SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002
[ ] 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 Company as specified in its charter)
Delaware 44-0663509
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
427 West 12th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
|
Company's telephone number, including area code (816) 983-1303
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
----------------------------------------- ------------------------
Preferred Stock, Par Value $25 Per Share, New York Stock Exchange
4%, Noncumulative
Common Stock, $.01 Per Share Par Value New York Stock Exchange
|
Indicate by check mark whether the Company (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the Company is an accelerated filer (as defined
in Exchange Act Rule 12b-2)
YES [X] NO [ ]
Company Stock. The Company's common stock is listed on the New York Stock Exchange under the symbol "KSU." As of June 30, 2002, the aggregate market value of the voting and non-voting common and preferred stock held by non-affiliates of the Company was approximately $1,027 million (amount computed based on closing prices of preferred and common stock on New York Stock Exchange). As of February 28, 2003, 61,495,992 shares of common stock and 242,170 shares of voting preferred stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference into
Part of the Form 10-K as indicated:
Document Part of Form 10-K into which incorporated ------------------------------------ ----------------------------------------- Company's Definitive Proxy Statement Parts I, III for the 2003 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2002 |
KANSAS CITY SOUTHERN
2002 FORM 10-K ANNUAL REPORT
Table of Contents
Page
----
PART I
Item 1. Business............................................................ 1
Item 2. Properties.......................................................... 14
Item 3. Legal Proceedings................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders................. 18
Executive Officers of the Company................................... 18
PART II
Item 5. Market for the Company's Common Stock and
Related Stockholder Matters....................................... 19
Item 6. Selected Financial Data............................................. 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 21
Item 7A Quantitative and Qualitative Disclosures About Market Risk.......... 55
Item 8. Financial Statements and Supplementary Data......................... 58
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................... 102
PART III
Item 10. Directors and Executive Officers of the Company..................... 102
Item 11. Executive Compensation.............................................. 103
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters........................ 103
Item 13. Certain Relationships and Related Transactions...................... 103
Item 14. Controls and Procedures............................................. 103
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................................ 104
Signatures.......................................................... 111
|
Part I
Item 1. Business
(a) GENERAL DEVELOPMENT OF COMPANY BUSINESS
Kansas City Southern ("KCS" or the "Company"), a Delaware corporation, is a holding company with principal operations in rail transportation that was initially organized in 1962 as Kansas City Southern Industries, Inc. In 2002, the Company formally changed its name to Kansas City Southern.
On June 14, 2000, KCS's Board of Directors approved the spin-off of Stilwell Financial Inc. ("Stilwell"), the Company's then wholly-owned financial services subsidiary. On July 12, 2000, KCS completed the spin-off of Stilwell through a special dividend of Stilwell common stock distributed to KCS common stockholders of record on June 28, 2000 ("Spin-off"). Each KCS stockholder received two shares of the common stock of Stilwell for every one share of KCS common stock owned on the record date. The total number of Stilwell shares distributed was 222,999,786. Under tax rulings received from the Internal Revenue Service ("IRS"), the Spin-off qualifies as a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended. Also on July 12, 2000, KCS completed a reverse stock split whereby every two shares of KCS common stock were converted into one share of KCS common stock.
Other information set forth in response to Item 101 of Regulation S-K under Part II Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", of this Form 10-K is incorporated by reference in response to this Item 1.
(b) INDUSTRY SEGMENT FINANCIAL INFORMATION
KCS, as the holding company, supplies its various subsidiaries with managerial, legal, tax, financial and accounting services, in addition to managing other minor "non-operating" investments. KCS's principal subsidiaries and affiliates, which are reported under one business segment, include the following:
o The Kansas City Southern Railway Company ("KCSR"), a wholly-owned
subsidiary;
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), a
46.6% owned unconsolidated affiliate, which owns 80% of the common stock of
TFM, S.A. de C.V. ("TFM"). TFM wholly-owns Mexrail, Inc. ("Mexrail").
Mexrail owns 100% of The Texas-Mexican Railway Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate that leases locomotive and rail equipment to KCSR;
o Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of which
KCSR owns 50% of the common stock. PCRC owns all of the common stock of
Panarail Tourism Company ("Panarail").
Other subsidiaries of the Company include:
o Trans-Serve, Inc., (d/b/a Superior Tie and Timber - "ST&T"), an
owner/operator of a railroad wood tie treating facility;
o PABTEX GP, LLC ("Pabtex") located in Port Arthur, Texas with deep-water
access to the Gulf of Mexico. Pabtex is an owner of a bulk materials
handling facility that stores and transfers petroleum coke from trucks and
rail cars to ships primarily for export; and
o Transfin Insurance, Ltd., a single-parent captive insurance company,
providing property, general liability and certain other insurance coverage
to KCS and its subsidiaries and affiliates.
Effective December 31, 2002, the Company merged Mid-South Microwave, Inc. ("Mid-South Microwave") and Rice-Carden Corporation ("Rice-Carden), two wholly-owned subsidiaries, into KCSR. Prior to the merger, Mid-South Microwave owned and operated a 1,600-mile industrial frequency microwave transmission system. This system is now
owned and operated by KCSR and serves as its primary communications facility. Prior to the merger, Rice-Carden owned and operated various industrial real estate and spur rail tracks. This real estate, which is primarily contiguous to the KCSR right-of-way, is now owned and operated by KCSR.
During 2002, due to the relocation of the Company's headquarters to a new building in downtown Kansas City, Missouri, the Company sold its interests in Wyandotte Garage Corporation, which owns and operates a parking facility located adjacent to the Company's former headquarters building in downtown Kansas City, Missouri.
Other information set forth in response to Item 101 of Regulation S-K under Part II Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K and under Item 8, "Financial Statements and Supplementary Data" of this Form 10-K, is incorporated by reference in response to this Item 1.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
The information set forth in response to Item 101 of Regulation S-K under Part II Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K is incorporated by reference in response to this Item 1.
OVERVIEW
The Company, along with its subsidiaries and affiliates, owns and operates a uniquely positioned North American rail network strategically focused on the growing north/south freight corridor that connects key commercial and industrial markets in the central United States with major industrial cities in Mexico. The Company's principal subsidiary, KCSR, which was founded in 1887, is one of seven Class I railroads in the United States. The Company's rail network (KCSR, TFM and Tex Mex) is comprised of approximately 6,000 miles of main and branch lines. Through a strategic alliance with Canadian National Railway Company ("CN") and Illinois Central Corporation ("IC") (together "CN/IC"), the Company has access to a contiguous rail network of approximately 25,000 miles of main and branch lines connecting Canada, the United States and Mexico. Management believes that, as a result of the strategic position of our rail network, the Company is poised to continue to benefit from the growing north/south trade between the United States, Mexico and Canada promoted by the North American Free Trade Agreement ("NAFTA").
The Company's rail network interconnects with all other Class I railroads and provides shippers with an effective alternative to other railroad routes, giving direct access to Mexico and the southeastern and southwestern United States through less congested interchange hubs.
The Company's rail network links directly to major trading centers in Mexico through Tex Mex and TFM. TFM operates a railroad that runs from the U.S./Mexico border at Laredo, Texas to Mexico City and serves most of Mexico's principal industrial cities and three of its major shipping ports. TFM also owns Mexrail, which wholly owns Tex Mex. Tex Mex operates between Laredo and the port city of Corpus Christi, Texas and with trackage rights connects to KCSR at Beaumont, Texas. TFM, through its concession with the Mexican government, has the right to control and operate the southern half of the rail-bridge at Laredo and, indirectly through its ownership of Mexrail, owns the northern half of the rail-bridge at Laredo, which spans the Rio Grande River between the United States and Mexico. Our principal international gateway is at Laredo, where more than 50% of all rail and truck traffic between the United States and Mexico crosses the border.
KCS's rail network is further expanded through its strategic alliance with CN/IC and marketing agreements with Norfolk Southern Railway Company ("Norfolk Southern"), The Burlington Northern and Santa Fe Railway Company ("BNSF") and the Iowa, Chicago & Eastern Railroad Corporation ("IC&E" - formerly I&M Rail Link, LLC). The CN/IC alliance connects Canadian markets with major midwestern and southern markets in the United States as well as with major markets in Mexico through KCRS's connections with Tex Mex and TFM. Marketing agreements with Norfolk Southern allow the Company to capitalize on its east/west route from Meridian, Mississippi to Dallas, Texas ("Meridian
Speedway") to gain incremental traffic volume between the southeast and the southwest. The marketing alliance with BNSF was developed to promote cooperation, revenue growth and extend market reach for both railroads in the United States and Canada. It is also designed to improve operating efficiencies for both KCSR and BNSF in key market areas, as well as provide customers with expanded service options. KCSR's marketing agreement with IC&E provides access to Minneapolis, Minnesota and Chicago and to originations of corn and other grain in Iowa, Minnesota and Illinois.
The Company also owns 50% of the common stock (or a 42% equity interest) of PCRC, which holds the concession to operate a 47-mile coast-to-coast railroad located adjacent to the Panama Canal. The railroad handles containers in freight service across the isthmus. Panarail, a wholly owned subsidiary of PCRC, operates a commuter and tourist railway service over the lines of the Panama Canal Railway. Passenger service commenced during the third quarter of 2001 and freight service started during the fourth quarter of 2001.
RAIL NETWORK
Owned Network
KCSR owns and operates approximately 3,100 miles of main and branch lines and 1,250 miles of other tracks in a ten-state region that includes Missouri, Kansas, Arkansas, Oklahoma, Mississippi, Alabama, Tennessee, Louisiana, Texas and Illinois. KCSR has the shortest north/south rail route between Kansas City and several key ports along the Gulf of Mexico in Louisiana, Mississippi and Texas. KCSR's rail route also serves the Meridian Speedway and the east/west route linking Kansas City with East St. Louis, Illinois and Springfield, Illinois. In addition, KCSR has limited haulage rights between Springfield and Chicago that allow for shipments that originate or terminate on the rail lines of the former Gateway Western Railway Company ("Gateway Western"). These lines also provide access to East St. Louis and allow rail traffic to avoid the St. Louis terminal. This geographic reach enables service to a customer base that includes electric generating utilities, which use coal, and a wide range of companies in the chemical and petroleum, agricultural and mineral, paper and forest, and automotive and intermodal markets.
Eastern railroads and their customers can bypass the gateways at Chicago, Illinois; St. Louis, Missouri; Memphis, Tennessee and New Orleans, Louisiana by interchanging with KCSR at Springfield, Illinois and East St. Louis and at Meridian and Jackson, Mississippi. Other railroads can also interconnect with the Company's rail network via other gateways at Kansas City, Missouri; Birmingham, Alabama; Shreveport and New Orleans, Louisiana; and Dallas, Beaumont and Laredo, Texas.
KCSR revenues and net income are dependent on providing reliable service to customers at competitive rates, the general economic conditions in the geographic region served and the ability to effectively compete against other rail carriers and alternative modes of surface transportation, such as over-the-road truck transportation. The ability of KCSR to construct and maintain the roadway in order to provide safe and efficient transportation service is important to its ongoing viability as a rail carrier. Additionally, cost containment is important in maintaining a competitive market position, particularly with respect to employee costs, as approximately 84% of KCSR employees are covered under various collective bargaining agreements.
Significant Investments
Grupo TFM
In December 1995, the Company entered into a joint venture agreement with
Transportacion Maritima Mexicana, S.A. de C.V. ("TMM") to provide for
participation in the privatization of the Mexican national railway system
through Grupo TFM, and to promote the movement of rail traffic over Tex Mex, TFM
and KCSR. In 1997, the Company invested $298 million to obtain a 36.9% interest
in Grupo TFM. At the time of purchase, TMM, the largest shareholder of Grupo
TFM, owned 38.5% of Grupo TFM and the Mexican government owned the remaining
24.6%. In 2001, TMM and Grupo TMM, S.A. ("Grupo TMM" - formerly Grupo Servia
S.A. de C.V) merged with the surviving entity being Grupo TMM. In 2002, KCS and
Grupo TMM exercised their call option and, on July 29, 2002, TFM completed the
purchase of the
Mexican government's 24.6% ownership of Grupo TFM. The $256.1 million purchase price was funded utilizing a combination of proceeds from an offering of debt securities by TFM, a credit from the Mexican government for the reversion of certain rail facilities and other resources. This transaction resulted in an increase in the Company's ownership percentage of Grupo TFM from 36.9% to approximately 46.6%. Grupo TFM owns 80% of the common stock of TFM and all of the shares entitled to full voting rights, while the remaining 20% of TFM is owned by the Mexican government.
TFM holds the concession, which was awarded by the Mexican Government in 1996, to operate Mexico's Northeast Rail Lines (the "Concession"; the "Northeast Rail Lines are now known as "TFM") for the 50 years ending in June 2047 and, subject to certain conditions, has an option to extend the Concession for an additional 50 years. The Concession is subject to certain mandatory trackage rights and is exclusive until 2027. However, the Mexican government may revoke TFM's exclusivity after 2017 if it determines that there is insufficient competition and may terminate the Concession as a result of certain conditions or events, including (1) TFM's failure to meet its operating and financial obligations with regard to the Concession under applicable Mexican law, (2) a statutory appropriation by the Mexican government for reasons of public interest and (3) liquidation or bankruptcy of TFM. TFM's assets and its rights under the Concession may, under certain circumstances such as natural disaster, war or other similar situations, also be seized temporarily by the Mexican government.
Under the Concession, TFM operates a strategically significant corridor between Mexico and the United States, and has as its core route a key portion of the shortest, most direct rail passageways between Mexico City and Laredo, Texas. TFM's rail lines are the only ones which serve Nuevo Laredo, the largest rail freight exchange point between the United States and Mexico. TFM's rail lines connect the most populated and industrialized regions of Mexico with Mexico's principal U.S. border railway gateway at Laredo. In addition, TFM serves three of Mexico's primary seaports at Veracruz and Tampico on the Gulf of Mexico and Lazaro Cardenas on the Pacific Ocean. TFM serves 15 Mexican states and Mexico City, which together represent a majority of the country's population and account for a majority of its estimated gross domestic product. KCS management believes the Laredo gateway is the most important interchange point for rail freight between the United States and Mexico. As a result, TFM's routes are an integral part of Mexico's foreign trade.
This route structure enables the Company to benefit from growing trade resulting from the increasing integration of the North American economy through NAFTA. Trade between Mexico and the United States has grown from 1993 through 2002. Through Tex Mex and KCSR, as well as through interchanges with other major U.S. railroads, TFM provides its customers with access to an extensive rail network through which they may distribute their products throughout North America and overseas.
TFM operates approximately 2,650 miles of main and branch lines and certain additional sidings, spur tracks and main line tracks under trackage rights. TFM has the right to operate the rail lines, but does not own the land, roadway or associated structures. Approximately 81% of the main line operated by TFM consists of continuously welded rail. As of December 31, 2002, TFM owned 468 locomotives, owned or leased from affiliates 4,558 freight cars and leased from non-affiliates 150 locomotives and 6,800 freight cars.
On February 27, 2002, the Company, Grupo TMM, and certain of Grupo TMM's affiliates entered into a stock purchase agreement with TFM to sell to TFM all of the common stock of Mexrail. Mexrail owns the northern half of the international railway bridge at Laredo, Texas and all of the common stock of the Tex Mex. The sale closed on March 27, 2002 and the Company received approximately $31.4 million for its 49% interest in Mexrail. The Company used the proceeds from the sale of Mexrail to reduce debt. Although the Company no longer directly owns 49% of Mexrail, it retains an indirect ownership through its 46.6% ownership of Grupo TFM. Under the stock purchase agreement, KCS retained rights to prevent further sale or transfer of the stock or significant assets of Mexrail and Tex Mex and the right to continue to participate in the corporate governance of Mexrail and Tex Mex, which will remain U.S. corporations and subject to the Company's super majority rights contained in Grupo TFM's bylaws.
Tex Mex operates a 160-mile rail line extending from Laredo to Corpus Christi. Tex Mex connects to KCSR through trackage rights over The Union Pacific Railroad Company ("UP") between Robbstown, Texas and Beaumont. These
trackage rights were granted pursuant to a 1996 Surface Transportation Board ("STB") decision and have an initial term of 99 years. Tex Mex provides a vital link between the Company's U.S. operations through KCSR and its Mexican operations through TFM.
On March 12, 2001, Tex Mex purchased from UP a line of railroad right-of-way extending 84.5 miles between Rosenberg, Texas and Victoria, Texas, and granted Tex Mex trackage rights sufficient to integrate the line into the existing trackage rights. The line is not in service and will require extensive reconstruction, which has not yet been scheduled. The purchase price for the line of $9.2 million was determined through arbitration and the acquisition also required the prior approval or exemption of the transaction by the STB. By its Order entered on December 8, 2000, the STB granted Tex Mex's Petition for Exemption and exempted the transaction from this prior approval requirement. Once reconstruction of the line is completed, Tex Mex will be able to shorten its existing route between Corpus Christi and Houston, Texas by over 70 miles.
TFM, including its indirect ownership of Tex Mex, is both a strategic and financial investment for KCS. Strategically KCSR's investment in TFM promotes the NAFTA growth strategy whereby the Company and its strategic partners can provide transportation services between the heart of Mexico's industrial base, the United States and Canada. TFM seeks to establish its railroad as the primary inland freight transporter linking Mexico with the U.S. and Canadian markets along the NAFTA corridor. TFM's strategy is to provide reliable customer service, capitalize on foreign trade growth and convert truck tonnage to rail.
KCS management believes TFM is an excellent long-term financial investment. TFM's operating strategy has been to increase productivity and maximize operating efficiencies. With Mexico's economic progress, growth of NAFTA trade between Mexico, the United States and Canada, and customer focused rail service, KCS management believes that the growth potential of TFM could be significant.
The term of the Grupo TFM joint venture agreement was renewed for a term of three years on December 1, 2000 and will automatically renew for additional terms of three years each unless either Grupo TMM or the Company gives notice of termination at least 90 days prior to the end of the then-current term. The joint venture agreement may also terminate under certain circumstances prior to the end of a term, including upon a change of control or bankruptcy of either Grupo TMM or the Company or a material default by Grupo TMM or the Company. Upon termination of the agreement, any joint venture assets that are not held in the name of KCS or Grupo TMM will be distributed proportionally to Grupo TMM and KCS. The joint venture does not have any material assets and management believes that a termination of the joint venture agreement would not have a material adverse effect on the Company or its interest in Grupo TFM.
The shareholders agreement dated May 1997 between KCS and Grupo TMM and certain affiliates, which governs the Company's investment in Grupo TFM (1) restricts each of the parties to the shareholders agreement from directly or indirectly transferring any interest in Grupo TFM or TFM to a competitor of Grupo TFM or TFM without the prior written consent of each of the parties, and (2) provides that KCS and Grupo TMM may not transfer control of any subsidiary holding all or any portion of shares of Grupo TFM to a third party, other than an affiliate of the transferring party or another party to the shareholders agreement, without the consent of the other parties to the shareholders agreement. The Grupo TFM bylaws prohibit any transfer of shares of Grupo TFM to any person other than an affiliate of the existing shareholders without the prior consent of Grupo TFM's board of directors. In addition, the Grupo TFM bylaws grant the shareholders of Grupo TFM a right of first refusal to acquire shares to be transferred by any other shareholder in proportion to the number of shares held by each non-transferring shareholder, although holders of preferred shares or shares with special or limited rights are only entitled to acquire those shares and not ordinary shares. The shareholders agreement requires that the boards of directors of Grupo TFM and TFM be constituted to reflect the parties' relative ownership of the ordinary voting common stock of Grupo TFM.
On or prior to October 31, 2003 the Mexican government may sell its 20% interest in TFM through a public offering (with the consent of Grupo TFM if prior to October 31, 2003). If, on October 31, 2003, the Mexican government has not sold all of its capital stock in TFM, Grupo TFM is obligated to purchase the capital stock at the initial share price paid by Grupo TFM, adjusted for Mexican inflation and changes in the U.S. Dollar/Mexican Peso exchange rate. In the event that Grupo TFM does not purchase the Mexican government's remaining interest in TFM, Grupo TMM and KCS, or
either Grupo TMM or KCS, are obligated to purchase the Mexican government's interest. KCS and Grupo TMM have cross indemnities in the event the Mexican government requires only one of them to purchase its interest. The cross indemnities allow the party required to purchase the Mexican government's interest to require the other party to purchase its pro rata portion of such interest. However, if KCS were required to purchase the Mexican government's interest in TFM and Grupo TMM could not meet its obligations under the cross-indemnity, then KCS would be obligated to pay the total purchase price for the Mexican government's interest. If KCS and Grupo TMM, or either KCS or Grupo TMM alone had been required to purchase the Mexican government's 20% interest in TFM as of December 31, 2002, the total purchase price would have been approximately $485.0 million.
Panama Canal Railway Company
In January 1998, the Republic of Panama awarded PCRC, a joint venture between
KCSR and Mi-Jack Products, Inc. ("Mi-Jack"), the concession to reconstruct and
operate the Panama Canal Railway, a 47-mile railroad located adjacent to the
Panama Canal, that provides international shippers with a railway transportation
option to complement the Panama Canal. The Panama Canal Railway, which traces
its origins back to the mid-1800's, is a north-south railroad traversing the
Panama isthmus between the Pacific and Atlantic Oceans. The railroad has been
reconstructed and it resumed freight operations on December 1, 2001. KCS
management believes the prime potential and opportunity for this railroad to be
in the movement of container traffic between the ports of Balboa and Colon for
shipping customers repositioning of such containers. The Panama Canal Railway
has significant interest from both shipping companies and port terminal
operators. In addition, there is demand for passenger traffic for both commuter
and pleasure/tourist travel. Panarail operates and promotes commuter and tourist
passenger service over the Panama Canal Railway. Passenger service started
during July 2001. While only 47 miles long, KCS management believes the Panama
Canal Railway provides the Company with a unique opportunity to participate in
transoceanic shipments as a complement to the existing Panama Canal traffic.
As of December 31, 2002, the Company has invested approximately $19.9 million toward the reconstruction and operations of the Panama Canal Railway. This investment is comprised of $12.9 million of equity and $7.0 million of subordinated loans. These loans carry a 10% interest rate and are payable on demand, subject to certain restrictions.
In November 1999, PCRC completed the financing arrangements for this project with the International Finance Corporation ("IFC"), a member of the World Bank Group. The financing is comprised of a $5 million investment by the IFC and senior loans through the IFC in an aggregate amount of up to $45 million. Additionally, PCRC has $4.2 million of equipment loans from Transamerica Corporation and other capital leases totaling $3.8 million. The IFC's investment of $5 million in PCRC is comprised of non-voting preferred shares which pay a 10% cumulative dividend. As of December 31, 2002, PCRC has recorded a $1.5 million liability for these cumulative preferred dividends. The preferred shares may be redeemed at the IFC's option any year after 2008 at the lower of (1) a net cumulative internal rate of return of 30% or (2) eight times earnings before interest, income taxes, depreciation and amortization for the two years preceding the redemption that is proportionate to the IFC's percentage ownership in PCRC. Under the terms of the loan agreement with IFC, the Company is a guarantor for up to $5.6 million of the associated debt. Also if PCRC terminates the concession contract without the IFC's consent, the Company is a guarantor for up to 50% of the outstanding senior loans. The Company is also a guarantor for up to $2.1 million of the equipment loans from Transamerica Corporation and approximately $50,000 relating to the other capital leases. The cost of the reconstruction totaled approximately $80 million. The Company expects to loan an additional $2 million to PCRC during 2003 under the same terms as the existing $7.0 million subordinated loans.
Southern Capital
In 1996, KCSR and GATX Capital Corporation ("GATX") formed a 50-50 joint
venture--Southern Capital--to perform certain leasing and financing activities.
Southern Capital's operations are comprised of the acquisition of locomotives
and rolling stock and the leasing thereof to KCSR. Concurrent with the formation
of this joint venture, KCSR entered into operating leases with Southern Capital
for substantially all the locomotives and rolling stock that KCSR contributed or
sold to Southern Capital at the time of formation of the joint venture. GATX
contributed cash in the joint venture transaction formation. Southern Capital
formerly managed a portfolio of non-rail loan assets primarily in the amusement
entertainment, construction and trucking industries which it sold in April 1999
to Textron Financial Corporation, thereby leaving only the rail equipment
related assets that are leased to KCSR.
The purpose for the formation of Southern Capital was to partner a Class I railroad in KCSR with an industry leader in the rail equipment financing in GATX. Southern Capital provides the Company with access to equipment financing alternatives.
Expanded Network
Through our strategic alliance with CN/IC and marketing agreements with Norfolk Southern, BNSF and the IC&E, the Company has expanded the domestic geographic reach beyond that covered by its owned network.
Strategic Alliance with Canadian National and Illinois Central. In 1998, KCSR, CN and IC announced a 15-year strategic alliance aimed at coordinating the marketing, operations and investment elements of north-south rail freight transportation. The strategic alliance did not require STB approval and was effective immediately. This alliance connects Canadian markets, the major midwest U.S. markets of Detroit, Michigan, Chicago, Kansas City and St. Louis and the key southern markets of Memphis, Dallas and Houston. It also provides U.S. and Canadian shippers with access to Mexico's rail system through connections with Tex Mex and TFM.
In addition to providing access to key north-south international and domestic U.S. traffic corridors, the alliance with CN/IC is intended to increase business primarily in the automotive and intermodal markets, the grain market, the chemical and petroleum market and the paper and forest products markets. This alliance has provided opportunities for revenue growth and positioned the Company as a key provider of rail service for NAFTA trade.
KCSR and CN formed a management group made up of senior management representatives from both railroads to, among other things, guide the realization of the alliance goals, and to develop plans for the construction of new facilities to support business development, including investments in automotive, intermodal and transload facilities at Memphis, Dallas, Kansas City and Chicago.
Under a separate agreement, KCSR was granted certain trackage and haulage rights and CN and IC were granted certain haulage rights. Under the terms of this agreement, and through action taken by the STB, in October 2000 KCSR gained access to six additional chemical customers in the Geismar, Louisiana industrial area through haulage rights.
Marketing Agreements with Norfolk Southern.
In December 1997, KCSR entered into a three-year marketing agreement with
Norfolk Southern and Tex Mex that allows KCSR to increase its traffic volume
along the east-west corridor between Meridian and Dallas by using interchange
points with Norfolk Southern. This agreement provides Norfolk Southern
run-through service with access to Dallas and the Mexican border at Laredo while
avoiding the rail gateways of Memphis and New Orleans. This agreement was
renewed in December 2000 for a term of three years and will be automatically
renewed for additional three-year terms unless written notice of termination is
given at least 90 days prior to the expiration of the then-current term.
In May 2000, KCSR entered into an additional marketing agreement with Norfolk Southern under which KCSR provides haulage services for intermodal traffic between Meridian and Dallas in exchange for fees from Norfolk Southern. Under this agreement Norfolk Southern may quote rates and enter into transportation service contracts with shippers and receivers covering this haulage traffic. This agreement terminates on December 31, 2006.
The May 2000 marketing agreement with Norfolk Southern provides KCSR with additional sources of intermodal business. Under the current arrangement, trains run between the Company's connection with Norfolk Southern at Meridian and the BNSF connection at Dallas. The structure of the agreement provides for lower gross revenue to KCSR, but improved operating income since, as a haulage arrangement, locomotives, locomotive fuel and car hire expenses are the responsibility of Norfolk Southern, not KCSR. Management believes this business has additional growth potential as Norfolk Southern seeks to shift its traffic to southern gateways to increase its length of haul.
Marketing Alliance with BNSF
In April 2002, KCSR and BNSF formed a comprehensive joint marketing alliance
aimed at promoting cooperation, revenue growth and extending market reach for
both railroads in the United States and Canada. The marketing alliance is also
expected to improve operating efficiencies for both carriers in key market
areas, as well as provide customers with expanded service options. KCSR and BNSF
have agreed to coordinate marketing and operational initiatives in a number of
target markets. The marketing alliance is expected to allow the two railroads to
be more responsive to shippers' requests for rates and service throughout the
two rail networks. Coal and unit train operations are excluded from the
marketing alliance, as well as any points where KCSR and BNSF are the only
direct rail competitors. Movements to and from Mexico by either party are also
excluded. Management believes this marketing alliance will afford important
opportunities to grow KCSR's revenue base, particularly in the chemical, grain
and forest product markets, providing both participants with expanded access to
important markets and providing shippers with enhanced options and competitive
alternatives.
Marketing Agreement with IC&E.
In May 1997, KCSR entered into a marketing agreement with I&M Rail Link, now
known as IC&E. This marketing agreement provides KCSR with access to Minneapolis
and Chicago and to originations of corn and other grain in Iowa, Minnesota and
Illinois. Through this marketing agreement, KCSR receives and originates
shipments of grain products for delivery to poultry industry feed mills on its
network. Grain is currently KCSR's largest export into Mexico. This agreement is
terminable upon 90 days notice. Management believes this agreement provides IC&E
with an important channel of distribution over our rail network versus other
railroads.
Haulage Rights.
As a result of the 1988 acquisition of the Missouri-Kansas-Texas Railroad by UP,
KCSR was granted (1) haulage rights between Kansas City and each of Council
Bluffs, Iowa, Omaha and Lincoln, Nebraska and Atchison and Topeka, Kansas, and
(2) a joint rate agreement for our grain traffic between Beaumont and each of
Houston and Galveston, Texas. KCSR has the right to convert these haulage rights
to trackage rights. KCSR's haulage rights require UP to move KCSR traffic in UP
trains; trackage rights would allow KCSR to operate its trains over UP tracks.
These rights have a term of 199 years. In addition, KCSR has limited haulage
rights between Springfield and Chicago that allow for shipments that originate
or terminate on the former Gateway Western's rail lines.
Markets Served
The following table summarizes KCSR revenue and carload statistics by commodity
category. Certain prior year amounts have been reclassified to reflect changes
in the business groups and to conform to the current year presentation.
Carloads and
Revenues Intermodal Units
--------------------------------- ---------------------------------
(dollars in millions) (in thousands)
2002 2001 2000 2002 2001 2000
--------- --------- --------- --------- --------- ---------
General commodities:
Chemical and petroleum $ 130.7 $ 124.8 $ 127.1 145.4 147.8 155.9
Paper and forest 134.8 129.1 130.8 178.2 182.2 190.6
Agricultural and mineral 97.2 93.8 100.1 126.5 125.7 132.0
--------- --------- --------- --------- --------- ---------
Total general commodities 362.7 347.7 358.0 450.1 455.7 478.5
Intermodal and automotive 59.9 69.1 64.2 287.4 299.8 274.1
Coal 101.2 118.7 105.0 210.0 202.3 184.2
--------- --------- --------- --------- --------- ---------
Carload revenues and carload
and intermodal units 523.8 535.5 527.2 947.5 957.8 936.8
========= ========= =========
Other rail-related revenues 35.8 36.8 42.4
--------- --------- ---------
Total KCSR revenues $ 559.6 $ 572.3 $ 569.6
========= ========= =========
|
Chemical and Petroleum
Chemical and petroleum products accounted for approximately 23.4% of KCSR
revenues in 2002. KCSR transports chemical and petroleum products via tank and
hopper cars primarily to markets in the southeast and northeast United States
through interchanges with other rail carriers. Primary traffic includes
plastics, petroleum and oils, petroleum coke, rubber, and miscellaneous
chemicals. Under the terms of the CN/IC strategic alliance, and through certain
actions taken by the STB, KCSR obtained access to six additional chemical
customers in the Geismar, Louisiana industrial corridor (one of the largest
concentrations of chemical suppliers in the world) effective October 1, 2000.
This access has resulted in additional revenue for KCSR and management believes
it could provide future competitive opportunities for revenue growth as existing
contracts with other rail carriers expire for these customers.
Paper and Forest
Paper and forest products accounted for approximately 24.1% of 2002 KCSR
revenues. The Company's rail lines run through the heart of the southeastern
U.S. timber-producing region. Management believes that forest products made from
trees in this region are generally less expensive than those from other regions
due to lower production costs. As a result, southern yellow pine products from
the southeast are increasingly being used at the expense of western producers
who have experienced capacity reductions because of public policy
considerations. KCSR serves eleven paper mills directly and six others
indirectly through short-line connections. Primary traffic includes pulp and
paper, lumber, panel products (plywood and oriented strand board), engineered
wood products, pulpwood, woodchips, raw fiber used in the production of paper,
pulp and paperboard, as well as metal, scrap and slab steel, waste and military
equipment. Slab steel products are used primarily in the manufacture of drill
pipe for the oil industry, and military equipment is shipped to and from several
military bases on the Company's rail lines.
Agricultural and Mineral
Agricultural and mineral products accounted for approximately 17.4% of KCSR
revenues in 2002. Agricultural products consist of domestic and export grain,
food and related products. Shipper demand for agricultural products is affected
by competition among sources of grain and grain products as well as price
fluctuations in international markets for key commodities. In the domestic grain
business, the Company's rail lines receive and originate shipments of grain and
grain products for delivery to feed mills serving the poultry industry. Through
the marketing agreement with IC&E, the Company's rail lines have access to
sources of corn and other grain in Iowa and other Midwestern states. KCSR
currently serves 35 feed mills along its rail lines throughout Arkansas,
Oklahoma, Texas, Louisiana, Mississippi and Alabama. Export grain shipments
include primarily wheat, soybean and corn transported to the Gulf of Mexico for
overseas destinations and to Mexico via Laredo. Over the long term, grain
shipments are expected to increase as a result of the Company's strategic
investments in Tex Mex and TFM, given Mexico's reliance on grain imports. Food
and related products consist mainly of soybean meal, grain meal, oils and canned
goods, sugar and beer. Mineral shipments consist of a variety of products
including ores, clay, stone and cement.
Intermodal and Automotive
Intermodal and automotive products accounted for approximately 10.7% of 2002
KCSR revenues. The intermodal freight business consists primarily of hauling
freight containers or truck trailers by a combination of water, rail and motor
carriers, with rail carriers serving as the link between the other modes of
transportation. The Company's intermodal business has grown significantly over
the last eight years with intermodal units increasing from 61,748 in 1993 to
274,473 in 2002 and intermodal revenues increasing from $17 million to $51
million during the same period. Through our dedicated intermodal train service
between Meridian and Dallas, the Company competes directly with truck carriers
along the Interstate 20 corridor.
The intermodal business is highly price and service driven as the trucking industry maintains certain competitive advantages over the rail industry. Trucks are not obligated to provide or maintain rights of way and do not have to pay real estate taxes on their routes. In prior years, the trucking industry diverted a substantial amount of freight from railroads as truck operators' efficiency over long distances increased. In response to these competitive pressures, railroad industry management sought avenues to improve the competitiveness of rail traffic and forged numerous alliances with truck companies in order to move more traffic by rail and provide faster, safer and more efficient service to their customers. KCSR has entered into agreements with several trucking companies for train service in several corridors, but those services are concentrated between Dallas and Meridian.
The strategic alliance with CN/IC and marketing agreements with Norfolk Southern provide the Company the potential to further capitalize on the growth potential of intermodal freight revenues, particularly for traffic moving between points in the upper midwest and Canada to Kansas City, Dallas and Mexico. Furthermore, the Company is developing the former Richards-Gebaur Airbase in Kansas City as a U.S. customs pre-clearance processing facility, the Kansas City International Freight Gateway ("IFG"), which, when at full capacity, is expected to handle and process large volumes of domestic and international intermodal freight. Through an agreement with Mazda through the Ford Motor Company Claycomo manufacturing facility located in Kansas City, KCSR has developed an automotive loading and distribution facility at IFG. This loading and distribution facility became operational in April 2000 for the movement of Mazda vehicles. Management believes that, as additional opportunities arise, the IFG facility will be expanded to include additional automotive and intermodal operations.
The Company's automotive traffic consists primarily of vehicle parts moving into Mexico from the northern sections of the United States and finished vehicles moving from Mexico into the United States. CN/IC, Norfolk Southern and TFM have a significant number of automotive production facilities on their rail lines. The Company's rail network essentially serves as the connecting bridge carrier for these movements of automotive parts and finished vehicles.
Coal
Coal historically has been one of the most stable sources of revenues and is the
largest single commodity handled by KCSR. In 2002, coal revenues represented
18.1% of total KCSR revenues. Substantially all coal customers are under long
term contracts, which typically have an average contract term of approximately
five years. KCSR's most significant customer is Southwestern Electric Power
Company ("SWEPCO"- a subsidiary of American Electric Power, Inc.), which is
under contract through 2006. The Company, directly or indirectly, delivers coal
to eight electric generating plants, including the Flint Creek, Arkansas and
Welsh, Texas facilities of SWEPCO, Kansas City Power and Light plants in Kansas
City and Amsterdam, Missouri, an Empire District Electric Company plant near
Joplin, Missouri and an Entergy Gulf States plant in Mossville, Louisiana. The
coal KCSR transports originates in the Powder River Basin in Wyoming and is
transferred to KCSR's rail lines at Kansas City. KCSR serves as a bridge carrier
for coal deliveries to a Texas Utilities electric generating plant in Martin
Lake, Texas. In addition, KCSR delivers lignite to an electric generating plant
at Monticello, Texas. SWEPCO comprised approximately 63.9% of KCSR total coal
revenues and 11.4% of KCS consolidated revenues in 2002. Coal revenue declined
approximately 15% in 2002 compared to 2001 as a result of a contractual rate
reduction, which took effect on January 1, 2002, as well as the expiration in
April 2002 of a contract that was not renewed for another coal customer.
Other
Other rail-related revenues include a variety of miscellaneous services provided
to customers and interconnecting carriers and accounted for approximately 6.4%
of total KCSR revenues in 2002. Major items in this category include railcar
switching services, demurrage (car retention penalties) and drayage (local truck
transportation services). This category also includes haulage services performed
for the benefit of BNSF under an agreement that continues through 2004 and
includes minimum volume commitments.
Railroad Industry
Overview
U.S. railroad companies are categorized by the STB into three types: Class I,
(railroads with annual revenues of at least $250 million, as indexed for
inflation) Class II (Regional) and Class III (Local). There currently are seven
Class I railroads in the United States, which can be further divided
geographically by eastern or western classification. The eastern railroads are
CSX Corporation ("CSX"), Grand Trunk Corporation (which is owned by CN and
includes IC and Wisconsin Central Transportation Corporation - "Wisconsin
Central")) and Norfolk Southern. The western railroads include BNSF, KCSR, Soo
Line Railroad Company (owned by Canadian Pacific Railway Company ("CP")) and UP.
The STB and Regulation
The STB, an independent body administratively housed within the Department of
Transportation, is responsible for the economic regulation of railroads within
the United States. The STB's mission is to ensure that competitive, efficient
and
safe transportation services are provided to meet the needs of shippers, receivers and consumers. The STB was created by an Act of Congress known as the ICC Termination Act of 1995 ("ICCTA"). Passage of the ICCTA represented a further step in the process of streamlining and reforming the Federal economic regulatory oversight of the railroad, trucking and bus industries that was initiated in the late 1970's and early 1980's. The STB is authorized to have three members, each with a five-year term of office. The STB Chairman is designated by the President of the United States from among the STB's members. The STB adjudicates disputes and regulates interstate surface transportation. Railway transportation matters under the STB's jurisdiction in general include railroad rate and service issues, rail restructuring transactions (mergers, line sales, line construction and line abandonment) and railroad labor matters.
The U.S. railroad industry was significantly deregulated with the passage of The Staggers Rail Act of 1980 (the "Staggers Act"). In enacting the Staggers Act, Congress recognized that railroads faced intense competition from trucks and other modes of transportation for most freight traffic and that prevailing regulation prevented them from earning adequate revenues and competing effectively. Through the Staggers Act, a new regulatory scheme allowing railroads to establish their own routes, tailor their rates to market conditions and differentiate rates on the basis of demand was put in place. The basic principle of the Staggers Act was that reasonable rail rates should be a function of supply and demand. The Staggers Act, among others things:
o allows railroads to price competing routes and services differently to reflect relative demand;
o allows railroads to enter into confidential rate and service contracts with shippers; and
o abolishes collective rate making except among railroads participating in a joint-line movement.
If it is determined that a railroad is not facing enough competition to hold down prices, then the STB has the authority to investigate the actions of the railroad.
The Staggers Act has had a positive effect on the U.S. rail industry, competition, and savings to consumers. Lower rail rates brought about by the Staggers Act have resulted in significant cost savings for shippers and their customers. After decades of steady decline, the rail market share of inter-city freight ton-miles bottomed out at 35.2% in 1978 and has trended slowly upward since then, reaching 41.0% in 2000 and 41.7% in 2001.
Recent Events in Railroad Consolidation
On June 11, 2001, the STB issued new rules governing major railroad mergers and
consolidations involving two or more "Class I" railroads. These rules
substantially increase the burden on rail merger applicants to demonstrate that
a proposed transaction would be in the public interest. The rules require
applicants to demonstrate that, among other things, a proposed transaction would
enhance competition where necessary to offset negative effects of the
transaction, such as competitive harm, and to address fully the impact of the
transaction on transportation service.
The STB recognized, however, that a merger between KCSR and another Class I carrier would not necessarily raise the same concerns and risks as potential mergers between larger Class I railroads. Accordingly, the STB decided that for a merger proposal involving KCSR and another Class I railroad, the STB will waive the application of the new rules and apply the rules previously in effect unless it is persuaded that the new rules should apply.
Competition
The Company's rail operations compete against other railroads, many of which are
much larger and have significantly greater financial and other resources. Since
1994, there has been significant consolidation among major North American rail
carriers, including the 1995 merger of Burlington Northern, Inc. and Santa Fe
Pacific Corporation ("BN/SF", collectively "BNSF"), the 1995 merger of the UP
and the Chicago and North Western Transportation Company ("UP/CNW") and the 1996
merger of UP with Southern Pacific Corporation ("SP"). Further, Norfolk Southern
and CSX purchased the assets of Conrail in 1998 and the CN acquired the IC in
June 1999. In October 2001, CN completed its acquisition of Wisconsin Central
Transportation Corporation. As a result of this consolidation, the railroad
industry is now dominated by a few "mega-carriers." KCS management believes that
revenues were negatively affected by the UP/CNW, UP/SP and BN/SF mergers, which
led to diversions of rail traffic away from KCSR's rail lines. Management
regards the larger western railroads (BNSF and UP), in particular, as significant competitors to the Company's operations and prospects because of their substantial resources. The ongoing impact of these mergers is uncertain. KCS management believes, however, that because of the Company's investments and strategic alliances, it is positioned to attract additional rail traffic through our NAFTA rail network.
The Company is subject to competition from motor carriers, barge lines, and other maritime shipping, which compete across certain routes in our operating area. Truck carriers have eroded the railroad industry's share of total transportation revenues. Changing regulations, subsidized highway improvement programs and favorable labor regulations have improved the competitive position of trucks in the United States as an alternative mode of surface transportation for many commodities. In the United States, the trucking industry generally is more cost and transit-time competitive than railroads for short-haul distances. In addition, Mississippi and Missouri River barge traffic, among others, compete with KCSR and its rail connections in the transportation of bulk commodities such as grains, steel and petroleum products. Intermodal traffic and certain other traffic face highly price sensitive competition, particularly from motor carriers. However, rail carriers, including KCSR, have placed an emphasis on competing in the intermodal marketplace and working together with motor carriers and each other to provide end-to-end transportation of products.
While deregulation of freight rates has enhanced the ability of railroads to compete with each other and with alternative modes of transportation, this increased competition has resulted in downward pressure on freight rates. Competition with other railroads and other modes of transportation is generally based on the rates charged, the quality and reliability of the service provided and the quality of the carrier's equipment for certain commodities.
Employees and Labor Relations
Labor relations in the U.S. railroad industry are subject to extensive
governmental regulation under the Railway Labor Act ("RLA"). Under the RLA,
national labor agreements are renegotiated when they become open for
modification, but their terms remain in effect until new agreements are reached.
Typically, neither management nor labor employees are permitted to take economic
action until extended procedures are exhausted. Existing national union
contracts with the railroads became amendable at the end of 1999. Included in
the contracts was a provision for wages to increase automatically in the year
following the contract term. These federal labor regulations are often more
burdensome and expensive than regulations governing other industries and may
place KCS at a competitive disadvantage relative to other non-rail industries,
such as trucking competitors, which are not subject to these regulations.
Railroad industry personnel are covered by the Railroad Retirement Act ("RRA") instead of the Social Security Act. Employer contributions under the RRA are currently substantially higher than those under the Social Security Act and may rise further because of the increasing proportion of retired employees receiving benefits relative to the number of working employees. The RRA currently requires up to a 21.85% contribution by railroad employers on eligible wages while the Social Security and Medicare Acts only require a 7.65% employer contribution on similar wage bases. Railroad industry personnel are also covered by the Federal Employers' Liability Act ("FELA") rather than state workers' compensation systems. FELA is a fault-based system with compensation for injuries settled by negotiation and litigation, which can be expensive and time-consuming. By contrast, most other industries are covered by state administered no-fault plans with standard compensation schedules. The difference in the labor regulations for the rail industry compared to the non-rail industries illustrates the competitive disadvantage placed upon the rail industry by federal labor regulations.
Approximately 84% of KCSR employees are covered under various collective bargaining agreements. Periodically, the collective bargaining agreements with the various unions become eligible for re-negotiation. In 1996, national labor contracts governing KCSR were negotiated with all major railroad unions, including the United Transportation Union ("UTU"), the Brotherhood of Locomotive Engineers ("BLE"), the Transportation Communications International Union ("TCU"), the Brotherhood of Maintenance of Way Employees ("BMWE"), and the International Association of Machinists and Aerospace Workers. In August 2002, a new labor contract was reached with the UTU. The provisions of this agreement include the use of remote control locomotives in and around terminals and retroactive application of wage increases back to July 1, 2002. Also, a new labor contract has been reached with the TCU. It is anticipated that this agreement will be signed during the first quarter of 2003. A new labor contract was reached with the BMWE effective
May 31, 2001. Formal negotiations to enter into new agreements are in progress with the other unions and the 1996 labor contracts will remain in effect until new agreements are reached. The wage increase elements of these new agreements may have retroactive application. Management has reached new agreements with all but one of the unions relating to the former Gateway Western. Gateway Western was merged into KCSR on October 1, 2001. Similarly, management has reached new agreements with all but one of the unions relating to the former MidSouth Railroad ("MidSouth") employees (MidSouth was merged into KCSR on January 1, 1994). Discussions with these unions are ongoing. The provisions of the various labor agreements generally include periodic general wage increases, lump-sum payments to workers and greater work rule flexibility, among other provisions. Management does not expect that the negotiations or the resulting labor agreements will have a material impact on our consolidated results of operations, financial condition or cash flows.
Railroad Retirement Improvement Act
On December 21, 2001, the Railroad Retirement and Survivors' Improvement Act of
2001 ("RRIA") was signed into law. This legislation liberalizes early retirement
benefits for employees with 30 years of service by reducing the full benefit age
from 62 to 60, eliminates a cap on monthly retirement and disability benefits,
lowers the minimum service requirement from 10 years to 5 years of service, and
provides for increased benefits for surviving spouses. It also provides for the
investment of railroad retirement funds in non-governmental assets, adjustments
in the payroll tax rates paid by employees and employers, and the repeal of a
supplemental annuity work-hour tax. The law also reduced the employer
contribution for payroll taxes by 0.5% in 2002 and by an additional 1.4% in
2003. Beginning in 2004, the employer contribution will be based on a formula
and could range between 8.2% and 22.1%. These reductions in the employer
contributions under the RRA are expected to have a favorable impact on fringe
benefits expenses in 2003. Additionally, the reduction in the retirement age
from 62 to 60 is expected to result in increased employee attrition, leading to
additional potential cost savings since it is not anticipated that all employees
selecting early retirement will be replaced.
Insurance
KCS maintains multiple insurance programs for its various subsidiaries including
rail liability and property, general liability, directors and officers'
coverage, workers compensation coverage and various specialized coverage for
specific entities as needed. Coverage for KCSR is by far the most significant
part of the KCS program. It includes liability coverage up to $250 million,
subject to a $3 million deductible ($10 million for incidents occurring on or
after July 1, 2002) and certain aggregate limitations, and property coverage up
to $200 million subject to a $2 million deductible and certain aggregate
limitations. We believe that our insurance program is in line with industry
norms given the size of the Company and provides adequate coverage for potential
losses.
Employees
As of December 31, 2002, the approximate number of employees of KCS and its
consolidated subsidiaries was as follows:
KCSR 2,653
All other combined 54
----------
Total 2,707
==========
|
Available Information
The Company's Internet address is www.kcsi.com. Through this website, KCS makes
available, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K, and amendments to those reports, as
soon as reasonably practicable after electronic filing or furnishing of these
reports with the Securities and Exchange Commission.
Item 2. Properties
The information set forth in response to Item 102 of Regulation S-K under Item 1, "Business", of this Form 10-K and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", is incorporated by reference in response to this Item 2.
In the opinion of management, the various facilities, office space and other properties owned and/or leased by the Company and its subsidiaries are adequate for current operating needs.
KCSR
Certain KCSR property statistics follow:
2002 2001 2000
--------- --------- ---------
Route miles - main and branch line 3,109 3,103 3,103
Total track miles 4,359 4,444 4,444
Miles of welded rail in service 2,261 2,197 2,157
Main line welded rail (%) 61% 59% 59%
Cross ties replaced 232,993 233,489 355,444
Average Age (in years): 2002 2001 2000
----------------------- --------- --------- ---------
Wood ties in service 16.0 16.0 15.2
Rail in main and branch line 29.9 28.9 29.5
Road locomotives 24.6 23.6 22.9
All locomotives 25.6 24.5 23.8
|
KCSR's fleet of locomotives and rolling stock consisted of the following at December 31:
2002 2001 2000
Leased Owned Leased Owned Leased Owned
-------- -------- -------- -------- -------- --------
Locomotives:
Road Units 302 122 304 122 324 122
Switch Units 52 4 52 4 55 9
Other -- 8 -- 8 -- 8
-------- -------- -------- -------- -------- --------
Total 354 134 356 134 379 139
======== ======== ======== ======== ======== ========
Rolling Stock:
Box Cars 5,358 1,366 6,164 1,420 5,951 2,020
Gondolas 760 74 780 88 842 95
Hopper Cars 2,614 966 2,002 1,179 2,217 1,285
Flat Cars (Intermodal
And Other) 1,599 541 1,585 601 1,584 616
Tank Cars 42 40 44 43 46 55
Auto Rack 201 -- 201 -- 201 --
-------- -------- -------- -------- -------- --------
Total 10,574 2,987 10,776 3,331 10,841 4,071
======== ======== ======== ======== ======== ========
|
As of December 31, 2002, KCSR's fleet consisted of 488 diesel locomotives, of which 134 were owned, 333 leased from Southern Capital and 21 leased from non-affiliates. KCSR's fleet of rolling stock consisted of 13,561 freight cars, of which 2,963 were owned, 3,387 leased from Southern Capital and 7,211 leased from non-affiliates. The locomotives and freight cars leased from Southern Capital secure pass through certificates issued by Southern Capital during 2002. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments - Debt Refinancing - Southern Capital."
The owned equipment is subject to liens created under our senior secured credit facilities, as well as liens created under certain conditional sales agreements, capital leases, and equipment trust certificates. KCSR indebtedness with respect to equipment trust certificates and capital leases totaled approximately $26.0 million at December 31, 2002.
KCSR, in support of its transportation operations, owns and operates repair shops, depots and office buildings along its right-of-way. A major facility, the Deramus Yard, is located in Shreveport, Louisiana and includes a general office building, locomotive repair shop, car repair shops, customer service center, material warehouses and fueling facilities totaling approximately 227,000 square feet. KCSR owns a 107,800 square foot facility in Pittsburg, Kansas that previously was used as a diesel locomotive repair facility. This facility was closed during 1999 and is now being leased to an engineering and manufacturing company. KCSR also owns freight warehousing and office facilities in Dallas, Texas totaling approximately 150,000 square feet. Other facilities owned by KCSR include a 21,000 square foot freight car repair shop in Kansas City, Missouri and approximately 15,000 square feet of office space in Baton Rouge, Louisiana. KCSR also has the support of a locomotive repair facility in Kansas City, Missouri. This facility is owned and operated by General Electric Company ("GE") to repair and maintain 50 AC 4400 locomotives manufactured by GE. These locomotives are leased by KCSR from Southern Capital.
In June 2001, the Company entered into a 17-year lease agreement for a new corporate headquarters building in downtown Kansas City, Missouri. In April 2002, the Company moved its corporate offices into this building. The Company's corporate offices had previously been located in another building in downtown Kansas City, Missouri, which was leased from a subsidiary of the Company until the building was sold in June 2001.
KCSR owns six intermodal facilities and has contracted with third parties to operate these facilities. These facilities are located in Dallas; Kansas City; Shreveport and New Orleans, Louisiana; Jackson, Mississippi and Salisaw, Oklahoma. The Company has constructed an automobile facility and has plans to construct an intermodal facility at the former Richards-Gebaur Airbase in Kansas City, Missouri. A portion of the automotive facility became operational in April 2000 for the storage and movement of automobiles. Intermodal and automotive operations at the facility may be further expanded in the future as business opportunities arise. The Company is also expanding the intermodal facilities in Kansas City, Dallas and Shreveport. The various intermodal facilities include strip tracks, cranes and other equipment used in facilitating the transfer and movement of trailers and containers. KCSR also has six bulk transload facilities located at Kansas City, Missouri; Spiro, Oklahoma; Jackson, Mississippi; Dallas Texas; Sauget, Illinois and Baton Rouge, Louisiana. Due to growth in transload traffic, KCSR expanded its facility in Spiro during the fourth quarter of 2002, and plans to expand the facility in Jackson during the first half of 2003. The sixth transload facility was opened in Baton Rouge, Louisiana in early 2003. A second Dallas transload facility was expected to open during 2002, however, due to lower than expected traffic as a result of the continued slowdown in the North American economy, opening of this facility has been postponed pending development of additional traffic. Transload operations consist of rail/truck shipments whereby the products shipped are unloaded from the trailer, container or rail car and reloaded onto the other mode of transportation. Transload is similar to intermodal, except that intermodal shipments transfer the entire container or trailer and transload shipments transfer only the product being shipped.
KCSR owns 16.6% of the Kansas City Terminal Railway Company, which owns and operates approximately 80 miles of track, and operates an additional eight miles of track under trackage rights in greater Kansas City, Missouri. KCSR also leases for operating purposes certain short sections of trackage owned by various other railroad companies and jointly owns certain other facilities with these railroads.
Systems and Technology
Management Control System
On July 14, 2002, the Company initiated a conversion from its legacy system
operating platform to a Management Control System ("MCS") on KCSR. The Company
had previously implemented a pilot version of MCS on the former Gateway Western
(which was merged into KCSR effective October 1, 2001) in the first quarter of
2000. In anticipation of the conversion to MCS, significant resources were
committed to the planning and training of personnel. However, upon
implementation of MCS, personnel responsible for train operations experienced
initial difficulties implementing the
new system as they learned to respond to the data discipline demanded by the new system. As a result, KCSR experienced considerable congestion throughout its U.S. rail network with escalated freight car volumes in its major terminals and less efficient train movements. Although management believes that the issues related to the implementation of MCS largely were resolved prior to the end of 2002, the initial difficulties experienced by operating personnel in converting to the new platform led to the congestion issues and operating inefficiencies during the second half of 2002, which contributed to a decline in consolidated operating income. See Item 7, "Management's Discussion of Financial Condition and Results of Operations - Results of Operations" for a discussion of the impact on operations. MCS includes the following elements:
o a new waybill system;
o a new transportation system;
o a work queue management infrastructure;
o a service scheduling system; and
o EDI interfaces to the new systems.
MCS is designed to deliver work orders to yard and train crews to ensure that the service being provided reflects what was sold to the customer. The system also tracks individual shipments as they move across the rail system, compares that movement to the service sold to the customer and automatically reports the shipment's status to the customer and to operations management. If a shipment falls behind schedule, MCS automatically generates alerts and action recommendations so that corrective action promptly can be initiated.
MCS provides better analytical tools for management to use in its decision-making process. MCS provides more accurate and timely information on, among other things, terminal dwell time, car velocity through terminals and priority of switching to meet schedules. A data warehouse provides an improved decision support infrastructure. By making decisions based upon that information, management is working to improve service quality and the utilization of locomotives, rolling stock, crews, yards, and line of road and thereby reduce cycle times and costs. With the implementation of MCS service scheduling, personnel are striving to improve customer service through improved advanced planning and real-time decision support. With the design of all new business processes around workflow technology, management intends to more effectively follow key operating statistics to measure productivity and improve performance across the entire operation.
As KCSR continues to become more accustomed to using MCS, management expects that clerical and information technology group efficiencies will also continue to improve. Management believes that information technology and other support groups will be able to reduce maintenance costs, increase their flexibility to respond to new requests and improve productivity. By using a layered design approach, MCS is expected to have the ability to extend to new technology as it becomes available. MCS can be further modified to connect customers with additional applications via the Internet and is intended to be constructed to support multiple railroads, permit modifications to accommodate the local language requirements of the area and operate across multiple time zones. A later enhancement of MCS is expected to also include revenue and car accounting systems. Additionally, MCS is expected to be implemented on Tex Mex later this year and on TFM next year.
Train Dispatching System
KCSR is currently operating on two types of train dispatching systems, Direct
Train Control ("DTC") and Centralized Traffic Control ("CTC"). DTC uses direct
radio communication between dispatchers and engineers to coordinate train
movement. DTC is used on approximately 65% of KCSR's track, including the track
from Shreveport to Meridian and Shreveport to New Orleans. CTC controls switches
and signals in the field from the dispatcher's desk top via microwave link. CTC
is used on approximately 35% of KCSR's track, including the track from Kansas
City to Beaumont and Shreveport to Dallas. CTC is normally utilized on heavy
traffic areas. Each dispatcher has an assigned territory displayed on
high-resolution monitors driven by a mini-mainframe in Shreveport with a remote
station in Beaumont. KCSR implemented a new dispatching computer system in May
1999, which has enhanced the overall efficiency of train movements on the
railroad system.
Grupo TFM
TFM operates approximately 2,650 miles of main and branch lines and certain
additional sidings, spur tracks and main line under trackage rights. TFM has the
right to operate the rail lines, but does not own the land, roadway or
associated structures. Approximately 81% of the main line operated by TFM
consists of continuously welded rail. As of December 31, 2002, TFM owned 468
locomotives, owned or leased from affiliates 4,558 freight cars and leased from
non-affiliates 150 locomotives and 6,800 freight cars. Grupo TFM (through TFM)
has office space at which various operational, administrative, managerial and
other activities are performed. The primary facilities are located in Mexico
City and Monterrey, Mexico. TFM leases 94,915 square feet of office space in
Mexico City and holds, under the Concession, a 115,157 square foot facility in
Monterrey. On February 27, 2002, the Company, Grupo TMM, and certain of Grupo
TMM's affiliates entered into an agreement with TFM to sell to TFM all of the
common stock of Mexrail. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Developments - Sale of
Mexrail, Inc. to TFM" for further discussion.
Panama Canal Railway Company
PCRC, a joint venture in which the Company owns 50% of the common stock (or a
42% equity interest), holds the concession to operate a 47-mile railroad that
runs parallel to the Panama Canal. Reconstruction of the railroad was completed
during 2001 and both passenger and freight traffic commenced during 2001. PCRC
leases four locomotives and owns two locomotives. PCRC also owns 12 double stack
cars, 6 passenger cars and various other infrastructure improvements and
equipment. Under the concession, PCRC constructed and operates operating
intermodal terminal facilities at each end of its railroad and an approximate
15,000 square foot equipment maintenance facility. All of this property and
equipment is subject to liens securing PCRC debt as further described in Item 1,
"Narrative Description of the Business - Rail Network - Significant Investments
- Panama Canal Railway Company."
Other
The Company owns 1,025 acres of property located on the waterfront in the Port
Arthur, Texas area, which includes 22,000 linear feet of deep-water frontage and
three docks. Port Arthur is an uncongested port with direct access to the Gulf
of Mexico. Approximately 75% of this property is available for development.
Trans-Serve, Inc. operates a railroad wood tie treating plant in Vivian, Louisiana under an industrial revenue bond lease arrangement with an option to purchase. This facility includes buildings totaling approximately 12,000 square feet.
Pabtex GP LLP owns a 70-acre bulk commodity handling facility in Port Arthur, Texas.
Mid-South Microwave was merged into KCSR effective December 31, 2002. Prior to the merger, Mid-South Microwave, Inc. owned and operated a microwave system, which extended essentially along the right-of-way of KCSR from Kansas City to Dallas, Beaumont and Port Arthur, Texas and New Orleans, Louisiana. This system is now owned by KCSR.
Other subsidiaries of the Company own approximately 5,500 acres of land at various points adjacent to the KCSR right-of-way. Other properties owned include a 354,000 square foot warehouse at Shreveport, Louisiana and several former railway buildings now being rented to non-affiliated companies, primarily as warehouse space.
Item 3. Legal Proceedings
The information set forth in response to Item 103 of Regulation S-K under Part II Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Other - Litigation, - Other - Environmental Matters and -Significant Developments - Houston Cases" of this Form 10-K is incorporated by reference in response to this Item 3. In addition, see discussion in Part II Item 8, "Financial Statements and Supplementary Data - Note 11 - Commitments and Contingencies" of this Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the three-month period ended December 31, 2002.
Executive Officers of the Company
Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to paragraph
(b) of Item 401 of Regulation S-K, the following list is included as an
unnumbered Item in Part I of this Form 10-K in lieu of being included in KCS's
Definitive Proxy Statement which will be filed no later than 120 days after
December 31, 2002. All executive officers are elected annually and serve at the
discretion of the Board of Directors. All of the executive officers have
employment agreements with the Company.
Name Age Position(s)
---- --- -----------
Michael R. Haverty 58 Chairman of the Board, President and Chief
Executive Officer
Gerald K. Davies 58 Executive Vice President and Chief Operating
Officer
Ronald G. Russ 48 Executive Vice President and Chief Financial
Officer
Jerry W. Heavin 51 Senior Vice President - Operations of KCSR
Larry O. Stevenson 39 Senior Vice President - Sales and Marketing of
KCSR
Warren K. Erdman 44 Vice President - Corporate Affairs
Paul J. Weyandt 50 Vice President and Treasurer
Louis G. Van Horn 44 Vice President and Comptroller
Jay M. Nadlman 42 Associate General Counsel and Corporate
Secretary
|
The information set forth in the Company's Definitive Proxy Statement in the description of Nominees for Directors to Serve Until the Annual Meeting of Stockholders in 2006 in Proposal 1 with respect to Mr. Haverty is incorporated herein by reference.
Gerald K. Davies has served as Executive Vice President and Chief Operating Officer of KCS since July 18, 2000. Mr. Davies joined KCSR in January 1999 as the Executive Vice President and Chief Operating Officer. Mr. Davies has served as a director of KCSR since November 1999. Prior to joining KCSR, Mr. Davies served as the Executive Vice President of Marketing with Canadian National Railway from 1993 through 1998. Mr. Davies held senior management positions with Burlington Northern Railway from 1976 to 1984 and 1991 to 1993, respectively, and with CSX Transportation from 1984 to 1991.
Ronald G. Russ has served as Executive Vice President and Chief Financial Officer since January 16, 2003. Mr. Russ served as Senior Vice President and Chief Financial Officer from July 1, 2002 to January 15, 2003. Mr. Russ served as Executive Vice President and Chief Financial Officer of Wisconsin Central from 1999 to 2002. He served as Treasurer of Wisconsin Central from 1987 to 1993. From 1993 to 1999 he was executive manager and chief financial officer for Tranz Rail Holdings Limited, an affiliate of Wisconsin Central in Wellington, New Zealand. He also served in various capacities with Soo Line Railroad and The Chicago, Milwaukee, St. Paul and Pacific Railroad Company, spanning a 25-year career in the railroad industry.
Jerry W. Heavin has served as Senior Vice President of Operations and a director of KCSR since July 9, 2002. Mr. Heavin joined KCSR on September 1, 2001 and served as Vice President of Engineering of KCSR until July 8, 2002. Prior to joining KCSR, Mr. Heavin served as an independent engineering consultant from 1997 through August 2001. Mr. Heavin began his railroad career in 1970 with UP, serving in various capacities, including general superintendent transportation and chief engineer of facilities.
Larry O. Stevenson has served as Senior Vice President of Marketing and Sales of KCSR since January 1, 2003. Mr. Stevenson served as Vice President - Paper and Forest Products of KCSR from September 1, 2000 to December 31, 2002 and General Director Customer Service of KCSR from February 14, 2000 to August 31, 2000. Prior to joining
KCSR, Mr. Stevenson served in various capacities at Canadian National Railway from June 1983 to December 1999, most recently as Assistant Vice President of Sales.
Warren K. Erdman has served as Vice President--Corporate Affairs of KCS since April 15, 1997 and as Vice President--Corporate Affairs of KCSR since May 1997. Prior to joining KCS, Mr. Erdman served as Chief of Staff to United States Senator Kit Bond of Missouri from 1987 to 1997.
Paul J. Weyandt has served as Vice and President and Treasurer of KCS and of KCSR since September 2001. Before joining KCS, Mr. Weyandt was a consultant to the Structured Finance Group of GE Capital Corporation from May 2001 to September 2001. Prior to consulting, Mr. Weyandt spent 23 years with BNSF, most recently as Assistant Vice President - Finance and Assistant Treasurer.
Louis G. Van Horn has served as Vice President and Comptroller of KCS since May 1996. Mr. Van Horn has also served as Vice President and Comptroller of KCSR since 1995. Mr. Van Horn was Comptroller of KCS from September 1992 to May 1996. From January 1992 to September 1992, Mr. Van Horn served as Assistant Comptroller of KCS. Mr. Van Horn is a Certified Public Accountant.
Jay M. Nadlman has served as Associate General Counsel and Corporate Secretary of KCS since April 1, 2001. Mr. Nadlman joined KCS in December 1991 as a General Attorney, and was promoted to Assistant General Counsel in 1997, serving in that capacity until April 1, 2001. Mr. Nadlman has served as Associate General Counsel and Secretary of KCSR since May 3, 2001 and as Assistant General Counsel and Assistant Secretary from August 1997 to May 3, 2001. Prior to joining KCS, Mr. Nadlman served as an attorney with Union Pacific Railroad Company from 1985 to 1991.
There are no arrangements or understandings between the executive officers and any other person pursuant to which the executive officer was or is to be selected as an officer of KCS, except with respect to the executive officers who have entered into employment agreements, which agreements designate the position(s) to be held by the executive officer.
None of the above officers are related to one another by family.
Part II
Item 5. Market for the Company's Common Stock and Related Stockholder
Matters
The information set forth in response to Item 201 of Regulation S-K on the cover (page i) under the heading "Company Stock," and in Part II Item 8, "Financial Statements and Supplementary Data, at Note 13 - Quarterly Financial Data (Unaudited)" of this Form 10-K is incorporated by reference in response to this Item 5.
On July 12, 2000, KCS completed its spin-off of Stilwell through a special dividend of Stilwell common stock distributed to KCS common stockholders of record on June 28, 2000 ("Spin-off"). The Spin-off occurred after the close of business of the New York Stock Exchange on July 12, 2000, and each KCS stockholder received two shares of the common stock of Stilwell for every one share of KCS common stock owned on the record date. The total number of Stilwell shares distributed was 222,999,786. Also on July 12, 2000, KCS completed a reverse stock split whereby every two shares of KCS common stock were converted into one share of KCS common stock. The Company's stockholders approved a one-for-two reverse stock split in 1998 in contemplation of the Spin-off. The total number of KCS shares outstanding immediately following this reverse split was 55,749,947.
The Company has not declared any cash dividends on its common stock during the last two fiscal years and does not anticipate making any cash dividend payments to common stockholders in the foreseeable future. Pursuant to the Company's amended and restated credit agreement as further described in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments - Debt Refinancing - New Credit Agreement," the Company is restricted from the payment of cash dividends on the Company's common stock.
During 2002 and 2000, certain debt securities were issued by KCSR pursuant to Rule 144A under the Securities Act of 1933 in the United States and Regulation S outside of the United States. These notes are guaranteed by the Company and were ultimately exchanged for registered notes. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments - Debt Refinancing - 7 1/2% Senior Notes and - Significant Developments - 2000 Debt Refinancing and Re-capitalization of the Company's Debt Structure - Registration of Senior Unsecured Notes" for further discussion.
As of February 28, 2003, there were 5,674 holders of the Company's common stock based upon an accumulation of the registered stockholder listing.
Item 6. Selected Financial Data (dollars in millions, except per share
and ratio data)
The selected financial data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included under Item 7 of this Form 10-K and the consolidated financial statements and the related notes thereto, and the Reports of Independent Accountants thereon, included under Item 8, "Financial Statements and Supplementary Data" of this Form 10-K and such data is qualified by reference thereto. All years reflect the 1-for-2 reverse common stock split to shareholders of record on June 28, 2000 paid July 12, 2000.
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Revenues $ 566.2 $ 583.2 $ 578.7 $ 609.0 $ 620.0
Equity in net earnings (losses)
from unconsolidated affiliates -
continuing operations $ 43.4 $ 27.1 $ 22.1 $ 5.2 $ (2.9)
Income from continuing operations (i) $ 57.2 $ 31.1(ii) $ 16.7 $ 10.2 $ 38.0
Income from continuing
operations per common share:
Basic $ 0.94 $ 0.53 $ 0.29 $ 0.18 $ 0.69
Diluted 0.91 0.51 0.28 0.17 0.67
Total assets (iii) $ 2,008.8 $ 2,010.9 $ 1,944.5 $ 2,672.0 $ 2,337.0
Total debt $ 582.6 $ 658.4 $ 674.6 $ 760.9 $ 836.3
Cash dividends per
Common share $ -- $ -- $ -- $ 0.32 $ 0.32
Ratio of earnings to fixed charges (iv) 1.3x 1.1x 1.0x 1.2x 1.9x
|
(i) Income from continuing operations for the years ended December 31, 2002, 2001 and 2000 include certain unusual costs and expenses and other income as further described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - "Results of Operations." These costs include MCS implementation related costs, benefits received from the settlement of certain legal and insurance claims, severance costs and expenses associated with legal verdicts against the Company, gains recorded on the sale of operating property, among others. Other non-operating income includes gains recorded on sale of non-operating properties and investments. For the year ended December 31, 1999, income from continuing operations includes unusual costs and expenses related to facility and project closures, employee separations Separation related costs, labor and personal injury related issues.
(ii) Income from continuing operations for the year ended December 31, 2001 excludes a charge for the cumulative effect of an accounting change of $0.4 million (net of income taxes of $0.2 million). This charge reflects the Company's adoption of Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective January 1, 2001.
(iii) The total assets presented herein as of December 31, 1999 and 1998 include the net assets of Stilwell of $814.6 million and $540.2 million respectively. Due to the Spin-off on July 12, 2000, the total assets as of December 31, 2002, 2001 and 2000 do not include the net assets of Stilwell.
(iv) The ratio of earnings to fixed charges is computed by dividing earnings
by fixed charges. For this purpose "earnings" represent the sum of (i)
pretax income from continuing operations adjusted for income (loss) from
unconsolidated affiliates, (ii) fixed charges, (iii) distributed income
from unconsolidated affiliated and (iv) amortization of capitalized
interest, less capitalized interest. "Fixed charges" represent the sum of
(i) interest expensed, (ii) capitalized interest, (iii) amortization of
deferred debt issuance costs and (iv) one-third of our annual rental
expense, which management believes is representative of the interest
component of rental expense.
The information set forth in response to Item 301 of Regulation S-K under Part II Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", of this Form 10-K is incorporated by reference in partial response to this Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
The discussion set forth below, as well as other portions of this Form 10-K, contains forward-looking comments that are not based upon historical information. Such forward-looking comments are based upon information currently available to management and management's perception thereof as of the date of this Form 10-K. Readers can identify these forward-looking comments by the use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. The actual results of operations of Kansas City Southern ("KCS" or the "Company") could materially differ from those indicated in forward-looking comments. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in the Company's Current Report on Form 8-K dated December 11, 2001, which is on file with the U.S. Securities and Exchange Commission ("SEC") (File No.1-4717) and is hereby incorporated by reference herein. Readers are strongly encouraged to consider these factors when evaluating any forward-looking comments. The Company will not update any forward-looking comments set forth in this Form 10-K.
The discussion herein 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 8 of this Form 10-K. This discussion should be read in conjunction with these consolidated financial statements, the related notes and the Reports of Independent Accountants thereon, and is qualified by reference thereto.
General
Kansas City Southern ("KCS" or the "Company") is a Delaware corporation. KCS,
formerly Kansas City Southern Industries, Inc., is a holding company and its
principal subsidiaries and affiliates include the following:
o The Kansas City Southern Railway Company ("KCSR"), a wholly-owned
subsidiary;
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), a
46.6% owned unconsolidated affiliate, which owns 80% of the common stock of
TFM, S.A. de C.V. ("TFM"). TFM wholly owns Mexrail, Inc. ("Mexrail").
Mexrail owns 100% of The Texas-Mexican Railway Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate that leases locomotive and rail equipment to KCSR;
o Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of which
KCSR owns 50% of the common stock. PCRC owns all of the common stock of
Panarail Tourism Company ("Panarail").
During 2002, due to the relocation of the Company's headquarters to a new building in downtown Kansas City, Missouri, the Company sold its interest in Wyandotte Garage Corporation ("WGC"), which owns and operates a parking facility located adjacent to the Company's former headquarters building in downtown Kansas City, Missouri.
KCS, as the holding company, supplies its various subsidiaries with managerial, legal, tax, financial and accounting services, in addition to managing other "non-operating" investments.
Effective October 1, 2001, the Gateway Western Railway Company ("Gateway Western") was merged into KCSR. Discussions of KCSR in this Form 10-K include the operations and operating results of Gateway Western.
All per share information included in this Item 7 is presented on a diluted basis unless specifically identified otherwise.
RECENT DEVELOPMENTS
The following items reflect significant developments, events or transactions that have occurred during the year ended December 31, 2002 or in 2003 prior to the Company's filing of this Form 10-K.
Value Added Tax ("VAT") Lawsuit. As previously announced in the Company's Current Report on Form 8-K dated October 11, 2002, a three judge panel of the Court of the First Circuit ("Appellate Court") in Mexico City unanimously ruled in favor of TFM, finding that the decision issued by the Superior Court of the Federal Tribunal of Fiscal and Administrative Justice ("Fiscal Court") denying TFM's VAT claim had violated TFM's constitutional rights. The Appellate Court, in its decision, remanded the case back to the Fiscal Court with specific instructions to vacate its prior decision and enter a new decision consistent with the guidance provided by the Appellate Court's ruling. The Appellate Court ruling requires the fiscal authorities to issue the VAT credit certificate only in the name of the interested party, to issue the VAT credit certificate only in strict accordance with the terms of the fiscal code, and to deliver the VAT credit certificate only to the beneficiary.
As previously announced in the Company's Current Report on Form 8-K dated December 9, 2002, the Fiscal Court once again has issued a ruling denying TFM's VAT claim. TFM has filed in 2003 a timely constitutional appeal from the Fiscal Court's decision with the Appellate Court. Based on the advice of TFM's legal counsel, the Company and Grupo TMM remain confident of TFM's right under Mexican law to receive the VAT credit certificate. The face value of the VAT credit at issue is approximately $206 million. TFM's VAT claim dates from 1997. The amount of any recovery would, in accordance with Mexican law, reflect the face value of the VAT credit adjusted for inflation and interest accruals from 1997, with certain limitations.
Automobile Accident. On January 28, 2003, a passenger car carrying a driver and four passengers near Batchelor, Louisiana struck a KCSR section truck carrying two employees. All five occupants of the passenger car were pronounced dead at the scene while the two KCSR employees suffered minor injuries. The driver of the KCSR truck has been charged with five counts of negligent homicide. Investigation of the incident is still in its early stages and KCSR has not been served with any litigation regarding this incident. KCSR believes that it has insurance coverage for all but its $100,000 deductible in potential damages arising from this incident.
Purchase of Mexican government's ownership of Grupo TFM. KCS and Grupo TMM exercised their call option and, on July 29, 2002, completed the purchase of the Mexican government's 24.6% ownership of Grupo TFM. The Mexican government's ownership interest of Grupo TFM was purchased by TFM for a purchase price of $256.1 million, utilizing a combination of proceeds from an offering of debt securities by TFM, a credit from the Mexican government for the reversion of certain rail facilities and other resources. This transaction results in an increase in the Company's ownership percentage of Grupo TFM from 36.9% to approximately 46.6%.
Debt Refinancing. During 2002, the Company was party to several debt refinancing transactions as described below.
7 1/2% Senior Notes
On June 12, 2002, KCSR issued $200 million of 7 1/2% senior notes due June 15,
2009 ("7 1/2% Notes") through a private offering pursuant to Rule 144A under the
Securities Act of 1933 in the United States and Regulation S outside the United
States ("Note Offering"). Net proceeds from the Note Offering of $195.8 million,
together with cash, were used to repay a portion of the term debt under the
Company's senior secured credit facility ("KCS Credit Facility") and certain
other secured indebtedness of the Company. Debt issuance costs related to the
Note Offering of approximately $4.6 million were deferred and are being
amortized over the seven-year term of the 7 1/2% Notes. The remaining balance of
deferred debt issuance costs associated with the Note Offering was approximately
$4.2 million at December 31, 2002. Debt retirement costs associated with the
prepayment of certain term loans under the KCS Credit Facility using proceeds
from
the Note Offering were approximately $4.3 million. These debt retirement costs were previously reported as an extraordinary item, but have been reclassified in accordance with Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"), which the Company early adopted in the fourth quarter of 2002.
KCS submitted a Form S-4 Registration Statement to the SEC on July 12, 2002, as amended on July 24, 2002, relative to an Exchange Offer for the $200 million 7 1/2% Notes due 2009. On July 30, 2002, the SEC declared this Registration Statement effective thereby providing the opportunity for holders of the initial 7 1/2% Notes to exchange them for registered notes with substantially identical terms. All of the 7 1/2% Notes due 2009 were exchanged for $200 million of registered notes due June 15, 2009. The registered notes bear a fixed annual interest rate to be paid semi-annually on June 15 and December 15 and are due June 15, 2009. The registered notes are general unsecured obligations of KCSR, are guaranteed by the Company and certain of its subsidiaries, and contain certain covenants and restrictions customary for this type of debt instrument and for borrowers with similar credit ratings.
New Credit Agreement
On June 12, 2002, in conjunction with the repayment of certain of the term loans
under the KCS Credit Facility using the net proceeds received from the Note
Offering, the Company amended and restated the KCS Credit Facility (the amended
and restated credit agreement is referred to as the New Credit Agreement
herein). The New Credit Agreement provides KCSR with a $150 million term loan
("Tranche B term loan"), which matures on June 12, 2008, and a $100 million
revolving credit facility ("Revolver"), which matures on January 11, 2006.
Letters of credit are also available under the Revolver up to a limit of $15
million. The proceeds from future borrowings under the Revolver may be used for
working capital and for general corporate purposes. The letters of credit may be
used for general corporate purposes. Borrowings under the New Credit Agreement
are secured by substantially all of the Company's assets and are guaranteed by
the majority of its subsidiaries.
The Tranche B term loan and the Revolver bear interest at the London Interbank Offered Rate ("LIBOR"), or an alternate base rate, as the Company shall select, plus an applicable margin. The applicable margin for the Tranche B term loan is 2% for LIBOR borrowings and 1% for alternate base rate borrowings. The applicable margin for the Revolver is based on the Company's leverage ratio (defined as the ratio of the Company's total debt to consolidated EBITDA (earnings before interest, taxes, depreciation and amortization, excluding the undistributed earnings of unconsolidated affiliates) for the prior four fiscal quarters). Based on the Company's leverage ratio as of December 31, 2002, the applicable margin was 2.25% per annum for LIBOR borrowings and 1.25% per annum for alternate base rate borrowings.
The New Credit Agreement also requires the payment to the lenders of a commitment fee of 0.50% per annum on the average daily, unused amount of the Revolver. Additionally, a fee equal to a per annum rate of 0.25% plus the applicable margin for LIBOR priced borrowings under the Revolver will be paid on any letter of credit issued under the Revolver.
The New Credit Agreement contains certain provisions, covenants and restrictions customary for this type of debt and for borrowers with a similar credit rating. These provisions include, among others, restrictions on the Company's ability and its subsidiaries ability to 1) incur additional debt or liens; 2) enter into sale and leaseback transactions; 3) merge or consolidate with another entity; 4) sell assets; 5) enter into certain transactions with affiliates; 6) make investments, loans, advances, guarantees or acquisitions; 7) make certain restricted payments, including dividends, or make certain payments on other indebtedness; and 8) make capital expenditures. In addition, the Company is required to comply with certain financial ratios, including minimum interest expense coverage and leverage ratios. The New Credit Agreement also contains certain customary events of default. These covenants, along with other provisions, could restrict maximum utilization of the Revolver.
Debt issuance costs related to the New Credit Agreement of approximately $1.1 million were deferred and are being amortized over the respective term of the loans. The remaining balance of deferred debt issuance costs associated with the New Credit Agreement was approximately $1.0 million at December 31, 2002.
Southern Capital
On June 25, 2002, Southern Capital refinanced the outstanding balance of its
one-year bridge loan through the issuance of approximately $167.6 million of
pass through trust certificates and the sale of 50 locomotives. The pass through
trust certificates are secured by the sold locomotives, all of the remaining
locomotives and rolling stock owned by Southern Capital and rental payments
payable by KCSR under the sublease of the sold locomotives and its leases of the
equipment owned by Southern Capital. Payments of interest and principal of the
pass through trust certificates, which are due semi-annually on June 30 and
December 30 commencing on December 30, 2002 and ending on June 30, 2022, are
insured under a financial guarantee insurance policy by MBIA Insurance
Corporation. KCSR leases or subleases all of the equipment securing the pass
through trust certificates.
Implementation of New Management Control System. On July 14, 2002, the Company initiated the transition from its legacy operating system to a new platform called the Management Control System ("MCS") on KCSR. This state-of-the-art system is designed to provide better analytical tools for management to use in its decision-making processes. MCS, among other things, delivers work orders to yard and train crews to ensure that the service being provided reflects what was sold to the customer. The system also tracks individual shipments as they move across the rail system, compares that movement to the service sold to the customer and automatically reports the shipment's status to the customer and to operations management. If a shipment falls behind schedule, MCS automatically generates alerts and action recommendations so that corrective action promptly can be initiated. The Company's depreciation expense is expected to increase by approximately $4.8 million per annum ($2.4 million in 2002) as a result of the implementation of MCS.
As previously announced, in the second half of 2002, the Company's operating results were impacted by higher operating costs and some temporary traffic diversions caused by congestion directly related to the implementation of MCS. The MCS implementation slowed the railroad as employees learned to respond to the data discipline demanded by this new system. The initial difficulties experienced by office and field personnel in transitioning to this new platform led to the congestion issues and operating inefficiencies, which contributed to a decline in consolidated operating income. By mid-November 2002, however, the Company's operations began to experience improved transit times and terminal activities as MCS capabilities began to be fully integrated into KCS management processes and operations were virtually recovered by year end. See Results of Operations below for a discussion of the impact on 2002 results of operations.
Sale of Mexrail, Inc. to TFM. The Company, Grupo TMM, and certain of Grupo TMM's affiliates entered into an agreement on February 27, 2002 with TFM to sell to TFM all of the common stock of Mexrail. Mexrail owns the northern half of the international railway bridge at Laredo, Texas and all of the common stock of the Tex Mex. The sale closed on March 27, 2002 and the Company received approximately $31.4 million for its 49% interest in Mexrail. The Company used the proceeds from the sale of Mexrail to reduce debt. Although the Company no longer directly owns 49% of Mexrail, it retains an indirect ownership through its ownership of Grupo TFM. The proceeds from the sale of Mexrail to TFM exceeded the carrying value of the Company's investment in Mexrail by $11.2 million. The Company recognized a $4.4 million gain on the sale of Mexrail to TFM in the first quarter of 2002, while the remaining $6.8 of excess proceeds was deferred and is being amortized over 20 years.
Company Changes Name to Kansas City Southern. On May 2, 2002, at the Annual Meeting of Stockholders, the shareholders of the Company approved a proposal to amend the Certificate of Incorporation to change the name of the Company from "Kansas City Southern Industries, Inc." to "Kansas City Southern." The name change became effective on May 2, 2002 following the filing of the amended Certificate of Incorporation with the Secretary of State of the State of Delaware. The name change reflects the change in the Company's business and holdings following the spin-off of Stilwell Financial Inc. on July 12, 2000. By dropping "Industries, Inc." from the name, KCS will maintain the identification in the marketplace of the Company and KCSR, while emphasizing KCS's focus on transportation rather than a variety of industries. The name change did not require a change in the security ticker symbol of KSU on the New York Stock Exchange.
Changes to Mexican Tax Law. Effective January 1, 2002, Mexico implemented changes in its income tax laws. One of these changes reduced the Mexican corporate income tax rate from 35% to 32% in one-percent increments beginning in 2003, resulting in a 32% income tax rate in 2005. Accordingly, under accounting principles generally accepted in the United States of America ("U.S. GAAP"), Grupo TFM recorded the impact of this rate change during 2002. This rate change had the effect of reducing Grupo TFM's deferred tax asset, thus reducing Grupo TFM's deferred tax benefit for 2002. After consideration of minority interest, the impact of this rate change resulted in an approximate $2.8 million decline in the Company's equity in earnings of Grupo TFM for 2002.
KCSR and The Burlington Northern and Santa Fe Railway Company ("BNSF") Form Marketing Alliance. In April 2002, KCSR and BNSF formed a comprehensive joint marketing alliance aimed at promoting cooperation, revenue growth and extending market reach for both railroads in the United States and Canada. The marketing alliance is also expected to improve operating efficiencies for both carriers in key market areas, as well as provide customers with expanded service options. KCSR and BNSF have agreed to coordinate marketing and operational initiatives in a number of target markets. The marketing alliance is expected to allow the two railroads to be more responsive to shippers' requests for rates and service throughout the two rail networks. Coal and unit train operations are excluded from the marketing alliance, as well as any points where KCSR and BNSF are the only direct rail competitors. Movements to and from Mexico by either party are also excluded. Management believes this marketing alliance will provide important opportunities to grow KCSR's revenue base, particularly in the intermodal, chemical, grain and forest product markets, providing both participants with expanded access to important markets and providing shippers with enhanced options and competitive alternatives.
SIGNIFICANT DEVELOPMENTS
Bogalusa Cases.. In July 1996, KCSR was named as one of twenty-seven defendants in various lawsuits in Louisiana and Mississippi arising from the explosion of a rail car loaded with chemicals in Bogalusa, Louisiana on October 23, 1995. As a result of the explosion, nitrogen dioxide and oxides of nitrogen were released into the atmosphere over parts of that town and the surrounding area allegedly causing evacuations and injuries. Approximately 25,000 residents of Louisiana and Mississippi (plaintiffs) have asserted claims to recover damages allegedly caused by exposure to the released chemicals. On October 29, 2001, KCSR and representatives for its excess insurance carriers negotiated a settlement in principle with the plaintiffs for $22.3 million. A Master Global Settlement Agreement ("MGSA") was signed in early 2002. During 2002, KCSR made all payments under the MGSA and collected $19.3 million from its excess insurance carriers. Court approval of the MGSA is expected in 2003 from the 22nd Judicial District Court of Washington Parish, Louisiana. KCSR also expects to receive releases from about 4,000 Mississippi plaintiffs in numerous cases pending in the First Judicial District Circuit Court of Hinds County, Mississippi.
Houston Cases. In August 2000, KCSR and certain of its affiliates were added as defendants in lawsuits pending in Jefferson and Harris Counties, Texas. These lawsuits allege damage to approximately 3,000 plaintiffs as a result of an alleged toxic chemical release from a tank car in Houston, Texas on August 21, 1998. Litigation involving the shipper and the delivering carrier had been pending for some time, but KCSR, which handled the car during the course of its transport, had not previously been named a defendant. On June 28, 2001, KCSR reached a final settlement with the 1,664 plaintiffs in the lawsuit filed in Jefferson County, Texas. In 2002, KCSR settled with virtually all of the plaintiffs in the lawsuit filed in the 164th Judicial District Court of Harris County, Texas, and legal counsel for the remaining plaintiffs (approximately 120) has withdrawn, leaving the status of those claims in doubt.
Railroad Retirement Improvement Act. On December 21, 2001, the Railroad Retirement and Survivors' Improvement Act of 2001 ("RRIA") was signed into law. This legislation liberalizes early retirement benefits for employees with 30 years of service by reducing the full benefit age from 62 to 60, eliminates a cap on monthly retirement and disability benefits, lowers the minimum service requirement from 10 years to 5 years of service, and provides for increased benefits for surviving spouses. It also provides for the investment of railroad retirement funds in non-governmental assets,
adjustments in the payroll tax rates paid by employees and employers, and the repeal of a supplemental annuity work-hour tax. The law also reduced the employer contribution for payroll taxes by 0.5% in 2002 and by an additional 1.4% in 2003. Beginning in 2004, the employer contribution will be based on a formula and could range between 8.2% and 22.1%. The reductions in the employer contribution under RRIA had a favorable impact on fringe benefits expense in 2002 and are expected to have a favorable impact in 2003. Additionally, the reduction in the retirement age from 62 to 60 is expected to result in increased employee attrition, leading to additional potential cost savings since it is not anticipated that all employees selecting early retirement will be replaced.
Shelf Registration Statements and Public Securities Offerings. The Company filed a Universal Shelf Registration Statement on Form S-3 ("Initial Shelf" - Registration No. 33-69648) in September 1993, as amended in April 1996, for the offering of up to $500 million in aggregate amount of securities. The SEC declared the Initial Shelf effective on April 22, 1996; however, no securities have been issued thereunder. The Company has carried forward $200 million aggregate amount of unsold securities from the Initial Shelf to a Shelf Registration Statement filed on Form S-3 ("Second Shelf" - Registration No. 333-61006) on May 16, 2001 for the offering of up to $450 million in aggregate amount of securities. The SEC declared the Second Shelf effective on June 5, 2001. Securities in the aggregate amount of $300 million remain available under the Initial Shelf and securities in the aggregate amount of $450 million remain available under the Second Shelf. To date, no securities have been issued under either the Initial Shelf or Second Shelf.
Revision of Rules Governing Major Railroad Mergers and Consolidations. On June 11, 2001, the Surface Transportation Board ("STB") issued new rules governing major railroad mergers and consolidations involving two or more "Class I" railroads. These rules substantially increase the burden on rail merger applicants to demonstrate that a proposed transaction would be in the public interest. The rules require applicants to demonstrate that, among other things, a proposed transaction would enhance competition where necessary to offset negative effects of the transaction, such as competitive harm, and to address fully the impact of the transaction on transportation service.
The STB recognized, however, that a merger between KCSR and another Class I carrier would not necessarily raise the same concerns and risks as potential mergers between larger Class I railroads. Accordingly, the STB decided that for a merger proposal involving KCSR and another Class I railroad, the STB will waive the application of the new rules and apply the rules previously in effect unless it is persuaded that the new rules should apply.
New Corporate Headquarters. On June 26, 2001, the Company entered into a 17-year lease agreement for a new corporate headquarters building in downtown Kansas City, Missouri. The Company began occupancy of the building in April 2002. Additionally, in June 2001, the Company sold the building that formerly served as its corporate headquarters in Kansas City, Missouri in anticipation of occupying this new facility. The Company realized a net gain of approximately $0.9 million from this sale. Further, in 2002, the Company completed the sale of WGC to a third party for a gain of approximately $4.9 million. As part of the sale of WGC, the Company was able to eliminate approximately $4.9 million of debt.
Cost Reduction Plan. During the first quarter of 2001, KCS announced a cost
reduction strategy designed to keep the Company competitive during the current
economic slow-down. The cost reduction strategy resulted in a reduction of
approximately 5% of the Company's total workforce (excluding train and engine
personnel). Additionally, KCS implemented a voluntary, temporary salary
reduction for middle and senior management and temporarily suspended certain
management benefits. This voluntary, temporary salary reduction ended December
31, 2001. As part of the cost reduction plan, the Company also delayed the
implementation of MCS until July 2002, as outlined above in "Recent Developments
- Implementation of New Management Control System." Further, 2001 planned
capital expenditures were reduced by approximately $16 million. These capital
reductions did not affect the planned maintenance for the physical structure of
the railroad, but limited the amount of discretionary expenditures for projects
such as capacity improvements. During the first quarter of 2001, the Company
recorded approximately $1.3 million of costs related to severance benefits
associated with the workforce reduction.
Implementation of Derivative Standard. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 was amended by Statement of Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" and Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS 133." SFAS 133, as amended, requires that derivatives be recorded on the balance sheet as either assets or liabilities measured at fair value. Changes in the fair value of derivatives are recorded either through current earnings or as other comprehensive income, depending on the type of hedge transaction. Gains and losses on the derivative instrument reported in other comprehensive income are reclassified into earnings in the periods in which earnings are impacted by the variability of the cash flow of the hedged item. The ineffective portion of all hedge transactions is recognized in current period earnings.
The Company adopted the provisions of SFAS 133, as amended, effective January 1, 2001. As a result of this change in the method of accounting for derivative instruments and hedging activities, the Company recorded an after-tax charge to earnings of $0.4 million in the first quarter of 2001. This charge is presented as a cumulative effect of an accounting change in the accompanying financial statements and represents the ineffective portion of certain interest rate cap agreements the Company had as of December 31, 2000. The Company recorded an additional $0.4 million charge during the year ended December 31, 2001 for subsequent changes in the fair value of its interest rate hedging instruments. These interest rate cap agreements had a fair value of approximately zero at December 31, 2001 and were completely charged off during 2001. These agreements expired during the first quarter of 2002. During the year ended December 31, 2002, the Company did not record any adjustments to income for derivative transactions. The Company does not currently have any interest rate derivative transactions outstanding and currently has two diesel fuel swap transactions outstanding related to 2003. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" for further information with respect to these fuel swap transactions.
In addition, the Company records adjustments to its stockholders' equity (accumulated other comprehensive income (loss)) for its portion of the adjustment to the fair value of derivative transactions to which Southern Capital, a 50% owned unconsolidated affiliate, is a participant. The Company also adjusts its investment in Southern Capital by the change in the fair value of these derivative instruments. For the years ended December 31, 2002 and 2001, the Company recorded a reduction to its stockholders equity (accumulated other comprehensive loss) of approximately $0.3 million and $2.9 million, respectively, for its portion of the amount recorded by Southern Capital for the adjustment to the fair value of interest rate swap transactions. The Company also reduced its investment in Southern Capital by this same amount.
In conjunction with the refinancing transaction discussed above in "Recent Developments - Debt Refinancing," Southern Capital terminated these interest rate swap transactions. As a result, Southern Capital is amortizing the balance of accumulated other comprehensive income (loss) into interest expense over the former remaining life of the interest rate swap transactions. This charge resulted in additional interest expense of approximately $1.3 million in 2002 and is expected to increase Southern Capital's interest expense by approximately $2.4 million in 2003 and $0.9 million in each of 2004, 2005 and 2006. The Company is realizing the impact of this charge through a related reduction in equity in earnings from Southern Capital and is amortizing its balance in accumulated other comprehensive income (loss) to its investment in Southern Capital.
Spin-off of Stilwell Financial Inc. On June 14, 2000, KCS's Board of Directors
approved the spin-off of Stilwell. On July 12, 2000, KCS completed the spin-off
of Stilwell through a special dividend of Stilwell common stock distributed to
KCS common stockholders of record on June 28, 2000 ("Spin-off"). Each KCS
stockholder received two shares of the common stock of Stilwell for every one
share of KCS common stock owned on the record date. The total number of Stilwell
shares distributed was 222,999,786. Under tax rulings received from the Internal
Revenue Service ("IRS"), the Spin-off qualifies as a tax-free distribution under
Section 355 of the Internal Revenue Code of 1986, as amended. Also on July 12,
2000, KCS completed a reverse stock split whereby every two shares of KCS common
stock were converted into one share of KCS common stock. The Company's
stockholders approved a one-for-two reverse stock split in 1998 in contemplation
of the Spin-off. The total number of KCS shares outstanding immediately
following this reverse split was 55,749,947. In preparation for the Spin-off,
the Company re-capitalized its debt structure on January 11, 2000 as further
described in "2000 Debt Refinancing and Re-capitalization of the Company's Debt
Structure" below. Additionally, the Company does not have any remaining
contingencies with respect to Change in Ownership provisions contained within
certain restriction agreements between Stilwell and certain Janus Capital
Corporation minority
stockholders. Previously, the Company would have been obligated to make payments under certain of these agreements if Stilwell had been unable to meet its obligations under the agreements. These minority shareholder agreements have been superceded by new agreements and the Company is no longer a party to any of these agreements.
Duncan Case Settlement. In 1998, a jury in Beauregard Parish, Louisiana returned a verdict against KCSR in the amount of $16.3 million. This case arose from a railroad crossing accident that occurred at Oretta, Louisiana on September 11, 1994, in which three individuals were injured. Of the three, one was injured fatally, one was rendered quadriplegic and the third suffered less serious injuries. Subsequent to the verdict, the trial court held that the plaintiffs were entitled to interest on the judgment from the date the suit was filed, dismissed the verdict against one defendant and reallocated the amount of that verdict to the remaining defendants. On November 3, 1999, the Third Circuit Court of Appeals in Louisiana affirmed the judgment. Subsequently KCSR obtained review of the case in the Supreme Court of Louisiana. On October 30, 2000, the Supreme Court of Louisiana entered its order affirming in part and reversing in part the judgment. The net effect of the Louisiana Supreme Court action was to reduce the allocation of negligence to KCSR and reduce the judgment, with interest, against KCSR from approximately $28 million to approximately $14.2 million (approximately $9.7 million of damages and $4.5 million of interest). This judgment was in excess of KCSR's insurance coverage of $10 million for this case. KCSR filed an application for rehearing in the Supreme Court of Louisiana, which was denied on January 5, 2001. KCSR then sought a stay of judgment in the Louisiana court. The Louisiana court denied the stay application on January 12, 2001. KCSR reached an agreement as to the payment structure of the judgment in this case and payment of the settlement was made on March 7, 2001.
KCSR had previously recorded a liability of approximately $3.0 million for this case. Based on the Supreme Court of Louisiana's decision, as of December 31, 2000, management recorded an additional liability of $11.2 million and also recorded a receivable in the amount of $7.0 million representing the amount of the insurance coverage. This resulted in recording $4.2 million of net operating expense in the accompanying consolidated financial statements for the year ended December 31, 2000. The final installment on the $7.0 million receivable from the insurance company was received by KCSR in June 2001.
2000 Debt Refinancing and Re-capitalization of the Company's Debt Structure.
Registration of Senior Unsecured Notes. During the third quarter of 2000, the Company completed a $200 million private offering of debt securities through its wholly-owned subsidiary, KCSR. The offering, completed pursuant to Rule 144A under the Securities Act of 1933 in the United States and Regulation S outside the United States, consisted of 8-year senior unsecured notes ("9 1/2% Notes"). Net proceeds from this offering of $196.5 million were used to refinance term debt and reduce commitments under the KCS Credit Facility. The refinanced debt was scheduled to mature on January 11, 2001 (see below). Costs related to the issuance of the 9 1/2% Notes were deferred and are being amortized over their eight-year term. The remaining balance of deferred debt issuance costs associated with the 9 1/2% Notes was approximately $3.3 million at December 31, 2002.
On January 25, 2001, the Company filed a Form S-4 Registration Statement with the SEC registering exchange notes under the Securities Act of 1933. The Company filed Amendment No. 1 to this Registration Statement and the SEC declared this Registration Statement, as amended, effective on March 15, 2001, thereby providing the opportunity for holders of the initial 9 1/2% Notes to exchange them for registered notes with substantially identical terms. All of the 9 1/2% Notes were exchanged for $200 million of registered notes. These registered notes bear a fixed annual interest rate and are due on October 1, 2008. These registered notes are general unsecured obligations of KCSR, are guaranteed by the Company and certain of its subsidiaries, and contain certain covenants and restrictions customary for this type of debt instrument and for borrowers with similar credit ratings.
Re-capitalization of Debt Structure in anticipation of Spin-off. In preparation for the Spin-off, the Company re-capitalized its debt structure in January 2000 through a series of transactions as follows:
Bond Tender and Other Debt Repayment. On December 6, 1999, KCS commenced offers to purchase and consent solicitations with respect to any and all of the Company's outstanding 7.875% Notes due July 1, 2002, 6.625% Notes due
March 1, 2005, 8.8% Debentures due July 1, 2022, and 7% Debentures due December 15, 2025 (collectively "Debt Securities" or "notes and debentures").
Approximately $398.4 million of the $400 million outstanding Debt Securities were validly tendered and accepted by the Company. Total consideration paid for the repurchase of these outstanding notes and debentures was $401.2 million. In conjunction with the early retirement of these Debt Securities, the Company reported $10.9 million of debt retirement costs. These debt retirement costs were previously reported as an extraordinary item, but have been reclassified in accordance with SFAS 145. Funding for the repurchase of these Debt Securities and for the repayment of $264 million of borrowings under then-existing revolving credit facilities was obtained from two credit facilities (the "KCS Credit Facility" and the "Stilwell Credit Facility", or collectively the "Credit Facilities"), each of which was entered into on January 11, 2000. The Credit Facilities provided for total commitments of $950 million. Stilwell assumed the Stilwell Credit Facility, including the borrowings thereunder, and, upon completion of the Spin-off, the Company was released from all obligations thereunder.
KCS Credit Facility. The KCS Credit Facility initially provided for total commitments of $750 million comprised of three separate term loans totaling $600 million and a revolving credit facility available until January 11, 2006. On January 11, 2000, KCSR borrowed the full amount ($600 million) of the term loans and used the proceeds to repurchase the Debt Securities, retire other debt obligations and pay related fees and expenses. No funds were initially borrowed under the revolving credit facility. The term loans were initially comprised of the following: $200 million due January 11, 2001, $150 million due December 30, 2005 and $250 million due December 29, 2006. The $200 million term loan due January 11, 2001 was refinanced during the third quarter of 2000 as described above. The remainder of the KCS Credit Facility has also been refinanced as described above.
Issue costs relating to the KCS Credit Facility of approximately $17.6 million were deferred and amortized over the respective term of the loans. In conjunction with the refinancing of a $200 million term loan previously due January 11, 2001, which was a part of the KCS Credit Facilities, approximately $1.8 million of these deferred costs were immediately recognized. Additionally, for the year ended December 31, 2001, $1.4 million in fees were incurred related to a waiver for certain credit facility covenants. These fees have also been deferred and are being amortized over the respective term of the loans. After consideration of current year amortization, the remaining balance of these deferred costs was approximately $4.4 million at December 31, 2002.
Restricted Share and Option Program. In connection with the Spin-off, KCS
adopted a restricted share and option program (the "Option Program") under which
(1) certain senior management employees were granted performance based KCS stock
options and (2) all management employees and those directors of KCS who were not
employees (the "Outside Directors") became eligible to purchase a specified
number of KCS restricted shares and were granted a specified number of KCS stock
options for each restricted share purchased.
The performance stock options have an exercise price of $5.75 per share, which was the mean trading price of KCS common stock on the New York Stock Exchange (the "NYSE") on July 13, 2000. The performance stock options vested and became exercisable in equal installments as KCS's stock price achieved certain thresholds and after one year following the grant date. All performance thresholds were met for these performance stock options and all became exercisable on July 13, 2001. These stock options expire at the end of 10 years, subject to certain early termination events.
The purchase price of the restricted shares, and the exercise price of the stock options granted in connection with the purchase of restricted shares, was based on the mean trading price of KCS common stock on the NYSE on the date the employee or Outside Director purchased restricted shares under the Option Program. Each eligible employee and Outside Director was allowed to purchase the restricted shares offered under the Option Program on one date out of a selection of dates offered. With respect to management employees, the number of shares available for purchase and the number of options granted in connection with shares purchased were based on the compensation level of the employees. Each Outside Director was granted the right to purchase up to 3,000 restricted shares of KCS, with two KCS stock options granted in connection with each restricted share purchased. Shares purchased are restricted from sale and the options are not exercisable for a period of three years from the date of grant for senior management and the Outside
Directors and two years from the date of grant for other management employees. KCS provided senior management and the Outside Directors with the option of using a sixty-day interest-bearing full recourse note to purchase these restricted shares. These loans accrued interest at 6.49% per annum and were all fully repaid by September 11, 2000.
Management employees purchased 475,597 shares of KCS restricted stock under the Option Program and 910,697 stock options were granted in connection with the purchase of those restricted shares. Outside Directors purchased a total of 9,000 shares of KCS restricted stock under the Option Program and 18,000 KCS stock options were granted in connection with the purchase of those shares.
Norfolk Southern Haulage and Marketing Agreement. In May 2000, KCSR and Norfolk Southern entered into an agreement under which KCSR provides haulage services for intermodal traffic between Meridian and Dallas and receives fees for such services from Norfolk Southern. Under this agreement, Norfolk Southern may quote rates and enter into transportation service contracts with shippers and receivers covering this haulage traffic.
Safety and Quality Programs. KCSR's safety vision is to become the safest railway in North America. In 2002, KCSR continued working toward this vision. Federal Railroad Administration ("FRA") Reportable Derailments declined nearly 9% during 2002 compared to 2001 and grade crossing accidents decreased by almost 14% compared to 2001. KCSR had the best safety record among mid-tier railroads in both 2001 and 2000 and received the Gold Harriman award, the highest recognition for safety in the industry, in both years.
KCS management believes the driving force for these improvements is strong leadership at the senior field and corporate levels and joint responsibility for the safety processes by craft employees and managers. KCS management believes the leadership and joint responsibility in safety is helping shape an improved safety culture at KCSR.
The Company is in the process of completing its implementation of Beltpack, a remote-control locomotive operating system. This system allows a train engine employee to run switching by remote control. The use of Beltpack is expected to improve safety and allow a decrease in the number of employees per switching train crew.
RESULTS OF OPERATIONS
The following table details certain income statement components for the Company for the years ended December 31, 2002, 2001, and 2000, respectively, for use in the analysis below. See the consolidated financial statements accompanying this Form 10-K for other captions not presented within this table.
(dollars in millions)
2002 2001 2000
--------- --------- ---------
Revenues $ 566.2 $ 583.2 $ 578.7
Costs and expenses 518.2 527.8 520.9
--------- --------- ---------
Operating income 48.0 55.4 57.8
Equity in net earnings of unconsolidated affiliates 43.4 27.1 22.1
Gain on sale of Mexrail, Inc. 4.4 -- --
Interest expense (45.0) (52.8) (65.8)
Debt retirement costs (i) (4.3) -- (10.9)
Other, net 17.6 4.2 6.0
--------- --------- ---------
Income from continuing operations
before income taxes 64.1 33.9 9.2
Income tax expense (benefit) 6.9 2.8 (7.5)
--------- --------- ---------
Income from continuing operations $ 57.2 $ 31.1 $ 16.7
========= ========= =========
|
(i) In prior periods, debt retirement costs were previously reported as an extraordinary item, but have been reclassified in accordance with SFAS 145.
The following table summarizes consolidated KCS revenues, including the revenues and carload statistics of KCSR for the years ended December 31, 2002, 2001, 2000, respectively. Certain prior year amounts have been reclassified to reflect changes in the business groups and to conform to the current year presentation.
Carloads and
Revenues Intermodal Units
--------------------------------- ---------------------------------
(dollars in millions) (in thousands)
2002 2001 2000 2002 2001 2000
--------- --------- --------- --------- --------- ---------
General commodities:
Chemical and petroleum $ 130.7 $ 124.8 $ 127.1 145.4 147.8 155.9
Paper and forest 134.8 129.1 130.8 178.2 182.2 190.6
Agricultural and mineral 97.2 93.8 100.1 126.5 125.7 132.0
--------- --------- --------- --------- --------- ---------
Total general commodities 362.7 347.7 358.0 450.1 455.7 478.5
Intermodal and automotive 59.9 69.1 64.2 287.4 299.8 274.1
Coal 101.2 118.7 105.0 210.0 202.3 184.2
--------- --------- --------- --------- --------- ---------
Carload revenues and carload
And intermodal units 523.8 535.5 527.2 947.5 957.8 936.8
========= ========= =========
Other rail-related revenues 35.8 36.8 42.4
--------- --------- ---------
Total KCSR revenues 559.6 572.3 569.6
Other subsidiary revenues 6.6 10.9 9.1
--------- --------- ---------
Total consolidated revenues $ 566.2 $ 583.2 $ 578.7
========= ========= =========
|
The following table summarizes consolidated KCS costs and expenses for the years ended December 31, 2002, 2001, and 2000, respectively. Certain prior year amounts have been reclassified to conform to the current year presentation:
(dollars in millions)
2002 2001 2000
--------- --------- ---------
Compensation and benefits $ 197.8 $ 192.9 $ 197.8
Depreciation and amortization 61.4 58.0 56.1
Purchased services 59.6 57.0 54.8
Operating leases 55.0 56.8 58.2
Fuel 38.4 43.9 48.1
Casualties and insurance 25.2 42.1 34.9
Car hire 19.7 19.8 14.8
Other 61.1 57.3 56.2
--------- --------- ---------
Total consolidated costs and expenses $ 518.2 $ 527.8 $ 520.9
========= ========= =========
|
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2001
Net Income. For the year ended December 31, 2002, net income increased $26.5 million to $57.2 million (91(cent) per diluted share) from $30.7 million (50(cent) per diluted share) for the year ended December 31, 2001. This increase was primarily the result of a $17.3 million increase in equity in earnings of Grupo TFM, a $13.4 million increase in other income, a $7.8 million decrease in interest expense, and a $4.4 million gain realized on the sale of Mexrail to TFM. This increase in net income was partially offset by a $7.4 million decline in operating income, a $4.1 million increase in the provision for income taxes, and a $1.0 million decline in equity in net earnings (losses) of other unconsolidated affiliates. Additionally, net income for the year ended December 31, 2002 includes debt retirement costs of $4.3 million related to the early retirement of term debt in June 2002. These costs were previously reported as an extraordinary item, but have been reclassified in accordance with SFAS 145. See "Recent Developments - Debt Refinancing - 7 1/2% Senior Notes." Net income for the year ended December 31, 2001 includes a $0.4 million charge relating to the implementation of Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"("SFAS 133").
Revenues. Consolidated revenues for the year ended December 31, 2002 declined $17.0 million to $566.2 compared to $583.2 million for the year ended December 31, 2001. In 2002, KCSR revenues declined $12.7 million compared to 2001, primarily as a result of lower coal and automotive revenues partially offset by higher revenues for all other major commodity groups. The increase in revenues for certain commodity groups, including chemical and petroleum products, agricultural and mineral, paper and forest products and intermodal traffic, was driven by a combination of volume gains in certain commodities, increased length of haul and price improvements in key traffic lanes. These revenue gains were partially offset by volume losses in certain commodities within these groups. KCS management believes that revenues for these commodity groups would have improved even further during 2002, but were adversely affected by lower carloadings arising from MCS related congestion. See "Recent Developments - Implementation of New Management Control System" for further information. Revenue from other subsidiaries decreased approximately $4.3 million year over year primarily due to demand driven volume declines related to the Company's petroleum coke bulk handling facility. The following discussion provides an analysis of KCSR revenues by commodity group.
Chemical and Petroleum. For the year ended December 31, 2002, chemical and petroleum product revenues increased $5.9 million (4.7%) to $130.7 million compared to $124.8 million for the year ended December 31, 2001. These revenue increases were the result of a combination of higher traffic volumes for certain commodities within this business group as well as targeted rate increases and longer hauls due to gateway changes. Higher revenues for gases and organic products were primarily the result of production increases by certain customers, as well as changes in traffic patterns and targeted rate increases. Higher revenues for inorganic products were primarily the result of increased access to production facilities in Geismar, Louisiana as well as new business previously shipped by other rail carriers, which resulted in higher traffic volume. Increases in the production of PVC and plastic pellet products led to an increase in carloadings and higher revenues for plastic products. These increases were partially offset by volume related declines in agrichemical and petroleum product revenues due to lower industrial production related to the continued slowdown in the U.S. economy. Chemical and petroleum products revenue accounted for 25.0% and 23.3% of carload revenues for the years ended December 31, 2002 and 2001, respectively.
Paper and Forest. For the year ended December 31, 2002, paper and forest product revenue increased $5.7 million (4.4%) to $134.8 million versus $129.1 million for the year ended December 31, 2001. Increases in revenues for pulp and paper, scrap paper and lumber/plywood were partially offset by lower revenues for pulpwood/logs/chips, scrap metal and military /other traffic. Increase in pulp and paper revenues resulted from higher traffic volumes as a result of production growth in the paper industry, while continued strength in the home building market and housing starts led to increases in lumber and plywood product revenues. These revenues were also higher due to certain rate increases and changes in traffic mix and length of haul. Declines in industrial production as a result of the continued slowdown in the U.S. economy led to lower carloadings and revenues for pulpwood, logs, and chip products as well as metal products. The decline in military and other carload revenues is a reflection of the effect of a significant one-time military movement in 2001. Targeted rate increases and changes in traffic patterns for metal products and pulpwood, logs and chips partially offset the related revenue decline resulting from lower traffic volumes for these commodities. Paper and forest products revenue accounted for 25.7% and 24.1% of carload revenues for the years ended December 31, 2002 and 2001, respectively.
Agricultural and Mineral. For the year ended December 31, 2002, revenues for agricultural and mineral product increased $3.4 million (3.6%) to $97.2 million compared to $93.8 million for the year ended December 31, 2001, as a result of higher revenues across all major products in the agricultural and mineral commodity group. Domestic grain revenues increased as a result of certain rate increases and longer hauls partially mitigated by lower domestic demand. Export grain revenue increased slightly during 2002 versus 2001 on the strength of higher demand from Mexico and other export markets during the first half of 2002. This demand eased somewhat during the last half of 2002. Increases in revenue for stone, clay and glass product were primarily the result of higher production by two customers in addition to targeted rate increases and longer hauls. Agricultural and mineral products revenue accounted for 18.6% and 17.5% of carload revenues for the years ended December 31, 2002 and 2001, respectively.
Intermodal and Automotive. For the year ended December 31, 2002, combined intermodal and automotive revenues decreased $9.2 million (13.3%) to $59.9 million compared to $69.1 million for the year ended December 31, 2001, primarily as a result of lower automotive revenues, which declined $12.3 million (57.0%) year over year. This decline in
automotive revenues resulted from the loss of certain business in the third quarter of 2001 due to competitive pricing from another railroad and the loss of a significant movement effective May 2002. Also contributing was the general decline in the domestic automobile industry as a result of continued weakness in the U.S. economy. These factors contributed to a 62.8% year over year decline in carload volumes for automotive traffic. For the year ended December 31, 2002, intermodal revenues increased $3.1 million (6.6%) compared to 2001, as a result of increases in domestic carload traffic as well as international traffic moving to Mexico. Intermodal and automotive revenues accounted for 11.4% and 12.9% of carload revenues for the years ended December 31, 2002 and 2001, respectively.
