-----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, GdkWrTgh8Ej+7p9GpMioZGAxaP2hE6QwUBvRo5ExvQboSLoLnOLJKayj1Xp0B7QT zqOgmS596bzMS+hSfFZgsQ== 0000950131-02-002681.txt : 20020712 0000950131-02-002681.hdr.sgml : 20020712 20020712172347 ACCESSION NUMBER: 0000950131-02-002681 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 20020712 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: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-92360 FILM NUMBER: 02702295 BUSINESS ADDRESS: STREET 1: 427 WEST 12TH STREET CITY: KANSAS CITY STATE: MO ZIP: 64105 BUSINESS PHONE: 8169831303 MAIL ADDRESS: STREET 1: 427 WEST 12TH STREET CITY: KANSAS CITY STATE: MO ZIP: 64105 FORMER COMPANY: FORMER CONFORMED NAME: KANSAS CITY SOUTHERN INDUSTRIES INC DATE OF NAME CHANGE: 19920703 S-4 1 ds4.txt FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 12, 2002 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------- KANSAS CITY SOUTHERN* (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 4011 44-0663509 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER)
427 WEST 12TH STREET KANSAS CITY, MISSOURI 64105 (816) 983-1303 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ----------------- THE KANSAS CITY SOUTHERN RAILWAY COMPANY* (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MISSOURI 4011 44-6000758 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER)
427 WEST 12TH STREET KANSAS CITY, MISSOURI 64105 (816) 983-1303 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ----------------- WILLIAM J. PINAMONT, ESQ. KANSAS CITY SOUTHERN 427 WEST 12TH STREET KANSAS CITY, MISSOURI 64105 (816) 983-1303 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ----------------- COPIES TO: JOHN F. MARVIN, ESQ. SONNENSCHEIN NATH & ROSENTHAL 4520 MAIN STREET KANSAS CITY, MISSOURI 64111 (816) 460-2400 ----------------- *The companies listed on the next page are also included in this Form S-4 Registration Statement as additional Registrants. ----------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: The exchange offer will commence as soon as practicable after the effective date of this Registration Statement. ----------------- If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement of the earlier effective registration statement for the same offering. [_] _ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] _ CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- PROPOSED PROPOSED AMOUNT MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE FEE - ------------------------------------------------------------------------------------- 7 1/2% Senior Notes due 2009. $200,000,000 100% $200,000,000 $18,400 - ------------------------------------------------------------------------------------- Guarantees on Senior Notes(2) -- -- -- --(3) - ------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------
(1)Calculated in accordance with Rule 457 under the Securities Act of 1933, as amended. (2)The 7 1/2% Senior Notes are being issued by The Kansas City Southern Railway Company (the "Issuer") and are guaranteed by Kansas City Southern and its subsidiaries listed on the next page. (3)Pursuant to Rule 457(n), no separate fee is payable with respect to the guarantees being registered hereby. ----------------- THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
JURISDICTION PRIMARY OF IRS STANDARD INCORPORATION EMPLOYER INDUSTRIAL OR IDENTIFICATION CLASSIFICATION EXACT NAME OF ADDITIONAL REGISTRANTS* ORGANIZATION NUMBER NUMBER - ------------------------------------- ------------- -------------- -------------- Gateway Eastern Railway Company..... Illinois 37-1301047 4011 Mid-South Microwave, Inc............ Delaware 43-1422644 7359 PABTEX GP, LLC...................... Texas 43-1915234 4013 PABTEX, L.P......................... Delaware 43-0909361 4013 Rice-Carden Corporation............. Missouri 44-6011041 6512 SIS Bulk Holding, Inc............... Delaware 43-1915233 4013 Southern Development Company........ Missouri 44-6005843 6512 Southern Industrial Services, Inc... Delaware 36-3499535 6719 Trans-Serve, Inc.................... Delaware 43-0865086 2491
- -------- *The address for each of the additional registrants is c/o Kansas City Southern, 427 West 12th Street, Kansas City, Missouri 64105. ================================================================================ THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JULY 12, 2002 PROSPECTUS EXCHANGE OFFER $200,000,000 [LOGO] KANSAS CITY SOUTHERN Lines (small) THE KANSAS CITY SOUTHERN RAILWAY COMPANY 7 1/2% SENIOR NOTES DUE 2009 ----------------- WE ARE OFFERING TO EXCHANGE: up to $200,000,000 of our new 71/2% senior notes due 2009 for a like amount of our outstanding 71/2% senior notes due 2009 which we sold on June 12, 2002 in a private offering. ----------------- MATERIAL TERMS OF EXCHANGE OFFER: ... The terms of the new notes are substantially . The exchange offer expires at 5:00 p.m., New identical to the outstanding notes, except that the York City time, on , 2002, unless we transfer restrictions and registration rights extend the offer. relating to the outstanding notes will not apply to the new notes. . You may withdraw your tender of notes at any time before the expiration of the exchange offer. ... No public market currently exists for the We will exchange all of the outstanding notes outstanding notes. We do not intend to list the that are validly tendered and not validly new notes on any securities exchange and, withdrawn. therefore, no active public market is anticipated. . We will not receive any proceeds from the ... The exchange of outstanding notes for new notes exchange offer. in the exchange offer should not be a taxable event for United States federal income tax purposes.
----------------- Each broker-dealer that receives new notes for its own account pursuant to this registered exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such notes. 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 Securities 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 notes received in the exchange offer in exchange for outstanding notes where such outstanding notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuer has agreed that, for a period of 180 days after the expiration date of the exchange offer, it will make this prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." This prospectus and the accompanying letter of transmittal are first being mailed to holders of outstanding notes on or about , 2002. FOR A DISCUSSION OF CERTAIN FACTORS THAT YOU SHOULD CONSIDER BEFORE PARTICIPATING IN THIS EXCHANGE OFFER, SEE "RISK FACTORS" BEGINNING ON PAGE 13 OF THIS PROSPECTUS. ----------------- NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE NOTES TO BE DISTRIBUTED IN THE EXCHANGE OFFER, NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------------- THE DATE OF THIS PROSPECTUS IS , 2002 TABLE OF CONTENTS
PAGE ---- Forward-Looking Statements....................................... i Where You Can Find More Information.............................. ii Summary.......................................................... 1 Risk Factors..................................................... 13 Use of Proceeds.................................................. 25 Capitalization................................................... 26 Selected Consolidated Financial Data............................. 27 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 29 Railroad Industry................................................ 59 Business......................................................... 61 Management....................................................... 74
PAGE ---- Principal Stockholders and Stock Owned Beneficially by Directors and Certain Executive Officers................................. 77 Description of New Credit Agreement and Other Indebtedness....... 79 The Exchange Offer............................................... 81 Description of the Notes......................................... 91 Certain United States Federal Income Tax Considerations.......... 131 Plan of Distribution............................................. 132 Legal Matters.................................................... 132 Experts.......................................................... 132 Index to Financial Statements.................................... F-1
UNLESS WE HAVE INDICATED OTHERWISE, REFERENCES IN THIS PROSPECTUS TO "KCS" MEAN KANSAS CITY SOUTHERN (FORMERLY KANSAS CITY SOUTHERN INDUSTRIES, INC.) AND REFERENCES TO THE "COMPANY," "WE," "US," "OUR" AND SIMILAR TERMS REFER TO KCS AND OUR CONSOLIDATED SUBSIDIARIES, EXCLUDING THE DISCONTINUED OPERATIONS OF ITS FORMER FINANCIAL SERVICES BUSINESS STILWELL FINANCIAL, INC. ("STILWELL"). UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO "KCSR" MEAN THE KANSAS CITY SOUTHERN RAILWAY COMPANY THE PRINCIPAL SUBSIDIARY OF KCS, AND INCLUDES FOR ALL PERIODS PRESENTED THE GATEWAY WESTERN RAILWAY COMPANY, WHICH WAS MERGED INTO KCSR EFFECTIVE OCTOBER 1, 2001. REFERENCES TO "TFM" AND "TEX-MEX" MEAN TFM, S.A. DE C.V. AND THE TEXAS-MEXICAN RAILWAY COMPANY, RESPECTIVELY, AFFILIATES OF KCS. REFERENCES TO "GRUPO TFM" AND "MEXRAIL" MEAN GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S.A. DE C.V. AND MEXRAIL, INC., RESPECTIVELY, THE PARENT COMPANIES OF TFM AND TEX-MEX, RESPECTIVELY. REFERENCES TO "GRUPO TMM" MEAN GRUPO TMM, S.A. DE C.V., (THE SURVIVING ENTITY IN A MERGER OF TRANSPORTACION MARITIMA MEXICANA, S.A. DE C.V. AND THE FORMER GRUPO SERVIA, S.A. DE C.V.) A JOINT VENTURE PARTNER AND THE LARGEST SHAREHOLDER OF GRUPO TFM. ON MARCH 27, 2002, KCS, GRUPO TMM AND CERTAIN AFFILIATES OF GRUPO TMM SOLD TO TFM ALL OF THE COMMON STOCK OF MEXRAIL. REFERENCES TO "NAFTA" MEAN THE NORTH AMERICAN FREE TRADE AGREEMENT. You should rely only on the information contained, or incorporated by reference, in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to exchange the notes only where permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any exchange of the notes. FORWARD-LOOKING STATEMENTS This prospectus and the documents incorporated in this prospectus by reference may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, (the "Exchange Act"). You can typically identify forward-looking statements by the use of words, such as "may," "will," "could," "project," "believe," "anticipate," "expect," "estimate," "continue," "potential," "plan," "forecasts," and similar terms. These statements represent our intentions, plans, expectations and beliefs and are subject to risks, uncertainties and other factors. Many of these factors are outside our control and could cause actual results to differ materially from such forward-looking statements. These factors include, among others, those identified in this prospectus under "Risk Factors." There may be other factors that may cause our actual results to differ materially from the forward-looking statements. Other factors include, but are not limited to, changes in management strategies, objectives and business approaches, changes in lines of business, material litigation involving us and changes in the political, regulatory or economic environments in the United States, Mexico, Panama and other countries where we or our unconsolidated affiliates currently operate or may operate in the future. i WHERE YOU CAN FIND MORE INFORMATION KCS files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). These filings are available to the public over the Internet at the SEC's web site at http://www.sec.gov. You may also read and copy any document we file at the SEC's public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Copies of such information can be obtained by mail from the public reference room of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The reports and other information filed by Kansas City Southern can also be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. The SEC allows us to incorporate by reference the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus, and information that we file later with the SEC will automatically update and supersede the information in this prospectus. Accordingly, we incorporate by reference the following documents filed by KCS: 1. Annual Report on Form 10-K for the fiscal year ended December 31, 2001, as amended by Form 10-K/A filed with the SEC on April 1, 2002; 2. Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2002; 3. Definitive Schedule 14A filed with the SEC on April 3, 2002; and 4. Current Reports on Form 8-K filed with the SEC on January 22, 2002, June 17, 2002 and July 11, 2002. In addition, all reports and other documents we subsequently file pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act on or after the date of this prospectus (other than reports, documents or information furnished pursuant to Regulation FD) shall be deemed to be incorporated by reference in this prospectus and to be part of this prospectus from the date of the filing of such reports and documents. Any statement contained in this prospectus or in a document incorporated or deemed to be incorporated in this prospectus by reference shall be deemed to be modified or superseded for the purpose of this prospectus to the extent that a statement contained in any subsequently filed documents which is or is deemed to be incorporated by reference in this prospectus modified or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus. These filings have not been included in or delivered with this prospectus. You may request a copy of any or all of the documents summarized or incorporated by reference in this prospectus at no cost, by writing or telephoning our Corporate Secretary at: Kansas City Southern 427 West 12/th/ Street Kansas City, Missouri 64105 Telephone: (816) 983-1538. TO ENSURE TIMELY DELIVERY, YOU SHOULD REQUEST THESE FILINGS NO LATER THAN , 2002, THE DATE FIVE BUSINESS DAYS BEFORE THE EXPIRATION DATE OF THE EXCHANGE OFFER. We have filed with the SEC under the Securities Act and the rules and regulations thereunder a registration statement on Form S-4 with respect to the new notes issuable pursuant to the exchange offer. This prospectus does not contain all of the information contained in the registration statement, certain portions of which have been omitted in accordance with the rules and regulations of the SEC. Statements contained in this prospectus concerning the provisions of documents are not necessarily summaries of the material provisions of those documents, and each statement is qualified in its entirety by reference to the copy of the applicable document filed with the SEC. ii SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ TOGETHER WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS INCLUDED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. OUR COMPANY We, along with our subsidiaries and affiliates, own and operate a uniquely positioned North American rail network strategically focused on the growing north/south freight corridor that connects key commercial and industrial markets in the central United States with major industrial cities in Mexico. Our principal subsidiary, KCSR, founded in 1887, is one of eight Class I railroads in the United States (railroads with annual revenues of at least $250 million, as indexed for inflation). Our rail network, including TFM, is comprised of approximately 6,000 miles of main and branch lines. We have further expanded our rail network through marketing agreements and strategic alliances. Our expanded network includes: . KCSR, which operates approximately 3,100 miles of main and branch lines running on a north/south axis from Kansas City, Missouri to the Gulf of Mexico and on an east/west axis from Meridian, Mississippi to Dallas, Texas (our "Meridian Speedway") and from Kansas City to East St. Louis, Illinois; . our affiliates, TFM, which operates approximately 2,650 miles of main and branch lines running from the U.S./Mexico border at Laredo, Texas to Mexico City and serves most of Mexico's principal industrial cities and three of its four major shipping ports, and Tex-Mex, which operates approximately 160 miles of main and branch lines between Laredo and the port city of Corpus Christi, Texas; . a marketing agreement with Norfolk Southern Railway Co. ("Norfolk Southern") that allows us to gain incremental traffic volume between the southeast and the southwest United States and a marketing agreement with I&M Rail Link, LLC ("I&M Rail Link") that provides us with access to Minneapolis and Chicago and to originations of corn and other grain in Iowa, Minnesota and Illinois; . a strategic alliance with Canadian National Railway Company ("CN") and Illinois Central Corporation ("IC," and together with CN, "CN/IC"), through which we have created a contiguous rail network of approximately 25,000 miles of main and branch lines connecting Canada, the United States and Mexico; . a joint marketing alliance, entered into in April 2002 with The Burlington Northern and Santa Fe Railway Company ("BNSF") aimed at promoting cooperation, revenue growth and extending market reach, principally to enhance grain, chemical and forest products traffic for both railroads in the United States and Canada. The marketing alliance is also expected to improve operating efficiencies for both carriers in key market areas, as well as provide customers with expanded service options; and . our affiliate, the Panama Canal Railway Company ("PCRC"), which holds the concession to operate the Panama Canal Railway, a 47-mile railroad located adjacent to the Panama Canal. This railroad was recently reconstructed for the purpose of performing freight and passenger operations. Its wholly-owned subsidiary, Panarail Tourism Company ("PTC") operates a commuter and tourist railway service over the lines of the Panama Canal Railway. COMPETITIVE STRENGTHS STRATEGICALLY POSITIONED RAIL NETWORK. Our rail network interconnects with all other Class I railroads and provides customers with effective alternative routes that bypass congested gateways at Chicago, St. Louis, Memphis and New Orleans. 1 STRATEGIC MEXICAN INVESTMENTS. TFM serves three of Mexico's four major shipping ports as well as the Mexican states that account for approximately 70% of Mexico's population and industrial base. Mexrail, through Tex-Mex, provides a vital link between the United States and Mexico at Laredo--the largest rail freight exchange point between the United States and Mexico. STRONG, DIVERSIFIED TRAFFIC AND CUSTOMER MIX. We transport goods in the coal, chemicals and petroleum, paper and forest products, agricultural and mineral, and intermodal and automotive markets. Our diverse customer base includes Southwestern Electric Power Company, Exxon Mobil Chemical, International Paper, Cargill, Weyerhaeuser Company, Packaging Corporation of America, Huntsman, Georgia Pacific, Georgia Gulf Corporation, Kansas City Power & Light Company, Mazda and United Parcel Service. RECENT INVESTMENT IN INFRASTRUCTURE AND TECHNOLOGY. From 1996 through 2001, we invested approximately $276.0 million in our railway track and infrastructure, including new sidings and centralized traffic control which enable us to better serve our customers and mitigate congestion. In addition, we have invested in new technology, such as 50 fuel efficient locomotives with increased hauling power, new management control computer systems and locomotive remote control devices known as "Beltpacks." IMPROVED FINANCIAL POSITION. Since early 2001, we have improved the financial position and cost structure of our Company through reductions of our indebtedness and our variable costs. In response to the slowdown in the U.S. economy, we implemented a cost reduction plan, reducing our workforce by approximately 5% and lowering other variable operating expenses. Since the beginning of 2001, we have also reduced our indebtedness by approximately $80 million. These initiatives are intended to enhance our competitive ability once economic growth conditions in the U.S. improve. EXPERIENCED MANAGEMENT TEAM. Michael Haverty, our Chairman of the Board, President and CEO, has almost 40 years of railroad industry experience and joined us in 1995 with the vision of creating the "NAFTA Railway." In order to achieve this objective, we have assembled a highly qualified management team by selectively hiring experienced managers from other railroads, as well as from trucking and shipping companies. GROWTH STRATEGY We intend to pursue the following initiatives to expand traffic over our network and increase our earnings: CONTINUE TO CAPITALIZE ON NAFTA TRADE. According to the International Monetary Fund, during the period 1996 to 2001, total trade between the United States and Mexico and between the United States and Canada grew at an average annual rate of approximately 12.4% and 5.6%, respectively. Based on our investment in Grupo TFM and our strategic alliance with CN/IC, we believe we are positioned to capture rail traffic bound for or originating from Canada or Mexico. PURSUE DOMESTIC GROWTH OPPORTUNITIES. We believe our Meridian Speedway and Kansas City to East St. Louis east/west corridors have significant growth potential because of their strategic locations and because they are generally less congested than alternate routes. In addition, our planned further development of intermodal and transload facilities throughout our rail network should allow us to provide faster and more expanded service to our customers. ESTABLISH NEW AND EXPAND EXISTING STRATEGIC ALLIANCES AND MARKETING AGREEMENTS. We plan to pursue growth opportunities by executing alliance agreements similar to our alliances with CN/IC and BNSF and marketing agreements similar to those with Norfolk Southern and I&M Rail Link to increase the scope of products we transport and the regional markets we cover. PROVIDE SUPERIOR CUSTOMER SERVICE. In 1999, we completed the centralization of the customer service operations for our U.S. railroads, which we believe resulted in higher levels of customer satisfaction. In 2002, we 2 expect to fully implement our new management control system ("MCS") which provides real time information across our rail network and allows us to track individual shipments. We believe that the system will allow us to improve the quality of our customer service and increase asset utilization and productivity. RECENT EVENTS SOUTHERN CAPITAL. On June 25, 2002, Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned unconsolidated affiliate that leases locomotive and rail equipment to KCSR, refinanced the outstanding balance of its one-year bridge loan through the issuance of approximately $167.6 milion of pass through trust certificates and the sale of 50 locomotives. The pass through trust certificates are secured by the sold locomotives, all of the remaining locomotives and rolling stock owned by Southern Capital and rental payments payable by KCSR under the sublease of the sold locomotives and its leases of the equipment owned by Southern Capital. Payments of interest and principal of the pass through trust certificates, which are due semi-annually on June 30 and December 30 commencing on December 30, 2002 and ending on June 30, 2022, are insured under a financial guarantee insurance polcy by MBIA Insurance Corporation. KCSR leases or subleases all of the equipment securing the pass through trust certificates. PRIVATE OFFERING. We completed a private offering of $200 million of 7 1/2% senior notes due 2009 of KCSR ("outstanding notes") in June 2002 (the "Note Offering"). The initial purchasers of the outstanding notes (the "Initial Purchasers") subsequently resold the outstanding notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to qualified buyers outside the United States in reliance upon Regulation S under the Securities Act. NEW CREDIT AGREEMENT. In conjunction with the Note Offering, we amended and restated KCSR's senior secured credit facilities (the "KCS Credit Facilities") to provide us greater financial flexibility. The amended and restated credit facilities (the "New Credit Agreement") consist of a $100 million revolving credit facility and a $150 million term loan. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Recent Developments--Debt Refinancing and Re-capitilization of KCS's Debt Structure--New Credit Agreement." PURCHASE OF GOVERNMENT INTEREST IN GRUPO TFM. KCS and Grupo TMM have exercised their call option and intend to cause TFM to purchase, before July 31, 2002, the 24.6% of Grupo TFM currently held by the Government of Mexico, utilizing a combination of proceeds from an offering by TFM of debt securities, a credit from the government for the reversion of certain rail facilities and other resources. If the purchase had occurred on March 31, 2002, the purchase price would have been approximately $253 million. In the event TFM is unable to complete such purchase on a timely basis, KCS intends to exercise its right to do so, but there can be no assurance that will occur. See "Management's Discussion and Analysis of Financial Condition and Results of Operation--Recent Developments--Purchase of Additional Interest in Grupo TFM" and "Business--Rail Network--Significant Investments--Grupo TFM." MARKETING ALLIANCE WITH BNSF. In April 2002, KCSR and BNSF formed a comprehensive joint marketing alliance. BNSF and KCSR have agreed to coordinate marketing and operations initiatives in a number of target markets. The two carriers are developing plans to enhance competitive options for chemical shippers in the West Lake and West Lake Charles, Louisiana region. The coordination of operations is to provide improved and expanded service options for grain shippers and receivers. The marketing alliance is to allow BNSF and KCSR to be more responsive to shippers' requests for rates and service throughout the two rail networks. Coal and unit train operations are excluded from the marketing alliance, as well as any points where BNSF and KCSR are the only direct rail competitors. Movements to and from Mexico by either party are also excluded. We believe this new marketing alliance will afford important opportunities to grow KCSR's revenue base, particularly in the chemical, grain and forest product markets, providing both participants with expanded access to important markets and providing shippers with enhanced options and competitive alternatives. 3 SALE OF MEXRAIL. On March 27, 2002, we sold our 49% interest in Mexrail to TFM for approximately $31.4 million, which we used to reduce debt subsequent to March 31, 2002. Mexrail owns the northern half of the continental railway bridge at Laredo and all of the common stock of Tex-Mex. This sale comprised part of a settlement of a dispute we had with Grupo TMM regarding certain actions they had taken with regard to our joint interest in TFM. Pursuant to an agreement with Grupo TMM, we manage the operations functions of Tex-Mex and TFM manages Tex-Mex sales, marketing and finance functions. We retain an indirect interest in Mexrail through our 36.9% interest in Grupo TFM, the parent of TFM. COMPANY INFORMATION KCS is incorporated in Delaware. Our principal executive offices are located at 427 West 12/th/ Street, Kansas City, Missouri 64105. Our telephone number is 816-983-1303. ISSUER INFORMATION KCSR is incorporated in Missouri. Its principal executive offices (which include our principal executive offices) are located at 427 West 12/th/ Street, Kansas City, Missouri 64105. Its telephone number is 816-983-1303. THE EXCHANGE OFFER The Initial Offering of Outstanding Notes....... On June 12, 2002 , we completed the private offering of $200 million of 7 1/2% senior notes due 2009. The Initial Purchasers of the outstanding notes subsequently resold the outstanding notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to qualified buyers outside the United States in reliance upon Regulation S under the Securities Act. Registration Rights Agreement............... Simultaneously with the initial sale of the outstanding notes, we entered into a registration rights agreement. In the registration rights agreement, we agreed, among other things, to use our reasonable best efforts to file a registration statement with the SEC and to complete an exchange offer. Under certain circumstances outlined in the registration rights agreement, we may be required to file a "shelf" registration statement for a continuous offering pursuant to Rule 415 under the Securities Act with respect to the outstanding notes. In the event the exchange offer is not consummated and the shelf registration statement is not declared effective on or before January 8, 2003, the interest rate on the notes will be increased. See "Description of the Notes--Registration Rights Agreement." This exchange offer is intended to satisfy certain of our obligations under the registration rights agreement. After the exchange offer is complete, you may no longer be entitled to any exchange or registration rights with respect to your outstanding notes. The Exchange Offer........ We are offering to exchange up to $200 million aggregate principal amount of 7 1/2% senior notes which have been registered under the Securities Act (the "new notes") for up to $200 million aggregate 4 principal amount of outstanding notes, which were issued on June 12, 2002 in the Note Offering. Outstanding notes may be exchanged only in integral multiples of $1,000. In order to be exchanged, an outstanding note must be properly tendered and accepted. All outstanding notes that are validly tendered and not withdrawn prior to expiration of the exchange offer will be exchanged. We will issue new notes promptly after the expiration of the exchange offer. Resales of the New Notes.. We believe the new notes issued in the exchange offer may be offered for resale, resold and otherwise transferred by you without compliance with the registration and prospectus delivery provisions of the Securities Act provided that: . You acquire the new notes in the ordinary course of your business; . You are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate, in the distribution of the new notes issued to you in the exchange offer; and . You are not an affiliate of ours within the meaning of Rule 405 under the Securities Act. If any of these conditions are not satisfied and you transfer any new notes issued to you in the exchange offer without delivering a prospectus meeting the requirements of the Securities Act or without an exemption from registration of your new notes from these requirements, you may incur liability under the Securities Act. We will not assume, nor will we indemnify you against, any such liability. Each broker-dealer that is issued new notes in the exchange offer for its own account in exchange for outstanding notes that were acquired by that broker-dealer as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of the new notes. A broker-dealer may use this prospectus for an offer to resell, resale or other retransfer of the new notes issued to it in the exchange offer. We have agreed that, for a period of 180 days after the date this exchange offer is completed, we will make this prospectus available to any broker-dealer for use in connection with any such resale. Expiration Date........... The exchange offer will expire at 5:00 p.m., New York City time, on , 2002 or such later date and time to which we extend it. Conditions to the Exchange Offer................... The exchange offer is subject to certain customary conditions, including the condition that the exchange offer not violate applicable law or any applicable interpretation of the staff of the SEC. The exchange offer is not conditioned upon any minimum or maximum aggregate principal amount of outstanding notes being tendered. 5 Procedures for Tendering Outstanding Notes....... If you wish to accept the exchange offer, you must complete, sign and date the accompanying letter of transmittal, or a copy of the letter of transmittal, according to the instructions contained in this prospectus and the letter of transmittal. You must also mail or otherwise deliver the letter of transmittal, or the copy, together with your outstanding notes and any other required documents to the exchange agent at the address set forth on the cover of the letter of transmittal. If you hold outstanding notes through The Depository Trust Company, or DTC, and wish to participate in the exchange offer, you must comply with the Automated Tender Offer Program procedures of DTC, by which you will agree to be bound by the letter of transmittal. By signing or agreeing to be bound by the letter of transmittal, you will represent to us that, among other things: . any new notes that you receive will be acquired in the ordinary course of your business; . you have no arrangement or understanding with any person or entity to participate in the distribution of the new notes; . if you are a broker-dealer that will receive new notes for your own account in exchange for outstanding notes that were acquired as a result of market-making activities, that you will deliver a prospectus, as required by law, in connection with any resale of such new notes; and . you are not our "affiliate" as defined in Rule 405 under the Securities Act, or, if you are an affiliate, you will comply with any applicable registration and prospectus delivery requirements of the Securities Act. Guaranteed Delivery Procedures.............. If you wish to tender your outstanding notes and your outstanding notes are not immediately available or you cannot deliver your outstanding notes, the letter of transmittal or any other documents required by the letter of transmittal or comply with the applicable procedures under DTC's Automated Tender Offer Program prior to the expiration date, you may tender your outstanding notes according to the guaranteed delivery procedures set forth in this prospectus under "The Exchange Offer--Guaranteed Delivery Procedures." Withdrawal Rights......... You may withdraw the tender of your outstanding notes at any time prior to 5:00 p.m., New York City time on the expiration date of the exchange offer. Any outstanding notes not accepted for exchange for any reason will be returned without expense to the tendering holder promptly after the expiration or termination of the exchange offer. Effect on Holders of the Outstanding Notes....... Upon acceptance for exchange of all validly tendered outstanding notes pursuant to the terms of the exchange offer, we will have fulfilled a covenant contained in the registration rights agreement and, 6 accordingly, we will not be obligated to pay liquidated damages as described in the registration rights agreement. If you are a holder of outstanding notes and do not tender your outstanding notes in the exchange offer, you will continue to hold such outstanding notes and you will be entitled to all the rights and limitations applicable to the outstanding notes in the Indenture (as defined herein), except for any rights under the registration rights agreement that by their terms terminate upon the consummation of the exchange offer. Consequences of Failure to Exchange................ All untendered outstanding notes will continue to be subject to the restrictions on transfer provided for in the outstanding notes and in the indenture governing the notes (the "Indenture"). In general, the outstanding notes may not be offered or sold unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with this exchange offer, we do not currently anticipate that we will register the outstanding notes under the Securities Act. Certain Federal Income Tax Considerations.......... The exchange of outstanding notes for new notes in the exchange offer should not be a taxable event for United States federal income tax purposes. Use of Proceeds........... We will not receive any proceeds from the issuance of new notes pursuant to the exchange offer. We will pay all expenses incident to the exchange offer. Exchange Agent............ U.S. Bank National Association is the exchange agent for this exchange offer. THE NEW NOTES THE FOLLOWING SUMMARY IS PROVIDED SOLELY FOR YOUR CONVENIENCE. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE. YOU SHOULD READ THE FULL TEXT AND MORE SPECIFIC DETAILS CONTAINED ELSEWHERE IN THIS PROSPECTUS. FOR A MORE DETAILED DESCRIPTION OF THE NEW NOTES, SEE "DESCRIPTION OF THE NOTES" IN THIS PROSPECTUS. The form and terms of the new notes are the same as the form and terms of the outstanding notes, except that the issuance of the new notes will be registered under the Securities Act. As a result, the new notes will not bear legends restricting their transfer and will not contain the registration rights and liquidated damage provisions contained in the outstanding notes. The new notes represent the same debt as the outstanding notes. Both the outstanding notes and the new notes are governed by the same Indenture. We use the term "notes" in this prospectus to refer to both the outstanding notes and the new notes. Issuer.................... The Kansas City Southern Railway Company. New Notes................. $200,000,000 aggregate principal amount of 7 1/2% Senior Notes due 2009. 7 Maturity.................. June 15, 2009. Interest.................. 7.5% per annum, payable in cash on June 15 and December 15 of each year, beginning on December 15, 2002. Optional Redemption....... At any time prior to June 15, 2005, the Issuer may redeem up to 35% of the original aggregate principal amount of the notes with the net cash proceeds of certain equity offerings at a redemption price equal to 107.5% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages thereon, if any, so long as (a) at least 65% of the original aggregate principal amount of the notes remains outstanding immediately after each such redemption and (b) any such redemption occurs within 60 days after such equity offering. The notes are not otherwise redeemable prior to maturity. See "Description of the Notes--Optional Redemption." Change of Control......... Upon the occurrence of a change of control (as defined under "Description of the Notes"), you will have the right to require the Issuer to purchase all or a portion of your notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of purchase. See "Description of the Notes--Change of Control." Guarantees................ The notes are fully and unconditionally guaranteed (each such guarantee, a "Note Guarantee") on an unsecured senior basis by KCS and each of its subsidiaries, with certain exceptions, that guarantee the New Credit Agreement or any refinancing thereof (collectively, the "Note Guarantors"). The notes are guaranteed by all of KCS's significant domestic subsidiaries other than Caymex Transportation, Inc., SCC Holdings LLC, Wyandotte Garage Corporation, TransFin Insurance Ltd., The Kansas City Northern Railway Company and Veals, Inc. (the "Non-Guarantor Subsidiaries"). On an as adjusted basis, after giving effect to the $30 million reduction of our outstanding Tranche A term loans from the proceeds of the sale of our interest in Mexrail subsequent to March 31, 2002 and application of the net proceeds of the Note Offering, as of and for the three-month period ended March 31, 2002, the Non-Guarantor Subsidiaries would have represented less than 1% of each of KCS's consolidated EBITDA and consolidated revenues and approximately 19% of KCS's consolidated assets. See "Description of the Notes--Note Guarantees." Ranking................... The notes will be unsecured and: . will rank equally in right of payment with all existing and future senior debt of the Issuer; . will be senior in right of payment to all of the Issuer's future subordinated obligations; . will be effectively subordinated to all secured debt of KCS and its subsidiaries (including the Issuer) to the extent of the value of the assets securing such debt; and 8 . will be effectively subordinated to all liabilities (including trade payables) and preferred stock of each Non-Guarantor Subsidiary. Similarly, the Note Guarantees of each Note Guarantor will be unsecured and: . will rank equally in right of payment with all existing and future senior debt of such Note Guarantor; . will be senior in right of payment to all future subordinated obligations of such Note Guarantor; and . will be effectively subordinated to all secured debt of KCS and its subsidiaries to the extent of the value of the assets securing such debt. See "Description of the Notes--Ranking." Assuming the $30 million reduction of our outstanding Tranche A term loans from the proceeds of the sale of our interest in Mexrail and receipt of the net proceeds of the Note Offering had taken place on March 31, 2002, as of such date: . the Issuer would have had $590.7 million of senior debt (excluding unused commitments under the KCS Credit Facilities), of which $193.9 million would have been secured debt; . the Note Guarantors would have had $5.4 million of senior debt (excluding their guarantees of the Issuer's debt under the KCS Credit Facilities) of which $3.8 million would have been secured debt; . the Non-Guarantor Subsidiaries would have had $5.0 million of senior debt (and trade payables and other liabilities of $29.3 million); and . no debt of the Issuer or the Note Guarantors would have been subordinate or junior in right of payment to the notes or the Note Guarantees. The Indenture permits us to incur a significant amount of additional senior debt. Certain Covenants......... The Indenture will, among other things, restrict the Issuer's ability and the ability of the Restricted Subsidiaries (as defined in "Description of the Notes--Certain Definitions") to: . incur debt; . incur liens; . make distributions, redeem equity interests or redeem subordinated debt; . make investments; . sell assets; 9 . enter into agreements that restrict dividends from subsidiaries; . merge or consolidate; . enter into transactions with affiliates; and . sell or issue capital stock of subsidiaries. These covenants will be subject to a number of important exceptions and qualifications, including, the inapplicability of certain of the covenants during any period of time that the notes have an investment grade rating from two rating agencies and no default or event of default has occurred and is continuing under the Indenture. See "Description of the Notes--Certain Covenants" and "Description of the Notes--Merger and Consolidation." Absence of a Public Market for the Notes........... The outstanding notes have not been registered under the Securities Act, are subject to restrictions on transferability and resale and have no established trading market. The new notes generally will be freely transferable, but will also be new securities for which there will not initially be a market. Accordingly, there can be no assurance as to the development or liquidity of any market for the outstanding notes, or, the new notes. The Initial Purchasers have informed the Issuer that they currently intend to make a market in the new notes. However, the Initial Purchasers are not obligated to do so, and any market making with respect to the outstanding notes, or, the new notes may be discontinued at any time without notice. The Issuer does not intend to apply for a listing of the notes on any securities exchange or on any automated dealer quotation system. 10 SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA The following table sets forth summary consolidated financial data for KCS and other data for certain subsidiaries and affiliates. The statement of income data for the years ended December 31, 1999, 2000 and 2001 have been derived from KCS's audited financial statements which appear elsewhere in this prospectus. The statement of income data for the three months ended March 31, 2001 and 2002 and the balance sheet data as of March 31, 2002 have been derived from KCS's unaudited financial statements which appear elsewhere in this prospectus. The unaudited balance sheet data as of March 31, 2002 and the unaudited statement of income data for the three-month periods ended March 31, 2001 and 2002 include all adjustments, consisting of normal, recurring adjustments, which management considers necessary for a fair presentation of the financial position and results of operations of KCS as of such date and for such periods. Operating results for the three months ended March 31, 2002 are not necessarily indicative of results that may be expected for the entire year or for any future period. All of the summary data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of KCS and other financial information included elsewhere, or incorporated by reference in this prospectus.
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------- ------------------- 1999 2000 2001 2001 2002 ------ ------- ------ ------ ------- (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Revenues........................................................ $601.4 $ 572.2 $577.3 $144.0 $142.5 Costs and expenses.............................................. 480.4 458.3 463.9 123.5 114.2 Depreciation and amortization................................... 56.9 56.1 58.0 14.4 14.9 ------ ------- ------ ------ ------- Operating income................................................ 64.1 57.8 55.4 6.1 13.4 Equity in net earnings (losses) of unconsolidated affiliates: Grupo TFM.................................................... 1.5 21.6 28.5 11.1 4.8 Other........................................................ 3.7 2.2 (1.4) 0.1 0.1 Gain on sale of Mexrail......................................... -- -- -- -- 4.4 Interest expense................................................ (57.4) (65.8) (52.8) (15.2) (11.3) Other income.................................................... 5.3 6.0 4.2 1.0 4.4 ------ ------- ------ ------ ------- Income from continuing operations before income taxes........... 17.2 21.8 33.9 3.1 15.8 Income tax expense (benefit).................................... 7.0 (3.6) 2.8 (3.2) 4.1 ------ ------- ------ ------ ------- Income from continuing operations............................... $ 10.2 $ 25.4/(1)/ $ 31.1/(2)/ $ 6.3/(2)/ $ 11.7 ====== ======= ====== ====== ======= Basic earnings per share from continuing operations/(3)/............ $ 0.18 $ 0.44 $ 0.53 $ 0.11 $ 0.20 ====== ======= ====== ====== ======= Diluted earnings per share from continuing operations/(3)/.......... $ 0.17 $ 0.43 $ 0.51 $ 0.10 $ 0.19 ====== ======= ====== ====== ======= OTHER FINANCIAL DATA: EBITDA/(4)(6)/.................................................. $139.0/(5)/ $ 124.9 $120.2 $109.3 $133.2 Capital expenditures............................................ 106.2 104.5 66.0 13.9 17.4 EBITDA to interest expense/(6)/................................. 2.42x 1.90x 2.28x 1.72x 2.72x Ratio of total debt to EBITDA/(6)/.............................. 5.47 5.40 5.48 6.24 4.71 Ratio of earnings to fixed charges/(7)/......................... 1.2/(8)/ 1.0 1.1 -- /(9)/ 1.6 Cash Flows Provided by (used for): Operating activities............................................ $178.0 $ 77.2 $ 76.1 $ 13.8 $ 37.2 Investing activities............................................ (97.2) (101.8) (55.7) (13.6) 22.8 Financing activities............................................ (74.5) 34.2 (17.2) 6.9 (27.9)
11
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------- -------------- 1999 2000 2001 2001 2002 ------ ------ ------ ----- ----- OTHER DATA: KCSR: Millions of net ton miles/(10)/... 22,096 20,494 20,085 4,868 5,428 Approximate route miles........... 3,158 3,103 3,103 3,103 3,103 Approximate total track miles..... 4,499 4,444 4,444 4,444 4,444 Operating ratio/(11)/............. 85.2%/(12)/ 88.3% 88.2% 94.0% 87.2% TFM: Approximate route miles........... 2,661 2,661 2,642 2,642 2,642 Approximate total track miles..... 3,500 3,500 3,500 3,500 3,500 Operating ratio/(11)/............. 76.6% 74.0% 76.7% 79.8% 77.3%
AS OF MARCH 31, 2002 -------------------------- ACTUAL AS ADJUSTED /(13)/ -------- ----------------- (IN MILLIONS, UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents.... $ 56.8 $ 25.8 Working capital.............. 6.8 16.6 Total assets................. 1,999.9 1,970.6 Total debt................... 627.9 601.1 Total stockholders' equity... 698.7 697.1
- -------- (1) Income from continuing operations for 2000 excludes extraordinary items for debt retirement costs of $8.7 million (net of income taxes of $4.0 million). This amount includes $1.7 million (net of income taxes of $0.1 million) related to Grupo TFM. (2) Income from continuing operations for three months ended March 31, 2001 and the year ended December 31, 2001 excludes a charge for the cumulative effect of an accounting change of $0.4 million (net of income taxes of $0.2 million). This charge reflects KCS's adoption of Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") effective January 1, 2001. (3) On July 12, 2000, KCS completed a reverse stock split whereby every two shares of KCS common stock were converted into one share of KCS common stock. All periods presented reflect this one-for-two reverse stock split. (4) EBITDA as presented herein is defined as income (loss) from continuing operations before income taxes plus equity in net losses and minus equity in net earnings of unconsolidated affiliates, plus cash dividends from unconsolidated affiliates, interest expense, depreciation and amortization. EBITDA is not a measure of performance under generally accepted accounting principles. EBITDA should not be considered as a substitute for cash flow from operations, net income or other measures of performance as defined by generally accepted accounting principles or as a measure of profitability or liquidity. EBITDA does not give effect to the cash we must use to service our debt or pay our income taxes and thus does not reflect the funds actually available for capital expenditures, acquisitions, dividends or other discretionary uses. However, we have included EBITDA because it may be used by certain investors to analyze and compare companies on the basis of operating performance, leverage and liquidity and to determine a company's ability to service debt. Our definition of EBITDA may not be comparable to that of other companies. (5) 1999 EBITDA excludes $12.7 million of unusual costs incurred in the fourth quarter. These unusual costs relate to employee separations, labor and personal injury related costs, write-off of costs for a previously planned line build-out which we do not plan to pursue and costs associated with the closure of an intermodal facility. (6) EBITDA shown for the periods March 31, 2001 and 2002 represents EBITDA for the last twelve months in the periods ended on those dates. Similarly, the computation of EBITDA to interest expense and ratio of total debt to EBITDA reflects EBITDA and interest expense for the last twelve months ended March 31, 2001 and 2002, respectively. (7) The ratio of earnings to fixed charges is computed by dividing earnings by fixed charges. For this purpose "earnings" represent the sum of (i) pretax income from continuing operations adjusted for income (loss) from unconsolidated affiliates, (ii) fixed charges, (iii) distributed income from unconsolidated affiliates and (iv) amortization of capitalized interest, less capitalized interest. "Fixed charges" represent the sum of (i) interest expensed, (ii) capitalized interest, (iii) amortization of deferred debt issuance costs and (iv) one-third of our annual rental expense, which management believes is representative of the interest component of rental expense. (8) Includes unusual costs and expenses of $12.7 million as described in note (5) above. Excluding these items, the ratio of earnings to fixed charges would have been 1.3x. (9) The ratio of earnings to fixed charges would have been 1:1 if a deficiency of $6.2 million was eliminated. (10) Amounts beginning January, 2001 include the former Gateway Western which was merged with KCSR effective October 1, 2001. (11) Operating ratio is the ratio of operating expenses to revenues, which for KCSR is calculated under regulatory accounting rules of the Surface Transportation Board ("STB"). TFM's operating ratio is presented under International Accounting Standards. (12) Excluding 1999 unusual costs described in note (5) above. (13) The as adjusted balance sheet data gives effect to (i) the $30.0 million reduction of our outstanding Tranche A term loans from the proceeds of the sale of our interest in Mexrail; (ii) the sale of the outstanding notes in the Note Offering, and the application of the net proceeds therefrom of approximately $195.8 million, together with cash of approximately $1.0 million, to reduce our outstanding indebtedness under the KCS Credit Facilities and other indebtedness; (iii) the capitalization of $4.2 million of costs related to the Note Offering; and (iv) the write-off of $2.5 million of unamortized costs related to the KCS Credit Facilities, as if those transactions had occurred on March 31, 2002. 12 RISK FACTORS BEFORE DECIDING TO PARTICIPATE IN THE EXCHANGE OFFER, YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION CONTAINED ELSEWHERE, OR INCORPORATED BY REFERENCE, IN THIS PROSPECTUS. RISKS RELATED TO THE NOTES OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR ABILITY TO FULFILL OUR OBLIGATIONS UNDER THE NOTES AND OPERATE OUR BUSINESS. We are now and will continue to be highly leveraged after completion of this exchange offer and have and will continue to have significant debt service obligations. On an as adjusted basis after giving effect to the $30 million reduction of our outstanding Tranche A term loans from the proceeds of the sale of our interest in Mexrail and receipt of the net proceeds of the Note Offering, as if such transactions had occured on March 31, 2002, we would have had total debt of approximately $601.1 million (excluding unused commitments) and total stockholders' equity of approximately $697.1 million as of that date, giving us a total debt to equity ratio of 0.86 to 1.00. Our interest expense for the three-month period ended March 31, 2002 was $11.3 million. On an as adjusted basis, for the 12-month period ended March 31, 2002, our ratio of earnings to fixed charges was 1.30 to 1.00. In addition, we may incur additional debt from time to time to finance acquisitions or investments or capital expenditures or for other purposes, subject to the restrictions contained in our various debt instruments, including the New Credit Agreement, the indenture governing our 9.5% senior notes due 2008 and in the Indenture. As of March 31, 2002, giving effect to the New Credit Agreement we had $100 million of revolving loans available to be borrowed under that facility. Our high level of debt could have important consequences for you, including the following: . we may have difficulty borrowing money in the future for working capital, capital expenditures or other purposes; . we will need to use a large portion of the money earned by us and our subsidiaries to pay principal and interest on the debt outstanding under the New Credit Agreement, the notes and our other debt, which will reduce the amount of money available to us to finance our operations and other business activities; . some of our debt, including borrowings under the New Credit Agreement, has a variable rate of interest, which exposes us to the risk of increased interest rates; . debt under the New Credit Agreement is secured and matures prior to the notes; . debt under our 9.5% senior notes due 2008 also matures prior to the notes; . we have a much lower interest coverage ratio than some of our competitors, which may put us at a competitive disadvantage; . our debt level makes us more vulnerable to general economic downturns and adverse industry conditions; . our debt level could reduce our flexibility in planning for, or responding to, changing business and economic conditions, including increased competition in the railroad industry; . our level of debt may prevent us from raising the funds necessary to repurchase all of the notes tendered to us upon the occurrence of a change of control, which would constitute an event of default under the notes; and . our failure to comply with the financial and other restrictive covenants in our debt instruments, which, among other things, require us to maintain specified financial ratios and limit our ability to incur debt and sell assets, could result in an event of default that, if not cured or waived, could have a material adverse effect on our business or prospects. 13 See "Description of New Credit Agreement and Other Indebtedness," "Description of the Notes--Default" and "Description of the Notes--Certain Covenants." SERVICING OUR DEBT REQUIRES A SIGNIFICANT AMOUNT OF CASH, AND OUR ABILITY TO GENERATE CASH IS SUBJECT TO MANY FACTORS BEYOND OUR CONTROL. We expect to obtain the money to make payments on and to refinance our debt, including the notes, and to fund working capital, capital expenditures and other general corporate requirements in part from our operations and the operations of our subsidiaries. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot be certain that the cash earned by us and our subsidiaries will be sufficient to allow us to pay principal and interest on our debt (including the notes) and meet our other obligations or to fund our other liquidity needs. If we do not have enough cash we may be required to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing all or part of our existing debt (which could include the notes) or seeking additional equity capital. We cannot assure you that any of these remedies can be effected on commercially reasonable terms or at all. In addition, the terms of existing or future debt agreements, including the New Credit Agreement, the indenture governing our 9.5% senior notes due 2008 and the Indenture, may restrict us from adopting any of these alternatives. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." DESPITE OUR SUBSTANTIAL LEVERAGE, WE WILL BE ABLE TO INCUR MORE DEBT, WHICH MAY INCREASE THE RISKS ASSOCIATED WITH OUR SUBSTANTIAL LEVERAGE, INCLUDING OUR ABILITY TO SERVICE OUR DEBT. The New Credit Agreement and certain of our other debt instruments and the Indenture permit us, subject to the conditions described under "Description of New Credit Agreement and Other Indebtedness" and "Description of the Notes--Certain Covenants--Limitation on Indebtedness," to incur a significant amount of additional debt. In addition, as of the date of this prospectus, all of the borrowing capacity remained available under our $100 million revolving credit facilities. See "Description of New Credit Agreement and Other Indebtedness." If we incur additional debt above the levels in effect upon the consummation of this Offering, the risks associated with our substantial leverage, including our ability to service our debt, could increase. We conduct a portion of our operations through subsidiaries other than the Issuer and its subsidiaries and the Issuer conducts a portion of its operations through its subsidiaries. The Issuer is therefore dependent in part upon dividends or other intercompany transfers of funds from these entities in order to meet its debt service and other obligations. Generally, creditors of these entities will have claims to the assets and earnings of these entities that are superior to the claims of creditors of the Issuer, except to the extent the claims of the Issuer's creditors are guaranteed by these entities. Although the Note Guarantees provide the holders of the notes with a direct claim against the assets of the Note Guarantors, enforcement of the Note Guarantees against any Note Guarantor may be challenged in a bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of the Note Guarantor and would be subject to certain defenses available to guarantors generally. To the extent that the Note Guarantees are not enforceable, the notes would be effectively subordinated to all liabilities of the Note Guarantors, including trade payables, contingent liabilities and preferred stock of the Note Guarantors. In any event, the notes will be effectively subordinated to all liabilities of our Non-Guarantor Subsidiaries (other than the Issuer). On an as adjusted basis after giving effect to the $30 million reduction of our outstanding Tranche A term loans from the proceeds of the sale of our interest in Mexrail and the Note Offering, as of and for the three-month period ended March 31, 2002, those Non-Guarantor Subsidiaries would have represented less than 1% of each of KCS's consolidated EBITDA and consolidated revenues and approximately 19% of KCS's consolidated assets. Assuming the $30 million reduction of our outstanding Tranche A term loans from the proceeds of the sale of our interest in Mexrail and the Note Offering had taken place on March 31, 2002, as of such date the Non-Guarantor Subsidiaries would have had $5.0 million of senior debt (and trade payables and other liabilities of 14 $29.3 million). See "Description of the Notes" and "Description of New Credit Agreement and Other Indebtedness." Accordingly, in the event of the Issuer's dissolution, bankruptcy, liquidation or reorganization, the holders of the notes may not receive any amounts with respect to the notes until after the payment in full of the claims of creditors of its subsidiaries and our other subsidiaries. The ability of the Issuer's and the Note Guarantors' subsidiaries to pay dividends and make other payments to them may be restricted by, among other things, applicable corporate, tax and other laws and regulations and agreements of the subsidiaries. Although the New Credit Agreement, certain of our other debt instruments and the Indenture limit the ability of our subsidiaries to agree to restrictions on their ability to pay dividends and make other payments, these limitations have a number of significant qualifications and exceptions. See "Description of the Notes--Certain Covenants." RESTRICTIONS IMPOSED BY THE NEW CREDIT AGREEMENT, CERTAIN OF OUR OTHER DEBT INSTRUMENTS, AND THE INDENTURE MAY LIMIT OUR ABILITY TO FINANCE FUTURE OPERATIONS OR CAPITAL NEEDS OR ENGAGE IN OTHER BUSINESS ACTIVITIES THAT MAY BE IN OUR INTEREST. The Indenture and certain of our other debt instruments will impose, and the terms of any future debt may impose, operating and other restrictions on us. These restrictions affect, and in many respects limit or prohibit, among other things, our ability to: . incur additional debt; . pay dividends or make distributions; . repurchase equity interests; . redeem subordinated debt; . make other restricted payments, including, without limitation, investments; . sell or otherwise dispose of assets, including capital stock of subsidiaries; . create liens; . enter into agreements that restrict dividends from subsidiaries; . merge or consolidate; and . enter into transactions with affiliates. In addition, the New Credit Agreement includes other and more restrictive covenants that prohibit us from prepaying our other debt, including the notes, while debt under the New Credit Agreement is outstanding. The New Credit Agreement also requires us to achieve certain financial and operating results and maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control. These restrictions could: . limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; or . adversely affect our ability to finance our operations, acquisitions, investments or strategic alliances or other capital needs or to engage in other business activities that would be in our interest. A breach of any of these restrictive covenants or our inability to comply with the required financial ratios could result in a default under certain of these debt instruments. If a default occurs, the lenders under the New Credit Agreement and the holders of these other debt instruments may elect to declare all borrowings 15 outstanding, together with accrued interest and other fees, to be immediately due and payable, which would result in an event of default under the notes. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further financing. If we are unable to repay the borrowings when due, the lenders under the New Credit Agreement will also have the right to proceed against the collateral granted to them to secure the debt. If the debt under the New Credit Agreement, these other debt instruments and the notes was to be accelerated, we cannot assure you that our assets would be sufficient to repay in full the debt under the New Credit Agreement, these debt instruments and our other debt, including the notes. See "Description of the Notes--Certain Covenants" and "Description of New Credit Agreement and Other Indebtedness." UNSECURED OBLIGATIONS--THE LIQUIDATION OF OUR ASSETS MAY RESULT IN INSUFFICIENT PROCEEDS, AFTER ALL OF OUR SECURED DEBT IS PAID IN FULL, TO PAY AMOUNTS DUE ON YOUR NOTES. The notes and the Note Guarantees are unsecured obligations of the Issuer and the Note Guarantors, as applicable. In contrast, debt outstanding under the New Credit Agreement is secured by substantially all of the tangible and intangible assets of KCS and each existing or subsequently acquired or formed subsidiary of KCS guaranteeing the New Credit Agreement, including a pledge of certain of the capital stock held by KCS or its subsidiaries in certain of its existing or subsequently acquired or organized subsidiaries. On an as adjusted basis after giving effect to the $30 million reduction of our outstanding Tranche A term loans from the proceeds of the sale of our interest in Mexrail and receipt of the net proceeds of the Note Offering, we would have had approximately $193.9 million of secured debt (excluding unused commitments). In addition, we may incur other debt, which may be substantial in amount, and which may in certain circumstances be secured. Because the notes and the Note Guarantees are unsecured obligations, your right of repayment may be compromised in the following situations: . we enter into bankruptcy, liquidation, reorganization, or other winding-up; . there is a default in payment under the New Credit Agreement or other secured debt; or . there is an acceleration of any debt under the New Credit Agreement or other secured debt. If any of these events occurs, the secured lenders could foreclose on the pledged stock of the Issuer or certain of KCS's other subsidiaries and on the Issuer's assets and those of the Note Guarantors in which they have been granted a security interest, in each case to your exclusion, even if an event of default exists under the Indenture at such time. As a result, upon the occurrence of any of these events, there may not be sufficient funds to pay amounts due on the notes and the Note Guarantees. Furthermore, under the Note Guarantees, if all shares of any Note Guarantor are sold to persons pursuant to an enforcement of the pledge of shares in the Note Guarantor for the benefit of the lenders under the New Credit Agreement, then the applicable Note Guarantor will be released from its Note Guarantee automatically and immediately upon the sale. See "Description of the Notes." BECAUSE THE NEW CREDIT AGREEMENT PROHIBITS THE ISSUER FROM REPURCHASING THE NOTES, A DEFAULT MAY BE TRIGGERED IF YOU EXERCISE YOUR RIGHT TO REQUIRE THE ISSUER TO REPURCHASE YOUR NOTES IN THE EVENT THE ISSUER OR ITS PARENT CORPORATION EXPERIENCES A CHANGE OF CONTROL OR IN THE EVENT OF ASSET SALES THAT DO NOT MEET SPECIFIED CONDITIONS. The New Credit Agreement prohibits, and our future debt may prohibit, the Issuer from repurchasing any notes, even though the Indenture requires the Issuer to offer to repurchase some or all of the notes. If we make certain asset sales or if a change of control occurs when the Issuer is prohibited from repurchasing notes, the Issuer could ask the lenders under the New Credit Agreement (or such future debt) for permission to repurchase the notes or we could attempt to refinance the borrowings that contain these prohibitions. In addition, if we make certain asset sales we may also be required to prepay the New Credit Agreement and offer to purchase a portion of our outstanding 9.5% senior notes due 2008, in each case, to the extent of the proceeds thereof. If a change of 16 control occurs that would require us to repurchase the notes at the option of the holders, that would be an event of default under the New Credit Agreement and we will also be required to prepay the New Credit Agreement and offer to purchase all of our outstanding 9.5% senior notes due 2008. If the Issuer does not obtain the consent to repay the borrowings or is unable to refinance the borrowings, it would be unable to repurchase the notes or the outstanding 9.5% senior notes due 2008. The Issuer's failure to repurchase tendered notes at a time when the repurchase is required by the Indenture would constitute an event of default under the Indenture and the Issuer's failure to repurchase tendered 9.5% senior notes due 2008 at a time when the repurchase is required by the indenture governing those notes would also constitute an event of default under that indenture, each of which, in turn, would constitute a default under the New Credit Agreement and may constitute an event of default under debt incurred in the future. See "Description of New Credit Agreement and Other Indebtedness," "Description of the Notes--Change of Control" and "Description of the Notes--Certain Covenants." The change of control provision in the Indenture will not necessarily afford you protection in the event of a highly leveraged transaction that may adversely affect you, including a reorganization, restructuring, merger or other similar transaction involving us. These transactions may not involve a change in voting power or beneficial ownership or, even if they do, may not involve a change of the magnitude required under the definition of change of control in the Indenture to trigger these provisions. Except as described under "Description of the Notes--Change of Control," the Indenture does not contain provisions that permit the holders of the notes to require us to repurchase or redeem the notes in the event of a recapitalization or similar transaction. FEDERAL AND STATE FRAUDULENT TRANSFER STATUTES MAY AFFECT YOU. Under U.S. federal or state fraudulent transfer laws, a court could take actions detrimental to you if it found that, at the time the notes or the Note Guarantees were issued: (1)the Issuer or a Note Guarantor issued the notes or the Note Guarantee with the intent of hindering, delaying or defrauding current or future creditors; or (2)(a) the Issuer or a Note Guarantor received less than fair consideration or reasonably equivalent value for incurring the debt represented by the notes or the Note Guarantees; and (b) the Issuer or a Note Guarantor: . was insolvent or rendered insolvent by issuing the notes or the Note Guarantees; . was engaged, or about to engage, in a business or transaction for which the assets remaining with the Issuer or the Note Guarantor would constitute unreasonably small capital to carry on the Issuer's or the Note Guarantors' business; or . intended to incur, believed that it would incur or did incur debt beyond the Issuer's or the Note Guarantor's ability to pay. If a court made this finding, it could: . void all or part of the Issuer's obligations or the Note Guarantor's obligations to the holders of notes; . subordinate the Issuer's obligations or the Note Guarantor's obligations to the holders of the notes to the Issuer's or the Note Guarantors' other debt; or . take other actions detrimental to the holders of the notes. 17 In that event, we could not assure you that the Issuer could pay amounts due on the notes. Under fraudulent transfer statutes, it is not certain whether a court would determine that the Issuer or a Note Guarantor was insolvent on the date that the notes and Note Guarantees were issued. However, the Issuer or a Note Guarantor generally would be considered insolvent at the time it incurred the debt constituting the notes or the Note Guarantees if: . the fair saleable value of the relevant assets was less than the amount required to pay the Issuer's total existing debts and liabilities, including probable contingent liabilities, or those of a Note Guarantor, as they become absolute and mature; or . the Issuer or a Note Guarantor incurred debts beyond its ability to pay as such debts mature. We cannot predict: . what standard a court would apply in order to determine whether the Issuer or any of the Note Guarantors were insolvent as of the date the Issuer or the Note Guarantors issued the notes or the Note Guarantees or, regardless of the method of valuation, whether a court would determine that the Issuer or the Note Guarantors were insolvent on that date; or . whether a court would not determine that the payments constituted fraudulent transfers on another ground. To the extent a court voids a Note Guarantee as a fraudulent conveyance or holds it unenforceable for any other reason, holders of notes would cease to have any claim against the Note Guarantor. If a court took such an action, the Note Guarantor's assets would be applied to the Note Guarantor's liabilities. We cannot assure you that a Note Guarantor's assets would be sufficient to satisfy the claims of the holders of notes relating to any voided portions of any of the Note Guarantees. THERE IS NO PRIOR MARKET FOR THE NOTES. IF ONE DEVELOPS, IT MAY NOT BE LIQUID. The new notes will generally be permitted to be resold or otherwise transferred (subject to the restrictions described under "The Exchange Offer--Consequences of Failure to Exchange") by each holder without requirements of further registration. However, the new notes will also constitute a new issue of securities with no established trading market. We cannot assure you that any liquid market for the new notes, will develop. In addition, notwithstanding that the Initial Purchasers have informed us that they currently intend to make a market in the new notes, they are not obligated to do so and may discontinue without notice any market making with respect to the new notes at any time in their sole discretion. In addition, this market-making activity may be limited during the pendency of the exchange offer or the effectiveness of a shelf registration statement in lieu of the exchange offer. See "Plan of Distribution." We do not intend to apply for listing of the new notes on any securities exchange or on any automated dealer quotation system. The liquidity of, and trading market for the new notes also may be adversely affected by general declines in the market for similar securities. A decline in such market may adversely affect the liquidity and trading markets independent of our prospects or financial performance. RISKS RELATED TO OUR BUSINESS WE MAY BE REQUIRED TO MAKE ADDITIONAL INVESTMENTS IN TFM. The Mexican government has the right to sell its 20% interest in TFM through a public offering on October 31, 2003 (or prior to October 31, 2003, with the consent of Grupo TFM). If, on October 31, 2003, the Mexican government has not sold all of its capital stock in TFM, Grupo TFM is obligated to purchase the capital stock at the initial share price paid by Grupo TFM plus interest computed at the Mexican Base Rate, published by Banco de Mexico. In the event that Grupo TFM does not purchase the Mexican government's 20% interest in 18 TFM, Grupo TMM, and we, or either of us alone, will be obligated to purchase the Mexican government's remaining interest in TFM. We and Grupo TMM have cross indemnities in the event the Mexican government requires only one of us to purchase its interest. The cross indemnities allow the party required to purchase the Mexican government's interest to require the other party to purchase its pro rata portion of such interest. However, if we were required to purchase the Mexican government's interest in TFM and Grupo TMM could not meet its obligations under the cross-indemnity, then we would be obligated to pay the total purchase price for the Mexican government's interest. If purchase of the Mexican government's 20% interest in TFM had occurred as of March 31, 2002, the total purchase price would have been approximately $537 million and as of that date, based on publicly available financial information about Grupo TMM, Grupo TMM did not appear to have the financial resources to complete its share of the purchase. WE ARE VULNERABLE TO INCREASES IN FUEL COSTS AND DECREASES IN FUEL SUPPLIES. ANY SIGNIFICANT INCREASE IN THE COST OF FUEL, OR SEVERE DISRUPTION OF FUEL SUPPLIES, WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION. We incur substantial fuel costs in our railroad operations. During the three-year period ended December 31, 2001, locomotive fuel expenses represented an average of 8.4% of KCSR's total operating costs. Fuel costs are affected by traffic levels, efficiency of operations and equipment, and petroleum market conditions. The supply and cost of fuel is subject to market conditions and is influenced by numerous factors beyond our control, including general economic conditions, world markets, government programs and regulations and competition. Fuel prices increased significantly in 2000, but declined in 2001. Fuel represented 9.7% of total KCSR operating costs in 2000 and approximately 8.8% of total KCSR operating costs in 2001. We attempt to minimize the effects of fuel price fluctuations through forward purchase contracts, but cannot guarantee that those arrangements will be beneficial to us. Any significant increase in the cost of fuel could have a material adverse effect on our business, results of operations and financial condition. Our operations, as well as those of our competitors, could also be affected by any limitation in the fuel supply or by any imposition of mandatory allocation or rationing regulations. In the event of a severe disruption of fuel supplies resulting from supply shortages, political unrest, war or otherwise, the operations of rail and truck carriers, including us, could be adversely affected. ONE OF OUR COAL CUSTOMERS ACCOUNTS FOR APPROXIMATELY 13% OF KCSR'S TOTAL REVENUES. Our largest coal customer, Southwestern Electric Power Company ("SWEPCO"), a subsidiary of American Electric Power Company, Inc., accounted for approximately 66% of our coal revenues and approximately 13% of KCSR's total revenues for the year ended December 31, 2001. The loss of all or a significant part of SWEPCO's business or a service outage at one or both of SWEPCO's facilities that we serve could materially adversely affect our financial condition and results of operations. We expect coal revenues from SWEPCO to decrease as a result of a contractual rate reduction which became effective January 1, 2002. WE ARE SUBJECT TO EXTENSIVE RAILROAD INDUSTRY REGULATION AND RELY UPON UNIONIZED LABOR. Labor relations in the U.S. railroad industry are subject to extensive governmental regulation under the Railway Labor Act ("RLA"). Railroad industry personnel are covered by the Railroad Retirement Act ("RRA") instead of the Social Security Act and by the Federal Employers' Liability Act ("FELA") rather than state workers' compensation systems. These federal labor regulations are often more burdensome and expensive than regulations governing other industries and may place us at a competitive disadvantage relative to other industries that are not subject to these regulations. Approximately 85% of the employees of KCSR are covered under various collective bargaining agreements. Periodically, the collective bargaining agreements with the various unions become eligible for renegotiation. In 1996, national labor contracts governing KCSR were negotiated with all major railroad unions, including the United Transportation Union ("UTU"), the Brotherhood of Locomotive Engineers ("BLE"), the Transportation Communications International Union, the Brotherhood of Maintenance of Way Employees ("BMWE") and the 19 International Association of Machinists and Aerospace Workers. A new labor contract was reached with the BMWE effective May 31, 2001 and a tentative agreement was reached with the UTU in early 2002. Formal negotiations to enter into new agreements are in progress with the remaining unions and the 1996 labor contracts will remain in effect until new agreements are reached. The wage increase elements of these new agreements may have retroactive application. Unions representing certain former Gateway Western employees are operating under 1994 contracts and are currently in negotiations to extend these contracts, which will remain in effect until new agreements are reached. A new agreement was reached with the BLE of Gateway Western effective December 31, 2001. We have reached new agreements with all but one union representing former employees of MidSouth Corporation, which was merged into KCSR on January 1, 1994. Discussions with this union are ongoing. We may be subject to work stoppages in the future as a result of labor disputes and may be subject to terms and conditions in amended or future labor agreements that could have a material adverse affect on our results of operations, financial position and cash flows. Railroads continue to be restricted by certain remaining restrictive work rules, and are thus prevented from achieving optimum productivity with existing technology and systems. UTILITY INDUSTRY DEREGULATION MAY REDUCE OUR COAL FREIGHT REVENUES OR MARGINS. Historically, coal has been an important commodity handled by us. In 2001, coal revenues comprised approximately 22.2% of KCSR's total carload revenues, all of which result from deliveries to utility customers. The utility industry is undergoing a process of deregulation which will likely cause utilities to become more competitive and thus more aggressive in negotiating with coal transportation companies to reduce costs. This could create downward pressure on utility coal transportation rates and increase service requirements. Additionally, there can be no assurance that negotiated coal transportation rates will remain at current levels in the future. Continuing competitive pressures, lower coal transportation rates and declining margins could have a material adverse effect on our business, financial condition and results of operations. Utilities will also have greater flexibility in selling electricity to, and buying electricity from, other regional markets. This could have a material adverse effect on our utility customers if such customers are not able to compete effectively with new utility companies that enter their respective markets. As a result, the pattern of coal shipments in a particular market may shift to an alternative utility company that does not use us to deliver its coal requirements. While we are working to help our utility customers remain competitive in this evolving environment, changes in the pattern of coal movements could have a material adverse impact on our business, financial condition and results of operations. IF THE PROPOSED MERGER OF TWO MEXICAN TRUNK LINE RAILROADS IS CONSUMMATED, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON THE VALUE OF OUR INVESTMENT IN GRUPO TFM. Grupo Carso, S.A. de C.V. and Grupo Mexico, S.A. de C.V. announced their intention to merge the Mexican main line railroads, Ferrosur, S.A. de C.V. ("Ferrosur") and Ferrocarril Mexicano, S.A. de C.V. ("Ferromex"). Ferrosur and Ferromex are two of the three main line railroads created out of the privatization of the Mexican National Railway System. Our affiliate, TFM, is the third. Approval of the proposed merger was recently denied by the Mexican Federal Competition Commission. However, Ferromex recently filed a petition with the Mexican Federal Competition Commission asking that the commission reconsider its decision to deny approval of the proposed merger. If the proposed merger should be consummated, it could have a material adverse effect on the value of our investment in Grupo TFM. WE MAY BE ADVERSELY AFFECTED BY CHANGES IN GENERAL ECONOMIC, WEATHER OR OTHER CONDITIONS. Our operations may be adversely affected by changes in the economic conditions of the industries and geographic areas that produce and consume the freight that we transport. The relative strength or weakness of the United States economy as well as various international and regional economies also affects the businesses served 20 by us. Grupo TFM, Panama Canal Railway Company and Panarail Tourism Company are more directly affected by their respective local economy. Historically, a stronger economy has resulted in improved results for our rail transportation operations. Conversely, when the economy has slowed, results have been less favorable. Our revenues may be affected by prevailing economic conditions and, if an economic slowdown or recession occurs in our key markets, the volume of rail shipments is likely to be reduced. Additionally, our operations may be affected by adverse weather conditions. A weak harvest in the Midwest, for example, may substantially reduce the volume of business we traditionally handle for our agricultural products customers. Additionally, many of the goods and commodities we carry experience cyclical demand. Our results of operations can be expected to reflect this cyclical demand because of the significant fixed costs inherent in railroad operations. Our operations may also be affected by natural disasters or terrorist acts. Significant reductions in our volume of rail shipments due to economic, weather or other conditions could have a material adverse effect on our business, financial condition and results of operations. OUR OPERATING RESULTS AND FINANCIAL CONDITION WILL DEPEND ON EXECUTION OF OUR BUSINESS STRATEGY. IF WE FAIL TO EXECUTE OUR BUSINESS STRATEGY, IT MAY NEGATIVELY IMPACT OUR FINANCIAL CONDITION. Our operating results and financial condition will depend in large measure on our ability to successfully execute our business strategy. Our business strategy includes capitalizing on NAFTA trade to generate traffic and increase revenues, exploiting our domestic opportunities, establishing new and expanding existing strategic alliances and marketing agreements, and providing superior customer service. Successful implementation of this strategy depends on many factors, including factors beyond our control. There can be no assurance that we will be able to implement our strategy on a timely basis or at all or that, if implemented, such strategy will achieve the desired results. WE COMPETE AGAINST OTHER RAILROADS, TRUCK CARRIERS AND OTHER MODES OF TRANSPORTATION. If we are unable to compete successfully, it could have a material adverse effect on our business, financial condition and results of operations. Our rail operations compete against other railroads, many of which are much larger and have significantly greater financial and other resources than us. Since 1994, there has been significant consolidation among major North American rail carriers. As a result of this consolidation, the railroad industry is now dominated by a few "mega-carriers." We believe that our revenues were negatively affected by the merger of Burlington Northern, Inc. and Santa Fe Pacific Corporation in 1995 (forming BNSF), the merger of the Union Pacific Railroad Company ("UP") with the Chicago and North Western Transportation Company in 1995 and the merger of the UP and the Southern Pacific Rail Corporation ("SP") in 1996, which led to diversions of rail traffic away from our lines. We also regard the larger western railroads (BNSF and UP), in particular, as significant competitors to our operations and prospects because of their substantial resources. Truck carriers have eroded the railroad industry's share of total transportation revenues. Changing regulations, subsidized highway improvement programs and favorable labor regulations have improved the competitive position of trucks in the United States as an alternative mode of surface transportation for many commodities. In the United States, the trucking industry generally is more cost and transit-time competitive than railroads for short-haul distances. We are also subject to competition from barge lines and other maritime shipping. Mississippi and Missouri River barge traffic, among others, compete with us in the transportation of bulk commodities such as grains, steel and petroleum products. Increased competition has resulted in downward pressure on freight rates. Competition with other railroads and other modes of transportation is generally based on the rates charged, the quality and reliability of the service provided and the quality of the carrier's equipment for certain commodities. Continuing competitive pressures and declining margins could have a material adverse effect on our business, financial condition and results of operations. 21 OUR BUSINESS STRATEGY, OPERATIONS AND GROWTH RELY SIGNIFICANTLY ON JOINT VENTURES AND OTHER STRATEGIC ALLIANCES. Operation of our integrated rail network and our plans for growth and expansion rely significantly on joint ventures and other strategic alliances. We hold an indirect interest in two strategically significant railroad companies, Tex-Mex through TFM and TFM through our minority interest in Grupo TFM. As a minority shareholder, we are not in a position to control operations, strategies or financial decisions without the concurrence of Grupo TMM, the largest shareholder in Grupo TFM. In addition, conflicts have arisen in the past and may arise in the future between our business objectives and those of Grupo TMM. Resolution of any future conflicts in our favor may be difficult or impossible given our minority ownership position. We do maintain supermajority rights, which provide us with the ability to block certain actions proposed by Grupo TMM at Grupo TFM. Our ownership interests in these companies are subject to restrictions on disposition. Our operations are also dependent on interchange, trackage rights, haulage rights and marketing agreements with other railroads and third parties that enable us to exchange traffic and utilize trackage we do not own. These agreements extend our network and provide strategically important rail links to Mexico, the northern Midwest United States and Canada. Our ability to provide comprehensive rail service to our customers depends in large part upon our ability to maintain these agreements with other railroads and third parties. The termination of these agreements could adversely affect our business, financial condition and results of operations. There can be no assurance that these agreements will be renewed after their expiration and the failure to renew any of them could adversely affect our business, financial condition and results of operations. In addition, we are dependent in part upon the financial health and efficient performance of other railroads. For example, much of Tex-Mex's traffic moves over the UP's lines via trackage rights, and a significant portion of our grain shipments originate with I&M Rail Link pursuant to our marketing agreement with it. BNSF is our largest partner in the interchange of rail traffic. There can be no assurance that we will not be materially affected adversely by operational or financial difficulties of other railroads. OUR SUCCESS WILL DEPEND UPON OUR ABILITY TO RETAIN AND ATTRACT QUALIFIED MANAGEMENT PERSONNEL. Our operations and the continued execution of our business strategy are dependent upon the continued employment of our senior management team. Recruiting, motivating and retaining qualified management personnel, particularly those with expertise in the railroad industry, are vital to our operations and ultimate success. There is substantial competition for qualified management personnel and there can be no assurance that we will be able to attract or retain qualified personnel. The loss of key personnel or the failure to hire qualified personnel could materially adversely affect our business and financial results. OUR MEXICAN INVESTMENT SUBJECTS US TO POLITICAL AND ECONOMIC RISKS. As of March 31, 2002, we had invested approximately $300 million in Grupo TFM. Our investment in Mexico involves a number of risks. The Mexican government exercises significant influence over the Mexican economy and its actions could have a significant impact on TFM. Our Mexican investment may also be adversely affected by currency fluctuations, price instability, inflation, interest rates, regulations, taxation, cultural differences, social instability, labor disputes and other political, social and economic developments in or affecting Mexico. Moreover, TFM's commercial success is heavily dependent on expected increases in U.S.-Mexico trade and will be strongly influenced by the effect of NAFTA on such trade. Downturns in either of the U.S. or Mexican economies or in trade between the United States and Mexico would be likely to adversely impact TFM's business, financial condition and results of operations. There can be no assurances that the various risks associated with operating in Mexico can be effectively and economically mitigated by TFM. Additionally, no assurances can be given that the value of these investments will not become impaired. TFM holds the concession to operate Mexico's Northeast Rail Lines (the "Concession") for 50 years, beginning in 1997, and, subject to certain conditions, has a 50-year extension option. The Concession is subject to certain mandatory trackage rights and is only exclusive for 30 years. Additionally, the Mexican government may revoke exclusivity after 20 years if it determines that there is insufficient competition and may terminate the Concession as a result of certain conditions or events, including (1) TFM's failure to meet its operating and financial obligations with regard to the Concession under applicable Mexican law, (2) a statutory appropriation 22 by the Mexican government for reasons of public interest and (3) liquidation or bankruptcy of TFM. TFM's assets and its rights under the Concession may also be seized temporarily by the Mexican government. Revocation or termination of the Concession would materially adversely affect TFM's operations and its ability to make payments on its debt. Further, even though TFM would be entitled to compensation for a statutory appropriation or temporary seizure, any such compensation might be insufficient to cover TFM's losses. The loss of the Concession would materially adversely impact TFM's business, financial condition and results of operations which, in turn, would materially adversely impact the value of and return on our investment in Grupo TFM and our ability to market our U.S. operations on the basis of our access to Mexican locations. Currently, Grupo TFM is limited in the amount of dividends it may pay because of bond covenants. An absence of dividends from Grupo TFM will, or limited dividends may, negatively impact our ability to obtain a current cash return on our investment in Grupo TFM. Under the Concession, TFM is obligated to grant and is entitled to receive certain trackage rights. The compensation for use of the trackage rights has been under discussion since the granting of the Concession. As TFM and Ferromex were unable to reach an agreement concerning compensation, the Secretary of Communications and Transportation ("SCT") issued an order on March 13, 2002 setting the compensation to be paid by each of TFM and Ferromex for use of the mandatory trackage rights. On April 15, 2002, the SCT rejected TFM's petition seeking reconsideration of its trackage rights decision. TFM has appealed to an administrative court both the SCT's rejection of its petition seeking reconsideration and the SCT's underlying decision on trackage rights compensation. An adverse trackage rights compensation decision could negatively impact our investment in Grupo TFM. OUR PANAMANIAN INVESTMENT SUBJECTS US TO POLITICAL AND ECONOMIC RISKS. We have entered into a joint venture with Mi-Jack Products, Inc. ("Mi-Jack"--a private U.S. company located in Illinois), through which we own 50% of the common stock of PCRC, which owns all of the common stock of PTC. As of June 30, 2002, we had invested approximately $19.0 million in the PCRC, comprised of $12.9 million in equity and $6.1 million in subordinated loans. PCRC operates a railroad between Panama City and Colon, Panama, while PTC operates a tourist and commuter railway service in conjunction with and over the lines of the PCRC. Our investment in PCRC has risks associated with operating in Panama, including, among others, cultural differences, varying labor and operating practices, political risk and differences between the U.S. and Panamanian economies. There can be no assurances that the risks associated with operating in Panama can be effectively and economically mitigated by PCRC. Additionally, no assurances can be given that the value of our investment in PCRC will not become impaired. Further, KCS is a guarantor to the International Finance Corporation (IFC) for up to $5.6 million of deferred principal payments on behalf of PCRC and, if PCRC terminates the concession contract without the consent of the IFC, a guarantor for up to 50% of the outstanding senior loans of PCRC. The senior loans had an outstanding balance of approximately $45 million at June 30, 2002. KCSR is also a guarantor for up to $2.4 million of equipment loans from Transamerica Corporation. WE ARE SUBJECT TO REGULATION BY FEDERAL, STATE AND LOCAL REGULATORY AGENCIES. OUR FAILURE TO COMPLY WITH VARIOUS FEDERAL, STATE AND LOCAL REGULATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. In addition to safety, health and other regulations, generally our U.S. rail subsidiaries, like other rail common carriers, are subject to regulation by the Surface Transportation Board, the Federal Railroad Administration, the Occupational Safety and Health Administration, state departments of transportation and other state and local regulatory agencies. Government regulation of the railroad industry is a significant determinant of the competitiveness and profitability of railroads. While deregulation of rates and services in the United States has substantially increased the flexibility of railroads to respond to market forces, the deregulated environment has also resulted in highly competitive rates. Material noncompliance by us with these various regulatory requirements or changes in regulation of the industry through legislative, administrative, judicial or other action could have a material adverse effect on our business, financial condition and results of operations, including limitations on our operating activities until compliance with applicable requirements is completed. 23 ENVIRONMENTAL LIABILITIES COULD REQUIRE US TO INCUR MATERIAL COSTS AND TEMPORARILY SUSPEND ANY OPERATIONS THAT ARE FOUND TO VIOLATE ENVIRONMENTAL LAWS. Our operations are subject to extensive federal, state and local environmental laws and regulations concerning, among other things, emissions to the air, discharges to waters, waste management, hazardous substance transportation, handling and storage, decommissioning of underground storage tanks and soil and groundwater contamination. Those laws and regulations can (1) impose substantial fines and criminal sanctions for violations, (2) require us to upgrade equipment or make operational changes to limit pollution emissions or decrease the likelihood of accidental hazardous substance releases, or (3) temporarily prohibit us from conducting operations if those operations violate applicable requirements. We incur, and expect to continue to incur, significant environmental compliance costs, including, in particular, costs necessary to maintain compliance with requirements governing our chemical and hazardous material shipping operations, our refueling operations and our repair facilities. Many of our current and former properties are or have been used for industrial purposes, including, for example, hazardous material storage, waste disposal and treatment, foundry operations, drum reconditioning services and chemical treatment of wood products. Accordingly, we also are subject to potentially material liabilities relating to the investigation and cleanup of contaminated properties, and to claims alleging personal injury or property damage as the result of exposures to, or releases of, hazardous substances. Such liabilities could relate to properties that we owned or operated in the past, as well as any of our currently owned or operated properties. Such liabilities also could relate to third-party sites to which we or our predecessors sent waste for treatment or disposal, or which otherwise were affected by our operations. For example, we are conducting investigation and cleanup activities at several properties which we own or which we or our predecessors owned or operated in the past. We also are investigating and remediating several third-party sites that were affected by spills from our rail car operations and have been identified as a potentially responsible party at several third-party disposal sites to which we sent waste and other materials in the past. In addition, we are a defendant in a class action lawsuit alleging personal injuries and property damage from a chemical rail car explosion in 1995. Although we have recorded liabilities for estimated environmental remediation and other environmental costs, actual expenditures or liabilities could exceed estimated amounts and could have a material adverse effect on our consolidated results of operations or financial position. New laws and regulations, stricter enforcement of existing requirements, new spills, releases or violations or the discovery of previously unknown contamination could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business, results of operations or financial condition. WE MAY SUFFER A CATASTROPHE, COLLISION, PROPERTY LOSS, SERVICE INTERRUPTION OR TERRORIST ACT. The operation of any railroad carries with it an inherent risk of catastrophe, collision and property loss. In the course of train operations, service interruptions, derailments, spills, explosions, leaks, other environmental events, cargo loss or damage and business interruption resulting from adverse weather conditions or natural phenomena could result in loss of revenues, increased liabilities or increased costs. Significant environmental mishaps can cause serious bodily injury, death and extensive property damage, particularly when such accidents occur in heavily populated areas. We maintain insurance (including self-insurance) consistent with industry practice against accident-related risks involved in the operation of our business. However, there can be no assurance that such insurance would be sufficient to cover the cost of damages suffered by us or damages to others or that such insurance will continue to be available at commercially reasonable rates. Moreover, our insurance coverage for events occurring prior to 1996 did not extend to punitive damage awards, which are increasingly being levied in civil cases related to environmental accidents. While we maintain terrorism coverage under certain of our liability insurance policies, we do not maintain such coverage under our property damage insurance policies and do not otherwise maintain insurance coverage for terrorist acts. Recently, the U.S. Department of Transportation issued a warning about possible terrorist attacks on rail and transit systems in the U.S. There can be no assurance that any accident, natural disaster or terrorist act would not cause a significant interruption in our operations or materially adversely affect our business, financial condition and results of operations. 24 USE OF PROCEEDS This exchange offer is intended to satisfy certain of our obligations under the registration rights agreement. We will not receive any cash proceeds from the issuance of the new notes. In consideration for issuing the new notes contemplated in this prospectus, we will receive outstanding notes in like principal amount, the form and terms of which are the same as the form and terms of the new notes, except as otherwise described in this prospectus. Our net proceeds from the sale of the outstanding notes (after deducting the Initial Purchasers' discounts and commissions and offering expenses payable by us) were approximately $195.8 million. We used the net proceeds to refinance existing bank debt and other indebtedness. See "Description of New Credit Agreement and Other Indebtedness." 25 CAPITALIZATION The following table sets forth our cash and cash equivalents and consolidated capitalization as of March 31, 2002: . on an actual basis; and . as adjusted to give effect to a $30.0 million reduction of indebtedness and to the sale of the outstanding notes and the application of the net proceeds received therefrom as if they had occurred on March 31, 2002. See "Use of Proceeds." This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements, including the notes thereto, and the other financial information included in this prospectus.
AS OF MARCH 31, 2002 ------------------- ACTUAL AS ADJUSTED -------- ----------- Cash and cash equivalents................. $ 56.8 $ 25.8 ======== ======== Debt (including short-term portions): Revolving credit facilities /(1)/...... $ -- $ -- Tranche A term loans................... 122.5 -- /(2)/ Tranche B term loans................... 246.9 150.0/(4)/ Other debt............................. 58.5 51.1/(4)/ 9 1/2% Senior notes due 2008........... 200.0 200.0 7 1/2% Senior notes due 2009........... -- 200.0 -------- -------- Total debt......................... 627.9 601.1 Stockholders' equity: Preferred stock........................ 6.1 6.1 Common stock........................... 0.6 0.6 Retained earnings...................... 694.2 692.6/(3)/ Accumulated other comprehensive income. (2.2) (2.2) -------- -------- Total stockholders' equity......... 698.7 697.1 -------- -------- Total capitalization............ $1,326.6 $1,298.2 ======== ========
- -------- /(1)/As of March 31, 2002, no amounts were drawn down under our $100.0 million revolving credit facilities. In connection with the sale of the outstanding notes, we amended and restated our credit facilities. See "Description of New Credit Agreement and other Indebtedness." /(2)/Reflects the reduction of Tranche A term loans of $30 million with proceeds from the sale of our equity interest in Mexrail and application of a portion of the net proceeds from the sale of the outstanding notes. /(3)/Reflects write-off of unamortized deferred financing costs of $1.6 million from the term loans outstanding under the KCS Credit Facilities, net of taxes of $0.9 million. /(4)/Reflects application of a portion of the net proceeds from the sale of the notes. 26 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data for KCS and certain subsidiaries and affiliates. The statement of income data for the years ended December 31, 1999, 2000 and 2001 and the balance sheet data as of December 31, 1999, 2000 and 2001 have been derived from KCS's audited financial statements which appear elsewhere in this prospectus. The statement of income data for the three-month periods ended March 31, 2001 and 2002 and the balance sheet data as of March 31, 2001 and 2002 have been derived from KCS's unaudited financial statements which appear elsewhere in this prospectus. The statement of income data for the year ended December 31, 1998 and the balance sheet data as of December 31, 1998 have been derived from KCS's audited financial statements, none of which are included in this prospectus. The statement of income data for the year ended December 31, 1997 and the balance sheet data as of December 31, 1997 and March 31, 2001 has been derived from KCS's unaudited financial statements, none of which are included in this prospectus. The unaudited balance sheet data and statement of income data as of and for the three-month periods ended March 31, 2001 and 2002 include all adjustments, consisting only of normal, recurring adjustments, which management considers necessary for a fair presentation of the financial position and results of operations of KCS as of such date and for such periods. Operating results for the three months ended March 31, 2002 are not necessarily indicative of results that may be expected for the entire year or for any future period. All of the summary data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of KCS and other financial information included elsewhere or incorporated by reference in this prospectus.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------------------- ------------------ 1997 1998 1999 2000 2001 2001 2002 ------- ------ ------ ------ ------ ------ ------ (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: /(9)/ Revenues................................. $ 573.2 $613.5 $601.4 $572.2 $577.3 $144.0 $142.5 Operating costs and expenses............. 424.0 438.6 480.4 458.3 463.9 123.5 114.2 Depreciation and amortization............ 62.1 56.7 56.9 56.1 58.0 14.4 14.9 Restructuring, asset impairment and other charges.......................... 178.0 -- -- -- -- -- -- ------- ------ ------ ------ ------ ------ ------ Operating income (loss).................. (90.9) 118.2 64.1 57.8 55.4 6.1 13.4 Equity in net earnings (loss) of unconsolidated affiliates: Grupo TFM............................ (12.9) (3.2) 1.5 21.6 28.5 11.1 4.8 Other................................ 3.2 0.3 3.7 2.2 (1.4) 0.1 0.1 Gain on sale of Mexrail.................. -- -- -- -- -- -- 4.4 Interest expense, net.................... (53.3) (59.6) (57.4) (65.8) (52.8) (15.2) (11.3) Other income............................. 3.2 9.4 5.3 6.0 4.2 1.0 4.4 ------- ------ ------ ------ ------ ------ ------ Income (loss) from continuing operations before income taxes......... (150.7) 65.1 17.2 21.8 33.9 3.1 15.8 Income tax expense (benefit)............. (18.6) 27.1 7.0 (3.6) 2.8 (3.2) 4.1 ------- ------ ------ ------ ------ ------ ------ Income (loss) from continuing operations............................. $(132.1) $ 38.0 $ 10.2 $ 25.4/(1)/ $ 31.1/(2)/ $ 6.3/(2)/ $ 11.7 ======= ====== ====== ====== ====== ====== ====== Basic earnings (loss) per share from continuing operations /(3)/............ $ (2.46) $ 0.69 $ 0.18 $ 0.44 $ 0.53 $ 0.11 $ 0.20 Diluted earnings per share from continuing operations /(3)/............ $ (2.46) $ 0.67 $ 0.17 $ 0.43 $ 0.51 $ 0.10 $ 0.19 Ratio of earnings to fixed charges /(4)/. -- /(5)/ 1.9x 1.2x/(6)/ 1.0x 1.1x -- /(7)/ 1.6x
27
DECEMBER 31, MARCH 31, ----------------------------------------------- ------------------ 1997 1998 1999 2000 2001 2001 2002 -------- -------- -------- -------- -------- -------- -------- (IN MILLIONS) (UNAUDITED) BALANCE SHEET DATA (AT END OF PERIOD): Working capital...... $ (195.2) $ 1.7 $ (45.7) $ (32.6) $ (3.1) $ (23.0) $ 6.8 Total assets/(8)/.... 2,109.9 2,337.0 2,672.0 1,944.5 2,010.9 1,956.4 1,999.9 Total debt........... 916.6 836.3 760.9 674.6 658.4 681.7 627.9 Stockholders' equity/(3)(8)/..... 698.3 931.2 1,283.1 643.4 680.3 649.6 698.7
- -------- /(1)/ Income from continuing operations for 2000 excludes extraordinary debt retirement costs of $8.7 million (net of income taxes of $4.0 million). This amount includes $1.7 million (net of income taxes of $0.1 million) related to Grupo TFM. /(2)/ Income from continuing operations for the three months ended March 31, 2001 and the year ended December 31, 2001 exclude a charge for the cumulative effect of an accounting change of $0.4 million (net of income taxes of $0.2 million). /(3)/ On July 12, 2000, KCS completed a reverse stock split whereby every two shares of KCS common stock were converted into one share of KCS common stock. All periods presented in the accompanying schedules reflect this one-for-two reverse stock split. /(4)/ The ratio of earnings to fixed charges is computed by dividing earnings by fixed charges. For this purpose "earnings" represent the sum of (i) pretax income from continuing operations adjusted for income (loss) from unconsolidated affiliates, (ii) fixed charges, (iii) distributed income from unconsolidated affiliates and (iv) amortization of capitalized interest, less capitalized interest. "Fixed charges" represent the sum of (i) interest expensed, (ii) capitalized interest, (iii) amortization of deferred debt issuance costs and (iv) one-third of our annual rental expense, which management believes is representative of the interest component of rental expense. /(5)/ Due to the restructuring, asset impairment and other charges of $178.0 million, the 1997 ratio of earnings to fixed charges coverage was less than 1:1. The ratio of earnings to fixed charges would have been 1:1 if a deficiency of $148.4 million was eliminated. Excluding these items, the ratio of earnings to fixed charges for 1997 would have been 1.4x. /(6)/ Includes unusual costs of $12.7 million. Excluding these items the ratio of earnings to fixed charges for 1999 would have been 1.3x. /(7)/ The ratio of earnings to fixed charges would have been 1:1 if a deficiency of $6.2 million was eliminated. /(8)/ The total assets and stockholders' equity presented herein include the net assets of Stilwell as of December 31, 1997, 1998 and 1999 as follows: $348.3 million, $540.2 million and $814.6 million, respectively. /(9)/ Effective January 1, 2002, KCS adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets". See Note 16 to the KCS financial statements for the year ended December 31, 2001 included in this prospectus for pro forma disclosures related to earnings per share reflecting the adoption of SFAS 142. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE DISCUSSION SET FORTH BELOW, AS WELL AS OTHER PORTIONS OF THIS PROSPECTUS, CONTAINS FORWARD-LOOKING COMMENTS THAT ARE NOT BASED UPON HISTORICAL INFORMATION. SUCH FORWARD-LOOKING COMMENTS ARE BASED UPON INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT AND MANAGEMENT'S PERCEPTION THEREOF AS OF THE DATE OF THIS PROSPECTUS. READERS CAN IDENTIFY THESE FORWARD-LOOKING COMMENTS BY THE USE OF SUCH VERBS AS EXPECTS, ANTICIPATES, BELIEVES OR SIMILAR VERBS OR CONJUGATIONS OF SUCH VERBS. OUR ACTUAL RESULTS COULD MATERIALLY DIFFER FROM THOSE INDICATED IN FORWARD-LOOKING COMMENTS. THE DIFFERENCES COULD BE CAUSED BY A NUMBER OF FACTORS OR COMBINATION OF FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE FACTORS IDENTIFIED IN "RISK FACTORS" HEREIN. READERS ARE STRONGLY ENCOURAGED TO CONSIDER THESE AND OTHER FACTORS WHEN EVALUATING ANY FORWARD-LOOKING COMMENTS. WE WILL NOT UPDATE ANY FORWARD-LOOKING COMMENTS SET FORTH IN THIS DOCUMENT. THE DISCUSSION HEREIN IS INTENDED TO CLARIFY AND FOCUS ON OUR RESULTS OF OPERATIONS, CERTAIN CHANGES IN OUR FINANCIAL POSITION, LIQUIDITY, CAPITAL STRUCTURE AND BUSINESS DEVELOPMENTS FOR THE PERIODS COVERED BY THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THIS PROSPECTUS. THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THESE CONSOLIDATED FINANCIAL STATEMENTS, THE RELATED NOTES AND THE REPORTS OF INDEPENDENT ACCOUNTANTS THEREON, AND IS QUALIFIED BY REFERENCE THERETO. OVERVIEW KCS is a Delaware corporation organized in 1962. KCS is a holding company and its principal subsidiaries and affiliates include the following: . The Kansas City Southern Railway Company ("KCSR"), a wholly-owned subsidiary; . Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), a 36.9% owned unconsolidated affiliate, which owns 80% of the common stock of TFM. TFM owns 100% of the common stock of Mexrail, Inc. ("Mexrail"), which in turn wholly owns The Texas-Mexican Railway Company ("Tex-Mex"); . Southern Capital Corporation, LLC, a 50% owned unconsolidated affiliate that leases locomotive and rail equipment to KCSR; . Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of which KCSR owns 50% of the common stock. PCRC owns all of the common stock of Panarail Tourism Company ("PTC"). 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. For purposes of this "Management's Discussion and Analysis of Financial Condition and Results of Operations," discussions for KCSR reflect the results of KCSR and Gateway Western, which merged October 1, 2001 as combined operating companies and exclude other KCSR subsidiaries or affiliates. See "Summary--Recent Events--Sale of Mexrail." All per share information included in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" is presented on a diluted basis unless specifically identified otherwise. RECENT DEVELOPMENTS PURCHASE OF ADDITIONAL INTEREST IN GRUPO TFM. KCS and Grupo TMM have exercised their call option and intend to cause TFM to purchase the 24.6% interest in Grupo TFM currently owned by the Mexican government prior to July 31, 2002. If the purchase had 29 occurred on March 31, 2002, the purchase price would have been approximately $253 million. Various financing alternatives are currently being explored. One source of financing could include the use of funds due to TFM from the Mexican government as a result of the reversion, during the first quarter of 2001, of a portion of the concession to the Mexican government by TFM that covers the Hercules-Mariscala rail line, an approximate 18-mile portion of redundant track in the vicinity of the city of Queretaro. The remainder of the financing required to purchase the Mexican government's Grupo TFM shares has been raised by TFM through the sale of $180 million of debt securities. If TFM is unable to complete this purchase on a timely basis, we intend to make the purchase, but there can be no assurance that we will be able to purchase all or any portion of the government's interest. DEBT REFINANCING AND RE-CAPITALIZATION OF KCS'S DEBT STRUCTURE. REGISTRATION OF SENIOR UNSECURED NOTES. During the third quarter of 2000, KCS completed a $200 million private offering of debt securities through its wholly-owned subsidiary, KCSR. The offering, completed pursuant to Rule 144A under the Securities Act of 1933 in the United States and Regulation S outside the United States, consisted of 8 year 9 1/2% senior unsecured notes. Net proceeds from the offering of $196.5 million were used to refinance term debt and reduce commitments under the KCS Credit Facilities. The refinanced debt was scheduled to mature on January 11, 2001. Costs related to the issuance of the 9 1/2% senior notes were deferred and are being amortized over the eight year term of the 9 1/2% senior notes. The remaining balance of these deferred costs was approximately $3.8 million at December 31, 2001. In connection with this refinancing, KCS reported an extraordinary loss of $1.1 million (net of income taxes of $0.7 million). GRUPO TFM. During the third quarter of 2000, Grupo TFM accomplished a refinancing of approximately $285 million of its senior secured credit facilities through the issuance of a U.S. Commercial Paper ("USCP") program backed by a letter of credit. The USCP is a 2-year program for up to a face value of $310 million. The average discount rate for the first issuance was 6.54%. This refinancing provides the ability for Grupo TFM to pay limited dividends. As a result of this refinancing, Grupo TFM recorded approximately $9.2 million in pretax extraordinary debt retirement costs. KCS reported $1.7 million (net of income taxes of $0.1 million) as its proportionate share of these costs as an extraordinary item. NOTE OFFERING. We completed a private offering of $200 million of 71/2% senior notes due 2009 of KCSR in June 2002. The Initial Purchasers of the outstanding notes subsequently resold the outstanding notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to qualified buyers outside the United States in reliance upon Regulation S under the Securities Act. Our net proceeds from the sale of the outstanding notes (after deducting the Initial Purchasers' discounts and commissions and offering expenses payable by us) were approximately $195.8 million. We used the net proceeds to refinance existing bank debt and other indebtedness. See "Description of New Credit Agreement and Other Indebtedness." NEW CREDIT AGREEMENT. The KCS Credit Facilities were amended and restated in connection with the Note Offering. The KCS Credit Facilities contained, and the New Credit Agreement contains, certain covenants that, among others, restrict the ability of KCS's subsidiaries, including KCSR, to incur additional indebtedness, and restrict KCS's ability and its subsidiaries' ability to: . incur additional liens, . enter into sale and leaseback transactions, . merge or consolidate with another entity, . sell assets, . enter into certain transactions with affiliates, . enter into agreements that restrict the ability to incur liens or, with respect to KCSR and KCS's other subsidiaries, pay dividends to KCS or another subsidiary of KCS, 30 . make investments, loans, advances, guarantees or acquisitions, . make certain restricted payments, including dividends, or make certain payments on other indebtedness, or . make capital expenditures. In addition, KCS is required to comply with specific financial ratios, including minimum interest expense coverage and leverage ratios. The KCS Credit Facilities and the New Credit Agreement also contain certain customary events of default. These covenants, along with other provisions, could restrict maximum utilization of the New Credit Agreement. Borrowings under the New Credit Agreement are guaranteed by all of the significant, domestic subsidiaries of KCS other than Wyandotte Garage Corporation and TransFin Insurance Ltd. Caymex Transportation, Inc., SCC Holdings LLC, The Kansas City Northern Railway Company and Veals, Inc., each of which guaranteed the New Credit Agreement, do not guarantee the notes. Wyandotte Garage Corporation and TransFin Insurance Ltd. do not guarantee either the New Credit Agreement or the notes. Interest on the outstanding loans, including revolving loans, under the New Credit Agreement accrues at a rate per annum based on the London Interbank Offered Rate ("LIBOR") or an alternate base rate, as KCS shall select, plus an applicable margin. The New Credit Agreement consists of a $100 million revolving credit facility and a $150 million term loan. The term loan under the New Credit Agreement has a maturity of approximately 6 years. We used the proceeds from the Note Offering to repay certain amounts of the term loans under the KCS Credit Facilities. The terms of the New Credit Agreement provide us greater financial flexibility than the covenants in the KCS Credit Facilities. We believe the most significant changes are as follows: . allowing us to retain 100% of the proceeds from any common stock issuances, or any non-cash-pay preferred stock issuances, . allowing us to retain 50% of the proceeds from any cash-pay preferred stock issuances, with the remaining 50% being utilized to repay our bank debt, . allowing us to issue additional senior unsecured indebtedness, provided the net proceeds are used to pay down bank debt; however, we may retain up to $50 million of net proceeds of senior unsecured indebtedness if issued in conjunction with at least $100 million of equity proceeds for the purpose of further investment in our Mexican operations, . allowing us to retain the first $10 million of net proceeds from asset sales per annum, . increasing the "material indebtedness" definition (contained in the KCS Credit Facilities) to $20 million from $10 million. As a result of the New Credit Agreement and the Note Offering, we expect that our interest expense will increase in the future. SOUTHERN CAPITAL REFINANCING. On June 25, 2002, Southern Capital refinanced the outstanding balance of its one-year bridge loan through the issuance of approximately $167.6 milion of pass through trust certificates and the sale of 50 locomotives. The pass through trust certificates are secured by the sold locomotives, all of the remaining locomotives and rolling stock owned by Southern Capital and rental payments payable by KCSR under the sublease of the sold locomotives and its leases of the equipment owned by Southern Capital. Payments of interest and principal of the pass through trust certificates, which are due semi-annually on June 30 and December 30 commencing on December 30, 2002 and ending on June 30, 2022, are insured under a financial guarantee insurance polcy by MBIA Insurance Corporation. KCSR leases or subleases all of the equipment securing the pass through trust certificates. 31 RESULTS OF OPERATIONS The following table details certain income statement components for KCS for the years ended December 31, 1999, 2000 and 2001 and the three months ended March 31, 2001 and 2002, respectively, for use in the analysis below. See the financial statements included elsewhere in this prospectus.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, - - ------------------------------ ------------------ 1999 2000 2001 2001 2002 ------ ------ ------ ------ ------ (IN MILLIONS) Revenues.................................................... $601.4 $572.2 $577.3 $144.0 $142.5 Costs and expenses.......................................... 537.3 514.4 521.9 137.9 129.1 ------ ------ ------ ------ ------ Operating income........................................ 64.1 57.8 55.4 6.1 13.4 Equity in net earnings (losses) of unconsolidated affiliates 5.2 23.8 27.1 11.2 4.9 Gain on sale of Mexrail..................................... -- -- -- -- 4.4 Interest expense............................................ (57.4) (65.8) (52.8) (15.2) (11.3) Other income................................................ 5.3 6.0 4.2 1.0 4.4 ------ ------ ------ ------ ------ Income from continuing operations before income taxes... 17.2 21.8 33.9 3.1 15.8 Income tax provision (benefit).............................. 7.0 (3.6) 2.8 (3.2) 4.1 ------ ------ ------ ------ ------ Income from continuing operations....................... $ 10.2/(1)/ $ 25.4/(2)/ $ 31.1/(3)/ $ 6.3/(3)/ $ 11.7 ====== ====== ====== ====== ======
- -------- /(1)/Income from continuing operations for the year ended December 31, 1999 includes $12.7 million of unusual costs. The unusual costs relate to employee separations, labor and personal injury related costs, write-off of costs for a previously planned line buildout, which we do not plan to pursue, and costs associated with the closure of an intermodal facility. /(2)/Income from continuing operations for the year ended 2000 excludes extraordinary items for debt retirement costs of $8.7 million (net of income taxes of $4.0 million). This amount includes $1.7 million (net of income taxes of $0.1 million) related to Grupo TFM. /(3)/Income from continuing operations for the three months ended March 31, 2002 and the year ended December 31, 2001 excludes a charge for the cumulative effect of an accounting change of $0.4 million (net of income taxes of $0.2 million). This charge reflects KCS's adoption of SFAS 133 effective January 1, 2001. The following table summarizes the revenues and carload statistics of KCSR for the years ended December 31, 1999, 2000 and 2001 and the three months ended March 31, 2001 and 2002, respectively. Certain prior year amounts have been reclassified to reflect changes in the business groups and to conform to the current year presentation.
REVENUES CARLOADS AND INTERMODAL UNITS ---------------------------------- ----------------------------- THREE MONTHS THREE MONTHS YEAR ENDED ENDED YEAR ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, -------------------- ------------- ----------------- ----------- 1999 2000 2001 2001 2002 1999 2000 2001 2001 2002 ------ ------ ------ ------ ------ ----- ----- ----- ----- ----- (IN MILLIONS) (IN THOUSANDS) General commodities: Chemical and petroleum........ $131.9 $125.6 $123.8 $ 32.6 $ 31.9 165.5 154.1 146.0 41.2 35.9 Paper and forest.............. 130.1 132.3 130.3 30.1 32.0 202.9 192.4 184.0 44.5 43.8 Agricultural and mineral...... 96.5 93.6 87.9 21.3 23.8 141.0 132.0 125.7 30.9 33.0 ------ ------ ------ ------ ------ ----- ----- ----- ----- ----- Total general commodities......... 358.5 351.5 342.0 84.0 87.7 509.4 478.5 455.7 116.6 112.7 Intermodal and automotive..... 58.7 62.1 66.0 18.6 14.2 233.9 269.3 291.1 76.8 67.0 Coal.......................... 117.4 105.0 118.7 27.6 28.8 200.8 184.2 202.3 46.5 58.5 ------ ------ ------ ------ ------ ----- ----- ----- ----- ----- Carload revenues and carload and intermodal units................. 534.6 518.6 526.7 130.2 130.7 944.1 932.0 949.1 239.9 238.2 ===== ===== ===== ===== ===== Other rail-related revenues....... 51.8 44.5 39.7 9.9 9.7 ------ ------ ------ ------ ------ Total KCSR revenues........... 586.4 563.1 566.4 140.1 140.4 Other subsidiary revenues......... 15.0 9.1 10.9 3.9 2.1 ------ ------ ------ ------ ------ Total consolidated revenues... $601.4 $572.2 $577.3 $144.0 $142.5 ====== ====== ====== ====== ======
32 The following table summarizes consolidated costs and expenses for the years ended December 31, 1999, 2000 and 2001 and the three months ended March 31, 2001 and 2002, respectively. Certain prior year amounts have been reclassified to conform to the current year presentation:
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, -------------------- ------------- 1999 2000 2001 2001 2002 ------ ------ ------ ------ ------ (IN MILLIONS) Compensation and benefits................. $206.0 $197.8 $192.9 $ 49.1 $ 49.4 Depreciation and amortization............. 56.9 56.1 58.0 14.4 14.9 Purchased services........................ 58.9 54.8 57.0 12.0 14.0 Operating leases.......................... 46.3 51.7 50.9 12.8 12.1 Fuel...................................... 34.2 48.1 43.9 12.4 9.5 Casualties and insurance.................. 30.8 34.9 42.1 14.6 7.9 Car hire.................................. 22.4 14.8 19.8 6.5 5.2 Other..................................... 81.8 56.2 57.3 16.1 16.1 ------ ------ ------ ------ ------ Total consolidated costs and expenses.. $537.3 $514.4 $521.9 $137.9 $129.1 ====== ====== ====== ====== ======
THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2001 NET INCOME. For the three months ended March 31, 2002, net income increased $5.8 million to $11.7 million ($0.19 per diluted share) from $5.9 million ($0.10 per diluted share) for the three months ended March 31, 2001. This quarter to quarter increase was primarily the result of a $8.8 million decline in operating expenses, a $3.9 million decrease in interest expense, a $3.4 million increase in other income and a $4.4 million gain realized on the sale of Mexrail to TFM. These increases were partially offset by a $1.5 million decrease in revenue, a $6.3 million decrease in equity in net earnings of unconsolidated affiliates and a $7.3 million increase in the income tax provision. REVENUES. Consolidated revenues for the three months ended March 31, 2002 were $142.5 million compared to $144.0 million for the three months ended March 31, 2001. An increase in revenues for KCSR of $0.3 million was offset by a decline of approximately $1.8 million from other subsidiaries, resulting mostly from volume declines at our bulk coke handling facility and our railroad tie plant. The following discussion provides an analysis of KCSR revenues by commodity group. CHEMICAL AND PETROLEUM PRODUCTS. For the three months ended March 31, 2002, revenues for chemical and petroleum products decreased $0.7 million (2.2%) compared to the three months ended March 31, 2001. Higher revenue for gases and inorganic products were offset by declines in other chemical and petroleum products. The increase in revenues for gases was primarily the result of an increase in production by a single customer during the quarter. The increase in revenue for inorganic products was primarily the result of increased access to production facilities in Geismar, Louisiana and new business previously shipped by other rail carriers. The decline in other chemical and petroleum products was primarily the result of lower industrial production as a result of the continued slowdown of the U.S. economy. Volume related revenue declines were somewhat mitigated through longer hauls and selective price increases. Chemical and petroleum products revenue accounted for 24.4% and 25.0% of total carload revenues for the three months ended March 31, 2002 and 2001, respectively. PAPER AND FOREST PRODUCTS. Paper and forest product revenues increased $1.9 million (6.3%) for the three months ended March 31, 2002 compared with the same period of 2001. Increases in revenues for paper and lumber products as well as military shipments were partially offset by a decrease in metal product revenues. The increase in revenue for shipments of lumber products resulted from volume gains due to strength in the home 33 building market, as well as certain rate increases and longer hauls. Higher revenue for paper products was due mostly to an increase in the revenue per carload arising from targeted rate increases and longer hauls. Demand driven volume declines contributed to lower revenue for metal products quarter to quarter. Paper and forest products revenue accounted for 24.5% and 23.1% of total carload revenues for the three months ended March 31, 2002 and 2001, respectively. AGRICULTURAL AND MINERAL PRODUCTS. Agricultural and mineral product revenues increased $2.5 million (11.7%) for the three months ended March 31, 2002 compared to the three months ended March 31, 2001. This increase resulted mostly from strength in the export grain and food product markets partially offset by lower revenues for ores and minerals. Higher demand for export grain and food products coupled with increases in certain rates and length of haul led to the increase in related revenue. Demand also improved slightly for domestic grain shipments to poultry producers due to an increase in consumer consumption. Agricultural and mineral products accounted for 18.2% of total carload revenues for the first quarter of 2002 compared to 16.4% for the first quarter of 2001. INTERMODAL AND AUTOMOTIVE. Intermodal and automotive revenues decreased $4.4 million (23.7%) for the three months ended March 31, 2002 compared to the same period in 2001. This decrease was primarily the result of a 6.2% decline in carload volume for intermodal traffic and a 50% decline in automotive carloads. These traffic declines were mostly due to the impact of the weakness in the U.S. economy on the intermodal and automotive industries. Automotive revenues were also significantly impacted by the loss of certain Ford business in the third quarter of 2001 due to competitive pricing from another railroad. Our on-time performance for this Ford automotive traffic was approximately 98%, and accordingly, we believe this on-time performance could lead to future business in the automotive marketplace. Intermodal and automotive product revenues accounted for 10.9% of total carload revenues for the first quarter of 2002 compared to 14.3% for the first quarter of 2001. COAL. Coal revenues increased $1.2 million (4.4%) for the three months ended March 31, 2002 compared to the same period in 2001, resulting mostly from a 30% increase in tons delivered due to higher customer demand, as well as the re-opening of the Kansas City Power & Light Company Hawthorn plant in June 2001. Hawthorn had been out of service since January 1999 due to an explosion at the Kansas City facility. Revenue increases resulting from higher traffic levels were somewhat mitigated by a contractual rate reduction for KCSR's largest customer, SWEPCO. This rate reduction, as well as the loss of a coal customer beginning in April 2002 due to the expiration of the contract, is expected to result in a reduction of coal revenues during the remainder of 2002. Coal revenues accounted for 22.0% of total carload revenues for the first quarter of 2002 compared to 21.2% for the first quarter of 2001. OTHER. Other rail related revenues decreased $0.2 million for the three months ended March 31, 2002 compared to the same period in 2001 primarily due to decreases in switching revenue partially offset by increases in haulage, demurrage, and other revenue. COSTS AND EXPENSES. Consolidated costs and expenses decreased $8.8 million for the three months ended March 31, 2002 compared to the same period in 2001 primarily as a result of lower KCSR expenses of $9.3 million and higher expenses at certain other subsidiaries of $0.5 million. COMPENSATION AND BENEFITS. Consolidated compensation and benefits expense for the three months ended March 31, 2002 increased $0.3 million to $49.4 million compared to $49.1 million for the three months ended March 31, 2001. A $2.3 million decrease in compensation expense resulted from reduced employee counts, lower overtime costs, and the use of fewer relief crews due to improved operating efficiency. This decrease was offset by a $2.6 million increase in fringe benefits as a result of a 15% increase in health and welfare costs during the first quarter of 2002 and a $2.0 million reduction in retirement-based costs for certain union employees recorded 34 during the first quarter of 2001. Additionally, first quarter 2001 costs for compensation and benefits include approximately $1.3 million associated with a workforce reduction. DEPRECIATION AND AMORTIZATION. Consolidated depreciation and amortization expense was $14.9 million for the three months ended March 31, 2002 compared to $14.4 million for the same period in 2001. This $0.5 million increase resulted from a higher asset base partially offset by property retirements. Depreciation and amortization expense is expected to increase by approximately $2.3 million in 2002 compared to 2001 due to the implementation of KCS's Management Control System, which is scheduled to occur in mid-2002. PURCHASED SERVICES. For the three months ended March 31, 2002, purchased services expense increased $2.0 million compared with the same period in 2001. This increase resulted from higher costs for locomotive and car repairs contracted to third parties as well as other general purchased services. OPERATING LEASES. For the three months ended March 31, 2002, operating lease expense decreased as a result of the expiration of certain leases that have not been renewed due to continued improvements in fleet utilization. Lease expense is expected to increase in the second quarter of 2002 as a result of costs associated with the lease for our new corporate headquarters building. We began leasing this new facility in April 2002. The annual lease payment is expected to be approximately $2.5 million. The net increase in lease expense arising from our new corporate headquarters building is expected to be approximately $1.9 million in 2002. FUEL. For the three months ended March 31, 2002, fuel expense decreased $2.9 million or 23.4% compared to the same period in 2001. This decrease in fuel expense was the result of a 26.1% decrease in the average price per gallon somewhat mitigated by a 4.3% increase in fuel usage. Fuel costs represented approximately 7.8% of total KCSR operating expenses for the quarter ended March 31, 2002 compared to 9.4% for the same period in 2001. CASUALTIES AND INSURANCE. For the three months ended March 31, 2002, casualties and insurance expense decreased $6.7 million compared to the three months ended March 31, 2001. KCSR experienced several significant derailments in the first quarter of 2001 as well as the settlement of a significant personal injury claim. Costs in the first quarter of 2001 related to these significant derailments approximated $8.5 million compared to derailment expense of approximately $2.5 million for the first quarter of 2002. CAR HIRE. Car hire expense for the first quarter of 2002 decreased $1.3 million compared to the first quarter of 2001. During the first quarter of 2002, KCSR was operating a more efficient and well-controlled railroad compared to the first quarter of 2001, leading to an improvement in car utilization and reduction of car hire costs. An unusual number of derailments (as discussed in casualties and insurance), as well as the effects of line washouts and flooding had a significant adverse impact on the efficiency of KCSR's operations during the first quarter of 2001. The resulting inefficiency led to congestion, which contributed to an increase in the number of freight cars from other railroads on our rail line, as well as fewer KCSR freight cars being used by other railroads during the first quarter of 2001. OPERATING INCOME AND KCSR OPERATING RATIO. Consolidated operating income for the three months ended March 31, 2002 increased $7.3 million, or 120% compared to $6.1 million for the same period in 2001. This increase resulted from an $8.8 million decrease in operating expenses partially offset by a $1.5 million decrease in revenues. The operating ratio for KCSR improved to 87.2% for the three months ended March 31, 2002 compared to 94.0% for the same period in 2001. INTEREST EXPENSE. Consolidated interest expense for the three months ended March 31, 2002 declined $3.9 million (26%) compared to the same period in 2001. This decrease was primarily the result of lower interest rates on variable rate debt as well as a lower average debt balance partially offset by a slight increase in amortization related to debt issue costs. 35 OTHER INCOME. For the three months ended March 31, 2002, other income increased $3.4 million compared to the prior year quarter primarily as a result of a $3.3 million gain recorded on the sale of non-operating property. INCOME TAX EXPENSE. For the three months ended March 31, 2002, the consolidated income tax provision was $4.1 million compared to an income tax benefit of $3.2 million of the prior year quarter. This $7.3 million increase in income tax expense resulted primarily from an increase in domestic operating income and gains recorded on the sale of our investment in Mexrail and non-operating property. As we intend to indefinitely reinvest the equity earnings from Grupo TFM, we do not provide deferred income tax expense for the excess of our book basis over the tax basis of our investment in Grupo TFM. Excluding equity earnings of Grupo TFM, the consolidated effective income tax rate for the three months ended March 31, 2002 was 37.3% compared to (40.0%) for the same period in 2001. EQUITY IN NET EARNINGS (LOSSES) OF UNCONSOLIDATED AFFILIATES. For the three months ended March 31, 2002, we recorded equity in net earnings of unconsolidated affiliates of $4.9 million compared to $11.2 million for the same period in 2001. This decrease is primarily the result of lower equity earnings from Grupo TFM of $6.3 million and PCRC of $0.8 million partially offset by an increase in equity in earnings from Southern Capital of $0.5 million and Mexrail of $0.3 million. For the three months ended March 31, 2001, equity in earnings from Grupo TFM reflected our proportionate share ($9.1 million) of the income recorded by Grupo TFM relating to the reversion of certain concession assets to the Mexican government. Exclusive of this 2001 reversion income, our first quarter 2002 equity in earnings from Grupo TFM increased $2.8 million compared to the same period in 2001. Grupo TFM's revenue for the three months ended March 31, 2002 improved 1% compared to the same period in 2001 while operating expenses declined slightly for the same period. Under International Accounting Standards ("IAS"), Grupo TFM's first quarter 2002 operating ratio was 77.3% compared to 79.8% in the same period in 2001. Grupo TFM's results for the first quarter of 2002 include a $3.5 million deferred tax benefit (calculated under U.S. GAAP) compared to a deferred income tax expense of $21.7 million in the first quarter of 2001. This variance resulted from an income tax provision on the reversion income recorded in the first quarter of 2001, as well as fluctuations in the peso exchange rate and inflation. Also contributing to Grupo TFM's deferred income tax calculation in the first quarter of 2002 was an approximate $1.7 million expense arising from the change in the Mexican corporate income tax rate, which is being reduced from 35% to 32% in one percent increments beginning in 2003. Under U.S. GAAP, the impact of this 3% graduated rate reduction was recognized for deferred tax purposes in the first quarter 2002. This rate reduction adversely impacted the results under U.S. GAAP because Grupo TFM has a deferred tax asset, which had previously been recorded based upon higher income tax rates and was reduced as a result of the rate reduction. After consideration of minority interest, this rate change resulted in a $0.5 million reduction in our equity earnings of Grupo TFM during the first quarter 2002. We report our equity in Grupo TFM under U.S. GAAP while Grupo TFM reports under IAS. Because we are required to report our equity in earnings (losses) in Grupo TFM under U.S. GAAP and Grupo TFM reports under IAS, differences in deferred income tax calculations and the classification of certain operating expense categories occur. The deferred tax calculations are significantly impacted by fluctuations in the relative value of the Mexican peso compared to the U.S. dollar and the rate of Mexican inflation, and result in significant variability in the amount of equity in earnings (losses) reported by us. CUMULATIVE EFFECT OF ACCOUNTING CHANGE. We adopted the provisions of Statement of Financial Accounting Standards No. 133 ''Accounting for Derivative Instruments and Hedging Activities'' (''SFAS 133'') effective January 1, 2001. As a result of this change in the method of accounting for derivative financial instruments, we recorded an after-tax charge to earnings of $0.4 million in the first quarter of 2001. This charge is presented as a cumulative effect of an accounting change in the accompanying consolidated condensed financial statements. 36 YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000 INCOME FROM CONTINUING OPERATIONS. For the year ended December 31, 2001, income from continuing operations increased $5.7 million to $31.1 million (51c per diluted share) from $25.4 million (43c per diluted share) for the year ended December 31, 2000. This increase was primarily a result of a $6.9 million increase in equity earnings from Grupo TFM and a $13.0 million decline in interest expense partially offset by a $2.4 million decrease in domestic operating income, a $3.6 million decrease in equity earnings from other unconsolidated affiliates, and an increase in the income tax provision of $6.4 million. Equity earnings for the year ended December 31, 2001 reflect our proportionate share ($9.1 million) of the income recorded by Grupo TFM relating to the reversion of certain concession assets to the Mexican government. REVENUES. Consolidated revenues for the year ended December 31, 2001 totaled $577.3 million compared to $572.2 million for the year ended December 31, 2000. This $5.1 million, or 0.9%, increase resulted from higher KCSR revenues of approximately $3.3 million coupled with higher revenues from certain other smaller subsidiaries. The following discussion provides an analysis of KCSR revenues by commodity group. CHEMICAL AND PETROLEUM. For the year ended December 31, 2001, chemical and petroleum product revenues decreased $1.8 million (1.4%) compared to the year ended December 31, 2000. Higher revenues for plastic and inorganic chemical products were offset by declines in most other chemical products. The increase in revenues for plastic products resulted from a plant expansion by a customer in late 2000. The decline in other chemical and petroleum products resulted primarily from lower industrial production reflecting the impact of the slowdown of the U.S. economy. These volume related revenue declines were somewhat mitigated through certain price increases taken in 2001. We believe that at such time that economic conditions improve, the demand for chemical and petroleum products could increase resulting in higher related revenues. PAPER AND FOREST. Revenues for paper and forest products decreased $2.0 million (1.5%) for the year ended December 31, 2001 compared to the year ended December 31, 2000. As a result of the transfer of certain National Guard personnel and related equipment to a military base near KCSR's rail lines, military and other carloads increased $3.9 million for the year ended December 31, 2001. Additionally, for the year ended December 31, 2001, revenues for pulpwood and logchips increased $1.6 million due to a fungus problem with logchips during 2000 (which reduced 2000 revenues) that has since been resolved. These increases for the year ended December 31, 2001 were offset by declines in steel shipments and most other paper and forest product commodities. Contributing to the decline in certain lumber product revenues was an ongoing trade dispute between the United States and Canada relating to softwood lumber producers, which has reduced certain lumber traffic between Canada and Mexico. Negotiations between the United States and Canada are continuing in an effort to resolve this trade dispute. Steel shipments declined due to the loss of certain business and the timing of the receipt of steel shipments in 2001 compared to 2000. Additionally, a significant portion of our steel shipments relate to drilling pipe for oil exploration. Drilling activity has declined due to the reductions in the price of oil, thus resulting in less demand for drilling pipe. The continued decline in the U.S. economy continues to affect the paper and forest product industry significantly as the need for raw materials in related manufacturing and production industries decreased during 2001. Certain price increases during 2001 have partially offset related volume declines. We believe an improvement in the economic conditions could raise the demand for paper and forest products resulting in an increase in related revenues. AGRICULTURAL AND MINERAL. Agricultural and mineral product revenues decreased $5.7 million (6.1%) for the year ended December 31, 2001 compared to the year ended December 31, 2000. In 2001, domestic grain revenues decreased $3.7 million compared to 2000 primarily due to a general decline in the production of poultry in the United States, which has decreased demand for grain deliveries to our poultry producing customers. Additionally, during the first half of 2001, flooding in Iowa and Minnesota forced a temporary shift in the origination of some domestic grain shipments to Illinois and Indiana, resulting in significantly shorter hauls for KCSR. Export grain increased $1.5 million (18.5%) compared to the year ended December 31, 2000, primarily as a result of increased shipments of soybeans for export through the ports of Beaumont, Texas and Reserve, Louisiana during the fourth quarter of 2001. Annual declines in food products, ores and minerals and stone, clay and glass product revenues resulted primarily from the ongoing decline in the U.S. and global economies. Based 37 on current expectations, we believe that the demand for poultry will improve slightly in 2002, resulting in improved revenues for domestic grain. We believe an improvement in the economic conditions could also raise the demand for other agriculture and mineral products resulting in an increase in related revenues. INTERMODAL AND AUTOMOTIVE. For the year ended December 31, 2001, intermodal and automotive revenues increased $3.9 million (6.3%) compared to the year ended December 31, 2000 as a result of an increase in automotive revenues of $9.0 million partially offset by a decrease in intermodal revenues of $5.1 million. Automotive revenues increased as a result of the following: (i) Mazda traffic originating at the International Freight Gateway ("IFG") at the former Richards-Gebaur airbase, located adjacent and connecting to KCSR's main line near Kansas City, Missouri; and (ii) Ford business originating on the CSX in Louisville and interchanged with the KCSR in East St. Louis. This Ford automotive traffic was shipped to Kansas City via KCSR and interchanged with Union Pacific Railroad for delivery to the western United States. During the third quarter of 2001, KCSR lost this Ford business due to competitive pricing; however, our on-time performance for this Ford automotive traffic approximated 98%, which we believe could lead to future business in the automotive marketplace. Intermodal revenues for the year ended December 31, 2001 declined due to several factors, including (i) the impact of the slow-down in the U.S. economy, which has caused related declines in demand; (ii) customer erosion due to service delays arising from congestion experienced in the first quarter of 2001; and (iii) a marketing agreement with Norfolk Southern, which provides that KCSR will perform haulage services for Norfolk Southern from Meridian, Mississippi to Dallas, Texas for an agreed upon haulage fee. This marketing agreement was entered into in May 2000 and became fully operational in June 2000. A portion of the decline in intermodal revenues resulted from the Norfolk Southern haulage traffic that replaced existing intermodal revenues as KCSR is now receiving a smaller per unit haulage fee than the share of revenue it received as part of the intermodal movement. The margins on this traffic are improved, however, because it has a lower cost base to KCSR as certain costs such as fuel and car hire are incurred and paid by Norfolk Southern. We believe an improvement in economic conditions could raise the demand for intermodal and automotive products resulting in an increase in related revenues. COAL. For the year ended December 31, 2001, coal revenue increased $13.7 million (13.0%) compared to the year ended December 31, 2000. These increases were primarily the result of higher demand from coal customers replenishing depleted stockpiles and to satisfy weather-related demands as a result of hot weather conditions in the summer months. Net tons of unit coal shipped increased approximately 9.3% for 2001. Also contributing to the increase was the return of the Kansas City Power & Light Company Hawthorn plant to production in the second quarter of 2001. The Hawthorn plant had been out of service since January 1999 due to an explosion at the Kansas City facility. See "--Trends and Outlook" for discussion of expected decline in coal revenues during 2002. OTHER. For the year ended December 31, 2001, other rail-related revenues declined $4.8 million, comprised mostly of declines in switching and demurrage revenues of $2.9 million and $2.2 million, respectively, partially offset by an increase in haulage revenues of $0.5 million. Declines in switching and demurrage revenues related primarily to volume declines reflecting the weak economy. Demurrage revenues also declined due to more efficient fleet utilization resulting from a well operating railroad. COSTS AND EXPENSES. Consolidated operating expenses increased $7.5 million (1.5%) to $521.9 million for the year ended December 31, 2001 compared to $514.4 for the year ended December 31, 2000 as a result of higher KCSR expenses of $2.3 million and higher expenses at certain other subsidiaries of $5.2 million. COMPENSATION AND BENEFITS. For the year ended December 31, 2001, consolidated compensation and fringe benefits expense declined $4.9 million compared to the year ended December 31, 2000, resulting from a $5.6 million reduction in compensation costs partially offset by an increase in fringe benefits expense of $0.7 million. This variance results primarily from a $4.2 million reduction of compensation and fringe benefits at KCSR resulting from a reduction in employee headcount arising from a workforce reduction in response to the 38 slowdown in the U.S. economy and lower costs associated with overtime due to improved operating efficiency. Fringe benefit costs were higher because of an approximate 17% increase in health insurance costs and an increase in unemployment insurance partially offset by a decline in expenses associated with stock option exercises and a $2.0 million reduction in retirement-based costs for certain union employees. The decline in compensation and fringe benefits expense was partially offset by the one-time severance costs of approximately $1.3 million associated with the workforce reduction. DEPRECIATION AND AMORTIZATION. Consolidated depreciation and amortization expense for the year ended December 31, 2001 increased $1.9 million compared to the year ended December 31, 2000. This increase was primarily the result of an increase in KCSR's asset base partially offset by property retirements and lower STB approved depreciation rates. Depreciation and amortization expense is expected to increase by approximately $2.3 million in 2002 due to the implementation of MCS, which is currently scheduled for implementation on KCSR in mid-2002. PURCHASED SERVICES. For the year ended December 31, 2001, purchased services expense increased $2.2 million compared to the year ended December 31, 2000. This variance is comprised of a $0.2 million decline in purchased services for KCSR offset by a $2.4 million increase in purchased services for other subsidiaries. The decline in purchased services for KCSR resulted from lower costs related to intermodal lift services and lower environmental compliance costs. The decline in intermodal lift services was the result of a decline in the number of trailers handled at terminals combined with an increase in lift charges billed to others. These declines in costs were partially offset by higher costs for locomotive and car repairs contracted to third parties as well as higher professional fees related to casualty claims. The increase in purchased services related to other subsidiaries consists mostly of higher holding company costs and higher legal costs at a subsidiary related to the settlement of a lawsuit. OPERATING LEASES. For the year ended December 31, 2001, consolidated operating lease expense decreased $0.8 million compared to the year ended December 31, 2000. This decline was primarily the result of lower KCSR operating lease costs due to the expiration of certain leases for rolling stock that have not been renewed due to better fleet utilization. Lease expense is expected to increase in 2002 as a result of costs associated with the lease for our new corporate headquarters building. We began leasing this new facility in April 2002 for an annual lease payment of approximately $2.5 million. The net increase in lease expense arising from our new corporate headquarters building is expected to approximate $1.9 million in 2002. FUEL. Fuel costs for the year ended December 31, 2001 decreased $4.2 million compared to the year ended December 31, 2000. This decrease was primarily the result of a 9.0% decline in the average price per gallon coupled with only a slight increase in fuel usage in 2001 compared to 2000. Fuel costs represented approximately 8.8% of total KCSR costs and expenses for the year ended December 31, 2001. CASUALTIES AND INSURANCE. For the year ended December 31, 2001, casualties and insurance expense increased $7.2 million compared to the year ended December 31, 2000 primarily as a result of higher casualties and insurance costs at KCSR of $6.6 million. Excluding the impact of the Duncan case settlement (See "Business--Legal Matters'') in 2000, KCSR casualties and insurance costs would have increased $10.8 million. This resulted from an $8.5 million increase in higher derailment costs related to several significant first quarter 2001 derailments and higher personal injury costs associated with third party claims. Also contributing to the fluctuation in casualties and insurance expense was an increase in the personal injury reserve of approximately $5.7 million arising from our annual actuarial study. During 2001, we changed our approach towards employee and third party personal injury liabilities by aggressively pursuing settlement of open claims. Our approach for many years prior to 2001 had been to challenge claimants and prolong litigation, thereby, in some cases management believes, increasing the long-term costs of the incident. This change in approach towards claim settlement led to substantial payments to claimants in 2001 approximating $44 million for current and prior year casualty incidents, including the Duncan case discussed above. Our process of establishment of liability reserves for these types of incidents is based upon an actuarial study by an independent outside actuary, a process 39 followed by most large railroads. The significant change in settlement philosophy in 2001 led to the need to establish additional reserves for personal injury liabilities as indicated by the annual actuarial study. While the current year change in approach led to an increase in reserves associated with personal injury casualty expense, we believe this approach will ultimately lead to a decline in required reserves and operating costs in the future. CAR HIRE. For the year ended December 31, 2001, car hire expense increased $5.0 million compared to the year ended December 31, 2000. An unusual number of significant first quarter 2001 derailments (as discussed above in "Casualties and Insurance"), as well as the effects of the economic slowdown, line washouts and flooding had an adverse impact on the efficiency of KCSR's operations during the first quarter and early second quarter of 2001. The resulting inefficiency led to congestion on KCSR. This congestion contributed to an increase in the number of freight cars from other railroads on our rail line, as well as a lower number of KCSR freight cars being used by other railroads, resulting in an increase in car hire expense in 2001 compared to 2000. Also contributing to the increase in car hire expense was the larger number of auto rack cars being used in 2001 compared to 2000 to serve the related increase in automotive traffic. Partially offsetting these effects were more efficient operations in the third and fourth quarters of 2001, which led to a decline in the number of freight cars and trailers from other railroads and third parties on our rail line. As operations continued to improve throughout the second half of 2001, car hire costs also continued to improve, declining 37.7% compared to the first half of 2001. OTHER. Other operating expenses increased $1.1 million year to year as a result of several factors. We recorded higher expenses associated with our petroleum coke bulk handling facility of approximately $3.2 million resulting from a $1.1 million expense related to a legal settlement and higher terminal operating costs. Additionally, in 2000, we recorded a $3.0 million reduction to the allowance for doubtful accounts due to the collection of an outstanding receivable, which reduced other operating expenses in 2000. These variances resulting in increases to other 2001 operating expenses were partially offset by a decline in materials and supplies expense of approximately $3.0 million. Additionally, in 2001 we recorded $5.8 million of gains on the sale of operating property compared to $3.4 million in 2000. OPERATING INCOME AND KCSR OPERATING RATIO. Consolidated operating income for the year ended December 31, 2001 decreased $2.4 million, or 4.2%, to $55.4 million compared to $57.8 million for the year ended December 31, 2000. This decrease resulted from a $7.5 million increase in operating expenses partially offset by a $5.1 million increase in revenues. The operating income and operating ratio for KCSR improved to $67.0 million and 88.2%, respectively, for the year ended December 31, 2001 compared to $66.0 million and 88.3%, respectively, for the year ended December 31, 2000. INTEREST EXPENSE. Consolidated interest expense for the year ended December 31, 2001 declined $13.0 million compared to the year ended December 31, 2000 primarily as a result of lower interest rates on variable rate debt, a lower average debt balance and lower amortization related to debt issue costs. Also contributing to the decline in interest expense was $4.2 million of capitalized interest recorded in 2001 relating to MCS. On a comparative basis, interest expense in 2001 increased as a result of a $2.4 million benefit related to an adjustment to interest expense due to the settlement of certain income tax issues for 2001 compared to a $5.5 million benefit for similar items in 2000. INCOME TAX EXPENSE. For the year ended December 31, 2001, the income tax provision was $2.8 million compared to an income tax benefit of $3.6 million for the year ended December 31, 2000. Exclusive of equity earnings from Grupo TFM, the consolidated effective income tax rate for 2001 was 51.8%. In 2000, the comparable effective tax rate was negative. This variance in the income tax provision and effective tax rate was primarily the result of an increase in domestic operating results and changes in associated book/tax temporary differences and certain non-taxable items. Also contributing to this variance was a lower settlement amount during 2001 compared to 2000 relating to various income tax audit issues. Exclusive of equity earnings from Grupo TFM for the years ended December 31, 2001 and 2000, we recognized pre-tax income of $5.4 40 million for the year ended December 31, 2001 compared to pre-tax income of $0.2 million for the year ended December 31, 2000. We intend to indefinitely reinvest the equity earnings from Grupo TFM and accordingly, we do not provide deferred income tax expense for the excess of our book basis over the tax basis of the investment in Grupo TFM. EQUITY IN NET EARNINGS (LOSSES) OF UNCONSOLIDATED AFFILIATES. For the year ended December 31, 2001, we recorded equity earnings of $27.1 million compared to equity earnings of $23.8 million for the year ended December 31, 2000. This increase is primarily the result of higher equity earnings from Grupo TFM of $6.9 million and an increase in equity earnings from Southern Capital of $1.0 million. These increases were partially offset by a $2.3 million decline in equity earnings from Mexrail and equity losses of $1.6 million recorded from PCRC relating mostly to costs associated with the start-up of the business. Equity earnings related to Grupo TFM increased to $28.5 million for the year ended December 31, 2001 from $21.6 million (exclusive of the 2000 extraordinary item of $1.7 million related to debt issuance costs for Grupo TFM discussed below) for the year ended December 31, 2000. During the year ended December 31, 2001, TFM recorded approximately $54 million in pre-tax income related to the reversion of certain concession assets to the Mexican government. Our equity earnings for the year ended December 31, 2001 reflect our proportionate share of this income of approximately $9.1 million. Grupo TFM's revenues increased 4.2% to $667.8 million for the year ended December 31, 2001 from $640.6 for the year ended December 31, 2000. These higher revenues were partially offset by an approximate 9.5% increase in operating expenses (exclusive of the income related to the reversion of certain concession assets to the Mexican government discussed above as well as other gains/losses recorded on the sales of other operating assets) resulting in a year to year decline in ongoing operating income of approximately 10.3%. Under U.S. GAAP, the deferred tax expense for Grupo TFM was $10.9 million for the year ended December 31, 2001 compared to a deferred tax benefit of $13.2 million (excluding the impact of the extraordinary item) for the year ended December 31, 2000. Results of our investment in Grupo TFM are reported under U.S. GAAP while Grupo TFM reports its financial results under International Accounting Standards. Because we are required to report our equity earnings (losses) in Grupo TFM under U.S. GAAP and Grupo TFM reports under IAS, differences in deferred income tax calculations and the classification of certain operating expense categories occur. The deferred income tax calculations are significantly impacted by fluctuations in the relative value of the Mexican peso versus the U.S. dollar and the rate of Mexican inflation, and can result in significant variability in the amount of equity earnings (losses) reported by us. INCOME FROM DISCONTINUED OPERATIONS. Net income for the year ended December 31, 2000 includes income from discontinued operations (Stilwell) of $363.8 million. As a result of the spin-off of Stilwell effective July 12, 2000, we did not report income from discontinued operations during the year ended December 31, 2001. CUMULATIVE EFFECT OF ACCOUNTING CHANGE AND EXTRAORDINARY ITEMS. As a result of the implementation of SFAS 133, we recorded an after-tax charge to earnings of $0.4 million in the first quarter of 2001. This charge is presented as a cumulative effect of an accounting change in the accompanying consolidated statements of income for the year ended December 31, 2001. Also, as discussed in "--Recent Developments--Debt Refinancing and Re-capitalization of KCS's Debt Structure," we and Grupo TFM refinanced certain debt during the year ended December 31, 2000. Debt retirement costs arising from all debt refinancing transactions completed in 2000 totaled $8.7 million (15c per diluted share) and are presented as extraordinary items in the accompanying consolidated financial statements for the year ended December 31, 2000. YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999 INCOME FROM CONTINUING OPERATIONS. For the year ended December 31, 2000, income from continuing operations increased $15.2 million to $25.4 million from $10.2 million for the year ended December 31, 1999. A 41 $20.1 million increase in equity earnings from Grupo TFM and a $10.6 million decrease in the income tax provision were partially offset by a decline in U.S. operating income of $6.3 million and an increase in interest expense of $8.4 million. REVENUES. Revenues totaled $572.2 million for the year ended December 31, 2000 versus $601.4 million in the comparable period in 1999. This $29.2 million, or 4.9%, decrease resulted from lower KCSR revenues of approximately $23.3 million, as well as lower revenues at other transportation companies due to demand driven declines. While KCSR experienced revenue growth in certain product sectors including plastics, automotive, food products, paper and forest products and metal/ scrap, most commodities declined due to demand driven traffic declines. As the general economy slowed, industrial production and manufacturing also decreased leading to a decline in demand for product shipments. The following discussion provides an analysis of KCSR revenues by commodity group. CHEMICAL AND PETROLEUM. For the year ended December 31, 2000, chemical and petroleum product revenues decreased $6.3 million, or 4.8%, compared with the year ended December 31, 1999, resulting primarily from lower organic and agri-chemical revenues. Organic revenues declined 15.9% due to a merger within the chemical industry and a new dedicated soda ash terminal opening on the competitor railroad which originates the soda ash, which diverted soda ash movements from KCSR. PAPER AND FOREST. Paper and forest product revenues increased $2.2 million, or 1.7%, period to period as a result of increased revenues for paper/pulp products, lumber products and metal/scrap products partially offset by declines in pulpwood, logs and chips and military/other products. Paper/pulp products increased due to the expansion of several paper mills directly served by KCSR while lumber revenues improved due to a 1% increase in carloads and changes in length of haul. Higher metal/scrap revenues resulted from an increase in steel shipments to the domestic oil exploration industry, which uses steel for drilling pipe. Demand for pulpwood, logs and chips declined due to market weakness while the decline in military/other revenues resulted from higher 1999 revenues due to National Guard movements in 1999 from Camp Shelby, Mississippi to Fort Irving, California. AGRICULTURAL AND MINERAL. Agricultural and mineral product revenues decreased $2.9 million, or 3.0%, for the year ended December 31, 2000 compared with the year ended December 31, 1999. This decline resulted primarily from lower export grain revenues due to competitive pricing pressures, weather-related operational problems and weakness in the export market. INTERMODAL AND AUTOMOTIVE. Intermodal and automotive revenues increased $3.4 million, or 5.8%, for the year ended December 31, 2000 compared to the year ended December 31, 1999. This improvement was comprised primarily of an increase in automotive revenues, which increased 67.6% year to year, partially offset by a 3.2% decline in intermodal revenues. Automotive revenues increased due, in part, to higher traffic levels for the movement of automobile parts originating in the upper midwest of the United States and terminating in Mexico. Also contributing to the increase in automotive revenues was additional traffic handled by KCSR from Mexico, Missouri to Kansas City and the Mazda traffic resulting from the opening of the IFG. Intermodal revenues were affected by the fourth quarter 1999 closure of two intermodal facilities that were not meeting profit expectations. These closures resulted in a loss of revenues, but also improved operating efficiency and profitability of this business sector. Additionally, during the second quarter of 2000, we entered into a marketing agreement with Norfolk Southern whereby we agreed to perform haulage services for Norfolk Southern from Meridian to Dallas for an agreed upon haulage fee. Some of this haulage traffic replaced previous carload intermodal traffic while some of the traffic was incremental to KCSR. A portion of the decline in intermodal revenues resulted from the Norfolk Southern haulage traffic that replaced existing intermodal revenues, as KCSR received a smaller per unit haulage fee than the share of revenue it received as part of the intermodal movement. This traffic, however, is more profitable to KCSR as certain costs such as fuel and car hire are incurred and paid by Norfolk Southern. 42 COAL. Coal revenues declined $12.4 million, or 10.6%, for the year ended December 31, 2000 compared with the year ended December 31, 1999. Lower unit coal revenues were attributable to an approximate 8% decline in tons delivered coupled with a decline in revenue per carload due to changes in length of haul as KCS's longest haul utility temporarily reduced its coal deliveries in the second half of 2000. The decline in tons delivered was primarily due to the actions of one of our major coal customers, which reduced coal deliveries to decrease inventory stockpiles. COSTS AND EXPENSES. Consolidated costs and expenses decreased $22.9 million year to year. Excluding $12.7 million of unusual costs and expenses recorded during the fourth quarter of 1999, costs and expenses declined $10.2 million period to period. Operational efficiencies at KCSR led to decreases in compensation, materials and supplies, car hire, and purchased services expense. These expense reductions were offset by increases in fuel, casualty and lease expense. Costs and expenses related to subsidiaries other than KCSR decreased $8.1 million year to year, due primarily to volume-related declines and the revision to the estimate of the allowance for doubtful accounts discussed in "Other" below. COMPENSATION AND BENEFITS. Consolidated compensation and benefits expense for the year ended December 31, 2000 decreased $8.2 million versus the comparable 1999 period. This decline resulted primarily from lower KCSR compensation and benefits expense of $7.8 million. Exclusive of $3.0 million of certain 1999 unusual costs and expenses, KCSR compensation and benefits declined $4.8 million. Wage increases to certain classes of union employees were offset by reduced employee counts, lower overall overtime costs, and the use of fewer relief train crews. Improvements in operating efficiencies during 2000, as well as the absence of congestion-related issues that existed during portions of 1999, contributed to the decline in overtime and relief crew costs. DEPRECIATION AND AMORTIZATION. Consolidated depreciation and amortization expense was $56.1 million for the year ended December 31, 2000 compared to $56.9 million for the year ended December 31, 1999. Depreciation related to property acquisitions was offset by property retirements and lower STB approved depreciation rates. PURCHASED SERVICES. For the year ended December 31, 2000, purchased services expense declined $4.1 million compared to the year ended December 31, 1999, primarily due to lower KCSR costs of $3.8 million. The decrease in KCSR purchased services expense resulted from lower costs associated with short-term locomotive leases and other purchased services (partially related to Year 2000 contingency efforts in 1999) partially offset by higher costs associated with maintenance contracts for the 50 new leased locomotives. OPERATING LEASES. For the year ended December 31, 2000, consolidated operating lease expense increased $5.4 million compared to the year ended December 31, 1999 primarily as a result of the 50 new GE AC 4400 locomotives leased by KCSR during fourth quarter 1999. FUEL. For the year ended December 31, 2000, fuel expense increased $13.9 million, or 40.6%, compared to the year ended December 31, 1999. An increase in the average fuel price per gallon of approximately 64% was somewhat offset by a decrease in fuel usage of approximately 14%. While higher market prices significantly impacted overall fuel costs, improved fuel efficiency was achieved as a result of the lease of the 50 new fuel-efficient locomotives by KCSR in late 1999 and an aggressive fuel conservation plan which began in mid-1999. Fuel costs represented approximately 9.7% of KCSR operating expenses in 2000 compared to 6.7% in 1999. CASUALTIES AND INSURANCE. For the year ended December 31, 2000, consolidated casualties and insurance expense increased $4.1 million compared with the year ended December 31, 1999. This variance resulted primarily from an increase in KCSR related expenses of $3.4 million, reflecting $4.2 million in costs related to the Duncan case (See ''Business--Legal Matters'') and higher personal injury-related costs partially offset by lower derailment costs. 43 CAR HIRE. For the year ended December 31, 2000, car hire expense declined $7.6 million, or 33.9%, compared to 1999. Improved operations and the easing of congestion drove this improvement. During 1999, KCSR experienced significant congestion-related issues. OTHER. For the year ended December 31, 2000, other operating expenses declined $25.6 million, or 31.3%, compared to the year ended December 31, 1999. This significant decline resulted from several factors as follows: 1) a reduction in materials and supplies expense of approximately $4.8 million related mostly to lower costs associated with locomotives and related repairs due to the lease of the 50 AC 4400 locomotives in December 1999; 2) a $1.9 million decline in property and franchise taxes; 3) a $3.0 million revision to the estimate of the allowance for doubtful accounts at the holding company. This allowance was revised based on the collection of approximately $1.8 million of a receivable from an affiliate and agreement for payment of the remaining amount; 4) an approximate $2.0 million reduction in costs associated with third party sales from KCS's tie producing facility; and 5) the impact of gains on the sale of operating property, which were approximately $3.4 million in 2000 compared to an approximate $0.6 million gain in 1999. Also in 1999, there was an approximate $5.6 million loss associated with the write-off of certain operating assets. Also contributing to the decline were lower costs at various other subsidiaries and higher holding company costs in 1999 relating mostly to spin-off related and legal matters. OPERATING INCOME AND OPERATING RATIO. Consolidated operating income for the year ended December 31, 2000 decreased $6.3 million, or 9.8%, to $57.8 million, resulting from a $29.2 million decrease in revenues and a $22.9 million decrease in operating expenses. Excluding $12.7 million of 1999 unusual costs and expenses, consolidated operating income for the year ended December 31, 2000 would have been $19.0 million lower than 1999. KCSR's operating income declined $8.4 million to $66.0 million for the year ended 2000 compared to $74.4 million for the year ended 1999. Exclusive of $12.1 million of 1999 unusual costs and expenses, KCSR operating income declined $20.5 million. KCSR's operating ratio was 88.3% for the year ended December 31, 2000 compared to 85.2% (exclusive of 1999 unusual costs and expenses) for the year ended December 31, 1999. INTEREST EXPENSE. Consolidated interest expense for the year ended December 31, 2000 increased $8.4 million, or 14.6%, from the year ended December 31, 1999. This increase was due to higher interest rates and the amortization of debt issuance costs associated with the debt re-capitalization in January and September 2000 partially offset by lower overall debt balances and a benefit related to the adjustment of interest expense resulting from the settlement of certain income tax issues. INCOME TAX EXPENSE. For the year ended December 31, 2000, the income tax benefit was $3.6 million compared to an income tax provision of $7.0 million for the year ended December 31, 1999. Exclusive of equity earnings from Grupo TFM, the consolidated effective income tax rate for 2000 was (1,800%) compared to 44.6% in 1999. This variance in the income tax provision and effective rate was primarily the result of a decrease in domestic operating results and changes in associated book/tax temporary differences and certain non-taxable items. Also contributing to this variance was the settlement of various prior year income tax audit issues during 2000. Exclusive of equity earnings from Grupo TFM for the years ended December 31, 2000 and 1999, we recognized pre-tax income of $0.2 million for the year ended December 31, 2000 compared to pre-tax income of $15.7 million for the year ended December 31, 1999. We intend to indefinitely reinvest the equity earnings from Grupo TFM and accordingly, we do not provide deferred income tax expense for the excess of our book basis over the tax basis of our investment in Grupo TFM. EQUITY IN NET EARNINGS (LOSSES) OF UNCONSOLIDATED AFFILIATES. We recorded $23.8 million of equity earnings from unconsolidated affiliates for the year ended December 31, 2000 compared to $5.2 million for the year ended December 31, 1999. This $18.6 million increase was primarily attributable to higher equity earnings from Grupo TFM partially offset by a decline in equity earnings from Southern Capital (relates to gain on sale of non-rail loan portfolio by Southern Capital in 1999). Equity earnings related to Grupo TFM increased $20.1 million to $21.6 million (exclusive of extraordinary item of $1.7 million related to Grupo TFM--See "--Recent Developments--Debt Refinancing and 44 Re-capitalization of KCS's Debt Structure") for the year ended December 31, 2000 from $1.5 million for the year ended December 31, 1999. This increase resulted from fluctuations in deferred income taxes and higher Grupo TFM revenues and operating income, which improved 22.1% and 42.2%, respectively (exclusive of gains/losses on sales of operating property in 2000 and 1999). Revenue growth resulted from Grupo TFM's strategic positioning in a growing Mexican economy and NAFTA marketplace, as well as the ability for Grupo TFM to attract new business through its marketing efforts. Grupo TFM's 2000 operating expenses rose 16.2% (exclusive of gains/losses on sales of operating property in 2000 and 1999) compared to the prior year primarily as a result of volume related cost increases in salaries, wages and benefits, fuel, car hire and operating leases, partially offset by lower materials and supplies expense. In addition to volume related increases, fuel costs were driven by higher prices and car hire was affected by congestion near the U.S. and Mexican border. Under IAS, Grupo TFM's operating ratio improved to 74.0% for the year ended December 31, 2000 versus 76.6% for the comparable 1999 period. Also contributing to the increase in Grupo TFM equity earnings was the fluctuation in deferred income taxes. Under U.S. GAAP, the deferred tax benefit for Grupo TFM was $13.2 million (excluding the impact of the extraordinary item) for the year ended December 31, 2000 compared to a deferred tax expense of $11.5 million in 1999. INCOME FROM DISCONTINUED OPERATIONS. Net income for the year ended December 31, 2000 and 1999 includes income from discontinued operations (Stilwell) of $363.8 million and $313.1 million, respectively. This increase was primarily due to higher average assets under management in 2000 coupled with improving margins period to period. EXTRAORDINARY ITEMS. As discussed in "--Recent Developments-- Debt Refinancing and Re-capitalization of KCS's Debt Structure," KCS and Grupo TFM refinanced certain debt during the year ended December 31, 2000. Debt retirement costs arising from all debt refinancing transactions completed in 2000 totaled $8.7 million (15c per diluted share) and are presented as extraordinary items in the accompanying consolidated financial statements for the year ended December 31, 2000. There were no extraordinary items reported during 1999. TRENDS AND OUTLOOK We continue to make progress toward our goal of improving domestic profitability and reducing corporate debt. Despite the impact of the continuing lagging economy, we were able to maintain our revenue during the first quarter of 2002 and more than double our operating income compared to the same period in 2001. Our first quarter 2002 diluted earnings per share increased 90% compared to the first quarter of 2001. Domestic operating income increased 120% to $13.4 million from $6.1 million in the first quarter of 2001, despite the current economic environment and competitive revenue pressures. Consolidated revenues for the first quarter of 2002 declined slightly, while operating expenses decreased $8.8 million quarter to quarter, primarily as a result of lower costs for compensation, fuel, car hire and casualties. The decline in compensation costs reflects improved operational efficiency and a 6% employee reduction arising mostly from the cost reduction strategy implemented at the end of March 2001. Fuel costs were substantially lower due to an approximate $0.20 decline in the average market price per gallon and our forward purchase position at December 31, 2001. Casualty expenses were lower due to the absence of significant derailment and personal injury casualty events experienced during the first quarter of 2001. Additionally, Grupo TFM continues to provide growth to our earnings as ongoing equity in earnings increased $2.8 million quarter to quarter. We have been aggressively reducing our debt balance since the spin-off of Stilwell in July 2000. Our total corporate debt balance as of the date of the spin-off was approximately $682 million compared to approximately $628 million at March 31, 2002. Giving effect to the $30 million debt repayment we made after March 31, 2002 and to the sale of the notes and the application of the net proceeds therefrom, as if they had occurred as of March 31, 2002, our total debt as of that date would have been approximately $601 million. This trend is the result of a focused costs control, sound cash management and the sale of various non-core assets, including our investment in Mexrail to TFM in March 2002. Debt reduction will continue to be a high priority for us. 45 We have resolved our dispute with our Mexican partner, Grupo TMM in a manner satisfactory for both parties, which included the sale of our interest in Mexrail to Grupo TFM. Although we no longer directly own 49% of Mexrail, we retain an indirect ownership of Mexrail through a 36.9% interest in Grupo TFM. A current outlook for our businesses for the remainder of 2002 is as follows (refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview", regarding forward-looking comments): We expect coal revenues for the remainder of 2002 to decline as a result of a contractual rate reduction at SWEPCO, as well as the loss of business due to the expiration of another customer's contract that was not renewed. We believe, however, that total revenues for 2002 will remain essentially flat compared to 2001 as these anticipated coal revenue declines are expected to be offset by higher revenues in other commodity groups through new business and targeted rate increases. We recently announced a marketing agreement with BNSF, which we believe will provide important opportunities to grow our revenue base, particularly in the chemical, grain and forest product markets. Except as outlined herein, variable costs and expenses are expected to be proportionate with revenue activity, assuming normalized rail operations. Fuel prices are expected to decline based on existing market conditions, but are subject to market price fluctuations. To mitigate the market risk associated with fuel, we currently have approximately 47% of our remaining budgeted fuel usage for 2002 under purchase commitments, which lock in a specific price. Casualty expenses are expected to be lower in the remainder of 2002 compared to 2001 based on our continued focus and success on safety issues and the settlement approach implemented during 2001. Insurance costs are expected to rise as the insurance industry responds to the September 11, 2001 terrorist attacks and health care costs are also expected to be higher in 2002 based on the market trends. These increases are expected to be somewhat offset by declines in certain railroad retirement issues as a result of decreasing costs resulting from the Railroad Ratification and Survivor's Improvement Act of 2001. Depreciation expense is expected to increase beginning in mid-2002 following the implementation of MCS and operating lease expense is expected to remain relatively flat. We expect to continue to participate in the earnings/losses from our equity investments in Grupo TFM, Southern Capital and PCRC. Due to the variability of factors affecting the Mexican economy, we can make no assurances as to the impact that a change in the value of the peso or a change in Mexican inflation will have on the results of Grupo TFM. KCS and Grupo TMM have exercised their call option and intend to cause TFM to purchase the 24.6% interest in Grupo TFM currently owned by the Mexican government prior to July 31, 2002. See "Summary--Recent Events--Purchase of Government Interest in Grupo TFM." LIQUIDITY AND CAPITAL RESOURCES. CASH FLOW INFORMATION AND CONTRACTUAL OBLIGATIONS Summary cash flow data is as follows:
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------- -------------- 1999 2000 2001 2001 2002 ------ ------- ------ ------ ------ Cash flows provided by (used for): (IN MILLIONS) Operating activities.................... $178.0 $ 77.2 $ 76.1 $ 13.8 $ 37.2 Investing activities.................... (97.2) (101.8) (55.7) (13.6) 22.8 Financing activities.................... (74.5) 34.2 (17.2) 6.9 (27.9) ------ ------- ------ ------ ------ Net increase in cash and equivalents....... 6.3 9.6 3.2 7.1 32.1 Cash and equivalents at beginning of period 5.6 11.9 21.5 21.5 24.7 ------ ------- ------ ------ ------ Cash and equivalents at end of period...... $ 11.9 $ 21.5 $ 24.7 $ 28.6 $ 56.8 ====== ======= ====== ====== ======
46 During the three months ended March 31, 2002, our consolidated cash position increased $32.1 million from December 31, 2001, resulting primarily from operating cash flows, proceeds form the disposal of property and proceeds from the sale of Mexrail, partially offset by property acquisitions and net repayments of long-term debt. During the year ended December 31, 2001, our consolidated cash position increased $3.2 million from December 31, 2000. This increase resulted primarily from operating cash flows, proceeds from the disposal of property and the issuance of common stock under employee stock plans, partially offset by property acquisitions, investments in and loans to affiliates and the net repayment of long-term debt. OPERATING CASH FLOWS. Our cash flow from operations has historically been positive and sufficient to fund operations, as well as KCSR roadway capital improvements, other capital improvements and debt service. External sources of cash (principally bank debt and public debt) have been used to refinance existing indebtedness and to fund acquisitions, new investments, equipment additions and Company common stock repurchases. The following table summarizes consolidated operating cash flow information (DOLLARS IN MILLIONS):
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------- ---------------- 1999 2000 2001 2001 2002 ------- ------- ------- ------- ------- Net Income......................................... $ 323.3 $ 380.5 $ 30.7 $ 5.9 $ 11.7 Income from discontinued operations................ (313.1) (363.8) -- -- -- Depreciation and amortization...................... 56.9 56.1 58.0 14.4 14.9 Equity in undistributed (earnings) losses.......... (5.2) (23.8) (27.1) (11.2) (4.9) Distributions from unconsolidated affiliates....... -- 5.0 3.0 3.0 -- Deferred income taxes.............................. 9.8 23.1 30.4 4.8 1.0 Transfer from Stilwell............................. 56.6 -- -- -- -- Gain on sale of Mexrail............................ -- -- -- -- (4.4) Gain on sales of assets............................ (0.6) (3.4) (5.8) -- (4.5) Extraordinary items, net of taxes.................. -- 7.5 -- -- -- Tax benefit realized upon exercise of stock options 6.4 9.3 5.6 2.8 0.8 Change in working capital items.................... 49.7 (14.3) (33.3) (6.0) 23.1 Other.............................................. (5.8) 1.0 14.6 0.1 (0.5) ------- ------- ------- ------- ------- Net operating cash flow......................... $ 178.0 $ 77.2 $ 76.1 $ 13.8 $ 37.2 ======= ======= ======= ======= =======
Net operating cash inflows were $37.2 million and $13.8 million for the three months ended March 31, 2002 and 2001 respectively. The $23.4 million increase in operating cash flows was primarily attributable to higher net income and changes in working capital balances, comprised mainly of the receipt of an income tax refund during the first quarter of 2002. Net operating cash inflows were $76.1 million and $77.2 million for the years ended December 31, 2001 and 2000, respectively. This $1.1 million decrease in operating cash flows was primarily attributable to changes in working capital balances relating primarily to casualty payments and variances in the current tax liability, lower cash flows related to the tax benefit associated with the exercise of stock options, an increase in income from continuing operations and fluctuations in certain non-cash adjustments to net income. Net operating cash inflows in 2000 of $77.2 million declined $100.8 million compared to 1999 net operating cash inflows of $178.0 million. This decline was mostly attributable to the 1999 receipt of a $56.6 million transfer from Stilwell. Also contributing to the decline was the payment during 2000 of certain accounts payable and accrued liabilities, including accrued interest of approximately $11.4 million related to indebtedness, as well as the decline in the contribution of domestic operations to income from continuing operations. 47 INVESTING CASH FLOWS. Net investing cash flows (outflows) were $22.8 million and ($13.6) million for the three months ended March 31, 2002 and 2001, respectively. This $36.4 million difference was driven by proceeds received from the sale of our investment in Mexrail of $31.4 million and proceeds received from the sale of other assets of approximately $9.3 million in the first quarter of 2002. These cash inflows were partially offset by a $3.5 million increase in capital expenditures and a $1.4 million increase in investments in and loans to affiliates. Net investing cash outflows were $55.7 million and $101.8 million during the years ended December 31, 2001 and 2000, respectively. This variance of $46.1 million results primarily from a $38.5 million decline in 2001 capital expenditures and a $12.6 million increase in funds received from property dispositions, partially offset by an increase in investments in and loans to affiliates of $4.0 million. During the third quarter of 2001, we entered into a sale/leaseback transaction whereby we sold 446 boxcars to a third party for approximately $7.8 million. We realized a $4.7 million gain on this transaction, which has been deferred and will be recognized ratably over the lease term. The proceeds received from the sale of these boxcars are included as funds received from property dispositions in the accompanying cash flow statement and were used to reduce the outstanding debt. Net investing cash outflows were $101.8 million and $97.2 million for the years ended December 31, 2000 and 1999, respectively. The $4.6 million difference results from an increase in investments in and loans to affiliates of $0.3 million (which includes the impact of repayment of $16.6 million from Stilwell during 1999), partially offset by a decrease in capital expenditures of $1.7 million and a $2.7 million increase in funds received from property disposals. Cash used for property acquisitions was $17.4 and $13.9 million for the three months ended March 31, 2002 and 2001, respectively and $66.0, $104.5, and $106.2 million for the years ended December 31, 2001, 2000 and 1999, respectively. Cash (used for) provided by investments in and loans to affiliates was ($1.8) and ($0.4) million in the three months ended March 31, 2002 and 2001, respectively, and ($8.2), ($4.2) and $12.7 million for the years ended December 31, 2001, 2000 and 1999, respectively. Proceeds from the disposals of property were $9.3 and $0.5 million for the three months ended March 31, 2002 and 2001, respectively, and $18.1, $5.5 and $2.8 million for the years ended December 31, 2001, 2000 and 1999, respectively. Generally, operating cash flows and borrowings under lines of credit have been used to finance property acquisitions and investments in and loans to affiliates. FINANCING CASH FLOWS. Financing cash outflows are used primarily for the repayment of debt while financing cash inflows are generated from proceeds from the issuance of long-term debt and proceeds from the issuance of common stock under stock plans. Also included in financing cash flows are fluctuations in long-term liability accounts including long-term personal injury reserves. Financing cash flows for the three months ended March 31, 2002 and 2001, respectively and for the years ended December 31, 2001, 2000 and 1999 respectively, were as follows: . Borrowings of $0 and $15.0 million the three months ended March 31, 2002 and 2001, respectively, and $35.0, $1,052.0 and $21.8 million in 2001, 2000 and 1999, respectively. Borrowings in 2001 (from KCS Revolver) were used to make payments on the term debt. Proceeds from the issuance of debt in 2000 were used for refinancing debt in January and September 2000. Proceeds from the issuance of debt in 1999 were used for stock repurchases. . Repayment of indebtedness in the amounts of $30.5 and $7.9 million for the three months ended March 31, 2002 and 2001, respectively, and $51.3, $1,015.4 and $97.5 million in 2001, 2000 and 1999, respectively. Repayment of indebtedness is generally funded through operating cash flows and proceeds from the disposals of property. For the three months ended March 31, 2002, the repayment of indebtedness was funded through operating cash flows as well as from proceeds from the disposals of property. In 2001, the repayment of indebtedness was funded through borrowings under the KCS Revolver, as well as operating cash flows and proceeds from the disposals of property. In 2000, repayments of debt included the refinancing of debt in January and September 2000. Repayments in 1999 were partially funded through a transfer from Stilwell. 48 . Payment of debt issuance costs of $0.4, $17.6 and $4.2 million in 2001, 2000 and 1999, respectively. During the year ended December 31, 2000, we paid $17.6 million of debt issuance costs including $13.4 million associated with the January 2000 restructuring of KCS's debt and approximately $4.2 million associated with the $200 million offering of debt securities in the third quarter of 2000. Amounts paid in 1999 also related to the January 2000 debt restructuring. . Repurchases of KCS common stock during 1999 of $24.6 million were funded with borrowings under existing lines of credit and internally generated cash flows. . Proceeds from the sale of KCS common stock pursuant to stock plans of $2.1 million and $0.8 million for the three months ended March 31, 2002 and 2001, respectively, and $8.9, $17.9 and $37.0 million in 2001, 2000 and 1999, respectively. . Payment of cash dividends of $0.1 million in each of the three month periods ended March 31, 2002 and 2001, and $0.2, $4.8 and $17.6 million in 2001, 2000 and 1999, respectively. . Net payments of long-term casualty claims of $1.0 and ($3.1) million for the three months ended March 31, 2002 and 2001, respectively, and $8.3, ($1.5) and ($6.0) million in 2001, 2000 and 1999, respectively. CONTRACTUAL OBLIGATIONS. The following table outlines our obligations for payments under capital leases, debt obligations and operating leases for the periods indicated as of December 31, 2001. Typically, payments for these obligations are expected to be funded through operating cash flows. If operating cash flows are not sufficient, funds received from other sources, including property dispositions and employee stock plans, might also be available.
