As filed with the Securities and Exchange Commission on January 25, 2001
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM S-4
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
----------------
KANSAS CITY SOUTHERN INDUSTRIES, INC.*
(Exact name of registrant as specified in its charter)

Delaware 4011 44-0663509
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Number)
organization)

Missouri 4011 44-6000758
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Number)
organization)

114 West 11th Street
Kansas City, Missouri 64105
(816) 983-1303
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Richard P. Bruening, Esq.
Kansas City Southern Industries, Inc.
114 West 114th Street
Kansas City, Missouri 64105
(816) 983-1303
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:

Diane M. Bono, Esq.
Sonnenschein Nath & Rosenthal
4520 Main Street
Kansas City, Missouri 64111
(816) 460-2400
----------------
*The companies listed on the next page are also included in this Form S-4
Registration Statement as additional Registrants.
----------------
Approximate date of commencement of proposed sale of the securities to the
public: The exchange offer will commence as soon as practicable after the
effective date of this Registration Statement.
----------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement of the earlier effective
registration statement for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

CALCULATION OF REGISTRATION FEE

- ---------------------------------------------------------------------------------------------

Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Amount to Offering Price Aggregate Registration
Securities to be Registered Be Registered Per Unit(1) Offering Price Fee
- ---------------------------------------------------------------------------------------------

9 1/2% Senior Notes due 2008.... $200,000,000 100% $200,000,000 $50,000
- ---------------------------------------------------------------------------------------------
Guarantees on Senior Notes(2)... -- -- -- --(3)
- ---------------------------------------------------------------------------------------------

(1) Calculated in accordance with Rule 457 under the Securities Act of 1933,
as amended.
(2) The 9 1/2% Senior Notes were issued by The Kansas City Southern Railway
Company (the "Issuer") and have been guaranteed by Kansas City Southern
Industries, Inc. and its subsidiaries listed on the next page.
(3) Pursuant to Rule 457(n), no separate fee is payable with respect to the
guarantees being registered hereby.
----------------
The registrants hereby amend this registration statement on such date or
dates as may be necessary to delay its effective date until the registrants
shall file a further amendment that specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.

Jurisdiction Primary
of IRS Standard
Incorporation Employer Industrial
Exact Name of Additional or Identification Classification
Registrants* Organization Number Number
- ------------------------ ------------- -------------- --------------

Gateway Eastern Railway Company... Illinois 37-1301047 4011
Gateway Western Railway Company... Illinois 46-3681799 4011
PABTEX GP, LLC.................... Texas Applied for 4013
PABTEX, L.P....................... Delaware 43-0909361 4013
SIS Bulk Holding, Inc. ........... Delaware Applied for 4013
KCS Transportation Company........ Delaware 43-1760453 6719
Mid-South Microwave, Inc.......... Delaware 43-1422644 7359
Rice-Carden Corporation........... Missouri 44-6011041 6512
Southern Development Company...... Missouri 44-6005843 6512
Southern Industrial Services,
Inc.............................. Delaware 36-3499535 6719
Trans-Serve, Inc.................. Delaware 43-0865086 2491

- --------
*The address for each of the additional registrants is c/o Kansas City
Southern Industries, Inc., 114 West 11th Street, Kansas City, Missouri
64105.
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- -------------------------------------------------------------------------------

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. These +
+securities may not be sold until the registration statement filed with the +
+SEC is effective. This prospectus is not an offer to sell nor is it +
+soliciting an offer to buy these securities in any jurisdiction where the +
+offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 25, 2001

PROSPECTUS

Exchange Offer For
$200,000,000
The Kansas City Southern Railway Company

9 1/2% Senior Notes Due 2008

-----------------------------------------

We are offering to exchange:

up to $200,000,000 of our new 9 1/2% senior notes due 2008

for

a like amount of our outstanding 9 1/2% senior notes due 2008.

-----------------------------------------

Material Terms of Exchange Offer:

. The exchange offer
. The terms of the notes expires at 5:00 p.m.,
to be issued in the New York City time, on
exchange offer are , 2001,
substantially identical unless we extend the
to the outstanding offer.
notes, except that the
transfer restrictions
and registration rights
relating to the
outstanding notes will
not apply to the
exchange notes.

. You may withdraw your
tender of notes at any
time before the
expiration of the
exchange offer. We will
exchange all of the
outstanding notes that
are validly tendered
and not validly
withdrawn.

. No public market
currently exists for
the outstanding notes.
We do not intend to
list the new notes on
any securities exchange
and, therefore, no
active public market is
anticipated.

. We will not receive any
proceeds from the
exchange offer.

-----------------------------------------

Each broker-dealer that receives exchange notes for its own account pursuant to
the registered exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. The letter of
transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in the exchange offer in exchange for
outstanding notes where such outstanding notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities. The
Issuer has agreed that, for a period of 180 days after the expiration date of
the exchange offer, it will make this prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."

For a discussion of certain factors that you should consider before
participating in this exchange offer, see "Risk Factors" beginning on page 17
of this prospectus.

-----------------------------------------

Neither the SEC nor any state securities commission has approved or disapproved
the notes to be distributed in the exchange offer, nor have any of these
organizations determined that this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.

-----------------------------------------

The date of this prospectus is , 2001

TABLE OF CONTENTS

Page
----

Summary............................ 1
Risk Factors....................... 17
Use of Proceeds.................... 31
Capitalization..................... 31
Selected Consolidated Financial
Data and Other Data............... 32
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 34
Quantitative and Qualitative
Disclosures About Market Risk..... 58
Railroad Industry.................. 59
Business........................... 62
Management......................... 82
Certain Relationships and Related
Transactions...................... 95

Page
----

Security Ownership of Certain Beneficial Owners and Management........ 96
Description of KCS Credit Facilities and Other Indebtedness........... 98
The Exchange Offer.................................................... 101
Description of the Notes.............................................. 113
Exchange and Registration Rights Agreement............................ 151
Book-Entry; Delivery and Form......................................... 153
Certain United States Federal Income Tax Considerations............... 156
Plan of Distribution.................................................. 157
Legal Matters......................................................... 157
Experts............................................................... 157
Index to Consolidated Financial Statements............................ F-1

----------------

WHERE YOU CAN FIND MORE INFORMATION

Kansas City Southern Industries, Inc. ("KCSI") is subject to the
informational requirements of the Securities Exchange Act of 1934 (the
"Exchange Act"), and, accordingly, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC" or the
"Commission"). The reports and other information filed by KCSI with the SEC
may be inspected and copied at the public reference facilities maintained by
the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as at the Regional Offices of the SEC at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World
Trade Center, Suite 1300, New York, New York 10048. Copies of such information
can be obtained by mail from the Public Reference Branch of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates, or accessed
electronically by means of the SEC's home page on the Internet at
http://www.sec.gov. The reports and other information filed by KCSI can also
be inspected at the offices of the New York Stock Exchange, 20 Broad Street,
New York, New York 10005.

The SEC allows us to incorporate by reference the information we file with
them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede the information in this
prospectus. Accordingly, we incorporate by reference the following documents
filed by KCSI:

1. Annual Report on Form 10-K for the fiscal year ended December 31, 1999
as amended by the Amended Annual Report on Form 10-K/A filed with the SEC on
April 24, 2000 and the Amended Annual Report on Form 10-K/A filed with the SEC
on July 3, 2000;

2. Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31,
2000, June 30, 2000 and September 30, 2000 and the Amended Quarterly Report on
Form 10-Q/A filed with the SEC on January 16, 2001 amending the Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2000;

3. Current Reports on Form 8-K filed with the SEC on January 18, 2000, June
21, 2000, July 14, 2000, September 12, 2000 and October 4, 2000, and Amended
Current Report on Form 8-K/A filed with the SEC on September 14, 2000 amending
the Current Report on Form 8-K filed on July 14, 2000.

In addition, all reports and other documents we subsequently file pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act on or after the date
of this prospectus (other than reports, documents or information furnished
pursuant to Regulation FD) shall be deemed to be incorporated by reference in
this prospectus and to be part of this prospectus from the date of the filing
of such reports and documents. Any statement contained in this prospectus or
in a document incorporated or deemed to be incorporated in this prospectus by
reference shall be deemed to be modified or superseded for the purpose of this
prospectus to the extent that a statement contained in any subsequently filed
document which is or is deemed to be incorporated by reference in this
prospectus modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this prospectus.

These filings have not been included in or delivered with this prospectus.

You may request a copy of any or all of the documents incorporated by
reference in this prospectus at no cost, by writing or telephoning the
Corporate Secretary of Kansas City Southern Industries, Inc., 114 West 11th
Street, Kansas City, Missouri 64105, (816) 983-1303.

To ensure timely delivery, you should request these filings no later than
, 2001, or five business days before the expiration date, if the
exchange offer is extended.

We have filed with the SEC under the Securities Act of 1933 (the
"Securities Act") and the rules and regulations thereunder a registration
statement on Form S-4 with respect to the new notes issuable pursuant to the
exchange offer. This prospectus does not contain all of the information
contained in the registration statement, certain portions of which have been
omitted pursuant to the rules and regulations of the SEC. Statements contained
in this prospectus concerning the provisions of documents are not necessarily
summaries of the material provisions of those documents, and each statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the SEC.

Disclosure Regarding Forward-Looking Statements

This prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act
including, in particular, the statements about the Company's plans,
strategies, and prospects under the headings "Summary," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." Although we believe that our plans, intentions and expectations
reflected in or suggested by such forward-looking statements are reasonable,
we can give no assurance that such plans, intentions or expectations will be
achieved. Important factors that could cause actual results to differ
materially from the forward-looking statements we make in this prospectus are
set forth in this prospectus, including under the heading "Risk Factors." As
stated elsewhere in this prospectus, such risks and other important factors
include, among others:

. our ability to execute our business strategy;

. competition;

. our dependence on joint venture partners;

. our dependence on interchange, trackage rights, haulage rights and
marketing agreements with other railroads and third parties;

. foreign currency fluctuations, political and social instability and
cultural and economic differences in Mexico and Panama;

. potential required capital investments in an affiliate;

. railroad industry and environmental regulation;

. reliance on unionized labor;

. fuel costs and shortages;

. general economic and weather conditions;

. catastrophe, collision, property loss or service interruption; and

. loss of any of our significant customers.

There may be other factors that may cause our actual results to differ
materially from the forward-looking statements.

All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the cautionary statements
included in this prospectus.

Industry Data

Unless otherwise indicated, the industry data contained in this prospectus
is from the 2000 Edition of "Railroad Facts" or Volume 17 of "Railroad Ten-
Year Trends 1990-1999," each published by the Association of American
Railroads.

iii

SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this prospectus. Unless the context otherwise requires,
references in this document to "KCSI" mean Kansas City Southern Industries,
Inc. and references to the "Company," "we," "us," "our" and similar terms refer
to KCSI and its continuing subsidiaries, excluding the discontinued operations
of its financial services businesses. Unless the context otherwise requires,
references in this document to "KCSR" or the "Issuer" mean The Kansas City
Southern Railway Company, the principal subsidiary of KCSI.

The Company

We own one of eight Class I railroads in the United States and, along with
our subsidiaries and joint ventures, own and operate a rail network comprised
of approximately 6,000 miles of main and branch lines that link key commercial
and industrial markets in the United States and Mexico. Through our strategic
alliance with Canadian National Railway Company and Illinois Central
Corporation (together "CN/IC"), we have created a contiguous rail network of
approximately 25,000 miles of main and branch lines connecting Canada, the
United States and Mexico. We believe that, as a result of the strategic
position of our railway, we are poised to continue to benefit from the growing
north/south trade between the United States, Mexico and Canada promoted by the
implementation of the North American Free Trade Agreement ("NAFTA"). We offer
services to companies in a wide range of markets including the coal, chemicals
and petroleum, paper and forest, agricultural and mineral, and intermodal and
automotive markets. For the twelve months ended September 30, 2000, we
generated total revenues of $589.1 million, $56.3 million of operating income
and EBITDA (as adjusted and as defined on page 16) of $132.2 million. EBITDA as
presented excludes our equity in net earnings of unconsolidated affiliates of
$19.0 million for the twelve months ended September 30, 2000 and unusual costs
of $12.7 million in the fourth quarter of 1999.