Coal. For the year ended December 31, 2002, coal revenues declined $17.5 million to $101.2 million compared to $118.7 million for the year ended December 31, 2001. Coal revenues were significantly impacted by a rate reduction at the Company's largest utility customer as well as the loss of a coal customer in April 2002 due to the expiration of a contract. These revenue declines were partially mitigated by a near 7% increase in net tons delivered in 2002 compared to 2001 due to higher demand at certain utility customers and the reopening of a utility plant in Kansas City, Missouri in the second quarter of 2001 that had been out of service since July of 1999. Coal revenue accounted for 19.3% and 22.2% of carload revenues for the years ended December 31, 2002 and 2001, respectfully.
Other. For the year ended December 31, 2002, other rail-related revenues declined $1.0 million to $35.8 million compared to $36.8 million for the year ended December 31, 2001. This decline was primarily the result of declines in switching and demurrage revenues partially offset by increases in other revenues. Haulage revenues remained relatively unchanged in 2002 compared to 2001.
Costs and Expenses. For the year ended December 31, 2002, consolidated operating expenses decreased $9.6 million to $518.2 million compared to $527.8 million for the year ended December 31, 2001, resulting from a $6.0 million decline in KCSR expenses coupled with a $3.6 million decline in expenses from other subsidiaries. This decrease was partially mitigated by the impact of higher costs associated with the implementation of MCS (See "Recent Developments - Implementation of New Management Control System"). The expenses most affected by the MCS implementation were compensation and benefits, depreciation, purchased services and car hire. See further discussion below.
Compensation and Benefits. For the year ended December 31, 2002,
consolidated compensation and benefits expense increased $4.9 million to $197.8
million compared to $192.9 million for the year ended December 31, 2001. This
increase was primarily the result of higher overtime and crew costs during the
second half of 2002 related to the traffic congestion resulting from the third
quarter 2002 implementation of MCS. Compensation and benefits expense in 2002
was also impacted by the implementation of an increase in certain union wages
effective July 1, 2002, higher health insurance costs and a $1.3 million
increase in expenses for the estimate of post employment benefits arising from
the Company's third party actuarial study. Additionally, the increase in
compensation and benefits was affected by the impact of a $2.0 million reduction
in retirement-based costs for certain union employees recorded in 2001, which
reduced comparable 2001 expense. These factors were partially mitigated by lower
employee counts, the automation of certain switch locomotive crew functions, a
favorable adjustment related to the accrual for retroactive wage increases to
union employees, which was not provided for in the national labor union contract
and lower railroad retirement taxes as a result of the reduction in employer
contributions under the Railroad Retirement Act. (See "Significant Developments
- Railroad Retirement Improvement Act"). The increase in compensation and
benefits expense was also impacted by the effect of workforce reduction costs of
$1.3 million recorded in the first quarter of 2001.
Depreciation and Amortization. For the year ended December 31, 2002, consolidated depreciation expense increased $3.4 million to $61.4 million compared to $58.0 million for the year ended December 31, 2001. This increase was primarily the result of the implementation of MCS in July of 2002, which increased depreciation expense $2.4 million in 2002. The remainder of the increase resulted from a net increase in the property, plant and equipment asset base.
Purchased Services. For the year ended December 31, 2002, purchased services expense increased $2.6 million to $59.6 million compared to $57.0 million for the year ended December 31, 2001. This increase was the result of higher environmental compliance costs and legal costs, higher locomotive and car repair costs contracted to third parties as well as increased other general purchased services. Also contributing to the increase in purchased services expense were
higher employee training costs associated with the implementation of MCS and an increase to the reserve for environmental remediation related to a specific site. This increase in costs was partially mitigated by insurance and legal settlements totaling approximately $5.0 million.
Operating Leases. Consolidated operating lease expense for the year ended December 31, 2002 decreased $1.8 million to $55.0 million compared to $56.8 million for the year ended December 31, 2001. This decrease was primarily the result of the expiration of leases that have not been renewed due to continued changes in fleet utilization. This decrease in lease expense was partially mitigated by increases in lease costs of approximately $1.9 million in 2002 associated with the lease for the Company's new corporate headquarters building.
Fuel. Locomotive fuel costs for the year ended December 31, 2002 decreased $5.5 million to $38.4 million compared to $43.9 million for the year ended December 31, 2001. This decrease was the combined result of an 8.8% decrease in the average cost per gallon of fuel and a 4.0% decline in fuel consumption due primarily to aggressive fuel conservation measures.
Casualties and Insurance. For the year ended December 31, 2002, consolidated casualties and insurance expense decreased $16.9 million to $25.2 million compared to $42.1 million for the year ended December 31, 2001 due primarily to lower derailment costs, and the receipt of insurance settlements in 2002, partially offset by higher insurance costs. In the first quarter of 2001, the Company incurred $8.5 million in costs related to several significant derailments as well as the settlement of a personal injury claim. Derailment costs for the year ended December 31, 2002 were more normalized compared to 2001. Also impacting the decrease in casualties and insurance expense was the receipt of $8.2 million in legal and insurance settlements during 2002. Expenses in 2002 for personal injury claims were slightly higher compared to 2001. The Company's process of establishing liability reserves for these types of incidents is based upon an actuarial study by an independent outside actuary, a process followed by most large railroads.
Car Hire. Car hire expense for the year ended December 31, 2002 was relatively unchanged, decreasing only $0.1 million to $19.7 million compared to $19.8 million for the year ended December 31, 2001. For the first half of 2002, car hire expense decreased approximately $2.9 million compared to the same period in 2001 as KCSR was operating a more efficient and well-controlled railroad. In early 2001, an unusual number of significant derailments (as discussed in casualties and insurance), as well as the effects of line washouts and flooding had a significant adverse impact on the efficiency of KCSR's operations in the first half of 2001. The resulting inefficiency led to congestion on KCSR during the first half of 2001, which contributed to an increase in the number of freight cars from other railroads on the Company's rail line. For the second half of 2002, car hire expense increased $2.8 million compared to the second half of 2001. This increase was due to a higher number of freight cars from other railroads on the Company's rail line as well as fewer KCSR freight cars on other railroads as a result of increased congestion resulting from the implementation of MCS in the third quarter of 2002. (See "Recent Developments - Implementation of New Management Control System".)
Other Expense. Consolidated other expense increased $3.8 million to $61.1 million for the year ended December 31, 2002 compared to $57.3 million for the year ended December 31, 2001. Factors contributing to this increase included an increase in material and supply costs related to maintenance of way and equipment of $2.5 million as well as a $2.6 million decline in gains recorded on the sale of operating assets by KCSR. The effect of these increases was partially offset by a decline in the cost of sales and other expenses incurred by certain subsidiaries.
Operating Income and KCSR Operating Ratio. For the year ended December 31, 2002, consolidated operating income decreased $7.4 million to $48.0 million compared to $55.4 million for the year ended December 31, 2001. This decrease was primarily the result of a $17.0 million decline in revenues partially mitigated by a $9.6 million decline in operating expenses. The operating ratio for KCSR was 89.2% and 88.2% for the years ended December 31, 2002 and 2001, respectively.
Equity in Net Earnings (Losses) of Unconsolidated Affiliates. For the year ended December 31, 2002, the Company recorded equity in earnings of unconsolidated affiliates of $43.4 million reflecting an increase of $16.3 million compared to $27.1 million for the year ended December 31, 2001. This increase was driven by an increase in equity in earnings
from Grupo TFM of $17.3 million partially offset by a $1.0 million decline in equity in earnings from other unconsolidated affiliates.
Equity in earnings related to Grupo TFM increased to $45.8 million for the year ended December 31, 2002 compared to $28.5 million for 2001. For the year ended December 31, 2001, the Company's equity in the earnings of Grupo TFM included the Company's proportionate share ($9.1 million) of the income recorded by Grupo TFM related to the reversion of certain concession assets to the Mexican government. Exclusive of this 2001 reversion income, equity in earnings of Grupo TFM for the year ended December 31, 2002 increased $26.4 million compared to the year ended December 31, 2001. Revenues for Grupo TFM for the year ended December 31, 2002 decreased $7.5 million compared to the year ended December 31, 2001 (exclusive of Mexrail's results) while operating expenses (under U.S.GAAP) were $29.5 million lower (exclusive of the 2001 reversion income and Mexrail's results). For the year ended December 31, 2002, Grupo TFM's results include a deferred tax benefit of $91.5 million (calculated under U.S. GAAP) compared to a deferred tax expense of $10.9 million for the year ended December 31, 2001. This increase was the result of numerous factors, including a deferred tax expense recorded in 2001 related to the line reversion income, the weakening of the Mexican peso exchange rate and tax benefits derived from the impact of Mexican inflation in 2002. For the year ended December 31, 2002, fluctuations in the Mexican peso exchange rate also contributed to a $17.4 million exchange loss compared to an exchange gain of $2.8 million for the year ended December 31, 2001.
Results of the Company's investment in Grupo TFM are reported under U.S. GAAP while Grupo TFM reports its financial results under International Accounting Standards ("IAS"). Because the Company is required to report its equity earnings in Grupo TFM under U.S. GAAP and Grupo TFM reports under IAS, differences in deferred income tax calculations and the classification of certain operating expense categories occur. The deferred income tax calculations are significantly impacted by fluctuations in the relative value of the Mexican peso versus the U.S. dollar and the rate of Mexican inflation, and can result in significant variability in the amount of equity earnings reported by the Company.
Equity in losses of the Company's other unconsolidated affiliates for the year ended December 31, 2002 were $2.4 million compared to equity in losses of $1.4 million for the year ended December 31, 2001. In 2002, losses associated with PCRC were $3.8 million compared to $1.6 million in 2001. PCRC is not operating at full capacity as initially planned due to the delay in completion of the port expansion at Balboa. During 2001, losses were primarily related to the start-up of operations at PCRC. Additionally, the Company reported equity losses from Mexrail of $2.1 million in 2001 compared to essentially a break-even amount for 2002 prior to its sale to TFM. These losses were mitigated by equity earnings from Southern Capital of $1.4 million and $2.4 million for the years ended December 31, 2002 and 2001, respectively.
Gain on Sale of Mexrail, Inc. Net income for the year ended December 31, 2002 includes a gain on the sale of the Company's investment in Mexrail, Inc. of $4.4 million (See "Recent Developments - Sale of Mexrail, Inc. to TFM").
Interest Expense. Consolidated interest expense declined $7.8 million to $45.0 million for the year ended December 31, 2002 compared to $52.8 million for the year ended December 31, 2001. This decrease was the result of lower effective interest rates for the first six months of 2002 as well as lower debt balances. The Company's debt balance declined $75.8 million during 2002 from $658.4 million at December 31, 2001 to $582.6 million at December 31, 2002.
Debt Retirement Costs. Net income for the year ended December 31, 2002 includes debt retirement costs of $4.3 million related to the debt refinancing during the second quarter of 2002. (See "Recent Developments - Debt Refinancing - 7 1/2% Senior Notes").
Other Income. Other items affecting net income for the year ended December 31, 2002 were gains totaling approximately $7.4 million related to the sale of certain non-operating properties at a subsidiary of the Company and a $4.9 million gain on the sale of WGC. These items account for the majority of the increase reported in other income for 2002 compared to 2001.
Income Tax Expense. For the year ended December 31, 2002, the Company's income tax provision increased $4.1 million to $6.9 million compared to $2.8 million for the year ended December 31, 2001. This increase was primarily the
result of gains on the sale of the Company's investments in WGC and Mexrail as well as gains realized on the sale of other non-operating assets. Lower interest costs for the year ended December 31, 2002 also contributed to the increase in the income tax provision. These factors, which led to an increase in the income tax provision, were partially mitigated by lower domestic operating income. Exclusive of equity earnings in Grupo TFM, the consolidated effective income tax rate for the year ended December 31, 2002 was 37.7% compared to 51.8% for the year ended December 31, 2001. This variance in the effective tax rate was primarily the result of changes in associated book/tax temporary differences and certain non-taxable items. The Company intends to indefinitely reinvest the equity earnings from Grupo TFM and accordingly, the Company does not provide deferred income tax expense for the excess of its book basis over the tax basis of its investment in Grupo TFM.
Cumulative Effect of Accounting Change. The Company adopted the provisions of SFAS 133 effective January 1, 2001. As a result of this change in the method of accounting for derivative financial instruments, the Company recorded an after-tax charge to earnings of $0.4 million in the first quarter of 2001. This charge is presented as a cumulative effect of an accounting change in the accompanying consolidated financial statements.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000
Income from Continuing Operations. For the year ended December 31, 2001, income from continuing operations increased $14.4 million to $31.1 million (51(cent) per diluted share) from $16.7 million (28(cent) per diluted share) for the year ended December 31, 2000. This increase was primarily the result of a $13.0 million decline in interest expense, a $10.9 million decline in debt retirement costs and an $8.6 million increase in equity earnings from Grupo TFM, partially offset by an increase in the income tax provision of $10.3 million, a $3.6 million decrease in equity earnings from other unconsolidated affiliates, and a $2.4 million decrease in domestic operating income. Equity earnings for the year ended December 31, 2001 reflect the Company's proportionate share ($9.1 million) of the income recorded by Grupo TFM relating to the reversion of certain concession assets to the Mexican government.
Revenues. Consolidated revenues for the year ended December 31, 2001 totaled $583.2 million compared to $578.7 million for the year ended December 31, 2000. This $4.5 million, or 0.8%, increase resulted from higher KCSR revenues of approximately $2.7 million coupled with higher revenues from certain other smaller subsidiaries. The following discussion provides an analysis of KCSR revenues by commodity group.
Chemical and Petroleum. For the year ended December 31, 2001, chemical and petroleum product revenues decreased $2.3 million (1.8%) compared to the year ended December 31, 2000. Higher revenues for plastic and inorganic chemical products were offset by declines in most other chemical products. The increase in revenues for plastic products resulted from a plant expansion by a customer in late 2000. The decline in other chemical and petroleum products resulted primarily from lower industrial production reflecting the impact of the slowdown of the U.S. economy. These volume related revenue declines were somewhat mitigated through certain price increases taken in 2001.
Paper and Forest. Revenues for paper and forest products decreased $1.7 million (1.3%) for the year ended December 31, 2001 compared to the year ended December 31, 2000. As a result of the transfer of certain National Guard personnel and related equipment to a military base near KCSR's rail lines, military and other carloads increased $4.3 million for the year ended December 31, 2001. Additionally, for the year ended December 31, 2001, revenues for pulpwood and logchips increased $1.6 million due to a fungus problem with logchips during 2000 (which reduced 2000 revenues) that has since been resolved. These increases for the year ended December 31, 2001 were offset by declines in steel shipments and most other paper and forest product commodities. Contributing to the decline in certain lumber product revenues was an ongoing trade dispute between the United States and Canada relating to softwood lumber producers, which has reduced certain lumber traffic between Canada and Mexico. Negotiations between the United States and Canada are continuing in an effort to resolve this trade dispute. Steel shipments declined due to the loss of certain business and the timing of the receipt of steel shipments in 2001 compared to 2000. Additionally, a significant portion of our steel shipments relate to drilling pipe for oil exploration. Drilling activity has declined due to the reductions in the price of oil, thus resulting in less demand for drilling pipe. The continued decline in the U.S. economy continues to affect the paper and forest product industry significantly as the need for raw materials in related
manufacturing and production industries decreased during 2001. Certain price increases during 2001 have partially offset related volume declines.
Agricultural and Mineral. Agricultural and mineral product revenues decreased $6.3 million (6.3%) for the year ended December 31, 2001 compared to the year ended December 31, 2000. In 2001, domestic grain revenues decreased $4.1 million compared to 2000 primarily due to a general decline in the production of poultry in the United States, which decreased demand for grain deliveries to the Company's poultry producing customers. Additionally, during the first half of 2001, flooding in Iowa and Minnesota forced a temporary shift in the origination of some domestic grain shipments to Illinois and Indiana, resulting in significantly shorter hauls for KCSR. Export grain increased $1.3 million (14.0%) compared to the year ended December 31, 2000, primarily as a result of increased shipments of soybeans for export through the ports of Beaumont, Texas and Reserve, Louisiana during the fourth quarter of 2001. Annual declines in food products, ores and minerals and stone, clay and glass product revenues resulted primarily from the ongoing decline in the U.S. and global economies.
Intermodal and Automotive. For the year ended December 31, 2001, intermodal and automotive revenues increased $4.9 million (7.6%) compared to the year ended December 31, 2000 as a result of an increase in automotive revenues of $9.1 million partially offset by a decrease in intermodal revenues of $4.2 million. Automotive revenues increased as a result of the following: (i) Mazda traffic originating at the International Freight Gateway ("IFG") at the former Richards-Gebaur airbase, located adjacent and connecting to KCSR's main line near Kansas City, Missouri; and (ii) Ford business originating on the CSX in Louisville and interchanged with the KCSR in East St. Louis. This Ford automotive traffic was shipped to Kansas City via KCSR and interchanged with Union Pacific Railroad for delivery to the western United States. During the third quarter of 2001, KCSR lost this Ford business due to competitive pricing from another rail carrier. Intermodal revenues for the year ended December 31, 2001 declined due to several factors, including (i) the impact of the slow-down in the U.S. economy, which has caused related declines in demand; (ii) customer erosion due to service delays arising from congestion experienced in the first quarter of 2001; and (iii) a marketing agreement with Norfolk Southern, which provides that KCSR will perform haulage services for Norfolk Southern from Meridian, Mississippi to Dallas, Texas for an agreed upon haulage fee. This marketing agreement was entered into in May 2000 and became fully operational in June 2000. A portion of the decline in intermodal revenues resulted from the Norfolk Southern haulage traffic that replaced existing intermodal revenues as KCSR is now receiving a smaller per unit haulage fee than the share of revenue it received as part of the intermodal movement. The margins on this traffic are improved, however, because it has a lower cost base to KCSR as certain costs such as fuel and car hire are incurred and paid by Norfolk Southern.
Coal. For the year ended December 31, 2001, coal revenue increased $13.7 million (13.0%) compared to the year ended December 31, 2000. These increases were primarily the result of higher demand from coal customers replenishing depleted stockpiles and to satisfy weather-related demands as a result of hot weather conditions in the summer months. Net tons of unit coal shipped increased approximately 9.3% for 2001. Also contributing to the increase was the return of the Kansas City Power and Light Hawthorn plant to production in the second quarter of 2001. The Hawthorn plant had been out of service since January 1999 due to an explosion at the Kansas City facility.
Other. For the year ended December 31, 2001, other rail-related revenues declined $5.6 million, comprised of declines in switching and demurrage revenues of $2.9 million and $2.2 million, respectively, as well as declines in haulage revenues of $0.4 million. These declines related primarily to volume declines reflecting the weak economy. Demurrage revenues also declined due to more efficient fleet utilization resulting from a well operating railroad.
Costs and Expenses. Consolidated operating expenses increased $6.9 million (1.3%) to $527.8 million for the year ended December 31, 2001 compared to $520.9 for the year ended December 31, 2000 as a result of higher KCSR expenses of $1.7 million and higher expenses at certain other subsidiaries of $5.2 million.
Compensation and Benefits. For the year ended December 31, 2001, consolidated compensation and fringe benefits expense declined $4.9 million compared to the year ended December 31, 2000, resulting from a $5.6 million reduction in costs for salaries and wages partially offset by an increase in fringe benefits expense of $0.7 million. This variance results primarily from a $4.2 million reduction of compensation and fringe benefits at KCSR resulting from a reduction in
employee headcount arising from the workforce reduction discussed in "Significant Developments - Cost Reduction Plan" and lower costs associated with overtime due to improved operating efficiency. Fringe benefit costs were higher because of an approximate 17% increase in health insurance costs and an increase in unemployment insurance partially offset by a decline in expenses associated with stock option exercises and a $2.0 million reduction in retirement-based costs for certain union employees. The decline in compensation and fringe benefits expense was partially offset by the one-time severance costs of approximately $1.3 million associated with the workforce reduction.
Depreciation and Amortization. Consolidated depreciation and amortization expense for the year ended December 31, 2001 increased $1.9 million compared to the year ended December 31, 2000. This increase was primarily the result of an increase in KCSR's asset base partially offset by property retirements and lower STB approved depreciation rates.
Purchased Services. For the year ended December 31, 2001, purchased services expense increased $2.2 million compared to the year ended December 31, 2000. This variance is comprised of a $0.2 million decline in purchased services for KCSR offset by a $2.4 million increase in purchased services for other subsidiaries. The decline in purchased services for KCSR resulted from lower costs related to intermodal lift services and lower environmental compliance costs. The decline in intermodal lift services was the result of a decline in the number of trailers handled at terminals combined with an increase in lift charges billed to others. These declines in costs were partially offset by higher costs for locomotive and car repairs contracted to third parties as well as higher professional fees related to casualty claims. The increase in purchased services related to other subsidiaries consists mostly of higher holding company costs and higher legal costs at a subsidiary related to the settlement of a lawsuit.
Operating Leases. For the year ended December 31, 2001, consolidated operating lease expense decreased $1.4 million compared to the year ended December 31, 2000. This decline was primarily the result of lower KCSR operating lease costs due to the expiration of certain leases for rolling stock that were not renewed due to better fleet utilization.
Fuel. Fuel costs for the year ended December 31, 2001 decreased $4.2 million compared to the year ended December 31, 2000. This decrease was primarily the result of a 9.0% decline in the average price per gallon coupled with only a slight increase in fuel usage in 2001 compared to 2000. Fuel costs represented approximately 8.7% of total KCSR costs and expenses for the year ended December 31, 2001.
Casualties and Insurance. For the year ended December 31, 2001, casualties and insurance expense increased $7.2 million compared to the year ended December 31, 2000 primarily as a result of higher casualties and insurance costs at KCSR of $6.6 million. Excluding the impact of the Duncan case settlement (See "Significant Developments - Duncan Case Settlement") in 2000, KCSR casualties and insurance costs would have increased $10.8 million. This resulted from an $8.5 million increase in higher derailment costs related to several significant first quarter 2001 derailments and higher personal injury costs associated with third party claims. Also contributing to the fluctuation in casualties and insurance expense was an increase in the personal injury reserve of approximately $5.7 million arising from the Company's annual actuarial study. During 2001, the Company changed its approach towards employee and third party personal injury liabilities by aggressively pursuing settlement of open claims. The Company's approach for many years prior to 2001 had been to challenge claimants and prolong litigation, thereby, in some cases management believes, increasing the long-term costs of the incident. This change in approach towards claim settlement led to substantial payments to claimants in 2001 approximating $44 million for current and prior year casualty incidents, including the Duncan case discussed earlier. The Company's process of establishment of liability reserves for these types of incidents is based upon an actuarial study by an independent outside actuary, a process followed by most large railroads. The significant change in settlement philosophy in 2001 led to the need to establish additional reserves for personal injury liabilities as indicated by the annual actuarial study.
Car Hire. For the year ended December 31, 2001, car hire expense increased $5.0 million compared to the year ended December 31, 2000. An unusual number of significant first quarter 2001 derailments (as discussed in casualties and insurance), as well as the effects of the economic slowdown, line washouts and flooding had an adverse impact on the efficiency of the Company's U.S. operations during the first quarter and early second quarter of 2001. The resulting inefficiency led to congestion on KCSR. This congestion contributed to an increase in the number of freight cars from other railroads on the Company's rail line, as well as a lower number of KCSR freight cars being used by other railroads,
resulting in an increase in car hire expense in 2001 compared to 2000. Also contributing to the increase in car hire expense was the larger number of auto rack cars being used in 2001 compared to 2000 to serve the related increase in automotive traffic. Partially offsetting these effects were more efficient operations in the third and fourth quarters of 2001, which led to a decline in the number of freight cars and trailers from other railroads and third parties on the Company's rail line. As operations continued to improve throughout the second half of 2001, car hire costs also continued to improve, declining 37.7% compared to the first half of 2001.
Other. Other operating expenses increased $1.1 million year to year as a result of several factors. The Company recorded higher expenses associated with its petroleum coke bulk handling facility of approximately $3.2 million resulting from a $1.1 million expense related to a legal settlement and higher terminal operating costs. Additionally, in 2000, the Company recorded a $3.0 million reduction to the allowance for doubtful accounts due to the collection of an outstanding receivable, which reduced other operating expenses in 2000. These variances resulting in increases to other 2001 operating expenses were partially offset by a decline in materials and supplies expense of approximately $3.0 million. Additionally, in 2001 the Company recorded $5.8 million of gains on the sale of operating property compared to $3.4 million in 2000.
Operating Income and KCSR Operating Ratio. Consolidated operating income for the year ended December 31, 2001 decreased $2.4 million, or 4.2%, to $55.4 million compared to $57.8 million for the year ended December 31, 2000. This decrease resulted from a $6.9 million increase in operating expenses partially offset by a $4.5 million increase in revenues. The operating income and operating ratio for KCSR improved to $67.0 million and 88.2%, respectively, for the year ended December 31, 2001 compared to $66.0 million and 88.3%, respectively, for the year ended December 31, 2000.
Equity in Net Earnings (Losses) of Unconsolidated Affiliates. For the year ended December 31, 2001, the Company recorded equity earnings of $27.1 million compared to equity earnings of $22.1 million for the year ended December 31, 2000. This increase is primarily the result of higher equity earnings from Grupo TFM of $8.6 million and an increase in equity earnings from Southern Capital of $1.0 million. These increases were partially offset by a $2.3 million decline in equity earnings from Mexrail and equity losses of $1.6 million recorded from PCRC relating mostly to costs associated with the start-up of the business.
Equity earnings related to Grupo TFM increased to $28.5 million for the year ended December 31, 2001 from $19.9 million for the year ended December 31, 2000. During the year ended December 31, 2001, TFM recorded approximately $54 million in pre-tax income related to the reversion of certain concession assets to the Mexican government. The Company's equity earnings for the year ended December 31, 2001 reflect it's proportionate share of this income of approximately $9.1 million. Grupo TFM's revenues increased 4.2% to $667.8 million for the year ended December 31, 2001 from $640.6 for the year ended December 31, 2000. These higher revenues were partially offset by an approximate 9.5% increase in operating expenses (exclusive of the income related to the reversion of certain concession assets to the Mexican government discussed above as well as other gains/losses recorded on the sales of other operating assets) resulting in a year to year decline in ongoing operating income of approximately 10.3%. Under U.S. GAAP, the deferred tax expense for Grupo TFM was $10.9 million for the year ended December 31, 2001 compared to a deferred tax benefit of $13.2 million for the year ended December 31, 2000.
Interest Expense. Consolidated interest expense for the year ended December 31, 2001 declined $13.0 million compared to the year ended December 31, 2000 primarily as a result of lower interest rates (LIBOR) on variable rate debt, a lower average debt balance and lower amortization related to debt issue costs. Also contributing to the decline in interest expense was $4.2 million of capitalized interest recorded in 2001 relating to MCS. On a comparative basis, interest expense in 2001 increased as a result of a $2.4 million benefit related to an adjustment to interest expense due to the settlement of certain income tax issues for 2001 compared to a $5.5 million benefit for similar items in 2000.
Debt Retirement Costs. Income from continuing operations for the year ended December 31, 2000, includes debt retirement costs of $10.9 million related to certain debt refinancing and re-capitalization transactions during 2000. These costs were previously reported as an extraordinary item, but have been reclassified in accordance with SFAS 145. (See
"Significant Developments - Debt Refinancing and Re-capitalization of the Company's Debt Structure - Bond Tender and Other Debt Repayment").
Income Tax Expense. For the year ended December 31, 2001, the Company's income tax provision was $2.8 million compared to an income tax benefit of $7.5 million for the year ended December 31, 2000. Exclusive of equity earnings from Grupo TFM, the consolidated effective income tax rate for 2001 was 51.8%. In 2000, the comparable effective tax rate was negative. This variance in the income tax provision and effective tax rate was primarily the result of an increase in the Company's domestic operating results and changes in associated book/tax temporary differences and certain non-taxable items. Also contributing to this variance was a lower settlement amount during 2001 compared to 2000 relating to various income tax audit issues. Exclusive of equity earnings from Grupo TFM for the years ended December 31, 2001 and 2000, the Company recognized pre-tax income of $5.4 million for the year ended December 31, 2001 compared to a pre-tax loss of $10.7 million for the year ended December 31, 2000. The Company intends to indefinitely reinvest the equity earnings from Grupo TFM and accordingly, the Company does not provide deferred income tax expense for the excess of its book basis over the tax basis of its investment in Grupo TFM.
Income from Discontinued Operations. Net income for the year ended December 31, 2000 includes income from discontinued operations (Stilwell) of $363.8 million. As a result of the spin-off of Stilwell effective July 12, 2000, the Company did not report income from discontinued operations during the year ended December 31, 2001.
Cumulative Effect of Accounting Change. As a result of the implementation of SFAS 133 discussed in "Recent Developments- Implementation of Derivative Standard," the Company recorded an after-tax charge to earnings of $0.4 million in the first quarter of 2001. This charge is presented as a cumulative effect of an accounting change in the accompanying consolidated statements of income for the year ended December 31, 2001.
TRENDS AND OUTLOOK
See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" for cautionary statements concerning forward-looking comments.
The Company improved its profitability and reduced its debt during the first half of 2002 in spite of the continued downturn in the North American economy. Consolidated revenue for the first half of 2002 declined 2.4% primarily as a result of slowdowns in the U.S. economy as well as reduced coal revenues. While the decline in revenues during the first half of 2002 adversely impacted operating results, the Company's efforts to maintain it's cost structure were effective as operating income increased compared to the first half of 2001. However, from mid-July to mid-November 2002, the Company's operations were significantly impacted by congestion throughout it's U.S. rail network and reduced operating efficiency related to the implementation of MCS (See "Recent Developments - Implementation of New Management Control System"). This MCS related congestion resulted in certain operating delays and higher expenses for certain categories including car hire, regular and overtime wages, fuel, certain equipment charges as well as MCS implementation related expenses. In addition to its impact on certain operating expenses, congestion related to the implementation of MCS also impacted revenues during the second half of 2002. Also contributing to these revenue declines were lower coal and automotive revenues, as well as the continued economic slowdown. Coal revenues declined due to a contractual rate reduction at one of the Company's major coal customers and the loss of business in the second quarter of 2002 due to the expiration of the contract. Automotive revenues declined due to the loss of certain business. Despite the overall decline in revenues year over year, however, management was encouraged by the positive trends noted for revenues in certain commodity groups, including chemical and petroleum products, paper and forest products, agricultural and mineral products, and intermodal traffic. Revenues for those commodities increased in 2002 compared to 2001 despite the continued slump in the U.S. economy. Additionally, during the latter part of the fourth quarter of 2002, the operational performance of the Company started to show signs of improvement. Key performance measurements such as terminal dwell time, train speed and average daily crew starts improved compared to the third quarter of 2002. Operations were essentially at normal levels by late fourth quarter of 2002. Management believes this trend will continue in 2003 and that MCS will provide the management tools necessary to enhance productivity and efficiency while decreasing costs.
While domestic operating results for the year ended December 31, 2002 were adversely impacted by the factors mentioned above, other areas showed improvement. The Company's investment in Grupo TFM continues to provide significant value as part of the Company's NAFTA rail network. Equity in earnings of Grupo TFM increased 136% for the year ended December 31, 2002 compared to the year ended December 31, 2001 (after adjusting for the Company's $9.1 million share of the income recorded by Grupo TFM related to the reversion of certain concession asset to the Mexican government during 2001). During 2002, the Company's equity in earnings in Grupo TFM was favorably impacted by a significant change in the deferred tax benefit for Grupo TFM. The year to year increase also resulted from the Company's increased ownership interest in Grupo TFM arising from the purchase of the Mexican government's ownership interest in Grupo TFM. Interest expense continued to decline as a result of lower effective interest rates during the first half of 2002, as well as lower debt balances as the Company continued to reduce its debt. The Company reduced consolidated debt by approximately $75.8 million from $658.4 million at December 31, 2001 to $582.6 million at December 31, 2002. Additionally, the Company realized significant gains in 2002 on the sale of certain investments and non-operating assets. During 2002, the Company realized a gain of $4.4 million on the sale of its investment in Mexrail to TFM and a gain of $4.9 million on the sale of its investment in WGC. The Company also realized gains of approximately $7.4 million on the sale of certain other non-operating assets. For the year ended December 31, 2002, the Company's diluted earnings per share increased 82.0% compared to the year ended December 31, 2001.
A current outlook for the Company's businesses for 2003 is as follows (refer to the first paragraph of "Overview" section of this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, regarding forward-looking comments):
For 2003, the Company will focus on improving domestic operations and generating stronger growth in operating income. Management expects traffic growth to exceed growth in the economy and expects revenues for 2003 to increase approximately 3%. The Company plans to strive to increase efficiencies through a continued focus on improvements in productivity and operations, using MCS as the management tool to help enable this process.
Except as outlined herein, assuming normalized rail operations, variable costs and expenses are expected to be proportionate with revenues as management believes that operating difficulties related to the implementation of MCS have been resolved and the railroad has returned to relatively normal operations. Fuel expenses are expected to reflect market conditions, which management believes will be higher in 2003 given the current situations in foreign markets, such as Iraq and Venezuela. Insurance costs are expected to increase based on market conditions. Depreciation expense is expected to be higher in the first half of 2003 compared to the same period in 2002 primarily as a result of the implementation of MCS while remaining relatively flat for the remainder of the year. Operating leases are expected to remain relatively flat as increases in operating leases as a result of the occupancy of the Company's new corporate headquarters are expected to be mitigated by declines associated with better equipment utilization.
The Company expects to continue to participate in the earnings and losses from its equity investments in Grupo TFM, Southern Capital and PCRC. Due to the variability of factors affecting the Mexican economy, management can make no assurances regarding the impact that a change in the value of the peso or change in Mexican inflation will have on the results of Grupo TFM. See "Other - Foreign Exchange Matters" and Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" for further information. Upon completion of expansion of the port of Balboa in Panama, management believes that PCRC should provide the Company with opportunities for future earnings growth beginning in the early part of 2004.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW INFORMATION AND CONTRACTUAL OBLIGATIONS
Summary cash flow data follows for the years ended December 31, 2002, 2001 and 2000, respectively (dollars in millions):
2002 2001 2000
--------- --------- ---------
Cash flows provided by (used for):
Operating activities $ 100.4 $ 68.2 $ 74.7
Investing activities (34.9) (55.7) (101.8)
Financing activities (71.2) (9.3) 36.7
--------- --------- ---------
Net increase (decrease) in
Cash and cash equivalents (5.7) 3.2 9.6
Cash and cash equivalents at beginning of year 24.7 21.5 11.9
--------- --------- ---------
Cash and cash equivalents at end of year $ 19.0 $ 24.7 $ 21.5
========= ========= =========
|
During the year ended December 31, 2002, the Company's consolidated cash position decreased by $5.7 million from December 31, 2001. This decrease was primarily the result of capital expenditures as well as the net repayment of long-term debt and debt issuance costs partially offset by cash flows from operating activities, proceeds from the sale of certain investments (Mexrail and WGC) and certain non-operating property and proceeds received from issuance of stock under employee stock plans.
Operating Cash Flows. The Company's cash flow from operations has historically been positive and sufficient to fund operations, as well as KCSR roadway capital improvements, other capital improvements and debt service. External sources of cash (principally bank debt and public debt) have been used to refinance existing indebtedness and to fund acquisitions, new investments, equipment additions and repurchases of Company common stock. The following table summarizes consolidated operating cash flow information for the years ended December 31, respectively (dollars in millions):
2002 2001 2000
--------- --------- ---------
Net income $ 57.2 $ 30.7 $ 380.5
Income from discontinued operations -- -- (363.8)
Depreciation and amortization 61.4 58.0 56.1
Equity in undistributed earnings (43.4) (27.1) (23.8)
Distributions from unconsolidated affiliates -- 3.0 5.0
Deferred income taxes 21.8 30.4 23.1
Gains on sales of properties and investments (20.1) (5.8) (3.4)
Tax benefit realized upon exercise of stock options 4.5 5.6 9.3
Change in working capital items 10.4 (41.2) (9.3)
Other 8.6 14.6 1.0
--------- --------- ---------
Net operating cash flow $ 100.4 $ 68.2 $ 74.7
========= ========= =========
|
Net operating cash flows for 2002 were $100.4 million compared to $68.2 million in 2001 for an increase of $32.2 million. This increase was primarily attributable to higher net income as well as changes in working capital items related to collections on receivables partially offset by reductions in accounts payable, accrued liabilities and deferred income taxes as well as fluctuations in certain non-cash adjustments to net income.
Net operating cash inflows for 2001 decreased $6.5 million over 2000. This decrease was primarily attributable to changes in working capital balances relating primarily to casualty payments and variances in the current tax liability, lower cash flows related to the tax benefit associated with the exercise of stock options, and increase in income from continuing operations and fluctuations in certain non-cash adjustments to net income.
Investing Cash Flows. Net investing cash outflows were $34.9 million and $55.7 million during the years ended December 31, 2002 and 2001, respectively. This variance of $20.8 million was primarily caused by an increase of $31.1 million of proceeds received from the sale of investments and a $3.8 million decrease in investment in and loans to affiliates. In the first quarter of 2002, the Company sold its 49% interest in Mexrail to TFM for approximately $31.4 million. The proceeds from the sale exceeded the Company's carrying value of Mexrail by $11.2 million. The Company recognized a gain of $4.4 million on the sale while the remaining $6.8 million in excess proceeds has been deferred. The Company used the proceeds from the sale of Mexrail to reduce debt. These cash inflows were partially offset by a $13.8 million increase in capital expenditures compared to 2001.
Net investing cash outflows were $55.7 million and $101.8 million during the years ended December 31, 2001 and 2000, respectively. This variance of $46.1 million was primarily the result of a $38.5 million decline in 2001 capital expenditures and a $12.6 million increase in funds received from property dispositions, partially offset by an increase in investments in and loans to affiliates of $4.0 million. During the third quarter of 2001, the Company entered into a sale/leaseback transaction whereby it sold 446 boxcars to a third party for approximately $7.8 million. The Company realized a $4.7 million gain on this transaction, which has been deferred and will be recognized ratably over the lease term. The proceeds received from the sale of these boxcars were included as funds received from property dispositions in the accompanying cash flow statement and were used to reduce the Company's outstanding debt.
Cash used for property acquisitions was $79.8, $66.0 and $104.5 million in 2002, 2001 and 2000, respectively. Cash used for investments in and loans to affiliates was $4.4, $8.2 and $4.2 million in 2002, 2001 and 2000, respectively. Proceeds from the disposals of property were $18.1, $18.1, and $5.5 million in 2002, 2001 and 2000, respectively.
Generally, operating cash flows and borrowings under lines of credit have been used to finance property acquisitions and investments in and loans to affiliates.
Financing Cash Flows. Financing cash outflows are used primarily for the repayment of debt while financing cash inflows are generated from proceeds from the issuance of long-term debt and proceeds from the issuance of common stock under employee stock plans. Also included in financing cash flows are fluctuations in long-term liability accounts including long-term personal injury reserves. Financing cash flows for 2002, 2001, and 2000 were as follows:
o Borrowings of $200, $35, and $1,052 million in 2002, 2001 and 2000, respectively. Proceeds from the issuance of debt in June 2002 were used to refinance term debt. In 2001, borrowings under the Company's revolving credit facility were used to make payments on the term debt. Proceeds from the issuance of debt in 2000 were used for refinancing debt in January and September 2000.
o Repayment of indebtedness in the amounts of $270.9, $51.3 and $1,015.4 million in 2002, 2001 and 2000, respectively. Repayment of indebtedness is generally funded through operating cash flows and proceeds from the disposals of property. In 2002, the repayment of indebtedness was funded from the proceeds from the issuance of debt as well as operating cash flows and proceeds from the disposals of certain assets. In 2001, the repayment of indebtedness was funded through borrowings under the Company's revolving credit facility, as well as operating cash flows and proceeds from the disposals of property. In 2000, repayments of debt included the refinancing of debt in January and September 2000.
o Payment of debt issuance costs of $5.7, $0.4, and $17.6 million in 2002, 2001 and 2000, respectively. In 2002, the Company paid $5.7 million of debt issuance costs related to the $200 million offering of 7 1/2% Notes in June of 2002. During the year ended December 31, 2000, the Company paid $17.6 million of debt issuance costs including $13.4 million associated with the January 2000 restructuring of the Company's debt and approximately $4.2 million associated with the $200 million offering of 9 1/2% Notes in the third quarter of 2000.
o Proceeds from the sale of KCS common stock pursuant to employee stock plans of $10.3, $8.9 and $17.9 million in 2002, 2001 and 2000, respectively.
o Payment of cash dividends of $0.2, $0.2 and $4.8 million in 2002, 2001 and 2000, respectively.
o Net accruals (payments) of long-term casualty claims of $3.4, ($2.1), and ($1.5) million in 2002, 2001, and 2000, respectively.
Contractual Obligations. The following table outlines the Company's obligations for payments under its capital leases, debt obligations and operating leases for the periods indicated. Typically, payments for these obligations are funded through operating cash flows. If operating cash flows are not sufficient, funds received from other sources, including property and other asset dispositions, might also be available. Additionally, the Company anticipates refinancing certain of its long-term debt maturing in 2006 and 2008 prior to maturity (dollars in millions).
Capital Leases Operating Leases
------------------------------------- -------------------------------------
Minimum Net Long-
Lease Less Present Term Total Southern Third
Payments Interest Value Debt Debt Capital Party Total
---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
2003 $ 0.7 $ 0.1 $ 0.6 $ 9.4 $ 10.0 $ 34.1 $ 26.1 $ 60.2
2004 0.6 0.2 0.4 9.4 9.8 30.7 22.1 52.8
2005 0.5 0.1 0.4 8.7 9.1 27.0 16.4 43.4
2006 0.4 0.1 0.3 7.6 7.9 26.4 15.3 41.7
2007 0.3 0.1 0.2 72.7 72.9 21.9 15.2 37.1
Later years 0.6 0.0 0.6 472.3 472.9 151.3 58.8 210.1
---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------
Total $ 3.1 $ 0.6 $ 2.5 $ 580.1 $ 582.6 $ 291.4 $ 153.9 $ 445.3
========== ========== ========== =========== ========== ========== ========== ==========
|
CAPITAL EXPENDITURE REQUIREMENTS
Capital improvements for KCSR roadway track structures have historically been
funded with cash flows from operations and external debt. The Company has
traditionally used equipment trust certificates for major purchases of
locomotives and rolling stock, while using internally generated cash flows or
leasing for other equipment. Through its Southern Capital joint venture, the
Company has the ability to finance railroad equipment, and therefore, has
increasingly used lease-financing alternatives for its locomotives and rolling
stock. As discussed in "Recent Events - Debt Refinancing," Southern Capital
refinanced the outstanding balance of its bridge loan through the issuance of
approximately $167.6 million of pass through trust certificates and the sale of
50 locomotives.
Internally generated cash flows and borrowings under the Company's lines of credit were used to finance capital expenditures (property acquisitions) of $79.8 million, $66.0 million and $104.5 million in 2002, 2001 and 2000, respectively. Internally generated cash flows and borrowings are expected to be used to fund capital programs for 2003, currently estimated at approximately $79 million.
KCSR MAINTENANCE
KCSR, like all railroads, is required to maintain its own property
infrastructure. Portions of roadway and equipment maintenance costs are
capitalized and other portions are expensed (as components of material and
supplies, purchased services and others), as appropriate. Maintenance and
capital improvement programs are in conformity with the Federal Railroad
Administration's track standards and are accounted for in accordance with
applicable regulatory accounting rules. Management expects to continue to fund
roadway and equipment maintenance expenditures with internally generated cash
flows. Maintenance expenses (exclusive of amounts capitalized) for way and
structure (roadbed, rail, ties, bridges, etc.) and equipment (locomotives and
rail cars) for the three years ended December 31, 2002, 2001 and 2000,
respectively, as a percentage of KCSR revenues were as follows (dollars in
millions):
KCSR Maintenance
----------------------------------------------------------
Way and Structure Equipment
----------------------- -----------------------
Percent of Percent of
Amount Revenue Amount Revenue
-------- ---------- -------- ----------
2002 $ 43.6 7.7% $ 48.2 8.5%
2001 43.9 7.5 44.8 7.7
2000 39.8 6.9 44.3 7.7
|
CAPITAL STRUCTURE
Components of the Company's capital structure are as follows (dollars in
millions).
2002 2001 2000
-------- -------- --------
Debt due within one year $ 10.0 $ 46.7 $ 36.2
Long-term debt 572.6 611.7 638.4
-------- -------- --------
Total debt 582.6 658.4 674.6
Stockholders' equity 752.9 680.3 643.4
-------- -------- --------
Total debt plus equity $1,335.5 $1,338.7 $1,318.0
======== ======== ========
Total debt as a percent of
Total debt plus equity ("debt ratio") 43.6% 49.2% 51.2%
-------- -------- --------
|
The Company's consolidated debt ratio as of December 31, 2002 decreased 5.6 percentage points compared to December 31, 2001. Total consolidated debt decreased $75.8 million as a result of net repayments of long-term debt and the elimination of $4.9 million of debt as a result of the sale of WGC. Stockholders' equity increased $72.6 million as a result of 2002 net income of $57.2 million and the issuance of common stock under employee stock plans partially offset by dividends on preferred stock. This increase in stockholders' equity coupled with the decrease in debt resulted in the continued decline in the debt ratio from December 31, 2001.
The Company's consolidated debt ratio as of December 31, 2001 decreased 2.0 percentage points compared to December 31, 2000. Total debt decreased $16.2 million as a result of net repayments of long-term debt. Stockholders' equity increased $36.9 million as a result of 2001 net income of $30.7 million, and the issuance of common stock under employee stock plans partially offset by dividends on preferred stock and a reduction of equity related to accumulated comprehensive income arising from a SFAS 133 adjustment related to our unconsolidated affiliate, Southern Capital. The increase in stockholders' equity coupled with the decrease in debt resulted in the decline in the debt ratio from December 31, 2000.
Under the existing capital structure of KCS at December 31, 2002, management anticipates that the ratio of debt to total capitalization will decline slightly during 2003 as a result of net debt repayments and an increase to stockholders' equity.
Registration of 7 1/2% Senior Unsecured Notes. On June 12, 2002, KCSR issued $200 million of 7 1/2% senior notes due June 15, 2009 through a private offering pursuant to rule 144A under the Securities Act of 1933 in the United States and Regulation S outside the United States. On July 12, 2002, KCSR submitted a Form S-4 Registration Statement to the SEC as amended on July 24, 2002, relative to an Exchange Offer for the $200 million 7 1/2% senior notes due 2009 as described above in "Recent Developments - Debt Refinancing - 7 1/2% Senior Notes."
KCS Credit Agreement. In June 2002, the Company entered into a new credit agreement as described above in "Recent Developments - Debt Refinancing - New Credit Agreement."
Refinance of Southern Capital Bridge Loan. On June 25, 2002, Southern Capital refinanced the outstanding balance of its bridge loan through the issuance of approximately $167.6 million of pass through trust certificates and the sale of 50 locomotives as described above in "Recent Developments - Debt Refinancing - Southern Capital."
Registration of 9 1/2% Senior Unsecured Notes. During the third quarter of 2000, KCSR completed a $200 million private offering of debt securities. On January 25, 2001, KCSR filed a Form S-4 Registration Statement with the SEC relative to an Exchange Offer for the $200 million 9 1/2% Senior unsecured notes due 2008 as described above in "Significant Developments - Debt Refinancing and Re-capitalization of the Company's Debt Structure - Registration of Senior Unsecured Notes."
OVERALL LIQUIDITY
The Company has financing available under the Revolver with a maximum borrowing
amount of $100 million. As of December 31, 2002, all $100 million was available
under the Revolver. The New Credit Agreement contains, among other provisions,
various financial covenants. The Company was in compliance with these
provisions, including the financial covenants as of December 31, 2002 and
expects to be in compliance throughout 2003. As a result of these financial
covenants, the Company's borrowings under the Revolver may be restricted. See
below for discussion of the possibility of the Company requesting a waiver from
these financial covenants during 2003. Also see "Recent Developments - Debt
Refinancing."
As discussed in Item 1, "Business - Rail Network - Significant Investments - Grupo TFM," Grupo TMM and KCS, or either Grupo TMM or KCS, could be required to purchase the Mexican government's interest in TFM. However, this provision is not exercisable prior to October 31, 2003 without the consent of Grupo TFM. If KCS and Grupo TMM, or either KCS or Grupo TMM alone had been required to purchase the Mexican government's 20% interest in TFM, the total purchase price would have been approximately $485.0 million as of December 31, 2002. The Company is exploring various alternatives for financing this transaction. It is anticipated that this financing, if necessary, can be accomplished using the Company's ability to access the capital markets. No commitments for such financing have been obtained at this time. In conjunction with exploring various alternatives for financing this transaction, the Company anticipates requesting a waiver from existing financial covenants in the New Credit Agreement to provide flexibility in structuring the funding for this transaction. Although, the Company's current cash position would allow it to meet its financial covenants as of March 31, 2003, management has decided to seek this waiver in order to permit the Company to retain this cash pending its analysis of financing alternatives for this transaction.
As discussed in "Significant Developments - Shelf Registration Statements and Public Securities Offerings," the Company filed the Initial Shelf on Form S-3 (Registration No. 33-69648) in September 1993, as amended in April 1996, for the offering of up to $500 million in aggregate amount of securities. The SEC declared the Initial Shelf effective on April 22, 1996; however, no securities have been issued thereunder. The Company has carried forward $200 million aggregate amount of unsold securities from the Initial Shelf to the Second Shelf filed on Form S-3 (Registration No. 333-61006) on May 16, 2001 for the offering of up to $450 million in aggregate amount of securities. The SEC declared the Second Shelf effective on June 5, 2001. Securities in the aggregate amount of $300 million remain available under the Initial Shelf and securities in the aggregate amount of $450 million remains available under the Second Shelf. To date, no securities have been issued under either the Initial Shelf or Second Shelf.
The Company believes, based on current expectations, that its cash and other liquid assets, operating cash flows, access to capital markets, borrowing capacity, and other available financing resources are sufficient to fund anticipated operating, capital and debt service requirements and other commitments through 2003 (see comment above with respect to purchase of Mexican government's 20% interest in TFM). However, the Company's operating cash flows and financing alternatives can be impacted by various factors, some of which are outside of the Company's control. For example, if the Company were to experience a substantial reduction in revenues or a substantial increase in operating costs or other liabilities, its operating cash flows could be significantly reduced. Additionally, the Company is subject to economic factors surrounding capital markets and the Company's ability to obtain financing under reasonable terms is subject to market conditions. Further, the Company's 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.
CRITICAL ACCOUNTING ESTIMATES
The accounting and financial reporting policies of the Company are in conformity with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management has discussed the development and selection of the critical accounting estimates discussed herein related to the recoverability and useful lives of assets as well as liabilities for litigation, environmental remediation, casualty claims, and income taxes with the audit committee of the Company's Board of Directors and the audit committee has reviewed the Company's related disclosures herein.
Depreciation of Property, Plant and Equipment The railroad industry is extremely capital intensive. Plant maintenance and the depreciation of operating assets constitutes a substantial operating cost for the Company, as well as the railroad industry as a whole. The Company capitalizes property, plant and equipment and depreciates it consistent with industry standards and rules established by the STB. The cost of property, plant and equipment normally retired, less salvage value, is charged to depreciation expense over the estimated life of the operating assets using composite straight-line rates for financial statement purposes. The STB approves the depreciation rates used by KCSR (excluding the amortization of computer software). KCSR periodically conducts studies of depreciation rates for properties and equipment and implements approved changes, as necessary, to depreciation rates. These studies take into consideration the historical retirement experience of similar assets, the current condition of the assets, current operations and potential changes in technology, estimated salvage value of the assets, and industry regulations. For all other consolidated subsidiaries, depreciation is derived based upon the asset value in excess of estimated salvage value using the straight-line method over the estimated useful lives of the assets for financial reporting purposes. Depreciation is based upon estimates of the useful lives of assets as well as their net salvage value at the end of their useful lives. Estimation of the useful lives of assets that are long-lived as well as their salvage value requires significant management judgement. Accordingly, management believes that accounting estimates related to depreciation expense are critical.
For the years ended December 31, 2002, 2001 and 2000, no significant changes have been made to the depreciation rates applied to operating assets, the underlying assumptions related to estimates of depreciation, or the methodology applied. Currently, the Company depreciates its operating assets, including road and structures, rolling stock and equipment, and capitalized leases over a range of 3 to 100 years, depending upon the estimated life of the particular asset. The Company amortizes computer software over a range of 3 to 12 years, depending upon the estimated useful life of the software. However, certain events could occur that would materially effect the Company's estimates and assumptions related to depreciation. Unforeseen changes in operations or technology could substantially alter management's assumptions regarding the Company's ability to realize the return of its investment in operating assets and therefore affect the amount of depreciation expense to charge against both current and future revenues. Because depreciation expense is a function of analytical studies made of property, plant and equipment, subsequent studies could result in different estimates of useful lives and net salvage values. If future depreciation studies yield results indicating that the Company's assets have shorter lives as a result of obsolescence, physical condition, changes in technology or changes in net salvage values, the estimate of depreciation expense could increase. Likewise, if studies indicate that assets have longer lives, the estimate of depreciation expense could decrease. For the year ended December 31, 2002, consolidated depreciation expense was $61.4 million, representing 11.8% of consolidated operating expenses. If the estimated lives of all assets being depreciated were increased by one year, the consolidated depreciation expense would have decreased by approximately $2.4 million or 3.9%. If the estimated lives of all assets being depreciated were decreased by one year, the consolidated depreciation expense would have increased by approximately $2.6 million or 4.2%.
Provision for Environmental Remediation
The Company's operations are subject to extensive federal, state and local
environmental laws and regulations. The major 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 liability for cleanup and investigation costs,
without regard to fault or legality of
the original conduct, on current and predecessor owners and operators of a site, as well as those who generate, or arrange for the disposal of, hazardous substances. The risk of incurring environmental liability is inherent in the railroad industry. 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.
The Company conducts studies, as well as site surveys, to determine the extent of environmental damage and determine the necessary requirements to remediate this damage. These studies incorporate the analysis of our internal environmental engineering staff and consultation with legal counsel. From these studies and surveys, a range of estimates of the costs involved is derived and a liability and related expense for environmental remediation is recorded within this range. The Company's recorded liabilities for these issues represent its best estimates (on an undiscounted basis) of remediation and restoration costs that may be required to comply with present laws and regulations. These estimates are based on forecasts of the total future direct costs related to environmental remediation. These estimates change periodically as additional or better information becomes available as to the extent of site remediation required, if any. In addition, advanced technologies related to the detection, appropriate remedial course of action and anticipated cost can influence these estimates. Certain changes could occur that would materially effect the Company's estimates and assumptions related to costs for environmental remediation. If the Company becomes subject to more stringent environmental remediation costs at known sites, if the Company discovers additional contamination, discovers previously unknown sites, or becomes subject to related personal or property damage, the Company could incur material costs in connection with its environmental remediation. Accordingly, management believes that estimates related to the accrual of environmental remediation liabilities are critical to the Company's results of operations.
For the year ended December 31, 2002, the expense related to environmental remediation was $2.4 million and is included as purchased services expense on the consolidated statements of income. Additionally, as of December 31, 2002, the Company has a total liability recorded for environmental remediation of $5.4 million. This amount was derived from a range of reasonable estimates based upon the Company's studies and site surveys described above and in accordance with Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies" ("SFAS 5"). For environmental remediation sites known as of December 31, 2002, if the highest estimate from the range (based upon information presently available) were recorded, the total estimated liability would have increased $3.7 million in 2002.
Provision for Casualty Claims
Due to the nature of railroad operations, claims related to personal injuries,
or third party liability resulting from crossing collisions as well as claims
related to damage to personal property and other casualties, is a substantial
expense to the Company. For personal injury claims, employees are compensated
for work related injuries according to provisions contained within the Federal
Employers Liability Act. ("FELA"). Claims are estimated and recorded for known
reported occurrences as well as for incurred but not reported ("IBNR")
occurrences. Consistent with the general practice within the railroad industry,
the Company's estimated liability for these casualty expenses is actuarially
determined on an undiscounted basis. In estimating the liability for casualty
claims, the Company obtains an estimate from an independent third party
actuarial firm, which calculates an estimate using historical experiences and
estimates of claim costs as well as numerous assumptions regarding factors
relevant to the derivation of an estimate of future claim costs. For other
occupational injury claims, an assessment is made on a case-by-case basis in
accordance with SFAS 5.
Personal injury and casualty claims are subject to a significant degree of uncertainty, especially estimates related to IBNR personal injuries as a party has yet to assert a claim and therefore the degree to which injuries have been incurred and the related costs have not yet been determined. Additionally, in estimating costs related to casualty claims, management must make assumptions regarding future costs. The cost of casualty claims is significantly related to numerous factors, including the severity of the injury, the age of the claimant, and the legal jurisdiction. Therefore, in deriving an estimation of the provision for casualty claims, management must make assumptions related to substantially uncertain matters. Additionally, changes in the assumptions made in actuarial studies could potentially have a material effect on the estimate of the provision for casualty claims. Accordingly, management believes that the accounting estimate related to the liability for personal injuries and other casualty claims is critical to the Company's results of operations.
During the year ended December 31, 2001, the Company modified its approach towards employee and third party personal injury liabilities. Prior to 2001, the Company's strategy had been to challenge claimants and prolong litigation, thereby potentially increasing the long-term costs of the incident. In 2001, the Company decided to aggressively pursue settlement options of open claims when warranted, thereby reducing legal costs and ultimately overall casualty expense. This change in approach towards claim settlement led to substantial payments to claimants in 2001 for 2001 and prior year casualty incidents. While this significantly impacted the Company's 2001 casualty expense and related liability accounts, we believe this methodology has the Company better positioned to control its ongoing casualty expense.
Additionally, this change in approach towards claim settlement also led to changes in assumptions relating to the actuarial study conducted in order to estimate future claims cost and estimate an adequate reserve for casualty losses incurred.
For the year ended December 31, 2002, the provision for casualty events was approximately $15.3 million and was included in casualties and insurance expense in the consolidated statements of income. Additionally, as of December 31, 2002, the Company had a total liability recorded for casualty claims of approximately $36.9 million. For the year ended December 31, 2002, the provision for casualty expense represented 2.7% of consolidated operating expenses. For purposes of earnings sensitivity analysis, if the December 31, 2002 reserve were adjusted (increased or decreased) 10%, casualty expense would have changed $3.7 million.
Provision for Income Taxes
Deferred income taxes represent a substantial liability of the Company. For
financial reporting purposes, the Company's management determines the Company's
current tax liability as well as those taxes incurred as a result of current
operations yet deferred until future periods. In accordance with the liability
method of accounting for income taxes as specified in Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes," the provision for
income taxes is the sum of income taxes both currently payable and deferred.
Currently payable income taxes represent the liability related to the Company's
income tax return for the current year while the net deferred tax expense or
benefit represents the change in the balance of deferred tax assets or
liabilities as reported on the balance sheet. The changes in deferred tax assets
and liabilities are determined based upon the changes in differences between the
basis of assets and liabilities for financial reporting purposes and the basis
of assets and liabilities for tax purposes as measured by the enacted tax rates
that management estimates will be in effect when these differences reverse. In
addition to estimating the future tax rates applicable to the reversal of tax
differences, management must also make certain assumptions regarding whether tax
differences are permanent or temporary. If the differences are temporary,
management must estimate the timing of their reversal, and whether taxable
operating income in future periods will be sufficient to fully recognize any
gross deferred tax assets of the Company. Accordingly, management believes that
the estimate related to the provision for income taxes is critical to the
Company's results of operations.
For the years ended December 31, 2002, 2001, and 2000, management made no material changes in its assumptions regarding the determination of the provision for income taxes. However, certain events could occur that would materially affect the Company's estimates and assumptions regarding deferred taxes. Changes in current tax laws and applicable enacted tax rates could affect the valuation of deferred tax assets and liabilities, thereby impacting the Company's income tax provision. Additionally, significant declines in taxable operating income could materially impact the realizable value of deferred tax assets.
As of December 31, 2002, the Company's financial reporting basis exceeded the tax basis of its investment in Grupo TFM by $79.4 million. Management has not provided a deferred income tax liability for the income taxes, if any, that would become payable upon the realization of this basis difference as the Company intends to reinvest in Grupo TFM the financial statement earnings that yielded the basis difference. Likewise the Company has no plans to realize this basis differential by a sale of its investment in Grupo TFM. If management were to change this assumption in determining its provision for deferred taxes, the impact on earnings could be significant. If the Company were to realize this basis difference in the future by a receipt of dividends or the sale of its investment in Grupo TFM, as of December 31, 2002, the Company could incur additional gross federal income taxes of approximately $27.8 million, which may be partially or fully offset by Mexican income taxes and could be available to reduce federal income taxes at such time.
For the year ended December 31, 2002, the Company's provision for income taxes was $6.9 million consisting of ($14.9) million for the current tax benefit and $21.8 million for the deferred tax expense. Changes in management's estimates
and assumptions regarding the enacted tax rate applied to deferred tax assets and liabilities, the ability to realize the value of deferred tax assets, or the timing of the reversal of tax basis differences could potentially impact the provision for income taxes. Changes in these assumptions could potentially change the effective tax rate. A 1% change in the effective tax rate from 37.7% (exclusive of the equity in earnings of Grupo TFM - see "Results of Operations - Income Tax Expense") to 38.7% would increase the current year income tax provision $0.2 million.
Equity in Net Earnings of Grupo TFM
Equity in the earnings of unconsolidated affiliates is a significant component of the Company's net income. For financial reporting purposes, the Company records equity in the net earnings of its unconsolidated affiliates in accordance with the provisions of Accounting Principles Board Opinion No. 18 "The Equity Method of Accounting for Investments in Common Stock." For the Company's investment in Grupo TFM, the equity in net earnings recorded by the Company is materially impacted by estimates included in Grupo TFM's tax computation. These estimates are dependent to a certain extent on changes in Mexican tax rates, fluctuations in the Mexican rate of inflation and changes in the exchange rate between the U.S. dollar and the Mexican peso. To determine the income tax provision (benefit) and the value of deferred tax assets and liabilities, Grupo TFM and KCS management must make assumptions and estimates related to material amounts into the future. Accordingly, management of the Company believes that the accounting estimate made by Grupo TFM and KCS management related to Grupo TFM's provision for income taxes is a "critical accounting estimate" due to its significant impact on the Company's results of operations.
For the years ended December 31, 2001 and 2000, there were no material changes in the assumptions regarding the determination of the provision for income taxes for Grupo TFM. Effective January 1, 2002, Mexico implemented changes in its income tax laws that had an impact on the Company's equity in Grupo TFM's earnings reported under the equity method of accounting. Beginning in 2003, the Mexican corporate income tax rate will be reduced from 35% to 32% in one-percent increments over the next four years. As a result of this change in tax rates, management's assumptions and estimates related to the value of Grupo TFM's net tax asset changed, and the value of Grupo TFM's tax asset was reduced by approximately $7.6 million in the year ended December 31, 2002 resulting in an impact of approximately $2.8 million to the Company. The provision for income taxes and the value of Grupo TFM's net deferred tax assets could further be impacted by changes in the rate of inflation in Mexico, provisions within Mexican tax law that provide for inflation indexation for tax purposes, as well as changes in the exchange rate between the U.S. dollar and the Mexican peso. Changes in these estimates could have a material impact on the Company's equity in earnings in Grupo TFM.
OTHER
Significant Customer. Southwestern Electric Power Company ("SWEPCO") is the Company's only customer that accounted for more than 10% of revenues during the years ended December 31, 2002, 2001, and 2000, respectively. SWEPCO is a subsidiary of American Electric Power, Inc. Revenues related to SWEPCO during these periods were $64.7, $75.9, and $67.2 million, respectively. KCSR coal revenues declined in 2002 as a result of a contractual rate reduction for SWEPCO, which became effective on January 1, 2002.
Derivative Instruments and Purchase Commitments. Fuel expense is a significant component of the Company's operating expenses. Fuel costs are affected by (i) traffic levels, (ii) efficiency of operations and equipment, and (iii) fuel market conditions. Controlling fuel expenses is a top priority of management. As a result, from time to time, the Company will enter into transactions to hedge against fluctuations in the price of its diesel fuel purchases to protect the Company's operating results against adverse fluctuations in fuel prices. KCSR enters into forward diesel fuel purchase commitments and commodity swap transactions (fuel swaps or caps) as a means of fixing future fuel prices. Commodity swap or cap transactions are accounted for as hedges under SFAS 133 and are correlated to market benchmarks. Positions are monitored to ensure that they will not exceed actual fuel requirements in any period. See Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" for further information with respect to these fuel transactions.
At December 31, 2001 the Company had five separate interest rate cap agreements for an aggregate notional amount of $200 million. These interest rate cap agreements expired during 2002. See "Significant Developments - Implementation of Derivative Standard" and Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" for discussion of these interest rate cap transactions. As of December 31, 2002, the Company did not have any interest rate cap agreements or interest rate hedging instruments.
Derivative transactions entered into by the Company are intended to mitigate the impact of rising fuel prices and interest rates and, if applicable, are recorded using the accounting policies as set forth in Item 8, "Financial Statements and Supplementary Data - Note 2- Significant Accounting Policies" of this Form 10-K. In general, the Company enters into transactions such as those discussed above in limited situations based on management's assessment of current market conditions and perceived risks. Historically, the Company has engaged in a limited number of such transactions and their impact has been insignificant. However, the Company intends to respond to evolving business and market conditions in order to manage risks and exposures associated with the Company's various operations, and in doing so, may enter into transactions similar to those discussed above.
Foreign Exchange Matters. In connection with the Company's investment in Grupo TFM, matters arise with respect to financial accounting and reporting for foreign currency transactions and for translating foreign currency transactions into U.S. dollars. The Company follows the requirements outlined in Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS 52"), and related authoritative guidance. The Company uses the U.S. dollar as the functional currency for Grupo TFM. Equity earnings (losses) from Grupo TFM included in the Company's results of operations reflect the Company's share of any such translation gains and losses that Grupo TFM records in the process of translating certain transactions from Mexican pesos to U.S. dollars. Results of the Company's investment in Grupo TFM are reported under U.S. GAAP while Grupo TFM reports its financial results under IAS. Because the Company is required to report its equity earnings (losses) in Grupo TFM under U.S. GAAP and Grupo TFM reports under IAS, differences in deferred income tax calculations and the classification of certain operating expense categories occur.
The Company continues to evaluate existing alternatives with respect to utilizing foreign currency instruments to hedge its U.S. dollar investment in Grupo TFM as market conditions change or exchange rates fluctuate. At December 31, 2002, 2001and 2000, the Company had no outstanding foreign currency hedging instruments.
New Accounting Pronouncements. Effective January 1, 2002, the Company implemented Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 provides, among other things, that goodwill with an indefinite life shall no longer be amortized, but shall be evaluated for impairment on an annual basis. SFAS 142 also requires separate presentation of goodwill on the balance sheet and impairment losses are to be shown as a separate item on the income statement. Additionally, changes in the carrying amount of goodwill should be disclosed in the footnotes to the financial statements. SFAS 142 also requires various transitional disclosures until all periods presented reflect the provisions of SFAS 142. These transitional disclosures include the presentation of net income and earnings per share information adjusted to exclude amortization expense (including the related income tax effects) for all periods presented. These transitional disclosures are presented in the table below.
The Company has presented its goodwill as a separate line item in the accompanying balance sheets. Additionally, the Company has performed its goodwill impairment test and determined that existing goodwill is not impaired. During the year ended December 31, 2002, the Company's goodwill decreased $8.5 million due to the sale of Mexrail to TFM and $0.2 million due to the sale of WGC.
Year Ended December 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
Reported income from continuing operations $ 57.2 $ 31.1 $ 16.7
Add back: Goodwill amortization -- 0.6 0.6
--------- --------- ---------
Adjusted income from continuing operations $ 57.2 $ 31.7 $ 17.3
========= ========= =========
Reported income from discontinued operations $ -- $ -- $ 363.8
Add back: Goodwill amortization -- -- 5.7
--------- --------- ---------
Adjusted income from discontinued operations $ -- $ -- $ 369.5
========= ========= =========
Reported net income $ 57.2 $ 30.7 $ 380.5
Add back: Goodwill amortization -- 0.6 6.3
--------- --------- ---------
Adjusted net income $ 57.2 $ 31.3 $ 386.8
========= ========= =========
Reported diluted earnings per share from
Continuing operations $ 0.91 $ 0.51 $ 0.28
Add back: Goodwill amortization -- 0.01 0.01
--------- --------- ---------
Adjusted diluted earnings per share from
Continuing operations $ 0.91 $ 0.52 $ 0.29
========= ========= =========
Reported diluted earnings per share from
Discontinued operations $ -- $ -- $ 6.14
Add back: Goodwill amortization -- -- 0.10
--------- --------- ---------
Adjusted diluted earnings per share from
Discontinued operations $ -- $ -- $ 6.24
========= ========= =========
Reported diluted earnings per share - net income $ 0.91 $ 0.50 $ 6.42
Add back: Goodwill amortization -- 0.01 0.11
--------- --------- ---------
Adjusted diluted earnings per share - net income $ 0.91 $ 0.51 $ 6.53
========= ========= =========
|
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 is effective for fiscal years beginning after June 15, 2002. Under SFAS 143, the fair value of a liability for an asset retirement obligation must be recognized in the period in which it is incurred if a reasonable estimate of the fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. KCSR, along with other Class I railroads, depreciates track structure (rail, ties, and other track material) in accordance with regulation promulgated by the STB. These regulations require KCSR to depreciate track structure to a net salvage value (gross estimated salvage value less estimated costs to remove the track structure at the end of its useful life). For certain track structure such as ties, with little or no gross salvage value, this practice ultimately results in depreciating an asset below zero, and thus, in effect, results in a liability. Under the new requirements of SFAS 143, in the absence of a legal obligation to remove the track structure, such accounting practice is not allowed. In the opinion of management, a legal obligation to remove track structure does not exist. Accordingly, the Company is currently reviewing its depreciation of track structures to determine instances where the depreciation of removal costs has resulted or would be expected (based on the current depreciation rate) to result in the depreciation of an asset below zero when considering net salvage value. To the extent that accumulated depreciation includes amounts related to instances of excess depreciation, a cumulative effect adjustment will be recorded to reflect the change in accounting principle required by SFAS 143 in the first quarter of 2003. Additionally, future depreciation rates applied to certain track structure elements that were previously yielding a negative salvage value will be modified to comply with the provisions of SFAS 143. The Company intends to adopt the provisions of SFAS 143 in the first quarter of 2003. The Company is currently assessing the potential impact of SFAS 143 on its consolidated results of operations, financial position, and cash flows.
In June 2002, the FASB issued Statement No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Under SFAS 146, a liability for a cost associated with an exit or disposal activity must be recognized when the liability is incurred. Previously, a liability for an exit cost was recognized as of the date of an entity's commitment to an exit or
disposal plan. The Company is currently evaluating the provisions of SFAS 146 and does not expect the adoption of this pronouncement to have a material impact on its consolidated results of operations, financial position, or cash flows.
In December 2002, the FASB issued Statement No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148"). SFAS 148 provides two additional transition methods for entities that adopt the method of accounting for stock-based compensation as defined in SFAS 123. The Company is currently evaluating the provisions of SFAS 148 and, if adopted, does not expect it to have a material impact on its consolidated results of operations, financial position, or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 provides guidance on the accounting and disclosure requirements relating to the issuance of certain types of guarantees and requires the guarantor to recognize at the inception of a guarantee a liability for the fair value of the potential obligation. The provisions for the initial recognition and measurement of guarantees are effective prospectively for all guarantees issued or modified after December 31, 2002. The disclosure requirements under FIN 45 were effective for financial statements for periods ending after December 15, 2002. KCS management does not believe that the adoption of FIN 45 will have a material impact on its consolidated results of operations, financial position, or cash flows. See Item 8, "Financial Statements and Supplementary Data - Note 5 and - Note 11 to the Company's consolidated financial statements for disclosures of guarantees.
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities," ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to certain variable interest entities created after January 31, 2003. The Company is currently assessing the potential impact of this accounting interpretation on its method of accounting for unconsolidated subsidiaries and does not believe it will have a material impact on its consolidated results of operations, financial position, or cash flows.
Litigation. The Company and its subsidiaries are involved as plaintiff or defendant in various legal actions arising in the normal course of business. While the ultimate outcome of the various legal proceedings involving the Company and its subsidiaries cannot be predicted with certainty, it is management's opinion (after consultation with legal counsel) that the Company's litigation reserves are adequate. See "Significant Developments - Bogalusa Cases" and "Significant Developments - Duncan Case Settlement" for a discussion of the dismissal and settlement of those cases, respectively. Additionally, see "Significant Developments- Houston Cases" for a discussion of the ongoing proceedings in that case. Also see "Recent Developments - Automobile Accident" for discussion of a potential legal claim.
The Company also is a defendant in various matters brought primarily by current and former employees and third parties for job related injury incidents or crossing accidents. The Company is aggressively defending these matters and has established liability reserves which management believes are adequate to cover expected costs. Nevertheless, due to the inherent unpredictability of these matters, the Company could incur substantial costs above reserved amounts.
Stilwell Tax Dispute. On November 19, 2002, Stilwell, now Janus Capital Group Inc., filed a Statement of Claim against KCS with the American Arbitration Association. This claim involves the entitlement to compensation expense deductions for federal income tax purposes which are associated with the exercise of certain stock options issued by Stilwell (the "Substituted Options") in connection with the Spin-off of Stilwell from KCS on July 12, 2000. Stilwell alleges that upon exercise of a Substituted Option, Stilwell is entitled to the associated compensation expense deductions. Stilwell bases its claim on a letter, dated August 17, 1999, addressed to Landon H. Rowland, Chairman, President and Chief Executive Officer of Kansas City Southern Industries, Inc. (the "Letter"), purporting to allow Stilwell to claim such deductions. The Letter was signed by the Vice President and Tax Counsel of Stilwell, who was also at the time the Senior Assistant Vice President and Tax Counsel of KCS, and by Landon H. Rowland, currently a director of KCS and the non-executive Chairman of Janus Capital Group Inc., who was at that time a director and officer of both Stilwell and KCS.
Stilwell seeks a declaratory award and/or injunction ordering KCS to file and amend its tax returns for the tax year 2000 and subsequent years to reflect that KCS does not claim the associated compensation expense deductions and to indemnify Stilwell against any related taxes imposed upon Stilwell, which allegedly has taken, and plans to take, such
deductions. On December 20, 2002, KCS filed an Objection to Stilwell's Demand for Arbitration and Motion to Dismiss. KCS disputes the validity and enforceability of the Letter. KCS asserts, among other things, that a Private Letter Ruling issued by the Internal Revenue Service on July 9, 1999 provides that KCS subsidiaries are entitled to compensation expense deductions upon exercise of Substituted Options by their employees.
KCS has answered that the claims of Stilwell are without merit and intends to vigorously defend against them. Given the early stage of the proceeding, KCS is unable to predict the outcome, but does not expect this matter to result in any material adverse financial consequences to KCS's net income in the event, which it regards as unlikely, that it would not prevail.
Environmental Matters. As discussed above in "Critical Accounting Estimates," the Company's operations, as well as those of its competitors, are subject to extensive federal, state and local environmental laws and regulations. Certain laws and regulations can impose joint and several liability for cleanup and investigation costs, without regard to fault or legality of the original conduct, on current and predecessor owners and operators of a site, as well as those who generate, or arrange for the disposal of, hazardous substances. The Company does not foresee that compliance with the requirements imposed by the environmental legislation will impair its competitive capability or result in any material additional capital expenditures, operating or maintenance costs. However, stricter environmental requirements relating to our business, which may be imposed in the future, could result in significant additional costs.
The risk of incurring environmental liability is inherent in the railroad industry. The Company's operations involve the use and, as part of serving the petroleum and chemicals industry, transportation of significant quantities of hazardous materials. The Company has a professional team available to respond and handle environmental issues that might occur in the transport of such materials. The Company also is a partner in the Responsible Care(R) environmental program and, as a result, has initiated certain additional environmental and safety practices. KCSR performs ongoing review and evaluation of the various environmental programs and issues within the Company's operations, and, as necessary, takes actions to limit the Company's exposure to environmental liabilities.
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. In the event that the Company becomes subject to more stringent cleanup requirements at these sites, discovers additional contamination, or becomes subject to related personal or property damage claims, the Company could incur material costs in connection with these sites.
KCSR has been named a Potential Responsible Party (PRP) in connection with a former foundry site in Alexandria, Louisiana. A small portion of this property was owned through a former subsidiary during the years 1924 - 1974 and leased to a foundry operator. The foundry operator, Ruston Foundry, ceased operations in early 1990. The site is on the CERCLA National Priorities List of contaminated sites. The United States Environmental Protection Agency has recently completed a Record of Decision of the site. Management is in the process of evaluating the potential impact with respect to this site and has recorded a $1.6 million liability to provide for potential remediation costs at this site. Further evaluation is ongoing and any remaining exposure is not expected to have a material effect on the Company's results of operations, financial condition, or cash flows.
In 1996, the Louisiana Department of Transportation ("LDOT") sued KCSR and a number of other defendants in Louisiana state court to recover cleanup costs incurred by LDOT while constructing Interstate Highway 49 at Shreveport, Louisiana (Louisiana Department of Transportation v. The Kansas City Southern Railway Company, et al., Case No. 417190-B in the First Judicial District Court, Caddo Parish, Louisiana). The cleanup was associated with contamination in the area of a former oil refinery site, operated by Crystal Refinery. KCSR's main line was adjacent to that site. LDOT claims that a 1966 derailment contributed to contamination at the site. However, KCSR management believes that KCSR's liability exposure with respect to this site is remote.
The Company is presently investigating and remediating environmental impacts associated with historical roundhouse and fueling operations at KCSR rail yards located in East St. Louis, Illinois; Venice, Illinois; Kansas City, Missouri; Roodhouse, Illinois; and Mexico, Missouri. Management does not expect costs relating to these activities to have a material effect on the Company's results of operations, financial condition or cash flows.
The Company records liabilities for remediation and restoration costs related to past activities when the Company's obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance activities to current operations are expensed as incurred. The Company's recorded liabilities with respect to these various environmental issues represent its best estimates of remediation and restoration costs that may be required to comply with present laws and regulations. Although these costs cannot be predicted with certainty, management believes that the ultimate outcome of identified matters will not have a material adverse effect on the Company's consolidated results of operations, financial condition, or cash flows.
Regulatory Influence. In addition to the environmental agencies mentioned above, KCSR operations are regulated by the STB, various state regulatory agencies, and the Occupational Safety and Health Administration ("OSHA"). State agencies regulate some aspects of rail operations with respect to health and safety and in some instances, intrastate freight rates. OSHA has jurisdiction over certain health and safety features of railroad operations. The Company does not foresee that regulatory compliance under present statutes will impair its competitive capability or result in any material effect on its results of operations.
Inflation. Inflation has not had a significant impact on the Company's operations in the past three years. Changes in fuel prices, however, impacted our operating results in 2002, 2001 and 2000. During the two-year period ended December 31, 1999, locomotive fuel expenses represented an average of 6.9% of KCSR's total costs and expenses compared to 9.7% in 2000, 8.8% in 2001, and 7.7% in 2002. U.S. GAAP requires the use of historical costs. Replacement cost and related depreciation expense of the Company's property would be substantially higher than the historical costs reported. Any increase in expenses from these fixed costs, coupled with variable cost increases due to significant inflation, would be difficult to recover through price increases given the competitive environments of the Company's principal subsidiaries. See "Foreign Exchange Matters" above with respect to inflation in Mexico.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company utilizes various financial instruments that have certain inherent
market risks. Generally, these instruments have not been entered into for
trading purposes. The following information, together with information included
in Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 8, "Financial Statements and Supplementary Data
- Note 11" in this Form 10-K, describe the key aspects of certain financial
instruments that have market risk to the Company.
Interest Rate Sensitivity
The Company's floating-rate indebtedness totaled $149.3 million and $397.5
million at December 31, 2002 and 2001, respectively. The Company's variable rate
debt, comprised of a revolving credit facility and a term loan, accrues interest
based on target interest indexes (e.g., LIBOR, federal funds rate, etc.) plus an
applicable spread, as set forth in the credit agreement. See "Recent
Developments - Debt Refinancing - New Credit Agreement" for further information.
As a result of the refinancing of $200 million of variable rate debt with the 7
1/2% Notes, the Company has been able to reduce its sensitivity to fluctuations
in interest rates compared to previous years. However, given the balance of
$149.3 million variable rate debt at December 31, 2002, the Company is still
sensitive to fluctuations in interest rates. For example, a hypothetical 100
basis points increase in each of the respective target interest indexes would
result in additional interest expense of approximately $1.5 million on an
annualized basis for the floating-rate instruments held by the Company as of
December 31, 2002.
Based upon the borrowing rates available to KCS and its subsidiaries for
indebtedness with similar terms and average maturities, the fair value of the
Company's long-term debt was approximately $616.9 million at December 31, 2002
and $681 million at December 31, 2001.
One of the Company's objectives is to manage its interest rate risk through the use of derivative instruments. In 2000, the Company entered into five separate interest rate cap agreements for an aggregate notional amount of $200 million, which were designated as cash flow hedges. These interest rate cap agreements were designed to hedge the Company's exposure to movements in the LIBOR on which the Company's variable rate interest is calculated. $100 million of the aggregate notional amount provided a cap on the Company's LIBOR based interest rate of 7.25% plus the applicable spread, while $100 million limited the LIBOR based interest rate to 7% plus the applicable spread. By holding these interest rate cap agreements, the Company was able to limit the risk of rising interest rates on its variable rate debt. These interest rate cap agreements expired during 2002 and as of December 31, 2002, the Company did not have any other interest rate cap agreements or interest rate hedging instruments.
Commodity Price Sensitivity
Fuel expense is a significant component of the Company's operating expenses. Fuel costs are affected by (i) traffic levels, (ii) efficiency of operations and equipment, and (iii) fuel market conditions. Controlling fuel expenses is a top priority of management. As a result, from time to time, the Company will enter into transactions to hedge against fluctuations in the price of its diesel fuel purchases to protect the Company's operating results against adverse fluctuations in fuel prices. KCSR enters into forward diesel fuel purchase commitments and commodity swap transactions (fuel swaps or caps) as a means of fixing future fuel prices. Forward purchase commitments are used to secure fuel volumes at competitive prices. These contracts normally require the Company to purchase defined quantities of diesel fuel at prices established at the origination of the contract. Commodity swap or cap transactions are accounted for as hedges under SFAS 133 and are typically based on the price of heating oil #2, which the Company believes to produce a high correlation to the price of diesel fuel. These transactions are generally settled monthly in cash with the counterparty. Positions are monitored to ensure that they will not exceed actual fuel requirements in any period.
At December 31, 1999, the Company was party to two diesel fuel cap transactions for a total of six million gallons (approximately 10% of expected 2000 usage) at a cap price of $0.60 per gallon. The contract prices for these diesel fuel cap transactions did not include taxes, transportation costs or other incremental fuel handling costs. These hedging instruments expired during 2000. The Company received approximately $0.8 million during 2000 related to these diesel fuel cap transactions and recorded the proceeds as a reduction of diesel fuel expenses. At December 31, 1999, the Company did not have any outstanding purchase commitments for 2000. At December 31, 2000, KCSR had purchase commitments for approximately 12.6% of budgeted gallons of fuel for 2001, which resulted in higher fuel expense of approximately $0.4 million in 2001. There were no fuel swap or cap transactions outstanding at December 31, 2000. At December 31, 2001, KCSR had purchase commitments for approximately 39% of its budgeted gallons of fuel for 2002, which resulted in a decrease in fuel expenses of approximately $0.4 million in 2002. There were no diesel fuel cap or swap transactions outstanding as of December 31, 2001. At December 31, 2002, KCSR had purchase commitments and was a party to a fuel swap transaction, which, on a combined basis, resulted in approximately 21% of expected 2003 diesel fuel usage. On January 14, 2003, KCSR entered into an additional fuel swap transaction, which raised the total hedged gallons to approximately 25% of budgeted 2003 diesel fuel usage. KCSR is also a party to swap transactions for approximately 2.5 million gallons of fuel for 2004. The commodity swap transaction entered into prior to December 31, 2002 is recorded on the accompanying balance sheet at its fair market value, which approximates $0.2 million at December 31, 2002. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Other - Derivative Instruments and Purchase Commitments."
The excess of payments to be received or savings to be realized over the current market price at December 31, 2002 related to the diesel fuel purchase commitments and fuel swap transactions approximated $1.8 million and $0.6 million, respectively, at December 31, 2002. The excess of current market prices for diesel fuel purchase commitments over the payments to be made under such commitments approximated $2.6 million at December 31, 2001. A hypothetical 10% increase in the price of diesel fuel would have resulted in additional fuel expense of approximately $3.8 million for the year ended December 31, 2002.
At December 31, 2002, the Company held fuel inventories for use in normal operations. These inventories were not material to the Company's overall financial position. With the exception of the 16.6% of fuel currently under forward purchase commitments and 8.8% of fuel currently hedged under fuel swap transactions for 2003, fuel costs are expected to mirror market conditions in 2003.
Foreign Exchange Sensitivity
The Company owns a 46.6% interest in Grupo TFM, incorporated in Mexico. In
connection with the Company's investment in Grupo TFM, matters arise with
respect to financial accounting and reporting for foreign currency transactions
and for translating foreign currency transactions into U.S. dollars. The Company
uses the U.S. dollar as the functional currency for Grupo TFM. Equity earnings
(losses) from Grupo TFM included in the Company's results of operations reflect
the Company's share of any such translation gains and losses that Grupo TFM
records in the process of translating certain transactions from Mexican pesos to
U.S. dollars. Therefore, the Company has exposure to fluctuations in the value
of the Mexican peso. While not currently utilizing foreign currency instruments
to hedge the Company's U.S. dollar investment in Grupo TFM, the Company
continues to evaluate existing alternatives as market conditions and exchange
rates fluctuate.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
-----------------------------
Page
----
Management Report on Responsibility for Financial Reporting............... 59
Financial Statements:
Reports of Independent Accountants................................... 60
Consolidated Statements of Income
for the three years ended December 31, 2002........................ 61
Consolidated Balance Sheets at December 31, 2002
2001 and 2000...................................................... 62
Consolidated Statements of Cash Flows for the three
years ended December 31, 2002...................................... 63
Consolidated Statements of Changes in Stockholders'
Equity for the three years ended December 31, 2002................. 64
Notes to Consolidated Financial Statements........................... 65
Financial Statement Schedules:
All schedules are omitted because they are not applicable, are
insignificant or the required information is shown in the consolidated
financial statements or notes thereto.
The combined and consolidated financial statements of Grupo TFM as of
December 31, 2002 and for each of the three years in the period ended
December 31, 2002 are attached to this Form 10-K as Exhibit 99.3.
|
Management Report on Responsibility for Financial Reporting
The accompanying consolidated financial statements and related notes of Kansas City Southern and its subsidiaries were prepared by management in conformity with generally accepted accounting principles appropriate in the circumstances. In preparing the financial statements, management has made judgments and estimates based on currently available information. Management is responsible for not only the financial information, but also all other information in this Annual Report on Form 10-K. Representations contained elsewhere in this Annual Report on Form 10-K are consistent with the consolidated financial statements and related notes thereto.
The Company's financial statements as of and for the years ended December 31, 2002 and 2001 have been audited by our independent accountants, KPMG LLP. The Company's financial statements as of and for the year ended December 31, 2000 were audited by our previous independent accountants, PricewaterhouseCoopers LLP. Management has made available to the independent accountants all of the Company's financial records and related data, as well as the minutes of shareholders' and directors' meetings. Furthermore, management believes that all representations made to its independent accountants during their audits were valid and appropriate.
The Company has a formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that its financial records are reliable. Management monitors the system for compliance, and the Company's internal auditors review and evaluate both internal accounting and operating controls and recommend possible improvements thereto. In addition, as part of their audit of the consolidated financial statements, the independent accountants, review and test the internal accounting controls on a selective basis to establish the extent of their reliance thereon in determining the nature, extent and timing of audit tests to be applied. The internal audit staff coordinates with the independent accountants on the annual audit of the Company's financial statements.
The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This committee, composed solely of qualified non-management directors, meets regularly with the respective independent accountants, management and internal auditors to monitor the proper discharge of responsibilities relative to internal accounting controls and to evaluate the quality of external financial reporting. Both the independent accountants and internal auditors have full and free access to this committee.
/s/ MICHAEL R. HAVERTY -------------------------------------------------- Michael R. Haverty Chairman, President & Chief Executive Officer /s/ RONALD G. RUSS -------------------------------------------------- Ronald G. Russ Executive Vice President & Chief Financial Officer |
Report of Independent Accountants
To the Board of Directors and Stockholders of Kansas City Southern
We have audited the accompanying consolidated balance sheets of Kansas City Southern and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. (Grupo TFM), a 36.9% owned investee company, as of and for the year ended December 31, 2001. The Company's investment in Grupo TFM at December 31, 2001 was $334.4 million and its equity in earnings of Grupo TFM was $28.5 million for the year 2001. The financial statements of Grupo TFM, as of and for the year ended December 31, 2001, were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Grupo TFM as of and for the year ended December 31, 2001, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors for 2001 provide a reasonable basis for our opinion.
In our opinion, based on our audits, and the report of other auditors for 2001, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kansas City Southern and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP KPMG LLP Kansas City, Missouri March 24, 2003 |
Report of Independent Accountants
To the Board of Directors and Stockholders of Kansas City Southern
In our opinion, the accompanying consolidated balance sheet as of December 31, 2000 and the related consolidated statement of income, of changes in stockholders' equity and of cash flows for the year then ended present fairly, in all material respects, the financial position of Kansas City Southern and its subsidiaries at December 31, 2000 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Kansas City, Missouri March 22, 2001, except as to the adoption of Statement of Financial Accounting Standards No. 142 described in Note 2 which is as of January 1, 2002 |
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
Dollars in Millions, Except per Share Amounts
2002 2001 2000
---------- ---------- ----------
Revenues $ 566.2 $ 583.2 $ 578.7
Costs and expenses
Compensation and benefits 197.8 192.9 197.8
Depreciation and amortization 61.4 58.0 56.1
Purchased services 59.6 57.0 54.8
Operating leases 55.0 56.8 58.2
Fuel 38.4 43.9 48.1
Casualties and insurance 25.2 42.1 34.9
Car hire 19.7 19.8 14.8
Other 61.1 57.3 56.2
---------- ---------- ----------
Total costs and expenses 518.2 527.8 520.9
---------- ---------- ----------
Operating income 48.0 55.4 57.8
Equity in net earnings (losses) of unconsolidated affiliates:
Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V 45.8 28.5 19.9
Other (2.4) (1.4) 2.2
Gain on sale of Mexrail, Inc. 4.4 -- --
Interest expense (45.0) (52.8) (65.8)
Debt retirement costs (4.3) -- (10.9)
Other income 17.6 4.2 6.0
---------- ---------- ----------
Income from continuing operations before income taxes
And cumulative effect of accounting change 64.1 33.9 9.2
Income tax provision (benefit) (Note 8) 6.9 2.8 (7.5)
---------- ---------- ----------
Income from continuing operations before
Cumulative effect of accounting change 57.2 31.1 16.7
Income from discontinued operations, (net of income
Taxes of $0.0, $0.0 and $233.3, respectively) -- -- 363.8
---------- ---------- ----------
Income before cumulative effect of accounting change 57.2 31.1 380.5
Cumulative effect of accounting change, net of income taxes -- (0.4) --
---------- ---------- ----------
Net income $ 57.2 $ 30.7 $ 380.5
========== ========== ==========
Per Share Data
Basic earnings per Common share
Continuing operations $ 0.94 $ 0.53 $ 0.29
Discontinued operations -- -- 6.42
---------- ---------- ----------
Basic earnings per share before cumulative
Effect of accounting change 0.94 0.53 6.71
Cumulative effect of accounting change, net of income taxes -- (0.01) --
---------- ---------- ----------
Total basic earnings per Common share $ 0.94 $ 0.52 $ 6.71
========== ========== ==========
Diluted earnings per Common share
Continuing operations $ 0.91 $ 0.51 $ 0.28
Discontinued operations -- -- 6.14
---------- ---------- ----------
Diluted earnings per share before cumulative
Effect of accounting change 0.91 0.51 6.42
Cumulative effect of accounting change, net of income taxes -- (0.01) --
---------- ---------- ----------
Total diluted earnings per Common share $ 0.91 $ 0.50 $ 6.42
========== ========== ==========
Weighted average Common shares outstanding (in thousands)
Basic 60,336 58,598 56,650
Potential dilutive common shares 1,982 2,386 1,740
---------- ---------- ----------
Diluted 62,318 60,984 58,390
========== ========== ==========
Dividends per Preferred share $ 1.00 $ 1.00 $ 1.00
|
See accompanying notes to consolidated financial statements
KANSAS CITY SOUTHERN
CONSOLIDATED BALANCE SHEETS
at December 31
Dollars in Millions, Except per Share Amounts
2002 2001 2000
-------- -------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 19.0 $ 24.7 $ 21.5
Accounts receivable, net (Note 6) 118.5 130.0 135.0
Inventories 34.2 27.9 34.0
Other current assets (Note 6) 44.5 71.8 25.9
-------- -------- --------
Total current assets 216.2 254.4 216.4
-------- -------- --------
Investments (Notes 3, 5) 423.1 386.8 358.2
Properties, net (Note 6) 1,337.4 1,327.4 1,327.8
Goodwill 10.6 19.3 19.9
Other assets 21.5 23.0 22.2
-------- -------- --------
Total assets $2,008.8 $2,010.9 $1,944.5
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year (Note 7) $ 10.0 $ 46.7 $ 36.2
Accounts and wages payable 47.7 50.4 52.9
Accrued liabilities (Note 6) 128.6 150.0 157.4
-------- -------- --------
Total current liabilities 186.3 247.1 246.5
-------- -------- --------
Other Liabilities
Long-term debt (Note 7) 572.6 611.7 638.4
Deferred income taxes (Note 8) 392.8 370.2 332.2
Other deferred credits 104.2 101.6 84.0
Commitments and contingencies
(Notes 3,7,8,11,12)
-------- -------- --------
Total other liabilities 1,069.6 1,083.5 1,054.6
-------- -------- --------
Stockholders' Equity (Notes 2,3,4,7,9):
$25 par, 4% noncumulative, Preferred stock 6.1 6.1 6.1
$.01 par, Common stock 0.6 0.6 0.6
Retained earnings 748.5 676.5 636.7
Accumulated other comprehensive loss (2.3) (2.9) --
-------- -------- --------
Total stockholders' equity 752.9 680.3 643.4
-------- -------- --------
Total liabilities and stockholders' equity $2,008.8 $2,010.9 $1,944.5
======== ======== ========
|
See accompanying notes to consolidated financial statements
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
Dollars in Millions
2002 2001 2000
-------- -------- --------
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 57.2 $ 30.7 $ 380.5
Adjustments to reconcile net income to net cash
Provided by operating activities
Income from discontinued operations -- -- (363.8)
Depreciation and amortization 61.4 58.0 56.1
Deferred income taxes 21.8 30.4 23.1
Equity in undistributed earnings of unconsolidated affiliates (43.4) (27.1) (23.8)
Distributions from unconsolidated affiliates -- 3.0 5.0
Gains on sales of properties and investments (20.1) (5.8) (3.4)
Tax benefit realized upon exercise of stock options 4.5 5.6 9.3
Changes in working capital items
Accounts receivable 12.4 4.0 (2.8)
Inventories (8.8) 6.1 6.5
Other current assets 29.8 (19.3) 11.7
Accounts and wages payable (2.4) (5.1) (15.7)
Accrued liabilities (20.6) (26.9) (9.0)
Other, net 8.6 14.6 1.0
-------- -------- --------
Net 100.4 68.2 74.7
-------- -------- --------
INVESTING ACTIVITIES:
Property acquisitions (79.8) (66.0) (104.5)
Proceeds from disposal of property 18.1 18.1 5.5
Investment in and loans to affiliates (4.4) (8.2) (4.2)
Proceeds from sale of investments, net 31.7 0.6 --
Other, net (0.5) (0.2) 1.4
-------- -------- --------
Net (34.9) (55.7) (101.8)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 200.0 35.0 1,052.0
Repayment of long-term debt (270.9) (51.3) (1,015.4)
Debt issuance costs (5.7) (0.4) (17.6)
Proceeds from stock plans 10.3 8.9 17.9
Cash dividends paid (0.2) (0.2) (4.8)
Other, net (4.7) (1.3) 4.6
-------- -------- --------
Net (71.2) (9.3) 36.7
-------- -------- --------
CASH AND CASH EQUIVALENTS:
Net decrease in cash and cash equivalents (5.7) 3.2 9.6
At beginning of year 24.7 21.5 11.9
-------- -------- --------
At end of period $ 19.0 $ 24.7 $ 21.5
======== ======== ========
|
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars in Millions, Except per Share Amounts
Accumulated
$25 Par $.01 Par other
Preferred Common Retained comprehensive
Stock Stock Earnings income (loss) Total
-------- -------- -------- -------- --------
Balance at December 31, 1999 $ 6.1 $ 1.1 $1,167.0 $ 108.9 $1,283.1
Comprehensive income:
Net income 380.5
Net unrealized gain on investments 5.9
Less: Reclassification adjustment for
gains included in net income (1.1)
Foreign currency translation adjustment (2.6)
Comprehensive income 382.7
Spin-off of Stilwell Financial Inc. (954.1) (111.1) (1,065.2)
1-for-2 reverse stock split (0.5) 0.5
Dividends (0.2) (0.2)
Stock plan shares issued from treasury 6.3 6.3
Options exercised and stock subscribed 36.7 36.7
-------- -------- -------- -------- --------
Balance at December 31, 2000
6.1 0.6 636.7 -- 643.4
-------- -------- -------- -------- --------
Comprehensive income:
Net income 30.7
Cumulative effect of accounting change (0.9)
Change in fair market value of cash flow
Hedge of unconsolidated affiliate (2.0)
Comprehensive income 27.8
Dividends (0.2) (0.2)
Options exercised and stock subscribed 9.3 9.3
-------- -------- -------- -------- --------
Balance at December 31, 2001 6.1 0.6 676.5 (2.9) 680.3
-------- -------- -------- -------- --------
Comprehensive income:
Net income 57.2
Change in fair value of cash flow hedges (0.1)
Amortization of accumulated other
Comprehensive income (loss) related to
Interest rate swaps 0.7
Comprehensive income 57.8
Dividends (0.2) (0.2)
Options exercised and stock subscribed 15.0 15.0
-------- -------- -------- -------- --------
Balance at December 31, 2002 $ 6.1 $ 0.6 $ 748.5 $ (2.3) $ 752.9
======== ======== ======== ======== ========
|
See accompanying notes to consolidated financial statements.
KANSAS CITY SOUTHERN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Kansas City Southern ("KCS" or the "Company") is a Delaware corporation that was initially organized in 1962 as Kansas City Southern Industries, Inc. In 2002, the Company formally changed its name to Kansas City Southern. KCS is a holding company with principal operations in rail transportation. On July 12, 2000 KCS completed its spin-off of Stilwell Financial Inc. ("Stilwell" - a former wholly-owned financial services subsidiary) through a special dividend of Stilwell common stock distributed to KCS common stockholders of record on June 28, 2000 ("Spin-off"). See Note 3. KCS's principal subsidiaries and affiliates, which are reported under one business segment, include the following:
o The Kansas City Southern Railway Company ("KCSR"), a wholly-owned
subsidiary of KCS;
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), a
46.6% owned unconsolidated affiliate of KCSR. Grupo TFM owns 80% of the
common stock of TFM, S.A. de C.V. ("TFM"). TFM wholly-owns Mexrail, Inc.
("Mexrail"). Mexrail wholly-owns The Texas-Mexican Railway Company ("Tex
Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate of KCSR that leases locomotive and rail equipment
to KCSR;
o Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of which
KCSR indirectly owns 50% of the common stock. PCRC owns all of the common
stock of Panarail Tourism Company ("Panarail").
KCS, along with its principal subsidiaries and joint ventures, owns and operates a rail network that links key commercial and industrial markets in the United States and Mexico. The Company also has a strategic alliance with the Canadian National Railway Company ("CN") and Illinois Central Corporation ("IC") (collectively "CN/IC") and other marketing agreements, which provide the ability for the Company to expand its geographic reach.
KCS's rail network, including its joint ventures, strategic alliances and marketing agreements, connects shippers in the midwestern and eastern regions of the United States, including shippers utilizing Chicago, Illinois and Kansas City, Missouri--the two largest rail centers in the United States--with the largest industrial centers of Canada and Mexico, including Toronto, Edmonton, Mexico City and Monterrey. KCS's rail system, through its core network, strategic alliances and marketing agreements, interconnects with all Class I railroads in North America.
KCSR, which owns and operates one of seven Class I railroad systems in the United States, is comprised of approximately 3,100 miles of main and branch lines and approximately 1,250 miles of other tracks in a ten-state region that includes Missouri, Kansas, Arkansas, Oklahoma, Mississippi, Alabama, Tennessee, Louisiana, Texas and Illinois. KCSR, which traces its origins to 1887, offers the shortest north/south rail route between Kansas City and several key ports along the Gulf of Mexico in Louisiana, Mississippi and Texas. Additionally, KCSR, in conjunction with the Norfolk Southern Railway Company ("Norfolk Southern"), operates the most direct rail route (referred to as the "Meridian Speedway"), between the Atlanta, Georgia and Dallas, Texas rail gateways, for rail traffic moving between the southeast and southwest regions of the United States. The "Meridian Speedway" also provides eastern shippers and other U.S. and Canadian railroads with an efficient connection to Mexican markets. KCSR's rail route also serves the east/west route linking Kansas City with East St. Louis and Springfield, Illinois. Further, KCSR has limited haulage rights between Springfield and Chicago that allow for shipments that originate or terminate on the former Gateway Western's rail lines. These lines also provide access to East St. Louis and allow rail traffic to avoid the St. Louis, Missouri terminal. KCSR's geographic reach enables service to a customer base that includes, among others, electric generating utilities, which use coal, and a wide range of companies in the chemical and petroleum, agricultural and mineral, paper and forest, and automotive and intermodal markets.
Southwestern Electric Power Company ("SWEPCO"), which is a subsidiary of American Electric Power, Inc., is the Company's only customer which accounted for more than 10% of revenues during the years ended December 31, 2002, 2001, and 2000, respectively. Revenues related to SWEPCO during these periods were $64.7, $75.9 and $67.2, million, respectively.
The Company's rail network links directly to major trading centers in Mexico through TFM and Tex Mex. TFM operates a railroad of approximately 2,650 miles of main and branch lines running from the U.S./Mexican border at Laredo, Texas to Mexico City and serves most of Mexico's principal industrial cities and three of its major shipping ports. TFM also owns all of Mexrail, which in turn wholly-owns Tex Mex. Tex Mex operates approximately 160 miles of main and branch lines between Laredo and the port city of Corpus Christi, Texas. TFM, through its concession with the Mexican government, has the right to control and operate the southern half of the rail-bridge at Laredo and, indirectly through its ownership of Mexrail, owns the northern half of the rail-bridge at Laredo, which spans the Rio Grande River between the United States and Mexico. Our principal international gateway is at Laredo where more than 50% of all rail and truck traffic between the United States and Mexico crosses the border.
Basis of Presentation. Use of the term "Company" as described in these Notes to Consolidated Financial Statements means Kansas City Southern and all of its consolidated subsidiaries and unconsolidated affiliates. Significant accounting and reporting policies are described below. Certain prior year amounts have been reclassified to conform to the current year presentation.
As a result of the Spin-off, the accompanying consolidated financial statements for each of the applicable periods presented reflect the financial position, results of operations and cash flows of Stilwell as discontinued operations.
Use of Estimates. The accounting and financial reporting policies of the Company conform with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management reviews its estimates, including those related to the recoverability and useful lives of assets as well as liabilities for litigation, environmental remediation, casualty claims, and income taxes. Changes in facts and circumstances may result in revised estimates. Actual results could differ from those estimates.
Principles of Consolidation. The accompanying consolidated financial statements are presented using the accrual basis of accounting and include the Company and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The equity method of accounting is used for all entities in which the Company or its subsidiaries have significant influence, but not more than 50% voting interest; the cost method of accounting is generally used for investments of less than 20% voting interest.
Revenue Recognition. The Company recognizes freight revenue based upon the percentage of completion of a commodity movement. Other revenues, in general, are recognized when the product is shipped, as services are performed or contractual obligations fulfilled.
Cash Equivalents. Short-term liquid investments with an initial maturity of generally three months or less are considered cash equivalents.
Inventories. Materials and supplies inventories are valued at the lower of average cost or market.
Properties and Depreciation. Properties are stated at cost. Additions and renewals, including those on leased assets that increase the life of the asset or utility and constitute a unit of property are capitalized and all properties are depreciated over the estimated remaining life or leased life of such assets, whichever is shorter. Ordinary maintenance and repairs are charged to expense as incurred.
The cost of transportation equipment and road property normally retired, less salvage value, is charged to accumulated depreciation. The cost of industrial and other property retired, and the cost of transportation property abnormally retired, together with accumulated depreciation thereon, are eliminated from the property accounts and the related gains or losses are reflected in net income. Gains recognized on the sale or disposal of operating properties that were reflected in operating income were $3.1, $5.8 and $3.4 million in 2002, 2001 and 2000, respectively. Gains or losses recognized on the sale of non-operating properties reflected in other income were $7.4 million in 2002. Gains or losses recognized on the sale of non-operating properties reflected in other income were not significant in 2001 and 2000.
Depreciation is computed using composite straight-line rates for financial statement purposes. The Surface Transportation Board ("STB") approves the depreciation rates used by KCSR. KCSR evaluates depreciation rates for properties and equipment and implements approved rates. Periodic revisions of rates have not had a material effect on operating results. Depreciation for other consolidated subsidiaries is computed based on the asset value in excess of estimated salvage value using the straight-line method over the estimated useful lives of the assets. Accelerated depreciation is used for income tax purposes. The ranges of annual depreciation rates for financial statement purposes are:
Road and structures 1% - 20% Rolling stock and equipment 1% - 24% Other equipment 1% - 33% Computer software 8% Capitalized leases 3% - 20% |
Long-lived assets. The Company periodically evaluates the recoverability of its operating properties. The measurement of possible impairment is based primarily on the ability to recover the carrying value of the asset from expected future operating cash flows of the assets on an undiscounted basis.
Casualty Claims. Casualty claims in excess of self-insurance levels are insured up to certain coverage amounts, depending on the type of claim. The Company's process for establishing its casualty liability reserves is based on an actuarial study by an independent third party actuarial firm on an undiscounted basis. It is based on claims filed and an estimate of claims incurred but not yet reported. While the ultimate amount of claims incurred is dependent on various factors, it is management's opinion that the recorded liability is adequate to provide for the payment of future claims. Adjustments to the liability will be reflected as operating expenses in the period in which the adjustments are known. For other occupational injury claims, an assessment is made on a case-by-case basis in accordance with SFAS 5.
Computer Software Costs. Costs incurred in conjunction with the purchase or development of computer software for internal use are accounted for in accordance with American Institute of Certified Public Accountant's Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). Costs incurred in the preliminary project stage, as well as training and maintenance costs, are expensed as incurred. Direct and indirect costs associated with the application development stage of internal use software are capitalized until such time that the software is substantially complete and ready for its intended use. Capitalized costs are amortized on a straight-line basis over the useful life of the software. As of December 31, 2002 and 2001, a total of approximately $58 and $55 million, respectively, was capitalized (including a total of approximately $5.9 and $4.2 million of capitalized interest costs related to 2002 and 2001, respectively) for a new transportation operating system, management control system ("MCS"), which was implemented on July 14, 2002.
Goodwill and other intangible assets. Effective January 1, 2002, the Company implemented Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 provides, among other things, that goodwill with an indefinite life shall no longer be amortized, but shall be evaluated for impairment on an annual basis. SFAS 142 also requires separate presentation of goodwill on the balance sheet and impairment losses are to be shown as a separate item on the income statement. Additionally, changes in the carrying amount of goodwill should be disclosed in the footnotes to the financial statements. SFAS 142 also requires various transitional disclosures until all periods presented reflect the provisions of SFAS 142. These transitional disclosures include the presentation of
net income and earnings per share information adjusted to exclude amortization expense (including the related income tax effects) for all periods presented. The transitional disclosures are presented in the table below.
The Company has presented its goodwill as a separate line item in the accompanying balance sheets. Additionally, the Company has performed its goodwill impairment test and determined that existing goodwill is not impaired. During the year ended December 31, 2002, the Company's goodwill decreased $8.5 million due to the sale of Mexrail to TFM and $0.2 million due to the sale of Wyandotte Garage Corporation.
Year Ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Reported income from continuing operations $ 57.2 $ 31.1 $ 16.7
Add back: Goodwill amortization -- 0.6 0.6
-------- -------- --------
Adjusted income from continuing operations $ 57.2 $ 31.7 $ 17.3
======== ======== ========
Reported income from discontinued operations $ -- $ -- $ 363.8
Add back: Goodwill amortization -- -- 5.7
-------- -------- --------
Adjusted income from discontinued operations $ -- $ -- $ 369.5
======== ======== ========
Reported net income $ 57.2 $ 30.7 $ 380.5
Add back: Goodwill amortization -- 0.6 6.3
-------- -------- --------
Adjusted net income $ 57.2 $ 31.3 $ 386.8
======== ======== ========
Reported diluted earnings per share from
continuing operations $ 0.91 $ 0.51 $ 0.28
Add back: Goodwill amortization -- 0.01 0.01
-------- -------- --------
Adjusted diluted earnings per share from
continuing operations $ 0.91 $ 0.52 $ 0.29
======== ======== ========
Reported diluted earnings per share from
discontinued operations $ -- $ -- $ 6.14
Add back: Goodwill amortization -- -- 0.10
-------- -------- --------
Adjusted diluted earnings per share from
discontinued operations $ -- $ -- $ 6.24
======== ======== ========
Reported diluted earnings per share - net income $ 0.91 $ 0.50 $ 6.42
Add back: Goodwill amortization -- 0.01 0.11
-------- -------- --------
Adjusted diluted earnings per share - net income $ 0.91 $ 0.51 $ 6.53
======== ======== ========
|
Derivative Instruments. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 was amended by Statement of Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" and Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS 133." SFAS 133, as amended, requires that derivatives be recorded on the balance sheet as either assets or liabilities measured at fair value. Changes in the fair value of derivatives are recorded either through current earnings or as other comprehensive income, depending on the type of hedge transaction. Gains and losses on the derivative instrument reported in other comprehensive income are reclassified into earnings in the periods in which earnings are impacted by the variability of the cash flow of the hedged item. The ineffective portion of all hedge transactions will be recognized in current period earnings.
The Company does not engage in the trading of derivatives. The Company's objective is to manage its fuel and interest rate risk through the use of derivative instruments as deemed appropriate. At December 31, 2002, the Company had one fuel swap agreement for a notional amount of approximately 2.5 million gallons of fuel. Under the terms of this swap, the Company will receive a variable price based upon an average of the spot prices calculated on a monthly basis as reported through a petroleum price reporting service. The Company will pay a fixed price of 62.5(cent) per gallon. This
swap will expire on December 31, 2003. Additionally, on January 14, 2003, the Company entered into an additional swap with a notional amount of approximately 2.5 million gallons of fuel. Under the terms of this swap, the Company will receive a variable price under the same terms as discussed above and pay a fixed price of 73.8(cent) per gallon. This swap will expire on June 30, 2003. Additionally, KCSR is also a party to swap transactions for approximately 2.5 million gallons of fuel for 2004. Cash settlements of these swaps occur on a monthly basis on the fifth business day of the month following the month in which the settlement is calculated. These swaps are designed to hedge the Company's exposure to movements in the price of No. 2 Gulf Coast Heating Oil on which the Company's diesel fuel prices are determined. By holding these swaps, the Company is able to limit its risk to rising fuel prices.
At December 31, 2001 the Company had five separate interest rate cap agreements for an aggregate notional amount of $200 million. These interest rate cap agreements expired during 2002 and as of December 31, 2002, the Company did not have any interest rate cap agreements or interest rate hedging instruments.
KCS adopted the provisions of SFAS 133, as amended, effective January 1, 2001. As a result of this change in the method of accounting for derivative instruments, the Company recorded an after-tax charge to earnings of $0.4 million in the first quarter of 2001. This charge is presented as a cumulative effect of an accounting change in the accompanying financial statements and represents the ineffective portion of the interest rate cap agreements discussed above. The Company recorded an additional $0.4 million charge during the year ended December 31, 2001 for subsequent changes in the fair value of its interest rate hedging instruments. In 2002, these interest rate cap agreements expired with no significant effect on earnings.
In addition, the Company records adjustments to its stockholders' equity (accumulated other comprehensive income (loss)) for its portion of the adjustment to the fair value of derivative transactions to which Southern Capital, a 50% owned unconsolidated affiliate, was a participant. The Company also adjusts its investment in Southern Capital by the change in the fair value of these derivative instruments. For the years ended December 31, 2002 and 2001, the Company recorded a reduction to its stockholders equity (accumulated other comprehensive loss) of approximately $0.3 million and $2.9 million, respectively, for its portion of the amount recorded by Southern Capital for the adjustment to the fair value of interest rate swap transactions. The Company also reduced its investment in Southern Capital by the same amount.
In conjunction with the refinancing of its debt, Southern Capital terminated
these interest rate swap transactions (See Note 7). As a result, Southern
Capital will amortize the balance of accumulated other comprehensive income
(loss) into interest expense over the former remaining life of the interest rate
swap transactions. This charge resulted in additional interest expense of
approximately $1.3 million in 2002. The Company is realizing the impact of this
charge through a related reduction in equity earnings from Southern Capital and
is amortizing its balance in accumulated other comprehensive income (loss) to
its investment in Southern Capital. During the year ended December 31, 2002, the
Company recorded amortization of its balance in accumulated other comprehensive
income (loss) of $0.7 million.
Fair Value of Financial Instruments. Statement of Financial Accounting Standards No. 107 "Disclosures About Fair Value of Financial Instruments" ("SFAS 107") requires an entity to disclose the fair value of its financial instruments. The Company's financial instruments include cash and cash equivalents, accounts receivable, lease and contract receivables, accounts payable and long-term debt. In accordance with SFAS 107, lease financing and contracts that are accounted for under Statement of Financial Accounting Standards No. 13 "Accounting for Leases," are excluded from fair value presentation.
The carrying value of the Company's cash equivalents approximate their fair values due to their short-term nature. Carrying value approximates fair value for all financial instruments with six months or less to re-pricing or maturity and for financial instruments with variable interest rates. The Company estimates the fair value of long-term debt based upon borrowing rates available at the reporting date for indebtedness with similar terms and average maturities. Based upon the borrowing rates currently available to the Company and its subsidiaries for indebtedness with similar terms and average maturities, the fair value of long-term debt was approximately $617, $681 and $685 million at December 31, 2002, 2001 and 2000, respectively.
Income Taxes. Deferred income tax effects of transactions reported in different periods for financial reporting and income tax return purposes are recorded under the liability method of accounting for income taxes. This method gives consideration to the future tax consequences of the deferred income tax items and immediately recognizes changes in income tax laws upon enactment. The income statement effect is generally derived from changes in deferred income taxes on the balance sheet.
Grupo TFM provides deferred income taxes for the difference between the financial reporting and income tax bases of its assets and liabilities. The Company records its proportionate share of these income taxes through our equity in Grupo TFM's earnings. As of December 31, 2002 the Company had not provided deferred income taxes for the temporary difference between the financial reporting basis and income tax basis of its investment in Grupo TFM because Grupo TFM is a foreign corporate joint venture that is considered permanent in duration, and the Company does not expect the reversal of the temporary difference to occur in the foreseeable future.