CAPITAL LEASES OPERATING LEASES ------------------------- --------------------------- MINIMUM NET LEASE LESS PRESENT LONG-TERM TOTAL SOUTHERN PAYMENTS INTEREST VALUE DEBT DEBT CAPITAL THIRD PARTY TOTAL -------- -------- ------- --------- ------ -------- ----------- ------ (DOLLARS IN MILLIONS) 2002....... $0.7 $0.2 $0.5 $ 46.2 $ 46.7 $ 34.1 $ 21.1 $ 55.2 2003....... 0.7 0.1 0.6 49.2 49.8 34.1 19.7 53.8 2004....... 0.6 0.2 0.4 40.9 41.3 34.1 15.6 49.7 2005....... 0.5 0.1 0.4 50.0 50.4 28.3 13.7 42.0 2006....... 0.4 0.1 0.3 264.0 264.3 24.3 6.4 30.7 Later years 0.9 0.1 0.8 205.1 205.9 180.4 54.1 234.5 ---- ---- ---- ------ ------ ------ ------ ------ Total...... $3.8 $0.8 $3.0 $655.4 $658.4 $335.3 $130.6 $465.9 ==== ==== ==== ====== ====== ====== ====== ======
CAPITAL EXPENDITURE REQUIREMENTS Capital improvements for KCSR roadway track structures have historically been funded with cash flows from operations and external debt. We have traditionally used equipment trust certificates for major purchases of locomotives and rolling stock, while using internally generated cash flows or leasing for other equipment. Through our Southern Capital joint venture, we have the ability to finance railroad equipment, and therefore, have increasingly used lease-financing alternatives for its locomotives and rolling stock. Southern Capital was used to finance the purchase of the 50 new GE AC 4400 locomotives in November and December 1999. These locomotives are being financed by KCSR under an operating lease with Southern Capital. Internally generated cash flows and borrowings under existing lines of credit were used to finance capital expenditures (property acquisitions) of $17.4 million and $13.9 million for the three months ended March 31, 2002 and 2001, respectively, and $66.0 million, $104.5 million and $106.2 million in 2001, 2000 and 1999, respectively. Internally generated cash flows and borrowings under the existing line of credit are expected to be used to fund capital programs for 2002, currently estimated at approximately $67 million. 49 KCSR MAINTENANCE KCSR, like all railroads, is required to maintain its 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 the Federal Railroad Administration's track standards and are accounted for in accordance with applicable regulatory accounting rules. Management expects to continue to fund roadway and equipment maintenance expenditures with internally generated cash flows. Maintenance expenses (exclusive of amounts capitalized) for way and structure (roadbed, rail, ties, bridges, etc.) and equipment (locomotives and rail cars) for each of the three years ended December 31, 2001, as a percentage of KCSR revenues is as follows (DOLLARS IN MILLIONS):
KCSR MAINTENANCE ---------------------------------- WAY AND STRUCTURE EQUIPMENT ---------------- ---------------- PERCENT OF PERCENT OF AMOUNT REVENUE AMOUNT REVENUE ------ ---------- ------ ---------- 2001... $43.9 7.8% $44.8 7.9% 2000... 39.8 7.1 44.3 7.9 1999... 41.6 7.1 52.1 8.9
CAPITAL STRUCTURE Components of our capital structure are as follows (DOLLARS IN MILLIONS). For purposes of this analysis, stockholders' equity for 1999 (prior to the spin-off of Stilwell) excludes the net assets of Stilwell.
DECEMBER 31, ---------------------------- 1999 2000 2001 MARCH 31, 2002 -------- -------- -------- -------------- Debt due within one year............... $ 10.9 $ 36.2 $ 46.7 $ 47.9 Long-term debt......................... 750.0 638.4 611.7 580.0 -------- -------- -------- -------- Total debt.......................... 760.9 674.6 658.4 627.9 Stockholders' equity (excludes the net assets of Stilwell).................. 468.5 643.4 680.3 698.7 -------- -------- -------- -------- Total debt plus equity................. $1,229.4 $1,318.0 $1,338.7 $1,326.6 ======== ======== ======== ======== Total debt as a percent of total debt plus equity ("debt ratio") 61.9% 51.2% 49.2% 47.3%
Our consolidated ratio of debt to total capitalization was 47.3% and 49.2% at March 31, 2002 and December 31, 2001, respectively. Our debt decreased $30.5 million from December 31, 2001 to $627.9 million at March 31, 2002 as a result of the repayment of long-term debt. This decrease in debt was coupled with an increase in the stockholders' equity of $18.4 million to $698.7 million at March 31, 2002. This increase was due primarily to net income of $11.7 million and the issuance of common stock under employee stock plans. Our consolidated debt ratio as of December 31, 2001 decreased 2.0 percentage points compared to December 31, 2000. Total debt decreased $16.2 million as a result of net repayments of long-term borrowings. Stockholders' equity increased $36.9 million as a result of 2001 net income of $30.7 million, and the issuance of common stock under employee stock plans partially offset by dividends and a reduction of equity related to accumulated comprehensive income arising from a SFAS 133 adjustment at Southern Capital. The increase in stockholders' equity coupled with the decrease in debt resulted in the decline in the debt ratio from December 31, 2000. 50 At December 31, 2000, our consolidated debt ratio decreased 10.7 percentage points compared to December 31, 1999. Total debt decreased $86.3 million as a result of the assumption of $125 million of debt by Stilwell partially offset by net long-term borrowings. Stockholders' equity increased $174.9 million as a result of 2000 income from continuing operations of $25.4 million, the assumption of $125 million of debt by Stilwell and the issuance of common stock under employee stock plans partially offset by extraordinary items of $8.7 million and dividends. The increase in stockholders' equity coupled with the decrease in debt resulted in the decline in the debt ratio from December 31, 1999. We anticipate that the ratio of debt to total capitalization will decline slightly during the remainder of 2002 as debt continues to be reduced and equity increases. OVERALL LIQUIDITY We have financing available under our revolving credit facility with a maximum borrowing amount of $100 million. As of March 31, 2002, all $100 million was available under our revolving credit facility. The New Credit Agreement contains, among other provisions, various financial covenants. The availability of our revolving credit facility is conditioned on compliance with such financial covenants. As a result of certain financial covenants contained in the New Credit Agreement, maximum utilization of KCS's available line of credit may be restricted. We were in full compliance with all covenant provisions of the KCS Credit Facilities (as amended) at March 31, 2002 and were in full compliance with the covenants of the New Credit Agreement at June 30, 2002 and expect to be in compliance for the foreseeable future. We filed a Universal Shelf Registration Statement on Form S-3 ("Initial Shelf"--Registration No. 33-69648) in September 1993, as amended in April 1996, for the offering of up to $500 million in aggregate amount of securities. The SEC declared the Initial Shelf effective on April 22, 1996; however, no securities have been issued thereunder. We carried forward $200 million aggregate amount of unsold securities from the Initial Shelf to a Shelf Registration Statement filed on Form S-3 ("Second Shelf"--Registration No. 333-61006) on May 16, 2001 for the offering of up to $450 million in aggregate amount of securities. The SEC declared the Second Shelf effective on July 5, 2001. 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. To date, no securities have been issued under either the Initial Shelf or Second Shelf. As discussed in, ''Business--Rail Network--Significant Investments--Grupo TFM,'' Grupo TMM and us, or either Grupo TMM or us, could be required to purchase the Mexican government's interest in TFM. However, this provision is not exercisable prior to October 31, 2003 without the consent of Grupo TFM. As discussed in "Summary--Recent Events--Purchase of Government Interest in Grupo TFM," KCS and Grupo TMM have exercised their call option and intend to cause TFM to purchase the 24.6% interest in Grupo TFM currently owned by the Mexican government prior to July 31, 2002. We completed a private offering of $200 million of 71/2% senior notes due 2009 of KCSR in June 2002. The Initial Purchasers of the outstanding notes subsequently resold the outstanding notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to qualified buyers outside the United States in reliance upon Regulation S under the Securities Act. Our net proceeds from the sale of the outstanding notes (after deducting the Initial Purchasers' discounts and commissions and offering expenses payable by us) were approximately $195.8 million. We used the net proceeds to refinance existing bank debt and other indebtedness. See "Description of New Credit Agreement and Other Indebtedness." During 2001, Southern Capital, a 50% owned unconsolidated affiliate that provides KCSR with access to equipment financing alternatives, refinanced its five-year credit facilities, which was scheduled to mature on October 19, 2001, with a one-year bridge loan for $201 million. There was $190.5 million borrowed under the bridge loan as of March 31, 2002. On June 25, 2002, Southern Capital refinanced the outstanding balance of its 51 one-year bridge loan through the issuance of approximately $167.6 million of pass through trust certificates and the sale of 50 locomotives. The pass through trust certificates are secured by the sold locomotives, all of the remaining locomotives and rolling stock owned by Southern Capital and rental payments payable by KCSR under the sublease of the sold locomotives and its leases of the equipment owned by Southern Capital. Payments of interest and principal of the pass through trust certificates, which are due semi-annually on June 30 and December 30 commencing on December 30, 2002 and ending on June 30, 2022, are insured under a financial guarantee insurance polcy by MBIA Insurance Corporation. KCSR leases or subleases all of the equipment securing the pass through trust certificates. See "--Contractual Obligations" above for KCSR's minimum lease commitments to Southern Capital. We believe, based on current expectations, that our cash and other liquid assets, operating cash flows, access to capital markets, borrowing capacity, and other available financing resources, including the proceeds of the Note Offering, are sufficient to fund anticipated operating, capital and debt service requirements and other commitments through 2002. However, our operating cash flows and financing alternatives can be impacted by various factors, some of which are outside of our control. For example, if we were 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, we are subject to economic factors surrounding capital markets and our ability to obtain financing under reasonable terms is subject to market conditions. Further, our 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. OTHER CRITICAL ACCOUNTING POLICIES. In response to the SEC's Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," we have identified certain key accounting policies on which our financial condition and results of operations are dependent. These key accounting policies most often involve complex matters or are based on subjective judgments or decisions. In the opinion of management, our most critical accounting policies are those related to revenue recognition, casualty claims and property and depreciation. These accounting policies are outlined in Note 2--Significant Accounting Policies in the financial statements included elsewhere in this prospectus. SIGNIFICANT CUSTOMER. SWEPCO is KCSR's only customer that accounted for more than 10% of revenues during the years ended December 31, 2001, 2000 and 1999, respectively. SWEPCO is a subsidiary of American Electric Power, Inc. Revenues related to SWEPCO during these periods were $75.9, $67.2 and $75.9 million, respectively. We expect KCSR coal revenues to decline in 2002 as a result of a contractual rate reduction for SWEPCO, which became effective on January 1, 2002. FOREIGN CORPORATE JOINT VENTURE. Grupo TFM provides deferred income taxes for the difference between the financial reporting and income tax bases of its assets and liabilities. We record our proportionate share of these income taxes through our equity in Grupo TFM's earnings. As of March 31, 2002, we had not provided deferred income taxes for the temporary difference between the financial reporting basis and income tax basis of our investment in Grupo TFM because Grupo TFM is a foreign corporate joint venture and because we intend` to indefinitely reinvest in Grupo TFM the financial statement earnings which gave rise to the basis differential. Moreover, we have no other plans to realize this basis differential by a sale of our investment in Grupo TFM. We do not expect the reversal of the temporary difference to occur in the foreseeable future. At December 31, 2001, our book basis exceeded the tax basis of our investment in Grupo TFM by $33.6 million. If we were to realize this basis difference in the future by a repatriation of dividends or the sale of our interest in Grupo TFM, at March 31, 2002, we would have incurred gross federal income taxes of $11.8 million, which might be partially or fully offset by Mexican income taxes, which could be available to reduce federal income taxes at such time. FINANCIAL INSTRUMENTS AND PURCHASE COMMITMENTS. Fuel expense is a significant component of our operating expenses. Fuel costs are affected by (i) traffic levels, (ii) efficiency of operations and equipment, and 52 (iii) fuel market conditions. Controlling fuel expenses is a top priority of management. As a result, from time to time, we will enter into transactions to hedge against fluctuations in the price of its diesel fuel purchases to protect our operating results against adverse fluctuations in fuel prices. KCSR enters into forward diesel fuel purchase commitments and commodity swap transactions (fuel swaps or caps) as a means of fixing future fuel prices. Commodity swap or cap transactions are accounted for as hedges under SFAS 133 and are correlated to market benchmarks. Positions are monitored to ensure that they will not exceed actual fuel requirements in any period. At December 31, 1998, we had purchase commitments and fuel swap transactions for approximately 32% and 16%, respectively, of expected 1999 diesel fuel usage. In 1999, KCSR saved approximately $0.6 million as a result of these purchase commitments while the fuel swap transactions resulted in higher fuel expense of approximately $1 million. At December 31, 1999, we had entered into two diesel fuel cap transactions for a total of six million gallons (approximately 10% of expected 2000 usage) at a cap price of $0.60 per gallon. These hedging instruments expired on March 31, 2000 and June 30, 2000. We received approximately $0.8 million during 2000 related to these diesel fuel cap transactions and recorded the proceeds as a reduction of diesel fuel expenses. At December 31, 1999, we did not have any outstanding purchase commitments for 2000. At December 31, 2000, KCSR had purchase commitments for approximately 12.6% of budgeted gallons of fuel for 2001, which resulted in higher fuel expense of approximately $0.4 million in 2001. There were no fuel swap or cap transactions outstanding at December 31, 2000. At December 31, 2001, KCSR had purchase commitments for approximately 39% of its budgeted gallons of fuel for 2002. On January 14, 2002, KCSR entered into an additional fuel purchase commitment. As of March 31, 2002, KCSR had purchase commitments for approximately 47% of its remaining budgeted gallons of fuel for 2002. There are currently no diesel fuel cap or swap transactions outstanding. These diesel fuel transactions are intended to mitigate the impact of rising fuel prices and, if applicable, are recorded using the accounting policies as set forth in Note 2--"Significant Accounting Policies" of financial statements included elsewhere in this prospectus. In general, we enter into transactions such as those discussed above in limited situations based on management's assessment of current market conditions and perceived risks. Historically, we have engaged in a limited number of such transactions and their impact has been insignificant. However, we intend to respond to evolving business and market conditions in order to manage risks and exposures associated with our various operations, and in doing so, may enter into transactions similar to those discussed above. FOREIGN EXCHANGE MATTERS. In connection with our investment in Grupo TFM, matters arise with respect to financial accounting and reporting for foreign currency transactions and for translating foreign currency financial statements into U.S. dollars. We follow the requirements outlined in Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS 52"), and related authoritative guidance. Prior to January 1, 1999, Mexico's economy was classified as "highly inflationary" as defined in SFAS 52. Accordingly, under the highly inflationary accounting guidance in SFAS 52, the U.S. dollar was used as Grupo TFM's functional currency, and any gains or losses from translating Grupo TFM's financial statements into U.S. dollars were included in the determination of its net income (loss). Equity earnings (losses) from Grupo TFM included in our results of operations reflected our share of such translation gains and losses. Effective January 1, 1999, the SEC staff declared that Mexico should no longer be considered a highly inflationary economy. Accordingly, we performed an analysis under the guidance of SFAS 52 to determine whether the U.S. dollar or the Mexican peso should be used as the functional currency for financial accounting and reporting purposes for periods subsequent to December 31, 1998. Based on the results of the analysis, we believe the U.S. dollar to be the appropriate functional currency for our investment in Grupo TFM; therefore, the financial accounting and reporting of the operating results of Grupo TFM will be performed using the U.S. dollar as Grupo TFM's functional currency. 53 We continue to evaluate existing alternatives with respect to utilizing foreign currency instruments to hedge our U.S. dollar investment in Grupo TFM as market conditions change or exchange rates fluctuate. At March 31, 2002, and December 31, 2001, 2000 and 1999, we had no outstanding foreign currency hedging instruments. Results of our investment in Grupo TFM are reported under U.S. GAAP while Grupo TFM reports its financial results under IAS. Because we are required to report our equity earnings (losses) in Grupo TFM under U.S. GAAP and Grupo TFM reports under IAS, differences in deferred income tax calculations and the classification of certain operating expense categories occur. The deferred income tax calculations are significantly impacted by fluctuations in the relative value of the Mexican peso versus the U.S. dollar and the rate of Mexican inflation, and can result in significant variability in the amount of equity earnings (losses) reported by us. NEW ACCOUNTING PRONOUNCEMENTS. In July 2001, the FASB issued Statement No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 is effective for any business combination initiated after June 30, 2001 and requires purchase method accounting. Under SFAS 142, goodwill with an indefinite life will no longer be amortized; however, both goodwill and other intangible assets will be subject to annual impairment testing. SFAS 142 is effective for fiscal years beginning after December 31, 2001. In June 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 is effective for fiscal years beginning after June 15, 2002. Under SFAS 143, the fair value of a liability for an asset retirement obligation must be recognized in the period in which it is incurred if a reasonable estimate of the fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. In October 2001, the FASB issued Statement No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). Under SFAS 144, an impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows. The impairment loss is equal to the difference between the carrying amount and fair value of the asset. We have adopted the provisions of SFAS 141 and SFAS 142, neither of which had a significant impact on our results of operations, financial position or cash flows. We are currently evaluating the provisions of SFAS 143 and SFAS 144 and do not expect the adoption of these pronouncements to have a material impact on our consolidated results of operations, financial position, or cash flows. LITIGATION. We are involved as plaintiff or defendant in various legal actions arising in the normal course of business. While the ultimate outcome of the various legal proceedings involving us and our subsidiaries cannot be predicted with certainty, it is our opinion (after consultation with legal counsel) that our litigation reserves are adequate. See "Business--Legal Matters." We are also a defendant in various matters brought primarily by current and former employees and third parties for job related injury incidents or crossing accidents. In addition, we are subject to claims alleging hearing loss as a result of alleged elevated noise levels in connection with our current and former operations. We are aggressively defending these matters and has established liability reserves which management believes are adequate to cover expected costs. Nevertheless, due to the inherent unpredictability of these matters, we could incur substantial costs above reserved amounts. ENVIRONMENTAL MATTERS. Our operations are subject to extensive federal, state and local environmental laws and regulations. The major environmental laws to which we are 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 liability 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. We do not foresee that compliance with the requirements imposed by the environmental legislation will impair our competitive capability or result in any material additional capital expenditures, operating or maintenance costs. However, stricter environmental requirements relating to our business, which may be imposed in the future, could result in significant additional costs. 54 The risk of incurring environmental liability is inherent in the railroad industry. Our operations involve the use and, as part of serving the petroleum and chemicals industry, transportation of hazardous materials. We have a professional team available to respond and handle environmental issues that might occur in the transport of such materials. Additionally, we are a partner in the Responsible Care(R) environmental program and, as a result, has initiated certain additional environmental and safety practices. KCSR performs ongoing reviews and evaluations of the various environmental programs and issues within our operations, and, as necessary, takes actions to limit exposure to potential liability. In addition, we own property that is, or has been, used for industrial purposes. Use of these properties may subject us 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 we are responsible for investigating and remediating contamination at several locations, based on currently available information, we do not expect any related liabilities, individually or collectively, to have a material impact on our results of operations, financial position or cash flows. In the event that we become subject to more stringent cleanup requirements at these sites, discovers additional contamination, or becomes subject to related personal or property damage claims, we could incur material costs in connection with these sites. We are responsible for investigating and remediating contamination at several locations, which were formerly leased to industrial tenants. For example, in North Baton Rouge, Louisiana, we are solely responsible for investigating and remediating soil and groundwater contamination at two contiguous properties, which were leased to third parties in the petrochemical and drum-recycling business. We have sought recovery from these tenants, one of which has filed for bankruptcy. KCSR has established reserves that management believes are adequate to address the costs expected to be incurred at this site. In Port Arthur, Texas, KCSR is responsible for investigating and remediating property formerly leased to a company that reconditioned 55-gallon drums. We received some recovery from this tenant to cover a portion of remedial costs. KCSR has established reserves that management believes are adequate to address additional costs expected to be incurred at this site. In 1996, the Louisiana Department of Transportation (''LDOT'') sued KCSR and a number of other defendants in Louisiana state court to recover cleanup costs incurred by LDOT while constructing Interstate Highway 49 at Shreveport, Louisiana (LOUISIANA DEPARTMENT OF TRANSPORTATION V. THE KANSAS CITY SOUTHERN RAILWAY COMPANY, ET AL., CASE NO. 417190-B in the First Judicial District Court, Caddo Parish, Louisiana). The cleanup was associated with contamination in the area of a former oil refinery site, operated by Crystal Refinery. KCSR's main line was adjacent to that site. LDOT claims that a 1966 derailment contributed to the contamination at this site. However, we believe that KCSR's liability exposure with respect to this site is limited. In another proceeding, in 1991 the Louisiana Department of Environmental Quality named KCSR as a party in the alleged contamination of Capitol Lake in Baton Rouge, Louisiana, a portion of which sits on KCSR's property. During 1994, the list of potentially responsible parties, which includes at least one other industrial operator on the lake, was expanded to include the State of Louisiana, and the City and Parish of Baton Rouge, among others. Investigation of the site by the Louisiana Department of Environmental Quality, as well as evaluation of remedial options, is ongoing at this time. Depending on the remedial measures required, the ultimate costs to address contamination of lake sediments could be substantial. Nevertheless, studies commissioned by KCSR indicate that contaminants contained in the lake were not generated by KCSR. We currently do not believe this matter will have a material effect on KCSR. KCSR may be subject to potential liability in connection with a former foundry site in Alexandria, Louisiana. The property was once owned through a former subsidiary and leased to a foundry operator. The foundry operator, Ruston Foundry, ceased operations in early 1990. The site is on the CERCLA National Priorities List of contaminated sites. The United States Environmental Protection Agency has recently completed a Remedial Investigation of the site, and the remedial activities that may be required have not yet been selected. 55 Accordingly, KCSR does not currently possess sufficient information to assess its exposure with respect to clean-up costs at this site. We are presently investigating and remediating contamination associated with historical roundhouse and fueling operations at Gateway Western yards located in East St. Louis, Illinois, Venice, Illinois, Kansas City, Missouri and Mexico, Missouri. We do not expect costs relating to these activities to materially affect us. We have recorded liabilities with respect to various environmental issues, which represent our best estimates of remediation and restoration costs that may be required to comply with present laws and regulations. At March 31, 2002 and December 31, 2001, 2000 and 1999, these recorded liabilities were not material. Although these costs cannot be predicted with certainty, we believe that the ultimate outcome of identified matters will not have a material adverse effect on our consolidated results of operations, financial condition or cash flows. REGULATORY INFLUENCE. In addition to the environmental agencies mentioned above, KCSR operations are regulated by the STB, various state regulatory agencies, and the Occupational Safety and Health Administration ("OSHA"). State agencies regulate some aspects of rail operations with respect to health and safety and in some instances, intrastate freight rates. OSHA has jurisdiction over certain health and safety features of railroad operations. We do not foresee that regulatory compliance under present statutes will impair our competitive capability or result in any material effect on our results of operations. INFLATION. Inflation has not had a significant impact on our operations in the past three years. Increases in fuel prices, however, impacted our operating results in 2001 and 2000. During the two-year period ended December 31, 1999, locomotive fuel expenses represented an average of 6.9% of KCSR's total costs and expenses compared to 9.7% in 2000 and 8.8% in 2001. U.S. GAAP requires the use of historical costs. Replacement cost and related depreciation expense of our property would be substantially higher than the historical costs reported. Any increase in expenses from these fixed costs, coupled with variable cost increases due to significant inflation, would be difficult to recover through price increases given the competitive environments of our principal subsidiaries. See "--Foreign Exchange Matters" above with respect to inflation in Mexico. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We utilize various financial instruments that have certain inherent market risks. Generally, these instruments have not been entered into for trading purposes. The following information, together with information included elsewhere in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 11 to the financial statements included in this prospectus, describe the key aspects of certain financial instruments which have market risk to KCS. INTEREST RATE SENSITIVITY Our floating-rate indebtedness totaled $369.4 million at March 31, 2002 and $397.5 million and $400 million at December 31, 2001 and 2000, respectively. The KCS Credit Facilities, comprised of different tranches and types of indebtedness, accrues interest based on target interest indexes (e.g., LIBOR, federal funds rate, etc.) plus an applicable spread, as set forth in the credit agreement. Due to the high percentage of variable rate debt associated with the restructuring of the debt in 2000, we are currently more sensitive to fluctuations in interest rates than in recent years. A hypothetical 100 basis points increase in each of the respective target interest indexes would result in additional interest expense of approximately $3.7 million and $4.0 million on an annualized basis for the 56 floating-rate instruments outstanding as of March 31, 2002 and December 31, 2001, respectively. A 100 basis points increase in interest rates would have resulted in additional interest expense of approximately $2.9 million (after consideration of approximately $1.1 million reflecting the impact of interest rate caps in effect) in 2000. Based upon the borrowing rates available to us for indebtedness with similar terms and average maturities, the fair value of our long-term debt was approximately $648 million at March 31, 2002, $681 million at December 31, 2001 and $685 million at December 31, 2000. Our objective is to manage our interest rate risk through the use of derivative instruments in accordance with the provisions of our credit facilities. In 2000, we entered into five separate interest rate cap agreements for an aggregate notional amount of $200 million, which were designated as cash flow hedges. These interest rate cap agreements were designed to hedge our exposure to movements in the London Interbank Offered Rate ("LIBOR") on which our variable rate interest is calculated. $100 million of the aggregate notional amount provided a cap on our LIBOR based interest rate of 7.25% plus the applicable spread, while $100 million limited the LIBOR based interest rate to 7% plus the applicable spread. By holding these interest rate cap agreements, we have been able to limit the risk of rising interest rates on our variable rate debt. We adopted the provisions of SFAS 133 effective January 1, 2001. As a result of this change in the method of accounting for derivative financial instruments, we recorded an after-tax charge to earnings of $0.4 million in the first quarter of 2001. This charge is presented as a cumulative effect of an accounting change in the accompanying consolidated financial statements and represents the ineffective portion of interest rate cap agreements that we held at the time of adoption of SFAS 133. These interest rate cap agreements, which expired during the first quarter of 2002, had a fair value of approximately zero at December 31, 2001 and were completely charged off during 2001. During the first quarter of 2002, we did not record any adjustments to income for derivative transactions. We do not currently have any derivative financial instruments outstanding. In addition, we record adjustments to our stockholders' equity (accumulated other comprehensive income (loss)) for our portion of the adjustment to the fair value of interest rate swap transactions to which Southern Capital, a 50% owned unconsolidated affiliate, is a participant. We also adjust our investment in Southern Capital by the change in the fair value of these derivative instruments. During the first quarter of 2002, we recorded comprehensive income of $0.7 million related to an adjustment to the fair value of interest rate swap transactions of Southern Capital. As of December 31, 2001 we recorded a reduction to stockholders' equity (accumulated other comprehensive loss) of approximately $2.9 million for its portion of the amount recorded by Southern Capital for the adjustment to the fair value of its interest rate swap transactions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Other--Financial Instruments and Purchase Commitments." COMMODITY PRICE SENSITIVITY Fuel expense is a significant component of our operating expenses. Fuel costs are affected by (i) traffic levels, (ii) efficiency of operations and equipment, and (iii) fuel market conditions. Controlling fuel expenses is a top priority of management. As a result, from time to time, we will enter into transactions to hedge against fluctuations in the price of diesel fuel purchases to protect our operating results against adverse fluctuations in fuel prices. KCSR enters into forward diesel fuel purchase commitments and commodity swap transactions (fuel swaps or caps) as a means of fixing future fuel prices. Forward purchase commitments are used to secure fuel volumes at competitive prices. These contracts normally require us to purchase defined quantities of diesel fuel at prices established at the origination of the contract. Commodity swap or cap transactions are accounted for as hedges under SFAS 133 and are typically based on the price of heating oil #2, which we believe to produce a high correlation to the price of diesel fuel. These transactions are generally settled monthly in cash with the counterparty. Positions are monitored to ensure that they will not exceed actual fuel requirements in any period. 57 At December 31, 1998, we had purchase commitments and fuel swap transactions for approximately 32% and 16%, respectively, of expected 1999 diesel fuel usage. In 1999, KCSR saved approximately $0.6 million as a result of these purchase commitments while the fuel swap transactions resulted in higher fuel expense of approximately $1 million. At December 31, 1999, we had entered into two diesel fuel cap transactions for a total of six million gallons (approximately 10% of expected 2000 usage) at a cap price of $0.60 per gallon. The contract prices for these diesel fuel cap transactions did not include taxes, transportation costs or other incremental fuel handling costs. These diesel fuel cap instruments expired on March 31, 2000 and June 30, 2000 and we received approximately $0.8 million during 2000 related to these transactions and recorded the proceeds as a reduction of diesel fuel expenses. At December 31, 1999, we did not have any outstanding purchase commitments for 2000. At December 31, 2000, KCSR had purchase commitments for approximately 12.6% of budgeted gallons of fuel for 2001, which resulted in higher fuel expense of approximately $0.4 million in 2001. There were no fuel swap or cap transactions outstanding at December 31, 2000. At December 31, 2001, KCSR had purchase commitments for approximately 39% of its budgeted gallons of fuel for 2002. On January 14, 2002, KCSR entered into an additional fuel purchase commitment. As of March 31, 2002, KCSR had purchase commitments for approximately 47% of its remaining budgeted gallons of fuel for 2002 at an average price per gallon of $0.64. There are currently no diesel fuel cap or swap transactions outstanding. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Other--Financial Instruments and Purchase Commitments." The excess of payments to be made related to the diesel fuel purchase commitments over current market prices for diesel fuel purchase commitments approximated $2.6 million at December 31, 2001. The excess of current market prices for diesel fuel purchase commitments over the payments to be made under such commitments approximated $1.1 million at December 31, 2000. At March 31, 2002, we held fuel inventories for use in normal operations. These inventories were not material to our overall financial position. With the exception of the 47% of fuel currently under forward purchase commitments for the remainder of 2002, fuel costs are expected to mirror market conditions in 2002. FOREIGN EXCHANGE SENSITIVITY We own a 36.9% interest in Grupo TFM, incorporated in Mexico. In connection with this investment, matters arise with respect to financial accounting and reporting for foreign currency transactions and for translating foreign currency financial statements into U.S. dollars. Therefore, we have exposure to fluctuations in the value of the Mexican peso. While not currently utilizing foreign currency instruments to hedge our U.S. dollar investment in Grupo TFM, we continue to evaluate existing alternatives as market conditions and exchange rates fluctuate. 58 RAILROAD INDUSTRY INDUSTRY OVERVIEW U.S. railroad companies are categorized by the STB into three types: Class I, Class II (Regional) and Class III (Local). Class I railroads are railroads with annual revenues of at least $250 million, as indexed for inflation. There are currently eight Class I railroads in the United States, which can be further divided geographically by eastern or western classification. The eastern railroads are CSX Corporation ("CSX"), Grand Trunk Western (owned by CN), IC (owned by CN) and Norfolk Southern. The western railroads include The Burlington Northern and Santa Fe Railway Company ("BNSF"), KCSR, Soo Line Railroad Company (owned by Canadian Pacific Railway Company ("CP")) and the Union Pacific Railroad Company ("UP"). 2000 U.S. RAILROAD INDUSTRY HIGHLIGHTS Unless otherwise indicated, the industry data contained in this prospectus is from the 2001 Edition of "Railroad Facts" or Volume 18 of "Railroad Ten Year Trends 1991-2000," each published by the Association of American Railroads ("AAR").
NUMBER OF FREIGHT REVENUE RAILROAD CLASSIFICATION RAILROADS MILES OPERATED EMPLOYEES ($ IN THOUSANDS) - ----------------------- --------- -------------- --------- ---------------- Class I......... 8 120,597 168,360 $33,082,907 Regional........ 35 20,978 11,254 1,743,276 Local........... 517 28,937 12,194 1,455,728 --- ------- ------- ----------- Total......... 560 170,512 191,808 $36,281,911 === ======= ======= ===========
Class I railroads generated total freight revenues of $33.1 billion, or approximately 91% of total U.S. rail freight revenues, in 2000. Revenues are derived generally from the shipment of products under negotiated contracts between suppliers and shippers and, to a lesser extent, published tariff rates. The shipment of coal is the primary source of Class I U.S. railroad revenues. The AAR estimates that in 2000, coal accounted for 43.6% of total Class I U.S. railroad volume in terms of tons originated and 21.5% of total Class I U.S. railroad carload revenues. The next largest commodity source was chemicals and allied products, which the AAR estimates accounted for 9.0% of total Class I U.S. railroad volume in terms of tons originated and 12.9% of total Class I U.S. railroad carload revenues. The AAR estimates that intermodal traffic accounted for 15 to 20% of total Class I U.S. railroad carload revenues. In 2000, Class I railroads accounted for approximately 71% of total U.S. railroad mileage operated, approximately 88% of total U.S. railroad employees and approximately 91% of total U.S. railroad freight revenue. In 2000, Class I railroads had an estimated 41.0%/1/ share of the total U.S. intercity freight traffic in terms of ton-miles and an estimated 25.3%/1/ of the total U.S. intercity freight traffic in terms of tons carried. In terms of revenue, railroads accounted for an estimated 9%/1/, trucks accounted for an estimated 80.7%/1/, and domestic air accounted for an estimated 4.9%/1/ of the U.S. intercity commercial freight transportation market. THE SURFACE TRANSPORTATION BOARD AND REGULATION The STB, an independent body administratively housed within the Department of Transportation, is responsible for the economic regulation of railroads within the United States. The STB's mission is to ensure that competitive, efficient and safe transportation services are provided to meet the needs of shippers, receivers and consumers. The STB was created by an Act of Congress known as the ICC Termination Act of 1995 ("ICCTA"). Passage of the ICCTA represented a further step in the process of streamlining and reforming the Federal - -------- /1/ Inter-city freight traffic and inter-city freight revenue numbers for 2000 are preliminary. 59 economic regulatory oversight of the railroad, trucking and bus industries that was initiated in the late 1970's and early 1980's. The STB adjudicates disputes and regulates interstate surface transportation. Railway transportation matters under the STB's jurisdiction in general include railroad rate and service issues, rail restructuring transactions (mergers, line sales, line construction and line abandonments) and railroad labor matters. The U.S. railroad industry was significantly deregulated with the passage of The Staggers Rail Act of 1980 (the "Staggers Act"). In enacting the Staggers Act, Congress recognized that railroads faced intense competition from trucks and other modes for most freight traffic and that prevailing regulation prevented them from earning adequate revenues and competing effectively. Through the Staggers Act, a new regulatory scheme allowing railroads to establish their own routes, tailor their rates to market conditions and differentiate rates on the basis of demand was put in place. The basic principle of the Staggers Act is that reasonable rail rates should be a function of supply and demand. The Staggers Act, among others things: . allows railroads to price competing routes and services differently to reflect relative demand; . allows railroads to enter into confidential rate and service contracts with shippers; and . abolishes collective rate making except among railroads participating in a joint-line movement. If it is determined that a railroad is not facing enough competition to hold down prices, then the STB has the authority to investigate the actions of the railroad. The Staggers Act has had a positive effect on the U.S. rail industry. Lower rail rates brought about by the Staggers Act (down 57% in inflation-adjusted terms from 1981 to 1998) have resulted in significant cost savings for shippers and their customers. After decades of steady decline, the rail market share of inter-city freight ton-miles bottomed out at 35.2% in 1978, and has increased to 41.0%/2/ in 2000. RECENT EVENTS IN RAILROAD CONSOLIDATION On June 11, 2001, the STB issued new rules governing major railroad mergers and consolidations involving two or more Class I railroads. These new rules substantially increase the burden on rail merger applicants to demonstrate that a proposed transaction would be in the public interest. The new rules require applicants to demonstrate that, among other things, a proposed transaction would enhance competition where necessary to offset negative effects of the transaction, such as competitive harm, and to address fully the impact of the transaction on transportation service. The STB recognized, however, that a merger between KCSR and another Class I carrier would not necessarily raise the same concerns and risks as potential mergers between larger Class I railroads. Accordingly, the STB decided that for a merger proposal involving KCSR and another Class I railroad, the STB will waive the application of the new rules and apply the rules previously in effect unless it is persuaded that the new rules should apply. In October 2001, CN completed its acquisition of Wisconsin Central Transportation Corporation. 60 - -------- /2/ Inter-city freight traffic numbers for 2000 are preliminary. BUSINESS OVERVIEW We, along with our subsidiaries and affiliates, own and operate a uniquely positioned North American rail network strategically focused on the growing north/south freight corridor that connects key commercial and industrial markets in the central United States with major industrial cities in Mexico. Our principal subsidiary, KCSR, is one of eight Class I railroads in the United States and our rail network is comprised of approximately 6,000 miles of main and branch lines. Through our strategic alliance with CN/IC, we have created a contiguous rail network of approximately 25,000 miles of main and branch lines connecting Canada, the United States and Mexico. Our rail network interconnects with all other Class I railroads and provides customers with an effective alternative to other railroad routes, giving direct access to Mexico and the southwestern United States through less congested interchange hubs. In addition, our rail network links directly to major trading centers in Mexico through our affiliates TFM and Tex-Mex and serves most of Mexico's principal industrial cities and three of its four major shipping ports. Our principal international gateway is at Laredo, Texas where more than 50% of all rail and truck traffic between the United States and Mexico crosses the border. We also own an indirect 49% interest in Mexrail, which owns Tex-Mex. Tex-Mex operates approximately 160 miles of main and branch lines between Laredo and the port city of Corpus Christi, Texas. RAIL NETWORK OWNED NETWORK KCSR owns and operates approximately 3,100 miles of main and branch lines and approximately 1,340 miles of other tracks in the ten-state region of Missouri, Kansas, Arkansas, Oklahoma, Mississippi, Alabama, Tennessee, Louisiana, Texas and Illinois. KCSR has the shortest north/south rail route between Kansas City and several key ports along the Gulf of Mexico in Louisiana, Mississippi and Texas and east/west rail routes linking Meridian with Dallas and linking Kansas City with East St. Louis and Springfield, Illinois. This geographic reach enables us to service a customer base that includes electric generating utilities and a wide range of companies in the chemical and petroleum, agricultural and mineral, paper and forest, and automotive and intermodal markets. Eastern railroads and their customers can bypass congested gateways at Chicago, St. Louis, Memphis and New Orleans by interchanging with us at Meridian, Jackson and East St. Louis. SIGNIFICANT INVESTMENTS GRUPO TFM In December 1995, we entered into a joint venture agreement with Grupo TMM to provide for our participation in the upcoming privatization of the Mexican national railway system through Grupo TFM, and to promote the movement of rail traffic over Tex-Mex, TFM and KCSR. We own a 36.9% interest in Grupo TFM. Grupo TMM, which owns 38.5% of Grupo TFM, is the largest shareholder of Grupo TFM and the Mexican government owns the remaining 24.6% of Grupo TFM. Grupo TFM owns 80% of the common stock of TFM. The remaining 20% of TFM was retained by the Mexican government. TFM holds the concession to operate Mexico's Northeast Rail Lines (the "Concession") for the 50 years ending in June 2047 and, subject to certain conditions, has an option to extend the Concession for an additional 50 years. The Concession is subject to certain mandatory trackage rights and is exclusive until 2027. Additionally, the Mexican government may revoke exclusivity after 2017 if it determines that there is insufficient 61 competition and may terminate the Concession as a result of certain conditions or events, including (1) TFM's failure to meet its operating and financial obligations with regard to the Concession under applicable Mexican law, (2) a statutory appropriation by the Mexican government for reasons of public interest and (3) liquidation or bankruptcy of TFM. TFM's assets and its rights under the Concession may also be seized temporarily by the Mexican government. Under the Concession, TFM operates the Northeast Rail Lines, which are located along a strategically significant corridor between Mexico and the United States, and have as their core routes a key portion of the shortest, most direct rail passageway between Mexico City and the southern, midwestern and eastern United States. These rail lines are the only rail lines which serve Nuevo Laredo, the largest rail freight exchange point between the United States and Mexico. TFM's rail lines connect the most populated and industrialized regions of Mexico with Mexico's principal U.S. border railway gateway at Laredo. In addition, this rail system serves three of Mexico's four primary seaports at Veracruz and Tampico on the Gulf of Mexico and Lazaro Cardenas on the Pacific Ocean. TFM serves 15 Mexican states and Mexico City, which together represent a majority of the country's population and account for a majority of its estimated gross domestic product. We believe the Laredo gateway is the most important interchange point for rail freight between the United States and Mexico. As a result, we believe TFM's routes are integral to Mexico's foreign trade. This route structure enables us to benefit from growing trade resulting from the increasing integration of the North American economy through NAFTA. According to the International Monetary Fund, trade between Mexico and the United States has grown at an average annual rate of approximately 12.4% from 1996 through 2001. Through Tex-Mex and KCSR, as well as through interchanges with other major U.S. railroads, TFM provides its customers with access to an extensive network through which they may distribute their products throughout North America and overseas. The Northeast Rail Lines consist of 2,642 miles of main and branch lines and an additional 838 miles of sidings, spur tracks and main line under trackage rights. TFM has the right to operate the rail lines, but does not own the land, roadway or associated structures. Approximately 81% of the main line operated by TFM consists of continuously welded rail. As of December 31, 2001, TFM owned 468 locomotives, owned or leased from affiliates 4,611 freight cars and leased from non-affiliates 150 locomotives and 6,192 freight cars. TFM's operating strategy has been to increase productivity and maximize operating efficiencies. With Mexico's economic progress, growth of NAFTA trade between Mexico, the United States and Canada, and customer focused rail service, we believe the growth potential of TFM could be significant. Since TFM commenced operations in June 1997, it has made significant progress, which is reflected in its financial results. In 2001, TFM increased revenues by 4.3% from 2000. Grupo TFM has substantially lowered its operating ratio (under International Accounting Standards) since taking operational control in June 1997 to 76.7% for 2001, from 85.5% in 1998 and 93.9% for the first six months following commencement of its operations in June 1997. We believe this operating ratio achievement is significant given that the weighted average operating ratio for the eight major U.S. or Class I railroads was approximately 85.2% for 2000. Based upon the relatively low labor costs prevailing in Mexico coupled with revenue growth opportunities, we believe that TFM has the potential to achieve additional operating ratio improvements. A shareholders agreement dated May 1997, between KCS, and Grupo TMM and certain affiliates, which governs our investment in Grupo TFM (1) restricts each of the parties to the shareholders agreement from directly or indirectly transferring any interest in Grupo TFM or TFM to a competitor of Grupo TFM or TFM without the prior written consent of each of the parties, and (2) provides that KCS and Grupo TMM may not transfer control of any subsidiary holding all or any portion of shares of Grupo TFM to a third party, other than an affiliate (as defined in the Grupo TFM by-laws) of the transferring party or another party to the shareholders agreement, without the consent of the other parties to the shareholders agreement. The Grupo TFM by-laws prohibit any transfer of shares of Grupo TFM to any person other than an affiliate (as defined in the by-laws) without the prior consent of Grupo TFM's board of directors. In addition, the Grupo TFM by-laws grant the 62 shareholders of Grupo TFM a right of first refusal to acquire shares to be transferred by any other shareholder in proportion to the number of shares held by each non-transferring shareholder, although holders of preferred shares or shares with special or limited rights are only entitled to acquire those shares and not ordinary shares. The shareholders agreement requires that the boards of directors of Grupo TFM and TFM be constituted to reflect the parties' relative ownership of the ordinary voting common stock of Grupo TFM. Grupo TFM has the ability to pay dividends to its shareholders, subject to certain restrictions. KCS and Grupo TMM have exercised their call option and intend to cause TFM to purchase the 24.6% interest in Grupo TFM currently owned by the Mexican government prior to July 31, 2002. If the purchase had occurred on March 31, 2002, the purchase price would have been approximately $253 million. Various financing alternatives are currently being explored. One source of financing could include the use of funds due to TFM from the Mexican government as a result of the reversion, during the first quarter of 2001, of a portion of the concession to the Mexican government by TFM that covers the Hercules-Mariscala rail line, an approximate 18-mile portion of redundant track in the vicinity of the city of Queretaro. The remainder of the financing required to purchase the Mexican government's Grupo TFM shares has been raised by TFM through the sale of $180 million of debt securities. If TFM is unable to complete this purchase on a timely basis, we intend to make the purchase, but there can be no assurance that we will be able to purchase all or any portion of the government's interest. In addition, after the expiration of the call option, the original shareholders have a right of first refusal to purchase the Mexican government's interest in Grupo TFM if the Mexican government wishes to sell that interest to a third party which is not a Mexican governmental entity. The Mexican government has the right to sell its 20% interest in TFM through a public offering on October 31, 2003 (or prior to October 31, 2003 with the consent of Grupo TFM). If, on October 31, 2003, the Mexican government has not sold all of its capital stock in TFM, Grupo TFM is obligated to purchase the capital stock at the initial share price paid by Grupo TFM plus interest. In the event that Grupo TFM does not purchase the Mexican government's remaining interest in TFM, Grupo TMM and KCS, or either Grupo TMM or KCS, are obligated to purchase the Mexican government's interest. KCS and Grupo TMM have cross indemnities in the event the Mexican government requires only one of them to purchase its interest. The cross indemnities allow the party required to purchase the Mexican government's interest to require the other party to purchase its pro rata portion of such interest. However, if KCS were required to purchase the Mexican government's interest in TFM and Grupo TMM could not meet its obligations under the cross-indemnity, then KCS would be obligated to pay the total purchase price for the purchase of the Mexican government's interest. If the purchase of the Mexican government's 20% interest in TFM had occurred as of March 31, 2002, the total purchase price would have been approximately $537 million and, as of that date, based upon publicly available financial information, Grupo TMM did not appear to have the financial resources needed to complete the purchase. MEXRAIL Mexrail owns 100% of Tex-Mex and certain other assets. Mexrail owns the northern half of the continental rail traffic bridge at Laredo spanning the Rio Grande River, and TFM, which now owns 100% of Mexrail, owns and operates the southern half of the bridge. The bridge at Laredo is the most significant entry point for rail traffic between Mexico and the United States. Tex-Mex also operates a 160-mile rail line extending from Laredo to Corpus Christi and has 99-year trackage rights granted pursuant to a 1996 STB decision totaling approximately 360 miles between Corpus Christi and Beaumont, where Tex-Mex connects with KCSR. In early 1999, Tex-Mex completed Phase II of a new rail yard in Laredo. Phase I of the project was completed in December 1998 and included four tracks comprising approximately 6.5 miles. Phase II of the project consisted of two new intermodal tracks totaling approximately 2.8 miles. Although groundwork for an additional ten tracks has been completed, construction on those ten tracks has not yet begun. Capacity of the Laredo yard is currently approximately 800 freight cars and, upon completion of all tracks, is expected to be approximately 2,000 freight cars. 63 In March 2001, Tex-Mex purchased from the UP a line of railroad extending 84.5 miles between Rosenberg, Texas and Victoria, Texas, and the UP granted Tex-Mex trackage rights sufficient to integrate the line into Tex-Mex's existing trackage rights. The line is not in service and will require extensive reconstruction, which has not yet been scheduled. The $9.2 million purchase price for the line was determined through arbitration and the acquisition also required the prior approval or exemption of the transaction by the STB. By an order entered in December 2000, the STB granted Tex-Mex's petition for exemption and exempted the transaction from this prior approval requirement. Once reconstruction of the line is completed, Tex-Mex will be able to shorten its existing route between Corpus Christi and Houston by over 70 miles. Under a stock purchase agreement dated as of February 27, 2002, pursuant to which KCS and Grupo TMM sold all of the stock of Mexrail to TFM, KCS retained rights to prevent the further sale or transfer of the stock or significant assets of Mexrail and Tex-Mex and the right to continue to participate in the corporate governance of Mexrail and Tex-Mex, which will remain U.S. corporations and subject to KCS's super majority rights contained in Grupo TFM's bylaws. PANAMA CANAL RAILWAY COMPANY We own 50% of the common stock (or a 42% equity interest) of PCRC, a joint venture between us and Mi-Jack Products, Inc. In January 1998, the Republic of Panama awarded PCRC the concession 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 medium to complement the Panama Canal. The Panama Canal Railway is a north-south railroad traversing the Panama isthmus between the Pacific and Atlantic Oceans and serves as a complement to the Panama Canal shipping channel. The railroad has been reconstructed and resumed freight operations on December 1, 2001. We believe the prime potential and opportunity of the Panama Canal Railway will be in the movement of traffic between the ports of Balboa and Colon for shipping customers repositioning of containers. We have significant interest from both shipping companies and port terminal operators. While only 47 miles long, we believe the Panama Canal Railway provides us with a unique opportunity to participate in transoceanic shipments as a complement to the existing Canal traffic. As of March 31, 2002, we have invested approximately $17.3 million toward the reconstruction and operations of the existing 47-mile railway. This investment consists of $12.9 million of equity and $4.4 million of subordinated loans. In November 1999, the Panama Canal Railway Company completed the financing arrangements for this project with the International Finance Corporation ("IFC"), a member of the World Bank Group. The financing for this project is comprised of a $5 million investment from the IFC and senior loans through the IFC in an aggregate amount of up to $45 million. The investment of $5 million from the IFC is comprised of non-voting preferred shares which pay a 10% cumulative dividend. The preferred shares may be redeemed at the IFC's option any year after 2008 at the lower of (1) a net cumulative internal rate of return of 30% or (2) eight times earnings before interest, income taxes, depreciation and amortization for the two years preceding the redemption that is proportionate to the IFC's percentage ownership in Panama Canal Railway Company. Under the terms of the concession, we are, under certain limited conditions, a guarantor for up to $7.5 million of cash deficiencies associated with the completion and operation of the project and, if Panama Canal Railway Company terminates the concession contract without the IFC's consent, a guarantor for up to 50% of the outstanding senior loans. In addition, we are a guarantor for up to $2.4 million of notes for the purchase of rail and passenger cars. The cost of the reconstruction, which is virtually complete, is expected to total approximately $80 million. We project that an additional $4.0 million, which we expect would be in the form of a subordinated loan, could be required under the cash deficiencies guarantee. Panarail, a wholly-owned subsidiary of the Panama Canal Railway Company, operates and promotes a commuter and tourist railway service over the lines of the Panama Canal Railway. Panarail initiated railway passenger service between the cities of Panama and Colon in July 2001. 64 SOUTHERN CAPITAL CORPORATION, LLC In 1996, KCSR and GATX formed a 50-50 joint venture, Southern Capital, to perform certain leasing and financing activities. Southern Capital's operations are comprised of the acquisition of locomotives and rolling stock and the leasing thereof to KCSR. Concurrent with the formation of this joint venture, KCSR entered into operating leases with Southern Capital for substantially all the locomotives and rolling stock which KCSR contributed or sold to Southern Capital at the time of formation of the joint venture. GATX contributed cash in the joint venture transaction formation. EXPANDED NETWORK Through our strategic alliances with CN/IC and BNSF and marketing agreements with Norfolk Southern and the I&M Rail Link we have expanded our domestic geographic reach beyond that covered by our owned network. STRATEGIC ALLIANCE WITH CANADIAN NATIONAL AND ILLINOIS CENTRAL In 1998, KCSR, CN and IC announced a 15-year strategic alliance aimed at coordinating the marketing, operations and investment elements of north-south rail freight transportation. The strategic alliance did not require STB approval and was effective immediately. This alliance connects Canadian markets, the major midwest U.S. markets of Detroit, Chicago, Kansas City and St. Louis and the key southern markets of Memphis, Dallas and Houston. It also provides U.S. and Canadian shippers with access to Mexico's rail system through our connections with Tex-Mex and TFM. In addition to providing access to key north-south international and domestic U.S. traffic corridors, our alliance with CN/IC is intended to increase business primarily in the automotive and intermodal markets and also in the chemical and petroleum and paper and forest products markets. This alliance has provided opportunities for revenue growth and positioned us as a key provider of rail service for NAFTA trade. KCSR and CN formed a management group made up of senior management representatives from both railroads to, among other things, develop plans for the construction of new facilities to support business development, including investments in automotive, intermodal and transload facilities at Memphis, Dallas, Kansas City and Chicago. Under a separate agreement, KCSR was granted certain trackage and haulage rights and CN and IC were granted certain haulage rights. Under the terms of this agreement, and through action taken by the STB, in October 2000 we gained access to six additional chemical customers in the Geismar, Louisiana industrial area through haulage rights. MARKETING ALLIANCE WITH BNSF In April 2002, KCSR and BNSF formed a comprehensive joint marketing alliance aimed at promoting cooperation, revenue growth and extending market reach for both railroads in the United States and Canada. The marketing alliance is also expected to improve operating efficiencies for both carriers in key market areas, as well as provide customers with expanded service options. BNSF and KCSR have agreed to coordinate marketing and operations initiatives in a number of target markets. The two carriers are developing plans to enhance competitive options for shippers in the West Lake and West Lake Charles, Louisiana region. The coordination of operations is to provide improved and expanded service options for grain shippers and receivers. The marketing alliance is to allow BNSF and KCSR to be more responsive to shippers' requests for rates and service throughout the two rail networks. Coal and unit train operations are excluded from the marketing alliance, as well as any points where BNSF and KCSR are the only direct rail competitors. Movements to and from Mexico by either party are also excluded. We believe this new marketing alliance will afford important opportunities to grow KCSR's revenue base, particularly in the chemical, grain and forest product markets, providing both participants with expanded access to important markets and providing shippers with enhanced options and competitive alternatives. 65 MARKETING AGREEMENTS WITH NORFOLK SOUTHERN In December 1997, we entered into a three-year marketing agreement with Norfolk Southern and Tex-Mex which allows us to increase our traffic volume along our east-west corridor between Meridian and Dallas by using interchange points with Norfolk Southern. This agreement provides Norfolk Southern run-through service with access to Dallas and the Mexican border at Laredo while avoiding the congested rail gateways of Memphis and New Orleans. This agreement was renewed in December 2000 for a term of three years and will be automatically renewed for additional three-year terms unless written notice of termination is given at least 90 days prior to the expiration of the then-current term. This marketing agreement with Norfolk Southern provides us with additional sources of intermodal business. Under the current arrangement, approximately two trains per day run both east and west between our connection with the Norfolk Southern at Meridian and our BNSF connection at Dallas. The structure of the agreement provides for lower gross revenue to KCSR but improved operating income since, as a haulage arrangement, fuel and car hire expenses are the responsibility of Norfolk Southern not KCSR. We believe this business has additional growth potential as Norfolk Southern seeks to shift its traffic to southern gateways to increase its length of haul. In June 2000, an agreement we made with Norfolk Southern became fully operational, under which we provide haulage services for intermodal traffic between Meridian and Dallas and receive fees for those services from Norfolk Southern. Under this agreement Norfolk Southern may quote rates and enter into transportation service contracts with shippers and receivers covering this haulage traffic. Norfolk Southern recently renewed this agreement, which terminates on December 31, 2006. MARKETING AGREEMENT WITH I&M RAIL LINK In May 1997, we entered into a marketing agreement with I&M Rail Link which provides us with access to Minneapolis and Chicago and to originations of corn and other grain in Iowa, Minnesota and Illinois. Through this marketing agreement, we receive and originate shipments of grain products for delivery to 35 poultry industry feed mills on our network. Grain is currently our largest export product to Mexico. This agreement is terminable upon 90 days notice. We believe this agreement provides I&M Rail Link with an important channel of distribution over our rail network. HAULAGE RIGHTS As a result of the 1988 acquisition of the Missouri-Kansas-Texas Railroad by UP, we were granted for a term of 199 years (1) haulage rights between Kansas City, Missouri and each of Council Bluffs, Iowa, Omaha and Lincoln, Nebraska and Atchison and Topeka, Kansas, and (2) a joint rate agreement for our grain traffic between Beaumont, Texas and each of Houston and Galveston, Texas. We have the right to convert these haulage rights to trackage rights. Our haulage rights require UP to move our traffic in UP trains; trackage rights would allow us to operate our trains over UP tracks. In addition, KCSR has limited haulage rights between Springfield and Chicago that allow us to move traffic that originates or terminates on the former Gateway Western rail lines. 66 MARKETS SERVED The following summarizes KCSR revenue and carload statistics by commodity category. Certain prior year amounts have been reclassified to reflect changes in the business groups and to conform to the current period presentation.
FREIGHT REVENUES CARLOADS AND INTERMODAL UNITS --------------------------------- ------------------------------ THREE MONTHS THREE MONTHS YEAR ENDED ENDED YEAR ENDED ENDED DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, -------------------- ------------ ----------------- ------------ 1999 2000 2001 2002 1999 2000 2001 2002 ------ ------ ------ ------------ ----- ----- ----- ------------ (IN MILLIONS) (IN THOUSANDS) General Commodities: Chemical and petroleum..................... $131.9 $125.6 $123.8 $ 31.9 165.5 154.1 146.0 35.9 Paper and forest........................... 130.1 132.3 130.3 32.0 202.9 192.4 184.0 43.8 Agricultural and mineral................... 96.5 93.6 87.9 23.8 141.0 132.0 125.7 33.0 ------ ------ ------ ------ ----- ----- ----- ----- Total general commodities............... 358.5 351.5 342.0 87.7 509.4 478.5 455.7 112.7 Intermodal and automotive.................. 58.7 62.1 66.0 14.2 233.9 269.3 291.1 67.0 Coal....................................... 117.4 105.0 118.7 28.8 200.8 184.2 202.3 58.5 ------ ------ ------ ------ ----- ----- ----- ----- Carload revenues and total carloads and intermodal units......................... 534.6 518.6 526.7 130.7 944.1 932.0 949.1 238.2 Other rail-related revenues................ 51.8 44.5 39.7 9.7 -- -- -- -- ------ ------ ------ ------ ----- ----- ----- ----- Total................................... $586.4 $563.1 $566.4 $140.4 944.1 932.0 949.1 238.2 ====== ====== ====== ====== ===== ===== ===== =====
The following summarizes the composition of our major market segments. . Chemical and petroleum business includes plastics, petroleum and oils, petroleum coke, rubber and miscellaneous chemicals. . Paper and forest business includes pulp and paper, lumber, panel products (plywood and oriented strandboard), engineered wood products, woodchips, pulpwood, raw fiber used in the production of paper, pulp and paperboard, as well as metal, scrap and slab steel, waste and military equipment. . Agricultural and mineral business includes domestic and export grain, food and related products, ores, clay, stone and cement. . Intermodal and automotive freight business consists of hauling freight containers or truck trailers by a combination of water, rail and motor carriers, with rail carriers serving as the link between the other modes of transportation; automotive traffic consists primarily of moving vehicle parts into Mexico from the northern sections of the United States and moving finished vehicles from Mexico into the United States. . Coal business consists primarily of shipments of coal to utilities. . Other revenue sources include railcar switching services, demurrage (car retention penalties) and drayage (local truck transportation services). SALES AND MARKETING We employ a total of 17 sales and 23 marketing professionals on a full-time basis. Our marketing staff is organized by product category, while our sales staff is generally organized by geographic region. Transportation needs vary depending upon the type of customer and its specific market. Consequently, our sales and marketing staffs are composed of professionals who are knowledgeable about the particular markets and customers they cover. Our sales and marketing professionals work together to maintain existing relationships as well as ascertain opportunities for incremental business with additional customers in a given market. Our sales and marketing professionals market our services through customer visits, direct customer contacts, telemarketing, trade shows and industry meetings. In addition, our marketing force focuses on conducting market and competitive research 67 to identify new business and strategic opportunities. Our rates, service design changes, equipment supply and traffic scheduling are generally communicated by our sales and marketing forces and depend upon the customer, specific market and specific geographic route. Our sales staff uses competitive market information and detailed knowledge about our customers to tailor services to the specific needs of our customers. Our sales and marketing staffs are compensated through both salaries and stock option and stock-ownership programs. We believe that this method of compensation focuses our sales and marketing professionals on establishing and maintaining profitable long-term customer relationships. In connection with our strategic alliance with CN/IC, we are undertaking coordinated sales and marketing efforts to attract new customers in the United States and Canada. Our alliance allows our and CN/IC's salespeople to quote single through rates from origin to destination along our expanded network, including through rates to specific destinations in Mexico. We coordinate similar programs related to steel and other shipments with TFM to maximize asset utilization. CUSTOMER SERVICE Most of our customer services are centralized in our Customer Service Center ("CSC") in Shreveport. Shippers can contact our CSC 24 hours a day, seven days a week to receive prompt responses to a range of shipping inquiries. CSC performance is measured by internally generated service standards. For example, over 80% of all incoming calls to the CSC are answered within the first 20 seconds. Our CSC is staffed with approximately 123 customer service representatives and 11 managers who have expertise in the transportation of specific commodities. Our customer service representatives interact closely with our other employees to provide fast solutions to customer needs and requests. In addition, our dedicated problem resolution team communicates to our field managers specific problems on behalf of customers for immediate resolution, while our proactive monitoring team consistently monitors system traffic and communicates this information to customers. Our CSC can help our customers check the status of shipments traveling on any KCSR, Tex-Mex or TFM line. We use electronic data interchange ("EDI") and now receive approximately 89% of all bills of lading from customers electronically. Inquiries regarding invoices and bills of lading are directed to our customer service specialists, revenue accounting staff or credit and collections personnel depending on the issue in question. Our customers can use the Internet to track shipments through our website. In conjunction with other rail carriers we are working to develop web portals which include nationwide tracking and tracing of shipments, bills of lading, electronic billing and payment, shipment priority, capacity management and car ordering through an industry initiative called STEELROADS.COM. SYSTEMS AND TECHNOLOGY MANAGEMENT CONTROL SYSTEM We implemented a pilot version of our MCS on Gateway Western (which was merged into KCSR effective October 1, 2001) in the first quarter of 2000. While development of MCS is not yet complete, during November 2001, a small functional part of MCS was installed relating to waybilling functions at our customer service center. We expect to fully implement MCS on KCSR during the third quarter of 2002. Our proprietary MCS includes the following elements: . a new waybill system; . a new transportation system; . a work queue management infrastructure; . a service scheduling system; and . EDI interfaces to the new systems. 68 We expect our MCS to provide more accurate and timely information on terminal dwell time, car velocity through terminals and priority of switching to meet schedules. MCS is designed to provide better analytical tools for us to make decisions based on more timely and accurate information. A data warehouse will provide the foundation of an improved decision support infrastructure. By making decisions based upon that information, we intend to improve service quality and utilization of locomotives, rolling stock, crews, yards, and line of road and thereby reduce cycle times and costs. With the implementation of service scheduling, we also expect our MCS to provide improved customer service through improved advanced planning and real-time decision support. By designing all new business processes around workflow technology, we intend to more effectively follow key operating statistics to measure productivity and improve performance across our entire operations. We also expect our MCS to improve clerical and information technology group efficiencies. We believe that information technology and other support groups will be able to reduce maintenance costs, increase their flexibility to respond to new requests and improve productivity. By using a layered design approach, we expect to be able to extend our MCS to new technologies as they become available. Our MCS can be further modified to connect customers with additional applications via the Internet and will be constructed to support multiple railroads, permit modifications to accommodate the local language requirements of the area and operate across multiple time zones. As of March 31, 2002, we had invested approximately $56.4 million in MCS. TRAIN DISPATCHING SYSTEM KCSR is currently operating on two types of train dispatching systems, Direct Train Control ("DTC") and Centralized Traffic Control ("CTC"). DTC uses direct radio communication between dispatchers and engineers to coordinate train movement. DTC is used on approximately 65% of KCSR's track, including the track from Shreveport to Meridian and Shreveport to New Orleans. CTC controls switches and signals in the field from the dispatcher's desk top via microwave link. CTC is used on approximately 35% of KCSR's track, including the track from Kansas City to Beaumont and Shreveport to Dallas. CTC is normally utilized on heavy traffic areas with single main line or heavy traffic areas with multiple routes. Each dispatcher currently has an assigned territory displayed on high resolution monitors driven by a mini-mainframe in Shreveport with a remote station in Beaumont. REMOTE CONTROL LOCOMOTIVE OPERATING SYSTEM We have begun implementing a remote control locomotive operating system called Beltpack. This system allows a train engine employee to run switching by remote control. The use of Beltpacks are expected to improve safety and allow a decrease in the number of employees per train crew. We expect to complete this implementation by September 2002. 69 PROPERTIES AND EQUIPMENT KCSR'S FLEET
AS OF DECEMBER 31, 2001 ----------------------- LEASED OWNED ------ ----- Locomotives Road Units...................... 304 122 Switch Units.................... 52 4 Other........................... -- 8 ------ ----- Total Locomotives............... 356 134 ====== ===== Rolling Stock Box Cars........................ 6,164 1,420 Hopper Cars..................... 2,002 1,179 Flat Cars (Intermodal & Others). 1,585 601 Gondolas........................ 780 88 Auto Rack....................... 201 -- Tank Cars....................... 44 43 ------ ----- Total Rolling Stock............. 10,776 3,331 ====== =====
As of December 31, 2001, KCSR's fleet consisted of 490 diesel locomotives, of which 134 were owned, 334 were leased from Southern Capital and 22 were leased from non-affiliates. During the fourth quarter of 1999, KCSR leased 50 new General Electric 4400 AC locomotives from Southern Capital, a 50-50 joint venture with GATX Capital Corporation. As of December 31, 2001, KCSR's fleet of rolling stock consisted of 14,107 freight cars, of which 3,331 were owned, 3,390 were leased from Southern Capital and 7,386 were leased from non-affiliates. Our owned equipment is subject to liens created the KCS Credit Facilities, as well as liens created under certain conditional sales agreements and equipment trust certificates. KCSR indebtedness with respect to equipment trust certificates, conditional sales agreement and capital leases totalled approximately $46.5 million at December 31, 2001. Certain KCSR property statistics follow:
AS OF DECEMBER 31, ------------------------- 1999 2000 2001 ------- ------- ------- Route miles--main and branch line. 3,158 3,103 3,103 Total track miles................. 4,499 4,444 4,444 Miles of welded rail in service... 2,153 2,157 2,197 Main line welded rail (% of total) 59% 59% 59% Cross ties replaced (during year). 346,686 355,444 233,489 Average Age (in years): Wood ties in service........... 15.5 15.2 16.0 Rail in main and branch line... 28.5 29.5 28.9 Road locomotives............... 22.0 22.9 23.6 All locomotives................ 22.9 23.8 24.5
In support of our transportation operations, we own and operate repair shops, depots and office buildings along our right-of-way. A major facility, the Deramus Yard, is located in Shreveport, Louisiana and includes a general office building, locomotive repair shop, car repair shops, customer service center, material warehouses and fueling facilities totaling approximately 227,000 square feet. We also own a 107,800 square foot facility in Pittsburg, Kansas that previously was used as a diesel locomotive repair facility. This facility was closed in 1999. 70 We also own freight and truck maintenance buildings in Dallas totaling approximately 125,200 square feet. We also own a 21,000 square foot freight car repair shop in Kansas City and approximately 15,000 square feet of office space in Baton Rouge, Louisiana. We own five intermodal facilities located in Dallas, Kansas City, Shreveport, New Orleans, and Jackson, Mississippi which are operated by third party contractors. In April 2000, we opened automotive facilities at the former Richards-Gebaur Airbase in Kansas City and we may further expand these facilities as business opportunities arise. We are also expanding our intermodal facilities in Kansas City, Dallas and Shreveport. We also have two transload facilities, one in Spiro, Oklahoma and the other in Jackson, Mississippi. A third transload facility is expected to open in Dallas during 2002. Transload operations consist of train/truck shipments whereby the products shipped are unloaded from the trailer, container or railcar and reloaded onto the other mode of transportation. We own 16.6% of Kansas City Terminal Railway Company, which owns and operates approximately 80 miles of track and operates an additional eight miles of track under trackage rights in greater Kansas City, Missouri. We also lease for operating purposes certain short sections of track owned by various other railroad companies and jointly own certain other facilities with these railroads. We own 1,025 acres of property located on the waterfront in the Port Arthur, Texas area, which includes 22,000 linear feet of deep-water frontage and three docks. Port Arthur is an uncongested port with direct access to the Gulf of Mexico. Approximately 75% of this property is available for development. Through wholly owned subsidiaries we operate a 12,000 square foot railroad wood tie treating plant in Vivian, Louisiana under an industrial revenue bond lease arrangement with an option to purchase, own a 70 acre coal and petroleum coke bulk handling facility in Port Arthur, Texas and own and operate a microwave system, which extends essentially along our right-of-way from Kansas City to Dallas, Beaumont, Port Arthur and New Orleans. This microwave system is leased to KCSR. Our other subsidiaries own approximately 8,000 acres of land at various points adjacent to our right-of-way, a 354,000 square foot warehouse at Shreveport and several former railway buildings which are now being rented to non-affiliated companies, primarily as warehouse space. In June 2001, KCS entered into a 17-year lease agreement for a new corporate headquarters building in downtown Kansas City, Missouri. We began occupancy of the building in April 2002. Additionally, in June 2001, KCS sold the building that formerly served as its corporate headquarters in Kansas City. We own 80% of Wyandotte Garage Corporation, which owns a 1,147 space parking facility adjacent to our former corporate headquarters building in downtown Kansas City that is used by certain of our employees, our affiliates and the general public, which is subject to an option to purchase held by a third party. The option is expected to be exercised. The obligations under the New Credit Agreement and the related documents are secured by a first priority lien upon substantially all of our real and personal property. COMPETITION Our rail operations compete against other railroads, many of which are much larger and have significantly greater financial and other resources than us. Since 1994, there has been significant consolidation among major North American rail carriers, including the 1995 merger of Burlington Northern, Inc. with Santa Fe Pacific Corporation, the 1995 merger of UP with the Chicago and North Western Transportation Company ("CNW") and the 1996 merger of UP with the Southern Pacific Railroad Corporate. Further, CSX and Norfolk Southern purchased the assets of Consolidated Rail Corporation ("Conrail") in 1998 and CN acquired the IC in June 1999. As a result of this consolidation, the railroad industry is now dominated by a few "mega-carriers". We believe that our revenues were negatively affected by the UP/CNW, UP/SP and BNSF mergers, which led to diversions of rail traffic away from our lines. We regard the larger western railroads (BNSF and UP), in particular, as significant competitors to our operations and prospects because of their substantial resources. The ongoing 71 impact of these mergers is uncertain. We believe, however, that because of our investments and strategic alliances, we are positioned to attract additional rail traffic through our "NAFTA Railway." We are subject to competition from motor carriers, barge lines and other maritime shipping, which compete with us across certain routes in our operating area. Changing regulations, subsidized highway improvement programs and favorable labor regulations have improved the competitive position of trucks in the United States as an alternative mode of surface transportation for many commodities. In the United States, the truck industry generally is more cost and transit-time competitive than railroads for short-haul distances. The rail market share of inter-city freight revenues has declined from 13.6% in 1991 to 9.0% in 2000, while the market share for trucks grew from 74.6% to 80.7% over the same period. In addition, Mississippi and Missouri River barge traffic, among others, compete with KCSR and its rail connections in the transportation of bulk commodities such as grains, steel and petroleum products. Intermodal traffic and certain other traffic face highly price sensitive competition, particularly from motor carriers. However, rail carriers, including KCSR, have placed an emphasis on competing in the intermodal marketplace, working together 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 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 action until extended procedures are exhausted. Existing national union contracts with the railroads became amendable at the end of 1999. Included in the contracts was a provision for wages to increase automatically in the year following the contract term. These federal labor regulations are often more burdensome and expensive than regulations governing other industries and may place us at a competitive disadvantage relative to other industries that are not subject to these regulations. Railroad industry personnel are covered by the RRA instead of the Social Security Act. Employer contributions under the RRA are currently substantially higher than those under the Social Security Act and may rise further because of the increasing proportion of retired employees receiving benefits relative to the number of working employees. The RRA has required up to a 23.75% contribution by railroad employers on eligible wages (see the discussion below of the Railroad Retirement and Survivors' Improvement Act of 2001 for a discussion of changes to this rate effective in 2002), while the Social Security and Medicare Acts only require a 7.65% employer contribution on similar wage bases. Railroad industry personnel are also covered by the FELA rather than by state workers' compensation systems. FELA is a fault-based system by which compensation for injuries are settled by negotiation and litigation, which can be expensive and time consuming. By contrast, most other industries are covered by state administered no-fault plans with standard compensation schedules. At March 31, 2002, we had approximately 2,653 employees, including approximately 2,598 KCSR employees. Approximately 85% of KCSR employees are covered under various collective bargaining agreements. Periodically, the collective bargaining agreements with the various unions become eligible for renegotiations. On December 21, 2001, the Railroad Retirement and Survivors' Improvement Act of 2001 was signed into law. This legislation liberalizes early retirement benefits for employees with 30 years of service by reducing the full benefit age from 62 to 60, eliminates a cap on monthly retirement and disability benefits, lowers the minimum service requirement from 10 years to 5 years of service, and provides for increased benefits for surviving spouses. It also provides for the investment of certain railroad retirement funds in non-governmental 72 assets, adjustments in the payroll tax rates paid by employees and employers, and the repeal of a supplemental annuity work-hour tax. The new law provides for a 0.5% reduction in the employer contribution for payroll taxes in 2002 and a 1.9% decline beginning in 2003. Beginning in 2004, the employer contribution will be based on a formula and could range between 8.2% and 22.1%. The reductions in the employer contribution under RRA and the repeal of the supplemental annuity work-hour tax are expected to reduce fringe benefits expenses by approximately $2.2 million in 2002. Additionally, the reduction in the retirement age from 62 to 60 is expected to result in increased employee attrition, leading to additional potential cost savings since it is not anticipated that all employees selecting early retirement will be replaced. INSURANCE KCS maintains multiple insurance programs for its various subsidiaries including rail liability and property, general liability, directors and officers coverage, workers compensation coverage and various specialized coverages for specific entities as needed. Coverage for KCSR is by far the most significant part of the KCS program. It includes liability coverage up to $250 million, subject to a $3 million deductible and certain aggregate limitations, and property coverage up to $200 million subject to a $5 million deductible and certain aggregate limitations. We believe that our insurance program is in line with industry norms given our size and provides adequate coverage for potential losses. LEGAL MATTERS In July 1996, KCSR was named as one of twenty-seven defendants in various lawsuits in Louisiana and Mississippi arising from the explosion of a rail car loaded with chemicals in Bogalusa, Louisiana on October 23, 1995. Approximately 25,000 residents of Louisiana and Mississippi asserted claims to recover damages allegedly caused by exposure to the released chemicals. On October 29, 2001, KCSR and representatives for its excess insurance carriers negotiated a settlement in principle with the claimants for $22.3 million. The settlement was finalized with the execution of a Master Global Settlement Agreement ("MSGA") in early 2002. In Louisiana, the Court will evaluate the MSGA at a fairness hearing and decide whether the proposed settlement is fair for the class of plaintiffs. In Mississippi, the plaintiffs are expected to individually execute release instruments. The first payment under the MSGA of $11.1 million was made on April 1, 2002, reducing the recorded liability from $22.3 million to $11.2 million. KCS also has a related insurance receivable remaining of $11.3 million. In August 2000, KCSR and certain of its affiliates were added as defendants in lawsuits pending in Jefferson and Harris Counties, Texas. These lawsuits allege damage to approximately 3,000 plaintiffs as a result of an alleged toxic chemical release from a tank car in Houston, Texas on August 21, 1998. On June 28, 2001, KCSR reached a final settlement with the 1,664 plaintiffs in the lawsuit filed in Jefferson County, Texas. KCSR continues to vigorously defend the lawsuit filed in Harris County, Texas and management believes KCS's probability of liability for damages in this case to be remote. We are a defendant in various matters brought primarily by current and former employees and third parties for job related injury incidents or crossing accidents. In addition, we are subject to claims alleging hearing loss as a result of alleged elevated noise levels in connection with our current and former operations. We are aggressively defending these matters and has established liability reserves which management believes are adequate to cover expected costs. Nevertheless, due to the inherent unpredictability of these matters, we could incur substantial costs above reserved amounts. We are involved as plaintiff or defendant in various legal actions arising in the normal course of business. While the ultimate outcome of our various legal proceedings cannot be predicted with certainty, we believe, after consulting with legal counsel, that our litigation reserves are adequate. ENVIRONMENTAL MATTERS See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Other--Environmental Matters" for a detailed discussion of certain environmental proceedings. 73 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning each of the current directors and executive officers of KCS as of July 1, 2002:
NAME AGE POSITION - ---- --- -------- Michael R. Haverty/ (1)/.. 58 Chairman of the Board, President and Chief Executive Officer Gerald K. Davies.......... 58 Executive Vice President and Chief Operating Officer Ronald G. Russ............ 47 Senior Vice President and Chief Financial Officer William J. Pinamont....... 41 Vice President and General Counsel Warren K. Erdman.......... 43 Vice President--Corporate Affairs Paul J. Weyandt........... 49 Vice President and Treasurer Louis G. Van Horn......... 44 Vice President and Comptroller Jay M. Nadlman............ 42 Associate General Counsel and Corporate Secretary Albert W. Rees............ 56 Senior Vice President--Operations of KCSR A. Edward Allinson/ (2,3)/ 67 Director Michael G. Fitt/ (1,2,3)/. 70 Director James R. Jones/ (1,3)/.... 62 Director Landon H. Rowland/ (1)/... 64 Director Rodney E. Slater.......... 47 Director Byron G. Thompson/ (2)/... 69 Director
- -------- (1)Member of the Executive Committee (2)Member of the Audit Committee (3)Member of the Compensation and Organization Committee MICHAEL R. HAVERTY has served as the President and Chief Executive Officer of KCS since July 12, 2000 and as a director since May 1995. Mr. Haverty has served as Chairman of the Board of KCS since January 1, 2001. Mr. Haverty served as Executive Vice President of KCS from May 1995 until July 12, 2000. He has been President, Chief Executive Officer and a director of KCSR since 1995. Mr. Haverty has served as Chairman of the Board of KCSR since November 1999. He also has served as the President and a director of Mexrail since 1995 and as a director of the Panama Canal Railway Company since October 1996 and as Co-Chairman of the Board of Directors of that company since May 1999. Mr. Haverty has served as Co-Chairman of Panarail Tourism Company since October 2000. Mr. Haverty is also a director and Chairman of the Executive Committee of the Board of Directors of Grupo TFM, an affiliate of KCS, a director of Tex-Mex and a director and Chairman of the Executive Committee of TFM. He previously served as Chairman and Chief Executive Officer of Haverty Corporation, a transportation investment business from 1993 to May 1995, acted as an independent executive transportation adviser from 1991 to 1993 and was President and Chief Operating Officer of The Atchison, Topeka and Santa Fe Railway Company from 1989 to 1991. Mr. Haverty is also a director of Midwest Grain Products, Inc. of Atchison, Kansas. GERALD K. DAVIES has served as Executive Vice President and Chief Operating Officer of KCS since July 18, 2000. Mr. Davies joined KCSR in January 1999 as the Executive Vice President and Chief Operating Officer. Mr. Davies has served as a director of KCSR since November 1999. Prior to joining KCSR, Mr. Davies served as the Executive Vice President of Marketing with Canadian National Railway from 1993 through 1998. Mr. Davies held senior management positions with Burlington Northern Railway from 1976 to 1984 and 1991 to 1993 and with CSX Transportation from 1984 to 1991. RONALD G. RUSS became Senior Vice President and Chief Financial Officer on July 1, 2002. Mr. Russ served as Executive Vice President and Chief Financial Officer of Wisconsin Central from 1999 to 2002. He served as Treasurer of Wisconsin Central from 1987 to 1993. From 1993 to 1999 he was executive manager and chief 74 financial officer for Tranz Rail Holdings Limited, an affiliate of Wisconsin Central in Wellington, New Zealand. He also served in various capacities with Soo Line Railroad and The Chicago, Milwaukee, St. Paul and Pacific Railroad Company, spanning a 25-year career in the railroad industry. WILLIAM J. PINAMONT has served as Vice President and General Counsel of KCS since April 2001. He joined KCSR in December 2000 as Assistant Vice President Risk Management. Prior to joining KCS, Mr. Pinamont was Of Counsel at the law firm Piper, Marbury, Rudnick & Wolfe, LLP from September 1999 to December 2000. From July 1992 until June 1999, he served as Associate General Counsel for Consolidated Rail Corporation. WARREN K. ERDMAN has served as Vice President--Corporate Affairs of KCS since April 15, 1997 and as Vice President--Corporate Affairs of KCSR since May 1997. Mr. Erdman became a director of KCSR in May 2001. Prior to joining KCS, Mr. Erdman served as Chief of Staff to United States Senator Kit Bond of Missouri from 1987 to 1997. PAUL J. WEYANDT has served as Vice and President and Treasurer of KCS and of KCSR since September 2001. Before joining KCS, Mr. Weyandt was a consultant to the Structured Finance Group of GE Capital Corporation from May 2001 to September 2001. Prior to consulting, Mr. Weyandt spent 23 years with BNSF, most recently as Assistant Vice President-Finance and Assistant Treasurer. LOUIS G. VAN HORN has served as Vice President and Comptroller of KCS since May 1996. He has also served as Vice President and Comptroller of KCSR since 1995. He was Comptroller of KCS from September 1992 to May 1996. From January 1992 to September 1992, he served as Assistant Comptroller of KCS. Mr. Van Horn is a Certified Public Accountant. JAY M. NADLMAN has served as Associate General Counsel and Corporate Secretary of KCS since April 1, 2001. Mr. Nadlman joined KCS in December 1991 as a General Attorney, and was promoted to Assistant General Counsel in 1997, serving in that capacity until April 1, 2001. Mr. Nadlman has served as Associate General Counsel and Secretary of KCSR since May 3, 2001, and as Assistant General Counsel and Assistant Secretary from August 1997 to May 3, 2001. Prior to joining KCS, Mr. Nadlman served as an attorney with Union Pacific Railroad Company from 1985 to 1991. ALBERT W. REES has served as a director of KCSR since May 1996. Since March 2001, he has served as Senior Vice President--Operations of KCSR. From January 1999 to March 2001, he served as Senior Vice President--International Operations of KCSR. From June 1995 to January 1999, Mr. Rees served as Senior Vice President--Operations of KCSR. Prior to joining KCSR, Mr. Rees was with The Atchison, Topeka and Santa Fe Railway Company, serving as Vice President--Quality Management from June 1991 to June 1995 and as Vice President--Operations from June 1989 through May 1991. Mr. Rees also serves as a director and chairman of the executive committee of each of the Kansas City Terminal Railway Company and Tex-Mex. Mr. Rees has announced his departure from KCSR and will resign from all positions with KCSR effective July 31, 2002. A. EDWARD ALLINSON has been a director of KCS since 1990. He served as the Chief Executive Officer and Chairman of the Board of EquiServe LP ("EquiServe") from December 1999 through October 2000. EquiServe provides stock transfer and related services to publicly listed corporations. Prior to joining EquiServe, Mr. Allinson was an Executive Vice President of State Street Bank and Trust Company, Chairman of the Board of Directors of Boston Financial Data Services, Inc. ("BFDS"), and Executive Vice President of State Street Corporation from March 1990 through December 1999. BFDS provides full service share owner accounting and recordkeeping services to mutual funds, selected services to certain retirement plans and certain securities transfer services. DST Systems, Inc. owns 50% of BFDS. In 2001, EquiServe became a wholly-owned subsidiary of DST Systems, Inc. Mr. Allinson is also a director of DST Systems, Inc. MICHAEL G. FITT has been a director of KCS since 1986. Prior to retirement, he was Chairman and Chief Executive Officer of Employers Reinsurance Corporation of Overland Park, Kansas, from 1980 through 1992 75 and President of that company from 1979 through 1991. Employers Reinsurance Corporation, a subsidiary of General Electric Capital Services, Inc., is a reinsurance company. Mr. Fitt is also a director of DST Systems, Inc. JAMES R. JONES has been a director of KCS since November, 1997. Mr. Jones is also a director of Grupo TFM and TFM, both affiliates of KCS. He has been Senior Counsel to the firm of Manatt, Phelps & Phillips since March 1, 1999. Mr. Jones is also Co-Chairman of Manatt Jones Global Strategies. He is also Chairman of Globe Ranger Corp. Mr. Jones was President of Warnaco Inc. International Division from 1997 through 1998; U.S. Ambassador to Mexico from 1993 through 1997 and Chairman and Chief Executive Officer of the American Stock Exchange from 1989 through 1993. Mr. Jones served as a member of the U.S. Congress representing Oklahoma for 14 years. He was White House Special Assistant and Appointments Secretary to President Lyndon Johnson. Mr. Jones is also a director of Anheuser-Busch, Grupo Modelo S.A. de C.V., San Luis Corporacion, TV Azteca, and Keyspan Energy Corporation. LANDON H. ROWLAND has been a director of KCS since 1983 and served as Chairman of the Board of KCS from May 1997 through December 31, 2000. Mr. Rowland served as President of KCS from July 1983 to July 12, 2000 and as Chief Executive Officer from January 1987 to July 12, 2000. Mr. Rowland has been a director and President of Stilwell Financial Inc. since May 1998. He has served as Chairman of the Board of Directors and Chief Executive Officer of Stilwell Financial Inc. since August 1999. RODNEY E. SLATER has been a director of KCS since June 5, 2001. Mr. Slater is a partner in the public policy practice group of the firm Patton Boggs LLP and has served as head of the firm's transportation practice group in Washington, D.C. since April 1, 2001. He served as U.S. Secretary of Transportation from 1997 to January 2001 and head of the Federal Highway Administration from 1993 to 1996. Mr. Slater is also a director of Southern Development Bancorporation and Parsons Brinckerhoff International Advisory Board. BYRON G. THOMPSON has been a director of KCS since August 17, 2000. Mr. Thompson has served as Chairman of the Board of Country Club Bank, n.a., Kansas City since February 1985. Prior to that time, Mr. Thompson served as Vice Chairman of Investment Banking at United Missouri Bank of Kansas City and as a member of the Board of United Missouri Bancshares, Inc. 76 PRINCIPAL STOCKHOLDERS AND STOCK OWNED BENEFICIALLY BY DIRECTORS AND CERTAIN EXECUTIVE OFFICERS The following table sets forth information as of March 4, 2002 concerning the beneficial ownership of KCS's common stock by: (i) beneficial owners of more than five percent of any class of such stock that have publicly disclosed their ownership; (ii) the members of the board of directors, the Chief Executive Officer and the four other most highly compensated executive officers; and (iii) all executive officers and directors as a group. KCS is not aware of any beneficial owner of more than five percent of the preferred stock. None of the directors or executive officers own any shares of preferred stock. No officer or director of KCS owns any equity securities of any subsidiary of KCS. Beneficial ownership is generally either the sole or shared power to vote or dispose of the shares. KCS is not aware of any arrangement which would at a subsequent date result in a change of control of KCS.
COMMON PERCENT NAME AND ADDRESS /(1)/ STOCK /(2)/ OF CLASS/ (2)/ - ---------------------- ---------- ------------- Perkins, Wolf, McDonnell & Company........... 3,308,689/(3)/ 5.51% A. Edward Allinson........................... 86,033/(4)/ * Director Ronald G. Russ............................... 0/(5)/ * Senior Vice President and Chief Financial Officer Gerald K. Davies............................. 455,636/(6)/ * Executive Vice President and Chief Operating Officer Michael G. Fitt.............................. 94,800/(7)/ * Director Michael R. Haverty........................... 2,321,862/(8)/ 3.81% Chairman of the Board, President and Chief Executive Officer James R. Jones............................... 56,880/(9)/ * Director William J. Pinamont.......................... 25,994/(10)/ * Vice President and General Counsel Albert W. Rees............................... 472,619/(11)/ * Senior Vice President--Operations of KCSR Landon H. Rowland............................ 865,606/(12)/ 1.44% Director Rodney E. Slater............................. 0 * Director Byron G. Thompson............................ 40,000/(13)/ * Director All Directors and Executive Officers as a Group (15 Persons).................... 5,255,319/(14)/ 8.42%
- -------- * Less than one percent of the outstanding shares. /(1)/ The address for each of the individuals listed in the above table as of the Record Date, other than Mr. Rowland, is 427 West 12/th/ Street, Kansas City, Missouri 64105. The address for Mr. Rowland is Stilwell Financial Inc., 920 Main Street, 21/st/ Floor, Kansas City, Missouri 64105-2008. /(2)/ Under applicable law, shares that may be acquired upon the exercise of options or other convertible securities that are exercisable on March 4, 2002 or will become exercisable within 60 days of that date, are considered beneficially owned. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares subject to options held by that person that are exercisable on, or exercisable within 60 days of, March 4, 2002, are deemed outstanding. These shares are not, however, deemed outstanding for the purpose of computing the percentage ownership of any other person. In addition, under applicable law, shares that are held indirectly are considered beneficially owned. Directors and executive officers may also be deemed to own, 77 beneficially, shares included in the amounts shown above which are held in other capacities. The holders may disclaim beneficial ownership of shares included under certain circumstances. Except as noted, the holders have sole voting and dispositive power over the shares. /(3)/ Based upon information in Schedule 13G filed February 26, 2002. The address for Perkins, Wolf, McDonnell & Company is 310 S. Michigan Avenue, Suite 2600, Chicago, Illinois 60604. Perkins, Wolf, McDonnell & Company reports that it has sole voting and dispositive power with respect to 37,189 shares and shared voting and dispositive power with respect to 3,271,500 shares. /(4)/ Mr. Allinson's beneficial ownership includes 70,000 shares that may be acquired through options that are exercisable as of, or will become exercisable within 60 days of, March 4, 2002 and 1,200 shares held in a Keogh plan. /(5)/ Mr. Russ joined KCS as Senior Vice President and Chief Financial Officer effective July 1, 2002. /(6)/ Mr. Davies' beneficial ownership includes 388,645 shares that may be acquired through options that are exercisable as of, or will become exercisable within 60 days of, March 4, 2002, and 585 shares allocated to his account in the KCS ESOP. /(7)/ Mr. Fitt's beneficial ownership includes 40,000 shares that may be acquired through options that are exercisable as of, or will become exercisable within 60 days of, March 4, 2002. /(8)/ Mr. Haverty's beneficial ownership includes 1,015,570 shares that may be acquired through options that are exercisable as of, or will become exercisable within 60 days of, March 4, 2002, 26,322 shares allocated to his account in the KCS ESOP, 10,843 shares allocated to his account in KCS's 401(k) and Profit Sharing Plan, 412 shares held by one of his children and 375,000 shares held in trusts for his children for which his brother acts as trustee. /(9)/ Mr. Jones' beneficial ownership includes 46,000 shares that may be acquired through options that are exercisable as of, or will become exercisable within 60 days of, March 4, 2002. /(10)/ Mr. Pinamont's beneficial ownership includes 25,000 shares that may be acquired through options that are exercisable as of, or will become exercisable within 60 days of, March 4, 2002, and 994 shares allocated to his account in the KCS's 401(k) and Profit Sharing Plan. /(11)/ Mr. Rees' beneficial ownership includes 246,728 shares that may be acquired through options that are exercisable as of, or will become exercisable within 60 days of, March 4, 2002, 17,227 shares allocated to his account in the KCS ESOP, 9,905 shares allocated to his account in KCS's 401(k) and Profit Sharing Plan, 2,914 shares in his wife's IRA account, 7,300 shares held in trust by his wife, and 430 shares held as custodian for his son. /(12)/ Mr. Rowland's beneficial ownership includes 10,000 shares that may be acquired through options that are exercisable as of, or will become exercisable within 60 days of, March 4, 2002 and 240 shares allocated to his account in Stilwell's 401(k) and Profit Sharing Plan. /(13)/ Mr. Thompson's beneficial ownership includes 30,000 shares that may be acquired through options that are exercisable as of, or will become exercisable within 60 days of, March 4, 2002. /(14)/ The number includes 2,498,392 shares that may be acquired through options that are exercisable as of, or will become exercisable within 60 days of, March 4, 2002 and 481,311 shares otherwise held indirectly. 78 DESCRIPTION OF NEW CREDIT AGREEMENT AND OTHER INDEBTEDNESS NEW CREDIT AGREEMENT The KCS Credit Facilities were amended and restated in connection with the Note Offering. The KCS Credit Facilities contained, and the New Credit Agreement contains, certain covenants that, among others, restrict the ability of KCS's subsidiaries, including KCSR, to incur additional indebtedness, and restrict KCS's ability and its subsidiaries' ability to: . incur additional liens, . enter into sale and leaseback transactions, . merge or consolidate with another entity, . sell assets, . enter into certain transactions with affiliates, . enter into agreements that restrict the ability to incur liens or, with respect to KCSR and KCS's other subsidiaries, pay dividends to KCS or another subsidiary of KCS, . make investments, loans, advances, guarantees or acquisitions, . make certain restricted payments, including dividends, or make certain payments on other indebtedness, or . make capital expenditures. In addition, KCS is required to comply with specific financial ratios, including minimum interest expense coverage and leverage ratios. The KCS Credit Facilities and the New Credit Agreement also contain certain customary events of default. These covenants, along with other provisions, could restrict maximum utilization of the New Credit Agreement. Borrowings under the New Credit Agreement are guaranteed by all of the significant, domestic subsidiaries of KCS other than Wyandotte Garage Corporation and TransFin Insurance Ltd. Caymex Transportation, Inc., SCC Holdings LLC, The Kansas City Northern Railway Company and Veals, Inc., each of which guaranteed the New Credit Agreement, do not guarantee the notes. Wyandotte Garage Corporation and TransFin Insurance Ltd. do not guarantee either the New Credit Agreement or the notes. Interest on the outstanding loans, including revolving loans, under the New Credit Agreement accrues at a rate per annum based on the London Interbank Offered Rate ("LIBOR") or an alternate base rate, as KCS shall select, plus an applicable margin. The New Credit Agreement will provide us with a $150 million term loan and a $100 million revolving credit facility. The term loan under the New Credit Agreement has a maturity of approximately 6 years. The terms of the New Credit Agreement provide us greater financial flexibility than the covenants in the KCS Credit Facilities. We believe the most significant changes are as follows: . allowing us to retain 100% of the proceeds from any common stock issuances, or any non-cash-pay preferred stock issuances, . allowing us to retain 50% of the proceeds from any cash-pay preferred stock issuances, with the remaining 50% being utilized to repay our bank debt, . allowing us to issue additional senior unsecured indebtedness, provided the net proceeds are used to pay down bank debt; however, we may retain up to $50 million of net proceeds of senior unsecured indebtedness if issued in conjunction with at least $100 million of equity proceeds for the purpose of further investment in our Mexican operations, 79 . allowing us to retain the first $10 million of net proceeds from asset sales per annum, . increasing the "material indebtedness" definition (contained in the KCS Credit Facilities) to $20 million from $10 million. As a result of the New Credit Agreement and the Note Offering, we expect that our interest expense will increase in the future. SENIOR NOTES On September 27, 2000, KCSR issued $200 million of its 9 1/2% senior notes due October 1, 2008. All of such senior notes were exchanged for registered notes prior to April 16, 2001. Each such senior note bears interest at a rate of 9 1/2% per annum with interest to be paid semi-annually to holders of record at the close of business on the March 15 and September 15 immediately preceding the respective interest payment dates on April 1 and October 1 of each year. The senior notes are general unsecured obligations of KCSR and are guaranteed by KCS and all of its subsidiaries which are required to guarantee the notes to be issued in the Offering. The indenture under which the 9 1/2% senior notes were issued contains a number of restrictive covenants similar to those applicable to the notes. See "Description of the Notes." OTHER INDEBTEDNESS KCSR has purchased rolling stock under equipment trust certificates and capitalized lease obligations. The equipment has been pledged as collateral for the related indebtedness. We lease transportation equipment, as well as office and other operating facilities under various capital and operating leases. Our indebtedness with respect to the equipment trust certificates and capital leases totaled approximately $44.6 million as of March 31, 2002. In addition, KCSR had approximately $3.5 million of various state sponsored Department of Transportation secured indebtedness as of March 31, 2002. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Contractual Obligations." 80 THE EXCHANGE OFFER GENERAL We hereby offer to exchange the new notes, which have been registered under the Securities Act, for a like principal amount of our original, unregistered outstanding notes. The exchange offer is subject to the terms and conditions set forth in this prospectus. Following the consummation of the exchange offer, holders of the outstanding notes who were eligible to participate in the exchange offer but who did not tender their outstanding notes may not have any further registration rights and the outstanding notes will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for the outstanding notes could be adversely affected. BACKGROUND, PURPOSE AND EFFECT OF THE EXCHANGE OFFER We originally sold the outstanding notes on June 12, 2002 to the Initial Purchasers. The Initial Purchasers subsequently resold the outstanding notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and qualified buyers outside the United States in reliance upon Regulation S under the Securities Act. As a condition to that sale to the Initial Purchasers, we entered into a registration rights agreement with the Initial Purchasers. Pursuant to that agreement, we agreed to: (1) file with the SEC, a registration statement on an appropriate form under the Securities Act, relating to a registered exchange offer for the outstanding notes under the Securities Act; and (2) use our reasonable best efforts to cause the exchange offer registration statement to be declared effective under the Securities Act. We agreed to, as soon as practicable after the effectiveness of the exchange offer registration statement, offer to the holders of the restricted securities who are not prohibited by any law or policy of the SEC from participating in the exchange offer the opportunity to exchange their securities for the new notes, which will be identical in all material respects to the outstanding notes (except that the new notes will not contain transfer restrictions) and that would be registered under the Securities Act. We agreed to keep the exchange offer open for not less than 20 business days (or longer, if required by applicable law) after the date on which notice of the exchange offer is mailed to holders of the outstanding notes. In addition, we agreed to file with the SEC a shelf registration statement to cover resales of restricted securities by those holders who satisfy certain conditions relating to the provisions of information in connection with the shelf registration statement, if: (1) because of any applicable law or interpretation of the staff of the SEC, the Issuer is not permitted to effect the exchange offer as contemplated hereby; (2) the exchange offer is not consummated by January 8, 2003; or (3) the exchange offer has been completed but counsel for the Placement Agents opines that a shelf registration is nevertheless required. We will be obligated to increase the interest rate on the notes by 0.5% per annum if the exchange offer is not consummated and the shelf registration statement is not declared effective by the SEC on or prior to January 8, 2003, and until such consummation or effectiveness occurs. 81 Each holder of outstanding notes that wishes to exchange outstanding notes for transferable new notes in the exchange offer will be required to make the following representations: (1) any new notes will be acquired in the ordinary course of its business; (2) the holder (other than a broker-dealer referred to in the next sentence) is not engaged in, and does not intend to engage in, the distribution of the new notes; (3) such holder has no arrangement or undertaking with any person to participate in the distribution of the new notes; and (4) neither the holder nor any such other person is our "affiliate" within the meaning of Rule 405 under the Securities Act, or if it is an affiliate, that it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. As indicated above, each participating broker-dealer that receives a new note for its own account in exchange for outstanding notes that were acquired as a result of market-making activities or other trading activities must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such new notes. For a description of the procedures for resales by participating broker-dealers, see "Plan of Distribution." RESALE OF THE NEW NOTES Based on interpretations by the staff of the SEC set forth in no-action letters issued to unrelated third parties, we believe that a holder or other person who receives new notes will be allowed to resell the new notes to the public without further registration under the Securities Act and without delivering to the purchasers of the new notes a prospectus provided that exchanging holder: . acquired the outstanding notes in the ordinary course of its business; . is not participating, does not intend to participate, and has no arrangement or understanding with any person to participate, in the distribution of the new notes; and . is not an affiliate of ours within the meaning of Rule 405 under the Securities Act. If any holder acquires new notes in the exchange offer for the purpose of distributing or participating in a distribution of the new notes, the holder cannot rely on the position of the staff of the SEC expressed in the no-action letters or any similar interpretive letters, and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction, unless an exemption from registration is otherwise available. This prospectus may be used for an offer to resell, for the resale or for other retransfer of new notes only as specifically set forth in this prospectus. With regard to broker-dealers, only broker-dealers that acquired the outstanding notes as a result of market-making activities or other trading activities may participate in the exchange offer. Each broker-dealer that receives new notes for its own account in exchange for outstanding notes, where such outstanding notes 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 notes. See "Plan of Distribution." TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, we will accept any and all outstanding notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the expiration date of the exchange offer. We will issue $1,000 principal amount of new notes in exchange for each $1,000 principal amount of outstanding notes accepted in the exchange offer. Holders may 82 tender some or all of their outstanding notes pursuant to the exchange offer. However, outstanding notes may be tendered only in integral multiples of $1,000. The form and terms of the new notes will be substantially identical to the form and terms of the outstanding notes except the new notes will be registered under the Securities Act, will not bear legends restricting their transfer and will not provide for any liquidated damages upon our failure to fulfill our obligations under the exchange and registration rights agreement to file, and cause to be effective, a registration statement. The new notes will evidence the same debt as the outstanding notes. The new notes will be issued under and entitled to the benefits of the same Indenture that authorized the issuance of the outstanding notes. Consequently, both series will be treated as a single class of debt securities under that Indenture. The exchange offer is not conditioned upon any minimum or maximum aggregate principal amount of outstanding notes being tendered for exchange. As of the date of this prospectus, $200,000,000 aggregate principal amount of the outstanding notes were outstanding. This prospectus and the letter of transmittal are being sent to all registered holders of outstanding notes. There will be no fixed record date for determining registered holders of outstanding notes entitled to participate in the exchange offer. Holders of outstanding notes do not have any appraisal or dissenters' rights under the General and Business Corporation Law of Missouri, or in the Indenture, in connection with the exchange offer. We intend to conduct the exchange offer in accordance with the provisions of the registration rights agreement, the applicable requirements of the Securities Act and the Securities Exchange Act of 1934 and the rules and regulations of the SEC thereunder. Outstanding notes that are not tendered for exchange in the exchange offer will remain outstanding and continue to accrue interest and will be entitled to the rights and benefits such holders have under the Indenture relating to the outstanding notes. We will be deemed to have accepted for exchange validly tendered outstanding notes when, as and if we have given oral or written notice of the acceptance to the exchange agent. The exchange agent will act as agent for the tendering holders for the purpose of receiving the new notes from us and delivering new notes to such holders. Subject to the terms of the registration rights agreement, we expressly reserve the right to amend or terminate the exchange offer, and not to accept for exchange any outstanding notes not previously accepted for exchange, upon the occurrence of any of the conditions specified below under the caption "--Certain Conditions to the Exchange Offer." If any tendered outstanding notes are not accepted for exchange because of an invalid tender, the occurrence of specified other events set forth in this prospectus or otherwise, the certificates for any unaccepted outstanding notes will be returned, without expense, to the tendering holder thereof as promptly as practicable after the expiration date of the exchange offer. Holders who tender outstanding notes in the exchange offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of outstanding notes pursuant to the exchange offer. We will pay all charges and expenses, other than certain applicable taxes described below, in connection with the exchange offer. It is important that you read the section labeled "-- Fees and Expenses" below for more details regarding fees and expenses incurred in the exchange offer. EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "expiration date" will mean 5:00 p.m., New York City time, on , 2002, unless we, in our sole discretion, extend the exchange offer, in which case the term "expiration date" will mean the latest date and time to which the exchange offer is extended. 83 In order to extend the exchange offer, we will notify the exchange agent of any extension by oral or written notice. We will notify, in writing or by public announcement, the registered holders of outstanding notes of the extension no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. We reserve the right, in our sole discretion, . to delay accepting for exchange any outstanding notes; . to extend the exchange offer or to terminate the exchange offer and to refuse to accept outstanding notes not previously accepted if any of the conditions set forth below under "--Certain Conditions to the Exchange Offer" have not been satisfied, by giving oral or written notice of any delay, extension or termination to the exchange agent; or . subject to the terms of the registration rights agreement, to amend the terms of the exchange offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice or public announcement thereof to the registered holders of outstanding notes. If we amend the exchange offer in a manner that we determine to constitute a material change, we will promptly disclose such amendment in a manner reasonably calculated to inform the holders of outstanding notes of such amendment. Without limiting the manner in which we may choose to make public announcements of any delay in acceptance, extension, termination or amendment of the exchange offer, we shall have no obligation to publish, advertise or otherwise communicate any such public announcement, other than by issuing a timely press release to a financial news service. CERTAIN CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other term of the exchange offer, we will not be required to accept for exchange, or exchange any new notes for, any outstanding notes, and may terminate or amend the exchange offer as provided in this prospectus before accepting any outstanding notes for exchange, if in our reasonable judgment: . the new notes to be received will not be tradable by the holder without restriction under the Securities Act or the Securities Exchange Act of 1934 and without material restrictions under the blue sky or securities laws of substantially all of the states of the United States; . the exchange offer, or the making of any exchange by a holder of outstanding notes, would violate applicable law or any applicable interpretation of the staff of the SEC; or . any action or proceeding has been instituted or threatened in any court or by or before any governmental agency with respect to the exchange offer that, in our judgment, would reasonably be expected to impair our ability to proceed with the exchange offer. In addition, we will not be obligated to accept for exchange the outstanding notes of any holder that has not made: . the representations described under "--Background, Purpose and Effect of the Exchange Offer" and "--Procedures for Tendering"; and . such other representations as may be reasonably necessary under applicable SEC rules, regulations or interpretations to make available to us an appropriate form for registration of the new notes under the Securities Act We expressly reserve the right, at any time or at various times, to extend the period of time during which the exchange offer is open. Consequently, we may delay acceptance of any outstanding notes by giving oral or 84 written notice of such extension to the registered holders of the outstanding notes. During any such extensions, all outstanding notes previously tendered will remain subject to the exchange offer, and we may accept them for exchange unless they have been previously withdrawn. We will return any outstanding notes that we do not accept for exchange for any reason without expense to their tendering holder as promptly as practicable after the expiration or termination of the exchange offer. We expressly reserve the right to amend or terminate the exchange offer, and to reject for exchange any outstanding notes not previously accepted for exchange, upon the occurrence of any of the conditions of the exchange offer specified above. We will give oral or written notice or public announcement of any extension, amendment, non-acceptance or termination to the registered holders of the outstanding notes as promptly as practicable. In the case of any extension, such oral or written notice or public announcement will be issued no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. These conditions are for our sole benefit and we may assert them regardless of the circumstances that may give rise to them or waive them in whole or in part at any or at various times in our sole discretion. If we fail at any time to exercise any of the foregoing rights, that failure will not constitute a waiver of such right. Each such right will be deemed an ongoing right that we may assert at any time or at various times. In addition, we will not accept for exchange any outstanding notes tendered, and will not issue new notes in exchange for any such outstanding notes, if at such time any stop order is threatened or in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the Indenture under the Trust Indenture Act of 1939. PROCEDURES FOR TENDERING Only a holder of outstanding notes may tender such outstanding notes in the exchange offer. To tender in the exchange offer, a holder must: (i) complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal; have the signature on the letter of transmittal guaranteed if the letter of transmittal so requires; and mail or deliver such letter of transmittal or facsimile to the exchange agent prior to the expiration date; and (ii) comply with the procedures established by DTC's Automated Tender Offer Program described below. In addition, either: . the exchange agent must receive outstanding notes along with the letter of transmittal; or . the exchange agent must receive, prior to the expiration date, a timely confirmation of book-entry transfer of such outstanding notes into the exchange agent's account at DTC according to the procedures for book-entry transfer described below or a properly transmitted agent's message; or . the holder must comply with the guaranteed delivery procedures described below. To be tendered effectively, the exchange agent must receive any physical delivery of the letter of transmittal and other required documents at the address set forth below under "--Exchange Agent" prior to the expiration date. The tender by a holder that is not withdrawn prior to the expiration date will constitute an agreement between such holder and us in accordance with the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal. The method of delivery of outstanding notes, the letter of transmittal and all other required documents to the exchange agent is at the holder's election and risk. Rather than mail these items, we recommend that holders use an overnight or hand delivery service. In all cases, holders should allow sufficient time to assure delivery to the exchange agent before the expiration date. Holders should not send the letter of transmittal or outstanding notes 85 to the Issuer. Holders may request their respective brokers, dealers, commercial banks, trust companies or other nominees to effect the above transactions for them. Any beneficial owner whose outstanding notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact the registered holder promptly and instruct it to tender on the owner's behalf. If such beneficial owner wishes to tender on its own behalf, it must, prior to completing and executing the letter of transmittal and delivering its outstanding notes, either: . make appropriate arrangements to register ownership of the outstanding notes in such owner's name; or . obtain a properly completed bond power from the registered holder of outstanding notes. The transfer of registered ownership may take considerable time and may not be completed prior to the expiration date. Signatures on a letter of transmittal or a notice of withdrawal described below must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or another "eligible institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, unless the outstanding note tendered pursuant thereto is tendered: . by a registered holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the letter of transmittal; or . for the account of an eligible institution. If the letter of transmittal is signed by a person other than the registered holder of any outstanding notes listed on the outstanding notes, such outstanding notes must be endorsed or accompanied by a properly completed bond power. The bond power must be signed by the registered holder as the registered holder's name appears on the outstanding notes and an eligible institution must guarantee the signature on the bond power. If the letter of transmittal or any outstanding notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing. Unless waived by us, they should also submit evidence satisfactory to us of their authority to deliver the letter of transmittal. The exchange agent and DTC have confirmed that any financial institution that is a participant in DTC's system may use DTC's Automated Tender Offer Program to tender. Participants in the program may, instead of physically completing and signing the letter of transmittal and delivering it to the exchange agent, transmit their acceptance of the exchange offer electronically. They may do so by causing DTC to transfer the outstanding notes to the exchange agent in accordance with its procedures for transfer. DTC will then send an agent's message to the exchange agent. The term "agent's message" means a message transmitted by DTC, received by the exchange agent and forming part of the book-entry confirmation, to the effect that: . DTC has received an express acknowledgement from a participant in its Automated Tender Offer Program that is tendering outstanding notes that are the subject of such book-entry confirmation; . such participant has received and agrees to be bound by the terms of the letter of transmittal (or, in the case of an agent's message relating to guaranteed delivery, that such participant has received and agrees to be bound by the applicable notice of guaranteed delivery); and . the agreement may be enforced against such participant. We will determine in our sole discretion all questions as to the validity, form, eligibility (including time of receipt), acceptance of tendered outstanding notes and withdrawal of tendered outstanding notes. Our 86 determination will be final and binding. We reserve the absolute right to reject any outstanding notes not properly tendered or any outstanding notes the acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the right to waive any defects, irregularities or conditions of tender as to particular outstanding notes. Our interpretation of the terms and conditions of the exchange offer (including the instructions in the letter of transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of outstanding notes must be cured within such time as we shall determine. Although we intend to notify holders of defects or irregularities with respect to tenders of outstanding notes, neither we, the exchange agent nor any other person will incur any liability for failure to give such notification. Tenders of outstanding notes will not be deemed made until such defects or irregularities have been cured or waived. Any outstanding notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned to the tendering holder by the exchange agent without cost to the tendering holder, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date. In all cases, we will issue new notes for outstanding notes that we have accepted for exchange under the exchange offer only after the exchange agent timely receives: . outstanding notes or a timely book-entry confirmation of such outstanding notes into the exchange agent's account at DTC; and . a properly completed and duly executed letter of transmittal and all other required documents or a properly transmitted agent's message. By signing the letter of transmittal or transmitting the agent's message, each tendering holder of outstanding notes will represent to us that, among other things: . any new notes that the holder receives will be acquired in the ordinary course of its business; . the holder has no arrangement or understanding with any person or entity to participate in the distribution of the new notes; . if the holder is not a broker-dealer, that it is not engaged in and does not intend to engage in the distribution of the new notes; . if the holder is a broker-dealer that will receive new notes for its own account in exchange for outstanding notes that were acquired as a result of market-making activities, that it will deliver a prospectus, as required by law, in connection with any resale of such new notes; and . the holder is not an "affiliate," as defined in Rule 405 of the Securities Act, of ours or, if the holder is an affiliate, it will comply with any applicable registration and prospectus delivery requirements of the Securities Act. BOOK-ENTRY TRANSFER The exchange agent will make a request to establish an account with respect to the outstanding notes at DTC for purposes of the exchange offer promptly after the date of this prospectus; and any financial institution participant in DTC's system may make book-entry delivery of outstanding notes by causing DTC to transfer such outstanding notes into the exchange agent's account at DTC in accordance with DTC's procedures for transfer. Holders of outstanding notes who are unable to deliver confirmation of the book-entry tender of their outstanding notes into the exchange agent's account at DTC or all other documents of transmittal to the exchange agent on or prior to the expiration date must tender their outstanding notes according to the guaranteed delivery procedures described below. 87 GUARANTEED DELIVERY PROCEDURES Holders wishing to tender their outstanding notes but whose outstanding notes are not immediately available or who cannot deliver their outstanding notes, the letter of transmittal or any other required documents to the exchange agent or comply with the applicable procedures under DTC's Automated Tender Offer Program prior to the expiration date may tender if: . the tender is made through an eligible institution; . on or prior to the expiration date, the exchange agent receives from such eligible institution either a properly completed and duly executed notice of guaranteed delivery (by facsimile transmission, mail or hand delivery) or a properly transmitted agent's message and notice of guaranteed delivery: . setting forth the name and address of the holder, the registered number(s) of such outstanding notes and the principal amount of outstanding notes tendered; . stating that the tender is being made thereby; and . guaranteeing that, within three (3) New York Stock Exchange trading days after the expiration date, the letter of transmittal (or facsimile thereof) together with the outstanding notes or a book-entry confirmation, and any other documents required by the letter of transmittal will be deposited by the eligible institution with the exchange agent; and . the exchange agent receives such properly completed and executed letter of transmittal (or facsimile thereof), as well as all tendered outstanding notes in proper form for transfer or a book-entry confirmation, and all other documents required by the letter of transmittal, within three (3) New York Stock Exchange trading days after the expiration date. Upon request to the exchange agent, a notice of guaranteed delivery will be sent to holders who wish to tender their outstanding notes according to the guaranteed delivery procedures set forth above. WITHDRAWAL OF TENDERS Except as otherwise provided in this prospectus, tenders of outstanding notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the expiration date. For a withdrawal to be effective: . the exchange agent must receive a written notice (which may be by telegram, telex, facsimile transmission or letter) of withdrawal at one of the addresses set forth below under "--Exchange Agent" prior to 5:00 p.m., New York City time, on the expiration date; or . holders must comply with the appropriate procedures of DTC's Automated Tender Offer Program system. Any such notice of withdrawal must: . specify the name of the person who tendered the outstanding notes to be withdrawn; . identify the outstanding notes to be withdrawn (including the principal amount of such outstanding notes); and . where certificates for outstanding notes have been transmitted, specify the name in which such outstanding notes were registered, if different from that of the withdrawing holder. 88 If certificates for outstanding notes have been delivered or otherwise identified to the exchange agent, then, prior to the release of such certificates, the withdrawing holder must also submit: . the serial numbers of the particular certificates to be withdrawn; and . a signed notice of withdrawal with signatures guaranteed by an eligible institution unless such holder is an eligible institution. If outstanding notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn outstanding notes and otherwise comply with the procedures of such facility. We will determine all questions as to the validity, form and eligibility (including the time of receipt) of such notices, and our determination shall be final and binding on all parties. We will deem any outstanding notes so withdrawn not to have validly tendered for exchange for purposes of the exchange offer. Any outstanding notes that have been tendered for exchange but that are not exchanged for any reason will be returned to their holder without cost to the holder (or, in the case of outstanding notes tendered by book-entry transfer into the exchange agent's account at DTC according to the procedures described above, such outstanding notes will be credited to an account maintained with DTC for outstanding notes) as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. Properly withdrawn outstanding notes may be retendered by following one of the procedures described under "--Procedures for Tendering" above at any time on or prior to the expiration date. EXCHANGE AGENT U.S. Bank National Association has been appointed as exchange agent for the exchange offer. You should direct questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for the notice of guaranteed delivery to the exchange agent addressed as follows: FOR OVERNIGHT DELIVERY, DELIVERY BY HAND OR DELIVERY BY REGISTERED OR CERTIFIED MAIL: U.S. Bank Trust Center 180 East Fifth Street St. Paul, Minnesota 55101 Attention: Specialized Finance Group BY FACSIMILE TRANSMISSION (FOR ELIGIBLE INSTITUTIONS ONLY): (651) 244-1537 CONFIRM FACSIMILE BY TELEPHONE ONLY: (800) 934-6802 DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL. FEES AND EXPENSES We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail; however, we may make additional solicitations by telegraph, telephone or in person by our officers and regular employees and those of our affiliates. We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to brokers, dealers or others soliciting acceptances of the exchange offer. We will, however, pay the 89 exchange agent's reasonable and customary fees for its services and will reimburse it for its related reasonable out-of-pocket expenses. We will pay the cash expenses to be incurred in connection with the exchange offer. Such expenses include SEC registration fees, fees and expenses of the exchange agent and trustee, accounting and legal fees and printing costs, and related fees and expenses. TRANSFER TAXES We will pay all transfer taxes, if any, applicable to the exchange of outstanding notes under the exchange offer. The tendering holder, however, will be required to pay any transfer taxes (whether imposed on the registered holder or any other person) if: . certificates representing outstanding notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered holder of outstanding notes tendered; . tendered outstanding notes are registered in the name of any person other than the person signing the letter of transmittal; or . a transfer tax is imposed for any reason other than the exchange of outstanding notes under the exchange offer. If satisfactory evidence of payment of such taxes is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed to that tendering holder. Holders who tender their outstanding notes for exchange will not be required to pay any transfer taxes. However, holders who instruct us to register new notes in the name of, or request that outstanding notes not tendered or not accepted in the exchange offer be returned to, a person other than the registered tendering holder will be required to pay any applicable transfer tax. ACCOUNTING TREATMENT We will record the new notes in our accounting records at the same carrying value as the outstanding notes, as reflected in our accounting records on the date of exchange. Accordingly, we will not recognize any gain or loss for accounting purposes as a result of the exchange offer. We will record the expenses of the exchange offer as incurred. CONSEQUENCES OF FAILURE TO EXCHANGE Holders of outstanding notes who do not exchange their outstanding notes for new notes under the exchange offer will remain subject to the restrictions on transfer applicable to the outstanding notes: . as set forth in the legend printed on the outstanding notes as a consequence of the issuance of the outstanding notes pursuant to the exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws; and . otherwise as set forth in the prospectus distributed in connection with the Note Offering. In general, you may not offer or sell the outstanding notes unless they are registered under the Securities Act, or if the offer or sale is exempt from registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreement, we do not intend to register resales of the outstanding notes under the Securities Act. Based on interpretations of the SEC staff, new notes issued pursuant to the exchange offer may be offered for resale, resold or otherwise transferred by their holders (other than any 90 such holder that is our "affiliate" within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the holders acquired the new notes in the ordinary course of the holders' business and the holders have no arrangement or understanding with respect to the distribution of the new notes to be acquired in the exchange offer. Any holder who tenders in the exchange offer for the purpose of participating in a distribution of the new notes: . could not rely on the applicable interpretations of the SEC; and . must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. OTHER Participation in the exchange offer is voluntary, and you should carefully consider whether to accept. You are urged to consult your financial and tax advisors in making your own decision on what action to take. We may in the future seek to acquire untendered outstanding notes in the open market or privately negotiated transactions, through subsequent exchange offers or otherwise. We have no present plans to acquire any outstanding notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any untendered outstanding notes. DESCRIPTION OF THE NOTES Definitions of certain terms used in this Description of the Notes may be found under the heading "Certain Definitions." For purposes of this section, (i) the term "Issuer" refers only to The Kansas City Southern Railway Company and not any of its subsidiaries, and (ii) the term "Parent" refers only to Kansas City Southern, the parent company of the Issuer, and not to any of its subsidiaries. The Parent and certain of its existing subsidiaries guarantee the notes. Each company that guarantees the notes is referred to in this section as a "Note Guarantor." Each such guarantee is termed a "Note Guarantee." We issued the outstanding notes and will issue the new notes under an Indenture, dated as of June 12, 2002 (the "Indenture"), among the Issuer, the Note Guarantors and U.S. Bank National Association, as Trustee (the "Trustee"), a copy of which is available upon request to the Issuer. The Indenture contains provisions which define your rights under the notes. In addition, the Indenture governs the obligations of the Issuer and of each Note Guarantor under the notes. The terms of the notes include those stated in the Indenture and those made part of the Indenture by reference to the TIA. The terms of the new notes are identical in all material respects to the outstanding notes, except the new notes will not contain transfer restrictions and holders of new notes will no longer have any registration rights. The Trustee will authenticate and deliver new notes for original issue only in exchange for a like principal amount of outstanding notes. Any outstanding notes that remain outstanding after the consummation of the exchange offer, together with the new notes, will be treated as a single class of securities under the Indenture. Accordingly, all references in this section to specified percentages in aggregate principal amount of the outstanding new notes shall be deemed to mean, at any time after the exchange offer is consummated, such percentage in aggregate principal amount of the outstanding notes and new notes then outstanding. The following description is meant to be only a summary of certain provisions of the Indenture. It does not restate the terms of the Indenture in their entirety. We urge that you carefully read the Indenture as it, and not this description, governs your rights as Holders. The Indenture provides for the issuance of additional notes, in an unlimited amount, having identical terms and conditions to the notes offered hereby (the "Additional Notes"), subject to compliance with the covenants 91 contained in the Indenture and applicable law. Any Additional Notes will be part of the same issue as the notes offered hereby and will vote on all matters with the notes offered hereby. For purposes of this "Description of the Notes" section, reference to the notes does not include Additional Notes. OVERVIEW OF THE NOTES AND THE NOTE GUARANTEES The notes: . will be general unsecured obligations of the Issuer; . will rank equally in right of payment with all existing and future Senior Indebtedness of the Issuer; . will be senior in right of payment to all future Subordinated Obligations of the Issuer; . will be effectively subordinated to all Secured Indebtedness of the Parent and its Subsidiaries to the extent of the value of the assets securing such Indebtedness; and . will be effectively subordinated to all liabilities (including Trade Payables) and Preferred Stock of each Subsidiary of the Parent (other than the Issuer) that is not a Note Guarantor. The Note Guarantees: The notes are guaranteed by the Parent and certain of its existing subsidiaries. The Note Guarantors other than the Parent are: Gateway Eastern Railway Company; Mid-South Microwave, Inc.; PABTEX GP, LLC; PABTEX L.P.; Rice-Carden Corporation; SIS Bulk Holding, Inc.; Southern Development Company; Southern Industrial Services, Inc.; and Trans-Serve, Inc. The Note Guarantee of each Note Guarantor: . will be a general unsecured obligation of such Note Guarantor; . will rank equally in right of payment with all existing and future Senior Indebtedness of such Note Guarantor; . will be senior in right of payment to all future Subordinated Obligations of such Note Guarantor; and . will be effectively subordinated to all Secured Indebtedness of the Parent and its Subsidiaries to the extent of the value of the assets securing such Indebtedness. Initially, the notes will not be guaranteed by Caymex Transportation Inc., SCC Holdings LLC, The Kansas City Northern Railway Company and Veals, Inc., each of which guarantees the Bank Indebtedness, and any Subsidiaries of the Parent that do not guarantee the Bank Indebtedness. The only significant, domestic Subsidiaries that do not guarantee the Bank Indebtedness are Wyandotte Garage Corporation and TransFin Insurance, Ltd. Caymex Transportation, Inc. is a holding company that indirectly owns our investments in Grupo TFM and TFM (through Nafta Rail, S.A. de C.V.) and the Panama Canal Railway Company. SCC Holdings LLC is a holding company that owns our investment in Southern Capital LLC. The Kansas City Northern Railway Company and Veals, Inc. are inactive and do not hold any material assets. Wyandotte Garage Corporation is a Subsidiary that owns and operates a parking facility located in downtown Kansas City, Missouri used by the Parent and the Issuer. TransFin Insurance, Ltd. is a single-parent captive insurance company, providing property, general liability and certain other coverages to the Parent and its Subsidiaries and Affiliates. As of and for the three months ended March 31, 2002, after giving effect to the $30 million reduction of our outstanding Tranche 92 A term loans from the proceeds of the sale of our equity interest in Mexrail and the Note Offering and the application of the net proceeds thereof and eliminating intercompany activity, the Subsidiaries of the Parent, other than the Issuer and those Subsidiaries that are Note Guarantors, would have had approximately $29.3 million of total liabilities (including trade payables), would have had approximately 19% of the Parent's consolidated assets and would have generated less than 1% of the Parent's consolidated revenues and consolidated EBITDA. PRINCIPAL, MATURITY AND INTEREST We issued the outstanding notes in an aggregate principal amount of $200 million. The notes will mature on June 15, 2009. We will issue the new notes in fully registered form, without coupons, in denominations of $1,000 and any integral multiple of $1,000. Each note bears interest at a rate of 7.5% per annum beginning on June 12, 2002 or from the most recent date to which interest has been paid or provided for. We will pay interest semiannually to Holders of record at the close of business on June 1 or December 1 immediately preceding the interest payment date on June 15 and December 15 of each year. We will begin paying interest to Holders on December 15, 2002. We will pay interest on overdue principal at 1% per annum in excess of such rate, and we will pay interest on overdue installments of interest at such higher rate to the extent lawful. If by January 8, 2003, the Issuer and the Note Guarantors have not consummated a registered exchange offer for the notes or caused a shelf registration statement with respect to resales of the notes to be declared effective, the annual interest rate on the notes will increase by 0.5% until the consummation of a registered exchange offer or the effectiveness of a shelf registration statement. These liquidated damage provisions are more fully explained under the heading "--Registration Rights Agreement." PAYING AGENT AND REGISTRAR We will pay the principal of, premium, if any, interest and liquidated damages, if any, on the notes at any office of ours or any agency designated by us which is located in the Borough of Manhattan, The City of New York. We have initially designated the corporate trust office of the Trustee to act as the agent of the Issuer in such matters. The location of the corporate trust office is Corporate Trust Services, 180 East Fifth Street, St. Paul, Minnesota 55101, Attn: Corporate Trust Administration. We, however, reserve the right to pay interest to Holders by check mailed directly to Holders at their registered addresses. Holders may exchange or transfer their notes at the same location given in the preceding paragraph. No service charge will be made for any registration of transfer or exchange of notes. We, however, may require Holders to pay any transfer tax or other similar governmental charge payable in connection with any such transfer or exchange. OPTIONAL REDEMPTION Except as set forth in this paragraph, we may not redeem the notes. Prior to June 15, 2005, we may, on one or more occasions, redeem up to a maximum of 35% of the original aggregate principal amount of the notes with the Net Cash Proceeds of one or more Equity Offerings (1) by the Issuer or (2) by the Parent to the extent the Net Cash Proceeds thereof are contributed to the Issuer or used to purchase Capital Stock (other than Disqualified Stock) of the Issuer from the Issuer, at a redemption price equal to 107.5% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages thereon, if any, to the redemption date; PROVIDED, HOWEVER, that after giving effect to any such redemption: (1)at least 65% of the original aggregate principal amount of the notes remains outstanding; and (2)any such redemption must be made within 60 days of such Equity Offering and must be made in accordance with certain procedures set forth in the Indenture. 93 SELECTION If we partially redeem notes, the Trustee will select the notes to be redeemed on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate, although no note of $1,000 in original principal amount or less will be redeemed in part. If we redeem any note in part only, the notice of redemption relating to such note shall state the portion of the principal amount thereof to be redeemed. A new note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancelation of the original note. On and after the redemption date, interest will cease to accrue on notes or portions thereof called for redemption so long as we have deposited with the Paying Agent funds sufficient to pay the principal of, plus accrued and unpaid interest and liquidated damages thereon, if any, the notes to be redeemed. RANKING The notes are unsecured Senior Indebtedness of the Issuer, will rank equally in right of payment with all existing and future Senior Indebtedness of the Issuer and will be senior in right of payment to all future Subordinated Obligations of the Issuer. The notes also will be effectively subordinated to all Secured Indebtedness of the Parent and its Subsidiaries (including the Issuer) to the extent of the value of the assets securing such Secured Indebtedness. The Note Guarantees are unsecured Senior Indebtedness of the applicable Note Guarantor, will rank equally in right of payment with all existing and future Senior Indebtedness of such Note Guarantor and will be senior in right of payment to all future Subordinated Obligations of such Note Guarantor. The Note Guarantees also will be effectively subordinated to all Secured Indebtedness of the Parent and its Subsidiaries to the extent of the value of the assets securing such Secured Indebtedness. Although the Indenture will limit the Incurrence of Indebtedness by and the issuance of preferred stock of certain of our subsidiaries, such limitation is subject to a number of significant qualifications. The Parent currently conducts all of its operations through its Subsidiaries, and the Issuer currently conducts a portion of its operations through its Subsidiaries. To the extent the Subsidiaries of the Parent (other than the Issuer) are not Note Guarantors, creditors of such Subsidiaries, including trade creditors, and preferred stockholders, if any, of such Subsidiaries generally will have priority with respect to the assets and earnings of such Subsidiaries over the claims of the Holders. The notes, therefore, will be effectively subordinated to the claims of creditors, including trade creditors, and preferred stockholders, if any, of Subsidiaries of the Parent (other than the Issuer) that are not Note Guarantors. After giving effect to the $30 million reduction of outstanding Tranche A term loans from the proceeds of the sale of our interest in Mexrail and to the application of the net proceeds we received from the Note Offering as of March 31, 2002, there would have been outstanding: (1)$590.7 million of Senior Indebtedness of the Issuer, of which $193.9 million would have been Secured Indebtedness (exclusive of unused commitments under the New Credit Agreement); (2)$5.4 million of Senior Indebtedness of the Note Guarantors (exclusive of guarantees of Indebtedness under the New Credit Agreement), $3.8 million of which would have been Secured Indebtedness; (3)$5.0 million of Senior Indebtedness of Subsidiaries of the Parent (other than the Issuer) that are not Note Guarantors (and trade payables and other liabilities of $29.3 million); and (4)no Indebtedness of the Issuer or the Note Guarantors subordinate or junior in right of payment to the notes or the Note Guarantees. 94 Although the Indenture will limit the Incurrence of Indebtedness by the Parent, the Issuer and the other Restricted Subsidiaries and the issuance of Preferred Stock by the Restricted Subsidiaries, such limitation is subject to a number of significant qualifications. The Parent and its Subsidiaries may be able to Incur substantial amounts of Indebtedness in certain circumstances. Such Indebtedness may be Senior Indebtedness. See "--Certain Covenants--Limitation on Indebtedness" below. "Senior Indebtedness" of the Issuer or any Note Guarantor means the principal of, premium (if any) and accrued and unpaid interest on (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization of the Issuer or any Note Guarantor, regardless of whether or not a claim for post-filing interest is allowed in such proceedings), and fees and other amounts owing in respect of, Bank Indebtedness and all other Indebtedness of the Issuer or any Note Guarantor, as applicable, whether outstanding on the Closing Date or thereafter Incurred, unless in the instrument creating or evidencing the same or pursuant to which the same is outstanding it is provided that such obligations are subordinated in right of payment to the notes or such Note Guarantor's Note Guarantee, as applicable; PROVIDED, HOWEVER, that Senior Indebtedness of the Issuer or any Note Guarantor shall not include: (1)any obligation of the Issuer to the Parent or any other Subsidiary of the Parent or any obligation of such Note Guarantor to the Parent or any other Subsidiary of the Parent; (2)any liability for Federal, state, local or other taxes owed or owing by the Issuer or such Note Guarantor, as applicable; (3)any accounts payable or other liability to trade creditors arising in the ordinary course of business (including Guarantees thereof or instruments evidencing such liabilities); (4)any Indebtedness or obligation of the Issuer or such Note Guarantor, as applicable (and any accrued and unpaid interest in respect thereof), that by its terms is subordinate or junior in any respect to any other Indebtedness or obligation of the Issuer or such Note Guarantor, as applicable, including any Subordinated Obligations of the Issuer or such Note Guarantor, as applicable; (5)any obligations with respect to any Capital Stock; or (6)any Indebtedness Incurred in violation of the Indenture. NOTE GUARANTEES The Parent and each of its Subsidiaries that guarantees the Bank Indebtedness on the Closing Date (other than Caymex Transportation, Inc., SCC Holdings LLC, The Kansas City Northern Railway Company and Veals, Inc.), and certain future subsidiaries of the Parent (as described below), as primary obligors and not merely as sureties, have jointly and severally irrevocably and unconditionally guaranteed on an unsecured senior basis the performance and full and punctual payment when due, whether at Stated Maturity, by acceleration or otherwise, of all obligations of the Issuer under the Indenture (including obligations to the Trustee) and the notes, whether for payment of principal of or interest on or liquidated damages in respect of the notes, expenses, indemnification or otherwise (all such obligations guaranteed by such Note Guarantors being herein called the "Guaranteed Obligations"). Such Note Guarantors have agreed to pay, in addition to the amount stated above, any and all costs and expenses (including reasonable counsel fees and expenses) incurred by the Trustee or the Holders in enforcing any rights under the Note Guarantees. Each Note Guarantee will be limited in amount to an amount not to exceed the maximum amount that can be guaranteed by the applicable Note Guarantor without rendering the Note Guarantee, as it relates to such Note Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. After the Closing Date, the Parent will cause (i) at any time that any Bank Indebtedness is outstanding, each Subsidiary of the Parent (other than the Issuer, Caymex Transportation, Inc., SCC Holdings LLC, The Kansas City Northern Railway Company and Veals, Inc.) that enters into a Guarantee of any Bank Indebtedness and (ii) at any time that no Bank Indebtedness is outstanding, each Subsidiary of the Parent (other than the Issuer, The Kansas City Northern Railway Company and Veals, Inc.) that enters into a Guarantee of any obligations of the Parent or any 95 of its domestic Subsidiaries, to execute and deliver to the Trustee a supplemental indenture pursuant to which such Subsidiary will guarantee payment of the notes. See "--Certain Covenants--Future Note Guarantors" below. Each Note Guarantee is a continuing guarantee and shall (a) remain in full force and effect until payment in full of all the Guaranteed Obligations, (b) be binding upon each Note Guarantor and its successors and (c) inure to the benefit of, and be enforceable by, the Trustee, the Holders and their successors, transferees and assigns. Notwithstanding the foregoing, the Note Guarantee of a Note Guarantor will be released and terminated (1) upon the sale (including by means of a merger) of all of the Capital Stock of such Note Guarantor made in compliance with the terms of the Indenture and (2) upon any release and termination of the Guarantee by such Note Guarantor of the Bank Indebtedness (other than by reason of repayment and satisfaction of all of the Bank Indebtedness) or any other obligations pursuant to (ii) in the prior paragraph. CHANGE OF CONTROL Upon the occurrence of any of the following events (each a "Change of Control"), each Holder will have the right to require the Issuer to purchase all or any part of such Holder's notes at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest and liquidated damages, if any, to the date of purchase: (1)at any time, less than 75% of the members of the board of directors of the Parent shall be (A) individuals who are members of such board on the date of this prospectus or (B) individuals whose election, or nomination for election by the Parent's stockholders, was approved by a vote of at least 75% of the members of the board of directors of the Parent then still in office who are members of such board on the date of this prospectus (or whose election or nomination has been approved as provided in this clause (B)); (2)at any time, any person, or any two or more persons acting as a partnership, limited partnership, syndicate or other group for the purpose of acquiring, holding or disposing of Voting Stock of the Parent, shall become, according to public announcement or filing, the "beneficial owner" (as defined in Rule 13d-3 issued under the Exchange Act), directly or indirectly, of securities of the Parent representing 30% or more (calculated in accordance with such Rule 13d-3) of the combined voting power of the Parent's then outstanding Voting Stock; (3)any Person other than the Parent shall acquire ownership, directly or indirectly, beneficially or of record of more than 30% of the Voting Stock of the Issuer; or (4)the merger or consolidation of the Parent or the Issuer with or into another Person or the merger of another Person with or into the Parent or the Issuer, or the sale of all or substantially all the assets of the Parent or the Issuer to another Person, and, in the case of any such merger or consolidation, the securities of the Parent or the Issuer that are outstanding immediately prior to such transaction and which represent 100% of the aggregate voting power of the Voting Stock of the Parent or the Issuer are changed into or exchanged for cash, securities or property, unless pursuant to such transaction such securities are changed into or exchanged for, in addition to any other consideration, securities of the surviving Person or transferee that represent immediately after such transaction, at least a majority of the aggregate voting power of the Voting Stock of the surviving Person or transferee. Within 30 days following any Change of Control, the Issuer shall mail a notice to each Holder with a copy to the Trustee (the "Change of Control Offer") stating: (1)that a Change of Control has occurred and that such Holder has the right to require the Issuer to purchase all or a portion of such Holder's notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, to the date of purchase; 96 (2)the circumstances and relevant facts and financial information regarding such Change of Control; (3)the purchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed); and (4)the instructions determined by the Issuer, consistent with this covenant, that a Holder must follow in order to have its notes purchased. The Issuer will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Issuer and purchases all notes validly tendered and not withdrawn under such Change of Control Offer. The Issuer will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the purchase of notes pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, the Issuer will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this covenant by virtue thereof. The Change of Control purchase feature is a result of negotiations between the Issuer and the Placement Agents. Management has no present intention to engage in a transaction involving a Change of Control, although it is possible that we would decide to do so in the future. Subject to the limitations discussed below, we could, in the future, enter into certain transactions, including acquisitions, refinancings or recapitalizations, that would not constitute a Change of Control under the Indenture, but that could increase the amount of indebtedness outstanding at such time or otherwise affect our capital structure or credit ratings. Restrictions on our ability to Incur additional Indebtedness are contained in the covenants described under "--Certain Covenants--Limitation on Indebtedness," "--Limitations on Liens" and "--Limitation on Sale/Leaseback Transactions." Such restrictions can only be waived with the consent of the Holders of a majority in principal amount of the notes then outstanding. Except for the limitations contained in such covenants, however, the Indenture will not contain any covenants or provisions that may afford Holders protection in the event of a highly leveraged transaction. The occurrence of certain of the events which would constitute a Change of Control would constitute a default under the New Credit Agreement. Future Senior Indebtedness of the Parent and its Subsidiaries may contain prohibitions of certain events which would constitute a Change of Control or require such Senior Indebtedness to be repurchased or repaid upon a Change of Control. Moreover, the exercise by the Holders of their right to require the Issuer to purchase the notes could cause a default under such Senior Indebtedness, even if the Change of Control itself does not, due to the financial effect of such repurchase on the Parent and its Subsidiaries. Finally, the Issuer's ability to pay cash to the Holders upon a purchase may be limited by the Issuer's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required purchases. The provisions under the Indenture relative to the Issuer's obligation to make an offer to purchase the notes as a result of a Change of Control may be waived or modified with the written consent of the Holders of a majority in principal amount of the notes. The definition of Change of Control includes a phrase relating to the sale, lease or transfer of "all or substantially all" the assets of the Parent or the Issuer. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a Holder of notes to require the Issuer to repurchase such notes as a result of a sale, lease or transfer of less than all of the assets of the Parent or the Issuer to another Person or group may be uncertain. 97 CERTAIN COVENANTS The Indenture contains covenants including, among others, those described below. COVENANTSUSPENSION. During any period of time that: (a)the notes have an Investment Grade Rating from both the Rating Agencies; and (b)no Default or Event of Default has occurred and is continuing under the Indenture, the Parent and the Restricted Subsidiaries will not be subject to the following provisions of the Indenture: . "--Limitation on Indebtedness," . "--Limitation on Restricted Payments," . "--Limitation on Restrictions on Distributions from Restricted Subsidiaries," . "--Limitation on Sales of Assets and Capital Stock," . "--Limitation on Transactions with Affiliates" and . "--Limitation on Lines of Business" (collectively, the "Suspended Covenants"). In the event that the Parent and the Restricted Subsidiaries are not subject to the Suspended Covenants for any period of time as a result of the preceding sentence and, subsequently, one or both of the Rating Agencies withdraws its ratings or downgrades the ratings assigned to the notes below the required Investment Grade Ratings or a Default or Event of Default (other than as a result of any breach of the Suspended Covenants) occurs and is continuing, then the Parent and the Restricted Subsidiaries will thereafter again be subject to the Suspended Covenants and compliance with the Suspended Covenants with respect to Restricted Payments made after the time of such withdrawal, downgrade, Default or Event of Default will be calculated in accordance with the terms of the covenant described below under "--Limitation on Restricted Payments" as though, for purposes of determining whether new Restricted Payments can be made after such time, such covenant had been in effect during the entire period of time from the Closing Date. LIMITATION ON INDEBTEDNESS. (a) The Parent will not, and will not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness; PROVIDED, HOWEVER, that the Parent or any Restricted Subsidiary that is a Note Guarantor may Incur Indebtedness if on the date of such Incurrence and after giving effect thereto the Consolidated Coverage Ratio would be greater than 2.0:1. (b) Notwithstanding the foregoing paragraph (a), the Parent and the Restricted Subsidiaries may Incur the following Indebtedness: (1) Bank Indebtedness in an aggregate principal amount not to exceed (A) in the case of any term borrowings, $250 million less the aggregate amount of all (i) prepayments of principal from the proceeds of Asset Dispositions applied to permanently reduce any such Indebtedness, (ii) scheduled repayments of principal of, and reductions of commitments for, any such Indebtedness and (iii) Attributable Debt in respect of Designated Sale/Leaseback Transactions and (B) in the case of any borrowings under a revolving credit facility or accounts receivable financing not treated as an Asset Disposition, $125 million; (2) Indebtedness of the Parent owed to and held by any Wholly Owned Subsidiary or Indebtedness of a Restricted Subsidiary owed to and held by the Parent or any Wholly Owned Subsidiary; PROVIDED, HOWEVER, that (A) any subsequent issuance or transfer of any Capital Stock or any other event that results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of any such Indebtedness (except to the Parent or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Indebtedness by the issuer thereof, (B) if the Issuer is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all obligations with respect to the notes and (C) if a Note Guarantor is the obligor on such Indebtedness and such Indebtedness is owed to and held by a Wholly Owned Subsidiary that is not a Note Guarantor, such 98 Indebtedness is expressly subordinated to the prior payment in full in cash of all obligations of such Note Guarantor with respect to its Note Guarantee; (3) Indebtedness (A) represented by the notes and the Note Guarantees, (B) outstanding on the Closing Date (other than the Indebtedness described in clauses (1) and (2) above), (C) consisting of Refinancing Indebtedness Incurred in respect of any Indebtedness described in this clause (3) (including Indebtedness that is Refinancing Indebtedness) or the foregoing paragraph (a) and (D) consisting of Guarantees of any Indebtedness permitted under clauses (1) and (2) of this paragraph (b); (4) (A) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or prior to the date on which such Restricted Subsidiary was acquired by the Parent (other than Indebtedness Incurred in contemplation of, in connection with, as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Subsidiary of or was otherwise acquired by the Parent); PROVIDED, HOWEVER, that on the date that such Restricted Subsidiary is acquired by the Parent, the Parent would have been able to Incur $1.00 of additional Indebtedness pursuant to the foregoing paragraph (a) after giving effect to the Incurrence of such Indebtedness pursuant to this clause (4) and (B) Refinancing Indebtedness Incurred by a Restricted Subsidiary in respect of Indebtedness Incurred by such Restricted Subsidiary pursuant to this clause (4); (5) Indebtedness (A) in respect of performance bonds, bankers' acceptances, letters of credit and surety or appeal bonds provided by the Parent and the Restricted Subsidiaries in the ordinary course of their business, and (B) under Interest Rate Agreements entered into for bona fide hedging purposes of the Parent in the ordinary course of business; PROVIDED, HOWEVER, that such Interest Rate Agreements do not increase the Indebtedness of the Parent outstanding at any time other than as a result of fluctuations in interest rates or by reason of fees, indemnities and compensation payable thereunder; (6) Purchase Money Indebtedness and Capitalized Lease Obligations (in an aggregate principal amount not in excess of 10% of Consolidated Net Tangible Assets at any time outstanding); (7) Attributable Debt in respect of Designated Sale/Leaseback Transactions in an aggregate principal amount not to exceed $250 million; or (8) Indebtedness (other than Indebtedness permitted to be Incurred pursuant to the foregoing paragraph (a) or any other clause of this paragraph (b)) in an aggregate principal amount on the date of Incurrence that, when added to all other Indebtedness Incurred pursuant to this clause (8) and then outstanding, will not exceed $25.0 million. (c) Notwithstanding the foregoing, the Issuer or any Note Guarantor may not Incur any Indebtedness pursuant to paragraph (b) above if the proceeds thereof are used, directly or indirectly, to repay, prepay, redeem, defease, retire, refund or refinance any Subordinated Obligations unless such Indebtedness will be subordinated to the notes or such Note Guarantor's Note Guarantee, as applicable, to at least the same extent as such Subordinated Obligations. (d) Notwithstanding any other provision of this covenant, the maximum amount of Indebtedness that the Parent or any Restricted Subsidiary may Incur pursuant to this covenant shall not be deemed to be exceeded solely as a result of fluctuations in the exchange rates of currencies. For purposes of determining the outstanding principal amount of any particular Indebtedness Incurred pursuant to this covenant: (1) Indebtedness Incurred pursuant to the Credit Agreement prior to or on the Closing Date shall be treated as Incurred pursuant to clause (1) of paragraph (b) above, (2) Indebtedness permitted by this covenant need not be permitted solely by reference to one provision permitting such Indebtedness but may be permitted in part by one such provision and in part by one or more other provisions of this covenant permitting such Indebtedness, and 99 (3) in the event that Indebtedness meets the criteria of more than one of the types of Indebtedness described in this covenant, the Parent, in its sole discretion, shall classify such Indebtedness and only be required to include the amount of such Indebtedness in one of such clauses. LIMITATION ON RESTRICTED PAYMENTS. (a) The Parent will not, and will not permit any Restricted Subsidiary, directly or indirectly, to: (1) declare or pay any dividend, make any distribution on or in respect of its Capital Stock or make any similar payment (including any payment in connection with any merger or consolidation involving the Parent, or any Subsidiary of the Parent) to the direct or indirect holders of its Capital Stock, except (x) dividends or distributions payable solely in its Capital Stock (other than Disqualified Stock) and (y) dividends or distributions payable to the Parent or a Restricted Subsidiary (and, if such Restricted Subsidiary has shareholders other than the Parent or other Restricted Subsidiaries, to its other shareholders on a pro rata basis), (2) purchase, repurchase, redeem, retire or otherwise acquire for value any Capital Stock of the Parent or any Restricted Subsidiary held by Persons other than the Parent or a Restricted Subsidiary, (3) purchase, repurchase, redeem, retire, defease or otherwise acquire for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment any Subordinated Obligations (other than the purchase, repurchase redemption, retirement, defeasance or other acquisition for value of Subordinated Obligations acquired in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of acquisition), (4) make any Investment (other than a Permitted Investment) in any Person, (any such dividend, distribution, payment, purchase, redemption, repurchase, defeasance, retirement, or other acquisition or Investment being herein referred to as a "Restricted Payment") if at the time the Parent or such Restricted Subsidiary makes such Restricted Payment: (A) a Default will have occurred and be continuing (or would result therefrom); (B) the Parent could not Incur at least $1.00 of additional Indebtedness under paragraph (a) of the covenant described under "--Limitation on Indebtedness;" or (C) the aggregate amount of such Restricted Payment and all other Restricted Payments (the amount so expended, if other than in cash, to be determined in good faith by the Board of Directors, whose determination will be conclusive and evidenced by a resolution of the Board of Directors) declared or made subsequent to September 27, 2000 would exceed the sum, without duplication, of: (i) 50% of the Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter immediately following the fiscal quarter which included September 27, 2000 to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or, in case such Consolidated Net Income will be a deficit, minus 100% of such deficit); (ii) the aggregate Net Cash Proceeds received by the Parent or the Issuer from the issue or sale of its Capital Stock (other than Disqualified Stock or in respect of Excluded Contributions) subsequent to September 27, 2000 (other than an issuance or sale to (x) a Subsidiary of the Parent or (y) an employee stock ownership plan or other trust established by the Parent or any of its Subsidiaries); (iii) the amount by which Indebtedness of the Parent or the Restricted Subsidiaries is reduced on the Parent's balance sheet upon the conversion or exchange (other than by a Subsidiary of the Parent) subsequent to September 27, 2000 of any Indebtedness of the Parent or the Restricted Subsidiaries issued after September 27, 2000 which is convertible or exchangeable for Capital Stock (other than Disqualified Stock) of the Parent (less the amount of any cash or the Fair Market Value of other property distributed by the Parent or any Restricted Subsidiary upon such conversion or exchange); 100 (iv) the amount equal to the net reduction in Investments in Unrestricted Subsidiaries resulting from (x) payments of dividends, repayments of the principal of loans or advances or other transfers of assets to the Parent or any Restricted Subsidiary from Unrestricted Subsidiaries or (y) the redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investment") not to exceed, in the case of any Unrestricted Subsidiary, the amount of Investments previously made by the Parent or any Restricted Subsidiary in such Unrestricted Subsidiary, which amount was included in the calculation of the amount of Restricted Payments; and (v) $40.0 million. (b) The provisions of the foregoing paragraph (a) will not prohibit: (1) any purchase, repurchase, redemption, retirement or other acquisition for value of Capital Stock of the Parent made by exchange for, or out of the proceeds of the substantially concurrent sale of, Capital Stock of the Parent (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Parent or an employee stock ownership plan or other trust established by the Parent or any of its Subsidiaries); PROVIDED, HOWEVER, that: (A) such purchase, repurchase, redemption, retirement or other acquisition for value will be excluded in the calculation of the amount of Restricted Payments, and (B) the Net Cash Proceeds from such sale applied in the manner set forth in this clause (1) will be excluded from the calculation of amounts under clause (4)(C)(ii) of paragraph (a) above; (2) any prepayment, repayment, purchase, repurchase, redemption, retirement, defeasance or other acquisition for value of Subordinated Obligations of the Parent made by exchange for, or out of the proceeds of the substantially concurrent sale of, Indebtedness of the Parent that is permitted to be Incurred pursuant to paragraph (b) of the covenant described under "--Limitation on Indebtedness;" PROVIDED, HOWEVER, that such prepayment, repayment, purchase, repurchase, redemption, retirement, defeasance or other acquisition for value will be excluded in the calculation of the amount of Restricted Payments; (3) any prepayment, repayment, purchase, repurchase, redemption, retirement, defeasance or other acquisition for value of Subordinated Obligations from Net Available Cash to the extent permitted by the covenant described under "--Limitation on Sales of Assets and Capital Stock"; PROVIDED, HOWEVER, that such prepayment, repayment, purchase, repurchase, redemption, retirement, defeasance or other acquisition for value will be excluded in the calculation of the amount of Restricted Payments; (4) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividends would have complied with this covenant; PROVIDED, HOWEVER, that such dividends will be included in the calculation of the amount of Restricted Payments; (5) dividends paid by the Parent with respect to the 242,170 outstanding shares of its preferred stock, par value $25.00 per share, paying noncumulative dividends of $1.00 per share in amounts each year which do not exceed $242,170 (the amount paid with respect to such preferred stock in the year ended December 31, 2001); PROVIDED, HOWEVER, that such dividends will be included in the calculation of the amount of Restricted Payments; (6) Investments that are made with Excluded Contributions; PROVIDED, HOWEVER, that such Investments will be excluded in the calculation of the amount of Restricted Payments; or (7) any purchase, repurchase, redemption, retirement or other acquisition for value of shares of, or options to purchase shares of, common stock of the Parent or any of its Subsidiaries from employees, former employees, directors or former directors of the Parent or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors), pursuant to the terms of agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals purchase or sell or are granted the option to purchase or sell, shares of such common stock; PROVIDED, HOWEVER, that the aggregate amount of such purchases, repurchases, redemptions, 101 retirements and other acquisitions for value will not exceed $3.0 million in any calendar year; PROVIDED FURTHER, HOWEVER, that such purchases, repurchases, redemptions, retirements and other acquisitions for value shall be excluded in the calculation of the amount of Restricted Payments. LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES. The Parent will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to: (1) pay dividends or make any other distributions on its Capital Stock or pay any Indebtedness or other obligations owed to the Parent or any Restricted Subsidiary; (2) make any loans or advances to the Parent or any Restricted Subsidiary; or (3) transfer any of its property or assets to the Parent or any Restricted Subsidiary, except: (A) any encumbrance or restriction pursuant to applicable law or an agreement in effect at or entered into on the Closing Date; (B) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary prior to the date on which such Restricted Subsidiary was acquired by the Parent (other than Indebtedness Incurred as consideration in, in contemplation of, or to provide all or any portion of the funds or credit support utilized to consummate the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was otherwise acquired by the Parent) and outstanding on such date; (C) any encumbrance or restriction pursuant to an agreement effecting a Refinancing of Indebtedness Incurred pursuant to an agreement referred to in clause (A) or (B) of this covenant or this clause (C) or contained in any amendment to an agreement referred to in clause (A) or (B) of this covenant or this clause (C); PROVIDED, HOWEVER, that the encumbrances and restrictions contained in any such Refinancing agreement or amendment are no less favorable to the Holders than the encumbrances and restrictions contained in such predecessor agreements; (D) in the case of clause (3), any encumbrance or restriction (i) that restricts in a customary manner the subletting, assignment or transfer of any property or asset that is subject to a lease, license or similar contract, or (ii) contained in security agreements securing Indebtedness of a Restricted Subsidiary to the extent such encumbrance or restriction restricts the transfer of the property subject to such security agreements; and (E) with respect to a Restricted Subsidiary, any restriction imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition. LIMITATION ON SALES OF ASSETS AND CAPITAL STOCK. (a) The Parent will not, and will not permit any Restricted Subsidiary to, make any Asset Disposition unless: (1) the Parent or such Restricted Subsidiary receives consideration (including by way of relief from, or by any other Person assuming sole responsibility for, any liabilities, contingent or otherwise) at the time of such Asset Disposition at least equal to the Fair Market Value of the shares and assets subject to such Asset Disposition, (2) at least 75% of the consideration thereof received by the Parent or such Restricted Subsidiary is in the form of cash, and (3) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Parent (or such Restricted Subsidiary, as the case may be) 102 (A) FIRST, to the extent the Parent elects (or is required by the terms of any Indebtedness), to prepay, repay, purchase, repurchase, redeem, retire, defease or otherwise acquire for value Bank Indebtedness of the Parent or a Note Guarantor within 360 days after the later of the date of such Asset Disposition or the receipt of such Net Available Cash; (B) SECOND, to the extent of the balance of Net Available Cash after application in accordance with clause (A), to the extent the Parent or such Restricted Subsidiary elects, to reinvest in Additional Assets (including by means of an Investment in Additional Assets by a Restricted Subsidiary with Net Available Cash received by the Parent or another Restricted Subsidiary) within 360 days from the later of such Asset Disposition or the receipt of such Net Available Cash; (C) THIRD, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A) and (B), to make an Offer (as defined in paragraph (b) of this covenant below) to purchase notes pursuant to and subject to the conditions set forth in paragraph (b) of this covenant; PROVIDED, HOWEVER, that if the Parent or the Issuer elects (or is required by the terms of any other Senior Indebtedness), such Offer may be made ratably to purchase the notes and other Senior Indebtedness of the Parent, the Issuer or any Note Guarantor, and (D) FOURTH, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A), (B) and (C), for any general corporate purpose permitted by the terms of the Indenture; PROVIDED,HOWEVER that in connection with any prepayment, repayment, purchase, repurchase, redemption, retirement, defeasance or other acquisition for value of Indebtedness pursuant to clause (A) or (C) above, the Parent or such Restricted Subsidiary will retire such Indebtedness and will cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid, purchased, repurchased, redeemed, retired, defeased or otherwise acquired for value. Notwithstanding the foregoing provisions of this covenant, the Parent and the Restricted Subsidiaries will not be required to apply any Net Available Cash in accordance with this covenant except to the extent that the aggregate Net Available Cash from all Asset Dispositions that is not applied in accordance with this covenant exceeds $40.0 million. For the purposes of this covenant, the following are deemed to be cash: . the assumption of Indebtedness of the Parent or any Restricted Subsidiary (other than any Preferred Stock, including Disqualified Stock, constituting Indebtedness) and the release of the Parent or such Restricted Subsidiary from all liability on such Indebtedness in connection with such Asset Disposition, and . securities received by the Parent or any Restricted Subsidiary from the transferee that are promptly converted by the Parent or such Restricted Subsidiary into cash. (b) In the event of an Asset Disposition that requires the purchase of notes pursuant to clause (a)(3)(C) of this covenant, the Parent or the Issuer will be required (i) to purchase notes tendered pursuant to an offer by the Issuer for the notes (the "Offer") at a purchase price of 100% of their principal amount plus accrued and unpaid interest and liquidated damages thereon, if any, to the date of purchase (subject to the right of Holders of record on the relevant date to receive interest due on the relevant interest payment date) in accordance with the procedures (including prorating in the event of oversubscription), set forth in the Indenture and (ii) to purchase other Senior Indebtedness of the Parent, the Issuer or any Note Guarantor on the terms and to the extent contemplated thereby (provided that in no event shall the Parent or the Issuer offer to purchase such other Senior Indebtedness at a purchase price in excess of 100% of its principal amount, plus accrued and unpaid interest thereon). If the aggregate purchase price of notes (and other Senior Indebtedness) tendered pursuant to the Offer is less than the Net Available Cash allotted to the purchase of the notes (and other Senior Indebtedness), the Parent or the Issuer will apply the remaining Net Available Cash in accordance with clause (a)(3)(D) of this covenant. The Parent and the Issuer will not be required to make an Offer for notes (and other Senior Indebtedness) pursuant to this covenant if the Net Available Cash available therefor (after application of the 103 proceeds as provided in clauses (a)(3)(A) and (B)) is less than $20.0 million in the aggregate for all Asset Dispositions after the Closing Date. (c) The Parent and the Issuer will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of notes pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this covenant, the Parent and the Issuer will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this covenant by virtue thereof. LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Parent will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into or conduct any transaction or series of related transactions (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate of the Parent (an "Affiliate Transaction") unless such transaction is on terms: (1) that are no less favorable to the Parent or such Restricted Subsidiary, as the case may be, than those that could be obtained at the time of such transaction in arm's-length dealings with a Person who is not such an Affiliate, (2) that, in the event such Affiliate Transaction involves an aggregate amount in excess of $5.0 million, (A) are set forth in writing, and (B) have been approved by a majority of the members of the Board of Directors having no personal stake in such Affiliate Transaction, and (3) that, in the event such Affiliate Transaction involves an amount in excess of $20.0 million, have been determined by a nationally recognized appraisal or investment banking firm to be fair, from a financial standpoint, to the Patent and its Restricted Subsidiaries. (b) The provisions of the foregoing paragraph (a) will not prohibit: (1) any Restricted Payment permitted to be paid pursuant to the covenant described under "Limitation on Restricted Payments," (2) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors, (3) the grant of stock options or similar rights to employees and directors of the Parent pursuant to plans approved by the Board of Directors, (4) loans or advances to employees in the ordinary course of business in accordance with past practices of the Parent, but in any event not to exceed $2.0 million in the aggregate outstanding at any one time, (5) Stock Purchase Loans, but in any event not to exceed $3.0 million in the aggregate outstanding at any one time, (6) the payment of reasonable fees to directors of the Parent and its Subsidiaries who are not employees of the Parent or its Subsidiaries, or (7) any transaction between the Parent and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries. LIMITATION ON LIENS. The Parent will not, and will not permit any Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any Lien of any nature whatsoever on any of its property or assets (including Capital Stock of a Restricted Subsidiary), whether owned at the Closing Date or thereafter acquired, other than Permitted Liens, without effectively providing that the notes shall be secured equally and ratably with (or prior to) the obligations so secured for so long as such obligations are so secured; PROVIDED, HOWEVER, that the Parent and any Restricted Subsidiary may Incur other Liens to secure Indebtedness as long as the amount of outstanding 104 Indebtedness secured by Liens Incurred pursuant to this proviso does not exceed 5% of Consolidated Net Tangible Assets, as determined based on the consolidated balance sheet of the Parent as of the end of the most recent fiscal quarter ending at least 45 days prior thereto. SEC REPORTS. Whether or not the Parent is then required to file reports with the SEC, the Parent will (a) file with the SEC and provide the Trustee for delivery to the Holders and prospective Holders (upon request) within 15 days after it files them with the SEC a copy of its annual report and the information, documents and other reports that are specified in Sections 13 and 15(d) of the Exchange Act if it were subject thereto and (b) furnish to the Trustee for delivery to the Holders, promptly upon their becoming available, a copy of its annual report to shareholders and any other information provided by it to its public shareholders generally. In addition, following an underwritten primary public offering of common stock of the Issuer pursuant to an effective registration statement under the Securities Act, the Parent shall furnish to the Trustee for delivery to the Holders, promptly upon their becoming available, copies of the annual report to shareholders and any other information provided by the Issuer, as applicable, to its public shareholders generally. The Parent also will comply with the other provisions of Section 314(a) of the TIA. FUTURE NOTE GUARANTORS. The Parent will cause (i) at any time that any Bank Indebtedness is outstanding, each Subsidiary of the Parent (other than the Issuer, Caymex Transportation, Inc., SCC Holdings LLC, The Kansas City Northern Railway Company and Veals, Inc.) that enters into a Guarantee of any Bank Indebtedness and (ii) at any time that no Bank Indebtedness is outstanding, each Subsidiary of the Parent (other than the Issuer, The Kansas City Northern Railway Company and Veals, Inc.) that enters into a Guarantee of any obligations of the Parent or any of its domestic Subsidiaries, to execute and deliver to the Trustee a supplemental indenture in the form set forth in the Indenture pursuant to which such Subsidiary will Guarantee payment of the notes. Each Note Guarantee will be limited to an amount not to exceed the maximum amount that can be Guaranteed by that Note Guarantor without rendering the Note Guarantee, as it relates to such Note Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer, or similar laws affecting the rights of creditors generally. LIMITATION ON LINES OF BUSINESS. The Parent will not, and will not permit any Restricted Subsidiary to, engage in any business other than a Permitted Business. At any time that it is not Guaranteeing payment of the notes (which shall be effected by executing and delivering to the Trustee a supplemental indenture in the form set forth in the Indenture), (1) Caymex Transportation, Inc. will not engage in any business or activity other than the ownership of the Capital Stock of foreign subsidiaries and activities incidental thereto, (2) SCC Holdings LLC will not engage in any business or activity other than the ownership of the Capital Stock of Southern Capital LLC and activities incidental thereto, (3) TransFin Insurance Ltd. will not engage in any business or activity other than the insurance business and activities incidental thereto, and (4) The Kansas City Northern Railway Company and Veals, Inc. will not conduct any material business or activity. LIMITATION ON SALE/LEASEBACK TRANSACTIONS. The Parent will not, and will not permit any Restricted Subsidiary to, enter into any Sale/Leaseback Transaction with respect to any property unless: (1) the Parent or such Restricted Subsidiary would be entitled to: (A) Incur Indebtedness in an amount equal to the Attributable Debt with respect to such Sale/Leaseback Transaction pursuant to the covenant described under "Limitation on Indebtedness" and (B) create a Lien on such property securing such Attributable Debt without equally and ratably securing the notes pursuant to the covenant described under "Limitation on Liens," and (2) the net proceeds received by the Parent or such Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at least equal to the Fair Market Value of such property and (3) the transfer of such property is permitted by, and the Parent applies the proceeds of such transaction in compliance with, the covenant described under "Limitation on Sale of Assets and Capital Stock." 