As filed with the Securities and Exchange Commission on February 9, 2004
Registration No. 333-107573
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST EFFECTIVE AMENDMENT NO. 5 TO
FORM S-3
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
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KANSAS CITY SOUTHERN
(Exact Name of Registrant as Specified in Its Charter)
Delaware 44-0663509
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
427 WEST 12th STREET
KANSAS CITY, MISSOURI 64105
(816) 983-1303
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
JAY M. NADLMAN, ESQ.
427 WEST 12TH STREET
KANSAS CITY, MISSOURI 64105
(816) 983-1384
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code
of Agent for Service)
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Copy to:
JOHN F. MARVIN, ESQ.
DIANE M. BONO, ESQ.
SONNENSCHEIN NATH & ROSENTHAL LLP
4520 MAIN STREET, SUITE 1100
KANSAS CITY, MISSOURI 64111
(816) 460-2400
Approximate date of commencement of proposed sale to the public: From time
to time after this registration statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Secutities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
PRELIMINARY PROSPECTUS
Subject to Completion, Dated February 9, 2004
400,000 Shares of
KANSAS CITY SOUTHERN
4.25% REDEEMABLE CUMULATIVE CONVERTIBLE PERPETUAL PREFERRED STOCK, SERIES C
(LIQUIDATION PREFERENCE $500 PER SHARE)
AND
13,389,120 SHARES OF COMMON STOCK (PAR VALUE $0.01 PER SHARE)
ISSUABLE UPON CONVERSION OF THE
REDEEMABLE CUMULATIVE CONVERTIBLE PERPETUAL PREFERRED STOCK, SERIES C
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This prospectus relates to the offering for resale of Kansas City
Southern's 4.25% Redeemable Cumulative Convertible Perpetual Preferred Stock,
Series C (liquidation preference $500 per share), or "Series C Preferred Stock,"
and the shares of our common stock (including attached preferred stock purchase
rights) issuable upon conversion of the Series C Preferred Stock. The Series C
Preferred Stock was offered to qualified institutional buyers in reliance on
Rule 144A in transactions exempt from the registration requirements of the
Securities Act of 1933, through the initial purchasers, Morgan Stanley & Co.
Incorporated and Deutsche Bank Securities Inc. This prospectus will be used by
selling securityholders to resell their shares of Series C Preferred Stock and
shares of our common stock issuable upon conversion of their Series C Preferred
Stock. We will not receive any proceeds from sales by the selling
securityholders.
CONVERTIBILITY OF THE SERIES C PREFERRED STOCK
Holders may convert their Series C Preferred Stock into 33.4728 shares of
our common stock only under certain circumstances related to: (i) the trading
price of our common stock; (ii) a credit rating downgrade; (iii) the trading
price per share of the Series C Preferred Stock; (iv) redemption of the Series C
Preferred Stock; and (v) the occurrence of certain corporate transactions. The
conversion rate may be adjusted upon the occurrence of certain events. There is
no established trading market for the Series C Preferred Stock and we do not
intend to list the Series C Preferred Stock on any national securities exchange.
Our common stock is listed and traded on the New York Stock Exchange under the
symbol "KSU." On February 6, 2004, the closing sale price of our common stock
was $14.64.
REDEMPTION OR REPURCHASE OF SERIES C PREFERRED STOCK
Subject to certain conditions, on or after May 20, 2008, we will have the
option to redeem some or all of the shares of Series C Preferred Stock at a
redemption price of 100% of the liquidation preference, plus accumulated and
unpaid dividends, including special dividends, if any, to the redemption date.
Under certain circumstances, we may be required to purchase shares of the Series
C Preferred Stock at the option of the holder at a price equal to 100% of the
liquidation preference plus any accumulated and unpaid dividends, including
special dividends, if any, to, but excluding, the purchase date.
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INVESTING IN OUR SERIES C PREFERRED STOCK OR COMMON STOCK INVOLVESS RISKS.
PLEASE READ CAREFULLY THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 13.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRRIMINAL OFFENSE.
THE DATE OF THIS PROSEPCTUS IS , 2004
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You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. You should not assume that the information contained in
this prospectus is accurate as of any date other than the date on the front of
this prospectus.
TABLE OF CONTENTS
PAGE
----
About this Prospectus................................................... i
Prospectus Summary...................................................... 1
Risk Factors............................................................ 13
Use of Proceeds......................................................... 37
Business ............................................................... 37
Description of the Acquisition.......................................... 39
Description of the Series C Preferred Stock............................. 55
Description of KCS Capital Stock........................................ 71
Description of the Class A Convertible Common Stock..................... 75
Certain United States Federal Tax Considerations........................ 79
Selling Securityholders................................................. 82
Plan of Distribution.................................................... 85
Financial Statements of Grupo TFM....................................... 87
Pro Forma Financial Information......................................... 88
Legal Matters........................................................... 99
Experts ............................................................... 99
Where You Can Find More Information..................................... 99
Forward-Looking Statements.............................................. 100
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission, or SEC, utilizing a "shelf" registration
process or continuous offering process. Under this shelf registration process,
the selling securityholders may, from time to time, sell the securities
described in this prospectus in one or more offerings. This prospectus provides
you with a general description of the securities which may be offered by the
selling securityholders. Each time a selling securityholder sells securities,
the selling securityholder is required to provide you with this prospectus and,
in certain cases, a prospectus supplement containing specific information about
the selling securityholder and the terms of the securities being offered. That
prospectus supplement may include additional risk factors or other special
considerations applicable to those securities. Any prospectus supplement may
also add, update, or change information in this prospectus. If there is any
inconsistency between the information in this prospectus and any prospectus
supplement, you should rely on the information in that prospectus supplement.
You should read both this prospectus and any prospectus supplement together with
additional information described under "Where You Can Find More Information."
UNLESS WE HAVE INDICATED OTHERWISE, REFERENCES IN THIS PROSPECTUS TO "KCS"
MEAN KANSAS CITY SOUTHERN (FORMERLY KANSAS CITY SOUTHERN INDUSTRIES, INC.) AND
REFERENCES TO THE "COMPANY," "WE," "US," "OUR," AND SIMILAR TERMS REFER TO KCS
AND OUR CONSOLIDATED SUBSIDIARIES, EXCLUDING THE DISCONTINUED OPERATIONS OF ITS
FORMER FINANCIAL SERVICES BUSINESS STILWELL FINANCIAL, INC. (NOW KNOWN AS JANUS
CAPITAL GROUP INC. ("JANUS")). UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES
IN THIS PROSPECTUS TO "KCSR" MEAN THE KANSAS CITY SOUTHERN RAILWAY COMPANY, THE
PRINCIPAL SUBSIDIARY OF KCS, AND INCLUDES FOR ALL PERIODS PRESENTED THE GATEWAY
WESTERN RAILWAY COMPANY, WHICH WAS MERGED INTO KCSR EFFECTIVE OCTOBER 1, 2001.
REFERENCES TO "TFM" AND "TEX-MEX" MEAN TFM, S.A. de C.V. AND THE TEXAS-MEXICAN
RAILWAY COMPANY, RESPECTIVELY, AFFILIATES OF KCS. REFERENCES TO "GRUPO TFM" AND
"MEXRAIL" MEAN GRUPO TRANSPORTACION FERROVIARIA MEXICANA, S.A. DE C.V. AND
MEXRAIL, INC., RESPECTIVELY, THE PARENT COMPANIES OF TFM AND TEX-MEX,
RESPECTIVELY. REFERENCES TO "GRUPO TMM" MEAN GRUPO TMM, S.A. (THE SURVIVING
ENTITY IN A MERGER OF TRANSPORTACION MARITIMA MEXICANA, S.A. DE C.V. AND THE
FORMER GRUPO SERVIA, S.A. DE C.V. AND WHICH, AFTER A REORGANIZATION THAT
ELIMINATED THE VARIABLE PORTION OF GRUPO TMM, S.A. DE C.V. CAPITAL STOCK, BECAME
A FIXED CAPITAL CORPORATION WITH THE NAME GRUPO TMM, S.A.), CURRENTLY A JOINT
VENTURE PARTNER AND THE LARGEST SHAREHOLDER OF GRUPO TFM. REFERENCES TO "TMM
HOLDINGS" AND " MULTIMODAL" MEAN TMM HOLDINGS, S.A. DE C.V. AND TMM MULTIMODAL,
S.A. DE C.V., RESPECTIVELY, SUBSIDIARIES OF GRUPO TMM. REFERENCES TO "KARA SUB"
MEAN KARA SUB, INC., A WHOLLY-OWNED SUBSIDIARY OF KCS. REFERENCES TO "NAFTA"
MEAN THE NORTH AMERICAN FREE TRADE AGREEMENT.
PROSPECTUS SUMMARY
This summary may not contain all the information that may be important to
you. You should read this entire prospectus and the documents to which we have
referred you before making an investment decision. You should carefully consider
the information set forth under "Risk Factors." In addition, certain statements
include forward-looking information which involves risks and uncertainties. See
"Forward-Looking Statements."
OUR COMPANY
We, along with our subsidiaries and affiliates, own and operate a uniquely
positioned North American rail network strategically focused on the growing
north/south freight corridor that connects key commercial and industrial markets
in the central United States with major industrial cities in Mexico. KCS's
principal subsidiary, KCSR, which was founded in 1887, is one of seven Class I
railroads in the United States (railroads with annual revenues of at least $250
million, as indexed for inflation). Our rail network (KCSR, TFM and Tex-Mex) is
comprised of approximately 6,000 miles of main and branch lines. We have further
expanded our rail network through marketing alliances and strategic alliances.
Our expanded network includes:
o KCSR, which operates approximately 3,100 miles of main and branch
lines running on a north/south axis from Kansas City, Missouri to the
Gulf of Mexico and on an east/west axis from Meridian, Mississippi to
Dallas, Texas (our "Meridian Speedway") and from Kansas City to East
St. Louis, Illinois and Springfield, Illinois;
o our affiliates, TFM, which operates approximately 2,650 miles of main
and branch lines running from the U.S./Mexico border at Laredo, Texas
to Mexico City and serves most of Mexico's principal industrial cities
and three of its major shipping ports, and Tex-Mex, which operates a
160-mile rail line extending from Laredo to Corpus Christi, Texas;
o a marketing agreement with Norfolk Southern Railway Company ("Norfolk
Southern") that allows us to gain incremental traffic volume between
the southeast and the southwest United States and a marketing
agreement with I&M Rail Link, now known as IC&E, that provides us with
access to Minneapolis and Chicago and to originations of corn and
other grain in Iowa, Minnesota and Illinois;
o a strategic alliance with Canadian National Railway Company ("CN") and
Illinois Central Corporation ("IC," and together with CN, "CN/IC"),
through which we have created a contiguous rail network of
approximately 25,000 miles of main and branch lines connecting Canada,
the United States and Mexico;
o a joint marketing alliance, entered into in April 2002 with The
Burlington Northern and Santa Fe Railway Company ("BNSF") aimed at
promoting cooperation, revenue growth and extending market reach,
principally to enhance chemical, grain and forest product traffic for
both railroads in the United States and Canada. The marketing alliance
is also expected to improve operating efficiencies for both carriers
in key market areas, as well as provide customers with expanded
service options; and
o our affiliate, the Panama Canal Railway Company ("PCRC"), which holds
the concession to operate the Panama Canal Railway, a 47-mile railroad
located adjacent to the Panama Canal. This railroad has been
reconstructed for the purpose of performing freight and passenger
operations. Its wholly-owned subsidiary, Panarail Tourism Company
("PTC"), operates a commuter and tourist railway service over the
lines of the Panama Canal Railway.
COMPANY INFORMATION
KCS is incorporated in Delaware. Our principal executive offices are
located at 427 West 12th Street, Kansas City, Missouri 64105. Our telephone
number is 816-983-1303.
PROPOSED ACQUISITION
GENERAL
Since 1997, pursuant to a joint venture agreement, and other agreements,
entered into by KCS and Grupo TMM, subsidiaries of KCS and Grupo TMM have owned,
along with Mexican governmental agencies, interests in Grupo TFM, which is the
owner of 80% of the voting stock of TFM. TFM holds the concession to operate,
and operates, a major rail system in Mexico, formerly known as the "Northeast
Rail Lines". In 1995, KCS acquired from Grupo TMM 49% of the stock of Mexrail,
owner of 100% of the voting stock of Tex-Mex. Mexrail also owns the northern
half of the international railway bridge at Laredo, Texas. Tex-Mex operates a
160 mile rail line from Laredo to Corpus Christi, Texas, which connects with the
KCSR through trackage rights over the Union Pacific Railroad between Robbstown,
Texas and Beaumont, Texas. In March, 2002, KCS and Grupo TMM sold their
interests in Mexrail to TFM, with KCS receiving approximately $31.4 million for
its 49% interest in Mexrail. The structure of this ownership prior to the
execution of the Acquisition Agreement (defined below) (with intermediate
subsidiaries, other than KCSR, eliminated), including imputed ownership from
TFM's ownership of 24.6% of Grupo TFM, appears in the following diagram:
[Organizational chart type diagram appears here showing ownership of Grupo
TFM by KCS (46.6%, indirectly through its 100% ownership of KCSR) and Grupo
TMM (48.5%)(including in both cases imputed ownership from TFM's ownership
of 24.6% of Grupo TFM), Grupo TFM's ownership of 80% of TFM (with the other
20% held by the Mexican Government), TFM's ownership of 100% of Mexrail and
Mexrail's ownership of 100%of Tex-Mex]
On April 20, 2003, KCS and Grupo TMM entered into separate agreements for
the acquisition by KCS of control of TFM and Mexrail. On May 9, 2003, pursuant
to the terms of a stock purchase agreement for KCS to acquire control of Mexrail
(the "Stock Purchase Agreement"), KCS acquired from Grupo TMM (through its
subsidiary, TFM) 51% of the shares of Mexrail for approximately $32.7 million.
KCS deposited the Mexrail shares into a voting trust pending resolution of KCS's
application to the Surface Transportation Board ("STB") seeking authority to
exercise common control over Tex-Mex and KCS's other rail companies, KCSR and
the Gateway Eastern Railway Company ("Gateway Eastern"). See "Description of the
Acquisition--Summary of the Acquisition Agreement and Related Agreements" and
"Description of the Acquisition--Regulatory Matters." On September 30, 2003, in
accordance with the terms of the Stock Purchase Agreement, TFM reacquired the
51% interest in Mexrail from KCS at the purchase price paid to TFM by KCS in May
2003. Upon the repurchase of these Mexrail shares by TFM, the Stock Purchase
Agreement automatically terminated. See "--Recent Developments," "Description of
the Acquisition--Recent Developments," and "Description of the
Acquisition--Summary of the Acquisition Agreement and Related Agreements--The
Stock Purchase Agreement."
Pursuant to the agreement for the acquisition of control of TFM (the
"Acquisition") entered into on April 20, 2003 by KCS with Grupo TMM and other
parties (the "Acquisition Agreement"), KCS will acquire all of the interest of
Grupo TMM (held by its subsidiary, Multimodal) in Grupo TFM for $200 million in
cash and 18,000,000 shares of a new class of common securities of KCS, to be
designated "Class A Convertible Common Stock." Grupo TFM owns an 80% economic
interest in TFM and all of the shares of stock with full voting rights of TFM
(the "TFM Voting Stock"). KCS has the right to elect to pay up to $80 million of
the cash portion of the purchase price by delivering up to 6,400,000 shares of
KCS Class A Convertible Common Stock or KCS common stock. KCS and Grupo TMM are
in dispute over Grupo TMM's attempt to terminate the Acquisition Agreement. See
"--Recent Developments," "Description of the Acquisition--Recent Developments."
The following diagram illustrates the ownership structure resulting if the
acquisition of TFM is completed (eliminating intermediate subsidiaries)
[Organizational chart type diagram appears here showing ownership by KCS
(to be renamed "NAFTA Rail") of 100% of Grupo TFM, as well as KCS's 100%
ownership of KCSR); Grupo TFM's ownership of 80% of TFM (with the other 20%
held by the Mexican Government and footnoted with the information in (1)
below), TFM's ownership of 100% of Mexrail and Mexrail's ownership of 100%
of Tex-Mex]
(1) Limited Voting. Mexican government has certain "put" rights discussed under
"Risk Factors--KCS Risk Factors--Risks Related to Our Business--We may be
required to make additional investments in TFM" and "Description of the
Acquisition--Summary of the Acquisition Agreement and Related
Agreements--Agreement of Assignment and Assumption of Rights, Duties and
Obligations."
In addition, provided the Acquisition has occurred and neither KCS nor any
of its subsidiaries has purchased TFM shares held by the Mexican government upon
exercise of the Mexican government's right to compel purchase of those shares
(referred to as the "Put"), KCS will be obligated to pay to Grupo TMM an
additional amount (referred to as the "VAT Contingency Payment") of up to $180
million in cash in the event that a pending Value Added Tax claim (referred to
as the "VAT Claim") against the Mexican government by TFM is successfully
resolved and the amount received is greater than the purchase price of the Put.
See "Description of the Acquisition--Summary of the Acquisition Agreement and
Related Agreements--The Acquisition Agreement--VAT Contingency Payment." Upon
completion of the Acquisition, KCS will assume Grupo TMM's obligations to make
any payment upon the exercise by the Mexican government of the Put and will
indemnify Grupo TMM and its affiliates, and their respective officers,
directors, employees and shareholders, against obligations or liabilities
relating thereto. See "Description of the Acquisition--Summary of the
Acquisition Agreement and Related Agreements--Agreement of Assignment and
Assumption of Rights, Duties and Obligations."
In connection with the Acquisition, KCS will enter into a consulting
agreement with a consulting company organized by Jose Serrano Segovia pursuant
to which it will provide consulting services to KCS in connection with the
portion of the business of KCS in Mexico for a period of three years. As
consideration for the services, the consulting company will receive an annual
fee of $600,000 per year and a grant of 2,100,000 shares of restricted stock of
KCS. The restricted stock will vest over a period of time subject to certain
conditions. The consulting agreement may be extended for an additional year at
the option of KCS, upon delivery of an additional 525,000 shares of restricted
stock. See "Description of the Acquisition--Summary of the Acquisition Agreement
and Related Agreements--Consulting Agreement."
The obligations of KCS and Grupo TMM to complete the Acquisition are
subject to a number of conditions. See "Description of the Acquisition--Summary
of the Acquisition Agreement and Related Agreements--The Acquisition
Agreement--Conditions to Obligations to Complete the Acquisition."
RECENT DEVELOPMENTS
DISPUTE OVER ACQUISITION AGREEMENT
On August 18, 2003, Grupo TMM shareholders purportedly voted not to approve
the sale of Grupo TMM's interests in Grupo TFM to KCS. On August 23, 2003, Grupo
TMM sent a notice to KCS claiming to terminate the Acquisition Agreement,
because the Grupo TMM shareholders had failed to approve the Acquisition
Agreement.
On August 27, 2003, KCS announced that it had received notice from the
Mexican Foreign Investment Commission of its decision to close the proceeding
with respect to KCS's application to acquire control of Grupo TFM and, thus,
TFM, without prejudice to refile in the event the dispute is resolved between
KCS and Grupo TMM over whether the Acquisition Agreement remains in effect.
On August 29, 2003, KCS delivered to Grupo TMM a formal notice of dispute,
referred to as the Notice of Dispute, pursuant to the Acquisition Agreement.
This initiated a 60-day negotiation period between the parties. The parties were
unable to resolve the disputes within that period of time. In addition, on
August 29, 2003, KCS filed a complaint in the
Delaware Chancery Court alleging that Grupo TMM had breached the Acquisition
Agreement and seeking a final order requiring Grupo TMM not to sell Grupo TFM or
take other actions outside of the ordinary course of business, so as to preserve
the assets and business of TFM while the parties follow the dispute resolution
procedures provided for in the Acquisition Agreement. The Notice of Dispute and
complaint point out that the Acquisition Agreement does not provide that a
negative shareholder vote by Grupo TMM shareholders is a basis for termination,
and KCS maintains that the Acquisition Agreement is still valid and remains in
effect until December 31, 2004.
On September 2, 2003, KCS filed in the Delaware Court of Chancery a motion
for a preliminary injunction to preserve the parties' positions while KCS seeks
to resolve its dispute over Grupo TMM's attempt to terminate the Acquisition
Agreement. KCS asked for an expedited hearing on its motion for a preliminary
injunction.
On October 28, 2003, Chancellor William B. Chandler III of the Delaware
Court of Chancery entered a written order granting KCS' motion seeking a
preliminary injunction to preserve the parties' positions pending resolution of
the dispute between KCS and Grupo TMM over the Acquisition Agreement.
On October 31, 2003, KCS initiated binding arbitration in accordance with
the terms of the Acquisition Agreement by serving an Arbitration Demand on Grupo
TMM and the American Arbitration Association. In its Artibration Demand, KCS
seeks a determination that the Acquisition Agreement is in full force and
effect, specific performance of the Acquisition Agreement, and damages for Grupo
TMM's breach of the terms of the Acquisition Agreement and failure to negotiate
in good faith during the 60-day negotiation period. By the agreement of the
parties, the arbitration has been bifurcated. The first stage of the arbitration
will only address the question of whether Grupo TMM's purported negative
shareholder vote gave Grupo TMM the right to terminate the Acquisition
Agreement.
On January 6, 2004, KCS announced that in a ruling to the Delaware Court of
Chancery regarding a motion to enforce injunction and hold Grupo TMM in contempt
in the dispute between KCS and Grupo TMM over the Acquisition Agreement, the
court held Grupo TMM in contempt of court for taking action inconsistent with
the court's October 29, 2003 order discussed above. The court held that by Grupo
TMM causing its subsidiary Grupo TFM to revoke powers of attorney requiring the
signature of a KCS representative for transactions in excess of $2.5 million and
in granting new powers of attorney to Grupo TMM directors, Jose Serrano and
Mario Mohar to act on behalf of the comany, Grupo TMM violated provisions of the
Acquisition Agreement. The previous order of the court required Grupo TMM to
cause Grupo TFM to conduct its business in accordance with past practices and
not to directly or indirectly amend its organizational documents. The court
ordered TMM to take the actions necessary to revoke the new powers of attorney,
to re-enact the original powers of attorney, and to pay KCS its costs and
attorneys fees for bringing the motion for contempt.
REPURCHASE OF MEXRAIL SHARES BY TFM
On August 29, 2003, KCS received a demand for TFM to repurchase from KCS
shares of Mexrail sold to KCS in May 2003. On September 23, 2003, the STB issued
a decision finding no need to rule on the transfer back to TFM of the 51%
interest in Mexrail that KCS acquired on May 9, 2003. The effect of the decision
was to allow TFM to reacquire the shares in accordance with the Stock Purchase
Agreement and KCS has abided by that agreement. The repurchase of Mexrail by TFM
on September 30, 2003 returned 100% ownership of Mexrail to TFM and the Stock
Purchase Agreement automatically terminated. The repurchase price was the price
KCS paid TFM in May.
NOTICE OF TERMINATION OF JOINT VENTURE AGREEMENT
In addition, KCS acknowledged receipt from Grupo TMM of a notice to
terminate a joint venture agreement between the parties entered into in 1995.
Pursuant to such notice, the joint venture agreement terminated on December 1,
2003. The joint venture agreement provides that upon its termination, the joint
venture shall be liquidated and any assets held in the name of the joint venture
shall be distributed proportionally to KCS and Grupo TMM. There are no
significant assets held by the joint venture and its termination has not had a
material adverse effect on KCS.
STB REVIEW STATUS
On September 23, 2003, the STB entered an order asking all interested
parties to file comments by September 30, 2003 addressing whether "in light of
recent developments" the STB should continue with the procedural schedule, which
called for a decision on the merits to be issued by October 17, 2003. On
September 30, 2003, KCS filed comments with the STB suggesting that STB
precedent establishes that the STB has sufficient jurisdiction to rule on
control applications even where closing on the underlying transaction has been
put in doubt. In the alternative, KCS argued that the matter should be held in
abeyance, rather than dismissed, until the arbitration is completed. On October
8, 2003, the STB issued an order suspending the procedural schedule pending a
resolution of the uncertainties that now surround KCS's efforts to acquire
control of Tex-Mex, and requiring KCS to file status reports regarding
developments in its efforts to acquire control of TFM and Tex-Mex. In accordance
with the STB's order, KCS filed its first status report on November 3, 2003.
DECLARATION OF DIVIDEND ON SERIES C PREFERRED STOCK
The Executive Committee of the KCS Board of Directors has declared a cash
dividend of $5.3125 per share on the outstanding Series C Preferred Stock. This
dividend will be payable on February 17, 2004, to stockholders of record at the
close of business on February 2, 2004.
THE OFFERING
On May 5, 2003, we completed a private offering of the Series C Preferred
Stock. We entered into a registration rights agreement with the initial
purchasers in the private offering in which we agreed, for the benefit of the
holders of the Series C Preferred Stock, to file a registration statement with
the SEC by August 3, 2003 with respect to resales of the Series C Preferred
Stock and common stock issued upon the conversion of the Series C Preferred
Stock. We also agreed to use our best efforts to cause the shelf registration
statement to be declared effective under the Securities Act of 1933 by November
1, 2003 and to keep the shelf registration statement effective until the earlier
of (i) the sale to the public pursuant to Rule 144 (or any similar provision
then in force, but not Rule 144A) under the Securities Act or the registration
statement of which this prospectus forms a part of all the securities registered
thereunder, and (ii) the expiration of the holding period applicable to such
securities held by persons that are not our affiliates under Rule 144(k) under
the Securities Act or any successor provision, subject to permitted exceptions.
Securities offered............. 400,000 shares of Series C Preferred Stock.
Liquidation preference......... $500 per share of Series C Preferred Stock.
Dividends...................... Holders of Series C Preferred Stock are entitled
to receive, when, as and if, declared by our
board of directors, out of funds legally
available therefor, cash dividends at the rate
of 4.25% per annumn payable quarterly in arrears
on February 15, May 15, August 15 and November
15 of each year, commencing August 15, 2003.
Dividends on the Series C Preferred Stock will
be cumulative from the date of initial issuance.
Accumulated but unpaid dividends cumulate
dividends at the annual rate of 4.25%.
We will also pay "special dividends" if we
fail to comply with certain obligations under
the registration rights agreement discussed
above.
For so long as the Series C Preferred Stock
remains outstanding, (1) we will not declare,
pay or set apart funds for the payment of any
dividend or other distribution with respect to
any junior stock or parity stock and (2) neither
we, nor any of or subsidiaries will, subject to
certain exceptions, redeem, purchase or
otherwise acquire for consideration junior stock
or parity stock through a sinking fund or
otherwise, in each case unless we have paid or
set apart funds for the payment of all
accumulated and unpaid dividends, including
special dividends, if any, with respect to the
shares of Series C Preferred Stock and any
parity stock for all preceding dividend periods.
See "Description of the Series Preferred Stock--
Dividends."
Conversion..................... A holder may convert its Series C Preferred
Stock into a number of shares of our common
stock equal to the conversion rate only under
the following circumstances:
o in any fiscal quarter commencing after June
30, 2003 if the closing sale price of our
common stock for at least 20 trading days in
a period of 30 consecutive trading days
ending on the last trading day of the
preceding fiscal quarter is more than 110%
of the initial conversion price (initially
110% of $14.9375, or $16.4313);
` o after the earlier of (1) the date the Series
C Preferred Stock is assigned a credit
rating by both Standard & Poor's Rating
Services, a division of The McGraw-Hill
Companies, Inc. and its successors ("S&P")
and Moody's Investor Services and its
successors ("Moody's") and (2) May 31, 2003,
during any period in which the credit rating
assigned to the Series C Preferred Stock by
S&P is below CCC, or the credit rating
assigned to the Series C Preferred Stock by
Moody's is below Caa3, or no rating is
assigned to the Series C Preferred Stock by
either S&P or Moody's or any rating is
suspended or withdrawn by either S&P or
Moody's;
o during the five business day period after
any five consecutive trading day period in
which the trading price per share of Series
C Preferred Stock for each day of that
period was less than 98% of the product of
the closing sale price of our common stock
and the conversion rate on each such day;
o if the Series C Preferred Stock has been
called for redemption; or
o upon the occurrence of certain corporate
transactions described under "Description of
the Series C Preferred Stock--Conversion
Rights--Conversion Upon Occurrence of
Certain Corporate Transactions."
For each share of Series C Preferred Stock
surrendered for conversion, a holder will
receive 33.4728 shares of our common stock. This
represents an initial conversion price of
$14.9375 per share of common stock. The
conversion rate may be adjusted for certain
reasons, but will not be adjusted for
accumulated and unpaid dividends or special
dividends, if any. Upon conversion, holders will
not receive any cash payment representing
accumulated dividends, if any. Instead,
accumulated dividends, if any, will be deemed
paid by the common stock received by holders on
conversion.
Optional redemption.............We may not redeem any shares of Series C
Preferred Stock at any time before May 20, 2008.
On or after May 20, 2008, we may redeem some or
all of the Series C Preferred Stock at a
redemption price equal to 100% of the
liquidation preference, plus accumulated but
unpaid dividends, including special dividends,
if any, to the redemption date, but only if the
closing sale price of our common stock for 20
trading days within a period of 30 consecutive
trading days ending on the trading day before
the date we give the redemption notice exceeds
135% of the conversion price of the Series C
Preferred Stock, subject to adjustment in a
number of circumstances as described under
"Description of the Series C Preferred Stock--
Adjustments to the Conversion Rate." We may
choose to pay the redemption price in cash,
common stock, or a combination of cash and
common stock. If we elect to pay all or a
portion of the redemption price in shares of
common stock, the common stock will be valued at
a discount of 2.5% below the average of the
closing sale prices for the five trading days
ending on the third trading day prior to the
redemption date. The terms of our debt
instruments and/or bank facilities currently
restrict our ability to redeem shares of Series
C Preferred Stock for cash.
If full cumulative dividends on the Series C
Preferred Stock have not been paid, the Series C
Preferred Stock may not be redeemed and we may
not purchase or acquire any shares of Series C
Preferred Stock otherwise than pursuant to a
purchase or exchange offer made on the same
terms to all holders of Series C Preferred
Stock.
The Series C Preferred Stock is not subject to
any mandatory redemption or sinking fund
provision.
Fundamental change............. If we become subject to a fundamental change,
each holder of shares of Series C Preferred
Stock will have the right to require us to
purchase any or all of its shares at a purchase
price equal to 100% of the liquidation
preference, plus accumulated and unpaid
dividends, including special dividends, if any,
to the date of purchase. We may choose to pay
the purchase price in cash, common stock, or a
combination of cash and common stock. If we
elect to pay all or a portion of the purchase
price in shares of common stock, the common
stock will be valued at a discount of 2.5% below
the average of the closing sale prices for the
five trading days ending on the third trading
day prior to the purchase date. Our ability to
purchase all or a portion of Series C Preferred
Stock for cash is subject to our obligation to
repay or repurchase any outstanding debt
required to be repaid or repurchased in
connection with a fundamental change and to any
contractual restrictions then contained in our
debt. If, following a fundamental change, we are
prohibited from paying the purchase price of the
Series C Preferred Stock in cash under the terms
of our debt instruments, but are not prohibited
under applicable law from paying such purchase
price in shares of our common stock, we will pay
the purchase price of the Series C Preferred
Stock in shares of our common stock.
Voting rights.................. Holders of Series C Preferred Stock do not have
any voting rights except as set forth below, as
specifically provided for in our restated
certificate of incorporation or as otherwise
from time to time required by law. Whenever (1)
dividends on the Series C Preferred Stock or any
other class or series of stock ranking on a
parity with the Series C Preferred Stock with
respect to the payment of dividends are in
arrears for dividend periods, whether or not
consecutive, containing in the aggregate a
number of days equivalent to six calendar
quarters, or (2) we fail to pay the redemption
price on the date shares of Series C Preferred
Stock are called for redemption or the purchase
price on the purchase date for shares of Series
C Preferred Stock following a fundamental
change, then, in each case, the holders of
Series C Preferred Stock (voting separately as a
class with all other series of Series C
Preferred Stock upon which like voting rights
have been conferred and are exercisable) will be
entitled to vote for the election of two of the
authorized number of our directors at the next
annual meeting of stockholders and at each
subsequent meeting until all dividends
accumulated on the Series C Preferred Stock have
been fully paid or set apart for payment. The
term of office of all directors elected by the
holders of Series C Preferred Stock will
terminate immediately upon the termination of
the rights of the holder of Series C Preferred
Stock to vote for directors. Holders of shares
of Series C Preferred Stock will have one vote
for each share of Series C Preferred Stock held.
Ranking........................ The Series C Preferred Stock are, with respect
to dividend rights and rights upon liquidation,
winding up or dissolution:
o junior to all our existing and future debt
obligations;
o junior to our $25 par value preferred stock
and each other class or series of our
capital stock other than (a) our common
stock and any other class or series of our
capital stock the terms of which provide
that such class or series will rank junior
to the Series C Preferred Stock and (b) any
other class or series of our capital stock
the terms of which provide that such class
or series will rank on a parity with the
Series C Preferred Stock;
o on a parity with any other class or series
of our capital stock the terms of which
provide that such class or series will rank
on a parity with the Series C Preferred
Stock;
o senior to our common stock and any other
class or series of our capital stock the
terms of which provide that such class or
series will rank junior to the Series C
Preferred Stock; and
o effectively junior to all of our
subsidiaries' (i) existing and future
liabilities and (ii) capital stock held by
others.
Trading........................ We do not intend to list the Series C Preferred
Stock on any national securities exchange.
NYSE symbol for our
common stock................... Our common stock is traded on the New York Stock
Exchange under the symbol "KSU."
On September 24, 2003, KCS announced that its Board of Directors declared a
cash dividend of $5.3125 per share on its outstanding Series C Preferred Stock.
The dividend was paid on November 17, 2003, to stockholders of record at the
close of business on November 3, 2003.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
For purposes of determining the ratio of earnings to combined fixed charges
and preferred dividends, earnings are defined as (i) the sum of (a) pretax
income from continuing operations before adjustment for minority interests in
consolidated subsidiaries or income or loss from equity investees, (b) fixed
charges, (c) amortization of capitalized interest, (d) distributed income of
equity investees, and (e) our share of pretax losses of equity investees for
which charges arising from guarantees are included in fixed charges, less (ii)
the sum of (x) interest capitalized, (y) preference security dividend
requirements of consolidated subsidiaries, and (z) the minority interest in
pretax income of subsidiaries that have not incurred fixed charges. Fixed
charges consist of interest (whether expensed or capitalized), amortized
premiums, discounts and capitalized expenses related to indebtedness, and
estimate of the interest within rental expense, and preference security dividend
requirements of consolidated subsidiaries. Preference security dividend consists
of the amount of pretax earnings that is required to pay the dividends on
outstanding preference securities.
NINE
MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------- -------------------------------------------
2003 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
Ratio of earnings to combined fixed charges and
preferred dividends 1.31 1.28 1.07 1.03 1.15 1.91
RISK FACTORS
An investment in the Series C Preferred Stock or the underlying common
stock involves certain risks that a potential investor should carefully evaluate
prior to making an investment in the Series C Preferred Stock. See "Risk
Factors."
RISK FACTORS
KCS RISK FACTORS
----------------
RISKS RELATED TO THE SERIES C PREFERRED STOCK
--------------------------------------------
THE SERIES C PREFERRED STOCK RANKS JUNIOR TO ALL OF OUR LIABILITIES AND TO OUR
$25 PAR VALUE PREFERRED STOCK.
The Series C Preferred Stock ranks junior to all of our liabilities. The
Series C Preferred Stock also ranks junior to our $25 par value preferred stock
("Preferred Stock"). In the event of our bankruptcy, liquidation or winding-up,
our assets will be available to pay obligations on the Series C Preferred Stock,
including the purchase of your shares of the Series C Preferred Stock for cash
upon a change in control, only after all our indebtedness and other liabilities
and our Preferred Stock have been paid. In addition, the Series C Preferred
Stock will effectively rank junior to all existing and future liabilities of our
subsidiaries and any capital stock of our subsidiaries held by others. The
rights of holders of the Series C Preferred Stock to participate in the
distribution of assets of our subsidiaries will rank junior to the prior claims
of that subsidiary's creditors and any other equity holders. As of March 31,
2003, we had total consolidated liabilities of approximately $1.3 billion.
Consequently, if we are forced to liquidate our assets to pay our creditors, we
may not have sufficient assets remaining to pay amounts due on any or all of the
Series C Preferred Stock then outstanding. We and our subsidiaries may incur
substantial amounts of additional debt and other obligations that will rank
senior to the Series C Preferred Stock.
WE MAY NOT BE ABLE TO PAY THE PURCHASE PRICE OF THE SERIES C PREFRRED STOCK IN
CASH UPON A FUNDAMENTAL CHANGE. WE ALSO COULD BE PREVENTED FROM PAYING DIVIDENDS
ON SHARES OF THE SERIES C PREFERRED STOCK.
In the event of a fundamental change you will have the right to require us
to purchase all your shares of Series C Preferred Stock. We may pay the purchase
price in cash, shares of our common stock, or a combination thereof. However, we
may not have sufficient cash to purchase your shares of Series C Preferred Stock
upon a fundamental change or may in certain circumstances either be forced to
pay the purchase price in shares of our common stock or may be unable to pay the
purchase price in cash or may be legally prohibited from paying the purchase
price in shares of our common stock.
Under the terms of our current debt instruments we are prohibited from
paying the purchase price of the Series C Preferred Stock in cash. Even if the
terms of the instruments governing our indebtedness allow us to pay cash
dividends and to redeem and purchase the Series C Preferred Stock in cash, we
can only make such payments from legally available funds, as determined by our
board of directors, and such funds may not be available to pay cash dividends to
you or to redeem or purchase your shares of Series C Preferred Stock.
In addition, because we are a holding company, our ability to purchase the
Series C Preferred Stock for cash or to pay dividends on the Series C Preferred
Stock may be limited by restrictions on our ability to obtain funds for such
repurchase through dividends from our subsidiaries.
YOU MAY BE UNABLE TO CONVERT THE SERIES C PREFERRED STOCK INTO OUR COMMON STOCK
AND, IF YOU ARE ABLE AND DO CONVERT, YOU WILL EXPERIENCE IMMEDIATE DILUTION.
You may convert your shares of Series C Preferred Stock into common stock
only if (1) the closing sale price of our common stock reaches, or the trading
price of the Series C Preferred Stock falls below, specified thresholds, (2) the
Series C Preferred Stock is called for redemption, (3) specified corporate
transactions have occurred or (4) upon certain credit downgrade events. Your
inability to convert the Series C Preferred Stock may adversely affect its
value.
If you convert your shares of Series C Preferred Stock into shares of
common stock, you will experience immediate dilution because the per share
conversion price of the Series C Preferred Stock immediately after this offering
will be higher than the net tangible book value per share of the outstanding
common stock. In addition, you will also experience dilution when and if we
issue additional shares of common stock, which we may be required to issue
pursuant to the Acquisition or related ancillary agreements or otherwise issue
pursuant to options, warrants, our stock option plan or other employee or
director compensation plans.
THE PRICE OF OUR COMMON STOCK, AND THEREFORE OF THE SERIES C PREFERRED STOCK,
MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY MAKE IT DIFFICULT FOR YOU TO RESELL THE
SERIES C PREFERRED STOCK, OR COMMON STOCK ISSUABLE UPON CONVERSION OF THE SERIES
C PREFERRED STOCK, WHEN YOU WANT OR AT PRICES YOU FIND ATTRACTIVE.
The price of our common stock on the New York Stock Exchange constantly
changes. We expect that the market price of our common stock will continue to
fluctuate. Because the Series C Preferred Stock is convertible into our common
stock, volatility or depressed prices for our common stock could have a similar
effect on the trading price of the Series C Preferred Stock. Holders who have
received common stock upon conversion will also be subject to the risk of
volatility and depressed prices.