Changes of Interest in Subsidiaries and Equity Investees. A change of the Company's interest in a subsidiary or equity investee resulting from the sale of the subsidiary's or equity investee's stock is generally recorded as a gain or loss in the Company's net income in the period that the change of interest occurs. If an issuance of stock by the subsidiary or affiliate is from treasury shares on which gains have been previously recognized, however, KCS will record the gain directly to its equity and not include the gain in net income. A change of interest in a subsidiary or equity investee resulting from a subsidiary's or equity investee's purchase of its stock increases the Company's ownership percentage of the subsidiary or equity investee. The Company records this type of transaction under the purchase method of accounting, whereby any excess of fair market value over the net tangible and identifiable intangible assets is recorded as goodwill.
Treasury Stock. The excess of par over cost of the Preferred shares held in Treasury is credited to capital surplus. Common shares held in Treasury are accounted for as if they were retired and the excess of cost over par value of such shares is charged to capital surplus, if available, then to retained earnings.
Stock Plans. Proceeds received from the exercise of stock options or subscriptions are credited to the appropriate capital accounts in the year they are exercised.
The FASB issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") in October 1995. This statement allows companies to continue under the approach set forth in Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"), for recognizing stock-based compensation expense in the financial statements, but encourages companies to adopt the fair value method of accounting for employee stock options. Under SFAS 123, companies must either record compensation expense based on the estimated grant date fair value of stock options granted or disclose the impact on net income as if they had adopted the fair value method (for grants subsequent to December 31, 1994.) If KCS had measured compensation cost for the KCS stock options granted to its employees and shares subscribed by its employees under the KCS employee stock purchase plan, under the fair value based method prescribed by SFAS 123, net income and earnings per share would have been as follows:
2002 2001 2000
-------- -------- --------
Net income (in millions):
As reported $ 57.2 $ 30.7 $ 380.5
Total stock-based compensation expense
determined under fair value method, net of
income taxes (1.7) (4.0) (4.7)
-------- -------- --------
Pro forma 55.5 26.7 375.8
Earnings per Basic share:
As reported $ 0.94 $ 0.52 $ 6.71
Pro forma 0.92 0.45 6.63
Earnings per Diluted share:
As reported $ 0.91 $ 0.50 $ 6.42
Pro forma 0.88 0.43 6.37
|
In December 2002, the FASB issued Statement No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148"). SFAS 148 provides two additional transition methods for entities that adopt the method of accounting for stock-based compensation as defined in FASB Statement No. 123. The Company is currently evaluating the provisions of this new accounting pronouncement and does not expect this pronouncement, if adopted, to have a material impact on its consolidated results of operations, financial position, or cash flows.
All shares held in the Employee Stock Ownership Plan ("ESOP") are treated as outstanding for purposes of computing the Company's earnings per share. See additional information on the ESOP in Note 10.
Earnings Per Share. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed giving effect to all dilutive potential common shares that were outstanding during the period (i.e., the denominator used in the basic calculation is increased to include the number of additional common shares that would have been outstanding if the dilutive potential shares had been issued).
The effect of stock options issued to employees represent the only difference between the weighted average shares used for the basic earnings per share computation compared to the diluted earnings per share computation. The following is a reconciliation from the weighted average shares used for the basic earnings per share computation and the diluted earnings per share computation for the years ended December 31, 2002, 2001 and 2000, respectively (in thousands):
2002 2001 2000
-------- -------- --------
Basic shares 60,336 58,598 56,650
Effect of dilution: Stock options 1,982 2,386 1,740
-------- -------- --------
Diluted shares 62,318 60,984 58,390
======== ======== ========
Shares excluded from diluted computation 321 97 18
-------- -------- --------
|
Shares were excluded from the applicable periods diluted earnings per share computation because the exercise prices were greater than the average market price of the common shares.
The only adjustments that currently affect the numerator of the Company's diluted earnings per share computation include preferred dividends and potentially dilutive securities at certain subsidiaries and affiliates. Adjustments related to potentially dilutive securities totaled $5.4 million for the year ended December 31, 2000. This adjustment related to securities at certain Stilwell subsidiaries and affiliates and affected the diluted earnings per share from discontinued operations computation in 2000. Preferred dividends are the only adjustments that affect the numerator of the diluted earnings per share from continuing operations computation. Adjustments related to preferred dividends were not material for the periods presented.
Stockholders' Equity. Information regarding the Company's capital stock at December 31, 2002, 2001 and 2000 follows:
Shares Shares
Authorized Issued
----------- ----------
$25 Par, 4% noncumulative, Preferred stock 840,000 649,736
$1 Par, Preferred stock 2,000,000 None
$1 Par, Series A, Preferred stock 150,000 None
$1 Par, Series B convertible, Preferred stock 1,000,000 None
$.01 Par, Common stock 400,000,000 73,369,116
|
The Company's stockholders approved a one-for-two reverse stock split at a special meeting held on July 15, 1998. On July 12, 2000, KCS completed the reverse stock split whereby every two shares of KCS common stock were converted into one share of KCS common stock. All share and per share data reflect this split.
Shares outstanding are as follows at December 31, (in thousands):
2002 2001 2000
-------- -------- --------
$25 Par, 4% noncumulative, Preferred stock 242 242 242
$.01 Par, Common stock 61,103 59,243 58,140
|
Comprehensive Income. In 2002, the Company's other comprehensive income (loss) consists of the adjustment to the fair value of its fuel swap transactions as well as its proportionate share of the amount recorded by Southern Capital for the adjustment to the fair value of its interest rate swap transactions. In 2001, the Company's other comprehensive income consists of its proportionate share of the amount recorded by Southern Capital for the adjustment to the fair value of its interest rate swap transactions. In 2000, the Company's other comprehensive income consists primarily of its proportionate share of unrealized gains and losses relating to investments held by certain subsidiaries and affiliates of Stilwell (discontinued operations) as "available for sale" securities as defined by Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The Company recorded its proportionate share of any unrealized gains or losses related to these investments, net of deferred income taxes, in stockholders' equity as accumulated other comprehensive income. The unrealized gain related to these investments increased $5.9 million, net of deferred taxes, for the year ended December 31, 2000. Subsequent to the Spin-off the Company has not and does not expect to hold investments that are accounted for as "available for sale" securities.
Postretirement benefits. The Company provides certain medical, life and other postretirement benefits to certain retirees. The costs of such benefits are expensed over the estimated period of employment.
Environmental liabilities. The Company records liabilities for remediation and restoration costs related to past activities when the Company's obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance activities related to current operations are expensed as incurred. As of December 31, 2002, 2001 and 2000, liabilities for environmental remediation were not material.
New Accounting Pronouncements. In June 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 is effective for fiscal years beginning after June 15, 2002. Under SFAS 143, the fair value of a liability for an asset retirement obligation must be recognized in the period in which it is incurred if a reasonable estimate of the fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. KCSR, along with other Class I railroads, depreciates track structure (rail, ties, and other track material) in accordance with regulation promulgated by the STB. These regulations require KCSR to depreciate track structure to a net salvage value (gross estimated salvage value less estimated costs to remove the track structure at the end of its useful life). For certain track structure such as ties, with little or no gross salvage value, this practice ultimately results in depreciating an asset below zero, and thus, in effect, results in a liability. Under the new requirements of SFAS 143, in the absence of a legal obligation to remove the track structure, such accounting practice is not allowed. In the opinion of management, a legal obligation to remove track structure does not exist. Accordingly, the Company is currently reviewing its depreciation of track structures to determine instances where the depreciation of removal costs has resulted or would be expected (based on the current depreciation rate) to result in the depreciation of an asset below zero when considering net salvage value. To the extent that accumulated depreciation includes amounts related to instances of excess depreciation, a cumulative effect adjustment will be recorded to reflect the change in accounting principle required by SFAS 143 in the first quarter of 2003. Additionally, future depreciation rates applied to certain track structure elements that were previously yielding a negative salvage value will be modified to comply with the provisions of SFAS 143. The Company intends to adopt the provisions of SFAS 143 in the first quarter of 2003. The Company is currently assessing the potential impact of this accounting pronouncement on its consolidated results of operations, financial position, and cash flows.
In June 2002, the FASB issued Statement No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Under SFAS 146, a liability for a cost associated with an exit or disposal activity must be recognized when the liability is incurred. Previously, a liability for an exit cost was recognized as of the date of an entity's commitment to an exit or disposal plan. The Company is currently evaluating the provisions of SFAS 146 and does not expect adoption of this pronouncement to have a material impact on its consolidated results of operations, financial position, or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 provides guidance on the accounting and disclosure requirements relating to the issuance of certain types of guarantees and requires the guarantor to recognize at the inception of a guarantee a liability for the fair value of the potential obligation. The provisions for the initial recognition and measurement of guarantees are effective prospectively for all guarantees issued or modified after December 31, 2002. The disclosure requirements under FIN 45 were effective for financial statements for periods ending after December 15, 2002. KCS management does not believe that the adoption of FIN 45 will have a material impact on its consolidated results of operations, financial position, or cash flows. See Note 5 and Note 11 for disclosures of guarantees.
In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities," ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to certain variable interest entities created after January 31, 2003. The Company is currently assessing the potential impact of this accounting interpretation on its method of accounting for unconsolidated subsidiaries and does not believe it will have a material impact on the its consolidated results of operations, financial position, or cash flows.
Purchase of the Mexican government's ownership of Grupo TFM. The Company and Grupo TMM exercised their call option and, on July 29, 2002, completed the purchase of the Mexican government's 24.6% ownership of Grupo TFM. The Mexican government's ownership interest of Grupo TFM was purchased by TFM for a purchase price of $256.1 million, utilizing a combination of proceeds from an offering by TFM of debt securities, a credit from the Mexican government for the reversion of certain rail facilities and other resources. This transaction resulted in an increase in the Company's ownership percentage of Grupo TFM from 36.9% to approximately 46.6%. The purchase price was calculated by accreting the Mexican government's initial investment of approximately $199 million from the date of the Mexican government's investment through the date of the purchase, using the interest rate on one-year U.S. Treasury securities.
Sale of Mexrail, Inc. to TFM. On February 27, 2002, the Company, Grupo TFM, and certain of Grupo TMM's affiliates entered into a stock purchase agreement with TFM to sell to TFM all of the common stock of Mexrail. Mexrail owns the northern half of the international railway bridge at Laredo, Texas and all of the common stock of the Tex Mex. The sale closed on March 27, 2002 and the Company received approximately $31.4 million for its 49% interest in Mexrail. The Company used the proceeds from the sale of Mexrail to reduce debt. Although the Company no longer directly owns 49% of Mexrail, it retains an indirect ownership through its ownership of Grupo TFM. The Company's proportionate share of the proceeds from the sale of Mexrail to TFM exceeded the carrying value of the Company's investment in Mexrail by $11.2 million. The Company recognized a $4.4 million gain on the sale of Mexrail to TFM in the first quarter of 2002 while the remaining $6.8 of excess proceeds was deferred and is being amortized over 20 years.
Sale of Wyandotte Garage Corporation. In 2002, the Company sold its 80% interest in Wyandotte Garage Corporation for a gain of $4.9 million. Additionally, as a result of this sale, the Company was able to eliminate approximately $4.9 million of debt.
Spin-off of Stilwell. On July 12, 2000, KCS completed the Spin-off, which was approved by KCS's Board of Directors on June 14, 2000. Each KCS stockholder received two shares of the common stock of Stilwell for every one share of KCS common stock owned on the record date. The total number of Stilwell shares distributed was 222,999,786. Under
tax rulings received from the Internal Revenue Service ("IRS"), the Spin-off qualifies as a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended. Also on July 12, 2000, KCS completed a reverse stock split whereby every two shares of KCS common stock were converted into one share of KCS common stock. The Company's stockholders approved this one-for-two reverse stock split in 1998 in contemplation of the Spin-off. The total number of KCS shares outstanding immediately following this reverse split was 55,749,947.
As a result of the Spin-off, the accompanying consolidated financial statements for the year ended December 31, 2000 reflect the results of operations and cash flows of Stilwell as discontinued operations through the date of the Spin-off (July 12, 2000). Effective with the Spin-off, the net assets of Stilwell were removed from the consolidated balance sheet. The accompanying consolidated financial statements for the year ended December 31, 2000 reflect the results of operations and cash flows of Stilwell as discontinued operations.
Prior to the Spin-off, KCS and Stilwell entered into various agreements for the purpose of governing certain of the limited ongoing relationships between KCS and Stilwell during a transitional period following the Spin-off, including an intercompany agreement, a contribution agreement and a tax disaffiliation agreement. See Note 12.
For the period between January 1, 2000 and July 12, 2000, the Company reported revenues related to Stilwell of $1,187.9 million, operating expenses of $646.2 million and operating income of $541.7 million. After further adjustments for the recognition of certain gains, interest expense, income taxes and a minority interest in earnings, the Company reported net income from discontinued operations, net of income taxes, of $363.8 million for the period between January 1, 2000 and July 12, 2000.
Supplemental Disclosures of Cash Flow Information.
2002 2001 2000
--------- --------- ---------
Cash payments (refunds) (in millions):
Interest (includes $0.0, $0.0 and $0.7 million,
Respectively, related to Stilwell) $ 45.5 $ 49.1 $ 72.4
Income tax payments (refunds) (includes $0.0, $0.0 and
$195.9 million, respectively, related to Stilwell) $ (29.6) $ (25.0) $ 143.1
|
Non-cash Investing and Financing Activities.
The Company initiated the Thirteenth Offering of KCS common stock under the
Employee Stock Purchase Plan ("ESPP") during 2001. Stock subscribed under the
Thirteenth Offering was issued to employees in January 2003 and was paid for
through employee payroll deductions in 2002. The Company received approximately
$3.5 million from payroll deductions associated with this offering of the ESPP.
In connection with the Twelfth Offering of the ESPP (initiated in 2000), in 2001
the Company received approximately $4.5 million from employee payroll deductions
for the purchase of KCS common stock. This stock was issued to employees in
January 2002. The Company did not initiate an offering of KCS common stock under
the ESPP during 1999. Accordingly, no payroll deductions related to an ESPP were
recorded in 2000.
In conjunction with the January 2000 refinancing of the Company's debt structure, KCS borrowed $125 million under a $200 million 364-day senior unsecured competitive advance/revolving credit facility to retire debt obligations. Stilwell assumed this credit facility and repaid the $125 million in March 2000. Upon such assumption, KCS was released from all obligations, and Stilwell became the sole obligor, under this credit facility. The Company's indebtedness decreased as a result of the assumption of this indebtedness by Stilwell.
During 1999, the Company's Board of Directors declared a quarterly dividend totaling approximately $4.6 million payable in January of 2000. The dividend declaration reduced retained earnings and established a liability at the end of
1999. No cash outlay occurred until 2000. During the first quarter of 2000, the Company's Board of Directors suspended common stock dividends of KCS in conjunction with the terms of the KCS Credit Facility discussed above. It is not anticipated that KCS will make any cash dividend payments to its common stockholders for the foreseeable future.
In 2002, 2001 and 2000, the Company capitalized approximately $2, $4, and $9 million, respectively, of costs related to capital projects for which no cash outlay had yet occurred. These costs were included in accounts payable and accrued liabilities at December 31, 2002, 2001 and 2000 respectively.
Investments, including investments in unconsolidated affiliates, are as follows
(in millions):
Percentage
Ownership
Company Name December 31, 2002 Carrying Value
----------------------------- ---------------------- --------------------------------------
2002 2001 2000
---------- ---------- ----------
Grupo TFM 46.6% $ 380.1 $ 334.4 $ 306.0
Southern Capital 50% 24.9 23.2 24.6
Mexrail 0%(1) -- 11.7 13.3
PCRC 50%(2) 14.5 11.0 9.9
Other 3.6 6.5 4.4
---------- ---------- ----------
$ 423.1 $ 386.8 $ 358.2
========== ========== ==========
|
(1) The Company's investment in Mexrail was sold to TFM during 2002. See Note 3
for further information.
(2) The Company owns 50% of the outstanding voting common stock of PCRC.
Grupo TFM. In June 1996, the Company and Transportacion Maritima Mexicana, S.A. de C.V. ("TMM" - now Grupo TMM - see below) formed Grupo TFM to participate in the privatization of the Mexican railroad system. In December 1996, the Mexican government awarded Grupo TFM the right to acquire an 80% interest (representing 100% of the shares with unrestricted voting rights) in TFM for approximately 11.072 billion Mexican pesos (approximately $1.4 billion based on the U.S. dollar/Mexican peso exchange rate on the award date). TFM holds a 50-year concession (with the option of a 50-year extension subject to certain conditions) to operate approximately 2,650 miles of track which directly link Mexico City and Monterrey (as well as Guadalajara through trackage rights) with the ports of Lazaro Cardenas, Veracruz and Tampico and the Mexican/United States border crossings of Nuevo Laredo-Laredo, Texas and Matamoros-Brownsville, Texas. TFM's route network provides a connection to the major industrial and population areas of Mexico from the United States. TFM interchanges traffic with Tex Mex and the Union Pacific Railroad ("UP") at Laredo, Texas.
During December 2001, the Company's partner in Grupo TFM, TMM announced that its largest shareholder, Grupo TMM S.A. ("Grupo TMM" - formerly known as Grupo Servia, S.A. de C.V.), filed a registration statement on Form F-4 with the Securities and Exchange Commission ("SEC"). This registration statement, which was declared effective December 13, 2001, was filed to register securities that would be issued in the proposed merger of TMM with Grupo TMM. The proposed merger was approved with the surviving entity being Grupo TMM.
The Company and Grupo TMM exercised their call option and on July 29, 2002, completed the purchase of the Mexican government's 24.6% ownership of Grupo TFM. See Note 3 for further information.
On or prior to October 31, 2003, the Mexican government may sell its 20% interest in TFM through a public offering (with the consent of Grupo TFM if prior to October 31, 2003). If, on October 31, 2003, the Mexican government has not
sold all of its capital stock in TFM, Grupo TFM is obligated to purchase the capital stock at the initial share price paid by Grupo TFM, adjusted for Mexican inflation and changes in the U.S. Dollar/Mexican Peso exchange rate. In the event that Grupo TFM does not purchase the Mexican government's remaining interest in TFM, Grupo TMM and KCS, or either Grupo TMM or KCS, are obligated to purchase the Mexican government's interest. KCS and Grupo TMM have cross indemnities in the event the Mexican government requires only one of them to purchase its interest. The cross indemnities allow the party required to purchase the Mexican government's interest to require the other party to purchase its pro rata portion of such interest. However, if KCS were required to purchase the Mexican government's interest in TFM and Grupo TMM could not meet its obligations under the cross-indemnity, then KCS would be obligated to pay the total purchase price for the Mexican government's interest. If KCS and Grupo TMM, or either KCS or Grupo TMM alone had been required to purchase the Mexican government's 20% interest in TFM as of December 31, 2002, the total purchase price would have been approximately $485.0 million.
At December 31, 2002, the Company's investment in Grupo TFM was approximately $380.1 million. The Company's interest in Grupo TFM is approximately 46.6%, with Grupo TMM owning approximately 48.5% and the remaining 4.9% is owned indirectly by the Mexican government through its 20% ownership of TFM. The Company has a management services agreement with Grupo TFM to provide certain consulting and management services. At December 31, 2002, $2.4 million is reflected as an account receivable in the Company's consolidated balance sheet related to this management service agreement. The Company accounts for its investment in Grupo TFM under the equity method.
Southern Capital. In 1996, the Company and GATX Capital Corporation ("GATX") completed a transaction for the formation and financing of a joint venture, Southern Capital, to perform certain leasing and financing activities. Southern Capital's principal operations are the acquisition of locomotives and rolling stock and the leasing thereof to the Company. The Company holds a 50% interest in Southern Capital, which it accounts for using the equity method of accounting. Concurrent with the formation of this joint venture, the Company entered into operating leases with Southern Capital for substantially all the locomotives and rolling stock contributed or sold to Southern Capital at rental rates which management believes reflected market conditions at that time. KCSR paid Southern Capital $28.7, $28.8, and $27.3 million under these operating leases in 2002, 2001 and 2000, respectively. In connection with the formation of Southern Capital, the Company received cash that exceeded the net book value of assets contributed to the joint venture by approximately $44.1 million. Accordingly, this excess fair value over book value is being recognized as a reduction in lease rental expense over the terms of the leases (approximately $4.5, $4.4 and $5.8 million in 2002, 2001 and 2000, respectively). During 2001 and 2000, the Company received dividends of $3.0 million and $5.0 million, respectively, from Southern Capital. No dividends were received from Southern Capital during 2002.
Additionally, the Company performs certain general administrative and accounting functions for Southern Capital. Payments to the Company under these agreements were not material in 2002, 2001, and 2000, respectively. GATX also entered into an agreement to manage the rail portfolio assets, as well as to perform certain general and administrative services.
During 2001, Southern Capital refinanced its five-year credit facility, which was scheduled to mature on October 19, 2001, with a one-year bridge loan for $201 million. On June 25, 2002, Southern Capital refinanced the outstanding balance of this bridge loan through the issuance of approximately $167.6 million of pass through trust certificates and the sale of 50 locomotives. The pass through trust certificates are secured by the sold locomotives, all of the remaining locomotives and rolling stock owned by Southern Capital and rental payments payable by KCSR under the sublease of the sold locomotives and its leases of the equipment owned by Southern Capital. Payments of interest and principal of the pass through trust certificates, which are due semi-annually on June 30 and December 30 commencing on December 30, 2002 and ending on June 30, 2022, are insured under a financial guarantee insurance policy by MBIA Insurance Corporation. KCSR leases or subleases all of the equipment securing the pass through certificates.
Panama Canal Railway Company. In January 1998, the Republic of Panama awarded PCRC, a joint venture between KCSR and Mi-Jack Products, Inc. ("Mi-Jack"), the concession to reconstruct and operate the Panama Canal Railway, a 47-mile railroad located adjacent to the Panama Canal, that provides international shippers with a railway transportation option to complement the Panama Canal. The Panama Canal Railway, which traces its origins back to the late 1800's, is a north-south railroad traversing the Panama isthmus between the Pacific and Atlantic Oceans. The railroad has been
reconstructed and it resumed freight operations on December 1, 2001. Panarail operates and promotes commuter and tourist passenger service over the Panama Canal Railway. Passenger service started during July 2001.
As of December 31, 2002, the Company has invested approximately $19.9 million toward the reconstruction and operations of the Panama Canal Railway. This investment is comprised of $12.9 million of equity and $7.0 million of subordinated loans. These loans carry a 10% interest rate and are payable on demand, subject to certain restrictions.
In November 1999, PCRC completed the financing arrangements for this project with the International Finance Corporation ("IFC"), a member of the World Bank Group. The financing is comprised of a $5 million investment by the IFC and senior loans through the IFC in an aggregate amount of up to $45 million. Additionally, PCRC has $4.2 million of equipment loans from Transamerica Corporation and other capital leases totaling $3.8 million. The IFC's investment of $5 million in PCRC is comprised of non-voting preferred shares which pay a 10% cumulative dividend. As of December 31, 2002, PCRC has recorded a $1.5 million liability for these cumulative preferred dividends. The preferred shares may be redeemed at the IFC's option any year after 2008 at the lower of (1) a net cumulative internal rate of return of 30% or (2) eight times earnings before interest, income taxes, depreciation and amortization for the two years preceding the redemption that is proportionate to the IFC's percentage ownership in PCRC. Under the terms of the loan agreement with IFC, the Company is a guarantor for up to $5.6 million of the associated debt. Also if PCRC terminates the concession contract without the IFC's consent, the Company is a guarantor for up to 50% of the outstanding senior loans. The Company is also a guarantor for up to $2.1 million of the equipment loans from Transamerica Corporation and approximately $50 thousand relating to the other capital leases. The cost of the reconstruction totaled approximately $80 million. The Company expects to loan an additional $2 million to PCRC during 2003 under the same terms as the existing $7.0 million subordinated loans.
Financial Information. Combined financial information of all unconsolidated affiliates that the Company and its subsidiaries account for under the equity method follows. All amounts, including those for Grupo TFM, are presented under U.S. GAAP. Certain prior year amounts have been reclassified to reflect amounts from applicable audited financial statements (dollars in millions).
December 31, 2002
------------------------------
Grupo Southern
TFM Capital PCRC
-------- -------- --------
Investment in unconsolidated affiliates $ 380.1 $ 24.9 $ 7.5
Equity in net assets of unconsolidated affiliates 366.0 24.9 7.5
Dividends and distributions received from
Unconsolidated affiliates -- -- --
Financial Condition:
Current assets $ 265.2 $ 5.5 $ 8.8
Non-current assets 2,061.3 139.4 83.3
-------- -------- --------
Assets $2,326.5 $ 144.9 $ 92.1
======== ======== ========
Current liabilities $ 147.3 $ -- $ 4.0
Non-current liabilities 1,045.3 95.1 73.1
Minority interest 348.0 -- --
Equity of stockholders and partners 785.9 49.8 15.0
-------- -------- --------
Liabilities and equity $2,326.5 $ 144.9 $ 92.1
======== ======== ========
Operating results:
Revenues $ 712.1 $ 31.0 $ 5.0
-------- -------- --------
Costs and expenses 540.6 26.4 12.9
-------- -------- --------
Net income $ 110.2 $ 2.7 $ (7.9)
-------- -------- --------
|
December 31, 2001
----------------------------------------------
Grupo Southern
TFM Capital Mexrail PCRC
--------- --------- --------- ---------
Investment in unconsolidated affiliates $ 334.4 $ 23.2 $ 11.7 $ 11.5
Equity in net assets of unconsolidated affiliates 331.3 23.2 12.0 11.5
Dividends and distributions received from
Unconsolidated affiliates -- 3.0 -- --
Financial Condition:
Current assets $ 294.3 $ 2.5 $ 34.9 $ 3.6
Non-current assets 1,924.3 240.6 59.3 85.5
--------- --------- --------- ---------
Assets $ 2,218.6 $ 243.1 $ 94.2 $ 89.1
========= ========= ========= =========
Current liabilities $ 350.8 $ 196.6 $ 42.8 $ 10.8
Non-current liabilities 593.8 -- 27.5 55.3
Minority interest 376.3 -- -- --
Equity of stockholders and partners 897.7 46.5 23.9 23.0
--------- --------- --------- ---------
Liabilities and equity $ 2,218.6 $ 243.1 $ 94.2 $ 89.1
========= ========= ========= =========
Operating results:
Revenues $ 667.8 $ 30.2 $ 55.0 $ 1.8
--------- --------- --------- ---------
Costs and expenses $ 457.7 $ 25.5 $ 58.2 $ 3.2
--------- --------- --------- ---------
Net income $ 76.7 $ 4.8 $ (2.0) $ (2.0)
--------- --------- --------- ---------
December 31, 2000
----------------------------------------------
Grupo Southern
TFM Capital Mexrail PCRC
--------- --------- --------- ---------
Investment in unconsolidated affiliates $ 306.0 $ 24.6 $ 13.3 $ 9.5
Equity in net assets of unconsolidated affiliates 303.0 24.6 13.9 9.5
Dividends and distributions received from
Unconsolidated affiliates -- 5.0 -- --
Financial Condition:
Current assets $ 190.9 $ 0.2 $ 24.7 $ 7.1
Non-current assets 1,885.6 262.0 42.7 49.4
--------- --------- --------- ---------
Assets $ 2,076.5 $ 262.2 $ 67.4 $ 56.5
========= ========= ========= =========
Current liabilities $ 80.5 $ 0.4 $ 32.2 $ 0.6
Non-current liabilities 817.8 212.5 6.8 37.0
Minority interest 357.2 -- -- --
Equity of stockholders and partners 821.0 49.3 28.4 18.9
--------- --------- --------- ---------
Liabilities and equity $ 2,076.5 $ 262.2 $ 67.4 $ 56.5
========= ========= ========= =========
Operating results:
Revenues $ 640.6 $ 30.8 $ 56.5 $ 0.3
--------- --------- --------- ---------
Costs and expenses $ 493.7 $ 27.7 $ 57.7 $ 1.2
--------- --------- --------- ---------
Net income $ 44.8 $ 3.2 $ (0.1) $ (0.9)
--------- --------- --------- ---------
|
The Company, Grupo TFM, and certain of their affiliates entered into an agreement on February 27, 2002 with TFM to sell to TFM all of the common stock of Mexrail. The sale closed on March 27, 2002. Accordingly for 2002, the results of Mexrail have been consolidated into the results of Grupo TFM.
Generally, the difference between the carrying amount of the Company's investment in unconsolidated affiliates and the underlying equity in net assets is attributable to certain equity investments whose carrying amounts have been reduced to zero, and report a net deficit. With respect to the Company's investment in Grupo TFM, the effects of foreign currency transactions and capitalized interest prior to June 23, 1997, which are not recorded on the investee's books, also result in these differences. Additionally, the purchase by TFM of the Mexican government's former 24.6% interest in Grupo
TFM resulted in a reduction of Grupo TFM's stockholder's equity as the purchased shares from the Mexican government were recorded as Treasury shares at Grupo TFM. The Company invested no funds in this transaction, however, and, therefore, it did not have an impact on the Company's investment in Grupo TFM. As a result, the difference between the Company's equity in net assets of Grupo TFM and its underlying investment arising as a result of this transaction will be amortized against the Company's equity in earnings from Grupo TFM over a 33 year period, which is the estimate of the average remaining useful life of Grupo TFM's concession assets.
The deferred income tax calculations for Grupo TFM are significantly impacted by fluctuations in the relative value of the Mexican peso versus the U.S. dollar and the rate of Mexican inflation, and can result in significant variability in the amount of equity earnings (losses) reported by the Company.
Accounts Receivable. Accounts receivable include the following items (in millions):
2002 2001 2000
--------- --------- ---------
Accounts receivable $ 127.5 $ 140.4 $ 140.2
Allowance for doubtful accounts (9.0) (10.4) (5.2)
--------- --------- ---------
Accounts receivable, net $ 118.5 $ 130.0 $ 135.0
========= ========= =========
Bad debt expense $ 0.5 $ 1.7 $ (0.6)
--------- --------- ---------
|
Other Current Assets. Other current assets include the following items (in millions):
2002 2001 2000
--------- --------- ---------
Deferred income taxes $ 18.7 $ 16.0 $ 9.3
Federal income taxes receivable 16.6 27.6 --
Receivable - Duncan case (Note 11) -- -- 7.0
Receivable - Bogalusa case (Note 11) -- 19.3 --
Prepaid expenses 3.8 2.9 1.0
Other 5.4 6.0 8.6
--------- --------- ---------
Total $ 44.5 $ 71.8 $ 25.9
========= ========= =========
|
Properties. Properties and related accumulated depreciation and amortization are summarized below (in millions):
2002 2001 2000
--------- --------- ---------
Properties, at cost
Road properties $ 1,606.4 $ 1,520.4 $ 1,394.8
Equipment 342.9 289.2 295.5
Equipment under capital leases 6.6 6.6 6.7
Other 8.4 28.8 32.4
--------- --------- ---------
Total 1,964.3 1,845.0 1,729.4
Accumulated depreciation and amortization 702.3 660.2 622.9
--------- --------- ---------
Total 1,262.0 1,184.8 1,106.5
Construction in progress 75.4 142.6 221.3
--------- --------- ---------
Net Properties $ 1,337.4 $ 1,327.4 $ 1,327.8
========= ========= =========
|
Accrued Liabilities. Accrued liabilities include the following items (in millions):
2002 2001 2000
--------- --------- ---------
Claims reserves $ 35.3 $ 30.1 $ 45.7
Prepaid freight charges due other railroads 24.5 21.2 24.5
Duncan case liability (Note 11) -- -- 14.2
Bogalusa case liability (Note 11) -- 22.3 --
Car hire per diem 11.5 12.0 12.1
Vacation accrual 7.8 8.0 8.5
Other non-income related taxes 4.4 4.1 5.3
Federal income taxes payable -- -- 3.5
Interest payable 6.4 10.1 7.4
Other 38.7 42.2 36.2
--------- --------- ---------
Total $ 128.6 $ 150.0 $ 157.4
========= ========= =========
|
Indebtedness Outstanding. Long-term debt and pertinent provisions follow (in millions):
2002 2001 2000
--------- --------- ---------
KCS
Notes and Debentures, due March
2005 to December 2025
Rates: 6.625% to 7.00% $ 1.3 $ 1.6 $ 1.6
KCSR
Revolving Credit Facility, variable interest rate
4.03%, due January 2006 -- 20.0 --
Term Loans, variable interest rates
3.78%, due June 2008 149.2 377.5 400.0
Senior Notes, 7.5% interest rate, due
June 15, 2009 200.0 -- --
Senior Notes, 9.5% interest rate, due
October 1, 2008 200.0 200.0 200.0
Equipment Trust Certificates, 8.56% to 9.23%,
due serially to December 15, 2006 23.5 43.5 54.9
Capital Lease Obligations, 7.15% to 9.00%,
due serially to September 30, 2009 2.5 3.0 3.5
Term Loans with State of Illinois, 3% to 5%
due serially to 2009 3.3 3.9 4.4
Other
Industrial Revenue Bond 2.0 3.0 4.0
Mortgage Note -- 5.1 5.3
Term Loan with State of Illinois, 3% due
February 2018 0.8 0.8 0.9
--------- --------- ---------
Total 582.6 658.4 674.6
Less: debt due within one year 10.0 46.7 36.2
--------- --------- ---------
Long-term debt $ 572.6 $ 611.7 $ 638.4
========= ========= =========
|
Debt Refinancing
7 1/2% Senior Notes. On June 12, 2002, KCSR issued $200 million of 7 1/2% senior notes due June 15, 2009 ("7 1/2% Notes") through a private offering pursuant to Rule 144A under the Securities Act of 1933 in the United States and Regulation S outside the United States ("Note Offering"). Net proceeds from the Note Offering of $195.8 million, together with cash, were used to repay term debt under the Company's former senior secured credit facility ("KCS Credit Facility") and certain other secured indebtedness of the Company. Debt issuance costs related to the Note Offering of approximately $4.6 million were deferred and are being amortized over the seven-year term of the 7 1/2% Notes. The remaining balance of deferred debt issuance costs associated with the Note Offering was approximately $4.2 million at December 31, 2002. Debt retirement costs associated with the prepayment of certain term loans under the KCS Credit Facility using proceeds from the Note Offering were approximately $4.3 million. These debt retirement costs were previously reported as an extraordinary item, but have been reclassified in accordance with Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"), which the Company early adopted in the fourth quarter of 2002.
KCS submitted a Form S-4 Registration Statement to the SEC on July 12, 2002, as amended on July 24, 2002, relative to an Exchange Offer for the $200 million 7 1/2% senior notes due 2009. On July 30, 2002, the SEC declared this Registration Statement effective thereby providing the opportunity for holders of the initial 7 1/2% Senior Notes due 2009 to exchange them for registered notes with substantially identical terms. All of the 7 1/2% Senior Notes due 2009 were exchanged for $200 million of registered notes due June 15, 2009. The registered notes bear a fixed annual interest rate to be paid semi-annually on June 15 and December 15 and are due June 15, 2009. These registered notes are general unsecured obligations of KCSR, are guaranteed by the Company and certain of its subsidiaries, and contain certain covenants and restrictions customary for this type of debt instrument and for borrowers with similar credit ratings.
9 1/2% Senior Notes. During the third quarter of 2000, the Company completed a $200 million private offering of debt securities through KCSR. The offering, completed pursuant to Rule 144A under the Securities Act of 1933 in the United States and Regulation S outside the United States, consisted of 8-year senior unsecured notes ("9 1/2% Notes"). Net proceeds from this offering of $196.5 million were used to refinance term debt and reduce commitments under the KCS Credit Facility. The refinanced debt was scheduled to mature on January 11, 2001 (see below). Costs related to the issuance of these 9 1/2% Notes were deferred and are being amortized over their eight-year term. The remaining balance of these deferred costs was approximately $3.3 million at December 31, 2002.
On January 25, 2001, the Company filed a Form S-4 Registration Statement with the SEC registering exchange notes under the Securities Act of 1933. The Company filed Amendment No. 1 to this Registration Statement and the SEC declared this Registration Statement, as amended, effective on March 15, 2001, thereby providing the opportunity for holders of the initial 9 1/2% Notes to exchange them for registered notes with substantially identical terms. All of the 9 1/2% Notes were exchanged for $200 million of registered notes. These registered notes bear a fixed annual interest rate and are due on October 1, 2008. These registered notes are general unsecured obligations of KCSR, are guaranteed by the Company and certain of its subsidiaries, and contain certain covenants and restrictions customary for this type of debt instrument and for borrowers with similar credit ratings.
New Credit Agreement. On June 12, 2002, in conjunction with the repayment of certain of the term loans under the KCS Credit Facility using the net proceeds received from the Note Offering, the Company amended and restated the KCS Credit Facility (the amended and restated credit agreement is referred to as the New Credit Agreement herein). The New Credit Agreement provides KCSR with a $150 million term loan ("Tranche B term loan"), which matures on June 12, 2008, and a $100 million revolving credit facility ("Revolver"), which matures on January 11, 2006. Letters of credit are also available under the Revolver up to a limit of $15 million. The proceeds from future borrowings under the Revolver may be used for working capital and for general corporate purposes. The letters of credit may be used for general corporate purposes. Borrowings under the New Credit Agreement are secured by substantially all of the Company's assets and are guaranteed by the majority of its subsidiaries.
The Tranche B term loan and the Revolver bear interest at the London Interbank Offered Rate ("LIBOR") or an alternate base rate, as the Company shall select, plus an applicable margin. The applicable margin for the Tranche B term loan is 2% for LIBOR borrowings and 1% for alternate base rate borrowings. The applicable margin for the Revolver is based on the Company's leverage ratio (defined as the ratio of the Company's total debt to consolidated EBITDA (earnings before interest, taxes, depreciation and amortization, excluding the undistributed earnings of unconsolidated affiliates) for the prior four fiscal quarters). Based on the Company's leverage ratio as of December 31, 2002, the applicable margin was 2.25% per annum for LIBOR borrowings and 1.25% per annum for alternate base rate borrowings.
The New Credit Agreement also requires the payment to the lenders of a commitment fee of 0.50% per annum on the average daily, unused amount of the Revolver. Additionally, a fee equal to a per annum rate of 0.25% plus the applicable margin for LIBOR priced borrowings under the Revolver will be paid on any letter of credit issued under the Revolver.
The New Credit Agreement contains certain provisions, covenants and restrictions customary for this type of debt and for borrowers with a similar credit rating. These provisions include, among others, restrictions on the Company's ability and its subsidiaries ability to 1) incur additional debt or liens; 2) enter into sale and leaseback transactions; 3) merge or consolidate with another entity; 4) sell assets; 5) enter into certain transactions with affiliates; 6) make investments, loans, advances, guarantees or acquisitions; 7) make certain restricted payments, including dividends, or make certain payments on other indebtedness; and 8) make capital expenditures. In addition, the Company is required to comply with certain financial ratios, including minimum interest expense coverage and leverage ratios. The New Credit Agreement also contains certain customary events of default. These covenants, along with other provisions, could restrict maximum utilization of the Revolver.
Debt issuance costs related to the New Credit Agreement of approximately $1.1 million were deferred and are being amortized over the respective term of the loans. The remaining balance of deferred debt costs associated with the New Credit Agreement was approximately $1.0 million at December 31, 2002.
Re-capitalization of Debt Structure in anticipation of Spin-off. In preparation for the Spin-off, the Company re-capitalized its debt structure in January 2000 through a series of transactions as follows:
Bond Tender and Other Debt Repayment. On December 6, 1999, KCS commenced offers to purchase and consent solicitations with respect to any and all of the Company's outstanding 7.875% Notes due July 1, 2002, 6.625% Notes due March 1, 2005, 8.8% Debentures due July 1, 2022, and 7% Debentures due December 15, 2025 (collectively "Debt Securities" or "notes and debentures").
Approximately $398.4 million of the $400 million outstanding Debt Securities were validly tendered and accepted by the Company. Total consideration paid for the repurchase of these outstanding notes and debentures was $401.2 million. In conjunction with the early retirement of these Debt Securities, the Company reported $10.9 million of debt retirement costs. These debt retirement costs were previously reported as an extraordinary item, but have been reclassified in accordance with SFAS 145. Funding for the repurchase of these Debt Securities and for the repayment of $264 million of borrowings under then-existing revolving credit facilities was obtained from two credit facilities (the "KCS Credit Facility" and the "Stilwell Credit Facility", or collectively the "Credit Facilities"), each of which was entered into on January 11, 2000. The Credit Facilities, initially provided for total commitments of $950 million. Stilwell assumed the Stilwell Credit Facility, including the borrowings thereunder, and, upon completion of the Spin-off, the Company was released from all obligations thereunder.
KCS Credit Facility. The KCS Credit Facility initially provided for total commitments of $750 million comprised of three separate term loans totaling $600 million and a revolving credit facility available until January 11, 2006. On January 11, 2000, KCSR borrowed the full amount ($600 million) of the term loans and used the proceeds to repurchase the Debt Securities, retire other debt obligations and pay related fees and expenses. No funds were initially borrowed under the revolving credit facility. The term loans were initially comprised of the following: $200 million due January 11, 2001, $150 million due December 30, 2005 and $250 million due December 29, 2006. The $200 million term loan due January 11, 2001 was refinanced during the third quarter of 2000 as described above. The remainder of the KCS Credit Facility has also been refinanced as described above.
Issue costs relating to the KCS Credit Facility of approximately $17.6 million were deferred and amortized over the respective term of the loans. In conjunction with the refinancing of a $200 million term loan previously due January 11, 2001, which was a part of the KCS Credit Facilities, approximately $1.8 million of these deferred costs were immediately recognized. In conjunction with the issuance of the 7 1/2% Notes and related prepayment of certain term loans under the KCS Credit Facility, debt retirement costs of approximately $4.3 million were recognized for the year ended December 31, 2002. Additionally, for the year ended December 31, 2001, $1.4 million in fees were incurred related to a waiver for certain credit facility covenants. These fees have also been deferred and are being amortized over the respective term of the loans. After consideration of current year amortization, the remaining balance of these deferred costs was approximately $4.4 million at December 31, 2002.
Leases and Debt Maturities. The Company and its subsidiaries lease transportation equipment, as well as office and other operating facilities under various capital and operating leases. Rental expenses under operating leases were $55.0 million, $56.8 and $58.2 million for the years 2002, 2001 and 2000, respectively. Minimum annual payments and present value thereof under existing capital leases, other debt maturities, and minimum annual rental commitments under noncancellable operating leases are as follows (dollars in millions):
Capital Leases Operating Leases
------------------------------ ------------------------------
Minimum Net Long-
Lease Less Present Term Total Southern Third
Payments Interest Value Debt Debt Capital Party Total
-------- -------- -------- -------- -------- -------- -------- --------
2003 $ 0.7 $ 0.1 $ 0.6 $ 9.4 $ 10.0 $ 34.1 $ 26.1 $ 60.2
2004 0.6 0.2 0.4 9.4 9.8 30.7 22.1 52.8
2005 0.5 0.1 0.4 8.7 9.1 27.0 16.4 43.4
2006 0.4 0.1 0.3 7.6 7.9 26.4 15.3 41.7
2007 0.3 0.1 0.2 72.7 72.9 21.9 15.2 37.1
Later years 0.6 0.0 0.6 472.3 472.9 151.3 58.8 210.1
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 3.1 $ 0.6 $ 2.5 $ 580.1 $ 582.6 $ 291.4 $ 153.9 $ 445.3
======== ======== ======== ======== ======== ======== ======== ========
|
KCSR Indebtedness. KCSR has purchased locomotives and rolling stock under conditional sales agreements, equipment trust certificates and capitalized lease obligations. The equipment, which has been pledged as collateral for the related indebtedness, has an original cost of $134.7 million and a net book value of $72.4 million.
Other Agreements, Guarantees, Provisions and Restrictions. The Company has debt agreements containing restrictions on subsidiary indebtedness, advances and transfers of assets, and sale and leaseback transactions, as well as requiring compliance with various financial covenants. At December 31, 2002, the Company was in compliance with the provisions and restrictions of these agreements. Because of certain financial covenants contained in the debt agreements, however, maximum utilization of the Company's available line of credit may be restricted. As discussed in Note 5, the Company is a guarantor for up to $5.6 million of debt associated with PCRC. Also if PCRC terminates its' concession contract without the IFC's consent, the Company is a guarantor for up to 50% of PCRC's outstanding senior loans. The Company is also a guarantor for up to $2.1 million of the equipment loans from Transamerica Corporation and approximately $50 thousand relating to other capital leases.
Under the liability method of accounting for income taxes specified by Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," the provision for income tax expense is the sum of income taxes currently payable and deferred income taxes. Currently payable income taxes represents the amounts expected to be reported on the Company's income tax return, and deferred tax expense or benefit represents the change in deferred taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse.
Tax Expense. Income tax provision (benefit) attributable to continuing operations consists of the following components (in millions):
2002 2001 2000
--------- --------- ---------
Current
Federal $ (15.3) $ (26.6) $ (30.6)
State and local 0.4 (1.1) (0.2)
Foreign withholding taxes -- 0.1 0.2
--------- --------- ---------
Total current (14.9) (27.6) (30.6)
Deferred
Federal 20.8 29.5 23.4
State and local 1.0 0.9 (0.3)
--------- --------- ---------
Total deferred 21.8 30.4 23.1
--------- --------- ---------
Total income tax provision (benefit) $ 6.9 $ 2.8 $ (7.5)
========= ========= =========
|
The federal and state deferred tax liabilities (assets) attributable to continuing operations at December 31 are as follows (in millions):
2002 2001 2000
--------- --------- ---------
Liabilities:
Depreciation $ 409.5 $ 380.7 $ 351.0
Other, net -- 10.0 6.3
--------- --------- ---------
Gross deferred tax liabilities 409.5 390.7 357.3
--------- --------- ---------
Assets:
NOL and AMT credit carryovers (3.4) (3.4) (8.8)
Book reserves not currently deductible
for tax (26.8) (30.0) (22.3)
Vacation accrual (2.8) (3.1) (2.5)
Other, net (2.4) -- (0.8)
--------- --------- ---------
Gross deferred tax assets (35.4) (36.5) (34.4)
--------- --------- ---------
Net deferred tax liability $ 374.1 $ 354.2 $ 322.9
========= ========= =========
|
Based upon the Company's history of operating income and its expectations for the future, management has determined that operating income of the Company will, more likely than not, be sufficient to recognize fully the gross deferred tax assets set forth above.
Tax Rates. Differences between the Company's effective income tax rates applicable to continuing operations and the U.S. federal income tax statutory rates of 35% are as follows (in millions):
2002 2001 2000
--------- --------- ---------
Income tax provision using the
Statutory rate in effect $ 21.4 $ 11.9 $ 3.2
Tax effect of
Earnings of equity investees (15.0) (9.4) (6.6)
Other, net (0.9) 0.4 (3.8)
--------- --------- ---------
Federal income tax provision (benefit) 5.5 2.9 (7.2)
State and local income tax provision (benefit) 1.4 (0.2) (0.5)
Foreign withholding taxes -- 0.1 0.2
--------- --------- ---------
Total $ 6.9 $ 2.8 $ (7.5)
========= ========= =========
Effective tax rate 11.3% 8.3% (82.5)%
========= ========= =========
|
Temporary Difference Attributable to Grupo TFM Investment. At December 31, 2002, the Company's book basis exceeded the tax basis of its investment in Grupo TFM by $79.4 million. The Company has not provided a deferred income tax liability for the income taxes, if any, which might become payable on the realization of this basis difference because the Company intends to indefinitely reinvest in Grupo TFM the financial statement earnings which gave rise to the basis differential. Moreover, the Company has no other plans to realize this basis differential by a sale of its investment in Grupo TFM. If the Company were to realize this basis difference in the future by a receipt of dividends or the sale of its interest in Grupo TFM, as of December 31, 2002 the Company would incur gross federal income taxes of $27.8 million, which might be partially or fully offset by Mexican income taxes and could be available to reduce federal income taxes at such time.
Tax Carryovers. At December 31, 2000, the Company had $3.4 million of alternative minimum tax credit carryover generated by the MidSouth Railroad ("MidSouth") prior to its acquisition by the Company. This was fully utilized on the 2000 tax return filed in 2001. The amount of federal net operating loss (NOL) carryover generated by MidSouth and Gateway Western prior to acquisition by the Company was $67.8 million, of which $57.6 million was utilized in pre-2000 years. The Company utilized approximately $1.5 million of these NOL's in 2000, leaving approximately $8.7 million available for carryforward at December 31, 2002 with expiration dates beginning in 2008. The use of preacquisition net operating losses and tax credit carryovers is subject to limitations imposed by the Internal Revenue Code. The Company does not anticipate that these limitations will affect utilization of the carryovers prior to their expiration. Additionally, in 2002 and 2001, the Company generated net operating losses. These NOL's were carried back to 2000 and 1999 and the applicable tax returns have been amended.
Tax Examinations. The IRS is currently in the process of examining the consolidated federal income tax returns for the years 1993 through 1996. For years prior to 1993, the statute of limitations has closed. In addition, other taxing authorities are currently examining the years 1994 through 1999 and have proposed additional tax assessments for which the Company believes it has recorded adequate reserves. Since most of these asserted tax deficiencies represent temporary differences, subsequent payments of taxes will not require additional charges to income tax expense. In addition, accruals have been made for interest (net of tax benefit) for estimated settlement of the proposed tax assessments. Thus, management believes that final settlement of these matters will not have a material adverse effect on the Company's consolidated results of operations, financial condition, or cash flows.
Reverse Stock Split. All periods presented in the accompanying consolidated financial statements reflect the one-for-two reverse stock split completed on July 12, 2000 in conjunction with the Spin-off. See Note 3.
Stock Option Plans. During 1998, various existing Employee Stock Option Plans were combined and amended as the Kansas City Southern 1991 Amended and Restated Stock Option and Performance Award Plan (as amended and restated effective November 7, 2002). 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 granted under this Plan have been granted at 100% of the average market price of the Company's stock on the date of grant and generally may not be exercised sooner than one year or longer than ten years following the date of the grant, except that options outstanding with limited rights ("LRs") or limited stock appreciation rights ("LSARs"), become immediately exercisable upon certain defined circumstances constituting a change in control of 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.
For purposes of computing the pro forma effects of option grants under the fair value accounting method prescribed by SFAS 123, the fair value of each option grant is estimated on the date of grant using a version of the Black-Scholes option pricing model. The following assumptions were used for the various grants depending on the date of grant, nature of vesting and term of option:
2002 2001 2000
---------------- ---------------- ----------------
Dividend Yield 0% 0% 0%
Expected Volatility 35% to 38% 35% to 40% 34 to 50%
Risk-free Interest Rate 2.16% to 3.88% 2.98% to 4.84% 5.92% to 6.24%
Expected Life 3 years 3 years 3 years
|
Effect of Spin-off on Existing Stock Options. FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation" ("FIN 44") addresses the issues surrounding fixed stock option plans resulting from an equity restructuring, including spin-offs. This guidance indicates that changes to fixed stock option grants made to restore the option holder's economic position as a result of a spin-off do not result in additional compensation expense if certain criteria are met as follows: i) aggregate intrinsic value (difference between the market value per share and exercise price) of the options immediately after the change is not greater than the aggregate intrinsic value of the options immediately before the change; ii) the ratio of the exercise price per option to the market value per share is not reduced; and iii) the vesting provisions and option period of the original option grant remain the same.
As part of the Spin-off, generally holders of an option to purchase one share of KCS common stock received options to purchase two shares of Stilwell common stock. The option exercise price for the KCS and Stilwell stock options was prorated based on the market value for KCS common stock and Stilwell common stock on the date of the Spin-off. The exercise prices for periods subsequent to the Spin-off were accordingly reduced to reflect this amount. The changes made to the Company's fixed stock option grants as a result of the Spin-off in 2000 resulted in the option holder having the same economic position both immediately before and immediately after the Spin-off. In accordance with the provisions of FIN 44, the Company, therefore, did not record additional compensation expense as a result of the Spin-off.
Summary of Company's Stock Option Plans. A summary of the status of the Company's stock option plans as of December 31, 2002, 2001 and 2000 and changes during the years then ended is presented below. The number of shares, the weighted average exercise price and the weighted average fair value of options granted reflect the reverse stock split on July 12, 2000 for all periods presented. However, the weighted average exercise price and the weighted average fair value of options were not restated to reflect the impact of the Spin-off for the periods prior to the Spin-off (1/1/2000 - 7/12/2000).
2002 2001
------------------------ ------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ---------- ---------- ----------
Outstanding at January 1 5,821,315 $ 5.44 6,862,036 $ 4.92
Exercised (1,265,418) 4.87 (1,128,838) 3.71
Canceled/Expired (144,388) 6.15 (105,537) 4.79
Granted 433,717 14.25 193,654 13.37
---------- ----------
Outstanding at December 31 4,845,226 $ 6.35 5,821,315 $ 5.44
========== ==========
Exercisable at December 31 3,784,417 $ 5.63 4,803,942 $ 5.13
Weighted-Average fair value of
Options granted during the period $ 3.97 $ 4.18
|
7/13/2000-12/31/2000 1/1/2000-7/12/2000
------------------------ ------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ---------- ---------- ----------
Outstanding at beginning of period 4,165,692 $ 1.26 4,280,581 $ 33.94
Exercised (2,469,667) 0.76 (394,803) 47.14
Canceled/Expired (388,686) 4.82 (1,800) 89.13
Granted 5,554,697 5.81 281,714 142.08
---------- ----------
Outstanding at end of period 6,862,036 $ 4.92 4,165,692 $ 39.98
========== ==========
Exercisable at December 31 1,355,464 $ 1.41
Weighted-Average fair value of
Options granted during the period $ 1.54 $ 49.88
|
The following table summarizes information about stock options outstanding at December 31, 2002:
OUTSTANDING EXERCISABLE
------------------------------------------------- ----------------------------
Weighted- Weighted- Weighted-
Range of Average Average Average
Exercise Shares Remaining Exercise Shares Exercise
Prices Outstanding Contractual Life Price Exercisable Price
----------- ------------- ---------------- ---------- ------------- ----------
$.20 - 1 244,556 2.4 years $ 0.88 244,556 $ 0.88
1 - 2 161,296 4.2 1.33 161,296 1.33
2 - 4 163,399 5.8 2.84 126,399 2.80
4 - 7 3,570,216 7.5 5.76 2,955,451 5.77
7 - 10 105,072 7.7 8.37 105,072 8.37
10 - 13 85,000 8.5 12.62 85,000 12.62
13 - 17 515,687 9.4 14.28 106,643 14.20
------------- -------------
.20 - 17 4,845,226 7.3 6.35 3,784,417 5.63
============= =============
|
At December 31, 2002, shares available for future grants under the stock option plan were 1,771,372.
Stock Purchase Plan. The ESPP, established in 1977, provides to substantially all full-time employees of the Company, certain subsidiaries and certain other affiliated entities, the right to subscribe to an aggregate of 11.4 million shares of common stock. The purchase price for shares under any stock offering is to be 85% of the average market price on either the exercise date or the offering date, whichever is lower, but in no event less than the par value of the shares. At December 31, 2002 there were approximately 4.8 million shares available for future offerings.
The following table summarizes activity related to the various ESPP offerings:
Date Shares Shares Date
Initiated Subscribed Price Issued Issued
--------- ---------- ------------- ----------- -----------
Fourteenth Offering 2002 248,379 $12.29 -- --
Thirteenth Offering 2001 402,902 $10.24-$10.57 337,917 2002/2003
Twelfth Offering 2000 705,797 $ 7.31 623,060 2001/2002
|
For purposes of computing the pro forma effects of employees' purchase rights under the fair value accounting method prescribed by SFAS 123, the fair value of the offerings under the ESPP is estimated on the date of grant using a version of the Black-Scholes option pricing model. The following weighted-average assumptions were used for the Fourteenth, Thirteenth and Twelfth Offerings, respectively: i) dividend yield of 0.00%, 0.00% and 0.00%; ii) expected volatility of 36%, 38%, and 38%; iii) risk-free interest rate of 2.22%, 2.98% and 5.77%; and iv) expected life of one year. The
weighted-average fair value of purchase rights granted under the Fourteenth, Thirteenth and Twelfth Offerings of the ESPP were $3.00, $3.00 and $2.19, respectively.
Restricted Share and Option Program. In connection with the Spin-off, KCS
adopted a restricted share and option program (the "Option Program") under which
(1) certain senior management employees were granted performance based KCS stock
options and (2) all management employees and those directors of KCS who were not
employees (the "Outside Directors") became eligible to purchase a specified
number of KCS restricted shares and were granted a specified number of KCS stock
options for each restricted share purchased.
The performance stock options have an exercise price of $5.75 per share, which was the mean trading price of KCS common stock on the New York Stock Exchange (the "NYSE") on July 13, 2000. The performance stock options vested and became exercisable in equal installments as KCS's stock price achieved certain thresholds and after one year following the grant date. All performance thresholds were met for these performance stock options and all became exercisable on July 13, 2001. These stock options expire at the end of 10 years, subject to certain early termination events.
The purchase price of the restricted shares, and the exercise price of the stock options granted in connection with the purchase of restricted shares, is based on the mean trading price of KCS common stock on the NYSE on the date the employee or Outside Director purchased restricted shares under the Option Program. Each eligible employee and Outside Director was allowed to purchase the restricted shares offered under the Option Program on one date out of a selection of dates offered. With respect to management employees, the number of shares available for purchase and the number of options granted in connection with shares purchased were based on the compensation level of the employees. Each Outside Director was granted the right to purchase up to 3,000 restricted shares of KCS, with two KCS stock options granted in connection with each restricted share purchased. Shares purchased are restricted from sale and the options are not exercisable for a period of three years for senior management and the Outside Directors and two years for other management employees. KCS provided senior management and the Outside Directors with the option of using a sixty-day interest-bearing full recourse note to purchase these restricted shares. These loans accrued interest at 6.49% per annum and were all fully repaid by September 11, 2000.
Management employees purchased 475,597 shares of KCS restricted stock under the Option Program and 910,697 stock options were granted in connection with the purchase of those restricted shares. Outside Directors purchased a total of 9,000 shares of KCS restricted stock under the Option Program and 18,000 KCS stock options were granted in connection with the purchase of those shares.
Treasury Stock. Shares of common stock in Treasury at December 31, 2002 totaled 12,266,101 compared with 14,125,949 at December 31, 2001 and 15,221,844 at December 31, 2000. The Company issued shares of common stock from Treasury - 1,859,848 in 2002, 1,095,895 in 2001 and 2,375,760 in 2000 - to fund the exercise of options and subscriptions under various employee stock option and purchase plans. In 2000, the Company issued 484,597 of restricted stock in connection with the Restricted Share and Option Program (see above). Treasury stock previously acquired had been accounted for as if retired. Shares repurchased during 2002, 2001 and 2000 were not material.
The Company maintains various plans for the benefit of its employees as described below. For the years ended December 31, 2002, 2001 and 2000, the Company expensed $0.4, $0.9 and $2.3 million, respectively, related to the 401(k) and Profit Sharing Plan and ESOP. During 2002 and 2001, the Company did not record any expenses relative to profit sharing or the ESOP.
401(k) and Profit Sharing Plan. During 2000, the Company combined the Profit Sharing Plan and the 401(k) Plan into the KCS 401(k) and Profit Sharing Plan (the "Plan"). The Plan permits participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code and also allows employees to direct their profit sharing accounts into selected investments. The Company matched employee 401(k) contributions up to a maximum of 3% of
compensation during 2002, 2001 and 2000. Effective January 1, 2003, the Company will match employee 401(k) contributions up to a maximum of 5% of compensation. Qualified profit sharing plans are maintained for most employees not included in collective bargaining agreements. Contributions for the Company and its subsidiaries are made at the discretion of the Board of Directors of KCS in amounts not to exceed the maximum allowable for federal income tax purposes.
Employee Stock Ownership Plan. KCS established the ESOP for employees not covered by collective bargaining agreements. KCS contributions to the ESOP are based on a percentage of wages earned by eligible employees. Contributions and percentages are determined by the Compensation and Organization Committee of the Board of Directors.
Other Postretirement Benefits. The Company provides certain medical, life and other postretirement benefits other than pensions to its retirees. The medical and life plans are available to employees not covered under collective bargaining arrangements, who have attained age 60 and rendered ten years of service. Individuals employed as of December 31, 1992 were excluded from a specific service requirement. The medical plan is contributory and provides benefits for retirees, their covered dependents and beneficiaries. Benefit expense begins to accrue at age 40. The medical plan was amended effective January 1, 1993 to provide for annual adjustment of retiree contributions, and also contains, depending on the plan coverage selected, certain deductibles, co-payments, coinsurance and coordination with Medicare. The life insurance plan is non-contributory and covers retirees only. The Company's policy, in most cases, is to fund benefits payable under these plans as the obligations become due. However, certain plan assets (e.g., money market funds) do exist with respect to life insurance benefits.
The following assumptions were used to determine postretirement obligations/costs for the years ended December 31:
2002 2001 2000
--------- --------- ---------
Annual increase in CPI 2.50% 2.00% 3.00%
Expected rate of return on life
Insurance plan assets 6.50 6.50 6.50
Discount rate 6.50 7.00 7.50
Salary increase 3.00 3.00 3.00
|
A reconciliation of the accumulated postretirement benefit obligation, change in plan assets and funded status, respectively, at December 31 follows (in millions):
2002 2001 2000
--------- --------- ---------
Accumulated postretirement
Benefit obligation at beginning of year $ 9.1 $ 13.1 $ 14.6
Service cost 0.2 0.2 0.3
Interest cost 0.6 0.8 1.1
Plan terminations/amendments -- (3.4) --
Actuarial and other (gain) loss 1.0 (0.6) (1.8)
Benefits paid (i) (0.9) (1.0) (1.1)
--------- --------- ---------
Accumulated postretirement
Benefit obligation at end of year 10.0 9.1 13.1
--------- --------- ---------
Fair value of plan assets
at beginning of year 1.0 1.2 1.3
Actual return on plan assets 0.1 -- 0.1
Benefits paid (i) (0.1) (0.2) (0.2)
--------- --------- ---------
Fair value of plan assets at end of year 1.0 1.0 1.2
--------- --------- ---------
Funded status and accrued benefit cost $ (9.0) $ (8.1) $ (11.9)
========= ========= =========
|
(i) Benefits paid for the reconciliation of accumulated postretirement benefit obligation include both medical and life insurance benefits, whereas benefits paid for the fair value of plan assets reconciliation include only life insurance benefits. Plan assets relate only to the life insurance benefits. Medical benefits are funded as obligations become due.
Net periodic postretirement benefit cost included the following components (in millions):
2002 2001 2000
-------- -------- --------
Service cost $ 0.2 $ 0.2 $ 0.3
Interest cost 0.6 0.8 1.1
Expected return on plan assets (0.1) (0.1) (0.1)
-------- -------- --------
Net periodic postretirement benefit cost $ 0.7 $ 0.9 $ 1.3
======== ======== ========
|
The Company's health care costs, excluding former Gateway Western employees and certain former employees of the MidSouth, are limited to the increase in the Consumer Price Index ("CPI") with a maximum annual increase of 5%. Accordingly, health care costs in excess of the CPI limit will be borne by the plan participants, and therefore assumptions regarding health care cost trend rates are not applicable.
During 2001, the Company reduced its liability and recorded a reduction of operating expenses by approximately $2.0 million in connection with the transfer of union employees formerly covered by the Gateway Western plan to a multi-employer sponsored union plan, which effectively eliminated the Company's postretirement liability for this group of employees. This reduced the number of former Gateway Western employees or retirees covered under Gateway Western's benefit plan. The Gateway Western benefit plans are slightly different from those of the Company and other subsidiaries. Gateway Western provides contributory health, dental and life insurance benefits to these remaining employees and retirees. In 2001, the assumed annual rate of increase in health care costs for Gateway Western employees and retirees under this plan was 10%, decreasing over six years to 5.5% in 2008 and thereafter. An increase or decrease in the assumed health care cost trend rates by one percent in 2002, 2001 and 2000 would not have a significant impact on the accumulated postretirement benefit obligation. The effect of this change on the aggregate of the service and interest cost components of the net periodic postretirement benefit is not significant.
During 2001 a post-retirement benefit for directors was eliminated, resulting in a reduction of the related liability of approximately $1.4 million. This plan termination, as well as the transfer of Gateway Western union employees to a multi-employer sponsored union plan are reflected in the reconciliation above as plan terminations/amendments.
Under collective bargaining agreements, KCSR participates in a multi-employer benefit plan, which provides certain post-retirement health care and life insurance benefits to eligible union employees and certain retirees. Premiums under this plan are expensed as incurred and were $1.0, $0.8 and $0.5 million for 2002, 2001 and 2000, respectively.
Litigation. The Company and its subsidiaries are involved as plaintiff or defendant in various legal actions arising in the normal course of business. While the ultimate outcome of the various legal proceedings involving the Company and its subsidiaries cannot be predicted with certainty, it is management's opinion that the Company's litigation reserves are adequate.
Bogalusa Cases
In July 1996, KCSR was named as one of twenty-seven defendants in various lawsuits in Louisiana and Mississippi arising from the explosion of a rail car loaded with chemicals in Bogalusa, Louisiana on October 23, 1995. As a result of the explosion, nitrogen dioxide and oxides of nitrogen were released into the atmosphere over parts of that town and the surrounding area allegedly causing evacuations and injuries. Approximately 25,000 residents of Louisiana and Mississippi (plaintiffs) have asserted claims to recover damages allegedly caused by exposure to the released chemicals. On October 29, 2001, KCSR and representatives for its excess insurance carriers negotiated a settlement in principle with the plaintiffs for $22.3 million. A Master Global Settlement Agreement was signed in early 2002. During 2002, KCSR
made all payments under this agreement and collected $19.3 million from its excess insurance carriers. Court approval of the MGSA is expected in 2003 from the 22nd Judicial District Court of Washington Parish, Louisiana. KCSR also expects to receive releases from about 4,000 Mississippi plaintiffs in numerous cases pending in the First Judicial District Circuit Court of Hinds County, Mississippi.
Duncan Case Settlement
In 1998, a jury in Beauregard Parish, Louisiana returned a verdict against KCSR
in the amount of $16.3 million. This case arose from a railroad crossing
accident that occurred at Oretta, Louisiana on September 11, 1994, in which
three individuals were injured. Of the three, one was injured fatally, one was
rendered quadriplegic and the third suffered less serious injuries. Subsequent
to the verdict, the trial court held that the plaintiffs were entitled to
interest on the judgment from the date the suit was filed, dismissed the verdict
against one defendant and reallocated the amount of that verdict to the
remaining defendants. On November 3, 1999, the Third Circuit Court of Appeals in
Louisiana affirmed the judgment. Subsequently, KCSR obtained review of the case
in the Supreme Court of Louisiana. On October 30, 2000, the Supreme Court of
Louisiana entered its order affirming in part and reversing in part the
judgment. The net effect of the Louisiana Supreme Court action was to reduce the
allocation of negligence to KCSR and reduce the judgment, with interest, against
KCSR from approximately $28 million to approximately $14.2 million
(approximately $9.7 million of damages and $4.5 million of interest). This
judgment was in excess of KCSR's insurance coverage of $10 million for this
case. KCSR filed an application for rehearing in the Supreme Court of Louisiana,
which was denied on January 5, 2001. KCSR then sought a stay of judgment in the
Louisiana court. The Louisiana court denied the stay application on January 12,
2001. KCSR reached an agreement as to the payment structure of the judgment in
this case and payment of the settlement was made on March 7, 2001.
KCSR had previously recorded a liability of approximately $3.0 million for this case. Based on the Supreme Court of Louisiana's decision, as of December 31, 2000, management recorded an additional liability of $11.2 million and also recorded a receivable in the amount of $7.0 million representing the amount of the insurance coverage. This resulted in recording $4.2 million of net operating expense in the accompanying consolidated financial statements for the year ended December 31, 2000. The final installment on the $7.0 million receivable from the insurance company was received by KCSR in June 2001.
Houston Cases
In August 2000, KCSR and certain of its affiliates were added as defendants in
lawsuits pending in Jefferson and Harris Counties, Texas. These lawsuits allege
damage to approximately 3,000 plaintiffs as a result of an alleged toxic
chemical release from a tank car in Houston, Texas on August 21, 1998.
Litigation involving the shipper and the delivering carrier had been pending for
some time, but KCSR, which handled the car during the course of its transport,
had not previously been named a defendant. On June 28, 2001, KCSR reached a
final settlement with the 1,664 plaintiffs in the lawsuit filed in Jefferson
County, Texas. In 2002, KCSR settled with virtually all of the plaintiffs in the
lawsuit filed in the 164th Judicial District Court of Harris County, Texas, and
legal counsel for the remaining plaintiffs (approximately 120) has withdrawn,
leaving the status of those claims in doubt.
Stilwell Tax Dispute
On November 19, 2002, Stilwell, now Janus Capital Group Inc., filed a Statement
of Claim against KCS with the American Arbitration Association. This claim
involves the entitlement to compensation expense deductions for federal income
tax purposes which are associated with the exercise of certain stock options
issued by Stilwell (the "Substituted Options") in connection with the Spin-off
of Stilwell from KCS on July 12, 2000. Stilwell alleges that upon exercise of a
Substituted Option, Stilwell is entitled to the associated compensation expense
deductions. Stilwell bases its claim on a letter, dated August 17, 1999,
addressed to Landon H. Rowland, Chairman, President and Chief Executive Officer
of Kansas City Southern Industries, Inc. (the "Letter"), purporting to allow
Stilwell to claim such deductions. The Letter was signed by the Vice President
and Tax Counsel of Stilwell, who was also at the time the Senior Assistant Vice
President and Tax Counsel of KCS, and by Landon H. Rowland, currently a director
of KCS and the non-executive Chairman of Janus Capital Group Inc., who was at
that time a director and officer of both Stilwell and KCS.
Stilwell seeks a declaratory award and/or injunction ordering KCS to file and amend its tax returns for the tax year 2000 and subsequent years to reflect that KCS does not claim the associated compensation expense deductions and to indemnify Stilwell against any related taxes imposed upon Stilwell, which allegedly has taken, and plans to take, such deductions. On December 20, 2002, KCS filed an Objection to Stilwell's Demand for Arbitration and Motion to Dismiss. KCS disputes the validity and enforceability of the Letter. KCS asserts, among other things, that a Private Letter Ruling issued by the Internal Revenue Service on July 9, 1999 provides that KCS subsidiaries are entitled to compensation expense deductions upon exercise of Substituted Options by their employees.
KCS has answered that the claims of Stilwell are without merit and intends to vigorously defend against them. Given the early stage of the proceeding, KCS is unable to predict the outcome, but does not expect this matter to result in any material adverse financial consequences to KCS's net income in the event, which it regards as unlikely, that it would not prevail.
Environmental Liabilities. The Company's operations are subject to extensive federal, state and local environmental laws and regulations. The major 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 liability for cleanup and investigation costs, without regard to fault or legality of the original conduct, on current and predecessor owners and operators of a site, as well as those who generate, or arrange for the disposal of, hazardous substances. The Company does not foresee that compliance with the requirements imposed by the environmental legislation will impair its competitive capability or result in any material additional capital expenditures, operating or maintenance costs. The risk of incurring environmental liability is inherent in the railroad industry. As part of serving the petroleum and chemicals industry, KCSR transports hazardous materials and has a professional team available to respond and handle environmental issues that might occur in the transport of such materials. Additionally, the Company is a Responsible Care(R) partner and has initiated practices under this environmental program. KCSR performs ongoing reviews and evaluations of the various environmental programs and issues within the Company's operations, and, as necessary, takes actions 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. In the event that the Company becomes subject to more stringent cleanup requirements at these sites, discovers additional contamination, or becomes subject to related personal or property damage claims, the Company could incur material costs in connection with these sites.
The Company records liabilities for remediation and restoration costs related to past activities when the Company's obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance activities to current operations are expensed as incurred. The Company's recorded liabilities for these issues represent its best estimates (on an undiscounted basis) of remediation and restoration costs that may be required to comply with present laws and regulations. Although these costs cannot be predicted with certainty, management believes that the ultimate outcome of identified matters will not have a material adverse effect on the Company's consolidated results of operations, financial condition or cash flows.
Derivative Instruments and Purchase Commitments. Fuel expense is a significant component of the Company's operating expenses. Fuel costs are affected by (i) traffic levels, (ii) efficiency of operations and equipment, and (iii) fuel market conditions. Controlling fuel expenses is a top priority of management. As a result, from time to time, the Company will enter into transactions to hedge against fluctuations in the price of its diesel fuel purchases to protect the Company's operating results against adverse fluctuations in fuel prices. KCSR enters into forward diesel fuel purchase commitments and commodity swap transactions (fuel swaps or caps) as a means of fixing future fuel prices.
At December 31, 1999, the Company was party to two diesel fuel cap transactions for a total of six million gallons (approximately 10% of expected 2000 usage) at a cap price of $0.60 per gallon. These hedging instruments expired on March 31, 2000 and June 30, 2000. The Company received approximately $0.8 million during 2000 related to these diesel fuel cap transactions and recorded the proceeds as a reduction of fuel expense. At December 31, 1999, the Company did not have any outstanding purchase commitments for 2000. At December 31, 2000, KCSR had purchase commitments for approximately 12.6% of budgeted gallons of fuel for 2001, which resulted in higher fuel expense of approximately $0.4 million in 2001. There were no fuel swap or cap transactions outstanding at December 31, 2000. At December 31, 2001, KCSR had purchase commitments for approximately 39% of its budgeted gallons of fuel for 2002, which resulted in a decrease in fuel expense of approximately $0.4 million in 2002. There were no diesel fuel cap or swap transactions outstanding at December 31, 2001. At December 31, 2002, KCSR had purchase commitments and was a party to a fuel swap transaction, which, on a combined basis, resulted in approximately 21% of expected 2003 diesel fuel usage. On January 14, 2003, KCSR entered into an additional fuel swap transaction, which raised the total hedged gallons to approximately 25% of budgeted 2003 diesel fuel usage. KCSR is also a party to swap transactions for approximately 2.5 million gallons of fuel for 2004. Commodity swap transactions are accounted for as hedges under SFAS 133 and are typically based on the price of No. 2 Gulf Coast Heating Oil, which the Company believes to produce a high correlation to the price of diesel fuel. These transactions are generally settled monthly in cash with the counter-party. Positions are monitored to ensure that they will not exceed actual fuel requirements in any period. The commodity swap transaction entered into prior to December 31, 2002 is recorded on the accompanying balance sheet at its fair market value, which approximates $0.2 million at December 31, 2002.
At December 31, 2001, the Company had five separate interest rate cap agreements for an aggregate notional amount of $200 million. Three of these interest rate cap agreements expired on February 10, 2002 while the remaining two expired on March 10, 2002. As of December 31, 2002, the Company did not have any interest rate cap agreements or interest rate hedging instruments.
These derivative transactions are intended to mitigate the impact of rising fuel prices and interest rates and, if applicable, are recorded using the accounting policies as set forth in Note 2 - "Significant Accounting Policies." In general, the Company enters into transactions such as those discussed above in limited situations based on management's assessment of current market conditions and perceived risks. Historically, the Company has engaged in a limited number of such transactions and their impact has been insignificant. However, the Company intends to respond to evolving business and market conditions in order to manage risks and exposures associated with the Company's various operations, and in doing so, may enter into transactions similar to those discussed above.
Foreign Exchange Matters. In connection with the Company's investment in Grupo TFM, matters arise with respect to financial accounting and reporting for foreign currency transactions and for translating foreign currency financial statements into U.S. dollars. The Company follows the requirements outlined in Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS 52"), and related authoritative guidance. The Company uses the U.S. dollar as the functional currency for Grupo TFM. Equity earnings (losses) from Grupo TFM included in the Company's results of operations reflect the Company's share of any such translation gains and losses that Grupo TFM records in the process of translating certain transactions from Mexican pesos to U.S. dollars.
The Company continues to evaluate existing alternatives with respect to utilizing foreign currency instruments to hedge its U.S. dollar investment in Grupo TFM as market conditions change or exchange rates fluctuate. At December 31, 2002, 2001and 2000, the Company had no outstanding foreign currency hedging instruments.
Results of the Company's investment in Grupo TFM are reported under U.S. GAAP while Grupo TFM reports its financial results under IAS. Because the Company is required to report its equity earnings (losses) in Grupo TFM under U.S. GAAP and Grupo TFM reports under IAS, differences in deferred income tax calculations and the classification of certain operating expense categories occur. The deferred income tax calculations are significantly impacted by fluctuations in the relative value of the Mexican peso versus the U.S. dollar and the rate of Mexican inflation, and can result in significant variability in the amount of equity earnings (losses) reported by the Company.
Panama Canal Railway Company. Under certain limited conditions, the Company is a guarantor for up to $5.6 million of cash deficiencies associated with the operations of PCRC. In addition, the Company is a guarantor for up to $2.1 million of equipment loans. Further, if the Company or its partner terminate the concession contract without the consent of the IFC, the Company is a guarantor for up to 50% of the outstanding senior loans. See Note 5.
Subsidiaries and Affiliates. The Company is party to certain agreements with Grupo TMM covering the Grupo TFM venture, which contains "change of control" provisions, provisions intended to preserve the Company's and Grupo TMM's proportionate ownership of the ventures, and super majority provisions with respect to voting on certain significant transactions. Such agreements also provide a right of first refusal in the event that either party initiates a divestiture of its equity interest in Grupo TFM. Under certain circumstances, such agreements could affect the Company's ownership percentage and rights in these equity affiliates.
Employees. The Company and certain of its subsidiaries have entered into agreements with employees whereby, upon defined circumstances constituting a change in control of the Company or subsidiary, certain stock options become exercisable, certain benefit entitlements are automatically funded and such employees are entitled to specified cash payments upon termination of employment.
Assets. The Company and certain of its subsidiaries have established trusts to provide for the funding of corporate commitments and entitlements of officers, directors, employees and others in the event of a specified change in control of the Company or subsidiary. Assets held in such trusts at December 31, 2002 were not material. Depending upon the circumstances at the time of any such change in control, the most significant factor of which would be the highest price paid for KCS common stock by a party seeking to control the Company, funding of the Company's trusts could be substantial.
Debt. Certain loan agreements and debt instruments entered into or guaranteed by the Company and its subsidiaries provide for default in the event of a specified change in control of the Company or particular subsidiaries of the Company.
Stockholder Rights Plan. On September 19, 1995, the Board of Directors of the Company declared a dividend distribution of one Right for each outstanding share of the Company's common stock, $.01 par value per share (the "Common stock"), to the stockholders of record on October 12, 1995. Each Right entitles the registered holder to purchase from the Company 1/1,000th of a share of Series A Preferred Stock (the "Preferred Stock") or in some circumstances, Common stock, other securities, cash or other assets as the case may be, at a price of $210 per share, subject to adjustment.
The Rights, which are automatically attached to the Common stock, are not exercisable or transferable apart from the Common stock until the tenth calendar day following the earlier to occur of (unless extended by the Board of Directors and subject to the earlier redemption or expiration of the Rights): (i) the date of a public announcement that an acquiring person acquired, or obtained the right to acquire, beneficial ownership of 20 percent or more of the outstanding shares of the Common stock of the Company (or 15 percent in the case that such person is considered an "adverse person"), or (ii) the commencement or announcement of an intention to make a tender offer or exchange offer that would result in an acquiring person beneficially owning 20 percent or more of such outstanding shares of Common stock of the Company (or 15 percent in the case that such person is considered an "adverse person"). Until exercised, the Rights will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. In connection with certain business combinations resulting in the acquisition of the Company or dispositions of more than 50% of Company assets or earnings power, each Right shall thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of the highest priority voting securities of the acquiring company (or certain of its affiliates) that at the time of such transaction would have a market value of two times the exercise price of the Right. The Rights expire on October 12, 2005, unless earlier redeemed by the Company as described below.
At any time prior to the tenth calendar day after the first date after the public announcement that an acquiring person has acquired beneficial ownership of 20 percent (or 15 percent in some instances) or more of the outstanding shares of the Common stock of the Company, the Company may redeem the Rights in whole, but not in part, at a price of $0.005 per Right. In addition, the Company's right of redemption may be reinstated following an inadvertent trigger of the Rights (as determined by the Board) if an acquiring person reduces its beneficial ownership to 10 percent or less of the outstanding shares of Common stock of the Company in a transaction or series of transactions not involving the Company.
The Series A Preferred shares purchasable upon exercise of the Rights will have a cumulative quarterly dividend rate set by the Board of Directors or equal to 1,000 times the dividend declared on the Common stock for such quarter. Each share will have the voting rights of one vote on all matters voted at a meeting of the stockholders for each 1/1,000th share of preferred stock held by such stockholder. In the event of any merger, consolidation or other transaction in which the common shares are exchanged, each Series A Preferred share will be entitled to receive an amount equal to 1,000 times the amount to be received per common share. In the event of a liquidation, the holders of Series A Preferred shares will be entitled to receive $1,000 per share or an amount per share equal to 1,000 times the aggregate amount to be distributed per share to holders of Common stock. The shares will not be redeemable. The vote of holders of a majority of the Series A Preferred shares, voting together as a class, will be required for any amendment to the Company's Certificate of Incorporation that would materially and adversely alter or change the powers, preferences or special rights of such shares.
2002
------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Revenues (i) $ 144.2 $ 138.9 $ 139.2 $ 143.9
Costs and expenses (i) 114.2 116.9 110.1 115.6
Depreciation and amortization 16.1 15.8 14.6 14.9
--------- --------- --------- ---------
Operating income 13.9 6.2 14.5 13.4
Equity in net earnings (losses)
of unconsolidated affiliates
Grupo TFM 18.2 9.8 13.0 4.8
Other (0.5) (0.7) (1.3) 0.1
Gain on sale of Mexrail, Inc. -- -- -- 4.4
Interest expense (11.7) (11.5) (10.5) (11.3)
Debt retirement costs (i) -- -- (4.3) --
Other, net 2.3 6.5 4.4 4.4
--------- --------- --------- ---------
Income from operations before income taxes 22.2 10.3 15.8 15.8
Income taxes provision (benefit) 1.8 (0.3) 1.3 4.1
--------- --------- --------- ---------
Net income $ 20.4 $ 10.6 $ 14.5 $ 11.7
========= ========= ========= =========
Per Share Data
Total Basic Earnings per Common share $ 0.33 $ 0.17 $ 0.24 $ 0.20
========= ========= ========= =========
Total Diluted Earnings per Common share $ 0.32 $ 0.17 $ 0.23 $ 0.19
========= ========= ========= =========
Dividends per Preferred share $ 0.25 $ 0.25 $ 0.25 $ 0.25
Stock Price Ranges:
Preferred - High $ 20.00 $ 19.85 $ 20.75 $ 19.50
- Low $ 18.00 $ 16.25 $ 19.45 $ 17.95
Common - High $ 15.00 $ 17.35 $ 17.00 $ 15.99
- Low $ 12.00 $ 12.75 $ 14.96 $ 12.75
|
(i) The revenue and expense amounts reported hereon have been reclassified from the amounts previously reported under the applicable period's Quarterly Report on Form 10-Q. Additionally, debt retirement costs previously reported as an extraordinary item have been reclassified in accordance with SFAS 145.
2001
------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Revenues (i) $ 146.9 $ 146.1 $ 144.7 $ 145.5
Costs and expenses (i) 112.1 115.4 117.3 125.0
Depreciation and amortization 14.4 14.7 14.5 14.4
--------- --------- --------- ---------
Operating income 20.4 16.0 12.9 6.1
Equity in net earnings (losses)
of unconsolidated affiliates
Grupo TFM 5.0 7.5 4.9 11.1
Other (1.2) (0.6) 0.3 0.1
Interest expense (9.9) (13.2) (14.5) (15.2)
Other, net 1.2 0.9 1.1 1.0
--------- --------- --------- ---------
Income from operations before income taxes 15.5 10.6 4.7 3.1
Income taxes provision (benefit) 4.4 1.6 -- (3.2)
--------- --------- --------- ---------
Income from operations 11.1 9.0 4.7 6.3
Cumulative effect of accounting change,
net of income taxes -- -- -- (0.4)
--------- --------- --------- ---------
Net income $ 11.1 $ 9.0 $ 4.7 $ 5.9
========= ========= ========= =========
Per Share Data (ii)
Basic earnings per Common share
Continuing operations $ 0.19 $ 0.15 $ 0.08 $ 0.11
Cumulative effect of accounting change,
net of income taxes -- -- -- (0.01)
--------- --------- --------- ---------
Total Basic Earnings per Common share $ 0.19 $ 0.15 $ 0.08 $ 0.10
========= ========= ========= =========
Diluted earnings per Common share
Continuing operations $ 0.18 $ 0.15 $ 0.08 $ 0.10
Cumulative effect of accounting change,
net of income taxes -- -- -- (0.00)
--------- --------- --------- ---------
Total Diluted Earnings per Common share $ 0.18 $ 0.15 $ 0.08 $ 0.10
========= ========= ========= =========
Dividends per Preferred share
$ 0.25 $ 0.25 $ 0.25 $ 0.25
Stock Price Ranges:
Preferred - High $ 19.00 $ 21.00 $ 21.00 $ 20.95
- Low $ 16.50 $ 17.95 $ 20.63 $ 20.00
Common - High $ 15.40 $ 16.10 $ 16.75 $ 15.50
- Low $ 10.92 $ 10.25 $ 12.10 $ 9.00
|
(i) The revenue and expense amounts reported hereon have been reclassified from the amounts previously reported under the applicable period's Quarterly Report on Form 10-Q.
(ii) The accumulation of 2001's four quarters for Basic and Diluted earnings
(loss) per share data does not total the respective earnings per share
for the year ended December 31, 2001 due to rounding.
As discussed in Note 7, in September 2000 KCSR issued $200 million of 9 1/2% Notes due 2008. In addition, as discussed in Note 7, in June 2002, KCSR issued $200 million of 7 1/2% Notes due 2009. Both of these note issues are an unsecured obligation of KCSR, however, they are also jointly and severally and fully and unconditionally guaranteed on an unsecured senior basis by KCS and certain of its subsidiaries (all of which are wholly-owned) within the KCS consolidated group. For each of these note issues, KCS registered exchange notes with the SEC that have substantially identical terms and associated guarantees and all of the initial senior notes for each issue have been exchanged for $200 million of registered exchange notes for each respective note issue.
The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 "Financial statements of guarantors and affiliates whose securities collateralize an issue registered or being registered." This information is not intended to present the financial position, results of operations and cash flows of the individual companies or groups of companies in accordance with U.S. GAAP. Certain prior year information has been reclassified to reflect the merger of Gateway Western and certain other wholly-owned subsidiaries with KCSR.
Condensed Consolidating Statements of Income
December 31, 2002 (dollars in millions)
--------------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------ ------------ ------------ ------------ ------------ ------------
Revenues $ -- $ 567.4 $ 18.1 $ 38.3 $ (57.6) $ 566.2
Costs and expenses 10.8 506.4 19.5 39.1 (57.6) 518.2
------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) (10.8) 61.0 (1.4) (0.8) -- 48.0
Equity in net earnings (losses) of
unconsolidated affiliates and
subsidiaries 61.5 45.6 -- 43.6 (107.3) 43.4
Gain on sale of Mexrail -- 4.4 -- -- -- 4.4
Interest expense (0.4) (44.1) (0.4) (0.1) -- (45.0)
Debt retirement costs -- (4.3) -- -- -- (4.3)
Other income 3.9 11.0 2.0 0.7 -- 17.6
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 54.2 73.6 0.2 43.4 (107.3) 64.1
Income tax provision (benefit) (3.0) 10.6 0.1 (0.8) -- 6.9
------------ ------------ ------------ ------------ ------------ ------------
Net income $ 57.2 $ 63.0 $ 0.1 $ 44.2 $ (107.3) $ 57.2
============ ============ ============ ============ ============ ============
|
December 31, 2001 (dollars in millions)
--------------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------ ------------ ------------ ------------ ------------ ------------
Revenues $ -- $ 580.3 $ 12.3 $ 20.1 $ (29.5) $ 583.2
Costs and expenses 13.6 511.4 13.1 19.2 (29.5) 527.8
------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) (13.6) 68.9 (0.8) 0.9 -- 55.4
Equity in net earnings (losses) of
unconsolidated affiliates and
subsidiaries 39.2 26.8 -- 29.4 (68.3) 27.1
Interest expense 1.3 (55.2) (0.5) (0.4) 2.0 (52.8)
Other income 0.2 6.0 -- -- (2.0) 4.2
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes 27.1 46.5 (1.3) 29.9 (68.3) 33.9
Income tax provision (benefit) (4.0) 6.7 (0.5) 0.6 -- 2.8
Income (loss) before cumulative
effect of accounting change 31.1 39.8 (0.8) 29.3 (68.3) 31.1
------------ ------------ ------------ ------------ ------------ ------------
Cumulative effect of accounting
Change, net of income taxes (0.4) (0.4) -- -- 0.4 (0.4)
------------ ------------ ------------ ------------ ------------ ------------
Net income $ 30.7 $ 39.4 $ (0.8) $ 29.3 $ (67.9) $ 30.7
============ ============ ============ ============ ============ ============
|
December 31, 2000 (dollars in millions)
--------------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------ ------------ ------------ ------------ ------------ ------------
Revenues $ -- $ 577.8 $ 12.2 $ 11.0 $ (22.3) $ 578.7
Costs and expenses 10.0 511.1 11.5 10.6 (22.3) 520.9
------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) (10.0) 66.7 0.7 0.4 -- 57.8
Equity in net earnings (losses) of
unconsolidated affiliates and
subsidiaries 29.6 19.1 0.2 21.2 (48.0) 22.1
Interest expense (2.6) (68.6) (0.7) (1.1) 7.2 (65.8)
Debt retirement costs (10.9) -- -- -- -- (10.9)
Other income 4.0 9.1 0.1 -- (7.2) 6.0
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations before income taxes 10.1 26.3 0.3 20.5 (48.0) 9.2
Income tax provision (benefit) (6.6) (2.0) (0.2) 1.3 -- (7.5)
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from continuing
operations 16.7 28.3 0.5 19.2 (48.0) 16.7
Income (loss) from discontinued
operations 363.8 -- -- 363.8 (363.8) 363.8
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) $ 380.5 $ 28.3 $ 0.5 $ 383.0 $ (411.8) $ 380.5
============ ============ ============ ============ ============ ============
|
Condensed Consolidating Balance Sheets
As of December 31, 2002 (dollars in millions)
----------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------ ------------ ------------ ------------ ------------ ------------
ASSETS
Current assets $ 43.3 $ 234.7 $ 17.6 $ 13.0 $ (92.4) $ 216.2
Investments held for
operating purposes and
investments in subsidiaries 769.1 412.1 -- 432.5 (1,190.6) 423.1
Properties, net 0.2 1,333.2 3.9 0.1 -- 1,337.4
Goodwill and other assets 1.6 30.5 1.7 8.1 (9.8) 32.1
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 814.2 $ 2,010.5 $ 23.2 $ 453.7 $ (1,292.8) $ 2,008.8
============ ============ ============ ============ ============ ============
LIABILITIES AND EQUITY
Current liabilities $ 7.2 $ 245.3 $ 9.1 $ 16.2 $ (91.5) $ 186.3
Long-term debt 1.2 569.6 1.8 -- -- 572.6
Payable to affiliates 12.8 -- 0.6 -- (13.4) --
Deferred income taxes 8.6 391.1 0.3 2.6 (9.8) 392.8
Other liabilities 31.5 44.7 4.0 25.1 (1.1) 104.2
Stockholders' equity 752.9 759.8 7.4 409.8 (1,177.0) 752.9
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and equity $ 814.2 $ 2,010.5 $ 23.2 $ 453.7 $ ( 1,292.8) $ 2,008.8
============ ============ ============ ============ ============ ============
|
As of December 31, 2001 (dollars in millions)
----------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------ ------------ ------------ ------------ ------------ ------------
ASSETS
Current assets $ 25.5 $ 231.7 $ 13.7 $ 6.6 $ (23.1) $ 254.4
Investments held for
operating purposes and
investments in subsidiaries 701.4 377.9 -- 376.4 (1,068.9) 386.8
Properties, net 0.3 1,321.5 3.8 1.8 -- 1,327.4
Goodwill and other assets 1.7 40.5 1.6 0.1 (1.6) 42.3
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 728.9 $ 1,971.6 $ 19.1 $ 384.9 $ (1,093.6) $ 2,010.9
============ ============ ============ ============ ============ ============
LIABILITIES AND EQUITY
Current liabilities $ 7.2 $ 254.4 $ 4.8 $ 3.8 $ (23.1) $ 247.1
Long-term debt 1.3 602.9 2.8 4.7 -- 611.7
Payable to affiliates 4.8 -- 0.6 -- (5.4) --
Deferred income taxes 9.5 355.9 0.2 6.2 (1.6) 370.2
Other liabilities 25.8 62.0 3.4 10.4 -- 101.6
Stockholders' equity 680.3 696.4 7.3 359.8 (1,063.5) 680.3
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and equity $ 728.9 $ 1,971.6 $ 19.1 $ 384.9 $ (1,093.6) $ 2,010.9
============ ============ ============ ============ ============ ============
|
As of December 31, 2000 (dollars in millions)
----------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------ ------------ ------------ ------------ ------------ ------------
ASSETS
Current assets $ 16.9 $ 203.8 $ 10.5 $ 10.1 $ (24.9) $ 216.4
Investments held for
operating purposes and
investments in subsidiaries 666.3 359.0 0.7 343.8 (1,011.6) 358.2
Properties, net 0.3 1,318.7 6.6 2.2 -- 1,327.8
Goodwill and other assets 0.2 41.3 2.2 0.3 (1.9) 42.1
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 683.7 $ 1,922.8 $ 20.0 $ 356.4 $ (1,038.4) $ 1,944.5
============ ============ ============ ============ ============ ============
LIABILITIES AND EQUITY
Current liabilities $ 21.8 $ 239.5 $ 5.2 $ 5.3 $ (25.3) $ 246.5
Long-term debt 1.6 627.9 3.8 5.1 -- 638.4
Payable to affiliates 3.4 -- -- -- (3.4) --
Deferred income taxes 7.2 323.2 (0.2) 3.9 (1.9) 332.2
Other liabilities 6.3 72.7 2.5 2.5 -- 84.0
Stockholders' equity 643.4 659.5 8.7 339.6 (1,007.8) 643.4
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and equity $ 683.7 $ 1,922.8 $ 20.0 $ 356.4 $ (1,038.4) $ 1,944.5
============ ============ ============ ============ ============ ============
|
Condensed Consolidating Statements of Cash Flows
As of December 31, 2002 (dollars in millions)
---------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------ ------------ ------------ ------------ ------------ ------------
Net cash flows provided by (used
for) operating activities: $ (27.5) $ 118.5 $ 12.7 $ (6.7) $ 3.4 $ 100.4
------------ ------------ ------------ ------------ ------------ ------------
Investing activities:
Property acquisitions -- (79.1) (0.7) -- -- (79.8)
Proceeds from disposal of property -- 18.1 -- -- -- 18.1
Investments in and loans to affiliates (3.0) -- -- (13.0) 11.6 (4.4)
Proceeds from sale of investments 1.4 31.3 -- -- (1.0) 31.7
Other, net -- (1.0) -- (8.1) 8.6 (0.5)
------------ ------------ ------------ ------------ ------------ ------------
Net (1.6) (30.7) (0.7) (21.1) 19.2 (34.9)
------------ ------------ ------------ ------------ ------------ ------------
Financing activities:
Proceeds from issuance of
long-term debt -- 200.0 -- -- -- 200.0
Repayment of long-term debt (0.4) (269.3) (1.0) (0.2) -- (270.9)
Proceeds from loans from affiliates 8.0 -- 0.2 -- (8.2) --
Debt issuance costs (5.7) -- -- -- (5.7)
Proceeds from stock plans 10.0 0.3 -- -- 10.3
Cash dividends paid (0.2) -- -- -- (0.2)
Other, net (0.4) (18.9) 0.6 28.4 (14.4) (4.7)
------------ ------------ ------------ ------------ ------------ ------------
Net 17.0 (93.6) (0.2) 28.2 (22.6) (71.2)
------------ ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents:
Net increase (decrease) (12.1) (5.8) 11.8 0.4 -- (5.7)
At beginning of period 1.3 23.2 -- 0.2 -- 24.7
------------ ------------ ------------ ------------ ------------ ------------
At end of period $ (10.8) $ 17.4 $ 11.8 $ 0.6 $ -- $ 19.0
============ ============ ============ ============ ============ ============
|
As of December 31, 2001 (dollars in millions)
---------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------ ------------ ------------ ------------ ------------ ------------
Net cash flows provided by (used
for) operating activities: $ (10.0) $ 82.2 $ (4.3) $ (0.8) $ 1.1 $ 68.2
------------ ------------ ------------ ------------ ------------ ------------
Investing activities:
Property acquisitions -- (65.7) (0.2) (0.1) -- (66.0)
Proceeds from disposal of property -- 14.8 3.3 -- -- 18.1
Investments in and loans to affiliates -- (2.6) -- (9.0) 3.4 (8.2)
Proceeds from sale of investments -- -- 0.6 -- -- 0.6
Other, net -- -- 0.5 -- (0.7) (0.2)
------------ ------------ ------------ ------------ ------------ ------------
Net -- (53.5) 4.2 (9.1) 2.7 (55.7)
------------ ------------ ------------ ------------ ------------ ------------
Financing activities:
Proceeds from issuance of
long-term debt -- 35.0 -- -- -- 35.0
Repayment of long-term debt -- (50.0) (1.0) (0.3) -- (51.3)
Proceeds from loans from affiliates 1.4 -- 0.6 -- (2.0) --
Repayment of loans from affiliates -- -- -- -- -- --
Debt issuance costs -- (0.4) -- -- -- (0.4)
Proceeds from stock plans 8.9 -- -- -- -- 8.9
Cash dividends paid (0.2) -- -- -- -- (0.2)
Other, net (0.3) (9.5) 0.4 9.9 (1.8) (1.3)
------------ ------------ ------------ ------------ ------------ ------------
Net 9.8 (24.9) -- 9.6 (3.8) (9.3)
------------ ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents:
Net increase (decrease) (0.2) 3.8 (0.1) (0.3) -- 3.2
At beginning of period 1.5 19.4 0.1 0.5 -- 21.5
------------ ------------ ------------ ------------ ------------ ------------
At end of period $ 1.3 $ 23.2 $ -- $ 0.2 $ -- $ 24.7
============ ============ ============ ============ ============ ============
|
As of December 31, 2000 (dollars in millions)
---------------------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCS
------------ ------------ ------------ ------------ ------------ ------------
Net cash flows provided by (used
for) operating activities: $ 3.5 $ 86.9 $ (2.0) $ 11.2 $ (24.9) $ 74.7
------------ ------------ ------------ ------------ ------------ ------------
Investing activities:
Property acquisitions -- (103.3) (1.2) -- -- (104.5)
Proceeds from disposal of property -- 5.5 -- -- -- 5.5
Investments in and loans to affiliates (43.0) -- -- (4.6) 43.4 (4.2)
Repayment of loans to affiliates 544.8 -- -- -- (544.8) --
Other, net 1.1 (2.6) -- -- 2.9 1.4
------------ ------------ ------------ ------------ ------------ ------------
Net 502.9 (100.4) (1.2) (4.6) (498.5) (101.8)
------------ ------------ ------------ ------------ ------------ ------------
Financing activities:
Proceeds from issuance of
long-term debt 125.0 927.0 -- -- -- 1,052.0
Repayment of long-term debt (648.3) (365.7) (1.2) (0.2) -- (1,015.4)
Proceeds from loans from affiliates -- 74.2 3.8 -- (78.0) --
Repayment of loans from affiliates -- (577.6) -- -- 577.6 --
Debt issuance costs -- (17.6) -- -- -- (17.6)
Proceeds from stock plans 17.9 -- -- -- -- 17.9
Cash dividends paid (4.8) (15.3) (0.3) (8.7) 24.3 (4.8)
Other, net 0.1 2.3 0.2 2.5 (0.5) 4.6
------------ ------------ ------------ ------------ ------------ ------------
Net (510.1) 27.3 2.5 (6.4) 523.4 36.7
------------ ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents:
Net increase (decrease) (3.7) 13.8 (0.7) 0.2 -- 9.6
At beginning of period 5.2 5.6 0.8 0.3 -- 11.9
------------ ------------ ------------ ------------ ------------ ------------
At end of period $ 1.5 $ 19.4 $ 0.1 $ 0.5 $ -- $ 21.5
============ ============ ============ ============ ============ ============
|
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
The information regarding the Company's Change in and Disagreements with Accountants on Accounting and Financial Disclosure is set forth under Item 4 of the Company's Form 8-K dated June 20, 2001, which is incorporated herein by reference.
There were no disagreements with accountants on accounting and financial disclosure matters during 2002.
Part III
The Company has incorporated by reference certain responses to the Items of this Part III pursuant to Rule 12b-23 under the Exchange Act and General Instruction G(3) to Form 10-K. The Company's definitive proxy statement for the annual meeting of stockholders scheduled for May 1, 2003 ("Proxy Statement") will be filed no later than 120 days after December 31, 2002.
Item 10. Directors and Executive Officers of the Company
(a) Directors of the Company
The information set forth in response to Item 401 of Regulation S-K under the heading "Proposal 1 - Election of Three Directors" and "The Board of Directors" in the Company's Proxy Statement is incorporated herein by reference in partial response to this Item 10.
(b) Executive Officers of the Company
The information set forth in response to Item 401 of Regulation S-K under "Executive Officers of the Company," an unnumbered Item in Part I (immediately following Item 4, Submission of Matters to a Vote of Security Holders), of this Form 10-K is incorporated herein by reference in partial response to this Item 10.
(c) Compliance with Section 16(a) of the Exchange Act
The information set forth in response to Item 405 of Regulation S-K under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement is incorporated herein by reference in partial response to this Item 10.
Item 11. Executive Compensation
The information set forth in response to Item 402 of Regulation S-K under "Management Compensation" and "The Board of Directors -- Compensation of Directors" in the Company's Proxy Statement, (other than the Compensation and Organization Committee Report on Executive Compensation and the Stock Performance Graph), is incorporated herein by reference in response to this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The information set forth in response to Item 403 of Regulation S-K under the heading "Principal Stockholders and Stock Owned Beneficially by Directors and Certain Executive Officers" in the Company's Proxy Statement is incorporated herein by reference in response to this Item 12.
The information set forth in response to Item 201(d) of Regulation S-K under the heading, "Equity Compensation Plan Information" in the Company's Proxy Statement is incorporated herein by reference in response to this Item 12.
The Company has no knowledge of any arrangement the operation of which may at a subsequent date result in a change of control of the Company.
Item 13. Certain Relationships and Related Transactions
The information set forth in response to Item 404 of Regulation S-K under the heading "Compensation Committee Interlocks and Insider Participation; Certain Relationships and Related Transactions" in the Company's Proxy Statement is incorporated herein by reference in response to this Item 13.
Item 14. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of a date within ninety days before the filing of this annual report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have 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.
There have not been any significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weakness in the internal controls, and therefore no corrective actions were taken.
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of Documents filed as part of this Report
(1) Financial Statements
The financial statements and related notes, together with the report of KPMG LLP dated March 24, 2003 and the report of PricewaterhouseCoopers LLP dated March 22, 2001, except as to the adoption of Statement of Financial Accounting Standards No. 142 described in Note 2 which is as of January 1, 2002, appear in
Part II Item 8, Financial Statements and Supplementary Data, of this Form 10-K.
(2) Financial Statement Schedules
The schedules and exhibits for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission appear in Part II Item 8, Financial Statements and Supplementary Data, under the Index to Financial Statements of this Form 10-K.
(3) List of Exhibits
(a) Exhibits
The Company has incorporated by reference herein certain exhibits as specified below pursuant to Rule 12b-32 under the Exchange Act.
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession (Inapplicable)
(3) Articles of Incorporation and Bylaws
3.1 Exhibit 3.1 to the Company's Registration Statement on Form S-4 originally filed July 12, 2002 (Registration No. 333-92360), as amended and declared effective on July 30, 2002 (the " 2002 S-4 Registration Statement"), Restated Certificate of Incorporation, is hereby incorporated by reference as Exhibit 3.1
3.2 Exhibit 3.2 to the Company's Form 10-Q for the quarter ended September 30, 2002 (Commission File No. 1-4717), The By-Laws of Kansas City Southern, as amended and restated to September 24, 2002, is hereby incorporated by reference as Exhibit 3.2
(4) Instruments Defining the Right of Security Holders, Including Indentures
4.1 The Fourth, Seventh, Eighth, Eleventh, Twelfth, Thirteenth,
Fourteenth, Fifteenth and Sixteenth paragraphs of Exhibit 3.1
hereto are incorporated by reference as Exhibit 4.1
4.2 Article I, Sections 1, 3 and 11 of Article II, Article V and
Article VIII of Exhibit 3.2 hereto are incorporated by
reference as Exhibit 4.2
4.3 The Indenture, dated July 1, 1992 between the Company and The
Chase Manhattan Bank (the "1992 Indenture") which is attached
as Exhibit 4 to the Company's Shelf Registration of $300
million of Debt Securities on Form S-3 filed June 19, 1992
(Registration No. 33-47198) and as Exhibit 4(a) to the
Company's Form S-3 filed March 29, 1993 (Registration No.
33-60192) registering $200 million of Debt Securities, is
hereby incorporated by reference as Exhibit 4.3
4.3.1 Exhibit 4.5.2 to the Company's Form 10-K for the fiscal year
ended December 31, 1999 (Commission File No. 1-4717),
Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 6.625% Notes Due March 1, 2005
issued pursuant to the 1992 Indenture, is hereby incorporated
by reference as Exhibit 4.3.1
4.3.2 Exhibit 4.5.4 to the Company's Form 10-K for the fiscal year
ended December 31, 1999 (Commission File No. 1-4717),
Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 7% Debentures Due December 15,
2025 issued pursuant to the 1992 Indenture, is hereby
incorporated by reference as Exhibit 4.3.2
4.4 Exhibit 99 to the Company's Form 8-A dated October 24, 1995
(Commission File No. 1-4717), which is the Stockholder Rights
Agreement by and between the Company and Harris Trust and
Savings Bank dated as of September 19, 1995, is hereby
incorporated by reference as Exhibit 4.4
4.5 Exhibit 4.1 to the Company's S-4 Registration Statement on
Form S-4 originally filed on January 25, 2001 (Registration
No. 333-54262), as amended and declared effective on March 15,
2001 (the "2001 S-4 Registration Statement") the Indenture,
dated as of September 27, 2000, among the Company, The Kansas
City Southern Railway Company ("KCSR"), certain other
subsidiaries of the Company and The Bank of New York, as
trustee (the "2000 Indenture"), is hereby incorporated by
reference as Exhibit 4.5
4.5.1 Exhibit 4.1.1 to the Company's 2001 S-4 Registration Statement
(Registration No. 333-54262), Supplemental Indenture, dated as
of January 29, 2001, to the 2000 Indenture, among the Company,
KCSR, certain other subsidiaries of the Company and The Bank
of New York, as trustee, is hereby incorporated by reference
as Exhibit 4.5.1
4.6 Form of Exchange Note (included as Exhibit B to Exhibit 4.5.1
hereto)
4.7 Exhibit 4.3 to the Company's 2001 S-4 Registration Statement
(Registration No. 333-54262), the Exchange and Registration
Rights Agreement, dated as of September 27, 2000, among the
Company, KCSR, certain other subsidiaries of the Company, is
hereby incorporated by reference as Exhibit 4.7
4.8 The Indenture, dated June 12, 2002, among KCSR, the Company
and certain subsidiaries of the Company, and U.S. Bank
National Association, as Trustee (the "2002 Indenture"), which
is attached as Exhibit 4.1 to the 2002 S-4 Registration
Statement (Registration No. 333-92360) is hereby incorporated
by reference as Exhibit 4.8
Page 105
|
4.8.1 Form of Face of Exchange Note, included as Exhibit B to
Exhibit 4.8 and filed as Exhibit 4.2 to the 2002 S-4
Registration Statement (Registration No. 333-92360) is hereby
incorporated by reference as Exhibit 4.8.1
|
(9) Voting Trust Agreement
(Inapplicable)
(10) Material Contracts
10.1 Form of Officer Indemnification Agreement which is attached as
Exhibit 10.1 to the Company's Form 10-K for the year ended
December 31, 2001 (Commission File No. 1-4717), is hereby
incorporated by reference as Exhibit 10.1
10.2 Form of Director Indemnification Agreement which is attached
as Exhibit 10.2 to the Company's Form 10-K for the year ended
December 31, 2001 (Commission File No. 1-4717), is hereby
incorporated by reference as Exhibit 10.2
10.3 The 1992 Indenture (See Exhibit 4.3)
10.4.1 Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 6.625% Notes Due March 1, 2005
issued pursuant to the 1992 Indenture (See Exhibit 4.3.1)
10.4.2 Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 7% Debentures Due December 15,
2025 issued pursuant to the 1992 Indenture (See Exhibit 4.3.2)
10.5 Exhibit 10.1 to the Company's Form 10-Q for the period ended
March 31, 1997 (Commission File No. 1-4717), The Kansas City
Southern Railway Company Directors' Deferred Fee Plan as
adopted August 20, 1982 and the amendment thereto effective
March 19, 1997 to such plan, is hereby incorporated by
reference as Exhibit 10.5
10.6 Exhibit 10.4 to the Company's Form 10-K for the fiscal year
ended December 31, 1990 (Commission File No. 1-4717),
Description of the Company's 1991 incentive compensation plan,
is hereby incorporated by reference as Exhibit 10.6
10.7 Exhibit 10.10 to the Company's 2002 S-4 Registration Statement
(Registration No. 333-92360), Directors Deferred Fee Plan,
adopted August 20, 1982, amended and restated June 1, 2002, is
hereby incorporated by reference as Exhibit 10.7
10.8 Kansas City Southern 1991 Amended and Restated Stock Option
and Performance Award Plan, as amended and restated effective
as of November 7, 2002 is attached to this Form 10-K as
Exhibit 10.8
10.9 Exhibit 10.8 to the Company's 2001 S-4 Registration Statement
(Registration No. 333-54262), Tax Disaffiliation Agreement,
dated October 23, 1995, by and between the Company and DST
Systems, Inc., is hereby incorporated by reference as Exhibit
10.9
10.10.1 Kansas City Southern 401(k) and Profit Sharing Plan (Amended
and Restated Effective April 1, 2002), is attached to this
Form 10-K as Exhibit 10.10.1
10.10.2 First Amendment to the Kansas City Southern 401(k) and Profit
Sharing Plan (As Amended and Restated Effective April 1,
2002), effective January 1, 2003, is attached hereto as
Exhibit 10.10.2
Page 106
|
10.11 Exhibit 10.10 to the Company's 2001 S-4 Registration Statement
(Registration No. 333-54262), the Assignment, Consent and
Acceptance Agreement, dated August 10, 1999, by and among the
Company, DST Systems, Inc. and Stilwell Financial, Inc., is
hereby incorporated by reference as Exhibit 10.11
10.12 Employment Agreement, as amended and restated January 1, 2001,
by and among the Company, KCSR and Michael R. Haverty, which
is attached as Exhibit 10.12 to the Company's Form 10-K for
the year ended December 31, 2001 (Commission File No. 1-4717),
is hereby incorporated by reference as Exhibit 10.12
10.13 Exhibit 10.14 to the Company's 2001 S-4 Registration Statement
(Registration No. 333-54262), Employment Agreement, dated
January 1, 1999, by and among the Company, KCSR and Gerald K.
Davies, is hereby incorporated by reference as Exhibit 10.13
10.13.1 Amendment to Employment Agreement, dated as of January 1,
2001, by and among the Company, KCSR and Gerald K. Davies
which is attached as Exhibit 10.13.1 to the Company's Form
10-K for the year ended December 31, 2001 (Commission File No.
1-4717) is hereby incorporated by reference as
Exhibit 10.13.1
10.14 Employment Agreement, dated June 1, 2002 by and among the
Company, KCSR and Ronald G. Russ, which is attached as Exhibit
10.17 to the Company's 2002 S-4 Registration Statement
(Registration No. 333-92360) is hereby incorporated by
reference as Exhibit 10.14
10.14.1 First Amendment to Employment Agreement, dated March 14, 2003,
by and among the Company, KCSR, and Ronald G. Russ is attached
to this Form 10-K as Exhibit 10.14.1
10.15 Employment Agreement, dated September 1, 2001, by and between
the Company, KCSR and Jerry W. Heavin is attached to this Form
10-K as Exhibit 10.15
10.15.1 First Amendment to Employment Agreement, dated March 14, 2003,
by and among the Company, KCSR and Jerry W. Heavin is attached
to this Form 10-K as Exhibit 10.l5.1
10.16 Employment Agreement, dated August 14, 2000, by and between
the Company, KCSR and Larry O. Stevenson is attached to this
Form 10-K as Exhibit 10.16
10.16.1 Amendment to Employment Agreement dated January 1, 2002, by
and among the Company, KCSR and Larry O. Stevenson is attached
to this Form 10-K as Exhibit 10.16.1
10.16.2 Amendment to Employment Agreement, dated March 14, 2003, by
and among the Company, KCSR and Larry O. Stevenson is attached
to this Form 10-K as Exhibit 10.16.2
10.17 Employment Agreement (Amended and Restated January 1, 2001) by
and between the Company and Louis G. Van Horn is attached to
this Form 10-K as Exhibit 10.17
10.18 Employment Agreement dated as of August 1, 2001, as amended by
the Amendment to Employment Agreement dated as of August 1,
2001, by and among the Company, KCSR and William J. Pinamont,
which is attached as Exhibit 10.16 to the Company's Form 10-K
for the year ended December 31, 2001 (Commission File No.
1-4717) is hereby incorporated by reference as Exhibit 10.18
10.19 Exhibit 10.18 to the Company's Form 10-K for the year ended
December 31, 1998 (Commission File No. 1-4717), Kansas City
Southern Industries, Inc. Executive Plan, as amended and
restated effective November 17, 1998, is hereby incorporated
by reference as Exhibit 10.19
10.20 The Kansas City Southern Annual Incentive Plan is attached
hereto as Exhibit 10.20
Page 107
|
10.21 Amendment and Restatement Agreement dated June 12, 2002, among
the Company, KCSR and the lenders named therein, together with
the Amended and Restated Credit Agreement dated June 12, 2002
among the Company, KCSR and the lenders named therein attached
thereto as Exhibit A, which is attached as Exhibit 10.6 to the
Company's 2002 S-4 Registration Statement (Registration No.