105 MERGER AND CONSOLIDATION The Issuer will not consolidate with or merge with or into, or convey, transfer or lease all or substantially all its assets to, any Person, unless: (1) the resulting, surviving or transferee Person (the "Successor Company") will be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and the Successor Company (if not the Issuer) will expressly assume, by a supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Issuer under the notes and the Indenture; (2) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Company, the Parent or any Restricted Subsidiary as a result of such transaction as having been Incurred by the Successor Company, the Parent or such Restricted Subsidiary at the time of such transaction), no Default shall have occurred and be continuing; (3) immediately after giving effect to such transaction, the Parent would be able to incur an additional $1.00 of Indebtedness under paragraph (a) of the covenant described under "--Limitation on Indebtedness;" (4) immediately after giving effect to such transaction, the Successor Company will have Consolidated Net Worth in an amount which is not less than the Consolidated Net Worth of the Parent immediately prior to such transaction; (5) the Issuer shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with the Indenture; and (6) the Issuer shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders will not recognize income, gain or loss for Federal income tax purposes as a result of such transaction and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred. The Successor Company will succeed to, and be substituted for, and may exercise every right and power of the Issuer under the Indenture, but the predecessor Issuer in the case of a conveyance, transfer or lease of all or substantially all its assets will not be released from the obligation to pay the principal of and interest on the notes. In addition, none of the Note Guarantors will consolidate with or merge with or into, or convey, transfer or lease all or substantially all of its assets to any Person unless: (1) the resulting surviving or transferee Person (the "Successor Guarantor") will be a corporation organized and existing under the laws of the jurisdiction under which such Note Guarantor was organized and existing or the laws of the United States of America, any State thereof or the District of Columbia, and such Person (if not such Note Guarantor) will expressly assume, by a supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of such Note Guarantor under its Note Guarantee; (2) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Guarantor or any Restricted Subsidiary as a result of such transaction as having been incurred by the Successor Guarantor or such Restricted Subsidiary at the time of such transaction), no Default shall have occurred and be continuing; (3) immediately after giving effect to such transaction, the Parent or the Successor Guarantor, as applicable, would be able to incur an additional $1.00 of Indebtedness under paragraph (a) of the covenant described under "--Limitation on Indebtedness"; (4) immediately after giving effect to such transaction, the Parent and the Restricted Subsidiaries will have Consolidated Net Worth in an amount which is not less than the Consolidated Net Worth of the Parent and the Restricted Subsidiaries immediately prior to such transaction; 106 (5) the Parent shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with the Indenture; and (6) the Parent shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders will not recognize income, gain or loss for Federal income tax purposes as a result of such transaction and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred. Notwithstanding the foregoing: (A) any Restricted Subsidiary may consolidate with, merge into or transfer all or part of its properties and assets to the Issuer or any Note Guarantor; and (B) the Parent or the Issuer may merge with an Affiliate incorporated solely for the purpose of reincorporating the Parent or the Issuer, as the case may be, in another jurisdiction to realize tax or other benefits. DEFAULTS Each of the following is an Event of Default: (1) a default in any payment of interest on any note or in any payment of liquidated damages continued for 30 days after the due date thereof, (2) a default in the payment of principal of any note when due and payable at its Stated Maturity, upon required redemption or repurchase, upon declaration or otherwise, (3) the failure by the Parent or any Subsidiary to comply with its obligations under the covenant described under "--Merger and Consolidation" above, (4) the failure by the Parent or any Subsidiary to comply for 30 days after notice with any of its obligations under the covenants described under "--Change of Control" or "--Certain Covenants" above (in each case, other than a failure to purchase notes), (5) the failure by the Parent or any Subsidiary to comply for 60 days after notice with its other agreements contained in the notes or the Indenture, (6) the failure by the Parent or any Subsidiary to pay any Indebtedness within any applicable grace period after final maturity or the acceleration of any such Indebtedness by the holders thereof because of a default if the total amount of such Indebtedness unpaid or accelerated exceeds $20.0 million or its foreign currency equivalent (the "cross acceleration provision") and such failure continues for 10 days after receipt of the notice specified in the Indenture, (7) certain events of bankruptcy, insolvency or reorganization of the Parent, the Issuer or a Significant Subsidiary (the "bankruptcy provisions"), (8) the rendering of any judgment or decree for the payment of money in excess of $10.0 million or its foreign currency equivalent against the Parent or a Subsidiary if: (A) an enforcement proceeding thereon is commenced by any creditor, or (B) such judgment or decree remains outstanding for a period of 60 days following such judgment and is not discharged, waived or stayed (the "judgment default provision"), or (9) any Note Guarantee ceases to be in full force and effect (except as contemplated by the terms thereof) or any Note Guarantor or Person acting by or on behalf of such Note Guarantor denies or disaffirms such Note Guarantor's obligations under the Indenture or any Note Guarantee and such Default continues for 10 days after receipt of the notice specified in the Indenture. 107 The foregoing will constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by the operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body. However, a default under clauses (4), (5) or (6) will not constitute an Event of Default until the Trustee notifies the Issuer or the Holders of at least 25% in principal amount of the outstanding notes notify the Issuer and the Trustee of the default and the Issuer or the Note Guarantor, as applicable, does not cure such default within the time specified in clauses (4), (5) or (6) hereof after receipt of such notice. If an Event of Default (other than an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Parent or the Issuer) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the outstanding notes by notice to the Issuer, may declare the principal of and accrued but unpaid interest on all the notes to be due and payable. Upon such a declaration, such principal and interest will be due and payable immediately. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Parent or the Issuer occurs, the principal of and interest on all the notes will become immediately due and payable without any declaration or other act on the part of the Trustee or any Holders. Under certain circumstances, the Holders of a majority in principal amount of the outstanding notes may rescind any such acceleration with respect to the notes and its consequences. Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the Holders unless such Holders have offered to the Trustee indemnity or security satisfactory to the Trustee in its reasonable discretion against any loss, liability or expense. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no Holder may pursue any remedy with respect to the Indenture or the notes unless: (1) such Holder has previously given the Trustee notice that an Event of Default is continuing, (2) Holders of at least 25% in principal amount of the outstanding notes have requested the Trustee in writing to pursue the remedy, (3) such Holders have offered the Trustee security or indemnity satisfactory to it in its reasonable discretion against any loss, liability or expense, (4) the Trustee has not complied with such request within 60 days after the receipt of the request and the offer of security or indemnity, and (5) the Holders of a majority in principal amount of the outstanding notes have not given the Trustee a direction inconsistent with such request within such 60-day period. Subject to certain restrictions, the Holders of a majority in principal amount of the outstanding notes will be given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other Holder or that would involve the Trustee in personal liability. Prior to taking any action under the Indenture, the Trustee will be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. If a Default occurs and is continuing and is known to the Trustee, the Trustee must mail to each Holder notice of the Default within the earlier of 90 days after it occurs or 30 days after it is known to a Trust Officer or written notice of it is received by the Trustee. Except in the case of a Default in the payment of principal of, premium (if any) or interest on any note (including payments pursuant to the redemption provisions of such note), the Trustee may withhold notice if and so long as a committee of its Trust Officers in good faith determines that withholding notice is in the interests of the Holders. In addition, the Issuer will be required to deliver to the Trustee, within 120 days after the end of each fiscal year, a certificate indicating whether the signers thereof know of any Default that occurred during the previous year. The Issuer will also be required to 108 deliver to the Trustee, within 30 days after the occurrence thereof, written notice of any event which would constitute certain Events of Default, their status and what action the Issuer is taking or proposes to take in respect thereof. AMENDMENTS AND WAIVERS Subject to certain exceptions, the Indenture or the notes may be amended with the written consent of the Holders of a majority in principal amount of the notes then outstanding and any past default or compliance with any provisions may be waived with the consent of the Holders of a majority in principal amount of the notes then outstanding. However, without the consent of each Holder of an outstanding note affected, no amendment may, among other things: (1) reduce the amount of notes whose Holders must consent to an amendment, (2) reduce the rate of or extend the time for payment of interest or any liquidated damages on any note, (3) reduce the principal of or extend the Stated Maturity of any note, (4) reduce the premium payable upon the redemption of any note or change the time at which any note may be redeemed as described under "--Optional Redemption" above, (5) make any note payable in money other than that stated in the note, (6) impair the right of any Holder to receive payment of principal of, and interest or any liquidated damages on, such Holder's notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such Holder's notes, (7) make any change in the amendment provisions which require each Holder's consent or in the waiver provisions, or (8) modify the Note Guarantees in any manner adverse to the Holders. Without the consent of any Holder, the Issuer, the Note Guarantors and the Trustee may amend the Indenture to: . cure any ambiguity, omission, defect or inconsistency, . provide for the assumption by a successor corporation of the obligations of the Issuer or a Note Guarantor under the Indenture, . provide for uncertificated notes in addition to or in place of certificated notes (PROVIDED, HOWEVER, that the uncertificated notes are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated notes are described in Section 163(f)(2)(B) of the Code), . add additional Guarantees with respect to the notes, . secure the notes, . add to the covenants of the Parent and the Restricted Subsidiaries for the benefit of the Holders or to surrender any right or power conferred upon the Parent or the Issuer, . make any change that does not adversely affect the rights of any Holder, subject to the provisions of the Indenture, . provide for the issuance of new notes, or . comply with any requirement of the SEC in connection with the qualification of the Indenture under the TIA. 109 The consent of the Holders will not be necessary to approve the particular form of any proposed amendment. It will be sufficient if such consent approves the substance of the proposed amendment. After an amendment becomes effective, the Issuer is required to mail to Holders a notice briefly describing such amendment. However, the failure to give such notice to all Holders, or any defect therein, will not impair or affect the validity of the amendment. TRANSFER AND EXCHANGE A Holder will be able to transfer or exchange notes. Upon any transfer or exchange, the registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Issuer may require a Holder to pay any taxes required by law or permitted by the Indenture. The Issuer will not be required to transfer or exchange any note selected for redemption or to transfer or exchange any note for a period of 15 days prior to the mailing of a notice of redemption of notes. The notes will be issued in registered form and the Holder will be treated as the owner of such note for all purposes. DEFEASANCE The Parent and the Issuer may at any time terminate all their obligations under the notes and the Indenture ("legal defeasance"), except for certain obligations, including those respecting the defeasance trust and obligations to register the transfer or exchange of the notes, to replace mutilated, destroyed, lost or stolen notes and to maintain a registrar and paying agent in respect of the notes. In addition, the Parent and the Issuer may at any time terminate: (1) its obligations under the covenants described under "--Certain Covenants," (2) the operation of the cross acceleration provision, the bankruptcy provisions with respect to Significant Subsidiaries and the judgment default provision described under "Defaults" above and the limitations contained in clauses (3) and (4) under the first paragraph and clause (3) under the third paragraph of "--Merger and Consolidation" above ("covenant defeasance"). In the event that the Parent and the Issuer exercise their legal defeasance option or their covenant defeasance option, each Note Guarantor will be released from all of its obligations with respect to its Note Guarantee. The Parent and the Issuer may exercise their legal defeasance option notwithstanding their prior exercise of their covenant defeasance option. If the Parent and the Issuer exercise their legal defeasance option, payment of the notes may not be accelerated because of an Event of Default with respect thereto. If the Parent and the Issuer exercise their covenant defeasance option, payment of the notes may not be accelerated because of an Event of Default specified in clause (4), (6) or (7) (with respect only to Significant Subsidiaries), (8) (with respect only to Significant Subsidiaries) under "Defaults" above or because of the failure of the Issuer to comply with clause (3) or (4) under the first paragraph and clauses (3) and (4) under the third paragraph of "--Merger and Consolidation" above. In order to exercise either defeasance option, the Parent and the Issuer must irrevocably deposit in trust (the "defeasance trust") with the Trustee money in an amount sufficient or U.S. Government Obligations, the principal of and interest on which will be sufficient, or a combination thereof sufficient, to pay the principal of, premium (if any) and interest on, and liquidated damages, if any, in respect of the notes to redemption or maturity, as the case may be, and must comply with certain other conditions, including delivery to the Trustee of an Opinion of Counsel to the effect that Holders will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit and defeasance and will be subject to Federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred (and, in the case of legal defeasance only, such Opinion of Counsel must be based on a ruling of the Internal Revenue Service or other change in applicable Federal income tax law). 110 CONCERNING THE TRUSTEE U.S. Bank National Association is to be the Trustee under the Indenture and has been appointed by the Parent as Registrar and Paying Agent with regard to the notes. GOVERNING LAW The Indenture and the notes will be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. BOOK-ENTRY; DELIVERY AND FORM The new notes will initially be represented by one or more permanent global notes in definitive, fully registered book-entry form, without interest coupons that will be deposited with, or on behalf of, DTC and registered in the name of DTC or its nominee, on behalf of the acquirers of new notes represented thereby for credit to the respective accounts of the acquirers, or to such other accounts as they may direct, at DTC. See "The Exchange Offer--Book Entry Transfer." Except as set forth below, the global notes may be transferred, in whole and not in part, solely to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the global notes may not be exchanged for notes in physical, certificated form except in the limited circumstances described below. All interests in the global notes may be subject to the procedures and requirements of DTC. CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES The descriptions of the operations and procedures of DTC set forth below are provided solely as a matter of convenience. These operations and procedures are solely within the control of DTC and are subject to change by DTC from time to time. We will take no responsibility for these operations or procedures, and investors are urged to contact DTC or its participants directly to discuss these matters. DTC has advised the Issuer that it is . a limited purpose trust company organized under the laws of the State of New York, . a "banking organization" within the meaning of the New York Banking Law, . a member of the Federal Reserve System, . a "clearing corporation" within the meaning of the Uniform Commercial Code, as amended, and . a "clearing agency" registered pursuant to Section 17A of the Exchange Act. DTC was created to hold securities for its participants and facilitates the clearance and settlement of securities transactions between participants through electronic book-entry changes to the accounts of its participants, thereby eliminating the need for physical transfer and delivery of certificates. DTC's participants include securities brokers and dealers, banks and trust companies, clearing corporations and certain other organizations. Indirect access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly. Investors who are not participants may beneficially own securities held by or on behalf of DTC only through participants or indirect participants. The Issuer expects that pursuant to procedures established by DTC ownership of the new notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the interests of participants) and the records of participants and the indirect participants (with respect to the interests of persons other than participants). 111 The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Accordingly, the ability to transfer interests in the new notes represented by a global note to such persons may be limited. In addition, because DTC can act only on behalf of its participants, who in turn act on behalf of persons who hold interests through participants, the ability of a person having an interest in new notes represented by a global note to pledge or transfer such interest to persons or entities that do not participate in DTC's system, or to otherwise take actions in respect of such interest, may be affected by the lack of a physical definitive security in respect of such interest. So long as DTC or its nominee is the registered owner of a global note, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the notes represented by the global note for all purposes under the Indenture. Except as provided below, owners of beneficial interests in a global note . will not be entitled to have new notes represented by such global note registered in their names, . will not receive or be entitled to receive physical delivery of certificated new notes, and . will not be considered the owners or holders thereof under the Indenture for any purpose, including with respect to the giving of any direction, instruction or approval to the Trustee thereunder. Accordingly, each holder owning a beneficial interest in a global note must rely on the procedures of DTC and, if such holder is not a participant or an indirect participant, on the procedures of the participant through which such holder owns its interest, to exercise any rights of a holder of notes under the Indenture or such global note. The Issuer understands that under existing industry practice, in the event that the Issuer requests any action of holders of notes, or a holder that is an owner of a beneficial interest in a global note desires to take any action that DTC, as the holder of such global note, is entitled to take, DTC would authorize the participants to take such action and the participants would authorize holders owning through such participants to take such action or would otherwise act upon the instruction of such holders. Neither the Issuer nor the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of notes by DTC, or for maintaining, supervising or reviewing any records of DTC relating to such new notes. Payments with respect to the principal of, and premium, if any, and interest on, any new notes represented by a global note registered in the name of DTC or its nominee on the applicable record date will be payable by the Trustee to or at the direction of DTC or its nominee in its capacity as the registered holder of the global note representing the new notes under the Indenture. Under the terms of the Indenture, the Issuer and the Trustee may treat the persons in whose names the new notes, including the global notes, are registered as the owners thereof for the purpose of receiving payment thereon and for any and all other purposes whatsoever. Accordingly, neither the Issuer nor the Trustee has or will have any responsibility or liability for the payment of such amounts to owners of beneficial interests in a global note (including principal, premium, if any, liquidated damages, if any, and interest). Payments by the participants and the indirect participants to the owners of beneficial interests in a global note will be governed by standing instructions and customary industry practice and will be the responsibility of the participants or the indirect participants and DTC. Transfers between participants in DTC will be effected in accordance with DTC's procedures, and will be settled in same-day funds. CERTIFICATED NOTES If . the Issuer notifies the Trustee in writing that DTC is no longer willing or able to act as a depositary or DTC ceases to be registered as a clearing agency under the Exchange Act and a successor depositary is not appointed within 90 days of such notice or cessation, . the Issuer, at its option, notifies the Trustee in writing that it elects to cause the issuance of notes in definitive form under the Indenture or 112 . upon the occurrence of certain other events as provided in the Indenture, then, upon surrender by DTC of the global notes, certificated notes will be issued to each person that DTC identifies as the beneficial owner of the notes represented by the global notes. Upon any such issuance, the Trustee is required to register such certificated notes in the name of such person or persons (or the nominee of any thereof) and cause the same to be delivered thereto. Neither the Issuer nor the Trustee shall be liable for any delay by DTC or any participant or indirect participant in identifying the beneficial owners of the related notes and each such person may conclusively rely on, and shall be protected in relying on, instructions from DTC for all purposes. REGISTRATION RIGHTS AGREEMENT This summary of certain provisions of the registration rights agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the registration rights agreement, a copy of which we will make available upon written request as described under "Where You Can Find More Information." EXCHANGE OFFER The Issuer and the Note Guarantors have agreed to use their reasonable best efforts, at their cost, to file a registration statement for a registered offer to exchange the outstanding notes for the new notes, guaranteed by the Note Guarantors, with terms identical to the outstanding notes (except that the new notes will not bear legends restricting the transfer thereof). When the registration statement is declared effective, the Issuer shall offer the new notes in return for surrender of the outstanding notes. The offer shall remain open for not less than 20 business days after the date notice of the Exchange Offer is mailed to the holders. For each note the Issuer receives in the Exchange Offer, it will issue the holder a new note of equal principal amount. Interest on each new note shall accrue from the last date on which interest was paid on the notes so surrendered or, if no interest has been paid, from the date the Issuer first issues the notes under the Indenture. Once the Issuer has accepted all notes validly surrendered in accordance with the terms of the Exchange Offer, it can close the Exchange Offer within 20 business days. Notes not tendered in the Exchange Offer shall bear interest at the rate set forth on the cover page of this prospectus and be subject to all of the terms and conditions specified in the Indenture and to the transfer restrictions described in " The Exchange Offer--Consequences of Failure to Exchange." SHELF REGISTRATION If the Issuer and the Note Guarantors are not permitted to conduct the Exchange Offer due to, among other things, applicable interpretations of the staff of the SEC, or under other specified circumstances, the Issuer and the Note Guarantors have agreed with the Placement Agents to use their reasonable best efforts, at their cost, to cause to become effective a shelf registration statement ("Shelf Registration") for registered re-sales of the outstanding notes. The Issuer and the Note Guarantors must keep the Shelf Registration effective until the earlier of two years after the date the Issuer first issues these notes under the Indenture or until all notes covered by the Shelf Registration have been sold. The Issuer and the Note Guarantors shall provide to each holder copies of the prospectus, notify each holder when the Shelf Registration for the notes has become effective and take certain other actions as are required to permit re-sales of the notes. A holder that sells its notes under the Shelf Registration generally will: . be named as a selling security holder in the related prospectus; . be required to deliver a prospectus to purchasers; 113 . be subject to certain of the civil liability provisions under the Securities Act; and . be bound by the provisions of the registration rights agreement (including certain indemnification obligations). If by January 8, 2003, the Exchange Offer is not consummated or a Shelf Registration is not declared effective, the annual interest rate borne by the outstanding notes thereafter will be increased by 0.5% per annum until the Exchange Offer is consummated or the Shelf Registration is declared effective. CERTAIN DEFINITIONS "Additional Assets" means: (1) any property or assets (other than Indebtedness and Capital Stock) to be used by the Parent or a Restricted Subsidiary in a Permitted Business; (2) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Parent or another Restricted Subsidiary; or (3) Capital Stock constituting a minority interest in any Person that at such time is a Restricted Subsidiary; PROVIDED, HOWEVER, that: any such Restricted Subsidiary described in clauses (2) or (3) above is primarily engaged in a Permitted Business. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of the provisions described under "--Certain Covenants--Limitation on Transactions with Affiliates" and "--Certain Covenants--Limitation on Sales of Assets and Capital Stock" only, "Affiliate" shall also mean any beneficial owner of shares representing 10% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Parent or the Issuer or of rights or warrants to purchase such Voting Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. "Asset Disposition" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) by the Parent or any Restricted Subsidiary, including any disposition by means of a merger, consolidation, or similar transaction (each referred to for the purposes of this definition as a "disposition"), of: (1) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Parent or a Restricted Subsidiary), (2) all or substantially all the assets of any division or line of business of the Parent or any Restricted Subsidiary or (3) any other assets of the Parent or any Restricted Subsidiary outside of the ordinary course of business of the Parent or such Restricted Subsidiary other than, in the case of (1), (2) and (3) above, (A) disposition by a Restricted Subsidiary to the Parent or by the Parent or a Restricted Subsidiary to a Wholly Owned Subsidiary, 114 (B) for purposes of the provisions described under "--Certain Covenants--Limitation on Sales of Assets and Capital Stock" only, a disposition subject to the covenant described under "--Certain Covenants--Limitation on Restricted Payments", (C) a disposition of assets with a Fair Market Value of less than $1,000,000, and (D) any exchange of like property pursuant to Section 1031 of the Code for use in a Permitted Business. "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the interest rate borne by the notes, compounded annually) of the total obligations of the 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). "Average Life" means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the quotient obtained by dividing: (1) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness or scheduled redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (2) the sum of all such payments. "Bank Indebtedness" means any and all amounts payable under or in respect of the Credit Agreement (after giving effect to this Offering and the application of the net proceeds therefrom and the other transactions described herein) and any Refinancing Indebtedness with respect thereto, as amended from time to time, including principal, premium (if any), interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Issuer whether or not a claim for post-filing interest is allowed in such proceedings), fees, charges, expenses, reimbursement obligations, guarantees and all other amounts payable thereunder or in respect thereof. It is understood and agreed that Refinancing Indebtedness in respect of the Credit Agreement may be Incurred from time to time after termination of the Credit Agreement. "Board of Directors" means the Board of Directors of the Parent or any committee thereof duly authorized to act on behalf of the Board of Directors of the Parent. "Business Day" means each day which is not a Legal Holiday. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. "Capitalized Lease Obligations" means an obligation that is required to be classified and accounted for as a capitalized lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be prepaid by the lessee without payment of a penalty. "Closing Date" means the date the notes are originally issued under the Indenture. "Code" means the Internal Revenue Code of 1986, as amended. "Consolidated Coverage Ratio" as of any date of determination means the ratio of: (1) the aggregate amount of EBITDA for the period of the most recent four consecutive fiscal quarters ending at least 45 days prior to the date of such determination to (2) Consolidated Interest Expense for such four fiscal quarters; 115 provided, however, that: (A) if the Parent or any Restricted Subsidiary has Incurred any Indebtedness since the beginning of such period (other than Indebtedness under a revolving credit facility) that remains outstanding on such date of determination or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period and the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such discharge had occurred on the first day of such period, (B) if the Parent or any Restricted Subsidiary has repaid, repurchased, defeased or otherwise discharged any Indebtedness (other than Indebtedness under a revolving credit facility) since the beginning of such period or if any Indebtedness is to be repaid, repurchased, defeased or otherwise discharged on the date of the transaction giving rise to the need to calculate the Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense for such period shall be calculated on a pro forma basis as if such discharge had occurred on the first day of such period and as if the Parent or such Restricted Subsidiary had not earned the interest income actually earned during such period in respect of cash or Temporary Cash Investments used to repay, repurchase, defease or otherwise discharge such Indebtedness, (C) if since the beginning of such period the Parent or any Restricted Subsidiary shall have made any Asset Disposition, the EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the assets that are the subject of such Asset Disposition for such period or increased by an amount equal to the EBITDA (if negative) directly attributable thereto for such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Indebtedness of the Parent or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Parent and its continuing Restricted Subsidiaries in connection with such Asset Disposition for such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent the Parent and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale), (D) if since the beginning of such period the Parent or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person that becomes a Restricted Subsidiary) or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness) as if such Investment or acquisition occurred on the first day of such period, and (E) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Parent or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Disposition or any Investment or acquisition of assets that would have required an adjustment pursuant to clause (C) or (D) above if made by the Parent or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Disposition, Investment or acquisition of assets occurred on the first day of such period. For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets or other Investment, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred in connection therewith, the pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Parent and shall comply with the requirements of Rule 11-02 of Regulation S-X promulgated by the SEC. 116 If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest expense on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term as at the date of determination in excess of 12 months). For purposes of making the computation referred to above, interest on any Indebtedness under a revolving credit facility computed on a pro forma basis shall be computed based upon the average daily balance of such Indebtedness during the applicable period. "Consolidated Current Liabilities" as of the date of determination means the aggregate amount of liabilities of the Parent and its consolidated Restricted Subsidiaries which may properly be classified as current liabilities (including taxes accrued as estimated), on a Consolidated basis, after eliminating: (1) all intercompany items between the Parent and any Restricted Subsidiary and (2) all current maturities of long-term Indebtedness, all as determined in accordance with GAAP consistently applied. "Consolidated Interest Expense" means, for any period, the total interest expense of the Parent and its Consolidated Restricted Subsidiaries, plus, to the extent Incurred by the Parent and its Consolidated Restricted Subsidiaries in such period but not included in such interest expense, without duplication: (1) interest expense attributable to Capitalized Lease Obligations and the interest expense attributable to leases constituting part of a Sale/Leaseback Transaction, (2) amortization of debt discount and debt issuance costs, (3) capitalized interest, (4) noncash interest expense, (5) commissions, discounts and other fees and charges attributable to letters of credit and bankers' acceptance financing, (6) interest accruing on any Indebtedness of any other Person to the extent such Indebtedness is Guaranteed by the Parent or any Restricted Subsidiary, (7) net costs associated with Hedging Obligations (including amortization of fees), (8) dividends in respect of all Disqualified Stock of the Parent or the Issuer and all Preferred Stock of any of the Subsidiaries of the Parent (other than the Issuer), to the extent held by Persons other than the Parent or a Wholly Owned Subsidiary, (9) interest Incurred in connection with investments in discontinued operations and (10) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Parent) in connection with Indebtedness Incurred by such plan or trust. "Consolidated Net Income" means, for any period, the net income of the Parent and its Consolidated Subsidiaries for such period; PROVIDED, HOWEVER, that there shall not be included in such Consolidated Net Income: (1) subject to the limitations contained in clause (2) below, any net income of any Person (other than the Parent) if such Person is not a Restricted Subsidiary, except that: (A) subject to the limitations contained in clause (5) below, the Parent's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Parent or a 117 Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution made to a Restricted Subsidiary, to the limitations contained in clause (4) below) and (B) the Parent's equity in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income; (2) all net income and net loss attributable to each Foreign Equity Investment shall be excluded from Consolidated Net Income and, in lieu thereof, the amount determined as follows shall be included in Consolidated Net Income: (A) the Parent's equity in the pretax net income and pretax net loss attributable to each Foreign Equity Investment shall be determined in the aggregate (so that pretax net losses offset corresponding amounts of pretax net income); (B) if the amount determined pursuant to subclause (A) is positive, it shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Persons during such period to the Parent or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution made to a Restricted Subsidiary, to the limitations contained in clause (4) below) and (C) if the amount determined pursuant to subclause (A) is negative, such loss shall be included in determining such Consolidated Net Income; (3) any net income (or loss) of any Person acquired by the Parent or a Subsidiary of the Parent in a pooling of interests transaction for any period prior to the date of such acquisition; (4) any net income (or loss) of any Restricted Subsidiary other than the Issuer if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions by such Restricted Subsidiary, directly or indirectly, except that: (A) subject to the limitations contained in clause (5) below, the Parent's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Restricted Subsidiary during such period to the Parent or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution made to another Restricted Subsidiary, to the limitation contained in this clause) and (B) the Parent's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining such Consolidated Net Income, (5) any gain (but not loss) realized upon the sale or other disposition of any asset of the Parent or its Consolidated Subsidiaries (including pursuant to any Sale/Leaseback Transaction) that is not sold or otherwise disposed of in the ordinary course of business and any gain (but not loss) realized upon the sale or other disposition of any Capital Stock of any Person; (6) any extraordinary gain or loss; and (7) the cumulative effect of a change in accounting principles. Notwithstanding the foregoing, for the purpose of the covenant described under "Certain Covenants--Limitation on Restricted Payments" only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Parent or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clause (a)(4)(C)(iv) thereof, "Consolidated Net Tangible Assets" as of any date of determination, means the total amount of assets (less accumulated depreciation and amortization, allowances for doubtful receivables, other applicable reserves and other properly deductible items) which would appear on a consolidated balance sheet of the Parent and its 118 Consolidated Restricted Subsidiaries, determined on a Consolidated basis in accordance with GAAP, and after giving effect to purchase accounting and after deducting therefrom Consolidated Current Liabilities and, to the extent otherwise included, the amounts of: (1) minority interests in consolidated Subsidiaries held by Persons other than the Parent or a Restricted Subsidiary; (2) excess of cost over fair value of assets of businesses acquired, as determined in good faith by the Board of Directors; (3) any revaluation or other write-up in book value of assets subsequent to the Closing Date as a result of a change in the method of valuation in accordance with GAAP consistently applied; (4) unamortized debt discount and expenses and other unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, licenses, organization or developmental expenses and other intangible items; (5) treasury stock; (6) cash set apart and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of Capital Stock to the extent such obligation is not reflected in Consolidated Current Liabilities; and (7) Investments in and assets of Unrestricted Subsidiaries. "Consolidated Net Worth" means the total of the amounts shown on the balance sheet of the Parent and its Restricted Subsidiaries, determined on a Consolidated basis, as of the end of the most recent fiscal quarter of the Parent ending at least 45 days prior to the taking of any action for the purpose of which the determination is being made, as (1) the par or stated value of all outstanding Capital Stock of the Parent, plus (2) paid-in capital or capital surplus relating to such Capital Stock, plus (3) any retained earnings or earned surplus, less (A) any accumulated deficit, and (B) any amounts attributable to Disqualified Stock. "Consolidation" means the consolidation of the amounts of each of the Restricted Subsidiaries with those of the Parent in accordance with GAAP consistently applied; PROVIDED, HOWEVER, that "Consolidation" will not include consolidation of the accounts of any Unrestricted Subsidiary, but the interest of the Parent or any Restricted Subsidiary in an Unrestricted Subsidiary will be accounted for as an investment. The term "Consolidated" has a correlative meaning. "Credit Agreement" means the Credit Agreement dated as of January 11, 2000, among the Parent, the Issuer, the lenders party thereto, The Chase Manhattan Bank, as Administrative Agent, Collateral Agent, Issuing Bank and Swingline Lender, the Bank of Nova Scotia, as Syndication Agent, and Fleet National Bank, as Documentation Agent, as amended, restated, supplemented, waived, replaced (whether or not upon termination, and whether with the original lenders or otherwise), refinanced, restructured or otherwise modified from time to time (except to the extent that any such amendment, restatement, supplement, waiver, replacement, refinancing, restructuring or other modification thereto would be prohibited by the terms of the Indenture, unless otherwise agreed to by the Holders of at least a majority in aggregate principal amount of notes at the time outstanding). "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. 119 "Designated Sale/Leaseback Transaction" means any Sale/Leaseback Transaction that at the time of determination (a) has been designated a Designated Sale/Leaseback Transaction by the Board of Directors by promptly filing with the Trustee a copy of the resolution of the Board of Directors giving effect to such designation and (b) has not been removed as a Designated Sale/Leaseback Transaction by the Board of Directors by promptly filing with the Trustee a copy of the resolution of the Board of Directors giving effect to such removal. "Disqualified Stock" means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable or exercisable) or upon the happening of any event: (1) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (2) is convertible or exchangeable for Indebtedness or Disqualified Stock (excluding Capital Stock convertible or exchangeable solely at the option of the Parent or a Restricted Subsidiary; PROVIDED, HOWEVER, that any such conversion or exchange shall be deemed an Incurrence of Indebtedness or Disqualified Stock, as applicable) or (3) is redeemable at the option of the holder thereof, in whole or in part, in the case of each of clauses (1), (2) and (3), on or prior to the first anniversary of the Stated Maturity of the notes; PROVIDED, HOWEVER, that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the first anniversary of the Stated Maturity of the notes shall not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are not more favorable to the holders of such Capital Stock than the provisions of the covenants described under "--Change of Control" and "--Limitation on Sale of Assets and Capital Stock." "EBITDA" for any period means the Consolidated Net Income for such period, plus, without duplication, the following to the extent deducted in calculating such Consolidated Net Income: (1) income tax expense of the Parent and its Consolidated Restricted Subsidiaries, (2) Consolidated Interest Expense, (3) deprecation expense of the Parent and its Consolidated Restricted Subsidiaries, and (4) amortization expense of the Parent and its Consolidated Restricted Subsidiaries (excluding amortization expense attributable to a prepaid cash item that was paid in a prior period). Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and noncash charges of, a Restricted Subsidiary of the Parent shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was including in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Parent by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its stockholders. "Equity Offering" means an underwritten primary public offering of common stock of the Parent or the Issuer pursuant to an effective registration statement under the Securities Act or a bona fide private placement of the common stock of the Parent or the Issuer on arm's-length terms to unaffiliated third parties. "Exchange Act" means the Securities Exchange Act of 1933, as amended. 120 "Excluded Contributions" means net cash proceeds received by the Parent or the Issuer from the issue or sale of its Capital Stock (other than Disqualified Stock) subsequent to the Closing Date (other than an issuance or sale to (x) a Subsidiary of the Parent or (y) an employee stock ownership plan or other trust established by the Parent or any of its Subsidiaries), in each case designated as Excluded Contributions pursuant to an Officers' Certificate executed on the date such Capital Stock is issued or sold which are excluded from the calculation set forth in clause (a)(4)(C) under "--Certain Covenants--Limitation on Restricted Payments." "Fair Market Value" means, with respect to any asset or property, the price which could be negotiated in an arm's-length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. "Foreign Equity Investment" means any investment in Mexrail, Tex-Mex, TFM, Grupo TFM or Panama Canal Railway Company or their successors for which the equity method of accounting is used. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Closing Date, including those set forth in: (1) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants; (2) statements and pronouncements of the Financial Accounting Standards Board; (3) such other statements by such other entities as approved by a significant segment of the accounting profession; and (4) the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC. All ratios and computations based on GAAP contained in the Indenture shall be computed in conformity with GAAP. "Grupo TFM Disposition" means any sale, transfer or other disposition for cash (or series of related sales, transfers or dispositions) by Caymex Transportation, Inc. or Nafta Rail S.A. de C.V. of any shares of Capital Stock of Nafta Rail S.A. de C.V., Grupo TFM, TFM or any combination thereof, in each case on arm's length terms to unaffiliated third parties. "Grupo TFM Investment" means (1) any purchase or acquisition by Nafta Rail S.A. de C.V., the Parent or any directly or indirectly Wholly Owned Subsidiary of the Parent, of any shares of Capital Stock of Grupo TFM or TFM from the government of Mexico or an instrumentality thereof or (2) any capital contribution made to Grupo TFM, TFM or both to fund the purchase by it or them, as applicable, of shares of Capital Stock of Grupo TFM, TFM or both from the government of Mexico or an instrumentality thereof, in each case made with the proceeds of a Grupo TFM Disposition. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person: (1) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statements conditions or otherwise), or 121 (2) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing any obligation. "Hedging Obligations" of any Person means the obligations of such Person pursuant to any Interest Rate Agreement. "Holder" means the Person in whose name a note is registered on the Registrar's books. "Incur" means issue, assume, Guarantee, incur or otherwise become liable for; PROVIDED, HOWEVER, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Person at the time it becomes a Subsidiary. The term "Incurrence" when used as a noun shall have a correlative meaning. The accretion of principal of a non-interest bearing or other discount security shall not be deemed the Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person on any date of determination, without duplication: (1) the principal of and premium (if any) in respect of indebtedness of such Person for borrowed money; (2) the principal of and premium (if any) in respect of obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (3) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto); (4) all obligations of such Person to pay the deferred and unpaid purchase price of property or services (except Trade Payables), which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services; (5) all Capitalized Lease Obligations and all Attributable Debt of such Person; (6) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person that is not a Note Guarantor, any Preferred Stock (but excluding, in each case, any accrued dividends); (7) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; PROVIDED, HOWEVER, that the amount of Indebtedness of such Person shall be the lesser of: (A) the Fair Market Value of such asset at such date of determination and (B) the amount of such Indebtedness of such other Persons; (8) Hedging Obligations of such Person; and (9) all obligations of the type referred to in clauses (1) through (8) of other Persons and all dividends of other Persons for the payment of which, in each case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee. 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 the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. 122 "Interest Rate Agreement" means with respect to any Person any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement to which such Person is a party or of which it is a beneficiary. "Investment" in any Person means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of the lender) or other extension of credit (including by way of Guarantee or similar arrangement) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by such Person. For purposes of the definition of "Unrestricted Subsidiary" and the covenant described under "--Certain Covenants--Limitation on Restricted Payments:" (1) "Investment" shall include the portion (proportionate to the Parent's equity interest in such Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of the Parent at the time that such Subsidiary is designated an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Parent shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to: (A) the Parent's "Investment" in such Subsidiary at the time of such redesignation less (B) the portion (proportionate to the Parent's equity interest in such Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the time of such redesignation; and (2) any property transferred to or from an Unrestricted Subsidiary shall be valued at its Fair Market Value at the time of such transfer. "Investment Grade Rating" means a rating equal to or higher than Baa3 (or the equivalent) by Moody's Investors Service, Inc. or BBB- (or the equivalent) by Standard & Poor's Ratings Services, Inc., as each such company is defined in the definition of "Rating Agency". "Legal Holiday" means a Saturday, Sunday or other day on which banking institutions are not required by law or regulation to be open in the State of New York. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof). "Net Available Cash" from an Asset Disposition means cash payments received (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise and proceeds from the sale or other disposition of any securities received as consideration, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to the properties or assets that are the subject of such Asset Disposition or received in any other noncash form) therefrom, in each case net of: (1) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be paid or accrued as a liability under GAAP, as a consequence of such Asset Disposition, (2) all payments made on any Indebtedness which is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such assets, or which must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law be repaid out of the proceeds from such Asset Disposition, (3) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Disposition and 123 (4) appropriate amounts to be provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the property or other assets disposed of in such Asset Disposition and retained by the Parent or any Restricted Subsidiary after such Asset Disposition. "Net Cash Proceeds," with respect to any issuance or sale of Capital Stock, means the cash proceeds of such issuance or sale net of attorneys' fees, accountants' fee, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Note Guarantee" means each Guarantee of the obligations with respect to the notes issued by a Person pursuant to the terms of the Indenture. "Note Guarantor" means any Person that has issued a Note Guarantee. "Officer" means the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer, the President, any Vice President, the Treasurer or the Secretary of the Parent. "Officer" of a Note Guarantor has a correlative meaning. "Officers' Certificate" means a certificate signed by two Officers. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Parent, the Company, a Note Guarantor or the Trustee. "Permitted Business" means any business engaged in by the Parent or any Restricted Subsidiary on the Closing Date and any Related Business. "Permitted Investment" means an Investment by the Parent or any Restricted Subsidiary in: (1) the Parent, a Restricted Subsidiary or a Person that will, upon the making of such Investment, become a Restricted Subsidiary; PROVIDED, HOWEVER, that the primary business of such Restricted Subsidiary is a Permitted Business; (2) another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Parent or a Restricted Subsidiary; PROVIDED, HOWEVER, that such Person's primary business is a Permitted Business; (3) Temporary Cash Investments; (4) receivables owing to the Parent or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; PROVIDED, HOWEVER, that such trade terms may include such concessionary trade terms as the Parent or any such Restricted Subsidiary deems reasonable under the circumstances; (5) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (6) loans or advances to employees made in the ordinary course of business consistent with past practices of the Parent or such Restricted Subsidiary and not exceeding $2.0 million in the aggregate outstanding at any one time; (7) Stock Purchase Loans not exceeding $3.0 million in the aggregate outstanding at any one time; (8) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Parent or any Restricted Subsidiary or in satisfaction of judgments; 124 (9) any Person to the extent such Investment represents the noncash portion of the consideration received for an Asset Disposition that was made pursuant to and in compliance with the covenant described under "--Certain Covenants--Limitation on Sale of Assets and Capital Stock"; (10) The Texas Mexican Railway Company or any other domestic railway company that owns railways that are contiguous with those owned by the Issuer in the form of Guarantees for the benefit of, or capital contributions or loans to, or sale/leaseback transactions with, The Texas Mexican Railway Company or such other domestic railway company; PROVIDED, HOWEVER, that the aggregate amount of such capital contributions, loans and guaranteed Indebtedness and sale/leaseback transactions shall not exceed $25.0 million; (11) any company that is engaged in the same line of business as the Issuer or a related line of business in the form of Guarantees for the benefit of, or capital contributions or loans to, or sale/leaseback transactions with, such company; PROVIDED, HOWEVER, that the aggregate amount of such capital contributions, loans and guaranteed Indebtedness and sale/leaseback transactions shall not exceed $25.0 million; (12) Grupo TFM Investments; or (13) the Panama Canal Railway Company; PROVIDED, HOWEVER, that the aggregate amount of all such Investments made after the Closing Date shall not exceed $15.0 million. "Permitted Liens" means, with respect to any Person: (1) Liens to secure Indebtedness permitted pursuant to clause (b)(1) and (b)(7) of the covenant described under "--Certain Covenants--Limitation on Indebtedness;" (2) Liens for taxes, assessments or governmental charges or levies on such Person's property if the same shall not at the time be delinquent or thereafter can be paid without penalty or are being contested in good faith and by appropriate proceedings; (3) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens and other similar Liens arising in the ordinary course of business that secure payment of obligations (A) which are being contested in good faith by appropriate proceedings or (B) for which such Person or any of its Subsidiaries, as applicable, has posted a bond supported only by cash; (4) Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, laws providing for old age pensions or other social security or retirement benefits, or similar legislation or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness) or leases to which such Person is a party, or deposits to secure public or statutory obligations of such Person or deposits of cash or United States government bonds to secure surety or appeal bonds to which such Person is a party, or deposits as security for contested taxes or import duties or for the payment of rent, in each cash Incurred in the ordinary course of business; (5) utility easements, building restrictions and such other encumbrances or charges against real property and defects and irregularities in the title thereto or facts an accurate survey of the property would show and landlords' and lessors' liens under leases to which such Person or any of its Subsidiaries is a party, none of which in any material way affect the marketability of the same or interfere with the use thereof in the ordinary course of the business of such Person or its Subsidiaries; (6) Liens existing on the Closing Date; (7) any Lien on any property or asset prior to the acquisition thereof by such Person or any of its Subsidiaries or existing on any property or asset of any other Person that becomes a Subsidiary of such Person after the Closing Date prior to the time such other Person becomes a Subsidiary of such Person; PROVIDED, HOWEVER, that (A) such Lien is not created, Incurred or assumed in contemplation of or in connection with such acquisition or such other Person becoming a Subsidiary of such Person, as the case 125 may be, (B) such Lien shall not apply to any other property or assets of such Person or its Subsidiaries and (C) such Lien shall secure only those obligations which it secures on the date of such acquisition or the date such other Person becomes a Subsidiary of such Person, as the case may be; (8) Liens on fixed or capital assets acquired, constructed or improved by such Person or any of its Subsidiaries; PROVIDED, HOWEVER, that (A) such Liens secure Indebtedness permitted pursuant to clause (b)(6) of the covenant described under "--Certain Covenants--Limitation on Indebtedness," (B) such Liens and the Indebtedness secured thereby are Incurred prior to or within 180 days after such acquisition or the completion of such construction or improvement, (C) the Indebtedness secured thereby does not exceed the cost of acquiring, constructing or improving such fixed or capital assets and (D) such Liens shall not apply to any other property or assets of such Person or any of its Subsidiaries; (9) judgment Liens in respect of judgments that do not constitute an Event of Default pursuant to clause (8) under "Defaults;" (10) Liens securing Indebtedness or other obligations of a Subsidiary of such Person owing to such Person or a Wholly Owned Subsidiary of such Person; (11) Liens in favor of issuers of surety bonds or letters of credit issued pursuant to the request of and for the account of such Person in the ordinary course of business; PROVIDED, HOWEVER, that such letters of credit do not constitute Indebtedness; (12) Liens securing obligations under Interest Rate Agreements so long as such obligations relate to Indebtedness that is, and is permitted under the Indenture to be, secured by a Lien on the same property securing such obligations; and (13) Liens to secure any Refinancing (or successive Refinancings) as a whole, or in part, of any Indebtedness secured by any Lien referred to in the foregoing clauses (6), (7) and (8); PROVIDED, HOWEVER, that: (A) such new Lien shall be limited to all or part of the same property that secured the original Lien (plus improvements to or on such property), and (B) the Indebtedness secured by such Lien at such time is not increased to any amount greater than the sum of: (i) the outstanding principal amount or, if greater, committed amount of Indebtedness secured by Liens described under clauses (6), (7) or (8) at the time the original Lien became a Permitted Lien under the Indenture, and (ii) an amount necessary to pay any fees and expenses, including premiums, related to such Refinancings. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock," as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) that is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person. "principal" of a note means the principal of the note plus the premium, if any, payable on the note which is due or overdue or is to become due at the relevant time. 126 "PurchaseMoney Indebtedness" means Indebtedness: (1) consisting of the deferred purchase price of an asset, conditional sale obligations, obligations under any title retention agreement and other purchase money obligations, in each case where the maturity of such Indebtedness does not exceed the anticipated useful life of the asset being financed, and (2) Incurred to finance the acquisition by the Parent or a Restricted Subsidiary of such asset, including additions and improvements; PROVIDED, HOWEVER, that such Indebtedness is incurred within 180 days after the acquisition by the Parent or such Restricted Subsidiary of such asset. "Rating Agency" means Standard & Poor's Ratings Group, Inc. and Moody's Investors Service, Inc. or if Standard & Poor's Rating Group, Inc. or Moody's Investors Service, Inc. or both shall not make a rating on the notes publicly available, a nationally recognized statistical rating agency or agencies, as the case may be, selected by the Parent (as certified by the Board of Directors) which shall be substituted for Standard & Poor's Ratings Group, Inc. or Moody's Investors Service, Inc. or both, as the case may be. "Refinance" means, in respect of any Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Indebtedness exchange or replacement for, such Indebtedness. "Refinanced" and "Refinancing" shall have correlative meanings. "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 the Indenture (including Indebtedness of the Parent that Refinances Refinancing Indebtedness); PROVIDED, HOWEVER, that: (1) the Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being Refinanced, (2) 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, (3) 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, and (4) if the Indebtedness being Refinanced is subordinated in right of payment to the notes, such Refinancing Indebtedness is subordinated in right of payment to the notes at least to the same extent as the Indebtedness being Refinanced; PROVIDED FURTHER, HOWEVER, that Refinancing Indebtedness shall not include: (A) Indebtedness of a Restricted Subsidiary that Refinances Indebtedness of the Issuer or (B) Indebtedness of the Parent or a Restricted Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary. "Related Business" means any business related, ancillary or complementary to the businesses of the Parent and the Restricted Subsidiaries on the Closing Date. "Representative" means the trustee, agent or representative (if any) for an issue of Senior Indebtedness. "Restricted Subsidiary" means the Issuer and any other Subsidiary of the Parent other than an Unrestricted Subsidiary. 127 "Sale/Leaseback Transaction" means an arrangement entered into after the Closing Date relating to property now owned or hereafter acquired by the Parent or a Restricted Subsidiary whereby the Parent or a Restricted Subsidiary transfers such property to a Person and the Parent or such Restricted Subsidiary leases it from such Person, other than leases between the Parent and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries. "SEC" means the Securities and Exchange Commission. "Secured Indebtedness" means any Indebtedness of the Issuer secured by a Lien. "Secured Indebtedness" of a Note Guarantor has a correlative meaning. "Securities Act" means the Securities Act of 1933, as amended. "Significant Subsidiary" means any Restricted Subsidiary other than the Issuer that would be a "Significant Subsidiary" of the Parent within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the final payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless such contingency has occurred). "Stock Purchase Loans" means loans or advances made by the Parent or any Restricted Subsidiary in the ordinary course of business to employees for the purpose of purchasing restricted shares of common stock of the Parent. "Subordinated Obligation" means any Indebtedness of the Issuer (whether outstanding on the Closing Date or thereafter Incurred) that is subordinate or junior in right of payment to the notes pursuant to a written agreement. "Subordinated Obligation" of a Note Guarantor has a correlative meaning. "Subsidiary" of any Person means any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by: (1) such Person, (2) such Person and one or more Subsidiaries of such Person or (3) one or more Subsidiaries of such Person. "Temporary Cash Investments" means any of the following: (1) any investment in direct obligations of the United States of America or any agency thereof or obligations Guaranteed by the United States of America or any agency thereof, (2) investments in time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company that 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 having capital, surplus and undivided profits aggregating in excess of $250,000,000 (or the foreign currency equivalent thereof) and whose long-term debt is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act), 128 (3) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (1) above entered into with a bank meeting the qualifications described in clause (2) above, (4) investments in commercial paper, maturing not more than 270 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Parent) organized and in existence, under the laws of the United States of America or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings Service, a division of The McGraw-Hill Companies, Inc. ("S&P"), and (5) investments in securities with maturities of six months or less from the date of acquisition issued or fully 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 "A" by Moody's Investors Service, Inc. "TIA" means the Trust Indenture Act of 1938 (15 U.S.C. (S)(S)77aaa-77bbbb) as in effect on the Closing Date. "Trade Payables" means, with respect to any Person, any accounts payable or any indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person arising in the ordinary course of business in connection with the acquisition of goods or services. "Trustee" means the party named as such in the Indenture until a successor replaces it and, thereafter, means the successor. "Trust Officer" means any officer within the corporate trust department of the Trustee, including any vice president, assistant vice president, assistant secretary, assistant treasurer, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such person's knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of the Indenture. "UnrestrictedSubsidiary" means: (1) any Subsidiary of the Parent that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (2) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Parent (including any newly acquired or newly formed Subsidiary of the Parent but excluding the Issuer) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any Lien on any property of, the Parent or any other Subsidiary of the Parent that is not a Subsidiary of the Subsidiary to be so designated; PROVIDED, HOWEVER, that either: (A) the Subsidiary to be so designated has total assets consolidated with those of its subsidiaries in accordance with GAAP consistently applied of $1,000 or less or (B) if such Subsidiary has assets consolidated with those of its subsidiaries in accordance with GAAP consistently applied greater than $1,000, then such designation would be permitted under the covenant entitled "Limitation on Restricted Payments." 129 The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED, HOWEVER, that immediately after giving effect to such designation: (x) the Parent could Incur $1.00 of additional Indebtedness under paragraph (a) of the covenant designated under "--Certain Covenants--Limitation on Indebtedness" and (y) no Default shall have occurred and be continuing. Any such designation of a Subsidiary as a Restricted Subsidiary or Unrestricted Subsidiary by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution of the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the Issuer's option. "Voting Stock" of a Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means a Restricted Subsidiary of the Parent all the Capital Stock of which (other than directors' qualifying shares) is owned by the Parent or another Wholly Owned Subsidiary. 130 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following is a summary of material United States federal income tax consequences of the exchange of outstanding notes for new notes pursuant to the exchange offer, but does not address any other aspects of United States federal income tax consequences to holders of outstanding notes or new notes. This summary is based on provisions of the Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury regulations promulgated thereunder (the "Treasury Regulations") and administrative and judicial interpretations thereof, all as of the date hereof and all of which are subject to change, possibly on a retroactive basis. This summary applies only to U.S. Holders (as defined below) that exchange outstanding notes for new notes in the exchange offer and who hold the outstanding notes as capital assets. It does not address the tax consequences to taxpayers who are subject to special rules (such as financial institutions, tax-exempt organizations and insurance companies). As used herein, the term "U.S. Holder" means a beneficial owner of a note that is, for U.S. federal income tax purposes, (a) a citizen or resident of the United States, (b) a corporation created or organized in the United States or under the laws of the United States or of any state of the United States, (c) an estate whose income is includable in gross income for U.S. federal income tax purposes regardless of its source or (d) a trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust and (ii) at least one U.S. person has authority to control all substantial decisions of the trust. PERSONS CONSIDERING THE EXCHANGE OF OUTSTANDING NOTES FOR NEW NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION. EXCHANGE OF AN OUTSTANDING NOTE FOR A NEW NOTE PURSUANT TO THE EXCHANGE OFFER The exchange by any holder of an outstanding note for a new note should not constitute a taxable exchange for United States federal income tax purposes. Consequently, no gain or loss should be recognized by holders that exchange outstanding notes for new notes pursuant to the exchange offer. For purposes of determining gain or loss upon the subsequent sale or exchange of new notes, a holder's tax basis in a new note should be the same as the holder's tax basis in the outstanding note exchanged therefor. Holders should be considered to have held the new notes from the time of their acquisition of the outstanding notes. 131 PLAN OF DISTRIBUTION Each broker-dealer that receives new notes 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 notes. 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 notes received in exchange for outstanding notes where such outstanding notes were acquired as a result of market-making activities or other trading activities. We have agreed that for a period of 180 days after the expiration date, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until , 2002, all dealers effecting transactions in the new notes may be required to deliver a prospectus. We will not receive any proceeds from any sales of the new notes by broker-dealers. New notes 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 notes 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 at 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 or the purchasers of any such new notes. Any broker-dealer that resells new notes 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 notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of new notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities 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 Securities Act. For a period of 180 days after the expiration date we 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. We have agreed to pay all expenses incident to the exchange offer (including the expenses of one counsel for the holders of the notes) other than commissions or concessions of any broker-dealers and will indemnify the holders of the notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The validity of the new notes will be passed upon for us by Sonnenschein Nath & Rosenthal, Kansas City, Missouri. EXPERTS The consolidated financial statements of Kansas City Southern Industries, Inc. and subsidiaries as of and for the year ended December 31, 2001, have been included in the prospectus in reliance upon the report of KPMG LLP, independent accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Kansas City Southern Industries, Inc. and subsidiaries as of December 31, 2000 and 1999 and for each of the two years in the period ended December 31, 2000 included in this prospectus have been so included in reliance on the report of PriceWaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of Grupo TFM, as of December 31, 2001 and 2000 and for each of the three years ended December 31, 2001, which are incorporated by reference in this prospectus have been audited by PricewaterhouseCoopers, S.C., independent accountants, as stated in their report incorporated by reference herein. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 132 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Audited Financial Statements: Reports of Independent Accountants................................................... F-2 Consolidated Statements of Income for the three years ended December 31, 2001........ F-4 Consolidated Balance Sheets at December 31, 1999, 2000 and 2001...................... F-5 Consolidated Statements of Cash Flows for the three years ended December 31, 2001.... F-6 Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 2001.................................................................. F-7 Notes to Consolidated Financial Statements........................................... F-8 Unaudited Financial Statements: Introductory Comments................................................................ F-51 Consolidated Condensed Balance Sheets- March 31, 2002 and December 31, 2001............................................... F-52 Consolidated Condensed Statements of Income- Three Months Ended March 31, 2002 and 2001......................................... F-53 Consolidated Condensed Statements of Cash Flows- Three Months Ended March 31, 2002 and 2001......................................... F-54 Consolidated Condensed Statement of Changes in Stockholders' Equity- Three Months Ended March 31, 2002.................................................. F-55 Notes to Consolidated Condensed Financial Statements................................. F-56
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Kansas City Southern Industries, Inc. We have audited the accompanying consolidated balance sheet of Kansas City Southern Industries, Inc. and subsidiaries as of December 31, 2001, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended. 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 audit. We did not audit the financial statements of Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. (Grupo TFM), a 36.9% owned investee company. The Company's investment in Grupo TFM at December 31, 2001 was $334.4 million and its equity in earnings of Grupo TFM was $28.5 million for the year 2001. The financial statements of Grupo TFM 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, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 audit and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audit and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kansas City Southern Industries, Inc. and subsidiaries as of December 31, 2001, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP KPMG LLP Kansas City, Missouri March 28, 2002 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Kansas City Southern Industries, Inc. In our opinion, the accompanying consolidated balance sheets as of December 31, 2000 and 1999 and the related consolidated statements of income, of changes in stockholders' equity and of cash flows for each of the two years in the period ended December 31, 2000 present fairly, in all material respects, the financial position of Kansas City Southern Industries, Inc. and its subsidiaries at December 31, 2000 and 1999 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Kansas City, Missouri March 22, 2001, except as to the adoption of Statement of Financial Accounting Standards No. 142 described in Note 16 which is as of January 1, 2002 F-3 KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31 DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
1999 2000 2001 ------- ------- ------- REVENUES.......................... $ 601.4 $ 572.2 $ 577.3 Costs and expenses Salaries, wages and benefits... 206.0 197.8 192.9 Depreciation and amortization.. 56.9 56.1 58.0 Purchased services............. 58.9 54.8 57.0 Operating leases............... 46.3 51.7 50.9 Fuel........................... 34.2 48.1 43.9 Casualties and insurance....... 30.8 34.9 42.1 Car hire....................... 22.4 14.8 19.8 Other.......................... 81.8 56.2 57.3 ------- ------- ------- Total costs and expenses.......... 537.3 514.4 521.9 ------- ------- ------- OPERATING INCOME.................. 64.1 57.8 55.4 Equity in net earnings (losses) of unconsolidated affiliates: Grupo TFM...................... 1.5 21.6 28.5 Other.......................... 3.7 2.2 (1.4) Interest expense.................. (57.4) (65.8) (52.8) Other, net........................ 5.3 6.0 4.2 ------- ------- ------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES... 17.2 21.8 33.9 Income tax provision (benefit) (Note 8)......................... 7.0 (3.6) 2.8 ------- ------- ------- INCOME FROM CONTINUING OPERATIONS. 10.2 25.4 31.1 Income from discontinued operations, (net of income taxes of $216.1, $233.3 and $0.0, respectively).............. 313.1 363.8 -- ------- ------- ------- INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE................ 323.3 389.2 31.1 Extraordinary item, net of income taxes Debt retirement costs--KCS..... -- (7.0) -- Debt retirement costs--Grupo TFM........................... -- (1.7) -- Cumulative effect of accounting change........................... -- -- (0.4) ------- ------- ------- NET INCOME........................ $ 323.3 $ 380.5 $ 30.7 ======= ======= ======= PER SHARE DATA (NOTE 2): Basic earnings per share: Continuing operations.......... $ 0.18 $ 0.44 $ 0.53 Discontinued operations........ 5.68 6.42 -- ------- ------- ------- Basic earnings per share before extraordinary item and cumulative effect of accounting change........................... 5.86 6.86 0.53 Extraordinary item............. -- (0.15) -- Cumulative effect of accounting change............. -- -- (0.01) ------- ------- ------- TOTAL........................ $ 5.86 $ 6.71 $ 0.52 ======= ======= ======= Diluted earnings per share: Continuing operations.......... $ 0.17 0.43 $ 0.51 Discontinued operations........ 5.40 6.14 -- ------- ------- ------- Diluted earnings per share before extraordinary item and cumulative effect of accounting change........................... 5.57 6.57 0.51 Extraordinary item............. -- (0.15) -- Cumulative effect of accounting change............. -- -- (0.01) ------- ------- ------- TOTAL........................ $ 5.57 $ 6.42 $ 0.50 ======= ======= ======= Weighted average common shares outstanding (IN THOUSANDS): Basic.......................... 55,142 56,650 58,598 Dilutive potential common shares........................ 1,883 1,740 2,386 ------- ------- ------- Diluted...................... 57,025 58,390 60,984 ======= ======= ======= Dividends per share Preferred...................... $ 1.00 $ 1.00 $ 1.00 Common......................... $ .32 $ -- --
See accompanying notes to consolidated financial statements. F-4 KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS AT DECEMBER 31 DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
1999 2000 2001 -------- -------- -------- ASSETS Current Assets: Cash and equivalents.................................. $ 11.9 $ 21.5 $ 24.7 Accounts receivable, net (Note 6)..................... 132.2 135.0 130.0 Inventories........................................... 40.5 34.0 27.9 Other current assets (Note 6)......................... 23.9 25.9 71.8 -------- -------- -------- Total current assets.................................. 208.5 216.4 254.4 Investments held for operating purposes (Notes 3, 5)..... 337.1 358.2 386.8 Properties, net (Note 6)................................. 1,277.4 1,327.8 1,327.4 Goodwill................................................. 20.5 19.9 19.3 Other Assets............................................. 13.9 22.2 23.0 Net Assets of Discontinued Operations (Note 3)........... 814.6 -- -- -------- -------- -------- Total assets.......................................... $2,672.0 $1,944.5 $2,010.9 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Debt due within one year (Note 7)..................... $ 10.9 $ 36.2 $ 46.7 Accounts and wages payable............................ 74.8 52.9 50.4 Accrued liabilities (Note 6).......................... 168.5 159.9 160.4 -------- -------- -------- Total current liabilities............................. 254.2 249.0 257.5 -------- -------- -------- Other Liabilities: Long-term debt (Note 7)............................... 750.0 638.4 611.7 Deferred income taxes (Note 8)........................ 297.4 332.2 370.2 Other deferred credits................................ 87.3 81.5 91.2 Commitments and contingencies (Notes 3, 7, 8, 11, 12). -------- -------- -------- Total other liabilities............................... 1,134.7 1,052.1 1,073.1 -------- -------- -------- Stockholders' Equity (Notes 2, 3, 4, 7, 9): $25 par, 4% noncumulative, Preferred stock............ 6.1 6.1 6.1 $.01 par, Common stock................................ 1.1 0.6 0.6 Retained earnings..................................... 1,167.0 636.7 676.5 Accumulated other comprehensive income (loss)......... 108.9 -- (2.9) -------- -------- -------- Total stockholders' equity............................ 1,283.1 643.4 680.3 -------- -------- -------- Total liabilities and stockholders' equity............ $2,672.0 $1,944.5 $2,010.9 ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31 DOLLARS IN MILLIONS
1999 2000 2001 ------- --------- ------ CASH FLOWS PROVIDED BY (USED FOR): OPERATING ACTIVITIES: Net income....................................................... $ 323.3 $ 380.5 $ 30.7 Adjustments to net income: Income from discontinued operations........................... (313.1) (363.8) -- Depreciation and amortization................................. 56.9 56.1 58.0 Deferred income taxes......................................... 9.8 23.1 30.4 Equity in undistributed earnings of unconsolidated affiliates. (5.2) (23.8) (27.1) Distributions from unconsolidated affiliates.................. -- 5.0 3.0 Transfer from Stilwell Financial Inc.......................... 56.6 -- -- Gain on sale of assets........................................ (0.6) (3.4) (5.8) Tax benefit associated with exercised stock options.............. 6.4 9.3 5.6 Extraordinary item, net of tax................................... -- 7.5 -- Changes in working capital items: Accounts receivable........................................... (0.4) (2.8) 4.0 Inventories................................................... 6.5 6.5 6.1 Other current assets.......................................... (2.1) 4.2 (19.3) Accounts and wages payable.................................... 4.5 (15.7) (5.1) Accrued liabilities........................................... 41.2 (6.5) (19.0) Other, net....................................................... (5.8) 1.0 14.6 ------- --------- ------ Net........................................................... 178.0 77.2 76.1 ------- --------- ------ INVESTING ACTIVITIES: Property acquisitions............................................ (106.2) (104.5) (66.0) Proceeds from disposal of property............................... 2.8 5.5 18.1 Investments in and loans to affiliates........................... 12.7 (4.2) (8.2) Other, net....................................................... (6.5) 1.4 0.4 ------- --------- ------ Net........................................................... (97.2) (101.8) (55.7) ------- --------- ------ FINANCING ACTIVITIES: Proceeds from issuance of long-term debt......................... 21.8 1,052.0 35.0 Repayment of long-term debt...................................... (97.5) (1,015.4) (51.3) Debt issue costs................................................. (4.2) (17.6) (0.4) Proceeds from stock plans........................................ 37.0 17.9 8.9 Stock repurchased................................................ (24.6) -- -- Cash dividends paid.............................................. (17.6) (4.8) (0.2) Other, net....................................................... 10.6 2.1 (9.2) ------- --------- ------ Net........................................................... (74.5) 34.2 (17.2) ------- --------- ------ CASH AND EQUIVALENTS: Net increase..................................................... 6.3 9.6 3.2 At beginning of year............................................. 5.6 11.9 21.5 ------- --------- ------ At end of year (Note 4).......................................... $ 11.9 $ 21.5 $ 24.7 ======= ========= ======
See accompanying notes to consolidated financial statements. F-6 KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
ACCUMULATED $25 PAR $.01 PAR OTHER PREFERRED COMMON RETAINED COMPREHENSIVE STOCK STOCK EARNINGS INCOME (LOSS) TOTAL --------- -------- -------- ------------- --------- BALANCE AT DECEMBER 31, 1998..................... $6.1 $ 1.1 $ 849.1 $ 74.9 $ 931.2 Comprehensive income: Net income.................................... 323.3 Net unrealized gain on investments............ 39.3 Less: Reclassification adjustment for gains included in net income............ (4.4) Foreign currency translation adjustment....... (0.9) Comprehensive income............................. 357.3 Dividends........................................ (17.9) (17.9) Stock repurchased................................ (24.6) (24.6) Options exercised and stock subscribed........... 37.1 37.1 ---- ----- -------- ------- --------- BALANCE AT DECEMBER 31, 1999..................... 6.1 1.1 1,167.0 108.9 1,283.1 Comprehensive income: Net income.................................... 380.5 Net unrealized gain on investments............ 5.9 Less: Reclassification adjustment for gains included in net income............ (1.1) Foreign currency translation adjustment....... (2.6) Comprehensive income............................. 382.7 Spin-off of Stillwell Financial Inc.............. (954.1) (111.1) (1,065.2) 1-for-2 reverse stock split...................... (0.5) 0.5 Dividends........................................ (0.2) (0.2) Stock plan shares issued from treasury........... 6.3 6.3 Options exercised and stock subscribed........... 36.7 36.7 ---- ----- -------- ------- --------- BALANCE AT DECEMBER 31, 2000..................... 6.1 0.6 636.7 -- 643.4 Comprehensive income: Net income.................................... 30.7 Cumulative effect of accounting change........ (0.9) Change in fair market value of cash flow hedge of unconsolidated affiliate........... (2.0) Comprehensive income............................. 27.8 Dividends........................................ (0.2) (0.2) Options exercised and stock subscribed........... 9.3 9.3 ---- ----- -------- ------- --------- BALANCE AT DECEMBER 31, 2001..................... $6.1 $ 0.6 $ 676.5 $ (2.9) $ 680.3 ==== ===== ======== ======= =========
See accompanying notes to consolidated financial statements. F-7 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. DESCRIPTION OF THE BUSINESS Kansas City Southern Industries, Inc. (''Company'' or ''KCS''), a Delaware Corporation organized in 1962, is a holding company with principal operations in rail transportation. On July 12, 2000 KCS completed its spin-off of Stilwell Financial Inc. (''Stilwell''--a former wholly-owned financial services subsidiary) through a special dividend of Stilwell common stock distributed to KCS common stockholders of record on June 28, 2000 ("Spin-off"). See Note 3. KCS's principal subsidiaries and affiliates, which following the Spin-off, are reported under one business segment, include the following: . The Kansas City Southern Railway Company ("KCSR"), a wholly-owned subsidiary of KCS; . Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), a 36.9% owned unconsolidated affiliate of KCSR. Grupo TFM owns 80% of the common stock of TFM, S.A. de C.V. ("TFM"); . Mexrail, Inc. ("Mexrail"), a 49% owned unconsolidated affiliate of KCSR. Mexrail wholly owns The Texas-Mexican Railway Company ("Tex-Mex"); . Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned unconsolidated affiliate of KCSR that leases locomotive and rail equipment primarily to KCSR; . Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of which KCSR indirectly owns 50% of the common stock. PCRC wholly-owns Panarail Tourism Company ("Panarail"). KCS, along with its principal subsidiaries and joint ventures, owns and operates a rail network that links key commercial and industrial markets in the United States and Mexico. KCS also has a strategic alliance with the Canadian National Railway Company (''CN'') and Illinois Central Corporation (''IC'') (collectively ''CN/IC'') and other marketing agreements, which provide the ability for KCS to expand its geographic reach. KCS's rail network connects shippers in the midwestern and eastern regions of the United States, including shippers utilizing Chicago, Illinois and Kansas City, Missouri--the two largest rail centers in the United States--with the largest industrial centers of Canada and Mexico, including Toronto, Edmonton, Mexico City and Monterrey. KCS's rail system, through its core network, strategic alliances and marketing agreements, interconnects with all Class I railroads in North America. KCSR, which owns and operates one of eight Class I railroad systems in the United States, is comprised of approximately 3,100 miles of main and branch lines and approximately 1,340 miles of other tracks in a ten-state region that includes Missouri, Kansas, Arkansas, Oklahoma, Mississippi, Alabama, Tennessee, Louisiana, Texas and Illinois. KCSR, which traces its origins to 1887, offers the shortest north/south rail route between Kansas City and several key ports along the Gulf of Mexico in Louisiana, Mississippi and Texas. Additionally, KCSR, in conjunction with the Norfolk Southern Corporation (''Norfolk Southern''), operates the most direct rail route (referred to as the ''Meridian Speedway''), between the Atlanta, Georgia and Dallas, Texas rail gateways, for rail traffic moving between the southeast and southwest regions of the United States. The ''Meridian Speedway'' also provides eastern shippers and other U.S. and Canadian railroads with an efficient connection to Mexican markets. KCSR's rail route also serves the east/west route linking Kansas City with East St. Louis and Springfield, Illinois. Further, KCSR has limited haulage rights between Springfield and Chicago that allow for shipments that originate or terminate on the former Gateway Western's rail lines. These lines also provide access to East St. Louis and allows rail traffic to avoid the more congested and costly St. Louis, Missouri terminal. KCSR's geographic reach enables service to a customer base that includes, among others, electric generating utilities, which use coal, and a wide range of companies in the chemical and petroleum, agricultural and mineral, paper and forest, and automotive and intermodal markets. Southwestern Electric Power Company ("SWEPCO"), which is a subsidiary of American Electric Power, Inc. (''AEP''), is KCS's only customer which accounted for more than 10% of revenues during the years ended F-8 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, 2000 and 2001, respectively. Revenues related to SWEPCO during these periods were $75.9, $67.2, and $75.9 million, respectively. KCS's rail network links directly to major trading centers in Mexico, through our unconsolidated affiliates TFM and Tex-Mex. KCS owns a 36.9% interest in Grupo TFM, which owns 80% of TFM. TFM operates a railroad of approximately 2,650 miles of main and branch lines running from the U.S./Mexican border at Laredo, Texas to Mexico City and serves most of Mexico's principal industrial cities and three of its four major shipping ports. Our principal international gateway is at Laredo where more than 50% of all rail and truck traffic between the United States and Mexico crosses the border. KCS also owns a 49% interest in Mexrail, which owns Tex-Mex. Tex-Mex operates approximately 160 miles of main and branch lines between Laredo and the port city of Corpus Christi, Texas. In addition, Mexrail owns the northern half of the rail-bridge at Laredo, which spans the Rio Grande River into Mexico. TFM owns and operates the southern half of the bridge. See Note 15 for discussion of subsequent events with respect to Grupo TFM and Mexrail. NOTE 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. Use of the term "Company" as described in these Notes to Consolidated Financial Statements means Kansas City Southern Industries, Inc. and all of its consolidated subsidiaries and unconsolidated affiliates. Significant accounting and reporting policies are described below. Certain prior year amounts have been reclassified to conform to the current year presentation. As a result of the Spin-off, the accompanying consolidated financial statements for each of the applicable periods presented reflect the financial position, results of operations and cash flows of Stilwell as discontinued operations. USE OF ESTIMATES. The accounting and financial reporting policies of KCS conform with accounting principles generally accepted in the United States of America ("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, income taxes and postretirement benefits. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements are presented using the accrual basis of accounting and include KCS and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The equity method of accounting is used for all entities in which KCS or its subsidiaries have significant influence, but not more than 50% voting interest; the cost method of accounting is generally used for investments of less than 20% voting interest. REVENUE RECOGNITION. KCS recognizes freight revenue based upon the percentage of completion of a commodity movement. 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 generally three months or less are considered cash equivalents. F-9 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INVENTORIES. Materials and supplies inventories are valued at the lower of average cost or market. PROPERTIES AND DEPRECIATION. Properties are stated at cost. Additions and renewals, including those on leased assets that increase the life of the asset or utility and constitute a unit of property are capitalized and all properties are depreciated over the estimated remaining life or leased life of such assets, whichever is shorter. Ordinary maintenance and repairs are charged to expense as incurred. 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, are eliminated from the property accounts and the related gains or losses are reflected in net income. Gains or losses recognized on the sale or disposal of operating properties that were reflected in operating income were ($5.0), $3.4 and $5.8 million in 1999, 2000 and 2001, respectively. Gains or losses recognized on the sale of non-operating properties reflected in other, net were not significant in 1999, 2000 and 2001, respectively. Depreciation is computed using composite straight-line rates for financial statement purposes. The Surface Transportation Board ("STB") approves the depreciation rates used by KCSR. KCSR evaluates depreciation rates for properties and equipment and implements approved rates. Periodic revisions of rates have not had a material effect on operating results. Depreciation for other consolidated subsidiaries is computed based on the asset value in excess of estimated salvage value using the straight-line method over the estimated useful lives of the assets. Accelerated depreciation is used for income tax purposes. The ranges of annual depreciation rates for financial statement purposes are: Road and structures........ 1% - 20% Rolling stock and equipment 1% - 24% Other equipment............ 1% - 33% Capitalized leases......... 3% - 20%
LONG-LIVED ASSETS. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (''SFAS 121''), KCS periodically evaluates the recoverability of its operating properties. 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 of the assets on a discounted basis. See "New Accounting Pronouncements" below. INTANGIBLES. Intangibles principally represent the excess of cost over the fair value of net underlying assets of acquired companies using purchase accounting and are amortized using the straight-line method (principally over 40 years). On a periodic basis, KCS reviews the recoverability of goodwill and other intangibles by comparing the related carrying value to its fair value. See "New Accounting Pronouncements" below. CASUALTY CLAIMS. Casualty claims in excess of self-insurance levels are insured up to certain coverage amounts, depending on the type of claim. KCS's process for establishing its liability reserves is based on an actuarial study by an independent third party actuary. It 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 adequate to provide for the payment of future claims. Adjustments to the liability will be reflected as operating expenses in the period in which the adjustments are known. COMPUTER SOFTWARE COSTS. Costs incurred in conjunction with the purchase or development of computer software for internal use are accounted for in accordance with American Institute of Certified Public F-10 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Accountant's Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which was adopted by KCS in 1998. 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 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. As of December 31, 2001, approximately $55 million has been capitalized (including approximately $4.2 million of interest costs capitalized in 2001) for a management control system ("MCS"), which is expected to be implemented in mid-2002. DERIVATIVE FINANCIAL INSTRUMENTS. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ''Accounting for Derivative Instruments and Hedging Activities'' (''SFAS 133''). SFAS 133 was amended by Statement of Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133 and Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS 133." SFAS 133 requires that derivatives be recorded on the balance 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 the type of hedge transaction. For fair value hedge transactions (changes in the fair value of an asset, liability or an unrecognized firm commitment are hedged), changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cash flow hedge transactions (the variability of cash flows related to a variable rate asset, liability or a forecasted transaction are hedged), changes in the fair value of the derivative instrument will be reported in other comprehensive income to the extent it offsets changes in cash flows related to the variable rate asset, liability or forecasted transaction, with the difference reported in current earnings. Gains and losses on the derivative instrument reported in other comprehensive income will be 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 will be recognized in current period earnings. KCS does not engage in the trading of derivatives. KCS's objective is to manage its interest rate risk through the use of derivative instruments in accordance with the provisions of its senior secured credit facilities. At December 31, 2001, KCS had five separate interest rate cap agreements for an aggregate notional amount of $200 million, which were designated as cash flow hedges. These interest rate cap agreements were designed to hedge KCS's exposure to movements in the London Interbank Offered Rate ("LIBOR") on which KCS's variable rate interest is calculated. $100 million of the aggregate notional amount provided a cap on KCS's LIBOR based interest rate of 7.25% plus the applicable spread, while $100 million limited the LIBOR based interest rate to 7% plus the applicable spread. By holding these interest rate cap agreements, KCS has been able to limit the risk of rising interest rates on its variable rate debt. Three of these interest rate cap agreements expired on February 10, 2002 and the remaining two expired on March 10, 2002. As of December 31, 2001, KCS did not have any other interest rate cap agreements or interest rate hedging instruments. KCS adopted the provisions of SFAS 133 effective January 1, 2001. As a result of this change in the method of accounting for derivative financial instruments, KCS recorded an after-tax charge to earnings of $0.4 million in the first quarter of 2001. This charge is presented as a cumulative effect of an accounting change in the accompanying financial statements and represents the ineffective portion of the interest rate cap agreements. KCS recorded an additional $0.4 million charge during the year ended December 31, 2001 for subsequent changes in the fair value of its interest rate hedging instruments. As of December 31, 2001, the interest rate cap asset had a fair value of less than $0.1 million. F-11 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In addition, as of December 31, 2001 KCS recorded a reduction to its stockholders' equity (accumulated other comprehensive loss) of approximately $2.9 million for its portion of the amount recorded by Southern Capital for the adjustment to the fair value of its interest rate swap transactions. KCS also reduced its investment in Southern Capital by the same amount. FAIR VALUE OF FINANCIAL INSTRUMENTS. Statement of Financial Accounting Standards No. 107 "Disclosures About Fair Value of Financial Instruments" ("SFAS 107") requires an entity to disclose the fair value of its financial instruments. KCS's financial instruments include cash and cash equivalents, accounts receivable, lease and contract receivables, accounts payable and long-term debt. In accordance with SFAS 107, lease financing and contracts that are accounted for under Statement of Financial Accounting Standards No. 13 "Accounting for Leases," are excluded from fair value presentation. The carrying value of KCS's cash equivalents approximate their fair values 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. KCS approximates 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 KCS and its subsidiaries for indebtedness with similar terms and average maturities, the fair value of long-term debt was approximately $766, $685, and $681 million at December 31, 1999, 2000 and 2001, respectively. 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. The income statement effect is generally derived from changes in deferred income taxes on the balance sheet. Grupo TFM provides deferred income taxes for the difference between the financial reporting and income tax bases of its assets and liabilities. KCS records its proportionate share of these income taxes through our equity in Grupo TFM's earnings. As of December 31, 2001, KCS had not provided deferred income taxes for the temporary difference between the financial reporting basis and income tax basis of its investment in Grupo TFM because Grupo TFM is a foreign corporate joint venture that is considered permanent in duration, and KCS does not expect the reversal of the temporary difference to occur in the foreseeable future. CHANGES OF INTEREST IN SUBSIDIARIES AND EQUITY INVESTEES. A change of KCS's interest in a subsidiary or equity investee resulting from the sale of the subsidiary's or equity investee's stock is generally recorded as a gain or loss in KCS's net income in the period that the change of interest occurs. If an issuance of stock by the subsidiary or affiliate is from treasury shares on which gains have been previously recognized, however, KCS will record the gain directly to its equity and not include the gain in net income. A change of interest in a subsidiary or equity investee resulting from a subsidiary's or equity investee's purchase of its stock increases KCS's ownership percentage of the subsidiary or equity investee. KCS records this type of transaction under the purchase method of accounting, whereby any excess of fair market value over the net tangible and identifiable intangible assets is recorded as goodwill. TREASURY STOCK. The excess of par over cost of the Preferred shares held in Treasury is credited to capital surplus. Common shares held in Treasury are accounted for as if they were retired and the excess of cost over par value of such shares is charged to capital surplus, if available, then to retained earnings. STOCK PLANS. Proceeds received from the exercise of stock options or subscriptions are credited to the appropriate capital accounts in the year they are exercised. F-12 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The FASB issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") in October 1995. This statement allows companies to continue under the approach set forth in Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"), for recognizing stock-based compensation expense in the financial statements, but encourages companies to adopt the fair value method of accounting for employee stock options. KCS has elected to retain its accounting approach under APB 25, and has presented the applicable pro forma disclosures in Note 9 to the consolidated financial statements pursuant to the requirements of SFAS 123. All shares held in the Employee Stock Ownership Plan ("ESOP") are treated as outstanding for purposes of computing KCS's earnings per share. See additional information on the ESOP in Note 10. EARNINGS PER SHARE. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed giving effect to all dilutive potential common shares that were outstanding during the period (i.e., the denominator used in the basic calculation is increased to include the number of additional common shares that would have been outstanding if the dilutive potential shares had been issued). The effect of stock options issued to employees represent the only difference between the weighted average shares used for the basic earnings per share computation compared to the diluted earnings per share computation. The following is a reconciliation from the weighted average shares used for the basic earnings per share computation and the diluted earnings per share computation for the years ended December 31, 1999, 2000 and 2001, respectively (in thousands):
1999 2000 2001 ------ ------ ------ Basic shares...................... 55,142 56,650 58,598 Effect of Dilution: Stock Options.................. 1,883 1,740 2,386 ------ ------ ------ Diluted Shares.................... 57,025 58,390 60,984 ====== ====== ====== Excluded from Diluted Computation* 44 18 97 ------ ------ ------
* Excluded from the applicable periods diluted earnings per share computation because the exercise prices were greater than the average market price of the common shares. The only adjustments that currently affect the numerator of KCS's diluted earnings per share computation include preferred dividends and potentially dilutive securities at certain subsidiaries and affiliates. Adjustments related to potentially dilutive securities totaled $4.8 and $5.4 million for the years ended December 31, 1999 and 2000, respectively. These adjustments relate to securities at certain Stilwell subsidiaries and affiliates and affect the diluted earnings per share from discontinued operations computation in the applicable periods presented. Preferred dividends are the only adjustments that affect the numerator of the diluted earnings per share from continuing operations computation. Adjustments related to preferred dividends were not material for the periods presented. STOCKHOLDERS' EQUITY. Information regarding KCS's capital stock at December 31, 1999, 2000 and 2001 follows:
SHARES SHARES AUTHORIZED ISSUED ----------- ---------- $25 Par, 4% noncumulative, Preferred stock... 840,000 649,736 $1 Par, Preferred stock...................... 2,000,000 None $1 Par, Series A, Preferred stock............ 150,000 None $1 Par, Series B convertible, Preferred stock 1,000,000 None $.01 Par, Common stock....................... 400,000,000 73,369,116
F-13 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) KCS's stockholders approved a one-for-two reverse stock split at a special stockholders' meeting held on July 15, 1998. On July 12, 2000, KCS completed the reverse stock split whereby every two shares of KCS common stock were converted into one share of KCS common stock. All share and per share data reflect this split. Shares outstanding are as follows at December 31, (IN THOUSANDS):
1999 2000 2001 ------ ------ ------ $25 Par, 4% noncumulative, Preferred stock 242 242 242 $.01 Par, Common stock.................... 55,287 58,140 59,243
COMPREHENSIVE INCOME. In 2001, KCS's other comprehensive income (loss) consists of its proportionate share of the amount recorded by Southern Capital for the adjustment to the fair value of its interest rate swap transactions. In 1999 and 2000, KCS's other comprehensive income consists primarily of its proportionate share of unrealized gains and losses relating to investments held by certain subsidiaries and affiliates of Stilwell (discontinued operations) as "available for sale" securities as defined by Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). KCS recorded its proportionate share of any unrealized gains or losses related to these investments, net of deferred income taxes, in stockholders' equity as accumulated other comprehensive income. The unrealized gain related to these investments increased $39.3 million and $5.9 million, net of deferred taxes, for the years ended December 31, 1999 and 2000, respectively. Subsequent to the Spin-off KCS does not expect to hold investments that are accounted for as "available for sale" securities. POSTRETIREMENT BENEFITS. KCS provides certain medical, life and other postretirement benefits to certain retirees. The costs of such benefits are expensed over the estimated period of employment. ENVIRONMENTAL LIABILITIES. KCS records liabilities for remediation and restoration costs related to past activities when KCS's obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance activities to current operations are expensed as incurred. As of December 31, 1999, 2000 and 2001, liabilities for environmental remediation were not material. NEW ACCOUNTING PRONOUNCEMENTS. In July 2001, the FASB issued Statement No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 is effective for any business combination initiated after June 30, 2001 and requires purchase method accounting. Under SFAS 142, goodwill with an indefinite life will no longer be amortized; however, both goodwill and other intangible assets will be subject to annual impairment testing. SFAS 142 is effective for fiscal years beginning after December 31, 2001. In June 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 is effective for fiscal years beginning after June 15, 2002. Under SFAS 143, the fair value of a liability for an asset retirement obligation must be recognized in the period in which it is incurred if a reasonable estimate of the fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. In October 2001, the FASB issued Statement No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). Under SFAS 144, an impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows. The impairment loss is equal to the difference between the carrying amount and fair value of the asset. NOTE 3. ACQUISITIONS AND DISPOSITIONS SPIN-OFF OF STILWELL. On July 12, 2000, KCS completed the Spin-off, which was approved by KCS's Board of Directors on June 14, 2000. Each KCS stockholder received two shares of the common stock of Stilwell F-14 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) for every one share of KCS common stock owned on the record date. The total number of Stilwell shares distributed was 222,999,786. Under tax rulings received from the Internal Revenue Service ("IRS"), the Spin-off qualifies as a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended. Also on July 12, 2000, KCS completed a reverse stock split whereby every two shares of KCS common stock were converted into one share of KCS common stock. KCS's stockholders approved a one-for-two reverse stock split in 1998 in contemplation of the Spin-off. The total number of KCS shares outstanding immediately following this reverse split was 55,749,947. In preparation for the Spin-off, KCS re-capitalized its debt structure on January 11, 2000 as described in Note 7. As a result of the Spin-off, the accompanying consolidated financial statements for the year ended December 31, 2000 reflect the results of operations and cash flows of Stilwell as discontinued operations through the date of the Spin-off (July 12, 2000). Effective with the Spin-off, the net assets of Stilwell were removed from the consolidated balance sheet. The accompanying consolidated financial statements as of December 31, 1999 and for the year ended December 31, 1999 reflect the financial position, results of operations and cash flows of Stilwell as discontinued operations. Prior to the Spin-off, KCS and Stilwell entered into various agreements for the purpose of governing certain of the limited ongoing relationships between KCS and Stilwell during a transitional period following the Spin-off, including an intercompany agreement, a contribution agreement and a tax disaffiliation agreement. Summarized financial information of the discontinued Stilwell businesses is as follows (IN MILLIONS):
DECEMBER 31, 1999 ------------ Current assets............................... $ 525.0 Total assets................................. 1,231.5 Current liabilities.......................... 162.5 Total liabilities............................ 359.6 Minority interest............................ 57.3 Net assets of discontinued operations........ 814.6
YEAR ENDED 1/1/00- 12/31/1999 7/12/00 ---------- -------- Revenues.................................................... $1,212.3 $1,187.9 Operating expenses.......................................... 694.0 646.2 -------- -------- Operating income............................................ 518.3 541.7 Equity in earnings of unconsolidated affiliates............. 46.7 37.0 Reduction in ownership of DST............................... -- -- Gain on litigation settlement............................... -- 44.2 Gain on sale of Janus common stock.......................... -- 15.1 Interest expense and other, net............................. 21.5 18.6 -------- -------- Pretax income............................................... 586.5 656.6 Income tax provision........................................ 216.1 233.3 Minority interest in consolidated earnings.................. 57.3 59.5 -------- -------- Income from discontinued operations, net of income taxes.... $ 313.1 $ 363.8 ======== ========
F-15 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THE FOLLOWING DISCUSSES CERTAIN AGREEMENTS BETWEEN KCS AND CERTAIN JANUS STOCKHOLDERS. SUBSEQUENT TO THE SPIN-OFF, THESE AGREEMENTS AND RELATED PROVISIONS APPLY TO STILWELL THROUGH ASSIGNMENT OR THROUGH THE AGREEMENT OF STILWELL TO MEET KCS'S OBLIGATIONS UNDER THE AGREEMENTS. A stock purchase agreement with Thomas H. Bailey, the Chairman, President and Chief Executive Officer of Janus Capital Corporation ("Janus"), and another Janus stockholder (the "Janus Stock Purchase Agreement") and certain restriction agreements with other Janus minority stockholders contain, among other provisions, mandatory put rights. The Janus Stock Purchase Agreement, and certain stock purchase agreements and restriction agreements with other minority stockholders also contain provisions whereby upon the occurrence of a Change in Ownership of KCS or Stilwell, as applicable (as defined in such agreements), Stilwell may be required to purchase such holders' Janus stock. The fair market value price for the purchase or sale under the mandatory put rights or the Change in Ownership provisions would be equal to fifteen times the net after-tax earnings of Janus over the period indicated in the relevant agreement or in some circumstances as determined by Janus' Stock Option Committee or as determined by an independent appraisal. The Janus Stock Purchase Agreement has been assigned to Stilwell and Stilwell has assumed and agreed to discharge KCS's obligations under that agreement; however, KCS is obligated as a guarantor of Stilwell's obligations under that agreement. With respect to other restriction agreements not assigned to Stilwell, Stilwell has agreed to perform all of KCS's obligations under these agreements and KCS has agreed to transfer all of its benefits and assets under these agreements to Stilwell. In addition, Stilwell has agreed to indemnify KCS for any and all losses incurred with respect to the Janus Stock Purchase Agreement and all other Janus minority stockholder agreements. In certain 2001 SEC filings, Stilwell disclosed that in March and April 2001, Stilwell acquired 202,042 shares of Janus common stock from several minority stockholders of Janus exercising their put rights under certain of the agreements discussed above. On September 4, 2001, Janus purchased from employees (other than Mr. Bailey) approximately 139,000 shares of Janus common stock. On May 1, 2001, Stilwell announced that it completed the purchase of 600,000 shares of Janus common stock from Mr. Bailey under the terms and conditions of the Janus Stock Purchase Agreement. Additionally, on November 9, 2001, Stilwell announced that it had completed the purchase of an additional 609,950 shares of Janus common stock owned by Mr. Bailey and one other minority stockholder through the exercise of put rights for a price of approximately $613 million. Upon the completion of the purchase of 609,950 shares on November 9, 2001, KCS was relieved of its obligations to make any payments under the mandatory put rights. There remain, however, potential obligations under the Change in Ownership provisions under certain share restriction agreements. KCS believes, based on discussions with Stilwell management and as previously demonstrated by Stilwell, that Stilwell has adequate financial resources available to fund any obligation under the Change in Ownership provisions described above. However, if Stilwell were somehow unable to meet its obligations with respect to these agreements, KCS would be obligated to make the payments under these agreements. At December 31, 2001, KCS could have been ultimately responsible for approximately $63.6 million under the Change in Ownership provisions in the event Stilwell was unable to meet its obligations. NOTE 4. SUPPLEMENTAL CASH FLOW DISCLOSURES Supplemental Disclosures of Cash Flow Information.
1999 2000 2001 ------ ------ ------ Cash payments (refunds) (in millions): Interest (includes $1.5, $0.7 and $0.0 million, respectively, related to Stilwell).............................................................. $ 64.2 $ 72.4 $ 49.1 Income taxes (includes $142.9, $195.9 and $0.0 million, respectively, related to Stilwell)................................................... $143.3 $143.1 $(25.0)
F-16 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NON-CASH INVESTING AND FINANCING ACTIVITIES. KCS initiated the Twelfth Offering of KCS common stock under the Employee Stock Purchase Plan ("ESPP") during 2000. Stock subscribed under the Twelfth Offering was issued to employees in January 2002 and was paid for through employee payroll deductions in 2001. KCS received approximately $4.5 million from payroll deductions associated with this offering of the ESPP. KCS did not initiate an offering of KCS common stock under the ESPP during 1999. In connection with the Eleventh Offering of the ESPP (initiated in 1998), in 1999 KCS received approximately $6.3 million from employee payroll deductions for the purchase of KCS common stock. This stock was issued to employees in January 2000. In conjunction with the January 2000 refinancing of KCS's debt structure, KCS borrowed $125 million under a $200 million 364-day senior unsecured competitive advance/revolving credit facilities to retire debt obligations. Stilwell assumed this credit facilities and repaid the $125 million in March 2000. Upon such assumption, KCS was released from all obligations, and Stilwell became the sole obligor, under this credit facilities. KCS's indebtedness decreased as a result of the assumption of this indebtedness by Stilwell. During 1999, KCS's Board of Directors declared a quarterly dividend totaling approximately $4.6 million payable in January of 2000. The dividend declaration reduced retained earnings and established a liability at the end of 1999. No cash outlay occurred until 2000. During the first quarter of 2000, KCS's Board of Directors suspended common stock dividends of KCS in conjunction with the terms of the KCS credit facilities discussed above. It is not anticipated that KCS will make any cash dividend payments to its common stockholders for the foreseeable future. In 1999, 2000 and 2001, KCS capitalized approximately $4, $9 and $4 million, respectively, of costs related to capital projects for which no cash outlay had yet occurred. These costs were included in accounts payable and accrued liabilities at December 31, 1999, 2000 and 2001, respectively. NOTE 5. INVESTMENTS See Note 15 for discussion of subsequent events with respect to Grupo TFM and Mexrail. Investments, including investments in unconsolidated affiliates, are as follows (IN MILLIONS):
PERCENTAGE OWNERSHIP DECEMBER 31, COMPANY NAME 2001 CARRYING VALUE - ------------ ------------ -------------------- 1999 2000 2001 - - ------ ------ ------ Grupo TFM............................... 36.9% $286.5 $306.0 $334.4 Southern Capital........................ 50% 28.1 24.6 23.2 Mexrail................................. 49% 13.7 13.3 11.7 PCRC.................................... 50%* 4.5 9.9 11.0 Other................................... 4.3 4.4 6.5 ------ ------ ------ Total................................ $337.1 $358.2 $386.8 ====== ====== ======
* KCS owns 50% of the outstanding voting common stock of PCRC. GRUPO TFM. In June 1996, KCS and Transportacion Maritima Mexicana, S.A. de C.V. (Grupo "TMM" --now Grupo TMM--see below) formed Grupo TFM to participate in the privatization of the Mexican railroad system. In December 1996, the Mexican government awarded Grupo TFM the right to acquire an 80% interest F-17 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (representing 100% of the unrestricted voting rights) in TFM for approximately 11.072 billion Mexican pesos (approximately $1.4 billion based on the U.S. dollar/Mexican peso exchange rate on the award date). TFM holds a 50-year concession (with the option of a 50-year extension subject to certain conditions) to operate approximately 2,650 miles of track which directly link Mexico City and Monterrey (as well as Guadalajara through trackage rights) with the ports of Lazaro Cardenas, Veracruz and Tampico and the Mexican/United States border crossings of Nuevo Laredo-Laredo, Texas and Matamoros-Brownsville, Texas. TFM's route network provides the shortest connection to the major industrial and population areas of Mexico from midwestern and eastern points in the United States. TFM interchanges traffic with Tex-Mex and the Union Pacific Railroad ("UP") at Laredo, Texas. During December 2001, KCS's partner in Grupo TFM and Mexrail, Grupo TMM announced that its largest shareholder, Grupo TMM S.A. de C.V. ("Grupo TMM"), filed a registration statement on Form F-4 with the Securities and Exchange Commission ("SEC"), which was declared effective December 13, 2001, to register securities that would be issued in the proposed merger of Grupo TMM with Grupo TMM (formerly Grupo Servia, S.A. de C.V. (''Grupo Servia'')). The surviving entity in the merger is known as Grupo TMM. On January 31, 1997, Grupo TFM paid the first installment of the purchase price (approximately $565 million based on the U.S. dollar/Mexican peso exchange rate) to the Mexican government, representing approximately 40% of the purchase price. Grupo TFM funded the initial installment of the TFM purchase price through capital contributions from Grupo TMM and KCS. KCS contributed approximately $298 million to Grupo TFM, of which approximately $277 million was used by Grupo TFM as part of the initial installment payment. KCS financed this contribution using borrowings under then-existing lines of credit. On June 23, 1997, Grupo TFM completed the purchase of 80% of TFM through the payment of the remaining $835 million to the Mexican government. This payment was funded by Grupo TFM using a significant portion of the funds obtained from: (i) senior secured term credit facilities ($325 million); (ii) senior notes and senior discount debentures ($400 million); (iii) proceeds from the sale of 24.6% of Grupo TFM to the Mexican government (approximately $199 million based on the U.S. dollar/Mexican peso exchange rate on June 23, 1997); and (iv) additional capital contributions from Grupo TMM and KCS (approximately $1.4 million from each partner). Additionally, Grupo TFM entered into a $150 million revolving credit facilities for general working capital purposes. The Mexican government's interest in Grupo TFM is in the form of limited voting right shares. KCS and Grupo TMM have a call option for the Mexican government's 24.6% interest in Grupo TFM which is exercisable on or prior to July 31, 2002 at the original amount (in U.S. dollars) paid by the Mexican government plus interest based on one-year U.S. Treasury securities (see below). In addition, after the expiration of that call option, KCS and Grupo TMM have a right of first refusal to purchase the Mexican government's interest in Grupo TFM if the Mexican government wishes to sell that interest to a third party which is not a Mexican governmental entity. On or before July 31, 2002, it is the intention of KCS, along with Grupo TMM, to exercise their call option with respect to the purchase of the 24.6% interest in Grupo TFM currently owned by the Mexican government. The purchase price will be calculated by accreting the Mexican government's initial investment of approximately $199 million from the date of the Mexican government's investment through the date of the purchase, using the interest rate on one-year U.S. Treasury securities. Various financing alternatives are currently being explored. One source of financing could include the use of approximately $81 million due to TFM from the Mexican government as a result of the reversion, during the first quarter of 2001, of a portion of the Concession to the Mexican government by TFM that covers the Hercules-Mariscala rail line, an approximate 18-mile portion of redundant track in the vicinity of the city of Queretaro. TFM recorded income of approximately $54 million F-18 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (under U.S. GAAP) in connection with the reversion. The remainder of the financing required to purchase the Mexican government's Grupo TFM shares is expected to be raised either at TFM or by KCS and Grupo TMM, respectively. This transaction has been delayed pending improved market conditions and is expected to be completed when markets become more favorable, but on or prior to July 31, 2002. However, there can be no assurances that KCS and Grupo TMM will be able to complete this transaction prior to the expiration of the call option on July 31, 2002. On or prior to October 31, 2003 the Mexican government may sell its 20% interest in TFM through a public offering (with the consent of Grupo TFM if prior to October 31, 2003). If, on October 31, 2003, the Mexican government has not sold all of its capital stock in TFM, Grupo TFM is obligated to purchase the capital stock at the initial share price paid by Grupo TFM plus interest. In the event that Grupo TFM does not purchase the Mexican government's remaining interest in TFM, Grupo TMM and KCS, or either Grupo TMM or KCS, are obligated to purchase the Mexican government's interest. KCS and Grupo TMM have cross indemnities in the event the Mexican government requires only one of them to purchase its interest. The cross indemnities allow the party required to purchase the Mexican government's interest to require the other party to purchase its pro rata portion of such interest. However, if KCS were required to purchase the Mexican government's interest in TFM and Grupo TMM could not meet its obligations under the cross-indemnity, then KCS would be obligated to pay the total purchase price for the Mexican government's interest. If KCS and Grupo TMM, or either KCS or Grupo TMM alone had been required to purchase the Mexican government's 20% interest in TFM as of December 31, 2001, the total purchase price would have been approximately $518.8 million. At December 31, 2001, KCS's investment in Grupo TFM was approximately $334.4 million. KCS's interest in Grupo TFM is 36.9% (with Grupo TMM owning 38.5% and the Mexican Government owning the remaining 24.6%). KCS has a management services agreement with Grupo TFM to provide certain consulting and management services. At December 31, 2001, $3.6 million is reflected as an account receivable in KCS's consolidated balance sheet. KCS accounts for its investment in Grupo TFM under the equity method. MEXRAIL, INC. In November 1995, KCS purchased a 49% interest in Mexrail, which owns 100% of Tex-Mex . Mexrail owns the northern half of the international rail traffic bridge at Laredo spanning the Rio Grande River and TFM owns and operates the southern half of the bridge. This bridge is a significant entry point for rail traffic between Mexico and the United States. Tex-Mex is comprised of a 524-mile rail network between Laredo and Beaumont, Texas (including 160 owned miles from Laredo to Corpus Christi, Texas and 364 miles, via trackage rights, from Corpus Christi to Houston and Beaumont, Texas). Tex-Mex connects with KCSR via trackage rights at Beaumont, with TFM at Laredo (the single largest rail freight transfer point between the United States and Mexico), as well as with other Class I railroads at various locations. KCS accounts for its investment in Mexrail using the equity method of accounting. SOUTHERN CAPITAL. In 1996, KCS and GATX Capital Corporation (''GATX'') completed a transaction for the formation and financing of a joint venture, Southern Capital, to perform certain leasing and financing activities. Southern Capital's principal operations are the acquisition of locomotives and rolling stock and the leasing thereof to KCS. KCS holds a 50% interest in Southern Capital, which it accounts for using the equity method of accounting. Concurrent with the formation of this joint venture, KCS entered into operating leases with Southern Capital for substantially all the locomotives and rolling stock contributed or sold to Southern Capital at rental rates which management believes reflected market conditions at that time. KCSR paid Southern Capital $27.0, $27.3, and $28.8 million under these operating leases in 1999, 2000 and 2001, respectively. In connection with the formation of Southern Capital, KCS received cash that exceeded the net book value of assets contributed to the joint venture by approximately $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 (approximately $5.6, F-19 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) $5.8 and $4.4 million in 1999, 2000 and 2001, respectively). During 2000 and 2001, KCS received dividends of $5.0 million and $3.0 million, respectively, from Southern Capital. No dividends were received from Southern Capital during 1999. Additionally, prior to the sale of the loan portfolio (discussed below), KCS entered into agreements with Southern Capital to manage the loan portfolio assets held by Southern Capital, as well as to perform general administrative and accounting functions for the joint venture. Payments under these agreements were not material in 1999, 2000 and 2001, respectively. GATX also entered into an agreement to manage the rail portfolio assets, as well as to perform certain general and administrative services. In April 1999, Southern Capital sold its loan portfolio assets (comprised primarily of finance receivables in the amusement and other non-rail transportation industries) to Textron Financial Corporation. The purchase price for these assets approximated $52.8 million resulting in a gain of approximately $2.7 million. The proceeds from the sale were used to reduce outstanding indebtedness of the joint venture as mandated by its loan agreement. During 2001, Southern Capital refinanced its five-year credit facilities, which was scheduled to mature on October 19, 2001, with a one-year bridge loan for $201 million. There was $196 million borrowed under the bridge loan as of December 31, 2001. Southern Capital is currently evaluating financing alternatives to refinance the bridge loan with long-term debt. PANAMA CANAL RAILWAY COMPANY. In January 1998, the Republic of Panama awarded the PCRC, a joint venture between KCSR and Mi-Jack Products, Inc. ("Mi-Jack"), the concession to reconstruct and operate the Panama Canal Railway. The Panama Canal Railway is a 47-mile north-south railroad traversing the Panama isthmus between the Pacific and Atlantic Oceans. As of December 31, 2001, KCS has invested approximately $15.5 million toward the reconstruction and operations of the Panama Canal Railway. This investment is comprised of $12.9 million of equity and $2.6 million of subordinated loans. The Panama Canal Railway became fully operational on December 1, 2001 with the commencement of freight traffic. Passenger service started during July 2001. Panarail operates and promotes commuter and tourist passenger service over the Panama Canal Railway. KCS owns 50% of the common stock of PCRC, which it accounts for using the equity method of accounting. In November 1999, the financing arrangements for PCRC were completed with the International Finance Corporation (''IFC''), a member of the World Bank Group. The financing is comprised of a $5 million investment by the IFC and senior loans through the IFC in an aggregate amount of up to $45 million, as well as $4.8 million of equipment loans from Transamerica Corporation. The IFC's investment of $5 million in PCRC is comprised of non-voting preferred shares which pay a 10% cumulative dividend. The preferred shares may be redeemed at the IFC's option any year after 2008 at the lower of (1) a net cumulative internal rate of return of 30% or (2) eight times earnings before interest, income taxes, depreciation and amortization for the two years preceding the redemption that is proportionate to the IFC's percentage ownership in PCRC. Under the terms of the concession, KCS is, under certain limited conditions, a guarantor for up to $7.5 million of cash deficiencies associated with the completion of the reconstruction project and operations of PCRC. Also if PCRC terminates the concession contract without the IFC's consent, KCS is a guarantor for up to 50% of the outstanding senior loans. In addition, KCS is a guarantor for up to $2.4 million of the equipment loans from Transamerica Corporation. The cost of the reconstruction, which is virtually complete, is expected to total approximately $80 million. KCS projects that an additional $2.5 million, which management expects would be in the form of a subordinated loan, could be required under the cash deficiency guarantee. Excluding the impact of any loan guarantees discussed above, KCS expects its total cash outlay to approximate $18.0 million ($12.9 million of equity and $5.1 million of subordinated loans). F-20 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FINANCIAL INFORMATION. Combined financial information of all unconsolidated affiliates that KCS and its subsidiaries account for under the equity method follows. Totals do not include certain cost based investments included on the balance sheet. All amounts, including those for Grupo TFM, are presented under U.S. GAAP. Certain prior year amounts have been reclassified to reflect amounts from applicable audited financial statements (DOLLARS IN MILLIONS).
DECEMBER 31, 1999 ------------------------------------------------- GRUPO SOUTHERN TFM CAPITAL MEXRAIL PCRC OTHER TOTAL -------- -------- ------- ----- ------ -------- Investment in unconsolidated affiliates.......... $ 286.5 $ 28.1 $13.7 $ 4.5 $ -- $ 332.8 Equity in net assets of unconsolidated affiliates 286.4 28.1 14.0 4.0 0.1 332.6 FINANCIAL CONDITION: Current assets................................ $ 134.4 $ 0.1 $20.4 $ 4.4 $ 1.0 $ 160.3 Non-current assets............................ 1,916.5 274.5 43.6 12.0 0.4 2,247.0 -------- ------ ----- ----- ------ -------- Assets.................................... $2,050.9 $274.6 $64.0 $16.4 $ 1.4 $2,407.3 ======== ====== ===== ===== ====== ======== Current liabilities........................... $ 255.7 $ -- $29.3 $ 1.6 $ 0.1 $ 286.7 Non-current liabilities....................... 672.9 218.4 6.2 5.1 0.9 903.5 Minority interest............................. 346.1 -- -- -- -- 346.1 Equity of stockholders and partners........... 776.2 56.2 28.5 9.7 0.4 871.0 -------- ------ ----- ----- ------ -------- Liabilities and equity.................... $2,050.9 $274.6 $64.0 $16.4 $ 1.4 $2,407.3 ======== ====== ===== ===== ====== ======== OPERATING RESULTS: Revenues...................................... $ 524.5 $ 26.0 $50.0 $ 0.6 $ 0.3 $ 601.4 -------- ------ ----- ----- ------ -------- Costs and expenses............................ $ 409.7 $ 22.3 $48.3 $ 0.6 $ 0.1 $ 481.0 -------- ------ ----- ----- ------ -------- Net income.................................... $ 1.6 $ 7.0 $ 1.6 $ -- $ 0.1 $ 10.3 -------- ------ ----- ----- ------ -------- DECEMBER 31, 2000 ------------------------------------------------- GRUPO SOUTHERN TFM CAPITAL MEXRAIL PCRC OTHER TOTAL -------- -------- ------- ----- ------ -------- Investment in unconsolidated affiliates.......... $ 306.0 $ 24.6 $13.3 $ 9.9 $ (0.1) $ 353.7 Equity in net assets of unconsolidated affiliates 303.0 24.6 13.9 7.9 -- 349.4 Dividends and distributions received from unconsolidated affiliates...................... -- 5.0 -- -- -- 5.0 FINANCIAL CONDITION: Current assets............................ $ 190.9 $ 0.2 $24.7 $ 7.1 $ 0.9 $ 223.8 Non-current assets........................ 1,885.6 262.0 42.7 49.4 0.3 2,240.0 -------- ------ ----- ----- ------ -------- Assets................................. $2,076.5 $262.2 $67.4 $56.5 $ 1.2 $2,463.8 ======== ====== ===== ===== ====== ======== Current liabilities....................... $ 80.5 $ 0.4 $32.2 $ 0.6 $ 0.1 $ 113.8 Non-current liabilities................... 817.8 212.5 6.8 37.0 0.8 1,074.9 Minority interest......................... 357.2 -- -- -- -- 357.2 Equity of stockholders and partners....... 821.0 49.3 28.4 18.9 0.3 917.9 -------- ------ ----- ----- ------ -------- Liabilities and equity................. $2,076.5 $262.2 $67.4 $56.5 $ 1.2 $2,463.8 ======== ====== ===== ===== ====== ======== OPERATING RESULTS: Revenues...................................... $ 640.5 $ 30.8 $56.5 $ 0.3 $ -- $ 728.1 -------- ------ ----- ----- ------ -------- Costs and expenses............................ $ 493.7 $ 27.7 $57.7 $ 1.2 $ -- $ 580.3 -------- ------ ----- ----- ------ -------- Net income.................................... $ 44.8 $ 3.2 $(0.1) $(0.9) $ 0.1 $ 47.1 -------- ------ ----- ----- ------ --------
F-21 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001 ------------------------------------------------ GRUPO SOUTHERN TFM CAPITAL MEXRAIL PCRC OTHER TOTAL -------- -------- ------- ----- ----- -------- Investment in unconsolidated affiliates.......... $ 334.4 $ 23.2 $11.7 $11.0 $(0.8) $ 379.5 Equity in net assets of unconsolidated affiliates 331.3 23.2 12.0 11.0 (0.8) 376.7 Dividends and distributions received from unconsolidated affiliates...................... -- 3.0 -- -- -- 3.0 FINANCIAL CONDITION: Current assets................................ $ 294.3 $ 2.5 $34.9 $ 3.4 $ 0.1 $ 335.2 Non-current assets............................ 1,924.3 240.6 59.3 88.9 -- 2,313.1 -------- ------ ----- ----- ----- -------- Assets.................................... $2,218.6 $243.1 $94.2 $92.3 $ 0.1 $2,648.3 ======== ====== ===== ===== ===== ======== Current liabilities........................... $ 350.8 $196.6 $42.8 $ 8.1 $ 0.2 $ 598.5 Non-current liabilities....................... 593.8 -- 27.5 62.2 0.9 684.4 Minority interest............................. 376.3 -- -- -- -- 376.3 Equity of stockholders and partners........... 897.7 46.5 23.9 22.0 (1.0) 989.1 -------- ------ ----- ----- ----- -------- Liabilities and equity.................... $2,218.6 $243.1 $94.2 $92.3 $ 0.1 $2,648.3 ======== ====== ===== ===== ===== ======== OPERATING RESULTS: Revenues...................................... $ 667.8 $ 30.2 $55.0 $ 0.6 $ -- $ 753.6 -------- ------ ----- ----- ----- -------- Costs and expenses............................ $ 457.7 $ 25.5 $58.2 $ 2.8 $ 0.2 $ 544.4 -------- ------ ----- ----- ----- -------- Net income.................................... $ 76.7 $ 4.8 $(2.0) $(2.2) $(0.2) $ 77.1 -------- ------ ----- ----- ----- --------
Generally, the difference between the carrying amount of KCS's investment in unconsolidated affiliates and the underlying equity in net assets is attributable to certain equity investments whose carrying amounts have been reduced to zero, and report a net deficit. With respect to KCS's investment in Grupo TFM, the effects of foreign currency transactions and capitalized interest prior to June 23, 1997, which are not recorded on the investee's books, also result in these differences. The deferred income tax calculations for Grupo TFM are significantly impacted by fluctuations in the relative value of the Mexican peso versus the U.S. dollar and the rate of Mexican inflation, and can result in significant variability in the amount of equity earnings (losses) reported by KCS. F-22 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. OTHER BALANCE SHEET CAPTIONS ACCOUNTS RECEIVABLE. Accounts receivable include the following allowances (IN MILLIONS):
1999 2000 2001 -------- -------- -------- Accounts receivable........................................ $ 140.2 $ 140.2 $ 140.4 Allowance for doubtful accounts............................ (8.0) (5.2) (10.4) -------- -------- -------- Accounts receivable, net................................... $ 132.2 $ 135.0 $ 130.0 ======== ======== ======== Doubtful accounts expense.................................. $ 1.7 $ (0.6) $ 1.7 -------- -------- -------- OTHER CURRENT ASSETS. Other current assets include the following items (IN MILLIONS): 1999 2000 2001 -------- -------- -------- Deferred income taxes...................................... $ 8.7 $ 9.3 $ 16.0 Federal income taxes receivable............................ -- -- 27.6 Receivable--Duncan case (Note 11).......................... -- 7.0 -- Receivable--Bogalusa case (Note 11)........................ -- -- 19.3 Prepaid expenses........................................... 2.5 1.0 2.9 Other...................................................... 12.7 8.6 6.0 -------- -------- -------- Total........................................ $ 23.9 25.9 $ 71.8 ======== ======== ======== PROPERTIES. Properties and related accumulated depreciation and amortization are summarized below (IN MILLIONS): 1999 2000 2001 -------- -------- -------- PROPERTIES, AT COST Road properties......................................... $1,367.9 $1,394.8 $1,520.4 Equipment............................................... 279.8 295.5 289.2 Equipment under capital leases.......................... 6.7 6.7 6.6 Other................................................... 54.5 32.4 28.8 -------- -------- -------- Total................................................... 1,708.9 1,729.4 1,845.0 Accumulated depreciation and amortization.................. 578.0 622.9 660.2 -------- -------- -------- Total................................................... 1,130.9 1,106.5 1,184.8 Construction in progress................................... 146.5 221.3 142.6 -------- -------- -------- Net Properties.......................................... $1,277.4 $1,327.8 $1,327.4 ======== ======== ======== ACCRUED LIABILITIES. Accrued liabilities include the following items (IN MILLIONS): 1999 2000 2001 -------- -------- -------- Claims reserves............................................ $ 35.7 $ 45.7 $ 30.1 Prepaid freight charges due other railroads................ 25.1 24.5 21.2 Duncan case liability (Note 11)............................ -- 14.2 -- Bogalusa case liability (Note 11).......................... -- -- 22.3 Car hire per diem.......................................... 13.5 12.1 12.0 Vacation accrual........................................... 8.0 8.5 8.0 Other non-income related taxes............................. 6.2 5.3 4.1 Federal income taxes payable............................... 4.8 3.5 -- Interest payable........................................... 12.5 7.4 10.1 Other...................................................... 62.7 38.7 52.6 -------- -------- -------- Total............................................... $ 168.5 $ 159.9 $ 160.4 ======== ======== ========
F-23 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. LONG-TERM DEBT INDEBTEDNESS OUTSTANDING. Long-term debt and pertinent provisions follow (IN MILLIONS):
1999 2000 2001 ------ ------ ------ KCS Competitive Advance & Revolving Credit Facilities, Rates: below prime......... $250.0 $ -- $ -- Notes and Debentures, due July 2002 to December 2025 Rates: 6.625% to 8.80%...................................................... 400.0 1.6 1.6 Unamortized discount.......................................................... (2.1) -- -- KCSR Revolving Credit Facility, variable interest rate 4.85%, due January 2006..... -- -- 20.0 Term Loans, variable interest rates 5.13% to 5.38%, due December 2005 to December 2006............................................................... -- 400.0 377.5 Senior Notes, 9.5% interest rate, due October 1, 2008......................... -- 200.0 200.0 Equipment Trust Certificates, 8.56% to 9.68%, due serially to December 15, 2006........................................................................ 64.7 54.9 43.5 Capital Lease Obligations, 7.15% to 9.00% due serially to September 30, 2009.. 3.9 3.5 3.0 Revolving Credit Facility, variable interest rate (7.31% at December 31, 1999) 28.0 -- -- Term Loans with State of Illinois, 3% to 5% due serially to 2009.............. 4.9 4.4 3.9 OTHER Industrial Revenue Bond....................................................... 5.0 4.0 3.0 Mortgage Note................................................................. 5.6 5.3 5.1 Term Loans with State of Illinois, 3%, due serially to 2018................... 0.9 0.9 0.8 ------ ------ ------ Total......................................................................... 760.9 674.6 658.4 Less: debt due within one year................................................ 10.9 36.2 46.7 ------ ------ ------ Long-term debt................................................................ $750.0 $638.4 $611.7 ====== ====== ======
DEBT REFINANCING AND RE-CAPITALIZATION OF KCS'S DEBT STRUCTURE. REGISTRATION OF SENIOR UNSECURED NOTES. During the third quarter of 2000, KCS completed a $200 million private offering of debt securities through its wholly-owned subsidiary, KCSR. The offering, completed pursuant to Rule 144A under the Securities Act of 1933 in the United States and Regulation S outside the United States, consisted of 8-year senior unsecured notes ("Senior Notes"). Net proceeds from this offering of $196.5 million were used to refinance term debt and reduce commitments under the KCS Credit Facility (as defined below). The refinanced debt was scheduled to mature on January 11, 2001 (see below). Costs related to the issuance of the Senior Notes were deferred and are being amortized over the eight-year term of the Senior Notes. The remaining balance of these deferred costs was approximately $3.8 million at December 31, 2001. In connection with this refinancing, KCS reported an extraordinary loss of $1.1 million (net of income taxes of $0.7 million). On January 25, 2001, KCS filed a Form S-4 Registration Statement with the SEC registering exchange notes under the Securities Act of 1933. KCS filed Amendment No. 1 to this Registration Statement and the SEC declared this Registration Statement, as amended, effective on March 15, 2001, thereby providing the opportunity for holders of the initial Senior Notes to exchange them for registered notes with substantially identical terms. The registration exchange offer expired on April 16, 2001 and all of the Senior Notes were exchanged for $200 million of registered notes. These registered notes bear a fixed annual interest rate of 9.5% and are due on October 1, 2008 and contain certain covenants typical of this type of debt instrument. F-24 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GRUPO TFM. During the third quarter of 2000, Grupo TFM accomplished a refinancing of approximately $285 million of its senior secured credit facility through the issuance of a U.S. Commercial Paper ("USCP") program backed by a letter of credit. The USCP is a 2-year program for up to a face value of $310 million. The average discount rate for the first issuance was 6.54%. This refinancing provides Grupo TFM with the ability to pay limited dividends. As a result of this refinancing, Grupo TFM recorded approximately $9.2 million in pretax extraordinary debt retirement costs. KCS reported $1.7 million (net of income taxes of $0.1 million) as its proportionate share of these costs as an extraordinary item. RE-CAPITALIZATION OF DEBT STRUCTURE IN ANTICIPATION OF SPIN-OFF. In preparation for the Spin-off, KCS re-capitalized its debt structure in January 2000 through a series of transactions as follows: BOND TENDER AND OTHER DEBT REPAYMENT. On December 6, 1999, KCS commenced offers to purchase and consent solicitations with respect to any and all of KCS's outstanding 7.875% Notes due July 1, 2002, 6.625% Notes due March 1, 2005, 8.8% Debentures due July 1, 2022, and 7% Debentures due December 15, 2025 (collectively "Debt Securities" or "notes and debentures"). Approximately $398.4 million of the $400 million outstanding Debt Securities were validly tendered and accepted by KCS. Total consideration paid for the repurchase of these outstanding notes and debentures was $401.2 million. Funding for the repurchase of these Debt Securities and for the repayment of $264 million of borrowings under then-existing revolving credit facilities was obtained from two credit facilities (the "KCS Credit Facility" and the "Stilwell Credit Facility", or collectively the "Credit Facilities"), each of which was entered into on January 11, 2000. The Credit Facilities, as described further below, initially provided for total commitments of $950 million. KCS reported an extraordinary loss on the extinguishment of KCS's notes and debentures of approximately $5.9 million (net of income taxes of approximately $3.2 million). KCS CREDIT FACILITY. The KCS Credit Facility initially provided for total commitments of $750 million comprised of three separate term loans totaling $600 million and a revolving credit facility available until January 11, 2006 ("KCS Revolver"). On January 11, 2000, KCSR borrowed the full amount ($600 million) of the term loans and used the proceeds to repurchase the Debt Securities, retire other debt obligations and pay related fees and expenses. No funds were initially borrowed under the KCS Revolver. The term loans were initially comprised of the following: $200 million due January 11, 2001, $150 million due December 30, 2005 and $250 million due December 29, 2006. The $200 million term loan due January 11, 2001 was refinanced during the third quarter of 2000 as described further above. Additionally, in accordance with the terms of the KCS Credit Facility, the availability under the KCS Revolver was reduced from $150 million to $100 million on January 2, 2001. Letters of credit are also available under the KCS Revolver up to a limit of $15 million. Proceeds of future borrowings under the KCS Revolver are to be used for working capital and for other general corporate purposes. The letters of credit under the KCS Revolver may be used for general corporate purposes. Borrowings under the KCS Credit Facility are secured by substantially all of KCS's assets and are guaranteed by the majority of its subsidiaries. Interest on the outstanding loans under the KCS Credit Facility accrues at a rate per annum based on the London Interbank Offered Rate ("LIBOR") or an alternate base rate, as KCS shall select. Following completion of the refinancing of the January 11, 2001 term loan discussed above, each remaining loan under the KCS Credit Facility accrues interest at the selected rate plus an applicable margin. The applicable margin is determined by the type of loan and KCS's leverage ratio (defined as the ratio of KCS's total debt to consolidated earnings before interest, taxes, depreciation and amortization excluding the equity earnings of unconsolidated affiliates for the prior four fiscal quarters). Based on KCS's current leverage ratio, the term loan maturing in 2005 and all loans under the KCS Revolver have an applicable margin of 2.75% per F-25 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) annum for LIBOR priced loans and 1.75% per annum for alternate base rate priced loans. The term loan maturing in 2006 currently has an applicable margin of 3.0% per annum for LIBOR priced loans and 2.0% per annum for alternate base rate loans. The KCS Credit Facility also requires the payment to the lenders of a commitment fee of 0.50% per annum on the average daily, unused amount of each commitment. Additionally a fee equal to a per annum rate equal to 0.25% plus the applicable margin for LIBOR priced revolving loans will be paid on any letter of credit issued under the KCS Credit Facility. The term loans are subject to a mandatory prepayment with, among other things: . 100% of the net proceeds of (1) certain asset sales or other dispositions of property, (2) the sale or issuance of certain indebtedness or equity securities and (3) certain insurance recoveries. . 50% of excess cash flow (as defined in the KCS Credit Facility) The KCS Credit Facility contains certain covenants that, among others, restrict KCS's subsidiaries, including KCSR, to incur additional indebtedness, and restricts KCS's ability and its subsidiaries' ability to: . incur additional liens, . enter into sale and leaseback transactions, . merge or consolidate with another entity, . sell assets, . enter into certain transactions with affiliates, . enter into agreements that restrict the ability to incur liens or, with respect to KCSR and KCS's other subsidiaries, pay dividends to KCS or another subsidiary of KCS, . make investments, loans, advances, guarantees or acquisitions, . make certain restricted payments, including dividends, or make certain payments on other indebtedness, or . make capital expenditures. In addition, KCS is required to comply with specific financial ratios, including minimum interest expense coverage and leverage ratios. The KCS Credit Facility also contains certain customary events of default. These covenants, along with other provisions, could restrict maximum utilization of the facility. As discussed below, KCS received a waiver from certain of the financial and coverage covenant provisions contained in the KCS Credit Facility and was granted an amendment to the credit agreement through March 31, 2002. KCS was in compliance with the provisions of the KCS Credit Facility, as so amended, including the financial covenants, as of December 31, 2001. Issue costs relating to the KCS Credit Facility of approximately $17.6 million were deferred and are being amortized over the respective term of the loans. In conjunction with the refinancing of the $200 million term loan previously due January 11, 2001, approximately $1.8 million of these deferred costs were immediately recognized. Additionally, $1.4 million in fees were incurred related to the waiver for credit facilities covenants (discussed below). These fees have also been deferred and are being amortized over the respective term of the loans. After consideration of current year amortization, the remaining balance of these deferred costs was approximately $10.4 million at December 31, 2001. As a result of the debt refinancing transactions discussed above, extraordinary items of $8.7 million (net of income taxes of $4.0 million) were reported in the statement of income for the year ended December 31, 2000. STILWELL CREDIT FACILITY. On January 11, 2000, KCS also arranged a new $200 million 364-day senior unsecured competitive Advance/Revolving Credit Facility, the Stilwell Credit Facility. KCS borrowed F-26 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) $125 million under this facility and used the proceeds to retire debt obligations as discussed above. Stilwell assumed this credit facilities, including the $125 million borrowed thereunder, and upon completion of the Spin-off, KCS was released from all obligations thereunder. Stilwell repaid the $125 million in March 2000. WAIVER AND AMENDMENTS FOR CREDIT FACILITIES COVENANTS. Due to various factors, including the impact on the operations of KCS of the U.S. economic recession during 2001, KCS requested and received from lenders a waiver from certain of the financial and coverage covenant provisions in the KCS credit facilities. This waiver was granted on March 19, 2001 and was effective until May 15, 2001. In addition, KCS requested an amendment to the applicable covenant provisions of the KCS credit facilities. The amendment, among other things, revised certain of the covenant provisions (including financial and coverage provisions) through March 31, 2002 to provide KCS with time to strengthen its financial position and pursue various financing alternatives. The lenders approved and executed the amendment to the credit agreement on May 10, 2001. At December 31, 2001, KCS had $397.5 million borrowed under this facility, comprised of $377.5 million of term debt and $20 million under the KCS Revolver and was in compliance with the applicable covenant provisions, as amended. KCS has obtained an additional amendment to the leverage ratio covenant provision of the KCS credit facilities for the period April 1, 2002 through June 29, 2002. As a result of certain financial covenants contained in the credit agreement, maximum utilization of KCS's available line of credit may be restricted. KCS presently expects that it will achieve compliance with the financial and coverage ratios under the KCS credit facilities, as amended. KCS is currently evaluating various alternatives for its existing debt under the KCS credit facilities and will pursue all measures within its control to ensure that it will be in compliance with the financial and coverage ratios under the provisions of the KCS credit facilities. If, however, KCS is unable to meet the provisions of its financial and coverage ratios (which would result in a violation of its covenants), KCS would pursue negotiations with its lenders to cure any covenant violation, which would likely result in additional costs including, among others, interest, bank and other fees, which could be significant. LEASES AND DEBT MATURITIES. KCS and its subsidiaries lease transportation equipment, as well as office and other operating facilities under various capital and operating leases. Rental expenses under operating leases were $46.3, $51.6, and $50.9 million for the years 1999, 2000, and 2001, respectively. Minimum annual payments and present value thereof under existing capital leases, other debt maturities, and minimum annual rental commitments under noncancellable operating leases are as follows (DOLLARS IN MILLIONS):
CAPITAL LEASES OPERATING LEASES ------------------------- ----------------------------- MINIMUM NET LEASE LESS PRESENT OTHER TOTAL PAYMENTS INTEREST VALUE DEBT DEBT AFFILIATES THIRD PARTY TOTAL -------- -------- ------- ------ ------ ---------- ----------- ------ 2002....... $0.7 $0.2 $0.5 $ 46.2 $ 46.7 $ 34.1 $ 21.1 $ 55.2 2003....... 0.7 0.1 0.6 49.2 49.8 34.1 19.7 53.8 2004....... 0.6 0.2 0.4 40.9 41.3 34.1 15.6 49.7 2005....... 0.5 0.1 0.4 50.0 50.4 28.3 13.7 42.0 2006....... 0.4 0.1 0.3 264.0 264.3 24.3 6.4 30.7 Later years 0.9 0.1 0.8 205.1 205.9 180.4 54.1 234.5 ---- ---- ---- ------ ------ ------ ------ ------ Total...... $3.8 $0.8 $3.0 $655.4 $658.4 $335.3 $130.6 $465.9 ==== ==== ==== ====== ====== ====== ====== ======
KCSR INDEBTEDNESS. KCSR has purchased locomotives and rolling stock under conditional sales agreements, equipment trust certificates and capitalized lease obligations. The equipment, which has been pledged as collateral for the related indebtedness, has an original cost of $134.7 million and a net book value of $78.8 million. F-27 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OTHER AGREEMENTS, GUARANTEES, PROVISIONS AND RESTRICTIONS. KCS has debt agreements containing restrictions on subsidiary indebtedness, advances and transfers of assets, and sale and leaseback transactions, as well as requiring compliance with various financial covenants. At December 31, 2001, KCS was in compliance with the provisions and restrictions of these agreements. Because of certain financial covenants contained in the debt agreements, however, maximum utilization of KCS's available line of credit may be restricted. NOTE 8. INCOME TAXES Under the liability method of accounting for income taxes specified by Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," the provision for income tax expense is the sum of income taxes currently payable and deferred income taxes. Currently payable income taxes represents the amounts expected to be reported on KCS's income tax return, and deferred tax expense or benefit represents the change in deferred taxes. 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. TAX EXPENSE. Income tax provision (benefit) attributable to continuing operations consists of the following components (IN MILLIONS):
1999 2000 2001 ----- ------ ------ Current Federal.......................... $(3.4) $(26.7) $(26.6) State and local.................. 0.6 (0.2) (1.1) Foreign withholding taxes........ -- 0.2 0.1 ----- ------ ------ Total current................ (2.8) (26.7) (27.6) ----- ------ ------ Deferred Federal.......................... 9.4 23.4 29.5 State and local.................. 0.4 (0.3) 0.9 ----- ------ ------ Total deferred............... 9.8 23.1 30.4 ----- ------ ------ Total income tax provision (benefit) $ 7.0 $ (3.6) $ 2.8 ===== ====== ======
The federal and state deferred tax liabilities (assets) attributable to continuing operations at December 31 are as follows (IN MILLIONS):
1999 2000 2001 ------ ------ ------ Liabilities: Depreciation................................... $333.3 $351.0 $380.7 Other, net..................................... (1.4) 6.3 10.0 ------ ------ ------ Gross deferred tax liabilities............. 331.9 357.3 390.7 ------ ------ ------ Assets: NOL and AMT credit carryovers.................. (2.3) (8.8) (3.4) Book reserves not currently deductible for tax. (33.2) (22.3) (30.0) Vacation accrual............................... (2.9) (2.5) (3.1) Other, net..................................... (4.8) (0.8) -- ------ ------ ------ Gross deferred tax assets.................. (43.2) (34.4) (36.5) ------ ------ ------ Net deferred tax liability........................ $288.7 $322.9 $354.2 ====== ====== ======
F-28 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Based upon KCS's history of operating income and its expectations for the future, management has determined that operating income of KCS will, more likely than not, be sufficient to recognize fully the gross deferred tax assets set forth above. TAX RATES. Differences between KCS's effective income tax rates applicable to continuing operations and the U.S. federal income tax statutory rates of 35% are as follows (IN MILLIONS):
1999 2000 2001 ----- ------ ----- Income tax provision using the statutory rate in effect $ 5.6 $ 7.6 $11.9 Tax effect of: Earnings of equity investees........................ (0.7) (7.2) (9.4) Other, net.......................................... 1.1 (3.7) 0.4 ----- ------ ----- Federal income tax provision (benefit)................. 6.0 (3.3) 2.9 State and local income tax provision................... 1.0 (0.5) (0.2) Foreign withholding taxes.............................. -- 0.2 0.1 ----- ------ ----- Total.................................................. $ 7.0 $ (3.6) $ 2.8 ===== ====== ===== Effective tax rate..................................... 40.7% (16.5)% 8.3% ===== ====== =====
TEMPORARY DIFFERENCE ATTRIBUTABLE TO GRUPO TFM INVESTMENT. At December 31, 2001, KCS's book basis exceeded the tax basis of its investment in Grupo TFM by $33.6 million. KCS 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 KCS intends to indefinitely reinvest in Grupo TFM the financial statement earnings which gave rise to the basis differential. Moreover, KCS has no other plans to realize this basis differential by a sale of its investment in Grupo TFM. If KCS were to realize this basis difference in the future by a receipt of dividends or the sale of its interest in Grupo TFM, as of December 31, 2001 KCS would incur gross federal income taxes of $11.8 million, which might be partially or fully offset by Mexican income taxes and could be available to reduce federal income taxes at such time. TAX CARRYOVERS. At December 31, 2000, KCS had $3.4 million of alternative minimum tax credit carryover generated by MidSouth prior to acquisition by KCS. This was fully utilized on the 2000 tax return filed in 2001. The amount of federal NOL carryover generated by MidSouth and Gateway Western prior to acquisition was $67.8 million. KCS utilized approximately $1.5 million of these NOL's in 2000. $57.6 million of the NOL carryover was utilized in pre-1998 years leaving approximately $8.7 million of carryover available at December 31, 2001, with expiration dates beginning in the year 2008. The use of preacquisition net operating losses and tax credit carryovers is subject to limitations imposed by the Internal Revenue Code. KCS does not anticipate that these limitations will affect utilization of the carryovers prior to their expiration. TAX EXAMINATIONS. The IRS is currently in the process of examining the consolidated federal income tax returns for the years 1993 through 1996. For years prior to 1993, the statute of limitations has closed. In addition, other taxing authorities are currently examining the years 1994 through 1999 and have proposed additional tax assessments for which KCS believes it has recorded adequate reserves. Since most of these asserted tax deficiencies represent temporary differences, subsequent payments of taxes will not require additional charges to income tax expense. In addition, accruals have been made for interest (net of tax benefit) for estimated settlement of the proposed tax assessments. Thus, management believes that final settlement of these matters will not have a material adverse effect on KCS's consolidated results of operations or financial condition. F-29 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. STOCKHOLDERS' EQUITY REVERSE STOCK SPLIT. All periods presented in the accompanying consolidated financial statements reflect the one-for-two reverse stock split completed on July 12, 2000 in conjunction with the Spin-off. See Note 3. PRO FORMA FAIR VALUE INFORMATION FOR STOCK-BASED COMPENSATION PLANS. Under SFAS 123, companies must either record compensation expense based on the estimated grant date fair value of stock options granted or disclose the impact on net income as if they had adopted the fair value method (for grants subsequent to December 31, 1994.) If KCS had measured compensation cost for the KCS stock options granted to its employees and shares subscribed by its employees under the KCS employee stock purchase plan, under the fair value based method prescribed by SFAS 123, net income and earnings per share would have been as follows:
1999 2000 2001 ------ ------ ------ Net income (loss) (IN MILLIONS): As reported.................... $323.3 $380.5 $ 30.7 Pro forma...................... 318.0 375.8 26.7 Earnings (loss) per Basic share: As reported.................... $ 5.86 $ 6.71 $ 0.52 Pro forma...................... 5.76 6.63 0.45 Earnings (loss) per Diluted share: As reported.................... $ 5.57 $ 6.42 $ 0.50 Pro forma...................... 5.48 6.37 0.43
STOCK OPTION PLANS. During 1998, various existing Employee Stock Option Plans were combined and amended as the Kansas City Southern Industries, Inc. 1991 Amended and Restated Stock Option and Performance Award Plan (as amended and restated effective February 27, 2001). The Plan provides for the granting of options to purchase up to 16.0 million shares of KCS's common stock by officers and other designated employees. Options granted under this Plan have been granted at 100% of the average market price of KCS's stock on the date of grant and generally may not be exercised sooner than one year or longer than ten years following the date of the grant, 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 KCS. The Plan includes provisions for stock appreciation rights, LRs and LSARs. All outstanding options include LRs, except for options granted to non-employee Directors. For purposes of computing the pro forma effects of option grants under the fair value accounting method prescribed by SFAS 123, the fair value of each option grant is estimated on the date of grant using a version of the Black-Scholes option pricing model. The following assumptions were used for the various grants depending on the date of grant, nature of vesting and term of option:
1999 2000 2001 -------------- -------------- -------------- Dividend Yield......... .25% to .36% 0% 0% Expected Volatility.... 42% to 43% 34% to 50% 35% to 40% Risk-free Interest Rate 4.67% to 5.75% 5.92% to 6.24% 2.98% to 4.84% Expected Life.......... 3 years 3 years 3 years
EFFECT OF SPIN-OFF ON EXISTING STOCK OPTIONS. FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation" ("FIN 44") addresses the issues surrounding fixed stock option plans resulting from an equity restructuring, including spin-offs. This guidance indicates that changes to fixed F-30 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) stock option grants made to restore the option holder's economic position as a result of a spin-off do not result in additional compensation expense if certain criteria are met as follows: i) aggregate intrinsic value (difference between the market value per share and exercise price) of the options immediately after the change is not greater than the aggregate intrinsic value of the options immediately before the change; ii) the ratio of the exercise price per option to the market value per share is not reduced; and iii) the vesting provisions and option period of the original option grant remain the same. As part of the Spin-off, generally holders of an option to purchase one share of KCS common stock received options to purchase two shares of Stilwell common stock. The option exercise price for the KCS and Stilwell stock options was prorated based on the market value for KCS common stock and Stilwell common stock on the date of the Spin-off. The exercise prices for periods subsequent to the Spin-off have accordingly been reduced to reflect this amount. The changes made to KCS's fixed stock option grants as a result of the Spin-off in 2000 resulted in the option holder having the same economic position both immediately before and immediately after the Spin-off. In accordance with the provisions of FIN 44, KCS, therefore, did not record additional compensation expense in 2000. SUMMARY OF COMPANY'S STOCK OPTION PLANS. A summary of the status of KCS's stock option plans as of December 31, 1999, 2000 and 2001, and changes during the years then ended, is presented below. The number of shares presented, the weighted average exercise price and the weighted average fair value of options granted have been restated to reflect the reverse stock split on July 12, 2000. However, the weighted average exercise price and the weighted average fair value of options have not been restated to reflect the impact of the Spin-off for periods prior to the Spin-off.
