustee solely for the purpose of making payment of such amounts by no later than the date that is 91 days prior to the maturity date thereof, shall maintain such deposit until such payment is made in full and shall make such payment on its due date.
     SECTION 6.13 Additional Guarantors. The Borrower shall cause additional Subsidiaries of the Borrower to accede to this Agreement as Guarantors and agree to be bound by all such terms and conditions hereof which are applicable to the Guarantors to the extent necessary to cause the Borrower’s Obligations to be, at all times until their full satisfaction, Guaranteed by Subsidiaries of the Borrower that represent, in the aggregate with the Borrower, at least 90% of the total assets of the Borrower and its Consolidated Subsidiaries, Consolidated EBITDA and Consolidated Net Income, in each case measured as of the close of each fiscal quarter of the Borrower and its Consolidated Subsidiaries. In furtherance of the foregoing undertaking, each such Guarantor shall, within twenty Business Days after the issuance of the financial statements indicating the obligation of an additional Subsidiary or Subsidiaries to become an additional Guarantor(s) hereunder: (a) execute an Accession Agreement substantially in the form of Exhibit I hereto (an “Accession Agreement”), (b) if requested by a Lender, sign as guarantor (por avao the Note(s) of such Lender and (c) provide to the Administrative Agent favorable opinions of New York counsel and counsel from the jurisdiction of organization of such Guarantor as to enforceability and due authorization, respectively, of such Guarantee, and as to such other matters as the Administrative Agent may reasonably request.

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ARTICLE VII.
NEGATIVE COVENANTS
     Each of the Loan Parties covenants and agrees that, until the payment in full of all Obligations, and so long as any Commitment is outstanding:
     SECTION 7.1 Financial Covenants. (a) Consolidated Interest Coverage Ratio. The Consolidated Interest Coverage Ratio of the Borrower and its Consolidated Subsidiaries as of the last day of any fiscal quarter of the Borrower shall not be less than: (i) for each fiscal quarter ending on or before the first anniversary of the Effective Date, 2.0:1x; (ii) for each fiscal quarter ending after the first anniversary of the Effective Date and on or before the second anniversary of the Effective Date, 2.25:1x; and (iii) for each fiscal quarter thereafter, 2.5:1x.
     (b) Consolidated Fixed Charge Coverage Ratio. The Consolidated Fixed Charge Coverage Ratio of the Borrower and its Consolidated Subsidiaries as of the last day of any fiscal quarter shall not be less than 1.0:1x.
     (c) Consolidated Leverage Ratio. The Consolidated Leverage Ratio of the Borrower and its Consolidated Subsidiaries, as of the last day of any fiscal quarter of the Borrower, shall not exceed: (i) for each fiscal quarter ending on or before the first anniversary of the Effective Date, 4.5:1x; (ii) for each fiscal quarter ending after the first anniversary of the Effective Date and on or before the second anniversary of the Effective Date, 4.0:1x; and (iii) for each fiscal quarter thereafter, 3.5:1 x.
     (d) Capital Expenditures. The Capital Expenditures of the Borrower and its Consolidated Subsidiaries shall not exceed an amount equal to US$100,000,000 for any period of four consecutive fiscal quarters after the Effective Date; provided that (i) such amount shall be increased to US$125,000,000 if the Consolidated Leverage Ratio for the period of four consecutive fiscal quarters most recently ended shall be equal to or less than 3.5:1x and (ii) no limitation shall apply if the Consolidated Leverage Ratio for the period of four consecutive fiscal quarters most recently ended shall be less than 3.0:1x; provided that if, at any time thereafter, the Consolidated Leverage Ratio for any period of four consecutive fiscal quarters shall be 3.0:1x or greater, the foregoing limitations shall continue to be in effect.
     (e) The financial covenants set forth in this Section 7.1 shall be calculated in Dollars and, to the extent any amounts necessary for the calculation thereof are denominated in a currency other than Dollars, such amounts shall be converted into Dollars based on (i) the Exchange Rate as of the close of business on the relevant date (for balance sheet items) and (ii) the average Exchange Rate for the relevant period (for income statement items).
     SECTION 7.2 Margin Regulations. The Borrower shall not use proceeds of the Loans hereunder for any purpose which would result in any violation of Regulations T, U or X of the Board of Governors of the Federal Reserve System or to extend credit to others for any such purpose. The Borrower will not engage in, or maintain as one of its important activities, the business of extending credit for the purpose of purchasing or carrying any margin stock.
     SECTION 7.3 Limitation on Restricted Payments. None of the Loan Parties, nor any of their respective Subsidiaries, will declare or make, or otherwise set apart assets for a sinking

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or other analogous fund for the making of, any Restricted Payment to or for the benefit of any Person, except:
     (a) any Restricted Payments made by a Subsidiary of the Borrower to the Borrower or by any Subsidiary of the Borrower to a Wholly Owned Subsidiary or to such Subsidiary’s parent corporation which is itself a Subsidiary of the Borrower;
     (b) the declaration and payment of dividends to Grupo TFM by the Borrower in an amount not to exceed, in any fiscal year of the Borrower, the lesser of (i) actual administrative and other ordinary costs and expenses of Grupo TFM for such fiscal year and (ii) US$ 1,000,000, so long as at the time of the making of such dividend no Default shall exist or would exist after the making thereof; and
     (c) the declaration and payment of dividends to its shareholders by the Borrower for any fiscal year (the “Subject Year”) of the Borrower if (i) the Consolidated Leverage Ratio, as of the end of such Subject Year and at the time of the making of any such dividend in the year immediately following the Subject Year, shall be equal to or less than 3.25:1x, (ii) such dividend payment is made after the mandatory prepayment of the Loans required by Section 2.8(b) has been made with respect to Excess Cash Flow during the Subject Year, (iii) such mandatory prepayment in respect of Excess Cash Flow for such Subject Year has been fully made in accordance with the terms of this Agreement, (iv) the amount of such dividends in respect of any Subject Year shall not exceed the amount of such mandatory prepayment in respect of Excess Cash Flow for such Subject Year and (v) as of the time of the making of such dividend, no Default shall exist or would exist after the making thereof.
     SECTION 7.4 Limitation on Investments. Each of the Loan Parties shall not (nor shall any of their respective Subsidiaries) make any Investment in any Person other than:
  (a)   Investments existing on the Effective Date and set forth on Schedule 7.4;
 
  (b)   Temporary Cash Investments;
 
  (c)   stock, obligations or securities received in satisfaction of judgments; and
 
  (d)   Investments in any Loan Party.
     SECTION 7.5 Optional Payments and Modifications of Certain Debt Instruments. None of the Loan Parties shall (nor shall any of their respective Subsidiaries) (a) make or offer to make any optional or voluntary prepayment of any Indebtedness (other than the Loans hereunder and Indebtedness permitted under Section 7.9(d) and (e), except pursuant to a refinancing of Indebtedness permitted by Section 7.9(h), or (b) amend, modify, waive or otherwise change, or consent or agree to any amendment, modification, waiver or other change to, any of the terms of any existing Indebtedness in a manner that could reasonably be expected to be materially adverse to the Lenders hereunder (it being understood that, except in respect of Indebtedness permitted under Section 7.9(d) and (e), any amendment to any existing Indebtedness that purports to shorten the maturity of any of the foregoing, shall be deemed to be materially adverse to the Lenders).

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     SECTION 7.6 Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries. None of the Loan Parties shall (nor shall any of their Subsidiaries) create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Subsidiary to (a) pay dividends or make any other distributions permitted by Applicable Law on any Equity Interests of such Subsidiary owned by such Loan Party or any other Subsidiary of such Loan Party; (b) pay any Indebtedness owed to the Borrower or any Subsidiary of the Borrower; (c) make loans or advances to the Borrower or any Subsidiary of the Borrower; or (d) transfer any of its Property to the Borrower or any Subsidiary of the Borrower, except for the following:
     (i) any such encumbrance or restriction existing on the Effective Date and set forth on Schedule 7.6;
     (ii) any such encumbrance or restriction existing in the Senior Notes Indentures and any extensions, refinancings, renewals or replacements thereof permitted by Section 7.9(h); provided that the encumbrances and restrictions in any such extensions, refinancings, renewals or replacements are no less favorable in any material respect to the Lenders than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced;
     (iii) any such encumbrance or restriction existing with respect to any Person or the Property of such Person acquired by such Loan Party or any of its Subsidiaries, existing at the time of such acquisition and not incurred in contemplation thereof, which encumbrance or restriction is not applicable to any Person or the Property of any Person other than such Person or the Property of such Person so acquired; or
     (iv) with respect to a Subsidiary, any such encumbrance or restriction imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Equity Interests or Property of such Subsidiary not prohibited by any other provision of this Agreement.
     SECTION 7.7 Limitation on Transactions with Affiliates. None of the Loan Parties shall (nor shall any of their respective Subsidiaries) enter into, renew or extend any transaction (including, without limitation, the purchase, sale, lease or exchange of Property, or the rendering of any service) with any holder (or any Affiliate of such holder) of 5.0% or more of any class of Equity Interests of such Loan Party or with any Affiliate or Subsidiary of such Loan Party (other than a Loan Party or Wholly Owned Subsidiary of a Loan Party), except upon fair and reasonable terms no less favorable to such Loan Party or such Subsidiary than could be obtained, at the time of such transaction or, if such transaction is pursuant to a written agreement, at the time of the execution of the agreement providing therefor, in a comparable arm’s-length transaction with a Person that is not such a holder, Affiliate or Subsidiary; provided that the foregoing limitations shall not prevent the Borrower from selling its 49% equity interest in Mexrail to KCS.
     SECTION 7.8 Limitation on Liens. None of the Loan Parties shall (nor shall any of them permit any Subsidiary to) create, incur, assume or suffer to exist any Lien on any of its respective Property, whether now owned or hereafter acquired, except:

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     (a) Liens on the Property of any Loan Party (or Subsidiary of a Loan Party) existing on the Effective Date;
     (b) Liens granted on or after the Effective Date on any Property of a Loan Party or any Subsidiary created in favor of the Lenders to secure the Obligations;
     (c) Liens upon Property of any Loan Party or any Subsidiary of a Loan Party acquired after the Effective Date; provided that (i) such Liens are created solely for the purpose of securing Indebtedness of such Loan Party or Subsidiary not in excess of US$10,000,000 in the aggregate (for all Loan Parties and their Subsidiaries) at any time outstanding which is incurred to finance the cost (including the cost of improvement, lease or construction) of the Property subject thereto and such Liens are created prior to, at the time of or within 90 days after the later of the acquisition, the completion of construction or the commencement of full operation or the lease of such Property, (ii) the principal amount of the Indebtedness secured by such Lien does not exceed 100.0% of such cost and (iii) any such Lien shall not extend to or cover any Property other than such item of Property and any improvements on such item;
     (d) in addition to clause (c) above, Liens upon locomotives and/or railroad cars (or any similar rolling stock) of any Loan Party or any Subsidiary of a Loan Party acquired on or after the Effective Date; provided that (i) such Liens are created solely for the purpose of securing Indebtedness of such Loan Party or Subsidiary not in excess of US$25,000,000 in the aggregate (for all Loan Parties and their Subsidiaries) at any time outstanding which is incurred to finance the cost of the locomotives and/or railroad cars (or similar rolling stock) subject thereto and such Liens are created prior to, at the time of or within 90 days after the later of the acquisition of such locomotives or railroad cars, (ii) the principal amount of the Indebtedness secured by such Lien does not exceed 100.0% of such cost and (iii) any such Lien shall not extend to or cover any Property other than such locomotives and/or railroad cars (or similar rolling stock) being acquired; provided that the amount of the Indebtedness permitted in accordance with clause (i) to be secured by Liens created pursuant to this clause shall be increased to US$50,000,000 if the Consolidated Leverage Ratio for the period of four consecutive fiscal quarters most recently ended shall be equal to or less than 3.5:1x; provided, further, that if, at any time thereafter, the Consolidated Leverage Ratio for any period of four consecutive fiscal quarters shall exceed 3.5:1x, then the amount of the Indebtedness permitted to be secured by Liens created pursuant to this clause shall again be reduced to the greater of (A) US$25,000,000 or (B) the amount of Indebtedness then secured by Liens created pursuant to this clause;
     (e) Liens on Property of any Person existing at the time such Person becomes, or becomes a part of, a Subsidiary of a Loan Party;
     (f) any interest or title of a lessor in the Property of a Loan Party (or Subsidiary of a Loan Party) subject to any Capitalized Lease; provided that the aggregate Attributable Debt of such Capitalized Leases does not exceed US$10,000,000 in the aggregate at any time outstanding;
     (g) Liens on Property (other than Property subject to the Arrendadora Pledges) securing Indebtedness of any Loan Party or Subsidiary of a Loan Party permitted by Section 7.9