Our stock price can fluctuate as a result of a variety of factors, many of
which are beyond our control. These factors include:
o quarterly variations in our operating results;
o operating results that vary from the expectations of management,
securities analysts and investors;
o changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
o developments generally affecting our industry;
o announcements by us or our competitors of significant contracts,
acquisitions, joint marketing relationships, joint ventures or capital
commitments;
o announcements by third parties of significant claims or proceedings
against us;
o our dividend policy;
o future sales of our equity or equity-linked securities;
o our dispute with Grupo TMM over Grupo TMM's attempt to terminate the
Acquisition Agreement;
o the Mexican Government's audit of Grupo TFM's past tax returns and its
preliminary determination to disallow Grupo TFM's and its consolidated
subsidiaries right to depreciate the concession and other assets
purchased by TFM from the Mexican Government as part of the
privatization of the Mexican National railway system; and
o general domestic and international economic conditions.
In addition, the stock market in general has experienced extreme volatility
that has often been unrelated to the operating performance of a particular
company. These broad market fluctuations may adversely affect the market price
of our common stock.
THE TRADING PRICE FOR THE SERIES C PREFERRED STOCK WILL BE DIRECTLY AFFECTED BY
THE TRADING PRICES FOR OUR COMMON STOCK, WHICH IS IMPOSSIBLE TO PREDICT.
The price of our common stock could be affected by possible sales of our
common stock by investors who view the Series C Preferred Stock as a more
attractive means of equity participation in KCS and by hedging or arbitrage
activity that may develop involving the common stock. The arbitrage could, in
turn, affect the trading prices of the Series C Preferred Stock.
OUR RIGHTS AGREEMENT AND AMENDED CHARTER DOCUMENTS MAY MAKE IT HARDER FOR OTHERS
TO OBTAIN CONTROL OF US EVEN IF SOME STOCKHOLDERS MIGHT CONSIDER SUCH A
DEVELOPMENT FAVORABLE, WHICH MAY ADVERSELIY AFFECT OUR STOCK PRICE.
Our rights agreement and provisions of our amended and restated certificate
of incorporation and our by-laws may delay, inhibit or prevent someone from
gaining control of us through a tender offer, business combination, proxy
contest or some other method even if some of our stockholders might believe a
change in control is desirable.
ISSUANCE OF CLASS A CONVERTIBLE COMMON STOCK AND COMMON STOCK IN CONNECTION WITH
THE ACQUISITION COULD CAUSE THE PRICE OF OUR COMMON STOCK TO FALL.
Under the terms of the Acquisition Agreement, KCS, at its option, may elect
to pay up to $80 million of the $200 million cash consideration for the Grupo
TFM shares by delivering a number of shares of common stock or Class A
Convertible Common Stock determined by dividing the amount that KCS elects to
pay other than in cash by $12.50. Assuming KCS elects to pay $80 million in this
manner, KCS would deliver 6,400,000 shares. In addition, shares of KARA Sub
purchased by Multimodal during the course of the Acquisition shall be
automatically converted into 18,000,000 shares of our Class A Convertible Common
Stock upon the successful completion of the Acquisition. The Class A Convertible
Common Stock will be convertible into an equal number of shares of common stock
at any time, upon the option of holders, and mandatorily, upon the occurrence of
certain conditions.
In connection with the Acquisition, KCS will enter into a consulting
agreement pursuant to which 2,100,000 shares of restricted common stock will be
granted to the consulting firm. The restricted common stock, subject to certain
performance conditions under the consulting agreement, will vest over the course
of three years following the date the Acquisition is consummated. If KCS, in its
sole discretion, chooses to extend the consulting agreement at the end of its
three-year term, an additional 525,000 shares of restricted common stock will be
granted and will immediately vest.
KCS will, pursuant to a registration rights agreement, be obligated to
register the shares of common stock issued upon conversion of the Class A
Convertible Common Stock, pursuant to the Acquisition Agreement to the extent
that KCS elects to pay a portion of the cash consideration through the issuance
of shares of common stock, pursuant to the consulting agreement, or otherwise
acquired by Grupo TMM, TMM Holdings, Multimodal, certain Grupo TMM stockholders
or any of their respective affiliates upon the exercise of pre-emptive rights in
compliance with the Stockholders' Agreement.
We cannot predict whether any actual or potential increase in availability
of our common stock for sale as a result of these transactions will adversely
affect the market price of our common stock.
OUR ABILITY TO PAY DIVIDENDS MAY BE LIMITED, AND WE DO NOT ANTICIPATE PAYING
CASH DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
We are restricted in our ability to pay dividends to the holders of our
common stock by the terms of our outstanding Series C Preferred Stock and our
credit facilities and senior notes. In the future, we may agree to further
restrictions on our ability to pay dividends. In addition, to maintain our
credit ratings, we may be limited in our ability to pay dividends so that we can
maintain an appropriate level of debt. During the first quarter of 2000, our
board of directors suspended our common stock dividends. We do not anticipate
making any cash dividend payments to our common stockholders for the foreseeable
future.
SUBSTANTIAL SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.
SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD
ADVERSELY AFFECT THE PREVAILING MARKET PRICE OF OUR COMMON STOCK.
Commencing July 29, 2003, an additional 5,384,883 shares beneficially owned
by our executive officers and directors became freely tradeable upon the
expiration of agreements not to sell such shares, subject to compliance with
Rule 144 under the Securities Act of 1933. In addition, as of June 30, 2003, we
had 1,188,020 remaining shares of common stock reserved for issuance under our
stock option plan. Sales of common stock by stockholders upon expiration of the
lock-up agreements, exercise of their options, or the perception that such sales
could occur, may adversely affect the market price of our common stock.
WE HAVE PROVISIONS IN OUR CHARTER, BYLAWS AND RIGHTS AGREEMENT THAT COULD DETER,
DELAY OR PREVENT A THIRD PARTY FROM ACQUIRING US AND THAT COULD DEPRIVE YOU OF
AN OPPORTUNITY TO OBTAIN A TAKEOVER PREMIUM FOR SHARES OF OUR COMMON STOCK.
We have provisions in our charter and bylaws that may delay or prevent
unsolicited takeover bids from third parties. These provisions may deprive our
stockholders of an opportunity to sell their shares at a premium over prevailing
market prices. For example, our restated certificate of incorporation provides
for a classified board of directors. It further provides that the vote of 70% of
the shares entitled to vote in the election of directors is required to amend
our restated certificate of incorporation to increase the number of directors to
more than eighteen, abolish cumulative voting for directors and abolish the
classification of the board. The same vote requirement is imposed by our
restated certificate of incorporation on certain transactions involving mergers,
consolidations, sales or leases of assets with or to certain owners of more than
5% of our outstanding stock entitled to vote in the election of directors. Our
bylaws provide that a stockholder must provide us with advance written notice of
its intent to nominate a director or raise a matter at an annual meeting. In
addition, we have adopted a rights agreement which under certain circumstances
would significantly impair the ability of third parties to acquire control of us
without prior approval of our board of directors.
RISKS RELATED TO OUR BUSINESS
-----------------------------
WE MAY BE REQUIRED TO MAKE ADDITIONAL INVESTMENTS IN TFM.
The Mexican government had the right to sell its 20% interest in TFM
through a public offering on October 31, 2003 (or prior to October 31, 2003,
with the consent of Grupo TFM). If, on October 31, 2003, the Mexican government
had not sold all of its capital stock in TFM, Grupo TFM was, following
notification by the Mexican government in accordance with the terms of the
applicable agreements, obligated to purchase the TFM capital stock at the
initial share price paid by Grupo TFM plus interest computed at the Mexican Base
Rate, published by Banco de Mexico. The Mexican government did not sell any of
its interest in TFM prior to October 31, 2003. Prior to October 31, 2003, Grupo
TFM filed suit in the Federal District Court of Mexico City seeking, among other
things, a declaratory judgment interpreting whether Grupo TFM was obligated to
honor its obligation under the Put Agreement. The Mexican government has
provided Grupo TFM with notice of its intention to sell its interest in TFM.
Grupo TFM has responded to the Mexican government's notice reaffirming its right
and interest in purchasing the Mexican government's remaining interest in TFM,
but also advising the Mexican government that it would not take any action until
its lawsuit seeking a declaratory judgment was resolved. In the event that Grupo
TFM does not purchase the Mexican government's 20% interest in TFM, Grupo TMM,
and we, or either of us alone, would, following notification by the Mexican
government in accordance with the terms of the applicable agreements, be
obligated to purchase the Mexican government's remaining interest in TFM. If the
Acquisition is completed, we will be solely responsible for purchasing the
Mexican government's 20% interest in TFM. If we had been required to purchase
this interest as of September 30, 2003, the total purchase price would have been
approximately $470 million. Based upon public disclosures made by Grupo TMM, it
is not in a position to make this purchase. Grupo TMM disclosed in its Form 20-F
for the year ended December 31, 2002, that it did not at the time of the filing
have sufficient resources to acquire the Mexican government's interest if
required to do so.
WE ARE VULNERABLE TO INCREASES IN FUEL COSTS AND DECREASES IN FUEL SUPPLIES. ANY
SIGNIFICANT INCREASE IN THE COST OF FUEL, OR SEVERE DISRUPTION OF FUEL SUPPLIES,
WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OEPRATIONS AND
FINANCIAL CONDITION.
We incur substantial fuel costs in our railroad operations. During the
three-year period ended December 31, 2002, locomotive fuel expenses represented
an average of 8.7% of KCSR's total operating costs. Fuel costs are affected by
traffic levels, efficiency of operations and equipment, and petroleum market
conditions. The supply and cost of fuel is subject to market conditions and is
influenced by numerous factors beyond our control, including general economic
conditions, world markets, government programs and regulations and competition.
Fuel represented 7.7% of total KCSR operating costs in 2002. We attempt to
minimize the effects of fuel price fluctuations through forward purchase
contracts and hedging agreements, but cannot guarantee that those arrangements
will be beneficial to us. Any significant increase in the cost of fuel could
have a material adverse effect on our business, results of operations and
financial condition. During the first quarter of 2003, average fuel prices were
43% higher than in the first quarter of 2002. Our operations, as well as those
of our competitors, could also be affected by any limitation in the fuel supply
or by any imposition of mandatory allocation or rationing regulations. In the
event of a severe disruption of fuel supplies resulting from supply shortages,
political unrest, war or otherwise, the operations of rail and truck carriers,
including us, could be adversely affected.
ONE OF OUR COAL CUSTOMERS ACCOUNTS FOR APPROXIMATELY 11% OF KCS'S TOTAL
REVENUES.
Our largest coal customer, Southwestern Electric Power Company ("SWEPCO"),
a subsidiary of American Electric Power Company, Inc., accounted for
approximately 64% of our coal revenues and approximately 11% of KCS's total
revenues for the year ended December 31, 2002. The loss of all or a significant
part of SWEPCO's business, or a service outage at one or both of SWEPCO's
facilities that we serve, could materially adversely affect our financial
condition and results of operations.
WE ARE SUBJECT TO EXTENSIVE RAILROAD INDUSTRY REGULATION AND RELY UPON UNIONIZED
LABOR.
Labor relations in the U.S. railroad industry are subject to extensive
governmental regulation under the Railway Labor Act. Railroad industry personnel
are covered by the Railroad Retirement Act instead of the Social Security Act
and by the Federal Employers' Liability Act rather than state workers'
compensation systems. These federal labor regulations are often more burdensome
and expensive than regulations governing other industries and may place us at a
competitive disadvantage relative to other industries that are not subject to
these regulations.
Approximately 84% of KCSR employees are covered under various collective
bargaining agreements. Periodically, the collective bargaining agreements with
the various unions become eligible for re-negotiation. In 1996, national labor
contracts governing KCSR were negotiated with all major railroad unions,
including the United Transportation Union ("UTU"), the Brotherhood of Locomotive
Engineers, the Transportation Communications International Union ("TCU"), the
Brotherhood of Maintenance of Way Employees ("BMWE"), and the International
Association of Machinists and Aerospace Workers. In August 2002, a new labor
contract was reached with the UTU. The provisions of this agreement include the
use of remote control locomotives in and around terminals and retroactive
application of wage increases back to July 1, 2002. Also, a new labor contract
has been reached with the TCU which was signed on January 23, 2003. A new labor
contract was reached with the BMWE effective May 31, 2001. Formal negotiations
to enter into new agreements are in progress with the other unions and the 1996
labor contracts will remain in effect until new agreements are reached. The wage
increase elements of these new agreements may have retroactive application.
Management has reached new agreements with all but one of the unions relating to
the former Gateway Western. Gateway Western was merged into KCSR on October 1,
2001. Similarly, management has reached new agreements with all but one of the
unions relating to the former MidSouth Railroad ("MidSouth") employees (MidSouth
was merged into KCSR on January 1, 1994). Discussions with these unions are
ongoing. The provisions of the various labor agreements generally include
periodic general wage increases, lump-sum payments to workers and greater work
rule flexibility, among other provisions. Management does not expect that the
negotiations or the resulting labor agreements will have a material impact on
our consolidated results of operations, financial condition or cash flows.
We may be subject to work stoppages in the future as a result of labor
disputes and may be subject to terms and conditions in amended or future labor
agreements that could have a material adverse affect on our results of
operations, financial position and cash flows. Railroads continue to be
restricted by certain remaining restrictive work rules, and are thus prevented
from achieving optimum productivity with existing technology and systems.
UTILITY INDUSTRY DEREGULATION MAY REDUCE OUR COAL FREIGHT REVENUES OR MARGINS.
Historically, coal has been an important commodity handled by us. In 2002,
coal revenues comprised approximately 18.1% of KCSR's total carload revenues,
all of which result from deliveries to utility customers. The utility industry
is undergoing a process of deregulation which will likely cause utilities to
become more competitive and thus more aggressive in negotiating with coal
transportation companies to reduce costs. This could create downward pressure on
utility coal transportation rates and increase service requirements.
Additionally, there can be no assurance that negotiated coal transportation
rates will remain at current levels in the future. Continuing competitive
pressures, lower coal transportation rates and declining margins could have a
material adverse effect on our business, financial condition and results of
operations.
Utilities will also have greater flexibility in selling electricity to, and
buying electricity from, other regional markets. This could have a material
adverse effect on our utility customers if such customers are not able to
compete effectively with new utility companies that enter their respective
markets. As a result, the pattern of coal shipments in a particular market may
shift to an alternative utility company that does not use us to deliver its coal
requirements. While we are working to help our utility customers remain
competitive in this evolving environment, changes in the pattern of coal
movements could have a material adverse impact on our business, financial
condition and results of operations.
WE MAY BE ADVERSELY AFFECTED BY CHANGES IN GENERAL ECONOMIC, WEATHER OR OTHER
CONDITIONS.
Our operations may be adversely affected by changes in the economic
conditions of the industries and geographic areas that produce and consume the
freight that we transport. The relative strength or weakness of the United
States economy as well as various international and regional economies also
affects the businesses served by us. Grupo TFM, Panama Canal Railway Company and
Panarail Tourism Company are more directly affected by their respective local
economy. Historically, a stronger economy has resulted in improved results for
our rail transportation operations. Conversely, when the economy has slowed,
results have been less favorable. Our revenues may be affected by prevailing
economic conditions and, if an economic slowdown or recession occurs in our key
markets, the volume of rail shipments is likely to be reduced. Additionally, our
operations may be affected by adverse weather conditions. A weak harvest in the
Midwest, for example, may substantially reduce the volume of business we
traditionally handle for our agricultural products customers. Additionally, many
of the goods and commodities we carry experience cyclical demand. Our results of
operations can be expected to reflect this cyclical demand because of the
significant fixed costs inherent in railroad operations. Our operations may also
be affected by natural disasters or terrorist acts. Significant reductions in
our volume of rail shipments due to economic, weather or other conditions could
have a material adverse effect on our business, financial condition and results
of operations.
OUR OPERATING RESULTS AND FINANCIAL CONDITION WILL DEPEND ON EXECUTION OF OUR
BUSINESS STRATEGY. IF WE FAIL TO EXECUTE OUR BUSINESS STRATEGY, IT MAY
NEGATIVELY IMPACT OUR FINANCIAL CONDITION.
Our operating results and financial condition will depend in large measure
on our ability to successfully execute our business strategy. Our business
strategy includes capitalizing on NAFTA trade to generate traffic and increase
revenues, exploiting our domestic opportunities, establishing new and expanding
existing strategic alliances and marketing agreements, and providing superior
customer service. Successful implementation of this strategy depends on many
factors, including factors beyond our control. There can be no assurance that we
will be able to implement our strategy on a timely basis or at all or that, if
implemented, such strategy will achieve the desired results.
WE COMPETE AGAINST OTHER RAILROADS, TRUCK CARRIERS AND OTHER MODES OF
TRANSPORTATION.
If we are unable to compete successfully, it could have a material adverse
effect on our business, financial condition and results of operations.
Our rail operations compete against other railroads, many of which are much
larger and have significantly greater financial and other resources than us.
Since 1994, there has been significant consolidation among major North American
rail carriers. As a result of this consolidation, the railroad industry is now
dominated by a few "mega-carriers." We believe that our revenues were negatively
affected by the merger of Burlington Northern, Inc. and Santa Fe Pacific
Corporation in 1995 (forming BNSF), the merger of the Union Pacific Railroad
Company ("UP") with the Chicago and North Western Transportation Company in 1995
and the merger of the UP and the Southern Pacific Rail Corporation in 1996,
which led to diversions of rail traffic away from our lines. We also regard the
larger western railroads (BNSF and UP), in particular, as significant
competitors to our operations and prospects because of their substantial
resources.
Truck carriers have eroded the railroad industry's share of total
transportation revenues. Changing regulations, subsidized highway improvement
programs and favorable labor regulations have improved the competitive position
of trucks in the United States as an alternative mode of surface transportation
for many commodities. In the United States, the trucking industry generally is
more cost and transit-time competitive than railroads for short-haul distances.
We are also subject to competition from barge lines and other maritime shipping.
Mississippi and Missouri River barge traffic, among others, compete with us in
the transportation of bulk commodities such as grains, steel and petroleum
products.
Increased competition has resulted in downward pressure on freight rates.
Competition with other railroads and other modes of transportation is generally
based on the rates charged, the quality and reliability of the service provided
and the quality of the carrier's equipment for certain commodities. Continuing
competitive pressures and declining margins could have a material adverse effect
on our business, financial condition and results of operations.
OUR BUSINESS STRATEGY, OPERATIONS AND GROWTH RELY SIGNIFICANTLY ON JOINT
VENTURES AND OTHER STRATEGIC ALLIANCES.
Operation of our integrated rail network and our plans for growth and
expansion rely significantly on joint ventures and other strategic alliances.
Unless the Acquisition is consummated, we will continue to hold an indirect
interest in two strategically significant railroad companies, Tex-Mex through
TFM and TFM through our minority interest in Grupo TFM. As a minority
shareholder, we are not in a position to control operations, strategies or
financial decisions without the concurrence of Grupo TMM, the largest
shareholder in Grupo TFM. In addition, conflicts have arisen in the past and may
arise in the future between our business objectives and those of Grupo TMM. We
are currently in a dispute with Grupo TMM over Grupo TMM's attempt to terminate
the Acquisition Agreement. We cannot assure that this dispute will be resolved
in our favor. If the Acquisition is not consummated, resolution of any future
conflicts in our favor may be difficult or impossible given our minority
ownership position. We do maintain supermajority rights, which provide us with
the ability to block certain actions proposed by Grupo TMM at Grupo TFM. Our
ownership interests in these companies are subject to restrictions on
disposition. KCS received notice from Grupo TMM to terminate a joint venture
agreement between the parties entered into in 1995. Pursuant to such notice,
that joint venture agreement terminated on December 1, 2003. This joint venture
agreement provides that upon its termination, the joint venture shall be
liquidated and any assets held in the name of the joint venture shall be
distributed proportionally to KCS and Grupo TMM. There are no significant assets
held by the joint venture and the termination of the joint venture agreement did
not have a material adverse effect on KCS.
Our operations are dependent on interchange, trackage rights, haulage
rights and marketing agreements with other railroads and third parties that
enable us to exchange traffic and utilize trackage we do not own. These
agreements extend our network and provide strategically important rail links to
Mexico, the northern Midwest United States and Canada. Our ability to provide
comprehensive rail service to our customers depends in large part upon our
ability to maintain these agreements with other railroads and third parties. The
termination of these agreements could adversely affect our business, financial
condition and results of operations. There can be no assurance that these
agreements will be renewed after their expiration and the failure to renew any
of them could adversely affect our business, financial condition and results of
operations. In addition, we are dependent in part upon the financial health and
efficient performance of other railroads. For example, much of Tex-Mex's traffic
moves over the UP's lines via trackage rights, and a significant portion of our
grain shipments originate with Iowa, Chicago & Eastern Railroad Corporation
("IC&E" - formerly I&M Rail Link, LLC) pursuant to our marketing agreement with
it. BNSF is our largest partner in the interchange of rail traffic. There can be
no assurance that we will not be materially affected adversely by operational or
financial difficulties of other railroads.
OUR SUCCESS WILL DEPEND UPON OUR ABILITY TO RETAIN AND ATTRACT QUALIFIED
MANAGEMENT PERSONNEL.
Our operations and the continued execution of our business strategy are
dependent upon the continued employment of our senior management team.
Recruiting, motivating and retaining qualified management personnel,
particularly those with expertise in the railroad industry, are vital to our
operations and ultimate success. There is substantial competition for qualified
management personnel and there can be no assurance that we will be able to
attract or retain qualified personnel. The loss of key personnel or the failure
to hire qualified personnel could materially adversely affect our business and
financial results.
OUR MEXICAN INVESTMENT SUBJECTS US TO POLITICAL AND ECONOMIC RISKS.
As of December 31, 2002, we had invested approximately $300 million in
Grupo TFM. If the Acquisition is consummated, our investment in Mexico will be
materially increased. Our investment in Mexico involves a number of risks. The
Mexican government exercises significant influence over the Mexican economy and
its actions could have a significant impact on TFM. Our Mexican investment may
also be adversely affected by currency fluctuations, price instability,
inflation, interest rates, regulations, taxation, cultural differences, social
instability, labor disputes and other political, social and economic
developments in or affecting Mexico. Moreover, TFM's commercial success is
heavily dependent on expected increases in U.S.-Mexico trade and will be
strongly influenced by the effect of NAFTA on such trade. Downturns in either of
the U.S. or Mexican economies or in trade between the United States and Mexico
would be likely to adversely impact TFM's business, financial condition and
results of operations. There can be no assurances that the various risks
associated with operating in Mexico can be effectively and economically
mitigated by TFM. Additionally, no assurances can be given that the value of
these investments will not become impaired.
TFM holds the concession to operate Mexico's Northeast Rail Lines (the
"Concession") for 50 years, beginning in 1997, and, subject to certain
conditions, has a 50-year extension option. The Concession is subject to certain
mandatory trackage rights and is only exclusive for 30 years. Additionally, the
Mexican government may revoke exclusivity after 20 years if it determines that
there is insufficient competition and may terminate the Concession as a result
of certain conditions or events, including (1) TFM's failure to meet its
operating and financial obligations with regard to the Concession under
applicable Mexican law, (2) a statutory appropriation by the Mexican government
for reasons of public interest and (3) liquidation or bankruptcy of TFM. TFM's
assets and its rights under the Concession may also be seized temporarily by the
Mexican government. Revocation or termination of the Concession would materially
adversely affect TFM's operations and its ability to make payments on its debt.
Further, even though TFM would be entitled to compensation for a statutory
appropriation or temporary seizure, any such compensation might be insufficient
to cover TFM's losses. The loss of the Concession would materially adversely
impact TFM's business, financial condition and results of operations which, in
turn, would materially adversely impact the value of and return on our
investment in Grupo TFM and our ability to market our U.S. operations on the
basis of our access to Mexican locations. Currently, Grupo TFM is limited in the
amount of dividends it may pay because of debt covenants. An absence of
dividends from Grupo TFM will, or limited dividends may, negatively impact our
ability to obtain a current cash return on our investment in Grupo TFM.
Under the Concession, TFM is obligated to grant and is entitled to receive
certain trackage rights. The compensation for use of the trackage rights has
been under discussion since the granting of the Concession. As TFM and Ferromex
were unable to reach an agreement concerning compensation, the Ministry of
Communications and Transports, or "Ministry of Transportation," issued its
ruling on March 13, 2002 setting the compensation to be paid by each of TFM and
Ferromex for use of the mandatory trackage rights. On April 15, 2002, the
Ministry of Transportation rejected TFM's petition seeking reconsideration of
its trackage rights decision. TFM has appealed to an administrative court both
the Ministry of Transportation's rejection of its petition seeking
reconsideration and the Ministry of Transportation's underlying decision on
trackage rights compensation. TFM also requested and obtained a suspension of
the effectiveness of the Ministry of Transportation's ruling pending resolution
of its appeal. An adverse trackage rights compensation decision could negatively
impact our investment in Grupo TFM.
OUR PANAMANIAN INVESTMENT SUBJECTS US TO POLITICAL AND ECONOMIC RISKS.
We have entered into a joint venture with Mi-Jack Products, Inc.
("Mi-Jack"--a private U.S. company located in Illinois), through which we own
50% of the common stock of the Panama Canal Railway Company ("PCRC"), which owns
all of the common stock of Panarail Tourism Company ("PTC"). As of December 31,
2002, we had invested approximately $19.9 million in the PCRC, comprised of
$12.9 million in equity and $7.0 million in subordinated loans. PCRC operates a
railroad between Panama City and Colon, Panama, while PTC operates a tourist and
commuter railway service in conjunction with and over the lines of the PCRC. Our
investment in PCRC has risks associated with operating in Panama, including,
among others, cultural differences, varying labor and operating practices,
political risk and differences between the U.S. and Panamanian economies. There
can be no assurances that the risks associated with operating in Panama can be
effectively and economically mitigated by PCRC. Additionally, no assurances can
be given that the value of our investment in PCRC will not become impaired.
Further, KCS is a guarantor to the International Finance Corporation ("IFC") for
up to $5.6 million of deferred principal payments on behalf of PCRC and, if PCRC
terminates the concession contract without the consent of the IFC, a guarantor
for up to 50% of the outstanding senior loans of PCRC. The senior loans had an
outstanding balance of approximately $45 million at December 31, 2002. KCSR is
also a guarantor for up to $2.1 million of equipment loans from Transamerica
Corporation.
WE ARE SUBJECT TO REGULATION BY FEDERAL, STATE AND LOCAL REGULATORY AGENCIES.
OUR FAILURE TO COMPLY WITH VARIOUS FEDERAL, STATE AND LOCAL REGULATIONS COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In addition to safety, health and other regulations, generally our U.S.
rail subsidiaries, like other rail common carriers, are subject to regulation by
the Surface Transportation Board, the Federal Railroad Administration, the
Occupational Safety and Health Administration, state departments of
transportation and other state and local regulatory agencies. Government
regulation of the railroad industry is a significant determinant of the
competitiveness and profitability of railroads. While deregulation of rates and
services in the United States has substantially increased the flexibility of
railroads to respond to market forces, the deregulated environment has also
resulted in highly competitive rates. Material noncompliance by us with these
various regulatory requirements or changes in regulation of the industry through
legislative, administrative, judicial or other action could have a material
adverse effect on our business, financial condition and results of operations,
including limitations on our operating activities until compliance with
applicable requirements is completed.
ENVIRONMENTAL LIABILITIES COULD REQUIRE US TO INCUR MATERIAL COSTS AND
TEMPORARILY SUSPEND ANY OPERATIONS THAT ARE FOUND TO VIOLATE ENVIRONMENTAL LAWS.
Our operations are subject to extensive federal, state and local
environmental laws and regulations concerning, among other things, emissions to
the air, discharges to waters, waste management, hazardous substance
transportation, handling and storage, decommissioning of underground storage
tanks and soil and groundwater contamination. Those laws and regulations can (1)
impose substantial fines and criminal sanctions for violations, (2) require us
to upgrade equipment or make operational changes to limit pollution emissions or
decrease the likelihood of accidental hazardous substance releases or (3)
temporarily prohibit us from conducting operations if those operations violate
applicable requirements. We incur, and expect to continue to incur, significant
environmental compliance costs, including, in particular, costs necessary to
maintain compliance with requirements governing our chemical and hazardous
material shipping operations, our refueling operations and our repair
facilities.
Many of our current and former properties are or have been used for
industrial purposes, including, for example, hazardous material storage, waste
disposal and treatment, foundry operations, drum reconditioning services and
chemical treatment of wood products. Accordingly, we also are subject to
potentially material liabilities relating to the investigation and cleanup of
contaminated properties, and to claims alleging personal injury or property
damage as the result of exposures to, or releases of, hazardous substances. Such
liabilities could relate to properties that we owned or operated in the past, as
well as any of our currently owned or operated properties. Such liabilities also
could relate to third-party sites to which we or our predecessors sent waste for
treatment or disposal, or which otherwise were affected by our operations. For
example, we are conducting investigation and cleanup activities at several
properties which we own or which we or our predecessors owned or operated in the
past. We also are investigating and remediating several third-party sites that
were affected by spills from our rail car operations and have been identified as
a potentially responsible party at several third-party disposal sites to which
we sent waste and other materials in the past. In addition, we are a defendant
in a class action lawsuit alleging personal injuries and property damage from a
chemical rail car explosion in 1995.
Although we have recorded liabilities for estimated environmental
remediation and other environmental costs, actual expenditures or liabilities
could exceed estimated amounts and could have a material adverse effect on our
consolidated results of operations or financial position. New laws and
regulations, stricter enforcement of existing requirements, new spills, releases
or violations or the discovery of previously unknown contamination could require
us to incur costs or become the basis for new or increased liabilities that
could have a material adverse effect on our business, results of operations or
financial condition.
WE MAY SUFFER A CATASTROPHE, COLLISION, PROPERTY LOSS, SERVICE INTERRUPTION OR
TERRORIST ACT.
The operation of any railroad carries with it an inherent risk of
catastrophe, collision and property loss. In the course of train operations,
service interruptions, derailments, spills, explosions, leaks, other
environmental events, cargo loss or damage and business interruption resulting
from adverse weather conditions or natural phenomena could result in loss of
revenues, increased liabilities or increased costs. Significant environmental
mishaps can cause serious bodily injury, death and extensive property damage,
particularly when such accidents occur in heavily populated areas. We maintain
insurance (including self-insurance) consistent with industry practice against
accident-related risks involved in the operation of our business. However, there
can be no assurance that such insurance would be sufficient to cover the cost of
damages suffered by us or damages to others or that such insurance will continue
to be available at commercially reasonable rates. Moreover, our insurance
coverage for events occurring prior to 1996 did not extend to punitive damage
awards, which are increasingly being levied in civil cases related to
environmental accidents.
While we maintain terrorism coverage under certain of our liability
insurance policies, we do not maintain such coverage under our property damage
insurance policies and do not otherwise maintain insurance coverage for
terrorist acts. Recently, the U.S. Department of Transportation issued a warning
about possible terrorist attacks on rail and transit systems in the U.S. There
can be no assurance that any accident, natural disaster or terrorist act would
not cause a significant interruption in our operations or materially adversely
affect our business, financial condition and results of operations.
WE MAY BE UNABLE TO COMPLETE THE ACQUISITION.
On August 18, 2003, Grupo TMM shareholders purportedly voted not to approve
the sale of Grupo TMM's interests in Grupo TFM to KCS. On August 23, 2003, Grupo
TMM sent a notice to KCS claiming to terminate the Acquisition Agreement,
because the Grupo TMM shareholders had failed to approve the Acquisition
Agreement. On August 29, 2003, KCS delivered to Grupo TMM a Notice of Dispute,
which initiated a 60-day negotiation period between the parties. The parties
were unable to resolve the disputes in that period of time. In addition on
August 29, 2003, KCS filed a complaint in the Delaware Chancery Court alleging
that Grupo TMM had breached the Acquisition Agreement. The Notice of Dispute and
complaint point out that the Acquisition Agreement does not provide that a
negative shareholder vote by Grupo TMM shareholders is a basis for termination,
and KCS maintains that the Acquisition Agreement is still valid and remains in
effect until December 31, 2004. On September 2, 2003, KCS filed in the Delaware
Court of Chancery a motion for preliminary injunction to preserve the parties'
positions while KCS seeks to resolve its dispute over Grupo TMM's attempt to
terminate the Acquisition Agreement. On October 28, 2003, Chancellor William B.
Chandler III of the Delaware Court of Chancery entered a written order granting
KCS' motion seeking a preliminary injunction to preserve the parties' positions
pending resolution of the dispute between KCS and Grupo TMM over the Acquisition
Agreement. On October 31, 2003, KCS initiated binding arbitration in accordance
with the terms of the Acquisition Agrement by serving an Arbitration Demand on
Grupo TMM and the American Arbitration Association. In its Arbitration Demand,
KCS seeks a determination that the Acquisition Agreement is in full force and
effect, specific performance of the Acquisition Agreement, and damages for Grupo
TMM's breach of the terms of the Acquisition Agreement and failure to negotiate
in good faith during the 60-day negotiation period. By the agreement of the
parties, the arbitration has been bifurcated. The first stage of the arbitration
will only address the question of whether Grupo TMM's purported negative
shareholder vote gave Grupo TMM the right to terminate the Acquisition
Agreement. On January 6, 2004, KCS announced that in a ruling by the Delaware
Court of Chancery regarding a motion to enforce injunction and hold Grupo TMM in
contempt in the dispute between KCS and Grupo TMM over the Acquisiton Agreement,
the court held Grupo TMM in contempt of court for taking action inconsistent
with the court's October 29, 2003 order discussed above. However, there can be
no assurance that the parties will resolve their disputes relating to the
Acquisition Agreement, or that the arbitrators or the courts will resolve the
disputes, in favor of KCS.
Even if disputes relating to the Acquisition Agreement are resolved in
favor of KCS, the consummation of the Acquisition is subject to a number of
conditions, including among others, that Grupo TMM obtain consent of the holders
of its outstanding 2003 notes and 2006 notes. Grupo TMM has disclosed in its
Form 20-F for the fiscal year ended December 31, 2002 that it sought consents in
connection with its recent exchange offers but was not successful in obtaining
such consents. On December 18, 2003, Grupo TMM announced it had reached an
agreement on the principal terms of a restructuring with an ad hoc committee of
bondholders representing approximately 43% of its 2003 Notes and its 2006 Notes,
referred to together as the Exisiting Notes. In its announcement, Grupo TMM
stated that the restructuring will be accomplished through a registered exchange
offer of new senior secured notes due 2007, referred to as New Secured Notes,
for the Existing Notes, together with a consent solicitation to amend the
indenture governing any untendered Senior Notes due 2006 and a prepackaged plan
solicitation. If the conditions to the exchange offer are not met or waived, the
restructuring will be implemented through a prepackaged plan in the United
States or, if Grupo TMM elects, in Mexico. On January 12, 2004, Grupo TMM
announced that it had received voting agreements executed by holders of
approximately 64% of the aggregate outstanding principal amount of the Existing
Notes. However, there can be no assurance that such consent solicitation will be
successful or that the other conditions to the Acquisition will be satisfied. If
the Acquisition is not consummated, the value of our investment in Grupo TFM may
become impaired.
As of September 30, 2003, KCS has recorded deferred costs of approximately
$6.1 million related to the transaction, which have been reflected in our
consolidated balance sheet pending completion of the Acquisition. We expect that
we will incur and defer additional costs related to the Acquisition. If we are
unable to complete the Acquisition, these deferred costs would be reflected as a
charge to earnings in our consolidated income statement in the period in which
such determination is made.
TFM RISK FACTORS
----------------
TFM'S SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT ITS FINANCIAL POSITION AND
ITS ABILITY TO MEET ITS OBLIGATIONS UNDER ITS DEBT SECURITIES AND TO OPERATE ITS
BUSINESS.
TFM has a significant amount of debt and significant debt service
obligations. As of December 31, 2002, TFM had total outstanding indebtedness of
$1,023.1 million, consisting of senior unsecured indebtedness under its
outstanding notes and debentures, obligations under capital leases and its new
bank facilities (its commercial paper program and its term loan facility). TFM
has no secured indebtedness. Under U.S. GAAP, TFM's shareholders' equity was
$1,133.9 million as of December 31, 2002, resulting in a debt to equity ratio of
92.2%. In addition, TFM may incur more debt, subject to the restrictions
contained in the indentures governing the existing notes and the outstanding
notes and the credit agreements governing its new commercial paper program and
term loan facility.
TFM's substantial indebtedness could interfere with its ability to pay
interest and principal on its debt and may have important consequences for its
operations and capital expenditure requirements, including the following:
o TFM will have to dedicate a substantial portion of its cash flow from
operations to the payment of principal, premium, if any, or interest
on its debt, which will reduce funds available for other purposes;
o TFM may not be able to fund capital expenditures, working capital and
other corporate requirements;
o TFM may not be able to obtain additional financing, or to obtain it at
acceptable rates;
o TFM'sability to adjust to changing market conditions and to withstand
competitive pressures could be limited, and it may be vulnerable to
additional risk if there is a downturn in general economic conditions
or its business;
o TFM may be exposed to risks in exchange rate fluctuations, because any
devaluation of the peso would cause the cost of TFM's
dollar-denominated debt to increase; and
o TFM may be at a competitive disadvantage compared to its competitors
that have less debt and greater operating and financing flexibility
than it does.
In addition, the notes issued under TFM's new commercial paper program
generally have maturities of less than 180 days, so it must either repay them or
refinance them by issuing and selling new commercial paper notes on an ongoing
basis. TFM's commercial paper program terminates on September 17, 2004 (unless
extended), so it must either repay, replace, refinance or extend the program at
that time. TFM may be unable to refinance its commercial paper program or it may
not have sufficient cash to repay this debt when it becomes due. These events
could result in a default under the respective indentures governing the existing
notes and the outstanding notes as well as the agreements governing TFM's
commercial paper program. On January 21, 2004, Moody's Investors Service, or
Moody's, announced that it had placed the B1 senior unsecured debt rating of TFM
under review for possible downgrade. Moody's announced that its review will
consider the implications of these issues as part of the current review -- the
Grupo TMM/KCS dispute, the value and rights for the VAT reimbursement, and the
obligations under the Mexican Government's put of TFM shares.
FAILURE TO COMPLY WITH RESTRICTIVE COVENANTS IN TFM'S EXISTING CONTRACTUAL
ARRANGEMENTS COULD ACCELERATE ITS REPAYMENT OBLIGATIONS UNDER ITS DEBT.
The indentures relating to TFM's outstanding notes, and the credit
agreements relating to TFM's bank facilities, contain a number of restrictive
covenants, and any additional financing arrangements it enters into may contain
additional restrictive covenants. The credit agreements relating to TFM's bank
facilities contain covenants that are more restrictive than those contained in
the indentures relating to the existing notes and the outstanding notes,
including certain financial covenants which require TFM to maintain specified
financial ratios. Any breach of these covenants could result in a default under
the indentures and the credit agreements. These covenants restrict or prohibit
many actions, including TFM's ability to:
o incur debt;
o create or suffer to exist liens;
o make prepayments of particular debt;
o pay dividends;
o make investments;
o engage in transactions with stockholders and affiliates;
o sell assets; and
o engage in mergers and consolidations or in sale-leaseback
transactions.
If TFM fails to comply with these restrictive covenants, its obligation to
repay the existing notes and the exchange notes or its other debt may be
accelerated. In addition, a default under these covenants could affect TFM's
ability to refinance its commercial paper program.
TFM MAY BE UNABLE TO GENERATE SUFFICIENT CASH TO SERVICE OR REFINANCE ITS DEBT.
TFM's ability to satisfy its obligations under its debt in the future will
depend upon its future performance, including its ability to increase revenues
significantly and control expenses. TFM's future operating performance depends
upon prevailing economic, financial, business and competitive conditions and
other factors, many of which are beyond TFM's control.
We cannot assure you that TFM's business will generate sufficient cash flow
from operations, that currently anticipated revenues and operating performance
will be realized or that future borrowings will be available to TFM in amounts
sufficient to pay its debt or to fund its other liquidity needs.
If TFM's cash flow from operations is insufficient to satisfy its
obligations, it may take specific actions, including delaying or reducing
capital expenditures, attempting to refinance its debt at or prior to its
maturity or, in the absence of such refinancing, attempting to sell assets
quickly in order to make up for any shortfall in payments under circumstances
that might not be favorable to getting the best price for the assets, or seeking
additional equity capital. TFM's ability to refinance its debt and take other
actions will depend on, among other things, its financial condition at the time,
the restrictions in the instruments governing its debt and other factors,
including market conditions, beyond TFM's control. TFM may be unable to take any
of these actions on satisfactory terms or in a timely manner. Further, any of
these actions may not be sufficient to allow TFM to meet its debt obligations.