333-92360), is hereby incorporated by reference as Exhibit
10.21
10.21.1 Reaffirmation Agreement, dated June 12, 2002, among the
Company, KCSR and JP Morgan Chase Bank, which is attached as
Exhibit 10.6.1 to the Company's 2002 S-4 Registration
Statement (Registration No. 333-92360), is hereby incorporated
by reference as Exhibit 10.21.1
10.21.2 Master Assignment and Acceptance, dated June 12, 2002, among
the Company, KCSR and the lenders named therein, which is
attached as Exhibit 10.6.2 to the Company's 2002 S-4
Registration Statement
(Registration No. 333-92360), is hereby incorporated by
reference as Exhibit 10.21.2
10.22 The 2000 Indenture (See Exhibit 4.5)
10.23 Supplemental Indenture, dated as of January 29, 2001, to the
2000 Indenture (See Exhibit 4.5.1)
10.24 Exhibit 10.23 to the Company's 2001 S-4 Registration Statement
(Registration No. 333-54262), Intercompany Agreement, dated as
of August 16, 1999, between the Company and Stilwell Financial
Inc.,
is hereby incorporated by reference as Exhibit 10.24
10.25 Exhibit 10.24 to the Company's 2001 S-4 Registration Statement
(Registration No. 333-54262), Tax Disaffiliation Agreement,
dated as of August 16, 1999, between the Company and Stilwell
Financial Inc., is hereby incorporated by reference as Exhibit
10.25
10.26 Exhibit 10.25 to the Company's 2001 S-4 Registration Statement
(Registration No. 333-54262), Pledge Agreement, dated as of
January 11, 2000, among the Company, KCSR, the subsidiary
pledgors party thereto and The Chase Manhattan Bank, as
Collateral Agent (the "Pledge Agreement"), is hereby
incorporated by reference as Exhibit 10.26
10.27 Exhibit 10.26 to the Company's 2001 S-4 Registration Statement
(Registration No. 333-54262), Guarantee Agreement, dated as of
January 11, 2000, among the Company, the subsidiary guarantors
party thereto and The Chase Manhattan Bank, as Collateral
Agent (the "Guarantee Agreement"), is hereby incorporated by
reference as Exhibit 10.27
10.28 Exhibit 10.27 to the Company's 2001 S-4 Registration Statement
(Registration No. 333-54262), Security Agreement, dated as of
January 11, 2000, among the Company, KCSR, the subsidiary
guarantors party thereto and The Chase Manhattan Bank, as
Collateral Agent (the "Security Agreement"), is hereby
incorporated by reference as Exhibit 10.28
10.29 Exhibit 10.28 to the Company's 2001 S-4 Registration Statement
(Registration No. 333-54262), Indemnity, Subrogation and
Contribution Agreement, dated as of January 11, 2000, among
the Company, KCSR, the subsidiary guarantors party thereto and
The Chase Manhattan Bank, as Collateral Agent (the "Indemnity,
Subrogation and Contribution Agreement"), is hereby
incorporated by reference as Exhibit 10.29
10.30 Exhibit 10.29 to the Company's 2001 S-4 Registration Statement
(Registration No. 333-54262), Supplement No. 1, dated as of
January 29, 2001, to the Pledge Agreement, among PABTEX GP,
LLC, SIS Bulk Holding, Inc. and The Chase Manhattan Bank, as
Collateral Agent, is hereby incorporated by reference as
Exhibit 10.30
Page 108
|
10.31 Exhibit 10.30 to the Company's 2001 S-4 Registration Statement
(Registration No. 333-54262), Supplement No. 1, dated as of
January 29, 2001, to the Guarantee Agreement, among PABTEX GP,
LLC, SIS Bulk Holding, Inc. and The Chase Manhattan Bank, as
Collateral Agent, is hereby incorporated by reference as
Exhibit 10.31
10.32 Exhibit 10.31 to the Company's 2001 S-4 Registration Statement
(Registration No. 333-54262), Supplement No. 1, dated as of
January 29, 2001, to the Security Agreement, among PABTEX GP,
LLC, SIS Bulk Holding, Inc. and The Chase Manhattan Bank, as
Collateral Agent, is hereby incorporated by reference as
Exhibit 10.32
10.33 Exhibit 10.32 to the Company's 2001 S-4 Registration
Statement (Registration No. 333-54262), Supplement No. 1,
dated as of January 29, 2001, to the Indemnity, Subrogation
and Contribution Agreement, among PABTEX GP, LLC, SIS Bulk
Holding, Inc. and The Chase Manhattan Bank, as Collateral
Agent, is hereby incorporated by reference as Exhibit 10.33
10.34 Lease Agreement, as amended, between The Kansas City Southern
Railway Company and Broadway Square Partners LLP dated June
26, 2001, which is attached as Exhibit 10.34 to the Company's
Form 10-K for the year ended December 31, 2001 (Commission
File No. 1-4717), is hereby incorporated by reference as
Exhibit 10.34
10.35 The 2002 Indenture (See Exhibit 4.8)
10.36 Agreement to Forego Compensation between A. Edward Allinson
and the Company, fully executed on March 30, 2001; Loan
Agreement between A. Edward Allinson and the Company fully
executed on September 18, 2001; and the Promissory Note
executed by the Trustees of The A. Edward Allinson Irrevocable
Trust Agreement dated, June 4, 2001, Courtney Ann Arnot, A.
Edward Allinson III and Bradford J. Allinson, Trustees, as
Maker, and the Company, as Holder, are attached hereto as
Exhibit 10.36
10.37 Agreement to Forego Compensation between Michael G. Fitt and
the Company, fully executed on March 30, 2001; Loan Agreement
between Michael G. Fitt and the Company, fully executed on
September 7, 2001; and the Promissory Note executed by the
Trustees of The Michael G. and Doreen E. Fitt Irrevocable
Insurance Trust, Anne E. Skyes, Colin M-D. Fitt and Ian D.G.
Fitt, Trustees, as Maker, and the Company, as Holder, are
attached hereto as Exhibit 10.37
10.38 Kansas City Southern Employee Stock Ownership Plan (As Amended
and Restated Effective April 1, 2002) is attached hereto as
Exhibit 10.38
|
(11) Statement Re Computation of Per Share Earnings
(Inapplicable)
(12) Statements Re Computation of Ratios
12.1 The Computation of Ratio of Earnings to Fixed Charges prepared pursuant to Item 601(b)(12) of Regulation S-K is attached to this Form 10-K as Exhibit 12.1
(13) Annual Report to Security Holders, Form 10-Q or Quarterly Report to Security Holders (Inapplicable)
(16) Letter Re Change in Certifying Accountant
16.1 The information set forth under Item 4 and Exhibit 16.1 of the Company's Form 8-K dated June 20, 2001 (Commission File No. 1-4717) prepared pursuant to Item 304 (a) of Regulation S-K is hereby incorporated by reference as Exhibit 16.1
(18) Letter Re: Change in Accounting Principles
(Inapplicable)
(21) Subsidiaries of the Company
21.1 The list of the Subsidiaries of the Company prepared pursuant to Item 601(b)(21) of Regulation S-K is attached to this Form 10-K as Exhibit 21.1
(22) Published Report Regarding Matters Submitted to Vote of Security Holders
(Inapplicable)
(23) Consents of Experts and Counsel
23.1 The Consents of Independent Accountants prepared pursuant to Item 601(b)(23) of Regulation S-K are attached to this Form 10-K as Exhibit 23.1
(24) Power of Attorney
(Inapplicable)
(99) Additional Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.3 The combined and consolidated financial statements of Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. (including the notes thereto and the Report of Independent Accountants thereon) as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002 as listed under Item 15(a)(2) herein, are hereby included in this Form 10-K as Exhibit 99.3
(b) Reports on Form 8-K
The Company furnished a Current Report on Form 8-K dated October 10, 2002 announcing the date of its third quarter 2002 earnings release and conference call. The information included in this Current Report on Form 8-K was furnished pursuant to Item 9 and shall not be deemed to be filed.
The Company furnished a Current Report on Form 8-K dated October 11, 2002 under Item 5 of such form, announcing a favorable ruling in the Value Added Tax ("VAT") Lawsuit.
The Company furnished a Current Report on Form 8-K dated October 24, 2002 under Item 5 of such form, providing additional information about the favorable ruling on the TFM VAT suit.
The Company furnished a Current Report on Form 8-K dated October 31, 2002 under Item 5 of such form, announcing the Company's VAT accounting position.
The Company furnished a Current Report on Form 8-K dated November 5, 2002 reporting its third quarter 2002 operating results. The information included in this Current Report on Form 8-K was furnished pursuant to Item 9 and shall not be deemed to be filed.
The Company filed a Current Report on Form 8-K dated December 9, 2002, under Item 5 of such form, announcing a new decision of the Mexican Fiscal Court denying TFM's VAT claim.
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Kansas City Southern
March 26, 2003 By: /s/ M.R. HAVERTY
-------------------------------
M.R. Haverty
Chairman, President,
Chief Executive
Officer and Director
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on March 26, 2003.
Signature Capacity
--------- --------
/s/ M.R. HAVERTY Chairman, President, Chief Executive Officer
---------------------------- and Director
M.R. Haverty
/s/ G.K. DAVIES Executive Vice President and Chief Operating
---------------------------- Officer
G.K Davies
/s/ R.G. RUSS Executive Vice President and Chief Financial
---------------------------- Officer
R.G. Russ (Principal Financial Officer)
/s/ L.G. VAN HORN Vice President and Comptroller
---------------------------- (Principal Accounting Officer)
L.G. Van Horn
/s/ A.E ALLINSON Director
----------------------------
A.E. Allinson
/s/ M.G. FITT Director
----------------------------
M.G. Fitt
/s/ J.R. JONES Director
----------------------------
J.R. Jones
/s/ L.H. ROWLAND Director
----------------------------
L.H. Rowland
/s/ B.G. THOMPSON Director
----------------------------
B.G. Thompson
/s/ R.E. SLATER Director
----------------------------
R.E. Slater
Page 111
|
CERTIFICATION ------------- |
I, Michael R. Haverty, certify that:
1. I have reviewed this annual report on Form 10-K of Kansas City Southern;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ MICHAEL R. HAVERTY
-----------------------------------------------
Michael R. Haverty
Chairman, President and Chief Executive Officer
|
I, Ronald G. Russ, certify that:
1. I have reviewed this annual report on Form 10-K of Kansas City Southern;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ RONALD G. RUSS
----------------------------------------------------
Ronald G. Russ
Executive Vice President and Chief Financial Officer
|
KANSAS CITY SOUTHERN
2002 FORM 10-K ANNUAL REPORT
INDEX TO EXHIBITS
Regulation S-K
Exhibit Item 601(b)
No. Document Exhibit No.
------- ---------------------------------------------------------- -----------
10.8 Kansas City Southern 1991 Amended and Restated Stock Option
and Performance Award Plan (as amended and restated effective
as of November 7, 2002) 10
10.10.1 Kansas City Southern 401(k) and Profit Sharing Plan (Amended
and Restated Effective April 1, 2002) 10
10.10.2 First Amendment to the Kansas City Southern 401(k) and Profit
Sharing Plan (As Amended and Restated Effective April 1, 2002 10
10.14.1 First Amendment to Employment Agreement dated March 14, 2003
by and among the Company, KCSR and Ronald G. Russ 10
10.15 Employment Agreement dated September 1, 2001 by and between
KCSR, the Company and Jerry W. Heavin 10
10.15.1 First Amendment to Employment Agreement dated March 14, 2003
by and among KCSR, the Company and Jerry W. Heavin 10
10.16 Employment Agreement dated August 14, 2000 by and between
the Company, KCSR and Larry O. Stevenson 10
10.16.1 Amendment to Employment Agreement dated January 1, 2001 by
and among the Company, KCSR and Larry O. Stevenson 10
10.16.2 Amendment to Employment Agreement dated March 14, 2003 by and
among the Company, KCSR and Larry O. Stevenson 10
10.17 Employment Agreement (Amended and Restated January 1, 2001)
by and between the Company and Louis G. Van Horn 10
10.20 The Kansas City Southern Annual Incentive Plan 10
10.36 Agreement to Forego Compensation between A. Edward Allinson and the
Company, fully executed on March 30, 2001; Loan Agreement between
A. Edward Allinson and the Company fully executed on September 18, 2001;
and the Promissory Note executed by the Trustees of The A. Edward Allinson
Irrevocable Trust Agreement dated, June 4, 2001, Courtney Ann Arnot,
A. Edward Allinson III and Bradford J. Allinson, Trustees, as Maker, and
the Company, as Holder 10
10.37 Agreement to Forego Compensation between Michael G. Fitt and the
Company, fully executed on March 30, 2001; Loan Agreement between
Michael G. Fitt and the Company, fully executed on September 7, 2001;
and the Promissory Note executed by the Trustees of The Michael G. and
Doreen E. Fitt Irrevocable Insurance Trust, Anne E. Skyes, Colin M-D. Fitt
and Ian D.G. Fitt, Trustees, as Maker, and the Company, as Holder 10
|
10.38 Kansas City Southern Employee Stock Ownership Plan (As Amended and
Restated Effective April 1, 2002) 10
12.1 Computation of Ratio of Earnings to Fixed Charges 12
21.1 Subsidiaries of the Company 21
23.1 Consents of Independent Accountants 23
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 99
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 99
99.3 Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. combined and
consolidated financial statements as of December 31, 2002 and 2001 and for
each of the three years in the period ended December 31, 2002 99
|
Exhibit 10.8
Kansas City Southern
1991 Amended and Restated Stock Option
and Performance Award Plan
(as amended and restated effective as of November 7, 2002)
Exhibit 10.8
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.............................................................. 15
Article 7. Stock Appreciation Rights and Limited Stock Appreciation Rights............ 17
Article 8. Restricted Shares.......................................................... 19
Article 9. Performance Units and Performance Shares................................... 20
Article 10. Bonus Shares............................................................... 21
Article 11. Beneficiary Designation.................................................... 21
Article 12. Deferrals.................................................................. 21
Article 13. Rights of Employees/Directors/Consultants.................................. 21
Article 14. Change of Control.......................................................... 21
Article 15. Amendment, Modification, and Termination................................... 23
Article 16. Withholding................................................................ 23
Article 17. Successors................................................................. 24
Article 18. Additional Provisions...................................................... 25
|
Exhibit 10.8
KANSAS CITY SOUTHERN
1991 AMENDED AND RESTATED STOCK OPTION
AND PERFORMANCE AWARD PLAN
(AS AMENDED AND RESTATED EFFECTIVE AS OF NOVEMBER 7, 2002)
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. The Plan, as so amended, has been restated as set forth herein effective as of November 7, 2002.
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 to amend or terminate the Plan at any time pursuant to Article 15 hereof, until all Shares subject to it shall have been purchased or acquired 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.
Exhibit 10.8
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
Exhibit 10.8
(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
Exhibit 10.8
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
(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
Exhibit 10.8
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.
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
Exhibit 10.8
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
(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.
Exhibit 10.8
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.
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
Exhibit 10.8
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 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.
Exhibit 10.8
(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.
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;
Exhibit 10.8
(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;
(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.
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) 15,600,000, 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 16,003,186); 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, applied as payment, or sold pursuant to procedures approved by the Committee and the proceeds thereof 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.
Exhibit 10.8
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 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
Exhibit 10.8
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.
(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.
Exhibit 10.8
(c) On Account of Retirement. If a Grantee has a Termination of Affiliation on account of Retirement, 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 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:
(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.
(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
Exhibit 10.8
(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.
(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;
(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.
5.9 Loans and Guarantees. The Committee may, subject to applicable law, (i) allow a Grantee to defer payment to the Company of all or any portion of the Option Price of an Option or the purchase price of Restricted Shares, or (ii) cause the Company to loan to the Grantee, or guarantee a loan from a third party to the Grantee for, all or any portion of the Option Price of an Option or the purchase price of Restricted Shares or all or any portion of any taxes associated with the exercise of, nonforfeitability of, or payment of benefits in connection with, an Award. Any such payment deferral, loan or guarantee by the Company shall be on such terms and conditions as the Committee may determine.
Exhibit 10.8
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.
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
Exhibit 10.8
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
(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.
Exhibit 10.8
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 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; or
(e) when permitted by the Committee, payment may also be made in accordance with Section 5.9.
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.
Exhibit 10.8
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;
by
(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 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;
Exhibit 10.8
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.
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.
Exhibit 10.8
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.
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.
Exhibit 10.8
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 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:
Exhibit 10.8
(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.
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.
Exhibit 10.8
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.
(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.
Exhibit 10.8
(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
(C) the Grantee's election shall be irrevocable.
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 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.
Exhibit 10.8
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 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.
Exhibit 10.8
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);
(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);
Exhibit 10.8
(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.
Exhibit 10.10.1
KANSAS CITY SOUTHERN
401(k) AND PROFIT SHARING PLAN
(Amended and Restated Effective April 1, 2002)
KANSAS CITY SOUTHERN
401(k) AND PROFIT SHARING PLAN TABLE OF CONTENTS
Article I. DEFINITIONS........................................................................................... 2
1.01 "Plan".............................................................................................. 2
1.02 "Employer".......................................................................................... 2
1.03 "Trustee"........................................................................................... 2
1.04 "Plan Administrator"................................................................................ 2
1.05 "Advisory Committee"................................................................................ 2
1.06 "Employee".......................................................................................... 3
1.07 "Highly Compensated Employee"....................................................................... 3
1.08 "Participant"....................................................................................... 4
1.09 "Beneficiary"....................................................................................... 4
1.10 "Compensation"...................................................................................... 4
1.11 "Account"........................................................................................... 5
1.12 "Accrued Benefit"................................................................................... 5
1.13 "Nonforfeitable".................................................................................... 5
1.14 "Plan Year"......................................................................................... 5
1.15 "Effective Date".................................................................................... 5
1.16 "Plan Entry Date"................................................................................... 5
1.17 "Accounting Date"................................................................................... 6
1.18 "Trust"............................................................................................. 6
1.19 "Trust Fund"........................................................................................ 6
1.20 "Nontransferable Annuity"........................................................................... 6
1.21 "ERISA"............................................................................................. 6
1.22 "Code".............................................................................................. 6
1.23 "Service"........................................................................................... 6
1.24 "Hour of Service"................................................................................... 6
1.25 "Disability"........................................................................................ 7
1.26 SERVICE FOR PREDECESSOR EMPLOYER.................................................................... 8
1.27 RELATED EMPLOYERS................................................................................... 8
1.28 LEASED EMPLOYEES.................................................................................... 8
1.29 DETERMINATION OF TOP HEAVY STATUS................................................................... 8
1.30 PLAN MAINTAINED BY MORE THAN ONE EMPLOYER........................................................... 10
Article II. EMPLOYEE PARTICIPANTS................................................................................ 11
2.01 ELIGIBILITY......................................................................................... 11
2.02 YEAR OF SERVICE - PARTICIPATION..................................................................... 12
2.03 BREAK IN SERVICE - PARTICIPATION.................................................................... 12
2.04 PARTICIPATION UPON REEMPLOYMENT..................................................................... 12
Article III. EMPLOYER CONTRIBUTIONS AND FORFEITURES.............................................................. 12
3.01 AMOUNT.............................................................................................. 12
3.02 DETERMINATION OF CONTRIBUTION....................................................................... 13
3.03 TIME OF PAYMENT OF CONTRIBUTION..................................................................... 13
3.04 CONTRIBUTION ALLOCATION............................................................................. 14
3.05 FORFEITURE ALLOCATION............................................................................... 16
|
3.06 ACCRUAL OF BENEFIT.................................................................................. 16
3.07 LIMITATIONS ON ALLOCATIONS TO PARTICIPANTS' ACCOUNTS................................................ 17
3.08 DEFINITIONS - ARTICLE III........................................................................... 18
Article IV. PARTICIPANT CONTRIBUTIONS............................................................................ 20
4.01 PARTICIPANT VOLUNTARY CONTRIBUTIONS................................................................. 20
4.02 PARTICIPANT VOLUNTARY CONTRIBUTIONS - SPECIAL DISCRIMINATION TEST. (Reserved)....................... 20
4.03 PARTICIPANT ROLLOVER CONTRIBUTIONS.................................................................. 20
4.04 PARTICIPANT CONTRIBUTION - FORFEITABILITY........................................................... 20
4.05 PARTICIPANT CONTRIBUTION - WITHDRAWAL/DISTRIBUTION.................................................. 21
4.06 PARTICIPANT CONTRIBUTION - ACCRUED BENEFIT.......................................................... 21
Article V. TERMINATION OF SERVICE - PARTICIPANT VESTING.......................................................... 21
5.01 NORMAL RETIREMENT AGE............................................................................... 21
5.02 PARTICIPANT DISABILITY OR DEATH..................................................................... 21
5.03 VESTING SCHEDULE.................................................................................... 21
5.04 CASH-OUT DISTRIBUTIONS TO PARTIALLY-VESTED PARTICIPANTS/RESTORATION OF FORFEITED ACCRUED BENEFIT.... 22
5.05 SEGREGATED ACCOUNT FOR REPAID AMOUNT................................................................ 23
5.06 YEAR OF SERVICE - VESTING........................................................................... 23
5.07 BREAK IN SERVICE - VESTING.......................................................................... 23
5.08 INCLUDED YEARS OF SERVICE - VESTING................................................................. 24
5.09 FORFEITURE OCCURS................................................................................... 24
Article VI. TIME AND METHOD OF PAYMENT OF BENEFITS............................................................... 24
6.01 TIME OF PAYMENT OF ACCRUED BENEFIT.................................................................. 24
6.02 METHOD OF PAYMENT OF ACCRUED BENEFIT................................................................ 26
6.03 BENEFIT PAYMENT ELECTIONS........................................................................... 28
6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING
SPOUSES............................................................................................. 31
6.05 WAIVER ELECTION - QUALIFIED JOINT AND SURVIVOR ANNUITY [Reserved]................................... 32
6.06 WAIVER ELECTION - PRERETIREMENT SURVIVOR ANNUITY [Reserved]......................................... 32
6.07 DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS....................................................... 32
6.08 ROLLOVER DISTRIBUTIONS.............................................................................. 33
Article VII. EMPLOYER ADMINISTRATIVE PROVISIONS.................................................................. 34
7.01 INFORMATION TO COMMITTEE............................................................................ 34
7.02 NO LIABILITY........................................................................................ 34
7.03 INDEMNITY OF COMMITTEE.............................................................................. 34
7.04 EMPLOYER DIRECTION OF INVESTMENT.................................................................... 34
7.05 AMENDMENT TO VESTING SCHEDULE....................................................................... 34
Article VIII. PARTICIPANT ADMINISTRATIVE PROVISIONS.............................................................. 35
8.01 BENEFICIARY DESIGNATION............................................................................. 35
8.02 NO BENEFICIARY DESIGNATION.......................................................................... 35
8.03 PERSONAL DATA TO COMMITTEE.......................................................................... 36
8.04 ADDRESS FOR NOTIFICATION............................................................................ 36
|
8.05 ASSIGNMENT OR ALIENATION............................................................................ 36
8.06 NOTICE OF CHANGE IN TERMS........................................................................... 36
8.07 LITIGATION AGAINST THE TRUST........................................................................ 36
8.08 INFORMATION AVAILABLE............................................................................... 37
8.09 APPEAL PROCEDURE FOR DENIAL OF BENEFITS............................................................. 37
Article IX. ADVISORY COMMITTEE - DUTIES WITH RESPECT TO PARTICIPANT'S ACCOUNTS................................... 38
9.01 MEMBERS' COMPENSATION, EXPENSES..................................................................... 38
9.02 TERM................................................................................................ 38
9.03 POWERS.............................................................................................. 38
9.04 GENERAL............................................................................................. 38
9.05 FUNDING POLICY...................................................................................... 39
9.06 MANNER OF ACTION.................................................................................... 39
9.07 AUTHORIZED REPRESENTATIVE........................................................................... 39
9.08 INTERESTED MEMBER................................................................................... 39
9.09 INDIVIDUAL ACCOUNTS................................................................................. 39
9.10 INDIVIDUAL STATEMENT................................................................................ 39
9.11 ACCOUNT CHARGED..................................................................................... 39
9.12 UNCLAIMED ACCOUNT PROCEDURE......................................................................... 40
9.13 INVESTMENT MANAGER.................................................................................. 40
9.14 BLACK-OUT PERIOD.................................................................................... 41
9.15 ELECTRONIC ELECTIONS................................................................................ 41
Article X. [RESERVED]............................................................................................ 41
Article XI. EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION............................................................ 41
11.01 EXCLUSIVE BENEFIT................................................................................... 41
11.02 AMENDMENT BY EMPLOYER............................................................................... 41
11.03 DISCONTINUANCE...................................................................................... 42
11.04 FULL VESTING ON TERMINATION......................................................................... 42
11.05 MERGER/DIRECT TRANSFER.............................................................................. 42
11.06 TERMINATION......................................................................................... 43
Article XII. PROVISIONS RELATING TO THE CODE Section 401(k) ARRANGEMENT.......................................... 44
12.01 CODE Section 401(k) ARRANGEMENT..................................................................... 44
12.02 DEFINITIONS......................................................................................... 45
12.03 ANNUAL ELECTIVE DEFERRAL LIMITATION................................................................. 47
12.04 ACTUAL DEFERRAL PERCENTAGE ("ADP") TEST............................................................. 48
12.05 NONDISCRIMINATION RULES FOR EMPLOYER MATCHING CONTRIBUTIONS/EMPLOYEE CONTRIBUTIONS.................. 52
12.06 CATCH-UP CONTRIBUTIONS.............................................................................. 55
Article XIII. MISCELLANEOUS...................................................................................... 55
13.01 EVIDENCE............................................................................................ 55
13.02 NO RESPONSIBILITY FOR EMPLOYER ACTION............................................................... 56
13.03 FIDUCIARIES NOT INSURERS............................................................................ 56
13.04 WAIVER OF NOTICE.................................................................................... 56
13.05 SUCCESSORS.......................................................................................... 56
|
13.06 WORD USAGE.......................................................................................... 56
13.07 STATE LAW........................................................................................... 56
13.08 EMPLOYMENT NOT GUARANTEED........................................................................... 56
Article XIV. [RESERVED].......................................................................................... 57
Article XV. PARTICIPANT'S ACCOUNTS AND THEIR INVESTMENT.......................................................... 57
15.01 INDIVIDUAL ACCOUNTS................................................................................. 57
15.02 INVESTMENT OF ACCOUNTS.............................................................................. 57
15.03 PARTICIPANT ACCOUNTS - INVESTMENT PERCENTAGES....................................................... 57
15.04 VALUATION OF PARTICIPANTS' ACCRUED BENEFITS......................................................... 58
15.05 ALLOCATION AND DISTRIBUTION OF NET INCOME GAIN OR LOSS.............................................. 58
15.06 PARTICIPANT VOTING RIGHTS - EMPLOYER STOCK.......................................................... 59
Article XVI. PROVISIONS EFFECTIVE UPON CHANGE IN CONTROL OF KCS.................................................. 60
16.01 DEFINITIONS OF "CHANGE IN CONTROL OF KCS":.......................................................... 60
16.02 PROVISIONS EFFECTIVE UPON CHANGE IN CONTROL......................................................... 60
16.03 RIGHT TO AMEND ARTICLE XVI PRIOR TO CHANGE IN CONTROL OF KCS........................................ 61
Article XVII. PROVISIONS APPLICABLE TO ACCOUNTS TRANSFERRED FROM FORMER MIDSOUTH PLAN............................ 61
17.01 MIDSOUTH ACCOUNTS................................................................................... 61
17.02 MIDSOUTH PARTICIPANT CONTRIBUTION ACCOUNTS.......................................................... 62
17.03 METHOD OF PAYMENT OF ACCRUED BENEFIT................................................................ 62
17.04 TIME OF PAYMENT AND ACCRUED BENEFIT................................................................. 63
17.05 BENEFIT PAYMENT ELECTIONS........................................................................... 65
17.06 ANNUITY DISTRIBUTIONS TO MIDSOUTH PARTICIPANTS AND SURVIVING SPOUSES............................... 66
17.07 WAIVER ELECTION-QUALIFIED JOINT AND SURVIVOR ANNUITY................................................ 68
17.08 WAIVER ELECTION - PRERETIREMENT SURVIVOR ANNUITY.................................................... 69
17.09 COORDINATION WITH SURVIVOR REQUIREMENTS............................................................. 70
17.10 PARTICIPANT LOANS................................................................................... 70
17.10 VESTING SCHEDULE FOR REPAID AMOUNTS................................................................. 70
Article XVIII. PROVISIONS APPLICABLE TO ACCOUNTS TRANSFERRED FROM FORMER GATEWAY PLAN............................ 70
18.01 GATEWAY ACCOUNTS.................................................................................... 70
18.02 SPECIAL WITHDRAWAL RIGHTS........................................................................... 71
18.03 METHOD OF PAYMENT OF ACCRUED BENEFIT................................................................ 71
18.04 TIME OF PAYMENT AND ACCRUED BENEFIT................................................................. 72
18.05 BENEFIT PAYMENT ELECTIONS........................................................................... 74
18.06 ANNUITY DISTRIBUTIONS TO GATEWAY PARTICIPANTS AND SURVIVING SPOUSES................................. 75
18.07 WAIVER ELECTION - QUALIFIED JOINT AND SURVIVOR ANNUITY.............................................. 77
18.08 WAIVER ELECTION - PRERETIREMENT SURVIVOR ANNUITY.................................................... 78
18.09 COORDINATION WITH SURVIVOR REQUIREMENTS............................................................. 78
|
ALPHABETICAL LISTING OF DEFINITIONS
Plan Definition Reference
(Page Number)
Account.................................................................................................... 1.11(5)
Accounting Date............................................................................................ 1.17(6)
Accrued Benefit............................................................................................ 1.12(5)
Advisory Committee......................................................................................... 1.05(2)
Annual Addition ....................................................................................... 3.08(a)(18)
Annuity Starting Date .................................................................................... 6.01(24)
Beneficiary ............................................................................................... 1.09(4)
Break in Service for Vesting Purposes .................................................................... 5 07(23)
Cash-Out Distribution .................................................................................... 5 04(22)
Catch-up Contributions Subaccount ..................................................................... 3.04(A)(14)
Code ...................................................................................................... 1.22(6)
Code Section 411 (d)(6) Protected Benefits .............................................................. 11.02(42)
Compensation .............................................................................................. 1.10(4)
Compensation for Code Section 415 Purposes ............................................................ 3.08(b)(19)
Compensation for Top Heavy Purposes ................................................................... 1.29(c)(10)
Deemed Cash-Out Rule .................................................................................. 5.04(C)(23)
Deferral Contributions .................................................................................. 12.01(44)
Deferral Contributions Account ........................................................................ 3.04(A)(14)
Defined Contribution Plan ............................................................................. 3.08(g)(19)
Defined Benefit Plan .................................................................................. 3.08(h)(20)
Determination Date .................................................................................... 1.29(g)(10)
Disability ................................................................................................ 1.25(7)
Effective Date............................................................................................. 1.15(5)
Elective Contributions..................................................................................... 1.10(4)
Elective Transfer........................................................................................ 11.05(43)
Employee................................................................................................... 1.06(3)
Employer................................................................................................... 1.02(2)
Employer for Code Section 415 Purposes................................................................. 3.08(d)(19)
Employer for Top Heavy Purposes........................................................................ 1.29(f)(10)
Employment Commencement Date.............................................................................. 2.01(11)
Employer Contributions Account............................................................................ 3.04(14)
ERISA...................................................................................................... 1.21(6)
Excess Amount.......................................................................................... 3.08(e)(19)
Forfeiture Break In Service............................................................................... 5.08(24)
Former Gateway Plan...................................................................................... 18.01(70)
Former MidSouth Plan..................................................................................... 17.01(61)
Gateway Accounts......................................................................................... 18.01(70)
Gateway Participant...................................................................................... 18.01(70)
Hardship............................................................................................... 6.03(E)(30)
Highly Compensated Employee................................................................................ 1.07(3)
Hour of Service............................................................................................ 1.24(6)
Investment Manager........................................................................... 9.04(i)(39); 9.13(40)
|
KCS........................................................................................................ 1.02(2) Key Employee............................................................................................ 1.29(a)(9) Leased Employees........................................................................................... 1.28(8) Limitation Year ....................................................................................... 3.08(f)(19) Maximum Permissible Amount............................................................................. 3.08(c)(19) MidSouth Accounts........................................................................................ 17.01(61) MidSouth Participant..................................................................................... 17.01(61) Minimum Distribution Incidental Benefit (MDIB)......................................................... 6.02(A)(27) Non-Key Employee....................................................................................... 1.29(b)(10) Nonforfeitable............................................................................................. 1.13(5) Nontransferable Annuity.................................................................................... 1.20(6) Normal Retirement Age..................................................................................... 5.01(21) Participant................................................................................................ 1.08(4) Participating Employer..................................................................................... 1.02(2) Permissive Aggregation Group........................................................................... 1.29(e)(10) Plan....................................................................................................... 1.01(2) Plan Entry Date............................................................................................ 1.16(5) Plan Administrator......................................................................................... 1.04(2) Plan Year.................................................................................................. 1.14(5) Qualified Domestic Relations Order........................................................................ 6.07(32) Qualified Matching Contributions Account.................................................................. 3.04(14) Qualified Nonelective Contributions Account............................................................... 3.04(15) Regular Matching Contributions Account.................................................................... 3.04(14) Related Employers.......................................................................................... 1.27(8) Required Aggregation Group............................................................................. 1.29(d)(10) Required Beginning Date................................................................................ 6.01(B)(25) Rollover Account.......................................................................................... 4.03(20) Rollover Contributions.................................................................................... 4.03(20) Separation from Service.................................................................................... 1.23(6) Service.................................................................................................... 1.23(6) Sponsor.................................................................................................... 1.02(2) Top Heavy Minimum Allocation........................................................................... 3.04(B)(15) Top Heavy Ratio............................................................................................ 1.29(8) Trust Fund................................................................................................. 1.19(6) Trust...................................................................................................... 1.18(6) Trustee.................................................................................................... 1.03(2) Year of Service for Eligibility Purposes.................................................................. 2.02(12) Year of Service for Vesting Purposes...................................................................... 5.06(23) |
Exhibit 10.10.1
KANSAS CITY SOUTHERN
401(k) AND PROFIT SHARING PLAN
(Amended and Restated Effective April 1, 2002)
INTRODUCTION
Kansas City Southern ("KCS") (known as Kansas City Southern Industries, Inc. prior to May 2, 2002) originally established, effective as of January 1, 1996, the Kansas City Southern Industries, Inc. 401(k) Plan (the "401 (k) Plan"), for the administration and distribution of contributions made by the Employers for the purpose of providing retirement benefits for eligible Employees.
Immediately prior to July 12, 2000 (the "Spinoff Date"), Stilwell Financial Inc. ("Stilwell") and its subsidiaries (collectively, the "Stilwell Group") were members of the controlled group of corporations (within the meaning of Code Section 414(b)) that includes KCS. As of the Spinoff Date, all of the shares of Stilwell held by KCS were distributed to the shareholders of KCS as a spinoff dividend (such transaction being referred to herein as the "Spinoff") and the members of the Stilwell Group thereby ceased to be members of the controlled group of corporations that includes KCS.
As of the Spinoff Date, the 401(k) Plan was split into two separate
plans: (1) an amended and restated 401(k) plan providing benefits to eligible
employees of KCS and certain of its affiliates (exclusive of the Stilwell
Group), which continued to hold the assets of the 401(k) Plan allocable to
employees and former employees of KCS and certain of its affiliates other than
the Stilwell Group, and which continued to be known as the Kansas City Southern
Industries, Inc. 401(k) Plan (the "401(k) Plan"); and (2) a newly established
401(k) plan with a profit sharing plan component providing benefits to eligible
employees of the Stilwell Group, to which were transferred the assets of the
401(k) Plan allocable to employees and former employees of the Stilwell Group,
and which is known as the Stilwell Financial, Inc. 401(k) and Profit Sharing
Plan ("Stilwell Plan").
KCS originally established, effective as of January 1, 1990, the Kansas City Southern Industries, Inc. Profit Sharing Plan (the "Profit Sharing Plan") for the administration and distribution of contributions made by the Employers for the purpose of providing retirement benefits for eligible Employees. Effective as of the Spinoff Date the Profit Sharing Plan was amended and restated, participants in the Profit Sharing Plan who were employees or former employees of the Stilwell Group ceased to actively participate in the Profit Sharing Plan, and the assets of the Profit Sharing Plan allocable to employees and former employees of the Stilwell Group were transferred to the profit sharing component of the Stilwell Plan.
Effective as of January 1, 2001 (the "Merger Date") the Profit Sharing Plan was merged with the 401(k) Plan, which was amended, restated and renamed the Kansas City Southern Industries, Inc. 401(k) and Profit Sharing Plan, and which was subsequently renamed the Kansas City Southern 401(k) and Profit Sharing Plan effective as of May 2, 2002 (the "Plan").
The provisions of this Plan, as amended and restated effective as of the Merger Date, applied to each Employee who was employed by an Employer on or after the Merger Date, and to any other Employee who was employed by an Employer before the Merger Date and whose
Account under the Profit Sharing Plan was transferred to the Plan as of the
Merger Date. If a Participant in the 401(k) Plan or the Profit Sharing Plan
terminated employment from his last Employer prior to the Merger Date, the
benefits to which he is entitled shall be determined under the terms of the
401(k) Plan or the Profit Sharing Plan, as applicable, as in effect on the date
of the Employee's termination of employment, unless otherwise indicated.
Effective as of January 1, 2002, the Plan was amended and restated to reflect certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). The amendment and restatement is intended as good faith compliance with the requirements of EGTRRA and plan provisions should be construed in accordance with EGTRRA and guidance issued thereunder.
The Plan is hereby further amended and restated effective as of April 1, 2002 (the "Effective Date"). Effective as of April 1, 2002, KCS appointed a new Trustee and entered into a service agreement with a new recordkeeper. In order to facilitate the change to the new recordkeeper and Trustee, the Advisory Committee imposed a black-out period, as defined in Section 9.14, effective as of March 15, 2002 and continuing until the Advisory Committee, in its sole discretion, deems it no longer necessary to impose such a black-out period. Except as otherwise provided, the provisions of this Plan, as hereby amended and restated, shall be effective as of April 1, 2002. The provisions of this amended and restated Plan shall apply to an Employee who is employed by an Employer on or after the Effective Date. If a Participant terminated employment from his last Employer prior to the Effective Date, the benefits to which he is entitled shall be determined under the terms of the Plan as in effect on the date of the Employee's termination of employment, unless otherwise indicated.
ARTICLE I.
DEFINITIONS
1.01 "Plan" means the retirement plan established and continued by KCS as set forth herein, designated as the "Kansas City Southern 401(k) and Profit Sharing Plan" and known as the "Kansas City Southern Industries, Inc. 401(k) and Profit Sharing Plan" prior to May 2, 2002.
1.02 "Employer" means Kansas City Southern ("KCS" or the "Sponsor") (known as Kansas City Southern Industries, Inc. ("KCSI") prior to May 2, 2002), or any other employer (a "Participating Employer") who with the written consent of KCS adopts this Plan.
1.03 "Trustee" means Nationwide Trust Company, FSB, or any successor in office who in writing accepts the position of Trustee.
1.04 "Plan Administrator" is Kansas City Southern unless KCS designates another person to hold the position of Plan Administrator. In addition to its other duties, the Plan Administrator has full responsibility for compliance with the reporting and disclosure rules under ERISA as respects this Plan.
1.05 "Advisory Committee" means the Sponsor's Advisory Committee as from time to time constituted.
1.06 "Employee" means any employee of an Employer, excluding any Leased Employee, and excluding any individual who performs services for an Employer and (i) is working in a classification described as an independent contractor (even if such person is subsequently determined to be a common-law employee of the Employer), (ii) is paid, directly or indirectly, through an Employer's accounts payable system, or (iii) performs such services pursuant to a contract or agreement which provides that the person is an independent contractor or consultant (even if such person is subsequently determined to be a common-law employee of the Employer).
1.07 "Highly Compensated Employee" means, for any Plan Year commencing on or after January 1, 1997, any individual who (i) is an Employee described in subsection (a) or (b) below, or (ii) is a former Employee described in subsection (c), below:
(a) An Employee who at any time during the current Plan Year or the preceding Plan Year is a more than five percent (5%) owner (or is considered as owning more than five percent (5%) within the meaning of Section 318 of the Code) ("5% Owner") of the Employer;
(b) An Employee who (i) received Compensation during the preceding Plan Year in excess of $80,000 (in 1996, as adjusted in accordance with regulations and rulings under Section 414(q) of the Code), and (ii) if the Advisory Committee elects by amendment of the Plan to apply this clause (ii) to determine the Highly Compensated Employees for a Plan Year, for this Plan and, except as otherwise permitted, consistently for all plans of the Employer whose plan years begin in the same calendar year as such preceding Plan Year, is in the group consisting of the top twenty percent (20%) of the total number of persons employed by the Employer when ranked on the basis of Compensation paid during the preceding Plan Year, provided that, for purposes of determining the total number of persons employed by the Employer, the following Employees shall be excluded:
(1) Employees who have not completed an aggregate of six
(6) months of service during the preceding Plan Year,
(2) Employees who work less than seventeen and one-half (17-1/2) hours per week for 50% or more of the total weeks worked by such employees during the preceding Plan Year,
(3) Employees who normally work during not more than six
(6) months during any year,
(4) Employees who have not attained age 21 by the end of the preceding Plan Year,
(5) Employees who are nonresident aliens and who receive
no earned income (within the meaning of Section 911(d)(2) of the Code)
from the Employer which constitutes income during the preceding Plan
Year from sources within the United States (within the meaning of
Section 861(a)(3) of the Code), and
(6) Except to the extent provided in regulations prescribed by the Secretary of the Treasury, Employees who are members of a collective bargaining unit represented by a collective bargaining agent with which an Employer has or has had a bargaining agreement.
For purposes of this Section 1.07, "Compensation" means Compensation as defined in Section 1.10 and Compensation must include Elective Contributions.
The Advisory Committee must make the determination of who is a Highly Compensated Employee, including the determinations of the number and identity of the top paid 20% group and the relevant Compensation, consistent with Code Section 414(q) and regulations issued under that Code section. The Employer may make a calendar year election to determine the Highly Compensated Employees for the Plan Year, as prescribed by Treasury regulations. Except as otherwise permitted, a calendar year election must apply to all plans and arrangements of the Employer.
(c) The term "Highly Compensated Employee" also includes any former Employee who separated from Service (or has a deemed Separation from Service, as determined under Treasury regulations) prior to the Plan Year, performs no Service for the Employer during the Plan Year, and was a Highly Compensated Employee either for the separation year or any Plan Year ending on or after his 55th birthday.
1.08 "Participant" is an Employee who is eligible to be and becomes a Participant in accordance with the provisions of Section 2.01.
1.09 "Beneficiary" is a person designated by a Participant who is or may become entitled to a benefit under the Plan. A Beneficiary who becomes entitled to a benefit under the Plan remains a beneficiary under the Plan until the Trustee has fully distributed his benefit to him. A Beneficiary's right to (and the Plan Administrator's, the Advisory Committee's or a Trustee's duty to provide to the Beneficiary) information or data concerning the Plan does not arise until he first becomes entitled to receive a benefit under the Plan.
1.10 "Compensation" means, effective as of January 1, 1997, the Participant's wages, salaries, fees for professional service and other amounts received for personal services actually rendered in the course of employment with the Employer maintaining the Plan as defined in Code Section 3401(a) for purposes of income tax withholding at the source but determined without regard to any rules that limit remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2)). Compensation includes Elective Contributions made by the Employer on the Employee's behalf. "Elective Contributions" are amounts excludible from the Employee's gross income under Code Sections 125, Section 402(a)(8), 402(h) or 403(b), and contributed by the Employer, at the Employee's election, to a Code Section 401(k) arrangement, a simplified employee pension, cafeteria plan or tax-sheltered annuity. A Compensation payment includes Compensation paid by the Employer to an Employee through another person under the common paymaster provisions of Code Sections 3121(s) and 3306(p).
Any reference in this Plan to Compensation is a reference to the definition in this Section 1.10, unless the Plan reference specifies a modification to this definition. The Advisory Committee will take into account only Compensation actually paid for the relevant period.
In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, the annual Compensation of each Employee taken into account under the Plan shall not exceed the EGTRRA annual compensation limit. The EGTRRA annual compensation limit is $200,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the EGTRRA annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12.
Any reference in this Plan to the limitation under Code
Section 401(a)(17) shall mean the EGTRRA annual compensation limit set forth in
this provision.
Nondiscrimination. For purposes of determining whether the Plan discriminates in favor of Highly Compensated Employees, Compensation means Compensation as defined in this Section 1.10, unless KCS elects to use an alternate nondiscriminatory definition, in accordance with the requirements of Code Section 414(s) and the regulations issued under that Code section. KCS may elect to include all Elective Contributions made by the Employer on behalf of the Employees. KCS's election to include Elective Contributions must be consistent and uniform with respect to Employees and all plans of the Employer for any particular Plan Year. KCS may make this election to include Elective Contributions for nondiscrimination testing purposes, irrespective of whether this Section 1.10 includes Elective Contributions in the general Compensation definition applicable to the Plan.
1.11 "Account" means the separate account(s) which the Advisory Committee or the Trustee maintains for a Participant under the Plan.
1.12 "Accrued Benefit" means the amount standing in a Participant's Account(s) as of any date derived from both Employer contributions and Employee contributions, if any.
1.13 "Nonforfeitable" means a Participant's or Beneficiary's unconditional claim, legally enforceable against the Plan, to the Participant's Accrued Benefit.
1.14 "Plan Year" means the fiscal year of the Plan, a 12 consecutive month period ending every December 31.
1.15 "Effective Date" of this amended and restated Plan is April 1, 2002.
1.16 "Plan Entry Date" means July 1, 2002 and every October 1, January 1, April 1 and July 1 thereafter.
1.17 "Accounting Date" is the last day of the Plan Year. Unless otherwise specified in the Plan, the Advisory Committee will make all the Plan allocations for a particular Plan Year as of the Accounting Date of that Plan Year.
1.18 "Trust" means the Master Trust established pursuant to the Directed Trust Agreement between KCS and Nationwide Trust Company, FSB and/or any other trust that may be established under this Plan.
1.19 "Trust Fund" means all property of every kind held or acquired by the Trustee under the Plan, other than incidental benefit insurance contracts.
1.20 "Nontransferable Annuity" means an annuity which by its terms provides that it may not be sold, assigned, discounted, pledged as collateral for a loan or security for the performance of an obligation or for any purpose to any person other than the insurance company. If the Trustee distributes an annuity contract, the contract must be a Nontransferable Annuity.
1.21 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
1.22 "Code" means the Internal Revenue Code of 1986, as amended.
1.23 "Service" means any period of time the Employee is in the employ of the Employer, including any period the Employee is on an unpaid leave of absence authorized by the Employer under a uniform, nondiscriminatory policy applicable to all Employees. Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service shall be provided in accordance with Section 414(u) of the Code. "Separation from Service" means a severance from employment with the Employer maintaining this Plan and all Related Employers.
1.24 "Hour of Service" means:
(a) Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee, or for which the Employee is entitled to payment, for the performance of duties. The Advisory Committee credits Hours of Service under this paragraph (a) to the Employee for the computation period in which the Employee performs the duties, irrespective of when paid;
(b) Each Hour of Service for back pay, irrespective of mitigation of damages, to which the Employer has agreed or for which the Employee has received an award. The Advisory Committee credits Hours of Service under this paragraph (b) to the Employee for the computation period(s) to which the award or the agreement pertains rather than for the computation period in which the award, agreement or payment is made; and
(c) Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee, or for which the Employee is entitled to payment (irrespective of whether the employment relationship is terminated), for reasons other than for the performance of duties during a computation period, such as leave of absence, vacation,
holiday, sick leave, illness, incapacity (including disability), layoff, jury duty or military duty. The Advisory Committee will credit no more than 501 Hours of Service under this paragraph (c) to an Employee on account of any single continuous period during which the Employee does not perform any duties (whether or not such period occurs during a single computation period). The Advisory Committee credits Hours of Service under this paragraph (c) in accordance with the rules of paragraphs (b) and (c) of Labor Reg. Section 2530.200b-2, which the Plan, by this reference, specifically incorporates in full within this paragraph (c).
The Advisory Committee will not credit an Hour of Service under more
than one of the above paragraphs. A computation period for purposes of this
Section 1.24 is the Plan Year, Year of Service period, Break in Service period
or other period, as determined under the Plan provision for which the Advisory
Committee is measuring an Employee's Hours of Service.
The Employer will credit every Employee with Hours of Service on the basis of the "actual" method. For purposes of the Plan, "actual" method means the determination of Hours of Service from records of hours worked and hours for which the Employer makes payment or for which payment is due from the Employer. However, for an Employee who is paid on other than an hourly basis, Hours of Service shall be credited according to the following schedule, based on the payroll period of the Employee, for each payroll period with respect to which he or she is paid or is entitled to payment of compensation:
Payroll Period Hours of Service -------------- ---------------- Daily 10 Weekly 45 Bi-Monthly 95 Monthly 190 |
Solely for purposes of determining whether the Employee incurs a Break in Service under any provision of this Plan, the Advisory Committee must credit Hours of Service during an Employee's unpaid absence period due to maternity or paternity leave. The Advisory Committee considers an Employee on maternity or paternity leave if the Employee's absence is due to the Employee's pregnancy, the birth of the Employee's child, the placement with the Employee of an adopted child, or the care of the Employee's child immediately following the child's birth or placement. The Advisory Committee credits Hours of Service under this paragraph on the basis of the number of Hours of Service the Employee would receive if he were paid during the absence period or, if the Advisory Committee cannot determine the number of Hours of Service the Employee would receive, on the basis of 8 hours per day during the absence period. The Advisory Committee will credit only the number (not exceeding 501) of Hours of Service necessary to prevent an Employee's Break in Service. The Advisory Committee credits all Hours of Service described in this paragraph to the computation period in which the absence period begins or, if the Employee does not need these Hours of Service to prevent a Break in Service in the computation period in which his absence period begins, the Advisory Committee credits these Hours of Service to the immediately following computation period.
1.25 "Disability" means that the Participant has been determined to be disabled by the Railroad Retirement Board or the Social Security Administration.
1.26 SERVICE FOR PREDECESSOR EMPLOYER. If the Employer maintains the plan of a predecessor employer, the Plan treats service of the Employee with the predecessor employer as service with the Employer.
1.27 RELATED EMPLOYERS. A related group is a controlled group of
corporations (as defined in Code Section 414(b)), trades or businesses (whether
or not incorporated) which are under common control (as defined in Code
Section 414(c)) or an affiliated service group (as defined in Code Section
414(m) or in Code Section 414(o)). If the Employer is a member of a related
group, the term "Employer" includes, for the time period during which the
relation exists, the related group members for purposes of crediting Hours of
Service, determining Years of Service and Breaks in Service under Articles II
and V, applying the limitations on allocations in Part 2 of Article III,
applying the top heavy rules and the minimum allocation requirements of Article
III, the definitions of Employee, Highly Compensated Employee, Compensation and
Leased Employee, and for any other purpose required by the applicable Code
section or by a Plan provision. In addition, (i) the Plan shall treat all
service prior to the Effective Date that is credited with respect to an Employee
under the terms of the Plan in effect prior to the Effective Date as service
with the Employer, and (ii) the Plan shall treat service of an Employee on or
after the Effective Date with an "affiliate" of KCS during the time it is an
"affiliate" as service with the Employer. For purposes of the immediately
preceding sentence, the term "affiliate" means any corporation, partnership,
joint venture or other business entity with respect to which twenty-five percent
(25%) or more of the equity interests therein are owned, directly or indirectly,
by KCS, or by any entity at least 80% of the equity interests of which are owned
by KCS. However, only a Participating Employer described in Section 1.02 may
contribute to the Plan and only an Employee employed by a Participating Employer
described in Section 1.02 is eligible to participate in this Plan. For Plan
allocation purposes, "Compensation" does not include compensation received from
a related employer that is not participating in this Plan.
1.28 LEASED EMPLOYEES. The Plan does not treat a Leased Employee as an Employee of the Employer. A Leased Employee is an individual (who otherwise is not an Employee of the Employer) who, pursuant to a leasing agreement between the Employer and any other person, has performed services for the Employer (or for the Employer and any persons related to the Employer within the meaning of Code Section 144(a)(3)) on a substantially full time basis for at least one year and who performs services under the primary direction or control of the Employer. A Leased Employee who performs services for the Employer pursuant to a contract or agreement which provides that the person is a Leased Employee will not become eligible to participate in this Plan merely by reason of a determination that the person is a common-law employee of the Employer, unless and until the Employer changes the employment classification of such person.
1.29 DETERMINATION OF TOP HEAVY STATUS. If this Plan is the only qualified plan maintained by the Employer, the Plan is top heavy for a Plan Year if the top heavy ratio as of the Determination Date exceeds 60%. The top heavy ratio is a fraction, the numerator of which is the sum of the present value of Accrued Benefits of all Key Employees as of the Determination Date and the denominator of which is a similar sum determined for all Employees. The Advisory Committee must include in the top heavy ratio, as part of the present value of Accrued Benefits, any contribution not made as of the Determination Date but includible under Code Section 416 and the applicable Treasury regulations, distributions on account of
Separation from Service, death or disability made within the Determination Period and any other distributions made within the 5-year period ending on the Determination Date. The Advisory Committee must calculate the top heavy ratio by disregarding the Accrued Benefit (and distributions, if any, of the Accrued Benefit) of any Non-Key Employee who was formerly a Key Employee, and by disregarding the Accrued Benefit (including distributions, if any, of the Accrued Benefit) of an individual who has not received credit for at least one Hour of Service with the Employer during the Determination Period. The Advisory Committee must calculate the top heavy ratio, including the extent to which it must take into account distributions, rollovers and transfers, in accordance with Code Section 416 and the regulations under that Code section.
If the Employer maintains other qualified plans (including a simplified employee pension plan), or maintained another such plan which now is terminated, this Plan is top heavy only if it is part of the Required Aggregation Group, and the top heavy ratio for the Required Aggregation Group and for the permissive Aggregation Group, if any, each exceeds 60%. The Advisory Committee will calculate the top heavy ratio in the same manner as required by the first paragraph of this Section 1.29, taking into account all plans within the Aggregation Group. To the extent the Advisory Committee must take into account distributions to a Participant, the Advisory Committee must include distributions from a terminated plan which would have been part of the Required Aggregation Group if it were in existence on the Determination Date. The Advisory Committee will calculate the present value of Accrued Benefits under defined benefit plans or simplified employee pension plans included within the group in accordance with the terms of those plans, Code Section 416 and the regulations under that Code section. If a Participant in a defined benefit plan is a Non-Key Employee, the Advisory Committee will determine his Accrued Benefit under the accrual method, if any, which is applicable uniformly to all defined benefit plans maintained by the Employer or, if there is no uniform method, in accordance with the slowest accrual rate permitted under the fractional rule accrual method described in Code Section 411(b)(1)(C). To calculate the present value of benefits from a defined benefit plan, the Advisory Committee will use the actuarial assumptions (interest and mortality only) prescribed by the defined benefit plan(s) to value benefits for top heavy purposes. If an aggregated plan does not have a valuation date coinciding with the Determination Date, the Advisory Committee must value the Accrued Benefits in the aggregated plan as of the most recent valuation date falling within the twelve-month period ending on the Determination Date, except as Code Section 416 and applicable Treasury regulations require for the first and second plan year of a defined benefit plan. The Advisory Committee will calculate the top heavy ratio with reference to the Determination Dates that fall within the same calendar year.
Definitions. For purposes of applying the provisions of this
Section 1.29:
(a) "Key Employee" means, as of any Determination Date,
any Employee or former Employee (or Beneficiary of such Employee), who,
for the Plan Year that includes the Determination Date: (i) has
Compensation in excess of $130,000 (as adjusted under Code Section
416(i)(1) for Plan Years beginning after December 31, 2002) and is an
officer of the Employer; (ii) is a more than 5% owner of the Employer;
or (iii) is a more than 1% owner of the Employer and has Compensation
of more than $150,000. The constructive ownership rules of Code
Section 318 (or the principles of that section, in the case of an
unincorporated Employer) will apply to determine ownership in the
Employer.
The number of officers taken into account under clause (i) will not exceed the greater of 3 or 10% of the total number (after application of the Code Section 414(q)(8) exclusions) of Employees, but no more than 50 officers. The Advisory Committee will make the determination of who is a Key Employee in accordance with Code Section 416(i)(1) and the regulations under that Code section.
(b) "Non-Key Employee" is an Employee who does not meet the definition of Key Employee.
(c) "Compensation" means Compensation as determined under
Section 1.07 (relating to the Highly Compensated Employee definition).
(d) "Required Aggregation Group" means: (1) each qualified plan of the Employer in which at least one Key Employee participates at any time during the Determination Period; and (2) any other qualified plan of the Employer which enables a plan described in clause (1) to meet the requirements of Code Section 401(a)(4) or Code Section 410.
(e) "Permissive Aggregation Group" is the Required Aggregation Group plus any other qualified plans maintained by the Employer, but only if such group would satisfy in the aggregate the requirements of Code Section 401(a)(4) and Code Section410. The Advisory Committee will determine the Permissive Aggregative Group.
(f) "Employer" means the Employer that adopts this Plan and any related employers described in Section 1.27.
(g) "Determination Date" for any Plan Year is the Accounting Date of the preceding Plan Year or, in the case of the first Plan Year of the Plan, the Accounting Date of that Plan Year. The "Determination Period" is the 1-year period ending on the Determination Date.
1.30 PLAN MAINTAINED BY MORE THAN ONE EMPLOYER. If more than one Employer maintains this Plan, then for purposes of determining Service and Hours of Service, the Advisory Committee will treat all Employers maintaining this Plan as a single employer.
Plan Allocations. The Advisory Committee and the Trustee will account separately for each Employer's contributions under the Plan. In this respect, the Advisory Committee will allocate each Employer's contributions to the Trustee for a Plan Year, in accordance with Article III, to the Accounts of those Participants actually employed by that Employer during the Plan Year. The Advisory Committee will attribute Participant forfeitures to the Employer or Employers that actually employed the forfeited Participant in the year of the forfeiture. For this purpose, Compensation will mean Compensation paid during the Plan Year to those Participants actually employed by that Employer during the Plan Year.
ARTICLE II.
EMPLOYEE PARTICIPANTS
2.01 ELIGIBILITY. Each Employee (other than an Excluded Employee) becomes a Participant in the Plan on the Plan Entry Date (if employed on that date) coincident with or immediately following the later of his Employment Commencement Date or the date he attains age 18. Each Employee who was a Participant in the 401(k) Plan or the Profit Sharing Plan on the day before the Merger Date and who continued as an Employee on the Merger Date continued as a Participant in the Plan on the Merger Date. Each Employee who was a Participant in the Plan on the day before the Effective Date and who continues as an Employee on the Effective Date continues as a Participant in the Plan on the Effective Date. The term "Employment Commencement Date" means the date on which the Employee first performs an Hour of Service for an Employer.
An Employee is an Excluded Employee if he is (a) a nonresident alien who receives no earned income (within the meaning of Code Section 911(d)(2)) from an Employer which constitutes income from sources within the United States (within the meaning of Code Section 861(a)(3)), or (b) a member of a collective bargaining unit, unless the collective bargaining agreement provides otherwise. An Employee is a member of a collective bargaining unit if he is included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more Employers if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such Employer or Employers. The term "employee representatives" does not include an organization more than one half the members of which are owners, officers or executives of the Employer.
If a Participant has not incurred a Separation from Service but becomes an Excluded Employee, then during the period such a Participant is an Excluded Employee, the Advisory Committee will limit that Participant's sharing in the allocation of Employer contributions and Participant forfeitures, if any, under the Plan by disregarding his Compensation paid by the Employer for services rendered in his capacity as an Excluded Employee. However, during such period of exclusion, the Participant, without regard to employment classification, continues to receive credit for vesting under Article V for each included Year of Service and the Participant's Account continues to share fully in Trust Fund allocations under Section 15.05.
If an Excluded Employee who is not a Participant becomes eligible to participate in the Plan by reason of a change in employment classification, he will participate in the Plan immediately if he has satisfied the eligibility conditions of Section 2.01 and would have been a Participant had he not been an Excluded Employee during his period of Service. Furthermore, the Plan takes into account all of the Participant's included Years of Service with the Employer as an Excluded Employee for purposes of vesting credit under Article V.
A Leased Employee who performs services for the Employer pursuant to a contract or agreement which provides that the person is a Leased Employee will not become eligible to participate in this Plan merely by reason of a determination that the person is a common-law employee of the Employer, unless and until the Employer changes the employment classification of such person. If a Leased Employee who is not a Participant becomes eligible to participate in
the Plan by reason of a change in employment classification, he will participate
in the Plan immediately if he has satisfied the eligibility conditions of
Section 2.01 and would have been a Participant had he not been a Leased Employee
during his period of Service. Furthermore, the Plan takes into account all of
the Participant's included Years of Service with the Employer as a Leased
Employee for purposes of vesting credit under Article V.
2.02 YEAR OF SERVICE - PARTICIPATION. For purposes of an Employee's participation in the Plan under Section 2.01, the Plan does not apply any minimum Hour of Service requirement. The Plan does not require an Employee who terminates employment to establish a new Employment Commencement Date if re-employed by the Employer.
2.03 BREAK IN SERVICE - PARTICIPATION. For purposes of participation in the Plan, the Plan does not apply any Break in Service rule.
2.04 PARTICIPATION UPON REEMPLOYMENT. A Participant whose employment terminates reenters the Plan as a Participant on the date of his reemployment. An Employee who satisfies the Plan's eligibility conditions but who terminates employment prior to becoming a Participant becomes a Participant in the Plan on the later of the Plan Entry Date on which he would have entered the Plan had he not terminated employment or the date of his reemployment. Any Employee who terminates employment prior to satisfying the Plan's eligibility conditions becomes a Participant in accordance with the provisions of Section 2.01.
ARTICLE III.
EMPLOYER CONTRIBUTIONS AND FORFEITURES
PART 1. AMOUNT OF EMPLOYER CONTRIBUTIONS AND PLAN ALLOCATIONS:
SECTIONS 3.01 THROUGH 3.06.
3.01 AMOUNT.
(A) Contribution Formula. For each Plan Year, the Employer shall contribute to the Trust the following amounts:
Deferral Contributions. The amount by which the Participants have elected to have their Compensation (as defined in Section 1.10 after modification by Section 12.01) for the Plan Year reduced and contributed to the Trust as deferral contributions pursuant to their salary reduction agreements on file with the Advisory Committee.
Catch-up Contributions. The amount of deferral contributions determined to be catch-up contributions in accordance with Section 3.04.
Employer Matching Contributions. An amount equal to 100% of each Participant's eligible contributions. The Employer will determine the amount of its matching contributions by disregarding Participants not entitled to an allocation of matching contributions. The Employer, in its sole discretion, may designate all or any portion of its matching contribution as a qualified matching contribution at the time it makes the contribution.
Discretionary Profit Sharing Contribution. The additional amount the Employer may from time to time deem advisable and designates as a discretionary profit sharing contribution. The Employer, in its sole discretion, may designate all or any portion of its discretionary profit sharing contribution as a qualified nonelective contribution at the time it makes the contribution.
The Employer shall make its contribution under the Plan irrespective of
whether it has net profits. Although the Employer may contribute to this Plan
irrespective of whether it has net profits, the Employer intends this plan to be
a profit sharing plan for all purposes under the Code. The Employer shall not
make a contribution to the Trust for any Plan Year to the extent the
contribution would exceed the Participants' "Maximum Permissible Amount" under
Section 3.08.
Eligible Contributions. Under the matching contribution formula, a Participant's "eligible contributions" are the deferral contributions allocated to the Participant not in excess of 3% of the Participant's Compensation (as defined in Section 1.10 after modification by Section 12.01) for the Plan Year. Eligible contributions do not include deferral contributions that are excess deferrals under Section 12.03. For this purpose: (a) excess deferrals relate first to deferral contributions for the Plan Year not otherwise eligible for a matching contribution; and (b) if the Plan Year is not a calendar year, the excess deferrals for a Plan Year are the last deferrals made for a calendar year.
(B) Return of Contributions. The Employer contributes to this Plan on the condition its contribution is not due to a mistake of fact and the Internal Revenue Service will not disallow the deduction for its contribution. The Trustee, upon written request from the Employer, must return to the Employer the amount of the Employer's contribution made by the Employer by mistake of fact or the amount of the Employer's contribution disallowed as a deduction under Code Section 404. The Trustee will not return any portion of the Employer's contribution under the provisions of this paragraph more than one year after:
(a) The Employer made the contribution by mistake of fact; or
(b) The disallowance of the contribution as a deduction, and then only to the extent of the disallowance.
The Trustee will not increase the amount of the Employer contribution returnable under this Section 3.01 for any earnings attributable to the contribution, but the Trustee will decrease the Employer contribution returnable for any losses attributable to it. The Trustee may require the Employer to furnish it whatever evidence the Trustee deems necessary to enable the Trustee to confirm the amount the Employer has requested be returned is properly returnable under ERISA.
3.02 DETERMINATION OF CONTRIBUTION. The Employer, from its records, determines the amount of any contributions to be made by it to the Trust under the terms of the Plan.
3.03 TIME OF PAYMENT OF CONTRIBUTION. The Employer may pay its contribution for each Plan Year in one or more installments without interest. The Employer must
make its contribution to the Trust within the time prescribed by the Code or applicable Treasury regulations. The Employer must make deferral contributions to the Trust, to the extent made pursuant to salary reduction agreements, within an administratively reasonable period of time after withholding the corresponding Compensation from the Participant. The Employer also must make deferral contributions and qualified nonelective contributions no later than the time prescribed by the Code or by Treasury regulations. Deferral contributions are Employer contributions for all purposes under this Plan, except to the extent the Code or Treasury regulations prohibit the use of these contributions to satisfy the qualification requirements of the Code.
3.04 CONTRIBUTION ALLOCATION.
(A) Method of Allocation. To make allocations under the Plan, the Advisory Committee must establish a Deferral Contributions Account, a Regular Matching Contributions Account, a Qualified Matching Contributions Account, a Qualified Nonelective Contributions Account and a Profit Sharing Contributions Account for each Participant.
Deferral Contributions. The Advisory Committee will allocate to each Participant's Deferral Contributions Account the deferral contributions the Employer makes to the Trust on behalf of the Participant. Deferral contributions shall be made to the Trust by the Employer as of the earliest date on which such contributions can reasonably be segregated from the Employer's general assets.
Catch-up Contributions. The amount of a Participant's catch-up
contributions for a calendar year shall not be determinable until the last day
of the year. Catch-up contributions will be treated as such only if, and to the
extent that, the Participant's deferral contributions for the year exceed the
Plan limits described in Section 12.01, the 402(g) limitations set forth in
Section 12.03, the limitations described in Section 3.07, or the
nondiscrimination limits described in Section 12.04. To the extent the Advisory
Committee deems it advisable, amounts deemed to be catch-up contributions may be
accounted for in a separate subaccount ("Catch-up Contributions Subaccount")
under the Deferral Contributions Account.
Matching Contributions. The Employer, at the time of contribution, must designate which portion, if any, of its matching contribution is allocable to the Qualified Matching Contributions Accounts and which part, if any, is allocable to the Regular Matching Contributions Accounts. The Advisory Committee will allocate the matching contributions to the Regular Matching Contributions Account of the Participant on whose behalf the Employer makes that contribution as of the last day of the Plan Year; provided, however, that the Advisory Committee will make tentative interim allocations of matching contributions to the Regular Matching Contributions Account of the Participant on whose behalf the Employer makes the contribution as of each date during the Plan Year on which such Participant is paid, and shall make a final allocation upon the earlier of the Participant's termination of employment with the Employer or the last day of the Plan Year equal to the amount of matching contribution required under Section 3.01(A) less any interim allocations made to such Participant's Regular Matching Contributions Account during the Plan Year.
To the extent the Employer makes qualified matching contributions, the Advisory Committee will allocate the qualified matching contributions to the Qualified Matching Contributions Account of the Participant on whose behalf the Employer makes the contribution.
Qualified Nonelective Contributions. If the Employer, at the time of contribution, designates a contribution to be a qualified nonelective contribution for the Plan Year, the Advisory Committee will allocate that qualified nonelective contribution to the Qualified Nonelective Contributions Account of each Participant in the same ratio that the Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for the Plan Year.
Discretionary Profit Sharing Contributions. Subject to Section 3.04(B) and any restoration allocation required under Section 5.04, the Advisory Committee will allocate and credit each annual Employer discretionary profit sharing contribution, if any, other than discretionary profit sharing contributions which, at the time of contribution, the Employer designates as qualified nonelective contributions, to the Profit Sharing Contributions Account of each Participant who satisfies the conditions of Section 3.06 in the same ratio that each Participant's Compensation for the Plan Year bears to the total Compensation of all such Participants for the Plan Year.
(B) Top Heavy Minimum Allocation.
(1) Minimum Allocation. If the Plan is top heavy in any Plan Year:
(a) Each Non-Key Employee (as defined in Section 1.29) who is a Participant and is employed by the Employer on the last day of the Plan Year will receive a top heavy minimum allocation for that Plan Year and
(b) The top heavy minimum allocation is the lesser of 3%
of the Non-Key Employee's Compensation for the Plan Year or the highest
contribution rate for the Plan Year made on behalf of any Key Employee
(as defined in section 1.29). However, if a defined benefit plan
maintained by the Employer which benefits a Key Employee depends on
this Plan to satisfy the antidiscrimination rules of Code
Section 401(a)(4) or the coverage rules of Code Section410 (or another
plan benefiting the Key Employee so depends on such defined benefit
plan), the top heavy minimum allocation is 3% of the Non-Key Employee's
Compensation regardless of the contribution rate for the Key Employees.
(c) For purposes of this Section 3.04(B), the term
"Participant" includes any employee otherwise eligible to participate
in the Plan but who is not a Participant because of his failure to make
elective deferrals under a Code Section 401(k) arrangement or because
of his failure to make mandatory employee contributions. For purposes
of clause (b), "Compensation" means Compensation as defined in Section
1.10. For purposes of this Section 3.04(B), a Participant's
contribution rate is the sum of Employer contributions (including
Employer matching contributions but not including Employer
contributions to Social Security) and forfeitures allocated to the
Participant's Account for the Plan Year divided by his Compensation for
the entire Plan Year. However, a Non-Key Employee's contribution rate
does not include any Elective Contributions under a Code Section 401(k)
arrangement. To determine a Participant's contribution rate, the
Advisory Committee
must treat all qualified top heavy defined contribution plans
maintained by the Employer (or by any related Employers described in
Section 1.27) as a single Plan.
(2) Method of Compliance. The Plan will satisfy the top heavy minimum allocation in accordance with this Section 3.04(B)(2). The Advisory Committee first will allocate the Employer contributions (and Participant forfeitures, if any) for the Plan Year in accordance with the allocation formula under Section 3.04(A). The Employer then will contribute an additional amount for the Account of any Participant who is entitled under this Section 3.04(B) to a top heavy minimum allocation and whose contribution rate for the Plan Year is less than the top heavy minimum allocation. The additional amount is the amount necessary to increase the Participant's contribution rate to the top heavy minimum allocation. The Advisory Committee will allocate the additional contribution to the Account of the Participant on whose behalf the Employer makes the contribution.
3.05 FORFEITURE ALLOCATION. The amount of a Participant's Accrued
Benefit forfeited under the Plan is a Participant forfeiture. Subject to any
restoration allocation required under Section 5.04 or 9.12 and the special
forfeiture allocation for certain excess aggregate contributions described in
Section 12.05, the Advisory Committee will allocate the amount of a
Participant's Accrued Benefit forfeited under the Plan in accordance with
Section 3.04 to reduce the Employer matching contributions or profit sharing
contributions for the Plan Year in which the forfeiture occurs and, if
necessary, to reduce Employer matching contributions or profit sharing
contributions in subsequent Plan Years. The Advisory Committee will continue to
hold the undistributed, non-vested portion of a terminated Participant's Accrued
Benefit in his Account solely for his benefit until a forfeiture occurs at the
time specified in Section 5.09 or, if applicable, until the time specified in
Section 9.12. Except as provided under Section 5.04, a Participant will not
share in the allocation of a forfeiture of any portion of his Accrued Benefit.
Forfeiture of certain matching contributions. A Participant will forfeit any matching contributions allocated with respect to excess deferrals, excess contributions or excess aggregate contributions, as determined under Article XII. The Advisory Committee will allocate these forfeited amounts in accordance with this Section 3.05.
3.06 ACCRUAL OF BENEFIT. The Advisory Committee will determine the accrual of benefit (Employer contributions and Participant forfeitures) on the basis of the Plan Year, except as provided in Section 3.04.
Compensation Taken Into Account. In allocating an Employer qualified nonelective contribution or an Employer discretionary profit sharing contribution to a Participant's Account, the Advisory Committee, except for purposes of determining the top heavy minimum contribution under Section 3.04(B), will take into account only the Compensation determined for the portion of the Plan Year in which the Employee is actually a Participant.
Hours of Service Requirement. A Participant will share in the allocation of Employer deferral contributions, matching contributions and qualified nonelective contributions for a Plan Year without regard to any Hours of Service requirement for that Plan Year. Subject to the top-heavy minimum allocation requirement of Section 3.04(B), a Participant will not share in the
allocation of Employer discretionary profit sharing contributions for a Plan Year if the Participant does not complete a minimum of 1,000 Hours of Service during the Plan Year, unless the Participant terminates employment during the Plan Year because of death or Disability or because of the attainment of Normal Retirement Age in the current Plan Year or in a prior Plan Year.
Employment Requirement. A Participant will share in the allocation of Employer contributions for a Plan Year without regard to whether he is employed by the Employer on the Accounting Date of that Plan Year.
PART 2. LIMITATIONS ON ALLOCATION: SECTIONS 3.07 AND 3.08.
3.07 LIMITATIONS ON ALLOCATIONS TO PARTICIPANTS' ACCOUNTS. Except to the extent permitted under Section 12.06 and Code Section 414(v), if applicable, the amount of Annual Additions which the Advisory Committee may allocate under this Plan on a Participant's behalf for a Limitation Year may not exceed the Maximum Permissible Amount. If the amount the Employer otherwise would contribute to the Participant's Account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the Employer will reduce the amount of its contribution so the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. If an allocation of Employer contributions, pursuant to Section 3.04, would result in an Excess Amount (other than an Excess Amount resulting from the circumstances described in Section 3.07(B)) to the Participant's Account, the Advisory Committee will reallocate the Excess Amount to the remaining Participants who are eligible for an allocation of Employer contributions for the Plan Year in which the Limitation Year ends. The Advisory Committee will make this reallocation on the basis of the allocation method under the Plan as if the Participant whose Account otherwise would receive the Excess Amount is not eligible for an allocation of Employer contributions.
(A) Estimation of Compensation. Prior to the determination of the Participant's actual Compensation for a Limitation Year, the Advisory Committee may determine the Maximum Permissible Amount on the basis of the Participant's estimated annual Compensation for such Limitation Year. The Advisory Committee must make this determination on a reasonable and uniform basis for all Participants similarly situated. The Advisory Committee must reduce any Employer contributions (including any allocation of forfeitures) based on estimated annual Compensation by any Excess Amount carried over from prior years. As soon as is administratively feasible after the end of the Limitation Year, the Advisory Committee will determine the Maximum Permissible Amount for such Limitation Year on the basis of the Participant's actual Compensation for such Limitation Year.
(B) Disposition of Excess Amount. If, as a result of a reasonable error in determining the amount of elective deferrals an Employee may make without violating the limitations of Part 2 of Article III, an Excess Amount results, the Advisory Committee will return the Excess Amount (as adjusted for allocable income) attributable to the elective deferrals. The Advisory Committee will make this distribution before making any of the corrective distributions in the remaining paragraphs of this Section 3.07(B). The Advisory Committee will disregard any elective deferrals returned under this paragraph for purposes of Article XII.
If, because of a reasonable error in estimating Compensation, or because of the allocation of forfeitures, there is an Excess Amount with respect to a Participant for a Limitation Year, the Advisory Committee will dispose of such Excess Amount as follows:
(a) The Advisory Committee will return any nondeductible voluntary Employee contributions to the Participant to the extent that the return would reduce the Excess Amount.
(b) If, after the application of paragraph (a), an Excess Amount still exists, and the Plan covers the Participant at the end of the Limitation Year, then the Advisory Committee will use the Excess Amount(s) to reduce future Employer contributions (including any allocation of forfeitures) under the Plan for the next Limitation Year and for each succeeding Limitation Year, as is necessary, for the Participant.
(c) If, after the application of paragraph (a), an Excess Amount still exists, and the Plan does not cover the Participant at the end of the Limitation Year, then the Advisory Committee will hold the Excess Amount unallocated in a suspense account. The Advisory Committee will apply the suspense account to reduce Employer Contributions (including allocation of forfeitures) for all remaining Participants in the next Limitation Year, and in each succeeding Limitation Year if necessary.
(d) Except as provided in paragraph (a), the Advisory Committee will not distribute any Excess Amount(s) to Participants or to former Participants.
(C) More Than One Plan. If the Advisory Committee allocated an Excess Amount to a Participant's Account on an allocation date of this Plan which coincides with an allocation date of another defined contribution plan maintained by the Employer, the Advisory Committee will attribute the Excess Amount allocated as of such date to the profit sharing component of this Plan. If an Excess Amount remains, it will then be attributed to the Kansas City Southern Employee Stock Ownership Plan, and then, if necessary, to the 401(k) plan component of this Plan.
3.08 DEFINITIONS - ARTICLE III. For purposes of Article III, the following terms mean:
(a) "Annual Addition" - The sum of the following amounts
allocated on behalf of a Participant for a Limitation Year: (i) all
Employer contributions; (ii) all forfeitures; and (iii) all Employee
contributions. Except to the extent provided in Treasury Regulations,
Annual Additions include excess contributions described in Code
Section 401(k), excess aggregate contributions described in Code
Section 401(m) and excess deferrals described in Code Section 402(g),
irrespective of whether the Plan distributes or forfeits such excess
amounts. Annual Additions also include Excess Amounts re-applied to
reduce Employer contributions under Section 3.07. Amounts allocated
after March 31, 1984, to an individual medical account (as defined in
Code
Section 415(1)(2)) included as part of a defined benefit plan maintained by the Employer are Annual Additions. Furthermore, Annual Additions include contributions paid or accrued after December 31, 1985, for taxable years ending after December 31, 1985, attributable to post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code Section 419A(d)(3)) under a welfare benefit fund (as defined in Code Section 419(e)) maintained by the Employer, but only for purposes of the dollar limitation applicable to the Maximum Permissible Amount.
(b) "Compensation" - For purposes of applying the limitations of Part 2 of this Article III, "Compensation" means Compensation as defined in Section 1.10, disregarding any exclusions from Compensation and disregarding Elective Contributions with respect to Plan Years commencing before January 1, 1998, but including Elective Contributions for Plan Years commencing after December 31, 1997.
(c) "Maximum Permissible Amount" - The lesser of (i)
$40,000 (as adjusted for increases in the cost-of-living under Code
Section 415(d)), or (ii) 100% of the Participant's Compensation for the
Limitation Year. If there is a short Limitation Year because of a
change in Limitation Year, the Advisory Committee will multiply the
$40,000 (or adjusted) limitation by the following fraction:
Number of months in the short Limitation Year
(d) "Employer" - The Employer that adopts this Plan and
any related employers described in Section 1.27. Solely for purposes of
applying the limitations of Part 2 of this Article III, the Advisory
Committee will determine related employers described in Section 1.27 by
modifying Code Section 414(b) and (c) in accordance with Code
Section 415(h).
(e) "Excess Amount" - The excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount.
(f) "Limitation Year" - The Plan Year. If the Employer amends the Limitation Year to a different 12 consecutive month period, the new Limitation Year must begin on a date within the Limitation Year for which the Employer makes the amendment, creating a short Limitation Year.
(g) "Defined contribution plan" - A retirement plan which
provides for an individual account for each participant and for
benefits based solely on the amount contributed to the participant's
account, and any income, expenses, gains and losses, and any
forfeitures of accounts of other participants which the plan may
allocate to such participant's account. The Advisory Committee must
treat all defined contribution plans (whether or not terminated)
maintained by the Employer as a single plan. For purposes of the
limitations of part 2 of this Article III, the Advisory Committee will
treat employee contributions made to a defined benefit plan maintained
by the Employer as a separate defined contribution plan. The Advisory
Committee also will treat as a defined contribution plan an individual
medical account (as defined in Code Section 415(l)(2)) included as part
of a defined benefit plan maintained by the Employer and, for taxable
years ending after December 31, 1985, a welfare benefit fund under Code
Section 419(e) maintained by the Employer to the extent there are
post-retirement medical benefits allocated to the separate account of a
key employee (as defined in Code Section 419A(d)(3)).
(h) "Defined benefit plan" - A retirement plan which does not provide for individual accounts for Employer contributions. The Advisory Committee must treat all defined benefit plans (whether or not terminated) maintained by the Employer as a single plan.
ARTICLE IV.
PARTICIPANT CONTRIBUTIONS
4.01 PARTICIPANT VOLUNTARY CONTRIBUTIONS. The Plan does not permit or require Participant nondeductible contributions.
4.02 PARTICIPANT VOLUNTARY CONTRIBUTIONS - SPECIAL DISCRIMINATION TEST. (Reserved)
4.03 PARTICIPANT ROLLOVER CONTRIBUTIONS. Any Participant, with the Employer's written consent and after filing with the Trustee the form prescribed by the Advisory Committee, may contribute cash or other property to the Trust other than as a voluntary contribution if the contribution is a "rollover contribution" which the Code permits an employee to transfer either directly or indirectly from one of the following types of plans to this Plan: (1) a qualified plan described in Code Section 401(a) or Code Section 403(a), excluding after-tax employee contributions; (2) an annuity contract described in Code Section 403(b), excluding after-tax employee contributions; or (3) an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state. Before accepting a rollover contribution, the Trustee may require an Employee to furnish satisfactory evidence that the proposed transfer is in fact a "rollover contribution" which the Code permits an employee to make to a qualified plan. A rollover contribution is not an Annual Addition under Part 2 of Article III.
The Advisory Committee must establish a Rollover Account for each Participant making a rollover contribution, and allocate the rollover contribution to the Rollover Account as of the date the rollover contribution is received. The Trustee will invest the rollover contribution as a part of the Trust Fund.
The Advisory Committee may accept a rollover contribution on behalf of an Employee who is otherwise eligible to become a Participant in the Plan prior to the Plan Entry Date on which such Employee would become a Participant. If the Advisory Committee accepts such a rollover contribution, the Advisory Committee must treat the Employee as a Participant for all purposes of the Plan except the Employee is not a Participant for purposes of sharing in Employer contributions or Participant forfeitures under the Plan until he actually becomes a Participant in the Plan.
4.04 PARTICIPANT CONTRIBUTION - FORFEITABILITY. A Participant's Accrued Benefit is, at all times, one hundred percent (100%) Nonforfeitable to the extent the value of his Accrued Benefit is derived from Participant rollover contributions made by him to the Trust for his own benefit.
4.05 PARTICIPANT CONTRIBUTION - WITHDRAWAL/DISTRIBUTION. A
Participant may not withdraw any part of his Rollover Account attributable to a
Participant rollover contribution made by him to the Trust except as provided in
Section 6.03(E). The Trustee, in accordance with the direction of the Advisory
Committee, will distribute a Participant's unwithdrawn Accrued Benefit
attributable to his Participant rollover contributions in accordance with the
provisions of Article VI applicable to the distribution of the Participant's
Nonforfeitable Accrued Benefit.
4.06 PARTICIPANT CONTRIBUTION - ACCRUED BENEFIT. The Advisory Committee must maintain, or must direct the Trustee to maintain, a separate Account(s) in the name of each Participant to reflect the Participant's Accrued Benefit under the Plan derived from his Participant rollover contributions. A Participant's Accrued Benefit derived from his Participant rollover contributions as of any applicable date is the balance of his separate Participant rollover contribution Account(s).
ARTICLE V.
TERMINATION OF SERVICE - PARTICIPANT VESTING
5.01 NORMAL RETIREMENT AGE. A Participant's Normal Retirement Age is 65 years of age. A Participant who remains in the employ of the Employer after attainment of Normal Retirement Age will continue to participate in Employer contributions. A Participant's Accrued Benefit derived from Employer contributions is 100% Nonforfeitable upon and after his attaining Normal Retirement Age (if employed by the Employer on or after that date).
5.02 PARTICIPANT DISABILITY OR DEATH. If a Participant's employment with the Employer terminates as a result of death or disability, the Participant's Accrued Benefit derived from Employer contributions will be 100% Nonforfeitable.
5.03 VESTING SCHEDULE. A Participant's Deferral Contributions Account (including any Catch-up Contributions Subaccount), Qualified Matching Contributions Account, Qualified Nonelective Contributions Account, Profit Sharing Contributions Account and Rollover Account will be one hundred percent (100%) Nonforfeitable at all times. Except as provided in Sections 5.01 and 5.02, for each Year of Service, a Participant's Nonforfeitable percentage of his Regular Matching Contributions Account equals the percentage in the following vesting schedule:
Percent of
Years of Service Nonforfeitable
With the Employer Accrued Benefit
----------------- ---------------
Less than 2 None
2 20%
3 40%
4 60%
5 100%
|
Notwithstanding anything in this Section 5.03 or Article XVIII to the contrary, each Gateway Participant (as defined in Section 18.01) shall be 100% vested in his Accrued Benefit.
5.04 CASH-OUT DISTRIBUTIONS TO PARTIALLY-VESTED
PARTICIPANTS/RESTORATION OF FORFEITED ACCRUED BENEFIT. If, pursuant to Article
VI, a partially-vested Participant receives a cash-out distribution before he
incurs a Forfeiture Break in Service (as defined in Section 5.08), the cash-out
distribution will result in an immediate forfeiture of the non-vested portion of
the Participant's Accrued Benefit derived from Employer contributions. See
Section 5.09. A partially-vested Participant is a Participant whose
Nonforfeitable Percentage determined under Section 5.03 is less than 100%. A
cash-out distribution is a distribution of the entire present value of the
Participant's Nonforfeitable Accrued Benefit.
(A) Restoration and Conditions upon Restoration. A partially- vested Participant who is reemployed by the Employer after receiving a cash-out distribution of the Nonforfeitable percentage of his Accrued Benefit may repay the Trustee the amount of the cash-out distribution attributable to Employer contributions, unless the Participant no longer has a right to restoration under the requirements of this Section 5.04. If a partially-vested Participant makes the cash-out distribution repayment, the Advisory Committee, subject to the conditions of this paragraph (A), must restore his Accrued Benefit attributable to Employer contributions to the same dollar amount as the dollar amount of his Accrued Benefit on the Accounting Date, or other valuation date, immediately preceding the date of the cash-out distribution, unadjusted for any gains or losses occurring subsequent to that Accounting Date, or other valuation date. Restoration of the Participant's Accrued Benefit includes restoration of all Code Section 411(d)(6) protected benefits with respect to that restored Accrued Benefit, in accordance with applicable Treasury regulations. The Advisory Committee will not restore a reemployed Participant's Accrued Benefit under this paragraph if:
(1) Five (5) years have elapsed since the Participant's first reemployment date following the cash-out distribution; or
(2) The Participant incurred a Forfeiture Break in Service (as defined in Section 5.08). This condition also applies if the Participant makes repayment within the Plan Year in which he incurs the Forfeiture Break in Service and that Forfeiture Break in Service would result in a complete forfeiture of the amount the Advisory Committee otherwise would restore.
(B) Time and Method of Restoration. If neither of the two conditions preventing restoration of the Participant's Accrued Benefit applies, the Advisory Committee will restore the Participant's Accrued Benefit as of the Plan Year Accounting Date coincident with or immediately following the repayment. To restore the Participant's Accrued Benefit, the Advisory Committee, to the extent necessary, will allocate to the Participant's Account:
(1) First, the amount, if any, of Participant forfeitures the Advisory Committee would otherwise allocate under Section 3.05;
(2) Second, the amount, if any, of the Trust Fund net income or gain for the Plan Year; and
(3) Third, the Employer contribution for the Plan Year to the extent made under a discretionary formula.
To the extent the amounts described in clauses (1), (2) and (3) are
insufficient to enable the Advisory Committee to make the required restoration,
the Employer must contribute, without regard to any requirement or condition of
Section 3.01, the additional amount necessary to enable the Advisory Committee
to make the required restoration. If, for a particular Plan Year, the Advisory
Committee must restore the Accrued Benefit of more than one reemployed
Participant, then the Advisory Committee will make the restoration allocation(s)
to each such Participant's Account in the same proportion that a Participant's
restored amount for the Plan Year bears to the restored amount for the Plan Year
of all reemployed Participants. The Advisory Committee will not take into
account the allocation under this Section 5.04 in applying the limitation on
allocations under Part 2 of Article III.
(C) 0% Vested Participant. The deemed cash-out rule applies to a 0% vested Participant. A 0% vested Participant is a Participant whose Accrued Benefit derived from Employer contributions is entirely forfeitable at the time of his Separation from Service. Under the deemed cash-out rule, the Advisory Committee will treat the 0% vested Participant as having received a cash-out distribution on the date of the Participant's Separation from Service or, if the Participant's Account is entitled to an allocation of Employer contributions for the Plan Year in which he separates from Service, on the last day of that Plan Year.
For purposes of applying the restoration provisions of this Section 5.04, the Advisory Committee will treat the 0% vested Participant as repaying his cash-out "distribution" on the first date of his reemployment with the Employer.
5.05 SEGREGATED ACCOUNT FOR REPAID AMOUNT. Until the Advisory Committee restores the Participant's Accrued Benefit, as described in Section 5.04, the Trustee will invest the cash-out amount the Participant has repaid in a segregated Account maintained solely for that Participant. The Trustee must invest the amount in the Participant's segregated Account in Federally insured interest bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. Until commingled with the balance of the Trust Fund on the date the Advisory Committee restores the Participant's Accrued Benefit, the Participant's segregated Account remains a part of the Trust, but it alone shares in any income it earns and it alone bears any expense or loss it incurs. Unless the repayment qualifies as a rollover contribution, the Advisory Committee will direct the Trustee to repay to the Participant as soon as is administratively practicable the full amount of the Participant's segregated Account if the Advisory Committee determines either of the conditions of Sections 5.04(A) prevents restoration as of the applicable Accounting Date, notwithstanding the Participant's repayment.
5.06 YEAR OF SERVICE - VESTING. For purposes of vesting under
Section 5.03, Year of Service means any Plan Year during which an Employee
completes not less than 1,000 Hours of Service with the Employer.
5.07 BREAK IN SERVICE - VESTING. For purposes of this Article V, a Participant incurs a "Break in Service" if during any Plan Year he does not complete more than 500 Hours of Service with the Employer.
5.08 INCLUDED YEARS OF SERVICE - VESTING. For purposes of determining "Years of Service" under Section 5.06, the Plan takes into account all Years of Service an Employee completes with the Employer. For the sole purpose of determining a Participant's Nonforfeitable percentage of his Accrued Benefit derived from Employer contributions which accrued for his benefit prior to a Forfeiture Break in Service, the Plan disregards any Year of Service after the Participant first incurs a Forfeiture Break in Service. The Participant incurs a Forfeiture Break in Service when he incurs 5 consecutive Breaks in Service.
5.09 FORFEITURE OCCURS. A Participant's forfeiture, if any, of his Accrued Benefit derived from Employer contributions occurs under the Plan on the earlier of:
(a) The last day of the Plan Year in which the Participant first incurs a Forfeiture Break in Service; or
(b) The date the Participant receives a cash-out distribution.
The Advisory Committee determines the percentage of a Participant's Accrued Benefit forfeiture, if any, under this Section 5.09 solely by reference to the vesting schedule of Section 5.03. A Participant will not forfeit any portion of his Accrued Benefit for any other reason or cause except as expressly provided by this Section 5.09 or as provided under Section 9.12.
ARTICLE VI.
TIME AND METHOD OF PAYMENT OF BENEFITS
6.01 TIME OF PAYMENT OF ACCRUED BENEFIT. Unless, pursuant to
Section 6.03, the Participant or the Beneficiary elects in writing to a
different time or method of payment, the Advisory Committee will direct the
Trustee to commence distribution of a Participant's Nonforfeitable Accrued
Benefit in accordance with this Section 6.01. A Participant must consent, in
writing, to any distribution required under this Section 6.01 if the present
value of the Participant's Nonrollover Nonforfeitable Accrued Benefit, at the
time of the distribution to the Participant, exceeds $5,000 and the Participant
has not attained Normal Retirement Age. A Participant's Nonrollover
Nonforfeitable Accrued Benefit is such Participant's Nonforfeitable Accrued
Benefit excluding that portion of the Participant's Accrued Benefit that is
attributable to rollover contributions (and earnings allocable thereto) within
the meaning of Code Sections 402(c), 403(a)(4), (403(b)(8), 408(d)(3)(A)(ii),
and 457(e)(16). For all purposes of this Article VI, the term "annuity starting
date" means the first day of the first period for which the Plan pays an amount
as an annuity or in any other form. Requests for distributions under this
Article VI (and under Articles XVII and XVIII) may be made at such times, on
such forms and in accordance with such procedures as the Advisory Committee may
from time to time prescribe. The distribution of a Participant's Account shall
be made or commenced as soon as administratively practicable following receipt
by the Advisory Committee of a properly completed request for distribution (or,
if the Participant's Nonrollover Nonforfeitable Accrued Benefit does not exceed
$5,000, following the Participant's Separation from Service).
(A) Termination of Employment For a Reason Other Than Death. For a Participant who terminates employment with the Employer for a reason other than death, the
Advisory Committee will direct the Trustee to commence distribution of the Participant's Accrued Benefit, as follows:
(1) Participant's Nonrollover Nonforfeitable Accrued Benefit Not Exceeding $5,000. In a lump sum, as soon as administratively practicable following the Participant's Separation from Service, but in no event later than the 60th day following the close of the Plan Year in which the Participant attains Normal Retirement Age.
(2) Participant's Nonrollover Nonforfeitable Accrued Benefit Exceeds $5,000 In a form and at the time elected by the Participant, pursuant to Section 6.03. Unless the Participant has elected otherwise, the Advisory Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit in a lump sum, on the 60th day following the close of the Plan Year in which the later of the following events occurs: (a) the Participant attains Normal Retirement Age; or (b) the Participant's Separation from Service; provided however, that a Participant's failure to make an election pursuant to Section 6.03 shall be deemed to be an election to defer commencement of distribution for purposes of this Section 6.01. Notwithstanding any other provision herein, or any elections made by the Participant, benefit payments shall be made or shall commence not later than the Required Beginning Date.
(B) Required Beginning Date. If any distribution commencement date described under Paragraph (A) of this Section 6.01, either by Plan provision or by Participant election (or nonelection), is later than the Participant's Required Beginning Date, the Advisory Committee instead must direct the Trustee to make distribution under this Section 6.01 on the Participant's Required Beginning Date. A Participant's Required Beginning Date is the April 1 of the calendar year following the later of (i) the calendar year in which the Participant attains age 70 1/2, or (ii) the calendar year in which the Participant separates from Service. However, clause (ii) of the preceding sentence shall not apply if the Participant is a 5% owner (as defined in Section 1.07(a)) with respect to the Plan Year ending in the calendar year in which he attains age 70 1/2. Mandatory distributions commencing at the Participant's Required Beginning Date will be made in an amount equal to the Participant's required minimum distribution for the calendar year determined in accordance with Section 6.02(A), unless the Participant, pursuant to the provisions of this Article VI, makes a valid election to receive an alternative form of payment.
(C) Death of the Participant. The Advisory Committee will direct the Trustee, in accordance with this Section 6.01(C), to distribute to the Participant's Beneficiary the Participant's Nonforfeitable Accrued Benefit remaining in the Trust at the time of the Participant's death. The Advisory Committee will determine the death benefit by reducing the Participant's Nonforfeitable Accrued Benefit by any security interest the Plan has against that Nonforfeitable Accrued Benefit by reason of an outstanding Participant loan.
(1) Deceased Participant's Nonrollover Nonforfeitable Accrued Benefit Does Not Exceed $5,000. The Advisory Committee must direct the Trustee to pay the deceased Participant's Nonforfeitable Accrued Benefit in a single cash sum, as soon as administratively practicable following the Participant's death or, if later, the date on
which the Advisory Committee receives notification of or otherwise confirms the Participant's death.
(2) Deceased Participant's Nonrollover Nonforfeitable Accrued Benefit Exceeds $5,000. The Advisory Committee will direct the Trustee to pay the deceased Participant's Nonforfeitable Accrued Benefit at the time and in the form elected by the Participant or, if applicable by the Beneficiary, as permitted under this Article VI. In the absence of an election, the Advisory Committee will direct the Trustee to distribute the Participant's undistributed Nonforfeitable Accrued Benefit in a lump sum as soon as administratively practicable following the Participant's death or, if later, the date on which the Advisory Committee receives notification of or otherwise confirms the Participant's death.
If the death benefit is payable to the Participant's surviving spouse in full, the surviving spouse, in addition to the distribution options provided in this Section 6.01(C), may elect distribution at any time or in any form this Article VI would permit for a Participant.
6.02 METHOD OF PAYMENT OF ACCRUED BENEFIT. Subject to any restrictions prescribed by Section 6.03, a Participant or Beneficiary may elect distribution from the Participant's Accounts under one or any combination of the following methods: (a) by payment in a lump sum; or (b) by payment in monthly, quarterly or annual installments over a fixed reasonable period of time, not exceeding the life expectancy of the Participant, or the joint life and last survivor expectancy of the Participant and his Beneficiary.
In the absence of contrary Participant elections, the Trustee shall make all distributions of benefits to Participants under the Plan in cash. A Participant may, however, elect to receive distributions of benefits under the Plan in whole shares of common stock of KCS, or in a combination of cash and whole shares of common stock of KCS, to the extent of whole shares of common stock of KCS allocated to such Participant's Accounts.
The installment distribution options permitted under this Section 6.02 are available only if the present value of the Participant's Nonrollover Nonforfeitable Accrued Benefit, at the time of the distribution to the Participant, exceeds $5,000. To facilitate installment payments under this Article VI, the Advisory Committee may direct the Trustee to segregate all or any part of the Participant's Accrued Benefit in a separate Account. The Trustee will invest the Participant's segregated Account in Federally insured interest bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. A segregated Account remains a part of the Trust, but it alone shares in any income it earns, and it alone bears any expense or loss it incurs. A Participant or Beneficiary may elect to receive an installment distribution in the form of a Nontransferable Annuity Contract. The Nontransferable Annuity Contract option will be eliminated with respect to distributions commencing on or after the earlier of ninety (90) days after a Participant receives a summary of material modification of the elimination of such option or two (2) years after the date of the adoption of this amendment and restatement of the Plan if such Participant does not receive a summary of material modification. Under an installment distribution, the Participant or Beneficiary, at any time, may elect to accelerate the payment of all, or any portion, of the Participant's unpaid Nonforfeitable Accrued Benefit.
(A) Minimum Distribution Requirements for Participants. The Advisory Committee may not direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit, nor may the Participant elect to have the Trustee distribute his Nonforfeitable Accrued Benefit, under a method of payment which, as of the Required Beginning Date, does not satisfy the minimum distribution requirements under Code Section 401(a)(9) and the applicable Treasury regulations. The minimum distribution for a calendar year equals the Participant's Nonforfeitable Accrued Benefit as of the latest valuation date preceding the beginning of the calendar year divided by the Participant's life expectancy or, if applicable, the joint and last survivor expectancy of the Participant and his designated Beneficiary (as determined under Article VIII, subject to the requirements of the Code Section 401(a)(9) regulations). The Advisory Committee will increase the Participant's Nonforfeitable Accrued Benefit, as determined on the relevant valuation date, for contributions or forfeitures allocated after the valuation date and by December 31 of the valuation calendar year, and will decrease the valuation by distributions made after the valuation date and by December 31 of the valuation calendar year. For purposes of this valuation, the Advisory Committee will treat any portion of the minimum distribution for the first distribution calendar year made after the close of that year as a distribution occurring in that first distribution calendar year. In computing a minimum distribution, the Advisory Committee must use the unisex life expectancy multiples under Treas. Reg. Section 1.72-9. The Advisory Committee, only upon the Participant's written request, will compute the minimum distribution for a calendar year subsequent to the first calendar year for which the Plan requires a minimum distribution by redetermining the applicable life expectancy. However, the Advisory Committee may not redetermine the joint life and last survivor expectancy of the Participant and a non-spouse designated Beneficiary in a manner which takes into account any adjustment to a life expectancy other than the Participant's life expectancy.
If the Participant's spouse is not his designated Beneficiary, a method of payment to the Participant may not provide more than incidental benefits to the Beneficiary. For Plan Years beginning after December 31, 1988, the Plan must satisfy the minimum distribution incidental benefit ("MDIB") requirement in the Treasury regulations issued under Code Section 401(a)(9) for distributions made on or after the Participant's Required Beginning Date and before the Participant's death. To satisfy the MDIB requirement, the Advisory Committee will compute the minimum distribution required by this Section 6.02(A) by substituting the applicable MDIB divisor for the applicable life expectancy factor, if the MDIB divisor is a lesser number. Following the Participant's death, the Advisory Committee will compute the minimum distribution required by this Section 6.02(A) solely on the basis of the applicable life expectancy factor and will disregard the MDIB factor. For Plan Years beginning prior to January 1, 1989, the Plan satisfies the incidental benefits requirement if the distributions to the Participant satisfied the MDIB requirement or if the present value of the retirement benefits payable solely to the Participant is greater than 50% of the present value of the total benefits payable to the Participant and his Beneficiaries. The Advisory Committee must determine whether benefits to the Beneficiary are incidental as of the date the Trustee is to commence payment of the retirement benefits to the Participant, or as of any date the Trustee redetermines the payment period to the Participant.
The minimum distribution for the first distribution calendar year is due by the Participant's Required Beginning Date. The minimum distribution for each subsequent distribution calendar year, including the calendar year in which the Participant's Required
Beginning Date falls, is due by December 31 of that year. If the Participant receives distribution in the form of a Nontransferable Annuity Contract, the distribution satisfies this Section 6.02(A) if the contract complies with the requirements of Code Section 401(a)(9) and the applicable Treasury regulations.
(B) Minimum Distribution Requirements for Beneficiaries. The
method of distribution to the Participant's Beneficiary must satisfy Code
Section 401(a)(9) and the applicable Treasury regulations. If the Participant's
death occurs after his Required Beginning Date, the method of payment to the
Beneficiary must provide for completion of payment over a period which does not
exceed the payment period which had commenced for the Participant. If the
Participant's death occurs prior to his Required Beginning Date, the method of
payment to the Beneficiary, must provide for completion of payment to the
Beneficiary over a period not exceeding: (i) 5 years after the date of the
Participant's death; or (ii) if the Beneficiary is a designated Beneficiary, the
designated Beneficiary's life expectancy. The Advisory Committee may not direct
payment of the Participant's Nonforfeitable Accrued Benefit over a period
described in clause (ii) unless the Trustee will commence payment to the
designated Beneficiary no later than the December 31 following the close of the
calendar year in which the Participant's death occurred or, if later, and the
designated Beneficiary is the Participant's surviving spouse, December 31 of the
calendar year in which the Participant would have attained age 70 1/2. If the
Trustee will make distribution in accordance with clause (ii), the minimum
distribution for a calendar year equals the Participant's Nonforfeitable Accrued
Benefit as of the latest valuation date preceding the beginning of the calendar
year divided by the designated Beneficiary's life expectancy. The Advisory
Committee must use the unisex life expectancy multiples under Treas. Reg.
Section 1.72-9 for purposes of applying this paragraph. The Advisory Committee,
only upon the written request of the Participant or of the Participant's
surviving spouse, will recalculate the life expectancy of the Participant's
surviving spouse not more frequently than annually but may not recalculate the
life expectancy of a non-spouse designated Beneficiary after the Trustee
commences payment to the designated Beneficiary. The Advisory Committee will
apply this paragraph by treating any amount paid to the Participant's child,
which becomes payable to the Participant's surviving spouse upon the child's
attaining the age of majority, as paid to the Participant's surviving spouse.
Upon the Beneficiary's written request, the Advisory Committee must direct the
Trustee to accelerate payment of all, or any portion, of the Participant's
unpaid Accrued Benefit, as soon as administratively practicable following the
effective date of that request.
6.03 BENEFIT PAYMENT ELECTIONS. Not earlier than 90 days before nor later than 30 days before the Participant's annuity starting date, the Plan Administrator must provide a benefit notice to a Participant who is eligible to make an election under this Section 6.03. The benefit notice must explain the optional forms of benefit in the Plan, including the material features and relative values of those options, and the Participant's right to defer distribution until he attains Normal Retirement Age.
A distribution may commence less than 30 days after the benefit notice is given, provided that:
(1) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the
decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and
(2) the Participant, after receiving the notice, affirmatively elects a distribution.
If a Participant or Beneficiary makes an election prescribed by this
Section 6.03, the Advisory Committee will direct the Trustee to distribute the
Participant's Nonforfeitable Accrued Benefit in accordance with that election.
Any election under this Section 6.03 is subject to the requirements of Section
6.02. The Participant or Beneficiary must make an election under this Section
6.03 by filing his election form with the Advisory Committee at any time before
the Trustee otherwise would commence to pay a Participant's Accrued Benefit in
accordance with the requirements of Article VI.
(A) Participant Elections After Termination of Employment. If the
present value of a Participant's Nonrollover Nonforfeitable Accrued Benefit
exceeds $5,000, he may elect to have the Trustee commence distribution as soon
as administratively practicable following the Participant's Separation from
Service. The Participant may reconsider an election at any time prior to the
annuity starting date and elect to commence distribution as of any other
distribution date, but not earlier than the date described in the first sentence
of this Paragraph (A). A Participant who has separated from Service may elect
distribution as of any distribution date following his attainment of Normal
Retirement Age, irrespective of the restrictions otherwise applicable under this
Section 6.03(A). If the Participant is partially-vested in his Accrued Benefit,
an election under this Paragraph (A) to distribute prior to the Participant's
incurring a Forfeiture Break in Service (as defined in Section 5.08), must be in
the form of a cash-out distribution (as defined in Article V). A Participant may
not receive a cash-out distribution if, prior to the time the Trustee actually
makes the cash out distribution, the Participant returns to employment with the
Employer.
(B) Participant Elections Prior to Termination of Employment.
(1) Distribution. After a Participant (1) attains Normal Retirement Age or (2) attains age 59-1/2 and has at least five Years of Service, or is otherwise 100% vested, the Participant, until he retires, has a continuing election to receive all or any portion of his Accrued Benefit attributable to his Regular Matching Contributions Account and Profit Sharing Contributions Account. A Participant must make an election under this Section 6.03(B) on a form prescribed by the Advisory Committee at any time during the Plan Year for which his election is to be effective. In his written election, the Participant must specify the percentage or dollar amount he wishes the Trustee to distribute to him. The Participant's election relates solely to the percentage or dollar amount specified in his election form and his right to elect to receive an amount, if any, for a particular Plan Year greater than the dollar amount or percentage specified in his election form terminates on the Accounting Date. The Trustee must make a distribution to a Participant in accordance with his election under this Section 6.03(B) within the 90-day period (or as soon as administratively practicable) after the Participant files his written election with the Trustee.
The Trustee will distribute the balance of the Participant's Accrued Benefit not distributed under this Section 6.03(B) in accordance with the other distribution provisions of this Plan.
(C) Death Benefit Elections. If the present value of the deceased Participant's Nonrollover Nonforfeitable Accrued Benefit exceeds $5,000, the Participant's Beneficiary may elect to have the Trustee distribute the Participant's Nonforfeitable Accrued Benefit in a form and within a period permitted under Section 6.02. The Beneficiary's election is subject to any restrictions designated in writing by the Participant and not revoked as of his date of death.
(D) Transitional Elections. Notwithstanding the provisions of
Section 6.01 and 6.02, if the Participant (or Beneficiary) signed a written
distribution designation prior to January 1, 1984, the Advisory Committee must
distribute the Participant's Nonforfeitable Accrued Benefit in accordance with
that designation. This Section 6.03(D) does not apply to a pre-1984 distribution
designation, and the Advisory Committee will not comply with that designation if
any of the following applies: the method of distribution would have disqualified
the Plan under Code Section 401(a)(9) as in effect on December 31, 1983; (2) the
Participant did not have an Accrued Benefit as of December 31, 1983; (3) the
distribution designation does not specify the timing and form of the
distribution and the death Beneficiaries (in order of priority); (4) the
substitution of a Beneficiary modifies the payment period of the distribution;
or (5) the Participant (or Beneficiary) modifies or revokes the distribution
designation. In the event of a revocation, the Plan must distribute, no later
than December 31 of the calendar year following the year of revocation, the
amount which the Participant would have received under Section 6.02(A) if the
election had not been in effect or, if the Beneficiary revokes the election, the
amount which the Beneficiary would have received under Section 6.02(B) if the
election had not been in effect. The Advisory Committee will apply this Section
6.03(D) to rollovers and transfers in accordance with Part J of the Code
Section 401(a)(9) regulations.
(E) Special Distributions Rules for Deferral Contributions Account, Rollover Account and Qualified Accounts. The in-service distribution provisions in Section 6.03(B) will not apply to the Deferral Contributions Account (including any Catch-up Contributions Subaccount), Rollover Account, Qualified Nonelective Contributions Account, and Qualified Matching Contributions Account. Instead, the distribution provisions in this Section 6.03(E) will apply to withdrawals from these Accounts by a Participant prior to his Separation from Service. After the Participant's Separation from Service, the provisions of this Article VI other than this Section 6.03(E) will apply to the distribution of the Participant's entire Accrued Benefit.
The Participant, until he retires, has a continuing election to receive a distribution from his Deferral Contributions Account (including any Catch-up Contributions Subaccount), Rollover Account, Qualified Nonelective Contributions Account, and Qualified Matching Contributions Account if: (I) he has attained age 59-1/2; or (II) he incurs an immediate and heavy financial hardship. The distribution event under clause (I) applies to all or any portion of these Accounts. The distribution event under clause (II) applies only to the elective deferrals allocated to the Participant's Deferral Contributions Account (excluding earnings) and the Participant's Rollover Account.
A hardship distribution, as described in clause (II), must be on account of one or more of the following immediate and heavy financial needs: (1) medical expenses described in Code
Section 213(d) incurred by the Participant, by the Participant's spouse, or by
any of the Participant's dependents, or necessary to obtain such medical care;
(2) the purchase (excluding mortgage payments) of a principal residence for the
Participant; (3) the payment of post-secondary education tuition, related
educational fees, and room and board expenses, for the next 12 months for the
Participant, for the Participant's spouse, or for any of the Participant's
dependents; or (4) to prevent the eviction of the Participant from his principal
residence or the foreclosure on the mortgage of the Participant's principal
residence. The Participant may make application for a hardship distribution at
any time.
Restrictions on hardship distribution. The following restrictions apply to a Participant's hardship distribution under this Section 6.03(E) that is made from the Participant's Deferral Contributions Account (including any Catch-up Contributions Subaccount): (a) the Participant may not make elective deferrals or employee contributions to the Plan for the 12-month period following the date of his hardship distribution; (b) the distribution may not exceed the amount of the immediate and heavy financial need (including any amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution); and (c) the Participant must have obtained all distributions, other than hardship distributions, and all nontaxable loans currently available under this Plan and all other qualified plans maintained by the Employer. The suspension of elective deferrals and employee contributions described in clause (a) also must apply to all other qualified plans and to all nonqualified plans of deferred compensation maintained by the Employer (other than any mandatory employee contribution portion of a defined benefit plan), including stock option, stock purchase and other similar plans. Notwithstanding the previous sentence, the suspension of employee contributions shall not include employee contributions for health or welfare benefit plans (other than the cash or deferred arrangement portion of a cafeteria plan). In order to make elective deferrals or employee contributions to the Plan following the 12-month suspension period, the Participant must file a new salary reduction agreement with the Advisory Committee. A salary reduction agreement executed by an eligible Employee shall be effective in accordance with Sections 12.01 and 12.06.
Procedure. A Participant must make an election under this Section 6.03(E) on a form prescribed by the Advisory Committee at any time during the Plan Year for which his election is to be effective. In his written election, the Participant must specify the percentage or dollar amount he wishes the Trustee to distribute to him. The Participant's election relates solely to the percentage or dollar amount specified in his election form and his right to elect to receive an amount, if any, for a particular Plan Year greater than the dollar amount or percentage specified in his election form terminates on the Accounting Date. The minimum amount a Participant may elect for purposes of a hardship distribution is $1,000. A hardship distribution shall be withdrawn first from the Participant's Rollover Account and second from the Participant's Deferral Contributions Account (including any Catch-up Contributions Subaccount). The Trustee must make a distribution to a Participant in accordance with his election under this Section 6.03(E) within the 90-day period (or as soon as administratively practicable) after the Participant files his written election with the Trustee.
6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES. The joint and survivor annuity requirements do not apply to this Plan. The Plan does not provide any annuity distributions to Participants nor to surviving spouses. A transfer
agreement described in Section 11.05 may not permit a plan which is subject to the provisions of Code Section417 to transfer assets to this Plan, unless the transfer is an elective transfer, as described in Section 11.05.
6.05 WAIVER ELECTION - QUALIFIED JOINT AND SURVIVOR ANNUITY.
[Reserved]
6.06 WAIVER ELECTION - PRERETIREMENT SURVIVOR ANNUITY. [Reserved]
6.07 DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS. Nothing contained in this Plan prevents the Trustee, in accordance with the direction of the Advisory Committee, from complying with the provisions of a qualified domestic relations order (as defined in Code Section 414(p)). This Plan specifically permits distribution to an alternate payee under a qualified domestic relations order as soon as administratively practicable irrespective of whether the Participant has attained his earliest retirement age (as defined under Code Section 414(p)) under the Plan. A distribution to an alternate payee prior to the Participant's attainment of earliest retirement age is available only if: (1) the order specifies distribution at that time or permits an agreement between the Plan and the alternate payee to authorize an earlier distribution; and (2) if the present value of the alternate payee's benefits under the Plan exceeds $5,000, and the order requires, the alternate payee consents to any distribution occurring prior to the Participant's attainment of earliest retirement age. Nothing in this Section 6.07 gives a Participant a right to receive distribution at a time otherwise not permitted under the Plan nor does it permit the alternate payee to receive a form of payment not permitted under the Plan.
The Plan Administrator must establish reasonable procedures to determine the qualified status of a domestic relations order. Upon receiving a domestic relations order, the Plan Administrator promptly will notify the Participant and any alternate payee named in the order, in writing, of the receipt of the order and the Plan's procedures for determining the qualified status of the order. Within a reasonable period of time after receiving the domestic relations order, the Plan Administrator must determine the qualified status of the order and must notify the Participant and each alternate payee, in writing, of its determination. The Plan Administrator must provide notice under this paragraph by mailing to the individual's address specified in the domestic relations order, or in a manner consistent with Department of Labor regulations. A qualified domestic relations order that, prior to the Effective Date, had been determined to be qualified under the Profit Sharing Plan with respect to the Accrued Benefit of a Participant under the Profit Sharing Plan, shall continue to be treated as a qualified domestic relations order under this Plan with respect to the Accounts of the Participant that were transferred to this Plan from the Profit Sharing Plan.
If any portion of the Participant's Nonforfeitable Accrued Benefit is payable during the period the Plan Administrator is making its determination of the qualified status of the domestic relations order, the Advisory Committee must make a separate accounting of the amounts payable. If the Plan Administrator determines the order is a qualified domestic relations order within 18 months of the date amounts first are payable following receipt of the order, the Advisory Committee will direct the Trustee to distribute the payable amounts in accordance with the order. If the Plan Administrator does not make its determination of the qualified status of the
order within the 18 month determination period, the Advisory Committee will direct the Trustee to distribute the payable amounts in the manner the Plan would distribute if the order did not exist and will apply the order prospectively if the Plan Administrator later determines the order is a qualified domestic relations order.