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in an amount not in excess of US$5,000,000 in the aggregate (for all Loan Parties and their Subsidiaries); and
     (h) Permitted Liens.
     SECTION 7.9 Limitation on Indebtedness. None of the Loan Parties shall (nor shall any of them permit any Subsidiary to) create, incur, assume or suffer to exist Indebtedness except:
     (a) Indebtedness of any Loan Party existing on the Effective Date;
     (b) Indebtedness secured by Liens permitted by Sections 7.8(c), 7.8(d) and 7.8 (e);
     (c) Capitalized Leases of any Loan Party secured by Liens permitted by Section 7.8(f).
     (d) Indebtedness of any Loan Party or Subsidiary of a Loan Party under Swap Agreements (excluding equity based Swap Agreements) entered into in the ordinary course of business; provided that such Swap Agreements (i) are designed solely to protect such Loan Party or Subsidiary against the fluctuations in (A) foreign currency exchange rates, (B) interest rates or (C) rates in respect of fuel purchases or other acquisitions of fuel in the ordinary course of business and (ii) do not increase the Indebtedness of any Loan Party or any Subsidiary outstanding at any time other than as a result of fluctuations in foreign currency exchange rates, interest rates or rates in respect of fuel purchases or other acquisitions of fuel or by reason of fees, indemnities and compensation payable thereunder;
     (e) short-term Indebtedness of any Loan Party or Subsidiary of a Loan Party for working capital purposes, including factoring or other similar arrangements with respect to current account receivables, not to exceed US$15,000,000 in the aggregate for all Loan Parties and Subsidiaries at any time outstanding;
     (f) unsecured Indebtedness of any Loan Party or Subsidiary of a Loan Party; provided that (i) the Consolidated Leverage Ratio for the period of four consecutive fiscal quarters most recently ended shall be equal to or less than 3.0:lx (taking into account the unsecured Indebtedness proposed to be incurred in accordance with this clause (f) on a pro forma basis), (ii) no Default shall then exist and be continuing or would exist upon the incurrence of such Indebtedness and (iii) immediately following the incurrence of and giving effect to such Indebtedness on a pro forma basis as of the last day of the immediately preceding fiscal quarter, the Borrower would be in compliance with the financial covenants set forth in Section 7.1; provided, further, that, if any Indebtedness is incurred in full compliance with the terms of this clause, no Event of Default shall be deemed to have occurred subsequently solely because the Consolidated Leverage Ratio for any such subsequent period shall be in excess of 3.0:1x (but in any event not in excess of the Consolidated Leverage Ratio permitted under Section 7.1(c));
     (g) other Indebtedness of the Borrower or any Subsidiary of the Borrower which provides for no amortization of principal on or prior to the Final Maturity Date and the proceeds of which are used to prepay Loans in accordance with Section 2.8(a); and

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     (h) Indebtedness of the Borrower (the “New Indebtedness”) which (i) is unsecured and incurred to refinance all or any portion of the Senior Notes, Indebtedness permitted under clause or such unsecured New Indebtedness or (ii) is incurred to refinance all or any portion of Indebtedness permitted under clauses (a), (b), (c), (d), (e) and (g) above or such New Indebtedness permitted under this clause (ii); provided that, in each case under clauses i and ii: (A) the aggregate principal amount of the New Indebtedness shall be less than or equal to the sum of (1) the aggregate amount of the Indebtedness (including principal and accrued interest) being refinanced, (2) the aggregate amount of unused commitments under the Indebtedness being refinanced, (3) prepayment fees or premiums, consent fees and/or other costs and expenses directly related to the Indebtedness being refinanced and (4) reasonable fees, expenses and costs directly related to the entering into the New Indebtedness; (B) such New Indebtedness shall have an average weighted maturity equal to or greater than the average weighted maturity of the Indebtedness so refinanced; and (C) the terms of the New Indebtedness following such refinancing shall in all other material respects be no less favorable to the Lenders than such Indebtedness prior to the refinancing thereof.
     SECTION 7.10 Limitation on Sale-Leaseback Transactions. None of the Loan Parties shall (nor shall any of them permit any Subsidiary to) enter into any sale-leaseback transaction involving any Property of any Loan Party or Subsidiary of a Loan Party, whether now owned or hereafter acquired, whereby such Loan Party or Subsidiary sells or transfers such Property and then or thereafter leases such Property or any part thereof or any other Property which such Loan Party or Subsidiary, as the case may be, intends to use for substantially the same purpose or purposes as the Property sold or transferred, except (a) to the extent that the Attributable Debt created under such sale-leaseback transaction would be permitted pursuant to Section 7.9(c) and (b) the Borrower or such Subsidiary applies the Net Cash Proceeds received from any such sale (other than from a sale-leaseback of Property acquired by the Borrower after the Effective Date which is concluded within 180 days following the date of the acquisition of such Property) to prepay the Loans in accordance with, and to the extent required by, Section 2.8(a).
     SECTION 7.11 Limitation on Asset Sales. None of the Loan Parties shall (nor shall any of them permit any Subsidiary to) consummate any Asset Sale, except:
     (a) sales of obsolete, used (with material impairment of value or utility), defunct, damaged or worn-out Property in the ordinary course of business;
     (b) sales of inventory in the ordinary course of business;
     (c) sales of current accounts receivable pursuant to factoring or similar working capital financing arrangements permitted by Section 7.9(e);
     (d) any Asset Sale to a Loan Party;
     (e) any Asset Sale of Property as part of a sale-leaseback transaction where all such Property was acquired by the Borrower after the Effective Date and where such sale-leaseback transaction is concluded within 180 days following the date of the acquisition of such Property; and

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     (f) any other Asset Sales if (i) the consideration received by the Loan Party or such Subsidiary is at least equal to the fair market value of the assets sold or disposed of; (ii) at least 70.0% of the consideration received consists of cash or Temporary Cash Investments; and (iii) the Net Cash Proceeds of such Asset Sale are applied in accordance with Section 2.8(a); provided that in no event shall any Loan Party or any Subsidiary enter into any Asset Sale with respect to future accounts receivables to be generated by it; provided, further, that clauses i and ii shall not apply to a sale of the Borrower’s 49% equity interest in Mexrail to KCS.
     SECTION 7.12 Consolidation. Merger and Sale of Assets. None of the Loan Parties shall (nor shall any of them permit any Subsidiary to) consolidate with, merge with or into, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of its Property (as an entirety or substantially an entirety in one transaction or a series of related transactions) to, any Person or permit any Person to merge with or into any Loan Party or any Subsidiary except that (provided that no Default exists immediately before or would exist immediately after any of the following):
     (a) any Subsidiary of a Loan Party may be merged or consolidated with or into such Loan Party (provided that such Loan Party shall be the continuing or surviving corporation) or with or into any Wholly Owned Subsidiary of such Loan Party (provided that the Wholly Owned Subsidiary shall be the continuing or surviving corporation);
     (b) any Subsidiary may dispose of any or all of its Property (i) to a Loan Party or any Wholly Owned Subsidiary of such Loan Party (upon voluntary liquidation or otherwise) or (ii) pursuant to a disposition permitted by Section 7.11 and in a transaction not otherwise prohibited by any provision of this Agreement;
     (c) Arrendadora and the Borrower may merge or consolidate with or into, or sell or transfer all or substantially all of its Property to, each other; provided that (i) the Borrower is the entity surviving such merger or consolidation or the entity to which such Property has been so sold or transferred and (ii) prior to or simultaneously with such merger, consolidation, sale or transfer: (A) to the extent deemed necessary or advisable by Mexican counsel designated by the Administrative Agent, the Arrendadora Pledges shall have been amended or new pledge agreements shall have been executed by the Borrower, in each case to reasonable satisfaction of the Administrative Agent, to reflect such merger, consolidation, sale or transfer and shall have been filed for registration with the RPPC and the RFM, to the extent requested by either Agent or the Majority Lenders, and (B) the Administrative Agent shall have received favorable customary opinions from New York and Mexican counsel as to enforceability of this Agreement, the Notes and continuance of the security interest granted under, and to the extent provided for in, each of the Arrendadora Pledges (or such amendments to the Arrendadora Pledges or new pledge agreements, as the case may be), and as to creation, perfection and priority of the pledge granted by means of the Arrendadora Pledges (or of the Arrendadora Pledges as so amended, or the new pledge agreements, as the case may be); and
     (d) the Borrower and Grupo TFM may merge or consolidate with or into, or sell or transfer all or substantially all of its Property to, each other; provided that, if Grupo TFM is the entity surviving such merger or consolidation or the entity to which such Property has been so sold or transferred, prior to or simultaneously with such merger, consolidation, sale or transfer,

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Grupo TFM shall: (i) to the extent deemed necessary or advisable by New York or Mexican counsel designated by the Administrative Agent, explicitly assume in writing all of the obligations of the Borrower under the Loan Documents and (ii) provide to the Administrative Agent favorable customary opinions of New York and Mexican counsel as to enforceability of the Loan Documents (and, if applicable, such assumption of the Borrower’s obligations by Grupo TFM) and, if the Borrower shall then be the owner of the Property covered by the Arrendadora Pledges, continuance of the security interest granted by means of the Arrendadora Pledges (or of the Arrendadora Pledges as amended, or new pledge agreements, as the case may be).
     SECTION 7.13 Lines of Business. None of the Loan Parties shall (nor shall any of them permit any Subsidiary to) enter into any business, either directly or through any Subsidiary, except for those businesses in which such Loan Party or Subsidiary is engaged on the date of this Agreement or that are reasonably related thereto.
ARTICLE VIII.
EVENTS OF DEFAULT
     SECTION 8.1 Events of Default. The following specified events shall be “Events of Default” for the purposes of this Agreement:
     (a) (i) Any payment of any principal of the Loans shall not be made in full when due, or (ii) the Borrower shall default for three Business Days or more in the payment of interest on the Loans (or any amounts payable pursuant to Section 3.1(a)) or (iii) any Loan Party shall default for ten calendar days or more in the payment of any other amount whatsoever payable (or to be deposited) under the Loan Documents; or
     (b) Any representation or warranty made or deemed made by any Loan Party herein or in any other Loan Document or that is contained in any certificate, document or financial or other statement furnished at any time pursuant to or in connection with this Agreement or any other Loan Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or
     (c) Any Loan Party shall default in the observance or performance of any covenant contained in Sections 6.1, 6.2(f), 6.3, 6.4(a), 6.12 or Article VII of this Agreement; or
     (d) Any Loan Party shall default in the observance or performance of any other covenant or agreement contained in any Loan Document to which it is a party (other than as provided in clauses (a), (b) and (c), and such default shall continue unremedied for a period of 30 days or more after written notice to the Borrower from the Administrative Agent; or
     (e) Any Loan Party shall (i) default in any payment of principal of or interest on any Indebtedness outstanding in an aggregate principal amount of at least US$10,000,000 (or the equivalent thereof in another currency) (other than the Loans and any other amounts owed under the Loan Documents), including in the payment of any Guarantee of such Indebtedness, beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created; or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or Guarantee or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur

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or condition exist, in each case beyond any applicable grace period or cure period, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness, including the beneficiary or beneficiaries of any Guarantee (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause such Indebtedness (or, with respect to a Guarantee, the Indebtedness that is the subject matter of such Guarantee) to become due prior to its stated maturity; or
     (f) (i) Any Loan Party shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, concurso mercantil, quiebra, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) in any jurisdiction seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its Property, or any Loan Party shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against any Loan Party in any jurisdiction any case, proceeding or other action of a nature referred to in clause i above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) to the extent applicable, remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against any Loan Party in any jurisdiction any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its Property (other than a proceeding seeking the issuance of a warrant of attachment, execution, distraint or similar process against the assets pledged under the Supplemental Arrendadora Pledge as a result of the Arrendadora Internacional Litigation) which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) any Loan Party shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause i , ii or iii above; or (v) any Loan Party shall admit in writing its inability to pay its debts as they become due; or
     (g) One or more judgments, orders, decrees, awards, settlements and/or agreements to settle (including any relating to any arbitration), other than any of the foregoing in connection with the Arrendadora Internacional Litigation, shall be entered against any Loan Party in any jurisdiction involving in the aggregate a liability (not paid or fully covered by insurance) of US$10,000,000 (or an amount in another currency equivalent thereto) or more, and shall not have been vacated, discharged, stayed or bonded pending appeal within 90 days from the entry thereof; or
     (h) Any Governmental Authority shall (i) condemn, nationalize, seize or otherwise expropriate any substantial portion of the Property or the capital stock of any Loan Party and such action is not reversed within a period of 60 days or (ii) take any action that would prevent any Loan Party from carrying on, or would have a material adverse effect on, the rights conferred on the Borrower under, or the material terms of, the Concession Title, including any action that would result in the Concession Title ceasing to grant the Borrower the rights originally provided therein or the Concession Title being terminated or the rights originally provided therein as exclusive to the Borrower becoming non-exclusive; or

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     (i) A Change of Control shall occur; or
     (j) The validity of any Loan Document shall be contested by any Loan Party or any Governmental Authority or any Loan Party shall deny liability under any Loan Document to which it is a party or any Loan Document shall for any reason be terminated or become invalid, ineffective or unenforceable or any Lien created by the Arrendadora Pledges shall (other than, with respect to Liens under the Supplemental Arrendadora Pledge, as a result of the Arrendadora Internacional Litigation) cease to be enforceable and of the same effect and priority purported to be created thereby; provided that, in the case of any contest by a Governmental Authority, such contest is not dismissed within a period of 75 days; or
     (k) Any governmental or other authorization, consent, license, permit, concession, approval (including any foreign exchange approval) or authorization which is necessary or appropriate under any Applicable Law for the execution, delivery or performance by any Loan Party of any material obligation under any Loan Document to which it is a party or to make any Loan Document legal, valid, enforceable and admissible in evidence shall not be obtained or shall be withdrawn or shall cease to be in full force and effect or shall be modified in a manner which, in each case, could reasonably be expected to have a Material Adverse Effect; or
     (l) Any restriction or requirement not in effect on the Effective Date is imposed, whether by legislative enactment, decree, regulation, order or otherwise, which limits the availability or the transfer of foreign exchange by any Loan Party in a manner that would reasonably be expected to materially adversely affect the payment of such Loan Party’ obligations under any Loan Document to which it is a party.
     SECTION 8.2Remedies. (a) If any Event of Default under Section 8.1 has occurred and is continuing, automatically the Commitments shall immediately terminate and the Loans, together with accrued interest thereon and any fees and all other Obligations accrued hereunder, under the Notes and under all other Loan Documents shall immediately become due and payable.
     (b) If any Event of Default other than under Section 8.1 (f) has occurred and is continuing, the Administrative Agent shall, at the request of the Majority Lenders, or may: (i) by notice to the Borrower, declare: (1) the Commitments to be terminated immediately, whereupon the Commitments shall immediately terminate, and/or (2) the principal amount of the Loans to be forthwith due and payable, whereupon such principal amount, together with accrued interest thereon and any fees and all other Obligations accrued hereunder, under the Notes and under all other Loan Documents, shall become immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived; and/or (ii) instruct the Collateral Agent in writing to exercise any and all rights available in respect of the Arrendadora Pledges.
ARTICLE IX.
GUARANTEE
     SECTION 9.1Guarantees. (a) For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and to induce the Lenders to enter into this Agreement, each of the Guarantors, jointly and severally, hereby absolutely, unconditionally and

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irrevocably Guarantees the full and punctual payment and performance (whether at stated maturity, upon acceleration or otherwise) of all Obligations, in each case as primary obligor and not merely as surety and with respect to all such Obligations howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due (collectively, the “Guaranteed Obligations”). This is a guarantee of payment and not merely of collection.
     (b) All Guaranteed Obligations shall be payable in the manner required for payments by the Borrower hereunder, including: (i) the obligation to make all such payments in Dollars or in Pesos, as applicable, free and clear of, and without deduction for, any Taxes, and (ii) the obligation to pay interest at the Default Rate where applicable.
     SECTION 9.2Guarantees Unconditional. The Guaranteed Obligations shall be unconditional and absolute and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by:
     (a) any extension, renewal, settlement, compromise, waiver or release in respect of any Obligation of a Loan Party under the Loan Documents and/or any Commitment(s) under the Loan Documents, by operation of law or otherwise (other than with respect to any such extension, renewal, settlement, compromise, waiver or release agreed in accordance with the terms hereunder as expressly applying to the obligations of the Guarantors under this Article IX);
     (b) any modification or amendment of or supplement to this Agreement or any other Loan Document (other than with respect to any modification, amendment or supplement agreed in accordance with the terms hereunder as expressly applying to the obligations of the Guarantors under this Article IX);
     (c) any release, impairment, non-perfection or invalidity of any collateral granted pursuant to the Loan Documents;
     (d) any change in the corporate existence, structure or ownership of the Borrower or any other Person, or any event of the type described in Section 8.1(f) with respect to any Person;
     (e) the existence of any claim, set-off or other rights that any Guarantor may have at any time against the Borrower, either Agent or any other Person, whether in connection herewith or with any unrelated transactions;
     (f) any invalidity or unenforceability relating to or against any Loan Party for any reason of any Loan Document, or any Applicable Law purporting to prohibit the performance by any Loan Party of any of its Obligations (other than any such invalidity or unenforceability with respect solely to the obligations of the Guarantors under this Article IX); or
     (g) any other act or omission to act or delay of any kind by any Loan Party, either Agent or any other Person or any other circumstance whatsoever that might, but for the provisions of this Section 9.2, constitute a legal or equitable discharge of the obligations of any Loan Party under the Loan Documents.

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     SECTION 9.3 Discharge OW yupon Payment in Full; Reinstatement In Certain Circumstances. The obligations of the Guarantors hereunder shall remain in full force and effect until all of the Borrower’s Obligations under the Loan Documents shall have been paid or otherwise performed in full and all of the Commitments shall have terminated. If at any time any payment made under this Agreement or any other Loan Document is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, concurso mercantil, quiebra, reorganization, insolvency, custodianship, liquidation, receivership, dissolution, winding up or relief of debtors or similar event of a Loan Party or any other Person or otherwise, then the obligations of the Guarantors hereunder with respect to such payment shall be reinstated at such time as though such payment had been due but not made at such time.
     SECTION 9.4 Waiver by the Guarantors. (a) Each of the Guarantors hereby irrevocably and unconditionally waives, to the fullest extent permitted by Applicable Law: (i) notice of acceptance of the Guarantee provided in this Article IX and notice of any liability to which this Guarantee may apply, (ii) all notices that may be required by Applicable Law or otherwise to preserve intact any rights of any Beneficiary against any Loan Party, including any demand, presentment, protest, proof of notice of non-payment, notice of any failure on the part of any Loan Party to perform and comply with any covenant, agreement, term, condition or provision of any agreement and any other notice to any other party that may be liable in respect of the Obligations Guaranteed hereby (including any Loan Party) except any of the foregoing as may be expressly required hereunder, (iii) any right to the enforcement, assertion or exercise by any Beneficiary of any right, power, privilege or remedy conferred upon such Person under the Loan Documents or otherwise, (iv) any requirement that any Beneficiary exhaust any right, power, privilege or remedy, or exhaust or apply any assets of the Borrower or any other Guarantor or mitigate any damages resulting from a default, under any Loan Document, or proceed to take any action against any collateral granted pursuant to the Loan Documents, or against any Loan Party or any other Person under or in respect of any Loan Document or otherwise, or protect, secure, perfect or ensure any Lien on any collateral granted pursuant to any Loan Document (including any requirement that any action be initiated and/or completed against the Borrower prior to any action being initiated against any Guarantor), and (v) any requirement that claims or liabilities be divided among Guarantors.
     (b) Each of the Guarantors expressly acknowledges that the Guarantee provided in this Article IX is governed by the laws of the State of New York and expressly agrees that any rights and privileges that it might otherwise have under the laws of Mexico shall not be applicable to this Guarantee, including, but not limited to, any benefit of orden, excusión, división, quita, novación, espera and modificación which may be available to it under articles 2813, 2814, 2815, 2817, 2818, 2820, 2821, 2822, 2823, 2827, 2836, 2840, 2842, 2845, 2846, 2847, 2848, 2849 or any other applicable articles of the Federal Civil Code of Mexico and the corresponding articles under the Civil Code in effect for the Federal District of Mexico and in all other states of Mexico.
     SECTION 9.5 Subrogation. Upon any Guarantor’s making payment under this Article IX, the payor shall be subrogated to the rights of the payee against the Borrower with respect to such obligation; provided that such Guarantor shall not enforce any payment by way of subrogation, indemnity, contribution or otherwise, or exercise any other right, against the Borrower or any other Loan Party (or otherwise benefit from any payment or other transfer

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arising from any such right) so long as any Obligations under the Loan Documents remain unpaid and/or unsatisfied.
     SECTION 9.6 Stay of Acceleration. If acceleration of the time for payment of any amounts payable under the Loan Documents is stayed due to any event described in Section 8.1(f), then all such amounts otherwise subject to acceleration under this Agreement shall nonetheless be payable by the Guarantors hereunder immediately upon demand by the Administrative Agent.
ARTICLE X.
THE AGENTS
     SECTION 10.1 Appointment and Authority. Each of the Lenders hereby irrevocably appoints Bank of America to act on its behalf as the Administrative Agent and each of the Lenders and (in its capacity as Beneficiary) the Administrative Agent hereby irrevocably appoints BBVA Bancomer as the Collateral Agent, in each case hereunder and under the other Loan Documents and authorizes each Agent to take such actions on its behalf and to exercise such powers as are delegated to such Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto. The provisions of this Article are solely for the benefit of the Agents and the Lenders, and neither the Borrower nor any other Loan Party shall have rights as a third party beneficiary of any of such provisions.
     SECTION 10.2 Rights as a Lender. Each Person serving as an Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not an Agent and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include each Person serving as Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with any Loan Party or any Subsidiary or other Affiliate thereof as if such Person were not an Agent hereunder and without any duty to account therefor to the Lenders.
     SECTION 10.3 Exculpatory Provisions. The Agents shall not have any duties or obligations except those expressly set forth herein and in the other Loan Documents. Without limiting the generality of the foregoing, neither Agent:
     (a) shall be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;
     (b) shall have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that such Agent is required to exercise as directed in writing by the Majority Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Loan Documents); provided that neither Agent shall be required to take any action that, in its opinion or the opinion of its counsel, may expose such Agent to liability or that is contrary to any Loan Document or Applicable Law; and