In addition, TFM's debt agreements and, upon consummation of the Acquisition,
our debt agreements, will limit TFM's ability to take certain of these actions.
TFM's failure to successfully undertake any of these actions or to earn enough
revenues to pay its debts, or significant increases in the peso cost to service
its dollar-denominated debt, could materially and adversely affect TFM's
business or operations.
TFM'S BUSINESS IS CAPITAL INTENSIVE AND IT MUST MAKE SIGNIFICANT ADDITIONAL
CAPITAL EXPENDITURES; FAILURE TO MAKE SUCH ADDITIONAL CAPITAL EXPENDITURES COULD
RESULT IN THE REVOCATION OF TFM'S CONCESSION.
TFM's business is capital intensive and requires substantial ongoing
expenditures for, among other things, improvements to roadway, structures and
technology, acquisitions, leases and repair of equipment and maintenance of its
rail system. TFM's failure to make necessary capital expenditures could impair
its ability to accommodate increases in traffic volumes or service its existing
customers. In addition, TFM's railroad Concession from the Mexican government
requires it to make investments and undertake capital projects, including
capital projects described in a business plan filed every five years with the
Mexican government. TFM may defer capital expenditures with respect to its
five-year business plan with the permission of the Secretaria de Comunicaciones
y Transportes (Ministry of Communications and Transports or "Ministry of
Transportation"). However, the Ministry of Transportation might not grant this
permission, and TFM's failure to comply with its commitments in its business
plan could result in the Mexican government revoking the Concession.
In 2000, 2001 and 2002, TFM made capital expenditures of $66.9 million,
$85.2 million and $89.4 million, which represented 9.6%, 11.8% and 12.5% of its
transportation revenues for each of those years, respectively. These capital
expenditures include the expenses TFM expects to incur for the rehabilitation
and improvement of its secondary rail lines and the construction of new
intermodal terminals near the manufacturing plants of its automotive customers.
TFM has funded, and expects to continue to fund, capital expenditures with funds
from operating cash flows and vendor financing. TFM may not be able to generate
sufficient cash flows from its operations or obtain sufficient funds from
external sources to fund its capital expenditure requirements. Also, additional
financing may not be available to TFM. If financing is available, it may not be
obtainable on terms acceptable to TFM and within the limitations contained in
the indentures and other agreements relating to TFM's debt. If TFM is unable to
complete its planned capital improvements projects, TFM's ability to accommodate
increases in its traffic volumes or service its existing customers may be
limited or impaired, and the Mexican government could revoke TFM's Concession.
SIGNIFICANT COMPETITION FROM TRUCKS AND OTHER RAILROADS, AS WELL AS LIMITED
COMPETITION FROM THE SHIPPING INDUSTRY, COULD ADVERSELY AFFECT TFM'S FUTURE
FINANCIAL PERFORMANCE.
TFM faces significant competition from trucks and other rail carriers as
well as limited competition from the shipping industry in its freight
operations. The trucking industry is TFM's primary competition. In the past, the
trucking industry has significantly eroded the railroad's market share of
Mexico's total overland freight transportation. In some circumstances, the
trucking industry can provide effective rate and service competition because
trucking requires substantially smaller capital investments and maintenance
expenditures, and allows for more frequent and flexible scheduling.
NAFTA called for Mexican trucks to have unrestricted access to highways in
the U.S. border states by 1995 and full access to all U.S. highways by January
2000. In February 2001, a NAFTA tribunal ruled in an arbitration between the
United States and Mexico that the United States must allow Mexican trucks to
cross the border and operate on U.S. highways. However, the United States has
not followed the timetable because of concerns over Mexico's trucking safety
standards. On March 14, 2002, as part of its agreement under NAFTA, the U.S.
Department of Transportation issued safety rules that allow Mexican truckers to
apply for operating authority to transport goods beyond the 20-mile commercial
zones along the U.S.-Mexico border. These safety rules require Mexican carriers
seeking to operate in the United States to pass, among other things, safety
inspections, obtain valid insurance with a U.S. registered insurance company,
conduct alcohol and drug testing for drivers and obtain a U.S. Department of
Transportation identification number. Mexican commercial vehicles with authority
to operate beyond the commercial zones will be permitted to enter the United
States only at commercial border crossings and only when a certified motor
carrier safety inspector is on duty. Given these recent developments, we cannot
assure you that truck transport between Mexico and the United States will not
increase substantially in the future. Such an increase could affect TFM's
ability to continue converting traffic to rail from truck transport because it
may result in an expansion of the availability, or an improvement of the
quality, of the trucking services offered in Mexico. Since a key element of
TFM's business strategy is to recapture market share lost to the trucking
industry, its inability to successfully convert traffic to rail from truck
transport would materially impair its ability to achieve its strategic
objectives. There can be no assurance that TFM will have the ability to continue
to convert traffic from truck to rail transport or that TFM will retain the
customers that it has already converted. For example, in 2000 TFM lost a
significant amount of the business it derived from a major customer, as this
customer increased the use of trucks in its product distribution network.
In addition to trucks, TFM faces significant competition in some industry
segments from other railroads, in particular Ferromex, which operates the
Pacific-North Rail Lines. In particular, TFM has experienced, and continues to
experience, competition from Ferromex with respect to the transport of grain,
minerals and steel products. The rail lines operated by Ferromex run from
Guadalajara and Mexico City to four U.S. border crossings west of Laredo, Texas,
providing a potential alternative to TFM's routes for the transport of freight
from those cities to the U.S. border. Ferromex directly competes with TFM in
some areas of its service territory, including Tampico, Saltillo, Monterrey and
Mexico City. Also in direct competition for traffic to and from southeastern
Mexico is Ferrosur, which operates the Southeast Rail Lines. Ferrosur, like TFM,
serves Mexico City, Puebla and Veracruz.
Ferromex and Ferrosur are privately owned companies that may have greater
financial resources than TFM. Among other things, this advantage may give them
greater ability to reduce freight prices. Price reductions by competitors would
make TFM's freight services less competitive, and we cannot assure you that TFM
would be able to match these rate reductions. For example, TFM has experienced,
and continues to experience, aggressive price competition from Ferromex in
freight rates for agricultural products which has adversely affected its results
of operations. TFM's ability to respond to competitive measures by decreasing
its prices without adversely affecting its gross margins and operating results
will depend on, among other things, TFM's ability to reduce its operating costs.
TFM's failure to respond to competitive pressures, and particularly price
competition, in a timely manner would have a material adverse effect on its
results of operations.
Under TFM's Concession, TFM must grant to Ferromex the right to operate
over a north-south portion of our rail lines between Ramos Arizpe near Monterrey
and the city of Queretaro that constitutes over 600 kilometers of its main
track. Using these trackage rights, Ferromex may be able to compete with TFM
over its rail lines for traffic between Mexico City and the United States. TFM's
Concession also requires it to grant rights to use certain portions of its
tracks to Ferrosur and the "belt railroad" operated in the greater Mexico City
area by the Ferrocarril y Terminal del Valle de Mexico, S.A. de C.V. ("Mexico
City Railroad and Terminal"), thereby providing Ferrosur with more efficient
access to certain Mexico City industries. As a result of having to grant
trackage rights to other railroads, TFM must incur additional maintenance costs
and also lose the flexibility of using its tracks at all times.
In recent years, there has been significant consolidation among major North
American rail carriers. The resulting merged railroads could attempt to use
their size and pricing power to block other railroads' access to efficient
gateways and routing options that are currently and have been historically
available. We cannot assure you that further consolidation will not have an
adverse effect on TFM.
TFM also faces limited competition from the shipping industry with respect
to some products, including chemicals transported by barges and vessels from
Gulf of Mexico ports in Texas and Louisiana.
THE RATES FOR TRACKAGE RIGHTS SET BY THE MINISTRY OF TRANSPORTATION MAY NOT
ADEQUATELY COMPENSATE TFM.
Pursuant to TFM's Concession, it is required to grant rights to use
portions of its tracks to Ferromex, Ferrosur and the Mexico City Railroad and
Terminal. Applicable law stipulates that Ferromex, Ferrosur and the Mexico City
Railroad and Terminal are required to grant to TFM rights to use portions of
their tracks.
TFM's Concession classifies trackage rights as short trackage rights and
long-distance trackage rights. Although all of these trackage rights have been
granted under TFM's Concession, no railroad has actually operated under the
long-distance trackage rights because the means of setting rates for usage and
other related terms of usage have not been agreed upon. Under the Ley
Reglamentaria del Servicio Ferroviario (Law Regulating Railroad Services or
"Mexican railroad services law and regulations"), the rates that TFM may charge
for rights to use its tracks must be agreed upon in writing between TFM and the
party to which those rights are granted. However, if TFM cannot reach an
agreement on rates with rail carriers entitled to trackage rights on its rail
lines, the Ministry of Transportation is entitled to set the rates using
criteria including:
o the costs of infrastructure maintenance and traffic control relating
to the portion of TFM's lines to be used by the other rail operator;
o the increment in costs due to interference with TFM's operations;
o the amortized capital investments, including the value of the
Concession, directly related to the affected lines; and
o a reasonable profit calculated with reference to international
railroad standards and reflecting investment conditions in Mexico.
TFM and Ferromex have not been able to agree upon the rates each of them is
required to pay the other for interline services and haulage and trackage
rights. Therefore, in accordance with its rights under the Mexican railroad
services law and regulations, in February 2001, TFM initiated an administrative
proceeding requesting a determination of such rates by the Ministry of
Transportation.
In September 2001, Ferromex filed a legal claim against TFM relating to the
payments that TFM and Ferromex are required to make to each other for interline
services and trackage and haulage rights. TFM has indicated it believes that
this legal claim is without merit, and that the payments for interline services
and trackage and haulage rights owed to TFM by Ferromex exceed the amount of
payments that Ferromex claims TFM owes to Ferromex for such services and rights.
Accordingly, TFM has indicated it believes that the outcome of this legal claim
will not have a material adverse effect on the financial condition of TFM. On
September 25, 2002, the third civil court of Mexico City rendered its judgment
in TFM's favor. Ferromex has appealed the judgment, and we cannot predict
whether TFM will ultimately prevail.
In connection with the Ferromex claim, Ferromex temporarily prevented TFM
from using certain short trackage rights which TFM has over a portion of its
route running from Celaya to Silao, which is the site of a General Motors plant
from where TFM transports finished vehicles to the border crossing at Nuevo
Laredo. Ferromex was subsequently ordered by the court to resume giving TFM
access, and in October 2001, TFM filed a counterclaim against Ferromex relating
to these actions.
In March 2002, the Ministry of Transportation issued its ruling in response
to TFM's request, establishing a rate to be charged for trackage rights using
the criteria set forth in the Mexican railroad services law and regulations. TFM
is appealing the ruling on the grounds that it fails to establish rates for
interline service and because TFM disagrees with the methodology applied to the
criteria in calculating the trackage rights rates. TFM also requested and
obtained a suspension of the effectiveness of the ruling pending resolution of
its appeal.
We cannot predict whether TFM will ultimately prevail in this proceeding
and whether the rates TFM is ultimately allowed to charge will be adequate to
compensate TFM. TFM has indicated it believes that, even if the rates
established in the ruling go into effect and TFM and Ferromex begin using the
long-distance trackage rights over each other's rail line, this will not have a
material adverse effect on TFM's results of operations. However, we cannot
guarantee that TFM's competitors' usage of its rail lines will not result in TFM
losing business or that its losses will be offset by revenues generated from the
payments for the rights to use its tracks. The occurrence of any of these events
could have a material adverse effect on TFM's results of operations. A separate
ruling was issued confirming TFM's right to the Celaya-Silao stretch of Ferromex
track.
RECENT TERRORIST ACTIVITIES AND GEOPOLITICAL EVENTS AND THEIR CONSEQUENCES COULD
ADVERSELY AFFECT TFM'S OPERATIONS.
As a result of the terrorist attacks in the United States on September 11,
2001, and the recent war involving, among others, the United States and Iraq,
there has been increased short-term market volatility, and there may be
long-term effects on U.S. and world economies and markets.
Terrorist attacks may negatively affect TFM's operations. The continued
threat of terrorism within the United States and abroad and the potential for
military action and heightened security measures in response to such threat may
cause significant disruption to commerce throughout the world, including
restrictions on cross-border transport and trade. In addition, related political
events may cause a lengthy period of uncertainty that may adversely affect TFM's
business. There can be no assurance that there will not be further large-scale
terrorist attacks. Political and economic instability in other regions of the
world, including the United States and Canada, may also result and could
negatively impact TFM's operations. The consequences of terrorism and the
responses thereto are unpredictable, and could have an adverse effect on TFM's
operations.
DOWNTURNS IN GLOBAL ECONOMIC CONDITIONS, IN THE U.S. ECONOMY, IN U.S.-MEXICO
TRADE OR IN CERTAIN CYCLICAL INDUSTRIES IN WHICH TFM'S CUSTOMERS OPERATE COULD
ADVERSELY AFFECT ITS BUSINESS AND RESULTS OF OPERATIONS.
TFM believes that traffic that crosses the U.S. border on its rail lines
generates the majority of its freight revenue. As a result, the level and timing
of TFM's business activity is, and will continue to be, strongly influenced by
the level of U.S.-Mexican trade and the effects of NAFTA or other international
trade agreements on such trade. Downturns in global economic conditions, in the
U.S. or Mexican economy or in trade between the United States and Mexico will
likely have adverse effects on TFM's business and results of operations. Mexican
exports to the United States of manufactured goods, beer, metals and minerals,
automobiles, chemical and petrochemical products and other products, many of
which TFM transports, are an important element of U.S.-Mexico trade. In
addition, a significant portion of TFM's business consists of imports into
Mexico from the United States. The level of TFM's business activity depends
heavily on the U.S. and Mexican economies and markets, the relative
competitiveness of Mexican and U.S. products at any given time and existing and
new tariffs or other barriers to trade. For example, the recent downturn in the
U.S. economy has had an adverse effect on TFM's revenues in all product
categories, particularly in the automotive and industrial segments. This
downturn may continue and could worsen, thereby having a material adverse effect
on TFM's results of operations and its ability to meet its debt service
obligations as described above.
Some of TFM's customers operate in industries that experience cyclicality,
including the oil and gas, automotive and agricultural sectors. Any downturn in
these sectors due to the effects of cyclicality, or otherwise, could have a
material adverse effect on TFM's operating results. Also, some of the products
TFM transports have had a historical pattern of price cyclicality which has
typically been influenced by the general economic environment and by industry
capacity and demand. For example, global steel and petrochemical prices have
decreased in the past. We cannot assure you that prices and demand for these
products will not decline in the future, adversely affecting those industries
and, in turn, TFM's financial results.
Fluctuations in the peso-dollar exchange rate could lead to shifts in the
types and volumes of Mexican imports and exports. Although a decrease in the
level of exports of some of the commodities that TFM transports to the United
States may be offset by a subsequent increase in imports of other commodities
TFM hauls into Mexico and vice versa, any offsetting increase might not occur on
a timely basis, if at all. Future developments in U.S.-Mexico trade beyond TFM's
control may result in a reduction of freight volumes or in an unfavorable shift
in the mix of products and commodities it transports.
POTENTIAL LABOR DISRUPTIONS COULD ADVERSELY AFFECT TFM'S FINANCIAL CONDITION AND
ITS ABILITY TO MEET ITS OBLIGATIONS UNDER ITS DEBT.
Approximately 73% of TFM's employees are covered by a labor agreement. The
compensation terms of the labor agreement are subject to renegotiation on an
annual basis and all other terms are renegotiated every two years. TFM may not
be able to negotiate these provisions favorably under its labor agreement, and
strikes, boycotts or other disruptions could occur. These potential disruptions
could have a material adverse effect on TFM's financial condition and results of
operations and on its ability to meet its payment obligations under its debt.
THE MEXICAN GOVERNMENT MAY REVOKE OR RESTRICT TFM'S ABILITY TO EXPLOIT ITS
CONCESSION UNDER A NUMBER OF CIRCUMSTANCES.
Under the Concession and Mexican law, TFM may freely set its rates for rail
freight services unless the Mexican Antitrust Commission determines that there
is no effective competition, taking into account alternative rail routes and
modes of transportation. If the Mexican Antitrust Commission determines that
there is a lack of competition in the railroad system, the Ministry of
Transportation will establish the basis for TFM's rates. TFM's rates must be
registered and applied in accordance with the Mexican railroad services law and
regulations. In applying its rates, TFM must not make cross-subsidies, engage in
tied sales or engage in other discriminatory pricing tactics. TFM is required to
provide railroad services to all users on a fair and non-discriminatory basis
and in accordance with the efficiency and safety standards approved periodically
by the Ministry of Transportation. In the event that TFM collects from customers
rates higher than the registered rates, it must reimburse those customers with
interest. Since the Mexican government only recently privatized Mexico's rail
system and opened the rail industry to competition, the Mexican Antitrust
Commission has not considered the issue of, or published guidelines concerning,
what constitutes a lack of competition. It is therefore unclear under what
circumstances the Mexican Antitrust Commission would deem a lack of competition
to exist. If the Ministry of Transportation does intervene and sets tariffs, the
rates it sets may be too low to allow TFM to operate profitably.
The Mexican government may terminate the Concession as a result of TFM's
surrender of its rights under the Concession, or for reasons of public interest,
by revocation or upon TFM's liquidation or bankruptcy. The Mexican government
may also temporarily seize TFM's assets and its rights under the Concession. The
Mexican railroad services law and regulations provide that the Ministry of
Transportation may revoke the Concession upon the occurrence of specified
events, some of which will trigger automatic revocation.
Revocation or termination of the Concession would prevent TFM from
operating its railroad and would materially adversely affect TFM's operations
and its ability to make payments on its debt. In the event that the Concession
is revoked by the Ministry of Transportation, TFM will receive no compensation,
and its rail lines and all other fixtures covered by the Concession, as well as
all improvements made by it, will revert to the Mexican government. All other
property not covered by the Concession, including movable railroad property TFM
purchased from the Mexican government, as well as all locomotives and railcars
it otherwise acquired, will remain TFM's property. However, TFM's ability to
sell this property will be restricted, and the Mexican government will have
certain rights to purchase or lease such property from TFM.
The Ministry of Transportation has agreed that, except with respect to
those events which constitute grounds for automatic revocation of the
Concession, it will notify those creditors which provided financing for Grupo
TFM's acquisition of its equity interest in TFM in 1997 and are identified by
TFM and Grupo TFM to the Ministry of Transportation of all events which
constitute grounds for revocation of the Concession and will allow such
creditors, with the Ministry of Transportation's prior written consent, the
opportunity to nominate a party to assume the Concession. The Concession would
be automatically revoked in the case of: TFM's unjustified interruption of the
operation of its rail lines; TFM's assignment of or creation of liens on the
Concession without the Ministry of Transportation's approval; and TFM's failure
to maintain insurance coverage required under the Mexican railroad services law
and regulations. In addition, if the Concession is terminated by revocation,
permanent seizure of its rail lines, or upon the liquidation or bankruptcy of
TFM, then profits received by the Mexican government or by a third party
concessionaire from the operation and exploitation of our rail lines shall
continue to be committed to repay creditors that provided financing to TFM for
work projects directly related to the rendering of railroad services and
performed on the rail lines.
If the Mexican government terminates the Concession for reasons of public
interest, public domain assets used in the operation of TFM's rail lines would
be owned, controlled and managed by the Mexican government. The Mexican
government may also temporarily seize TFM's rail lines and TFM's assets used in
connection with its operations of its rail lines in the case of a natural
disaster, war, significant public disturbances, or imminent danger to the
domestic peace or economy. In such events, the Ministry of Transportation may
restrict TFM's ability to exploit the Concession fully for such time and in such
manner as the Ministry of Transportation deems necessary under the
circumstances.
Mexican law requires that the Mexican government pay TFM compensation if it
effects a statutory appropriation for reasons of the public interest. With
respect to a temporary seizure due to any cause other than international war,
the Mexican railroad services law and regulations provide that the Mexican
government will indemnify an affected concessionaire for an amount equal to
damages caused and losses suffered. These payments may not be sufficient to
compensate TFM for our losses and may not be timely made.
TRAFFIC CONGESTION OR SIMILAR PROBLEMS EXPERIENCED IN THE U.S. OR MEXICAN
RAILROAD SYSTEM MAY ADVERSELY AFFECT TFM'S OPERATIONS.
Traffic congestion experienced in the U.S. railroad system may result in
overall traffic congestion which would impact the ability to move traffic to and
from Mexico and adversely affect TFM's operations. This system congestion may
result also in certain equipment shortages. Any similar congestion experienced
by railroads in Mexico could have an adverse effect on TFM's business and
results of operations. In addition, the rapid growth of cross-border traffic in
recent years has contributed to congestion on the international bridge at the
Laredo border gateway which is expected to continue in the near future. This
could adversely affect TFM's business.
CONFLICTS HAVE ARISEN INVOLVING TFM'S STRATEGIC PARTNERS AND, AS A RESULT, TFM'S
BUSINESS AND OPERATIONS COULD BE ADVERSELY AFFECTED.
TFM is a subsidiary of Grupo TFM, which holds 80.0% of its equity,
representing 100.0% of its shares with unrestricted voting rights. Grupo TMM and
KCS are the principal shareholders of Grupo TFM. As a result of their indirect
ownership of TFM's capital stock, Grupo TMM and KCS are able to direct TFM's
policies and operations and elect all but one of TFM's directors. Although Grupo
TMM holds a majority voting interest in Grupo TFM, the bylaws of Grupo TFM and
TFM require that decisions on certain material matters require the approval of
the representatives of both of Grupo TMM and KCS.
Grupo TMM and KCS are currently in dispute over Grupo TMM's attempt to
terminate the Acquisition Agreement. This dispute could adversely affect TFM's
operations and business.
In addition, Grupo TMM has announced it had reached an agreement on the
principal terms of a restructuring with an ad hoc committee of bondholders
representing approximately 43% of its 2003 Notes and its 2006 Notes (together,
the "Existing Notes"), in the aggregate principal amounts outstanding of $176.9
million and $200 million, respectively. In its announcement, Grupo TMM stated
that the restructuring will be accomplished through a registered exchange offer
of new senior secured notes for the Existing Notes, together with a consent
solicitation to amend the indenture governing any untendered 2006 Notes and a
prepackaged plan solicitation. Grupo TMM has also announced that it has received
voting agreements executed by holders of approximately 64% of the aggregate
outstanding principal amount of the Existing Notes. However, if the conditions
to the exchange offer are not met or waived, the restructuring will be
implemented through a prepackaged bankruptcy plan in the United States or, if
Grupo TMM elects, in Mexico. If Grupo TMM does go into a bankruptcy
reorganization, it could result in a change of Grupo TMM's busines strategy or
even ownership of its subsidiaries that hold control over Grupo TFM. This could
have a material adverse effect on TFM's ability to operate successfully.
In addition, although the trucking and specialized shipping operations of
Grupo TMM are generally complementary to, and not competitive with TFM's
operations, it is possible that they will compete with TFM's operations. Also,
KCS or Grupo TMM may at times be required to negotiate with TFM with respect to
the allocation of revenues generated by shipments both over TFM's rail lines and
by KCSR. Conflicts of interest with or between these strategic partners could
have a material adverse effect on TFM's ability to operate successfully.
TFM'S BUSINESS STRATEGY, OPERATIONS AND GROWTH RELY SIGNIFICANTLY ON THIRD
PARTIES.
TFM's operations are dependent on interchange agreements that it has
negotiated with major U.S. railroads in the north, Ferromex in the west and
Ferrosur in the south of Mexico. TFM also has trackage rights agreements with
Ferrosur and a terminal operations agreement with the Mexico City Railroad and
Terminal and it is negotiating and expects to have a trackage rights agreement
with Ferromex. In addition, TFM and each of the concessionaires of Ferromex and
Ferrosur has a 25.0% interest in the Mexico City Railroad and Terminal. These
agreements enable TFM to exchange traffic and utilize trackage which is not part
of its rail system, extending our network and providing it with strategically
important rail links to the United States and to areas of Mexico that it does
not directly serve. TFM's ability to provide comprehensive service to its
customers will depend in part on its ability to maintain these agreements with
other railroads and third parties. TFM's failure to enter into these agreements,
or the termination of these agreements, could adversely affect its business,
financial condition and results of operations. The other parties to these
agreements may not faithfully execute their obligations under their agreements
or arrangements with TFM, and may become TFM's competitors. The failure of any
of these parties to fulfill its obligations to TFM could adversely affect TFM's
financial condition and results of operations. In addition, TFM may not be able
to coordinate its interchange and switching activities with these other
concessionaires and railroads in an efficient manner. Inefficient coordination
of our interchange and switching activities would negatively impact TFM's
operating results.
IF TFM'S PRIMARY FUEL SUPPLY CONTRACT IS TERMINATED, OR IF FUEL PRICES
SUBSTANTIALLY INCREASE, TFM'S OPERATIONS COULD BE ADVERSELY AFFECTED.
Nearly all of the locomotives TFM operates are diesel-powered, and its fuel
expenses are significant. TFM currently meets, and expects to continue to meet,
its fuel requirements almost exclusively through purchases at market prices from
Petroleos Mexicanos (Mexican Petroleum or "PEMEX"), a government-owned entity
exclusively responsible for the distribution and sale of diesel fuel in Mexico.
TFM is party to a fuel supply contract with PEMEX of indefinite duration. Either
party may terminate the contract upon 30 days' written notice to the other at
any time. If the fuel contract terminates and TFM is unable to acquire diesel
fuel from alternative sources on acceptable terms, TFM's operations could be
materially adversely affected. In addition, instability in the Middle East may
result in an increase in fuel prices. Since TFM's fuel expense represents a
significant portion of its operating expenses, significant increases in the
price of diesel fuel could have a material adverse effect on its results of
operations. TFM experienced increases of 61.3%, 21.6% and 17.9% in its average
price of fuel per gallon in 2000, 1999 and 1998, respectively, which resulted in
increases in its fuel expense for each of these periods. In 2001, TFM's fuel
costs decreased by 8.7% from 2000. In 2002, TFM's fuel costs decreased by 15.5%
from 2001. The price of diesel fuel has increased significantly recently which
could have an adverse effect on TFM's future results of operations.
TFM FACES POSSIBLE CATASTROPHIC LOSS AND LIABILITY.
The operation of any railroad carries with it an inherent risk of
catastrophe, mechanical failure, collision and property loss. In the course of
TFM's operation, spills or other environmental mishaps, cargo loss or damage,
business interruption due to political developments, as well as labor disputes,
strikes and adverse weather conditions, could result in a loss of revenues,
liabilities or increased costs. Collisions, environmental mishaps or other
accidents can cause serious bodily injury, death and extensive property damage,
particularly when such accidents occur in heavily populated areas. Additionally,
TFM's operations may be affected from time to time by natural disasters such as
earthquakes, volcanoes, hurricanes or other storms. The occurrence of a major
natural disaster, especially in the Mexico City area, which is the site of the
Mexico City Railroad and Terminal and significant portions of TFM's customer
base, could have a material adverse effect on TFM's operations. TFM has acquired
insurance that is consistent with industry practice against the accident-related
risks involved in the conduct of its business and business interruption due to
natural disaster. However, this insurance is subject to a number of limitations
on coverage, depending on the nature of the risk insured against. This insurance
may not be sufficient to cover TFM's damages or damages to others, and this
insurance may not continue to be available at commercially reasonable rates.
Even with insurance, if any catastrophic interruption of service occurs, TFM may
not be able to restore service without a significant interruption to operations.
TFM FACES POTENTIAL ENVIRONMENTAL LIABILITY.
TFM's operations are subject to general Mexican federal and state laws and
regulations relating to the protection of the environment. The Procuraduria
Federal de Proteccion al Ambiente (Attorney General for Environmental
Protection) is empowered to bring administrative proceedings and impose
corrective actions and economic sanctions against companies that violate
environmental laws, and temporarily or permanently close non-complying
facilities. The Secretaria del Medio Ambiente y Recursos Naturales (Ministry of
the Environment and Natural Resources) and other ministries have promulgated
compliance standards for, among other things, water discharge, water supply, air
emissions, noise pollution, hazardous substances transportation and handling,
and hazardous and solid waste generation.
TFM is responsible for the costs of environmental compliance associated with its
ongoing operations. Pursuant to TFM's Concession, Ferrocarriles Nacionales de
Mexico, S.A. de C.V. ("FNM") is responsible for any environmental damage caused
before the commencement of TFM's operations, and both the Mexican government and
FNM will indemnify TFM for any environmental liability relating to soil, subsoil
or groundwater contamination arising from acts or omissions attributable to FNM
that occurred before Grupo TFM's acquisition of TFM's shares. However, the
Mexican government is not obligated to compensate TFM for any expenses that it
incurs in complying with any amended environmental laws or regulations relating
to our ongoing operations or activities that impose higher regulatory standards
than those in effect on the date the Concession was granted. TFM cannot predict
the effect, if any, that the adoption of additional or more stringent
environmental laws and regulations would have on our results of operations, cash
flows or financial condition. TFM may also incur other environmental liabilities
with respect to U.S. environmental laws in connection with its ownership of
Mexrail. The U.S. Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA" or "Superfund") and similar state laws (known as
Superfund laws) impose liability for the cost of remedial or removal actions,
natural resources damages and related costs at certain sites identified as
posing a threat to the environment or public health. CERCLA imposes strict
liability on the owners and operators of facilities in which hazardous waste and
other hazardous substances are deposited or from which they are released or are
likely to be released into the environment. Liability may be imposed, without
regard to fault or the legality of the activity, on certain classes of persons,
including the current and certain prior owners or operators of a site and
persons that arranged for the disposal or treatment of hazardous substances.
Liability is imposed on a joint and several basis. In addition, other
potentially responsible parties, adjacent landowners or other third parties may
initiate cost recovery actions or toxic tort litigation against sites subject to
CERCLA or similar state laws.
TFM COULD BE SUBJECT TO THIRD PARTY CLAIMS OR LEGAL ACTIONS AS A CONSEQUENCE OF
THE RULING ISSUED BY THE MEXICAN FISCAL COURT IN CONNECTION WITH THE VAT REFUND.
On July 9, 2003, TFM was formally notified by the Mexican appellate court
of its June 11, 2003 judgment which granted TFM constitutional protection
against the ruling of the Mexican Fiscal Court issued on December 6, 2002, which
had denied TFM the right to receive the Value Added Tax ("VAT") refund. The
Mexican appellate court's judgment ordered the Mexican Fiscal Court to vacate
its December 6, 2002 resolution, and to issue a new resolution following the
guidelines of the Mexican appellate court's judgment. The Mexican appellate
court found that the VAT refund certificate had not been delivered to TFM, and
confirmed the Mexican Fiscal Court's determination that TFM has the right to
receive the VAT refund certificate. The Mexican appellate court's ruling states
that the Mexican Treasury's decision denying delivery of the VAT refund
certificate to TFM violated the law, and it instructs that the VAT reimbursement
certificate be issued to TFM on the terms established by Article 22 of the
Mexican Federal Fiscal Code in effect at that time. As a result of this ruling,
the case was remanded to the Mexican Fiscal Court. On August 14, 2003, Grupo TMM
announced that in a public session held August 13, the Mexican Fiscal Court
issued a resolution regarding TFM's VAT Claim (defined below) vacating its
previous resolution of December 6, 2002, and, in strict compliance with the
ruling issued on June 11, 2003 by the Mexican appellate court, resolved that TFM
had proved its case, and that a "ficta denial" occurred, declaring such denial
null and void as ordered by the Mexican appellate court. On October 3, 2003,
Grupo TMM announced that the Tax Attorney of the Mexican Government has filed
for a review of the ruling, and in November 2003, the Mexican appellate court
dismissed the tax authorities appeal. On January 20, 2004, KCS announced that
TFM received, on January 19, 2004, a Special Certificate from the Mexican
Federal Treasury in the amount of 2,111,111,790 pesos. The Special Certificate
has the same face amount as the VAT refund claimed by TFM.
On January 21, 2004, KCS announced that TFM was served on January 20, 2004
with an official letter notifying TFM of the Mexican Government's findings and
conclusions arising from its tax audit of TFM's tax return for the fiscal year
ended December 31, 1997 ("Tax Audit Summary." In the Tax Audit Summary, the
Mexican Government notified TFM of its conclusion that the documentation
provided by TFM in support of the value added tax payment and depreciation of
the TFM concession title and the assets reported on TFM's 1997 tax return do not
comply with the formalities required by the applicable tax legislation. The Tax
Audit Summary also creates a provisional administrative attachment of the value
added tax refund certificate received by TFM on Januaary 19, 2004 from the
Mexican Federal Treasury in the amount of 2,111,111,790.00 pesos. By the terms
of the Tax Audit Summary, TFM has 20 business days to present evidence to the
Mexican Government in support of its position. KCS is currently reviewing the
Tax Audit Summary with its legal advisors and with TFM officers. KCS will,
following the completion of its legal review of the Tax Audit Summary, take the
appropriate actions to support TFM's right to claim on its 1997 tax return
depreciation and tax credits arising form the Northeast Railroad Company's,
TFM's predecessor in interest, purchase of the assets and concession title from
the Mexican National Railway Company as part of the privatization of the Mexican
national railway system in 1997. The Company expects TFM to respond to SAT's
preliminary audit conclusions and to take all other legal actions required to
establish the validity of the deductions taken and the recordation of the VAT
receivable. However, should the SAT's preliminary determination that TFM does
not have a tax basis in the concession title and other assets purchased from the
Mexican Government in the amount of approximately $1.4 billion dollars becomes
final and is not subject to any further judicial challenge, then the resulting
accounting adjustments at TFM and Grupo TFM from the inability of TFM to
depreciate for tax purposes the concession title and other assets purchased from
the Mexican Government would have a material adverse impact on KCS.
We cannot at this point in time be certain as to the amount or timing of
any VAT refund recovery. In addition, a third party claim or legal action could
be brought against TFM as a consequence of the ruling issued by the Mexican
Fiscal Court. Although TFM has indicated that it believes it would have
sufficient legal defenses should such an action or claim be brought against TFM,
there can be no assurance that TFM would prevail in such action or claim. If TFM
does not prevail in any such action or claim, this could adversely affect TFM's
financial condition and results of operations.
FACTORS RELATED TO MEXICO
-------------------------
MEXICAN REGULATORY, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH EMERGING MARKET
ECONOMIES COULD ADVERSELY AFFECT TFM'S FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The Mexican government has exercised, and continues to exercise,
significant influence over the Mexican economy. Accordingly, Mexican
governmental actions concerning the economy and state-owned enterprises could
have a significant impact on Mexican private sector entities in general and TFM
in particular, as well as on market conditions, prices and returns on Mexican
securities, including TFM's outstanding notes and debentures. TFM's financial
condition, results of operations and prospects and, consequently, the price for
its outstanding notes and debentures, may also be affected by currency
fluctuations, inflation, interest rates, regulation, taxation, social
instability and other political, social and economic developments in or
affecting Mexico.
The national elections held on July 2, 2000 ended 71 years of rule by the
Institutional Revolutionary Party ("PRI") with the election of President Vicente
Fox Quesada, a member of the National Action Party ("PAN") and resulted in the
increased representation of opposition parties in the Mexican Congress and in
mayoral and gubernatorial positions. Although there have not yet been any
material adverse repercussions resulting from this political change, multiparty
rule is still relatively new in Mexico and could result in economic or political
conditions that could materially and adversely affect TFM's operations. We
cannot predict the impact that this political landscape will have on the Mexican
economy.
Securities of companies in emerging market countries tend to be influenced
by economic and market conditions in other emerging market countries. Emerging
market countries have recently been experiencing significant economic downturns
and market volatility. These events have had an adverse effect on the economic
conditions and securities markets of other emerging market countries, including
Mexico.
The Mexican economy in the past has suffered balance of payment deficits
and shortages in foreign exchange reserves. There are currently no exchange
controls in Mexico; however, Mexico has imposed foreign exchange controls in the
past. Pursuant to the provisions of NAFTA, if Mexico experiences serious balance
of payment difficulties or the threat thereof in the future, Mexico would have
the right to impose foreign exchange controls on investments made in Mexico,
including those made by U.S. and Canadian investors. Any restrictive exchange
control policy could adversely affect TFM's ability to obtain dollars or to
convert pesos into dollars for purposes of making payments of principal,
premium, if any, and interests due on its indebtedness, to the extent that it
may have to effect those conversions. This could have a material adverse effect
on TFM's business and financial condition.
In addition, the value of the peso relative to the dollar has been volatile
in the past. Greater than 50% of TFM's revenues for the year ended December 31,
2002 were denominated in U.S. Dollars. After a five-year period of controlled
devaluation of the peso, on December 19, 1994 the value of the peso dropped
sharply as a result of pressure against the currency. This decline, among other
factors, precipitated an economic crisis in Mexico that continued for several
years. In 2002, the peso depreciated 12.8% against the dollar. Any future
devaluations in the peso and currency instability could make it difficult for
TFM to purchase dollars and to service its dollar-denominated obligations.
Further, any additional devaluation of the peso would cause the peso cost of
TFM's dollar-denominated debt to increase. Furthermore, currency instability may
affect the balance of trade between the United States and Mexico.
Mexico also has a history of high levels of inflation, and may experience
inflation in the future. During most of the 1980s and during the mid- and late
1990s, Mexico experienced periods of high levels of inflation. The annual rates
of inflation, as measured by changes in the Mexican National Consumer Price
Index, for the years from 1997 through 2002 as provided by Banco de Mexico,
Mexico's central bank, were:
1997 .............................................. 15.7%
1998 .............................................. 18.6%
1999 .............................................. 12.3%
2000 .............................................. 9.0%
2001 .............................................. 4.4%
2002 .............................................. 5.7%
A substantial increase in the Mexican inflation rate would have the effect
of increasing TFM's costs including salaries, some purchased services and other
costs denominated in pesos, which could adversely affect TFM's results of
operations and financial condition. High levels of inflation may also affect the
balance of trade between the United States and Mexico, which could also
adversely affect TFM's results of operations.
Mexican political events may also affect significantly TFM's operations and
the performance of Mexican securities, including its outstanding notes and
debentures. In addition, a change in economic policy could have a material
adverse effect on TFM's business, financial condition, prospects and results of
operation.
We are unable to predict whether any future political or economic events in
Mexico could impact the Mexican transportation regulatory environment.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the Series C
Preferred Stock or the common stock contemplated by this prospectus. Please read
"Selling Securityholders" for a list of the persons receiving proceeds from the
sale of the Series C Preferred Stock or the underlying common stock.
BUSINESS
We, along with our subsidiaries and affiliates, own and operate a uniquely
positioned North American rail network strategically focused on the growing
north/south freight corridor that connects key commercial and industrial markets
in the central United States with major industrial cities in Mexico. Our
principal subsidiary, KCSR, which was founded in 1887, is one of seven Class I
railroads in the United States. Our rail network (KCSR, TFM and Tex-Mex) is
comprised of approximately 6,000 miles of main and branch lines. Through a
strategic alliance with Canadian National Railway Company ("CN") and Illinois
Central Corporation ("IC") (together "CN/IC"), we have access to a contiguous
rail network of approximately 25,000 miles of main and branch lines connecting
Canada, the United States and Mexico. Management believes that, as a result of
the strategic position of our rail network, we are poised to continue to benefit
from the growing north/south trade between the United States, Mexico and Canada
promoted by NAFTA.
Our rail network interconnects with all other Class I railroads and
provides shippers with an effective alternative to other railroad routes, giving
direct access to Mexico and the southeastern and southwestern United States
through less congested interchange hubs.
