e10vq

-----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, PF/g+NepK91dGyCYCmFx9EqMKBVKYjiXzrQTRNyBkoUOS2tpA8BjReU0pzphsKte ApIEpKTZ4hRlsl2PpTiBZw== 0000950137-07-016051.txt : 20071026 0000950137-07-016051.hdr.sgml : 20071026 20071026154051 ACCESSION NUMBER: 0000950137-07-016051 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20070930 FILED AS OF DATE: 20071026 DATE AS OF CHANGE: 20071026 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KANSAS CITY SOUTHERN CENTRAL INDEX KEY: 0000054480 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 440663509 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04717 FILM NUMBER: 071193479 BUSINESS ADDRESS: STREET 1: 427 W 12TH STREET CITY: KANSAS CITY STATE: MO ZIP: 64105 BUSINESS PHONE: 8169831303 MAIL ADDRESS: STREET 1: PO BOX 219335 CITY: KANSAS CITY STATE: MO ZIP: 64121 FORMER COMPANY: FORMER CONFORMED NAME: KANSAS CITY SOUTHERN INDUSTRIES INC DATE OF NAME CHANGE: 19920703 10-Q 1 c19484e10vq.htm FORM 10-Q e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2007
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number 1-4717

KANSAS CITY SOUTHERN

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization) 427 West 12th Street, Kansas City, Missouri (Address of principal executive offices)				44-0663509 (I.R.S. Employer Identification No.) 64105 (Zip Code)

816.983.1303

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at October 18, 2007

Common Stock, $0.01 per share par value		76,882,375 Shares

Kansas City Southern

Form 10-Q
September 30, 2007

Index


			Page

PART I — FINANCIAL INFORMATION
	Item 1.	Financial Statements		3
		Introductory Comments		3
		Consolidated Statements of Income — Three and nine months ended September 30, 2007 and 2006		4
		Consolidated Balance Sheets — September 30, 2007 and December 31, 2006		5
		Consolidated Statements of Cash Flows — Nine months ended September 30, 2007 and 2006		6
		Notes to Consolidated Financial Statements		7
		Report of Independent Registered Public Accounting Firm		25
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		37
	Item 4.	Controls and Procedures		37
	Item 4T.	Controls and Procedures		37

PART II — OTHER INFORMATION
	Item 1.	Legal Proceedings		37
	Item 1A.	Risk Factors		37
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		38
	Item 3.	Defaults upon Senior Securities		38
	Item 4.	Submission of Matters to a Vote of Security Holders		38
	Item 5.	Other Information		38
	Item 6.	Exhibits		38

SIGNATURES				39

Kansas City Southern

Form 10-Q
September 30, 2007

PART I — FINANCIAL INFORMATION


Item 1.	*Financial Statements.*

Introductory Comments.

The Consolidated Financial Statements included herein have been prepared by Kansas City Southern, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). For the purposes of this report, unless the context otherwise requires, all references herein to “KCS” and the “Company” shall mean Kansas City Southern and its subsidiaries. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed, or omitted pursuant to such rules and regulations. The Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and the related notes, 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, 2006, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-Q. Results for the three and nine months ended September 30, 2007, are not necessarily indicative of the results expected for the full year ending December 31, 2007.

Kansas City Southern

Consolidated Statements of Income


	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2007			2006			2007			2006
	(In millions, except share and per share amounts)
	(Unaudited)

Revenues	$	444.1		$	415.7		$	1,282.5		$	1,217.3
Operating expenses:
Compensation and benefits		104.7			96.5			303.1			289.1
Purchased services		47.9			56.6			137.7			163.9
Fuel		66.6			66.4			194.8			187.8
Equipment costs		43.7			46.1			137.1			130.1
Depreciation and amortization		38.9			37.7			117.8			112.9
Casualties and insurance		15.9			12.0			52.8			40.1
Materials and other costs		28.2			23.1			85.5			77.3

Total operating expenses		345.9			338.4			1,028.8			1,001.2

Operating income		98.2			77.3			253.7			216.1

Equity in net earnings of unconsolidated affiliates		3.3			3.2			7.2			5.7
Interest expense		(37.3	)		(42.3	)		(118.3	)		(123.5	)
Debt retirement costs		—			—			(6.9	)		(2.2	)
Foreign exchange gain (loss)		(1.9	)		4.5			(1.6	)		(6.7	)
Other income		2.0			3.5			5.9			9.3

Income before income taxes and minority interest		64.3			46.2			140.0			98.7
Income tax expense		17.5			14.7			40.6			30.2

Income before minority interest		46.8			31.5			99.4			68.5
Minority interest		0.1			0.2			0.3			0.2

Net income		46.7			31.3			99.1			68.3
Preferred stock dividends		4.9			4.9			15.0			14.6

Net income available to common shareholders	$	41.8		$	26.4		$	84.1		$	53.7

Earnings per share:
Basic earnings per share	$	0.55		$	0.35		$	1.11		$	0.72

Diluted earnings per share	$	0.48		$	0.32		$	1.00		$	0.67

Average shares outstanding (in thousands):
Basic		75,935			75,178			75,797			74,490
Potential dilutive common shares		21,716			16,411			14,781			16,431

Diluted		97,651			91,589			90,578			90,921

See accompanying notes to consolidated financial statements.

Kansas City Southern

Consolidated Balance Sheets


	September 30,		December 31,
	2007		2006
	(In millions, except share amounts)
	(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents	$	116.2	$	79.0
Accounts receivable, net		284.5		334.3
Restricted funds		30.9		26.5
Inventories		87.9		72.5
Other current assets		73.9		93.7

Total current assets		593.4		606.0
Investments		67.4		64.9
Property and equipment, net of accumulated depreciation of $807.3 and $897.0 at September 30, 2007 and December 31, 2006, respectively		2,692.0		2,452.2
Concession assets, net		1,230.6		1,303.3
Deferred tax asset		118.4		128.7
Other assets		73.8		82.2

Total assets	$	4,775.6	$	4,637.3


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Debt due within one year	$	351.3	$	41.9
Accounts and wages payable		143.2		189.9
Current liability related to KCSM acquisition		54.1		50.9
Accrued liabilities		384.5		354.7

Total current liabilities		933.1		637.4

Other liabilities:
Long-term debt		1,295.7		1,631.8
Long-term liability related to KCSM acquisition		—		32.4
Deferred income taxes		424.2		417.3
Other noncurrent liabilities and deferred credits		246.0		235.7

Total other liabilities		1,965.9		2,317.2

Minority interest		204.9		100.3
Commitments and contingencies		—		—
Stockholders’ equity:
$25 par, 4% noncumulative, preferred stock, 840,000 shares authorized, 649,736 shares issued, 242,170 shares outstanding		6.1		6.1
Series C — redeemable cumulative convertible perpetual preferred stock, $1 par, 4.25%, 400,000 shares authorized, issued and outstanding		0.4		0.4
Series D — cumulative convertible perpetual preferred stock, $1 par, 5.125%, 210,000 shares authorized, issued and outstanding		0.2		0.2
$.01 par, common stock, 400,000,000 shares authorized; 92,863,585 shares issued at September 30, 2007 and December 31, 2006, respectively; 76,882,325 and 75,920,333 shares outstanding at September 30, 2007 and December 31, 2006, respectively		0.7		0.7
Paid in capital		544.0		523.0
Retained earnings		1,119.1		1,050.7
Accumulated other comprehensive income		1.2		1.3

Total stockholders’ equity		1,671.7		1,582.4

Total liabilities and stockholders’ equity	$	4,775.6	$	4,637.3

See accompanying notes to consolidated financial statements.

Kansas City Southern

Consolidated Statements of Cash Flows


	Nine Months Ended September 30,
	2007			2006
	(In millions)
	(Unaudited)

Operating activities:
Net income	$	99.1		$	68.3
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		117.8			112.9
Deferred income taxes		40.4			30.9
KCSM employees’ statutory profit sharing		9.3			5.0
Equity in undistributed earnings of unconsolidated affiliates		(7.2	)		(5.7	)
Minority interest		0.3			0.2
Stock based compensation		7.7			3.6
Debt retirement costs		6.9			2.2
Changes in working capital items:
Accounts receivable		49.8			(19.4	)
Inventories		(15.4	)		(4.2	)
Other current assets		18.9			9.4
Accounts payable and accrued liabilities		(46.4	)		31.6
Other, net		15.1			(64.3	)

Net cash provided by operating activities		296.3			170.5

Investing activities:
Capital expenditures		(213.0	)		(150.9	)
Proceeds from disposal of property		9.4			0.4
Contribution from NS for MSLLC (net of change in restricted contribution)		100.0			51.3
Property investments in MSLLC		(87.7	)		(13.8	)
Other, net		(4.2	)		21.5

Net cash used for investing activities		(195.5	)		(91.5	)

Financing activities:
Proceeds from issuance of long-term debt		286.7			274.4
Repayment of long-term debt		(312.9	)		(315.9	)
Debt costs		(19.7	)		(7.5	)
Proceeds from stock plans		0.7			7.4
Dividends paid		(18.4	)		(4.3	)

Net cash used for financing activities		(63.6	)		(45.9	)

Cash and cash equivalents:
Net increase during each period		37.2			33.1
At beginning of year		79.0			31.1

At end of period	$	116.2		$	64.2

See accompanying notes to consolidated financial statements.

Kansas City Southern

Notes to Consolidated Financial Statements


1.	Accounting Policies and Interim Financial Statements.

In the opinion of the management of KCS, the accompanying unaudited consolidated financial statements contain all adjustments necessary, which are of a normal and recurring nature, to present fairly the financial position of the Company as of September 30, 2007, and December 31, 2006, the results of operations for the three and nine months ended September 30, 2007 and 2006, and cash flows for the nine months ended September 30, 2007 and 2006. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The results of operations for the three and nine months ended September 30, 2007, are not necessarily indicative of the results to be expected for the full year ending December 31, 2007. Certain prior year amounts have been reclassified to conform to the current year presentation.


2.	Share-Based Compensation.

Effective January 2006, Statement of Financial Accounting Standards No. 123R (Revised) “Share-Based Payments” (“SFAS 123R”) was adopted on a modified prospective basis requiring the Company to measure the cost of equity classified share-based compensation awards at grant date fair value in exchange for employee services rendered. All stock options and nonvested stock awards are granted at their market value on the date of grant. Their fair value is determined on the date of grant and recorded as compensation expense over the attribution period, which is generally the vesting period. Stock options and the Employee Stock Purchase Plan (“ESPP”) awards are valued at their fair value as determined using the Black-Scholes pricing model.

Stock Option Plan. The Kansas City Southern 1991 Amended and Restated Stock Option and Performance Award Plan (as amended and restated effective August 7, 2007) (the “Plan”) provides for the granting of options to purchase up to 16.0 million shares of the Company’s common stock by officers and other designated employees. Options have been granted under the Plan at 100% of the average market price of the Company’s stock on the date of grant and generally have a five year cliff vesting period and are exercisable over the ten year contractual term, except that options outstanding with limited rights (“LRs”) or limited stock appreciation rights (“LSARs”) become immediately exercisable upon certain defined circumstances constituting a change in control of the Company. The Plan includes provisions for stock appreciation rights, LRs and LSARs. All outstanding options include LSARs, except for options granted to non-employee Directors prior to 1999. The grant date fair value, less estimated forfeitures, is recorded to expense on a straight-line basis over the vesting period.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average assumptions used to value options issued during the respective periods are as follows:


	Nine Months Ended September 30,
	2007			2006

Expected dividend yield		0	%		0	%
Expected volatility		34.17	%		37.84	%
Risk-free interest rate		4.70	%		4.96	%
Expected term (years)		7.5			6.8
Weighted-average grant date fair value of stock options granted	$	16.04		$	12.62

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)

The Company has not paid dividends to common stockholders since January of 2000 and currently does not expect to pay dividends to common stockholders in the future. The expected volatility is based on the historical volatility of the Company’s stock price over a term equal to the estimated life of the options. The risk-free interest rate is determined based on the U.S. Treasury rates approximating the expected life of the options granted, which represents the period of time the awards are expected to be outstanding and is based on the historical experience of similar awards.

The following table summarizes activity under the stock option plan:


						Weighted-
				Weighted-		Average
				Average		Remaining
				Exercise		Contractual		Aggregate
				Price		Term		Intrinsic
Nine Months Ended September 30, 2007	Shares			per Share		in Years		Value
								(In millions)

Options outstanding at December 31, 2006		2,940,332		$	8.98
Granted		32,500			33.78
Exercised		(87,123	)		6.37
Forfeited or expired		(18,872	)		21.23

Options outstanding at September 30, 2007		2,866,837		$	9.26		3.92	$	65.7

Vested and expected to vest at September 30, 2007		2,854,500		$	9.21		3.90	$	65.5

Exercisable at September 30, 2007		2,415,004		$	7.85		3.47	$	58.7

Compensation expense of $0.2 million and $0.3 million was recognized for stock option awards for the three months ended September 30, 2007 and 2006, and $0.5 million and $1.0 million for the nine months ended September 30, 2007 and 2006, respectively. The total income tax benefit recognized in the income statement for stock options was $0.1 million for the three months ended September 30, 2007 and 2006, respectively, and $0.2 million and $0.4 million for the nine months ended September 30, 2007 and 2006, respectively.

Additional information regarding stock option exercises appears in the table below (in millions):


	Nine Months Ended September 30,
	2007		2006

Aggregate grant-date fair value of stock options vested	$	0.1	$	0.2
Intrinsic value of stock options exercised		2.2		8.6
Cash received from option exercises		0.6		5.4
Excess tax benefit realized from option exercises		—		—

As of September 30, 2007, $1.2 million of unrecognized compensation cost relating to nonvested stock options is expected to be recognized over a weighted-average period of 1.65 years. At September 30, 2007, there were 1,871,521 shares available for future grants under the Plan.

Nonvested Stock. The Plan provides for the granting of nonvested stock awards to officers and other designated employees. The grant date fair value is based on the average market price of the stock on the date of the grant. These awards are subject to forfeiture if employment terminates during the vesting period, which is generally a five year cliff vesting for employees and one year for directors. The grant date fair value of nonvested shares, less estimated forfeitures, is recorded to compensation expense on a straight-line basis over the vesting period.

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)

A summary of nonvested stock activity is as follows:


				Weighted-
				Average		Aggregate
	Number of			Grant Date		Intrinsic
Nine Months Ended September 30, 2007	Shares			Fair Value		Value
						(In millions)

Nonvested stock at December 31, 2006		613,573		$	23.74
Granted		481,214			32.22
Vested		(64,948	)		25.67
Forfeited		(87,796	)		26.05

Nonvested stock at September 30, 2007		942,043		$	27.72	$	30.3

Compensation cost on nonvested stock was $1.4 million and $0.4 million for the three months ended September 30, 2007 and 2006, and $4.7 million and $2.1 million for the nine months ended September 30, 2007 and 2006, respectively. The total income tax benefit recognized in the income statement for nonvested stock awards was $0.5 million and $0.1 million for the three months ended September 30, 2007 and 2006, and $1.7 million and $0.7 million for the nine months ended September 30, 2007 and 2006, respectively.

As of September 30, 2007, $18.4 million of unrecognized compensation costs related to nonvested stock is expected to be recognized over a weighted-average period of 1.66 years. The fair value (at vest date) of shares vested during the nine months ended September 30, 2007, was $1.7 million.

Performance Based Awards. During 2007, the Company granted performance based nonvested stock awards which are subject to continued employment through January 2010. In addition to the three year service condition, the number of nonvested shares to be received depends on the attainment of performance goals based on the following annual measures: operating ratio, earnings before interest, tax, depreciation and amortization (EBITDA) and return on capital employed. Over the three year performance period, participants in the aggregate can earn up to a maximum of 864,724 shares which have a weighted-average grant date fair value of $29.98 per share.

The Company expenses the grant date fair value of the awards which are probable of being earned based on forecasted annual performance goals over the three year performance period. Compensation expense on performance based awards was $0.7 million and $2.0 million for the three and nine months ended September 30, 2007, respectively. Total income tax benefit recognized in the income statement for performance based awards was $0.2 million and $0.7 million for the three and nine months ended September 30, 2007.

As of September 30, 2007, $2.9 million of unrecognized compensation cost related to performance based awards is expected to be recognized over a weighted-average period of 1.12 years. The unrecognized compensation cost includes only the amount determined to be probable of being earned based upon the attainment of the annual performance goals.


3.	Earnings Per Share Data.

Basic earnings per common share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Restricted stock granted to employees and officers is included in weighted average shares for purposes of computing basic earnings per common share as it is earned. Diluted earnings per share reflect the potential dilution that could occur if convertible securities were converted into common stock or stock options were exercised. The following

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)

reconciles the weighted average shares used for the basic earnings per share computation to the shares used for the diluted earnings per share computation (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006

Basic shares		75,935		75,178		75,797		74,490
Effect of dilution		21,716		16,411		14,781		16,431

Diluted shares		97,651		91,589		90,578		90,921

Potentially dilutive shares excluded from the calculation:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006

Stock options where the exercise price is greater than the average market price of common shares		72		204		72		261
Convertible debt instruments which are anti-dilutive		—		1,478		—		1,478
Convertible preferred stock which is anti-dilutive		—		7,000		7,000		7,000

The following reconciles net income available to common stockholders for purposes of basic earnings per share to net income available to common stockholders for purposes of diluted earnings per share (in millions):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006

Net income available to common stockholders for purposes of computing basic earnings per share		41.8		26.4		84.1		53.7
Effect of dividends on conversion of convertible preferred stock		4.8		2.1		6.5		6.4
Effect of interest expense on conversion of $47.0 million note		—		0.4		—		1.1

Net income available to common stockholders for purposes of computing diluted earnings per share		46.6		28.9		90.6		61.2


4.	Derivative Instruments.

The Company does not engage in the trading of derivative financial instruments except where the Company’s objective is to manage fuel price risk and foreign currency fluctuations. In general, the Company enters into derivative transactions in limited situations based on management’s assessment of current market conditions and perceived risks. However, management intends to respond to evolving business and market conditions and in doing so, may enter into such transactions more frequently as deemed appropriate.

Fuel Derivative Transactions. As of September 30, 2007, the Company did not have any outstanding fuel swap agreements. Fuel hedging transactions, consisting of fuel swaps, resulted in a decrease in fuel expense of $0.3 million and $0.6 million for the nine months ended September 30, 2007 and 2006, respectively.

Foreign Exchange Contracts. The purpose of the foreign exchange contracts of Kansas City Southern de México, S.A. de C.V., a wholly-owned subsidiary of the Company (“KCSM”), is to limit exposure arising from exchange rate fluctuations in its Mexican peso-denominated financial assets and liabilities. Management determines the nature and quantity of any hedging transactions based upon net asset exposure and market

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)

conditions. As of September 30, 2007, KCSM did not have any outstanding call option contracts. As of September 30, 2006, KCSM had one Mexican peso call option outstanding in the notional amount of $1.7 million, based on the average exchange rate of Ps.14.50 Mexican pesos per U.S. dollar. This option expired on May 29, 2007.

As of September 30, 2007, the Company had six U.S. dollar forward contracts with an aggregate notional amount of $0.6 million. The U.S. dollar contracts mature between June and December 2008 and are based on the forward exchange rate ranging from Ps.11.35 to Ps.11.49.

Foreign Currency Balance. At September 30, 2007 and at December 31, 2006, KCSM had financial assets and liabilities denominated in Mexican pesos of Ps.2,119.4 million and Ps.2,304.0 million, and Ps.695.6 million and Ps.651.4 million, respectively. At September 30, 2007 and at December 31, 2006, the exchange rate was Ps.10.92 and Ps.10.82, per U.S. dollar, respectively.