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     (c) shall, except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, or be liable for the failure to disclose, any information relating to any of the Loan Parties or any of their respective Affiliates that is communicated to or obtained by the Person serving as Agent or any of its Affiliates in any capacity.
     Neither Agent shall be liable for any action taken or not taken by it (i) with the consent or at the request of the Majority Lenders (or such other number or percentage of the Lenders as shall be necessary, or as such Agent shall believe in good faith shall be necessary, under the circumstances as provided in Sections 8.2 and 11.3) or (ii) in the absence of its own gross negligence or willful misconduct. Neither Agent shall be deemed to have knowledge of any Default unless and until notice describing such Default is given to such Agent by a Loan Party or a Lender.
     Neither Agent shall be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.
     SECTION 10.4 Reliance by the Agents. Each Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. Each Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon. In determining compliance with any condition hereunder to the making of a Loan that by its terms must be fulfilled to the satisfaction of a Lender, the Administrative Agent may presume that such condition is satisfactory to such Lender unless the Administrative Agent shall have received notice to the contrary from such Lender prior to the making of such Loan. Each Agent may consult with legal counsel (who may be counsel for any Loan Party), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.
     SECTION 10.5 Delegation of Duties. Each Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Document by or through any one or more sub-agents appointed by such Agent. Each Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of this Article shall apply to any such sub-agent and to the Related Parties of such Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Agent.

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     SECTION 10.6 Resignation of an Agent. Each Agent may at any time give notice of its resignation to the Lenders and the Borrower. Upon receipt of any such notice of resignation, the Majority Lenders shall have the right, in consultation with the Borrower, to appoint a successor, which shall be a bank with an office (or a subsidiary) in the United States, or an Affiliate of any such bank with an office (or a subsidiary) in the United States. If no such successor shall have been so appointed by the Majority Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may on behalf of the Lenders or (if the Collateral Agent, the Beneficiaries) appoint a successor Agent meeting the qualifications set forth above; provided that if such Agent shall notify the Borrower and the Lenders that no qualifying Person has accepted such appointment, then such resignation shall nonetheless become effective in accordance with such notice and (a) the retiring Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents (except that in the case of any collateral security held by the Collateral Agent on behalf of the Beneficiaries under any of the Loan Documents, the retiring Collateral Agent shall continue to hold such collateral security until such time as a successor Collateral Agent is appointed) and (b) all payments, communications and determinations provided to be made by, to or through such Agent shall instead be made by or to each Lender directly, until such time as the Majority Lenders appoint a successor Agent as provided for above in this Section. Upon the acceptance of a successor’s appointment as Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring (or retired) Agent, and the retiring Agent shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents (if not already discharged therefrom as provided above in this Section). The fees payable by the Borrower to a successor Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the retiring Agent’s resignation hereunder and under the other Loan Documents, the provisions of this Article and Section 11.2 shall continue in effect for the benefit of such retiring Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring Agent was acting as Agent.
     SECTION 10.7 Non-Reliance on Agents and Other Lenders. Each Lender acknowledges that it has, independently and without reliance upon either Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon either Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder.
     SECTION 10.8 No Other Duties, Etc. Anything herein to the contrary notwithstanding, none of the Arrangers shall have any powers, duties or responsibilities under this Agreement or any of the other Loan Documents, except in its capacity, as applicable, as an Agent or a Lender.
     SECTION 10.9 Administrative Agent May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, concurso mercantil, quiebra, arrangement, adjustment, composition or other judicial proceeding relative to any Loan Party, the Administrative Agent (irrespective of whether the principal of any Loan

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shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made the demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise:
     (a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans, and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Beneficiaries (including any claim for the reasonable compensation, expenses, disbursements and advances of the Beneficiaries and their respective agents and counsel and all other amounts due to the Beneficiaries under Sections 2.12 and 11.2) allowed in such judicial proceeding; and
     (b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;
     and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Beneficiary to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Beneficiaries, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Sections 2.12 and 11.2.
     Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, concurso mercantil, quiebra, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.
     SECTION 10.10 Collateral and Guarantee Matters. The Beneficiaries irrevocably authorize the Collateral Agent, at its option and in its discretion, to release any Lien on any Property granted to or held by the Collateral Agent under any Loan Document (i) upon termination of the Commitments and payment in full of all Obligations (other than contingent indemnification obligations), (ii) that is sold or to be sold as part of or in connection with any sale permitted hereunder or under any other Loan Document, or (iii) subject to Section 11.3, if approved, authorized or ratified in writing by the Majority Lenders.
     Upon request by the Administrative Agent or (if the Majority Lenders shall so agree) the Borrower at any time, the Majority Lenders will confirm in writing the Collateral Agent’s authority to release its interest in particular types or items of Property pursuant to this Section 10.10.
ARTICLE XI.
MISCELLANEOUS
     SECTION 11.1 Financial Data. Except as otherwise provided herein, financial data required hereby shall be prepared both as to classification of items and as to amount in accordance with GAAP.

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     SECTION 11.2 Expenses; Indemnity; Damage Waiver.(a) Costs and Expenses. Each Loan Party agrees, jointly and severally, to pay (i) all reasonable out of pocket expenses incurred by each Agent and its respective Affiliates (including the reasonable fees, charges and disbursements of counsel for each Agent and all fees, charges and disbursements, including fees and expenses with any notary public and registry, incurred in connection with the execution, filing and registration of the Arrendadora Pledges), in connection with the syndication of the credit facilities provided for herein, the preparation, negotiation, execution, delivery and administration of this Agreement and the other Loan Documents or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated) and (ii) all out of pocket expenses incurred by each Agent or any Lender (including the fees, charges and disbursements of any counsel for each Agent or any Lender), and shall pay all fees and time charges for attorneys who may be employees of either Agent or any Lender, in connection with the enforcement or protection of its rights (A) in connection with this Agreement and the other Loan Documents, including its rights under this Section 11.2, or (B) in connection with the Loans made hereunder, including all such out of pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans.
     (b) Indemnification. Each Loan Party agrees, jointly and severally, to indemnify each Agent (and any sub-agent thereof) and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an “Indemnitee”) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses (including the fees, charges and disbursements of any counsel for any Indemnitee and of attorneys who may be employees of any Indemnitee), incurred by any Indemnitee or asserted against any Indemnitee by any third party or by the Borrower or any other Loan Party (or any of their respective Related Parties) arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto of their respective obligations hereunder or thereunder, the consummation of the transactions contemplated hereby or thereby, or, in the case of the Administrative Agent and the Collateral Agent (and any sub-agent thereof) and its Related Parties only, the administration of this Agreement and the other Loan Documents and the holding of collateral for the benefit of the Beneficiaries under the Loan Documents, (ii) any Loan or the use or proposed use of the proceeds thereof, (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by any Loan Party or any of its Subsidiaries, or any Environmental Liability related in any way to any Loan Party or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by the Borrower or any other Loan Party (or any of their respective Related Parties), and regardless of whether any Indemnitee is a party thereto, in all cases, whether or not caused by or arising, in whole or in part, out of the comparative, contributory or sole negligence of the Indemnitee; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses (A) are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee or (B) result from a claim brought by the Borrower or any other Loan Party against an Indemnitee for breach in bad faith of such Indemnitee’s obligations hereunder or under any other Loan Document, if the Borrower or such

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other Loan Party has obtained a final and nonappealable judgment in its favor on such claim as determined by a court of competent jurisdiction.
     (c) Reimbursement by Lenders. To the extent that any Loan Party for any reason fails to indefeasibly pay any amount required under clause (a) or (b) of this Section to be paid by it to either Agent (or any sub-agent thereof) or any Related Party of either Agent, each Lender severally agrees to pay to such Agent (or any such sub-agent) or such Related Party, as the case may be, such Lender’s ratable share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against such Agent (or any such sub-agent) in its capacity as such, or against any Related Party of such Agent acting for such Agent (or any such sub-agent) in connection with such capacity. The obligations of the Lenders under this clause (c) are subject to the provisions of Section 2.4.
     (d) Waiver of Consequential Damages, Etc. To the fullest extent permitted by Applicable Law, no Loan Party shall assert, and each Loan Party hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Loan or the use of the proceeds thereof. No Indemnitee referred to in clause (b) above shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby.
     (e) Payments. All amounts due under this Section 11.2 shall be payable not later than ten Business Days after demand therefor.
     (f) Survival. The agreements in this Section shall survive the resignation of either Agent, the replacement of any Lender, the termination of the Commitments and the repayment, satisfaction or discharge of all the other Obligations.
     SECTION 11.3 Amendments and Waivers, Etc. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent to any departure by the Borrower or any other Loan Party therefrom, shall be effective unless in writing signed by the Majority Lenders and the Borrower or the applicable Loan Party, as the case may be, and acknowledged by the Administrative Agent, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided that no such amendment, waiver or consent shall:
     (a) waive any condition set forth in Section 4.1(a) without the written consent of each Lender;
     (b) extend or increase the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 8.2) without the written consent of such Lender;

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     (c) postpone any date fixed by this Agreement or any other Loan Document for any payment or mandatory prepayment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document without the written consent of each Lender directly affected thereby;
     (d) reduce the principal of, or the rate of interest specified herein on, any Loan or (subject to clause (ii) of the second provision to this Section 11.3) any fees or other amounts payable hereunder or under any Note, or change the manner of computation of any financial ratio (including any change in any applicable defined term) used in determining the Applicable Margin that would result in a reduction of any interest rate on any Loan or any fee payable hereunder without the written consent of each Lender directly affected thereby; provided that only the consent of the Majority Lenders shall be necessary to amend the definition of “Default Rate” or to waive any obligation of the Borrower to pay interest at the Default Rate;
     (e) change Section 2.13 in a manner that would alter the pro rata sharing of payments required thereby without the written consent of each Lender;
     (f) change any provision of this Section, the definition of “Majority Lenders” or “Tranche Majority Lenders” or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder without the written consent of each Lender;
     (g) release any Guarantor from its Guarantee hereunder without the written consent of each Lender; or
     (h) release all or substantially all of the Property pledged under the Arrendadora Pledges in any transaction or series of related transactions without the written consent of each Lender;
and, provided further that (i) no amendment, waiver or consent shall, unless in writing and signed by the relevant Agent in addition to the Lenders required above, affect the rights or duties of such Agent under this Agreement or any other Loan Document; and (ii) the Fee Letters may be amended, or rights or privileges thereunder waived, in a writing executed only by the parties thereto. Notwithstanding anything to the contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder, except that the Commitment of such Lender may not be increased or extended without the consent of such Lender.
     SECTION 11.4 Governing Law. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK (NOT INCLUDING SUCH STATE’S CONFLICT OF LAWS PROVISIONS OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).
     SECTION 11.5 Notices; Effectiveness; Electronic Communication. (a) Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in clause (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or