Our rail network links directly to major trading centers in Mexico through
Tex-Mex and TFM. TFM operates a railroad that runs from the U.S./Mexico border
at Laredo, Texas to Mexico City and serves most of Mexico's principal industrial
cities and three of its major shipping ports. On May 9, 2003, KCS acquired from
TFM for cash 51% of the shares of Mexrail, which owns 100% of Tex-Mex, and
deposited the Mexrail shares into an irrevocable voting trust pending resolution
of KCS's application to the STB seeking authority to exercise common control
over Tex-Mex and KCS's other rail companies, KCSR and Gateway Eastern. However,
on September 30, 2003, KCS returned its 51% interest in Mexrail to TFM. TFM now
owns 100% of Mexrail. Tex-Mex operates between Laredo and the port city of
Corpus Christi, Texas and with trackage rights connects to KCSR at Beaumont,
Texas. TFM, through its Concession with the Mexican government, has the right to
control and operate the southern half of the rail-bridge at Laredo and, TFM
indirectly through its ownership of Mexrail, owns the northern half of the
rail-bridge at Laredo, which spans the Rio Grande River between the United
States and Mexico. Our principal international gateway is at Laredo, where more
than 50% of all rail and truck traffic between the United States and Mexico
crosses the border.
Our rail network is further expanded through our strategic alliance with
CN/IC and marketing agreements with Norfolk Southern Railway Company ("Norfolk
Southern"), The Burlington Northern and Santa Fe Railway Company ("BNSF") and
the Iowa, Chicago & Eastern Railroad Corporation ("IC&E" - formerly I&M Rail
Link, LLC). The CN/IC alliance connects Canadian markets with major midwestern
and southern markets in the United States as well as with major markets in
Mexico through KCSR's connections with Tex-Mex and TFM. Marketing agreements
with Norfolk Southern allow us to capitalize on our east/west route from
Meridian, Mississippi to Dallas, Texas ("Meridian Speedway") to gain incremental
traffic volume between the southeast and the southwest. The marketing alliance
with BNSF was developed to promote cooperation, revenue growth and extend market
reach for both railroads in the United States and Canada. It is also designed to
improve operating efficiencies for both KCSR and BNSF in key market areas, as
well as provide customers with expanded service options. KCSR's marketing
agreement with IC&E provides access to Minneapolis, Minnesota and Chicago and to
originations of corn and other grain in Iowa, Minnesota and Illinois.
We also owns 50% of the common stock (or a 42% equity interest) of PCRC,
which holds the concession to operate a 47-mile coast-to-coast railroad located
adjacent to the Panama Canal. The railroad handles containers in freight service
across the isthmus. Panarail, a wholly owned subsidiary of PCRC, operates a
commuter and tourist railway service over the lines of the Panama Canal Railway.
Passenger service commenced during the third quarter of 2001 and freight service
started during the fourth quarter of 2001.
Additional information concerning us is included in our reports and other
documents incorporated by reference in this prospectus. Please read "Where You
Can Find More Information."
DESCRIPTION OF THE ACQUISITION
OVERVIEW
On April 20, 2003, KCS entered into the Acquisition Agreement with Grupo
TMM under which KCS ultimately would acquire control of TFM through the purchase
of shares of common stock of Grupo TFM. Grupo TFM holds an 80% economic interest
in TFM and all of the TFM Voting Stock. The remaining 20% economic interest in
TFM is owned by the Mexican government in the form of shares with limited voting
rights. KCS currently owns a 46.6% economic interest in Grupo TFM and 49.0% of
the shares of common stock of Grupo TFM entitled to full voting rights. On
February 27, 2002, KCS, Grupo TMM, and certain of Grupo TMM's affiliates entered
into a stock purchase agreement with TFM to sell to TFM all of the common stock
of Mexrail. The sale closed on March 27, 2002 and KCS received approximately
$31.4 million for its 49% interest in Mexrail. On May 9, 2003, KCS acquired from
TFM for $32.7 million in cash 51% of the shares of Mexrail, which owns 100% of
Tex-Mex. KCS deposited the Mexrail shares into a voting trust pending resolution
of KCS's application to the STB seeking authority to exercise common control
over Tex-Mex and KCS's other rail companies, KCSR and Gateway Eastern. However,
on September 30, 2003, in accordance with the terms of the Stock Purchase
Agreement, TFM repurchased from KCS the 51% interest in Mexrail acquired by KCS
in May 2003. Upon this repurchase by TFM, the Stock Purchase Agreement
automatically terminated. The repurchase price was the price paid by KCS for
these shares in May 2003. According to the terms of the Acquisition Agreement
and certain related agreements (described in detail below), KCS will issue:
o 18,000,000 shares of Class A Convertible Common Stock to Multimodal
upon the closing of the Acquisition;
o at KCS's option, up to 6,400,000 shares of Class A Convertible Common
Stock or Common Stock in lieu of a portion of the $200 million
consideration to be paid in cash at the closing of the Acquisition
Agreement; and
o up to 2,625,000 shares of restricted Common Stock pursuant to the
Consulting Agreement.
The securities to be issued in connection with the Acquisition represent in the
aggregate more than 20% of the issued and outstanding shares of KCS Common
Stock.
SUMMARY OF THE ACQUISITION AGREEMENT AND RELATED AGREEMENTS
The following summary of the terms and provisions of the Acquisition
Agreement, First Amendment to Rights Agreement, Stockholders' Agreement,
Registration Rights Agreement, Consulting Agreement, Marketing and Services
Agreement, Agreement of Assignment and Assumption of Rights, Duties and
Obligations and Stock Purchase Agreement is qualified in its entirety by
reference to each of those documents, each of which are exhibits to the
registration statement of which this prospectus forms a part. You should read
these agreements carefully for more details regarding the provisions described
below and for other provisions that may be important to you.
THE ACQUISITION AGREEMENT
Upon the terms and subject to the conditions of the Acquisition Agreement,
dated April 20, 2003, by and among KCS, KARA Sub, Grupo TMM, TMM Holdings and
Multimodal, KCS would acquire all of the interest of Multimodal in Grupo TFM for
consideration to Multimodal of $200 million and 18 million shares of KCS Class A
Convertible Common Stock. The Acquisition will be accomplished in three steps,
the Stock Purchase, the Subsidiary Investment and the Merger described below
(and together comprising the Acquisition), all occurring sequentially and
virtually simultaneously as follows:
(1) THE STOCK PURCHASE. KARA Sub will purchase from Multimodal all Grupo
TFM shares held by Multimodal, consisting of 25,500 shares of Series "A"
fixed capital stock of Grupo TFM and 3,842,901 shares of Series "A"
variable capital stock of Grupo TFM. The purchase price to be paid by KARA
Sub to Multimodal at the closing for the purchase of the Grupo TFM shares
is: (i) $200 million (up to $80 million of which may be paid, at KCS's
option, in shares of KCS Common Stock or KCS Class A Convertible Common
Stock); and (ii) a subordinated promissory note of KARA Sub in the
principal amount of $25 million. KCS will provide KARA Sub with the funds
and securities to make these payments.
(2) THE SUBSIDIARY INVESTMENT. Immediately following the Stock Purchase,
Multimodal will purchase 10% of the issued and outstanding shares of KARA
Sub common stock, in consideration for delivery by Multimodal to KARA Sub
of the KARA Sub subordinated promissory note.
(3) THE MERGER. KARA Sub will then be merged into KCS in accordance with
the Delaware Corporation Law. The Merger will be consummated by filing a
certificate of merger with the Delaware Secretary of State in accordance
with the Delaware Corporation Law. At such time, the shares of KARA Sub
held by Multimodal will be converted into and exchanged for 18 million
shares of KCS Class A Convertible Common Stock. As a result of the Merger,
the separate corporate existence of KARA Sub will cease and KCS will
continue as the surviving corporation. Subject to approval by KCS
stockholders, upon the date and time of the filing of the Certificate of
Merger, KCS will change its name to "NAFTA Rail" and the capital stock of
KCS (including the KCS common stock, the $25 par value preferred stock and
the Series C Preferred Stock) will continue to be issued and outstanding as
the capital stock of NAFTA Rail without further action by any holder
thereof. Subject to listing approval by the New York Stock Exchange
("NYSE"), the NAFTA Rail Common Stock and $25 par value preferred stock
will trade on the NYSE.
The closing of the Acquisition is dependent upon the closing of each of the
Stock Purchase, the Subsidiary Investment and the Merger. If the Acquisition is
consummated, two new directors, Jose Serrano Segovia, Chairman of Grupo TMM and
Javier Segovia Serrano, President of Grupo TMM, will be appointed to the NAFTA
Rail Board of Directors to serve until the first Annual Meeting of Stockholders
of NAFTA Rail following consummation of the Acquisition. At that meeting, Jose
Serrano Segovia will be nominated for election to the class of directors serving
until the annual meeting of stockholders in 2006 and Javier Segovia Serrano will
be nominated for election to the class of directors serving until the annual
meeting of stockholders in 2005.
KCS and Grupo TMM are currently in a dispute over Grupo TMM's attempt to
terminate the Acquisition Agreement. For a discussion of recent developments in
connection with the Acquisition, see "--Recent Developments" below.
CONDITIONS TO OBLIGATIONS TO COMPLETE THE ACQUISITION
The obligations of KCS and Grupo TMM to complete the Acquisition are
subject to a number of conditions, including, among others:
o KCS must have obtained approval of KCS stockholders of the amendments
to KCS's restated certificate of incorporation and the issuance of
Class A Convertible Common Stock and common stock;
o All consents, waivers, authorizations and approvals required from all
governmental authorities to consummate the Acquisition must have been
obtained and remain effective as of the closing date of the
Acquisition Agreement;
o The common stock to be issued must have been approved for listing by
the NYSE;
o Each of the Ancillary Agreements must have been duly executed and
delivered by or on behalf of KCS and each of Grupo TMM, TMM Holdings
and Multimodal, as the case may be;
o Grupo TMM must have received consents from the holders of its
outstanding Notes due 2003 and Notes due 2006; and
o There must not be any insolvency or bankruptcy proceeding pending
against Multimodal, TMM Holdings or TFM that has been pending for more
than 60 days, and certain material adverse effects shall not have
occurred.
TERMINATION
The Acquisition Agreement may be terminated prior to the closing of the
Acquisition as follows:
o By written consent of KCS and Grupo TMM;
o By KCS or Grupo TMM if any order of any governmental authority
permanently prohibiting the consummation of the Acquisition has become
final and non-appealable or if any of the approvals of any
governmental authority to perform the transactions contemplated by the
Acquisition Agreement imposes any condition or requirement, the
satisfaction of which is reasonably likely to have a material adverse
effect on either KCS or Grupo TMM;
o By KCS if any conditions to the obligations of KCS under the
Acquisition Agreement becomes incapable of fulfillment through no
fault of KCS and is not waived by KCS;
o By Grupo TMM if any condition to the obligations of Grupo TMM,
Multimodal and TMM Holdings (collectively, the "Sellers") under the
Acquisition Agreement becomes incapable of fulfillment through no
fault of Sellers and is not waived by Grupo TMM;
o By KCS if Grupo TMM has experienced a change of control, or by Grupo
TMM if KCS has experienced a change of control; and
o By KCS or Grupo TMM if the closing of the Acquisition does not occur
on or prior to December 31, 2004 (the "Termination Date"); provided,
however, that the Termination Date may be extended by KCS and Grupo
TMM by written agreement.
A termination fee of $18 million is payable in the event of termination of
the Acquisition Agreement due to (i) a change of control of either KCS or Grupo
TMM, in which case the party experiencing the change of control shall pay the
termination fee to the other party, or (ii) the failure of the stockholders of
KCS or of Grupo TMM to approve the Acquisition if at or prior to the meeting of
such stockholders to approve the Acquisition, the Board of Directors of KCS, in
the case of the KCS stockholders' meeting, or the Board of Directors of Grupo
TMM, in the case of the Grupo TMM stockholders' meeting, has failed to recommend
or has withdrawn and not reinstated its recommendation of the Acquisition, then
the party whose stockholders shall not have approved the Acquisition shall pay
the termination fee to the other party.
REQUIRED REGULATORY AND OTHER CONSENTS, APPROVALS AND FILINGS
Certain regulatory approvals and filings and other consents are required in
connection with the closing of the Acquisition. These include, among others:
o Prior approval of the Mexican Foreign Investments Commission of
control of Grupo TFM by a non-Mexican entity;
o Clearance by the Mexican Antitrust Commission of anti-competitive
concerns;
o Notice to the Mexican Ministry of Communications and Transportation;
o Filing with NYSE for listing of common stock issuable upon conversion
of Class A Convertible Common Stock;
o Grupo TMM noteholder consents;
o Notice filing under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 ("HSR") filing and clearance of investment by Multimodal in
KCS; and
o KCS stockholder approval of amendments to its restated certificate of
incorporation and issuance of KCS equity.
KCS has obtained an amendment to its Amended and Restated Credit Agreement
allowing:
o KCS (NAFTA Rail) investment in further equity interests of Grupo TFM;
o KCS (NAFTA Rail) investment in equity interests representing 51% of
Mexrail's issued and outstanding capital stock;
o Use of KCS cash to acquire Mexrail.
For a discussion of the filings made and the status of such filings, see
"--Regulatory Matters" below.
VAT CONTINGENCY PAYMENT
The VAT Claim, which has been pending in the Mexican courts since 1997,
arose out of the Mexican Treasury's delivery of a VAT credit certificate to a
Mexican governmental agency rather than to TFM. On September 25, 2002, the
Mexican appellate court issued a judgment in favor of TFM on the VAT Claim,
vacating a prior judgment of the Mexican Fiscal Court and remanding the case to
the Fiscal Court with specific instructions to enter a new decision consistent
with the guidance provided by the Mexican appellate court's ruling. The Mexican
appellate court's ruling required the fiscal authorities to issue the VAT credit
certificate only in the name of TFM. On December 6, 2002, the upper chamber of
the Fiscal Court issued a ruling denying TFM's right to receive a VAT refund
from the Mexican Federal Government. On January 8, 2003, TFM was officially
notified of the new judgment of the Fiscal Court and on January 29, 2003, filed
the appropriate appeal. On June 11, 2003, the Mexican appellate court issued a
judgment in favor of TFM against the ruling of the Fiscal Court. The judgment
granted TFM constitutional protection against the ruling of the Fiscal Court
issued on December 6, 2002 denying TFM's right to receive the VAT refund. The
judgment ordered the Fiscal Court to vacate its December 6, 2002 resolution and
to issue a new resolution following the guidelines of the Mexican appellate
court's judgment. The Mexican appellate court found that the VAT refund
certificate had not been delivered to TFM, and confirmed the Fiscal Court's
determination that TFM has the right to receive the VAT refund certificate. The
Mexican appellate court's ruling states that the Treasury's decision denying
delivery of the VAT refund certificate to TFM violated the law, and it instructs
that the VAT reimbursement certificate be issued to TFM on the terms established
by Article 22 of the Federal Fiscal Code in effect at that time. As a result of
the Mexican appellate court's ruling, the case was remanded to the Mexican
Fiscal Court. On August 14, 2003, Grupo TMM announced that in a public session
held August 13, the Mexican Fiscal Court issued a resolution regarding TFM's VAT
Claim vacating its previous resolution of December 6, 2002, and, in strict
compliance with the ruling issued on June 11, 2003 by the Mexican appellate
court, resolved that TFM has proved its case, and that a "ficta denial"
occurred, declaring such denial null and void as ordered by the Mexican
appellate court. On October 3, 2003, Grupo TMM announced that the Tax Attorney
of the Mexican Government had filed for a review of the ruling.
On January 20, 2004, KCS announced that TFM received, on January 19, 2004,
a Special Certificate from the Mexican Federal Treasury in the amount of
2,111,111,790 pesos. The Special Certificate has the same face amount as the VAT
refund claimed by TFM. On January 21, 2004, KCS announced that TFM was served on
January 20, 2004 with an official letter notifying TFM of the Mexican
Government's findings and conclusions arising from its Tax Audit Summary. In the
Tax Audit Summary, the Mexican Government notified TFM of its conclusion that
the documentation provided by TFM in support of the value added tax payment and
depreciation of the TFM concession title and the assets reported on TFM's 1997
tax return do not comply with the formalities required by the applicable tax
legislation. The Tax Audit Summary also creates a provisional administrative
attachment of the value added tax refund certificate received by TFM on January
19, 2004 from the Mexican Federal Treasury in the amount of 2,111,111,790.00
pesos. By the terms of the Tax Audit Summary, TFM has 20 business days to
present evidence to the Mexican Government in support of its position. KCS is
currently reviewing the Tax Audit Summary with its legal advisors and with TFM
officers. KCS will, following the completion of its legal review of the Tax
Audit Summary, take the appropriate actions to support TFM's right to claim on
its 1997 tax return depreciation and tax credits arising from the Northeast
Railroad Company's, TFM's predecessor in interest, purchase of the assets and
concession title from the Mexican National Railway Company as part of the
privatization of the Mexican national railway system in 1997.
Provided the Acquisition has occurred and neither KCS nor any of its
subsidiaries has purchased the TFM "Class III" shares (representing 20% of the
capital stock of TFM) currently held by the Mexican government upon exercise by
the Mexican government of its Put to compel purchase of the shares of TFM held
by it, as compensation for Grupo TMM's services in obtaining the final
settlement or resolution of TFM's VAT Claim against the Mexican Treasury for the
refund of a VAT payment in the original principal amount of 2,111,111,790 pesos,
KCS will make or cause TFM to make the VAT Contingency Payment to Grupo TMM as
set forth below, following the date of final resolution of the VAT Claim, and
the receipt by TFM or its designee of shares or cash compensation received by
TFM or its designee from the Mexican government on the VAT Claim (the "VAT
Payment"). The VAT Payment must consist of at least (i) all of the TFM "Class
III" shares currently held by the Mexican government or (ii) a cash payment or
other property acceptable to the parties which has a fair value equal to or
greater than the Put Purchase Price (as defined in the Acquisition Agreement) as
calculated on the date the VAT Payment is received. In such event, KCS will, at
its option, pay or cause TFM to pay to Grupo TMM (iii) $100 million within 90
days thereafter or (iv) $50 million within 90 days thereafter and an additional
$55 million within 365 days thereafter. If the VAT Payment exceeds the Put
Purchase Price as calculated on the date the VAT Payment is received, KCS will
pay or cause TFM to pay to Grupo TMM within 90 days after the VAT Payment and
final resolution of the VAT Claim the first $25 million received above the Put
Purchase Price, and 15% of any additional amount received above the Put Purchase
Price beyond the first $25 million, not to exceed $50 million. The VAT
Contingency Payment shall be made after reducing the value of the VAT Payment by
the amount of all expenses incurred by or on behalf of TFM in effecting final
resolution of the VAT Claim and receipt of the VAT Payment.
THIRD PARTY MATTERS
Until the filing of the Certificate of Merger for the Merger, neither KCS
nor Sellers can seek or entertain other offers with respect to acquisitions,
mergers or business combinations of KCS or KCSR, and TMM Holdings, Multimodal,
Grupo TFM or any of their respective subsidiaries, respectively. In addition,
Grupo TMM will not enter into any agreement concerning any acquisition or
purchase of a controlling equity interest in Grupo TMM by any competitor. These
limitations are subject to the fiduciary duties of the respective Board of
Directors of KCS and Grupo TMM.
INDEMNIFICATION
The representations and warranties of the Sellers and KCS survive for three
to five years. The Sellers have jointly and severally agreed to indemnify KCS,
the surviving corporation and each of their subsidiaries, and their respective
officers, directors, employees, members, stockholders, agents and
representatives harmless from and against all losses, damages, liabilities,
claims, demands, obligations, deficiencies, payments, judgments, settlements,
costs and expenses of any nature whatsoever ("Losses") resulting from or arising
out of any inaccuracy or misrepresentation in, or breach of, any representation
or warranty of Sellers in connection with the Acquisition Agreement, or any
breach or nonfulfillment of any covenant or agreement of any of the Sellers in
connection with the Acquisition Agreement, or any claims, causes of actions,
rights asserted or demands made by any third parties arising from or relating to
any of the foregoing. The Sellers' indemnification obligations for any
inaccuracy or misrepresentation in, or breach of, any representation or warranty
regarding Grupo TFM or its subsidiaries is limited to 51% of Losses aggregating
$5 million or more. This limitation is not applicable to any Losses arising out
of or resulting from any action or omission on the part of any Seller or its
affiliate that involved a crime, fraud, willful misconduct or gross negligence.
KCS has agreed to indemnify the Sellers, each of their subsidiaries and
each of their respective officers, directors, employees, members, stockholders,
agents and representatives from and against all Losses resulting from or arising
out of any inaccuracy or misrepresentation in, or breach of, any representation
or warranty of KCS in connection with the Acquisition Agreement, or any breach
or nonfulfillment of any covenant of KCS in connection with the Acquisition
Agreement, or any claims, causes of actions, rights asserted or demands made by
any third parties arising from or relating to any of the foregoing. KCS's
indemnification obligations are limited to Losses aggregating $10 million or
more. This limitation is not applicable to any Losses arising out of or
resulting from any action or omission on the part of KCS or its affiliate that
involved a crime, fraud, willful misconduct or gross negligence.
Additionally, KCS's Restated Certificate of Incorporation and Bylaws would
be amended to reflect the agreements contained in the Acquisition Agreement and
certain Ancillary Agreements. A number of Ancillary Agreements have been, or
will be prior to the closing of the Acquisition, entered into to carry out
certain objectives of the Acquisition Agreement and the Acquisition. Each of
these Ancillary Agreements is described below.
FIRST AMENDMENT TO RIGHTS AGREEMENT
In connection with the Acquisition, KCS and Harris Trust & Savings Bank, as
Rights Agent will enter into a First Amendment to Rights Agreement (the "Rights
Agreement") dated as of September 19, 1995. The Rights Agreement will be amended
to prevent any TMM Holder from becoming an Acquiring Person (as defined in the
Rights Agreement), which would otherwise cause a Triggering Event (as defined in
the Rights Agreement) as a result of the Acquisition. Accordingly, the First
Amendment to Rights Agreement will amend Section 1(a), the definition of
Acquiring Person, to provide that no person or affiliate of such person shall
become an "Acquiring Person" as a result of the acquisition of beneficial
ownership of (i) shares of Class A Convertible Common Stock, (ii) shares of
Common Stock issued or issuable upon conversion of the Class A Convertible
Common Stock, (iii) any shares of Common Stock or Class A Convertible Common
Stock acquired pursuant to Section 1.2 of the Acquisition Agreement, (iv) any
shares of Common Stock or Class A Convertible Common Stock acquired pursuant to
the Consulting Agreement, and (v) shares of Common Stock or Class A Convertible
Common Stock acquired in compliance with the Stockholders' Agreement, including
upon exercise of pre-emptive rights as provided therein.
The definition of "Substantial Block" found at Section 1(z) of the Rights
Agreement will also be amended to lower the threshold beneficial ownership that
constitutes a "Triggering Event" from 20% to 15% (and from 15% to 13% in the
event the Acquiring Person is declared by the Board of Directors to be an
Adverse Person (as defined in the Rights Agreement)).
In order to conform to the foregoing amendments, subsection (iii) of
Section 3(e) regarding Restrictions on transfer of Rights to Acquiring Persons
shall be deleted and amended to provide that no Right (as defined in the Rights
Agreement) shall be transferable or transferred other than as permitted under
Section 1(a) of the Rights Agreement, as amended, to any person who, as a result
of such transfer, would beneficially own 15% or more of the Rights.
Finally, Section 7(e) of the Rights Agreement will be amended to correct a
clerical error.
STOCKHOLDERS' AGREEMENT
KCS, Grupo TMM, TMM Holdings, Multimodal and the Principal Stockholders
plan to enter into a Stockholders' Agreement, which shall set forth the rights
and duties of the parties thereto arising out or and in connection with the
Acquisition Agreement and the transactions contemplated thereby.
STANDSTILL PROVISIONS
For a period of seven years from the date of the Stockholders' Agreement,
Grupo TMM, TMM Holdings, Multimodal and each of the Principal Stockholders
agrees that, unless specifically invited in writing to do so by the Board of
Directors, such Person (as defined in the Stockholders' Agreement) will not, and
will cause each of its affiliates not to, among other things:
o acquire or agree to acquire aggregate beneficial ownership of more
than 20% of the Total Voting Power of KCS (as defined in the
Stockholders' Agreement);
o initiate or propose any matter for submission to a vote of
stockholders of KCS or participate in the making of, or solicit
stockholders for the approval of, any stockholder proposal;
o grant any proxy with respect to any Voting Securities to any Person
not approved in writing by KCS;
o except through its representatives on the Board of Directors (or any
committee thereof) of KCS, otherwise act, alone or in concert with
others, to seek to control or influence the management, Board of
Directors or policies of KCS.
The standstill provisions terminate upon the earliest to occur of (i) a
Change of Control of KCS (as defined in the Stockholders' Agreement), or (ii)
the first date the TMM Holders beneficially own in the aggregate less than 15%
of the outstanding Voting Securities of KCS for at least 30 consecutive days.
TRANSFER RESTRICTIONS
The TMM Holders may not sell, assign, transfer, pledge, hypothecate,
otherwise subject to any lien, grant an option with respect to or otherwise
dispose of any interest in (or enter into an agreement or understanding with
respect to the foregoing) any Voting Securities beneficially owned by them (a
"Disposition") except in accordance with the terms of the Stockholders'
Agreement. For a period of five years from the date of the Stockholders'
Agreement, the TMM Holders may not effect a Disposition:
o to a Competitor (as defined in the Stockholders' Agreement);
o to an Affiliate unless such Affiliate agrees in writing to be bound by
the terms of the Stockholders' Agreement and provided that the TMM
Holders shall remain responsible, jointly and severally, for any
breaches of the Stockholders' Agreement by such Affiliate;
o that in the aggregate represents 5% or more of the outstanding Voting
Securities to any Person other than an 13G Filer (as defined in the
Stockholders' Agreement), and no disposition shall be made to any 13G
Filer unless such 13G Filer would continue to be eligible to file
reports pursuant to Section 13G under the Exchange Act with respect to
the Voting Securities after giving effect to the proposed acquisition
and KCS has been provided the right (but not the obligation) to
purchase such Voting Securities;
o to any Person that would, together with such person's Affiliates or
Associates (as defined in the Stockholders' Agreement) and after
giving effect to the acquisition of such Voting Securities,
beneficially own or have the right to acquire 15% of the Total Voting
Power; and
o of any capital stock or Voting Securities or control of any Person
that, directly or indirectly, beneficially owns any Voting Securities
of KCS to a Competitor.
Subject to the provisions contained in the Stockholders' Agreement, a TMM
Holder may pledge or hypothecate as security for any indebtedness or other
obligations any or all Voting Securities beneficially owned by such Person
provided that KCS shall have a right to purchase the pledged Voting Securities
upon the occurrence of a Foreclosure Event (as defined in the Stockholders'
Agreement).
The TMM Holders may participate in a tender or exchange offer made by an
unaffiliated third party, provided the TMM Holders did not solicit the tender or
exchange offer and (i) the same consideration is offered to all holders of the
securities tendered in the tender offer; (ii) the transaction is approved by a
majority of other KCS stockholders; (iii) the tender or exchange offer is not
conditioned on financing; and (iv) the TMM Holders do not tender, or publicly
disclose their intention to tender, prior to the last day before expiration of
the offer.
The transfer restrictions contained in the Stockholders' Agreement
terminate upon the earliest to occur of (i) a Change of Control of KCS, or (ii)
the first date the TMM Holders beneficially own in the aggregate less than 15%
of the outstanding Voting Securities of KCS for at least 30 consecutive days.
PRE-EMPTIVE RIGHTS
TMM Holders have the right to purchase additional shares of Class A
Convertible Common Stock to maintain their percentage ownership in the event KCS
authorizes the issuance or sale of any shares of Common Stock or any securities
containing options or rights to acquire shares of Common Stock, except for
issuances of Common Stock (including for this purpose, options, warrants and
other securities convertible into or exercisable for Common Stock) issued:
o to KCS's employees, directors, consultants, agents, independent
contractors or other service providers in connection with a Plan (as
defined in the Stockholders' Agreement) existing as of the date of the
Stockholders' Agreement or a Plan approved by the Board of Directors
and adopted by KCS after the date of the Stockholders' Agreement;
o upon the conversion of Class A Convertible Common Stock;
o upon the exercise of any options, warrants, convertible or
exchangeable securities which are outstanding as of the date hereof;
o in connection with the acquisition (by merger, consolidation,
acquisition of assets or equity interests or otherwise) of the equity
interests or assets of another Person; or
o in the event KCS issues additional equity in lieu of up to $80 million
in cash at Closing.
CORPORATE GOVERNANCE
The Stockholders' Agreement provides for the Board of Directors to be
comprised of eleven directors, to be selected as follows: (i) the chief
executive officer of KCS and another person selected by him; (ii) two persons
elected by the holders of the Class A Convertible Common Stock (reduced to one
in the event the TMM Holders' ownership falls below 75% of the Voting Securities
initially acquired pursuant to the Merger and reduced to zero in the event the
TMM Holders' ownership falls below 40% of the Voting Securities initially
acquired pursuant to the Merger); and (iii) seven independent directors
designated by the chief executive officer of KCS. The Nominating Committee of
the Board of Directors will consist of three Independent Directors designated by
the chief executive officer of KCS. The Compensation Committee will consist of
three Independent Directors designated by the chief executive officer of KCS and
one Independent Director designated by the chief executive officer of Grupo TMM.
The Executive Committee will consist of three Directors designated by the chief
executive officer of KCS and one Director designated by the chief executive
officer of Grupo TMM.
Each TMM Holder shall vote all of the Voting Securities beneficially owned
by such Person and entitled to vote in the election of directors: (i) in favor
of all nominees of the Nominating Committee; and (ii) against any proposal to
remove any director nominated by the Nominating Committee and elected to the
Board of Directors.
The TMM Holders' rights and duties under the corporate governance
provisions of the Stockholders' Agreement terminate upon the earliest to occur
of (i) the first date the TMM Holders beneficially own in the aggregate at least
40% of the outstanding Voting Securities initially acquired pursuant to the
Merger, or (ii) a Change of Control of Grupo TMM or any of the TMM Holders.
TERMINATION
Subject to specific termination provisions contained in the Stockholders'
Agreement, the entire Agreement (with a few exceptions) terminates when the TMM
Holders ownership falls below 40% of the Voting Securities initially acquired
pursuant to the Merger, or in the event the Class A nominees are not elected to
the KCS Board of Directors (except for good cause).
REGISTRATION RIGHTS AGREEMENT
The Registration Rights Agreement to be entered into by KCS, Grupo TMM, TMM
Holdings, Multimodal and certain principal stockholders of Grupo TMM, will
provide Grupo TMM, TMM Holdings, Multimodal, such principal stockholders of
Grupo TMM, and any Permitted Transferee (as defined in the Registration Rights
Agreement) who acquires shares of Class A Convertible Common Stock or shares of
Registrable Stock (as defined in the Registration Rights Agreement) and agrees
to be bound by the terms and conditions of the Registration Rights Agreement
(collectively, the "Holders") with certain registration rights with respect to
the shares of KCS Common Stock (i) issuable upon conversion of the KCS Class A
Convertible Common Stock, (ii) issued in lieu of cash at closing, (iii) issued
pursuant to the Consulting Agreement and (iv) acquired on pre-emptive exercises.
REQUIRED AND INCIDENTAL REGISTRATIONS
Beginning on the 180th day following the consummation of the Acquisition,
the Holders shall have the right to request, and KCS shall use commercially
reasonable efforts to effect, six demand registrations. In the event KCS issues
additional equity in lieu of up to $80 million in cash at Closing, the Holders
shall be entitled to one additional shelf registration. Holders shall also be
entitled to unlimited incidental, or "piggy-back," registrations. KCS can delay
filing registrations upon the occurrence of certain events, including situations
in which KCS is not eligible to use Form S-3 to effect such registration or in
the event that KCS furnishes to the Holders a resolution adopted by the Board of
Directors to the effect that in the good faith judgment of KCS it would be
seriously detrimental for a registration statement to be filed at that time.
In the event the managing underwriters of a public offering furnish a
written opinion that the amount of securities to be included in an offering
exceed the maximum amount which can be marketed without materially and adversely
affecting such offering, then the Holders, KCS and all other holders of KCS
securities having the right to include such securities in the registration shall
be subject to certain underwriting cut-backs. Holders are also subject to
certain market standoff provisions during the ten days prior to and up to, but
not exceeding, 90 days following the effective date of a registration statement
to the same extent that KCS or its officers or directors are subject to such
market standoff provisions.
REGISTRATION EXPENSES
With respect to the first four demand registrations and any incidental
registrations, KCS shall pay all registration expenses, including all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements or counsel for KCS and blue sky fees and expenses. With
respect to demand registrations effected beyond the first four, the Holders
whose shares are included in the applicable registration shall pay all
registration expenses.
CONSULTING AGREEMENT
KCS and the consulting firm controlled by Jose Serrano Segovia ("Consulting
Firm") plan to enter into a Consulting Agreement, which calls for Consulting
Firm to provide certain consulting services to the KCS Board of Directors and
Chief Executive Officer relating to the Mexican portion of KCS's rail network
operations, including its customers and suppliers, regulatory matters and
regarding the Mexican railroad industry in general. Jose Serrano Segovia is
required under the terms of the Consulting Agreement to be personally involved
in the provision of services by the Consulting Firm. Jose Serrano Segovia is the
current Chairman of the Board of Directors of Grupo TMM and certain of its
subsidiaries, including TFM and Grupo TFM and will become a director and
Vice-Chairman of KCS.
TERM
The Consulting Agreement has an initial term of three years beginning on
the closing date of the Acquisition Agreement. KCS has the option of extending
the term of the Consulting Agreement for an additional year. In the event of a
Change of Control (as defined in the Consulting Agreement), Consulting Firm
agrees to continue its engagement with KCS for a period equal to the longer of
(i) one year from the date of such Change of Control; or (ii) the remainder of
the term and KCS agrees to continue to engage Consulting Firm during the
remainder of the term.
Notwithstanding the initial three-year term, the Consulting Agreement and
Consulting Firm's engagement shall terminate automatically upon the death or
disability of Jose Serrano Segovia or dissolution or bankruptcy of Consulting
Firm. Consulting Firm may terminate the Consulting Agreement at any time by
giving at least 30 days' advance written notice to KCS or in the event of a
material breach, and failure to cure the same, by KCS. Additionally, KCS may
terminate the Consulting Agreement and Consulting Firm's engagement for cause,
or other than for cause, subject to certain conditions specified in the
Consulting Agreement.
COMPENSATION
Under the Consulting Agreement, KCS will pay to Consulting Firm an annual
fee of $600,000. In addition, KCS will grant to Consulting Firm 2,100,000 shares
of KCS restricted Common Stock (the "Consulting Firm Stock"), subject to the
following vesting provisions:
o 525,000 shares shall become vested with ten days after TFM enters into
a renegotiated or extended labor agreement with the El Sindicato de
Trabajadores Ferrocarrileros de la Republica Mexicana;
o 250,000 shares shall become vested on each of the first, second and
third anniversary dates of the Consulting Agreement;
o 125,000 shares shall become vested in the event KCS or any subsidiary
receives the Certificate of Devolution of Taxes (Certificado de
Devolucion de Impuestos) issued by the Treasury of the Mexican
Federation (Tesoreria de la Federacion) in the term of Article 22 of
the Tax Code of the Mexican Federation (Codigo Fiscal de la
Federacion); and
o 700,000 shares shall become vested in the event KCS or any subsidiary
receives the shares or cash compensation from the Mexican government
as a result of TFM's claim against the Mexican Treasury for the refund
of a value added tax payment. See Section 6(i) of the Consulting
Agreement attached to this proxy statement as Appendix F and Section
7.13 of the Acquisition Agreement attached to this proxy statement as
Appendix B.
As a condition to the vesting of Consulting Firm Stock on the first, second and
third anniversary dates, KCS's Board of Directors shall review the compliance,
good faith performance and existence of triggering events that would terminate
the Agreement. If the Board determines that the Consulting Firm has not
satisfied the requisite standard during any one-year period, the Consulting Firm
Stock subject to vesting at such one-year period shall be forfeited.
If KCS extends the initial term of the Consulting Agreement, KCS will grant
to Consulting Firm on the first day of the extended term an additional 525,000
shares of KCS restricted Common Stock which will vest immediately upon issuance.
TRANSFER RESTRICTIONS
Consulting Firm may not sell, transfer, assign, pledge or otherwise dispose
of (whether with or without consideration and whether voluntary or involuntary
or by operation of law) any interest in any shares of Consulting Firm Stock,
except in accordance with the terms of the Stockholders' Agreement (described
above).
MARKETING AND SERVICES AGREEMENT
The Marketing and Services Agreement to be entered into by Grupo TMM
(together with its subsidiaries and affiliates), TFM and KCS (together with its
subsidiaries and affiliates), provides for the parties to enter into various
most favored nations provisions, requiring, among other things, (i) KCS to
provide certain services to Grupo TMM on terms which are no less favorable than
the terms provided to third or fourth party logistics companies; (ii) that Grupo
TMM shall have the right to be the exclusive provider of Road-Railer freight
services over TFM's rail system within Mexico; (iii) Grupo TMM shall have the
right, but not the obligation, to operate KCS's intermodal terminals to the
extent that KCS determines to utilize a third party to operate such within
Mexico, the terms of such operations subject to mutual agreement of Grupo TMM
and KCS; and (iv) that Grupo TMM shall have the right to make a bid for the
provision of certain specified transportation related services normally provided
by Grupo TMM or its affiliates, if TFM determines to have such services provided
by any unaffiliated third party in Mexico or the United States. The
relationships among KCS and Grupo TMM shall be those of independent contractors
and neither KCS nor Grupo TMM shall be or represent itself to be an agent,
employee or joint venturer of the other. Neither KCS nor Grupo TMM shall have or
represent itself to have any power or authority to act for, bind or commit the
other party.
The initial term of the Marketing and Services Agreement is five years from
the Effective Date (as defined in the Acquisition Agreement), subject to
automatic renewal for periods of one year unless terminated by Grupo TMM or KCS.
Notwithstanding the foregoing, the Marketing and Services Agreement shall
terminate automatically in the event that (i) TMM Logistics, a subsidiary of
Grupo TMM, files any voluntary proceeding under any bankruptcy laws, or if TMM
Logistics has filed against it any involuntary proceeding under any bankruptcy
law which is not dismissed or stayed within 30 days or (ii) a change of control
of Grupo TMM occurs and the party effecting such change of control is a
Competitor (as defined in the Marketing and Services Agreement).
AGREEMENT OF ASSIGNMENT AND ASSUMPTION OF RIGHTS, DUTIES AND OBLIGATIONS.
This agreement is to be entered into by and among Grupo TMM, KCS, and Grupo
TFM (a form of which is attached as Exhibit C to the Acquisition Agreement), by
which Grupo TMM will assign and transfer to KCS, and KCS will accept and assume,
all of Grupo TMM's rights, duties and obligations with respect to the purchase
of the Put Shares (defined below) under the Put Agreement described below. KCS
shall have the right to designate another party to be the purchaser of the Put
Shares, however, no such designation shall relieve KCS of its obligation to pay
the purchase price for such Put Shares or to indemnify Grupo TMM or its
Affiliates.
According to the terms of the original share purchase agreement for the
Northeast Rail lines and an Agreement, dated June 9, 1997, by and among the
Federal Government of the Mexican States, Grupo TFM, Grupo TMM and KCS (the "Put
Agreement"), the Mexican government had the right to sell its 20% interest in
TFM through a public offering on October 31, 2003 (or prior to October 31, 2003,
with the consent of Grupo TFM). If on October 31, 2003, the Mexican government
had not sold all of its capital stock in TFM, Grupo TFM was obligated under the
Put Agreement following receipt of notice from the Mexican government to
purchase the Mexican government's 20% interest in TFM (the "Put Shares"). As of
October 31, 2003, the Mexican government had not sold any of its remaining 20%
interest in TFM. Prior to October 31, 2003, Grupo TFM filed suit in the Federal
District Court of Mexico City seeking, among other things, a declaratory
judgment interpreting whether Grupo TFM was obligated to honor its obligation
under the Put Agreement, as the Mexican government had not made any effort to
sell its 20% in TFM through a public offering prior to October 31, 2003. We,
along with Grupo TMM, have been named as additional necessary parties in the
suit, but we have not yet been served with Grupo TFM's complaint. The Mexican
government has provided Grupo TFM with notice of its intention to sell its
interest in TFM. Grupo TFM responded to the Mexican government's notice,
reaffirming its right and interest in purchasing the Mexican government's
remaining interest in TFM, but also advising the Mexican government that it
would not take any action until its lawsuit seeking a declaratory judgment was
resolved. In the event that Grupo TFM does not purchase the Put Shares
and the Acquisition has not been consummated, then Grupo TMM and KCS, are
jointly and severally obligated to purchase the Mexican government's remaining
interest in TFM. Should the Mexican government cause Grupo TMM to purchase any
of the Put Shares after consummation of the Acquisition Agreement, KCS would be
obligated to purchase such shares from Grupo TMM.