1999 1/1/2000-7/12/2000 ---------------------------- ------------------------------ WEIGHTED-AVERAGE WEIGHTED-AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ---------- ---------------- ------------ ---------------- Outstanding at January 1.............. 4,713,971 $30.70 4,280,581 $ 33.94 Exercised............................. (636,482) 31.82 (394,803) 47.14 Canceled/Expired...................... (42,266) 85.78 (1,800) 89.13 Granted............................... 245,358 99.46 281,714 142.08 ---------- ------------ Outstanding at end of period.......... 4,280,581 $33.94 4,165,692 $ 39.98 ========== ============ Exercisable at December 31............ 3,834,393 $27.06 Weighted-Average fair value of options granted during the year............. $33.28 $ 49.88 7/13/2000-12/31/2000 2001 ---------------------------- ------------------------------ WEIGHTED-AVERAGE WEIGHTED-AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ---------- ---------------- ------------ ---------------- Outstanding at beginning of period.... 4,165,692 $ 1.26 6,862,036 $ 4.92 Exercised............................. (2,469,667) 0.76 (1,128,838) 3.71 Canceled/Expired...................... (388,686) 4.82 (105,537) 4.79 Granted............................... 5,554,697 5.81 193,654 13.37 ---------- ----- Outstanding at end of period.......... 6,862,036 $ 4.92 5,821,315 $ 5.44 ========== ========= Exercisable at December 31............ 1,355,464 $ 1.41 4,803,942 $ 5.13 Weighted-Average fair value of options granted during the period........... $ 1.54 $ 4.18
F-31 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 2001:
OUTSTANDING EXERCISABLE --------------------------------------------- ---------------------------- RANGE OF WEIGHTED-AVERAGE EXERCISE SHARES REMAINING WEIGHTED-AVERAGE SHARES WEIGHTED-AVERAGE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE ------ ----------- ---------------- ---------------- ----------- ---------------- $ .20-1 397,614 3.1 years $ 0.84 397,614 $ 0.84 1-2 224,593 5.2 1.33 224,593 1.33 2-4 201,974 6.9 2.81 164,974 2.77 4-7 4,709,109 8.5 5.76 3,899,261 5.75 7-10 105,668 8.7 8.36 90,059 8.29 10-13 85,000 9.5 12.62 -- -- 13-17 97,357 9.4 14.38 27,441 14.34 --------- --------- .20-17 5,821,315 8.0 $ 5.44 4,803,942 $ 5.13 ========= =========
At December 31, 2001, shares available for future grants under the stock option plan were 2,035,011. STOCK PURCHASE PLAN. The ESPP, established in 1977, provides to substantially all full-time employees of KCS, certain subsidiaries and certain other affiliated entities, the right to subscribe to an aggregate of 11.4 million shares of common stock. The purchase price for shares under any stock offering is to be 85% of the average market price on either the exercise date or the offering date, whichever is lower, but in no event less than the par value of the shares. At December 31, 2001, there were approximately 4.6 million shares available for future offerings. The following table summarizes activity related to the various ESPP offerings:
DATE SHARES SHARES DATE INITIATED SUBSCRIBED PRICE ISSUED ISSUED - - --------- ---------- ------ ------- --------- Thirteenth Offering............. 2001 402,902 $10.57 -- 2003 Twelfth Offering................ 2000 705,797 $ 7.31 615,335 2001/2002 Eleventh Offering............... 1998 106,913 $71.94 94,149 1999/2000
For purposes of computing the pro forma effects of employees' purchase rights under the fair value accounting method prescribed by SFAS 123, the fair value of the Twelfth and Eleventh Offering under the ESPP is estimated on the date of grant using a version of the Black-Scholes option pricing model. The following weighted-average assumptions were used for the Thirteenth, Twelfth and Eleventh Offerings, respectively: i) dividend yield of 0.00%, 0.00% and 0.95%; ii) expected volatility of 38%, 38% and 42%; iii) risk-free interest rate of 2.98%, 5.77% and 4.63%; and iv) expected life of one year. The weighted-average fair value of purchase rights granted under the Thirteenth, Twelfth and Eleventh Offerings of the ESPP were $3.00, $2.19 and $21.52, respectively. There were no offerings in 1999. RESTRICTED SHARE AND OPTION PROGRAM. In connection with the Spin-off, KCS adopted a restricted share and option program (the "Option Program") under which (1) certain senior management employees were granted performance based KCS stock options and (2) all management employees and those directors of KCS who were not employees (the "Outside Directors") became eligible to purchase a specified number of KCS restricted shares and were granted a specified number of KCS stock options for each restricted share purchased. The performance stock options have an exercise price of $5.75 per share, which was the mean trading price of KCS common stock on the New York Stock Exchange (the "NYSE") on July 13, 2000. The performance stock options vested and became exercisable in equal installments as KCS's stock price achieved certain thresholds and F-32 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) after one year following the grant date. All performance thresholds were met for these performance stock options and all became exercisable on July 13, 2001. These stock options expire at the end of 10 years, subject to certain early termination events. Vesting will accelerate in the event of death, disability, or a KCS board-approved change in control of KCS. The purchase price of the restricted shares, and the exercise price of the stock options granted in connection with the purchase of restricted shares, is based on the mean trading price of KCS common stock on the NYSE on the date the employee or Outside Director purchased restricted shares under the Option Program. Each eligible employee and Outside Director was allowed to purchase the restricted shares offered under the Option Program on one date out of a selection of dates offered. With respect to management employees, the number of shares available for purchase and the number of options granted in connection with shares purchased were based on the compensation level of the employees. Each Outside Director was granted the right to purchase up to 3,000 restricted shares of KCS, with two KCS stock options granted in connection with each restricted share purchased. Shares purchased are restricted from sale and the options are not exercisable for a period of three years for senior management and the Outside Directors and two years for other management employees. KCS provided senior management and the Outside Directors with the option of using a sixty-day interest-bearing full recourse note to purchase these restricted shares. These loans accrued interest at 6.49% per annum and were all fully repaid by September 11, 2000. Management employees purchased 475,597 shares of KCS restricted stock under the Option Program and 910,697 stock options were granted in connection with the purchase of those restricted shares. Outside Directors purchased a total of 9,000 shares of KCS restricted stock under the Option Program and 18,000 KCS stock options were granted in connection with the purchase of those shares. TREASURY STOCK. Shares of common stock in Treasury at December 31, 2001 totaled 14,125,949 compared with 15,221,844 at December 31, 2000 and 18,082,201 at December 31, 1999. KCS issued shares of common stock from Treasury - 609,462 in 1999, 2,375,760 in 2000 and 1,095,895 in 2001 - to fund the exercise of options and subscriptions under various employee stock option and purchase plans. In 2000, KCS issued 484,597 of restricted stock in connection with the Restricted Share and Option Program (see above). Treasury stock previously acquired had been accounted for as if retired. KCS repurchased 230,000 in 1999. Shares repurchased during 2000 and 2001 were not material. NOTE 10. PROFIT SHARING AND OTHER POSTRETIREMENT BENEFITS KCS maintains various plans for the benefit of its employees as described below. KCS's employee benefit expense for these plans aggregated $4.2 and $2.3 million in 1999 and 2000, respectively. During 2001, there were no accruals recorded for contributions into the Profit Sharing or Employee Stock Ownership Plan for the plan year ended December 31, 2001. KCS expensed approximately $0.9 million with respect to the 401(k) plan in 2001. PROFIT SHARING. Qualified profit sharing plans are maintained for most employees not included in collective bargaining agreements. Contributions for KCS and its subsidiaries are made at the discretion of the Boards of Directors in amounts not to exceed the maximum allowable for federal income tax purposes. During 2000, KCS combined the Profit Sharing Plan and KCS's 401(k) Plan into the KCS 401(k) and Profit Sharing Plan. This allows employees to direct their profit sharing accounts into selected investments. There were no profit sharing contributions made during 2001. 401(K) PLAN. KCS's 401(k) plan permits participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code. KCS matches contributions up to a maximum of 3% of F-33 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) compensation. During 2000, KCS combined the Profit Sharing Plan and KCS's 401(k) Plan into the KCS 401(k) and Profit Sharing Plan. EMPLOYEE STOCK OWNERSHIP PLAN. KCS established the ESOP for employees not covered by collective bargaining agreements. KCS contributions to the ESOP are based on a percentage of wages earned by eligible employees. Contributions and percentages are determined by the Compensation Committee of the Board of Directors. There were no contributions to the ESOP plan during 2001. OTHER POSTRETIREMENT BENEFITS. KCS and several of its subsidiaries provide certain medical, life and other postretirement benefits other than pensions to its retirees. The medical and life plans are available to employees not covered under collective bargaining arrangements, who have attained age 60 and rendered ten years of service. Individuals employed as of December 31, 1992 were excluded from a specific service requirement. The medical plan is contributory and provides benefits for retirees, their covered dependents and beneficiaries. Benefit expense begins to accrue at age 40. The medical plan was amended effective January 1, 1993 to provide for annual adjustment of retiree contributions, and also contains, depending on the plan coverage selected, certain deductibles, co-payments, coinsurance and coordination with Medicare. The life insurance plan is non-contributory and covers retirees only. KCS's policy, in most cases, is to fund benefits payable under these plans as the obligations become due. However, certain plan assets (e.g., money market funds) do exist with respect to life insurance benefits. The following assumptions were used to determine postretirement obligations/costs for the years ended December 31:
1999 2000 2001 ---- ---- ---- Annual increase in the CPI........................... 3.00% 3.00% 2.00% Expected rate of return on life insurance plan assets 6.50 6.50 6.50 Discount rate........................................ 8.00 7.50 7.00 Salary increase...................................... 4.00 3.00 3.00
A reconciliation of the accumulated postretirement benefit obligation, change in plan assets and funded status, respectively, at December 31 follows (IN MILLIONS):
1999 2000 2001 ------ ------ ----- Accumulated postretirement benefit obligation at beginning of year $ 13.2 $ 14.6 $13.1 Service cost...................................................... 0.4 0.3 0.2 Interest cost..................................................... 0.9 1.1 0.8 Plan terminations/amendments...................................... -- -- (3.4) Actuarial and other (gain) loss................................... 1.2 (1.8) (0.6) Benefits paid (i)................................................. (1.1) (1.1) (1.0) ------ ------ ----- Accumulated postretirement benefit obligation at end of year...... 14.6 13.1 9.1 ------ ------ ----- Fair value of plan assets at beginning of year.................... 1.4 1.3 1.2 Actual return on plan assets...................................... 0.1 0.1 -- Benefits paid (i)................................................. (0.2) (0.2) (0.2) ------ ------ ----- Fair value of plan assets at end of year.......................... 1.3 1.2 1.0 ------ ------ ----- Funded status and accrued benefit cost............................ $(13.3) $(11.9) $(8.1) ====== ====== =====
- -------- (i)Benefits paid for the reconciliation of accumulated postretirement benefit obligation include both medical and life insurance benefits, whereas benefits paid for the fair value of plan assets reconciliation include only life insurance benefits. Plan assets relate only to the life insurance benefits. Medical benefits are funded as obligations become due. F-34 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net periodic postretirement benefit cost included the following components (IN MILLIONS):
1999 2000 2001 ----- ----- ----- Service cost...................................... $ 0.4 $ 0.3 $ 0.2 Interest cost..................................... 0.9 1.1 0.8 Expected return on plan assets.................... (0.1) (0.1) (0.1) ----- ----- ----- Net periodic postretirement benefit cost.......... $ 1.2 $ 1.3 $ 0.9 ===== ===== =====
KCS's health care costs, excluding former Gateway Western employees and certain former employees of the MidSouth, 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 trend rates are not applicable. During 2001, KCS reduced its liability and recorded a reduction of operating expenses by approximately $2.0 million in connection with the transfer of union employees formerly covered by the Gateway Western plan to a multi-employer sponsored union plan, which effectively eliminated KCS's postretirement liability for this group of employees. This reduced the number of former Gateway Western employees or retirees covered under Gateway Western's benefit plan. The Gateway Western benefit plans are slightly different from those of KCS and other subsidiaries. Gateway Western provides contributory health, dental and life insurance benefits to these remaining employees and retirees. In 2001, the assumed annual rate of increase in health care costs for Gateway Western employees and retirees under this plan was 10%, decreasing over six years to 5.5% in 2008 and thereafter. An increase or decrease in the assumed health care cost trend rates by one percent in 1999, 2000 and 2001 would not have a significant impact on the accumulated postretirement benefit obligation. The effect of this change on the aggregate of the service and interest cost components of the net periodic postretirement benefit is not significant. During 2001 a post-retirement benefit for directors was eliminated, resulting in a reduction of the related liability of approximately $1.4 million. This plan termination, as well as the transfer of Gateway Western union employees to a multi-employer sponsored union plan are reflected in the reconciliation above as plan terminations/amendments. 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 $0.4, $0.5 and $0.8 million for 1999, 2000 and 2001, respectively. NOTE 11. COMMITMENTS AND CONTINGENCIES LITIGATION. KCS and its subsidiaries are involved as plaintiff or defendant in various legal actions arising in the normal course of business. While the ultimate outcome of the various legal proceedings involving KCS and its subsidiaries cannot be predicted with certainty, it is management's opinion that KCS's litigation reserves are adequate. BOGALUSA CASES In July 1996, KCSR was named as one of twenty-seven defendants in various lawsuits in Louisiana and Mississippi arising from the explosion of a rail car loaded with chemicals in Bogalusa, Louisiana on October 23, F-35 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1995. As a result of the explosion, nitrogen dioxide and oxides of nitrogen were released into the atmosphere over parts of Bogalusa and the surrounding area allegedly causing evacuations and injuries. Approximately 25,000 residents of Louisiana and Mississippi (plaintiffs) have asserted claims to recover damages allegedly caused by exposure to the released chemicals. On October 29, 2001, KCSR and representatives for its excess insurance carriers negotiated a settlement in principle with the Louisiana and Mississippi plaintiffs for $22.3 million. The settlement is subject to the execution of a Master Global Settlement Agreement ("MGSA") and releases by the parties. In Louisiana, the Court will evaluate the MGSA at a fairness hearing and decide whether the proposed settlement is fair for the class of plaintiffs. In Mississippi, the plaintiffs are expected to individually execute release instruments. Management expects that these events could occur by the end of the third quarter of 2002. At December 31, 2001, KCS had recorded a liability in its consolidated financial statements of $22.3 million and an insurance receivable of $19.3 million related to the Bogalusa cases. DUNCAN CASE SETTLEMENT In 1998, a jury in Beauregard Parish, Louisiana returned a verdict against KCSR in the amount of $16.3 million. This case arose from a railroad crossing accident that occurred at Oretta, Louisiana on September 11, 1994, in which three individuals were injured. Of the three, one was injured fatally, one was rendered quadriplegic and the third suffered less serious injuries. Subsequent to the verdict, the trial court held that the plaintiffs were entitled to interest on the judgment from the date the suit was filed, dismissed the verdict against one defendant and reallocated the amount of that verdict to the remaining defendants. On November 3, 1999, the Third Circuit Court of Appeals in Louisiana affirmed the judgment. Subsequently, KCSR obtained review of the case in the Supreme Court of Louisiana. On October 30, 2000, the Supreme Court of Louisiana entered its order affirming in part and reversing in part the judgment. The net effect of the Louisiana Supreme Court action was to reduce the allocation of negligence to KCSR and reduce the judgment, with interest, against KCSR from approximately $28 million to approximately $14.2 million (approximately $9.7 million of damages and $4.5 million of interest). This judgment was in excess of KCSR's insurance coverage of $10 million for this case. KCSR filed an application for rehearing in the Supreme Court of Louisiana, which was denied on January 5, 2001. KCSR then sought a stay of judgment in the Louisiana court. The Louisiana court denied the stay application on January 12, 2001. KCSR reached an agreement as to the payment structure of the judgment in this case and payment of the settlement was made on March 7, 2001. KCSR had previously recorded a liability of approximately $3.0 million for this case. Based on the Supreme Court of Louisiana's decision, as of December 31, 2000, management recorded an additional liability of $11.2 million and also recorded a receivable in the amount of $7.0 million representing the amount of the insurance coverage. This resulted in recording $4.2 million of net operating expense in the accompanying consolidated financial statements for the year ended December 31, 2000. The final installment on the $7.0 million receivable from the insurance company was received by KCSR in June 2001. JAROSLAWICZ CLASS ACTION On October 3, 2000, a lawsuit was filed in the New York State Supreme Court purporting to be a class action on behalf of KCS's preferred shareholders, and naming KCS, its Board of Directors and Stilwell as defendants. This lawsuit sought a declaration that KCS's Spin-off was a defacto liquidation of KCS, alleged violation of directors' fiduciary duties to the preferred shareholders and also sought a declaration that the F-36 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) preferred shareholders were entitled to receive the par value of their shares and other relief. KCS filed a motion to dismiss with prejudice in the New York State Supreme Court on December 22, 2000; the plaintiff filed its brief in opposition to the motion to dismiss on February 1, 2001, and KCS served reply papers on March 7, 2001. On November 19, 2001, the New York State Supreme Court granted KCS's motion in its entirety and dismissed this lawsuit. HOUSTON CASES In August 2000, KCSR and certain of its affiliates were added as defendants in lawsuits pending in Jefferson and Harris Counties, Texas. These lawsuits allege damage to approximately 3,000 plaintiffs as a result of an alleged toxic chemical release from a tank car in Houston, Texas on August 21, 1998. Litigation involving the shipper and the delivering carrier had been pending for some time, but KCSR, which handled the car during the course of its transport, had not previously been named a defendant. On June 28, 2001, KCSR reached a final settlement with the 1,664 plaintiffs in the lawsuit filed in Jefferson County, Texas. KCSR continues to vigorously defend the lawsuit filed in Harris County, Texas and management believes KCS's probability of liability for damages in this case to be remote. DIESEL FUEL COMMITMENTS AND HEDGING ACTIVITIES. Fuel expense is a significant component of KCS's operating expenses. Fuel costs are affected by (i) traffic levels, (ii) efficiency of operations and equipment, and (iii) fuel market conditions. Controlling fuel expenses is a top priority of management. As a result, from time to time, KCS will enter into transactions to hedge against fluctuations in the price of its diesel fuel purchases to protect KCS's operating results against adverse fluctuations in fuel prices. KCSR enters into forward diesel fuel purchase commitments and commodity swap transactions (fuel swaps or caps) as a means of fixing future fuel prices. Forward purchase commitments are used to secure fuel volumes at competitive prices. These contracts normally require KCS to purchase defined quantities of diesel fuel at prices established at the origination of the contract. Commodity swap or cap transactions are accounted for as hedges under SFAS 133 and are typically based on the price of heating oil #2, which KCS believes to produce a high correlation to the price of diesel fuel. These transactions are generally settled monthly in cash with the counterparty. Positions are monitored to ensure that they will not exceed actual fuel requirements in any period. At December 31, 1998, KCS had purchase commitments and fuel swap transactions for approximately 32% and 16%, respectively, of expected 1999 diesel fuel usage. In 1999, KCSR fuel costs were reduced by approximately $0.6 million as a result of these purchase commitments while the fuel swap transactions resulted in higher fuel expense of approximately $1 million. At December 31, 1999, KCS had entered into two diesel fuel cap transactions for a total of six million gallons (approximately 10% of expected 2000 usage) at a cap price of $0.60 per gallon. These hedging instruments expired on March 31, 2000 and June 30, 2000. KCS received approximately $0.8 million during 2000 related to these diesel fuel cap transactions and recorded the proceeds as a reduction of fuel expense. At December 31, 1999, KCS did not have any outstanding purchase commitments for 2000. At December 31, 2000, KCSR had purchase commitments for approximately 12.6% of budgeted gallons of fuel for 2001, which resulted in higher fuel expense of approximately $0.4 million in 2001. There were no fuel swap or cap transactions outstanding at December 31, 2000. At December 31, 2001, KCSR had purchase commitments for approximately 39% of its budgeted gallons of fuel for 2002. On January 14, 2002, KCSR entered into an additional fuel purchase commitment. As a result, KCSR currently has purchase commitments for approximately 49% of its budgeted gallons of fuel for 2002 at an average price per gallon of $0.66. There are currently no diesel fuel cap or swap transactions outstanding. In accordance with the provision of the KCS Credit Facility requiring KCS to manage its interest rate risk through hedging activity, at December 31, 2001 KCS had five separate interest rate cap agreements for an F-37 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) aggregate notional amount of $200 million. Three of these interest rate cap agreements expired on February 10, 2002 while the remaining two expired on March 10, 2002. The interest rate caps were linked to LIBOR. $100 million of the aggregate notional amount provided a cap on KCS's interest rate of 7.25% plus the applicable spread, while $100 million limited the interest rate to 7% plus the applicable spread. Counterparties to the interest rate cap agreements were major financial institutions who also participate in the KCS Credit Facility. As of December 31, 2001, KCS did not have any other interest rate cap agreements or interest rate hedging instruments. See Note 2. FOREIGN EXCHANGE MATTERS. In connection with KCS's investment in Grupo TFM, matters arise with respect to financial accounting and reporting for foreign currency transactions and for translating foreign currency financial statements into U.S. dollars. KCS follows the requirements outlined in Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS 52"), and related authoritative guidance. In 1997, KCS entered into foreign currency contracts in order to reduce the impact of fluctuations in the value of the Mexican peso on its investment in Grupo TFM. These contracts were intended to hedge only a portion of KCS's exposure related to the final installment of the purchase price and not any other transactions or balances. In April 1997, KCS recorded a gain in connection with these contracts and such gain was deferred and has been accounted for as a component of KCS's investment in Grupo TFM. Prior to January 1, 1999, Mexico's economy was classified as "highly inflationary" as defined in SFAS 52. Accordingly, under the highly inflationary accounting guidance in SFAS 52, the U.S. dollar was used as Grupo TFM's functional currency, and any gains or losses from translating Grupo TFM's financial statements into U.S. dollars were included in the determination of its net income (loss). Equity earnings (losses) from Grupo TFM included in KCS's results of operations reflected KCS's share of such translation gains and losses. Effective January 1, 1999, the SEC staff declared that Mexico should no longer be considered a highly inflationary economy. Accordingly, KCS performed an analysis under the guidance of SFAS 52 to determine whether the U.S. dollar or the Mexican peso should be used as the functional currency for financial accounting and reporting purposes for periods subsequent to December 31, 1998. Based on the results of the analysis, management believes the U.S. dollar to be the appropriate functional currency for KCS's investment in Grupo TFM; therefore, the financial accounting and reporting of the operating results of Grupo TFM will be performed using the U.S. dollar as Grupo TFM's functional currency. Because KCS is required to report equity in Grupo TFM under U.S. GAAP and Grupo TFM reports under International Accounting Standards, fluctuations in deferred income tax calculations occur based on translation requirements and differences in accounting standards. The deferred income tax calculations are significantly impacted by fluctuations in the relative value of the Mexican peso versus the U.S. dollar and the rate of Mexican inflation, and can result in significant variability in the amount of equity earnings (losses) reported by KCS. KCS continues to evaluate existing alternatives with respect to utilizing foreign currency instruments to hedge its U.S. dollar investment in Grupo TFM as market conditions change or exchange rates fluctuate. At December 31, 1999, 2000 and 2001, KCS had no outstanding foreign currency hedging instruments. ENVIRONMENTAL LIABILITIES. KCS's operations are subject to extensive federal, state and local environmental laws and regulations. The major environmental laws to which KCS 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 liability for cleanup and investigation costs, without regard to fault or legality of the original conduct, on current and predecessor owners F-38 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and operators of a site, as well as those who generate, or arrange for the disposal of, hazardous substances. KCS does not foresee 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 risk of incurring environmental liability is inherent in the railroad industry. As part of serving the petroleum and chemicals industry, KCSR 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, KCS is a Responsible Care(R) partner and has initiated practices under this environmental program. KCSR performs ongoing reviews and evaluations of the various environmental programs and issues within KCS's operations, and, as necessary, takes actions to limit KCS's exposure to potential liability. KCS owns property that is, or has been, used for industrial purposes. Use of these properties may subject KCS 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 KCS is responsible for investigating and remediating contamination at several locations, based on currently available information, KCS does not expect any related liabilities, individually or collectively, to have a material impact on its results of operations, financial position or cash flows. In the event that KCS becomes subject to more stringent cleanup requirements at these sites, discovers additional contamination, or becomes subject to related personal or property damage claims, KCS could incur material costs in connection with these sites. KCS records liabilities for remediation and restoration costs related to past activities when KCS's obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance activities to current operations are expensed as incurred. KCS'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. At December 31, 1999, 2000 and 2001 these recorded liabilities were not material. 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 KCS's consolidated results of operations or financial condition. PANAMA CANAL RAILWAY COMPANY. Under certain limited conditions, KCS is a guarantor for up to $7.5 million of cash deficiencies associated with project completion and operations of PCRC. In addition, KCS is a guarantor for up to $2.4 million of notes for the purchase of rail and passenger cars. Further, if KCS or its partner terminate the concession contract without the consent of the IFC, KCS is a guarantor for up to 50% of the outstanding senior loans. See Note 5. NOTE 12. CONTROL SUBSIDIARIES AND AFFILIATES. KCS is party to certain agreements with Grupo TMM covering the Grupo TFM and Mexrail ventures, which contain "change of control" provisions, provisions intended to preserve KCS's and Grupo TMM's proportionate ownership of the ventures, and super majority provisions with respect to voting on certain significant transactions. Such agreements also provide a right of first refusal in the event that either party initiates a divestiture of its equity interest in Grupo TFM or Mexrail. Under certain circumstances, such agreements could affect KCS's ownership percentage and rights in these equity affiliates. EMPLOYEES. KCS and certain of its subsidiaries have entered into agreements with employees whereby, upon defined circumstances constituting a change in control of KCS 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. F-39 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ASSETS. KCS 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 KCS or subsidiary. Assets held in such trusts at December 31, 2001 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 KCS, funding of KCS's trusts could be very substantial. DEBT. Certain loan agreements and debt instruments entered into or guaranteed by KCS and its subsidiaries provide for default in the event of a specified change in control of KCS or particular subsidiaries of KCS. STOCKHOLDER RIGHTS PLAN. On September 19, 1995, the Board of Directors of KCS declared a dividend distribution of one Right for each outstanding share of KCS's common stock, $.01 par value per share (the "Common stock"), to the stockholders of record on October 12, 1995. Each Right entitles the registered holder to purchase from KCS 1/1,000th of a share of Series A Preferred Stock (the "Preferred Stock") or in some circumstances, Common stock, other securities, cash or other assets as the case may be, at a price of $210 per share, subject to adjustment. The Rights, which are automatically attached to the Common stock, are not exercisable or transferable apart from the Common stock until the tenth calendar day following the earlier to occur of (unless extended by the Board of Directors and subject to the earlier redemption or expiration of the Rights): (i) the date of a public announcement that an acquiring person acquired, or obtained the right to acquire, beneficial ownership of 20 percent or more of the outstanding shares of the Common stock of KCS (or 15 percent in the case that such person is considered an "adverse person"), or (ii) the commencement or announcement of an intention to make a tender offer or exchange offer that would result in an acquiring person beneficially owning 20 percent or more of such outstanding shares of Common stock of KCS (or 15 percent in the case that such person is considered an "adverse person"). Until exercised, the Rights will have no rights as a stockholder of KCS, including, without limitation, the right to vote or to receive dividends. In connection with certain business combinations resulting in the acquisition of KCS or dispositions of more than 50% of Company assets or earnings power, each Right shall thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of the highest priority voting securities of the acquiring company (or certain of its affiliates) that at the time of such transaction would have a market value of two times the exercise price of the Right. The Rights expire on October 12, 2005, unless earlier redeemed by KCS as described below. At any time prior to the tenth calendar day after the first date after the public announcement that an acquiring person has acquired beneficial ownership of 20 percent (or 15 percent in some instances) or more of the outstanding shares of the Common stock of KCS, KCS may redeem the Rights in whole, but not in part, at a price of $0.005 per Right. In addition, KCS's right of redemption may be reinstated following an inadvertent trigger of the Rights (as determined by the Board) if an acquiring person reduces its beneficial ownership to 10 percent or less of the outstanding shares of Common stock of KCS in a transaction or series of transactions not involving KCS. The Series A Preferred shares purchasable upon exercise of the Rights will have a cumulative quarterly dividend rate set by the Board of Directors or equal to 1,000 times the dividend declared on the Common stock for such quarter. Each share will have the voting rights of one vote on all matters voted at a meeting of the stockholders for each 1/1,000th share of preferred stock held by such stockholder. In the event of any merger, consolidation or other transaction in which the common shares are exchanged, each Series A Preferred share will be entitled to receive an amount equal to 1,000 times the amount to be received per common share. In the event of a liquidation, the holders of Series A Preferred shares will be entitled to receive $1,000 per share or an amount per share equal to 1,000 times the aggregate amount to be distributed per share to holders of Common stock. The F-40 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) shares will not be redeemable. The vote of holders of a majority of the Series A Preferred shares, voting together as a class, will be required for any amendment to KCS's Certificate of Incorporation that would materially and adversely alter or change the powers, preferences or special rights of such shares. NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN MILLIONS, EXCEPT PER SHARE AMOUNTS): REVERSE STOCK SPLIT. The quarterly Per Share Data presented for 2000 herein reflects the reverse stock split paid in July 2000 for all period presented. Additionally, the range of stock prices for common stock reflect this reverse stock split for all periods presented and the Spin-off for periods subsequent to July 12, 2000.
2000 --------------------------------- FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- REVENUES................................................................ $134.8 $ 144.1 $ 144.4 $ 148.9 Costs and expenses...................................................... 114.2 115.8 111.7 116.6 Depreciation and amortization........................................... 13.7 13.8 14.3 14.3 ------ ------- ------- ------- OPERATING INCOME 6.9 14.5 18.4 18.0 Equity in net earnings (losses) of unconsolidated affiliates: Grupo TFM........................................................ 2.8 2.6 8.0 8.2 Other............................................................ (1.1) 1.5 1.2 0.6 Interest expense........................................................ (11.6) (18.3) (18.4) (17.5) Other, net.............................................................. 1.2 1.2 0.9 2.7 ------ ------- ------- ------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (1.8) 1.5 10.1 12.0 Income taxes provision (benefit)........................................ (5.4) (1.1) 1.3 1.6 ------ ------- ------- ------- INCOME FROM CONTINUING OPERATIONS 3.6 2.6 8.8 10.4 Income from discontinued operations, net of income taxes................ -- 23.4 151.7 188.7 ------ ------- ------- ------- INCOME BEFORE EXTRAORDINARY ITEM 3.6 26.0 160.5 199.1 Extraordinary items, net of income taxes................................ Debt retirement costs -- KCS..................................... -- (1.1) -- (5.9) Debt retirement costs -- Grupo TFM............................... -- (1.7) -- -- ------ ------- ------- ------- NET INCOME.............................................................. $ 3.6 $ 23.2 $ 160.5 $ 193.2 ====== ======= ======= ======= PER SHARE DATA (i) Basic Earnings per Common share Continuing operations............................................... $ 0.06 $ 0.05 $ 0.16 $ 0.18 Discontinued operations............................................. -- 0.40 2.72 3.40 ------ ------- ------- ------- Basic Earnings per Common share before extraordinary item........ 0.06 0.45 2.88 3.58 Extraordinary item, net of income taxes............................. -- (0.05) -- (0.10) ------ ------- ------- ------- Total Basic Earnings per Common share............................ $ 0.06 $ 0.40 $ 2.88 $ 3.48 ====== ======= ======= ======= Diluted Earnings per Common share Continuing operations............................................... $ 0.06 $ 0.05 $ 0.15 $ 0.18 Discontinued operations............................................. -- 0.39 2.59 3.24 ------ ------- ------- ------- Diluted Earnings per Common share before extraordinary item...... 0.06 0.44 2.74 3.42 Extraordinary item, net of income taxes............................. -- (0.05) -- (0.10) ------ ------- ------- ------- Total Diluted Earnings per Common share.......................... $ 0.06 $ 0.39 $ 2.74 $ 3.32 ====== ======= ======= ======= DIVIDENDS PER SHARE: Preferred........................................................... $ 0.25 $ 0.25 $ 0.25 $ 0.25 Common.............................................................. $ -- $ -- $ -- $ -- STOCK PRICE RANGES: Preferred --High.................................................... $20.88 $ 20.00 $ 19.50 $ 16.00 --Low......................................................... $20.31 $ 18.63 $ 14.75 $ 14.25 Common --High....................................................... $10.31 $191.50 $177.75 $187.75 --Low......................................................... $ 7.36 $ 5.13 $117.75 $127.75
- -------- (i)The accumulation of 2000's four quarters for Basic and Diluted earnings (loss) per share data does not total the respective earnings per share for the year ended December 31, 2000 due to rounding and the impact of the timing of the Spin-off related to changes in weighted average shares. F-41 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2001 ------------------------------ FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- REVENUES....................................................... $145.5 $144.6 $143.2 $144.0 Costs and expenses............................................. 110.7 113.9 115.8 123.5 Depreciation and amortization.................................. 14.4 14.7 14.5 14.4 ------ ------ ------ ------ Operating income........................................ 20.4 16.0 12.9 6.1 Equity in net earnings (losses) of unconsolidated affiliates: Grupo TFM................................................... 5.0 7.5 4.9 11.1 Other....................................................... (1.2) (0.6) 0.3 0.1 Interest expense............................................... (9.9) (13.2) (14.5) (15.2) Other, net..................................................... 1.2 0.9 1.1 1.0 ------ ------ ------ ------ Income from continuing operations before income taxes.......... 15.5 10.6 4.7 3.1 Income taxes provision (benefit)............................... 4.4 1.6 -- (3.2) ------ ------ ------ ------ Income from continuing operations.............................. 11.1 9.0 4.7 6.3 Cumulative effect of accounting change, net of income taxes.... -- -- -- (0.4) ------ ------ ------ ------ Net income..................................................... $ 11.1 $ 9.0 $ 4.7 $ 5.9 ====== ====== ====== ====== PER SHARE DATA (i) Basic Earnings per Common share Continuing operations....................................... $ 0.19 $ 0.15 $ 0.08 $ 0.11 Cumulative effect of accounting change, net of income taxes. -- -- -- (0.01) ------ ------ ------ ------ Total Basic Earnings per Common share....................... $ 0.19 $ 0.15 $ 0.08 $ 0.10 ====== ====== ====== ====== Diluted Earnings per Common share Continuing operations....................................... $ 0.18 $ 0.15 $ 0.08 $ 0.10 Cumulative effect of accounting change, net of income taxes. -- -- -- (0.00) ------ ------ ------ ------ Total Diluted Earnings per Common share..................... $ 0.18 $ 0.15 $ 0.08 $ 0.10 ====== ====== ====== ====== DIVIDENDS PER SHARE: Preferred................................................... $ 0.25 $ 0.25 $ 0.25 $ 0.25 Common...................................................... $ -- $ -- $ -- $ -- STOCK PRICE RANGES: Preferred--High............................................. $19.00 $21.00 $21.00 $20.95 --Low................................................ $16.50 $17.95 $20.63 $20.00 Common--High................................................ $15.40 $16.10 $16.75 $15.50 --Low................................................ $10.92 $10.25 $12.10 $ 9.00
- -------- (i)The accumulation of 2001's four quarters for Diluted earnings per share data does not total the respective earnings per share for the year ended December 31, 2001 due to rounding. F-42 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION As discussed in Note 7, in September 2000 KCSR issued $200 million 9.5% senior notes due 2008. 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 of its subsidiaries (all of which are wholly-owned). KCS registered exchange notes with substantially identical terms and associated guarantees with the SEC. The accompanying condensed consolidating financial information 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 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 generally accepted accounting principles. Certain prior year information has been reclassified to reflect the merger of Gateway Western with KCSR in 2001. CONDENSED CONSOLIDATING STATEMENTS OF INCOME
DECEMBER 31, 1999 (DOLLARS IN MILLIONS) ---------------------------------------------------------------------- NON- SUBSIDIARY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS KCS ------ ---------- ------------ ------------ ------------- ------------ Revenues.......................... $ -- $585.2 $32.9 $ 10.3 $ (27.0) $601.4 Costs and expenses................ 12.7 511.9 29.1 10.6 (27.0) 537.3 ------ ------ ----- ------ ------- ------ Operating income (loss)........ (12.7) 73.3 3.8 (0.3) -- 64.1 Equity in net earnings (losses) of unconsolidated affiliates and subsidiaries.................... 18.0 (5.0) 0.2 2.0 (10.0) 5.2 Interest expense.................. (48.7) (37.3) (0.8) (19.3) 48.7 (57.4) Other, net........................ 49.8 4.0 0.1 0.1 (48.7) 5.3 ------ ------ ----- ------ ------- ------ Income (loss) from continuing operations before income taxes.. 6.4 35.0 3.3 (17.5) (10.0) 17.2 Income tax provision (benefit).... (3.8) 16.4 1.0 (6.6) -- 7.0 ------ ------ ----- ------ ------- ------ Income (loss) from continuing operations...................... 10.2 18.6 2.3 (10.9) (10.0) 10.2 Income (loss) from discontinued operations...................... 313.1 -- -- 313.1 (313.1) 313.1 ------ ------ ----- ------ ------- ------ Income (loss) before extraordinary items........................... 323.3 18.6 2.3 302.2 (323.1) 323.3 Extraordinary items, net of income taxes........................... -- -- -- -- -- -- ------ ------ ----- ------ ------- ------ Net income (loss)................. $323.3 $ 18.6 $ 2.3 $302.2 $(323.1) $323.3 ====== ====== ===== ====== ======= ======
F-43 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 (DOLLARS IN MILLIONS) ---------------------------------------------------------------------- NON- SUBSIDIARY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS KCS ------ ---------- ------------ ------------ ------------- ------------ Revenues.......................... $ -- $562.4 $21.1 $ 11.0 $ (22.3) $572.2 Costs and expenses................ 10.0 498.3 17.8 10.6 (22.3) 514.4 ------ ------ ----- ------ ------- ------ Operating income (loss)........ (10.0) 64.1 3.3 0.4 -- 57.8 Equity in net earnings (losses) of unconsolidated affiliates and subsidiaries.................... 31.3 22.0 -- 22.9 (52.4) 23.8 Interest expense.................. (2.6) (68.6) (0.7) (1.1) 7.2 (65.8) Other, net........................ 4.0 9.0 0.2 -- (7.2) 6.0 ------ ------ ----- ------ ------- ------ Income (loss) from continuing operations before income taxes.. 22.7 26.5 2.8 22.2 (52.4) 21.8 Income tax provision (benefit).... (2.7) (2.8) 0.6 1.3 -- (3.6) ------ ------ ----- ------ ------- ------ Income (loss) from continuing operations...................... 25.4 29.3 2.2 20.9 (52.4) 25.4 Income (loss) from discontinued operations...................... 363.8 -- -- 363.8 (363.8) 363.8 ------ ------ ----- ------ ------- ------ Income (loss) before extraordinary items........................... 389.2 29.3 2.2 384.7 (416.2) 389.2 Extraordinary items, net of income taxes........................... (8.7) (1.1) -- (1.7) 2.8 (8.7) ------ ------ ----- ------ ------- ------ Net income (loss)................. $380.5 $ 28.2 $ 2.2 $383.0 $(413.4) $380.5 ====== ====== ===== ====== ======= ======
DECEMBER 31, 2001 (DOLLARS IN MILLIONS) ---------------------------------------------------------------------- NON- SUBSIDIARY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS KCS ------ ---------- ------------ ------------ ------------- ------------ Revenues.............................. $ -- $565.6 $21.1 $20.1 $(29.5) $577.3 Costs and expenses.................... 13.6 500.9 17.7 19.2 (29.5) 521.9 ------ ------ ----- ----- ------ ------ Operating income (loss)............ (13.6) 64.7 3.4 0.9 -- 55.4 Equity in net earnings (losses) of unconsolidated affiliates and subsidiaries........................ 39.2 29.6 (0.1) 29.4 (71.0) 27.1 Interest expense...................... 1.3 (55.1) (0.6) (0.4) 2.0 (52.8) Other, net............................ 0.3 5.9 -- -- (2.0) 4.2 ------ ------ ----- ----- ------ ------ Income (loss) before income taxes and cumulative effect of accounting change.............................. 27.2 45.1 2.7 29.9 (71.0) 33.9 Income tax provision (benefit)........ (4.0) 5.2 1.0 0.6 -- 2.8 ------ ------ ----- ----- ------ ------ Income (loss) before cumulative effect of accounting change................ 31.2 39.9 1.7 29.3 (71.0) 31.1 Cumulative effect of accounting change.............................. (0.4) (0.4) -- -- 0.4 (0.4) ------ ------ ----- ----- ------ ------ Net income (loss)..................... $ 30.8 $ 39.5 $ 1.7 $29.3 $(70.6) $ 30.7 ====== ====== ===== ===== ====== ======
F-44 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1999 (DOLLARS IN MILLIONS) ------------------------------------------------------------------------ NON- SUBSIDIARY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS KCS -------- ---------- ------------ ------------ ------------- ------------ ASSETS: Current assets...................... $ 9.9 $ 190.7 $10.8 $ 19.4 $ (22.3) $ 208.5 Investments held for operating purposes and investments in subsidiaries.................... 1,148.0 41.5 0.6 290.4 (1,143.4) 337.1 Properties, net..................... 0.4 1,231.0 43.4 2.6 -- 1,277.4 Goodwill and other assets........... 8.0 26.6 2.3 0.2 (2.7) 34.4 Net assets of discontinued operations......................... 814.6 -- -- 814.6 (814.6) 814.6 -------- -------- ----- -------- --------- -------- Total assets................... $1,980.9 $1,489.8 $57.1 $1,127.2 $(1,983.0) $2,672.0 ======== ======== ===== ======== ========= ======== LIABILITIES AND EQUITY: Current liabilities................. $ 34.7 $ 225.1 $ 4.1 $ 11.7 $ (21.4) $ 254.2 Long-term debt...................... 647.8 90.9 6.0 5.3 -- 750.0 Payable to affiliates............... 3.9 398.9 1.5 335.7 (740.0) -- Deferred income taxes............... 4.9 288.4 5.1 1.6 (2.6) 297.4 Other liabilities................... 6.5 78.6 2.2 -- -- 87.3 Stockholders equity................. 1,283.1 407.9 38.2 772.9 (1,219.0) 1,283.1 -------- -------- ----- -------- --------- -------- Total liabilities and equity...... $1,980.9 $1,489.8 $57.1 $1,127.2 $(1,983.0) $2,672.0 ======== ======== ===== ======== ========= ========
F-45 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 (DOLLARS IN MILLIONS) ---------------------------------------------------------------------- NON- SUBSIDIARY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS KCS ------ ---------- ------------ ------------ ------------- ------------ ASSETS: Current assets................... $ 16.9 $ 199.7 $14.6 $ 10.1 $ (24.9) $ 216.4 Investments held for operating purposes and investments in subsidiaries..... 666.3 392.2 0.6 343.8 (1,044.7) 358.2 Properties, net.................. 0.3 1,282.7 42.6 2.2 -- 1,327.8 Goodwill and other assets........ 0.2 41.2 2.3 0.3 (1.9) 42.1 ------ -------- ----- ------ --------- -------- Total assets................... $683.7 $1,915.8 $60.1 $356.4 $(1,071.5) $1,944.5 ====== ======== ===== ====== ========= ======== LIABILITIES AND EQUITY: Current liabilities.............. $ 21.8 $ 237.5 $ 7.2 $ 7.8 $ (25.3) $ 249.0 Long-term debt................... 1.6 627.9 3.8 5.1 -- 638.4 Payable to affiliates............ 3.4 -- -- -- (3.4) -- Deferred income taxes............ 7.2 318.2 4.8 3.9 (1.9) 332.2 Other liabilities................ 6.3 72.7 2.5 -- -- 81.5 Stockholders equity.............. 643.4 659.5 41.8 339.6 (1,040.9) 643.4 ------ -------- ----- ------ --------- -------- Total liabilities and equity... $683.7 $1,915.8 $60.1 $356.4 $(1,071.5) $1,944.5 ====== ======== ===== ====== ========= ========
DECEMBER 31, 2001 (DOLLARS IN MILLIONS) ---------------------------------------------------------------------- NON- SUBSIDIARY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS KCS ------ ---------- ------------ ------------ ------------- ------------ ASSETS: Current assets................... $ 25.5 $ 223.4 $22.0 $ 6.6 $ (23.1) $ 254.4 Investments held for operating purposes and investments in subsidiaries..... 701.4 413.6 -- 376.4 (1,104.6) 386.8 Properties, net.................. 0.3 1,287.1 38.2 1.8 -- 1,327.4 Goodwill and other assets........ 1.7 40.4 1.7 0.1 (1.6) 42.3 ------ -------- ----- ------ --------- -------- Total assets................... $728.9 $1,964.5 $61.9 $384.9 $(1,129.3) $2,010.9 ====== ======== ===== ====== ========= ======== LIABILITIES AND EQUITY: Current liabilities.............. $ 7.2 $ 252.3 $ 6.9 $ 14.2 $ (23.1) $ 257.5 Long-term debt................... 1.3 602.9 2.8 4.7 -- 611.7 Payable to affiliates............ 4.8 -- 0.6 -- (5.4) -- Deferred income taxes............ 9.5 350.9 5.2 6.2 (1.6) 370.2 Other liabilities................ 25.8 62.0 3.4 -- -- 91.2 Stockholders equity.............. 680.3 696.4 43.0 359.8 (1,099.2) 680.3 ------ -------- ----- ------ --------- -------- Total liabilities and equity... $728.9 $1,964.5 $61.9 $384.9 $(1,129.3) $2,010.9 ====== ======== ===== ====== ========= ========
F-46 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
DECEMBER 31, 1999 (DOLLARS IN MILLIONS) ---------------------------------------------------------------------- NON- SUBSIDIARY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS KCS ------ ---------- ------------ ------------ ------------- ------------ Net cash flows provided by (used for) Operating activities:................................... $ 21.3 $ 142.9 $ 2.4 $ 0.6 $ 10.8 $ 178.0 Investing activities: Property acquisitions........................ -- (104.7) (1.5) -- -- (106.2) Investments in and loans to affiliates....... (3.9) -- -- -- -- (3.9) Repayment of loans to affiliates............. 55.6 -- -- -- (39.0) 16.6 Other, net................................... 0.3 4.2 0.7 0.1 (9.0) (3.7) ------ ------- ----- ----- ------ ------- Net......................................... 52.0 (100.5) (0.8) 0.1 (48.0) (97.2) ------ ------- ----- ----- ------ ------- Financing activities: Proceeds from issuance of long- term debt.... 21.8 -- -- -- -- 21.8 Repayment of long-term debt.................. (86.8) (10.5) -- (0.2) -- (97.5) Proceeds from loans from affiliates.......... -- -- -- -- -- -- Repayment of loans from affiliates........... -- (38.3) -- (1.9) 40.2 -- Debt issuance costs.......................... (4.2) -- -- -- -- (4.2) Proceeds from stock plans.................... 37.0 -- -- -- -- 37.0 Stock repurchased............................ (24.6) -- -- -- -- (24.6) Cash dividends paid.......................... (17.6) -- -- -- -- (17.6) Other, net................................... 6.1 6.9 (1.5) (1.8) 0.9 10.6 ------ ------- ----- ----- ------ ------- Net......................................... (68.3) (41.9) (1.5) (3.9) 41.1 (74.5) ------ ------- ----- ----- ------ ------- Cash and equivalents: Net increase (decrease)...................... 5.0 0.5 0.1 (3.2) 3.9 6.3 At beginning of year......................... 0.2 5.1 0.7 3.5 (3.9) 5.6 ------ ------- ----- ----- ------ ------- At end of year............................... $ 5.2 $ 5.6 $ 0.8 $ 0.3 $ -- $ 11.9 ====== ======= ===== ===== ====== =======
F-47 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 (DOLLARS IN MILLIONS) ----------------------------------------------------------------------- NON- SUBSIDIARY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS KCS ------- ---------- ------------ ------------ ------------- ------------ Net cash flows provided by (used for) Operating activities:..................... $ 3.5 $ 85.4 $ 2.8 $13.7 $ (28.2) $ 77.2 ------- ------- ----- ----- ------- --------- Investing activities: Property acquisitions.................... -- (102.5) (2.0) -- -- (104.5) Investments in and loans to affiliates... (43.0) -- -- (4.6) 43.4 (4.2) Repayment of loans to affiliates......... 544.8 -- -- -- (544.8) -- Other, net............................... 1.1 3.6 -- -- 2.2 6.9 ------- ------- ----- ----- ------- --------- Net..................................... 502.9 (98.9) (2.0) (4.6) (499.2) (101.8) ------- ------- ----- ----- ------- --------- Financing activities: Proceeds from issuance of long-term debt. 125.0 927.0 -- -- -- 1,052.0 Repayment of long-term debt.............. (648.3) (365.7) (1.2) (0.2) -- (1,015.4) Proceeds from loans from affiliates...... -- 74.2 3.8 -- (78.0) -- Repayment of loans from affiliates....... -- (577.6) -- -- 577.6 -- Debt issuance costs...................... -- (17.6) -- -- -- (17.6) Proceeds from stock plans................ 17.9 -- -- -- -- 17.9 Stock repurchased........................ -- -- -- -- -- -- Cash dividends paid...................... (4.8) (15.3) (4.3) (8.7) 28.3 (4.8) Other, net............................... 0.1 2.3 0.2 -- (0.5) 2.1 ------- ------- ----- ----- ------- --------- Net..................................... (510.1) 27.3 (1.5) (8.9) 527.4 34.2 ------- ------- ----- ----- ------- --------- Cash and equivalents: Net increase (decrease).................. (3.7) 13.8 (0.7) 0.2 -- 9.6 At beginning of period................... 5.2 5.6 0.8 0.3 -- 11.9 ------- ------- ----- ----- ------- --------- At end of year........................... $ 1.5 $ 19.4 $ 0.1 $ 0.5 $ -- $ 21.5 ======= ======= ===== ===== ======= =========
DECEMBER 31, 2001 (DOLLARS IN MILLIONS) ----------------------------------------------------------------------- SUBSIDIARY GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS KCS ------ ---------- ------------ ------------- ------------- ------------ Net cash flows provided by (used for) Operating activities:................................... $(10.0) $ 82.0 $(2.7) $ 7.1 $(0.3) $ 76.1 ------ ------ ----- ----- ----- ------ Investing activities: Property acquisitions........................ -- (64.5) (1.4) (0.1) -- (66.0) Investments in and loans to affiliates....... -- (2.5) (0.1) (9.0) 3.4 (8.2) Repayment of loans to affiliates............. -- -- -- -- -- -- Other, net................................... -- 13.7 4.1 -- 0.7 18.5 ------ ------ ----- ----- ----- ------ Net......................................... -- (53.3) 2.6 (9.1) 4.1 (55.7) ------ ------ ----- ----- ----- ------ Financing activities: Proceeds from issuance of long-term debt..... -- 35.0 -- -- -- 35.0 Repayment of long-term debt.................. -- (50.0) (1.0) (0.3) -- (51.3) Proceeds from loans from affiliates.......... 1.4 -- 0.6 -- (2.0) -- Repayment of loans from affiliates........... -- -- -- -- -- -- Debt issuance costs.......................... -- (0.4) -- -- -- (0.4) Proceeds from stock plans.................... 8.9 -- -- -- -- 8.9 Stock repurchased............................ -- -- -- -- -- -- Cash dividends paid.......................... (0.2) -- -- -- -- (0.2) Other, net................................... (0.3) (9.5) 0.4 2.0 (1.8) (9.2) ------ ------ ----- ----- ----- ------ Net......................................... 9.8 (24.9) -- 1.7 (3.8) (17.2) ------ ------ ----- ----- ----- ------ Cash and equivalents: Net increase (decrease)...................... (0.2) 3.8 (0.1) (0.3) -- 3.2 At beginning of period....................... 1.5 19.4 0.1 0.5 -- 21.5 ------ ------ ----- ----- ----- ------ At end of year............................... $ 1.3 $ 23.2 $ -- $ 0.2 $ -- $ 24.7 ====== ====== ===== ===== ===== ======
F-48 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15. SUBSEQUENT EVENTS KCS and Grupo TMM have resolved their previously announced dispute over resolutions adopted at the Grupo TFM shareholders meetings held at the end of last year authorizing, among other things, the payment of a dividend by Grupo TFM and TFM's entry into a long-term lease with Mexrail for the northern half of the international railway bridge at Laredo, Texas. On March 26, 2002, the 18/th/ Civil Court of Mexico, D.F. issued an order declaring the Ordinary General Meeting of Shareholders held on December 21, 2001, which adopted resolutions authorizing the payment of a dividend, null and void. As a result of that court order, the dividend payment declared to the parties to the lawsuit, our subsidiary NAFTA Rail, S.A. de C.V. and Grupo TMM's subsidiary Grupo TMM Multimodal, S.A. de C.V., has been determined to be null and void. In addition, the dispute over the Mexrail-TFM bridge lease has been resolved by i) the termination of that lease; ii) a judicial settlement between the parties and the withdrawal from the action filed with the 14/th/ Civil Court of Mexico, D.F.; and iii) KCS's dismissal of the lawsuit it had filed in Delaware. KCS, Grupo TMM, and certain of their affiliates entered into an agreement on February 27, 2002 with TFM to sell to TFM all of the common stock of Mexrail. Mexrail owns the northern half of the international railway bridge at Laredo and all of the common stock of Tex-Mex. The sale closed on March 27, 2002 and KCS received approximately $31.4 million for its 49% interest in Mexrail. KCS intends to use the proceeds from the sale to reduce debt. Although KCS no longer directly owns 49% of Mexrail, it retains an indirect ownership through its ownership of Grupo TFM. KCS is currently evaluating the accounting treatment for this transaction. NOTE 16. ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142. Effective January 1, 2002, the Company implemented Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 provides, among other things, that goodwill with an indefinite life shall no longer be amortized, but shall be evaluated for impairment on an annual basis. SFAS 142 also requires separate presentation of goodwill on the balance sheet and impairment losses are to be shown as a separate item on the income statement. Additionally, changes in the carrying amount of goodwill are to be disclosed in the footnotes to the financial statements. SFAS 142 also requires various transitional disclosures until all periods presented reflect the provisions of SFAS 142. These transitional disclosures include the presentation of income before extraordinary items, net income and earnings per share information adjusted to exclude amortization expense (including the related income tax effects) for all periods presented. A reconciliation of reported income from continuing operations to adjusted income from continuing operations, reported income before extraordinary items to adjusted income before extraordinary items, reported net income to adjusted net income and reported earnings per share to adjusted earnings per share are presented in the table below. In accordance with SFAS 142, the Company has presented its goodwill as a separate line item on the balance sheet. Additionally, the Company has performed its transitional goodwill impairment test and has determined that existing goodwill is not impaired. F-49 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, ----------------------- 1999 2000 2001 ------ ------ ----- Reported income from continuing operations...................... $ 10.2 $ 25.4 $31.1 Add back: Goodwill amortization................................. 0.6 0.6 0.6 ------ ------ ----- Adjusted income before extraordinary items...................... $ 10.8 $ 26.0 $31.7 ====== ====== ===== Reported income from discontinued operations.................... $313.1 $363.8 $ -- Add back: Goodwill amortization................................. 9.7 5.7 -- ------ ------ ----- Adjusted income from discontinued operations.................... $322.8 $369.5 $ -- ====== ====== ===== Reported income before extraordinary items...................... $323.3 $389.2 $31.1 Add back: Goodwill amortization................................. 10.3 6.3 0.6 ------ ------ ----- Adjusted income before extraordinary items...................... $333.6 $395.5 $31.7 ====== ====== ===== Reported net income............................................. $323.3 $380.5 $30.7 Add back: Goodwill amortization................................. 10.3 6.3 0.6 ------ ------ ----- Adjusted net income............................................. $333.6 $386.8 $31.3 ====== ====== ===== Reported diluted earnings per share from continuing operations.. $ 0.17 $ 0.43 $0.51 Add back: Goodwill amortization................................. 0.01 0.01 0.01 ------ ------ ----- Adjusted diluted earnings per share from continuing operations.. $ 0.18 $ 0.44 $0.52 ====== ====== ===== Reported diluted earnings per share from discontinued operations $ 5.40 $ 6.14 $ -- Add back: Goodwill amortization................................. 0.17 0.10 -- ------ ------ ----- Adjusted diluted earnings per share from discontinued operations $ 5.57 $ 6.24 $ -- ====== ====== ===== Reported diluted earnings per share--net income................. $ 5.57 $ 6.42 $0.50 Add back: Goodwill amortization................................. 0.18 0.11 0.01 ------ ------ ----- Adjusted diluted earnings per share--net income................. $ 5.75 $ 6.53 $0.51 ====== ====== =====
F-50 INTRODUCTORY COMMENTS The Consolidated Condensed Financial Statements included herein have been prepared by Kansas City Southern ("Company" or "KCS"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These Consolidated Condensed Financial Statements should be read in conjunction with the financial statements and the notes thereto, as well as Management's Discussion and Analysis of Financial Condition and Results of Operations, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 (as amended), and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Form 10-Q for the period ended March 31, 2002. Results for the three months ended March 31, 2002 are not necessarily indicative of the results expected for the full year 2002. F-51 KANSAS CITY SOUTHERN CONSOLIDATED CONDENSED BALANCE SHEETS (DOLLARS IN MILLIONS)
DECEMBER 31, MARCH 31, 2001 2002 ------------ ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and equivalents........................................................ $ 24.7 $ 56.8 Accounts receivable, net.................................................... 130.0 129.6 Inventories................................................................. 27.9 28.2 Other current assets........................................................ 71.8 45.1 -------- -------- Total current assets.................................................... 254.4 259.7 INVESTMENTS.................................................................... 386.8 382.3 PROPERTIES (net of $660.2 and $677.9 accumulated depreciation and amortization, respectively)................................................................ 1,327.4 1,325.2 GOODWILL....................................................................... 19.3 10.8 OTHER ASSETS................................................................... 23.0 21.9 -------- -------- Total assets............................................................ $2,010.9 $1,999.9 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Debt due within one year.................................................... $ 46.7 $ 47.9 Accounts and wages payable.................................................. 50.4 41.7 Accrued liabilities......................................................... 160.4 163.3 -------- -------- Total current liabilities............................................... 257.5 252.9 -------- -------- OTHER LIABILITIES: Long-term debt.............................................................. 611.7 580.0 Deferred income taxes....................................................... 370.2 371.1 Other deferred credits...................................................... 91.2 97.2 -------- -------- Total other liabilities................................................. 1,073.1 1,048.3 -------- -------- STOCKHOLDERS' EQUITY: Preferred stock............................................................. 6.1 6.1 Common stock................................................................ 0.6 0.6 Retained earnings........................................................... 676.5 694.2 Accumulated other comprehensive loss........................................ (2.9) (2.2) -------- -------- Total stockholders' equity.............................................. 680.3 698.7 -------- -------- Total liabilities and stockholders' equity.................................. $2,010.9 $1,999.9 ======== ========
See accompanying notes to consolidated condensed financial statements. F-52 KANSAS CITY SOUTHERN CONSOLIDATED CONDENSED STATEMENTS OF INCOME (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------- 2001 2002 ------- ------- REVENUES............................................................. $ 144.0 $ 142.5 Costs and expenses Compensation and benefits......................................... 49.1 49.4 Depreciation and amortization..................................... 14.4 14.9 Purchased services................................................ 12.0 14.0 Operating leases.................................................. 12.8 12.1 Fuel.............................................................. 12.4 9.5 Casualties and insurance.......................................... 14.6 7.9 Other............................................................. 22.6 21.3 ------- ------- Total costs and expenses...................................... 137.9 129.1 ------- ------- OPERATING INCOME.............................................. 6.1 13.4 Equity in net earnings of unconsolidated affiliates: Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V........................................... 11.1 4.8 Other........................................................... 0.1 0.1 Gain on sale of Mexrail, Inc......................................... -- 4.4 Interest expense..................................................... (15.2) (11.3) Other income......................................................... 1.0 4.4 ------- ------- Income before income taxes and cumulative effect of accounting change 3.1 15.8 Income tax provision (benefit)....................................... (3.2) 4.1 ------- ------- Income before cumulative effect of accounting change................. 6.3 11.7 Cumulative effect of accounting change, net of income taxes.......... (0.4) -- ------- ------- NET INCOME........................................................... $ 5.9 $ 11.7 ======= ======= PER SHARE DATA Basic Earnings per Common share Income before cumulative effect of accounting change.............. $ 0.11 $ 0.20 Cumulative effect of accounting change, net of income taxes....... (0.01) -- ------- ------- Total Basic Earnings per Common share......................... $ 0.10 $ 0.20 ======= ======= Diluted Earnings per Common share Income before cumulative effect of accounting change.............. $ 0.10 $ 0.19 Cumulative effect of accounting change, net of income taxes....... 0.00 -- ------- ------- Total Diluted Earnings per Common share....................... $ 0.10 $ 0.19 ======= ======= Weighted Average Common Shares Outstanding (IN THOUSANDS) Basic............................................................. 58,257 59,777 Potential dilutive common shares.................................. 2,519 2,065 ------- ------- Diluted......................................................... 60,776 61,842 ======= ======= Dividends Per Share: Per Preferred share............................................... $ .25 $ .25 Per Common share.................................................. -- --
See accompanying notes to consolidated condensed financial statements. F-53 KANSAS CITY SOUTHERN CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------- 2001 2002 ------ ------ CASH FLOWS PROVIDED BY (USED FOR): OPERATING ACTIVITIES: Net income............................................................ $ 5.9 $ 11.7 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..................................... 14.4 14.9 Deferred income taxes............................................. 4.8 1.0 Equity in undistributed earnings of unconsolidated affiliates..... (11.2) (4.9) Distributions from unconsolidated affiliates...................... 3.0 -- Gain on sale of Mexrail, Inc...................................... -- (4.4) Gain on sale of property.......................................... -- (4.5) Tax benefit realized upon exercise of stock options................... 2.8 0.8 Changes in working capital items:..................................... Accounts receivable............................................... (5.3) (0.6) Inventories....................................................... 2.2 (0.4) Other current assets.............................................. 2.2 26.7 Accounts and wages payable........................................ (8.5) (8.7) Accrued liabilities............................................... 3.4 6.1 Other, net............................................................ 0.1 (0.5) ------ ------ Net cash provided by operating activities......................... 13.8 37.2 ------ ------ INVESTING ACTIVITIES: Property acquisitions................................................. (13.9) (17.4) Proceeds from disposals of property................................... 0.5 9.3 Investment in and loans to affiliates................................. (0.4) (1.8) Proceeds from the sale of Mexrail, Inc................................ -- 31.4 Other, net............................................................ 0.2 1.3 ------ ------ Net cash provided by (used for) investing activities.............. (13.6) 22.8 ------ ------ FINANCING ACTIVITIES: Proceeds from issuance of long-term debt.............................. 15.0 -- Repayment of long-term debt........................................... (7.9) (30.5) Proceeds from stock plans............................................. 0.8 2.1 Cash dividends paid................................................... (0.1) (0.1) Other, net............................................................ (0.9) 0.6 ------ ------ Net cash provided by (used for) financing activities.............. 6.9 (27.9) ------ ------ CASH AND EQUIVALENTS: Net increase in cash and cash equivalents............................. 7.1 32.1 At beginning of year.................................................. 21.5 24.7 ------ ------ At end of period...................................................... $ 28.6 $ 56.8 ====== ======
See accompanying notes to consolidated condensed financial statements. F-54 KANSAS CITY SOUTHERN CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN MILLIONS, EXCEPT SHARE AMOUNTS) (UNAUDITED)
ACCUMULATED OTHER $25 PAR $.01 PAR RETAINED COMPREHENSIVE PREFERRED STOCK COMMON STOCK EARNINGS INCOME (LOSS) TOTAL --------------- ------------ -------- ------------- ------ Balance at December 31, 2001........... $6.1 $0.6 $676.5 $(2.9) $680.3 Comprehensive income: Net income.......................... 11.7 Change in fair market value of cash flow hedge of unconsolidated affiliate......................... 0.7 Comprehensive income................... 12.4 Dividends.............................. (0.1) (0.1) Options exercised and stock subscribed. -- -- 6.1 -- 6.1 ---- ---- ------ ----- ------ Balance at March 31, 2002.............. $6.1 $0.6 $694.2 $(2.2) $698.7 ==== ==== ====== ===== ======
See accompanying notes to consolidated condensed financial statements. F-55 KANSAS CITY SOUTHERN NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES AND INTERIM FINANCIAL STATEMENTS. In the opinion of the management of Kansas City Southern ("Company" or "KCS"), the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of normal closing procedures) necessary to present fairly the financial position of the Company and its subsidiary companies as of December 31, 2001 and March 31, 2002, the results of its operations for the three months ended March 31, 2001 and 2002, its cash flows for the three months ended March 31, 2001 and 2002, and its changes in stockholders' equity for the three months ended March 31, 2002. The accompanying consolidated condensed financial statements have been prepared consistently with accounting policies described in Note 2 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001 (as amended). The results of operations for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for the full year 2002. Certain comparative prior year amounts in the consolidated condensed financial statements have been reclassified to conform to the current period presentation. 2. EARNINGS PER SHARE DATA. The effect of stock options to employees represent the only difference between the weighted average shares used for the basic earnings per share computation compared to the diluted earnings per share computation. The following is a reconciliation from the weighted average shares used for the basic earnings per share computation and the diluted earnings per share computation for the three months ended March 31, 2001 and 2002, respectively (in thousands):
THREE MONTHS ENDED MARCH 31, --------------- 2001 2002 ------ ------ Basic shares..................... 58,257 59,777 Effect of Dilution: Stock Options................. 2,519 2,065 ------ ------ Diluted Shares................... 60,776 61,842 ------ ------ Excluded from Diluted Computation 34 20 ------ ------
Shares were excluded from the applicable periods diluted earnings per share computation because the exercise prices were greater than the average market price of the common shares. Preferred dividends are the only adjustments that affect the numerator of the diluted earnings per share computation. Adjustments related to preferred dividends were not material for the periods presented. 3. INVESTMENTS. Investments in unconsolidated affiliates and certain other investments accounted for under the equity method generally include all entities in which the Company or its subsidiaries have significant influence, but not more than 50% voting control. Investments in unconsolidated affiliates at March 31, 2002 include, among others, equity interests in Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), Southern Capital Corporation, LLC ("Southern Capital"), and the Panama Canal Railway Company ("PCRC"). The Company, our Mexican partner, Grupo TMM, S.A. de C.V. ("Grupo TMM"), and certain of Grupo TMM's affiliates entered into an agreement on February 27, 2002 with TFM, S.A. de C.V. ("TFM") to sell to TFM all of the common stock of Mexrail, Inc., ("Mexrail") a former 49% unconsolidated affiliate of the Company. Mexrail owns the northern half of the international railway bridge at Laredo and all of the common stock of The Texas-Mexican Railway Company ("Tex-Mex"). The sale closed on March 27, 2002 and the Company received approximately $31.4 million for its 49% interest in Mexrail. The Company used the proceeds from the sale to reduce debt. Although the Company no longer directly owns 49% of Mexrail, it retains an indirect ownership through its 36.9% ownership of Grupo TFM. The proceeds from the sale of Mexrail to TFM exceeded the carrying value of the Company's investment in Mexrail by $11.2 million. The Company recognized a $4.4 million gain on the sale of Mexrail to TFM in the first quarter of 2002, while the remaining $6.8 million of excess proceeds has been deferred. F-56 The Company is party to certain agreements with Grupo TMM covering the Grupo TFM joint venture. KCS owns approximately 36.9% of Grupo TFM while Grupo TMM (together with certain of its affiliates) owns approximately 38.4% of Grupo TFM. These agreements contain "change in control" provisions, provisions intended to preserve the Company's and Grupo TMM's proportionate ownership of the joint venture, and super majority provisions with respect to voting on certain significant transactions. Such agreements also provide a right of first refusal in the event that either party initiates a divestiture of its equity interest in Grupo TFM. Under certain circumstances, such agreements could affect the Company's ownership percentage and rights in these equity affiliates. Condensed financial information of certain unconsolidated affiliates is shown below. All amounts, including those for Grupo TFM, are presented under accounting principles generally accepted in the United States of America ("U.S. GAAP"). March 31, 2002 balance sheet information for Mexrail is included below in the consolidated accounts of Grupo TFM due to the sale of Mexrail to TFM on March 27, 2002. Financial information of immaterial unconsolidated affiliates has been omitted: FINANCIAL CONDITION (DOLLARS IN MILLIONS):
DECEMBER 31, 2001 MARCH 31, 2002 ------------------------------- ----------------------- GRUPO SOUTHERN GRUPO SOUTHERN MEXRAIL PCRC TFM CAPITAL PCRC TFM CAPITAL ------- ----- -------- -------- ----- -------- -------- Current assets..................... 34.9 $ 3.6 $ 294.3 $ 2.5 $ 2.4 $ 304.1 $ 0.2 Non-current assets................. 59.3 85.5 1,924.3 240.6 92.4 1,986.4 240.6 ----- ----- -------- ------ ----- -------- ------ ASSETS........................ $94.2 $89.1 $2,218.6 $243.1 $94.8 $2,290.5 $240.8 ===== ===== ======== ====== ===== ======== ====== Current liabilities................ $42.8 $10.8 $ 350.8 $196.6 $ 9.8 $ 389.9 $ 0.7 Non-current liabilities............ 27.5 55.3 593.8 -- 63.0 610.1 190.5 Minority interest.................. -- -- 376.3 -- -- 379.8 -- Equity of stockholders and partners 23.9 23.0 897.7 46.5 22.0 910.7 49.6 ----- ----- -------- ------ ----- -------- ------ LIABILITIES AND EQUITY........ $94.2 $89.1 $2,218.6 $243.1 $94.8 $2,290.5 $240.8 ===== ===== ======== ====== ===== ======== ====== KCS's investment................... $11.7 $11.9 $ 334.4 $ 23.2 $11.1 $ 339.2 $ 24.8 ===== ===== ======== ====== ===== ======== ======
OPERATING RESULTS (DOLLARS IN MILLIONS):
THREE MONTHS ENDED MARCH 31, -------------- 2001 2002 ------ ------ Revenues: Mexrail................... $ 14.6 $ 13.3 PCRC...................... -- 1.0 Grupo TFM................. 156.1 157.5 Southern Capital.......... 7.6 7.5 Operating costs and expenses: Mexrail................... $ 15.3 $ 13.3 PCRC...................... 0.4 2.9 Grupo TFM................. 70.3 122.0 Southern Capital.......... 6.7 5.7 Net income (loss): Mexrail................... $ (0.3) $ 0.0 PCRC...................... 0.0 (1.8) Grupo TFM................. 30.2 13.0 Southern Capital.......... 0.9 1.9
F-57 4. NONCASH INVESTING AND FINANCING ACTIVITIES. The Company initiated the Thirteenth Offering of KCS common stock under the Employee Stock Purchase Plan ("ESPP") during 2001. Stock subscribed under the Thirteenth Offering will be issued to employees in 2003 and is being paid for through employee payroll deductions in 2002. During the first quarter of 2002, the Company received approximately $0.6 million from payroll deductions associated with the Thirteenth Offering of the ESPP. In the first quarter of 2002, the Company issued approximately 611,107 shares of KCS under the Twelfth Offering of the ESPP. These shares, totaling a purchase price of approximately $4.5 million, were subscribed and paid for through employee payroll deductions in 2001. During the first quarter of 2001, the Company received approximately $1.0 million associated with the Twelfth Offering of the ESPP. 5. DERIVATIVE FINANCIAL INSTRUMENTS. The Company adopted the provisions of Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") effective January 1, 2001. As a result of this change in the method of accounting for derivative financial instruments, the Company recorded an after-tax charge to earnings of $0.4 million in the first quarter of 2001. This charge is presented as a cumulative effect of an accounting change in the accompanying consolidated condensed financial statements and represents the ineffective portion of interest rate cap agreements that the Company held at the time of adoption of SFAS 133. These interest rate cap agreements, which expired during the first quarter of 2002, had a fair value of approximately zero at December 31, 2001 and were completely charged off during 2001. During the first quarter of 2002, the Company did not record any adjustments to income for derivative transactions. The Company does not currently have any derivative financial instruments outstanding. In addition, the Company records adjustments to its stockholders' equity (accumulated other comprehensive income (loss)) for its portion of the adjustment to the fair value of interest rate swap transactions to which Southern Capital, a 50% owned unconsolidated affiliate, is a participant. The Company also adjusts its investment in Southern Capital by the change in the fair value of these derivative instruments. During the first quarter of 2002, the Company recorded comprehensive income of $0.7 million related to an adjustment to the fair value of interest rate swap transactions of Southern Capital. During the first quarter of 2001, the Company recorded ($2.3) million of comprehensive income (loss) associated with these interest rate swap transactions. 6. COST REDUCTION PLAN. During the first quarter of 2001, the Company implemented a cost reduction strategy designed to keep the Company competitive during the economic slow-down existing at that time. The cost reduction strategy, among other things, resulted in a reduction of approximately 6% of the Company's total workforce quarter to quarter (both management and union employees). Additionally, KCS implemented a voluntary, temporary salary reduction for middle and senior management and temporarily suspended certain management benefits. This voluntary, temporary salary reduction ended December 31, 2001. The Company also delayed the implementation of its new computer system, Management Control System ("MCS"). During November 2001, a small functional part of MCS was installed relating to waybilling functions at the Company's customer service center. Management expects to fully implement MCS in mid-2002. Also as part of the cost reduction strategy, 2001 planned capital expenditures were reduced by approximately $16 million. These capital reductions did not affect the maintenance for the physical structure of the railroad, but limited the amount of discretionary expenditures for projects such as capacity improvements. During the first quarter of 2001, the Company recorded approximately $1.3 million of costs related to severance benefits associated with the workforce reduction. F-58 7. WAIVER AND AMENDMENTS FOR CREDIT FACILITY COVENANTS. As discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2001, as amended by Amendment No. 1 on Form 10-K/A ("2001 Form 10-K"), during the first quarter of 2001, the Company requested and received from lenders a waiver from certain of the financial and coverage covenant provisions outlined in the credit agreement for the Company's senior secured credit facilities ("KCS Credit Facility"). This waiver was granted on March 19, 2001 and was effective until May 15, 2001. In addition, on May 10, 2001, the lenders approved and executed an amendment to the applicable covenant provisions of the credit agreement, which, among other things, revised certain of the covenant provisions (including financial and coverage provisions) through March 31, 2002. Due to the uncertainty of the timing of the resolution of the previously disclosed dispute with Grupo TMM and the associated transactions, as well as the return on April 1, 2002 of the leverage ratio covenant provision to the original calculation under the credit agreement, the Company obtained, as a precautionary measure, an additional amendment to the credit agreement. This amendment, which was approved by the lenders on March 28, 2002, revises the leverage ratio covenant provision for the period April 1, 2002 through June 29, 2002. At March 31, 2002, the Company had $369.4 million of term debt borrowed under the KCS Credit Facility and there were no borrowings outstanding under the revolving debt portion of the credit facilities. The Company was in compliance with all covenant provisions of the credit agreement (as amended) at March 31, 2002. 8. COMMITMENTS AND CONTINGENCIES. The Company has had no significant changes in its outstanding litigation or other commitments and contingencies from that previously reported in Note 11 of the Company's Annual Report on Form 10-K for the year ended December 31, 2001 in the Notes to Consolidated Financial Statements. The following provides an update of the Bogalusa cases. BOGALUSA CASES. In July 1996, KCSR was named as one of twenty-seven defendants in various lawsuits in Louisiana and Mississippi arising from the explosion of a rail car loaded with chemicals in Bogalusa, Louisiana on October 23, 1995. As a result of the explosion, nitrogen dioxide and oxides of nitrogen were released into the atmosphere over parts of that town and the surrounding area allegedly causing evacuations and injuries. Approximately 25,000 residents of Louisiana and Mississippi (plaintiffs) have asserted claims to recover damages allegedly caused by exposure to the released chemicals. On October 29, 2001, KCSR and representatives for its excess insurance carriers negotiated a settlement in principle with the plaintiffs for $22.3 million. The settlement was finalized with the execution of a Master Global Settlement Agreement ("MSGA") in early 2002. In Louisiana, the Court will evaluate the MSGA at a fairness hearing and decide whether the proposed settlement is fair for the class of plaintiffs. In Mississippi, the plaintiffs are expected to individually execute release instruments. The first payment under the MSGA of $11.1 million was made on April 1, 2002, reducing the recorded liability from $22.3 million to $11.2 million. The Company also has recorded an insurance receivable of $19.3 million related to the Bogalusa cases. 9. NEW ACCOUNTING PRONOUNCEMENT. Effective January 1, 2002, the Company implemented Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 provides, among other things, that goodwill with an indefinite life shall no longer be amortized, but shall be evaluated for impairment on an annual basis. SFAS 142 also requires separate presentation of goodwill on the balance sheet and impairment losses are to be shown as a separate item on the income statement. Additionally, changes in the carrying amount of goodwill should be disclosed in the footnotes to the financial statements. SFAS 142 also requires various transitional disclosures until all periods presented reflect the provisions of SFAS 142. These transitional disclosures include the presentation of net income and earnings per share information adjusted to exclude amortization expense (including the related income tax effects) for all periods presented. The reconciliation of reported net income to adjusted net income is presented in the table below. For the three months ended March 31, 2001, the adjustment to add back amortization expense associated with goodwill did not have an impact on the related basic or diluted earnings per share computations. F-59 In accordance with SFAS 142, the Company has presented its goodwill as a separate line item on the balance sheet. The Company is in the process of performing its transitional goodwill impairment test to determine if existing goodwill was impaired at the time of adoption of SFAS 142. Management does not believe that any impairment will result from this evaluation. During the quarter ended March 31, 2002, the Company's goodwill decreased $8.5 million due to the sale of Mexrail to TFM. A gain was recognized on the Mexrail transaction, and thus, there was no impairment of this goodwill to be recognized as a change in accounting principle.
THREE MONTHS ENDED MARCH 31, ------------ 2001 2002 ---- ----- Reported net income.................................... $5.9 $11.7 Add back: Amortization of goodwill, net of income taxes 0.1 -- ---- ----- Adjusted net income.................................... $6.0 $11.7 ==== =====
10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION. In September 2000, KCSR issued $200 million of 9.5% Senior Notes due 2008. 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 of the subsidiaries (all of which are wholly-owned) within the KCS consolidated group. KCS registered exchange notes with the SEC that have substantially identical terms and associated guarantees and all of the initial Senior Notes were exchanged for $200 million of registered exchange notes. F-60 The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial statements of guarantors and issuers of guaranteed securities registered or being registered." This 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
THREE MONTHS ENDED MARCH 31, 2001 (DOLLARS IN MILLIONS) ----------------------------------------------------------------------- SUBSIDIARY GUARANTOR NON- GUARANTOR CONSOLIDATING CONSOLIDATED PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS KCS ------ ---------- ------------ -------------- ------------- ------------ Revenues.......................... $ -- $139.8 $ 6.6 $ 5.5 $ (7.9) $144.0 Costs and expenses................ 2.4 132.6 5.2 5.6 (7.9) 137.9 ----- ------ ----- ----- ------ ------ Operating income (loss)........ (2.4) 7.2 1.4 (0.1) -- 6.1 Equity in net earnings of unconsolidated affiliates and subsidiaries..................... 8.0 11.6 -- 11.6 (20.0) 11.2 Interest expense.................. (0.2) (15.5) (0.1) (0.1) 0.7 (15.2) Other income...................... -- 1.7 -- -- (0.7) 1.0 ----- ------ ----- ----- ------ ------ Income before income taxes..... 5.4 5.0 1.3 11.4 (20.0) 3.1 Income tax provision (benefit).... (0.9) (2.9) 0.5 0.1 -- (3.2) Income before cumulative effect of accounting change................ 6.3 7.9 0.8 11.3 (20.0) 6.3 Cumulative effect of accounting change, net of income taxes...... (0.4) (0.4) -- -- 0.4 (0.4) ----- ------ ----- ----- ------ ------ Net income........................ $ 5.9 $ 7.5 $ 0.8 $11.3 $(19.6) $ 5.9 ===== ====== ===== ===== ====== ======
THREE MONTHS ENDED MARCH 31, 2002 (DOLLARS IN MILLIONS) ---------------------------------------------------------------------- SUBSIDIARY GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS KCS ------ ---------- ------------ ------------- ------------- ------------ Revenues....................... $ -- $140.3 $ 6.0 $ 3.7 $ (7.5) $142.5 Costs and expenses............. 2.2 123.9 6.8 3.7 (7.5) 129.1 ----- ------ ----- ----- ------ ------ Operating income (loss)..... (2.2) 16.4 (0.8) -- -- 13.4 Equity in net earnings of unconsolidated affiliates and subsidiaries.................. 8.9 7.3 -- 4.9 (16.2) 4.9 Gain on sale of Mexrail........ 4.4 4.4 -- -- (4.4) 4.4 Interest expense............... (0.3) (10.8) (0.2) (0.1) 0.1 (11.3) Other income................... 0.1 0.9 3.4 0.1 (0.1) 4.4 ----- ------ ----- ----- ------ ------ Income before income taxes.. 10.9 18.2 2.4 4.9 (20.6) 15.8 Income tax provision (benefit). (0.8) 4.0 0.9 -- -- 4.1 ----- ------ ----- ----- ------ ------ Net income..................... $11.7 $ 14.2 $ 1.5 $ 4.9 $(20.6) $ 11.7 ===== ====== ===== ===== ====== ======
F-61 CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2001 (DOLLARS IN MILLIONS) ---------------------------------------------------------------------- NON- SUBSIDIARY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS KCS ------ ---------- ------------ ------------ ------------- ------------ ASSETS: Current assets................ $ 25.5 $ 223.4 $22.0 $ 6.6 $ (23.1) $ 254.4 Investments................... 701.4 413.6 -- 376.4 (1,104.6) 386.8 Properties, net............... 0.3 1,287.1 38.2 1.8 -- 1,327.4 Goodwill and other assets..... 1.7 40.4 1.7 0.1 (1.6) 42.3 ------ -------- ----- ------ --------- -------- Total assets............... $728.9 $1,964.5 $61.9 $384.9 $(1,129.3) $2,010.9 ====== ======== ===== ====== ========= ======== LIABILITIES AND EQUITY: Current liabilities........... $ 7.2 $ 252.3 $ 6.9 $ 14.2 $ (23.1) $ 257.5 Long-term debt................ 1.3 602.9 2.8 4.7 -- 611.7 Payable to affiliates......... 4.8 -- 0.6 -- (5.4) -- Deferred income taxes......... 9.5 350.9 5.2 6.2 (1.6) 370.2 Other liabilities............. 25.8 62.0 3.4 -- -- 91.2 Stockholders equity........... 680.3 696.4 43.0 359.8 (1,099.2) 680.3 ------ -------- ----- ------ --------- -------- Total liabilities and equity.................... $728.9 $1,964.5 $61.9 $384.9 $(1,129.3) $2,010.9 ====== ======== ===== ====== ========= ========
AS OF MARCH 31, 2002 (DOLLARS IN MILLIONS) ---------------------------------------------------------------------- NON- SUBSIDIARY GUARANTOR GUARANTOR CONSOLIDATING CONSOLIDATED PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS KCS ------ ---------- ------------ ------------ ------------- ------------ ASSETS: Current assets................ $ 34.1 $ 246.2 $25.4 $ 6.6 $ (52.6) $ 259.7 Investments................... 715.4 409.7 -- 391.1 (1,133.9) 382.3 Properties, net............... 0.3 1,285.8 37.4 1.7 -- 1,325.2 Goodwill and other assets..... 1.7 31.4 1.0 0.2 (1.6) 32.7 ------ -------- ----- ------ --------- -------- Total assets............... $751.5 $1,973.1 $63.8 $399.6 $(1,188.1) $1,999.9 ====== ======== ===== ====== ========= ======== LIABILITIES AND EQUITY: Current liabilities........... $ 3.8 $ 270.9 $ 7.4 $ 23.6 $ (52.8) $ 252.9 Long-term debt................ 1.3 571.3 2.8 4.6 -- 580.0 Payable to affiliates......... 12.2 -- 0.5 -- (12.7) -- Deferred income taxes......... 9.5 352.2 5.0 6.0 (1.6) 371.1 Other liabilities............. 26.0 67.5 3.6 0.1 -- 97.2 Stockholders equity........... 698.7 711.2 44.5 365.3 (1,121.0) 698.7 ------ -------- ----- ------ --------- -------- Total liabilities and equity.................... $751.5 $1,973.1 $63.8 $399.6 $(1,188.1) $1,999.9 ====== ======== ===== ====== ========= ========
F-62 CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 (DOLLARS IN MILLIONS) ---------------------------------------------------------------------- SUBSIDIARY GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS KCS ------ ---------- ------------ ------------- ------------- ------------ Net cash flows provided by (used for) operating activities:.................... $(2.9) $ 14.6 $ 2.5 $ 0.3 $(0.7) $ 13.8 ----- ------ ----- ----- ----- ------ Investing activities: Property acquisitions................. -- (13.7) (0.2) -- -- (13.9) Investments in and loans to affiliates........................... -- -- -- (2.8) 2.4 (0.4) Other, net............................ -- 0.2 0.6 -- (0.1) 0.7 ----- ------ ----- ----- ----- ------ Net................................ -- (13.5) 0.4 (2.8) 2.3 (13.6) ----- ------ ----- ----- ----- ------ Financing activities: Proceeds from issuance of long-term debt................................. -- 15.0 -- -- -- 15.0 Repayment of long-term debt........... -- (7.9) -- -- -- (7.9) Proceeds from loans from affiliates........................... 2.4 -- -- -- (2.4) -- Proceeds from stock plans............. 0.8 -- -- -- -- 0.8 Cash dividends paid................... (0.1) -- -- -- -- (0.1) Other, net............................ (1.3) 0.4 -- -- -- (0.9) ----- ------ ----- ----- ----- ------ Net................................ 1.8 7.5 -- -- (2.4) 6.9 ----- ------ ----- ----- ----- ------ Cash and equivalents: Net increase (decrease)............... (1.1) 8.6 2.9 (2.5) (0.8) 7.1 At beginning of period................ 1.5 19.1 0.4 0.5 -- 21.5 ----- ------ ----- ----- ----- ------ At end of period...................... $ 0.4 $ 27.7 $ 3.3 $(2.0) $(0.8) $ 28.6 ===== ====== ===== ===== ===== ======
THREE MONTHS ENDED MARCH 31, 2002 (DOLLARS IN MILLIONS) ----------------------------------------------------------------------- SUBSIDIARY GUARANTOR NON-GUARANTOR CONSOLIDATING CONSOLIDATED PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS KCS ------ ---------- ------------ ------------- ------------- ------------ Net cash flows provided by (used for) operating activities:.................... $(10.5) $ 42.7 $(4.4) $ 9.3 $ 0.1 $ 37.2 ------ ------ ----- ----- ----- ------ Investing activities: Property acquisitions................. -- (17.2) (0.2) -- -- (17.4) Investments in and loans to affiliates........................... -- -- -- (9.1) 7.3 (1.8) Proceeds from sale of investments..... -- 31.4 -- -- -- 31.4 Other, net............................ (0.1) 6.5 4.3 -- (0.1) 10.6 ------ ------ ----- ----- ----- ------ Net................................ (0.1) 20.7 4.1 (9.1) 7.2 22.8 ------ ------ ----- ----- ----- ------ Financing activities: Proceeds from issuance of long-term debt................................. -- -- -- -- -- -- Repayment of long-term debt........... -- (30.4) -- (0.1) -- (30.5) Proceeds from loans from affiliates........................... 7.3 -- -- -- (7.3) -- Proceeds from stock plans............. 2.1 -- -- -- -- 2.1 Cash dividends paid................... (0.1) -- -- -- -- (0.1) Other, net............................ 0.4 0.1 0.1 -- -- 0.6 ------ ------ ----- ----- ----- ------ Net................................ 9.7 (30.3) 0.1 (0.1) (7.3) (27.9) ------ ------ ----- ----- ----- ------ Cash and equivalents: Net increase (decrease)............... (0.9) 33.1 (0.2) 0.1 -- 32.1 At beginning of period................ 1.3 23.2 -- 0.2 -- 24.7 ------ ------ ----- ----- ----- ------ At end of period...................... $ 0.4 $ 56.3 $(0.2) $ 0.3 $ -- $ 56.8 ====== ====== ===== ===== ===== ======
F-63 11.DEBT REFINANCING. During the second quarter of 2002, the Company was party to several debt refinancing transactions as described below. SENIOR NOTES On June 12, 2002, KCSR issued $200 million of 71/2% senior notes due June 15, 2009 ("71/2% Notes") through a private offering pursuant to Rule 144A under the Securities Act of 1933 in the United States and Regulation S outside the United States ("Note Offering"). The 71/2% Notes bear a fixed annual interest rate of 71/2%, with interest to be paid semi-annually on June 15 and December 15. These notes are general unsecured obligations of KCSR, are guaranteed by the Company and certain of its subsidiaries and contain certain covenants and restrictions customary for this type of debt instrument and for borrowers with similar credit ratings. Net proceeds from the Note Offering of $195.8 million, together with cash, were used to repay term debt under the KCS Credit Facility and certain other secured indebtedness of the Company. Debt issuance costs related to the Note Offering of approximately $4.2 million were deferred and are being amortized over the seven-year term of the 71/2% Notes. See "New Credit Agreement" below. NEW CREDIT AGREEMENT On June 12, 2002, in conjunction with the repayment of certain of the term loans under the KCS Credit Facility using the net proceeds received from the Note Offering, the Company amended and restated the KCS Credit Facility (the amended and restated credit agreement is referred to as the New Credit Agreement herein). The New Credit Agreement provides KCSR with a $150 million term loan ("Tranche B term loan"), which matures on June 12, 2008, and a $100 million revolving credit facility ("Revolver"), which matures on January 11, 2006. Letters of credit are also available under the Revolver up to a limit of $15 million. The proceeds from future borrowings under the Revolver may be used for working capital and for general corporate purposes. The letters of credit may be used for general corporate purposes. Borrowings under the New Credit Agreement are secured by substantially all of the Company's assets and are guaranteed by the majority of its subsidiaries. The Tranche B term loan and the Revolver bear interest at the London Interbank Offered Rate ("LIBOR") or an alternate base rate, as the Company shall select, plus an applicable margin. The applicable margin for the Tranche B term loan is 2% for LIBOR borrowings and 1% for alternate base rate borrowings. The applicable margin for the Revolver is based on the Company's leverage ratio (defined as the ratio of the Company's total debt to consolidated EBITDA (earnings before interest, taxes, depreciation and amortization, excluding the undistributed earnings of unconsolidated affiliates) for the prior four fiscal quarters). Based on the Company's leverage ratio on June 12, 2002, the applicable margin was 2.50% per annum for LIBOR borrowings and 1.50% per annum for alternate base rate borrowings. The New Credit Agreement also requires the payment to the lenders of a commitment fee of 0.50% per annum on the average daily, unused amount of the Revolver and Tranche B term loan. Additionally, a fee equal to a per annum rate of 0.25% plus the applicable margin for LIBOR priced borrowings under the Revolver will be paid on any letter of credit issued under the Revolver. The New Credit Agreement contains certain provisions, covenants and restrictions customary for this type of debt and for borrowers with a similar credit rating. These provisions include, among others, restrictions on the Company's ability and its subsidiaries ability to 1) incur additional debt or liens; 2) enter into sale and leaseback transactions; 3) merge or consolidate with another entity; 4) sell assets; 5) enter into certain transactions with affiliates; 6) make investments, loans, advances, guarantees or acquisitions; 7) make certain restricted payments, including dividends, or make certain payments on other indebtedness; or 8) make capital expenditures. In addition, the Company is required to comply with certain financial F-64 ratios, including minimum interest expense coverage and leverage ratios. The New Credit Agreement also contains certain customary events of default. These covenants, along with other provisions, could restrict maximum utilization of the Revolver. Debt issuance costs related to the New Credit Agreement of approximately $1.1 million were deferred and are being amortized over the respective term of the loans. Extraordinary debt retirement costs associated with the prepayment of certain term loans under the KCS Credit Facility using proceeds from the Note Offering were approximately $4.3 million ($2.7 million, net of income taxes). SOUTHERN CAPITAL On June 25, 2002, Southern Capital refinanced the outstanding balance of its one-year bridge loan through the issuance of approximately $167.6 million of pass through trust certificates and the sale of 50 locomotives. The pass through trust certificates are secured by the sold locomotives, all of the remaining locomotives and rolling stock owned by Southern Capital and rental payments payable by KCSR under the sublease of the sold locomotives and its leases of the equipment owned by Southern Capital. Payments of interest and principal of the pass through trust certificates, which are due semi-annually on June 30 and December 30 commencing on December 30, 2002 and ending on June 30, 2022, are insured under a financial guarantee insurance policy by MBIA Insurance Corporation. KCSR leases or subleases all of the equipment securing the pass through trust certificates. F-65 [LOGO] KANSAS CITY SOUTHERN Lines (small) [KCS LOGO] $200,000,000 THE KANSAS CITY SOUTHERN RAILWAY COMPANY OFFER TO EXCHANGE ALL OUTSTANDING 7 1/2% SENIOR NOTES DUE 2009 FOR 7 1/2% SENIOR NOTES DUE 2009 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ----------------- PROSPECTUS , 2002 ----------------- - -------------------------------------------------------------------------------- We have not authorized anyone to give you any information or to make any representations as to matters not stated in this prospectus. If you are given any information or representations about these matters that is not discussed in this prospectus, you must not rely on that information. This prospectus is not an offer to sell or a solicitation of an offer to buy securities anywhere or to anyone where or to whom we are not permitted to offer or sell securities under applicable law. The delivery of this prospectus does not, under any circumstances, mean that there has not been a change in our affairs since the date of this prospectus. It also does not mean that the information in this prospectus is correct after this date. - -------------------------------------------------------------------------------- Until , 2002 (90 days after the date of this prospectus), all dealers effecting transactions in the new notes, whether or not participating in this exchange offer, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when selling new notes received in exchange for outstanding notes held for their own account. - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS REGISTRANTS INCORPORATED OR ORGANIZED UNDER DELAWARE LAW KCS, SIS Bulk Holding, Inc., PABTEX, L.P., Mid-South Microwave, Inc., Southern Industrial Services, Inc. and Trans-Serve, Inc. are each incorporated or organized under the laws of the State of Delaware. Section 145 of the General Corporation Law of the State of Delaware (the "Delaware Statute") provides that a Delaware corporation may indemnify any persons who are, or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), other than an action by or in the right of such corporation, by reason of the fact that such person is or was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise (an "indemnified capacity"). The indemnity may include expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was illegal. Similar provisions apply to actions brought by or in the right of the corporation, except that no indemnification shall be made without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director has actually and reasonably incurred. Section 145 of the Delaware Statute further authorizes a corporation to purchase and maintain insurance on behalf of any indemnified person against any liability asserted against him and incurred by him in any indemnified capacity, or arising out of his status as such, regardless of whether the corporation would otherwise have the power to indemnify him under the Delaware Statute. Section 17-108 of the Delaware Revised Uniform Limited Partnership Act provides that, subject to such standards and restrictions as may be set forth in the partnership agreement, a limited partnership has the power to indemnify any partner or other person from and against any and all claims and demands whatsoever. The bylaws of KCS provide that each person who, at any time is, or shall have been, a director, officer, employee or agent of KCS, 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 KCS, or served at the request of KCS 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), judgments, 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 Delaware Statute. The bylaws of Mid-South Microwave, Inc. provide that it has the power to indemnify to the full extent authorized by law any person made or threatened to be made a party to any action, suit or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer or employee of the corporation or any predecessor of the corporation or serves or served any other enterprise as director, officer or employee at the request of the corporation or any predecessor of the corporation. The certificate of incorporation and bylaws of Southern Industrial Services, Inc. provide that each person who, at any time is, or shall have been, a director, officer, employee or agent of the corporation, and who was or is a party, or is threatened to be 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, II-1 trustee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified against expense (including attorneys' fees), judgments, 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 Delaware Statute. The certificate of incorporation provides that the right to indemnification is a contractual right and includes the right to be paid by the corporation for expenses incurred in defending any such proceeding in advance of its final disposition upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it is determined ultimately that such director or officer is not entitled to be indemnified. The certificate of incorporation of SIS Bulk Holding, Inc. provides that the corporation shall, to the fullest extent permitted by law, indemnify any and all officers and directors of the corporation, and may, to the fullest extent permitted by law or to such lesser extent as is determined in the discretion of the corporation's Board of Directors, indemnify and advance expenses to any and all other persons whom it shall have power to indemnify, from and against all expenses, liabilities or other matters arising out of their status as such or their acts, omissions or services rendered in such capacities. The certificate of incorporation further provides that the corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability. The certificate of incorporation of each of KCS, Southern Industrial Services, Inc. and SIS Bulk Holding, Inc. provides that to the fullest extent permitted by the Delaware Statute and any amendments thereto, no director of the corporation shall be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. The Agreement of Limited Partnership (the "Partnership Agreement") of PABTEX, L.P. provides that the partnership, its receiver or its trustee shall indemnify and pay all judgments and claims against the general partner and its representatives relating to any liability or damage incurred by reason of any act performed or omitted to be performed by the general partner and its representatives in connection with the business of the partnership, including attorneys' fees incurred by the general partner and its representatives in connection with the defense of any action based on any such act or omission, which attorneys' fees may be paid as incurred, including all liabilities under federal and state securities laws (including the Securities Act) as permitted by law. The Partnership Agreement further provides that in the event of any action by the limited partner against the general partner and/or its representatives, including a partnership derivative suit, the partnership shall indemnify and pay all expenses of the general partner and its representatives, including attorneys' fees incurred in the defense of such action, if the general partner and its representatives are successful in such action. In addition, the Partnership Agreement provides that the partnership shall indemnify and pay all expenses, costs or liabilities of the general partner and its representatives who for the benefit of the partnership makes any deposit, acquires any option, or makes any other similar payment or assumes any obligation in connection with any property proposed to be acquired by the partnership and who suffers any financial loss as the result of such action. Notwithstanding the above indemnification provisions, under the Partnership Agreement, neither the general partner nor any of its representatives is indemnified from any liability for fraud, bad faith, willful misconduct or gross negligence. In addition, KCS has entered into indemnification agreements with its officers and directors. Those agreements are intended to supplement its officer and director liability insurance and provide the officers and directors with specific contractual assurance that the protection provided by its bylaws will continue to be available regardless of, among other things, an amendment to the bylaws or a change in management or control of KCS. The indemnification agreements provide for prompt indemnification to the fullest extent permitted by law and for the prompt advancement of expenses, including attorneys' fees and all other costs and expenses incurred in connection with any action, suit or proceeding in which the director or officer is a witness or other participant, or to which the director or officer is a party, by reason (in whole or in part) of service in certain II-2 capacities. Under the indemnification agreements, KCS's determinations of indemnity are made by a committee of disinterested directors unless a change in control of KCS has occurred, in which case the determination is made by special independent counsel. The indemnification agreements also provide a mechanism to seek court relief if indemnification or expense advances are denied or not received within specified periods. Indemnification and advancement of expenses would also be provided in connection with court proceedings initiated to determine rights under the indemnification agreements and certain other matters. REGISTRANTS INCORPORATED UNDER MISSOURI LAW KCSR, Rice-Carden Corporation and Southern Development Company are each incorporated under the laws of the State of Missouri. Section 351.355 of the General and Business Corporation Law of Missouri (the "Missouri Statute") provides that a Missouri corporation may indemnify any person who was or is a party or is threatened to be made a party to any proceeding, other than an action by or in the right of the corporation, by reason of the fact that he is or was serving in an indemnified capacity against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Similar provisions apply to actions brought by or in the right of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person has been found liable for negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the court in which the action or suit was brought determines upon application that, despite the finding of liability and in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Where an officer or director is successful on the merits or otherwise in defense of any proceeding referred to above, the corporation must indemnify him against the expenses which he has actually and reasonably incurred. The Missouri Statute further provides that its provisions concerning indemnification are not exclusive of any other rights to which a person seeking indemnification may be entitled under a corporation's articles of incorporation or bylaws or any agreement, vote of shareholders or disinterested directors or otherwise. In addition, the Missouri Statute authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was serving in an indemnified capacity against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, regardless of whether the corporation would otherwise have the power to indemnify him under the Missouri Statute. The Articles of Association of KCSR, as amended, provide that the corporation shall indemnify each of its directors and officers to the full extent permitted by the Missouri Statute and, in addition, shall indemnify each of them against all expenses (including without limitation all attorneys' fees, judgments, fines and amounts paid in settlement) incurred by any of them in connection with any claim (including without limitation any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether or not by or in the right of the corporation) by reason of the fact that they are or were serving the corporation or at the request of the corporation in any of the capacities referred to in the Missouri Statute or arising out of their status in any such capacity, provided that the corporation shall not indemnify any person from or on account of such person's conduct which was finally adjudged to have been knowingly fraudulent, deliberately dishonest or willful misconduct. Such Articles of Association further provide that the corporation may, as it deems appropriate and as may be permitted by the Missouri Statute, indemnify any other person referred to in the Missouri Statute against any such expenses incurred by him in connection with any such claim by reason of the fact that they are or were serving the corporation or at the request of the corporation in any of such capacities or arising out of their status in any such capacity. In addition, such Articles of Association authorize the corporation to give or supplement any of the above indemnifications by by-law, agreement or otherwise and fund them by insurance to the extent it deems appropriate and provides that such indemnification of officers and directors will survive elimination or modification of such Articles with respect to any such expenses incurred in connection with claims arising out of the acts or omissions occurring prior to such II-3 elimination or modification and persons to whom such indemnification is given shall be entitled to rely upon such indemnification as a contract with the corporation. The by-laws of KCSR provide that 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, serving in such capacity, or served at the request of the corporation in such capacity of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified against expenses (including attorneys' fees), judgments, 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 the Missouri Statute. REGISTRANT INCORPORATED UNDER ILLINOIS LAW Gateway Eastern Railway Company is incorporated under the laws of the State of Illinois. Section 8.75 of Illinois' Business Corporation Act of 1983 (the "Illinois Statute") provides that an Illinois corporation may indemnify any person who was or is a party or is threatened to be made a party to any proceeding, other than an action by or in the right of the corporation, by reason of the fact that he or she is or was serving in an indemnified capacity against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such proceeding if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Similar provisions apply to actions brought by or in the right of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person has been found liable to the corporation, unless, and only to the extent that the court in which the action or suit was brought determines upon application that, despite the finding of liability and in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper. Where an officer, director, employee or agent is successful on the merits or otherwise in defense of any proceeding referred to above, the corporation must indemnify such person against the expenses actually and reasonably incurred by such person. The Illinois Statute further provides that its provisions concerning indemnification are not exclusive of any other rights to which a person seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. In addition, the Illinois Statute authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was serving in an indemnified capacity against any liability asserted against such person and incurred by such person in any such capacity, or arising out of his or her status as such, regardless of whether the corporation would otherwise have the power to indemnify such person under the Illinois Statute. The By-laws of Gateway Eastern Railway Company provide that the corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement reasonably incurred by him in connection with the action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Such By-laws contain similar provisions with respect to actions brought by or in the right of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person has been found liable for negligence or misconduct in the performance of his duty to the corporation, except to the extent the court in which the action or suit was brought determines upon application II-4 that, despite the finding of liability but in view of all the circumstances of the case, that person is fairly and reasonably entitled to indemnity for those expenses which the court determines proper. Such By-laws also provide that to the extent an officer, director, employee or agent is successful on the merits or otherwise in defense of any proceeding referred to above, the corporation must indemnify him against the expenses actually and reasonably incurred by him, and to the extent such person is not successful in such defense, he may be indemnified against expenses (including attorneys' fees) reasonably incurred by him in connection with the action, suit or proceeding, if authorized by (a) the board of directors by a majority vote of a quorum consisting of directors who were not party to the action, suit or proceeding, or (b) if that quorum is not obtainable, or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the shareholders. In addition, such By-laws provide for advancement of expenses prior to the final disposition of the action, suit or proceeding, as authorized by the board of directors in a specific case, upon receipt of an undertaking by or on behalf of the director, officer employee or agent to repay the amount, unless it is ultimately determined that he is entitled to indemnification by the corporation as authorized by such By-laws. Such By-laws further provide that the indemnification provided for in such By-laws is not exclusive of any other rights to which a person seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of that person. Such By-laws also provide that the corporation may purchase and maintain insurance on behalf of any person who is or was serving in an indemnified capacity against any liability asserted against such person and incurred by such person in any such capacity, or arising out of his or her status as such, regardless of whether the corporation would otherwise have the power to indemnify such person under such By-laws. REGISTRANTS ORGANIZED UNDER TEXAS LAW PABTEX GP, LLC is organized under the laws of the State of Texas. Section 2.20 of the Texas Limited Liability Company Act ("TLLCA") provides that, subject to such standards and restrictions, if any, as are set forth in its articles of organization or in its regulations, a limited liability company has the power to indemnify managers, officers and other persons and purchase and maintain liability insurance for such persons. Section 2.01 of the TLLCA provides in pertinent part that each limited liability company shall have the power provided for a corporation under the Texas Business Corporation Act ("TBCA"). The TBCA provides that a corporation may indemnify a person who was, or is threatened to be made a named defendant or respondent in a proceeding because the person is or was a director only if it is determined in the manner set forth in the statute that the person conducted himself in good faith; reasonably believed, in the case of conduct in his official capacity as a director of the corporation, that his conduct was in the corporation's best interests, and in all other cases, that his conduct was at least not opposed to the corporation's best interests; and in the case of any criminal proceeding, had no reasonable cause to believe his conduct was unlawful. Under the TBCA, except as described below, a director may not be indemnified in respect of a proceeding in which the person is found liable on the basis that he improperly received personal benefit or in which the person is found liable to the corporation. A person may be indemnified under the TBCA against judgments, penalties (including excise and similar taxes), fines, settlements, and reasonable expenses actually incurred by the person in connection with the proceeding; but if the person is found liable to the corporation or is found liable on the basis that personal benefit was improperly derived by the person, the indemnification is limited to reasonable expenses actually incurred by the person in connection with the proceeding and shall not be made in respect of any proceeding in which the person shall have been found liable for willful or intentional misconduct in the performance of his duty to the corporation. The TBCA further provides that a corporation shall indemnify a director or officer against reasonable expenses incurred by him in connection with a proceeding in which he is named a defendant or respondent because he is or was a director or officer if he has been wholly successful, on the merits or otherwise, in the defense of the proceeding. A corporation may pay or reimburse reasonable expenses incurred by a director in advance of the final disposition of a proceeding and without the determination of indemnification or authorization of indemnification required by the statute if the corporation receives a written II-5 affirmation by the director of his good faith belief that he has met the standard of conduct necessary for indemnification under the TBCA and a written undertaking by or on behalf of the director to repay the amount advanced if it is ultimately determined that he has not met the standard or that indemnification of such person against such expenses is prohibited by the TBCA. A provision in the corporation's articles of organization, bylaws, a resolution of shareholders or directors, or an agreement that makes mandatory the advancement of such expenses is deemed to constitute authorization of the advancement of such expenses. A corporation may indemnify and advance expenses to an officer, employee or agent of the corporation, or to persons who are or were serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, employee benefit plan, other enterprise, or other entity, to the same extent that it may indemnify and advance expenses to directors, and to such further extent, consistent with law, as may be provided by its articles of incorporation, bylaws, general or specific action of its board of directors, or contract or as permitted or required by common law. In addition, under the TBCA, a corporation may purchase and maintain insurance or another arrangement on behalf of any such any person serving in any such indemnified capacity against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person, whether or not the corporation would have the power to indemnify him against that liability under the TBCA, however, if the insurance or other arrangement is with a person or entity that is not regularly engaged in the business of providing insurance coverage, the insurance or arrangement may provide for payment of a liability with respect to which the corporation would not have the power to indemnify the person only if including coverage for the additional liability has been approved by the shareholders of the corporation. The TBCA further provides that the articles of incorporation of a corporation may restrict the circumstances under which the corporation is required or permitted to indemnify a person under certain sections of the TBCA. The Articles of Organization of PABTEX GP, LLC provide that the company shall indemnify any person who was, is, or is threatened to be made a named defendant or respondent in a proceeding because the person (i) is or was a member or officer of the company or (ii) while a member or officer of the company, is or was serving at the request of the company as a director, manager, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise, to the fullest extent that a limited liability company may grant indemnification to a member under the TLLCA and the TBCA. Such Articles further provide that such right is a contract right and runs to the benefit of any member or officer who is elected and accepts the position of member or officer of the company or elects to continue to serve as a member or officer of the company while the Article covering indemnification is in effect. Such right includes the right to be paid or reimbursed by the company for expenses incurred in defending any such proceeding in advance of its final disposition to the maximum extent permitted under the TLLCA and the TBCA. If a claim for indemnification or advancement of expenses is not paid in full by the company within 90 days after a written claim has been received by the company, the claimant may at any time thereafter bring suit against the company to recover the unpaid amount of the claim, and if successful in whole or in part, the claimant is entitled to be paid also the expenses of prosecuting such claim. Under such Articles, the company may additionally indemnify any person covered by the grant of mandatory indemnification set forth above to such further extent as is permitted by law and may indemnify any other person to the fullest extent permitted by law. To the extent permitted by then applicable law, the grant of mandatory indemnification to any person as set forth above extends to proceedings involving the negligence of such person. As used in such Articles and in the TBCA, the term "proceeding" is defined as any threatened, pending or completed action, suit or proceeding, whether civil or criminal, administrative, arbitrative or investigative, any appeal in such an action, suit or proceeding, and any inquiry or investigation that could lead to such an action, suit or proceeding. The Regulations of PABTEX GP, LLC provide that, subject to the limitations and conditions described below, each person who was or is made a party or is threatened to be made a party to or is involved in any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, or any appeal in such an action, suit or proceeding, by reason of the fact that such person is or was a member of the company or while such member of the company is or was serving at the request of the II-6 company as a member, manager, director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic limited liability company, corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise shall be indemnified by the company to the fullest extent permitted by the TLLCA against judgments, penalties (including excise and similar taxes and punitive damages), fines, settlements and reasonable expenses (including attorneys' fees) actually incurred by such person in connection with such action, suit or proceeding. The Regulations further provide that such indemnification rights are contract rights and it is expressly acknowledged that the indemnification provided in the Regulations could involve indemnification for negligence or under theories of strict liabilities. The Regulations further provide that the company shall indemnify and advance expenses to an officer of the company to the extent required to do so by the TLLCA or other applicable law. The company, by adoption of a resolution of the member, may indemnify and advance expenses to an officer, employee or agent of the company to the same extent and subject to the same conditions under which it may indemnify and advance expenses to the member, and may indemnify and advance expenses to persons who are or were serving at the request of the company as a member, manager, director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic limited liability company, corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise against any liability asserted against such person and incurred by such person in such a capacity arising out of its status as such a person to the same extent that the company may indemnify and advance expenses to the member. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------- 1.1 Placement Agreement dated June 5, 2002, is attached hereto as Exhibit 1.1 3.1 Restated Certificate of Incorporation of Kansas City Southern (the "Company"), as amended is attached hereto as Exhibit 3.1 3.2 By-Laws of the Company, as amended and restated to May 2, 2002, which is attached as Exhibit 3.2 to the Company's Form 10-Q for the quarterly period ended March 31, 2002 (Commission File Number 1-4717), is hereby incorporated by reference as Exhibit 3.2 3.3 Articles of Association of The Kansas City Southern Railway Company, ("KCSR"), a Missouri corporation, which is attached as Exhibit 3.3 to the Company's Registration Statement on Form S-4 originally filed January 25, 2001 (Registration No. 333-54262), as amended and declared effective on March 15, 2001 (the "S-4 Registration Statement"), and is hereby incorporated by reference as Exhibit 3.3 3.4 By-Laws of KCSR, which is attached as Exhibit 3.4 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.4 3.5 Articles of Incorporation of Gateway Eastern Railway Company, an Illinois corporation, which is attached as Exhibit 3.5 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.5 3.6 By-Laws of Gateway Eastern Railway Company, which is attached as Exhibit 3.6 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.6 3.7 Certificate of Incorporation of Mid-South Microwave, Inc., as corrected, which is attached as Exhibit 3.11 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.7 3.8 By-Laws of Mid-South Microwave, Inc., which is attached as Exhibit 3.12 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.8
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EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.9 Articles of Incorporation of Rice-Carden Corporation, a Missouri corporation, which is attached as Exhibit 3.13 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.9 3.10 By-Laws of Rice-Carden Corporation, which is attached as Exhibit 3.14 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.10 3.11 Articles of Incorporation of Southern Development Company, a Missouri corporation, which is attached as Exhibit 3.15 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.11 3.12 By-Laws of Southern Development Company, which is attached as Exhibit 3.16 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.12 3.13 Certificate of Incorporation of Southern Industrial Services, Inc., as amended, which is attached as Exhibit 3.17 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.13 3.14 By-Laws of Southern Industrial Services, Inc., which is attached as Exhibit 3.18 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.14 3.15 Certificate of Incorporation of Trans-Serve, Inc., which is attached as Exhibit 3.19 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.15 3.16 By-Laws of Trans-Serve, Inc., which is attached as Exhibit 3.20 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.16 3.17 Certificate of Incorporation of SIS Bulk Holding, Inc., which is attached as Exhibit 3.21 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.17 3.18 By-Laws of SIS Bulk Holding, Inc., which is attached as Exhibit 3.22 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.18 3.19 Certificate of Conversion of Global Terminaling Services, Inc. into PABTEX, L.P., which is attached as Exhibit 3.23 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.19 3.20 Certificate of Limited Partnership of PABTEX, L.P., which is attached as Exhibit 3.24 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.20 3.21 Agreement of Limited Partnership of PABTEX, L.P., which is attached as Exhibit 3.25 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.21 3.21.1 First Amendment to Limited Partnership Agreement of PABTEX, L.P., which is attached as Exhibit 3.25.1 to the Company's Form S-4A originally filed March 15, 2001, Registration Statement (Registration No. 333-54626 (the "S-4A Registration Statement")), and is hereby incorporated by reference as Exhibit 3.21.1 3.22 Articles of Organization of PABTEX GP, LLC, which is attached as Exhibit 3.26 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.22
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EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.23 Regulations of PABTEX GP, LLC, which is attached as Exhibit 3.27 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.23 3.23.1 First Amendment to Regulations of PABTEX GP, LLC, which is attached as Exhibit 3.27.1 to the Company's S-4/A Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 3.23.1 4.1 Indenture, dated June 12, 2002, among the Company, the Guarantors and U.S. Bank National Association, as Trustee, is attached hereto as Exhibit 4.1 4.2 Form of Face of Exchange Security, included as Exhibit B to Exhibit 4-1, is attached hereto as Exhibit 4.2 4.3 Registration Rights Agreement dated as of June 5, 2002, among the Company, the Guarantors and the Initial Purchasers, is attached hereto as Exhibit 4.3 4.4 Indenture, dated September 27, 2000, among the Company, KCSR, certain other subsidiaries of the Company, and The Bank of New York, as trustee (the "2000 Indenture") which is attached as Exhibit 4.1 to the Company's S-4 Registration Statement (Registration No. 333-54262) is hereby incorporated by reference as Exhibit 4.4 4.4.1 Supplemental Indenture, dated 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, which is attached as Exhibit 4.1.1 to the Company's S-4 Registration Statement (Registration No. 333-54262) is hereby incorporated by reference as Exhibit 4.4.1 4.5 The Indenture, dated July 1, 1992 between the Company. and The Chase Manhattan Bank (the "1992 Indenture"), which is attached as Exhibit 4 to KCS's Shelf Registration of $300 million of Debt Securities on Form S-3 filed June 19, 1992 (Commission File No. 33-47198) and as Exhibit 4(a) to the Company's Form S-3 filed March 29, 1993 (Commission File No. 33-60192) registering $200 million of Debt Securities, is hereby incorporated by reference as Exhibit 4.5 4.5.1 Supplemental Indenture, dated December 17, 1999 to the 1992 Indenture with respect to the 6.625% Notes Due March 1. 2005 issued pursuant to the 1992 Indenture, which is attached as Exhibit 4.5.2 to KCS's Form 10-K for the year ended December 31, 1999 (Commission File No. 1-4717), is hereby incorporated by reference as Exhibit 4.5.1 4.5.2 Supplemental Indenture, dated December 17, 1999 to the 1992 Indenture with respect to the 7% Debentures Due December 15, 2025 issued pursuant to the 1992 Indenture, which is attached as Exhibit 4.5.4 to KCS's Form 10-K for the year ended December 31, 1999 (Commission File No. 1-4717), is hereby incorporated by reference as Exhibit 4.5.2 4.6 Stockholder Rights Agreement, dated September 19, 1995, by and between the Company and Harris Trust and Savings Bank, which is attached as Exhibit 99 to the Company's Form 8-A dated October 24, 1995 (Commission File No. 1-4717), and is hereby incorporated by reference as Exhibit 4.6 5.1* Opinion of Sonnenschein Nath & Rosenthal regarding the validity of the securities offered 8.1* Opinion of Sonnenschein Nath & Rosenthal regarding federal income tax consequences 10.1 Form of Director Indemnification Agreement, which is attached as Exhibit 10.2 to the Company's Form 10-K for the year ended December 31, 2001 (Commission File No. 1-4717), is hereby incorporated by reference as Exhibit 10.1 10.2 Form of Officer Indemnification Agreement, which is attached as Exhibit 10.1 to the Company's Form 10-K for the year ended December 31, 2001 (Commission File No. 1-4717), is hereby incorporated by reference as Exhibit 10.2
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EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.3 The 1992 Indenture, which is incorporated by reference as Exhibit 4.5 hereto, is hereby incorporated by reference as Exhibit 10.3 10.3.1 Supplemental Indenture, dated December 17, 1999 to the 1992 Indenture with respect to the 6.625% Notes Due March 1, 2005 issued pursuant to the 1992 Indenture, which is incorporated by reference as Exhibit 4.5.2 hereto, is hereby incorporated by reference as Exhibit 10.3.1 10.3.2 Supplemental Indenture dated December 17, 1999 to the 1992 Indenture with respect to the 7% Debentures Due December 15, 2025 issued pursuant to the 1992 Indenture, which is incorporated by reference as Exhibit 4.5.4 hereto, is hereby incorporated by reference as Exhibit 10.3.2 10.4 The Kansas City Southern Railway Company Directors' Deferred Fee Plan, as adopted August 20, 1982 and the amendment thereto effective March 19, 1997 to such plan, which is attached as Exhibit 10.1 to the Company's Form 10-Q for the period ended March 31, 1997 (Commission File No. 1-4717), is hereby incorporated by reference as Exhibit 10.4 10.5 Description of the Company's 1991 incentive compensation plan, which is attached as Exhibit 10.4 to the Company's Form 10-K for the year ended December 31, 1990 (Commission File No. 1-4717), is hereby incorporated by reference as Exhibit 10.5 10.6 Amendment and Restatement Agreement dated June 12, 2002, among the Company, KCSR and the lenders named therein, together with the Amended and Restated Credit Agreement dated June 12, 2002 among the Company, KCSR and the lenders named therein attached thereto as Exhibit A, is attached hereto as Exhibit 10.6. 10.6.1 Reaffirmation Agreement dated June 12, 2002 among the Company, KCSR and JP Morgan Chase Bank, is attached hereto as Exhibit 10.6.1 10.6.2 Master Assignment and Acceptance dated June 12, 2002, among the Company, KCSR and the lenders named therein, is attached hereto as Exhibit 10.6.2 10.7 Tax Disaffiliation Agreement, dated October 23, 1995, by and between the Company and DST Systems, Inc., which is attached as Exhibit 10.8 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 10.7 10.8 Kansas City Southern Industries, Inc. 401(k) and Profit Sharing Plan, which is attached as Exhibit 4.8 to the Company's Form S-8 filed on December 14, 2000 (Registration No. 333-51854), is hereby incorporated by reference as Exhibit 10.8 10.9 Assignment, Consent and Acceptance Agreement, dated August 10, 1999, by and among the Company, DST Systems, Inc., and Stilwell Financial, Inc., which is attached as Exhibit 10.10 to the Company's S-4 Registration Statement (Registration No. 333-54262), and is hereby incorporated by reference as Exhibit 10.9 10.10 Directors Deferred Fee Plan, adopted August 20, 1982, amended and restated June 1, 2002, is attached hereto as Exhibit 10.10 10.11 Kansas City Southern Industries, Inc. 1991 Amended and Restated Stock Option and Performance Award Plan, as amended and restated effective as of February 27, 2001, which is attached as Exhibit 4.4 to the Company's Form S-8 filed on April 4, 2001 (Registration No. 333-58250), is hereby incorporated by reference as Exhibit 10.11 10.12 Employment Agreement, as amended and restated January 1, 2001, by and among the Company, KCSR and Michael R. Haverty, which is attached as Exhibit 10.12 to the Company's Form 10-K for the year ended December 31, 2001 (Commission File No. 1-4717), is hereby incorporated by reference as Exhibit 10.12
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EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.13 Employment Agreement, dated January 1, 1999, by and among the Company, KCSR and Gerald K. Davies, which is attached as Exhibit 10.14 to the Company's S-4 Registration Statement (Registration No. 333-54262), is hereby incorporated by reference as Exhibit 10.13 10.13.1 Amendment to Employment Agreement, dated as of January 1, 2001, by and among the Company, KCSR and Gerald K. Davies, which is attached as Exhibit 10.13.1 to the Company's Form 10-K for the year ended December 31, 2001 (Commission File No. 1-4717), is hereby incorporated by reference as Exhibit 10.13.1 10.14 Employment Agreement, as amended and restated January 1, 2001, by and between the Company and Robert H. Berry, which is attached as Exhibit 10.14 to the Company's Form 10-K for the year ended December 31, 2001 (Commission File No. 1-4717), is hereby incorporated by reference as Exhibit 10.14 10.15 Employment Agreement, dated August 1, 2001, as amended by the Amendment to Employment Agreement dated August 1, 2001, by and among the Company, KCSR and William J. Pinamont, which is attached as Exhibit 10.16 to the Company's Form 10-K for the year ended December 31, 2001 (Commission File No. 1-4717), is hereby incorporated by reference as Exhibit 10.15 10.16 Employment Agreement, as amended and restated effective as of January 1, 2001 between the Company, KCSR and Albert W. Rees, which is attached as Exhibit 10.15 to the Company's Form 10-K for the year ended December 31, 2001 (Commission File No. 1-4717), is hereby incorporated by reference as Exhibit 10.16 10.17 Employment Agreement, dated June 1, 2002, by and between the Company, KCSR and Ronald G. Russ, is attached hereto as Exhibit 10.17 10.18 Kansas City Southern Industries, Inc. Executive Plan, as amended and restated effective November 17, 1998, which is attached as Exhibit 10.18 to the Company's Form 10-K for the year ended December 31, 1998 (Commission File No. 1-4717), is hereby incorporated by reference as Exhibit 10.18 10.19 The 2000 Indenture (See Exhibit 4.4) 10.20.1 Supplemental Indenture, dated January 29, 2001, to the 2000 Indenture (Exhibit 4.4.1) 10.21 Intercompany Agreement, dated August 16, 1999, between the Company and Stilwell Financial Inc., which is attached as Exhibit 10.23 to the Company's S-4 Registration Statement (Registration No. 333-54262), is hereby incorporated by reference as Exhibit 10.21 10.22 Tax Disaffiliation Agreement, dated August 16, 1999, between the Company and Stilwell Financial Inc., which is attached as Exhibit 10.24 to the Company's S-4 Registration Statement (Registration No. 333-54262), is hereby incorporated by reference as Exhibit 10.22 10.23 Pledge Agreement, dated January 11, 2000, among the Company, KCSR, the subsidiary pledgors party thereto and the Chase Manhattan Bank, as Collateral Agent (the "Pledge Agreement"), which is attached as Exhibit 10.25 to the Company's S-4/A Registration Statement (Registration No. 333-54262), is hereby incorporated by reference as Exhibit 10.23 10.24 Guarantee Agreement, dated January 11, 2000, among the Company, the subsidiary guarantors party thereto and The Chase Manhattan Bank, as Collateral Agent (the "Guarantee Agreement"), which is attached as Exhibit 10.26 to the Company's S-4/A Registration Statement (Registration No. 333-54262), is hereby incorporated by reference as Exhibit 10.24
II-11
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.25 Security Agreement, dated January 11, 2000, among the Company, KCSR, the subsidiary grantors party thereto and The Chase Manhattan Bank, as Collateral Agent (the "Security Agreement"), which is attached as Exhibit 10.27 to the Company's S-4A Registration Statement (Registration No. 333-54262), is hereby incorporated by reference as Exhibit 10.25 10.26 Indemnity, Subrogation and Contribution Agreement, dated January 11, 2000, among the Company, KCSR, the subsidiary guarantors party thereto, and The Chase Manhattan Bank, as Collateral Agent (the "Indemnity, Subrogation and Contribution Agreement"), which is attached as Exhibit 10.28 to the Company' S-4/A Registration Statement (Registration No. 333-54262), is hereby incorporated by reference as Exhibit 10.26 10.27 Supplement No. 1, dated January 29, 2001, to the Pledge Agreement, among PABTEX GP, LLC, SIS BULK HOLDING, INC. and The Chase Manhattan Bank, as Collateral Agent, which is attached as Exhibit 10.29 to the Company's S-4/A Registration Statement (Registration No. 333-54262), is hereby incorporated by reference as Exhibit 10.27 10.28 Supplement No. 1, dated January 29, 2001, to the Guarantee Agreement, among PABTEX GP, LLC, SIS Bulk Holdings, Inc. and The Chase Manhattan Bank, as Collateral Agent, which is attached as Exhibit 10.30 to the Company's S-4/A Registration Statement (Registration No. 333-54262), is hereby incorporated by reference as Exhibit 10.28 10.29 Supplement No. 1, dated January 29, 2001, to the Security Agreement, among PABTEX GP, LLC, SIS Bulk Holdings, Inc. and The Chase Manhattan Bank, as Collateral Agent, which is attached as Exhibit 10.31 to the Company's S-4/A Registration Statement (Registration No. 333-54262), is hereby incorporated by reference as Exhibit 10.29 10.30 Supplement No. 1, dated January 29, 2001, to the Indemnity, Subrogation and Contribution Agreement, among PABTEX GP, LLC, SIS Bulk Holding, inc. and The Chase Manhattan Bank, as Collateral Agent, which is attached as Exhibit 10.32 to the Company's S-4/A Registration Statement (Registration No. 333-54262), is hereby incorporated by reference as Exhibit 10.30 10.31 Lease Agreement, as amended, dated June 26, 2001, between KCSR and Broadway Square Partners LLP, which is attached as Exhibit 10.34 to the Company's Form 10-K for the year ended December 31, 2001, is hereby incorporated by reference as Exhibit 10.31 12.1 Statement Re Computation of Ratios, is attached hereto as Exhibit 12.1 21.1 Subsidiaries of the Registrants, is attached hereto as Exhibit 21.1 23.1 Consent of KPMG LLP, is attached hereto as Exhibit 23.1 23.2 Consent of PricewaterhouseCoopers LLP, is attached hereto as Exhibit 23.2 23.3 Consent of PricewaterhouseCoopers, S.C., is attached hereto as Exhibit 23.3 23.4* Consent of Sonnenschein Nath & Rosenthal (included in Exhibits 5.1 and 8.1) 24.1 Powers of Attorney (included on the signature pages) 25.1 Statement of Eligibility of Trustee on Form T-1 under the Trust Indenture Act of 1939 of U.S. Bank National Association, is attached hereto as Exhibit 25.1 99.1 Form of Letter of Transmittal, is attached hereto as Exhibit 99.1 99.2 Form of Notice of Guaranteed Delivery, is attached hereto as Exhibit 99.2 99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees, is attached hereto as Exhibit 99.3 99.4 Form of Letter to Clients, is attached hereto as Exhibit 99.4
-------- *To be filed by Amendment. II-12 (b) FINANCIAL STATEMENT SCHEDULES No financial statement schedules are required to be filed herewith pursuant to this Item. ITEM 22. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrants pursuant to the foregoing provisions, or otherwise, the registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrants of expenses incurred or paid by a director, officer or controlling person of the registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrants will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrants hereby undertake: 1. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (a) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (b) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (c) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. 2. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the exchange offer. The undersigned registrants hereby undertake to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequently to the effective date of the registration statement through the date of responding to the request. The undersigned registrants hereby undertake to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-13 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI, ON JULY 12, 2002. KANSAS CITY SOUTHERN /S/ M. R. HAVERTY By: _______________________________ Michael R. Haverty CHAIRMAN OF THE BOARD OF DIRECTORS; PRESIDENT AND CHIEF FINANCIAL OFFICER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS MICHAEL R. HAVERTY, RONALD G. RUSS, LOUIS G. VAN HORN, PAUL J. WEYANDT AND JAY M. NADLMAN, 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 OR ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ANY SUBSEQUENT REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, 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 TO ALL INTENTS AND PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR, OR HIS OR HER SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON JULY 12, 2002 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE --------- ----- /S/ M. R. HAVERTY Chairman of the Board of Directors; President and Chief ______________________ Executive Officer Michael R. Haverty /S/ RONALD G. RUSS Senior Vice President and Chief Financial Officer ______________________ Ronald G. Russ /S/ LOUIS VAN HORN Vice President and Comptroller ______________________ Louis G. Van Horn /S/ LANDON ROWLAND Director ______________________ Landon H. Rowland /S/ A. EDWARD ALLISON Director ______________________ A. Edward Allinson /S/ MICHAEL G. FITT Director ______________________ Michael G. Fitt /S/ JAMES R. JONES Director ______________________ James R. Jones /S/ BYRON G. THOMPSON Director ______________________ Byron G. Thompson /S/ RODNEY E. SLATER Director ______________________ Rodney E. Slater
II-14 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI, ON JULY 12, 2002. THE KANSAS CITY SOUTHERN RAILWAY COMPANY /S/ M. R. HAVERTY By: _______________________________ Michael R. Haverty CHAIRMAN OF THE BOARD OF DIRECTORS; PRESIDENT AND CHIEF FINANCIAL OFFICER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS MICHAEL R. HAVERTY, RONALD G. RUSS, LOUIS G. VAN HORN, PAUL J. WEYANDT AND JAY M. NADLMAN, 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 OR ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ANY SUBSEQUENT REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, 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 TO ALL INTENTS AND PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR, OR HIS OR HER SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON JULY 12, 2002 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE --------- ----- /S/ M. R. HAVERTY Chairman of the Board of Directors; President and Chief _____________________ Executive Officer Michael R. Haverty /S/ RONALD G. RUSS Senior Vice President and Chief Financial Officer; Director _____________________ Ronald G. Russ /S/ LOUIS VAN HORN Vice President and Comptroller _____________________ Louis G. Van Horn /S/ GERALD K. DAVIES Director _____________________ Gerald K. Davies /S/ WARREN K. ERDMAN Director _____________________ Warren K. Erdman /S/ ALBERT W. REES Director _____________________ Albert W. Rees
II-15 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI, ON JULY 12, 2002. GATEWAY EASTERN RAILWAY COMPANY /S/ M. R. HAVERTY By: _______________________________ Michael R. Haverty CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS MICHAEL R. HAVERTY, RONALD G. RUSS, LOUIS G. VAN HORN, PAUL J. WEYANDT AND JAY M. NADLMAN, 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 OR ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ANY SUBSEQUENT REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, 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 TO ALL INTENTS AND PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR, OR HIS OR HER SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON JULY 12, 2002 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED. SIGNATURE TITLE --------- ----- /S/ M. R. HAVERTY Chairman of the Board and Chief Executive Officer _____________________ Michael R. Haverty /S/ GERALD K. DAVIES President and General Manager; Director _____________________ Gerald K. Davies /S/ PAUL J. WEYANDT Vice President and Treasurer (Principal Financial Officer _____________________ and Accounting Officer) Paul J. Weyandt /S/ ALBERT W. REES Director _____________________ Albert W. Rees II-16 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI, ON JULY 12, 2002. SIS BULK HOLDING, INC. /S/ MICHAEL R. HAVERTY By: _______________________________ Michael R. Haverty PRESIDENT POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS MICHAEL R. HAVERTY, RONALD G. RUSS, LOUIS G. VAN HORN, PAUL J. WEYANDT AND JAY M. NADLMAN, 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 OR ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ANY SUBSEQUENT REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, 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 TO ALL INTENTS AND PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR, OR HIS OR HER SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON JULY 12, 2002 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED. SIGNATURE TITLE --------- ----- /S/ MICHAEL R. HAVERTY President; Director _______________________ Michael R. Haverty /S/ RONALD G. RUSS Vice President and Treasurer (Principal Financial _______________________ Officer) Ronald G. Russ /S/ LOUIS G. VAN HORN Vice President and Comptroller _______________________ Louis G. Van Horn /S/ GERALD K. DAVIES Director _______________________ Gerald K. Davies /S/ WARREN K. ERDMAN Director _______________________ Warren K. Erdman II-17 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI, ON JULY 12, 2002. MID-SOUTH MICROWAVE, INC. /S/ M. R. HAVERTY By: _______________________________ Michael R. Haverty PRESIDENT POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS MICHAEL R. HAVERTY, RONALD G. RUSS, LOUIS G. VAN HORN, PAUL J. WEYANDT AND JAY M. NADLMAN, 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 OR ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ANY SUBSEQUENT REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, 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 TO ALL INTENTS AND PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR, OR HIS OR HER SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON JULY 12, 2002 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE --------- ----- /S/ M. R. HAVERTY President; Director _____________________ Michael R. Haverty /S/ RONALD G. RUSS Vice President and Treasurer, Director (Principal Financial _____________________ Officer and Accounting Officer) Ronald G. Russ /S/ WARREN K. ERDMAN Director _____________________ Warren K. Erdman /S/ LOUIS VAN HORN Director _____________________ Louis G. Van Horn
II-18 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI, ON JULY 12, 2002. RICE-CARDEN CORPORATION /S/ M. R. HAVERTY By: _______________________________ Michael R. Haverty PRESIDENT POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS MICHAEL R. HAVERTY, RONALD G. RUSS, LOUIS G. VAN HORN, PAUL J. WEYANDT AND JAY M. NADLMAN, 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 OR ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ANY SUBSEQUENT REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, 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 TO ALL INTENTS AND PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR, OR HIS OR HER SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON JULY 12, 2002 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE --------- ----- /S/ M. R. HAVERTY President; Director _____________________ Michael R. Haverty /S/ RONALD G. RUSS Vice President and Treasurer; Director (Principal Financial _____________________ Officer) Ronald G. Russ /S/ LOUIS VAN HORN Vice President and Controller; Director _____________________ Louis G. Van Horn /S/ WARREN K. ERDMAN Director _____________________ Warren K. Erdman
II-19 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI, ON JULY 12, 2002. SOUTHERN DEVELOPMENT COMPANY /S/ M. R. HAVERTY By: _______________________________ Michael R. Haverty PRESIDENT POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS MICHAEL R. HAVERTY, RONALD G. RUSS, LOUIS G. VAN HORN, PAUL J. WEYANDT AND JAY M. NADLMAN, 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 OR ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ANY SUBSEQUENT REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, 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 TO ALL INTENTS AND PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR, OR HIS OR HER SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON JULY 12, 2002 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE --------- ----- /S/ M. R. HAVERTY President; Director _____________________ Michael R. Haverty /S/ RONALD G. RUSS Vice President and Treasurer; Director _____________________ (Principal Financial Officer) Ronald G. Russ /S/ LOUIS VAN HORN Vice President Director and Comptroller _____________________ Louis G. Van Horn /S/ WARREN K. ERDMAN Director _____________________ Warren K. Erdman
II-20 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI, ON JULY 12, 2002. SOUTHERN INDUSTRIAL SERVICES, INC. /S/ M. R. HAVERTY By: _______________________________ Michael R. Haverty PRESIDENT POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS MICHAEL R. HAVERTY, RONALD G. RUSS, LOUIS G. VAN HORN, PAUL J. WEYANDT AND JAY M. NADLMAN, 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 OR ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ANY SUBSEQUENT REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, 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 TO ALL INTENTS AND PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR, OR HIS OR HER SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON JULY 12, 2002 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE --------- ----- /S/ M. R. HAVERTY President; Director _____________________ Michael R. Haverty /S/ RONALD G. RUSS Vice President and Treasurer; Director (Principal Financial _____________________ Officer and Accounting Officer) Ronald G. Russ /S/ WARREN K. ERDMAN Director _____________________ Warren K. Erdman
II-21 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI, ON JULY 12, 2002. TRANS-SERVE, INC. /S/ ALBERT W. REES By: _______________________________ Albert W. Rees PRESIDENT POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS ALBERT W. REES, RONALD G. RUSS, LOUIS G. VAN HORN, PAUL J. WEYANDT AND JAY M. NADLMAN, 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 OR ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ANY SUBSEQUENT REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, 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 TO ALL INTENTS AND PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR, OR HIS OR HER SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON JULY 12, 2002 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED. SIGNATURE TITLE --------- ----- /S/ ALBERT W. REES President; Director _____________________ Albert W. Rees /S/ RONALD G. RUSS Vice President and Treasurer; Director _____________________ (Principal Financial Officer) Ronald G. Russ /S/ LOUIS VAN HORN Vice President and Comptroller _____________________ Louis G. Van Horn /S/ WARREN K. ERDMAN Director _____________________ Warren K. Erdman II-22 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI, ON JULY 12, 2002. PABTEX GP, LLC By: Southern Industrial Services, Inc., its sole member /S/ MICHAEL R. HAVERTY By: ___________________________ Michael R. Haverty PRESIDENT POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS MICHAEL R. HAVERTY, RONALD G. RUSS, LOUIS G. VAN HORN, PAUL J. WEYANDT AND JAY M. NADLMAN, 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 OR ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ANY SUBSEQUENT REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, 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 TO ALL INTENTS AND PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR, OR HIS OR HER SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON JULY 12, 2002 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE --------- ----- /S/ MICHAEL. R. HAVERTY President and Director of Southern Industrial Services, Inc. ________________________ Michael R. Haverty /S/ RONALD G. RUSS Vice President and Treasurer and Director of Southern ________________________ Industrial Services, Inc. Ronald G. Russ /S/ WARREN K. ERDMAN Director of Southern Industrial Services, Inc. ________________________ Warren K. Erdman
II-23 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI, ON JULY 12, 2002. PABTEX L.P. By: PABTEX GP, LLC, its General Partner By: Southern Industrial Services, Inc., the sole member of PABTEX GP, LLC /S/ MICHAEL R. HAVERTY By: _________________________ Michael R. Haverty PRESIDENT POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS MICHAEL R. HAVERTY, RONALD G. RUSS, LOUIS G. VAN HORN, PAUL J. WEYANDT AND JAY M. NADLMAN, 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 OR ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ANY SUBSEQUENT REGISTRATION STATEMENT FILED PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH, 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 TO ALL INTENTS AND PURPOSES AS HE OR SHE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR, OR HIS OR HER SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON JULY 12, 2002 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE --------- ----- /S/ MICHAEL R. HAVERTY President and Director of Southern Industrial Services, Inc. _______________________ Michael R. Haverty /S/ RONALD G. RUSS Vice President and Treasurer and Director of Southern _______________________ Industrial Services, Inc. Ronald G. Russ /S/ WARREN K. ERDMAN Director of Southern Industrial Services, Inc. _______________________ Warren K. Erdman
II-24 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 1.1 Placement Agreement dated June 5, 2002, is attached hereto as Exhibit 1.1 3.1 Restated Certificate of Incorporation of Kansas City Southern (the "Company"), as amended is attached hereto as Exhibit 3.1 4.1 Indenture, dated June 12, 2002, among the Company, the Guarantors and U.S. Bank National Association, as Trustee, is attached hereto as Exhibit 4.1 4.2 Form of Face of Exchange Security, included as Exhibit B to Exhibit 4-1, is attached hereto as Exhibit 4.2 4.3 Registration Rights Agreement dated as of June 5, 2002, among the Company, the Guarantors and the Initial Purchasers, is attached hereto as Exhibit 4.3 5.1* Opinion of Sonnenschein Nath & Rosenthal regarding the validity of the securities offered 8.1* Opinion of Sonnenschein Nath & Rosenthal regarding federal income tax consequences 10.6 Amendment and Restatement Agreement dated June 12, 2002, among the Company, KCSR and the lenders named therein, together with the Amended and Restated Credit Agreement dated June 12, 2002, among the Company, KCSR and the lenders named therein attached thereto as Exhibit A, is attached hereto as Exhibit 10.6. 10.6.1 Reaffirmation Agreement dated June 12, 2002, among the Company, KCSR and JP Morgan Chase Bank, is attached hereto as Exhibit 10.6.1 10.6.2 Master Assignment and Acceptance dated June 12, 2002, among the Company, KCSR and the lenders named therein, is attached hereto as Exhibit 10.6.2 10.10 Directors Deferred Fee Plan, adopted August 20, 1982, amended and restated June 1, 2002, is attached hereto as Exhibit 10.10 10.17 Employment Agreement, dated June 1, 2002, by and between the Company, KCSR and Ronald G. Russ, is attached hereto as Exhibit 10.17 12.1 Statement Re Computation of Ratios, is attached hereto as Exhibit 12.1 21.1 Subsidiaries of the Registrants, is attached hereto as Exhibit 21.1 23.1 Consent of KPMG LLP, is attached hereto as Exhibit 23.1 23.2 Consent of PricewaterhouseCoopers LLP, is attached hereto as Exhibit 23.2 23.3 Consent of PricewaterhouseCoopers, S.C., is attached hereto as Exhibit 23.3 23.4* Consent of Sonnenschein Nath & Rosenthal (included in Exhibits 5.1 and 8.1) 24.1 Powers of Attorney (included on the signature pages) 25.1 Statement of Eligibility of Trustee on Form T-1 under the Trust Indenture Act of 1939 of U.S. Bank National Association, is attached hereto as Exhibit 25.1 99.1 Form of Letter of Transmittal, is attached hereto as Exhibit 99.1 99.2 Form of Notice of Guaranteed Delivery, is attached hereto as Exhibit 99.2 99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees, is attached hereto as Exhibit 99.3 99.4 Form of Letter to Clients, is attached hereto as Exhibit 99.4
- *To be filed by Amendment. EX-1.1 3 dex11.txt PLACEMENT AGREEMENT DATED JUNE 5, 2002 Exhibit 1.1 EXECUTION COPY THE KANSAS CITY SOUTHERN RAILWAY COMPANY 7 1/2% SENIOR NOTES DUE 2009 Guaranteed by THE GUARANTORS NAMED HEREIN PLACEMENT AGREEMENT June 5, 2002 Morgan Stanley & Co. Incorporated J.P. Morgan Securities Inc. Deutsche Bank Securities Inc. Banc One Capital Markets, Inc. Scotia Capital (USA) Inc. c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Dear Sirs and Mesdames: The Kansas City Southern Railway Company, a Missouri corporation (the "Company"), proposes to issue and sell to the several purchasers named in Schedule I hereto (the "Initial Purchasers"): $200,000,000 principal amount of its 7 1/2% Senior Notes Due 2009 (the "Notes") to be issued pursuant to the provisions of an Indenture dated as of June 12, 2002 (the "Indenture") to be entered into among the Company, Kansas City Southern (the "Parent") and the companies named in Schedule II hereto as guarantors (collectively, and together with Parent, the "Guarantors") and U.S. Bank National Association, as Trustee (the "Trustee"), and will be jointly and severally guaranteed on an unsecured senior basis by the Guarantors (the "Guarantees" and together with the Notes, the "Securities"). The Securities will be offered without being registered under the Securities Act of 1933, as amended (the "Securities Act"), or qualification under state securities or blue sky laws, to qualified institutional buyers in compliance with the exemption from Securities Act registration provided by Rule 144A under the Securities Act and in offshore transactions in reliance on Regulation S under the Securities Act ("Regulation S"). The Initial Purchasers and their direct and indirect transferees will be entitled to the benefits of a Registration Rights Agreement dated the date hereof among the Company, the Guarantors and the Initial Purchasers (the "Registration Rights Agreement"). In connection with the sale of the Securities, the Company and the Guarantors have prepared a preliminary offering memorandum (the "Preliminary Memorandum") and will prepare a final offering memorandum (the "Final Memorandum" and, with the Preliminary Memorandum, each a "Memorandum") including or incorporating by reference a description of the terms of the Securities, the terms of the offering and a description of the Company and the Guarantors. As used herein, the term "Memorandum" shall include in each case the documents incorporated by reference therein. The terms "supplement", "amendment" and "amend" as used herein with respect to a Memorandum shall include all documents deemed to be incorporated by reference in the Preliminary Memorandum or Final Memorandum that are filed subsequent to the date of such Memorandum with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 1. Representations and Warranties. (A) Each of the Company and the Guarantors jointly and severally represents and warrants to, and agrees with, you that: (a) (i) Each document, if any, filed or to be filed pursuant to the Exchange Act and incorporated by reference in either Memorandum complied or will comply when so filed in all material respects with the Exchange Act and the applicable rules and regulations of the Commission thereunder and (ii) the Preliminary Memorandum does not contain and the Final Memorandum, in the form used by the Initial Purchasers to confirm sales on the Closing Date (as defined in Section 4), will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in either Memorandum based upon information relating to any Initial Purchaser furnished to the Company and the Guarantors in writing by such Initial Purchaser through you expressly for use therein. (b) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of Missouri, has the corporate power and authority to own its property and to conduct its business as described in each Memorandum and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. (c) The Parent and each of its subsidiaries (other than the Company) has been duly organized, is validly existing as a corporation, limited liability company or limited partnership, as the case may be, in good standing under the laws of the jurisdiction of its organization, has the corporate, limited liability company or limited partnership power and authority, as the case may be, to own its property and to conduct its business as described in each Memorandum and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Parent and its subsidiaries, taken as a whole; all of the outstanding shares of capital stock of the Parent have been duly and validly authorized and issued and are fully paid and non-assessable, and all of the issued shares of capital stock, membership interests or partnership interests, as the case may be, of each subsidiary of the Parent have been duly and validly authorized and issued, are fully paid and non-assessable and, except as set forth in exhibit 21.1 to the Parent's Form 10-K for the year ended December 31, 2001, are owned directly or indirectly by the Parent, free and clear of all liens, encumbrances, equities or claims, except those that arise under the Credit Agreement dated as of January 11, 2000, as amended through the date hereof, among the Parent, the Company, the lenders thereto, JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), as administrative agent, collateral agent, issuing bank and swingline lender, the Bank of Nova Scotia, as syndication agent, and Fleet National Bank, as documentation agent (the "KCS Credit Facilities") or, upon effectiveness, the Amended KCS Credit Facilities (as defined below). (d) This Agreement has been duly authorized, executed and delivered by the Company and the Guarantors. (e) The Company and each of the Guarantors have full right, power and authority to execute and deliver each of this Agreement, the Indenture, the Registration Rights Agreement and the Securities (collectively, the "Transaction Documents") to which they are party and perform their respective obligations thereunder; and all corporate action required to be taken for the due and proper authorization, execution and delivery of each of the Transaction Documents and the consummation of the transactions contemplated thereby have been duly and validly taken. (f) The Notes have been duly authorized and, when executed and authenticated in accordance with the provisions of the Indenture and delivered to and paid for by the Initial Purchasers in accordance with the terms of this Agreement, will be valid and binding obligations of the Company, enforceable in accordance with their terms, subject to the effects of applicable bankruptcy, insolvency, reorganization, receivership, moratorium and similar laws relating to or affecting creditors' rights generally and equitable principles of general applicability (whether applied by a court of law or equity), and will be entitled to the benefits of the Indenture and the Registration Rights Agreement pursuant to which such Securities are to be issued. (g) The Guarantees have been duly authorized and, when executed and delivered in accordance with the terms of the Indenture and this Agreement, will have been duly executed, issued and delivered and will constitute valid and binding obligations of each Guarantor, enforceable against each Guarantor in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, receivership, moratorium and similar laws relating to or affecting creditors' rights generally and equitable principles of general applicability (whether applied by a court of law or equity), and will be entitled to the benefits of the Indenture and the Registration Rights Agreement pursuant to which such Securities are to be issued. (h) The Indenture has been duly authorized by the Company and the Guarantors and, when executed and delivered in accordance with its terms by each of the parties thereto, will be a valid and binding agreement of the Company and the Guarantors, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, receivership, moratorium and similar laws relating to or affecting creditors' rights generally and equitable principles of general applicability (whether applied by a court of law or equity). On the Closing Date, the Indenture will conform in all material respects to the requirements of the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and the rules and regulations of the Commission applicable to an indenture which is qualified thereunder. The Securities and the Indenture conform in all material respects to the description thereof contained in each Memorandum under the heading "Description of the Notes". (i) The Registration Rights Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company and the Guarantors, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, receivership, moratorium and similar laws relating to or affecting creditors' rights generally and equitable principles of general applicability (whether applied by a court of law or equity) and except as rights to indemnification and contribution under the Registration Rights Agreement may be limited under applicable law. (j) The execution and delivery by the Company and the Guarantors of, and the performance by the Company and the Guarantors of their obligations under the Transaction Documents will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Parent and its subsidiaries or any agreement or other instrument binding upon the Parent and its subsidiaries that are material to the Parent and its subsidiaries, taken as a whole, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Parent and its subsidiaries, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company or the Guarantors of their obligations under the Transaction Documents, except such as may be required by the securities or blue sky laws of the various states in connection with the offer and sale of the Securities and by federal and state securities and blue sky laws with respect to the Company's and the Guarantors' obligations under the Registration Rights Agreement. (k) KPMG LLP are independent certified public accountants with respect to the Parent and its subsidiaries within the meaning of Rule 101 of the Code of Professional Conduct of the American Institute of Certified Public Accountants ("AICPA") and its interpretations and rulings thereunder. The historical financial statements (including the related notes) contained in each Memorandum comply in all material respects with the requirements applicable to a registration statement on Form S-1 under the Securities Act (except that disclosure of earnings per share and certain supporting schedules are omitted); such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods covered thereby and fairly present the financial position of the entities purported to be covered thereby at the respective dates indicated and the results of their operations and their cash flows for the respective periods indicated; and the financial information contained in each Memorandum under the headings "Summary--Summary Consolidated Financial Information and Other Data", "Capitalization", "Selected Consolidated Financial Data", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Management" is derived from the accounting records of the Parent and its subsidiaries and fairly presents the information purported to be shown thereby. The other historical financial and statistical information and data included in each Memorandum are, in all material respects, fairly presented. (l) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Parent and its subsidiaries, taken as a whole, from that set forth in the Preliminary Memorandum (including, if applicable, any amendment or supplement thereto) provided to prospective purchasers of the Securities. (m) There are no legal or governmental proceedings pending or, to the knowledge of the Company and the Guarantors, threatened to which the Parent or any of its subsidiaries is a party or to which any of the properties of the Parent or any of its subsidiaries is subject other than proceedings accurately described in all material respects in each Memorandum and proceedings that could not reasonably be expected to have a material adverse effect on the Parent and its subsidiaries, taken as a whole, or on the power or ability of the Company and the Guarantors to perform their respective obligations under the Transaction Documents or to consummate the transactions contemplated by the Final Memorandum. (n) There are no contracts, documents, pending legal or governmental actions, suits or proceedings of a character that would be required to be described in each Memorandum, if it were a prospectus filed as part of a registration statement under the Securities Act, that are not set forth or incorporated by reference in each Memorandum. All descriptions in each Memorandum of such contracts or documents are accurate in all material respects. (o) To the knowledge of the Company and the Guarantors, no action has been taken and no statute, rule, regulation or order has been enacted, adopted or issued by any governmental agency or body which prevents the issuance of the Securities or suspends the sale of the Securities in any jurisdiction; no injunction, restraining order or order of any nature by any federal or state court of competent jurisdiction has been issued with respect to the Parent or any of its subsidiaries which would prevent or suspend the issuance or sale of the Securities or the use of the Preliminary Memorandum or the Final Memorandum in any jurisdiction; no action, suit or proceeding is pending against or, to the knowledge of the Company and each of the Guarantors, threatened against or affecting the Parent or any of its subsidiaries before any court or arbitrator or any governmental agency, body or official, domestic or foreign, which could reasonably be expected to interfere with or adversely affect the issuance of the Securities or the validity or enforceability of any of the Transaction Documents or any action taken or to be taken pursuant thereto. (p) None of the Company or the Guarantors is in violation of its charter or by-laws and none of the Parent or its subsidiaries is (i) in default in any material respect, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any material indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which it is a party or by which it is bound or to which any of its property or assets is subject or (ii) in violation in any material respect of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject, except, in the case of clause (i) and (ii), for any default or violation that could not be reasonably expected to have a material adverse effect on the Parent and its subsidiaries, taken as a whole. (q) The Parent and each of its subsidiaries possess all material licenses, certificates, authorizations and permits issued by, and have made all declarations and filings with, the appropriate federal, state or foreign regulatory agencies or bodies which are necessary or desirable for the ownership of their respective properties or the conduct of their respective businesses as described in each Memorandum, except where the failure to possess or make the same would not, singularly or in the aggregate, have a material adverse effect on the Parent and its subsidiaries taken as a whole, and neither the Parent nor any of its subsidiaries has received notification of any revocation or modification of any such license, certificate, authorization or permit or has any reason to believe that any such license, certificate, authorization or permit will not be renewed in the ordinary course, except where such revocation, modification or nonrenewal could not reasonably be expected to, singularly or in the aggregate, have a material adverse effect on the Parent and its subsidiaries, taken as a whole. (r) The Parent and each of its subsidiaries have filed all federal, state, local and foreign income and franchise tax returns required to be filed through the date hereof and have paid all taxes due thereon, and no tax deficiency has been determined adversely to the Parent or any of its subsidiaries which has had (nor does the Company or any of the Guarantors have any knowledge of any tax deficiency which, if determined adversely to the Parent or any of its subsidiaries, could reasonably be expected to have) a material adverse effect on the Parent and its subsidiaries taken as a whole. (s) The Parent and its subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, in each case except as described in each Memorandum or where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Parent and its subsidiaries, taken as a whole. (t) In the ordinary course of its business, the Parent conducts a periodic review of the effect of Environmental Laws on the business, operations and properties of the Parent and its subsidiaries. On the basis of such review, the Parent has concluded that, except as described in each Memorandum, there are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the Parent and its subsidiaries, taken as a whole. (u) The Parent and each of its subsidiaries carry, or are covered by, insurance covering their respective properties, operations, personnel and businesses, which insurance is in amounts and insures against such losses and risks as are adequate to protect the Parent and its subsidiaries and their respective businesses. Neither the Parent nor any of its subsidiaries has received notice from any insurer or agent of such insurer that material capital improvements or other material expenditures are required or necessary to be made in order to continue such insurance. (v) The Parent and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences, to the extent necessary. (w) The Parent and each of its subsidiaries own or possess adequate rights to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses and know-how (including trade secrets and other unpatented and/or upatentable proprietary or confidential information, systems or procedures) necessary for the conduct of their respective businesses, except where the failure to possess such rights could not reasonably be expected to have a material adverse effect on the Parent and its subsidiaries taken as a whole, and the conduct of their respective businesses will not conflict with, and, except as described in each Memorandum, the Parent and its subsidiaries have not received any notice of any claim or conflict with, any such rights of others that, if determined adversely to the Parent or any of its subsidiaries, would, individually or in the aggregate, have a material adverse effect on the Parent and its subsidiaries taken as whole. (x) The Parent and each of its subsidiaries have good and marketable title in fee simple to, or have valid rights to lease or otherwise use, all items of real and personal property which are material to the business of the Parent and its subsidiaries, in each case free and clear of all liens, encumbrances, claims and defects and imperfections of title except those that (i) arise under the KCS Credit Facilities or, upon effectiveness, the Amended KCS Credit Facilities (as defined below) or (ii) do not materially interfere with the use made and proposed to be made of such property by the Parent and its subsidiaries and could not reasonably be expected to have a material adverse effect on the Parent and its subsidiaries, taken as a whole. (y) No labor disturbance by or dispute with the employees of the Parent or any of its subsidiaries exists or, to the knowledge of the Company and each of the Guarantors, is threatened that could reasonably be expected to have a material adverse effect on the Parent and its subsidiaries, taken as a whole. (z) No "prohibited transaction" (as defined in Section 406 of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986, as amended from time to time (the "Code")) or "accumulated funding deficiency" (as defined in Section 302 of ERISA) or any of the events set forth in Section 4043(b) of ERISA (other than events with respect to which the 30-day notice requirement under Section 4043 of ERISA has been waived) has occurred with respect to any employee benefit plan of the Parent or any of its subsidiaries which could reasonably be expected to have a material adverse effect on the Parent and its subsidiaries taken as a whole, each such employee benefit plan is in compliance with applicable law, including ERISA and the Code, except where such noncompliance, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on the Parent and its subsidiaries taken as a whole, the Parent and each of its subsidiaries have not incurred and do not expect to incur liability under Title IV of ERISA with respect to the termination of, or withdrawal from, any pension plan for which the Parent or any of its subsidiaries would have any liability; and each such pension plan that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which could reasonably be expected to cause the loss of such qualification. (aa) Except as otherwise disclosed in each Memorandum, there has been no storage, generation, transportation, handling, treatment, disposal, discharge, emission or other release of any kind of toxic or other wastes or other hazardous substances by, due to or caused by the Parent or any of its subsidiaries (or, to the knowledge of the Company and each of the Guarantors, any other entity (including any predecessor) for whose acts or omissions the Parent or any of its subsidiaries is or could reasonably be expected to be liable) upon any of the property now or previously owned or leased by the Parent or any of its subsidiaries, or upon any other property, in violation of any statute or any ordinance, rule, regulation, order, judgment, decree or permit or which would, under any statute or any ordinance, rule (including rule of common law), regulation, order, judgment, decree or permit, give rise to any liability, except for any violation or liability that could not reasonably be expected to have, singularly or in the aggregate with all such violations and liabilities, a material adverse effect, on the Parent and its subsidiaries taken as a whole; and, except as otherwise disclosed in each Memorandum, there has been no disposal, discharge, emission or other release of any kind onto such property or into the environment surrounding such property of any toxic or other wastes or other hazardous substances with respect to which the Company or each of the Guarantors has knowledge, except for any such disposal, discharge, emission or other release of any kind which could not reasonably be expected to have, singularly or in the aggregate with all such discharges and other releases, a material adverse effect on the Parent and its subsidiaries taken as a whole. (bb) Neither the Parent nor, to the best knowledge of the Company and each of the Guarantors, any director, officer, agent employee or other person associated with or acting on behalf of the Parent or any of its subsidiaries has (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment. (cc) On and immediately after the Closing Date, the Company (after giving effect to the issuance of the Securities and to the other transactions related thereto as described in the Final Memorandum) will be Solvent. As used in this paragraph, the term "Solvent" means, with respect to a particular date, that on such date (i) the present fair market value (or present fair saleable value) of the assets of the Company is not less than the total amount required to pay the probable liabilities of the Company on its total existing debts and liabilities (including contingent liabilities) as they become absolute and matured, (ii) the Company is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and commitments as they mature and become due in the normal course of business, (iii) assuming the sale of the Securities as contemplated by this Agreement and the Final Memorandum, the Company is not incurring debts or liabilities beyond its ability to pay as such debts and liabilities mature and (iv) the Company is not engaged in any business or transaction, and is not about to engage in any business or transaction, for which its property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which the Company is engaged. In computing the amount of such contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. (dd) None of the proceeds of the sale of the Securities will be used, directly or indirectly, for the purpose of purchasing or carrying any "margin security" as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Securities to be considered a "purpose credit" within the meanings of Regulation T, U or X of the Federal Reserve Board. (ee) Except as contemplated hereby, neither the Parent nor any of its subsidiaries is a party to any contract, agreement or understanding with any person that would give rise to a valid claim against the Parent, any of its subsidiaries, or the Initial Purchasers for a brokerage commission, finder's fee or like payment in connection with the offering and sale of the Securities. (ff) The Company and the Guarantors are not, and after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Final Memorandum will not be, required to register as an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (gg) When the Guarantees are executed and delivered in accordance with the terms of the Indenture and this Agreement, the Notes will be jointly and severally guaranteed on an unsecured basis by the Parent and each of its subsidiaries that guarantees the KCS Credit Facilities or, upon effectiveness, the Amended KCS Credit Facilities (as defined below)(except for SCC Holdings Inc., The Kansas City Northern Railway Company, Veals, Inc. and Caymex Transportation, Inc.) and the Company's 9.5% Senior Notes due 2008, as more particularly set forth on Schedule II hereto. (hh) No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Preliminary Memorandum or the Final Memorandum has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith. (ii) None of the Company, the Guarantors or any affiliate (as defined in Rule 501(b) of Regulation D under the Securities Act, an "Affiliate") of the Company or the Guarantors has directly, or through any agent, (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the sale of the Securities in a manner that would require the registration under the Securities Act of the Securities or (ii) offered, solicited offers to buy or sold the Securities by any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act. (jj) None of the Company, the Guarantors, their Affiliates or any person acting on its or their behalf has engaged or will engage in any directed selling efforts (within the meaning of Regulation S) with respect to the Securities and the Company, the Guarantors and their Affiliates and any person acting on its or their behalf have complied and will comply with the offering restrictions requirement of Regulation S. (kk) Assuming that your representations and warranties herein are true and compliance by you with your covenants set forth herein, it is not necessary in connection with the offer, sale and delivery of the Securities to the Initial Purchasers in the manner contemplated by this Agreement to register the Securities under the Securities Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended. (ll) The Securities satisfy the requirements set forth in Rule 144A(d)(3) under the Securities Act. (B) Each of the Company and the Parent jointly and severally represents and warrants to and agrees with you that it has received a letter from J.P. Morgan Securities, Inc. ("J.P. Morgan Securities") to the effect that J.P. Morgan Securities has received commitments from the necessary lenders under the KCS Credit Facilities to permit the issuance of the Securities and otherwise amend and restate the terms of the KCS Credit Facilities in accordance with the term sheet attached to such letter (the "Amended KCS Credit Facilities"), copies of such letter having been provided to you on or prior to the date hereof. Such commitments are subject only to satisfactory review of the documentation evidencing the Amended KCS Credit Facilities, the form of which is attached hereto as Exhibit B (the "Amended KCS Credit Facilities Documentation"). Such Amended KCS Credit Facilities Documentation (A) has been duly authorized by the Parent, the Company and each other subsidiary of the Parent party thereto and, when duly executed and delivered on or prior to the Closing Date, will be a valid and binding agreement of the Parent, the Company and each other subsidiary of the Parent party thereto enforceable in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, receivership, moratorium and similar laws relating to or affecting creditors' rights generally and equitable principles of general applicability (whether applied by a court of law or equity) and (B) conforms in all material respects to the description thereof in each Memorandum. 2. Agreements to Sell and Purchase. The Company and the Guarantors, subject to the conditions hereinafter stated, hereby agree to sell to the several Initial Purchasers, and each Initial Purchaser, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from the Company the respective principal amount of Securities set forth in Schedule I hereto opposite its name at a purchase price of 98.25% of the principal amount thereof (the "Purchase Price") plus accrued interest, if any, to the Closing Date. The Company and the Guarantors hereby agree that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Initial Purchasers, they will not, during the period beginning on the date hereof and continuing for a period of 90 days from the date of the Final Memorandum, offer, sell, contract to sell or otherwise dispose of any debt of the Company or the Guarantors or warrants to purchase debt of the Company substantially similar to the Securities (other than the sale of the Securities under this Agreement). 3. Terms of Offering. You have advised the Company and the Guarantors that the Initial Purchasers will make an offering of the Securities purchased by the Initial Purchasers hereunder in accordance with Section 7 hereof on the terms to be described in the Final Memorandum, as soon as practicable after this Agreement is entered into as in your judgment is advisable. 4. Payment and Delivery. Payment for the Securities shall be made to the Company in federal or other funds immediately available in New York City against delivery of such Securities for the respective accounts of the several Initial Purchasers at 10:00 a.m., New York City time, on June 12, 2002, or at such other time on the same or such other date, not later than June 19, 2002, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "Closing Date". The Securities shall be in definitive form or global form, as specified by you, and registered in such names and in such denominations as you shall request in writing not later than two full business days prior to the Closing Date. The Securities shall be delivered to you on the Closing Date for the respective accounts of the several Initial Purchasers, with any transfer taxes payable in connection with the transfer of the Securities to the Initial Purchasers duly paid, against payment of the Purchase Price therefore plus accrued interest, if any, to the date of payment and delivery. 