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overnight courier service, mailed by certified or registered mail or sent by telecopier as follows, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows:
     (i) if to the Borrower, Arrendadora, the Administrative Agent or the Collateral Agent, to the address, telecopier number, electronic mail address or telephone number specified for such Person on Schedule 11.5;
     (ii) if to a Guarantor that enters into an Accession Agreement, to the address, telecopier number, electronic mail address or telephone number specified in such Accession Agreement; and
     (iii) if to any Lender, to the address, telecopier number, electronic mail address or telephone number specified in its Administrative Questionnaire.
Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next business day for the recipient). Notices delivered through electronic communications to the extent provided in clause (b) below, shall be effective as provided in such clause (b).
     (b) Electronic Communications. Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent; provided that the foregoing shall not apply to notices to any Lender pursuant to Article II if such Lender has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication. The Administrative Agent or any Loan Party may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.
Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement); provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.
     (c) The Platform. THE PLATFORM IS PROVIDED “AS IS” AND “AS AVAILABLE.” THE AGENT PARTIES (AS DEFINED BELOW) DO NOT WARRANT THE ACCURACY OR COMPLETENESS OF THE BORROWER MATERIALS OR THE ADEQUACY OF THE PLATFORM, AND EXPRESSLY DISCLAIM LIABILITY FOR

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ERRORS IN OR OMISSIONS FROM THE BORROWER MATERIALS. NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY ANY AGENT PARTY IN CONNECTION WITH THE BORROWER MATERIALS OR THE PLATFORM. In no event shall the Administrative Agent or any of its Related Parties (collectively, the “Agent Parties”) have any liability to any Loan Party, any Lender or any other Person for losses, claims, damages, liabilities or expenses of any kind (whether in tort, contract or otherwise) arising out of any Loan Party’s or the Administrative Agent’s transmission of Borrower Materials through the Internet, except to the extent that such losses, claims, damages, liabilities or expenses are determined by a court of competent jurisdiction by a final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Agent Party; provided that in no event shall any Agent Party have any liability to any Loan Party, any Lender or any other Person for indirect, special, incidental, consequential or punitive damages (as opposed to direct or actual damages).
     (d) Change of Address, Etc. Each of the Loan Parties, the Administrative Agent and the Collateral Agent may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the other parties hereto. Each Lender may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the Borrower, the Administrative Agent and the Collateral Agent. In addition, each Lender agrees to notify the Administrative Agent from time to time to ensure that the Administrative Agent has on record (i) an effective address, contact name, telephone number, telecopier number and electronic mail address to which notices and other communications may be sent and (ii) accurate wire instructions for such Lender.
     (e) Reliance by the Agents and Lenders. The Agents and the Lenders shall be entitled to rely and act upon any notices purportedly given by or on behalf of any Loan Party even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof. Each Loan Party agrees, jointly and severally, to indemnify each Agent and each Lender and the Related Parties of each of them from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of any Loan Party. All telephonic notices to and other telephonic communications with either Agent may be recorded by such Agent, and each of the parties hereto hereby consents to such recording.
     SECTION 11.6 Table of Contents; Headings. The table of contents and captions and section headings appearing herein are inserted for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.
     SECTION 11.7 Survival. All representations and warranties made hereunder and in any other Loan Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof. Such representations and warranties have been or will be relied upon by each Agent and each Lender, regardless of any investigation made by either Agent or any Lender or on their behalf and notwithstanding that either Agent or any Lender may have had notice or knowledge of any

Credit Agreement 69


 

Default at the time of any Loan, and shall continue in full force and effect as long as any Loan or any other Obligation hereunder shall remain unpaid or unsatisfied or any Commitment shall remain outstanding. The obligations of the Borrower under Sections 3.1(b), 3.3, 3.4, and 11.2 and the obligations of the Lenders under Section 11.2(c) shall survive the repayment of the Loans and the termination of the Commitments and, in the case of any Lender that may assign any interest in its Commitment or Loan hereunder, shall survive the making of such assignment with respect to the assigning Lender, notwithstanding that such assigning Lender may cease to be a “Lender” hereunder; provided that any Lender’s obligations under Section 11.2(c) shall only apply to the extent that the event with respect to which any indemnification is payable thereunder occurred at the time that such Lender maintained a Loan or Commitment hereunder.
     SECTION 11.8 Successors and Assigns. (a) Successors and Assigns Generally. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that no Loan Party may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender and no Lender may assign or otherwise transfer all or any portion of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of clause (b), (ii) by way of participation in accordance with the provisions of clause (d), or (iii) by way of pledge or assignment of a security interest subject to the restrictions of clause (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in clause (d) and, to the extent expressly contemplated hereby, the Related Parties of each of the Agents and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.
     (b) Assignments by Lenders. Any Lender may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that:
     (i) except in the case of an assignment of the entire remaining amount of the assigning Lender’s Commitment and the Loans at the time owing to it or in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund with respect to a Lender, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) or, if the Commitment is not then in effect, the principal outstanding balance of the Loans of the assigning Lender subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if “Trade Date” is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than, (A) with respect to Revolving Loans, US$5,000,000 (or the Peso Equivalent thereof) and (B) with respect to Tranche B Loans, US$1,000,000, in each case unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed); provided that concurrent assignments to members of an Assignee Group and concurrent assignments from members of an Assignee Group to a single Eligible Assignee (or to an Eligible Assignee and members of its Assignee Group) will be treated

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     as a single assignment for purposes of determining whether such minimum amount has been met;
     (ii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement with respect to the Loans or the Commitment assigned;
     (iii) any assignment of a Commitment or a Revolving Loan must be approved by the Administrative Agent (which approval shall not be unreasonably withheld or delayed) unless the Person that is the proposed assignee is itself a Lender or an Affiliate of a Lender (whether or not the proposed assignee would otherwise qualify as an Eligible Assignee); and
     (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee in the amount of US$3,500 and the Eligible Assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.
Subject to acceptance and recording thereof by the Administrative Agent pursuant to clause (c), from and after the effective date specified in each Assignment and Assumption, the Eligible Assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 3.1, 3.3, 3.4 and 11.2 with respect to facts and circumstances occurring prior to the effective date of such assignment. Upon request, the Borrower (at its expense) shall execute and deliver a Note to the assignee Lender. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this clause shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with clause (d).
     (c) Register. The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at the Administrative Agent’s Office a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive, and the Borrower, the Agents and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement and the other Loan Documents, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower at any reasonable time and from time to time upon reasonable prior notice. In addition, at any time that a request for a consent for a material or substantive change to the Loan Documents is pending, any Lender may request and receive from the Administrative Agent a copy of the Register.

Credit Agreement 71


 

     (d) Participations. Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural person or any Loan Party or any Loan Party’s Affiliates or Subsidiaries) (each, a “Participant”) in all or a portion of such Lender’s rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans owing to it); provided that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Loan Parties, the Agents and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement.
Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification described in the first proviso to Section 11.3 that affects such Participant. Subject to clause (e), the Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.1, 3.3 and 3.4 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to clause (b). To the extent permitted by Applicable Law, each Participant also shall be entitled to the benefits of Section 2.14(a) as though it were a Lender if such Participant agrees to be subject to Section 2.14(b) as though it were a Lender.
     (e) Limitation upon Participant Rights. A Participant shall not be entitled to receive any greater payment under Section 3.1 or 3.3 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent.
     (f) Certain Pledges. Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under its Note(s), if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.
     (g) Electronic Execution of Assignments. The words “execution,” “signed,” “signature,” and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any Applicable Law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.
     SECTION 11.9 Interest Rate Limitation. Notwithstanding anything to the contrary contained in any Loan Document, the interest paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by Applicable Law (the “Maximum Rate”). If the Administrative Agent or any Lender shall receive interest in

Credit Agreement 72


 

an amount that exceeds the Maximum Rate, the excess interest shall be applied to the principal of the Loans or, if it exceeds such unpaid principal, refunded to the Borrower. In determining whether the interest contracted for, charged, or received by the Administrative Agent or a Lender exceeds the Maximum Rate, such Person may, to the extent permitted by Applicable Law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations hereunder.
     SECTION 11.10 Submission to Jurisdiction; Venue; Service; Waiver of Jury Trial.
     (a) EACH OF THE PARTIES HERETO (AND ITS SUCCESSORS AND ASSIGNS) (i) AGREES THAT ANY CLAIM, SUIT, ACTION OR PROCEEDING BROUGHT BY ANY PARTY OR SUCCESSOR THERETO ARISING OUT OF OR WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE SUBJECT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK OR THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK (IN EACH CASE LOCATED IN THE BOROUGH OF MANHATTAN IN NEW YORK CITY), TO THE JURISDICTION OF ANY COMPETENT COURT IN THE PLACE OF ITS CORPORATE DOMICILE IN RESPECT OF ACTIONS BROUGHT AGAINST IT AS A DEFENDANT AND TO APPELLATE COURTS THEREFROM AND EACH OF THE PARTIES HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO SUCH JURISDICTION FOR SUCH PURPOSE AND (ii) TO THE FULLEST EXTENT PERMITTED BY LAW, (A) IRREVOCABLY WAIVES ANY OBJECTION IT MAY HAVE AT ANY TIME TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT BROUGHT IN ANY SUCH COURT, (B) IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM, (C) IRREVOCABLY WAIVES THE RIGHT TO OBJECT, WITH RESPECT TO SUCH CLAIM, SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT, THAT SUCH COURT DOES NOT HAVE JURISDICTION OVER IT AND (D) IRREVOCABLY WAIVES ANY RIGHT TO WHICH IT MAY BE ENTITLED ON ACCOUNT OF PLACE OF RESIDENCE OR DOMICILE. EACH OF THE PARTIES HERETO HEREBY EXPRESSLY AND IRREVOCABLY WAIVES ALL RIGHTS OF JURISDICTION IN ANY SUCH ACTION OR PROCEEDING, WHICH IT MAY NOW OR HEREAFTER BE AFFORDED BY LAW, IN ANY OTHER FORUM. EACH OF THE PARTIES HERETO FURTHER AGREES THAT A FINAL JUDGMENT IN ANY SUCH SUIT, ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY MANNER PROVIDED BY LAW.
     (b) EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY

Credit Agreement 73


 