Our principal subsidiary, KCSR, founded in 1887, operates a rail network of
approximately 2,800 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. In addition to KCSR, our
operations include Gateway Western Railway Company ("Gateway Western"), a
wholly-owned subsidiary, an approximate 37% interest in Grupo Transportacion
Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), and a 49% interest in
Mexrail, Inc. ("Mexrail"), which wholly owns The Texas Mexican Railway Company
("Tex-Mex"). In addition, Mexrail owns the northern half of the rail bridge at
Laredo which spans the Rio Grande River into Mexico. TFM, S.A. de C.V. ("TFM")
operates the southern half of the bridge. Gateway Western, a regional rail
carrier, operates approximately 400 miles of main and branch lines running from
East St. Louis, Illinois to Kansas City, Missouri. Grupo TFM owns 80% of TFM,
which operates a railroad of approximately 2,700 miles of main and branch lines
running from the U.S./Mexican border at Laredo, Texas to Mexico City and serves
three of the four major shipping ports in Mexico. Tex-Mex operates
approximately 150 miles of main and branch lines between Laredo and the port
city of Corpus Christi, Texas. We also own 50% of the common stock of the
Panama Canal Railway Company, which holds the concession to operate a 47-mile
railroad located adjacent to the Panama Canal. That railroad is currently being
reconstructed and is expected to resume operations in 2001.

Tennessee and New Orleans, Louisiana by interchanging with us at Meridian and
Jackson, Mississippi and East St. Louis. Other railroads can also interconnect
with us at our other gateways at Kansas City, Birmingham, Alabama, Shreveport,
Louisiana, Dallas, New Orleans, Beaumont, Texas and Laredo. Our rail network
links directly to major trading centers in northern Mexico through TFM at
Laredo, where more than 50% of all rail and truck traffic between the two
countries crosses the border.

Our network is further expanded through marketing agreements with Norfolk
Southern Railway Co. ("Norfolk Southern") and I&M Rail Link, LLC ("I&M Rail
Link"). Our marketing agreements with Norfolk Southern allow us to capitalize
on our east/west "Meridian Speedway," which runs from Meridian to Dallas, to
gain incremental traffic volume between the southeast and the southwest. Our
agreement with I&M Rail Link provides us with access to Minneapolis and Chicago
and to originations of corn and other grain in Iowa, Minnesota and Illinois.

Industry Overview

U.S. railroad companies are categorized by the Surface Transportation Board
("STB") into three types: Class I, Class II (Regional) and Class III (Local).
There are currently eight Class I railroads in the U.S., which can be further
divided geographically by eastern or western classification. The eastern
railroads are CSX Corporation ("CSX"), Grand Trunk Western Railroad, Inc.
("Grand Trunk Western") (owned by Canadian National Railway Company ("CN")),
Illinois Central Corporation ("IC") (owned by CN) and Norfolk Southern. The
western railroads include The Burlington Northern and Santa Fe Railway Company
("BNSF"), KCSR, Soo Line Railroad Company (owned by Canadian Pacific Railway
Company ("CP")) and Union Pacific Railroad Company ("UP").

The Association of American Railroads ("AAR") estimates that Class I
railroads generated total operating revenues of $32.7 billion in 1999. Revenues
are derived generally from the shipment of products under negotiated contracts
between suppliers and shippers and, to a lesser extent, published tariff rates.
The shipment of coal is the primary source of Class I U.S. railroad revenues.
The AAR estimates that in 1999, coal accounted for 43.7% of total Class I U.S.
railroad volume in terms of tons originated and 21.8% of total Class I U.S.
railroad carload revenues. The next largest commodity source was chemicals and
allied products, which the AAR estimates in 1999 accounted for 9.0% of total
Class I U.S. railroad volume in terms of tons originated and 13.2% of total
Class I U.S. railroad carload revenues. The AAR estimates that intermodal
traffic accounted for 15 to 20% of total Class I U.S. railroad carload revenues
in 1999.

Industry Trends

Since 1994, there has been significant consolidation among major North
American rail carriers, including the 1995 merger of Burlington Northern, Inc.
with Santa Fe Pacific Corporation, the 1995 merger of the UP and the Chicago
and North Western Transportation Company ("UP/CNW") and the 1996 merger of UP
with Southern Pacific Railroad ("SP"). Further, CSX and Norfolk Southern
purchased the assets of Consolidated Rail Corporation ("Conrail") in 1998 and
CN acquired the IC in 1999. As a result of this consolidation, the industry is
now dominated by a few "mega-carriers."

In late 1999 a merger was announced between BNSF and CN. After this
announcement, the STB imposed a 15-month moratorium on Class I railroad merger
activity while it reviews and rewrites the rules applicable to railroad
consolidation. In July 2000 the STB's moratorium was upheld by the United
States Court of Appeals for the District of Columbia. Subsequent to the court
decision, BNSF and CN announced the termination of their proposed merger. The
moratorium, and more directly the new rules, will likely have a substantial
effect on future railroad merger activity.

Competitive Strengths

Strategically Positioned Rail Network. Through our rail network, our
strategic alliance with CN/IC and our marketing agreements with Norfolk
Southern and I&M Rail Link, we connect with railroads serving major trading
points in the United States, Canada, and Mexico. During the mid-1990s, while
most major U.S. railroads concentrated on enlarging their shares of east/west
transcontinental traffic in the United States, we focused on creating the
"NAFTA Railway" that would serve north/south traffic across the United States'
borders with Mexico and Canada through acquisitions, joint ventures, a
strategic alliance and marketing agreements. According to the U.S. Department
of Commerce, trade between the United States and Mexico and between the United
States and Canada has grown at an average annual rate of 18.0% and 11.0%,
respectively, since the implementation of NAFTA in 1994 through 1998. Our
investments in Mexrail and Grupo TFM extend our rail network from Beaumont to
the U.S. border at Laredo and through the heart of Mexico's industrial base to
Mexico City. TFM serves three of Mexico's four major shipping ports as well as
the Mexican states that account for approximately 70% of Mexico's population
and industrial base. Through our strategic alliance with CN/IC, we expanded our
network into the northern and midwestern United States and Canada. Our Meridian
Speedway provides other railroads and their customers with a less congested
route linking the eastern United States with the southwestern United States and
Mexico. Gateway Western provides an efficient east/west route by bypassing the
more costly and congested route through the St. Louis terminal.

Strong, Diversified Traffic Mix. We serve customers in a wide range of
industries with different transportation needs. We transport products in the
coal, chemicals and petroleum, paper and forest, agricultural and mineral, and
intermodal and automotive markets. For example, in the coal market, we serve
nine utility plants for customers, such as Southwestern Electric Power Company
and Entergy Gulf States, under long term contracts with an average life of
approximately five years. In the chemical and petroleum, paper and forest and
agricultural and mineral markets, our customers include Exxon Chemical, Condea
Vista, Huntsman, International Paper, Willamette, Georgia Pacific, Tyson, and
Pilgrims Pride. In the automotive market, our customers include General Motors,
Chrysler, Mazda, Volkswagon and Ford.

Well-Maintained Rail Property. Over the last five years, we have invested
approximately $236 million in our railway track and infrastructure. As a result
of recently completed projects, we currently have the capacity and
infrastructure to increase our traffic volume and improve our operating
efficiency. Investments in locomotives, rail cars, new sidings, centralized
traffic control and infrastructure enable us to better serve our customers and
mitigate congestion. In the fourth quarter of 1999, we received delivery, under
long-term operating leases, of 50 new GE 4400 AC locomotives. The addition of
these state-of-the-art locomotives is having a favorable impact on operations
and has resulted in fewer train delays and less congestion by decreasing
maintenance costs, improving fuel efficiency and fleet utilization, increasing
hauling power and improving reliability and efficiency. We are also expanding
our intermodal/automotive facilities in Kansas City, Dallas and Shreveport.
These initiatives have produced improvements in operations and traffic flow
since the fourth quarter of 1999.

Strategic International Investments. In recent years our investments have
enabled us to service a greater variety of customers with growing
transportation needs. Through our 49% investment in Mexrail, we have access to
a vital link between the U.S. and Mexico at Laredo--the largest rail freight
exchange point between the U.S. and Mexico. In 1997, we invested approximately
$300 million to acquire an approximate 37% interest in Grupo TFM, which
provides us with a connection to Mexico's most industrialized and populated
regions. Grupo TFM's revenues, operating income and EBITDA (as adjusted and as
defined on page 16) have increased from $431.3 million, $76.6 million and
$150.5

million, respectively, in 1998, the first full fiscal year after privatization,
to $524.5 million, $119.7 million and $195.6 million, respectively, in 1999.
Grupo TFM's revenues, operating income and EBITDA have increased from $383.9
million, $92.2 million and $149.2 million, respectively, in the first nine
months of 1999 to $475.2 million, $123.1 million and $180.5 million,
respectively, in the first nine months of 2000. Grupo TFM's improved operating
efficiencies and economies of scale led to an approximate 30% increase in
EBITDA from 1998 to 1999, an approximate 21% increase in EBITDA in the first
nine months of 2000 compared to the first nine months of 1999, and operating
ratios of 77.2% in 1999 and 74.1% in the first nine months of 2000, both of
which were better than the U.S. industry average of 83.6% for 1999.

Experienced Management Team. Our growth-oriented management team has
substantial transportation industry experience and has been a critical
component in our transformation from a regional rail carrier to an extensive
North American rail network. Michael Haverty, our Chairman of the Board,
President and CEO, has over 35 years of railroad industry experience and joined
us in 1995 with the vision of creating the "NAFTA Railway." In order to achieve
this objective, we have assembled a highly qualified management team by
selectively hiring experienced managers from other railroads, as well as from
trucking and shipping companies. Our senior managers have on average
approximately 20 years of transportation experience.

Strategy

Capitalize on NAFTA Trade. The United States government forecasts that, for
the five years ending December 31, 2004, trade (in terms of revenue) between
the United States and Mexico and between the United States and Canada will grow
at an average annual rate of 11.7% and 11.0%, respectively. We are well
positioned to capture rail traffic bound to or originating from Mexico. Our
rail network links to TFM via Tex-Mex at Laredo, the single largest rail
freight transfer point between the U.S. and Mexico. We believe that revenues
should grow significantly as NAFTA traffic continues to grow. Furthermore, our
strategic alliance with CN/IC and our marketing agreements with Norfolk
Southern and I&M Rail Link have enhanced our ability to haul traffic bound for
or originating from Mexico by providing coordinated service and competitive
rates for customers in market areas served by our expanded rail network. In
particular, we believe that our CN/IC alliance and Norfolk Southern marketing
agreements will generate additional intermodal and automotive traffic, one of
our fastest growing product segments along the NAFTA corridor.

Exploit Domestic Opportunities. We believe our Meridian Speedway and Gateway
Western east/west corridors have significant growth potential because of their
strategic locations and because they are less congested than alternate routes.
For many traffic moves, the Meridian Speedway, which runs from Meridian to
Dallas, provides the most direct connection for rail traffic moving from the
eastern United States to Dallas. The use of the Meridian Speedway provides
eastern U.S. and Canadian railroads opportunities for longer hauls, which are
more profitable for them. The use of Gateway Western provides an alternative to
the more costly and congested route through the St. Louis terminal. Also, we
are currently in the process of constructing an intermodal and automotive
facility at the former Richards-Gebaur Airbase in Kansas City, Missouri. While
portions of the automotive facility are currently being utilized, intermodal
and expanded automotive operations are expected to be in service in 2001 and
should allow us to provide faster and more expanded service in and out of
Kansas City.

Establish New and Expand Existing Strategic Alliances and Marketing
Agreements. In 1998, we entered into a 15-year strategic alliance with CN/IC
which provides for joint marketing and pricing for traffic over a coordinated
rail network connecting Canadian markets, the major U.S. midwest markets of
Detroit, Chicago, Kansas City and St. Louis, and the key southern markets of
Memphis, Dallas and Houston. This alliance is designed to target new markets in
key north/south traffic corridors and provide (1) increased routing options and
reduced transit times, (2) a coordinated sales effort, (3) close coordination
of operations, and (4) a direct link to Canada. Our marketing agreements with

Norfolk Southern provide incremental traffic volume between the southeast and
the southwest through an interchange with Norfolk Southern on the Meridian
Speedway. In May 2000, we signed an additional marketing and haulage agreement
with Norfolk Southern to move intermodal traffic between Meridian and Dallas.
We plan to pursue growth opportunities by executing similar alliances and
marketing agreements to increase the scope of products we transport and the
regional markets we cover.