5. Conditions to the Initial Purchasers' Obligations. The several obligations of the Initial Purchasers to purchase and pay for the Securities on the Closing Date are subject to the following conditions: (a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date: (i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded the Parent, the Company or any of the Parent's or the Company's securities or in the rating outlook for the Parent or the Company by any "nationally recognized statistical rating organization", as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; and (ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Parent and its subsidiaries, taken as a whole, from that set forth in the Preliminary Memorandum (including, if applicable, any amendment or supplement thereto) provided to prospective purchasers of the Securities that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Securities on the terms and in the manner contemplated in the Final Memorandum. (b) The Initial Purchasers shall have received on the Closing Date a certificate dated the Closing Date and signed by an executive officer of the Company and the Parent respectively, to the effect set forth in Section 5(a)(i). The Initial Purchasers shall have also received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of the Company and each Guarantor, respectively, to the effect that the representations and warranties of the Company and the Guarantors contained in this Agreement are true and correct as of the Closing Date and that the Company and the Guarantors have complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened. (c) The Initial Purchasers shall have received on the Closing Date the opinions of Sonnenschein Nath & Rosenthal, outside counsel for the Company and the Guarantors, and Jay M. Nadlman, Esq., associate general counsel for the Company and the Guarantors, each dated the Closing Date, to the effect set forth in Exhibit A. Such opinions shall be rendered to the Initial Purchasers at the request of the Company and the Guarantors and shall so state therein. The opinion of the outside counsel for the Company and the Guarantors shall cover the matters set forth in clauses (iii), (iv), the first clause of clause (v) (other than "Business - Legal Matters", and "Part II, Item 1 - Legal Proceedings" of the Parent's Form 10-K and Form 10-Q referred to therein) and (vi) - (xvi) of Exhibit A. The opinion of the associate general counsel for the Company and the Guarantors shall cover the matters set forth in clauses (i), (ii), (v) (other than the matters covered by the opinion of the outside counsel, as set forth above), (xi), (xii) and (xvi) of Exhibit A. (d) The Initial Purchasers shall have received on the Closing Date an opinion of Shearman & Sterling, counsel for the Initial Purchasers, dated the Closing Date in form and substance satisfactory to you. (e) The Initial Purchasers shall have received on each of the date hereof and the Closing Date a letter, dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Initial Purchasers, from KPMG LLP, independent public accountants, with respect to the Parent and its subsidiaries, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in or incorporated by reference into each Memorandum; provided that the letter delivered on the Closing Date shall use a "cut-off date" not earlier than the date hereof. (f) The Initial Purchasers shall have received on each of the date hereof and the Closing Date a letter, dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Initial Purchasers from PricewaterhouseCoopers LLP, independent public accountants, with respect to the Parent and its subsidiaries, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in or incorporated by reference into each Memorandum; provided that the letter delivered on the Closing Date shall use a "cut-off date" not earlier than the date hereof. (g) The Initial Purchasers shall have received on each of the date hereof and the Closing Date a letter, dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Initial Purchasers from PricewaterhouseCoopers LLP, independent public accountants, with respect to Grupo Transportacion Fernoviaria Mexicana, S.A. de C.V., containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in or incorporated by reference into each Memorandum; provided that the letter delivered on the Closing Date shall use a "cut-off date" not earlier than the date hereof. (h) The Company and the Parent shall have received, on or before the Closing Date, written notice from JP Morgan Bank that all conditions to the effectiveness of the Amended KCS Credit Facilities Documentation, including the due authorization, execution and delivery of the Amended KCS Credit Facilities Documentation substantially in the form attached hereto as Exhibit B (copies of which, along with copies of such written notice, will be provided to you on or before the Closing Date), have been satisfied other than the repayment of the Tranche A term loans and certain of the Tranche B term loans as required under the Amended KCS Credit Facilities Documentation. On the Closing Date the Tranche A term loans and certain of the Tranche B term loans outstanding under the KCS Credit Facilities shall be repaid as set forth in the Final Memorandum pursuant to the Amended KCS Credit Facilities Documentation and the Amended KCS Credit Facilities shall become effective simultaneously with the payment for and delivery of the Securities pursuant to this Agreement. 6. Covenants of the Company and the Guarantors. In further consideration of the agreements of the Initial Purchasers contained in this Agreement, each of the Company and the Guarantors, jointly and severally, covenants with each Initial Purchaser as follows: (a) To furnish to you in New York City, without charge, prior to 10:00 a.m. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in Section 6(c), as many copies of the Final Memorandum, any documents incorporated by reference therein and any supplements and amendments thereto as you may reasonably request. (b) Before amending or supplementing either Memorandum, to furnish to you a copy of each such proposed amendment or supplement and not to use any such proposed amendment or supplement to which you reasonably object. (c) If, during such period after the date hereof and prior to the date on which all of the Securities shall have been sold by the Initial Purchasers, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Final Memorandum in order to make the statements therein, in the light of the circumstances when the Final Memorandum is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Initial Purchasers, it is necessary to amend or supplement the Final Memorandum to comply with applicable law, forthwith to prepare and furnish, at its own expense, to the Initial Purchasers, either amendments or supplements to the Final Memorandum so that the statements in the Final Memorandum as so amended or supplemented will not, in the light of the circumstances when the Final Memorandum is delivered to a purchaser, be misleading or so that the Final Memorandum, as amended or supplemented, will comply with applicable law. (d) To endeavor to qualify the Securities for offer and sale under the securities or blue sky laws of such jurisdictions as you shall reasonably request; provided that the Parent and its subsidiaries shall not be obligated to qualify as a Foreign corporation in any jurisdiction in which they have not so qualified or to file a general consent to service of process in any jurisdiction. (e) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's and the Guarantors' counsel and the Company's and the Guarantors' accountants in connection with the issuance and sale of the Securities and all other fees or expenses in connection with the preparation of each Memorandum and all amendments and supplements thereto, including all printing costs associated therewith, and the delivering of copies thereof to the Initial Purchasers, in the quantities herein above specified, (ii) all costs and expenses related to the transfer and delivery of the Securities to the Initial Purchasers, including any transfer or other taxes payable thereon, (iii) the cost of printing or producing any blue sky or legal investment memorandum in connection with the offer and sale of the Securities under state securities laws and all expenses in connection with the qualification of the Securities for offer and sale under state securities laws as provided in Section 6(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Initial Purchasers in connection with such qualification and in connection with the blue sky or legal investment memorandum, (iv) any fees charged by rating agencies for the rating of the Securities, (v) the fees and expenses, if any, incurred in connection with the admission of the Securities for trading in PORTAL or any appropriate market system, (vi) the costs and charges of the Trustee and any transfer agent, registrar or depositary, (vii) the cost of the preparation, issuance and delivery of the Securities, (viii) one-half of the costs and expenses of the Company and the Guarantors relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Securities, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company and the Guarantors, travel and lodging expenses of the representatives and officers of the Company, the Guarantors and any such consultants, and the cost of any aircraft chartered in connection with the road show, (ix) all other costs and expenses incident to the performance of the obligations of the Company and the Guarantors hereunder for which provision is not otherwise made in this Section. It is understood, however, that except as provided in this Section, Section 8, and the last paragraph of Section 10, the Initial Purchasers will pay all of their costs and expenses, including fees and disbursements of their counsel, transfer taxes payable on resale of any of the Securities by them and any advertising expenses connected with any offers they may make. (f) Neither the Company, the Guarantors nor any Affiliate will sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Securities Act) which could be integrated with the sale of the Securities in a manner which would require the registration under the Securities Act of the Securities. (g) Not to solicit any offer to buy or offer or sell the Securities by means of any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act. (h) While any of the Securities remain "restricted securities" within the meaning of the Securities Act, to make available, upon request, to any seller of such Securities the information specified in Rule 144A(d)(4) under the Securities Act, unless the Parent is then subject to Section 13 or 15(d) of the Exchange Act. (i) If requested by you, to use its best efforts to permit the Securities to be designated PORTAL securities in accordance with the rules and regulations adopted by the National Association of Securities Dealers, Inc. relating to trading in the PORTAL Market. (j) None of the Company, the Guarantors, their Affiliates or any person acting on its or their behalf (other than the Initial Purchasers) will engage in any directed selling efforts (as that term is defined in Regulation S) with respect to the Securities, and the Company, the Guarantors and their Affiliates and each person acting on its or their behalf (other than the Initial Purchasers) will comply with the offering restrictions requirement of Regulation S. (k) During the period of two years after the Closing Date, the Company and the Guarantors will not, and will not permit any of their affiliates (as defined in Rule 144 under the Securities Act) to resell any of the Securities which constitute "restricted securities" under Rule 144 that have been reacquired by any of them. (l) Not to take any action prohibited by Regulation M under the Exchange Act in connection with the distribution of the Securities contemplated hereby. (m) The Securities (and all securities issued in exchange therefore or in substitution thereof) shall bear the following legend until, in our judgment, such legend shall no longer be necessary or advisable because such Securities are no longer subject to the restrictions on transfer described therein: THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT FOR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN "INSTITUTIONAL ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS NOTE, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE ISSUER OR ANY OF ITS SUBSIDIARIES, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES OF LESS THAN $100,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE ISSUER THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) UNDER THE SECURITIES ACT AFTER THE ORIGINAL ISSUANCE OF THE NOTES, THE HOLDER MUST TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR OR NON-U.S. PERSON, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE ISSUER SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS PROVISIONS REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTION. 7. Offering of Securities; Restrictions on Transfer. (a) Each Initial Purchaser, severally and not jointly, represents and warrants that such Initial Purchaser is a qualified institutional buyer as defined in Rule 144A under the Securities Act (a "QIB"). Each Initial Purchaser, severally and not jointly, agrees with the Company and the Guarantors that (i) it will not solicit offers for, or offer or sell, such Securities by any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act and (ii) it will solicit offers for such Securities only from, and will offer such Securities only to, persons that it reasonably believes to be (A) in the case of offers inside the United States, QIBs and (B) in the case of offers outside the United States, to persons other than U.S. persons ("foreign purchasers", which term shall include dealers or other professional fiduciaries in the United States acting on a discretionary basis for foreign beneficial owners (other than an estate or trust)) in reliance upon Regulation S under the Securities Act that, in each case, in purchasing such Securities are deemed to have represented and agreed as provided in the Final Memorandum under the caption "Transfer Restrictions". (b) Each Initial Purchaser, severally and not jointly, represents, warrants, and agrees with respect to offers and sales outside the United States that: (i) such Initial Purchaser understands that no action has been or will be taken in any jurisdiction by the Company and the Guarantors that would permit a public offering of the Securities, or possession or distribution of either Memorandum or any other offering or publicity material relating to the Securities, in any country or jurisdiction where action for that purpose is required; (ii) such Initial Purchaser will comply with all applicable laws and regulations in each jurisdiction in which it acquires, offers, sells or delivers Securities or has in its possession or distributes either Memorandum or any such other material, in all cases at its own expense; (iii) the Securities have not been registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Rule 144A or Regulation S under the Securities Act or pursuant to another exemption from the registration requirements of the Securities Act; (iv) such Initial Purchaser has offered the Securities and will offer and sell the Securities (A) as part of their distribution at any time and (B) otherwise until 40 days after the later of the commencement of the offering and the Closing Date, only in accordance with Rule 903 of Regulation S or as otherwise permitted in Section 7(a); accordingly, neither such Initial Purchaser, its Affiliates nor any persons acting on its or their behalf have engaged or will engage in any directed selling efforts (within the meaning of Regulation S) with respect to the Securities, and any such Initial Purchaser, its Affiliates and any such persons have complied and will comply with the offering restrictions requirement of Regulation S; (v) such Initial Purchaser (A) has not offered or sold and, prior to the date six months after the Closing Date, will not offer or sell any Securities to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (B) has complied and will comply with all applicable provisions of the Financial Services and Markets Act 2000 (the "FSMA") with respect of anything done by it in relation to the Securities in, from or otherwise involving the United Kingdom, and (C) will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the FSMA) received by it in connection with the issue or sale of the Securities in circumstances in which section 21(1) of the FSMA does not apply to the Company and the Guarantors; (vi) such Initial Purchaser understands that the Securities have not been and will not be registered under the Securities and Exchange Law of Japan, and represents that it has not offered or sold, and agrees not to offer or sell, directly or indirectly, any Securities in Japan or for the account of any resident thereof except pursuant to any exemption from the registration requirements of the Securities and Exchange Law of Japan and otherwise in compliance with applicable provisions of Japanese law; and (vii) such Initial Purchaser agrees that, at or prior to confirmation of sales of the Securities, it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Securities from it during the restricted period a confirmation or notice to substantially the following effect: "The Securities covered hereby have not been registered under the U.S. Securities Act of 1933 (the "Securities Act") and may not be offered and sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the closing date, except in either case in accordance with Regulation S (or Rule 144A if available) under the Securities Act. Terms used above have the meaning given to them by Regulation S." Terms used in this Section 7(b) have the meanings given to them by Regulation S. 8. Indemnity and Contribution. (a) The Company and the Guarantors, jointly and severally, agree to indemnify and hold harmless each Initial Purchaser, each person, if any, who controls any Initial Purchaser within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, and each affiliate of any Initial Purchaser within the meaning of Rule 405 under the Securities Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in either Memorandum (as amended or supplemented if the Company and the Guarantors shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, except (i) insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Initial Purchaser furnished to the Company and the Guarantors in writing by such Initial Purchaser through any of you expressly for use therein and (ii) insofar as the sale to the person asserting any such losses, claims, damages or liabilities was an initial resale by such Initial Purchaser and any such losses, claims, damages or liabilities of or with respect to such Initial Purchaser results from the fact that both (A) to the extent required by applicable law, the Company and the Guarantors have sustained the burden of proving that a copy of the Offering Memorandum was not sent or given to such person at or prior to the written confirmation of the sale of such Securities to such person and (B) the untrue statement in or omission from the Preliminary Memorandum was corrected in the Final Memorandum unless, in either case, such failure to deliver the Final Memorandum was a result of the Company's and the Guarantors' failure to provide copies of the corrected Final Memorandum to such Initial Purchaser prior to the written confirmation of the sale of such Securities. (b) Each Initial Purchaser agrees, severally and not jointly, to indemnify and hold harmless the Company and the Guarantors, their directors, their officers and each person, if any, who controls the Company or the Guarantors within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company and each of the Guarantors to such Initial Purchaser, but only with reference to information relating to such Initial Purchaser furnished to the Company and the Guarantors in writing by such Initial Purchaser through any of you expressly for use in either Memorandum or any amendments or supplements thereto. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b), such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all such indemnified parties and that all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by Morgan Stanley & Co. Incorporated, in the case of parties indemnified pursuant to Section 8(a), and by the Company and the Guarantors, in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (d) To the extent the indemnification provided for in Section 8(a) or 8(b) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantors on the one hand and the Initial Purchasers on the other hand from the offering of the Securities or (ii) if the allocation provided by clause 8(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Company and the Guarantors on the one hand and of the Initial Purchasers on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Guarantors on the one hand and the Initial Purchasers on the other hand in connection with the offering of the Securities shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Securities (before deducting expenses) received by the Company and the Guarantors and the total discounts and commissions received by the Initial Purchasers, in each case as set forth in the Final Memorandum, bear to the aggregate offering price of the Securities. The relative fault of the Company and the Guarantors on the one hand and of the Initial Purchasers on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Guarantors or by the Initial Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Initial Purchasers' respective obligations to contribute pursuant to this Section 8 are several in proportion to the respective principal amount of Securities they have purchased hereunder, and not joint. (e) The Company, the Guarantors and the Initial Purchasers agree that it would not be just or equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in Section 8(d) shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8, no Initial Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Securities resold by it in the initial placement of such Securities were offered to investors exceeds the amount of any damages that such Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 8 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (f) The indemnity and contribution provisions contained in this Section 8 and the representations, warranties and other statements of the Company and the Guarantors contained in this Agreement shall remain operative and in full force and effect regardless of any termination of this Agreement, (ii) any investigation made by or on behalf of (i) any Initial Purchaser, any person controlling any Initial Purchaser or any affiliate of any Initial Purchaser or by or on behalf of the Company and the Guarantors, their officers or directors or any person controlling the Company and the Guarantors and (iii) acceptance of and payment for any of the Securities. 9. Termination. The Initial Purchasers may terminate this Agreement by notice given by you to the Company and the Guarantors, if, after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on, or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any securities of the Parent or the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a material disruption in securities settlement, payment or clearance services in the United States shall have occurred, (iv) any moratorium on commercial banking activities shall have been declared by federal or New York State authorities or (v) there shall have occurred any outbreak or escalation of hostilities, or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and which, singly or together with any other event specified in this clause (v), makes it, in your judgment, impracticable or inadvisable to proceed with the offer, sale or delivery of the Securities on the terms and in the manner contemplated in the Final Memorandum. 10. Effectiveness; Defaulting Initial Purchasers. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto. If, on the Closing Date, any one or more of the Initial Purchasers shall fail or refuse to purchase Securities that it or they have agreed to purchase hereunder on such date, and the aggregate principal amount of Securities which such defaulting Initial Purchaser or Initial Purchasers agreed but failed or refused to purchase is not more than one-tenth of the aggregate principal amount of Securities to be purchased on such date, the other Initial Purchasers shall be obligated severally in the proportions that the principal amount of Securities set forth opposite their respective names in Schedule I bears to the aggregate principal amount of Securities set forth opposite the names of all such non-defaulting Initial Purchasers, or in such other proportions as you may specify, to purchase the Securities which such defaulting Initial Purchaser or Initial Purchasers agreed but failed or refused to purchase on such date; provided that in no event shall the principal amount of Securities that any Initial Purchaser has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 10 by an amount in excess of one-ninth of such principal amount of Securities without the written consent of such Initial Purchaser. If, on the Closing Date any Initial Purchaser or Initial Purchasers shall fail or refuse to purchase Securities which it or they have agreed to purchase hereunder on such date and the aggregate principal amount of Securities with respect to which such default occurs is more than one-tenth of the aggregate principal amount of Securities to be purchased on such date, and arrangements satisfactory to you and the Company for the purchase of such Securities are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Initial Purchaser or of the Company. In any such case either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Final Memorandum or in any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Initial Purchaser from liability in respect of any default of such Initial Purchaser under this Agreement. If this Agreement shall be terminated by the Initial Purchasers, or any of them, because of any failure or refusal on the part of the Company or the Guarantors to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company or the Guarantors shall be unable to perform their obligations under this Agreement, the Company and the Guarantors will reimburse the Initial Purchasers or such Initial Purchasers as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Initial Purchasers in connection with this Agreement or the offering contemplated hereunder. If this Agreement is terminated by reason of the default of one or more of the Initial Purchasers, the Company and the Guarantors shall not be obligated to reimburse each such defaulting Initial Purchaser on account of such expenses. 11. Notices, etc. All statements requests, notices and agreements hereunder shall be in writing, and: (A) If to the Initial Purchasers shall be delivered or sent by mail, telex or facsimile transmission to Moran Stanley & Co. Incorporated, 1585 Broadway, New York, New York 10036, Attention: Equity Capital Markets Syndicate Desk (Fax: 212-761-0260), with a copy to Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022, Attention: Joel Klaperman, Esq. (Fax: 212-848-7179); and (B) If to the Company or any Guarantor, shall be delivered or sent by mail, telex or facsimile transmission to The Kansas City Southern Railway Company, 427 West 12th Street, Kansas City, Missouri 64105, Attention: Chief Financial Officer (Fax: 816-983-1297), with a copy to the Sonnenschein Nath & Rosenthal, 4520 Main Street, Suite 1100, Kansas City, Missouri 64111, Attention: John Marvin, Esq. (Fax: 816-531-7545). 12. Parties. This Agreement shall inure to the benefit of and be binding upon the Company, the Guarantors, the Initial Purchasers and their respective successors and assigns. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that (i) the representations, warranties, indemnities and agreements of the Company and the Guarantors contained in this Agreement shall also be deemed to be for the benefit of the person or persons, if any, who control any Initial Purchaser within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, and each affiliate of any Initial Purchaser within the meaning of Rule 405 under the Securities Act and (ii) the representations, warranties, indemnities and agreements of the Initial Purchasers contained in this Agreement shall also be deemed to be for the benefit of officers and directors of the Company and each Guarantor and any person who controls the Company or the Guarantors within the meaning of either Section 15 of the Securities Act and Section 20 of the Exchange Act. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 12, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 13. Amendments. No amendment or waiver of any provision of this Agreement, nor any consent or approval to any departure therefrom, shall in any event be effective unless the same is in writing and signed by the partied hereto. 14. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 15. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. Headings. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement. Very truly yours, Kansas City Southern By: /s/ Robert H. Berry ---------------------------------------- Name: Robert H. Berry Title: Senior Vice President & CFO The Kansas City Southern Railway Company By: /s/ Robert H. Berry ---------------------------------------- Name: Robert H. Berry Title: Senior Vice President & CFO Gateway Eastern Railway Company By: /s/ Jay M. Nadlman ---------------------------------------- Name: Jay M. Nadlman Title: Vice President Mid-South Microwave, Inc. By: /s/ Robert H. Berry ---------------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer PABTEX GP, LLC By: /s/ Robert H. Berry ---------------------------------------- Name: Robert H. Berry Title: Authorized Representative PABTEX L.P. By: PABTEX GP, LLC By: /s/ Robert H. Berry ---------------------------------------- Name: Robert H. Berry Title: Authorized Representative Rice-Carden Corporation By: /s/ Robert H. Berry ---------------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer SIS Bulk Holding, Inc. By: /s/ Robert H. Berry ---------------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer Southern Development Company By: /s/ Robert H. Berry ---------------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer Southern Industrial Services, Inc. By: /s/ Robert H. Berry ---------------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer Trans-Serve, Inc. By: /s/ Robert H. Berry ---------------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer Accepted as of the date hereof Morgan Stanley & Co. Incorporated J.P. Morgan Securities Inc. Deutsche Bank Securities Inc. Banc One Capital Markets, Inc. Scotia Capital (USA) Inc. Acting severally on behalf of themselves and the several Initial Purchasers named in Schedule I hereto. By: Morgan Stanley & Co. Incorporated By: /s/ Bryan Andrzejwski ---------------------------- Name: Bryan Andrzejwski Title: Executive Director SCHEDULE I Initial Purchaser Principal Amount of Securities to Be Purchased Morgan Stanley & Co., Incorporated............... $130,000,000 J.P. Morgan Securities Inc....................... 30,000,000 Deutsche Bank Securities Inc..................... 24,000,000 Banc One Capital Markets, Inc.................... 8,000,000 Scotia Capital (USA) Inc......................... 8,000,000 ------------ Total................................... $200,000,000 ============ SCHEDULE II Gateway Eastern Railway Company Mid-South Microwave, Inc. PABTEX GP, LLC PABTEX L.P. Rice-Carden Corporation SIS Bulk Holding, Inc. Southern Development Company Southern Industrial Services, Inc. Trans-Serve, Inc. EX-3.1 4 dex31.txt RESTATED CERTIFICATE OF INCORPORATION Exhibit 3.1 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 10:00 AM 04/17/1998 981146927 - 0579020 RESTATED CERTIFICATE OF INCORPORATION OF KANSAS CITY SOUTHERN INDUSTRIES, INC. The undersigned, Kansas City Southern Industries, Inc., a Delaware corporation (the "Corporation"), for the purpose of restating and integrating the Certificate of Incorporation of the Corporation originally filed January 29, 1962, as amended and supplemented (the "Certificate of Incorporation"), in accordance with the General Corporation Law of Delaware ("Delaware Corporation Law"), does hereby make and execute this Restated Certificate of Incorporation and does hereby certify that it was duly adopted in accordance with Section 245 of the Delaware Corporation Law. The undersigned further certifies that this Restated Certificate of Incorporation only restates and integrates and does not further amend the Certificate of Incorporation and there is no discrepancy between the Certificate of Incorporation and this Restated Certificate of Incorporation. FIRST. The name of the corporation is Kansas City Southern Industries, Inc. SECOND. Its principal office in the State of Delaware is located at 1209 Orange Street, in the City of Wilmington, County of New Castle. The name and address of its resident agent is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. THIRD. The nature of the business, or objects or purposes to be transacted, promoted or carried on are: a. To make, manufacture, process, organize, finance, manage, operate, purchase, sell, own, hold, store, exchange, rent, lease, service, repair, handle or deal in and with in any manner, either as a manufacturer, processor, principal, agent, wholesaler, jobber, distributor or retailer, or in any other legal capacity, new and used articles, products, merchandise, supplies, and property of any and every description and class which is now or may become the subject of trade or commerce; b. To carry on and conduct either directly or through subsidiaries any lawful business or businesses including, but without limitation, any manufacturing, extractive, distributive, mercantile, finance, service, transportation, pipe line, and other lawful businesses, and to do all things necessary or proper for the conduct of any businesses in which the corporation is now or may hereafter be engaged; c. To cause to be formed, to promote, and to aid in the formation of any corporation or association, domestic or foreign, and to cause or participate in the merger, consolidation, reorganization, liquidation or dissolution of any corporation or association, domestic or foreign, in which, or in the business or welfare of which, the corporation shall have directly or indirectly any interest; d. To operate, manage, supervise, and control all or any part of the business and property of any corporation, association, firm, entity, individual or undertaking, domestic or foreign, or to take any part therein, and to appoint and remunerate any directors, accountants, other experts, agents, employees and persons; e. To acquire by purchase, lease or otherwise, to construct, assemble, own, hold, lease, rent, remodel, improve, reconstruct, mortgage, encumber, operate, manage, deal in and dispose of machinery, equipment, appliances, fixtures, buildings, offices, factories, store rooms, warehouses, plants, garages, apartments and houses, with all improvements, machines, fixtures and equipment appurtenant or convenient thereto, or which may be useful or desirable in the conduct of any business, or businesses in which the corporation is or may be engaged; f. To own, acquire, buy, sell, deal in, lease, rent, remodel, improve, reconstruct, mortgage and otherwise encumber real estate, whether improved or unimproved, and any interest of any kind whatsoever therein, and to own, hold, deal in and dispose of such property, whether real, personal or mixed, as may be necessary or desirable for the successful conduct and operation of any business or businesses in which the corporation is or may be engaged; g. To acquire the good will, business, right and property of any person, firm, association or corporation, and to pay for the same in cash, property, stocks, notes or otherwise; to hold and enjoy or in any manner to dispose of the whole or any part of the property, assets and rights so acquired; to conduct in any lawful manner the whole or any part of any business so acquired, and to exercise all powers necessary or convenient in and about the conduct and management of any business or businesses in which the corporation is now or may hereafter be engaged; h. To sell, lease, convey, or otherwise dispose of, mortgage, pledge or otherwise encumber all or any part of its property and assets; i. To acquire, deal in, purchase, own, hold, lease, rent, mortgage, develop, mine, produce, acquire, exploit, encumber and dispose of lumber, natural resources, minerals and mineral rights or royalty interests of any kind, either as a principal, agent, or in any other legal capacity; j. To acquire, own, deal in, hold, enjoy, use and dispose of parents and patent rights, trademarks and trade names, distinctive marks, copyrights, licenses, inventions, improvements, processes, franchises, permits and other evidences of lawful authority or agency in aid of, or as incident to the lawful transaction of any business or businesses in which the corporation is or may be engaged and the accomplishment of its objects and purposes; k. To borrow money for any of the purposes of the corporation and to draw, make, accept, endorse, discount, execute, issue, sell, pledge or otherwise dispose of promissory notes, drafts, bills of exchange, warrants, bonds, debentures and other negotiable or non-negotiable, transferable or non-transferable instruments and evidences of indebtedness, and to secure the payment thereof and the interest thereon by mortgage, assignment in trust, pledge, conveyance, or other encumbrance of the whole or any part of the property of the corporation at the time owned or thereafter acquired; l. To invest its funds; to acquire by purchase, exchange, subscription or in any other lawful manner, and to receive, hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge or otherwise dispose of or deal in any manner in and with any of the shares of the capital stock, or any voting trust certificates in respect of the shares of capital stock, scrip, warrants, rights, bonds, debentures, notes, trust receipts, and other securities, obligations, choses in action and evidence of indebtedness or interest issued or created by any corporations, joint stock companies, syndicates, associations, firms, trusts or persons, public or private, or by the government of the United States of America, or by any foreign government, or by any state, territory, province, municipality or other political subdivision or by any governmental agency, and as owner thereof to possess and exercise all the rights, powers and privileges of ownership, including, but without limitation, the right to execute consents and vote thereon, to operate, supervise, control, manage and conduct any business, and to do any and all acts and things necessary or advisable for the preservation, protection, improvement and enhancement in value thereof; m. To purchase, acquire, hold, sell, transfer and redeem or otherwise deal in shares of its own capital stock, whenever and to the fullest extent permitted by law; n. To lend money, and to acquire, take or hold as security, if desired, real and personal property, bonds, debentures, notes or any other evidences of interest or indebtedness or any other security for the payment of funds so loaned; to promote or to aid in any manner, financially or otherwise, any corporation or association of which any stocks, bonds or other evidences of indebtedness or securities are held directly or indirectly by this corporation; and for this purpose to guarantee the contracts, dividends, stocks, bonds, notes and other obligations of such other corporation or association, and to do any other acts or things designed to protect, preserve, improve or enhance the value of such stocks, bonds or other evidences of indebtedness or securities; o. To have one or more offices in any of the states, districts, territories or colonies of the United States and in any and all foreign countries, to carry on all or any of its operations and businesses and, without restriction or limit as to amount, to purchase or otherwise acquire, hold, own, mortgage, sell, convey or otherwise dispose of, real and personal property of every class and description in any of the states, districts, territories or colonies of the United States, and in any and all foreign countries, subject to the laws of such state, district, territory, colony or country; p. In general, to carry on any business whatsoever which is calculated directly or indirectly to promote the interest of the corporation or to enhance the value of its properties, and to have and exercise all the powers conferred by the laws of Delaware upon corporations formed under the General Corporation Law of the State of Delaware, and to do any or all of the things hereinbefore set forth to the same extent as natural persons might or could do; q. The objects and purposes specified in the foregoing clauses shall, except where otherwise expressed, be in nowise limited or restricted by reference to, or inference from, the terms of any other clause in this Certificate of Incorporation, but the objects and purposes specified in each of the foregoing "a" to "p" inclusive of this paragraph shall be regarded as independent objects and purposes; r. The foregoing clauses shall be construed both as objects and powers, and it is hereby expressly provided that the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the powers of this company; FOURTH. The total number of shares of stock which the Corporation shall have authority to issue is FOUR HUNDRED TWO MILLION EIGHT HUNDRED FORTY THOUSAND (402,840,000) shares, of which Eight Hundred Forty Thousand (840,000) shares having a par value of $25 each shall be Preferred Stock, Two Million (2,000,000) shares having a par value of $1 each shall be New Series Preferred Stock, and Four Hundred Million (400,000,000) shares having a par value of $0.01 each shall be Common Stock. The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions of the shares of each class are as follows: PREFERRED STOCK a. The holders of the Preferred Stock shall be entitled to receive from the net earnings of the corporation dividends thereon up to but not exceeding the rate of Four per cent per annum, as the same may be ascertained and determined by the directors, and in their discretion declared, before any dividends shall be declared or paid upon the New Series Preferred Stock or the common stock for the same period, but such dividends on the Preferred Stock shall not be cumulative, nor shall the Preferred Stock during such period be entitled to participate in any other or additional earnings or profits, but such additional earnings or profits may be subject to application by the directors to dividends upon the New Series Preferred Stock or the common stock or other uses of the corporation, as they may determine. b. In case of liquidation or dissolution of the corporation, the holders of Preferred Stock shall be entitled to receive payment in the amount of the par value thereof before any payment or liquidation is made upon the New Series Preferred Stock or the common stock, and shall not thereafter participate further in the property of the corporation or the proceeds of the sale thereof. c. Whenever no dividends shall have been paid on the Preferred Stock for six quarter-annual periods, the holders of the issued and outstanding Preferred Stock shall have the right, voting as a class, to elect two directors at the next stockholders' meeting held for the election of directors, and shall continue to have such right at each stockholders' meeting thereafter held for the election of directors until dividends shall have been paid on the Preferred Stock for four consecutive quarter-annual periods. In determining the number of quarter-annual periods for which no dividends have been paid, no quarter-annual period shall be counted if dividends shall have been paid at any time thereafter for four consecutive quarter-annual periods. At any meeting at which the holders of Preferred Stock shall have the foregoing right, voting as a class, to elect two directors, they shall not be entitled to vote for the election of any other directors. Except as otherwise provided in this subparagraph c, the voting rights of holders of Preferred Stock shall be those set forth in subparagraph k of this Paragraph. NEW SERIES PREFERRED STOCK d. The New Series Preferred Stock may be issued from time to time by the Board of Directors as herein provided in one or more series. The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of the shares of each series of New Series Preferred Stock, may be similar to or may differ from those of any other series. The Board of Directors of the corporation i. hereby expressly granted authority, subject to the provisions of this Paragraph FOURTH, to issue New Series Preferred Stock from time to time in one or more series and to fix from time to time before issuance thereof, by filing a certificate pursuant to the General Corporation Law of Delaware, the number of shares in each such series of the class, and the designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of the shares in each such series except that the powers, preferences or rights vested in the holders of Preferred Stock by this Paragraph FOURTH shall not be amended, altered, changed or repealed thereby. Without limiting the generality of the foregoing the Board of Directors may fix, with respect to the shares in each series of New Series Preferred Stock, the following: (i) The number of shares to constitute such series (which number may at any time, or from time to time, be increased or decreased by the Board of Directors, notwithstanding that shares of the series may be outstanding at the time of such increase or decrease, unless the Board of Directors shall have otherwise provided in creating such series) and the distinctive designation thereof; (ii) The dividend rate on the shares of such series, whether or not dividends on the shares of such series, shall be cumulative, and the date or dates, if any, from which dividends thereon shall be cumulative; (iii) Whether or not the shares of such series shall be redeemable, and, if redeemable, the date or dates upon or after which they shall be redeemable, the amount per share (which shall be, in the case of each share, not less than its preference upon involuntary liquidation, plus an amount equal to all dividends thereon accrued and unpaid, whether or not earned or declared) payable thereon in the case of the redemption thereof, which amount may vary at different redemption dates or otherwise as permitted by law; (iv) The right, if any, of holders of such series to convert the same into, or exchange the same for common stock or other stock as permitted by law, and the terms and conditions of such conversion or exchange, as well as provisions for adjustment of the conversion rate in such events as the Board of Directors shall determine; (v) The amount per share payable on the shares of such series upon the voluntary and involuntary liquidation, dissolution or winding up of the corporation; (vi) Whether the holders of shares of such series shall have voting power, full or limited, in addition to the voting powers provided by law, and in case additional voting powers are accorded to fix the extent thereof; and (vii) Generally to fix the other rights and privileges and any qualifications, limitations or restrictions of such rights and privileges of such series; PROVIDED, however that the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, so fixed by the Board of Directors shall not amend, alter, change or repeal the powers, preferences or rights vested in or given to the Preferred Stock or the holders thereof by this Certificate of Incorporation, nor conflict with this Certificate of Incorporation or with the resolution or resolutions adopted by the Board of Directors as hereinabove provided, providing for the issue of any series for which there are then shares outstanding. All shares of New Series Preferred Stock of the same series shall be identical in all respects, except that shares of any one series issued at different times may differ as to dates, if any, from which dividends thereon may accumulate. All shares of New Series Preferred Stock of all series shall be of equal rank and shall be identical in all respects except that to the extent not otherwise limited in this Paragraph FOURTH any series may differ from any other series with respect to any one or more of the designations, relative rights, preferences and limitations (including, without limitation, the designations, relative rights, preferences and limitations described or referred to in subparagraphs (i) to (vii) inclusive above) which may be fixed by the Board of Directors pursuant to this subparagraph d. e. Dividends. Dividends on the outstanding New Series Preferred Stock of each series shall be declared and paid or set apart for payment after dividends on the Preferred Stock at the rate provided in subparagraph a. shall have been declared and paid or set apart for the same quarter-annual period and before any dividends shall be declared and paid or set apart for payment on the common stock with respect to the same quarter-annual period. Dividends on any shares of New Series Preferred Stock shall be cumulative only if and to the extent set forth in a certificate filed pursuant to law. After dividends on all shares of Preferred Stock and of New Series Preferred Stock (including cumulative dividends if and to the extent any such shares shall be entitled thereto) shall have been declared and paid or set apart for payment with respect to any quarterly dividend period, then and not otherwise so long as any shares of Preferred Stock and New Series Preferred Stock shall remain outstanding, dividends may be declared and paid or set apart for payment with respect to the same quarterly dividend period on the common stock out of the assets or funds of the corporation legally available therefor. All share of New Series Preferred Stock of all series shall be of equal rank, preference and priority as to dividends irrespective of whether or not the rates of dividends to which the same shall be entitled shall be the same and when the stated dividends are not paid in full, the shares of all series of the New Series Preferred Stock shall share ratably in the payment thereof in accordance with the sums which would be payable on such shares if all dividends were paid in full provided, however, that any two or more series of the New Series Preferred Stock may differ from each other as to the existence and extent of the right to cumulative dividends, as aforesaid. f. Voting Rights. Except as otherwise specifically provided herein or in the certificate filed pursuant to law with respect to any series of the New Series Preferred Stock, or as otherwise provided by law, the New Series Preferred Stock shall not have any right to vote for the election of directors or for any other purpose, and when so provided shall not have more than one vote for each share of stock held of record by him at the time entitled to voting rights. g. Liquidation. In the event of any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, each series of New Series Preferred Stock shall be subordinate to the Preferred Stock but shall have preference and priority over the common stock for payment of the amount to which such series of New Series Preferred Stock shall be entitled in accordance with the provision thereof and each holder of New Series Preferred Stock shall be entitled to be paid in full his shares of such amount, or have a sum sufficient for the payment in full set aside, after the holders of Preferred Stock have received payment of the amounts to which they are entitled upon liquidation or dissolution or winding up of the corporation, but before any payments shall be made to the holders of the common stock. If, upon liquidation, dissolution or winding up of the corporation, the assets of the corporation or proceeds thereof, distributable among the holders of the shares of all series of the New Series Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributed among such holders ratably in accordance with the respective amounts which would be payable if all amounts payable thereon were paid in full. After the payment to the holders of Preferred Stock and New Series Preferred Stock of all such amounts to which they are entitled, as above provided, the remaining assets and funds of the corporation shall be divided and paid to the holders of common stock. h. Redemption. In the event that the New Series Preferred Stock of any one or more series shall be made redeemable as provided in clause (iii) of subparagraph d. of this Paragraph FOURTH, the corporation, at the option of the Board of Directors, may redeem, at the time or times specified in the certificate filed pursuant to law with respect to any such series, all or any part of any such series of New Series Preferred Stock outstanding upon notice duly given as hereinafter specified, by paying for each share the then applicable redemption price fixed by the Board of Directors as provided herein, plus an amount equal to accrued and unpaid dividends to the date fixed for redemption, provided, however, that a notice specifying the shares to be redeemed, and the time and place of redemption (and, if less than the total outstanding shares are to be redeemed, specifying the certificate numbers and number of shares to be redeemed) shall be published once in a daily newspaper printed in the English language and published and of general circulation in the Borough of Manhattan, the City of New York, and shall be mailed, addressed to the holders of record of the New Series Preferred Stock to be redeemed at their respective addresses as the same shall appear upon the books of the corporation, not less than thirty (30) days nor more than ninety (90) days previous to the date fixed for redemption. If less than the whole amount of any outstanding series of New Series Preferred Stock is to be redeemed, the shares of such series to be redeemed shall be selected by lot or pro rata in any manner determined by resolution of the Board of Directors to be fair and proper. From and after the date fixed in any such notice as the date of redemption (unless default shall be made by the corporation in providing moneys at the time and place of redemption for payment of the redemption price) all dividends upon the New Series Preferred Stock so called for redemption shall cease to accrue, and all rights of the holders of said New Series Preferred Stock as stockholders in the corporation, except the right to receive the redemption price upon surrender of the certificate representing the New Series Preferred Stock so called for redemption, duly endorsed for transfer, if required, shall cease and determine. With respect to any shares of New Series Preferred Stock so called for redemption, if, before the redemption date, the corporation shall deposit with a bank or trust company in the United States, having a capital and surplus of at least $10,000,000, funds necessary for such redemption, in trust, to be applied to the redemption of the shares of New Series Preferred Stock so called for redemption, then from and after the date of such deposit, all rights of the holders of such shares of New Series Preferred Stock, so called for redemption shall cease and determine, except the right to receive, on and after the date of such deposit, the redemption price upon surrender of the certificates representing such shares of New Series Preferred Stock, so called for redemption, duly endorsed for transfer, if required, and except as might otherwise be provided in the certificate filed pursuant to law with respect to any such shares of New Series Preferred Stock, so called for redemption. Any interest accrued on such funds shall be paid to the corporation from time to time. Any funds so deposited and unclaimed at the end of six (6) years from such redemption date shall be released or repaid to the corporation, after which the holders of such shares of New Series Preferred Stock so called for redemption shall look only to the corporation for payment of the redemption price. Notwithstanding the foregoing, no redemption of any shares of any series of New Series Preferred Stock shall be made by the corporation (1) which as of the date of mailing of the notice of such redemption would, if such date were the date fixed for redemption, reduce the net assets of the corporation remaining after such redemption below twice the aggregate amount payable upon voluntary or involuntary liquidation, dissolution or winding up to the holders of shares having rights senior or equal to the New Series Preferred Stock in the assets of the corporation upon liquidation, dissolution or winding up; or (2) unless all cumulative dividends for the current and all prior dividend periods have been declared and paid or declared and set apart for payment on all shares of the corporation having a right to cumulative dividends. GENERAL PROVISIONS i. Shares of any series of New Series Preferred Stock which have been redeemed, retired or purchased by the corporation (whether through the operation of a sinking or purchase fund or otherwise) or which, if convertible or exchangeable, have been converted into or exchanged for shares of stock of the corporation of any other class or series shall thereafter have the status of authorized but unissued shares of New Series Preferred Stock of the corporation, and may thereafter be reissued as part of the same series or may be reclassified and reissued by the Board of Directors in the same manner as any other authorized and unissued shares of New Series Preferred Stock. j. No holder of shares of any class of stock authorized or issued pursuant hereto or hereafter authorized or issued shall have any pre-emptive or preferential right of subscription to any shares of any class of stock of this corporation, either now or hereafter authorized, or to any obligations convertible into stock of any class of this corporation, issued or sold, nor any right of subscription to any thereof, other than such, if any, as the Board of Directors in its discretion may from time to time determine, and at such prices as the Board of Directors in its discretion may from time to time fix. k. Each holder of shares of common stock each holder of shares of Preferred Stock, and each holder of shares of New Series Preferred Stock entitled to vote by the certificate filed pursuant to law with respect to any series of New Series Preferred Stock or as provided by law if this Certificate provides for New Series Preferred Stock (such shares of common stock, Preferred Stock and New Series Preferred Stock being referred to in this subparagraph as voting shares), shall be entitled to vote on the basis of one vote for each voting share held by him, except (i) as provided in Paragraph THIRTEENTH; (ii) as provided in subparagraph c. of this Paragraph FOURTH; (iii) in elections for directors commencing with the annual meeting of stockholders in 1970 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. l. The Board of Directors may from time to time issue scrip in lieu of fractional shares of stock. Such scrip shall not confer upon the holder any right to dividends or any voting or ocher rights of a stockholder of the corporation, but the corporation shall from time to time, within such time as the Board of Directors may determine or without limit of time if the Board of Directors so determines, issue one or more whole shares of stock upon the surrender of scrip for fractional shares aggregating the number of whole shares issuable in respect to the scrip so surrendered, provided that the scrip so surrendered shall be properly endorsed for transfer if in registered form. m. For purposes of applying Paragraph THIRTEENTH hereof, New Series Preferred Stock shall not be considered preferred stock as that term is used therein. NEW SERIES PREFERRED STOCK, SERIES A 1. Designation and Amount. The shares of such series shall be designated as "New Series Preferred Stock, Series A (the "Series A Preferred Stock") and the number of shares initially constituting such series shall be 150,000 (which number may be increased or decreased by the Board of Directors without a vote of Stockholders). 2. Dividends and Distributions. A. Subject to any prior and superior rights of the holders of any series of Preferred Stock ranking prior and superior to the shares of Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock shall be entitled prior to the payment of any dividends on shares ranking junior to the Series A Preferred Stock to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $10.00 or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock, par value $0.01 per share, of the Corporation (the "Common Stock") or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any whole or fractional share of Series A Preferred Stock. In the event the Corporation shall at any time after October 12, 1995 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Such adjustment shall be made successively whenever such a dividend or change in the Common Stock is consummated. B. The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided, that in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $10.00 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. C. Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: A. Subject to the provision for adjustment hereinafter set forth, each 1/1,000th share of Series A Preferred Stock shall entitle the holder thereof to one vote on all matters voted on at a meeting of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Such adjustment shall be made successively whenever such a dividend or change in the Common Stock is consummated. B. Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters voted on at a meeting of stockholders of the Corporation. C. Except as set forth herein, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 4. Certain Restrictions. A. Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding, shall have been paid in full, the Corporation shall not: i. declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of capital stock of the Corporation ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; ii. declare or pay dividends on or make any other distributions on any shares of capital stock of the Corporation ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; iii. redeem or purchase or otherwise acquire for consideration shares of any capital stock of the Corporation ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock; provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any capital stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or iv. purchase or otherwise acquire for consideration any shares of Series A Preferred Stock or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. B. The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of capital stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of New Series Preferred Stock and may be reissued as part of a new series of New Series Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. 6. Liquidation, Dissolution or Winding Up. A. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, no distribution shall be made on any shares of capital stock of the Corporation that rank junior (whether as to dividends or upon liquidation, dissolution or winding up) to Series A Preferred Stock unless prior hereto the holders of shares of Series A Preferred Stock shall have received an amount per share equal to 1,000 times the aggregate amount to be distributed per share to holders of the Common Stock. B. In the event, however, that there are not sufficient assets available to permit payment in full of the Series A liquidation preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. C. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount that the holders of the Series A Preferred Stock were entitled to receive upon liquidation, dissolution or winding up of the Corporation immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Such adjustment shall be made successively whenever such a dividend or change in the Common Stock is consummated. 7. Merger; Consolidation, etc. In case the Corporation shall enter into any merger, consolidation, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then, in each such case, the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Such adjustment shall be made successively whenever such a dividend or change in the Common Stock is consummated. 8. No Redemption. The Series A Preferred Stock shall not be redeemable. 9. Ranking. The Series A Preferred Stock shall rank on a parity with all other series of the Corporation's Preferred Stock as to the payment of dividends and other distribution of assets, unless the terms of any such other series shall provide otherwise. 10. Amendment. The Certificate of Incorporation of the Corporation shall not be further amended in any manner that would materially alter or change the powers, preferences, rights, qualifications, limitations and restrictions of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Preferred Stock, voting separately as a class. 11. Fractional Shares. Series A Preferred Stock may be issued in fractions of a share, which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Stock. SERIES B CONVERTIBLE PREFERRED STOCK "Section 1. Designation and Amount; Special Purpose Restricted Transfer Issue. (A) The shares of such series shall be designated as "Series B Convertible Preferred Stock" ("Series B Preferred Stock") and the number of shares constituting such series initially shall be 1,000,000, such number of shares to be subject to increase or decrease by the Board of Directors as evidenced by a certificate of designations; provided, however, that no decrease shall reduce the number of shares of Series B Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options. (B) Shares of Series B Preferred Stock shall be issued only to Boatmen's Trust Company or its successors as trustee, or their respective nominees (the "Trustee"), of the Kansas City Southern Industries, Inc. Employee Plan Funding Trust (together with any successor trust, the `Trust") or to any trustee or administrator of any plan designated as a beneficiary of the Trust ("Beneficiary Plan"). In the event of any transfer of shares of Series B Preferred Stock to any person or entity other than the Corporation, the Trustee or a trustee or administrator of any Beneficiary Plan, the shares of Series B Preferred Stock so transferred, upon such transfer and without any further action by the Corporation, the holder thereof or the transferee thereof, shall be automatically converted into shares of Common Stock pursuant to paragraph 5(G) hereof and no such transferee shall have any of the voting powers, preferences and relative, optional or special rights ascribed to shares of Series B Preferred Stock hereunder but, rather, only the powers and rights pertaining to the Common Stock into which such shares of Series B Preferred Stock shall be so converted. In the event of such a conversion, the transferee of the shares of Series B Preferred Stock shall be treated for all purposes as the record holder of the shares of Common Stock into which such shares of Series B Preferred Stock have been automatically converted as of the date of such transfer. Notwithstanding the foregoing, the pledge of Series B Preferred Stock as collateral by or pursuant to any credit agreement, indenture or other document or instrument shall not constitute a transfer for purposes of this paragraph 1(B), but the foreclosure or other realization upon such pledged shares shall constitute such a transfer. Certificates representing shares of Series B Preferred Stock shall bear a legend to reflect the foregoing provisions. Notwithstanding the foregoing provisions of this paragraph 1(B), shares of Series B Preferred Stock (i) may be converted into shares of Common Stock as provided by Section 5 hereof and the shares of Common Stock issued upon such conversion may be transferred by the holder thereof as permitted by law and (ii) shall be redeemable by the Corporation upon the terms and conditions provided by Sections 6 and 7 hereof. "Section 2. Dividends and Distributions. (A) Subject to the provisions for adjustment hereinafter set forth, the holders of shares of Series B Preferred Stock, in preference to any shares of any stock ranking as to dividends, or as to distributions in the event of a liquidation in whole, dissolution or winding-up of the Corporation, junior to the Series B Preferred Stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available therefor, cash dividends ("Preferred Dividends") in an amount per share equal to $10.00 per share per annum, and no more, payable quarterly in arrears, one-fourth each on the last day of December, March, June, and September of each year (each a "Dividend Payment Date") commencing on December 31, 1993, to the holders of record at the start of business on such Dividend Payment Date. In the event that any Dividend Payment Date shall fall on any day other than a Business Day (as defined in paragraph 8(F) hereof), the dividend payment due on such Dividend Payment Date shall be payable on the Business Day immediately following such Dividend Payment Date. Preferred Dividends shall begin to accrue on outstanding shares of Series B Preferred Stock from and including the date of issuance thereon. Preferred Dividends shall accrue on a daily basis whether or not the Corporation shall have earnings or surplus at the time, but Preferred Dividends accrued after issuance on the shares of Series B Preferred Stock for any period less than a full quarterly period between Dividend Payment Dates shall be computed on the basis of a 360-day year of 30-day months. Accrued but unpaid Preferred Dividends shall cumulate as of the Dividend Payment Date on which they first become payable, but no interest shall accrue on accumulated but unpaid Preferred Dividends. (B) So long as any shares of the Preferred Stock of the Corporation shall be outstanding, no dividend shall be, directly or indirectly, declared or paid or set apart for payment on Series B Preferred Stock unless there shall also be or have been declared or paid or set apart for payment dividends for the same dividend payment period of the Preferred Stock at the rate provided for in the Certificate of Incorporation. So long as any shares of Series B Preferred Stock shall be outstanding, no dividend shall be, directly or indirectly, declared or paid or set apart for payment on any other series of stock ranking junior to or on a parity with the Series B Preferred Stock as to dividends, unless there shall also be or have been declared and paid or set apart for payment on the Series B Preferred Stock, dividends for all dividend payment periods of the Series B Preferred Stock ending on or before the dividend payment date of such parity stock, ratably in proportion to the respective amounts of dividends accumulated and unpaid or payable through such dividend payment period on the Series B Preferred Stock and accumulated and unpaid or payable on such parity stock through the dividend payment period on such parity stock next preceding such dividend payment date, and the Corporation shall have redeemed all of the shares of Series B Preferred Stock for which a notice of redemption has been sent pursuant to paragraph 6(B) hereof, if any. In the event that full cumulative dividends on the Series B Preferred Stock have not been declared and paid or set apart for payment when due or the Corporation shall fail to discharge its obligation to redeem shares of Series B Preferred Stock pursuant to Section 6 hereof once notice of redemption has been sent the Corporation shall not, directly or indirectly, declare or pay or set apart for payment any dividends or make any other distributions on, or make any payment on account of the purchase, redemption or other retirement of any other class of stock or series thereof of the Corporation ranking, as to dividends or as to distributions in the event of a liquidation in whole, dissolution or winding-up of the Corporation, junior to or on a parity with the Series B Preferred Stock until full cumulative dividends on the Series B Preferred Stock shall have been paid in full or declared and set apart for payment in full and any such obligation shall have been discharged; provided, however, that the foregoing shall not apply to (i) any dividend payable solely in any shares of any stock ranking, as to dividends and as to distributions in the event of a liquidation in whole, dissolution or winding-up of the Corporation, junior to the Series B Preferred Stock, or (ii) the acquisition of shares of any stock ranking, as to dividends or as to distributions in the event of a liquidation in whole, dissolution or winding-up of the Corporation, junior to the Series B Preferred Stock either (A) pursuant to any employee or director incentive or benefit plan or arrangement (including any employment, severance or consulting agreement) of the Corporation or any subsidiary of the Corporation heretofore or hereafter adopted or (B) in exchange solely for shares of any other stock ranking, as to dividends and as to distributions in the event of a liquidation in whole, dissolution or winding-up of the Corporation, junior to the Series B Preferred Stock. "Section 3. Voting Rights. The holders of shares of Series B Preferred Stock shall have no voting rights with respect to such stock, other than as required by law and as set forth herein, except that the Certificate of Incorporation of the Corporation (including this Certificate of Designations) shall not be amended, altered or repealed in any manner (including any amendment, alteration or repeal effected by any merger or consolidation) which would adversely alter or change the powers, preferences or special rights of the Series B Preferred Stock without the affirmative vote or consent of the holders of a majority of the outstanding shares of Series B Preferred Stock, voting separately as a series; provided, that any increase in the authorized Preferred Stock or the creation and issuance (whether or not authorized on or prior to the issuance of any Series B Preferred Stock) of any other class or series of Preferred Stock ranking senior to or on a parity with or junior to the Series B Preferred Stock as to payment of dividends and upon liquidation in whole, dissolution or winding-up of the Corporation or any increase or decrease in the number of shares which constitute the Series B Preferred Stock (but not below the number of shares thereof then outstanding) shall not be deemed to alter or change the powers, preferences or special rights of the Series B Preferred Stock so as to affect the holders thereof adversely within the meaning of the Delaware General Corporation Law (the "DGCL"). "Section 4. Liquidation, Dissolution or Winding-Up. (A) Upon any voluntary or involuntary liquidation in whole, dissolution or winding-up of the Corporation, the holders of Series B Preferred Stock shall be entitled to receive out of assets of the Corporation which remain after satisfaction in full of all valid claims of creditors of the Corporation and which are available for payment to stockholders, and subject to the rights of the holders of the Preferred Stock and any other stock of the Corporation ranking senior to or on a parity with the Series B Preferred Stock in respect of distributions upon liquidation in whole, dissolution or winding-up of the Corporation, before any amount shall be paid or distributed among the holders of Common Stock or any other shares ranking junior to the Series B Preferred Stock in respect of distributions upon liquidation in whole, dissolution or winding-up of the Corporation, liquidating distributions in the amount of $200.00 per share (the "Liquidation Preference"), plus an amount equal to all accumulated and unpaid dividends (including dividends declared and set aside) and accrued dividends thereon to the date fixed for distribution, and no more. If upon any liquidation in whole, dissolution or winding-up of the Corporation, the amounts payable with respect to the Series B Preferred Stock and any other stock ranking as to any such distribution on a parity with the Series B Preferred Stock are not paid in full, the holders of the Series B Preferred Stock and such other stock shall share ratably in any distribution of assets in proportion to the full respective preferential amounts to which they are entitled. After payment of the full amount to which they are entitled as provided by the foregoing provisions of this paragraph 4(A), the holders of shares of Series B Preferred Stock shall not be entitled as such to any further right or claim to any of the remaining assets of the Corporation. (B) Neither the merger or consolidation of the Corporation with or into any other corporation, nor the merger or consolidation of any other corporation with or into the Corporation, nor the sale, lease, exchange or other transfer of all or any portion of the assets of the Corporation, nor any partial liquidation of the Corporation, shall be deemed to be a liquidation in whole, dissolution or winding-up of the affairs of the Corporation for purposes of this Section 4, but the holders of Series B Preferred Stock shall nevertheless be entitled in the event of any such merger or consolidation to the rights provided by Section 7 hereof. (C) Written notice of any voluntary or involuntary liquidation in whole, dissolution or winding-up of the Corporation, stating the payment date or dates when, and the place or places where, the amounts distributable to the holders of the Series B Preferred Stock in such circumstances shall be payable, shall be given by first-class mail, postage prepaid, mailed not less than thirty (30) calendar days prior to any payment date stated therein, or such shorter period prior to such payment date as may be necessary under the circumstances, to the holders of Series B Preferred Stock at the addresses shown on the books of the Corporation or any transfer agent for the Series B Preferred Stock or as otherwise required by any applicable law or regulation. "Section 5. Conversion into Common Stock. (A) A holder of shares of Series B Preferred Stock shall be entitled, at any time prior to the close of business on the date fixed for redemption of such shares pursuant to Section 6 or 7 hereof, to cause any or all of such shares to be converted into shares of Common Stock at a conversion rate equal to the ratio of (i) the Liquidation Preference per share to (ii) an amount which initially shall be $50.00 and which shall be adjusted as hereinafter provided (and which amount, as it may be so adjusted from time to time, is hereinafter sometimes referred to as the "Conversion Price") (that is, a conversion rate initially equivalent to four shares of Common Stock for each share of Series B Preferred Stock so converted, which is subject to adjustment as the Conversion Price may be adjusted as hereinafter provided, and which will limit the maximum number of shares of Common Stock issuable upon conversion to 4 million). (B) Any holder of shares of Series B Preferred Stock desiring to convert such shares into shares of Common Stock shall surrender the certificate or certificates representing the shares of Series B Preferred Stock being converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto), at the principal executive office of the Corporation or the offices of the transfer agent for the Series B Preferred Stock or such office or offices in the continental United States of an agent for conversion as may from time to time be designated by notice to the holders of the Series B Preferred Stock by the Corporation or the transfer agent for the Series B Preferred Stock, accompanied by written notice of conversion, on any Business Day. Such notice of conversion shall specify (i) the number of shares of Series B Preferred Stock to be converted and the name or names in which such holder wishes the certificate or certificates for Common Stock and for any shares of Series B Preferred Stock not to be so converted to be issued (subject to compliance with applicable legal requirements if any of said certificates are to be issued in a name other than the name of the holder), and (ii) the address to which such holder wishes delivery to be made of such new certificates to be issued upon such conversion. (C) Upon surrender of a certificate representing a share or shares of Series B Preferred Stock for conversion, the Corporation shall, as promptly as practicable after such surrender, issue and send by hand delivery (with receipt to be acknowledged) or by first-class mail, postage prepaid, to the holder thereof or to such holder's designee, at the address designated by such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled upon conversion. In the event that there shall have been surrendered a certificate or certificates representing shares of Series B Preferred Stock, only part of which are to be converted, the Corporation shall issue and deliver to such holder a new certificate or certificates representing the number of shares of Series B Preferred Stock which shall not have been converted. (D) The issuance by the Corporation of shares of Common Stock upon a conversion of shares of Series B Preferred Stock into shares of Common Stock (otherwise than pursuant to paragraph 1(B), 5(G) or 5(H) hereof) shall be effective as of the close of business on the day of the surrender to the Corporation of the certificate or certificates for the shares of Series B Preferred Stock to be converted, duly assigned or endorsed for transfer to the Corporation (or accompanied by duly executed stock powers relating thereto) and accompanied by a written notice of conversion, as provided by this Resolution. After the effective day of conversion, the shares of Series B Preferred Stock so converted shall no longer be deemed to be outstanding for any purpose, and the person or persons entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock, but no allowance or adjustment shall be made in respect of dividends payable to the holders of Common Stock of record on any date prior to such effective date. Except as otherwise expressly provided for herein, the Corporation shall not be obligated to pay any accumulated and unpaid dividends and accrued dividends on any shares of Series B Preferred Stock being converted pursuant to the provisions hereof or any dividends which shall have been declared and shall be payable to holders of shares of Series B Preferred Stock on a Dividend Payment Date if such Dividend Payment Date for such dividend shall be on or subsequent to the effective date of the conversion of such shares. (E) The Corporation shall not be obligated to deliver to the holders of Series B Preferred Stock any fractional share or shares of Common Stock issuable upon any conversion of such shares of Series B Preferred Stock, but in lieu thereof may make a cash payment in an amount equal to such fraction multiplied by the Current Market Price (as defined in paragraph 8(F) hereof) per share of the Common Stock at the close of business on the effective date of conversion of such shares. The Corporation shall pay all issue taxes, if any, incurred in respect of the Common Stock on conversion of shares of Series B Preferred Stock as set forth in paragraph 10(C) hereof. (F) The Corporation shall at all times, reserve and keep available out of its authorized and unissued Common Stock, solely for issuance upon the conversion of shares of Series B Preferred Stock as herein provided, free from any preemptive rights, such number of shares of Common Stock as shall from time to time be issuable upon the conversion of all the shares of Series B Preferred Stock then outstanding and convertible pursuant to paragraph 5(A) hereof. Nothing contained herein shall preclude the Corporation from delivering shares of Common Stock held in its treasury upon the conversion of shares of Series B Preferred Stock into Common Stock pursuant to the terms hereof; provided, that such shares of Common Stock held in the Corporation's treasury shall, at the effective time of such conversion, be free and clear of all liens and similar encumbrances. The Corporation shall prepare and shall use its best efforts to obtain and keep in force such governmental or regulatory or listing (to the extent the Common Stock is then listed) permits or other authorizations as may be required by law or the securities exchange or exchanges on which the Common Stock is then listed, if any, and shall comply with all requirements as to registration or qualification of the Common Stock, in order to enable the Corporation lawfully to issue and deliver to each holder of record of Series B Preferred Stock such number of shares of its Common Stock as shall from time to time be sufficient to effect the conversion of all shares of Series B Preferred Stock then outstanding and convertible into shares of Common Stock. The Corporation shall also take any corporate or other action which is reasonably necessary and permissible in order that the Corporation deliver such number of legally and validly issued and fully paid and nonassessable shares of Common Stock as my be required to effect said conversion. (G) In the event that the Trustee ceases to be the holder of any share of Series B Preferred Stock (except in the case of the redemption or repurchase of shares by the Corporation or a transfer to a trustee or administrator of any Beneficiary Plan), and in the event that any trustee or administrator of any Beneficiary Plan ceases to be the holder of any share of Series B Preferred Stock (except in the case of the redemption or repurchase of shares by the Corporation), such share of Series B Preferred Stock will automatically, without any act or deed on the part of the Corporation, or any other person, be converted into the number of shares of Common Stock into which such share of Series B Preferred Stock would then be convertible if it were voluntarily presented for conversion in accordance with the other provisions of this Section 5 plus the right to receive an amount in cash equal to all accumulated and unpaid dividends (including dividends declared and set aside) and accrued dividends thereon through the date of such automatic conversion. To the extent applicable, the other provisions of this Section 5 shall govern any automatic conversion pursuant to this paragraph 5(G), subject to the following: (a) any share surrendered for transfer by the Trustee or any such trustee or administrator shall be deemed to have been surrendered for conversion by the transferee prior to the close of business on the day such share would otherwise be transferred into the transferee's name on the books of the Corporation; (b) no notice of conversion need be submitted by the Trustee or any such trustee or administrator in order to effect the automatic conversion provided for hereby; and (c) notwithstanding any provisions of paragraph 5(A) hereof, each share of Series B Preferred Stock is subject to automatic conversion pursuant to this paragraph 5(G) at any time prior to such share having been redeemed or otherwise purchased by the Corporation. (H) In the event that any trustee or administrator of any Beneficiary Plan shall certify that conversion of a share of Series B Preferred Stock held by such trustee or administrator is necessary either (a) to provide for distributions required to be made to participants under a Beneficiary Plan or (b) to make any payments of principal, interest or premium due and payable (whether as scheduled, upon redemption, upon acceleration or otherwise) under any indebtedness incurred by the holder for the benefit of any Beneficiary Plan, then such share of Series B Preferred Stock will automatically, upon notice to the Corporation given not less than five (5) Business Days prior to the date fixed for conversion by the holder of such shares of Series B Preferred Stock in such notice but without any further act or deed on the part of the Corporation, or any other person, be converted into the greater of (i) the number of shares of Common Stock into which such share of Series B Preferred Stock would then be convertible if it were voluntarily presented for conversion in accordance with the other provisions of this Section 5 or (ii) the number of shares of Common Stock that, when multiplied by the Fair Market Value (as defined in paragraph 8(F) hereof) per share of Common Stock on the date of such automatic conversion, equals the Liquidation Preference per share plus, in each case, the right to receive an amount of cash equal to all accumulated and unpaid dividends (including dividends declared and set aside) and accrued dividends thereon through the date of such automatic conversion; provided that the automatic conversion provided for in this paragraph 5(H) shall take effect only when and to the extent necessary for the satisfaction of either of the conditions set forth in clauses (a) and (b) of this paragraph 5(H); and provided, further, that, upon conversion of a share of Series B Preferred Stock in satisfaction of the condition described in clause (b) of this paragraph 5(H), the Corporation may, in lieu of such conversion, make payment to such trustee or administrator in cash in an amount equal to the Fair Market Value (as defined in paragraph 8(F) hereof) of the shares of Common Stock into which such share of Series B Preferred Stock would be convertible pursuant to this paragraph 5(H). "Section 6. Redemption at the Option of the Corporation. (A) The Series B Preferred Stock shall be redeemable, in whole or in part, at the option of the Corporation at any time after April 1, 1995, or at any time after the date of issuance, if permitted by Paragraph 6(C), 6(D) or 6(E) hereof, at the following redemption prices per share (expressed in percentages of the Liquidation Preference) (or, if pursuant to Paragraph 6(C) or 6(E) hereof, at the redemption price per share set forth therein): During the 12 month period beginning April 1 Percentage 1993 105% 1994 104% 1995 103% 1996 102% 1997 101% 1998 and thereafter 100% and, thereafter, at the Liquidation Preference per share, plus, in each case, an amount equal to all accumulated and unpaid dividends (including dividends declared and set aside) and accrued dividends thereon to the date fixed for redemption. Payment of the redemption price shall be made by the Corporation in cash or shares of Common Stock, or a combination thereof, as permitted by paragraph 6(F) hereof. From and after the close of business on the date fixed for redemption, unless the Corporation shall have defaulted in the payment or setting aside in trust of moneys and/or shares of Common Stock at the time and place specified for the payment of the full redemption price (as set forth in this Section 6) pursuant to the redemption notice described in paragraph 6(B) hereof, all dividends on shares of Series B Preferred Stock called for redemption will cease to accrue, such shares will no longer be deemed to be outstanding and will no longer be convertible and all rights in respect of such shares of the Corporation shall cease, except the rights to receive such full redemption price. If less than all of the outstanding shares of Series B Preferred Stock are to be redeemed, the Corporation shall either redeem a portion of the shares of each holder determined pro rata based on the number of shares held by each holder or shall select the shares to be redeemed by lot, as may be determined by the Board of Directors of the Corporation. (B) Unless otherwise required by law or regulation, notice of any redemption effected pursuant to this Section 6 shall be published once in a daily newspaper printed in the English language and published and of general circulation in the Borough of Manhattan, the City of New York, and sent to the holders of Series B Preferred Stock at the address shown on the books of the Corporation or any transfer agent for the Series B Preferred Stock by first-class mail, postage prepaid, mailed, not less than thirty (30) calendar days nor more than ninety (90) calendar days prior to the redemption date. Each such notice shall state: (i) the paragraph or clause within a paragraph of this Resolution pursuant to which the redemption is being effected, (ii) the redemption date; (iii) the total number of shares of the Series B Preferred Stock to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (iv) the redemption price; (v) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; (vi) that dividends on the shares to be redeemed will cease to accrue from and after the close of business on such redemption date; and (vii) the conversion rights of the shares to be redeemed, the period within which conversion rights may be exercised, and the Conversion Price and number of shares of Common Stock issuable upon conversion of a share of Series B Preferred Stock at the time. Upon surrender of the certificate for any shares so called for redemption and not previously converted (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and the notice shall so state), such shares shall be redeemed by the Corporation at the date fixed for redemption and at the redemption price set forth in this Section 6. (C) In the event (i) that shares of Series B preferred Stock are held in such a manner as to entitle the Corporation to claim a tax deduction with respect to dividends paid or payable on the Series B Preferred Stock when such dividends are used as provided under Section 404(k)(2)(C) of the Internal Revenue Code of 1986, as amended and in effect on the date shares of Series B Stock are initially issued and a change occurs (whether or not then effective) in the federal tax law of the United States of America which has or would have the effect of precluding the Corporation from claiming any of such tax deductions or (ii) that shares of Series B Preferred Stock are held by an employee benefit plan intended to qualify as an employee stock ownership plan within the meaning of Section 4975 of the Internal Revenue Code of 1986, as amended, and such plan does not so qualify, (such as postal services), then the Corporation may, in its sole discretion and notwithstanding anything to the contrary in paragraph 6(A) hereof, call for redemption any or all then outstanding shares of Series B Preferred Stock for an amount per share equal to the redemption price per share which would be applicable were the Corporation to redeem such shares of Series B Preferred Stock pursuant to paragraph 6(A) hereof (without regard to whether such shares of Series B Preferred Stock are redeemable thereunder), plus an amount equal to all accumulated and unpaid dividends (including dividends declared and set aside) and accrued dividends thereon to the date fixed for such redemption. (D) Notwithstanding anything to the contrary in paragraph 6(A) hereof, the Corporation may, in its sole discretion, elect to redeem any or all of the shares of Series B Preferred Stock at any time on the terms and conditions set forth in paragraphs 6(A) and 6(B) hereof, if the last reported sales price, regular way, of a share of Common Stock, as reported on the New York Stock Exchange Composite Tape or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which such stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or, if the Common Stock is not quoted on such National Market System, the average of the closing bid and asked prices in the over-the-counter market as reported by NASDAQ, in each case for at least twenty (20) trading days within a period of thirty (30) consecutive trading days ending within five (5) calendar days of the notice of redemption, equals or exceeds one hundred fifty percent (150%) of the Conversion Price (giving effect in making such calculation to any adjustments required by Section 8 hereof). (E) In the event that the Trust or any Beneficiary Plan is terminated in accordance with its terms, and notwithstanding anything to the contrary in paragraph 6(A) hereof, the Corporation shall, as soon thereafter as practicable and permissible under applicable state law and to the extent the Corporation shall have legally available funds for such payment, call for redemption all then outstanding shares of Series B Preferred Stock held by the Trustee, or by such trustee or administrator for such Beneficiary Plan, as the case may be, for an amount per share equal to the redemption price per share which would be applicable were the Corporation to redeem such shares of Series B Preferred Stock pursuant to paragraph 6(A) hereof (without regard to whether such shares of Series B Preferred Stock are then redeemable thereunder), plus an amount in cash equal to all accumulated and unpaid dividends (including dividends declared and set aside) and accrued dividends thereon to the date fixed for such redemption. (F) Notwithstanding any provision hereof to the contrary, the Corporation, at its option, may make payment of the redemption price or Liquidation Preference, as the case may be, plus, in each case, any amount equal to all accumulated and unpaid dividends (including dividends declared and set aside) and accrued dividends thereon to the date of such redemption, required upon redemption of shares of Series B Preferred Stock pursuant to Sections 6 and 7 hereof in cash or in shares of Common Stock (or fractional shares thereof), or in a combination of such shares and cash, any such shares of Common Stock to be valued for such purposes at their Fair Market Value (as defined in paragraph 8(F) hereof). All shares of Common Stock to be delivered as full or partial payment of the redemption price to be paid pursuant to this Section 6 or Section 7 hereof shall be validly and legally issued, fully paid and nonassessable, and any shares of Common Stock delivered to make any such payment shall, at the effective time of such redemption, be free and clear of all liens and similar encumbrances. "Section 7. Consolidation, Merger, etc. (A) In the event that (i) the Corporation shall consummate any consolidation or merger pursuant to which the outstanding shares of Common Stock are exchanged solely for or changed, reclassified or converted solely into stock of any successor or resulting corporation (including the Corporation) that constitutes "qualifying employer securities" with respect to a holder of Series B Preferred Stock within the meaning of Section 4975(e)(8) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(5) of the Employee Retirement Income Security Act of 1974, as amended, or any successor provisions of law, and, if applicable, for a cash payment in lieu of fractional shares, if any, or (ii) the Corporation shall consummate any sale of all or substantially all of the Corporation's assets pursuant to which consideration consisting solely of stock of any corporation that constitutes such qualifying employer securities with respect to a holder of Series B Preferred Stock is distributed to holders of Common Stock, together with, if applicable, a cash payment in lieu of fractional shares, if any, then the shares of Series B Preferred Stock of such holder shall, in connection with such consolidation, merger or sale of all or substantially all of the Corporation's assets, be assumed by and shall become preferred stock of such successor, resulting or other corporation, having in respect of such corporation, insofar as possible, the same powers, preferences and relative, optional or other special rights (including the redemption and other rights provided by Sections 6 and 7 hereof), and the qualifications, limitations or restrictions thereon, that the Series B Preferred Stock had immediately prior to such transaction, except that after such transaction each share of the Series B Preferred Stock shall be convertible, otherwise on the terms and conditions provided by Section 5 hereof, into the number and kind of qualifying employer securities so receivable by a holder of the number of shares of Common Stock into which such shares of Series B Preferred Stock could have been converted immediately prior to such transaction; provided, however, that if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election between two or more kinds of qualifying employer securities, which election cannot practicably be made by the holders of the Series B Preferred Stock, then the shares of Series B Preferred Stock so assumed by, and becoming (as described above) preferred stock of, such successor, resulting or other corporation shall be convertible, otherwise on the terms and conditions provided by Section 5 hereof, into the aggregate amount of the kind of qualifying employer securities receivable by a holder of the number of shares of Common Stock into which such shares of Series B Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind of qualifying employer securities receivable upon such transaction (provided that, if the kind or amount of qualifying employer securities receivable upon such transaction is not the same for each non-electing share, then the kind and amount so receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by the plurality of the non-electing shares). The rights of the Series B Preferred Stock as preferred stock of such successor, resulting or other corporation shall successively be subject to adjustments pursuant to Section 8 hereof after any such transaction as nearly equivalent as practicable to the adjustment provided for by such section prior to such transaction. The Corporation shall not consummate any such consolidation, merger or sale of all or substantially all of the Corporation's assets unless all then outstanding shares of Series B Preferred Stock shall be assumed and authorized by the successor, resulting or other corporation as aforesaid. (B) In the event that (i) the Corporation shall consummate any consolidation or merger pursuant to which the outstanding shares of Common Stock are exchanged for or changed, reclassified or converted into stock or securities or cash or any other property, or any combination thereof, which consideration is not constituted solely of qualifying employer securities (as referred to in paragraph 7(A) hereof) and cash payments, if applicable, in lieu of fractional shares, or (ii) the Corporation shall consummate any sale of all or substantially all of the Corporation's assets pursuant to which consideration not consisting solely of stock constituting such qualifying employer securities and cash payments, if applicable, in lieu of fractional shares, is distributed, then outstanding shares of Series B Preferred Stock shall, without any action on the part of the Corporation or any holder thereof (but subject to paragraph 7(C) hereof), be automatically converted by virtue of such consolidation, merger or sale of all or substantially all of the Corporation's assets immediately prior to such consummation into the number of shares of Common Stock into which such shares of Series B Preferred Stock could have been converted at such time so that each share of Series B Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be exchanged for or changed, reclassified or converted into, or shall entitle the holder thereof to otherwise receive, the aggregate amount of stock, securities, cash or other property (payable in like kind) receivable by a holder of the number of shares of Common Stock into which such shares of Series B Preferred Stock could have been converted immediately prior to such transaction; provided, however, that if by virtue of the structure of such transaction, a holder of Common Stock is required to make an election with respect to the nature and kind of consideration to be received in such transaction, which election cannot practicably be made by the holders of the Series B Preferred Stock, then the shares of Series B Preferred Stock shall, by virtue of such transaction and on the same terms as apply to the holders of Common Stock, be exchanged for or changed, reclassified or converted into, or shall entitle the holder thereof to otherwise receive, the aggregate amount of stock, securities, cash or other property (payable in kind) receivable by a holder of the number of shares of Common Stock into which such shares of Series B Preferred Stock could have been converted immediately prior to such transaction if such holder of Common Stock failed to exercise any rights of election as to the kind or amount of stock, securities, cash or other property receivable upon such transaction (provided that, if the kind or amount of stock, securities, cash or other property receivable upon such transaction is not the same for each non-electing share, then the kind and amount of stock, securities, cash or other property receivable upon such transaction for each non-electing share shall be the kind and amount so receivable per share by a plurality of the non-electing shares). (C) In the event the Corporation shall enter into any agreement providing for any consolidation, merger or any sale of all or substantially all of the Corporation's assets, in each case, described in paragraph 7(B) hereof, then the Corporation shall as soon as practicable thereafter (and in any event at least ten (10) Business Days before consummation of such transaction) give notice of such agreement and the material terms thereof, and the earliest date of consummation thereof, to each holder of Series B Preferred Stock, and if the holder would be unable to hold the consideration receivable under paragraph 7(B) hereof as a result of such transaction under the Employee Retirement Income Security Act of 1974, as amended, or any successor statute, then each such holder shall have the right to elect, by written notice to the Corporation, to receive, upon consummation of such transaction (if and when such transaction is consummated), from the Corporation or the successor of the Corporation, in redemption and retirement of such Series B Preferred Stock, a cash payment equal to the greater of (i) an amount per share equal to the redemption price per share which would be applicable were the Corporation to redeem such shares of Series B Preferred Stock pursuant to paragraph 6(A) hereof (without regard to whether such shares of Series B Preferred Stock are then redeemable thereunder), plus an amount equal to all accumulated and unpaid dividends (including dividends declared and set aside) and accrued dividends thereon to the date of the consummation of such transaction or (ii) the Fair Market Value (as defined in paragraph 8(F) hereof) of the Common Stock into which such Series B Preferred Stock could be converted pursuant to paragraph 5(A) hereof on the date of consummation of such transaction. No such notice of redemption shall be effective unless given to the Corporation prior to the close of business on the third Business Day prior to consummation of such transaction, unless the Corporation or the successor of the Corporation shall waive such prior notice, but any notice of redemption so given prior to such time may be withdrawn by notice of withdrawal given to the Corporation prior to the close of business on the third Business Day prior to consummation of such transaction. (D) In the event the Corporation shall, at any time or from time to time while the shares of Series B Preferred Stock are outstanding, make a Distribution of Other Securities (as defined in paragraph 8(F) hereof), whether by dividend, distribution, reclassification of shares or recapitalization of the Corporation (including a recapitalization or reclassification effected by a merger or consolidation to which neither paragraph 7(A) nor 7(B) hereof apply), then upon any subsequent conversion of shares of the Series B Preferred Stock, the holder thereof shall receive, in addition to any shares of Common Stock received upon such conversion pursuant to any other provisions hereof, the aggregate amount of Other Securities (as defined in paragraph 8(F) hereof) which such holder would have received had it converted such shares of Series B Preferred Stock immediately prior to the distribution date with respect to such Distribution of Other Securities and thereafter retained such Other Securities (and any other cash, securities, evidences of indebtedness or other property subsequently distributed with respect thereto or exchanged therefor) until the date of such conversion. (E) In the event the Corporation shall, at any time or from time to time while the shares of Series B Preferred Stock are outstanding, effect a Repurchase for Other Property (as defined in Paragraph 8(F) hereof), then upon any subsequent conversion of shares of the Series B Preferred Stock, the holder thereof shall receive the aggregate amount of Other Property (as defined in paragraph 8(F) hereof) which such holder would have received had it converted such shares of Series B Preferred Stock immediately prior to the date of repurchase with respect to such Repurchase for Other Property and had all such shares of Common Stock so issued upon such conversion been tendered and (subject to any proration or similar terms of such Repurchase for Other Property, but without giving effect to any provisions of such Repurchase of Other Property regarding fractional shares) repurchased in such Repurchase for Other Property, together with that number of shares of Common Stock into which such shares of Series B Preferred Stock could have been converted immediately prior to the date of repurchase with respect to such Repurchase for Other Property which shares of Common Stock so issued upon such conversion would not have been repurchased in such Repurchase for Other Property (due, for example, to the proration or similar terms of such Repurchase for Other Securities) and had such holder thereafter retained such Other Property and any other cash, securities, evidences of indebtedness or other property subsequently exchanged herefor) until the date of such conversion; provided that such Other Property shall be issued as of such conversion date and any dividend or interest thereon shall accrue from such conversion date. "Section 8. Anti-dilution Adjustments. (A) In the event the Corporation shall, at any time or from time to time while any of the shares of the Series B Preferred Stock are outstanding, (i) pay a dividend or make a distribution in respect of the Common Stock in shares of Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii) combine the outstanding shares of Common Stock into a smaller number of shares, in each case whether by reclassification of shares, recapitalization of the Corporation (including a recapitalization effected by a merger or consolidation to which Section 7 hereof does not apply) or otherwise, then, subject to the provisions of paragraphs 8(D) and 8(E) hereof, the Conversion Price shall be adjusted by multiplying such Conversion Price by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately before such event, and the denominator of which is the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this paragraph 8(A) shall be given effect, upon payment of such a dividend or distribution, as of the record date for the determination of stockholders entitled to receive such dividend or distribution (on a retroactive basis) and in the case of a subdivision or combination shall become effective immediately as of the effective date thereof. (B) In the event that the Corporation shall, at any time or from time to time while any of the shares of Series B Preferred Stock are outstanding, issue to the holders of shares of Common Stock as a dividend or distribution, including by way of a reclassification of shares or a recapitalization of the Corporation, any right or warrant to purchase shares of Common Stock (including without limitation any securities convertible into such Common Stock or any right or warrant to purchase such convertible securities, at a purchase price per share less than the Fair Market Value (as defined in paragraph 8(F) hereof) of a share of Common Stock on the date of issuance of such right or warrant, then, subject to he provisions of paragraphs 8(D) and 8(E) hereof, the Conversion Price shall be adjusted by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the number of shares of Common Stock which could be purchased at the Fair Market Value of a share of Common Stock on the date of such issuance for the maximum aggregate consideration payable upon exercise in full of all such rights or warrants, and the denominator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock that could be acquired upon exercise in full of all such rights and warrants. An adjustment made pursuant to this paragraph 8(B) shall be given effect, upon issuance of such rights or warrants, as of the record date for the determination of stockholders entitled to receive such rights or warrants (on a retroactive basis); provided, that, to the extent shares of Common Stock otherwise issuable upon exercise of such rights or warrants are not delivered after the expiration of such rights or warrants, the Conversion Price will be readjusted (but only with respect to shares of Series B Preferred Stock converted after such expiration) to the Conversion Price which would then be in effect had the adjustments made upon such issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock actually issued. (C) In the event the Corporation shall, at any time or from time to time while any of the shares of Series B Preferred Stock are outstanding, make an Extraordinary Distribution (as hereinafter defined) in respect of the Common Stock, whether by dividend or distribution, or effect a Pro Rata Repurchase (as hereinafter defined), the Conversion Price in effect immediately prior to such Extraordinary Distribution or Pro Rata Repurchase shall, subject to paragraphs 8(D) and 8(E) hereof, be adjusted by multiplying such Conversion Price by the fraction the numerator of which is (i) the product of (x) the number of shares of Common Stock outstanding immediately before such Extraordinary Distribution or Pro Rata Repurchase multiplied by (y) the Current Market Price of a share of Common Stock on the day before the ex-dividend date with respect to an Extraordinary Distribution, or on the applicable expiration date (including all extensions thereof) of any tender offer which is a Pro Rata Repurchase, or on the date of purchase with respect to any Pro Rata Repurchase which is not a tender offer, as the case may be, minus (ii) the Fair Market Value of the Extraordinary Distribution or the aggregate purchase price of the Pro Rata Repurchase, as the case may be, on such date, and the denominator of which is the product of (a) the number of shares of Common Stock outstanding immediately before such Extraordinary Distribution or Pro Rata Repurchase minus, in the case of a Pro Rata Repurchase, the number of shares of Common Stock repurchased by the Corporation, multiplied by (b) the Current Market Price of a share of Common Stock on the day before the ex-dividend date with respect to an Extraordinary Distribution, or on the applicable expiration date (including all extensions thereof) of any tender offer which is a Pro Rata Repurchase or on the date of purchase with respect to any Pro Rata Repurchase which is not a tender offer, as the case may be. The Corporation shall send each holder of Series B Preferred Stock (i) notice of its intent to make any dividend or distribution and (ii) notice of any offer by the Corporation to make a Pro Rata Repurchase, in each case at the same time as, or as soon as practicable after, such offer is first communicated (including by announcement of a record date in accordance with the rules of any stock exchange on which the Common Stock is listed or admitted to trading) to the holders of Common Stock. Such notice shall indicate the intended record date, ex-dividend date, the applicable expiration date, if any, the amount and nature of such dividend or distribution, and the Other Securities, if any, to be distributed in connection therewith, or the number of shares subject to such offer for a Pro Rata Repurchase and the purchase price payable by, and the Other Property, if any, to be distributed by, the Corporation pursuant to such offer, as well as the Conversion Price and the number of shares of Common Stock into which a share of Series B Preferred Stock may be converted at such time. (D) Notwithstanding any other provisions of this Section 8, the Corporation shall not be required to make any adjustment to the Conversion Price unless such adjustment would require an increase or decrease of at least one percent (1 %) in the Conversion Price. Any lesser adjustment shall be carried forward and shall be made no later than the earlier of (a) the time of, and together with, the next subsequent adjustment which, together with any adjustment or adjustments so carried forward, shall amount to an increase or decrease of at least one percent (1%) in the Conversion Price or (b) three (3) years from the date of the event giving rise to such lesser adjustment. (E) The Corporation shall be entitled to make such additional adjustments in the Conversion Price, in addition to those required by the foregoing provisions of this Section 8, as shall be necessary in order that any dividend or distribution in shares of capital stock of the Corporation, subdivision, reclassification or combination of shares of stock of the Corporation or any recapitalization of the Corporation shall not be taxable to the holders of the Common Stock. (F) For purposes of this Resolution, the following definitions shall apply: "Business Day" shall mean each day that is not a Saturday, Sunday or a day on which state or federally chartered banking institutions in the State of Missouri are not required to be open. "Distribution of Other Securities" shall mean any dividend or other distribution to the holders of Common Stock (effected while any of the shares of Series B Preferred Stock are outstanding) of any shares of capital stock of the Corporation (other than shares of Common Stock), other securities of the Corporation (other than securities of the type referred to in paragraph 8(B) hereof), evidences of indebtedness of the Corporation or any other person or any other property (including shares of any subsidiary of the Corporation but excluding cash) or any combination thereof (such shares of capital stock, other securities, evidences of indebtedness and other property being herein referred to as "Other Securities"). "Extraordinary Distribution" shall mean any dividend or other distribution to the holders of Common Stock (effected while any of the shares of Series B Preferred Stock are outstanding) of cash, where the aggregate amount of such cash dividend or distribution together with the amount of all cash dividends and distributions made during the preceding period of 12 months, when combined with (i) the aggregate Fair Market Value of all Other Securities included in Distributions of Other Securities made during the preceding period of 12 months and (ii) the aggregate amount of all Pro Rata Repurchases and the aggregate Fair Market Value of all Repurchases for Other Property (for this purpose, including only that portion of the aggregate purchase price of such Pro Rata Repurchase or Repurchase for Other Property, as the case may be, which is in excess of the Fair Market Value of the Common Stock repurchased as determined on the applicable expiration date (including all extensions thereof) of any tender offer which is a Pro Rata Repurchase or Repurchase for Other Property, as the case may be, or the date of purchase with respect to any other Pro Rata Repurchase or Repurchase for Other Property, as the case may be, which is not a tender offer made during such period), exceeds fifteen percent (15%) of the aggregate Fair Market Value of all shares of Common Stock outstanding on the day before the ex-dividend date with respect to such Extraordinary Distribution. The amount of an Extraordinary Distribution for purposes of paragraph (C) of this Section 8 shall be equal to the sum of such Extraordinary Distribution plus the amount of any cash dividends or distributions which are not Extraordinary Distributions made during such 12-month period and not previously included in the calculation of an adjustment pursuant to said paragraph (C). "Fair Market Value" shall mean (a) as to cash, the amount of cash, and (b) as to shares of Common Stock or any other class of capital stock or securities of the Corporation or any other issuer which are publicly traded, the average of the Current Market Prices of such shares or securities for each day of the Adjustment Period. "Current Market Price" of publicly traded shares of Common Stock or any other class of capital stock or other security of the Corporation or any other issuer for any day shall mean the last reported sales price, regular way, or, in the event that no sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in either case as reported on the New York Stock Exchange Composite Tape or, if such security is not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which such security is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the NASDAQ National Market System or, if such security is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for such security on such day shall not have been reported through NASDAQ, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in such security on each trading day during the Adjustment Period, which firm shall be selected for such purpose by the Board of Directors of the Corporation or a committee thereof. "Adjustment Period" shall mean the period of five (5) consecutive trading days preceding the date as of which the Fair Market Value of a security is to be determined. The "Fair Market Value" of any security which is not publicly traded or of any other property shall mean the fair value thereof as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board of Directors of the Corporation or a committee thereof, or, if no such investment banking or appraisal firm is in the good faith judgment of the Board of Directors or such committee available to make such determination, as determined in good faith by the Board of Directors of the Corporation or such committee. "Pro Rata Repurchase" shall mean any purchase of shares of Common Stock by the Corporation or any subsidiary thereof for cash, effected while any of the shares of Series B Preferred Stock are outstanding, pursuant to any tender offer subject to Section 13(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor provision of law, or pursuant to any other offer designed to be available to all or substantially all of the holders of Common Stock; provided, however, that no purchase of shares by the Corporation or any subsidiary thereof made in open market or privately negotiated transactions shall be deemed a Pro Rata Repurchase, so long as in any such case offers to effect such purchases shall not be made to all or substantially all of the holders of Common Stock. For purposes of this paragraph 8(F), shares shall be deemed to have been purchased by the Corporation or any subsidiary thereof "in open market transactions" if they have been purchased substantially in accordance with the requirements of Rule 10b-18 as in effect under the Exchange Act (or any successor provision) on the date shares of Series B Preferred Stock are initially issued by the Corporation or on such other terms and conditions as the Board of Directors of the Corporation or a committee thereof shall have determined are reasonably designed to prevent such purchases from having a material effect on the trading market for the Common Stock. "Repurchase for Other Property" shall mean any purchase of shares of Common Stock by the Corporation or any subsidiary thereof for shares of other capital stock of the Corporation, other securities of the Corporation, evidences of indebtedness of the Corporation or any other person or any other property (including shares of a subsidiary of the Corporation but excluding cash), or any combination thereof (such shares of capital stock, other securities, evidences of indebtedness and other property being herein referred to as "Other Property"), effected while any of the shares of Series B Preferred Stock are outstanding, pursuant to any tender offer or exchange offer subject to Section 13(e) of the Exchange Act, or any successor provision of law, or pursuant to any other offer designed to be available to substantially all holders of Common Stock; provided, however, that no purchase of shares by the Corporation or any subsidiary thereof made in open market or privately-negotiated transactions shall be deemed a Repurchase for Other Property, so long as in any such case offers to effect such purchases shall not be made to all or substantially all of the holders of Common Stock. (G) Whenever an adjustment to the Conversion Price and the related voting rights of the Series B Preferred Stock is required pursuant to this Resolution, the Corporation shall forthwith place on file with the transfer agent for the Common Stock and the Series B Preferred Stock, and with the Secretary of the Corporation, a statement signed by an officer of the Corporation stating the adjusted Conversion Price determined as provided herein and the resulting conversion ratio, and the voting rights (as appropriately adjusted), of the Series B Preferred Stock. Such statement shall set forth in reasonable detail such facts as shall be necessary to show the reason and the manner of computing such adjustment, including the determination of Fair Market Value involved in such computation. Promptly after each adjustment to the Conversion Price and the related voting rights of the Series B Preferred Stock, the Corporation shall mail a notice thereof and of the then prevailing conversion ratio to each holder of shares of the Series B Preferred Stock. "Section 9. Ranking; Attributable Capital and Adequacy of Surplus; Retirement of Shares. (A) The Series B Preferred Stock shall rank senior to the Common Stock as to the payment of dividends and the distribution of assets on liquidation in whole, dissolution and winding-up of the Corporation, and, unless otherwise provided in the Certificate of Incorporation of the Corporation or a Certificate of Designations relating to a subsequent series of Series Preferred Stock of the Corporation, the Series B Preferred Stock shall rank junior to the Corporation's Preferred Stock and on a parity with the corporation's Series A Preferred Stock, as to the payment of dividends and the distribution of assets on liquidation in whole, dissolution or winding-up. (B) In addition to any vote of stockholders required by law, the vote of the holders of a majority of the outstanding shares of Series B Preferred Stock shall be required to increase the capital of the Corporation allocable to the Common Stock for the purpose of the DGCL if, as a result thereof, the surplus of the Corporation for purposes of the DGCL would be less than the amount of Preferred Dividends that would accrue on the then outstanding shares of Series B Preferred Stock during the following three years. (C) Any shares of Series B Preferred Stock acquired by the Corporation by reason of the conversion or redemption of such shares as provided by this Resolution, or otherwise so acquired, shall be retired as shares of Series B Preferred Stock and restored to the status of authorized but unissued shares of New Series Preferred Stock of the Corporation, undesignated as to series, and may thereafter be reissued as part of a new series of such New Series Preferred Stock as permitted by law. "Section 10. Miscellaneous. (A) All notices referred to herein shall be in writing, and all notices hereunder shall be deemed to have been given upon the earlier of receipt thereof or three (3) business days after the mailing thereof if sent by registered mail (unless first-class mail shall be specifically permitted for such notice under the terms of this Resolution) with postage prepaid, addressed: (i) if to the Corporation, to its office as 114 West 11th Street, Kansas City, Missouri (Attention: Secretary) or to the transfer agent for the Series B Preferred Stock, or other agent of the Corporation designated as permitted by this Resolution or (ii) if to any holder of the Series B Preferred Stock or Common Stock, as the case may be, to such holder at the address of such holder as listed in the stock record books of the Corporation (which may include the records of any transfer agent for the Series B Preferred Stock or Common Stock, as the case may be) or (iii) to such other address as the Corporation or any such holder, as the case may be, shall have designated by notice similarly given. (B) The term "Common Stock" as used in this Resolution means the Corporation's Common Stock, no par value per share, as the same exists at the date of filing of a Certificate of Designations relating to Series B Preferred Stock or any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes from no par value to par value or in par value. In the event that, at any time as a result of an adjustment made pursuant to Section 8 of this Resolution, the holder of any share of the Series B Preferred Stock surrendering such shares for conversion, shall become entitled to receive any shares or other securities of the Corporation other than shares of Common Stock, the Conversion Price in respect of such other shares or securities so receivable upon conversion of shares of Series B Preferred Stock shall thereafter be adjusted, and shall be subject to further adjustment from time to time, in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in Section 8 hereof, and the provisions of this Resolution with respect to the Common Stock shall apply on like or similar terms to any such other shares or securities. (C) The Corporation shall pay any and all stock transfer and documentary stamp taxes that may be payable in respect of any issuance or delivery of shares of Series B Preferred Stock or shares of Common Stock or other securities issued on account of Series B Preferred Stock pursuant hereto or certificates representing such shares or securities. The Corporation shall not, however, be required to pay any such tax which may be payable in respect of any transfer involved in the issuance or delivery to any holder other than the Trustee or any trustee or administrator of any Beneficiary Plan or any participant in any Beneficiary Plan, of shares of Series B Preferred Stock or Common Stock or other securities in a name other than that in which the shares of Series B Preferred Stock with respect to which such shares or other securities are issued or delivered were registered, or in respect of any payment to any person with respect to any such shares or securities other than a payment to the registered holder thereof, and shall not be required to make any such issuance, delivery or payment unless and until the person otherwise entitled to such issuance, delivery or payment has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid or is not payable. (D) In the event that a holder of shares of Series B Preferred Stock shall not by written notice designate the name in which shares of Common Stock to be issued upon conversion of such shares should be registered or to whom payment upon redemption of shares of Series B Preferred Stock should be made or the address to which the certificate or certificates representing such shares, or such payment, should be sent, the Corporation shall be entitled to register such shares, and make such payment, in the name of the holder of such Series B Preferred Stock as shown on the records of the Corporation and to send the certificate or certificates representing such shares, or such payment, to the address of such holder shown on the records of the Corporation. (E) Unless otherwise provided in the Certificate of Incorporation of the Corporation, all payments in the form of dividends, distributions on voluntary or involuntary liquidation in whole, dissolution or winding-up or otherwise made upon the shares of Series B Preferred Stock and any other stock ranking on a parity with the Series B Preferred Stock with respect to such dividend or distribution shall be pro rata, so that amounts paid per share on the Series B Preferred Stock and such other stock shall in all cases bear to each other the same ratio that the required dividends, distributions or payments, as the case may be, then payable per share on the shares of the Series B Preferred Stock and such other stock bear to each other. (F) The Corporation may appoint, and from time to time discharge and change, a transfer agent for the Series B Preferred Stock. Upon any such appointment or discharge of a transfer agent, the Corporation shall send notice thereof by first-class mail, postage prepaid, to each holder of record of Series B Preferred Stock." FIFTH. The minimum amount of capital with which the corporation shall commence business is One Thousand Dollars ($1,000) SIXTH. The names and places of residence of each of the incorporators are as follows: NAME RESIDENCE William N. Deramus 6109 McGee Kansas City, Missouri Edward M. Douthat 4915 W. 11th Street Johnson County, Kansas R. Crosby Kemper The Walnuts, 5049 Wornall Rd. Kansas City, Missouri SEVENTH. The existence of this corporation is to be perpetual. EIGHTH. The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever. NINTH. In addition to and in furtherance of, and not in limitation of, the powers conferred by law, the board of directors is expressly authorized: a. To make, alter or repeal the by-laws of the corporation. b. To fix the amount to be reserved as working capital. c. To authorize and cause to be executed mortgages and liens without limit as to the amount upon the real and personal property and franchises of the corporation. d. To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created. e. By resolution passed by a majority of the whole board, to designate one or more committees, each committee to consist of two or more of the directors of the corporation, which, to the extent provided in the resolution or in the by-laws of the corporation, shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be stated in the by-laws of the corporation or as may be determined from time to time by resolution adopted by the board of directors. TENTH. 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 entire Board, and such exact number shall be eighteen until otherwise determined by resolution adopted by a majority of the entire Board. As used in this paragraph "entire Board" means the total number of directors which the corporation would have if there were no vacancies. In the event that the Board is increased by such a resolution, the vacancy or vacancies so resulting shall be filled by a vote of the majority of the directors then in office. No decrease in the Board shall shorten the term of any incumbent directors. The Board of Directors shall be divided into three classes as nearly equal in number as may be, with the term of office of one (the first) class expiring at the annual meeting of stockholders in 1970, of the second class expiring at the annual meeting of stockholders in 1971, and of the third class expiring at the annual meeting of stockholders in 1972. Any vacancies on the Board existing at or immediately after the time this Paragraph TENTH becomes effective shall be allocated first to the third class, then to the second class and, if any remain, then to the first class. The stockholders shall elect directors to fill such vacancies, at any meeting called for such purpose whether or not in session at the time this Article TENTH becomes effective, but the stockholders shall have the power to elect directors to fill vacancies only with respect to those vacancies existing at or immediately after the time this Article TENTH becomes effective. The Board of Directors shall have power to fill all subsequent vacancies and newly created directorships pursuant to Section 223 of the General Corporation Law of Delaware. 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. ELEVENTH. The stockholders of this corporation shall have such rights to examine and inspect the books, records and accounts of this corporation as are conferred upon them by law. TWELFTH. The stockholders and directors shall have power to hold their meetings and keep the books, documents and papers of the corporation within or without the State of Delaware, at such places as may be from time to time designated by the by-laws or by resolution of the directors, except as otherwise required by the laws of Delaware. THIRTEENTH. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation; PROVIDED, however, that if any such amendment, alteration, change or repeal shall amend, alter, change or repeal any of the powers, preferences or rights vested in the holders of preferred stock by Paragraph FOURTH of this Certificate of Incorporation then the holders of preferred stock shall be entitled to vote as a class upon such amendment, alteration, change or repeal and the affirmative vote of the holders of not less than two-thirds (2/3) of the issued and outstanding preferred stock shall be necessary for the adoption thereof, in addition to any other vote or approval required by statute; AND PROVIDED FURTHER, that the vote of the holders of 70% of the outstanding shares of stock of the corporation entitled to vote in elections of directors (considered for this purpose as one class) shall be required to amend this Certificate of Incorporation a. to increase the number of directors to more than eighteen, if this Certificate of Incorporation provides therefor. b. to abolish cumulative voting in elections for directors, if this Certificate of Incorporation provides therefor. c. to abolish the division of the Board of Directors into three classes, if this Certificate of Incorporation provides therefor. FOURTEENTH. Except as set forth below, the affirmative vote of the holders of 70% of all classes of stock of the corporation, entitled to vote in elections of directors, considered for the purposes of this Paragraph FOURTEENTH as one class, shall be required (a) for the adoption of any agreement for the merger or consolidation of the corporation with or into any other corporation, or (b) to authorize any sale or lease of all or any substantial part of the assets of the corporation to, or any sale or lease to the corporation or any subsidiary thereof in exchange for securities of the corporation of any assets (except assets having an aggregate fair market value of less than $2,000,000) of, any other corporation, person or other entity, if, in either case, as of the record date for the determination of stockholders entitled to notice thereof and to vote thereon or consent thereto such other corporation, person or entity is the beneficial owner, directly or indirectly, of more than 5% of the outstanding shares of stock of the corporation entitled to vote in elections of directors considered for the purposes of this Paragraph FOURTEENTH as one class. Such affirmative vote shall be in addition to the vote of the holders of the stock of the corporation otherwise required by law or any agreement between the corporation and any national securities exchange. For the purposes of this Paragraph FOURTEENTH, (x) any corporation, person or other entity shall be deemed to be the beneficial owner of any shares of stock of the corporation (i) which it has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, or (ii) which are beneficially owned, directly or indirectly (including shares deemed owned through application of clause (i), above), by any other corporation, person or entity with which it or its `affiliate' or `associate' (as defined below) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of stock of the corporation, or which is its `affiliate' or `associate' as those terms are defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934 as in effect on January 1, 1969, and (y) the outstanding shares of any class of stock of the corporation shall include shares deemed owned through application of clauses (i) and (ii) above but shall not include any other shares which may be issuable pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. The Board of Directors shall have the power and duty to determine for the purposes of this Paragraph FOURTEENTH, on the basis of information known to the corporation, whether (i) such other corporation person or other entity beneficially owns more than 5% of the outstanding shares of stock of the corporation entitled to vote in elections of directors, (ii) a corporation, person or entity is an `affiliate' or `associate' (as defined above) of another, (iii) the assets being acquired by the corporation, or any subsidiary thereof, have an aggregate fair market value of less than $2,000,000 and (iv) the memorandum of understanding referred to below is substantially consistent with the transaction covered thereby. Any such determination shall be conclusive and binding for all purposes of this Paragraph FOURTEENTH. The provisions of this paragraph FOURTEENTH shall not be applicable to (i) any merger or consolidation of the corporation with or into any other corporation, or any sale or lease of all or any substantial part of the assets of the corporation to, or any sale or lease to the corporation or any subsidiary thereof in exchange for securities of the corporation of any assets of, any corporation if the Board of Directors of the corporation shall by resolution have approved a memorandum of understanding with such other corporation with respect to and substantially consistent with such transaction, prior to the time that such other corporation shall have become a holder of more than 5% of the outstanding shares of stock of the corporation entitled to vote in elections of directors; or (ii) any merger or consolidation of the corporation with, or any sale or lease to the corporation or any subsidiary thereof of any of the assets of, any corporation of which a majority of the outstanding shares of all classes of stock entitled to vote in elections of directors is owned of record or beneficially by the corporation and its subsidiaries. No amendment to the Certificate of Incorporation of the corporation shall amend, alter, change or repeal any of the provisions of this Paragraph FOURTEENTH, unless the amendment effecting such amendment, alteration, change or repeal shall receive the affirmative vote of the holders of 70% of all classes of stock of the corporation entitled to vote in elections of directors, considered for the purposes of this Paragraph FOURTEENTH as one class. FIFTEENTH. Annual and special meetings of stockholders shall be held as provided in the By-Laws of the corporation. No meetings of stockholders shall be held without prior written notice as provided in the By-Laws and no actions may be taken by waiver of written notice and consent by stockholders in lieu of meeting. SIXTEENTH. To the fullest extent permitted by the General Corporation Law of the State of Delaware and any amendments thereto, no director of the corporation shall be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been executed on behalf of the Corporation by its President and attested by its Secretary as of April 8, 1998, and each of them does hereby affirm and acknowledge that this Restated Certificate of Incorporation is the act and deed of the Corporation and that the facts stated herein are true and correct. KANSAS CITY SOUTHERN INDUSTRIES, INC. By: /s/ Landon H. Rowland ---------------------------------- Landon H. Rowland Its: President and Chief Executive Officer (Corporate Seal) ATTEST: /s/ Richard P. Bruening - ------------------------- By: Richard P. Bruening Its: Secretary STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 05:30 PM 07/12/2000 001353615 - 0579020 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF KANSAS CITY SOUTHERN INDUSTRIES, INC. Kansas City Southern Industries, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, as amended (the "DGCL"), DOES HEREBY CERTIFY: FIRST, that at meetings of the Board of Directors of the Corporation resolutions were duly adopted setting forth proposed amendments of the Corporation's Certificate of Incorporation, declaring the amendments to be advisable and directing that the proposed amendments be considered at a special meeting of the stockholders of the Corporation. Said amendments add the following paragraphs immediately following the first paragraph of paragraph "FOURTH" of the Corporation's Certificate of Incorporation, as amended and restated on April 17, 1998: This Corporation's Certificate of Incorporation is hereby amended (this "Amendment") so that every two outstanding shares of this Corporation's Common Stock, par value $0.01 per share (the "Common Stock"), be, upon the effectiveness of this Amendment, combined into one share of Common Stock; provided, however, that fractional shares of Common will not be issued in connection with such combination, and each holder of a fractional share of Common Stock shall receive in lieu thereof a cash payment (the "Fractional Share Payment") from the Corporation determined by multiplying two times such fractional share of Common Stock by the average closing price per share (pre-split) of Common Stock on the New York Stock Exchange for the five trading days immediately preceding the effective date of this Amendment. Certificates representing shares of Common Stock outstanding prior to the effective date of this Amendment be canceled as of such effective date and, upon presentation of the canceled certificates to the Corporation, the holders thereof shall be entitled to receive new certificates representing the whole shares resulting from such combination together with the Fractional Share Payment, which payment to be made upon such other terms and conditions as the officers of the Corporation, in their judgment, determine to be advisable and in the best interests of the Corporation. SECOND, that thereafter, pursuant to resolution of the Corporation's Board of Directors, a special meeting of the stockholders of the Corporation was duly called and held, upon notice, such notice describing such amendments, in accordance with Section 222 of the DGCL at which meeting in excess of the necessary number of shares as required by statute and the Corporation's Certificate of Incorporation were voted in favor of the above amendments. THIRD, that these amendments were duly adopted in accordance with the provisions of Section 242 of the DGCL. FOURTH, that the capital of the Corporation shall not be reduced by reason of said amendments. FIFTH, that this Amendment shall be effective at 6:00 p.m. EDT on July 12, 2000. IN WITNESS WHEREOF, said Kansas City Southern Industries, Inc. has caused this certificate to be signed by Landon H. Rowland, its authorized officer, this 11th day of July, 2000. By: /s/ Landon H. Rowland ------------------------------------ Name: Landon H. Rowland Title: President and Chief Executive Officer ATTEST: /s/ Richard P. Bruening - --------------------------------- By: Richard P. Bruening Title: Vice President, General Counsel and Corporate Secretary CERTIFICATE OF OWNERSHIP AND MERGER MERGING KANSAS CITY SOUTHERN LINES, INC. INTO KANSAS CITY SOUTHERN INDUSTRIES, INC. (PURSUANT TO SECTION 253 OF THE GENERAL CORPORATION LAW OF DELAWARE) KANSAS CITY SOUTHERN INDUSTRIES, INC., a Delaware corporation (the "Corporation"), does hereby certify: FIRST: That the Corporation is incorporated pursuant to the General Corporation Law of the State of Delaware. SECOND: That the Corporation owns all of the outstanding shares of each class of the capital stock of Kansas City Southern Lines, Inc., a Delaware corporation. THIRD: That the Corporation, by the following resolutions of its Board of Directors, duly adopted on the 19th day of December, 2000, determined to merge into itself Kansas City Southern Lines, Inc. on the conditions set forth in such resolutions: RESOLVED: That Kansas City Southern Industries, Inc. merge into itself its subsidiary, Kansas City Southern Lines, Inc. and assume all of said subsidiary's liabilities and obligations, effective as of December 31, 2000; FURTHER RESOLVED: That the President and the Secretary of this Corporation be and they hereby are directed to make, execute and acknowledge a certificate of ownership and merger setting forth a copy of the resolution to merge said Kansas City Southern Lines, Inc. into this Corporation and to assume said subsidiary's liabilities and obligations and the date of adoption thereof and to file the same in the office of the Secretary of State of Delaware and a certified copy thereof in the Office of the Recorder of Deeds of New Castle County. IN WITNESS WHEREOF, said Kansas City Southern Industries, Inc. has caused its corporate seal to be affixed and this certificate to be signed by Richard P. Bruening, its authorized Senior Vice President, General Counsel and Secretary, this 21 day of December, 2000. KANSAS CITY SOUTHERN INDUSTRIES, INC. By: /s/ Richard P. Bruening ------------------------------ Richard P. Bruening, Senior Vice President, General Counsel and Secretary STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 11:00 AM 12/22/2000 001647328 - 0579020 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 02:30 PM 05/02/2002 020281317 - 0579020 KANSAS CITY SOUTHERN INDUSTRIES, INC. CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION KANSAS CITY SOUTHERN INDUSTRIES, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, as amended (the "DGCL"), DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of the Corporation, a resolution was duly adopted setting forth a proposed amendment of the Corporation's Certificate of Incorporation to amend the Certificate of Incorporation to change the corporation name to "Kansas City Southern," declaring the amendment to be advisable and directing that the proposed amendment be considered at the Annual Meeting of Shareholders of the Corporation. SECOND: That thereafter, pursuant to a resolution of the Board of Directors, the Stockholders of said Corporation, in a meeting held in accordance with Section 211 of the General Corporation Law of the State of Delaware, approved such resolution by voting the necessary number of shares as required by statute in favor of the amending. THIRD: That following the duly called and held Annual Meeting of the Stockholders of the Corporation, at a meeting of the Board of Directors of the Corporation, the following resolution setting forth the proposed amendment was adopted: "RESOLVED, That the Certificate of Incorporation be and is hereby amended by deleting Article FIRST thereof in its entirety and by substituting in lieu thereof the following: FIRST: The name of the corporation is Kansas City Southern." FOURTH: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. FIFTH: That this Amendment shall be effective at 6:00 p.m. EDT on May 2, 2002. IN WITNESS WHEREOF, KANSAS CITY SOUTHERN INDUSTRIES, INC. has caused this certificate to be signed by Louis G. Van Horn, its authorized officer, this 29th day of April, 2002. KANSAS CITY SOUTHERN INDUSTRIES, INC. By: /s/ Louis G. Van Horn -------------------------------- Name: Louis G. Van Horn Title: Vice President and Comptroller (Corporate Seal) ATTEST: /s/ Julie D. Powell - ----------------------------- By: Julie D. Powell Its: Assistant Secretary AFFIDAVIT FILED PURSUANT TO SECTION 102(a)(1)(i) OF THE DELAWARE GENERAL CORPORATION LAW STATE OF MISSOURI ) ) ss. COUNTY OF JACKSON ) Louis G. Van Horn, being of lawful age and having been first duly sworn, certifies as follows: 1. I am an authorized officer of Kansas City Southern Industries, Inc. (the "Corporation") and have personal knowledge of the facts and statements contained herein and full authority to make this Affidavit on behalf of the Corporation. 2. That the Corporation is organized and existing under and by virtue of the General Corporation Law of the State of Delaware. 3. That the Corporation's total assets, as defined in Section 503(i) of the General Corporation Law of the State of Delaware and as reported on the Corporation's U.S. Income Tax Return Form 1120 Schedule L, for the period ending December 31, 2000, are not less than Ten Million Dollars ($10,000,000.00). I declare under penalty of perjury that the foregoing statements are true and correct. Executed this 29th day of April, 2002. KANSAS CITY SOUTHERN INDUSTRIES, INC. By: /s/ Louis G. Van Horn ------------------------------- Name: Louis G. Van Horn Title: Vice President and Comptroller Subscribed and sworn before me in the County of Jackson, State of Missouri, this 29th day of April, 2002. /s/ Victoria L. Houston ----------------------------- Notary Public My Commission Expires: 1/3/2005 [Notary Seal] EX-4.1 5 dex41.txt INDENTURE DATED JUNE 12, 2002 Exhibit 4.1 EXECUTION VERSION The Kansas City Southern Railway Company, Issuer and U.S. Bank National Association, Trustee ___________________ Indenture Dated as of June 12, 2002 ___________________ 7 1/2% Senior Notes due 2009 - ------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01 Definitions .................................................. 1 SECTION 1.02 Other Definitions ............................................ 21 SECTION 1.03 Incorporation by Reference of Trust Indenture Act ............ 21 SECTION 1.04 Rules of Construction ........................................ 22 ARTICLE 2 THE SECURITIES SECTION 2.01 Amount of Securities; Issuable in Series ..................... 22 SECTION 2.02 Form and Dating .............................................. 23 SECTION 2.03 Execution and Authentication ................................. 24 SECTION 2.04 Registrar and Paying Agent ................................... 24 SECTION 2.05 Paying Agent to Hold Money in Trust .......................... 25 SECTION 2.06 Holder Lists ................................................. 25 SECTION 2.07 Transfer and Exchange ........................................ 25 SECTION 2.08 Replacement Securities ....................................... 26 SECTION 2.09 Outstanding Securities ....................................... 26 SECTION 2.10 Temporary Securities ......................................... 27 SECTION 2.11 Cancellation ................................................. 27 SECTION 2.12 Defaulted Interest ........................................... 27 SECTION 2.13 CUSIP Numbers ................................................ 27 ARTICLE 3 REDEMPTION SECTION 3.01 Notices to Trustee ........................................... 28 SECTION 3.02 Selection of Securities to Be Redeemed ....................... 28 SECTION 3.03 Notice of Redemption ......................................... 28 SECTION 3.04 Effect of Notice of Redemption ............................... 29 SECTION 3.05 Deposit of Redemption Price .................................. 29 SECTION 3.06 Securities Redeemed in Part .................................. 29 ARTICLE 4 COVENANTS
SECTION 4.01 Payment of Securities ........................................ 29 SECTION 4.02 SEC Reports .................................................. 30 SECTION 4.03 Limitation on Indebtedness ................................... 30 SECTION 4.04 Limitation on Restricted Payments ............................ 32 SECTION 4.05 Limitation on Restrictions on Distributions from Restricted Subsidiaries ................................................. 35 SECTION 4.06 Limitation on Sales of Assets and Capital Stock .............. 36 SECTION 4.07 Limitation on Transactions with Affiliates ................... 40 SECTION 4.08 Change of Control ............................................ 41 SECTION 4.09 Compliance Certificate ....................................... 42 SECTION 4.10 Further Instruments and Acts ................................. 42 SECTION 4.11 Future Note Guarantors ....................................... 42 SECTION 4.12 Limitation on Lines of Business .............................. 43 SECTION 4.13 Limitation on Liens .......................................... 43 SECTION 4.14 Limitation on Sale/Leaseback Transactions .................... 43 SECTION 4.15 Covenant Suspension .......................................... 44 ARTICLE 5 SUCCESSOR COMPANY SECTION 5.01 When Company May Merge or Transfer Assets .................... 44 ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01 Events of Default ............................................ 46 SECTION 6.02 Acceleration ................................................. 47 SECTION 6.03 Other Remedies ............................................... 48 SECTION 6.04 Waiver of Past Defaults ...................................... 48 SECTION 6.05 Control by Majority .......................................... 48 SECTION 6.06 Limitation on Suits .......................................... 48 SECTION 6.07 Rights of Holders to Receive Payment ......................... 49 SECTION 6.08 Collection Suit by Trustee ................................... 49 SECTION 6.09 Trustee May File Proofs of Claim ............................. 49 SECTION 6.10 Priorities ................................................... 49 SECTION 6.11 Undertaking for Costs ........................................ 50 SECTION 6.12 Waiver of Stay or Extension Laws ............................. 50 ARTICLE 7 TRUSTEE SECTION 7.01 Duties of Trustee ............................................ 50 SECTION 7.02 Rights of Trustee ............................................ 51 SECTION 7.03 Individual Rights of Trustee ................................. 52 SECTION 7.04 Trustee's Disclaimer ......................................... 52 SECTION 7.05 Notice of Defaults ........................................... 53 SECTION 7.06 Reports by Trustee to Holders ................................ 53 SECTION 7.07 Compensation and Indemnity ................................... 53 SECTION 7.08 Replacement of Trustee ....................................... 54 SECTION 7.09 Successor Trustee by Merger .................................. 55 SECTION 7.10 Eligibility; Disqualification ................................ 55 SECTION 7.11 Preferential Collection of Claims Against Company ............ 55 ARTICLE 8 DISCHARGE OF INDENTURE; DEFEASANCE
SECTION 8.01 Discharge of Liability on Securities; Defeasance ............. 55 SECTION 8.02 Conditions to Defeasance ..................................... 57 SECTION 8.03 Application of Trust Money ................................... 58 SECTION 8.04 Repayment to Company ......................................... 58 SECTION 8.05 Indemnity for Government Obligations ......................... 58 SECTION 8.06 Reinstatement ................................................ 58 ARTICLE 9 AMENDMENTS SECTION 9.01 Without Consent of Holders ................................... 59 SECTION 9.02 With Consent of Holders ...................................... 59 SECTION 9.03 Compliance with Trust Indenture Act .......................... 60 SECTION 9.04 Revocation and Effect of Consents and Waivers ................ 60 SECTION 9.05 Notation on or Exchange of Securities ........................ 61 SECTION 9.06 Trustee to Sign Amendments ................................... 61 SECTION 9.07 Payment for Consent .......................................... 61 ARTICLE 10 NOTE GUARANTEES SECTION 10.01 Note Guarantees ............................................. 61 SECTION 10.02 Limitation on Liability ..................................... 63 SECTION 10.03 Successors and Assigns ...................................... 64 SECTION 10.04 No Waiver ................................................... 64 SECTION 10.05 Modification ................................................ 64 SECTION 10.06 Execution of Supplemental Indenture for Future Note Guarantors .................................................. 64 SECTION 10.07 Non-Impairment .............................................. 65 ARTICLE II MISCELLANEOUS SECTION 11.01 Trust Indenture Act Controls ................................ 65 SECTION 11.02 Notices ..................................................... 65 SECTION 11.03 Communication by Holders with Other Holders ................. 66 SECTION 11.04 Certificate and Opinion as to Conditions Precedent .......... 66 SECTION 11.05 Statements Required in Certificate or Opinion ............... 66 SECTION 11.06 When Securities Disregarded ................................. 66 SECTION 11.07 Rules by Trustee, Paying Agent and Registrar ................ 67 SECTION 11.08 Legal Holidays .............................................. 67 SECTION 11.09 GOVERNING LAW ............................................... 67 SECTION 11.10 No Recourse Against Others .................................. 67 SECTION 11.11 Successors .................................................. 67 SECTION 11.12 Multiple Originals .......................................... 67 SECTION 11.13 Table of Contents; Headings ................................. 67
Appendix A - Provisions Relating to Original Securities, Additional Securities, Private Exchange Securities and Exchange Securities Exhibit A - Form of Initial Security Exhibit B - Form of Exchange Security Exhibit C - Form of Supplemental Indenture Exhibit D - Form of Transferee Letter of Representation Exhibit E - Form of Note Guarantee Exhibit F - Exhibit Evidencing Indebtedness of the Company Outstanding on the Date of this Indenture INDENTURE dated as of June 12, 2002, among The Kansas City Southern Railway Company, a Missouri corporation (the "Company"), Kansas City Southern (the "Parent"), Gateway Eastern Railway Company, Mid-South Microwave, Inc., PABTEX GP, LLC, PABTEX L.P., Rice-Carden Corporation, SIS Bulk Holding, Inc., Southern Development Company, Southern Industrial Services, Inc., and Trans-Serve, Inc. (collectively, including the Parent, the "Note Guarantors") and U.S. Bank National Association, a national banking corporation, as trustee (the "Trustee"). Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders of (a) the Company's 7 1/2% Senior Notes due 2009 issued on the date hereof (the "Original Securities"), (b) any Additional Securities (as defined herein) that may be issued on any Issue Date (all such Securities in clauses (a) and (b) being referred to collectively as the "Initial Securities"), (c) if and when issued as provided in the Registration Agreement (as defined in Appendix A hereto (the "Appendix")), the Company's 7 1/2% Senior Notes due 2009 issued in the Registered Exchange Offer in exchange for any Initial Securities (the "Exchange Securities") and (d) if and when issued as provided in the Registration Agreement, the Private Exchange Securities (together with the Initial Securities and any Exchange Securities issued hereunder, the "Securities") issued in the Private Exchange. Except as otherwise provided herein, the Securities will be unlimited in aggregate principal amount outstanding, of which $200,000,000 in aggregate principal amount will be initially issued on the date hereof. Subject to the conditions and in compliance with the covenants set forth herein, the Company may issue an unlimited aggregate principal amount of Additional Securities. ARTICLE 1 Definitions and Incorporation by Reference SECTION 1.01 Definitions. "Additional Assets" means (a) any property or assets (other than Indebtedness and Capital Stock) to be used by the Parent or a Restricted Subsidiary in a Permitted Business; (b) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Parent or another Restricted Subsidiary; or (c) Capital Stock constituting a minority interest in any Person that at such time is a Restricted Subsidiary; provided, however, that any such Restricted Subsidiary described in clauses (b) or (c) above is primarily engaged in a Permitted Business. "Additional Securities" means an unlimited aggregate principal amount of 7 1/2% Senior Notes due 2009 issued under the terms of this Indenture subsequent to the Closing Date. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of Section 4.06 and Section 4.07 only, "Affiliate" shall also mean any beneficial owner of shares representing 10% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Parent or the Company or of rights or warrants to purchase such Voting Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. "Asset Disposition" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) by the Parent or any Restricted Subsidiary, including any disposition by means of a merger, consolidation, or similar transaction (each referred to for the purposes of this definition as a "disposition"), of: (a) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares or shares required by applicable law to be held by a Person other than the Parent or a Restricted Subsidiary), (b) all or substantially all the assets of any division or line of business of the Parent or any Restricted Subsidiary, or (c) any other assets of the Parent or any Restricted Subsidiary outside of the ordinary course of business of the Parent or such Restricted Subsidiary other than, in the case of (a), (b) or (c) above, (i) disposition by a Restricted Subsidiary to the Parent or by the Parent or a Restricted Subsidiary to a Wholly Owned Subsidiary, (ii) for purposes of Section 4.06 only, a disposition that constitutes a Restricted Payment permitted by Section 4.04, (iii) a disposition of assets with a Fair Market Value of less than $1,000,000, and (iv) any exchange of like property pursuant to Section 1031 of the Code for use in a Permitted Business, "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the interest rate borne by the Securities, compounded annually) of the total obligations of the 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). "Average Life" means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the quotient obtained by dividing (a) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness or scheduled redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (b) the sum of all such payments. "Bank Indebtedness" means any and all amounts payable under or in respect of the Credit Agreement (after giving effect to the issuance of the Original Securities and the repayment of Bank Indebtedness with the proceeds therefrom; after such repayment $150,000,000 of Tranche B term loans will remain outstanding under the Credit Agreement), and any Refinancing Indebtedness with respect thereto, including principal, premium (if any), interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company whether or not a claim for post-filing interest is allowed in such proceedings), fees, charges, expenses, reimbursement obligations, guarantees and all other amounts payable thereunder or in respect thereof. It is understood and agreed that Refinancing Indebtedness in respect of the Credit Agreement may be Incurred from time to time after termination of the Credit Agreement. "Board of Directors" means the Board of Directors of the Parent or any committee thereof duly authorized to act on behalf of the Board of Directors of the Parent. "Business Day" means each day that is not a Legal Holiday. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. "Capitalized Lease Obligations" means an obligation that is required to be classified and accounted for as a capitalized lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be prepaid by the lessee without payment of a penalty. "Change of Control" means the occurrence of any of the following events: (a) at any time, less than 75% of the members of the Board of Directors of the Parent shall be (1) individuals who are members of such board on June 5, 2002 or (2) individuals whose election, or nomination for election by the Parent's stockholders, was approved by a vote of at least 75% of the members of the Board of Directors of the Parent then still in office who are members of such board on June 5, 2002 (or whose election or nomination has been approved as provided in this clause (a)); (b) at any time, any Person, or any two or more Persons acting as a partnership, limited partnership, syndicate or other group for the purpose of acquiring, holding or disposing of Voting Stock of the Parent, shall become, according to public announcement or filing, the "beneficial owner" (as defined in Rule 13d-3 issued under the Exchange Act), directly or indirectly, of securities of the Parent representing 30% or more (calculated in accordance with such Rule 13d-3) of the combined voting power of the Parent's then outstanding Voting Stock; (c) any Person other than the Parent shall acquire ownership, directly or indirectly, beneficially or of record of more than 30% of the Voting Stock of the Company; or (d) the merger or consolidation of the Parent or the Company with or into another Person or the merger of another Person with or into the Parent or the Company, or the sale of all or substantially all the assets of the Parent or the Company to another Person, and, in the case of any such merger or consolidation, the securities of the Parent or the Company that are outstanding immediately prior to such transaction and that represent 100% of the aggregate voting power of the Voting Stock of the Parent or the Company are changed into or exchanged for cash, securities or property, unless pursuant to such transaction such securities are changed into or exchanged for, in addition to any other consideration, securities of the surviving Person or transferee that represent immediately after such transaction at least a majority of the aggregate voting power of the Voting Stock of the surviving Person or transferee. "Closing Date" means the date of this Indenture. "Code" means the Internal Revenue Code of 1986, as amended. "Company" means the party named as such in this Indenture until a successor replaces it and, thereafter, means the successor and, for purposes of any provision contained herein and required by the TIA, each other obligor on the indenture securities. "Consolidated Coverage Ratio" as of any date of determination means the ratio of (a) the aggregate amount of EBITDA for the period of the most recent four consecutive fiscal quarters ending at least 45 days prior to the date of such determination to (b) Consolidated Interest Expense for such four fiscal quarters; provided, however, that: (i) if the Parent or any Restricted Subsidiary has Incurred any Indebtedness since the beginning of such period (other than Indebtedness under a revolving credit facility) that remains outstanding on such date of determination or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period and the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such discharge had occurred on the first day of such period; (ii) if the Parent or any Restricted Subsidiary has repaid, repurchased, defeased or otherwise discharged any Indebtedness (other than Indebtedness under a revolving credit facility) since the beginning of such period or if any Indebtedness is to be repaid, repurchased, defeased or otherwise discharged on the date of the transaction giving rise to the need to calculate the Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense for such period shall be calculated on a pro forma basis as if such discharge had occurred on the first day of such period and as if the Parent or such Restricted Subsidiary had not earned the interest income actually earned during such period in respect of cash or Temporary Cash Investments used to repay, repurchase, defease or otherwise discharge such Indebtedness; (iii) if since the beginning of such period the Parent or any Restricted Subsidiary shall have made any Asset Disposition, the EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the assets that are the subject of such Asset Disposition for such period or increased by an amount equal to the EBITDA (if negative) directly attributable thereto for such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Indebtedness of the Parent or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Parent and its continuing Restricted Subsidiaries in connection with such Asset Disposition for such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent the Parent and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale); (iv) if since the beginning of such period the Parent or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person that becomes a Restricted Subsidiary) or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness) as if such Investment or acquisition occurred on the first day of such period; and (v) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Parent or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Disposition or any Investment or acquisition of assets that would have required an adjustment pursuant to clause (iii) or (iv) above if made by the Parent or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Disposition, Investment or acquisition of assets occurred on the first day of such period. For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets or other Investment, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred in connection therewith, the pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Parent and shall comply with the requirements of Rule 11-02 of Regulation S-X promulgated by the SEC. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest expense on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term as at the date of determination in excess of 12 months). For purposes of making the computation referred to above, interest on any Indebtedness under a revolving credit facility computed on a pro forma basis shall be computed based upon the average daily balance of such Indebtedness during the applicable period. "Consolidated Current Liabilities" as of the date of determination means the aggregate amount of liabilities of the Parent and its Consolidated Restricted Subsidiaries that may properly be classified as current liabilities (including taxes accrued as estimated), on a Consolidated basis, after eliminating (a) all intercompany items between the Parent and any Restricted Subsidiary and (b) all current maturities of long-term Indebtedness, all as determined in accordance with GAAP consistently applied. "Consolidated Interest Expense" means, for any period, the total interest expense of the Parent and its Consolidated Restricted Subsidiaries, plus, to the extent Incurred by the Parent and its Consolidated Restricted Subsidiaries in such period but not included in such interest expense, without duplication (a) interest expense attributable to Capitalized Lease Obligations and the interest expense attributable to leases constituting part of a Sale/Leaseback Transaction, (b) amortization of debt discount and debt issuance costs, (c) capitalized interest, (d) noncash interest expense, (e) commissions, discounts and other fees and charges attributable to letters of credit and bankers' acceptance financing, (f) interest accruing on any Indebtedness of any other Person to the extent such Indebtedness is Guaranteed by the Parent or any Restricted Subsidiary, (g) net costs associated with Hedging Obligations (including amortization of fees), (h) dividends in respect of all Disqualified Stock of the Parent and all Preferred Stock of any of the Subsidiaries of the Parent (other than the Company), to the extent held by Persons other than the Parent or a Wholly Owned Subsidiary, (i) interest Incurred in connection with investments in discontinued operations, and (j) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Parent) in connection with Indebtedness Incurred by such plan or trust. "Consolidated Net Income" means, for any period, the net income of the Parent and its Consolidated Subsidiaries for such period; provided, however, that there shall not be included in such Consolidated Net Income: (a) subject to the limitations contained in clause (b) below, any net income of any Person (other than the Parent) if such Person is not a Restricted Subsidiary, except that (i) subject to the limitations contained in clause (e) below, the Parent's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Parent or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution made to a Restricted Subsidiary, to the limitations contained in clause (d) below) and (ii) the Parent's equity in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income; (b) all net income and net loss attributable to each Foreign Equity Investment shall be excluded from Consolidated Net Income, and in lieu thereof, the amount determined as follows shall be included in Consolidated Net Income: (i) the Parent's equity in the pretax net income and pretax net loss attributable to each Foreign Equity Investment shall be determined in the aggregate (so that pretax net losses offset corresponding amounts of pretax net income); (ii) if the amount determined pursuant to subclause (i) is positive, it shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Persons during such period to the Parent or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution made to a Restricted Subsidiary, to the limitations contained in clause (d) below); and (iii) if the amount determined pursuant to subclause (i) is negative, such loss shall be included in determining such Consolidated Net Income; (c) any net income (or loss) of any Person acquired by the Parent or a Subsidiary of the Parent in a pooling of interests transaction for any period prior to the date of such acquisition; (d) any net income (or loss) of any Restricted Subsidiary other than the Issuer if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions by such Restricted Subsidiary, directly or indirectly, except that (i) subject to the limitations contained in clause (e) below, the Parent's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Restricted Subsidiary during such period to the Parent or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution made to another Restricted Subsidiary, to the limitation contained in this clause) and (ii) the Parent's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining such Consolidated Net Income; (e) any gain (but not loss) realized upon the sale or other disposition of any asset of the Parent or its Consolidated Subsidiaries (including pursuant to any Sale/Leaseback Transaction) that is not sold or otherwise disposed of in the ordinary course of business and any gain (but not loss) realized upon the sale or other disposition of any Capital Stock of any Person; (f) any extraordinary gain or loss; and (g) the cumulative effect of a change in accounting principles. Notwithstanding the foregoing, for the purposes of Section 4.04 only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Parent or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such Section pursuant to clause (a)(iv)(3)(D) thereof. "Consolidated Net Tangible Assets" as of any date of determination means the total amount of assets (less accumulated depreciation and amortization, allowances for doubtful receivables, other applicable reserves and other properly deductible items) that would appear on a consolidated balance sheet of the Parent and its Consolidated Restricted Subsidiaries, determined on a Consolidated basis in accordance with GAAP, and after giving effect to purchase accounting and after deducting therefrom Consolidated Current Liabilities and, to the extent otherwise included, the amounts of: (a) minority interests in consolidated Subsidiaries held by Persons other than the Parent or a Restricted Subsidiary; (b) excess of cost over fair value of assets of businesses acquired, as determined in good faith by the Board of Directors; (c) any revaluation or other write-up in book value of assets subsequent to the Closing Date as a result of a change in the method of valuation in accordance with GAAP consistently applied; (d) unamortized debt discount and expenses and other unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, licenses, organization or developmental expenses and other intangible items; (e) treasury stock; (f) cash set apart and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of Capital Stock to the extent such obligation is not reflected in Consolidated Current Liabilities; and (g) Investments in and assets of Unrestricted Subsidiaries. "Consolidated Net Worth" means the total of the amounts shown on the balance sheet of the Parent and its Restricted Subsidiaries, determined on a Consolidated basis, as of the end of the most recent fiscal quarter of the Parent ending at least 45 days prior to the taking of any action for the purpose of which the determination is being made, as (a) the par or stated value of all outstanding Capital Stock of the Parent plus (b) paid-in capital or capital surplus relating to such Capital Stock plus (c) any retained earnings or earned surplus less (i) any accumulated deficit and (ii) any amounts attributable to Disqualified Stock. "Consolidation" means the consolidation of the amounts of each of the Restricted Subsidiaries with those of the Parent in accordance with GAAP consistently applied; provided, however, that "Consolidation" shall not include consolidation of the accounts of any Unrestricted Subsidiary, but the interest of the Parent or any Restricted Subsidiary in an Unrestricted Subsidiary will be accounted for as an investment. The term "Consolidated" has a correlative meaning. "Credit Agreement" means the Credit Agreement dated as of January 11, 2000, among the Parent, the Company, the lenders party thereto, JPMorgan Chase Bank (formerly, The Chase Manhattan Bank), as Administrative Agent, Collateral Agent, Issuing Bank and Swingline Lender, The Bank of Nova Scotia, as Syndication Agent, and Fleet National Bank, as Documentation Agent, as amended, restated, supplemented, waived, replaced (whether or not upon termination, and whether with the original lenders or otherwise), refinanced, restructured or otherwise modified from time to time (except to the extent that any such amendment, restatement, supplement, waiver, replacement, refinancing, restructuring or other modification thereto would be prohibited by the terms of this Indenture, unless otherwise agreed to by the Holders of at least a majority in aggregate principal amount of Securities at the time outstanding). "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Designated Sale/Leaseback Transaction" means any Sale/Leaseback Transaction that at the time of determination (a) has been designated a Designated Sale/Leaseback Transaction by the Board of Directors by its promptly filing with the Trustee a copy of the resolution of the Board of Directors giving effect to such designation and (b) has not been removed as a Designated Sale/Leaseback Transaction by the Board of Directors by its prompt filing with the Trustee a copy of the resolution of the Board of Directors giving effect to such removal. "Disqualified Stock" means, with respect to any Person, any Capital Stock that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable or exercisable) or upon the happening of any event (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b) is convertible or exchangeable for Indebtedness or Disqualified Stock (excluding Capital Stock convertible or exchangeable solely at the option of the Parent or a Restricted Subsidiary; provided, however, that any such conversion or exchange shall be deemed an Incurrence of Indebtedness or Disqualified Stock, as applicable) or (c) is redeemable at the option of the holder thereof, in whole or in part, in the case of each of clauses (a), (b) and (c) on or prior to the first anniversary of the Stated Maturity of the Securities; provided, however, that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the first anniversary of the Stated Maturity of the Securities shall not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are not more favorable to the holders of such Capital Stock than the provisions of Sections 4.06 and 4.08. "EBITDA" for any period means the Consolidated Net Income for such period, plus, without duplication, the following to the extent deducted in calculating such Consolidated Net Income: (a) income tax expense of the Parent and its Consolidated Restricted Subsidiaries, (b) Consolidated Interest Expense, (c) depreciation expense of the Parent and its Consolidated Restricted Subsidiaries and (d) amortization expense of the Parent and its Consolidated Restricted Subsidiaries (excluding amortization expense attributable to a prepaid cash item that was paid in a prior period). Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and noncash charges of, a Restricted Subsidiary of the Parent shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Parent by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its stockholders. "Equity Offering" means an underwritten primary public offering of common stock of the Parent or the Company pursuant to an effective registration statement under the Securities Act or a bona fide private placement of the common stock of the Parent or the Company on arm's-length terms to unaffiliated third parties. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Excluded Contributions" means net cash proceeds received by the Parent or the Company from the issue or sale of its Capital Stock (other than Disqualified Stock) subsequent to the Closing Date (other than an issuance or sale to (x) a Subsidiary of the Parent or (y) an employee stock ownership plan or other trust established by the Parent or any of its Subsidiaries), in each case designated as Excluded Contributions pursuant to an Officers' Certificate executed on the date such Capital Stock is issued or sold, which are excluded from the calculation set forth in Section 4.04(a)(iv)(3). "Fair Market Value" means, with respect to any asset or property, the price that could be negotiated in an arm's-length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. "Foreign Equity Investment" means any investment in Mexrail, Inc., The Texas Mexican Railway Company, TFM, Grupo TFM or Panama Canal Railway Company or their successors for which the equity method of accounting is used. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Closing Date, including those set forth in (a) the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (b) statements and pronouncements of the Financial Accounting Standards Board, (c) such other statements by such other entities as approved by a significant segment of the accounting profession and (d) the rules and regulations of the SEC governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the SEC. All ratios and computations based on GAAP contained in this Indenture shall be computed in conformity with GAAP. "Grupo TFM" means Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. "Grupo TFM Disposition" means any sale, transfer or other disposition for cash (or series of related sales, transfers or dispositions) by Caymex Transportation, Inc. or Nafta Rail S.A. de C.V. of any shares of Capital Stock of Nafta Rail S.A. de C.V., Grupo TFM, TFM or any combination thereof, in each case on arm's-length terms to unaffiliated third parties. "Grupo TFM Investment" means (i) any purchase or acquisition by Nafta Rail S.A. de C.V., the Parent or any directly or indirectly Wholly Owned Subsidiary of the Parent, of any shares of Capital Stock of Grupo TFM or TFM from the government of Mexico or an instrumentality thereof or (ii) any capital contribution made to Grupo TFM, TFM or both to fund the purchase by it or them, if applicable, of shares of Capital Stock of Grupo TFM, TFM or both from the government of Mexico or an instrumentality thereof, in each case made with the proceeds of a Grupo TFM Disposition. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, 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 obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing any obligation. "Hedging Obligations" of any Person means the obligations of such Person pursuant to any Interest Rate Agreement. "Holder" means the Person in whose name a Security is registered on the Registrar's books. "Incur" means issue, assume Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Person at the time it becomes a Subsidiary. The term "Incurrence" when used as a noun shall have a correlative meaning. The accretion of principal of a non-interest bearing or other discount security shall not be deemed the Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person on any date of determination, without duplication: (a) the principal of and premium (if any) in respect of indebtedness of such Person for borrowed money; (b) the principal of and premium (if any) in respect of obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto); (d) all obligations of such Person to pay the deferred and unpaid purchase price of property or services (except Trade Payables), which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services; (e) all Capitalized Lease Obligations and all Attributable Debt of such Person; (f) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person that is not a Note Guarantor, any Preferred Stock (but excluding, in each case, any accrued dividends); (g) all indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such indebtedness is assumed by such Person; provided, however, that the amount of indebtedness of such Person shall be the lesser of (i) the Fair Market Value of such asset at such date of determination and (ii) the amount of such Indebtedness of such other Persons; (h) Hedging Obligations of such Person; and (i) all obligations of the type referred to in clauses (a) through (h) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee. 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 the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. "Indenture" means this Indenture as amended or supplemented from time to time. "Interest Rate Agreement" means, with respect to any Person, any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement to which such Person is party or of which it is a beneficiary. "Investment" in any Person means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of the lender) or other extension of credit (including by way of Guarantee or similar arrangement) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by such Person. For purposes of the definition of "Unrestricted Subsidiary" and Section 4.04, (a) "Investment" shall include the portion (proportionate to the Parent's equity interest in such Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of the Parent at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Parent shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to (i) the Parent's "Investment" in such Subsidiary at the time of such redesignation less (ii) the portion (proportionate to the Parent's equity interest in such Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the time of such redesignation; and (b) any property transferred to or from an Unrestricted Subsidiary shall be valued at its Fair Market Value at the time of such transfer. "Investment Grade Rating" means a rating equal to or higher than Baa3 (or the equivalent) by Moody's Investors Service, Inc. or BBB- (or the equivalent) by Standard & Poor's Ratings Services, Inc., as each such company is defined in the definition of "Rating Agency". "Issue Date", with respect to any Initial Securities, means the date on which the Initial Securities are originally issued. "Legal Holiday" means a Saturday, Sunday or other day on which banking institutions are not required by law or regulation to be open in the State of New York. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof). "liquidated damages" means any liquidated damages payable under a Registration Agreement. "Net Available Cash" from an Asset Disposition means cash payments received (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise and proceeds from the sale or other disposition of any securities received as consideration, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to the properties or assets that are the subject of such Asset Disposition or received in any other noncash form) therefrom, in each case net of (a) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all federal, state, provincial, foreign and local taxes required to be paid or accrued as a liability under GAAP, as a consequence of such Asset Disposition, (b) all payments made on any Indebtedness that is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such assets, or that must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law be repaid out of the proceeds from such Asset Disposition, (c) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Disposition and (d) appropriate amounts to be provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the property or other assets disposed of in such Asset Disposition and retained by the Parent or any Restricted Subsidiary after such Asset Disposition. "Net Cash Proceeds", with respect to any issuance or sale of Capital Stock, means the cash proceeds of such issuance or sale net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Note Guarantee" means each Guarantee of the obligations with respect to the Securities issued by a Person pursuant to the terms of this Indenture. "Note Guarantor" means any Person that has issued a Note Guarantee. "Officer" means the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer, the President, any Vice President, the Treasurer or the Secretary of the Parent. "Officer" of a Note Guarantor has a correlative meaning. "Officers' Certificate" means a certificate signed by two Officers. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Parent, the Company, a Note Guarantor or the Trustee. "Parent" means Kansas City Southern, a Delaware corporation, until a successor replaces it and, thereafter, means such successor. "Permitted Business" means any business engaged in by the Parent or any Restricted Subsidiary on the Closing Date and any Related Business. "Permitted Investment" means an Investment by the Parent or any Restricted Subsidiary in (a) the Parent, a Restricted Subsidiary or a Person that will, upon the making of such Investment, become a Restricted Subsidiary; provided, however, that the primary business of such Restricted Subsidiary is a Permitted Business; (b) another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Parent or a Restricted Subsidiary; provided, however, that such Person's primary business is a Permitted Business; (c) Temporary Cash Investments; (d) receivables owing to the Parent or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Parent or any such Restricted Subsidiary deems reasonable under the circumstances; (e) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (f) loans or advances to employees made in the ordinary course of business consistent with past practices of the Parent or such Restricted Subsidiary and not exceeding $2.0 million in the aggregate outstanding at any one time; (g) Stock Purchase Loans not exceeding $3.0 million in the aggregate outstanding at any one time; (h) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Parent or any Restricted Subsidiary or in satisfaction of judgments; (i) any Person to the extent such Investment represents the noncash portion of the consideration received for an Asset Disposition that was made pursuant to and in compliance with Section 4.06; (j) The Texas Mexican Railway Company or any other domestic railway company that owns railways that are contiguous with those owned by the Company in the form of Guarantees for the benefit of, or capital contributions or loans to, or sale/leaseback transactions with, The Texas Mexican Railway Company or such other domestic railway company; provided, however, that the aggregate amount of such capital contributions, loans and guaranteed Indebtedness and sale/leaseback transactions shall not exceed $25.0 million; (k) any company that is engaged in the same line of business as the Company or a related line of business in the form of Guarantees for the benefit of, or capital contributions or loans to, or sale/leaseback transactions with, such company; provided, however, that the aggregate amount of such capital contributions, loans and guaranteed Indebtedness and sale/leaseback transactions shall not exceed $25.0 million; (l) Grupo TFM Investments; or (m) the Panama Canal Railway Company; provided, however, that the aggregate amount of all such Investments made after the Closing Date shall not exceed $15.0 million. "Permitted Liens" means, with respect to any Person: (a) Liens to secure Indebtedness permitted pursuant to clauses (b)(i) and (b)(vii) of Section 4.03; (b) Liens for taxes, assessments or governmental charges or levies on such Person's property if the same shall not at the time be delinquent or thereafter can be paid without penalty or are being contested in good faith and by appropriate proceedings; (c) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens and other similar Liens arising in the ordinary course of business that secure payment of obligations (i) that are being contested in good faith by appropriate proceedings or (ii) for which such Person or any of its Subsidiaries, as applicable, has posted a bond supported only by cash; (d) Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, laws providing for old age pensions or other social security or retirement benefits, or similar legislation or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness) or leases to which such Person is a party, or deposits to secure public or statutory obligations of such Person or deposits of cash or United States government bonds to secure surety or appeal bonds to which such Person is a party, or deposits as security for contested taxes or import duties or for the payment of rent, in each case Incurred in the ordinary course of business; (e) utility easements, building restrictions and such other encumbrances or charges against real property and defects and irregularities in the title thereto or facts an accurate survey of the property would show and landlords' and lessors' liens under leases to which such Person or any of its Subsidiaries is a party, none of which in any material way affect the marketability of the same or interfere with the use thereof in the ordinary course of the business of such Person or its Subsidiaries; (f) Liens existing on the Closing Date; (g) any Lien on any property or asset prior to the acquisition thereof by such Person or any of its Subsidiaries or existing on any property or asset of any other Person that becomes a Subsidiary of such Person after the Closing Date prior to the time such other Person becomes a Subsidiary of such Person; provided, however, that (i) such Lien is not created, Incurred or assumed in contemplation of or in connection with such acquisition or such other Person's becoming a Subsidiary of such Person, as the case may be, (ii) such Lien shall not apply to any other property or assets of such Person or its Subsidiaries and (iii) such Lien shall secure only those obligations which it secures on the date of such acquisition or the date such other Person becomes a Subsidiary of such Person, as the case may be; (h) Liens on fixed or capital assets acquired, constructed or improved by such Person or any of its Subsidiaries; provided, however, that (i) such Liens secure Indebtedness permitted pursuant to Section 4.03(b)(vi), (ii) such Liens and the Indebtedness secured thereby are Incurred prior to or within 180 days after such acquisition or the completion of such construction or improvement, (iii) the Indebtedness secured thereby does not exceed the cost of acquiring, constructing or improving such fixed or capital assets and (iv) such Liens shall not apply to any other property or assets of such Person or any of its Subsidiaries; (i) judgment Liens in respect of judgments that do not constitute an Event of Default pursuant to Section 6.01(i); (j) Liens securing Indebtedness or other obligations of a Subsidiary of such Person owing to such Person or a Wholly Owned Subsidiary of such Person; (k) Liens in favor of issuers of surety bonds or letters of credit issued pursuant to the request of and for the account of such Person in the ordinary course of business; provided, however, that such letters of credit do not constitute Indebtedness; (l) Liens securing obligations under Interest Rate Agreements so long as such obligations relate to Indebtedness that is, and is permitted under this Indenture to be, secured by a Lien on the same property securing such obligations; and (m) Liens to secure any Refinancing (or successive Refinancings) as a whole, or in part, of any Indebtedness secured by any Lien referred to in the foregoing clauses (f), (g) and (h); provided, however, that: (i) such new Lien shall be limited to all or part of the same property that secured the original Lien (plus improvements to or on such property) and (ii) the Indebtedness secured by such Lien at such time is not increased to any amount greater than the sum of: (1) the outstanding principal amount or, if greater, committed amount of Indebtedness secured by Liens described under clauses (f), (g) or (h) at the time the original Lien became a Permitted Lien under this Indenture and (2) an amount necessary to pay any fees and expenses, including premiums, related to such Refinancings. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock", as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) that is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person. "principal" of a Security means the principal of the Security plus the premium, if any, payable on the Security that is due or overdue or is to become due at the relevant time. "Purchase Money Indebtedness" means Indebtedness (a) consisting of the deferred purchase price of an asset, conditional sale obligations, obligations under any title retention agreement and other purchase money obligations, in each case if the maturity of such Indebtedness does not exceed the anticipated useful life of the asset being financed, and (b) Incurred to finance the acquisition by the Parent or a Restricted Subsidiary of such asset, including additions and improvements; provided, however, that such Indebtedness is incurred within 180 days after the acquisition by the Parent or such Restricted Subsidiary of such asset. "Rating Agency" means Standard & Poor's Ratings Services, Inc. and Moody's Investors Service, Inc. or, if Standard & Poor's Ratings Services, Inc. or Moody's Investors Service, Inc. or both shall not make a rating on the Securities publicly available, a nationally recognized statistical rating agency or agencies, as the case may be, selected by the Parent (as certified by the Board of Directors) that shall be substituted for Standard & Poor's Ratings Services, Inc. or Moody's Investors Service, Inc. or both, as the case may be. "Refinance" means, in respect of any Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and "Refinancing" shall have correlative meanings. "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); 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 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. "Related Business" means any business related, ancillary or complementary to the businesses of the Parent and the Restricted Subsidiaries on the Closing Date. "Restricted Subsidiary" means the Company and any other Subsidiary of the Parent other than an Unrestricted Subsidiary. "Sale/Leaseback Transaction" means an arrangement entered into after the Closing Date relating to property now owned or hereafter acquired by the Parent or a Restricted Subsidiary whereby the Parent or a Restricted Subsidiary transfers such property to a Person and the Parent or such Restricted Subsidiary leases it from such Person, other than leases between the Parent and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries. "SEC" means the Securities and Exchange Commission. "Secured Indebtedness" means any Indebtedness of the Company secured by a Lien. "Secured Indebtedness" of a Note Guarantor has a correlative meaning. "Securities" means the Securities issued under this Indenture. "Securities Act" means the Securities Act of 1933, as amended. "Senior Indebtedness" of the Company or any Note Guarantor means the principal of, premium (if any) and accrued and unpaid interest on (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization of the Company or any Note Guarantor, regardless of whether or not a claim for post-filing interest is allowed in such proceedings) and fees and other amounts owing in respect of, Bank Indebtedness and all other Indebtedness of the Company or any Note Guarantor, as applicable, whether outstanding on the Closing Date or thereafter Incurred, unless in the instrument creating or evidencing the same or pursuant to which the same is outstanding it is provided that such obligations are subordinated in right of payment to the Securities or such Note Guarantor's Note Guarantee, as applicable; provided, however, that Senior Indebtedness shall not include (a) any obligation of the Company to the Parent or any other Subsidiary of the Parent or any obligation of such Note Guarantor to the Parent or any other Subsidiary of the Parent, (b) any liability for federal, state, local or other taxes owed or owing by the Company or such Note Guarantor, as applicable, (c) any accounts payable or other liability to trade creditors arising in the ordinary course of business (including Guarantees thereof or instruments evidencing such liabilities), (d) any Indebtedness or obligation of the Company or such Note Guarantor (and any accrued and unpaid interest in respect thereof) that by its terms is subordinate or junior in any respect to any other Indebtedness or obligation of the Company or such Note Guarantor, as applicable, including any Subordinated Obligations, (e) any obligations with respect to any Capital Stock or (f) any Indebtedness Incurred in violation of this Indenture. "Significant Subsidiary" means any Restricted Subsidiary other than the Company that would be a "Significant Subsidiary" of the Parent within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the final payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the Company unless such contingency has occurred). "Stock Purchase Loans" means loans or advances made by the Parent or any Restricted Subsidiary in the ordinary course of business to employees for the purpose of purchasing restricted shares of common stock of the Parent. "Subordinated Obligation" means any Indebtedness of the Company (whether outstanding on the Closing Date or thereafter Incurred) that is subordinate or junior in right of payment to the Securities pursuant to a written agreement. "Subordinated Obligation" of a Note Guarantor has a correlative meaning. "Subsidiary" of any Person means any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (a) such Person, (b) such Person and one or more Subsidiaries of such Person or (c) one or more Subsidiaries of such Person. "Temporary Cash Investments" means any of the following: (a) any investment in direct obligations of the United States of America or any agency thereof or obligations Guaranteed by the United States of America or any agency thereof, (b) investments in time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company that 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 having capital, surplus and undivided profits aggregating in excess of $250,000,000 (or the foreign currency equivalent thereof) and whose long-term debt is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act), (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) investments in commercial paper, maturing not more than 270 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Parent) organized and in existence under the laws of the United States of America or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's Investors Services, Inc. or "A-1 " (or higher) according to Standard and Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P"), and (e) investments in securities with maturities of six months or less from the date of acquisition issued or fully 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 "A" by Moody's Investors Service, Inc. "TFM" means Transportacion Ferroviaria Mexicana, S.A. de C.V. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the Closing Date, except as provided in Section 9.03. "Trade Payables" means, with respect to any Person, any accounts payable or any indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person arising in the ordinary course of business in connection with the acquisition of goods or services. "Trust Officer" means any officer within the corporate trust department of the Trustee, including any vice president, assistant vice president, assistant secretary, assistant treasurer, trust officer or any other officer of the Trustee who customarily performs functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such person's knowledge of and familiarity with the particular subject and who shall have direct responsibility for the administration of this Indenture. "Trustee" means the party named as such in this Indenture until a successor replaces it and, thereafter, means the successor. "Uniform Commercial Code" means the New York Uniform Commercial Code as in effect from time to time. "Unrestricted Subsidiary" means (a) any Subsidiary of the Parent that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (b) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Parent (including any newly acquired or newly formed Subsidiary of the Parent but excluding the Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any Lien on any property of, the Parent or any other Subsidiary of the Parent that is not a Subsidiary of the Subsidiary to be so designated; provided, however, that either (i) the Subsidiary to be so designated has total assets consolidated with those of its subsidiaries in accordance with GAAP consistently applied of $1,000 or less or (ii) if such Subsidiary has assets consolidated with those of its subsidiaries in accordance with GAAP consistently applied greater than $1,000, then such designation would be permitted under Section 4.04. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that immediately after giving effect to such designation (a) the Parent could Incur $1.00 of additional Indebtedness under Section 4.03(a) and (b) no Default shall have occurred and be continuing. Any such designation of a Subsidiary as a Restricted Subsidiary or Unrestricted Subsidiary by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution of the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "Voting Stock" of a Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means a Restricted Subsidiary of the Parent all the Capital Stock of which (other than directors' qualifying shares) is owned by the Parent or another Wholly Owned Subsidiary. SECTION 1.02 Other Definitions. Defined in Term Section - ---- ---------- "Additional Security" ....................................... 1.01 "Affiliate Transaction" ..................................... 4.07(a) "Appendix" .................................................. 1.01 "Bankruptcy Law" ............................................ 6.01 "beneficially own" .......................................... 1.01 "Change of Control Offer" ................................... 4.08(b) "covenant defeasance option" ................................ 8.01 (b) "Custodian" ................................................. 6.01 "Definitive Securities" ..................................... Appendix A "Event of Default" .......................................... 6.01 "Exchange Securities" ....................................... 1.01 "Global Securities" ......................................... Appendix A "Guaranteed Obligations" .................................... 10.01 "incorporated provision" .................................... 11.01 "Initial Securities" ........................................ 1.01 "legal defeasance option" ................................... 8.01(b) "Legal Holiday" ............................................. 11.08 "Notice of Default" ......................................... 6.01 "Offer" ..................................................... 4.06(b) "Offer Amount" .............................................. 4.06(c)(ii) "Offer Period" .............................................. 4.06(c)(ii) "Original Securities" ....................................... 1.01 "Paying Agent" .............................................. 2.04 "Private Exchange" .......................................... Appendix A "Private Exchange Securities" ............................... Appendix A "protected purchaser" ....................................... 2.08 "Purchase Date" ............................................. 4.06(c)(i) "Registered Exchange Offer" ................................. Appendix A "Registrar" ................................................. 2.03 "Registration Agreement" .................................... Appendix A "Restricted Payment" ........................................ 4.04(a) "Securities Custodian" ...................................... Appendix A "Successor Company" ......................................... 5.01(a) SECTION 1.03 Incorporation by Reference of Trust Indenture Act. This Indenture is subject to the mandatory provisions of the TIA, which are incorporated by reference in and made a part of this Indenture. The following TIA terms have the following meanings: "Commission" means the SEC. "indenture securities" means the Securities and the Note Guarantees. "indenture security holder" means a Holder. "indenture to be qualified" means this Indenture. indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Company, the Note Guarantors and any other obligor on the indenture securities. All other TIA terms used in this Indenture that are defined in the TIA, defined by TIA reference to another statute or defined by SEC rule have the meanings assigned to them by such definitions. SECTION 1.04 Rules of Construction. Unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (c) "or" is not exclusive; (d) "including" means including without limitation; (e) words in the singular include the plural and words in the plural include the singular; (f) the principal amount of any non-interest bearing or other discount security at any date shall be the principal amount thereof that would be shown on a balance sheet of the issuer dated such date prepared in accordance with GAAP; and (g) the principal amount of any Preferred Stock shall be (i) the maximum liquidation value of such Preferred Stock or (ii) the maximum mandatory redemption or mandatory repurchase price with respect to such Preferred Stock, whichever is greater. ARTICLE 2 The Securities SECTION 2.01 Amount of Securities; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series. All Securities of any one series shall be substantially identical except as to denomination. With respect to any Additional Securities issued after the Closing Date (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 2.07, 2.08, 2.09, 2. 10 or 3.06 or the Appendix), there shall be (a) established in or pursuant to a resolution of the Board of Directors and (b) (i) set forth or determined in the manner provided in an Officers' Certificate or (ii) established in one or more indentures supplemental hereto, prior to the issuance of such Additional Securities: (1) whether such Additional Securities shall be issued as part of a new or existing series of Securities and the title of such Additional Securities (which shall distinguish the Additional Securities of the series from Securities of any other series); (2) the issue price and issuance date of such Additional Securities, including the date from which interest on such Additional Securities shall accrue; provided, however, that no Additional Securities may be issued at a price that would cause such Additional Securities to have "original issue discount" within the meaning of Section 1273 of the Code; (3) if applicable, that such Additional Securities shall be issuable in whole or in part in the form of one or more Global Securities and, in such case, the respective depositaries for such Global Securities, the form of any legend or legends which shall be borne by such Global Securities in addition to or in lieu of those set forth in Exhibit A hereto and any circumstances in addition to or in lieu of those set forth in Section 2.2 of the Appendix in which any such Global Security may be exchanged in whole or in part for Additional Securities registered, or any transfer of such Global Security in whole or in part may be registered, in the name or names of Persons other than the depositary for such Global Security or a nominee thereof; and (4) if applicable, that such Additional Securities shall not be issued in the form of Initial Securities as set forth in Exhibit A, but shall be issued in the form of Exchange Securities as set forth in Exhibit B. If any of the terms of any Additional Securities are established by action taken pursuant to a resolution of the Board of Directors, a copy of an appropriate record of such action shall be certified by the Secretary or any Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers' Certificate or the indenture supplemental hereto setting forth the terms of the Additional Securities. SECTION 2.02 Form and Dating. Provisions relating to the Original Securities, the Additional Securities, the Private Exchange Securities and the Exchange Securities are set forth in the Appendix, which is hereby incorporated in and expressly made a part of this Indenture. The (a) Original Securities and the Trustee's certificate of authentication, (b) Private Exchange Securities and the Trustee's certificate of authentication and (c) any Additional Securities (if issued as Transfer Restricted Securities) and the Trustee's certificate of authentication shall each be substantially in the form of Exhibit A hereto, which is hereby incorporated in and expressly made a part of this Indenture. The Exchange Securities and any Additional Securities issued other than as Transfer Restricted Securities and the Trustee's certificate of authentication shall each be substantially in the form of Exhibit B hereto, which is hereby incorporated in and expressly made a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Parent, the Company or any Note Guarantor is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). Each Security shall be dated the date of its authentication. The Securities shall be issuable only in registered form without interest coupons and only in denominations of $1,000 and integral multiples thereof. SECTION 2.03 Execution and Authentication. Two Officers shall sign the Securities for the Company by manual or facsimile signature. If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless. A Security shall not be valid until an authorized signatory of the Trustee manually signs the certificate of authentication on the Security. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate and make available for delivery Securities as set forth in the Appendix. The Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate the Securities. Any such appointment shall be evidenced by an instrument signed by a Trust Officer, a copy of which shall be furnished to the Company. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as any Registrar, Paying Agent or agent for service of notices and demands. SECTION 2.04 Registrar and Paying Agent. (a) The Company shall maintain an office or agency where Securities may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Securities may be presented for payment (the "Paying Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent, and the term "Registrar" includes any co-registrars. The Company initially appoints the Trustee as (i) Registrar and Paying Agent in connection with the Securities and (ii) the Securities Custodian with respect to the Global Securities. (b) The Company shall enter into an appropriate agency agreement with any Registrar or Paying Agent not a party to this Indenture, which shall incorporate the terms of the TIA. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of any such agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.07. The Parent or any of its domestically organized Wholly Owned Subsidiaries, including the Company, may act as Paying Agent or Registrar. (c) The Company may remove any Registrar or Paying Agent upon written notice to such Registrar or Paying Agent and to the Trustee; provided, however, that no such removal shall become effective until (i) acceptance of an appointment by a successor as evidenced by an appropriate agreement entered into by the Company and such successor Registrar or Paying Agent, as the case may be, and delivered to the Trustee or (ii) notification to the Trustee that the Trustee shall serve as Registrar or Paying Agent until the appointment of a successor in accordance with clause (i) above. Thereupon the removal shall become effective and the successor or Trustee, as the case may be, shall have all the rights, powers and duties of the Registrar or Paying Agent under this Indenture. The Registrar or Paying Agent may resign at any time upon written notice to the Company and the Trustee. SECTION 2.05 Paying Agent to Hold Money in Trust. On or prior to each due date of the principal of and interest and liquidated damages (if any) on any Security, the Company shall deposit with the Paying Agent (or if the Company or a Wholly Owned Subsidiary is acting as Paying Agent, segregate and hold in trust for the benefit of the Persons entitled thereto) a sum sufficient to pay such principal, interest and liquidated damages (if any) when so becoming due. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that the Paying Agent shall hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal of and interest and liquidated damages (if any) on the Securities, and shall notify the Trustee of any default by the Company in making any such payment. If the Parent, the Company or a Subsidiary of the Parent acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed by the Paying Agent. Upon complying with this Section, the Paying Agent shall have no further liability for the money delivered to the Trustee. SECTION 2.06 Holder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders. If the Trustee is not the Registrar, the Company shall furnish, or cause the Registrar to furnish, to the Trustee, in writing at least five Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders. SECTION 2.07 Transfer and Exchange. The Securities shall be issued in registered form and shall be transferable only upon the surrender of a Security for registration of transfer and in compliance with the Appendix. When a Security is presented to the Registrar with a request to register a transfer, the Registrar shall register the transfer as requested if its requirements therefor are met. When Securities are presented to the Registrar with a request to exchange them for an equal principal amount of Securities of other denominations, the Registrar shall make the exchange as requested if the same requirements are met. To permit registration of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Securities at the Registrar's request. The Company may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges in connection with any transfer or exchange pursuant to this Section. The Company shall not be required to make and the Registrar need not register transfers or exchanges of Securities selected for redemption (except, in the case of Securities to be redeemed in part, the portion thereof not to be redeemed) or any Securities for a period of 15 days before the mailing of a notice of redemption of Securities. Prior to the due presentation for registration of transfer of any Security, the Company, the Note Guarantors, the Trustee, the Paying Agent, and the Registrar may deem and treat the Person in whose name a Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and (subject to paragraph 2 of the Securities) interest, if any, on such Security and for all other purposes whatsoever, whether or not such Security is overdue, and none of the Company, any Note Guarantor, the Trustee, the Paying Agent, or the Registrar shall be affected by notice to the contrary. Any Holder of a Global Security shall, by acceptance of such Global Security, agree that transfers of beneficial interest in such Global Security may be effected only through a book-entry system maintained by (a) the Holder of such Global Security (or its agent) or (b) any Holder of a beneficial interest in such Global Security, and that ownership of a beneficial interest in such Global Security shall be required to be reflected in a book entry. All Securities issued upon any transfer or exchange pursuant to the terms of this Indenture shall evidence the same debt and shall be entitled to the same benefits under this Indenture as the Securities surrendered upon such transfer or exchange. SECTION 2.08 Replacement Securities. If a mutilated Security is surrendered to the Registrar or if the Holder of a Security claims that the Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the requirements of Section 8-405 of the Uniform Commercial Code are met, such that the Holder (a) satisfies the Company or the Trustee within a reasonable time after such Holder has notice of such loss, destruction or wrongful taking and the Registrar does not register a transfer prior to receiving such notification, (b) makes such request to the Company or the Trustee prior to the Security being acquired by a protected purchaser as defined in Section 8-303 of the Uniform Commercial Code (a "protected purchaser") and (c) satisfies any other reasonable requirements of the Trustee. Such Holder shall furnish an indemnity bond sufficient in the judgment of the Trustee to protect the Company, the Trustee, the Paying Agent and the Registrar from any loss that any of them may suffer if a Security is replaced. The Company and the Trustee may charge the Holder for their expenses in replacing a Security. In the event any such mutilated, lost, destroyed or wrongfully taken Security has become or is about to become due and payable, the Company in its discretion may pay such Security instead of issuing a new Security in replacement thereof. Every replacement Security is an obligation of the Company. The provisions of this Section 2.08 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, lost, destroyed or wrongfully taken Securities. SECTION 2.09 Outstanding Securities. Securities outstanding at any time are all Securities authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section as not outstanding. Subject to Section 11.06, a Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the Security. If a Security is replaced or paid pursuant to Section 2.08, it ceases to be outstanding unless the Trustee and the Company receive proof satisfactory to them that the replaced or paid Security is held by a protected purchaser. If the Paying Agent segregates and holds in trust, in accordance with this Indenture, on a redemption date or maturity date money sufficient to pay all principal, interest and liquidated damages, if any, payable on that date with respect to the Securities (or portions thereof) to be redeemed or maturing, as the case may be, then on and after that date such Securities (or portions thereof) cease to be outstanding and interest on them ceases to accrue. SECTION 2.10 Temporary Securities. In the event that Definitive Securities are to be issued under the terms of this Indenture, until such Definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of Definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall, upon the written order of the Company, authenticate Definitive Securities and deliver them in exchange for temporary Securities upon surrender of such temporary Securities at the office or agency of the Company, without charge to the Holder. SECTION 2.11 Cancellation. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall cancel all Securities surrendered for registration of transfer, exchange, payment or cancellation and shall dispose of cancelled Securities in accordance with its customary procedures or deliver cancelled Securities to the Company pursuant to written direction by an Officer. The Company may not issue new Securities to replace Securities it has redeemed, paid or delivered to the Trustee for cancellation. The Trustee shall not authenticate Securities in place of cancelled Securities other than pursuant to the terms of this Indenture. SECTION 2.12 Defaulted Interest. If the Company defaults in a payment of interest on the Securities, the Company shall pay the defaulted interest (plus interest on such defaulted interest to the extent lawful) in any lawful manner. The Company may pay the defaulted interest to the Persons who are Holders on a subsequent special record date. The Company shall fix or cause to be fixed any such special record date and payment date to the reasonable satisfaction of the Trustee and shall promptly mail or cause to be mailed to each Holder a notice that states the special record date, the payment date and the amount of defaulted interest to be paid. SECTION 2.13 CUSIP Numbers. The Company in issuing the Securities may use "CUSIP" numbers (if then generally in use) and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the "CUSIP" numbers. ARTICLE 3 Redemption SECTION 3.01 Notices to Trustee. If the Company elects to redeem Securities pursuant to paragraph 5 of the Securities, it shall notify the Trustee in writing of the redemption date and the principal amount of Securities to be redeemed. The Company shall give each notice to the Trustee provided for in this Section at least 60 days before the redemption date unless the Trustee consents to a shorter period. Such notice shall be accompanied by an Officers' Certificate and an Opinion of Counsel from the Company to the effect that such redemption will comply with the conditions herein. Any such notice may be cancelled at any time prior to notice of such redemption being mailed to any Holder and shall thereby be void and of no effect. SECTION 3.02 Selection of Securities to Be Redeemed. If fewer than all the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed pro rata or by lot or by a method that the Trustee in its sole discretion shall deem to be fair and appropriate. The Trustee shall make the selection from outstanding Securities not previously called for redemption. The Trustee may select for redemption portions of the principal of Securities that have denominations larger than $1,000. Securities and portions of them the Trustee selects shall be in amounts of $1,000 or a whole multiple of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. The Trustee shall notify the Company promptly of the Securities or portions of Securities to be redeemed. SECTION 3.03 Notice of Redemption. (a) At least 30 days but not more than 60 days before a date for redemption of Securities, the Company shall mail a notice of redemption by first-class mail to each Holder of Securities to be redeemed at such Holder's registered address. The notice shall identify the Securities to be redeemed and shall state: (i) the redemption date; (ii) the redemption price and the amount of accrued interest to the redemption date; (iii) the name and address of the Paying Agent; (iv) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; (v) if fewer than all the outstanding Securities are to be redeemed, the certificate numbers and principal amounts of the particular Securities to be redeemed; (vi) that, unless the Company defaults in making such redemption payment or the Paying Agent is prohibited from making such payment pursuant to the terms of this Indenture, interest on Securities (or portion thereof) called for redemption ceases to accrue on and after the redemption date; (vii) the CUSIP number, if any, printed on the Securities being redeemed; and (viii) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Securities. (b) At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. In such event, the Company shall provide the Trustee with the information required by this Section. SECTION 3.04 Effect of Notice of Redemption. Once notice of redemption is mailed, Securities called for redemption become due and payable on the redemption date and at the redemption price stated in the notice. Upon surrender to the Paying Agent, such Securities shall be paid at the redemption price stated in the notice, plus accrued interest and liquidated damages, if any, to the redemption date; provided, however, that if the redemption date is after a regular record date and on or prior to the interest payment date, the accrued interest and liquidated damages, if any, shall be payable to the Holder of the redeemed Securities registered on the relevant record date. Failure to give notice or any defect in the notice to any Holder shall not affect the validity of the notice to any other Holder. SECTION 3.05 Deposit of Redemption Price. Prior to 10:00 a.m., New York City time, on the redemption date, the Company shall deposit with the Paying Agent (or, if the Parent, the Company or a Wholly Owned Subsidiary is the Paying Agent, shall segregate and hold in trust) money sufficient to pay the redemption price of and accrued interest and liquidated damages, if any, on all Securities or portions thereof to be redeemed on that date other than Securities or portions of Securities called for redemption that have been delivered by the Company to the Trustee for cancellation. On and after the redemption date, interest shall cease to accrue on Securities or portions thereof called for redemption so long as the Company has deposited with the Paying Agent funds sufficient to pay the principal of, plus accrued and unpaid interest and liquidated damages, if any, on the Securities to be redeemed, unless the Paying Agent is prohibited from making such payment pursuant to the terms of this Indenture. SECTION 3.06 Securities Redeemed in Part. Upon surrender of a Security that is redeemed in part, the Company shall execute and the Trustee shall authenticate for the Holder (at the Company's expense) a new Security equal in principal amount to the unredeemed portion of the Security surrendered. ARTICLE 4 Covenants SECTION 4.01 Payment of Securities. The Company shall promptly pay the principal of and interest and liquidated damages, if any, on the Securities on the dates and in the manner provided in the Securities and in this Indenture. Principal, interest and liquidated damages, if any, shall be considered paid on the date due if on such date the Trustee or the Paying Agent holds in accordance with this Indenture money sufficient to pay all principal and interest then due and the Trustee or the Paying Agent, as the case may be, is not prohibited from paying such money to the Holders on that date pursuant to the terms of this Indenture. The Company shall pay interest on overdue principal at the rate specified therefor in the Securities, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. SECTION 4.02 SEC Reports. (a) Whether or not the Parent is then required to file reports with the SEC, Parent will (i) file with the SEC and provide the Trustee for delivery to the Holders and prospective Holders (upon request) within 15 days after it files them with the SEC a copy of its annual report and the information, documents and other reports that are specified in Sections 13 and 15(d) of the Exchange Act as if it were subject thereto and (ii) furnish to the Trustee for delivery to the Holders, promptly upon their becoming available, a copy of its annual report to shareholders and any other information provided by it to its public shareholders generally. In addition, following an underwritten primary public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act, the Parent shall furnish to the Trustee for delivery to the Holders, promptly upon their becoming available, copies of the annual report to shareholders and any other information provided by the Company, as applicable, to its public shareholders generally. The Parent also will comply with the other provisions of Section 314(a) of the TIA. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder. (b) For so long as the Securities are outstanding and are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, the Parent shall furnish to the Holders and prospective purchasers of the Securities designated by Holders, upon the request of Holders or such prospective purchasers, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act, unless the Company is then subject to and in compliance with Section 13 or 15(d) of the Exchange Act. SECTION 4.03 Limitation on Indebtedness. (a) The Parent will not, and will not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness; provided, however, that the Parent or any Restricted Subsidiary that is a Note Guarantor may Incur Indebtedness if on the date of such Incurrence and after giving effect thereto the Consolidated Coverage Ratio would be greater than 2.0:1. (b) Notwithstanding Section 4.03(a), the Parent and the Restricted Subsidiaries may Incur the following Indebtedness: (i) Bank Indebtedness in an aggregate principal amount not to exceed (1) in the case of any term borrowings, $250.0 million less the aggregate amount of all (A) prepayments of principal from the proceeds of Asset Dispositions applied to permanently reduce any such Indebtedness, (B) scheduled repayments of principal of, and reductions of commitments for, any such Indebtedness and (C) Attributable Debt in respect of Designated Sale/Leaseback Transactions and (2) in the case of any borrowings under a revolving credit facility or accounts receivable financing not treated as an Asset Disposition, $125.0 million; (ii) Indebtedness of the Parent owed to and held by any Wholly Owned Subsidiary or Indebtedness of a Restricted Subsidiary owed to and held by the Parent or any Wholly Owned Subsidiary; provided, however, that (1) any subsequent issuance or transfer of any Capital Stock or any other event that results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of any such Indebtedness (except to the Parent or a Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Indebtedness by the issuer thereof, (2) if the Company is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all obligations with respect to the Notes and (3) if a Note Guarantor is the obligor on such Indebtedness and such Indebtedness is owed to and held by a Wholly Owned Subsidiary that is not a Note Guarantor, such Indebtedness is expressly subordinated to the prior payment in full in cash of all obligations of such Note Guarantor with respect to its Note Guarantee; (iii) Indebtedness (1) represented by the Securities (not including any Additional Securities) and the Note Guarantees, (2) outstanding on the Closing Date (other than the Indebtedness described in clauses (i) and (ii) above) as set forth on Exhibit F hereto, (3) consisting of Refinancing Indebtedness Incurred in respect of any Indebtedness described in this clause (iii) (including Indebtedness that is Refinancing Indebtedness) or Section 4.03(a) and (4) consisting of Guarantees of any Indebtedness permitted under clauses (i) and (ii) of this paragraph (b); (iv) (1) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or prior to the date on which such Restricted Subsidiary was acquired by the Parent (other than Indebtedness Incurred in contemplation of, in connection with, as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Subsidiary of or was otherwise acquired by the Parent); provided, however, that on the date that such Restricted Subsidiary is acquired by the Parent, the Parent would have been able to Incur $1.00 of additional Indebtedness pursuant to Section 4.03(a) after giving effect to the Incurrence of such Indebtedness pursuant to this clause (iv) and (2) Refinancing Indebtedness Incurred by a Restricted Subsidiary in respect of Indebtedness Incurred by such Restricted Subsidiary pursuant to this clause (iv); (v) Indebtedness (1) in respect of performance bonds, bankers' acceptances, letters of credit and surety or appeal bonds provided by the Parent and the Restricted Subsidiaries in the ordinary course of their business, and (2) under Interest Rate Agreements entered into for bona fide hedging purposes of the Parent in the ordinary course of business; provided, however, that such Interest Rate Agreements do not increase the Indebtedness of the Parent outstanding at any time other than as a result of fluctuations in interest rates or by reason of fees, indemnities and compensation payable thereunder; (vi) Purchase Money Indebtedness and Capitalized Lease Obligations (in an aggregate principal amount not in excess of 10% of Consolidated Net Tangible Assets at any time outstanding); (vii) Attributable Debt in respect of Designated Sale/Leaseback Transactions in an aggregate principal amount not to exceed $250.0 million; or (viii) Indebtedness (other than Indebtedness permitted to be Incurred pursuant to Section 4.03(a) or any other clause of this Section 4.03(b)) in an aggregate principal amount on the date of Incurrence that, when added to all other Indebtedness Incurred pursuant to this clause (viii) and then outstanding, will not exceed $25.0 million. (c) Notwithstanding the foregoing, the Company or any Note Guarantor may not Incur any Indebtedness pursuant to Section 4.03(b) above if the proceeds thereof are used, directly or indirectly, to repay, prepay, redeem, defease, retire, refund or refinance any Subordinated Obligations unless such Indebtedness will be subordinated to the Notes or such Note Guarantor's Note Guarantee, as applicable, to at least the same extent as such Subordinated Obligations. (d) Notwithstanding any other provision of this Section 4.03, the maximum amount of Indebtedness that the Parent or any Restricted Subsidiary may Incur pursuant to this Section shall not be deemed to be exceeded solely as a result of fluctuations in the exchange rates of currencies. For purposes of determining the outstanding principal amount of any particular Indebtedness Incurred pursuant to this Section 4.03: (i) Indebtedness Incurred pursuant to the Credit Agreement prior to or on the Closing Date shall be treated as Incurred pursuant to Section 4.03(b)(i); (ii) Indebtedness permitted by this Section 4.03 need not be permitted solely by reference to one provision permitting such Indebtedness but may be permitted in part by one such provision and in part by one or more other provisions of this Section permitting such Indebtedness; and (iii) in the event that Indebtedness meets the criteria of more than one of the types of Indebtedness described in this Section, the Parent, in its sole discretion, shall classify such Indebtedness and only be required to include the amount of such Indebtedness in one of such clauses. SECTION 4.04 Limitation on Restricted Payments. (a) The Parent will not, and will not permit any Restricted Subsidiary, directly or indirectly, to: (i) declare or pay any dividend, make any distribution on or in respect of its Capital Stock or make any similar payment (including any payment in connection with any merger or consolidation involving the Parent, or any Subsidiary of the Parent) to the direct or indirect holders of its Capital Stock, except (x) dividends or distributions payable solely in its Capital Stock (other than Disqualified Stock) and (y) dividends or distributions payable to the Parent or a Restricted Subsidiary (and, if such Restricted Subsidiary has shareholders other than the Parent or other Restricted Subsidiaries, to its other shareholders on a pro rata basis); (ii) purchase, repurchase, redeem, retire or otherwise acquire for value any Capital Stock of the Parent or any Restricted Subsidiary held by Persons other than the Parent or a Restricted Subsidiary; (iii) purchase, repurchase, redeem, retire, defease or otherwise acquire for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment, any Subordinated Obligations (other than the purchase, repurchase, redemption, retirement, defeasance or other acquisition for value of Subordinated Obligations acquired in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of acquisition); or (iv) make any Investment (other than a Permitted Investment) in any Person (any such dividend, distribution, payment, purchase, redemption, repurchase, defeasance, retirement, or other acquisition or Investment being herein referred to as a "Restricted Payment") if, at the time the Parent or such Restricted Subsidiary makes such Restricted Payment: (1) a Default will have occurred and be continuing (or would result therefrom); (2) the Parent could not Incur at least $1.00 of additional Indebtedness under Section 4.03(a); or (3) the aggregate amount of such Restricted Payment and all other Restricted Payments (the amount so expended, if other than in cash, to be determined in good faith by the Board of Directors, whose determination will be conclusive and evidenced by a resolution of the Board of Directors) declared or made subsequent to September 27, 2000 would exceed the sum, without duplication, of: (A) 50% of the Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter immediately following the fiscal quarter which included September 27, 2000 to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or, in case such Consolidated Net Income will be a deficit, minus 100% of such deficit); (B) the aggregate Net Cash Proceeds received by the Parent or the Company from the issue or sale of its Capital Stock (other than Disqualified Stock or in respect of Excluded Contributions) subsequent to September 27, 2000 (other than an issuance or sale to (x) a Subsidiary of the Parent or (y) an employee stock ownership plan or other trust established by the Parent or any of its Subsidiaries); (C) the amount by which Indebtedness of the Parent or the Restricted Subsidiaries is reduced on the Parent's balance sheet upon the conversion or exchange (other than by a Subsidiary of the Parent) subsequent to September 27, 2000 of any Indebtedness of the Parent or the Restricted Subsidiaries issued after September 27, 2000 which is convertible or exchangeable for Capital Stock (other than Disqualified Stock) of the Parent (less the amount of any cash or the Fair Market Value of other property distributed by the Parent or any Restricted Subsidiary upon such conversion or exchange); (D) the amount equal to the net reduction in Investments in Unrestricted Subsidiaries resulting from (x) payments of dividends, repayments of the principal of loans or advances or other transfers of assets to the Parent or any Restricted Subsidiary from Unrestricted Subsidiaries or (y) the redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investment") not to exceed, in the case of any Unrestricted Subsidiary, the amount of Investments previously made by the Parent or any Restricted Subsidiary in such Unrestricted Subsidiary, which amount was included in the calculation of the amount of Restricted Payments; and (E) $40.0 million (b) The provisions of Section 4.04(a) shall not prohibit: (i) any purchase, repurchase, redemption, retirement or other acquisition for value of Capital Stock of the Parent made by exchange for, or out of the proceeds of the substantially concurrent sale of, Capital Stock of the Parent (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Parent or an employee stock ownership plan or other trust established by the Parent or any of its Subsidiaries); provided, however, that: (1) such purchase, repurchase, redemption, retirement or other acquisition for value will be excluded in the calculation of the amount of Restricted Payments, and (2) the Net Cash Proceeds from such sale applied in the manner set forth in this clause (i) will be excluded from the calculation of amounts under Section 4.04(a)(iv)(3)(B); (ii) any prepayment, repayment, purchase, repurchase, redemption, retirement, defeasance or other acquisition for value of Subordinated Obligations of the Parent made by exchange for, or out of the proceeds of the substantially concurrent sale of, Indebtedness of the Parent that is permitted to be Incurred pursuant to Section 4.03(b); provided, however, that such prepayment, repayment, purchase, repurchase, redemption, retirement, defeasance or other acquisition for value will be excluded in the calculation of the amount of Restricted Payments; (iii) any prepayment, repayment, purchase, repurchase, redemption, retirement, defeasance or other acquisition for value of Subordinated Obligations from Net Available Cash to the extent permitted by Section 4.06; provided, however, that such prepayment, repayment, purchase, repurchase, redemption, retirement, defeasance or other acquisition for value will be excluded in the calculation of the amount of Restricted Payments; (iv) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividends would have complied with Section 4.04(a); provided, however, that such dividends will be included in the calculation of the amount of Restricted Payments; (v) dividends paid by the Parent with respect to the 242,170 outstanding shares of its preferred stock, par value $25.00 per share, noncumulative dividends of $1.00 per share in amounts each year which do not exceed $242,170 (the amount paid with respect to such preferred stock in the year ended December 31, 2001); provided, however, that such dividends will be included in the calculation of the amount of Restricted Payments; (vi) Investments that are made with Excluded Contributions; provided, however, that such Investments will be excluded in the calculation of the amount of Restricted Payments; or (vii) any purchase, repurchase, redemption, retirement or other acquisition for value of shares of, or options to purchase shares of, common stock of the Parent or any of its Subsidiaries from employees, former employees, directors or former directors of the Parent or any of its Subsidiaries (or permitted transferees of such employees, former employees, directors or former directors) pursuant to the terms of agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals purchase or sell, or are granted the option to purchase or sell, shares of such common stock; provided, however, that the aggregate amount of such purchases, repurchases, redemptions, retirements and other acquisitions for value will not exceed $3.0 million in any calendar year; provided further, however, that such purchases, repurchases, redemptions, retirements and other acquisitions for value shall be excluded in the calculation of the amount of Restricted Payments. SECTION 4.05 Limitation on Restrictions on Distributions from Restricted Subsidiaries. The Parent will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to: (a) pay dividends or make any other distributions on its Capital Stock or pay any Indebtedness or other obligations owed to the Parent or any Restricted Subsidiary; (b) make any loans or advances to the Parent or any Restricted Subsidiary; or (c) transfer any of its property or assets to the Parent or any Restricted Subsidiary, except: (i) any encumbrance or restriction pursuant to applicable law or an agreement in effect at or entered into on the Closing Date; (ii) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary prior to the date on which such Restricted Subsidiary was acquired by the Parent (other than Indebtedness Incurred as consideration in, in contemplation of, or to provide all or any portion of the funds or credit support utilized to consummate the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was otherwise acquired by the Parent) and outstanding on such date; (iii) any encumbrance or restriction pursuant to an agreement effecting a Refinancing of Indebtedness Incurred pursuant to an agreement referred to in clause (i) or (ii) of this Section 4.05(c) or this clause (iii) or contained in any amendment to an agreement referred to in clause (i) or (ii) of this Section 4.05(c) or this clause (iii); provided, however, that the encumbrances and restrictions contained in any such refinancing agreement or amendment are no less favorable to the Holders than the encumbrances and restrictions contained in such predecessor agreements; (iv) in the case of this clause (c), any encumbrance or restriction (A) that restricts in a customary manner the subletting, assignment or transfer of any property or asset that is subject to a lease, license or similar contract, or (B) contained in security agreements securing Indebtedness of a Restricted Subsidiary to the extent such encumbrance or restriction restricts the transfer of the property subject to such security agreements; and (v) with respect to a Restricted Subsidiary, any restriction imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition. SECTION 4.06 Limitation on Sales of Assets and Capital Stock. (a) The Parent will not, and will not permit any Restricted Subsidiary to, make any Asset Disposition unless: (i) the Parent or such Restricted Subsidiary receives consideration (including by way of relief from, or by any other Person assuming sole responsibility for, any liabilities, contingent or otherwise) at the time of such Asset Disposition at least equal to the Fair Market Value of the shares and assets subject to such Asset Disposition; (ii) at least 75% of the consideration thereof received by the Parent or such Restricted Subsidiary is in the form of cash; and (iii) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Parent (or such Restricted Subsidiary, as the case may be): (1) first, to the extent the Parent elects (or is required by the terms of any Indebtedness) to prepay, repay, purchase, repurchase, redeem, retire, defease or otherwise acquire for value Bank Indebtedness of the Parent or a Note Guarantor within 360 days after the later of the date of such Asset Disposition or the receipt of such Net Available Cash; (2) second, to the extent of the balance of Net Available Cash after application in accordance with clause (1), to the extent the Parent or such Restricted Subsidiary elects, to reinvest in Additional Assets (including by means of an Investment in Additional Assets by a Restricted Subsidiary with Net Available Cash received by the Parent or another Restricted Subsidiary) within 360 days from the later of such Asset Disposition or the receipt of such Net Available Cash; (3) third, to the extent of the balance of such Net Available Cash after application in accordance with clauses (1) and (2), to make an Offer as defined in paragraph (b) of this covenant below to purchase Securities pursuant to and subject to the conditions set forth in Section 4.06(b); provided, however, that if the Parent or the Company elects (or is required by the terms of any other Senior Indebtedness), such Offer may be made ratably to purchase the Securities and other Senior Indebtedness of the Parent, the Company or any Note Guarantor; and (4) fourth, to the extent of the balance of such Net Available Cash after application in accordance with clauses (1), (2) and (3), for any general corporate purpose permitted by the terms of this Indenture; provided, however, that in connection with any prepayment, repayment, purchase, repurchase, redemption, retirement, defeasance or other acquisition for value of Indebtedness pursuant to clause (1) or (3) above, the Parent or such Restricted Subsidiary will retire such Indebtedness and will cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid, purchased, repurchased, redeemed, retired, defeased or otherwise acquired for value. Notwithstanding the foregoing provisions of this Section 4.06(a), the Parent and the Restricted Subsidiaries will not be required to apply any Net Available Cash in accordance with this Section 4.06(a) except to the extent that the aggregate Net Available Cash from all Asset Dispositions that is not applied in accordance with this Section 4.06(a) exceeds $40.0 million. For the purposes of this Section 4.06(a), the following are deemed to be cash: (A) the assumption of Indebtedness of the Parent or any Restricted Subsidiary (other than any Preferred Stock, including Disqualified Stock, constituting Indebtedness) and the release of the Parent or such Restricted Subsidiary from all liability on such Indebtedness in connection with such Asset Disposition, and (B) securities received by the Parent or any Restricted Subsidiary from the transferee that are promptly converted by the Parent or such Restricted Subsidiary into cash. (b) In the event of an Asset Disposition that requires the purchase of Securities (and other Senior Indebtedness) pursuant to Section 4.06(a)(iii)(3), the Parent or the Company will be required (i) to purchase Securities tendered pursuant to an offer by the Company for the Securities (the "Offer") at a purchase price of 100% of their principal amount plus accrued and unpaid interest and liquidated damages thereon, if any, to the date of purchase (subject to the right of Holders of record on the relevant date to receive interest due on the relevant interest payment date) in accordance with the procedures (including prorating in the event of oversubscription) set forth in Section 4.06(c) and (ii) to purchase other Senior Indebtedness of the Parent, the Company or any Note Guarantor on the terms and to the extent contemplated thereby (provided that in no event shall the Parent or the Company offer to purchase such other Senior Indebtedness at a purchase price in excess of 100% of its principal amount, plus accrued and unpaid interest thereon). If the aggregate purchase price of Securities (and other Senior Indebtedness) tendered pursuant to the Offer is less than the Net Available Cash allotted to the purchase of the Securities (and other Senior Indebtedness), the Parent or the Company will apply the remaining Net Available Cash in accordance with Section 4.06(a)(iii)(4). The Parent and the Company will not be required to make an Offer for Securities (and other Senior Indebtedness) pursuant to this Section 4.06 if the Net Available Cash available therefor (after application of the proceeds as provided in clauses (1) and (2) of this Section 4.06(a)(iii)) is less than $20.0 million in the aggregate for all Asset Dispositions after the Closing Date. (c) (i) Promptly, and in any event within 10 days after the Parent or the Company becomes obligated to make an Offer, the Parent or the Company shall be obligated to deliver to the Trustee and send, by first-class mail to each Holder, a written notice stating that the Holder may elect to have his Securities purchased by the Parent or the Company either in whole or in part (subject to prorating as hereinafter described in the event the Offer is oversubscribed) in integral multiples of $1,000 of principal amount, at the applicable purchase price. The notice shall specify a purchase date not less than 30 days nor more than 60 days after the date of such notice (the "Purchase Date") and shall contain such information concerning the business of the Parent and the Company as the Parent and the Company in good faith believe will enable such Holders to make an informed decision (which at a minimum shall include (1) the most recently filed Annual Report on Form 10-K (including audited consolidated financial statements) of the Parent, the most recent subsequently filed Quarterly Report on Form 10-Q and any Current Report on Form 8-K of the Parent filed subsequent to such Quarterly Report, other than Current Reports describing Asset Dispositions otherwise described in the offering materials (or corresponding successor reports), (2) a description of material developments in the Parent's business subsequent to the date of the latest of such reports, and (3) if material, appropriate pro forma financial information) and all instructions and materials necessary to tender Securities pursuant to the Offer, together with the address referred to in clause (iii). (ii) Not later than the date upon which written notice of an Offer is delivered to the Trustee as provided above, the Parent shall deliver to the Trustee an Officers' Certificate as to (1) the amount of the Offer (the "Offer Amount"), (2) the allocation of the Net Available Cash from the Asset Dispositions pursuant to which such Offer is being made and (3) the compliance of such allocation with the provisions of Section 4.06(a). On such date, the Parent or the Company shall also irrevocably deposit with the Trustee or with a paying agent (or, if the Parent or the Company is acting as its own paying agent, segregate and hold in trust) an amount equal to the Offer Amount to be invested in Temporary Cash Investments according to the directions of the Company and to be held for payment in accordance with the provisions of this Section. Upon the expiration of the period for which the Offer remains open (the "Offer Period"), the Parent or the Company shall deliver to the Trustee for cancellation the Securities or portions thereof that have been properly tendered to and are to be accepted by the Parent or the Company. The Trustee (or the Paying Agent, if not the Trustee) shall, on the date of purchase, mail or deliver payment to each tendering Holder in the amount of the purchase price. In the event that the Offer Amount delivered by the Parent or the Company to the Trustee is greater than the purchase price of the Securities tendered, the Trustee shall deliver the excess to the Parent or the Company, as applicable, immediately after the expiration of the Offer Period for application in accordance with this Section 4.06. (iii) Holders electing to have a Security purchased shall be required to surrender the Security, with an appropriate form duly completed, to the Parent or the Company, as applicable, at the address specified in the notice at least three Business Days prior to the Purchase Date. Holders shall be entitled to withdraw their election if the Trustee or the Parent or the Company, as applicable, receives not later than one Business Day prior to the Purchase Date a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security which was delivered by the Holder for purchase and a statement that such Holder is withdrawing his election to have such Security purchased. If at the expiration of the Offer Period the aggregate principal amount of Securities included in the Offer surrendered by Holders thereof exceeds the Offer Amount, the Parent or the Company shall select the Securities to be purchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Parent or the Company so that only Securities in denominations of $1,000, or integral multiples thereof, shall be purchased). Holders whose Securities are purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered. (iv) At the time the Parent or the Company delivers to the Trustee Securities which are to be accepted for purchase, the Parent shall also deliver an Officers' Certificate stating that such Securities are to be accepted by the Parent or the Company pursuant to and in accordance with the terms of this Section. A Security shall be deemed to have been accepted for purchase at the time the Trustee, directly or through an agent, mails or delivers payment therefor to the surrendering Holder. (v) The Parent and the Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Securities pursuant to this Section. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section, the Parent and the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached their obligations under this Section by virtue thereof. SECTION 4.07 Limitation on Transactions with Affiliates. (a) The Parent will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into or conduct any transaction or series of related transactions (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate of the Parent (an "Affiliate Transaction") unless such transaction is on terms: (i) that are no less favorable to the Parent or such Restricted Subsidiary, as the case may be, than those that could be obtained at the time of such transaction in arm's-length dealings with a Person who is not such an Affiliate, (ii) that, in the event such Affiliate Transaction involves an aggregate amount in excess of $5.0 million, (1) are set forth in writing, and (2) have been approved by a majority of the members of the Board of Directors having no personal stake in such Affiliate Transaction, and (iii) that, in the event such Affiliate Transaction involves an amount in excess of $20.0 million, have been determined by a nationally recognized appraisal or investment banking firm to be fair, from a financial standpoint, to the Parent and its Restricted Subsidiaries. (b) The provisions of Section 4.07(a) will not prohibit: (i) any Restricted Payment permitted to be paid pursuant to Section 4.04; (ii) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors; (iii) the grant of stock options or similar rights to employees and directors of the Parent pursuant to plans approved by the Board of Directors; (iv) loans or advances to employees in the ordinary course of business in accordance with past practices of the Parent, but in any event not to exceed $2.0 million in the aggregate outstanding at any one time; (v) Stock Purchase Loans, but in any event not to exceed $3.0 million in the aggregate outstanding at any one time; (vi) the payment of reasonable fees to directors of the Parent and its Subsidiaries who are not employees of the Parent or its Subsidiaries; or (vii) any transaction between the Parent and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries. SECTION 4.08 Change of Control. (a) Upon a Change of Control, each Holder will have the right to require the Company to purchase all or any part of such Holder's Securities at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest and liquidated damages, if any, to the date of purchase (subject to the right of Holders of record on the relevant record date to receive interest and liquidated damages, if any, due on the relevant interest payment date), in accordance with the terms contemplated in Section 4.08(b); provided, however, that notwithstanding the occurrence of a Change of Control, the Company shall not be obligated to purchase the Securities pursuant to this Section 4.08 in the event that it has exercised its right to redeem all the Securities under paragraph 5 of the Securities. (b) Within 30 days following any Change of Control (except as provided in the proviso to the first sentence of Section 4.08(a)), the Company shall mail a notice to each Holder with a copy to the Trustee (the "Change of Control Offer") stating: (i) that a Change of Control has occurred and that such Holder has the right to require the Company to purchase all or a portion of such Holder's Securities at a purchase price in cash equal to 101 % of the principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, to the date of purchase (subject to the right of Holders of record on the relevant record date to receive interest and liquidated damages, if any, on the relevant interest payment date); (ii) the circumstances and relevant facts and financial information regarding such Change of Control; (iii) the purchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed); and (iv) the instructions determined by the Company, consistent with this Section, that a Holder must follow in order to have its Securities purchased. (c) Holders electing to have a Security purchased shall be required to surrender the Security, with an appropriate form duly completed, to the Company, at the address specified in the notice, at least three Business Days prior to the purchase date. Holders shall be entitled to withdraw their election if the Trustee or the Company receives, not later than one Business Day prior to the purchase date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security which was delivered for purchase by the Holder and a statement that such Holder is withdrawing his election to have such Security purchased. Holders whose Securities are purchased only in part shall be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered. (d) On the purchase date, all Securities purchased by the Company under this Section shall be delivered to the Trustee for cancellation, and the Company shall pay the purchase price plus accrued and unpaid interest and liquidated damages, if any, to the Holders entitled thereto. (e) Notwithstanding the foregoing provisions of this Section, the Company will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times, and otherwise in compliance with the requirements set forth in Section 4.08(b) applicable to a Change of Control Offer made by the Company and purchases all Securities validly tendered and not withdrawn under such Change of Control Offer. (f) At the time the Company delivers Securities to the Trustee which are to be accepted for purchase, the Company shall also deliver an Officers' Certificate stating that such Securities are to be accepted by the Company pursuant to and in accordance with the terms of this Section 4.08. A Security shall be deemed to have been accepted for purchase at the time the Trustee, directly or through an agent, mails or delivers payment therefor to the surrendering Holder. (g) Prior to any Change of Control Offer, the Company shall deliver to the Trustee an Officers' Certificate stating that all conditions precedent contained herein to the right of the Company to make such offer have been complied with. (h) The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Securities pursuant to this Section. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this Section by virtue thereof. SECTION 4.09 Compliance Certificate. The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year of the Company an Officers' Certificate, one of the signers of which shall be the principal executive, principal accounting or principal financial officer of the Company stating that in the course of the performance by the signers of their duties as Officers of the Company they would normally have knowledge of any Default and whether or not the signers know of any Default that occurred during such period. If they do, the certificate shall describe the Default, its status and what action the Company is taking or proposes to take with respect thereto. The Company also shall comply with Section 314(a)(4) of the TIA. SECTION 4.10 Further Instruments and Acts. Upon request of the Trustee, the Company shall execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. SECTION 4.11 Future Note Guarantors. The Parent will cause (i) at any time that any Bank Indebtedness is outstanding, each Subsidiary of the Parent (other than the Company, Caymex Transportation, Inc., SCC Holdings, LLC, The Kansas City Northern Railway Company and Veals, Inc.) that enters into a Guarantee of any Bank Indebtedness and (ii) at any time that no Bank Indebtedness is outstanding, each Subsidiary of the Parent (other than the Company, The Kansas City Northern Railway Company and Veals, Inc.) that enters into a Guarantee of any obligations of the Parent or any of its domestic Subsidiaries, to execute and deliver to the Trustee a supplemental indenture substantially in the form of Exhibit C pursuant to which such Subsidiary will Guarantee payment of the Securities. Each Note Guarantee will be limited to an amount not to exceed the maximum amount that can be Guaranteed by that Note Guarantor without rendering the Note Guarantee, as it relates to such Note Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer, or similar laws affecting the rights of creditors generally. SECTION 4.12 Limitation on Lines of Business. The Parent will not, and will not permit any Restricted Subsidiary to, engage in any business other than a Permitted Business. At any time that it is not Guaranteeing payment of the Securities (which shall be effected by executing and delivering to the Trustee a supplemental indenture in the form set forth in this Indenture), (i) Caymex Transportation, Inc. will not engage in any business or activity other than the ownership of the Capital Stock of foreign subsidiaries and activities incidental thereto, (ii) SCC Holdings LLC, will not engage in any business or activity other than the ownership of the Capital Stock of Southern Capital LLC and activities incidental thereto, (iii) TransFin Insurance Ltd. will not engage in any business or activity other than the insurance business and activities incidental thereto, and (iv) The Kansas City Northern Railway Company and Veals, Inc. will not conduct any material business or activity. SECTION 4.13 Limitation on Liens. The Parent will not, and will not permit any Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any Lien of any nature whatsoever on any of its property or assets (including Capital Stock of a Restricted Subsidiary), whether owned at the Closing Date or thereafter acquired, other than Permitted Liens, without effectively providing that the Securities shall be secured equally and ratably with (or prior to) the obligations so secured for so long as such obligations are so secured; provided, however, that the Parent and any Restricted Subsidiary may Incur other Liens to secure Indebtedness as long as the amount of outstanding Indebtedness secured by Liens Incurred pursuant to this proviso does not exceed 5% of Consolidated Net Tangible Assets, as determined based on the consolidated balance sheet of the Parent as of the end of the most recent fiscal quarter ending at least 45 days prior thereto. SECTION 4.14 Limitation on Sale/Leaseback Transactions. The Parent will not, and will not permit any Restricted Subsidiary to, enter into any Sale/Leaseback Transaction with respect to any property unless: (a) the Parent or such Restricted Subsidiary would be entitled to: (i) Incur Indebtedness in an amount equal to the Attributable Debt with respect to such Sale/Leaseback Transaction pursuant to Section 4.03; and (ii) create a Lien on such property securing such Attributable Debt without equally and ratably securing the Securities pursuant to Section 4.13; (b) the net proceeds received by the Parent or such Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at least equal to the Fair Market Value of such property; and (c) the transfer of such property is permitted by, and the Parent applies the proceeds of such transaction in compliance with, Section 4.06. SECTION 4.15 Covenant Suspension. During any period of time that (a) the Securities have an Investment Grade Rating from both Rating Agencies and (b) no Default or Event of Default has occurred and is continuing under this Indenture, the Parent and the Restricted Subsidiaries will not be subject to the following provisions of the Indenture: Sections 4.03, 4.04, 4.05, 4.06, 4.07 and 4.12 (collectively, the "Suspended Covenants"). In the event that the Parent and the Restricted Subsidiaries are not subject to the Suspended Covenants for any period of time as a result of the preceding sentence and, subsequently, one or both of the Rating Agencies withdraws its ratings or downgrades the ratings assigned to the Securities below the required Investment Grade Ratings or a Default or Event of Default (other than as a result of any breach of the Suspended Covenants) occurs and is continuing, then the Parent and the Restricted Subsidiaries will thereafter again be subject to the Suspended Covenants and compliance with the Suspended Covenants with respect to Restricted Payments made after the time of such withdrawal, downgrade, Default or Event of Default will be calculated in accordance with the terms of Section 4.04 as though, for purposes of determining whether new Restricted Payments can be made after such time, such covenant had been in effect during the entire period of time from the Issue Date. The Parent shall provide prompt written notice to the Trustee of any changes in the ratings of the Securities by the Ratings Agencies. The Trustee shall not be required to notify the Holders of any such changes. ARTICLE 5 Successor Company SECTION 5.01 When Company May Merge or Transfer Assets. (a) The Company will not consolidate with or merge with or into, or convey, transfer or lease all or substantially all its assets to, any Person, unless: (i) the resulting, surviving or transferee Person (the "Successor Company") shall be a corporation organized and existing under the laws of the United States of America, any state thereof or the District of Columbia and the Successor Company (if not the Company) shall expressly assume, by a supplemental indenture hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Securities and this Indenture; (ii) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Company, the Parent or any Restricted Subsidiary as a result of such transaction as having been Incurred by the Successor Company, the Parent or such Restricted Subsidiary at the time of such transaction), no Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction, the Parent would be able to Incur an additional $1.00 of Indebtedness pursuant to Section 4.03(a); (iv) immediately after giving effect to such transaction, the Successor Company will have Consolidated Net Worth in an amount which is not less than the Consolidated Net Worth of the Parent immediately prior to such transaction; (v) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with this Indenture; and (vi) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such transaction and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred. The Successor Company will succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture, but the predecessor Company in the case of a conveyance, transfer or lease of all or substantially all its assets shall not be released from the obligation to pay the principal of and interest on the Securities. (b) The Note Guarantors will not consolidate with or merge with or into, or convey, transfer or lease all or substantially all of its assets to any Person unless: (i) the resulting, surviving or transferee Person (the "Successor Guarantor") will be a corporation organized and existing under the laws of the United States of America, any state thereof or the District of Columbia, and such Person (if not such Note Guarantor) will expressly assume, by a supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of such Note Guarantor under its Note Guarantee; (ii) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Guarantor or any Restricted Subsidiary as a result of such transaction as having been Incurred by the Successor Guarantor or such Restricted Subsidiary at the time of such transaction), no Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction, the Parent or the Successor Guarantor, as applicable, would be able to Incur an additional $1.00 of Indebtedness under Section 4.03(a); (iv) immediately after giving effect to such transaction, the Parent and the Restricted Subsidiaries will have Consolidated Net Worth in an amount which is not less than the Consolidated Net Worth of the Parent and the Restricted Subsidiaries immediately prior to such transaction; (v) the Parent shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with this Indenture; and (vi) the Parent shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such transaction and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such transaction had not occurred. (c) Notwithstanding the foregoing, (i) any Restricted Subsidiary may consolidate with, merge into or transfer all or part of its properties and assets to the Company or any Note Guarantor; and (ii) the Parent or the Company may merge with an Affiliate incorporated solely for the purpose of reincorporating the Parent or the Company, as the case may be, in another jurisdiction to realize tax or other benefits. ARTICLE 6 Defaults and Remedies SECTION 6.01 Events of Default. An "Event of Default" occurs if: (a) the Company defaults in any payment of interest on any Security when the same becomes due and payable or in any payment of liquidated damages, and such default continues for a period of 30 days; (b) the Company defaults in the payment of the principal of any Security when the same becomes due and payable at its Stated Maturity, upon required redemption or repurchase, upon declaration or otherwise; (c) the Parent or any of its Subsidiaries fails to comply with Section 5.01; (d) the Parent or any of its Subsidiaries fails to comply with Section 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.11, 4.12, 4.13 or 4.14 (other than a failure to purchase Securities when required under Section 4.06 or 4.08) and such failure continues for 30 days after the notice specified below; (e) the Parent or any of its Subsidiaries fails to comply with any of its agreements in the Securities or this Indenture (other than those referred to in (a), (b), (c) or (d) above) and such failure continues for 60 days after the notice specified below; (f) Indebtedness of the Parent or any of its Subsidiaries is not paid within any applicable grace period after final maturity or the acceleration by the holders thereof because of a default and the total amount of such Indebtedness unpaid or accelerated exceeds $20.0 million or its foreign currency equivalent at the time and such failure continues for 10 days after the notice specified below; (g) the Parent, the Company or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (i) commences a voluntary case; (ii) consents to the entry of an order for relief against it in an involuntary case; (iii) consents to the appointment of a Custodian of it or for any substantial part of its property; or (iv) makes a general assignment for the benefit of its creditors; or takes any comparable action under any foreign laws relating to insolvency; (h) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Parent, the Company or any Significant Subsidiary in an involuntary case; (ii) appoints a Custodian of the Parent, the Company or any Significant Subsidiary or for any substantial part of its property; or (iii) orders the winding up or liquidation of the Parent, the Company or any Significant Subsidiary; or any similar relief is granted under any foreign laws and the order or decree remains unstayed and in effect for 60 days; (i) any judgment or decree for the payment of money in excess of $ 10.0 million or its foreign currency equivalent is entered against the Parent or any of its Subsidiaries and either (i) an enforcement proceeding has been commenced by any creditor upon such judgment or decree or (ii) there is a period of 60 days following the entry of such judgment or decree during which such judgment or decree is not discharged, waived or the execution thereof stayed; or (j) any Note Guarantee ceases to be in full force and effect (except as contemplated by the terms thereof) or any Note Guarantor or Person acting by or on behalf of such Note Guarantor denies or disaffirms such Note Guarantor's obligations under this Indenture or any Note Guarantee and such Default continues for 10 days after receipt of the notice specified below. The foregoing will constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body. The term "Bankruptcy Law" means Title 11, United States Code, or any similar federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. A default under clauses (d), (e) or (f) will not constitute an Event of Default until the Trustee notifies the Company, or the Holders of at least 25% in principal amount of the outstanding Securities notify the Company and the Trustee of the Default and the Company or the Note Guarantor, as applicable, does not cure such Default within the time specified in clauses (d), (e) or (f) hereof after receipt of such notice. Such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default". The Company shall deliver to the Trustee, within 30 days after the occurrence thereof, written notice in the form of an Officers' Certificate of any event which is, or with the giving of notice or the lapse of time or both would become, an Event of Default, its status and what action the Company is taking or proposes to take with respect thereto. SECTION 6.02 Acceleration. If an Event of Default (other than an Event of Default specified in Section 6.01(g) or (h) with respect to the Parent or the Company) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the outstanding Securities, by notice to the Company, may declare the principal of and accrued but unpaid interest on all the Securities to be due and payable. Upon such a declaration, such principal and interest will be due and payable immediately. If an Event of Default specified in Section 6.01(g) or (h) with respect to the Parent or the Company occurs, the principal of and interest on all the Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holders. The Holders of a majority in principal amount of the outstanding Securities by notice to the Trustee may rescind any such acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of acceleration. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 6.03 Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative. SECTION 6.04 Waiver of Past Defaults. The Holders of a majority in principal amount of the Securities by notice to the Trustee may waive an existing Default and its consequences except (a) a Default in the payment of the principal of or interest on a Security, (b) a Default arising from the failure to redeem or purchase any Security when required pursuant to the terms of this Indenture or (c) a Default in respect of a provision that under Section 9.02 cannot be amended without the consent of each Holder affected. When a Default is waived, it is deemed cured, but no such waiver shall extend to any subsequent or other Default or impair any consequent right. SECTION 6.05 Control by Majority. The Holders of a majority in principal amount of the Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture or, subject to Section 7.01, that the Trustee determines is unduly prejudicial to the rights of other Holders or would involve the Trustee in personal liability; provided, however, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. Prior to taking any action hereunder, the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. SECTION 6.06 Limitation on Suits. (a) Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no Holder may pursue any remedy with respect to this Indenture or the Securities unless: (i) the Holder gives to the Trustee written notice stating that an Event of Default is continuing; (ii) the Holders of at least 25% in principal amount of the Securities make a written request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer to the Trustee security or indemnity satisfactory to it in its reasonable discretion against any loss, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of security or indemnity; and (v) the Holders of a majority in principal amount of the Securities do not give the Trustee a direction inconsistent with the request during such 60-day period. (b) A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. SECTION 6.07 Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder to receive payment of principal of and liquidated damages and interest on the Securities held by such Holder, on or after the respective due dates expressed or provided for in the Securities, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.08 Collection Suit by Trustee. If an Event of Default specified in Section 6.01 (a) or (b) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company or any other obligor on the Securities for the whole amount then due and owing (together with interest on overdue principal and (to the extent lawful) on any unpaid interest at the rate provided for in the Securities) and the amounts provided for in Section 7.07. SECTION 6.09 Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Holders allowed in any judicial proceedings relative to the Company, any Subsidiary or Note Guarantor, their creditors or their property and, unless prohibited by law or applicable regulations, may vote on behalf of the Holders in any election of a trustee in bankruptcy or other Person performing similar functions, and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and its counsel, and any other amounts due the Trustee under Section 7.07. SECTION 6.10 Priorities. If the Trustee collects any money or property pursuant to this Article 6, it shall pay out the money or property in the following order: FIRST: to the Trustee for amounts due under Section 7.07; SECOND: to Holders for amounts due and unpaid on the Securities for principal and interest, ratably, and any liquidated damages without preference or priority of any kind, according to the amounts due and payable on the Securities for principal, interest and any liquidated damages, respectively; and THIRD: to the Company. The Trustee may fix a record date and payment date for any payment to Holders pursuant to this Section. At least 15 days before such record date, the Trustee shall mail to each Holder and the Company a notice that states the record date, the payment date and the amount to be paid. SECTION 6.11 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of more than 10% in principal amount of the Securities. SECTION 6.12 Waiver of Stay or Extension Laws. Neither the Company nor any Note Guarantor (to the extent it may lawfully do so) shall at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company and each Note Guarantor (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE 7 Trustee SECTION 7.01 Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05; and (iv) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. (f) Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (g) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section and to the provisions of the TIA. SECTION 7.02 Rights of Trustee. (a) In the absence of bad faith, the Trustee may conclusively rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on the Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers; provided, however, that the Trustee's conduct does not constitute willful misconduct or negligence. (e) The Trustee may consult with counsel of its selection, and the advice or opinion of counsel with respect to legal matters relating to this Indenture and the Securities shall be full and complete authorization and protection from liability in respect of any action taken, omitted or suffered by it hereunder in good faith and in accordance with the advice or opinion of such counsel. (f) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, note or other paper or document unless requested in writing to do so by the Holders of not less than a majority in principal amount of the Securities at the time outstanding, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney. (g) The rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder and each agent, custodian and other Person employed to act hereunder. (h) The Trustee may request that the Company deliver an Officers' Certificate setting forth the names of individuals and/or titles of officers authorized at such time to take specified actions pursuant to this Indenture. SECTION 7.03 Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. Any Paying Agent or Registrar may do the same with like rights. However, the Trustee must comply with Sections 7.10 and 7.11. SECTION 7.04 Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture, any Note Guarantee or the Securities, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement of the Company or any Note Guarantor in this Indenture or in any document issued in connection with the sale of the Securities or in the Securities other than the Trustee's certificate of authentication. Delivery of reports, information and documents to the Trustee under Article 4 is for informational purposes only and the Trustee's receipt of the foregoing shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of their covenants hereunder (as to which the Trustee is entitled to rely conclusively on Officers' Certificates). Except with respect to Sections 4.01, 4.02 and 4.09, the Trustee shall have no duty to inquire as to the performance of the Company with respect to the covenants contained in Article Four. The Trustee shall not be charged with knowledge of any Default or Event of Default under Section 6.01(c), (d), (e), (f), (i) or (j) or of the identity of any Significant Subsidiary unless either (a) a Trust Officer shall have actual knowledge thereof or (b) the Trustee shall have received notice thereof in accordance with Section 11.02 hereof from the Company, any Note Guarantor or any Holder. SECTION 7.05 Notice of Defaults. If a Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Holder notice of the Default within the earlier of 90 days after it occurs or 30 days after it is known to a Trust Officer. Except in the case of a Default in payment of principal of or interest on any Security (including payments pursuant to the mandatory redemption provisions of such Security), the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Holders. SECTION 7.06 Reports by Trustee to Holders. As promptly as practicable after each May 15 beginning with the May 15 following the Issue Date, and in any event prior to July 15 in each year, the Trustee shall mail to each Holder a brief report dated as of such May 15 that complies with Section 313(a) of the TIA if and to the extent required thereby. The Trustee shall also comply with Section 313(b) of the TIA. A copy of each report at the time of its mailing to Holders shall be filed with the SEC and each stock exchange (if any) on which the Securities are listed. The Company agrees to promptly notify the Trustee whenever the Securities become listed on any stock exchange and of any delisting thereof. SECTION 7.07 Compensation and Indemnity. The Company shall pay to the Trustee from time to time such compensation as the Company and the Trustee shall from time to time agree in writing for its services. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred or made by it, including costs of collection, in addition to the compensation for its services. Such expenses shall include the reasonable compensation and expenses, disbursements and advances of the Trustee's agents, counsel, accountants and experts. The Company and each Note Guarantor, jointly and severally, shall indemnify the Trustee against any and all loss, liability, damage, claim or expense (including reasonable attorneys' fees and expenses) incurred by or in connection with the acceptance or administration of this trust and the performance of its duties hereunder. The Trustee shall notify the Company of any claim for which it may seek indemnity promptly upon obtaining actual knowledge thereof; provided, however, that any failure to so notify the Company shall not relieve the Company or any Note Guarantor of its indemnity obligations hereunder. The Company shall defend the claim and the indemnified party shall provide reasonable cooperation at the Company's expense in the defense. Such indemnified parties may have separate counsel and the Company and the Note Guarantors, as applicable, shall pay the fees and expenses of such counsel; provided, however, that the Company shall not be required to pay such fees and expenses if it assumes such indemnified parties' defense and, in such indemnified parties' reasonable judgment, there is no conflict of interest between the Company and the Note Guarantors, as applicable, and such parties in connection with such defense. The Company need not reimburse any expense or indemnify against any loss, liability or expense incurred by an indemnified party through such party's own willful misconduct, negligence or bad faith. To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee other than money or property held in trust to pay principal of and interest and liquidated damages, if any, on particular Securities. The Company's payment obligations pursuant to this Section shall survive the satisfaction or discharge of this Indenture, any rejection or termination of this Indenture under any bankruptcy law or the resignation or removal of the Trustee. Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses after the occurrence of a Default specified in Section 6.01(g) or (h) with respect to the Company, the expenses are intended to constitute expenses of administration under the Bankruptcy Law. SECTION 7.08 Replacement of Trustee. (a) The Trustee may resign at any time by so notifying the Company. The Holders of a majority in principal amount of the Securities may remove the Trustee by so notifying the Trustee and may appoint a successor Trustee. The Company shall remove the Trustee if: (i) the Trustee fails to comply with Section 7.10; (ii) the Trustee is adjudged bankrupt or insolvent; (iii) a receiver or other public officer takes charge of the Trustee or its property; or (iv) the Trustee otherwise becomes incapable of acting. (b) If the Trustee resigns, is removed by the Company or by the Holders of a majority in principal amount of the Securities and such Holders do not reasonably promptly appoint a successor Trustee, or if a vacancy exists in the office of Trustee for any reason (the Trustee in such event being referred to herein as the retiring Trustee), the Company shall promptly appoint a successor Trustee. (c) A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.07. (d) If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee or the Holders of 10% in principal amount of the Securities may, at the expense of the Company, petition any court of competent jurisdiction for the appointment of a successor Trustee. (e) If the Trustee fails to comply with Section 7.10, unless the Trustee's duty to resign is stayed as provided in Section 310(b) of the TIA, any Holder who has been a bona fide holder of a Security for at least six months may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (f) Notwithstanding the replacement of the Trustee pursuant to this Section, the Company's obligations under Section 7.07 shall continue for the benefit of the retiring Trustee. SECTION 7.09 Successor Trustee by Merger. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation or banking association, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee. In case at the time such successor or successors by merger, conversion or consolidation to the Trustee shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor to the Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have. SECTION 7. 10 Eligibility; Disqualification. The Trustee shall at all times satisfy the requirements of Section 310(a) of the TIA. The Trustee shall have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with Section 310(b) of the TIA, subject to its right to apply for a stay of its duty to resign under the penultimate paragraph of Section 310(b) of the TIA; provided, however, that there shall be excluded from the operation of Section 310(b)(1) of the TIA any indenture or indentures under which other securities or certificates of interest or participation in other securities of the Company are outstanding if the requirements for such exclusion set forth in Section 310(b)(1) of the TIA are met. SECTION 7.11 Preferential Collection of Claims Against Company. The Trustee shall comply with Section 311(a) of the TIA, excluding any creditor relationship listed in Section 311(b) of the TIA. A Trustee who has resigned or been removed shall be subject to Section 311(a) of the TIA to the extent indicated. ARTICLE 8 Discharge of Indenture; Defeasance SECTION 8.01 Discharge of Liability on Securities; Defeasance. (a) When (i) all outstanding Securities (other than Securities replaced or paid pursuant to Section 2.08) have been cancelled or delivered to the Trustee for cancellation or (ii) all outstanding Securities have become due and payable, whether at maturity or as a result of the mailing of a notice of redemption pursuant to Article 3 hereof, and the Company irrevocably deposits with the Trustee funds in an amount sufficient, or U.S. Government Obligations, the principal of and interest on which will be sufficient, or a combination thereof sufficient, in the written opinion of a nationally recognized firm of independent public accountants delivered to the Trustee (which delivery shall only be required if U.S. Government Obligations have been so deposited), to pay the principal of and interest and liquidated damages, if any, on the outstanding Securities when due at maturity or upon redemption of such Securities, including interest thereon to maturity or such redemption date (other than Securities replaced or paid pursuant to Section 2.08) and liquidated damages, if any, and if in either case the Company pays all other sums payable hereunder by the Company, then this Indenture shall, subject to Section 8.01(c), cease to be of further effect. The Trustee shall acknowledge satisfaction and discharge of this Indenture on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Company. (b) Subject to Sections 8.01(c) and 8.02, the Parent and the Company at any time may terminate (i) all of their obligations under the Securities and this Indenture ("legal defeasance option") or (ii) their obligations under Sections 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.11, 4.12, 4.13, and 4.14 and the operation of Sections 5.01(a)(iii), 5.01(a)(iv), 6.01 (d), 6.01 (f), 6.01 (g) (with respect to Significant Subsidiaries of the Parent only), 6.01(h) (with respect to Significant Subsidiaries of the Parent only) and 6.01(i) ("covenant defeasance option"). The Parent and the Company may exercise their legal defeasance option notwithstanding their prior exercise of their covenant defeasance option. In the event that the Parent and the Company terminate all of their obligations under the Securities and this Indenture by exercising their legal defeasance option, the obligations under the Note Guarantees shall each be terminated simultaneously with the termination of such obligations. If the Parent and the Company exercise their legal defeasance option, payment of the Securities may not be accelerated because of an Event of Default. If the Parent and the Company exercise their covenant defeasance option, payment of the Securities may not be accelerated because of an Event of Default specified in Section 6.01(d), 6.01(f), 6.01(g) (with respect to Significant Subsidiaries only), 6.01(h) (with respect only to Significant Subsidiaries) or 6.01(i) or because of the failure of the Company to comply with clauses (iii) and (iv) of Section 5.01(a). Upon satisfaction of the conditions set forth herein and upon request of the Company, the Trustee shall acknowledge in writing the discharge of those obligations that the Company terminates. (c) Notwithstanding clauses (a) and (b) above, the Company's obligations in Sections 2.04, 2.05, 2.06, 2.07, 2.08, 2.09, 7.07 and 7.08 and in this Article 8 shall survive until the Securities have been paid in full. Thereafter, the Company's obligations in Sections 7.07, 8.05 and 8.06 shall survive. SECTION 8.02 Conditions to Defeasance. (a) The Parent and the Company may exercise their legal defeasance option or their covenant defeasance option only if: (i) the Parent and the Company irrevocably deposit in trust with the Trustee money in an amount sufficient, or U.S. Government Obligations, the principal of and interest on which will be sufficient, or a combination thereof sufficient, to pay the principal of, and premium (if any), interest and liquidated damages (if any) on, the Securities when due at maturity or redemption, as the case may be, including interest thereon to maturity or such redemption date; (ii) the Parent and the Company deliver to the Trustee a certificate from a nationally recognized firm of independent accountants expressing their opinion that the payments of principal and interest when due and without reinvestment on the deposited U.S. Government Obligations plus any deposited money without investment will provide cash at such times and in such amounts as will be sufficient to pay principal, premium, if any, interest and liquidated damages, if any, when due on all the Securities to maturity or redemption, as the case may be; (iii) 123 days pass after the deposit is made and during the 123-day period no Default specified in Section 6.01(g) or (h) with respect to the Company occurs which is continuing at the end of the period; (iv) the deposit does not constitute a default under any other agreement binding on the Company; (v) the Parent and the Company deliver to the Trustee an Opinion of Counsel to the effect that the trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940; (vi) in the case of the legal defeasance option, the Parent and the Company shall have delivered to the Trustee an Opinion of Counsel stating that (1) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (2) since the date of this Indenture there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred; (vii) in the case of the covenant defeasance option, the Parent and the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred; and (viii) the Parent and the Company deliver to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance and discharge of the Securities as contemplated by this Article 8 have been complied with. (b) Before or after a deposit, the Company may make arrangements satisfactory to the Trustee for the redemption of Securities at a future date in accordance with Article 3. SECTION 8.03 Application of Trust Money. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to this Article 8. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal of and interest and liquidated damages, if any, on the Securities. SECTION 8.04 Repayment to Company. The Trustee and the Paying Agent shall promptly turn over to the Company upon request any money or U.S. Government Obligations held by it as provided in this Article which, in the written opinion of a nationally recognized firm of independent public accountants delivered to the Trustee (which delivery shall only be required if U.S. Government Obligations have been so deposited), are in excess of the amount thereof which would then be required to be deposited to effect an equivalent discharge or defeasance in accordance with this Article. Subject to any applicable abandoned property law, the Trustee and the Paying Agent shall pay to the Company upon written request any money held by them for the payment of principal, interest or liquidated damages that remains unclaimed for two years, and, thereafter, Holders entitled to the money must look to the Company for payment as general creditors, and the Trustee and the Paying Agent shall have no further liability with respect to such monies. SECTION 8.05 Indemnity for Government Obligations. The Company shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed against deposited U.S. Government Obligations or the principal and interest received on such U.S. Government Obligations. SECTION 8.06 Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Article 8 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article 8 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article 8; provided, however, that, if the Company has made any payment of principal of or interest or liquidated damages on any Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE 9 Amendments SECTION 9.01 Without Consent of Holders. (a) The Company, the Note Guarantors and the Trustee may amend this Indenture or the Securities without notice to or consent of any Holder: (i) to cure any ambiguity, omission, defect or inconsistency; (ii) to comply with Article 5; (iii) to provide for uncertificated Securities in addition to or in place of certificated Securities; provided, however, that the uncertificated Securities are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Securities are described in Section 163(f)(2)(B) of the Code; (iv) to add additional Guarantees with respect to the Securities; (v) to secure the Securities; (vi) to add to the covenants of the Parent and the Restricted Subsidiaries for the benefit of the Holders or to surrender any right or power conferred upon the Parent or the Company; (vii) to make any change that does not adversely affect the rights of any Holder; (viii) to provide for the issuance of the Exchange Securities, Private Exchange Securities or Additional Securities, which shall have terms substantially identical in all material respects to the Original Securities (except that the transfer restrictions contained in the Original Securities shall be modified or eliminated, as appropriate) and which shall be treated, together with any outstanding Original Securities, as a single issue of securities; or (ix) to comply with any requirement of the SEC in connection with the qualification of the Indenture under the TIA. (b) After an amendment under this Section 9.01 becomes effective, the Company shall mail to Holders a notice briefly describing such amendment. The failure to give such notice to all Holders, or any defect therein, shall not impair or affect the validity of an amendment under this Section 9.01. SECTION 9.02 With Consent of Holders. (a) The Company, the Note Guarantors and the Trustee may amend this Indenture or the Securities without notice to any Holder but with the written consent of the Holders of at least a majority in principal amount of the Securities then outstanding (including consents obtained in connection with a tender offer or exchange for the Securities). However, without the consent of each Holder affected, an amendment may not: (i) reduce the amount of Securities whose Holders must consent to an amendment; (ii) reduce the rate of or extend the time for payment of interest or any liquidated damages on any Security; (iii) reduce the principal of or extend the Stated Maturity of any Security; (iv) reduce the premium payable upon the redemption of any Security or change the time at which any Security may be redeemed; (v) make any Security payable in money other than that stated in the Security; (vi) make any change in Section 6.04 or 6.07 or this sentence of Section 9.02; or (vii) modify the Note Guarantees in any manner adverse to the Holders. (b) It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. (c) After an amendment under this Section 9.02 becomes effective, the Company shall mail to Holders a notice briefly describing such amendment. The failure to give such notice to all Holders, or any defect therein, shall not impair or affect the validity of an amendment under this Section 9.02. SECTION 9.03 Compliance with Trust Indenture Act. Every amendment to this Indenture or the Securities shall comply with the TIA as then in effect. SECTION 9.04 Revocation and Effect of Consents and Waivers. (a) A consent to an amendment or a waiver by a Holder of a Security shall bind the Holder and every subsequent Holder of that Security or any portion of the Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent or waiver is not made on the Security. However, any such Holder or subsequent Holder may revoke the consent or waiver as to such Holder's Security or such portion of the Security if the Trustee receives the notice of revocation before the date on which the Trustee receives an Officers' Certificate from the Company certifying that the requisite number of consents have been received. After an amendment or waiver becomes effective, it shall bind every Holder. An amendment or waiver becomes effective upon the (i) receipt by the Company or the Trustee of the requisite number of consents, (ii) satisfaction of conditions to effectiveness as set forth in this Indenture and any indenture supplemental hereto containing such amendment or waiver and (iii) execution of such amendment or waiver (or supplemental indenture) by the Company and the Trustee. (b) The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to give their consent or take any other action described above or required or permitted to be taken pursuant to this Indenture. If a record date is fixed then, notwithstanding the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to give such consent or to revoke any consent previously given or to take any such action, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 120 days after such record date. SECTION 9.05 Notation on or Exchange of Securities. If an amendment changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security regarding the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, in exchange for the Security the Company shall issue and the Trustee shall authenticate a new Security that reflects the changed terms. Failure to make the appropriate notation or to issue a new Security shall not affect the validity of such amendment. SECTION 9.06 Trustee to Sign Amendments. The Trustee shall sign any amendment authorized pursuant to this Article 9 if the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may but need not sign it. In signing such amendment the Trustee shall be entitled to receive indemnity reasonably satisfactory to it and to receive, and (subject to Section 7.01) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that such amendment is authorized or permitted by this Indenture and that such amendment is the legal, valid and binding obligation of the Company and the Note Guarantors enforceable against them in accordance with its terms, subject to customary exceptions, and complies with the provisions hereof (including Section 9.03). SECTION 9.07 Payment for Consent. Neither the Company nor any Affiliate of the Company shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Securities unless such consideration is offered to be paid to all Holders that so consent, waive or agree to amend in the time frame set forth in solicitation documents relating to such consent, waiver or agreement. ARTICLE 10 Note Guarantees SECTION 10.01 Note Guarantees. (a) Each Note Guarantor hereby jointly and severally irrevocably and unconditionally guarantees, as a primary obligor and not merely as a surety, to each Holder and to the Trustee and its successors and assigns (i) the full and punctual payment when due, whether at Stated Maturity, by acceleration, by redemption or otherwise, of all obligations of the Company under this Indenture (including obligations to the Trustee) and the Securities, whether for payment of principal of, interest on or liquidated damages, if any, in respect of the Securities and all other monetary obligations of the Company under this Indenture and the Securities, and (11) the full and punctual performance within applicable grace periods of all other obligations of the Company, whether for fees, expenses, indemnification or otherwise, under this Indenture and the Securities (all the foregoing being hereinafter collectively called the "Guaranteed Obligations"). Each Note Guarantor further agrees that the Guaranteed Obligations may be extended or renewed, in whole or in part, without notice or further assent from each such Note Guarantor, and that each such Note Guarantor shall remain bound under this Article 10 notwithstanding any extension or renewal of any Guaranteed Obligation. (b) Each Note Guarantor waives presentation to, demand of payment from and protest to the Company of any of the Guaranteed Obligations and also waives notice of protest for nonpayment. Each Note Guarantor waives notice of any default under the Securities or the Guaranteed Obligations. The obligations of each Note Guarantor hereunder shall not be affected by: (i) the failure of any Holder or the Trustee to assert any claim or demand or to enforce any right or remedy against the Company or any other Person under this Indenture, the Securities or any other agreement or otherwise; (ii) any extension or renewal thereof; (iii) any rescission, waiver, amendment or modification of any of the terms or provisions of this Indenture, the Securities or any other agreement; (iv) the release of any security held by any Holder or the Trustee for the Guaranteed Obligations or any of them; (v) the failure of any Holder or Trustee to exercise any right or remedy against any other guarantor of the Guaranteed Obligations; or (vi) any change in the ownership of such Note Guarantor, except as provided in Section 10.02(b). (c) Each Note Guarantor hereby waives any right to which it may be entitled to have its obligations hereunder divided among the Note Guarantors, such that such Note Guarantor's obligations would be less than the full amount claimed. Each Note Guarantor hereby waives any right to which it may be entitled to have the assets of the Company first be used and depleted as payment of the Company's or such Note Guarantor's obligations hereunder prior to any amounts being claimed from or paid by such Note Guarantor hereunder. Each Note Guarantor hereby waives any right to which it may be entitled to require that the Company be sued prior to an action being initiated against such Note Guarantor. (d) Each Note Guarantor further agrees that its Note Guarantee herein constitutes a guarantee of payment, performance and compliance when due (and not a guarantee of collection) and waives any right to require that any resort be had by any Holder or the Trustee to any security held for payment of the Guaranteed Obligations. (e) Except as expressly set forth in Sections 8.01(b), 10.02 and 10.06, the obligations of each Note Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense of setoff, counterclaim, recoupment or termination whatsoever or by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of each Note Guarantor herein shall not be discharged or impaired or otherwise affected by the failure of any Holder or the Trustee to assert any claim or demand or to enforce any remedy under this Indenture, the Securities or any other agreement, by any waiver or modification thereof, by any default, failure or delay, willful or otherwise, in the performance of the obligations, or by any other act or thing or omission or delay to do any other act or thing which may or might in any manner or to any extent vary the risk of any Note Guarantor or would otherwise operate as a discharge of any Note Guarantor as a matter of law or equity. (f) Each Note Guarantor agrees that its Note Guarantee shall remain in full force and effect until payment in full of all the Guaranteed Obligations. Each Note Guarantor further agrees that its Note Guarantee herein shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest or liquidated damages, if any, on any Guaranteed Obligation is rescinded or must otherwise be restored by any Holder or the Trustee upon the bankruptcy or reorganization of the Company or otherwise. (g) In furtherance of the foregoing and not in limitation of any other right which any Holder or the Trustee has at law or in equity against any Note Guarantor by virtue hereof, upon the failure of the Company to pay the principal of or interest or liquidated damages, if any, on any Guaranteed Obligation when and as the same shall become due, whether at maturity, by acceleration, by redemption or otherwise, or to perform or comply with any other Guaranteed Obligation, each Note Guarantor hereby promises to and shall, upon receipt of written demand by the Trustee, forthwith pay, or cause to be paid, in cash, to the Holders or the Trustee an amount equal to the sum of (i) the unpaid principal amount of such Guaranteed Obligations, (ii) accrued and unpaid interest on such Guaranteed Obligations (but only to the extent not prohibited by law) and (iii) all other monetary obligations of the Company to the Holders and the Trustee. (h) Each Note Guarantor agrees that it shall not be entitled to any right of subrogation in relation to the Holders in respect of any Guaranteed Obligations guaranteed hereby until payment in full of all Guaranteed Obligations. Each Note Guarantor further agrees that, as between it, on the one hand, and the Holders and the Trustee, on the other hand, (i) the maturity of the Guaranteed Obligations guaranteed hereby may be accelerated as provided in Article 6 for the purposes of any Note Guarantee herein, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Guaranteed Obligations guaranteed hereby, and (ii) in the event of any declaration of acceleration of such Guaranteed Obligations as provided in Article 6, such Guaranteed Obligations (whether or not due and payable) shall forthwith become due and payable by such Note Guarantor for the purposes of this Section 10.01. (i) Each Note Guarantor also agrees to pay any and all costs and expenses (including reasonable attorneys' fees and expenses) incurred by the Trustee or any Holder in enforcing any rights under this Section 10.01. (j) Upon request of the Trustee, each Note Guarantor shall execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purpose of this Indenture. SECTION 10.02 Limitation on Liability. (a) Any term or provision of this Indenture to the contrary notwithstanding, the maximum aggregate amount of the Guaranteed Obligations guaranteed hereunder by any Note Guarantor shall not exceed the maximum amount that can be hereby guaranteed without rendering this Indenture, as it relates to such Note Guarantor, voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. (b) A Note Guarantee as to any Note Guarantor shall terminate and be of no further force or effect and such Note Guarantor shall be deemed to be released from all obligations under this Article 10 upon (i) any release and termination of the Guarantee by such Note Guarantor of the Bank Indebtedness (other than by reason of repayment and satisfaction of all of the Bank Indebtedness), (ii) the merger or consolidation of such Note Guarantor with or into any Person other than the Parent or a Subsidiary or Affiliate of the Parent where such Note Guarantor is not the surviving entity of such consolidation or merger or (iii) the sale by the Parent or the Company or any Subsidiary of the Company (or any pledgee of the Company) of the Capital Stock of such Note Guarantor where, after such sale, such Note Guarantor is no longer a Subsidiary of the Parent; provided, however, that each such merger, consolidation or sale (or, in the case of a sale by such a pledgee, the disposition of the proceeds of such sale) shall comply with Section 4.06 and Section 5.01(b). At the request of the Company, the Trustee shall execute and deliver an appropriate instrument evidencing such release (in the form provided by the Company). SECTION 10.03 Successors and Assigns. This Article 10 shall be binding upon each Note Guarantor and its successors and assigns and shall inure to the benefit of the successors and assigns of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges conferred upon that party in this Indenture and in the Securities shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions of this Indenture. SECTION 10.04 No Waiver. Neither a failure nor a delay on the part of either the Trustee or the Holders in exercising any right, power or privilege under this Article 10 shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The rights, remedies and benefits of the Trustee and the Holders herein expressly specified are cumulative and not exclusive of any other rights, remedies or benefits which either may have under this Article 10 at law, in equity, by statute or otherwise. SECTION 10.05 Modification. No modification, amendment or waiver of any provision of this Article 10, nor the consent to any departure by any Note Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Trustee, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any Note Guarantor in any case shall entitle such Note Guarantor to any other or further notice or demand in the same, similar or other circumstances. SECTION 10.06 Execution of Supplemental Indenture for Future Note Guarantors. Each Subsidiary which is required to become a Note Guarantor pursuant to Section 4.11 shall promptly execute and deliver to the Trustee a supplemental indenture in the form of Exhibit C hereto pursuant to which such Subsidiary shall become a Note Guarantor under this Article 10 and shall guarantee the Guaranteed Obligations. Concurrently with the execution and delivery of such supplemental indenture, the Company shall deliver to the Trustee an Opinion of Counsel and an Officers' Certificate to the effect that such supplemental indenture has been duly authorized, executed and delivered by such Subsidiary and that, subject to the application of bankruptcy, insolvency, moratorium, fraudulent conveyance or transfer and other similar laws relating to creditors' rights generally and to the principles of equity, whether considered in a proceeding at law or in equity, the Note Guarantee of such Note Guarantor is a legal, valid and binding obligation of such Note Guarantor, enforceable against such Note Guarantor in accordance with its terms, and/or to such other effect as the Trustee may reasonably request. SECTION 10.07 Non-Impairment. The failure to endorse a Note Guarantee on any Security shall not affect or impair the validity thereof. ARTICLE 11 Miscellaneous SECTION 11.01 Trust Indenture Act Controls. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by, or with another provision (an "incorporated provision") included in this Indenture by operation of, Sections 310 to 318 of the TIA, inclusive, such imposed duties or incorporated provision shall control. SECTION 11.02 Notices. Any notice or communication shall be in writing and delivered in person or mailed by first-class mail addressed as follows: if to the Company: The Kansas City Southern Railway Company 427 West 12th Street Kansas City, Missouri 64105 Attention of Michael R. Haverty, President if to the Trustee: U.S. Bank National Association 180 East Fifth Street St. Paul, Minnesota 55101 Attention of Corporate Trust Administration The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Holder shall be mailed, first-class mail, to the Holder at the Holder's address as it appears on the registration books of the Registrar and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Holder or any defect therein shall not affect the sufficiency thereof with respect to other Holders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. SECTION 11.03 Communication by Holders with Other Holders. Holders may communicate pursuant to Section 312(b) of the TIA with other Holders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of Section 312(c) of the TIA. SECTION 11.04 Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take or refrain from taking any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate in form reasonably satisfactory to the Trustee stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) an Opinion of Counsel in form reasonably satisfactory to the Trustee stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 11.05 Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture (other than pursuant to Section 4.09) shall include: (a) a statement that the individual making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such individual, such covenant or condition has been complied with. SECTION 11.06 When Securities Disregarded. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Parent, the Company or any Note Guarantor or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Parent, the Company or any Note Guarantor shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which (i) a Trust Officer of the Trustee actually knows are so owned or (ii) as to which the Trustee shall have received notice of ownership in accordance with Section 11.02 hereof shall be so disregarded. Subject to the foregoing, only Securities outstanding at the time shall be considered in any such determination. SECTION 11.07 Rules by Trustee, Paying Agent and Registrar. The Trustee may make reasonable rules for action by, or a meeting of, Holders. The Registrar and the Paying Agent may make reasonable rules for their functions. SECTION 11.08 Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or any other day on which banking institutions are not required by law or regulation to be open in the State of New York. If a payment date is a Legal Holiday, payment shall be made on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. If a regular record date is a Legal Holiday, the record date shall not be affected. SECTION 11.09 GOVERNING LAW. THIS INDENTURE AND THE SECURITIES 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. SECTION 11.10 No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Parent, the Company or any of the Note Guarantors shall not have any liability for any obligations of the Parent, the Company or any of the Note Guarantors under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Holder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Securities. SECTION 11.11 Successors. All agreements of the Company and each Note Guarantor in this Indenture and the Securities shall bind their successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 11.12 Multiple Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. SECTION 11.13 Table of Contents; Headings. The table of contents, cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed as of the date first written above. THE KANSAS CITY SOUTHERN RAILWAY COMPANY By /s/ Paul J. Weyandt -------------------------------------- Name: Paul J. Weyandt Title: Vice President and Treasurer KANSAS CITY SOUTHERN By /s/ Paul J. Weyandt -------------------------------------- Name: Paul J. Weyandt Title: Vice President and Treasurer GATEWAY EASTERN RAILWAY COMPANY By /s/ Paul J. Weyandt -------------------------------------- Name: Paul J. Weyandt Title: Vice President and Treasurer MID-SOUTH MICROWAVE, INC. By /s/ Robert H. Berry -------------------------------------- Name: Robert H. Berry Title: Vice President and Treasurer PABTEX GP, LLC By /s/ Paul J. Weyandt -------------------------------------- Name: Paul J. Weyandt Title: Authorized Representative PABTEX, L.P. By /s/ Paul J. Weyandt -------------------------------------- Name: Paul J. Weyandt Title: Authorized Representative RICE-CARDEN CORPORATION By /s/ Robert H. Berry -------------------------------------- Name: Robert H. Berry Title: Vice President and Treasurer SIS BULK HOLDING, INC. By /s/ Robert H. Berry -------------------------------------- Name: Robert H. Berry Title: Vice President and Treasurer SOUTHERN DEVELOPMENT COMPANY By /s/ Robert H. Berry -------------------------------------- Name: Robert H. Berry Title: Vice President and Treasurer SOUTHERN INDUSTRIAL SERVICES, INC. By /s/ Robert H. Berry -------------------------------------- Name: Robert H. Berry Title: Vice President and Treasurer TRANS-SERVE, INC. By /s/ Robert H. Berry -------------------------------------- Name: Robert H. Berry Title: Vice President and Treasurer U.S. BANK NATIONAL ASSOCIATION, as trustee By /s/ Richard H. Prokosch -------------------------------------- Name: Richard H. Prokosch Title: Vice President APPENDIX A PROVISIONS RELATING TO ORIGINAL SECURITIES, ADDITIONAL SECURITIES, PRIVATE EXCHANGE SECURITIES AND EXCHANGE SECURITIES 1. Definitions 1.1 Definitions For the purposes of this Appendix A the following terms shall have the meanings indicated below: "Applicable Procedures" means, with respect to any transfer or transaction involving a Regulation S Global Security or beneficial interest therein, the rules and procedures of the Depositary for such Global Security, Euroclear and Clearstream, in each case to the extent applicable to such transaction and as in effect from time to time. "Clearstream" means Clearstream Banking, societe anonyme, or any successor securities clearing agency. "Definitive Security" means a certificated Initial Security, Private Exchange Security or Exchange Security (bearing the Restricted Securities Legend if the transfer of such Security is restricted by applicable law) that does not include the Global Securities Legend. "Depositary" means The Depository Trust Company, its nominees and their respective successors. "Euroclear" means the Euroclear Clearance System or any successor securities clearing agency. "Global Securities Legend" means the legend set forth under that caption in Exhibit A to this Indenture. "IAI" means an institutional "accredited investor" as described in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "Initial Purchasers" means Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc., Deutsche Bank Securities Inc., Banc One Capital Markets, Inc. and Scotia Capital (USA) Inc. "Private Exchange" means an offer by the Company, pursuant to the Registration Agreement, to issue and deliver to certain purchasers, in exchange for the Initial Securities held by such purchasers as part of their initial distribution, a like aggregate principal amount of Private Exchange Securities. "Private Exchange Securities" means the Securities of the Company issued in exchange for Initial Securities pursuant to this Indenture in connection with the Private Exchange pursuant to the Registration Agreement. "Purchase Agreement" means (a) the Purchase Agreement dated June 5, 2002 among the Company, the Note Guarantors and the Initial Purchasers and (b) any other similar Purchase Agreement relating to Additional Securities. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Registered Exchange Offer" means the offer by the Company, pursuant to the Registration Agreement, to certain Holders of Initial Securities, to issue and deliver to such Holders, in exchange for their Initial Securities, a like aggregate principal amount of Exchange Securities registered under the Securities Act. "Registration Agreement" means (a) the Registration Rights Agreement dated June 5, 2002 among the Company, the Note Guarantors and the Initial Purchasers and (b) any other similar Registration Rights Agreement relating to Additional Securities. "Regulation S" means Regulation S under the Securities Act. "Regulation S Securities" means all Initial Securities offered and sold outside the United States in reliance on Regulation S. "Restricted Period", with respect to any Securities, means the period of 40 consecutive days beginning on and including the later of (a) the day on which such Securities are first offered to persons other than distributors (as defined in Regulation S under the Securities Act) in reliance on Regulation S, notice of which day shall be promptly given by the Company to the Trustee, and (b) the Issue Date with respect to such Securities. "Restricted Securities Legend" means the legend set forth in Section 2.3(e)(i) herein. "Rule 501 " means Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "Rule 144A" means Rule 144A under the Securities Act. "Rule 144A Securities" means all Initial Securities offered and sold to QIBs in reliance on Rule 144A. "Securities Act" means the Securities Act of 1933, as amended. "Securities Custodian" means the custodian with respect to a Global Security (as appointed by the Depositary) or any successor person thereto, who shall initially be the Trustee. "Shelf Registration Statement" means a registration statement filed by the Company in connection with the offer and sale of Initial Securities pursuant to the Registration Agreement. "Transfer Restricted Securities" means Definitive Securities and any other Securities that bear or are required to bear the Restricted Securities Legend. 1.2 Other Definitions Term: Defined in Section: "Agent Members" ........................................ 2.1(c) "IAI Global Security" .................................. 2.1(b) "Global Security" ...................................... 2.1(b) "Regulation S Global Security" ......................... 2.1(b) "Rule 144A Global Security" ............................ 2.1(b) 2. The Securities 2.1 Form and Dating (a) The Initial Securities. The Initial Securities issued on the date hereof will be (i) offered and sold by the Company pursuant to the Purchase Agreement and (ii) resold, initially only to (1) QIBs in reliance on Rule 144A and (2) Persons other than U.S. Persons (as defined in Regulation S) in reliance on Regulation S. Such Initial Securities may thereafter be transferred to, among others, QIBs, purchasers in reliance on Regulation S and, except as set forth below, IAIs in accordance with Rule 501. Additional Securities offered after the date hereof may be offered and sold by the Company from time to time pursuant to one or more Purchase Agreements in accordance with applicable law. (b) Global Securities. Rule 144A Securities shall be issued initially in the form of one or more permanent global Securities in definitive, fully registered form (collectively, the "Rule 144A Global Security") and Regulation S Securities shall be issued initially in the form of one or more global Securities (collectively, the "Regulation S Global Security"), in each case without interest coupons and bearing the Global Securities Legend and Restricted Securities Legend, which shall be deposited on behalf of the purchasers of the Securities represented thereby with the Securities Custodian, and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as provided in this Indenture. One or more global securities in definitive, fully registered form without interest coupons and bearing the Global Securities Legend and the Restricted Securities Legend (collectively, the "IAI Global Security") shall also be issued on the Closing Date, deposited with the Securities Custodian, and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as provided in this Indenture to accommnodate transfers of beneficial interests in the Securities to IAIs subsequent to the initial distribution. Beneficial ownership interests in the Regulation S Global Security shall not be exchangeable for interests in the Rule 144A Global Security, the IAI Global Security or any other Security without a Restricted Securities Legend until the expiration of the Restricted Period. The Rule 144A Global Security, the IAI Global Security and the Regulation S Global Security are each referred to herein as a "Global Security" and are collectively referred to herein as "Global Securities", provided that the term "Global Security" when used in Sections 2.1(b), 2.1(c), 2.3(g)(i), 2.3(h)(i) and 2.4 shall also include any Security in global form issued in connection with a Registered Exchange Offer or Private Exchange. The aggregate principal amount of the Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee and on the schedules thereto as hereinafter provided. (c) Book-Entry Provisions. This Section 2.1(c) shall apply only to a Global Security deposited with or on behalf of the Depositary. The Company shall execute and the Trustee shall, in accordance with this Section 2.1(c) and Section 2.2 and pursuant to an order of the Company signed by two Officers, authenticate and deliver initially one or more Global Securities that (i) shall be registered in the name of the Depositary for such Global Security or Global Securities or the nominee of such Depositary and (ii) shall be delivered by the Trustee to such Depositary or pursuant to such Depositary's instructions or held by the Trustee as Securities Custodian. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depositary or by the Trustee as Securities Custodian or under such Global Security, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices of such Depositary governing the exercise of the rights of a holder of a beneficial interest in any Global Security. (d) Definitive Securities. Except as provided in Section 2.3 or 2.4, owners of beneficial interests in Global Securities will not be entitled to receive physical delivery of certificated Securities. [2.2 Authentication. The Trustee shall authenticate and make available for delivery upon a written order of the Company signed by two Officers (a) Original Securities for original issue on the date hereof in an aggregate principal amount of $200,000,000, (b) subject to the terms of this Indenture, Additional Securities in an unlimited amount and (c) the (i) Exchange Securities for issue only in a Registered Exchange Offer and (ii) Private Exchange Securities for issue only in the Private Exchange, in the case of each of (i) and (ii) pursuant to the Registration Agreement and for a like principal amount of Initial Securities exchanged pursuant thereto. Such order shall specify the amount of the Securities to be authenticated, the date on which the original issue of Securities is to be authenticated and whether the Securities are to be Initial Securities, Exchange Securities or Private Exchange Securities. The aggregate principal amount of Securities outstanding at any time is unlimited under this Indenture. Notwithstanding anything to the contrary in this Appendix or otherwise in this Indenture, any issuance of Additional Securities after the Closing Date shall be in a principal amount of at least $10,000,000, whether such Additional Securities are of the same or a different series than the Original Securities. 2.3 Transfer and Exchange. (a) Transfer and Exchange of Definitive Securities. When Definitive Securities are presented to the Registrar with a request: (i) to register the transfer of such Definitive Securities; or (ii) to exchange such Definitive Securities for an equal principal amount of Definitive Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Definitive Securities surrendered for transfer or exchange: (1) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing; and (2) in the case of Transfer Restricted Securities, are accompanied by the following additional information and documents, as applicable: (A) if such Definitive Securities are being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect (in the form set forth on the reverse side of the Initial Security); or (B) if such Definitive Securities are being transferred to the Company, a certification to that effect (in the form set forth on the reverse side of the Initial Security); or (C) if such Definitive Securities are being transferred pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act or in reliance upon another exemption from the registration requirements of the Securities Act, (x) a certification to that effect (in the form set forth on the reverse side of the Initial Security) and (y) if the Company so requests, an opinion of counsel or other evidence reasonably satisfactory to it as to the compliance with the restrictions set forth in the legend set forth in Section 2.3(e)(i). (b) Restrictions on Transfer of a Definitive Security for a Beneficial Interest in a Global Security. A Definitive Security may not be exchanged for a beneficial interest in a Global Security except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a Definitive Security, duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Registrar, together with: (i) certification (in the form set forth on the reverse side of the Initial Security) that such Definitive Security is being transferred (1) to a QIB in accordance with Rule 144A, (2) to an IAI that has furnished to the Trustee a signed letter substantially in the form of Exhibit D or (3) outside the United States in an offshore transaction within the meaning of Regulation S and in compliance with Rule 904 under the Securities Act; and (ii) written instructions directing the Trustee to make, or to direct the Securities Custodian to make, an adjustment on its books and records with respect to such Global Security to reflect an increase in the aggregate principal amount of the Securities represented by the Global Security, such instructions to contain information regarding the Depositary account to be credited with such increase, then the Trustee shall cancel such Definitive Security and cause, or direct the Securities Custodian to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Securities Custodian, the aggregate principal amount of Securities represented by the Global Security to be increased by the aggregate principal amount of the Definitive Security to be exchanged and shall credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the Global Security equal to the principal amount of the Definitive Security so cancelled. If no Global Securities are then outstanding and the Global Security has not been previously exchanged for certificated securities pursuant to Section 2.4, the Company shall issue and the Trustee shall authenticate, upon written order of the Company in the forrn of an Officers' Certificate, a new Global Security in the appropriate principal amount. (c) Transfer and Exchange of Global Securities. (i) The transfer and exchange of Global Securities or beneficial interests therein shall be effected through the Depositary, in accordance with this Indenture (including applicable restrictions on transfer set forth herein, if any) and the procedures of the Depositary therefor. A transferor of a beneficial interest in a Global Security shall deliver a written order given in accordance with the Depositary's procedures containing information regarding the participant account of the Depositary to be credited with a beneficial interest in such Global Security or another Global Security and such account shall be credited in accordance with such order with a beneficial interest in the applicable Global Security and the account of the Person making the transfer shall be debited by an amount equal to the beneficial interest in the Global Security being transferred. Transfers by an owner of a beneficial interest in the Rule 144A Global Security or the IAI Global Security to a transferee who takes delivery of such interest through the Regulation S Global Security, whether before or after the expiration of the Restricted Period, shall be made only upon receipt by the Trustee of a certification in the form provided on the reverse of the Initial Securities from the transferor to the effect that such transfer is being made in accordance with Regulation S or (if available) Rule 144 under the Securities Act and that, if such transfer is being made prior to the expiration of the Restricted Period, the interest transferred shall be held immediately thereafter through Euroclear or Clearstream. In the case of a transfer of a beneficial interest in either the Regulation S Global Security or the Rule 144A Global Security for an interest in the IAI Global Security, the transferee must furnish a signed letter substantially in the form of Exhibit D to the Trustee. (ii) If the proposed transfer is a transfer of a beneficial interest in one Global Security to a beneficial interest in another Global Security, the Registrar shall cause to be reflected on its books and records the date and an increase in the principal amount of the Global Security to which such interest is being transferred in an amount equal to the principal amount of the interest to be so transferred, and the Registrar shall cause to be reflected on its books and records the date and a corresponding decrease in the principal amount of Global Security from which such interest is being transferred. (iii) Notwithstanding any other provisions of this Appendix (other than the provisions set forth in Section 2.4), a Global Security may not be transferred as a whole except by the Depositary to a nominee of the Depositary, or by a nominee of the Depositary to the Depositary or another nominee of the Depositary, or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (iv) In the event that a Global Security is exchanged for Definitive Securities pursuant to Section 2.4 prior to the consummation of the Registered Exchange Offer or the effectiveness of the Shelf Registration Statement with respect to such Securities, such Securities may be exchanged only in accordance with such procedures as are substantially consistent with the provisions of this Section 2.3 (including the certification requirements set forth on the reverse of the Initial Securities intended to ensure that such transfers comply with Rule 144A, Regulation S or such other applicable exemption from registration under the Securities Act, as the case may be) and such other procedures as may from time to time be adopted by the Company. (d) Restrictions on Transfer of Regulation S Global Security. (i) Prior to the expiration of the Restricted Period, interests in the Regulation S Global Security may only be held through Euroclear or Clearstream. During the Restricted Period, beneficial ownership interests in the Regulation S Global Security may only be sold, pledged or transferred through Euroclear or Clearstream in accordance with the Applicable Procedures and only (1) to the Company, (2) so long as such security is eligible for resale pursuant to Rule 144A, to a person whom the selling holder reasonably believes is a QIB that purchases for its own account or for the account of a QIB to whom notice is given that the resale, pledge or transfer is being made in reliance on Rule 144A, (3) in an offshore transaction in accordance with Regulation S, (4) pursuant to an exemption from registration under the Securities Act provided by Rule 144 (if applicable) under the Securities Act, (5) to an IAI purchasing for its own account, or for the account of such an IAI, in a minimum principal amount of Securities of $250,000 or (6) pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States. Prior to the expiration of the Restricted Period, transfers by an owner of a beneficial interest in the Regulation S Global Security to a transferee who takes delivery of such interest through the Rule 144A Global Security or the IAI Global Security shall be made only in accordance with Applicable Procedures and upon receipt by the Trustee of a written certification from the transferor of the beneficial interest in the form provided on the reverse of the Initial Security to the effect that such transfer is being made to (1) a QIB within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A or (2) an IAI purchasing for its own account, or for the account of such an IAI in a minimum principal amount of Securities of $250,000. Such written certification shall no longer be required after the expiration of the Restricted Period. In the case of a transfer of a beneficial interest in the Regulation S Global Security for an interest in the IAI Global Security, the transferee must furnish a signed letter substantially in the form of Exhibit D to the Trustee. (ii) Upon the expiration of the Restricted Period, beneficial ownership interests in the Regulation S Global Security shall be transferable in accordance with applicable law and the other terms of this Indenture. (e) Legend. (i) Except as permitted by the following paragraphs (ii), (iii) or (iv), each Security certificate evidencing the Global Securities and the Definitive Securities (and all Securities issued in exchange therefor or in substitution thereof) shall bear a legend in substantially the following form (each defined term in the legend being defined as such for purposes of the legend only): THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS NOTE, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE ISSUER OR ANY OF ITS SUBSIDIARIES, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $100,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) UNDER THE SECURITIES ACT AFTER THE ORIGINAL ISSUANCE OF THE NOTES, THE HOLDER MUST TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTION. Each Definitive Security, whether or not an Exchange Note, shall also bear the following legend on the face thereof: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR OF SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE FOREGOING RESTRICTIONS. (ii) Upon any sale or transfer of a Transfer Restricted Security that is a Definitive Security, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a Definitive Security that does not bear the legends set forth above and rescind any restriction on the transfer of such Transfer Restricted Security if the Holder certifies in writing to the Registrar that its request for such exchange was made in reliance on Rule 144 (such certification to be in the form set forth on the reverse of the Initial Security). (iii) After a transfer of any Original or Additional Securities or Private Exchange Securities during the period of the effectiveness of a Shelf Registration Statement with respect to such Original or Additional Securities or Private Exchange Securities, as the case may be, all requirements pertaining to the Restricted Securities Legend on such Original or Additional Securities or such Private Exchange Securities shall cease to apply and the requirements that any such Original or Additional Securities or such Private Exchange Securities be issued in global form shall continue to apply. (iv) Upon the consummation of a Registered Exchange Offer with respect to the Original or Additional Securities pursuant to which Holders of such Original or Additional Securities are offered Exchange Securities in exchange for their Original or Additional Securities, all requirements pertaining to Original or Additional Securities that Original or Additional Securities be issued in global form shall continue to apply, and Exchange Securities in global form without the Restricted Securities Legend shall be available to Holders that exchange such Original or Additional Securities in such Registered Exchange Offer. (v) Upon the consummation of a Private Exchange with respect to the Original or Additional Securities pursuant to which Holders of such Original or Additional Securities are offered Private Exchange Securities in exchange for their Original or Additional Securities, all requirements pertaining to such Original or Additional Securities that Original or Additional Securities be issued in global form shall continue to apply, and Private Exchange Securities in global form with the Restricted Securities Legend shall be available to Holders that exchange such Original or Additional Securities in such Private Exchange. (vi) Upon a sale or transfer after the expiration of the Restricted Period of any Initial Security acquired pursuant to Regulation S, all requirements that such Initial Security bear the Restricted. Securities Legend shall cease to apply and the requirements requiring that any such Initial Security be issued in global form shall continue to apply. (vii) Any Additional Securities sold in a registered offering shall not be required to bear the Restricted Securities Legend. (f) Cancellation or Adjustment of Global Security. At such time as all beneficial interests in a Global Security have either been exchanged for Definitive Securities, transferred, redeemed, repurchased or cancelled, such Global Security shall be returned by the Depositary to the Trustee for cancellation or retained and cancelled by the Trustee. At any time prior to such cancellation, if any beneficial interest in a Global Security is exchanged for Definitive Securities, transferred in exchange for an interest in another Global Security, redeemed, repurchased or cancelled, the principal amount of Securities represented by such Global Security shall be reduced and an adjustment shall be made on the books and records of the Trustee (if it is then the Securities Custodian for such Global Security) with respect to such Global Security, by the Trustee or the Securities Custodian, to reflect such reduction. (g) Obligations with Respect to Transfers and Exchanges of Securities. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate, Definitive Securities and Global Securities at the Registrar's request. (ii) No service charge shall be made for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax, assessments, or similar governmental charge payable in connection therewith (other than any such transfer taxes, assessments or similar governmental charge payable upon exchanges pursuant to Sections 2.07, 3.06, 4.06, 4.08 and 9.05 of this Indenture). (iii) Prior to the due presentation for registration of transfer of any Security, the Company, the Trustee, the Paying Agent or the Registrar may deem and treat the person in whose name a Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and interest on such Security and for all other purposes whatsoever, whether or not such Security is overdue, and none of the Company, the Trustee, the Paying Agent and the Registrar shall be affected by notice to the contrary. (iv) All Securities issued upon any transfer or exchange pursuant to the tenns of this Indenture shall evidence the same debt and shall be entitled to the same benefits under this Indenture as the Securities surrendered upon such transfer or exchange. (h) No Obligation of the Trustee. (i) The Trustee shall have no responsibility or obligation to any beneficial owner of a Global Security, a member of, or a participant in, the Depositary or any other Person with respect to the accuracy of the records of the Depositary or its nominee or of any participant or member thereof, with respect to any ownership interest in the Securities or with respect to the delivery to any participant, member, beneficial owner or other Person (other than the Depositary) of any notice (including any notice of redemption or repurchase) or the payment of any amount, under or with respect to such Securities. All notices and communications to be given to the Holders and all payments to be made to Holders under the Securities shall be given or made only to the registered Holders (which shall be the Depositary or its nominee in the case of a Global Security). The rights of beneficial owners of any Global Security shall be exercised only through the Depositary subject to the applicable rules and procedures of the Depositary. The Trustee may conclusively rely and shall be fully protected in relying upon information furnished by the Depositary with respect to its members, its participants and any beneficial owners. (ii) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among Depositary participants or members or beneficial owners of any Global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. 2.4 Definitive Securities (a) A Global Security deposited with the Depositary or with the Trustee as Securities Custodian pursuant to Section 2.1 or issued in connection with a Registered Exchange Offer or Private Exchange shall be transferred to the beneficial owner thereof in the form of Definitive Securities in an aggregate principal amount equal to the principal amount of such Global Security, in exchange for such Global Security, only if such transfer complies with Section 2.3 and (i) the Depositary notifies the Company that it is unwilling or unable to continue as a Depositary for such Global Security or if at any time the Depositary ceases to be a "clearing agency" registered under the Exchange Act, and a successor depositary is not appointed by the Company within 90 days of such notice or after the Company becomes aware of such cessation, or (ii) an Event of Default has occurred and is continuing or (iii) the Company, in its sole discretion, notifies the Trustee in writing that it elects to cause the issuance of certificated Securities under this Indenture. (b) Any Global Security that is transferable to the beneficial owners thereof pursuant to this Section 2.4 shall be surrendered by the Depositary to the Trustee, to be so transferred, in whole or from time to time in part, without charge, and the Trustee shall authenticate and deliver, upon such transfer of each portion of such Global Security, an equal aggregate principal amount of Definitive Securities of authorized denominations. Any portion of a Global Security transferred pursuant to this Section shall be executed, authenticated and delivered only in denominations of $1,000 and any integral multiple thereof and registered in such names as the Depositary shall direct. Any certificated Initial Security in the form of a Definitive Security delivered in exchange for an interest in the Global Security shall, except as otherwise provided by Section 2.3(e), bear the Restricted Securities Legend. (c) Subject to the provisions of Section 2.4(b), the registered Holder of a Global Security may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities. (d) In the event of the occurrence of any of the events specified in Section 2.4(a)(i), (ii) or (iii), the Company will promptly make available to the Trustee a reasonable supply of Definitive Securities in fully registered form without interest coupons. EXHIBIT A [FORM OF FACE OF INITIAL SECURITY] [Global Securities Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO DTC, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. [Restricted Securities Legend] THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS NOTE, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE ISSUER OR ANY OF ITS SUBSIDIARIES, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES OF LESS THAN $100,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE ISSUER THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION Exh. A-1 PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) UNDER THE SECURITIES ACT AFTER THE ORIGINAL ISSUANCE OF THE NOTES, THE HOLDER MUST TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR OR NON-U.S. PERSON, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE ISSUER SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS PROVISIONS REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTION. Each Definitive Security, whether or not an Exchange Note, shall also bear the following legend on the face thereof: UNLESS TIUS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR OF SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH Exh. A-2 SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE FOREGOING RESTRICTIONS. Exh. A-3 No. $______________ 7 1/2% Senior Note due 2009 CUSIP No._______ THE KANSAS CITY SOUTHERN RAILWAY COMPANY, a Missouri corporation, promises to pay to Cede & Co., or registered assigns, the principal sum [of Dollars] [listed on the Schedule of Increases or Decreases in Global Security attached hereto](1) on June 15, 2009. Interest Payment Dates: June 15 and December 15. Record Dates: June 1 and December 1. Additional provisions of this Security are set forth on the other side of this Security. IN WITNESS WHEREOF, the parties have caused this instrument to be duly executed. The Kansas City Southern Railway Company, By:____________________________________ Name: Title: By:____________________________________ Name: Title: __________ (1) Use the Schedule of Increases and Decreases language if Note is in global form. Exh. A-4 Dated: TRUSTEE'S CERTIFICATE OF AUTHENTICATION U. S. Bank National Association, as Trustee, certifies that this is one of the Securities referred to in the Indenture. By:____________________________________ Authorized Signatory */ If the Security is to be issued in global form, add the Global Securities Legend and the attachment from Exhibit A captioned ["TO BE ATTACHED TO GLOBAL SECURITIES] - SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY". Exh. A-5 [FORM OF REVERSE SIDE OF INITIAL SECURITY] 7 1/2% Senior Note due 2009 1. Interest (a) THE KANSAS CITY SOUTHERN RAILWAY COMPANY, a Missouri corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company shall pay interest semiannually on June 15 and December 15 of each year. Interest on the Securities shall accrue from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from June 12, 2002 until the principal hereof is due. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal at the rate borne by the Securities plus 1% per annum, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. (b) Liquidated Damages. The Holder of this Security is entitled to the benefits of a Registration Rights Agreement, dated as of June 5, 2002, among the Company, Kansas City Southern (the "Parent"), Gateway Eastern Railway Company, Mid-South Microwave, Inc., PABTEX GP, LLC, PABTEX L.P., Rice-Carden Corporation, SIS Bulk Holding, Inc., Southern Development Company, Southern Industrial Services, Inc., and Trans-Serve, Inc. (collectively, including the Parent, the "Note Guarantors") and the Initial Purchasers named therein (the "Registration Agreement"). Capitalized terms used in this paragraph (b) but not defined herein have the meanings assigned to them in the Registration Agreement. If an exchange offer (the "Exchange Offer") registered under the Securities Act is not consummated or a shelf registration statement (the "Shelf Registration Statement") under the Securities Act with respect to resales of the Securities is not declared effective by the Commission, on or before January 8, 2003 in accordance with the terms of the Registration Agreement, the annual interest rate borne by the Security shall be increased by 0.5% from the rate shown above accruing from January 8, 2003, payable in cash semiannually, in arrears, on each Interest Payment Date, commencing June 15, 2003 until the Exchange Offer is consummated or the Shelf Registration Statement is declared effective. The Holder of this Note is entitled to the benefits of such Registration Agreement. All accrued liquidated damages shall be paid to Holders in the same manner as interest payments on the Securities on semi-annual payment dates which correspond to interest payment dates for the Securities. Following the cure of all Registration Defaults, the accrual of liquidated damages shall cease. The Trustee shall have no responsibility with respect to the determination of the amount of any such liquidated damages. For purposes of the foregoing, "Transfer Restricted Securities" means (i) each Initial Security until the date on which such Initial Security has been exchanged for a freely transferable Exchange Security in the Registered Exchange Offer, (ii) each Initial Security or Private Exchange Security until the date on which such Initial Security or Private Exchange Security has been effectively registered under the Securities Act and disposed of in accordance with a Shelf Registration Statement or (iii) each Initial Security or Private Exchange Security until the date on which such Exh. A-6 Initial Security or Private Exchange Security is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. 2. Method of Payment The Company shall pay interest on the Securities (except defaulted interest) to the Persons who are registered Holders at the close of business on the June 1 or December 1 next preceding the interest payment date even if the Securities are cancelled after the record date and on or before the interest payment date. Holders must surrender the Securities to a Paying Agent to collect principal payments. The Company shall pay principal, premium, if any, liquidated damages, if any, and interest in money of the United States of America that at the time of payment is legal tender for payment of public and private debts. Payments in respect of the Securities represented by a Global Security (including principal, premium, if any, liquidated damages, if any, and interest) shall be made by wire transfer of immediately available funds to the accounts specified by The Depository Trust Company or any successor depositary. The Company will make all payments in respect of a certificated Security (including principal, premium, if any, interest and liquidated damages, if any), at the office of the Paying Agent, except that, at the option of the Company, payment of interest or liquidated damages may be made by mailing a check to the registered address of each Holder thereof; PROVIDED, HOWEVER, that payments on the Securities may also be made, in the case of a Holder of at least $1,000,000 aggregate principal amount of Securities, by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States if such Holder elects payment by wire transfer by giving written notice to the Trustee or the Paying Agent to such effect designating such account no later than 30 days immediately preceding the relevant due date for payment (or such other date as the Trustee may accept in its discretion). 3. Paying Agent and Registrar Initially, U.S. Bank National Association, a New York banking corporation (the "Trustee"), will act as Paying Agent and Registrar. The Company may appoint and change any Paying Agent or Registrar without notice. The Parent, the Company or any of the Parent's domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent or Registrar. 4. Indenture The Company issued the Securities under an Indenture dated as of June 12, 2002 (the "Indenture") among the Company, the Note Guarantors and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the date of the Indenture (the "TIA"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. The Securities are subject to all terms and provisions of the Indenture, and Holders (as defined in the Indenture) are referred to the Indenture and the TIA for a statement of such terms and provisions. The Securities are senior unsecured obligations of the Company unlimited in aggregate principal amount at any one time outstanding, subject to the conditions and in compliance with the covenants set forth in the Indenture. This Security is one of the Original Securities referred to in the Indenture. The Exh. A-7 Securities include the Original Securities, the Additional Securities and any Exchange Securities and Private Exchange Securities issued in exchange for Initial Securities pursuant to the Indenture. The Original Securities, the Additional Securities and any Exchange Securities and Private Exchange Securities are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the ability of the Parent, the Company and the Parent's Restricted Subsidiaries to, among other things, make certain Investments and other Restricted Payments, pay dividends and other distributions, incur Indebtedness, enter into consensual restrictions upon the payment of certain dividends and distributions by such Restricted Subsidiaries, issue or sell shares of capital stock of such Restricted Subsidiaries, enter into or permit certain transactions with Affiliates, create or incur Liens and make asset sales. The Indenture also imposes limitations on the ability of the Parent, the Company and each Note Guarantor to consolidate or merge with or into any other Person or convey, transfer or lease all or substantially all its property. To guarantee the due and punctual payment of the principal, interest and liquidated damages, if any, on the Securities and all other amounts payable by the Company under the Indenture and the Securities when and as the same shall be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Securities and the Indenture, the Note Guarantors have, jointly and severally, unconditionally guaranteed the Guaranteed Obligations on a senior basis pursuant to the terms of the Indenture. 5. Optional Redemption Except as set forth in this paragraph, the Company may not redeem the Securities. Prior to June 15, 2005, the Company may, on one or more occasions, redeem up to a maximum of 35% of the original aggregate principal amount of the Securities (calculated giving effect to any issuance of Additional Securities) with the Net Cash Proceeds of one or more Public Equity Offerings (i) by the Company or (ii) by Parent to the extent the Net Cash Proceeds thereof are contributed to the Company or used to purchase Capital Stock (other than Disqualified Stock) of the Company from the Company, at a redemption price equal to 107.5% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, thereon to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest and liquidated damages, if any, due on the relevant interest payment date); provided, however, that after giving effect to any such redemption, at least 65% of the original aggregate principal amount of the Securities remains outstanding. Any such redemption shall be made within 60 days of such Equity Offering and must be made in accordance with the procedures set forth in the Indenture. 6. Sinking Fund The Securities are not subject to any sinking fund. 7. Notice of Redemption Notice of redemption will be mailed by first-class mail at least 30 days but not more than 60 days before the redemption date to each Holder of Securities to be redeemed at his or her registered address. Securities in denominations larger than $1,000 may be redeemed in part but only in whole Exh. A-8 multiples of $1,000. If money sufficient to pay the redemption price of, and accrued and unpaid interest and liquidated damages, if any, on all Securities (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Securities (or such portions thereof) called for redemption. 8. Repurchase of Securities at the Option of Holders upon Change of Control and Asset Dispositions Upon a Change of Control, any Holder of Securities will have the right, subject to certain conditions specified in the Indenture, to cause the Company to repurchase all or any part of the Securities of such Holder at a purchase price equal to 101% of the principal amount of the Securities to be repurchased plus accrued and unpaid interest and liquidated damages, if any, to the date of repurchase (subject to the right of Holders of record on the relevant record date to receive interest due and liquidated damages, if any, on the relevant interest payment date that is on or prior to the date of purchase) as provided in, and subject to the terms of, the Indenture. In accordance with Section 4.06 of the Indenture, the Company will be required to offer to purchase Securities upon the occurrence of certain events. 9. Denominations; Transfer; Exchange The Securities are in registered form without coupons in denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. Upon any transfer or exchange, the Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities selected for redemption (except, in the case of a Security to be redeemed in part, the portion of the Security not to be redeemed) or transfer or exchange any Securities for a period of 15 days prior to the mailing of a notice of redemption of Securities. 10. Persons Deemed Owners Except as provided in paragraph 2 hereof, the registered Holder of this Security may be treated as the owner of it for all purposes. 11. Unclaimed Money If money for the payment principal, interest or liquidated damages, if any, remains unclaimed for two years, the Trustee and the Paying Agent shall pay the money back to the Company at its written request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look to the Company for payment as general creditors and the Trustee and the Paying Agent shall have no further liability with respect to such money. Exh. A-9 12. Discharge and Defeasance Subject to certain conditions, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal of, and interest and liquidated damages, if any, on the Securities to redemption or maturity, as the case may be. 13. Amendment, Waiver Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Securities may be amended without prior notice to any Holder but with the written consent of the Holders of at least a majority in aggregate principal amount of the outstanding Securities and (ii) any default may be waived with the written consent of the Holders of at least a majority in principal amount of the outstanding Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Holder, the Company, the Note Guarantors and the Trustee may amend the Indenture or the Securities (i) to cure any ambiguity, omission, defect or inconsistency; (ii) to comply with Article 5 of the Indenture; (iii) to provide for uncertificated Securities in addition to or in place of certificated Securities; (iv) to add Note Guarantees with respect to the Securities; (v) to secure the Securities; (vi) to add additional covenants or Exh. A-11 to surrender rights and powers conferred on the Company; (vii) to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the TIA; (viii) to make any change that does not adversely affect the rights of any Holder; or (ix) to provide for the issuance of the Exchange Securities, Private Exchange Securities or Additional Securities. 14. Defaults and Remedies If an Event of Default occurs (other than an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company) and is continuing, the Trustee or the Holders of at least 25% in principal amount of the outstanding Securities may declare the principal of, and accrued but unpaid interest on, all the Securities to be due and payable. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company occurs, the principal of, and interest on, all the Securities shall become iminediately due and payable without any declaration or other act on the part of the Trustee or any Holders. Under certain circumstances, the Holders of a majority in principal amount of the outstanding Securities may rescind any such acceleration with respect to the Securities and the consequences of any such acceleration. If an Event of Default occurs and is continuing, the Trustee shall be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the Holders unless such Holders have offered to the Trustee indemnity or security satisfactory to it in its reasonable discretion against any loss, liability or expense and certain other conditions are complied with. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no Holder may pursue any remedy with respect to the Indenture or the Securities unless (i) such Holder has previously given the Trustee notice that an Event of Default is continuing, (ii) Holders of at least 25% in principal amount of the outstanding Securities have requested the Trustee in writing to pursue the remedy, (iii) such Holders have offered the Trustee security or indemnity satisfactory to it in its reasonable discretion Exh. A-10 against any loss, liability or expense, (iv) the Trustee has not complied with such request within 60 days after the receipt of the request and the offer of security or indemnity and (v) the Holders of a majority in principal amount of the outstanding Securities have not given the Trustee a direction inconsistent with such request within such 60-day period. Subject to certain restrictions, the Holders of a majority in principal amount of the outstanding Securities are given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other Holder or that would involve the Trustee in personal liability. Prior to taking any action under the Indenture, the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. 15. Trustee Dealings with the Company Subject to certain limitations imposed by the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 16. No Recourse Against Others A director, officer, employee or stockholder, as such, of the Parent, the Company or any Note Guarantor shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. by accepting a Security, each Holder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 17. Authentication This Security shall not be valid until an authorized signatory of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Security. 18. Abbreviations Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with rights of survivorship and not as tenants in common), CUST (= custodian), and U/G/M/A (= Uniform Gift to Minors Act). 19. Governing Law THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES Exh. A-11 OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. 20. CUSIP Numbers The Company has caused CUSIP numbers to be printed on the Securities and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder of Securities, upon written request and without charge to the Holder, a copy of the Indenture which has in it the text of this Security. Exh. A-12 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to ________________________________________________________________________________ (Print or type assignee's name, address and zip code) ________________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date: ............. Your Signature: .................... Sign exactly as your name appears on the other side of this Security. Exh. A-13 CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER RESTRICTED SECURITIES This certificate relates to $_______ principal amount of Securities held in (check applicable space) ____ book-entry or ____ definitive form by the undersigned. The undersigned (check one box below): [_] has requested the Trustee by written order to deliver in exchange for its beneficial interest in the Global Security held by the Depositary a Security or Securities in definitive, registered form of authorized denominations and an aggregate principal amount equal to its beneficial interest in such Global Security (or the portion thereof indicated above); or [_] has requested the Trustee by written order to exchange or register the transfer of a Security or Securities. In connection with any transfer of any of the Securities evidenced by this certificate occurring prior to the expiration of the period referred to in Rule 144(k) under the Securities Act, the undersigned confirms that such Securities are being transferred in accordance with its terms: CHECK ONE BOX BELOW [_] (1) to the Company; or [_] (2) to the Registrar for registration in the name of the Holder, without transfer; or [_] (3) pursuant to an effective registration statement under the Securities Act of 1933; or [_] (4) inside the United States to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act of 1933) that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that such transfer is being made in reliance on Rule 144A, in each case pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or [_] (5) outside the United States in an offshore transaction within the meaning of Regulation S under the Securities Act in compliance with Rule 904 under the Securities Act of 1933 and such Security shall be held immediately after the transfer through Euroclear or Clearstrearn until the expiration of the Restricted Period (as defined in the Indenture); or [_] (6) to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933) that has furnished to the Trustee a signed letter containing certain representations and agreements; or [_] (7) pursuant to another available exemption from registration provided by Rule 144 under the Securities Act of 1933. Exh. A-14 Unless one of the boxes is checked, the Trustee will refuse to register any of the Securities evidenced by this certificate in the name of any Person other than the registered Holder thereof, provided, however, that if box (5), (6) or (7) is checked, the Trustee may require, prior to registering any such transfer of the Securities, such legal opinions, certifications and other information as the Company has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933. _________________________________ Your Signature Signature Guarantee: Date:_____________________ _________________________________ Signature must be guaranteed by a Signature of Signature participant in a recognized signature Guarantee guaranty medallion program or other signature guarantor acceptable to the Trustee Exh. A-15 TO BE COMPLETED BY PURCHASER IF (4) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated:_____________________ ___________________________________ NOTICE: To be executed by an executive officer Exh. A-16 [TO BE ATTACHED TO GLOBAL SECURITIES] SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY The initial principal amount of this Global Security is $[ ]. The following increases or decreases in this Global Security have been made:
Amount of decrease Amount of increase Principal amount of Signature of Date of Exchange in Principal Amount in Principal Amount this Global Security authorized signatory of this Global of this Global following such of Trustee or Security Security decrease or increase Securities Custodian
Exh. A-17 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.06 (Asset Disposition) or 4.08 (Change of Control) of the Indenture, check the box: Asset Disposition [_] Change of Control [_] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.06 or 4.08 of the Indenture, state the amount ($1,000 or an integral multiple thereof): $_________________ Date:______________________ Your Signature:________________________________ (Sign exactly as your name appears on the other side of the Security) Signature Guarantee:____________________________________________________________ Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee Exh. A-18 EXHIBIT B [FORM OF FACE OF EXCHANGE SECURITY] [Global Securities Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO DTC, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. Exh. B-1 No. $_________ 7 1/2% Senior Note due 2009 CUSIP No.____ THE KANSAS CITY SOUTHERN RAILWAY COMPANY, a Missouri corporation, promises to pay to Cede & Co., or its registered assigns, the principal sum of Dollars listed on the Schedule of Increases or Decreases in Global Security attached hereto on June 15, 2009. Interest Payment Dates: June 15 and December 15. Record Dates: June I and December 1. Additional provisions of this Security are set forth on the other side of this Security. IN WITNESS WHEREOF, the parties have caused this instrument to be duly executed. The Kansas City Southern Railway Company By: ____________________________________ Name: Title: By: ____________________________________ Name: Title: Exh. B-2 Dated: TRUSTEE'S CERTIFICATE OF AUTHENTICATION U. S. Bank National Association, as Trustee, certifies that this is one of the Securities referred to in the Indenture. By:_____________________________ Authorized Signatory */ If the Security is to be issued in global form, add the Global Securities Legend and the attachment from Exhibit A captioned "TO BE ATTACHED TO GLOBAL SECURITIES - SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY". Exh. B-3 [FORM OF REVERSE SIDE OF EXCHANGE SECURITY] 7 1/2% Senior Note due 2009 1. Interest THE KANSAS CITY SOUTHERN RAILWAY COMPANY, a Missouri corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company shall pay interest semiannually on June 15 and December 15 of each year. Interest on the Securities shall accrue from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from June 12, 2002 until the principal hereof is due. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal at the rate borne by the Securities plus 1% per annum, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. 2. Method of Payment The Company shall pay interest on the Securities (except defaulted interest) to the Persons who are registered Holders at the close of business on the June 1 and December 1 next preceding the interest payment date even if the Securities are cancelled after the record date and on or before the interest payment date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company shall pay principal, premium, if any, and interest in money of the United States of America that at the time of payment is legal tender for payment of public and private debts. Payments in respect of the Securities represented by a Global Security (including principal, premium and interest) shall be made by wire transfer of immediately available funds to the accounts specified by The Depository Trust Company or any successor depositary. The Company will make all payments in respect of a certificated Security (including principal, premium, if any, and interest) at the office of the Paying Agent, except that, at the option of the Company, payment of interest may be made by mailing a check to the registered address of each Holder thereof; provided, however, that payments on the Securities may also be made, in the case of a Holder of at least $1,000,000 aggregate principal amount of Securities, by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States if such Holder elects payment by wire transfer by giving written notice to the Trustee or the Paying Agent to such effect designating such account no later than 30 days immediately preceding the relevant due date for payment (or such other date as the Trustee may accept in its discretion). 3. Paying Agent and Registrar Initially, U.S. Bank National Association, a New York banking corporation (the "Trustee"), will act as Paying Agent and Registrar. The Company may appoint and change any Paying Agent or Registrar without notice. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent or Registrar. Exh. B-4 4. Indenture The Company issued the Securities under an Indenture dated as of June 12, 2002 (the "Indenture") among the Company, the Note Guarantors and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the date of the Indenture (the "TIA"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. The Securities are subject to all terms and provisions of the Indenture, and Holders (as defined in the Indenture) are referred to the Indenture and the TIA for a statement of such terms and provisions. The Securities are senior unsecured obligations of the Company unlimited in aggregate principal amount at any one time outstanding, subject to the conditions and in compliance with the covenants set forth in the Indenture. This Security is one of the Exchange Securities referred to in the Indenture. The Securities include the Original Securities, the Additional Securities and any Exchange Securities and Private Exchange Securities issued in exchange for Initial Securities pursuant to the Indenture. The Original Securities, the Additional Securities, Exchange Securities and the Private Exchange Securities are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the ability of the Parent, the Company and the Parent's Restricted Subsidiaries to, among other things, make certain Investments and other Restricted Payments, pay dividends and other distributions, incur Indebtedness, enter into consensual restrictions upon the payment of certain dividends and distributions by such Restricted Subsidiaries, issue or sell shares of capital stock of such Restricted Subsidiaries, enter into or permit certain transactions with Affiliates, create or incur Liens and make Asset Sales. The Indenture also imposes limitations on the ability of the Parent, the Company and each Note Guarantor to consolidate or merge with or into any other Person or convey, transfer or lease all or substantially all of its property. To guarantee the due and punctual payment of the principal and interest, if any, on the Securities and all other amounts payable by the Company under the Indenture and the Securities when and as the same shall be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Securities and the Indenture, the Note Guarantors have, jointly and severally, unconditionally guaranteed the Guaranteed Obligations on a senior basis pursuant to the terms of the Indenture. 5. Optional Redemption Except as set forth in this paragraph, the Company may not redeem the Securities. Prior to June 15, 2005, the Company may, on one or more occasions, redeem up to a maximum of 35% of the original aggregate principal amount of the Securities (calculated giving effect to any issuance of Additional Securities) with the Net Cash Proceeds of one or more Equity Offerings (i) by the Company or (ii) by Parent to the extent the Net Cash Proceeds thereof are contributed to the Company or used to purchase Capital Stock (other than Disqualified Stock) of the Company from the Company, at a redemption price equal to 107.5% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages thereon, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that after giving effect to Exh. B-5 any such redemption, at least 65% of the original aggregate principal amount of the Securities remains outstanding. Any such redemption shall be made within 60 days of such Equity Offering and must be made in accordance with the procedures set forth in the Indenture. 6. Sinking Fund The Securities are not subject to any sinking fund. 7. Notice of Redemption Notice of redemption will be mailed by first-class mail at least 30 days but not more than 60 days before the redemption date to each Holder of Securities to be redeemed at his or her registered address. Securities in denominations larger than $1,000 maybe redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of, and accrued and unpaid interest and liquidated damages, if any, on all Securities (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Securities (or such portions thereof) called for redemption. 8. Repurchase of Securities at the Option of Holders upon Change of Control and Asset Dispositions Upon a Change of Control, any Holder of Securities will have the right, subject to certain conditions specified in the Indenture, to cause the Company to repurchase all or any part of the Securities of such Holder at a purchase price equal to 101% of the principal amount of the Securities to be repurchased plus accrued and unpaid interest and liquidated damages, if any, to the date of repurchase (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date that is on or prior to the date of purchase) as provided in, and subject to the terms of, the Indenture. In accordance with Section 4.06 of the Indenture, the Company will be required to offer to purchase Securities upon the occurrence of certain events. 9. Denominations Transfer; Exchange The Securities are in registered form without coupons in denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. Upon any transfer or exchange, the Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities selected for redemption (except, in the case of a Security to be redeemed in part, the portion of the Security not to be redeemed) or transfer or exchange any Securities for a period of 15 days prior to the mailing of a notice of redemption of Securities or 15 days before an interest payment date. Exh. B-6 10. Persons Deemed Owners Except as provided in paragraph 2 hereof, the registered Holder of this Security may be treated as the owner of it for all purposes. 11. Unclaimed Money If money for the payment of principal or interest remains unclaimed for two years, the Trustee and the Paying Agent shall pay the money back to the Company at its written request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look to the Company for payment as general creditors and the Trustee and the Paying Agent shall have no further liability with respect to such money. 12. Discharge and Defeasance Subject to certain conditions, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal of and interest on, the Securities to redemption or maturity, as the case may be. 13. Amendments, Waiver Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Securities may be amended without prior notice to any Holder but with the written consent of the Holders of at least a majority in aggregate principal amount of the outstanding Securities and (ii) any default may be waived with the written consent of the Holders of at least a majority in principal amount of the outstanding Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Holder, the Company, the Note Guarantors and the Trustee may amend the Indenture or the Securities (i) to cure any ambiguity, omission, defect or inconsistency; (ii) to comply with Article 5 of the Indenture; (iii) to provide for uncertificated Securities in addition to or in place of certificated Securities; (iv) to add Note Guarantees with respect to the Securities; (v) to secure the Securities; (vi) to add additional covenants or to surrender rights and powers conferred on the Company; (vii) to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the TIA; (viii) to make any change that does not adversely affect the rights of any Holder; or (ix) to provide for the issuance of the Exchange Securities, Private Exchange Securities or Additional Securities. 14. Defaults and Remedies If an Event of Default occurs (other than an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company) and is continuing, the Trustee or the Holders of at least 25% in principal amount of the outstanding Securities may declare the principal of, and accrued but unpaid interest on, all the Securities to be due and payable. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company occurs, the principal of, and interest on, all the Securities shall become immediately due and payable without any declaration or other act on the part of the Trustee or any Holders. Under certain circumstances, the Holders of a majority in principal Exh. B-7 amount of the outstanding Securities may rescind any such acceleration with respect to the Securities and the consequences of any such acceleration. If an Event of Default occurs and is continuing, the Trustee shall be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the Holders unless such Holders have offered to the Trustee indemnity or security satisfactory to it in its reasonable discretion against any loss, liability or expense and certain other conditions are complied with. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no Holder may pursue any remedy with respect to the Indenture or the Securities unless (i) such Holder has previously given the Trustee notice that an Event of Default is continuing, (ii) Holders of at least 25% in principal amount of the outstanding Securities have requested the Trustee in writing to pursue the remedy, (iii) such Holders have offered the Trustee security or indemnity satisfactory to it in its reasonable discretion against any loss, liability or expense, (iv) the Trustee has not complied with such request within 60 days after the receipt of the request and the offer of security or indemnity and (v) the Holders of a majority in principal amount of the outstanding Securities have not given the Trustee a direction inconsistent with such request within such 60-day period. Subject to certain restrictions, the Holders of a majority in principal amount of the outstanding Securities are given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other Holder or that would involve the Trustee in personal liability. Prior to taking any action under the Indenture, the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. 15. Trustee Dealings with the Company Subject to certain limitations imposed by the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Parent, the Company or its Affiliates and may otherwise deal with the Parent, the Company or its Affiliates with the same rights it would have if it were not Trustee. 16. No Recourse Against Others A director, officer, employee or stockholder, as such, of the Parent, the Company or any Note Guarantor shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Holder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 17. Authentication This Security shall not be valid until an authorized signatory of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Security. Exh. B-8 18. Abbreviations Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with rights of survivorship and not as tenants in common), CUST (= custodian), and U/G/M/A (= Uniform Gift to Minors Act). 19. Governing Law THIS SECURITY 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. 20. CUSIP Numbers The Company has caused CUSIP numbers to be printed on the Securities and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder of Securities, upon written request and without charge to the Holder, a copy of the Indenture which has in it the text of this Security. Exh. B-9 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to ________________________________________________________________________________ (Print or type assignee's name, address and zip code) ________________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date:___________________ Your Signature:______________________ ________________________________________________________________________________ Sign exactly as your name appears on the other side of this Security. Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee. Exh. B-10 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.06 (Asset Disposition) or 4.08 (Change of Control) of the Indenture, check the box: Asset Disposition [ ] Change of Control [ ] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.06 or 4.08 of the Indenture, state the amount ($1,000 or an integral multiple thereof): $_______________________ Date:____________________ Your Signature:______________________________________ (Sign exactly as your name appears on the other side of the Security) Signature Guarantee:____________________________________________ Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee Exh. B-11 [TO BE ATTACHED TO GLOBAL SECURITIES] SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY The initial principal amount of this Global Security is $[ ]. The following increases or decreases in this Global Security have been made:
Amount of decrease Amount of increase Principal amount of Signature of Date of Exchange in Principal Amount in Principal Amount this Global Security authorized signatory of this Global of this Global following such of Trustee or Security Security decrease or increase Securities Custodian
Exh. B-12 EXHIBIT C FORM OF SUPPLEMENTAL INDENTURE SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") dated as of , among (GUARANTOR] (the "New Guarantor"), a subsidiary of THE KANSAS CITY SOUTHERN RAILWAY COMPANY (or its successor), a Missouri corporation (the "Company"), KANSAS CITY SOUTHERN, GATEWAY EASTERN RAILWAY COMPANY, MID-SOUTH MICROWAVE, INC., PABTEX GP, LLC, PABTEX L.P., RICE-CARDEN CORPORATION, SIS BULK HOLDING INC., SOUTHERN DEVELOPMENT COMPANY, SOUTHERN INDUSTRIAL SERVICES, INC., TRANS-SERVE, INC., [OTHER EXISTING GUARANTORS] and U.S. BANK ASSOCIATION, a New York banking corporation, as trustee under the indenture referred to below (the "Trustee"). WITNESSETH: WHEREAS the Company and [OLD GUARANTORS] (the "Existing Guarantors") have heretofore executed and delivered to the Trustee an Indenture (the "Indenture") dated as of June 15, 2002, providing for the issuance of an unlimited aggregate principal amount of 7 1/2 % Senior Notes due 2009 (the "Securities"), subject to the conditions and in compliance with the covenants set forth in the Indenture; WHEREAS Section 4.11 of the Indenture provides that under certain circumstances the Company is required to cause the New Guarantor to execute and deliver to the Trustee a supplemental indenture pursuant to which the New Guarantor shall unconditionally guarantee all the Company's obligations under the Securities pursuant to a Note Guarantee on the terms and conditions set forth herein; and WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee, the Company and the Existing Guarantors are authorized to execute and deliver this Supplemental Indenture; NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the New Guarantor, the Company, the Existing Guarantors and the Trustee mutually covenant and agree for the equal and ratable benefit of the holders of the Securities as follows: 1. Agreement to Guarantee. The New Guarantor hereby agrees, jointly and severally with all the Existing Guarantors, to unconditionally guarantee the Company's obligations under the Securities on the terms and subject to the conditions set forth in Article 10 of the Indenture and to be bound by all other applicable provisions of the Indenture and Securities. 2. Ratification of Indenture; Supplemental Indentures Part of Indenture. Except as expressly amended hereby, the Indenture is In all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. This 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. Exh. C-1 3. Governing Law. THIS 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. 4. Trustee Makes No Representation. The Trustee makes no representation as to the validity or sufficiency of this Supplemental Indenture. 5. Counterparts. The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 6. Effect of Headings. The Section headings herein are for convenience only and shall not affect the construction hereof. IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed as of the date first above written. [NEW GUARANTOR] By: ________________________________________ Name: Title: THE KANSAS CITY SOUTHERN RAILWAY COMPANY By: ________________________________________ Name: Title: KANSAS CITY SOUTHERN By: ________________________________________ Name: Title: GATEWAY EASTERN RAILWAY COMPANY By: ________________________________________ Name: Title: Exh. C-2 MID-SOUTH MICROWAVE, INC. By: ________________________________________ Name: Title: PABTEX GP, LLC By: ________________________________________ Name: Title: PABTEX L.P. By: ________________________________________ Name: Title: RICE-CARDEN CORPORATION By: ________________________________________ Name: Title: SIS BULK HOLDING, INC. By: ________________________________________ Name: Title: SOUTHERN DEVELOPMENT COMPANY By: ________________________________________ Name: Title: SOUTHERN INDUSTRIAL SERVICES, INC. By: ________________________________________ Name: Title: Exh. C-3 TRANS-SERVE, INC. By: ________________________________________ Name: Title: [OTHER EXISTING GUARANTORS] By: ________________________________________ Name: Title: U.S. BANK NATIONAL ASSOCIATION, as Trustee By: ________________________________________ Name: Title: Exh. C-4 EXHIBIT D Form of Transferee Letter of Representation The Kansas City Southern Railway Company 427 West 12th Street Kansas City, MO 64105 Ladies and Gentlemen: This certificate is delivered to request a transfer of $[ ] principal amount of the 7 1/2% Senior Notes due 2009 (the "Securities") of The Kansas City Southern Railway Company (the "Company"). Upon transfer, the Securities would be registered in the name of the new beneficial owner as follows: Name:___________________________________ Address:________________________________ Taxpayer ID Number:_____________________ The undersigned represents and warrants to you that: 1. We are an institutional "accredited investor" (as defined in Rule 50 1 (a)(1), (2), (3) or (7) under the Securities Act of 1933, as amended (the "Securities Act")), purchasing for our own account or for the account of such an institutional "accredited investor" at least $250,000 principal amount of the Securities, and we are acquiring the Securities not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act. We have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Securities, and we invest in or purchase securities similar to the Securities in the normal course of our business. We, and any accounts for which we are acting, are each able to bear the economic risk of our or its investment. 2. We understand that the Securities have not been registered under the Securities Act and, unless so registered, may not be sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing Securities to offer, sell or otherwise transfer such Securities prior to the date that is two years after the later of the date of original issue and the last date on which the Company or any affiliate of the Company was the owner of such Securities (or any predecessor thereto) (the "Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to a registration statement that has been declared effective under the Securities Act, (c) in a transaction complying with the requirements of Rule Exh. D-1 144A under the Securities Act ("Rule 144A"), to a person we reasonably believe is a qualified institutional buyer under Rule 144A (a "QIB") that is purchasing for its own account or for the account of a QIB and to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the United States within the meaning of Regulation S under the Securities Act, (e) to an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act that is purchasing for its own account or for the account of such an institutional "accredited investor," in each case in a minimum principal amount of Securities of $250,000, or (f) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of our property or the property of such investor account or accounts be at all times within our or their control and in compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Securities is proposed to be made pursuant to clause (e) above prior to the Resale Restriction Termination Date, the transferor shall deliver a letter from the transferee substantially in the form of this letter to the Company and the Trustee, which shall provide, among other things, that the transferee is an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act and that it is acquiring such Securities for investment purposes and not for distribution in violation of the Securities Act. Each purchaser acknowledges that the Company and the Trustee reserve the right prior to the offer, sale or other transfer prior to the Resale Restriction Termination Date of the Securities pursuant to clause (d), (e) or (f) above to require the delivery of an opinion of counsel, certifications or other information satisfactory to the Company and the Trustee. TRANSFEREE:_________________________________ By:_________________________________________ Exh. D-2 EXHIBIT E FORM OF NOTE GUARANTEES [Name of Note Guarantors] (the "Note Guarantors," which term includes any successor Person under the Indenture dated as of June 12, 2002 among The Kansas City Southern Railway Company, as issuer, the Note Guarantors and U.S. Bank National Association, as trustee (the "Indenture")) has unconditionally guaranteed, to the extent set forth in the Indenture and subject to the provisions of the Indenture, the due and punctual payment of the principal of, any premium and interest on the Securities, when and as the same shall become due and payable, whether at maturity, by acceleration, redemption, repayment or otherwise, all in accordance with the terms set forth in Article 10 of the Indenture. Each capitalized term used but not defined herein shall have the meaning ascribed thereto in the Indenture. The obligation of the undersigned to the Holders of the Securities and to the Trustee pursuant to these Note Guarantees and in the Indenture are expressly set forth in the Indenture and reference is hereby made to the Indenture for the precise terms of the Note Guarantees and all of the other provisions of the Indenture to which these Note Guarantees relate. These Note Guarantees shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made or instruments entered into and, in each case, performed in said state. Exh. E-1 IN WITNESS WHEREOF, the Note Guarantors have caused this instrument to be duly executed. By and on Behalf of: [NAME OF NOTE GUARANTORS] By:__________________________________ Name: Title: Exh. E-2 EXHIBIT F Exhibit Describing Indebtedness of the Company Outstanding on the Date of this Indenture