HERETO (i) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (ii) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
     (c) FOR THE PURPOSE OF PROCEEDINGS IN THE COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK (IN EACH CASE LOCATED IN THE BOROUGH OF MANHATTAN IN NEW YORK CITY), EACH LOAN PARTY HEREBY IRREVOCABLY DESIGNATES AS OF THE EFFECTIVE DATE CT CORPORATION SYSTEM (“PROCESS AGENT’) WITH OFFICES CURRENTLY LOCATED AT 111 EIGHTH AVENUE, NEW YORK, NEW YORK 10011 AS ITS AGENT FOR SERVICE OF PROCESS. IN THE EVENT THAT SUCH AGENT OR ANY SUCCESSOR SHALL CEASE TO BE LOCATED IN THE BOROUGH OF MANHATTAN, EACH LOAN PARTY SHALL PROMPTLY AND IRREVOCABLY BEFORE THE RELOCATION OF SUCH AGENT FOR SERVICE OF PROCESS, IF PRACTICABLE, OR PROMPTLY THEREAFTER DESIGNATE A SUCCESSOR AGENT, WHICH SUCCESSOR AGENT SHALL BE LOCATED IN THE BOROUGH OF MANHATTAN, AND NOTIFY THE ADMINISTRATIVE AGENT THEREOF, TO ACCEPT ON ITS BEHALF SERVICE OF ANY AND ALL PROCESS OR OTHER DOCUMENTS WHICH MAY BE SERVED IN ANY ACTION OR PROCEEDING IN ANY OF SUCH COURTS AND FURTHER AGREES THAT SERVICE UPON SUCH AGENT SHALL CONSTITUTE VALID AND EFFECTIVE SERVICE UPON EACH SUCH LOAN PARTY AND THAT FAILURE OF ANY SUCH AGENT TO GIVE ANY NOTICE OF SUCH SERVICE TO SUCH LOAN PARTY SHALL NOT AFFECT THE VALIDITY OF SUCH SERVICE OR ANY JUDGMENT RENDERED IN ANY ACTION OR PROCEEDING BASED THEREON. EACH OF THE PARTIES HERETO AGREES THAT SERVICE OF ANY AND ALL SUCH PROCESS OR OTHER DOCUMENTS ON SUCH PERSON MAY ALSO BE EFFECTED BY REGISTERED MAIL TO ITS ADDRESS AS SET FORTH IN SECTION 11.5 OR SCHEDULE 11.5. WITH RESPECT TO EACH LOAN PARTY, SERVICE OF ANY AND ALL SUCH PROCESS OR OTHER DOCUMENTS TO THE PROCESS AGENT OR SUCH OTHER AGENT FOR SERVICE OF PROCESS DESIGNATED BY SUCH LOAN PARTY IN ACCORDANCE WITH THIS AGREEMENT SHALL CONSTITUTE VALID AND EFFECTIVE SERVICE ONLY IF MADE IN PERSON TO THE PROCESS AGENT OR SUCH OTHER AGENT FOR SERVICE OF PROCESS.
     SECTION 11.11 Judgment Currency. All payments made under this Agreement and the Notes shall be made in Dollars or Pesos (to the extent required by the terms hereof, the applicable “Agreement Currency”), as applicable, and, if for any reason any payment made hereunder or under any Note is made in a currency (the “Other Currency”) other than the applicable Agreement Currency, then to the extent that the payment actually received by the relevant Beneficiary, when converted into the applicable Agreement Currency at the Rate of Exchange (as defined below) on the date of payment (or, if conversion on such date is not practicable, as soon thereafter as it is practicable for such Beneficiary to purchase the applicable Agreement Currency) falls short of the amount due under the terms of this Agreement or any

Credit Agreement 74


 

Note, the Loan Parties shall, as a separate and independent obligation of the Loan Parties, indemnify such Beneficiary and hold such Beneficiary harmless against the amount of such shortfall. As used in this Section 11.11, the term “Rate of Exchange” means the rate at which the Beneficiary is able on the relevant date to purchase the applicable Agreement Currency with the Other Currency and shall include any premiums and costs of exchange payable in connection with the purchase of or conversion into, the applicable Agreement Currency.
     SECTION 11.12 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument.
     SECTION 11.13 Waiver of Immunities. To the extent that any Loan Party has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its Property, such Loan Party hereby irrevocably waives such immunity in respect of its obligations under this Agreement and the other Loan Documents. The foregoing waiver is intended to be effective to the fullest extent now or hereafter permitted by Applicable Law.
     SECTION 11.14 Severability. To the fullest extent permitted by law, any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction, and the remaining portion of such provision and all other remaining provisions hereof will be construed to render them enforceable.
     SECTION 11.15 Treatment of Certain Information; Confidentiality. Each of the Agents and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its and its Affiliates’ respective partners, directors, officers, employees, agents, advisors and representatives (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and be required to keep such Information confidential), (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by Applicable Laws or by any subpoena or similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Loan Document or any action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement with each Person receiving the Information containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and its obligations, (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to such Agent, any Lender, or any of their respective Affiliates on a nonconfidential basis from a source other than the Borrower.

Credit Agreement 75


 

     For purposes of this Section, “Information” means all information received from any Loan Party or any Subsidiary relating to any Loan Party or any Subsidiary or any of their respective businesses, other than any such information that is available to either Agent or any Lender on a nonconfidential basis prior to disclosure by such Loan Party or Subsidiary; provided that, in the case of information received from a Loan Party or any Subsidiary after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.
     Each of the Agents and the Lenders acknowledges that (a) the Information may include material non-public information concerning a Loan Party or a Subsidiary, as the case may be, (b) it has developed compliance procedures regarding the use of material non-public information and (c) it will handle such material non-public information in accordance with Applicable Law, including Federal and state securities laws.
     SECTION 11.16 No Waiver; Remedies. No failure on the part of either Agent or any of the Lenders to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.
     SECTION 11.17 Entire Agreement. As of the Effective Date, this Agreement and the other Loan Documents (including the Fee Letters with respect to the matters covered thereby) constitute the entire agreement among the parties with respect to the subject matter hereof and thereof and supersede all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof.
     SECTION 11.18 USA PATRIOT Act. Each Lender that is subject to the Act (as hereinafter defined) and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act’), it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender or the Administrative Agent, as applicable, to identify the Borrower in accordance with the Act.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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     IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be executed by their duly authorized representatives as of the date first above written.
         
  TFM, S.A. DE C.V., as Borrower
 
 
  By:      
    Name:      
    Title:      
 
     
  By:      
    Name:      
    Title:      
 
         
  ARRENDADORA TFM, S.A. DE C.V., as Guarantor
 
 
  By:      
    Name:      
    Title:      
 
     
  By:      
    Name:      
    Title:      
Credit Agreement S-1

 


 

         
  BANK OF AMERICA, N.A.,
as Administrative Agent
 
 
  By:      
    Name:      
    Title:      
Credit Agreement S-2

 


 

         
 
BBVA BANCOMER, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO BBVA BANCOMER, as Collateral Agent
 
 
  By:      
    Name:      
    Title:      
Credit Agreement S-3

 


 

         
  LENDERS

BBVA BANCOMER, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO BBVA BANCOMER, GRAND CAYMAN BRANCH
 
 
     
  By:      
    Name:      
    Title:      
 
     
  By:      
    Name:      
    Title:      
 
  Lending Office: Grand Cayman, Cayman Islands
 
 
 
 
BBVA BANCOMER, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO BBVA BANCOMER
 
 
  By:      
    Name:      
    Title:      
 
     
  By:      
    Name:      
    Title:      
 
  Lending Office: Mexico City, D.F., Mexico
 
 
Credit Agreement S-4

 


 

         
  BANK OF AMERICA, N.A.,
 
 
  By:      
    Name:      
    Title:      
 
  Lending Office: Concord, California, United States of America
 
 
 
  BANK OF AMERICA, N.A.,
 
 
  By:      
    Name:      
    Title:      
 
  Lending Office: Mexico City, D.F., Mexico
 
Credit Agreement S-5

 


 

         
  EXPORT DEVELOPMENT CANADA
 
 
  By:      
    Name:      
    Title:      
 
     
  By:      
    Name:      
    Title:      
 
  Lending Office: Ottawa, Ontario, Canada
 
 
Credit Agreement S-6

 


 

         
  KFW
 
 
  By:      
    Name:      
    Title:      
 
     
  By:      
    Name:      
    Title:      
 
  Lending Office: Frankfurt, Germany
 
 
Credit Agreement S-7

 


 

         
  BANK OF MONTREAL
 
 
  By:      
    Name:      
    Title:      
 
     
  By:      
    Name:      
    Title:      
 
  Lending Office: Chicago, Illinois, United States of America
 
 
Credit Agreement S-8

 


 

         
  THE BANK OF NOVA SCOTIA
 
 
  By:      
    Name:      
    Title:      
 
     
  By:      
    Name:      
    Title:      
 
  Lending Office: New York, New York, United States of America
 
 
Credit Agreement S-9

 


 

         
  JPMORGAN CHASE BANK, N.A.
 
 
  By:      
    Name:      
    Title:      
 
     
  By:      
    Name:      
    Title:      
 
  Lending Office: New York, New York, United States of America
 
 
Credit Agreement S-10

 


 

         
  RAIFFEISEN ZENTRALBANK OSTERREICH AG
 
 
  By:      
    Name:      
    Title:      
 
     
  By:      
    Name:      
    Title:      
 
  Lending Office: Vienna, Australia
 
 
Credit Agreement S-11

 


 

ANNEX 1
to Credit Agreement
COMMITMENTS
                                                 
    TRANCHE 1 COMMITMENT   TRANCHE 2 COMMITMENT   TRANCHE B COMMITMENT
LENDERS   AMOUNT (US$)   %   AMOUNT (US$)   %   AMOUNT (US$)   %
Bbva Bancomer, S.A. Institución de Banca Múliple, Grupo Financiero BBVA Bancomer, Grand Cayman Branch
                                    12,050,500       15.856  
 
                                               
 
                                               
Bbva Bancomer, S.A. Institución de Banca Múliple, Grupo Financiero BBVA Bancomer
                    5,949,500       56.775                  
 
                                               
 
                                               
Bank of America, N.A.
                                    11,470,500       15.093  
 
                                               
 
                                               
Bank of America Mexico, N.A.
                    4,529,500       43.225               V  
 
                                               
 
                                               
Export Development Canada
    4,244,000       21.741                       10,756,000       14.153  
 
                                               
 
                                               
KfW
    4,244,000       21.741                       10,756,000       14.153  
 
                                               
 
                                               
Bank of Montreal
    4,244,000       21.741                       10,756,000       14.153  
 
                                               
 
                                               
Bank of Nova Scotia
    2,263,000       11.593                       6,737,000       8.864  
 
                                               
 
                                               
JPMorgan Chase Bank, N.A.
    2,263,000       11.593                       6,737,000       8.864  
 
                                               
 
                                               
Raiffeisen Zentralbank Oesterreich AG
    2,263,000       11.593                       6,737,000       8.864  
 
                                               
 
                                               
Total
    19,521,000               10,479,000               76,000,000          
Credit Agreement Anex 1-1

 

EX-10.53.1 9 c12119exv10w53w1.htm AMENDMENT NO. 1 AND WAIVER NO. 1 TO THE 2005 CREDIT AGREEMENT exv10w53w1
 

EXHIBIT 10.53.1
EXECUTION COPY
 
AMENDMENT No. 1 and WAIVER No. 1
TO THE
CREDIT AGREEMENT
dated as of April 7, 2006
among
Kansas City Southern de México, S.A. de C.V.
(formerly known as TFM, S.A. de C.V.),
as Borrower
ARRENDADORA TFM, S.A. de C.V.,
as Guarantor
CERTAIN LENDERS,
BANK OF AMERICA, N.A.,
as Administrative Agent,
and
BBVA BANCOMER, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO
FINANCIERO BBVA BANCOMER,
as the Collateral Agent
     
 

 


 

     THIS AMENDMENT No. 1 AND WAIVER NO. 1 TO THE CREDIT AGREEMENT, dated as of April 7, 2006 (this “Amendment”), is entered into among Kansas City Southern de México, S.A. de C.V. (formerly known as TFM, S.A. de C.V., a corporation with variable capital (sociedad anónima de capital variable) organized under the laws of Mexico (the “Borrower”), Arrendadora TFM, S.A. de C.V., a corporation with variable capital (sociedad anónima de capital variable) organized under the laws of the Mexico (“Arrendadora”), each of the lenders that is a signatory hereto under the caption “LENDERS” on the signature pages hereto and each other Person that becomes a “Lender” after the date hereof pursuant to Section 11.8(b) of the Credit Agreement, as defined below (each a “Lender”), Bank of America, N.A., as the administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the “Administrative Agent”), and BBVA Bancomer, S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer, as the collateral agent for the Beneficiaries (as defined in the Credit Agreement) (in such capacity, together with its successors in such capacity, the “Collateral Agent”).
RECITALS
     WHEREAS, the Borrower, the Guarantor, the Lenders, the Administrative Agent and the Collateral Agent have entered into the Credit Agreement, dated as of October 24, 2005 (the “Credit Agreement”);
     WHEREAS, the parties hereto desire to amend the Credit Agreement as set forth below, in accordance with Section 11.3 of the Credit Agreement, subject to the conditions set forth herein; and
     WHEREAS, the parties hereto desire to waive certain obligations of the Borrower under the Credit Agreement, subject to the conditions set forth herein,
     NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
     SECTION 1. Certain Defined Terms. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement.
     SECTION 2. Amendments. (a) The parties hereto hereby agree that the definition of “Indebtedness” in Section 1.1 of the Credit Agreement shall be deleted and the following definition shall be inserted in proper alphabetical order:
Indebtedness” shall mean, with respect to any Person at any date of determination (without duplication):
(a) all indebtedness of such Person for borrowed money;
(b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments;
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