5.	Comprehensive Income.

Other comprehensive income refers to revenues, expenses, gains and losses that under U.S. GAAP are included in comprehensive income, a component of stockholders’ equity within the consolidated balance sheets, rather than net income. Under existing accounting standards, other comprehensive income for KCS reflects the amortization of interest rate swaps and amortization of prior service credit.

KCS’ total comprehensive income was as follows:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007			2006		2007			2006

Net income	$	46.7		$	31.3	$	99.1		$	68.3
Other comprehensive income:
Amortization of interest rate swaps		—			0.1		—			0.3
Amortization of prior service credit		(0.1	)		—		(0.1	)		—

Total comprehensive income	$	46.6		$	31.4	$	99.0		$	68.6


6.	Long-Term Debt

During the third quarter, the Company reclassified the obligations outstanding under its Amended and Restated Credit Agreement dated April 28, 2006, as amended on May 31, 2007 (the “Credit Agreement”), from long term debt to current debt. The revolving credit facility, the swing line facility and the letter of credit facility have a final termination date of April 28, 2011 and the term loan B facility and the term loan C facility have a final termination date of April 28, 2013. However, the Credit Agreement provides for an earlier termination date that is 90 days prior to the earliest final maturity date of any outstanding 2000 Senior Notes and 2002 Senior Notes unless the facilities are rated at least Ba3 by Moody’s Investor Service (“Moody’s”) and BB+ by Standards & Poor’s Rating Services (“S&P”) (in each case, with at least stable outlooks) or prior to such date the 2000 Senior Notes and 2002 Senior Notes have been refinanced in full or an amount sufficient to indefeasibly repay such 2000 Senior Notes and 2002 Senior Notes has been deposited with the applicable bond trustee. The earliest final maturity date of the 2000 Senior Notes and 2002 Senior Notes is currently October 1, 2008. On May 14, 2007, Moody’s assigned the debt a rating of Ba2 and on September 25, 2007, S&P rated the debt BB. Based upon the aforementioned termination provision, the rating criteria of S&P was not met resulting in a maturity date of July 3, 2008. The Company intends to refinance the 2000 Senior Notes prior to such date. As of September 30, 2007, the obligations reclassified from long term debt to current debt totaled $347.8 million.

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)


7.	Commitments and Contingencies.

Litigation. The Company is a party to various legal proceedings and administrative actions, all of which are of an ordinary, routine nature and incidental to its operations. Included in these proceedings are various tort claims brought by current and former employees for job related injuries and by third parties for injuries related to railroad operations. KCS aggressively defends these matters and has established liability reserves which management believes are adequate to cover expected costs. Although it is not possible to predict the outcome of any legal proceeding, in the opinion of the Company’s management, other than those proceedings described in detail below, such proceedings and actions should not, individually or in the aggregate, have a material effect on the Company’s financial position. However, a material adverse outcome in one or more of these proceedings could have a material impact on the operating results of a particular period.

Environmental Liabilities. The Company’s U.S. operations are subject to extensive federal, state and local environmental laws and regulations. The major U.S. environmental laws to which the Company is subject include, among others, the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA,” also known as the Superfund law), the Toxic Substances Control Act, the Federal Water Pollution Control Act, and the Hazardous Materials Transportation Act. CERCLA can impose joint and several liabilities for cleanup and investigation costs, without regard to fault or legality of the original conduct, on current and predecessor owners and operators of a site, as well as those who generate, or arrange for the disposal of hazardous substances. The Company does not believe that compliance with the requirements imposed by the environmental legislation will impair its competitive capability or result in any material additional capital expenditures, operating or maintenance costs. The Company is, however, subject to environmental remediation costs as described below.

The Mexican operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment through the establishment of standards for water discharge, water supply, emissions, noise pollution, hazardous substances and transportation and handling of hazardous and solid waste. The Mexican government may bring administrative and criminal proceedings and impose economic sanctions against companies that violate environmental laws, and temporarily or even permanently close non-complying facilities.

The risk of incurring environmental liability is inherent in the railroad industry. As part of serving the petroleum and chemicals industry, the Company transports hazardous materials and has a professional team available to respond and handle environmental issues that might occur in the transport of such materials. Additionally, the Company is a partner in the Responsible Care^® program and, as a result, has initiated certain additional environmental, health and safety programs. The Company performs ongoing reviews and evaluations of the various environmental programs and issues within the Company’s operations, and, as necessary, takes actions intended to limit the Company’s exposure to potential liability.

The Company owns property that is, or has been, used for industrial purposes. Use of these properties may subject the Company to potentially material liabilities relating to the investigation and cleanup of contaminants, claims alleging personal injury, or property damage as the result of exposures to, or release of, hazardous substances. Although the Company is responsible for investigating and remediating contamination at several locations, based on currently available information, the Company does not expect any related liabilities, individually or collectively, to have a material impact on its results of operations, financial position or cash flows. Should the Company become subject to more stringent cleanup requirements at these sites, discover additional contamination, or become subject to related personal or property damage claims, the Company could incur material costs in connection with these sites.

The Company records liabilities for remediation and restoration costs related to past activities when the obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance activities to current operations are expensed as incurred. The Company’s recorded liabilities for these issues represent its

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)

best estimates (on an undiscounted basis) of remediation and restoration costs that may be required to comply with present laws and regulations. Although these costs cannot be predicted with certainty, management believes that the ultimate outcome of identified matters will not have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows.

Environmental remediation expense was $5.3 million and $3.3 million for the nine months ended September 30, 2007 and 2006, respectively, and was included in casualties and insurance expense on the consolidated statements of income. Additionally, as of September 30, 2007, KCS had a liability for environmental remediation of $9.7 million. This amount was derived from a range of reasonable estimates based upon the studies and site surveys described above and in accordance with Statement of Financial Accounting Standards No. 5 “Accounting for Contingencies” (“SFAS 5”).

Casualty Claim Reserves. The Company’s casualty and liability reserve for its U.S. business segment is based on actuarial studies performed on an undiscounted basis. The reserve is based on claims filed and an estimate of claims incurred but not yet reported. While the ultimate amount of claims incurred is dependent on various factors, it is management’s opinion that the recorded liability is a reasonable estimate of aggregate future payments. Adjustments to the liability are reflected as operating expenses in the period in which the adjustments are known. Casualty claims in excess of self-insurance levels are insured up to certain coverage amounts, depending on the type of claim and year of occurrence. Activity in the reserve follows (in millions):


	Nine Months Ended
	September 30,
	2007			2006

Balance at beginning of year	$	117.4		$	103.9
Accruals, net (includes the impact of actuarial studies)		19.5			27.6
Payments		(49.8	)		(15.8	)

Balance at end of period	$	87.1		$	115.7

The casualty claim reserve balance as of September 30, 2007 is based on an updated study of casualty reserves for data through May 31, 2007 and a review of the last four month’s experience. The activity for the nine months ended September 30, 2007 primarily relates to the net settlements and payments related to a large casualty claim, and the reserves for Federal Employers Liability Act (FELA), third-party, and occupational illness claims. The changes to the reserve in the current year compared to the prior year primarily reflect a large litigation settlement and the current accruals related to the trend of loss experience since the date of the prior study.

Reflecting the uncertainty surrounding the outcome of casualty claims, it is reasonably possible that costs to settle casualty claims may range from approximately $83 million to $97 million. However, management believes that the $87.1 million recorded is the best estimate of the Company’s future obligations for the settlement of casualty claims at September 30, 2007. The most sensitive assumptions for personal injury accruals are the expected average cost per claim and the projected frequency rates for the number of claims that will ultimately result in payment. A 5% increase or decrease in either the expected average cost per claim or the frequency rate for claims with payments would result in an approximate $4.4 million increase or decrease in the Company’s recorded personal injury reserves.

Antitrust Lawsuit. As of September 30, 2007, 24 putative class actions have been filed against The Kansas City Southern Railway Company, a wholly-owned subsidiary of the Company (“KCSR”), along with the other Class I U.S. railroads (and, in some cases, the Association of American Railroads), in various Federal district courts alleging that the railroads conspired to fix fuel surcharges in violation of U.S. antitrust laws. A motion is presently pending before the Judicial Panel on Multidistrict Litigation (“JPML”) to transfer all of these lawsuits to a single district court for coordinated pretrial proceedings. Because plaintiffs and defendants

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)

agree that multidistrict treatment of the lawsuits is appropriate, KCSR anticipates that the JPML motion will be granted. However, because the JPML has not yet ruled, the transferee court has not yet been identified. In addition, the New Jersey Attorney General has initiated an investigation of rail fuel surcharges and has sought information regarding those surcharges from KCSR and other railroads. KCSR is cooperating with the New Jersey Attorney General’s request for information while preserving all of its legal defenses. KCSR believes that the price fixing allegations against it have no merit, believes it has strong defenses and intends to vigorously contest these lawsuits through trial and appeal if necessary. While the final outcome of these matters cannot be predicted with certainty, the Company believes that these matters will not have a material adverse effect on any of its consolidated financial position, results of operations, cash flows or business.

Disputes Relating to Payments for the Use of Trackage and Haulage Rights and Interline Services. KCSM and Ferrocarril Mexicano, S.A. de C.V. (“Ferromex”) both initiated administrative proceedings seeking a determination by the Mexican Secretaria de Comunicaciones y Transportes (“Ministry of Communications and Transportation” or “SCT”) of the rates that the companies should pay each other in connection with the use of trackage and haulage rights and interline and terminal services. The SCT, in March of 2002, issued rulings setting the rates for trackage and haulage rights. In August of 2002, the SCT issued a ruling setting the rates for interline and terminal services. KCSM and Ferromex appealed both rulings. Following the trial and appellate court decisions, the Mexican Supreme Court in February of 2006, in a ruling from the bench, sustained KCSM’s appeal of the SCT’s trackage and haulage rights ruling, vacating the ruling and ordering the SCT to issue a new ruling consistent with the Court’s opinion. KCSM has not yet received the written opinion of the Mexican Supreme Court relating to the interline and terminal services appeal. In October 2006, KCSM was served with a claim raised by Ferromex in which Ferromex asked for information concerning the interline traffic between KCSM and Ferromex from January 2002 through December 2004. KCSM filed an answer to this claim and expects this litigation to continue over the next few years. The Company believes that based on its assessment of the facts in this case, there will be no material effect on KCS’ results of operations.

Disputes Relating to the Scope of the Mandatory Trackage Rights. KCSM and Ferromex are parties to various civil cases involving disputes over the application and proper interpretation of the mandatory trackage rights. In August 2002, the SCT issued rulings determining Ferromex’s trackage rights in Monterrey, Nuevo León. KCSM and Ferromex both appealed the SCT’s rulings. At the Mexican Administrate Federal Court level, KCSM obtained what it believed were favorable rulings in April 2005. Ferromex appealed these rulings and the case was returned to the Mexican Administrative Federal Court. The Administrative Federal Court issued a ruling on June 11, 2007, which was served on KCSM on August 8, 2007. In the ruling, the Mexican Administrative Federal Court reversed the earlier favorable ruling and decided that Ferromex could use certain auxiliary tracks awarded to KCSM in its concession. KCSM appealed this ruling at the beginning of September 2007, arguing that the Mexican Administrative Federal Court wrongly failed to consider the earlier favorable decision in making its revised ruling and also failed to consider the length and limits of this trackage rights included in KCSM’s Concession Title. The Company believes that based on its assessment of the facts in this case, there will be no material effect on KCS’ results of operations.

Claims Asserted under the TMM Acquisition Agreement. On September 24, 2007, KCS entered into a Settlement Agreement (“Agreement”) with Grupo TMM, S.A.B. (“TMM”, formerly Grupo TMM, S.A.), TMM Logistics, S.A. de C.V., a subsidiary of TMM, and Vex Asesores Corporativos, S.A. de C.V. (formerly Jose F. Serrano International Business, S.A. de C.V.) (the “Consulting Firm”), resolving certain claims and disputes over liabilities established as part of KCS’ acquisition of KCSM (successor by merger to Grupo KCSM). Pursuant to the terms of the Agreement, KCS agreed to pay TMM $54.1 million in cash to retire two notes totaling $86.6 million created at the closing of the KCSM acquisition to cover certain post-closing contingencies and tax liabilities. This agreement was primarily accounted for as a change to the final purchase price of KCS’ investment in KCSM. KCSM adjusted its purchase accounting assets and will reduce prospectively the amortization of these assets over approximately the next twenty four years. In addition, the parties also agreed to terminate the consulting agreement between KCS and the Consulting Firm and make the final annual

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)

payment of $3.0 million due December 15, 2007, payable on settlement. The settlement amount of $57.1 million was paid by KCS to TMM on October 1, 2007.

Acquisition of Locomotives. In August 2006, KCSR entered into an agreement with Electro-Motive Diesel, Inc. (“EMD”) to acquire 30 new locomotives at a cost of $62.1 million. Of the 30 locomotives, 20 have been delivered and financed through an operating lease as of September 30, 2007 with the remainder to be delivered in October and November of 2007. The company intends to finance the remaining 10 locomotives through an operating lease.

In April 2007, KCSR and KCSM entered into a definitive purchase agreement with EMD to acquire 70 locomotives for delivery in October 2007 through April 2008 at an aggregate cost of approximately $144.9 million. KCSR will acquire 30 of these locomotives and KCSM will acquire the other 40. The Company intends to finance the acquisitions through operating leases.

In August 2007, KCSR and KCSM entered into a definitive purchase agreement with General Electric Company (“GE”) to acquire 80 locomotives with delivery beginning in September of 2007 continuing through August 2008 at an aggregate cost of approximately $174 million, with 30 delivered to KCSR and the remaining 50 delivered to KCSM. In September of 2007, KCSR received all 30 locomotives and has financed them through an operating lease. KCSM received nine locomotives in September, which have been recorded as assets held for sale. KCSM intends to finance the acquisitions with operating leases.

Panama Canal Railway Company. Under the terms of a loan agreement with the International Finance Corporation (“IFC”), the Company is a guarantor for up to $3.9 million of the IFC debt of Panama Canal Railway Company (“PCRC”). Also, if PCRC terminates its concession contract with the Panamanian government without the IFC’s consent, KCS is a guarantor for up to $9.5 million of the outstanding senior loans. The Company is also a guarantor for up to $0.3 million of PCRC equipment loans and capital leases, and has issued three irrevocable letters of credit totaling approximately $2.8 million to fulfill the Company’s fifty percent guarantee of equipment loans.


8.	Income Taxes.

In June 2006, the Financial Accounting Standards Board issued Interpretation Number 48 “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109, Accounting for Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires the Company to recognize in the financial statements the benefit of a tax position only if the impact is more likely than not of being sustained on audit based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.

The provisions of FIN 48 were effective for KCS beginning January 1, 2007. The Company recognized a cumulative effect of the change in accounting principle of $1.3 million recorded as a decrease to opening retained earnings. The total unrecognized tax benefit as of January 1, 2007 was $26.3 million of which $5.1 million would impact the effective tax rate if recognized.

The Company recorded a $3.9 million increase in unrecognized tax benefits in the second quarter due to uncertainty regarding the timing of deducting certain reserves. The increase to unrecognized tax benefits would have no impact on the effective tax rate if recognized.

Within the next twelve months the company anticipates a tax examination will be settled which will result in a decrease in unrecognized tax benefits of approximately $12 million. The tax examination settlement is expected to have an immaterial affect on the effective tax rate.

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)

Tax returns filed in the United States from 1997 through the current year remain open to examination by the Internal Revenue Service. Tax returns filed in Mexico from 2001 through the current year remain open to examination by the taxing authorities in Mexico.

Interest and penalties related to uncertain tax positions are included in income before taxes on the income statement. Accrued interest and penalties as of the date of adoption was $13.5 million with an increase of $2.7 million in 2007.

On October 1, 2007 the Entrepreneurial Tax of Unique Rate (referred to by its Spanish acronym, IETU or “Flat Tax”) in Mexico was published. The Flat Tax law will be effective on January 1, 2008 and replaces the Asset Tax law. The Flat Tax applies to a different tax base than the income tax and will be paid if the Flat Tax exceeds the income tax computed under existing law. Additional secondary laws and clarifying rulings will be published before the effective date of the Flat Tax. The Company is assessing various tax alternatives and is awaiting additional rulings expected to be issued in the fourth quarter. The Company is currently unable to determine with certainty the full impact of the new tax law and whether it will have a material effect on the consolidated financial statements.


9.	Business Segments.

The accompanying segment reporting information (in millions) has been prepared and presented pursuant to Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Operating units are defined as either U.S. or Mexico segments. Appropriate eliminations of revenue and reclassifications of operating revenues and expenses have been recorded in deriving consolidated data. The U.S. segment consists primarily of KCSR and The Texas Mexican Railway Company (“Tex-Mex”). The Mexico segment consists of KCSM and Arrendadora KCSM, S.A. de C.V. (“Arrendadora”).


	Three Months Ended September 30, 2007
	U.S.		Mexico		Elimination			Consolidated

Revenue	$	234.3	$	209.8	$	—		$	444.1

Operating expenses:
Compensation and benefits		68.0		36.7		—			104.7
Purchased services		25.6		26.6		(4.3	)		47.9
Fuel		36.4		30.2		—			66.6
Equipment costs		17.9		25.5		0.3			43.7
Depreciation and amortization		15.5		23.4		—			38.9
Casualties and insurance		13.5		2.4		—			15.9
Materials and other costs		21.5		2.4		4.3			28.2

Total operating expenses		198.4		147.2		0.3			345.9

Operating income	$	35.9	$	62.6	$	(0.3	)	$	98.2

Income before income taxes and minority interest	$	22.4	$	41.9	$	—		$	64.3

Capital expenditures		50.3		30.0		—			80.3

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)


	Three Months Ended September 30, 2006
	U.S.		Mexico		Elimination			Consolidated

Revenue	$	224.8	$	190.9	$	—		$	415.7

Operating expenses:
Compensation and benefits		65.6		30.9		—			96.5
Purchased services		22.3		33.1		1.2			56.6
Fuel		37.9		28.5		—			66.4
Equipment costs		19.4		26.7		—			46.1
Depreciation and amortization		16.1		21.6		—			37.7
Casualties and insurance		8.1		3.9		—			12.0
Materials and other costs		20.1		4.2		(1.2	)		23.1

Total operating expenses		189.5		148.9		—			338.4

Operating income	$	35.3	$	42.0	$	—		$	77.3

Income before income taxes and minority interest	$	21.3	$	24.9	$	—		$	46.2

Capital expenditures		18.6		28.9		—			47.5


	Nine Months Ended September 30, 2007
	U.S.		Mexico		Elimination			Consolidated

Revenue	$	683.1	$	599.4	$	—		$	1,282.5

Operating expenses:
Compensation and benefits		196.3		106.8		—			303.1
Purchased services		72.6		77.6		(12.5	)		137.7
Fuel		106.2		88.6		—			194.8
Equipment costs		58.9		78.2					137.1
Depreciation and amortization		47.0		70.8		—			117.8
Casualties and insurance		43.1		9.7		—			52.8
Materials and other costs		58.7		14.3		12.5			85.5

Total operating expenses		582.8		446.0		—			1,028.8

Operating income	$	100.3	$	153.4	$	—		$	253.7

Income before income taxes and minority interest	$	60.0	$	80.0	$	—		$	140.0

Total assets	$	2,394.2	$	2,428.1	$	(46.7	)	$	4,775.6
Total liabilities		1,788.6		1,157.1		(46.7	)		2,899.0
Capital expenditures		132.7		80.3		—			213.0

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)


	Nine Months Ended September 30, 2006
	U.S.		Mexico		Elimination			Consolidated

Revenue	$	655.7	$	561.6	$	—		$	1,217.3

Operating expenses:
Compensation and benefits		194.4		94.7		—			289.1
Purchased services		63.7		96.6		3.6			163.9
Fuel		105.3		82.5		—			187.8
Equipment costs		62.9		67.2		—			130.1
Depreciation and amortization		46.7		66.2		—			112.9
Casualties and insurance		29.9		10.2		—			40.1
Materials and other costs		60.5		20.4		(3.6	)		77.3

Total operating expenses		563.4		437.8		—			1,001.2

Operating income	$	92.3	$	123.8	$	—		$	216.1

Income before income taxes and minority interest	$	47.4	$	51.3	$	—		$	98.7

Total assets	$	2,241.7	$	2,401.2	$	(117.5	)	$	4,525.4
Total liabilities		1,848.2		1,164.8		(117.5	)		2,895.5
Capital expenditures		93.5		57.4		—			150.9

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)


10.	Condensed Consolidating Financial Information.

KCSR has outstanding $200.0 million of 91/2% Senior Notes due 2008 and $200.0 million of 71/2% Senior Notes due 2009. These notes are unsecured obligations of KCSR, however, they are also jointly and severally and fully and unconditionally guaranteed on an unsecured senior basis by KCS and certain wholly-owned domestic subsidiaries. For each of these note issues, KCSR registered exchange notes with the SEC that have substantially identical terms and associated guarantees and all of the initial senior notes for each issue have been exchanged for $200.0 million of registered exchange notes for each respective note issue.

