UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2008
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number 1-4717
KANSAS CITY SOUTHERN
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
427 West 12th Street,
Kansas City, Missouri
(Address of principal
executive offices)
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44-0663509
(I.R.S. Employer
Identification No.)
64105
(Zip
Code)
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816.983.1303
(Registrants telephone
number, including area code)
None
(Former name, former address and
former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer
þ
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Accelerated
filer
o
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Non-accelerated
filer
o
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Smaller
reporting
company
o
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
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Class
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Outstanding at October 20, 2008
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Common Stock, $0.01 per share par value
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91,292,709 Shares
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Kansas
City Southern
Form 10-Q
September 30, 2008
Index
2
Kansas
City Southern
Form 10-Q
September 30, 2008
PART I
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements.
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Introductory
Comments.
The Consolidated Financial Statements included herein have been
prepared by Kansas City Southern, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission
(SEC). As used herein, KCS or the
Company may refer to Kansas City Southern or, as the
context requires, to one or more subsidiaries of Kansas City
Southern. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
U.S. generally accepted accounting principles
(U.S. GAAP) have been condensed, or omitted
pursuant to such rules and regulations. The Company believes
that the disclosures are adequate to enable a reasonable
understanding of the information presented. These Consolidated
Financial Statements should be read in conjunction with the
consolidated financial statements and the related notes, as well
as Managements Discussion and Analysis of Financial
Condition and Results of Operations, included in the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2007, and Managements
Discussion and Analysis of Financial Condition and Results of
Operations included in this
Form 10-Q.
Results for the three and nine months ended September 30,
2008, are not necessarily indicative of the results expected for
the full year ending December 31, 2008.
3
Kansas
City Southern
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Three Months
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Nine Months
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Ended September 30,
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Ended September 30,
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2008
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2007
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2008
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2007
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(In millions, except share and per share amounts)
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(Unaudited)
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Revenues
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$
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491.5
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$
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444.1
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$
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1,428.3
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$
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1,282.5
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Operating expenses:
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Compensation and benefits
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92.2
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104.7
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296.6
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303.1
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Purchased services
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51.0
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47.9
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145.6
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137.7
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Fuel
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90.1
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66.6
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259.2
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194.8
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Equipment costs
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45.1
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43.7
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138.8
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137.1
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Depreciation and amortization
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43.0
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38.9
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124.5
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117.8
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Casualties and insurance
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23.8
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15.9
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62.0
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52.8
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Materials and other
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35.3
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28.2
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102.6
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85.5
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Total operating expenses
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380.5
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345.9
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1,129.3
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1,028.8
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Operating income
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111.0
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98.2
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299.0
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253.7
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Equity in net earnings of unconsolidated affiliates
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5.0
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3.3
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13.8
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7.2
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Interest expense
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(35.5
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(37.3
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(102.7
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(118.3
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Debt retirement costs
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(5.6
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(6.9
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Foreign exchange gain (loss)
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(7.5
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(1.9
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0.7
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(1.6
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Other income
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3.8
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2.0
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7.0
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5.9
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Income before income taxes and minority interest
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76.8
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64.3
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212.2
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140.0
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Income tax expense
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25.1
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17.5
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67.2
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40.6
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Income before minority interest
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51.7
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46.8
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145.0
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99.4
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Minority interest
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0.1
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0.1
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0.3
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0.3
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Net income
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51.6
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46.7
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144.7
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99.1
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Preferred stock dividends
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2.7
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4.9
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12.4
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15.0
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Net income available to common shareholders
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$
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48.9
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$
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41.8
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$
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132.3
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$
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84.1
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Earnings per share:
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Basic earnings per share
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$
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0.55
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$
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0.55
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$
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1.62
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$
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1.11
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Diluted earnings per share
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$
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0.52
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$
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0.48
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$
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1.46
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$
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1.00
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Average shares outstanding
(in thousands):
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Basic
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88,400
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75,935
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81,618
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75,797
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Potential dilutive common shares
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10,518
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21,716
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17,375
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14,781
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Diluted
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98,918
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97,651
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98,993
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90,578
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See accompanying notes to consolidated financial statements.
4
Kansas
City Southern
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September 30,
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December 31,
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2008
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2007
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(In millions,
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except share amounts)
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(Unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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96.5
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$
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55.5
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Accounts receivable, net
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218.9
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243.4
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Restricted funds
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17.8
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11.5
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Inventories
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98.4
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90.3
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Deferred income taxes
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221.0
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177.8
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Other current assets
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114.5
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67.2
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Total current assets
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767.1
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645.7
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Investments
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68.8
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79.3
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Property and equipment, net of accumulated depreciation of
$894.1 million and $871.9 million at
September 30, 2008 and December 31, 2007, respectively
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3,227.4
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2,917.8
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Concession assets, net of accumulated amortization of
$174.6 million and $129.2 million at
September 30, 2008 and December 31, 2007, respectively
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1,199.4
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1,215.5
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Other assets
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89.2
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69.9
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Total assets
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$
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5,351.9
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$
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4,928.2
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Debt due within one year
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$
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627.2
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$
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650.9
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Accounts and wages payable
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148.2
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121.1
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Accrued liabilities
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318.3
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326.7
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Total current liabilities
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1,093.7
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1,098.7
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Other liabilities:
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Long-term debt
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1,282.5
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1,105.0
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Deferred income taxes
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624.3
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499.1
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Other noncurrent liabilities and deferred credits
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213.2
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256.1
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Total other liabilities
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2,120.0
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1,860.2
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Minority interest
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262.1
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243.0
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Commitments and contingencies
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Stockholders equity:
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$25 par, 4% noncumulative, preferred stock,
840,000 shares authorized, 649,736 shares issued,
242,170 shares outstanding
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6.1
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6.1
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Series C redeemable cumulative convertible
perpetual preferred stock, $1 par, 4.25%,
400,000 shares authorized, issued, and outstanding at
December 31, 2007
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0.4
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Series D cumulative convertible perpetual
preferred stock, $1 par, 5.125%, 210,000 shares
authorized and issued, 209,995 and 210,000 shares
outstanding with a liquidation preference of $210.0 million
at September 30, 2008 and December 31, 2007,
respectively
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0.2
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0.2
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$.01 par, common stock, 400,000,000 shares authorized;
106,252,860 and 92,863,585 shares issued at
September 30, 2008 and December 31, 2007,
respectively; 91,262,938 and 76,975,507 shares outstanding
at September 30, 2008 and December 31,
2007,respectively
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0.9
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0.8
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Paid in capital
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566.0
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549.5
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Retained earnings
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1,301.2
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1,168.9
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Accumulated other comprehensive income
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1.7
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0.4
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Total stockholders equity
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1,876.1
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1,726.3
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Total liabilities and stockholders equity
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$
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5,351.9
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$
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4,928.2
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See accompanying notes to consolidated financial statements.
5
Kansas
City Southern
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Nine Months Ended
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September 30,
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2008
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2007
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(In millions)
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(Unaudited)
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Operating activities:
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Net income
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$
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144.7
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$
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99.1
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Adjustments to reconcile net income to net cash provided by
operating activities:
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Depreciation and amortization
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124.5
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117.8
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Deferred income taxes
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66.0
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40.4
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Equity in undistributed earnings of unconsolidated affiliates
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(13.8
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)
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(7.2
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Share-based and other deferred compensation
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13.6
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17.0
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Minority interest
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0.3
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0.3
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Distributions from unconsolidated affiliates
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14.3
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Loss (gain) on sale of assets
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(1.9
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)
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(1.4
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)
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Excess tax benefit from share-based compensation
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(2.0
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)
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Debt retirement costs
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5.6
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6.9
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Changes in working capital items:
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Accounts receivable
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24.5
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49.8
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Inventories
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(8.1
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)
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|
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(15.4
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)
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Other current assets
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(49.1
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)
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18.9
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Accounts payable and accrued liabilities
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18.7
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(46.4
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)
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Other, net
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(4.2
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)
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16.5
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Net cash provided by operating activities
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|
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333.1
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|
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296.3
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Investing activities:
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Capital expenditures
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(415.6
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)
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(213.0
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)
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Proceeds from disposal of property
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17.6
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9.4
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Contribution from NS for MSLLC (net of change in restricted
contribution)
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18.8
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100.0
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Property investments in MSLLC
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|
|
(19.4
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)
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|
|
(87.7
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)
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Other, net
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|
|
(18.7
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)
|
|
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
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Net cash used for investing activities
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|
|
(417.3
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)
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|
|
(195.5
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)
|
|
|
|
|
|
|
|
|
|
Financing activities:
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|
|
|
|
|
|
|
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Proceeds from issuance of long-term debt
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|
|
399.9
|
|
|
|
286.7
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|
Repayment of long-term debt
|
|
|
(258.9
|
)
|
|
|
(312.9
|
)
|
Debt costs
|
|
|
(12.7
|
)
|
|
|
(19.7
|
)
|
Proceeds from stock plans
|
|
|
7.3
|
|
|
|
0.7
|
|
Excess tax benefit from share-based compensation
|
|
|
2.0
|
|
|
|
|
|
Dividends paid
|
|
|
(12.4
|
)
|
|
|
(18.4
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
125.2
|
|
|
|
(63.6
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Net increase during each period
|
|
|
41.0
|
|
|
|
37.2
|
|
At beginning of year
|
|
|
55.5
|
|
|
|
79.0
|
|
|
|
|
|
|
|
|
|
|
At end of period
|
|
$
|
96.5
|
|
|
$
|
116.2
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
Kansas
City Southern
|
|
1.
|
Accounting
Policies and Interim Financial Statements.
|
In the opinion of the management of KCS, the accompanying
unaudited consolidated financial statements contain all
adjustments necessary, which are of a normal and recurring
nature, to present fairly the financial position of the Company
as of September 30, 2008, and December 31, 2007, the
results of operations for the three and nine months ended
September 30, 2008 and 2007, and cash flows for the nine
months ended September 30, 2008 and 2007. Certain
information and footnote disclosure normally included in
financial statements prepared in accordance with U.S. GAAP
have been condensed or omitted. These consolidated financial
statements should be read in conjunction with the financial
statements and accompanying notes included in the Companys
Annual Report on
Form 10-K
for the year ended December 31, 2007. The results of
operations for the three and nine months ended
September 30, 2008, are not necessarily indicative of the
results to be expected for the full year ending
December 31, 2008. Certain prior year amounts have been
reclassified to conform to the current year presentation.
|
|
2.
|
Share-Based
Compensation.
|
At a special stockholders meeting held on October 7,
2008, the Companys stockholders approved a new 2008 Stock
Option and Performance Award Plan (the 2008 Plan),
which became effective on October 14, 2008. Future equity
awards by the Company will be granted under, and governed by,
the 2008 Plan and the related award agreements. Outstanding
equity awards granted under the Companys 1991 Amended and
Restated Stock Option and Performance Award Plan (the 1991
Plan), which expired on October 14, 2008, will
continue to be governed by the terms and conditions of the 1991
Plan and the related award agreements.
Nonvested Stock.
The 1991 Plan provides for
the granting of nonvested stock awards to officers and other
designated employees. The grant date fair value is based on the
average market price of the stock on the date of the grant.
These awards are subject to forfeiture if employment terminates
during the vesting period, which is generally five year or three
year cliff vesting for employees and one year for non-employee
directors. The grant date fair value of nonvested shares, less
estimated forfeitures, is recorded to compensation expense on a
straight-line basis over the vesting period.
A summary of nonvested stock activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Intrinsic
|
|
Nine Months Ended September 30, 2008
|
|
Shares
|
|
|
Fair Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
In millions
|
|
|
Nonvested stock at December 31, 2007
|
|
|
1,014,628
|
|
|
$
|
28.80
|
|
|
|
|
|
Granted
|
|
|
221,679
|
|
|
|
38.49
|
|
|
|
|
|
Vested
|
|
|
(133,329
|
)
|
|
|
30.49
|
|
|
|
|
|
Forfeited
|
|
|
(274,843
|
)
|
|
|
26.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested stock at September 30, 2008
|
|
|
828,135
|
|
|
$
|
31.74
|
|
|
$
|
36.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation cost on nonvested stock was $1.8 million and
$1.4 million for the three months ended September 30,
2008 and 2007, and $3.5 million and $4.7 million for
the nine months ended September 30, 2008 and 2007,
respectively. The total income tax benefit recognized in the
income statement for nonvested stock awards was
$0.6 million and $0.5 million for the three months
ended September 30, 2008 and 2007, and $1.3 million
and $1.7 million for the nine months ended
September 30, 2008 and 2007, respectively.
As of September 30, 2008, $15.7 million of
unrecognized compensation costs related to nonvested stock is
expected to be recognized over a weighted-average period of
1.53 years. The fair value (at vest date) of shares vested
during the nine months ended September 30, 2008 was
$5.1 million.
7
Kansas
City Southern
Notes to
Consolidated Financial
Statements (Continued)
Performance Based Awards.
During 2007, the
Company granted performance based nonvested stock awards. The
awards granted establish an annual target number of shares that
generally vest at the end of a three year requisite service
period following the grant date. In addition to the three year
service condition, the number of nonvested shares to be received
depends on the attainment of performance goals based on the
following annual measures: operating ratio, earnings before
interest, tax, depreciation and amortization (EBITDA) and return
on capital employed. The number of nonvested shares ultimately
earned will range from zero to 200% of the annual target award.
A summary of performance based nonvested awards activity at
target is as follows:
|
|
|
|
|
|
|
|
|
|
|
Target Number of
|
|
|
Weighted-Average Grant
|
|
Nine Months Ended September 30, 2008
|
|
Shares *
|
|
|
Date Fair Value
|
|
|
Nonvested stock at December 31, 2007
|
|
|
477,638
|
|
|
$
|
30.82
|
|
Granted
|
|
|
74,228
|
|
|
|
39.14
|
|
Vested
|
|
|
(46,988
|
)
|
|
|
30.13
|
|
Forfeited
|
|
|
(124,666
|
)
|
|
|
29.93
|
|
|
|
|
|
|
|
|
|
|
Nonvested stock at September 30, 2008
|
|
|
380,212
|
|
|
$
|
32.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The performance shares earned in 2007 were 122,983, which was
approximately 120% of the annual target award granted for the
2007 performance period. Over the remaining two year performance
period, participants in the aggregate can earn up to a maximum
of 649,760 shares.
|
The Company expenses the grant date fair value of the awards
which are probable of being earned based on forecasted annual
performance goals over the three year performance period.
Compensation expense on performance based awards was less than
$0.1 million and $0.7 million for the three months
ended September 30, 2008 and 2007, and $1.3 million
and $2.0 million for the nine months ended
September 30, 2008 and 2007, respectively. The total income
tax benefit recognized in the income statement for performance
based awards was less than $0.1 million and
$0.2 million for the three months ended September 30,
2008 and 2007, and $0.5 million and $0.7 million for
the nine months ended September 30, 2008 and 2007,
respectively.
As of September 30, 2008, $2.0 million of unrecognized
compensation cost related to performance based awards is
expected to be recognized over a weighted-average period of
.72 years. The unrecognized compensation cost includes only
the amount determined to be probable of being earned based upon
the attainment of the annual performance goals. The fair value
(at vest date) of shares vested during the nine months ended
September 30, 2008 was $1.4 million.
|
|
3.
|
Earnings
Per Share Data.
|
Basic earnings per common share is computed by dividing income
available to common stockholders by the weighted average number
of common shares outstanding for the period. Restricted stock
granted to employees and officers is included in weighted
average shares for purposes of computing basic earnings per
common share as it is earned. Diluted earnings per share reflect
the potential dilution that could occur if convertible
securities were converted into common stock or stock options
were exercised. The following table reconciles the weighted
average shares used for the basic earnings per share computation
to the shares used for the diluted earnings per share
computation
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Basic shares
|
|
|
88,400
|
|
|
|
75,935
|
|
|
|
81,618
|
|
|
|
75,797
|
|
Effect of dilution
|
|
|
10,518
|
|
|
|
21,716
|
|
|
|
17,375
|
|
|
|
14,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
98,918
|
|
|
|
97,651
|
|
|
|
98,993
|
|
|
|
90,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Kansas
City Southern
Notes to
Consolidated Financial
Statements (Continued)
Potentially dilutive shares excluded from the calculation
(in
thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Stock options where the exercise price is greater than the
average market price of common shares
|
|
|
15
|
|
|
|
72
|
|
|
|
15
|
|
|
|
72
|
|
Convertible preferred stock which is anti-dilutive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
The following table reconciles net income available to common
stockholders for purposes of basic earnings per share to net
income available to common stockholders for purposes of diluted
earnings per share
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net income available to common stockholders for purposes of
computing basic earnings per share
|
|
$
|
48.9
|
|
|
$
|
41.8
|
|
|
$
|
132.3
|
|
|
$
|
84.1
|
|
Effect of dividends on conversion of convertible preferred stock
|
|
|
2.7
|
|
|
|
4.8
|
|
|
|
12.3
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders for purposes of
computing diluted earnings per share
|
|
$
|
51.6
|
|
|
$
|
46.6
|
|
|
$
|
144.6
|
|
|
$
|
90.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Fair
Value Measurements.
|
In September 2006, the Financial Accounting Standards Board (the
FASB) issued Statement of Financial Accounting
Standards No. 157 Fair Value Measurements
(SFAS 157), which defines fair value,
establishes a framework for measuring fair value and enhances
disclosures regarding fair value measurements. SFAS 157
does not require any new fair value measurements but rather
eliminates inconsistencies in guidance found in various prior
accounting pronouncements and is effective for fiscal years
beginning after November 15, 2007. In February 2008, the
FASB issued FASB
FSP 157-2
which delays the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until
fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years. These nonfinancial items
include assets and liabilities such as reporting units measured
at fair value in a goodwill impairment test and nonfinancial
assets acquired and liabilities assumed in a business
combination. Effective January 1, 2008, KCS adopted
SFAS 157 prospectively for financial assets and liabilities
recognized at fair value on a recurring basis. The partial
adoption of SFAS 157 for financial assets and liabilities
did not have a material impact on KCS consolidated
financial position, results of operations or cash flows.
SFAS 157 Hierarchy Tables.
The following
tables present information about the Companys financial
assets and liabilities measured at fair value on a recurring
basis as of September 30, 2008, and indicates the fair
value hierarchy of the valuation techniques utilized by the
Company to determine such fair value. In general, fair values
determined by Level 1 inputs utilize quoted prices
(unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access.
Level 2 inputs include quoted prices for similar assets and
liabilities in active markets, and inputs other than quoted
prices that are observable for the asset or liability.
Level 3 inputs are unobservable inputs for the asset or
liability, and include situations where there is little, if any,
market activity for the asset or liability. In certain cases,
the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, the level in
the fair value hierarchy within which the fair value measurement
in its entirety falls has been determined based on the lowest
level input that is significant to the fair value measurement in
its entirety. The Companys assessment
9
Kansas
City Southern
Notes to
Consolidated Financial
Statements (Continued)
of the significance of a particular input to the fair value in
its entirety requires judgment and considers factors specific to
the asset or liability.
Assets and liabilities measured at fair value on a recurring
basis as of September 30, 2008
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
Assets at
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments(i)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16.3
|
|
|
$
|
16.3
|
|
Derivative financial instruments
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
2.3
|
|
|
$
|
16.3
|
|
|
$
|
18.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
|
Investments with Level 1 and/or Level 2 inputs are
classified as a Level 3 investment in their entirety if it
has at least one significant Level 3 input.
|
The following table presents additional information about assets
and liabilities measured at fair value on a recurring basis for
which the Company has utilized Level 3 inputs to determine
fair value.
Changes in Level 3 assets measured at fair value on a
recurring basis for the three months ended September 30,
2008
(in millions)
:
|
|
|
|
|
Balance at June 30, 2008
|
|
$
|
17.1
|
|
Total gains/(losses) (realized and unrealized)
|
|
|
|
|
Purchases, issuances and settlements
|
|
|
(0.8
|
)
|
Transfers in and/or out of level 3
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
$
|
16.3
|
|
|
|
|
|
|
Changes in Level 3 assets measured at fair value on a
recurring basis for the nine months ended September 30,
2008
(in millions)
:
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
37.8
|
|
Total gains/(losses) (realized and unrealized)
|
|
|
|
|
Purchases, issuances and settlements
|
|
|
(21.5
|
)
|
Transfers in and/or out of level 3
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
$
|
16.3
|
|
|
|
|
|
|
|
|
5.
|
Derivative
Instruments.
|
The Company does not engage in the trading of derivative
financial instruments except where the Companys objective
is to manage fuel price risk, foreign currency fluctuations, or
the variability of forecasted interest payments attributable to
changes in interest rates. In general, the Company enters into
derivative transactions in limited situations based on
managements assessment of current market conditions and
perceived risks. However, management intends to respond to
evolving business and market conditions and in doing so, may
enter into such transactions more frequently as deemed
appropriate.
Forward starting interest rate swap.
On
March 18, 2008, the Company entered into a forward starting
interest rate swap, which has been designated as a cash flow
hedge under the Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133). The
forward starting interest rate swap effectively converts
interest payments from variable rates to fixed rates. The
hedging instrument has a notional amount of $75.0 million
and forward starting settlements indexed off the three-month
London InterBank Offered Rate (LIBOR) will occur
every quarter through March 28, 2011.
10
Kansas
City Southern
Notes to
Consolidated Financial
Statements (Continued)
On September 16, 2008, the Company entered into a forward
starting interest rate swap, which has been designated as a cash
flow hedge under SFAS 133. The forward starting interest
rate swap effectively converts interest payments from variable
rates to fixed rates. The hedging instrument has a notional
amount of $50.0 million and forward starting settlements
indexed off the three-month LIBOR will occur every quarter
beginning September 30, 2008 through September 30,
2010.
The aforementioned swaps are highly effective as defined by
SFAS 133 and as a result there will be de minimus
income statement variability associated with ineffectiveness of
these hedges. At September 30, 2008, the estimated fair
value of the forward starting interest rate swaps was an
unrealized gain of $2.3 million and was recognized in other
assets in the consolidated balance sheet.
Foreign Currency Balance.
At
September 30, 2008, Kansas City Southern de Mexico, S.A. de
C.V., a wholly-owned subsidiary of KCS (KCSM), had
financial assets and liabilities denominated in Mexican pesos of
Ps.1,917 million and Ps.697 million, respectively. At
December 31, 2007, KCSM had financial assets and
liabilities denominated in Mexican pesos of
Ps.1,921 million and Ps.595 million, respectively. At
September 30, 2008 and December 31, 2007, the exchange
rate was Ps.10.79 per U.S. dollar and Ps.10.90 per
U.S. dollar, respectively.
Other comprehensive income refers to revenues, expenses, gains
and losses that under U.S. GAAP are included in
comprehensive income, a component of stockholders equity
within the consolidated balance sheets, rather than net income.
Under existing accounting standards, other comprehensive income
for KCS reflects the net unrealized gain on cash flow hedge, net
of tax, and amortization of prior service credit, net of tax.
KCS total comprehensive income is as follows
(in
millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Net income
|
|
$
|
51.6
|
|
|
$
|
46.7
|
|
|
$
|
144.7
|
|
|
$
|
99.1
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain on cash flow hedges, net of tax
|
|
|
0.1
|
|
|
|
|
|
|
|
1.4
|
|
|
|
|
|
Amortization of prior service credit, net of tax
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
51.6
|
|
|
$
|
46.6
|
|
|
$
|
146.0
|
|
|
$
|
99.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 24, 2008, KCSM entered into a financing
agreement (the Agreement) with DVB Bank AG
(DVB). KCSM received the loan principal amount under
the Agreement of $52.2 million on September 26, 2008.
KCSM used the proceeds to finance approximately 80% of the
purchase price of
twenty-nine
ES44AC locomotives (the Locomotives) delivered and
purchased by KCSM in June 2008. KCSM granted DVB a security
interest in the Locomotives to secure the loan. The Agreement
requires KCSM to make sixty equal quarterly principal payments
plus interest at an annual rate of 6.195%. The first payment is
due and payable on December 31, 2008, and the final payment
is due and payable on September 29, 2023.
The Agreement contains representations, warranties and covenants
typical of such equipment loan agreements. Events of default in
the Agreement include, but are not limited to, certain payment
defaults, certain bankruptcy and liquidation proceedings and the
failure to perform any covenants or agreements
11
Kansas
City Southern
Notes to
Consolidated Financial
Statements (Continued)
contained in the Agreement. Any event of default could trigger
acceleration of KCSMs payment obligations under the terms
of the Agreement.
|
|
8.
|
Redemption
of Series C Redeemable Cumulative Convertible Perpetual
Preferred Stock.
|
On June 12, 2008, the Company called for redemption all of
the outstanding shares of its 4.25% Series C Redeemable
Cumulative Convertible Perpetual Preferred Stock (the
Series C Preferred Stock) with a redemption
date of July 15, 2008 (the
Redemption Date). The holders of the
outstanding shares had the option to redeem at a redemption
price of $500 per share or convert each share into
33.4728 shares of KCS common stock. Each share converted is
also entitled to receive an appropriate number of common stock
or other preferred stock purchase rights under KCS 2005
Rights Agreement. As of the Redemption Date, holders had
converted all 400,000 shares of Series C Preferred
Stock into 13,389,109 shares of common stock.
|
|
9.
|
Commitments
and Contingencies.
|
Litigation.
The Company is a party to various
legal proceedings and administrative actions, all of which,
except as set forth below, are of an ordinary, routine nature
and incidental to its operations. Included in these proceedings
are various tort claims brought by current and former employees
for job related injuries and by third parties for injuries
related to railroad operations. KCS aggressively defends these
matters and has established liability reserves, which management
believes are adequate to cover expected costs. Although it is
not possible to predict the outcome of any legal proceeding, in
the opinion of management, other than those proceedings
described in detail below, such proceedings and actions should
not, individually, or in the aggregate, have a material adverse
effect on the Companys financial condition and liquidity.
However, a material adverse outcome in one or more of these
proceedings could have a material adverse impact on the
operating results of a particular quarter or fiscal year.
Environmental Liabilities.
The Companys
U.S. operations are subject to extensive federal, state and
local environmental laws and regulations. The major
U.S. environmental laws to which the Company is subject
include, among others, the Federal Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA,
also known as the Superfund law), the Toxic Substances Control
Act, the Federal Water Pollution Control Act, and the Hazardous
Materials Transportation Act. CERCLA can impose joint and
several liabilities for cleanup and investigation costs, without
regard to fault or legality of the original conduct, on current
and predecessor owners and operators of a site, as well as those
who generate, or arrange for the disposal of, hazardous
substances. The Company does not believe that compliance with
the requirements imposed by the environmental legislation will
impair its competitive capability or result in any material
additional capital expenditures, operating or maintenance costs.
The Company is, however, subject to environmental remediation
costs as described below.
The Companys Mexico operations are subject to Mexican
federal and state laws and regulations relating to the
protection of the environment through the establishment of
standards for water discharge, water supply, emissions, noise
pollution, hazardous substances and transportation and handling
of hazardous and solid waste. The Mexican government may bring
administrative and criminal proceedings and impose economic
sanctions against companies that violate environmental laws, and
temporarily or even permanently close non-complying facilities.
The risk of incurring environmental liability is inherent in the
railroad industry. As part of serving the petroleum and
chemicals industry, the Company transports hazardous materials
and has a professional team available to respond to and handle
environmental issues that might occur in the transport of such
materials. Additionally, the Company is a partner in the
Responsible
Care
®
program and, as a result, has initiated additional
environmental, health and safety programs. The Company performs
ongoing reviews and evaluations of the various environmental
programs and issues within the Companys operations, and,
as necessary, takes actions intended to limit the Companys
exposure to potential liability.
12
Kansas
City Southern
Notes to
Consolidated Financial
Statements (Continued)
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 financial
position or cash flows. Should the Company become subject to
more stringent cleanup requirements at these sites, discover
additional contamination, or become subject to related personal
or property damage claims, the Company could incur material
costs in connection with these sites.
The Company records liabilities for remediation and restoration
costs related to past activities when the Companys
obligation is probable and the costs can be reasonably
estimated. Costs of ongoing compliance activities to current
operations are expensed as incurred. The Companys 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
Companys consolidated financial position or cash flows.
Environmental remediation expense was $3.7 million and
$5.3 million for the nine months ended September 30,
2008 and 2007, respectively, and was included in Casualties and
insurance expense on the consolidated statements of income.
Additionally, as of September 30, 2008, KCS had a liability
for environmental remediation of $6.6 million. This amount
was derived from a range of reasonable estimates based upon the
studies and site surveys described above and in accordance with
the Statement of Financial Accounting Standards No. 5,
Accounting for Contingencies
(SFAS 5).
Casualty Claim Reserves.
The Companys
casualty and liability reserve is based on actuarial studies
performed on an undiscounted basis. This reserve is based on
personal injury 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
managements opinion that the recorded liability is a
reasonable estimate of aggregate future payments. Adjustments to
the liability are reflected as operating expenses in the period
in which changes to estimates are known. Casualty claims in
excess of self-insurance levels are insured up to certain
coverage amounts, depending on the type of claim and year of
occurrence. The activity in the reserve follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at beginning of year
|
|
$
|
90.0
|
|
|
$
|
117.4
|
|
Accruals, net (includes the impact of actuarial studies)
|
|
|
15.5
|
|
|
|
19.5
|
|
Payments
|
|
|
(10.2
|
)
|
|
|
(49.8
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
95.3
|
|
|
$
|
87.1
|
|
|
|
|
|
|
|
|
|
|
The casualty claim reserve balance as of September 30, 2008
is based on an updated study of casualty reserves for data
through May 31, 2008 and review of the last four
months experience. The activity for the nine months ended
September 30, 2008 primarily relates to the net settlements
and the reserves for Federal Employers Liability Act
(FELA), third-party, and occupational illness
claims. The changes to the reserve in the current year compared
to the prior year primarily reflect a large litigation
settlement in 2007 and the current accruals related to the trend
of loss experience since the date of the prior study.
Reflecting potential uncertainty surrounding the outcome of
casualty claims, it is reasonably possible based on assessments
that future costs to settle casualty claims may range from
approximately $89 million to $104 million. While the
final outcome of these claims cannot be predicted with
certainty, management
13
Kansas
City Southern
Notes to
Consolidated Financial
Statements (Continued)
believes that the $95.3 million recorded is the best
estimate of the Companys future obligations for the
settlement of casualty claims at September 30, 2008. The
most sensitive assumptions for personal injury accruals are the
expected average cost per claim and the projected frequency
rates for the number of claims that will ultimately result in
payment. A 5% increase or decrease in either the expected
average cost per claim or the frequency rate for claims with
payments would result in an approximate $4.8 million
increase or decrease in the Companys recorded personal
injury reserves.