2


 

(c) all obligations, contingent or otherwise, of such Person in respect of acceptances, letters of credit, financial guaranty insurance policies or similar instruments;
(d) all obligations of such Person for the deferred purchase price of Property or services (other than current trade payables incurred in the ordinary course of such Person’s business and other than the Specified Deferred Payment Obligations);
(e) all obligations of such Person as lessee under Capitalized Leases (but not operating leases);
(f) all Guarantees of such Person in respect of obligations of the kind referred to in clauses (a) through (e) and (h) of this definition;
(g) all Indebtedness of other Persons secured by a Lien on any Property of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of such Indebtedness shall be the lesser of (i) the fair market value of such Property at such date of determination and (ii) the amount of such Indebtedness; and
(h) to the extent not otherwise included in this definition, net obligations to make payments under Swap Agreements.
The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation; provided that, in the case of clause (h) above, the amount of Indebtedness shall be the mark-to-market amount of such obligations at such date.
(b) The parties hereto hereby agree to add the following definition in Section 1.1 of the Credit Agreement which shall be inserted in proper alphabetical order:
Specified Deferred Payment Obligations” mean all payment obligations as in effect as of April 1, 2006 with respect to: (a) the locomotive maintenance agreements with each of Alstom Transporte, S.A. de C.V. and GETS Locomotive Services, S.A. de C.V., and (b) a track maintenance rehabilitation agreement with Alstom Transporte, S.A. de C.V. that accrue and are recorded on the Borrower’s balance sheet. Such payment obligations are set forth on Schedule I to the Amendment No. 1 and Waiver No. 1 to the Credit Agreement dated as of April 7, 2006 among Kansas City Southern de México, S.A. de C.V., Arrendadora TFM, S.A. de C.V., each of the lenders that is a signatory thereto, Bank of America, N.A., as the administrative agent and BBVA Bancomer, S.A., Institución de Banca Múltiple, Grupo Financiero BBVA Bancomer, as the collateral agent.
(c) The parties hereto hereby agree to eliminate the minimum and the multiple borrowing thresholds of the Tranche A2 Loans that the Borrower may request on a Borrowing Date under Section 2.1(b)(i), such that such Tranche A2 Loans may be borrowed in any amount.
(d) The parties hereto hereby agree that Section 6.2(b) of the Credit Agreement shall be deleted and substituted with the following:
“(b) as soon as available, and in any case within 45 days of the end of each of the first three fiscal quarters of each year, beginning with the fiscal quarter ending on September 30, 2005, the unaudited consolidated financial statements of the Borrower and
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

3


 

its Consolidated Subsidiaries in respect of such fiscal quarter prepared in accordance with GAAP, consistently applied (except as otherwise discussed in the notes to such financial statements), which financial statements shall present fairly in accordance with GAAP (subject to absence of footnotes), the financial condition of the Borrower and its Consolidated Subsidiaries as at the end of the relevant fiscal quarter of each fiscal year and the results of the operations of the Borrower and its Consolidated Subsidiaries for such fiscal quarter; provided that for so long as the Borrower files a Form 10-Q with the Securities and Exchange Commission, the furnishing by the Borrower to the Administrative Agent of such Form 10-Q for each fiscal quarter of the Borrower shall satisfy the Borrower’s obligation to provide the financial statements contemplated in this clause (b); ”
     SECTION 3. Waiver. (a) The parties hereto hereby waive the reporting requirements in Section 6.2(a) of the Credit Agreement, requiring that the Borrower shall deliver to the Administrative Agent the information contained therein within 90 days of the end of each fiscal year with respect to fiscal year 2005, provided that such reports shall be delivered to the Administrative Agent by April 30, 2006.
     (b) The parties hereto hereby waive the reporting requirements in Section 6.2(b) of the Credit Agreement, requiring that the Borrower shall deliver to the Administrative Agent within 45 days of the end of the last fiscal quarter of 2005 the reports contained therein.
     (c) The parties hereto hereby waive the reporting requirements in Section 6.2(c) of the Credit Agreement, requiring that the Borrower shall deliver to the Administrative Agent updated financial projections of the Borrower for the three year period commencing on January 1, 2006 by March 31, 2006, provided that such projections shall be delivered to the Administrative Agent no later than April 30, 2006.
     (d) The parties hereto hereby waive the requirement in Section 6.2(d) of the Credit Agreement with respect to the delivery of a certificate of a Responsible Officer of the Borrower concurrently with the delivery of the financial statements pursuant to Section 6.2(a) and (b) with respect to the end of fiscal year 2005, provided that such certificate shall be delivered to the Administrative Agent no later than April 30, 2006.
     (e) The parties hereto hereby waive compliance with the obligations of Section 7.1(c) of the Credit Agreement for the four quarters ending December 31, 2005 if compliance therewith was calculated without giving effect to the amendment to the definition of “Indebtedness” set forth in Section 2(a) above, provided that the Borrower is in compliance therewith after giving effect to such amendment.
     SECTION 4. Representations and Warranties. Each of the Borrower and each Guarantor represents and warrants to the Administrative Agent, the Collateral Agent and the Lender that:
     (a) The representations and warranties made in the Credit Agreement are (or after giving effect hereto will be) true and correct as if made on the date hereof.
     (b) The execution and delivery by each of the Borrower and the Guarantor of this Amendment and the performance by it of its obligations hereunder (i) are within its corporate
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

4


 

powers, (ii) have been duly authorized by all necessary corporate action and (iii) do not and will not contravene or conflict with any provision of (A) its organizational documents, (B) any Applicable Law, decree, judgment, award, injunction or similar legal restriction in effect, except to the extent that any contravention thereof is not reasonably likely to have a Material Adverse Effect or (C) any document or other contractual restriction binding upon or affecting it or any of its Properties, except to the extent that any contravention thereof is not reasonably likely to have a Material Adverse Effect.
     SECTION 5. Effect of Amendment. All provisions of the Credit Agreement, except as expressly amended and modified by this Amendment, shall remain in full force and effect. After this Amendment becomes effective, all references in any Loan Document (or any other document) referring to the Credit Agreement shall be deemed to be references to the Credit Agreement as amended by this Amendment. This Amendment shall not be deemed to expressly or impliedly waive, amend or supplement any provision of the Credit Agreement other than as expressly set forth herein.
     SECTION 6. Effectiveness. This Amendment shall become effective on the date when the Administrative Agent shall have received counterparts of this Amendment duly executed and delivered by each of the Borrower, the Guarantor, each Agent and the Majority Lenders and the following documents, each in form and substance satisfactory to the Administrative Agent:
  (a)   certified copies of the Organizational Documents of the Borrower and the Guarantor (unless such Organizational Documents have not been modified since the Effective Date (other than the modification to the Borrower’s Organizational Documents to change the name of TFM, S.A. de C.V. to Kansas City Southern de México, S.A. de C.V., which was effective on December 2, 2005), as certified by an authorized officer of the Borrower or the Guarantor, as applicable), and
 
  (b)   if required by Applicable Law, documents (including appropriate resolutions of its shareholders or the Board of Directors or similar body) evidencing due authorization of the execution, delivery and performance by it of this Amendment by the Borrower and the Guarantor, or a certification from an authorized officer of the Borrower and the Guarantor if such documents are not required by Applicable Law.
     SECTION 7. Governing Law. THIS AMENDMENT THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK (NOT INCLUDING SUCH STATE’S CONFLICT OF LAWS PROVISIONS OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).
     SECTION 8. Counterparts. This Amendment may be executed on any number of separate counterparts (including by fax or electronic delivery), and all of such counterparts taken together shall be deemed to constitute one and the same instrument.
     SECTION 9. Section Headings. The various headings of this Amendment are inserted for convenience only and shall not affect the meaning or interpretation of this Amendment (or the Credit Agreement).
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

5


 

     SECTION 10. Loan Document. The parties hereto hereby acknowledge and agree that this Amendment shall constitute a Loan Document for all purposes of the Credit Agreement and the other Loan Documents.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

6


 

     IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the day and year first above written.
         
    KANSAS CITY SOUTHERN DE MÉXICO, S.A. DE C.V.,
      as Borrower
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
    ARRENDADORA TFM, S.A. DE C.V.,
      as Guarantor
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

S-1


 

         
  BANK OF AMERICA, N.A.,
  as Administrative Agent
 
 
  By:      
    Name:      
    Title:      
 
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

S-2


 

         
  BBVA BANCOMER, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE,
GRUPO FINANCIERO BBVA BANCOMER,

  as Collateral Agent
 
  By:      
    Name:      
    Title:      
 
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

S-3


 

         
    LENDERS:
 
       
    BBVA BANCOMER, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO BBVA BANCOMER, GRAND CAYMAN BRANCH
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
    Lending Office: Grand Cayman, Cayman Islands
 
       
    BBVA BANCOMER, S.A., INSTITUCIÓN DE BANCA MÚLTIPLE, GRUPO FINANCIERO BBVA BANCOMER
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
    Lending Office: Mexico City, D.F., Mexico
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

S-4


 

         
    BANK OF AMERICA, N.A.
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
    Lending Office: Concord, California, United States of America
 
       
    BANK OF AMERICA MEXICO, S.A.
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
    Lending Office: Mexico City, D.F., Mexico
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

S-5


 

         
    EXPORT DEVELOPMENT CANADA
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
    Lending Office: Ottawa, Ontario, Canada
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

S-6


 

         
    KFW
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
    Lending Office: Frankfurt, Germany
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

S-7


 

         
    BANK OF MONTREAL
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
    Lending Office: Chicago, Illinois, United States of America
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

S-8


 

         
    THE BANK OF NOVA SCOTIA
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
    Lending Office: New York, New York, United States of America
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

S-9


 

         
    JPMORGAN CHASE BANK, N.A.
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
    Lending Office: New York, New York, United States of America
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

S-10


 

         
    RAIFFEISEN ZENTRALBANK OESTERREICH AG
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
 
  By:    
 
       
 
      Name:
 
      Title:
 
       
    Lending Office: Vienna, Austria
Amendment No. 1 and Waiver
No. 1 to the Credit Agreement

S-11

EX-12.1 10 c12119exv12w1.htm COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES exv12w1
 

EXHIBIT 12.1
Kansas City Southern
Computation of Ratio of Earnings to Fixed Charges
Dollars in millions
                                         
    2006     2005     2004     2003     2002  
Earnings:
                                       
 
                                       
Pretax income (loss) from continuing operations, excluding equity in earnings of unconsolidated affiliates
  $ 147.3     $ 73.1 (i)   $ 52.5     $ (10.5 )   $ 20.7  
 
                                       
Interest expense on indebtedness
    167.2       133.5       44.4       46.4       45.0  
 
                                       
Portion of rents representative of an appropriate interest factor
    45.6       34.3       19.2       19.1       18.3  
 
                                       
Distributed income of equity investments
    4.5       8.3       8.8              
 
                             
 
                                       
Pretax income as adjusted
  $ 364.6     $ 249.2     $ 124.9     $ 55.0     $ 84.0  
 
                             
 
                                       
Fixed Charges:
                                       
 
                                       
Interest expense on indebtedness
  $ 167.2     $ 133.5     $ 44.4     $ 46.4     $ 45.0  
 
                                       
Capitalized interest
                            1.7  
 
                                       
Portion of rents representative of an appropriate interest factor
    45.6       34.3       19.2       19.1       18.3  
 
                             
 
                                       
Fixed charges before preference dividends
    212.8       167.8       63.6       65.5       65.0  
 
                                       
Preference security dividend as defined by Item 503(d)(B) of Regulation S-K
    27.6       15.4       14.2       7.7       0.4  
 
                             
 
                                       
Total fixed charges
  $ 240.4     $ 183.2     $ 77.8     $ 73.2     $ 65.4  
 
                             
 
                                       
Ratio of earnings to fixed charges and preference dividends
    1.5       1.4       1.6       0.8 (ii)     1.3  
 
                             
 
                                       
Ratio of earnings to fixed charges
    1.7       1.5       2.0       0.8 (iii)     1.3  
 
                             
 
Note:   Excludes amortization expense on debt discount due to immateriality.
 