The accompanying condensed consolidating financial information (in millions) has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantors and affiliates whose securities collateralize an issue registered or being registered.” This condensed information is not intended to present the financial position, results of operations and cash flows of the individual companies or groups of companies in accordance with U.S. GAAP.

CONDENSED CONSOLIDATING STATEMENTS OF INCOME


	Three Months Ended September 30, 2007
							Guarantor			Non-Guarantor			Consolidating			Consolidated
	Parent			KCSR			Subsidiaries			Subsidiaries			Adjustments			KCS

Revenues	$	—		$	209.6		$	4.1		$	238.3		$	(7.9	)	$	444.1
Operating expenses		6.3			170.5			5.4			171.3			(7.6	)		345.9

Operating income (loss)		(6.3	)		39.1			(1.3	)		67.0			(0.3	)		98.2
Equity in net earnings of unconsolidated affiliates		51.0			0.4			—			2.3			(50.4	)		3.3
Interest income (expense)		1.2			(17.0	)		(0.3	)		(21.7	)		0.5			(37.3	)
Debt retirement costs		—			—			—			—			—			—
Foreign exchange loss		—			—			—			(1.9	)		—			(1.9	)
Other income (expense)		(0.2	)		0.1			—			2.3			(0.2	)		2.0

Income (loss) before income taxes and minority interest		45.7			22.6			(1.6	)		48.0			(50.4	)		64.3
Income tax expense (benefit)		(1.1	)		8.4			(0.6	)		10.8			—			17.5

Income (loss) before minority interest		46.8			14.2			(1.0	)		37.2			(50.4	)		46.8
Minority interest		0.1			—			—			—			—			0.1

Net income (loss)	$	46.7		$	14.2		$	(1.0	)	$	37.2		$	(50.4	)	$	46.7

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)


	Three Months Ended September 30, 2006
							Guarantor			Non-Guarantor			Consolidating			Consolidated
	Parent			KCSR			Subsidiaries			Subsidiaries			Adjustments			KCS

Revenues	$	—		$	199.3		$	2.5		$	218.3		$	(4.4	)	$	415.7
Operating expenses		2.9			159.6			4.9			175.4			(4.4	)		338.4

Operating income (loss)		(2.9	)		39.7			(2.4	)		42.9			—			77.3
Equity in net earnings of unconsolidated affiliates		34.1			0.9			—			0.5			(32.3	)		3.2
Interest expense		(1.2	)		(16.9	)		(0.3	)		(24.3	)		0.4			(42.3	)
Foreign exchange gain		—			—			—			4.5			—			4.5
Other income		0.2			1.2			—			2.5			(0.4	)		3.5

Income (loss) before income taxes and minority interest		30.2			24.9			(2.7	)		26.1			(32.3	)		46.2
Income tax expense (benefit)		(1.3	)		9.2			(1.0	)		7.8			—			14.7

Income (loss) before minority interest		31.5			15.7			(1.7	)		18.3			(32.3	)		31.5
Minority interest		0.2			—			—			—			—			0.2

Net income (loss)	$	31.3		$	15.7		$	(1.7	)	$	18.3		$	(32.3	)	$	31.3


	Nine Months Ended September 30, 2007
							Guarantor			Non-Guarantor			Consolidating			Consolidated
	Parent			KCSR			Subsidiaries			Subsidiaries			Adjustments			KCS

Revenues	$	—		$	611.2		$	9.2		$	684.2		$	(22.1	)	$	1,282.5
Operating expenses		18.0			505.7			14.2			512.0			(21.1	)		1,028.8

Operating income (loss)		(18.0	)		105.5			(5.0	)		172.2			(1.0	)		253.7
Equity in net earnings of unconsolidated affiliates		113.0			1.6			—			4.7			(112.1	)		7.2
Interest expense		(1.8	)		(46.9	)		(1.0	)		(70.0	)		1.4			(118.3	)
Debt retirement costs		—			—			—			(6.9	)		—			(6.9	)
Foreign exchange loss		—			—			—			(1.6	)		—			(1.6	)
Other income (expense)		(0.5	)		1.3			—			5.5			(0.4	)		5.9

Income (loss) before income taxes and minority interest		92.7			61.5			(6.0	)		103.9			(112.1	)		140.0
Income tax expense (benefit)		(6.7	)		23.5			(2.3	)		26.1			—			40.6

Income (loss) before minority interest		99.4			38.0			(3.7	)		77.8			(112.1	)		99.4
Minority interest		0.3			—			—			—			—			0.3

Net income (loss)	$	99.1		$	38.0		$	(3.7	)	$	77.8		$	(112.1	)	$	99.1

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)


	Nine Months Ended September 30, 2006
							Guarantor			Non-Guarantor			Consolidating			Consolidated
	Parent			KCSR			Subsidiaries			Subsidiaries			Adjustments			KCS

Revenues	$	—		$	585.4		$	7.7		$	639.6		$	(15.4	)	$	1,217.3
Operating expenses		11.9			481.3			14.6			508.8			(15.4	)		1,001.2

Operating income (loss)		(11.9	)		104.1			(6.9	)		130.8			—			216.1
Equity in net earnings (losses) of unconsolidated affiliates		81.7			(0.7	)		—			3.9			(79.2	)		5.7
Interest expense		(4.9	)		(48.1	)		(0.9	)		(70.7	)		1.1			(123.5	)
Debt retirement costs		—			(2.2	)		—			—			—			(2.2	)
Foreign exchange loss		—			—			—			(6.7	)		—			(6.7	)
Other income		0.6			4.3			—			5.5			(1.1	)		9.3

Income (loss) before income taxes and minority interest		65.5			57.4			(7.8	)		62.8			(79.2	)		98.7
Income tax expense (benefit)		(3.0	)		19.4			(2.7	)		16.5			—			30.2

Income (loss) before minority interest		68.5			38.0			(5.1	)		46.3			(79.2	)		68.5
Minority interest		0.2			—			—			—			—			0.2

Net income (loss)	$	68.3		$	38.0		$	(5.1	)	$	46.3		$	(79.2	)	$	68.3

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)

CONDENSED CONSOLIDATING BALANCE SHEETS


	September 30, 2007
						Guarantor			Non-Guarantor		Consolidating			Consolidated
	Parent			KCSR		Subsidiaries			Subsidiaries		Adjustments			KCS

*Assets:*
Current assets	$	25.0		$	231.5	$	3.3		$	334.0	$	(0.4	)	$	593.4
Investments		2,038.8			426.9		—			453.1		(2,851.4	)		67.4
Property and equipment, net		0.6			1,275.4		221.4			1,195.1		(0.5	)		2,692.0
Concession assets, net		—			—		—			1,230.6		—			1,230.6
Other assets		1.5			27.5		0.2			163.0		—			192.2

Total assets	$	2,065.9		$	1,961.3	$	224.9		$	3,375.8	$	(2,852.3	)	$	4,775.6

*Liabilities and equity:*
Current liabilities	$	410.8		$	119.6	$	136.5		$	266.5	$	(0.3	)	$	933.1
Long-term debt		0.2			407.6		0.5			887.4		—			1,295.7
Payables to affiliates		—			—		—			—		—			—
Deferred income taxes		(41.8	)		384.4		74.2			7.4		—			424.2
Other liabilities		24.2			92.8		14.9			114.1		—			246.0
Minority interest		0.8			31.4		—			201.8		(29.1	)		204.9
Stockholders’ equity		1,671.7			925.5		(1.2	)		1,898.6		(2,822.9	)		1,671.7

Total liabilities and equity	$	2,065.9		$	1,961.3	$	224.9		$	3,375.8	$	(2,852.3	)	$	4,775.6


	December 31, 2006
							Guarantor		Non-Guarantor			Consolidating			Consolidated
	Parent			KCSR			Subsidiaries		Subsidiaries			Adjustments			KCS

*Assets:*
Current assets	$	4.8		$	253.4		$	4.8	$	355.8		$	(12.8	)	$	606.0
Investments		1,952.3			429.9			—		450.8			(2,768.1	)		64.9
Property and equipment, net		0.6			1,163.7			227.9		1,060.5			(0.5	)		2,452.2
Concession assets, net		—			—			—		1,303.3			—			1,303.3
Other assets		5.0			31.4			—		174.5			—			210.9

Total assets	$	1,962.7		$	1,878.4		$	232.7	$	3,344.9		$	(2,781.4	)	$	4,637.3

*Liabilities and equity:*
Current liabilities	$	353.4		$	(229.5	)	$	140.1	$	386.1		$	(12.7	)	$	637.4
Long-term debt		0.2			733.4			0.6		897.6			—			1,631.8
Payables to affiliates		32.4			—			—		—			—			32.4
Deferred income taxes		(10.4	)		361.0			76.5		(9.8	)		—			417.3
Other liabilities		4.7			94.5			13.0		123.8			(0.3	)		235.7
Minority interest		—			31.4			—		100.3			(31.4	)		100.3
Stockholders’ equity		1,582.4			887.6			2.5		1,846.9			(2,737.0	)		1,582.4

Total liabilities and equity	$	1,962.7		$	1,878.4		$	232.7	$	3,344.9		$	(2,781.4	)	$	4,637.3

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30, 2007
							Guarantor			Non-Guarantor			Consolidating		Consolidated
	Parent			KCSR			Subsidiaries			Subsidiaries			Adjustments		KCS

*Operating activities:*
Excluding intercompany activity	$	(37.9	)	$	158.7		$	2.6		$	172.9		$	—	$	296.3
Intercompany activity		55.2			(17.8	)		(2.4	)		(35.0	)		—		—

Net cash provided		17.3			140.9			0.2			137.9			—		296.3

*Investing activities:*
Capital expenditures		—			(126.2	)		(0.2	)		(86.6	)		—		(213.0	)
Proceeds from disposal of property		—			5.3			—			4.1			—		9.4
Contribution from NS for MSLLC (net of change in restricted contribution)		—			—			—			100.0			—		100.0
Property investments in MSLLC		—			—			—			(87.7	)		—		(87.7	)
Other, net		—			(7.6	)		—			3.4			—		(4.2	)

Net cash used		—			(128.5	)		(0.2	)		(66.8	)		—		(195.5	)

*Financing activities:*
Proceeds from issuance of long-term debt		—			75.0			—			211.7			—		286.7
Repayment of long-term debt		—			(75.3	)		—			(237.6	)		—		(312.9	)
Debt costs		—			(3.6	)		—			(16.1	)		—		(19.7	)
Proceeds from stock plans		0.7			—			—			—			—		0.7
Dividends paid		(18.4	)		—			—			—			—		(18.4	)

Net cash used		(17.7	)		(3.9	)		—			(42.0	)		—		(63.6	)

Cash and cash equivalents:
Net increase (decrease)		(0.4	)		8.5			—			29.1			—		37.2
At beginning of year		0.2			36.2			—			42.6			—		79.0

At end of period	$	(0.2	)	$	44.7		$	—		$	71.7		$	—	$	116.2

Kansas City Southern

Notes to Consolidated Financial Statements — (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30, 2006
							Guarantor			Non-Guarantor			Consolidating		Consolidated
	Parent			KCSR			Subsidiaries			Subsidiaries			Adjustments		KCS

*Operating activities:*
Excluding intercompany activity	$	(132.5	)	$	269.9		$	1.6		$	31.5		$	—	$	170.5
Intercompany activity		172.8			(183.9	)		(0.6	)		11.7			—		—

Net cash provided		40.3			86.0			1.0			43.2			—		170.5

*Investing activities:*
Capital expenditures		—			(65.8	)		(0.2	)		(84.9	)		—		(150.9	)
Proceeds from disposal of property		—			—			—			0.4			—		0.4
Contribution from NS for MSLLC (net of change in restricted contribution)		—			—			—			51.3			—		51.3
Property investments in MSLLC		—			—			—			(13.8	)		—		(13.8	)
Other, net		—			7.8			—			13.7			—		21.5

Net cash used		—			(58.0	)		(0.2	)		(33.3	)		—		(91.5	)

*Financing activities:*
Proceeds from issuance of long- term debt		—			246.1			—			28.3			—		274.4
Repayment of long-term debt		(44.0	)		(265.0	)		—			(6.9	)		—		(315.9	)
Debt costs		—			(7.5	)		—			—			—		(7.5	)
Proceeds from stock plans		7.4			—			—			—			—		7.4
Dividends paid		(4.3	)		—			—			—			—		(4.3	)

Net cash provided (used)		(40.9	)		(26.4	)		—			21.4			—		(45.9	)

Cash and cash equivalents:
Net increase (decrease)		(0.6	)		1.6			0.8			31.3			—		33.1
At beginning of year		0.7			20.7			(0.9	)		10.6			—		31.1

At end of period	$	0.1		$	22.3		$	(0.1	)	$	41.9		$	—	$	64.2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

Kansas City Southern:

We have reviewed the accompanying consolidated balance sheet of Kansas City Southern and subsidiaries (the Company) as of September 30, 2007, the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2007 and 2006, and the related consolidated statements of cash flows for the nine-month periods ended September 30, 2007 and 2006. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

As discussed in note 8 to the consolidated interim financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, effective January 1, 2007.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2006, and the related consolidated statements of income, stockholders’ equity and comprehensive income and cash flows for the year then ended (not presented herein); and in our report dated February 26, 2007, we expressed an unqualified opinion on those consolidated financial statements. Our report refers to the Company’s adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, effective January 1, 2006. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2006 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

KPMG LLP

Kansas City, Missouri

October 25, 2007


Item 2.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations.*

The discussion below, as well as other portions of this Form 10-Q, contain forward-looking statements that are not based upon historical information. Such forward-looking statements are based upon information currently available to management and management’s perception thereof as of the date of this Form 10-Q. Readers can identify these forward-looking statements by the use of such verbs as “expects,” “anticipates,” “believes” or similar verbs or conjugations of such verbs. The actual results of operations of Kansas City Southern (“KCS” or the “Company”) could materially differ from those indicated in forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s annual report on Form 10-K for the year ended December 31, 2006, which is on file with the U.S. Securities and Exchange Commission (File No. 1-4717) incorporated by reference and in Part II Item 1A — “Risk Factors” in the Form 10-K and this Form 10-Q. Readers are strongly encouraged to consider these factors when evaluating forward-looking statements. Forward-looking statements contained in this Form 10-Q will not be updated.

This discussion is intended to clarify and focus on the Company’s results of operations, certain changes in its financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included under Item 1 of this Form 10-Q. This discussion should be read in conjunction with those consolidated financial statements and the related notes, and is qualified by reference to them.

Critical Accounting Policies and Estimates.

The Company’s discussion and analysis of its financial position and results of operations is based upon its consolidated financial statements. The preparation of the financial statements requires estimation and judgment that affect the reported amounts of revenue, expenses, assets, and liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the accounting for assets and liabilities that are not readily apparent from other sources. If the estimates differ materially from actual results, the impact on the consolidated financial statements may be material. The Company’s critical accounting policies are disclosed in the 2006 annual report on Form 10-K. There have been no significant changes with respect to these policies during the first nine months of 2007.

Overview.

KCS operates under two reportable business segments, which are defined geographically as United States (“U.S.”) and Mexico. The U.S. segment consists primarily of The Kansas City Southern Railway Company (“KCSR”), Mexrail Inc. (“Mexrail”), and Meridian Speedway, LLC (“MSLLC”), while the Mexico segment includes primarily Kansas City Southern de México, S.A. de C.V. (“KCSM”) and Arrendadora KCSM, S.A. de C.V. (“Arrendadora”). In both the U.S. and the Mexico segments, the Company generates revenues and cash flows by providing customers with freight delivery services throughout North America directly and through connections with other rail carriers. Customers conduct business in a number of different industries, including electric-generating utilities, chemical and petroleum products, paper and forest products, agriculture and mineral products, automotive products and intermodal transportation. Appropriate eliminations and reclassifications have been recorded in deriving consolidated financial statements. Each of these segments is comprised of companies with separate boards of directors, operates and serves different geographical regions, and is subject to different customs, laws and tax regulations.

Third Quarter Analysis.

The Company reported quarterly earnings of $0.48 per diluted share on consolidated net income of $46.7 million for the three months ended September 30, 2007 compared to quarterly earnings of $0.32 per diluted share on consolidated net income of $31.3 million for the same period ended 2006. The revenue growth of 6.8% over the third quarter 2006 was primarily driven by price increases.

Cash flows from operations increased to $296.3 million as compared to $170.5 million for the nine month periods ended September 30, 2007 and 2006, respectively, an increase of $125.8 million. The increase is primarily due to increased net income and a reduction in working capital. Capital expenditures are a significant use of cash flows due to the capital intensive nature of railroad operations. Cash used for capital expenditures for the nine months ended September 30, 2007 was $213.0 million as compared to $150.9 million for the same period in 2006.

Results of Operations.

Consolidated net income for the third quarter of 2007 increased $15.4 million compared to the prior year third quarter.

The following summarizes KCS’ income statement (in millions):


	Three Months Ended
	September 30,						Change
	2007			2006			Dollars			Percent

Revenues	$	444.1		$	415.7		$	28.4			7	%
Operating expenses		345.9			338.4			7.5			2	%

Operating income		98.2			77.3			20.9			27	%
Equity in net earnings of unconsolidated affiliates		3.3			3.2			0.1			3	%
Interest expense		(37.3	)		(42.3	)		(5.0	)		(12	)%
Foreign exchange gain (loss)		(1.9	)		4.5			(6.4	)		(142	)%
Other income		2.0			3.5			(1.5	)		(43	)%

Income before income taxes and minority interest		64.3			46.2			18.1			39	%
Income tax expense		17.5			14.7			2.8			19	%

Income before minority interest		46.8			31.5			15.3			49	%
Minority interest		0.1			0.2			(0.1	)		(50	)%

Net income	$	46.7		$	31.3		$	15.4			49	%

Consolidated net income for the nine months ended September 30, 2007 increased $30.8 million compared to the same period in 2006. The following summarizes the consolidated income statement components of KCS (in millions):


	Nine Months Ended
	September 30,						Change
	2007			2006			Dollars			Percent

Revenues	$	1,282.5		$	1,217.3		$	65.2			5	%
Operating expenses		1,028.8			1,001.2			27.6			3	%

Operating income		253.7			216.1			37.6			17	%
Equity in net earnings of unconsolidated affiliates		7.2			5.7			1.5			26	%
Interest expense		(118.3	)		(123.5	)		(5.2	)		(4	)%
Debt retirement costs		(6.9	)		(2.2	)		4.7			214	%
Foreign exchange loss		(1.6	)		(6.7	)		5.1			76	%
Other income		5.9			9.3			(3.4	)		(37	)%

Income before income taxes and minority interest		140.0			98.7			41.3			42	%
Income tax expense		40.6			30.2			10.4			34	%

Income before minority interest		99.4			68.5			30.9			45	%
Minority interest		0.3			0.2			0.1			50	%

Net income	$	99.1		$	68.3		$	30.8			45	%

U.S. Segment.