To the extent it is not inconsistent with the provisions of the qualified domestic relations order, the Advisory Committee at the election of an alternate payee may direct the Trustee to invest any partitioned amount in a segregated subaccount or separate account and to invest the account in Federally insured, interest-bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. A segregated subaccount remains a part of the Trust, but it alone shares in any income it earns, and it alone bears any expense or loss it incurs. The Trustee will make any payments or distributions required under this Section 6.07 by separate benefit checks or other separate distribution to the alternate payee(s).
6.08 ROLLOVER DISTRIBUTIONS. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. For purposes of this Section 6.08, the following definitions shall apply.
(a) Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under section 401(a)(9) of the Code; and any hardship distributions made pursuant to Section 6.03(E).
(b) Eligible retirement plan: An eligible retirement plan is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in 403(a) of the Code, an annuity contract described in section 403(b) of the Code, an eligible plan under section 457(b) of the Code which is maintained by a state, political subdivison of a state, or any agency or instrumentality of a state or political subdivision of a state, or a qualified trust described in section 401(a) of the Code, that accepts and agrees to separately account for the distributee's eligible rollover distribution.
(c) Distributee: A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse.
(d) Direct rollover: A direct rollover is a payment by the Plan to an eligible retirement plan specified by the distributee.
ARTICLE VII.
EMPLOYER ADMINISTRATIVE PROVISIONS
7.01 INFORMATION TO COMMITTEE. The Employer must supply current information to the Advisory Committee as to the name, date of birth, date of employment, annual compensation, leaves of absence, Years of Service and date of termination of employment of each Employee who is, or who will be eligible to become, a Participant under the Plan, together with any other information which the Advisory Committee considers necessary. The Employer's records as to the current information the Employer furnishes to the Advisory Committee are conclusive as to all persons.
7.02 NO LIABILITY. The Employer assumes no obligation or responsibility to any of its Employees, Participants or Beneficiaries for any act of, or failure to act, on the part of its Advisory Committee (unless the Employer is the Advisory Committee), the Trustee or the Plan Administrator (unless the Employer is the Plan Administrator).
7.03 INDEMNITY OF COMMITTEE. The Employer indemnifies and saves harmless the Plan Administrator and the members of the Advisory Committee, and each of them, from and against any and all loss resulting from liability to which the Plan Administrator and the Advisory Committee, or the members of the Advisory Committee, may be subjected by reason of any act or conduct (except willful misconduct or gross negligence) in their official capacities in the administration of this Trust or Plan or both, including all expenses reasonably incurred in their defense, in case the Employer fails to provide such defense. The indemnification provisions of this Section 7.03 do not relieve the Plan Administrator or any Advisory Committee member from any liability he may have under ERISA for breach of a fiduciary duty. Furthermore, the Plan Administrator and the Advisory Committee members and the Employer may execute a letter agreement further delineating the indemnification agreement of this Section 7.03, provided the letter agreement must be consistent with and must not violate ERISA. The indemnification provisions of this Section 7.03 extend to the Trustee solely to the extent provided by a letter agreement executed by the Trustee and the Employer.
7.04 EMPLOYER DIRECTION OF INVESTMENT. The Employer has the right to direct the Trustee with respect to the investment and reinvestment of assets comprising the Trust Fund only if the Trustee consents in writing to permit such direction. If the Trustee consents to Employer direction of investment, the Trustee and the Employer must execute a letter agreement as a part of this Plan containing such conditions, limitations and other provisions they deem appropriate before the Trustee will follow any Employer direction as respects the investment or reinvestment of any part of the Trust Fund.
7.05 AMENDMENT TO VESTING SCHEDULE. Though the Employer reserves the right to amend the vesting schedule at any time, the Advisory Committee will not apply the amended vesting schedule to reduce the Nonforfeitable percentage of any Participant's Accrued Benefit derived from Employer contributions (determined as of the later of the date the Employer adopts the amendment, or the date the amendment becomes effective) to a percentage less than the Nonforfeitable percentage computed under the Plan without regard to the amendment.
If the Employer makes a permissible amendment to the vesting schedule,
each Participant having at least 3 Years of Service with the Employer may elect
to have the percentage of his Nonforfeitable Accrued Benefit computed under the
Plan without regard to the amendment. The Participant must file his election
with the Plan Administrator within 60 days of the latest of (a) the Employer's
adoption of the amendment; (b) the effective date of the amendment; or (c) his
receipt of a copy of the amendment. The Plan Administrator, as soon as
practicable, must forward a true copy of any amendment to the vesting schedule
to each affected Participant, together with an explanation of the effect of the
amendment, the appropriate form upon which the Participant may make an election
to remain under the vesting schedule provided under the Plan prior to the
amendment and notice of the time within which the Participant must make an
election to remain under the prior vesting schedule. For purposes of this
Section 7.05, an amendment to the vesting schedule includes any Plan amendment
which directly or indirectly affects the computation of the Nonforfeitable
percentage of an Employee's rights to his Employer derived Accrued Benefit.
ARTICLE VIII.
PARTICIPANT ADMINISTRATIVE PROVISIONS
8.01 BENEFICIARY DESIGNATION. Any Participant may from time to time designate, in writing, any person or persons, contingently or successively, to whom the Trustee will pay his Accrued Benefit (including any life insurance proceeds payable to the Participant's Account) in the event of his death and the Participant may designate the form and method of payment. The Advisory Committee will prescribe the form for the written designation of Beneficiary and, upon the Participant's filing the form with the Advisory Committee, the form effectively revokes all designations filed prior to that date by the same Participant. A Beneficiary designation by a Participant that was valid under the Profit Sharing Plan immediately prior to the Merger Date shall continue to be valid under this Plan as to the Participant's Accounts transferred to the Plan from the Profit Sharing Plan until revoked by the Participant in accordance with this Section 8.01.
A married Participant's Beneficiary designation is not valid unless the Participant's spouse consents, in writing, to the Beneficiary designation. The spouse's consent must acknowledge the effect of that consent and a notary public or the Plan Administrator (or his representative) must witness that consent. The spousal consent requirements of this paragraph do not apply if: (1) the Participant and his spouse are not married through the one-year period ending on the date of the Participant's death; (2) the Participant's spouse is the Participant's sole primary beneficiary; (3) the Plan Administrator is not able to locate the Participant's spouse; (4) the Participant is legally separated or has been abandoned (within the meaning of State law) and the Participant has a court order to that effect; or (5) other circumstances exist under which the Secretary of the Treasury will excuse the consent requirement. If the Participant's spouse is legally incompetent to give consent, the spouse's legal guardian (even if the guardian is the Participant) may give consent.
8.02 NO BENEFICIARY DESIGNATION. If a Participant fails to name a Beneficiary in accordance with Section 8.01, or if the Beneficiary named by a Participant predeceased him, then the Trustee will pay the Participant's Accrued Benefit in accordance with Section 6.02 in the following order of priority to:
(a) The Participant's surviving spouse;
(b) The Participant's surviving children, including adopted children, in equal shares;
(c) The Participant's surviving parents, in equal shares; or
(d) The legal representative of the estate of the Participant.
If the Beneficiary does not predecease the Participant, but dies prior to distribution of the Participant's entire Nonforfeitable Accrued Benefit, the Trustee will pay the remaining Nonforfeitable Accrued Benefit to the Beneficiary's estate unless the Participant's Beneficiary designation provides otherwise. The Advisory Committee will direct the Trustee as to the method and to whom the Trustee will make the payment under this Section 8.02.
8.03 PERSONAL DATA TO COMMITTEE. Each Participant and each Beneficiary of a deceased Participant must furnish to the Advisory Committee such evidence, data or information as the Advisory Committee considers necessary or desirable for the purpose of administering the Plan. The provisions of this Plan are effective for the benefit of each Participant upon the condition precedent that each Participant will furnish promptly full, true and complete evidence, data and information when requested by the Advisory Committee, provided the Advisory Committee advises each Participant of the effect of his failure to comply with its request.
8.04 ADDRESS FOR NOTIFICATION. Each Participant and each Beneficiary of a deceased Participant must file with the Advisory Committee from time to time, in writing, his post office address and any change of post office address. Any communication, statement or notice addressed to a Participant, or Beneficiary, at his last post office address filed with the Advisory Committee, or as shown on the records of the Employer, binds the Participant, or Beneficiary, for all purposes of this Plan.
8.05 ASSIGNMENT OR ALIENATION. Subject to Code Section414(p) relating to qualified domestic relations orders, neither a Participant nor a Beneficiary may anticipate, assign or alienate (either at law or in equity) any benefit provided under the Plan, and the Trustee will not recognize any such anticipation, assignment or alienation. Furthermore, a benefit under the Plan is not subject to attachment, garnishment, levy, execution or other legal or equitable process.
8.06 NOTICE OF CHANGE IN TERMS. The Plan Administrator, within the time prescribed by ERISA and the applicable regulations, must furnish all Participants and Beneficiaries a summary description of any material amendment to the Plan or notice of discontinuance of the Plan and all other information required by ERISA to be furnished without charge.
8.07 LITIGATION AGAINST THE TRUST. A court of competent jurisdiction may authorize any appropriate equitable relief to redress violations of ERISA or to enforce any provisions of ERISA or the terms of the Plan. A fiduciary may receive reimbursement of expenses properly and actually incurred in the performance of his duties with the Plan.
8.08 INFORMATION AVAILABLE. Any Participant in the Plan or any
Beneficiary may examine copies of the Plan description, latest annual report,
any bargaining agreement, this Plan and Trust, contract or any other instrument
under which the Plan was established or is operated. The Plan Administrator will
maintain all of the items listed in this Section 8.08 in his office, or in such
other place or places as he may designate from time to time in order to comply
with the regulations issued under ERISA, for examination during reasonable
business hours. Upon the written request of a Participant or Beneficiary the
Plan Administrator will furnish him with a copy of any item listed in this
Section 8.08. The Plan Administrator may make a reasonable charge to the
requesting person for the copy so furnished.
8.09 APPEAL PROCEDURE FOR DENIAL OF BENEFITS. The Plan Administrator will provide adequate notice in writing to any Participant or to any Beneficiary ("Claimant") whose claim for benefits under the Plan the Advisory Committee has denied. The Plan Administrator's notice to the Claimant must set forth:
(a) The specific reason for the denial;
(b) Specific references to pertinent Plan provisions on which the Advisory Committee based its denial;
(c) A description of any additional material and information needed for the Claimant to perfect his claim and an explanation of why the material or information is needed; and
(d) That any appeal the Claimant wishes to make of the adverse determination must be in writing to the Advisory Committee within 75 days after receipt of the Plan Administrator's notice of denial of benefits. The Plan Administrator's notice must further advise the Claimant that his failure to appeal the action to the Advisory Committee in writing within the 75 day period will render the Advisory Committee's determination final, binding and conclusive.
If the Claimant should appeal to the Advisory Committee, he, or his duly authorized representative, may submit, in writing, whatever issues and comments he, or his duly authorized representative, feels are pertinent. The Claimant, or his duly authorized representative, may review pertinent plan documents. The Advisory Committee will reexamine all facts related to the appeal and make a final determination as to whether the denial of benefits is justified under the circumstances. The Advisory Committee must advise the Claimant of its decision within 60 days of the Claimant's written request for review, unless special circumstances (such as a hearing) would make the rendering of a decision within the 60 day limit unfeasible, but in no event may the Advisory Committee render a decision respecting a denial for a claim for benefits later than 120 days after its receipt of a request for review.
The Plan Administrator's notice of denial of benefits must identify the name of each member of the Advisory Committee and the name and address of the Advisory Committee member to whom the Claimant may forward his appeal.
ARTICLE IX.
ADVISORY COMMITTEE - DUTIES WITH RESPECT
TO PARTICIPANT'S ACCOUNTS
9.01 MEMBERS' COMPENSATION, EXPENSES. The Sponsor must appoint an Advisory Committee to administer the Plan, the members of which may or may not be Participants in the Plan, or which may be the Plan Administrator acting alone. The members of the Advisory Committee will serve without compensation for services as such. All expenses of the Plan and Trust (including Trustee fees) will be paid out of the assets of the Plan except to the extent paid by the Employer.
9.02 TERM. Each member of the Advisory Committee serves until the appointment of his successor.
9.03 POWERS. In case of a vacancy in the membership of the Advisory Committee, the remaining members of the Advisory Committee may exercise any and all of the powers, authority, duties and discretion conferred upon the Advisory Committee pending the filling of the vacancy.
9.04 GENERAL. The Advisory Committee, in its sole and absolute discretion, shall have all powers necessary to discharge its duties under this Plan including, without limitation, the following:
(a) To select a Secretary, who need not be a member of the Advisory Committee;
(b) To determine the rights of eligibility of an Employee to participate in the Plan, the value of a Participant's Accrued Benefit and the Nonforfeitable percentage of each Participant's Accrued Benefit;
(c) To adopt rules of procedure and regulations necessary for the proper and efficient administration of the Plan provided the rules are not inconsistent with the terms of this Plan;
(d) To construe and enforce the terms of the Plan and the rules and regulations it adopts, including interpretation of the Plan documents and documents related to the Plan's operation, and its decisions shall be final and binding on all interested persons;
(e) To direct the Trustee as respects the crediting and distribution of the Trust;
(f) To review and render decisions respecting a claim for (or denial of a claim for) a benefit under the Plan;
(g) To furnish the Employer with information which the Employer may require for tax or other purposes;
(h) To engage the service of agents whom it may deem advisable to assist it with the performance of its duties; and
(i) To engage the services of an Investment Manager or Managers (as defined in ERISA Section 3(38)), each of whom will have full power and authority to manage, acquire or dispose (or direct the Trustee with respect to acquisition or disposition) of any Plan asset under its control.
The Advisory Committee must exercise all of its powers, duties and discretion under the Plan in a uniform and nondiscriminatory manner.
9.05 FUNDING POLICY. The Advisory Committee will review, not less often than annually, all pertinent Employee information and Plan data in order to establish the funding policy of the Plan and to determine the appropriate methods of carrying out the Plan's objectives. The Advisory Committee must communicate periodically, as it deems appropriate, to the Trustee and to any Plan Investment Manager the Plan's short-term and long-term financial needs so investment policy can be coordinated with Plan financial requirements.
9.06 MANNER OF ACTION. The decision of a majority of the members appointed and qualified controls.
9.07 AUTHORIZED REPRESENTATIVE. The Advisory Committee may authorize any person, whether or not such person is a member of the Advisory Committee, to sign on its behalf any notices, directions, applications, certificates, consents, approvals, waivers, letters or other documents. The Advisory Committee must evidence this authority by an instrument signed by all members and filed with the Trustee.
9.08 INTERESTED MEMBER. No member of the Advisory Committee may decide or determine any matter concerning the distribution, nature or method of settlement of his own benefits under the Plan, except in exercising an election available to that member in his capacity as a Participant, unless the Plan Administrator is acting alone in the capacity of the Advisory Committee.
9.09 INDIVIDUAL ACCOUNTS. The Advisory Committee will maintain, or direct the Trustee to maintain, a separate Account, or multiple Accounts, in the name of each Participant to reflect the Participant's Accrued Benefit in accordance with the provisions of Article XV hereof and shall give the Trustee directions with respect to the investment of the Accounts of Participants in accordance with the provisions of Article XV.
9.10 INDIVIDUAL STATEMENT. As soon as practicable after the Accounting Date of each Plan Year, but within the time prescribed by ERISA and the regulations under ERISA, the Plan Administrator will deliver to each Participant (and to each Beneficiary) a statement reflecting the condition of his Accrued Benefit in the Trust as of that date and such other information ERISA requires be furnished the Participant or Beneficiary. No Participant, except a member of the Advisory Committee, has the right to inspect the records reflecting the Account of any other Participant.
9.11 ACCOUNT CHARGED. The Advisory Committee will charge all distributions made to a Participant or to his Beneficiary from his Account against the Account of the Participant when made.
9.12 UNCLAIMED ACCOUNT PROCEDURE. The Plan does not require either the Trustee or the Advisory Committee to search for, or ascertain the whereabouts of, any Participant or Beneficiary. At the time the Participant's or Beneficiary's benefit becomes distributable under Article VI, the Advisory Committee, by certified or registered mail addressed to his last known address of record with the Advisory Committee or the Employer, must notify the Participant, or Beneficiary, that he is entitled to a distribution under this Plan. The notice must quote the provisions of this Section 9.12 and otherwise must comply with the notice requirements of Article VI. If the Participant, or Beneficiary, fails to claim his distributive share or make his whereabouts known in writing to the Advisory Committee within 6 months from the date of mailing of the notice, the Advisory Committee will treat the Participant's or Beneficiary's unclaimed payable Accrued Benefit as forfeited and will reallocate the unclaimed payable Accrued Benefit in accordance with Section 3.05. Where the benefit is distributable to the Participant, the forfeiture under this paragraph occurs as of the last day of the notice period, if the Participant's Nonrollover Nonforfeitable Accrued Benefit does not exceed $5,000, or as of the first day the benefit is distributable without the Participant's consent, if the present value of the Participant's Nonrollover Nonforfeitable Accrued Benefit exceeds $5,000. Where the benefit is distributable to a Beneficiary, the forfeiture occurs on the date the notice period ends except, if the Beneficiary is the Participant's spouse and the Nonrollover Nonforfeitable Accrued Benefit payable to the spouse exceeds $5,000, the forfeiture occurs as of the first day the benefit is distributable without the spouse's consent. Pending forfeiture, the Advisory Committee, following the expiration of the notice period, may direct the Trustee to segregate the Nonforfeitable Accrued Benefit in a segregated Account and to invest that segregated Account in Federally insured interest bearing savings accounts or time deposits (or in a combination of both), or in other fixed income investments.
If a Participant or Beneficiary who has incurred a forfeiture of his Accrued Benefit under the provisions of the first paragraph of this Section 9.12 makes a claim, at any time, for his forfeited Accrued Benefit, the Advisory Committee must restore the Participant's or Beneficiary's forfeited Accrued Benefit to the same dollar amount as the dollar amount of the Accrued Benefit forfeited, unadjusted for any gains or losses occurring subsequent to the date of the forfeiture. The Advisory Committee will make the restoration during the Plan Year in which the Participant or Beneficiary makes the claim, first from the amount, if any, of Participant forfeitures the Advisory Committee otherwise would allocate for the Plan Year, then from the amount, if any, of the Trust Fund net income or gain for the Plan Year and then from the amount, or additional amount, the Employer contributes to enable the Advisory Committee to make the required restoration. The Advisory Committee will direct the Trustee to distribute the Participant's or Beneficiary's restored Accrued Benefit to him no later than 60 days after the close of the Plan Year in which the Advisory Committee restores the forfeited Accrued Benefit. The forfeiture provisions of this Section 9.12 apply solely to the Participant's or to the Beneficiary's Accrued Benefit derived from Employer contributions.
9.13 INVESTMENT MANAGER. The Advisory Committee shall have the right, as provided in Section 9.04(i), to appoint an Investment Manager for all or any part of the assets of the Trust Fund as the Advisory Committee shall designate, provided that any firm so appointed shall be and continue qualified to act as such in accordance with ERISA. The Advisory Committee may remove any Investment Manager at any time, and need not specify any cause for such removal.
9.14 BLACK-OUT PERIOD. Notwithstanding any other provisions in the Plan to the contrary, in the event of a change in recordkeepers, trustees, investment vehicles or other similar change or event, the Advisory Committee shall have the power and authority to impose such temporary restrictions and limitations on loans, withdrawals, distributions and Participant investment elections as necessary to facilitate such a change or event (a "black-out period"). In the event of a change in investment funds, the Advisory Committee shall have the authority to direct the investment of each Participant's Accounts and contributions in investment vehicles having investment objectives and risks similar to those investment vehicles being eliminated or replaced.
9.15 ELECTRONIC ELECTIONS. Anything in the Plan to the contrary notwithstanding, the Advisory Committee, in its discretion, may make disclosure or give information to Participants and Beneficiaries and permit Participants or their Beneficiaries to make electronic or telephonic elections in lieu of written disclosure, information or elections provided in the Plan. In making such a determination, the Advisory Committee shall consider the availability of electronic and telephonic disclosure of information and elections to Participants and Beneficiaries, the protection of the rights of Participants and their Beneficiaries, the appropriateness of the standards for authentication of identity and other security considerations involved in the electronic or telephonic election system and any guidance issued by the Internal Revenue Service and the Department of Labor. Notwithstanding the foregoing, any election requiring spousal consent shall be made only on such written forms as approved by the Advisory Committee.
ARTICLE X.
[RESERVED]
ARTICLE XI.
EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION
11.01 EXCLUSIVE BENEFIT. Except as provided under Article III, the Employer has no beneficial interest in any asset of the Trust and no part of any asset in the Trust may ever revert to or be repaid to an Employer, either directly or indirectly; nor, prior to the satisfaction of all liabilities with respect to the Participants and their Beneficiaries under the Plan, may any part of the corpus or income of the Trust Fund, or any asset of the Trust, be (at any time) used for, or diverted to, purposes other than the exclusive benefit of the Participants or their Beneficiaries.
11.02 AMENDMENT BY EMPLOYER. Kansas City Southern, by duly adopted resolution of its Board of Directors, or of the Compensation and Organization Committee of its Board of Directors, has the right at any time and from time to time:
(a) To amend this Plan in any manner it deems necessary or
advisable in order to qualify (or maintain qualification of) this Plan
and the Trust created under it under the appropriate provisions of Code
Section 401(a); or
(b) To amend this Plan in any other manner.
No amendment may authorize or permit any of the Trust Fund (other than the part which is required to pay taxes and administration expenses) to be used for or diverted to purposes other than for the exclusive benefit of the Participants or their Beneficiaries or estates. No amendment may cause or permit any portion of the Trust Fund to revert to or become a property of the Employer. No amendment may be made which affects the rights, duties or responsibilities of the Trustee, the Plan Administrator or the Advisory Committee without the written consent of the affected Trustee, the Plan Administrator or the affected member of the Advisory Committee.
Code Section 411(d)(6) Protected Benefits. An amendment (including the
adoption of this Plan as a restatement of an existing plan) may not decrease a
Participant's Accrued Benefit, except to the extent permitted under Code
Section 412(c)(8), and may not reduce or eliminate Code Section 411(d)(6)
protected benefits determined immediately prior to the adoption date (or, if
later, the effective date) of the amendment. An amendment reduces or eliminates
Code Section 411(d)(6) protected benefits if the amendment has the effect of
either (1) eliminating or reducing an early retirement benefit or a
retirement-type subsidy (as defined in Treasury regulations), or (2) except as
provided by Treasury regulations, eliminating an optional form of benefit. The
Advisory Committee must disregard an amendment to the extent application of the
amendment would fail to satisfy this paragraph. If the Advisory Committee must
disregard an amendment because the amendment would violate clause (1) or clause
(2), the Advisory Committee must maintain a schedule of the early retirement
option or other optional forms of benefit the Plan must continue for the
affected Participants.
All amendments must be made in writing. Each amendment must state the date to which it is either retroactively or prospectively effective.
11.03 DISCONTINUANCE. Each Employer has the right, at any time, to suspend or discontinue its contributions under the Plan. The Board of Directors of Kansas City Southern, or the Compensation and Organization Committee thereof, or any other duly authorized committee thereof, has the right to terminate, at any time, this Plan and the Trust created under it. The Plan will terminate upon the first to occur of the following:
(a) The date terminated by action of the Board of Directors of Kansas City Southern, or the Compensation and Organization Committee thereof, or any other duly authorized committee thereof; or
(b) The date Kansas City Southern is judicially declared bankrupt or insolvent, unless the proceeding authorized continued maintenance of the Plan.
11.04 FULL VESTING ON TERMINATION. Upon either full or partial termination of the Plan, or, if applicable, upon complete discontinuance of profit sharing plan contributions to the Plan, an affected Participant's right to his Accrued Benefit is 100% Nonforfeitable, irrespective of the Nonforfeitable percentage which otherwise would apply under Article V.
11.05 MERGER/DIRECT TRANSFER. The Plan may not be a party to any merger or consolidation with another plan, or to a transfer of assets or liabilities to another plan, unless immediately after the merger, consolidation or transfer, the surviving Plan provides each Participant a benefit equal to or greater than the benefit each Participant would have received had the Plan terminated immediately before the merger or consolidation or transfer. The Advisory
Committee possesses the specific authority to enter into merger agreements or direct transfer of assets agreements with the trustees of other retirement plans described in Code Section 401(a), including an elective transfer, and to accept the direct transfer of plan assets, or to transfer plan assets, as a party to any such agreement.
The Advisory Committee may accept a direct transfer of plan assets on behalf of an Employee prior to the date the Employee satisfies the Plan's eligibility conditions. If the Advisory Committee accepts a direct transfer of plan assets, the Advisory Committee must treat the Employee as a Participant for all purposes of the Plan except the Employee is not a Participant for purposes of sharing in Employer contributions or Participant forfeitures under the Plan until he actually becomes a Participant in the Plan.
The Advisory Committee may not consent to, or be a party to a merger,
consolidation or transfer of assets with a defined benefit plan, except with
respect to an elective transfer. The Trustee will hold, administer and
distribute the transferred assets as a part of the Trust Fund and the Trustee
must maintain a separate Employer contribution Account for the benefit of the
Employee on whose behalf the Advisory Committee accepted the transfer in order
to reflect the value of the transferred assets. Unless a transfer of assets to
this Plan is an elective transfer, the Plan will preserve all Code
Section 411(d)(6) protected benefits with respect to those transferred assets,
in the manner described in Section 11.02. A transfer is an elective transfer if:
(1) the transfer satisfies the first paragraph of this Section 11.05; (2) the
transfer is voluntary, under a fully informed election by the Participant; (3)
the Participant has an alternative that retains his Code Section 411(d)(6)
protected benefits (including an option to leave his benefit in the transferor
plan, if that plan is not terminating); (4) the transfer satisfies the
applicable spousal consent requirements of the Code; (5) the transferor plan
satisfies the joint and survivor notice requirements of the Code, if the
Participant's transferred benefit is subject to those requirements; (6) the
Participant has a right to immediate distribution from the transferor plan, in
lieu of the elective transfer; (7) the transferred benefit is at least the
greater of the single sum distribution provided by the transferor plan payable
at that plan's normal retirement age; (8) the Participant has a 100%
Nonforfeitable interest in the transferred benefit; and (9) the transfer
otherwise satisfies applicable Treasury regulations. An elective transfer may
occur between qualified plans of any type.
Distribution restrictions under Code Section 401(k). If the Plan
receives a direct transfer (by merger or otherwise) of elective contributions
(or amounts treated as elective contributions) under a plan with a Code
Section 401(k) arrangement, the distribution restrictions of Code
Sections 401(k)(2) and (10) continue to apply to those transferred elective
contributions.
11.06 TERMINATION. Upon termination of the Plan, the distribution provisions of Article VI remain operative, with the following exceptions:
(1) if the present value of the Participant's Nonrollover Nonforfeitable Accrued Benefit does not exceed $5,000, the Advisory Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit to him in lump sum as soon as administratively practicable after the Plan terminates; and
(2) if the present value of the Participant's Nonrollover Nonforfeitable Accrued Benefit exceeds $5,000, the Participant or the Beneficiary, in addition to the
distribution events permitted under Article VI, may elect to have the Trustee commence distribution of his Nonforfeitable Accrued Benefit as soon as administratively practicable after the Plan terminates.
To liquidate the Trust, the Advisory Committee will purchase a deferred annuity contract for each Participant which protects the Participant's distribution rights under the Plan, if the Participant's Nonrollover Nonforfeitable Accrued Benefit exceeds $5,000 and the Participant does not elect an immediate distribution pursuant to Paragraph (2). The Trust will continue until the Trustee in accordance with the direction of the Advisory Committee has distributed all of the benefits under the Plan.
On each valuation date, the Advisory Committee will credit any part of a Participant's Accrued Benefit retained in the Trust with its proportionate share of the Trust's income, expenses, gains and losses, both realized and unrealized. Upon termination of the Plan, the amount, if any, in a suspense account under Article III will revert to the Employer, subject to the conditions of the Treasury regulations permitting such a reversion. A resolution or amendment to freeze all future benefit accrual but otherwise to continue maintenance of this Plan, is not a termination for purposes of this Section 11.06.
Special Rule for Deferral Contributions Account. Notwithstanding the
provisions of this Section 11.06, the Participant may not receive a distribution
of the portion of his Nonforfeitable Accrued Benefit attributable to elective
contributions under a Code Section 401(k) arrangement (or to amounts treated
under the Code Section 401(k) arrangement as elective contributions) pursuant to
the termination of the Plan unless: (a) the Participant otherwise is entitled to
a distribution of that portion of his Nonforfeitable Accrued Benefit; or (b) the
Plan termination occurs without the establishment of a successor plan. A plan is
a successor plan under clause (b) if (i) the plan is a defined contribution plan
(other than an ESOP) maintained by the Employer (or by a related employer); (ii)
at least 2% of the Employees who were eligible under the Plan are or were
eligible under the successor plan at any time within the 24-month period ending
after the time of termination; and (iii) the successor plan is in existence at
the time of the termination of the Plan or within the period ending twelve (12)
months after the final distribution of assets of the Plan. A distribution
pursuant to clause (b), must be part of a lump sum distribution to the
Participant of his Nonforfeitable Accrued Benefit.
ARTICLE XII.
PROVISIONS RELATING TO THE CODE Section 401(k) ARRANGEMENT
12.01 CODE Section 401(k) ARRANGEMENT. The deferral contributions
and related Employer contributions described in Section 3.01(A) comprise a Code
Section 401(k) arrangement. An Employee who is eligible to participate in the
401(k) arrangement may file a salary reduction agreement with the Advisory
Committee. A salary reduction agreement must specify the amount of Compensation
or percentage of Compensation the Employee wishes to defer; for which purpose
"Compensation" shall be as defined in Section 1.10 but modified to exclude
income attributable to the grant or exercise of employee stock options, the
vesting of restricted property, and such similar items of extraordinary or
non-cash compensation as the Advisory Committee shall prescribe. Any reference
in this Section to "Compensation" is a reference to such definition of
"Compensation" as so modified.
A salary reduction agreement executed by an eligible Employee shall be
effective with respect to Compensation received on or after the first day of the
calendar quarter specified by the Employee in such agreement provided that the
Advisory Committee receives the salary reduction agreement by the 15th day of
the month immediately preceding such calendar quarter and provided that the
agreement may not be effective earlier than the Employee's Plan Entry Date (or,
in the case of a reemployed Employee, his reparticipation date under Article
II). The salary reduction agreement will apply only to Compensation which is
currently available to the Employee after the effective date of the salary
reduction agreement.
If the salary reduction agreement specifies the reduction amount as a percentage of Compensation, the percentage may not be less than one percent (1%) of Compensation and shall specify a reduction percentage equal to an increment of one percent (1%). If the salary reduction agreement specifies the reduction amount as a dollar amount of Compensation, the dollar amount must equal an increment of $5. An Employee's deferral contributions for the Plan Year may not exceed seventy-five percent (75%) of his Compensation for the portion of the Plan Year in which the Employee is actually a Participant. Further, each individual deferral contribution of an Employee may not exceed seventy-five percent (75%) of Compensation for the pay period for which such deferral contribution is calculated, unless such Participant elects catch-up contributions in accordance with Section 12.06. The Advisory Committee may from time to time specify a maximum deferral percentage for Highly Compensated Employees that is less than seventy-five percent (75%). Notwithstanding the foregoing provisions, the maximum deferral percentage that may be elected by any Participant with respect to Compensation paid prior to July 1, 2002 is ten percent (10%) of Compensation, unless such Participant elects catch-up contributions in accordance with Section 12.06. An Employee may modify his salary reduction agreement, either to reduce or to increase the amount of deferral contributions, effective with respect to Compensation received on or after the first day of the next calendar quarter provided that the Advisory Committee receives the new salary reduction agreement by the 15th day of the month immediately preceding such calendar quarter. The Employee shall make this modification by filing a new salary reduction agreement with the Advisory Committee. An Employee may revoke a salary reduction agreement at any time and such revocation shall be effective as soon as administratively feasible after the Advisory Committee receives such revocation. An Employee who revokes his salary reduction agreement may file a new salary reduction agreement effective with respect to Compensation received on or after the first day of the next calendar quarter, provided the Advisory Committee receives the new salary reduction agreement by the 15th day of the month immediately preceding such calendar quarter.
12.02 DEFINITIONS.
(a) "Highly Compensated Employee" means an Eligible Employee who satisfies the definition in Section 1.07 of the Plan.
(b) "Nonhighly Compensated Employee" means an eligible Employee who is not a Highly Compensated Employee.
(c) "Eligible Employee" means, for purposes of the ADP test described in Section 12.04, an Employee who is eligible to make elective deferrals for the Plan Year, irrespective of whether the Employer actually makes deferral contributions on behalf of
the Employee. For purposes of the ACP test described in Section 12.05, an "Eligible Employee" means a Participant who is eligible to receive an allocation of Employer matching contributions (or would be eligible if he made the type of contributions necessary to receive an allocation of matching contributions) and a Participant who is eligible to make employee contributions, irrespective of whether he actually makes employee contributions. An Employee continues to be an Eligible Employee during a period the Plan suspends the Employee's right to make elective deferrals or nondeductible contributions following a hardship distribution.
(d) "Highly Compensated Group" means the group of Eligible Employees who are Highly Compensated Employees for the Plan Year.
(e) "Nonhighly Compensated Group" means the group of Eligible Employees who are Nonhighly Compensated Employees for the Plan Year.
(f) "Compensation" means, for purposes of any nondiscrimination test required under this Article XII, Compensation as defined for nondiscrimination purposes in the last paragraph of Section 1.10 of the Plan. Compensation must include Compensation for the entire Plan Year, irrespective of whether the Code Section 401(k) arrangement was in effect for the entire Plan Year or whether the Employee begins, resumes or ceases to be an Eligible Employee during the Plan Year.
(g) "Deferral contributions" means the sum of the deferral contributions the Employer contributes to the Trust on behalf of an Eligible Employee, pursuant to Section 3.01.
(h) "Elective deferrals" are the deferral contributions the Employer contributes to the Trust at the election of an Eligible Employee. If the Code Section 401(k) arrangement includes a cash or deferred feature, any portion of a cash or deferred contribution contributed to the Trust because of the Employee's failure to make a cash election is an elective deferral, but any portion of a cash or deferred contribution over which the Employee does not have a cash election is not an elective deferral. Elective deferrals do not include amounts which have become currently available to the Employee prior to the election nor amounts designated as nondeductible employee contributions at the time of deferral or contribution.
(i) "Matching contributions" are contributions made by the Employer on account of elective deferrals under a Code Section 401(k) arrangement or on account of employee contributions. Matching contributions also include Participant forfeitures allocated on account of such elective deferrals or employee contributions.
(j) "Nonelective contributions" are contributions made by the Employer which are not subject to a deferral election by an Employee and which are not matching contributions.
(k) "Qualified matching contributions" are matching contributions which are 100% Nonforfeitable at all times and which are subject to the distribution restrictions described in paragraph (m). For purposes of this definition, matching contributions are
not 100% Nonforfeitable at all times if the Employee has a 100% Nonforfeitable interest because of his Years of Service taken into account under a vesting schedule.
(l) "Qualified nonelective contributions" are nonelective contributions which are 100% Nonforfeitable at all times and which are subject to the distribution restrictions described in paragraph (m). For purposes of this definition, nonelective contributions are not 100% Nonforfeitable at all times if the Employee has a 100% Nonforfeitable interest because of his Years of Service taken into account under a vesting schedule. Any nonelective contributions allocated to a Participant's Qualified Nonelective Contributions Account under the Plan automatically satisfy the definition of qualified nonelective contributions.
(m) "Distribution restrictions" means the Employee may not
receive a distribution of the specified contributions (nor earnings on
those contributions) except in the event of (1) the Participant's
death, disability, termination of employment, attainment of age 59 1/2,
(2) financial hardship satisfying the requirements of Code
Section 401(k) and the applicable Treasury regulations, or (3) plan
termination, without establishment of a successor defined contribution
plan (other than an ESOP). A distribution on account of financial
hardship, as described in clause (2), may not include earnings on
elective deferrals credited as of a date later than December 31, 1988,
and may not include qualified matching contributions and qualified
nonelective contributions, nor any earnings on such contributions,
irrespective of when credited. A distribution described in clause (3)
must be a lump sum distribution, as required under Code
Section 401(k)(10).
(n) "Employee contributions" are contributions made by a Participant on an after-tax basis, whether voluntary or mandatory, and designated, at the time of contribution, as an employee (or nondeductible) contribution. Elective deferrals and deferral contributions are not employee contributions. Participant nondeductible contributions, made pursuant to Section 4.01 of the Plan, are employee contributions.
12.03 ANNUAL ELECTIVE DEFERRAL LIMITATION.
Annual Elective Deferral Limitation. Except to the extent permitted
under Section 12.06 and Code Section 414(v), if applicable, an Employee's
elective deferrals may not exceed the 402(g) limitation. The 402(g) limitation
is: (1) for calendar year 2002, $11,000; (2) for calendar year 2003, $12,000;
(3) for calendar year 2004, $13,000; (4) for calendar year 2005, $14,000; and
(5) for calendar year 2006 and thereafter, $15,000 or such increased amount as
determined by the Secretary of the Treasury in accordance with Code Section
402(g)(4). If the Employer determines the Employee's elective deferrals to the
Plan for a calendar year would exceed the 402(g) limitation for the calendar
year, the Employer will not make any additional elective deferrals with respect
to that Employee for the remainder of that calendar year, paying in cash to the
Employee any amounts which would result in the Employee's elective deferrals for
the calendar year exceeding the 402(g) limitation. If the Advisory Committee
determines an Employee's elective deferrals already contributed to the Plan for
a calendar year exceed the 402(g) limitation, the Advisory Committee will
distribute the amount in excess of the 402(g) limitation (the "excess
deferral"), as adjusted for allocable income, no later than April 15 of the
following calendar year. If the Advisory Committee distributes the excess
deferral by the
appropriate April 15, it may make the distribution irrespective of any other provision under this Plan or under the Code. The Advisory Committee will reduce the amount of excess deferrals for a calendar year distributable to the Employee by the amount of excess contributions (as determined in Section 12.04), if any, previously distributed to the Employee for the Plan Year beginning in that calendar year.
If an Employee participates in another plan under which he makes elective deferrals pursuant to a Code Section 401(k) arrangement, elective deferrals under a Simplified Employee Pension, or salary reduction contributions to a tax-sheltered annuity, irrespective of whether the Employer maintains the other plan, he may provide the Advisory Committee a written claim for excess deferrals made for a calendar year. The Employee must submit the claim no later than the March 1 following the close of the particular calendar year and the claim must specify the amount of the Employee's elective deferrals under this Plan which are excess deferrals. If the Advisory Committee receives a timely claim, it will distribute the excess deferral (as adjusted for allocable income) the Employee has assigned to this Plan, in accordance with the distribution procedure described in the immediately preceding paragraph.
Allocable income. For purposes of making a distribution of excess deferrals pursuant to this Section 12.03, allocable income means net income or net loss allocable to the excess deferrals for the calendar year in which the Employee made the excess deferral and for the "gap period" measured from the beginning of the next calendar year to the date of the distribution. If the distribution of the excess deferral occurs during the calendar year in which the Employee made the excess deferral, the Advisory Committee will treat as a "gap period" the period from the first day of that calendar year to the date of the distribution. The Advisory Committee will determine allocable income in the same manner as described in Section 12.04 for excess contributions, except the numerator of the allocation fraction will be the amount of the Employee's excess deferrals and the denominator of the allocation fraction will be the Employee's Accrued Benefit attributable to his elective deferrals.
12.04 ACTUAL DEFERRAL PERCENTAGE ("ADP") TEST. For each Plan Year, the Advisory Committee must determine whether the Plan's Code Section401(k) arrangement satisfies one of the following ADP tests:
(i) The average ADP for the Highly Compensated Group for such Plan Year does not exceed 1.25 times the average ADP of the Nonhighly Compensated Group for the preceding Plan Year; or
(ii) The average ADP for the Highly Compensated Group for such Plan Year does not exceed the average ADP for the Nonhighly Compensated Group for the preceding Plan Year by more than two percentage points and the average ADP for the Highly Compensated Group for such Plan Year is not more than twice the average ADP for the Nonhighly Compensated Group for the preceding Plan Year.
If the Advisory Committee so elects, it may apply the limits set forth in paragraphs (i) and (ii) of this Section by using the Average ADP of the Nonhighly Compensated Group for the Plan Year for which the determination is made rather than for the preceding Plan Year; provided that such election may not be changed except as provided by the Secretary of the Treasury.
Calculation of ADP. The average ADP for a group is the average of the separate ADPs calculated for each Eligible Employee who is a member of that group. An Eligible Employee's ADP for a Plan Year is the ratio of the Eligible Employee's deferral contributions for the Plan Year to the Employee's Compensation for the Plan Year. A Nonhighly Compensated Employee's ADP does not include elective deferrals made to this Plan or to any other Plan maintained by the Employer, to the extent such elective deferrals exceed the Section 402(g) limitation described in Section 12.03.
The Advisory Committee may determine (in a manner consistent with Treasury regulations) the ADPs of the Eligible Employees by taking into account qualified nonelective contributions or qualified matching contributions, or both, made to this Plan or to any other qualified Plan maintained by the Employer, if any such contributions are made. The Advisory Committee may not include qualified nonelective contributions in the ADP test unless the allocation of nonelective contributions is nondiscriminatory when the Advisory Committee takes into account all nonelective contributions (including the qualified nonelective contributions) and also when the Advisory Committee takes into account only the nonelective contributions not used in either the ADP test described in this Section 12.04 or the ACP test described in Section 12.05. The Advisory Committee may not include in the ADP test any qualified nonelective contributions or qualified matching contributions under another qualified plan unless that plan has the same plan year as this Plan. The Advisory Committee must maintain records to demonstrate compliance with the ADP test, including the extent to which the Plan used qualified nonelective contributions or qualified matching contributions to satisfy the test.
Special aggregation rule for Highly Compensated Employees. To determine the ADP of any Highly Compensated Employee, the deferral contributions taken into account must include any elective deferrals made by the Highly Compensated Employee under any other Code Section 401(k) arrangement maintained by the Employer, unless the elective deferrals are to an ESOP. If the plans containing the Code Section 401(k) arrangements have different plan years, the Advisory Committee will determine the combined deferral contributions on the basis of the plan years ending in the same calendar year.
Aggregation of certain Code Section 401(k) arrangements. If the Employer treats two plans as a unit for coverage or nondiscrimination purposes, the Employer must combine the Code Section 401(k) arrangements under such plans to determine whether either plan satisfies the ADP test. This aggregation rule applies to the ADP determination for all Eligible Employees, irrespective of whether an Eligible Employee is a Highly Compensated Employee or a Nonhighly Compensated Employee. An aggregation of Code Section 401(k) arrangements under this paragraph does not apply to plans which have different plan years and the Advisory Committee may not aggregate an ESOP (or the ESOP portion of a plan) with a non-ESOP plan (or non-ESOP portion of a plan).
Characterization of excess contributions. If, pursuant to this Section 12.04, the Advisory Committee has elected to include qualified matching contributions in the average ADP, the Advisory Committee will treat excess contributions as attributable proportionately to deferral contributions and to qualified matching contributions allocated on the basis of those deferral contributions. If the total amount of a Highly Compensated Employee's excess contributions for the Plan Year exceeds his deferral contributions or qualified matching contributions for the Plan
Year, the Advisory Committee will treat the remaining portion of his excess contributions as attributable to qualified nonelective contributions. The Advisory Committee will reduce the amount of excess contributions for a Plan Year distributable to a Highly Compensated Employee by the amount of excess deferrals (as defined in Section 12.03), if any, previously distributed to that Employee for the Employee's taxable year ending in that Plan Year.
Distribution of excess contributions. If the Advisory Committee determines the Plan fails to satisfy the ADP test for a Plan Year, it must distribute the excess contributions, as adjusted for allocable income, during the next Plan Year. However, the Employer will incur an excise tax equal to 10% of the amount of excess contributions for a Plan Year not distributed to the appropriate Highly Compensated Employees during the first 2 1/2 months of that next Plan Year. The excess contributions are the amount of deferral contributions made by the Highly Compensated Employees which causes the Plan to fail to satisfy the ADP test. The Advisory Committee will distribute to each Highly Compensated Employee his respective share of the excess contributions. The Advisory Committee will determine the respective shares of excess contributions as follows:
Step 1: The Advisory Committee shall first determine the dollar amount of the reductions which would have to be made to the elective deferrals of each Highly Compensated Employee who is a Participant for the Plan Year in order for the average ADP of the Highly Compensated Group for the Plan Year to satisfy Section 401(k)(3) of the Code. Such amount shall be calculated by first determining the dollar amount by which the deferred contributions of Highly Compensated Employees who have the highest ADPs would have to be reduced until the first to occur of: (i) such Employees' ADPs would equal the ADPs of the Highly Compensated Employee or group of Highly Compensated Employees with the next highest ADPs; or (ii) the average ADP of the Highly Compensated Group, as recalculated after the reductions made under this Step 1, satisfies the requirements of Section 401(k)(3) of the Code and this Section.
Then, unless the recalculated average ADP of the Highly Compensated Group satisfies Section 401(k)(3) of the Code, the reduction process shall be repeated by determining the amount of reductions which would have to be made to the elective deferrals of the Highly Compensated Employees who, after all prior reductions, would have the highest ADP until the first to occur of: (iii) the ADP, after all prior reductions under this Step 1, of each person in such group would equal the ADP of the Highly Compensated Employee or group of Highly Compensated Employees with the next highest ADP; or (iv) the average ADP of the Highly Compensated Group, after the prior reductions, satisfies the requirements of Code Section 401(k)(3) and this Section. This process is repeated until the average ADP of the Highly Compensated Group, after all reductions, satisfies the requirements of Code Section 401(k)(3) and this Section.
Step 2: Determine the total dollar amount of reductions to the elective deferrals calculated under Step 1 ("Total Excess Deferrals").
Step 3: Reduce the elective deferrals of the Highly Compensated Employees with the highest dollar amount of elective deferrals by the lesser of the dollar amount which either (i) causes each such Highly Compensated Employee's elective deferrals to equal
the dollar amount of the elective deferrals of the Highly Compensated Employee or group of Highly Compensated Employees with the next highest dollar amount of elective deferrals; or (ii) reduces the Highly Compensated Employees' elective deferrals by the Total Excess Deferrals.
Then, unless the total amount of reductions made to Highly Compensated Employees' elective deferrals under this Step 3 equals the amount of the Total Excess Deferrals, the reduction process shall be repeated by reducing the elective deferrals of the group of Highly Compensated Employees with the highest dollar amount of elective deferrals, after the prior reductions made in this Step 3, by the lesser of the amount which either: (iii) causes such Highly Compensated Employees' elective deferrals after prior reductions made in this Step 3 to equal the dollar amount of the elective deferrals of the Highly Compensated Employees with the next highest dollar amount of elective deferrals; or (iv) causes total reductions to equal the Total Excess Deferrals. This process is repeated with each successive group of Highly Compensated Employees with the highest dollar amount, after the prior reductions, of elective deferrals until the total reductions made under this Step 3 equal the Total Excess Deferrals.
A Participant's elective deferrals required to be reduced under this
Section shall be reduced in the following order: the Participant's unmatched
elective deferrals will be reduced first, and then, if necessary, matched
elective deferrals. Matching contributions made with respect to elective
deferrals so reduced (other than qualified matching contributions treated as
elective deferrals for purposes of this Section) shall be forfeited.
Allocable income. To determine the amount of the corrective distribution required under this Section 12.04, the Advisory Committee must calculate the allocable income for the Plan Year in which the excess contributions arose and for the "gap period" measured from the beginning of the next Plan Year to the date of the distribution. "Allocable income" means net income or net loss. To calculate allocable income for the Plan Year, the Advisory Committee: (1) first will determine the net income or net loss for the Plan Year on the Highly Compensated Employee's Accrued Benefit attributable to deferral contributions; and (2) then will multiply this net income or net loss by the following fraction:
Amount of the Highly Compensated Employee's excess contributions Accrued Benefit attributable to deferral contributions
The Accrued Benefit attributable to deferral contributions includes the Accrued Benefit attributable to qualified matching contributions and qualified nonelective contributions, if any are made, taken into account in the ADP test for the Plan Year or for any prior Plan Year. For purposes of the denominator of the fraction, the Advisory Committee will calculate the Accrued Benefit attributable to deferral contributions as of the last day of the Plan Year (without regard to the net income or net loss for the Plan Year on that Accrued Benefit).
To calculate allocable income for the "gap period," the Advisory Committee will perform the same calculation as described in the preceding paragraph, except in clause (1) the Advisory Committee will determine, as of the last day of the month preceding the date of distribution, the net income or net loss for the "gap period" and in clause (2) will calculate the Accrued Benefit attributable to deferral contributions as of the day before the distribution. If the Plan does not
perform a valuation on the last day of the month preceding the date of distribution, the Advisory Committee, in lieu of the calculation described in this paragraph, will calculate allocable income for each month in the "gap period" as equal to 10% of the allocable income for the Plan Year. Under this alternate calculation, the Advisory Committee will disregard the month in which the distribution occurs, if the Plan makes the distribution no later than the 15th day of that month.
12.05 NONDISCRIMINATION RULES FOR EMPLOYER MATCHING CONTRIBUTIONS/EMPLOYEE CONTRIBUTIONS. The Advisory Committee must determine whether the annual Employer matching contributions (other than qualified matching contributions used in the ADP test), if any, and the Employee contributions, if any, satisfy one of the following average contribution percentage ("ACP") test:
(i) The ACP for the Highly Compensated Group for such Plan Year does not exceed 1.25 times the ACP of the Nonhighly Compensated Group for the prior Plan Year; or
(ii) The ACP for the High Compensated Group for such Plan Year does not exceed the ACP for the Nonhighly Compensated Group for the prior Plan Year by more than two percentage points and the ACP for the Highly Compensated Group for such Plan Year is not more than twice the ACP for the Nonhighly Compensated Group for the prior Plan Year.
If the Advisory Committee so elects, it may apply the limits set forth in paragraphs (i) and (ii) of this Section by using the Average ACP of the Nonhighly Compensated Group for the Plan Year for which the determination is made rather than for the preceding Plan Year; provided that such election may not be changed except as provided by the Secretary of the Treasury.
(A) Calculation of ACP. The average contribution percentage for a group is the average of the separate contribution percentages calculated for each Eligible Employee who is a member of that group. An Eligible Employee's contribution percentage for a Plan Year is the ratio of the Eligible Employee's aggregate contributions for the Plan Year to the Employee's Compensation for the Plan Year. "Aggregate contributions" are matching contributions (other than qualified matching contributions used in the ADP test) and employee contributions.
The Advisory Committee, in a manner consistent with Treasury regulations, may determine the contribution percentages of the Eligible Employees by taking into account qualified nonelective contributions (other than qualified nonelective contributions used in the ADP test under Section 12.04) or elective deferrals, or both, made to this Plan or to any other qualified Plan maintained by the Employer. The Advisory Committee may not include qualified nonelective contributions in the ACP test unless the allocation of nonelective contributions is nondiscriminatory when the Advisory Committee takes into account all nonelective contributions (including the qualified nonelective contributions) and also when the Advisory Committee takes into account only the nonelective contributions not used in either the ADP test described in Section 12.04 or the ACP test described in Section 12.05 The Advisory Committee may not include elective deferrals in the ACP test, unless the Plan which includes the elective deferrals satisfies the ADP test both with and without the elective deferrals included in this ACP test. For Plan Years beginning after December 31, 1989, the Advisory Committee may not include in the ACP test any qualified nonelective contributions or elective deferrals under another qualified
plan unless that plan has the same plan year as this Plan. The Advisory Committee must maintain records to demonstrate compliance with the ACP Test, including the extent to which the Plan used qualified nonelective contributions or elective deferrals to satisfy the test.
(B) Special aggregation rule for Highly Compensated Employees. To determine the contribution percentage of any Highly Compensated Employee, the aggregate contributions taken into account must include any matching contributions (other than qualified matching contributions used in the ADP test) and any employee contributions made on his behalf to any other plan maintained by the Employer, unless the other plan is an ESOP. If the plans have
different plan years, the Advisory Committee will determine the combined aggregate contributions on the basis of the plan years ending in the same calendar year.
(C) Aggregation of certain plans. If the Employer treats two plans a unit for coverage or nondiscrimination purposes, the Employer must combine the plans to determine whether either plan satisfies the ACP test. This aggregation rule applies to the contribution percentage determination for all Eligible Employees, irrespective of whether an Eligible Employee is a Highly Compensated Employee or a Nonhighly Compensated Employee. For Plan Years beginning after December 31, 1989, an aggregation of plans under this paragraph does not apply to plans which have different plan years and the Advisory Committee may not aggregate an ESOP (or the ESOP portion of a plan) with a non-ESOP plan (or non-ESOP portion of plan).
(D) Distribution of excess aggregate contributions. The Advisory Committee will determine excess aggregate contributions after determining excess deferrals under Section 12.03 and excess contributions under Section 12.04. If the Advisory Committee determines the Plan fails to satisfy the ACP test for a Plan Year, it must distribute the excess aggregate contributions, as adjusted for allocable income, during the next Plan Year. However, the Employer will incur an excise tax equal to 10% of the amount of excess aggregate contributions for a Plan Year not distributed to the appropriate Highly Compensated Employees during the first 2 1/2 months of that next Plan Year. The excess aggregate contributions are the amount of aggregate contributions made by the Highly Compensated Employees which causes the Plan to fail to satisfy the ACP test. The Advisory Committee will distribute to each Highly Compensated Employee his respective share of the excess aggregate contributions. The Advisory Committee will determine the respective shares of excess aggregate contributions as follows:
Step 1: The Advisory Committee shall first determine the
dollar amount of the reductions which would have to be made to the
aggregate contributions of each Highly Compensated Employee who is a
Participant for the Plan Year in order for the average ACP of the
Highly Compensated Group for the Plan Year to satisfy Section 401(m) of
the Code. Such amount shall be calculated by first determining the
dollar amount by which the aggregate contributions of Highly
Compensated Employees who have the highest ACPs would have to be
reduced until the first to occur of: (i) such Employees' ACPs would
equal the ACPs of the Highly Compensated Employee or group of Highly
Compensated Employees with the next highest ACPs; or (ii) the average
ACP of the Highly Compensated Group, as recalculated after the
reductions made under this Step 1, satisfies the requirements of
Section 401(m) of the Code and this Section.
Then, unless the recalculated average ACP of the Highly Compensated Group satisfies Section 401(m) of the Code, the reduction process shall be repeated by determining the amount of reductions which would have to be made to the aggregate contributions of the Highly Compensated Employees who, after all prior reductions, would have the highest ACP until the first to occur of: (iii) the ACP, after all prior reductions under this Step 1, of each person in such group would equal the ACP of the Highly Compensated Employee or group of Highly Compensated Employees with the next highest ACP; or (iv) the average ACP of the Highly Compensated Group, after the prior reductions, satisfies the requirements of Code Section 401(m) and this Section. This process is repeated until the average ACP of the Highly Compensated Group, after all reductions, satisfies the requirements of Code Section 401(m) and this Section.
Step 2: Determine the total dollar amount of reductions to the aggregate contributions calculated under Step 1 ("Total Excess Contributions").
Step 3: Reduce the aggregate contributions of the Highly Compensated Employees with the highest dollar amount of aggregate contributions by the lesser of the dollar amount which either (i) causes each such Highly Compensated Employee's aggregate contributions to equal the dollar amount of the aggregate contributions of the Highly Compensated Employee or group of Highly Compensated Employees with the next highest dollar amount of aggregate contributions; or (ii) reduces the Highly Compensated Employees' aggregate contributions by the Total Excess Contributions.
Then, unless the total amount of reductions made to Highly Compensated Employees' aggregate contributions under this Step 3 equals the amount of the Total Excess Contributions, the reduction process shall be repeated by reducing the aggregate contributions of the group of Highly Compensated Employees with the highest dollar amount of aggregate contributions, after the prior reductions made in this Step 3, by the lesser of the amount which either: (iii) causes such Highly Compensated Employees' aggregate contributions after prior reductions made in this Step 3 to equal the dollar amount of the aggregate contributions of the Highly Compensated Employees with the next highest dollar amount of aggregate contributions; or (iv) causes total reductions to equal the Total Excess Deferrals. This process is repeated with each successive group of Highly Compensated Employees with the highest dollar amount, after the prior reductions, of aggregate contributions until the total reductions made under this Step 3 equal the Total Excess Contributions.
(E) Allocable income. To determine the amount of the corrective distribution required under this Section 12.05, the Advisory Committee must calculate the allocable income for the Plan Year in which the excess aggregate contributions arose. "Allocable income" means net income or net loss. The Advisory Committee will determine allocable income in the same manner as described in Senior 12.04(F) for excess contributions.
(F) Characterization of excess aggregate contributions. The Advisory Committee will treat a Highly Compensated Employee's allocable share of excess aggregate contributions in the following priority: (1) first as attributable to his employee contributions which are voluntary contributions, it any; (2) then as matching contributions allocable with respect to excess
contributions determined under the ADP test; (3) then on a pro rata basis to matching contributions and to the deferral contributions relating to those matching contributions which the Advisory Committee has included in the ACP test; (4) then on a pro rata basis to employee contributions which are mandatory contributions; and (5) last to qualified nonelective contributions used in the ACP test. To the extent the Highly Compensated Employee's excess aggregate contributions are attributable to matching contributions and he is not 100% vested in his Accrued Benefit attributable to matching contributions, the Advisory Committee will distribute only the vested portion and forfeit the nonvested portion. The vested portion of the Highly Compensated Employee's excess aggregate contributions attributable to Employer matching contributions is the total amount of such excess aggregate contributions (as adjusted for allocable income) multiplied by his vested percentage (determined as of the last day of the Plan Year for which the Employer made the matching contribution). The Plan will allocate forfeited excess aggregate contributions to reduce Employer matching contributions for the Plan Year in which the forfeiture occurs.
12.06 CATCH-UP CONTRIBUTIONS. Effective as of January 1, 2002, all
Participants who are eligible to make deferral contributions under the Plan and
who have attained age 50 before the close of the Plan Year shall be eligible to
have a portion of such deferral contributions treated as catch-up contributions
in accordance with, and subject to the limitations of, Code Section 414(v). Such
catch-up contributions shall not be taken into account for purposes of Section
12.01 or 12.03, which implements the provisions of Code Section 402(g), nor for
purposes of Part 2 of Article III, which implements the provisions of Code
Section 415. The Plan shall not be treated as failing to satisfy the
requirements of Section 12.04 (implementing the requirements of Code Section
401(k)(3)), Section 3.04(B) (implementing the requirements of Code Section 416),
or Code Section 410(b)) by reason of the making of such catch-up contributions.
The catch-up contributions limit is: (1) for calendar year 2002,
$1,000; (2) for calendar year 2003, $2,000; (3) for calendar year 2004, $3,000;
(4) for calendar year 2005, $4,000; and (5) for calendar year 2006 and
thereafter, $5,000 or such increased amount as determined by the Secretary of
the Treasury to reflect changes in the cost of living index.
In no event shall the amount of a Participant's deferral contributions
(including catch-up contributions) under the Plan and under any other 401(k)
plans maintained by the Employer for the calendar year exceed the Participant's
Compensation for such calendar year. In addition, the maximum amount of deferral
contributions (including catch-up contributions) shall not exceed the total
amount of cash remuneration otherwise payable to such Participant, after giving
effect to all applicable deductions and withholdings, including, without
limitation, FICA and any other applicable tax withholding (determined after
giving effect to the Participant's deferral contribution election), garnishment
of wages and any applicable employee premiums or contributions for welfare
benefits.
ARTICLE XIII.
MISCELLANEOUS
13.01 EVIDENCE. Anyone required to give evidence under the terms of the Plan may do so by certificate, affidavit, document or other information which the person to act in reliance
may consider pertinent, reliable and genuine, and to have been signed, made or presented by the proper party or parties. Both the Advisory Committee and the Trustee are fully protected in acting and relying upon any evidence described under the immediately preceding sentence.
13.02 NO RESPONSIBILITY FOR EMPLOYER ACTION. Neither the Trustee nor the Advisory Committee has any obligation or responsibility with respect to any action required by the Plan to be taken by the Employer, any Participant or eligible Employee, or for the failure of any of the above persons to act or make any payment or contribution, or to otherwise provide any benefit contemplated under this Plan. Furthermore, the Plan does not require the Trustee or the Advisory Committee to collect any contribution required under the Plan, or to determine the correctness of the amount of any Employer contribution. Neither the Trustee nor the Advisory Committee need inquire into or be responsible for any action or failure to act on the part of the others. Any action required of Kansas City Southern must be by its Board of Directors, the Compensation and Organization Committee of such Board, or the designees of such Board or Committee. Any action required of any other corporate Employer must be by its Board of Directors or its designees.
13.03 FIDUCIARIES NOT INSURERS. The Trustee, the Advisory Committee, the Plan Administrator and the Employer in no way guarantee the Trust Fund from loss or depreciation. The Employer does not guarantee the payment of any money which may be or becomes due to any person from the Trust Fund. The liability of the Advisory Committee and the Trustee to make any payment from the Trust Fund at any time and all times is limited to the then available assets of the Trust.
13.04 WAIVER OF NOTICE. Any person entitled to notice under the Plan may waive the notice.
13.05 SUCCESSORS. The Plan is binding upon all persons entitled to benefits under the Plan, their respective heirs and legal representatives, upon the Employer, its successors and assigns, and upon the Trustee and the Advisory Committee and their successors.
13.06 WORD USAGE. Words used in the masculine also apply to the feminine where applicable, and wherever the context of the Plan dictates, the plural includes the singular and the singular includes the plural.
13.07 STATE LAW. Missouri law will determine all questions arising with respect to the provisions of this Plan except to the extent Federal law supersedes Missouri law.
13.08 EMPLOYMENT NOT GUARANTEED. Nothing contained in this Plan, or with respect to the establishment of the Trust, or any modification or amendment to the Plan or Trust, or in the creation of any Account, or the payment of any benefit, gives any Employee, Employee-Participant or any Beneficiary any right to continue employment, any legal or equitable right against the Employer, or Employee of the Employer, or against the Trustee, or its agents or employees, or against the Plan Administrator, except as expressly provided by the Plan, the Trust, ERISA or by a separate agreement.
ARTICLE XIV.
[RESERVED]
ARTICLE XV.
PARTICIPANT'S ACCOUNTS AND THEIR INVESTMENT
15.01 INDIVIDUAL ACCOUNTS. The Advisory Committee shall maintain, or direct the Trustee to maintain, a separate Account, or multiple Accounts, in the name of each Participant to reflect the Participant's Accrued Benefit under the Plan. Such Accounts shall include, but not be limited to, a Deferral Contributions Account, a Qualified Nonelective Contributions Account, a Regular Matching Contributions Account, a Qualified Matching Contributions Account, and a Profit Sharing Contributions Account. Furthermore, if a Participant reenters the Plan subsequent to his having a Forfeiture Break in Service, the Advisory Committee, or the Trustee, shall maintain a separate Account for the Participant's pre-Forfeiture Break in Service Accrued Benefit and a separate Account for his post-Forfeiture Break in Service Accrued Benefit unless the Participant's entire Accrued Benefit under the Plan is one hundred percent (100%) Nonforfeitable. The Advisory Committee will make its allocations, or request the Trustee to make its allocations, to the Accounts of the Participants in accordance with the provisions of Section 15.05. The Advisory Committee may direct the Trustee to maintain a temporary segregated investment Account in the name of a Participant to prevent a distortion of income, gain or loss allocations under Section 15.05. The Advisory Committee shall maintain records of its activities.
A Participant's Accrued Benefit shall be segregated for separate investment when and as so expressly provided under the Plan. Except where the Plan expressly provides for such segregation, Participants' Accrued Benefits shall be invested collectively.
15.02 INVESTMENT OF ACCOUNTS. Each Participant's Accounts shall be invested, in accordance with the individual election of the Participant, in one or more investment vehicles designated by the Advisory Committee, including designated pooled investment funds. Effective as of January 1, 2001, such investment vehicles shall include an employer stock fund consisting of shares of common stock of KCS. Up to 100% of a Participant's Accounts may be invested in shares of common stock of KCS.
Each Participant whose Account includes shares of common stock of Stilwell Financial Inc. ("Stilwell Shares") may elect, at such times, in such manner and subject to such restrictions regarding minimum share dispositions or holdings as the Advisory Committee shall prescribe, (1) to continue to hold in such Account whole (but no fractional) Stilwell Shares, or (2) to have all or any portion of such whole Stilwell Shares sold and the sale proceeds reinvested in one or more investment vehicles designated by the Advisory Committee. Cash dividends received by the Plan with respect to Stilwell Shares held in a Participant's Account shall be reinvested in one or more investment vehicles, as elected by the Participant.
15.03 PARTICIPANT ACCOUNTS - INVESTMENT PERCENTAGES. The Advisory Committee from time to time shall establish procedures by which each Participant may specify the percentage of his Accounts, and the percentage of future contributions to be made on his behalf, to be invested in each of the available investment vehicles for Accounts. The
investment percentage for each investment vehicle selected by the Participant must be a multiple of 1%. The Participant's investment direction shall remain in effect unless and until the Participant replaces the direction in accordance with the established procedures. Contributions and Accounts with respect to which no affirmative Participant investment direction has been made shall be invested in an investment vehicle selected by the Advisory Committee. The Trustee shall be responsible for carrying out Participant investment direction.
15.04 VALUATION OF PARTICIPANTS' ACCRUED BENEFITS. The value of each Participant's Accrued Benefit shall consist of the value of such Participant's Account(s), including any segregated account hereunder. For purposes of a distribution under the Plan, the value of a Participant's Accrued Benefit shall be its value as of the valuation date immediately preceding the date of the distribution.
15.05 ALLOCATION AND DISTRIBUTION OF NET INCOME GAIN OR LOSS. A "valuation date" under this Plan is the last day of each calendar month and each interim valuation date designated by the Advisory Committee which is a business day on which the New York Stock Exchange is open for business. As of each valuation date the Advisory Committee must adjust Accounts to reflect net income, gain or loss since the last valuation date. The valuation period is the period beginning the day after the last valuation date and ending on the current valuation date.
Trust Fund Accounts. The allocation provisions of this paragraph apply
to all Participant's Accounts other than segregated investment Accounts. The
Advisory Committee first will adjust the Participant Accounts, as those Accounts
stood at the beginning of the current valuation period, by reducing the Accounts
for any forfeitures arising under Section 5.09 or under Section 9.12, for
amounts charged during the valuation period to the Accounts in accordance with
Section 9.11 (relating to distributions) and for the amount of any Account which
the Trustee has fully distributed since the immediately preceding valuation
date. The Advisory Committee then, subject to the restoration allocation
requirements of Section 5.04 or of Section 9.12, will allocate the net income,
gain or loss for the current valuation period for each of the Plan's investment
vehicles (as specified by the Advisory Committee pursuant to Section 15.02) pro
rata to the Participants having accounts in each respective investment vehicle
as the accounts stood at the beginning of the valuation period. Separate
allocations and adjustments shall be made with respect to each investment
vehicle. For each investment vehicle the allocable net income, gain or loss is
the net income (or net loss), including the increase or decrease in the fair
market value of assets, since the last valuation date.
Segregated investment accounts. A segregated investment Account receives all income it earns and bears all expenses or loss it incurs. As of the valuation date, the Advisory Committee must reduce a segregated Account for any forfeiture arising under Section 5.09 after the Advisory Committee has made all other allocations, changes or adjustments to the Account for the Plan Year.
Additional rules. An Excess Amount or suspense account described in Part 2 of Article III does not share in the allocation of net income, gain or loss described in this Section 15.05. This Section 15.05 applies solely to the allocation of net income, gain or loss of the Trust. The
Advisory Committee will allocate the Employer contributions and Participant forfeitures, if any, in accordance with Article III.
15.06 PARTICIPANT VOTING RIGHTS - EMPLOYER STOCK. Each Participant (or the Beneficiary thereof) acting as a named fiduciary shall have the right to direct the Trustee as to the manner in which (a) to vote any shares of stock of KCS allocated to his Accounts as of the applicable record date of any shareholder meeting in any matter put to a shareholder vote; and (b) to respond to a tender offer, exchange offer or any other offer to purchase shares of KCS stock allocated to the Participant's Accounts.
Before any meeting in which a shareholder vote is to be taken, the Employer will deliver to the Trustee or its designee such quantities of proxy soliciting materials as are necessary to solicit voting instructions from the Participants. The Trustee or its designee will mail the proxy solicitation materials (and any additional material made available to other shareholders or otherwise deemed appropriate by the Trustee) to the Participants within a reasonable time before the meeting. A reasonable deadline for the return of such materials may be specified.
Shares will be voted as instructed by the Participants on each matter brought before the meeting. Such participants are appointed as named fiduciaries to direct the Trustee as to the voting of shares allocated to the accounts of Participants who have not timely instructed the Trustee how to vote them and any unallocated shares. Such shares will be voted in the same proportions as the shares for which the Trustee has received timely instructions. The Trustee may submit to the Employer one summary proxy for the aggregate number of shares.
With regard to any tender offer, exchange offer or any other offer to purchase shares of KCS stock, the Trustee or its designee will solicit such instructions from Participants by distributing to each Participant such information as is distributed to shareholders of the Employer, generally in connection with any such offer, and any additional information the trustee deems appropriate in order for each Participant to give instructions. A reasonable deadline for the return of such materials may be specified.
Shares will, in response to a tender offer, exchange offer or other offer to purchase, be tendered, exchanged or sold as instructed by the Participants. Fractional shares will be aggregated for purposes of tendering, exchanging or selling shares, to the extent possible, to reflect the instructions of the Participants. Such participants are appointed as named fiduciaries to direct the Trustee as to the tender, exchange or sale of shares allocated to an Account of a Participant who has not timely instructed the Trustee how to respond to such offer and any unallocated shares. Such shares will be tendered, exchanged or sold in the same proportion as shares for which the Trustee has received timely instructions.
For purposes of receiving, tabulating and transmitting instructions, the Trustee will establish a procedure to insure that instructions received from individual Participants regarding voting or responding to a tender offer, exchange offer, or any other offer are held in confidence, and are not divulged, released or otherwise utilized in a manner that, in the Trustee's reasonable judgment, might influence the Participant's free exercise of the rights set forth in this Section 15.06.
ARTICLE XVI.
PROVISIONS EFFECTIVE UPON CHANGE IN CONTROL OF KCS
16.01 DEFINITIONS OF "CHANGE IN CONTROL OF KCS". For purposes of this Plan, a "Change in Control of KCS" shall be deemed to have occurred if:
(a) for any reason at any time less than seventy-five
percent (75%) of the members of the Board of Directors of Kansas City
Southern, a Delaware corporation, shall be individuals who fall into
any of the following categories: (A) individuals who were members of
such Board on September 1, 1995; (B) individuals whose election, or
nomination for election by KCS's stockholders, was approved by a vote
of at least seventy-five percent (75%) of the members of the Board then
still in office who were members of such Board on September 1, 1995; or
(C) individuals whose election, or nomination for election, by KCS's
stockholders, was approved by a vote of at least seventy-five percent
(75%) of the members of the Board then still in office who were elected
in the manner described in (A) or (B) above, or
(b) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) shall have become after September 1, 1995, according to a public announcement or filing, without the prior approval of the Board of Directors of KCS, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of KCS representing forty percent (40%) or more (calculated in accordance with Rule 13d-3) of the combined voting power of KCS's, then outstanding voting securities (such "person" hereinafter referred to as a "Major Stockholder of KCS"); or
(c) the stockholders of KCS shall have approved a merger,
consolidation or dissolution of KCS or a sale, lease, exchange or
disposition of all or substantially all of KCS's assets, or a Major
Stockholder of KCS shall have proposed any such transaction, unless
such merger, consolidation, dissolution, sale, lease, exchange or
disposition shall have been approved by at least seventy-five percent
(75%) of the members of the Board of Directors of KCS who are
individuals falling into any combination of the following categories:
(i) individuals who were members of such Board of Directors on
September 1, 1995, (ii) individuals whose election, or nomination for
election by KCS's stockholders, was approved by at least seventy-five
percent (75%) of the members of the Board of Directors then still in
office who are members of the Board of Directors on September 1, 1995,
or (iii) individuals whose election or nomination for election by KCS's
stockholders was approved by a vote of at least seventy-five percent
(75%) of the members of the Board then still in office who were elected
in the manner described in (i) or (ii) above.
16.02 PROVISIONS EFFECTIVE UPON CHANGE IN CONTROL. Upon a Change in Control of KCS as defined in Section 16.01, notwithstanding what is otherwise provided in this Plan, the following provisions will supersede the indicated sections and otherwise govern the operation of the Plan from that point forward:
(a) "Section 5.03, Vesting Schedule" shall provide as follows:
5.03 VESTING SCHEDULE. A Participant's Accrued Benefit derived from Employer contributions shall be one hundred percent (100%) Nonforfeitable at all times.
(b) A new section numbered "8.10" and entitled "Participant Direction of Investment" shall be added to provide as follows:
8.10 PARTICIPANT DIRECTION OF INVESTMENT. A Participant shall have the right to direct the Trustee with respect to the investment of reinvestment of the assets comprising the Participant's individual Account only if the Trustee consents in writing to permit such direction. If the Trustee does consent to Participant direction of investment, the Trustee and each Participant shall execute a letter agreement as a part of this Plan containing such conditions, limitations and other provisions they deem appropriate before the Trustee shall follow any Participant direction as respects the investment or reinvestment of any part of the Participant's individual Account. The Trustee shall not be liable for any loss, or by reason of any breach, resulting from a Participant's direction of the investment of any part of his individual Account.
(c) Except for the right to amend the Plan pursuant to
Section 11.02(a), the Employer shall not exercise its right to amend
pursuant to Section 11.02(b), discontinue or terminate pursuant to
Section 11.03, or transfer assets of or merge, pursuant to Section
11.05, the Plan without the prior written consent to such aforesaid
action by seventy-five percent (75%) of the Participants on a per
capita basis.
16.03 RIGHT TO AMEND ARTICLE XVI PRIOR TO CHANGE IN CONTROL OF KCS. The Board of Directors of KCS, or any duly authorized committee thereof, reserves the right to amend or eliminate this Article XVI prior to the date of a Change in Control of KCS.
ARTICLE XVII.
PROVISIONS APPLICABLE TO ACCOUNTS
TRANSFERRED FROM FORMER MIDSOUTH PLAN
17.01 MIDSOUTH ACCOUNTS. The Advisory Committee shall maintain, in order to reflect each Participant's Accrued Benefit under the Plan derived from contributions to the MidSouth Rail Corporation Thrift and Savings Plan ("Former MidSouth Plan"), a separate MidSouth Deferral Contributions Account, a separate MidSouth Other Contributions Account and a separate MidSouth Participant Contributions Account ("MidSouth Accounts") for each Participant ("MidSouth Participant") in the Former MidSouth Plan who had an account under the Former MidSouth Plan which was transferred to the Former Plan and thereafter transferred to this Plan, except that a MidSouth Participant's Contribution Account shall be maintained only for a MidSouth Participant who had such an account under the Former MidSouth Plan. The MidSouth Deferral Contributions Account shall reflect a Participant's Accrued Benefit derived from his deferral contributions to the MidSouth Plan, the MidSouth Participant Contributions Account shall reflect a Participant's Accrued Benefit derived from his participant contributions to the Former MidSouth Plan, and the MidSouth Other Contributions Account shall reflect a Participant's Accrued Benefit derived from all other contributions to the Former MidSouth Plan
on his behalf. The provisions of this Article XVII shall govern the separate MidSouth Accounts, and with respect to such Accounts, the provisions of this Article XVII shall supersede any other provisions in the Plan to the contrary. Except as provided under this Article XVII, the Trustee shall hold, administer and distribute the MidSouth Accounts in the same manner under the Plan as the similar Account derived from contributions to this Plan.
The provisions of this Article XVII shall not apply to any Accounts other than the MidSouth Accounts.
A MidSouth Participant's Accrued Benefit is, at all times, one hundred percent (100%) Nonforfeitable to the extent the value of his Accrued Benefit is derived from the transfer to the Trust of his Account(s) in the Former MidSouth Plan.
17.02 MIDSOUTH PARTICIPANT CONTRIBUTION ACCOUNTS. The Advisory Committee must maintain a separate MidSouth Participant Contributions Account for each MidSouth Participant who had a Participant Contributions Account under the Former MidSouth Plan to reflect the MidSouth Participant's Accrued Benefit under the Plan derived from his participant contributions to the Former MidSouth Plan. A MidSouth Participant's Accrued Benefit derived from his Participant contributions as of any applicable date is the balance of his separate MidSouth Participant Contribution Account(s).
A MidSouth Participant, by giving prior written notice to the Trustee, may withdraw all or any part of his MidSouth Participant Contributions Account described in this Section 17.02. A distribution of Participant contributions must comply with the joint and survivor annuity requirements described in this Article XVII, if those requirements apply to the MidSouth Participant. The Trustee, in accordance with the direction of the Advisory Committee, will distribute a Participant's unwithdrawn MidSouth Participant Contributions Account in accordance with the provisions of this Article XVII applicable to the distribution of the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts.
17.03 METHOD OF PAYMENT OF ACCRUED BENEFIT. Subject to the annuity distribution requirements, if any, prescribed by Section 17.06, and any restrictions prescribed by Section 17.05, a MidSouth Participant or beneficiary of a MidSouth Participant ("MidSouth Beneficiary") may elect distribution of his MidSouth Accounts under one, or any combination, of the following methods:
(a) by payment in a lump sum;
(b) by payment in the form of a qualified joint and survivor annuity, as defined in Section 17.06(A). If, as of the annuity starting date, the MidSouth Participant is married, the MidSouth Participant may elect to receive a smaller annuity benefit, having an actuarial value equivalent to the actuarial value of the qualified joint and survivor annuity, with continuation of payments to the surviving spouse at a rate of seventy-five (75%) or one hundred percent (100%) of the rate payable to the MidSouth Participant during his lifetime.
The distribution options permitted under this Section 17.03 are available only if the present value of the MidSouth Participant's entire Nonrollover Nonforfeitable Accrued Benefit under the Plan, at the time of the distribution to the MidSouth Participant, exceeds $5,000.
The provisions of Section 6.02(A) shall apply in determining the minimum distribution requirements under Code Section 401(a)(9) for MidSouth Participants, and the provisions of Section 6.02(B) shall apply in determining the minimum distribution requirements under Code Section 401(a)(9) for MidSouth Beneficiaries.
17.04 TIME OF PAYMENT AND ACCRUED BENEFIT. Unless, pursuant to
Section 6.03 or 17.05, the MidSouth Participant or the MidSouth Beneficiary
elects in writing a different time or method of payment, the Advisory Committee
will direct the Trustee to commence distribution of a MidSouth Participant's
Nonforfeitable Accrued Benefit derived from his MidSouth Accounts in accordance
with this Section 17.04. A MidSouth Participant must consent, in writing, to any
distribution required under this Section 17.04 if the present value of the
MidSouth Participant's Nonrollover Nonforfeitable Accrued Benefit, at the time
of the distribution to the MidSouth Participant, exceeds $5,000 and the MidSouth
Participant has not attained the later of Normal Retirement Age or age 62.
Furthermore, the MidSouth Participant's spouse also must consent, in writing, to
any distribution for which Section 17.06 requires the spouse's consent. For all
purposes of Article VI and this Article XVII, the term "annuity starting date"
means the first day of the first period for which the Plan pays an amount as an
annuity or in any other form. For purposes of the consent requirements under
this Article XVII, if the present value of the MidSouth Participant's
Nonrollover Nonforfeitable Accrued Benefit derived from his MidSouth Accounts,
at the time of any distribution, exceeds $5,000 the Advisory Committee must
treat that present value as exceeding $5,000 for purposes of all subsequent Plan
distributions to the MidSouth Participant.
(A) Separation from Service for a Reason Other Than Death.
(1) MidSouth Participant's Nonrollover Nonforfeitable Accrued Benefit Not Exceeding $5,000. If the MidSouth Participant's Separation from Service is for any reason other than death, the Advisory Committee will direct the Trustee to distribute the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts in a lump sum as soon as administratively practicable following the MidSouth Participant's Separation from Service, but in no event later than the 60th day following the close of the Plan Year in which the MidSouth Participant attains Normal Retirement Age. If the MidSouth Participant has attained Normal Retirement Age when he separates from Service, the distribution under this paragraph will occur no later than the 60th day following the close of the Plan Year in which the MidSouth Participant's Separation from Service occurs.
(2) MidSouth Participant's Nonrollover Nonforfeitable Accrued Benefit Exceeds $5,000. If the MidSouth Participant's Separation from Service is for any reason other than death, the Advisory Committee will direct the Trustee to distribute the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts in a form and at the time elected by the MidSouth Participant, pursuant to Section 17.05. In the absence of an election by the MidSouth Participant, the Advisory
Committee will direct the Trustee to distribute the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts in a lump sum (or, if applicable, the normal annuity form of distribution required under Section 17.06), on the 60th day following the close of the Plan Year in which the latest of the following events occurs: (a) the MidSouth Participant attains Normal Retirement Age; (b) the MidSouth Participant attains age 62; or (c) the MidSouth Participant's Separation from Service.
(B) Required Beginning Date. The provisions of Section 6.01(B)
shall determine a MidSouth Participant's Required Beginning Date.
(C) Death of the MidSouth Participant. The Advisory Committee will direct the Trustee, in accordance with this Section 17.04(C), to distribute to the MidSouth Participant's Beneficiary the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts remaining in the Trust at the time of the MidSouth Participant's death. Subject to the requirements of Section 17.06, the Advisory Committee will determine the death benefit by reducing the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts by any security interest the Plan has against that Nonforfeitable Accrued Benefit derived from his MidSouth Accounts by reason of an outstanding MidSouth Participant loan.
(1) Deceased MidSouth Participant's Nonrollover Nonforfeitable Accrued Benefit Does Not Exceed $5,000. The Advisory Committee, subject to the requirements of Section 17.06, must direct the Trustee to distribute the deceased MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts in a single cash sum, as soon as administratively practicable following the MidSouth Participant's death or, if later, the date on which the Advisory Committee receives notification of or otherwise confirms the MidSouth Participant's death.
(2) Deceased MidSouth Participant's Nonrollover Nonforfeitable Accrued Benefit Exceeds $5,000. The Advisory Committee will direct the Trustee to distribute the deceased MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts at the time and in the form elected by the MidSouth Participant or, if applicable, by the MidSouth Beneficiary, as permitted under this Article XVII. In the absence of an election, subject to the requirements of Section 17.06, the Advisory Committee will direct the Trustee to distribute the MidSouth Participant's undistributed Nonforfeitable Accrued Benefit derived from his MidSouth Accounts in a lump sum as soon as administratively practicable following the MidSouth Participant's death or, if later, the date on which the Advisory Committee receives notification of or otherwise confirms the MidSouth Participant's death.
If the death benefit is payable in full to the MidSouth Participant's surviving spouse, the surviving spouse, in addition to the distribution options provided in this Section 17.04(C), may elect distribution at any time or in any form (other than the joint and survivor annuity) this Article XVII would permit for a MidSouth Participant.
(D) Rollovers. The provisions of Section 6.08 shall apply to the MidSouth Accounts.
17.05 BENEFIT PAYMENT ELECTIONS. Not earlier than 90 days before nor later than 30 days before the MidSouth Participant's annuity starting date, the Plan Administrator must provide a benefit notice to a MidSouth Participant who is eligible to make an election under this Section 17.05. The benefit notice must explain the optional forms of benefit in the Plan, including the material features and relative values of those options, and the MidSouth Participant's right to defer distribution until he attains the later of Normal Retirement Age or age 62.
Such distribution may commence less than 30 days after the benefit notice is given, provided that:
(1) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, of applicable, a particular distribution option), and
(2) the Participant, after receiving the notice, affirmatively elects a distribution.
If a MidSouth Participant or MidSouth Beneficiary makes an election prescribed by this Section 17.05, the Advisory Committee will direct the Trustee to distribute the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts in accordance with that election. Any election under this Section is subject to the requirements of Section 17.06. The MidSouth Participant or MidSouth Beneficiary must make an election under this Section 17.05 by filing his election form with the Advisory Committee at any time before the Trustee otherwise would commence to pay a MidSouth Participant's Accrued Benefit derived from his MidSouth Accounts in accordance with the requirements of Articles VI and XVII.
(A) MidSouth Participant Elections After Separation from Service.
If the present value of a MidSouth Participant's Nonrollover Nonforfeitable Accrued Benefit exceeds $5,000, he may elect to have the Trustee commence distribution as soon as administratively practicable following the MidSouth Participant's Separation from Service. The MidSouth Participant may reconsider an election at any time prior to the annuity starting date and elect to commence distribution as of any other distribution date, but not earlier than the date described in the first sentence of this Paragraph (A). Following his attainment of Normal Retirement Age, a MidSouth Participant who has separated from Service may elect distribution as of any distribution date, irrespective of the restrictions otherwise applicable under this Section 17.05(A). If the MidSouth Participant is partially vested in his Accrued Benefit, an election under this Paragraph (A) to distribute prior to the MidSouth Participant's incurring a Forfeiture Break in Service (as defined in Section 5.08) must be in the form of a cash-out distribution (as defined in Article V). A MidSouth Participant may not receive a cash-out distribution if, prior to the time the Trustee actually makes the cash-out distribution, the MidSouth Participant returns to employment with the Employer.
(B) MidSouth Participant Elections Prior to Separation from Service.
In addition to the distribution options provided in Section 6.03, a MidSouth Participant, until he retires, has a continuing election to receive all or any portion of his MidSouth Deferral Contributions Account and his MidSouth Other Contributions Accounts if: (a) he has attained age 59 1/2 and (b) he is 100% vested in the Account. The procedures set forth in Section 6.03(B) shall apply.
(C) Death Benefit Elections.
If the present value of the deceased MidSouth Participant's Nonrollover Nonforfeitable Accrued Benefit exceeds $5,000, the MidSouth Participant's Beneficiary may elect to have the Trustee distribute the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts in a form and within a period permitted under Section 17.04. The MidSouth Beneficiary's election is subject to any restrictions designated in writing by the MidSouth Participant and not revoked as of his date of death.
(D) Transitional Elections.
Notwithstanding the provisions of Sections 17.03 and 17.04, if the MidSouth Participant (or MidSouth Beneficiary) signed a written distribution designation prior to January 1, 1984, the Advisory Committee must distribute the MidSouth Participant's Nonforfeitable Accrued Benefit in accordance with that designation, subject, however, to the survivor requirements, if applicable, of Sections 17.06, 17.07 and 17.08. This Section 17.05(D) does not apply to a pre-1984 distribution designation, and the Advisory Committee will not comply with that designation, if any of the following applies: (1) the method of distribution would have disqualified the Plan under Code Section 401(a)(9) as in effect on December 31, 1983; (2) the MidSouth Participant did not have an Accrued Benefit as of December 31, 1983; (3) the distribution designation does not specify the timing and form of the distribution and the death Beneficiaries (in order of priority); (4) the substitution of a MidSouth Beneficiary modifies the payment period of the distribution; or (5) the MidSouth Participant (or MidSouth Beneficiary) modifies or revokes the distribution designation. In the event of a revocation, the Plan must distribute, no later than December 31 of the calendar year following the year of revocation, the amount which the MidSouth Participant would have received under Section 17.04(A) if the distribution designation had not been in effect or, if the MidSouth Beneficiary revokes the distribution designation, the amount which the MidSouth Beneficiary would have received under Section 17.04(C) if the distribution designation had not been in effect. The Advisory Committee will apply this Section 17.05(D) to rollovers and transfers in accordance with Part J of the Code Section 401(a)(9) Treasury regulations.
17.06 ANNUITY DISTRIBUTIONS TO MIDSOUTH PARTICIPANTS AND SURVIVING
SPOUSES.
(A) Joint and Survivor Annuity. The Advisory Committee must direct
|
the Trustee to distribute a MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts in the form of a qualified joint and survivor annuity, unless the MidSouth Participant makes a valid waiver election (described in Section 17.07) within the 90-day period ending on the annuity starting date. If, as of the annuity starting date, the MidSouth Participant is married, a qualified joint and survivor annuity is an immediate annuity which is purchasable with the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Account and which provides a life annuity for the MidSouth Participant and a survivor annuity
payable for the remaining life of the MidSouth Participant's surviving spouse equal to 50% of the amount of the annuity payable during the life of the MidSouth Participant. If, as of the annuity starting date, the MidSouth Participant is not married, a qualified joint and survivor annuity is an immediate life annuity for the MidSouth Participant which is purchasable with the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts. On or before the annuity starting date, the Advisory Committee, without MidSouth Participant or spousal consent, must direct the Trustee to pay the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts, in a lump sum, in lieu of a qualified joint and survivor annuity in accordance with Section 17.04, if the MidSouth Participant's Nonrollover Nonforfeitable Accrued Benefit is not greater than $5,000.
(B) Preretirement Survivor Annuity. If a married MidSouth Participant dies prior to his annuity starting date the Advisory Committee will direct the Trustee to distribute a portion of the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts to the MidSouth Participant's surviving spouse in the form of a preretirement survivor annuity, unless the MidSouth Participant has a valid waiver election (as described in Section 17.08) in effect, or unless the MidSouth Participant and his spouse were not married throughout the one year period ending on the date of his death. A preretirement survivor annuity is an annuity which is purchasable with 50% of the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts (determined as of the date of the MidSouth Participant's death) and which is payable for the life of the MidSouth Participant's surviving spouse. The value of the preretirement survivor annuity is attributable to Employer contributions and to Employee contributions in the same proportion as the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts is attributable to those contributions. The portion of the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts not payable under this paragraph is payable to the MidSouth Participant's Beneficiary, in accordance with the other provisions of this Article XVII. If the present value of the preretirement survivor annuity does not exceed $5,000, the Advisory Committee, on or before the annuity starting date, must direct the Trustee to make a lump sum distribution to the MidSouth Participant's surviving spouse, in lieu of a preretirement survivor annuity.
(C) Surviving Spouse Elections. If the present value of the
preretirement survivor annuity exceeds $5,000, the MidSouth Participant's
surviving spouse may elect to have the Trustee commence payment of the
preretirement survivor annuity at any time following the date of the MidSouth
Participant's death, but not later than the mandatory distribution periods
described in Section 17.04, and may elect any form of payment described in
Section 17.03, in lieu of the preretirement survivor annuity. In the absence of
an election by the surviving spouse, the Advisory Committee must direct the
Trustee to distribute the preretirement survivor annuity on the first
distribution date following the close of the Plan Year in which the latest of
the following events occurs: (i) the MidSouth Participant's death; (ii) the date
the Advisory Committee receives notification of or otherwise confirms the
MidSouth Participant's death, (iii) the date the MidSouth Participant would have
attained Normal Retirement Age; or (iv) the date the MidSouth Participant would
have attained age 62.
(D) Special Rules. If the MidSouth Participant has in effect a valid waiver election regarding the qualified joint and survivor annuity or the preretirement survivor annuity, the
Advisory Committee must direct the Trustee to distribute the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts in accordance with Sections 17.03, 17.04 and 17.05. The Advisory Committee will reduce the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts by any security interest (pursuant to any offset rights authorized by Section 17.10) held by the Plan by reason of a MidSouth Participant loan to determine the value of the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts distributable in the form of a qualified joint and survivor annuity or preretirement survivor annuity, provided any post-August 18, 1985, loan satisfied the spousal consent requirement described in Section 17.10 of the Plan. For purposes of applying this Article XVII, the Advisory Committee treats a former spouse as the MidSouth Participant's spouse or the surviving spouse to the extent provided under a qualified domestic relations order described in Section 6.07. The provisions of this Article XVII apply separately to the portion of the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts subject to the qualified domestic relations order and to the portion of the MidSouth Participant's Nonforfeitable Accrued Benefit derived from his MidSouth Accounts not subject to that order.
(E) Limited Application of Section. The preceding provisions of
this Section 17.06 apply only to (1) a MidSouth Participant as respects whom the
Plan is a direct or indirect transferee from a plan subject to the Code
Section 417 requirements and the Plan received the transfer after December 31,
1984, unless the transfer is an elective transfer described in Section 11.05;
(2) a MidSouth Participant who is eligible to and who elects a life annuity
distribution; and (3) a MidSouth Participant whose benefits under a defined
benefit plan are offset by benefits provided under this Plan. Sections 17.07 and
17.08 only apply to MidSouth Participants to whom the preceding provisions of
this Section 17.06 apply.
17.07 WAIVER ELECTION-QUALIFIED JOINT AND SURVIVOR ANNUITY. Within 90 days, but not later than 30 days, before the MidSouth Participant's annuity starting date, the Advisory Committee must provide the MidSouth Participant a written explanation of the terms and conditions of the qualified joint and survivor annuity, the MidSouth Participant's right to make, and the effect of, an election to waive the joint and survivor form of benefit, the rights of the MidSouth Participant's spouse regarding the waiver election, and the MidSouth Participant's right to make, and the effect of, a revocation of a waiver election. The Plan does not limit the number of times the MidSouth Participant may revoke a waiver of the qualified joint and survivor annuity or make a new waiver during the election period.
A married MidSouth Participant's waiver election is not valid unless
(a) the MidSouth Participant's spouse (to whom the survivor annuity is payable
under the qualified joint and survivor annuity), after the MidSouth Participant
has received the written explanation described in this Section 17.07, has
consented in writing to the waiver election, the spouse's consent acknowledges
the effect of the election, and a notary public or the Plan Administrator (or
his representative) witnesses the spouse's consent, (b) the spouse consents to
the alternate form of payment designated by the MidSouth Participant or to any
change in that designated form of payment, and (c) unless the spouse is the
MidSouth Participant's sole primary MidSouth Beneficiary, the spouse consents to
the MidSouth Participant's Beneficiary designation or to any change in the
MidSouth Participant's Beneficiary designation. The spouse's consent to a waiver
of the qualified joint and survivor annuity is irrevocable, unless the MidSouth
Participant
revokes the waiver election. The spouse may execute a blanket consent to any form of payment designation or to any Beneficiary designation made by the MidSouth Participant, if the spouse acknowledges the right to limit that consent to a specific designation but, in writing, waives that right. The consent requirements of this Section 17.07 apply to a former spouse of a MidSouth Participant, to the extent required under a qualified domestic relations order described in Section 6.07.
The Advisory Committee will accept as valid a waiver election which does not satisfy the spousal consent requirements if the Advisory Committee establishes the MidSouth Participant does not have a spouse, the Advisory Committee is not able to locate the MidSouth Participant's spouse, the MidSouth Participant is legally separated or has been abandoned (within the meaning of State law) and the MidSouth Participant has a court order to that effect, or other circumstances exist under which the Secretary of the Treasury will excuse the consent requirement. If the MidSouth Participant's spouse is legally incompetent to give consent, the spouse's legal guardian (even if the guardian is the MidSouth Participant) may give consent.
17.08 WAIVER ELECTION - PRERETIREMENT SURVIVOR ANNUITY. The Advisory
Committee must provide a written explanation of the preretirement survivor
annuity to each married MidSouth Participant, within the following period which
ends last: (1) the period beginning on the first day of the Plan Year in which
the MidSouth Participant attains age 32 and ending on the last day of the Plan
Year in which the MidSouth Participant attains age 34; (2) a reasonable period
after an Employee becomes a MidSouth Participant; (3) a reasonable period after
the joint and survivor rules become applicable to the MidSouth Participant; or
(4) a reasonable time after a fully subsidized preretirement survivor annuity no
longer satisfies the requirements of a fully subsidized benefit. A reasonable
period described in clauses (2), (3) and (4) is the period beginning one year
before and ending one year after the applicable event. If the MidSouth
Participant separates from Service before attaining age 35, clauses (1), (2),
(3) and (4) do not apply and the Advisory Committee must provide the written
explanation within the period beginning one year before and ending one year
after the Separation from Service. The written explanation must describe, in a
manner consistent with Treasury Regulations, the terms and conditions of the
preretirement survivor annuity comparable to the explanation of the qualified
joint and survivor annuity required under Section 17.06. The Plan does not limit
the number of times the MidSouth Participant may revoke a waiver of the
preretirement survivor annuity or make a new waiver during the election period.
A MidSouth Participant's waiver election of the preretirement survivor annuity is not valid unless (a) the MidSouth Participant makes the waiver election no later than the first day of the Plan Year in which he attains age 35 and (b) the MidSouth Participant's spouse (to whom the preretirement survivor annuity is payable) satisfies the consent requirements described in Section 17.06, except the spouse need not consent to the form of benefit payable to the designated MidSouth Beneficiary. The spouse's consent to the waiver of the preretirement survivor annuity is irrevocable, unless the MidSouth Participant revokes the waiver election. Irrespective of the time of election requirement described in clause (a), if the MidSouth Participant separates from Service prior to the first day of the Plan Year in which he attains age 35, the Advisory Committee will accept a waiver election as respects the MidSouth Participant's Accrued Benefit attributable to his Service prior to this Separation from Service. Furthermore, if a MidSouth Participant who has separated from Service makes a valid waiver election, except for the timing
requirement of clause (a), the Plan Administrator will accept that election as valid, but only until the first day of the Plan Year in which the MidSouth Participant attains age 35. A waiver election described in this paragraph is not valid unless made after the MidSouth Participant has received the written explanation described in this Section 17.08.
17.09 COORDINATION WITH SURVIVOR REQUIREMENTS. If the joint and
survivor requirements of Article XVII apply to the MidSouth Participant, neither
Section 8.01 nor this Section 17.09 impose any special spousal consent
requirements on the MidSouth Participant's Beneficiary designation. However, in
the absence of spousal consent (as required by Articles VI and XVII) to the
MidSouth Participant's Beneficiary designation: (1) any waiver of the joint and
survivor annuity or of the preretirement survivor annuity is not valid; and (2)
if the MidSouth Participant dies prior to his annuity starting date, the
MidSouth Participant's Beneficiary designation will apply only to the portion of
the death benefit which is not payable as a preretirement survivor annuity.
Regarding clause (2), if the MidSouth Participant's surviving spouse in a
primary Beneficiary under the MidSouth Participant's Beneficiary designation,
the Trustee will satisfy the spouse's interest in the MidSouth Participant's
death benefit first from the portion which is payable as a preretirement
survivor annuity.
17.10 PARTICIPANT LOANS. Effective for Plan Years beginning after December 31, 1993, the Trustee shall not make any new loans to MidSouth Participants or MidSouth Beneficiaries.
17.10 VESTING SCHEDULE FOR REPAID AMOUNTS. If a former MidSouth Participant in the Former MidSouth Plan received a cash-out distribution when he was less than 100% vested and repays his distribution pursuant to Section 5.04 of the Former MidSouth Plan, his Accrued Benefit shall be, at all times, one hundred percent (100%) Nonforfeitable to the extent the value of his Accrued Benefit is derived from his MidSouth Accounts.
ARTICLE XVIII.
PROVISIONS APPLICABLE TO ACCOUNTS
TRANSFERRED FROM FORMER GATEWAY PLAN
18.01 GATEWAY ACCOUNTS. The Advisory Committee shall maintain, in order to reflect each Participant's Accrued Benefit under the Plan derived from contributions to the Gateway Western 401(k) Plan ("Former Gateway Plan"), a separate Gateway Deferral Contributions Account, a separate Gateway Rollover Contributions Account, a separate Gateway Voluntary Contributions Account, and a separate Gateway Matching Contributions Account ("Gateway Accounts") for each Participant in the Former Gateway Plan ("Gateway Participant") who had an account under the Former Gateway Plan, except that a Gateway Rollover Contributions Account shall be maintained only for a Gateway Participant who had such an account under the Former Gateway Plan, and a Gateway Voluntary Contributions Account shall be maintained only for a Gateway Participant who had such an account under the Former Gateway Plan. The Gateway Deferral Contributions Account shall reflect a Participant's Accrued Benefit derived from his deferral contributions to the Former Gateway Plan, the Gateway Rollover Contributions Account shall reflect a Participant's Accrued Benefit derived
from his rollover contributions to the Former Gateway Plan, the Gateway Voluntary Contributions Account shall reflect a Participant's Accrued Benefit derived from his voluntary after-tax contributions to the Former Gateway Plan and the Gateway Matching Contributions Account shall reflect a Participant's Accrued Benefit derived from all matching contributions to the Former Gateway Plan on his behalf. The provisions of this Article XVIII shall govern the separate Gateway Accounts, and with respect to such Accounts, the provisions of this Article XVIII shall supersede any other provisions in the Plan to the contrary. Except as provided under this Article XVIII, the Trustee shall hold, administer and distribute the Gateway Accounts in the same manner under the Plan as the similar Account derived from contributions to this Plan.
The provisions of this Article XVIII shall not apply to any Accounts other than the Gateway Accounts.
A Gateway Participant's early retirement age under the Plan shall be 55.
18.02 SPECIAL WITHDRAWAL RIGHTS. A Gateway Participant, by giving prior written notice to the Trustee, may withdraw all or any part of his Gateway Voluntary Contributions Account described in this Section 18.02 at any time, provided, however, that a Gateway Participant may make no more than two such withdrawals in any 12-month period. A distribution of voluntary contributions must comply with the joint and survivor annuity requirements described in this Article XVIII, if those requirements apply to the Gateway Participant. The Trustee, in accordance with the direction of the Advisory Committee, will distribute a Participant's unwithdrawn Gateway Voluntary Contributions Account in accordance with the provisions of this Article XVIII applicable to the distribution of the Gateway Participant's Nonforfeitable Accrued Benefit derived from his Gateway Accounts.
18.03 METHOD OF PAYMENT OF ACCRUED BENEFIT. Subject to the annuity distribution requirements, if any, prescribed by Section 18.06, and any restrictions prescribed by Section 18.05, a Gateway Participant or the beneficiary of a Gateway Participant ("Gateway Beneficiary") may elect distribution of his Gateway Accounts under one, or any combination, of the following methods:
(a) by payment in a lump sum;
(b) by payment in the form of a single life annuity;
(c) by payment in the form of a single life annuity with certain periods of five, ten, or fifteen years;
(d) by payment in the form of a single life annuity with installment refund;
(e) by payment in the form of a qualified joint and survivor annuity, as defined in Section 18.06(A). As of the annuity starting date, the Gateway Participant may elect to receive a smaller annuity benefit, having an actuarial value equivalent to the actuarial value of the qualified joint and survivor annuity, with continuation of payments to the beneficiary at a rate of 100% of the rate payable to the Gateway Participant during his lifetime;
(f) fixed period annuities for any period of whole months which is not less than 60 and does not exceed the life expectancy of the Gateway Participant and named beneficiary where the life expectancy is not recalculated;
(g) a series of installments chosen by the Participant. The Participant may choose at any time to have the balance of his account paid in a different form permitted under this Section 18.03.
If the Gateway Participant's Accrued Benefit is distributed in the form of an annuity purchased from an insurance company, distributions thereunder shall be made in accordance with the requirements of Code Section 401 (a)(9) and the regulations thereunder. Any annuity contract distributed shall be nontransferable.
A series of installment payments shall not be available as a death benefit if the Gateway Beneficiary is riot the spouse of the deceased Gateway Participant.
The distribution options permitted under this Section 18.03 are available only if the present value of the Gateway Participant's entire Nonrollover Nonforfeitable Accrued Benefit under the Plan, at the time of the distribution to the Gateway Participant, exceeds $5,000.
The provisions of Section 6.02(A) shall apply in determining the minimum distribution requirements under Code Section 401(a)(9) for Gateway Participants, and the provisions of Section 6.02(B) shall apply in determining the minimum distribution requirements under Code Section 401 (a)(9) for Gateway Beneficiaries.
18.04 TIME OF PAYMENT AND ACCRUED BENEFIT. Unless, pursuant to
Section 18.05, the Gateway Participant or the Gateway Beneficiary elects in
writing a different time or method of payment, the Advisory Committee will
direct the Trustee to commence distribution of a Gateway Participant's
Nonforfeitable Accrued Benefit derived from his Gateway Accounts in accordance
with this Section 18.04. A Gateway Participant must consent, in writing, to any
distribution required under this Section 18.04 if the present value of the
Gateway Participants Nonforfeitable Accrued Benefit, at the time of the
distribution to the Gateway Participant, exceeds $5,000 and the Gateway
Participant has not attained the later of Normal Retirement Age or age 62.
Furthermore, the Gateway Participant's spouse also must consent, in writing, to
any distribution for which Section 18.06 requires the spouse's consent. For all
purposes of Article VI and this Article XVIII, the term "annuity starting date"
means the first day of the first period for which the Plan pays an amount as an
annuity or in any other form. For purposes of the consent requirements under
this Article XVIII, if the present value of the Gateway Participant's
Nonrollover Nonforfeitable Accrued Benefit derived from his Gateway Accounts, at
the time of any distribution, exceeds $5,000, the Advisory Committee must treat
that present value as exceeding $5,000 for purposes of all subsequent Plan
distributions to the Gateway Participant.
(A) Separation from Service for a Reason Other Than Death.
(1) Gateway Participant's Nonrollover Nonforfeitable Accrued Benefit Not Exceeding $5,000. If the Gateway Participant's Separation from Service is for any reason other than death, the Advisory Committee will direct the Trustee to distribute the
Gateway Participant's Nonforfeitable Accrued Benefit derived from his Gateway Accounts in a lump sum as soon as administratively practicable following the Gateway Participant's Separation from Service, but in no event later than the 60th day following the close of the Plan Year in which the Gateway Participant attains Normal Retirement Age. If the Gateway Participant has attained Normal Retirement Age when he separates from Service, the distribution under this paragraph will occur no later than the 60th day following the close of the Plan Year in which the Gateway Participant's Separation from Service occurs.
(2) Gateway Participant's Nonrollover Nonforfeitable
Accrued Benefit Exceeds $5,000. If the Gateway Participant's Separation
from Service is for any reason other than death, the Advisory Committee
will direct the Trustee to distribute the Gateway Participant's
Nonforfeitable Accrued Benefit derived from his Gateway Accounts in a
form and at the time elected by the Gateway Participant, pursuant to
Section 18.05. In the absence of an election by the Gateway
Participant, the Advisory Committee will direct the Trustee to
distribute the Gateway Participant's Nonforfeitable Accrued Benefit
derived from his Gateway Accounts in a lump sum (or, if applicable, the
normal annuity form of distribution required under Section 19.06), on
the 60th day following the close of the Plan Year in which the latest
of the following events occurs: (a) the Gateway Participant attains
Normal Retirement Age; (b) the Gateway Participant attains age 62; or
(c) the Gateway Participant's Separation from Service.
(B) Required Beginning Date. The provisions of Section 6.01(B)
shall determine a Gateway Participants Required Beginning Date.
(C) Death of the Gateway Participant. The Advisory Committee will direct the Trustee, in accordance with this Section 18.04(C), to distribute to the Gateway Beneficiary the Gateway Participant's Nonforfeitable Accrued Benefit derived from his Gateway Accounts remaining in the Trust at the time of the Gateway Participant's death.
(1) Deceased Gateway Participant's Nonrollover Nonforfeitable Accrued Benefit Does Not Exceed $5,000. The Advisory Committee, subject to the requirements of Section 18.06, must direct the Trustee to distribute the deceased Gateway Participant's Nonforfeitable Accrued Benefit derived from his Gateway Accounts in a single cash sum, as soon as administratively practicable following the Gateway Participant's death or, if later, the date on which the Advisory Committee receives notification of or otherwise confirms the Gateway Participant's death.
(2) Deceased Gateway Participant's Nonrollover Nonforfeitable Accrued Benefit Exceeds $5,000. The Advisory Committee will direct the Trustee to distribute the deceased Gateway Participant's Nonforfeitable Accrued Benefit derived from his Gateway Accounts at the time and in the form elected by the Gateway Participant or, if applicable, by the Gateway Beneficiary, as permitted under this Article XVIII.
If the death benefit is payable in full to the Gateway Participant's surviving spouse, the surviving spouse, in addition to the distribution options provided in this Section 18.04(C), may elect distribution at any time or in any form (other than the joint and survivor annuity) this Article XVIII would permit for a Gateway Participant.
(D) Rollovers. The provisions of Section 6.08 shall apply to the Gateway Accounts.
18.05 BENEFIT PAYMENT ELECTIONS. Not earlier than 90 days before nor later than 30 days before the Gateway Participant's annuity starting date, the Plan Administrator must provide a benefit notice to a Gateway Participant who is eligible to make an election under this Section 18.05. The benefit notice must explain the optional forms of benefit in the Plan, including the material features and relative values of those options, and the Gateway Participant's right to defer distribution until he attains the later of Normal Retirement Age or age 62.
Such distribution may commence less than 30 days after the benefit notice is given, provided that:
(1) The Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and
(2) The Participant, after receiving the notice, affirmatively elects a distribution.
If a Gateway Participant or Gateway Beneficiary makes an election prescribed by this Section 18.05, the Advisory Committee will direct the Trustee to distribute the Gateway Participant's Nonforfeitable Accrued Benefit derived from his Gateway Accounts in accordance with that election. Any election under this Section is subject to the requirements of Section 18.06. The Gateway Participant or Gateway Beneficiary must make an election under this Section 18.05 by filing his election form with the Advisory Committee at any time before the Trustee otherwise would commence to pay a Gateway Participant's Accrued Benefit derived from his Gateway Accounts in accordance with the requirements of Articles VI and XVIII.
(A) Gateway Participant Elections After Separation from Service.
If the present value of a Gateway Participant's Nonrollover Nonforfeitable Accrued Benefit exceeds $5,000, he may elect to have the Trustee commence distribution as soon as administratively practicable following the Gateway Participant's Separation from Service. The Gateway Participant may reconsider an election at any time prior to the annuity starting date and elect to commence distribution as of any other distribution date, but not earlier than the date described in the first sentence of this Paragraph (A). Following his attainment of Normal Retirement Age, a Gateway Participant who has separated from Service may elect distribution as of any distribution date, irrespective of the restrictions otherwise applicable under this Section 18.05(A).
(B) Gateway Participant Elections Prior to Separation from Service.
In addition to the distribution options provided in Section 6.03, a Gateway Participant, until he retires, has a continuing election to receive all or any portion of his Gateway Deferral Contributions Account if: (a) he has attained age 59 1/2 and (b) he is 100% vested in the Account.
The procedures set forth in Section 6.03(B) shall apply. Any distribution is subject to the requirements of Section 19.06.
(C) Death Benefit Elections.
If the present value of the deceased Gateway Participant's Nonrollover Nonforfeitable Accrued Benefit exceeds $5,000, the Gateway Beneficiary may elect to have the Trustee distribute the Gateway Participant's Nonforfeitable Accrued Benefit derived from his Gateway Accounts in a form and within a period permitted under Section 18.04. The Gateway Beneficiary's election is subject to any restrictions designated in writing by the Gateway Participant and not revoked as of his date of death.
(D) Transitional Elections.
Notwithstanding the provisions of Section 18.03 and 18.04, if the
Gateway Participant (or Gateway Beneficiary) signed a written distribution
designation prior to January 1, 1984, the Advisory Committee must distribute the
Gateway Participant's Nonforfeitable Accrued Benefit in accordance with that
designation, subject however, to the survivor requirements, if applicable, of
Sections 18.06, 18.07 and 18.08. This Section 18.05(D) does not apply to a
pre-1984 distribution designation, and the Advisory Committee will not comply
with that designation, if any of the following applies: (1) the method of
distribution would have disqualified the Plan under Code Section 401(a)(9) as in
effect on December 31, 1983; (2) the Gateway Participant did not have an Accrued
Benefit as of December 31, 1983; (3) the distribution designation does not
specify the timing and form of the distribution and the death Beneficiaries (in
order of priority); (4) the substitution of a Gateway Beneficiary modifies the
payment period of the distribution; or (5) the Gateway Participant (or Gateway
Beneficiary) modifies or revokes the distribution designation. In the event of a
revocation, the Plan must distribute, no later than December 31 of the calendar
year following the year of revocation, the amount which the Gateway Participant
would have received under Section 18.04(A) if the distribution designation had
not been in effect or, if the Gateway Beneficiary revokes the distribution
designation, the amount which the Gateway Beneficiary would have received under
Section 18.04(C) if the distribution designation had not been in effect. The
Advisory Committee will apply this Section 18.05(D) to rollovers and transfers
in accordance with Part J of the Code Section 401(a)(9) Treasury regulations.
18.06 ANNUITY DISTRIBUTIONS TO GATEWAY PARTICIPANTS AND SURVIVING
SPOUSES.
(A) Joint and Survivor Annuity. The Advisory Committee must direct
|
the Trustee to distribute a Gateway Participant's Nonforfeitable Accrued Benefit derived from his Gateway Accounts in the form of a qualified joint and survivor annuity, unless the Gateway Participant makes a valid waiver election (described in Section 18.07) within the 90-day period ending on the annuity starting date. If, as of the annuity starting date, the Gateway Participant is married, a qualified joint and survivor annuity is an immediate annuity which is purchasable with the Gateway Participant's Nonforfeitable Accrued Benefit derived from his Gateway Account and which provides a life annuity for the Gateway Participant and a survivor annuity payable for the remaining life of the Gateway Participant's surviving spouse equal to 50% of the amount of the annuity payable during the life of the Gateway Participant. If, as of the annuity starting date, the Gateway Participant is not married, a qualified joint and survivor annuity is an immediate life
annuity for the Gateway Participant which is purchasable with the Gateway Participant's Nonforfeitable Accrued Benefit derived from his Gateway Accounts. On or before the annuity starting date, the Advisory Committee, without Gateway Participant or spousal consent, must direct the Trustee to pay the Gateway Participant's Nonforfeitable Accrued Benefit derived from his Gateway Accounts, in a lump sum, in lieu of a qualified joint and survivor annuity in accordance with Section 18.04, if the Gateway Participant's Nonrollover Nonforfeitable Accrued Benefit is not greater than $5,000.
(B) Preretirement Survivor Annuity. If a married Gateway
Participant dies prior to his annuity starting date the Advisory Committee will
direct the Trustee to distribute a portion of the Gateway Participant's
Nonforfeitable Accrued Benefit derived from his Gateway Accounts to the Gateway
Participant's surviving spouse in the form of a preretirement survivor annuity,
unless the Gateway Participant has a valid waiver election (as described in
Section 18.08) in effect, or unless the Gateway Participant and his spouse were
not married throughout the one year period ending on the date of his death. A
preretirement survivor annuity is an annuity which is purchasable with 50% of
the Gateway Participants Nonforfeitable Accrued Benefit derived from his Gateway
Accounts (determined as of the date of the Gateway Participant's death) and
which is payable for the life of the Gateway Participant's surviving spouse. The
value of the preretirement survivor annuity is attributable to Employer
contributions and to Employee contributions in the same proportion as the
Gateway Participant's Nonforfeitable Accrued Benefit derived from his Gateway
Accounts is attributable to those contributions. The portion of the Gateway
Participant's Nonforfeitable Accrued Benefit derived from his Gateway Accounts
not payable under this paragraph is payable to the Gateway Participant's
Beneficiary, in accordance with the other provisions of this Article XVIII. If
the present value of the preretirement survivor annuity does not exceed $5,000,
the Advisory Committee, on or before the annuity starting date, must direct the
Trustee to make a lump sum distribution to the Gateway Participant's surviving
spouse, in lieu of a preretirement survivor annuity.