Provide Superior Customer Service. We intend to achieve higher levels of
customer satisfaction by improving the quality of our customer service
operations and increasing the efficiency of our rail operations. In 1999, we
completed the centralization of the customer service operations for our U.S.
railroads, which we believe has resulted in higher levels of customer
satisfaction. Through our well-maintained railroad property and a revised
transportation service plan, we have created a more fluid rail network that can
safely manage higher traffic volumes at faster speeds on our current track
infrastructure and thereby mitigate congestion. In addition, in the first half
of 2001 we intend to implement a new management control system ("MCS") to
enhance our transportation operations.

Recent Events

The Spin-Off

On June 14, 2000 KCSI's Board of Directors approved the spin-off of Stilwell
Financial Inc. ("Stilwell"), KCSI's then wholly-owned financial services
subsidiary. As of the date of the Spin-off Stilwell was comprised of Janus
Capital Corporation, an approximate 81.5% owned subsidiary; Berger LLC, an
approximate 88% owned subsidiary; Nelson Money Managers Plc, an 80% owned
subsidiary; DST Systems, Inc., an equity investment in which Stilwell holds an
approximate 32% interest; and miscellaneous other financial services
subsidiaries and equity investments.

On July 12, 2000, KCSI completed its spin-off of Stilwell through a special
dividend of Stilwell common stock distributed to KCSI common stockholders of
record on June 28, 2000 ("Spin-off"). The Spin-off occurred after the close of
business of the New York Stock Exchange on July 12, 2000, and each KCSI
stockholder received two shares of the common stock of Stilwell for every one
share of KCSI common stock owned on the record date. The total number of
Stilwell shares distributed was 222,999,786.

On July 9, 1999, KCSI received a tax ruling from the Internal Revenue
Service ("IRS") which states that for United States federal income tax purposes
the Spin-off qualifies as a tax-free distribution under Section 355 of the
Internal Revenue Code of 1986, as amended. Additionally, in February 2000, KCSI
received a favorable supplementary tax ruling from the IRS to the effect that
the assumption of $125 million of KCSI indebtedness by Stilwell would have no
effect on the previously issued tax ruling.

In preparation for the Spin-off, KCSI re-capitalized its debt structure in
January 2000 through a bond tender for its outstanding notes and debentures,
other debt repayment and entering into new senior secured credit facilities (as
amended, modified or supplemented from time to time, the "KCS Credit
Facilities") providing for a total commitment of $750 million. See "Description
of KCS Credit Facilities and Other Indebtedness."

KCSI and Stilwell are now two separate, stand-alone companies. Stilwell
holds KCSI's former financial services businesses and KCSI continues to operate
its transportation businesses. KCSI's common stock continues to be listed on
the New York Stock Exchange (under the symbol "KSU"). Stilwell common stock is
listed on the New York Stock Exchange (under the symbol "SV").

The Issuer

KCSR is incorporated in Missouri. Our principal executive offices (which
include KCSR's principal executive offices) are at 114 West 11th Street, Kansas
City, Missouri 64105. Our telephone number is 816-983-1303.

SUMMARY OF THE EXCHANGE OFFER

The Initial Offering of
Outstanding Notes........
On September 27, 2000, we completed the private
offering of $200 million of our outstanding 9
1/2% senior notes due 2008 ("Outstanding
Notes"). The initial purchasers of the
Outstanding Notes (the "Initial Purchasers")
subsequently resold the Outstanding Notes to
qualified institutional buyers pursuant to Rule
144A under the Securities Act and to qualified
buyers outside the United States in reliance
upon Regulation S under the Securities Act.

Exchange and Registration
Rights Agreement.........
Simultaneously with the initial sale of the
Outstanding Notes, we entered into an exchange
and registration rights agreement. In the
exchange and registration rights agreement, we
agreed, among other things, to use our
reasonable best efforts to file a registration
statement with the Commission and to complete
an exchange offer by April 25, 2001. Under
certain circumstances outlined in the
registration rights agreement, we may be
required to file a "shelf" registration
statement for a continuous offering pursuant to
Rule 415 under the Securities Act with respect
to the Outstanding Notes. This exchange offer
is intended to satisfy certain of our
obligations under the exchange and registration
rights agreement. After the exchange offer is
complete, you may no longer be entitled to any
exchange or registration rights with respect to
your Outstanding Notes.

The Exchange Offer........ We are offering to exchange up to $200 million
aggregate principal amount of 9 1/2% senior
notes which have been registered under the
Securities Act (the "Exchange Notes") for up to
$200 million aggregate principal amount of
Outstanding Notes, which were issued on
September 27, 2000 in the private offering.
Outstanding Notes may be exchanged only in
integral multiples of $1,000. In order to be
exchanged, an Outstanding Note must be properly
tendered and accepted. All Outstanding Notes
that are validly tendered and not withdrawn
will be exchanged. We will issue Exchange Notes
promptly after the expiration of the exchange
offer.

Resales of the Exchange We believe the Exchange Notes issued in the
Notes..................... exchange offer may be offered for resale,
resold and otherwise transferred by you without
compliance with the registration and prospectus
delivery provisions of the Securities Act
provided that:

. you acquire the Exchange Notes in the ordinary
course of your business;

. you are not participating, do not intend to
participate, and have no arrangement or
understanding with any person to participate, in
the distribution of the Exchange Notes issued to
you in the exchange offer; and

. you are not an affiliate of ours within the
meaning of Rule 405 under the Securities Act.

If any of these conditions are not satisfied
and you transfer any Exchange Notes issued to
you in the exchange offer without delivering a
prospectus meeting the requirements of the
Securities Act or without an exemption from
registration of your Exchange Notes from these
requirements, you may incur liability under the
Securities Act. We will not assume, nor will we
indemnify you against, any such liability.

Each broker-dealer that is issued Exchange
Notes in the exchange offer for its own account
in exchange for Outstanding Notes that were
acquired by that broker-dealer as a result of
market-making or other trading activities, must
acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act
in connection with any resale of the Exchange
Notes.

A broker-dealer may use this prospectus for an
offer to resell, resale or other retransfer of
the Exchange Notes issued to it in the exchange
offer. We have agreed that, for a period of 180
days after the date this exchange offer is
completed, we will make this prospectus
available to any broker-dealer for use in
connection with any such resale.

Expiration Date........... The exchange offer will expire at 5:00 p.m.,
New York City time, on , 2001 or
such later date and time to which we extend it.

Conditions to the The exchange offer is subject to certain
Exchange Offer............ customary conditions, including the condition
that the exchange offer not violate applicable
law or any applicable interpretation of the
Staff of the Commission. The exchange offer is
not conditioned upon any minimum or maximum
aggregate principal amount of Outstanding Notes
being tendered.

Procedures for Tendering
Outstanding Notes........
If you wish to accept the exchange offer, you
must complete, sign and date the accompanying
letter of transmittal, or a copy of the letter
of transmittal, according to the instructions
contained in this prospectus and the letter of
transmittal. You must also mail or otherwise
deliver the letter of transmittal, or the copy,
together with your Outstanding Notes and any
other required documents to the exchange agent
at the address set forth on the cover of the
letter of transmittal. If you hold Outstanding
Notes through The Depository Trust Company, or
DTC, and wish to participate in the exchange
offer, you must comply with the Automated
Tender Offer Program procedures of DTC, by
which you will agree to be bound by the letter
of transmittal.

By signing or agreeing to be bound by the
letter of transmittal, you will represent to us
that, among other things:

. any Exchange Notes that you receive will be
acquired in the ordinary course of your business;

. you have no arrangement or understanding with any
person or entity to participate in the
distribution of the Exchange Notes;

. if you are a broker-dealer that will receive
Exchange Notes for your own account in exchange
for Outstanding Notes that were acquired as a
result of market-making activities, that you will
deliver a prospectus, as required by law, in
connection with any resale of such Exchange
Notes; and

. you are not our "affiliate" as defined in Rule
405 under the Securities Act, or, if you are an
affiliate, you will comply with any applicable
registration and prospectus delivery requirements
of the Securities Act.

Guaranteed Delivery If you wish to tender your Outstanding Notes
Procedures................ and your Outstanding Notes are not immediately
available or you cannot deliver your
Outstanding Notes, the letter of transmittal or
any other documents required by the letter of
transmittal or comply with the applicable
procedures under DTC's Automated Tender Offer
Program prior to the expiration date, you may
tender your Outstanding Notes according to the
guaranteed delivery procedures set forth in
this prospectus under "The Exchange Offer--
Guaranteed Delivery Procedures."

Withdrawal Rights......... You may withdraw the tender of your Outstanding
Notes at any time prior to 5:00 p.m., New York
City time on the expiration date of the
exchange offer. Any Outstanding Notes not
accepted for exchange for any reason will be
returned without expense to the tendering
holder promptly after the expiration or
termination of the exchange offer.

Effect on Holders of the
Outstanding Notes........
As a result of the making of, and upon
acceptance for exchange of all validly tendered
Outstanding Notes pursuant to the terms of, the
exchange offer, we will have fulfilled a
covenant contained in the exchange and
registration rights agreement and, accordingly,
we will not be obligated to pay liquidated
damages as described in the exchange and
registration rights agreement. If you are a
holder of Outstanding Notes and do not tender
your Outstanding Notes in the exchange offer,
you will continue to hold such Outstanding
Notes and you will be entitled to all the
rights and limitations applicable to the
Outstanding Notes in the Indenture (as defined
herein), except for any rights under the
exchange and registration rights agreement that
by their terms terminate upon the consummation
of the exchange offer.

Consequences of Failure to
Exchange.................
All untendered Outstanding Notes will continue
to be subject to the restrictions on transfer
provided for in the Outstanding Notes and in
the Indenture. In general, the Outstanding
Notes may not be offered or sold unless
registered under the Securities Act, except
pursuant to an exemption from, or in a
transaction not subject to, the Securities Act
and applicable state securities laws.

Other than in connection with this exchange
offer, we do not currently anticipate that we
will register the Outstanding Notes under the
Securities Act.

Certain Federal Income Tax
Considerations...........
The exchange of Outstanding Notes for Exchange
Notes in this exchange offer should not be a
taxable event for United States federal income
tax purposes.

Use of Proceeds........... We will not receive any proceeds from the
issuance of Exchange Notes pursuant to the
exchange offer. We will pay all expenses
incident to the exchange offer.

Exchange Agent............ The Bank of New York is the exchange agent for
this exchange offer.

SUMMARY OF THE EXCHANGE NOTES

The following summary contains basic information about the Exchange Notes.
It does not contain all the information that may be important to you. For a
more complete description of the Exchange Notes, please refer to the section of
this prospectus entitled "Description of the Notes."

The form and terms of the Exchange Notes are the same as the form and terms
of the Outstanding Notes, except that the Exchange Notes will be registered
under the Securities Act. As a result, the Exchange Notes will not bear legends
restricting their transfer and will not contain the registration rights and
liquidated damage provisions contained in the Outstanding Notes. The Exchange
Notes represent the same debt as the Outstanding Notes. Both the Outstanding
Notes and the Exchange Notes are governed by the same Indenture. We use the
term Notes in this prospectus to collectively refer to the Outstanding Notes
and the Exchange Notes.

Issuer.................... The Kansas City Southern Railway Company.

Notes Offered............. $200,000,000 aggregate principal amount of 9
1/2% Senior Notes due 2008.

Maturity.................. October 1, 2008.

Interest.................. Annual rate: 9 1/2%.
Payment frequency: every six months on April 1
and October 1.
First Payment Date: April 1, 2001.

Each Exchange Note will bear interest from its
issuance date. The holders of Outstanding Notes
that are accepted for exchange will receive, in
cash, accrued interest on those Outstanding
Notes to, but not including, the issuance date
of the Exchange Notes. This interest will be
paid with the first interest payment on the
Exchange Notes, except that if the exchange
offer is not completed on or before April 1,
2001, holders of Outstanding Notes will receive
the first interest payment due on the
Outstanding Notes on April 1, 2001. Interest on
the Outstanding Notes accepted for exchange
will cease to accrue upon issuance of the
Exchange Notes.

Consequently, if you exchange your Outstanding
Notes for Exchange Notes you will receive the
same interest payment that you would have
received if you had not accepted this exchange
offer.

Optional Redemption....... At any time prior to October 1, 2003, the
Issuer may redeem up to $70 million of the
original aggregate principal amount of the
Notes with the net cash proceeds of certain
equity offerings at a redemption price equal to
109 1/2% of the principal amount thereof, plus
accrued and unpaid interest, so long as (a) at
least $130 million of the original aggregate
principal amount of the Notes remains
outstanding immediately after each such
redemption and (b) any such redemption shall
occur within 60 days after such equity
offering. The Exchange Notes are not otherwise
redeemable prior to maturity. See "Description
of the Notes--Optional Redemption."