Revenues.

Revenues for the U.S. segment constituted 52.8% and 54.1% of KCS’ consolidated revenues for the quarter ended September 30, 2007 and 2006, respectively. The following summarizes U.S. revenues (in millions) and carload statistics (in thousands). Certain prior year amounts have been reclassified to reflect changes in the business groups to conform to the current year presentation.


	Revenues										Carloads and Intermodal Units
	Three Months										Three Months
	Ended September 30,				Change						Ended September 30,				Change
	2007		2006		Dollars			Percent			2007		2006		Units			Percent

Chemical and petroleum	$	47.4	$	41.3	$	6.1			15	%		37.1		34.9		2.2			6	%
Forest products and metals		64.8		62.8		2.0			3	%		46.7		52.5		(5.8	)		(11	)%
Agricultural and minerals		47.1		47.1		—			0	%		36.6		39.6		(3.0	)		(8	)%

Total general commodities		159.3		151.2		8.1			5	%		120.4		127.0		(6.6	)		(5	)%
Intermodal and automotive		18.8		20.4		(1.6	)		(8	)%		70.7		91.1		(20.4	)		(22	)%
Coal		43.9		38.1		5.8			15	%		73.1		70.0		3.1			4	%

Carload revenues, units and intermodal units		222.0		209.7		12.3			6	%		264.2		288.1		(23.9	)		(8	)%

Other revenue		12.3		15.1		(2.8	)		(19	)%

Total revenues(i)	$	234.3	$	224.8	$	9.5			4	%


(i) Included in revenues:
Fuel surcharge	$	20.2	$	25.5


	Revenues										Carloads and Intermodal Units
	Nine Months										Nine Months
	Ended September 30,				Change						Ended September 30,				Change
	2007		2006		Dollars			Percent			2007		2006		Units			Percent

Chemical and petroleum	$	137.8	$	121.8	$	16.0			13	%		109.9		104.6		5.3			5	%
Forest products and metals		185.5		185.2		0.3			0	%		139.4		156.5		(17.1	)		(11	)%
Agricultural and minerals		143.4		139.8		3.6			3	%		115.1		120.9		(5.8	)		(5	)%

Total general commodities		466.7		446.8		19.9			4	%		364.4		382.0		(17.6	)		(5	)%
Intermodal and automotive		54.1		55.9		(1.8	)		(3	)%		210.3		248.9		(38.6	)		(16	)%
Coal		125.1		109.8		15.3			14	%		214.2		205.0		9.2			4	%

Carload revenues, units and intermodal units		645.9		612.5		33.4			5	%		788.9		835.9		(47.0	)		(6	)%

Other revenue		37.2		43.2		(6.0	)		(14	)%

Total revenues(i)	$	683.1	$	655.7	$	27.4			4	%


(i) Included in revenues:
Fuel surcharge	$	57.0	$	61.4

U.S. operations experienced revenue increases primarily due to targeted rate increases partially offset by a decrease in carload volumes primarily related to haulage business in the Intermodal and automotive category. The following discussion provides an analysis of revenues by commodity group.

Chemical and petroleum. Revenues increased for chemical and petroleum products for the three and nine months ended September 30, 2007, due to strong price increases and increased traffic volumes, primarily in the petroleum, soda ash, and plastics products.

Forest products and metals. Revenues increased for forest products and metals for the three and nine months ended September 30, 2007 due to targeted rate increases primarily in paper products, partially offset by decreases in volume due to the declining housing market which negatively impacted lumber products.

Agricultural and minerals. Revenues remained consistent for the three months ended September 30, 2007 and increased for the nine months ended September 30, 2007, due to continued targeted rate adjustments and an increase in velocity over certain corridors and business sectors. Grain traffic accounts for the majority of the decrease in carloads while revenues related to grain traffic were flat. Shipments of building material commodities decreased for the nine months ended September 30, 2007, due to higher than normal shipments into hurricane affected areas for rebuilding purposes during the first quarter of 2006 and lower shipments due to extremely wet weather in the south slowing shipments, primarily in the third quarter of 2007.

Intermodal and automotive. Revenues decreased in the intermodal and automotive sectors for the three and nine months ended September 30, 2007. Decreases in the intermodal business unit were primarily due to the reduction in volume related to haulage business. The decrease in haulage business is expected to be partially offset in the fourth quarter of 2007 with new agreements. The decrease in the intermodal business unit for the three and nine months ended September 30, 2007 was primarily offset by increased volumes in the automotive business unit due to the increase in production of U.S. automotives.

Coal. Revenue increased for the three and nine months ended September 30, 2007, as a result of certain targeted rate increases related to renegotiated contracts and overall increases in carloadings to electric generating stations driven by strong demand.

Operating Expenses.

For the three and nine months ended September 30, 2007, U.S. operating expenses increased $8.9 million and $19.4 million when compared to the same period in 2006 as shown below (in millions).


	Three Months
	Ended September 30,				Change
	2007		2006		Dollars			Percent

Compensation and benefits	$	68.0	$	65.6	$	2.4			4	%
Purchased services		25.6		22.3		3.3			15	%
Fuel		36.4		37.9		(1.5	)		(4	)%
Equipment costs		17.9		19.4		(1.5	)		(8	)%
Depreciation and amortization		15.5		16.1		(0.6	)		(4	)%
Casualties and insurance		13.5		8.1		5.4			67	%
Materials and other costs		21.5		20.1		1.4			7	%

Total operating expenses	$	198.4	$	189.5	$	8.9			5	%


	Nine Months
	Ended September 30,				Change
	2007		2006		Dollars			Percent

Compensation and benefits	$	196.3	$	194.4	$	1.9			1	%
Purchased services		72.6		63.7		8.9			14	%
Fuel		106.2		105.3		0.9			1	%
Equipment costs		58.9		62.9		(4.0	)		(6	)%
Depreciation and amortization		47.0		46.7		0.3			1	%
Casualties and insurance		43.1		29.9		13.2			44	%
Materials and other costs		58.7		60.5		(1.8	)		(3	)%

Total operating expenses	$	582.8	$	563.4	$	19.4			3	%

Compensation and benefits. Compensation and benefits increased for the three and nine months ended September 30, 2007, compared to the same period in 2006, primarily due to annual wage and salary rate increases, new collective bargaining agreements which became effective in the third quarter, and higher healthcare costs. These increases were partially offset by a decrease in estimated labor costs following contract negotiations in the first and second quarter of 2007.

Purchased services. Purchased services increased for the three and nine months ended September 30, 2007, compared to the same period in 2006, primarily due to increased use of facilities jointly used by the Company and other railroads resulting from increased volume for those facilities, increases in the locomotive maintenance program, and additional outsourcing of related maintenance.

Fuel. Fuel expense decreased for the three months ended September 30, 2007, compared with the same period in 2006, primarily due to lower gross ton miles of freight and increased capitalization of fuel related to work trains used in the Company’s capital programs, partially offset by higher diesel fuel prices. Fuel expense increased for the nine months ended September 30, 2007 due to higher diesel fuel prices offset by lower gross ton miles of freight and increased fuel efficiency.

Equipment costs. Equipment costs decreased for the three months ended September 30, 2007, compared to the same period in 2006, primarily due to a decrease in locomotive short-term lease expense due to a reduction in short-term leased locomotives in addition to lower rates on the use of certain other short-term leased locomotives. Equipment costs decreased for the nine months ended September 30, 2007, compared to the same period in 2006, primarily due to a decrease in car hire expense during the first quarter of the year and a decrease in short-term leased locomotive expense in the third quarter. The decrease in car hire expense is due to decreased cycle times attributed to the effects of the hurricanes in the first quarter of 2006 and a decrease in the use of other railroads’ freight cars.

Depreciation and amortization. Depreciation and amortization decreased for the quarter ended September 30, 2007, compared to the same period in 2006, due to lower depreciation rates from a rate study completed in the fourth quarter of 2006. Depreciation and amortization increased for the nine months ended September 30, 2007, compared to the same period in 2006, due to an increase in the asset base partially offset by the lower depreciation rates from the rate study.

Casualties and insurance. Casualties and insurance expenses increased for the three and nine months ended September 30, 2007, compared to the same period in 2006, primarily due to a casualty reserve release recorded in the first quarter of 2006, higher derailment expense resulting from a large derailment in the first quarter of 2007 and increased derailment incidents in the second quarter of 2007. Increases were partially offset by proceeds received from the settlement of previously disclosed reinsurance litigation.

Materials and other costs. Materials and other expense increased for the three months ended September 30, 2007, compared to the same period in 2006, due to higher materials and supplies used for the maintenance of locomotives and freight cars which was partially offset by a decrease in state franchise tax expense. Materials and other expense decreased for the nine months ended September 30, 2007, compared to the same period in

2006, due to lower sales and use tax resulting from a favorable court ruling in the first quarter of 2007, lower state franchise tax expense, and a decrease in rental expense.

Mexico Segment.

Revenues.

Revenues for the Mexico segment constituted 47.2% and 45.9% of KCS’ consolidated revenues for the quarters ended September 30, 2007 and 2006, respectively. The following summarizes consolidated Mexico revenues (in millions) and carload statistics (in thousands). Certain prior year amounts have been reclassified to reflect changes in the business groups to conform to the current year presentation.


	Revenues										Carloads and Intermodal Units
	Three Months										Three Months
	Ended September 30,				Change						Ended September 30,				Change
	2007		2006		Dollars			Percent			2007		2006		Units			Percent

Chemical and petroleum	$	36.1	$	32.8	$	3.3			10	%		21.1		20.3		0.8			4	%
Forest products and metals		59.1		59.9		(0.8	)		(1	)%		48.3		55.5		(7.2	)		(13	)%
Agricultural and minerals		56.0		49.3		6.7			14	%		37.5		36.2		1.3			4	%

Total general commodities		151.2		142.0		9.2			6	%		106.9		112.0		(5.1	)		(5	)%
Intermodal and automotive		47.6		40.8		6.8			17	%		92.2		77.2		15.0			19	%
Coal		6.7		5.2		1.5			29	%		6.7		6.1		0.6			10	%

Carload revenues, units and intermodal units		205.5		188.0		17.5			9	%		205.8		195.3		10.5			5	%

Other revenue		4.3		2.9		1.4			48	%

Total revenues(i)	$	209.8	$	190.9	$	18.9			10	%


(i) Included in revenues:
Fuel surcharge	$	14.0	$	10.7


	Revenues										Carloads and Intermodal Units
	Nine Months										Nine Months
	Ended September 30,				Change						Ended September 30,				Change
	2007		2006		Dollars			Percent			2007		2006		Units			Percent

Chemical and petroleum	$	99.6	$	94.0	$	5.6			6	%		59.9		61.0		(1.1	)		(2	)%
Forest products and metals		185.2		181.7		3.5			2	%		157.7		178.4		(20.7	)		(12	)%
Agricultural and minerals		152.9		138.0		14.9			11	%		107.6		105.5		2.1			2	%

Total general commodities		437.7		413.7		24.0			6	%		325.2		344.9		(19.7	)		(6	)%
Intermodal and automotive		131.4		118.6		12.8			11	%		254.5		227.5		27.0			12	%
Coal		16.1		14.5		1.6			11	%		18.3		18.1		0.2			1	%

Carload revenues, units and intermodal units		585.2		546.8		38.4			7	%		598.0		590.5		7.5			1	%

Other revenue		14.2		14.8		(0.6	)		(4	)%

Total revenues(i)	$	599.4	$	561.6	$	37.8			7	%


(i) Included in revenues:
Fuel surcharge	$	38.6	$	29.8

Mexico operations experienced revenue increases primarily due to targeted rate increases and increased fuel surcharge participation, partially offset by a decrease in carload volumes primarily in the chemical and forest products and metals commodity groups. The following discussion provides an analysis of revenues by commodity group.

Chemical and petroleum. Revenues increased for chemical and petroleum products for the three months ended September 30, 2007, compared to the same period in 2006, due to strong price increases and increased volume, primarily in soda ash, organic acid, and plastics products. Revenue increased for the nine months ended September 30, 2007, compared to the same period in 2006, due to strong price increases partially offset by a reduction in volume due to higher demand in 2006 for fuel, oil, diesel, gasoline, and plastic products attributable to the late 2005 hurricanes which had impacted the Gulf Coast refineries.

Forest products and metals. Revenues in forest products and metals decreased during the three months ended September 30, 2007, compared to the same period in 2006, primarily due to the decline of export volumes of beer and steel. The decline in steel is attributed to a major customer’s plant shutdown for maintenance during the third quarter of 2007. Revenues increased during the nine months ended September 30, 2007, compared to the same period in 2006, due to the increase in long haul carloadings from Lázaro Cárdenas to Monterrey.

Agricultural and minerals. Revenues and volume from agricultural and minerals products increased during the three and nine months ended September 30, 2007, compared to the same period in 2006, due to price increases and a recovery in import shipments of soybean and sorghum products.

Intermodal and automotive. Revenues and volume increased for intermodal and automotive during the three and nine months ended September 30, 2007, compared to the same period in 2006, as a result of targeted rate increases and increases in traffic at the port of Lázaro Cárdenas. The increased traffic at the port can be attributed to two additional shipping customers and an increase in intermodal cross border business. Automotive volume has also increased due to major customers’ recovery in production.

Coal. Revenues increased during the three and nine months ended September 30, 2007, compared to the same period in 2006, as a result of new traffic from Lázaro Cárdenas to Nava, Coahuila.

Operating Expenses.

Mexico operating expenses decreased $1.7 million and increased $8.2 million for the three and nine months ended September 30, 2007 when compared to the same period in 2006 as shown below (in millions).


	Three Months
	Ended September 30,				Change
	2007		2006		Dollars			Percent

Compensation and benefits	$	36.7	$	30.9	$	5.8			19	%
Purchased services		26.6		33.1		(6.5	)		(20	)%
Fuel		30.2		28.5		1.7			6	%
Equipment costs		25.5		26.7		(1.2	)		(4	)%
Depreciation and amortization		23.4		21.6		1.8			8	%
Casualties and insurance		2.4		3.9		(1.5	)		(38	)%
Materials and other costs		2.4		4.2		(1.8	)		(43	)%

Total operating expenses	$	147.2	$	148.9	$	(1.7	)		(1	)%


	Nine Months
	Ended September 30,				Change
	2007		2006		Dollars			Percent

Compensation and benefits	$	106.8	$	94.7	$	12.1			13	%
Purchased services		77.6		96.6		(19.0	)		(20	)%
Fuel		88.6		82.5		6.1			7	%
Equipment costs		78.2		67.2		11.0			16	%
Depreciation and amortization		70.8		66.2		4.6			7	%
Casualties and insurance		9.7		10.2		(0.5	)		(5	)%
Materials and other costs		14.3		20.4		(6.1	)		(30	)%

Total operating expenses	$	446.0	$	437.8	$	8.2			2	%

Compensation and benefits. For the three months ended September 30, 2007, compensation and benefits increased compared to the same period in 2006, primarily due to increases in the statutory profit sharing, other fringe benefits and pension costs. These increases were partially offset by a decrease in incentive compensation expense. For the nine months ended September 30, 2007, compensation and benefits increased compared to the same period in 2006, primarily due to increases in the statutory profit sharing, incentive compensation expense, other fringe benefits, and pension costs.

Purchased services. Purchased services expense for the three and nine months ended September 30, 2007 decreased compared to the same periods in 2006. This decrease is due to a reclassification of certain customer switching and transloading costs as revenue deductions, lower telecommunications expenses, and a decrease in locomotive maintenance expenses. These decreases were partially offset by an increase in legal and management expenses.

Fuel. For the three and nine months ended September 30, 2007, fuel expense increased compared to the same period in 2006. Fuel expense was driven by higher diesel fuel price partially offset by lower gross ton miles per gallon due to changes in traffic mix.

Equipment costs. Equipment costs decreased for the three months ended September 30, 2007 due to a reduction in the use of foreign freight cars by KCSM and the increased use of KCSM freight cars by foreign roads. These decreases were partially offset by customer car hire billed at the border, which was reclassified to revenues in 2007. For the nine months ended September 30, 2007, equipment costs increased compared to the same period in 2006, primarily due to customer car hire billed at the border, which was reclassified to revenues in 2007.

Depreciation and amortization. Depreciation and amortization expenses for the three and nine months ended September 30, 2007 increased compared to the same periods in 2006, primarily due to an increase in the asset base offset by changes in the estimated lives recorded in the third quarter of 2007.

Casualties and insurance. Casualties and insurance expense for the three and nine months ended September 30, 2007 decreased compared to the same periods in 2006, due to lower cargo damage accruals as well as decreased premium expenses during 2007 driven by reductions in derailment incidents. These decreases were partially offset by an increase in environmental remediation expenses.

Materials and other costs. For the three and nine months ended September 30, 2007, materials and other cost expenses decreased compared with the same period in 2006. The decrease reflects changes to the allowances for freight receivables bad debt expense primarily due to favorable loss experience and fewer write offs of receivables acquired in the acquisition of KCSM.

Consolidated Non-Operating Expenses.

Equity in Net Earnings (Losses) of Unconsolidated Affiliates. Equity in earnings from unconsolidated affiliates was $3.3 million and $7.2 million for the three and nine month periods ended September 30, 2007,

compared to $3.2 million and $5.7 million for the same periods in 2006. Significant components of this change follow:


	•	Equity in earnings from the operations of PCRC was $1.4 million and $3.1 million for the three and nine month periods ended September 30, 2007. Loss in earnings was $0.3 million for the three months ended September 30, 2006. This loss, when aggregated with a gain of $0.3 million for the first six months of 2006, resulted in a net equity in earnings balance of $0 for the nine months ended September 30, 2006. The increase is primarily due to increased freight revenue driven by higher volume.

	•	Equity in earnings of Southern Capital Corporation, LLC (“Southern Capital”) was $0.9 million and $3.4 million for the three and nine month periods ended September 30, 2007, compared to $2.5 million and $3.8 million for the same periods in 2006. The decrease primarily reflects a reduction in lease income attributed to fewer assets being leased by its partners.

	•	KCSM’s equity in earnings of Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”) was $1.0 million and $0.7 million for the three and nine month periods ended September 30, 2007, compared to $1.0 million and $1.9 million for the same periods in 2006. The decrease for the nine months ended September 30, 2007 is due to a prior year loss recorded in the first quarter of 2007 by FTVM and lower revenue in the second quarter attributable to a decrease in storage container revenue.

Consolidated Interest Expense. Interest expense decreased for the three and nine months ended September 30, 2007, compared to the same periods in 2006. The decrease for the three month period is primarily due to KCSM’s refinancing of higher interest rate debt in June of 2007 and November of 2006 and the reversal of interest expense previously accrued related to KCSM acquisition contingencies. The decrease for the nine month period is primarily due to a favorable summary judgment which resulted in the reversal of previously accrued interest expense related to a tax matter in the first quarter of 2007, the refinancing of KCSM’s higher rate debt, and the reversal of interest expense previously accrued related to KCSM acquisition contingencies.