Management believes that previous reserve estimates for prior
claims were reasonable based on current information available.
The Company is continuing its practice of accruing monthly for
estimated claim costs, including any changes recommended by
studies performed and evaluation of recent known trends; based
on this practice, management believes all accruals are
appropriately reflected.
Antitrust Lawsuit.
As of September 30,
2008, 29 putative class actions were on file against KCSR, along
with the other Class I U.S. railroads (and, in some
cases, the Association of American Railroads), in various
Federal district courts alleging that the railroads conspired to
fix fuel surcharges in violation of U.S. antitrust laws. On
November 6, 2007, the Judicial Panel on Multidistrict
Litigation ordered that these putative class action cases be
consolidated for pretrial handling before the United States
District Court for the District of Columbia, where the matters
remain pending (the Multidistrict Litigation). All
of the plaintiffs in the Multidistrict Litigation filed a
Consolidated Amended Complaint on April 15, 2008. KCSR was
not named as a defendant in that Consolidated Amended Complaint
pursuant to an agreement with the Multidistrict Litigation
plaintiffs to toll the statute of limitations, and the
Multidistrict Litigation will not proceed with KCSR as a party.
In any event, KCSR maintains there is no merit to the price
fixing allegations asserted against the Company. If KCSR is
named as a defendant in lawsuits making such claims in the
future, either in the Multidistrict Litigation or otherwise, the
Company intends to vigorously contest such allegations.
The New Jersey Attorney Generals office, which had sought
information regarding fuel surcharges from KCSR and other
railroads, has informed KCSR that it is discontinuing its
investigation of KCSR with respect to fuel surcharges.
Certain Disputes with Ferromex.
KCSM and
Ferrocarril Mexicano, S.A. de C.V.
(Ferromex)
both initiated administrative proceedings seeking a
determination by the Mexican
Secretaría de
Comunicaciones y Transportes
(Ministry of
Communications and Transportation or SCT) of
the rates that the companies should pay each other in connection
with the use of trackage rights, interline and terminal
services. The SCT issued a ruling setting the rates for trackage
rights in March of 2002, and a ruling setting the rates for
interline and terminal services in August of 2002. KCSM and
Ferromex challenged both rulings.
Following the trial and appellate court decisions, in February
of 2006 the Mexican Supreme Court sustained KCSMs appeal
of the SCTs trackage rights ruling, in effect vacating the
ruling and ordering the SCT to issue a new ruling consistent
with the Courts decision. On June 27, 2008, KCSM was
served with the new ruling issued by the SCT. In this ruling,
the SCT established the consideration that KCSM and Ferromex
must pay each other in connection with the use of the trackage
rights granted in their respective concessions between 2002 and
2004, and further stated that in the event KCSM and Ferromex
failed to reach an agreement in connection with the rates for
the years after 2004, the SCT shall make a determination along
the same lines. On September 19, 2008, KCSM appealed this
new ruling with the Mexican
Tribunal Federal de Justicia
Fiscal y Administrativa
(Administrative and Fiscal
Federal Court).
In April 2005, the Administrative and Fiscal Federal Court ruled
in favor of KCSM in the challenge to the SCT interline and
terminal services decision. Ferromex, however, challenged this
court ruling before the Fifteenth Collegiate Court, and the
Court ruled in its favor. Both Ferromex and KCSM have challenged
the rulings on different grounds. This most recent challenge is
now before the Mexican Supreme Court, which as of the date of
this filing has yet to issue a decision on the matter.
14
Kansas
City Southern
Notes to
Consolidated Financial
Statements (Continued)
In addition to the above, Ferromex has filed three commercial
proceedings against KCSM. In the first claim, which was served
in 2001 and is related to the payment of consideration for
interline services, KCSM received a favorable decision and
Ferromex has been ordered to pay related costs and expenses.
Although it has not yet done so, Ferromex has the right to
challenge this decision. KCSM received an unfavorable decision
in the second claim filed in 2004 and has filed a challenge to
this judgment, the outcome of which is still pending. The third
claim, filed in 2006, is an action for access to records related
to interline services between 2002 and 2004. No decision has
been rendered on the third claim. KCSM is continually analyzing
all of the records related to this dispute to determine the
adequacy of the reserves for the amounts due to as well as due
from Ferromex.
KCSM expects various proceedings and appeals related to the
matters described above to continue over the next few years.
Although KCSM and Ferromex have challenged these matters based
on different grounds and these cases continue to evolve,
management believes the reserves related to these matters are
adequate and does not believe there will be a future material
impact to the results of operations arising out of these
disputes.
Disputes Relating to the Provision of Services to a Large
U.S. Auto Manufacturer.
KCSM is involved in
several disputes related to providing service to a large
U.S. Auto Manufacturer (the Auto Manufacturer).
In March 2008, the Auto Manufacturer filed an arbitration suit
against KCSM under a contract entered into in 1999 for services
to the Auto Manufacturers plants in Mexico, which, as
amended, had a stated termination date of January 31, 2008.
The Auto Manufacturer claims that the contract was implicitly
extended and continued in effect beyond its stated termination
date, and that KCSM is therefore required to continue abiding by
its terms, including, but not limited to, the rates contemplated
in such contract. KCSM claims that the contract did in fact
expire on its stated termination date of January 31, 2008,
and that services rendered thereafter are thus subject to the
general terms and conditions (including rates) applicable in the
absence of a specific contract, pursuant to Mexican law.
Accordingly, KCSM filed a counterclaim against the Auto
Manufacturer to, among other things, recover the applicable rate
difference. The Auto Manufacturer is also seeking a declaration
by the arbitrator that the rates being assessed by KCSM are
discriminatory, even though the rates being charged are within
the legal rate limits set by Mexican law for such freight
transportation. KCSM believes that the facts of this dispute
provide it with strong legal arguments and intends to vigorously
defend its claims in this proceeding. As a result, management
believes the final resolution of these claims will not have any
material impact on KCSMs results of operations.
In May 2008, the SCT initiated a proceeding against KCSM, at the
Auto Manufacturers request, alleging that KCSM
impermissibly bundled international rail services and engaged in
discriminatory pricing practices with respect to rail services
provided by KCSM to the Auto Manufacturer. If the SCT finally
determines that KCSM did engage in such actions, the SCT could
impose sanctions on KCSM. On July 23, 2008, the SCT
delivered notice to KCSM of new proceedings against KCSM,
claiming, among other things, that KCSM refused to grant
Ferromex access to certain trackage rights in Coahuila on six
different occasions and thus denied Ferromex the ability to
provide service to the Auto Manufacturer at this location.
Management believes it has strong defenses to all of these
charges and intends to defend all these proceedings vigorously.
KCSM does not believe that these SCT proceedings will have a
material adverse effect on its results of operations or
financial condition. However, if KCSM is ultimately sanctioned
in connection with the bundling and discriminatory pricing
practices alleged by the Auto Manufacturer, any such sanction
would be considered a generic sanction under Mexican
law (i.e., sanctions applied to conduct not specifically
referred to in specific subsections of the Mexican railway law).
If challenges against any such sanction are conclusively ruled
adversely to KCSM and a sanction is effectively imposed, and if
the SCT imposes other generic sanctions on four
additional occasions over the remaining term of the Concession,
KCSM could be subject to possible future SCT action seeking
revocation of its Concession. Likewise, if each of the six
refusals to allow Ferromex to serve the Auto Manufacturer in
Coahuila is finally decided to warrant a separate sanction, KCSM
could be subject to a future SCT action seeking revocation of
its Concession.
15
Kansas
City Southern
Notes to
Consolidated Financial
Statements (Continued)
Revocation of the Concession would materially adversely affect
KCSMs results of operations and financial condition.
Disputes Relating to the Scope of the Mandatory Trackage
Rights.
KCSM and Ferromex are parties to various
cases involving disputes over the application and proper
interpretation of the mandatory trackage rights. In particular,
in August 2002, the SCT issued a ruling related to
Ferromexs trackage rights in Monterrey, Nuevo León.
KCSM and Ferromex both appealed the SCTs ruling and after
considerable litigation, on September 17, 2008, the Mexican
Administrative and Fiscal Federal Court announced a decision,
which if upheld, would grant Ferromex rights that KCSM believes
to be broader than those set forth in both its and
Ferromexs concession titles. KCSM further believes that
this decision conflicts with current applicable law and with
relevant judicial precedents and intends to challenge it and to
continue to pursue all other remedies available to it. KCSM
believes that there will be no material adverse effect on
KCSMs results of operations or financial condition from
the outcome of this case.
Other SCT Sanction Proceedings.
In April 2006,
the SCT initiated proceedings against KCSM, claiming that KCSM
had failed to make certain minimum capital investments projected
for 2004 and 2005 under its five-year business plan filed with
the SCT prior to its April 2005 acquisition by Kansas City
Southern or KCS (collectively, the Capital
Investment Proceedings). KCSM believes it made capital
expenditures exceeding the required amounts. KCSM responded to
the SCT by providing evidence in support of its investments and
explaining why it believes sanctions are not appropriate. In May
2007, KCSM was served with an SCT resolution regarding the
Capital Investment Proceeding for 2004, where the SCT determined
that KCSM had indeed failed to make the minimum capital
investments required for such year, but resolved to impose no
sanction as this would have been KCSMs first breach of the
relevant legal provisions. In June 2007, KCSM was served with an
SCT resolution regarding the Capital Investment Proceeding for
2005, where the SCT determined that KCSM had indeed failed to
make the minimum capital investments required for such year, and
imposed a fine in the amount of Ps.46,800. KCSM has filed
actions challenging both the 2004 and 2005 investment plan
resolutions issued by the SCT. KCSM will have the right to
challenge any adverse ruling by the Mexican Administrative and
Fiscal Federal Court.
KCSM believes that even if sanctions are ultimately imposed as a
consequence of the Capital Investment Proceedings, there will be
no material adverse effect on its results of operations or
financial condition. However, each of these potential sanctions
is considered a generic sanction under Mexican law
(i.e., sanctions applied to conduct not specifically referred to
in specific subsections of the Mexican railway law). If these
potential sanctions are conclusively ruled adversely against
KCSM and sanctions are imposed, and if the SCT imposes other
sanctions related to KCSMs capital investments or other
generic sanctions on three additional occasions over
the remaining term of the Concession, KCSM could be subject to
possible future SCT action seeking revocation of its Concession.
Such revocation would materially adversely affect the results of
operations and financial condition of KCSM.
Mancera Proceeding.
In February 2006, Mancera
Ernst & Young, S.C., (Mancera) filed a
claim against KCSM seeking payment for an additional contingency
fee for costs and expenses related to Manceras
representation of KCSM in its value added tax or VAT
claim against the Mexican government. In March 2006, KCSM
responded to the claim. On April 15, 2008 KCSM was served
with a resolution that required KCSM to pay an amount, which
included interest and damages lower than the amount originally
claimed by Mancera. This resolution was appealed by KCSM to
challenge the payment of any interest and damages and was
appealed by Mancera seeking to increase the amount it is to be
paid for contingency fees. On September 30, 2008, KCSM was
notified of the resolution by the Ninth Court of Appeals, which
released KCSM from any obligation for damages to Mancera but
increased the amount of fees to be paid to Mancera. KCSM intends
to appeal this decision and believes that it has adequately
reserved for its obligation under the engagement agreement with
Mancera.
16
Kansas
City Southern
Notes to
Consolidated Financial
Statements (Continued)
Credit Risk.
The Company continually monitors
risk related to the recent downturn in the automotive industry
and certain customer concentrations. Significant changes in
customer concentration or payment terms, deterioration of
customer credit-worthiness or weakening in economic trends could
have a significant impact on the collectability of the
Companys receivables and operating results. If the
financial condition of the Companys customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. Currently,
managements assessment is that it will collect all
outstanding receivables, or at this time, based on its
assessment has recorded necessary reserves as appropriate.
The liability for unrecognized tax benefits decreased from
$32.6 million as of December 31, 2007 to
$2.1 million as of September 30, 2008, primarily due
to an Internal Revenue Service (IRS) examination
settlement for years 1997 through 2002. The remaining
$2.1 million liability for unrecognized tax benefits at
September 30, 2008 would affect the effective income tax
rate if recognized and is not expected to change in the next
12 months.
As a result of the IRS examination settlement, accrued interest
and penalties on unrecognized tax benefits was reduced from
$15.8 million to $0.1 million as of December 31,
2007 and September 30, 2008, respectively.
The Company strategically manages its rail operations as one
reportable business segment over a single coordinated rail
network that extends from the midwest and southeast portions of
the United States south into Mexico and connects with other
Class I railroads. Financial information reported at this
level, such as revenues, operating income and cash flows from
operations, is used by corporate management, including the
Companys chief operating decision-maker, in evaluating
overall financial and operational performance, market
strategies, as well as the decisions to allocate capital
resources.
The Companys strategic initiatives, which drive its
operational direction, are developed and managed at the
Companys headquarters and targets are communicated to its
various regional activity centers. Corporate management is
responsible for, among others, KCS marketing strategy, the
oversight of large cross-border customer accounts, overall
planning and control of infrastructure and rolling stock, the
allocation of capital resources based upon growth and capacity
constraints over the coordinated network, and other functions
such as financial planning, accounting, and treasury.
The role of each region is to manage the operational activities
and monitor and control costs over the coordinated rail network.
Such cost control is required to ensure that pre-established
efficiency standards set at the corporate level are attained.
The regional activity centers are responsible for executing the
overall corporate strategy and operating plan established by
corporate management as a coordinated system.
17
Kansas
City Southern
Notes to
Consolidated Financial
Statements (Continued)
The following tables
(in millions)
provide information by
geographic area pursuant to Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information
(SFAS 131) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Revenues
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
U.S.
|
|
$
|
276.3
|
|
|
$
|
234.3
|
|
|
$
|
786.1
|
|
|
$
|
683.1
|
|
Mexico
|
|
|
215.2
|
|
|
|
209.8
|
|
|
|
642.2
|
|
|
|
599.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
491.5
|
|
|
$
|
444.1
|
|
|
$
|
1,428.3
|
|
|
$
|
1,282.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Long-lived assets
|
|
2008
|
|
|
2007
|
|
|
U.S.
|
|
$
|
2,256.5
|
|
|
$
|
2,045.0
|
|
Mexico
|
|
|
2,170.3
|
|
|
|
2,088.3
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
4,426.8
|
|
|
$
|
4,133.3
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Condensed
Consolidating Financial Information.
|
KCSR has outstanding $200.0 million of
7
1
/
2
% Senior
Notes due 2009 and $275.0 million of 8.0% Senior Notes
due 2015 which are unsecured obligations of KCSR, which are also
jointly and severally and fully and unconditionally guaranteed
on an unsecured senior basis by KCS and certain wholly-owned
domestic subsidiaries. As a result, the following accompanying
condensed consolidating financial information
(in millions)
has been prepared and presented pursuant to SEC
Regulation S-X
Rule 3-10
Financial statements of guarantors and issuers of
guaranteed securities registered or being registered. This
condensed information is not intended to present the financial
position, results of operations and cash flows of the individual
companies or groups of companies in accordance with U.S. GAAP.
For the
7
1
/
2
% senior
note issue, KCSR registered exchange notes with the SEC that
have substantially identical terms and associated guarantees;
and all of the initial
7
1
/
2
% senior
notes have been exchanged for $200.0 million of registered
exchange notes. The 8.0% senior notes were registered by
means of an amendment to KCS shelf registration statement
filed and declared effective by the SEC on May 23, 2008.
18
Kansas
City Southern
Notes to
Consolidated Financial
Statements (Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
KCSR
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
KCS
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
253.7
|
|
|
$
|
0.1
|
|
|
$
|
245.8
|
|
|
$
|
(8.1
|
)
|
|
$
|
491.5
|
|
Operating expenses
|
|
|
1.8
|
|
|
|
193.9
|
|
|
|
6.2
|
|
|
|
187.3
|
|
|
|
(8.7
|
)
|
|
|
380.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(1.8
|
)
|
|
|
59.8
|
|
|
|
(6.1
|
)
|
|
|
58.5
|
|
|
|
0.6
|
|
|
|
111.0
|
|
Equity in net earnings of unconsolidated affiliates
|
|
|
54.1
|
|
|
|
1.3
|
|
|
|
|
|
|
|
4.5
|
|
|
|
(54.9
|
)
|
|
|
5.0
|
|
Interest expense
|
|
|
(0.2
|
)
|
|
|
(13.1
|
)
|
|
|
(0.1
|
)
|
|
|
(22.7
|
)
|
|
|
0.6
|
|
|
|
(35.5
|
)
|
Foreign exchange loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7.5
|
)
|
|
|
|
|
|
|
(7.5
|
)
|
Other income
|
|
|
|
|
|
|
1.9
|
|
|
|
|
|
|
|
3.1
|
|
|
|
(1.2
|
)
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest
|
|
|
52.1
|
|
|
|
49.9
|
|
|
|
(6.2
|
)
|
|
|
35.9
|
|
|
|
(54.9
|
)
|
|
|
76.8
|
|
Income tax expense (benefit)
|
|
|
0.4
|
|
|
|
19.8
|
|
|
|
(2.3
|
)
|
|
|
7.2
|
|
|
|
|
|
|
|
25.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest
|
|
|
51.7
|
|
|
|
30.1
|
|
|
|
(3.9
|
)
|
|
|
28.7
|
|
|
|
(54.9
|
)
|
|
|
51.7
|
|
Minority interest
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
51.6
|
|
|
$
|
30.1
|
|
|
$
|
(3.9
|
)
|
|
$
|
28.7
|
|
|
$
|
(54.9
|
)
|
|
$
|
51.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
KCSR
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
KCS
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
209.6
|
|
|
$
|
4.1
|
|
|
$
|
238.3
|
|
|
$
|
(7.9
|
)
|
|
$
|
444.1
|
|
Operating expenses
|
|
|
6.3
|
|
|
|
170.5
|
|
|
|
5.4
|
|
|
|
171.3
|
|
|
|
(7.6
|
)
|
|
|
345.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(6.3
|
)
|
|
|
39.1
|
|
|
|
(1.3
|
)
|
|
|
67.0
|
|
|
|
(0.3
|
)
|
|
|
98.2
|
|
Equity in net earnings of unconsolidated affiliates
|
|
|
51.0
|
|
|
|
0.4
|
|
|
|
|
|
|
|
2.3
|
|
|
|
(50.4
|
)
|
|
|
3.3
|
|
Interest income (expense)
|
|
|
1.2
|
|
|
|
(17.0
|
)
|
|
|
(0.3
|
)
|
|
|
(21.7
|
)
|
|
|
0.5
|
|
|
|
(37.3
|
)
|
Foreign exchange loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
(1.9
|
)
|
Other income (expense)
|
|
|
(0.2
|
)
|
|
|
0.1
|
|
|
|
|
|
|
|
2.3
|
|
|
|
(0.2
|
)
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest
|
|
|
45.7
|
|
|
|
22.6
|
|
|
|
(1.6
|
)
|
|
|
48.0
|
|
|
|
(50.4
|
)
|
|
|
64.3
|
|
Income tax expense (benefit)
|
|
|
(1.1
|
)
|
|
|
8.4
|
|
|
|
(0.6
|
)
|
|
|
10.8
|
|
|
|
|
|
|
|
17.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest
|
|
|
46.8
|
|
|
|
14.2
|
|
|
|
(1.0
|
)
|
|
|
37.2
|
|
|
|
(50.4
|
)
|
|
|
46.8
|
|
Minority interest
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
46.7
|
|
|
$
|
14.2
|
|
|
$
|
(1.0
|
)
|
|
$
|
37.2
|
|
|
$
|
(50.4
|
)
|
|
$
|
46.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
CONDENSED CONSOLIDATING STATEMENTS OF
INCOME (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
KCSR
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
KCS
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
707.7
|
|
|
$
|
8.6
|
|
|
$
|
737.3
|
|
|
$
|
(25.3
|
)
|
|
$
|
1,428.3
|
|
Operating expenses
|
|
|
7.3
|
|
|
|
571.6
|
|
|
|
18.4
|
|
|
|
558.8
|
|
|
|
(26.8
|
)
|
|
|
1,129.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(7.3
|
)
|
|
|
136.1
|
|
|
|
(9.8
|
)
|
|
|
178.5
|
|
|
|
1.5
|
|
|
|
299.0
|
|
Equity in net earnings (losses) of unconsolidated affiliates
|
|
|
144.5
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
12.9
|
|
|
|
(143.4
|
)
|
|
|
13.8
|
|
Interest income (expense)
|
|
|
4.1
|
|
|
|
(42.7
|
)
|
|
|
1.5
|
|
|
|
(67.7
|
)
|
|
|
2.1
|
|
|
|
(102.7
|
)
|
Debt retirement costs
|
|
|
|
|
|
|
(5.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.6
|
)
|
Foreign exchange gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
0.7
|
|
Other income
|
|
|
|
|
|
|
5.5
|
|
|
|
|
|
|
|
5.0
|
|
|
|
(3.5
|
)
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest
|
|
|
141.3
|
|
|
|
93.1
|
|
|
|
(8.3
|
)
|
|
|
129.4
|
|
|
|
(143.3
|
)
|
|
|
212.2
|
|
Income tax expense (benefit)
|
|
|
(3.7
|
)
|
|
|
39.1
|
|
|
|
(3.1
|
)
|
|
|
34.9
|
|
|
|
|
|
|
|
67.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest
|
|
|
145.0
|
|
|
|
54.0
|
|
|
|
(5.2
|
)
|
|
|
94.5
|
|
|
|
(143.3
|
)
|
|
|
145.0
|
|
Minority interest
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
144.7
|
|
|
$
|
54.0
|
|
|
$
|
(5.2
|
)
|
|
$
|
94.5
|
|
|
$
|
(143.3
|
)
|
|
$
|
144.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
KCSR
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
KCS
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
611.2
|
|
|
$
|
9.2
|
|
|
$
|
684.2
|
|
|
$
|
(22.1
|
)
|
|
$
|
1,282.5
|
|
Operating expenses
|
|
|
18.0
|
|
|
|
505.7
|
|
|
|
14.2
|
|
|
|
512.0
|
|
|
|
(21.1
|
)
|
|
|
1,028.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(18.0
|
)
|
|
|
105.5
|
|
|
|
(5.0
|
)
|
|
|
172.2
|
|
|
|
(1.0
|
)
|
|
|
253.7
|
|
Equity in net earnings of unconsolidated affiliates
|
|
|
113.0
|
|
|
|
1.6
|
|
|
|
|
|
|
|
4.7
|
|
|
|
(112.1
|
)
|
|
|
7.2
|
|
Interest expense
|
|
|
(1.8
|
)
|
|
|
(46.9
|
)
|
|
|
(1.0
|
)
|
|
|
(70.0
|
)
|
|
|
1.4
|
|
|
|
(118.3
|
)
|
Debt retirement costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.9
|
)
|
|
|
|
|
|
|
(6.9
|
)
|
Foreign exchange loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
(1.6
|
)
|
Other income (expense)
|
|
|
(0.5
|
)
|
|
|
1.3
|
|
|
|
|
|
|
|
5.5
|
|
|
|
(0.4
|
)
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest
|
|
|
92.7
|
|
|
|
61.5
|
|
|
|
(6.0
|
)
|
|
|
103.9
|
|
|
|
(112.1
|
)
|
|
|
140.0
|
|
Income tax expense (benefit)
|
|
|
(6.7
|
)
|
|
|
23.5
|
|
|
|
(2.3
|
)
|
|
|
26.1
|
|
|
|
|
|
|
|
40.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest
|
|
|
99.4
|
|
|
|
38.0
|
|
|
|
(3.7
|
)
|
|
|
77.8
|
|
|
|
(112.1
|
)
|
|
|
99.4
|
|
Minority interest
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
99.1
|
|
|
$
|
38.0
|
|
|
$
|
(3.7
|
)
|
|
$
|
77.8
|
|
|
$
|
(112.1
|
)
|
|
$
|
99.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Kansas
City Southern
Notes to
Consolidated Financial
Statements (Continued)
CONDENSED
CONSOLIDATING BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
KCSR
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
KCS
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
21.2
|
|
|
$
|
218.2
|
|
|
$
|
2.2
|
|
|
$
|
540.6
|
|
|
$
|
(15.1
|
)
|
|
$
|
767.1
|
|
Investments held for operating purposes and affiliate investment
|
|
|
2,243.2
|
|
|
|
425.8
|
|
|
|
|
|
|
|
558.6
|
|
|
|
(3,158.8
|
)
|
|
|
68.8
|
|
Property and equipment, net
|
|
|
|
|
|
|
1,439.3
|
|
|
|
214.6
|
|
|
|
1,573.5
|
|
|
|
|
|
|
|
3,227.4
|
|
Concession assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,199.4
|
|
|
|
|
|
|
|
1,199.4
|
|
Other assets
|
|
|
1.3
|
|
|
|
37.5
|
|
|
|
0.4
|
|
|
|
64.4
|
|
|
|
(14.4
|
)
|
|
|
89.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,265.7
|
|
|
$
|
2,120.8
|
|
|
$
|
217.2
|
|
|
$
|
3,936.5
|
|
|
$
|
(3,188.3
|
)
|
|
$
|
5,351.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
361.4
|
|
|
$
|
314.1
|
|
|
$
|
122.3
|
|
|
$
|
307.9
|
|
|
$
|
(12.0
|
)
|
|
$
|
1,093.7
|
|
Long-term debt
|
|
|
0.2
|
|
|
|
286.4
|
|
|
|
0.5
|
|
|
|
995.4
|
|
|
|
|
|
|
|
1,282.5
|
|
Deferred income taxes
|
|
|
22.5
|
|
|
|
370.8
|
|
|
|
79.7
|
|
|
|
151.3
|
|
|
|
|
|
|
|
624.3
|
|
Other liabilities
|
|
|
4.0
|
|
|
|
107.7
|
|
|
|
8.1
|
|
|
|
110.9
|
|
|
|
(17.5
|
)
|
|
|
213.2
|
|
Minority interest
|
|
|
1.5
|
|
|
|
31.4
|
|
|
|
|
|
|
|
260.6
|
|
|
|
(31.4
|
)
|
|
|
262.1
|
|
Stockholders equity
|
|
|
1,876.1
|
|
|
|
1,010.4
|
|
|
|
6.6
|
|
|
|
2,110.4
|
|
|
|
(3,127.4
|
)
|
|
|
1,876.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,265.7
|
|
|
$
|
2,120.8
|
|
|
$
|
217.2
|
|
|
$
|
3,936.5
|
|
|
$
|
(3,188.3
|
)
|
|
$
|
5,351.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
KCSR
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
KCS
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
24.2
|
|
|
$
|
268.7
|
|
|
$
|
3.0
|
|
|
$
|
405.7
|
|
|
$
|
(55.9
|
)
|
|
$
|
645.7
|
|
Investments held for operating purposes and affiliate investment
|
|
|
2,100.1
|
|
|
|
436.7
|
|
|
|
|
|
|
|
571.3
|
|
|
|
(3,028.8
|
)
|
|
|
79.3
|
|
Property and equipment, net
|
|
|
0.6
|
|
|
|
1,329.7
|
|
|
|
219.5
|
|
|
|
1,368.5
|
|
|
|
(0.5
|
)
|
|
|
2,917.8
|
|
Concession assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,215.5
|
|
|
|
|
|
|
|
1,215.5
|
|
Other assets
|
|
|
1.5
|
|
|
|
27.4
|
|
|
|
|
|
|
|
41.0
|
|
|
|
|
|
|
|
69.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,126.4
|
|
|
$
|
2,062.5
|
|
|
$
|
222.5
|
|
|
$
|
3,602.0
|
|
|
$
|
(3,085.2
|
)
|
|
$
|
4,928.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
355.5
|
|
|
$
|
428.7
|
|
|
$
|
111.4
|
|
|
$
|
234.9
|
|
|
$
|
(31.8
|
)
|
|
$
|
1,098.7
|
|
Long-term debt
|
|
|
0.2
|
|
|
|
207.3
|
|
|
|
0.5
|
|
|
|
897.0
|
|
|
|
|
|
|
|
1,105.0
|
|
Deferred income taxes
|
|
|
11.9
|
|
|
|
341.1
|
|
|
|
83.0
|
|
|
|
63.1
|
|
|
|
|
|
|
|
499.1
|
|
Other liabilities
|
|
|
31.6
|
|
|
|
99.2
|
|
|
|
15.7
|
|
|
|
133.6
|
|
|
|
(24.0
|
)
|
|
|
256.1
|
|
Minority interest
|
|
|
0.9
|
|
|
|
31.4
|
|
|
|
|
|
|
|
239.8
|
|
|
|
(29.1
|
)
|
|
|
243.0
|
|
Stockholders equity
|
|
|
1,726.3
|
|
|
|
954.8
|
|
|
|
11.9
|
|
|
|
2,033.6
|
|
|
|
(3,000.3
|
)
|
|
|
1,726.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,126.4
|
|
|
$
|
2,062.5
|
|
|
$
|
222.5
|
|
|
$
|
3,602.0
|
|
|
$
|
(3,085.2
|
)
|
|
$
|
4,928.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Kansas
City Southern
Notes to
Consolidated Financial
Statements (Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
KCSR
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
KCS
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding intercompany activity
|
|
$
|
0.4
|
|
|
$
|
156.8
|
|
|
$
|
(9.7
|
)
|
|
$
|
185.6
|
|
|
$
|
|
|
|
$
|
333.1
|
|
Intercompany activity
|
|
|
3.2
|
|
|
|
(62.8
|
)
|
|
|
11.2
|
|
|
|
48.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided
|
|
|
3.6
|
|
|
|
94.0
|
|
|
|
1.5
|
|
|
|
234.0
|
|
|
|
|
|
|
|
333.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(150.6
|
)
|
|
|
(0.4
|
)
|
|
|
(264.6
|
)
|
|
|
|
|
|
|
(415.6
|
)
|
Other investing activities
|
|
|
|
|
|
|
13.4
|
|
|
|
(0.9
|
)
|
|
|
(7.1
|
)
|
|
|
(7.1
|
)
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used
|
|
|
|
|
|
|
(137.2
|
)
|
|
|
(1.3
|
)
|
|
|
(271.7
|
)
|
|
|
(7.1
|
)
|
|
|
(417.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
|
274.9
|
|
|
|
|
|
|
|
125.0
|
|
|
|
|
|
|
|
399.9
|
|
Repayment of long-term debt
|
|
|
(0.6
|
)
|
|
|
(234.0
|
)
|
|
|
|
|
|
|
(24.3
|
)
|
|
|
|
|
|
|
(258.9
|
)
|
Other financing activities
|
|
|
(3.1
|
)
|
|
|
(11.7
|
)
|
|
|
|
|
|
|
(8.1
|
)
|
|
|
7.1
|
|
|
|
(15.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used)
|
|
|
(3.7
|
)
|
|
|
29.2
|
|
|
|
|
|
|
|
92.6
|
|
|
|
7.1
|
|
|
|
125.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease)
|
|
|
(0.1
|
)
|
|
|
(14.0
|
)
|
|
|
0.2
|
|
|
|
54.9
|
|
|
|
|
|
|
|
41.0
|
|
At beginning of year
|
|
|
(0.2
|
)
|
|
|
27.6
|
|
|
|
0.1
|
|
|
|
28.0
|
|
|
|
|
|
|
|
55.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of period
|
|
$
|
(0.3
|
)
|
|
$
|
13.6
|
|
|
$
|
0.3
|
|
|
$
|
82.9
|
|
|
$
|
|
|
|
$
|
96.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Kansas
City Southern
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
Consolidating
|
|
|
Consolidated
|
|
|
|
Parent
|
|
|
KCSR
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Adjustments
|
|
|
KCS
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding intercompany activity
|
|
$
|
(37.9
|
)
|
|
$
|
158.7
|
|
|
$
|
2.6
|
|
|
$
|
172.9
|
|
|
$
|
|
|
|
$
|
296.3
|
|
Intercompany activity
|
|
|
55.2
|
|
|
|
(17.8
|
)
|
|
|
(2.4
|
)
|
|
|
(35.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided
|
|
|
17.3
|
|
|
|
140.9
|
|
|
|
0.2
|
|
|
|
137.9
|
|
|
|
|
|
|
|
296.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(126.2
|
)
|
|
|
(0.2
|
)
|
|
|
(86.6
|
)
|
|
|
|
|
|
|
(213.0
|
)
|
Contribution from NS for MSLLC (net of change in restricted
contribution)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
|
|
|
|
|
|
|
100.0
|
|
Property investments in MSLLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87.7
|
)
|
|
|
|
|
|
|
(87.7
|
)
|
Other investing activities
|
|
|
|
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
7.5
|
|
|
|
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used
|
|
|
|
|
|
|
(128.5
|
)
|
|
|
(0.2
|
)
|
|
|
(66.8
|
)
|
|
|
|
|
|
|
(195.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
|
75.0
|
|
|
|
|
|
|
|
211.7
|
|
|
|
|
|
|
|
286.7
|
|
Repayment of long-term debt
|
|
|
|
|
|
|
(75.3
|
)
|
|
|
|
|
|
|
(237.6
|
)
|
|
|
|
|
|
|
(312.9
|
)
|
Other financing activities
|
|
|
(17.7
|
)
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
(16.1
|
)
|
|
|
|
|
|
|
(37.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used
|
|
|
(17.7
|
)
|
|
|
(3.9
|
)
|
|
|
|
|
|
|
(42.0
|
)
|
|
|
|
|
|
|
(63.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease)
|
|
|
(0.4
|
)
|
|
|
8.5
|
|
|
|
|
|
|
|
29.1
|
|
|
|
|
|
|
|
37.2
|
|
At beginning of year
|
|
|
0.2
|
|
|
|
36.2
|
|
|
|
|
|
|
|
42.6
|
|
|
|
|
|
|
|
79.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of period
|
|
$
|
(0.2
|
)
|
|
$
|
44.7
|
|
|
$
|
|
|
|
$
|
71.7
|
|
|
$
|
|
|
|
$
|
116.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Kansas City Southern:
We have reviewed the accompanying consolidated balance sheet of
Kansas City Southern and subsidiaries (the Company) as of
September 30, 2008, the related consolidated statements of
income for the three-month and nine-month periods ended
September 30, 2008 and 2007, and the related consolidated
statements of cash flows for the nine-month periods ended
September 30, 2008 and 2007. These consolidated financial
statements are the responsibility of the Companys
management.