THE STOCK PURCHASE AGREEMENT
Pursuant to the terms and conditions of the Stock Purchase Agreement, dated
as of April 20, 2003, by and among KCS, Grupo TMM and TFM, on May 9, 2003, KCS
purchased from TFM 51% of the outstanding shares of Mexrail, a wholly-owned
subsidiary of TFM, for $32,680,000. TFM had the right to repurchase all of the
shares of Mexrail capital stock acquired by KCS at any time for the purchase
price paid by KCS, subject to any STB orders or directions. TFM made a demand in
August 2003 to repurchase from KCS the shares of Mexrail sold to KCS in May
2003. On September 23, 2003, the STB issued a decision finding no need to rule
on the transfer back to TFM of the 51% interest in Mexrail that KCS acquired on
May 9, 2003. The effect of the STB decision was to allow TFM to reacquire the
shares in accordance with the Stock Purchase Agreement. On September 30, 2003,
TFM repurchased the Mexrail shares from KCS at the price KCS paid TFM in May
2003, and TFM now owns 100% of Mexrail. Under the terms of the Stock Purchase
Agreement, upon this repurchase, the Stock Purchase Agreement automatically
terminated. However, the Stock Purchase Agreement provided that in the event TFM
reacquired the Mexrail shares from KCS, the parties to the Stock Purchase
Agreement intended the terms and conditions of a February 27, 2002 stock
purchase agreement under which TFM acquired the Mexrail shares, the Grupo TFM
bylaws and the shareholders agreement dated May 1997 to become again valid and
fully enforceable against the parties to such agreements.
On February 27, 2002, KCS, Grupo TMM, and certain of Grupo TMM's affiliates
entered into a stock purchase agreement with TFM to sell to TFM all of the
common stock of Mexrail. Under this stock purchase agreement, KCS retained
rights to prevent further sale or transfer of the stock or significant assets of
Mexrail and Tex-Mex and the right to continue to participate in the corporate
governance of Mexrail and Tex-Mex, which will remain U.S. corporations and
subject to KCS's super majority rights contained in Grupo TFM's bylaws.
The shareholders agreement dated May 1997 between KCS and Grupo TMM and
certain affiliates, which governed KCS's investment in Grupo TFM (1) restricted
each of the parties to the shareholders agreement from directly or indirectly
transferring any interest in Grupo TFM or TFM to a competitor of Grupo TFM or
TFM without the prior written consent of each of the parties, and (2) provided
that KCS and Grupo TMM may not transfer control of any subsidiary holding all or
any portion of shares of Grupo TFM to a third party, other than an affiliate of
the transferring party or another party to the shareholders agreement, without
the consent of the other parties to the shareholders agreement. The shareholders
agreement required that the boards of directors of Grupo TFM and TFM be
constituted to reflect the parties' relative ownership of the ordinary voting
common stock of Grupo TFM.
REGULATORY MATTERS
As discussed in "--Summary of the Acquisition Agreement and Related
Agreements--The Acquisition Agreement" and "--Summary of the Acquisition
Agreement and Related Agreements--The Stock Purchase Agreement" above, certain
regulatory approvals and filings are required in connection with the closing of
the Acquisition. The following actions have occurred to date:
o KCS's solicitation for permission as a foreign investor to control
TFM, through Grupo TFM, was filed with the Mexican National Foreign
Investments Commission on April 25, 2003. On August 27, 2003, KCS
announced that it received notice from the Mexican National Foreign
Investments Commission of that Commission's decision to close the
proceeding with respect to KCS's application to acquire control of
Grupo TFM and, through Grupo TFM, of TFM, without prejudice to refile
in the event the dispute is resolved between KCS and Grupo TMM over
whether the Acquisition Agreement remains in effect. See "--Recent
Developments";
o KCS's Notification with respect to the acquisition of the Grupo TFM
shares from Multimodal was filed with the Mexican Competition
Commission on April 21, 2003. KCS has received formal written notice
that the Mexican Competition Commission has approved the proposed
consolidation, without conditions. On September 26, 2003, KCS
announced this approval was extended for an additional 180 days;
o TFM formerly notified the Secretary of Communications and
Transportation of the proposed transactions on May 2, 2003;
o On December 26, 2002, Grupo TMM announced the commencement of public
offers for the exchange of its 91/2% Notes due 2003 (the "2003 Notes)
and its 10 1/4% Notes due 2006 (the "2006 Notes") for new bonds and
solicitations of consents from the holders of these notes to eliminate
substantially all of the restrictive covenants of the indentures
governing the 2003 Notes and the 2006 Notes. When it failed to receive
a sufficiently high positive response, Grupo TMM announced amendments
of the exchange offers and consent solicitations on February 18, 2003
and again on April 24, 2003. On May 16, 2003, Grupo TMM announced the
expiration of the exchange offers and consent solicitations and that
the conditions to the exchange offers were not satisfied at the
expiration date. In its Form 20-F filed on June 30, 2003, referred to
as its Form 20-F, Grupo TMM disclosed that it did not make payment of
the principal amount of the 2003 Notes, which matured on May 15, 2003,
or accrued interest on the due date. Grupo TMM further stated that, as
a result, it is in default under the terms of the 2003 Notes, and such
default resulted in a cross-default under its 2006 Notes and under
certain other obligations of Grupo TMM and its subsidiaries. On May
29, 2003, Grupo TMM announced that it had initiated discussions with
holders of the 2003 Notes and 2006 Notes and their representatives to
encourage the formation of an informal committee to engage Grupo TMM
in negotiations over the terms of a consensual restructuring of the
2003 Notes and the 2006 Notes. On June 16, 2003, Grupo TMM announced
the formation of an informal committee of holders of the 2003 Notes
and the 2006 Notes. In an Information Statement filed on Form 6-K on
August 6, 2003, Grupo TMM disclosed that in order to restructure its
debt, the management of Grupo TMM has initiated negotiations with the
informal committee. On December 18, 2003, Grupo TMM announced it had
reached an agreement on the principal terms of a restructuring with an
ad hoc committee of bondholders representing approximately 43% of its
2003 Notes and its 2006 Notes (together, the "Existing Notes"), in the
aggregate principal amounts outstanding of $176.9 million and $200
million, respectively. In its announcement, Grupo TMM stated that the
restructuring will be accomplished through a registered exchange offer
of new senior secured notes due 2007 ("New Secured Notes") for the
Existing Notes, together with a consent solicitation to amend the
indenture governing any untendered 2006 Notes and a prepackaged plan
solicitation. If the conditions to the exchange offer are not met or
waived, the restructuring will be implemented through a prepackaged
plan in the United States, or if Grupo TMM elects, in Mexico. On
January 12, 2004, Grupo TMM announced that it had received voting
agreements executed by holders of approximately 64% of the aggregate
outstanding principal amount of the Existing Notes. As previously
announced by Grupo TMM, bondholders who execute voting agreements
agree to support the restructuring proposed by Grupo TMM and agreed
upon with the Ad Hoc Bondholders' Committee, subject to the terms and
conditions of the voting agreements. According to Grupo TMM's
announcement, the voting agreements became effective upon execution by
holders of a majority in aggregate principal amount of the outstanding
Existing Notes. Grupo TMM announced that as a result, it is proceeding
with the restructuring on the terms set forth in the voting
agreements. Grupo TMM announced further that Jose Serrano, chairman of
TMM, and certain other controlling shareholders have agreed to support
the exchange offer and prepackaged plan solicitation. On January 27,
2004, Grupo TMM filed a registration statement on Form F-4 to register
the New Secured Notes which would be unconditionally guaranteed on a
senior secured basis by certain direct and indirect subsidiaries of
Grupo TMM. The prospectus and solicitation statement contained in the
Form F-4 proposes a financial restructuring through one of the
following: (i) an out-of-court restructuring or "recapitalization
plan," which would consist of (a) an exchange offer to exchange all of
the Existing Notes for the New Secured Notes on a dollar-for-dollar
basis, plus additional New Secured Notes with a face amount equal to
accrued and unpaid interest, as well as a consent fee described in the
Form F-4 to each holder whose consent is received by the consent
deadline, and (b) a consent solicitation to remove substantially all
the restrictive convenants and certain events of default in the
indenture governing the 2006 Notes; or (ii) an in-court restructuring
through the solicitation of acceptances under Chapter 11 of the United
States Bankruptcy Code (the "U.S. prepackaged plan") on substantially
the same terms as the recapitalization plan. In the event that Grupo
TMM does not receive sufficient acceptances to complete the U.S.
prepackaged plan, the Form F-4 states that it intends to pursue a
prearranged plan under the bankruptcy laws, of Mexico (the
"prearranged CONCURSO MERCANTIL"). The recapitalization plan, the U.S.
prepackaged plan and the prearranged CONCURSO MERCANTIL together are
referred to as the "restructuring." In the Form F-4, Grupo TMM states
that it has entered into agreements with sufficient creditors pursuant
to which they have agreed to consent to, and not oppose, the
restructuring, which Grupo TMM believes should permit it to accomplish
either the U.S. prepackaged plan, or, in the alternative, a
prearranged CONCURSO MERCANTIL, on substantially the same terms as the
recapitalization plan without having to secure the consent of any
other holder of existing notes or other creditors;
o KCS filed with the STB on May 13, 2003 a Railroad Control Application,
seeking permission to exercise common control over KCSR, Gateway
Eastern and Tex-Mex. On June 9, 2003, the STB issued its decision,
effective June 13, 2003, finding that the transaction proposed in
KCS's application is a "minor transaction" under 49 CFR 1180.2(c),
although KCS was required to supplement its application as discussed
in the decision, to address some of the implication of KCS's
acquisition of control of TFM. KCS filed the supplement on June 23,
2003, as required by the decision. The STB also outlined a procedural
schedule for consideration of KCS's application to exercise common
control over KCSR, Gateway Eastern and Tex-Mex. The STB decision set
October 17, 2003 as the date by which it will issue its final decision
on the merits of the application. On September 23, 2003, the STB
entered an order asking all interested parties to file comments by
September 30, 2003 addressing whether "in light of recent
developments" the STB should continue with the procedural schedule,
which calls for a decision on the merits to be issued by October 17,
2003. On September 30, 2003, KCS filed comments with the STB
suggesting that STB precedent establishes that the STB has sufficient
jurisdiction to rule on control applications even where closing on the
underlying transaction has been put in doubt. In the alternative, KCS
argued that the matter should be held in abeyance, rather than
dismissed, until the arbitration is completed. On October 8, 2003, the
STB issued an order suspending the procedural schedule pending a
resolution of the uncertainties that now surround KCS's efforts to
acquire control of Tex-Mex, and requiring KCS to file status reports
regarding developments in its efforts to acquire control of TFM and
Tex-Mex. In accordance with the STB's order, KCS filed its first
status report on November 3, 2003;
o KCS filed its Hart-Scott-Rodino notification on May 19, 2003. Grupo
TMM filed its HSR notification on July 1, 2003. Under the HSR process,
the United States Department of Justice ("DOJ") has 30 days after
notice is filed to issue a second request asking for various documents
and information from the HSR parties. The waiting period under the HSR
officially expired on July 31, 2003, with no request for additional
information from the DOJ.
RECENT DEVELOPMENTS
DISPUTE OVER ACQUISITION AGREEMENT
On August 18, 2003, Grupo TMM announced that at its General Ordinary
Shareholders meeting that day, the shareholders did not approve the sale of
Grupo TMM's interest in Grupo TFM to KCS. Grupo TMM further announced that as a
result of the stockholder vote, Grupo TMM's Board of Directors intended to meet
to review Grupo TMM's options and that Grupo TMM was proceeding to inform the
authorities at the Ministry of Communications and Transportaction, the Ministry
of Finance, other relevant authorities and stakeholders at Grupo TMM and
subsidiaries of the Grupo TMM shareholders' decision. On August 23, 2003, Grupo
TMM sent a notice to KCS claiming to terminate the Acquisition Agreement,
because the Grupo TMM shareholders had failed to approve the Acquisition
Agreement.
On August 29, 2003, KCS delivered to Grupo TMM the Notice of Dispute
pursuant to the Acquisition Agreement. This initiated a 60-day negotiation
period between the parties. The parties were unable to resolve the disputes
within that period of time. In addition, on August 29, 2003, KCS filed a
complaint in the Delaware Chancery Court alleging that Grupo TMM had breached
the Acquisition Agreement and seeking a final order requiring Grupo TMM not to
sell Grupo TFM or take other actions outside of the ordinary course of business,
so as to preserve the assets and business of TFM while the parties follow the
dispute resolution procedures provided for in the Acquisition Agreement. The
Notice of Dispute and complaint point out that the Acquisition Agreement does
not provide that a negative shareholder vote by Grupo TMM shareholders is a
basis for termination, and KCS maintains that the Acquisition Agreement is still
valid and remains in effect until December 31, 2004.
On September 2, 2003, KCS filed in the Delaware Court of Chancery a motion
for a preliminary injunction to preserve the parties' positions while KCS seeks
to resolve its dispute over Grupo TMM's attempt to terminate the Acquisition
Agreement.
On October 28, 2003, Chancellor William B. Chandler III of the Delaware
Court of Chancery entered a written order granting KCS' motion seeking a
preliminary injunction to preserve the parties' positions pending resolution of
the dispute between KCS and Grupo TMM over the Acquisition Agreement.
On October 31, 2003, KCS initiated binding arbitration in accordance with
the terms of the Acquisition Agreement by serving an Arbitration Demand on Grupo
TMM and the American Arbitration Association. In its Arbitration Demand, KCS
seeks a determination that the Acquisition Agreement is in full force and
effect, specific performance of the Acquisition Agreement, and damages for Grupo
TMM's breach of the terms of the Acquisition Agreement and failure to negotiate
in good faith during the 60-day negotiation period. By the agreement of the
parties, the arbitration has been bifurcated. The first stage of the arbitration
will only address the question of whether Grupo TMM's purported negative
shareholder vote gave Grupo TMM the right to terminate the Acquisition
Agreement.
On January 6, 2004, KCS announced that in a ruling by the Delaware Court of
Chancery regarding a motion to enforce injunction and hold Grupo TMM in contempt
in the dispute between KCS and Grupo TMM over the Acquisition Agreement, the
court held Grupo TMM in contempt of court for taking action inconsistent with
the court's October 29, 2003 order discussed above. The court held that by Grupo
TMM causing its subsidiary Grupo TFM to revoke powers of attorney requiring the
signature of a KCS representative for transactions in excess of $2.5 million and
in granting new powers of attorney to Grupo TMM directors, Jose Serrano and
Mario Mohar to act on behalf of the company, Grupo TMM violated provisions of
the Acquisition Agreement. The previous order of the court required Grupo TMM to
cause Grupo TFM to conduct its business in accordance with past practices and
not to directly or indirectly amend its organizational documents. The court
ordered Grupo TMM to take the actions necessary to revoke the new powers of
attorney, to re-enact the original powers of attorney, and to pay KCS its costs
and attorneys fees for bringing the motion for contempt.
REPURCHASE OF MEXRAIL SHARES BY TFM
On August 29, 2003, KCS received a demand for TFM to repurchase from KCS
shares of Mexrail sold to KCS in May 2003. On September 23, 2003, the STB issued
a decision finding no need to rule on the transfer back to TFM of the 51%
interest in Mexrail that KCS acquired on May 9, 2003. The effect of the decision
was to allow TFM to reaquire the shares in accordance with the Stock Purchase
Agreement and KCS has abided by that agreement. The repurchase of Mexrail by TFM
on September 30, 2003 returned 100% ownership of Mexrail to TFM and the Stock
Purchase Agreement automatically terminated. The repurchase price was the price
KCS paid TFM in May.
NOTICE OF TERMINATION OF JOINT VENTURE AGREEMENT
In addition, KCS acknowledged receipt from Grupo TMM of a notice to
terminate a joint venture agreement between the parties entered into in 1995.
Pursuant to such notice, the joint venture agreement terminated on December 1,
2003.
DESCRIPTION OF THE SERIES C PREFERRED STOCK
The following is a summary of certain provisions of the certificate of
designations for our 4.25% Redeemable Cumulative Convertible Perpetual Preferred
Stock, Series C, which we refer to as the "Series C Preferred Stock." A copy of
the certificate of designations and the form of Series C Preferred Stock share
certificate are available upon request from us at the address set forth under
"Where You Can Find More Information." The following summary of the terms of the
Series C Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the certificate of
designations, including the definitions of terms used in the certificate of
designations. Wherever particular provisions or defined terms of the certificate
of designations or form of Series C Preferred Stock are referred to, these
provisions or defined terms are incorporated by reference in this prospectus by
reference. We urge you to read the certificate of designations because it, and
not this description, defines your rights as a holder of shares of Series C
Preferred Stock. As used in this section, the terms the "KCS," "us," "we" or
"our" refer to Kansas City Southern and not any of its subsidiaries.
GENERAL
Under our restated certificate of incorporation, our board of directors is
authorized, without further stockholder action, to issue up to 2,000,000 shares
of New Series Preferred Stock, par value $1.00 per share, in one or more series,
with such voting powers or without voting powers, and with such designations,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions, as shall be set forth in the
resolutions providing therefor. We have 450,000 shares of authorized New Series
Preferred Stock which are undesignated. Of the 2,000,000 shares of New Series
Preferred Stock, (1) 150,000 shares are designated as New Series Preferred Stock
Series A, of which no shares are currently outstanding, (2) 1,000,000 shares are
designated as Series B Convertible Preferred Stock, of which no shares are
currently outstanding and (3) 400,000 shares of are designated as 4.25%
Redeemable Cumulative Convertible Perpetual Preferred Stock, Series C, of which
400,000 shares are currently outstanding. We also have outstanding 242,170
shares of Preferred Stock out of 840,000 authorized shares.
The holders of the shares of Series C Preferred Stock will have no
preemptive rights or preferential rights to purchase or subscribe for stock,
obligations, warrants or any other of our securities.
RANKING
The Series C Preferred Stock, with respect to dividend rights and upon
liquidation, winding up and dissolution, ranks:
o junior to all our existing and future debt obligations;
o junior to "senior stock," which is our Preferred Stock, and each class
or series of our capital stock other than (a) our common stock and any
other class or series of our capital stock the terms of which provide
that such class or series will rank junior to the Series C Preferred
Stock and (b) any other class or series of our capital stock the terms
of which provide that such class or series will rank on a parity with
the Series C Preferred Stock;
o on a parity with "parity stock," which is (a) our New Series Preferred
Stock, Series A, (b) our Series B Convertible Preferred Stock and (c)
any other class or series of our capital stock that has terms which
provide that such class or series will rank on a parity with the
Series C Preferred Stock;
o senior to "junior stock," which is our common stock and each class or
series of our capital stock that has terms which provide that such
class or series will rank junior to the Series C Preferred Stock; and
o effectively junior to all of our subsidiaries' (i) existing and future
liabilities and (ii) capital stock held by others.
The term "senior stock" includes warrants, rights, calls or options exercisable
for or convertible into that type of stock.
DIVIDENDS
Holders of the shares of Series C Preferred Stock are entitled to receive,
when, as and if declared by our board of directors, out of funds legally
available for payment, cumulative cash dividends on each outstanding share of
Series C Preferred Stock at the annual rate of 4.25% of the liquidation
preference per share. The dividend rate is initially equivalent to $21.25 per
share annually. The right of holders of the shares of Series C Preferred Stock
to receive dividend payments is subject to the rights of any holders of shares
of senior stock and parity stock.
Dividends are payable quarterly in arrears on February 15, May 15, August
15 and November 15 of each year, beginning on August 15, 2003. If any of those
dates is not a business day, then dividends will be payable on the next
succeeding business day. Dividends will accumulate from the most recent date as
to which dividends will have been paid or, if no dividends have been paid, from
the date of original issuance of the Series C Preferred Stock. Dividends are
payable to holders of record as they appear in our stock records at the close of
business on February 1, May 1, August 1 and November 1 of each year or on a
record date that may be fixed by our board of directors and that will be not
more than 60 days nor fewer than 10 days before the applicable quarterly
dividend payment date. Dividends will be cumulative from each quarterly dividend
payment date, whether or not we have funds legally available for the payment of
those dividends.
Dividends payable on the shares of Series C Preferred Stock for any period
shorter than a full quarterly period will be computed on the basis of a 360-day
year consisting of twelve 30-day months. Dividends on the shares of Series C
Preferred Stock, including special dividends, if any, will be payable in cash.
Accumulated unpaid dividends cumulate dividends at the annual rate of 4.25% and
are payable in the manner provided above.
For so long as the Series C Preferred Stock is outstanding, (1) we will not
declare, pay or set apart funds for the payment of any dividend or other
distribution with respect to any junior stock or parity stock and (2) neither
we, nor any of our subsidiaries, will redeem, purchase or otherwise acquire for
consideration junior stock or parity stock through a sinking fund or otherwise,
unless we have paid or set apart funds for the payment of all accumulated and
unpaid dividends, including special dividends, if any, with respect to the
shares of the Series C Preferred Stock and any parity stock for all preceding
dividend periods. As an exception to clause (2), we will be able to redeem,
purchase or otherwise acquire for consideration parity stock pursuant to a
purchase or exchange offer made on the same terms to all holders of Series C
Preferred Stock and such parity stock.
Holders of the Series C Preferred Stock will not have any right to receive
dividends that we may declare on our common stock. The right to receive
dividends declared on our common stock will be realized only after conversion of
such holder's shares of Series C Preferred Stock into shares of our common
stock.
CONVERSION RIGHTS
GENERAL
Each share of Series C Preferred Stock will be convertible at any time and
from time to time, on or after the occurrence of the conversion triggering
events described below at the option of the holder, into fully paid and
nonassessable shares of our common stock at a conversion rate of 33.4728 shares,
subject to adjustments as described under "--Adjustments to the Conversion
Rate."
A holder of shares of the Series C Preferred Stock may convert any or all
of those shares by surrendering to us at our principal office or at the office
of the transfer agent, as may be designated by our board of directors, the
certificate or certificates for those shares of the Series C Preferred Stock
accompanied by a written notice stating that the holder elects to convert all or
a specified whole number of those shares in accordance with the provisions
described in this prospectus and specifying the name or names in which the
holder wishes the certificate or certificates for shares of common stock to be
issued. In case the notice specifies a name or names other than that of the
holder, the notice will be accompanied by payment of all transfer taxes payable
upon the issuance of shares of common stock in that name or names. Other than
those taxes, we will pay any documentary, stamp or similar issue or transfer
taxes that may be payable in respect of any issuance or delivery of shares of
common stock upon conversion of shares of the Series C Preferred Stock. As
promptly as practicable after the surrender of that certificate or certificates
and the receipt of the notice relating to the conversion and payment of all
required transfer taxes, if any, or the demonstration to our satisfaction that
those taxes have been paid, we will deliver or cause to be delivered (a)
certificates representing the number of validly issued, fully paid and
nonassessable full shares of our common stock to which the holder, or the
holder's transferee, of shares of the Series C Preferred Stock being converted
will be entitled and (b) if less than the full number of shares of Series C
Preferred Stock evidenced by the surrendered certificate or certificates is
being converted, a new certificate or certificates, of like tenor, for the
number of shares evidenced by the surrendered certificate or certificates less
the number of shares being converted. This conversion will be deemed to have
been made at the close of business on the date of giving the notice and of
surrendering the certificate or certificates representing the shares of Series C
Preferred Stock to be converted so that the rights of the holder thereof as to
the shares being converted will cease except for the right to receive shares of
common stock, and the person entitled to receive the shares of common stock will
be treated for all purposes as having become the record holder of those shares
of common stock at that time.
In lieu of the foregoing procedures, if the Series C Preferred Stock is
held in global form, you must comply with The Depository Trust Company ("DTC")
procedures to convert your beneficial interest in respect of Series C Preferred
Stock evidenced by a global share of Series C Preferred Stock.
If a holder of shares of Series C Preferred Stock exercises conversion
rights, upon delivery of the shares for conversion, those shares will cease to
cumulate dividends as of the end of the day immediately preceding the date of
conversion. Holders of shares of Series C Preferred Stock who convert their
shares into our common stock will not be entitled to, nor will the conversion
rate be adjusted for, any accumulated and unpaid dividends. Accordingly, shares
of Series C Preferred Stock surrendered for conversion after the close of
business on any record date for the payment of dividends declared and before the
opening of business on the dividend payment date relating to that record date
must be accompanied by a payment in cash of an amount equal to the dividend
payable in respect of those shares for the dividend period in which the shares
are converted. A holder of shares of Series C Preferred Stock on a dividend
payment record date who converts such shares into shares of our common stock on
the corresponding dividend payment date will be entitled to receive the dividend
payable on such shares of Series C Preferred Stock on such dividend payment
date, and the converting holder need not include payment of the amount of such
dividend upon surrender of shares of Series C Preferred Stock for conversion.
Notwithstanding the foregoing, if shares of Series C Preferred Stock are
converted during the period between the close of business on any dividend
payment record date and the opening of business on the corresponding dividend
payment date, and we have called such shares of Series C Preferred Stock for
redemption during such period or we have specified a fundamental change purchase
date during such period, the holder who tenders such shares for conversion will
receive the dividend payable on such dividend payment date and need not include
payment of the amount of such dividend upon surrender of shares of Series C
Preferred Stock for conversion.
In case any shares of Series C Preferred Stock are to be redeemed, the
right to convert those shares of the Series C Preferred Stock will terminate at
5:00 p.m., New York City time, on the business day immediately preceding the
date fixed for redemption unless we default in the payment of the redemption
price of those shares.
In connection with the conversion of any shares of Series C Preferred
Stock, no fractional shares of common stock will be issued, but we will pay a
cash adjustment in respect of any fractional interest in an amount equal to the
fractional interest multiplied by the closing sale price of our common stock (as
defined below under "--Conversion Rights--Events Triggering Conversion
Rights--Conversion Rights Based on Trading Price of Our Common Stock") on the
date the shares of Series C Preferred Stock are surrendered for conversion. If
more than one share of Series C Preferred Stock will be surrendered for
conversion by the same holder at the same time, the number of full shares of
common stock issuable on conversion of those shares will be computed on the
basis of the total number of shares of Series C Preferred Stock so surrendered.
We will at all times reserve and keep available, free from preemptive
rights, for issuance upon the conversion of shares of Series C Preferred Stock a
number of our authorized but unissued shares of common stock that will from time
to time be sufficient to permit the conversion of all outstanding shares of
Series C Preferred Stock.
Before the delivery of any securities that we will be obligated to deliver
upon conversion of the Series C Preferred Stock, we will comply with all
applicable federal and state laws and regulations that require action to be
taken by us. All shares of common stock delivered upon conversion of the Series
C Preferred Stock will upon delivery be duly and validly issued, fully paid and
nonassessable, free of all liens and charges and not subject to any preemptive
rights.
EVENTS TRIGGERING CONVERSION RIGHTS
A holder's right to convert its shares of Series C Preferred Stock will
arise only upon the occurrence of the events specified in this section.
CONVERSION RIGHTS BASED ON TRADING PRICE OF OUR COMMON STOCK. Commencing
after June 30, 2003, a holder may surrender shares of Series C Preferred Stock
for conversion into shares of our common stock in any fiscal quarter (and only
during such fiscal quarter), if, as of the last day of the preceding fiscal
quarter, the closing sale price of our common stock for at least 20 trading days
in a period of 30 consecutive trading days ending on the last trading day of
such preceding fiscal quarter is more than 110% of the "conversion price" as of
the last day of such preceding fiscal quarter. The "conversion price" as of any
day will equal the liquidation preference divided by the conversion rate in
effect on such date.
"Trading day" means a day during which trading in securities generally
occurs on the New York Stock Exchange or, if our common stock is not listed on
the New York Stock Exchange, on the principal other national or regional
securities exchange on which our common stock is then listed or, if our common
stock is not listed on a national or regional securities exchange, on the
National Association of Securities Dealers Automated Quotation System ("Nasdaq")
or, if our common stock is not quoted on Nasdaq, on the principal other market
on which our common stock is then traded.
The "closing sale price" of our common stock on any date means the closing
sale price per share (or if no closing sale price is reported, the average of
the closing bid and ask prices or, if more than one in either case, the average
of the average closing bid and the average closing ask prices) on such date as
reported on the principal United States securities exchange on which our common
stock is traded or, if our common stock is not listed on a United States
national or regional securities exchange, as reported by Nasdaq or by the
National Quotation Bureau Incorporated. In the absence of such a quotation, we
will determine the closing sale price on the basis we consider appropriate.
CONVERSION RIGHTS UPON CREDIT RATING DOWNGRADE. After the earlier of (a)
the date the Series C Preferred Stock is assigned a credit rating by both S&P
and Moody's and (b) May 31, 2003, during a period in which (1) the credit rating
assigned to the Series C Preferred Stock by S&P is below CCC, (2) the credit
rating assigned to the Series C Preferred Stock by Moody's is below Caa3 (3)
either S&P or Moody's does not assign a credit rating to the Series C Preferred
Stock, or (4) any rating is suspended or withdrawn by either S&P or Moody's,
holders may also surrender Series C Preferred Stock for conversion into shares
of our common stock.
CONVERSION UPON SATISFACTION OF TRADING PRICE CONDITION. Holders may
surrender their shares of Series C Preferred Stock for conversion into shares of
our common stock during the five business day period after any five consecutive
trading-day period in which the trading price of the Series C Preferred Stock
for each day of that five trading-day period was less than 98% of the product of
the closing sale price of our common stock and the conversion rate in effect on
each such day.
The "trading price" of the Series C Preferred Stock on any date of
determination means the average of the secondary market bid quotations obtained
by us or a calculation agent for 50,000 shares of Series C Preferred Stock at
approximately 3:30 p.m., New York City time, on such determination date from
three independent nationally recognized securities dealers that we or a
calculation agent selects; provided that if three such bids cannot reasonably be
obtained by us or a calculation agent, but two such bids are obtained, then the
average of the two bids shall be used, and if only one such bid can reasonably
be obtained by us or the calculation agent, that one bid shall be used. If we or
a calculation agent cannot reasonably obtain at least one bid for 50,000 shares
of Series C Preferred Stock from a nationally recognized securities dealer, or
in our reasonable judgment, the bid quotations are not indicative of the
secondary market value of the Series C Preferred Stock, then the trading price
per share of Series C Preferred Stock will be deemed to be less than 98% of the
product of the closing sale price of our common stock and the conversion rate.
CONVERSION RIGHTS UPON NOTICE OF REDEMPTION. A holder may surrender for
conversion any or all shares of Series C Preferred Stock that have been called
for redemption at any time prior to 5:00 p.m., New York City time, on the
business day immediately preceding the date of redemption, even if the Series C
Preferred Stock is not otherwise convertible at that time.
CONVERSION RIGHTS UPON OCCURRENCE OF CERTAIN CORPORATE TRANSACTIONS. If we
are party to a consolidation, merger or binding share exchange pursuant to which
shares of our common stock would be converted into cash, securities or other
property, a holder may surrender shares of Series C Preferred Stock for
conversion into shares of our common stock at any time from and after the date
that is 15 days prior to the anticipated effective date of the transaction until
15 days after the actual date of such transaction and, at the effective time,
the right to convert shares of Series C Preferred Stock into shares of our
common stock will be changed into a right to convert such Series C Preferred
Stock into the kind and amount of cash, securities or other property of us or
another person that the holder would have received if the holder had converted
the holder's Series C Preferred Stock immediately prior to the transaction. If
such transaction also constitutes a fundamental change, the holder will be able
to require us to purchase all or a portion of such holder's Series C Preferred
Stock as described under "--Fundamental Change Requires Us to Purchase Shares of
Series C Preferred Stock at the Option of the Holder."
If we elect to:
o distribute to all holders of our common stock rights or warrants
entitling them to purchase, for a period expiring within 45 days of
the record date for such distribution, our common stock at less than
the average closing sale price for the 10 trading days preceding the
declaration date for such distribution; or
o distribute to all holders of our common stock, cash, assets, debt
securities or rights to purchase our securities, which distribution
has a per share value exceeding 5% of the closing sale price of our
common stock on the day immediately preceding the declaration date for
such distribution;
we must notify you at least 20 days prior to the ex-dividend date for such
distribution. Once we have given such notice, you may surrender your shares of
Series C Preferred Stock for conversion at any time until the earlier of the
close of business on the business day immediately preceding the ex-dividend date
or any announcement by us that such distribution will not take place. No
adjustment to the conversion rate or your ability to convert will be made if you
will otherwise participate in the distribution without conversion.
Upon determination that Series C Preferred Stock holders are or will be
entitled to convert their Series C Preferred Stock into shares of our common
stock in accordance with any of the foregoing provisions, we will issue a press
release and publish such information on our website on the World Wide Web.
ADJUSTMENTS TO THE CONVERSION RATE
The conversion rate is subject to adjustment from time to time if any of
the following events occur:
o dividends or distributions on shares of our common stock payable in
shares of our common stock;
o subdivisions, combinations or certain reclassifications of shares of
our common stock;
o distributions to all holders of shares of our common stock of rights
or warrants entitling them to purchase, for a period expiring within
45 days of the record date for such distribution, our common stock at
less than the average closing sale price for the 10 trading days
preceding the declaration date for such distribution;
o distributions to all holders of shares of our common stock of shares
of our capital stock, evidences of indebtedness or assets, including
securities but excluding:
o rights or warrants specified above;
o dividends or distributions specified above; and
o cash distributions.
In the event that we make a distribution to all holders of our common
stock consisting of capital stock of, or similar equity interest in, a
subsidiary or other business unit of ours, the conversion rate will be
adjusted based on the market value of the securities so distributed
relative to the market value of our common stock, in each case based
on the average closing sale prices of those securities for the 10
trading days commencing on and including the fifth trading day after
the date on which "ex-dividend trading" commences for such dividend or
distribution on the New York Stock Exchange or such other national or
regional exchange or market on which the securities are then listed or
quoted.
o distributions to all holders of shares of our common stock of cash,
excluding any dividend or distribution in connection with our
liquidation, dissolution or winding up, to the extent that the
aggregate cash dividends per share of common stock in any twelve month
period exceeds the greater of:
o the annualized amount per share of common stock of the next
preceding quarterly cash dividend on the common stock to the
extent that the preceding quarterly dividend did not require an
adjustment of the conversion rate pursuant to this clause, as
adjusted to reflect subdivisions or combinations of the common
stock; and
o 5% of the average of the closing sale price of the common stock
during the ten trading days immediately prior to the declaration
date of the dividend.
If an adjustment is required to be made under this clause as a result
of a distribution that is a quarterly dividend, the adjustment would
be based upon the amount by which the distribution exceeds the amount
of the quarterly cash dividend permitted to be excluded pursuant to
this clause. If an adjustment is required to be made under this clause
as a result of a distribution that is not a quarterly dividend, the
adjustment would be based upon the full amount of the distribution;
o we or one of our subsidiaries makes a payment in respect of a tender
offer or exchange offer for our common stock to the extent that the
cash and value of any other consideration included in the payment per
share of common stock exceeds the closing sale price per share of
common stock on the trading day next succeeding the last date on which
tenders or exchanges may be made pursuant to such tender or exchange
offer; and
o someone other than us or one of our subsidiaries makes a payment in
respect of a tender offer or exchange offer in which, as of the
closing date of the offer, our board of directors is not recommending
rejection of the offer. The adjustment referred to in this clause will
only be made if:
o the tender offer or exchange offer is for an amount that
increases the offeror's ownership of common stock to more than
25% of the total shares of common stock outstanding; and
o the cash and value of any other consideration included in the
payment per share of common stock exceeds the closing sale price
per share of common stock on the business day next succeeding the
last date on which tenders or exchanges may be made pursuant to
the tender or exchange offer.
However, the adjustment referred to in this clause will generally not
be made if as of the closing of the offer, the offering documents
disclose a plan or an intention to cause us to engage in a
consolidation or merger or a sale of all or substantially all of our
assets.
We have adopted a Rights Agreement dated September 19, 1995, pursuant to
which certain rights were issued with respect to our shares of common stock. You
will receive, upon conversion of your Series C Preferred Stock, in addition to
the common stock, the rights under the rights agreement or any other rights plan
then in effect unless, prior to conversion, the rights have expired, terminated
or been redeemed or unless the rights have separated from the common stock at
the time of conversion, in which case the conversion rate will be adjusted at
the time of separation as if we had distributed to all holders of our common
stock, shares of our capital stock, evidences of indebtedness or assets as
described under the fourth bullet point above, subject to readjustment in the
event of the expiration, termination or redemption of such rights.
In the event of:
o any reclassification of our common stock;
o a consolidation, merger or combination involving us; or
o a sale or conveyance to another person or entity of all or
substantially all of our property and assets;
in which holders of our common stock would be entitled to receive stock, other
securities, other property, assets or cash for their common stock, upon
conversion of your Series C Preferred Stock you will be entitled to receive the
same type of consideration that you would have been entitled to receive if you
had converted the Series C Preferred Stock into our common stock immediately
prior to any of these events.
The proposed Acquisition and transactions described under "Description of
the Acquisitions" including the Merger, and the renaming of KCS to NAFTA Rail
are not, as proposed, expected to trigger any adjustments to the conversion
rate.
You may in certain situations be deemed to have received a distribution
subject to United States federal income tax as a dividend in the event of any
taxable distribution to holders of common stock or in certain other situations
requiring a conversion rate adjustment. See "Certain United States Federal Tax
Considerations."
We may, from time to time, increase the conversion rate if our board of
directors has made a determination that this increase would be in our best
interests. Any such determination by our board will be conclusive. In addition,
we may increase the conversion rate if our board of directors deems it advisable
to avoid or diminish any income tax to holders of common stock resulting from
any stock or rights distribution. See "Certain United States Federal Tax
Considerations."
We will not be required to make an adjustment in the conversion rate unless
the adjustment would require a change of at least 1% in the conversion rate.
However, we will carry forward any adjustments that are less than 1% of the
conversion rate. Except as described above in this section, we will not adjust
the conversion rate for any issuance of our common stock or convertible or
exchangeable securities or rights to purchase our common stock or convertible or
exchangeable securities.
OPTIONAL REDEMPTION
We may not redeem any shares of Series C Preferred Stock before May 20,
2008. On or after May 20, 2008, we will have the option to redeem some or all
the shares of Series C Preferred Stock at a redemption price of 100% of the
liquidation preference, plus accumulated and unpaid dividends, including special
dividends, if any, to the redemption date, but only if the closing sale price of
our common stock for 20 trading days within a period of 30 consecutive trading
days ending on the trading day before the date we give the redemption notice
exceeds 135% of the conversion price in effect on each such day. If full
cumulative dividends on the Series C Preferred Stock have not been paid, the
Series C Preferred Stock may not be redeemed and we may not purchase or acquire
any shares of Series C Preferred Stock otherwise than pursuant to a purchase or
exchange offer made on the same terms to all holders of Series C Preferred Stock
and any parity stock.
We may elect to pay the redemption price in cash, common stock, or a
combination of cash and common stock. The number of shares of common stock a
holder will receive will equal the relevant amount of the redemption price
divided by 97.5% of the average of the closing sale prices of our common stock
for the five trading days ending on the third trading day prior to the
redemption date. However, we may not pay the purchase price in common stock or a
combination of common stock and cash unless we satisfy certain conditions prior
to the redemption date as provided in the certificate of designations,
including:
o registration of the shares of our common stock to be issued upon
redemption under the Securities Act and the Exchange Act, if required;
o qualification of the shares of our common stock to be issued upon
redemption under applicable state securities laws, if necessary, or
the availability of an exemption therefrom; and
o listing of our common stock on a United States national securities
exchange or quotation thereof in an inter-dealer quotation system of
any registered United States national securities association.