Change of Control......... Upon the occurrence of a change of control, you
will have the right to require the Issuer to
purchase all or a portion of your Exchange
Notes at a purchase price in cash equal to 101%
of the principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the
date of purchase. See "Description of the
Notes--Change of Control."

Note Guarantees........... The Exchange Notes will be fully and
unconditionally guaranteed (each such
guarantee, a "Note Guarantee") on an unsecured
senior basis by KCSI and each of its
subsidiaries that guarantees the KCS Credit
Facilities or any refinancing thereof (other
than Caymex Transportation, Inc., SCC Holdings,
Inc., The Kansas City Northern Railway Company
and Veals, Inc.) (collectively, the "Note
Guarantors"). Kansas City Southern Lines, Inc.,
which guaranteed the KCS Credit Facilities, was
merged into KCSI effective as of December 31,
2000. As of the consummation of the exchange
offer, the Exchange Notes will be guaranteed by
all of KCSI's subsidiaries other than Caymex
Transportation, Inc., SCC Holdings, Inc.,
Wyandotte Garage Corporation, TransFin
Insurance Ltd., The Kansas City Northern
Railway Company and Veals, Inc. (the "Non-
Guarantor Subsidiaries"). On a pro forma basis,
after giving effect to the offering of the
Outstanding Notes and the Spin-off, as of and
for the twelve-month period ended December 31,
1999, the Non-Guarantor Subsidiaries would have
represented approximately 1% of each of KCSI's
EBITDA and consolidated revenues and
approximately 18% of KCSI's consolidated
assets. See "Description of the Notes--Note
Guarantees."

Ranking................... The Exchange Notes will be unsecured and:

. will rank equally in right of payment with all
existing and future senior debt of the Issuer;

. will be senior in right of payment to all of the
Issuer's future subordinated obligations;

. will be effectively subordinated to all secured
debt of KCSI and its subsidiaries (including the
Issuer) to the extent of the value of the assets
securing such debt; and

. will be effectively subordinated to all
liabilities (including trade payables) and
preferred stock of each Non-Guarantor Subsidiary.

Similarly, the Note Guarantees of each Note
Guarantor will be unsecured and:

. will rank equally in right of payment with all
existing and future senior debt of such Note
Guarantor;

. will be senior in right of payment to all future
subordinated obligations of such Note Guarantor;
and

. will be effectively subordinated to all secured
debt of KCSI and its subsidiaries to the extent
of the value of the assets securing such debt.
See "Description of the Notes--Ranking."

At September 30, 2000:

. the Issuer had $669.0 million of senior debt
(excluding unused commitments under the KCS
Credit Facilities), of which $469.0 million was
secured debt;

. the Note Guarantors had $11.0 million of senior
debt (excluding their guarantees of the Issuer's
debt under the KCS Credit Facilities) of which
$9.4 million was secured debt;

. the Non-Guarantor Subsidiaries had $5.4 million
of senior debt (and trade payables and other
liabilities of $13.2 million); and

. no debt of the Issuer or the Note Guarantors was
subordinate or junior in right of payment to the
Outstanding Notes or the Note Guarantees.

The Indenture permits us to incur a significant
amount of additional senior debt.

Certain Covenants......... The Indenture, among other things, restricts
KCSI's ability and the ability of the
Restricted Subsidiaries (as defined in
"Description of the Notes--Certain
Definitions") to:

. incur debt;

. incur liens;

. make distributions, redeem equity interests or
redeem subordinated debt;

. make investments;

. sell assets;

. enter into agreements that restrict dividends
from subsidiaries;

. merge or consolidate;

. enter into transactions with affiliates; and

. sell or issue capital stock of subsidiaries.

These covenants are subject to a number of
important exceptions and qualifications,
including, the inapplicability of certain of
the covenants during any period of time that
the Exchange Notes have an investment grade
rating from both rating agencies and no default
or event of default has occurred and is
continuing under the Indenture. See
"Description of the Notes--Certain Covenants"
and "Description of the Notes--Merger and
Consolidation."

Absence of a Public
Market for the Notes.....
The Exchange Notes generally will be freely
transferable, but will also be new securities
for which there will not initially be a market.
Accordingly, there can be no assurance as to
the development or liquidity of any market for
the Exchange Notes. The Initial Purchasers have
informed the Issuer that they
currently intend to make a market in the
Exchange Notes.

However, the Initial Purchasers are not
obligated to do so, and any market making with
respect to the Exchange Notes, may be
discontinued at any time without notice. The
Issuer does not intend to apply for a listing
of the Exchange Notes on any securities
exchange or on any automated dealer quotation
system.

Risk Factors

You should carefully consider all of the information in this prospectus and,
in particular, should evaluate the specific factors under "Risk Factors"
beginning on page 17 before making a decision to participate in the exchange
offer.

SUMMARY CONSOLIDATED FINANCIAL DATA AND OTHER DATA

The following table sets forth summary consolidated financial data for KCSI
and other data for certain subsidiaries and affiliates. The statement of
operations data for the years ended December 31, 1997, 1998 and 1999 and the
balance sheet data as of December 31, 1998 and 1999 have been derived from
KCSI's audited financial statements which appear elsewhere in this prospectus.
The statement of operations data for the nine-month periods ended September 30,
1999 and 2000 and the balance sheet data as of September 30, 2000 have been
derived from KCSI's unaudited financial statements which appear elsewhere in
this prospectus. The balance sheet data as of December 31, 1997 and September
30, 1999 have been derived from KCSI's unaudited financial statements, which
are not included in this prospectus.

The unaudited balance sheets and statements of operations as of and for the
nine-month periods ended September 30, 1999 and 2000 include all adjustments,
consisting only of normal, recurring adjustments, which management considers
necessary for a fair presentation of the financial position and results of
operations of KCSI as of such date or for such periods. Operating results for
the nine months ended September 30, 2000 are not necessarily indicative of
results that may be expected for the entire year or for any future period.

All of the summary data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of KCSI and other
financial information included elsewhere in this prospectus.

Nine Months
Year Ended Ended
December 31, September 30,
--------------------------- ----------------------
1997 1998 1999 1999 2000
------- ------ ------ ------ --------------
(dollars in millions)
Restated(/10/)

Statement of Operations
Data:
Revenues............... $ 573.2 $613.5 $601.4 $449.7 $437.4
Costs and expenses..... 424.0 438.6 480.4 348.0 344.1
Depreciation and
amortization.......... 62.1 56.7 56.9 43.0 42.4
Restructuring, asset
impairment and other
charges............... 178.0 -- -- -- --
------- ------ ------ ------ ------
Operating income
(loss)................ (90.9) 118.2 64.1 58.7 50.9
Equity in net earnings
(losses) of
unconsolidated
affiliates:
Grupo TFM............ (12.9) (3.2) 1.5 4.8 18.8
Other................ 3.2 0.3 3.7 3.5 3.3
Interest expense....... (53.3) (59.6) (57.4) (43.3) (54.2)
Other, net............. 3.2 9.4 5.3 3.2 4.8
------- ------ ------ ------ ------
Income (loss) from
continuing operations
before income taxes... (150.7) 65.1 17.2 26.9 23.6
Income tax expense
(benefit)............. (18.6) 27.1 7.0 9.5 1.8
------- ------ ------ ------ ------
Income (loss) from
continuing
operations............ $(132.1) $ 38.0 $ 10.2 $ 17.4 $ 21.8(/1/)
======= ====== ====== ====== ======
Basic earnings (loss)
per share from
continuing operations.. $ (2.46) $ 0.69 $ 0.18 $ 0.31 $ 0.38
======= ====== ====== ====== ======
Diluted earnings (loss)
per share from
continuing operations.. $ (2.46) $ 0.67 $ 0.17 $ 0.30 $ 0.37
======= ====== ====== ====== ======

Other Financial Data:
EBITDA(/2/)............ $ 152.4 $184.3 $139.0 $104.9 $ 98.1
Capital expenditures... 76.8 69.9 106.2 65.6 79.0
EBITDA/interest
expense(/2/).......... 2.9x 3.1x 2.4x 2.4x 1.8x
Ratio of earnings to
fixed charges(/3/).... -- (/4/) 1.8x 1.2x(/5/) 1.4x 1.0x
Cash Flow Data:
Operating cash flows... 185.4 141.6 178.0 165.4 52.3
Investing cash flows... (364.7) (61.5) (97.2) (54.1) (74.5)
Financing cash flows... 184.1 (79.4) (74.5) (48.5) 40.5

December 31, September 30,
--------------------------------- -------------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- ---------------
(dollars in millions)
Restated (/10/)

Balance Sheet Data (at
end of period):
Working capital........ $ (195.2) $ 1.7 $ (45.7) $ 33.4 $ (3.3)
Total assets(/6/)...... 2,109.9 2,337.0 2,672.0 2,569.4 1,927.0
Total debt............. 916.6 836.3 760.9 791.6 685.4
Stockholders'
equity(/6/)........... 698.3 931.2 1,283.1 1,160.8 639.5
Other Data:
KCSR:
Millions of net ton
miles................. 19,323 21,765 22,096 16,896 15,724
Approximate route
miles, main and branch
lines................. 2,845 2,756 2,756 2,756 2,756
Approximate total track
miles................. 4,036 3,931 3,935 3,935 3,935
Operating ratio(/7/)... 83.0%(/8/) 79.1% 84.7%(/8/) 84.0% 86.9%
Gateway Western:
Approximate route
miles, main and branch
lines................. 402 402 402 402 402
Approximate total track
miles................. 564 564 564 564 564
Operating ratio(/7/)... 82.4% 79.9% 92.1% 97.3% 87.0%
Tex-Mex:
Approximate route
miles, main and branch
lines................. 157 157 157 157 157
Approximate total track
miles................. 521 530 533 533 533
Operating ratio
(Mexrail)(/7/)........ 103.1% 108.4% 96.6% 95.7% 90.2%
TFM:
Approximate route
miles, main and branch
lines................. 2,661 2,661 2,661 2,661 2,661
Approximate total track
miles................. 3,500 3,500 3,500 3,500 3,500
Operating ratio(/7/)... 93.9%(/9/) 82.2% 77.2% 76.0% 74.1%

- --------
(1) Income from continuing operations for the nine months ended September 30,
2000 excludes extraordinary items for debt retirement costs of $8.7
million (net of income taxes of 4.0 million). This amount includes $1.7
million (net of income taxes of $0.1 million) related to Group TFM.
(2) EBITDA as presented herein is defined as income (loss) from continuing
operations before income taxes plus equity in net losses and minus equity
in net earnings of unconsolidated affiliates plus interest expense,
depreciation and amortization. EBITDA is not a measure of performance
under generally accepted accounting principles. EBITDA should not be
considered as a substitute for cash flow from operations, net income or
other measures of performance as defined by generally accepted accounting
principles or as a measure of profitability or liquidity. EBITDA does not
give effect to the cash we must use to service our debt or pay our income
taxes and thus does not reflect the funds actually available for capital
expenditures, acquisitions, dividends or other discretionary uses.
However, we have included EBITDA because it may be used by certain
investors to analyze and compare companies on the basis of operating
performance, leverage and liquidity and to determine a company's ability
to service debt. Our definition of EBITDA may not be comparable to that of
other companies. Full year 1997 EBITDA excludes $178.0 million of
restructuring, asset impairment and other charges. Full year 1999 EBITDA
excludes $12.7 million of unusual costs incurred in the fourth quarter.
These unusual costs relate to employee separations, labor and personal
injury related costs, write-off of costs for a previously planned line
build-out which we will not pursue and costs associated with the closure
of an intermodal facility.
(3) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose "earnings" represent the sum of (i) pretax
income from continuing operations adjusted for income (loss) from
unconsolidated affiliates, (ii) fixed charges, and (iii) distributed
income from unconsolidated affiliates less (i) capitalized interest and
(ii) fixed charges. "Fixed charges" consist of interest expensed or
capitalized, amortization of deferred debt issuance costs and the portion
of rental expense which management believes is representative of the
interest component of rental expense.
(4) Due to the restructuring, asset impairment and other charges of $178.0
million, the 1997 ratio coverage was less than 1:1. The ratio of earnings
to fixed charges would have been 1:1 if a deficiency of $146.1 million was
eliminated. Excluding the $178.0 million, the ratio for 1997 would have
been 1.5x.
(5) Includes unusual costs of $12.7 million. Excluding these items the ratio
for 1999 would have been 1.4x.
(6) The total assets and stockholders' equity presented herein include the net
assets of Stilwell as of December 31, 1997, 1998 and 1999 and September
30, 1999 as follows: $348.3 million, $540.2 million, $814.6 million and
$681.9 million, respectively. The total assets and stockholders' equity as
of September 30, 2000 do not include the net assets of Stilwell as a
result of the Spin-off on July 12, 2000.
(7) Operating ratio is the ratio of operating expenses to revenues, which for
KCSR is calculated under STB regulatory accounting rules.
(8) Excluding 1997 restructuring, asset impairment and other charges and 1999
unusual costs.
(9) Since commencement of operations by TFM on June 23, 1997.
(10) The September 30, 2000 statement of operations and balance sheet data have
been restated. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Restatement of Financial Statements."