We conducted our review in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the consolidated financial
statements referred to above for them to be in conformity with
U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet of the Company as of
December 31, 2007, and the related consolidated statements
of income, stockholders equity and comprehensive income,
and cash flows for the year then ended (not presented herein);
and in our report dated February 15, 2008, we expressed an
unqualified opinion on those consolidated financial statements.
Our report refers to the Companys adoption of Financial
Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
, effective
January 1, 2007. In our opinion, the information set forth
in the accompanying consolidated balance sheet as of
December 31, 2007 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from
which it has been derived.
KPMG LLP
Kansas City, Missouri
October 28, 2008
24
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The discussion below, as well as other portions of this
Form 10-Q,
contain forward-looking statements that are not based upon
historical information. Such forward-looking statements are
based upon information currently available to management and
managements perception thereof as of the date of this
Form 10-Q.
Readers can identify these forward-looking statements by the use
of such verbs as expects, anticipates,
believes or similar verbs or conjugations of such
verbs. The actual results of operations of Kansas City Southern
(KCS or the Company) could materially
differ from those indicated in forward-looking statements. The
differences could be caused by a number of factors or
combination of factors including, but not limited to, those
factors identified in Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations in the Companys annual report on
Form 10-K
for the year ended December 31, 2007, which is on file with
the U.S. Securities and Exchange Commission (File
No. 1-4717)
incorporated by reference and in Part II
Item 1A Risk Factors in the
Form 10-K
and this
Form 10-Q.
Readers are strongly encouraged to consider these factors when
evaluating forward-looking statements. Forward-looking
statements contained in this
Form 10-Q
will not be updated.
This discussion is intended to clarify and focus on the
Companys results of operations, certain changes in its
financial position, liquidity, capital structure and business
developments for the periods covered by the consolidated
financial statements included under Item 1 of this
Form 10-Q.
This discussion should be read in conjunction with those
consolidated financial statements and the related notes, and is
qualified by reference to them.
Critical
Accounting Policies and Estimates.
The Companys discussion and analysis of its financial
position and results of operations is based upon its
consolidated financial statements. The preparation of the
financial statements requires estimation and judgment that
affect the reported amounts of revenue, expenses, assets, and
liabilities. The Company bases its estimates on historical
experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form
the basis for making judgments about the accounting for assets
and liabilities that are not readily apparent from other
sources. If the estimates differ materially from actual results,
the impact on the consolidated financial statements may be
material. The Companys critical accounting policies are
disclosed in the 2007 annual report on
Form 10-K.
There have been no significant changes with respect to these
policies during the first nine months of 2008.
Overview.
The Company is engaged in the freight rail transportation
business operating a single coordinated rail network under one
reportable business segment. The primary operating subsidiaries
of the Company consists of the following: The Kansas City
Southern Railway Company (KCSR), The Texas Mexican
Railway Company (TexMex), Meridian Speedway, LLC
(MSLLC), and Kansas City Southern de México,
S.A. de C.V. (KCSM). The Company generates revenues
and cash flows by providing customers with freight delivery
services within its regions, and throughout North America
through connections with other Class I rail carriers.
Customers conduct business in a number of different industries,
including electric-generating utilities, chemical and petroleum
products, industrial and consumer products, agriculture and
mineral products, automotive products and intermodal
transportation. Appropriate eliminations and reclassifications
have been recorded in deriving consolidated financial statements.
Third
Quarter Analysis.
The Company reported quarterly earnings of $0.52 per diluted
share on consolidated net income of $51.6 million for the
three months ended September 30, 2008, compared to
quarterly earnings of $0.48 per diluted share on consolidated
net income of $46.7 million for the same period in 2007.
The revenue growth of 10.7% during the third quarter 2008
was primarily driven by price increases, increased fuel
surcharges, including participation, and certain new business
growth.
Cash flows from operations increased to $333.1 million as
compared to $296.3 million for the nine month periods ended
September 30, 2008 and 2007, respectively, an increase of
$36.8 million from the prior year
25
period. The increase is primarily due to increased net income
and distributions from unconsolidated affiliates, continuous
improvements in the collection of accounts receivable, partially
offset by changes in other working capital items, resulting
mainly from the timing of certain payments and receipts. Capital
expenditures are a significant use of cash flows due to the
capital intensive nature of railroad operations and the
Companys growth strategy. Cash used for capital
expenditures for the nine months ended September 30, 2008
was $415.6 million as compared to $213.0 million for
the same period in 2007.
Results
of Operations.
Net income for the third quarter of 2008 increased
$4.9 million compared to the prior year third quarter.
The following summarizes KCS income statement
(in
millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
Revenues
|
|
$
|
491.5
|
|
|
$
|
444.1
|
|
|
$
|
47.4
|
|
|
|
11
|
%
|
Operating expenses
|
|
|
380.5
|
|
|
|
345.9
|
|
|
|
34.6
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
111.0
|
|
|
|
98.2
|
|
|
|
12.8
|
|
|
|
13
|
%
|
Equity in net earnings of unconsolidated affiliates
|
|
|
5.0
|
|
|
|
3.3
|
|
|
|
1.7
|
|
|
|
52
|
%
|
Interest expense
|
|
|
(35.5
|
)
|
|
|
(37.3
|
)
|
|
|
1.8
|
|
|
|
(5
|
)%
|
Foreign exchange loss
|
|
|
(7.5
|
)
|
|
|
(1.9
|
)
|
|
|
(5.6
|
)
|
|
|
295
|
%
|
Other income
|
|
|
3.8
|
|
|
|
2.0
|
|
|
|
1.8
|
|
|
|
90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
76.8
|
|
|
|
64.3
|
|
|
|
12.5
|
|
|
|
19
|
%
|
Income tax expense
|
|
|
25.1
|
|
|
|
17.5
|
|
|
|
7.6
|
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
51.7
|
|
|
|
46.8
|
|
|
|
4.9
|
|
|
|
10
|
%
|
Minority interest
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
51.6
|
|
|
$
|
46.7
|
|
|
$
|
4.9
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
Revenues
|
|
$
|
1,428.3
|
|
|
$
|
1,282.5
|
|
|
$
|
145.8
|
|
|
|
11
|
%
|
Operating expenses
|
|
|
1,129.3
|
|
|
|
1,028.8
|
|
|
|
100.5
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
299.0
|
|
|
|
253.7
|
|
|
|
45.3
|
|
|
|
18
|
%
|
Equity in net earnings of unconsolidated affiliates
|
|
|
13.8
|
|
|
|
7.2
|
|
|
|
6.6
|
|
|
|
92
|
%
|
Interest expense
|
|
|
(102.7
|
)
|
|
|
(118.3
|
)
|
|
|
15.6
|
|
|
|
(13
|
)%
|
Debt retirement costs
|
|
|
(5.6
|
)
|
|
|
(6.9
|
)
|
|
|
1.3
|
|
|
|
(19
|
)%
|
Foreign exchange gain (loss)
|
|
|
0.7
|
|
|
|
(1.6
|
)
|
|
|
2.3
|
|
|
|
(144
|
)%
|
Other income
|
|
|
7.0
|
|
|
|
5.9
|
|
|
|
1.1
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
212.2
|
|
|
|
140.0
|
|
|
|
72.2
|
|
|
|
52
|
%
|
Income tax expense
|
|
|
67.2
|
|
|
|
40.6
|
|
|
|
26.6
|
|
|
|
66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
145.0
|
|
|
|
99.4
|
|
|
|
45.6
|
|
|
|
46
|
%
|
Minority interest
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
144.7
|
|
|
$
|
99.1
|
|
|
$
|
45.6
|
|
|
|
46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Revenues.
The following summarizes revenues (
in millions
) and
carload statistics
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Carloads and Units
|
|
|
|
Three Months
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Change
|
|
|
Ended September 30,
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
|
Units
|
|
|
Percent
|
|
|
Chemical and petroleum
|
|
$
|
92.3
|
|
|
$
|
83.5
|
|
|
$
|
8.8
|
|
|
|
11
|
%
|
|
|
59.8
|
|
|
|
58.2
|
|
|
|
1.6
|
|
|
|
3
|
%
|
Industrial and consumer products
|
|
|
138.5
|
|
|
|
123.9
|
|
|
|
14.6
|
|
|
|
12
|
%
|
|
|
94.5
|
|
|
|
95.0
|
|
|
|
(0.5
|
)
|
|
|
(1
|
)%
|
Agriculture and minerals
|
|
|
115.8
|
|
|
|
103.1
|
|
|
|
12.7
|
|
|
|
12
|
%
|
|
|
72.8
|
|
|
|
74.1
|
|
|
|
(1.3
|
)
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general commodities
|
|
|
346.6
|
|
|
|
310.5
|
|
|
|
36.1
|
|
|
|
12
|
%
|
|
|
227.1
|
|
|
|
227.3
|
|
|
|
(0.2
|
)
|
|
|
|
|
Intermodal
|
|
|
43.3
|
|
|
|
37.4
|
|
|
|
5.9
|
|
|
|
16
|
%
|
|
|
136.8
|
|
|
|
134.9
|
|
|
|
1.9
|
|
|
|
1
|
%
|
Automotive
|
|
|
25.1
|
|
|
|
29.0
|
|
|
|
(3.9
|
)
|
|
|
(13
|
)%
|
|
|
21.5
|
|
|
|
28.0
|
|
|
|
(6.5
|
)
|
|
|
(23
|
)%
|
Coal
|
|
|
57.3
|
|
|
|
50.6
|
|
|
|
6.7
|
|
|
|
13
|
%
|
|
|
80.3
|
|
|
|
79.8
|
|
|
|
0.5
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carload revenues, carloads and units
|
|
|
472.3
|
|
|
|
427.5
|
|
|
|
44.8
|
|
|
|
10
|
%
|
|
|
465.7
|
|
|
|
470.0
|
|
|
|
(4.3
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue
|
|
|
19.2
|
|
|
|
16.6
|
|
|
|
2.6
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues(i)
|
|
$
|
491.5
|
|
|
$
|
444.1
|
|
|
$
|
47.4
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) Included in revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel surcharge
|
|
$
|
62.6
|
|
|
$
|
34.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Carloads and Units
|
|
|
|
Nine Months
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Change
|
|
|
Ended September 30,
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
|
Units
|
|
|
Percent
|
|
|
Chemical and petroleum
|
|
$
|
272.9
|
|
|
$
|
237.4
|
|
|
$
|
35.5
|
|
|
|
15
|
%
|
|
|
186.0
|
|
|
|
169.8
|
|
|
|
16.2
|
|
|
|
10
|
%
|
Industrial and consumer products
|
|
|
402.4
|
|
|
|
370.7
|
|
|
|
31.7
|
|
|
|
9
|
%
|
|
|
290.6
|
|
|
|
297.1
|
|
|
|
(6.5
|
)
|
|
|
(2
|
)%
|
Agriculture and minerals
|
|
|
342.3
|
|
|
|
296.3
|
|
|
|
46.0
|
|
|
|
16
|
%
|
|
|
220.2
|
|
|
|
222.7
|
|
|
|
(2.5
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general commodities
|
|
|
1,017.6
|
|
|
|
904.4
|
|
|
|
113.2
|
|
|
|
13
|
%
|
|
|
696.8
|
|
|
|
689.6
|
|
|
|
7.2
|
|
|
|
1
|
%
|
Intermodal
|
|
|
119.4
|
|
|
|
103.7
|
|
|
|
15.7
|
|
|
|
15
|
%
|
|
|
388.4
|
|
|
|
385.3
|
|
|
|
3.1
|
|
|
|
1
|
%
|
Automotive
|
|
|
85.5
|
|
|
|
81.8
|
|
|
|
3.7
|
|
|
|
5
|
%
|
|
|
76.3
|
|
|
|
79.5
|
|
|
|
(3.2
|
)
|
|
|
(4
|
)%
|
Coal
|
|
|
152.4
|
|
|
|
141.2
|
|
|
|
11.2
|
|
|
|
8
|
%
|
|
|
221.8
|
|
|
|
232.5
|
|
|
|
(10.7
|
)
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carload revenues, carloads and units
|
|
|
1,374.9
|
|
|
|
1,231.1
|
|
|
|
143.8
|
|
|
|
12
|
%
|
|
|
1,383.3
|
|
|
|
1,386.9
|
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue
|
|
|
53.4
|
|
|
|
51.4
|
|
|
|
2.0
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues(i)
|
|
$
|
1,428.3
|
|
|
$
|
1,282.5
|
|
|
$
|
145.8
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) Included in revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel surcharge
|
|
$
|
152.9
|
|
|
$
|
95.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2008,
revenues increased $47.4 million and $145.8 million
compared to the same periods in 2007, primarily due to certain
new business growth, rate increases, and increased fuel
surcharges, including participation, partially offset by a
decrease in volume due to the impact of the hurricanes in the
third quarter. The following discussion provides an analysis of
revenues by commodity group.
27
|
|
|
|
|
Revenues by commodity
|
|
|
group for the three months
|
|
|
ended September 30,
2008
|
|
Chemical and petroleum.
Revenues increased
$8.8 million and $35.5 million for the three and nine
months ended September 30, 2008, compared to the same
periods in 2007, due to targeted rate increases, fuel surcharge
increases, and increased traffic volumes from new business
primarily in the Plastics channel.
|
|
.
|
Industrial and consumer products.
Revenues
increased $14.6 million and $31.7 million for the
three and nine months ended September 30, 2008, compared to
the same periods in 2007, primarily due to higher demand in the
Metals and scrap channel in coil and pipe products as well as
new business within the channel, targeted rate increases, and
fuel surcharge increases. These increases were partially offset
by decreases in volume due to the declining housing market which
impacted the Forest products channel and declines in beer export
volume from Mexico reflected in the Other channel.
|
|
|
Agriculture and minerals.
Revenues increased
$12.7 million and $46.0 million for the three and nine
months ended September 30, 2008, compared to the same
periods in 2007, driven by targeted rate increases, fuel
surcharge increases and increased length of haul of cross border
traffic from customers moving their business from various
competitors onto the KCS network. The Grain channel accounted
for the majority of the revenue increase even with a later than
forecasted harvest decreasing volume. This volume decrease was
partially offset by increased traffic in the Ores and minerals
channel, particularly in rock and sand products, due to the
strong energy sector.
|
|
|
Intermodal.
Revenues increased
$5.9 million and $15.7 million for the three and nine
months ended September 30, 2008, compared to the same
periods in 2007. The primary drivers were increased imports and
exports of intermodal containerized business originating and
terminating at the port of Lázaro Cárdenas, targeted
rate increases, and fuel surcharge increases.
Automotive.
Revenues decreased
$3.9 million for the three months ended September 30,
2008, compared to the same period in 2007. Decreases were driven
by the overall downturn in the automotive industry as the higher
cost of fuel and tightening credit markets have automobile
manufacturers re-tooling factories to build more fuel efficient
vehicles as well as developing programs to incent the purchase
of new cars. Revenues increased $3.7 million for the nine
months ended September 30, 2008, compared to the same
period in 2007, due to targeted rate increases and new longer
haul traffic in the first half of 2008.
Coal.
Revenue increased $6.7 million and
$11.2 million for the three and nine months ended
September 30, 2008, compared to the same periods in 2007,
due to an increase in fuel surcharge participation, increased
length of haul, rate increases, and improved system velocity on
coal trains at the end of the third quarter. The increase was
partially offset by lower volumes during the first half of 2008
due to higher stockpile levels, utility customer maintenance
outages, and adverse weather in the Midwest affecting deliveries.
28
Operating
Expenses.
Operating expenses increased $34.6 million and
$100.5 million for the three and nine months ended
September 30, 2008, when compared to the same periods in
2007, as shown below
(in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
Compensation and benefits
|
|
$
|
92.2
|
|
|
$
|
104.7
|
|
|
$
|
(12.5
|
)
|
|
|
(12
|
)%
|
Purchased services
|
|
|
51.0
|
|
|
|
47.9
|
|
|
|
3.1
|
|
|
|
6
|
%
|
Fuel
|
|
|
90.1
|
|
|
|
66.6
|
|
|
|
23.5
|
|
|
|
35
|
%
|
Equipment costs
|
|
|
45.1
|
|
|
|
43.7
|
|
|
|
1.4
|
|
|
|
3
|
%
|
Depreciation and amortization
|
|
|
43.0
|
|
|
|
38.9
|
|
|
|
4.1
|
|
|
|
11
|
%
|
Casualties and insurance
|
|
|
23.8
|
|
|
|
15.9
|
|
|
|
7.9
|
|
|
|
50
|
%
|
Materials and other
|
|
|
35.3
|
|
|
|
28.2
|
|
|
|
7.1
|
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
380.5
|
|
|
$
|
345.9
|
|
|
$
|
34.6
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended September 30,
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
Compensation and benefits
|
|
$
|
296.6
|
|
|
$
|
303.1
|
|
|
$
|
(6.5
|
)
|
|
|
(2
|
)%
|
Purchased services
|
|
|
145.6
|
|
|
|
137.7
|
|
|
|
7.9
|
|
|
|
6
|
%
|
Fuel
|
|
|
259.2
|
|
|
|
194.8
|
|
|
|
64.4
|
|
|
|
33
|
%
|
Equipment costs
|
|
|
138.8
|
|
|
|
137.1
|
|
|
|
1.7
|
|
|
|
1
|
%
|
Depreciation and amortization
|
|
|
124.5
|
|
|
|
117.8
|
|
|
|
6.7
|
|
|
|
6
|
%
|
Casualties and insurance
|
|
|
62.0
|
|
|
|
52.8
|
|
|
|
9.2
|
|
|
|
17
|
%
|
Materials and other
|
|
|
102.6
|
|
|
|
85.5
|
|
|
|
17.1
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
1,129.3
|
|
|
$
|
1,028.8
|
|
|
$
|
100.5
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits.
Compensation and
benefits decreased $12.5 million for the three months ended
September 30, 2008, compared to the same period in 2007,
primarily due to decreases in incentive compensation expense,
including the Mexico statutory profit sharing expense, and an
increase in capitalized overhead rates based on new and updated
studies versus the prior year period. Compensation and benefits
decreased $6.5 million for the nine months ended
September 30, 2008. Increases due to annual wage and salary
rate increases and severance obligations were offset by lower
share-based compensation expense as a result of forfeitures in
the second quarter of 2008, and the aforementioned decreases in
incentive compensation, including the Mexico statutory profit
sharing expense, and an increase in capitalized overhead rates.
Purchased services.
Purchased services
increased $3.1 million and $7.9 million for the three
and nine months ended September 30, 2008, compared to the
same periods in 2007, primarily due to an increase in locomotive
maintenance expense in Mexico, equipment and track structure
maintenance expenses and volume driven switching costs during
the first half of 2008.
Fuel.
Fuel expense increased
$23.5 million and $64.4 million for the three and nine
months ended September 30, 2008, compared with the same
periods in 2007, primarily due to higher diesel fuel prices,
partially offset by lower consumption in certain parts of the
network and increased fuel efficiency driven primarily by older
locomotives being replaced with new locomotives through a
strategic initiative in 2007 and 2008.
Equipment costs.
Equipment costs increased
$1.4 million and $1.7 million for the three and nine
months ended September 30, 2008, primarily due to an
increase in locomotive lease expense partially offset by lower
car hire expenses.
29
Depreciation and amortization.
Depreciation
and amortization expenses increased $4.1 million and
$6.7 million for the three and nine months ended
September 30, 2008, compared to the same periods in 2007,
primarily due to a larger asset base reflecting a continued
commitment to investment in Mexico.
Casualties and insurance.
Casualties and
insurance expenses increased $7.9 million for the three
months ended September 30, 2008, compared to the same
period in 2007, primarily due to damage caused by hurricanes and
higher costs associated with fewer derailments. Casualties and
insurance expenses increased $9.2 million for the nine
months ended September 30, 2008 primarily due to the
aforementioned damages caused by hurricanes and lower expense in
2007 from a favorable reinsurance litigation settlement received
in the second quarter of 2007, primarily offset by decreases in
personal injury, derailment and environmental expenses.
Materials and other.
Materials and other
expense increased $7.1 million and $17.1 million for
the three and nine months ended September 30, 2008,
compared to the same periods in 2007, due to increased materials
and supplies used for the maintenance of freight cars and
locomotives and lower sales and use tax in the first quarter of
2007 as a result of a favorable tax ruling.
Non-Operating
Expenses.
Equity in Net Earnings (Losses) of Unconsolidated
Affiliates.
Equity in earnings from
unconsolidated affiliates was $5.0 million and
$13.8 million for the three and nine month periods ended
September 30, 2008, compared to $3.3 million and
$7.2 million for the same periods in 2007. Significant
components of this change are as follows:
|
|
|
|
|
Equity in earnings from the operations of Panama Canal Railway
Company (PCRC) was $3.0 million and
$6.4 million for the three and nine month periods ended
September 30, 2008, compared to $1.4 million and
$3.1 million for the same periods in 2007. The increase is
primarily due to increased freight revenue driven by higher
volume.
|
|
|
|
Equity in earnings of Southern Capital Corporation, LLC
(Southern Capital) was $1.1 million and
$3.9 million for the three and nine month periods ended
September 30, 2008, compared to $0.9 million and
$3.4 million for the same periods in 2007. The increase is
primarily attributed to increased lease income as well as a
reduction in interest and administrative expenses.
|
|
|
|
KCSMs equity in earnings of Ferrocarril y Terminal del
Valle de México, S.A. de C.V. (FTVM) was
$0.9 million and $3.5 million for the three and nine
month periods ended September 30, 2008, compared to
earnings of $1.0 million and $0.7 million for the same
periods in 2007. The increase for the nine months ended
September 30, 2008, is primarily due to a maintenance
accrual adjustment in the second quarter of 2008 and a prior
year loss recorded in the first quarter of 2007.
|
Interest Expense.
Interest expense decreased
by $1.8 million and $15.6 million for the three and
nine months ended September 30, 2008, compared to the same
periods in 2007, primarily due to lower interest rates related
to debt refinancing as well as lower accrued interest for
various tax related matters as a result of certain settlements
in the second quarter of 2008.
Debt Retirement Costs.
Debt retirement costs
were $1.3 million lower for the nine months ended
September 30, 2008, compared to the same period in 2007. In
May 2008, KCSR redeemed its
9
1
/
2
% Senior
Notes due October 1, 2008 and expensed $5.6 million
for cash tender offer expenses and unamortized debt issuance
costs. In June of 2007, KCSM redeemed its
12
1
/
2
% Senior
Notes due in 2012 and entered into a new bank credit agreement.
The charge of $16.7 million for the call premium and the
write-off of unamortized debt issuance costs associated with the
extinguished debt was partially offset by the $9.8 million
write off of the unamortized purchase accounting fair value
effect related to the
12
1
/
2
% Senior
Notes.
30
Foreign Exchange.
For the three and nine
months ended September 30, 2008, the foreign exchange was a
loss of $7.5 million and a gain of $0.7 million,
compared to a foreign exchange loss of $1.9 million and
$1.6 million for the same periods in 2007, due to
fluctuations in the U.S. dollar versus the Mexican peso
exchange rates. At October 27, 2008, the exchange rate was
Ps.13.4 per U.S. dollar versus Ps.10.79 per U.S. dollar at
September 30, 2008; should the exchange rate stay at this
amount on December 31, 2008, it would result in a
significant foreign currency loss in the fourth quarter of 2008.
Other Income.
Other income for the three and
nine months ended September 30, 2008, was $3.8 million
and $7.0 million, compared to $2.0 million and
$5.9 million for the same periods in 2007, and consists
primarily of miscellaneous interest income and dividend income.
Income Tax Expense.
For the three and nine
months ended September 30, 2008, the income tax provision
was $25.1 million and $67.2 million as compared to
$17.5 million and $40.6 million for the same periods
in 2007. The increase in the income tax provision was primarily
due to higher pre-tax income. The effective income tax rate was
32.7% and 31.7% for the three and nine months ended
September 30, 2008, as compared to 27.2% and 29.0% for the
same periods in 2007. The increase in the effective tax rate is
primarily attributable to a shift in the composition of income
between the U.S. and Mexico and foreign exchange rate
fluctuations.
Liquidity
and Capital Resources.
Overview.
KCS primary uses of cash are to support operations;
maintain and improve its railroad and information systems
infrastructure; pay debt service and preferred stock dividends;
acquire new and maintain existing locomotives, rolling stock and
other equipment; and meet other obligations. See Cash Flow
Information below.
As of September 30, 2008, KCS has a debt capitalization
ratio (total debt as a percentage of total debt plus equity) of
50.4 percent. Its primary sources of liquidity are cash
flows generated from operations, borrowings under its revolving
credit facilities and access to debt and equity capital markets.
Although KCS has had more than adequate access to the capital
markets, as a non-investment grade company, the financial terms
under which funding is obtained often contain restrictive
covenants. The covenants constrain financial flexibility by
restricting or prohibiting certain actions, including the
ability to incur additional debt for any purpose other than
refinancing existing debt, create or suffer to exist additional
liens, make prepayments of particular debt, pay dividends on
common stock, make capital investments, engage in transactions
with stockholders and affiliates, issue capital stock, sell
certain assets, and engage in mergers and consolidations or in
sale-leaseback transactions. On September 30, 2008, total
available liquidity (the unrestricted cash balance plus
revolving credit facility availability) was approximately
$203 million.
As a result of KCS acquiring a controlling interest in KCSM,
KCSM became subject to the terms and conditions of the indenture
governing KCSRs
7
1
/
2
% senior
notes issue. The restrictive covenants of the indenture limit
the ability of KCSM to incur additional debt for any purpose
other than the refinancing of existing debt and certain new
asset financing. The Company was in compliance with all of its
debt covenants as of September 30, 2008.
The Company believes, based on current expectations, that cash
and other liquid assets, operating cash flows, access to capital
markets, and other available financing resources will be
sufficient to fund anticipated operating, capital and debt
service requirements and other commitments in the foreseeable
future. However, KCS operating cash flow and financing
alternatives can be unexpectedly impacted by various factors,
some of which are outside of its control. For example, if KCS
was to experience a substantial reduction in revenues or a
substantial increase in operating costs or other liabilities,
its operating cash flows could be significantly reduced.
Additionally, the Company is subject to economic factors
surrounding capital markets and its ability to obtain financing
under reasonable terms is subject to market conditions. Recent
volatility in capital markets and the tightening of market
liquidity could impact KCS access to capital. Further,
KCS cost of debt can be impacted by independent rating
agencies, which assign debt ratings based on certain credit
measurements such as interest coverage and leverage ratios.