(C) Surviving Spouse Elections. If the present value of the
preretirement survivor annuity exceeds $5,000, the Gateway Participant's
surviving spouse may elect to have the Trustee commence payment of the
preretirement survivor annuity at any time following the date of the Gateway
Participant's death, but not later than the mandatory distribution periods
described in Section 18.04, and may elect any form of payment described in
Section 18.03, in lieu of the preretirement survivor annuity. In the absence of
an election by the surviving spouse, the Advisory Committee must direct the
Trustee to distribute the preretirement survivor annuity on the first
distribution date following the close of the Plan Year in which the latest of
the following events occurs: (i) the Gateway Participant's death; (ii) the date
the Advisory Committee receives notification of or otherwise confirms the
Gateway Participant's death; (iii) the date the Gateway Participant would have
attained Normal Retirement Age; or (iv) the date the Gateway Participant would
have attained age 62.
(D) Special Rules. If the Gateway Participant has in effect a valid waiver election regarding the qualified joint and survivor annuity or the preretirement survivor annuity, the Advisory Committee must direct the Trustee to distribute the Gateway Participant's Nonforfeitable Accrued Benefit derived from his Gateway Accounts in accordance with Sections 18.03, 18.04 and 18.05. For purposes of applying this Article XVIII, the Advisory Committee treats a former spouse as the Gateway Participant's spouse or the surviving spouse to the extent
provided under a qualified domestic relations order described in Section 6.07. The provisions of this Article XVIII apply separately to the portion of the Gateway Participant's Nonforfeitable Accrued Benefit derived from his Gateway Accounts subject to the qualified domestic relations order and to the portion of the Gateway Participant's Nonforfeitable Accrued Benefit derived from his Gateway Accounts not subject to that order.
Limited Application of Section. The preceding provisions of this
Section 18.06 apply only to (1) a Gateway Participant as respects whom the Plan
is a direct or indirect transferee from a plan subject to the Code Section 417
requirements and the Plan received the transfer after December 31, 1984, unless
the transfer is an elective transfer described in Section 11.05; (2) a Gateway
Participant or Gateway Beneficiary who is eligible to and who elects a life
annuity distribution; and (3) a Gateway Participant whose benefits under a
defined benefit plan are offset by benefits provided under this Plan. Sections
18.07 and 18.08 only apply to a Gateway Participant or Gateway Beneficiary to
whom the preceding provisions of this Section 18.06 apply.
18.07 WAIVER ELECTION - QUALIFIED JOINT AND SURVIVOR ANNUITY. Within 90 days, not later than 30 days, before the Gateway Participants annuity starting date, the Advisory Committee must provide the Gateway Participant a written explanation of the terms and conditions of the qualified joint and survivor annuity, the Gateway Participant's right to make, and the effect of, an election to waive the joint and survivor form of benefit, the rights of the Gateway Participant's spouse regarding the waiver election, and the Gateway Participant's right to make, and the effect of, a revocation of a waiver election. The Plan does not limit the number of times the Gateway Participant may revoke a waiver of the qualified joint and survivor annuity or make a new waiver during the election period.
A married Gateway Participants waiver election is not valid unless (a) the Gateway Participant's spouse (to whom the survivor annuity is payable under the qualified joint and survivor annuity), after the Gateway Participant has received the written explanation described in this Section 18.07, has consented in writing to the waiver election, the spouse's consent acknowledges the effect of the election, and a notary public as the Plan Administrator (or his representative) witnesses the spouse's consent, (b) the spouse consents to the alternate form of payment designated by the Gateway Participant or to any change in that designated form of payment, and (c) unless the spouse is the Gateway Participant's sole primary Beneficiary, the spouse consents to the Gateway Participant's Beneficiary designation or to any change in the Gateway Participant's Beneficiary designation. The spouse's consent to a waiver of the qualified joint and survivor annuity is irrevocable, unless the Gateway Participant revokes the waiver election. The spouse may execute a blanket consent to any form of payment designation or to any Beneficiary designation made by the Gateway Participant, if the spouse acknowledges the right to limit that consent to a specific designation but, in writing, waives that right. The consent requirements of this Section 18.07 apply to a former spouse of a Gateway Participant, to the extent required under a qualified domestic relations order described in Section 6.07.
The Advisory Committee will accept as valid a waiver election which does not satisfy the spousal consent requirements if the Advisory Committee establishes the Gateway Participant does not have a spouse, the Advisory Committee is not able to locate the Gateway Participant's spouse, the Gateway Participant is legally separated or has been abandoned (within the meaning
of State law) and the Gateway Participant has a court order to that effect, or other circumstances exist under which the Secretary of the Treasury will excuse the consent requirement. If the Gateway Participant's spouse is legally incompetent to give consent, the spouse's legal guardian (even if the guardian is the Gateway Participant) may give consent.
18.08 WAIVER ELECTION - PRERETIREMENT SURVIVOR ANNUITY. The Advisory
Committee must provide a written explanation of the preretirement survivor
annuity to each married Gateway Participant, within the following period which
ends last: (1) the period beginning on the first day of the Plan Year in which
the Gateway Participant attains age 32 and ending on the last day of the Plan
Year in which the Gateway Participant attains age 34; (2) a reasonable period
after an Employee becomes a Gateway Participant; (3) a reasonable period after
the joint and survivor rules become applicable to the Gateway Participant; or
(4) a reasonable time after a fully subsidized preretirement survivor annuity no
longer satisfies the requirements of a fully subsidized benefit. A reasonable
period described in clauses (2), (3) and (4) is the period beginning one year
before and ending one year after the applicable event. If the Gateway
Participant separates from Service before attaining age 35, clauses (1), (2),
(3) and (4) do not apply and the Advisory Committee must provide the written
explanation within the period beginning one year before and ending one year
after the Separation from Service. The written explanation must describe, in a
manner consistent with Treasury Regulations, the terms and conditions of the
preretirement survivor annuity comparable to the explanation of the qualified
joint and survivor annuity required under Section 18.06. The Plan does not limit
the number of times the Gateway Participant may revoke a waiver of the
preretirement survivor annuity or make a new waiver during the election period.
A Gateway Participants waiver election of the preretirement survivor
annuity is not valid unless (a) the Gateway Participant makes the waiver
election no later than the first day of the Plan Year in which he attains age 35
and (b) the Gateway Participant's spouse (to whom the preretirement survivor
annuity is payable) satisfies the consent requirements described in Section
18.06, except the spouse need not consent to the form of benefit payable to the
designated Gateway Beneficiary. The spouse's consent to the waiver of the
preretirement survivor annuity is irrevocable, unless the Gateway Participant
revokes the waiver election. Irrespective of the time of election requirement
described in clause (a), if the Gateway Participant separates from Service prior
to the first day of the Plan Year in which he attains age 35, the Advisory
Committee will accept a waiver election as respects the Gateway Participant's
Accrued Benefit attributable to his Service prior to this Separation from
Service. Furthermore, if a Gateway Participant who has separated from Service
makes a valid waiver election, except for the timing requirement of clause (a),
the Plan Administrator will accept that election as valid, but only until the
first day of the Plan Year in which the Gateway Participant attains age 35. A
waiver election described in this paragraph is not valid unless made after the
Gateway Participant has received the written explanation described in this
Section 18.08.
18.09 COORDINATION WITH SURVIVOR REQUIREMENTS. If the joint and
survivor requirements of Article XVIII apply to the Gateway Participant, neither
Section 8.01 nor this Section 18.09 impose any special spousal consent
requirements on the Gateway Participant's Beneficiary designation. However, in
the absence of spousal consent (as required by Articles VI and XVIII) to the
Gateway Participant's Beneficiary designation: (1) any waiver of the joint and
survivor annuity or of the preretirement survivor annuity is not valid; and (2)
if
the Gateway Participant dies prior to his annuity starting date, the Gateway Participant's Beneficiary designation will apply only to the portion of the death benefit which is not payable as a preretirement survivor annuity. Regarding clause (2), if the Gateway Participant's surviving spouse is a primary Beneficiary under the Gateway Participant's Beneficiary designation, the
18.10 Trustee will satisfy the spouse's interest in the Gateway Participant's death benefit first from the portion which is payable as a preretirement survivor annuity.
IN WITNESS WHEREOF, the Kansas City Southern has executed this amended and restated Plan in Kansas City, Missouri as of this 30th day of May, 2002.
KANSAS CITY SOUTHERN
By: /s/ Eric Freestone/TLR
---------------------------------
WITNESS:
/s/ Tony L. Robertson
----------------------------
|
Exhibit 10.10.2
FIRST AMENDMENT
TO THE
KANSAS CITY SOUTHERN 401(k) AND PROFIT SHARING PLAN
(As Amended and Restated Effective April 1, 2002)
The Kansas City Southern 401(k) and Profit Sharing Plan, as amended and restated effective April 1, 2002, (the "Plan"), is hereby amended by the sponsor of the Plan, Kansas City Southern, effective January 1, 2003, to the extent of substituting the figure "5%" for the figure "3%" in the paragraph defining deferral contributions eligible for the 100% matching contribution, such that said paragraph in Section 3.01(A) of the Plan will state as follows effective January 1, 2003:
Eligible Contributions. Under the matching contribution formula, a Participant's "eligible contributions" are the deferral contributions allocated to the Participant not in excess of 5% of the Participant's Compensation (as defined in Section 1.10 after modification by Section 12.01) for the Plan Year. Eligible contributions do not include deferral contributions that are excess deferrals under Section 12.03. For this purpose: (a) excess deferrals relate first to deferral contributions for the Plan Year not otherwise eligible for a matching contribution; and (b) if the Plan Year is not a calendar year, the excess deferrals for a Plan Year are the last deferrals made for a calendar year.
IN WITNESS WHEREOF, Kansas City Southern has executed this First Amendment in Kansas City, Missouri as of this 10th day of January, 2003.
KANSAS CITY SOUTHERN
By: /s/ Eric B. Freestone ----------------------- |
Exhibit 10.14.1
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") dated this 14th day of March 2003 by and between The Kansas City Southern Railway Company, a Missouri corporation ("Railway"), Kansas City Southern, a Delaware corporation f/k/a Kansas City Southern Industries, Inc. ("KCSI"), and Ronald G. Russ, an individual ("Executive").
WHEREAS, Railway, KCSI and Executive are parties to that certain Employment Agreement dated June 1, 2002 (the "Employment Agreement"), pursuant to which Railway employed Executive as Senior Vice President & Chief Financial Officer;
WHEREAS, as of January 16, 2003 (the "Effective Date"), Executive assumed the role of Executive Vice President & Chief Financial Officer for Railway (the "Promotion"); and
WHEREAS, Railway, KCSI and Executive desire to amend the Employment Agreement to provide for certain changes to the Employment Agreement necessitated by the Promotion.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. Section 1 of the Employment Agreement is hereby amended so that the first sentence and only the first sentence of Section 1 is deleted in its entirety and replaced with the following:
"Railway hereby continues the employment of Executive as Executive Vice President & Chief Financial Officer, to serve at the pleasure of the Board of Directors of Railway (the "Railway Board") and to have such duties, powers and responsibilities as may be prescribed or delegated from time to time by the President or other officer to whom Executive reports, subject to the powers vested in the Railway Board and in the stockholder of the Railway."
2. The parties hereto acknowledge and agree that this Amendment shall be deemed to have been effective as of the Effective Date.
3. Capitalized terms used herein without definition shall have the respective meanings attributed to such terms in the Employment Agreement.
4. The parties hereto hereby ratify, confirm and approve the Employment Agreement, as amended by this Amendment. Should any terms of this Amendment conflict with any terms of the Employment Agreement, the terms of this Amendment shall control.
5. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
Exhibit 10.14.1
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above.
RAILWAY:
THE KANSAS CITY SOUTHERN RAILWAY COMPANY
By: /s/ Michael R. Haverty ---------------------------------------------- Name: Michael R. Haverty Title: Chairman, President & CEO |
KCSI:
KANSAS CITY SOUTHERN
By: /s/ Michael R. Haverty ---------------------------------------------- Name: Michael R. Haverty Title: Chairman, President & CEO |
EXECUTIVE:
By: /s/ Ronald G. Russ ---------------------------------------------- Name: Ronald G. Russ |
Exhibit 10.15
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of this 1st day of September, 2001, by and between The Kansas City Southern Railway Company, a Missouri corporation ("Railway"), Kansas City Southern Industries, Inc., a Delaware corporation ("KCSI") and Jerry W. Heavin, an individual ("Executive").
WHEREAS, Railway, KCSI and Executive desire for Railway to employ Executive on the terms and conditions set forth in this Agreement and to provide an incentive to Executive to remain in the employ of Railway hereafter, particularly in the event of any change in control (as herein defined) of KCSI, or Railway, thereby establishing and preserving continuity of management of Railway.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, it is agreed by and between Railway, KCSI and Executive as follows:
1. Employment. Railway hereby continues the employment of Executive as its Vice President Engineering, to serve at the pleasure of the Board of Directors of Railway (the "Railway Board") and to have such duties, powers and responsibilities as may be prescribed or delegated from time to time by the President or other officer to whom Executive reports, subject to the powers vested in the Railway Board and in the stockholder of Railway. Executive shall faithfully perform his duties under this Agreement to the best of his ability and shall devote substantially all of his working time and efforts to the business and affairs of Railway and its affiliates.
Exhibit 10.15
2. Compensation.
(a) Base Compensation. Railway shall pay Executive as compensation for his services hereunder an annual base salary at the rate of $150,000. Such rate shall not be increased prior to January 1, 2002 and shall not be reduced except as agreed by the parties or except as part of a general salary reduction program imposed by Railway for non-union employees and applicable to all officers of Railway.
(b) Incentive Compensation. For the year 2001, Executive shall not be entitled to participate in the Railway Incentive Compensation Plan.
3. Benefits. During the period of his employment hereunder, Railway shall provide Executive with coverage under such benefit plans and programs as are made generally available to similarly situated employees of Railway, provided (a) Railway shall have no obligation with respect to any plan or program if Executive is not eligible for coverage thereunder, and (b) Executive acknowledges that stock options and other stock and equity participation awards are granted in the discretion of the Board of Directors of KCSI (the "KCSI Board") or the Compensation Committee of the KCSI Board and that Executive has no right to receive stock options or other equity participation awards or any particular number or level of stock options or other awards. In determining contributions, coverage and benefits under any disability insurance policy and under any cash compensation-based plan provided to Executive by Railway, it shall be assumed that the value of Executive's annual compensation, pursuant to this Agreement, is 145% of Executive's annual base salary. Executive acknowledges that all rights and benefits under benefit plans and programs shall be governed by the official text of each plan or program and not by any summary or description thereof or any provision of this Agreement (except to the extent that this Agreement expressly modifies such benefit plans or programs) and that none of KCSI, nor
Exhibit 10.15
Railway is under any obligation to continue in effect or to fund any such plan or program, except as provided in Paragraph 7 hereof.
4. Termination.
(a) Termination by Executive. Executive may terminate this Agreement and his employment hereunder by at least thirty (30) days advance written notice to Railway, except that in the event of any material breach of this Agreement by Railway, Executive may terminate this Agreement and his employment hereunder immediately upon notice to Railway.
(b) Death or Disability. This Agreement and Executive's employment hereunder shall terminate automatically on the death or disability of Executive, except to the extent employment is continued under Railway's disability plan. For purposes of this Agreement, Executive shall be deemed to be disabled if he qualifies for disability benefits under Railway's long-term disability plan.
(c) Termination by Railway For Cause. Railway may terminate this Agreement and Executive's employment "for cause" immediately upon notice to Executive. For purposes of this Agreement (except for Paragraph 7), termination "for cause" shall mean termination based upon any one or more of the following:
(i) Any material breach of this Agreement by Executive;
(ii) Executive's dishonesty involving Railway, KCSI, or any subsidiary of Railway, or KCSI;
(iii) Gross negligence or willful misconduct in the performance of Executive's duties as determined in good faith by the Railway Board;
(iv) Willful failure by Executive to follow reasonable instructions of the President or other officer to whom Executive reports;
(v) Executive's fraud or criminal activity; or
Exhibit 10.15
(vi) Embezzlement or misappropriation by Executive.
(d) Termination by Railway Other Than For Cause.
(i) Railway may terminate this Agreement and Executive's employment other than for cause immediately upon notice to Executive, and in such event, Railway shall provide severance benefits to Executive in accordance with Paragraph 4(d)(ii) below.
(ii) Unless the provisions of Paragraph 7 of this Agreement
are applicable, if Executive's employment is terminated under Paragraph
4(d)(i), Railway shall continue, for a period of one (1) year following
such termination, (a) to pay to Executive as severance pay a monthly
amount equal to one-twelfth (1/12th) of the annual base salary referenced
in Paragraph 2(a) above, at the rate in effect immediately prior to
termination, and, (b) to reimburse Executive for the cost (including state
and federal income taxes payable with respect to this reimbursement) of
continuing the health insurance coverage provided pursuant to this
Agreement or obtaining health insurance coverage comparable to the health
insurance provided pursuant to this Agreement, and obtaining coverage
comparable to the life insurance provided pursuant to this Agreement,
unless Executive is provided comparable health or life insurance coverage
in connection with other employment. The foregoing obligations of Railway
shall continue until the end of such one (1) year period notwithstanding
the death or disability of Executive during said period (except, in the
event of death, the obligation to reimburse Executive for the cost of life
insurance shall not continue). In the year in which termination of
employment occurs, Executive shall be eligible to receive benefits under
the Railway Incentive Compensation Plan and any Executive Plan in which
Executive participates (the "Executive Plan") (if such Plans then are in
existence and Executive was entitled to participate immediately prior to
termination) in accordance with the provisions of such plans then
applicable, and severance
Exhibit 10.15
pay received in such year shall be taken into account for the purpose of determining benefits, if any, under the Railway Incentive Compensation Plan but not under the Executive Plan. After the year in which termination occurs, Executive shall not be entitled to accrue or receive benefits under the Railway Incentive Compensation Plan or the Executive Plan with respect to the severance pay provided herein, notwithstanding that benefits under such plan then are still generally available to executive employees of Railway. After termination of employment, Executive shall not be entitled to accrue or receive benefits under any other employee benefit plan or program, except that Executive shall be entitled to participate in the KCSI Profit Sharing Plan, the KCSI Employee Stock Ownership Plan and the KCSI Section 401(k) Plan (if Railway employees then still participate in such plans) in the year of termination of employment only if Executive meets all requirements of such plans for participation in such year.
5. Non-Disclosure. During the term of this Agreement and at all times after any termination of this Agreement, Executive shall not, either directly or indirectly, use or disclose any Railway trade secret, except to the extent necessary for Executive to perform his duties for Railway while an employee. For purposes of this Agreement, the term "Railway trade secret" shall mean any information regarding the business or activities of Railway or any subsidiary or affiliate, including any formula, pattern, compilation, program, device, method, technique, process, customer list, technical information or other confidential or proprietary information, that (a) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (b) is the subject of efforts of Railway or its subsidiary or affiliate that are reasonable under the circumstance to maintain its secrecy. In the event of any breach of this Paragraph 5 by Executive, Railway shall be entitled to terminate any and all remaining severance
Exhibit 10.15
benefits under Paragraph 4(d)(ii) and shall be entitled to pursue such other legal and equitable remedies as may be available.
6. Duties Upon Termination; Survival.
(a) Duties. Upon termination of this Agreement by Railway or Executive for any reason, Executive shall immediately return to Railway all Railway trade secrets which exist in tangible form and shall sign such written resignations from all positions as an officer, director or member of any committee or board of Railway and all direct and indirect subsidiaries and affiliates of Railway as may be requested by Railway and shall sign such other documents and papers relating to Executive's employment, benefits and benefit plans as Railway may reasonably request.
(b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of this Agreement shall survive any termination of this Agreement by Railway or Executive, and the provisions of Paragraph 4(d)(ii) shall survive any termination of this Agreement by Railway under Paragraph 4(d)(i).
7. Continuation of Employment Upon Change in Control
(a) Continuation of Employment. Subject to the terms and conditions of this Paragraph 7, in the event of a Change in Control (as defined in Paragraph 7(d)) at any time during the term of this Agreement, Executive agrees to remain in the employ of Railway for a period of three years (the "Three-Year Period") from the date of such Change in Control (the "Control Change Date"). Railway agrees to continue to employ Executive for the Three-Year Period. During the Three-Year Period, (i) the Executive's position (including offices, titles, reporting requirements and responsibilities), authority and duties shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 12 month period immediately before
Exhibit 10.15
the Control Change Date and (ii) the Executive's services shall be performed at the location where Executive was employed immediately before the Control Change Date or at any other location less than 40 miles from such former location. During the Three-Year Period, Railway shall continue to pay to Executive an annual base salary on the same basis and at the same intervals as in effect prior to the Control Change Date at a rate not less than 12 times the highest monthly base salary paid or payable to the Executive by Railway in respect of the 12-month period immediately before the Control Change Date.
(b) Benefits. During the Three-Year Period, Executive shall be entitled to participate, on the basis of his executive position, in each of the following KCSI, or Railway plans (together, the "Specified Benefits") in existence, and in accordance with the terms thereof, at the Control Change Date:
(i) any benefit plan, and trust fund associated therewith, related to (A) life, health, dental, disability, accidental death and dismemberment insurance or accrued but unpaid vacation time, (B) profit sharing, thrift or deferred savings (including deferred compensation, such as under Sec. 401(k) plans), (C) retirement or pension benefits, (D) ERISA excess benefits and similar plans and (E) tax favored employee stock ownership (such as under ESOP, and Employee Stock Purchase programs); and
(ii) any other benefit plans hereafter made generally available to executives of Executive's level or to the employees of Railway generally.
In addition, Railway and KCSI shall use their best efforts to cause all outstanding options held by Executive under any stock option plan of KCSI or its affiliates to become immediately exercisable on the Control Change Date and to the extent that such options are not vested and are subsequently forfeited, the Executive shall receive a lump-sum cash payment within 5 days after the options are forfeited equal to the difference between the fair market value of the shares of stock subject to the non-vested, forfeited options determined as of the date such options are forfeited and the exercise price for such options. During the Three-Year Period Executive shall
Exhibit 10.15
be entitled to participate, on the basis of his executive position, in any incentive compensation plan of KCSI, or Railway in accordance with the terms thereof at the Control Change Date; provided that if under KCSI, or Railway programs or Executive's Employment Agreement in existence immediately prior to the Control Change Date, there are written limitations on participation for a designated time period in any incentive compensation plan, such limitations shall continue after the Control Change Date to the extent so provided for prior to the Control Change Date.
If the amount of contributions or benefits with respect to the Specified Benefits or any incentive compensation is determined on a discretionary basis under the terms of the Specified Benefits or any incentive compensation plan immediately prior to the Control Change Date, the amount of such contributions or benefits during the Three-Year Period for each of the Specified Benefits shall not be less than the average annual contributions or benefits for each Specified Benefit for the three plan years ending prior to the Control Change Date and, in the case of any incentive compensation plan, the amount of the incentive compensation during the Three-Year Period shall not be less than 75% of the maximum that could have been paid to the Executive under the terms of the incentive compensation plan.
(c) Payment. With respect to any plan or agreement under which Executive would be entitled at the Control Change Date to receive Specified Benefits or incentive compensation as a general obligation of Railway which has not been separately funded (including specifically, but not limited to, those referred to under Paragraph 7(b)(i)(d) above), Executive shall receive within five (5) days after such date full payment in cash (discounted to the then present value on the basis of a rate of seven percent (7%) per annum) of all amounts to which he is then entitled thereunder.
Exhibit 10.15
(d) Change in Control. Except as provided in the last sentence of this Paragraph 7(d), for purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if:
(i) for any reason at any time less than seventy-five percent (75%) of the members of the KCSI Board shall be individuals who fall into any of the following categories: (A) individuals who were members of the KCSI Board on the date of the Agreement; or (B) individuals whose election, or nomination for election by KCSI's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the KCSI Board then still in office who were members of the KCSI Board on the date of the Agreement; or (C) individuals whose election, or nomination for election, by KCSI's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the KCSI Board then still in office who were elected in the manner described in (A) or (B) above, or
(ii) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) other than KCSI shall have become after September 18, 1997, according to a public announcement or filing, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Railway or KCSI representing thirty percent (30%) (or, with respect to Paragraph 7(c) hereof, 40%) or more (calculated in accordance with Rule 13d-3) of the combined voting power of Railway's or KCSI's then outstanding voting securities; or
(iii) the stockholders of Railway or KCSI shall have approved a merger, consolidation or dissolution of Railway or KCSI or a sale, lease, exchange or disposition of all or substantially all of Railway's or KCSI's assets, if persons who were the beneficial
Exhibit 10.15
owners of the combined voting power of Railway's or KCSI's voting securities immediately before any such merger, consolidation, dissolution, sale, lease, exchange or disposition do not immediately thereafter, beneficially own, directly or indirectly, in substantially the same proportions, more than 60% of the combined voting power of any corporation or other entity resulting from any such transaction.
(e) Termination After Control Change Date. Notwithstanding any other provision of this Paragraph 7, at any time after the Control Change Date, Railway may terminate the employment of Executive (the "Termination"), but unless such Termination is for Cause as defined in subparagraph (g) or for disability, within five (5) days of the Termination Railway shall pay to Executive his full base salary through the Termination, to the extent not theretofore paid, plus a lump sum amount (the "Special Severance Payment") equal to the product (discounted to the then present value on the basis of a rate of seven percent (7%) per annum) of (i) 160% of his annual base salary specified in Paragraph 7(a) multiplied by (ii) Two; and Specified Benefits (excluding any incentive compensation) to which Executive was entitled immediately prior to Termination shall continue until the end of the 3-year period ("Benefits Period") beginning on the date of Termination. If any plan pursuant to which Specified Benefits are provided immediately prior to Termination would not permit continued participation by Executive after Termination, then Railway shall pay to Executive within five (5) days after Termination a lump sum payment equal to the amount of Specified Benefits Executive would have received under such plan if Executive had been fully vested in the average annual contributions or benefits in effect for the three plan years ending prior to the Control Change Date (regardless of any limitations based on the earnings or performance of KCSI or Railway) and a continuing participant in such plan to the end of the Benefits Period. Following the end of the Benefits Period, Railway shall continue to provide to the Executive and the Executive's
Exhibit 10.15
family the following benefits ("Post-Period Benefits"): (1) prior to the
Executive's attainment of age sixty (60), health, prescription and dental
benefits equivalent to those then applicable to active peer executives of
Railway) and their families, as the same may be modified from time to time, and
(2) following the Executive's attainment of age sixty (60) (and without regard
to the Executive's period of service with Railway) health and prescription
benefits equivalent to those then applicable to retired peer executives of
Railway and their families, as the same may be modified from time to time. The
cost to the Executive of such Post-Period Benefits shall not exceed the cost of
such benefits to active or retired (as applicable) peer executives, as the same
may be modified from time to time. Notwithstanding the preceding two sentences
of this Paragraph 7(e), if the Executive is covered under any health,
prescription or dental plan provided by a subsequent employer, then the
corresponding type of plan coverage (i.e., health, prescription or dental),
required to be provided as Post-Period Benefits under this Paragraph 7(e) shall
cease. The Executive's rights under this Paragraph 7(e) shall be in addition to,
and not in lieu of, any post-termination continuation coverage or conversion
rights the Executive may have pursuant to applicable law, including without
limitation continuation coverage required by Section 4980 of the Code. Nothing
in this Paragraph 7(e) shall be deemed to limit in any manner the reserved right
of Railway, in its sole and absolute discretion, to at any time amend, modify or
terminate health, prescription or dental benefits for active or retired
employees generally.
(f) Resignation After Control Change Date. In the event of a Change in Control as defined in Paragraph 7(d), thereafter, upon good reason (as defined below), Executive may, at any time during the 3-year period following the Change in Control, in his sole discretion, on not less than thirty (30) days' written notice (the "Notice of Resignation") to the Secretary of Railway and effective at the end of such notice period, resign his employment with Railway (the "Resignation"). Within five (5) days of such a Resignation, Railway shall pay to Executive his
Exhibit 10.15
full base salary through the effective date of such Resignation, to the extent not theretofore paid, plus a lump sum amount equal to the Special Severance Payment (computed as provided in the first sentence of Paragraph 7(e), except that for purposes of such computation all references to "Termination" shall be deemed to be references to "Resignation"). Upon Resignation of Executive, Specified Benefits to which Executive was entitled immediately prior to Resignation shall continue on the same terms and conditions as provided in Paragraph 7(e) in the case of Termination (including equivalent payments provided for therein), and Post-Period Benefits shall be provided on the same terms and conditions as provided in Paragraph 7(e) in the case of Termination. For purposes of this Agreement, "good reason" means any of the following:
(i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including offices, titles, reporting requirements or responsibilities), authority or duties as contemplated by Section 7(a)(i), or any other action by Railway which results in a diminution or other material adverse change in such position, authority or duties;
(ii) any failure by Railway to comply with any of the provisions of Paragraph 7;
(iii) Railway's requiring the Executive to be based at any office or location other than the location described in Section 7(a)(ii);
(iv) any other material adverse change to the terms and conditions of the Executive's employment; or
(v) any purported termination by Railway of the Executive's employment other than as expressly permitted by this Agreement (any such purported termination shall not be effective for any other purpose under this Agreement).
Exhibit 10.15
A passage of time prior to delivery of the Notice of Resignation or a failure by the Executive to include in the Notice of Resignation any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive under this Agreement or preclude the Executive from asserting such fact or circumstance in enforcing rights under this Agreement.
(g) Termination for Cause After Control Change Date. Notwithstanding any other provision of this Paragraph 7, at any time after the Control Change Date, Executive may be terminated by Railway "for cause." Cause means commission by the Executive of any felony or willful breach of duty by the Executive in the course of the Executive's employment; except that Cause shall not mean:
(i) bad judgment or negligence;
(ii) any act or omission believed by the Executive in good faith to have been in or not opposed to the interest of Railway (without intent of the Executive to gain, directly or indirectly, a profit to which the Executive was not legally entitled);
(iii) any act or omission with respect to which a determination could properly have been made by the Railway Board that the Executive met the applicable standard of conduct for indemnification or reimbursement under Railway's by-laws, any applicable indemnification agreement, or applicable law, in each case in effect at the time of such act or omission; or
(iv) any act or omission with respect to which Notice of Termination of the Executive is given more than 12 months after the earliest date on which any member of the Railway Board, not a party to the act or omission, knew or should have known of such act or omission.
Any Termination of the Executive's employment by Railway for Cause shall be communicated to the Executive by Notice of Termination.
Exhibit 10.15
(h) Gross-up for Certain Taxes. If it is determined (by the reasonable computation of Railway's independent auditors, which determinations shall be certified to by such auditors and set forth in a written certificate ("Certificate") delivered to the Executive) that any benefit received or deemed received by the Executive from Railway or KCSI pursuant to this Agreement or otherwise (collectively, the "Payments") is or will become subject to any excise tax under Section 4999 of the Code or any similar tax payable under any United States federal, state, local or other law (such excise tax and all such similar taxes collectively, "Excise Taxes"), then Railway shall, immediately after such determination, pay the Executive an amount (the "Gross-up Payment") equal to the product of:
(i) the amount of such Excise Taxes; multiplied by
(ii) the Gross-up Multiple (as defined in Paragraph 7(k)). The Gross-up Payment is intended to compensate the Executive for the Excise Taxes and any federal, state, local or other income or excise taxes or other taxes payable by the Executive with respect to the Gross-up Payment.
Railway shall cause the preparation and delivery to the Executive of a Certificate upon request at any time. Railway shall, in addition to complying with this Paragraph 7(h), cause all determinations and certifications under Paragraphs 7(h)-(o) to be made as soon as reasonably possible and in adequate time to permit the Executive to prepare and file the Executive's individual tax returns on a timely basis.
(i) Determination by the Executive.
(i) If Railway shall fail (A) to deliver a Certificate to the Executive or (B) to pay to the Executive the amount of the Gross-up Payment, if any, within 14 days after receipt from the Executive of a written request for a Certificate, or if at any time following receipt of a Certificate the Executive disputes the amount of the Gross-up
Exhibit 10.15
Payment set forth therein, the Executive may elect to demand the payment of the amount which the Executive, in accordance with an opinion of counsel to the Executive ("Executive Counsel Opinion"), determines to be the Gross-up Payment. Any such demand by the Executive shall be made by delivery to Railway of a written notice which specifies the Gross-up Payment determined by the Executive and an Executive Counsel Opinion regarding such Gross-up Payment (such written notice and opinion collectively, the "Executive's Determination"). Within 14 days after delivery of the Executive's Determination to Railway, Railway shall either (A) pay the Executive the Gross-up Payment set forth in the Executive's Determination (less the portion of such amount, if any, previously paid to the Executive by Railway) or (B) deliver to the Executive a Certificate specifying the Gross-up Payment determined by Railway's independent auditors, together with an opinion of Railway's counsel ("Railway Counsel Opinion"), and pay the Executive the Gross-up Payment specified in such Certificate. If for any reason Railway fails to comply with clause (B) of the preceding sentence, the Gross-up Payment specified in the Executive's Determination shall be controlling for all purposes.
(ii) If the Executive does not make a request for, and Railway does not deliver to the Executive, a Certificate, Railway shall, for purposes of Paragraph 7(j), be deemed to have determined that no Gross-up Payment is due.
(j) Additional Gross-up Amounts. If, despite the initial conclusion of Railway and/or the Executive that certain Payments are neither subject to Excise Taxes nor to be counted in determining whether other Payments are subject to Excise Taxes (any such item, a "Non-Parachute Item"), it is later determined (pursuant to subsequently-enacted provisions of the Code, final regulations or published rulings of the IRS, final IRS determination or judgment of a court of competent jurisdiction or Railway's independent auditors) that any of the Non-Parachute
Exhibit 10.15
Items are subject to Excise Taxes, or are to be counted in determining whether any Payments are subject to Excise Taxes, with the result that the amount of Excise Taxes payable by the Executive is greater than the amount determined by Railway or the Executive pursuant to Paragraph 7(h) or Paragraph 7(i), as applicable, then Railway shall pay the Executive an amount (which shall also be deemed a Gross-up Payment) equal to the product of:
(i) the sum of (A) such additional Excise Taxes and (B) any interest, fines, penalties, expenses or other costs incurred by the Executive as a result of having taken a position in accordance with a determination made pursuant to Paragraph 7(h); multiplied by
(ii) the Gross-up Multiple.
(k) Gross-up Multiple. The Gross-up Multiple shall equal a fraction, the numerator of which is one (1.0), and the denominator of which is one (1.0) minus the sum, expressed as a decimal fraction, of the rates of all federal, state, local and other income and other taxes and any Excise Taxes applicable to the Gross-up Payment; provided that, if such sum exceeds 0.8, it shall be deemed equal to 0.8 for purposes of this computation. (If different rates of tax are applicable to various portions of a Gross-up Payment, the weighted average of such rates shall be used.)
(l) Opinion of Counsel. "Executive Counsel Opinion" means a legal opinion of nationally recognized executive compensation counsel that there is a reasonable basis to support a conclusion that the Gross-up Payment determined by the Executive has been calculated in accord with this Paragraph 7 and applicable law. "Company Counsel Opinion" means a legal opinion of nationally recognized executive compensation counsel that (i) there is a reasonable basis to support a conclusion that the Gross-up Payment set forth in the Certificate of Railway's independent auditors has been calculated in accord with this Paragraph 7 and applicable law, and
Exhibit 10.15
(ii) there is no reasonable basis for the calculation of the Gross-up Payment determined by the Executive.
(m) Amount Increased or Contested. The Executive shall notify Railway in writing of any claim by the IRS or other taxing authority that, if successful, would require the payment by Railway of a Gross-up Payment. Such notice shall include the nature of such claim and the date on which such claim is due to be paid. The Executive shall give such notice as soon as practicable, but no later than 10 business days, after the Executive first obtains actual knowledge of such claim; provided, however, that any failure to give or delay in giving such notice shall affect Railway's obligations under this Paragraph 7 only if and to the extent that such failure results in actual prejudice to Railway. The Executive shall not pay such claim less than 30 days after the Executive gives such notice to Railway (or, if sooner, the date on which payment of such claim is due). If Railway notifies the Executive in writing before the expiration of such period that it desires to contest such claim, the Executive shall:
(i) give Railway any information that it reasonably requests relating to such claim;
(ii) take such action in connection with contesting such claim as Railway reasonably requests in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by Railway;
(iii) cooperate with Railway in good faith to contest such claim; and
(iv) permit Railway to participate in any proceedings relating to such claim; provided, however, that Railway shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise
Exhibit 10.15
Tax or income tax, including related interest and penalties, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing, Railway shall control all proceedings in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner. The Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Railway shall determine; provided, however, that if Railway directs the Executive to pay such claim and sue for a refund, Railway shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify the Executive, on an after-tax basis, for any Excise Tax or income tax, including related interest or penalties, imposed with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. The Railway's control of the contest shall be limited to issues with respect to which a Gross-up Payment would be payable. The Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the IRS or other taxing authority.
(n) Refunds. If, after the receipt by the Executive of an amount advanced by Railway pursuant to Paragraph 7(m), the Executive receives any refund with respect to such claim, the Executive shall (subject to Railway's complying with the requirements of Paragraph 7(m)) promptly pay Railway the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an
Exhibit 10.15
amount advanced by Railway pursuant to Paragraph 7(m), a determination is made that the Executive shall not be entitled to a full refund with respect to such claim and Railway does not notify the Executive in writing of its intent to contest such determination before the expiration of 30 days after such determination, then the applicable part of such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-up Payment required to be paid. Any contest of a denial of refund shall be controlled by Paragraph 7(m).
(o) Expenses. If any dispute should arise under this Agreement after the Control Change Date involving an effort by Executive to protect, enforce or secure rights or benefits claimed by Executive hereunder, Railway shall pay (promptly upon demand by Executive accompanied by reasonable evidence of incurrence) all reasonable expenses (including attorneys' fees) incurred by Executive in connection with such dispute, without regard to whether Executive prevails in such dispute except that Executive shall repay Railway any amounts so received if a court having jurisdiction shall make a final, nonappealable determination that Executive acted frivolously or in bad faith by such dispute. To assure Executive that adequate funds will be made available to discharge Railway's obligations set forth in the preceding sentence, Railway has established a trust and upon the occurrence of a Change in Control shall promptly deliver to the trustee of such trust to hold in accordance with the terms and conditions thereof that sum which the Railway Board shall have determined is reasonably sufficient for such purpose.
(p) Prevailing Provisions. On and after the Control Change Date, the provisions of this Paragraph 7 shall control and take precedence over any other provisions of this Agreement which are in conflict with or address the same or a similar subject matter as the provisions of this Paragraph 7.
Exhibit 10.15
8. Mitigation and Other Employment. After a termination of Executive's employment pursuant to Paragraph 4(d)(i) or a Change in Control as defined in Paragraph 7(d), Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and except as otherwise specifically provided in Paragraph 4(d)(ii) with respect to health and life insurance and in Paragraph 7(e) with respect to health, prescription and dental benefits, no such other employment, if obtained, or compensation or benefits payable in connection therewith shall reduce any amounts or benefits to which Executive is entitled hereunder. Such amounts or benefits payable to Executive under this Agreement shall not be treated as damages but as severance compensation to which Executive is entitled because Executive's employment has been terminated.
9. KCSI Not An Obligor. Notwithstanding that KCSI has executed this Agreement, it shall have no obligation for the payment of salary, benefits, or other compensation hereunder, and all such obligations shall be the sole responsibility of Railway.
10. Notice. Notices and all other communications to either party pursuant to this Agreement shall be in writing and shall be deemed to have been given when personally delivered, delivered by facsimile or deposited in the United States mail by certified or registered mail, postage prepaid, addressed, in the case of Railway or KCSI, to Railway or KCSI at 114 West 11th Street, Kansas City, Missouri 64105, Attention: Secretary, or, in the case of the Executive, to him at 114 West 11th Street, Kansas City, Missouri, 64105, or to such other address as a party shall designate by notice to the other party.
11. Amendment. No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, waiver, modification or discharge is agreed to in writing signed by Executive, the President of Railway and the President of KCSI. No waiver by any party hereto at any time of any breach by another party hereto of, or compliance with, any
Exhibit 10.15
condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the time or at any prior or subsequent time.
12. Successors in Interest. The rights and obligations of KCSI and Railway under this Agreement shall inure to the benefit of and be binding in each and every respect upon the direct and indirect successors and assigns of KCSI and Railway, regardless of the manner in which such successors or assigns shall succeed to the interest of KCSI or Railway hereunder, and this Agreement shall not be terminated by the voluntary or involuntary dissolution of KCSI or Railway or by any merger or consolidation or acquisition involving KCSI or Railway, or upon any transfer of all or substantially all of KCSI's or Railway's assets, or terminated otherwise than in accordance with its terms. In the event of any such merger or consolidation or transfer of assets, the provisions of this Agreement shall be binding upon and shall inure to the benefit of the surviving corporation or the corporation or other person to which such assets shall be transferred. Neither this Agreement nor any of the payments or benefits hereunder may be pledged, assigned or transferred by Executive either in whole or in part in any manner, without the prior written consent of Railway.
13. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted.
14. Controlling Law and Jurisdiction. The validity, interpretation and performance of this Agreement shall be subject to and construed under the laws of the State of Missouri, without regard to principles of conflicts of law.
15. Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and terminates and supersedes all other prior
Exhibit 10.15
agreements and understandings, both written and oral, between the parties with respect to the terms of Executive's employment or severance arrangements.
IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Agreement as of the 1st day of August 2001.
THE KANSAS CITY SOUTHERN RAILWAY
COMPANY
By /s/ Michael R. Haverty
---------------------------------
Michael R. Haverty
President and CEO
|
EXECUTIVE
/s/ Jerry W. Heavin
---------------------------------
Jerry W. Heavin
|
Exhibit 10.15.1
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") dated this 14th day of March 2003 by and between The Kansas City Southern Railway Company, a Missouri corporation ("Railway"), Kansas City Southern, a Delaware corporation f/k/a Kansas City Southern Industries, Inc. ("KCSI"), and Jerry W. Heavin, an individual ("Executive").
WHEREAS, Railway, KCSI and Executive are parties to that certain Employment Agreement dated September 1, 2001 (the "Employment Agreement"), pursuant to which Railway employed Executive as Vice President of Engineering;
WHEREAS, as of July 9, 2002 (the "Effective Date"), Executive assumed the role of Senior Vice President Operations for Railway (the "Promotion"); and
WHEREAS, Railway, KCSI and Executive desire to amend the Employment Agreement to provide for certain changes to the Employment Agreement necessitated by the Promotion.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. Section 1 of the Employment Agreement is hereby amended so that the first sentence and only the first sentence of Section 1 is deleted in its entirety and replaced with the following:
"Railway hereby continues the employment of Executive as Senior Vice President Operations, to serve at the pleasure of the Board of Directors of Railway (the "Railway Board") and to have such duties, powers and responsibilities as may be prescribed or delegated from time to time by the President or other officer to whom Executive reports, subject to the powers vested in the Railway Board and in the stockholder of the Railway."
2. Section 3 of the Employment Agreement is hereby amended so that the second sentence and only the second sentence of Section 3 is deleted in its entirety and replaced with the following:
"In determining contributions, coverage and benefits under any disability insurance policy and under any cash compensation-based plan provided to Executive by Railway, it shall be assumed that the value of Executive's annual compensation, pursuant to this Agreement, is 175% of Executive's annual base salary."
3. Section 7(e) of the Employment Agreement is hereby amended so that clauses
(i) and (ii) and only clauses (i) and (ii) are deleted in their entirety and
replaced with the following:
"(i) 175% of his annual base salary specified in Paragraph 7(a) multiplied by (ii) Three;"
Exhibit 10.15.1
4. The parties hereto acknowledge and agree that this Amendment shall be deemed to have been effective as of the Effective Date.
5. Capitalized terms used herein without definition shall have the respective meanings attributed to such terms in the Employment Agreement.
6. The parties hereto hereby ratify, confirm and approve the Employment Agreement, as amended by this Amendment. Should any terms of this Amendment conflict with any terms of the Employment Agreement, the terms of this Amendment shall control.
7. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
[ IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above.
RAILWAY:
THE KANSAS CITY SOUTHERN RAILWAY COMPANY
By: /s/ Michael R. Haverty --------------------------------- Name: Michael R. Haverty Title: Chairman, President & CEO |
KCSI:
KANSAS CITY SOUTHERN
By: /s/ Michael R. Haverty --------------------------------- Name: Michael R. Haverty Title: Chairman, President & CEO |
EXECUTIVE:
By: /s/ Jerry W. Heavin --------------------------------- Name: Jerry W. Heavin |
Exhibit 10.16
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of this 14th day of August, 2000, by and between The Kansas City Southern Railway Company, a Missouri corporation ("Railway"), Kansas City Southern Industries, Inc., a Delaware corporation ("KCSI") and Larry O. Stevenson, an individual ("Executive").
WHEREAS, Executive is now employed by Railway, and Railway, KCSI and Executive desire for Railway to continue to employ Executive on the terms and conditions set forth in this Agreement and to provide an incentive to Executive to remain in the employ of Railway hereafter, particularly in the event of any change in control (as herein defined) of KCSI, Railway or Kansas City Southern Lines, Inc., thereby establishing and preserving continuity of management of Railway.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, it is agreed by and between Railway, KCSI and Executive as follows:
1. Employment. Railway hereby employs Executive as its Vice President Forest Products Business Unit, to serve at the pleasure of the Board of Directors of Railway (the "Railway Board") and to have such duties, powers and responsibilities as may be prescribed or delegated from time to time by the President or other officer to whom Executive reports, subject to the powers vested in the Railway Board and in the stockholder of Railway. Executive shall faithfully perform his duties under this Agreement to the best of his ability and shall devote substantially all of his working time and efforts to the business and affairs of Railway and its affiliates.
Exhibit 10.16
2. Compensation.
(a) Base Compensation. Railway shall pay Executive as compensation for his services hereunder an annual base salary at the rate approved by the KCSI Compensation Committee. Such rate shall not be increased prior to January 1, 2002 and shall not be reduced except as agreed by the parties or except as part of a general salary reduction program imposed by Railway for non-union employees and applicable to all officers of Railway.
(b) Incentive Compensation. For the years 2000 and 2001, Executive shall not be entitled to participate in the Railway Incentive Compensation Plan.
3. Benefits. During the period of his employment hereunder, Railway shall
provide Executive with coverage under such benefit plans and programs as are
made generally available to similarly situated employees of Railway, provided
(a) Railway shall have no obligation with respect to any plan or program if
Executive is not eligible for coverage thereunder, and (b) Executive
acknowledges that stock options and other stock and equity participation awards
are granted in the discretion of the Board of Directors of KCSI (the "KCSI
Board") or the Compensation Committee of the KCSI Board and that Executive has
no right to receive stock options or other equity participation awards or any
particular number or level of stock options or other awards. In determining
contributions, coverage and benefits under any disability insurance policy and
under any cash compensation-based plan provided to Executive by Railway, it
shall be assumed that the value of Executive's annual compensation, pursuant
to this Agreement, is 145% of Executive's annual base salary. Executive
acknowledges that all rights and benefits under benefit plans and programs shall
be governed by the official text of each plan or program and not by any summary
or description thereof or any provision of this Agreement (except to the extent
that this Agreement expressly modifies such benefit plans or programs) and that
none of KCSI, KCSL nor
Exhibit 10.16
Railway is under any obligation to continue in effect or to fund any such plan or program, except as provided in Paragraph 7 hereof.
4. Termination.
(a) Termination by Executive. Executive may terminate this Agreement and his employment hereunder by at least thirty (30) days advance written notice to Railway, except that in the event of any material breach of this Agreement by Railway, Executive may terminate this Agreement and his employment hereunder immediately upon notice to Railway.
(b) Death or Disability. This Agreement and Executive's employment hereunder shall terminate automatically on the death or disability of Executive, except to the extent employment is continued under Railway's disability plan. For purposes of this Agreement, Executive shall be deemed to be disabled if he qualifies for disability benefits under Railway's long-term disability plan.
(c) Termination by Railway For Cause. Railway may terminate this Agreement and Executive's employment "for cause" immediately upon notice to Executive. For purposes of this Agreement (except for Paragraph 7), termination "for cause" shall mean termination based upon any one or more of the following:
(i) Any material breach of this Agreement by Executive;
(ii) Executive's dishonesty involving Railway, KCSI, KCSL or any subsidiary of Railway, KCSI or KCSL;
(iii) Gross negligence or willful misconduct in the performance of Executive's duties as determined in good faith by the Railway Board;
(iv) Willful failure by Executive to follow reasonable instructions of the President or other officer to whom Executive reports;
(v) Executive's fraud or criminal activity; or
Exhibit 10.16
(vi) Embezzlement or misappropriation by Executive.
(d) Termination by Railway Other Than For Cause.
(i) Railway may terminate this Agreement and Executive's employment other than for cause immediately upon notice to Executive, and in such event, Railway shall provide severance benefits to Executive in accordance with Paragraph 4(d)(ii) below.
(ii) Unless the provisions of Paragraph 7 of this Agreement are
applicable, if Executive's employment is terminated under Paragraph
4(d)(i), Railway shall continue, for a period of one (1) year following
such termination, (a) to pay to Executive as severance pay a monthly amount
equal to one-twelfth (1/12th) of the annual base salary referenced in
Paragraph 2(a) above, at the rate in effect immediately prior to
termination, and, (b) to reimburse Executive for the cost (including state
and federal income taxes payable with respect to this reimbursement) of
continuing the health insurance coverage provided pursuant to this
Agreement or obtaining health insurance coverage comparable to the health
insurance provided pursuant to this Agreement, and obtaining coverage
comparable to the life insurance provided pursuant to this Agreement,
unless Executive is provided comparable health or life insurance coverage
in connection with other employment. The foregoing obligations of Railway
shall continue until the end of such one (1) year period notwithstanding
the death or disability of Executive during said period (except, in the
event of death, the obligation to reimburse Executive for the cost of life
insurance shall not continue). In the year in which termination of
employment occurs, Executive shall be eligible to receive benefits under
the Railway Incentive Compensation Plan and the KCSL Executive Plan (if
such Plans then are in existence and Executive was entitled to participate
immediately prior to termination) in accordance with the provisions of such
plans then applicable, and severance pay received in such year shall be
taken into
Exhibit 10.16
account for the purpose of determining benefits, if any, under the Railway Incentive Compensation Plan but not under the KCSL Executive Plan. After the year in which termination occurs, Executive shall not be entitled to accrue or receive benefits under the Railway Incentive Compensation Plan or the KCSL Executive Plan with respect to the severance pay provided herein, notwithstanding that benefits under such plan then are still generally available to executive employees of Railway. After termination of employment, Executive shall not be entitled to accrue or receive benefits under any other employee benefit plan or program, except that Executive shall be entitled to participate in the KCSI Profit Sharing Plan, the KCSI Employee Stock Ownership Plan and the KCSI Section 401(k) Plan (if Railway employees then still participate in such plans) in the year of termination of employment only if Executive meets all requirements of such plans for participation in such year.
(e) Termination Upon Expiration of Right to Work Documentation. Notwithstanding the foregoing provisions of this Paragraph 4, this Agreement and Executive's employment shall terminate automatically upon the expiration, cancellation, revocation or other cessation of Executive's Right to Work Documentation without contemporaneous extension, renewal or replacement thereof. For purposes of this Paragraph 4(e), the term "Right to Work Documentation" shall mean a TN or H-1b visa or other documentation evidencing Executive's legal right to work in the United States pursuant to this Agreement. A termination of employment pursuant to this Paragraph 4(e) shall be treated, for all purposes of this Paragraph 4, as a voluntary termination of employment by the Executive, shall not be treated as a termination by Railway under Paragraph 4(d)(is), and shall not entitle the Executive to severance benefits under Paragraph 4(d)(ii).
Exhibit 10.16
5. Non-Disclosure. During the term of this Agreement and at all times after any termination of this Agreement, Executive shall not, either directly or indirectly, use or disclose any Railway trade secret, except to the extent necessary for Executive to perform his duties for Railway while an employee. For purposes of this Agreement, the term "Railway trade secret" shall mean any information regarding the business or activities of Railway or any subsidiary or affiliate, including any formula, pattern, compilation, program, device, method, technique, process, customer list, technical information or other confidential or proprietary information, that (a) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (b) is the subject of efforts of Railway or its subsidiary or affiliate that are reasonable under the circumstance to maintain its secrecy. In the event of any breach of this Paragraph 5 by Executive, Railway shall be entitled to terminate any and all remaining severance benefits under Paragraph 4(d)(ii) and shall be entitled to pursue such other legal and equitable remedies as may be available.
6. Duties Upon Termination; Survival.
(a) Duties. Upon termination of this Agreement by Railway or Executive for any reason, Executive shall immediately return to Railway all Railway trade secrets which exist in tangible form and shall sign such written resignations from all positions as an officer, director or member of any committee or board of Railway and all direct and indirect subsidiaries and affiliates of Railway as may be requested by Railway and shall sign such other documents and papers relating to Executive's employment, benefits and benefit plans as Railway may reasonably request.
(b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of this Agreement shall survive any termination of this Agreement by Railway or Executive, and the provisions of
Exhibit 10.16
Paragraph 4(d)(ii) shall survive any termination of this Agreement by Railway under Paragraph 4(d)(i).
7. Continuation of Employment Upon Change in Control
(a) Continuation of Employment. Subject to the terms and conditions of this Paragraph 7, in the event of a Change in Control (as defined in Paragraph 7(d)) at any time during the term of this Agreement, Executive agrees to remain in the employ of Railway for a period of three years (the "Three-Year Period") from the date of such Change in Control (the "Control Change Date"). Railway agrees to continue to employ Executive for the Three-Year Period. During the Three-Year Period, (i) the Executive's position (including offices, titles, reporting requirements and responsibilities), authority and duties shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 12 month period immediately before the Control Change Date and (ii) the Executive's services shall be performed at the location where Executive was employed immediately before the Control Change Date or at any other location less than 40 miles from such former location. During the Three-Year Period, Railway shall continue to pay to Executive an annual base salary on the same basis and at the same intervals as in effect prior to the Control Change Date at a rate not less than 12 times the highest monthly base salary paid or payable to the Executive by Railway in respect of the 12-month period immediately before the Control Change Date.
(b) Benefits. During the Three-Year Period, Executive shall be entitled to participate, on the basis of his executive position, in each of the following KCSI, KCSL or Railway plans (together, the "Specified Benefits") in existence, and in accordance with the terms thereof, at the Control Change Date:
(i) any benefit plan, and trust fund associated therewith, related to (A) life, health, dental, disability, accidental death and dismemberment insurance or accrued
Exhibit 10.16
but unpaid vacation time, (B) profit sharing, thrift or deferred savings
(including deferred compensation, such as under Sec. 401(k) plans), (C)
retirement or pension benefits, (D) ERISA excess benefits and similar plans
and (E) tax favored employee stock ownership (such as under ESOP, and
Employee Stock Purchase programs); and
(ii) any other benefit plans hereafter made generally available to executives of Executive's level or to the employees of Railway generally.
In addition, Railway and KCSI shall use their best efforts to cause all outstanding options held by Executive under any stock option plan of KCSI or its affiliates to become immediately exercisable on the Control Change Date and to the extent that such options are not vested and are subsequently forfeited, the Executive shall receive a lump-sum cash payment within 5 days after the options are forfeited equal to the difference between the fair market value of the shares of stock subject to the non-vested, forfeited options determined as of the date such options are forfeited and the exercise price for such options. During the Three-Year Period Executive shall be entitled to participate, on the basis of his executive position, in any incentive compensation plan of KCSI, KCSL or Railway in accordance with the terms thereof at the Control Change Date; provided that if under KCSI, KCSL or Railway programs or Executive's Employment Agreement in existence immediately prior to the Control Change Date, there are written limitations on participation for a designated time period in any incentive compensation plan, such limitations shall continue after the Control Change Date to the extent so provided for prior to the Control Change Date.
If the amount of contributions or benefits with respect to the Specified Benefits or any incentive compensation is determined on a discretionary basis under the terms of the Specified Benefits or any incentive compensation plan immediately prior to the Control Change Date, the amount of such contributions or benefits during the Three-Year Period for each of the Specified
Exhibit 10.16
Benefits shall not be less than the average annual contributions or benefits for each Specified Benefit for the three plan years ending prior to the Control Change Date and, in the case of any incentive compensation plan, the amount of the incentive compensation during the Three-Year Period shall not be less than 75% of the maximum that could have been paid to the Executive under the terms of the incentive compensation plan.
(c) Payment. With respect to any plan or agreement under which Executive would be entitled at the Control Change Date to receive Specified Benefits or incentive compensation as a general obligation of Railway which has not been separately funded (including specifically, but not limited to, those referred to under Paragraph 7(b)(i)(d) above), Executive shall receive within five (5) days after such date full payment in cash (discounted to the then present value on the basis of a rate of seven percent (7%) per annum) of all amounts to which he is then entitled thereunder.
(d) Change in Control. Except as provided in the last sentence of this Paragraph 7(d), for purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if:
(i) for any reason at any time less than seventy-five percent (75%) of the members of the KCSI Board shall be individuals who fall into any of the following categories: (A) individuals who were members of the KCSI Board on the date of the Agreement; or (B) individuals whose election, or nomination for election by KCSI's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the KCSI Board then still in office who were members of the KCSI Board on the date of the Agreement; or (C) individuals whose election, or nomination for election, by KCSI's stockholders, was approved by a vote of at least seventy-five percent (75%) of
Exhibit 10.16
the members of the KCSI Board then still in office who were elected in the manner described in (A) or (B) above, or
(ii) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) other than KCSI shall have become after September 18, 1997, according to a public announcement or filing, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of KCSL, Railway or KCSI representing thirty percent (30%) (or, with respect to Paragraph 7(c) hereof, 40%) or more (calculated in accordance with Rule 13d-3) of the combined voting power of KCSL's, Railway's or KCSI's then outstanding voting securities; or
(iii) the stockholders of KCSL, Railway or KCSI shall have approved a merger, consolidation or dissolution of KCSL, Railway or KCSI or a sale, lease, exchange or disposition of all or substantially all of KCSL's, Railway's or KCSI's assets, if persons who were the beneficial owners of the combined voting power of KCSL's, Railway's or KCSI's voting securities immediately before any such merger, consolidation, dissolution, sale, lease, exchange or disposition do not immediately thereafter, beneficially own, directly or indirectly, in substantially the same proportions, more than 60% of the combined voting power of any corporation or other entity resulting from any such transaction.
Notwithstanding the foregoing provisions of this Paragraph 7(d) to the contrary, the sale of shares of stock of KCSL pursuant to an initial public offering of shares of stock of KCSL shall not constitute a Change in Control.
(e) Termination After Control Change Date. Notwithstanding any other provision of this Paragraph 7, at any time after the Control Change Date, Railway may terminate
Exhibit 10.16
the employment of Executive (the "Termination"), but unless such Termination is for Cause as defined in subparagraph (g) or for disability, within five (5) days of the Termination Railway shall pay to Executive his full base salary through the Termination, to the extent not theretofore paid, plus a lump sum amount (the "Special Severance Payment") equal to the product (discounted to the then present value on the basis of a rate of seven percent (7%) per annum) of (i) 160% of his annual base salary specified in Paragraph 7(a) multiplied by (ii) Two; and Specified Benefits (excluding any incentive compensation) to which Executive was entitled immediately prior to Termination shall continue until the end of the 3-year period ("Benefits Period") beginning on the date of Termination. If any plan pursuant to which Specified Benefits are provided immediately prior to Termination would not permit continued participation by Executive after Termination, then Railway shall pay to Executive within five (5) days after Termination a lump sum payment equal to the amount of Specified Benefits Executive would have received under such plan if Executive had been fully vested in the average annual contributions or benefits in effect for the three plan years ending prior to the Control Change Date (regardless of any limitations based on the earnings or performance of KCSI, KCSL or Railway) and a continuing participant in such plan to the end of the Benefits Period. Following the end of the Benefits Period, Railway shall continue to provide to the Executive and the Executive's family the following benefits ("Post-Period Benefits"): (1) prior to the Executive's attainment of age sixty (60), health, prescription and dental benefits equivalent to those then applicable to active peer executives of Railway) and their families, as the same may be modified from time to time, and (2) following the Executive's attainment of age sixty (60) (and without regard to the Executive's period of service with Railway) health and prescription benefits equivalent to those then applicable to retired peer executives of Railway and their families, as the same may be modified from time to time. The cost to the Executive of such Post-Period Benefits
Exhibit 10.16
shall not exceed the cost of such benefits to active or retired (as applicable) peer executives, as the same may be modified from time to time. Notwithstanding the preceding two sentences of this Paragraph 7(e), if the Executive is covered under any health, prescription or dental plan provided by a subsequent employer, then the corresponding type of plan coverage (i.e., health, prescription or dental), required to be provided as Post-Period Benefits under this Paragraph 7(e) shall cease. The Executive's rights under this Paragraph 7(e) shall be in addition to, and not in lieu of, any post-termination continuation coverage or conversion rights the Executive may have pursuant to applicable law, including without limitation continuation coverage required by Section 4980 of the Code. Nothing in this Paragraph 7(e) shall be deemed to limit in any manner the reserved right of Railway, in its sole and absolute discretion, to at any time amend, modify or terminate health, prescription or dental benefits for active or retired employees generally.
(f) Resignation After Control Change Date. In the event of a Change in Control as defined in Paragraph 7(d), thereafter, upon good reason (as defined below), Executive may, at any time during the 3-year period following the Change in Control, in his sole discretion, on not less than thirty (30) days' written notice (the "Notice of Resignation") to the Secretary of Railway and effective at the end of such notice period, resign his employment with Railway (the "Resignation"). Within five (5) days of such a Resignation, Railway shall pay to Executive his full base salary through the effective date of such Resignation, to the extent not theretofore paid, plus a lump sum amount equal to the Special Severance Payment (computed as provided in the first sentence of Paragraph 7(e), except that for purposes of such computation all references to "Termination" shall be deemed to be references to "Resignation"). Upon Resignation of Executive, Specified Benefits to which Executive was entitled immediately prior to Resignation shall continue on the same terms and conditions as provided in Paragraph 7(e) in the case of Termination (including equivalent payments provided for therein), and Post-Period Benefits shall
Exhibit 10.16
be provided on the same terms and conditions as provided in Paragraph 7(e) in the case of Termination. For purposes of this Agreement, "good reason" means any of the following:
(i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including offices, titles, reporting requirements or responsibilities), authority or duties as contemplated by Section 7(a)(i), or any other action by Railway which results in a diminution or other material adverse change in such position, authority or duties;
(ii) any failure by Railway to comply with any of the provisions of Paragraph 7;
(iii) Railway's requiring the Executive to be based at any office or location other than the location described in Section 7(a)(ii);
(iv) any other material adverse change to the terms and conditions of the Executive's employment; or
(v) any purported termination by Railway of the Executive's employment other than as expressly permitted by this Agreement (any such purported termination shall not be effective for any other purpose under this Agreement).
A passage of time prior to delivery of the Notice of Resignation or a failure by the Executive to include in the Notice of Resignation any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive under this Agreement or preclude the Executive from asserting such fact or circumstance in enforcing rights under this Agreement.
(g) Termination for Cause After Control Change Date. Notwithstanding any other provision of this Paragraph 7, at any time after the Control Change Date, Executive may be terminated by Railway "for cause." Cause means commission by the Executive of any felony or
Exhibit 10.16
willful breach of duty by the Executive in the course of the Executive's employment; except that Cause shall not mean:
(i) bad judgment or negligence;
(ii) any act or omission believed by the Executive in good faith to have been in or not opposed to the interest of Railway (without intent of the Executive to gain, directly or indirectly, a profit to which the Executive was not legally entitled);
(iii) any act or omission with respect to which a determination could properly have been made by the Railway Board that the Executive met the applicable standard of conduct for indemnification or reimbursement under Railway's by-laws, any applicable indemnification agreement, or applicable law, in each case in effect at the time of such act or omission; or
(iv) any act or omission with respect to which Notice of Termination of the Executive is given more than 12 months after the earliest date on which any member of the Railway Board, not a party to the act or omission, knew or should have known of such act or omission.
Any Termination of the Executive's employment by Railway for Cause shall be communicated to the Executive by Notice of Termination.
(h) Gross-up for Certain Taxes. If it is determined (by the reasonable computation of Railway's independent auditors, which determinations shall be certified to by such auditors and set forth in a written certificate ("Certificate") delivered to the Executive) that any benefit received or deemed received by the Executive from Railway, KCSL or KCSI pursuant to this Agreement or otherwise (collectively, the "Payments") is or will become subject to any excise tax under Section 4999 of the Code or any similar tax payable under any United States federal, state, local or other law (such excise tax and all such similar taxes collectively,
Exhibit 10.16
"Excise Taxes"), then Railway shall, immediately after such determination, pay the Executive an amount (the "Gross-up Payment") equal to the product of:
(i) the amount of such Excise Taxes; multiplied by
(ii) the Gross-up Multiple (as defined in Paragraph 7(k)). The Gross-up Payment is intended to compensate the Executive for the Excise Taxes and any federal, state, local or other income or excise taxes or other taxes payable by the Executive with respect to the Gross-up Payment.
Railway shall cause the preparation and delivery to the Executive of a Certificate upon request at any time. Railway shall, in addition to complying with this Paragraph 7(h), cause all determinations and certifications under Paragraphs 7(h)-(o) to be made as soon as reasonably possible and in adequate time to permit the Executive to prepare and file the Executive's individual tax returns on a timely basis.
(i) Determination by the Executive.
(i) If Railway shall fail (A) to deliver a Certificate to the Executive or (B) to pay to the Executive the amount of the Gross-up Payment, if any, within 14 days after receipt from the Executive of a written request for a Certificate, or if at any time following receipt of a Certificate the Executive disputes the amount of the Gross-up Payment set forth therein, the Executive may elect to demand the payment of the amount which the Executive, in accordance with an opinion of counsel to the Executive ("Executive Counsel Opinion"), determines to be the Gross-up Payment. Any such demand by the Executive shall be made by delivery to Railway of a written notice which specifies the Gross-up Payment determined by the Executive and an Executive Counsel Opinion regarding such Gross-up Payment (such written notice and opinion collectively, the "Executive's Determination"). Within 14 days after delivery of the Executive's
Exhibit 10.16
Determination to Railway, Railway shall either (A) pay the Executive the Gross-up Payment set forth in the Executive's Determination (less the portion of such amount, if any, previously paid to the Executive by Railway) or (B) deliver to the Executive a Certificate specifying the Gross-up Payment determined by Railway's independent auditors, together with an opinion of Railway's counsel ("Railway Counsel Opinion"), and pay the Executive the Gross-up Payment specified in such Certificate. If for any reason Railway fails to comply with clause (B) of the preceding sentence, the Gross-up Payment specified in the Executive's Determination shall be controlling for all purposes.
(ii) If the Executive does not make a request for, and Railway does not deliver to the Executive, a Certificate, Railway shall, for purposes of Paragraph 7(j), be deemed to have determined that no Gross-up Payment is due.
(j) Additional Gross-up Amounts. If, despite the initial conclusion of Railway and/or the Executive that certain Payments are neither subject to Excise Taxes nor to be counted in determining whether other Payments are subject to Excise Taxes (any such item, a "Non-Parachute Item"), it is later determined (pursuant to subsequently-enacted provisions of the Code, final regulations or published rulings of the IRS, final IRS determination or judgment of a court of competent jurisdiction or Railway's independent auditors) that any of the Non-Parachute Items are subject to Excise Taxes, or are to be counted in determining whether any Payments are subject to Excise Taxes, with the result that the amount of Excise Taxes payable by the Executive is greater than the amount determined by Railway or the Executive pursuant to Paragraph 7(h) or Paragraph 7(i), as applicable, then Railway shall pay the Executive an amount (which shall also be deemed a Gross-up Payment) equal to the product of:
(i) the sum of (A) such additional Excise Taxes and (B) any interest, fines, penalties, expenses or other costs incurred by the Executive as a result of having
Exhibit 10.16
taken a position in accordance with a determination made pursuant to Paragraph 7(h); multiplied by
(ii) the Gross-up Multiple. (k) Gross-up Multiple. The Gross-up Multiple shall equal a fraction, the numerator of which is one (1.0), and the denominator of which is one (1.0) minus the sum, expressed as a decimal fraction, of the rates of all federal, state, local and other income and other taxes and any Excise Taxes applicable to the Gross-up Payment; provided that, if such sum exceeds 0.8, it shall be deemed equal to 0.8 for purposes of this computation. (If different rates of tax are applicable to various portions of a Gross-up Payment, the weighted average of such rates shall be used.)
(l) Opinion of Counsel. "Executive Counsel Opinion" means a legal opinion of nationally recognized executive compensation counsel that there is a reasonable basis to support a conclusion that the Gross-up Payment determined by the Executive has been calculated in accord with this Paragraph 7 and applicable law. "Company Counsel Opinion" means a legal opinion of nationally recognized executive compensation counsel that (i) there is a reasonable basis to support a conclusion that the Gross-up Payment set forth in the Certificate of Railway's independent auditors has been calculated in accord with this Paragraph 7 and applicable law, and (ii) there is no reasonable basis for the calculation of the Gross-up Payment determined by the Executive.
(m) Amount Increased or Contested. The Executive shall notify Railway in writing of any claim by the IRS or other taxing authority that, if successful, would require the payment by Railway of a Gross-up Payment. Such notice shall include the nature of such claim and the date on which such claim is due to be paid. The Executive shall give such notice as soon as practicable, but no later than 10 business days, after the Executive first obtains actual
Exhibit 10.16
knowledge of such claim; provided, however, that any failure to give or delay in giving such notice shall affect Railway's obligations under this Paragraph 7 only if and to the extent that such failure results in actual prejudice to Railway. The Executive shall not pay such claim less than 30 days after the Executive gives such notice to Railway (or, if sooner, the date on which payment of such claim is due). If Railway notifies the Executive in writing before the expiration of such period that it desires to contest such claim, the Executive shall:
(i) give Railway any information that it reasonably requests relating to such claim;
(ii) take such action in connection with contesting such claim as Railway reasonably requests in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by Railway;
(iii) cooperate with Railway in good faith to contest such claim; and
(iv) permit Railway to participate in any proceedings relating to such claim; provided, however, that Railway shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including related interest and penalties, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing, Railway shall control all proceedings in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner. The Executive agrees to prosecute such contest to a
Exhibit 10.16
determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as Railway shall determine; provided, however, that if Railway directs the Executive to pay such claim and sue for a refund, Railway shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify the Executive, on an after-tax basis, for any Excise Tax or income tax, including related interest or penalties, imposed with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. The Railway's control of the contest shall be limited to issues with respect to which a Gross-up Payment would be payable. The Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the IRS or other taxing authority.
(n) Refunds. If, after the receipt by the Executive of an amount advanced by Railway pursuant to Paragraph 7(m), the Executive receives any refund with respect to such claim, the Executive shall (subject to Railway's complying with the requirements of Paragraph 7(m)) promptly pay Railway the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by Railway pursuant to Paragraph 7(m), a determination is made that the Executive shall not be entitled to a full refund with respect to such claim and Railway does not notify the Executive in writing of its intent to contest such determination before the expiration of 30 days after such determination, then the applicable part of such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-up Payment required to be paid. Any contest of a denial of refund shall be controlled by Paragraph 7(m).
Exhibit 10.16
(o) Expenses. If any dispute should arise under this Agreement after the Control Change Date involving an effort by Executive to protect, enforce or secure rights or benefits claimed by Executive hereunder, Railway shall pay (promptly upon demand by Executive accompanied by reasonable evidence of incurrence) all reasonable expenses (including attorneys'fees) incurred by Executive in connection with such dispute, without regard to whether Executive prevails in such dispute except that Executive shall repay Railway any amounts so received if a court having jurisdiction shall make a final, nonappealable determination that Executive acted frivolously or in bad faith by such dispute. To assure Executive that adequate funds will be made available to discharge Railway's obligations set forth in the preceding sentence, Railway has established a trust and upon the occurrence of a Change in Control shall promptly deliver to the trustee of such trust to hold in accordance with the terms and conditions thereof that sum which the Railway Board shall have determined is reasonably sufficient for such purpose.
(p) Prevailing Provisions. On and after the Control Change Date, the provisions of this Paragraph 7 shall control and take precedence over any other provisions of this Agreement which are in conflict with or address the same or a similar subject matter as the provisions of this Paragraph 7.
(q) Termination Upon Expiration of Right to Work Documentation. Notwithstanding the foregoing provisions of this Paragraph 7, this Agreement and Executive's employment shall terminate automatically upon the expiration, cancellation, revocation or other cessation of Executive's Right to Work Documentation (as defined in Paragraph 4(e)) without contemporaneous extension, renewal or replacement thereof. A termination of employment pursuant to this Paragraph 7(q) shall be treated, for all purposes of this Paragraph 7, as a voluntary termination of employment by the Executive without good reason, shall not be treated as a
Exhibit 10.16
termination by Railway under Paragraph 7(e) and shall not entitle Executive to any Special Severance Payment, Specified Benefits or Post-Period Benefits under Paragraph 7(e) or 7(f).
8. Mitigation and Other Employment. After a termination of Executive's employment pursuant to Paragraph 4(d)(i) or a Change in Control as defined in Paragraph 7(d), Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and except as otherwise specifically provided in Paragraph 4(d)(ii) with respect to health and life insurance and in Paragraph 7(e) with respect to health, prescription and dental benefits, no such other employment, if obtained, or compensation or benefits payable in connection therewith shall reduce any amounts or benefits to which Executive is entitled hereunder. Such amounts or benefits payable to Executive under this Agreement shall not be treated as damages but as severance compensation to which Executive is entitled because Executive's employment has been terminated.
9. KCSI Not An Obligor. Notwithstanding that KCSI has executed this Agreement, it shall have no obligation for the payment of salary, benefits, or other compensation hereunder, and all such obligations shall be the sole responsibility of Railway.
10. Notice. Notices and all other communications to either party pursuant to this Agreement shall be in writing and shall be deemed to have been given when personally delivered, delivered by facsimile or deposited in the United States mail by certified or registered mail, postage prepaid, addressed, in the case of Railway or KCSI, to Railway or KCSI at 114 West 11th Street, Kansas City, Missouri 64105, Attention: Secretary, or, in the case of the Executive, to him at 114 West 11th Street, Kansas City, Missouri 64105, or to such other address as a party shall designate by notice to the other party.
11. Amendment. No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, waiver, modification or discharge is agreed to in writing
Exhibit 10.16
signed by Executive, the President of Railway and the President of KCSI. No waiver by any party hereto at any time of any breach by another party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the time or at any prior or subsequent time.
12. Successors in Interest. The rights and obligations of KCSI and Railway under this Agreement shall inure to the benefit of and be binding in each and every respect upon the direct and indirect successors and assigns of KCSI and Railway, regardless of the manner in which such successors or assigns shall succeed to the interest of KCSI or Railway hereunder, and this Agreement shall not be terminated by the voluntary or involuntary dissolution of KCSI or Railway or by any merger or consolidation or acquisition involving KCSI or Railway, or upon any transfer of all or substantially all of KCSI's or Railway's assets, or terminated otherwise than in accordance with its terms. In the event of any such merger or consolidation or transfer of assets, the provisions of this Agreement shall be binding upon and shall inure to the benefit of the surviving corporation or the corporation or other person to which such assets shall be transferred. Neither this Agreement nor any of the payments or benefits hereunder may be pledged, assigned or transferred by Executive either in whole or in part in any manner, without the prior written consent of Railway.
13. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted.
14. Controlling Law and Jurisdiction. The validity, interpretation and performance of this Agreement shall be subject to and construed under the laws of the State of Missouri, without regard to principles of conflicts of law.
Exhibit 10.16
15. Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and terminates and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the terms of Executive's employment or severance arrangements.
IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Agreement as of (DATE).
KANSAS CITY SOUTHERN INDUSTRIES, INC.
By /s/ Michael R. Haverty
------------------------------------------
Michael R. Haverty, President
|
EXECUTIVE
/s/ Larry O. Stevenson
------------------------------------------
Larry O. Stevenson
|
Exhibit 10.16.1
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT to Employment Agreement, made and entered into as of January 1, 2001, by and among The Kansas City Southern Railway Company, a Missouri corporation ("Railway"), Kansas City Southern Industries, Inc., a Delaware corporation ("KCSI") and Larry O. Stevenson, an individual ("Executive").
WHEREAS, Railway, KCSI and Executive have heretofore entered into an Employment Agreement, as amended and restated as of January 1, 1999 (the "Agreement"); and
WHEREAS, the Agreement makes reference in several places to Kansas City Southern Lines, Inc. or to KCSL (either of which being referred herein as "KCSL") which prior to January 1, 2001, was the wholly-owned subsidiary of KCSI and the sole shareholder of Railway; and
WHEREAS, KCSL was administratively merged into KCSI as of December 31, 2000, and thereby ceased existence as a separate entity.
NOW, THEREFORE, it is agreed by and among Railway, KCSI and Executive as follows:
1. Effective as of January 1, 2001, each and every reference to "Kansas City Southern Lines, Inc." or to "KCSL" or "KCSL's" which appear in the Whereas clause and in paragraphs 3, 4(c)(ii), 7(b), 7(d)(ii) and (iii) and 7(e) of the Agreement is deleted, and, where necessary, the conjunctive phrases contained in each such clause or paragraph are appropriately modified consistent with the deletion of each such reference.
2. Effective as of January 1, 2001, the final sentence of paragraph 7(d) of the Agreement is deleted.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the 1st day of January, 2001.
THE KANSAS CITY SOUTHERN RAILWAY COMPANY
By /s/ Michael R. Haverty
-----------------------------------------
Michael R. Haverty, President & CEO
|
KANSAS CITY SOUTHERN INDUSTRIES, INC.
By /s/ Michael R. Haverty
-----------------------------------------
Michael R. Haverty, President & CEO
|
EXECUTIVE
/s/ Larry O. Stevenson
-----------------------------------------
Larry O. Stevenson
|
EXHIBIT 10.16.2
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") dated this 14th day of March 2003 by and between The Kansas City Southern Railway Company, a Missouri corporation ("Railway"), Kansas City Southern, a Delaware corporation f/k/a Kansas City Southern Industries, Inc. ("KCSI"), and Larry O. Stevenson, an individual ("Executive").
WHEREAS, Railway, KCSI and Executive are parties to that certain Employment Agreement dated August 14, 2000 (the "Employment Agreement"), pursuant to which Railway employed Executive as Vice President Forest Products Business Unit;
WHEREAS, as of January 3, 2003 (the "Effective Date"), Executive assumed the role of Senior Vice President Sales and Marketing for Railway (the "Promotion"); and
WHEREAS, Railway, KCSI and Executive desire to amend the Employment Agreement to provide for certain changes to the Employment Agreement necessitated by the Promotion.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. Section 1 of the Employment Agreement is hereby amended so that the first sentence and only the first sentence of Section 1 is deleted in its entirety and replaced with the following:
"Railway hereby continues the employment of Executive as Senior Vice President Sales and Marketing, to serve at the pleasure of the Board of Directors of Railway (the "Railway Board") and to have such duties, powers and responsibilities as may be prescribed or delegated from time to time by the President or other officer to whom Executive reports, subject to the powers vested in the Railway Board and in the stockholder of the Railway."
2. Section 7(e) of the Employment Agreement is hereby amended so that clauses (i) and (ii) and only clauses (i) and (ii) are deleted in their entirety and replaced with the following:
"(i) 180% of his annual base salary specified in Paragraph 7(a) multiplied by (ii) Two;"
3. The parties hereto acknowledge and agree that this Amendment shall be deemed to have been effective as of the Effective Date.
4. Capitalized terms used herein without definition shall have the respective meanings attributed to such terms in the Employment Agreement.
5. The parties hereto hereby ratify, confirm and approve the Employment Agreement, as amended by this Amendment. Should any terms of this Amendment conflict with any terms of the Employment Agreement, the terms of this Amendment shall control.
EXHIBIT 10.16.2
6. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above.
RAILWAY:
THE KANSAS CITY SOUTHERN RAILWAY COMPANY
By: /s/ Michael R. Haverty ----------------------------------------- Name: Michael R. Haverty Title: Chairman, President & CEO |
KCSI:
KANSAS CITY SOUTHERN
By: /s/ Michael R. Haverty ----------------------------------------- Name: Michael R. Haverty Title: Chairman, President & CEO |
EXECUTIVE:
By: /s/ Larry O. Stevenson ----------------------------------------- Name: Larry O. Stevenson |
Exhibit 10.17
EMPLOYMENT AGREEMENT
(Amended and Restated January 1, 2001)
THIS AGREEMENT, made and entered into as of this 1st day of January, 2001, by and between Kansas City Southern Industries, Inc., a Delaware corporation ("KCSI") and Louis G. Van Horn, an individual ("Executive").
WHEREAS, KCSI, Kansas City Southern Lines, Inc., a Missouri corporation ("KCSL") and Executive have heretofore entered into an Employment Agreement, as amended and restated as of January 1, 1999 (the "Prior Agreement") pertaining to the employment of Executive by KCSL; and
WHEREAS, KCSL was administratively merged into KCSI as of December 31, 2000, and thereby ceased existence as a separate entity; and
WHEREAS, KCSI and Executive desire for KCSI to employ Executive on the terms and conditions set forth in this Agreement, which shall supercede the Prior Agreement, and to provide an incentive to Executive to remain in the employ of KCSI hereafter, particularly in the event of any change in control (as herein defined) of KCSI or The Kansas City Southern Railway Company ("Railway"), thereby establishing and preserving continuity of management of KCSI.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, it is agreed by and between KCSI and Executive as follows:
1. Employment. KCSI hereby employs Executive as its Vice President and Comptroller - KCSR, Vice President and Comptroller - KCSI, to serve at the pleasure of the Board of Directors of KCSI (the "KCSI Board") and to have such duties, powers and responsibilities as may be prescribed or delegated from time to time by the President or other
officer to whom Executive reports, subject to the powers vested in the KCSI Board and in the stockholders of KCSI. Executive shall faithfully perform his duties under this Agreement to the best of his ability and shall devote substantially all of his working time and efforts to the business and affairs of KCSI and its affiliates.
2. Compensation.
(a) Base Compensation. KCSI shall pay Executive as compensation for his services hereunder an annual base salary at the rate approved by the KCSI Compensation Committee. Such rate shall not be increased prior to January 1, 2002 and shall not be reduced except as agreed by the parties or except as part of a general salary reduction program imposed by KCSI for non-union employees and applicable to all officers of KCSI.
(b) Incentive Compensation. For the year 2001, Executive shall [not] be entitled to participate in the KCSI Incentive Compensation Plan.
3. Benefits. During the period of his employment hereunder, KCSI
shall provide Executive with coverage under such benefit plans and programs as
are made generally available to similarly situated employees of KCSI, provided
(a) KCSI shall have no obligation with respect to any plan or program if
Executive is not eligible for coverage thereunder, and (b) Executive
acknowledges that stock options and other stock and equity participation awards
are granted in the discretion of the KCSI Board or the Compensation Committee of
the KCSI Board and that Executive has no right to receive stock options or other
equity participation awards or any particular number or level of stock options
or other awards. In determining contributions, coverage and benefits under any
disability insurance policy and under any cash compensation-based plan provided
to Executive by KCSI, it shall be assumed that the value of Executive's
annual compensation, pursuant to this Agreement, is 145% of Executive's annual base salary. Executive acknowledges that all rights and benefits under benefit plans and programs shall be governed by the official text of each plan or program and not by any summary or description thereof or any provision of this Agreement (except to the extent that this Agreement expressly modifies such benefit plans or programs) and that neither KCSI nor Railway is under any obligation to continue in effect or to fund any such plan or program, except as provided in Paragraph 7 hereof.
4. Termination.
(a) Termination by Executive. Executive may terminate this Agreement and his employment hereunder by at least thirty (30) days advance written notice to KCSI, except that in the event of any material breach of this Agreement by KCSI, Executive may terminate this Agreement and his employment hereunder immediately upon notice to KCSI.
(b) Death or Disability. This Agreement and Executive's employment hereunder shall terminate automatically on the death or disability of Executive, except to the extent employment is continued under KCSI's disability plan. For purposes of this Agreement, Executive shall be deemed to be disabled if he qualifies for disability benefits under KCSI's long-term disability plan.
(c) Termination by KCSI For Cause. KCSI may terminate this Agreement and Executive's employment "for cause" immediately upon notice to Executive. For purposes of this Agreement (except for Paragraph 7), termination "for cause" shall mean termination based upon any one or more of the following:
(i) Any material breach of this Agreement by Executive;
(ii) Executive's dishonesty involving KCSI, Railway or any subsidiary of KCSI or Railway;
(iii) Gross negligence or willful misconduct in the performance of Executive's duties as determined in good faith by the KCSI Board;
(iv) Willful failure by Executive to follow reasonable instructions of the President or other officer to whom Executive reports;
(v) Executive's fraud or criminal activity; or
(vi) Embezzlement or misappropriation by Executive.
(d) Termination by KCSI Other Than For Cause.
(i) KCSI may terminate this Agreement and Executive's employment other than for cause immediately upon notice to Executive, and in such event, KCSI shall provide severance benefits to Executive in accordance with Paragraph 4(d)(ii) below.
(ii) Unless the provisions of Paragraph 7 of this Agreement are applicable, if Executive's employment is terminated under Paragraph 4(d)(i), KCSI shall continue, for a period of one (1) year following such termination, (a) to pay to Executive as severance pay a monthly amount equal to one-twelfth (1/12th) of the annual base salary referenced in Paragraph 2(a) above, at the rate in effect immediately prior to termination, and, (b) to reimburse Executive for the cost (including state and federal income taxes payable with respect to this reimbursement) of continuing the health insurance coverage provided pursuant to this Agreement or obtaining health insurance coverage comparable to the health insurance provided pursuant to this Agreement, and
obtaining coverage comparable to the life insurance provided pursuant to this Agreement, unless Executive is provided comparable health or life insurance coverage in connection with other employment. The foregoing obligations of KCSI shall continue until the end of such one (1) year period notwithstanding the death or disability of Executive during said period (except, in the event of death, the obligation to reimburse Executive for the cost of life insurance shall not continue). In the year in which termination of employment occurs, Executive shall be eligible to receive benefits under the KCSI Incentive Compensation Plan and any Executive Plan in which Executive participates (the "Executive Plan") (if such Plans then are in existence and Executive was entitled to participate immediately prior to termination) in accordance with the provisions of such plans then applicable, and severance pay received in such year shall be taken into account for the purpose of determining benefits, if any, under the KCSI Incentive Compensation Plan but not under the Executive Plan. After the year in which termination occurs, Executive shall not be entitled to accrue or receive benefits under the KCSI Incentive Compensation Plan or the Executive Plan with respect to the severance pay provided herein, notwithstanding that benefits under such plan then are still generally available to executive employees of KCSI. After termination of employment, Executive shall not be entitled to accrue or receive benefits under any other employee benefit plan or program, except that Executive shall be entitled to participate in the KCSI Employee Stock Ownership Plan and the KCSI 401(k) and Profit Sharing Plan (if KCSI employees then still participate in such plans) in the year of termination of employment only if Executive meets all requirements of such plans for participation in such year.
5. Non-Disclosure. During the term of this Agreement and at all times after any termination of this Agreement, Executive shall not, either directly or indirectly, use or disclose any KCSI trade secret, except to the extent necessary for Executive to perform his duties for KCSI while an employee. For purposes of this Agreement, the term "KCSI trade secret" shall mean any information regarding the business or activities of KCSI or any subsidiary or affiliate, including any formula, pattern, compilation, program, device, method, technique, process, customer list, technical information or other confidential or proprietary information, that (a) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (b) is the subject of efforts of KCSI or its subsidiary or affiliate that are reasonable under the circumstance to maintain its secrecy. In the event of any breach of this Paragraph 5 by Executive, KCSI shall be entitled to terminate any and all remaining severance benefits under Paragraph 4(d)(ii) and shall be entitled to pursue such other legal and equitable remedies as may be available.
6. Duties Upon Termination; Survival.
(a) Duties. Upon termination of this Agreement by KCSI or Executive for any reason, Executive shall immediately return to KCSI all KCSI trade secrets which exist in tangible form and shall sign such written resignations from all positions as an officer, director or member of any committee or board of KCSI and all direct and indirect subsidiaries and affiliates of KCSI as may be requested by KCSI and shall sign such other documents and papers relating to Executive's employment, benefits and benefit plans as KCSI may reasonably request.
(b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of this Agreement shall survive any termination of this Agreement by KCSI or Executive, and the provisions of Paragraph 4(d)(ii) shall survive any termination of this Agreement by KCSI under Paragraph 4(d)(i).
7. Continuation of Employment Upon Change in Control.
(a) Continuation of Employment. Subject to the terms and conditions of this Paragraph 7, in the event of a Change in Control (as defined in Paragraph 7(d)) at any time during the term of this Agreement, Executive agrees to remain in the employ of KCSI for a period of three years (the "Three-Year Period") from the date of such Change in Control (the "Control Change Date"). KCSI agrees to continue to employ Executive for the Three-Year Period. During the Three-Year Period, (i) the Executive's position (including offices, titles, reporting requirements and responsibilities), authority and duties shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 12 month period immediately before the Control Change Date and (ii) the Executive's services shall be performed at the location where Executive was employed immediately before the Control Change Date or at any other location less than 40 miles from such former location. During the Three-Year Period, KCSI shall continue to pay to Executive an annual base salary on the same basis and at the same intervals as in effect prior to the Control Change Date at a rate not less than 12 times the highest monthly base salary paid or payable to the Executive by KCSI in respect of the 12-month period immediately before the Control Change Date.
(b) Benefits. During the Three-Year Period, Executive shall be entitled to participate, on the basis of his executive position, in each of the following KCSI or Railway
plans (together, the "Specified Benefits") in existence, and in accordance with the terms thereof, at the Control Change Date:
(i) any benefit plan, and trust fund associated therewith, related to (a) life, health, dental, disability, accidental death and dismemberment insurance or accrued but unpaid vacation time, (b) profit sharing, thrift or deferred savings (including deferred compensation, such as under Sec. 401(k) plans), (c) retirement or pension benefits, (d) ERISA excess benefits and similar plans and (e) tax favored employee stock ownership (such as under ESOP, and Employee Stock Purchase programs); and
(ii) any other benefit plans hereafter made generally available to executives of Executive's level or to the employees of KCSI generally.
In addition, KCSI shall use its best efforts to cause all outstanding options held by Executive under any stock option plan of KCSI or its affiliates to become immediately exercisable on the Control Change Date and to the extent that such options are not vested and are subsequently forfeited, the Executive shall receive a lump-sum cash payment within 5 days after the options are forfeited equal to the difference between the fair market value of the shares of stock subject to the non-vested, forfeited options determined as of the date such options are forfeited and the exercise price for such options. During the Three-Year Period Executive shall be entitled to participate, on the basis of his executive position, in any incentive compensation plan of KCSI or Railway in accordance with the terms thereof at the Control Change Date; provided that if under KCSI or Railway programs or Executive's Employment Agreement in existence immediately prior to the Control Change Date, there are written limitations on participation for a designated time period in any incentive compensation plan, such limitations
shall continue after the Control Change Date to the extent so provided for prior to the Control Change Date.
If the amount of contributions or benefits with respect to the Specified Benefits or any incentive compensation is determined on a discretionary basis under the terms of the Specified Benefits or any incentive compensation plan immediately prior to the Control Change Date, the amount of such contributions or benefits during the Three-Year Period for each of the Specified Benefits shall not be less than the average annual contributions or benefits for each Specified Benefit for the three plan years ending prior to the Control Change Date and, in the case of any incentive compensation plan, the amount of the incentive compensation during the Three-Year Period shall not be less than 75% of the maximum that could have been paid to the Executive under the terms of the incentive compensation plan.
(c) Payment. With respect to any plan or agreement under which Executive would be entitled at the Control Change Date to receive Specified Benefits or incentive compensation as a general obligation of KCSI which has not been separately funded (including specifically, but not limited to, those referred to under Paragraph 7(b)(i)(d) above), Executive shall receive within five (5) days after such date full payment in cash (discounted to the then present value on the basis of a rate of seven percent (7%) per annum) of all amounts to which he is then entitled thereunder.
(d) Change in Control. Except as provided in the last sentence of this Paragraph 7(d), for purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if:
(i) for any reason at any time less than seventy-five percent (75%) of the members of the KCSI Board shall be individuals who fall into any of the following categories: (a) individuals who were members of the KCSI Board on the date of the Agreement; or (b) individuals whose election, or nomination for election by KCSI's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the KCSI Board then still in office who were members of the KCSI Board on the date of the Agreement; or (c) individuals whose election, or nomination for election, by KCSI's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the KCSI Board then still in office who were elected in the manner described in (a) or (b) above, or
(ii) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) other than KCSI shall have become after September 18, 1997, according to a public announcement or filing, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of KCSI or Railway representing thirty percent (30%) (or, with respect to Paragraph 7(c) hereof, 40%) or more (calculated in accordance with Rule 13d-3) of the combined voting power of KCSI's or Railway's then outstanding voting securities; or
(iii) the stockholders of KCSI or Railway shall have approved a merger, consolidation or dissolution of KCSI or Railway or a sale, lease, exchange or disposition of all or substantially all of KCSI's or Railway's assets, if persons who were the beneficial owners of the combined voting power of KCSI's or Railway's voting securities immediately before any such merger, consolidation, dissolution, sale, lease,
exchange or disposition do not immediately thereafter, beneficially own, directly or indirectly, in substantially the same proportions, more than 60% of the combined voting power of any corporation or other entity resulting from any such transaction.
(e) Termination After Control Change Date. Notwithstanding any other provision of this Paragraph 7, at any time after the Control Change Date, KCSI may terminate the employment of Executive (the "Termination"), but unless such Termination is for Cause as defined in subparagraph (g) or for disability, within five (5) days of the Termination KCSI shall pay to Executive his full base salary through the Termination, to the extent not theretofore paid, plus a lump sum amount (the "Special Severance Payment") equal to the product (discounted to the then present value on the basis of a rate of seven percent (7%) per annum) of (i) 180% of his annual base salary specified in Paragraph 7(a) multiplied by (ii) Two; and Specified Benefits (excluding any incentive compensation) to which Executive was entitled immediately prior to Termination shall continue until the end of the 3-year period ("Benefits Period") beginning on the date of Termination. If any plan pursuant to which Specified Benefits are provided immediately prior to Termination would not permit continued participation by Executive after Termination, then KCSI shall pay to Executive within five (5) days after Termination a lump sum payment equal to the amount of Specified Benefits Executive would have received under such plan if Executive had been fully vested in the average annual contributions or benefits in effect for the three plan years ending prior to the Control Change Date (regardless of any limitations based on the earnings or performance of KCSI or Railway) and a continuing participant in such plan to the end of the Benefits Period. Following the end of the Benefits Period, KCSI shall continue to provide to the Executive and the Executive's family the following benefits ("Post-Period Benefits"): (1) prior to the Executive's attainment of age sixty (60),
health, prescription and dental benefits equivalent to those then applicable to
active peer executives of KCSI) and their families, as the same may be modified
from time to time, and (2) following the Executive's attainment of age sixty
(60) (and without regard to the Executive's period of service with KCSI) health
and prescription benefits equivalent to those then applicable to retired peer
executives of KCSI and their families, as the same may be modified from time to
time. The cost to the Executive of such Post-Period Benefits shall not exceed
the cost of such benefits to active or retired (as applicable) peer executives,
as the same may be modified from time to time. Notwithstanding the preceding two
sentences of this Paragraph 7(e), if the Executive is covered under any health,
prescription or dental plan provided by a subsequent employer, then the
corresponding type of plan coverage (i.e., health, prescription or dental),
required to be provided as Post-Period Benefits under this Paragraph 7(e) shall
cease. The Executive's rights under this Paragraph 7(e) shall be in addition to,
and not in lieu of, any post-termination continuation coverage or conversion
rights the Executive may have pursuant to applicable law, including without
limitation continuation coverage required by Section 4980 of the Code. Nothing
in this Paragraph 7(e) shall be deemed to limit in any manner the reserved right
of KCSI, in its sole and absolute discretion, to at any time amend, modify or
terminate health, prescription or dental benefits for active or retired
employees generally.
(f) Resignation After Control Change Date. In the event of a Change in Control as defined in Paragraph 7(d), thereafter, upon good reason (as defined below), Executive may, at any time during the 3-year period following the Change in Control, in his sole discretion, on not less than thirty (30) days' written notice (the "Notice of Resignation") to the Secretary of KCSI and effective at the end of such notice period, resign his employment with KCSI (the "Resignation"). Within five (5) days of such a Resignation, KCSI shall pay to Executive his full
base salary through the effective date of such Resignation, to the extent not theretofore paid, plus a lump sum amount equal to the Special Severance Payment (computed as provided in the first sentence of Paragraph 7(e), except that for purposes of such computation all references to "Termination" shall be deemed to be references to "Resignation"). Upon Resignation of Executive, Specified Benefits to which Executive was entitled immediately prior to Resignation shall continue on the same terms and conditions as provided in Paragraph 7(e) in the case of Termination (including equivalent payments provided for therein), and Post-Period Benefits shall be provided on the same terms and conditions as provided in Paragraph 7(e) in the case of Termination. For purposes of this Agreement, "good reason" means any of the following:
(i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including offices, titles, reporting requirements or responsibilities), authority or duties as contemplated by Section 7(a)(i), or any other action by KCSI which results in a diminution or other material adverse change in such position, authority or duties;
(ii) any failure by KCSI to comply with any of the provisions of Paragraph 7;
(iii) KCSI's requiring the Executive to be based at any office or location other than the location described in Section 7(a)(ii);
(iv) any other material adverse change to the terms and conditions of the Executive's employment; or
(v) any purported termination by KCSI of the Executive's employment other than as expressly permitted by this Agreement (any such purported termination shall not be effective for any other purpose under this Agreement).
A passage of time prior to delivery of the Notice of Resignation or a failure by the Executive to include in the Notice of Resignation any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive under this Agreement or preclude the Executive from asserting such fact or circumstance in enforcing rights under this Agreement.
(g) Termination for Cause After Control Change Date. Notwithstanding any other provision of this Paragraph 7, at any time after the Control Change Date, Executive may be terminated by KCSI "for cause." Cause means commission by the Executive of any felony or willful breach of duty by the Executive in the course of the Executive's employment; except that Cause shall not mean:
(i) bad judgment or negligence;
(ii) any act or omission believed by the Executive in good faith to have been in or not opposed to the interest of KCSI (without intent of the Executive to gain, directly or indirectly, a profit to which the Executive was not legally entitled);
(iii) any act or omission with respect to which a determination could properly have been made by the KCSI Board that the Executive met the applicable standard of conduct for indemnification or reimbursement under KCSI's by-laws, any applicable indemnification agreement, or applicable law, in each case in effect at the time of such act or omission; or
(iv) any act or omission with respect to which Notice of Termination of the Executive is given more than 12 months after the earliest date on which any member of the KCSI Board, not a party to the act or omission, knew or should have known of such act or omission.
Any Termination of the Executive's employment by KCSI for Cause shall be communicated to the Executive by Notice of Termination.
(h) Gross-up for Certain Taxes. If it is determined (by the reasonable computation of KCSI's independent auditors, which determinations shall be certified to by such auditors and set forth in a written certificate ("Certificate") delivered to the Executive) that any benefit received or deemed received by the Executive from KCSI or Railway pursuant to this Agreement or otherwise (collectively, the "Payments") is or will become subject to any excise tax under Section 4999 of the Code or any similar tax payable under any United States federal, state, local or other law (such excise tax and all such similar taxes collectively, "Excise Taxes"), then KCSI shall, immediately after such determination, pay the Executive an amount (the "Gross-up Payment") equal to the product of:
(i) the amount of such Excise Taxes; multiplied by
(ii) the Gross-up Multiple (as defined in Paragraph 7(k)).
The Gross-up Payment is intended to compensate the Executive for the Excise Taxes and any federal, state, local or other income or excise taxes or other taxes payable by the Executive with respect to the Gross-up Payment.
KCSI shall cause the preparation and delivery to the Executive of a Certificate upon request at any time. KCSI shall, in addition to complying with this Paragraph 7(h), cause all determinations and certifications under Paragraphs 7(h)-(o) to be made as soon as reasonably possible and in adequate time to permit the Executive to prepare and file the Executive's individual tax returns on a timely basis.
(i) Determination by the Executive.
(i) If KCSI shall fail (a) to deliver a Certificate to the Executive or (B) to pay to the Executive the amount of the Gross-up Payment, if any, within 14 days after receipt from the Executive of a written request for a Certificate, or if at any time following receipt of a Certificate the Executive disputes the amount of the Gross-up Payment set forth therein, the Executive may elect to demand the payment of the amount which the Executive, in accordance with an opinion of counsel to the Executive ("Executive Counsel Opinion"), determines to be the Gross-up Payment. Any such demand by the Executive shall be made by delivery to KCSI of a written notice which specifies the Gross-up Payment determined by the Executive and an Executive Counsel Opinion regarding such Gross-up Payment (such written notice and opinion collectively, the "Executive's Determination"). Within 14 days after delivery of the Executive's Determination to KCSI, KCSI shall either (a) pay the Executive the Gross-up Payment set forth in the Executive's Determination (less the portion of such amount, if any, previously paid to the Executive by KCSI) or (b) deliver to the Executive a Certificate specifying the Gross-up Payment determined by KCSI's independent auditors, together with an opinion of KCSI's counsel ("KCSI Counsel Opinion"), and pay the Executive the Gross-up Payment specified in such Certificate. If for any reason KCSI fails to comply
with clause (b) of the preceding sentence, the Gross-up Payment specified in the Executive's Determination shall be controlling for all purposes.
(ii) If the Executive does not make a request for, and KCSI does not deliver to the Executive, a Certificate, KCSI shall, for purposes of Paragraph 7(j), be deemed to have determined that no Gross-up Payment is due.
(j) Additional Gross-up Amounts. If, despite the initial conclusion of KCSI and/or the Executive that certain Payments are neither subject to Excise Taxes nor to be counted in determining whether other Payments are subject to Excise Taxes (any such item, a "Non-Parachute Item"), it is later determined (pursuant to subsequently-enacted provisions of the Code, final regulations or published rulings of the IRS, final IRS determination or judgment of a court of competent jurisdiction or KCSI's independent auditors) that any of the Non-Parachute Items are subject to Excise Taxes, or are to be counted in determining whether any Payments are subject to Excise Taxes, with the result that the amount of Excise Taxes payable by the Executive is greater than the amount determined by KCSI or the Executive pursuant to Paragraph 7(h) or Paragraph 7(i), as applicable, then KCSI shall pay the Executive an amount (which shall also be deemed a Gross-up Payment) equal to the product of:
(i) the sum of (a) such additional Excise Taxes and
(b) any interest, fines, penalties, expenses or other costs incurred by
the Executive as a result of having taken a position in accordance with
a determination made pursuant to Paragraph 7(h); multiplied by
(ii) the Gross-up Multiple.
(k) Gross-up Multiple. The Gross-up Multiple shall equal a fraction, the numerator of which is one (1.0), and the denominator of which is one (1.0) minus the sum, expressed as a decimal fraction, of the rates of all federal, state, local and other income and other taxes and any Excise Taxes applicable to the Gross-up Payment; provided that, if such sum exceeds 0.8, it shall be deemed equal to 0.8 for purposes of this computation. (If different rates of tax are applicable to various portions of a Gross-up Payment, the weighted average of such rates shall be used.)
(l) Opinion of Counsel. "Executive Counsel Opinion" means a legal opinion of nationally recognized executive compensation counsel that there is a reasonable basis to support a conclusion that the Gross-up Payment determined by the Executive has been calculated in accord with this Paragraph 7 and applicable law. "Company Counsel Opinion" means a legal opinion of nationally recognized executive compensation counsel that (i) there is a reasonable basis to support a conclusion that the Gross-up Payment set forth in the Certificate of KCSI's independent auditors has been calculated in accord with this Paragraph 7 and applicable law, and (ii) there is no reasonable basis for the calculation of the Gross-up Payment determined by the Executive.
(m) Amount Increased or Contested. The Executive shall notify KCSI in writing of any claim by the IRS or other taxing authority that, if successful, would require the payment by KCSI of a Gross-up Payment. Such notice shall include the nature of such claim and the date on which such claim is due to be paid. The Executive shall give such notice as soon as practicable, but no later than 10 business days, after the Executive first obtains actual knowledge of such claim; provided, however, that any failure to give or delay in giving such notice shall affect KCSI's obligations under this Paragraph 7 only if and to the extent that such failure results
in actual prejudice to KCSI. The Executive shall not pay such claim less than 30 days after the Executive gives such notice to KCSI (or, if sooner, the date on which payment of such claim is due). If KCSI notifies the Executive in writing before the expiration of such period that it desires to contest such claim, the Executive shall:
(i) give KCSI any information that it reasonably requests relating to such claim;
(ii) take such action in connection with contesting such claim as KCSI reasonably requests in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by KCSI;
(iii) cooperate with KCSI in good faith to contest such claim; and
(iv) permit KCSI to participate in any proceedings relating to such claim; provided, however, that KCSI shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including related interest and penalties, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing, KCSI shall control all proceedings in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner. The Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as KCSI shall determine; provided, however, that if KCSI directs the Executive to pay such claim and sue for a refund, KCSI shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify the Executive, on an after-tax basis, for any Excise Tax or income tax, including related interest or penalties, imposed with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. The KCSI's control of the contest shall be limited to issues with respect to which a Gross-up Payment would be payable. The Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the IRS or other taxing authority.
(n) Refunds. If, after the receipt by the Executive of an amount advanced by KCSI pursuant to Paragraph 7(m), the Executive receives any refund with respect to such claim, the Executive shall (subject to KCSI's complying with the requirements of Paragraph 7(m)) promptly pay KCSI the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by KCSI pursuant to Paragraph 7(m), a determination is made that the Executive shall not be entitled to a full refund with respect to such claim and KCSI does not notify the Executive in writing of its intent to contest such determination before the expiration of 30 days after such determination, then the applicable part of such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the
amount of Gross-up Payment required to be paid. Any contest of a denial of refund shall be controlled by Paragraph 7(m).
(o) Expenses. If any dispute should arise under this Agreement after the Control Change Date involving an effort by Executive to protect, enforce or secure rights or benefits claimed by Executive hereunder, KCSI shall pay (promptly upon demand by Executive accompanied by reasonable evidence of incurrence) all reasonable expenses (including attorneys' fees) incurred by Executive in connection with such dispute, without regard to whether Executive prevails in such dispute except that Executive shall repay KCSI any amounts so received if a court having jurisdiction shall make a final, nonappealable determination that Executive acted frivolously or in bad faith by such dispute. To assure Executive that adequate funds will be made available to discharge KCSI's obligations set forth in the preceding sentence, KCSI has established a trust and upon the occurrence of a Change in Control shall promptly deliver to the trustee of such trust to hold in accordance with the terms and conditions thereof that sum which the KCSI Board shall have determined is reasonably sufficient for such purpose.
(p) Prevailing Provisions. On and after the Control Change Date, the provisions of this Paragraph 7 shall control and take precedence over any other provisions of this Agreement which are in conflict with or address the same or a similar subject matter as the provisions of this Paragraph 7.
8. Mitigation and Other Employment. After a termination of Executive's employment pursuant to Paragraph 4(d)(i) or a Change in Control as defined in Paragraph 7(d), Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and except as otherwise specifically
provided in Paragraph 4(d)(ii) with respect to health and life insurance and in Paragraph 7(e) with respect to health, prescription and dental benefits, no such other employment, if obtained, or compensation or benefits payable in connection therewith shall reduce any amounts or benefits to which Executive is entitled hereunder. Such amounts or benefits payable to Executive under this Agreement shall not be treated as damages but as severance compensation to which Executive is entitled because Executive's employment has been terminated.
9. Notice. Notices and all other communications to either party pursuant to this Agreement shall be in writing and shall be deemed to have been given when personally delivered, delivered by facsimile or deposited in the United States mail by certified or registered mail, postage prepaid, addressed, in the case of KCSI, to KCSI at 114 West 11th Street, Kansas City, Missouri 64105, Attention: Secretary, or, in the case of the Executive, to him at 9322 West 146th Street, Overland Park, Kansas 66221, or to such other address as a party shall designate by notice to the other party.
10. Amendment. No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, waiver, modification or discharge is agreed to in writing signed by Executive and the President of KCSI. No waiver by any party hereto at any time of any breach by another party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the time or at any prior or subsequent time.
11. Successors in Interest. The rights and obligations of KCSI under this Agreement shall inure to the benefit of and be binding in each and every respect upon the direct and indirect successors and assigns of KCSI, regardless of the manner in which such successors or assigns
shall succeed to the interest of KCSI hereunder, and this Agreement shall not be terminated by the voluntary or involuntary dissolution of KCSI or by any merger or consolidation or acquisition involving KCSI, or upon any transfer of all or substantially all of KCSI's assets, or terminated otherwise than in accordance with its terms. In the event of any such merger or consolidation or transfer of assets, the provisions of this Agreement shall be binding upon and shall inure to the benefit of the surviving corporation or the corporation or other person to which such assets shall be transferred. Neither this Agreement nor any of the payments or benefits hereunder may be pledged, assigned or transferred by Executive either in whole or in part in any manner, without the prior written consent of KCSI.
12. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted.
13. Controlling Law and Jurisdiction. The validity, interpretation and performance of this Agreement shall be subject to and construed under the laws of the State of Missouri, without regard to principles of conflicts of law.
14. Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and terminates and supersedes all other prior
agreements and understandings (including, without limitation, the Prior Agreement), both written and oral, between the parties with respect to the terms of Executive's employment or severance arrangements.
IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Agreement as of the 1st day of January, 2001.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
By /s/ Michael R. Haverty
--------------------------------------
Michael R. Haverty, President & CEO
|
EXECUTIVE
/s/ Louis G. Van Horn
--------------------------------------
Louis G. Van Horn
|
Exhibit 10.20
KANSAS CITY SOUTHERN ANNUAL INCENTIVE PLAN
1. PURPOSE. The purpose of the Plan is to provide management employees of the Employer with annual incentive compensation based on the level of achievement of financial and other performance criteria. The Plan is intended to focus the interests of these employees on the key measures of the Company's success and to reward these employees for achieving the key measures of the Company's success. This Plan is not intended to be a performance-based plan for purposes of Section 162(m) of the Code.
2. DEFINITIONS. As used in the Plan, the following terms shall have the meanings set forth below:
(a) "Award" shall mean a cash payment for a Performance Year paid to a Participant on account of his or her participation in the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, including applicable regulations and rulings thereunder and any successor provisions thereto.
(d) "Committee" shall mean the Compensation and Organization Committee of the Board (or any successor committee).
(e) "Company" shall mean Kansas City Southern, and any successor thereto which adopts the Plan.
(f) "Disability" shall mean a disability as defined under the Employer's applicable long-term disability program.
(g) "Eligible Employee" shall mean an individual who is employed by an Employer in active service and who is not represented by a union or other collective bargaining organization at any time during the Performance Year.
(h) "Employer" shall mean the Company and KCSR.
(i) "KCSR" shall mean The Kansas City Southern Railway Company, and any successor thereto which adopts the Plan.
(j) "Leave" shall mean an absence from work with the approval of the applicable Employer. Leaves include absences for short-term disability, family leaves of absence and other approved leaves of absence.
(k) "Maximum Award" shall mean an Award level that may be paid if the maximum level of the Performance Goal(s) is achieved in the Performance Year.
(l) "Participant" shall mean, with respect to any Performance Year, any Eligible Employee who is selected to participate in the Plan in accordance with Section 3 of the Plan.
(m) "Performance Goal" shall mean the pre-established performance goal(s) established by the Committee for each Performance Year as described in Section 4 of the Plan.
(n) "Performance Measures" shall mean one or more of the following criteria, on which Performance Goals may be based: revenues, net income, pre-tax income, operating income, earnings per share, earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation and amortization (EBITDA), cash flow, return on equity, return on capital, return on assets, cash flow, operating ratio, and capital expenditures; provided, that the Committee shall have the authority to use Performance Measures other than those herein specified as it deems appropriate in its sole discretion.
(o) "Performance Year" shall mean the calendar year of the Company in which a Participant provides services on account of which the Award is made.
(p) "Plan" shall mean the Kansas City Southern Annual Incentive Plan, as set forth herein, as from time to time amended.
(q) "Proration Fraction" shall mean a fraction, the numerator of which is the number of days in the Performance Year the individual was an Eligible Employee, and the denominator of which is 365.
(r) "Target Award" shall mean an Award level that may be paid if the target level of the Performance Goal(s) is achieved in the Performance Year.
(s) "Threshold Award" shall mean an Award level that may be paid if the threshold level of the Performance Goal(s) is achieved in the Performance Year.
3. ELIGIBILITY AND PARTICIPATION.
(a) In General. An Eligible Employee of an Employer will become a Participant for a Performance Year if he or she is selected by the Committee as eligible to participate in the Plan. Participants will be determined by the Committee at the beginning of each Performance Year, and participation in the Plan during one Performance Year does not guarantee continued participation in future Performance Years. The Committee may add Participants during the course of a Performance Year as it deems appropriate in its sole discretion. A Participant must be employed by an Employer on the last business day of a Performance Year
in order to be eligible to receive an Award, except as provided in
Section 3(b) below.
(b) Prorations for Partial Year. A Participant who is not an Eligible Employee for an entire Performance Year may receive an Award for any portion of the Performance Year that he or she is an Eligible Employee, subject to Section 5 of the Plan and the following:
1) New Hires, Transfers. A Participant who becomes an
Eligible Employee on account of being hired or
transferred during a Performance Year will be eligible
for a prorated Award for such Performance Year. The
amount of the prorated Award shall be equal to the full
amount of the Award otherwise determined under
Section 4 of the Plan, multiplied by the Proration
Fraction.
2) Death or Disability. A Participant who has a termination of employment during a Performance Year on account of death or Disability will be eligible for a prorated Award for such Performance Year. The amount of the prorated Award shall be equal to the full amount of the Award for such individual for the Performance Year in which the death or Disability occurs, multiplied by the Proration Fraction. With respect to the calculation of an Award for purposes of this provision, the Participant's rate of base salary in effect for the last full payroll period of his or her employment shall be used.
(c) Leaves. A Participant who is on Leave for an aggregate of more than three (3) months during a Performance Year will be eligible for an Award, the amount of which shall be prorated based on the portion of the Performance Year the individual was actively at work for an Employer. Such a Participant's prorated Award will be the full amount of such Award otherwise determined under Section 4 of the Plan, multiplied by the Proration Fraction. With respect to the calculation of an Award for purposes of this provision, the first three months of a Participant's Leave will be counted as a period during which the individual was actively at work.