(i)   Income from continuing operations for the year ended December 31, 2005, reflects the acquisition of Grupo KCSM effective April 1, 2005, and Mexrail effective January 1, 2005. The acquisitions were accounted for as purchases and are included in the consolidated results of operations for periods following the respective acquisition dates.
 
(ii)   For the year ended December 31, 2003, the ratio of earnings to combined fixed charges and preference dividends was less than 1:1. This ratio would have been 1:1 if a deficiency of $18.2 million was eliminated.
 
(iii)   For the year ended December 31, 2003, the ratio of earnings to fixed charges was less than 1:1. This ratio would have been 1:1 if a deficiency of $10.5 million was eliminated.

EX-21.1 11 c12119exv21w1.htm SUBSIDIARIES OF THE COMPANY exv21w1
 

Exhibit 21.1
Subsidiaries of the Company
     Kansas City Southern, a Delaware corporation, has no parent. All subsidiaries of the Company listed below are included in the consolidated financial statements unless otherwise indicated.
                 
            Jurisdiction of    
    Percent   Incorporation or    
    Ownership   Organization   Subsidiary of
Arrendadora KCSM, S.A. de C.V.
    100     Mexico   Kansas City Southern de México, S. de R.L. de C.V.
Canama Transportation
    100     Cayman Islands   Caymex Transportation, Inc.
Caymex Transportation, Inc.
    100     Delaware   The Kansas City Southern Railway Company
Ferrocarril y Terminal del Valle de México, S.A. de C.V. (1)
    25     Mexico   Kansas City Southern de México, S. de R.L. de C.V.
Gateway Eastern Railway Company
    100     Illinois   The Kansas City Southern Railway Company
Grupo KCSM, S.A. de C.V.
    100     Mexico   Owned 36.93% by NAFTA Rail, S.A. de C.V. , 24.62% by Kansas City Southern de México, S. de R.L. de C.V., 18.83% by KARA Sub, Inc., 18.83% by KCS Investment I, Ltd. and 0.79% by Caymex Transportation, Inc.
Joplin Union Depot (1)
    33     Missouri   The Kansas City Southern Railway Company
Kansas City Southern de México, S. de R.L. de C.V.
    100     Mexico   Grupo KCSM, S.A. de C.V.
Kansas City Southern International, Inc
    100     Delaware    
Kansas City Terminal Railway Company (1)
    17     Missouri   The Kansas City Southern Railway Company
KARA Sub, Inc.
    100     Delaware    
KCS Investment I, Ltd.
    100     Delaware    
KCSM Holdings LLC
    100     Delaware   Grupo KCSM, S.A. de C.V.
KCSM Internacional, S.A. de C.V.
    100     Mexico   Kansas City Southern de México, S. de R.L. de C.V.
KCSM Servicios, S.A. de C.V.
    100     Mexico   Kansas City Southern de México, S. de R.L. de C.V.
KCSRC y Compania, S. de N.C. de C.V.
    100     Mexico   The Kansas City Southern Railway Company
Meridian Speedway, LLC
    90     Delaware    
Mexrail, Inc.
    100     Delaware    
NAFTA Rail, S.A. de C.V.
    100     Mexico   Caymex Transportation, Inc.
North American Freight Transportation Alliance Railroad Corporation
    100     Delaware    
PABTEX GP, LLC
    100     Texas   Southern Industrial Services Inc.
PABTEX L.P.
    100     Delaware   SIS Bulk Holding, Inc.
Panama Canal Railway Company (1)
    50     Cayman Islands   Canama Transportation
Panarail Tourism Company (1)
    50     Cayman Islands   Panama Canal Railway Company
Port Arthur Bulk Marine Terminal Co.
    80     Partnership   The Kansas City Southern Railway Company
Rosenberg Regional LLC
    100     Delaware   The Texas Mexican Railway Company
SIS Bulk Holding, Inc.
    100     Delaware   Southern Industrial Services Inc.
Southern Capital Corporation, LLC (1)
    50     Colorado   The Kansas City Southern Railway Company
Southern Development Company
    100     Missouri   The Kansas City Southern Railway Company
Southern Industrial Services Inc.
    100     Delaware    
The Kansas City Northern Railway Company
    100     Delaware   The Kansas City Southern Railway Company
The Kansas City Southern Railway Company
    100     Missouri    
The Texas Mexican Railway Company
    100     Texas   Mexrail, Inc.
TransFin Insurance, Ltd.
    100     Vermont    
Trans-Serve, Inc. (dba Superior Tie and Timber)
    100     Delaware   Southern Industrial Services Inc.
Veals, Inc.
    100     Delaware    
 
(1)   Unconsolidated Subsidiary

EX-23.1 12 c12119exv23w1.htm CONSENT OF KPMG LLP exv23w1
 

Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Kansas City Southern:
We consent to the incorporation by reference in the registration statements (Nos. 33-50517, 33-50519, 33-64511, 333-91993, 333-73122, 333-58250, 333-51854, 333-91478, and 333-126207) on Form S-8 and (Nos. 33-69648, 333-61006, 333-107573, and 333-130112) on Form S-3 of Kansas City Southern of our reports dated February 26, 2007, with respect to the consolidated balance sheets of Kansas City Southern as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2006, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2006 and the effectiveness of internal control over financial reporting as of December 31, 2006, which reports appear in the December 31, 2006 annual report on Form 10-K of Kansas City Southern. The financial statements of Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. (Grupo TFM and currently known as Grupo KCSM), a 46.6% owned investee company, for the year ended December 31, 2004 were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Grupo TFM for the year ended December 31, 2004, is based solely on the report of other auditors.
Our report dated February 26, 2007 on the consolidated financial statements contains an explanatory paragraph stating that, as discussed in Note 2 to the consolidated financial statements, effective January 1, 2006, the Company adopted the fair value method of accounting for stock-based compensation as required by Statement of Financial Accounting Standards No. 123R (Revised), “Share Based Payment.”
KPMG LLP
Kansas City, Missouri
February 26, 2007

EX-23.2 13 c12119exv23w2.htm CONSENT OF PRICEWATERHOUSECOOPERS exv23w2
 

Exhibit 23.2
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 33-50517, 33-50519, 33-64511, 333-91993, 333-73122, 333-58250, 333-51854, 333-91478, 333-126207) and on Form S-3 (Nos. 33-69648, 333-61006, 333-107573, and 333-130122) of Kansas City Southern of our report dated April 16, 2005 relating to the financial statements of Grupo Transportación Ferroviaria Mexicana, S.A. de C.V. for the year ended December 31, 2004, which appears in this Form 10-K. We also consent to the references to us under the headings “Experts” in such Registration Statements.
 
PricewaterhouseCoopers, S.C.
Mexico City, Mexico
February 23, 2007

EX-23.3 14 c12119exv23w3.htm CONSENT OF KPMG CARDENAS DOSAL, S.C. exv23w3
 

Exhibit 23.3
Consent of Independent Registered Public Accounting Firm
We consent to the use of our report dated April 7, 2006, with respect to the consolidated balance sheet of Grupo KCSM, S.A. de C.V. and subsidiaries (formerly known as Grupo Transportación Ferroviaria Mexicana, S.A. de C.V. 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”), incorporated by reference in this Form 10-K of Kansas City Southern to be filed under the Securities Act of 1934, as amended.
The audit report dated on April 7, 2006, on the consolidated financial statements of Grupo KCSM, S.A. de C.V. (Grupo KCSM) contains an explanatory paragraph stating that due to the acquisition of control of Grupo KCSM by Kansas City Southern on April 1, 2005, the accompanying consolidated financial statements after March 31, 2005 (“Succesor”) 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 (“Predecessor”). Grupo KCSM’s consolidated financial statements are separated between “Successor” and “Predecessor” periods to reflect Grupo KCSM’s results and financial position before and after the change in control.
KPMG Cárdenas Dosal, S.C.
Mario Fernández Dávalos
Mexico City, February 23, 2007.

EX-31.1 15 c12119exv31w1.htm CERTIFICATION OF MICHAEL R. HAVERTY exv31w1
 

Exhibit 31.1
PRINCIPAL EXECUTIVE OFFICER’S CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael R. Haverty, certify that:
1. I have reviewed this annual report on Form 10-K of Kansas City Southern (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
  /s/ Michael R. Haverty    
  Michael R. Haverty   
Date: February 26, 2007  Chairman and Chief Executive Officer
 
 
 

EX-31.2 16 c12119exv31w2.htm CERTIFICATION OF PATRICK J. OTTENSMEYER exv31w2
 

Exhibit 31.2
PRINCIPAL FINANCIAL OFFICER’S CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Patrick J. Ottensmeyer, certify that:
1. I have reviewed this annual report on Form 10-K of Kansas City Southern (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
  /s/ Patrick J. Ottensmeyer    
  Patrick J. Ottensmeyer   
Date: February 26, 2007 Executive Vice President and Chief Financial Officer   

EX-32.1 17 c12119exv32w1.htm SECTION 1350 CERTIFICATION OF MICHAEL R. HAVERTY exv32w1
 

Exhibit 32.1
PRINCIPAL EXECUTIVE OFFICER’S CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     In connection with the Annual Report of Kansas City Southern (the “Company”) on Form 10-K for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael R. Haverty, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
 
  /s/ Michael R. Haverty
 
   
 
  Michael R. Haverty    
 
  Chairman and Chief Executive Officer    
February 26, 2007
A signed original of this written statement required by Section 906 has been provided to Kansas City Southern and will be retained by Kansas City Southern and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2 18 c12119exv32w2.htm SECTION 1350 CERTIFICATION OF PATRICK J. OTTENSMEYER exv32w2
 

Exhibit 32.2
PRINCIPAL FINANCIAL OFFICER’S CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     In connection with the Annual Report of Kansas City Southern (the “Company”) on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick J. Ottensmeyer, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
     
 
  /s/ Patrick J. Ottensmeyer
 
   
 
  Patrick J. Ottensmeyer
 
  Executive Vice President and Chief Financial Officer
February 26, 2007
   
A signed original of this written statement required by Section 906 has been provided to Kansas City Southern and will be retained by Kansas City Southern and furnished to the Securities and Exchange Commission or its staff upon request.

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