31
As of September 30, 2008, Standard & Poors
Rating Service (S&P) rated the senior secured
debt as BB, the senior unsecured debt as BB-, and the preferred
stock as CCC+. S&P also maintained a corporate rating on
KCS of B+ and gave KCS a developing outlook, which the Company
believes is positive. Moodys Investors Service
(Moodys) rated the senior secured debt as Ba2,
the senior unsecured debt of KCSR as B2, the senior unsecured
debt of KCSM as B1, and the preferred stock as B3. Moodys
also maintained a corporate rating of B1 and its outlook remains
stable for all issuers.
On September 24, 2008, KCSM entered into a financing
agreement (the Agreement) with DVB Bank AG
(DVB). KCSM received the loan principal amount under
the Agreement of $52.2 million on September 26, 2008.
KCSM used the proceeds to finance approximately 80% of the
purchase price of
twenty-nine
ES44AC locomotives (the Locomotives) delivered and
purchased by KCSM in June 2008. KCSM granted DVB a security
interest in the Locomotives to secure the loan. The Agreement
requires KCSM to make sixty equal quarterly principal payments
plus interest at an annual rate of 6.195%. The first payment is
due and payable on December 31, 2008, and the final payment
is due and payable on September 29, 2023.
The Agreement contains representations, warranties and covenants
typical of such equipment loan agreements. Events of default in
the Agreement include, but are not limited to, certain payment
defaults, certain bankruptcy and liquidation proceedings and the
failure to perform any covenants or agreements contained in the
Agreement. Any event of default could trigger acceleration of
KCSMs payment obligations under the terms of the Agreement.
Cash
Flow Information.
Summary cash flow data follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows provided by (used for):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
333.1
|
|
|
$
|
296.3
|
|
Investing activities
|
|
|
(417.3
|
)
|
|
|
(195.5
|
)
|
Financing activities
|
|
|
125.2
|
|
|
|
(63.6
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
41.0
|
|
|
|
37.2
|
|
Cash and cash equivalents beginning of year
|
|
|
55.5
|
|
|
|
79.0
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
96.5
|
|
|
$
|
116.2
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2008, the
consolidated cash position increased $41.0 million from
December 31, 2007, due to improved operating performance,
net proceeds from the issuance of the 8.0% Senior Notes and
loan proceeds received from financing locomotives, which were
partially offset by a higher level of capital expenditures and
redemption of the
9
1
/
2
% Senior
Notes. As compared to the nine months ended September 30,
2007, cash flow from operating activities increased
$36.8 million as a result of improved operating
performance, partially offset by changes in working capital
items, resulting mainly from the timing of certain payments and
receipts. Net investing cash outflows increased
$221.8 million due to a higher level of capital
expenditures. Financing activity cash inflows increased
$188.8 million due to the proceeds from the issuance of the
8.0% Senior notes and from financing locomotives purchased
in December 2007, January 2008 and June 2008, partially offset
by the redemption of the
9
1
/
2
% Senior
Notes.
KCS cash flow from operations has historically been
sufficient to fund operations, roadway capital expenditures,
other capital improvements and debt service. External sources of
cash (principally bank debt, public and private debt, preferred
stock and leases) have been used to refinance existing
indebtedness and to fund acquisitions, new investments and
equipment additions.
Capital
Expenditures.
Capital improvements for roadway track structures and
improvements are generally funded with cash flows from
operations. KCS has historically used internally generated cash
flows, loans or lease financing for equipment acquisition.
32
The following summarizes the cash capital expenditures by type
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Roadway capital programs
|
|
|
|
|
|
|
|
|
Track structure
|
|
$
|
142.9
|
|
|
$
|
102.9
|
|
Other improvements
|
|
|
30.3
|
|
|
|
16.6
|
|
|
|
|
|
|
|
|
|
|
Total roadway capital programs
|
|
|
173.2
|
|
|
|
119.5
|
|
Locomotive acquisitions
|
|
|
79.2
|
|
|
|
8.4
|
|
Capacity
|
|
|
105.3
|
|
|
|
31.0
|
|
Equipment
|
|
|
33.3
|
|
|
|
28.9
|
|
Information technology
|
|
|
6.2
|
|
|
|
5.9
|
|
Other
|
|
|
18.4
|
|
|
|
19.3
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
415.6
|
|
|
$
|
213.0
|
|
|
|
|
|
|
|
|
|
|
Other
Matters.
Employee and Labor Relations.
A negotiating
process for new, major collective bargaining agreements covering
all of KCSRs union employees has been underway since the
bargaining round was initiated November 1, 2004. Wages,
health and welfare benefits, work rules and other issues have
traditionally been addressed through industry-wide negotiations.
KCSR participates as a member of the National Carriers
Conference Committee representing the participating carriers.
Long term agreement settlements have been reached during 2007
and in the first half of 2008 covering approximately 95% of
KCSRs unionized work force. Negotiations are ongoing with
one remaining union representing KCSR employees and are expected
to conclude in the fourth quarter of 2008 under similar terms to
the other settlements. Existing agreements continue to remain in
effect until new agreements are reached. Contract negotiations
with the various unions generally take place over an extended
period of time and have not historically resulted in any
disruption to business operations during negotiations.
KCSM union employees are covered by one labor agreement, which
was signed on June 23, 1997 between KCSM and the Sindicato
de Trabajadores Ferrocarrileros de la República Mexicana
(Mexican Railroad Union), for a term of 50 years, for the
purpose of regulating the relationship between the parties and
improving conditions for the union employees. Approximately 80%
of KCSM employees are covered by this labor agreement. The
compensation terms under this labor agreement are subject to
renegotiation on an annual basis. The labor negotiation with the
Union in Mexico has not historically resulted in any disruption
to business operations. KCSM anticipates that the expected
negotiations concluded in the early fourth quarter of 2008 will
not have a material impact to the consolidated financial
statements.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
There was no material change during the quarter from the
information set forth in Part II, Item 7A.
Quantitative and Qualitative Disclosure about Market
Risk in the Annual Report on
Form 10-K
for the year ended December 31, 2007.
|
|
Item 4.
|
Controls
and Procedures.
|
(a) Disclosure Controls and Procedures
As of the end of the fiscal quarter for which this Quarterly
Report on
Form 10-Q
is filed, the Companys Chief Executive Officer and Chief
Financial Officer have each reviewed and evaluated the
effectiveness of the Companys disclosure controls and
procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act). Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have each
concluded that the Companys current disclosure controls
and procedures are effective to ensure that
33
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 Companys
management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
(b) Changes in Internal Control over Financial
Reporting
There have not been any changes in the Companys internal
control over financial reporting that occurred during the fiscal
quarter for which this Quarterly Report on
Form 10-Q
is filed that have materially affected, or are reasonably likely
to materially affect, the Companys internal controls over
financial reporting.
|
|
Item 4T.
|
Controls
and Procedures.
|
Not applicable.
PART II
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings.
|
For information related to the Companys settlements and
other legal proceedings, see Note 9, Commitments and
Contingencies under Part I, Item 1, of this quarterly
report on
Form 10-Q.
There were no material changes during the quarter in the Risk
Factors disclosed in Item 1A Risk
Factors in our annual report on
Form 10-K
for the year ended December 31, 2007.
|
|
Item 2.
|
Unregistered
Sale of Equity Securities and Use of Proceeds.
|
None
|
|
Item 3.
|
Defaults
upon Senior Securities.
|
None
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
On October 7, 2008, the Company held a special meeting of
its stockholders (the Meeting) for the purpose of
seeking stockholder approval of the KCS 2008 Stock Option and
Performance Award Plan (the Plan). A total of
71,361,192 shares of the common stock, $.01 per share par
value, and preferred stock, par value $25.00 per share, or
78.03% of the outstanding voting stock on the record date
(91,457,913 shares), was represented at the Meeting,
thereby constituting a quorum. These shares voted together as a
single class. The number of votes cast for and against approval
of the Plan is set forth in the following table:
|
|
|
|
|
|
|
Total Shares
|
|
|
Approval of 2008 Stock Option and Performance Award Plan
|
|
|
|
|
For
|
|
|
64,933,168
|
|
Against
|
|
|
6,343,473
|
|
Withheld
|
|
|
84,551
|
|
|
|
|
|
|
Total
|
|
|
71,361,192
|
|
|
|
|
|
|
|
|
Item 5.
|
Other
Information.
|
None
34
|
|
|
|
|
Exhibit No.
|
|
Description of Exhibits Filed with this Report
|
|
|
10
|
.1
|
|
Loan Agreement, dated as of September 24, 2008, between
Kansas City Southern de Mexico, S.A. de C.V. and DVB Bank
AG, is attached to this
Form 10-Q
as Exhibit 10.1.
|
|
15
|
.1
|
|
Letter regarding unaudited interim financial information is
attached to this
Form 10-Q
as Exhibit 15.1.
|
|
31
|
.1
|
|
Principal Executive Officers Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 is attached
to this
Form 10-Q
as Exhibit 31.1.
|
|
31
|
.2
|
|
Principal Financial Officers Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 is attached
to this
Form 10-Q
as Exhibit 31.2.
|
|
32
|
.1
|
|
Principal Executive Officers Certification furnished
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
is attached to this
Form 10-Q
as Exhibit 32.1.
|
|
32
|
.2
|
|
Principal Financial Officers Certification furnished
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
is attached to this
Form 10-Q
as Exhibit 32.2.
|
|
|
|
|
|
Exhibit No.
|
|
Description of Exhibits Incorporated by Reference
|
|
|
10
|
.2
|
|
Employment Agreement, dated September 10, 2008, between The
Kansas City Southern Railway Company and David L. Starling,
filed as Exhibit 10.1 to the Companys Current Report
on
Form 8-K
filed on September 15, 2008 (File
No. 1-4717),
is incorporated herein by reference as Exhibit 10.2.
|
|
10
|
.3
|
|
Employment Agreement, dated August 15, 2008, between The
Kansas City Southern Railway Company and Michael W.
Upchurch, filed as Exhibit 10.1 to the Companys
Current Report on
Form 8-K
filed on October 22, 2008 (File No.
1-4717),
is
incorporated herein by reference as Exhibit 10.3.
|
|
10
|
.4
|
|
First Amendment to the Kansas City Southern 1991 Amended and
Restated Stock Option and Performance Award Plan, effective
July 2, 2008 filed as Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed on July 8, 2008 (File
No. 1-4717),
is incorporated herein by reference as Exhibit 10.4.
|
|
10
|
.5
|
|
Kansas City Southern 2008 Stock Option and Performance Award
Plan, effective October 14, 2008, filed as
Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed on October 7, 2008
(File No. 1-4717),
is incorporated herein by reference as Exhibit 10.5.
|
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized and in
the capacities indicated on October 28, 2008.
Kansas City Southern
Michael W. Upchurch
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Michael K. Borrows
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
36
Exhibit 10.1
Loan Agreement
by and between
Kansas City Southern de México, S.A. de C.V.
and
DVB Bank AG
Dated as of September 24, 2008
Table of Contents
|
|
|
|
|
|
|
Section
|
|
Heading
|
Page
|
|
|
|
|
|
|
|
Article I
|
|
Definitions
|
|
|
1
|
|
|
|
|
|
|
|
|
Section 1.1.
|
|
Definitions
|
|
|
1
|
|
Section 1.2.
|
|
Directly or Indirectly
|
|
|
1
|
|
|
|
|
|
|
|
|
Article II
|
|
Closing Date; Acquisition Date
|
|
|
1
|
|
|
|
|
|
|
|
|
Section 2.1.
|
|
Closing
|
|
|
1
|
|
|
|
|
|
|
|
|
Article III
|
|
Funding of the Loan
|
|
|
2
|
|
|
|
|
|
|
|
|
Section 3.1.
|
|
Funding
|
|
|
2
|
|
Section 3.2.
|
|
Notice and Closing
|
|
|
2
|
|
Section 3.3.
|
|
Up-Front Fee
|
|
|
2
|
|
|
|
|
|
|
|
|
Article IV
|
|
The Notes
|
|
|
2
|
|
|
|
|
|
|
|
|
Section 4.1.
|
|
Notes
|
|
|
2
|
|
Section 4.2.
|
|
Method of Payment
|
|
|
3
|
|
Section 4.3.
|
|
Application of Payments to Principal Amount and Interest
|
|
|
3
|
|
Section 4.4.
|
|
Termination of Interest
|
|
|
3
|
|
Section 4.5.
|
|
Transfer of Notes
|
|
|
3
|
|
Section 4.6.
|
|
Loss, Theft, Etc. of Notes
|
|
|
4
|
|
Section 4.7.
|
|
Payment of Transfer Taxes
|
|
|
4
|
|
Section 4.8.
|
|
Prepayments
|
|
|
4
|
|
Section 4.9.
|
|
Equally and Ratably Secured
|
|
|
6
|
|
|
|
|
|
|
|
|
Article V
|
|
Security
|
|
|
7
|
|
|
|
|
|
|
|
|
Article VI
|
|
Closing Conditions
|
|
|
7
|
|
|
|
|
|
|
|
|
Article VII
|
|
Covenants of the Borrower
|
|
|
7
|
|
|
|
|
|
|
|
|
Section 7.1.
|
|
Payment of the Notes
|
|
|
7
|
|
Section 7.2.
|
|
Marking of Equipment
|
|
|
7
|
|
Section 7.3.
|
|
Maintenance of Equipment; Casualty Occurrences; Eminent Domain
|
|
|
8
|
|
Section 7.4.
|
|
Possession of Equipment; Assignments
|
|
|
10
|
|
Section 7.5.
|
|
Insurance
|
|
|
13
|
|
Section 7.6.
|
|
Borrowers Indemnities
|
|
|
14
|
|
Section 7.7.
|
|
The Lenders Inspection Rights
|
|
|
18
|
|
Section 7.8.
|
|
Merger Covenant
|
|
|
19
|
|
Section 7.9.
|
|
Financial Statements
|
|
|
19
|
|
Section 7.10.
|
|
Increased Costs
|
|
|
20
|
|
|
|
|
|
|
|
|
-i-
|
|
|
|
|
|
|
|
Section
|
|
Heading
|
Page
|
|
|
|
|
|
|
|
Section 7.11.
|
|
Withholding Tax Indemnity
|
|
|
22
|
|
Section 7.12.
|
|
Discharge of Liens
|
|
|
25
|
|
Section 7.13.
|
|
Recording
|
|
|
25
|
|
Section 7.14.
|
|
Further Assurances
|
|
|
25
|
|
Section 7.15 .
|
|
Negative Make-Whole Amount
|
|
|
26
|
|
Section 7.16 .
|
|
Equipment Use; Proceeds
|
|
|
26
|
|
|
|
|
|
|
|
|
Article VIII
|
|
Events of Default; Remedies of Upon An Event of Default
|
|
|
26
|
|
|
|
|
|
|
|
|
Section 8.1.
|
|
Events of Default
|
|
|
26
|
|
Section 8.2.
|
|
Rights and Remedies Upon Default
|
|
|
28
|
|
Section 8.3.
|
|
Waiver of Default
|
|
|
29
|
|
Section 8.4.
|
|
Obligations of Borrower Not Affected by Remedies
|
|
|
29
|
|
Section 8.5.
|
|
Borrower to Deliver Equipment to Trustee
|
|
|
30
|
|
Section 8.6.
|
|
Lender May Perform
|
|
|
30
|
|
Section 8.7.
|
|
Applications of Proceeds Received From Disposition of the Equipment
|
|
|
30
|
|
|
|
|
|
|
|
|
Article IX
|
|
Miscellaneous
|
|
|
30
|
|
|
|
|
|
|
|
|
Section 9.1.
|
|
Security; Termination
|
|
|
30
|
|
Section 9.2.
|
|
Notices
|
|
|
31
|
|
Section 9.3.
|
|
Entire Agreement; Severability
|
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31
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Section 9.4.
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Amendments
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32
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Section 9.5.
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Counterparts
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32
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Section 9.6.
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Governing Law
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32
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Section 9.7.
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Waiver of Jury Trial
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32
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Section 9.8.
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Powers and Rights Not Waived; Remedies Cumulative
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32
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Section 9.9.
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Exempted Transaction
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32
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Section 9.10.
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Reproduction of Documents
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33
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Section 9.11.
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Tax Disclosure
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33
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Section 9.12.
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Jurisdiction, Court Proceedings
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33
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Section 9.13.
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Judgment Currency
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34
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Section 9.14.
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Business Days
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35
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Section 9.15.
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Effect of Headings
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35
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Section 9.16.
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Participations
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35
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Section 9.17.
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Security Agreement
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36
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Appendix A
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Definitions
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Exhibit A
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Form of Note
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Exhibit B
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Form of Loan Request
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Exhibit C
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Closing Conditions
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Exhibit D
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Form of Borrowers Officers Certificate
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Exhibit E
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Loan Agreement Supplement
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Exhibit F
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Secretaría de Hacienda y Crédito Público Listing
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-ii-
Loan Agreement
This
Loan Agreement
(the
Agreement
), dated as of September 24, 2008, is made by and
between
Kansas City Southern de México, S.A. de C.V.
, a company incorporated under the
laws of Mexico (herein, together with its permitted successors and assigns,
Borrower
) and
DVB
Bank AG
, a German corporation (herein, together with its permitted successors and assigns,
each a
Lender
and, collectively, the
Lenders
).
Recitals
Whereas
, the Borrower has requested that the Lender make the Loan to the Borrower in
an aggregate principal amount not to exceed $52,200,000.00, and the Lender has indicated its
willingness to make the Loan on the terms set forth herein.
Now, Therefore
, in consideration of the premises and agreements herein contained and
for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties
hereto hereby agree as follows:
Article I
Definitions
Section 1.1. Definitions
. Unless the context otherwise requires, all capitalized terms used
herein without definition shall have the respective meanings set forth in Appendix A hereto for all
purposes hereof; and the rules of interpretation set forth in Appendix A hereto shall apply to this
Agreement.
Section 1.2. Directly or Indirectly.
Where any provision in this Agreement refers to action
to be taken by any Person, or which such Person is prohibited from taking, such provision shall be
applicable whether such action is taken directly or indirectly by such Person.
Article II
Closing Date; Acquisition Date
Section 2.1. Closing.
(a) Subject to the terms and conditions hereof, this Agreement shall be
effective as of September 26, 2008 (the
Closing Date
) upon the satisfaction or waiver of the
conditions precedent set forth in Exhibit C hereto.
(b) All documents and instruments required to be delivered on the Closing Date and in
connection with the Loan pursuant to this Agreement shall be delivered at the offices of Chapman
and Cutler LLP, 111 West Monroe Street, Suite 1700, Chicago, Illinois 60603, or at such other
location as the Lender and the Borrower may mutually agree.
Article III
Funding of the Loan
Section 3.1. Funding
. (a)
Amount of the Loan
. (a) Subject to the satisfaction or waiver of
the conditions precedent set forth in Exhibit C hereto, prior to 11:00 A.M., New York City time, on
the Closing Date, the Lender shall make a loan (the
Loan
) to the Borrower by delivery to the
Borrower by wire transfer immediately available funds in an amount equal to the Requested Loan
Amount as set forth in the Loan Request in accordance with the wiring instructions set forth in the
Loan Request;
provided,
that if the terms and conditions for the Loan set forth herein have not
been satisfied by 11:00 A.M. New York City time on the Closing Date, the Lender shall not be
obligated to maintain the availability of its funds for the Loan unless the Lender has received a
satisfactory indemnity from the Borrower for the overnight investment of such funds. The aggregate
amount of the Loan required to be made as above provided shall not exceed the lesser of (1) the
product of the Financing Percentage and the aggregate Equipment Cost of the Equipment being
financed on the Closing Date and (2) the Aggregate Commitment Amount. The funding by the Lender of
the Loan shall be deemed a waiver of the Loan Request. The Loan Request shall be irrevocable and
binding on the Borrower. Notwithstanding anything in this Agreement to the contrary, the Lender
shall not be obligated to make the Loan so long as either a Default or an Event of Default shall
have occurred and be continuing.
Section 3.2. Notice and Closing.
Not later than 1:00 P.M., New York City time, on the third
Business Day preceding the Closing Date, the Borrower shall deliver to the Lender a request (a
Loan Request
) by facsimile or other form of electronic communication or telephone (to be promptly
confirmed in writing) substantially in the form of Exhibit B hereto setting forth:
(i) the Closing Date;
(ii) the Requested Loan Amount; and
(iii) the number and type of Units for which settlement of the purchase price will be
made on the Closing Date and the Equipment Cost of such Units.
Section 3.3. Up-Front Fee
. On the Closing Date, the Borrower shall pay to the Lender an
up-front fee in an amount equal to 0.45% of the Aggregate Commitment Amount.
Article IV
The Notes
Section 4.1. Notes.
The Loan shall be evidenced by Notes executed by the Borrower and issued
to the Lender, substantially in the form of Exhibit A
attached hereto. The Lender shall be entitled to receive a single Note on the Closing Date in the
principal amount and with the maturity date specified in Schedule II to the Loan Agreement
Supplement dated the Closing Date.
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The principal amount of and interest on each Note issued pursuant to the provisions of this
Agreement shall be payable as set forth in the form thereof contained in Exhibit A. Interest on
the Notes shall accrue on the principal amount thereof remaining unpaid from time to time at the
Debt Rate and shall be computed on the basis of a 360-day year and the actual number of days
elapsed from and including the date thereof to but excluding the date of payment. Interest shall
be payable in arrears on each Payment Date. Each Note outstanding hereunder shall be identical
except in respect of principal amount thereof.
Section 4.2. Method of Payment
. (a) The principal of, and Positive Make-Whole Amount, if any,
and interest on each Note will be payable in U.S. dollars in immediately available funds to the
Lender at HSBC Bank, New York, ABA 021001088, Account Number: 000129879, Account Name: DVB Bank AG,
Frankfurt, Reference: KCSM Locomotives 3035647, without any presentment or surrender of any Note,
except that the holder of a Note shall promptly surrender such Note to the Borrower upon payment in
full of the principal amount of and interest on such Note and such other sums payable to such
holder hereunder or under the Note.
(b) Subject to Section 7.11, payments in respect of the Notes shall be reduced by any taxes,
fees or other charges required by applicable law to be withheld at the source.
Section 4.3. Application of Payments to Principal Amount and Interest
. In the case of each
Note, each payment of principal thereof and Positive Make-Whole Amount, if any, and interest
thereon shall be applied,
first
, to the payment of accrued but unpaid interest on such Note then
due thereunder,
second
, to the payment of the unpaid principal amount of such Note then due
thereunder and,
third
, to the payment of Positive Make-Whole Amount, if any, then due thereon. Any
prepayment of less than the entire outstanding principal amount of the Notes pursuant to
Section 4.8(b) shall be applied pro rata in accordance with the outstanding principal amounts
thereof.
Section 4.4. Termination of Interest
. The Lender shall have no further interest in, or other
right with respect to, any Equipment when and if the principal amount of and interest on all the
Notes and all other sums payable to the Lender hereunder and under such Notes shall have been paid
in full. The Lender shall provide the Trustee notice of the termination of this Agreement promptly
following the payment in full of the principal amount of and interest on the Notes and all other
sums payable to the Lender hereunder.
Section 4.5. Transfer of Notes
. The Borrower shall cause to be kept at its principal office a
register for the registration and transfer of the Notes (hereinafter called the
Note Register
)
and the Borrower will register or transfer or cause to be registered or transferred as hereinafter
provided any Notes issued pursuant to this
Agreement. A holder of a Note intending to transfer such Note to a new payee, or to exchange any
Note or Notes held by it for a Note or Notes of a different denomination or denominations, may
surrender such Note or Notes to the Borrower, together with a written request from such holder for
the issuance of a new Note or Notes, specifying the denomination or denominations (each of which
shall be not less than $5,000,000.00 (or, if less, the outstanding principal amount of such Note)
or such smaller denomination as may be necessary due to the original issuance of Notes of the
maturity in an
-3-
aggregate principal amount not evenly divisible by $5,000,000.00), and, in the case
of a surrender for registration of transfer, the name and address of the transferee or transferees.
Promptly upon receipt of such documents, the Borrower will issue a new Note or Notes in the same
aggregate principal amount, in the form set forth in Exhibit A, in the same maturity and bearing
the same interest rate as the Note or Notes surrendered, in such denomination or denominations and
payable to such payee or payees as shall be specified in the written request from such holder. All
Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations
of the Borrower evidencing the same respective obligations, and entitled to the same security and
benefits under this Agreement, as the Notes surrendered upon such registration of transfer or
exchange.
Prior to the due presentment for registration of transfer of a Note, the Borrower shall deem
and treat the registered holder of such Note as the absolute owner and holder of such Note for the
purpose of receiving payment of all amounts payable with respect to such Note and for all other
purposes and shall not be affected by any notice to the contrary.
Section 4.6. Loss, Theft, Etc. of Notes.
If any Note shall become mutilated, destroyed, lost
or stolen, the Borrower shall, upon the written request of the holder of such Note, issue in
replacement thereof, a new Note in the form set forth in Exhibit A, payable to the same holder in
the same principal amount, dated the same date, of the same maturity, bearing the same interest
rate and dated the same date as the Note so mutilated, destroyed, lost or stolen. If the Note
being replaced has become mutilated, such Note shall be surrendered to the Borrower. If the Note
being replaced has been destroyed, lost or stolen, the holder of such Note shall furnish to the
Borrower such security or indemnity as may be required by it to save the Borrower harmless and
evidence satisfactory to the Borrower of the destruction, loss or theft of such Note and of the
ownership thereof. The Borrower shall not charge the holder for the expense in replacing any Note
hereunder other than any amounts that may be payable in accordance with Section 4.7 hereof.
Section 4.7. Payment of Transfer Taxes
. Upon and as a condition to the transfer of any Note or
Notes pursuant to Section 4.5, the Borrower may require from the party requesting such new Note or
Notes payment of a sum to reimburse the Borrower for, or to provide funds for the payment of, any
tax or other governmental charge in connection therewith.
Section 4.8. Prepayments
. (a) All Notes issued with respect to any Unit that has suffered or
been deemed to have suffered a Casualty Occurrence shall be prepaid in whole or in part by the
Borrower if such Unit or Units are not replaced pursuant to Section 7.3 hereof on the relevant date
determined pursuant to Section 7.3 hereof, at a price equal to the sum of (i) as to principal
thereof, an amount equal to the product obtained by
multiplying the aggregate unpaid principal amount of such Notes as at the date of such prepayment
for such Unit or Units (after deducting therefrom the principal installment, if any, due on the
date of such prepayment) by a fraction, the numerator of which shall be the Equipment Cost of such
Unit or Units of Equipment and the denominator of which shall be the aggregate Equipment Cost of
all Units of Equipment subject to the Mexican Trust Agreement immediately prior to the date of such
prepayment, (ii) as to interest, the aggregate amount of interest accrued and unpaid in respect of
the principal amount of the Notes to be prepaid pursuant to clause (i) above to but not including
the date of
-4-
prepayment (after deducting therefrom any principal installment due on or prior to the
date of such prepayment) and (iii) a premium in an amount equal to the Positive Make-Whole Amount,
if any, applicable in respect of the principal amount of the Notes to be prepaid pursuant to
clause (i) above on the date of such prepayment;
provided
that, if such prepayment shall result in
a Negative Make-Whole Amount, the holders of the Notes so to be prepaid shall pay such Negative
Make-Whole Amount in accordance with the provisions of Section 7.15 of this Agreement.
(b) All Notes issued at any time outstanding hereunder may upon not less than three (3)
Business Days prior written notice be prepaid in whole or in part upon the request of the Borrower
at any time on a date selected by the Borrower at a price equal to the unpaid principal amount
thereof together with accrued but unpaid interest thereon, up to, but not including the date of
such payment plus, an amount equal to the Positive Make-Whole Amount determined as of the Business
Day immediately preceding such prepayment date, if any, applicable in respect of the principal
amount of such Notes to be prepaid pursuant to this Section 4.8(b);
provided
that, if such
prepayment shall result in a Negative Make-Whole Amount, the holders of the Notes so to be prepaid
shall pay such Negative Make-Whole Amount in accordance with the provisions of Section 7.15 of this
Agreement;
provided
,
further
, that if the Borrower shall prepay any Notes at any time prior to the
third anniversary of the Closing Date pursuant to this Section 4.8(b), the Borrower shall also pay
to the Lender in immediately available funds the applicable Prepayment Fee.
(c) If at any time as a result of a Change in Tax Law (as defined below) the Borrower is or
becomes obligated to make any increased payments pursuant to Section 7.11 hereof in respect of any
payment of interest on account of any of the Notes in excess of the amounts payable without regard
to such Change in Tax Law, the Borrower may give the Lender irrevocable written notice (a
Tax
Prepayment Notice
) of the prepayment of the Notes on a specified prepayment date (which shall be a
Business Day not less than 30 days nor more than 60 days after the date of such notice) and the
circumstances giving rise to the obligation of the Borrower to make any increased payments and the
amount thereof and stating that all of the Notes shall be prepaid on the date of such prepayment at
100% of the principal amount so prepaid together with interest accrued thereon up to, but not
including the date of such prepayment and Make-Whole Amount, if any, with respect thereto unless
the Lender gives Borrower written notice no more than 20 days after receipt of the Tax Prepayment
Notice (or, if earlier, the tenth day prior to the date for the payment giving rise to such
increased payments), rejecting such prepayment (a
Tax Prepayment Rejection Notice
). The form of
Tax Prepayment Rejection Notice shall also accompany the Tax Prepayment Notice and shall state that
execution and delivery thereof by the Lender shall operate as a permanent waiver of its right to
receive the increased payments arising as a result of the circumstances described in the Tax
Prepayment Notice in respect of all future payments of interest (but not of the Lenders right
to receive any increased payments that arise out of circumstances not described in the Tax
Prepayment Notice or which exceed the amount of the increased payment described in the Tax
Prepayment Notice). The Tax Prepayment Notice having been given, the principal amount of the Notes
together with interest accrued thereon to the date of such prepayment and Positive Make-Whole
Amount, if any, with respect thereto shall become due and payable on such prepayment date, unless
the Lender shall timely give a Tax Prepayment Rejection Notice. If any
-5-
prepayment under this
Section 4.8(c) shall result in a Negative Make-Whole Amount, the holders of the Notes so to be
prepaid shall pay such Negative Make-Whole Amount in accordance with the provisions of Section 7.15
of this Agreement,
No prepayment pursuant to this Section 4.8(c) shall affect the obligation of the Borrower to
pay increased payments in respect of any payment made on or prior to the date of such prepayment.