Consolidated Debt Retirement Costs. There were no debt retirement costs incurred during the three months ended September 30, 2007 and 2006, respectively. Debt retirement costs increased for the nine month period ended September 30, 2007 as compared to the same period in 2006. In June of 2007, KCSM redeemed its 121/2% Senior Notes due in 2012 and entered into a new bank credit agreement. As a result of these extinguishments of debt, there was a net $6.9 million write-off of debt retirement costs. Included in the debt retirement costs was a charge of $16.7 million for the call premium on the bonds, which was offset by a write-down of a related $9.8 million of unamortized purchase accounting fair value effects associated with the 121/2% Senior Notes. During the second quarter of 2006, KCSR entered into an amended and restated credit agreement and wrote-off $2.2 million in unamortized debt issuance costs related to a previous credit agreement.

Foreign Exchange. For the three and nine months ended September 30, 2007, the foreign exchange loss was $1.9 million and $1.6 million respectively, compared to a gain of $4.5 million and a loss of $6.7 million for the same periods in 2006, due to fluctuations in the U.S. dollar versus the Mexican peso exchange rates.

Other Income. Other income for the three and nine months ended September 30, 2007 consists primarily of miscellaneous interest and dividend income. For the three and nine months ended September 30, 2006, other income consisted of miscellaneous interest income, dividend income, and royalty income.

Consolidated Income Tax Expense. For the three months ended September 30, 2007, the income tax provision was $17.5 million as compared to $14.7 million for the three months ended September 30, 2006. The effective income tax rate was 27.2% and 31.8% for the three months ended September 30, 2007 and 2006, respectively. The lower consolidated tax rate in the quarter was a result of an update to reflect changes in the peso exchange rate and a refinement of the forecasted inflation impact on receivables and payables in Mexico.

Liquidity and Capital Resources.

Overview.

KCS’ primary uses of cash are to support operations; maintain and improve its railroad and information systems infrastructure; pay debt service and preferred stock dividends; acquire new and maintain existing locomotives, rolling stock and other equipment; and meet other obligations. See “Cash Flow Information” below.

KCS’ primary sources of liquidity are cash flows generated from operations, borrowings under its revolving credit facilities and access to debt and equity capital markets. Although KCS has had excellent access to capital markets, as a highly leveraged company, the financial terms under which funding is obtained often contain restrictive covenants. The covenants constrain financial flexibility by restricting or prohibiting certain actions, including the ability to incur debt, create or suffer to exist liens, make prepayments of particular debt, pay dividends, make capital investments, engage in transactions with stockholders and affiliates, issue capital stock, sell certain assets, and engage in mergers and consolidations or in sale-leaseback transactions. On September 30, 2007, total available liquidity (the unrestricted cash balance plus revolving credit facility availability) was $282 million.

As of September 30, 2007, KCS had a debt ratio (total debt as a percentage of total debt plus equity) of 50.4% and was in compliance with all of its debt covenants. On February 15, 2007, the Company paid all of the preferred stock dividends that were in arrears. KCS is current, and expects to remain current, on all of its preferred stock dividend payments. In addition, the Company’s “well-known seasoned issuer” status was restored in April of 2007.

The Company believes, based on current expectations, that cash and other liquid assets, operating cash flows, access to existing revolving credit facilities, access to capital markets, and other available financing resources will be sufficient to fund anticipated operating, capital and debt service requirements and other commitments through 2007. However, KCS’ operating cash flow and financing alternatives can be unexpectedly impacted by various factors, some of which are outside of its control. For example, if KCS was to experience a substantial reduction in revenues or a substantial increase in operating costs or other liabilities, its operating cash flows could be significantly reduced. Additionally, the Company is subject to economic factors surrounding capital markets and its ability to obtain financing under reasonable terms is subject to market conditions. Further, KCS’ cost of debt can be impacted by independent rating agencies, which assign debt ratings based on certain credit measurements such as interest coverage and leverage ratios.

On September 25, 2007, Standard & Poor’s Ratings Services (“S&P”) changed KCS’ outlook to developing from positive and raised the corporate and other debt ratings of the Company. S&P raised the corporate rating to B+ from B, the senior secured debt rating to BB from BB-, the senior unsecured debt rating to B from B- and the preferred stock rating to CCC+ from CCC. In addition S&P raised the rating on KCSM’s senior unsecured debt to B+ from B.

During the third quarter, the Company reclassified the obligations outstanding under its Amended and Restated Credit Agreement dated April 28, 2006, as amended on May 31, 2007 (the “Credit Agreement”), from long term debt to current debt. The revolving credit facility, the swing line facility and the letter of credit facility have a final termination date of April 28, 2011 and the term loan B facility and the term loan C facility have a final termination date of April 28, 2013. However, the Credit Agreement provides for an earlier termination date that is 90 days prior to the earliest final maturity date of any outstanding 2000 Senior Notes and 2002 Senior Notes unless the facilities are rated at least Ba3 by Moody’s Investor Service (“Moody’s”) and BB+ by S&P (in each case, with at least stable outlooks) or prior to such date the 2000 Senior Notes and 2002 Senior Notes have been refinanced in full or an amount sufficient to indefeasibly repay such 2000 Senior Notes and 2002 Senior Notes has been deposited with the applicable bond trustee. The earliest final maturity date of the 2000 Senior Notes and 2002 Senior Notes is currently October 1, 2008. On May 14, 2007, Moody’s assigned the debt a rating of Ba2 and on September 25, 2007, S&P rated the debt BB. Based upon the aforementioned termination provision, the rating criteria of S&P was not met resulting in a maturity date

of July 3, 2008. The Company intends to refinance the 2000 Senior Notes prior to such date. As of September 30, 2007, the obligation reclassified from long term debt to current debt totaled $347.8 million.

Cash Flow Information.

Summary cash flow data follows (in millions):


	Nine Months Ended September 30,
	2007			2006

Cash flows provided by (used for):
Operating activities	$	296.3		$	170.5
Investing activities		(195.5	)		(91.5	)
Financing activities		(63.6	)		(45.9	)

Net increase in cash and cash equivalents		37.2			33.1
Cash and cash equivalents beginning of year		79.0			31.1

Cash and cash equivalents end of period	$	116.2		$	64.2

During the nine months ended September 30, 2007, the consolidated cash position increased $37.2 million from December 31, 2006, primarily attributable to strong cash flows from operating activities. As compared to the nine months ended September 30, 2006, cash flow from operating activities increased $125.8 million as a result of improved operating performance and a decrease in working capital. Net investing cash outflows increased $104.0 million due to a higher level of capital expenditures for both KCS and MSLLC. Financing activity cash outflows increased $17.7 million due to the increase in debt costs and the payment of preferred dividends.

KCS’ cash flow from operations has historically been positive and sufficient to fund operations, roadway capital expenditures, other capital improvements and debt service. External sources of cash (principally bank debt, public debt, preferred stock and leases) have been used to refinance existing indebtedness and to fund acquisitions, new investments and equipment additions.

Capital Expenditures.

Capital improvements for roadway track structures have historically been funded with cash flows from operations. KCS has historically used internally generated cash flows or leasing for equipment capital expenditures.

The following summarizes the cash capital expenditures by type (in millions):


	Nine Months Ended September 30,
	2007		2006

Track infrastructure	$	119.5	$	118.8
Locomotives, freight cars and other equipment		37.3		16.8
Facilities and capacity projects		31.0		4.0
Information technology		5.9		5.3
Other		19.3		6.0

Total capital expenditures	$	213.0	$	150.9

Other Matters.

Preferred Stock Dividends. The Company declared a cash dividend on its 4%, noncumulative Preferred Stock, payable October 2, 2007, to stockholders of record on September 10, 2007. On July 18, 2007, the

Company declared a cash dividend on its Series C Preferred Stock and its Series D Preferred Stock for stockholders of record on August 1, 2007, payable August 15, 2007.

Employee and Labor Relations. A negotiating process for new, major collective bargaining agreements covering all of KCSR’s union employees has been underway since the bargaining round was initiated November 1, 2004. Wages, health and welfare benefits, work rules and other issues have traditionally been addressed through industry-wide negotiations. KCSR participates as a member of the National Carrier’s Conference Committee representing the participating carriers. Long term agreement settlements have been reached during 2007 covering the majority of KCSR’s unionized work force. Negotiations are ongoing with two remaining unions representing KCSR employees. Existing agreements continue to remain in effect until new agreements are reached. Contract negotiations with the various unions generally take place over an extended period of time, and KCS rarely experiences work stoppages during negotiations.


Item 3.	*Quantitative and Qualitative Disclosures about Market Risk.*

There was no material change during the quarter from the information set forth in Part II, Item 7A. “Quantitative and Qualitative Disclosure about Market Risk” in the Annual Report on Form 10-K for the year ended December 31, 2006.


Item 4.	*Controls and Procedures.*

(a) Disclosure Controls and Procedures

As of the end of the fiscal quarter for which this Quarterly Report on Form 10-Q is filed, the Company’s Chief Executive Officer and Chief Financial Officer have each reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have each concluded that the Company’s current disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter for which this Quarterly Report on Form 10-Q is filed that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.


Item 4T.	*Controls and Procedures.*

Not applicable.

PART II — OTHER INFORMATION


Item 1.	*Legal Proceedings.*

For information related to the Company’s settlements and other legal proceedings, see Note 6, Commitments and Contingencies under Part I, Item 1, of this quarterly report on Form 10-Q.


Item 1A.	*Risk Factors.*

There were no material changes during the quarter in the Risk Factors disclosed in Item 1A — “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2006.


Item 2.	*Unregistered Sale of Equity Securities and Use of Proceeds.*

None


Item 3.	*Defaults upon Senior Securities.*

None


Item 4.	*Submission of Matters to a Vote of Security Holders.*

None


Item 5.	*Other Information.*

None


Item 6.	*Exhibits*


Exhibit No.
	10	.1	Settlement Agreement dated as of September 21, 2007, by and among KCS and Grupo TMM, S.A.B., TMM Logistics, S.A. de C.V., and VEX Asesores Corporativos, S.A. de C.V. (formerly José F. Serrano International Business, S.A. de C.V.) is attached to this Form 10-Q as Exhibit 10.1.
	10	.2	Kansas City Southern 1991 Amended and Restated Stock Option and Performance Award Plan, as amended and restated effective August 7, 2007, is attached to this Form 10-Q as Exhibit 10.2.
	15	.1	Letter regarding unaudited interim financial information is attached to this Form 10-Q as Exhibit 15.1.
	31	.1	Principal Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.1.
	31	.2	Principal Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.2.
	32	.1	Principal Executive Officer’s Certification furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.1.
	32	.2	Principal Financial Officer’s Certification furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.2.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacities indicated on October 26, 2007.

Kansas City Southern


		/s/ Patrick J. Ottensmeyer

Patrick J. Ottensmeyer

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

/s/ Michael K. Borrows

Michael K. Borrows

Senior Vice President and Chief Accounting Officer

(Principal Accounting Officer)

EX-10.1 2 c19484exv10w1.htm SETTLEMENT AGREEMENT exv10w1

Exhibit 10.1

SETTLEMENT AGREEMENT

THIS SETTLEMENT AGREEMENT (this “Agreement”) is dated and effective as of September 21, 2007 (the “Effective Date”), and is made and entered into by and among Kansas City Southern, Grupo TMM, S.A.B., TMM Logistics, S.A. de C.V., and Vex Asesores Corporativos, S.A. de C.V. (the “Parties”).

WHEREAS, Kansas City Southern (“KCS”) has filed a Demand for Arbitration asserting claims under Article 10 of the Parties’ Amended and Restated Acquisition Agreement, dated December 15, 2004 (“AAA”); and

WHEREAS, Grupo TMM, S.A.B and TMM Logistics, S.A. de C.V. (“TMML”) (collectively “TMM”) have filed a Demand for Arbitration asserting claims under Article 10 of the AAA; and

WHEREAS, the Parties are currently pursuing these claims in Grupo TMM, S.A.B. and TMM Logistics, S.A. de C.V. v. Kansas City Southern, Case No. 50 180 T 00158 07, American Arbitration Association, International Centre for Dispute Resolution (the “Arbitration”); and

WHEREAS, the Parties wish to settle and release all the claims asserted against each other in the Arbitration; and

WHEREAS, the Parties wish to terminate all relationships among them, including, without limitation, the Consulting Agreement between Kansas City Southern and Vex Asesores Corporativos, S.A. de C.V. (formerly, Jose F. Serrano International Business, S.A. de C.V.);

NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the Parties agree as follows:

VAT Escrow and Indemnity Escrow:

This Agreement and the documents contemplated by this Agreement are being executed by each Party at their respective company headquarters in Kansas City, Missouri and Mexico City on this date of September 21, 2007. At the signing of this Agreement, TMM and KCS are executing all documents required under the VAT Escrow Agreement entered into pursuant to the AAA (the “VAT Escrow”) to cause the Escrow Agent to terminate the VAT Escrow, returning the VAT Escrow Note to KCS and making no payment or other distribution therefrom to any other Party thereto. At the signing of the Agreement, TMM and KCS are also executing all documents, required under the Indemnity Escrow Agreement entered into pursuant to the AAA (the “Indemnity Escrow”) to cause the Escrow Agent to terminate the Indemnity Escrow, returning the Indemnity Escrow Notes to KCS and making no payment or other distribution therefrom to any other Party thereto.

	2.		Following execution of this Agreement and other documents as set forth in this Agreement, TMM and KCS shall take all action (including, without limitation, payment of the Escrow Agent’s fees), and execute any additional necessary documents later deemed necessary or required under the VAT Escrow and the Indemnity Escrow to carry out the purposes of this Agreement.

	3.		Upon the execution of this Agreement and other documents as set forth in this Agreement, KCS shall pay TMM the sum of $54,137,000, without fees or deductions of any kind, by wire transfer to Grupo TMM S.A.B. on or before October 1, 2007.

Claims in the Arbitration:

The Parties hereby release each other from all the claims that have been asserted in the Arbitration and agree to take all action necessary or required to dismiss the Arbitration.

Marketing and Services Agreement:

TMM consents and TMML and KCS agree to terminate and cause their respective subsidiaries and affiliates and joint venture companies to terminate the Marketing and Services Agreement entered into pursuant to the AAA.

Consulting Agreement and Consulting Escrow:

	6.		Vex Asesores Corporativos, S.A. de C.V. (“VAC”) and KCS agree to terminate the Consulting Agreement between KCS and VAC entered into pursuant to the AAA. VAC and KCS further agree to take all action (including without limitation payment of the Escrow Agent’s fees) and execute all additional documents later deemed necessary or required under the Consulting Compensation Escrow Agreement to terminate the Consulting Compensation Escrow Agreement, and cause the Escrow Agent named therein to return all funds retained therein to KCS, making no payment or other distribution therefrom to any other party thereto.

	7.		Upon the execution of this Agreement and other documents as set forth in this Agreement, KCS shall pay the sum of $3,000,000, without fees or deductions of any kind, by wire transfer to José F. Serrano International Business, S.A. de C.V. (presently Vex Asesores Corporativos, S.A. de C.V.)) on or before October 1, 2007.

General Release:

	8.		In consideration of the agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the KCS and TMM and TMML each forever release and discharge each other and each of their respective parents, subsidiaries, affiliates, directors, stockholders, officers, employees, agents and attorneys (collectively, the “Released Persons”) and the heirs, executors, administrators, successors and assigns of the Released Persons from any and all charges, complaints, claims, promises, suits, debts, sums of money, accounts, covenants, contracts, controversies, damages, judgments, rights, obligations, agreements and causes of action, whether known or unknown, whether contingent or liquidated, of every kind, nature or description arising by reason of any matter, cause or thing whatsoever at any time to the date of this Release. This Release includes, but is not limited to, any claim related to the AAA or any agreement, schedule, exhibit or other document related to the AAA, including the agreements designated in Section 12.2 of AAA, and any claim that was or could have been raised in the Arbitration and including any rights arising out of alleged violations or breaches of any express or implied agreement; breach of the implied covenant of good faith and fair dealing (other than for breach of this Agreement, which is expressly excluded from this Release); any tort; negligent or intentional misrepresentation; intentional or negligent interference with contractual relations. The Parties promise not to initiate a lawsuit or an arbitration or bring a claim against any of the other Released Persons in any court or otherwise relating to any action released under this provision, under any common law claim, whether in law or equity, or any federal, state or local statute, ordinance or rule of law.

	9.		In consideration of the agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, KCS and VAC each forever release and discharge each other and each of their respective parents, subsidiaries, affiliates, directors, stockholders, officers, employees, agents and attorneys (collectively, the “Released Persons”) and the heirs, executors, administrators, successors and assigns of the Released Persons from any and all charges, complaints, claims, promises, suits, debts, sums of money, accounts, covenants, contracts, controversies, damages, judgments, rights, obligations, agreements and causes of action, whether known or unknown, whether contingent or liquidated, of every kind, nature or description arising by reason of any matter, cause or thing whatsoever at any time to the date of this Release. This Release includes, but is not limited to, any claim related to the Consulting Compensation Escrow and the Consulting Agreement, the AAA or any agreement, schedule, exhibit or other document related to the AAA, including the agreements designated in Section 12.2 of AAA, and any claim that was or could have been raised in the Arbitration and

			including any rights arising out of alleged violations or breaches of any express or implied agreement; breach of the implied covenant of good faith and fair dealing (other than for breach of this Agreement, which is expressly excluded from this Release); any tort; negligent or intentional misrepresentation; intentional or negligent interference with contractual relations. The Parties promise not to initiate a lawsuit or an arbitration or bring a claim against any of the other Released Persons in any court or otherwise relating to any action released under this provision, under any common law claim, whether in law or equity, or any federal, state or local statute, ordinance or rule of law.

	10.		The General Releases in paragraphs 8 and 9 of this Agreement do not apply to any action initiated pursuant to paragraph 12 of this Agreement.

Miscellaneous Provisions:

	11.		This Agreement shall be governed by, construed, applied and enforced in accordance with the internal laws of the State of Delaware and no doctrine or choice of law shall be used to apply any law other than that of Delaware and no defense, counterclaim or right of setoff given or allowed by the laws of any other state or jurisdiction, arising out of the enactment, modification or repeal of any law, regulation, ordinance or decree of any foreign jurisdiction shall be interposed in any action hereon.

	12.		Any disputes arising under, or relating to, this Agreement shall be brought by either Party, to a court of competent jurisdiction in the State of Delaware. Both Parties waive their right to a trial by jury. Each Party hereby consents to personal jurisdiction in any such action brought in any Delaware court and waives any objection to venue in any Delaware court and any claim that Delaware is an inconvenient forum.

	13.		This Agreement is binding upon and inures to the benefit of the Parties, and their partners, directors, officers, employees, agents, heirs, successors, assigns, and representatives, and anyone claiming through them, and as part of the consideration therefore, the Parties expressly represent and warrant for themselves, their partners, directors, officers, employees, agents, heirs, successors, assigns, and representatives, and to each other, that: (a) they are legally competent and authorized to execute this Agreement, and (b) they have not assigned, pledged, or otherwise, in any manner whatsoever, sold or transferred, either by assignment in writing or otherwise, any right, title, interest or claim which they may have in claims, causes of actions, demands, contracts, promises, and obligations hereby released.

	14.		This Agreement and the documents contemplated by this Agreement constitutes the final and complete expression of all the terms of the agreement between the Parties with respect to the subject matter hereof. It supersedes all understandings and negotiations concerning the matters specified herein. Any representation, oral statement, promise, or warranty made by any Party that differs in any way from the terms of this Agreement shall not be binding unless made in writing and signed by a duly authorized representative of all Parties.

	15.		Any invalidity, in whole or in part, of any provision of this Agreement shall not affect the validity of any other of its provisions.

	16.		This Agreement is executed by the Parties in four originals, one for each Party and each of which is deemed an original for all purposes.