- ----------------------------------------------------------------------------------------------------------------------- Obligor Payee Description Maturity Balance as of 3/31/02 - ----------------------------------------------------------------------------------------------------------------------- The Kansas City Chemical Bank Locomotive Purchase 8/04 $2,772,440 Southern Railway Company - ----------------------------------------------------------------------------------------------------------------------- The Kansas City Southern Railway Chemical Bank Locomotive Purchase 1/03 3,015,079 Company - ----------------------------------------------------------------------------------------------------------------------- The Kansas City Southern Railway JP Morgan Chase Bank Locomotive Purchase 12/06 27,040,970 Company - ----------------------------------------------------------------------------------------------------------------------- The Kansas City Southern Railway Bank of New York Locomotive Purchase 5/03 8,875,001 Company - ----------------------------------------------------------------------------------------------------------------------- The Kansas City Southern Railway Connecticut Bank and Capital Lease/ 6/04 604,879 Company Trust Rolling Stock - ----------------------------------------------------------------------------------------------------------------------- The Kansas City Southern Railway Trinity Industries Capital Lease/ 2/06 406,441 Company Rolling Stock - ----------------------------------------------------------------------------------------------------------------------- The Kansas City Southern Railway Senior Unsecured Senior Unsecured Notes 10/08 200,000,000 Company Notes - ----------------------------------------------------------------------------------------------------------------------- The Kansas City Southern Railway Pitney Bowes Capital Lease/ 9/09 1,916,216 Company Rolling Stock - ----------------------------------------------------------------------------------------------------------------------- The Kansas City Southern Railway State of Illinois Jacksonville 1/06 340,761 Company Rehabilitation Project - ----------------------------------------------------------------------------------------------------------------------- The Kansas City Southern Railway State of Illinois East St. Louis 4/07 188,593 Company Rehabilitation Project - ----------------------------------------------------------------------------------------------------------------------- The Kansas City Southern Railway State of Illinois Roadhouse to 1/07 1,593,537 Company East Louisiana - -----------------------------------------------------------------------------------------------------------------------
Exh. F-1
- ----------------------------------------------------------------------------------------------------------------------- Obligor Payee Description Maturity Balance as of 3/31/02 - ----------------------------------------------------------------------------------------------------------------------- The Kansas City State of Illinois Venice Intermodel 12/09 1,399,477 Southern Railway Facility Company Rehabilitation - ----------------------------------------------------------------------------------------------------------------------- Gateway Eastern State of Illinois Rehabilitation Project 2/18 802,088 Railway Company Wann-Lenox - ----------------------------------------------------------------------------------------------------------------------- Wyandotte Garage Lincoln National Mortgage on 12/12 4,984,271 Corporation Property - ----------------------------------------------------------------------------------------------------------------------- Southern Industrial Industrial Revenue Industrial Revenue 5/04 3,000,000 Services, Inc] Bonds Bonds TranServe, Inc. - ----------------------------------------------------------------------------------------------------------------------- Kansas City Unsecured Notes and Unsecured Notes and 7/02-12/25 1,601,000 Southern Debentures Debentures - ----------------------------------------------------------------------------------------------------------------------- Kansas City Panama Canal Railway Contingent Capital N/A 7,500,000 Southern Company contribution obligation - ----------------------------------------------------------------------------------------------------------------------- Kansas City Panama Canal Railway Guarantee of Notes N/A 2,400,000 Southern Company Related to Purchase of Freight and Passenger Rail Cars - -----------------------------------------------------------------------------------------------------------------------
Exh. F-2 EX-4.2 6 dex42.txt FORM OF FACE OF EXCHANGE SECURITY Exhibit 4.2 [FORM OF FACE OF EXCHANGE SECURITY] [Global Securities Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO DTC, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. No. $_________ 7 1/2% Senior Note due 2009 CUSIP No.____ THE KANSAS CITY SOUTHERN RAILWAY COMPANY, a Missouri corporation, promises to pay to Cede & Co., or its registered assigns, the principal sum of Dollars listed on the Schedule of Increases or Decreases in Global Security attached hereto on June 15, 2009. Interest Payment Dates: June 15 and December 15. Record Dates: June I and December 1. Additional provisions of this Security are set forth on the other side of this Security. IN WITNESS WHEREOF, the parties have caused this instrument to be duly executed. The Kansas City Southern Railway Company By: _________________________________ Name: Title: By: _________________________________ Name: Title: Exh. B-2 Dated: TRUSTEE'S CERTIFICATE OF AUTHENTICATION U. S. Bank National Association, as Trustee, certifies that this is one of the Securities referred to in the Indenture. By: _____________________________ Authorized Signatory */ If the Security is to be issued in global form, add the Global Securities Legend and the attachment from Exhibit A captioned "TO BE ATTACHED TO GLOBAL SECURITIES - SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY". Exh. B-3 [FORM OF REVERSE SIDE OF EXCHANGE SECURITY] 7 1/2% Senior Note due 2009 1. Interest THE KANSAS CITY SOUTHERN RAILWAY COMPANY, a Missouri corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company shall pay interest semiannually on June 15 and December 15 of each year. Interest on the Securities shall accrue from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from June 12, 2002 until the principal hereof is due. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal at the rate borne by the Securities plus 1% per annum, and it shall pay interest on overdue installments of interest at the same rate to the extent lawful. 2. Method of Payment The Company shall pay interest on the Securities (except defaulted interest) to the Persons who are registered Holders at the close of business on the June 1 and December 1 next preceding the interest payment date even if the Securities are cancelled after the record date and on or before the interest payment date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company shall pay principal, premium, if any, and interest in money of the United States of America that at the time of payment is legal tender for payment of public and private debts. Payments in respect of the Securities represented by a Global Security (including principal, premium and interest) shall be made by wire transfer of immediately available funds to the accounts specified by The Depository Trust Company or any successor depositary. The Company will make all payments in respect of a certificated Security (including principal, premium, if any, and interest) at the office of the Paying Agent, except that, at the option of the Company, payment of interest may be made by mailing a check to the registered address of each Holder thereof; provided, however, that payments on the Securities may also be made, in the case of a Holder of at least $1,000,000 aggregate principal amount of Securities, by wire transfer to a U.S. dollar account maintained by the payee with a bank in the United States if such Holder elects payment by wire transfer by giving written notice to the Trustee or the Paying Agent to such effect designating such account no later than 30 days immediately preceding the relevant due date for payment (or such other date as the Trustee may accept in its discretion). 3. Paying Agent and Registrar Initially, U.S. Bank National Association, a New York banking corporation (the "Trustee"), will act as Paying Agent and Registrar. The Company may appoint and change any Paying Agent or Registrar without notice. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent or Registrar. Exh. B-4 4. Indenture The Company issued the Securities under an Indenture dated as of June 12, 2002 (the "Indenture") among the Company, the Note Guarantors and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the date of the Indenture (the "TIA"). Terms defined in the Indenture and not defined herein have the meanings ascribed thereto in the Indenture. The Securities are subject to all terms and provisions of the Indenture, and Holders (as defined in the Indenture) are referred to the Indenture and the TIA for a statement of such terms and provisions. The Securities are senior unsecured obligations of the Company unlimited in aggregate principal amount at any one time outstanding, subject to the conditions and in compliance with the covenants set forth in the Indenture. This Security is one of the Exchange Securities referred to in the Indenture. The Securities include the Original Securities, the Additional Securities and any Exchange Securities and Private Exchange Securities issued in exchange for Initial Securities pursuant to the Indenture. The Original Securities, the Additional Securities, Exchange Securities and the Private Exchange Securities are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the ability of the Parent, the Company and the Parent's Restricted Subsidiaries to, among other things, make certain Investments and other Restricted Payments, pay dividends and other distributions, incur Indebtedness, enter into consensual restrictions upon the payment of certain dividends and distributions by such Restricted Subsidiaries, issue or sell shares of capital stock of such Restricted Subsidiaries, enter into or permit certain transactions with Affiliates, create or incur Liens and make Asset Sales. The Indenture also imposes limitations on the ability of the Parent, the Company and each Note Guarantor to consolidate or merge with or into any other Person or convey, transfer or lease all or substantially all of its property. To guarantee the due and punctual payment of the principal and interest, if any, on the Securities and all other amounts payable by the Company under the Indenture and the Securities when and as the same shall be due and payable, whether at maturity, by acceleration or otherwise, according to the terms of the Securities and the Indenture, the Note Guarantors have, jointly and severally, unconditionally guaranteed the Guaranteed Obligations on a senior basis pursuant to the terms of the Indenture. 5. Optional Redemption Except as set forth in this paragraph, the Company may not redeem the Securities. Prior to June 15, 2005, the Company may, on one or more occasions, redeem up to a maximum of 35% of the original aggregate principal amount of the Securities (calculated giving effect to any issuance of Additional Securities) with the Net Cash Proceeds of one or more Equity Offerings (i) by the Company or (ii) by Parent to the extent the Net Cash Proceeds thereof are contributed to the Company or used to purchase Capital Stock (other than Disqualified Stock) of the Company from the Company, at a redemption price equal to 107.5% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages thereon, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that after giving effect to Exh. B-5 any such redemption, at least 65% of the original aggregate principal amount of the Securities remains outstanding. Any such redemption shall be made within 60 days of such Equity Offering and must be made in accordance with the procedures set forth in the Indenture. 6. Sinking Fund The Securities are not subject to any sinking fund. 7. Notice of Redemption Notice of redemption will be mailed by first-class mail at least 30 days but not more than 60 days before the redemption date to each Holder of Securities to be redeemed at his or her registered address. Securities in denominations larger than $1,000 maybe redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of, and accrued and unpaid interest and liquidated damages, if any, on all Securities (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Securities (or such portions thereof) called for redemption. 8. Repurchase of Securities at the Option of Holders upon Change of Control and Asset Dispositions Upon a Change of Control, any Holder of Securities will have the right, subject to certain conditions specified in the Indenture, to cause the Company to repurchase all or any part of the Securities of such Holder at a purchase price equal to 101% of the principal amount of the Securities to be repurchased plus accrued and unpaid interest and liquidated damages, if any, to the date of repurchase (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date that is on or prior to the date of purchase) as provided in, and subject to the terms of, the Indenture. In accordance with Section 4.06 of the Indenture, the Company will be required to offer to purchase Securities upon the occurrence of certain events. 9. Denominations Transfer; Exchange The Securities are in registered form without coupons in denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Securities in accordance with the Indenture. Upon any transfer or exchange, the Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange any Securities selected for redemption (except, in the case of a Security to be redeemed in part, the portion of the Security not to be redeemed) or transfer or exchange any Securities for a period of 15 days prior to the mailing of a notice of redemption of Securities or 15 days before an interest payment date. Exh. B-6 10. Persons Deemed Owners Except as provided in paragraph 2 hereof, the registered Holder of this Security may be treated as the owner of it for all purposes. 11. Unclaimed Money If money for the payment of principal or interest remains unclaimed for two years, the Trustee and the Paying Agent shall pay the money back to the Company at its written request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look to the Company for payment as general creditors and the Trustee and the Paying Agent shall have no further liability with respect to such money. 12. Discharge and Defeasance Subject to certain conditions, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal of and interest on, the Securities to redemption or maturity, as the case may be. 13. Amendments, Waiver Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Securities may be amended without prior notice to any Holder but with the written consent of the Holders of at least a majority in aggregate principal amount of the outstanding Securities and (ii) any default may be waived with the written consent of the Holders of at least a majority in principal amount of the outstanding Securities. Subject to certain exceptions set forth in the Indenture, without the consent of any Holder, the Company, the Note Guarantors and the Trustee may amend the Indenture or the Securities (i) to cure any ambiguity, omission, defect or inconsistency; (ii) to comply with Article 5 of the Indenture; (iii) to provide for uncertificated Securities in addition to or in place of certificated Securities; (iv) to add Note Guarantees with respect to the Securities; (v) to secure the Securities; (vi) to add additional covenants or to surrender rights and powers conferred on the Company; (vii) to comply with the requirements of the SEC in order to effect or maintain the qualification of the Indenture under the TIA; (viii) to make any change that does not adversely affect the rights of any Holder; or (ix) to provide for the issuance of the Exchange Securities, Private Exchange Securities or Additional Securities. 14. Defaults and Remedies If an Event of Default occurs (other than an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company) and is continuing, the Trustee or the Holders of at least 25% in principal amount of the outstanding Securities may declare the principal of, and accrued but unpaid interest on, all the Securities to be due and payable. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company occurs, the principal of, and interest on, all the Securities shall become immediately due and payable without any declaration or other act on the part of the Trustee or any Holders. Under certain circumstances, the Holders of a majority in principal Exh. B-7 amount of the outstanding Securities may rescind any such acceleration with respect to the Securities and the consequences of any such acceleration. If an Event of Default occurs and is continuing, the Trustee shall be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the Holders unless such Holders have offered to the Trustee indemnity or security satisfactory to it in its reasonable discretion against any loss, liability or expense and certain other conditions are complied with. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no Holder may pursue any remedy with respect to the Indenture or the Securities unless (i) such Holder has previously given the Trustee notice that an Event of Default is continuing, (ii) Holders of at least 25% in principal amount of the outstanding Securities have requested the Trustee in writing to pursue the remedy, (iii) such Holders have offered the Trustee security or indemnity satisfactory to it in its reasonable discretion against any loss, liability or expense, (iv) the Trustee has not complied with such request within 60 days after the receipt of the request and the offer of security or indemnity and (v) the Holders of a majority in principal amount of the outstanding Securities have not given the Trustee a direction inconsistent with such request within such 60-day period. Subject to certain restrictions, the Holders of a majority in principal amount of the outstanding Securities are given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other Holder or that would involve the Trustee in personal liability. Prior to taking any action under the Indenture, the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. 15. Trustee Dealings with the Company Subject to certain limitations imposed by the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with and collect obligations owed to it by the Parent, the Company or its Affiliates and may otherwise deal with the Parent, the Company or its Affiliates with the same rights it would have if it were not Trustee. 16. No Recourse Against Others A director, officer, employee or stockholder, as such, of the Parent, the Company or any Note Guarantor shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Holder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Securities. 17. Authentication This Security shall not be valid until an authorized signatory of the Trustee (or an authenticating agent) manually signs the certificate of authentication on the other side of this Security. Exh. B-8 18. Abbreviations Customary abbreviations may be used in the name of a Holder or an assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with rights of survivorship and not as tenants in common), CUST (= custodian), and U/G/M/A (= Uniform Gift to Minors Act). 19. Governing Law THIS SECURITY 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. 20. CUSIP Numbers The Company has caused CUSIP numbers to be printed on the Securities and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Holders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Holder of Securities, upon written request and without charge to the Holder, a copy of the Indenture which has in it the text of this Security. Exh. B-9 ASSIGNMENT FORM To assign this Security, fill in the form below: I or we assign and transfer this Security to ________________________________________________________________________________ (Print or type assignee's name, address and zip code) ________________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date:___________________ Your Signature:______________________ ________________________________________________________________________________ Sign exactly as your name appears on the other side of this Security. Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee. Exh. B-10 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Security purchased by the Company pursuant to Section 4.06 (Asset Disposition) or 4.08 (Change of Control) of the Indenture, check the box: Asset Disposition [ ] Change of Control [ ] If you want to elect to have only part of this Security purchased by the Company pursuant to Section 4.06 or 4.08 of the Indenture, state the amount ($1,000 or an integral multiple thereof): $_______________________ Date:____________________ Your Signature:______________________________________ (Sign exactly as your name appears on the other side of the Security) Signature Guarantee: ____________________________________________ Signature must be guaranteed by a participant in a recognized signature guaranty medallion program or other signature guarantor acceptable to the Trustee Exh. B-11 [TO BE ATTACHED TO GLOBAL SECURITIES] SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY The initial principal amount of this Global Security is $[ ]. The following increases or decreases in this Global Security have been made:
Amount of decrease Amount of increase Principal amount of Signature of Date of Exchange in Principal Amount in Principal Amount this Global Security authorized signatory of this Global of this Global following such of Trustee or Security Security decrease or increase Securities Custodian
Exh. B-12 EX-4.3 7 dex43.txt REGISTRATION RIGHTS AGREEMENT DATED JUNE 5, 2002 Exhbit 4.3 REGISTRATION RIGHTS AGREEMENT Dated June 5, 2002 between THE KANSAS CITY SOUTHERN RAILWAY COMPANY and THE GUARANTORS NAMED HEREIN and MORGAN STANLEY & CO. INCORPORATED J.P. MORGAN SECURITIES INC. DEUTSCHE BANK SECURITIES INC. BANC ONE CAPITAL MARKETS, INC. SCOTIA CAPITAL (USA) INC. REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into June 5, 2002, by and among THE KANSAS CITY SOUTHERN RAILWAY COMPANY, a Missouri corporation (the "Company"), KANSAS CITY SOUTHERN ("Parent") and the companies named in Schedule A hereto as guarantors (collectively, and together with Parent, the "Guarantors"), and MORGAN STANLEY & CO. INCORPORATED, J.P. MORGAN SECURITIES INC., DEUTSCHE BANK SECURITIES INC., BANC ONE CAPITAL MARKETS, INC. and SCOTIA CAPTIAL (USA) INC. (the "Placement Agents"). This Agreement is made pursuant to the Placement Agreement, dated June 5, 2002 by and among the Company, the Guarantors and the Placement Agents (the "Placement Agreement"), which provides for the sale by the Company to the Placement Agents of an aggregate of $200,000,000 principal amount of the Company's 7.5 % Senior Notes Due 2009 (the "Securities") to be jointly and severally guaranteed on an unsecured senior basis by the Guarantors. In order to induce the Placement Agents to enter into the Placement Agreement, the Company and the Guarantors have agreed to provide to the Placement Agents and their direct and indirect transferees the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Placement Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. DEFINITIONS. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "1933 Act" shall mean the Securities Act of 1933, as amended from time to time. "1934 Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Closing Date" shall mean the Closing Date as defined in the Placement Agreement. "Company" shall have the meaning set forth in the preamble and shall also include the Company's successors. "Exchange Offer" shall mean the exchange offer by the Company of Exchange Securities for Registrable Securities pursuant to Section 2(a) hereof. "Exchange Offer Registration" shall mean a registration under the 1933 Act effected pursuant to Section 2(a) hereof. "Exchange Offer Registration Statement" shall mean an exchange offer registration statement on Form S-4 (or, if applicable, on another appropriate form) and all amendments and supplements to such registration statement, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchange Securities" shall mean securities issued by the Company and the Guarantors under the Indenture containing terms identical to the Securities (except that (i) interest thereon shall accrue from the last date on which interest was paid on the Securities or, if no such interest has been paid, from June 12, 2002 and (ii) the Exchange Securities will not contain restrictions on transfer) and to be offered to Holders of Securities in exchange for Securities pursuant to the Exchange Offer. "Guarantors" shall have the meaning set forth in the preamble and shall also include any Guarantor's successor. "Holder" shall mean the Placement Agents, for so long as they own any Registrable Securities, and each of their successors, assigns and direct and indirect transferees who become registered owners of Registrable Securities under the Indenture; provided that for purposes of Sections 4 and 5 of this Agreement, the term "Holder" shall include Participating Broker-Dealers (as defined in Section 4(a)). "Indenture" shall mean the Indenture relating to the Securities dated as of June 12, 2002 between the Company, the Guarantors and U.S. Bank National Association, as trustee, and as the same may be amended from time to time in accordance with the terms thereof. "Majority Holders" shall mean the Holders of a majority of the aggregate principal amount of outstanding Registrable Securities; provided that whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or any of its affiliates (as such term is defined in Rule 405 under the 1933 Act) (other than the Placement Agents or subsequent Holders of Registrable Securities if such subsequent Holders are deemed to be such affiliates solely by reason of their holding of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage or amount. "Person" shall mean an individual, partnership, limited liability company, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. "Placement Agents" shall have the meaning set forth in the preamble. "Placement Agreement" shall have the meaning set forth in the preamble. "Prospectus" shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to such prospectus, and in each case including all material incorporated by reference therein. "Registrable Securities" shall mean the Securities; provided, however, that the Securities shall cease to be Registrable Securities (i) when a Registration Statement with respect to such Securities shall have been declared effective under the 1933 Act and such Securities shall have been disposed of pursuant to such Registration Statement, (ii) when such Securities have been sold to the public pursuant to Rule 144(k) (or any similar provision then in force, but not Rule 144A) under the 1933 Act or (iii) when such Securities shall have ceased to be outstanding. "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company and the Guarantors with this Agreement, including, without limitation: (i) all SEC, stock exchange or National Association of Securities Dealers, Inc. registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of counsel for any underwriters or Holders in connection with blue sky qualification of any of the Exchange Securities or Registrable Securities), (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, (v) all fees and disbursements relating to the qualification of the Indenture under applicable securities laws, (vi) the fees and disbursements of the Trustee and its counsel, (vii) the fees and disbursements of counsel for the Company and the Guarantors and, in the case of a Shelf Registration Statement, the fees and disbursements of one counsel for the Holders (which counsel shall be selected by the Majority Holders and which counsel may also be counsel for the Placement Agents) and (viii) the fees and disbursements of the independent public accountants of the Company and the Guarantors, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, but excluding fees and expenses of counsel to the underwriters (other than fees and expenses set forth in clause (ii) above) or the Holders and underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Registrable Securities by a Holder. "Registration Statement" shall mean any registration statement of the Company and the Guarantors that covers any of the Exchange Securities or Registrable Securities pursuant to the provisions of this Agreement and all amendments and supplements to any 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. "SEC" shall mean the Securities and Exchange Commission. "Shelf Registration" shall mean a registration effected pursuant to Section 2(b) hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company and the Guarantors pursuant to the provisions of Section 2(b) of this Agreement which covers all of the Registrable Securities (but no other securities unless approved by the Holders whose Registrable Securities are covered by such Shelf Registration Statement) on an appropriate form under Rule 415 under the 1933 Act, or any similar rule that may be adopted by the SEC, and all 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. "Underwriter" shall have the meaning set forth in Section 3 hereof. "Underwritten Registration" or "Underwritten Offering" shall mean a registration in which Registrable Securities are sold to an Underwriter for reoffering to the public. 2. REGISTRATION UNDER THE 1933 ACT. (a) To the extent not prohibited by any applicable law or applicable interpretation of the Staff of the SEC, the Company and the Guarantors shall use their reasonable best efforts to cause to be filed an Exchange Offer Registration Statement covering the offer by the Company and the Guarantors to the Holders to exchange all of the Registrable Securities for Exchange Securities and to have such Registration Statement remain effective until the closing of the Exchange Offer. The Company and the Guarantors shall commence the Exchange Offer promptly after the Exchange Offer Registration Statement has been declared effective by the SEC and use their reasonable best efforts to have the Exchange Offer consummated not later than 60 days after such effective date. The Company and the Guarantors shall commence the Exchange Offer by mailing the related exchange offer Prospectus and accompanying documents to each Holder stating, in addition to such other disclosures as are required by applicable law: (i) that the Exchange Offer is being made pursuant to this Registration Rights Agreement and that all Registrable Securities validly tendered will be accepted for exchange; (ii) the dates of acceptance for exchange (which shall be a period of at least 20 business days from the date such notice is mailed) (the "Exchange Dates"); (iii) that any Registrable Security not tendered will remain outstanding and continue to accrue interest, but will not retain any rights under this Registration Rights Agreement; (iv) that Holders electing to have a Registrable Security exchanged pursuant to the Exchange Offer will be required to surrender such Registrable Security, together with the enclosed letters of transmittal, to the institution and at the address (located in the Borough of Manhattan, The City of New York) specified in the notice prior to the close of business on the last Exchange Date; and (v) that Holders will be entitled to withdraw their election, not later than the close of business on the last Exchange Date, by sending to the institution and at the address (located in the Borough of Manhattan, The City of New York) specified in the notice a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Registrable Securities delivered for exchange and a statement that such Holder is withdrawing his election to have such Securities exchanged. As soon as practicable after the last Exchange Date, the Company and the Guarantors shall: (i) accept for exchange Registrable Securities or portions thereof tendered and not validly withdrawn pursuant to the Exchange Offer; and (ii) deliver, or cause to be delivered, to the Trustee for cancellation all Registrable Securities or portions thereof so accepted for exchange by the Company and the Guarantors and issue, and cause the Trustee to promptly authenticate and mail to each Holder, an Exchange Security equal in principal amount to the principal amount of the Registrable Securities surrendered by such Holder. The Company and the Guarantors shall use their best efforts to complete the Exchange Offer as provided above and shall comply with the applicable requirements of the 1933 Act, the 1934 Act and other applicable laws and regulations in connection with the Exchange Offer. The Exchange Offer shall not be subject to any conditions, other than that the Exchange Offer does not violate applicable law or any applicable interpretation of the Staff of the SEC. The Company and the Guarantors shall inform the Placement Agents of the names and addresses of the Holders to whom the Exchange Offer is made, and the Placement Agents shall have the night, subject to applicable law, to contact such Holders and otherwise facilitate the tender of Registrable Securities in the Exchange Offer. (b) In the event that (i) the Company and the Guarantors determine that the Exchange Offer Registration provided for in Section 2(a) above is not available or may not be consummated as soon as practicable after the last Exchange Date because it would violate applicable law or the applicable interpretations of the Staff of the SEC, (ii) the Exchange Offer is not for any other reason consummated by 210 days after the Closing Date or (iii) the Exchange Offer has been completed and in the opinion of counsel for the Placement Agents a Registration Statement must be filed and a Prospectus must be delivered by the Placement Agents in connection with any offering or sale of Registrable Securities, the Company and the Guarantors shall use their reasonable best efforts to cause to be filed as soon as practicable after such determination, date or notice of such opinion of counsel is given to the Company and the Guarantors, as the case may be, a Shelf Registration Statement providing for the sale by the Holders of all of the Registrable Securities and to have such Shelf Registration Statement declared effective by the SEC. In the event the Company and the Guarantors are required to file a Shelf Registration Statement solely as a result of the matters referred to in clause (iii) of the preceding sentence, the Company and the Guarantors shall use their reasonable best efforts to file and have declared effective by the SEC both an Exchange Offer Registration Statement pursuant to Section 2(a) with respect to all Registrable Securities and a Shelf Registration Statement (which may be a combined Registration Statement with the Exchange Offer Registration Statement) with respect to offers and sales of Registrable Securities held by the Initial Purchasers after completion of the Exchange Offer. The Company and the Guarantors agree to use their reasonable best efforts to keep the Shelf Registration Statement continuously effective until the expiration of the period referred to in Rule 144(k) with respect to the Registrable Securities or such shorter period that will terminate when all of the Registrable Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement. The Company and the Guarantors further agree to supplement or amend the Shelf Registration Statement if required by the rules, regulations or instructions applicable to the registration form used by the Company and the Guarantors for such Shelf Registration Statement or by the 1933 Act or by any other rules and regulations thereunder for shelf registration or if reasonably requested by a Holder with respect to information relating to such Holder, and to use their reasonable best efforts to cause any such amendment to become effective and such Shelf Registration Statement to become usable as soon as thereafter practicable. The Company and the Guarantors agree to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the SEC. (c) The Company and the Guarantors shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) and Section 2(b). Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to the Shelf Registration Statement. (d) An Exchange Offer Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become effective unless it has been declared effective by the SEC; provided, however, that, if, after it has been declared effective, the offering of Registrable Securities pursuant to a Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have become effective during the period of such interference until the offering of Registrable Securities pursuant to such Registration Statement may legally resume. In the event the Exchange Offer is not consummated and the Shelf Registration Statement is not declared effective on or prior to 210 days after the Closing Date, the interest rate on the Securities will be increased on each day thereafter by 0.5% per annum until the Exchange Offer is consummated or the Shelf Registration Statement is declared effective by the SEC. Upon the consummation of the Exchange Offer or the effectiveness of the Shelf Registration Statement, the interest rate borne by the Securities from the date of such consummation or effectiveness, as the case may be, will be reduced to the original interest rate. (e) Without limiting the remedies available to the Placement Agents and the Holders, the Company and the Guarantors acknowledge that any failure by the Company and the Guarantors to comply with its obligations under Section 2(a) and Section 2(b) hereof may result in material irreparable injury to the Placement Agents or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Placement Agents or any Holder may obtain such relief as may be required to specifically enforce the Company's and the Guarantors' obligations under Section 2(a) and Section 2(b) hereof. 3. REGISTRATION PROCEDURES. In connection with the obligations of the Company and the Guarantors with respect to the Registration Statements pursuant to Section 2(a) and Section 2(b) hereof, the Company and the Guarantors shall as expeditiously as possible: (a) prepare and file with the SEC a Registration Statement on the appropriate form under the 1933 Act, which form (x) shall be selected by the Company and the Guarantors and (y) shall, in the case of a Shelf Registration, be available for the sale of the Registrable Securities by the selling Holders thereof and (z) shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith, and use its best efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof; (b) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary (i) to keep such Registration Statement effective for the applicable period and cause each Prospectus to be supplemented by any required prospectus supplement and, as so supplemented, to be filed pursuant to Rule 424 under the 1933 Act and (ii) to keep each Prospectus current during the period described under Section 4(3) and Rule 174 under the 1933 Act that is applicable to transactions by brokers or dealers with respect to the Registrable Securities or Exchange Securities; (c) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities, to counsel for the Placement Agents, to counsel for the Holders and to each Underwriter of an Underwritten Offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto and such other documents as such Holder or Underwriter may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Securities; and the Company and the Guarantors consent to the use of such Prospectus and any amendment or supplement thereto in accordance with applicable law by each of the selling Holders of Registrable Securities and any such Underwriters in connection with the offering and sale of the Registrable Securities covered by and in the manner described in such Prospectus or any amendment or supplement thereto in accordance with applicable law; (d) use their reasonable best efforts to register or qualify the Registrable Securities under all applicable state securities or "blue sky" laws of such jurisdictions as any Holder of Registrable Securities covered by a Registration Statement shall reasonably request in writing by the time the applicable Registration Statement is declared effective by the SEC, to cooperate with such Holders in connection with any filings required to be made with the National Association of Securities Dealers, Inc. and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Holder; provided, however, that the Company and the Guarantors shall not be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (ii) file any general consent to service of process or (iii) subject itself to taxation in any such jurisdiction if it is not so subject; (e) in the case of a Shelf Registration, notify each Holder of Registrable Securities, counsel for the Holders and counsel for the Placement Agents promptly and, if requested by any such Holder or counsel, confirm such advice in writing (i) when a Registration Statement has become effective and when any post-effective amendment thereto has been filed and becomes effective, (ii) of any request by the SEC or any state securities authority for amendments and supplements to a Registration Statement and Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) if, between the effective date of a Registration Statement and the closing of any sale of Registrable Securities covered thereby, the representations and warranties of the Company and the Guarantors contained in any underwriting agreement, securities sales agreement or other similar agreement, if any, relating to the offering cease to be true and correct in all material respects or if the Company and the Guarantors receive any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation of any proceeding for such purpose, (v) of the happening of any event during the period a Shelf Registration Statement is effective which makes any statement made in such Registration Statement or the related Prospectus untrue in any material respect or which requires the making of any changes in such Registration Statement or Prospectus in order to make the statements therein not misleading and (vi) of any determination by the Company and the Guarantors that a post-effective amendment to a Registration Statement would be appropriate; (f) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment and provide immediate notice to each Holder of the withdrawal of any such order; (g) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities, without charge, at least one conformed copy of each Registration Statement and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested); (h) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends and enable such Registrable Securities to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Holders may reasonably request at least one business day prior to the closing of any sale of Registrable Securities; (i) in the case of a Shelf Registration, upon the occurrence of any event contemplated by Section 3(e)(v) hereof, use their best efforts to prepare and file with the SEC a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (the Company and the Guarantors agree to notify the Holders to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event, and the Holders hereby agree to suspend use of the Prospectus until the Company and the Guarantors have amended or supplemented the Prospectus to correct such misstatement or omission); (j) a reasonable time prior to the filing of any Registration Statement, any Prospectus, any amendment to a Registration Statement or amendment or supplement to a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus after initial filing of a Registration Statement, provide copies of such document to the Placement Agents and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) and make such of the representatives of the Company and the Guarantors as shall be reasonably requested by the Placement Agents or their counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) available for discussion of such document, and shall not at any time file or make any amendment to the Registration Statement, any Prospectus or any amendment of or supplement to a Registration Statement or a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus, of which the Placement Agents and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) shall not have previously been advised and furnished a copy or to which the Placement Agents or their counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) shall object; (k) obtain a CUSIP number for all Exchange Securities or Registrable Securities, as the case may be, not later than the effective date of a Registration Statement; (l) cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended (the "TIA"), in connection with the registration of the Exchange Securities or Registrable Securities, as the case may be, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the TIA and execute, and use its best efforts to cause the Trustee to execute, all documents as may be required to effect such changes and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner; (m) in the case of a Shelf Registration, make available for inspection by a representative of the Holders of the Registrable Securities, any Underwriter participating in any disposition pursuant to such Shelf Registration Statement, and attorneys and accountants designated by the Holders, at reasonable times and in a reasonable manner, all financial and other records, pertinent documents and properties of the Company and the Guarantors, and cause the respective officers, directors and employees of the Company and the Guarantors to supply all information reasonably requested by any such representative, Underwriter, attorney or accountant in connection with a Shelf Registration Statement; (n) in the case of a Shelf Registration, use its reasonable best efforts to cause all Registrable Securities to be listed on any securities exchange or any automated quotation system on which similar securities issued by the Company are then listed if requested by the Majority Holders, to the extent such Registrable Securities satisfy applicable listing requirements; (o) use its reasonable best efforts to cause the Exchange Securities or Registrable Securities, as the case may be, to be rated by two nationally recognized statistical rating organizations (as such term is defined in Rule 436(g)(2) under the 1933 Act); (p) if reasonably requested by any Holder of Registrable Securities covered by a Registration Statement, (i) 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 (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as the Company and the Guarantors have received notification of the matters to be incorporated in such filing; and (q) in the case of a Shelf Registration, enter into such customary agreements and take all such other actions in connection therewith (including those requested by the Holders of a majority of the Registrable Securities, being sold) in order to expedite or facilitate the disposition of such Registrable Securities including, but not limited to, an Underwritten Offering and in such connection (i) to the extent possible, make such representations and warranties to the Holders and any Underwriters of such Registrable Securities with respect to the business of the Company and the Guarantors and their subsidiaries, the Registration Statement, Prospectus and documents incorporated by reference or deemed incorporated by reference, if any, in each case, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings and confirm the same if and when requested, (ii) obtain opinions of counsel to the Company and the Guarantors (which counsel and opinions, in form, scope and substance, shall be reasonably satisfactory to the Holders and such Underwriters and their respective counsel) addressed to each selling Holder and Underwriter of Registrable Securities, covering the matters customarily covered in opinions requested in underwritten offerings, (iii) obtain "cold comfort" letters from the independent certified public accountants of the Company and the Guarantors (and, if necessary, any other certified public accountant of any subsidiary of the Company or the Guarantors, or of any business acquired by the Company or the Guarantors for which financial statements and financial data are or are required to be included in the Registration Statement) addressed to each selling Holder and Underwriter of Registrable Securities, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings, and (iv) deliver such documents and certificates as may be reasonably requested by the Holders of a majority in principal amount of the Registrable Securities being sold or the Underwriters, and which are customarily delivered in underwritten offerings, to evidence the continued validity of the representations and warranties of the Company and the Guarantors made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in an underwriting agreement. In the case of a Shelf Registration Statement, the Company and the Guarantors may require each Holder of Registrable Securities to furnish to the Company and the Guarantors such information regarding the Holder and the proposed distribution by such Holder of such Registrable Securities as the Company and the Guarantors may from time to time reasonably request in writing. In the case of a Shelf Registration Statement, each Holder agrees that, upon receipt of any notice from the Company and the Guarantors of the happening of any event of the kind described in Section 3(e)(v) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to a Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(i) hereof, and, if so directed by the Company and the Guarantors, such Holder will deliver to the Company and the Guarantors (at their expense) all copies in its possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. If the Company and the Guarantors shall give any such notice to suspend the disposition of Registrable Securities pursuant to a Registration Statement, the Company and the Guarantors 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 received copies of the supplemented or amended Prospectus necessary to resume such dispositions. The Company and the Guarantors 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. The Holders of Registrable Securities covered by a Shelf Registration Statement who desire to do so may sell such Registrable Securities in an Underwritten Offering. In any such Underwritten Offering, the investment banker or investment bankers and manager or managers (the "Underwriters") that will administer the offering will be selected by the Majority Holders of the Registrable Securities included in such offering. 4. PARTICIPATION OF BROKER-DEALERS IN EXCHANGE OFFER. (a) The Staff of the SEC has taken the position that any broker-dealer that receives Exchange Securities for its own account in the Exchange Offer in exchange for Securities that were acquired by such broker-dealer as a result of market-making or other trading activities (a "Participating Broker-Dealer") may be deemed to be an "underwriter" within the meaning of the 1933 Act and must deliver a prospectus meeting the requirements of the 1933 Act in connection with any resale of such Exchange Securities. The Company and the Guarantors understand that it is the Staff's position that if the Prospectus contained in the Exchange Offer Registration Statement includes a plan of distribution containing a statement to the above effect and the means by which Participating Broker-Dealers may resell the Exchange Securities, without naming the Participating Broker-Dealers or specifying the amount of Exchange Securities owned by them, such Prospectus may be delivered by Participating Broker-Dealers to satisfy their prospectus delivery obligation under the 1933 Act in connection with resales of Exchange Securities for their own accounts, so long as the Prospectus otherwise meets the requirements of the 1933 Act. (b) In light of the above, notwithstanding the other provisions of this Agreement, the Company and the Guarantors agree that the provisions of this Agreement as they relate to a Shelf Registration shall also apply to an Exchange Offer Registration to the extent, and with such reasonable modifications thereto as may be, reasonably requested by the Placement Agents or by one or more Participating Broker-Dealers, in each case as provided in clause (ii) below, in order to expedite or facilitate the disposition of any Exchange Securities by Participating Broker-Dealers consistent with the positions of the Staff recited in Section 4(a) above; provided that: (i) the Company and the Guarantors shall not be required to amend or supplement the Prospectus contained in the Exchange Offer Registration Statement, as would otherwise be contemplated by Section 3(i), for a period exceeding 90 days after the last Exchange Date (as such period may be extended pursuant to the penultimate paragraph of Section 3 of this Agreement) and Participating Broker-Dealers shall not be authorized by the Company and the Guarantors to deliver and shall not deliver such Prospectus after such period in connection with the resales contemplated by this Section 4; and (ii) the application of the Shelf Registration procedures set forth in Section 3 of this Agreement to an Exchange Offer Registration, to the extent not required by the positions of the Staff of the SEC or the 1933 Act and the rules and regulations thereunder, will be in conformity with the reasonable request to the Company by the Placement Agents or with the reasonable request in writing to the Company by one or more broker-dealers who certify to the Placement Agents, the Company and the Guarantors in writing that they anticipate that they will be Participating Broker-Dealers; provided that, in connection with such application of the Shelf Registration procedures set forth in Section 3 to an Exchange Offer Registration, the Company and the Guarantors shall be obligated (x) to deal only with one entity representing the Participating Broker-Dealers, which shall be Morgan Stanley & Co. Incorporated unless it elects not to act as such representative, (y) to pay the fees and expenses of only one counsel representing the Participating Broker-Dealers which shall be counsel to the Placement Agents unless such counsel elects not to so act, and (z) to cause to be delivered only one, if any, "cold comfort" letter with respect to the Prospectus in the form existing on the last Exchange Date and with respect to each subsequent amendment or supplement, if any, effected during the period specified in clause (i) above. (c) The Placement Agents shall have no liability to the Company, the Guarantors or any Holder with respect to any request that it may make pursuant to Section 4(b) above. 5. INDEMNIFICATION AND CONTRIBUTION. (a) Each of the Company and the Guarantors agree, jointly and severally, to indemnify and hold harmless the Placement Agents, each Holder and each Person, if any, who controls any Placement Agent or any Holder within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, or is under common control with, or is controlled by, any Placement Agent or any Holder, from and against all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred by the Placement Agent, any Holder or any such controlling or affiliated Person in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto) pursuant to which Exchange Securities or Registrable Securities were registered under the 1933 Act, including all documents incorporated therein by reference, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or caused by any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (as amended or supplemented if the Company and the Guarantors shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact necessary to make the statements therein in light of the circumstances under which they were made not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to the Placement Agents or any Holder furnished to the Company and the Guarantors in writing through Morgan Stanley & Co. Incorporated or any selling Holder expressly for use therein. In connection with any Underwritten Offering permitted by Section 3, the Company and the Guarantors will also jointly and severally indemnify the Underwriters, if any, selling brokers, dealers and similar securities industry professionals participating in the distribution, their officers and directors and each Person who controls such Persons (within the meaning of the 1933 Act and the 1934 Act) to the same extent as provided above with respect to the indemnification of the Holders, if requested in connection with any Registration Statement. (b) Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company and the Guarantors, the Placement Agents and the other selling Holders, and each of their respective directors, officers who sign the Registration Statement and each Person, if any, who controls the Company or the Guarantors, any Placement Agent and any other selling Holder within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act to the same extent as the foregoing indemnity from the Company and the Guarantors to the Placement Agents and the Holders, but only with reference to information relating to such Holder furnished to the Company and the Guarantors in writing by such Holder expressly for use in any Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto). (c) In case any proceeding (including any governmental investigation) shall be instituted involving any Person in respect of which indemnity may be sought pursuant to either paragraph (a) or paragraph (b) above, such Person (the "indemnified party") shall promptly notify the Person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (a) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Placement Agents and all Persons, if any, who control any Placement Agent within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, (b) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company and the Guarantors, their directors and officers who sign the Registration Statement and each Person, if any, who controls the Company or the Guarantors within the meaning of either such Section and (c) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Holders and all Persons, if any, who control any Holders within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In such case involving the Placement Agents and Persons who control the Placement Agents, such firm shall be designated in writing by Morgan Stanley & Co. Incorporated. In such case involving the Holders and such Persons who control Holders, such firm shall be designated in writing by the Majority Holders. In all other cases, such firm shall be designated by the Company and the Guarantors. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but, if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which such indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (d) If the indemnification provided for in paragraph (a) or paragraph (b) of this Section 5 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company, the Guarantors and the Holders shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Guarantors or by the Holders and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Holders' respective obligations to contribute pursuant to this Section 5(d) are several in proportion to the respective principal amount of Registrable Securities of such Holder that were registered pursuant to a Registration Statement. (e) The Company, the Guarantors and each Holder agree that it would not be just or equitable if contribution pursuant to this Section 5 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in paragraph (d) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5, no Holder shall be required to indemnify or contribute 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 such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 5 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. The indemnity and contribution provisions contained in this Section 5 shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of the Placement Agents, any Holder or any Person controlling any Placement Agent or any Holder, or by or on behalf of the Company or the Guarantors, their officers or directors or any Person controlling the Company or the Guarantors, (iii) acceptance of any of the Exchange Securities and (iv) any sale of Registrable Securities pursuant to a Shelf Registration Statement. 6. MISCELLANEOUS. (a) No Inconsistent Agreements. The Company and the Guarantors have not entered into, and on or after the date of this Agreement will not enter into, any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's and the Guarantors' other issued and outstanding securities under any such agreements. (b) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company and the Guarantors have obtained the written consent of Holders of at least a majority in aggregate principal amount of the outstanding Registrable Securities affected by such amendment, modification, supplement, waiver or consent; provided, however, that no amendment, modification, supplement, waiver or consent to any departure from the provisions of Section 5 hereof shall be effective as against any Holder of Registrable Securities unless consented to in writing by such Holder. (c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such Holder to the Company and the Guarantors by means of a notice given in accordance with the provisions of this Section 6(c), which address initially is, with respect to the Placement Agents, the address set forth in the Placement Agreement, and (ii) if to the Company and the Guarantors, initially at the Company's address set forth in the Placement Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 6(c). All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands, or other communications shall be concurrently delivered by the Person giving the same to the Trustee, at the address specified in the Indenture. (d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Placement Agreement. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such Person shall be entitled to receive the benefits hereof. The Placement Agents (in their capacity as Placement Agents) shall have no liability or obligation to the Company or the Guarantors with respect to any failure by a Holder to comply with, or any breach by any Holder of, any of the obligations of such Holder under this Agreement. (e) Purchases and Sales of Securities. The Company and the Guarantors shall not, and shall use their best efforts to cause their affiliates (as defined in Rule 405 under the 1933 Act) not to, purchase and then resell or otherwise transfer any Securities. (f) Third Party Beneficiary. The Holders shall be third party beneficiaries to the agreements made hereunder between the Company and the Guarantors, 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 they deem such enforcement necessary or advisable to protect their rights or the rights of Holders hereunder. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. This Agreement shall be governed by the laws of the State of New York. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. KANSAS CITY SOUTHERN By: /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Senior Vice President & CFO THE KANSAS CITY SOUTHERN RAILWAY COMPANY By /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Senior Vice President & CFO GATEWAY EASTERN RAILWAY COMPANY By /s/ Jay M. Nadlman ----------------------------------- Name: Jay M. Nadlman Title: Vice President & Secretary MID-SOUTH MICROWAVE, INC. By /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer PABTEX GP, LLC By /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Authorized Representative PABTEX L.P. BY: PABTEX, GP, LLC By: /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Authorized Representative RICE-CARDEN CORPORATION By /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer SIS BULK HOLDING, INC. By /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer SOUTHERN DEVELOPMENT COMPANY By /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer SOUTHERN INDUSTRIAL SERVICES, INC. By /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer TRANS-SERVE, INC. By /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer Confirmed and accepted as of the date first above written: MORGAN STANLEY & CO. INCORPORATED J.P. MORGAN SECURITIES INC. DEUTSCHE BANK SECURITIES INC. BANC ONE CAPITAL MARKETS, INC. SCOTIA CAPITAL (USA) INC. By: MORGAN STANLEY & CO. INCORPORATED By /s/ Bryan Andrzejewski ----------------------------------- Name: Bryan Andrzejewski Title: Executive Director SCHEDULE A Gateway Eastern Railway Company Mid-South Microwave, Inc. PABTEX GP, LLC PABTEX L.P. Rice-Carden Corporation SIS Bulk Holding, Inc. Southern Development Company Southern Industrial Services, Inc. Trans-Serve, Inc. EX-10.6 8 dex106.txt AMENDMENT & RESTATEMENT AGREEMENT DATED 6/12/2002 Exhibit 10.6 EXECUTION VERSION AMENDMENT AND RESTATEMENT AGREEMENT dated as of June 12, 2002 (this "Amendment Agreement"), among KANSAS CITY SOUTHERN, a Delaware corporation ("Holdings"), THE KANSAS CITY SOUTHERN RAILWAY COMPANY, a Missouri corporation (the "Borrower"); the Lenders party hereto; and JPMORGAN CHASE BANK, as Administrative Agent, under the Credit Agreement dated as of January 11, 2000, among Holdings, the Borrower, the lenders referred to therein, the Collateral Agent, the Swingline Lender, the Issuing Bank and the Administrative Agent, as in effect on the date hereof (the "Original Credit Agreement"). WHEREAS, Holdings and the Borrower have requested, and the requisite Lenders and the Administrative Agent have agreed, upon the terms and subject to the conditions set forth herein, that (a) the Borrower will issue up to $200,000,000 aggregate principal amount of 2002 Senior Notes (as defined in the Restated Credit Agreement referred to below) on the Amendment Effectiveness Date (as defined below), the proceeds of which will be used (i) to repay in full the Tranche A Term Loans and (ii) to repay $96,875,000 principal amount of Tranche B Term Loans, in each case as defined in and outstanding under the Original Credit Agreement and (b) the Original Credit Agreement will be amended and restated as provided herein; NOW, THEREFORE, Holdings, the Borrower, each of the undersigned Lenders and the Administrative Agent hereby agree as follows: SECTION 1. Defined Terms. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Restated Credit Agreement referred to below. As used in this Amendment Agreement, "Required Lenders" and "Tranche B Commitment" shall have the meanings assigned to them in the Original Credit Agreement. Required Lenders shall be determined immediately prior to giving effect to the amendment and restatement provided for in Section 4 hereof. SECTION 2. Amendment Effectiveness Date. (a) The transactions provided for in Sections 3 through 5 hereof shall be consummated at a closing to be held on the Amendment Effectiveness Date at the offices of Cravath, Swaine & Moore, or at such other time and place as the parties hereto shall agree upon. (b) The "Amendment Effectiveness Date" shall be specified by the Borrower, and shall be a date not later than June 12, 2002, as of which all the conditions set forth or referred to in Section 6 hereof shall have been satisfied. The Borrower shall give not less than one Business Day's written notice proposing a date as the Amendment Effectiveness Date to the Administrative Agent, which shall send copies of such notice to the Lenders. This Amendment Agreement shall terminate at 5:00 p.m., New York City time, on June 30, 2002, if the Amendment Effectiveness Date shall not have occurred at or prior to such time. SECTION 3. Prepayment of Tranche A Term Loans and Tranche B Term Loans outstanding under the Original Credit Agreement. The Borrower hereby irrevocably directs the Administrative Agent pursuant to Section 2.11(e) of the Original Credit Agreement to apply the proceeds of the 2002 Senior Notes (net of all Transaction Costs) immediately upon the receipt thereof (a) to prepay in full the outstanding Tranche A Term Loans outstanding under the Original Credit Agreement together with all accrued interest thereon and (b) to apply $96,875,000 in remaining proceeds of the 2002 Senior Notes (i) first, to prepay the outstanding principal amount of the Tranche B Term Loans outstanding under the Original Credit Agreement together with accrued interest thereon of each Tranche B Lender under the Original Credit Agreement who has not executed each of this Amendment Agreement and the Master Assignment Agreement and (ii) second, to the extent there are any proceeds of the 2002 Senior Notes remaining after the prepayment described in clause (i), to prepay on a pro rata basis outstanding principal amounts of the Tranche B Term Loans outstanding under the Original Credit Agreement together with accrued interest thereon. SECTION 4. Amendment and Restatement of the Original Credit Agreement; Master Assignment Agreement; Loans and Letters of Credit. (a) Effective simultaneously with and upon the prepayment of the Tranche A Term Loans and the Tranche B Term Loans under Section 3 above, and without further action by any Person, the Original Credit Agreement (including all schedules thereto) is hereby amended and restated to read in its entirety as set forth in Exhibit A hereto (the "Restated Credit Agreement"), and the Administrative Agent is hereby directed to enter into such Loan Documents and to take such other actions as may be required to give effect to the transactions contemplated hereby. From and after the effectiveness of such amendment and restatement, the terms "Agreement", "this Agreement", "herein", "hereinafter", "hereto", "hereof' and words of similar import, as used in the Restated Credit Agreement, shall, unless the context otherwise requires, refer to the Original Credit Agreement as amended and restated in the form of the Restated Credit Agreement, and the term "Credit Agreement", as used in the Loan Documents, shall mean the Restated Credit Agreement. (b) Each party hereto agrees to execute and deliver to the Administrative Agent (or its counsel) a counterpart to the Master Assignment Agreement on behalf of such party. (c) All Revolving Loans and Letters of Credit outstanding under the Original Credit Agreement shall continue to be outstanding under the Restated Credit Agreement and the terms of the Restated Credit Agreement will govern the rights of the Lenders and the Issuing Banks with respect thereto. SECTION 5. Fees and Expenses. On the Amendment Effectiveness Date, on or before the effectiveness of the Restated Credit Agreement, the Borrower shall pay to the Administrative Agent (a) for its own account, all fees and other amounts owed to it in connection with this Agreement and the transactions contemplated hereby under any agreement or instrument between it and the Borrower as of the Amendment Effectiveness Date, (b) for the account of each applicable payee, all expenses due and payable on or before the Amendment Effectiveness Date in connection with the Loan Documents to be delivered on the Amendment Effectiveness Date or otherwise in connection with this Agreement and the transactions contemplated hereby, including, without limitation, the fees and expenses invoiced through the Amendment Effectiveness Date of Cravath, Swaine & Moore, counsel for the Administrative Agent and (c) for the account of each Revolving Lender that executes and delivers to the Administrative Agent (or its counsel) a copy of this Amendment Agreement at or prior to 12: 00 p.m. New York time, on June 10, 2002, an amendment fee (the "Amendment Fee") in an amount equal to 0.15% of such Lender's Revolving Commitment (whether used or unused) as of the Amendment Effectiveness Date. SECTION 6. Conditions. The consummation of the transactions set forth in Sections 3 through 5 of this Amendment Agreement shall be subject to the prior or simultaneous satisfaction of the following conditions precedent: (a) The Administrative Agent (or its counsel) shall have received from Holdings, the Borrower, each Tranche B Lender under the Restated Credit Agreement and Lenders constituting the Required Lenders (which may include certain of the aforementioned Tranche B lenders) either (1) counterparts of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed counterparts of this Agreement. (b) The Administrative Agent shall have received a favorable written opinion (addressed to the Administrative Agent, the Collateral Agent, the Issuing Bank and the Lenders and dated the Amendment Effectiveness Date) of Sonnenschein Nath & Rosenthal, counsel for Holdings, the Borrower and the other Loan Parties, in form and substance satisfactory to the Administrative Agent covering such other matters relating to the Loan Parties, the Loan Documents or the Transactions as the Administrative Agent shall reasonably request. Each of Holdings and the Borrower hereby requests such counsel to deliver such opinion. (c) The Administrative Agent shall have received such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of each Loan Party, the authorization of the Transactions and any other legal matters relating to the Loan Parties, the Loan Documents or the Transactions, all in form and substance satisfactory to the Administrative Agent and its counsel. (d) The Administrative Agent shall have received a certificate, dated the Amendment Effectiveness Date and signed by the President, a Vice President or a Financial Officer of Holdings and the Borrower, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.02 of the Restated Credit Agreement and paragraph (k) of this Section. (e) The Administrative Agent shall have received, or contemporaneously therewith shall receive, all fees and other amounts due and payable on or prior to the date hereof in connection with this Agreement and the transactions contemplated hereby, including, without limitation, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses (including, without limitation, fees, charges and disbursements of counsel), required to be reimbursed or paid by any Loan Party hereunder or under any other Loan Document. (f) The Transactions and the other transactions contemplated hereby shall not violate any applicable law, statute, rule or regulation or conflict with, or result in a default under, any material agreement of Holdings, the Borrower or any of Holdings' Subsidiaries. All governmental and third party approvals required in connection with the issuance of the 2002 Senior Notes and the other Transactions shall have been obtained on terms satisfactory to the Administrative Agent and there shall be no governmental or judicial action, actual or threatened, that could reasonably be expected to restrain, prevent or impose burdensome conditions on the Transactions. (g) There shall not have occurred or become known to the Lenders any material adverse change in the business, financial condition, results of operations, property or prospects of Holdings and its Subsidiaries, taken as a whole, since December 31, 2001. (h) The Administrative Agent (or its counsel) shall have received from each of Holdings, the Borrower, each other Loan Party and the Collateral Agent either (i) a counterpart of the Reaffirmation Agreement substantially in the form of Exhibit C hereto signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of the Reaffirmation Agreement) that such party has signed a counterpart of such Reaffirmation Agreement. (i) The Administrative Agent (or its counsel) shall have received from each of Holdings, the Borrower, the Administrative Agent and each Assignor and Assignee party to the Master Assignment Agreement either (i) a counterpart of the Master Assignment Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of the Master Assignment Agreement) that such party has signed a counterpart of the Master Assignment Agreement. (j) The 2002 Senior Notes shall have been issued on terms satisfactory to the Administrative Agent and in accordance with all applicable laws and on the terms and with the results consistent in all material respects with (a) the prospectus heretofore made available to the Lenders and (b) the pro forma financial information and projections delivered to the Administrative Agent and the Lenders prior to the date hereof (k) The Collateral and Guarantee Requirement shall continue to be satisfied, including but not limited to providing the Collateral Agent with (i) an updated Perfection Certificate dated the Amendment Effective Date and duly executed by a Responsible Officer of the Borrower and (ii) filing new Uniform Commercial Code financing statements reflecting the name change from Kansas City Southern Industries Inc. to Kansas City Southern. (1) The Lenders shall have received (a) audited consolidated balance sheets and related statements of income, stockholders' equity and cash flows of Holdings for the 2001 fiscal year and (b) unaudited consolidated balance sheets and related statements of income, stockholders' equity and cash flows of Holdings for each subsequent fiscal quarter ended not less than 30 days before the Amendment Effectiveness Date, which financial statements shall not be materially inconsistent with the financial statements or forecasts previously provided to the Lenders. (m) The Lenders shall have received a pro forma consolidated balance sheet of Holdings as of the last day of the fiscal quarter ended March 30, 2002, giving effect to the issuance of the 2002 Senior Notes and the other transactions contemplated hereby as if they had occurred on such date, which shall not be materially inconsistent with the pro forma financial information and projections previously delivered to the Administrative Agent and the Lenders. Holdings shall be in compliance with the covenants set forth in Sections 6.13, 6.14 and 6.15, giving pro forma effect to the Transactions as if such Transactions had occurred at the beginning of each relevant period, and the Administrative Agent shall have received a certificate of a Financial Officer of Holdings demonstrating such compliance. The Administrative Agent shall notify the Borrower and the Lenders of the Amendment Effectiveness Date (which shall be the date specified by the Borrower pursuant to Section 2(b) above; provided that the conditions specified in this Agreement shall have been satisfied on or prior to such date), and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans under the Restated Credit Agreement shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 9.02 of the Restated Credit Agreement) at or prior to 5:00 p.m., New York City time, on June 12, 2002 (and, in the event such conditions are not so satisfied or waived, this Agreement shall terminate at such time). SECTION 7. Effectiveness; Counterparts. This Amendment Agreement shall become effective when copies hereof which, when taken together, bear the signatures of each of (a) Holdings, the Borrower and the Administrative Agent, (b) the Tranche B Lenders under the Restated Credit Agreement and (c) lenders constituting the Required Lenders under the Original Credit Agreement (which may include certain of the Tranche B Lenders under the Restated Credit Agreement) shall have been received by the revolving lenders under the Original Credit Agreement) shall have been received by the Administrative Agent. This Amendment Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract. Delivery of an executed counterpart of a signature page of this Amendment Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Amendment Agreement. SECTION 8. No Novation. This Amendment Agreement shall not extinguish the Loans outstanding under the Original Credit Agreement. Nothing herein contained shall be construed as a substitution or novation of the Loans outstanding under the Original Credit Agreement, which shall remain outstanding as modified hereby. Notwithstanding any provision of this Agreement, the provisions of Sections 2.15, 2.16, 2.17 and 9.03 of the Original Credit Agreement as in effect immediately prior to the Amendment Effectiveness Date will continue to be effective as to all matters arising out of or in any way related to facts or events existing or occurring prior to the Amendment Effectiveness Date. SECTION 9. Notices. All notices hereunder shall be given in accordance with the provisions of Section 9.01 of the Restated Credit Agreement or, in the case of a notice to any Tranche B Lender under the Original Credit Agreement, in accordance with Section 9.01 of the Original Credit Agreement. SECTION 10. Applicable Law; Waiver of Jury Trial. (A) THIS AMENDMENT AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. (B) EACH PARTY HERETO HEREBY AGREES AS SET FORTH IN SECTION 10.10 OF THE RESTATED CREDIT AGREEMENT AS IF SUCH SECTION WERE SET FORTH IN FULL HEREIN. KANSAS CITY SOUTHERN, by /s/ Paul S. Weyandt ----------------------------------- Name: Paul S. Weyandt Title: Vice President & Treasurer KANSAS CITY SOUTHERN RAILWAY COMPANY, by /s/ Paul S. Weyandt ----------------------------------- Name: Paul S. Weyandt Title: Vice President & Treasurer JPMORGAN CHASE BANK, individually and as Administrative Agent, Collateral Agent, Issuing Bank and Swingline Lender, by /s/ Julie S. Long ----------------------------------- Name: Julie S. Long Title: Vice President EXHIBITS Exhibits Exhibit A - Restated Credit Agreement, together with schedules thereto Exhibit B - Form of Opinion of Sonnenschein, Nath & Rosenthal, Counsel for the Borrower Exhibit C - Form of Reaffirmation Agreement Exhibit D - Form of Master Assignment Agreement EXHIBIT A AMENDED AND RESTATED CREDIT AGREEMENT dated as of June 12, 2002 among KANSAS CITY SOUTHERN THE KANSAS CITY SOUTHERN RAILWAY COMPANY The Lenders Party Hereto and JPMORGAN CHASE BANK, as Administrative Agent, Collateral Agent, Issuing Bank and Swingline Lender J.P. MORGAN SECURITIES INC., as Advisor, Sole Arranger and Sole Bookrunner TABLE OF CONTENTS
Page ARTICLE I Definitions; Construction SECTION 1.01. Defined Terms .......................................... 1 SECTION 1.02. Classification of Loans and Borrowings ................. 20 SECTION 1.03. Terms Generally ........................................ 20 SECTION 1.04. Accounting Terms; GAAP ................................. 20 ARTICLE II The Credits SECTION 2.01. Commitments ............................................ 22 SECTION 2.02. Loans and Borrowings ................................... 22 SECTION 2.03. Requests for Borrowings ................................ 22 SECTION 2.04. Swingline Loans ........................................ 23 SECTION 2.05. Letters of Credit ...................................... 24 SECTION 2.06. Funding of Borrowing ................................... 27 SECTION 2.07. Interest Elections ..................................... 28 SECTION 2.08. Termination and Reduction of Revolving Commitments ..... 29 SECTION 2.09. Repayment of Loans: Evidence of Debt ................... 29 SECTION 2.10. Amortization of Trance B Term Loans .................... 30 SECTION 2.11. Prepayment of Loans .................................... 31 SECTION 2.12. Fees ................................................... 32 SECTION 2.13. Interest ............................................... 33 SECTION 2.14. Alternate Rate of Interest ............................. 33 SECTION 2.15. Increased Costs ........................................ 34 SECTION 2.16. Break Funding Payments ................................. 35 SECTION 2.17. Taxes .................................................. 35 SECTION 2.18. Payments Generally; Pro Rata Treatment; Sharing of Set-offs ............................................... 36 SECTION 2.19. Mitigation Obligations; Replacement of Lenders ......... 37 ARTICLE III Representations and Warranties SECTION 3.01. Organization; Powers ................................... 38 SECTION 3.02. Authorization; Enforceability .......................... 38 SECTION 3.03. Governmental Approvals; No Conflicts ................... 38 SECTION 3.04. Financial Condition; No Material Adverse Change ........ 39 SECTION 3.05. Properties ............................................. 39 SECTION 3.06. Litigation and Environmental Matters ................... 40 SECTION 3.07. Compliance with Laws and Agreements .................... 40 SECTION 3.08. Investment and Holding Company Status .................. 40 SECTION 3.09. Taxes .................................................. 40 SECTION 3.10. Employee Benefit Plans ................................. 40
SECTION 3.11. Disclosure ............................................. 41 SECTION 3.12. Subsidiaries ........................................... 41 SECTION 3.13. Insurance .............................................. 41 SECTION 3.14. No Undisclosed Dividend Restrictions ................... 41 ARTICLE IV Conditions SECTION 4.01. Effective Date ........................................ 41 SECTION 4.02. Each Credit Event ...................................... 41 ARTICLE V Affirmative Covenants SECTION 5.01. Financial Statements and Other Information ............. 42 SECTION 5.02. Notices of Material Events ............................. 43 SECTION 5.03. Information Regarding Collateral ....................... 43 SECTION 5.04. Existence; Conduct of Business ......................... 44 SECTION 5.06. Maintenance of Properties .............................. 44 SECTION 5.07. Insurance .............................................. 44 SECTION 5.08. Casualty and Condemnation .............................. 44 SECTION 5.09. Books and Records; Inspection and Audit Rights ......... 44 SECTION 5.10. Compliance with Laws ................................... 45 SECTION 5.11. Use of Proceeds and Letters of Credit .................. 45 SECTION 5.12. Additional Subsidiaries ................................ 45 SECTION 5.13. Further Assurances ..................................... 45 ARTICLE VI Negative Covenants SECTION 6.01. Indebtedness; Certain Equity Securities ................ 46 SECTION 6.02. Liens .................................................. 47 SECTION 6.03. Sale and Leaseback Transactions ........................ 48 SECTION 6.04. Mergers and Consolidations ............................. 48 SECTION 6.05. Asset Sales ............................................ 49 SECTION 6.06. Transactions with Affiliates ........................... 49 SECTION 6.07. Certain Other Agreements ............................... 49 SECTION 6.08. Investments, Loans, Advances, Guarantees and Acquisitions .......................................... 50 SECTION 6.09. Hedging Agreements ..................................... 51 SECTION 6.10. Restricted Payments; Certain Payments of Indebtedness .. 51 SECTION 6.11. Amendment of Material Documents ........................ 52 SECTION 6.12. Ownership of Caymex, NAFTA Rail and Grupo TFM .......... 52 SECTION 6.13. Interest Expense Coverage Ratio ........................ 52 SECTION 6.14. Leverage Ratio ......................................... 52 SECTION 6.15. Capital Expenditures ................................... 52 ARTICLE VII Events of Default ARTICLE VIII The Administrative Agent ARTICLE IX Miscellaneous SECTION 9.01. Notices ................................................ 57 SECTION 9.02. Waivers; Amendments .................................... 57 SECTION 9.03. Expenses; Indemnity; Damage Waiver ..................... 58 SECTION 9.04. Successors and Assigns ................................. 59 SECTION 9.05. Survival ............................................... 62 SECTION 9.06. Counterparts; Integration; Effectiveness ............... 62 SECTION 9.07. Severability ........................................... 62 SECTION 9.08. Right of Setoff ........................................ 63 SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process ............................................... 63 SECTION 9.10. WAIVER OF JURY TRIAL ................................... 63 SECTION 9.11. Headings ............................................... 64 SECTION 9.12. Confidentiality ........................................ 64 SECTION 9.13. Interest Rate Limitation ............................... 64 SECTION 9.15. No Novation ............................................ 65
SCHEDULES: Schedule 1 - Mortgaged Property Schedule 2.01 - Commitments Schedule 3.05(b) - Real Property Schedule 3.05(c) - Condemnation Proceedings Schedule 3.06 - Disclosed Matters Schedule 3.12 - Subsidiaries Schedule 3.13 - Insurance Schedule 6.01 - Existing Indebtedness Schedule 6.02 - Existing Liens Schedule 6.07 - Restrictive Agreements EXHIBITS: Exhibit A - Form of Assignment and Acceptance Exhibit B - Form of Opinion of Sonnenschein Nath & Rosenthal Exhibit C - Form of Guarantee Agreement Exhibit D - Form of Indemnity, Subrogation and Contribution Agreement Exhibit E - Form ofPledge Agreement Exhibit F - Form of Security Agreement AMENDED AND RESTATED CREDIT AGREEMENT dated as of June 12, 2002 among KANSAS CITY SOUTHERN, THE KANSAS CITY SOUTHERN RAILWAY COMPANY, the LENDERS party hereto, and JPMORGAN CHASE BANK (formerly known as The Chase Manhattan Bank), as Administrative Agent, Collateral Agent, Issuing Bank and Swingline Lender. The Borrower (such term and each other capitalized term used but not defined herein having the meaning given to it in Article I), Holdings, certain of the Lenders, the Administrative Agent, the Collateral Agent, the Issuing Bank and the Swingline Lender were parties to the Credit Agreement dated as of January 11, 2000, as amended (the "Original Credit Agreement"). The Borrower intends to issue the 2002 Senior Notes on the date hereof and will use the proceeds of the 2002 Senior Notes to repay on the Effective Date all of the Tranche A Term Loans (as defined in the Original Credit Agreement) and Tranche B Term Loans (as defined in the Original Credit Agreement) in an aggregate principal amount of at least $96,875,000, in each case outstanding under the Original Credit Agreement. The Borrower, Holdings, the Administrative Agent and certain of the Lenders are parties to the Amendment and Restatement Agreement dated the date hereof pursuant to which the Original Credit Agreement is being amended and restated in the form of this Agreement and pursuant to which the Borrower has requested the Lenders to continue to extend credit in the form of (a) the Tranche B Term Loans outstanding on the Effective Date and not repaid as contemplated in the preceding paragraph in an aggregate principal amount not in excess of $150,000,000 and (b) Revolving Loans, Swingline Loans and Letters of Credit at any time and from time to time on or after the Effective Date and prior to the Revolving Maturity Date in an aggregate principal amount at any time outstanding not in excess of $100,000,000. The Borrower has requested the Issuing Bank to issue Letters of Credit in an aggregate stated amount at any time outstanding that will not result in the LC Exposure exceeding $15,000,000, and has requested the Swingline Lender to make available Swingline Loans in an aggregate principal amount at anytime outstanding not in excess of $10,000,000. The proceeds of the Term Loans and of the Revolving Loans outstanding prior to the Effective Date were used for the purposes set forth in the Original Credit Agreement. The proceeds of Revolving Loans made on and after the Effective Date are to be used to pay fees and expenses related to the Effective Date Transactions, to provide working capital and for other general corporate purposes of Holdings and the Subsidiaries. The Letters of Credit and Swingline Loans are to be used for general corporate purposes of Holdings and the Subsidiaries. The parties hereto agree as follows: ARTICLE I Definitions; Construction SECTION 1.01. Defined Terms. As used in this Agreement, the following terms have the meanings specified below: "ABR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "Additional Permitted Unsecured Debt" means any unsecured Indebtedness of Holdings or the Borrower; provided that (a), in no event shall the terms of such unsecured Indebtedness require any payments in respect of principal (including any prepayment, redemption, repurchase or defeasance) prior to the Tranche B Maturity Date, (b) a Subsidiary shall not Guarantee such unsecured Indebtedness unless (i) such Subsidiary also has Guaranteed the Obligations pursuant to the Guarantee Agreement, (ii) such Guarantee is unsecured and (iii) such Guarantee provides for the release and termination thereof, without action by any party, upon any release and termination of the Guarantee by the applicable Subsidiary of the Obligations (other than by reason of repayment and satisfaction of all of the Obligations), (c) Holdings and its Subsidiaries shall be in compliance with Sections 6.13 and 6.14 of this Agreement at the time such Indebtedness is incurred and after giving effect to such incurrence and (d) all of the Net Proceeds of such Indebtedness shall be used to prepay Tranche B Term Loans outstanding under this Agreement simultaneously with the incurrence of such Indebtedness; provided that, in connection with the exercise of Holdings' option or obligation, as the case may be, to purchase shares of capital stock of TFM, S.A., .de C.V. or Grupo TFM, in either case from the Mexican Federal government or any other. Mexican governmental entity or quasi-governmental entity, so long as Holdings or any of its Subsidiaries has previously received Net Proceeds in an aggregate amount of not less that $100,000,000 from the issuance by Holdings or any of its Subsidiaries of common Equity Interests or preferred Equity Interests of Holdings or the Borrower that do not require redemptions or repurchases prior to the Tranche B Maturity Date and all dividends in respect of which are accrued or paid with additional shares of such preferred Equity Interest, and such Net Proceeds shall have been used directly or indirectly, in the form of a capital contribution, to purchase capital stock of TFM, S.A., de C.V. or Grupo TFM, as applicable, the Borrower may incur up to $50,000,000 in the aggregate of Additional Permitted Unsecured Debt, the proceeds of which may be used to purchase additional capital stock of TFM, S.A. de C.V. or Grupo TFM, as applicable. "Adjusted LIBO Rate" means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "Administrative Agent" means JPMorgan Chase Bank, in its capacity as administrative agent for the Secured Parties. "Administrative Questionnaire" means an Administrative Questionnaire in a form supplied by the Administrative Agent. "Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Alternate Base Rate" means, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Amendment and Restatement Agreement" means the Amendment and Restatement Agreement dated the date hereof among Holdings, the Borrower, the Administrative Agent and certain of the Lenders. "Applicable Percentage" means, with respect to any Revolving Lender, the percentage of the total Revolving Commitments represented by such Lender's Revolving Commitment. If the Revolving Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Revolving Commitments most recently in effect, giving effect to any assignments. "Applicable Rate" means, for any day, (a) with respect to any Tranche B Term Loan, (i) 2.00% per annum in the case of a Eurodollar Loan and (ii) 1.00% per annum in the case of an ABR Loan; provided that in the event the credit facility under this Agreement is rated BBB- or better by S&P or Baa3 or better by Moody's, the Applicable Rate for any day with respect to any Tranche B Term Loan shall be reduced by 0.25% and (b) with respect to any Revolving Loan, the applicable rate per annum set forth :in the table below based on the Leverage Ratio: ============================= =============== ========================= Revolving Facility Eurodollar Revolving Facility ABR Leverage Ratio Spread Spread ----------------------------- --------------- ------------------------- Category 1 2.75% 1.75% ---------- (greater than)5.0:1.0 ----------------------------- --------------- ------------------------- Category 2 2.50% 1.50% ---------- (greater than)4.5:1.0 and (lesser than)5.0:1.0 ----------------------------- --------------- ------------------------- Category 3 2.25% 1.25% ---------- (greater than)4.0:1.0 and (lesser than)4.5:1.0 ----------------------------- --------------- ------------------------- Category 4 2.00% 1.00% ---------- (greater than)3.5 and (lesser than)4.0:1.0 ----------------------------- --------------- ------------------------- Category 5 1.75% .75% (lesser than)3.5:1.0 ============================= =============== ========================= The Leverage Ratio shall be determined as of the end of each fiscal quarter of Holdings based upon Holdings' consolidated financial statements delivered pursuant to Section 5.01 (a) or (b). Each change to the Applicable Rate resulting from a change in the Leverage Ratio shall be effective during the period commencing on and including the second Business Day following the date of delivery to the Administrative Agent of the consolidated financial statements indicating such change and ending on the date immediately preceding the effective date of the next such change; provided that if Holdings fails to deliver the consolidated financial statements required to be delivered by it pursuant to Section 5.01 (a) or (b), during the period from the expiration of the time for delivery thereof until such consolidated financial statements are delivered the Leverage Ratio shall be deemed to be greater than 5.0 to 1.0. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent. "Attributable Debt" means, in connection with any Sale and Leaseback Transaction, the present value (discounted in accordance with GAAP at the discount rate implied in the lease) of the obligations of the lessee for rental payments during the term of the lease. "Board" means the Board of Governors of the Federal Reserve System of the United States of America. "Borrower" means The Kansas City Southern Railway Company, a Missouri corporation. "Borrowing" means (a) Loans of the same Class and Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect, or (b) a Swingline Loan. "Borrowing Request" means a request by the Borrower for a Borrowing in accordance with Section 2.03. "Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Expenditures" means, for any period, (a) the additions to property, plant and equipment and other capital expenditures of Holdings and its consolidated subsidiaries that are (or would be) set forth in a consolidated statement of cash flows of Holdings for such period prepared in accordance with GAAP and (b) Capital Lease Obligations incurred by Holdings and its consolidated subsidiaries during such period. "Capital Lease Obligations" of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "Canada" means Canada Transportation, Inc., a Delaware corporation. "Caymex"means Caymex Transportation, Inc., a Delaware corporation. A "Change in Control" shall be deemed to have occurred if (i) at any time, less than 75% of the members of the board of directors of Holdings shall be (A) individuals who are members of such board on the date hereof or (B) individuals whose election, or nomination for election by Holdings's stockholders, was approved by a vote of at least 75% of the members of the board then still in office who are members of the board on the date hereof (or whose election or nomination has been approved as provided in this clause (b)), (ii) at any time, any person, or any two or more persons acting as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding or disposing of Equity Interests of Holdings, shall become, according to public announcement or filing, the "beneficial owner" (as defined in Rule 13d-3 issued under the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of Holdings representing 30% or more (calculated in accordance with such Rule 13d-3) of the combined voting power of Holdings' then outstanding voting securities, (iii) any Person other than Holdings shall acquire ownership, directly or indirectly, beneficially or of record of any Equity Interests of the Borrower or (iv) a "Change of Control" (or similar event), as such term may be defined in any indenture or other agreement or instrument governing Material Indebtedness, shall have occurred. "Change in Law" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender or the Issuing Bank (or, for purposes of Section 2.15(b), by any lending office of such Lender or by such Lender's or the Issuing Bank's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Class", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans, Tranche B Term Loans or Swingline Loans. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral" means any and all "Collateral", as defined in any applicable Security Document. "Collateral Agent" means JPMorgan Chase Bank, in its capacity as collateral agent for the Secured Parties. "Collateral and Guarantee Requirement" means the requirement that: (a) the Administrative Agent shall have received from each Loan Party either (i) a counterpart of each of the Security Agreement, a Pledge Agreement, the Guarantee Agreement and the Indemnity, Subrogation and Contribution Agreement duly executed and delivered on behalf of such Loan Party or (ii) in the case of any Person that becomes a Loan Party after the Effective Date, a supplement to each such agreement, in the form specified therein, duly executed and delivered on behalf of such Loan Party; (b) all outstanding Equity Interests of the Borrower, any Subsidiary or any other Person owned by or on behalf of any Loan Party shall have been pledged pursuant to the Pledge Agreements (except that the Loan Parties shall not be required to pledge more than 65% of the outstanding voting Equity Interests of any Foreign Subsidiary) and the Administrative Agent shall have received certificates or other instruments representing all such Equity Interests, together with stock powers or other instruments of transfer with respect thereto endorsed in blank; (c) all Indebtedness of Holdings, the Borrower and each Subsidiary that is owing to any Loan Party shall have been pledged pursuant to the Pledge Agreement and any promissory notes evidencing any such Indebtedness shall have been delivered to the Collateral Agent, together with instruments of transfer with respect thereto endorsed in blank; (d) all documents and instruments, including Uniform Commercial Code financing statements and. filings with the STB, required by law or reasonably requested by the Administrative Agent to be filed, registered or recorded to create the Liens intended to be created by the Security Agreement and perfect such Liens to the extent required by, and with the priority required by, the Security Agreement, shall have been filed, registered or recorded or delivered to the Administrative Agent for filing, registration or recording; (e) the Collateral Agent shall have received (i) counterparts of Mortgages with respect to all Mortgaged Properties, duly executed and delivered by the record owners of such Mortgaged Property and (ii) such legal opinions, title insurance (except in the case of Mortgaged Properties consisting of railroad facilities (other than the Borrower's railroad yard in Shreveport, Louisiana), intermodal facilities and rights of way), insurance and other documents as may be required under the Mortgages or applicable law, or as the Administrative Agent may reasonably request, with respect to any such Mortgages or Mortgaged Properties; and (f) each Loan Party shall have obtained all consents and approvals required to be obtained by it in connection with the execution and delivery of all Security Documents to which it is a party, the performance of its obligations thereunder and the granting by it of the Liens thereunder. The foregoing definition shall not require the creation or perfection of pledges of or security interests in, or the obtaining of title insurance with respect to, particular assets of the Loan Parties if and for so long as, in the judgment of the Administrative Agent, the cost of creating or perfecting such pledges or security interests in such assets or obtaining title insurance in respect of such assets shall be excessive in view of the benefits to be obtained by the Lenders therefrom. The Administrative Agent may grant extensions of time for the perfection of security interests in or the obtaining of title insurance with respect to particular assets (including extensions beyond the Effective Date for the perfection of security interests in the assets of the Loan Parties on such date) where it determines that perfection cannot be accomplished without undue effort or expense by the time or times at which it would otherwise be required by this Agreement or the Security Documents. "Commitment" means a Revolving Commitment. "Consolidated EBITDA" means, for any period, Consolidated Net Income for such period plus (a) without duplication and to the extent deducted in determining such Consolidated Net Income, the sum of (i) Consolidated Interest Expense for such period, (ii) consolidated income tax expense for such period, (iii) all amounts attributable to depreciation and amortization for such period and (iv) all extraordinary losses for such period and minus (b) without duplication and to the extent included in determining such Consolidated Net Income, any extraordinary gains for such period, all determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" means, for any period, the interest expense (including imputed interest expense in respect of Capital Lease Obligations) of Holdings and the Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP; provided that (a) for purposes of calculating the "Consolidated Interest Expense" with respect to Unit Debentures in the financial covenant set forth in Section 6.13, the "Consolidated Interest Expense", for any period, shall include only the cash interest expense paid on Unit Debentures by Holdings and the Subsidiaries for such period and (b) all cash dividends paid during such period with respect to preferred Equity Interests issued after the date hereof in respect of which cash dividends are payable. "Consolidated Net Income" means, for any period, the net income or loss of Holdings, the Borrower and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded (a) the income of any Person (other than Holdings) in which any other Person (other than Holdings, the Borrower or any Subsidiary or any director holding qualifying shares in compliance with applicable law) owns an Equity Interest, except to the extent of the amount of dividends or other distributions actually paid to Holdings, the Borrower or any of the Subsidiaries during such period, and (b) the income or loss of any Person accrued prior to the date it becomes a Subsidiary or is merged into or consolidated with Holdings, the Borrower or any Subsidiary or the date that such Person's assets are acquired by Holdings, the Borrower or any Subsidiary. "Consolidated Net Worth" shall mean, on any date the stockholders' equity of Holdings and the Subsidiaries on such date, determined on a consolidated basis in accordance with GAAP. "Control" means 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. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with Holdings or any Subsidiary, are treated as a single employer under Section 414(b) or 414(c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, are treated as a single employer under Section 414(b), (c), (m) or (o) of the Code. "Default" means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Disclosed Matters" means the actions, suits and proceedings and the environmental matters disclosed in Schedule 3.06. "dollars" or I" refers to lawful money of the United States of America. "Effective Date" means the date on which the conditions specified in Section 6 of the Amendment and Restatement Agreement are satisfied (or waived in accordance with Section 9.02 hereof). "Effective Date Transactions" means the Transactions that have occurred, or that are contemplated or required by this Agreement to have occurred, on or before the Effective Date and prior to or simultaneously with the initial Borrowing or issuance of a Letter of Credit hereunder. "Environmental Laws" means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or to health and safety matters. "Environmental Liability" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of Holdings, the Borrower or any Subsidiary 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" means 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. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Event" means (a) any Reportable Event; (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by Holdings or any member of the Controlled Group of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by Holdings or any member of the Controlled Group from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or to appoint a trustee to administer any Plan; (f) the incurrence by Holdings or any member of the Controlled Group of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by Holdings or any member of the Controlled Group of any notice, or the receipt by any Multiemployer Plan from Holdings or any member of the Controlled Group of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "Eurodollar", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate. "Event of Default" has the meaning assigned to such term in Article VII. "Excess Cash Flow" means, for any fiscal year, an amount equal to: (a) Consolidated EBITDA for such fiscal year; minus (b) cash tax payments made by Holdings and its Subsidiaries during such fiscal year; minus (c) Consolidated Interest Expense for such fiscal year; minus (d) (i) Capital Expenditures for such fiscal year (except to the extent attributable to the incurrence of Capital Lease Obligations or otherwise financed by incurring longterm Indebtedness) and (ii) capital contributions, loans and guaranteed Indebtedness and sale and leaseback transactions made during such fiscal year, in each case permitted by Section 6.080); minus (e) the aggregate principal amount of long-term Indebtedness repaid or prepaid by Holdings and its consolidated Subsidiaries during such fiscal year, excluding (i) Indebtedness in respect of Revolving Loans and Letters of Credit, (ii) Term Loans prepaid pursuant to Section 2.11 (c) (other than any part of such prepayment attributable to gains on asset sales that are included in the calculation of consolidated Net Income for such fiscal year) or (d), and (iii) repayments or prepayments of long-term Indebtedness financed by incurring other long-term Indebtedness; minus (f) the aggregate amount of investments or other payments required to be made by Holdings or any of the Subsidiaries during such fiscal year pursuant to mandatory capital calls or similar agreements under joint venture, limited liability company or shareholder agreements. "Excluded Taxes" means, with respect to the Administrative Agent, any Lender, the Issuing Bank or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction described in clause (a) above and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.19(b)), any withholding tax that (i) is in effect and would apply to amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to any withholding tax pursuant to Section 2.17(a), or (ii) is attributable to such Foreign Lender's failure to comply with Section 2.17(e). "Federal Funds Effective Rate" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Financial Officer" means, with respect to any Person, the chief financial officer, principal accounting officer, treasurer or controller of such Person. "Foreign Lender" means any Lender that is organized under the laws of a jurisdiction other than that in :which the Borrower is located For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "Foreign Subsidiary" means any Subsidiary that is organized under the laws of a jurisdiction other than the United States of America or any State thereof or the District of Columbia. "GAAP" means generally accepted accounting principles in the United States of America. "Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government including the National Association of Insurance Commissioners. "Grupo TFM" means Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V., a Mexican corporation. "Grupo TFM Phase III Investment" means the purchase, or any capital contribution made to Grupo TFM, TFM, S.A. de C.V. or both to fund the purchase, on or about July 31, 2002 by Holdings (or a Subsidiary on behalf of Holdings) of an option to purchase (alone or together with other direct or indirect shareholders of Grupo TFM) from the Federal government of Mexico or any other Mexican governmental entity or quasi-governmental entity an interest of approximately 24.6% in Grupo TFM for approximately $255,000,000. "Grupo TFM Phase N Investment" means the purchase, or any capital contribution made to Grupo TFM, TFM, S.A. de C.V. or both to fund the purchase (alone or together with other direct or indirect shareholders of Grupo TFM) in October 2003 by Holdings from the Federal government of Mexico or any other Mexican governmental entity or quasi-governmental entity, pursuant to an option held by such government, of an additional interest of approximately 20% in TFM, S.A. de C.V. for consideration in an aggregate amount of approximately $555,000,000. "Guarantee" of or by any Person (the "guarantor") means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support ,such Indebtedness or obligation; provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. "Guarantee Agreement" means the Guarantee Agreement substantially in the form of Exhibit C among Holdings, the Subsidiaries from time to time party thereto and the Collateral Agent for the benefit of the Secured Parties, as the same may be amended, modified or supplemented from time to time in accordance with the provisions hereof. "Hazardous Materials" means 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. "Hedging Agreement" means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "Holdings" means Kansas City Southern, a Delaware corporation. "Indebtedness"of any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, including the Unit Debentures, (c) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (d) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (e) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (f) all Guarantees by such Person of Indebtedness of others, (g) all Capital Lease Obligations of such Person, (h) all Securitization Transactions of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty and (j) all obligations, contingent or otherwise, of such Person in respect of bankers' acceptances. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. For purposes of calculating the financial covenants set forth in Section 6.14 (but not for purposes of determining the Applicable Rate or for any other purpose), for the period from the closing of the Mandatory Convertible Units Offering to the third anniversary thereof, there shall be excluded from the definition of "Indebtedness" an amount equal to (i) 75(degree)/" of the aggregate outstanding principal amount of the Unit Debentures multiplied by (ii) the percentage, expressed as a decimal, of the aggregate consideration originally payable for Equity Interests in Holdings under the Units Purchase Contract that has not yet been paid by the purchasers. "Indemnified Taxes" means Taxes other than Excluded Taxes. "Indemnity Subrogation and Contribution Agreement" means an Indemnity, Subrogation and Contribution Agreement substantially in the form of Exhibit D among Holdings, the Borrower, the Subsidiaries from time to time party thereto and the Collateral Agent for the benefit of the Secured Parties, as the same may be amended, modified or supplemented from time to time in accordance with the provisions hereof. "Information Memorandum" means the Confidential Information Memorandum dated May 2002, relating to the Borrower and the Transactions. "Interest Election Request" means a request by the Borrower to convert or continue a Revolving Borrowing or Term Borrowing in accordance with Section 2.07. "Interest Payment Date" means (a) with respect to any ABR Loan (other than a Swingline Loan), the last day of each March, June, September and December, (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day prior to the last day of such Interest Period that occurs at intervals of three months' duration after the first day of such Interest Period, and (c) with respect to any Swingline Loan, the day that such Loan is required to be repaid. "Interest Period" means, with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect; provided, that (a) if any Interest Period would end on a. day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month; in which case such Interest Period shall end on the next preceding Business Day and (b) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. "Interstate Commerce Act" means the Interstate Commerce Commission Termination Act of 1995, and the regulations promulgated thereunder. "Issuing Bank" means JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), in its capacity as the issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section 2.05(i). The Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Issuing Bank, in which case the term "Issuing Bank" shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate. "LC Disbursement" means a payment made by the Issuing Bank pursuant to a draw under a Letter of Credit. "LC Exposure" means, at any time, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (b) the aggregate amount of all LC Disbursements that have not yet been reimbursed by or on behalf of the Borrower at such time. The LC Exposure of any Revolving Lender at any time shall be its Applicable Percentage of the total LC Exposure at such time. "Lenders" means the Persons listed on Schedule 2.01 and any other Person that shall have become a party hereto pursuant to an Assignment and Acceptance, other than any such Person that shall have ceased to be a party hereto pursuant to an Assignment and Acceptance. Unless the context otherwise requires, the term "Lenders" includes the Swingline Lender. "Letter of Credit" means any letter of credit issued pursuant to this Agreement. "Leverage Ratio" means, on any date, the ratio of (a) Total Indebtedness as of such date to (b) Consolidated EBITDA for the period of four consecutive fiscal quarters of Holdings ended on such date. "LIBO Rate" means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Dow Jones Market Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the. London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBO Rate" with respect to such Eurodollar Borrowing for such' Interest Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "Lien" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Loan Documents" means this Agreement, the Guarantee Agreement, the Indemnity, Subrogation and Contribution Agreement, each Pledge Agreement, the Security Agreement, the Mortgages, the other Security Documents, the Master Assignment Agreement, the Reaffirmation Agreement and the Amendment and Restatement Agreement. "Loan Parties" means Holdings, the Borrower and the other Subsidiary Loan Parties. "Loans" means the loans made by the Lenders to the Borrower pursuant to this Agreement. "Mandatory Convertible Units Offering" means the offering of (a) Unit Debentures and (b) the Units Purchase Contract. "Master Assignment Agreement" means the Master Assignment Agreement dated the date hereof among Holdings, the Borrower, the Administrative Agent, the Assignors (as defined therein) and the Assignees (as defined therein). "Material Adverse Effect" means a material adverse effect on (a) the business, assets, liabilities, operations, condition (financial or otherwise) or prospects of Holdings, the Borrower and the other Subsidiaries taken as a whole, (b) the ability of any Loan Party to perform any of its obligations under any Loan Document or to complete the Transactions in any material respect or (c) the rights of or benefits available to the Lenders under any Loan Document. "Material Indebtedness" means Indebtedness (other than the Loans and Letters of Credit), or obligations in respect of one or more Hedging Agreements, of any one or more of Holdings, the Borrower and the other Subsidiaries in an aggregate principal amount exceeding $20,000,000. For purposes of determining Material Indebtedness, the "principal amount" of the obligations of Holdings, the Borrower or any other Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that Holdings, the Borrower or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time. "Moody's" means Moody's Investors Service, Inc. "Mortgage" means a mortgage, deed of trust, assignment of leases and rents, leasehold mortgage or other security document granting a Lien on any Mortgaged Property to secure the Obligations. Each Mortgage shall be satisfactory in form and substance to the Collateral Agent. "Mortgaged Property" means, initially, the real property and the improvements thereto owned by the Loan Parties and described on Schedule 1 and all Rights of Way (as defined in any Mortgage), and includes all other real property and improvements thereto with respect to which Mortgages are granted pursuant to Section 5.12 or 5.13. "Multiemployer Plan" shall mean a Plan that is a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA as to which Holdings or any member of the Controlled Group may have any liability. "NAFTA Rail" means NAFTA Rail, S.A. de C.V.; a Mexican corporation. "Net Proceeds" means, with respect to any event, (a) the cash proceeds received in respect of such event including (i) any cash received in respect of any non-cash proceeds, but only as and when received, (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 (i) all reasonable fees and out-of-pocket expenses paid by Holdings, the Borrower and the other Subsidiaries to third parties (other than Affiliates) in connection with such event, (ii) in the case of a sale, transfer or other disposition of an asset (including pursuant to a Sale and Leaseback Transaction or a casualty or a condemnation or similar proceeding), the amount of all payments required to be made by Holdings, the Borrower and the other Subsidiaries as a result of such event to repay Indebtedness (other than Loans) secured by such asset or otherwise subject to mandatory prepayment as a result of such event, and (iii) the amount of all taxes paid (or reasonably estimated to be payable) by Holdings, the Borrower and the other Subsidiaries, and the amount of any reserves established by Holdings, the Borrower and the other 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 Holdings). Notwithstanding the foregoing, the first $10,000,000 of cash proceeds received during any fiscal year in respect of Prepayment Events described in clauses (a) and (b) of the definition of such term shall not be deemed to constitute Net Proceeds. "Obligations" means (a) the due and punctual payment of (i) the principal of and interest (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, (ii) each payment required to be made under this Agreement in respect of any Letter of Credit, when and as due, including payments in respect of reimbursement of LC Disbursements, interest thereon and obligations to provide cash collateral and (iii) all other monetary obligations, including fees, costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), of Holdings, the Borrower or any other Subsidiary to the Secured Parties under this Agreement or any other Loan Document, (b) the due and punctual payment and performance of all covenants, agreements, obligations, and liabilities of the Loan Parties, monetary or otherwise, under or pursuant to this Agreement and the other Loan Documents and (c) the due and punctual payment of all obligations of the Borrower under each. Hedging Agreement entered into (i) prior to the date hereof with any counterparty that is a Lender (or an Affiliate thereof) on the date hereof or (ii) on or after the date hereof with any counterparty that is a Lender (or an Affiliate thereof) at the time such Hedging Agreement is entered into, in either case to provide protection against interest rate fluctuations. "Original Credit Agreement" means the Credit Agreement dated as of January 11, 2000 among Holdings, the Borrower, the lenders named therein and The Chase Manhattan Bank, as administrative agent, collateral agent, issuing bank and swingline lender, as amended. "Other Taxes" means any and all present or future recording, stamp, documentary, excise, transfer, sales, property or similar taxes, charges or levies arising from any payment made under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document. "PBGC" means the- Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "Perfection Certificate" means a certificate in a form approved by the Collateral Agent. "Permitted Investments" means: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof; (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having,. at such date of acquisition, the highest credit rating obtainable from S&P or from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof which has a combined capital and surplus and undivided profits of not less than $500,000,000; (d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above; and (e) such other liquid investments as shall be approved by the Administrative Agent. "Permitted Subordinated Debt" means any unsecured Indebtedness of Holdings or the Borrower that is subordinated to the Obligations on terms satisfactory to, and all the provisions of which (including amount, maturity, amortization, prepayment or similar requirements, interest rate, covenants, defaults, and subordination) have been approved as to form and substance by, the Administrative Agent, it being understood that (a) in no event shall the terms of such subordinated Indebtedness require any amortization prior to the Tranche B Maturity Date, and (b) a Subsidiary shall not Guarantee such subordinated Indebtedness unless (i) such Subsidiary also has Guaranteed the Obligations pursuant to the Guarantee Agreement, (ii) such Guarantee of such subordinated Indebtedness is unsecured and subordinated to the Guarantee of the Obligations on terms no less favorable to:the Lenders than the subordination provisions of such subordinated Indebtedness and (iii) such Guarantee of such subordinated Indebtedness provides for the release and termination thereof, without action by any party, upon any release and termination of such Guarantee of the Obligations. "Permitted Unsecured Debt" means any unsecured Indebtedness of Holdings or the Borrower, in an aggregate principal amount not to exceed $200,000,000 outstanding at any time, all the provisions of which (including amount, maturity, amortization, prepayment or similar requirements, interest rate, covenants and defaults) have been approved as to form and substance by the Administrative Agent, it being understood that (a) in no event shall the terms of such unsecured Indebtedness require any payments in respect of principal or redemptions prior to the Tranche B Maturity Date, and (b) a Subsidiary shall not Guarantee such unsecured Indebtedness unless (i) such Subsidiary also has Guaranteed the Obligations pursuant to the Guarantee Agreement, (ii) such Guarantee is unsecured and (iii) such Guarantee provides for the release and termination thereof, without action by any party, upon any release and termination of the Guarantee by the applicable Subsidiary of the Obligations (other than by reason of repayment and satisfaction of all of the Obligations). "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "Plan" shall mean any employee pension benefit plan that is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which Holdings or any member of the Controlled Group may have any liability. "Pledge Agreements" means (a) a Pledge Agreement substantially in the form of Exhibit E among Holdings, the Borrower, the other Subsidiaries from time to time party thereto and the Collateral Agent and (b) in connection with pledges of shares of or other equity interests in Foreign Subsidiaries, other pledge agreements or similar agreements in form and substance satisfactory to the Collateral Agent, as the same may be amended, modified or supplemented from time to time in accordance with the provisions hereof. "Prepayment Event" means: (a) any sale, transfer or other disposition (including pursuant to a Sale and Leaseback Transaction or Securitization Transaction) of any property or asset of Holdings, the Borrower or any other Subsidiary, other than (i) sales, transfers or dispositions described in clauses (a) and (b) of Section 6.05 and (ii) transfers of accounts receivable in Securitization Transactions to the extent the aggregate amount of all such transactions after the date of this Agreement shall not exceed $25,000,000; or (b) any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of, any property or asset of Holdings, the Borrower or any other Subsidiary, but only to the extent that the Net Proceeds therefrom have not been applied to repair, restore or replace such property or asset within 360 days after such event; or (c) the issuance by Holdings, the Borrower or any other Subsidiary of any Equity Interests, or the receipt by Holdings, the Borrower or any other Subsidiary of any capital contribution, other than (i) any such issuance of Equity Interests to, or receipt of any such capital contribution from, Holdings, the Borrower or any other Subsidiary, (ii) issuances of preferred Equity Interests of Holdings or the Borrower that do not require redemptions or repurchases prior to the Tranche B Maturity Date and all dividends in respect of which are accrued or paid with additional shares of such preferred Equity Interest and (iii) issuances of common Equity Interests of Holdings, the Borrower or any Subsidiary; provided, with respect to issuances of such preferred Equity Interests or common Equity Interests by any Subsidiary, the Borrower shall apply the Net Proceeds of such issuance to prepay Term Borrowings or to acquire, directly or indirectly, real property, equipment,. tangible assets or Equity Interests of a Subsidiary or any entity in which Holdings or a Subsidiary already holds a minority interest, in each case within the same time periods and subject to similar certifications as described in Section 2.11(c); or (d) the oncurrence by Holdings, the Borrower or any other Subsidiary of any Additional Permitted Unsecured Indebtedness (except as otherwise permitted in such defined term), Permitted Unsecured Debt, any Permitted Subordinated Debt or any Indebtedness evidenced by the Unit Debentures. "Prime Rate" means the rate of interest per annum publicly announced from time to time by JPMorgan Chase Bank as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "Railway Labor Act" means Railway Labor Act, as amended from time to time. "Reaffirmation Agreement" means the Reaffirmation Agreement dated the date hereof among Holdings, the Borrower, the Subsidiary Loan Parties and the Collateral Agent. "Register" has the meaning set forth in Section 9.04. "Related Fund" means with respect to any Lender that is a fund that invests in bank loans, any other fund that invests in bank loans and is advised or managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor. "Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "Reportable Event" shall mean any reportable event as defined in Section 4043 of ERISA and the regulations issued under such Section with respect to a Plan (other than a Multiemployer Plan), excluding, however, such events as to which the PBGC by regulation or by technical update waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event; provided that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a reportable event regardless of the issuance of any waiver in accordance with Section 412(d) of the Code or Section 303(d) of ERISA. "Required Lenders" means, at any time, Lenders having Revolving Exposures, Term Loans and unused Commitments representing more than 50% of the sum of the total Revolving Exposures, outstanding Term Loans and unused Commitments at such time. "Restricted Payment" means any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests in Holdings, the Borrower or any other Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancelation or termination of any Equity Interests in Holdings, the Borrower or any other Subsidiary or any option, warrant or other right to acquire any such Equity Interests in Holdings, the Borrower or any other Subsidiary. "Revolving Availability, Period" means the period from and including the Effective Date to but excluding the earlier of the Revolving Maturity Date and the date of termination of the Revolving Commitments. "Revolving Commitment" means, with respect to each Lender, the commitment, if any, of such Lender to make Revolving Loans and to acquire participations in Letters of Credit and Swingline Loans hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amount of each Lender's Revolving Commitment is set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Revolving Commitment, as applicable. The initial aggregate amount of the Lenders' Revolving Commitments is $100,000,000. "Revolving Exposure" means, with respect to any Lender at any time, the sum of the outstanding principal amount of such Lender's Revolving Loans and its LC Exposure and Swingline Exposure at such time. "Revolving Lender" means a Lender with a Revolving Commitment or, if the Revolving Commitments have terminated or expired, a Lender with Revolving Exposure. "Revolving Loan" means a Loan made pursuant to clause (b) of Section 2.01. "Revolving Maturity Date" means January 11, 2006. "Sale and Leaseback Transaction" means any arrangement, directly or indirectly, whereby any Person shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred. "Secured Parties" means (a) the Lenders, (b) the Administrative Agent, (c) the Issuing Bank, (d) the Collateral Agent, (e) each other holder of or obligee in respect of any Obligations and (f) the successors and assigns of each of the foregoing. "Securitization Transaction" means any transfer by the Borrower or any Subsidiary of accounts receivable or interests therein (a) to a trust, partnership, corporation or other entity, which transfer is funded in whole or in part, directly or indirectly, by the incurrence or issuance by the transferee or any successor transferee of Indebtedness or other securities that are to receive payments from, or that represent interests in, the cash flow derived from such accounts receivable or interests, or (b) directly to one or more investors or other purchasers. The amount of any Securitization Transaction shall be deemed at any time to be the aggregate principal or stated amount of the Indebtedness or other securities referred to in the preceding sentence or, if there shall be no such principal or stated amount, the uncollected amount of the accounts receivable transferred pursuant to such Securitization Transaction net of any such accounts receivable that have been written off as uncollectible. "Security Agreement" means a Security Agreement substantially in the form of Exhibit F among Holdings, the Borrower, the other Subsidiaries from time to time party thereto and the Collateral Agent for the benefit of the Secured Parties, as the same may be amended, modified or supplemented from time to time in accordance with the provisions hereof. "Security Documents" means the Security Agreement, each Pledge Agreement, the Mortgages and each other security agreement or other instrument or document executed and delivered pursuant to Section 5.12 or 5.13 to secure any of the Obligations. "Significant Subsidiary" means (a) the Borrower and Caymex, (b) any Subsidiary owning an Equity Interest in a Significant Subsidiary and (c) any other Subsidiary (i) the consolidated revenues of which for the most recent fiscal year of Holdings for which audited financial statements have been delivered pursuant to Section 5.01 were greater than 5% of Holdings' consolidated revenues for such fiscal year or (ii) the consolidated tangible assets of which as of the end of such fiscal year were greater than 5% of Holdings' consolidated tangible assets as of such date. "S&P" means Standard & Poor's Ratings Group. "Statutory Reserve Rate" means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "STB" shall mean the Surface Transportation Board, a board established within the Department of Transportation, or any successor Federal agency charged with similar regulation of common carriers. "subsidiary" means, with respect to any Person (the "parent") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" means the Borrower and each other subsidiary of Holdings. "Subsidiary Loan Party" means each of Veals, Inc., Trans-Serve, Inc., Gateway Eastern Railway Company, PABTEX L.P., PABTEX GP, LLC, SIS Bulk Holding, Inc., The Kansas City Northern Railway Company, Mid-South Microwave, Inc. and any Significant Subsidiary that is not a Foreign Subsidiary. "Swingline Exposure" means, at any time, the aggregate principal amount of all Swingline Loans outstanding at such time. The Swingline Exposure of any Lender at any time shall be its Applicable Percentage of the total Swingline Exposure at such time. "Swingline Lender" means JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank), in its capacity as lender of Swingline Loans hereunder. "Swingline Loan" means a Loan made pursuant to Section 2.04. "Taxes" means any and all present or future taxes, levies, imposts, duties,deductions, charges or withholdings imposed by any Governmental Authority. "Term Loans" means Tranche B Term Loans. "Total Indebtedness" means, as of any date, the aggregate principal amount of Indebtedness of Holdings and the Subsidiaries outstanding as of such date that would be reflected on a balance sheet prepared as of such date on a consolidated basis in accordance with GAAP including, without duplication, the aggregate amount of all outstanding Securitization Transactions. "Tranche B Lender" means a Lender with an outstanding Tranche B Term Loan. "Tranche B Maturity Date" means June 12, 2008. "Tranche B Term Loan" means a Loan made pursuant to clause (b) of Section 2.01 of the Original Credit Agreement. "Transactions" means the issuance of the 2002 Senior Notes, the repayment in full of the Tranche A Term Loans (as defined in the Original Credit Agreement) under the Original Credit Agreement, the execution, delivery and performance by each Loan Party of the Loan Documents to which it is, or is to be, a party, the borrowing of Loans, the use of the proceeds thereof, the issuance of Letters of Credit, the creation of the Liens provided for in the Security Documents, the issuance of the 2002 Senior Notes and the use of proceeds thereof and the other transactions contemplated by the Loan Documents. "Transaction Costs" means the fees and expenses incurred in connection with the Transactions that are to occur on or prior to the Effective Date. "2002 Senior Notes" means unsecured 7-1/2% senior notes of the Borrower in an aggregate principal amount not to exceed $200,000,000 outstanding at any time, all the provisions of which (including amount, maturity, amortization, prepayment or similar requirements, interest rate, covenants and defaults) have been approved as to form and substance by the Administrative Agent, it being understood that (a) in no event shall the terms of such 2002 Senior Notes require any payments in respect of principal (including any prepayment, redemption, repurchase or defeasance) prior to the Tranche B Maturity Date, and (b) a Subsidiary shall not Guarantee such unsecured Indebtedness unless (i) such Subsidiary also has Guaranteed the Obligations pursuant to the Guarantee Agreement, (ii) such Guarantee of such Indebtedness is unsecured and (iii) such Guarantee of such Permitted Unsecured Debt provides for the release and termination thereof, without action by any party, upon any release and termination of the Guarantee by such Subsidiary of the Obligations (other than by reason of repayment and satisfaction of all of the Obligations). The proceeds of the 2002 Senior Notes shall be used (a) on the Effective Date to repay (i) the entire principal amount of the Tranche A Term Loans outstanding on such date under the Original Credit Agreement and interest thereon and (ii) $96,875,000 of the principal amount of Tranche B Term Loans outstanding under the Original Credit Agreement, (b) to repay $11,350,000 of aggregate principal amounts of other secured Indebtedness of the Borrower and (c) to pay Transaction Costs. "Type", when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate. "Unit Debentures" means the unsecured senior debentures to be either (a) issued by Holdings and guaranteed by the Borrower or (b) issued by the Borrower; it being understood that (i) in no event shall the terms of such unsecured debentures require any payments in respect of principal or redemptions prior to the Tranche B Maturity Date, and (ii) a Subsidiary (other than the Borrower) shall not Guarantee such unsecured debentures unless (x) such Subsidiary also has Guaranteed the Obligations pursuant to the Guarantee Agreement, (y) such Guarantee of such Indebtedness is unsecured and (z) such Guarantee of such debentures provides for the release and termination thereof, without action by any party, upon any release and termination of the Guarantee by such Subsidiary of the Obligations (other than by reason of repayment and satisfaction of all of the Obligations). "Units Purchase Contract" means the purchase contract between the purchasers of Unit Debentures and Holdings, pursuant to which such purchasers agree to buy, and Holdings agrees to sell, Equity Interests in Holdings three years from the date of the closing of the Mandatory Convertible Units Offering. "Withdrawal Liability" means liability to aMultiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02. Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Class (e., a "Revolving Loan") or by Type (e., a "Eurodollar Loan") or by Class and Type (e.g a "Eurodollar Revolving Loan"). Borrowings also may be classified and referred to by Class (e.g:., a "Revolving Borrowing") or by Type (ei., a "Eurodollar Borrowing") or by Class and Type (e. ., a "Eurodollar Revolving Borrowing"). SECTION 1.03. Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof' and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. SECTION 1.04. Accounting Terms; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. ARTICLE II The Credits SECTION 2.01. Commitments. Subject to the terms and conditions set forth herein, (a) each Tranche B Lender that was not a Tranche B Lender (as defined in the Original Credit Agreement) has executed and delivered a counterpart of the Master Assignment Agreement pursuant to which it shall have purchased and assumed from a Tranche B Lender under (and as defined in) the Original Credit Agreement a Tranche B Term Loan to the Borrower on the Effective Date in a principal amount not exceeding its Tranche B Commitment and (b) each Revolving Lender agrees, subject to the terms and conditions of this Agreement, to make Revolving Loans to the Borrower from time to time during the Revolving Availability Period in an aggregate principal amount that will not result in such Lender's Revolving Exposure exceeding such Lender's Revolving Commitment. Each Tranche B Lender agrees that the Tranche B Term Loans shall, as of the Effective Date, be governed by the terms and conditions of this Agreement. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans. Amounts repaid in respect of Term Loans may not be reborrowed. SECTION 2.02. Loans and Borrowings. (a) Each Loan (other than a Swingline Loan) shall be made as part of a Borrowing consisting of Loans of the same Class and Type made by the Lenders ratably in accordance with their respective Commitments of the applicable Class. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Loans as required. (b) Subject to Section 2.14, each Revolving Borrowing and Term Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith. Each Swingline Loan shall be an ABR Loan. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. (c) At the commencement of each Interest Period for any Eurodollar Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $1,000,000; provided that an ABR Revolving Borrowing maybe in an aggregate amount that is equal to the entire unused balance of the total Revolving Commitments or that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.05(e). Each Swingline Loan shall be in an amount that is an integral multiple of $100,000 and not less than $500,000. Borrowings of more than one Type and Class may be outstanding at the same time; provided that there shall not at any time be more than a total of 12 Eurodollar Borrowings outstanding. (d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Revolving Maturity Date or Tranche B Maturity Date, as applicable. SECTION 2.03. Requests for Borrowings. To request a Revolving Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, on the date of the proposed Borrowing; provided that any such notice of an ABR Revolving Borrowing to finance the reimbursement of an LC Disbursement as contemplated by Section 2.05(e) may be given not later than. 10:00 a.m., New York City time, on the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02: (i) the aggregate amount of such Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; (iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period"; and (v) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.06. If no election as to the Type of Borrowing is specified, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Revolving Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. SECTION 2.04. Swingline Loans. (a) Subject to the terms and conditions set forth herein, the Swingline Lender agrees to make Swingline Loans to the Borrower from time to time during the Revolving Availability Period, in an aggregate principal amount at any time outstanding that will not result in (i) the aggregate principal amount of outstanding Swingline Loans exceeding $10,000,000 or (ii) the sum of the total Revolving Exposures exceeding the total Revolving Commitments; provided that the Swingline Lender shall not be required to make a Swingline Loan to refinance an outstanding Swingline Loan. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Swingline Loans. (b) To request a Swingline Loan, the Borrower shall notify the Administrative Agent of such request by telephone (confirmed by telecopy), not later than 1:00 p.m., New York City time, on the day of a proposed Swingline Loan. Each such notice shall be irrevocable and shall specify the requested date (which shall be a Business Day) and amount of the requested Swingline Loan. The Administrative Agent will promptly advise the Swingline Lender of any such notice received from the Borrower. The Swingline Lender shall make each Swingline Loan available to the Borrower by means of a credit to the general deposit account of the Borrower with the Swingline Lender (or, in the case of a Swingline Loan made to finance the reimbursement of an LC Disbursement as provided in Section 2.06(e), by remittance to the Issuing Bank) by 3:00 p.m., New York City time, on the requested date of such Swingline Loan. (c) The Swingline Lender may by written notice given to the Administrative Agent not later than 12:00 noon, New York City time, on any Business Day require the Revolving Lenders to acquire participations on such Business Day in all or a portion of the Swingline Loans outstanding. Such .notice shall specify the aggregate amount of Swingline Loans in which Revolving Lenders will participate. Promptly upon receipt of such notice, the Administrative Agent will give notice thereof to each Revolving Lender, specifying in such notice such Lender's Applicable Percentage of such Swingline Loan or Loans. Each Revolving Lender hereby absolutely and unconditionally agrees, upon receipt of notice as provided above, to pay to the Administrative Agent, for the account of the Swingline Lender, such Lender's Applicable Percentage of such Swingline Loan or Loans. Each Revolving Lender acknowledges and agrees that its obligation to acquire participations in Swingline Loans pursuant to this paragraph is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Revolving Lender shall comply with its obligation under this paragraph by wire transfer of immediately available funds, in the same manner as provided in Section 2.06 with respect to Loans made by such Lender (and Section 2.06 shall apply, mutatis mutandis, to the payment obligations of the Revolving Lenders), and the Administrative Agent shall promptly pay to the Swingline Lender the amounts so received by it from the Revolving Lenders. The Administrative Agent shall notify the Borrower of any participations in any Swingline Loan acquired pursuant to this paragraph, and thereafter payments in respect of such Swingline Loan -shall be made to the Administrative Agent and not to the Swingline Lender. Any amounts received by the Swingline Lender from the Borrower (or other party on behalf of the Borrower) in respect of a Swingline Loan after receipt by the Swingline Lender of the proceeds of a sale of participations therein shall be promptly remitted to the Administrative Agent; any such amounts received by the Administrative Agent shall be promptly remitted by the Administrative Agent to the Revolving Lenders that shall have made their payments pursuant to this paragraph and to the Swingline Lender, as their interests may appear. The purchase of participations in a Swingline Loan pursuant to this paragraph shall not relieve the Borrower of any default in the payment thereof. SECTION 2.05. Letters of Credit. (a) General. Subject to the terms and conditions set forth herein, the Borrower may request the issuance of Letters of Credit for its own account, in a form reasonably acceptable to the Administrative Agent and the Issuing Bank, at any time and from time to time during the Revolving Availability Period. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by the Borrower to, or entered into by the Borrower with, the Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control. (b) Notice of Issuance Amendment Renewal Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Bank) to the Issuing Bank and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension (which shall be a Business Day), the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) of this Section), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. If requested by the Issuing Bank, the Borrower also shall submit a letter of credit application on the Issuing Bank's standard form in connection with any request for a Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Exposure shall not exceed $15,000,000 and (ii) the total Revolving Exposures shall not exceed the total Revolving Commitments. (c) Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Business Days prior to the Revolving Maturity Date. (d) Participations. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Revolving Lender, and each Revolving Lender hereby acquires from the Issuing Bank, a participation in such Letter of Credit equal to such Lender's Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Revolving Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Lender's Applicable Percentage of each LC Disbursement made by the Issuing Bank and not reimbursed by the Borrower on the date due as provided in paragraph (e) of this Section, or of any reimbursement payment required to be refunded to the Borrower for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. (e) Reimbursement. If the Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than 12:00 noon, New York City time, on the date that such LC Disbursement is made, if the Borrower shall have received notice of such LC Disbursement prior to 10:00 a.m., New York City time, on such date, or, if such notice has not been received by the Borrower prior to such time on such date, then not later than 12:00 noon, New York City time, on (i) the Business Day that the Borrower receives such notice, if such notice is received prior to 10:00 a.m., New York City time, on the day of receipt, or (ii) the Business Day immediately following the day that the Borrower receives such notice, if such notice is not received prior to such time on the day of receipt; provided that, if such LC Disbursement is not less than $1,000,000, the Borrower may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.03 or 2.04 that such payment be financed with an ABR Revolving Borrowing or Swingline Loan in an equivalent amount and, to the extent so financed, the Borrower's obligation to make such payment shall be discharged and replaced by the resulting ABR Revolving Borrowing or Swingline Loan. If the Borrower fails to make such payment when due, the Administrative Agent shall notify each Revolving Lender of the applicable LC Disbursement, the payment then due from the Borrower in respect thereof and such Lender's Applicable Percentage thereof. Promptly following receipt of such notice, each Revolving Lender shall pay to the Administrative Agent its Applicable Percentage of the payment then due from the Borrower, in the same manner as provided in Section 2.06 with respect to Loans made by such Lender (and Section 2.06 shall apply, mutatis mutandis, to the payment obligations of the Revolving Lenders), and the Administrative Agent shall promptly pay to the Issuing Bank the amounts so received by it from the Revolving Lenders. Promptly following receipt by the Administrative Agent of any payment from the Borrower pursuant to this paragraph, the Administrative Agent shall distribute such payment to the Issuing Bank or, to the extent that Revolving Lenders have made payments pursuant to this paragraph to reimburse the Issuing Bank, then to such Lenders and the Issuing Bank as their interests may appear. Any payment made by a Revolving Lender pursuant to this paragraph to reimburse the Issuing Bank for any LC Disbursement (other than the funding of ABR Revolving Loans or a Swingline Loan as contemplated above) shall not constitute a Loan and shall not relieve the Borrower of its obligation to reimburse such LC Disbursement. (f) Obligations Absolute. The Borrower's obligation to reimburse LC Disbursements as provided in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower's obligations hereunder. Neither the Administrative Agent, the Lenders nor the Issuing Bank, nor any of their Related Parties, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank; provided that the foregoing shall not be construed to excuse the Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Issuing Bank's failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or wilful misconduct on the part of the Issuing Bank (as finally determined by a court of competent . jurisdiction), the Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit. (g) Disbursement Procedures. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Administrative Agent and the Borrower by telephone (confirmed by telecopy) of such demand for payment and whether the Issuing Bank has made or will make an LC Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Issuing Bank and the Revolving Lenders with respect to any such LC Disbursement. (h) Interim Interest. If the Issuing Bank shall make any LC Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to ABR Revolving Loans; provided that, if the Borrower fails to reimburse such LC Disbursement when due pursuant to paragraph (e) of this Section, then Section 2.13(c) shall apply. Interest accrued pursuant to this paragraph shall be for the account of the Issuing Bank, except that interest accrued on and after the date of payment by any Revolving Lender pursuant to paragraph (e) of this Section to reimburse the Issuing Bank shall be for the account of such Lender to the extent of such payment. (i) Replacement of the Issuing Bank. The Issuing Bank may be replaced at any time by written agreement among the Borrower, the Administrative Agent, the replaced Issuing Bank and the successor Issuing Bank. The Administrative Agent shall notify the Lenders of any such replacement of the Issuing Bank. At the time any such replacement shall become effective, the Borrower shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to Section 2.12(b). From and after the effective date of any such replacement, (i) the successor Issuing Bank shall have all the rights and obligations of the Issuing Bank under this Agreement with respect to Letters of Credit to be issued thereafter and (ii) references herein to the term "Issuing Bank" shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the replacement of an Issuing Bank hereunder; the replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit. (j) Cash Collateralization. If any Event of Default shall occur and be continuing, on the Business Day that the Borrower receives notice from the Administrative Agent or the Required Lenders (or, if the maturity of the Loans has been accelerated, Revolving Lenders with LC Exposure representing greater than 50% of the total LC Exposure) demanding the deposit of cash collateral pursuant to this paragraph, the Borrower shall deposit in an account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Lenders, an amount in cash equal to the LC Exposure as of such date plus any accrued and unpaid interest thereon; provided that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Borrower or Holdings described in clause (h) or (i) of Article VII. Each such deposit shall be held by the Administrative Agent as collateral for the payment and performance of the obligations of the Borrower under this Agreement. The Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Administrative Agent and at the Borrower's risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse the Issuing Bank for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrower for the LC Exposure at such time or, if the maturity of the Loans has been accelerated (but subject to the consent of Revolving Lenders with LC Exposure representing greater than 50% of the total LC Exposure), be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three Business Days after all Events of Default have been cured or waived. If the Borrower is required to provide an amount of cash collateral hereunder pursuant to Section 2.11(b), such amount (to the extent not applied as aforesaid) shall be returned to the Borrower as and to the extent that, after giving effect to such return, the Borrower would remain in compliance with Section 2.11 (b) and no Default shall have occurred and be continuing. SECTION 2.06. Funding of Borrowings. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders; provided that Swingline Loans shall be made as provided in Section 2.04. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with the Administrative Agent in New York City and designated by the Borrower in the applicable Borrowing Request; provided that ABR Revolving Loans made to finance the reimbursement of an LC Disbursement as provided in Section 2.05(e) shall be remitted by the Administrative Agent to the Issuing Bank. (b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section 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 Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount 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 such Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of the Borrower, the interest rate applicable to such Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. SECTION 2.07. Interest Elections. (a) Each Revolving Borrowing and Term Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. This Section shall not apply to Swingline Borrowings, which may not be converted or continued. (b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower. (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02 and paragraph (e) of this Section: (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing); (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and (iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto. SECTION 2.08. Termination and Reduction of Revolving Commitments. (a) The Revolving Commitments shall terminate on the Revolving Maturity Date. (b) The Borrower may at any time terminate, or from time to time reduce, the Revolving Commitments; provided that (i) each reduction of the Revolving Commitments shall be in an amount that is an integral multiple of $1,000,000 and not less than $5,000,000 and (ii) the Borrower shall not terminate or reduce the Revolving Commitments if, after giving effect to any concurrent prepayment of the Revolving Loans in accordance with Section 2.11, the sum of the Revolving Exposures would exceed the total Revolving Commitments. (c) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Revolving Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable. provided that a notice of termination of the Revolving Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Revolving Commitments shall be permanent. Each reduction of the Revolving Commitments shall be made ratably among the Lenders in accordance with their respective Revolving Commitments. SECTION 2.09. Repayment of Loans; Evidence of Debt. (a) The Borrower hereby unconditionally promises to pay (i) to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Revolving Loan of such Lender on the Revolving Maturity Date, (ii) to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Tenn Loan of such Lender as provided in Section 2.10 and (iii) to the Swingline Lender the then unpaid principal amount of each Swingline Loan on the earlier of the Revolving Maturity Date and the 10th Business Day after such Swingline Loan is made; provided that on each date that a Revolving Borrowing is made, the Borrower shall repay all Swingline Loans that were outstanding on the date such Borrowing was requested. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terns of this Agreement. (e) Any Lender may request that Loans of any Class made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns). SECTION 2.10. Amortization of Tranche B Tenn Loans. (a) Subject to adjustment pursuant to paragraph (d) below, the Borrower shall repay Tranche B Tern Borrowings on each date set forth below in the aggregate principal amount set forth opposite such date: Date Amount September 30, 2002 $ 375,000 December 31, 2002 $ 375,000 March 31, 2003 $ 375,000 June 30, 2003 $ 375,000 September 30, 2003 $ 375,000 December 31, 2003 $ 375,000 March 31, 2004 $ 375,000 June 30, 2004 $ 375,000 September 30, 2004 $ 375,000 December 31, 2004 $ 375,000 March 31, 2005 $ 375,000 June 30, 2005 $ 375,000 September 30, 2005 $ 375,000 December 30, 2005 $ 375,000 March 31, 2006 $ 375,000 June 30, 2006 $ 375,000 September 29, 2006 $ 375,000 December 29, 2006 $ 375,000 March 30, 2007 $ 375,000 June 29, 2007 $ 375,000 October 1, 2007 $ 375,000 December 31, 2007 $ 375,000 March 31, 2008 $ 375,000 June 12, 2008 $ 375,000 (b) To the extent not previously paid, all Tranche B Term Loans shall be due and payable on the Tranche B Maturity Date. (c) Any prepayment of a Tranche B Term Borrowing shall be applied to reduce ratably the subsequent scheduled repayments of the Tranche B Term Borrowings. (d) Prior to any repayment of any Tranche B Term Borrowings hereunder, the Borrower shall select the Tranche B Term Borrowing or Borrowings to be repaid and shall notify the Administrative Agent by telephone (confirmed by telecopy) of such selection not later than 11:00 a.m., New York City time, three Business Days before the scheduled date of such repayment. Each repayment of a Borrowing shall be applied ratably to the Loans included in the repaid Borrowing. Repayments of Tranche B Term Borrowings shall be accompanied by accrued interest on the amount repaid. SECTION 2.11. Prepayment of Loans. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to the requirements of this Section. (b) In the event and each occasion that the sum of the Revolving Exposures exceeds the total Revolving Commitments, the Borrower shall prepay Revolving Borrowings or Swingline Borrowings (or, if no such Borrowings are outstanding, deposit cash collateral in an account with the Administrative Agent pursuant to Section 2.050)) in an aggregate amount equal to such excess. (c) In the event and on each occasion that any Net Proceeds are received by or on behalf of Holdings, the Borrower or any Subsidiary in respect of any Prepayment Event, the Borrower shall, within three Business Days after such Net Proceeds are received, prepay Term Borrowings in an aggregate amount equal to such Net Proceeds (or, in the case of a Prepayment Event relating to a Subsidiary that is not a wholly owned Subsidiary, the portion of such Net Proceeds corresponding to the direct or indirect equity interest of Holdings in such Subsidiary); provided that,(i) in the case of any event described in clause (a) of the definition of the term Prepayment Event, (x) the Borrower shall prepay Term Borrowings as set forth above within 30 days after the date on which the Net Proceeds are received or (y) if, within such 30 days, the Borrower shall deliver to the Administrative Agent a certificate of a Financial Officer of the Borrower to the effect that the Borrower and the Subsidiaries intend to apply the Net Proceeds from such event (or a portion thereof specified in such certificate), within 360 days after receipt of such Net Proceeds, to acquire real property, equipment or other tangible assets to be used in the business of the Borrower and the Subsidiaries, and certifying that no Event of Default has occurred and is continuing, then no prepayment shall be required pursuant to this paragraph in respect of the Net Proceeds in respect of such event (or the portion of such Net Proceeds specified in such certificate, as applicable) except to the extent of any such Net Proceeds that have not been so applied by the end of such 360-day period, at which time a prepayment shall be required in an amount equal to such Net Proceeds that have not been so applied and (ii) in the case of any Prepayment Event relating to issuances of preferred Equity Interests in respect of which cash dividends are payable or which require redemptions or repurchases in cash prior to the Tranche B Maturity Date, Holdings, the Borrower or the applicable Subsidiary will be required to prepay Tranche B Term Loans in an aggregate amount equal to 50% of such Net Proceeds. (d) Following the end of each fiscal year of Holdings, commencing with the fiscal year ending December 31, 2002, the Borrower shall prepay Term Borrowings in an aggregate amount equal to (a) 50% of Excess Cash Flow for such fiscal year if the Leverage Ratio as of the last day of such fiscal year shall have been greater than or equal to 3.75:1.00 and (b) 25% of Excess Cash Flow for such fiscal year if the Leverage Ratio as of the last day of such fiscal year shall have been greater than or equal to 3.25:1.00 and less than 3.75:1.00. Term Borrowings will not be required to be prepaid from Excess Cash Flow for any fiscal year if the Leverage Ratio as of the last day of such fiscal year shall have been less than 3.25:1.00. Each prepayment pursuant to this paragraph shall be made on or before the date on which financial statements are delivered pursuant to Section 5.01 with respect to the fiscal year for which Excess Cash Flow is being calculated (and in any event within 105 days after the end of such fiscal year). (e) Prior to any optional or mandatory prepayment of Borrowings hereunder, the Borrower shall select the Borrowing or Borrowings to be prepaid and shall specify such selection in the notice of such prepayment pursuant to paragraph (f) of this Section. (f) The Borrower shall notify the Administrative Agent (and, in the case of prepayment of a Swingline Loan, the Swingline Lender) by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment, (ii) in the case of prepayment of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of prepayment or (iii) in the case of prepayment of a Swingline Loan, not later than 12:00 noon, New York City time, on the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date, the principal amount of each Borrowing or portion thereof to be prepaid and, in the case of a mandatory prepayment, a reasonably detailed calculation of the amount of such prepayment; provided that, if a notice of optional prepayment is given in connection with a conditional notice of termination of the Revolving Commitments as contemplated by Section 2.08, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.08. Promptly following receipt of any such notice (other than a notice relating solely to Swingline Loans), the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Borrowing shall be in an amount that would be permitted in the case of an advance of a Borrowing of the same Type as provided in Section 2.02, except as necessary to apply fully the required amount of a mandatory prepayment. Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.13. SECTION 2.12. Fees. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a commitment fee, which shall accrue at the rate of .50% per annum on the average daily unused amount of each Revolving Commitment of such Lender during the period from and including the date of this Agreement to but excluding the date on which such Commitment terminates. Accrued commitment fees shall be payable in arrears in the case of commitment fees in respect of the Revolving Commitments, on the third Business Day following the last day of March, June, September and December of each year and on the date on which the Revolving Commitments terminate, commencing on the first such date to occur after the date hereof. All commitment fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). For purposes of computing commitment fees with respect to Revolving Commitments, a Revolving Commitment of a Lender shall be deemed to be used to the extent of the outstanding Revolving Loans and LC Exposure of such Lender (and the Swingline Exposure of such Lender shall be disregarded for such purpose). (b) The Borrower agrees to pay (i) to the Administrative Agent for the account of each Revolving Lender a participation fee with respect to its participations in Letters of Credit, which shall accrue at the Applicable Rate used to determine the interest rates applicable to Eurodollar Revolving Loans on the average daily amount of such Lender's LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date on which such Lender's Revolving Commitment terminates and the date on which such Lender ceases to have any LC Exposure, and (ii) to the Issuing Bank a fronting fee, which shall accrue at the rate of .25% per annum on the average daily amount of the LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date of termination of the Revolving Commitments and the date on which there ceases to be any LC Exposure, as well as the Issuing Bank's standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Participation fees and fronting fees accrued through and including the last day of March, June, September and December of each year shall be payable on the third Business Day following such last day, commencing on the first such date to occur after the Effective Date; provided that all such fees shall be payable on the date on which the Revolving Commitments terminate and any such fees accruing after the date on which the Revolving Commitments terminate shall be payable on demand. Any other fees payable to the Issuing Bank pursuant to this paragraph shall be payable within 10 days after demand. All participation fees and fronting fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (c) The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent. (d) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent (or to the Issuing Bank, in the case of fees payable to it) for distribution, in the case of commitment fees and participation fees, to the Lenders entitled thereto. Fees paid shall not be refundable under any circumstances. SECTION 2.13. Interest. (a) The Loans comprising each ABR Borrowing (including each Swingline Loan) shall bear interest at the Alternate Base Rate plus the Applicable Rate. (b) The Loans comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate. (c) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Revolving Loans as provided in paragraph (a) of this Section. (d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and, in the case of Revolving Loans, upon termination of the Revolving Commitments; provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Revolving Loan prior to the end of the Revolving Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion. (e) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate or Adjusted LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. SECTION 2.14. Alternate Rate of Interest. If on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing: (a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate for such Interest Period or that dollar deposits in the principal amounts of the Eurodollar Loans are not generally available in the London interbank markets; or (b) the Administrative Agent is advised by the Required Lenders that the Adjusted LIBO Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as an ABR Borrowing. In the event of any such determination, the Lenders shall negotiate with the Borrower, at its request, as to the interest rate which the Loans comprising such an ABR Borrowing shall bear; provided that such Loans shall bear interest as provided in Section 2.13(a) pending the execution by the Borrower and the Lenders of a written agreement providing for a different interest rate. Each determination by the Agent hereunder shall be conclusive absent manifest error. SECTION 2.15. Increased Costs. (a) If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate) or the Issuing Bank; or (ii) impose on any Lender or the Issuing Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein; and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to such Lender or the Issuing Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered. (b) If any Lender or the Issuing Bank determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's or the Issuing Bank's capital or on the capital of such Lender's or the Issuing Bank's holding company, if any, as a consequence of this Agreement or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by the Issuing Bank, to a level below that which such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company could have achieved but for such Change in Law (taking into consideration such Lender's or the Issuing Bank's policies and the policies of such Lender's or the Issuing Bank's holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company for any such reduction suffered. (c) A certificate of a Lender or the Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or the Issuing Bank or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender or the Issuing Bank, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof. (d) Failure or delay on the part of any Lender or the Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's or the Issuing Bank's right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender or the Issuing Bank pursuant to this Section for any increased costs or reductions incurred more than 180 days prior to the date that such Lender or the Issuing Bank, as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender's or the Issuing Bank's intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 180-day period referred to above shall be extended to include the period of retroactive effect thereof. SECTION 2.16. Break Funding Payments. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Revolving Loan or Term Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.11 (f) and is revoked in accordance therewith), or (d) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.19, then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event; provided that no such compensation shall be required in respect of the prepayment of a Eurodollar Loan for which an Interest Period of one month was selected by the Borrower if the Borrowing Request in respect of such Eurodollar Loan indicated that such Eurodollar Loan (or any portion thereof) would be prepaid in one or more payments within one month of the date on which such Interest Period commenced. In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest which would accrue on such principal amount for such period at the interest rate which such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of any Lender setting forth any amount -or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 2.17. Taxes. (a) Any and all payments by or on account of any, obligation of the Borrower hereunder or under any other Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased` as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent, Lender or Issuing Bank (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Administrative Agent, each Lender and the Issuing Bank, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent, such Lender or the Issuing Bank, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrower hereunder or under any other Loan Document (including Indemnified 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 Indemnified 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 the Borrower by a Lender or the Issuing Bank, or by the Administrative Agent on its own behalf or on behalf of a Lender or the Issuing Bank, shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate, provided that such Foreign Lender has received written notice from the Borrower advising it of the availability of such exemption or reduction and supplying all applicable documentation. SECTION 2.18. Payments Generally; Pro Rata Treatment; Sharing of Set-offs. (a) The Borrower shall make each payment required to be made by it hereunder or under any other Loan Document (whether of principal, interest, fees or reimbursement of LC Disbursements, or of amounts payable under Section 2.15, 2.16 or 2.17, or otherwise) prior to the time expressly required hereunder or under such other Loan Document for such payment (or, if no such time is expressly required, prior to 2:00 p.m., New York City time), on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices at 270 Park Avenue, New York, New York, except payments to be made directly to the Issuing Bank or Swingline Lender as expressly provided herein and except that payments pursuant to Sections 2.15, 2.16, 2.17 and 9.03 shall be made directly to the Persons entitled thereto and payments pursuant to other Loan Documents shall be made to the Persons specified therein. The Administrative Agent shall distribute any such payments; received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment under any Loan Document shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments under each Loan Document shall be made in dollars. (b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, unreimbursed LC Disbursements, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, towards payment of principal and unreimbursed LC Disbursements then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal and unreimbursed LC Disbursements then due to such parties. (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Revolving Loans, Term Loans or participations in LC Disbursements or Swingline Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Revolving Loans, Term Loans and participations in LC Disbursements and Swingline Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans, Term Loans and participations in LC Disbursements and Swingline Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans, Term Loans and participations in LC Disbursements and Swingline Loans; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in LC Disbursements to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation. (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 or the Issuing Bank 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 or the Issuing Bank, as the case may be, the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders or the Issuing Bank, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or Issuing Bank 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 greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation. (e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.04(c), 2.05(d) or (e), 2.06(b), 2.18(d) or 9.03(c), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. SECTION 2.19. Mitigation Obligations; Replacement of Lenders. (a) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.15 or 2.17, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. (b) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, or if any Lender defaults in its obligation to fund Loans hereunder, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Borrower shall have received the prior written consent of the Administrative Agent (and, if a Revolving Commitment is being assigned, the Issuing Bank and Swingline Lender), which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and participations in LC Disbursements and Swingline Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.15 or payments required to be made pursuant to Section 2.17, such assignment will result in a material reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply. ARTICLE III Representations and Warranties Each of Holdings and the Borrower represents and warrants to the Lenders that: SECTION 3.01. Organization, Powers. Each of Holdings and the Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where: such qualification is required. SECTION 3.02. Authorization; Enforceability. The Transactions to be completed by each Loan Party are within such Loan Party's corporate powers and have been duly authorized by all necessary corporate and, if required, stockholder action. This Agreement has been duly executed and delivered by each of Holdings and the Borrower and constitutes, and each other Loan Document to which any Loan Party is to be a party, when executed and delivered by such Loan Party, will constitute, a legal, valid and binding obligation of Holdings, the Borrower or such Loan Party, as the case may be, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and to general principles of equity, regardless of whether considered in a proceeding in equity or at law. SECTION 3.03. Governmental Approvals; No Conflicts. The Transactions (a) do not require any consent or approval of, registration or filing with or any other action by any Governmental Authority, except such as have been obtained or made and are in full force and effect and except filings necessary to perfect Liens created under the Security Documents, (b) will not violate any applicable law or regulation (including the Interstate Commerce Act) or the charter, by-laws or other organizational documents of Holdings or any of the Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon Holdings or any of the Subsidiaries or their assets (other than violations of agreements with respect to assets of Holdings or any Subsidiary which violations will not materially affect the value of any such asset or any right of any Secured Party with respect thereto), or give rise to a right thereunder to require any material payment to be made by Holdings or any of the Subsidiaries and (d) will not result in the creation or imposition of any Lien on any asset of Holdings or any of the Subsidiaries, except Liens created under the Loan Documents. SECTION 3.04. Financial Condition; No Material Adverse Change. (a) Holdings has heretofore furnished to the Lenders Holdings' consolidated balance sheet and statements of income, stockholders' equity and cash flows (i) as of and for the fiscal year ended December 31, 2001, reported on by KPMG LLP, independent public accountants and (ii) as of and for the fiscal quarter and the portion of the fiscal year ended March 31, 2002, certified by its chief financial officer. Such financial statements present fairly in all material respects the financial position and results of operations and cash flows of Holdings and the consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii) above. (b) Holdings has heretofore furnished to the Lenders Holdings' pro forma consolidated balance sheet as of March 31, 2002, prepared giving effect to the Effective Date Transactions as if such Transactions had occurred on such date. Such pro forma consolidated balance sheet (i) has been prepared in good faith based on the same assumptions used to prepare the pro forma financial statements included in the Information Memorandum (which assumptions are believed by Holdings and the Borrower to be reasonable), (ii) is based on the best information available to Holdings and the Borrower after due inquiry, (iii) accurately reflects all adjustments necessary to give effect to the Effective Date Transactions and (iv) presents fairly in all material respects the pro forma financial position of Holdings and the consolidated Subsidiaries as of March 31, 2002 as if such Transactions had occurred on such date. (c) Since December 31, 2001, there has been no material adverse change in the business, properties, financial condition, prospects or results of operations of Holdings and the Subsidiaries, taken as a whole. SECTION 3.05. Properties. (a) On the date hereof, Holdings and the Subsidiaries have good title to, or valid easement or leasehold interests in, all the real and personal property material to their businesses (including the Mortgaged Properties), free of all Liens other than those permitted by Section 6.02 with the exception however of those Rights of Way (as defined in the Mortgage) located on or passing over land owned not by any of the Mortgagors but by third parties and in such cases the foregoing representation is: limited to the actual Rights of Way exclusive of the underlying land, and subject also to Liens affecting such land to which the Rights of Way may be subject. (b) Schedule 3.05(b) describes each real property other than the Rights of Way (as defined in the Mortgage) that will be owned or leased by Holdings or any other Subsidiary as of the Effective Date after giving effect to the Transactions (other than real properties and leasehold interests which (i) which have a fair market value not greater than $500,000 and (ii) are not otherwise essential railroad operating facilities). (c) As of the date hereof, except as set forth on Schedule 3.05(c), neither Holdings, nor any of the Subsidiaries has received written notice of, and none of the President, any Vice President or any Financial Officer of Holdings or any Subsidiary has knowledge of, any pending or contemplated condemnation proceeding affecting any Mortgaged Property or any sale or disposition thereof in lieu of condemnation which would materially and adversely interfere with the operations of Holdings or any Subsidiary or which would materially affect the value of such Mortgaged Property. SECTION 3.06. Litigation and Environmental Matters. (a) Except as set forth in Schedule 3.06 or disclosed in Holdings' Annual Report on Form 10-K for the fiscal year ended December 31, 2001, filed with the Securities and Exchange Commission, there are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of Holdings or the Borrower, threatened against or affecting Holdings or any of the Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect, (ii) that involve any of the Loan Documents or the borrowings hereunder or (iii) that are pending as of the Effective Date and involve any of the other Transactions. (b) Except for the Disclosed Matters or as disclosed in Holdings' Annual Report on Form 10-K for the fiscal year ended December 31, 2001, filed with the Securities and Exchange Commission and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, neither Holdings, the Borrower nor any other Subsidiary (i) has 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 become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) to the best knowledge and belief of Holdings and the Borrower, knows of any basis for any Environmental Liability. SECTION 3.07. Compliance with Laws and Agreements. Holdings and each Subsidiary is, to the best knowledge of Holdings and the Borrower, in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property (including the Interstate Commerce Act and the Railway Labor Act) and all indentures, agreements and other instruments binding upon it or its property, except failures to be in compliance that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.08. Investment and Holding Company Status. Neither Holdings nor any of the Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 3.09. Taxes. Each of Holdings and the Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) any Taxes that are being contested in good faith by appropriate proceedings and for which Holdings or such Subsidiary, as applicable, has set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.10. Employee Benefit Plans. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $10,000,000 the fair market value of the assets of such Plan, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $20,000,000 the fair market value of the assets of all such underfunded Plans. SECTION 3.11. Disclosure. Neither the Information Memorandum nor any of the other reports, financial statements, certificates or other information furnished by or on behalf of any Loan Party to the Administrative Agent or any Lender in connection with the negotiation of this Agreement or any other Loan Document or delivered hereunder or thereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, Holdings and the Borrower represent only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. SECTION 3.12. Subsidiaries. Schedule 3.12 sets forth the name and the Persons owning the Equity Interests of each Subsidiary and identifies each Subsidiary that is a Subsidiary Loan Party, in each case after giving effect to the Transactions to occur on and as of the Effective Date. SECTION 3.13. Insurance. Schedule 3.13 sets forth a description of all insurance maintained by or on behalf of Holdings and its Subsidiaries on the Effective Date after giving effect to the Transactions to occur on the Effective Date. As of the Effective Date, all premiums in respect of such insurance have been paid. Holdings and the Borrower believe that the insurance maintained by or on behalf of Holdings and the Subsidiaries is adequate. SECTION 3.14. No Undisclosed Dividend Restrictions. Except as set forth in Schedule 6.07 and except for limitations on the payment of dividends under applicable law, none of the Subsidiaries is subject to any agreement, amendment, covenant or understanding that directly or indirectly (through the application of financial covenants or otherwise) prohibits the ability of such entity to declare or pay dividends. ARTICLE IV Conditions SECTION 4.01. Effective Date. This Agreement shall not become effective until the date on which each of the conditions set forth in Section 6 of the Amendment and Restatement Agreement is satisfied (or waived in accordance with Section 9.02 hereof). SECTION 4.02. Each Credit Event. The obligation of each Lender to make a Loan on the occasion of any Borrowing, and of the Issuing Bank to issue, amend, renew or extend any Letter of Credit, is subject to receipt of the request therefor in accordance herewith and to the satisfaction of the following conditions: (a) The representations and warranties of each Loan Party set forth in the Loan Documents shall be true and correct on and as of the date of such Borrowing or the date of issuance, amendment, renewal or extension of such Letter of Credit, as applicable. (b) At the time of and immediately after giving effect to such Borrowing or the issuance, amendment, renewal or extension of such Letter of Credit, as applicable, no Default shall have occurred and be continuing. (c) The Administrative Agent shall have received a notice of such Borrowing as required by Section 2.03, or in the case of a Borrowing of a Swingline Loan, the Swingline Lender and the Agent shall have received a notice requesting such Swingline Loan as required by Section 2.04(b). Each Borrowing and each issuance, amendment, renewal or extension of a Letter of Credit shall be deemed to constitute a representation and warranty by Holdings and the Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section. ARTICLE V Affirmative Covenants Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full and all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, each of Holdings and the Borrower covenants and agrees with the Lenders that: SECTION 5.01. Financial Statements and Other Information. Holdings will furnish to the Administrative Agent and each Lender: (a) within 105 days after the end of each fiscal year of Holdings, its audited consolidated balance sheet and related statements of income, changes in stockholders' equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by KPMG LLP or other independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of Holdings and the consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, accompanied by a certificate of said accountants stating whether they obtained knowledge during the course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines); (b) within 60 days after the end of each of the first three fiscal quarters of each fiscal year of Holdings, its consolidated balance sheet and related statements of income, changes in stockholders' equity and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by one of its Financial Officers as presenting fairly in all material respects the financial condition and results of operations of the Holdings and the consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes; (c) concurrently with any delivery of financial statements under clause (a) or (b) above, a certificate of a Financial Officer of the Borrower (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Sections 6.13, 6.14 and 6.15 and (iii) stating whether any change in GAAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 3.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (d) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by Holdings, the Borrower or any other Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or distributed by Holdings to its shareholders generally, as the case may be; (e) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of Holdings, the Borrower or any other Subsidiary, or compliance with the terms of any Loan Document, as the Administrative Agent or any Lender may reasonably request; and (f) prior to the commencement of each fiscal year of Holdings, a detailed consolidated budget for such fiscal year (including a projected consolidated balance sheet and related statements of projected operations and cash flow as of the end of and for such fiscal year and setting forth the assumptions used for purposes of preparing such budget) and, promptly when available, any significant revisions of such budget. SECTION 5.02. Notices of Material Events. Holdings and the Borrower will furnish to the Administrative Agent and each Lender prompt written notice of the following: (a) the occurrence of any Default; (b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting Holdings, the Borrower or any other Subsidiary that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect; (c) (i) the occurrence of any Reportable Event with respect to any Plan, (ii) the incurrence of Withdrawal Liability with respect to any Multiemployer Plan or (iii) the receipt by Holdings or any member of the Controlled Group of any notice concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization within the meaning of Title IV of ERISA; and (d) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect. Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. SECTION 5.03. Information Regarding Collateral. (a) Holdings and the Borrower will furnish to the Collateral Agent prompt written notice of any change (i) in any Loan Party's jurisdiction of incorporation or organization, as applicable, (ii) in any Loan Party's corporate name or in any trade name used to identify it in the conduct of its business or in the ownership: of its properties, (iii) in the location of any Loan Party's chief executive office, its principal place of business, any office in which it maintains books or records relating to Collateral owned by it or any office or facility at which Collateral owned by it is located (including the establishment of any such new office or facility), (iv) in any Loan Party's identity or corporate structure or (v) in any Loan Party's Federal Taxpayer Identification Number. Holdings and the Borrower agree not to effect or permit any change referred to in the preceding sentence unless all filings have been made under the Uniform Commercial Code or otherwise that are required in order for the Collateral Agent to continue at all times following such change to have a valid, legal and perfected security interest in all the Collateral. Holdings and the Borrower also agree promptly to notify the Administrative Agent if any material portion of the Collateral is damaged or destroyed. (b) Each year, at the time of delivery of annual financial statements with respect to the preceding fiscal year pursuant to clause (a) of Section 5.01, Holdings and the Borrower will deliver to the Administrative Agent a certificate of a Financial Officer of the Borrower (i) setting forth the information required pursuant to Section 1 of the Perfection Certificate or confirming that there has been no change in such information since the date of the Perfection Certificate delivered on the Effective Date or the date of the most recent certificate delivered pursuant to this Section and (ii) certifying that all Uniform Commercial Code financing statements (including fixture filings, as applicable) or other appropriate filings, recordings or registrations, including all refilings, rerecordings and reregistrations, containing a description of the Collateral have been filed of record in each governmental, municipal or other appropriate office in each jurisdiction identified pursuant to clause (i) above to the extent necessary to protect and perfect the security interests under the Security Documents for a period of not less than 18 months after the date of such certificate (except as noted therein with respect to any continuation statements to be filed within such period). SECTION 5.04. Existence; Conduct of Business. Each of Holdings and the Borrower will, and will cause each of the Significant Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges, franchises, patents, copyrights, trademarks and trade names material to the conduct of its business; provided that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 6.04. Holdings and the Borrower will, and will cause each Significant Subsidiary to, carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted. SECTION 5.05. Payment of Taxes. Each of Holdings and the Borrower will, and will cause each of the Subsidiaries to, pay its Tax liabilities 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 (b) Holdings, the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP. SECTION 5.06. Maintenance of Properties. Each of Holdings and the Borrower will, and will cause each of the Subsidiaries to, maintain, preserve, protect and keep their properties material to the conduct of their business in good repair, working order and condition, and make all necessary and proper repairs, renewals and replacements so that their businesses carried on in connection therewith may be properly conducted at all times. SECTION 5.07. Insurance. Holdings and the Borrower will, and will cause each of the Subsidiaries to, maintain, with financially sound and reputable insurance companies (a) insurance on all their property in such amounts and covering such risks as is consistent with sound business practice and customary with companies engaged in similar lines of business and (b) all insurance required to be maintained pursuant to the Security Documents. The Borrower will famish to the Lenders, upon request of the Administrative Agent, information in reasonable detail as to the insurance so maintained. SECTION 5.08. Casualty and Condemnation. Holdings and the Borrower (a) will furnish to the Administrative Agent and the Lenders prompt written notice of any casualty or other insured damage to any material portion of any Collateral or the commencement of any action or proceeding for the taking of any material Collateral or any part thereof or interest therein under power of eminent domain or by condemnation or similar proceeding and (b) will ensure that the Net Proceeds of any such event (whether in the form of insurance proceeds, condemnation awards or otherwise) are collected and applied in accordance with the applicable provisions of this Agreement and the Security Documents. SECTION 5.09. Books and Records; Inspection and Audit Rights. Holdings and the Borrower will, and will cause each of the Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. Holdings and the Borrower will, and will cause each of the Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender to make reasonable examinations and copies of the books of accounts and other financial records of Holdings, the Borrower and each other Subsidiary, and to discuss the affairs, finances and accounts of Holdings, the Borrower and each other Subsidiary with, and to be advised as to the same by, their respective officers upon reasonable notice and at such reasonable times and intervals as the Lenders or the Administrative Agent may designate; provided that (a) any inspection by any Lender shall be at such Lender's own expense and (b) the Lenders shall coordinate the timing of their inspections through the Administrative Agent. SECTION 5.10. Compliance with Laws. Holdings and the Borrower will, and will cause each of the Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property (including ERISA, Environmental Laws and the Interstate Commerce Act), except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.11. Use of Proceeds and Letters of Credit. Holdings and the Borrower will, and will cause each of the Subsidiaries to, use the proceeds of the Loans and cause Letters of Credit to be issued only for working capital and general corporate purposes. Holdings and the Borrower will not, nor will they permit any Subsidiary to, use any of the proceeds of the Loans (a) for any purpose that entails a violation of, or that is inconsistent with, the provisions of the Regulations of the Board, including Regulation U or X or (b) to make any acquisition for which the board of directors of the target company has not given its consent or approval. SECTION 5.12. Additional Subsidiaries. If any additional Significant Subsidiary is formed or acquired after the Effective Date, the Borrower will, within 30 days after such Significant Subsidiary is formed or acquired, notify the Administrative Agent and the Lenders thereof and cause the Collateral and Guarantee Requirement to be satisfied with respect to such Significant Subsidiary (if it is a Subsidiary Loan Party) and with respect to any Equity Interest in or Indebtedness of such Significant Subsidiary owned by or on behalf of any Loan Party. SECTION 5.13. Further Assurances. (a) Holdings and the Borrower will, and will cause each Subsidiary Loan Party to, execute any and all further documents, financing statements, agreements and instruments, and take all such further actions (including the filing and recording of financing statements, fixture filings, mortgages, deeds of trust and other documents), which may be required under any applicable law, or which the Administrative Agent or.the Required Lenders may reasonably request, to cause the Collateral and Guarantee Requirement to be and remain satisfied, all at the expense of the Loan Parties. Holdings and the Borrower also agree to provide to the Collateral Agent, from time to time upon request, evidence reasonably satisfactory to the Collateral Agent as to the perfection and priority of the Liens created or intended to be created by the Security Documents. (b) If any material assets (including any real property or improvements thereto or any interest therein) are acquired by Holdings, the Borrower or any other Subsidiary Loan Party after the Effective Date (other than assets constituting Collateral under the Security Agreement that become subject to the Lien of the Security Agreement upon acquisition thereof), Holdings and the Borrower will notify the Administrative Agent and the Lenders thereof, and, if requested by the Administrative Agent or the Required Lenders, will cause such assets to be subjected to a Lien securing the Obligations and will take, and cause the Subsidiary Loan Parties to take, such actions as shall be necessary or reasonably requested by the Collateral Agent to grant and perfect such Liens, including actions described in paragraph (a) of this Section, all at the expense of the Loan Parties. ARTICLE VI Negative Covenants Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full and all Letters of Credit have expired or terminated and all LC Disbursements shall have been reimbursed, each of Holdings and the Borrower covenants and agrees with the Lenders that: SECTION 6.01. Indebtedness; Certain Equity Securities. (a) Holdings and the Borrower will not permit any Subsidiary to create, incur, assume or permit to exist any Indebtedness, except: (i) the Obligations; (ii) the 2002 Senior Notes; (iii) other Indebtedness existing on the date hereof and described in Schedule 6.01 and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof or result in an earlier maturity date or decreased weighted average life thereof, (iv) the Permitted Unsecured Debt, the Additional Permitted Unsecured Debt, the Permitted Subordinated Debt and the Unit Debentures; (v) Indebtedness owed to Holdings, the Borrower or any other Subsidiary; (vi) Indebtedness incurred by Subsidiaries to finance the acquisition, construction or improvement of any fixed or capital assets used in the ordinary course of their railroad transportation business, which Indebtedness is secured solely by a Lien on the assets being acquired, and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof or result in an earlier maturity date or decreased weighted average life thereof; provided that the aggregate principal amount of the Indebtedness permitted by this clause (vi) and incurred during any fiscal year of Holdings does not exceed $50,000,000; (vii) Indebtedness of any Person that becomes a Subsidiary after the date hereof; provided that such Indebtedness exists at the time such Person becomes a Subsidiary and is not created in contemplation of or in connection with such Person becoming a Subsidiary; (viii) Securitization Transactions; (ix) Indebtedness of Holdings or a Subsidiary as an account party in respect of letters of credit (which do not constitute Letters of Credit hereunder) in an aggregate stated amount at any time outstanding not in excess of $5,000,000; and (x) other unsecured Indebtedness not expressly permitted by clauses (i) through (ix) above; provided that the sum of (A) the Indebtedness permitted by this clause (x), (B) the aggregate principal amount of the outstanding Indebtedness of Holdings secured by Liens permitted by clause (xi) of Section 6.02(a) and (C) the Attributable Debt in connection with all Sale and Leaseback Transactions of Holdings and the Subsidiaries permitted by clause (c) of Section 6.03 does not at any time exceed 10% of Consolidated Net Worth. (b) Holdings will not permit Caymex, NAFTA Rail, Canama or SCC Holdings, Inc. to create, incur, assume or permit to exist any Indebtedness, other than Indebtedness owed by Caymex to Holdings and Additional Permitted Unsecured Indebtedness. (c) Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, issue any preferred stock or other preferred Equity Interests other than preferred stock of Holdings that is not by its terms or by the terms of any agreement or instrument subject to any redemption, repurchase or similar requirement, whether absolute, at the option of any holder thereof or upon the occurrence of any event or contingency (other than an event which results in an Event of Default hereunder) which could occur prior to the final maturity of all the Loans. SECTION 6.02. Liens. (a) Holdings will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except: (i) Liens created under the Loan Documents or permitted under any other Loan Document; (ii) Liens for taxes, assessments or governmental charges or levies on its property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings; (iii) Liens imposed by law, such as carriers', warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business that secure payment of obligations (a) which are being contested in good faith by appropriate proceedings or (b) for which Holdings or any of its Subsidiaries, as applicable, have posted a bond supported only by cash; (iv) Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, laws providing for old age pensions or other social security or retirement benefits, or similar legislation; (v) Utility easements, building restrictions and such other encumbrances or charges against real property and defects and irregularities in the title thereto or facts an accurate survey of the property would show and landlords' and lessors' liens under leases to which any of Holdings or its Subsidiaries is a party, none of which in any material way affect the marketability of the same or interfere with the use thereof in the ordinary course of the business of Holdings, the Borrower or the Subsidiaries; (vi) Liens existing on the date hereof and described in Schedule 6.02 hereto; provided that such Liens shall secure only those obligations that they secure on the date hereof, (vii) any Lien existing on any property or asset prior to the acquisition thereof by Holdings or any Subsidiary or existing on any property or asset of any Person that becomes a Subsidiary after the date hereof prior to the time such Person becomes a Subsidiary; provided that (A) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary, as the case may be, (B) such Lien shall not apply to any other property or assets of Holdings or any Subsidiary and (C) such Lien shall secure only those obligations which it secures on the date of such acquisition or the date such Person becomes a Subsidiary, as the case may be, and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof, (viii) Liens on fixed or capital assets acquired, constructed or improved by Holdings or any Subsidiary; provided that (A) such Liens secure Indebtedness permitted by clause (vi) of Section 6.01 (a) (or Indebtedness of Holdings that would be permitted if such clause (vi) were applicable to Holdings as well as to the Subsidiaries), (B) such Liens and the Indebtedness secured thereby are incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement, (C) the Indebtedness secured thereby does not exceed the cost of acquiring, constructing or improving such fixed or capital assets and (D) such Liens shall not apply to any other property or assets of Holdings or any Subsidiary; (ix) to the extent any Securitization Transaction is not structured as a true sale of accounts receivable, Liens existing or deemed to exist in connection with such Securitization Transactions; provided, that any outstanding Tranche B Term Loans shall be prepaid to the extent required under Section 2.11(c); (x) judgment liens in respect of judgments that do not constitute an Event of Default under clause (k) of Article VII; and (xi) Liens not expressly permitted by clauses (i) through (x); provided that the sum of (A) the Indebtedness permitted by clause (x) of Section 6.01(a), (B) the aggregate principal amount of the outstanding Indebtedness of Holdings and the Subsidiaries secured by Liens permitted by this clause and (C) the Attributable Debt in connection with all Sale and Leaseback Transactions of Holdings and the Subsidiaries permitted by clause (c) of Section 6.03 does not at any time exceed 10% of Consolidated Net Worth. SECTION 6.03. Sale and Leaseback Transactions. Holdings will not, and will not permit any of its Subsidiaries to, enter into any Sale and Leaseback Transaction other than: (a) Sale and Leaseback Transactions involving locomotives, rolling stock or other equipment with Southern Capital Corporation, LLC; (b) Sale and Leaseback Transactions permitted by clauses (h) and G) of Section 6.08; and (c) any other Sale and Leaseback Transaction if (i) at the time of such Sale and Leaseback Transaction no Default shall have occurred and be continuing, (ii) the proceeds from the sale of the subject property shall be at least equal to its fair market value on the date of such sale and (iii) the sum of (A) the Indebtedness permitted by clause (x) of Section 6.01(a), (B) the aggregate principal amount of the outstanding Indebtedness of Holdings secured by Liens permitted by clause (xi) of Section 6.02(a) and (C) the Attributable Debt in connection with all Sale and Leaseback Transactions of Holdings and the Subsidiaries permitted by this clause (c) does not at any time exceed 10% of Consolidated Net Worth. SECTION 6.04. Mergers and Consolidations. (a) Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or liquidate or dissolve, except that if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing (i) any wholly owned Subsidiary may merge into Holdings or the Borrower in a transaction in which Holdings or the Borrower is the surviving corporation, (ii) any Subsidiary may merge into or consolidate with any other Subsidiary if (A) the surviving or resulting entity is a Subsidiary and the percentage of the Equity Interests of such surviving or resulting entity owned directly or indirectly by Holdings is not less than the percentage of the Equity Interests so owned in either of the constituent corporations and (B) if either of such constituent Subsidiaries is a Subsidiary Loan Party, the surviving or resulting entity shall be a Subsidiary Loan Party, and (iii) any Subsidiary may liquidate into its parent corporation or corporations or dissolve if Holdings or the Borrower determines in good faith that such liquidation or dissolution is in the best interests of Holdings or the Borrower. (b) Holdings and the Borrower will not permit Caymex to engage in any business or activity other than the ownership of all of the outstanding Equity Interests of NAFTA Rail and Canama and activities incidental thereto. Holdings and the Borrower will not permit NAFTA Rail to engage in any business or activity other than the ownership of Equity Interests of Grupo TFM and activities incidental thereto. Holdings and the Borrower will not permit Canama to engage in any business or activity other than the ownership of Equity Interests of Panama Canal Railway Company and activities incidental thereto. SECTION 6.05. Asset Sales. Holdings and the Borrower will not, and will not permit any of the Subsidiaries to, sell, transfer, lease or otherwise dispose of any asset, including any Equity Interest owned by it, nor will Holdings permit any of the Subsidiaries (other than the Borrower, subject to Section 2.11(c)) to issue any additional Equity Interest in such Subsidiary, except: (a) sales of inventory, used or surplus equipment and Permitted Investments in the ordinary course of business; (b) sales, transfers and dispositions to Holdings or a Subsidiary; provided that any such sales, transfers or dispositions involving a Subsidiary that is not a Loan Party shall be made in compliance with Section 6.06; (c) sales, transfers and dispositions of accounts receivable pursuant to one or more Securitization Transactions provided, any outstanding Tranche B Term Loans shall be prepaid to the extent required under Section 2.11(c); (d) sales, transfers and other dispositions of assets that are not permitted by any of the preceding clauses; provided that (i) the Net Proceeds from any such sale, transfer or other disposition are paid to the Lenders to the extent required by Section 2.11 (c) and (ii) such assets are sold, transferred or otherwise disposed of for fair market value; and (e) the issuance of any Equity Interest in connection with the Grupo TFM Phase III Investment or the Grupo TFM Phase IV Investment provided that all sales, transfers, leases and other dispositions permitted hereby (other than those permitted by clause (b) above) shall be made for fair value. SECTION 6.06. Transactions with Affiliates. Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of their respective Affiliates, except (a) transactions in the ordinary course of business at prices and on terms and conditions which, taken as a whole, are not less favorable to Holdings, the Borrower or such Subsidiary than would prevail in arm's-length transactions with unrelated third parties, (b) transactions between or among Holdings, the Borrower and the Subsidiary Loan Parties not involving any other Affiliate and (c) any Restricted Payment permitted by Section 6.10. SECTION 6.07. Certain Other Agreements. (a) Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, enter into or permit to exist any agreement or other arrangement that directly or indirectly (through the application of financial covenants or otherwise) prohibits or restricts (i) the ability of Holdings, the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets or (ii) the ability of any Subsidiary to pay dividends or other distributions with respect to its Equity Interests or to make or repay loans or advances to Holdings or any other Subsidiary or to Guarantee Indebtedness of Holdings or any other Subsidiary; provided that (A) the foregoing shall not apply to restrictions and conditions imposed by law or by any Loan Document, (B) the foregoing shall not apply to restrictions and conditions existing on the date of the Original Credit Agreement and identified on Schedule 6.07 thereto (but shall apply to any amendment or modification expanding the scope of any such restriction or condition), (C) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale if such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (D) clause (i) of the foregoing shall not apply to customary restrictions contained in the Permitted Unsecured Debt or the Additional Permitted Unsecured Debt, (E) clause (i) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (F) clause (i) of the foregoing shall not apply to customary provisions in leases and other contracts restricting the assignment thereof. (b) Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, directly or indirectly, enter into or be bound by any agreement or instrument containing any provision restricting the incurrence of Indebtedness or governing Holdings's and the Subsidiaries' financial condition if such provision is not contained in this Agreement or is more restrictive than the analogous provision contained in this Agreement unless (i) the Borrower has delivered a copy of such document to the Administrative Agent not less than 10 Business Days prior to executing the same and (ii) Holdings and the Borrower enter into an amendment to this Agreement to add the more restrictive provision or to conform the analogous provision of this Agreement to such more restrictive provision. SECTION 6.08. Investments, Loans, Advances, Guarantees and Acquisitions. Holdings and the Borrower will not, and will not permit any of the Subsidiaries to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a wholly owned Subsidiary prior to such merger) any Equity Interests in or evidences of Indebtedness or other securities. (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit (all the foregoing being collectively called "Investments"), except: (a) Permitted Investments; (b) Investments existing on the date hereof; (c) Investments in Loan Parties; (d) loans or advances to Holdings; (e) Guarantees of Indebtedness of Persons other than Subsidiaries constituting Indebtedness permitted by Section 6.01; (f) investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers and suppliers, in each case in the ordinary course of business; (g) Investments consisting of loans and advances to employees for moving, entertainment, travel and similar expenses; provided that the aggregate outstanding amount of such loans and advances shall not exceed $1,000,000; (h) Guarantees for the benefit of, or capital contributions or loans to, or sale and leaseback transactions with, Texas Mexican Railway Company or any other domestic railway company that owns railways that are contiguous with those owned by the Borrower; provided that the aggregate amount of such capital contributions, loans and guaranteed Indebtedness and sale and leaseback transactions shall not exceed $25,000,000; (i) the Grupo TFM Phase III Investment and the Grupo TFM Phase IV Investment; (j) Guarantees for the benefit of, or capital contributions or loans to, or sale and leaseback transactions with, any company that is engaged in the same line of business as the Borrower or a related line of business; provided that the aggregate amount of such capital contributions, loans and guaranteed Indebtedness and sale and leaseback transactions shall not exceed $25,000,000; (k) Investments made with the Net Proceeds of issuances of Equity Interests by Holdings or any of its Subsidiaries remaining after any prepayments required under Section 2.11 have been made; and (l) Investments not expressly permitted by clauses (a) through (k); provided that the aggregate amount all such Investments shall not at any time exceed $10,000,000. SECTION 6.09. Hedging Agreements. Holdings and the Borrower will not, and will not permit any of the Subsidiaries to, enter into any Hedging Agreement other than Hedging Agreements entered into in the ordinary course of business to hedge or mitigate risks to which Holdings, the Borrower or the Subsidiaries shall be exposed in the conduct of their businesses, and not for speculative purposes. SECTION 6.10. Restricted Payments, Certain Payments of Indebtedness. (a) Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, declare or make; or agree to pay or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, except (i) Holdings may declare and pay dividends with respect to its capital stock payable solely in additional shares of its capital stock, (ii) Subsidiaries may declare and pay dividends ratably with respect to their capital stock, (iii) Holdings may make Restricted Payments pursuant to and in accordance with stock option plans or other benefit plans for management or employees of Holdings and its Subsidiaries, (iv) Holdings may pay cash dividends with respect to shares of its preferred Equity Interests in respect of which cash dividends are payable or which require redemptions or repurchases in cash; provided that no such payments shall be made under this clause (iv) upon the occurrence and during the continuance of an Event of Default pursuant to clauses (a), (h) or (i) of Article VII. (b) Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, make or agree to pay or make, directly or indirectly, any payment or other distribution (whether in cash, securities or other property) of or in respect of principal of or interest on any Indebtedness (other than the Obligations), or any payment or other distribution (whether in cash, securities or other property) on account of the purchase, redemption, retirement, acquisition, cancelation, defeasance or termination of any Indebtedness, except: (i) scheduled or mandatory payments of the principal of or premium or interest on Indebtedness, other than payments in respect of the Permitted Subordinated Debt or other Indebtedness subordinated to the Obligations that shall be prohibited by the subordination provisions thereof; (ii) refinancings of Indebtedness to the extent permitted by Section 6.01; (iii) payment of secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; and (iv) payments in respect of Indebtedness owed to Holdings or any Subsidiary. SECTION 6.11. Amendment of Material Documents. Neither Holdings nor the Borrower will, nor will they permit any Subsidiary or, to the extent within their control, Grupo TFM, to, amend, modify or waive any of its rights under (a) any indenture or other agreement or instrument governing Material Indebtedness or (b) any other material agreement or instrument, in each case in a manner that would be materially adverse to the rights or interests of the Lenders. SECTION 6.12. Ownership of Caymex, NAFTA Rail and Grupo TFM. Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, permit (a) any Equity Interest in Caymex to be owned by any Person other than (i) Holdings or (ii) any other Loan Party that shall have pledged all Equity Interests in Caymex owned by it pursuant to the Pledge Agreement, (b) any Equity Interest in NAFTA Rail to be owned by any Person other than Caymex or (c) any Equity Interest in Grupo TFM, so long as it is owned directly or indirectly by Holdings, to be owned by any Person other than NAFTA Rail. SECTION 6.13. Interest Expense Coverage Ratio. Holdings will not permit the ratio as of the last day of any fiscal quarter during any period set forth below of (a) Consolidated EBITDA to (b) Consolidated Interest Expense, in each case for the period of four consecutive fiscal quarters ending on the last day of such fiscal quarter to be less than the ratio set forth below opposite such period: Period Ratio ------ ----- April 1, 2002 to December 31, 2002 2:00 : 1.00 January 1, 2003 to December 31, 2003 2.25 : 1.00 January 1, 2004 and thereafter 2.50 : 1.00 SECTION 6.14. Leverage Ratio. Holdings will not permit the Leverage Ratio as of the last day of any fiscal quarter during any period set forth below to exceed the ratio set forth opposite such period: Period Ratio ------ ----- March 31, 2002 6.25:1.00 April 1, 2002-December 31, 2002 5.00:1.00 January 1, 2003 -June 30, 2003 4.75:1.00 July 1, 2003 -December 31, 2003 4:50:1.00 January 1, 2004 - June 30, 2004 4:25:1.00 July 1, 2004 - December 31, 2004 4:00:1.00 January 1, 2005 and thereafter 3.75:1.00 SECTION 6.15. Capital Expenditures. Holdings will not permit the aggregate amount of Capital Expenditures during any fiscal year of Holdings during any period set forth below to exceed the amount set forth opposite such period: Period Amount ------ ------ January 1, 2002 to December 31, 2002 $ 95,000,000 January 1, 2003 to December 31, 2003 $100,000,000 January 1, 2004 to December 31, 2004 $105,000,000 January 1, 2005 to December 31, 2005 $110,000,000 January 1, 2006 and thereafter $115,000,000 provided, that the amount set forth opposite each of the periods above will be reduced by the aggregate amount of all capital contributions, loans, guaranteed Indebtedness and sale and leaseback transactions incurred pursuant to clause (j) of Section 6.08 during such period. ARTICLE VII Events of Default If any of the following events ("Events of Default") shall occur: (a) the Borrower shall fail to pay any principal of any Loan or any reimbursement obligation in respect of any LC Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise; (b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement or any other Loan Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of five Business Days; (c) any representation or warranty made or deemed made by or on behalf of Holdings, the Borrower or any other Subsidiary in or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, shall prove to have been materially false when made or deemed made; (d) Holdings or the Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 5.02, 5.04 (with respect to the existence of Holdings or the Borrower) or 5.11 or in Article VI; (e) any Loan Party shall fail to observe or perform any covenant, condition or agreement contained in any Loan Document (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 15 days after notice thereof from the Administrative Agent to the Borrower (which notice will be given at the request of any Lender); (f) Holdings, the Borrower or any other Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable; (g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of Holdings, the Borrower or any other Subsidiary or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrate or, conservator or similar official for Holdings, the Borrower or any other Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (i) Holdings, the Borrower or any other Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Holdings, the Borrower or any other Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; (j) Holdings, the Borrower or any other Subsidiary shall become unable, admit in writing its inability or fail generally to pay its debts as they become due; (k) one or more judgments for the payment of money in an aggregate amount in excess of $10,000,000 shall be rendered against Holdings, the Borrower, any other Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of Holdings, the Borrower or any other Subsidiary to enforce any such judgment; (l) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect; (m) any Lien purported to be created under any Security Document with respect to any material portion of the Collateral shall cease to be, or shall be asserted by any Loan Party not to be, a valid and perfected Lien on any Collateral, with the priority required by the applicable Security Document, except (i) as a result of the sale or other disposition of the applicable Collateral in a transaction permitted under the Loan Documents or (ii) as a result of the Collateral Agent's failure to maintain possession of any stock certificates, promissory notes or other instruments delivered to it under the Collateral Agreement; (n) a Change in Control shall occur; or (o) an event of default or purchase termination event or other comparable event shall occur in respect of any Securitization Transaction in an aggregate amount greater than $20,000,000, in any case that could reasonably be expected to have a material and adverse effect on the liquidity of the Borrower or any of its Subsidiaries or otherwise result in a Material Adverse Effect; then, and in every such event (other than an event with respect to Holdings or the Borrower described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to Holdings or the Borrower described in clause (h) or (i) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. ARTICLE VIII The Administrative Agent Each of the Lenders and the Issuing Bank hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms of the Loan Documents, together with such actions and powers as are reasonably incidental thereto. For purposes of this Article VIII and for the purposes of Article IX, all references to the Administrative Agent are deemed to include references to the Collateral Agent. The bank serving as the Administrative 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 the Administrative Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with Holdings, the Borrower or any other Subsidiary or other Affiliate thereof as if it were not the Administrative Agent hereunder. The Administrative Agent shall not have any duties or obligations except those expressly set forth in the Loan Documents. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated by the Loan Documents that the Administrative Agent is required to exercise in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02), and (c) except as expressly set forth in the Loan Documents, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to Holdings, the Borrower or any other Subsidiary that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02) or in the absence of its own gross negligence or wilful misconduct. The Administrative Agent shall not be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by Holdings, the Borrower or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with any Loan Document, (ii) the contents of any certificate, report or other document delivered thereunder or in connection therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth in any Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of any Loan Document or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent. The Administrative 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 believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be counsel for Holdings or the Borrower), 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. The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of each Administrative 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 Administrative Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided in this paragraph, the Administrative Agent may resign at any time by notifying the Lenders, the Issuing Bank and the Borrower. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders and' the Issuing Bank, appoint a successor Administrative Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Administrative 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 it was acting as Administrative Agent. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender 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 the Administrative Agent or any other Lender 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 related agreement or any document furnished hereunder or thereunder. ARTICLE IX Miscellaneous SECTION 9.01. Notices. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to Holdings or the Borrower, to it at 427 West 12th Street, Kansas City, Missouri 64105, Attention of the Vice President and Treasurer (Telecopy No. (816) 983-1198), with a copy to the Senior Vice President and General Counsel (Telecopy No. (816) 983-1227); (b) if to the Administrative Agent, to JPMorgan Chase Bank, Loan and Agency Services Group, One Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Margaret Swales (Telecopy No. (212) 552-5662), with a copy to J.P. Morgan Securities Inc., 270 Park Avenue, New York, NY 10017, Attention of Julie S. Long (Telecopy No. (212) 270-5127); (c) if to the Issuing Bank, to it at JPMorgan Chase Bank, Attention of Margaret Swales (Telecopy No. (212) 552-5662); (d) if to the Swingline Lender, to it at, Loan and Agency Services Group, One Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Margaret Swales (Telecopy No. (212) 552-5662); and (e) if to any other Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. SECTION 9.02. Waivers; Amendments. (a) No failure or delay by the Administrative Agent, the Issuing Bank or any Lender in exercising any right or power hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Issuing Bank and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of any Loan Document or consent to any departure by any Loan Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent, any Lender or the Issuing Bank may have had notice or knowledge of such Default at the time. (b) Neither this Agreement nor any other Loan Document nor any provision hereof or thereof may be waived, amended or modified except, in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by Holdings, the Borrower and the Required Lenders or, in the case of any other Loan Document, pursuant to an agreement or agreements in writing entered into by the Administrative Agent and the Loan Party or Loan Parties that are parties thereto, in each case with the consent of the Required Lenders; provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or LC Disbursement or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the maturity of any Loan, or any scheduled date of payment of the principal amount of any Term Loan under Section 2.10, or the required date of reimbursement of any LC Disbursement, or any date for the payment of any interest or fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.18(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender, (v) change any of the provisions of this Section or the percentage set forth in the definition of "Required Lenders" or any other provision of any Loan Document specifying the number or percentage of Lenders (or Lenders of any Class) required to waive, amend or modify any rights thereunder or make any determination or grant any consent thereunder, without the written consent of each Lender (or each Lender of such Class, as the case may be), (vi) release Holdings or any Subsidiary Loan Parties that are substantial in relation to Holdings and the Subsidiaries taken as a whole from their Guarantees under the Guarantee Agreement (except as expressly provided by Section 9.14), or limit their liability in respect of such Guarantee, without the written consent of each Lender, (vii) release all or any substantial part of the Collateral from the Liens of the Security Documents without the written consent of each Lender (except as expressly provided by Section 9.14) or (viii) change any provisions of any Loan Document in a manner that by its terms adversely affects the rights in respect of payments due to Lenders holding Loans of any Class differently than those of Lenders holding Loans of any other Class, without the written consent of Lenders holding a majority in interest of the outstanding Loans and unused Commitments of the Class adversely affected or receiving a lesser benefit; provided further that (A) no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent, the Collateral Agent, the Issuing Bank or the Swingline Lender without the prior written consent of the Administrative Agent, the Collateral Agent, the Issuing Bank or the Swingline Lender, as the case may be, and (B) any waiver, amendment or modification of this Agreement that by its terms affects the rights or duties under this Agreement of the Lenders of one Class, but not the other Lenders, may be effected by an agreement or agreements in writing entered into by Holdings, the Borrower and requisite percentage in interest of the affected Class of Lenders that would be required to consent thereto under this Section if such Class of Lenders were the only Class of Lenders hereunder at the time. Notwithstanding the foregoing, any provision of this Agreement may be amended by an agreement in writing entered into by ;Holdings, the Borrower, the Required Lenders and the Administrative Agent (and, if their rights or obligations are affected thereby, the Issuing Bank and the Swingline Lender) if (i) by the terms of such agreement the Commitment of each Lender not consenting to the amendment provided for therein shall terminate upon the effectiveness of such amendment and (ii) at the time such amendment becomes effective, each Lender not consenting thereto receives payment in full of the principal of and interest accrued on each Loan made by it and all other amounts owing to it or accrued for its account under this Agreement. SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and the Collateral Agent and their Affiliates, including the reasonable fees, charges and disbursements of counsel, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of the Loan Documents or any amendments, modifications or waivers of the provisions thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) all out-of-pocket expenses incurred by the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent, the Collateral Agent, the Issuing Bank or any Lender, in connection with the enforcement or protection of its rights in connection with the Loan Documents, including its rights under this Section, or in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit. (b) The Borrower agrees to indemnify the Administrative Agent, the Collateral Agent, the Issuing Bank, each Lender and each of their respective directors, officers, employees and agents (each such person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees, charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the Transactions, (ii) the use of the proceeds of the Loans or (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses (i) are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the negligence or wilful misconduct of such Indemnitee and (ii) have not, in whole or in part, arisen out of or resulted from any act, or omission to act, of Holdings, the Borrower or any of their Affiliates. (c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent, the Collateral Agent, the Issuing Bank or the Swingline Lender under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent, the Collateral Agent, the Issuing Bank or the Swingline Lender, as the case may be, such Lender's pro rata 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 the Administrative Agent, the Collateral Agent, the Issuing Bank or the Swingline Lender m its capacity as such. For purposes hereof, a Lender's "pro rata share" shall be determined based upon its share of the sum of the total Revolving Exposure, outstanding Term Loans and unused Commitments at the time. (d) To the extent permitted by applicable law, neither Holdings nor the Borrower shall assert, and each 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 or any agreement or instrument contemplated hereby, the Transactions, any Loan or Letter of Credit or the use of the proceeds thereof. (e) All amounts due under this Section shall be payable promptly after written demand therefor. SECTION 9.04. Successors and Assigns. (a) 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 (including any Affiliate of the Issuing Bank that issues any Letter of Credit), except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent 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 (including any Affiliate of the Issuing Bank that issues any Letter of Credit) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the Issuing Bank and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitments and the Loans at the time owing to it); provided that (i) except in the case of an assignment to a Lender, an Affiliate of a Lender or a Related Fund of any Lender, each of the Borrower and the Administrative Agent (and, in the case of an assignment of all or a portion of a Revolving Commitment or any Lender's obligations in respect of its LC Exposure or Swingline Exposure, the Issuing Bank and the Swingline Lender) must give their prior written consent to such assignment (which consent shall not be unreasonably withheld or delayed), (ii) except in the case of an assignment to a Lender, an Affiliate of a Lender or a Related Fund of any Lender or an assignment of the entire remaining amount of the assigning Lender's Commitment or Loans, the amount of the Commitment or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $1,000,000 unless each of the Borrower and the Administrative Agent otherwise consent, (iii) 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, except that this clause (iii) shall not be construed to prohibit the assignment of a proportionate part of all the assigning Lender's rights and obligations in respect of one or more, but not all, Classes of its Commitments or Loans, (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance together with a processing and recordation fee of $2,500 (except in the case of an assignment to a Lender or an Affiliate of a Lender or a Related Fund of a Lender and only one such fee shall be payable in the event of a concurrent assignment to two or more assignees that are Affiliates of one another, or to two or more Related Funds managed by the same investment advisor or affiliated investment advisor), and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; and provided further that any consent of the Borrower otherwise required under this paragraph shall not be required if an Event of Default has occurred and is continuing; provided that as a result of such assignment the Borrower would not incur any additional costs under Section 2.17 than it would have incurred had such assignment not occurred. Subject to acceptance and recording thereof pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Acceptance the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, 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 Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance 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 2.15, 2.16, 2.17 and 9.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph 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 paragraph (e) of this Section. (c) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans and LC Disbursements owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and Holdings, the Borrower, the Administrative Agent, the Issuing Bank 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, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, the Issuing Bank and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) Any Lender may, without the consent of the Borrower, the Administrative Agent, the Issuing Bank or the Swingline Lender, sell participations to one or more banks or other entities (a "Participant") in all or a portion of such Lender's rights and obligations under this Agreement (including all or a portion of its Commitment and 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) Holdings, the Borrower, the Administrative Agent, the Issuing Bank and the other 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 the Loan: Documents and to approve any amendment, modification or waiver of any provision of the Loan Documents; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to paragraph (f) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.15, 2.16 and 2.17 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted bylaw, each Participant also shall be entitled to the benefits of Section 9.08 as though it were a Lender, provided such Participant agrees to be subject to Section 2.18 (c) as though it were a Lender. (f) A Participant shall not be entitled to receive any greater payment under Section 2.15 or 2.17 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. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.17 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.17(e), and to be subject to Section 2.19, as though it were a Lender. (g) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. (h) Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Lender") may grant to a special purpose funding vehicle (an "SPC") of such Granting Lender, identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrower, the option to provide to the Borrower all or any part of any Loan that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to Section 2.01, provided that (i) nothing herein shall constitute a commitment to make any Loan by any SPC, (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof (iii) such Granting Lender's other obligations under this Agreement shall remain unchanged, (iv) such Granting Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (v) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Granting Lender in connection with such Granting Lender's rights and obligations under this Agreement. The making of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Loan were made by the Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the related Granting Lender). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or similar proceedings under the laws of the United States or any State thereof. In addition, notwithstanding anything to the contrary contained in this Section 9.04 or in Section 9.12, any SPC may (i) with notice to, but without the prior written consent of, the Borrower or the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to its Granting Lender or to any financial institutions providing liquidity and/or credit facilities to or for the account of such SPC to fund the Loans made by such SPC or to support the securities (if any) issued by such SPC to fund such Loans and (ii) disclose on a confidential basis, to the extent such disclosure would be permitted under Section 9.1'2 as if such SPC were a Lender, any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of a surety, guarantee or credit or liquidity enhancement to such SPC. SECTION 9.05. Survival. All covenants, agreements, representations and warranties made by the Loan Parties in the Loan Documents and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of the Loan Documents and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent, the Issuing Bank or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not expired or terminated. The provisions of Sections 2.15, 2.16, 2.17 and 9.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Letters of Credit and the Commitments or the termination of this Agreement or any provision hereof. SECTION 9.06. Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement, the other Loan Documents and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01 and Section 6 of the Amendment and Restatement Agreement, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 9.07. Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 9.08. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by such Lender or Affiliate to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) Each of Holdings and the Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to any Loan Document, or for recognition or enforcement of any judgment, and each of: the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law; in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement or any other Loan Document shall affect any right that the Administrative Agent, the Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against Holdings, the Borrower or its properties in the courts of any jurisdiction. (c) Each of Holdings and the Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives; to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement or any other Loan Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WANES, 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, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 9.11. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. SECTION 9.12. Confidentiality. Each of the Administrative Agent, the Issuing Bank and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors as need to know such information in connection with the servicing and protection of its interests in respect of its Loans and Commitments, the Loan Documents and the Transactions (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority including the National Association of Insurance Commissioners, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, 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 containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the Borrower, (h) to any direct or indirect contractual counterparty in swap agreements or such contractual counterparty's professional advisor (so long as such contractual counterparty of professional advisor to such contractual counterparty agrees to be bound by the provisions of this Section 9.12) or (i) 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 the Administrative Agent, the Issuing Bank or any Lender on a nonconfidential basis from a source other than Holdings or the Borrower. For the purposes of this Section, "Information" means all information received from Holdings or the Borrower relating to Holdings or the Borrower or its business, other than any such information that is available to the Administrative Agent, the Issuing Bank or any Lender on a nonconfidential basis prior to disclosure by Holdings or the Borrower; provided that, in the case of information received from Holdings or the Borrower 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. SECTION 9.13. Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the "Charges"), shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender. SECTION 9.14. Release of Liens and Guarantees. In the event that Holdings or any Subsidiary sells, transfers or otherwise disposes of all or any portion of any of the Equity Interests, assets or property owned by Holdings or such Subsidiary in a transaction not prohibited by this Agreement, the Administrative Agent and the Collateral Agent shall promptly (and the Lenders hereby authorize and instruct the Administrative Agent and the Collateral Agent to) take such action and execute any such documents as may be reasonably requested by the Borrower to release any Liens created by any Loan Document in respect of such Equity Interests, assets or property, including the release and satisfaction of record of any mortgage or deed of trust granted in connection herewith, and, in the case of a disposition of all or substantially all the Equity Interests or assets of any Subsidiary that is a Loan Party, to terminate such Subsidiary's obligations under the Guarantee Agreement and each other Loan Document. In addition, the Administrative Agent and the Collateral Agent will take such actions as are reasonably requested by the Borrower to terminate the Liens and security interests created by the Loan Documents when all the Obligations have been paid in full and all Letters of Credit and Commitments have been terminated. The Borrower agrees to pay all out-of-pocket expenses of the Administrative Agent and the Collateral Agent in connection with releases of Liens and obligations under the Guarantee Agreement provided for in this Section. SECTION 9.15. No Novation. This Agreement shall not extinguish the Loans outstanding under the Original Credit Agreement. Nothing herein contained shall be construed as a substitution or novation of the Loans outstanding under the Original Credit Agreement, which shall remain outstanding as modified hereby. Notwithstanding any provision of this Agreement, the provisions of Sections 2.15, 2.16, 2.17 and 9.03 of the Original Credit Agreement as in effect immediately prior to the Effective Date will continue to be effective as to all matters arising out of or in any way related to facts or events. existing or occurring prior to the Effective Date. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. KANSAS CITY SOUTHERN, by ______________________________ Name: Title: THE KANSAS CITY SOUTHERN RAILWAY COMPANY, by ______________________________ Name: Title: JPMORGAN CHASE BANK, individually and as Administrative Agent, Issuing Bank and Swingline Lender, by ______________________________ Name: Title: EX-10.6.1 9 dex1061.txt REAFFERMATION AGREEMENT DATED 6/12/02 Exhibit 10.6.1 REAFFIRMATION AGREEMENT, dated as of June 12, 2002 (as the same may from time to time be amended, supplemented or otherwise modified, this "Agreement"), among KANSAS CITY SOUTHERN, a Delaware corporation ("Holdings"), THE KANSAS CITY SOUTHERN RAILWAY COMPANY, a Missouri Corporation ("the Borrower") and JPMORGAN CHASE BANK (formerly known as The Chase Manhattan Bank), as Administrative Agent (in such capacity, "JPMorgan Chase") under the Credit Agreement referred to below. WHEREAS Holdings, the Borrower, the Lenders party thereto, and JPMorgan Chase have entered into the Amendment and Restatement Agreement (the "Amendment Agreement"), dated as of June 12, 2002, which provides for the amendment and restatement of the Credit Agreement dated as of January 11, 2000 (as amended after giving effect to the Amendment Agreement, the "Credit Agreement") among Holdings, the Borrower, the Lenders from time to time party thereto and JPMorgan Chase; WHEREAS each of the parties signatory hereto (each a "Reaffirming Party") is party to one or more of the Security Documents (such term and each other capitalized term used but not defined herein having the meaning assigned in the Credit Agreement), and each of the Subsidiary Loan Parties is party to the Guaranty Agreement and the Indemnity Subrogation and Contribution Agreement (the Security Documents, the Guaranty Agreement and the Indemnity Subrogation and Contribution Agreement herein together referred to as the "Collateral Documents"). WHEREAS each Reaffirming Party expects to realize, or has realized, substantial direct and indirect benefits as a result of the Amendment Agreement becoming effective and the consummation of the transactions contemplated thereby; and WHEREAS the execution and delivery of this Agreement is a condition precedent to the effectiveness of the Amendment Agreement and the consummation of the transactions contemplated thereby; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I Reaffirmation/Amendment and Restatement SECTION 1.01. Reaffirmation. Each of the Reaffirming Parties hereby consents to the Amendment Agreement and the transactions contemplated thereby and hereby confirms its respective guarantees, pledges and grants of security interests, as applicable, under each of the Collateral Documents to which it is party, and agrees that notwithstanding the effectiveness of the Amendment Agreement and the consummation of the transactions contemplated thereby such guarantees, pledges and grants of security interests shall continue to be in full force and effect and shall accrue to the benefit of the Secured Parties (as defined in the Credit Agreement). Each of the Reaffirming Parties further agrees to take any action that may be required or that is reasonably requested by the Administrative Agent to ensure compliance by the Borrower with Sections 5.12 and 5.13 of the Credit Agreement and hereby reaffirms its obligations under each similar provision of each Collateral Document to which it is party. SECTION 1.02. Amendment and Restatement. On and after the effectiveness of the Amendment Agreement, (i) each reference in each Collateral Document to the "Credit Agreement", "thereunder", "thereof" or words of like import shall mean and be a reference to the Credit Agreement as may be amended, modified or supplemented and in effect from time to time, (ii) the definition of any term defined in any Collateral Document by reference to the terms defined in the Credit Agreement shall be amended to be defined by reference to the defined term in the Credit Agreement, as amended, modified or supplemented and in effect from time to time and (iii) Schedule I to the Pledge Agreement is hereby amended as set forth on Schedule I hereto. ARTICLE II Representations and Warranties Each Reaffirming Party hereby represents and warrants, which representations and warranties shall survive execution and delivery of this Agreement, as follows: SECTION 2.01. Organization. Such Reaffirming Party is duly organized and validly existing in good standing under the laws of the jurisdiction of its formation. SECTION 2.02. Authority, Enforceability. Such Reaffirming Party has the power and authority to execute, deliver and carry out the terms and provisions of this Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Agreement. Such Reaffirming Party has duly executed and delivered this Agreement, and this Agreement constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms. SECTION 2.03. Loan Documents. The representations and warranties of such Reaffirming Party contained in each Loan Document are true and correct in all material respects on and as of the date hereof with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall have been true and correct in all material respects as of such earlier date). ARTICLE III Miscellaneous SECTION 3.01. Notices. All notices and other communications hereunder shall be made at the addresses, in the manner and with the effect provided in Article IX of the Credit Agreement; provided that, for this purpose, the address of each Reaffirming Party shall be the one specified for Holdings or the Borrower under the Credit Agreement. SECTION 3.02. Expenses. Each Reaffirming Party agrees to pay all reasonable costs, fees and expenses (including reasonable attorneys' fees and time charges of attorneys for JPMorgan Chase or any Lender, which attorneys may be employees of JPMorgan Chase or any Lender) incurred by JPMorgan Chase or any Lender in enforcing any Reaffirming Party's obligations under this Agreement. SECTION 3.03. Loan Document. This Agreement is a Loan Document executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof. SECTION 3.04. Section Captions. Section captions used in this Agreement are for convenience of reference only and shall not affect the construction of this Agreement. SECTION 3.05. Severability. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. SECTION 3.06. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. SECTION 3.07. Amendment. This Agreement may be waived, modified or amended only by a written agreement executed by each of the parties hereto. SECTION 3.08. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original but all of which shall together constitute one and the same agreement. Delivery of an executed counterpart of a signature page of this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 3.09. No Novation. Neither this Agreement nor the execution, delivery or effectiveness of the Amendment Agreement shall extinguish the obligations for the payment of money outstanding under the Amendment Agreement or the Credit Agreement or discharge or release the Lien or priority of any Security Document or any other security therefor. Nothing herein contained shall be construed as a substitution or novation of the obligations outstanding under the Amendment Agreement or the Credit Agreement or instruments securing the same, which shall remain in full force and effect, except to any extent modified hereby or by instruments executed concurrently herewith. Nothing implied in this Agreement, the Amendment Agreement or in any other document contemplated hereby or thereby shall be construed as a release or other discharge of any Borrower or any Guarantor or any Pledgor or any Grantor under any Collateral Document from any of its obligations and liabilities as a "Borrower", "Subsidiary Guarantor", "Subsidiary Loan Party", "Subsidiary Pledgor", "Subsidiary Grantor", "Guarantor", "Loan Party", "Pledgor" or "Grantor" under the Credit Agreement or the Collateral Documents. Each of the Credit Agreement and the Collateral Documents shall remain in full force and effect, until (as applicable) and except to any extent modified hereby or by the Amendment Agreement or in connection herewith and therewith. IN WITNESS WHEREOF, each Reaffirming Party and JPMorgan Chase as Administrative Agent for the benefit of the Lenders caused this Agreement to be duly executed and delivered as of the date first above written. KANSAS CITY SOUTHERN, by /s/ Paul J. Weyandt ----------------------------------- Name: Paul J. Weyandt Title: Vice President & Treasurer THE KANSAS CITY SOUTHERN RAILWAY COMPANY, by /s/ Paul J. Weyandt ----------------------------------- Name: Paul J. Weyandt Title: Vice President & Treasurer THE KANSAS CITY NORTHERN RAILWAY COMPANY, by /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Vice President & CFO CAYMEX TRANSPORTATION, INC., by /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer GATEWAY EASTERN RAILWAY COMPANY, by /s/ Paul J. Weyandt ----------------------------------- Name: Paul J. Weyandt Title: Vice President & Treasurer SCC HOLDINGS, INC., by /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Authorized Representative MID-SOUTH MICROWAVE, INC., by /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer PABTEX, L.P., by /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Authorized Representative PABTEX GP, LLC, by /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Authorized Representative RICE-CARDEN CORPORATION, by /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer SIS BULK HOLDINGS, INC., by /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer SOUTHERN DEVELOPMENT COMPANY, by /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer SOUTHERN INDUSTRIAL SERVICES, INC., by /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer TRANS-SERVE, INC., by /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer VEALS, INC., by /s/ Robert H. Berry ----------------------------------- Name: Robert H. Berry Title: Vice President & Treasurer JPMORGAN CHASE BANK, as Administrative Agent, by /s/ Julie S. Long ----------------------------------- Name: Julie S. Long Title: Vice President Schedule I to Reaffirmation Agreement EQUITY INTERESTS - --------------------------------------------------------------------------------
Ownership Percent Registered Owner Class Number Represented by Name of Entity Whose Entity Interests are being of Equity Interests of Equity of Equity Equity Interests Pledged (and jurisdiction of organization) being pledged Interests Cert No. Interests Being Pledged - ----------------------------------------------- ------------------- ---------- -------- --------- ----------------- Caymex Transportation, Inc. (Cayman Islands, domesticated in Delaware) KCSR Common 4 100 100% Gateway Eastern Railway Company (Illinois) KCSR Common 1 1,000 100% The Kansas City Northern Railway Company (Delaware) KCSR Common 3 10 100% The Kansas City Southern Railway Company (Missouri) KCS Preferred KP 445 57 100% The Kansas City Southern Railway Company (Con't) KCS Common KC 418 9,840,000 100% Mid-South Microwave, Inc. (Delaware) KCSR Common 5 1,000 100% PABTEX, L.P. (formerly known as Global Terminaling PABTEX GP, LLC Partnership 1 1 1% Services, Inc.) (Delaware) Interests SIS Bulk Holding, 2 99 99% Inc. PABTEX GP, LLC (Texas) SIS Membership 1 100 100% Interests Rice-Carden Corporation (Missouri) KCSR Common 31 1,000 100% SCC Holdings, LLC (Delaware) KCSR Membership --- --- 100% Interests SIS Bulk Holding, Inc. (Delaware) SIS Common 1 1,000 100% Southern Development Company (Missouri) KCSR Common 19 100 100% Southern Industrial Services, Inc. (Delaware) KCS Common 4 110 100% Trans-Serve, Inc. (Delaware) SIS Common A5 1,000 100% Veals, Inc. (Delaware) KCS Common 8 100 100%
EX-10.6.2 10 dex1062.txt MASTER ASSIGNMENT & ACCEPTANCE DATED 6/12/02 Exhbit 10.6.2 EXECUTION COPY MASTER ASSIGNMENT AND ACCEPTANCE Reference is made to (A) the Credit Agreement dated as of January 11, 2000, (the "Original Credit Agreement"), among Kansas City Southern ("Holdings"), The Kansas City Southern Railway Company (the "Borrower"), the Lenders from time to time party thereto and JPMorgan Chase Bank, as Administrative Agent, Collateral Agent, Issuing Bank and Swingline Lender, (B) the Original Credit Agreement as amended and restated as of the June 12, 2002, among Kansas City Southern, The Kansas City Southern Railway Company, the Lenders from time to time party thereto and JPMorgan Chase Bank (the "Restated Credit Agreement") and (C) the Amendment and Restatement Agreement (the "Amendment Agreement") dated as of June 12, 2002, among Holdings, the Borrower, the Lenders party thereto and the Administrative Agent. Capitalized terms used and not otherwise defined herein have the meanings assigned to them in the Original Credit Agreement and the Restated Credit Agreement. All Lenders executing this Master Assignment and Acceptance that hold Tranche B Term Loans under the Original Credit Agreement, and all financial institutions that will hold Tranche B Term Loans under the Restated Credit Agreement, agree as follows: SECTION 1. "Interest" means all interests in a Party's rights and obligations under the Restated Credit Agreement with respect to the Tranche B credit facilities contained therein, including, without limitation, the Term Loans that are outstanding on the Master Assignment Date. "New Lender" means any Party that shall not have been a Lender holding Tranche B Term Loans under the Original Credit Agreement. "Party" means any party to this Master Assignment and Acceptance other than Holdings or the Borrower. SECTION 2. Effective as of the Master Assignment Date set forth below, and after giving effect to the prepayments required under Section 3 of the Amendment Agreement, each Party hereby purchases and assumes and/or sells and assigns its rights and obligations under the Restated Credit Agreement such that such Party will hold an Interest, after giving effect to the transactions provided for in this Master Assignment and Acceptance, in the amount specified on such Party's signature page to this Master Assignment and Acceptance. To the extent that a Party's Interest is greater following the execution of this Master Assignment and Acceptance than it was prior to the execution of this Master Assignment and Acceptance (an "Increasing Lender"), such Increasing Lender will be deemed to have purchased and assumed the increase in such Lender's Interest from all Parties whose Interests have decreased as a result of the transactions provided for in this Master Assignment and Acceptance ("Decreasing Lenders") ratably in accordance with the Interests transferred by such Decreasing Lenders. Each Decreasing Lender shall be deemed to have sold and assigned an amount equal to the decrease in its Interest to the Increasing Lenders ratably in accordance with the Interests acquired by such Increasing Lenders. Each Party represents and warrants that it is the legal and beneficial owner of any interests being assigned by it hereunder and that such interests are free and clear of any Liens. Each New Lender hereby acknowledges receipt of a copy of the Restated Credit Agreement. From and after the Master Assignment Date (i) each New Lender shall be a party to and be bound by the provisions of the Restated Credit Agreement and, to the extent of the interests held by it after giving effect to the transactions provided for in this Master Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) each Party shall, to the extent of the interests assigned by it pursuant to this Master Assignment and Acceptance, relinquish its rights and be released from its obligations under the Restated Credit Agreement. SECTION 3. On the Master Assignment Date, subject to the terms and conditions set forth herein, (i) each Increasing Lender purchasing and assuming Interests pursuant to Section 2 above shall pay an amount equal to the difference between such Lender's Interest after giving effect to the transactions provided for in this Master Assignment and Acceptance and such Lender's Interest prior to such transactions by wire transfer of immediately available funds to the Administrative Agent not later than 12:00 Noon (New York City time) and (ii) the Administrative Agent shall promptly pay to each Decreasing Lender selling and assigning Interests pursuant to Section 2 above, out of the amounts received by the Administrative Agent pursuant to clause (i) of this Section, an amount equal to the difference between such Lender's Interest before giving effect to the transactions provided for in this Master Assignment and Acceptance and such Lender's Interest after giving effect to such transactions by wire transfer of immediately available funds to the account designated by such Decreasing Lender to the Administrative Agent; provided, however that the execution, delivery or effectiveness of this Master Assignment and Acceptance shall not affect the Borrower's obligations accrued in respect of any principal, interest, fees or other amounts under the Original Credit Agreement or discharge or release the Lien or priority of any pledge agreement or any other security therefor. SECTION 4. (a) This Master Assignment and Acceptance is being delivered to the Administrative Agent together with (i) to the extent required for each New Lender, any documentation required to be delivered by such New Lender pursuant to Section 2.17(e) of the Original Credit Agreement, and (ii) for each New Lender, an Administrative Questionnaire in the form provided by the Administrative Agent. (b) All New Lenders will be deemed to have agreed and become party to the Amendment Agreement. SECTION 5. This Master Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of New York. Date of Assignment: June 12, 2002 Effective Date, of Assignment ("Master Assignment Date"): June 12, 2002 IN WITNESS WHEREOF, the parties hereto have caused this Master Assignment and Acceptance to be executed as of the date first above written by their respective duly authorized officers. KANSAS CITY SOUTHERN by /s/ Robert H. Berry --------------------------------------- Name: Robert H. Berry Title: Senior Vice President & CFO THE KANSAS CITY SOUTHERN RAILWAY COMPANY by /s/ Robert H. Berry --------------------------------------- Name: Robert H. Berry Title: Senior Vice President & CFO JPMORGAN CHASE BANK, as Administrative Agent, Collateral Agent, Issuing Bank, Swingline Lender and Assignor, by /s/ Julie S. Long ---------------------------------------- Name: Julie S. Long Title: Vice President Signature Page to Kansas City Southern Master Assignment and Acceptance dated as of June 12, 2002 [_] New or Ongoing Lender* Principal amount of assumed and assigned Interest after giving effect to all assignments under this Master Assignment and Acceptance: $_____________________ [_] Departing Lender** Principal amount of assumed and assigned Interest after giving effect to all assignments under this Master Assignment and Acceptance: $0.00. Name of Institution: ___________________________________ by ___________________________________ Name: Title: ____________________________________ * All new and ongoing Tranche B Lenders should check the top box, fill in the amounts of their allocations and sign this page. ** Departing Tranche B Lenders should check the lower box and sign this page. EX-10.10 11 dex1010.txt DIRECTORS DEFERRED FEE PLAN Exhibit 10.10 KANSAS CITY SOUTHERN DIRECTORS' DEFERRED FEE PLAN ADOPTED AUGUST 20, 1982 AS AMENDED AND RESTATED EFFECTIVE JUNE 1, 2002 Section 1. Establishment 1.1 Establishment. Kansas City Southern (formerly Kansas City Southern Industries, Inc. hereinafter called "Company") established, pursuant to resolution adopted by the Board of Directors of the Company, at a meeting held on August 20, 1982, a deferred fee plan for members of its Board of Directors, which was known as "KANSAS CITY SOUTHERN INDUSTRIES, INC. DIRECTORS' DEFERRED FEE PLAN" (the "Plan"). 1.2 Transition and Name Change. The Plan originally became effective on January 1, 1983. This amended and restated Plan is hereby made effective June 1, 2002. Also effective June 1, 2002, the name of the Plan is changed to the "Kansas City Southern Directors' Deferred Fee Plan." Section 2. Definitions 2.1 Definitions. Whenever used in the Plan the following terms shall have the meaning set forth below: a. The term "Board" means the Board of Directors of the Company. b. The term "Director" means a member of the Board of Directors of the Company. c. The term "Participant" means a Director or former Director who has an account under the Plan. d. The term "Fees" means direct monetary remuneration from the Company due to the Directors for the discharge of their duties as directors. 2.2 Gender and Number. Except when otherwise indicated by the context, any masculine terminology used herein shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural. Section 3. Eligibility for Participation A Director shall be eligible for participation in the Plan and may elect to defer Fees to be earned as a Director of the Company in accordance with the provisions of this Plan for a period consisting of any calendar year or years during which he is a member of the Board. In the case of a newly elected Director who was not a Director on the preceding December 31st, he shall become eligible for participation for a period consisting of the balance of the calendar year following such election, and for succeeding calendar years. Section 4. Election to Defer Fees 4.1 Procedure for Election to Defer Fees. On or before December 31st of any calendar year, a Director may elect to become a Participant beginning the following calendar year. Any person elected to fill a vacancy on the Board of a newly created Directorship who was not a Director on the preceding December 31st may elect within 10 days of becoming a Director to become a Participant for the balance of the calendar year during which he was elected to the Board. An election to participate in the Plan shall be effected by the Director submitting a letter so stating to the administrator of the Plan. 4.2 Effect of Election or Failure to Elect to Participate. Failure to effect a timely election in accordance with the foregoing provisions shall preclude a Director's participation during the calendar year or portion of the calendar year in question, but shall not preclude the Director from becoming eligible for participation in any subsequent calendar year. An election to commence participation, made in accordance with the foregoing provision, shall be irrevocable for the immediately ensuing calendar year, or the balance of the current year in the case of a newly elected Director. Such election shall continue in effect with respect to each calendar year thereafter until modified in accordance with subsection 4.4. 4.3 Amount Deferred. A Director may defer any amount up to 100% of the Fees for the calendar year. If less than 100% of the Fees are deferred, then the amount deferred will be prorated over the payment periods anticipated to be served by the Director during the calendar year, or until the directorship is terminated. 4.4 Modification of Election. On or before December 31st of each year a Participant may elect, within the limits of subsection 4.3, to increase or decrease the amount of his Fees to be deferred during the ensuing calendar years, and this election shall include the right to terminate the deferral of Fees earned in such ensuing calendar years. Section 5. Crediting of Fees 5.1 Participants' Accounts. The Company shall establish a bookkeeping account ("account") for each Participant to be credited as of the date the Fee is deferred. 5.2 Earnings on Accounts. a. Prior to June 1, 2002. Earnings for time periods prior to June 1, 2002, shall accrue on deferred Fees from the date the Fees are credited to the Participant's account, and on the earnings on deferred Fees from the date the earnings are credited to the account. The rate of earnings shall be determined annually and shall be at a rate one percentage point less than the prime rate in effect at Chemical Bank, a New York banking corporation, on the last day of the calendar year (accrued interest shall be credited to the account at the end of each year). PROVIDED, a Participant shall have the right to request in writing directed to the plan administrator that the rate of earnings shall be determined by reference to the gains and losses on the following hypothetical investments as if an amount equal to the Participant's account had been invested as follows: Prior to February 6, 1997 50 percent of the account in Janus Venture Fund and 50 percent of the account in Janus Twenty Fund On and after February 6, 1997, but prior to June 1, 2002 33 1/3 percent of the account in Janus Venture Fund and 33 1/3 percent of the account in Janus Twenty Fund 33 1/3 percent of the account in Janus Worldwide Fund PROVIDED, HOWEVER; the plan administrator shall not be obligated to follow such Participant's request, and shall at its sole discretion be able to decide to continue to determine earnings by reference to the aforementioned prime rate in effect at Chemical Bank. b. On and After June 1, 2002. Earnings on the amount credited to a Participant's account as of May 31, 2002, and earnings on deferred Fees and earnings credited to the Participant's account on and after June 1, 2002, will be determined by the hypothetical "investment" of deferred Fees. The "investment" will based on the Director's election among investment options designated by the Company from time to time for the Plan. An Underlying Investment Rate determined form time to time by the Board (currently the ten year treasury bond rate plus one percent) is used to monthly credit with interest, any part of a Director's account for which a mutual fund has not been designated as the "investment". The Company has arranged for participants to receive quarterly statements from the funds, and the Company sends participants semi-annual statements. c. A Director may change investment allocation percentages by giving at least ten (10) days written notice to the Company prior to the beginning of a calendar month. In the written change in election, the Director must indicate whether the election is to apply (i) to all amounts credited to the Director's account as of the effective date of the written change in election, and/or (ii) to Fees deferred after the effective date of the written change in election. Section 6. Distribution Upon Cessation as Director of the Company Whenever a Participant ceases to be a Director of the Company, the Board shall exercise its sole discretion in electing one of the following methods of distributing the value of the Participant's account: a. Installment Method. The value of the Participant's account as of the end of the calendar year in which a Participant ceases to be a Director shall be distributed to the Participant in annual installments over a ten-year period beginning with the first day of the year immediately following the year in which the Participant ceases to be a Director. The amount of the Participant's account shall be reduced by the amount of each payment to the Participant as of the date of each payment. Earnings shall be credited to the Participant's account pursuant to subsection 5.2 (after taking into account reductions in the account under the preceding sentence) until the Participant (or his beneficiary) has received full payment of his account. The amount of the initial payment to the Participant shall be a fraction of the value of the Participant's account as of the end of the calendar year in which the Participant ceases to be a Director, the numerator of which fraction is 1 and the denominator of which fraction is 10. Subject to the provisions of subsection 7.1, for each annual payment the denominator of the fraction shall be reduced by 1 until the value of the Participant's account has been fully paid at which time the Participant's account shall be closed. b. Single Payment Method. The value of the Participant's account shall be distributed to the Participant in a lump sum within one year after the date upon which the Participant ceases to be a Director. The earnings on the Participant's account pursuant to subsection 5.2 shall be included in the calculation of the value of the Participant's account for distribution purposes. Upon delivery of the lump sum payment provided for above, the Participant's account shall be closed. 7.1 Death of Director or Former Director. Each Participant may designate one or more beneficiaries on a form provided by the plan administrator and delivered to the plan administrator before his death. Any such beneficiary thereafter may be changed without the consent of any prior beneficiary by similar written designation delivered to the plan administrator before the Participant's death. If no such beneficiary shall have been designated or if no designated beneficiary shall survive the Participant's death, any part or all of the balance of the Participant's account may be paid to the Participant's estate. Any remaining installment payments due a Participant at the time of his death may be paid at such time or times as directed by the Board in its sole discretion to the Participant's beneficiary or beneficiaries, if the Participant has designated one or more beneficiaries on the form described in this Section 7.1, or, if no beneficiary has been designated, or if no designated beneficiary shall survive the Participant, to the Participant's estate. 7.2 Financial Hardship of a Participant Caused by a Medical Emergency or Disability. Upon the determination by the Board that a Participant, or a member of the Participant's immediate family, has suffered a medical emergency or disability which has resulted in a financial hardship for the Participant, then the Board may, at its sole discretion, direct that some or all of the Participant's account be paid to the Participant; PROVIDED, that the amount paid to the Participant shall not exceed the amount determined by the Board to be necessary to relieve the financial hardship caused by the medical emergency or disability. The Board may require the Participant to provide any expert medical or financial information or opinions that the Board deems necessary to arrive at a determination. 7.3 Loss of Principal Residence of a Participant. Upon the determination by the Board that a Participant's principal residence, that being the personal residence at which he spends a majority of his time, has been damaged or destroyed by accident or natural causes, then the Board may, at its sole discretion, direct that some or all of the Participant's account be paid to the Participant; PROVIDED, that the amount paid to the Participant shall not exceed the amount determined by the Board to be necessary to relieve the financial hardship caused by the loss of the principal residence. The Board may require the Participant to provide any expert opinion or financial information that the Board deems necessary to arrive at a determination. 7.4 Financial Hardship of a Participant Caused By Other Unanticipated Events. Upon the determination by the Board that a Participant has suffered or will suffer a severe financial hardship because of unanticipated circumstances caused by an event beyond the reasonable control of such Participant, the Board may, at its sole discretion, direct that some or all of the Participant's account be paid to the Participant; PROVIDED, that the amount paid to the Participant shall not exceed the amount determined by the Board to be necessary to relieve the financial hardship. The Board may require the Participant to provide any expert opinion or financial information that the Board deems necessary to arrive at an opinion. 7.5 Special Provisions. Payments made pursuant to these Sections 7.2 through 7.4 during a Section 6(a) ten-year distribution shall be deemed to have been made from the last principal installment or installments to be made and the earnings credited to such installment or installments. For purposes of Sections 7.3 and 7.4 the Board shall not include the Participant if the Participant is a Director. Section 8. Transfers From Retirement Plan 8.1 Transferred Amounts. On May 2, 1996, this Plan shall accept a transfer of accrued benefits from the Kansas City Southern Industries, Inc. Retirement Plan for Directors (the "Retirement Plan") with respect to Directors continuing as Directors after such date. For each Participant with an account balance in the Retirement Plan to be transferred to this Plan, the Company shall establish a bookkeeping account ("retirement plan account") separate from the accounts established pursuant to Section 5.1 above. The amount in each Participant's retirement plan account shall earn a return determined by reference to the gains and losses on a hypothetical investment as if an amount equal to the Participant's retirement plan account had been invested in Company common stock, with a starting value for such common stock equal to the mean between the high and low for such common stock as reported on the New York Stock Exchange for May 2, 1996. When the Participant ceases to be a Director due to retirement or for any other reason, the balance in the Participant's retirement plan account as of the Director's last day of service as a Director shall be paid to the Director within 30 days. The Director, or his designated beneficiary or estate, as the case may be, shall have the election to receive the retirement plan account balance in either Company common stock, valued at the mean between the high and low prices reported by the New York Stock Exchange for such stock on the Participant's last day as a Director, or in cash. 8.2 Other Provisions. The provisions of this Plan other than Sections 3, 4, 5 and 6 shall be applicable to amounts transferred to this Plan in accordance with Section 8.1. Section 9. Dissolution. Liquidation. Merger. Consolidation and Sale of Assets 9.1 Dissolution or Liquidation of Company. Notwithstanding anything to the contrary, upon the dissolution or liquidation of the Company, each Participant who is a Director of the Company on the day preceding the date of the dissolution or liquidation shall be deemed to have ceased to be a Director of the Company on the date preceding such dissolution or liquidation. The accounts of all Participants shall be valued and distributed in lump sums at the time of such liquidation. 9.2 Merger, Consolidation, and Sale of Assets. Notwithstanding anything herein to the contrary, in the event that the Company consolidates with, merges into, or transfers all or substantially all of its assets to another corporation (hereinafter referred to as "Successor Corporation"), such Successor Corporation shall assume all obligations under this Plan. Upon such assumption, the Board of Directors of the Successor Corporation shall be substituted for the Board in this Plan. Section 10. Rights of Participants No Participant nor any Participant's estate or heirs shall have any interest in any fund or in any specific asset or assets of the Company by reason of any payments made under the Plan, or by reason of any account maintained for the Participant under the Plan. The Company shall have merely a contractual obligation to make payments when due hereunder and the Company shall not hold any funds in reserve or trust to secure payments hereunder. No Participant nor any Participant's estate or heirs may assign, pledge or in any way encumber his interest under the Plan, or any part thereof. Section 11. Administration and Amendment 11.1 Administration. The Board may designate an administrator of the Plan. Absent designation of an administrator by the Board, the Secretary of the Company shall administer the Plan. The Board may, from time to time, establish rules for the administration of the Plan that are not inconsistent with the provisions of the Plan. 11.2 Amendment. This Plan may be amended by a favorable vote of two-thirds of the members of the Board who are not Participants in the Plan or, in the event all Directors are Participants, by a favorable vote of a majority of the stockholders present or represented and voting at an annual or special meeting of the stockholders. IN WITNESS WHEREOF, this restated Plan has been duly executed as of this 31st day of May, 2002. Kansas City Southern By /s/ Michael R. Haverty ----------------------------- Michael R. Haverty EX-10.17 12 dex1017.txt RONALD G. RUSS EMPLOYMENT AGREEMENT Exhibit 10.17 EMPLOYMENT AGREEMENT THIS AGREEMENT, made and entered into as of the 1st day of June, 2002, by and between The Kansas City Southern Railway Company, a Missouri corporation ("Railway"), Kansas City Southern, a Delaware corporation ("KCS") and Ronald G. Russ, an individual ("Executive"). WHEREAS, Railway, KCS and Executive desire for Railway to employ Executive on the terms and conditions set forth in this Agreement, and to provide an incentive to Executive to remain in the employ of Railway hereafter, particularly in the event of any change in control (as herein defined) of Railway or KCS, thereby establishing and preserving continuity of management of Railway. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, it is agreed by and between Railway, KCS and Executive as follows: 1. Employment. Railway hereby employs Executive as its Senior Vice President and Chief Financial Officer to serve at the pleasure of the Board of Directors of Railway (the "Railway Board") and to have such duties, powers and responsibilities as may be prescribed or delegated from time to time by the President or other officer to whom Executive reports, subject to the powers vested in the Railway Board and in the stockholder of Railway. Executive shall faithfully perform his duties under this Agreement to the best of his ability and shall devote substantially all of his working time and efforts to the business and affairs of Railway and its affiliates. 2. Compensation. (a) Base Compensation. Railway shall pay Executive as compensation for his services hereunder an annual base salary at the rate approved by the KCS Compensation Committee. Such rate shall not be increased prior to January 1, 2003 and shall not be reduced except as agreed by the parties or except as part of a general salary reduction program imposed by Railway for non-union employees and applicable to all officers of Railway. (b) Incentive Compensation. For the year 2002, Executive shall not be entitled to participate in the Railway Incentive Compensation Plan. 3. Benefits. During the period of his employment hereunder, Railway shall provide Executive with coverage under such benefit plans and programs as are made generally available to similarly situated employees of Railway, provided (a) Railway shall have no obligation with respect to any plan or program if Executive is not eligible for coverage thereunder, and (b) Executive acknowledges that stock options and other stock and equity participation awards are granted in the discretion of the Board of Directors of KCS (the "KCS Board") or the Compensation Committee of the KCS Board and that Executive has no right to receive stock options or other equity participation awards or any particular number or level of stock options or other awards. In determining contributions, coverage and benefits under any disability insurance policy and under any cash compensation-based plan provided to Executive by Railway, it shall be assumed that the value of Executive's annual compensation, pursuant to this Agreement, is 175% of Executive's annual base salary. Executive acknowledges that all rights and benefits under benefit plans and programs shall be governed by the official text of each plan or program and not by any summary or description thereof or any provision of this Agreement (except to the extent that this Agreement expressly modifies such benefit plans or programs) and that neither Railway nor KCS is under any obligation to continue in effect or to fund any such plan or program, except as provided in Paragraph 7 hereof. 4. Termination. (a) Termination by Executive. Executive may terminate this Agreement and his employment hereunder by at least thirty (30) days advance written notice to Railway, except that in the event of any material breach of this Agreement by Railway, Executive may terminate this Agreement and his employment hereunder immediately upon notice to Railway. (b) Death or Disability. This Agreement and Executive's employment hereunder shall terminate automatically on the death or disability of Executive, except to the extent employment is continued under Railway's disability plan. For purposes of this Agreement, Executive shall be deemed to be disabled if he qualifies for disability benefits under Railway's long-term disability plan. (c) Termination by Railway For Cause. Railway may terminate this Agreement and Executive's employment "for cause" immediately upon notice to Executive. For purposes of this Agreement (except for Paragraph 7), termination "for cause" shall mean termination based upon any one or more of the following: (i) Any material breach of this Agreement by Executive; (ii) Executive's dishonesty involving Railway, KCS or any subsidiary of Railway or KCS; (iii) Gross negligence or willful misconduct in the performance of Executive's duties as determined in good faith by the Railway Board; (iv) Willful failure by Executive to follow reasonable instructions of the President or other officer to whom Executive reports; (v) Executive's fraud or criminal activity; or (vi) Embezzlement or misappropriation by Executive. (d) Termination by Railway Other Than For Cause. (i) Railway may terminate this Agreement and Executive's employment other than for cause immediately upon notice to Executive, and in such event, Railway shall provide severance benefits to Executive in accordance with Paragraph 4(d)(ii) below. (ii) Unless the provisions of Paragraph 7 of this Agreement are applicable, if Executive's employment is terminated under Paragraph 4(d)(i), Railway shall continue, for a period of one (1) year following such termination, (a) to pay to Executive as severance pay a monthly amount equal to one-twelfth (1/12th) of the annual base salary referenced in Paragraph 2(a) above, at the rate in effect immediately prior to termination, and, (b) to reimburse Executive for the cost (including state and federal income taxes payable with respect to this reimbursement) of continuing the health insurance coverage provided pursuant to this Agreement or obtaining health insurance coverage comparable to the health insurance provided pursuant to this Agreement, and obtaining coverage comparable to the life insurance provided pursuant to this Agreement, unless Executive is provided comparable health or life insurance coverage in connection with other employment. The foregoing obligations of Railway shall continue until the end of such one (1) year period notwithstanding the death or disability of Executive during said period (except, in the event of death, the obligation to reimburse Executive for the cost of life insurance shall not continue). In the year in which termination of employment occurs, Executive shall be eligible to receive benefits under the Railway Incentive Compensation Plan and any Executive Plan in which Executive participates (the "Executive Plan") (if such Plans then are in existence and Executive was entitled to participate immediately prior to termination) in accordance with the provisions of such plans then applicable, and severance pay received in such year shall be taken into account for the purpose of determining benefits, if any, under the Railway Incentive Compensation Plan but not under the Executive Plan. After the year in which termination occurs, Executive shall not be entitled to accrue or receive benefits under the Railway Incentive Compensation Plan or the Executive Plan with respect to the severance pay provided herein, notwithstanding that benefits under such plan then are still generally available to executive employees of Railway. After termination of employment, Executive shall not be entitled to accrue or receive benefits under any other employee benefit plan or program, except that Executive shall be entitled to participate in the KCS Employee Stock Ownership Plan and the KCS 401(k) and Profit Sharing Plan (if Railway employees then still participate in such plans) in the year of termination of employment only if Executive meets all requirements of such plans for participation in such year. 5. Non-Disclosure. During the term of this Agreement and at all times after any termination of this Agreement, Executive shall not, either directly or indirectly, use or disclose any Railway trade secret, except to the extent necessary for Executive to perform his duties for Railway while an employee. For purposes of this Agreement, the term "Railway trade secret" shall mean any information regarding the business or activities of Railway or any subsidiary or affiliate, including any formula, pattern, compilation, program, device, method, technique, process, customer list, technical information or other confidential or proprietary information, that (a) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (b) is the subject of efforts of Railway or its subsidiary or affiliate that are reasonable under the circumstance to maintain its secrecy. In the event of any breach of this Paragraph 5 by Executive, Railway shall be entitled to terminate any and all remaining severance benefits under Paragraph 4(d)(ii) and shall be entitled to pursue such other legal and equitable remedies as may be available. 6. Duties Upon Termination; Survival. (a) Duties. Upon termination of this Agreement by Railway or Executive for any reason, Executive shall immediately return to Railway all Railway trade secrets which exist in tangible form and shall sign such written resignations from all positions as an officer, director or member of any committee or board of Railway and all direct and indirect subsidiaries and affiliates of Railway as may be requested by Railway and shall sign such other documents and papers relating to Executive's employment, benefits and benefit plans as Railway may reasonably request. (b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of this Agreement shall survive any termination of this Agreement by Railway or Executive, and the provisions of Paragraph 4(d)(ii) shall survive any termination of this Agreement by Railway under Paragraph 4(d)(i). 7. Continuation of Employment Upon Change in Control. (a) Continuation of Employment. Subject to the terms and conditions of this Paragraph 7, in the event of a Change in Control (as defined in Paragraph 7(d)) at any time during the term of this Agreement, Executive agrees to remain in the employ of Railway for a period of three years (the "Three-Year Period") from the date of such Change in Control (the "Control Change Date"). Railway agrees to continue to employ Executive for the Three-Year Period. During the Three-Year Period, (i) the Executive's position (including offices, titles, reporting requirements and responsibilities), authority and duties shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 12 month period immediately before the Control Change Date and (ii) the Executive's services shall be performed at the location where Executive was employed immediately before the Control Change Date or at any other location less than 40 miles from such former location. During the Three-Year Period, Railway shall continue to pay to Executive an annual base salary on the same basis and at the same intervals as in effect prior to the Control Change Date at a rate not less than 12 times the highest monthly base salary paid or payable to the Executive by Railway in respect of the 12-month period immediately before the Control Change Date. (b) Benefits. During the Three-Year Period, Executive shall be entitled to participate, on the basis of his executive position, in each of the following Railway or KCS plans (together, the "Specified Benefits") in existence, and in accordance with the terms thereof, at the Control Change Date: (i) any benefit plan, and trust fund associated therewith, related to (a) life, health, dental, disability, accidental death and dismemberment insurance or accrued but unpaid vacation time, (b) profit sharing, thrift or deferred savings (including deferred compensation, such as under Sec. 401(k) plans), (c) retirement or pension benefits, (d) ERISA excess benefits and similar plans and (e) tax favored employee stock ownership (such as under ESOP, and Employee Stock Purchase programs); and (ii) any other benefit plans hereafter made generally available to executives of Executive's level or to the employees of Railway generally. In addition, Railway and KCS shall use their best efforts to cause all outstanding options held by Executive under any stock option plan of KCS or its affiliates to become immediately exercisable on the Control Change Date and to the extent that such options are not vested and are subsequently forfeited, the Executive shall receive a lump-sum cash payment within 5 days after the options are forfeited equal to the difference between the fair market value of the shares of stock subject to the non-vested, forfeited options determined as of the date such options are forfeited and the exercise price for such options. During the Three-Year Period Executive shall be entitled to participate, on the basis of his executive position, in any incentive compensation plan of Railway or KCS in accordance with the terms thereof at the Control Change Date; provided that if under Railway or KCS programs or Executive's Employment Agreement in existence immediately prior to the Control Change Date, there are written limitations on participation for a designated time period in any incentive compensation plan, such limitations shall continue after the Control Change Date to the extent so provided for prior to the Control Change Date. If the amount of contributions or benefits with respect to the Specified Benefits or any incentive compensation is determined on a discretionary basis under the terms of the Specified Benefits or any incentive compensation plan immediately prior to the Control Change Date, the amount of such contributions or benefits during the Three-Year Period for each of the Specified Benefits shall not be less than the average annual contributions or benefits for each Specified Benefit for the three plan years ending prior to the Control Change Date and, in the case of any incentive compensation plan, the amount of the incentive compensation during the Three-Year Period shall not be less than 75% of the maximum that could have been paid to the Executive under the terms of the incentive compensation plan. (c) Payment. With respect to any plan or agreement under which Executive would be entitled at the Control Change Date to receive Specified Benefits or incentive compensation as a general obligation of Railway which has not been separately funded (including specifically, but not limited to, those referred to under Paragraph 7(b)(i)(d) above), Executive shall receive within five (5) days after such date full payment in cash (discounted to the then present value on the basis of a rate of seven percent (7%) per annum) of all amounts to which he is then entitled thereunder. (d) Change in Control. For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if: (i) for any reason at any time less than seventy-five percent (75%) of the members of the KCS Board shall be individuals who fall into any of the following categories: (a) individuals who were members of the KCS Board on the date of the Agreement; or (b) individuals whose election, or nomination for election by KCS's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the KCS Board then still in office who were members of the KCS Board on the date of the Agreement; or (c) individuals whose election, or nomination for election, by KCS's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the KCS Board then still in office who were elected in the manner described in (a) or (b) above, or (ii) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) other than KCS shall have become after September 18, 1997, according to a public announcement or filing, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Railway or KCS representing thirty percent (30%) (or, with respect to Paragraph 7(c) hereof, 40%) or more (calculated in accordance with Rule 13d-3) of the combined voting power of Railway's or KCS's then outstanding voting securities; or (iii) the stockholders of Railway or KCS shall have approved a merger, consolidation or dissolution of Railway or KCS or a sale, lease, exchange or disposition of all or substantially all of Railway's or KCS's assets, if persons who were the beneficial owners of the combined voting power of Railway's or KCS's voting securities immediately before any such merger, consolidation, dissolution, sale, lease, exchange or disposition do not immediately thereafter, beneficially own, directly or indirectly, in substantially the same proportions, more than 60% of the combined voting power of any corporation or other entity resulting from any such transaction. (e) Termination After Control Change Date. Notwithstanding any other provision of this Paragraph 7, at any time after the Control Change Date, Railway may terminate the employment of Executive (the "Termination"), but unless such Termination is for Cause as defined in subparagraph (g) or for disability, within five (5) days of the Termination Railway shall pay to Executive his full base salary through the Termination, to the extent not theretofore paid, plus a lump sum amount (the "Special Severance Payment") equal to the product (discounted to the then present value on the basis of a rate of seven percent (7%) per annum) of (i) 175% of his annual base salary specified in Paragraph 7(a) multiplied by (ii) Three; and Specified Benefits (excluding any incentive compensation) to which Executive was entitled immediately prior to Termination shall continue until the end of the 3-year period ("Benefits Period") beginning on the date of Termination. If any plan pursuant to which Specified Benefits are provided immediately prior to Termination would not permit continued participation by Executive after Termination, then Railway shall pay to Executive within five (5) days after Termination a lump sum payment equal to the amount of Specified Benefits Executive would have received under such plan if Executive had been fully vested in the average annual contributions or benefits in effect for the three plan years ending prior to the Control Change Date (regardless of any limitations based on the earnings or performance of Railway or KCS) and a continuing participant in such plan to the end of the Benefits Period. Following the end of the Benefits Period, Railway shall continue to provide to the Executive and the Executive's family the following benefits ("Post-Period Benefits"): (1) prior to the Executive's attainment of age sixty (60), health, prescription and dental benefits equivalent to those then applicable to active peer executives of Railway) and their families, as the same may be modified from time to time, and (2) following the Executive's attainment of age sixty (60) (and without regard to the Executive's period of service with Railway) health and prescription benefits equivalent to those then applicable to retired peer executives of Railway and their families, as the same may be modified from time to time. The cost to the Executive of such Post-Period Benefits shall not exceed the cost of such benefits to active or retired (as applicable) peer executives, as the same may be modified from time to time. Notwithstanding the preceding two sentences of this Paragraph 7(e), if the Executive is covered under any health, prescription or dental plan provided by a subsequent employer, then the corresponding type of plan coverage (i.e., health, prescription or dental), required to be provided as Post-Period Benefits under this Paragraph 7(e) shall cease. The Executive's rights under this Paragraph 7(e) shall be in addition to, and not in lieu of, any post-termination continuation coverage or conversion rights the Executive may have pursuant to applicable law, including without limitation continuation coverage required by Section 4980 of the Code. Nothing in this Paragraph 7(e) shall be deemed to limit in any manner the reserved right of Railway, in its sole and absolute discretion, to at any time amend, modify or terminate health, prescription or dental benefits for active or retired employees generally. (f) Resignation After Control Change Date. In the event of a Change in Control as defined in Paragraph 7(d), thereafter, upon good reason (as defined below), Executive may, at any time during the 3-year period following the Change in Control, in his sole discretion, on not less than thirty (30) days' written notice (the "Notice of Resignation") to the Secretary of Railway and effective at the end of such notice period, resign his employment with Railway (the "Resignation"). Within five (5) days of such a Resignation, Railway shall pay to Executive his full base salary through the effective date of such Resignation, to the extent not theretofore paid, plus a lump sum amount equal to the Special Severance Payment (computed as provided in the first sentence of Paragraph 7(e), except that for purposes of such computation all references to "Termination" shall be deemed to be references to "Resignation"). Upon Resignation of Executive, Specified Benefits to which Executive was entitled immediately prior to Resignation shall continue on the same terms and conditions as provided in Paragraph 7(e) in the case of Termination (including equivalent payments provided for therein), and Post-Period Benefits shall be provided on the same terms and conditions as provided in Paragraph 7(e) in the case of Termination. For purposes of this Agreement, "good reason" means any of the following: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including offices, titles, reporting requirements or responsibilities), authority or duties as contemplated by Section 7(a)(i), or any other action by Railway which results in a diminution or other material adverse change in such position, authority or duties; (ii) any failure by Railway to comply with any of the provisions of Paragraph 7; (iii) Railway's requiring the Executive to be based at any office or location other than the location described in Section 7(a)(ii); (iv) any other material adverse change to the terms and conditions of the Executive's employment; or (v) any purported termination by Railway of the Executive's employment other than as expressly permitted by this Agreement (any such purported termination shall not be effective for any other purpose under this Agreement). A passage of time prior to delivery of the Notice of Resignation or a failure by the Executive to include in the Notice of Resignation any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive under this Agreement or preclude the Executive from asserting such fact or circumstance in enforcing rights under this Agreement. (g) Termination for Cause After Control Change Date. Notwithstanding any other provision of this Paragraph 7, at any time after the Control Change Date, Executive may be terminated by Railway "for cause." Cause means commission by the Executive of any felony or willful breach of duty by the Executive in the course of the Executive's employment; except that Cause shall not mean: (i) bad judgment or negligence; (ii) any act or omission believed by the Executive in good faith to have been in or not opposed to the interest of Railway (without intent of the Executive to gain, directly or indirectly, a profit to which the Executive was not legally entitled); (iii) any act or omission with respect to which a determination could properly have been made by the Railway Board that the Executive met the applicable standard of conduct for indemnification or reimbursement under Railway's by-laws, any applicable indemnification agreement, or applicable law, in each case in effect at the time of such act or omission; or (iv) any act or omission with respect to which Notice of Termination of the Executive is given more than 12 months after the earliest date on which any member of the Railway Board, not a party to the act or omission, knew or should have known of such act or omission. Any Termination of the Executive's employment by Railway for Cause shall be communicated to the Executive by Notice of Termination. (h) Gross-up for Certain Taxes. If it is determined (by the reasonable computation of Railway's independent auditors, which determinations shall be certified to by such auditors and set forth in a written certificate ("Certificate") delivered to the Executive) that any benefit received or deemed received by the Executive from Railway or KCS pursuant to this Agreement or otherwise (collectively, the "Payments") is or will become subject to any excise tax under Section 4999 of the Code or any similar tax payable under any United States federal, state, local or other law (such excise tax and all such similar taxes collectively, "Excise Taxes"), then Railway shall, immediately after such determination, pay the Executive an amount (the "Gross-up Payment") equal to the product of: (i) the amount of such Excise Taxes; multiplied by (ii) the Gross-up Multiple (as defined in Paragraph 7(k)). The Gross-up Payment is intended to compensate the Executive for the Excise Taxes and any federal, state, local or other income or excise taxes or other taxes payable by the Executive with respect to the Gross-up Payment. Railway shall cause the preparation and delivery to the Executive of a Certificate upon request at any time. Railway shall, in addition to complying with this Paragraph 7(h), cause all determinations and certifications under Paragraphs 7(h)-(o) to be made as soon as reasonably possible and in adequate time to permit the Executive to prepare and file the Executive's individual tax returns on a timely basis. (i) Determination by the Executive. (i) If Railway shall fail (a) to deliver a Certificate to the Executive or (B) to pay to the Executive the amount of the Gross-up Payment, if any, within 14 days after receipt from the Executive of a written request for a Certificate, or if at any time following receipt of a Certificate the Executive disputes the amount of the Gross-up Payment set forth therein, the Executive may elect to demand the payment of the amount which the Executive, in accordance with an opinion of counsel to the Executive ("Executive Counsel Opinion"), determines to be the Gross-up Payment. Any such demand by the Executive shall be made by delivery to Railway of a written notice which specifies the Gross-up Payment determined by the Executive and an Executive Counsel Opinion regarding such Gross-up Payment (such written notice and opinion collectively, the "Executive's Determination"). Within 14 days after delivery of the Executive's Determination to Railway, Railway shall either (a) pay the Executive the Gross-up Payment set forth in the Executive's Determination (less the portion of such amount, if any, previously paid to the Executive by Railway) or (b) deliver to the Executive a Certificate specifying the Gross-up Payment determined by Railway's independent auditors, together with an opinion of Railway's counsel ("Railway Counsel Opinion"), and pay the Executive the Gross-up Payment specified in such Certificate. If for any reason Railway fails to comply with clause (b) of the preceding sentence, the Gross-up Payment specified in the Executive's Determination shall be controlling for all purposes. (ii) If the Executive does not make a request for, and Railway does not deliver to the Executive, a Certificate, Railway shall, for purposes of Paragraph 7(j), be deemed to have determined that no Gross-up Payment is due. (j) Additional Gross-up Amounts. If, despite the initial conclusion of Railway and/or the Executive that certain Payments are neither subject to Excise Taxes nor to be counted in determining whether other Payments are subject to Excise Taxes (any such item, a "Non-Parachute Item"), it is later determined (pursuant to subsequently-enacted provisions of the Code, final regulations or published rulings of the IRS, final IRS determination or judgment of a court of competent jurisdiction or Railway's independent auditors) that any of the Non-Parachute Items are subject to Excise Taxes, or are to be counted in determining whether any Payments are subject to Excise Taxes, with the result that the amount of Excise Taxes payable by the Executive is greater than the amount determined by Railway or the Executive pursuant to Paragraph 7(h) or Paragraph 7(i), as applicable, then Railway shall pay the Executive an amount (which shall also be deemed a Gross-up Payment) equal to the product of: (i) the sum of (a) such additional Excise Taxes and (b) any interest, fines, penalties, expenses or other costs incurred by the Executive as a result of having taken a position in accordance with a determination made pursuant to Paragraph 7(h); multiplied by (ii) the Gross-up Multiple. (k) Gross-up Multiple. The Gross-up Multiple shall equal a fraction, the numerator of which is one (1.0), and the denominator of which is one (1.0) minus the sum, expressed as a decimal fraction, of the rates of all federal, state, local and other income and other taxes and any Excise Taxes applicable to the Gross-up Payment; provided that, if such sum exceeds 0.8, it shall be deemed equal to 0.8 for purposes of this computation. (If different rates of tax are applicable to various portions of a Gross-up Payment, the weighted average of such rates shall be used.) (l) Opinion of Counsel. "Executive Counsel Opinion" means a legal opinion of nationally recognized executive compensation counsel that there is a reasonable basis to support a conclusion that the Gross-up Payment determined by the Executive has been calculated in accord with this Paragraph 7 and applicable law. "Company Counsel Opinion" means a legal opinion of nationally recognized executive compensation counsel that (i) there is a reasonable basis to support a conclusion that the Gross-up Payment set forth in the Certificate of Railway's independent auditors has been calculated in accord with this Paragraph 7 and applicable law, and (ii) there is no reasonable basis for the calculation of the Gross-up Payment determined by the Executive. (m) Amount Increased or Contested. The Executive shall notify Railway in writing of any claim by the IRS or other taxing authority that, if successful, would require the payment by Railway of a Gross-up Payment. Such notice shall include the nature of such claim and the date on which such claim is due to be paid. The Executive shall give such notice as soon as practicable, but no later than 10 business days, after the Executive first obtains actual knowledge of such claim; provided, however, that any failure to give or delay in giving such notice shall affect Railway's obligations under this Paragraph 7 only if and to the extent that such failure results in actual prejudice to Railway. The Executive shall not pay such claim less than 30 days after the Executive gives such notice to Railway (or, if sooner, the date on which payment of such claim is due). If Railway notifies the Executive in writing before the expiration of such period that it desires to contest such claim, the Executive shall: (i) give Railway any information that it reasonably requests relating to such claim; (ii) take such action in connection with contesting such claim as Railway reasonably requests in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by Railway; (iii) cooperate with Railway in good faith to contest such claim; and (iv) permit Railway to participate in any proceedings relating to such claim; provided, however, that Railway shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including related interest and penalties, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing, Railway shall control all proceedings in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner. The Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Railway shall determine; provided, however, that if Railway directs the Executive to pay such claim and sue for a refund, Railway shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify the Executive, on an after-tax basis, for any Excise Tax or income tax, including related interest or penalties, imposed with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. The Railway's control of the contest shall be limited to issues with respect to which a Gross-up Payment would be payable. The Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the IRS or other taxing authority. (n) Refunds. If, after the receipt by the Executive of an amount advanced by Railway pursuant to Paragraph 7(m), the Executive receives any refund with respect to such claim, the Executive shall (subject to Railway's complying with the requirements of Paragraph 7(m)) promptly pay Railway the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by Railway pursuant to Paragraph 7(m), a determination is made that the Executive shall not be entitled to a full refund with respect to such claim and Railway does not notify the Executive in writing of its intent to contest such determination before the expiration of 30 days after such determination, then the applicable part of such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-up Payment required to be paid. Any contest of a denial of refund shall be controlled by Paragraph 7(m). (o) Expenses. If any dispute should arise under this Agreement after the Control Change Date involving an effort by Executive to protect, enforce or secure rights or benefits claimed by Executive hereunder, Railway shall pay (promptly upon demand by Executive accompanied by reasonable evidence of incurrence) all reasonable expenses (including attorneys' fees) incurred by Executive in connection with such dispute, without regard to whether Executive prevails in such dispute except that Executive shall repay Railway any amounts so received if a court having jurisdiction shall make a final, nonappealable determination that Executive acted frivolously or in bad faith by such dispute. To assure Executive that adequate funds will be made available to discharge Railway's obligations set forth in the preceding sentence, Railway has established a trust and upon the occurrence of a Change in Control shall promptly deliver to the trustee of such trust to hold in accordance with the terms and conditions thereof that sum which the Railway Board shall have determined is reasonably sufficient for such purpose. (p) Prevailing Provisions. On and after the Control Change Date, the provisions of this Paragraph 7 shall control and take precedence over any other provisions of this Agreement which are in conflict with or address the same or a similar subject matter as the provisions of this Paragraph 7. 8. Mitigation and Other Employment. After a termination of Executive's employment pursuant to Paragraph 4(d)(i) or a Change in Control as defined in Paragraph 7(d), Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and except as otherwise specifically provided in Paragraph 4(d)(ii) with respect to health and life insurance and in Paragraph 7(e) with respect to health, prescription and dental benefits, no such other employment, if obtained, or compensation or benefits payable in connection therewith shall reduce any amounts or benefits to which Executive is entitled hereunder. Such amounts or benefits payable to Executive under this Agreement shall not be treated as damages but as severance compensation to which Executive is entitled because Executive's employment has been terminated. 9. KCS Not an Obligor. Notwithstanding that KCS has executed this Agreement, it shall have no obligation for the payment of salary, benefits, or other compensation hereunder, and all such obligations shall be the sole responsibility of Railway. 10. Notice. Notices and all other communications to either party pursuant to this Agreement shall be in writing and shall be deemed to have been given when personally delivered, delivered by facsimile or deposited in the United States mail by certified or registered mail, postage prepaid, addressed, in the case of Railway or KCS, to Railway or KCS at 114 West 11th Street, Kansas City, Missouri 64105, Attention: Secretary, or, in the case of the Executive, to him at 114 West 11th Street, Kansas City, Missouri 64105, or to such other address as a party shall designate by notice to the other party. 11. Amendment. No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, waiver, modification or discharge is agreed to in writing signed by Executive and the President of Railway and the President of KCS. No waiver by any party hereto at any time of any breach by another party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the time or at any prior or subsequent time. 12. Successors in Interest. The rights and obligations of Railway and KCS under this Agreement shall inure to the benefit of and be binding in each and every respect upon the direct and indirect successors and assigns of Railway and KCS, regardless of the manner in which such successors or assigns shall succeed to the interest of Railway and KCS hereunder, and this Agreement shall not be terminated by the voluntary or involuntary dissolution of Railway or KCS or by any merger or consolidation or acquisition involving Railway or KCS, or upon any transfer of all or substantially all of Railway's or KCS's assets, or terminated otherwise than in accordance with its terms. In the event of any such merger or consolidation or transfer of assets, the provisions of this Agreement shall be binding upon and shall inure to the benefit of the surviving corporation or the corporation or other person to which such assets shall be transferred. Neither this Agreement nor any of the payments or benefits hereunder may be pledged, assigned or transferred by Executive either in whole or in part in any manner, without the prior written consent of Railway. 13. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted. 14. Controlling Law and Jurisdiction. The validity, interpretation and performance of this Agreement shall be subject to and construed under the laws of the State of Missouri, without regard to principles of conflicts of law. 15. Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and terminates and supersedes all other prior agreements and understandings both written and oral, between the parties with respect to the terms of Executive's employment or severance arrangements. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the 1st day of June, 2002. THE KANSAS CITY SOUTHERN RAILWAY COMPANY By /s/ Michael R. Haverty --------------------------------------------- Michael R. Haverty, Chairman, President & CEO KANSAS CITY SOUTHERN By /s/ Michael R. Haverty --------------------------------------------- Michael R. Haverty, Chairman, President & CEO EXECUTIVE /s/ Ronald G. Russ ---------------------------------------------- Ronald G. Russ EX-12.1 13 dex121.txt STATEMENT RE COMPUTATION OF RATIOS Exhibit 12.1 KANSAS CITY SOUTHERN INDUSTRIES, INC. AND SUBSIDIARY COMPANIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
As of December 31st As of March 31st -------------------------------------------------------------- ----------------------- 1997 1998 1999 2000 2001 2001 2002 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pretax income (loss) from continuing operations, excluding equity in earnings of unconsolidated affiliates $(141.0) $68.0 $12.0 $(2.0) $ 6.8 $(8.1) $10.9 Interest Expense on Indebtedness 53.3 59.6 57.4 65.8 52.8 15.2 11.3 Interest Differencial on Term Bank Debt Refinance with Notes and Common Stock Portion of Rents Representative of an 17.2 17.8 15.4 17.2 17.0 4.3 4.0 Appropriate Interest Factor Distributed income of equity investments - 5.0 - 5.0 3.0 3.0 - Income (Loss) as Adjusted $ 77.9 $77.4 $72.8 $83.0 $74.0 $20.6 $16.1 Fixed Charges: Interest Expense on Indebtedness $ 53.3 $59.6 $57.4 $65.8 $52.8 $15.2 $11.3 Interest Differencial on Term Bank Debt Refinance with Notes and Common Stock Capitalized Interest 7.4 - - - 4.2 1.1 0.8 Portion of Rents Representative of an Appropriate Interest Factor 17.2 17.8 15.4 17.2 17.0 4.3 4.0 --------- --------- ---------- ---------- ---------- ---------- ---------- Total Fixed Charges $ 77.9 $77.4 $72.8 $83.0 $74.0 $20.6 $16.1 --------- --------- ---------- ---------- ---------- ---------- ---------- Ratio of Earnings to Fixed Charges = (a) 1.9 1.2 (b) 1.0 1.1 - (c) 1.6 ========= ========= ========== ========== ========== ========== ==========
Note: Excludes amortization expense on debt discount due to immateriality (a) Due to restructuring, asset impairment and other charges of $178.0 million, the 1997 ratio of earnings to fixed charges coverage was less than 1:1. The ration of earnings to fixed charges would have been 1:1 if a deficiency of $148.4 million was eliminated. Excluding these items, the ratio of earnings to fixed charges for 1997 would have been 1.4x. (b) Includes unusual costs of $12.7 million. Excluding these items, the ratio of earnings to fixed charges for 1999 would have been 1.3x. (c) The ratio of earnings to fixed charges would have been 1:1 if a deficiency of $6.2 million was eliminated. EX-21.1 14 dex211.txt SUBSIDIARIES OF THE REGISTRANT 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 - ------------------------------------------ ----------------- ------------------- State or Percentage other Jurisdiction Of of Incorporation Ownership** or Organization - ------------------------------------------ ----------------- ------------------- Canama. Transportation (9) 100 Cayman Islands - ------------------------------------------ ----------------- ------------------- Caymex Transportation, Inc. (1) 100 Delaware - ------------------------------------------ ----------------- ------------------- Gateway Eastern Railway Company (1) 100 Illinois - ------------------------------------------ ----------------- ------------------- Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. *(8) 37 Mexico - ------------------------------------------ ----------------- ------------------- Joplin Union Depot * 33 Missouri - ------------------------------------------ ----------------- ------------------- KC Terminal Railway (12) 16 Missouri - ------------------------------------------ ----------------- ------------------- Mexrail, Inc. *(15) 100 Delaware - ------------------------------------------ ----------------- ------------------- Mid-South Microwave, Inc. (1) 100 Delaware - ------------------------------------------ ----------------- ------------------- NAFTA Rail, S.A. de C.V. (9) 100 Mexico - ------------------------------------------ ----------------- ------------------- North American Freight Transportation Alliance Rail Corporation 100 Delaware - ------------------------------------------ ----------------- ------------------- PABTEX GP, LLC (2) 100 Texas - ------------------------------------------ ----------------- ------------------- PABTEX L.P. (13) 100 Delaware - ------------------------------------------ ----------------- ------------------- Panama Canal Railway Company *(10) 42 Cayman Islands - ------------------------------------------ ----------------- ------------------- Panarail Tourism Company (11) 100 Cayman Islands - ------------------------------------------ ----------------- ------------------- Port Arthur Bulk Marine Terminal Co. (5) 80 Partnership - ------------------------------------------ ----------------- ------------------- Rice-Carden Corporation (1) 100 Missouri - ------------------------------------------ ----------------- ------------------- SCC Holdings, LLC (1) 100 Delaware - ------------------------------------------ ----------------- ------------------- SIS Bulk Holding, Inc. (2) 100 Delaware - ------------------------------------------ ----------------- ------------------- Southern Capital Corporation, LLC *(14) 50 Colorado - ------------------------------------------ ----------------- ------------------- Southern Development Company (1) 100 Missouri - ------------------------------------------ ----------------- ------------------- Southern Industrial Services, Inc. 100 Delaware - ------------------------------------------ ----------------- ------------------- The Kansas City Southern Railway Company 100 Missouri - ------------------------------------------ ----------------- ------------------- The Texas Mexican Railway Company *(4) 100 Texas - ------------------------------------------ ----------------- ------------------- TFM, S.A. de C.V. *(6) 80 Mexico - ------------------------------------------ ----------------- ------------------- TransFin Insurance, Ltd. 100 Vermont - ------------------------------------------ ----------------- ------------------- Trans-Serve, Inc. (2) (3) 100 Delaware - ------------------------------------------ ----------------- ------------------- Veals, Inc. 100 Delaware - ------------------------------------------ ----------------- ------------------- Wyandotte Garage Corporation 80 Missouri - ------------------------------------------ ----------------- ------------------- * Unconsolidated Affiliate, Accounted for Using the Equity Method ** Percentage of Ownership indicates percentage owned by the immediate parent of such entity. See footnotes below for additional information regarding our corporate structure. (1) Subsidiary of The Kansas City Southern Railway Company (2) Subsidiary of Southern Industrial Services, Inc. (3) Conducting business as Superior Tie & Timber (4) Subsidiary of Mexrail, Inc. (5) Subsidiary of Rice-Carden Corporation (6) Subsidiary of Grupo Transportacion Ferroviaria, S.A. de C.V. (7) Subsidiary of Southern Development Company (8) Unconsolidated affiliate of NAFTA Rail, S.A. de C.V. (9) Subsidiary of Caymex Transportation, Inc. (10) Unconsolidated affiliate of Canama Transportation (11) Subsidiary of Panama Canal Railway Company (12) Unconsolidated affiliate of The Kansas City Southern Railway Company (13) Subsidiary of SIS Bulk Holding, Inc. (14) Unconsolidated affiliate of SCC Holdings, Inc. (15) Subsidiary of TFM, S.A. de C.V. EX-23.1 15 dex231.txt CONSENT OF KPMG LLP Exhibit 23.1 Independent Auditors' Consent The Board of Directors and Stockholders Kansas City Southern: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. (signed) KPMG LLP Kansas City, Missouri July 11, 2002 EX-23.2 16 dex232.txt CONSENT OF PRICEWATERHOUSECOOPERS, LLP Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-4 of Kansas City Southern of our report dated March 22, 2001, except as to the adoption of Statement of Financial Accounting Standards No. 142 described in Note 16 which is as of January 1, 2002, relating to the financial statements of Kansas City Southern, which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Kansas City, Missouri July 12, 2002 EX-23.3 17 dex233.txt CONSENT OF PRICEWATERHOUSECOOPERS, S.C. Exhibit 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-4 of Kansas City Southern of our report dated March 26, 2002, relating to the consolidated financial statements of Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V., which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers, S.C. Mexico City July 12, 2002 EX-25.1 18 dex251.txt STATEMENT OF ELIGIBILITY OF TRUSTEE Exhibit 25.1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) - -------------------------------------------------------------------------------- U.S. BANK NATIONAL ASSOCIATION (Exact name of Trustee as specified in its charter) 31-0841368 I.R.S. Employer Identification No. - -------------------------------------------------------------------------------- 180 East Fifth Street St. Paul, Minnesota 55101 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) - -------------------------------------------------------------------------------- Richard Prokosch U.S. Bank National Association 180 East Fifth Street St. Paul, MN 55101 (651) 244-0721 (Name, address and telephone number of agent for service) Kansas City Southern (Issuer with respect to the Securities) - -------------------------------------------------------------------------------- Delaware 44-0663509 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or (I.R.S. Employer organization) Identification No.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 427 West 12"' Street 64105 Kansas City, Missouri - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) - -------------------------------------------------------------------------------- 7 1/2% Senior Notes due 2009 (Title of the Indenture Securities) - -------------------------------------------------------------------------------- TABLE OF ADDITIONAL REGISTRANTS State/Country I.R.S Employer Name of Incorporation Identification No. - ---- ---------------- ------------------ The Kansas City Southern Railway Company Missouri 44-6000758 Gateway Eastern Railway Company Illinois 37-1301047 PABTEX GP, LLC Texas 43-1915234 PABTEX, L.P. Delaware 43-0909361 SIS Bulk Holdings, Inc. Delaware 43-1915233 Mid-South Microwave, Inc. Delaware 43-1422644 Rice-Carden Corporation Missouri 44-6011041 Southern Development Company Missouri 44-6005843 Southern Industrial Services, Inc. Delaware 36-3499535 Trans-Serve, Inc. Delaware 43-0865086 - -------------------------------------------------------------------------------- [The address of each of the additional registrants is 427 West 12th Street, Kansas City, Missouri, 64105.] FORM T-1 Item 1. GENERAL INFORMATION. Furnish the following information as to the Trustee. a) Name and address of each examining or supervising authority to which it is subject. Comptroller of the Currency Washington, D.C. b) Whether it is authorized to exercise corporate trust powers. Yes Item 2. AFFILIATIONS WITH OBLIGOR. If the obligor is an affiliate of the Trustee, describe each such affiliation. None Items 3-15 Items 3-15 are not applicable because to the best of the Trustee's knowledge, the obligor is not in default under any Indenture for which the Trustee acts as Trustee. Item 16. LIST OF EXHIBITS: List below all exhibits filed as a part of this statement of eligibility and qualification. 1. A copy of the Articles of Association of the Trustee.* 2. A copy of the certificate of authority of the Trustee to commence business.* 3. A copy of the certificate of authority of the Trustee to exercise corporate trust powers.* 4. A copy of the existing bylaws of the Trustee.* 5. A copy of each Indenture referred to in Item 4. Not applicable. 6. The consent of the Trustee required by Section 321(b) of the Trust Indenture Act of 1939, attached as Exhibit 6. 7. Report of Condition of the Trustee as of March 31, 2002, published pursuant to law or the requirements of its supervising or examining authority, attached as Exhibit 7. * Incorporated by reference to Registration Number 333-67188. NOTE The answers to this statement insofar as such answers relate to what persons have been underwriters for any securities of the obligors within three years prior to the date of filing this statement, or what persons are owners of 10% or more of the voting securities of the obligors, or affiliates, are based upon information furnished to the Trustee by the obligors. While the Trustee has no reason to doubt the accuracy of any such information, it cannot accept any responsibility therefor. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the Trustee, U.S. BANK NATIONAL ASSOCIATION, a national banking association organized and existing under the laws of the United States of America, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of St. Paul, State of Minnesota on the 2nd day of July, 2002. U.S. BANK NATIONAL ASSOCIATION By: /s/ Julie Eddington ---------------------------------- Julie Eddington Assistant Vice President By: /s/ Lori-Anne Rosenberg --------------------------------- Lori-Anne Rosenberg Assistant Vice President Exhibit 6 CONSENT In accordance with Section 321(b) of the Trust Indenture Act of 1939, the undersigned, U.S. BANK NATIONAL ASSOCIATION hereby consents that reports of examination of the undersigned by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor. Dated: July 2, 2002 U.S. BANK NATIONAL ASSOCIATION By: /s/ Julie Eddington ---------------------------------- Julie Eddington Assistant Vice President By: /s/ Lori-Anne Rosenberg --------------------------------- Lori-Anne Rosenberg Assistant Vice President Exhibit 7 U.S. Bank National Association Statement of Financial Condition As of 3/31/2002 ($000's) 3/31/2002 ------------------- Assets Cash and Due From Depository Institutions $6,610,097 Federal Reserve Stock 0 Securities 24,432,814 Federal Funds 1,509,430 Loans & Lease Financing Receivables 112,081,360 Fixed Assets 1,414,464 Intangible Assets 8,269,267 Other Assets 6,637,699 ------------------- Total Assets $160,955,131 Liabilities Deposits $107,406,480 Fed Funds 6,981,749 Treasury Demand Notes 0 Trading Liabilities 120,375 Other Borrowed Money 18,019,329 Acceptances 185,399 Subordinated Notes and Debentures 5,104,491 Other Liabilities 3,878,626 ------------------- Total Liabilities $141,696,449 ------------------- Equity Minority Interest in Subsidiaries $985,901 Common and Preferred Stock 18,200 Surplus 11,278,504 Undivided Profits 6,976,077 ------------------- Total Equity Capital $19,258,682 ------------------- Total Liabilities and Equity Capital $160,955,131 - -------------------------------------------------------------------------------- To the best of the undersigned's determination, as of the date hereof, the above financial information is true and correct. U.S. Bank National Association By: /s/ Julie Eddington --------------------------------- Assistant Vice President Date: July 2, 2002 EX-99.1 19 dex991.txt FORM OF LETTER OF TRANSMITTAL Exhibit 99.1 LETTER OF TRANSMITTAL for 7 1/2% Senior Notes due 2009 of THE KANSAS CITY SOUTHERN RAILWAY COMPANY THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 2002, UNLESS EXTENDED (SUCH TIME AND DATE, AS THE SAME MAY BE EXTENDED, THE "EXPIRATION DATE"). The Exchange Agent is: U.S. Bank National Association For Overnight Delivery, Delivery by Hand or Delivery by Registered or Certified Mail: U.S. Bank Trust Center 180 East Fifth Street St. Paul, Minnesota 55101 Attention: Specialized Finance Group By Facsimile Transmission (For Eligible Institutions only): (651) 244-1537 Confirm facsimile by telephone only: (800) 934-6802 DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. The undersigned acknowledges receipt of the prospectus dated , 2002 (the "prospectus") of The Kansas City Southern Railway Company (the "Company"), and this Letter of Transmittal (the "Letter of Transmittal"), which together describe the Company's offer (the "Exchange Offer") to exchange its 7 1/2% senior notes due 2009 (the "new notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), for an equal aggregate principal amount of its outstanding 7 1/2% senior notes due 2009 (the "outstanding notes" and, together with the new notes, the "notes") from the holders thereof. The outstanding notes are, and the new notes will be, guaranteed by Kansas City Southern (the "Parent") and certain of the Parent's subsidiaries. The terms of the new notes are identical in all material respects (including principal amount, interest rate and maturity) to the terms of the outstanding notes for which they may be exchanged pursuant to the Exchange Offer, except that the new notes are freely transferable by holders thereof (except as provided herein or in the prospectus). All capitalized terms used but not defined herein shall have the same meaning given them in the prospectus. Your bank or broker can assist you in completing this form. The instructions included with this Letter of Transmittal must be followed. Questions and requests for assistance or for additional copies of the prospectus and this Letter of Transmittal may be directed to the Exchange Agent. The undersigned has checked the appropriate boxes below and signed this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. Please read the entire Letter of Transmittal and the prospectus carefully before checking any box below. List below the outstanding notes to which this Letter of Transmittal relates. If the space provided below is inadequate, list the certificate numbers and principal amounts on a separately executed schedule and affix the schedule to this Letter of Transmittal. The minimum permitted tender is $1,000 in principal amount. All other tenders must be in integral multiples of $1,000.
- ------------------------------------------------------------------------------------------------------- DESCRIPTION OF OUTSTANDING NOTES TENDERED HEREWITH - ------------------------------------------------------------------------------------------------------- Aggregate Principal Name(s) and Address(es) of Registered Holder(s) Certificate Amount Represented Principal Amount (Please fill in) Number(s)* by Outstanding Notes Tendered** - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- Total - ------------------------------------------------------------------------------------------------------- * Need not be completed by book-entry holders. ** Unless otherwise indicated, the holder will be deemed to have tendered the full aggregate principal amount represented by such outstanding notes. See Instruction 2 below. - -------------------------------------------------------------------------------------------------------
Holders of outstanding notes whose outstanding notes are not immediately available or who cannot deliver all other required documents to the Exchange Agent prior to the Expiration Date or who cannot complete the procedures for book-entry transfer on a timely basis, must tender their outstanding notes according to the guaranteed delivery procedures set forth in the prospectus. Unless the context otherwise requires, the term "holder" for purposes of this Letter of Transmittal means any person in whose name outstanding notes are registered or any other person who has obtained a properly completed bond power from the registered holder or any person whose outstanding notes are held of record by The Depository Trust Company ("DTC"). If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of new notes. If the undersigned is a broker-dealer that will receive new notes for its own account in exchange for outstanding notes that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such new notes; 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 Securities Act. A broker-dealer may not participate in the Exchange Offer with respect to outstanding notes acquired other than as a result of market-making activities or other trading activities. Any holder who is an "affiliate" of the Company or who has an arrangement or 2 understanding with respect to the distribution of the new notes to be acquired pursuant to the Exchange Offer, or any broker-dealer who purchased outstanding notes from the Company to resell pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act must comply with the registration and prospectus delivery requirements under the Securities Act. [_]CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND COMPLETE THE FOLLOWING: Name of Tendering Institution ______________________________________________ DTC Account Number _______________________ Transaction Code Number _______________________ [_]CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING: Names(s) of Registered Holders(s) __________________________________________ Window Ticket Number (if any) ______________________________________________ Date of Execution of Notice of Guaranteed Delivery _________________________ Name of Eligible Institution that Guaranteed Delivery ______________________ If Guaranteed Delivery is to be made by Book-Entry Transfer: Name of Tendering Institution ______________________________________________ DTC Account Number _______________________ Transaction Code Number _______________________ [_]CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED OUTSTANDING NOTES ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH ABOVE. [_]CHECK HERE 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: ___________________________________________________________________ 3 - ------------------------------------------------------ ------------------------------------------------------ SPECIAL EXCHANGE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (See Instructions 3, 4 and 5) (See Instructions 3, 4 and 5) To be completed ONLY if certificates for To be completed ONLY if certificates for outstanding notes in a principal amount not outstanding notes in a principal amount not tendered, or new notes issued in exchange for tendered, or new notes issued in exchange for outstanding notes accepted for exchange, are to be outstanding notes accepted for exchange, are to be issued in the name of someone other than the sent to someone other than the undersigned, or to undersigned. the undersigned at an address other than that shown above. Issue certificate(s) to: Deliver certificate(s) to: Name _____________________________________________ (Please Print) Name ______________________________________________ (Please Print) Address __________________________________________ Address ___________________________________________ __________________________________________________ (Include Zip Code) ___________________________________________________ (Include Zip Code) __________________________________________________ (Tax Identification or Social Security Number) ___________________________________________________ (Tax Identification or Social Security Number) - ------------------------------------------------------ ------------------------------------------------------
4 NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. Ladies and Gentlemen: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Company the principal amount of the outstanding notes indicated above. Subject to, and effective upon, the acceptance for exchange of, all or any portion of the outstanding notes tendered with this Letter of Transmittal in accordance with the terms and conditions of the Exchange Offer (including, if the Exchange Offer is extended or amended, the terms and conditions of any such extension or amendment), the undersigned hereby exchanges, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to such outstanding notes that are being tendered herewith. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent the true and lawful agent and attorney-in-fact of the undersigned (with full knowledge that the Exchange Agent also acts as the agent of the Issuer and the Note Guarantors, in connection with the Exchange Offer) to cause the outstanding notes to be assigned, transferred and exchanged. The undersigned represents and warrants that it has full power and authority to tender, exchange, assign and transfer the outstanding notes and to acquire new notes issuable upon the exchange of such tendered outstanding notes, and that, when the same are accepted for exchange, the Company will acquire good and unencumbered title to the tendered outstanding notes, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The undersigned and any beneficial owner of the outstanding notes tendered hereby further represent and warrant that (i) the new notes acquired by the undersigned and any such beneficial owner of outstanding notes pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such new notes, (ii) neither the undersigned nor any such beneficial owner has an arrangement with any person to participate in the distribution of such new notes, (iii) neither the undersigned nor any such beneficial owner nor any such other person is engaging in or intends to engage in a distribution of such new notes and (iv) neither the undersigned nor any such other person is an "affiliate," as defined under Rule 405 promulgated under the Securities Act, of the Company. The undersigned and each beneficial owner acknowledge and agree that any person who is an affiliate of the Company or who tenders in the Exchange Offer for the purpose of participating in a distribution of the new notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a resale transaction of the new notes acquired by such person and may not rely on the position of the staff of the Securities and Exchange Commission set forth in no-action letters discussed in the prospectus under the caption "The Exchange Offer--Resale of the New Notes." The undersigned and each beneficial owner will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Company to be necessary or desirable to complete the exchange, assignment and transfer of the outstanding notes tendered hereby. For purposes of the Exchange Offer, the Company shall be deemed to have accepted validly tendered Outstanding Notes when, as and if the Company has given oral notice (confirmed in writing) or written notice thereof to the Exchange Agent. If any tendered outstanding notes are not accepted for exchange pursuant to the Exchange Offer because of an invalid tender, the occurrence of certain other events set forth in the prospectus or otherwise, any such unaccepted outstanding notes will be returned, without expense, to the undersigned at the address shown below or at a different address as may be indicated herein under "Special Delivery Instructions" as promptly as practicable after the Expiration Date. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and every obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. 5 The undersigned understands that tenders of outstanding notes pursuant to the procedures described under the caption "The Exchange Offer--Procedures for Tendering" in the prospectus and in the instructions hereto will constitute a binding agreement between the undersigned and the Company upon the terms and subject to the conditions of the Exchange Offer, subject only to withdrawal of such tenders on the terms set forth in the prospectus under the caption "The Exchange Offer--Withdrawal of Tenders." Unless otherwise indicated herein under "Special Exchange Instructions," please cause the new notes be issued, and return any outstanding notes not tendered or not accepted for exchange, in the name(s) of the undersigned (and in the case of outstanding notes tendered by book-entry transfer, by credit to the account at DTC). Similarly, unless otherwise indicated herein under "Special Delivery Instructions," please mail any certificates for outstanding notes not tendered or not accepted for exchange (and accompanying documents, as appropriate), and any certificates for new notes, to the undersigned at the address shown below the undersigned's signature(s). In the event that both the "Special Exchange Instructions" box and the "Special Delivery Instructions" box are completed, please cause the new notes to be issued, and return any outstanding notes not tendered or not accepted for exchange, in the name(s) of, and deliver any certificates for such outstanding notes or new notes to, the person(s) so indicated (and in the case of outstanding notes tendered by book-entry transfer, by credit to the account at DTC so indicated). The undersigned recognizes that the Company has no obligation, pursuant to the "Special Exchange Instructions," to transfer any outstanding notes from the name of the registered holder(s) thereof if the Company does not accept for exchange any of the outstanding notes so tendered. Holders of outstanding notes whose outstanding notes are not immediately available or who cannot deliver all other required documents to the Exchange Agent prior to the Expiration Date or who cannot complete the procedures for book-entry transfer on a timely basis, may tender their outstanding notes according to the guaranteed delivery procedures set forth in the prospectus. 6 TENDERING HOLDER(S) SIGN HERE ______________________________________________________________________________ ______________________________________________________________________________ Signature(s) of Registered Holder(s) or Authorized Signatory) Date: ______________________________________________________________________ Date: ______________________________________________________________________ (Must be signed by registered holder(s) exactly as name(s) appear(s) on certificate(s) for outstanding notes hereby tendered or in whose name outstanding notes are registered on the books of DTC or one of its participants, or by any person(s) authorized to become the registered holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, please set forth the full title of such person. See Instruction 3 below.) Name(s): ___________________________________________________________________ ______________________________________________________________________________ (Please Print) Capacity: __________________________________________________________________ Address: ___________________________________________________________________ ______________________________________________________________________________ (Including Zip Code) Area Code and Telephone No.: _______________________________________________ Taxpayer Identification No. or Social Security No.: ________________________ GUARANTEE OF SIGNATURE(S) (If Required--See Instruction 3 below) Authorized Signature: ______________________________________________________ Name: ______________________________________________________________________ (Please type or print) Title: _____________________________________________________________________ Name of Firm: ______________________________________________________________ Address: ___________________________________________________________________ ______________________________________________________________________________ (Including Zip Code) Area Code and Telephone No.: _______________________________________________ Date: ______________________________________________________________________ 7 INSTRUCTIONS Forming Part of the Terms and Conditions of the Exchange Offer 1. Delivery of this Letter of Transmittal and Certificates; Guaranteed Delivery Procedures. A holder of outstanding notes may tender the same by (i) properly completing and signing this Letter of Transmittal or a facsimile hereof (all references in the prospectus to the Letter of Transmittal shall be deemed to include a facsimile thereof) and delivering the same, together with the certificate or certificates, if applicable, representing the outstanding notes being tendered and any required signature guarantees and any other documents required by this Letter of Transmittal, to the Exchange Agent at its address set forth above prior to the Expiration Date, or (ii) complying with the procedure for book-entry transfer described below, or (iii) complying with the guaranteed delivery procedures described below. Holders of outstanding notes may tender outstanding notes by book-entry transfer by crediting the outstanding notes to the Exchange Agent's account at DTC in accordance with DTC's Automated Tender Offer Program ("ATOP") and by complying with applicable ATOP procedures with respect to the Exchange Offer. DTC participants that are accepting the Exchange Offer should transmit their acceptance to DTC, which will edit and verify the acceptance and execute a book-entry delivery to the Exchange Agent's account at DTC. DTC will then send a computer-generated message (an "Agent's Message") to the Exchange Agent for its acceptance in which the holder of the outstanding notes acknowledges and agrees to be bound by the terms of, and makes the representations and warranties contained in, this Letter of Transmittal, the DTC participant confirms on behalf of itself and the beneficial owners of such outstanding notes all provisions of this Letter of Transmittal (including any representations and warranties) applicable to it and such beneficial owner as fully as if it had completed the information required herein and executed and transmitted this Letter of Transmittal to the Exchange Agent. Delivery of the Agent's Message by DTC will satisfy the terms of the Exchange Offer as to execution and delivery of a Letter of Transmittal by the participant identified in the Agent's Message. DTC participants may also accept the Exchange Offer by submitting a Notice of Guaranteed Delivery through ATOP. The method of delivery of this Letter of Transmittal, the outstanding notes and any other required documents is at the election and risk of the holder, and except as otherwise provided below, the delivery will be deemed made only when actually received or confirmed by the Exchange Agent. If such delivery is by mail, it is suggested that registered mail with return receipt requested, properly insured, be used. In all cases sufficient time should be allowed to permit timely delivery. No outstanding notes or Letters of Transmittal should be sent to the Issuer or any Note Guarantor. Holders wishing to participate in the Exchange Offer, but whose outstanding notes are not immediately available or who cannot deliver their outstanding notes and all other required documents to the Exchange Agent prior to the Expiration Date or comply with book-entry transfer procedures on a timely basis may tender their outstanding notes pursuant to the guaranteed delivery procedures set forth in the prospectus. Pursuant to such procedures: (i) such tender must be made by or through an Eligible Institution (as defined below); (ii) prior to the Expiration Date, the Exchange Agent must have received from such Eligible Institution a letter, telegram or facsimile transmission (receipt confirmed by telephone and an original delivered by guaranteed overnight courier) setting forth the name and address of the tendering holder, the names in which such outstanding notes are registered, and if applicable, the certificate numbers of the outstanding notes to be tendered; and (iii) all tendered outstanding notes (or a confirmation of any book-entry transfer of such outstanding notes into the Exchange Agent's account at a book-entry transfer facility) as well as this Letter of Transmittal and all other documents required by this Letter of Transmittal, must be received by the Exchange Agent within three New York Stock Exchange trading days after the date of execution of such letter, telegram or facsimile transmission, all as provided in the prospectus. No alternative, conditional, irregular or contingent tenders will be accepted. All tendering holders, by execution of this Letter of Transmittal (or facsimile thereof), shall waive any right to receive notice of the acceptance of the outstanding notes for exchange. 8 2. Partial Tenders; Withdrawals. Tenders of outstanding notes will be accepted only in integral multiples of $1,000. If less than the entire principal amount of outstanding notes evidenced by a submitted certificate is tendered, the tendering holder must fill in the aggregate principal amount of outstanding notes tendered in the box entitled "Description of Outstanding Notes Tendered Herewith." A newly issued certificate for the outstanding notes submitted but not tendered will be sent to such holder as soon as practicable after the Expiration Date. All outstanding notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise clearly indicated. If not yet accepted, a tender pursuant to the Exchange Offer may be withdrawn prior to the Expiration Date. To be effective with respect to the tender of outstanding notes, a written notice of withdrawal must: (i) be received by the Exchange Agent at one of the addresses for the Exchange Agent set forth above before the Company notifies the Exchange Agent that it has accepted the tender of outstanding notes pursuant to the Exchange Offer; (ii) specify the name of the person who tendered the outstanding notes to be withdrawn; (iii) identify the outstanding notes to be withdrawn (including the principal amount of such outstanding notes, or, if applicable, the certificate numbers shown on the particular certificates evidencing such outstanding notes and the principal amount of outstanding notes represented by such certificates); (iv) include a statement that such holder is withdrawing its election to have such outstanding notes exchanged; and (v) be signed by the holder in the same manner as the original signature on this Letter of Transmittal (including any required signature guarantee). The Exchange Agent will return the properly withdrawn outstanding notes promptly following receipt of notice of withdrawal. If outstanding notes have been tendered pursuant to the procedure for book-entry transfer, any notice of withdrawal must specify the name and number of the account at the book-entry transfer facility to be credited with the withdrawn outstanding notes or otherwise comply with the book-entry transfer facility's procedures. All questions as to the validity of notices of withdrawals, including time of receipt, will be determined by the Company, and such determination will be final and binding on all parties. Any outstanding notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any outstanding notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the holder thereof without cost to such holder (or, in the case of outstanding notes tendered by book-entry transfer into the Exchange Agent's account at the book-entry transfer facility pursuant to the book-entry transfer procedures described above, such outstanding notes will be credited to an account with such book-entry transfer facility specified by the holder) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn outstanding notes may be retendered by following one of the procedures described under the caption "The Exchange Offer--Procedures for Tendering" in the prospectus at any time prior to the Expiration Date. 3. Signatures on this Letter of Transmittal; Written Instruments and Endorsements; Guarantee of Signatures. If this Letter of Transmittal is signed by the registered holder(s) of the outstanding notes tendered hereby, the signature(s) must correspond with the name(s) as written on the face of the certificate(s) without alteration, enlargement or any change whatsoever. If any of the outstanding notes tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If a number of outstanding notes registered in different names are tendered, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal as there are different registrations of outstanding notes. When this Letter of Transmittal is signed by the registered holder or holders (which term, for the purposes described herein, shall include the book-entry transfer facility whose name appears on a security listing as the owner of the outstanding notes) of outstanding notes listed and tendered hereby, no endorsements of certificates or separate written instruments of transfer or exchange are required unless new notes issued in exchange therefor 9 are to be issued, or outstanding notes are not tendered or not exchanged are to be returned, in the name of any person other than the registered holder. Signatures on any such certificates or separate written instruments of transfer or exchange must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered holder or holders of the outstanding notes listed, such outstanding notes must be endorsed or accompanied by separate written instruments of transfer or exchange in form satisfactory to the Company and duly executed by the registered holder, in either case signed exactly as the name or names of the registered holder or holders appear(s) on the outstanding notes. If this Letter of Transmittal, any certificates or separate written instruments of transfer or exchange are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority so to act must be submitted with this Letter of Transmittal. Endorsements on certificates or signatures on separate written instruments of transfer or exchange required by this Instruction 3 must be guaranteed by an Eligible Institution. Signatures on this Letter of Transmittal must be guaranteed by an Eligible Institution, unless outstanding notes are tendered: (i) by a holder who has not completed the box entitled "Special Exchange Instructions" or "Special Delivery Instructions" on this Letter of Transmittal; or (ii) for the account of an Eligible Institution (as defined below). In the event that the exhibit signatures in this Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantees must be by an eligible guarantor institution which is a member of a firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or another "eligible institution" within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended (an "Eligible Institution"). If outstanding notes are registered in the name of a person other than the signer of this Letter of Transmittal, the outstanding notes surrendered for exchange must be endorsed by, or be accompanied by a written instrument or instruments of transfer or exchange, in satisfactory form as determined by the Company, in its sole discretion, duly executed by the registered holder with the signature thereon guaranteed by an Eligible Institution. 4. Special Exchange and Delivery Instructions. Tendering holders should indicate, as applicable, the name and address to which the new notes or certificates for outstanding notes not tendered or not accepted for exchange are to be issued or sent, if different from the name and address of the person signing this Letter of Transmittal. In the case of issuance in a different name, the tax identification number of the person named must also be indicated. Holders tendering outstanding notes by book-entry transfer may request that outstanding notes not exchanged be credited to such account maintained at the book-entry transfer facility as such holder may designate. 5. Transfer Taxes. The Company will pay all transfer taxes, if any, applicable to the transfer and exchange of outstanding notes to it or its order pursuant to the Exchange Offer. If, however, new notes or outstanding notes not tendered or accepted for exchange are to be delivered to, or are registered or issued in the name of any person other than the registered holder of the outstanding notes tendered hereby, or if tendered outstanding notes are registered in the name of any person other than the person signing this Letter of Transmittal, or if a transfer tax is imposed for any reason other than the transfer and exchange of outstanding notes to the Company or its order pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered holder or any other person) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exception therefrom is not submitted herewith the amount of such transfer taxes will be billed directly to such tendering holder. 10 6. Waiver of Conditions. The Company expressly reserves the absolute right to waive, in whole or in part, any of the conditions to the Exchange Offer set forth in the prospectus. 7. Mutilated, Lost, Stolen or Destroyed Securities. Any holder whose outstanding notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 8. Irregularities. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of Letters of Transmittals or outstanding notes will be resolved by the Company, whose determination shall be final and binding. The Company reserves the absolute right to reject any or all Letters of Transmittal or tenders that are not in proper form or the acceptance of which would, in the opinion of the Company's counsel, be unlawful. The Company also reserves the right to waive any irregularities or conditions of tender as to the particular outstanding notes covered by any Letter of Transmittal or tendered pursuant to such letter. None of the Company, the Exchange Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification. The Company's interpretation of the terms and conditions of the Exchange Offer shall be final and binding. 9. Taxpayer Identification Number. Federal income tax law generally requires that a tendering holder whose outstanding notes are accepted for exchange must provide the Exchange Agent with (i) such holder's correct taxpayer identification number ("TIN") on Substitute Form W-9, which is provided under "Important Tax Information" below, or (ii) in the case of certain exempt foreign persons, the Substitute Form W-8 below. If such tendering holder is an individual, the TIN is his or her social security number. If a tendering holder does not provide the Exchange Agent with its current TIN or an adequate basis for an exemption, such tendering holder may be subject to a $50 penalty imposed by the Internal Revenue Service (the "IRS") in addition to backup withholding in an amount equal to 31% of all reportable payments made after the exchange. If withholding results in an overpayment of taxes, a refund may be obtained. Exempt holders of outstanding notes (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. Certain foreign persons can qualify for this exemption by submitting a Form W-8 or Substitute Form W-8 below, signed under penalties of perjury and attesting to such person's foreign status. To prevent backup withholding, each tendering holder of outstanding notes must provide its correct TIN by completing the Substitute Form W-9 set forth below, certifying that the TIN provided is correct (or that such holder is awaiting a TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder has not been notified by the IRS that such holder is subject to backup withholding as a result of a failure to report all interest or dividends or (iii) the IRS has notified the holder that such holder is no longer subject to backup withholding. If the outstanding notes are in more than one name or are not in the name of the actual owner, such holder should consult the W-9 Guidelines for Information on which TIN to report. If such holder does not have a TIN, such holder should consult the W-9 Guidelines for instructions on applying for a TIN, check the box in Part 2 of the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note: Checking this box and writing "applied for" on the form means that such holder has already applied for a TIN or that such holder intends to apply for one in the near future. If such holder does not provide its TIN to the Exchange Agent within 60 days, backup withholding will begin and continue until such holder furnishes its TIN to the Exchange Agent. 11 10. Requests for Assistance or Additional Copies. Questions relating to the procedure for tendering, as well as requests for additional copies of the prospectus and this Letter of Transmittal, may be directed to the Exchange Agent at the address and telephone number set forth above. In addition, all questions relating to the Exchange Offer, as well as requests for assistance, may be directed to the Exchange Agent at the address and telephone number indicated above. IMPORTANT: This Letter of Transmittal or a facsimile or copy thereof (together with certificates of outstanding notes or confirmation of book-entry transfer and all other required documents) or a notice of guaranteed delivery must be received by the Exchange Agent prior to the Expiration Date. 12 IMPORTANT TAX INFORMATION The holder is required to give the Exchange Agent the social security number or employer identification number of the holder of the outstanding notes. If the outstanding notes are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidance on which number to report. PAYER'S NAME: - -------------------------------------------------------------------------------------------- SUBSTITUTE Part 1--Taxpayer Social Security Number(s) Identification Number--For Form W-9 all accounts, enter Taxpayer _________________________ Identification Number in the Department of the Treasury Internal box at right. (For most OR Revenue Service individuals, this is your social security number. For _________________________ Payer's Request for Taxpayer sole proprietors or resident Identification Number ("TIN") aliens, see the W-9 Employer Identification Guidelines. For other Number entities, it is your Employer (If awaiting TIN, write Identification Number. If you "Applied For") do not have a number, see Obtaining a Number in the enclosed W-9 Guidelines). Certify by signing and dating below. Note: If the account is in more than one name, see chart in the enclosed W-9 Guidelines to determine which number to give the payer. -------------------------------------------------------- Part 2--For payees exempt from backup withholding, see the enclosed W-9 Guidelines and complete as instructed therein. Certifications--Under penalties of perjury, I certify that: (1)The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me), and (2)I am not subject to backup withholding because (i) I am exempt from backup withholding, (ii) I have not been notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends or (iii) the IRS has notified me that I am no longer subject to backup withholding, and (3)I am a U.S. person (including a U.S. resident alien). and (4)Any other information provided on this form is true and correct. Certification Instructions--You must cross out item (2) in Part 2 above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax returns. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS that you are no longer subject to backup withholding, do not cross out item (2). Signature _________________________________________________________ Date ___________________________________________________________________ NAME (Please Print)
NOTE: FAILURETO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 30 PERCENT (SUBJECT TO ADJUSTMENT IN FUTURE YEARS) OF ANY AMOUNTS PAID TO YOU UNDER THE NEW NOTES ISSUED PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU ARE AWAITING (OR WILL SOON APPLY FOR) A TAXPAYER IDENTIFICATION NUMBER. CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that, if I do not provide a taxpayer identification number by the time of the exchange, 30 percent (subject to adjustment in future years) of all reportable payments made to me on account of the new notes will be retained until I provide a taxpayer identification number to the Exchange Agent and that, if I do not provide my taxpayer identification number within 60 days, such retained amounts shall be remitted to the Internal Revenue Service as backup withholding and 31% of all reportable payments made to me thereafter will be withheld and remitted to the Internal Revenue Service until I provide a taxpayer identification number. Signature __________________________________________________________________ Date _____________ ______________________________________________________________________________ Name (Please Print) 13 CERTIFICATE OF FOREIGN STATUS SUBSTITUTE Certification: Form W-8 BEN Under penalties of perjury, I certify that I am an exempt foreign person because: Department of the Treasury 1)I am the beneficial owner (or am authorized to sign for Internal Revenue Service the beneficial owner) of all of the income to which this - ------------------------- Form W-8 BEN relates; 2)I am a nonresident alien individual or a foreign corporation, partnership, estate or trust; Signature ____________ 3)I am an individual who has not been, and plans not to be, Print Name ___________ present in the United States for a total of 183 days or more during the calendar year; 4)The income to which this Form W-8 BEN relates is not effectively connected with the conduct of a trade or business in the United States; 5)I am neither engaged, nor plan to be engaged during the year, in a United States trade or business that has effectively connected gains from transactions with a broker or a barter exchange; and 6)I authorize this Form W-8 BEN to be provided to any withholding agent that has control, receipt, or custody of the income of which I am the beneficial owner. Date _________________________________________________________
14 EX-99.2 20 dex992.txt FORM OF NOTICE OF GUARANTEED DELIVERY Exhibit 99.2 NOTICE OF GUARANTEED DELIVERY for Tender of All Outstanding 7 1/2% Senior Notes due 2009 in exchange for New 7 1/2% Senior Notes due 2009 of THE KANSAS CITY SOUTHERN RAILWAY COMPANY Registered holders of outstanding 7 1/2% senior notes due 2009 (the "outstanding notes") who wish to tender their outstanding notes in exchange for a like principal amount of new 7 1/2% senior notes due 2009 (the "new notes") and whose outstanding notes are not immediately available or who cannot deliver their outstanding notes and Letter of Transmittal (and any other documents required by the Letter of Transmittal) to U.S. Bank National Association (the "Exchange Agent") prior to the Expiration Date (as defined below), may use this Notice of Guaranteed Delivery or one substantially equivalent hereto. This Notice of Guaranteed Delivery may be delivered by hand or sent by facsimile transmission (receipt confirmed by telephone and an original delivered by guaranteed overnight courier) or mail to the Exchange Agent. See "The Exchange Offer--Procedures for Tendering" in the prospectus dated , 2002 of The Kansas City Southern Railway Company (the "prospectus"). THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 2002, UNLESS EXTENDED (SUCH TIME AND DATE, AS THE SAME MAY BE EXTENDED, THE "EXPIRATION DATE"). The Exchange Agent for the Exchange Offer is: U.S. Bank National Association For Overnight Delivery, Delivery by Hand or Delivery by Registered or Certified Mail: U.S. Bank Trust Center 180 East Fifth Street St. Paul, Minnesota 55101 Attention: Specialized Finance Group By Facsimile Transmission (For eligible institutions only): (651) 244-1537 Confirm facsimile by telephone only: (800) 934-6802 DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. This Notice of Guaranteed Delivery is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an eligible institution (as defined in the prospectus), such signature guarantee must appear in the applicable space provided on the Letter of Transmittal for Guarantee of Signatures. Ladies and Gentlemen: The undersigned hereby tenders for exchange to the Company, upon the terms and subject to the conditions set forth in the prospectus and the Letter of Transmittal, receipt of which is hereby acknowledged, the principal amount of outstanding notes set forth below pursuant to the guaranteed delivery procedures set forth in the prospectus under the caption "The Exchange Offer--Guaranteed Delivery Procedures." The undersigned understands and acknowledges that the Exchange Offer will expire at 5:00 p.m., New York City time, on , 2002, unless extended by the Issuer and the Note Guarantors. The term "Expiration Date" shall mean 5:00 p.m., New York City time, on , 2002, unless the Exchange Offer is extended as provided in the prospectus, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. All authority conferred or agreed to be conferred by this Notice of Guaranteed Delivery shall survive the death, incapacity or dissolution of the undersigned, and every obligation of the undersigned under this Notice of Guaranteed Delivery shall be binding upon the undersigned's heirs, personal representatives, successors and assigns. Signature _______________________________________________________________________________ Date: __________________________ _______________________________________________________________________________ Date: __________________________ (Signature(s) of holder(s) or Authorized Signatory) Area Code and Telephone Number: _____________________________________________ Name(s): ____________________________________________________________________ _______________________________________________________________________ (Please Print) Capacity (full title), if signing in a fiduciary or representative capacity: _______________________________________________________________________________ Address: ____________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ Taxpayer Identification or Social Security No.: _____________________________ Principal Amount of Outstanding Notes Tendered (must be in integral multiples of $1,000): _______________________________________________________________________________ Certificate Number(s) of Outstanding Notes (if available): __________________ Aggregate Principal Amount Represented by Certificate(s): ___________________ If outstanding notes will be tendered by book-entry transfer, provide the following information: DTC Account Number: _________________________________________________________ Transaction Number: _________________________________________________________ GUARANTEE OF DELIVERY (Not to be used for Signature Guarantee) The undersigned, a member of a recognized signature guarantee medallion program within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, hereby guarantees to deliver to the Exchange Agent at one of its addresses set forth above, the certificates representing the outstanding notes (or a confirmation of book-entry transfer of such outstanding notes into the Exchange Agent's account at the book-entry transfer facility), together with a properly completed and duly executed Letter of Transmittal (or facsimile thereof), with any required signature guarantees, and any other documents required by the Letter of Transmittal within three New York Stock Exchange trading days after the Expiration Date (as defined in the Letter of Transmittal). Name of Firm: _______________________________________________________________ ___________________________________ (Authorized Signature) Address: ____________________________________________________________________ Title: __________________________ _______________________________________________________________________________ Name: ___________________________ (Zip Code) (Please type or print) Area Code and Telephone No.: ________________________________________________ Date: ___________________________ Note: Do not send outstanding notes with this Notice of Guaranteed Delivery. Outstanding notes should be sent with your Letter of Transmittal. EX-99.3 21 dex993.txt BROKER DEALER LETTER Exhibit 99.3 THE KANSAS CITY SOUTHERN RAILWAY COMPANY OFFER TO EXCHANGE UP TO $200,000,000 OF ITS 7 1/2% SENIOR NOTES DUE 2009 FOR ANY AND ALL OF ITS OUTSTANDING 7 1/2% SENIOR NOTES DUE 2009 THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 2002, UNLESS EXTENDED (SUCH TIME AND DATE, AS THE SAME MAY BE EXTENDED, THE "EXPIRATION DATE"). , 2002 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: The Kansas City Southern Railway Company (the "Company"), is offering, upon the terms and subject to the conditions set forth in the prospectus dated , 2002 (the "prospectus") and the accompanying Letter of Transmittal enclosed herewith (which together constitute the "Exchange Offer"), to exchange its 7 1/2% senior notes due 2009 (the "new notes") for an equal principal amount of their 7 1/2% senior notes due 2009 (the "outstanding notes" and together with the new notes, the "notes"). As set forth in the prospectus, the terms of the new notes are identical in all material respects to the outstanding notes, except that the new notes have been registered under the Securities Act of 1933, as amended, and therefore will not bear legends restricting their transfer and will not contain certain provisions providing for the payment of liquidated damages to the holders of the outstanding notes under certain circumstances relating to the Registration Rights Agreement dated as of June 5, 2002 among the Company, the Note Guarantors listed therein and Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc., Deutsche Bank Securities Inc., Banc One Capital Markets, Inc., and Scotia Capital (USA) Inc. The Exchange Offer is subject to certain customary conditions to an exchange offer. See "The Exchange Offer--Certain Conditions to the Exchange Offer" in the prospectus. Enclosed herewith for your information and forwarding to your clients are copies of the following documents: 1. the prospectus, dated , 2002; 2. the Letter of Transmittal for your use (unless outstanding notes are tendered by an Agent's Message) and for the information of your clients (facsimile copies of the Letter of Transmittal may be used to tender outstanding notes); 3. a form of letter which may be sent to your clients for whose accounts you hold outstanding notes registered in your name or in the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Exchange Offer; 4. a Notice of Guaranteed Delivery; 5. Guidelines of the Internal Revenue Service for Certification of Taxpayer Identification Number on Substitute Form W-9; and 6. a return envelope addressed to U.S. Bank National Association, the Exchange Agent. Your prompt action is requested. Please note the Exchange Offer will expire at 5:00 P.M., New York City time, on , 2002, unless extended. Please furnish copies of the enclosed materials to those of your clients for whom you hold outstanding notes registered in your name or in the name of your nominee as quickly as possible. In all cases, exchange of outstanding notes accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of (a) certificates representing such outstanding notes, or confirmation of book entry transfer of such outstanding notes, as the case may be, (b) the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, or an Agent's Message and (c) any other required documents. Holders who wish to tender their outstanding notes and (i) whose outstanding notes are not immediately available or (ii) who cannot deliver their outstanding notes, the Letter of Transmittal or an Agent's Message and in either case together with any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date must tender their outstanding notes according to the guaranteed delivery procedures set forth under the caption "The Exchange Offer--Guaranteed Delivery Procedures" in the prospectus. The Exchange Offer is not being made to, nor will tenders be accepted from or on behalf of, holders of outstanding notes residing in any jurisdiction in which the making of the Exchange Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. The Company will not pay any fees or commissions to brokers, dealers or other persons for soliciting exchanges of Notes pursuant to the Exchange Offer. The Company will, however, upon request, reimburse you for customary clerical and mailing expenses incurred by you in forwarding any of the enclosed materials to your clients. The Company will pay or cause to be paid any transfer taxes payable on the transfer of Notes to it, except as otherwise provided in Instruction 5 of the Letter of Transmittal. Questions and requests for assistance with respect to the Exchange Offer or for copies of the prospectus and Letter of Transmittal may be directed to the Exchange Agent by telephone at (651) 244-0721, attention of Richard Prokosch. Very truly yours, THE KANSAS CITY SOUTHERN RAILWAY COMPANY Nothing contained herein or in the enclosed documents shall constitute you or any other person the agent of the Company, or any affiliate thereof, or authorize you or any other person to make any statements or use any document on behalf of the Company, or any affiliate thereof, in connection with the Exchange Offer other than the enclosed documents and the statements contained therein. EX-99.4 22 dex994.txt FORM OF LETTER TO CLIENTS Exhibit 99.4 THE KANSAS CITY SOUTHERN RAILWAY COMPANY OFFER TO EXCHANGE UP TO $200,000,000 OF ITS 7 1/2% SENIOR NOTES DUE 2009 FOR ANY AND ALL OF ITS OUTSTANDING 7 1/2% SENIOR NOTES DUE 2009 THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 2002, UNLESS EXTENDED (SUCH TIME AND DATE, AS THE SAME MAY BE EXTENDED, THE "EXPIRATION DATE"). ,2002 To Our Clients: Enclosed for your consideration is a prospectus dated , 2002 (the "prospectus") and a Letter of Transmittal (which together constitute the "Exchange Offer") relating to the offer by The Kansas City Southern Railway Company (the "Company") to exchange its 7 1/2% senior notes due 2009 (the "new notes") for an equal principal amount of its outstanding 7 1/2% senior notes due 2009 (the "outstanding notes" and together with the new notes, the "notes"). As set forth in the prospectus, the terms of the new notes are identical in all material respects to the outstanding notes, except that the new notes have been registered under the Securities Act of 1933, as amended, and therefore will not bear legends restricting their transfer and will not contain certain provisions providing for the payment of liquidated damages to the holders of the outstanding notes under certain circumstances relating to the Registration Rights Agreement dated as of June 5, 2002 among the Company, the Note Guarantors listed therein and Morgan Stanley & Co. Incorporated, J.P. Morgan Securities Inc., Deutsche Bank Securities Inc., Banc One Capital Markets, Inc., and Scotia Capital (USA) Inc. (the "Registration Rights Agreement"). Outstanding notes may be tendered only in integral multiples of $1,000. The enclosed material is being forwarded to you as the beneficial owner of outstanding notes carried by us for your account or benefit but not registered in your name. An exchange of any outstanding notes may only be made by us as the registered holder and pursuant to your instructions. Therefore, the Company urges beneficial owners of outstanding notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee to contact such holder promptly if they wish to exchange outstanding notes in the Exchange Offer. Accordingly, we request instructions as to whether you wish us to exchange any or all such outstanding notes held by us for your account or benefit, pursuant to the terms and conditions set forth in the prospectus and Letter of Transmittal. We urge you to read carefully the prospectus and Letter of Transmittal before instructing us to exchange your outstanding notes. Your instructions to us should be forwarded as promptly as possible in order to permit us to exchange outstanding notes on your behalf in accordance with the provisions of the Exchange Offer. The Exchange Offer expires at 5:00 p.m., New York City time, on , 2002, unless extended. The term "Expiration Date" shall mean 5:00 p.m., New York City time, on , 2002, unless the Exchange Offer is extended as provided in the prospectus, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. A tender of outstanding notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Your attention is directed to the following: 1. The Exchange Offer is for the exchange of $1,000 principal amount of the new notes for each $1,000 principal amount of the outstanding notes, of which $200,000,000 aggregate principal amount was outstanding as of , 2002. The terms of the new notes are identical in all respects to the outstanding notes, except that the new notes have been registered under the Securities Act of 1933, as amended, and therefore will not bear legends restricting their transfer and will not contain certain provisions providing for the payment of liquidated damages to the holders of the outstanding notes under certain circumstances relating to the Registration Rights Agreement. 2. The Exchange Offer is subject to certain customary conditions. See "The Exchange Offer--Certain Conditions to the Exchange Offer" in the prospectus. 3. The Exchange Offer and withdrawal rights will expire at 5:00 p.m., New York City time, on , 2002, unless extended. 4. The Company has agreed to pay the expenses of the Exchange Offer. 5. Any transfer taxes incident to the transfer of outstanding notes from the tendering holder to the Company will be paid by the Company, except as provided in the prospectus and the Letter of Transmittal. The Exchange Offer is not being made to, nor will tenders be accepted from or on behalf of, holders of outstanding notes residing in any jurisdiction in which the making of the Exchange Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. If you wish us to tender any or all of your outstanding notes held by us for your account or benefit, please so instruct us by completing, executing and returning to us the attached instruction form. The accompanying Letter of Transmittal is furnished to you for informational purposes only and may not be used by you to exchange outstanding notes held by us and registered in our name for your account or benefit. Instructions The undersigned acknowledge(s) receipt of your letter and the enclosed material referred to therein relating to the Exchange Offer of The Kansas City Southern Railway Company. This will instruct you to tender for exchange the aggregate principal amount of outstanding notes indicated below (or, if no aggregate principal amount is indicated below, all outstanding notes) held by you for the account or benefit of the undersigned, pursuant to the terms of and conditions set forth in the prospectus and the Letter of Transmittal. Aggregate Principal Amount of outstanding notes to be tendered for exchange: $ *I (we) understand that if I (we) sign this instruction form without indicating an aggregate principal amount of outstanding notes in the space above, all outstanding notes held by you for my (our) account will be tendered for exchange. - -------------------------------------------------------------------------------- Signature(s) - -------------------------------------------------------------------------------- Capacity (full title), if signing in a fiduciary or representative capacity - -------------------------------------------------------------------------------- Name(s) and address, including zip code Date: _______________________________________________________________________ - -------------------------------------------------------------------------------- Area Code and Telephone Number - -------------------------------------------------------------------------------- Taxpayer Identification or Social Security No. -----END PRIVACY-ENHANCED MESSAGE-----