The Borrower may not offer to prepay or prepay Notes pursuant to this Section 4.8(c) (i) until
the Borrower shall have taken commercially reasonable steps to mitigate the requirement to make the
related increased payments or (ii) if the obligation to make such increased payments directly
results or resulted from actions taken by the Borrower (other than actions required to be taken
under applicable law), and any Tax Prepayment Notice given pursuant to this Section 4.8(c) shall
certify to the foregoing and describe such mitigation steps, if any.
For purposes of this Section 4.8(c):
Change in Tax Law
means (individually or collectively
with one or more prior changes) (i) an amendment to, or change in, any law, treaty, rule or
regulation of Mexico after the Closing Date, or an amendment to, or change in, an official
interpretation or application of such law, treaty, rule or regulation after the Closing Date, which
amendment or change is in force and continuing and meets the opinion and certification requirements
described below or (ii) in the case of any other jurisdiction that becomes a Taxing Jurisdiction
after the Closing Date, an amendment to, or change in, any law, treaty, rule or regulation of such
jurisdiction, or the application of any amendment to, or change in, an official interpretation or
application of such law, treaty, rule or regulation, in any case after such jurisdiction shall have
become a Taxing Jurisdiction, which amendment or change is in force and continuing and meets such
opinion and certification requirements. No such amendment or change shall constitute a Change in
Tax Law unless the same would in the opinion of the Borrower (which shall be evidenced by an
Officers Certificate of the Borrower and supported by a written opinion of counsel having
recognized expertise in the field of taxation in the Taxing Jurisdiction, both of which shall be
delivered to the Lender prior to or concurrently with the Tax Prepayment Notice in respect of such
Change in Tax Law) affect the deduction or require the withholding of any Tax imposed by such
Taxing Jurisdiction on any payment payable on the Notes.
(d) If the Borrower shall desire to prepay Notes pursuant to Section 4.8(b) above, it shall
deliver a Request to the Lender giving notice of the exercise of such right of prepayment and
specifying the aggregate principal amount of Notes to be prepaid, the date fixed for prepayment
(which date shall be at least 45 days after the delivery of such Request or such shorter period of
time as shall be satisfactory to the Lender) and shall state that payment of such
amount, together with accrued interest thereon, Make-Whole Amount, if any, and Prepayment Fee, if
any, will be made on the date of such prepayment and that on and after such date interest on the
principal amount of the Notes to be prepaid will cease to accrue.
Section 4.9. Equally and Ratably Secured
. All Notes at any time outstanding under this
Agreement shall be equally and ratably secured by the Mexican Trust Agreement without preference,
priority or distinction on account of the date or dates or the actual time or times of
-6-
the issue or
maturity of such Notes so that all Notes at any time issued and outstanding hereunder shall have
the same rights, Liens and preferences under and by virtue of the Mexican Trust Agreement.
Article V
Security
The indebtedness described in the Notes, the prompt and complete payment of the principal of,
interest on and Positive Make-Whole Amount, if any, with respect to the Notes, and all other
amounts due from the Borrower with respect to the Notes from time to time outstanding hereunder and
all other amounts due from the Borrower hereunder and the performance and observance by the
Borrower of all the agreements, covenants and provisions herein and in the Notes shall be secured
by the Equipment and the income and proceeds thereof pursuant to the terms of the Mexican Trust
Agreement. To the extent that the Borrower obtains, or is deemed to have obtained, any right,
title or interest in the Equipment and the income and proceeds thereof, the Borrower hereby grants
to the Lender, subject to Section 7.16, a security interest in the Equipment and the income and
proceeds thereof as collateral security for the indebtedness described in the Notes and this
Agreement and the prompt and complete payment of the principal of, interest on, and Positive
Make-Whole Amount, if any, with respect to the Notes, and all other amounts due from the Borrower
with respect to the Notes from time to time outstanding hereunder and all other amounts due from
the Borrower hereunder.
Article VI
Closing Conditions
The obligation of the Lender to make the Loan hereunder shall be subject to the satisfaction or
waiver of the applicable conditions precedent set forth in Exhibit C attached hereto on or before
the Closing Date (except as otherwise indicated).
Article VII
Covenants of the Borrower
Section 7.1. Payment of the Notes
. The Borrower shall promptly pay the principal and interest
on the Notes when due and
punctually perform and observe all of the covenants, agreements and provisions contained herein, in
the Notes and in any other instrument given as security for the Notes.
Section 7.2. Marking of Equipment
. The Borrower agrees that at or before the Closing Date,
the Borrower shall affix and maintain on each Unit the reporting mark, if any, and identification
number listed in the Loan Agreement Supplement for such Unit and such other markings as from time
to time may be required by law or to protect the interest of the Lender in such Units. In case any
of such marks shall at any time be removed, defaced or destroyed before
-7-
the termination of the
Mexican Trust Agreement, the Borrower shall promptly cause the same to be restored or replaced.
The Borrower shall not change, or permit to be changed, the reporting mark of any of the Equipment
at any time before the termination of the Mexican Trust Agreement (or any reporting mark which may
have been substituted as herein provided) except in accordance with a statement of new reporting
marks to be substituted therefor which shall be filed and recorded as provided in Section 7.13
hereof.
The Equipment may be lettered with the name, initials or insignia of the Borrower, or of any
Affiliate or any lessee of the Borrower which is permitted to use the Equipment as herein provided,
or may be lettered in some other appropriate manner, for convenience of identification of the
interest of the Borrower, or such Affiliate or lessee therein. Except as aforesaid, during the
term of this Agreement, the Borrower shall not allow the name of any Person to be placed on any of
the Equipment as a designation if the right, title and interest of the Trustee therein would
thereby be impaired or invalidated. The Lender shall, upon the Request of the Borrower, consent to
the placing of the name of any specified Person upon any Unit as a designation if there shall have
been delivered to the Lender an Opinion of Counsel to the effect that such designation will not
impair or invalidate the right, title and interest of the Trustee in or to such Unit.
Section 7.3. Maintenance of Equipment; Casualty Occurrences; Eminent Domain
.
(a)
Maintenance of Equipment.
The Borrower, at its own cost and expense, shall service,
maintain, repair and keep each Unit (i) in good repair and operating condition, ordinary wear and
tear excepted, (ii) in accordance with (a) prudent U.S. Class I railroad industry maintenance
practices in existence from time to time, (b) manufacturers recommendations to the extent required
to maintain such manufacturers warranties in effect with respect to such Unit and (c) the
requirements, if any, of any insurance policies maintained by, or on behalf of, the Borrower with
respect to such Unit, (iii) in a manner consistent with service, maintenance, overhaul and repair
practices used by the Borrower in respect of equipment owned or leased by the Borrower similar in
type to such Unit and without discrimination between owned and leased equipment and (iv) in
compliance, in all material respects, with all applicable laws and regulations, including any
applicable United States EPA Regulations and any applicable AAR Mechanical Standards and Federal
Railroad Administration regulations as applicable to continued use by the Borrower;
provided,
however
, that the Borrower may, in good faith and by appropriate proceedings diligently conducted,
contest the validity or application of any such law, regulation, requirement or rule in any
reasonable manner which does not materially adversely affect (it being agreed that the imposition
of a Lien (other than a Permitted Lien) on, or a
material risk of loss of a Unit, shall be a material adverse affect) the rights or interests of the
Lender in the Equipment or hereunder or otherwise expose the Lender to criminal sanctions,
regulatory sanctions or risk of material civil liability.
(b)
Casualty Occurrences.
Whenever any Unit shall suffer a Casualty Occurrence, the Borrower
shall within 60 days after a Responsible Officer of the Borrower has actual knowledge of such
occurrence give the Lender notice of such occurrence (such notice to include the amount,
description, reporting marks and road numbers of all the Units of Equipment that have suffered a
Casualty Occurrence) and of its election to perform one of the following options (it being agreed
that if the Borrower shall not have given notice of such election within such 60 days after such
-8-
actual knowledge of such occurrence, the Borrower shall be deemed to have elected to perform the
option set forth in the following clause (1)) (1) on or before a Payment Date selected by the
Borrower that is within 180 days (or, in the case of an event of the type described in clause (v)
of the definition of Casualty Occurrence, within 60 days) after the occurrence of the Casualty
Occurrence, the Borrower shall transfer to the Lender immediately available funds in an amount
equal to the amount required to prepay that portion of the Notes that are to be prepaid on account
of such Casualty Occurrence on such Payment Date pursuant to Section 4.8(a) hereof or (2) so long
as no Event of Default shall have occurred and be continuing, as promptly as practicable, and in
any event on or before the Business Day next preceding the 175th day next following the date of the
Casualty Occurrence, the Borrower shall convey to the Trustee a replacement Unit of similar type
and capable of performing comparable function as the replaced Unit (a
Replacement Unit
) with a
current fair market value, utility, condition and remaining useful life at least equal to such
replaced Unit, assuming such replaced Unit was in the condition and repair required by the terms
hereof immediately prior to such Casualty Occurrence;
provided
that, if the Borrower shall not
perform its obligation to effect such replacement under this clause (2) during the period of time
provided herein, then the Borrower shall pay on a Payment Date selected by the Borrower that is
within 180 days (or, in the case of an event of the type described in clause (v) of the definition
of Casualty Occurrence, within 60 days) of the occurrence of a Casualty Occurrence to the Lender
the amounts specified in clause (1) above. Prior to or at the time of any such conveyance and as a
condition to such replacement, the Borrower will, at its own expense:
(i) duly execute a Loan Agreement Supplement which shall subject such Replacement Unit
to this Agreement and cause such Loan Agreement Supplement to be delivered to the Lender for
execution and, upon such execution, cause such supplement or appropriate evidence thereof to
be filed, recorded or deposited in every public office where the supplement (or appropriate
evidence thereof) covering the replaced Unit shall have been filed, recorded or deposited;
(ii) cause title to the Replacement Unit to be transferred to the Mexican Trust;
(iii) furnish to the Lender an Officers Certificate certifying that the Replacement
Unit is free and clear of all Liens other than Permitted Liens;
(iv) furnish to the Lender an Opinion or Opinions of Counsel, in substantially the same
form as the Opinion or Opinions of Counsel delivered on the Closing Date, to
the effect that all filings, recordings and other action necessary to perfect the Lenders
interests in the United States of America, Canada and Mexico in the Replacement Unit have
been accomplished;
(v) furnish to the Lender a certificate of a qualified engineer (who may be the chief
mechanical officer employed by the Borrower) certifying that the Replacement Unit has a fair
market value, utility and remaining useful life at least equal to the Unit replaced thereby
(assuming that such replaced Unit was maintained in the condition required by the terms of
this Agreement);
provided
that if the Lender shall promptly notify the Borrower in writing
that the Lender, in good faith, objects to or disagrees with the fair
-9-
market value, utility
or remaining useful life of any Replacement Unit set forth in the certificate of the
qualified engineer of the Borrower described herein, the Lender shall be entitled, at
Borrowers expense, to obtain an appraisal from an independent appraiser of recognized
standing as to the fair market value, utility and remaining useful life of such Replacement
Unit and the parties agree that the determination of the fair market value, utility and
remaining useful life of such Replacement Unit as set forth in the appraisal prepared by the
independent appraiser shall be final and binding upon the parties; and
(vi) pay all of the Lenders reasonable costs and expenses (including reasonable
attorneys fees) incurred in connection with such replacement or substitution, but excluding
any appraisal fees.
Upon the compliance by the Borrower with the terms of this Section 7.3(b), the Lender shall
instruct the Trustee to execute and deliver to, or as directed in writing by, the Borrower an
appropriate instrument (in due form for recording) furnished by the Borrower conveying the replaced
Unit or Units of Equipment from the Trustee to the Borrower and releasing all proceeds, rents,
issues, profits, revenues, income thereof including leases, subleases and use agreements relating
thereto from the Mexican Trust Agreement. Notwithstanding anything to the contrary contained
herein, upon payment to the Lender of the amounts set forth in this Section 7.3 following a
Casualty Occurrence or the delivery of a Replacement Unit in accordance with this Section 7.3
following a Casualty Occurrence, the Borrower or its designee shall be entitled to any amounts
arising from the disposition of any Unit suffering a Casualty Occurrence, plus any awards,
insurance (other than insurance maintained by the Lender for its own account in accordance with
Section 7.5(d)) or other proceeds and damages (including any Association of American Railroads
interline settlement paid upon a Casualty Occurrence) received by the Borrower or the Lender by
reason of such Casualty Occurrence. For all purposes hereof, each Replacement Unit shall, after
such conveyance, be deemed to have the same Equipment Cost as the Unit it replaced.
In the event of the substitution of a Replacement Unit, all provisions of this Agreement
relating to the Unit or Units being replaced shall be applicable to such Replacement Unit with the
same force and effect as if such Replacement Unit was the same Unit being replaced.
Section 7.4. Possession of Equipment; Assignments
. (a) The Borrower shall be entitled to the
possession of the Equipment and to the use of the Equipment by it or any Affiliate in the general
operation of
the Borrowers or any such Affiliates freight rail business upon lines of railroad owned or
operated by it or any such Affiliate, upon lines of railroad over which the Borrower or any such
Affiliate has trackage or other operating rights or over which railroad equipment of the Borrower
or any such Affiliate is regularly operated pursuant to contract and on railroad lines of other
railroads in Mexico, the United States and Canada, in the usual interchange of traffic or in
through or run-through service and shall be entitled to permit the use of the Equipment upon lines
of railroad of connecting and other carriers in the usual interchange of traffic or pursuant to
through or run-through agreements;
provided
the Borrower shall use the Equipment only for the
purpose and in the manner for which it was designed and intended and in compliance, in all material
respects, with all applicable laws, regulations and guidelines of any governmental body, the
Association of American Railroads, the Federal Railroad Administration
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and the Secretaría de
Comunicaciones y Transporte and their successors and assigns. Nothing in this Section 7.4(a) shall
be deemed to constitute permission by the Lender to any Person that acquires possession of any Unit
to take any action inconsistent with the terms and provisions of this Agreement. The rights of any
person that acquires possession of any Unit pursuant to this Section 7.4(a) shall be subject and
subordinate to the rights of the Trustee under the Mexican Trust Agreement.
(b) Except as otherwise provided in this Section 7.4(b) or in the case of any requisition for
use by an agency or instrumentality of the Mexican, United States or Canadian government, the
Borrower will not, without the prior written consent of the Lender, assign any of its rights
hereunder;
provided, however,
that the Borrower, so long as no Event of Default shall have occurred
and be continuing under this Agreement, shall have the right, without the prior written consent of
the Lender, to lease any Unit to or permit its use by a user organized under the laws of Mexico,
organized under the federal laws or the laws of any state of the United States or organized under
the federal laws or the laws of any province of Canada, for use by such lessee or user upon lines
of railroad owned or operated by the Borrower, any Affiliate of the Borrower, such lessee or user
or by a railroad company or companies organized under the laws of Mexico, organized under the
federal laws or the laws of any state of the United States or organized under the federal laws or
the laws of any province of Canada, over which the Borrower, such Affiliate of the Borrower, such
lessee or user or such railroad company or companies has trackage or other operating rights, and
upon lines of railroad of connecting and other carriers in the usual interchange of traffic or
pursuant to through or run-through service agreements;
provided
such lessee or user shall not, at
the time of such lease, be insolvent or subject to insolvency or bankruptcy proceedings. Each such
lease or use agreement shall be subject and subordinate to the Mexican Trust Agreement. No lease
or use agreement shall contain a purchase option. The Borrower shall not enter into a lease or use
agreement with respect to any Unit for a period in excess of one year without the prior written
consent of the Lender, which consent shall not be unreasonably withheld or delayed. No lease or
use agreement shall in any way discharge or diminish any of the Borrowers obligations hereunder,
and the Borrower shall remain primarily liable hereunder for the performance of all the terms,
conditions and provisions of this Agreement to the same extent as if such lease or use agreement
had not been entered into. Nothing in this Section 7.4(b) shall be deemed to constitute permission
to any Person in possession of any Unit pursuant to any such lease or use agreement to take any
action inconsistent with the terms and provisions of this Agreement.
Notwithstanding anything to the contrary contained herein, any conveyance, transfer or lease,
directly or indirectly, of all or substantially all of the assets of the Borrower in accordance
with Section 7.8 shall not be deemed a breach of this covenant.
(c) The Lender shall not assign, transfer or convey any Notes without the prior written
consent of the Borrower (which consent shall not be unreasonably withheld) unless (i) such
assignment, transfer or conveyance shall be to an Affiliate of Lender or (ii) an Event of Default
described in Section 8.1(a) hereof shall have occurred and be continuing, in the case of either
such situation, such consent shall not be required;
provided
that any assignment, transfer or
conveyance shall (i) be to one or more Affiliates of the Lender or to one or more other assignees
that, so long as no Event of Default has occurred and is then continuing, is reasonably acceptable
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to the Borrower (each an
Assignee
) and (ii) be of all or a portion (not less than $5,000,000.00),
in each case, of its interests, rights and obligations under this Agreement and the Mexican Trust
Agreement, including all or a portion of the Loan, at the time made by or owing to it;
provided
further
that (1) the parties to each such assignment shall execute and deliver to the Lender an
instrument of assignment and acceptance; and (2) after giving effect to such assignment, the
assigning Lender shall retain (if it retains any portion) a minimum of $5,000,000.00 original
principal amount of its interests, rights, and obligations under this Agreement and the Mexican
Trust Agreement. The Lender shall provide the Borrower with at least thirty (30) days prior
written notice of any proposed assignment, transfer or conveyance of any Note specifying the name
and address of any proposed Assignee, the proposed date of such assignment, transfer or conveyance
(the
Transfer Date
) and such additional information as shall be necessary to determine whether
the proposed transfer satisfies the requirements of this Section 7.4(c). Upon acceptance, from and
after the effective date specified in each assignment and acceptance: (i) the Assignee shall be a
party hereto and, to the extent provided in such assignment and acceptance, have the same rights
and obligations as the Lender under this Agreement, and the term Lender thereafter shall include
such Assignee, and (ii) the assigning Lender shall be released from any future obligations under
this Agreement with respect to the interest assigned;
provided
that in the case of an assignment
and acceptance covering all or the remaining portion of assignors rights and obligations under
this Agreement, such Assignee shall continue to be entitled to the benefits of the indemnification
provisions of Sections 7.6, 7.10 and 7.11 hereof, as well as to any fees or amounts accrued for its
account hereunder and not yet paid and shall continue to be responsible for obligations and
liabilities incurred prior to such assignment. The Borrower shall, upon request of the Assignee
and delivery of the assignors Note, execute new Notes in appropriate denominations and series to
evidence the Loan after an assignment and shall deliver such new Notes to the Assignee and the
assignor (to the extent it retains any portion of the Loan) in exchange for the return of the Notes
that previously evidenced a portion of the Loan.
Notwithstanding anything to the contrary contained hereunder, if a holder of a Note seeking to
transfer its Note in accordance with this Section 7.4(c) (a
Assignor
) shall have executed and
delivered to the Borrower a Tax Prepayment Rejection Notice and/or an Increased Cost Rejection
Notice, as applicable, with respect to such Note, the Borrower may, by written notice delivered to
the Assignor not later than fifteen (15) days prior to the proposed Transfer Date, require the
proposed Assignee to execute and deliver to the Borrower a Tax Prepayment Rejection Notice with
respect to the Change in Tax Law giving rise to the original Tax Prepayment Notice and the
Assignors Tax Prepayment Rejection Notice and/or an Increased
Cost Rejection Notice with respect to the Regulatory Change giving rise to the original
Increased Cost Prepayment Notice and the Assignors Increased Cost Rejection Notice, as applicable.
If the proposed Assignee shall fail to execute and deliver a Tax Prepayment Rejection Notice
and/or an Increased Cost Rejection Notice, as applicable, to the Borrower at least five (5) days
prior to the proposed Transfer Date, the Borrower may give the Assignor irrevocable written notice
of the prepayment of the Assignors Note on a specified prepayment date (which shall be a Business
Day not less than 30 days nor more than 60 days after the date of such notice) stating that all of
the Notes held by the Assignor shall be prepaid on the date of such prepayment at 100% of the
principal amount so prepaid together with interest accrued thereon up to, but not including the
date of such prepayment and Positive Make-Whole
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Amount, if any, with respect thereto. If any
prepayment under this Section 7.4(c) shall result in a Negative Make-Whole Amount, the holders of
the Notes so to be prepaid shall pay such Negative Make-Whole Amount in accordance with the
provisions of Section 7.15 of this Agreement.
Section 7.5. Insurance
.
(a)
Coverages
. The Borrower will, at its own expense, cause to be carried and maintained
(i) all risk property insurance in respect of the Units of Equipment and (ii) public liability
insurance against loss or damage for personal injury, death, environmental restoration
(environmental clean up, removal or remedial action) or property damage suffered upon, in or about
any premises occupied by the Borrower or occurring as a result of the use, maintenance or operation
of the Units of Equipment in an amount not less than $75,000,000 and against such risks, with such
insurance companies and with such terms (including co-insurance, deductibles, limits of liability
and loss payment provisions) as are customary under the Borrowers risk management program and in
keeping with risks assumed by U.S. Class I railroads generally,
provided, however,
that the
Borrower may self-insure with respect to any or all of the above if customary under such risk
management program and in keeping with risks assumed by U.S. Class I Railroads generally, but in no
event shall such self-insurance or deductibles exceed $15,000,000 per occurrence. Such coverage
may provide for deductible amounts as are customary under the Borrowers risk management program
and in keeping with risks assumed by U.S. Class I Railroads generally. Notwithstanding the
foregoing, all insurance coverages (including, without limitation, self-insurance) with respect to
the Equipment required under this Agreement shall be comparable to, and no less favorable than,
insurance coverages applicable to equipment owned or leased by the Borrower which is comparable to
the Equipment. The Borrower shall, at its own expense, be entitled to make all proofs of loss and
take all other steps necessary to collect the proceeds of such insurance.
If any insurance required by this Agreement shall not be available to the Borrower at renewal
on a commercially reasonable basis on substantially the same terms and conditions as then carried
by the Borrower and the obtaining of such insurance is, in the Borrowers reasonable judgment,
commercially impracticable (taking into account both terms and premiums), the Borrower shall obtain
a written report of an independent insurance advisor of recognized national standing, chosen by the
Borrower and reasonably acceptable to the Lender confirming in reasonable detail that such
insurance, in respect of amount or scope of coverage, is not so available on a commercially
reasonable basis from insurers of recognized standing who provide insurance to the railroad
industry. During any period with respect to which any insurance is not
so available, the Borrower shall nevertheless maintain such insurance to the extent, with
respect to amount and scope of coverage, that it is available on a commercially reasonable basis
from insurers of recognized standing who provide insurance to the railroad industry. If any
insurance which was previously discontinued because of its commercial unavailability later becomes
available, in the Borrowers reasonable judgment, on a commercially reasonable basis, the Borrower
shall reinstate such insurance.
(b)
Certificate of Insurance
. The Borrower shall, on or prior to the Closing Date for any
Unit, furnish the Lender with a certificate signed by the insurer or an independent insurance
broker showing the insurance then maintained, if any, with respect to the Units of Equipment
financed on the Closing Date. The Lender may, but not more than twice in any twelve-month
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period,
request from the Borrower and the Borrower shall promptly thereafter furnish to the Lender, an
Officers Certificate or, at the Borrowers option, such a certificate signed by an independent
insurance broker, setting forth all insurance maintained by the Borrower pursuant to Section 7.5(a)
above and describing such policies, if any, including the amounts of coverage, any deductible
amounts and the names of the insurance providers. Such public liability insurance and all risk
property insurance shall name the Lender as an additional insured with respect to such public
liability insurance then maintained as its interest may appear. The Borrower agrees that such
insurer or such broker will endeavor to provide written notice to the Lender at least 30 days prior
to the cancellation or lapse of any insurance required to be maintained by the Borrower in
accordance with Section 7.5(a) above. Any insurance maintained pursuant to this Section 7.5 shall
(i) provide insurers waiver of its right of subrogation with respect to public liability insurance
and all risk property insurance, set-off or counterclaim or any other deduction, whether by
attachment or otherwise, in respect of any liability against any additional insured except for
claims as shall arise from the willful misconduct or gross negligence of such additional insured,
(ii) to the extent reasonably commercially available, provide that such all risk property insurance
as to the interest of the Lender shall not be invalidated by any action or inaction of the Borrower
or any other Person (other than such claimant), regardless of any breach or violation of any
warranty, declaration or condition contained in such policies by the Borrower or any other Person
(other than such claimant), and (iii) provide that all such insurance is primary without right of
contribution from any other insurance which might otherwise be maintained by the Lender and shall
expressly provide a severability of interest clause. Any insurance maintained by the Lender shall
not be considered co-insurance with any insurance maintained by the Borrower.
(c)
Proceeds of Insurance.
The entire proceeds of any property or casualty insurance or
third-party payments for damages or a Casualty Occurrence with respect to any Unit (including any
Association of American Railroads interline settlements) received by the Trustee or the Lender
shall be promptly paid over to, and retained by, the Borrower;
provided, however,
any such amount
which is payable to the Borrower shall not be paid to the Borrower, or if it has been previously
paid directly to the Borrower shall not be retained by the Borrower, if at the time of such payment
an Event of Default shall have occurred and be continuing, but shall be paid to and held by the
Lender as security for the obligations of the Borrower under this Agreement.
(d)
Additional Insurance.
At any time the Lender may but shall not be required to at its own
expense carry insurance with respect to its interest in the Equipment,
provided
that such
insurance does not interfere with the Borrowers ability to insure the Equipment as required by
this Section 7.5 or adversely affect the Borrowers insurance or the cost thereof, it being
understood that all salvage rights to each Unit and all primary subrogation rights shall remain
with the Borrowers insurers at all times. Any insurance payments received from policies
maintained by the Lender pursuant to the previous sentence shall be retained by the Lender without
reducing or otherwise affecting the Borrowers obligations hereunder.
Section 7.6. Borrowers Indemnities
. (a)
Claims Defined
. For the purposes of this
Section 7.6,
Claims
shall mean any and all costs, expenses, liabilities, obligations, losses,
damages, penalties, actions or suits or claims of whatsoever kind or nature (whether or not on the
basis of negligence, strict or absolute liability or liability in tort) which may be imposed on, or
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asserted against, an Indemnified Person, as defined herein, or any Unit and, except as otherwise
expressly provided in this Section 7.6, shall include, but not be limited to, all reasonable
out-of-pocket costs, disbursements and expenses (including reasonable and documented legal fees and
expenses) paid or incurred by an Indemnified Person in connection therewith or related thereto.
(b)
Indemnified Person Defined
. For the purposes of this Section 7.6,
Indemnified Person
means the Lender (and its successors and assigns), and its directors, officers, employees,
successors and permitted assigns, agents and servants (the directors, officers, employees,
successors and permitted assigns, agents and servants of the Lender together with the Lender being
referred to herein collectively as the
Related Indemnitee Group
of the Lender),
provided
that as
a condition of any obligations of the Borrower to pay any indemnity or perform any action under
this Section 7.6 with respect to any Lender who is not a signatory hereto, such Lender at the
written request of the Borrower shall expressly agree in writing to be bound by all the terms of
this Section 7.6. In the event that any Indemnified Person fails, after notice to such Indemnified
Person referring to this sentence, to comply with any duty or obligation under Section 7.6(e) and
(f), such Indemnified Person shall not be entitled to indemnity under this Section 7.6 to the
extent such failure to comply has a material adverse effect on the Borrowers ability to defend any
such Claim.
(c)
Claims Indemnified
. Subject to the exclusions stated in subsection (d) below, the
Borrower agrees to indemnify, protect, defend and hold harmless each Indemnified Person on an
After-Tax Basis against Claims resulting from or arising out of or related to (whether or not such
Indemnified Person shall be indemnified as to such Claim by any other Person), (i) this Agreement
or any of the transactions contemplated hereby and thereby or resulting herefrom or therefrom and
the enforcement thereof and hereof; (ii) the ownership, lease, operation, possession, modification,
use, non-use, maintenance, sublease, financing, substitution, control, repair, storage, alteration,
violation of law with respect to any Unit (including applicable securities laws and environmental
law), transfer or other disposition of any Unit, overhaul, testing or registration of any Unit
(including, without limitation, injury, death or property damage of passengers, shippers or others,
and environmental control, noise and pollution regulations); (iii) the manufacture, design,
purchase, acceptance, rejection, delivery, nondelivery or condition of any Unit (including, without
limitation, latent and other defects, whether or not discoverable, and any claim for patent,
trademark or copyright infringement); and (iv) any breach of or failure to perform or observe, or
any other non-compliance with, any covenant, condition or
agreement to be performed by, or other obligation of, the Borrower under this Agreement, or the
falsity when made of any representation or warranty of the Borrower in this Agreement or in any
document or certificate delivered in connection therewith.
(d)
Claims Excluded
. The following are excluded from the agreement to indemnify under this
Section 7.6:
(i) Claims with respect to any Unit to the extent attributable to acts or events
occurring after (A) the occurrence of a Casualty Occurrence with respect to such Unit under
Section 7.3 hereof, the last to occur of (x) if an Event of Default exists, the elimination
of such Event of Default and the payment of all amounts due under this
-15-
Agreement, (y) the
payment of all amounts due from the Borrower in connection with any such event and (z) the
conveyance of such Unit by the Trustee to the Borrower in accordance with the terms herein
or the terms of the Mexican Trust Agreement or (B) in all other cases, with respect to such
Unit, the earlier to occur of (y) if an Event of Default exists, the elimination of such
Event of Default and the payment of all amounts due under this Agreement and (z) the
conveyance of such Unit by the Trustee to the Borrower in accordance with the terms herein
or the terms of the Mexican Trust Agreement;
(ii) with respect to any particular Indemnified Person, Claims which are Taxes except
Taxes described in Section 7.11. Except as expressly provided in this Agreement (including
the foregoing sentence), the Borrowers entire obligation with respect to Taxes and losses
of tax benefits being fully set out in Section 7.11;
(iii) with respect to any particular Indemnified Person, Claims to the extent
attributable to the gross negligence or willful misconduct of (other than gross negligence
or willful misconduct imputed as a matter of law to such Indemnified Person solely by reason
of its interest in the Equipment), or to the breach of any contractual obligation by, or the
falsity or inaccuracy of any representation or warranty of such Indemnified Person or any of
such Indemnified Persons Related Indemnitee Group;
(iv) with respect to any particular Indemnified Person, Claims to the extent
attributable to any transfer (other than pursuant to Section 7.3 or Article VIII hereof) by
such Indemnified Person of any interest in the Units of Equipment or this Agreement;
(v) with respect to any particular Indemnified Person, any Claim to the extent
attributable to the offer, sale, transfer or disposition (voluntary or involuntary) by, or
on behalf of, such Indemnified Person of the Notes (except, with respect to a transfer of a
Note in accordance with the terms of Section 7.4(c), to the extent of the indemnification
expressly set forth therein), any interest in this Agreement, or any similar security, other
than a transfer by such Indemnified Person of its interests in any Unit pursuant to
Section 7.3 hereof or otherwise attributable to an Event of Default that has occurred and is
continuing;
(vi) any Claim to the extent attributable to the authorization or giving or
unreasonable withholding by such Indemnified Person of any future amendments,
supplements, modifications, alterations, waivers or consents with respect to any of this
Agreement, other than such as have been requested by or consented to by the Borrower or
necessary or required to effectuate the purpose or intent of this Agreement or as are
expressly required by this Agreement;
(vii) any Claim which relates to a cost, fee or expense payable by a Person other than
the Borrower or the Borrower pursuant to this Agreement;
(viii) any Claim which is an ordinary and usual operating or overhead expense of such
Indemnified Person other than such expenses attributable to the occurrence of an Event of
Default hereunder;
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(ix) with respect to any particular Indemnified Person, any Claim resulting from the
imposition of any Lenders Lien attributable to such Indemnified Person; or
(x) with respect to any particular Indemnified Person, any Claim, to the extent the
risk thereof has been expressly assumed by such Indemnified Person in connection with the
exercise by such Indemnified Person of the right of inspection granted under Section 7.7
hereof.