RISK FACTORS

In addition to the other matters described in this prospectus, you should
carefully consider the specific risk factors set forth below before making a
decision to participate in the exchange offer.

No Prior Market for the Exchange Notes--There is no prior market for the
Exchange Notes. If one develops, it may not be liquid

The Exchange Notes will be registered under the Securities Act, but will
constitute a new issue of securities with no established trading market, and
there can be no assurance as to:

. the liquidity of any trading market that may develop;

. the ability of holders to sell their Exchange Notes; or

. the price at which the holders would be able to sell their Exchange
Notes.

We understand that the Initial Purchasers presently intend to make a market
in the Notes. However, they are not obligated to do so, and any market-making
activity with respect to the Notes may be discontinued at any time without
notice in the sole discretion of the Initial Purchasers. In addition, any
market-making activity will be subject to the limits imposed by the Securities
Act and the Securities Exchange Act, and may be limited during the exchange
offer or the pendency of an applicable shelf registration statement. There can
be no assurance that an active trading market will exist for the Notes or that
any trading market that does develop will be liquid.

We do not intend to apply for a listing of the Exchange Notes on any
securities exchange or on any automated dealer quotation system. The liquidity
of, and trading market for, the Exchange Notes also may be adversely affected
by general declines in the market for similar securities. A decline in such
market may adversely affect the liquidity and trading markets independent of
our prospects or financial performance.

In addition, any outstanding note holder who tenders in the exchange offer
for the purpose of participating in a distribution of the Exchange Notes may
be deemed to have received restricted securities, and if so, will be required
to comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.

Failure to Follow Exchange Offer Procedures--Your Outstanding Notes will not
be accepted for exchange if you fail to follow the exchange offer procedures

We will issue Exchange Notes pursuant to this exchange offer only after a
timely receipt of your Outstanding Notes, a properly completed and duly
executed letter of transmittal and all other required documents. Therefore, if
you want to tender your Outstanding Notes, please allow sufficient time to
ensure timely delivery. We are under no duty to give notification of defects
or irregularities with respect to the tenders of Outstanding Notes for
exchange.

Failure to Exchange Outstanding Notes--If you do not exchange your Outstanding
Notes, your Outstanding Notes will continue to be subject to the existing
transfer restrictions and you may be unable to sell your Outstanding Notes

We did not register the Outstanding Notes, nor do we intend to do so
following the exchange offer. Outstanding Notes that are not tendered will
therefore continue to be subject to the existing transfer restrictions and may
be transferred only in limited circumstances under the U.S. federal securities
laws. If you do not exchange your Outstanding Notes, you may lose your right
to have your Outstanding Notes registered under the federal securities laws.

Because we anticipate that most holders of Outstanding Notes will elect to
exchange such Outstanding Notes, we expect that the liquidity of the market
for any Outstanding Notes remaining after the completion of the exchange offer
may be substantially limited. Any Outstanding Notes tendered and exchanged in
the exchange offer will reduce the aggregate principal amount at maturity of
the Outstanding Notes outstanding. Accordingly, the liquidity of the market
for such Outstanding Notes could be adversely affected.

Substantial Leverage--Our substantial leverage could adversely affect our
ability to fulfill our obligations under the Notes and operate our business

We are now and will continue to be highly leveraged after the exchange
offer and will have significant debt service obligations. As of September 30,
2000, we had total debt of approximately $685.4 million (excluding unused
commitments) and total stockholders' equity of approximately $639.5 million,
giving us a total debt to equity ratio of 1.07 to 1.00. Our interest expense
for the nine-month period ended September 30, 2000 was $54.2 million. For the
12-month period ended September 30, 2000, our ratio of earnings to fixed
charges was less than 1.00 to 1.00. Exclusive of $12.7 million of unusual
costs and expenses incurred during the fourth quarter of 1999, our ratio of
earnings to fixed charges was 1.10 to 1.00 for the 12-month period ended
September 30, 2000. We expect no material impact from the exchange offer on
interest expense or our ratio of earnings to fixed charges. In addition, we
may incur additional debt from time to time to finance acquisitions,
investments or capital expenditures or for other purposes, subject to the
restrictions contained in the KCS Credit Facilities and the Indenture.

Our high level of debt could have important consequences for you, including
the following:

. we may have difficulty borrowing money in the future for working capital,
capital expenditures or other purposes;

. we will need to use a large portion of the money earned by us and our
subsidiaries to pay principal and interest on the KCS Credit Facilities,
the Notes and our other debt, which will reduce the amount of money
available to us to finance our operations and other business activities;

. some of our debt, including borrowings under the KCS Credit Facilities,
has a variable rate of interest, which exposes us to the risk of
increased interest rates;

. debt under the KCS Credit Facilities is secured and matures prior to the
Notes;

. we have a much higher level of debt than some of our competitors, which
may put us at a competitive disadvantage;

. our debt level makes us more vulnerable to general economic downturns and
adverse industry conditions;

. our debt level could reduce our flexibility in planning for, or
responding to, changing business and economic conditions, including
increased competition in the railroad industry;

. our level of debt may prevent us from raising the funds necessary to
repurchase all of the Notes tendered to us upon the occurrence of a
change of control, which would constitute an event of default under the
Notes; and

. our failure to comply with the financial and other restrictive covenants
in our debt instruments, which, among other things, require us to
maintain specified financial ratios and limit our ability to incur debt
and sell assets, could result in an event of default that, if not cured
or waived, could have a material adverse effect on our business or
prospects.

See "Description of KCS Credit Facilities and Other Indebtedness,"
"Description of the Notes--Defaults" and "Description of the Notes--Certain
Covenants."

Ability to Service Debt--Servicing our debt requires a significant amount of
cash, and our ability to generate cash depends on many factors beyond our
control

We expect to obtain the money to make payments on and to refinance our
debt, including the Notes and the KCS Credit Facilities, and to fund working
capital, capital expenditures and other general corporate requirements in part
from our operations and the operations of our subsidiaries. Our ability to
generate cash is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. We
cannot be certain that the cash earned by us and our subsidiaries will be
sufficient to allow us to pay principal and interest on our debt (including
the Notes) and meet our other obligations or to fund our other liquidity
needs. If we do not have enough cash we may be required to take actions such
as reducing or delaying capital expenditures, selling assets, restructuring or
refinancing all or part of our existing debt (which could include the Notes)
or seeking additional equity capital. We cannot assure you that any of these
remedies can be effected on commercially reasonable terms or at all. In
addition, the terms of existing or future debt agreements, including the
credit agreement relating to the KCS Credit Facilities and the Indenture, may
restrict us from adopting any of these alternatives. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."

Additional Borrowing Capacity--Despite our substantial leverage, we will be
able to incur more debt, which may intensify the risks associated with our
substantial leverage, including our ability to service our debt

The KCS Credit Facilities and the Indenture permit us, subject to the
conditions described under "Description of KCS Credit Facilities and Other
Indebtedness" and "Description of the Notes--Certain Covenants--Limitation on
Indebtedness," to incur a significant amount of additional debt. In addition,
$95 million remains available under the revolving credit facility. The
availability under this revolving credit facility was reduced from $150
million to $100 million on January 2, 2001. See "Description of KCS Credit
Facilities and Other Indebtedness." If we incur additional debt above the
levels in effect upon the consummation of the exchange offer, the risks
associated with our substantial leverage, including our ability to service our
debt, could intensify.

Structural Subordination--Although the Issuer is an operating company it
conducts a portion of its operations through subsidiaries. As a result, its
ability to pay principal and interest on the Notes depends in part on its
receipt of dividends or other intercompany transfers from its subsidiaries and
our other subsidiaries. Claims of creditors of these entities may have
priority over your claims with respect to the assets and earnings of these
entities

We conduct a portion of our operations through subsidiaries other than the
Issuer and its subsidiaries and the Issuer conducts a portion of its
operations through its subsidiaries. The Issuer is therefore dependent in part
upon dividends or other intercompany transfers of funds from these entities in
order to meet its debt service and other obligations. Generally, creditors of
these entities will have claims to the assets and earnings of these entities
that are superior to the claims of creditors of the Issuer, except to the
extent the claims of the Issuer's creditors are guaranteed by these entities.

Although the Note Guarantees provide the holders of the Notes with a direct
claim against the assets of the Note Guarantors, enforcement of the Note
Guarantees against any Note Guarantor may be challenged in a bankruptcy or
reorganization case or a lawsuit by or on behalf of creditors of the Note
Guarantor and would be subject to certain defenses available to guarantors
generally. To the extent that the Note Guarantees are not enforceable, the
Notes would be effectively subordinated to all liabilities of the Note
Guarantors, including trade payables, contingent liabilities and preferred
stock of the Note Guarantors. In any event, the Notes will be effectively
subordinated to all liabilities of our Non-Guarantor Subsidiaries (other than
the Issuer). On a pro forma basis after giving effect to the

offering of the Outstanding Notes and the Spin-off, as of and for the twelve-
month period ended December 31, 1999, those Non-Guarantor Subsidiaries would
have represented approximately 1% of each of KCSI's EBITDA and consolidated
revenues and approximately 18% of KCSI's consolidated assets. See "Description
of the Notes" and "Description of KCS Credit Facilities and Other
Indebtedness."

Accordingly, in the event of the Issuer's dissolution, bankruptcy,
liquidation or reorganization, the holders of the Notes may not receive any
amounts with respect to the Notes until after the payment in full of the
claims of creditors of its subsidiaries and our other subsidiaries.

The ability of the Issuer's and the Note Guarantors' subsidiaries to pay
dividends and make other payments to them may be restricted by, among other
things, applicable corporate, tax and other laws and regulations and
agreements of the subsidiaries. Although the KCS Credit Facilities and the
Indenture limit the ability of our subsidiaries to enter into consensual
restrictions on their ability to pay dividends and make other payments, these
limitations have a number of significant qualifications and exceptions. See
"Description of the Notes--Certain Covenants."

Restrictive Covenants in our Debt Instruments--Restrictions imposed by the KCS
Credit Facilities and the Indenture may limit our ability to finance future
operations or capital needs or engage in other business activities that may be
in our interest

The Indenture imposes, and the terms of any future debt may impose,
operating and other restrictions on KCSI and the Restricted Subsidiaries,
including the Issuer. These restrictions affect, and in many respects limit or
prohibit, among other things, KCSI's, the Issuer's and the other Restricted
Subsidiaries' ability to:

. incur additional debt;

. pay dividends or make distributions;

. repurchase equity interests;

. redeem subordinated debt;

. make other restricted payments, including, without limitation,
investments;

. sell or otherwise dispose of assets, including capital stock of
subsidiaries;

. create liens;

. enter into agreements that restrict dividends from subsidiaries;

. merge or consolidate; and

. enter into transactions with affiliates.

In addition, the KCS Credit Facilities include other and more restrictive
covenants and prohibit us from prepaying our other debt, including the Notes,
while debt under the KCS Credit Facilities is outstanding. The KCS Credit
Facilities also require us to achieve certain financial and operating results
and maintain compliance with specified financial ratios. Our ability to comply
with these ratios may be affected by events beyond our control.

The restrictions contained in the Indenture and the KCS Credit Facilities
could:

. limit our ability to plan for or react to market conditions or meet
capital needs or otherwise restrict our activities or business plans; or

. adversely affect our ability to finance our operations, acquisitions,
investments or other capital needs or to engage in other business
activities that would be in our interest.

A breach of any of these restrictive covenants or our inability to comply
with the required financial ratios could result in a default under the KCS
Credit Facilities. If a default occurs, the lenders under the KCS Credit
Facilities may elect to declare all borrowings outstanding, together with
accrued interest and other fees, to be immediately due and payable, which
would result in an event of default under the Notes. The lenders will also
have the right in these circumstances to terminate any commitments they have
to provide further financing. If we are unable to repay the borrowings when
due, the lenders under the KCS Credit Facilities will also have the right to
proceed against the collateral granted to them to secure the debt. If the debt
under the KCS Credit Facilities and the Notes was to be accelerated, we cannot
assure you that our assets would be sufficient to repay in full the debt under
the KCS Credit Facilities and our other debt, including the Notes. See
"Description of the Notes--Certain Covenants" and "Description of KCS Credit
Facilities and Other Indebtedness."