4. DETERMINATION OF AWARDS.
(a) Establishment of Performance Goal. The Committee shall establish objective Performance Goals for each Award after the beginning of each Performance Year. The Performance Goals may be based upon the performance of the Company, KCSR, the Employer, or any operating unit level, division or function thereof, and may be applied either alone or relative to the performance of other businesses or individuals (including industry or general market indices), based on one or more of the
Performance Measures. Performance Goals may be expressed as whole dollar amounts, percentages or growth rates. Performance Goals will be determined each year by the Committee based on a recommendation from senior management of the Company, with consultation from other third party sources. Performance Goals will be set for each Performance Measure as follows: threshold, target and maximum. No Award will be made under a Performance Measure if results are below the threshold level.
(b) Establishment of Awards. The Committee shall also establish the Threshold Award, the Target Award and the Maximum Award payable to a Participant if the Performance Goal(s) is achieved. The payment of any Award shall be subject to achievement of the applicable Performance Goals and certification by the Committee to the degree to which each of the Performance Goals have been attained. Threshold Awards, Target Awards and Maximum Awards will be expressed as a percentage of a participant's base salary and correspond to salary grades. Target Award percentages will be determined each year by the Committee based on a recommendation from senior management of the Company, with consultation from other third party sources. For purposes of determining the amount of an Award, the Participant's rate of base salary in effect for the last full payroll period of the Performance Year to which the Award pertains shall be used.
(c) Maximum Individual Award. The maximum amount of any Maximum Award to a Participant for any Performance Year shall be the lesser of $2,000,000 or 200 percent of a Participant's Target Award for a Performance Year. Threshold Award amounts will be 25% of the potential Target Award amount (multiplied by the Performance Measure weighting).
(d) Adjustments to Awards. The Committee may, in its discretion, modify the amount of any Award based on such criteria as it shall determine, including, but not limited to, financial results, individual performance, safety performance, business unit and site accomplishments, and other factors tied to the success of the Company or any of its business units. The Committee shall retain the discretion to adjust any Award downward. There is no obligation of uniformity of treatment of Participants under the Plan.
(e) Determination of Attainment of Performance Goals. The Committee may determine in its sole discretion how results will be calculated related to the Performance Measures selected for a particular Performance Year. In determining results for a Performance Year, the Committee may approve adjustments in the calculations to reflect extraordinary, unusual or non-recurring items.
5. PAYMENT OF AWARDS.
(a) Time of Payment. An Award shall be paid to a Participant in cash as soon as practicable after the Committee has certified in writing that the Performance Goal(s) for the Performance Year have been achieved. No absolute right to any Award shall be considered as having accrued to any Participant prior to the payment of the Award. Awards payable to other Participants who have had a termination of employment on account of death or Disability during the Performance Year shall be payable in accordance with Section 3(b) of the Plan and at the same time other Participants receive Awards under the Plan.
(b) Termination of Employment Other Than on Account of Death or Disability. A Participant who has a termination of employment other than on account of death or Disability prior to the last day of a Performance Year shall not be paid any Award for such Performance Year.
(c) Termination of Employment on Account of Death or Disability.
A Participant who has a termination of employment on account of death
or Disability after the end of the Performance Year but prior to the
payment date for Awards for such Performance Year shall be paid the
full amount of any Award for such Performance Year, determined under
Section 4 of the Plan (in addition to any amount determined under
Section 3(b) for the Performance Year in which the termination of
employment on account of death or Disability occurs). If the
Participant dies prior to receiving payment of an Award, any Award
payable under the Plan to such Participant shall be paid to the
Participant's estate.
(d) Withholding. Awards are subject to withholding for applicable federal, state and local taxes.
6. PLAN ADMINISTRATION.
(a) Administration. The Plan shall be administered by the Committee. The Committee shall have full discretionary authority to establish the rules and regulations relating to the Plan, to interpret the Plan and those rules and regulations, to determine the Awards and the Performance Measures applicable to each Award, to approve all Awards, to decide the facts in any case arising under the Plan, and to make all other determinations and to take all other actions necessary or appropriate for the proper administration of the Plan. In making any determinations under or referred to in the Plan, the Committee shall be entitled to rely on opinions, reports or statements of employees of the Company and KCSR and of counsel, public accountants, and other professional or expert persons. The Committee's administration of the Plan, including all such rules and regulations, interpretations, selections, determinations, approvals, decisions, delegations, amendments, terminations and other actions, shall be final and binding on the Company and its stockholders and all employees, including Participants and their beneficiaries. No member of
the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Award.
(b) Delegation. Except to the extent prohibited by applicable law or the applicable rules of a stock exchange, the Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members, may delegate all or any part of its responsibilities and powers for administering the Plan to one or more persons as the Committee deems appropriate, and at any time revoke the allocation or delegation.
7. AMENDMENT OR TERMINATION OF PLAN. The Committee may amend (in whole or in part) or terminate the Plan at any time, effective at such date as the Committee may determine.
8. MISCELLANEOUS PROVISIONS.
(a) Awards Not Transferable. A Participant's right and interest under the Plan may not be assigned or transferred. Any attempted assignment or transfer shall be null and void and shall extinguish, in the Committee's sole discretion, the Company's obligation under the Plan to pay Awards with respect to the Participant.
(b) Effect of Awards on Other Compensation.
1) Awards shall not be considered eligible pay under other plans, benefit arrangements or fringe benefit arrangements of the Company or KCSR, unless otherwise provided under the terms of other plans.
2) To the extent provided in the applicable benefit plan or benefit arrangement of an Employer, amounts payable as Awards will be reduced in accordance with the Participant's compensation reduction election, if any, in effect under other plans at the time the Award is paid.
(c) No Employment Rights. This Plan is not a contract between the Employer and any employee or Participant. Neither the Plan, nor any action taken hereunder, shall be construed as giving to any Participant the right to be retained in the employ of the Company or KCSR. Nothing in the Plan shall limit or affect in any manner or degree the normal and usual powers of management, exercised by the officers and the Board or any committee of the Board, to change the duties or the character of employment of any employee or to remove an individual from the employment of the Company or KCSR at any time, all of which rights and powers are expressly reserved.
(d) Unfunded Plan. The Plan shall be unfunded. Neither the Company nor KCSR shall be required to establish any special or separate fund, or to
make any other segregation of assets, to assure payment of Awards. Awards shall be paid solely from the general assets of the Participant's Employer, to the extent the payments are attributable to services for the Employer. To the extent any person acquires a right to receive payments from an Employer under the Plan, the right is no greater than the right of any other unsecured general creditor.
(e) Applicable Law. The Plan shall be governed by the laws of the State of Missouri and applicable federal law.
Exhibit 10.36
AGREEMENT
TO FOREGO COMPENSATION
An Agreement is made between A. Edward Allinson (the "Director") and Kansas City Southern Industries, Inc. (the "Company").
WHEREAS, the Director has been and continues to be a valued member of the Board of Directors of the Company;
WHEREAS, the Company desires to assist the Director in acquiring a life insurance policy on the life of the Director (the "Policy"), by loaning an amount to the Director (or to a trust to be created by the Director), so that the loaned amount can be used by the Director (or the trust) to pay a premium for the Policy; and
WHEREAS, the Director agrees to forego all of the balance payable to the Director under the Retirement Plan Account in the Directors' Deferred Fee Plan of Kansas City Southern Industries, Inc. (the "Plan").
NOW, THEREFORE, in consideration for the aforementioned promises, and for other consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows, intending to be legally bound.
1. The Company agrees to enter into a loan agreement (the "Loan Agreement") to provide a loan to the Director or to a trust (the "Trust") created by the Director. The terms of the loan shall be documented by a Promissory Note (the "Note") to be executed by the Company and the Director (or the Trust).
2. In consideration for the Company's promise to enter into the Loan Agreement, the Director's Retirement Plan Account balance in the Plan shall be reduced to zero effective March 31, 2001. The Director's balance in such account as of such date shall be foregone by the Director, and the Director hereby irrevocably waives his right to payment of such amount.
IN WITNESS WHEREOF, the parties hereby execute this Agreement, intending to be legally bound,
Kansas City Southern Industries, Inc.
/s/ A. Edward Allinson By: /s/ Eric B. Freestone ----------------------------------- ------------------------------------- A. Edward Allinson March 27, 2001 3-30-01 ----------------------------------- ------------------------------------- Date Date |
Exhibit 10.36
|
LOAN AGREEMENT
This Loan Agreement is made between A. Edward Allinson (the "Director") and Kansas City Southern Industries, Inc. (the "Company").
WHEREAS, the Director has been and continues to be a valued member of the Board of Directors of the Company;
WHEREAS, the Director and the Company have entered into an Agreement to Forego Compensation (the "Agreement") under which the Director has agreed to forego certain compensation; and
WHEREAS, in consideration for the Director entering into the Agreement, the Company has agreed, pursuant to this Loan Agreement, to make a loan to a trust created by the Director.
NOW THEREFORE, in consideration for the aforementioned promises, and for other consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows, intending to be legally bound.
1. The Company agrees to loan $523,662 to The A. Edward Allinson Irrevocable Trust Agreement dated June 4, 2001, Courtney Ann Arnot, A. Edward Allinson III and Bradford J. Allinson, Trustees (the "Trust") with interest at the Applicable Federal Rate (AFR) provided for in Internal Revenue Code Section7872(f)(2)(A) or any successor Section in effect at the time the loan is made, with the loan principal amount to be used by the Trust to pay a premium on a life insurance policy on the life of the Director.
2. The terms of the loan shall be documented by a Promissory Note (the "Note") to be executed by the Company and the Trust.
IN WITNESS WHEREOF, the parties hereby execute this Agreement, intending to be legally bound,
Kansas City Southern Industries, Inc.
/s/ A. Edward Allinson By: /s/ Eric B. Freestone ----------------------------------- ------------------------------------- A. Edward Allinson 8-14-01 September 18, 2001 ----------------------------------- ------------------------------------- Date Date |
Exhibit 10.36
|
PROMISSORY NOTE
Principal Sum: $523,662
Maker: The A. Edward Allinson Irrevocable Trust Agreement dated June 4,
2001, Courtney Ann Arnot, A. Edward Allinson III and Bradford
J. Allinson, Trustees
Holder: Kansas City Southern Industries, Inc.
|
FOR VALUE RECEIVED, the undersigned Maker (also referred to herein as the "Trust") promises to pay to the order of the Holder the Principal Sum, plus interest from the Loan Date (as hereinafter defined, and as indicated on Schedule A attached hereto) until the date paid, at the Loan Rate indicated in Schedule A.
The Maker agrees that the entire Principal Sum shall be used to pay a premium on the life insurance Policy described in Schedule A, and that no part of the Principal Sum shall be used for any other purpose. Such premium shall be paid by the Maker within ninety (90) days after the Loan Date (subject to an extension of up to sixty (60) days if so agreed by the parties). The "Loan Date" shall be the date on which the Holder pays the Principal Sum to the Maker, or if the Maker instructs the Holder to pay the Principal Sum amount directly to the insurer issuing the Policy, the date on which the Holder pays the amount to the insurer.
The entire Principal Sum, plus accrued interest thereon, shall be due and payable within ninety (90) days following the death of the Insured (as listed in Schedule A). Maker agrees to take all reasonable steps to ensure payment of the Policy death benefit promptly following the deaths of the Insureds.
All payments hereon shall be made in lawful money of the United States of America to the order of the Holder at 114 West 11th Street, Kansas City, MO 64105-1804 or at such other place as the Holder may designate in writing to the Maker from time to time. This Note may be prepaid by the Maker in whole or in part at any time without penalty or premium. If any payment due is not paid within ten (10) business days of the due date, such overdue amount shall bear interest from and after the due date until paid in full at the rate of 10% per annum, compounded annually, or at the maximum rate permitted by law, whichever is less.
At any time during the term of this Note, the Maker may elect to reset the Loan Rate. The Reset Loan Rate shall equal the Applicable Federal Rate provided for under Internal Revenue Code Section 7872(f)(2)(A), or any successor Section, with such rate
Exhibit 10.36
to be the Applicable Federal Rate in effect on the Reset Date. The Reset Loan Rate shall be effective as of the Reset Date, which shall be specified in writing by the Maker to the Holder at least five (5) days in advance of such Reset Date. The outstanding loan principal and accrued interest at the Reset Date shall bear interest at the Reset Loan Rate from the Reset Date until the date paid. The Reset Loan Rate shall apply for the remaining term of the loan, and no further reset shall be allowed.
The Maker agrees that the Policy shall be owned solely by the Maker, that the Trust shall be designated as beneficiary to receive the Policy death benefit or any benefit paid at policy maturity, and that no other person or entity will have any interest in the policy, except as otherwise provided herein. Also, the Maker shall not surrender the Policy, in whole or in part, withdraw cash value from or borrow from the Policy, or otherwise pledge or encumber the Policy, except as expressly permitted by the terms of this Note. Maker further agrees that the entire Principal Sum and accrued interest shall become immediately due and payable, without any further demand or notice, all of which are expressly waived, upon the occurrence of any of the following events:
(1) The Maker fails to pay the Policy premium within the time allowed by the terms of this Note (including any permitted extensions).
(2) The Maker attempts to transfer all or any part of its interest in the Policy to any party, except that a transfer of Policy rights to a successor trustee under the terms of the Trust shall not be deemed a transfer for the purpose of this sentence.
(3) The Maker surrenders the Policy in whole or in part, or borrows from or withdraws cash value from the Policy, or otherwise pledges or encumbers the Policy.
(4) The Maker reduces the face amount of the Policy without the consent of the Holder, but only if the face amount reduction results in a distribution of policy cash values.
The obligations created by this Note are obligations of the Maker only, and no individual or entity who is a trustee of the Trust shall have any personal responsibility or liability with respect to this Note, except in such party's fiduciary capacity as a trustee. In addition, no beneficiary of the Trust, or creator of the Trust, shall have any personal responsibility or liability with respect to this Note, except to the extent of any Policy death benefits paid to any such beneficiary, in which case the Holder may pursue available legal remedies to recover any such amount if the Holder has not received payment of the full amount due to the Holder.
The Maker, the creator of the Trust, and any trustee or beneficiary of the Trust shall not be responsible for paying any additional amounts as Policy premiums, even if it becomes necessary to do so to prevent the Policy from lapsing. However, any such party may pay additional Policy premiums as it elects.
Exhibit 10.36
The Holder may transfer or assign its rights under this Note to any individual or entity without the consent of the Maker. However, notice of any such transfer or assignment shall be given to the Maker by the Holder.
The Maker hereby waives presentment, demand for payment, notice of default and notice of protest. The Maker agrees to pay on demand all losses, costs and expenses incurred by the Holder in connection with the enforcement of this Note.
This Note shall be governed by and construed in accordance with the laws of the state of Missouri.
IN WITNESS WHEREOF, the undersigned parties have caused this Note to be duly executed under seal as of the date first above written.
Holder Maker
By: /s/ Eric B. Freestone By: /s/ Courtney Ann Arnot
------------------------------------- ---------------------------------
Kansas City Southern Industries, Inc. Courtney Ann Arnot, Trustee
September 18, 2001 /s/ A. Edward Allinson III
------------------------------------- ---------------------------------
Date A. Edward Allinson III, Trustee
/s/ Bradford J. Allinson
---------------------------------
Bradford J. Allinson, Trustee
9-10-01
---------------------------------
Date
|
Exhibit 10.36
|
PROMISSORY NOTE
SCHEDULE A
Loan Date: September 19, 2001
Loan Rate: 5.49% per annum compounded semi-annually
Policy
Insurer: American General Life Insurance Company
Policy Number: VL1005743V
Insured: A. Edward Allinson
|
Exhibit 10.37
AGREEMENT
TO FOREGO COMPENSATION
An Agreement is made between Michael G. Fitt (the "Director") and Kansas City Southern Industries, Inc. (the "Company").
WHEREAS, the Director has been and continues to be a valued member of the Board of Directors of the Company;
WHEREAS, the Company desires to assist the Director in acquiring a life insurance policy on the lives of the Director and the Director's spouse (the "Policy"), by loaning an amount to the Director (or to a trust to be created by the Director), so that the loaned amount can be used by the Director (or the trust) to pay a premium for the Policy; and
WHEREAS, the Director agrees to forego all of the balance payable to the Director under the Retirement Plan Account in the Directors' Deferred Fee Plan of Kansas City Southern Industries, Inc. (the "Plan").
NOW, THEREFORE, in consideration for the aforementioned promises, and for other consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows, intending to be legally bound.
1. The Company agrees to enter into a loan agreement (the "Loan Agreement") to provide a loan to the Director or to a trust (the "Trust") created by the Director. The terms of the loan shall be documented by a Promissory Note (the "Note") to be executed by the Company and the Director (or the Trust).
2. In consideration for the Company's promise to enter into the Loan Agreement, the Director's Retirement Plan Account balance in the Plan shall be reduced to zero effective March 31, 2001. The Director's balance in such account as of such date shall be foregone by the Director, and the Director hereby irrevocably waives his right to payment of such amount.
IN WITNESS WHEREOF, the parties hereby execute this Agreement, intending to be legally bound,
Kansas City Southern Industries, Inc.
/s/ Michael G. Fitt By: /s/ Eric B. Freestone --------------------------------- ------------------------------------- Michael G. Fitt 3-26-2001 3-30-01 --------------------------------- ------------------------------------- Date Date |
Exhibit 10.37
|
LOAN AGREEMENT
This Loan Agreement is made between Michael G. Fitt (the "Director") and Kansas City Southern Industries, Inc. (the "Company").
WHEREAS, the Director has been and continues to be a valued member of the Board of Directors of the Company;
WHEREAS, the Director and the Company have entered into an Agreement to Forego Compensation (the "Agreement") under which the Director has agreed to forego certain compensation; and
WHEREAS, in consideration for the Director entering into the Agreement, the Company has agreed, pursuant to this Loan Agreement, to make a loan to a trust created by the Director.
NOW THEREFORE, in consideration for the aforementioned promises, and for other consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows, intending to be legally bound.
1. The Company agrees to loan $975,346 to The Michael G. and Doreen E. Fitt Irrevocable Trust, Anne E. Sykes, Colin M-D. Fitt and Ian D. G. Fitt, Trustees (the "Trust") with interest at the Applicable Federal Rate (AFR) provided for in Internal Revenue Code Section7872(f)(2)(A) in effect at the time the loan is made, with the loan principal amount to be used by the Trust to pay a premium on a life insurance policy on the lives of the Director and the Director's spouse.
2. The terms of the loan shall be documented by a Promissory Note (the "Note") to be executed by the Company and the Trust.
IN WITNESS WHEREOF, the parties hereby execute this Agreement, intending to be legally bound,
Kansas City Southern Industries, Inc.
/s/ Michael G. Fitt By: /s/ Eric B. Freestone --------------------------------- ------------------------------------- Michael G. Fitt August 13th 2001 September 7, 2001 --------------------------------- ------------------------------------- Date Date |
Exhibit 10.37
PROMISSORY NOTE
|
Principal Sum: $975,346
Maker: The Michael G. and Doreen E. Fitt Irrevocable Insurance Trust,
Anne E. Sykes, Colin M-D. Fitt and Ian D. G. Fitt, Trustees
Holder: Kansas City Southern Industries, Inc.
|
FOR VALUE RECEIVED, the undersigned Maker (also referred to herein as the "Trust") promises to pay to the order of the Holder the Principal Sum, plus interest from the Loan Date (as hereinafter defined, and as indicated on Schedule A attached hereto) until the date paid, at the Loan Rate indicated in Schedule A.
The Maker agrees that the entire Principal Sum shall be used to pay a premium on the life insurance Policy described in Schedule A, and that no part of the Principal Sum shall be used for any other purpose. Such premium shall be paid by the Maker within ninety (90) days after the Loan Date (subject to an extension of up to sixty (60) days if so agreed by the parties). The "Loan Date" shall be the date on which the Holder pays the Principal Sum to the Maker, or if the Maker instructs the Holder to pay the Principal Sum amount directly to the insurer issuing the Policy, the date on which the Holder pays the amount to the insurer.
The entire Principal Sum, plus accrued interest thereon, shall be due and payable within ninety (90) days following the death of the last survivor of the Insureds (as listed in Schedule A). Maker agrees to take all reasonable steps to ensure payment of the Policy death benefit promptly following the deaths of the Insureds.
All payments hereon shall be made in lawful money of the United States of America to the order of the Holder at 114 West 11th Street, Kansas City, MO 64105-1804 or at such other place as the Holder may designate in writing to the Maker from time to time. This Note may be prepaid by the Maker in whole or in part at any time without penalty or premium. If any payment due is not paid within ten (10) business days of the due date, such overdue amount shall bear interest from and after the due date until paid in full at the rate of 10% per annum, compounded annually, or at the maximum rate permitted by law, whichever is less.
The Maker agrees that the Policy shall be owned solely by the Maker, that the Trust shall be designated as beneficiary to receive the Policy death benefit or any benefit paid at policy maturity, and that no other person or entity will have any interest in the policy, except as otherwise provided herein. Also, the Maker shall not surrender the Policy, in
Exhibit 10.37
whole or in part, withdraw cash value from or borrow from the Policy, or otherwise pledge or encumber the Policy, except as expressly permitted by the terms of this Note. Maker further agrees that the entire Principal Sum and accrued interest shall become immediately due and payable, without any further demand or notice, all of which are expressly waived, upon the occurrence of any of the following events:
(1) The Maker fails to pay the Policy premium within the time allowed by the terms of this Note (including any permitted extensions).
(2) The Maker attempts to transfer all or any part of its interest in the Policy to any party, except that a transfer of Policy rights to a successor trustee under the terms of the Trust shall not be deemed a transfer for the purpose of this sentence.
(3) The Maker surrenders the Policy in whole or in part, or borrows from or withdraws cash value from the Policy, or otherwise pledges or encumbers the Policy.
(4) The Maker reduces the face amount of the Policy without the consent of the Holder, but only if the face amount reduction results in a distribution of policy cash values.
The obligations created by this Note are obligations of the Maker only, and no individual or entity who is a trustee of the Trust shall have any personal responsibility or liability with respect to this Note, except in such party's fiduciary capacity as a trustee. In addition, no beneficiary of the Trust, or creator of the Trust, shall have any personal responsibility or liability with respect to this Note, except to the extent of any Policy death benefits paid to any such beneficiary, in which case the Holder may pursue available legal remedies to recover any such amount if the Holder has not received payment of the full amount due to the Holder.
The Maker, the creator of the Trust, and any trustee or beneficiary of the Trust shall not be responsible for paying any additional amounts as Policy premiums, even if it becomes necessary to do so to prevent the Policy from lapsing. However, any such party may pay additional Policy premiums as it elects.
The Holder may transfer or assign its rights under this Note to any individual or entity without the consent of the Maker. However, notice of any such transfer or assignment shall be given to the Maker by the Holder.
The Maker hereby waives presentment, demand for payment, notice of default and notice of protest. The Maker agrees to pay on demand all losses, costs and expenses incurred by the Holder in connection with the enforcement of this Note.
This Note shall be governed by and construed in accordance with the laws of the state of Missouri.
Exhibit 10.37
IN WITNESS WHEREOF, the undersigned parties have caused this Note to be duly executed under seal as of the date first above written.
Holder Maker
By:/s/ Eric B. Freestone By: /s/ Anne E. Sykes
------------------------------------- -------------------------------
Kansas City Southern Industries, Inc. Anne E. Sykes, Trustee
September 7, 2001 /s/ Colin M-D. Fitt
------------------------------------- -------------------------------
Date Colin M-D. Fitt, Trustee
/s/ Ian D.G. Fitt
-------------------------------
Ian D. G. Fitt, Trustee
August 29, 2001
-------------------------------
Date
|
Exhibit 10.37
|
PROMISSORY NOTE
SCHEDULE A
Loan Date: September 19, 2001
Loan Rate: 5.49% per annum, compounded semi-annually
Policy
Insurer: American General Life Insurance Company
Policy Number: VL1005765V
Insureds: Michael G. Fitt and Doreen E. Fitt
|
Exhibit 10.38
KANSAS CITY SOUTHERN
EMPLOYEE STOCK OWNERSHIP PLAN
(AS AMENDED AND RESTATED EFFECTIVE APRIL 1, 2002)
KANSAS CITY SOUTHERN
EMPLOYEE STOCK OWNERSHIP PLAN
TABLE OF CONTENTS
Article I. DEFINITIONS......................................................................................... 2 1.01 "Plan"............................................................................................... 2 1.02 "Employer"........................................................................................... 3 1.03 "Trustee"............................................................................................ 3 1.04 "Plan Administrator"................................................................................. 3 1.05 "Advisory Committee"................................................................................. 3 1.06 "Employee"........................................................................................... 3 1.07 "Highly Compensated Employee"........................................................................ 3 1.08 "Participant"........................................................................................ 4 1.09 "Beneficiary"........................................................................................ 4 1.10 "Compensation"....................................................................................... 4 1.11 "Account"............................................................................................ 5 1.12 "Accrued Benefit".................................................................................... 5 1.13 "Nonforfeitable"..................................................................................... 5 1.14 "Plan Year".......................................................................................... 6 1.15 "Effective Date"..................................................................................... 6 1.16 "Plan Entry Date".................................................................................... 6 1.17 "Accounting Date".................................................................................... 6 1.18 "Trust".............................................................................................. 6 1.19 "Trust Fund"......................................................................................... 6 1.20 "Nontransferable Annuity"............................................................................ 6 1.21 "ERISA".............................................................................................. 6 1.22 "Code"............................................................................................... 6 1.23 "Service"............................................................................................ 6 1.24 "Hour of Service".................................................................................... 6 1.25 "Disability"......................................................................................... 8 1.26 SERVICE FOR PREDECESSOR EMPLOYER..................................................................... 8 1.27 RELATED EMPLOYERS.................................................................................... 8 1.28 LEASED EMPLOYEES..................................................................................... 8 1.29 DETERMINATION OF TOP HEAVY STATUS.................................................................... 8 1.30 PLAN MAINTAINED BY MORE THAN ONE EMPLOYER............................................................ 10 1.31 "Disqualified Person"................................................................................ 10 1.32 "Employer Securities"................................................................................ 10 1.33 "Exempt Loan"........................................................................................ 11 1.34 "Leveraged Employer Securities"...................................................................... 11 1.35 "Issuer"............................................................................................. 11 Article II. EMPLOYEE PARTICIPANTS.............................................................................. 11 2.01 ELIGIBILITY.......................................................................................... 11 2.02 SERVICE - PARTICIPATION.............................................................................. 12 2.03 BREAK IN SERVICE - PARTICIPATION..................................................................... 12 2.04 PARTICIPATION UPON REEMPLOYMENT...................................................................... 12 |
Article III. EMPLOYER CONTRIBUTIONS AND FORFEITURES............................................................ 12 3.01 AMOUNT............................................................................................... 12 3.02 CONTRIBUTION ALLOCATION.............................................................................. 13 3.03 LIMITATIONS ON ALLOCATIONS TO PARTICIPANTS' ACCOUNTS................................................. 14 3.04 DEFINITIONS.......................................................................................... 15 3.05 DETERMINATION OF CONTRIBUTION........................................................................ 17 3.06 TIME OF PAYMENT OF CONTRIBUTION...................................................................... 17 3.07 FORFEITURE ALLOCATION................................................................................ 17 3.08 ACCRUAL OF BENEFIT................................................................................... 17 Article IV. PARTICIPANT CONTRIBUTIONS.......................................................................... 18 4.01 PARTICIPANT VOLUNTARY CONTRIBUTIONS.................................................................. 18 4.02 PARTICIPANT ROLLOVER CONTRIBUTIONS................................................................... 18 Article V. TERMINATION OF SERVICE - PARTICIPANT VESTING........................................................ 18 5.01 NORMAL RETIREMENT AGE................................................................................ 18 5.02 PARTICIPANT DISABILITY OR DEATH...................................................................... 18 5.03 VESTING SCHEDULE..................................................................................... 18 5.04 CASH-OUT DISTRIBUTION TO PARTIALLY-VESTED PARTICIPANTS/ RESTORATION OF FORFEITED ACCRUED BENEFIT..... 19 5.05 [RESERVED]........................................................................................... 20 5.06 YEAR OF SERVICE - VESTING............................................................................ 20 5.07 BREAK IN SERVICE - VESTING........................................................................... 21 5.08 INCLUDED YEARS OF SERVICE - VESTING.................................................................. 21 5.09 FORFEITURE OCCURS.................................................................................... 21 Article VI. TIME AND METHOD OF PAYMENT OF BENEFITS............................................................. 21 6.01 TIME OF PAYMENT OF ACCRUED BENEFIT................................................................... 21 6.02 METHOD OF PAYMENT OF ACCRUED BENEFIT................................................................. 23 6.03 BENEFIT PAYMENT ELECTIONS............................................................................ 25 6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS................................................................ 26 6.05 SPECIAL DISTRIBUTION AND PAYMENT REQUIREMENTS........................................................ 26 6.06 [Reserved]........................................................................................... 27 6.07 DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS........................................................ 27 6.08 ROLLOVER DISTRIBUTIONS............................................................................... 28 Article VII. EMPLOYER ADMINISTRATIVE PROVISIONS................................................................ 29 7.01 INFORMATION TO COMMITTEE............................................................................. 29 7.02 NO LIABILITY......................................................................................... 29 7.03 INDEMNITY OF COMMITTEE............................................................................... 29 7.04 AMENDMENT TO VESTING SCHEDULE........................................................................ 29 Article VIII. PARTICIPANT ADMINISTRATIVE PROVISIONS............................................................ 30 8.01 BENEFICIARY DESIGNATION.............................................................................. 30 8.02 NO BENEFICIARY DESIGNATION........................................................................... 30 8.03 PERSONAL DATA TO COMMITTEE........................................................................... 31 |
8.04 ADDRESS FOR NOTIFICATION............................................................................. 31 8.05 ASSIGNMENT OR ALIENATION............................................................................. 31 8.06 NOTICE OF CHANGE IN TERMS............................................................................ 31 8.07 LITIGATION AGAINST THE TRUST......................................................................... 31 8.08 INFORMATION AVAILABLE................................................................................ 31 8.09 APPEAL PROCEDURE FOR DENIAL OF BENEFITS.............................................................. 32 8.10 ESOP DIVERSIFICATION................................................................................. 32 8.11 STILWELL SHARES AND INVESTMENT FUNDS................................................................. 33 Article IX. ADVISORY COMMITTEE -- DUTIES WITH RESPECT TO PARTICIPANTS' ACCOUNTS................................ 34 9.01 MEMBERS' COMPENSATION, EXPENSES...................................................................... 34 9.02 GENERAL.............................................................................................. 34 9.03 FUNDING POLICY....................................................................................... 35 9.04 INDIVIDUAL ACCOUNTS.................................................................................. 35 9.05 VALUE OF PARTICIPANT'S ACCRUED BENEFIT............................................................... 36 9.06 ALLOCATIONS TO PARTICIPANTS' ACCOUNTS................................................................ 36 9.07 UNCLAIMED ACCOUNT PROCEDURE.......................................................................... 37 9.08 TERM................................................................................................. 38 9.09 POWERS............................................................................................... 38 9.10 MANNER OF ACTION..................................................................................... 38 9.11 AUTHORIZED REPRESENTATIVE............................................................................ 38 9.12 INTERESTED MEMBER.................................................................................... 38 9.13 INDIVIDUAL STATEMENT................................................................................. 38 9.14 ACCOUNT CHARGED...................................................................................... 38 9.15 BLACK-OUT PERIOD..................................................................................... 39 9.16 ELECTRONIC ELECTIONS................................................................................. 39 Article X. TRUSTEE POWERS AND DUTIES........................................................................... 39 10.01 TRUSTEE POWERS AND DUTIES............................................................................ 39 10.02 [RESERVED]........................................................................................... 39 10.03 INVESTMENT POWERS.................................................................................... 39 10.04 [RESERVED]........................................................................................... 41 10.05 [RESERVED]........................................................................................... 41 10.06 [RESERVED]........................................................................................... 41 10.07 [RESERVED]........................................................................................... 41 10.08 DISTRIBUTION OF TRUST FUND........................................................................... 41 10.09 [RESERVED]........................................................................................... 42 10.10 [RESERVED]........................................................................................... 42 10.11 [RESERVED]........................................................................................... 42 10.12 [RESERVED]........................................................................................... 42 10.13 [RESERVED]........................................................................................... 42 10.14 [RESERVED]........................................................................................... 42 10.15 PARTICIPANT VOTING RIGHTS - EMPLOYER SECURITIES AND STILWELL SHARES ................................. 42 10.16 [RESERVED]........................................................................................... 43 10.17 USE OF INDEPENDENT APPRAISER......................................................................... 43 10.18 [RESERVED]........................................................................................... 43 |
10.19 STILWELL SHARES RESTRICTION.......................................................................... 43 Article XI. REPURCHASE OF EMPLOYER SECURITIES.................................................................. 43 11.01 PUT OPTION........................................................................................... 43 11.02 CONTINUATION OF PUT OPTION........................................................................... 45 Article XII. MISCELLANEOUS..................................................................................... 45 12.01 EVIDENCE............................................................................................. 45 12.02 NO RESPONSIBILITY FOR EMPLOYER ACTION................................................................ 45 12.03 FIDUCIARIES NOT INSURERS............................................................................. 45 12.04 WAIVER OF NOTICE..................................................................................... 45 12.05 SUCCESSORS........................................................................................... 45 12.06 WORD USAGE........................................................................................... 45 12.07 STATE LAW............................................................................................ 45 12.08 EMPLOYMENT NOT GUARANTEED............................................................................ 46 12.09 ELECTRONIC MEDIA..................................................................................... 46 Article XIII. EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION........................................................ 46 13.01 EXCLUSIVE BENEFIT.................................................................................... 46 13.02 AMENDMENT BY EMPLOYER................................................................................ 46 13.03 DISCONTINUANCE....................................................................................... 47 13.04 FULL VESTING ON TERMINATION.......................................................................... 47 13.05 MERGER/DIRECT TRANSFER............................................................................... 47 13.06 TERMINATION.......................................................................................... 48 Article XIV. PROVISIONS EFFECTIVE UPON CHANGE IN CONTROL....................................................... 49 14.01 DEFINITION OF "CHANGE IN CONTROL OF KCS"............................................................. 49 14.02 PROVISIONS EFFECTIVE UPON CHANGE IN CONTROL.......................................................... 50 14.03 RIGHT TO AMEND PART 1 OF ARTICLE XIV PRIOR TO CHANGE IN CONTROL OF KCS............................... 50 |
ALPHABETICAL LISTING OF DEFINITIONS
Plan Definition Reference
(Page Number)
Account................................................................................................... 1.11(5)
Accounting Date........................................................................................... 1.17(6)
Accrued Benefit........................................................................................... 1.12(5)
Advisory Committee........................................................................................ 1.05(3)
Affiliate ................................................................................................ 1.27(6)
Annual Addition........................................................................................ 3.04(a)(6)
Annuity Starting Date .................................................................................... 6.01(6)
Beneficial Owner ..................................................................................... 14.01(b)(6)
Beneficiary............................................................................................... 1.09(4)
Break in Service for Vesting Purposes..................................................................... 5.07(6)
Cash-Out Distribution .................................................................................... 5.04(6)
Change in Control of KCS................................................................................. 14.01(6)
Claimant.................................................................................................. 8.09(6)
Code...................................................................................................... 1.22(6)
Code Section 411(d)(6) Protected Benefits................................................................ 13.02(6)
Compensation.............................................................................................. 1.10(4)
Compensation for Code Section 415 Purposes ............................................................ 3.04(b)(6)
Compensation for Top Heavy Purposes.................................................................... 1.29(c)(6)
Deemed Cash-Out Rule .................................................................................. 5.04(C)(6)
Defined Contribution Plan.............................................................................. 3.04(g)(6)
Defined Benefit Plan................................................................................... 3.04(h)(6)
Determination Date..................................................................................... 1.29(g)(6)
Disability................................................................................................ 1.25(6)
Disqualified Person....................................................................................... 1.31(6)
Effective Date............................................................................................ 1.15(6)
Elective Contributions ................................................................................... 1.10(5)
Elective Transfer ....................................................................................... 13.05(6)
Eligible Accrued Benefit.................................................................................. 8.10(6)
Eligible Portion.......................................................................................... 6.05(6)
Employee.................................................................................................. 1.06(3)
Employer.................................................................................................. 1.02(3)
Employer for Code Section 415 Purposes................................................................. 3.04(c)(6)
Employer for Top Heavy Purposes........................................................................ 1.29(f)(6)
Employer Securities....................................................................................... 1.32(6)
Employment Commencement Date.............................................................................. 2.01(6)
ERISA..................................................................................................... 1.21(6)
Excess Amount.......................................................................................... 3.04(d)(6)
Exempt Loan............................................................................................... 1.33(6)
Exchange Act ............................................................................................ 14.01(6)
Excluded Employee ........................................................................................ 2.01(6)
5% Owner.................................................................................................. 1.07(3)
Forfeiture Break in Service .............................................................................. 5.08(6)
Highly Compensated Employee............................................................................... 1.07(3)
|
Hour of Service........................................................................................... 1.24(6) Investment Manager .................................................................................... 9.02(i)(6) Issuer.....................................................................................................1.35(6) KCS................................................................................................... 14.01(a)(6) Key Employee........................................................................................... 1.29(a)(6) Leased Employees ......................................................................................... 1.28(6) Leveraged Employer Securities............................................................................. 1.34(6) Limitation Year........................................................................................ 3.04(e)(6) Master Trust.............................................................................................. 1.18(6) Maximum Permissible Amount................................................................................ 3.01(6) Minimum Distribution Incidental Benefit (MDIB)......................................................... 6.02(A)(6) Non-Key Employee....................................................................................... 1.29(b)(6) Nonforfeitable............................................................................................ 1.13(5) Nontransferable Annuity................................................................................... 1.20(6) Normal Retirement Age .................................................................................... 5.01(6) Participant............................................................................................... 1.08(4) Permissive Aggregation Group........................................................................... 1.29(e)(6) Plan...................................................................................................... 1.01(2) Plan Administrator........................................................................................ 1.04(3) Plan Entry Date........................................................................................... 1.16(6) Plan Year................................................................................................. 1.14(6) Qualified Domestic Relations Order ....................................................................... 6.07(6) Related Employers ........................................................................................ 1.27(6) Required Aggregation Group ............................................................................ 1.29(d)(6) Required Beginning Date ............................................................................... 6.01(B)(6) Service................................................................................................... 1.23(6) Top Heavy Minimum Allocation .......................................................................... 3.02(B)(6) Top Heavy Ratio .......................................................................................... 1.29(6) Sponsor................................................................................................... 1.02(3) Trust..................................................................................................... 1.18(6) Trust Fund................................................................................................ 1.19(6) Trustee................................................................................................... 1.03(3) Years of Service.......................................................................................... 5.08(6) |
Exhibit 10.38
KANSAS CITY SOUTHERN
EMPLOYEE STOCK OWNERSHIP PLAN
(AS AMENDED AND RESTATED EFFECTIVE APRIL 1, 2002)
INTRODUCTION
Kansas City Southern ("KCS") (known as Kansas City Southern Industries, Inc. prior to May 2, 2002) hereby amends and restates this Kansas City Southern Employee Stock Ownership Plan (the "Plan") (known as the Kansas City Southern Industries, Inc. Employee Stock Ownership Plan prior to May 2, 2002), originally established effective as of February 3, 1988, for the administration and distribution of contributions made by the Employers for the purpose of providing retirement benefits for eligible Employees.
Prior to July 12, 2000 (the "Spinoff Date"), Stilwell Financial Inc.
("Stilwell") and its subsidiaries (collectively, the "Stilwell Group") were
members of the controlled group of corporations (within the meaning of Code
Section 414(b)) that includes KCS. As of the Spinoff Date, all of the shares of
Stilwell held by KCS were distributed to the shareholders of KCS as a spinoff
dividend (such transaction being referred to herein as the "Spinoff") and the
members of the Stilwell Group thereby ceased to be members of the controlled
group of corporations that includes KCS.
As of October 1, 1999, the Plan was split into two separate plans: (1) an employee stock ownership plan providing benefits to eligible employees of KCS and certain of its affiliates (exclusive of the Stilwell Group), which continued to hold the assets of the Plan allocable to employees and former employees of KCS and certain of its affiliates other than the Stilwell Group, and which continued to be known as the Kansas City Southern Industries, Inc. Employee Stock Ownership Plan; and (2) an employee stock ownership plan providing benefits to eligible employees of the Stilwell Group, to which were transferred the assets of the Plan allocable to employees and former employees of the Stilwell Group, and which is known as the Stilwell Financial Inc. Employee Stock Ownership Plan.
As a result of the Spinoff, Participants' Accounts under the Plan held both KCS Shares and shares of common stock of Stilwell ("Stilwell Shares") that were received as dividends with respect to such KCS Shares. KCS determined that in order to provide Participants with the opportunity to continue to hold the same economic investment following the Spinoff as before and enhanced investment flexibility following the Spinoff, the Plan shall provide for not only the holding of KCS Shares, but also the holding of Stilwell Shares and interests in certain diversified investment funds ("Investment Funds") that may be designated from time to time by the Advisory Committee as available for investment under the Plan. As provided in Section 8.11, and subject to the provisions thereof, following the Spinoff, Participants may elect to continue holding Stilwell Shares in their Accounts under the Plan, or may elect to sell Stilwell Shares and reinvest the proceeds in KCS Shares or in one or more Investment Funds. The continued holding of Stilwell Shares is limited to those Stilwell Shares that were allocated to Participants' Accounts as a result of the Spinoff. Accordingly, no future contributions to or earnings of the Plan, and no amounts transferred from the Investment Funds, may be invested in Stilwell Shares. Cash dividends on Stilwell Shares received by the Plan shall be invested in KCS Shares or in one or more Investment Funds, as elected by Participants.
Prior to January 1, 2001, the Plan was intended to be an employee stock
ownership plan, and to qualify as such under Section 4975(e)(7) of the Code and
under Treasury Regulation Section 54.4975-11. Effective as of January 1, 2001,
the Plan was amended and restated, and as so amended and restated the Plan (i)
is intended to continue to be an employee stock ownership plan for periods on
and after January 1, 2001, and to qualify as such under Section 4975(e)(7) of
the Code and under Treasury Regulation Section 54.4975-11, in respect of that
portion of the Plan as is invested in Employer Securities (including KCS Shares
acquired by the Plan in exchange for or with proceeds from the sale of Stilwell
Shares and also Employer Securities that are contributed to the Plan or are
purchased with cash contributions made to the Plan with the proceeds of an
Exempt Loan on or after January 1, 2001); (ii) is intended to be a stock bonus
plan for periods on and after January 1, 2001, and to qualify as such under
Section 401(a) of the Code (including Section 401(a)(23) of the Code) and
applicable regulations, in respect of the remainder of the Plan; and (iii) is
intended to satisfy the requirements of Treasury Regulation Section 54.4975-11
(including the requirement to provide participants with nonterminable
protections and rights set forth in Treasury Regulation
Section 54.4975-11(a)(3)) necessary to maintain the qualification of the Plan in
its entirety as an employee stock ownership plan under Section 4975(e)(7) of the
Code and Treasury Regulation Section 54.4975-11 with respect to all periods
prior to January 1, 2001.
Effective as of January 1, 2002, the Plan was amended and restated to reflect certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). The amendment and restatement is intended as good faith compliance with the requirements of EGTRRA and plan provisions should be construed in accordance with EGTRRA and guidance issued thereunder.
The Plan is hereby further amended and restated effective as of April 1, 2002 (the "Effective Date"). Effective as of April 1, 2002, KCS appointed a new Trustee and entered into a service agreement with a new recordkeeper. In order to facilitate the change to the new recordkeeper and Trustee, the Advisory Committee imposed a black-out period, as defined in Section 9.15, effective as of March 15, 2002 and continuing until the Advisory Committee, in its sole discretion, deems it no longer necessary to impose such a black-out period. Except as otherwise provided, the provisions of this Plan, as hereby amended and restated, shall be effective as of April 1, 2002. Unless otherwise indicated, the provisions of this amended and restated Plan shall apply solely to an Employee who is employed by an Employer on or after the Effective Date. If a participant terminated employment from his last Employer prior to the Effective Date, the benefits to which he is entitled shall be determined under the terms of the Plan as in effect on the date of the Employee's termination of employment, unless otherwise indicated.
ARTICLE I.
DEFINITIONS
1.01 "Plan" means the retirement plan established and continued by KCS as set forth herein, designated as the "Kansas City Southern Employee Stock Ownership Plan", and known as the "Kansas City Southern Industries, Inc. Employee Stock Ownership Plan" prior to May 2, 2002. The Sponsor has designed this Plan to invest contributions made to the Plan on and after January 1, 2001 primarily in Employer Securities.
1.02 "Employer" means Kansas City Southern ("KCS" or the "Sponsor") (known as Kansas City Southern Industries, Inc. ("KCSI") prior to May 2, 2002), or any other Employer who, with the written consent of KCS, adopts this Plan.
1.03 "Trustee" means Nationwide Trust Company, FSB, or any successor in office who in writing accepts the position of Trustee.
1.04 "Plan Administrator" is Kansas City Southern unless KCS designates another person to hold the position of Plan Administrator. In addition to its other duties, the Plan Administrator has full responsibility for compliance with the reporting and disclosure rules under ERISA as respects this Plan.
1.05 "Advisory Committee" means the Sponsor's Advisory Committee for the Plan as from time to time constituted.
1.06 "Employee" means any employee of the Employer, excluding any Leased Employee, and excluding any individual who performs services for an Employer and (i) is working in a classification described as an independent contractor (even if such person is subsequently determined to be a common-law employee of the Employer), (ii) is paid, directly or indirectly, through an Employer's accounts payable system, or (iii) performs such services pursuant to a contract or agreement which provides that the person is an independent contractor or consultant (even if such person is subsequently determined to be a common-law employee of the Employer).
1.07 "Highly Compensated Employee" means, for any Plan Year, commencing on or after January 1, 1997, any individual who (i) is an Employee described in subsection (a) or (b) below, or (ii) is a former Employee described in subsection (c), below:
(a) An Employee who at any time during the current Plan Year or the preceding Plan Year is a more than five percent (5%) owner (or is considered as owning more than five percent (5%) within the meaning of Section 318 of the Code) ("5% Owner") of the Employer;
(b) An Employee who (i) received Compensation during the preceding Plan Year in excess of $80,000 (in 1996, as adjusted in accordance with regulations and rulings under Section 414(q) of the Code), and (ii) if the Advisory Committee elects by amendment of the Plan to apply this clause (ii) to determine the Highly Compensated Employees for a Plan Year, for this Plan and, except as otherwise permitted, consistently for all plans of the Employer whose plan years begin in the same calendar year as such preceding Plan Year, is in the group consisting of the top twenty percent (20%) of the total number of persons employed by the Employer when ranked on the basis of Compensation paid during the preceding Plan Year, provided that, for purposes of determining the total number of persons employed by the Employer, the following Employees shall be excluded:
(1) Employees who have not completed an aggregate of six (6) months of service during the preceding Plan Year,
(2) Employees who work less than seventeen and one-half (17-1/2) hours per week for 50% or more of the total weeks worked by such employees during the preceding Plan Year,
(3) Employees who normally work during not more than six (6) months during any year,
(4) Employees who have not attained age 21 by the end of the preceding Plan Year,
(5) Employees who are nonresident aliens and who receive no earned income (within the meaning of Section 911(d)(2) of the Code) from the Employer which constitutes income during the preceding Plan Year from sources within the United States (within the meaning of Section 861(a)(3) of the Code), and
(6) Except to the extent provided in regulations prescribed by the Secretary of the Treasury, Employees who are members of a collective bargaining unit represented by a collective bargaining agent with which an Employer has or has had a bargaining agreement.
For purposes of this Section 1.07, "Compensation" means Compensation as defined in Section 1.10, and Compensation must include Elective Contributions.
The Advisory Committee must make the determination of who is a Highly Compensated Employee, including the determinations of the number and identity of the top paid 20% group and the relevant Compensation, consistent with Code Section 414(q) and regulations issued under that Code section. The Employer may make a calendar year election to determine the Highly Compensated Employees for the Plan Year, as prescribed by Treasury regulations. Except as otherwise permitted, a calendar year election must apply to all plans and arrangements of the Employer.
(c) The term "Highly Compensated Employee" also includes any former Employee who separated from Service (or has a deemed Separation from Service, as determined under Treasury regulations) prior to the Plan Year, performs no Service for the Employer during the Plan Year, and was a Highly Compensated Employee either for the separation year or for any Plan Year ending on or after his 55th birthday.
1.08 "Participant" is an Employee who is eligible to be and becomes a Participant in accordance with the provisions of Section 2.01.
1.09 "Beneficiary" is a person designated by a Participant who is or may become entitled to a benefit under the Plan. A Beneficiary who becomes entitled to a benefit under the Plan remains a Beneficiary under the Plan until the Trustee has fully distributed his benefit to him. A Beneficiary's right to (and the Plan Administrator's, the Advisory Committee's or a Trustee's duty to provide to the Beneficiary) information or data concerning the Plan does not arise until he first becomes entitled to receive a benefit under the Plan.
1.10 "Compensation" means a Participant's wages, salaries, fees for professional service and other amounts received for personal services actually rendered in the course of
employment with the Employer maintaining the Plan as defined in Code
Section 3401(a) for purposes of income tax withholding at the source but
determined without regard to any rules that limit remuneration included in wages
based on the nature or location of the employment or the services performed
(such as the exception for agricultural labor in Section 3401(a)(2)).
Compensation includes Elective Contributions made by the Employer on the
Employee's behalf. "Elective Contributions" are amounts excludible from the
Employee's gross income under Code Sections 125, 402(a)(8), 402(h) or
403(b), and contributed by the Employer, at the Employee's election, to a Code
Section 401(k) arrangement, simplified employee pension, cafeteria plan or
tax-sheltered annuity. A Compensation payment includes Compensation paid by the
Employer to an Employee through another person under the common paymaster
provisions of Code Sections 3121(s) and 3306(p).
Any reference in this Plan to Compensation is a reference to the definition in this Section 1.10, unless the Plan reference specifies a modification to this definition. The Advisory Committee will take into account only Compensation actually paid for the relevant period.
In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, the annual Compensation of each Employee taken into account under the Plan shall not exceed the EGTRRA annual compensation limit. The EGTRRA annual compensation limit is $200,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the EGTRRA annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12.
Any reference in this Plan to the limitation under Code
Section 401(a)(17) shall mean the EGTRRA annual compensation limit set forth in
this provision.
Nondiscrimination. For purposes of determining whether the Plan discriminates in favor of Highly Compensated Employees, Compensation means Compensation as defined in this Section 1.10, unless KCS elects to use an alternate nondiscriminatory definition, in accordance with the requirements of Code Section 414(s) and the regulations issued under that Code section. KCS may elect to include all Elective Contributions made by the Employer on behalf of the Employees. KCS's election to include Elective Contributions must be consistent and uniform with respect to Employees of the Employer and all plans of the Employer for any particular Plan Year. KCS may make this election to include Elective Contributions for nondiscrimination testing purposes, irrespective of whether this Section 1.10 includes Elective Contributions in the general Compensation definition applicable to the Plan.
1.11 "Account" means the separate account(s) which the Advisory Committee or the Trustee maintains for a Participant under the Plan.
1.12 "Accrued Benefit" means the amount standing in a Participant's Account(s) as of any date derived from both Employer contributions and Employee contributions, if any.
1.13 "Nonforfeitable" means a Participant's or Beneficiary's unconditional claim, legally enforceable against the Plan, to the Participant's Accrued Benefit.
1.14 "Plan Year" means the fiscal year of the Plan, a 12 consecutive month period ending every December 31.
1.15 "Effective Date" of this amended and restated Plan is April 1, 2002.
1.16 "Plan Entry Date" means July 1, 2002 and every October 1, January 1, April 1 and July 1 thereafter.
1.17 "Accounting Date" is the last day of the Plan Year. Unless otherwise specified in the Plan, the Advisory Committee shall make all Plan allocations for a particular Plan Year as of the last Accounting Date of that Plan Year.
1.18 "Trust" means the Master Trust established pursuant to the Directed Trust Agreement between KCS and Nationwide Trust Company, FSB and/or any other trust that may be established under this Plan. 1.19 "Trust Fund" means all property of every kind held or acquired by the Trustee under the Plan.
1.20 "Nontransferable Annuity" means an annuity which by its terms provides that it may not be sold, assigned, discounted, pledged as collateral for a loan or security for the performance of an obligation or for any purpose to any person other than the insurance company. If the Trustee distributes an annuity contract, the contract must be a Nontransferable Annuity.
1.21 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
1.22 "Code" means the Internal Revenue Code of 1986, as amended.
1.23 "Service" means any period of time the Employee is in the employ of the Employer, including any period the Employee is on an unpaid leave of absence authorized by the Employer under a uniform, nondiscriminatory policy applicable to all Employees. Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service shall be provided in accordance with Section 414(u) of the Code. "Separation from Service" means a severance from employment with the Employer maintaining this Plan and all Related Employers.
1.24 "Hour of Service" means:
(a) Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee, or for which the Employee is entitled to payment, for the performance of duties. The Advisory Committee credits Hours of Service under this paragraph (a) to the Employee for the computation period in which the Employee performs the duties, irrespective of when paid;
(b) Each Hour of Service for back pay, irrespective of mitigation of damages, to which the Employer has agreed or for which the Employee has received an award. The Advisory Committee credits Hours of Service under this paragraph (b) to the Employee for the computation period(s) to which the award or the agreement pertains
rather than for the computation period in which the award, agreement or payment is made; and
(c) Each Hour of Service for which the Employer, either directly or indirectly, pays an Employee, or for which the Employee is entitled to payment (irrespective of whether the employment relationship is terminated), for reasons other than for the performance of duties during a computation period, such as leave of absence, vacation, holiday, sick leave, illness, incapacity (including disability), layoff, jury duty or military duty. The Advisory Committee will credit no more than 501 Hours of Service under this paragraph (c) to an Employee on account of any single continuous period during which the Employee does not perform any duties (whether or not such period occurs during a single computation period). The Advisory Committee credits Hours of Service under this paragraph (c) in accordance with the rules of paragraphs (b) and (c) of Labor Reg. Section 2530.200b-2, which the Plan, by this reference, specifically incorporates in full within this paragraph (c).
The Advisory Committee will not credit an Hour of Service under more
than one of the above paragraphs. A computation period for purposes of this
Section 1.24 is the Plan Year, Year of Service period, Break in Service period
or other period, as determined under the Plan provision for which the Advisory
Committee is measuring an Employee's Hours of Service.
The Employer will credit every Employee with Hours of Service on the basis of the "actual" method. For purposes of the Plan, "actual" method means the determination of Hours of Service from records of hours worked and hours for which the Employer makes payment or for which payment is due from the Employer. However, for an Employee who is paid on other than an hourly basis, Hours of Service shall be credited according to the following schedule, based on the payroll period of the Employee, for each payroll period with respect to which he or she is paid or is entitled to payment of compensation:
Payroll Period Hours of Service -------------- ---------------- Daily 10 Weekly 45 Bi-Monthly 95 Monthly 190 |
Solely for purposes of determining whether the Employee incurs a Break in Service under any provision of this Plan, the Advisory Committee must credit Hours of Service during an Employee's unpaid absence period due to maternity or paternity leave. The Advisory Committee considers an Employee on maternity or paternity leave if the Employee's absence is due to the Employee's pregnancy, the birth of the Employee's child, the placement with the Employee of an adopted child, or the care of the Employee's child immediately following the child's birth or placement. The Advisory Committee credits Hours of Service under this paragraph on the basis of the number of Hours of Service the Employee would receive if he were paid during the absence period or, if the Advisory Committee cannot determine the number of Hours of Service the Employee would receive, on the basis of 8 hours per day during the absence period. The Advisory Committee will credit only the number (not exceeding 501) of Hours of Service necessary to prevent an Employee's Break in Service. The Advisory Committee credits all Hours of Service described in this paragraph to the computation period in which the absence
period begins or, if the Employee does not need these Hours of Service to prevent a Break in Service in the computation period in which his absence period begins, the Advisory Committee credits these Hours of Service to the immediately following computation period.
1.25 "Disability" means that the Participant has been determined to be disabled by the Railroad Retirement Board or the Social Security Administration.
1.26 SERVICE FOR PREDECESSOR EMPLOYER. If the Employer maintains the plan of a predecessor employer, the Plan treats service of the Employee with the predecessor employer as service with the Employer.
1.27 RELATED EMPLOYERS. A related group is a controlled group of
corporations (as defined in Code Section 414(b)), trades or businesses (whether
or not incorporated) which are under common control (as defined in Code
Section 414(c)) or an affiliated service group (as defined in Code
Section 414(m) or in Code Section 414(o)). If the Employer is a member of a
related group, the term "Employer" includes, for the time period during which
the relation exists, the related group members for purposes of crediting Hours
of Service, determining Years of Service and Breaks in Service under Articles II
and V, applying the limitations on allocations in Article III, applying the top
heavy rules and the minimum allocation requirements of Article III, the
definitions of Employee, Highly Compensated Employee, Compensation and Leased
Employee, and for any other purpose required by the applicable Code section or
by a Plan provision. In addition, (i) the Plan shall treat all service prior to
the Spinoff Date that is credited with respect to an Employee under the terms of
the Plan in effect prior to October 1, 1999 as service with the Employer, and
(ii) the Plan shall treat service of an Employee on or after the Spinoff Date
with an "affiliate" of KCS during the time it is an "affiliate" as service with
the Employer. For purposes of this Section 1.27, the term "affiliate" means any
corporation, partnership, joint venture or other business entity with respect to
which twenty-five percent (25%) or more of the equity interests therein are
owned, directly or indirectly, by Kansas City Southern or by any entity at least
80% of the equity interests of which are owned by Kansas City Southern. However,
only an Employer described in Section 1.02 may contribute to the Plan and only
an Employee employed by an Employer described in Section 1.02 is eligible to
participate in this Plan. For Plan allocation purposes, "Compensation" does not
include Compensation received from a related employer that is not participating
in this Plan.
1.28 LEASED EMPLOYEES. The Plan does not treat a Leased Employee as an Employee of the Employer. A Leased Employee is an individual (who otherwise is not an Employee of the Employer) who, pursuant to a leasing agreement between the Employer and any other person, has performed services for the Employer (or for the Employer and any persons related to the Employer within the meaning of Code Section 144(a)(3)) on a substantially full time basis for at least one year and who performs services under the primary direction or control of the Employer. A Leased Employee who performs services for the Employer pursuant to a contract or agreement which provides that the person is a Leased Employee will not become eligible to participate in this Plan merely by reason of a determination that the person is a common-law employee of the Employer, unless and until the Employer changes the employment classification of such person.
1.29 DETERMINATION OF TOP HEAVY STATUS. If this Plan is the only qualified plan maintained by the Employer, the Plan is top heavy for a Plan Year if the top heavy
ratio as of the Determination Date exceeds 60%. The top heavy ratio is a fraction, the numerator of which is the sum of the present value of Accrued Benefits of all Key Employees in the Plan as of the Determination Date and the denominator of which is a similar sum determined for all Employees in the Plan. The Advisory Committee must include in the top heavy ratio, as part of the present value of Accrued Benefits, any contribution by the Employer not made as of the Determination Date but includible under Code Section 416 and the applicable Treasury regulations, distributions on account of Separation From Service, death or disability made within the Determination Period and any other distributions made within the 5-year period ending on the Determination Date. The Advisory Committee must calculate the top heavy ratio by disregarding the Accrued Benefit (and distributions, if any, of the Accrued Benefit) of any Non-Key Employee who was formerly a Key Employee, and by disregarding the Accrued Benefit (including distributions, if any, of the Accrued Benefit) of an individual who has not received credit for at least one Hour of Service with the Employer during the Determination Period. The Advisory Committee must calculate the top heavy ratio, including the extent to which it must take into account distributions, rollovers and transfers, in accordance with Code Section 416 and the regulations under that Code section.
If the Employer maintains other qualified plans (including a simplified employee pension plan), or maintained another such plan which now is terminated, the Plan is top heavy only if it is part of the Required Aggregation Group, and the top heavy ratio for the Required Aggregation Group and for the Permissive Aggregation Group, if any, each exceeds 60%. The Advisory Committee will calculate the top heavy ratio in the same manner as required by the first paragraph of this Section 1.29, taking into account all plans within the Aggregation Group. To the extent the Advisory Committee must take into account distributions to a Participant, the Advisory Committee must include distributions from a terminated plan which would have been part of the Required Aggregation Group if it were in existence on the Determination Date. The Advisory Committee will calculate the present value of Accrued Benefits under defined benefit plans or simplified employee pension plans included within the group in accordance with the terms of those plans, Code Section 416 and the regulations under that Code section. If a Participant in a defined benefit plan is a Non-Key Employee, the Advisory Committee will determine his Accrued Benefit under the accrual method, if any, which is applicable uniformly to all defined benefit plans maintained by the Employer or, if there is no uniform method, in accordance with the slowest accrual rate permitted under the fractional rule accrual method described in Code Section 411(b)(1)(C). To calculate the present value of benefits from a defined benefit plan, the Advisory Committee will use the actuarial assumptions (interest and mortality only) prescribed by the defined benefit plan(s) to value benefits for top heavy purposes. If an aggregated plan does not have a valuation date coinciding with the Determination Date, the Advisory Committee must value the Accrued Benefits in the aggregated plan as of the most recent valuation date falling within the 12-month period ending on the Determination Date, except as Code Section 416 and applicable Treasury regulations require for the first and second plan year of a defined benefit plan. The Advisory Committee will calculate the top-heavy ratio with reference to the Determination Dates that fall within the same calendar year.
Definitions. For purposes of applying the provisions of this
Section 1.29:
(a) "Key Employee" means, as of any Determination Date, any Employee or former Employee (or Beneficiary of such Employee) who, for the Plan Year that includes the Determination Date: (i) has Compensation in excess of $130,000 (as adjusted under
Code Section 416 (i)(1) for Plan Years beginning after December 31,
2002) and is an officer of the Employer; (ii) is a more than 5% owner
of the Employer; or (iii) is a more than 1% owner of the Employer and
has Compensation of more than $150,000. The constructive ownership
rules of Code Section 318 (or the principles of that section, in the
case of an unincorporated Employer) will apply to determine ownership
in the Employer. The number of officers taken into account under clause
(i) will not exceed the greater of 3 or 10% of the total number (after
application of the Code Section 414(q)(8) exclusions) of Employees, but
no more than 50 officers. The Advisory Committee will make the
determination of who is a Key Employee in accordance with Code
Section 416(i)(1) and the regulations under that Code section.
(b) "Non-Key Employee" is an Employee who does not meet the definition of Key Employee.
(c) "Compensation" means Compensation as determined under
Section 1.07 (relating to the Highly Compensated Employee definition).
(d) "Required Aggregation Group" means: (1) each
qualified plan of the Employer in which at least one Key Employee
participates at any time during the Determination Period; and (2) any
other qualified plan of the Employer which enables a plan described in
clause (1) to meet the requirements of Code Section 401(a)(4) or Code
Section 410.
(e) "Permissive Aggregation Group" is the Required Aggregation Group plus any other qualified plans maintained by the Employer, but only if such group would satisfy in the aggregate the requirements of Code Section 401(a)(4) and Code Section 410. The Advisory Committee will determine the Permissive Aggregation Group.
(f) "Employer" means the Employer that adopts this Plan and any related employers described in Section 1.27.
(g) "Determination Date" for any Plan Year is the last Accounting Date of the preceding Plan Year or, in the case of the first Plan Year of the Plan, the last Accounting Date of that Plan Year. The "Determination Period" is the 1-year period ending on the Determination Date.
1.30 PLAN MAINTAINED BY MORE THAN ONE EMPLOYER. If more than one Employer maintains this Plan, then for purposes of determining Service and Hours of Service, the Advisory Committee will treat all Employers maintaining this Plan as a single employer.
1.31 "Disqualified Person" has the meaning ascribed to that term under Code Section 4975(e)(2).
1.32 "Employer Securities" means voting common stock issued by Kansas City Southern, or by a corporation which is a member of the same controlled group of corporations, which is readily tradable on an established securities market. Noncallable preferred stock of Kansas City Southern shall be treated as Employer Securities if such stock is convertible at any time into voting common stock issued by Kansas City Southern if such conversion is at a conversion price which (as of the date of acquisition by the Plan) is reasonable. Under regulations under Code Section 409(l), preferred stock shall be treated as noncallable if after the call
there will be a reasonable opportunity for a conversion which meets the requirements of the preceding sentence.
1.33 "Exempt Loan" means a loan made to this Plan by a Disqualified Person, or a loan to this Plan which a Disqualified Person guarantees, provided the loan satisfies the requirements of Treas. Reg. Section 54.4975-7(b).
1.34 "Leveraged Employer Securities" means Employer Securities acquired by the Trust with the proceeds of an Exempt Loan and which satisfy the definition of "qualifying employer securities" in Code Section 4975(e)(8) with respect to the Plan to which the Exempt Loan was made.
1.35 "Issuer" means the corporation that issued the Employer Securities.
ARTICLE II.
EMPLOYEE PARTICIPANTS
2.01 ELIGIBILITY. Each Employee (other than an Excluded Employee) becomes a Participant in the Plan on the Plan Entry Date (if employed on that date) coincident with or immediately following the later of his Employment Commencement Date or the date he attains age 18. Each Employee who was a Participant in the Plan on the day before the Effective Date and who continues as an Employee on the Effective Date continues as a Participant in the Plan on the Effective Date. The term "Employment Commencement Date" means the date on which the Employee first performs an Hour of Service for an Employer.
An Employee is an Excluded Employee if he is (a) a nonresident alien who receives no earned income (within the meaning of Code Section 911(d)(2)) from an Employer which constitutes income from sources within the United States (within the meaning of Code Section 861(a)(3)), or (b) a member of a collective bargaining unit, unless the collective bargaining agreement provides otherwise. An Employee is a member of a collective bargaining unit if he is included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such employer or employers. The term "employee representatives" does not include an organization more than one half the members of which are owners, officers or executives of an Employer.
If a Participant has not incurred a Separation from Service but becomes an Excluded Employee, then during the period such a Participant is an Excluded Employee, the Advisory Committee will limit that Participant's sharing in the allocation of Employer contributions and Participant forfeitures, if any, under the Plan by disregarding his Compensation paid by an Employer for services rendered in his capacity as an Excluded Employee. However, during such period of exclusion, the Participant, without regard to employment classification, continues to receive credit for vesting under Article V for each included Year of Service and the Participant's Account continues to share fully in Trust Fund allocations under Section 9.06.
If an Excluded Employee who is not a Participant becomes eligible to participate in the Plan by reason of a change in employment classification, he will participate in the Plan immediately if he would have been a Participant had he not been an Excluded Employee during
his period of Service. Furthermore, the Plan takes into account all of the Participant's included years of Service with an Employer as an Excluded Employee for purposes of vesting credit under Article V.
A Leased Employee who performs services for the Employer pursuant to a
contract or agreement which provides that the person is a Leased Employee will
not become eligible to participate in this Plan merely by reason of a
determination that the person is a common-law employee of the Employer, unless
and until the Employer changes the employment classification of such person. If
a Leased Employee who is not a Participant becomes eligible to participate in
the Plan by reason of a change in employment classification, he will participate
in the Plan immediately if he has satisfied the eligibility conditions of
Section 2.01 and would have been a Participant had he not been a Leased Employee
during his period of Service. Furthermore, the Plan takes into account all of
the Participant's included Years of Service with an Employer as a Leased
Employee for purposes of vesting credit under Article V.
2.02 SERVICE - PARTICIPATION. For purposes of an Employee's participation in the Plan under Section 2.01, the Plan does not apply any minimum Hour of Service requirement. The Plan does not require an Employee who terminates employment to establish a new Employment Commencement Date if reemployed by an Employer.
2.03 BREAK IN SERVICE - PARTICIPATION. For purposes of participation in the Plan, the Plan does not apply any Break in Service rule.
2.04 PARTICIPATION UPON REEMPLOYMENT. A Participant whose
employment terminates reenters the Plan as a Participant on the date of his
reemployment. An Employee who satisfies the Plan's eligibility conditions but
who terminates employment prior to becoming a Participant becomes a Participant
in the Plan on the later of the Plan Entry Date on which he would have entered
the Plan had he not terminated employment or the date of his reemployment. Any
Employee who terminates employment prior to satisfying the Plan's eligibility
conditions becomes a Participant in accordance with the provisions of
Section 2.01.
ARTICLE III.
EMPLOYER CONTRIBUTIONS AND FORFEITURES
3.01 AMOUNT. For each Plan Year, the Employer may contribute to the Trust an amount which the Employer may from time to time deem advisable. The Employer may not make a contribution to the Trust for any Plan Year to the extent the contribution would exceed the Participants' "Maximum Permissible Amounts" under Section 3.04.
The Employer contributes to this Plan on the condition its contribution is not due to a mistake of fact and the Internal Revenue Service will not disallow the deduction for its contribution. The Trustee, upon written request from the Employer, must return to the Employer the amount of the Employer contribution made by the Employer by mistake of fact or the amount of the Employer's contribution disallowed as a deduction under Code Section 404. The Trustee will not return any portion of the Employer's contribution under the provisions of this paragraph more than one year after:
(a) The Employer made the contribution by mistake of fact; or
(b) The disallowance of the contribution as a deduction, and then, only to the extent of the disallowance.
The Trustee will not increase the amount of the Employer contribution returnable under this Section 3.01 for any earnings attributable to the contribution, but the Trustee will decrease the Employer's contribution returnable for any losses attributable to it. The Trustee may require the Employer to furnish it whatever evidence the Trustee deems necessary to enable the Trustee to confirm the amount the Employer has requested be returned is properly returnable under ERISA.
The Employer may make its contribution in cash or in Employer Securities as the Employer from time to time may determine. The Employer may make its contribution of Employer Securities at fair market value determined at the time of contribution.
3.02 CONTRIBUTION ALLOCATION.
(A) Method of Allocation. Subject to Section 3.02(B) and any restoration
allocation required under Section 5.04, the Advisory Committee will allocate and
credit each annual Employer contribution (and Participant forfeitures, if any)
to the Account of each Participant in the Plan who satisfies the conditions of
Section 3.08, in the same ratio that each such Participant's Compensation for
the Plan Year bears to the total Compensation of all such Participants for the
Plan Year.
(B) Top Heavy Minimum Allocation.
(1) Minimum Allocation. If the Plan is top heavy in any Plan Year:
(a) Each Non-Key Employee (as defined in
Section 1.29) who is a Participant in the Plan and is employed
by the Employer on the last day of the Plan Year will receive
a top heavy minimum allocation for that Plan Year,
irrespective of whether he satisfies the Hours of Service
condition under Section 3.08(B); and
(b) The top heavy minimum allocation is the
lesser of 3% of the Non-Key Employee's Compensation for the
Plan Year or the highest contribution rate for the Plan Year
made on behalf of any Key Employee in the Plan (as defined in
Section 1.29). However, if a defined benefit plan maintained
by the Employer which benefits a Key Employee in the Plan
depends on this Plan to satisfy the antidiscrimination rules
of Code Section 401(a)(4) or the coverage rules of Code
Section 410 (or another plan benefiting the Key Employee so
depends on such defined benefit plan), the top heavy minimum
allocation is 3% of the Non-Key Employee's Compensation
regardless of the contribution rate for the Key Employees in
the Plan.
For purposes of clause (b), "Compensation" means Compensation
as defined in Section 1.10. For purposes of this Section 3.02(B), a
Participant's contribution rate is the sum of Employer contributions
(including Employer matching contributions described in Code
Section 401(m) but not including Employer contributions to Social
Security) and forfeitures allocated to the Participant's Account for
the Plan Year under Sections 3.02
and 3.07 divided by his Compensation for the entire Plan Year. However,
a Non-Key Employee's contribution rate does not include any Elective
Contributions under a Code Section 401(k) arrangement maintained by the
Employer. To determine a Participant's contribution rate, the Advisory
Committee must treat all qualified top heavy defined contribution plans
maintained by the Employer (or by any related Employers described in
Section 1.27) as a single plan.
(2) Method of Compliance. The Plan will satisfy the
top-heavy minimum allocation in accordance with this Section
3.02(B)(2). The Advisory Committee first will allocate the Employer
contributions (and Participant forfeitures, if any) for the Plan Year
in accordance with the allocation formula under Section 3.02(A). The
Employer then will contribute an additional amount for the Account of
any Participant in the Plan who is entitled under this Section 3.02(B)
to a top heavy minimum allocation and whose contribution rate for the
Plan Year is less than the top heavy minimum allocation. The additional
amount is the amount necessary to increase the Participant's
contribution rate to the top-heavy minimum allocation. The Advisory
Committee will allocate the additional contribution to the Account of
the Participant on whose behalf the Employer makes the contribution.
3.03 LIMITATIONS ON ALLOCATIONS TO PARTICIPANTS' ACCOUNTS. The amount of Annual Additions which the Advisory Committee may allocate under the Plan on a Participant's behalf for a Limitation Year may not exceed the Maximum Permissible Amount. If the amount the Employer otherwise would contribute to the Participant's Account would cause the Annual Additions for the Limitation Year to exceed the Maximum Permissible Amount, the Employer will reduce the amount of its contribution so the Annual Additions for the Limitation Year will equal the Maximum Permissible Amount. If an allocation of Employer contributions, pursuant to Section 3.02, would result in an Excess Amount (other than an Excess Amount resulting from the circumstances described in Section 3.02(B)) to the Participant's Account, the Advisory Committee will reallocate the Excess Amount to the remaining Participants in the Plan who are eligible for an allocation of Employer contributions for the Plan Year in which the Limitation Year ends. The Advisory Committee will make this reallocation on the basis of the allocation method under the Plan as if the Participant whose Account otherwise would receive the Excess Amount is not eligible for an allocation of Employer contributions.
(A) Estimation of Compensation. Prior to the determination of a Participant's actual Compensation for a Limitation Year, the Advisory Committee may determine the Maximum Permissible Amount on the basis of the Participant's estimated annual Compensation for such Limitation Year. The Advisory Committee must make this determination on a reasonable and uniform basis for all Participants in the Plan similarly situated. The Advisory Committee must reduce any Employer contributions (including any allocation of forfeitures) based on estimated annual Compensation by any Excess Amount carried over from prior years. As soon as is administratively feasible after the end of the Limitation Year, the Advisory Committee will determine the Maximum Permissible Amount for such Limitation Year on the basis of the Participant's actual Compensation for such Limitation Year.
(B) Disposition of Excess Amount. If, pursuant to Section 3.03(A), or because of the allocation of forfeitures, there is an Excess Amount with respect to a Participant in the Plan for a Limitation Year, the Advisory Committee will dispose of such Excess Amount as follows:
(a) The Advisory Committee will return any nondeductible voluntary Employee contributions to the Participant to the extent that the return would reduce the Excess Amount.
(b) If, after the application of paragraph (a), an Excess Amount still exists, and the Plan covers the Participant at the end of the Limitation Year, then the Advisory Committee will use the Excess Amount(s) to reduce future Employer contributions (including any allocation of forfeitures) under the Plan for the next Limitation Year and for each succeeding Limitation Year, as is necessary, for the Participant.
(c) If, after the application of paragraph (a), an Excess Amount still exists, and the Plan does not cover the Participant at the end of the Limitation Year, then the Advisory Committee will hold the Excess Amount unallocated in a suspense account. The Advisory Committee will apply the suspense account to reduce Employer contributions (including allocation of forfeitures) for all remaining Participants in the Plan in the next Limitation Year, and in each succeeding Limitation Year if necessary.
(d) Except as provided in paragraph (a), the Advisory Committee will not distribute any Excess Amount(s) to Participants or to former Participants.
(C) More Than One Plan. If the Advisory Committee allocated an Excess Amount to a Participant's Account on an allocation date of the Plan which coincides with an allocation date of another defined contribution plan maintained by the Employer, the Advisory Committee will attribute the Excess Amount allocated as of such date first to the profit sharing plan component of the Kansas City Southern 401(k) and Profit Sharing Plan. If an Excess Amount remains, it will then be attributed to this Plan and then, if necessary, to the 401(k) plan component of the Kansas City Southern 401(k) and Profit Sharing Plan.
(D) Catch-Up Contributions. Notwithstanding the foregoing, the provisions of this Article III shall be applied in a manner consistent with permitting, if applicable, catch-up contributions to be made to the Kansas City Southern 401(k) and Profit Sharing Plan in accordance with, and subject to the limitations of, Code Section 414(v).
3.04 DEFINITIONS. For purposes of Article III, the following terms mean:
(a) "Annual Addition" - The sum of the following amounts
allocated in the Plan on behalf of a Participant for a Limitation Year:
(i) all Employer contributions; (ii) all forfeitures; and (iii) all
Employee contributions. Except to the extent provided in Treasury
Regulations, Annual Additions include excess contributions described in
Code Section 401(k), excess aggregate contributions described in Code
Section 401(m) and excess deferrals described in Code Section 402(g),
irrespective of whether the plan distributes or forfeits such excess
amounts. Annual Additions also include Excess Amounts reapplied to
reduce Employer contributions under Section 3.03. Amounts allocated
after March 31, 1984, to an individual medical account (as defined in
Code Section 415(l)(2)) included as part of a defined benefit plan
maintained by the Employer are Annual Additions. Furthermore,
Annual Additions include contributions paid or accrued after December
31, 1985, for taxable years ending after December 31, 1985,
attributable to post-retirement medical benefits allocated to the
separate account of a key employee (as defined in Code
Section 419A(d)(3)) under a welfare benefit fund (as defined in Code
Section 419(e)) maintained by the Employer, but only for purposes of
the dollar limitation applicable to the Maximum Permissible Amount.
"Annual Additions" do not include any Employer contributions applied by the Advisory Committee (not later than the due date, including extensions, for filing the Employer's Federal income tax return for that Plan Year) to pay interest on an Exempt Loan, and any Leveraged Employer Securities the Advisory Committee allocates as forfeitures; provided, however, the provisions of this sentence do not apply in a Plan Year for which the Advisory Committee allocates more than one-third (1/3) of the Employer contributions applied to pay principal and interest on an Exempt Loan to Restricted Participants. The Advisory Committee may reallocate the Employer contributions in accordance with Section 3.03 to the Accounts of non-Restricted Participants to the extent necessary in order to satisfy this special limitation. For purposes of this Section 3.04, "Restricted Participants" mean Participants in the Plan who are Highly Compensated Employees within the meaning of Code Section 414(q).
(b) "Compensation" - For purposes of applying the limitations of Section 3.03, "Compensation" means Compensation as defined in Section 1.10, disregarding any exclusions from Compensation and disregarding Elective Contributions with respect to Plan Years commencing before January 1, 1998, but including Elective Contributions for Plan years commencing after December 31, 1997.
(c) "Employer" - The Employer that adopts this Plan and
any related employers described in Section 1.27. Solely for purposes of
applying the limitations of Section 3.03, the Advisory Committee will
determine related employers described in Section 1.27 by modifying Code
Section 414(b) and (c) in accordance with Code Section 415(h).
(d) "Excess Amount" - The excess of the Participant's Annual Additions for the Limitation year over the Maximum Permissible Amount.
(e) "Limitation Year" - The Plan Year. If the Employer amends the Limitation Year to a different 12 consecutive month period, the new Limitation Year must begin on a date within the Limitation Year for which the Employer makes the amendment, creating a short Limitation Year.
(f) "Maximum Permissible Amount" - The lesser of (i)
$40,000 (as adjusted for increases in the cost-of-living under Code
Section 415(d)), or (ii) 100% of the Participant's Compensation for the
Limitation Year. If there is a short Limitation Year because of a
change in Limitation Year, the Advisory Committee will multiply the
$40,000 (or adjusted) limitation by the following fraction:
(g) "Defined contribution plan" - A retirement plan which
provides for an individual account for each participant and for
benefits based solely on the amount contributed to the participant's
account, and any income, expenses, gains and losses, and any
forfeitures of accounts of other participants which the plan may
allocate to such participant's account. The Advisory Committee must
treat all defined contribution plans (whether or not terminated)
maintained by the Employer as a single plan. For purposes of the
limitations of Section 3.03, the Advisory Committee will treat employee
contributions made to a defined benefit plan maintained by the Employer
as a separate defined contribution plan. The Advisory Committee also
will treat as a defined contribution plan an individual medical account
(as defined in Code Section 415(l)(2)) included as part of a defined
benefit plan maintained by the Employer and, for taxable years ending
after December 31, 1985, a welfare benefit fund under Code
Section 419(e) maintained by the Employer to the extent there are
post-retirement medical benefits allocated to the separate account of a
key employee (as defined in Code Section 419A(d)(3)).
(h) "Defined benefit plan" - A retirement plan which does not provide for individual accounts for Employer contributions. The Advisory Committee must treat all defined benefit plans (whether or not terminated) maintained by the Employer as a single plan.
3.05 DETERMINATION OF CONTRIBUTION. The Employer, from its records, determines the amount of any contributions to be made by it to the Trust under the terms of the Plan.
3.06 TIME OF PAYMENT OF CONTRIBUTION. An Employer may pay its contribution for each Plan Year in one or more monthly installments without interest. An Employer must make its contribution to the Trust within the time prescribed by the Code or applicable Treasury regulations.
3.07 FORFEITURE ALLOCATION. The amount of a Participant's Accrued
Benefit forfeited under the Plan is a Participant forfeiture. Subject to any
restoration allocation required under Sections 5.04 or 9.07, the Advisory
Committee will allocate the forfeiture in accordance with Section 3.02, as an
Employer contribution for the Plan Year in which the forfeiture occurs, as if
the Participant forfeiture were an additional Employer contribution for that
Plan Year. The Advisory Committee will continue to hold the undistributed,
non-vested portion of a terminated Participant's Accrued Benefit in his Account
solely for his benefit until a forfeiture occurs at the time specified in
Section 5.09. Except as provided under Section 5.04, a Participant will not
share in the allocation of a forfeiture of any portion of his Accrued Benefit.
In making a forfeiture allocation under this Section 3.07, the Advisory
Committee will base forfeitures of Employer Securities upon the fair market
value of the Employer Securities as of the Accounting Date of the forfeitures.
3.08 ACCRUAL OF BENEFIT. The Advisory Committee will determine the accrual of benefit (Employer contributions and Participant forfeitures) on the basis of the Plan Year.
(A) Compensation Taken Into Account. In allocating an Employer contribution to a Participant's account, the Advisory Committee, except for purposes of determining the top heavy minimum contribution under Section 3.02(B), will take into account only the Compensation determined for the portion of the Plan Year in which the Employee actually is a Participant.
(B) Hours of Service Requirement. Subject to the top heavy minimum allocation requirement of Section 3.02(B), the Advisory Committee will not allocate any portion of an Employer contribution or Participant forfeiture for a Plan Year to any Participant's Account if the Participant does not complete a minimum of 1,000 Hours of Service during the Plan Year, unless the Participant terminates employment during the Plan Year because of death or disability or because of the attainment of Normal Retirement Age in the current Plan Year or in a prior Plan Year.
(C) Employment Requirement. A Participant who, during a particular Plan Year, completes the Hours of Service requirement under this Section 3.08 will share in the allocation of Employer contributions and Participant forfeitures without regard to whether he is employed by an Employer on the last day of that Plan Year.
ARTICLE IV.
PARTICIPANT CONTRIBUTIONS
4.01 PARTICIPANT VOLUNTARY CONTRIBUTIONS. The Plan does not permit or require Participant contributions.
4.02 PARTICIPANT ROLLOVER CONTRIBUTIONS. The Plan does not permit Participant rollover contributions.
ARTICLE V.
TERMINATION OF SERVICE - PARTICIPANT VESTING
5.01 NORMAL RETIREMENT AGE. A Participant's Normal Retirement Age is 65 years of age. A Participant who remains in the employ of an Employer after attaining Normal Retirement Age will continue to participate in Employer contributions. A Participant's Accrued Benefit derived from Employer contributions is 100% Nonforfeitable upon and after his attaining Normal Retirement Age (if employed by an Employer on or after that date).
5.02 PARTICIPANT DISABILITY OR DEATH. If a Participant's employment with an Employer terminates as a result of death or disability, the Participant's Accrued Benefit derived from Employer contributions will be 100% Nonforfeitable.
5.03 VESTING SCHEDULE. Except as provided in Sections 5.01 and 5.02, for each Year of Service, a Participant's Nonforfeitable percentage of his Accrued Benefit derived from Employer contributions equals the percentage in the following vesting schedule:
Percent of Years of Service Nonforfeitable With the Employer Accrued Benefit ----------------- --------------- Less than 5................................ None 5 or more...................................100% |
For any Plan Year in which the Plan is a top heavy Plan (as defined in
Section 1.29) the Advisory Committees will calculate a Participant's
Nonforfeitable percentage of his Accrued Benefit under the following schedule:
Percent of
Year of Service Nonforfeitable
With the Employer Accrued Benefit
----------------- ---------------
Less than 2................................................None
2............................................................20%
3............................................................40%
4............................................................60%
5 or more...................................................100%
|
The Advisory Committee will apply the top-heavy schedule to
Participants who earn at least one Hour of Service after the top-heavy schedule
becomes effective. A shift between vesting schedules under this Section 5.03 is
an amendment to the vesting schedule and the Advisory Committee must apply the
rules of Section 7.04 accordingly. A shift to a new vesting schedule under this
Section 5.03 is effective on the first day of the Plan Year for which the
top-heavy status of the Plan changes.
5.04 CASH-OUT DISTRIBUTION TO PARTIALLY-VESTED PARTICIPANTS/ RESTORATION OF FORFEITED ACCRUED BENEFIT. If, pursuant to Article VI, a partially-vested Participant receives a cash-out distribution from the Plan before he incurs a Forfeiture Break in Service (as defined in Section 5.08), the cash-out distribution will result in a forfeiture of the non-vested portion of the Participant's Accrued Benefit derived from Employer contributions in the Plan as of the last day of the Plan Year in which the cash-out distribution occurs. See Section 5.09. A partially-vested Participant is a Participant whose Nonforfeitable Percentage determined under Section 5.03 is less than 100%. A cash-out distribution is a distribution of the entire present value of the Participant's Nonforfeitable Accrued Benefit.
(A) Restoration and Conditions upon Restoration. A partially vested Participant who is reemployed by an Employer after receiving a cash-out distribution of the Nonforfeitable percentage of his Accrued Benefit may repay the Plan the amount of the cash-out distribution attributable to Employer contributions, unless the Participant no longer has a right to restoration under the requirements of this Section 5.04. If a partially-vested Participant makes the cash-out distribution repayment, the Advisory Committee, subject to the conditions of this paragraph (A), must restore his Accrued Benefit attributable to Employer contributions in the Plan to the same dollar amount as the dollar amount of his Accrued Benefit on the Accounting Date, or other valuation date, immediately preceding the date of the cash-out distribution, unadjusted for any gains or losses occurring subsequent to that Accounting Date, or other valuation date. Restoration of the Participant's Accrued Benefit includes restoration of all Code Section 411(d)(6) protected benefits with respect to that restored Accrued Benefit, in accordance with applicable Treasury regulations. The Advisory Committee will not restore a reemployed Participant's Accrued Benefit under this paragraph if:
(1) 5 years have elapsed since the Participant's first reemployment date following the cash-out distribution; or
(2) The Participant incurred a Forfeiture Break in Service (as defined in Section 5.08). This condition also applies if the Participant makes repayment within the Plan Year in which he incurs the Forfeiture Break in Service and that Forfeiture Break in Service would result in a complete forfeiture of the amount the Advisory Committee otherwise would restore.
(B) Time and Method of Restoration. If neither of the two conditions preventing restoration of the Participant's Accrued Benefit applies, the Advisory Committee will restore the Participant's Accrued Benefit as of the Plan Year Accounting Date coincident with or immediately following the repayment. To restore the Participant's Accrued Benefit, the Advisory Committee, to the extent necessary, will allocate to the Participant's Account:
(1) First, the amount, if any, of Participant
forfeitures the Advisory Committee would otherwise allocate under
Section 3.07;
(2) Second, the amount, if any, of the net income or gain for the Plan for the Plan Year; and
(3) Third, the Employer contribution for the Plan Year to the extent made under a discretionary formula.
To the extent the amounts described in clauses (1), (2) and (3) are
insufficient to enable the Advisory Committee to make any required restoration,
the Employer must contribute, without regard to any requirement or condition of
Section 3.01, the additional amount necessary to enable the Advisory Committee
to make the required restoration. If, for a particular Plan Year, the Advisory
Committee must restore the Accrued Benefit of more than one reemployed
Participant, then the Advisory Committee will make the restoration allocation(s)
to each such Participant's Account in the same proportion that a Participant's
restored amount for the Plan Year bears to the restored amount for the Plan Year
of all reemployed Participants in the Plan. The Advisory Committee will not take
into account the allocation under this Section 5.04 in applying the limitation
on allocations under Section 3.03.
(C) 0% Vested Participant. The deemed cash-out rule applies to a 0% vested Participant. A 0% vested Participant is a Participant whose Accrued Benefit derived from Employer contributions is entirely forfeitable at the time of his Separation from Service. Under the deemed cash-out rule, the Advisory Committee will treat a 0% vested Participant as having received a cash-out distribution on the last day of the Plan Year in which he separates from Service. For purposes of applying the restoration provisions of this Section 5.04, the Applicable Advisory Committee will treat the 0% vested Participant as repaying his cash-out "distribution" on the first date of his reemployment with an Employer.
5.05 [RESERVED].
5.06 YEAR OF SERVICE - VESTING. For purposes of vesting under
Section 5.03, Year of Service means any Plan Year during which an Employee
completes not less than 1,000 Hours of Service, including Plan Years prior to
the Effective Date of the Plan.
5.07 BREAK IN SERVICE - VESTING. For purposes of this Article V, a Participant incurs a "Break in Service" if during any Plan Year he does not complete more than 500 Hours of Service.
5.08 INCLUDED YEARS OF SERVICE - VESTING. For purposes of determining "Years of Service" under Section 5.06, the Plan takes into account all Years of Service an Employee completes with an Employer. For the sole purpose of determining a Participant's Nonforfeitable percentage of his Accrued Benefit derived from Employer contributions which accrued for his benefit prior to a Forfeiture Break in Service, the Plan disregards any Year of Service after the Participant first incurs a Forfeiture Break in Service. The Participant incurs a Forfeiture Break in Service when he incurs 5 consecutive Breaks in Service.
5.09 FORFEITURE OCCURS. A Participant's forfeiture, if any, of his Accrued Benefit derived from Employer contributions occurs under the Plan on the earlier of:
(a) The last day of the Plan Year in which the Participant first incurs a Forfeiture Break in Service; or
(b) The last day of the Plan Year in which the Participant receives a cash-out distribution.
The Advisory Committee determines the percentage of a Participant's forfeiture, if any, under this Section 5.09 solely by reference to the vesting schedule of Section 5.03. A Participant will not forfeit any portion of his Accrued Benefit for any other reason or cause except as expressly provided by this Section 5.09 or as provided under Section 9.07. Employer Securities and Stilwell Shares allocated to the Participant's Account under Section 9.06 or 8.11 of the Plan must be forfeited only after other assets.
ARTICLE VI.
TIME AND METHOD OF PAYMENT OF BENEFITS
6.01 TIME OF PAYMENT OF ACCRUED BENEFIT. Unless, pursuant to
Section 6.03, the Participant or the Beneficiary elects in writing to a
different time or method of payment, the Advisory Committee will direct the
Trustee to commence distribution of a Participant's Nonforfeitable Accrued
Benefit in accordance with this Section 6.01. A Participant must consent, in
writing, to any distribution required under this Section 6.01 if the present
value of the Participant's Nonforfeitable Accrued Benefit, at the time of the
distribution to the Participant, exceeds $5,000 and the Participant has not
attained Normal Retirement Age. For all purposes of this Article VI, the term
"annuity starting date" means the first day of the first period for which the
Plan pays an amount as an annuity or in any other form. Requests for
distributions under this Article VI may be made at such times, on such forms and
in accordance with such procedures as the Advisory Committee may from time to
time prescribe. The distribution of a Participant's Account shall be made or
commenced as soon as administratively practicable following receipt by the
Advisory Committee of a properly completed request for distribution (or, if the
Participant's Nonforfeitable Accrued Benefit does not exceed $5,000, following
the Participant's Separation from Service).
(A) Termination of Employment For a Reason Other Than Death. For a Participant who terminates employment with the Employer for a reason other than death, the Advisory
Committee will direct the Trustee to commence distribution of the Participant's Accrued Benefit, as follows:
(1) Participant's Nonforfeitable Accrued Benefit Not Exceeding $5,000. In a lump sum, as soon as administratively practicable following the Participant's Separation from Service, but in no event later than the 60th day following the close of the Plan Year in which the Participant attains Normal Retirement Age. If the Participant has attained Normal Retirement Age when he separates from Service, the distribution under this paragraph will occur no later than the 60th day following the close of the Plan Year in which the Participant's Separation from Service occurs.
(2) Participant's Nonforfeitable Accrued Benefit Exceeds
$5,000. In a form and at the time elected by the Participant, pursuant
to Section 6.03. Unless the Participant has elected otherwise, the
Advisory Committee will direct the Trustee to distribute the
Participant's Nonforfeitable Accrued Benefit in a lump sum on the 60th
day following the close of the Plan Year in which the latest of the
following events occurs: (a) the Participant attains Normal Retirement
Age; or (b) the Participant's Separation from Service; provided
however, that a Participant's failure to make an election pursuant to
Section 6.03 shall be deemed to be an election to defer commencement of
distribution for purposes of this Section 6.01. Notwithstanding any
other provision herein, or any elections made by the Participant,
benefit payments shall be made or shall commence not later than the
Required Beginning Date.
(B) Required Beginning Date. If any distribution commencement date described under Paragraph (A) of this Section 6.01, either by Plan provision or by Participant election (or non-election), is later than the Participant's Required Beginning Date, the Advisory Committee instead must direct the Trustee to make distribution under this Section 6.01 on the Participant's Required Beginning Date. A Participant's Required Beginning Date is the April 1 of the calendar year following the later of (i) the calendar year in which the Participant attains age 70-1/2 or (ii) the calendar year in which the Participant separates from Service. However, clause (ii) of the preceding sentence shall not apply if the Participant is a 5% owner (as defined in Section 1.07(a)) with respect to the Plan Year ending in the calendar year in which he attains age 70-1/2). Mandatory distributions commencing at the Participant's Required Beginning Date will be made in an amount equal to the Participant's required minimum distribution for the calendar year determined in accordance with Section 6.02(A), unless the Participant, pursuant to the provisions of this Article VI, makes a valid election to receive an alternative form of payment.
(C) Death of the Participant. The Advisory Committee will direct the Trustee, in accordance with this Section 6.01(C), to distribute to the Participant's Beneficiary the Participant's Nonforfeitable Accrued Benefit remaining in the Trust at the time of the Participant's death.
(1) Deceased Participant's Nonforfeitable Accrued Benefit Does Not Exceed $5,000. The Advisory Committee must direct the Trustee to pay the deceased Participant's Nonforfeitable Accrued Benefit in a single lump sum, as soon as administratively practicable following the Participant's death or, if later, the date on which the Advisory Committee receives notification of or otherwise confirms the Participant's death.
(2) Deceased Participant's Nonforfeitable Accrued Benefit Exceeds $5,000. The Advisory Committee will direct the Trustee to pay the deceased Participant's Nonforfeitable Accrued Benefit at the time and in the form elected by the Participant or, if applicable by the Beneficiary, as permitted under this Article VI. In the absence of an election, the Advisory Committee will direct the Trustee to distribute the Participant's undistributed Nonforfeitable Accrued Benefit in a lump sum as soon as administratively practicable following the date on which the Participant's death occurs or, if later, the date on which the Advisory Committee receives notification of or otherwise confirms the Participant's death.
If the death benefit is payable to the Participant's surviving spouse in full, the surviving spouse, in addition to the distribution options provided in this Section 6.01(C), may elect distribution at any time or in any form this Article VI would permit for a Participant.
6.02 METHOD OF PAYMENT OF ACCRUED BENEFIT. Subject to any restrictions prescribed by Section 6.03, a Participant or Beneficiary may elect distribution under one, or any combination, of the following methods: (a) by payment in a lump sum; or (b) by payment in monthly, quarterly or annual installments over a fixed reasonable period of time, not exceeding the life expectancy of the Participant, or the joint life and last survivor expectancy of the Participant and his Beneficiary.
The installment distribution options permitted under this Section 6.02 are available only if the present value of the Participant's Nonforfeitable Accrued Benefit, at the time of the distribution to the Participant, exceeds $5,000. To facilitate installment payments under this Article VI, at the election of the Participant, the Advisory Committee may direct the Trustee to segregate all or any part of the Participant's Accrued Benefit in a separate Account. The Trustee will invest the Participant's segregated Account in Federally insured interest bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. A segregated Account remains a part of the Trust, but it alone shares in any income it earns, and it alone bears any expense or loss it incurs. A Participant or Beneficiary may elect to receive an installment distribution in the form of a Nontransferable Annuity Contract. The Nontransferable Annuity Contract option will be eliminated with respect to distributions commencing on or after the earlier of ninety (90) days after a Participant receives a summary of material modification of the elimination of such option or two (2) years after the date of the adoption of this amendment and restatement of the Plan if such Participant does not receive a summary of material modification. Under an installment distribution, the Participant or Beneficiary, at any time, may elect to accelerate the payment of all, or any portion, of the Participant's unpaid Nonforfeitable Accrued Benefit.
(A) Minimum Distribution Requirements for Participants. The Advisory Committee may not direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit, nor may the Participant elect to have the Trustee distribute his Nonforfeitable Accrued Benefit, under a method of payment which, as of the Required Beginning Date, does not satisfy the minimum distribution requirements under Code Section 401(a)(9) and the applicable Treasury regulations.
The minimum distribution for a calendar year for a Participant in the Plan equals the Participant's Nonforfeitable Accrued Benefit in the Plan as of the latest valuation date preceding the beginning of the calendar year divided by the Participant's life expectancy or, if applicable,
the joint and last survivor expectancy of the Participant and his designated Beneficiary (as determined under Article VIII, subject to the requirements of the Code Section 401(a)(9) regulations). The Advisory Committee will increase the Participant's Nonforfeitable Accrued Benefit in the Plan, as determined on the relevant valuation date, for contributions or forfeitures allocated after the valuation date and by December 31 of the valuation calendar year, and will decrease the valuation by distributions made after the valuation date and by December 31 of the valuation calendar year. For purposes of this valuation, the Advisory Committee will treat any portion of the minimum distribution for the first distribution calendar year made after the close of that year as a distribution occurring in that first distribution calendar year. In computing a minimum distribution, the Advisory Committee must use the unisex life expectancy multiples under Treas. Reg. Section 1.72-9. The Advisory Committee, only upon the Participant's written request, will compute the minimum distribution for a calendar year subsequent to the first calendar year for which the Plan requires a minimum distribution by redetermining the applicable life expectancy. However, the Advisory Committee may not redetermine the joint life and last survivor expectancy of the Participant and a non-spouse designated Beneficiary in a manner which takes into account any adjustment to a life expectancy other than the Participant's life expectancy.
If the Participant's spouse is not his designated Beneficiary, a method of payment to the Participant may not provide more than incidental benefits to the Beneficiary. For Plan Years beginning after December 31, 1988, the Plan must satisfy the minimum distribution incidental benefit ("MDIB") requirement in the Treasury regulations issued under Code Section 401(a)(9) for distributions made on or after the Participant's Required Beginning Date and before the Participant's death. To satisfy the MDIB requirement, the Advisory Committee will compute the minimum distribution required by this Section 6.02(A) by substituting the applicable MDIB divisor for the applicable life expectancy factor, if the MDIB divisor is a lesser number. Following the Participant's death, the Advisory Committee will compute the minimum distribution required by this Section 6.02(A) solely on the basis of the applicable life expectancy factor and will disregard the MDIB factor. For Plan Years beginning prior to January 1, 1989, the Plan satisfies the incidental benefits requirement if the distributions to the Participant satisfied the MDIB requirement or if the present value of the retirement benefits payable solely to the Participant is greater than 50% of the present value of the total benefits payable to the Participant and his Beneficiaries. The Advisory Committee must determine whether benefits to the Beneficiary are incidental as of the date the Trustee is to commence payment of the retirement benefits to the Participant, or as of any date the Trustee redetermines the payment period to the Participant.
The minimum distribution for the first distribution calendar year is due by the Participant's Required Beginning Date. The minimum distribution for each subsequent distribution calendar year, including the calendar year in which the Participant's Required Beginning Date falls, is due by December 31 of that year. If the Participant receives distribution in the form of a Nontransferable Annuity Contract, the distribution satisfies this Section 6.02(A) if the contract complies with the requirements of Code Section 401(a)(9) and the applicable Treasury regulations.
(B) Minimum Distribution Requirements for Beneficiaries. The method of distribution to the Participant's Beneficiary must satisfy Code Section 401(a)(9) and the applicable Treasury regulations. If the Participant's death occurs after his Required Beginning Date, the method of payment to the Beneficiary must provide for completion of payment over a period which does
not exceed the payment period which had commenced for the Participant. If the Participant's death occurs prior to his Required Beginning Date, the method of payment to the Beneficiary, must provide for completion of payment to the Beneficiary over a period not exceeding: (i) 5 years after the date of the Participant's death; or (ii) if the Beneficiary is a designated Beneficiary, the designated Beneficiary's life expectancy.
The Advisory Committee may not direct payment of a Participant's
Nonforfeitable Accrued Benefit in the Plan over a period described in clause
(ii) above unless the Trustee will commence payment to the designated
Beneficiary no later than the December 31 following the close of the calendar
year in which the Participant's death occurred or, if later, and the designated
Beneficiary is the Participant's surviving spouse, December 31 of the calendar
year in which the Participant would have attained age 70-1/2. If the Trustee
will make distribution in accordance with clause (ii), the minimum distribution
for a calendar year equals the Participant's Nonforfeitable Accrued Benefit in
the Plan as of the latest valuation date preceding the beginning of the calendar
year divided by the designated Beneficiary's life expectancy.
The Advisory Committee must use the unisex life expectancy multiples under Treas. Reg. Section 1.72-9 for purposes of applying this Section 6.02(B). The Advisory Committee, only upon the written request of the Participant or of the Participant's surviving spouse, will recalculate the life expectancy of the Participant's surviving spouse not more frequently than annually, but may not recalculate the life expectancy of a non-spouse designated Beneficiary after the Trustee commences payment to the designated Beneficiary. The Advisory Committee will apply this Section 6.02(B) by treating any amount paid to the Participant's child, which becomes payable to the Participant's surviving spouse upon the child's attaining the age of majority, as paid to the Participant's surviving spouse. Upon the Beneficiary's written request, the Advisory Committee must direct the Trustee to accelerate payment of all, or any portion, of the Participant's unpaid Accrued Benefit, as soon as administratively practicable following the effective date of that request.
6.03 BENEFIT PAYMENT ELECTIONS. Not earlier than ninety (90) days before nor later than thirty (30) days before the Participant's annuity starting date, the Plan Administrator must provide a benefit notice to a Participant who is eligible to make an election under this Section 6.03. The benefit notice must explain the optional forms of benefit in the Plan, including the material features and relative values of those options, and the Participant's right to defer distribution until he attains Normal Retirement Age.
A distribution may commence less than 30 days after the benefit notice is given, provided that:
(1) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and
(2) the Participant, after receiving the notice, affirmatively elects a distribution.
If a Participant or Beneficiary makes an election prescribed by this
Section 6.03, the Advisory Committee will direct the Trustee to distribute the
Participant's Nonforfeitable
Accrued Benefit in accordance with that election. Any election under this
Section 6.03 is subject to the requirements of Section 6.02. The Participant or
Beneficiary must make an election under this Section 6.03 by filing his election
form with the Advisory Committee at any time before the Trustee otherwise would
commence to pay a Participant's Accrued Benefit in accordance with the
requirements of Article VI.
(A) Participant Elections After Termination of Employment. If the present value of a Participant's Nonforfeitable Accrued Benefit exceeds $5,000, he may elect to have the Trustee commence distribution as soon as administratively practicable following the Participant's Separation from Service. The Participant may reconsider an election at any time prior to the annuity starting date and elect to commence distribution as of any other distribution date, but not earlier than the date described in the first sentence of this Section 6.03(A). If the Participant is partially vested in his Accrued Benefit, an election under this Section 6.03(A) to distribute prior to the Participant's incurring a Forfeiture Break in Service (as defined in Section 5.08), must be in the form of a cash-out distribution (as defined in Article V). A Participant may not receive a cash-out distribution if, prior to the time the Trustee actually makes the cash-out distribution, the Participant returns to employment with an Employer.
(B) Participant Elections Prior to Termination of Employment. During his employment with an Employer, the Participant does not have any right to commence distribution of his Nonforfeitable Accrued Benefit for any reason, unless required by Section 6.01(B).
(C) Death Benefit Elections. If the present value of the deceased
Participant's Nonforfeitable Accrued Benefit exceeds $5,000, the Participant's
Beneficiary may elect to have the Trustee distribute the Participant's
Nonforfeitable Accrued Benefit in a form and within a period permitted under
Section 6.02. The Beneficiary's election is subject to any restrictions
designated in writing by the Participant and not revoked as of his date of
death.
6.04 ANNUITY DISTRIBUTIONS TO PARTICIPANTS. The joint and survivor annuity requirements of the Code do not apply to this Plan. The Plan does not provide any annuity distributions to Participants. A transfer agreement described in Section 13.05 may not permit a plan which is subject to the provisions of Code Section 417 to transfer assets to this Plan.
6.05 SPECIAL DISTRIBUTION AND PAYMENT REQUIREMENTS. If the Participant elects (unless other distribution provisions of the Plan require earlier distribution of the Participant's Accrued Benefit), the Trustee must distribute the portion of the Participant's vested Accrued Benefit attributable to Employer Securities (the "Eligible Portion") no later than the time prescribed by this Section 6.05, irrespective of any other provision of the Plan. The distribution provisions of this Section 6.05 are subject to the consent and form of distribution requirements of Articles V and VI of the Plan.
(a) If the Participant separates from Service by reason of the attainment of Normal Retirement Age, death, or disability, the Advisory Committee will direct the Trustee to commence distribution of the Eligible Portion not later than one year after the close of the Plan Year in which that event occurs.
(b) If the Participant separates from Service for any reason other than by reason of the attainment of Normal Retirement Age, death or disability, the Advisory Committee will direct the Trustee to commence distribution of the Eligible Portion not
later than one year after the close of the fifth Plan Year following the Plan Year in which the Participant separates from Service. If the Participant resumes employment with an Employer on or before the last day of the fifth Plan Year following the Plan Year of his Separation from Service, the distribution provisions of this paragraph (b) do not apply.
For purposes of this Section 6.05, Employer Securities do not include any Employer Securities acquired with the proceeds of an Exempt Loan until the close of the Plan Year in which the borrower repays the Exempt Loan in full.
Notwithstanding anything else in this Plan, unless the Participant otherwise elects, the distribution of the Participant's Accrued Benefit will be in substantially equal periodic payments (not less frequently than annually) over a period not longer than the greater of:
(c) Five years, or
(d) In the case of a Participant with an Accrued Benefit in excess of Five Hundred Thousand Dollars ($500,000) (or beginning January 1, 1990, such larger amount as the Commissioner of Internal Revenue shall prescribe), five (5) years plus one (1) additional year (not more than five (5) additional years) for each One Hundred Thousand Dollars ($100,000) (or beginning January 1, 1990, such larger amount as the Commissioner of Internal Revenue shall prescribe) or fraction thereof by which such balance exceeds $500,000.
The foregoing provisions of this paragraph shall not be construed so as to preclude the distribution of a Participant's Accrued Benefit in the form of a single lump-sum payment.
6.06 [Reserved]
6.07 DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS. Nothing contained in this Plan prevents the Trustee, in accordance with the direction of the Advisory Committee, from complying with the provisions of a qualified domestic relations order (as defined in Code Section 414(p)). This Plan specifically permits distribution to an alternate payee under a qualified domestic relations order as soon administratively practicable, irrespective of whether the Participant has attained his earliest retirement age (as defined under Code Section 414(p)) under the Plan. A distribution to an alternate payee prior to the Participant's attainment of earliest retirement age is available only if: (1) the order specifies distribution at that time or permits an agreement between the Plan and the alternate payee to authorize an earlier distribution; and (2) if the present value of the alternate payee's benefits under the Plan exceeds $5,000, and the order requires, the alternate payee consents to any distribution occurring prior to the Participant's attainment of earliest retirement age. Nothing in this Section 6.07 permits a Participant a right to receive distribution at a time otherwise not permitted under the Plan nor does it permit the alternate payee to receive a form of payment not permitted under the Plan.
The Plan Administrator must establish reasonable procedures to determine the qualified status of a domestic relations order. Upon receiving a domestic relations order, the Plan Administrator promptly will notify the Participant and any alternate payee named in the order, in writing, of the receipt of the order and the Plan's procedures for determining the qualified status of the order. Within a reasonable period of time after receiving the domestic relations order, the Plan Administrator must determine the qualified status of the order and must notify the
Participant and each alternate payee, in writing, of its determination. The Plan Administrator must provide notice under this paragraph by mailing to the individual's address specified in the domestic relations order, or in a manner consistent with Department of Labor regulations.
If any portion of the Participant's Nonforfeitable Accrued Benefit is payable during the period the Plan Administrator is making its determination of the qualified status of the domestic relations order, the Advisory Committee must make a separate accounting of the amounts payable. If the Plan Administrator determines the order is a qualified domestic relations order within 18 months of the date amounts first are payable following receipt of the order, the Advisory Committee will direct the Trustee to distribute the payable amounts in accordance with the order. If the Plan Administrator does not make its determination of the qualified status of the order within the 18-month determination period, the Advisory Committee will direct the Trustee to distribute the payable amounts in the manner the Plan would distribute if the order did not exist and will apply the order prospectively if the Plan Administrator later determines the order is a qualified domestic relations order.
To the extent it is not inconsistent with the provisions of the qualified domestic relations order, at the election of the alternate payee(s), the Advisory Committee may direct the Trustee to invest any partitioned amount in a segregated subaccount or separate account and to invest the account in Federally insured, interest-bearing savings account(s) or time deposit(s) (or a combination of both), or in other fixed income investments. A segregated subaccount remains a part of the Trust, but it alone shares in any income it earns, and it alone bears any expense or loss it incurs. The Trustee will make any payments or distributions required under this Section 6.07 by separate benefit checks or other separate distribution to the alternate payee(s).
6.08 ROLLOVER DISTRIBUTIONS. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section 6.08, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. For purposes of this Section 6.08, the following definitions shall apply.
(a) Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; and any distribution to the extent such distribution is required under Code Section 401(a)(9).
(b) Eligible retirement plan: An eligible retirement plan
is an individual retirement account described in Code Section 408(a),
an individual retirement annuity described in Code Section 408(b), an
annuity plan described in Code Section 403(a), an annuity contract
described in Code Section 403(b), an eligible plan under Code
Section 457(b) which is maintained by a state, political subdivison of
a state, or any agency or instrumentality of a state or political
subdivision of a state, or a qualified trust described in Code
Section 401(a), that accepts and agrees to separately account for the
distributee's eligible rollover distribution.
(c) Distributee: A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse.
(d) Direct rollover: A direct rollover is a payment by the Plan to an eligible retirement plan specified by the distributee.
ARTICLE VII.
EMPLOYER ADMINISTRATIVE PROVISIONS
7.01 INFORMATION TO COMMITTEE. The Employer must supply current information to the Advisory Committee as to the name, date of birth, date of employment, annual compensation, leaves of absence, Years of Service and date of termination of employment of each Employee who is, or who will be eligible to become, a Participant under the Plan, together with any other information which the Advisory Committee considers necessary. The Employer's records as to the current information the Employer furnishes to the Advisory Committee are conclusive as to all persons.
7.02 NO LIABILITY. No Employer assumes any obligation or responsibility to any of its Employees, Participants or Beneficiaries for any act of, or failure to act, on the part of the Advisory Committee (unless the Employer is the Advisory Committee), the Trustee or the Plan Administrator (unless the Employer is the Plan Administrator).
7.03 INDEMNITY OF COMMITTEE. The Employer indemnifies and saves harmless the Plan Administrator and the members of the Advisory Committee, and each of them, from and against any and all loss resulting from liability to which the Plan Administrator and the Advisory Committee, or the members of the Advisory Committee, may be subjected by reason of any act or conduct (except willful misconduct or gross negligence) in their official capacities in the administration of this Trust or Plan or both, including all expenses reasonably incurred in their defense, in case the Employer fails to provide such defense. The indemnification provisions of this Section 7.03 do not relieve the Plan Administrator or any member of the Advisory Committee from any liability he may have under ERISA for breach of a fiduciary duty. Furthermore, the Plan Administrator and the members of the Advisory Committee and the Employer may execute a letter agreement further delineating the indemnification agreement of this paragraph, provided the agreement must be consistent with and must not violate ERISA. The indemnification provisions of this paragraph extend to the Trustee solely to the extent provided by a letter agreement executed by the Trustee and the Employer.
7.04 AMENDMENT TO VESTING SCHEDULE. Though the Employer reserves the right to amend the vesting schedule of the Plan at any time, the Advisory Committee will not apply the amended vesting schedule to reduce the Nonforfeitable percentage of any Participant's Accrued Benefit derived from Employer contributions (determined as of the later of the date the amendment is adopted, or the date the amendment becomes effective) to a percentage less than the Nonforfeitable percentage computed under the Plan prior to the amendment.
If an Employer makes a permissible amendment to the vesting schedule, each Participant having at least 3 Years of Service with an Employer may elect to have the percentage of his
Nonforfeitable Accrued Benefit computed under the Plan without regard to the amendment. The Participant must file his election with the Plan Administrator within sixty (60) days of the latest of (a) the adoption of the amendment; (b) the effective date of the amendment; or (c) his receipt of a copy of the amendment. The Plan Administrator, as soon as practicable, must forward a true copy of any amendment to the vesting schedule to each affected Participant, together with an explanation of the effect of the amendment, the appropriate form upon which the Participant may make an election to remain under the vesting schedule provided under the Plan prior to the amendment and notice of the time within which the Participant must make an election to remain under the prior vesting schedule. For purposes of this Section 7.04, an amendment to the vesting schedule includes any Plan amendment which directly or indirectly affects the computation of the Nonforfeitable percentage of an Employee's rights to his Employer derived Accrued Benefit.
ARTICLE VIII.
PARTICIPANT ADMINISTRATIVE PROVISIONS
8.01 BENEFICIARY DESIGNATION. Any Participant may from time to time designate, in writing, any person or persons, contingently or successively, to whom the Trustee will pay his Accrued Benefit in the event of his death and the Participant may designate the form and method of payment. The Advisory Committee will prescribe the form for the written designation of Beneficiary and, upon the Participant's filing the form with the Advisory Committee, the form effectively revokes all designations filed prior to that date by the same Participant.
A married Participant's Beneficiary designation is not valid unless the Participant's spouse consents, in writing, to the Beneficiary designation. The spouse's consent must acknowledge the effect of that consent and a notary public or the Plan Administrator (or his representative) must witness that consent. The spousal consent requirements of this paragraph do not apply if: (1) the Participant and his spouse are not married throughout the one-year period ending on the date of the Participant's death; (2) the Participant's spouse is the Participant's sole primary beneficiary; (3) the Participant's spouse cannot be located; (4) the Participant is legally separated or has been abandoned (within the meaning of State law) and the Participant has a court order to that effect; or (5) other circumstances exist under which the Secretary of the Treasury will excuse the consent requirement. If the Participant's spouse is legally incompetent to give consent, the spouse's legal guardian (even if the guardian is the Participant) may give consent.