(e)
Insured Claims
. In the case of any Claim indemnified by the Borrower hereunder which is
covered by a policy of insurance maintained by the Borrower pursuant to Section 7.5 of this
Agreement or otherwise, each Indemnified Person agrees to provide reasonable cooperation at the
expense of the Borrower to the insurers in the exercise of their rights to investigate, defend or
compromise such Claim as may be required to retain the benefits of such insurance with respect to
such Claim.
(f)
Claims Procedure
. An Indemnified Person shall, upon becoming aware of any Claim for which
indemnification is sought, promptly notify the Borrower in writing of such Claim;
provided,
however,
that, notwithstanding the last sentence of Section 7.6(b), the failure to give such notice
shall not release the Borrower from any of its obligations under this Section 7.6, except to the
extent that such failure to give notice shall have a material adverse effect on the Borrowers
ability to defend such claim or recover proceeds under any insurance policies maintained by the
Borrower. Subject to the rights of insurers under policies of insurance maintained by the
Borrower, the Borrower shall have the right in each case at the Borrowers sole expense to
investigate, and the right in its sole discretion to defend or compromise, any Claim for which
indemnification is sought under this Section 7.6 and the Indemnified Person shall cooperate, at
Borrowers expense, with all reasonable requests of the Borrower in connection therewith;
provided
that no right to defend or compromise such Claim shall exist on the part of the Borrower with
respect to any Indemnified Person if (1) an Event of Default shall have occurred and be continuing
or (2) such Claim would entail a significant risk to the Lender of any criminal liability,
regulatory sanction or material civil liability;
provided, further,
that no right to compromise or
settle such Claim shall exist unless the Borrower agrees in writing to pay the amount of such
settlement or compromise. In any case in which any action, suit or proceeding is brought against
any Indemnified Person in connection with any Claim, the Borrower may, and upon such Indemnified
Persons request will, at the Borrowers expense
resist and defend such action, suit or proceeding, or cause the same to be resisted or defended by
counsel selected by the Borrower and reasonably acceptable to such Indemnified Person and, in the
event of any failure by the Borrower to do so, the Borrower shall pay all costs and expenses
(including, without limitation, reasonable attorneys fees and expenses) incurred by such
Indemnified Person in connection with such action, suit or proceeding. Where the Borrower or the
insurers under a policy of insurance maintained by the Borrower undertake the defense of an
Indemnified Person with respect to a Claim, no additional legal fees or expenses of such
Indemnified Person in connection with the defense of such Claim shall be indemnified hereunder
unless such fees or expenses were incurred at the request of the Borrower or such insurers;
provided, however,
that if in the written opinion of counsel to such Indemnified Person an actual
or potential material conflict exists where it is advisable for such Indemnified Person to be
represented by separate counsel, the reasonable fees and expenses of any such separate counsel
-17-
shall be paid by the Borrower. Subject to the requirements of any policy of insurance, an
Indemnified Person may participate at its own expense in any judicial proceeding controlled by the
Borrower pursuant to the preceding provisions;
provided
that such partys participation does not,
in the opinion of the independent counsel appointed by the Borrower or its insurers to conduct such
proceedings, interfere with such control; and such participation shall not constitute a waiver of
the indemnification provided in this Section 7.6(f). Nothing contained in this Section 7.6(f)
shall be deemed to require an Indemnified Person to contest any Claim or to assume responsibility
for or control of any judicial proceeding with respect thereto.
(g)
Subrogation
. If a Claim indemnified by the Borrower under this Section 7.6 is paid by the
Borrower and/or an insurer under a policy of insurance maintained by the Borrower, the Borrower
and/or such insurer, as the case may be, shall be subrogated to the extent of such payment to the
rights and remedies of the Indemnified Person (other than under insurance policies maintained by
such Indemnified Person) on whose behalf such Claim was paid with respect to the transaction or
event giving rise to such Claim. So long as no Event of Default shall have occurred and be
continuing, should an Indemnified Person receive any refund, in whole or in part, with respect to
any Claim paid by the Borrower hereunder, it shall promptly pay over the amount refunded (but not
in excess of the amount the Borrower or any of its insurers has paid in respect of such Claim paid
or payable by such Indemnified Person on account of such refund) to the Borrower.
(h)
Waiver of Certain Claims
. The Borrower hereby waives and releases any Claim now or
hereafter existing against any Indemnified Person arising out of death or personal injury to
personnel of the Borrower, loss or damage to property of the Borrower, or the loss of use of any
property of the Borrower, which may result from or arise out of the condition, use or operation of
the Equipment during the term of this Agreement, including without limitation any latent or patent
defect whether or not discoverable.
(i)
Conflicting Provisions
. The general indemnification provisions of this Section 7.6 are
not intended to waive or supersede any specific provisions of, or any rights or remedies of the
Borrower under, this Agreement to the extent such provisions apply to any Claim.
Section 7.7. The Lenders Inspection Rights
. The Lender shall have the right, but not the
obligation, at its sole
cost and expense (unless, in the case of any such expense, an Event of Default shall have occurred
and be continuing) and risk (including, without limitation, the risk of personal injury or death),
by its authorized representatives, to the extent within the Borrowers control: on not more than
one occasion in any 12-month period (unless an Event of Default shall have occurred and be
continuing) or during the last 12 months prior to the final maturity of the Notes, to inspect the
Equipment and the Borrowers records with respect thereto, during the Borrowers normal business
hours and upon reasonable prior notice to the Borrower;
provided
,
however
, that the Borrower shall
not be liable for any injury to, or the death of, any Person exercising, either on behalf of the
Lender or any prospective user, the rights of inspection granted under this Section 7.7 except as
may result or arise from the Borrowers gross negligence or willful misconduct. No inspection
pursuant to this Section 7.7 shall interfere with the use, operation or maintenance of the
Equipment or the normal conduct of the Borrowers
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business, and the Borrower shall not be required
to undertake or incur any additional liabilities in connection therewith.
Section 7.8. Merger Covenant
. The Borrower shall not consolidate with or merge into any other
Person (other than an Affiliate of the Borrower) or convey, transfer or lease substantially all of
its assets as an entirety to any Person (other than an Affiliate of the Borrower) unless (i) the
Person formed by such consolidation or into which the Borrower is merged or the Person which
acquires by conveyance, transfer or lease substantially all of the assets of the Borrower as an
entirety shall execute and deliver to the Lender an agreement containing the assumption by such
successor entity of the due and punctual performance and observance of each covenant and condition
of this Agreement to be performed or observed by the Borrower, (ii) immediately after giving effect
to such transaction, no Event of Default shall have occurred solely as a result of such
consolidation or merger or such conveyance, transfer or lease and (iii) such transaction does not
result in a Material Adverse Effect. Upon such consolidation or merger, or any conveyance,
transfer or lease of substantially all of the assets of the Borrower as an entirety in accordance
with this Section 7.8, the successor entity formed by such consolidation or into which the Borrower
is merged or to which such conveyance, transfer or lease is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Borrower under this Agreement with
the same effect as if such successor entity had been named as the Borrower herein. If the Borrower
shall have consolidated with or merged into any other Person or conveyed, transferred or leased
substantially all of its assets, such assets to include the Equipment and the Borrowers interest
in this Agreement, the Person owning such interest after such event shall deliver to the Lender an
opinion of counsel (which counsel may be such Persons in-house counsel) confirming that the
assumption agreement pursuant to which such Person assumed the obligations of the Borrower shall
have been duly authorized, executed and delivered by such Person and that such agreement is the
legal, valid and binding obligation of such Person, enforceable against such Person in accordance
with its terms.
Section 7.9. Financial Statements
. The Borrower shall furnish the following to the Lender:
(i) unless included in a Form 10-Q delivered or deemed delivered under clause (iii)
below, as soon as available and in any event within 60 days after the end of
each quarterly period, except the last, of each fiscal year, consolidated balance sheets of
the Borrower and its consolidated Subsidiaries as at the end of such period, together with
the related consolidated statements of income and cash flows of the Borrower and its
consolidated Subsidiaries for the period beginning on the first day of such fiscal year and
ending on the last day of such quarterly period, setting forth in each case (except for the
consolidated balance sheet) in comparative form the figures for the corresponding periods of
the previous fiscal year, all in reasonable detail and prepared in accordance with U.S.
generally accepted accounting principles and certified by any Responsible Officer of the
Borrower;
(ii) unless included in a Form 10-K delivered or deemed delivered under clause (iii)
below, as soon as available and in any event within 120 days after the last day of each
fiscal year, a copy of the Borrowers annual audited report covering the
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operations of the
Borrower and its consolidated Subsidiaries, including consolidated balance sheets, and
related consolidated statements of income and retained earnings and consolidated statement
of cash flows of the Borrower and its consolidated Subsidiaries for such fiscal year,
setting forth in each case in comparative form the figures for the previous fiscal year, all
in reasonable detail and prepared in accordance with U.S. generally accepted accounting
principles applied on a consistent basis, which statements will have been certified by a
firm of independent public accountants of recognized national standing selected by the
Borrower;
(iii) as soon as available, one copy of each Annual Report on Form 10-K (or any
successor form), Quarterly Report on Form 10-Q (or any successor form) and Form 8-K filed by
the Borrower with the SEC or any successor agency,
provided
that, as long as the Borrower is
subject to informational requirements of the Securities Exchange Act of 1934 and in
accordance therewith files reports and other information with the SEC, the Lender shall be
deemed to have been furnished the foregoing reports and forms required under clauses (i),
(ii) and (iii) at the time the Lender may electronically access such reports and forms by
means of the SECs homepage on the internet or at the Borrowers homepage on the internet,
provided
,
further,
in the event that the Borrower shall cease to be subject to such
informational requirements, the Borrower will provide the Lender with 90 days advance
written notice and thereafter the Borrower shall directly furnish such reports and forms to
the Lender;
(iv) as soon as available and in any event within 120 days after the last day of each
fiscal year, a certificate signed by any Responsible Officer of the Borrower stating that
he/she has reviewed the activities of the Borrower during such year and that the Borrower
during such year has kept, observed, performed and fulfilled each and every covenant,
obligation and condition contained herein, or if an Event of Default shall exist or if an
event has occurred and is continuing which, with the giving of notice or the passage of time
or both, would constitute an Event of Default, specifying such Event of Default and all such
events and the nature and status thereof;
(v) as soon as available and in any event within 120 days after the last day of each
fiscal year, a certificate signed by any Responsible Officer of the Borrower
(i) stating whether any Units are subject to a lease or use agreement as of the end of such
fiscal year and (ii) if any such Units are subject to a lease or use agreement as of the end
of such fiscal year, setting forth the reporting marks of the Units being leased or used by
another entity and the name of the entity leasing or using such Units; and
(vi) from time to time, such additional information kept by the Borrower in the
ordinary course of business reasonably related to the transactions contemplated hereby as
the Lender may reasonably request.
Section 7.10. Increased Costs
. (a) In the event of (x) a Regulatory Change or (y) a judgment
being rendered after the Closing Date which subjects or imposes any increase in the actual cost to
the Lender of agreeing to make or making, funding or maintaining the Loan evidenced by the Notes,
then, within twenty (20) days after delivery to the Borrower of an
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Officers Certificate of the
Lender setting forth in reasonable detail the event giving rise to such increase in cost and the
basis for the determination of the amount of such increase in cost, the Borrower shall pay to the
Lender such amount as shall be necessary to reimburse the Lender for such increase in respect of
any period which is no more than ninety (90) days prior to such demand;
provided, however
, that the
Lender shall not be entitled to assert any claim under this Section 7.10(a) in respect of Taxes.
Such Officers Certificate shall, in the absence of manifest error, be binding and conclusive on
the Borrower. The Lender shall notify the Borrower as soon as possible of the occurrence of the
event by reason of which it is entitled to make a claim as described in this Section 7.10(a), but
the failure to give such notice shall not affect the obligations of the Borrower hereunder. In
determining the amount of compensation payable by the Borrower under this Section 7.10(a), the
Lender shall use reasonable efforts to take actions that are not materially adverse to the Lender
to minimize the compensation payable by the Borrower including using reasonable efforts to obtain
refunds or credit and any compensation paid by the Borrower, which is later determined not to have
been properly payable, shall forthwith be reimbursed by such holder to the Borrower.
(b) For purposes of Section 7.10(a),
Regulatory Change
means with respect to the Lender
(i) any change after the Closing Date in the laws or regulations of Mexico or any State thereof or
any Permitted Jurisdiction or the adoption or making after such date of any interpretation,
directive or request applying to a class of banks including the Lender, as the case may be, of or
under any law or regulation (whether or not having the force of law) of Mexico or any State thereof
or any Permitted Jurisdiction by any court or governmental or monetary authority charged with the
interpretation or administration thereof and (ii) any change after the Closing Date in any
regulation, guideline or requirement or in the interpretation or administration thereof (whether or
not having the force of law) issued by any governmental or monetary authority applying to a class
of banks including the Lender, as the case may be, or the bank holding company of Lender, as the
case may be (including any change after the Closing Date in the regulations, guidelines or
requirements or interpretations or administration of any of the foregoing implementing the
proposals for a risk-based capital framework described by the Basle Committee on Banking
Regulations and Supervisory Practices in its paper entitled International Convergence of Capital
Measurement and Capital Standards (commonly known as Basel II) dated June 2004, as modified and
supplemented from time to time).
(c) The Lender shall, if seeking compensation under this Section 7.10, use commercially
reasonable efforts (at its own expense) that are not materially adverse to the Lender to mitigate
the amount of compensation, including designating a different lending office if such designation
will avoid the need for, or reduce the amount of, such compensation and will not, in the reasonable
judgment of the Lender, result in any non-
de minimis
economic, legal or regulatory disadvantage to
the Lender. The Borrower shall not be required to make payments under this Section 7.10 to the
Lender if (A) a claim hereunder arises solely through circumstances peculiar to the Lender and
which do not affect commercial banks in the jurisdiction of organization of the Lender generally,
(B) so long as no Event of Default described in Section 8.1(a) hereof shall have occurred and be
continuing, the Lender is not organized under the laws of, or a resident in, a Permitted
Jurisdiction, or (C) the claim arises out of a voluntary relocation by the Lender of its lending
office (it being understood that any such relocation effected pursuant to the first sentence of
this Section 7.10(c) is not
voluntary
), or (D) the
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Lender is not seeking similar compensation for
such costs from its borrowers generally in similarly situated commercial loans.
(d) If at any time the Borrower is or becomes obligated to make any payment of increased cost
pursuant to this Section 7.10, the Borrower may give the Lender irrevocable written notice (an
Increased Cost Prepayment Notice
) of the prepayment of the Notes on a specified prepayment date
(which shall be a Business Day not less than 30 days nor more than 60 days after the date of such
notice) and the circumstances giving rise to the obligation of the Borrower to make such payment of
increased cost and the amount thereof and stating that all of the Notes shall be prepaid on the
date of such prepayment at 100% of the principal amount so prepaid together with interest accrued
thereon up to, but not including, the date of such prepayment and Make-Whole Amount, if any, with
respect thereto, unless the Lender gives Borrower written notice no more than 20 days after receipt
of the Increased Cost Prepayment Notice (or, if earlier, the tenth day prior to the date for the
payment giving rise to such payment of increased cost), that it rejecting such prepayment (an
Increased Cost Rejection Notice
). The form of Increased Cost Rejection Notice shall also
accompany the Increased Cost Prepayment Notice and shall state that execution and delivery thereof
by the Lender shall operate as a permanent waiver of its right to receive the payment of increased
cost arising as a result of the circumstances described in the Increased Cost Prepayment Notice
(but not of the Lenders right to receive any payments of increased cost that arise out of
circumstances not described in the Increased Cost Prepayment Notice or which exceed the amount of
the payment of increased cost described in the Increased Cost Prepayment Notice). The Increased
Cost Prepayment Notice having been given, the principal amount of the Notes together with interest
accrued thereon to the date of such prepayment and Positive Make-Whole Amount, if any, with respect
thereto shall become due and payable on such prepayment date, unless the Lender shall timely give
an Increased Cost Rejection Notice. If any prepayment under this Section 7.10(d) shall result in a
Negative Make-Whole Amount, the holders of the Notes so to be prepaid shall pay such Negative
Make-Whole Amount in accordance with the provisions of Section 7.15 of this Agreement.
Section 7.11. Withholding Tax Indemnity
. (a) All payments whatsoever under this Agreement and
the Notes will be made by the Borrower free and clear of withholding or deduction for any present
or future
Taxes by or on behalf of any jurisdiction from or through which the Borrower makes such payments
(hereinafter a
Taxing Jurisdiction
) imposed or levied on payments of interest, unless the
withholding or deduction of such Tax is compelled by law.
If any deduction or withholding for any Tax of a Taxing Jurisdiction imposed or levied on
payments of interest shall at any time be required in respect of any amounts to be paid by the
Borrower under this Agreement or the Notes, the Borrower will pay to the relevant Taxing
Jurisdiction the full amount required to be withheld or deducted and pay to the Lender such
additional amounts as may be necessary in order that the net amounts paid to the Lender pursuant to
the terms of this Agreement or the Notes after such deduction or withholding (including, without
limitation, any required deduction or withholding of Tax on or with respect to such additional
amount) and after taking into account tax benefits to the Lender of credits and deductions actually
realized by the Lender as a result of all such deductions and withholdings,
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shall be not less than
the amounts then due and payable to the Lender under the terms of this Agreement or the Notes
before the assessment of such Tax,
provided
that no payment of any additional amounts shall be
required to be made for or on account of:
(i) any Tax that would not have been imposed but for the existence of any present or
former connection between the Lender and the Taxing Jurisdiction, other than the mere
holding of the relevant Note or the receipt of payments thereunder or in respect thereof,
including, without limitation, the Lender being or having been a citizen or resident
thereof, or being or having been present or engaged in trade or business therein or having
or having had an establishment, office, fixed base or branch therein,
provided
that this
exclusion shall not apply with respect to a Tax that would not have been imposed but for the
Borrower, after the Closing Date, opening an office in, moving an office to, reincorporating
in, or changing the Taxing Jurisdiction from or through which payments on account of this
Agreement or the Notes are made to, the Taxing Jurisdiction imposing the relevant Tax;
(ii) any Tax that would not have been imposed but for the delay or failure by the
Lender (following a written request by the Borrower) in the filing with the relevant Taxing
Jurisdiction of Forms (as defined below) that are required to be filed by the Lender to
avoid or reduce such Taxes,
provided
that the filing of such Forms would not (in the
Lenders reasonable judgment) result in any confidential or proprietary income tax return
information being revealed, either directly or indirectly, to any Person and such delay or
failure could have been lawfully avoided by the Lender and the Lender was legally eligible
to provide such Forms without unindemnified adverse consequences (other than certain de
minimis costs), and
provided further
that the Lender shall be deemed to have satisfied the
requirements of this clause (ii) upon the good faith completion and submission of such Forms
as may be specified in a written request of the Borrower no later than 60 days after receipt
by the Lender of such written request (accompanied by copies of such Forms and related
instructions, if any, all in the English language or with an English translation thereof);
or
(iii) any combination of clauses (i) and (ii) above;
and
provided further
that in no event shall the Borrower be obligated to pay such additional
amounts to a holder of the Notes (1) so long as no Event of Default described in Section 8.1(a)
hereof shall have occurred and be continuing, if such holder is organized under the laws of, or a
resident in, any jurisdiction other than a Permitted Jurisdiction on the date such holder acquires
its Note, (2) except as provided in clause (3) below, to the extent such additional amounts are
attributable to a rate of withholding or deduction imposed by such Taxing Jurisdiction that is in
excess of 4.9% or (3) unless such Tax is imposed or levied by reason of a Change in Tax Law (for
this purpose only, with respect to any Lender other than the Original Lender, Change in Tax Law
shall mean a change in tax law occurring after the date on which such Lender acquires its Note).
By acceptance of any Note, the Lender agrees, subject to the limitations of clause (ii) above,
that it will from time to time with reasonable promptness (x) duly complete and deliver to
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or as
reasonably directed by the Borrower all such forms, certificates, documents and returns provided to
the Lender by the Borrower (collectively, together with instructions for completing the same,
Forms
) required to be filed by or on behalf of the Lender in order to avoid or reduce any such
Tax pursuant to the provisions of an applicable statute, regulation or administrative practice of
the relevant Taxing Jurisdiction or of a tax treaty between Mexico and such Taxing Jurisdiction and
(y) provide the Borrower with such information with respect to the Lender as the Borrower may
reasonably request in order to complete any such Forms,
provided
that nothing in this Section 7.11
shall require the Lender to provide copies of its tax return or other information with respect to
any such Form or otherwise if in the opinion of the Lender such Form or disclosure of information
would involve the disclosure of tax return or other information that is confidential or proprietary
to the Lender, and
provided further
that the Lender shall be deemed to have complied with its
obligation under this paragraph with respect to any Form if such Form shall have been duly
completed and delivered by the Lender to the Borrower or mailed to the appropriate taxing
authority, whichever is applicable, within 60 days following a written request of the Borrower
(which request shall be accompanied by copies of such Form and English translations of any such
Form not in the English language) and, in the case of a transfer of any Note, at least 90 days
prior to the relevant interest payment date.
On or before the Closing Date, the Borrower will furnish the Lender with copies of the
appropriate Form (and English translation if required as aforesaid) currently required to be filed
in Mexico pursuant to clause (ii) of the second paragraph of this Section 7.11(a), if any, and in
connection with the transfer of any Note the Borrower will furnish the transferee of such Note with
copies of any Form and English translation then required.
If any payment is made by the Borrower to or for the account of the Lender after deduction for
or on account of any Taxes, and increased payments are made by the Borrower pursuant to this
Section 7.11, then, if the Lender determines that it has received or been granted a tax benefit
with respect to such Taxes or such increased payments, the Lender shall, to the extent it has not
taken such tax benefits into account in calculating and reducing Borrowers payments pursuant to
this Section 7.11 and to the extent it can do so without prejudice to the retention of the amount
of such tax benefit, reimburse to the Borrower such amount as the Lender shall determine to be
attributable to the relevant Taxes or deduction or withholding or increased payments. Nothing
herein contained shall interfere with the right of the Lender to arrange its tax
affairs in whatever manner it thinks fit and, in particular, the Lender shall not be under any
obligation to claim relief from its corporate profits or similar tax liability in respect of such
Tax in priority to any other claims, reliefs, credits or deductions available to it or (other than
as set forth in clause (ii) above) oblige the Lender to disclose any information relating to its
tax affairs or any computations in respect thereof.
If the Borrower makes payment to or for the account of the Lender and the Lender is entitled
to a refund of the Tax to which such payment is attributable upon the making of a filing (other
than a Form described above), then the Lender shall, as soon as practicable after receiving written
request from the Borrower (which shall specify in reasonable detail and supply the refund forms to
be filed) use reasonable efforts to complete and deliver such refund forms to or as directed by the
Borrower, subject, however, to the same limitations with respect to Forms as are set forth above.
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The obligations of the Borrower under this Section 7.11 shall survive the payment or transfer
of any Note and the provisions of this Section 7.11 shall also apply to successive transferees of
the Notes.
(b) The Lender shall, if seeking increased payments under this Section 7.11 (other than with
respect to the Mexican withholding taxes applicable to interest payments on the date hereof), use
commercially reasonable efforts (at its own expense) to mitigate the amount of increased payments,
including designating a different lending office if such designation will avoid the need for, or
reduce the amount of, such increased payments and will not, in the reasonable judgment of the
Lender, result in any non-
de minimis
economic, legal or regulatory disadvantage to the Lender.
(c) On or before the Closing Date, the Lender will furnish the Borrower with a certificate, or
other documentation acceptable to the Borrower, from the applicable governmental authority of a
Permitted Jurisdiction evidencing the Lenders residency in such Permitted Jurisdiction.
Section 7.12. Discharge of Liens.
The Borrower will not directly or indirectly create, incur,
assume or suffer to exist any Lien on or with respect to any Units of Equipment or the Borrowers
interest therein under this Agreement, except Permitted Liens, and the Borrower shall promptly, at
its own expense, take such action as may be necessary to duly discharge (by bonding or otherwise)
any such Lien not excepted above if the same shall arise at any time.
Section 7.13. Recording.
(a) On or prior to the Closing Date, the Borrower will (x) at its
own expense, (i) cause this Agreement and the Loan Agreement Supplement dated the Closing Date, or
appropriate evidence thereof, to (A) be duly filed and recorded with the STB in accordance with
49 U.S.C. § 11301 and (B) be deposited with the Registrar General of Canada pursuant to Section 105
of the Canada Transportation Act and (ii) cause a Uniform Commercial Code precautionary financing
statement covering the security interest created by or pursuant to this Agreement naming the
Borrower, as debtor, and the Lender, as a secured party, to be filed with (1) the Recorder of Deeds
of the District of
Columbia and (2) the Secretary of State of the State of Missouri and (y) at Lenders expense and
upon the written request of Lender, cause or permit such other filings and notices to be filed or
made as necessary or appropriate to protect the interests of Lender, and will furnish Lender proof
thereof.
(b) The Borrower, at its sole expense, shall (i) promptly file the Mexican Trust Agreement
with the Mexican Railroad Registry (
Registro Ferroviario Mexicano
) and (ii) provide the Lender with
evidence of the completion of the registration of the Mexican Trust Agreement with the Mexican
Railroad Registry (
Registro Ferroviario Mexicano
) promptly following its receipt of the same. The
Lender hereby appoints and constitutes the Borrower its agent and attorney-in-fact to file, record
or register, in the name and for the account of the Lender and the Borrower, as their interests may
appear, statements or notices required by the Mexican Railroad Registry (
Registro Ferroviario
Mexicano
).
Section 7.14. Further Assurances
. The Borrower will duly execute and deliver to the Lender
such further documents and assurances and take such further action as the Lender may
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from time to
time reasonably request in order to effectively carry out the intent and purpose of this Agreement
and the Mexican Trust Agreement and to establish and protect the rights and remedies created in
favor of the Lender hereunder, including, without limitation, if requested by the Lender, the
execution and delivery of supplements or amendments hereto, in recordable form, subjecting to this
Agreement and the Mexican Trust Agreement any Replacement Unit and the recording or filing of
counterparts hereof or thereof in accordance with the laws of such jurisdiction as the Lender may
from time to time deem advisable;
provided
that this sentence is not intended to impose upon
Borrower any additional liabilities not otherwise contemplated by this Agreement and the Mexican
Trust Agreement;
provided further
that except for the Uniform Commercial Code financing statement
described in Section 7.13(a)(iii), nothing contained herein shall require the Borrower to file or
record, or cause to be filed or recorded, or bear the cost or expense of any filing or recordation
of, any Uniform Commercial Code financing statement (including any continuation statement) absent a
change in law which requires that such filings be made to protect the interests of the Lender.
Section 7.15. Negative Make-Whole Amount
. Each holder agrees, by its acceptance of a Note,
that in the event of any redemption of the Notes pursuant to Section 4.8, Section 7.4, Section 7.10
or Section 9.16 or any acceleration of the Notes pursuant to Section 8.2, if the calculation of the
Make-Whole Amount results in Negative Make-Whole Amount, then such Negative Make-Whole Amount shall
be due on the date of such redemption as provided for in Section 4.8, Section 7.4, Section 7.10 or
Section 9.16 or Section 8.2, as the case may be, and such Negative Make-Whole Amount shall be paid
in Dollars on such date by the holders of the Notes (each such holder to pay its ratable portion of
such Negative Make-Whole Amount in accordance with its percentage of the Notes then being prepaid
or purchased) directly to the Borrower free of any Lien in the case of any redemption pursuant to
Section 4.8, Section 7.4, Section 7.10 or Section 9.16 and if at any time that the Borrower is
required to make a payment of the aggregate unpaid principal amount of all Notes then outstanding
plus the accrued but unpaid interest thereon in connection with any acceleration of the Notes
pursuant to Section 8.2, there shall exist
an obligation of the holders of the Notes to pay any Negative Make-Whole Amount, there shall be
deducted from such payment of the aggregate unpaid principal amount of all Notes then outstanding
plus the accrued but unpaid interest thereon an amount equal to the aggregate amount of such
Negative Make-Whole Amount owed by the holders of the Notes at such time.
Section 7.16. Equipment Use; Proceeds
. Notwithstanding anything to the contrary contained
herein or in any other Loan Document, so long as no Event of Default shall have occurred and be
continuing, the Borrower shall be entitled to use, possess and operate the Equipment and retain all
income, proceeds and revenues therefrom for its own benefit and disposition.