Unsecured Obligations--Because the Notes and the Note Guarantees are not
secured, our assets may be insufficient to pay amounts due on your Notes

The Notes and the Note Guarantees will be unsecured obligations of the
Issuer or the Note Guarantors, as applicable. In contrast, debt outstanding
under the KCS Credit Facilities is secured by substantially all of the
tangible and intangible assets of KCSI and each existing or subsequently
acquired or formed subsidiary of KCSI guaranteeing the KCS Credit Facilities,
including a pledge of certain of the capital stock held by KCSI or its
subsidiaries in certain of its existing or subsequently acquired or organized
subsidiaries. We had approximately $484 million of secured debt (excluding
unused commitments) as of September 30, 2000. In addition, KCSI and its
subsidiaries may incur other debt, which may be substantial in amount, and
which may in certain circumstances be secured.

Because the Notes and the Note Guarantees will be unsecured obligations,
your right of repayment may be compromised in the following situations:

. we enter into bankruptcy, liquidation, reorganization, or other winding-
up;

. there is a default in payment under the KCS Credit Facilities or other
secured debt; or

. there is an acceleration of any debt under the KCS Credit Facilities or
other secured debt.

If any of these events occurs, the secured lenders could foreclose on the
pledged stock of the Issuer or certain of KCSI's other subsidiaries and on the
Issuer's assets and those of the Note Guarantors in which they have been
granted a security interest, in each case to your exclusion, even if an event
of default exists under the Indenture at such time. As a result, upon the
occurrence of any of these events, there may not be sufficient funds to pay
amounts due on the Notes and the Note Guarantees. Furthermore, under the Note
Guarantees, if all shares of any Note Guarantor are sold to persons pursuant
to an enforcement of the pledge of shares in the Note Guarantor for the
benefit of the lenders under the KCS Credit Facilities, then the applicable
Note Guarantor will be released from its Note Guarantee automatically and
immediately upon the sale. See "Description of the Notes."

Financing Change of Control Offer--We may not have the ability to raise the
funds necessary to finance the change of control offer required by the
Indenture

Upon a change of control, we will be required to offer to repurchase all of
the Notes then outstanding at 101% of the principal amount thereof plus
accrued interest. If a change of control were to occur, we may not have
sufficient funds to pay the purchase price for the outstanding Notes tendered,
and we expect that we would require third-party financing; however, we may not
be able to obtain such financing on favorable terms, if at all. In addition,
our other debt may contain restrictions on our ability to repurchase the
Notes. In particular, a change of control constitutes an event of default
under the KCS Credit Facilities. The Issuer's failure to repurchase tendered
Notes at a time when the repurchase is required by the Indenture would
constitute an event of default under the Indenture,

which, in turn, would constitute an event of default under the KCS Credit
Facilities and may constitute an event of default under future debt. See
"Description of KCS Credit Facilities and Other Indebtedness," "Description of
the Notes--Change of Control" and "Description of the Notes--Certain
Covenants."

The change of control provision in the Indenture will not necessarily
afford you protection in the event of a highly leveraged transaction,
including a reorganization, restructuring, merger or other similar transaction
involving us, that may adversely affect you. These transactions may not
involve a change in voting power or beneficial ownership, or, even if they do,
may not involve a change of the magnitude required under the definition of
change of control in the Indenture to trigger these provisions. Except as
described under "Description of the Notes--Change of Control," the Indenture
does not contain provisions that permit the holders of the Notes to require us
to repurchase or redeem the Notes in the event of a takeover, recapitalization
or similar transaction.

U.S. Fraudulent Transfer or Conveyance Considerations--Federal and state
fraudulent transfer statutes may affect you

Under U.S. federal or state fraudulent transfer laws, a court could take
actions detrimental to you if it found that, at the time the Notes or the Note
Guarantees were issued:

(1) the Issuer or a Note Guarantor issued the Notes or the Note
Guarantee with the intent of hindering, delaying or defrauding current or
future creditors; or

(2) (a) the Issuer or a Note Guarantor received less than fair
consideration or reasonably equivalent value for incurring the debt
represented by the Notes or the Note Guarantees; and (b) the Issuer or a
Note Guarantor:

. was insolvent or rendered insolvent by issuing the Notes or the Note
Guarantees;

. was engaged, or about to engage, in a business or transaction for
which the assets remaining with the Issuer or the Note Guarantor
would constitute unreasonably small capital to carry on the Issuer's
or the Note Guarantors' business; or

. intended to incur, believed that it would incur or did incur debt
beyond the Issuer's or the Note Guarantor's ability to pay.

If a court made this finding, it could:

. void all or part of the Issuer's obligations or the Note Guarantor's
obligations to the holders of Notes;

. subordinate the Issuer's obligations or the Note Guarantor's obligations
to the holders of the Notes to the Issuer's or the Note Guarantors' other
debt; or

. take other actions detrimental to the holders of the Notes.

In that event, we could not assure you that the Issuer could pay amounts
due on the Notes. Under fraudulent transfer statutes, it is not certain
whether a court would determine that the Issuer or a Note Guarantor was
insolvent on the date that the Notes and Note Guarantees were issued. However,
the Issuer or a Note Guarantor generally would be considered insolvent at the
time it incurred the debt constituting the Notes or the Note Guarantees if:

. the fair saleable value of the relevant assets was less than the amount
required to pay the Issuer's total existing debts and liabilities,
including contingent liabilities, or those of a Note Guarantor, as they
become absolute and mature; or

. the Issuer or a Note Guarantor incurred debts beyond its ability to pay
as such debts mature.

We cannot predict:

. what standard a court would apply in order to determine whether the
Issuer or any of the Note Guarantors were insolvent as of the date the
Issuer or the Note Guarantors issued the Notes or the Note Guarantees or,
regardless of the method of valuation, whether a court would determine
that the Issuer or the Note Guarantors were insolvent on that date; or

. whether a court would not determine that the payments constituted
fraudulent transfers on another ground.

To the extent a court voids a Note Guarantee as a fraudulent conveyance or
holds it unenforceable for any other reason, holders of Notes would cease to
have any claim directly against the Note Guarantor or its assets.

Based upon financial and other information available to us, we believe that
the Issuer and the Note Guarantors are issuing the Exchange Notes and the Note
Guarantees for proper purposes and in good faith and that at the time the
Issuer and the Note Guarantors are issuing the Exchange Notes and the Note
Guarantees the Issuer and the Note Guarantors:

. are not insolvent or rendered insolvent by the issuance;

. have sufficient capital to run their businesses; and

. are able to pay their debts as they mature or become due.

In reaching these conclusions, we have relied on various valuations and
estimates of future cash flow that necessarily involve a number of assumptions
and choices of methodology. However, a court may not adopt the assumptions and
methodologies that we have chosen or concur with our conclusion as to our
solvency.

In the event there are any additional Note Guarantors in the future, the
foregoing would apply to their guarantees.

Spin-off Tax Ruling--If KCSI is required to recognize gain on its distribution
of Stilwell common stock, it could have a negative impact on KCSI's financial
condition and deter potential combinations that could benefit KCSI

On July 9, 1999, KCSI received a tax ruling from the IRS to the effect
that, for United States federal income tax purposes, the Spin-off qualifies as
a tax-free distribution under Section 355 of the Internal Revenue Code of
1986, as amended. Additionally, in February 2000, KCSI received a favorable
supplementary tax ruling from the IRS to the effect that the assumption of
$125 million of KCSI indebtedness by Stilwell would have no effect on the
previously issued tax ruling. However, KCSI may nevertheless be required to
recognize gain on its distribution of Stilwell common stock to KCSI
stockholders if such distribution is part of a plan (or series of related
transactions) pursuant to which one or more persons acquire directly or
indirectly a 50% or greater equity interest in KCSI or Stilwell. Moreover, an
additional rule applies if one or more persons acquire such a 50% equity
interest during the four year period that begins two years before the
distribution and ends two years after the distribution. In that case, the
acquisition is treated as pursuant to such a plan unless it is established
that the distribution and the acquisition are not pursuant to a plan or series
of related transactions. The potential negative impact on KCSI's financial
condition if it is required to recognize gain on its distribution of Stilwell
common stock may deter potential combinations that could benefit KCSI.

Execution of Business Strategy--Our operating results and financial condition
will depend on execution of our business strategy

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.

Significant Competition--We compete against other railroads, truck carriers
and other modes of transportation

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 and the merger of the UP and the SP
in 1996, which both led to diversions of rail traffic away from our lines, and
by congestion resulting from the purchase of Conrail's assets by Norfolk
Southern and CSX in 1998. We also regard the larger western railroads, in
particular, as significant competitors to our operations and prospects because
of their substantial resources.

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. See "Railroad Industry--The STB and Regulation" and "Business--
Competition."

Dependence on Joint Venture Partners and Third Parties--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.
Two strategically significant railroad companies, Tex-Mex and TFM, are
companies in which we hold a minority interest through Mexrail and Grupo TFM,
respectively. As a minority shareholder, we are not in a position to control
operations, strategies or financial decisions without the concurrence of
Transportacion Maritima Mexicana, S.A. de C.V. ("TMM"), the largest
shareholder in each of Mexrail and Grupo TFM. In addition, conflicts may arise
between our business objectives and those of TMM. Resolution of any such
conflicts in our favor may be difficult or impossible given our minority
ownership position. Our interests in these companies are subject to
restrictions on disposition.

Our operations are also dependent on interchange, trackage rights, haulage
rights and marketing agreements with other railroads and third parties that
enable us to exchange traffic and utilize trackage we do not own. These
agreements extend our network and provide strategically important rail links
to Mexico, the northern midwest United States and Canada. Our ability to
provide comprehensive rail service to our customers depends in large part upon
our ability to maintain these agreements with other railroads and third
parties. The termination of these agreements could adversely affect our
business, financial condition and results of operations. There can be no
assurance that these agreements will be renewed after their expiration and the
failure to renew any of them could adversely affect our business, financial
condition and results of operations. In addition, we are dependent in part
upon the financial health and efficient performance of other railroads. For
example, much of Tex-Mex's traffic moves over the UP's lines via trackage
rights, and a significant portion of our grain shipments originate with I&M
Rail Link pursuant to our marketing agreement with it. BNSF is our largest
partner in the interchange of rail traffic. There can be no assurance that we
will not be materially affected adversely by operational or financial
difficulties of other railroads.

Dependence on Key Personnel--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. If Mr. Haverty or other members
of our senior management team become unable or unwilling to continue in their
present positions, our business and financial results could be materially
adversely affected. See "Management."

Risks of Investments in Mexico--Our Mexican investments subject us to
political and economic risks

We have invested approximately $300 million in Grupo TFM. Our investments
in Mexico involve 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 investments 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 a favorable market will exist for any of our
investments in Mexico, and therefore the value of these investments could
potentially 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 bond covenants. An absence of dividends from Grupo TFM will, or
limited dividends may, negatively impact our ability to obtain a current cash
return on our investment in Grupo TFM.

Risks of Investment in Panama--Our Panamanian investment subjects us to
political and economic risks

We have entered into a joint venture with Mi-Jack Products, Inc. ("Mi-
Jack") through which we own 50% of the common stock of the Panama Canal
Railway Company. As of September 30, 2000, we have invested approximately $9.5
million and we may invest up to an additional $7 million. Panama Canal Railway
Company will operate a railroad between Panama City and Colon, Panama. Our
investment in the Panama Canal Railway Company 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 the
Panama Canal Railway Company. Additionally, no assurances can be given that a
favorable market will exist for our investment in the Panama Canal Railway
Company, and therefore the value of this investment could potentially become
impaired. See "Business--Rail Network--Significant Investments--Panama Canal
Railway Company."