	17.		Given that the Parties have had the opportunity to draft, review, and edit the language of this Agreement, no presumption for or against any Party arising out of drafting all or any part of this Agreement will be applied in any action relevant to, connected to, or involving this Agreement.

EXECUTED for all purposes as of the Effective Date September 21, 2007:


		KANSAS		CITY SOUTHERN

		By: Name: Title:		/s/ Michael R. Haverty Michael R. Haverty Chairman and Chief Executive Office

		GRUPO TMM, S.A.B.

		By:		/s/ Javier Segovia Serrano

		Name: Title:		Javier Segovia Serrano Attorney-in-Fact

		TMM LOGISTICS, S.A. DE C.V.

		By:		/s/ Javier Segovia Serrano

		Name: Title:		Javier Segovia Serrano Attorney-in-Fact

		VEX ASESORES
		CORPORATIVOS, S.A.DE C.V.
		(Formerly: JOSE F.
		SERRANO INTERNATIONAL BUSINESS, S.A. de C.V.)

		By:		/s/ José F. Serrano Segovia

		Name: Title:		José F. Serrano Segovia Attorney-in-Fact

EX-10.2 3 c19484exv10w2.htm 1991 AMENDED AND RESTATED STOCK OPTION AND PERFORMANCE AWARD PLAN exv10w2

Exhibit 10.2

Kansas City Southern

1991 Amended and Restated Stock Option
and Performance Award Plan

(as amended and restated effective as of August 7, 2007)

Table of Contents


	Page
Article 1. Amendment and Restatement, Effective Date, Objectives and Duration		1
Article 2. Definitions		2
Article 3. Administration		8
Article 4. Shares Subject to the Plan and Maximum Awards		10
Article 5. Eligibility and General Conditions of Awards		11
Article 6. Stock Options		14
Article 7. Stock Appreciation Rights and Limited Stock Appreciation Rights		17
Article 8. Restricted Shares		18
Article 9. Performance Units and Performance Shares		19
Article 10. Bonus Shares		20
Article 11. Beneficiary Designation		20
Article 12. Deferrals		20
Article 13. Rights of Employees/Directors/Consultants		21
Article 14. Change of Control		21
Article 15. Amendment, Modification, and Termination		22
Article 16. Withholding		22
Article 17. Successors		24
Article 18. Additional Provisions		24

KANSAS CITY SOUTHERN
1991 AMENDED AND RESTATED STOCK OPTION
AND PERFORMANCE AWARD PLAN
(AS AMENDED AND RESTATED EFFECTIVE AS OF AUGUST 7, 2007)

Article 1. Amendment and Restatement, Effective Date, Objectives and Duration

1.1 Amendment and Restatement of the Plan. Kansas City Southern, a Delaware corporation (the “Company”), has heretofore amended, restated and combined the Kansas City Southern Industries, Inc. 1991 Amended and Restated Stock Option and Performance Award Plan (as amended through September 18, 1997), the Kansas City Southern Industries, Inc. 1993 Directors’ Stock Option Plan (the “1993 Plan”), the Kansas City Southern Industries, Inc. 1987 Stock Option Plan (as amended September 26, 1996) (the “1987 Plan”) and the Kansas City Southern Industries, Inc. 1983 Stock Option Plan (as amended September 26, 1996) (the “1983 Plan”) (as the same may be amended from time to time, the “Plan”). The Plan, as so amended, restated and combined, was adopted by the Board of Directors of the Company (the “Board”) and approved by the stockholders of the Company, to be effective as of July 15, 1998 (the “Effective Date”). On May 6, 1999, the Board amended Sections 2.14 and 15.1 of the Plan. Effective as of July 11, 2000, the Compensation and Organization Committee of the Board (the “Compensation Committee”) amended Sections 2.50, 4.1 and 5.7 of the Plan and, effective as of July 12, 2000, adjusted the number of Shares referred to as reserved for issuance in Section 4.1 of the Plan to reflect the 1-for-2 reverse stock split that took place on that date. On November 7, 2002, the Compensation Committee amended the Plan to reflect the Company’s name change from Kansas City Southern Industries, Inc. to Kansas City Southern. On May 5, 2004, the Compensation Committee amended Sections 1.3 and 4.1 and deleted Sections 5.9 and 6.5(e) of the Plan. On March 14, 2005, the Compensation Committee amended Section 3.2 of the Plan. On May 5, 2005, the shareholders of the Company approved an amendment to the Plan by the Compensation Committee to increase the number of Shares reserved for issuance under the Plan by 2,500,000. On August 7, 2007, the Compensation Committee amended Section 5.7(a) of the Plan. The Plan, as so amended, has been restated as set forth herein effective as of August 7, 2007.

1.2 Objectives of the Plan. The Plan is intended to allow employees, directors and consultants of the Company and its Subsidiaries to acquire or increase equity ownership in the Company, thereby strengthening their commitment to the success of the Company and stimulating their efforts on behalf of the Company, and to assist the Company and its Subsidiaries in attracting new employees, directors and consultants and retaining existing employees, directors and consultants. The Plan also is intended to optimize the profitability and growth of the Company through incentives which are consistent with the Company’s goals; to provide employees, directors and consultants with an incentive for excellence in individual performance; and to promote teamwork among employees, directors and consultants.

1.3 Duration of the Plan. The Plan shall remain in effect, subject to the right of the Board or the Committee to amend or terminate the Plan at any time pursuant to Article 15 hereof, until the earlier of July 14, 2008 or the date all Shares subject to the Plan shall have been

purchased or acquired and the restrictions on all Restricted Shares granted under the Plan shall have lapsed, according to the Plan’s provisions. However, in no event may an Incentive Stock Option be granted under the Plan on or after the date 10 years following the earlier of (i) the date the Plan was adopted and (ii) the date the Plan was approved by the stockholders of the Company.

Article 2. Definitions

Whenever used in the Plan, the following terms shall have the meanings set forth below:

2.1 “Article” means an Article of the Plan.

2.2 “Award” means Options (including Incentive Stock Options), Restricted Shares, Bonus Shares, stock appreciation rights (SARs), limited stock appreciation rights (LSARs), Performance Units or Performance Shares granted under the Plan.

2.3 “Award Agreement” means the written agreement by which an Award shall be evidenced.

2.4 “Board” has the meaning set forth in Section 1.1.

2.5 “Bonus Shares” means Shares that are awarded to a Grantee without cost and without restrictions in recognition of past performance (whether determined by reference to another employee benefit plan of the Company or otherwise) or as an incentive to become an employee, director or consultant of the Company or a Subsidiary.

2.6 “Cause” means, unless otherwise defined in an Award Agreement,

(i) before the occurrence of a Change of Control, any one or more of the following, as determined by the Committee:

(A) a Grantee’s commission of a crime which, in the judgment of the Committee, resulted or is likely to result in damage or injury to the Company or a Subsidiary;

(B) the material violation by the Grantee of written policies of the Company or a Subsidiary;

(C) the habitual neglect or failure by the Grantee in the performance of his or her duties to the Company or a Subsidiary (but only if such neglect or failure is not remedied within a reasonable remedial period after Grantee’s receipt of written notice from the Company which describes such neglect or failure in reasonable detail and specifies the remedial period); or

(D) action or inaction by the Grantee in connection with his or her duties to the Company or a Subsidiary resulting, in the judgment of the Committee, in material injury to the Company or a Subsidiary; and

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(ii) from and after the occurrence of a Change of Control, the occurrence of any one or more of the following, as determined in the good faith and reasonable judgment of the Committee:

(A) Grantee’s conviction for committing an act of fraud, embezzlement, theft, or any other act constituting a felony involving moral turpitude or causing material damage or injury, financial or otherwise, to the Company;

(B) a demonstrably willful and deliberate act or failure to act which is committed in bad faith, without reasonable belief that such action or inaction is in the best interests of the Company, which causes material damage or injury, financial or otherwise, to the Company (but only if such act or inaction is not remedied within 15 business days of Grantee’s receipt of written notice from the Company which describes the act or inaction in reasonable detail); or

(C) the consistent gross neglect of duties or consistent wanton negligence by the Grantee in the performance of the Grantee’s duties (but only if such neglect or negligence is not remedied within a reasonable remedial period after Grantee’s receipt of written notice from the Company which describes such neglect or negligence in reasonable detail and specifies the remedial period).

2.7 “Change of Control” means, unless otherwise defined in an Award Agreement, any one or more of the following:

(i) the acquisition or holding by any person, entity or “group” (within the meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act), other than by the Company or any Subsidiary or any employee benefit plan of the Company or a Subsidiary, of beneficial ownership (within the meaning of Rule 13d-3 under the 1934 Act) of 20% or more of the then-outstanding Common Stock or the then-outstanding Voting Power of the Company; provided, however, that no Change of Control shall occur solely by reason of any such acquisition by a corporation with respect to which, after such acquisition, more than 60% of both the then-outstanding common shares and the then-outstanding Voting Power of such corporation are then beneficially owned, directly or indirectly, by the persons who were the beneficial owners of the then-outstanding Common Stock and Voting Power of the Company immediately before such acquisition, in substantially the same proportions as their respective ownership, immediately before such acquisition, of the then-outstanding Common Stock and Voting Power of the Company; or

(ii) individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least 75% of the Board; provided that any individual who becomes a director after the Effective Date whose election or nomination for election by the Company’s stockholders was approved by at least 75% of the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened “election contest” relating to the election of the directors of the Company (as such terms are used in Rule 14a-11 under the 1934 Act) or “tender offer” (as such term is used in Section 14(d) of the 1934 Act) or a proposed Extraordinary Transaction (as defined below)) shall be deemed to be a member of the Incumbent Board; or

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(iii) approval by the stockholders of the Company of any one or more of the following:

(A) a merger, reorganization, consolidation or similar transaction (any of the foregoing, an “Extraordinary Transaction”) with respect to which persons who were the respective beneficial owners of the then-outstanding Common Stock and Voting Power of the Company immediately before such Extraordinary Transaction would not, if such Extraordinary Transaction were to be consummated immediately after such stockholder approval (but otherwise in accordance with the terms presented in writing to the stockholders of the Company for their approval), beneficially own, directly or indirectly, more than 60% of both the then-outstanding common shares and the then-outstanding Voting Power of the corporation resulting from such Extraordinary Transaction, in substantially the same proportions as their respective ownership, immediately before such Extraordinary Transaction, of the then-outstanding Common Stock and Voting Power of the Company,

(B) a liquidation or dissolution of the Company, or

(C) the sale or other disposition of all or substantially all of the assets of the Company in one transaction or a series of related transactions.

2.8 “Change of Control Value” means the Fair Market Value of a Share on the date of a Change of Control.

2.9 “Code” means the Internal Revenue Code of 1986, as amended from time to time, and regulations and rulings thereunder. References to a particular section of the Code include references to successor provisions of the Code or any successor code.

2.10 “Committee,” “Plan Committee” and “Management Committee” have the meaning set forth in Article 3.

2.11 “Common Stock” means the common stock, $.01 par value, of the Company.

2.12 “Company” has the meaning set forth in Section 1.1.

2.13 “Covered Employee” means a Grantee who, as of the date that the value of an Award is recognizable as taxable income, is one of the group of “covered employees,” within the meaning of Code Section 162(m).

2.14 “Disability” means, unless otherwise defined in an Award Agreement, for purposes of the exercise of an Incentive Stock Option after Termination of Affiliation, a disability within the meaning of Section 22(e)(3) of the Code, and for all other purposes, means total disability as determined for purposes of the long term disability plan of KCS or any Subsidiary or other employer of the Grantee and disability shall be deemed to occur for purposes of the Plan on the date such determination of disability is made.

2.15 “Disqualifying Disposition” has the meaning set forth in Section 6.4.

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2.16 “Effective Date” has the meaning set forth in Section 1.1.

2.17 “Eligible Person” means (i) any employee (including any officer) of the Company or any Subsidiary, including any such employee who is on an approved leave of absence, layoff, or has been subject to a disability which does not qualify as a Disability, (ii) any director of the Company or any Subsidiary and (iii) any person performing services for the Company or a Subsidiary in the capacity of a consultant.

2.18 “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time. References to a particular section of the Exchange Act include references to successor provisions.

2.19 “Extraordinary Transaction” has the meaning set forth in Section 2.7.

2.20 “Fair Market Value” means (A) with respect to any property other than Shares, the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee, and (B) with respect to Shares, unless otherwise determined by the Committee, as of any date, (i) the average of the high and low trading prices on the date of determination on the New York Stock Exchange (or, if no sale of Shares was reported for such date, on the next preceding date on which a sale of Shares was reported); (ii) if the Shares are not listed on the New York Stock Exchange, the average of the high and low trading prices of the Shares on such other national exchange on which the Shares are principally traded or as reported by the National Market System, or similar organization, or if no such quotations are available, the average of the high bid and low asked quotations in the over-the-counter market as reported by the National Quotation Bureau Incorporated or similar organizations; or (iii) in the event that there shall be no public market for the Shares, the fair market value of the Shares as determined by the Committee.

2.21 “Freestanding SAR” means an SAR that is granted independently of any other Award.

2.22 “Good Reason” means, unless otherwise defined in an Award Agreement, the occurrence after a Change of Control, without a Grantee’s prior written consent, of any one or more of the following:

(i) the assignment to the Grantee of any duties which result in a material adverse change in the Grantee’s position (including status, offices, titles, and reporting requirements), authority, duties, or other responsibilities with the Company, or any other action of the Company which results in a material adverse change in such position, authority, duties, or responsibilities, other than an insubstantial and inadvertent action which is remedied by the Company promptly after receipt of notice thereof given by the Grantee,

(ii) any relocation of the Grantee of more than 40 miles from the place where the Grantee was located at the time of the Change of Control, or

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(iii) a material reduction or elimination of any component of the Grantee’s rate of compensation, including (x) base salary, (y) any incentive payment or (z) benefits or perquisites which the Grantee was receiving immediately prior to a Change of Control.

2.23 “Grant Date” has the meaning set forth in Section 5.2.

2.24 “Grantee” means an individual who has been granted an Award.

2.25 “Incentive Stock Option” means an option granted under Article 6 of the Plan that is intended to meet the requirements of Section 422 of the Code or any successor provisions thereto.

2.26 “including” or “includes” means “including, without limitation,” or “includes, without limitation,” respectively.

2.27 “LSAR” means a limited stock appreciation right.

2.28 “Mature Shares” means Shares for which the holder thereof has good title, free and clear of all liens and encumbrances, and which such holder either (i) has held for at least six months or (ii) has purchased on the open market.

2.29 “Minimum Consideration” means $.01 per Share or such other amount that is from time to time considered to be capital for purposes of Section 154 of the Delaware General Corporation Law.

2.30 “Option” means an option granted under Article 6 of the Plan.

2.31 “Option Price” means the price at which a Share may be purchased by a Grantee pursuant to an Option.

2.32 “Option Term” means the period beginning on the Grant Date of an Option and ending on the expiration date of such Option, as specified in the Award Agreement for such Option and as may, consistent with the provisions of the Plan, be extended from time to time by the Committee prior to the expiration date of such Option then in effect.

2.33 “Outside Director” means a member of the Board who is not an employee of the Company or any Subsidiary.

2.34 “Performance-Based Exception” means the performance-based exception from the tax deductibility limitations of Code Section 162(m).

2.35 “Performance Period” has the meaning set forth in Section 9.2.

2.36 “Performance Share” or “Performance Unit” has the meaning set forth in Article 9.

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2.37 “Period of Restriction” means the period during which the transfer of Restricted Shares is limited in some way (the length of the period being based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee), and the Shares are subject to a substantial risk of forfeiture, as provided in Article 8.

2.38 “Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d) thereof.

2.39 “Plan” has the meaning set forth in Section 1.1.

2.40 “Required Withholding” has the meaning set forth in Article 16.

2.41 “Restricted Shares” means Shares that are subject to forfeiture if the Grantee does not satisfy the conditions specified in the Award Agreement applicable to such Shares.

2.42 “Retirement” means for any Grantee who is an employee, Termination of Affiliation by the Grantee upon either (i) having both attained age fifty-five (55) and completed at least ten (10) years of service with the Company or a Subsidiary or (ii) meeting such other requirements as may be specified by the Committee.

2.43 “Rule 16b-3” means Rule 16b-3 promulgated by the SEC under the Exchange Act, as amended from time to time, together with any successor rule, as in effect from time to time.

2.44 “SAR” means a stock appreciation right.

2.45 “SEC” means the United States Securities and Exchange Commission, or any successor thereto.

2.46 “Section” means, unless the context otherwise requires, a Section of the Plan.

2.47 “Section 16 Person” means a person who is subject to potential liability under Section 16(b) of the 1934 Act with respect to transactions involving equity securities of the Company.

2.48 “Share” means a share of Common Stock.

2.49 “Strike Price” of any SAR shall equal, for any Tandem SAR (whether such Tandem SAR is granted at the same time as or after the grant of the related Option), the Option Price of such Option, or for any other SAR, 100% of the Fair Market Value of a Share on the Grant Date of such SAR; provided that the Committee may specify a higher Strike Price in the Award Agreement.

2.50 “Subsidiary” means, for purposes of grants of Incentive Stock Options, a corporation as defined in Section 424(f) of the Code (with the Company being treated as the

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employer corporation for purposes of this definition) and, for all other purposes, a United States or foreign corporation or partnership or other similar entity with respect to which the Company owns, directly or indirectly, 50% (or such lesser percentage as the Committee may specify, which percentage may be changed from time to time and may be different for different entities) or more of the Voting Power of such corporation, partnership or other entity.

2.51 “Tandem SAR” means an SAR that is granted in connection with a related Option, the exercise of which shall require cancellation of the right to purchase a Share under the related Option (and when a Share is purchased under the related Option, the Tandem SAR shall similarly be canceled).

2.52 “Termination of Affiliation” occurs on the first day on which an individual is for any reason no longer providing services to the Company or any Subsidiary in the capacity of an employee, director or consultant, or with respect to an individual who is an employee or director of, or consultant to, a corporation which is a Subsidiary, the first day on which such corporation ceases to be a Subsidiary.

2.53 “10% Owner” means a person who owns capital stock (including stock treated as owned under Section 424(d) of the Code) possessing more than 10% of the total combined voting power of all classes of capital stock of the Company or any Subsidiary.

2.54 “Voting Power” means the combined voting power of the then-outstanding securities of a corporation entitled to vote generally in the election of directors.

Article 3. Administration

3.1 Committee.

(a) Subject to Article 15, and to Section 3.2, the Plan shall be administered by the Board, or a committee appointed by the Board to administer the Plan (“Plan Committee”). To the extent the Board considers it desirable to comply with or qualify under Rule 16b-3 or meet the Performance-Based Exception, the Plan Committee shall consist of two or more directors of the Company, all of whom qualify as “outside directors” as defined for purposes of the regulations under Code Section 162(m) and “non-employee directors” within the meaning of Rule 16b-3. The number of members of the Plan Committee shall from time to time be increased or decreased, and shall be subject to such conditions, in each case as the Board deems appropriate to permit transactions in Shares pursuant to the Plan to satisfy such conditions of Rule 16b-3 and the Performance-Based Exception as then in effect.

(b) The Board or the Plan Committee may appoint and delegate to another committee (“Management Committee”) any or all of the authority of the Board or the Plan Committee, as applicable, with respect to Awards to Grantees other than Grantees who are Section 16 Persons at the time any such delegated authority is exercised.

(c) Any references herein to “Committee” are references to the Board, or the Plan Committee or the Management Committee, as applicable.