Article VIII
Events of Default; Remedies of Upon An Event of Default
Section 8.1. Events of Default
. The following events shall constitute Events of Default
hereunder (whether any such event shall be voluntary or involuntary or come about or be
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effected by
operation of law or pursuant to or in compliance with any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body) and each such Event of
Default shall be deemed to exist and continue so long as, but only as long as, it shall not have
been remedied:
(a) default by the Borrower in making any payment when due of principal of, or Positive
Make-Whole Amount, if any, or interest on, any Note or Notes and the continuance of such
default unremedied for five (5) Business Days after such payment shall become due hereunder
or default by the Borrower in making any payment when due of any other amount owing with
respect to any Note or Notes and the continuance of such default unremedied for 30 days
after receipt by the Borrower of written notice of such failure from the Lender and
demanding the same be remedied; or
(b) any representation or warranty made by the Borrower in this Agreement is untrue or
incorrect in any material respect as of the date of issuance or making thereof and such
untruth or incorrectness shall continue to be material and unremedied for a period of 30
days after the earlier to occur of (x) knowledge of a Responsible Officer of the Borrower or
(y) receipt by the Borrower of written notice specifying such incorrectness, stating that
such incorrectness is a default hereunder and requiring it to be remedied from the Lender or
from any holder of a Note;
provided
that, if such untruth or incorrectness is capable of
being remedied, no such untruth or incorrectness shall constitute an Event of Default
hereunder for a period of 180 days after receipt of such written notice so long as the
Borrower is diligently proceeding to remedy such untruth or incorrectness; or
(c) other than as set forth in clauses (a), (b), (f) or (g), any failure by the
Borrower to observe or perform any covenant to be observed or performed by the
Borrower hereunder or under the Notes and such failure shall continue unremedied for 30 days
after the earlier to occur of (x) knowledge of a Responsible Officer of the Borrower or
(y) receipt by the Borrower of a written notice thereof from the Lender and demanding the
same to be remedied;
provided
that, if such failure is capable of being remedied, no such
failure shall constitute an Event of Default hereunder for a period of 180 days after such
written notice so long as the Borrower is diligently proceeding to remedy such failure; or
(d) the Borrower shall (i) commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or its debts under any
bankruptcy (
concurso mercantil
), insolvency or other similar law now or hereafter in effect,
or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, or (ii) consent to any such relief
or to the appointment of or taking possession by any such official in any voluntary case or
other proceeding commenced against it, or (iii) admit in writing its inability to pay its
debts generally as they come due, or (iv) make a general assignment for the benefit of
creditors, or (v) take any corporate action to authorize any of the foregoing; or
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(e) an involuntary case or other proceeding shall be commenced against the Borrower or
the Mexican Trust seeking liquidation, reorganization or other relief with respect to it or
its debts under any bankruptcy (
concurso mercantil
), insolvency or other similar law now or
hereafter in effect, or seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial part of its property, and such
involuntary case or other proceeding shall remain undismissed and unstayed for a period of
90 days; or
(f) the Borrower shall (i) fail to comply with the provisions of Section 7.8; or
(ii) fail to maintain any and all insurance policies required in Section 7.5 and, in either
case, such failure shall continue unremedied for 20 days; or
(g) the Concession Title shall cease to grant the Borrower the rights originally
provided therein or the Concession Title shall be revoked or terminated; or
(h) the Borrower shall fail to provide the Lender with evidence of the completion of
the registration of the Mexican Trust Agreement with the Mexican Railroad Registry as
required by Section 7.13(b)(ii) by June 30, 2009; or
(i) at any time after the execution and delivery thereof, the Mexican Trust Agreement
shall be terminated by the Borrower;
provided, however,
any termination of the Mexican Trust
Agreement in accordance with its terms shall not constitute an Event of Default hereunder.
Section 8.2. Rights and Remedies Upon Default
. Upon the occurrence and during the continuance
of any Event of Default, Lender shall have the right to exercise all of the remedies conferred
hereunder, under the Notes and any other document executed in connection herewith, and Lender shall
have all the
rights and remedies of a secured party, and Lender may proceed to protect and enforce its rights by
an action at law, suit in equity, or other appropriate proceeding, whether for the specific
performance of any agreement contained herein or in any Notes, or for an injunction against a
violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted
hereby or thereby or by law or otherwise. Without limitation, the Lender shall have the following
rights and powers:
(a) (i) If an Event of Default described in Section 8.1(d) or Section 8.1(e) above has
occurred, the entire unpaid principal amount and all accrued and unpaid interest under the
Notes (at par
plus
any Positive Make-Whole Amount, if any, applicable thereto) shall
automatically become immediately due and payable and (ii) if any other Event of Default has
occurred the Lender shall have the right to declare the entire unpaid principal and all
accrued and unpaid interest under the Notes (at par
plus
any Positive Make-Whole Amount, if
any, applicable thereto) immediately due and payable and upon such declaration, such
principal and interest shall become immediately due and payable without presentment, demand,
protest or further notice, all of which are hereby waived. Promptly upon payment of the
foregoing amounts to the Lender, the Lender shall pay to the Borrower in immediately
available funds the Negative Make-Whole Amount, if any, with respect to the Notes.
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(b) Notwithstanding anything to the contrary contained in this Section 8.2, after the
occurrence and during the continuance of an Event of Default all remedies with respect to
Units shall be exercised pursuant to the terms and conditions of the Mexican Trust
Agreement.
Section 8.3. Waiver of Default
. If at any time after the principal of all the Notes shall
have been declared and have become due and payable, or if at any time after the entire amount of
Notes shall have been declared due and payable, all as provided in Section 8.2 hereof, all expenses
of the Lender occasioned by the Borrowers default, and all other sums which shall have become due
and payable by the Borrower hereunder shall be paid by the Borrower before any sale or lease by the
Trustee of any of the Units and every other default in the observance or performance of any
covenant or condition hereof shall be made good or secured to the satisfaction of the Lender, or
provision deemed by the Lender to be adequate shall be made therefor, then, and in every such case,
the Lender shall, by written notice to the Borrower, waive the default by reason of which there
shall have been such declaration or declarations and the consequences of such default, but no such
waiver shall extend to or affect any subsequent default or impair any right consequent thereon.
Section 8.4. Obligations of Borrower Not Affected by Remedies
. No retaking of possession of
the Equipment by the Trustee, nor any withdrawal, lease or sale thereof, nor any action or failure
or omission to act against the Borrower or in respect of the Units, on the part of the Lender or on
the part of the holder of any Note, nor any delay or indulgence granted to the Borrower by the
Lender or by any such holder, shall affect the obligations of the Borrower hereunder. The Borrower
hereby waives presentation and demand in respect of any of the Notes and waives
notice of presentation, of demand and notice of any default in the payment of the principal of and
interest on the Notes.
Section 8.5. Borrower to Deliver Equipment to Trustee
. In case the Lender shall demand the
Trustee to take possession of the Equipment pursuant to the provisions of the Mexican Trust
Agreement, the Borrower shall forthwith deliver possession of the Equipment to the Trustee. For
the purpose of delivering possession of any Unit of Equipment to the Trustee, the Borrower shall at
its own cost, expense and risk:
(a) forthwith place such Equipment upon such storage tracks of the Borrower or, at the
expense of the Borrower, on any other storage tracks, as the Borrower may select;
(b) permit the Trustee to store such Equipment on such tracks without charge for
insurance, rent or storage until the earlier of (x) three months after such demand for
storage and (y) the date such Equipment is sold, leased or otherwise disposed of by the
Trustee and during such period of storage the Borrower shall continue to maintain all
insurance required by Section 7.5 hereof; and
(c) transport the Equipment to the Borrowers nearest point of interchange with a
railroad in the 48 contiguous United States, when directed by the Lender.
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It is hereby expressly covenanted and agreed that the performance of this covenant is of the
essence of this Agreement and that, upon application to any court having jurisdiction in the
premises, the Lender shall be entitled to a decree against the Borrower requiring the specific
performance thereof.
Section 8.6. Lender May Perform
. If Borrower fails to perform any agreement contained herein,
the Lender may itself perform, or cause performance of, such agreement, and the reasonable expenses
of the Lender, including reasonable attorneys fees and expenses, incurred in connection therewith
shall be payable by the Borrower.
Section 8.7. Applications of Proceeds Received From Disposition of the Equipment
. All
proceeds received by the Lender in respect of any sale of, collection from, or other realization
upon all or any part of the Equipment following an Event of Default shall be applied in the
following order of priority:
(a) First, to the payment of all costs and expenses of such sale, collection or
realization, including reasonable compensation to the Lender and its agents and counsel, and
all other expenses, liabilities and advances made or incurred by the Lender in connection
therewith, and all reasonable amounts for which the Lender is entitled to indemnification
under the Notes and to the payment of all reasonable costs and expenses
paid or incurred by the Lender in connection with the exercise of any right or remedy under
this Agreement, all in accordance with this Agreement;
(b) Next, to satisfaction of the Borrowers obligations under this Agreement, and the
Notes; and
(c) Thereafter, to the extent of any excess proceeds, to the payment to or upon the
order of the Borrower or to whomsoever may be lawfully entitled to receive the same or as a
court of competent jurisdiction may direct.
If, upon the sale, license or other disposition of the Equipment, the proceeds thereof are
insufficient to pay all amounts to which the Lender is legally entitled, the Borrower will be
liable for the deficiency, together with interest thereon, at the Late Rate, and the reasonable
fees of any attorneys employed by the Lender to collect such deficiency. To the extent permitted
by applicable law, the Borrower waives all claims, damages and demands against the Lender arising
out of the sale of the Equipment.
Article IX
Miscellaneous
Section 9.1. Security; Termination
. (a) The Mexican Trust Agreement shall (i) remain in full
force and effect until the payment in full of the Borrowers obligations under the Notes and
hereunder, (ii) be binding upon the Borrower, its successors and assigns, and (iii) inure, together
with the rights and remedies of the Lender hereunder and thereunder, to the benefit of the Lender
and its permitted successors, transferees and assigns.
-30-
(b) Immediately upon the payment in full of the Borrowers obligations under the Notes, this
Agreement and the Mexican Trust Agreement shall terminate and all rights to the Equipment shall
revert to the Borrower. Upon any such termination, the Lender shall execute and deliver, and
instruct the Trustee to execute and deliver, to, or as directed in writing by, the Borrower an
appropriate instrument (in due form for recording) furnished by the Borrower conveying and/or
releasing the Equipment from the Mexican Trust Agreement within five (5) days of the Lenders
receipt of a written request therefor from the Borrower.
Section 9.2. Notices
. (a) Unless otherwise expressly specified or permitted by the terms
hereof, all communications and notices provided for herein shall be in writing or by a
telecommunications device capable of creating a written record (including electronic mail), and any
such notice shall become effective (a) upon personal delivery thereof, including, without
limitation, by overnight mail and courier service, (b) in the case of notice by United States mail,
certified or registered, postage prepaid, return receipt requested, upon receipt thereof, or (c) in
the case of notice by such a telecommunications device, upon transmission thereof, provided such
transmission is promptly confirmed in writing by either of the methods set forth in clauses (a) and
(b) above, in each case addressed to the following
Person at its respective address set forth below or at such other address as such Person may from
time to time designate by written notice to the other Persons listed below:
(i) to the Borrower, at Kansas City Southern de México, S.A. de C.V., Montes Urales
#625, Col. Lomas de Chapultepec C.P., 11000 Mexico, DF, Attention: Director Jurídico
Ejecutivo, Facsimile No.: 011 5255 9178 5604, Telephone No.: 011 5255 9178 5647, with a
copy to (i) in the case of mail delivery, Kansas City Southern, P.O. Box 219335, Kansas
City, MO 64121-9335, Attention: Senior Vice President Finance & Treasurer, Facsimile
No.: (816) 983-1198, Telephone No.: (816) 983-1802 and (ii) in the case of courier and
similar delivery, Kansas City Southern, 427 West 12th Street, Kansas City, MO 64105,
Attention: Senior Vice President Finance & Treasurer, Facsimile No.: (816) 983-1198,
Telephone No.: (816) 983-1802, and Kansas City Southern, 427 West 12th Street, Kansas City,
MO 64105, Attention: Senior Vice President & General Counsel, Facsimile No.: (816)
983-1227, Telephone No.: (816) 983-1303;
(ii) if to Lender at DVB Bank AG, Attention: Loan Administration Department, Platz der
Republik 6, D-60325 Frankfurt am Main, Germany, Fax No.: 011 49 69 9750 4526, with a copy
to: DVB Transport (US) LLC, Attention: Land Transport Division, 609 Fifth Avenue, New
York, NY 10017, Fax No.: 212-588-8936; and
(iii) if to the agent designated pursuant to Section 9,12, at CT Corporation System,
111 Eighth Avenue, New York, New York 10011.
Section 9.3. Entire Agreement; Severability
. (a) This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof and is intended to supersede all
prior negotiations, understandings and agreements with respect thereto. No provision of this
Agreement may be modified or amended except by a written agreement specifically referring to this
Agreement and signed by the parties hereto.
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(b) In the event that any provision of this Agreement is held to be invalid, prohibited or
unenforceable in any jurisdiction for any reason, unless such provision is narrowed by judicial
construction, this Agreement shall, as to such jurisdiction, be construed as if such invalid,
prohibited or unenforceable provision had been more narrowly drawn so as not to be invalid,
prohibited or unenforceable. If, notwithstanding the foregoing, any provision of this Agreement is
held to be invalid, prohibited or unenforceable in any jurisdiction, such provision, as to such
jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or
unenforceability without invalidating the remaining portion of such provision or the other
provisions of this Agreement and without affecting the validity or enforceability of such provision
or the other provisions of this Agreement in any other jurisdiction.
Section 9.4. Amendments
. No amendment, modification, termination or waiver of any provision
of this Agreement, and no consent to any departure by the Borrower therefrom, shall in any event be
effective unless the same shall be in writing and signed by the Lender and, in the case of any such
amendment or modification, by the
Borrower. Any such waiver or consent shall be effective only in the specific instance and for the
specific purpose for which it was given.
Section 9.5. Counterparts
. This Agreement 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.
Section 9.6. Governing Law
. This Agreement and any extensions, amendments, modifications,
renewals or supplements hereto and the Notes shall be governed by and construed in accordance with
the internal laws and decisions (as opposed to conflicts of law provisions) of the State of
New York;
provided
,
however
, that the parties shall be entitled to all rights conferred by any
applicable Federal statute, rule or regulation. The Mexican Trust Agreement shall be governed by
and construed in accordance with the laws of Mexico.
Section 9.7. Waiver of Jury Trial
.
Each party hereto knowingly, irrevocably, voluntarily
and intentionally waives any right it may have to a trial by jury in respect of any action,
proceeding or counterclaim based on or arising out of, under or in connection with any of the
transaction documents, or any course of conduct, course of dealing, statement (whether verbal or
written) or actions of any party thereto
.
Section 9.8. Powers and Rights Not Waived; Remedies Cumulative.
No delay or failure on the
part of the holder of any Note in the exercise of any power or right shall operate as a waiver
thereof; nor shall any single or partial exercise of the same preclude any other or further
exercise thereof, or the exercise of any other power or right, and the rights and remedies of the
holder of any Note are cumulative to, and are not exclusive of, any rights or remedies any such
holder would otherwise have.
Section 9.9. Exempted Transaction
. The Borrower agrees that (i) the Notes constitute an
extension of credit to a business entity for an amount greater than two hundred fifty thousand
dollars ($250,000.00) for purposes of New York General Obligations Law § 5-501(6)(a), (ii) the
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payment obligations evidenced by this Agreement and the Notes are exempted transactions under the
Truth in Lending Act, 15 U.S.C. § 1601, et seq., (iii) the proceeds of the indebtedness evidenced
by the Notes will not be used for the purchase of registered equity securities within the purview
of Regulation U issued by the Board of Governors of the Federal Reserve System and (iv) on the
maturity date of any Note, the Lender shall not have any obligation to refinance the indebtedness
evidenced by such Note or to extend further credit to the Borrower.
Section 9.10. Reproduction of Documents
. This Agreement and all documents relating thereto,
including, without limitation, (a) consents, waivers and modifications that may hereafter be
executed, (b) documents received by the parties hereto on the Closing Date (except the Notes), and
(c) financial statements, certificates and other information previously or hereafter furnished
pursuant hereto,
may be reproduced by the parties hereto by any photographic, photostatic, microfilm, microcard,
miniature photographic, electronic or other similar process and the parties hereto may destroy any
original document so reproduced. The parties agree to accept delivery of all of the foregoing
documents in electronic format in lieu of original closing transcripts. The parties further agree
and stipulate that, to the extent permitted by applicable law, any such reproduction, in electronic
format or otherwise, shall be admissible in evidence as the original itself in any judicial or
administrative proceeding (whether or not the original is in existence and whether or not such
reproduction was made in the regular course of business) and any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence. This Section 9.10
shall not prohibit the parties hereto from contesting any such reproduction to the same extent that
it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any
such reproduction.
Section 9.11. Tax Disclosure
. Notwithstanding anything herein to the contrary, each party
hereto (and each employee, representative or other agent of such person) may disclose to any and
all persons, without limitation of any kind, the tax treatment and tax structure of the
transactions described in this Agreement, and all materials of any kind (including opinions or
other tax analyses) that are provided to the person related to such tax treatment and tax
structure. The preceding sentence is intended to cause the transaction contemplated hereby to be
treated as not having been offered under conditions of confidentiality for purposes of U.S.
Treasury Regulation §1.6011-4(b)(3) and shall be construed in a manner consistent with such
purpose.
Section 9.12. Jurisdiction, Court Proceedings
. Any suit, action or proceeding against any
party to this Agreement arising out of or relating to this Agreement, the Notes or any transaction
contemplated hereby may be brought in any Federal or state court located in New York, New York, and
each such party hereby submits to the exclusive jurisdiction of such courts for the purpose of any
such suit, action or proceeding. Any suit, action or proceeding against any party to this
Agreement arising out of or relating to the Mexican Trust Agreement shall be brought in Mexico, and
each such party hereby submits to the exclusive jurisdiction of such courts for the purpose of any
such suit, action or proceeding. Each of the parties to this Agreement (that is a resident of the
United States of America), in the event that service of process by mail is permitted by applicable
law, each such party irrevocably consents to the service of process in any such suit, action or
proceeding in such courts by the mailing of such process by registered or certified mail, postage
prepaid, at its address for notices provided for in Section 9.2. Nothing contained herein shall be
deemed to limit in any way any right to serve process in any manner
-33-
permitted by law. Each such
party irrevocably agrees not to assert any objection which it may ever have to the laying of venue
of any such suit, action or proceeding in any Federal or state court located in New York, New York,
including without limitation, objections regarding jurisdiction to which they may be entitled by
reason of their current or future domiciles; and any claim that any such suit, action or proceeding
brought in any such court has been brought in an inconvenient forum.
Each of the parties to this Agreement (that are not residents of the United States of
America), hereby irrevocably designate, appoint and empower CT Corporation System as its lawful
agent to receive for and on its behalf service of process in the State of New York in any
action or proceeding described in this Section 9.12 and irrevocably consents to the service of
process outside the territorial jurisdiction of said courts in any such action or proceeding. Any
service made on such agent or its successor shall be effective when delivered regardless of whether
notice thereof is given to affected party. If any person or firm designated as agent hereunder
shall no longer serve as agent of such party to receive service of process in the State of New
York, the party so affected shall be obligated promptly to appoint a successor to so serve; and,
unless and until such successor is appointed and the parties hereto notified of the same in
writing, service upon the last designated agent shall be good and effective. The parties to this
Agreement agree that a final judgment in any such action or proceeding shall be conclusive and may
be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.
Section 9.13. Judgment Currency
. This is an international transaction in accordance with
which the specification of Dollars is of the essence, and Dollars shall be the currency of account
in the case of all obligations under this Agreement and the Notes. The payment obligations of the
parties under this Agreement and the Notes shall not be discharged by an amount paid in a currency
or in a place other than that specified with respect to such obligations, whether pursuant to a
judgment or otherwise, to the extent that the amount so paid on prompt conversion to Dollars and
transfer to the specified place of payment under normal banking procedures does not yield the
amount of Dollars, in such place, due under this Agreement and the Notes, as the case may be. In
the event that any payment, whether pursuant to a judgment or otherwise, upon conversion and
transfer does not result in payment of such amount of Dollars in the specified place of payment,
the obligee of such payment shall have a separate cause of action against the party making the same
for the additional amount necessary to yield the amount due and owing under this Agreement and the
Notes. If, for the purpose of obtaining a judgment in any court with respect to any obligation of
a party under any of this Agreement or any Note or any of the agreements contemplated thereby, it
shall be necessary to convert to any other currency any amount in Dollars due thereunder and a
change shall occur between the rate of exchange applied in making such conversion and the rate of
exchange prevailing on the date of payment of such judgment, the respective judgment debtor agrees
to pay such additional amounts (if any) as may be necessary to insure that the amount paid on the
date of payment is the amount in such other currency which, when converted into Dollars and
transferred to New York, New York, in accordance with normal banking procedures, will result in the
amount then due under this Agreement or any Note, as the case may be, in Dollars. Any amount due
from the respective judgment debtor shall be due as a separate debt and shall not be affected by or
merged into any judgment being obtained for any other sum due under or in respect of this Agreement
or any
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Note. In no event, however, shall the respective judgment debtor be required to pay a
larger amount in such other currency at the rate of exchange in effect on the date of payment than
the amount of Dollars stated to be due under this Agreement or any Note, as the case may be, so
that in any event the obligations of the respective judgment debtor under this Agreement or such
Note, as the case may be, will be effectively maintained as Dollar obligations.
Section 9.14. Business Days
. If any payment is to be made hereunder or any action is to be
taken hereunder on any date that is not a Business Day, such payment or action otherwise required
to be made or taken on such date shall
be made or taken on the immediately succeeding Business Day with the same force and effect as if
made or taken on such scheduled date and as to any payment (provided any such payment is made on
such succeeding Business Day) no interest shall accrue on the amount of such payment from and after
such scheduled date to the time of such payment on such next succeeding Business Day.
Section 9.15. Effect of Headings
. The Article and Section headings herein are for convenience
only and shall not affect the construction hereof.
Section 9.16. Participations
. (a) The Lender shall not sell a participation to any Person
(each, a
Participant
) in all or a portion of the Lenders rights and/or obligations under this
Agreement (including all or a portion of the Loan owing to it) without the prior written consent of
the Borrower (which consent shall not be unreasonably withheld) unless an Event of Default
described in Section 8.1(a) hereof shall have occurred and be continuing, in which case, such
consent shall not be required;
provided
that (i) the Lenders obligations under this Agreement
shall remain unchanged, (ii) the Lender shall remain solely responsible to the Borrower for the
performance of such obligations and (iii) the Borrower shall continue to deal solely and directly
with the Lender in connection with the Lenders rights and obligations under this Agreement. The
Lender shall provide the Borrower with at least thirty (30) days prior written notice of any
proposed participation specifying the name and address of any proposed Participant and the proposed
date of such participation (the
Participation Date
).
Any agreement or instrument pursuant to which the Lender sells such a participation shall
provide that the Lender shall retain the sole right to enforce this Agreement and to approve any
amendment, modification or waiver of any provision of this Agreement;
provided
that such agreement
or instrument may provide that the Lender will not, without the consent of the Participant, agree
to any amendment, waiver or other modification that affects such Participant. Subject to
clause (b) below, the Borrower agrees that each Participant shall be entitled to the benefits of
Sections 7.10 and 7.11 to the same extent as if it were the Lender and had acquired its interest by
assignment pursuant to Section 7.4(c).
(b) A Participant shall not be entitled to receive any greater payment under Section 7.10 or
Section 7.11 than the Lender would have been entitled to receive with respect to the participation
sold to such Participant, unless the sale of the participation to such Participant is made with the
Borrowers prior written consent.
(c) Notwithstanding anything to the contrary contained hereunder, if a holder of a Note
seeking to sell a participation to any Person in all or a portion of its rights and/or obligations
-35-
under this Agreement (including all or a portion of the Loan owing to it) in accordance with this
Section 9.16 (a
Transferor
) shall have executed and delivered to the Borrower a Tax Prepayment
Rejection Notice and/or an Increased Cost Rejection Notice, as applicable, with respect to such
Note, the Borrower may, by written notice delivered to the Transferor not later than fifteen (15)
days prior to the proposed Participation Date, require the proposed Participant to execute and
deliver to the Borrower a Tax Prepayment Rejection Notice with respect to the
Change in Tax Law giving rise to the original Tax Prepayment Notice and the Transferors Tax
Prepayment Rejection Notice and/or an Increased Cost Rejection Notice with respect to the
Regulatory Change giving rise to the original Increased Cost Prepayment Notice and the Transferors
Increased Cost Rejection Notice, as applicable. If the proposed Participant shall fail to execute
and deliver a Tax Prepayment Rejection Notice and/or an Increased Cost Rejection Notice, as
applicable, to the Borrower at least five (5) days prior to the proposed Participation Date, the
Borrower may give the Transferor irrevocable written notice of the prepayment of the Transferors
Note on a specified prepayment date (which shall be a Business Day not less than 30 days nor more
than 60 days after the date of such notice) stating that all of the Notes held by the Transferor
shall be prepaid on the date of such prepayment at 100% of the principal amount so prepaid together
with interest accrued thereon up to, but not including the date of such prepayment and Make-Whole
Amount, if any, with respect thereto. If any prepayment under this Section 9.16(c) shall result in
a Negative Make-Whole Amount, the holders of the Notes so to be prepaid shall pay such Negative
Make-Whole Amount in accordance with the provisions of Section 7.15 of this Agreement.
Section 9.17. Security Agreement
. This Agreement shall constitute a security agreement as
defined in the NY UCC, and the Borrower hereby grants to Lender a security interest within the
meaning of the NY UCC in favor of the Lender in the Equipment, the proceeds thereof and other
rights described herein.
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In Witness Whereof
, the parties have caused this Agreement to be duly executed and
delivered by their respective officers thereunto duly authorized as of the date first above
written.
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Kansas City Southern de México, S.A. de C.V.,
a company incorporated under the laws of Mexico
|
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By:
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/s/ Paul J. Weyandt
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Name:
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Paul J. Weyandt
|
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Title:
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Attorney-in-Fact and Treasurer
|
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DVB Bank AG,
a German corporation
|
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By:
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/s/ M. Lieschied
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Name:
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M. Lieschied
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Title:
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Vice President
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By:
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/s/ Volker Eberhart
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Name:
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Volker Eberhart
|
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Title:
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Vice President
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-37-
Definitions
General Provisions
The following terms shall have the following meanings for all purposes of the Loan Agreement
referred to below, unless otherwise defined in the Loan Agreement or the context thereof shall
otherwise require and such meanings shall be equally applicable to both the singular and the plural
forms of the terms herein defined. In the case of any conflict between the provisions of this
Appendix A and the provisions of the main body of the Loan Agreement, the provisions of the main
body of the Loan Agreement shall control the construction of the Loan Agreement.
Unless the context otherwise requires, (i) references to agreements shall be deemed to mean
and include such agreements as the same may be amended, supplemented and otherwise modified from
time to time, and (ii) references to parties to agreements shall be deemed to include the permitted
successors and assigns of such parties.
Defined Terms
AAR Mechanical Standards
shall mean the rules, standards and supplements thereto of the
Mechanical Division of the Association of American Railroads, as the same may be in effect from
time to time.
Affiliate
of any Person shall mean any other Person which directly or indirectly controls,
or is controlled by, or is under a common control with, such Person. The term
control
means the
possession, directly or indirectly, of the power to direct or cause the direction of the management
and policies of a Person, whether through the ownership of voting securities, by contract or
otherwise, and the terms
controlling
and
controlled
shall have meanings correlative to the
foregoing.
After-Tax Basis
means with respect to any payment to be received by a Person, the amount of
such payment plus a further payment or payments so that the net amount received by such Person,
after deducting from such payment and such further payment the amount of all Taxes actually imposed
on the Person receiving such payments by any U.S. federal, state or local or foreign taxing
authority with respect to such payments (net of any current credits, deductions or other Tax
benefits actually arising from the payment by such Person of any amount, including Taxes, with
respect to the payment received or arising by reason of the receipt or accrual by such Person of
the payment received) is equal to the original payment required to be received.
Aggregate Commitment Amount
means $52,200,000.
Assignee
shall have the meaning set forth in Section 7.4(c) of the Loan Agreement.
Assignor
shall have the meaning set forth in Section 7.4(c) of the Loan Agreement.
Borrower
shall have the meaning specified in the Recitals to the Loan Agreement.
A
PPENDIX
A
(to Loan Agreement)
Business Day
means any day other than a Saturday or Sunday or other day on which banks in
Mexico City, Mexico, Frankfurt, Germany or New York, New York, are authorized or obligated to be
closed.
Casualty Occurrence
shall mean, with respect to any Unit, the occurrence of any of the
following: (i) the destruction, damage, contamination, wear or unsuitability of such Unit which, in
the Borrowers good faith opinion, makes repair uneconomic or renders such Unit unfit for
commercial use, (ii) theft or disappearance of such Unit, (iii) the permanent return of such Unit
to the manufacturer pursuant to any warranty or patent indemnity provisions, (iv) the taking of
title of such Unit or appropriation of such Unit by any governmental authority under the power of
eminent domain or otherwise or (v) the taking or requisition for use of such Unit by any
governmental authority under the power of eminent domain or otherwise for a continuous period in
excess of 180 days.
Change in Tax Law
shall have the meaning set forth in Section 4.8(c) of the Loan Agreement.
Claims
shall have the meaning set forth in Section 7.6 of the Loan Agreement.
Closing Date
shall have the meaning set forth in Section 2.1(a) of the Loan Agreement.
Concession Title
shall mean the Borrowers right, for a period of 50 years, to be the
exclusive provider (subject to certain trackage rights) of freight transportation services over the
northeast rail lines of the Mexican railroad system and for an additional 50 years to be a
non-exclusive provider of such services over such rail lines, granted by the Mexican government
pursuant to the Concession Title, subject in all cases to the terms and conditions of the
Concession Title, as in effect on June 23, 1997 and as amended on February 12, 2001 and
November 22, 2006.
Debt Rate
shall mean 6.1950% per annum, calculated on the basis of a 360-day year and the
actual number of days elapsed.
Default
shall mean an event that with the passage of time or the giving of notice, or both,
would become an Event of Default.
Dollars, U.S. Dollars
and
$
shall mean lawful currency of the United States.
Equipment
shall mean collectively those locomotives described in the Loan Agreement
Supplements and in any supplement thereto as applicable, together with any and all accessions,
additions, improvements and replacements from time to time incorporated or installed in any item
thereof and
Unit
shall mean individually the various items thereof.
Equipment Cost
shall mean, for each Unit, the cost thereof as set forth in Schedule 1 to the
Loan Agreement Supplement for such Unit.
A-2
Event of Default
shall mean any event specified in Section 8.1 of the Loan Agreement to be
an Event of Default.
Financing Percentage,
shall mean the percentage specified in the Loan Request delivered
pursuant to Section 3.2 of the Loan Agreement relating to the Loan, which is the percentage of the
Equipment Cost intended to be financed through the Loan, and which shall not exceed 80%.