Additional Capital Investment in TFM--We may be required to make additional
investments in TFM

On or after October 31, 2003, the Mexican government has the option to sell
its 20% interest in TFM (1) through a public offering or (2) to Grupo TFM at
the initial share price paid by Grupo TFM plus interest computed at the
Mexican Base Rate (the Unidades de Inversion ("UDI") published by Banco de
Mexico). In the event that Grupo TFM does not purchase the Mexican
government's 20% interest in TFM, the Mexican government may require TMM and
us, or either TMM or us alone, to purchase its interest. See "Business--Rail
Network--Significant Investments--Grupo TFM." We and TMM have cross
indemnities in the event the Mexican government requires only one of us or TMM
to purchase its interest. The cross indemnities allow the party required to
purchase the Mexican government's interest to require the other party to
purchase its pro rata portion of such interest. However, if we were required
to purchase the Mexican government's interest in TFM and TMM could not meet
its obligations under the cross-indemnity, then we would be obligated to pay
the total purchase price for the Mexican government's interest. If we and TMM,
or either us or TMM alone, had been required to purchase the Mexican
government's 20% interest in TFM as of September 30, 2000, the total purchase
price would have been approximately $472.2 million.

Minority Purchase Agreements--We may be required to purchase stock of Janus
Capital Corporation, a subsidiary of Stilwell, from certain minority
stockholders of Janus Capital Corporation. The amounts to purchase this stock
could be material

We could be required under certain agreements with minority stockholders of
Janus Capital Corporation ("Janus") to purchase their shares of Janus common
stock in the event Stilwell is unable to meet its obligations with respect to
these agreements. KCSI believes, based upon discussions with Stilwell
management, that Stilwell is in a financial position to meet these
obligations. If we were required to purchase those shares of Janus common
stock under these minority stockholder agreements, it could have a material
adverse effect on our business, financial condition and results of operations.
See Note 3 to our consolidated financial statements in this prospectus.

Labor Relations; Reliance on Unionized Labor--We are subject to extensive
railroad industry regulation and rely upon unionized labor

Labor relations in the U.S. railroad industry are subject to extensive
governmental regulation under the Railway Labor Act ("RLA"). Railroad industry
personnel are covered by the Railroad Retirement Act ("RRA") instead of the
Social Security Act and by the Federal Employers Liability Act ("FELA") rather
than state workers' compensation systems. These federal labor regulations are
often more burdensome and expensive than regulations governing other
industries and may place us at a competitive disadvantage relative to other
industries that are not subject to these regulations. See "Railroad Industry--
Labor Relations."

Approximately 83% of KCSR's and 88% of Gateway Western's employees,
respectively, are covered under various collective bargaining agreements.
Although national labor contracts governing KCSR and the majority of Gateway
Western's employees were negotiated with all major railroad unions in 1996,
these contracts opened for renegotiation on December 31, 1999 and formal
negotiations have begun with all unions on revising these agreements. Unions
representing certain Gateway Western employees are operating under 1994
contracts and are currently in negotiations to extend these contracts. We have
reached new agreements with all but one union representing former MidSouth
Corporation employees. Discussions with this union are ongoing. We may be
subject to work stoppages in the future as a result of labor disputes and may
be subject to terms and conditions in amended or future labor agreements that
could have a material adverse affect on our results of operations, financial
position and cash flows. Moreover, because such agreements are generally
negotiated on an industry-wide basis, determination of the terms and
conditions of future labor agreements could be beyond our control. Railroads
continue to be restricted by certain remaining restrictive work rules and are
thus prevented from achieving optimum productivity with existing technology
and systems. See "Business--Employees and Labor Relations."

Impact of Utility Deregulation on Coal Shipments--Utility industry
deregulation may reduce our coal freight revenues or margins

Historically, coal has been an important commodity handled by us. In 1999
coal revenues comprised approximately 20% of KCSR/Gateway Western's combined
total revenues. Revenues from coal deliveries to three locations of two
utility companies comprised approximately 80% of total coal revenues generated
by KCSR in 1999, and one of these two utility companies (Southwestern Electric
Power Company ("SWEPCO")) represented approximately 13% and 14% of
KCSR/Gateway Western combined revenues in 1999 and for the nine months ended
September 30, 2000, respectively. 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. While we believe we
can improve our performance in these areas, continuing competitive pressures
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.

Fuel Costs and Shortages--We are vulnerable to increases in fuel costs and
decreases in fuel supplies

We incur substantial fuel costs in our railroad operations. During the
three-year period ended December 31, 1999, locomotive fuel expenses
represented an average of 7.2% of KCSR/Gateway Western's combined total
operating costs excluding 1997 restructuring, asset impairment and other
charges. Fuel costs are affected by traffic levels, efficiency of operations
and equipment, and petroleum market conditions. The supply and cost of fuel is
subject to market conditions and is influenced by numerous factors beyond our
control, including general economic conditions, world markets, government
programs and regulations and competition. Fuel prices have increased
significantly in 2000 and represented 9.4% of total KCSR/Gateway Western
operating costs in the first nine months of 2000. We attempt to minimize the
effects of fuel price fluctuations through forward purchase contracts, but
cannot guarantee that those arrangements will be beneficial to us. Any
significant increase in the cost of fuel could have a material adverse effect
on our business, results of operations and financial condition. Our
operations, as well as those of our competitors, could also be affected by any
limitation in the fuel supply or by any imposition of mandatory allocation or
rationing regulations. In the event of a severe disruption of fuel supplies
resulting from supply shortages, political unrest, war or otherwise, the
operations of rail and truck carriers, including us, could be adversely
affected.

Government Regulation--We are subject to regulation by federal, state and
local regulatory agencies

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 STB, the Federal Railroad Administration ("FRA"), the Occupational
Safety and Health Administration ("OSHA"), 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. Our material noncompliance 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 Compliance--Environmental liabilities could require us to incur
material costs and temporarily suspend operations that 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 that 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. See "Business--Environmental Matters"
and "Business--Legal Matters."

Economic and Other Factors--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 we transport. 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. Many of the goods and commodities we carry
experience cyclical demand. Our results of operations can be expected to
reflect this cyclicality because of the significant fixed costs inherent in
railroad operations. 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 we carry is likely to be reduced.
Significant reductions in our volume of rail shipments could have a material
adverse effect on our business, financial condition and results of operations.

Possible Catastrophic Loss and Liability; Service Interruption--We may suffer
a catastrophe, collision, property loss or service interruption

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 mishaps, 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.
Further, there can be no assurance that any accident or natural disaster would
not cause a significant interruption in our operations or materially adversely
affect our business, financial condition and results of operations. See
"Business--Environmental Matters" and "Business--Legal Matters."

Concentration of Client Base--One of our coal customers accounts for
approximately 13% to 14% of KCSR/Gateway Western's total revenues

SWEPCO, our largest coal customer, accounted for approximately 13% of
KCSR/Gateway Western's total revenues for the year ending December 31, 1999
and approximately 14% of KCSR/Gateway Western's total revenues for the nine
months ended September 30, 2000. The loss of all or a significant part of
SWEPCO's business or a service outage at one or more of SWEPCO's facilities
could materially adversely effect our financial condition and results of
operations. See "Business--Markets Served--Coal."

USE OF PROCEEDS

This exchange offer is intended to satisfy certain of our obligations under
the exchange and registration rights agreement. We will not receive any cash
proceeds from the issuance of the Exchange Notes. In consideration for issuing
the Exchange Notes contemplated in this prospectus, we will receive
Outstanding Notes in like principal amount, the form and terms of which are
the same as the form and terms of the Exchange Notes, except as otherwise
described in this prospectus.

Our net proceeds from the sale of the Outstanding Notes (after deducting
the Initial Purchasers' discounts and commissions and offering expenses
payable by us) were approximately $196.5 million. We used the net proceeds to
refinance existing bank term debt, which was scheduled to mature on January
11, 2001. See "Description of KCS Credit Facilities and Other Indebtedness."

CAPITALIZATION

The following table sets forth our cash and cash equivalents and
consolidated capitalization as of September 30, 2000. See "Use of Proceeds."
This table should be read in conjunction with "Selected Consolidated Financial
Data and Other Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements, including
the notes thereto, beginning on page F-3 of this prospectus.

As of
September 30,
2000
-------------

Cash and cash equivalents......................................... $ 30.2
========
Debt (including short-term portions):
Revolving credit facility(/1/).................................. 5.0
Tranche A term loan............................................. 150.0
Tranche B term loan............................................. 250.0
Other debt...................................................... 80.4
9 1/2% Notes.................................................... 200.0
--------
Total debt.................................................... 685.4
Stockholders' equity:
Preferred stock................................................. 6.1
Common stock.................................................... 0.6
Retained earnings............................................... 632.8
--------
Total stockholders' equity.................................... 639.5
--------
Total capitalization.............................................. $1,324.9
========

- --------
(1) Drawn on $150.0 million total credit facility. This credit facility was
reduced to $100 million on January 2, 2001.

SELECTED CONSOLIDATED FINANCIAL DATA
AND OTHER DATA

The following table sets forth selected consolidated financial data for
KCSI. The statement of operations data for the years ended December 31, 1997,
1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999 have
been derived from KCSI's audited financial statements which appear elsewhere
in this prospectus. The statement of operations data for the nine-month
periods ended September 30, 1999 and 2000 and the balance sheet data as of
September 30, 2000 have been derived from KCSI's unaudited financial
statements which appear elsewhere in this prospectus. The statement of
operations data for the years ended December 31, 1995 and 1996 and the balance
sheet data as of December 31, 1995, 1996 and 1997 and September 30, 1999 has
been derived from KCSI's unaudited financial statements, none of which are
included in this prospectus.

Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- -------------
(dollars in millions, except per share amounts)
Restated(/7/)

Statement of Operations
Data:
Revenues............... $ 538.5 $ 517.7(/1/) $ 573.2(/1/) $ 613.5 $ 601.4 $ 449.7 $ 437.4
Costs and expenses..... 399.3 382.7 424.0 438.6 480.4 348.0 344.1
Depreciation and
amortization.......... 60.2 62.9 62.1 56.7 56.9 43.0 42.4
Restructuring, asset
impairment and other
charges............... -- -- 178.0 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating income
(loss)................ 79.0 72.1 (90.9) 118.2 64.1 58.7 50.9
Equity in net earnings
(loss) of
unconsolidated
affiliates:
Grupo TFM............ -- -- (12.9) (3.2) 1.5 4.8 18.8
Other................ 0.2 1.5 3.2 0.3 3.7 3.5 3.3
Interest expense, net.. (51.9) (52.8) (53.3) (59.6) (57.4) (43.3) (54.2)
Other, net............. 3.0 7.9 3.2 9.4 5.3 3.2 4.8
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes... 30.3 28.7 (150.7) 65.1 17.2 26.9 23.6
Income tax expense
(benefit)............. 11.6 12.4 (18.6) 27.1 7.0 9.5 1.8
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing
operations............ $ 18.7 $ 16.3 $ (132.1) $ 38.0 $ 10.2 $ 17.4 $ 21.8(/2/)
======== ======== ======== ======== ======== ======== ========
Ratio of earnings to
fixed charges(/3/).... 1.4x 1.4x -- (/4/) 1.8x 1.2x(/5/) 1.4x 1.0x
Basic earnings (loss)
per share from
continuing operations.. $ 0.29 $ 0.28 $ (2.46) $ 0.69 $ 0.18 $ 0.31 $ 0.38
Diluted earnings (loss)
per share from
continuing operations.. $ 0.28 $ 0.28 $ (2.46) $ 0.67 $ 0.17 $ 0.30 $ 0.37
Balance Sheet Data (at
end of period):
Working capital........ $ (20.1) $ (36.7) $ (195.2) $ 1.7 $ (45.7) $ 33.4 $ (3.3)
Total assets(/6/)...... 1,815.1 1,770.7 2,109.9 2,337.0 2,672.0 2,569.4 1,927.0
Total debt............. 644.2 645.1 916.6 836.3 760.9 791.6 685.4
Stockholders'
equity(/6/)........... 695.2 715.7 698.3 931.2 1,283.1 1,160.8 639.5

(footnotes on following page)

- --------
(1) Includes Gateway Western as a wholly-owned unconsolidated affiliate as of
December 5, 1996 and as a wholly-owned consolidated subsidiary effective
January 1, 1997.
(2) Income from continuing operations for the nine months ended September 30,
2000 excludes extraordinary items for debt retirement costs of $8.7
million (net of income taxes of $4.0 million). This amount includes $1.7
million (net of income taxes of $0.1 million) related to Grupo TFM.
(3) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose "earnings" represent the sum of (i) pretax
income from continuing operations adjusted for income (loss) from
unconsolidated affiliates, (ii) fixed charges, and (iii) distributed
income from unconsolidated affiliated less (i) capitalized interest and
(ii) fixed charges. "Fixed charges" consist of interest expensed or
capitalized, amortization of deferred debt issuance costs and the portion
of rental expense which management believes is representative of the
interest component of rental expense.
(4) Due to the restructuring, asset impairment and other charges of $178.0
million, the 1997 ratio coverage was less than 1:1. The ratio of earnings
to fixed charges would have been 1:1 if a deficiency of $146.1 million was
eliminated. Excluding the $178.0 million, the ratio for 1997 would have
been 1.5x.
(5) Includes unusual costs of $12.7 million. Excluding these items the ratio
for 1999 would have been 1.4x.
(6) The total assets and stockholders' equity presented herein include the net
assets of Stilwell as of December 31, 1995, 1996, 1997, 1998 and 1999 and
September 30, 1999 as follows: $180.4 million, $234.8 million, $348.3
million, $540.2 million, $814.6 million and $681.9 million, respectively.
The total assets and stockholders' equity as of September 30, 2000 do not
include the net assets of Stilwell as a result of the Spin-off on July 12,
2000.
(7) The September 30, 2000 Statement of Operations and Balance Sheet data have
been restated. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Restatement of Financial Statements."