In the event of an optional redemption, we will send a written notice by
first class mail to each holder of record of the Series C Preferred Stock at
such holder's registered address, not fewer than 30 nor more than 90 days prior
to the redemption date, stating, among other things, whether the redemption
price will be paid in cash or common stock, or a combination and, if a
combination, specifying the portions payable in cash and common stock. In
addition, we will (i) publish such information once in a daily newspaper printed
in the English language and of general circulation in the Borough of Manhattan,
City of New York, (ii) issue a press release containing such information, and
(iii) publish such information on our website on the World Wide Web.
Because the average closing sale price of our common stock will be
determined prior to the redemption date, holders of Series C Preferred Stock
bear the market risk that our common stock will decline in value between the
date the average closing sale price is calculated and the redemption date. In
addition, because the number of shares of our common stock that you will receive
upon any redemption for shares is based on the average closing sale price for a
5 trading day period, the market value of those shares on the date of receipt
may be less than the value of those shares based on the average closing sale
price.
If we give notice of redemption, then, by 12:00 p.m., New York City time,
on the redemption date, to the extent funds are legally available, we shall,
with respect to:
o shares of Series C Preferred Stock held by DTC or its nominees,
deposit or cause to be deposited, irrevocably with DTC cash or common
stock sufficient to pay the redemption price and will give DTC
irrevocable instructions and authority to pay the redemption price to
holders of such shares of Series C Preferred Stock; and
o shares of Series C Preferred Stock held in certificated form, deposit
or cause to be deposited, irrevocably with the transfer agent cash or
common stock sufficient to pay the redemption price and will give the
transfer agent irrevocable instructions and authority to pay the
redemption price to holders of such shares of Series C Preferred Stock
upon surrender of their certificates evidencing their shares of Series
C Preferred Stock.
If on the redemption date DTC and the transfer agent hold cash or common
stock sufficient to pay the redemption price for the shares of Series C
Preferred Stock delivered for redemption in accordance with the terms of the
certificate of designations, dividends will cease to accumulate on those shares
of Series C Preferred Stock called for redemption and all rights of holders of
such shares will terminate except for the right to receive the redemption price.
Payment of the redemption price for the shares of Series C Preferred Stock
is conditioned upon book-entry transfer of or physical delivery of certificates
representing the Series C Preferred Stock, together with necessary endorsements,
to the transfer agent, or to the transfer agent's account at DTC, at any time
after delivery of the redemption notice. Payment of the redemption price for the
Series C Preferred Stock will be made (i) if book-entry transfer of or physical
delivery of the Series C Preferred Stock has been made by or on the redemption
date, on the redemption date, or (ii) if book-entry transfer of or physical
delivery of the Series C Preferred Stock has not been made by or on such date,
at the time of book-entry transfer of or physical delivery of the Series C
Preferred Stock.
If the redemption date falls after a dividend payment record date and
before the related dividend payment date, holders of the shares of Series C
Preferred Stock at the close of business on that dividend payment record date
will be entitled to receive the dividend payable on those shares on the
corresponding dividend payment date. The redemption price payable on such
redemption date will include only the liquidation preference, but will not
include any amount in respect of dividends declared and payable on such
corresponding dividend payment date.
In the case of any partial redemption, we will select the shares of Series
C Preferred Stock to be redeemed on a pro rata basis, by lot or any other method
that we, in our discretion, deem fair and appropriate.
Our restated certificate of incorporation provides that we may not redeem
the Series C Preferred Stock if, (i) as of the date of the mailing of the
redemption notice, such redemption would, if such date were the date fixed for
redemption, reduce our net assets remaining after such redemption below twice
the aggregate amount payable upon voluntary or involuntary liquidation,
dissolution or winding up or (ii) we have not paid or set apart for payment all
accumulated dividends for the current and prior dividend periods in respect of
shares which have a right to cumulative dividends.
FUNDAMENTAL CHANGE REQUIRES US TO PURCHASE SHARES OF SERIES C PREFERRED STOCK AT
THE OPTION OF THE HOLDER
In the event of a fundamental change, you will have the right, at your
option, subject to the terms and conditions of the certificate of designations,
to require us to purchase any or all of your shares of Series C Preferred Stock.
We will purchase the Series C Preferred Stock at a price equal to 100% of the
liquidation preference of the Series C Preferred Stock to be purchased plus any
accumulated and unpaid dividends, including special dividends, if any, to, but
excluding, the fundamental change purchase date, unless such fundamental change
purchase date falls after a record date and on or prior to the corresponding
dividend payment date, in which case (i) we will pay the full amount of
accumulated and unpaid dividends payable on such dividend payment date only to
the holder of record at the close of business on the corresponding record date
and (ii) the purchase price payable on the fundamental change purchase date will
include only the liquidation preference, but will not include any amount in
respect of dividends declared and payable on such corresponding payment date. We
will be required to purchase the Series C Preferred Stock as of the date that is
not less than 20 nor more than 35 business days after the occurrence of such
fundamental change, which we refer to as a fundamental change purchase date.
We will pay the purchase price of the Series C Preferred Stock, at our
option, in cash, in shares of our common stock or any combination thereof. The
number of shares of common stock a holder will receive will equal the purchase
price divided by 97.5% of the average closing sale prices for the five trading
days ending on the third trading day prior to the fundamental change purchase
date. However, we may not pay the purchase price in common stock, unless we
satisfy certain conditions prior to the fundamental change purchase date as
provided in the certificate of designations including:
o registration of the shares of the applicable common stock or
securities to be issued upon repurchase under the Securities Act and
the Exchange Act, if required;
o qualification of the shares of common stock to be issued upon
repurchase under applicable state securities laws, if necessary, or
the availability of an exemption therefrom; and
o listing of the shares of common stock on a United States national
securities exchange or quotation thereof in an inter-dealer quotation
system of any registered United States national securities
association.
If we pay the purchase price in shares of common stock, we will notify you
of such payment in our notice regarding the fundamental change. Because the
average closing sale price of our common stock will be determined prior to the
fundamental change purchase date, holders of Series C Preferred Stock bear the
market risk that our common stock will decline in value between the date the
average closing sale price is calculated and the purchase date. In addition,
because the number of shares of our common stock that you will receive is based
on the average closing sale price for a five trading day period, the market
value of those shares on the date of receipt may be less than the value of those
shares based on the average closing sale price.
A "fundamental change" is any transaction or event (whether by means of an
exchange offer, liquidation, tender offer, consolidation, merger, combination,
reclassification, recapitalization or otherwise) in connection with which all or
substantially all of our common stock is exchanged for, converted into, acquired
for or constitutes solely the right to receive consideration which is not all or
substantially all common stock that:
o is listed on, or immediately after the transaction or event will be
listed on, a United States national securities exchange, or
o is approved, or immediately after the transaction or event will be
approved, for quotation on the Nasdaq National Market or any similar
United States system of automated dissemination of quotations of
securities prices.
Within 15 business days after the occurrence of a fundamental change, we
are obligated to mail to all holders of Series C Preferred Stock at their
addresses shown in the register of the registrar and to beneficial owners as
required by applicable law (and issue a press release and publish on our website
on the World Wide Web) a notice regarding the fundamental change, stating, among
other things:
o the events causing a fundamental change;
o the date of such fundamental change;
o the last date on which the purchase right may be exercised;
o the fundamental change purchase price and whether that price will be
paid in cash or shares of our common stock or any specified
combination thereof;
o the fundamental change purchase date;
o the name and address of the paying agent and the conversion agent;
o the conversion rate and any adjustments to the conversion rate;
o that the Series C Preferred Stock with respect to which a fundamental
change purchase notice is given by the holder may be converted only if
the fundamental change purchase notice has been withdrawn in
accordance with the terms of the Series C Preferred Stock; and
o the procedures that holders must follow to exercise these rights.
To exercise this right, you must deliver a written notice to the transfer
agent prior to the close of business on the business day immediately before the
fundamental change purchase date. The required purchase notice upon a
fundamental change must state:
o if certificated shares of Series C Preferred Stock have been issued,
the Series C Preferred Stock certificate numbers, or if not, such
information as may be required under applicable DTC procedures;
o the number of preferred shares to be purchased; and
o that we are to purchase such Series C Preferred Stock pursuant to the
applicable provisions of the Series C Preferred Stock and certificate
of designations.
You may withdraw any fundamental change purchase notice by a written notice
of withdrawal delivered to the transfer agent prior to the close of business on
the business day before the fundamental change purchase date. The notice of
withdrawal must state:
o the number of the withdrawn shares of Series C Preferred Stock;
o if certificated shares of Series C Preferred Stock have been issued,
the Series C Preferred Stock certificate numbers, or if not, such
information as may be required under applicable DTC procedures; and
o the number, if any, of shares of Series C Preferred Stock that remain
subject to your fundamental change purchase notice.
A holder must either effect book-entry transfer or deliver the Series C
Preferred Stock to be purchased, together with necessary endorsements, to the
office of the transfer agent after delivery of the fundamental change purchase
notice to receive payment of the fundamental change purchase price. You will
receive payment in cash or shares of common stock, as applicable, on the later
of the fundamental change purchase date or the time of book-entry transfer or
the delivery of the Series C Preferred Stock. If the transfer agent holds money
or securities sufficient to pay the fundamental change purchase price of the
Series C Preferred Stock on the business day following the fundamental change
purchase date, then, immediately after the fundamental change purchase date:
o the shares of Series C Preferred Stock will cease to be outstanding;
o dividends will cease to accrue; and
o all other rights of the holder will terminate.
This will be the case whether or not book-entry transfer of the Series C
Preferred Stock is made or whether or not the Series C Preferred Stock is
delivered to the transfer agent.
The fundamental change purchase feature of the Series C Preferred Stock may
in certain circumstances make more difficult or discourage a takeover of KCS.
The fundamental change purchase feature, however, is not the result of our
knowledge of any specific effort:
o to accumulate shares of common stock;
o to obtain control of KCS by means of a merger, tender offer,
solicitation or otherwise; or
o by management to adopt a series of anti-takeover provisions.
Instead, the terms of the fundamental change purchase feature resulted from
negotiations between the Initial Purchasers and us.
We could, in the future, enter into certain transactions, including certain
recapitalizations, that would not constitute a fundamental change with respect
to the fundamental change purchase feature of the Series C Preferred Stock but
that would increase the amount of our (or our subsidiaries') outstanding
indebtedness.
Our ability to purchase shares of Series C Preferred Stock upon the
occurrence of a fundamental change is subject to important limitations. Because
we are a holding company, our ability to purchase the Series C Preferred Stock
for cash may be limited by restrictions on our ability to obtain funds for such
repurchase through dividends from our subsidiaries and the terms of our then
existing borrowing agreements. If a fundamental change were to occur, we may not
have sufficient legally available funds to pay the purchase price in cash for
all tendered shares of Series C Preferred Stock. Any future credit agreements or
other agreements relating to our indebtedness may contain provisions prohibiting
the purchase of the Series C Preferred Stock under certain circumstances, or
expressly prohibit our purchase of the Series C Preferred Stock upon a
fundamental change or may provide that a fundamental change constitutes an event
of default under that agreement. If a fundamental change occurs at a time when
we are prohibited from purchasing shares of Series C Preferred Stock for cash,
we could seek the consent of our lenders to purchase the Series C Preferred
Stock or attempt to refinance this debt. If we do not obtain consent, we would
not be permitted to purchase the Series C Preferred Stock, except as described
below.
If, following a fundamental change, we are prohibited from paying the
purchase price of the Series C Preferred Stock in cash under the terms of our
credit agreements or other agreements relating to our indebtedness, we will, if
permitted under those agreements and under applicable law, elect to pay the
purchase price of the Series C Preferred Stock in shares of our common stock or,
in the case of a merger in which we are not the surviving corporation, common
stock of the surviving corporation or its direct or indirect parent corporation.
VOTING RIGHTS
Unless otherwise determined by our board of directors, holders of shares of
Series C Preferred Stock will not have any voting rights except as described
below, as provided in our restated certificate of incorporation, or as otherwise
required from time to time by law. Whenever (1) dividends on any shares of
Series C Preferred Stock or any other class or series of stock ranking on a
parity with the Series C Preferred Stock with respect to the payment of
dividends shall be in arrears for dividend periods, whether or not consecutive,
containing in the aggregate a number of days equivalent to six calendar quarters
or (2) we fail to pay the redemption price on the date shares of Series C
Preferred Stock are called for redemption or the purchase price on the purchase
date for shares of Series C Preferred Stock following a fundamental change,
then, in each case, the holders of shares of Series C Preferred Stock (voting
separately as a class with all other series of other preferred stock on parity
with the Series C Preferred Stock upon which like voting rights have been
conferred and are exercisable) will be entitled to vote for the election of two
of the authorized number of our directors at the next annual meeting of
stockholders and each subsequent meeting until all dividends accumulated on the
Series C Preferred Stock have been fully paid or set aside for payment. The term
of office of all directors elected by the holders of Series C Preferred Stock
will terminate immediately upon the termination of the right of the holders of
Series C Preferred Stock to vote for directors. Each holder of shares of the
Series C Preferred Stock will have one vote for each share of Series C Preferred
Stock held.
So long as any shares of the Series C Preferred Stock remain outstanding,
we will not, without the consent of the holders of at least two-thirds of the
shares of Series C Preferred Stock outstanding at the time, voting separately as
a class with all other series of Series C Preferred Stock upon which like voting
rights have been conferred and are exercisable (1) issue or increase the
authorized amount of any class or series of stock ranking senior to the
outstanding Series C Preferred Stock as to dividends or upon liquidation or (2)
amend, alter or repeal provisions of our restated certificate of incorporation
or of the resolutions contained in the certificate of designations, whether by
merger, consolidation or otherwise, so as to amend, alter or affect any power,
preference or special right of the outstanding Series C Preferred Stock or the
holders thereof without the affirmative vote of not less than two-thirds of the
issued and outstanding Series C Preferred Stock; provided, however, that any
increase in the amount of the authorized common stock or authorized Series C
Preferred Stock or the creation and issuance of other series of common stock or
Series C Preferred Stock ranking on a parity with or junior to the Series C
Preferred Stock as to dividends and upon liquidation will not be deemed to
materially and adversely affect such powers, preference or special rights.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
our company resulting in a distribution of assets to the holders of any class or
series of our capital stock, each holder of shares of Series C Preferred Stock
will be entitled to payment out of our assets available for distribution of an
amount equal to the liquidation preference per share of Series C Preferred Stock
held by that holder, plus all accumulated and unpaid dividends, on those shares
to the date of that liquidation, dissolution, winding up, before any
distribution is made on any junior stock, including our common stock, but after
any distributions on any of our indebtedness or senior stock. After payment in
full of the liquidation preference and all accumulated and unpaid dividends to
which holders of shares of Series C Preferred Stock are entitled, holders will
not be entitled to any further participation in any distribution of our assets.
If, upon any voluntary or involuntary liquidation, dissolution or winding up of
our company, the amounts payable with respect to shares of Series C Preferred
Stock and all other parity stock are not paid in full, holders of shares of
Series C Preferred Stock and holders of the parity stock will share equally and
ratably in any distribution of our assets in proportion to the liquidation
preference and all accumulated and unpaid dividends to which each such holder is
entitled.
Neither the voluntary sale, conveyance, exchange or transfer, for cash,
shares of stock, securities or other consideration, of all or substantially all
of our property or assets nor the consolidation, merger or amalgamation of our
company with or into any corporation or the consolidation, merger or
amalgamation of any corporation with or into our company will be deemed to be a
voluntary or involuntary liquidation, dissolution or winding up of our company.
We are not required to set aside any funds to protect the liquidation
preference of the shares of Series C Preferred Stock, although the liquidation
preference will be substantially in excess of the par value of the shares of the
Series C Preferred Stock.
TRANSFER AGENT
The transfer agent, registrar, dividend disbursing agent, calculation agent
and redemption agent for the Series C Preferred Stock is UMB Bank, N.A.
BOOK-ENTRY SYSTEM
The Series C Preferred Stock has been issued in the form of a global
security held in book-entry form. DTC's nominee, Cede & Co. is the sole
registered holder of the Series C Preferred Stock. Owners of beneficial
interests in the Series C Preferred Stock represented by the global security
will hold their interests pursuant to the procedures and practices of DTC. As a
result, beneficial interests in any such securities will be shown on, and
transfers will be effected only through, records maintained by DTC and its
direct and indirect participants and any such interest may not be exchanged for
certificated securities, except in limited circumstances. Owners of beneficial
interests must exercise any rights in respect of their interests, including any
right to convert or require repurchase of their interests in the Series C
Preferred Stock, in accordance with the procedures and practices of DTC.
Beneficial owners will not be holders and will not be entitled to any rights
provided to the holders of the Series C Preferred Stock under the global
security or the certificate of designations. Our company and any of our agents
may treat DTC as the sole holder and registered owner of the global securities.
DTC has advised us as follows: DTC is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
facilitates the settlement of transactions among its participants through
electronic computerized book-entry changes in participants' accounts,
eliminating the need for physical movement of securities certificates. DTC's
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. DTC is owned by a number
of its participants and by the New York Stock Exchange, Inc., the American Stock
Exchange LLC, and the National Association of Securities Dealers, Inc. Access to
DTC's book-entry system is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
EXCHANGE OF GLOBAL SECURITIES
The Series C Preferred Stock, represented by the global security, will be
exchangeable for certificated securities with the same terms only if:
o DTC is unwilling or unable to continue as depositary or if DTC ceases
to be a clearing agency registered under the Exchange Act and a
successor depositary is not appointed by us within 90 days; or
o we decide to discontinue use of the system of book-entry transfer
through DTC (or any successor depositary).
REGISTRATION RIGHTS
This summary of certain provisions of the registration rights agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the registration rights
agreement, a copy of which we will make available upon written request as
described under "Where You Can Find More Information."
We have agreed under the registration rights agreement, at our expense, for
the benefit of the holders, to file with the SEC a shelf registration statement
covering resale of the Series C Preferred Stock and the shares of our common
stock issuable upon conversion of the Series C Preferred Stock by August 3,
2003. We have agreed to use our best efforts to cause the shelf registration
statement to become effective by November 1, 2003, and to keep the shelf
registration statement effective until the earlier of (i) the sale pursuant to
Rule 144 under the Securities Act or the shelf registration statement of all the
securities registered thereunder, and (ii) the expiration of the holding period
applicable to such securities held by persons that are not affiliates of ours
under Rule 144(k) under the Securities Act or any successor provision, subject
to permitted exceptions.
We may suspend the use of the prospectus under certain circumstances
relating to pending corporate developments, public filings with the SEC and
similar events. Any suspension period shall not:
o exceed 30 days in any three-month period; or
o exceed an aggregate of 90 days for all periods in any 12-month period.
We will pay predetermined liquidated damages as described herein in the
form of "special dividends" to holders of transfer restricted Series C Preferred
Stock and in the form of "liquidated damages payments" to holders of transfer
restricted common stock issued upon conversion of such Series C Preferred Stock,
if a shelf registration statement is not timely declared effective or if the
prospectus is unavailable for the periods in excess of those permitted above.
Such special dividends or liquidated damages payments shall accumulate until
such failure to file or become effective or unavailability is cured:
o on the Series C Preferred Stock at an annual rate equal 0.50% of the
aggregate liquidation preference of Series C Preferred Stock; and
o on the common stock that has been issued on conversion of the Series C
Preferred Stock, at an annual rate equal to 0.50% of an amount equal
to the conversion price.
So long as the failure to become effective or unavailability continues, we
will pay special dividends or make liquidated damages payments, as applicable,
in cash on each dividend payment date for the Series C Preferred Stock to the
holder of record of such transfer restricted Series C Preferred Stock or common
stock on the record date immediately preceding the applicable dividend payment
date. When such registration default is cured, accumulated and unpaid special
dividends or liquidated damages payments will be paid in cash to the record
holder as of the date of such cure.
A holder who sells Series C Preferred Stock or shares of our common stock
issued upon conversion of the Series C Preferred Stock pursuant to the shelf
registration statement generally will be required to:
o be named as a selling securityholder in the related prospectus;
o deliver a prospectus to purchasers; and
o be bound by certain provisions of the registration rights agreement
that are applicable to such holder, including certain indemnification
provisions, and will be subject to certain civil liability provisions
under the Securities Act.
Under the registration rights agreement we will:
o pay all of our expenses of the shelf registration statement;
o provide copies of such prospectus to each holder that has notified us
of its acquisition of Series C Preferred Stock or shares of our common
stock issued upon conversion of the Series C Preferred Stock;
o notify each such holder when the shelf registration statement has
become effective; and
o take certain other actions as are required to permit, subject to the
foregoing, unrestricted resales of the Series C Preferred Stock and
the shares of our common stock issued upon conversion of the Series C
Preferred Stock.
We have agreed in the registration rights agreement to give notice to all
holders of the filing and effectiveness of the shelf registration statement by
release made to Reuters Economic Services and Bloomberg Business News or other
reasonable means of distribution. A notice and questionnaire (the
"questionnaire") must be completed and delivered by a holder to us at least
three business days prior to any intended distribution of Series C Preferred
Stock or shares of our common stock issuable upon conversion of the Series C
Preferred Stock pursuant to the shelf registration statement. Holders are
required to complete and deliver the questionnaire at least ten business days
prior to the effectiveness of the shelf registration statement in order to be
named as a selling security holder in the related prospectus at the time of
effectiveness. Upon receipt of a completed questionnaire after that time,
together with such other information as we may reasonably request from a holder,
we will, within five business days, file such amendments to the shelf
registration statement or supplements to a related prospectus as are necessary
to permit such holder to deliver such prospectus to purchasers of Series C
Preferred Stock or shares of our common stock issuable upon conversion of the
Series C Preferred Stock, subject to our right to suspend the use of the
prospectus as described above. We will pay the special dividends or liquidated
damages payments described above to the holder if we fail to make the filing in
the time required or, if such filing is a post-effective amendment to the shelf
registration statement required to be declared effective under the Securities
Act, if such amendment is not declared effective within 45 days of the filing.
Any holder that does not complete and deliver a questionnaire or provide such
other information will not be named as a selling security holder in the
prospectus and therefore will not be permitted to sell the Series C Preferred
Stock or shares of our common stock issuable upon conversion of the Series C
Preferred Stock pursuant to the shelf registration statement.
DESCRIPTION OF KCS CAPITAL STOCK
The description of our capital stock set forth below is not complete and is
qualified by reference to our restated certificate of incorporation (including
the certificate of designations for the Series C Preferred Stock) and bylaws.
Copies of our restated certificate of incorporation (including the certificate
of designations for the Series C Preferred Stock) and bylaws are available from
us upon request. These documents have also been filed with the SEC. Please read
"Where You Can Find More Information."
AUTHORIZED CAPITAL STOCK
Under our restated certificate of incorporation, KCS is authorized to issue
(i) 400,000,000 shares of common stock, par value $0.01 per share, (ii) 840,000
shares of Preferred Stock, par value $25.00 per share, and (ii) 2,000,000 shares
of New Series Preferred Stock, par value $1.00 per share, of which 150,000
shares are designated as New Series Preferred Stock, Series A ("Series A
Preferred Stock"), 1,000,000 shares are designated as Series B Convertible
Preferred Stock ("Series B Preferred Stock") and 400,000 shares are designated
as 4.25% Redeemable Cumulative Convertible Perpetual Preferred Stock, Series C.
As of November 30, 2003, 62,102,283 shares of common stock were issued and
outstanding (excluding 11,266,833 treasury shares), 242,170 shares of Preferred
Stock were issued and outstanding, 400,000 shares of Series C Preferred Stock
were issued and outstanding, and no other shares of New Series Preferred Stock
were outstanding. In connection with the Acquisition, upon obtaining stockholder
approval, KCS intends to amend its restated certificate of incorporation to,
among other things, authorize the issuance of the Class A Convertible Common
Stock. See "Description of the Class A Convertible Common Stock." No other
classes of capital stock are authorized under KCS's restated certificate of
incorporation. The issued and outstanding shares of common stock, Preferred
Stock and Series C Preferred Stock are duly authorized, validly issued, fully
paid and non-assessable. Our common stock and Preferred Stock are listed on the
New York Stock Exchange.
COMMON STOCK
Holders of common stock are entitled to receive dividends when, as and if
declared by the board of directors out of funds legally available therefor,
provided that, if any shares of New Series Preferred Stock or Preferred Stock
are outstanding, no dividends or other distributions may be made with respect to
the common stock unless full required dividends on the shares of New Series
Preferred Stock and Preferred Stock have been paid, including accumulated
dividends in the case of any series of New Series Preferred Stock designated to
receive cumulative dividends.
Holders of common stock are entitled to one vote per share multiplied by
the number of directors to be elected in an election of directors, which may be
cast cumulatively, and to one vote per share on any other matter, voting as a
single class. In certain instances, holders of New Series Preferred Stock or
Preferred Stock may have special class voting rights. Holders of Preferred Stock
are entitled to one vote per share multiplied by the number of directors to be
elected in an election of directors, which may be cast cumulatively, and to one
vote per share on other matters. Holders of Preferred Stock vote as a single
class with the holders of common stock and any series of New Series Preferred
Stock having voting rights; however, whenever dividends are in arrears on the
Preferred Stock for six quarters, the holders of Preferred Stock have the right
to vote as a class to elect two directors at the next annual stockholders'
meeting at which directors are elected and have such right until dividends have
been paid on the Preferred Stock for four consecutive quarters. The vote of the
holders of two-thirds of Preferred Stock voting together as a class is required
for any amendment to KCS's restated certificate of incorporation which would
materially and adversely alter or change the powers, preferences or special
rights of such stock. See "Description of the Series C Preferred Stock--Voting
Rights" for a discussion of the voting rights of holders of the Series C
Preferred Stock.
In the event of the voluntary or involuntary dissolution, liquidation or
winding up of KCS, holders of common stock are entitled to receive pro rata,
after satisfaction in full of the prior rights of creditors (including holders
of KCS's indebtedness) and holders of New Series Preferred Stock and Preferred
Stock, all the remaining assets of KCS available for distribution. The issuance
of additional shares of New Series Preferred Stock or Preferred Stock may result
in a dilution of the voting power and relative equity interests of the holders
of common stock and would subject the common stock to the prior dividend and
liquidation rights of the New Series Preferred Stock and Preferred Stock issued.
The common stock is not redeemable and has no preemptive rights.
PREFERRED STOCK
We have 840,000 shares of authorized Preferred Stock, of which 242,170
shares are issued and outstanding. Holders of Preferred Stock are entitled to
receive, in the discretion of our board of directors, noncumulative dividends
declared by our board of directors of up to $1 per share per year, and no more,
before dividends may be declared or paid with respect to our common stock or any
series of New Series Preferred Stock.
Holders of Preferred Stock are entitled to one vote per share multiplied by
the number of directors to be elected in an election of directors, which may be
cast cumulatively, and to one vote per share on other matters. Holders of
Preferred Stock vote as a single class with the holders of our common stock and
any series of New Series Preferred Stock having voting rights. However, whenever
dividends are in arrears on the Preferred Stock for six quarters, the holders of
Preferred Stock have the right to vote as a class to elect two directors at the
next annual stockholders' meeting at which directors are elected and have such
right until dividends have been paid on the Preferred Stock for four consecutive
quarters. The vote of the holders of two-thirds of Preferred Stock voting
together as a class is required for any amendment to our restated certificate of
incorporation which would materially and adversely alter or change the powers,
preferences or special rights of the Preferred Stock.
In the event of our voluntary or involuntary dissolution, liquidation or
winding up, holders of Preferred Stock are entitled to receive payment in the
amount of the par value of their Preferred Stock and any declared and unpaid
dividends before any payment is made upon the New Series Preferred Stock or our
common stock. The Preferred Stock is not redeemable by us and has no preemptive
rights.
NEW SERIES PREFERRED STOCK
Under our restated certificate of incorporation, our board of directors is
authorized without further stockholder action, to issue up to 2,000,000 shares
of New Series Preferred Stock in one or more series, with such designations,
powers, preferences, rights, qualifications, limitations or restrictions, as
shall be set forth in a certificate of designations filed pursuant to the
Delaware Corporation Law, subject to the powers, preferences and rights of the
Preferred Stock.
If any series of New Series Preferred Stock entitles the holders thereof to
dividends, such dividends may be paid following the payment or setting apart for
payment of dividends on the Preferred Stock and prior to the payment or setting
apart for payment of dividends on our common stock. If specified, dividends may
be cumulative. In the event of a liquidation, dissolution or winding up of KCS,
holders of each series of New Series Preferred Stock are subordinate to the
holders of Preferred Stock, but have preference and priority over the holders of
our common stock, for payments of amounts as set forth in a certificate of
designations. The New Series Preferred Stock has no preemptive rights. We have
450,000 shares of authorized New Series Preferred Stock which are undesignated.
SERIES A PREFERRED STOCK
Our board of directors established the Series A Preferred Stock, consisting
of 150,000 shares, for issuance pursuant to our Stockholder Rights Agreement
(the "Rights Agreement"). No shares of Series A Preferred Stock have been
issued. See "--Anti-Takeover Provisions--Rights Agreement" below.
The shares of Series A Preferred Stock purchasable upon exercise of the
Rights will have a cumulative quarterly dividend rate set by our board of
directors or equal to 1,000 times the dividend declared on our common stock for
such quarter. Each share will have the voting rights of one vote on all matters
voted at a meeting of the stockholders for each 1/1,000th share of Series A
Preferred Stock held by such stockholder. In the event of any merger,
consolidation or other transaction in which our common shares are exchanged,
each share of Series A Preferred Stock will be entitled to receive an amount
equal to 1,000 times the amount to be received per common share. In the event of
a liquidation, the holders of Series A Preferred Stock will be entitled to
receive $1,000 per share or an amount per share equal to 1,000 times the
aggregate amount to be distributed per share to holders of our common stock. The
shares will not be redeemable. The vote of holders of a majority of the Series A
Preferred Stock, voting together as a class, will be required for any amendment
to the our restated certificate of incorporation that would materially and
adversely alter or change the powers, preferences or special rights of such
shares.
SERIES B PREFERRED STOCK
In 1993, our board of directors authorized the establishment of the Series
B Preferred Stock, consisting of 1,000,000 shares, for issuance to the trustee
of a grantor trust formed by us entitled "Employee Plan Funding Trust" (the
"Trust") for the purpose of holding shares of Series B Preferred Stock for the
benefit of various KCS employee benefit plans, including the Employee Stock
Ownership Plan, stock option plans and Employee Stock Purchase Plan. On October
1, 1993, we sold 1,000,000 shares of Series B Preferred Stock to the Trust for
$200 million with funds borrowed from us, secured by a pledge of the securities.
The Trust was administered by an independent bank trustee. The Series B
Preferred Stock could only be held by the trustee of the Trust or on behalf of
any employee benefit plan designated as a beneficiary of the Trust. Effective
September 30, 1998, we terminated the Trust. In accordance with the Agreement to
terminate the Trust, we received 872,362 shares of Series B Preferred Stock in
full repayment of the indebtedness from the Trust. In addition, the remaining
127,638 shares of Series B Preferred Stock were converted by the Trustee into
our common stock, at the rate of 6 to 1, resulting in the issuance to the Trust
of 765,828 shares of our common stock. The Trustee then transferred this common
stock to us and we have set these shares aside for use in connection with the
KCS 1991 Amended and Restated Stock Option and Performance Award Plan, as
amended and restated effective November 7, 2002. No shares of Series B Preferred
Stock remain outstanding.
SERIES C PREFERRED STOCK
For a detailed discussion of the Series C Preferred Stock, see "Description
of the Series C Preferred Stock."
ANTI-TAKEOVER PROVISIONS
CLASSIFIED BOARD OF DIRECTORS
Our restated certificate of incorporation provides that our board of
directors will be divided into three classes as nearly equal in number as
possible. Each class of directors serves for a term of three years and such
terms commence in three consecutive years so that one class of directors is
elected at the annual stockholders' meeting each year. Our restated certificate
of incorporation also provides that the vote of 70% of the shares entitled to
vote in the election of directors is required to amend the restated certificate
of incorporation to increase the number of directors to more than eighteen,
abolish cumulative voting for directors and abolish the classification of the
board. The same vote requirement is imposed by our restated certificate of
incorporation on certain transactions involving mergers, consolidations, sales
or leases of assets having a fair market value of $2 million or more, with or to
certain owners of more than 5% of our stock entitled to vote in the election of
directors, unless our board of directors has approved a memorandum of
understanding with any such owner prior to its becoming such a 5% holder. These
provisions could have the effect of delaying, deferring or preventing a change
in control of KCS.
RIGHTS AGREEMENT
To implement the Rights Agreement, in 1995 our board of directors declared
and made a dividend distribution of one Series A Preferred Stock purchase right
("Right") for each outstanding share of our common stock. Each Right entitles
the registered holder to purchase from us 1/1,000 of a share of Series A
Preferred Stock, or in some circumstances, common stock, other securities, cash
or other assets, as the case may be, at a price of $210 per share, subject to
adjustment.
The Rights, which are automatically attached to our common stock, are not
exercisable or transferable apart from our common stock until the tenth calendar
day following the earlier to occur of (unless extended by our board of directors
and subject to the earlier redemption or expiration of the Rights):
o the date of a public announcement that an acquiring person acquired,
or obtained the right to acquire, beneficial ownership of 20% or more
of the outstanding shares of our common stock (or 15% in the case that
such person is considered an "adverse person"); or
o the commencement or announcement of an intention to make a tender
offer or exchange offer that would result in an acquiring person
beneficially owning 20% or more of such outstanding shares of our
common stock (or 15% in the case that such person is considered an
"adverse person").
Until exercised, the Rights will have no rights as a stockholder of KCS,
including, without limitation, the right to vote or receive dividends. In
connection with certain business combinations resulting in the acquisition of
KCS or dispositions or more than 50% of our assets or earnings power, each Right
shall thereafter have the right to receive, upon the exercise of the Right at
the then current exercise price of the Right, that number of shares of the
highest priority voting securities of the acquiring company (or certain of its
affiliates) that at the time of such transaction would have a market value of
two times the exercise price of the Right. The Rights expire on October 12,
2005, unless earlier redeemed by us.
At any time prior to the tenth calendar day after the first date after the
public announcement that an acquiring person has acquired beneficial ownership
of 20% (or 15% in some instances) or more of the outstanding shares of our
common stock, we may redeem the Rights in whole, but not in part, at a price of
$0.005 per Right. In addition, our right of redemption may be reinstated
following an inadvertent trigger of the Rights (as determined by our board of
directors) if an acquiring person reduces its beneficial ownership to 10% or
less of the outstanding shares of our common stock in a transaction or series of
transactions not involving us.
Under certain circumstances, the Rights Agreement could significantly
impair the ability of third parties to acquire control of us without prior
approval of our board of directors.
DESCRIPTION OF THE CLASS A CONVERTIBLE COMMON STOCK
Shares of Class A Convertible Common Stock are to be issued pursuant to the
Acquisition Agreement and the transactions contemplated thereby. Additional
shares of Class A Convertible Common Stock may be issued pursuant to the
Consulting Agreement. The Class A Convertible Common Stock and the shares of
common stock issuable upon conversion of the Class A Convertible Common Stock
will be subject to the rights and obligations contained in the amended and
restated certificate of incorporation, to be filed upon occurrence of the
Merger, and the Stockholders' Agreement.
All capitalized terms used in this "Description of the Class A Convertible
Common Stock" section and not otherwise defined shall have the meanings set
forth in the Stockholders' Agreement and form of the amended and restated
certificate of incorporation attached as Exhibit A to the Acquisition Agreement.
DIVIDEND RIGHTS
When and as dividends or other distributions are declared, whether payable
in cash, in property or in shares of our stock, the holders of the Class A
Convertible Common Stock and common stock shall be entitled to share equally,
share for share, in such dividends or other distributions as if all such shares
were of a single class.
TERMS OF CONVERSION
The Class A Convertible Common Stock will be convertible into an equal
number of shares of common stock at any time, upon the option of holders, and
mandatorily, upon the occurrence of certain conditions. Shares of Class A
Convertible Common Stock shall be converted automatically, without any action on
the part of any Person, into an equal number of shares of common stock upon the
occurrence of the following events: (i) a Transfer by any TMM Holder of any
shares of Class A Convertible Common Stock to a Person other than Grupo TMM, TMM
Holdings, Multimodal, or the stockholders of Grupo TMM who will have executed
the Stockholders' Agreement ("Grupo TMM Principal Stockholders") (collectively,
the "TMM Holders"), or an entity which is an Affiliate of any of the TMM
Holders; (ii) on the first day on which the TMM Holders, in the aggregate, cease
to beneficially own, in the aggregate, at least 40% of the Voting Securities
initially acquired by Multimodal pursuant to the Merger contemplated by the
Acquisition Agreement; (iii) a Change of Control of KCS; or (iv) a Change of
Control of such TMM Holder, if after such Change of Control a Competitor has
Beneficial Ownership of more than a majority of the Total Voting Power of such
TMM Holder.
In order to facilitate optional conversions and transfers of Class A
Convertible Common Stock (and, except for Transfers to Affiliates in accordance
with the Stockholders' Agreement, the conversion of such shares into common
stock), any TMM Holder shall, at its option, deliver written notice of the
proposed conversion or transfer, together with the certificate or certificates
representing such shares to be converted and/or transferred, to Conversion
Agent. Following any automatic conversion, the share or shares of Class A
Convertible Common Stock so converted shall cease to be outstanding
(notwithstanding the fact that the holder or holders may not have surrendered
the certificate or certificates representing such Class A Convertible Common
Stock for conversion), and such certificate or certificates shall thereafter
represent solely the right to receive a certificate or certificates for common
stock issuable upon conversion of the Class A Convertible Common Stock so
converted, upon surrender of such certificate or certificates to the Conversion
Agent.
VOTING RIGHTS
Each holder of Class A Convertible Common Stock shall be entitled to one
vote for each share of such stock held by such holder. Each outstanding share of
Class A Convertible Common Stock shall be entitled to vote on each matter on
which our stockholders shall be entitled to vote. However, with respect to the
election of directors other than the Class A Directors (described below), the
Class A Convertible Common Stock shall be voted in favor of nominees recommended
by our board of directors who were nominated in compliance with Article V of the
Stockholders' Agreement.
Voting separately as a class, the holders of the Class A Convertible Common
Stock shall have the right to elect Class A Director(s) as follows: (i) from and
after the effectiveness of the amended and restated certificate of incorporation
until such time as the TMM Holders cease to beneficially own in the aggregate at
least 75% of the Voting Securities initially acquired by MM pursuant to the
Merger contemplated by the Acquisition Agreement (80% if a Change of Control of
TMM or any TMM Holder shall have occurred), two members of our board of
directors will be elected by the holders of the Class A Convertible Common Stock
voting as a separate class; (ii) at such time as the TMM Holders cease to
beneficially own in the aggregate at least 75% of the Voting Securities
initially acquired by MM pursuant to the Merger contemplated by the Acquisition
Agreement (80% if a Change of Control of TMM or any TMM Holder shall have
occurred) and provided that such TMM Holders continue to beneficially own in the
aggregate at least 40% of the Voting Securities initially acquired by MM
pursuant to the Merger contemplated by the Acquisition Agreement, the number of
directors which the holders of Class A Convertible Common Stock have the right
to elect voting as a separate class will be decreased from two to one; and (iii)
at such time as the TMM Holders cease to beneficially own in the aggregate at
least 40% of the Voting Securities initially acquired by MM pursuant to the
Merger contemplated by the Acquisition Agreement, the right of the holders of
Class A Convertible Common Stock voting as a separate class to elect any member
of our board of directors shall terminate. Notwithstanding any of the above to
the contrary, if a Change of Control of Grupo TMM or any TMM Holder shall have
occurred and the acquiror is a Competitor, the right of the holders of Class A
Convertible Common Stock voting as a separate class to elect any member(s) of
our board of directors shall immediately terminate.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of KCS, holders of the Class A Convertible Common
Stock and common stock shall be entitled to share ratably according to the
number of shares held by them, in all of our assets available for distribution
to our stockholders.