Forms
shall have the meaning set forth in Section 7.11 of the Loan Agreement.
Governmental Authority
shall mean any branch of power (whether administrative, legislative
or judicial) of any state, any nation or government, any state or other political or administrative
subdivision thereof, any central bank (or similar monetary or regulatory authority) and any entity
exercising executive, legislative, judicial, regulatory or administrative authority of or
pertaining to government.
The word
holder
shall mean the registered owner of a Note.
Increased Cost Prepayment Notice
shall have the meaning set forth in Section 7.10(d) of the
Loan Agreement.
Increased Cost Prepayment Rejection Notice
shall have the meaning set forth in
Section 7.10(d) of the Loan Agreement.
Indemnified Person
shall have the meaning set forth in Section 7.6 of the Loan Agreement.
Late Rate
shall mean the lesser of 2% over the Debt Rate and the maximum interest rate from
time to time permitted by law.
Lender
shall have the meaning specified in the introductory paragraph to the Loan Agreement.
Lenders Lien
shall mean any Lien against the Equipment or any part thereof that results
from any act of, or any failure to act by, or as a result of any claim against, the Lender arising
out of any event or condition unrelated to the transactions contemplated by the Agreement,
excluding any tax, assessment or charge for which the Borrower is obligated to indemnify the Lender
thereunder.
Lien
shall mean any mortgage, pledge, security interest, lien, encumbrance, lease, exercise
of rights, claim, disposition of title or other charge of any kind on property.
Loan
shall have the meaning set forth in Section 3.1(a) of the Loan Agreement.
Loan Agreement
or
Agreement
shall mean the Loan Agreement dated as of September 24, 2008
by and between the Borrower and the Lender, as amended, supplemented
A-3
or otherwise modified from
time to time. The term Loan Agreement or Agreement shall include each Loan Agreement
Supplement entered into pursuant to the terms of the Loan Agreement.
Loan Agreement Supplement
shall mean a Loan Agreement Supplement dated the Closing Date or
the date that any Replacement Unit is subjected to the Loan Agreement, as applicable, substantially
in the form of Exhibit E to the Loan Agreement, between the Borrower and the Lender, covering the
Units described therein.
Loan Request
shall have the meaning set forth in Section 3.2 of the Loan Agreement.
Make-Whole Amount
shall mean, with respect to the principal amount of a Note to be prepaid
on any prepayment date, an amount equal to the amount which the holder of such Note would receive
(such amount to be expressed as negative amount) or pay (such amount to be expressed as a positive
amount) in accordance with market practice as a result of terminating all, or the application
portion of, a LIBOR to fixed rate (such fixed rate to equal the Debt Rate minus 185 basis points)
U. S. Dollar denominated interest rate swap entered into on the Closing Date governed by an ISDA
master agreement with an amortizing notional amount equal to the scheduled principal amount
outstanding of such Note, the fixed and floating rates payable on the same dates as interest is
scheduled to be paid on the Note. Make-Whole Amount shall be determined by the holder of such Note
and shall be certified to the Borrower in an Officers Certificate of such holder, which Officers
Certificate shall be binding and conclusive absent manifest error. The Officers Certificate of
the applicable holder referenced in the immediately preceding sentence shall describe in reasonable
detail the basis of determination of the Make-Whole Amount as of the specified prepayment date.
For the purposes of the definition of
Make-Whole Amount
, references to
prepayment
,
date of
prepayment
and similar references shall also be deemed to refer to acceleration of the Notes
pursuant to Section 8.2 of the Loan Agreement.
Material Adverse Effect
means a material adverse effect on the (a) financial condition or
operations of the Borrower and its Subsidiaries, taken as a whole or (b) Borrowers ability to
perform its obligations under the Loan Agreement or (c) the validity or enforceability of the Loan
Agreement, the Mexican Trust Agreement or the Notes.
Mexican Trust
shall mean the trust established pursuant to the Mexican Trust Agreement.
Mexican Trust Agreement
means the Irrevocable Guaranty Trust Agreement, dated as of
September 24, 2008, by and among the Borrower, as Settlor and as Second Beneficiary, the Lender, as
First Beneficiary and the Trustee.
Mexico
shall mean the
Estados Unidos Mexicanos
(United Mexican States).
Negative Make-Whole Amount
shall mean an amount equal to the absolute value of the
Make-Whole Amount to the extent such Make-Whole Amount is a negative number.
A-4
Note Register
shall have the meaning set forth in Section 4.5 of the Loan Agreement.
Notes
shall mean the promissory notes, each to be substantially in the form therefor set
forth in Exhibit A of the Loan Agreement issued by the Borrower pursuant to the terms of the Loan
Agreement, and shall include any notes issued in exchange therefor or replacement thereof pursuant
to Section 4.5 or Section 4.6 of the Loan Agreement.
Officers Certificate
shall mean a certificate signed by either the Chairman of the Board,
the Chief Executive Officer, the Chief Financial Officer, the Chief Accounting Officer, the
President, any Vice President, the Treasurer, any Assistant Treasurer or any Attorney-in-Fact
authorized to execute and deliver any such certificate.
Opinion of Counsel
shall mean an opinion in writing signed by legal counsel who may be
(1) an employee of or counsel to the Borrower or (2) other counsel reasonably acceptable to the
Lender.
Participant
shall have the meaning specified in Section 9.16 of the Loan Agreement.
Participation Date
shall have the meaning specified in Section 9.16 of the Loan Agreement.
Payment Date
shall mean each date on which payments of principal or interest on the Notes
are scheduled to be made pursuant to the terms thereof.
Permitted Jurisdiction
shall mean any of the jurisdictions set forth on the then-current
version of the Secretaría de Hacienda y Crédito Público registry listing those countries having a
treaty to avoid double taxation with Mexico. A copy of the Secretaría de Hacienda y Crédito
Público registry in effect as of the Closing Date is attached as Exhibit F to the Loan Agreement.
Permitted Liens
with respect to the Equipment and each Unit thereof, shall mean: (i) the
interest of the Borrower and any lessee as provided in any lease permitted pursuant to
Section 7.4(b) of the Loan Agreement; (ii) any Liens thereon for taxes, assessments, levies, fees
and other governmental and similar charges not due and payable or the amount or validity of which
is being contested in good faith by appropriate proceedings so long as there exists no material
risk of sale, forfeiture, loss, or loss of use of any Unit or any interest therein or any risk of
criminal liability or risk of material civil liability on the Lender; (iii) any Liens of mechanics,
suppliers, materialmen, laborers, employees, repairmen and other like Liens arising in the ordinary
course of the Borrowers (or if a lease is then in effect, any lessees) business securing
obligations which are not due and payable or the amount or validity of which is being contested so
long as there exists no material risk of sale, forfeiture, loss, or loss of use of any Unit or any
risk of criminal liability or risk of material civil liability on the Lender; (iv) the Lien and
security interest granted to the Trustee under and pursuant to the Mexican Trust Agreement;
(v) Liens arising out of any judgment or award against the Borrower (or any lessee permitted
pursuant to
Section 7.4(b) of the Loan Agreement) with respect to which an appeal or proceeding for review
is being presented in good faith and with respect to which there shall have been secured a stay of
A-5
execution pending such appeal or proceeding for review; or (vi) salvage rights of insurers under
insurance policies maintained pursuant to Section 7.5 of the Loan Agreement.
Person
shall mean any individual, corporation, partnership, joint venture, limited liability
company, association, joint-stock company, trust, unincorporated organization or government or any
agency or political subdivision thereof.
Positive Make-Whole Amount
shall mean an amount equal to the Make-Whole Amount to the extent
such Make-Whole Amount is a positive number.
Prepayment Fee
shall mean, with respect to the prepayment of any Note pursuant to
Section 4.8(b) of the Loan Agreement (i) at any time prior to the first anniversary of the Closing
Date, an amount equal to 0.75% of the principal amount of such Note being prepaid, (ii) at any time
after the first anniversary of the Closing Date, but prior to the second anniversary of the Closing
Date, an amount equal to 0.50% of the principal amount of such Note being prepaid, (iii) at any
time after the second anniversary of the Closing Date, but prior to the third anniversary of the
Closing Date, an amount equal to 0.25% of the principal amount of such Note being prepaid and
(iv) at any time on or after the third anniversary of the Closing Date, an amount equal to 0% of
the principal amount of such Note being prepaid.
Regulatory Change
shall have the meaning specified in Section 7.10(b) of the Loan Agreement.
Rejection Notice
shall have the meaning set forth in Section 4.8(c) of the Loan Agreement.
Related Indemnitee Group
shall have the meaning set forth in Section 7.6 of the Loan
Agreement.
Replacement Unit
shall have the meaning set forth in Section 7.3(b) of the Loan Agreement.
Request
shall mean a written request for the action therein specified, delivered to the
Lender and signed on behalf of the Borrower by the Chairman of the Board, the Chief Executive
Officer, the Chief Financial Officer, the Chief Accounting Officer, the President, any Vice
President, the Treasurer, any Assistant Treasurer or any Attorney-in-Fact authorized to execute and
deliver any such request.
Requested Loan Amount
shall mean the amount of the Loan as requested by the Borrower
pursuant to the Loan Request.
Responsible Officer
shall mean shall mean, with respect to the subject matter of any
covenant, agreement or obligation of any party contained in the Loan Agreement, Chairman of the
Board, the Chief Executive Officer, the Chief Financial Officer, the Chief Accounting
Officer, the President, any Vice President, Assistant Vice President, Treasurer or Assistant
Treasurer.
A-6
SEC
shall mean the Securities and Exchange Commission.
Secured Party
shall mean the Lender.
Subsidiary
of any Person shall mean any corporation, association, or other business entity
of which more than 50% (by number of votes) of the voting stock or other ownership interest at the
time outstanding shall at the time be owned, directly or indirectly, by such Person or by any other
corporation, association or trust which is itself a Subsidiary within the meaning of this
definition, or collectively by such Person and any one or more such Subsidiaries.
Surface Transportation Board
or
STB
means the Surface Transportation Board of the United
States Department of Transportation and any agency or instrumentality of the United States
Government succeeding to its functions.
Tax Prepayment Notice
shall have the meaning set forth in Section 4.8(c) of the Loan
Agreement.
Tax Prepayment Rejection Notice
shall have the meaning set forth in Section 4.8(c) of the
Loan Agreement.
Taxes
means all fees, taxes, levies, assessments, charges or withholdings of any nature
imposed by any Governmental Authority, together with any penalties, fines or interest thereon or
additions thereto.
Taxing Jurisdiction
shall have the meaning set forth in Section 7.11 of the Loan Agreement.
Transfer Date
shall have the meaning set forth in Section 7.4(c) of the Loan Agreement.
Transferor
shall have the meaning set forth in Section 9.16(c) of the Loan Agreement.
Trustee
shall mean Banco Nacional de México, S.A., integrante del Grupo Financiero Banamex,
a Mexican Banking Institution, in its capacity as trustee under the Mexican Trust Agreement.
Unit
shall have the meaning set forth in the definition of Equipment.
A-7
PROMISSORY NOTE
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No.
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New York, New York
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U.S.$
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___, 20___
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FOR VALUE RECEIVED,
Kansas City Southern de México, S.A. de C.V.
, a variable stock
corporation (sociedad anónima de capital variable) organized and existing under the laws of the
United Mexican States (the
Obligor
), by this Promissory Note hereby unconditionally promises to
pay to the order of
DVB BANK AG
(the
Holder
) the principal sum of U.S.$
(___ DOLLARS 00/100, CURRENCY OF THE UNITED STATES OF AMERICA), in installments
payable on the dates set forth under the column entitled To (Payment Date) in Annex A hereto
commencing ___ ___, ___ and thereafter to and including ___ ___, ___, each
such installment to be in an amount equal to the corresponding percentage (if any) of the remaining
principal amount hereof set forth under the column entitled Percentage of Remaining Principal
Balance Payable in Annex A hereto, together with interest thereon on the amount of such principal
amount remaining unpaid from time to time from and including the date hereof until such principal
amount shall be due and payable, payable on ___, ___ and on the last day of each
March, June, September and December thereafter to the maturity date hereof at the rate of 6.1950%
per annum (computed on the basis of a 360-day year and the actual number of days elapsed).
Interest on any overdue principal, interest or Positive-Make Whole Amount, if any, hereof shall be
paid from the due date thereof at the Late Rate (computed on the basis of a 360-day year and the
actual number of days elapsed), payable on demand.
This Promissory Note is one of the Notes issued pursuant to the Loan Agreement, dated as of
September 24, 2008 (as from time to time amended, supplemented or modified, the
Loan Agreement
),
between the Obligor and DVB Bank AG and is entitled to the benefits thereof. Unless otherwise
indicated, capitalized terms used in this Promissory Note shall have the respective meanings
ascribed to such terms in the Loan Agreement.
Payments with respect to the principal amount hereof, Positive Make-Whole Amount, if any, and
interest hereon shall be payable in U.S. Dollars in immediately available funds in accordance with
Section 4.2 of the Loan Agreement. Each such payment shall be made on the date such payment is due
and, except for the last payment of principal hereof, without any presentment or surrender of this
Promissory Note. Whenever the date scheduled for any payment to be made hereunder or under the
Loan Agreement shall not be a Business Day, then such payment need not be made on such scheduled
date but may be made on the next succeeding Business Day with the same force and effect as if made
on such scheduled date and (provided such payment is made on such next succeeding Business Day) no
interest shall accrue on the amount of such payment from and after such scheduled date to the time
of such payment on such next succeeding Business Day.
Payments hereunder shall be reduced by any taxes, fees or charges required by applicable law
to be withheld at the source, and any such withholdings shall be deemed to have been made for the
benefit of the holder hereof.
E
XHIBIT
A
(to Loan Agreement)
Each holder hereof, by its acceptance of this Promissory Note, agrees that each payment
received by it hereunder shall be applied,
first
, to the payment of accrued but unpaid interest on
this Promissory Note then due,
second
, to the payment of the unpaid principal amount of this
Promissory Note then due, and,
third
, to the payment of any Positive Make-Whole Amount then due.
This Promissory Note is subject to prepayment, in whole or from in part, at the times and on
the terms specified in the Loan Agreement, but not otherwise.
This Promissory Note is a registered Note and, as provided in the Loan Agreement, upon
surrender of this Promissory Note, together with a written request from the holder of this
Promissory Note for the issuance of a new Note or Notes of the same aggregate principal amount, the
Obligor will issue and register in the name of a transferee a new Note or Notes. Prior to due
presentment for registration of transfer, the Obligor may treat the person in whose name this
Promissory Note is registered as the owner hereof for the purpose of receiving payment and for all
other purposes, and the Obligor will not be affected by any notice to the contrary.
If an Event of Default occurs and is continuing, the principal of this Promissory Note may be
declared or otherwise become due and payable in the manner, at the price (including any Positive
Make-Whole Amount) and with the effect provided in the Loan Agreement.
This Promissory Note has not been registered under the Securities Act of 1933 and may not be
transferred in violation of such Act. This Promissory Note shall be governed by, and construed in
accordance with, the laws of the State of New York, United States of America.
The Obligor and the holder, by holding this Promissory Note, submit themselves to the
jurisdiction of the Federal or state courts located in New York, New York in any legal action or
proceeding arising out of or with respect to this Promissory Note. Each such party irrevocably
agrees not to assert any objection which it may ever have to the laying of venue of any such suit,
action or proceeding in any Federal or state court located in New York, New York, including without
limitation, objections regarding jurisdiction to which they may be entitled by reason of their
current or future domiciles; and any claim that any such suit, action or proceeding brought in any
such court has been brought in an inconvenient forum.
A-2
IN WITNESS WHEREOF, the Obligor has duly executed this Promissory Note as of the date
mentioned below.
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Kansas City Southern de México, S.A. de C.V.,
a company incorporated under the laws of Mexico
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By:
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Name:
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Title:
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Attorney-in-Fact
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A-3
Amortization Schedule
Equipment Note
A-4
Loan Request
, 20____
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To:
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DVB Bank AG, as lender (
Lender
) under that certain Loan
Agreement dated as of September 24, 2008 between the Kansas
City Southern de México, S.A. de C.V., as borrower and the
Lender (the
Agreement
) (all capitalized terms used herein
and not otherwise defined shall have the meanings assigned
to them in the Agreement, unless the context otherwise
requires).
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From:
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Kansas City Southern de México, S.A. de C.V.
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Re:
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Loan Request
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1. The Closing Date is
, 20___.
2. The undersigned hereby requests the Loan in the amount of $52,200,000.00. The Financing
Percentage relating to the requested Loan is 79.1%.
3. Set forth on Annex A is a description of number and type of Units of Equipment for which
settlement of the purchase price will be made on the Closing Date with the proceeds of this Loan
and the Equipment Cost of such Units.
4. The undersigned hereby certifies that the requested Loan complies with the limitations and
conditions set forth in Section 3.1(a) of the Agreement and all conditions to the Loan set forth in
Article VI of the Agreement have been fully satisfied or waived.
5. The undersigned requests that the Loan be sent by wire transfer in accordance with the
payment instructions attached hereto as
Annex B.
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Kansas City Southern de México, S.A. de C.V.
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By:
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Name:
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Title:
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E
XHIBIT
B
(to Loan Agreement)
Annex A
to Loan Request
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Equipment Cost
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Equipment
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Quantity
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Per Unit
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Reporting Marks
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GE ES44AC Locomotives
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29
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$
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2,275,662.00
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KCSM 4730 through
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KCSM 4758, inclusive
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B-2
Annex B
to Loan Request
Wiring Instructions
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Beneficiary:
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Kansas City Southern de México, S.A. de C.V.
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Account:
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62908 26870
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ABA
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026 0095 93
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Bank:
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Bank of America
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Loc.
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Concorde California
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B-3
Conditions Precedent
The obligation of the Lender to make the Loan to the Borrower on the Closing Date shall be
subject to the following conditions precedent:
(1)
Execution of the Loan Agreement.
On or before the Closing Date, the Loan Agreement
(the
Agreement
) between DVB Bank AG, as Lender (the
Lender
) and Kansas City Southern de
México, S.A. de C.V. (the
Borrower
) shall be in full force and effect and shall be
satisfactory in form and substance to the Lender, shall have been duly executed and
delivered by the Lender and the Borrower (except that the execution and delivery of the
Agreement by a party thereto shall not be a condition precedent to such partys obligations
hereunder), and executed counterparts of the Agreement shall have been delivered to Lender
or its counsel on or before the Closing Date.
(2)
Loan Request
. The Lender shall have received the Loan Request from the Borrower
relating to the Loan requested to be made on the Closing Date.
(3)
Loan Agreement Supplement
. A Loan Agreement Supplement shall be in full force and
effect and shall be satisfactory in form and substance to the Lender, shall have been duly
executed and delivered by the Lender and the Borrower (except that the execution and
delivery of the Agreement by a party thereto shall not be a condition precedent to such
partys obligations hereunder), and executed counterparts of the Loan Agreement Supplement
shall have been delivered to Lender or its counsel on or before the Closing Date.
(4)
Appraisal.
On or before the Closing Date, the Lender shall have received an
appraisal from the Borrower by RailSolutions, Inc.
(5)
Recordation and Filing.
On or before the Closing Date, the Borrower will (i) cause
the Agreement and the Loan Agreement Supplement dated the Closing Date or appropriate
evidence thereof, to be duly filed, recorded and deposited (A) with the Surface
Transportation Board in conformity with 49 U.S.C. § 11301 and (B) with the Registrar General
of Canada pursuant to Section 105 of the Canada Transportation Act and (ii) cause a Uniform
Commercial Code precautionary financing statement covering the security interest created by
or pursuant to the Agreement naming the Borrower, as debtor, and the Lender, as a secured
party, to be filed with (x) the Recorder of Deeds of the District of Columbia and (y) the
Secretary of State of the State of Missouri.
(6)
Officers Certificate of the Borrower.
On the Closing Date, the Lender shall have
received an Officers Certificate dated such date from the Borrower, substantially in the
form attached to the Agreement as Exhibit D.
(7)
Opinions of Counsel.
On the Closing Date, the Lender and the Borrower shall have
received the favorable written opinion of each of (A) internal counsel to the Borrower and
special U.S. counsel to the
E
XHIBIT
C
(to Loan Agreement)
Borrower, (B) Alvord and Alvord, special STB counsel and
(C) McCarthy Tétrault LLP, special Canadian counsel;
provided
that receipt by a party hereto
of a favorable written opinion from counsel to such party shall not be a condition precedent
to such partys obligations hereunder.
(8)
Insurance Certificate.
On or before the Closing Date, the Lender shall have
received a certificate relating to insurance that is required pursuant to Section 7.5 of the
Agreement.
(9)
Corporate Documents.
The Lender and the Borrower shall have received such
documents and evidence with respect to the Lender and the Borrower as either such party may
reasonably request in order to establish the authority for the consummation of the
transactions contemplated by the Agreement, the taking of all corporate and other
proceedings in connection therewith and compliance with the conditions herein or therein set
forth and the incumbency of all officers signing the Agreement.
(10)
No Proceedings.
No action or proceeding shall have been instituted nor shall
governmental action be threatened before any court or governmental agency, nor shall any
order, judgment or decree have been issued or proposed to be issued by any court or
governmental agency at the time of the Closing Date, to set aside, restrain, enjoin or
prevent the completion and consummation of any of the Agreement or the transactions
contemplated hereby or thereby.
(11)
Governmental Actions.
All actions, if any, required to have been taken on or
prior to the Closing Date in connection with the transactions contemplated by the Agreement
on the Closing Date shall have been taken by any governmental or political agency,
subdivision or instrumentality of the United States and all orders, permits, waivers,
exemptions, authorizations and approvals of such entities required to be in effect on the
Closing Date in connection with such transactions contemplated by the Agreement on the
Closing Date shall have been issued, and all such orders, permits, waivers, exemptions,
authorizations and approvals shall be in full force and effect, on the Closing Date.
(12)
Mexican Trust Agreement
. The Mexican Trust Agreement, in form and substance
satisfactory to the parties thereto, shall have been executed by the Borrower, the Lender
and the Trustee and the Lender shall have received an original counterpart of the executed
Mexican Trust Agreement.
C-2
Form of Officers Certificate of
Kansas City Southern de México, S.A. de C.V.
The undersigned certifies that he is the
of
Kansas City Southern de
México, S.A. de C.V.
(the
Borrower
) and that, as such, he is authorized to execute this
Certificate on behalf of the Borrower, and further certifies that (i) the Borrower has performed
and complied with all agreements and conditions contained in the Loan Agreement dated as of
September 24, 2008, between DVB Bank AG and the Borrower (the
Agreement
) which are required to be
performed or complied with by the Borrower on or before the date hereof (capitalized terms used
herein without definition have the meanings assigned to them in the Agreement) and (ii) the
representations and warranties of the Borrower set forth below are true and correct in all material
respects on and as of the date hereof, except to the extent that such representations and
warranties relate solely to an earlier date (in which case such representations and warranties were
true and correct on and as of such earlier date):
(a) the Borrower is a company duly organized and validly existing under the laws of
Mexico, is duly licensed or qualified in each jurisdiction where it operates in which the
failure to so qualify would have a material adverse effect on its ability to enter into and
perform its obligations under the Agreement, has the corporate power and authority to carry
on its business as now conducted, and has the requisite power and authority to execute,
deliver and perform its obligations under the Agreement;
(b) the Agreement has been duly authorized by all necessary corporate action (no
shareholder approval being required), executed and delivered by the Borrower, and
constitutes the legal, valid and binding obligation of the Borrower, enforceable against the
Borrower in accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency and similar laws and by general principles of equity;
(c) the execution, delivery and performance by the Borrower of the Agreement and
compliance by the Borrower with all of the provisions thereof do not and will not contravene
any law or regulation, or any order of any court or governmental authority or agency
applicable to or binding on the Borrower or any of its properties, or contravene the
provisions of, or constitute a default by the Borrower under, or result in the creation of
any Lien (except for Permitted Liens) upon the property of the Borrower under its by-laws or
any material indenture, mortgage, contract or other agreement or instrument to which the
Borrower is a party or by which the Borrower or any of its property is bound or affected;
(d) except for those matters discussed in the financial statements of the Borrower
referred to in paragraph (e) below, there are no proceedings pending or, to the knowledge of
the Borrower, threatened against the Borrower in any court or before any governmental
authority or arbitration board or tribunal which individually or in the aggregate would
materially and adversely affect the financial condition of the Borrower or impair the
ability of the Borrower to perform its obligations under the Agreement or
E
XHIBIT
D
(to Loan Agreement)
which questions the validity of the Agreement or any action taken or to be taken pursuant
thereto;
(e) the audited consolidated balance sheet and consolidated statements of income and
retained earnings and cash flows of the Borrower for the fiscal year ended December 31,
2007, fairly present, in conformity with U.S. generally accepted accounting principles, the
consolidated financial position of the Borrower as of such date and the results of its
operations for the period then ended. Since December 31, 2007, there has been no material
adverse change in such financial condition or results of operations;
(f) the Equipment is covered by the insurance required by Section 7.5 of the Agreement
and all premiums due prior to the Closing Date in respect of such insurance shall have been
paid in full;
(g) no Event of Default has occurred and is continuing and no Casualty Occurrence has
occurred; and
(h) no authorization or approval or other action by, and no notice to or filing with,
any governmental authority or regulatory body is required for the due execution, delivery or
performance by the Borrower of the Agreement, except for the filings contemplated by
Section 7.13 of the Agreement.
In
Witness
Whereof
, the undersigned has hereunto subscribed his/her
name this ___ day of
, 2008.
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Name:
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Title: Attorney-in-Fact
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D-2
Loan Agreement Supplement No. ___
Between
Kansas City Southern de México, S.A. de C.V.,
as Borrower
and
DVB Bank AG,
as Lender
___ GE ES44AC Locomotives
Dated
___, 2008
Memorandum of Loan Agreement Supplement No. ___ filed with the Surface Transportation Board
pursuant to 49 U.S.C. §11301 on
___, 2008, at ___:___ .M., Recordation Number
___, and deposited in the Office of the Registrar General of Canada pursuant to Section 105 of
the Canada Transportation Act on
___, 2008, at ___:___ .M.
E
XHIBIT
E
(to Loan Agreement)
Loan Agreement Supplement No. ___
Loan Agreement Supplement No. ___
dated
___, 2008 by and between
Kansas City Southern de México, S.A.
de C.V
., a company incorporated under the
laws of Mexico (together with its successors and permitted assigns, the
Borrower
) and
DVB
Bank AG,
a German corporation (together with its successors and permitted assigns, the
Lender
).
Whereas
, the Loan Agreement, dated as of September 24, 2008 (as amended, supplemented
or restated and in effect from time to time, the
Loan Agreement
) between the Borrower and the
Lender provides for the execution and delivery of supplements thereto (each a
Loan Agreement
Supplement
and collectively,
Loan Agreement Supplements
) substantially in the form hereof which
shall particularly describe the Equipment (such term and other terms defined in the Loan Agreement
being used herein as therein defined) and any Replacement Units (terms used in this instrument
having the meanings assigned thereto in the Loan Agreement);
Whereas
, the Loan Agreement relates to the Units of Equipment described in Schedule I
hereto and made a part hereof;
Now
,
therefore
, the indebtedness described in the Notes, the prompt and
complete payment of the principal of, interest on and Positive Make-Whole Amount, if any, with
respect to the Notes, and all other amounts due from the Borrower with respect to the Notes from
time to time outstanding under the Loan Agreement and all other amounts due thereunder and the
performance and observance by the Borrower of all the agreements, covenants and provisions in the
Loan Agreement and in the Notes is secured by the Equipment and the income and proceeds thereof
pursuant to the terms of the Mexican Trust Agreement. To the extent that the Borrower obtains, or
is deemed to have obtained, any right, title or interest in the Equipment and the income and
proceeds thereof, the Borrower grants to the Lender, subject to Section 7.16 of the Loan Agreement,
a security interest in the Equipment and the income and proceeds thereof as collateral security for
the indebtedness described in the Notes and the Loan Agreement and the prompt and complete payment
of the principal of, interest on, and Positive Make-Whole Amount, if any, with respect to the
Notes, and all other amounts due from the Borrower with respect to the Notes from time to time
outstanding under the Loan Agreement and all other amounts due from the Borrower under the Loan
Agreement.
This Loan Agreement Supplement shall be construed as supplemental to the Loan Agreement and
shall form a part thereof; and the Loan Agreement is hereby incorporated by reference herein to the
same extent as if fully set forth herein and is hereby ratified, approved and confirmed in all
respects.
This Loan Agreement Supplement shall be governed by and construed in accordance with the laws
of the State of New York, including all matters of construction, validity and performance.
E-2
In Witness Whereof
, the parties hereto have caused this Loan Agreement Supplement to
be duly executed, as of the day and year first above written.
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Kansas City Southern de México, S.A.
de C.V
.,
as Borrower
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By:
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Name:
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Title:
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DVB Bank AG,
as Lender
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By:
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Name:
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Title:
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E-3
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State of
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SS.:
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County of
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)
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On this ___ day of
, 2008, before me personally appeared
to me personally known, who being by me duly sworn, says that
(s)he is the
of
DVB Bank AG
, that said instrument was
signed on
___, 2008, on behalf of said corporation by authority of its
Management Board and Supervisory Board and (s)he acknowledged that the execution of the foregoing
instrument was the free act and deed of said corporation.
(SEAL)
My Commission Expires:
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State of
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)
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)
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SS.:
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County of
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)
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On this ___ day of
, 2008, before me personally appeared
to me personally known, who being by me duly sworn, says that
(s)he is the
of
Kansas City Southern de México, S.A de
C.V.
, that said instrument was signed on
___, 2008, on behalf of said
corporation by authority of its Board of Directors; and (s)he acknowledged that the execution of
the foregoing instrument was the free act and deed of said corporation.
(SEAL)
My Commission Expires:
E-4
Schedule I
to
Loan Agreement Supplement No. ___
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Equipment Cost
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Equipment
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Quantity
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Per Unit
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Reporting Marks
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GE ES44AC Locomotives
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29
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$
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2,275,662.00
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KCSM 4730 through
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KCSM 4758, inclusive
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E-5
Schedule II
to
Loan Agreement Supplement No. ___
Terms of Notes
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Principal Amount
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Interest Rate
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Final Maturity
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$52,200,000.00
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6.1950%
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_September 29, 2023
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E-6
Secretaría de Hacienda y Crédito Público Listing
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United States of America
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Israel
Italy
Japan
Luxembourg
Norway
New Zealand
Netherlands
Poland
Portugal
United Kingdom
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Romania
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Exhibit F
(to Loan Agreement)