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3.2 Powers of Committee. Subject to the express provisions of the Plan, the Committee has full and final authority and sole discretion as follows:

(i) to determine when, to whom and in what types and amounts Awards should be granted and the terms and conditions applicable to each Award, including the benefit payable under any SAR, Performance Unit or Performance Share, and whether or not specific Awards shall be granted in connection with other specific Awards, and if so whether they shall be exercisable cumulatively with, or alternatively to, such other specific Awards;

(ii) to determine the amount, if any, that a Grantee shall pay for Restricted Shares, whether to permit or require the payment of cash dividends thereon to be deferred and the terms related thereto, when Restricted Shares (including Restricted Shares acquired upon the exercise of an Option) shall be forfeited and whether such shares shall be held in escrow;

(iii) to construe and interpret the Plan and to make all determinations necessary or advisable for the administration of the Plan;

(iv) to make, amend, and rescind rules relating to the Plan, including rules with respect to the exercisability and nonforfeitability of Awards upon the Termination of Affiliation of a Grantee;

(v) to determine the terms and conditions of all Award Agreements (which need not be identical) and, with the consent of the Grantee, to amend any such Award Agreement at any time, among other things, to permit transfers of such Awards to the extent permitted by the Plan; provided that the consent of the Grantee shall not be required for any amendment which (A) does not adversely affect the rights of the Grantee, or (B) is necessary or advisable (as determined by the Committee) to carry out the purpose of the Award as a result of any new or change in existing applicable law;

(vi) to cancel, with the consent of the Grantee, outstanding Awards and to grant new Awards in substitution therefor;

(vii) to accelerate the exercisability (including exercisability within a period of less than six months after the Grant Date) of, and to accelerate or waive any or all of the terms and conditions applicable to, any Award or any group of Awards for any reason and at any time, including in connection with a Termination of Affiliation;

(viii) subject to Sections 1.3 and 5.3, to extend the time during which any Award or group of Awards may be exercised;

(ix) to make such adjustments or modifications to Awards to Grantees working outside the United States as are advisable to fulfill the purposes of the Plan or to comply with applicable local law;

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(x) to impose such additional terms and conditions upon the grant, exercise or retention of Awards as the Committee may, before or concurrently with the grant thereof, deem appropriate, including limiting the percentage of Awards which may from time to time be exercised by a Grantee; and

(xi) to take any other action with respect to any matters relating to the Plan for which it is responsible.

Notwithstanding the foregoing authority of the Committee and notwithstanding any other discretionary power granted to the Committee under the Plan, without the prior approval of the Company’s stockholders, the Committee may not amend the terms of any option to reduce the option price, nor cancel any option and grant a new option in its place if the effect is the same as if the cancelled option had been amended to reduce the option price. Further, the Board may not amend the Plan to authorize the Committee to take any such action without the prior approval of the Company’s stockholders.

All determinations on all matters relating to the Plan or any Award Agreement may be made in the sole and absolute discretion of the Committee, and all such determinations of the Committee shall be final, conclusive and binding on all Persons. No member of the Committee shall be liable for any action or determination made with respect to the Plan or any Award.

Article 4. Shares Subject to the Plan and Maximum Awards

4.1 Number of Shares Available for Grants. Subject to adjustment as provided in Section 4.2, the number of Shares hereby reserved for issuance under the Plan shall be equal to the sum of (i) 18,100,000, and (ii) the total number of Shares subject to Awards granted under the 1993 Plan, 1987 Plan and 1983 Plan that are outstanding as of the Effective Date (for a total of 18,503,186); and the number of Shares for which Awards may be granted to any Grantee on any Grant Date, when aggregated with the number of Shares for which Awards have previously been granted to such Grantee in the same calendar year, shall not exceed the greater of (i) one percent (1%) of the total Shares outstanding as of such Grant Date or (ii) 1,300,000; provided, however, that the total number of Shares for which Awards may be granted to any Grantee in any calendar year shall not exceed 2,000,000. If any Shares subject to an Award granted hereunder are forfeited or such Award otherwise terminates without the issuance of such Shares or of other consideration in lieu of such Shares, the Shares subject to such Award, to the extent of any such forfeiture or termination shall again be available for grant under the Plan. If any Shares (whether subject to or received pursuant to an Award granted hereunder, purchased on the open market, or otherwise obtained) are withheld or applied as payment in connection with the exercise of an Award or the withholding of taxes related thereto, such Shares, to the extent of any such withholding or payment, shall again be available or shall increase the number of Shares available, as applicable, for grant under the Plan. The Committee may from time to time determine the appropriate methodology for calculating the number of Shares issued pursuant to the Plan. Shares issued pursuant to the Plan may be treasury Shares or newly-issued Shares.

4.2 Adjustments in Authorized Shares. In the event that the Committee determines that any dividend or other distribution (whether in the form of cash, Shares, other securities, or

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other property), recapitalization, stock split, reverse stock split, subdivision, consolidation or reduction of capital, reorganization, merger, scheme of arrangement, split-up, spin-off or combination involving the Company or repurchase or exchange of Shares or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that any adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares (or other securities or property) with respect to which Awards may be granted, (ii) the number and type of Shares (or other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award or the substitution of other property for Shares subject to an outstanding Award; provided, in each case that with respect to Awards of Incentive Stock Options no such adjustment shall be authorized to the extent that such adjustment would cause the Plan to violate Section 422(b)(1) of the Code or any successor provision thereto; and provided further, that the number of Shares subject to any Award denominated in Shares shall always be a whole number.

Article 5. Eligibility and General Conditions of Awards

5.1 Eligibility. The Committee may grant Awards to any Eligible Person, whether or not he or she has previously received an Award.

5.2 Grant Date. The Grant Date of an Award shall be the date on which the Committee grants the Award or such later date as specified by the Committee.

5.3 Maximum Term. The Option Term or other period during which an Award may be outstanding shall under no circumstances extend more than 10 years after the Grant Date, and shall be subject to earlier termination as herein provided; provided, however, that any deferral of a cash payment or of the delivery of Shares that is permitted or required by the Committee pursuant to Article 12 may, if so permitted or required by the Committee, extend more than 10 years after the Grant Date of the Award to which the deferral relates.

5.4 Award Agreement. To the extent not set forth in the Plan, the terms and conditions of each Award (which need not be the same for each grant or for each Grantee) shall be set forth in an Award Agreement.

5.5 Restrictions on Share Transferability. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise or vesting of an Award as it may deem advisable, including restrictions under applicable federal securities laws.

5.6 Termination of Affiliation. Except as otherwise provided in an Award Agreement, and subject to the provisions of Section 14.1, the extent to which the Grantee shall have the right to exercise, vest in, or receive payment in respect of an Award following Termination of Affiliation shall be determined in accordance with the following provisions of this Section 5.6.

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(a) For Cause. If a Grantee has a Termination of Affiliation for Cause, (i) the Grantee’s Restricted Shares that are forfeitable shall thereupon be forfeited, subject to the provisions of Section 8.4 regarding repayment of certain amounts to the Grantee; and (ii) any unexercised Option, LSAR or SAR, and any Performance Share or Performance Unit with respect to which the Performance Period has not ended as of the date of such Termination of Affiliation, shall terminate effective immediately upon such Termination of Affiliation.

(b) On Account of Death or Disability. If a Grantee has a Termination of Affiliation on account of death or Disability, then:

(i) the Grantee’s Restricted Shares that were forfeitable shall thereupon become nonforfeitable;

(ii) any unexercised Option or SAR, whether or not exercisable on the date of such Termination of Affiliation, may be exercised, in whole or in part, within the first 12 months after such Termination of Affiliation (but only during the Option Term) by the Grantee or, after his or her death, by (A) his or her personal representative or the person to whom the Option or SAR, as applicable, is transferred by will or the applicable laws of descent and distribution, or (B) the Grantee’s beneficiary designated in accordance with Article 11; and

(iii) the benefit payable with respect to any Performance Share or Performance Unit with respect to which the Performance Period has not ended as of the date of such Termination of Affiliation on account of death or Disability shall be equal to the product of the Fair Market Value of a Share as of the date of such Termination of Affiliation or the value of the Performance Unit specified in the Award Agreement (determined as of the date of such Termination of Affiliation), as applicable, multiplied successively by each of the following:

(1) a fraction, the numerator of which is the number of months (including as a whole month any partial month) that have elapsed since the beginning of such Performance Period until the date of such Termination of Affiliation and the denominator of which is the number of months (including as a whole month any partial month) in the Performance Period; and

(2) a percentage determined by the Committee that would be earned under the terms of the applicable Award Agreement assuming that the rate at which the performance goals have been achieved as of the date of such Termination of Affiliation would continue until the end of the Performance Period, or, if the Committee elects to compute the benefit after the end of the Performance Period, the Performance Percentage, as determined by the Committee, attained during the Performance Period.

(i) the Grantee’s Restricted Shares that were forfeitable shall thereupon become nonforfeitable;

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(ii) any unexercised Option or SAR, whether or not exercisable on the date of such Termination of Affiliation, may be exercised, in whole or in part, within the first five years after such Termination of Affiliation (but only during the Option Term) by the Grantee or, after his or her death, by (A) his or her personal representative or the person to whom the Option or SAR, as applicable, is transferred by will or the applicable laws of descent and distribution, or (B) the Grantee’s beneficiary designated in accordance with Article 11; and

(iii) the benefit payable with respect to any Performance Share or Performance Unit with respect to which the Performance Period has not ended as of the date of such Termination of Affiliation on account of Retirement shall be equal to the product of the Fair Market Value of a Share as of the date of such Termination of Affiliation or the value of the Performance Unit specified in the Award Agreement (determined as of the date of such Termination of Affiliation), as applicable, multiplied successively by each of the following:

(d) Any Other Reason. If a Grantee has a Termination of Affiliation for any reason other than for Cause, death, Disability or Retirement, then:

(i) the Grantee’s Restricted Shares, to the extent forfeitable on the date of the Grantee’s Termination of Affiliation, shall be forfeited on such date;

(ii) any unexercised Option or SAR, to the extent exercisable immediately before the Grantee’s Termination of Affiliation, may be exercised in whole or in part, not later than three months after such Termination of Affiliation (but only during the Option Term) by the Grantee or, after his or her death, by (A) his or her personal representative or the person to whom the Option or SAR, as applicable, is transferred by will or the applicable laws of descent and distribution, or (B) the Grantee’s beneficiary designated in accordance with Article 11; and

(iii) any Performance Shares or Performance Units with respect to which the Performance Period has not ended as of the date of such Termination of Affiliation shall terminate immediately upon such Termination of Affiliation.

5.7 Nontransferability of Awards.

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(a) Except as provided in Section 5.7(c) below, each Award, and each right under any Award, shall be exercisable only by the Grantee during the Grantee’s lifetime, or, if permissible under applicable law, by the Grantee’s guardian or legal representative or an agent acting exclusively for the benefit of the Grantee pursuant to a power of attorney.

(b) Except as provided in Section 5.7(c) below, no Award (prior to the time, if applicable, Shares are issued in respect of such Award), and no right under any Award, may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Grantee otherwise than by will or by the laws of descent and distribution (or in the case of Restricted Shares, to the Company), and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Subsidiary; provided, that the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance.

(c) To the extent and in the manner permitted by the Committee, and subject to such terms, conditions, restrictions or limitations that may be prescribed by the Committee, a Grantee may transfer an Award (other than an Incentive Stock Option) to (i) a spouse, sibling, parent, child (including an adopted child) or grandchild (any of which, an “Immediate Family Member”) of the Grantee; (ii) a trust, the primary beneficiaries of which consist exclusively of the Grantee or Immediate Family Members of the Grantee; or (iii) a corporation, partnership or similar entity, the owners of which consist exclusively of the Grantee or Immediate Family Members of the Grantee.

5.8 Cancellation and Rescission of Awards. Unless the Award Agreement specifies otherwise, the Committee may cancel, rescind, suspend, withhold, or otherwise limit or restrict any unexercised Award at any time if the Grantee is not in compliance with all applicable provisions of the Award Agreement and the Plan or if the Grantee has a Termination of Affiliation for Cause.

Article 6. Stock Options

6.1 Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to any Eligible Person in such number, and upon such terms, and at any time and from time to time as shall be determined by the Committee. Without in any manner limiting the generality of the foregoing, the Committee may grant to any Eligible Person, or permit any Eligible Person to elect to receive, an Option in lieu of or in substitution for any other compensation (whether payable currently or on a deferred basis, and whether payable under this Plan or otherwise) which such Eligible Person may be eligible to receive from the Company or a Subsidiary.

6.2 Award Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the Option Term, the number of shares to which the Option pertains, the time or times at which such Option shall be exercisable and such other provisions as the Committee shall determine.

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6.3 Option Price. The Option Price of an Option under this Plan shall be determined by the Committee, and shall be equal to or more than 100% of the Fair Market Value of a Share on the Grant Date; provided, however, that any Option that is (x) granted to a Grantee in connection with the acquisition (“Acquisition”), however effected, by the Company of another corporation or entity (“Acquired Entity”) or the assets thereof, (y) associated with an option to purchase shares of stock of the Acquired Entity or an affiliate thereof (“Acquired Entity Option”) held by such Grantee immediately prior to such Acquisition, and (z) intended to preserve for the Grantee the economic value of all or a portion of such Acquired Entity Option (“Substitute Option”) may, to the extent necessary to achieve such preservation of economic value, be granted with an Option Price that is less than 100% of the Fair Market Value of a Share on the Grant Date.

6.4 Grant of Incentive Stock Options. At the time of the grant of any Option, the Committee may designate that such Option shall be made subject to additional restrictions to permit it to qualify as an “incentive stock option” under the requirements of Section 422 of the Code. Any Option designated as an Incentive Stock Option shall, to the extent required by Section 422 of the Code:

(i) if granted to a 10% Owner, have an Option Price not less than 110% of the Fair Market Value of a Share on its Grant Date;

(ii) be exercisable for a period of not more than 10 years (five years in the case of an Incentive Stock Option granted to a 10% Owner) from its Grant Date, and be subject to earlier termination as provided herein or in the applicable Award Agreement;

(iii) not have an aggregate Fair Market Value (as of the Grant Date of each Incentive Stock Option) of the Shares with respect to which Incentive Stock Options (whether granted under the Plan or any other stock option plan of the Grantee’s employer or any parent or Subsidiary thereof (“Other Plans”)) are exercisable for the first time by such Grantee during any calendar year, determined in accordance with the provisions of Section 422 of the Code, which exceeds $100,000 (the “$100,000 Limit”);

(iv) if the aggregate Fair Market Value of the Shares (determined on the Grant Date) with respect to the portion of such grant which is exercisable for the first time during any calendar year (“Current Grant”) and all Incentive Stock Options previously granted under the Plan and any Other Plans which are exercisable for the first time during the same calendar year (“Prior Grants”) would exceed the $100,000 Limit be exercisable as follows:

(A) the portion of the Current Grant which would, when added to any Prior Grants, be exercisable with respect to Shares which would have an aggregate Fair Market Value (determined as of the respective Grant Date for such options) in excess of the $100,000 Limit shall, notwithstanding the terms of the Current Grant, be exercisable for the first time by the Grantee in the first subsequent calendar year or years in which it could be exercisable for the first time by the Grantee when added to all Prior Grants without exceeding the $100,000 Limit; and

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(B) if, viewed as of the date of the Current Grant, any portion of a Current Grant could not be exercised under the preceding provisions of this Section during any calendar year commencing with the calendar year in which it is first exercisable through and including the last calendar year in which it may by its terms be exercised, such portion of the Current Grant shall not be an Incentive Stock Option, but shall be exercisable as an Option which is not an Incentive Stock Option at such date or dates as are provided in the Current Grant;

(v) be granted within 10 years from the earlier of the date the Plan is adopted or the date the Plan is approved by the stockholders of the Company; and

(vi) by its terms not be assignable or transferable other than by will or the laws of descent and distribution and may be exercised, during the Grantee’s lifetime, only by the Grantee; provided, however, that the Grantee may, in any manner permitted by the Plan and specified by the Committee, designate in writing a beneficiary to exercise his or her Incentive Stock Option after the Grantee’s death.

Any Option designated as an Incentive Stock Option shall also require the Grantee to notify the Committee of any disposition of any Shares issued pursuant to the exercise of the Incentive Stock Option under the circumstances described in Section 421(b) of the Code (relating to certain disqualifying dispositions) (any such circumstance, a “Disqualifying Disposition”), within 10 days of such Disqualifying Disposition.

Notwithstanding the foregoing and Section 3.2(v), the Committee may, without the consent of the Grantee, at any time before the exercise of an Option (whether or not an Incentive Stock Option), take any action necessary to prevent such Option from being treated as an Incentive Stock Option.

6.5 Payment. Options granted under this Article 6 shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares made by any one or more of the following means subject to the approval of the Committee:

(a) cash, personal check or wire transfer;

(b) Mature Shares, valued at their Fair Market Value on the date of exercise;

(c) Restricted Shares held by the Grantee for at least six months prior to the exercise of the Option, each such Share valued at the Fair Market Value of a Share on the date of exercise;

(d) subject to applicable law, pursuant to procedures approved by the Committee, through the sale of the Shares acquired on exercise of the Option through a broker-dealer to whom the Grantee has submitted an irrevocable notice of exercise and irrevocable instructions to deliver promptly to the Company the amount of sale or loan proceeds

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sufficient to pay for such Shares, together with, if requested by the Company, the amount of federal, state, local or foreign withholding taxes payable by Grantee by reason of such exercise.

If any Restricted Shares (“Tendered Restricted Shares”) are used to pay the Option Price, a number of Shares acquired on exercise of the Option equal to the number of Tendered Restricted Shares shall be subject to the same restrictions as the Tendered Restricted Shares, determined as of the date of exercise of the Option.

Article 7. Stock Appreciation Rights and Limited Stock Appreciation Rights

7.1 Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to any Eligible Person at any time and from time to time as shall be determined by the Committee. The Committee may grant Freestanding SARs, Tandem SARs, or any combination thereof.

The Committee shall determine the number of SARs granted to each Grantee (subject to Article 4), the Strike Price thereof, and, consistent with Section 7.2 and the other provisions of the Plan, the other terms and conditions pertaining to such SARs.

7.2 Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Award upon the surrender of the right to exercise the equivalent portion of the related Award. A Tandem SAR may be exercised only with respect to the Shares for which its related Award is then exercisable.

Notwithstanding any other provision of this Plan to the contrary, with respect to a Tandem SAR, (i) the Tandem SAR will expire no later than the expiration of the underlying Option; (ii) the value of the payout with respect to the Tandem SAR may be for no more than 100% of the difference between the Option Price of the underlying Option and the Fair Market Value of the Shares subject to the underlying Option at the time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only when the Fair Market Value of the Shares subject to the Option exceeds the Option Price of the Option.

7.3 Payment of SAR Amount. Upon exercise of an SAR, the Grantee shall be entitled to receive payment from the Company in an amount determined by multiplying:

(a)

the excess of the Fair Market Value of a Share on the date of exercise over the Strike Price;

(b)

the number of Shares with respect to which the SAR is exercised;

provided that the Committee may provide in the Award Agreement that the benefit payable on exercise of an SAR shall not exceed such percentage of the Fair Market Value of a Share on the Grant Date as the Committee shall specify. As determined by the Committee, the payment upon SAR exercise may be in cash, in Shares which have an aggregate Fair Market Value (as of the

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date of exercise of the SAR) equal to the amount of the payment, or in some combination thereof, as set forth in the Award Agreement.

7.4 Grant of LSARs. Subject to the terms and conditions of the Plan, LSARs may be granted to any Eligible Person at any time and from time to time as shall be determined by the Committee. Each LSAR shall be identified with a Share subject to an Option or SAR held by the Grantee, which may include an Option or SAR previously granted under the Plan. Upon the exercise, expiration, termination, forfeiture or cancellation of the Option or SAR with which an LSAR is identified, such LSAR shall terminate.