PREEMPTION RIGHTS
The holders of Class A Convertible Common Stock shall have preemptive
rights to acquire additional shares of Class A Convertible Common Stock in the
event we authorize the issuance or sale of any shares of common stock or any
securities containing options or rights to acquire any shares of common stock
(other than as a dividend on the outstanding common stock). Notwithstanding the
foregoing, the holders of Class A Convertible Common Stock do not have
preemptive rights with respect to issuances of common stock (including for this
purpose, options, warrants and other securities into or exercisable for common
stock) issued: (i) to our employees, directors, consultants, agents, independent
contractors or other service providers in connection with a Plan existing on the
date hereof or a Plan approved by our board of directors and adopted by us after
the date hereof; (ii) upon the conversion of Class A Convertible Common Stock;
(iii) upon the exercise of any options, warrants, or exchangeable securities
which are outstanding as of the effective date of the amended and restated
certificate of incorporation; or (iv) in connection with the acquisition (by
merger, consolidation, acquisition of assets or equity interests or otherwise)
of the equity interests or assets of another Person.
We shall first notify then-existing TMM Holders of Class A Convertible
Common Stock of any proposed transaction triggering preemptive rights of the
Class A Convertible Common Stock and offer to sell to each such Person a number
of shares of Class A Convertible Common Stock (or, as applicable, options,
warrants or other securities into or exercisable for Class A Convertible Common
Stock) determined according to the formula specified in the amended and restated
certificate of incorporation. To the extent that any TMM Holder elects not to
participate in such preemptive rights, each of the other TMM Holders shall have
a pro rata right to purchase at the same price and on the same terms and
conditions the Voting Securities which such non-participating TMM Holder had the
right but elected not to purchase.
The preemptive rights of the TMM Holders of Class A Convertible Common
Stock shall immediately and irrevocably terminate on the date that the TMM
Holders do not beneficially own in the aggregate at least 40% of the Voting
Securities initially acquired by Multimodal pursuant to the Acquisition
Agreement.
TRANSFER RESTRICTIONS
For a period of five years from and after the effectiveness of the amended
and restated certificate of incorporation, the TMM Holders shall not, directly
or indirectly, alone or in concert with others, sell, assign, transfer, pledge,
hypothecate, otherwise subject to any lien, grant any option with respect to or
otherwise dispose of any interest in (or enter into an agreement or
understanding with respect to the foregoing) any Voting Securities (a
"Disposition") to a Competitor. Disposition pursuant to a Public Offering or a
Rule 144 Transaction will not be deemed to violate this prohibition if the
selling TMM Holder(s) follow appropriate and reasonable procedures designed to
prevent the sale of such Voting Securities to any Competitor. After the earliest
of (i) five years following the date of the amended and restated certificate of
incorporation, or (ii) the first date on which the TMM Holders beneficially own
in the aggregate, directly or indirectly and alone or as part of a Group, less
than 15% of the outstanding Voting Securities of KCS, a TMM Holder may propose
to sell Voting Securities to a Competitor; provided we shall have the right (but
not the obligation) to purchase, in whole but not in part, such Voting
Securities at a per share cash purchase price equal to the purchase price in the
agreement between the selling TMM Holder and a Competitor. This purchase right
shall be assignable, in whole or in part, by us to any other Person, but no such
assignment shall relieve us of our obligation to assure payment of the purchase
price for any Voting Securities as to which a notice of election to exercise the
Right of First Refusal is made by us or any such assignee.
For a period of five years from and after the effectiveness of the amended
and restated certificate of incorporation, each of the TMM Holders shall not
effect a Disposition of Voting Securities to any Affiliate of either Grupo TMM,
TMM Holdings or Multimodal or any Affiliate of any Grupo TMM Principal
Stockholders unless such Affiliate agrees in writing to be bound by the terms of
the Stockholders' Agreement. The TMM Holders shall remain responsible, jointly
and severally, for any breaches of the Stockholders' Agreement by such Affiliate
(provided that any TMM Holder which is a Grupo TMM Principal Stockholder shall
be severally responsible only for breaches by an Affiliate of the Grupo TMM
Principal Stockholder to which such Grupo TMM Principal Stockholder effects a
Distribution).
Subject to the foregoing transfer restrictions, TMM Holders may sell any or
all Voting Securities beneficially owned by such Person provided that: (i) no
Disposition that in the aggregate represents 5% or more of the outstanding
Voting Securities shall be made to any Person other than a Person who is
eligible to file reports pursuant to Rule 13d-1 under the Exchange Act (a "13G
Filer"), unless such Person would not be so eligible with respect to the Voting
Securities acquired from the Disposition; and (ii) no Disposition of Voting
Securities that in the aggregate represents 5% or more of the outstanding Voting
Securities shall be made to any 13G Filer unless (a) such 13G Filer would
continue to be eligible to file reports pursuant to Section 13G under the
Exchange Act with respect to the Voting Securities after giving effect to the
proposed acquisition of such Voting Securities; and (b) the selling TMM Holder
shall have delivered a written notice to us advising us of the number of Voting
Securities the seller desires to sell and the terms, including price, of the
proposed transaction and we have been provided the right (but not the
obligation) to purchase, in whole or in part, such Voting Securities at a per
share cash purchase price equal to the purchase price in the proposed
transaction.
Notwithstanding any provision of the amended and restated certificate of
incorporation to the contrary, no Disposition shall be made to any Person or
Group that would, together with such Person's Affiliates and Associates and
after giving effect to the acquisition of such Voting Securities, beneficially
own or have the right to acquire more than 15% of the Total Voting Power of KCS.
TMM Holders shall be permitted to make a Disposition, notwithstanding any
contrary provision in the amended and restated certificate of incorporation, in
connection with any tender or exchange offer made by an unaffiliated third party
to acquire KCS common stock so long as certain conditions are satisfied.
The transfer restrictions imposed by the amended and restated certificate
of incorporation (with the exception of our right of first refusal in the event
a TMM Holder intends to sell shares of Class A Convertible Common Stock to a
Competitor, which shall survive indefinitely) shall immediately and irrevocably
terminate upon the earlier of the first date the TMM Holders beneficially own in
the aggregate less than 15% of the outstanding Voting Securities of KCS for at
least 30 consecutive days, or the occurrence of a Change of Control of KCS.
PLEDGES
Subject to the transfer restrictions contained in the amended and restated
certificate of incorporation, a TMM Holder may pledge or hypothecate as security
for any indebtedness or other obligations any or all Voting Securities
beneficially owned by such Person; provided that such TMM Holder obtains written
consent from the pledgee that upon the occurrence of an event which gives the
pledgee the right to foreclose on the pledged Voting Securities ("Foreclosure
Event") such pledgee shall provide to us prompt written notice of such
Foreclosure Event and provide us the right to purchase, in whole or in part,
such Voting Securities at a price determined in accordance with such provision
of the amended and restated certificate of incorporation. This purchase right
shall be assignable, in whole or in part, by us to any other Person, but no such
assignment shall relieve us of our obligation to assure payment of the purchase
price for any Voting Securities as to which we have delivered such a written
notice.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a discussion of the material U.S. federal income tax
consequences of purchasing, owning and disposing of our Series C Preferred
Stock, but it does not purport to be a comprehensive description of all of the
tax considerations that may be relevant to a decision to acquire our Series C
Preferred Stock. The discussion applies to you only if you are a United States
holder (as defined below) and only if you hold our Series C Preferred Stock as a
capital asset for federal income tax purposes. It does not address special
classes of holders, such as:
o certain financial institutions;
o insurance companies;
o dealers and traders in securities or foreign currencies;
o persons holding Series C Preferred Stock as part of a short sale, wash
sale, straddle or conversion transaction;
o persons whose functional currency for U.S. federal income tax purposes
is not the U.S. dollar;
o partnerships or other entities classified as partnerships for U.S.
o federal income tax purposes; or
o tax-exempt organizations.
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), final, temporary and proposed Treasury regulations, administrative
pronouncements and judicial decisions all as currently in effect. These
authorities are subject to change, possibly on a retroactive basis. Please
consult your own tax advisers concerning the U.S. federal, state, local and
foreign tax consequences of purchasing, owning and disposing of shares of our
Series C Preferred Stock in your particular circumstances.
As used herein, the term "United States Holder" means a beneficial owner of
a share of Series C Preferred Stock that is, for United States federal income
tax purposes:
o a citizen or resident of the United States;
o a corporation, or other entity taxable as a corporation for U.S.
federal income tax purposes, created or organized in or under the laws
of the United States or of any political subdivision thereof; or
o an estate or trust the income of which is subject to United States
federal income taxation regardless of its source.
The term "United States holder" also includes certain former citizens and
residents of the United States.
TAXATION OF DISTRIBUTIONS
Distributions paid on our Series C Preferred Stock will be treated as
dividends taxable to you as ordinary income to the extent of our current or
accumulated earnings and profits (as determined under U.S. federal income tax
principles). Distributions in excess of our current or accumulated earnings and
profits will be treated first as a tax free return of capital to the extent of
the your basis in our Series C Preferred Stock and then as capital gain.
Distributions on our Series C Preferred Stock will be taxable when received by
you.
Distributions taxable as dividends received by corporate United States
Holders will be eligible for the 70% dividends received deduction, subject to
various limitations. The benefits of the dividends received deduction to a
corporate United States Holder may, in effect, be reduced or eliminated by many
exceptions and restrictions, including restrictions relating to the corporate
United States Holder's taxable income, holding period of our Series C Preferred
Stock, debt financing and the so-called "extraordinary dividend" provision of
Section 1059 of the Code. The dividends received deduction is not a deduction
for purposes of the computation of the adjusted current earnings for alternative
minimum tax purposes.
CCONSTRUCTIVE DIVIDENDS
Any increase to the conversion rate of our Series C Preferred Stock may,
depending on the circumstances, be deemed to be a distribution to you. Any
deemed distribution will be taxed in the same manner as an actual distribution.
See "Taxation of Distributions" above.
CONVERSION INTO COMMON STOCK
Your conversion of our Series C Preferred Stock into our common stock will
not be a taxable event, except that the receipt of cash in lieu of a fractional
share of our common stock will result in capital gain or loss (measured by the
difference between the cash received in lieu of the fractional share and your
tax basis in the fractional share).
Your tax basis in common stock received upon a conversion of your Series C
Preferred Stock will be the same as your basis in your Series C Preferred Stock
at the time of conversion, reduced by any basis allocated to a fractional share.
Your holding period for the common stock received will include your holding
period for your converted Series C Preferred Stock.
REDEMPTION FOR CASH
You will generally recognize capital gain or loss on the redemption of your
Series C Preferred Stock for cash, provided that the redemption meets at least
one of the following requirements as determined under federal income tax
principles:
O the redemption is not essentially equivalent to a dividend;
o the redemption results in a complete termination of your interest in
our stock (preferred and common); or
o the redemption is substantially disproportionate with respect to you.
In determining whether any of the above requirements applies, shares
considered to be owned by you by reason of certain attribution rules must be
taken into account. A redemption is not essentially equivalent to a dividend if
the redemption results in a "meaningful reduction" in the shareholder's
proportionate interest in the corporation. It may be more difficult for a person
who owns, actually or constructively by operation of the attribution rules, any
of our common stock to satisfy any of the above requirements, including the
requirement that there be a meaningful reduction in the holder's proportionate
interest in us.
If the redemption satisfies any of the above requirements, such capital
gain or loss will be equal to the difference between the amount of cash received
by you and your tax basis in your redeemed Series C Preferred Stock. The capital
gain or loss will be long-term if the holding period for our Series C Preferred
Stock is more than one year.
If the redemption does not satisfy any of the above requirements, then the
entire amount received (without offset for your tax basis in your Series C
Preferred Stock redeemed) will be treated as a distribution taxable as described
in "Taxation of Distributions" above. In such case, your tax basis in your
redeemed Series C Preferred Stock will be allocated to your remaining stock, if
any. Prospective investors should consult their own tax advisors as to the U.S.
federal income tax consequences of a redemption of our Series C Preferred Stock.
REDEMPTION SOLELY FOR COMMON STOCK
You will not recognize gain or loss on our redemption of your Series C
Preferred Stock solely for our common stock (except that you may recognize
ordinary income to the extent that a portion of our common stock is determined
to constitute a payment in respect of dividends in arrears on your Series C
Preferred Stock). The tax basis of the common stock received will equal the tax
basis of the Series C Preferred Stock redeemed, and the holding period for the
common stock received will include the holding period of the Series C Preferred
Stock redeemed (except that the portion, if any, of common stock received that
constitutes a payment in respect of dividends in arrears will have a tax basis
equal to its fair market value at the time of the redemption and a new holding
period commencing on the day following the redemption).
REDEMPTION FOR A COMBINATION OF CASH AND COMMON STOCK
Upon a redemption of our Series C Preferred Stock for a combination of cash
and our common stock, you will recognize gain, but not loss, equal to the lesser
of (i) the excess of the fair market value of our common stock plus the cash
received in redemption of our Series C Preferred Stock over your adjusted tax
basis in your Series C Preferred Stock redeemed and (ii) the amount of cash
received in the redemption. Notwithstanding the previous sentence, any shares of
common stock that are determined to constitute a payment in respect of dividends
in arrears on our Series C Preferred Stock will be taxable as ordinary income.
Except as described below, the gain recognized upon such a redemption will be
capital gain and will be long-term if the holding period for your Series C
Preferred Stock redeemed is more than one year. Your basis for our common stock
received will equal your basis in your Series C Preferred Stock redeemed plus
any gain recognized and minus the cash received. Your holding period for the
common stock will include your holding period in the Series C Preferred Stock
redeemed.
If the redemption has the effect of the distribution of a dividend, then
the gain recognized upon the redemption, as determined above, will be treated as
a dividend taxable as ordinary income to the extent of your ratable share of our
earnings and profits. The remainder of the gain will be capital gain and will be
long-term if the holding period for your Series C Preferred Stock redeemed is
more than one year. For purposes of determining whether your gain will be
treated as a dividend, stock (including our common stock) owned by you actually
and constructively through attribution rules, will be taken into account.
OTHER SALES AND DISPOSITIONS
Except as set forth above, gain or loss you realize on the sale or other
disposition of shares of our Series C Preferred Stock will be capital gain or
loss, and will be long-term capital gain or loss if you held the shares for more
than one year. The amount of your gain or loss will be equal to the difference
between your tax basis in the shares of our Series C Preferred Stock disposed of
and the amount realized on the disposition.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Payment of dividends and sales or redemption proceeds that are made within
the United States or through certain U.S.-related financial intermediaries
generally are subject to information reporting and to backup withholding unless
(i) you are a corporation or other exempt recipient or (ii), in the case of
backup withholding, you provide a correct taxpayer identification number and
certify that no loss of exemption from backup withholding has occurred.
The amount of any backup withholding from a payment to you will be allowed
as a credit against your U.S. federal income tax liability and may entitle you
to a refund, provided that the required information is furnished to the Internal
Revenue Service.
SELLING SECURITYHOLDERS
The Series C Preferred Stock, and any shares of our common stock issued
upon conversion of the Series C Preferred Stock, are being offered by the
selling securityholders listed in the table below. We issued and sold the Series
C Preferred Stock in a private placement to the initial purchasers, Morgan
Stanley & Co. Incorporated and Deutsche Bank Securities Inc. The selling
securityholders purchased their Series C Preferred Stock from the initial
purchasers or from subsequent holders in transactions exempt from registration
under the Securities Act.
This prospectus covers sales, by the named selling securityholders, of
Series C Preferred Stock and shares of common stock issued upon any conversion
of the Series C Preferred Stock by the selling securityholder. This prospectus
will not cover subsequent sales of our common stock received upon conversion of
Series C Preferred Stock purchased from a selling securityholder named in this
prospectus.
No offer or sale under this prospectus may be made by a securityholder
unless that holder is listed in the table below, in a supplement to this
prospectus or in an amendment to the related registration statement that has
become effective. We will supplement or amend this prospectus to include
additional selling securityholders upon request and upon provision of all
required information to us, subject to the terms of the Registration Rights
Agreement, dated as of May 5, 2003 between KCS and the initial purchasers.
The following table sets forth certain information, as of February 6, 2004,
about the amount of Series C Preferred Stock beneficially owned by each selling
security holder and the number of shares of common stock issuable upon
conversion of the Series C Preferred Stock that may be offered from time to time
pursuant to this prospectus.
The percentage of Series C Preferred Stock outstanding beneficially owned
by each selling security holder is based on 400,000 shares of Series C Preferred
Stock outstanding. The number of shares of common stock owned prior to the
offering does not include shares of common stock issuable upon conversion of the
Series C Preferred Stock. The number of shares of common stock shown in the
table below assumes conversion of all shares of Series C Preferred Stock held by
such holder at the initial conversion rate of 33.4728 shares of common stock per
share of Series C Preferred Stock. This conversion rate is subject to adjustment
as described under "Description of the Series C Preferred Stock--Adjustments to
the Conversion Rate." Accordingly, the number of shares of common stock issuable
upon conversion of the Series C Preferred Stock may increase or decrease from
time to time. Under the certificate of designations for the Series C Preferred
Stock, fractional shares will not be issued upon conversion of the Series C
Preferred Stock. Cash will be paid instead of fractional shares, if any.
The following table has been prepared based upon the information furnished
to us by the selling security holders. The selling security holders identified
below may have sold, transferred or otherwise disposed of some or all of their
Series C Preferred Stock since the date on which the information in the
following table is presented in transactions exempt from or not subject to the
registration requirements of the Securities Act of 1933. Information concerning
the selling security holders may change from time to time and, if necessary, we
will supplement this prospectus accordingly. We cannot give an estimate as to
the amount of Series C Preferred Stock or common stock issuable upon conversion
thereof that will be held by the selling security holders upon the termination
of this offering because the selling security holders may offer some or all of
their Series C Preferred Stock or common stock pursuant to the offering
contemplated by this prospectus. See "Plan of Distribution."
Except as otherwise disclosed in footnotes to the table below, to our
knowledge, other than their ownership of the securities described below, none of
the selling security holders has, or has had within the past three years, any
position, office or other material relationship with us or any of our
predecessors or affiliates.
NUMBER OF
SHARES OF
SERIES C
PREFERRED NUMBER OF NUMBER OF
STOCK PERCENTAGE OF SHARES OF SHARES OF
BENEFICIALLY SERIES C COMMON COMMON
OWNED PREFERRED STOCK OWNED STOCK THAT PERCENTAGE OF
THAT MAY STOCK PRIOR TO THE MAY BE COMMON STOCK
NAME BE SOLD OUTSTANDING OFFERING(1) SOLD(2) OUTSTANDING(3)
---- ------------ ------------- ------------- ----------- --------------
Alexandra Global Master Fund LTD 1,500 * 0 50,209 *
Allstate Insurance Company 2,000 * 16,300 66,945 *
B.G.I. Global Investors 200 * 0 6,694 *
Bank Austria Cayman Islands, LTD 2,000 * 0 66,945 *
BNP Paribas Equity Strategies, SNC 2,065 * 19,211 69,121 *
BP Amoco PLC Master Trust 2,026 * 0 67,815 *
Clinton Multistrategy Master Fund,
Ltd. 3,375 * 0 112,970 *
Clinton Riverside Convertible
Portfolio Limited 2,975 * 0 99,581 *
Context Convertible Arbitrage Fund,
L.P. 3,340 * 0 111,799 *
CooperNeff Convertible Strategies
(Cayman) Master Fund, L.P. 2,160 * 0 72,301 *
CSFB Convertible & Quantitative
Strategies Master Fund Limited 50,500 12.63% 0 1,690,376 2.63%
DBAG London 5,000 1.25% 0 167,364 *
Equitec Group LLC 2,500 * 0 83,682 *
Guardian Pension Trust 1,000 * 0 33,472 *
Guggenheim Portfolio Co. XV, LLC 1,500 * 0 50,209 *
Hotel Union & Hotel Industry of
Hawaii Pension Plan 732 * 0 24,502 *
Jefferies & Company Inc. 18 * 0 602 *
KBC Financial Products USA Inc. 41 * 0 1,372 *
KD Convertible Arbitrage Fund L.P. 9,485 2.37% 0 317,489 *
LLT Limited 700 * 0 23,430 *
Lyxor/Convertible Arbitrage Fund, Ltd. 140 * 0 4,686 *
Lyxor Master Fund Ref.: Silverado 400 * 0 13,389 *
McMahan Securities Co. L.P. 350 * 0 11,715 *
Morgan Stanley & Co. Incorporated(4) 31,239 7.81% 70,922 1,045,656 1.75%
Newport Alternative Income Fund 1,551 * 0 51,916 *
OIP Limited 505 * 0 16,903 *
Pacific Life Insurance Company 250 * 0 8,368 *
Polaris Vega Fund L.P. 1,750 * 0 58,577 *
Putnam Convertible Income - Growth
Trust 15,000 3.75% 0 502,092 *
RCG Latitude Master Fund, LTD 4,250 1.06% 0 142,259 *
RCG Multi Strategy Master Fund, LTD 3,000 * 0 100,418 *
Radcliffe SPC, Ltd. for and on behalf
of the Class A Convertible Crossover
Segregated Portfolio 12,500 3.13% 0 418,410 *
Ramius Master Fund, LTD 7,250 1.81% 0 242,677 *
Silverado Arbitrage Trading, LTD 550 * 0 18,410 *
Silverback Master, LTD 34,100 8.53% 0 1,141,422 1.79%
Silvercreek II Limited 4,799 1.20% 0 160,635 *
Silvercreek Limited Partnership 10,060 2.52% 0 336,736 *
Singlehedge U.S. Convertible
Arbitrage Fund 340 * 0 11,380 *
Sphinx Convertible Arb Fund SPC 711 * 0 23,799 *
SSI Blended Market Neutral L.P. 1,025 * 0 34,309 *
SSI Hedged Convertible Market Neutral
L.P. 1,117 * 0 37,389 *
Sturgeon Limited 295 * 0 9,874 *
NUMBER OF
SHARES OF
SERIES C
PREFERRED NUMBER OF NUMBER OF
STOCK PERCENTAGE OF SHARES OF SHARES OF
BENEFICIALLY SERIES C COMMON COMMON
OWNED PREFERRED STOCK OWNED STOCK THAT PERCENTAGE OF
THAT MAY STOCK PRIOR TO THE MAY BE COMMON STOCK
NAME BE SOLD OUTSTANDING OFFERING(1) SOLD(2) OUTSTANDING(3)
---- ------------ ------------- ------------- ----------- --------------
Sunrise Partners Limited
Partnership 5,250 1.31% 0 175,732 *
TQA Master Plus Fund, Ltd. 5,000 1.25% 0 167,364 *
UBS A6 London Branch 24,500 6.13% 0 820,083 1.29%
UBS O'Connor LLC F/B/O
O'Connor Global Convertible
Portfolio 500 * 0 16,736 *
Viacom Inc. Pension Plan Master
Trust 66 * 0 2,209 *
Wachovia Bank National Association 1,250 * 0 41,841 *
Xavex Convertible Arbitrage #5 1,000 * 0 33,472 *
Institutional Benchmarks Master
Fund Ltd. (formerly Zurich
Institutional Benchmark's Master
Fund Ltd.) 4,305 1.08% 0 144,100 *
All other beneficial owners(5)(6) 60 * 0 2,008 *
TOTAL(7) 266,230 66.56% 106,433 8,911,464 12.60%
* Less than one percent.
(1) Does not include shares of common stock issuable upon conversion of the
Series C Preferred Stock.
(2) Consists of shares of common stock issuable upon conversion of the Series C
Preferred Stock, assuming a conversion rate of 33.4728 shares of common
stock for each share of Series C Preferred Stock and a cash payment in lieu
of any fractional share interest. The conversion rate is subject to
adjustment as described under "Description of the Series C Preferred
Stock--Adjustments to the Conversion Rate." Accordingly, the number of
shares of common stock issuable upon conversion of the Series C Preferred
Stock may increase or decrease from time to time. Numbers have been rounded
down to whole numbers due to fact that fractional shares will not be issued
upon conversion of the Series C Preferred Stock. The "total" for number of
shares of common stock that may be sold is based on the conversion rate
applied to the total shares of Series C Preferred Stock remaining unsold
under the registration statement.
(3) Calculated based on Rule 13d-3(d)(1) under the Securities Exchange Act of
1934, as amended, using 62,564,376 shares of common stock outstanding on
January 31, 2004. In calculating this amount, we treated as outstanding the
number of shares of common stock issuable upon conversion of the Series C
Preferred Stock by the applicable holder. However, we did not assume the
conversion of any other holder's Series C Preferred Stock.
(4) Morgan Stanley Senior Funding, Inc. was a lender under KCS's credit
facility. In addition, during the past three years, Morgan Stanley & Co.
Incorporated and/or its affiliates have performed financial advisory and
investment banking services for KCS. Morgan Stanley & Co., Incorporated was
an initial purchaser of 80% of the Series C Preferred Stock in the private
placement of these securities.
(5) We will identify additional selling security holders, if any, by
post-effective amendment before they offer or sell their securities.
(6) Assumes that the unnamed holders of Series C Preferred Stock or any future
transferees, pledgees or donees of or from any such unnamed holder do not
beneficially own any common stock other than the common stock issuable upon
conversion of the Series C Preferred Stock at the initial conversion rate.
(7) Does not include 133,770 shares of Series C Preferred Stock sold by selling
securityholders which shares are convertible into 4,477,644 shares of KCS
common stock, assuming a conversion rate of 33.4728 shares of common stock
for each share of Series C Preferred Stock and a cash payment in lieu of
any fractional share interest.
PLAN OF DISTRIBUTION
The Series C Preferred Stock and the common stock are being registered to
permit public secondary trading of these securities by the holders thereof from
time to time after the date of this prospectus. We have agreed, among other
things, to bear all expenses (other than underwriting discounts and selling
commissions) in connection with the registration and sale of the securities
covered by this prospectus.
We will not receive any of the proceeds from the offering by the selling
securityholders of Series C Preferred Stock or the common stock into which the
Series C Preferred Stock is convertible. We have been advised by the selling
securityholders that the selling securityholders may sell all or a portion of
the Series C Preferred Stock and common stock beneficially owned by them and
offered hereby from time to time on any exchange on which the securities are
listed on terms to be determined at the times of such sales. The selling
securityholders may also make private sales directly or through a broker or
brokers. Alternatively, any of the selling securityholders may from time to time
offer the Series C Preferred Stock or the common stock beneficially owned by
them through underwriters, dealers or agents, who may receive compensation in
the form of underwriting discounts, commissions or concessions from the selling
securityholders and the purchasers of the Series C Preferred Stock and the
common stock for whom they may act as agent. The aggregate proceeds to the
selling securityholders from the sale of the Series C Preferred Stock or common
stock offering by them hereby will be the purchase price of such Series C
Preferred Stock or common stock less discounts and commissions, if any.
The Series C Preferred Stock and common stock may be sold from time to time
in one or more transactions at fixed offering prices, which may be changed, or
at varying prices determined at the time of sale or at negotiated prices. These
prices will be determined by the holders of such securities or by agreement
between these holders and underwriters or dealers who may receive fees or
commissions in connection therewith.
These transactions may include block transactions or crosses. Crosses
are transactions in which the same broker acts as an agent on both sides of the
trade. These transactions may be effected (i) on any national securities
exchange or quotation service on which the Series C Preferred Stock or common
stock may be listed or quoted at the time of sale, (ii) in the over-the-counter
market, (iii) in transactions otherwise than on such exchanges or services or in
the over-the-counter market, (iv) through the writing of options (including the
issuance by the selling securityholder of derivative securities), whether the
options or such other derivative securities are listed on an options or other
exchange or otherwise, (v) through the settlement of short sales, or (vi) any
combination of the foregoing.
In connection with the sales of the Series C Preferred Stock or our common
stock or otherwise, the selling securityholder may enter into hedging
transactions with broker-dealers or others, which may in turn engage in short
sales of the Series C Preferred Stock or our common stock in the course of
hedging the positions they assume. The selling securityholder may also sell
Series C Preferred Stock or our common stock short and deliver Series C
Preferred Stock or our common stock to close out short positions, or loan or
pledge Series C Preferred Stock or our common stock to broker-dealers or others
that in turn may sell such securities. The selling securityholder may enter into
option or other transactions with broker-dealers or other financial institutions
that require the delivery to the broker-dealer or other financial institutions
of the Series C Preferred Stock or the common stock, which the broker-dealer or
other financial institution may resell pursuant to the prospectus, or enter into
transactions in which a broker-dealer makes purchases as a principal for resale
for its own account or though other types of transactions. The selling
securityholder may pledge or grant a security interest in some or all of the
Series C Preferred Stock or our common stock issued upon conversion of the
Series C Preferred Stock owned by it and if it defaults in the performance of
its secured obligations, the pledgees or secured parties may offer and sell the
Series C Preferred Stock or our common stock from time to time pursuant to this
prospectus. The selling securityholder also may transfer and donate Series C
Preferred Stock or shares of our common stock issuable upon conversion of the
Series C Preferred Stock in other circumstances in which case the transferees,
donees, pledgees or other successors in interest will be the selling
securityholder for purposes of the prospectus. The selling securityholder may
sell short our common stock and may deliver this prospectus in connection with
such short sales and use the shares of our common stock covered by the
prospectus to cover such short sales. In addition, any Series C Preferred Stock
or shares of our common stock covered by this prospectus that qualify for sale
pursuant to Rule 144, Rule 144A or any other available exemption from
registration under the Securities Act may be sold under Rule 144, Rule 144A or
such other available exemption.
At the time a particular offering of Series C Preferred Stock or shares of
our common stock issuable upon conversion of the Series C Preferred Stock is
made, a prospectus supplement, if required, will be distributed which will set
forth the aggregate amount of Series C Preferred Stock or number of shares of
our common stock being offered and the terms of the offering, including the name
or names of any underwriters, dealers, brokers or agents, if any, and any
discounts, commissions or concessions allowed or reallowed to be paid to brokers
or dealers.
Our outstanding common stock is listed for trading on the New York Stock
Exchange.
The Series C Preferred Stock was issued and sold on May 5, 2003 in
transactions exempt from the registration requirements of the Securities Act to
persons reasonably believed by the Initial Purchasers to be "qualified
institutional buyers" (as defined in Rule 144A under the Securities Act). We
have agreed to indemnify each selling securityholder and each person, if any,
who controls any selling securityholder (within the meaning of either Section 15
of the Securities Act or Section 20 of the Exchange Act), and each selling
securityholder has agreed to indemnify us, our directors, our officers who sign
the registration statement of which this prospectus forms a part and each
person, if any, who controls us (within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act), each underwriter and each
person who controls any underwriter within the meaning of the Securities Act (in
the case of an underwritten offering) and each other selling securityholder
against certain liabilities arising under the Securities Act.
Selling securityholders and any underwriters, dealers, brokers or agents
who participate in the distribution of the Series C Preferred Stock or our
common stock may be deemed to be "underwriters" within the meaning of the
Securities Act and any profits on the sale of the Series C Preferred Stock and
our common stock by them and any discounts, commissions or concessions received
by any such underwriters, dealers, brokers or agents may be deemed to be
underwriting discounts and commissions under the Securities Act.
The selling securityholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M which may limit the timing of purchases and sales of the Series C Preferred
Stock and our common stock by the selling securityholders and any other such
person. Furthermore, Regulation M under the Exchange Act may restrict the
ability of any person engaged in a distribution of the Series C Preferred Stock
and our common stock being distributed for a period of up to five business days
prior to the commencement of such distribution. All of the foregoing may affect
the marketability of the Series C Preferred Stock and our common stock and the
ability of any person or entity to engage in market-making activities with
respect to the Series C Preferred Stock and our common stock.
We will use our best efforts to keep the registration statement of which
this prospectus is a part effective until the earliest of (i) the sale to the
public pursuant to Rule 144 (or any similar provision then in force, but not
Rule 144A) under the Securities Act or the registration statement of which this
prospectus forms a part of all the securities registered thereunder, and (ii)
the expiration of the holding period applicable to such securities held by
persons that are not our affiliates under Rule 144(k) under the Securities Act
or any successor provision, subject to permitted exceptions.
FINANCIAL STATEMENTS OF GRUPO TFM
The combined and consolidated financial statements for Grupo TFM for the
year ended December 31, 2000 and as of and for the years ended December 31, 2001
and 2002 and the notes thereto are incorporated herein by reference to Exhibit
99.3 to our annual report on Form 10-K for the year ended December 31, 2002.
PRO FORMA FINANCIAL INFORMATION
In April 2003, KCS completed the sale of 400,000 shares of its Series C
Preferred Stock, resulting in net proceeds of approximately $193.2 million.
Annual preferred stock dividends related to these shares are approximately $8.5
million, which will be reflected as a reduction of net earnings in determining
earnings available to common stockholders and earnings per share in periods
following the sale of the Series C Preferred Stock. Additionally, to the extent
that the assumed conversion of these shares into 13,389,121 shares of common
stock would have a dilutive impact on earnings per share, such shares will be
included in the computation of diluted earnings per share in future periods.
In April 2003, KCS and Grupo TMM announced a series of transactions that were
approved by both respective boards of directors, that would, following KCS
shareholder approval and satisfaction of other conditions, place KCSR, Tex-Mex
and TFM under the common control of a single transportation holding company,
NAFTA Rail. Grupo TFM holds an 80% interest in TFM, which held a 100% interest
in Mexrail. Mexrail wholly-owns Tex-Mex.
Under the terms of the agreement, Multimodal, a subsidiary of TMM, would receive
18 million shares of NAFTA Rail representing approximately 22% (20% voting, 2%
subject to voting restrictions) of NAFTA Rail outstanding shares, $200 million
in cash and a potential incentive payment of between $100 million and $180
million based upon the resolution of certain future contingencies. See Note 17
of the Notes to Pro Forma Condensed Consolidated Financial Statements for
further information.
On August 23, 2003, Grupo TMM sent a notice to KCS claiming to terminate the
Acquisition Agreement because Grupo TMM shareholders failed to approve the
Acquisition Agreement. Accordingly, while KCS intends to pursue all reasonable
legal means available to it in enforcing the Acquisition Agreement, no assurance
can be given that KCS will be able to consummate the Acquisition. See "Risk
Factors--KCS Risk Factors--Risks Related to Our Business--We may be unable to
complete the Acquisition."
Notwithstanding this uncertainty, the following pro forma condensed consolidated
financial statements are presented to illustrate the impact of the Acquisition
on the KCS's historical financial statements and reflect the effect of the
various transactions necessary to consummate the agreements as if the
transaction had occurred on January 1, 2002 for income statement purposes as of
and for the year ended December 31, 2002 and the nine months ended September 30,
2003 and as of September 30, 2003 for balance sheet purposes. The historical
financial statements of Grupo TFM are prepared under the principles of
International Accounting Standards ("IAS") and include a reconciliation between
U.S. Generally Accepted Accounting Principles ("US GAAP") and IAS. The Grupo TFM
historical financial information included in these pro forma financial
statements is reflected under US GAAP and therefore no reconciliation of
financial information between US GAAP and IAS is required for these purposes.
KANSAS CITY SOUTHERN
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2003
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRO FORMA
KCS GRUPO TFM ADJUSTMENTS PRO
HISTORICAL HISTORICAL DEBIT CREDIT FORMA
ASSETS:
Current Assets:
Cash and cash equivalents $ 230.2 $ 8.4 $200.0 (4) $ 38.6
Accounts receivable, net 113.0 190.2 3.3 (11) 299.9
Inventories 36.2 16.2 52.4
Other current assets 18.0 8.5 26.5
----------- ------------ ---------- --------- ----------
TOTAL CURRENT ASSETS 397.4 223.3 - 203.3 417.4
----------- ------------ ---------- --------- ----------
Investments 433.8 7.0 386.1 (1) 54.7
Concession rights and related assets - 1,185.1 43.0 (2,7, 6.2 2,3) 1,221.9
10)
Properties, net 1,348.9 652.3 2,001.2
Goodwill 10.6 - 10.6
Deferred income taxes and employees statutory profit
sharing - 200.0 200.0
Other assets 27.3 32.2 59.5
----------- ------------ ---------- ========= ==========
TOTAL ASSETS $2,218.0 $2,299.9 $ 43.0 $595.6 $3,965.3
=========== ============ ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Debt due within one year $ 10.0 $ 131.9 $ 141.9
Accounts and wages payable and accrued liabilities 186.3 134.8 3.3 (1,11) 317.8
----------- ------------ ---------- --------- ----------
TOTAL CURRENT LIABILITIES 196.3 266.7 3.3 - 459.7
----------- ------------ ---------- --------- ----------
OTHER LIABILITIES:
Long-term debt 568.7 846.0 1,414.7
Deferred income taxes 393.9 - 14.1 (10) 408.0
Other deferred credits 92.9 36.3 6.2 (3) 123.0
----------- ------------ ---------- --------- ----------
TOTAL OTHER LIABILITIES 1,055.5 882.3 6.2 14.1 1,945.7
----------- ------------ ---------- --------- ----------
MINORITY INTEREST - 351.5 - 39.5 (16) 391.0
----------- ------------ ---------- --------- ----------
STOCKHOLDERS' EQUITY
Preferred stock 6.1 - - - 6.1
Redeemable cumulative convertible perpetual preferred
stock 0.4 - - - 0.4
Common / capital stock 0.6 807.0 807.0 (5) - 0.6
New issue, non-voting common, $. 01 par - - - 0.2 (6) 0.2
Treasury shares and effect on purchase of subsidiary
shares - (222.0) - 222.0 (5) -
Retained earnings 851.4 214.4 214.4 (5) - (6) 851.4
Capital Surplus 108.9 - - 202.5 (6) 311.4
Accumulated other compehensive loss (1.2) - (1.2)
----------- ------------ ---------- --------- ----------
Total stockholders' equity 966.2 799.4 1,021.4 424.7 1,168.9
----------- ------------ ---------- --------- ----------
----------- ------------ ---------- --------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,218.0 $2,299.9 $1,030.9 $478.3 $3,965.3
=========== ============ ========== ========= ==========
See notes to proforma condensed consolidated financial statements.
KANSAS CITY SOUTHERN
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2003
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRO FORMA
KCS GRUPO TFM ADJUSTMENTS PRO
HISTORICAL HISTORICAL DEBIT CREDIT FORMA
REVENUES $ 432.8 $523.4 $956.2
Costs and expenses 348.8 355.1 2.6 (14) 706.5
Depreciation and amortization 48.1 65.1 0.9 (15) 114.1
---------- --------- --------- ----------
OPERATING INCOME 35.9 103.2 3.5 - 135.6
Equity in net earnings of unconsolidated affiliates:
Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. 6.2 - 6.2 (8) -
Other (1.0) - (1.0)
Interest expense (34.8) (83.4) (118.2)
Other income (expense) 4.8 (33.3) (28.5)
---------- --------- --------- ------- ----------
Income (loss) before income taxes, minority and accounting
change 11.1 (13.5) 9.7 - (12.1)
Income tax provision (benefit) 2.6 (30.4) (1.7) (10) - (29.5)
Minority interest - (3.4) 0.7 (16) (4.1)
---------- --------- --------- ------- ----------
INCOME BEFORE ACCOUNTING CHANGE 8.5 13.5 8.7 - 13.3
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX 8.9 - - - 8.9
---------- --------- --------- ------- ----------
NET INCOME 17.4 13.5 8.7 - 22.2
PREFERRED STOCK DIVIDENDS 4.7 1.7 (12) 6.4
---------- --------- --------- ------- ----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 12.7 $ 13.5 $ 10.4 $ - $ 15.8
========== ========= ========= ======= ==========
BASIC EARNINGS PER COMMON SHARE:
INCOME BEFORE ACCOUNTING CHANGE $ 0.06 $ 0.09
========== ==========
NET INCOME $ 0.15 $ 0.20 (12)
========== ==========
Basic Weighted Average Common shares outstanding (IN THOUS) 61,607 79,607 (13)
---------- ----------
DILUTED EARNINGS PER COMMON SHARE:
INCOME BEFORE ACCOUNTING CHANGE $ 0.06 $ 0.09
========== ==========
NET INCOME $ 0.14 $ 0.20 (12)
========== ==========
Diluted Weighted Average Common shares outstanding (IN THOUS) 80,998 (13)
62,998 ----------
----------
See notes to proforma condensed consolidated financial statements.