8.02 NO BENEFICIARY DESIGNATION. If a Participant fails to name a Beneficiary in accordance with Section 8.01, or if the Beneficiary named by a Participant predeceases him, then the Trustee will pay the Participant's Accrued Benefit in accordance with Section 6.02 in the following order of priority to:
(a) The Participant's surviving spouse;
(b) The Participant's surviving children, including adopted children, in equal shares;
(c) The Participant's surviving parents, in equal shares; or
(d) The legal representative of the estate of the Participant.
If the Beneficiary does not predecease the Participant, but dies prior to the distribution of the Participant's entire Nonforfeitable Accrued Benefit, the Trustee will pay the remaining Nonforfeitable Accrued Benefit to the Beneficiary's estate unless the Participant's Beneficiary designation provides otherwise. The Advisory Committee will direct the Trustee as to the method and to whom the Trustee will make payment under this Section 8.02.
8.03 PERSONAL DATA TO COMMITTEE. Each Participant (and each Beneficiary of a deceased Participant) must furnish to the Advisory Committee such evidence, data or information as the Advisory Committee considers necessary or desirable for the purpose of administering the Plan. The provisions of this Plan are effective for the benefit of each Participant upon the condition precedent that each Participant will furnish promptly full, true and complete evidence, data and information when requested by the Advisory Committee, provided the Advisory Committee advises each Participant of the effect of his failure to comply with its request.
8.04 ADDRESS FOR NOTIFICATION. Each Participant (and each Beneficiary of a deceased Participant) must file with the Advisory Committee from time to time, in writing, his post office address and any change of post office address. Any communication, statement or notice addressed to a Participant, or Beneficiary, at his last post office address filed with the Advisory Committee, or as shown on the records of an Employer, binds the Participant, or Beneficiary, for all purposes of this Plan.
8.05 ASSIGNMENT OR ALIENATION. Subject to Code Section 414(p) relating to qualified domestic relations orders, neither a Participant nor a Beneficiary may anticipate, assign or alienate (either at law or in equity) any benefit provided under the Plan, and the Trustee will not recognize any such anticipation, assignment or alienation. Furthermore, a benefit under the Plan is not subject to attachment, garnishment, levy, execution or other legal or equitable process.
8.06 NOTICE OF CHANGE IN TERMS. The Plan Administrator, within the time prescribed by ERISA and the applicable regulations, must furnish all Participants and Beneficiaries in the Plan a summary description of any material amendment to, or notice of discontinuance of, the Plan and all other information required by ERISA to be furnished without charge.
8.07 LITIGATION AGAINST THE TRUST. A court of competent jurisdiction may authorize any appropriate equitable relief to redress violations of ERISA or to enforce any provisions of ERISA or the terms of the Plan. A fiduciary may receive reimbursement of expenses properly and actually incurred in the performance of his duties with the Plan.
8.08 INFORMATION AVAILABLE. Any Participant in the Plan or any
Beneficiary may examine copies of the Plan description, latest annual report,
any bargaining agreement, this Plan and Trust, contract or any other instrument
under which the Plan was established or is operated. The Plan Administrator will
maintain all of the items listed in this Section 8.08 in his office, or in such
other place or places as he may designate from time to time in order to comply
with the regulations issued under ERISA, for examination during reasonable
business hours. Upon the written request of a Participant or Beneficiary the
Plan Administrator will furnish him with a copy of any item listed in this
Section 8.08. The Plan Administrator may make a reasonable charge to the
requesting person for the copy so furnished.
8.09 APPEAL PROCEDURE FOR DENIAL OF BENEFITS. The Plan Administrator will provide adequate notice in writing to any Participant or to any Beneficiary ("Claimant") whose claim for benefits under the Plan the Advisory Committee has denied. The Plan Administrator's notice to the Claimant must set forth:
(a) The specific reason for the denial;
(b) Specific references to pertinent Plan provisions on which the Advisory Committee based its denial;
(c) A description of any additional material and information needed for the Claimant to perfect his claim and an explanation of why the material or information is needed; and
(d) That any appeal the Claimant wishes to make of the adverse determination must be in writing to the Advisory Committee within 75 days after receipt of the Plan Administrator's notice of denial of benefits. The Plan Administrator's notice must further advise the Claimant that his failure to appeal the action to the Advisory Committee in writing within the 75-day period will render the Advisory Committee's determination final, binding and conclusive.
If the Claimant should appeal to the Advisory Committee, he, or his duly authorized representative, may submit, in writing, whatever issues and comments he, or his duly authorized representative, feels are pertinent. The Claimant, or his duly authorized representative, may review pertinent plan documents. The Advisory Committee will reexamine all facts related to the appeal and make a final determination as to whether the denial of benefits is justified under the circumstances. The Advisory Committee must advise the Claimant of its decision within sixty (60) days of the Claimant's written request for review, unless special circumstances (such as a hearing) would make the rendering of a decision within the sixty (60) day limit unfeasible, but in no event may the Advisory Committee render a decision respecting a denial for a claim for benefits later than 120 days after its receipt of a request for review.
The Plan Administrator's notice of denial of benefits must identify the name of each member of the Advisory Committee and the name and address of the Advisory Committee member to whom the Claimant may forward his appeal.
8.10 ESOP DIVERSIFICATION. Except as provided in this Section 8.10
and in Section 8.11, a Participant does not have the right to direct the Trustee
with respect to the investment or reinvestment of the assets comprising the
Participant's individual Account. Each Qualified Participant may direct the
Trustee as to the investment of 25% of the value of the Participant's Accrued
Benefit attributable to Employer Securities (the "Eligible Accrued Benefit"),
within 90 days after the Accounting Date of each Plan Year (to the extent a
direction amount exceeds the amount to which a prior direction under this
Section 8.10 applies) during the Participant's Qualified Election Period. For
the last Plan Year in the Participant's Qualified Election Period, the Trustee
will substitute "50%" for "25%" in the immediately preceding sentence. The
Qualified Participant must make his direction to the Trustee in writing at such
time and in such manner as the Advisory Committee shall prescribe, the direction
may be effective no later than 180 days after the close of the Plan Year to
which the direction applies, and the direction must either (i) request
distribution of the portion of the Qualified Participant's
Eligible Accrued Benefit covered by the election or (ii) if the Advisory Committee has designated Investment Funds to be available under the Plan, specify the Investment Fund or Funds from among those designated by the Advisory Committee as available under the Plan. The Trustee will make a distribution requested under this Section 8.10 within 90 days after the last day of the period during which the Qualified Participant may make the election.
For purpose of this Section 8.10, the following definitions apply:
(1) "Qualified Participant" means a Participant who has attained age 55 and who has completed at least 10 years of participation in the Plan. A "year of participation" means a Plan Year in which the Participant was eligible for an allocation of Employer contributions, irrespective of whether the Employer actually contributed to the Plan for that Plan Year.
(2) "Qualified Election Period" means the six (6) Plan Year period beginning with the Plan Year in which the Participant first becomes a Qualified Participant.
A Participant's right under this Section 8.10 to direct the investment of his Account applies solely to Employer Securities acquired by the Plan after December 31, 1986.
8.11 STILWELL SHARES AND INVESTMENT FUNDS.
(A) Stilwell Shares Received In Spinoff. All of the Stilwell Shares that are received in the Spinoff as a dividend with respect to KCS Shares allocated to Participants' Accounts shall, as soon as possible following the Spinoff Date as is consistent with prudent investment standards as determined by the Trustee, be sold and the sale proceeds reinvested in the Investment Fund designated by the Advisory Committee for this purpose; provided, however, that, at such time, in such manner and subject to such restrictions regarding minimum share dispositions or holdings as the Advisory Committee shall prescribe, a Participant may elect to have all or any portion of the Stilwell Shares that are received in the Spinoff as a dividend with respect to KCS Shares allocated to such Participant's Account (1) continued to be held in such Account as whole (but no fractional) Stilwell Shares, (2) sold (or exchanged for KCS Shares) and the sale proceeds reinvested in KCS Shares, (3) sold and the sale proceeds reinvested in one or more Investment Funds, or (4) any combination of the foregoing.
(B) On-Going Participant Investment Direction. Following the Spinoff, each Participant whose Account includes Stilwell Shares or interests in one or more Investment Funds may elect, at such times, in such manner and subject to such restrictions regarding minimum share dispositions or holdings as the Advisory Committee shall prescribe, (1) to have all or any portion of such whole Stilwell Shares sold and the sale proceeds reinvested in (i) KCS Shares, (ii) one or more Investment Funds, or (iii) any combination thereof, and (2) to have all or any portion of such Investment Fund interests sold and the sale proceeds reinvested in (i) KCS Shares, (ii) one or more Investment Funds or (iii) any combination thereof.
(C) Stilwell Dividends. Cash dividends received by the Plan with respect to Stilwell Shares held in a Participant's Account shall be invested in KCS Shares or in one or more Investment Funds, as elected by the Participant. In the absence of a Participant election, such dividends shall be invested in KCS Shares.
(D) Forfeiture of Stilwell Shares. If Stilwell Shares held in a Participant's Account are forfeited pursuant to Section 5.09 or 9.07, immediately prior to the occurrence of such forfeiture such Stilwell Shares shall be sold, the sale proceeds shall be reinvested in KCS Shares and such KCS Shares shall be allocated in accordance with Section 3.07.
(E) KCS Shares. Such portion of a Participant's Account that is invested in
KCS Shares, whether as a result of such Participant's election pursuant to
Section 8.11(A) or (B), the reinvestment of Stilwell dividends pursuant to
Section 8.11(C) or the allocation of forfeitures pursuant to Section 8.11(D),
shall remain invested in KCS Shares and shall not be subject to investment
direction by the Participant except to the extent permitted by, and in
accordance with the provisions of, Section 8.10.
(F) Investment Funds and Participant Investment Elections. The Advisory Committee may designate the Investment Funds to be available for investment under Section 8.10 or 8.11. The Advisory Committee may from time to time designate additional Investment Funds, terminate the availability of any Investment Fund or modify the investment characteristics of any Investment Fund as it deems appropriate in its sole discretion. The Advisory Committee shall prescribe the times and the manner in which Participant investment elections may be made pursuant to Section 8.10 or 8.11. The Advisory Committee may prescribe such limitations and restrictions on the number, timing and frequency of investment elections and such other rules and procedures as it may deem appropriate in its sole discretion.
ARTICLE IX.
ADVISORY COMMITTEE -- DUTIES WITH RESPECT TO
PARTICIPANTS' ACCOUNTS
9.01 MEMBERS' COMPENSATION, EXPENSES. Kansas City Southern must appoint an Advisory Committee to administer the Plan, the members of which may or may not be Participants in the Plan, or which may be the Plan Administrator acting alone. The members of the Advisory Committee will serve without compensation for services as such. All expenses of the Plan and Trust (including Trustee fees) will be paid out of the assets of the Plan except to the extent paid by the Employer
9.02 GENERAL. The Advisory Committee, in its sole and absolute discretion, shall have all powers necessary to discharge its duties under this Plan including, without limitation, the following:
(a) To select a Secretary, who need not be a member of the Advisory Committee;
(b) To determine the rights of eligibility of an Employee to participate in the Plan, the value of a Participant's Accrued Benefit in the Plan and the Nonforfeitable percentage of each Participant's Accrued Benefit in the Plan;
(c) To adopt rules of procedure and regulations necessary for the proper and efficient administration of the Plan provided the rules are not inconsistent with the terms of this Plan;
(d) To construe, interpret and enforce the terms of the Plan (including making factual determinations) and the rules and regulations it adopts, including interpretation of the Plan documents and documents related to the Plan's operation, and its decisions shall be final and binding on all interested persons;
(e) To direct the Trustee as respects the crediting and distribution of the Trust;
(f) To review and render decisions respecting a claim for (or denial of a claim for) a benefit under the Plan;
(g) To furnish the Employer with information which the Employer may require for tax or other purposes;
(h) To engage the service of agents whom it may deem advisable to assist it with the performance of its duties; and
(i) To engage the services of an Investment Manager or Managers (as defined in ERISA Section 3(38)), each of whom will have full power and authority to manage, acquire or dispose (or direct the Trustee with respect to acquisition or disposition) of any asset in the Plan under its control.
The Advisory Committee must exercise all of its powers, duties and discretion under the Plan in a uniform and nondiscriminatory manner.
9.03 FUNDING POLICY. The Advisory Committee will review, not less often than annually, all pertinent Employee information and Plan data in order to establish the funding policy of the Plan and to determine the appropriate methods of carrying out the Plan's objectives. The Advisory Committee must communicate periodically, as it deems appropriate, to the Trustee and to any Plan Investment Manager the Plan's short-term and long-term financial needs so investment policy can be coordinated with Plan financial requirements.
9.04 INDIVIDUAL ACCOUNTS. The Trustee shall maintain a separate Account, or multiple separate Accounts, in the name of each Participant in the Plan to reflect the Participant's Accrued Benefit under the Plan. The Trustee must maintain one Account designated as the Employer Securities Account to reflect a Participant's interest in Employer Securities held by the Plan, and another Account designated as the General Investments Account to reflect the Participant's interest in the Plan attributable to assets other than Employer Securities. If a Participant reenters the Plan subsequent to his having a Forfeiture Break in Service (as defined in Section 5.08), the Trustee must maintain separate Accounts for the Participant's pre-Forfeiture Break in Service Accrued Benefit and separate Accounts for his post-Forfeiture Break in Service Accrued Benefit unless the Participant's entire Accrued Benefit under the Plan is 100% Nonforfeitable.
The Trustee shall make its allocations to the Accounts of the Participants in the Plan in accordance with the provisions of Section 9.06. The Trustee may and if directed by the Advisory Committee shall maintain a temporary segregated investment Account in the name of a Participant to prevent a distortion of income, gain or loss allocations under Section 9.06. The Trustee shall maintain records of its activities.
9.05 VALUE OF PARTICIPANT'S ACCRUED BENEFIT. The value of each Participant's Accrued Benefit consists of that portion of the net worth (at fair market value) of the Plan which the net credit balance in his Accounts bears to the total net credit balance in the Accounts of all Participants in the Plan. For purposes of a distribution under the Plan, the value of a Participant's Accrued Benefit is its value as of the valuation date immediately preceding the date of the distribution. A Participant's Accrued Benefit shall not include or be deemed to include, any Employer Security held in a suspense account, as provided in Section 10.03(B).
9.06 ALLOCATIONS TO PARTICIPANTS' ACCOUNTS. A "valuation date" under this Plan is each Accounting Date and each interim valuation date designated by the Advisory Committee which is a business day on which the New York Stock Exchange is open for business. As of each valuation date the Trustee must adjust Accounts to reflect net income, gain or loss since the last valuation date. The valuation period is the period beginning the day after the last valuation date and ending on the current valuation date.
(A) Employer Securities Account. As of the Accounting Date of each Plan Year, the Trustee first will reduce Employer Securities Accounts in the Plan for any forfeitures arising under Section 5.09 and then will credit the Employer Securities Account maintained for each Participant in the Plan with the Participant's allocable share of Employer Securities (including fractional shares) purchased and paid for by the Trust or contributed in kind to the Trust, with any forfeitures of Employer Securities and with any stock dividends on Employer Securities allocated to his Employer Securities Account. The Trustee will allocate Employer Securities acquired with an Exempt Loan under Section 10.03(B) in accordance with that Section. Except as otherwise specifically provided in Section 10.03(B), the Trustee will base allocations to the Participants' Accounts on dollar values expressed as shares of Employer Securities or on the basis of actual shares where there is a single class of Employer Securities. In making a forfeiture reduction under this Section 9.06(A), the Trustee, to the extent possible, first must forfeit from a Participant's General Investment Account before making a forfeiture from his Employer Securities Account.
(B) GENERAL INVESTMENT ACCOUNT.
Trust Fund Accounts. The allocation provisions of this paragraph apply
to all Participant General Investment Accounts in the Plan other than segregated
investment Accounts. The Trustee first will adjust such Participant General
Investment Accounts, as those Accounts stood at the beginning of the current
valuation period, by reducing the Accounts for any forfeitures arising under
Section 5.09 or under Section 9.07, for amounts charged during the valuation
period to the Accounts in accordance with Section 9.14 (relating to
distributions) and for the amount of any such General Investment Account which
the Trustee has fully distributed since the immediately preceding valuation
date. The Trustee then, subject to the restoration allocation requirements of
Section 5.04 or of Section 9.07, will allocate the net income, gain or loss pro
rata to the adjusted Participant General Investment Accounts in the Plan. The
allocable net income, gain or loss is the net income (or net loss), including
the increase or decrease in the fair market value of assets, since the last
valuation date. In making its allocations under this Section 9.06(B), the
Trustee will exclude Employer Securities allocated to Employer Securities
Accounts, stock dividends on allocated Employer Securities and interest paid by
the Trust on an Exempt Loan. The Trustee will include cash dividends on Employer
Securities as income (available for payment on an Exempt Loan to the extent such
dividends are attributable to
Employer Securities acquired with the proceeds of an Exempt Loan) except cash dividends which the Advisory Committee has directed the Trustee to distribute in accordance with Section 10.08, or which the Advisory Committee has directed the Trustee to use for the payment of principal and/or interest on any Exempt Loan, or to use for the funding of a benefit distribution in cash, in lieu of Employer Securities, to a Participant pursuant to Section 10.08. If dividends on any Employer Securities are used for the funding of such a benefit distribution in cash pursuant to Section 10.08, then the Employer Securities which, but for such benefit distribution in cash rather than Employer Securities, would have been distributed to the Participant shall be allocated for the Plan Year in which such cash benefit distribution occurred to the Accounts of Participants as if such Employer Securities constituted earnings for such Plan Year.
Segregated Investment Accounts. A segregated investment Account receives all income it earns and bears all expense or loss it incurs. As of the valuation date, the Trustee must reduce a segregated investment Account for any forfeiture arising under Section 5.09 after the Trustee has made all other allocations, changes or adjustments to the Account for the Plan Year.
Additional Rules. An Excess Amount or suspense account described in Article III does not share in the allocation of net income, gain or loss described in this Section 9.06(B). The Trustee will allocate the Employer contributions and Participant forfeitures, if any, in accordance with Article III.
9.07 UNCLAIMED ACCOUNT PROCEDURE. The Plan does not require either the Trustee or the Advisory Committee to search for, or ascertain the whereabouts of, any Participant or Beneficiary. At the time the Participant's or Beneficiary's benefit becomes distributable under Article VI, the Advisory Committee, by certified or registered mail addressed to his last known address of record with the Advisory Committee or the Employer, must notify the Participant, or Beneficiary, that he is entitled to a distribution under this Plan. The notice must quote the provisions of this Section 9.07 and otherwise must comply with the notice requirements of Article VI. If the Participant, or Beneficiary, fails to claim his distributive share or make his whereabouts known in writing to the Advisory Committee within 6 months from the date of mailing of the notice, the Advisory Committee will treat the Participant's or Beneficiary's unclaimed payable Accrued Benefit as forfeited and will reallocate the unclaimed payable Accrued Benefit in accordance with Section 3.07. Where the benefit is distributable to the Participant, the forfeiture under this paragraph occurs as of the last day of the notice period, if the Participant's Nonforfeitable Accrued Benefit does not exceed $5,000, or as of the first day the benefit is distributable without the Participant's consent, if the present value of the Participant's Nonforfeitable Accrued Benefit exceeds $5,000. Where the benefit is distributed to a Beneficiary, the forfeiture occurs on the date the notice period ends except, if the Beneficiary is the Participant's spouse and the Nonforfeitable Accrued Benefit payable to the spouse exceeds $5,000, the forfeiture occurs as of the first day the benefit is distributable without the spouse's consent. Pending forfeiture, the Advisory Committee, following the expiration of the notice period, may direct the Trustee to segregate the Nonforfeiture Accrued Benefit in the Plan in a segregated Account and to invest that segregated Account in Federally insured interest bearing savings accounts or time deposits (or in a combination of both), or in other fixed income investments.
If a Participant or Beneficiary in the Plan who has incurred a forfeiture of his Accrued Benefit in the Plan under the provisions of the first paragraph of this Section 9.07 makes a claim,
at any time, for the forfeited Accrued Benefit, the Advisory Committee must restore such forfeited Accrued Benefit to the same dollar amount as the dollar amount of the Accrued Benefit forfeited, unadjusted for any gains or losses occurring subsequent to the date of the forfeiture. The Advisory Committee will make the restoration during the Plan Year in which the Participant or Beneficiary makes the claim, first from the amount, if any, of Participant forfeitures the Advisory Committee otherwise would allocate for the Plan Year in the Plan, then from the amount, if any, of the Trust Fund net income or gain allocable to the Plan for the Plan Year and then from the amount, or additional amount, that the Employer contributes to enable the Advisory Committee to make the required restoration. The Advisory Committee will direct the Trustee to distribute the Participant's or Beneficiary's restored Accrued Benefit to him not later than 60 days after the close of the Plan Year in which the Advisory Committee restores the forfeited Accrued Benefit. The forfeiture provisions of this Section 9.07 apply solely to the Participant's or the Beneficiary's Accrued Benefit derived from Employer contributions.
9.08 TERM. Each member of the Advisory Committee serves until the appointment of his successor.
9.09 POWERS. In case of a vacancy in the membership of the Advisory Committee, the remaining members of the Advisory Committee may exercise any and all of the powers, authority, duties and discretion conferred upon the Advisory Committee pending the filling of the vacancy.
9.10 MANNER OF ACTION. The decision of a majority of the members appointed and qualified controls.
9.11 AUTHORIZED REPRESENTATIVE. The Advisory Committee may authorize any one of its members, or its Secretary, to sign on its behalf any notices, directions, applications, certificates, consents, approvals, waivers, letters or other documents. The Advisory Committee must evidence this authority by an instrument signed by all its members and filed with the Trustee.
9.12 INTERESTED MEMBER. No member of the Advisory Committee may decide or determine any matter concerning the distribution, nature or method of settlement of his own benefits under the Plan, except in exercising an election available to that member in his capacity as a Participant, unless the Plan Administrator is acting alone in the capacity of the Advisory Committee.
9.13 INDIVIDUAL STATEMENT. As soon as practicable after the last Accounting Date of each Plan Year, but within the time prescribed by ERISA and the regulations under ERISA, the Plan Administrator will deliver to each Participant (and to each Beneficiary) a statement reflecting the condition of his Accrued Benefit in the Trust as of that date and such other information ERISA requires be furnished the Participant or Beneficiary. No Participant, except a member of the Advisory Committee, has the right to inspect the records reflecting the Account of any other Participant.
9.14 ACCOUNT CHARGED. The Advisory Committee will charge all distributions made to a Participant or to his Beneficiary from his Account against the Account of the Participant when made.
9.15 BLACK-OUT PERIOD. Notwithstanding any other provisions in the Plan to the contrary, in the event of a change in recordkeepers, trustees, investment vehicles or other similar change or event, the Advisory Committee shall have the power and authority to impose such temporary restrictions and limitations on loans, withdrawals, distributions and Participant investment elections as necessary to facilitate such a change or event (a "black-out period"). In the event of a change in investment funds, the Advisory Committee shall have the authority to direct the investment of each Participant's Accounts and contributions in investment vehicles having investment objectives and risks similar to those investment vehicles being eliminated or replaced.
9.16 ELECTRONIC ELECTIONS. Anything in the Plan to the contrary notwithstanding, the Advisory Committee, in its discretion, may make disclosure or give information to Participants and Beneficiaries and permit Participants or their Beneficiaries to make electronic or telephonic elections in lieu of written disclosure, information or elections provided in the Plan. In making such a determination, the Advisory Committee shall consider the availability of electronic and telephonic disclosure of information and elections to Participants and Beneficiaries, the protection of the rights of Participants and their Beneficiaries, the appropriateness of the standards for authentication of identity and other security considerations involved in the electronic or telephonic election system and any guidance issued by the Internal Revenue Service and the Department of Labor. Notwithstanding the foregoing, any election requiring spousal consent shall be made only on such written forms as approved by the Advisory Committee.
ARTICLE X.
TRUSTEE POWERS AND DUTIES
10.01 TRUSTEE POWERS AND DUTIES. In addition to the powers and duties set forth in the Master Trust Agreement, the Trustee shall have the powers and duties set forth in this Article X.
10.02 [RESERVED]
10.03 INVESTMENT POWERS.
(A) [RESERVED]
(B) Exempt Loan. This Section 10.03(B) specifically authorizes the Trustee to enter into an Exempt Loan transaction with respect to the Plan. The following terms and conditions will apply to any Exempt Loan authorized by this Section 10.03(B).
(1) The Trustee will use the proceeds of the loan within a reasonable time after receipt only for any or all of the following purposes: (i) to acquire Employer Securities, (ii) to repay such loan, or (iii) to repay a prior Exempt Loan. Except as provided under Article XI, no Employer Security acquired with the proceeds of an Exempt Loan may be subject to a put, call or other option, or buy-sell or similar arrangement while held by and when distributed from this Plan, whether or not this Plan is then an employee stock ownership plan.
(2) The interest rate of the loan may not be more than a reasonable rate of interest.
(3) Any collateral the Trustee pledges to the creditor must consist only of the assets purchased by the borrowed funds and those assets the Trust used as collateral on the prior Exempt Loan repaid with the proceeds of the current Exempt Loan.
(4) The creditor may have no recourse against the Trust under the loan except with respect to such collateral given for the loan, contributions (other than contributions of Employer Securities) made to the Trust to meet its obligations under the loan, and earnings attributable to such collateral and the investment of such contributions. The payment made with respect to an Exempt Loan by the Plan during a Plan Year must not exceed an amount equal to the sum of such contributions and earnings received during or prior to the year less such payments in prior years. The Advisory Committee and the Trustee must account separately for such contributions and earnings in the books of account of the Plan until the Trust repays the loan.
(5) In the event of default upon the loan, the value of Plan assets transferred in satisfaction of the loan must not exceed the amount of the default, and if the lender is a Disqualified Person, the loan must provide for transfer of Plan assets upon default only upon and to the extent of the failure of the Plan to meet the payment schedule of the loan.
(6) The Trustee must add and maintain all assets acquired with the proceeds of an Exempt Loan in a Suspense Account. In withdrawing assets from the Suspense Account, the Trustee will apply the provisions of Treas. Reg. Sections 54.4975-7(b)(8) and (15) as if all securities in the Suspense Account were encumbered. Upon the payment of any portion of the loan, the Trustee will effect the release of assets in the Suspense Account from encumbrances. For each Plan Year during the duration of the loan, the number of Employer Securities released must equal the number of encumbered Employer Securities held immediately before release for the current Plan Year multiplied by a fraction. The numerator of the fraction is the amount of principal and interest paid for the Plan Year. The denominator of the fraction is the sum of the numerator plus the principal and interest to be paid for all future Plan Years. The number of future Plan Years under the loan must be definitely ascertainable and must be determined without taking into account any possible extension or renewal periods. If the interest rate under the loan is variable, the interest to be paid in future Plan Years must be computed by using the interest rate applicable as of the end of the Plan Year. If collateral includes more than one class of Employer Securities, the number of Employer Securities of each class to be released for a Plan Year must be determined by applying the same fraction to each such class. The Advisory Committee will allocate assets withdrawn from the Suspense Account to the Accounts of Participants who otherwise share in the allocation of the Employer's contribution for the Plan Year for which the Trustee has paid the portion of the loan resulting in the release of the assets. The Advisory Committee consistently will make this allocation as of each Accounting Date on the basis of nonmonetary units, taking into account the relative Compensation of all such Participants for such Plan Year. Notwithstanding the foregoing provisions for the allocation of Employer Securities withdrawn from the Suspense Account, if dividends on any Employer Securities which are allocated to any Participant are used to make any payment on an Exempt Loan, then
Employer Securities with a fair market value not less than the amount of such dividends shall be allocated to the Account of such Participant for the Plan Year in which, but for the use of the dividends to make a payment on the loan, such dividends would have been allocated to the Account of such Participant. Employer Securities acquired by the Trust must be accounted for in accordance with the provisions of Treasury Regulation Section 54.4975-11(d)(1), both while they are held in the Suspense Account and after release therefrom.
(7) The loan must be for a specific term and may not be payable at the demand of any person except in the case of default.
(8) Notwithstanding the fact this Plan ceases to be an
employee stock ownership plan, Employer Securities acquired with the
proceeds of an Exempt Loan will continue after the Trustee repays the
loan to be subject to the provisions of Treas. Reg.
Sections 54.4975-7(b)(4), (10), (11) and (12) relating to put,
call or other options and to buy-sell or similar arrangements, except
to the extent these regulations are inconsistent with Code
Section 409(h).
10.04 [RESERVED] 10.05 [RESERVED] 10.06 [RESERVED] 10.07 [RESERVED] 10.08 DISTRIBUTION OF TRUST FUND. In the absence of a contrary |
Participant election, the Trustee shall make all distributions of benefits to such Participant under the Plan in cash. A Participant may, however, elect to receive distributions of benefits in whole shares of Employer Securities or in a combination of cash and whole shares of Employer Securities. The Trustee shall pay in cash any fractional security share to which a Participant or his Beneficiary is entitled. Any remaining balance in a Participant's Accounts shall be paid in cash, except that, at the Participant's election, such balance shall be applied to provide whole shares of common stock of Kansas City Southern for Participants in the Plan for distribution at the then fair market value.
If the charter or bylaws of the Issuer of the Employer Securities restrict ownership of substantially all shares of Employer Securities to Employees and the Trust, as described in Code Section 409(h)(2), the Trustee may make the distribution of a Participant's Accrued Benefit entirely in cash without granting the Participant the right to demand distribution in shares of Employer Securities.
In addition to the distribution options set forth above, a Participant may elect to receive a distribution in the form of such number (or any fewer number) of whole Stilwell Shares held in his or her Account as of the date of distribution.
Notwithstanding the preceding provisions of this Section 10.08, the Trustee, if directed in writing by the Advisory Committee, shall pay, in cash, any cash dividends on Employer Securities allocated, or allocable to Participants' Employer Securities Account in the Plan,
irrespective of whether a Participant is fully vested in his Employer Securities Account. The Advisory Committee's direction shall state whether the Trustee is to pay the cash dividend distributions currently, or within the ninety (90) day period following the close of the Plan Year in which the Employer pays the dividends to the Trust. The Advisory Committee may request the Employer to pay dividends on Employer Securities directly to Participants in the Plan.
10.09 [RESERVED] 10.10 [RESERVED] 10.11 [RESERVED] 10.12 [RESERVED] 10.13 [RESERVED] 10.14 [RESERVED] 10.15 PARTICIPANT VOTING RIGHTS - EMPLOYER SECURITIES AND STILWELL |
SHARES . Each Participant (or the Beneficiary thereof) acting as a named fiduciary shall have the right, with respect to Employer Securities, to direct the Trustee as to the manner in which (a) to vote any stock allocated to his Employer Securities Account as of the applicable record date of any shareholder meeting in any matter put to a shareholder vote; and (b) to respond to a tender offer, exchange offer or any other offer to purchase Employer Securities allocated to the Participant's Employer Securities Account.
Before any meeting in which a shareholder vote is to be taken, the Employer will deliver to the Trustee or its designee such quantities of proxy soliciting materials as are necessary to solicit voting instructions from the Participants. The Trustee or its designee will mail the proxy solicitation materials (and any additional material made available to other shareholders or otherwise deemed appropriate by the Trustee) to the Participants within a reasonable time before the meeting. A reasonable deadline for the return of such materials may be specified.
Shares will be voted as instructed by the Participants on each matter brought before the meeting. Such participants are appointed as named fiduciaries to direct the Trustee as to the voting of shares allocated to the accounts of Participants who have not timely instructed the Trustee how to vote them and any unallocated shares. Such shares will be voted in the same proportions as the shares for which the Trustee has received timely instructions. The Trustee may submit to the Employer one summary proxy for the aggregate number of shares.
With regard to any tender offer, exchange offer or any other offer to purchase Employer Securities, the Trustee or its designee will solicit such instructions from Participants by distributing to each Participant such information as is distributed to shareholders of the Employer, generally in connection with any such offer, and any additional information the Trustee deems appropriate in order for each Participant to give instructions. A reasonable deadline for the return of such materials may be specified.
Shares will, in response to a tender offer, exchange offer or other offer to purchase, be tendered, exchanged or sold as instructed by the Participants. Fractional shares will be
aggregated for purposes of tendering, exchanging or selling shares, to the extent possible, to reflect the instructions of the Participants. Such participants are appointed as named fiduciaries to direct the Trustee as to the tender, exchange or sale of shares allocated to an account of a Participant who has not timely instructed the Trustee how to respond to such offer and any unallocated shares. Such shares will be tendered, exchanged or sold in the same proportion as shares for which the Trustee has received timely instructions.
For purposes of receiving, tabulating and transmitting instructions, the Trustee will establish a procedure to insure that instructions received from individual Participants regarding voting or responding to a tender offer, exchange offer, or any other offer are held in confidence, and are not divulged, released or otherwise utilized in a manner that, in the Trustee's reasonable judgment, might influence the Participant's free exercise of the rights set forth in this Section 10.15.
Voting, tender and exchange rights with respect to Stilwell Shares held by the Plan shall be exercised in the same manner as such rights are exercised with respect to Employer Securities as described in this Section 10.15.
10.16 [RESERVED]
10.17 USE OF INDEPENDENT APPRAISER. All valuations of Employer
Securities or Stilwell Shares acquired after December 31, 1986, which are not
readily tradable on an established securities market (within the meaning of Code
Section 401(a)(28)(C)) with respect to activities carried on by the Plan shall
be by an independent appraiser. For purposes of the preceding sentence, the term
"independent appraiser" means any appraiser meeting requirements similar to the
requirements of the Treasury Regulations prescribed under Code Section
170(a)(1).
10.18 [RESERVED]
10.19 STILWELL SHARES RESTRICTIONS. Stilwell Shares received by the Plan in the Spinoff with respect to Employer Securities acquired with the proceeds of an exempt loan shall continue to be subject to the provisions of Treas. Regs. Sections 54.4975-7(b)(4), (10), (11) and (12) relating to put, call or other options and to buy-sell or similar arrangements, except to the extent such regulations are inconsistent with Code Section 409(h).
ARTICLE XI.
REPURCHASE OF EMPLOYER SECURITIES
11.01 PUT OPTION. Shares of Employer Securities distributed to a Participant from the Trust shall be subject to a "put" option at the time of distribution, provided that at such time the shares are either not readily tradable on an established market within the meaning of Code Section 409(h) or are subject to a trading limitation. The "put" option shall be exercisable by the Participant or his Beneficiary, by the donees of either, or by a person (including an estate or its distributee) to whom the Employer Securities pass by reason of the Participant's or Beneficiary's death. The "put" option shall provide that for a period of at least fifteen (15) months after such shares are distributed, the holder of the option shall have the right to cause the Employer, by notifying it in writing, to purchase such shares at their fair market value, as determined by the Advisory Committee, in accordance with Treasury Regulation Section 54.4975-11(d)(5) and Section 10.17 hereof. The Advisory Committee may give the Trustee the option to assume the rights and
obligations of the Employer at the time the "put" option is exercised, insofar
as the repurchase of Employer Securities is concerned. The period during which
the "put" option is exercisable shall not include any period during which the
holder is unable to exercise such "put" option because the Employer is
prohibited from honoring it by federal or state law. If the Employer is
prohibited from honoring the "put" option by federal or state law, the holder
shall be entitled to cause it to be honored, consistent with such law, by an
affiliate or shareholder of the Employer that has substantial net worth and
whose net worth is reasonably expected to remain substantial. If shares of
Employer Securities are readily tradable on an established market on the date of
distribution, but cease to be readily tradable on an established market (as
described above) within fifteen (15) months after such date, the Employer
Securities distributed shall be subject to the "put" option described herein for
the balance of the fifteen (15) month period. The Employer shall give written
notice to each shareholder within ten (10) days of the date the Employer
Securities cease to be readily tradable on an established market or that the
Employer Securities become subject to a trading limitation that the Employer
Securities are subject to the "put" option for the remainder of the fifteen (15)
month period. If the Employer fails to give such notice to the shareholder
within such ten (10) day period, then the number of days between such tenth
(10th) day and the date on which the notice is actually given shall be added to
the duration of the fifteen (15) month period. The terms of payment for the
purchase of such shares of Employer Securities shall be as set forth in the
"put" option and, if the Employer Securities are distributed as part of a total
distribution, may be either in a lump sum or in installments, as determined by
the Advisory Committee. For purposes of the preceding sentence, the term "total
distribution" means the distribution within one taxable year to the Participant
of the balance to the credit of the Participant's Account. If the "put" option
is exercised with respect to Employer Securities constituting part of an
installment distribution to a Participant, the amount to be paid for the
Employer Securities shall be paid not later than thirty (30) days after the date
the "put" option is exercised.
An installment payment in connection with a "put" option shall:
(1) provide for acceleration in the event of thirty (30) days' default in the payment of interest or principal and shall permit prepayment of the installment obligation in whole or in part at any time or times without penalty;
(2) be adequately secured and bear a reasonable rate of interest, both as determined by the Advisory Committee;
(3) require equal annual payments;
(4) have a payment period not longer than five (5) years from the date the "put" option is exercised;
(5) require that any payments pursuant to the installment obligation must be substantially equal and begin to be made no later than thirty (30) days after the date the "put" option is exercised; and
(6) satisfy the requirements of Treasury Regulation
Section 54.4975-7(b)(12), except to the extent this regulation is
inconsistent with Code Section 409(h).
11.02 CONTINUATION OF PUT OPTION. The "put" option provided for by
Section 11.01 is nonterminable and shall continue to apply to shares of Employer
Securities distributed hereunder notwithstanding the repayment of any Exempt
Loan or any amendment to, or termination of, this Plan which causes the Plan or
a portion of the Plan to cease to be an employee stock ownership plan within the
meaning of Code Section 4975(e)(7).
ARTICLE XII.
MISCELLANEOUS
12.01 EVIDENCE. Anyone required to give evidence under the terms of the Plan may do so by certificate, affidavit, document or other information which the person to act in reliance may consider pertinent, reliable and genuine, and to have been signed, made or presented by the proper party or parties. Both the Advisory Committee and the Trustee are fully protected in acting and relying upon any evidence described under the immediately preceding sentence.
12.02 NO RESPONSIBILITY FOR EMPLOYER ACTION. Neither the Trustee nor Advisory Committee has any obligation or responsibility with respect to any action required by the Plan to be taken by an Employer, any Participant or eligible Employee, or for the failure of any of the above persons to act or make any payment or contribution, or to otherwise provide any benefit contemplated under this Plan. Furthermore, the Plan does not require the Trustee or the Advisory Committee to collect any contribution required under the Plan, or to determine the correctness of the amount of any Employer contribution. Neither the Trustee nor Advisory Committee needs to inquire into or be responsible for any action or failure to act on the part of the others. Any action required of Kansas City Southern must be by its Board of Directors, the Compensation and Organization Committee of such Board, or the designees of such Board or Committee. Any action required of any other corporate Employer must be by its Board of Directors or its designates.
12.03 FIDUCIARIES NOT INSURERS. The Trustee, the Advisory Committee, the Plan Administrator and the Employers in no way guarantee the Trust Fund from loss or depreciation. The Employers do not guarantee the payment of any money which may be or becomes due to any person from the Trust Fund. The liability of the Advisory Committee and the Trustee to make any payment from the Trust Fund at any time and all times is limited to the then available assets of the Trust.
12.04 WAIVER OF NOTICE. Any person entitled to notice under the Plan may waive the notice.
12.05 SUCCESSORS. The Plan is binding upon all persons entitled to benefits under the Plan, their respective heirs and legal representatives, upon the Employer, its successors and assigns, and upon the Trustee and the Advisory Committee and their successors.
12.06 WORD USAGE. Words used in the masculine also apply to the feminine where applicable, and wherever the context of the Plan dictates, the plural includes the singular and the singular includes the plural.
12.07 STATE LAW. Missouri law will determine all questions arising with respect to the provisions of this Plan except to the extent Federal law supersedes Missouri law.
12.08 EMPLOYMENT NOT GUARANTEED. Nothing contained in this Plan, or with respect to the establishment of the Trust, or any modification or amendment to the Plan or Trust, or in the creation of any Account, or the payment of any benefit, gives any Employee, Employee-Participant or any Beneficiary any right to continue employment, any legal or equitable right against an Employer, or Employee of an Employer or against the Trustee, or its agents or employees, or against the Plan Administrator, except as expressly provided by the Plan, the Trust, ERISA or by a separate agreement.
12.09 ELECTRONIC MEDIA. Under procedures authorized or approved by the Advisory Committee, any form for any notice, election, designation, or similar communication required or permitted for a Participant or Beneficiary under this Plan (other than a designation of Beneficiary or spousal consent thereto under Section 8.01) may be made available to such Participant or Beneficiary through an electronic medium (including a computer network, WEB site, e-mail or voice response system) which (i) affords the Participant or Beneficiary a reasonable opportunity to obtain written confirmation, (ii) is given under a system that is reasonably designed to preclude an individual other than the Participant or Beneficiary from taking the action contemplated by such communication, and (iii) provides the Participant or Beneficiary a reasonable opportunity to review and to confirm, modify or rescind such action. Any such communication to or from a Participant or Beneficiary through such electronic medium shall be fully effective under this Plan for all purposes and any copy or regeneration of such communication by such electronic medium under its normal storage and retrieval parameters shall be effective as a fully authentic executed writing for all purposes of this Plan absent manifest error in the storage or retrieval process.
ARTICLE XIII.
EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION
13.01 EXCLUSIVE BENEFIT. Except as provided under Article III, no Employer has any beneficial interest in any asset of the Trust and no part of any asset in the Trust may ever revert to or be repaid to an Employer, either directly or indirectly; nor, prior to the satisfaction of all liabilities with respect to the Participants and their Beneficiaries under the Plan, may any part of the corpus or income of the Trust Fund, or any asset of the Trust, be (at any time) used for, or diverted to, purposes other than the exclusive benefit of the Participants or their Beneficiaries.
13.02 AMENDMENT BY EMPLOYER. Kansas City Southern, by duly adopted resolution of its Board of Directors, or of the Compensation and Organization Committee of its Board of Directors, has the right at any time and from time to time:
(a) To amend this Plan in any manner it deems necessary or advisable in order to qualify (or maintain qualification of) this Plan and the Trust created under it under the appropriate provisions of Code Section 401(a), or
(b) To amend this Plan in any other manner.
No amendment may authorize or permit any of the Trust Fund (other than the part which is required to pay taxes and administration expenses) to be used for or diverted to purposes other than for the exclusive benefit of the Participants or their Beneficiaries or estates. No amendment may cause or permit any portion of the Trust Fund to revert to or become a property of the Employer. No amendment may be made which affects the rights, duties or responsibilities of the
Trustee or the Plan Administrator without the written consent of the affected Trustee or the Plan Administrator. No amendment may be made which affects the rights, duties or responsibilities of the Advisory Committee without the written consent of the affected member of the Advisory Committee.
Code Section 411(d)(6) Protected Benefits. An amendment (including the
adoption of this Plan as a restatement of an existing plan) may not decrease a
Participant's Accrued Benefit, except to the extent permitted under Code
Section 412(c)(8), and may not reduce or eliminate Code Section 411(d)(6)
protected benefits determined immediately prior to the adoption date (or, if
later, the effective date) of the amendment. An amendment reduces or eliminates
Code Section 411(d)(6) protected benefits if the amendment has the effect of
either (1) eliminating or reducing an early retirement benefit or a
retirement-type subsidy (as defined in Treasury regulations), or (2) except as
provided by Treasury regulations, eliminating an optional form of benefit. The
Advisory Committee must disregard an amendment to the extent application of the
amendment would fail to satisfy this paragraph. If the Advisory Committee must
disregard an amendment because the amendment would violate clause (1) or clause
(2), the Advisory Committee must maintain a schedule of the early retirement
option or other optional forms of benefit the Plan must continue for the
affected Participants.
All amendments must be made in writing. Each amendment must state the date to which it is either retroactively or prospectively effective.
13.03 DISCONTINUANCE. Each Employer has the right, at any time, to suspend or discontinue its contributions under the Plan. The Board of Directors of Kansas City Southern, or the Compensation and Organization Committee thereof, or any other duly authorized committee thereof, has the right to terminate the Plan at any time. The Plan will terminate upon the first to occur of the following:
(a) The date terminated by action of the Board of Directors of Kansas City Southern, or the Compensation and Organization Committee thereof, or any other duly authorized committee thereof; or
(b) The date Kansas City Southern is judicially declared bankrupt or insolvent, unless the proceeding authorized continued maintenance of the Plan.
13.04 FULL VESTING ON TERMINATION. Upon either full or partial termination of the Plan, or, if applicable, upon complete discontinuance of contributions to the Plan, an affected Participant's right to his Accrued Benefit is 100% Nonforfeitable, irrespective of the Nonforfeitable percentage which otherwise would apply under Article V.
13.05 MERGER/DIRECT TRANSFER. The Plan may not be a party to any merger or consolidation with another plan, or to a transfer of assets or liabilities to another plan, unless immediately after the merger, consolidation or transfer, the surviving Plan provides each Participant a benefit equal to or greater than the benefit each Participant would have received had the Plan terminated immediately before the merger or consolidation or transfer. The Advisory Committee possesses the specific authority to enter into merger agreements or direct transfer of assets agreements with the trustees of other retirement plans described in Code Section 401(a), including an elective transfer, and to accept the direct transfer of plan assets, or to transfer plan assets, as a party to any such agreement.
The Advisory Committee may accept a direct transfer of plan assets on behalf of an Employee prior to the date the Employee satisfies the Plan's eligibility conditions. If the Advisory Committee accepts a direct transfer of plan assets under this paragraph, the Advisory Committee must treat the Employee as a Participant in the Plan for all purposes of the Plan except the Employee is not a Participant in the Plan for purposes of sharing in Employer contributions or Participant forfeitures under the Plan until he actually becomes a Participant in the Plan.
The Advisory Committee may not consent to, or be a party to a merger,
consolidation or transfer of assets with a defined benefit plan, except with
respect to an elective transfer. The Trustee will hold, administer and
distribute the transferred assets as a part of the Trust Fund and the Trustee
must maintain a separate Employer contribution Account for the benefit of the
Employee on whose behalf the Advisory Committee accepted the transfer in order
to reflect the value of the transferred assets. Unless a transfer of assets to
this Plan is an elective transfer, the Plan will preserve all Code Section
411(d)(6) protected benefits with respect to those transferred assets, in the
manner described in Section 13.02. A transfer is an elective transfer if: (1)
the transfer satisfies the first paragraph of this Section 13.05; (2) the
transfer is voluntary, under a fully informed election by the Participant; (3)
the Participant has an alternative that retains his Code Section 411(d)(6)
protected benefits (including an option to leave his benefit in the transferor
plan, if that plan is not terminating); (4) the transfer satisfies the
applicable spousal consent requirements of the Code; (5) the transferor plan
satisfies the joint and survivor notice requirements of the Code, if the
Participant's transferred benefit is subject to those requirements; (6) the
Participant has a right to immediate distribution from the transferor plan, in
lieu of the elective transfer; (7) the transferred benefit is at least the
greater of the single sum distribution provided by the transferor plan for which
the Participant is eligible or the present value of the Participant's accrued
benefit under the transferor plan payable at that plan's normal retirement age;
(8) the Participant has a 100% Nonforfeitable interest in the transferred
benefit; and (9) the transfer otherwise satisfies applicable Treasury
regulations. An elective transfer may occur between qualified plans of any type.
Distribution Restrictions Under Code Section 401(k). If the Plan
receives a direct transfer (by merger or otherwise) of Elective Contributions
(or amounts treated as Elective Contributions) under a Plan with a Code
Section 401(k) arrangement, the distribution restrictions of Code
Sections 401(k)(2) and (10) continue to apply to those transferred Elective
Contributions.
13.06 TERMINATION. Upon termination of the Plan, the distribution provisions of Article VI remain operative, with the following exceptions:
(1) if the present value of the Participant's Nonforfeitable Accrued Benefit does not exceed $5,000, the Advisory Committee will direct the Trustee to distribute the Participant's Nonforfeitable Accrued Benefit to him in lump sum as soon as administratively practicable after the Plan terminates; and
(2) if the present value of the Participant's Nonforfeitable Accrued Benefit exceeds $5,000 the Participant or the Beneficiary, in addition to the distribution events permitted under Article VI, may elect to have the Trustee commence distribution of his Nonforfeitable Accrued Benefit as soon as administratively practicable after the Plan terminates.
To liquidate the Trust, the Advisory Committee will purchase a deferred annuity contract for each Participant which protects the Participant's distribution rights under the Plan, if the Participant's Nonforfeitable Accrued Benefit exceeds $5,000 and the Participant does not elect an immediate distribution pursuant to Paragraph (2). The Trust will continue until the Trustee in accordance with the direction of the Advisory Committee has distributed all of the benefits under the Plan.
On each valuation date, the Advisory Committee will credit any part of
a Participant's Accrued Benefit retained in the Trust with its allocable share
of the Trust's income, expenses, gains and losses, both realized and unrealized.
Upon termination of the Plan, the amount, if any, in a suspense account under
such portion under Article III will revert to the Employer, subject to the
conditions of the Treasury regulations permitting such a reversion. A resolution
or amendment to freeze all future benefit accruals but otherwise to continue
maintenance of this Plan is not a termination for purposes of this
Section 13.06.
ARTICLE XIV.
PROVISIONS EFFECTIVE UPON CHANGE IN CONTROL
14.01 DEFINITION OF "CHANGE IN CONTROL OF KCS". For purposes of this Plan, a "Change in Control of KCS" shall be deemed to have occurred if:
(a) for any reason at any time less than seventy-five
percent (75%) of the members of the Board of Directors of Kansas City
Southern, a Delaware corporation, shall be individuals who fall into
any of the following categories: (A) individuals who were members of
such Board on September 1, 1995; or (B) individuals whose election, or
nomination for election by KCS's stockholders, was approved by a vote
of at least seventy-five percent (75%) of the members of the Board then
still in office who were members of such Board on September 1, 1995; or
(C) individuals whose election, or nomination for election, by KCS's
stockholders, was approved by a vote of at least seventy-five percent
(75%) of the members of the Board then still in office who were elected
in the manner described in (A) or (B) above, or
(b) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) shall have become after September 1, 1995, according to a public announcement or filing, without the prior approval of the Board of directors of KCS, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of KCS, representing forty percent (40%) or more (calculated in accordance with Rule 13d-3) of the combined voting power of KCS's, then outstanding voting securities (such "person" hereinafter referred to as a "Major Stockholder of KCS"); or
(c) the stockholders of KCS shall have approved a merger,
consolidation or dissolution of KCS or a sale, lease, exchange or
disposition of all or substantially all of KCS's assets, or a Major
Stockholder of KCS shall have proposed any such transaction, unless
such merger, consolidation, dissolution, sale, lease, exchange or
disposition shall have been approved by at least seventy-five percent
(75%) of the members of the Board of Directors of KCS who are
individuals falling into any combination of the following categories:
(i) individuals who were members of such Board of Directors on
September 1, 1995, (ii) individuals whose election, or nomination for
election by KCS's
stockholders, was approved by at least seventy-five percent (75%) of the members of the Board of Directors then still in office who are members of the Board of Directors on September 1, 1995, or (iii) individuals whose election or nomination for election by KCS's stockholders was approved by a vote of at least seventy-five percent (75%) of the members of the Board then still in office who were elected in the manner described in (i) or (ii) above.
14.02 PROVISIONS EFFECTIVE UPON CHANGE IN CONTROL. Upon a Change in Control of KCS as defined in Section 14.01, notwithstanding what is otherwise provided in this Plan, the following provisions will supersede the indicated sections and otherwise govern the operation of the Plan and Trust from that point forward:
(a) "Section 5.03, Vesting Schedule" shall provide as follows:
5.03 VESTING SCHEDULE. A Participant's Accrued Benefit derived from Employer contributions in the Plan shall be One Hundred Percent (100%) Nonforfeitable at all times.
(b) Except for the right to amend the Plan pursuant to
Section 13.02(a) to qualify or maintain the qualification of the Plan
under the appropriate provisions of Code Section 401(a), the Board of
Directors of Kansas City Southern, the Compensation and Organization
Committee thereof, or any other duly authorized officer or committee
thereof, shall not exercise its right to amend pursuant to Section
13.02(b), discontinue or terminate pursuant to Section 13.03, or merge
pursuant to Section 13.05, the Plan without the prior written consent
to such aforesaid action by seventy-five percent (75%) of the
Participants in the Plan on a per-capita basis.
14.03 RIGHT TO AMEND PART 1 OF ARTICLE XIV PRIOR TO CHANGE IN CONTROL OF KCS. The Board of Directors of Kansas City Southern, or any duly authorized committee thereof, reserves the right to amend or eliminate this Article XIV prior to the date of a Change in Control of KCS.
IN WITNESS WHEREOF, the Employer has executed this Plan in Kansas City, Missouri, as of this 30th day of May, 2002.
KANSAS CITY SOUTHERN
By: /s/ Eric Freestone/TLR
------------------------------
WITNESS:
/s/ Tony L. Robertson
------------------------
|
Exhibit 12.1
KANSAS CITY SOUTHERN
AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
As of December 31st
---------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Pretax income/(loss) from continuing operations,
excluding equity in earnings of unconsolidated affilites $ 20.7 $ 6.8 $ (2.0) $ 12.0 $ 68.0
Interest Expense on Indebtedness 45.0 52.8 65.8 57.4 59.6
Portion of Rents Representative of an Appropriate
Interest Factor 18.3 18.9 19.4 18.0 20.0
Distributed income of equity investments - 3.0 5.0 - 5.0
---------- ---------- ---------- ---------- ----------
Income (Loss) as Adjusted $ 84.0 $ 81.5 $ 88.2 $ 87.4 $ 152.6
---------- ---------- ---------- ---------- ----------
Fixed Charges:
Interest Expense on Indebtedness $ 45.0 $ 52.8 $ 65.8 $ 57.4 $ 59.6
Capitalized Interest 1.7 4.2 - - -
Portion of Rents Representative of an Appropriate
Interest Factor 18.3 18.9 19.4 18.0 20.0
---------- ---------- ---------- ---------- ----------
Total Fixed Charges $ 65.0 $ 75.9 $ 85.2 $ 75.4 $ 79.6
---------- ---------- ---------- ---------- ----------
Ratio of Earnings to Fixed Charges 1.3 1.1 1.0 1.2(a) 1.9
========== ========== ========== ========== ==========
|
Note: Excludes amortization expense on debt discount due to immateriality
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Kansas City Southern, a Delaware corporation, has no parent. All subsidiaries of the Company listed below are included in the consolidated financial statements
unless otherwise indicated
State or
Percentage other Jurisdiction
of of Incorporation
Ownership or Organization
---------- ------------------
Canama Transportation (8) 100 Cayman Islands
Caymex Transportation, Inc. (1) 100 Delaware
Gateway Eastern Railway Company (1) 100 Illinois
Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V. *(7) 46.6 Mexico
Joplin Union Depot * 33 Missouri
KC Terminal Railway (11) 16 Missouri
Mexrail, Inc. *(14) 100 Delaware
NAFTA Rail, S.A. de C.V. (8) 100 Mexico
North American Freight Transportation
Alliance Rail Corporation 100 Delaware
PABTEX GP, LLC (2) 100 Texas
PABTEX L.P. (12) 100 Delaware
Panama Canal Railway Company *(9) 42 Cayman Islands
Panarail Tourism Company (10) 100 Cayman Islands
Port Arthur Bulk Marine Terminal Co. (1) 80 Partnership
Rice-Carden Corporation (1) 100 Missouri
SCC Holdings, LLC (1) 100 Delaware
SIS Bulk Holding, Inc. (2) 100 Delaware
Southern Capital Corporation, LLC *(13) 50 Colorado
Southern Development Company (1) 100 Missouri
Southern Industrial Services, Inc. 100 Delaware
The Kansas City Southern Railway Company 100 Missouri
The Texas Mexican Railway Company *(4) 100 Texas
TFM, S.A. de C.V. *(5) 80 Mexico
TransFin Insurance, Ltd. 100 Vermont
Trans-Serve, Inc. (2) (3) 100 Delaware
Veals, Inc. 100 Delaware
|
* Unconsolidated Affiliate, Accounted for Using the Equity Method
(1) Subsidiary of The Kansas City Southern Railway Company
(2) Subsidiary of Southern Industrial Services, Inc.
(3) Conducting business as Superior Tie & Timber
(4) Subsidiary of Mexrail, Inc.
(5) Subsidiary of Grupo Transportacion Ferroviaria, S.A. de C.V.
(6) Subsidiary of Southern Development Company
(7) Unconsolidated affiliate of NAFTA Rail, S.A. de C.V.
(8) Subsidiary of Caymex Transportation, Inc.
(9) Unconsolidated affiliate of Canama Transportation
(10) Subsidiary of Panama Canal Railway Company
(11) Unconsolidated affiliate of The Kansas City Southern Railway Company
(12) Subsidiary of SIS Bulk Holding, Inc.
(13) Unconsolidated affiliate of SCC Holdings, Inc.
(14) Subsidiary of TFM, S.A. de C.V.
Exhibit 23.1
The Board of Directors
Kansas City Southern:
We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-50517, 33-50519, 33-64511, 333-91993, 333-73122, 333-58250, 333-51854, and 333-91478), on Form S-3 (Nos. 33-69648 and 333-61006) and on Form S-4 (Nos. 333-54262 and 333-92360) of Kansas City Southern of our report dated March 24, 2003 with respect to the consolidated balance sheets of Kansas City Southern as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 2002, which report appears in the December 31, 2002, annual report on Form 10-K of Kansas City Southern.
/s/ KPMG LLP Kansas City, Missouri March 26, 2003 |
"We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-50517, 33-50519, 33-64511, 333-91993, 333-73122, 333-58250, 333-51854, and 333-91478), on Form S-3 (Nos. 33-69648 and 333-61006) and on Form S-4 (Nos. 333-54262 and 333-92360) of Kansas City Southern of our report dated February 28, 2003, relating to the combined and consolidated financial statements of Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V., which are included in this Annual Report on Form 10-K."
Mexico City, March 26, 2003
/s/ PricewaterhouseCoopers, S.C. /s/ Alberto Del Castillo V. V. Audit Partner |
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-50517, 33-50519, 33-64511, 333-91993, 333-73122, 333-58250, 333-51854, and 333-91478), on Form S-3 (Nos. 33-69648 and 333-61006) and on Form S-4 (Nos. 333-54262 and 333-92360) of Kansas City Southern of our report dated March 22, 2001, except as to the adoption of Statement of Financial Accounting Standards No. 142 described in Note 2 which is as of January 1, 2002, relating to the financial statements, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP March 26, 2003 |
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Kansas City Southern (the "Company") on Form 10-K for the period ending December 31, 2002 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. ss. 1350, as adopted pursuant to ss. 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 and 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 Chief Executive Officer March 26, 2003 |
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Kansas City Southern (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald G. Russ, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 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 and 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/ RONALD G. RUSS Ronald G. Russ Chief Financial Officer March 26, 2003 |
GRUPO TRANSPORTACION FERROVIARIA
MEXICANA, S. A. DE C. V.
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
GRUPO TRANSPORTACION FERROVIARIA
MEXICANA, S. A. DE C. V.
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
INDEX
Contents Page -------- ---- Report of Independent Accountants 1 and 2 Combined and Consolidated Balance Sheets 3 Combined and Consolidated Statements of Income 4 Combined and Consolidated Statements of Changes in Stockholders' Equity 5 Combined and Consolidated Statements of Cash Flows 6 Notes to the Combined and Consolidated Financial Statements 7 to 33 |
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico City, February 28, 2003
To the Board of Directors and Stockholders of Grupo Transportacion Ferroviaria Mexicana, S. A. de C. V.
We have audited the accompanying combined and consolidated balance sheets of Grupo Transportacion Ferroviaria Mexicana, S. A. de C. V. and subsidiaries as of December 31, 2002 and 2001, and the related combined and consolidated statements of income, of changes in stockholders' equity and of cash flows for each of the three years in the period ended December 31, 2002, all expressed in US dollars. These combined and consolidated financial statements are the responsibility of the Company's Management. Our responsibility is to express an opinion on these combined and consolidated financial statements based on our audits.
We conducted our audits in accordance with International Auditing Standards and Auditing Standards Generally Accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and that they were prepared in accordance with International Accounting Standards. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned combined and consolidated financial
statements present fairly, in all material respects, the combined and
consolidated financial position of Grupo Transportacion Ferroviaria Mexicana, S.
A. de C. V. and subsidiaries as of December 31, 2002 and 2001, and the combined
and consolidated results of their operations, the changes in stockholders'
equity and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with International Accounting Standards.
International Accounting Standards differ in certain material respects from Accounting Principles Generally Accepted in the United States of America. The application of the latter would have affected the determination of the combined and consolidated net income for each of the three years in the period ended December 31, 2002, and the determination of combined and consolidated stockholders' equity and combined and consolidated financial position as of December 31, 2002 and 2001, to the extent summarized in Note 11 to the consolidated financial statements.
PricewaterhouseCoopers
/s/ Alberto Del Castillo V. V. Alberto Del Castillo V. Vilchis Audit Partner |
GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S. A. DE C. V.
COMBINED AND CONSOLIDATED BALANCE SHEETS
(Note 1)
(amounts in thousands of US dollars)
December 31,
------------
Assets 2001 2002
---- ----
Current assets:
Cash and cash equivalents $ 53,110 $ 30,249
Accounts receivable net of allowance for
doubtful accounts of $3,568 in 2001
and $3,913 in 2002 103,562 90,596
Amounts due from related parties (Note 7) 22,728 5,316
Other accounts receivable - Net 78,042 106,628
Materials and supplies 23,329 20,261
Other current assets 10,030 12,200
----------- -----------
Total current assets 290,801 265,250
Due from Mexican Government (Note 3) 81,892
Long-term account receivable 1,388
Concession rights and related assets - Net (Note 3) 1,257,591 1,215,487
Property, machinery and equipment - Net (Note 4) 568,755 609,367
Investment held for operating purposes (Note 2i.) 6,166 7,435
Deferred financing costs 11,647 34,281
Other assets 454 365
Deferred income taxes (Note 9) 131,206 100,972
----------- -----------
Total assets $ 2,348,512 $ 2,234,545
=========== ===========
Liabilities and stockholders' equity
Short-term liabilities:
Commercial paper (Note 5) $ 264,638
Current portion of long-term debt (Note 5) $ 18,286
Current portion of capital lease obligations (Note 10) 298 267
Amounts owed to related parties (Note 7) 10,767 9,175
Accounts payable and accrued expenses 105,756 119,567
----------- -----------
Total short-term liabilities 381,459 147,295
----------- -----------
Long-term portion of capital lease obligations (Note 10) 2,137 1,875
Long-term debt (Note 5) 570,938 1,002,677
Other long-term liabilities 21,554 40,735
----------- -----------
Total long-term liabilities 594,629 1,045,287
----------- -----------
Total liabilities 976,088 1,192,582
----------- -----------
Minority interest (Note 2o.) 395,992 329,619
----------- -----------
Commitments and contingencies (Note 10)
Stockholders' equity (Note 8):
Common stock, 10,063,570 shares authorized, issued and
outstanding without par value 807,008 807,008
Treasury shares (204,904)
Effect on purchase of subsidiary shares 17,912 (33,562)
Retained earnings 151,512 143,802
----------- -----------
Total stockholders' equity 976,432 712,344
----------- -----------
Total liabilities and stockholders' equity $ 2,348,512 $ 2,234,545
=========== ===========
|
The accompanying notes are an integral part of these combined and consolidated financial statements.
GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S. A. DE C. V.
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
(Notes 1 and 7)
(amounts in thousands of US dollars, except per share amounts)
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Transportation revenues $ 695,425 $ 720,627 $ 712,140
--------- --------- ---------
Operating expenses:
Salaries, wages and employee benefits 111,790 128,845 124,413
Purchased services 138,453 147,015 163,835
Fuel, material and supplies 74,203 68,717 58,594
Other costs 129,497 147,578 129,428
Depreciation and amortization 77,777 79,496 82,552
--------- --------- ---------
Total operating expenses 531,720 571,651 558,822
--------- --------- ---------
Operating income 163,705 148,976 153,318
--------- --------- ---------
Other (expenses) income - Net (21,574) 35,572 (19,255)
--------- --------- ---------
Interest income 2,238 4,510 4,974
Interest expense (109,739) (87,009) (101,722)
Exchange (loss) gain - Net (1,424) 2,783 (17,411)
--------- --------- ---------
Net comprehensive financing cost (108,925) (79,716) (114,159)
--------- --------- ---------
Income before provision for deferred income
taxes and minority interest 33,206 104,832 19,904
Deferred income tax benefit (expense) (Note 9) 18,268 (2,652) (30,233)
--------- --------- ---------
Income (loss) before minority interest 51,474 102,180 (10,329)
Minority interest (10,163) (20,431) 2,341
--------- --------- ---------
Net income (loss) for the year $ 41,311 $ 81,749 ($ 7,988)
========= ========= =========
Net income (loss) for the year per share (Note 2p.) $ 4.10 $ 8.12 ($ .886)
========= ========= =========
|
The accompanying notes are an integral part of these combined and consolidated financial statements.
GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S. A. DE C. V.
COMBINED AND CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 2000, 2001 AND 2002
(Notes 1 and 8)
(amounts in thousands of US dollars)
Effect on
purchase of
Common subsidiary Treasury Retained
stock shares shares earnings Total
----- ------ ------ -------- -----
Balance at December 31, 1999 $ 807,008 $ 17,912 $ 28,452 $ 853,372
Net income for the year 41,311 41,311
---------- -------- -------- ---------
Balance at December 31, 2000 807,008 17,912 69,763 894,683
Net income for the year 81,749 81,749
---------- -------- -------- ---------
Balance at December 31, 2001 807,008 17,912 151,512 976,432
Effect on purchase of subsidiary shares (51,474) 278 (51,196)
Treasury shares ($ 204,904) (204,904)
Net loss for the year (7,988) (7,988)
---------- -------- --------- -------- ---------
Balance at December 31, 2002 $ 807,008 ($ 33,562) ($ 204,904) $143,802 $ 712,344
========== ======== ========= ======== =========
|
The accompanying notes are an integral part of these combined and consolidated financial statements.
GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S. A. DE C. V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Note 1)
(amounts in thousands of US dollars)
Year ended December 31,
-----------------------
Cash flows from operating activities: 2000 2001 2002
------------------------------------ ---- ---- ----
Net income (loss) for the year $ 41,311 $ 81,749 ($ 7,988)
--------- --------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 77,777 79,496 82,552
Amortization of discount on senior secured debentures
and commercial paper 45,665 49,408 23,158
Deferred income tax (benefit) expense (18,268) 2,652 30,233
Provision for doubtful accounts 1,852 (247) 345
Amortization of deferred financing costs 14,307 3,498 5,140
Minority interest 10,163 20,431 (2,341)
Loss on sale of property, machinery and equipment - Net 23,203 7,585 6,897
Gain on transfer of concession rights - Net (60,744)
Changes in other assets and liabilities:
Accounts receivable (34,277) (17,450) 12,621
Other accounts receivable (4,132) (24,595) (36,915)
Materials and supplies (3,030) 1,269 3,068
Other current assets 248 (1,084) (2,170)
Amounts due to related parties 15 (21,289) (4,180)
Accounts payable and accrued expenses 21,935 11,912 13,811
Other non-current assets and long-term liabilities (62) (44) (11,485)
--------- --------- --------
Total adjustments 135,396 50,798 120,739
--------- --------- --------
Net cash provided by operating activities 176,707 132,547 112,746
--------- --------- --------
Cash flows from investing activities:
Investment in Mexrail Inc. (44,000)
Sale of property, machinery and equipment 7,153 2,012 642
Acquisition of property, machinery and equipment (66,918) (85,245) (89,355)
Acquisition of treasury shares (162,575)
--------- --------- --------
Net cash used in investing activities (59,765) (83,233) (295,288)
--------- --------- --------
Cash flows from financing activities:
------------------------------------
Payments under commercial paper (25,156) (340,000)
Repayments for debt (15,074)
Proceeds from commercial paper 280,662 196,738
Proceeds from senior notes 175,241
Proceeds from term loan facility 128,000
Principal payment of senior secured credit facility (269,769)
Proceeds from revolving credit facility 15,102
Principal payments under capital lease obligations (10,248) (4,227) (298)
Payments under revolving credit facility (100,100)
--------- --------- ---------
Net cash (used in) provided by financing activities (99,427) (29,383) 159,681
--------- --------- --------
Increase (decrease) in cash and cash equivalents 17,515 19,931 (22,861)
Cash and cash equivalents:
Beginning of the year 15,664 33,179 53,110
--------- --------- --------
End of the year $ 33,179 $ 53,110 $ 30,249
========= ========= ========
Supplemental information:
------------------------
Cash paid during the year for interest $ 53,564 $ 28,779 $ 58,525
========= ========= ========
Non cash transactions:
----------------------
Due from Mexican Government $ 81,892 $ 93,555
========= ========
Due from related parties $ 20,000
========
Assets acquired through capital lease obligation $ 2,448
=========
|
The accompanying notes are an integral part of these combined and consolidated financial statements.
GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S. A. DE C. V.
NOTES TO THE COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(amounts in thousands of US dollars, except number of shares)
NOTE 1 - THE COMPANY:
Grupo Transportacion Ferroviaria Mexicana, S. A. de C. V. ("Grupo TFM") was incorporated on July 12, 1996. In December 1996, Grupo TFM was awarded the right to acquire (the "Acquisition") an 80% interest in TFM, S. A. de C. V. ("TFM" or the "Company"), formerly Ferrocarril del Noreste, S. A. de C. V. pursuant to a stock purchase agreement.
Grupo TFM is a non-operating holding company with no material assets or operations other than its investment in the Company, which in turn is the holding company of Mexrail, Inc. ("Mexrail") and Arrendadora TFM, S. A. de C. V. ("Arrendadora TFM"). The stockholders of Grupo TFM are TMM Multimodal, S. A. de C. V. ("TMM Multimodal"), an indirect subsidiary of Grupo TMM, S. A. de C. V. ("Grupo TMM"), Nafta Rail, S. A. de C. V. ("Nafta"), an indirectly wholly owned subsidiary of Kansas City Southern, Inc. ("KCS") and TFM. See Note 8.
TFM lines are comprised of approximately 2,641 (excluding the 20 miles of the Griega-Mariscala stretch, see Note 3) miles of track, which form a strategically important rail link within Mexico and to the North American Free Trade Agreement corridor. TFM lines directly link Mexico City and Monterrey (as well as Guadalajara through trackage rights) with the ports of Lazaro Cardenas, Veracruz and Tampico and the Mexican/United States border crossings of Nuevo Laredo-Laredo, Texas and Matamoros-Brownsville, Texas.
Approximately 70% of the Company's employees are covered under a collective bargaining agreement dated July 1, 2001. Under this labor agreement, the compensation terms of the collective bargaining agreement are subject to renegotiation on an annual basis, whereas all other terms are to be renegotiated every two years.
On February 27,2002, Grupo TMM and KCS announced that they had agreed to sell Mexrail (a US company), and its wholly owned subsidiary, the Tex-Mex Railway, to TFM for an aggregate price of $64 million ($32.6 million to Grupo TMM and $31.4 million to KCS). The sale was completed on March 27, 2002 and the purchase price was paid by crediting and account
receivable amounting to $20,000 due from Grupo TMM, and the remaining balance of $44,000 was paid in cash. As a result, Mexrail, Inc., with its wholly owned subsidiary, the Tex-Mex Railway, became wholly owned subsidiaries of TFM. TFM now controls the operation and dispatching of the entire international rail bridge.
The purchase of Mexrail by TFM was accounted for at historical cost in a manner similar to a pooling of interests because it is considered a business reorganization among companies within the same control group. As a result, all the assets and liabilities acquired by TFM were recorded at their historical cost. The transaction resulted in a reduction of stockholders' equity, at TFM level amounting to $41,952 representing the difference between the historical carrying value of the assets and liabilities acquired and the purchase price of $64,000. Thus, the transaction in Grupo TFM was accounted as a reduction of stockholders' equity amounting to $33,562 and to minority interest amounting to $8,390.
Since the above sale of Mexrail to TFM was a transaction between entities under common control, the transaction, for financial reporting purposes, has been retroactively restructured for all the previous periods on a historical cost basis in a manner similar to a pooling of interest.
Arrendadora TFM was incorporated on September 27, 2002 under the Mexican Law regulations and its only operation is the leasing to TFM of the locomotives acquired through the privatization previously transferred by TFM. Arrendadora TFM is a subsidiary of TFM.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Grupo TFM and subsidiaries prepare their financial statements in accordance with International Accounting Standards ("IAS") expressed in U.S. dollars, which differ in certain material respects from those under United States of America Generally Accepted Accounting Principles ("U.S. GAAP"). See Note 11. The most significant accounting policies are described below.
a. Consolidation
The consolidated financial statements include the accounts of Grupo TFM and its subsidiaries. All intercompany balances and transactions have been eliminated.
b. Translation
Although Grupo TFM and subsidiaries are required to maintain for tax purposes their books and records in Mexican pesos ("Ps"), except Mexrail, Grupo TFM and subsidiaries keep records and use the US dollar as their functional and reporting currency.
Monetary assets and liabilities denominated in Mexican pesos are translated into US dollars using current exchange rates. The difference between the exchange rate on the date of the transaction and the exchange rate on the settlement date, or balance sheet date if not settled, is included in the income statement as a foreign exchange gain/loss. Non monetary assets or
liabilities originally denominated in Mexican pesos are translated into US dollars using the historical exchange rate at the date of the transaction. Capital stock and minority interest are translated at historical rates. Results of operations are mainly translated at the monthly average exchange rates. Depreciation and amortization of non-monetary assets are translated at the historical exchange rate.
c. Cash and cash equivalents
Cash and cash equivalents represent highly liquid interest-bearing deposits and investments with an original maturity of less than three months.
d. Materials and supplies
Materials and supplies, consisting mainly of fuel and items for maintenance of property and equipment, are valued at the lower of the average cost or market.
e. Concession rights and related assets
Costs incurred by the Company to acquire the concession rights and related assets were capitalized and are amortized on a straight-line basis over the estimated useful lives of the related assets and rights acquired (see Notes 3 and 4). The purchase price to acquire the concession rights and related assets was allocated to the identifiable assets acquired and liabilities assumed in connection with the privatization process (see Note 3) based on their estimated fair value.
The assets acquired and liabilities assumed include:
(i) The tangible assets acquired pursuant to the asset purchase agreement, consisting of locomotives, rail cars and materials and supplies;
(ii) The rights to utilize the right of way, track structure, buildings and related maintenance facilities of the TFM lines;
(iii) The 25% equity interest in the company established to operate the Mexico City rail terminal facilities; and
(iv) Capital lease obligations assumed.
f. Property, machinery and equipment
Machinery and equipment acquired through the asset purchase agreement were initially recorded at their estimated fair value. Subsequent acquisitions are stated at cost. Depreciation is calculated by the straight-line method based on the estimated useful lives of the respective fixed assets (see Note 4).
Recurring maintenance and repair expenditures are charged to operating expenses as incurred. The cost of locomotives rebuilt is capitalized and is amortized over the period in which benefits are expected to be received (eight years).
g. Foreign currency position
At December 31, 2002 Grupo TFM had monetary assets and liabilities denominated in Mexican pesos of Ps1,292 million and Ps414 million (Ps1,718 million and Ps334 million, at December 31, 2001), respectively. At December 31, 2001 and 2002 the exchange rate was Ps9.18 and Ps10.45 per US dollar, respectively. At February 28, 2003, date of issuance of these consolidated financial statements, the exchange rate was Ps10.86 per US dollar.
h. Derivative financial instruments
The Company enters into financial and commodity derivative instruments as a part of its risk management program including currency exchange contracts, interest rate arrangements and U.S. based fuel futures. These contracts are mark to market and accordingly gains and losses related to such transactions are recognized in results of operations on a monthly basis. See Note 6.
i. Investment held for operating purposes
TFM's 25% interest in the Mexico City rail terminal is accounted for using the equity method of accounting. For the years ended December 31, 2000, 2001 and 2002, the equity in the loss (income) of Mexico City rail terminal amounted $19, $915 and ($1,269), respectively and is included in other (expenses) income-net in the statements of income.
j. Deferred financing costs
Includes fees and other related expenses paid by the Company to obtain long-term debt (see Note 5). These deferred financing costs are amortized by the effective interest method during the outstanding period of such long-term debt.
k. Deferred income tax
Deferred income tax is determined following interperiod allocation procedures under the liability method.
Under this method the Company is required to establish a provision for deferred income taxes on the tax indexation of certain non-current assets and, in relation to an acquisition, on the difference between the acquisition cost of the net assets acquired and their tax base.
l. Seniority premiums
Seniority premiums to which employees are entitled upon termination of employment after 15 years of service are expensed in the years in which the services are rendered. Starting in 2002, the Company recognized the seniority premiums based on actuarial computations. At December 31, 2001 and 2002, the Company had a provision of $1,478 and $778, respectively.
Other compensations based on length of service to which employees may be entitled in the event of dismissal or death, in accordance with the Mexican Federal Law, are charged to the statement of income in the year in which they become payable.
m. Revenue recognition
Revenue is recognized proportionally as a shipment moves from origin to destination.
n. Intangible assets and long-lived assets
The carrying value of intangible assets and long-lived assets are periodically reviewed by the Company and impairments are recognized when the expected future operating cash flows, undiscounted and without interest charges, derived from such intangible assets and long-lived assets are less than their carrying value.
o. Minority interest
The minority interest reflects the 20% share of the Company held by the Government.
p. Net income per share
Net income per share is calculated based on the weighted average number of shares outstanding during the year. The weighted average number of shares outstanding for the years ended December 31, 2000, 2001 and 2002 was 10,063,570, 10,063,570 and 9,011,069, respectively.
q. Concentration of risk
Over 23% of the Company's transportation revenues are generated by the automotive industry, which is made up of a relatively small number of customers. In addition, the Company's largest customer accounted for approximately 10% of transportation revenues. The Company performs ongoing credit valuations of its customers' financial conditions and maintains an allowance for doubtful accounts.
r. Use of estimates
The preparation of the consolidated financial statements requires management to make estimates and assumptions that could affect the reported amounts of assets and liabilities at the date of the financial statements. Actual results could differ from these estimates.
NOTE 3 - CONCESSION RIGHTS AND RELATED ASSETS:
In December 1996, the Government granted TFM the Concession (the "Concession") to operate the northeast rail lines for an initial period of fifty years, exclusive for thirty years, renewable, subject to certain conditions, for a second period of equal length. Under the terms of the Concession, the Company has the right to use and the obligation to maintain the right of way, track structure, buildings and related maintenance facilities. Ownership of such property and fixtures, however, has been retained by the Government.
Concession rights and related assets are summarized below:
December 31, Estimated
------------
useful
2001 2002 lives (years)
---- ---- -------------
Land $ 132,878 $ 132,878 50
Buildings 33,113 33,113 27-30
Bridges 75,350 75,350 41
Tunnels 94,043 94,043 40
Rail 317,268 317,268 29
Concrete and wood ties 137,351 137,351 27
Yards 106,174 106,174 35
Ballast 107,189 107,189 27
Grading 391,808 391,808 50
Culverts 14,942 14,942 21
Signals 1,418 1,418 26
Other 61,792 61,792 5-50
---------- ----------
1,473,326 1,473,326
Accumulated amortization (215,735) (257,839)
---------- ----------
Concession rights and related assets - Net $1,257,591 $1,215,487
========== ==========
|
Amortization of concession rights was $40.5 million, $40.0 million, and $40.2 for the years ended December 31, 2000, 2001 and 2002, respectively.
On February 9, 2001 the Ministry of Communications and Transport ("SCT") issued statement 4.123. Under this statement, the SCT and TFM agreed to transfer a line of the two-way Griega-Mariscala stretch to the Government in order to be included in the North Pacific concession. In return for this stretch, TFM recorded a receivable from the Government in the amount of $85,226, which was applied against the purchase price of the 24.63% Grupo TFM's capital stock owned indirectly by the Government through Ferrocarriles Nacionales de Mexico ("FNM") and Nacional Financiera, S. N. C. ("Nafin") the amount of $85,226 (see Note 8). During 2001, the Company recognized a net gain related with this transaction of approximately $60,744, which was credited to other (expenses) income-net in the statement of income.
Government payment was restated in accordance with an appraisal performed by the "Comision de Avaluos de Bienes Nacionales", until the payment date.
On February 12, 2001, the SCT modified the Concession title granted to TFM (i) to transfer the Griega-Mariscala stretch described above, and (ii) authorized the dismantling of the catenary running over the route between Huehuetoca, State of Mexico and the City of Queretaro.
NOTE 4 - PROPERTY, MACHINERY AND EQUIPMENT:
Pursuant to the asset purchase agreement, the Company obtained the right to acquire locomotives and rail cars and various materials and supplies, formerly owned by FNM. The Company also agreed to assume the outstanding indebtedness, as of the commencement of operations, relating to certain locomotives originally acquired by FNM under capital lease arrangements (see Note 10). Legal title to the purchased assets was transferred to TFM at that time.
December 31, Estimated
------------
useful
2001 2002 lives (years)
---- ---- -------------
Locomotives $ 176,647 $ 176,456 14
Freight cars 105,921 98,622 12-16
Machinery of workshop 17,111 17,515 8
Machinery of road 28,233 30,906 14
Furniture and equipment 268,198 318,677 1-15
Buildings 6,697 7,168 20
Other 67,081 77,192 8
----------- -----------
669,888 726,536
Less accumulated depreciation
and amortization (159,430) (199,246)
----------- -----------
510,458 527,290
Land 37,538 37,607
Construction in progress 20,759 44,470
----------- -----------
$ 568,755 $ 609,367
=========== ===========
|
Depreciation of property, machinery and equipment was $37.2 million in 2000, $39.4 million in 2001 and $42.8 in 2002.
NOTE 5 - FINANCING:
Financing is summarized as follows:
December 31,
------------
Short-term debt: 2001 2002
--------------- ---- ----
Commercial paper (1) $ 265,000
Less-discount on commercial paper (362)
----------- -----------
$ 264,638 $ -
=========== ===========
Current portion of long-term debt:
----------------------------------
Term loan facility (6) $ 18,286
===========
|
December 31,
------------
Long-term debt: 2001 2002
-------------- ---- ----
Senior notes due 2007 (2) $ 150,000 $ 150,000
Senior discount debentures (3) 443,501 443,501
Senior notes due 2012 (4) 180,000
Commercial paper (5) 122,000
Term loan facility (6) 109,714
----------- -------------
593,501 1,005,215
Less-discount on senior discount debentures, senior
notes and commercial paper (22,563) (2,538)
----------- -------------
$ 570,938 $ 1,002,677
=========== =============
|
(1) Commercial paper
On September 17, 2002, the total amount of the commercial paper was due and the Company entered into two new bank facilities provided by a consortium of banks for an aggregate amount of $250 million in order to refinance the commercial paper program. The Company repaid the remaining $60 million of indebtedness outstanding under the former commercial program. See (5) below.
(2) Senior notes due 2007
In June 1997 the Company issued US dollar denominated securities bearing interest semiannually at a fixed rate of 10.25% and maturing on June 15, 2007.
Interest expense related with the senior notes amounted $16,167, for each one of the years ended December 31, 2000, 2001 and 2002.
(3) Senior discount debentures ("SDD")
The US dollar denominated SDD were sold in June 1997, at a substantial discount from their principal amount of $443,501, and no interest will be payable thereon prior to June 15, 2002. The SDD will mature on June 15, 2009. The price of the SDD represents a yield to maturity of 11.75% fixed rate, computed on the basis of semiannual compounding and maturing on June 15, 2002. Interest on the SDD is payable semiannually at a fixed rate of 11.75%, commencing on December 15, 2002. The SDD are redeemable at the option of the Company, in whole or in part, at any time on or after June 15, 2002, at the redemption prices shown in the next page (expressed in percentages of principal amount at maturity), plus accrued and unpaid interest, if any. The unamortized discount at December 31, 2001 amounted to $22,563.
Senior discount debenture
Year redemption price
---- ----------------
2002 105.8750%
2003 102.9375%
2004 and thereafter 100.0000%
|
Interest expense related with the SDD amounted $42,608, $47,763 and $53,406 during 2000, 2001 and 2002, respectively.
(4) Senior notes due 2012
TFM completed a solicitation of consents of holders of 10.25% Senior Notes due 2007 and 11.75% SDD due 2009 senior notes and its debentures to an amendment providing for certain changes to the "Limitation on Restricted Payments", "Limitation on Indebtedness", and "Limitation on Liens" covenants in each of the indentures pursuant to which the securities were issued. TFM obtained the requisite consents and paid a fee of $16,972 to allow it to issue additional $180,000 in new debt and to purchase the call option shares in Grupo TFM held by the Government (see Note 8).
In June 2002, TFM issued senior notes for an aggregate principal amount of $180,000. The senior notes are denominated in dollars, bear interest semi-annually at a fixed rate of 12.50% and mature on June 15, 2012. The senior notes are redeemable at TFM's option on or after June 15, 2007 and, subject to certain limitations, at any time in the event of certain changes in Mexican tax law. The senior notes were issued at a discount of $2.5 million, which is being amortized based on the interest method over its term. The unamortized discount at December 31, 2002 amounted to $2,376.
The Company incurred and capitalized $25.1 million in consent and professional services fees in connection with the issuance of these notes and is being amortized based on the interest method over the term of the senior notes.
Interest expense related with the senior notes due 2012 amounted to $12,944, for the year ended December 31, 2002.
According to the refinancing of the commercial paper program due in September 2002, the Company entered into two new bank facilities as follows:
(5) Commercial paper
The commercial paper program consists of a two-year facility in the amount of $122,000, which is supported by a letter of credit issued under the bank facility. The new commercial paper facility allows the Company to draw-down advances from time to time, subject to certain terms
and conditions. The obligations of the commercial paper facility rank at least pari passu with the other senior unsecured indebtedness. The unamortized discount at December 31, 2002 amounted to $162.
(6) Term loan facility
The term loan facility is a four-year term loan in the amount of $128,000. The term loan is payable in semi-annual installments beginning in September 2003 and ending in September 2006 and bearing interest at Libor plus applicable margin. The obligations of the term loan facility rank at least pari passu with the other senior unsecured indebtedness.
Covenants
The agreements related to the above-mentioned loans include certain affirmative and negative covenants and maintenance of certain financial conditions, including, among other things, dividend and other payment restrictions affecting restricted subsidiaries, limitation on affiliate transactions and restrictions and asset sales, with which Grupo TFM and subsidiaries were in compliance at December 31, 2002.
NOTE 6 - FINANCIAL INSTRUMENTS:
Fuel contracts
The Company may seek to assure itself of more predictable fuel expenses through U.S. fuel swap contracts. TFM's fuel hedging program covered approximately 25% of estimated fuel purchases. Hedge positions are also closely monitored to ensure that they will not exceed actual fuel requirements in any period.
As of December 31, 2002, the Company had ten swap contracts outstanding for 5,000,083 gallons of fuel which expired in January and February 2003. The realized gain was $1,548 and the Company has only recorded at December 31, 2002 a benefit of $1,009.
Foreign exchange contracts
The purpose of the Company's foreign exchange contracts is to limit the risks arising from its peso-denominated monetary assets and liabilities.
The nature and quantity of any hedging transactions will be determined by Management of the Company based upon net assets exposure and market conditions.
As of December 31, 2001, the Company had eight Mexican peso call options outstanding in the notional amount of $10 million each one, based on the exchange rate of Ps9.973 per dollar. These options expired during 2002.
As of December 31, 2002, the Company had one Mexican peso call option outstanding in the notional amount of $1.7 million, based on the average exchange rate of Ps11.0 per dollar. This option will expire in May 29, 2003.
Additionally, as of December 31, 2002, the Company had one forward contract outstanding in the notional amount of $10 million, based on the exchange rate of Ps9.769 per dollar. This forward expired on February 13, 2002.
Fair value of financial instruments
The fair values of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate carrying values because of the short maturity of these financial instruments.
The related fair value based on the quoted market prices for the Senior notes due 2007 and SDD or similar issues at December 31, 2001 was $138,000 and $385,845, and at December 31, 2002 was $140,625 and $427,334, respectively. The related fair value of the senior notes due 2012 at December 31, 2002 was $179,325. The carrying amount of commercial paper and term loan facility approximates fair value due to their variable rates.
NOTE 7 - BALANCES AND TRANSACTIONS WITH RELATED PARTIES:
December 31,
------------
2001 2002
---- ----
Accounts receivable:
-------------------
TMM Multimodal $ 20,000
Other Grupo TMM's subsidiaries 2,728 $ 5,316
---------- ---------
$ 22,728 $ 5,316
========== =========
December 31,
------------
2001 2002
---- ----
Accounts payable:
----------------
KCS $ 3,284 $ 1,222
Terminal Ferroviaria del Valle del Mexico, S. A. de C. V. 2,308 3,479
Other Grupo TMM's subsidiaries 5,175 4,474
---------- ---------
$ 10,767 $ 9,175
========== =========
|
The most important transactions with related parties are summarized as follows:
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Transportation revenues $ 3,410 $ 3,434 $ 7,645
========= ========== ==========
Management services ($ 2,500) ($ 2,500) ($ 2,500)
========= ========== ==========
Other expenses ($ 5,262) ($ 9,501) ($ 11,634)
========= ========== ==========
|
Grupo TMM management services agreement
The Company and Grupo TMM entered into a management services agreement pursuant to which Grupo TMM provides certain consulting and management services to the Company commencing May 1997 for a term of 12 months and which may be renewed for additional one-year periods by agreement of the parties. Under the terms of the agreement, Grupo TMM is to be reimbursed for its costs and expenses incurred in the performance of such services.
KCS Transportation Company ("KCSTC") management services agreement
The Company and KCSTC, a wholly owned subsidiary of KCS, entered into a management services agreement pursuant to which KCSTC makes available to the Company certain railroad consulting and management services commencing May 1997 for a term of 12 months and which may be renewed for additional one-year periods by agreement of the parties. Under the terms of the agreement, KCSTC is to be reimbursed for its costs and expenses incurred in the performance of such services.
On April 30, 2002, TFM and KCS, as successor in interest through merger with KCSTC, as well as TFM and Grupo TMM, entered into amendments to the management services agreements that provides for automatic renewal of the agreements and compensates KCS and Grupo TMM for their services under the agreements. The amendments state that KCS and Grupo TMM are entitled to receive (1) $2,500,000 paid in nine equal monthly installments beginning in April 2002, as compensation for services rendered between January 1, 1999 and December 31, 2000; (2) and additional $2,500,000 in a lump sum payment on or before January 2, 2003 as compensation for services rendered from January 1, 2001 through December 31, 2002; and (3) quarterly service payments, payable in arrears, for the period beginning January 1, 2003 at an annual rate of $1,250,000. The management services agreements are terminable by either party upon 60 days written notice.
NOTE 8 - STOCKHOLDERS' EQUITY:
Grupo TFM's capital stock is variable with a fixed minimum of Ps50,000 and an unlimited maximum. The capital stock of Grupo TFM is divided into series without par value, whose principal differences relate to: a) Series "A" shares with voting rights, which can be held only by persons or companies of Mexican nationality and represent up to 51% of the capital stock of Grupo TFM; b) Series "B" shares with voting rights, which can be held by persons or companies of non-Mexican nationality and represent up to 49% of the capital stock of Grupo TFM, unless authorized by the National Commission of Foreign Investments, in which case the percentage can be higher, and c) Series "L" shares with restricted voting rights, which are not entitled to a dividend preference.
In connection with the original formation of Grupo TFM, the Government purchased
a 24.63% non-voting interest in Grupo TFM for $198.8 million. The Government
also granted the original shareholders of Grupo TFM an option (the "call
option") to purchase the Government's equity interest in Grupo TFM. TFM has been
appointed as the purchaser and, on July 29, 2002, purchased all of the call
option shares for an aggregate purchase price of $256.1 million. The purchase
price for the call option shares was financed through (1) a portion ($162,575)
of the proceeds of the issuance of $180,000 of debt securities by TFM (see Note
5) and approximately $93,555 was applied against note receivables from the
Government.
At December 31, 2002 the capital stock of Grupo TFM is represented by 10,063,570 shares as follows:
Number of shares Number of shares
Stockholders (fixed portion of capital stock) (variable portion of capital stock)
------------ -------------------------------- -----------------------------------
Series "A" Series "A"
---------- ----------
TMM Multimodal 25,500 3,842,901
Series "B" Sub-series "B"
---------- --------------
Nafta 24,500 3,692,199
Sub-series "L"
--------------
TFM (treasury shares) 2,478,470
------ ----------
Total 50,000 10,013,570
====== ==========
|
Pursuant to the new shares sub-series "L-2" granted to TFM, the voting rights
attached to these shares are limited to the following matters: (i) extension of
the duration of the Company; (ii) premature dissolution of the Company; (iii)
change in the object of the Company; (iv) change of nationality of the Company;
(v) transformation of the Company; (vi) merger with another company; (vii) the
split-up of the Company and (viii) the cancellation of the registration of the
shares with the Mexican Stock Exchange or any foreign stock exchange of the
shares which might be registered. Except as described above, holders of
Sub-series "L-2" shares have no voting rights. Grupo TFM Sub-series "L-2" shares
do not confer upon the holders thereof any right to preference dividends.
The sub-series "L-1" shares that were previously held the by Government were cancelled as the call option was appointed by TFM.
At the General Ordinary Stockholders' Meeting held on December 21, 2001, the stockholders of Grupo TFM agreed to pay dividends of $33,819, equivalent to $3.3605 per share.
At the Unanimous Resolutions Meeting held on December 21, 2001, the stockholders of TFM agreed to pay dividends of $33,165, equivalent to $0.0002396 per share.
On March 26, 2002, the Company received the ruling from Mexican Court annulling the Ordinary Stockholders' Meeting mentioned above. As a consequence the Unanimous Resolutions Meeting mentioned above, was also annulled, thus the dividends, agreed in both Meetings, were cancelled in the consolidated financial statements as of December 31, 2001, giving retroactive effect to said annulment. Thus, the amounts paid in this regard were applied against the acquisition of Mexrail and the purchase price of the 24.63%. (See Note 1).
The Government has retained a 20% interest in TFM's shares and has reserved the right to sell such shares by October 31, 2003 in a public offering. In the event that such public offering does not occur by October 31, 2003, Grupo TFM may purchase the Government's equity interest in TFM at a purchase price equal to the per share price initially paid by Grupo TFM, indexed based on Mexican inflation. If Grupo TFM does not purchase the Government's TFM interest, the Government may require Grupo TMM and KCS to purchase the TFM shares at the price discussed above. See Note 3.
Dividends paid are not subject to income tax if paid from the Net Tax Profit Account. Any excess over this account is subject to a tax equivalent to 51.52%, 49.25% or 47.06% depending on whether paid in 2003, 2004 or 2005, respectively. The tax is payable by the Company and may be credited against its income tax in the same year or the following two years. Dividends paid are not subject to tax withholding.
In the event of a capital reduction, any excess of stockholders' equity over capital contributions, the latter restated in accordance with the provisions of the Income Tax Law, is accorded the same treatment as dividends.
NOTE 9 - INCOME TAX, EMPLOYEES' STATUTORY PROFIT SHARING, ASSET TAX AND TAX LOSS CARRYFORWARDS:
Income tax
Grupo TFM and its subsidiaries compute income tax on an individual basis.
Grupo TFM and its subsidiaries had combined losses for tax purposes of $135,816, $51,680 and $401,415 for the years ended December 31, 2000, 2001 and 2002, respectively. The difference between tax losses and book income (loss) is due principally to the inflation gain or loss recognized for tax purposes, the difference between book and tax depreciation and amortization, non-deductible expenses and temporary differences for certain items that are reported in different periods for financial reporting and income tax purposes.
The (benefit) expense for income tax (credited) charged to income was as follows:
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Current income tax $ - $ 79 $ -
Deferred income tax
(benefit) expense (18,268) 2,573 30,233
---------- --------- ----------
Net income tax (benefit) expense ($ 18,268) $ 2,652 $ 30,233
========== ========= ==========
|
Reconciliation of the income tax expense based on the statutory income tax rate to recorded income tax (benefit) expense was as follows:
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Income before income tax $ 33,206 $ 104,832 $ 19,904
========= =========== ===========
Income tax at 35% $ 11,622 $ 36,691 $ 6,967
(Decrease) increase resulting from:
Effects of inflationary components (2,603) (10,969) 4,867
Effects of inflation on tax loss carryforwards (28,599) (26,202) 14,281
Non-deductible expenses 672 911 2,128
Change in tax rate from 35% to 32% (1,837)
Other - Net 640 2,142 3,827
--------- ----------- -----------
Net deferred income tax (benefit) expense ($ 18,268) $ 2,573 $ 30,233
========= =========== ===========
|
According to the amendments to the Mexican Income Tax Law in 2002, the income tax rate will decrease one percent per year from 35% starting in 2003 up to 32% in 2005.
The components of deferred tax assets and (liabilities) are comprised of the following:
December 31,
------------
2001 2002
---- ----
Tax-loss carryforwards $ 287,045 $ 381,954
Inventories and provisions - Net 47,011 31,255
Machinery and equipment (5,284) (42,951)
Concession rights (198,922) (264,046)
Other 1,356 (5,240)
---------- ----------
Net deferred income tax asset $ 131,206 $ 100,972
========== ==========
|
Employees' statutory profit sharing
Employees' statutory profit sharing is determined by the Company at the rate of 10% on taxable income, adjusted as prescribed by the Mexican Income Tax Law. For the years ended December 31, 2000, 2001 and 2002, there was no basis for employees' statutory profit sharing.
Asset tax
The Asset Tax Law establishes a tax of 1.8% on the average of assets, less certain liabilities, which is payable when it exceeds the income tax due. There was no basis for asset tax in 2001 and 2002.
Tax loss carryforwards
At December 31, 2002 Grupo TFM and its subsidiaries had combined tax loss carryforwards, which under the Mexican Income Tax Law are inflation-indexed through the date of utilization as shown in the next page.
Inflation-indexed
Year in which amounts as of Year of
loss arose December 31, 2002 expiration
---------- ----------------- ----------
1996 $ 14,690 2046
1997 232,418 2046
1998 292,030 2046
1999 7,152 2046
2000 160,993 2046
2001 70,842 2046
2002 412,168 2012
-----------
$ 1,190,293
===========
|
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
A) Commitments:
Concession duty
Under the Concession, the Government has the right to receive a payment from the Company equivalent to 0.5% of the gross revenue during the first 15 years of the Concession period and 1.25% during the remaining years of the Concession period. For the years ended December 31, 2000, 2001 and 2002 the concession duty expense amounted to $3,334, $3,391 and $3,267, respectively, which was recorded as operating expense.
Capital lease obligations
At December 31, 2001 and 2002, the outstanding indebtedness corresponds to two land capital leases for a period of ten years, in which TFM has the option to purchase them at the end of the agreement term.
Locomotives operating leases
In May 1998 and September 1999, the Company entered into operating lease agreements for 75 locomotives each, which expire over the next 18 and 19 years, respectively. At the end of the contracts the locomotives will be returned to the lessor. As of December 31, 2002, the Company had received 150 locomotives. Rents under these agreements amounted $22.8 million in 2000, $34.1 million in 2001 and $32.5 million in 2002.
Future minimum payments, by year and in the aggregate, under the aforementioned leases are as follows:
Year ending December 31,
------------------------
2003 $ 28,720
2004 28,720
2005 28,720
2006 28,720
2007 28,720
2008 and thereafter 321,851
--------
$465,451
========
|
Railcars operating leases
The Company leases certain railcars under agreements, which are classified as operating leases. The term of the contracts fluctuate between 3 and 15 years. Future minimum rental payments, under these agreements are shown as follows:
Year ended December 31,
-----------------------
2003 $ 32,830
2004 18,064
2005 12,504
2006 10,012
2007 9,084
2008 and thereafter 51,143
--------
$133,637
========
|
Locomotives maintenance agreements
The Company has entered into two locomotives maintenance agreements, which expire in 2004 and 2018 with third-party contractors. Under current arrangements, the contractors provide both routine maintenance and major overhauls at an established rate in a range from four to five hundred dollars per locomotive per day.
Track maintenance and rehabilitation agreement
In May 2000, the Company entered into a track maintenance and rehabilitation agreement, which expires in 2012. Under this contract, the contractor provides both routine maintenance and major rehabilitation to the Celaya - Lazaro Cardenas stretch, which is comprised of approximately 350
miles. Maintenance and rehabilitation expense amounted to $30.2 million in 2001 and $35.6 million in 2002. Under this agreement, the Company will pay approximately $33 million in the following 10 years.
Fuel purchase agreement
On December 19, 1997, the Company entered into a fuel purchase agreement with PEMEX Refinacion, under which the Company has the obligation to purchase at market price a minimum of 15,000 cubic meters and a maximum of 20,000 cubic meters per month of PEMEX diesel. The term of the agreement is indefinite but can be terminated for justified cause by each party with a written notification upon three months notice.
Fuel freight service agreement
On October 30, 2002, the Company entered into a freight service agreement with PEMEX Refinacion, which will expire until 2006. Under this agreement the Company has the obligation to provide services amounting in pesos by year as shown below:
Minimum Maximum
------- -------
2003 Ps 126,264 Ps 315,659
2004 98,769 246,922
2005 98,769 246,922
2006 65,756 164,390
---------- ----------
Ps 389,558 Ps 973,893
========== ==========
|
B) Contingencies:
- Grupo TFM and its subsidiaries are parties to various legal actions and other claims in the ordinary course of their business, mainly related with labor and social security obligations. Management does not believe that any pending litigation against Grupo TFM and subsidiaries will, individually or in the aggregate, have a material adverse effect on their results of operations or financial condition.
- The Company has filed a claim for the refund of approximately $262 million (Ps 2,111 million) of value added tax paid in connection with the Acquisition (see Note 1). However, a full valuation allowance has been provided in the accompanying consolidated financial statements.
On September 25, 2002 the Mexican Magistrates Court of the First District (the "Federal Court"), issued its judgment in favor of TFM on the VAT claim which has been pending in the Mexican Courts since 1997. By a unanimous decision, a three-judge panel of the Federal Court vacated a prior judgment of the Mexican Fiscal Court (Tribunal Federal de Justicia Fiscal y
Administrativa) and remanded the case to the Mexican Fiscal Court with specific instructions to enter a new decision consistent with the guidance provided by the Federal Court's ruling. The Federal Court's ruling requires the fiscal authorities to issue the VAT credit certificate only in the name of TFM. On December 6, 2002 the upper chamber of the Mexican Fiscal Court has issued a ruling denying TFM's right to receive a value added tax refund from the Mexican Federal Government. On January 8, 2003, TFM was officially notified of the new judgment of the Fiscal Court and on January 29, 2003, filed the appropriate appeal. TFM is considering filing an additional complaint against the fiscal courts new judgment, and in both instances believes that it will prevail. In the event TFM prevail, a third party who can establish that its rights have been adversely and improperly affected by the new ruling may seek to bring a claim, in a different proceeding, against TFM. However, TFM does not believe that any third party's rights would be improperly affected and believes that it would prevail in any such action.
- In September 2001, Ferrocarril Mexicano, S. A. de C. V. ("Ferromex") filed a legal claim against the Company relating to payments that both parties are required to make to each other for interline services and trackage and haulage rights pursuant to each of their respective concessions. At the date of issuance of these consolidated financial statements, the Company and Ferromex have not been able to agree upon the rates that each is required to pay to the other for such services and rights. Accordingly, in 2001 the Company has initiated an administrative proceeding pursuant to the Mexican Railroad Services Law and Regulations requesting a determination of such rates by the SCT to determine the conditions and rates under which such services and rights are to be rendered. On September 25, 2002 the third civil court of Mexico City rendered its judgment in favor of TFM. Ferromex has appealed the judgment and it cannot be predicted whether TFM will ultimately prevail.
On March 14, 2002, the Company received the ruling from SCT solving the procedures and conditions for the trackage rights for 2002. The Ministry of Transportation was silent with respect to rates for interline services and stated that rates for haulage services should be privately negotiated because these services are not established under any railroad concession. The trackage rights rates established by the Ministry of Transportation under the ruling are to become effective immediately, and the Company and Ferromex are directed to settle the amounts each one owes to the other for interline services and trackage and haulage rights within a period of 45 day after TFM commence operating under long-distance trackage rights. Although the Ministry of Transportation's ruling establishes rates using the criteria set forth in the Mexican railroad services law and regulations, TFM is appealing the ruling on the grounds that it fails to establish rates for interline services and because the Company disagree with the methodology applied to the criteria in calculating the trackage rights rates. The Company is also requesting a suspension of the effectiveness of the ruling pending resolution of this appeal.
In connection with the Ferromex claim, Ferromex temporarily prevented TFM from using certain short trackage rights, which TFM has over a portion of its route running from Celaya to Silao, which is the site of a General Motors plant from where TFM transport finished vehicles to the border crossing at Nuevo Laredo. Ferromex was subsequently ordered by the court to resume giving TFM access, and in October 2002, TFM filed a counterclaim against Ferromex relating to these actions.
Management cannot predict whether TFM will ultimately prevail in this proceeding and whether the rates TFM is ultimately allowed to charge will be adequate to compensate the Company. Management believes that, even if the rates established in the ruling go into effect and TFM and Ferromex begin using the long-distance trackage rights over each other's rail line, this will not have a material adverse effect on the results of operations. However, Management cannot guarantee that the competitors' usage of TFM's rail lines will not result in losing business or that losses will be offset by revenues generated from the payments for the rights to use TFM's tracks.
The Company believes that the payments for interline services and haulage owed by Ferromex exceed the amount of payments that Ferromex claims the Company owes to Ferromex for such services and rights. Accordingly, the Company believes that the outcome of this legal claim will not have a material adverse effect on the financial condition of TFM.
NOTE 11 - RECONCILIATION OF DIFFERENCES BETWEEN IAS AND U.S. GAAP:
The Company's combined and consolidated financial statements are prepared in accordance with IAS which differ in certain material respects from U.S. GAAP. The main differences between IAS and U.S. GAAP, as they relate to the Company, are summarized in the following pages. An explanation is provided when considered necessary of the effects on the consolidated net income and on stockholders' equity.
a. Reconciliation of net income
Year ended December 31,
-----------------------
Reference to
subnote d. 2000 2001 2002
---------- ---- ---- ----
Net income (loss) under IAS $ 41,311 $ 81,749 ($ 7,988)
Deferred income tax i (1,822) (6,679) 121,738
Deferred employees' statutory profit
sharing i 4,573 (2,623) 25,792
Deferred charges ii (933) 702
Depreciation iii (459)
Effect of U.S. GAAP adjustments on
minority interest (550) 2,047 (29,601)
---------- ---------- -----------
Net income under U.S. GAAP $ 43,512 $ 73,561 $ 110,184
========== ========== ===========
|
b. Reconciliation of stockholders' equity
December 31,
------------
Reference to
subnote d. 2001 2002
---------- ---- ----
Stockholders' equity under IAS $ 976,432 $ 712,344
Deferred income tax i (88,332) 33,406
Deferred employees' statutory profit sharing i 12,901 38,693
Deferred charges ii (933) (231)
Depreciation iii (459)
Effect on purchase of subsidiary shares iii 16,447
Effect of U.S. GAAP adjustments on minority interest 15,273 (14,328)
----------- -----------
Stockholders' equity under U.S. GAAP $ 915,341 $ 785,872
=========== ===========
|
c. Analysis of changes in stockholders' equity under U.S. GAAP:
December 31,
------------
Reference to
subnote d. 2001 2002
---------- ---- ----
Balance at beginning of the year $ 841,780 $ 915,341
Effect on purchase of subsidiary shares iii (34,749)
Treasury shares (204,904)
Net income 73,561 110,184
----------- -----------
Balance at end of the year $ 915,341 $ 785,872
=========== ===========
|
d. Significant differences between IAS and U.S. GAAP:
i. Deferred income tax and employees' statutory profit sharing
The deferred income tax included in the consolidated financial statements was calculated in accordance with the IAS-12 (revised) which requires the recording of deferred taxes for fixed assets and concession, including the effects of indexing for tax purposes.
U.S. GAAP prohibits recognition of deferred tax assets or liabilities for differences related to assets and liabilities that are remeasured from the local currency into the functional currency using historical exchange rates and that result from changes in exchange rates or the indexation for tax purposes.
In Mexico, companies are obligated to pay their employees a portion of the net income as defined by specific regulations. For U.S. GAAP purposes, deferred profit sharing liabilities or assets would be recorded for temporary differences that may arise in the determination of the current liability based on the statutory rate of 10%. These temporary differences are similar to those that exist for deferred income tax purposes. IAS do not require the establishment of assets or liabilities for these differences.
The differences in the net deferred income tax and employees' statutory profit sharing assets determined under U.S. GAAP and IAS at December 31, 2001 and 2002 are summarized below:
Deferred income Deferred profit
tax assets sharing assets
---------- --------------
2001 2002 2001 2002
---- ---- ---- ----
Amounts recorded under IAS $ 131,206 $ 100,972 $ - $ -
Amount determined under U.S.
GAAP 42,874 134,378 12,901 38,693
---------- --------- --------- ---------
Net difference $ 88,332 ($ 33,406) $ 12,901 $ 38,693
========== ========= ========= =========
|
Under U.S. GAAP, employee profit sharing would be considered as operating expense.
ii. Deferred charges
During 2001, the Company incurred in certain financing costs paid to third parties which were capitalized under IAS amounting to $933. Under U.S. GAAP, it is required that these costs are expensed as incurred.
Additionally during 2002, the Company incurred in certain expenses related with the 180,000 senior notes as mentioned in Note 5. Under U.S.GAAP the legal fees for the exchange of such senior notes amounting to $231 should be expensed as incurred. Nevertheless, under IAS these expenses should be capitalized and amortized over the period of the senior notes.
iii. Mexrail transaction
As more fully described in Note 1, on March 27,2002, Grupo TMM and KCS sold their respective interests in Mexrail to TFM for an aggregate purchase price of $64 million. Under U.S. GAAP, TFM has recorded this transaction pursuant to SFAS No. 141 "Business Combinations" with partial fair value step-up (49%), for KCS's investment, being recognized for the assets and liabilities being acquired. Thus, the amount recorded was $20,557 and the corresponding deferred income tax (45%) for $9,249, both allocated in fixed assets. During the year ended December 31, 2002 the depreciation of this transaction was $459. The portion sold
by Grupo TMM to TFM (51%) amounting to $21.4 million would be accounted for on a historical carryover basis since both Mexrail and TFM are under the common control of Grupo TMM. Thus, the effect of the latter affected stockholders' equity by $16.4 million (80%) and minority interest by $4.1 million.
iv. Earnings per share
The weighted average number of shares outstanding for the years ended December 31, 2000, 2001 and 2002 was 10,063,570, 10,063,570 and 9,011,069, respectively. The net income per share (basic and diluted) under U.S. GAAP was $4.32 in 2000, $7.31 in 2001 and $12.23 in 2002.
v. Sales and disposals of fixed assets
In accordance with SAB 101, the gains or losses on sales and disposals of fixed assets should be included in other operating expenses. Under IAS, these expenses are included in other (expenses) income - net. For the years ended December 31, 2000, 2001 and 2002 the (losses) or gains on sales and disposals of fixed assets amounted to ($23,203), $53,159 and ($6,897), respectively.
vi. Extraordinary item
Under IAS, the deferred financing costs expensed for the pre-payment of the Senior credit facilities for an amount of $9,227 were included in interest expense, while under U.S. GAAP, it would be included in the income statement as extraordinary item, net of taxes ($5,075).
vii. Effect of recently issued accounting standards as they relate to the company
On August 15, 2001, the FASB issued Statement of Financial Accounting Standards No. 143 ("FAS 143") "Accounting for Asset Retirement Obligations". This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. This Statement also requires that the fair value of a liability for and asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is encouraged.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections as of April 2002." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." As a result, gains and losses from extinguishment of debt will no longer be classified as extraordinary items unless they meet the criteria of unusual or infrequent as described in APB Opinion No. 30, "Reporting the Results of Operations -Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." In addition, SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002.
In July of 2002, the FASB issued Statement No. 146 ("SFAS 146"), "Accounting for Cost Associated with Exit or Disposal Activities". This Statement addresses financial accounting and reporting costs associated with exit or disposal activities and nullifies Emmerging Issues Task Force No. 94-3 ("EITF 94-3"), "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exist an Activity (Including Certain Costs Incurred in a Restructuring)". The principal difference between SFAS 146 and EITF 94-3 is that FAS 146 requires that a liability for a cost associated with a exit or disposal activity be recognized when the liability is incurred rather than at the date of an entity's commitment to an exit plan. This Statement also revises the definition of exit costs and established that fair value is the objective for initial measurement of the liability.
Management is currently evaluating the impact that the adoption of the above-mentioned statements will have on the consolidated financial statements.
e. Condensed combined and consolidated balance sheets and income statements
The following condensed combined and consolidated balance sheets and income statements reflect the effects of the principal differences between IAS and U.S.
GAAP:
Condensed combined
and consolidated
Balance Sheets
--------------
December 31,
------------
2001 2002
---- ----
Total current assets $ 290,801 $ 265,250
Due from Mexican Government 81,892
Long-term account receivable 1,388
Concession rights and related assets - Net 1,257,591 1,215,487
Property, machinery and equipment - Net 568,755 638,716
Deferred income taxes and employees' statutory
profit sharing 55,775 163,822
Other non-current assets 17,334 41,850
------------- --------------
Total assets $ 2,272,148 $ 2,326,513
============= ==============
Total short-term liabilities $ 381,459 $ 147,295
Total long-term liabilities 594,629 1,045,287
------------- --------------
Total liabilities 976,088 1,192,582
------------- --------------
Minority interest 380,719 348,059
------------- --------------
Capital stock 807,008 807,008
Treasury Shares (204,904)
Effect on purchase of subsidiary shares 17,912 (17,115)
Retained earnings 90,421 200,883
------------- --------------
Total stockholders' equity 915,341 785,872
------------- --------------
Total liabilities and stockholders' equity $ 2,272,148 $ 2,326,513
============= ==============
|
Condensed combined
and consolidated
Statements of Income
--------------------
Years ended December 31,
------------------------
2000 2001 2002
---- ---- ----
Transportation revenues $ 695,425 $ 720,627 $ 712,140
Total operating expenses 550,350 521,115 540,617
----------- ----------- -----------
Operating income 145,075 199,512 171,523
Other income (expenses) - net 1,629 (17,587) (12,358)
Comprehensive financing cost (103,850) (80,649) (113,226)
----------- ----------- -----------
Income before provision for
deferred income taxes, minority
interest and extraordinary item 42,854 101,276 45,939
Current income tax (79)
Deferred income tax benefit (expense) 16,446 (9,252) 91,505
Minority interest (10,713) (18,384) (27,260)
----------- ----------- -----------
Income before extraordinary item 48,587 73,561 110,184
Extraordinary item, net of taxes (5,075)
----------- ----------- -----------
Net income for the year $ 43,512 $ 73,561 $ 110,184
=========== =========== ===========
|