7.5 Exercise of LSARs. Each LSAR shall automatically be exercised upon a Change of Control which has not been approved by the Incumbent Board. The exercise of an LSAR shall result in the cancellation of the Option or SAR with which such LSAR is identified, to the extent of such exercise.

7.6 Payment of LSAR Amount. Within 10 business days after the exercise of an LSAR, the Company shall pay to the Grantee, in cash, an amount equal to the difference between:

(a)

the greatest of (i) the Change of Control Value, (ii) the Fair Market Value of a Share on the date occurring during the 180-day period immediately preceding the date of the Change of Control on which such Fair Market Value is the greatest, or (iii) such other valuation amount, if any, as may be determined pursuant to the provisions of the applicable Award Agreement;

minus

(b)

either (i) in the case of an LSAR identified with an Option, the Option Price of such Option or (ii) in the case of an LSAR identified with an SAR, the Strike Price of such SAR.

Article 8. Restricted Shares

8.1 Grant of Restricted Shares. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Restricted Shares to any Eligible Person in such amounts as the Committee shall determine.

8.2 Award Agreement. Each grant of Restricted Shares shall be evidenced by an Award Agreement that shall specify the Period(s) of Restriction, the number of Restricted Shares granted, and such other provisions as the Committee shall determine. The Committee may impose such conditions and/or restrictions on any Restricted Shares granted pursuant to the Plan as it may deem advisable, including restrictions based upon the achievement of specific performance goals (Company-wide, divisional, Subsidiary and/or individual), time-based restrictions on vesting, and/or restrictions under applicable securities laws.

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8.3 Consideration. The Committee shall determine the amount, if any, that a Grantee shall pay for Restricted Shares, which shall be (except with respect to Restricted Shares that are treasury shares) at least the Minimum Consideration for each Restricted Share. Such payment shall be made in full by the Grantee before the delivery of the shares and in any event no later than 10 business days after the Grant Date for such shares.

8.4 Effect of Forfeiture. If Restricted Shares are forfeited, and if the Grantee was required to pay for such shares or acquired such Restricted Shares upon the exercise of an Option, the Grantee shall be deemed to have resold such Restricted Shares to the Company at a price equal to the lesser of (x) the amount paid by the Grantee for such Restricted Shares, or (y) the Fair Market Value of a Share on the date of such forfeiture. The Company shall pay to the Grantee the required amount as soon as is administratively practical. Such Restricted Shares shall cease to be outstanding, and shall no longer confer on the Grantee thereof any rights as a stockholder of the Company, from and after the date of the event causing the forfeiture, whether or not the Grantee accepts the Company’s tender of payment for such Restricted Shares.

8.5 Escrow; Legends. The Committee may provide that the certificates for any Restricted Shares (x) shall be held (together with a stock power executed in blank by the Grantee) in escrow by the Secretary of the Company until such Restricted Shares become nonforfeitable or are forfeited and/or (y) shall bear an appropriate legend restricting the transfer of such Restricted Shares. If any Restricted Shares become nonforfeitable, the Company shall cause certificates for such shares to be issued without such legend.

Article 9. Performance Units and Performance Shares

9.1 Grant of Performance Units and Performance Shares. Subject to the terms of the Plan, Performance Units or Performance Shares may be granted to any Eligible Person in such amounts and upon such terms, and at any time and from time to time, as shall be determined by the Committee.

9.2 Value/Performance Goals. Each Performance Unit shall have an initial value that is established by the Committee at the time of grant. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the date of grant. The Committee shall set performance goals which, depending on the extent to which they are met, will determine the number or value of Performance Units or Performance Shares that will be paid out to the Grantee. For purposes of this Article 9, the time period during which the performance goals must be met shall be called a “Performance Period.”

9.3 Earning of Performance Units and Performance Shares. Subject to the terms of this Plan, after the applicable Performance Period has ended, the holder of Performance Units or Performance Shares shall be entitled to receive a payout based on the number and value of Performance Units or Performance Shares earned by the Grantee over the Performance Period, to be determined as a function of the extent to which the corresponding performance goals have been achieved.

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If a Grantee is promoted, demoted or transferred to a different business unit of the Company during a Performance Period, then, to the extent the Committee determines the performance goals or Performance Period are no longer appropriate, the Committee may adjust, change or eliminate the performance goals or the applicable Performance Period as it deems appropriate in order to make them appropriate and comparable to the initial performance goals or Performance Period.

9.4 Form and Timing of Payment of Performance Units and Performance Shares. Payment of earned Performance Units or Performance Shares shall be made in a lump sum following the close of the applicable Performance Period. The Committee may pay earned Performance Units or Performance Shares in the form of cash or in Shares (or in a combination thereof) which have an aggregate Fair Market Value equal to the value of the earned Performance Units or Performance Shares at the close of the applicable Performance Period. Such Shares may be granted subject to any restrictions deemed appropriate by the Committee. The form of payout of such Awards shall be set forth in the Award Agreement pertaining to the grant of the Award.

As determined by the Committee, a Grantee may be entitled to receive any dividends declared with respect to Shares which have been earned in connection with grants of Performance Units or Performance Shares but not yet distributed to the Grantee. In addition, a Grantee may, as determined by the Committee, be entitled to exercise his or her voting rights with respect to such Shares.

Article 10. Bonus Shares

Subject to the terms of the Plan, the Committee may grant Bonus Shares to any Eligible Person, in such amount and upon such terms and at any time and from time to time as shall be determined by the Committee. The terms of such Bonus Shares shall be set forth in the Award Agreement pertaining to the grant of the Award.

Article 11. Beneficiary Designation

Each Grantee under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Grantee, shall be in a form prescribed by the Company, and will be effective only when filed by the Grantee in writing with the Company during the Grantee’s lifetime. In the absence of any such designation, benefits remaining unpaid at the Grantee’s death shall be paid to the Grantee’s estate.

Article 12. Deferrals

The Committee may permit or require a Grantee to defer receipt of the payment of cash or the delivery of Shares that would otherwise be due by virtue of the exercise of an Option or SAR, the lapse or waiver of restrictions with respect to Restricted Shares, the satisfaction of any requirements or goals with respect to Performance Units or Performance Shares, or the grant of

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Bonus Shares. If any such deferral is required or permitted, the Committee shall establish rules and procedures for such deferrals. Except as otherwise provided in an Award Agreement, any payment or any Shares that are subject to such deferral shall be made or delivered to the Grantee upon the Grantee’s Termination of Affiliation.

Article 13. Rights of Employees/Directors/Consultants

13.1 Employment. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Grantee’s employment, directorship or consultancy at any time, nor confer upon any Grantee the right to continue in the employ or as a director or consultant of the Company.

13.2 Participation. No employee, director or consultant shall have the right to be selected to receive an Award under the Plan, or, having been so selected, to be selected to receive a future Award.

Article 14. Change of Control

14.1 Change of Control. Except as otherwise provided in an Award Agreement, if a Change of Control occurs, then:

(i) the Grantee’s Restricted Shares that were forfeitable shall thereupon become nonforfeitable;

(ii) any unexercised Option or SAR, whether or not exercisable on the date of such Change of Control, shall thereupon be fully exercisable and may be exercised, in whole or in part; and

(iii) the Company shall immediately pay to the Grantee, with respect to any Performance Share or Performance Unit with respect to which the Performance Period has not ended as of the date of such Change of Control, a cash payment equal to the product of (A) in the case of a Performance Share, the Change of Control Value or (B) in the case of a Performance Unit, the value of the Performance Unit specified in the Award Agreement, as applicable, multiplied successively by each of the following:

(1) a fraction, the numerator of which is the number of whole and partial months that have elapsed between the beginning of such Performance Period and the date of such Change of Control and the denominator of which is the number of whole and partial months in the Performance Period; and

(2) a percentage equal to a greater of (x) the target percentage, if any, specified in the applicable Award Agreement or (y) the maximum percentage, if any, that would be earned under the terms of the applicable Award Agreement assuming that the rate at which the performance goals have been achieved as of the date of such Change of Control would continue until the end of the Performance Period.

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14.2 Pooling of Interests Accounting. If the Committee determines, prior to a sale or merger of the Company that the Committee determines is reasonably likely to occur, that the grant or exercise of Options, SARs or LSARs would preclude the use of pooling of interests accounting (“pooling”) after the consummation of such sale or merger and that such preclusion of pooling would have a material adverse effect on such sale or merger, the Committee may (a) make any adjustments in such Options, SARs or LSARs prior to the sale or merger that will permit pooling after the consummation of such sale or merger or (b) cause the Company to pay the benefits attributable to such Options, SARs or LSARs (including for this purpose not only the spread between the then Fair Market Value of the Shares subject to such Options, SARs or LSARs and the Option Price or Strike Price applicable thereto, but also the additional value of such Options, SARs, or LSARs in excess of such spread, as determined by the Committee) in the form of Shares if such payment would not cause the transaction to remain or become ineligible for pooling; provided, however, no such adjustment or payment may be made that would adversely affect in any material way any such Options, SARs or LSARs without the consent of the affected Grantee.

Article 15. Amendment, Modification, and Termination

15.1 Amendment, Modification, and Termination. Subject to the terms of the Plan, the Board may at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part without the approval of the Company’s stockholders. The Board may delegate to the Plan Committee any or all of the authority of the Board under Section 15.1 to alter, amend suspend or terminate the Plan.

15.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including the events described in Section 4.2) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan; provided that no such adjustment shall be authorized to the extent that such authority would be inconsistent with the Plan’s meeting the requirements of the Performance-Based Exception.

15.3 Awards Previously Granted. Notwithstanding any other provision of the Plan to the contrary, no termination, amendment, or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Grantee of such Award.

Article 16. Withholding

16.1 Withholding

(a) Mandatory Tax Withholding.

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(1) Whenever under the Plan, Shares are to be delivered upon exercise or payment of an Award or upon Restricted Shares becoming nonforfeitable, or any other event with respect to rights and benefits hereunder, the Company shall be entitled to require (i) that the Grantee remit an amount in cash, or if determined by the Committee, Mature Shares, sufficient to satisfy all federal, state, local and foreign tax withholding requirements related thereto (“Required Withholding”), (ii) the withholding of such Required Withholding from compensation otherwise due to the Grantee or from any Shares or other payment due to the Grantee under the Plan or (iii) any combination of the foregoing.

(2) Any Grantee who makes a Disqualifying Disposition or an election under Section 83(b) of the Code shall remit to the Company an amount sufficient to satisfy all resulting Required Withholding; provided that, in lieu of or in addition to the foregoing, the Company shall have the right to withhold such Required Withholding from compensation otherwise due to the Grantee or from any Shares or other payment due to the Grantee under the Plan.

(b) Elective Share Withholding.

(1) Subject to subsection 16.1(b)(2), a Grantee may elect the withholding (“Share Withholding”) by the Company of a portion of the Shares subject to an Award upon the exercise of such Award or upon Restricted Shares becoming non-forfeitable or upon making an election under Section 83(b) of the Code (each, a “Taxable Event”) having a Fair Market Value equal to (i) the minimum amount necessary to satisfy Required Withholding liability attributable to the Taxable Event; or (ii) with the Committee’s prior approval, a greater amount, not to exceed the estimated total amount of such Grantee’s tax liability with respect to the Taxable Event.

(2) Each Share Withholding election shall be subject to the following conditions:

(A) any Grantee’s election shall be subject to the Committee’s discretion to revoke the Grantee’s right to elect Share Withholding at any time before the Grantee’s election if the Committee has reserved the right to do so in the Award Agreement;

(B) the Grantee’s election must be made before the date (the “Tax Date”) on which the amount of tax to be withheld is determined; and

16.2 Notification Under Code Section 83(b). If the Grantee, in connection with the exercise of any Option, or the grant of Restricted Shares, makes the election permitted under Section 83(b) of the Code to include in such Grantee’s gross income in the year of transfer the amounts specified in Section 83(b) of the Code, then such Grantee shall notify the Company of such election within 10 days of filing the notice of the election with the Internal Revenue Service, in addition to any filing and notification required pursuant to regulations issued under

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Section 83(b)of the Code. The Committee may, in connection with the grant of an Award or at any time thereafter prior to such an election being made, prohibit a Grantee from making the election described above.

Article 17. Successors

All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise of all or substantially all of the business and/or assets of the Company.

Article 18. Additional Provisions

18.1 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular and the singular shall include the plural.

18.2 Severability. If any part of the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any other part of the Plan. Any Section or part of a Section so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

18.3 Requirements of Law. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or stock exchanges as may be required. Notwithstanding any provision of the Plan or any Award, Grantees shall not be entitled to exercise, or receive benefits under, any Award, and the Company shall not be obligated to deliver any Shares or other benefits to a Grantee, if such exercise or delivery would constitute a violation by the Grantee or the Company of any applicable law or regulation.

18.4 Securities Law Compliance.

(a) If the Committee deems it necessary to comply with any applicable securities law, or the requirements of any stock exchange upon which Shares may be listed, the Committee may impose any restriction on Shares acquired pursuant to Awards under the Plan as it may deem advisable. All certificates for Shares delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the SEC, any stock exchange upon which Shares are then listed, any applicable securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. If so requested by the Company, the Grantee shall make a written representation to the Company that he or she will not sell or offer to sell any Shares unless a registration statement shall be in effect with respect to such Shares under the Securities Act of 1993, as amended, and any applicable state securities law or unless he or she

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shall have furnished to the Company evidence satisfactory to the Company that such registration is not required.

(b) If the Committee determines that the exercise or nonforfeitability of, or delivery of benefits pursuant to, any Award would violate any applicable provision of securities laws or the listing requirements of any stock exchange upon which any of the Company’s equity securities are listed, then the Committee may postpone any such exercise, nonforfeitability or delivery, as applicable, but the Company shall use all reasonable efforts to cause such exercise, nonforfeitability or delivery to comply with all such provisions at the earliest practicable date.

18.5 No Rights as a Stockholder. A Grantee shall not have any rights as a stockholder of the Company with respect to the Shares (other than Restricted Shares) which may be deliverable upon exercise or payment of such Award until such shares have been delivered to him or her. Restricted Shares, whether held by a Grantee or in escrow by the Secretary of the Company, shall confer on the Grantee all rights of a stockholder of the Company, except as otherwise provided in the Plan or Award Agreement. At the time of a grant of Restricted Shares, the Committee may require the payment of cash dividends thereon to be deferred and, if the Committee so determines, reinvested in additional Restricted Shares. Stock dividends and deferred cash dividends issued with respect to Restricted Shares shall be subject to the same restrictions and other terms as apply to the Restricted Shares with respect to which such dividends are issued. The Committee may provide for payment of interest on deferred cash dividends.

18.6 Nature of Payments. Awards shall be special incentive payments to the Grantee and shall not be taken into account in computing the amount of salary or compensation of the Grantee for purposes of determining any pension, retirement, death or other benefit under (a) any pension, retirement, profit-sharing, bonus, insurance or other employee benefit plan of the Company or any Subsidiary or (b) any agreement between (i) the Company or any Subsidiary and (ii) the Grantee, except as such plan or agreement shall otherwise expressly provide.

18.7 Performance Measures. Unless and until the Committee proposes for stockholder vote and stockholders approve a change in the general performance measures set forth in this Section 18.7, the performance measure(s) to be used for purposes of such Awards shall be chosen from among the following:

	(a)		Earnings (either in the aggregate or on a per-share basis);

	(b)		Net income (before or after taxes);

	(c)		Operating income;

	(d)		Cash flow;

	(e)		Return measures (including return on assets, equity, or sales);

-25-

	(f)		Earnings before or after either, or any combination of, taxes, interest or depreciation and amortization;

	(g)		Gross revenues;

	(h)		Share price (including growth measures and stockholder return or attainment by the Shares of a specified value for a specified period of time);

	(i)		Reductions in expense levels in each case, where applicable, determined either on a Company-wide basis or in respect of any one or more business units;

	(j)		Net economic value; or

	(k)		Market share.

Any of the foregoing performance measures may be applied, as determined by the Committee, on the basis of the Company as a whole, or in respect of any one or more Subsidiaries or divisions of the Company or any part of a Subsidiary or division of the Company that is specified by the Committee.

The Committee may adjust the determinations of the degree of attainment of the preestablished performance goals; provided, however, that Awards which are designed to qualify for the Performance-Based Exception may not be adjusted upward without the approval of the Company’s stockholders (the Committee may adjust such Awards downward).

In the event that applicable tax and/or securities laws change to permit Committee discretion to alter the governing performance measures without obtaining stockholder approval of such changes, and still qualify for the Performance-Based Exception, the Committee shall have sole discretion to make such changes without obtaining stockholder approval.

18.8 Governing Law. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware other than its laws respecting choice of law.

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EX-15.1 4 c19484exv15w1.htm LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION exv15w1

Exhibit 15.1

The Board of Directors and Stockholders
Kansas City Southern:

Re: Registration Statement Nos. 002-85200, 002-81228, 002-66477, 002-70370, 002-62526, 033-50517, 033-50519, 033-64511, 033-59388, 033-54168, 033-08880, 333-91993, 333-73122, 333-58250, 333-51854, 333-91478 and 333-126207 on Form S-8, and 333-130112 on
Form S-3

With respect to the subject registration statement, we acknowledge our awareness of the use therein of our report dated October 25, 2007 related to our review of interim financial information.

Pursuant to Rule 436 under the Securities Act of 1933 (the Act), such report is not considered part of a registration statement prepared or certified by an independent registered public accounting firm, or a report prepared or certified by an independent registered public accounting firm within the meaning of Sections 7 and 11 of the Act.

KPMG LLP

Kansas City, MO

October 25, 2007

EX-31.1 5 c19484exv31w1.htm PRINCIPAL EXECUTIVE OFFICER'S CERTIFICATION PURSUANT TO SECTION 302 exv31w1

Exhibit 31.1

PRINCIPAL EXECUTIVE OFFICER’S CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael R. Haverty, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Kansas City Southern (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under management’s supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under management’s supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report management’s conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on the most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Michael R. Haverty

Michael R. Haverty

Chairman and Chief Executive Officer

Date: October 26, 2007

EX-31.2 6 c19484exv31w2.htm PRINCIPAL FINANCIAL OFFICER'S CERTIFICATION PURSUANT TO SECTION 302 exv31w2

Exhibit 31.2

PRINCIPAL FINANCIAL OFFICER’S CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Patrick J. Ottensmeyer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Kansas City Southern (the “registrant”);

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Patrick J. Ottensmeyer

Patrick J. Ottensmeyer

Executive Vice President and Chief Financial Officer

Date: October 26, 2007

EX-32.1 7 c19484exv32w1.htm PRINCIPAL EXECUTIVE OFFICER'S CERTIFICATION PURSUANT TO SECTION 906 exv32w1

Exhibit 32.1

PRINCIPAL EXECUTIVE OFFICER’S CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Kansas City Southern (the “Company”) on Form 10-Q for the period ended September 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael R. Haverty, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael R. Haverty

Michael R. Haverty

Chairman and Chief Executive Officer

October 26, 2007

A signed original of this written statement required by Section 906 has been provided to Kansas City Southern and will be retained by Kansas City Southern and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2 8 c19484exv32w2.htm PRINCIPAL FINANCIAL OFFICER'S CERTIFICATION PURSUANT TO SECTION 906 exv32w2

Exhibit 32.2

PRINCIPAL FINANCIAL OFFICER’S CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Kansas City Southern (the “Company”) on Form 10-Q for the period ended September 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Patrick J. Ottensmeyer, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Patrick J. Ottensmeyer

Patrick J. Ottensmeyer

Executive Vice President and Chief Financial Officer

October 26, 2007

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