KANSAS CITY SOUTHERN
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRO FORMA
KCS GRUPO TFM ADJUSTMENTS PRO
HISTORICAL HISTORICAL DEBIT CREDIT FORMA
REVENUES $ 566.2 $712.1 $1,278.3
Costs and expenses 456.8 457.6 3.4 (14) 917.8
Depreciation and amortization 61.4 83.0 1.2 (15) 145.6
---------- ------- ---------- -------- ---------
OPERATING INCOME 48.0 171.5 4.6
- 214.9
Equity in net earnings of unconsolidated affiliates:
Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. 45.8 - 45.8 (8)
Other (2.4) - (2.4)
Gain on sale of Mexrail, Inc. 4.4 - 4.4 (9) -
Interest expense (45.0) (95.8) (140.8)
Debt retirement costs (4.3) - (4.3)
Other income (expense) 17.6 (29.8) (12.2)
---------- ------- ---------- -------- ---------
Income before income taxes 64.1 45.9 54.8 - 55.2
Income tax provision (benefit) 6.9 (91.5) (3.0) (10) - (87.6)
---------- ------- ---------- -------- ---------
INCOME BEFORE MINORITY INTEREST 57.2 137.4 51.8 - 142.8
MINORITY INTEREST - (27.3) 17.0 (16) - (44.3)
---------- ------- ---------- -------- ---------
NET INCOME 57.2 110.1 68.8 - 98.5
PREFERRED STOCK DIVIDENDS 0.2 8.5 (12) 8.7
---------- ------- ---------- -------- ---------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 57.0 $110.1 $ 77.3 $ - $ 89.8
---------- ------- ---------- -------- ---------
BASIC EARNINGS PER COMMON SHARE $ 0.94 $ 1.15 (12)
========== =========
Basic Weighted Average Common shares outstanding (IN THOUS) 60,336 78,336 (13)
---------- ---------
DILUTED EARNINGS PER COMMON SHARE $ 0.91 $ 1.05 (12)
========== =========
Diluted Weighted Average Common shares outstanding (IN THOUS) 62,138 93,527 (13)
---------- ---------
See notes to proforma condensed consolidated financial statements.
KANSAS CITY SOUTHERN
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: REMOVAL OF THE EQUITY INVESTMENT IN GRUPO TFM & MEXRAIL
Pursuant to the Acquisition Agreement, Kansas City Southern (the "Company" or
"KCS") would acquire a controlling interest in Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V. ("Grupo TFM"), resulting in the full consolidation of
Grupo TFM's balance sheet into NAFTA Rail, successor to KCS. Accordingly, the
equity investment as of September 30, 2003 reflected on the Company's condensed
consolidated balance sheet would be eliminated.
On May 9, 2003, the Company closed on its 51% investment in Mexrail, Inc.
("Mexrail") for a total of $32.7 million. The Mexrail shares have been placed in
a voting trust while awaiting the approval of the Surface Transportation Board
("STB"). Since the acquisition of the controlling interest in Mexrail has not
been approved and Grupo TFM holds a right of repurchase, the Company and Grupo
TFM consider this investment in Mexrail as temporary. Accordingly, Grupo TFM
continues to consolidate the balance sheet and operating results of Mexrail
pending approval of the transaction.
NOTE 2: CREATION OF IDENTIFIABLE INTANGIBLE ASSETS
Additional identifiable intangibles or goodwill may result from the Grupo TFM
acquisition. The current value of the consideration to obtain a controlling
interest in Grupo TFM exceeds the current book value of the underlying net
assets of approximately $15.1 million, which is reflected on the condensed
consolidated pro forma balance sheet as an addition to concession assets. The
Company has not completed a fair value appraisal or any associated allocation of
excess purchase price to the fair value of tangible assets as of this date. At
the time those processes are completed, the allocation of the purchase price
could change and may include certain identifiable intangibles assets, such as
customer contracts, customer relationships or similar items. For purposes of
these pro forma financial statements the Company has assumed the difference in
value will be assigned to concession assets.
NOTE 3: RECOGNITION OF THE DEFERRED GAIN ON THE SALE OF MEXRAIL
On April 1, 2002, the Company sold its 49% interest in Mexrail to TFM for $31.4
million resulting in a pre-tax gain of $4.4 million, which was reported in the
Company's Consolidated Statement of Income for the year ended December 31, 2002.
In addition, the transaction resulted in the recognition of a deferred gain, of
which $6.2 million remained unamortized as of September 30, 2003. Assuming the
transaction contemplated had occurred on September 30, 2003, the remaining
unamortized gain on the April 2002 Mexrail transaction would be eliminated from
the Company's long-term liabilities and reflected with an offsetting adjustment
to concession assets as part of the transaction. Also see notes 2 and 9.
NOTE 4: TRANSACTION FINANCING
As described above, part of the transaction consideration includes a payment of
$200 million. This payment may be made by the Company, at its option, in a
combination of additional common stock issuance to TMM and cash. For purposes of
these pro forma financial statements the Company has assumed that the entire
payment of $200 million will be made in cash with a combination of the net
proceeds of the sale of 4.25% Redeemable Cumulative Convertible Perpetual
Preferred Stock ("Convertible Preferred Stock") of approximately $193.0 million,
completed in April 2003, and $7.0 million of the Company's available cash. The
pro forma financial statements presented herein reflect the effect of these
transactions. Also see note 6.
The Convertible Preferred Stock is redeemable at the option of a holder only in
the event of a "fundamental change", which is defined as "any transaction or
event (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization or
otherwise) in connection with which all or substantially all of the Company's
Common stock is exchanged for, converted into, acquired for or constitutes
solely the right to receive common stock that is not listed on a United States
national securities exchange or approved for quotation on the Nasdaq National
Market or similar system. The practical effect of this provision is to limit the
Company's ability to eliminate a holder's ability to convert the Convertible
Preferred Stock into common shares of publicly traded security through a merger
or consolidation transaction. In no other circumstances is the Company
potentially obligated to redeem the Convertible Preferred Stock for cash.
Accordingly, since the Company is in a position to control a "fundamental
change" the Convertible Preferred Stock is classified as permanent equity
capital.
NOTE 5: ELIMINATION OF GRUPO TFM STOCKHOLDERS' EQUITY
As a result of NAFTA Rail obtaining a controlling interest in Grupo TFM, its
assets and liabilities would be consolidated with NAFTA Rail. Accordingly, Grupo
TFM's stockholders' equity amounts would be eliminated in the consolidation
process.
NOTE 6: ISSUANCE OF NEW SECURITIES
As noted above, TMM will receive as consideration for the transaction 18 million
shares of NAFTA Rail. This pro forma adjustment reflects the addition to
stockholders' equity of a total of $202.7 million of equity based upon 18
million common shares as part of the initial agreement and assuming a stock
price of $11.26 per share. The assumed stock price was derived by averaging the
closing price of the Company's common stock five days before and five days after
the announcement of the transaction on April 21, 2003. The total allocation of
the new capital is $0.2 million, which is comprised of 18 million shares of new
non-voting common stock with a par value of $.01 per share and $202.5 million,
which is reflected as capital surplus representing the value of the stock issued
in excess of par.
In April 2003, the Company issued 400,000 shares of $1.00 par value 4.25%
Convertible Preferred Stock resulting in net proceeds of approximately $193.0
million (net of fees of approximately $7.0 million). This transaction is
reflected in the accompanying Registrant historical consolidated balance sheet
as of September 30, 2003 as new capital of $0.4 million and capital surplus of
$192.6 million.
Holders of the Convertible Preferred Stock are entitled to receive any dividends
declared by the Company's board of directors at the rate of 4.25% per annum,
payable quarterly in arrears on February 15, May 15, August 15 and November 15
of each year, commencing August 15, 2003. The dividends are cumulative from the
date of initial issuance and accumulated but unpaid dividends cumulate dividends
at the annual rate of 4.25%. In addition, the Company will also pay "special
dividends" if it fails to comply with certain obligations under a registration
rights agreement. A holder may convert its Convertible Preferred Stock into
shares of the Company's Common Stock only under certain circumstances, relating
to: (i) the trading price of the Company's Common Stock; (ii) a credit rating
downgrade; (iii) the trading price per share of the Convertible Preferred Stock;
(iv) redemption of the Convertible Preferred Stock; and (v) the occurrence of
certain corporate transactions.
The conversion rate may be adjusted upon the occurrence of certain events.
Subject to certain conditions, on or after May 20, 2008, the Company will have
the option to redeem some or all of the shares of Convertible Preferred Stock at
a redemption price of 100% of the liquidation preference, plus accumulated and
unpaid dividends, if any, to the redemption date. In the event of a "fundamental
change," the Company may be required to purchase shares of the Convertible
Preferred Stock at the option of the holder at a price equal to 100% of the
liquidation preference plus any accumulated and unpaid dividends, including
special dividends, if any, to, but excluding, the purchase date.
The Company may elect to pay the purchase price in cash, Common Stock, or a
combination of cash and Common Stock. If the Company elects to pay all or a
portion of the purchase price in shares of Common Stock, the Common Stock will
be valued at a specified discount. The Company agreed to file with the
Securities and Exchange Commission a shelf registration statement with respect
to the resale of the Convertible Preferred Stock and the Common Stock issuable
upon conversion of the Convertible Preferred Stock and to keep the shelf
registration statement effective for a specified period of time. In addition,
the Company will be required to pay to holders of the Convertible Preferred
Stock liquidated damages in the form of special dividends or liquidated damages
payments, as applicable, if the Company fails to register the Convertible
Preferred Stock and the Common Stock issuable upon conversion of the Convertible
Preferred Stock within, and to keep such registration statement effective
during, the specified time periods.
NOTE 7: ELIMINATION OF EQUITY BASIS DIFFERENCE IN GRUPO TFM
The calculation of the Company's net equity in Grupo TFM's underlying net assets
utilizing the Company's current ownership percentage of approximately 46.6% as
compared to the amount recorded as an investment as of September 30, 2003 of
approximately $386.1 million results in a basis difference of approximately
$13.8 million. This difference in basis results from a number of factors the
most significant of which is the changing ownership interest in Grupo TFM which
produced a difference in investment basis that occurred when TFM acquired the
Mexican Government's 24.6% interest in Grupo TFM during 2002. This basis
difference would have been amortized over time, however, due to the contemplated
transaction wherein the Company will obtain a controlling interest in Grupo TFM,
the remaining basis difference will be recognized at the date of the
transaction. The pro forma financial statements as stated herein recognize the
elimination of this basis difference as an addition to concession assets on the
condensed consolidated balance sheet. See Note 2.
NOTE 8: ELIMINATION OF EQUITY EARNINGS FROM GRUPO TFM
Assuming the contemplated transaction would have been consummated on January 1,
2002 or January 1, 2003 as applicable, the Company would have consolidated
earnings of Grupo TFM and accordingly, the equity in earnings of Grupo TFM would
be eliminated.
NOTE 9: ELIMINATION OF THE GAIN ON THE SALE OF MEXRAIL
In April 2002, the Company sold to Grupo TFM its 49% interest in Mexrail for
$31.4 million. Assuming the contemplated transaction would have occurred as of
January 1, 2002, the sale of Mexrail to Grupo TFM would not have occurred and
accordingly, the associated gain would not have been recorded. The income
statement as of and for the year ended December 31, 2002 for Grupo TFM has been
restated to reflect Mexrail as a consolidated subsidiary effective January 1,
2002.
NOTE 10: PROVISION FOR INCOME TAXES / DEFERRED INCOME TAXES
The pro forma condensed consolidated income statement reflects the income tax
impacts of the pro forma adjustments utilizing an income tax rate of 38.25%, but
excluding any consideration of the equity earnings of Grupo TFM, since the
Company has not previously provided a tax provision on these amounts.
In addition, the recognition of additional identifiable intangible assets in the
form of concession assets creates an additional deferred tax liability
associated with those assets. The pro forma condensed consolidated balance sheet
as of September 30, 2003 recognizes the deferred tax liability of approximately
$14.1 million using the tax rate noted above.
NOTE 11: CONSOLIDATION ELIMINATIONS
These pro forma adjustments reflect the elimination of intercompany amounts
between the Company, Grupo TFM and Mexrail, assuming the three entities were
consolidated for financial reporting purposes.
NOTE 12: COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share for the purposes of the pro forma condensed
consolidated income statement reflect pro forma consolidated net income, less
dividends on the Company's $25 par preferred stock of approximately $242,000
annually, less dividends on the Company's $.01 par redeemable cumulative
convertible perpetual preferred stock of approximately $8.5 million annually,
divided by the weighted average outstanding shares as described in note 13
below.
Diluted earnings per share for the purposes of the pro forma consolidated
condensed income statement reflect pro forma consolidated net income, less
dividends on the Company's $25 par preferred stock of approximately $242,000
annually, divided by the weighted average diluted outstanding shares as
described in note 13 below.
The assumed conversion of the Company's $1.00 par Convertible Preferred Stock
(convertible into 13,389,121 common shares). would have been anti-dilutive to
the pro forma diluted earnings per share computations in each of the periods.
Accordingly, conversion of preferred shares into common shares was not assumed
and these shares were not included in the pro forma diluted earnings per share
computations.Total preferred dividends, however, were subtracted from net income
in the computation of the pro forma diluted earnings per share.
NOTE 13: WEIGHTED AVERAGE SHARES OUTSTANDING
The weighted average basic shares outstanding are calculated beginning with
Company historical average basic shares of (60,336,000 for the year ended
December 31, 2002 and 61,607,000 for the nine months ended September 30, 2003),
plus 18,000,000 assumed shares to be issued as described in the note 6 above.
The weighted average diluted shares outstanding are calculated beginning with
Company historical average diluted shares of (62,138,000 for the year ended
December 31, 2002 and 62,998,000 for the nine months ended September 30, 2003)
plus 18,000,000 assumed shares to be issued as described in the note 6 above,
but excluding the 13,389,121 shares assuming full conversion of the redeemable
cumulative convertible perpetual preferred stock into common utilizing a
conversion rate of 33.4728 for each share of preferred to common. As stated in
Note 12 above, the inclusion of the 13,389,121 shares would have had an
anti-dilutive effect on the computations of pro forma dilutive earnings per
share.
NOTE 14: CONSULTING AGREEMENT
In connection with the transaction, the Company intends to enter into a
consulting agreement with a consulting firm ("Consultant") controlled by Jose
Serrano Segovia with an initial term of three years. In consideration of
services provided, Consultant will receive an annual fee of $0.6 million in
cash, plus up to 2.1 million shares of restricted common stock of the Company.
The restricted stock vests based upon the achievement of certain events as
defined in the consulting agreement and or ratably over the term of the
agreement in certain circumstances. The pro forma condensed consolidated
financial statements herein reflect the effect of these transactions as follows.
The restricted stock will be accounted for as compensation expense based upon
the assumed fair market value at date of vesting and expensed in the period the
stock vests.
The annual fee is reflected as additional operating costs and expenses of $0.6
million for the year ended December 31, 2002 and $0.5 million for the nine
months ended September 30, 2003. An initial 750,000 shares of restricted stock
vest ratably over the term of the agreement. For purposes of the pro forma
statements of income the Company has assumed a calculated value of stock based
upon the stock price of $11.26 as noted above. The resulting amount is reflected
as compensation expense and amortized on a straight line basis over three years.
The additional compensation expense is approximately $2.8 million for the year
ended December 31, 2002 and approximately $2.1 million for the nine months ended
September 30, 2003. The Company recognizes that the prospective accounting for
these shares will result in variable accounting treatment and the resulting
expense will be dependent upon the Company's stock price at the actual time the
stock vests. Since the Company cannot predict the future price of the Company's
stock, the pro forma adjustments assume the stock price as noted above.
The consulting agreement provides for additional vesting of restricted stock
totaling 1,350,000 shares, in increments of 525,000, 125,000 and 700,000 shares
depending on the achievement of certain events ("contingent shares"). These
events include the completion of an agreement with TFM labor unions and events
related to the VAT tax issue. While the Company cannot predict the ultimate
timing of achievement of these events and thus pro forma their effect on the
adjusted financial statements, the Company would intend to record compensation
expense at the time and in the quarter or annual period in which these shares
vest, at then fair value as determined by the Company's stock price. No
adjustments for these contingent shares has been made in the attached pro forma
financial statements due to the uncertainty of their realization and vesting.
The calculated value of the restricted stock is approximately $15.2 million
based upon the stock price of $11.26 as noted above. The actual impact to the
Company's financial statements related to the restricted stock is dependant upon
the price of the Company's stock at the time the restricted stock vests and
which the Company cannot predict. A $1.00 per share change, either higher or
lower, in the Company's stock price at the time the restricted stock vests could
result in higher or lower compensation expense of approximately $1.4 million,
assuming all 1.35 million shares vested at the same time.
NOTE 15: AMORTIZATION OF IDENTIFIABLE INTANGIBLES - CONCESSION ASSETS
The transactions as described above result in a net addition to concession
assets of approximately $24.2 million plus $15.0 million of deferred income tax
impact described in Note 10 above. For purposes of the pro forma income
statements presented herein, this balance is amortized over the remaining
amortizable life of the concession assets of 33 years. This results in
additional amortization expense of approximately $1.2 million for the year ended
December 31, 2002 and approximately $0.9 million for the nine months ended
September 30, 2003.
NOTE 16: MINORITY INTEREST
As previously reported, TFM repurchased the Mexican Government's 24.6% interest
in Grupo TFM in June 2002. Since the purchase of the Mexican Government 24.6%
interest was completed by Grupo TFM's subsidiary TFM and the fact that the
Mexican Government also continues to maintain a 20% minority interest in TFM,
the Mexican Government retained an indirect 4.9448% minority interest in Grupo
TFM through its ownership of TFM. The pro forma adjusting entries to minority
interest reflect the continuing indirect minority ownership in Grupo TFM by the
Mexican Government for the periods indicated. For the pro forma condensed
consolidated balance sheet as of September 30, 2003 an additional $39.5 million
of minority interest was added to the pro forma balances representing 4.9448% of
Grupo TFM's net assets. For the pro forma condensed consolidated income
statements, the amount of minority interest in Grupo TFM's US GAAP net income
was computed for the periods presented resulting in approximately $17.0 million
for the year ended December 31, 2002 and $0.7 million for the nine months ended
September 30, 2003.
NOTE 17: VAT RELATED MATTERS
The impact of any settlement of the VAT dispute between TFM and the Mexican
Government on the Company's consolidated financial statements of will be
dependent upon the timing and amount of any such settlement.
It is expected that the value of any consideration received from the Mexican
Government from the settlement of the VAT dispute will be recorded as income by
TFM and Grupo TFM, net of related income taxes. If a binding agreement is
reached before the consummation of the Acquisition, the Company would record its
proportionate share of any such gain through its equity in earnings of Grupo
TFM, based upon its existing ownership of 46.6%. If the Acquisition is
subsequently consummated, the proceeds from any settlement received and retained
by TFM, including the impacts of any additional consideration as may become
payable as discussed below, would impact the Company's allocation of the
purchase price to assets acquired and liabilities assumed, likely impacting
amounts otherwise allocable to long-lived assets, including intangibles, as
presented herein.
If the VAT dispute were settled following the consummation of the Acquisition,
the Company would record in income its proportionate share of any such gain
through its consolidation of the operating results of Grupo TFM, based upon its
pre-acquisition ownership interest of 46.6%. The portion of any gain
attributable to the acquired interest of TMM would likely constitute a
pre-acquisition contingency and not impact the Company's operating results, but
rather would be considered in the allocation of the purchase price to assets
acquired and liabilities assumed, likely reducing amounts otherwise allocable to
long-lived assets, including intangibles, as presented herein.
Pursuant to the terms of the Acquisition, if the value of the consideration
received by TFM in connection with the settlement of the VAT dispute exceeds the
amount payable pursuant to the Put Agreement in place between the Mexican
Government, Grupo TFM, TMM and the Company, whereby the Mexican Government may
put its ownership in TFM to the other parties, additional amounts will be
payable by the Company or TFM to TMM, depending on the amount of such excess.
Such payment would range from $100 million to $180 million. Any such payment
would constitute additional consideration for the purchase of TMM's interest in
Grupo TFM and as such would likely increase amounts allocable to long-lived
assets, including intangibles, as presented herein.
NOTE 18: CONSIDERATION OF THE MEXICAN GOVERNMENT'S PUT RIGHTS REGARDING ITS 20%
MINORITY INTEREST IN TFM
The provisions of the "Put Agreement" obligate Grupo TFM or the Registrant to
purchase the Mexican Government's 20% minority interest in TFM under certain
conditions. As disclosed in the Registrant's Form 10-K for the year ended
December 31, 2002 and its most recently filed Form 10-Q for the period ended
September 30, 2003, the total estimated purchase price of the Mexican
Government's minority interest was approximately $485 million and $469 million,
respectively. The calculation of the purchase price is dependent upon
inflationary factors of the Mexican economy and foreign exchange rate factors,
which the Registrant can not predict. While the Registrant along with Grupo TFM
are currently exploring financing alternatives, the source and cost any such
financing for this obligation is not reasonably determinable at this time . In
addition, the acquisition of the Mexican Government's interest and funding of
this obligation could be affected by the outcome and settlement of TFM's VAT
dispute with the Mexican Government.
Due to the uncertainties noted above, the accompanying pro forma financial
statements do not reflect the impact of the acquisition of additional shares of
TFM which could arise under the Put Agreement. If, following the consummation of
the acquisition of Grupo TFM shares from TMM, the Registrant acquires the
remaining shares of TFM held by the Mexican Government pursuant to the Put
Agreement, the accompanying pro forma financial statements would be generally
impacted as follows. The excess of the purchase price over the carrying value of
minority interest would be allocated to the assets and liabilities of GTFM,
based upon their fair values, with the likely impact being an increase to
recorded amounts for long-lived assets, including intangibles, as presented
herein. Additionally, the minority interest in earnings of Grupo TFM would be
eliminated from the pro forma income statement, offset by the costs of any debt
financing incurred to finance the purchase and any increases in depreciation or
amortization expense relating the application of purchase accounting.
NOTE 19: SUBSEQUENT EVENTS
KCS and TMM are in dispute over TMM's attempt to terminate the agreement entered
into on April 20, 2003 by KCS and TMM and other parties under which KCS would
acquire control of TFM. On August 29, 2003, KCS received a demand by TFM to
repurchase from KCS shares of Mexrail sold to KCS in May 2003. On September 23,
2003, the STB issued a decision finding no need to rule on the transfer back to
TFM of the 51% interest in Mexrail that KCS acquired on May 9, 2003. On
September 30, 2003, TFM repurchased, for $32.7 million, the Mexrail shares from
KCS at the price KCS paid TFM in May 2003.
LEGAL MATTERS
The validity of the issuance of the Series C Preferred Stock and the
validity of the common stock issuable upon conversion of the Series C Preferred
Stock and tax matters have been passed upon for us by Sonnenschein Nath &
Rosenthal LLP, Kansas City, Missouri.
EXPERTS
Our consolidated financial statements as of and for the years ended
December 31, 2002 and 2001, incorporated in this prospectus by reference to our
annual report on Form 10-K for the year ended December 31, 2002, have been so
incorporated in reliance on the report of KPMG LLP, independent accountants,
given and on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Kansas City Southern as of
December 31, 2000 and for the year ended December 31, 2000, which are
incorporated in this prospectus by reference to the annual report on Form 10-K
for the year ended December 31, 2002, have been have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The combined and consolidated financial statements of Grupo TFM, as of
December 31, 2002 and 2001 and for each of the three years ended December 31,
2002, which are incorporated in this prospectus by reference to our annual
report on Form 10-K for the year ended December 31, 2002, have been so
incorporated in reliance on the report of PricewaterhouseCoopers, S.C.,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports and other information with
the SEC. You may inspect and copy such material at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for more information on the public
reference room. You can also find our SEC filings at the SEC's website at
www.sec.gov and on our website at www.kcsi.com. Information contained on our
website is not part of this prospectus.
In addition, our reports and other information concerning us can be
inspected at the New York Stock Exchange, 20 Broad Street, New York, New York
10005, where our common stock is listed.
The following documents we filed with the SEC pursuant to the Exchange Act
are incorporated herein by reference:
o Our annual report on Form 10-K for the fiscal year ended December 31,
2002;
o Our quarterly reports on Form 10-Q for the quarters ended March 31,
2003, June 30, 2003 and September 30, 2003; and
o Our current reports on Form 8-K filed on March 19, 2003, April 7,
2003, April 22, 2003, May 1, 2003 (regarding intent to sell Series C
Preferred Stock in private offering), May 5, 2003, and July 14, 2003,
the information filed under Item 5 and Exhibit 99.1 of the Form 8-K
filed August 1, 2003, current reports on Form 8-K filed on August 5,
2003, August 19, 2003, October 23, 2003, January 9, 2004, January 20,
2004 and January 21, 2004.
All documents subsequently filed by us pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act (excluding any information furnished pursuant to
Item 9 or Item 12 on any current report on Form 8-K), prior to the termination
of the offering, shall be deemed to be incorporated by reference into this
prospectus and to be a part hereof from the date of the filing of such document.
In addition, all documents filed by us pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act (excluding any information furnished pursuant to Item
9 or Item 12 on any current report on Form 8-K) after the date of the initial
registration statement and prior to effectiveness of the registration statement
shall be deemed to be incorporated by reference into this prospectus and to be a
part hereof from the date of the filing of such document. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for all purposes to the extent that a statement contained
in this prospectus, or in any other subsequently filed document which is also
incorporated or deemed to be incorporated by reference, modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
We will provide without charge to each person to whom this prospectus is
delivered, upon written or oral request of such person, a copy of any or all
documents incorporated by reference in this prospectus. Requests for such copies
should be directed to Kansas City Southern, P.O. Box 219335, Kansas City,
Missouri 64121-9335 (or if by United Parcel Service or some other form of
express delivery to 427 West 12th Street, Kansas City, Missouri 64105),
Attention: Corporate Secretary's Office, or if by telephone at (816) 983-1538.
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated in this prospectus by
reference may contain forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. You can typically
identify forward-looking statements by the use of words such as "may," "will,"
"could," "project," "believe," "anticipate," "expect," "estimate," "continue,"
"potential," "plan," "forecasts," and similar terms. These statements represent
our intentions, plans, expectations and beliefs and are subject to risks,
uncertainties and other factors. Many of these factors are outside our control
and could cause actual results to differ materially from such forward-looking
statements. These factors include, among others, those identified in this
prospectus under "Risk Factors."
There may be other factors that may cause our actual results to differ
materially from the forward-looking statements. Other factors include, but are
not limited to, changes in management strategies, objectives and business
approaches, changes in lines of business, material litigation involving us and
changes in the political, regulatory or economic environments in the United
States, Mexico, Panama and other countries where we or our unconsolidated
affiliates currently operate or may operate in the future. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses of this offering (all of which are to be paid by the
registrant) are estimated to be as set forth in the table below. All of the
expenses are estimated, except the Securities and Exchange Commission
registration fee.
Securities and Exchange Commission registration fee.........$ 16,180
Legal fees and expenses..................................... 75,000
Accounting fees and expenses................................ 50,000
Printing expenses........................................... 50,000
Miscellaneous............................................... 8,820
---------
TOTAL........................................ ......$ 200,000
=========
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
KCS is incorporated under the laws of the State of Delaware. Section 145 of
the General Corporation Law of the State of Delaware (the "Delaware Statute")
provides that a Delaware corporation may indemnify any persons who are, or are
threatened to be made, parties to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), other than an action by or in the right of such corporation, by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise (an "indemnified capacity"). The indemnity may include expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was illegal. Similar provisions apply to actions
brought by or in the right of the corporation, except that no indemnification
shall be made without judicial approval if the officer or director is adjudged
to be liable to the corporation. Where an officer or director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred. Section 145 of the Delaware
Statute further authorizes a corporation to purchase and maintain insurance on
behalf of any indemnified person against any liability asserted against him and
incurred by him in any indemnified capacity, or arising out of his status as
such, regardless of whether the corporation would otherwise have the power to
indemnify him under the Delaware Statute.
The bylaws of KCS provide that each person who, at any time is, or shall
have been, a director, officer, employee or agent of KCS, and is threatened to
be or is made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is, or was, a director, officer, employee or agent of KCS,
or served at the request of KCS as a director, officer, employee, trustee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified against expense (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with any such action, suit or proceeding to the full extent
provided under Section 145 of the Delaware Statute.
The certificate of incorporation of KCS provides that to the fullest extent
permitted by the Delaware Statute and any amendments thereto, no director of the
corporation shall be liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director.
In addition, KCS has entered into indemnification agreements with its
officers and directors. Those agreements are intended to supplement its officer
and director liability insurance and provide the officers and directors with
specific contractual assurance that the protection provided by its bylaws will
continue to be available regardless of, among other things, an amendment to the
bylaws or a change in management or control of KCS. The indemnification
agreements provide for prompt indemnification to the fullest extent permitted by
law and for the prompt advancement of expenses, including attorneys' fees and
all other costs and expenses incurred in connection with any action, suit or
proceeding in which the director or officer is a witness or other participant,
or to which the director or officer is a party, by reason (in whole or in part)
of service in certain capacities. Under the indemnification agreements, KCS's
determinations of indemnity are made by a committee of disinterested directors
unless a change in control of KCS has occurred, in which case the determination
is made by special independent counsel. The indemnification agreements also
provide a mechanism to seek court relief if indemnification or expense advances
are denied or not received within specified periods. Indemnification and
advancement of expenses would also be provided in connection with court
proceedings initiated to determine rights under the indemnification agreements
and certain other matters.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following exhibits are filed herewith pursuant to the requirements of
Item 601 of Regulation S-K:
------------------- ------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
------------------- ------------------------------------------------------------
2.1* Acquisition Agreement, dated as of April 20, 2003, by and
among KCS, KARA Sub, Inc., Grupo TMM, S.A., TMM Holdings,
S.A. de C.V. and TMM Multimodal, S.A. de C.V. which is filed
as Exhibit 10.1 to KCS's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2003 (Commission File No.
1-4717) is incorporated herein by reference as Exhibit 2.1
------------------- ------------------------------------------------------------
2.2* Stock Purchase Agreement, dated as of April 20, 2003 by and
among KCS, Grupo TMM, S.A. and TFM, S.A. de C.V., which is
filed as Exhibit 10.2 to KCS's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2003 (Commission File No.
1-4717) is incorporated herein by reference as Exhibit 2.2
------------------- ------------------------------------------------------------
2.3* Form of Amended and Restated Certificate of Incorporation of
KCS
------------------- ------------------------------------------------------------
2.4* Form of First Amendment to Rights Agreement
------------------- ------------------------------------------------------------
2.5* Form of Stockholders' Agreement to be entered into by and
among KCS, Grupo TMM, S.A., TMM Holdings, S.A. de C.V., TMM
Multimodal, S.A. de C.V. and certain stockholders of Grupo
TMM, S.A.
------------------- ------------------------------------------------------------
2.6* Form of Registration Rights Agreement to be entered into by
and among KCS, Grupo TMM, S.A., TMM Holdings, S.A. de C.V.
and TMM Multimodal, S.A. de C.V.
------------------- ------------------------------------------------------------
2.7* Form of Consulting Agreement to be entered into by and
between KCS and a consulting firm to be established by Jose
Serrano Segovia
------------------- ------------------------------------------------------------
2.8* Marketing and Services Agreement to be entered into by and
among KCS, Grupo TMM, S.A. and TFM, S.A. de C.V.
------------------- ------------------------------------------------------------
4.1* Certificate of Designations, which is filed as Exhibit
3.1(b) to KCS's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003, is hereby incorporated by
reference as Exhibit 4.1
------------------- ------------------------------------------------------------
4.2* The Fourth, Seventh, Eighth, Eleventh, Twelfth, Thirteenth,
Fourteenth, Fifteenth and Sixteenth paragraphs of KCS's
Restated Certificate of Incorporation, which is filed as
Exhibit 3.1 to the Company's Registration Statement on Form
S-4 originally filed July 12, 2002 (Registration No.
333-92360), as amended and declared effective on July 30,
2002 (the "2002 S-4 Registration Statement"), are
incorporated herein by reference as Exhibit 4.2
------------------- ------------------------------------------------------------
4.3* Article I, Sections 1, 3 and 11 of Article II, Article V and
Article VIII of KCS's By-Laws, as amended and restated to
September 24, 2002, which is attached as Exhibit 3.2 to
KCS's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 (Commission File No. 1-4717) are
incorporated herein by reference as Exhibit 4.3
------------------- ------------------------------------------------------------
4.4* Exhibit 99 to KCS's Form 8-A dated October 24, 1995
(Commission File No. 1-4717), which is the Stockholder
Rights Agreement by and between KCS and Harris Trust and
Savings Bank dated as of September 19, 1995, is hereby
incorporated by reference as Exhibit 4.4
------------------- ------------------------------------------------------------
4.5* Registration Rights Agreement dated May 5, 2003 among KCS,
Morgan Stanley & Co. Incorporated and Deutsche Bank
Securities Inc.
------------------- ------------------------------------------------------------
5.1* Opinion of Sonnenschein Nath & Rosenthal LLP regarding the
validity of the securities being registered
------------------- ------------------------------------------------------------
8.1* Opinion of Sonnenschein Nath & Rosenthal LLP regarding tax
matters
------------------- ------------------------------------------------------------
12.1* Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends
------------------- ------------------------------------------------------------
23.1* Consent of KPMG LLP
------------------- ------------------------------------------------------------
23.2* Consent of PricewaterhouseCoopers LLP
------------------- ------------------------------------------------------------
23.3* Consent of PricewaterhouseCoopers, S.C.
------------------- ------------------------------------------------------------
23.4* Consent of Sonnenschein Nath & Rosenthal LLP (included in
Exhibit 5.1 and Exhibit 8.1)
------------------- ------------------------------------------------------------
24* Power of Attorney (included in the signature page of this
registration statement)
------------------- ------------------------------------------------------------
* Previously filed or incorporated by reference herein.
(b) Financial Statement Schedules.
Incorporated herein by reference to Part II Item 8, Financial Statements
and Supplementary Data, under the Index to Financial Statements of KCS's Annual
Report on Form 10-K for the year ended December 31, 2002.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
PROVIDED, HOWEVER, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial BONA FIDE offering thereof.
(5) That, for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(6) That, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
[The remainder of this page intentionally left blank]
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this post-effective
Amendment No. 5 to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Kansas City, State of
Missouri, on February 9, 2004.
Kansas City Southern
By: /s/ Ronald G. Russ
--------------------------------
Ronald G. Russ
Executive Vice President and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this
post-effective Amendment No. 5 to the registration statement has been signed on
February 9, 2004 by the following persons in the capacities indicated.
Signature Capacity
--------- --------
Michael R. Haverty* Chairman, President, Chief Executive Officer
-------------------------- and Director
Michael R. Haverty
Gerald K. Davies* Executive Vice President and Chief Operating
-------------------------- Officer
Gerald K. Davies
/s/ Ronald G. Russ Executive Vice President and Chief Financial
-------------------------- Officer (Principal Financial Officer)
Ronald G. Russ
/s/ Mark W. Osterberg Vice President and Comptroller (Principal
-------------------------- Accounting Officer)
Mark W. Osterberg
A. Edward Allinson* Director
--------------------------
A. Edward Allinson
Signature Capacity
--------- --------
Michael G. Fitt* Director
---------------------------
Michael G. Fitt
James R. Jones* Director
---------------------------
James R. Jones
Landon H. Rowland* Director
---------------------------
Landon H. Rowland
Byron G. Thompson* Director
---------------------------
Byron G. Thompson
Director
---------------------------
Rodney E. Slater
Thomas A. McDonnell* Director
---------------------------
Thomas A. McDonnell
*By: /s/ Ronald G. Russ
---------------------------
Ronald G. Russ
Attorney-in-fact
EXHIBIT INDEX
------------------- ------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
------------------- ------------------------------------------------------------
2.1* Acquisition Agreement, dated as of April 20, 2003, by and
among KCS, KARA Sub, Inc., Grupo TMM, S.A., TMM Holdings,
S.A. de C.V. and TMM Multimodal, S.A. de C.V. which is filed
as Exhibit 10.1 to KCS's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2003 (Commission File No.
1-4717) is incorporated herein by reference as Exhibit 2.1
------------------- ------------------------------------------------------------
2.2* Stock Purchase Agreement, dated as of April 20, 2003 by and
among KCS, Grupo TMM, S.A. and TFM, S.A. de C.V., which is
filed as Exhibit 10.2 to KCS's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2003 (Commission File No.
1-4717) is incorporated herein by reference as Exhibit 2.2
------------------- ------------------------------------------------------------
2.3* Form of Amended and Restated Certificate of Incorporation of
KCS
------------------- ------------------------------------------------------------
2.4* Form of First Amendment to Rights Agreement
------------------- ------------------------------------------------------------
2.5* Form of Stockholders' Agreement to be entered into by and
among KCS, Grupo TMM, S.A., TMM Holdings, S.A. de C.V., TMM
Multimodal, S.A. de C.V. and certain stockholders of Grupo
TMM, S.A.**
------------------- ------------------------------------------------------------
2.6* Form of Registration Rights Agreement to be entered into by
and among KCS, Grupo TMM, S.A., TMM Holdings, S.A. de C.V.
and TMM Multimodal, S.A. de C.V.
------------------- ------------------------------------------------------------
2.7* Form of Consulting Agreement to be entered into by and
between KCS and a consulting firm to be established by Jose
Serrano Segovia
------------------- ------------------------------------------------------------
2.8* Marketing and Services Agreement to be entered into by and
among KCS, Grupo TMM, S.A. and TFM, S.A. de C.V.
------------------- ------------------------------------------------------------
4.1* Certificate of Designations, which is filed as Exhibit
3.1(b) to KCS's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003, is hereby incorporated by
reference as Exhibit 4.1
------------------- ------------------------------------------------------------
4.2* The Fourth, Seventh, Eighth, Eleventh, Twelfth, Thirteenth,
Fourteenth, Fifteenth and Sixteenth paragraphs of KCS's
Restated Certificate of Incorporation, which is filed as
Exhibit 3.1 to the Company's Registration Statement on Form
S-4 originally filed July 12, 2002 (Registration No.
333-92360), as amended and declared effective on July 30,
2002 (the "2002 S-4 Registration Statement"), are
incorporated herein by reference as Exhibit 4.2
------------------- ------------------------------------------------------------
4.3* Article I, Sections 1, 3 and 11 of Article II, Article V and
Article VIII of KCS's By-Laws, as amended and restated to
September 24, 2002, which is attached as Exhibit 3.2 to
KCS's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 (Commission File No. 1-4717) are
incorporated herein by reference as Exhibit 4.3
------------------- ------------------------------------------------------------
4.4* Exhibit 99 to KCS's Form 8-A dated October 24, 1995
(Commission File No. 1-4717), which is the Stockholder
Rights Agreement by and between KCS and Harris Trust and
Savings Bank dated as of September 19, 1995, is hereby
incorporated by reference as Exhibit 4.4
------------------- ------------------------------------------------------------
4.5* Registration Rights Agreement dated May 5, 2003 among KCS,
Morgan Stanley & Co. Incorporated and Deutsche Bank
Securities Inc.
------------------- ------------------------------------------------------------
5.1* Opinion of Sonnenschein Nath & Rosenthal LLP regarding the
validity of the securities being registered
------------------- ------------------------------------------------------------
8.1* Opinion of Sonnenschein Nath & Rosenthal LLP regarding tax
matters
------------------- ------------------------------------------------------------
12.1* Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Dividends
------------------- ------------------------------------------------------------
23.1* Consent of KPMG LLP
------------------- ------------------------------------------------------------
23.2* Consent of PricewaterhouseCoopers LLP
------------------- ------------------------------------------------------------
23.3* Consent of PricewaterhouseCoopers, S.C.
------------------- ------------------------------------------------------------
23.4* Consent of Sonnenschein Nath & Rosenthal LLP (included in
Exhibit 5.1 and Exhibit 8.1)
------------------- ------------------------------------------------------------
24* Power of Attorney (included in the signature page of this
registration statement)
------------------- ------------------------------------------------------------
* Previously filed or incorporated by reference herein.