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The discussions set forth below and in other portions of this prospectus
contain comments not based upon historical fact. Such forward-looking comments
are based upon information currently available to management and management's
perception thereof as of the date of this prospectus. Readers can identify
these forward-looking comments by the use of such verbs as expects,
anticipates, believes or similar verbs or conjugations of such verbs. The
actual results of operations of KCSI could materially differ from those
indicated in forward-looking comments. The differences could be caused by a
number of factors or combination of factors including, but not limited to,
those factors identified in the section entitled "Risk Factors." Readers are
strongly encouraged to consider these factors when evaluating any forward-
looking comments. We will not update any forward-looking comments set forth in
this prospectus.

The discussion and the financial data herein provide information only
related to the continuing operations of KCSI as of the dates and for the
periods being discussed, exclusive of the discontinued operations of Stilwell.
For purposes of this "Management's Discussion and Analysis of Financial
Condition and Results of Operations," discussions for KCSR/Gateway Western
represent them as combined operating companies and exclude other KCSR
subsidiaries. This discussion should be read in conjunction with the
consolidated financial statements, the related notes, and the Report of
Independent Accountants thereon, and is qualified by reference thereto.

Restatement of Financial Statements

The Company has restated its consolidated balance sheet as of September 30,
2000 to present the $14.2 million liability and $7.0 million receivable
associated with the Duncan case as current. These amounts had previously been
classified as long-term. Additionally, the Company has restated its
consolidated statements of operations for the nine months ended September 30,
2000 to present the $4.2 million attributed to interest in the Duncan case
judgment in "Cost and Expenses". This amount had previously been classified as
"Interest Expense". These revisions had no impact on income from continuing
operations, net income, earnings per share or on total shareholders' equity as
previously reported.

General

KCSI, a Delaware corporation organized in 1962, is a holding company with
principal operations in rail transportation. KCSI supplies its various
subsidiaries with managerial, legal, tax, financial and accounting services,
in addition to managing certain investments. Kansas City Southern Lines, Inc.
("KCSL") which was the direct parent of KCSR and was a wholly-owned subsidiary
of KCSI, was merged into KCSI as of December 31, 2000. KCSI's principal
subsidiaries and affiliates include, among others:

. KCSR, a wholly-owned subsidiary;

. Gateway Western, a wholly-owned subsidiary;

. Grupo TFM, an approximate 37% owned unconsolidated affiliate, which owns
80% of the common stock of TFM;

. Mexrail, a 49% owned unconsolidated affiliate, which wholly owns Tex-Mex;

. Panama Canal Railway Company, an unconsolidated affiliate of which we own
50% of the common stock; and

. Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate that leases locomotive and rail equipment
primarily to KCSR.

Trends and Outlook

For the nine-month period ended September 30, 2000, our results have been
favorably affected by the ongoing results of our investment in Grupo TFM as
well as KCSR/Gateway Western's success in maintaining an effective operating
cost structure. Domestically, however, our results continue to be adversely
affected by competitive revenue pressures, higher fuel costs and higher
interest costs. Combined KCSR/Gateway Western revenues declined approximately
2% during the nine months ended September 30, 2000 compared to the nine months
ended September 30, 1999. These revenue declines continue to reflect
competitive pricing issues, as well as demand driven traffic declines.
Interest expense rose 25% for the nine months ended September 30, 2000
compared to the same prior year period as a result of higher interest rates
and amortization of debt costs associated with the January 2000 debt re-
capitalization discussed elsewhere, even though average debt balances were
lower. Operationally, KCSR and Gateway Western are operating more efficiently
in 2000 than in 1999 as evidenced by lower operating expenses (excluding fuel
and casualty and insurance costs) and certain improved operating measures,
such as increased train speeds, faster coal cycle times, lower terminal dwell
times, reduced overtime hours and the use of fewer relief crews. In spite of
significantly higher diesel fuel costs (which rose approximately 45% for the
nine months ended September 30, 2000 compared to the same period in 1999), we
were able to reduce operating expenses by approximately 1.2% during the first
nine months of 2000, primarily due to operational improvements and the easing
of congestion at KCSR and Gateway Western. Also contributing to this decline
in operating expenses was a $3.0 million revision to the estimate of the
allowance for doubtful accounts based on collection of approximately $1.8
million of a receivable from an affiliate and agreement for payment on the
remaining amount. Grupo TFM results improved for the nine months ended
September 30, 2000 due primarily to revenue growth and cost containment, as
well as the impact of fluctuations in the value of the peso and Mexican
inflation on deferred taxes under U.S. GAAP.

The current outlook for our business for the remainder of 2000 and 2001 is
as follows:

. While we have not completed our closing process for the year ended
December 31, 2000, based on preliminary traffic levels, we expect
revenues in fourth quarter 2000 to decline compared to fourth quarter
1999. The lower fourth quarter 2000 revenues result from lower unit coal
traffic due to our largest customer (SWEPCO) reducing excess stockpiles
and a general slowdown in U.S. economic, manufacturing and production
levels for commodities we move. We anticipate that coal revenues will
begin to recover in first quarter 2001 and that general freight,
intermodal and automotive traffic will be largely dependent on the
economic trends within certain industries in the geographic region served
by the railroads comprising the NAFTA Railway. Variable costs and
expenses are expected to be proportionate with revenue activity, except
for fuel expenses, where prices are expected to mirror market conditions.

. In the short-term, competitive pricing issues and weak export markets for
grain and chemicals will present revenue challenges to the rail
operations. However, in the longer term, we believe that, with the
effective cost controls and system utilization improvements, the NAFTA
Railway continues to provide an attractive service for shippers and is
well-positioned to take advantage of the continued growth potential of
NAFTA traffic; and

. We expect to continue to participate in the earnings/losses from our
equity investments in Grupo TFM, Southern Capital and Mexrail. We do not
make any assurances as to the impact that a change in the value of the
peso or a change in Mexican inflation will have on the results of Grupo
TFM.

Recent Developments

Spin-off of Stilwell Financial Inc. On June 14, 2000 KCSI's Board of
Directors approved the Spin-off of Stilwell, KCSI's then wholly-owned
financial services subsidiary. As of the date of the Spin-off, Stilwell was
comprised of Janus Capital Corporation, an approximate 81.5% owned subsidiary;
Berger LLC, an approximate 88% owned subsidiary; Nelson Money Managers Plc, an
80% owned

subsidiary; DST Systems, Inc., an equity investment in which Stilwell holds an
approximate 32% interest; and miscellaneous other financial services
subsidiaries and equity investments.

On July 12, 2000, KCSI completed the Spin-off through a special dividend of
Stilwell common stock distributed to KCSI common stockholders of record on
June 28, 2000. The Spin-off occurred after the close of business of the New
York Stock Exchange on July 12, 2000, and each KCSI stockholder received two
shares of the common stock of Stilwell for every one share of KCSI common
stock owned on the record date. The total number of Stilwell shares
distributed was 222,999,786.

On July 9, 1999, KCSI received a tax ruling from the IRS which states that
for United States federal income tax purposes the Spin-off qualifies as a tax-
free distribution under Section 355 of the Internal Revenue Code of 1986, as
amended. Additionally, in February 2000, KCSI received a favorable
supplementary tax ruling from the IRS to the effect that the assumption of
$125 million of KCSI indebtedness by Stilwell would have no effect on the
previously issued tax ruling.

KCSI Reverse Stock Split. Also on July 12, 2000, KCSI completed a reverse
stock split whereby every two shares of KCSI common stock were converted into
one share of KCSI common stock. Earnings per share computations for each
period discussed herein reflect this one-for-two reverse stock split. KCSI
common stockholders approved this reverse stock split in 1998.

KCSI Elects New Chairman. On December 12, 2000, KCSI announced that Michael
R. Haverty was elected Chairman of the Board of Directors of KCSI effective
January 1, 2001. Mr. Haverty succeeded Landon H. Rowland, who has resigned as
Chairman but remains on the Board of Directors, Mr. Haverty retains his
current titles of Chief Executive Officer and President.

KCSI Adds New Director. On August 17, 2000, Byron G. Thompson was named as
a director of KCSI. Mr. Thompson has served as Chairman of the Board of
Country Club Bank, n.a., Kansas City since February 1985. Prior to that time,
Mr. Thompson served as Vice Chairman of Investment Banking at United Missouri
Bank of Kansas City and as a member of the Board of United Missouri
Bancshares, Inc.

Duncan Case Update. In 1998, a jury in Beauregard Parish, Louisiana
returned a verdict against KCSR in the amount of $16.3 million. This case
arose from a railroad crossing accident that occurred at Oretta, Louisiana on
September 11, 1994, in which three individuals were injured. Of the three, one
was injured fatally, one was rendered quadriplegic and the third suffered less
serious injuries.

Subsequent to the verdict, the trial court held that the plaintiffs were
entitled to interest on the judgment from the date the suit was filed,
dismissed the verdict against one defendant and reallocated the amount of that
verdict to the remaining defendants. The resulting total judgment against
KCSR, together with interest, was approximately $28.0 million as of September
30, 2000.

On November 3, 1999, the Third Circuit Court of Appeals in Louisiana
affirmed the judgment. Subsequently KCSR sought and obtained review of the
case in the Supreme Court of Louisiana. On October 30, 2000 the Supreme Court
of Louisiana entered its order affirming in part and reversing in part the
judgment. The net effect of the Louisiana Supreme Court action was to reduce
the allocation of negligence to KCSR and reduce the judgment, with interest,
against KCSR from approximately $28 million to approximately $14.2 million
(approximately $9.7 million of damages and $4.5 million of interest), which is
in excess of KCSR's insurance coverage of $10 million for this case. KCSR
filed an application for rehearing in the Supreme Court of Louisiana which was
denied on January 5, 2001. KCSR then sought a stay of judgment in the
Louisiana court. The Louisiana court denied the stay application on January
12, 2001. KCSR is currently evaluating its options of settling this case or
seeking relief in the United States Supreme Court.

insurance coverage. This resulted in recording $4.2 million of net operating
expense in the accompanying consolidated financial statements for the period
ended September 30, 2000.

Debt Refinancing and Re-capitalization of Our Debt Structure.

. During the third quarter of 2000, we announced the completion of a $200
million private offering of debt securities through our wholly owned
subsidiary, KCSR. The offering, completed pursuant to Rule 144A under the
Securities Act of 1933 in the United States and Regulation S outside the
United States, consisted of the 8-year Outstanding Notes. The Outstanding
Notes bear a fixed annual interest rate of 9.5% and are due on October 1,
2008. These Outstanding Notes contain certain covenants typical of this
type of debt instrument. Net proceeds from the offering of $196.5 million
were used to refinance existing bank term debt, which was scheduled to
mature on January 11, 2001. Costs related to the issuance of these notes
of approximately $4.1 million were deferred and are being amortized over
the eight-year term of the Outstanding Notes.

In connection with this refinancing, we reported an extraordinary loss on
the extinguishment of the bank term debt due January 11, 2001. The
extraordinary loss was $1.1 million (net of income taxes of $0.7
million).

. Also during the third quarter of 2000, Grupo TFM accomplished a
refinancing of approximately $285 million of its senior secured credit
facility through the issuance of a U.S. Commercial Paper ("USCP") program
backed by a letter of credit. The USCP is a 2-year program for up to a
face value of $310 million. The average discount rate for the first
issuance was 6.54%. This refinancing provides the ability for Grupo TFM
to pay limited dividends.

A result of this refinancing, Grupo TFM recorded approximately $9.2
million in pretax extraordinary debt retirement costs. During the third
quarter of 2000, we reported $1.7 million (net of income taxes of $0.1
million) as our proportionate share of these costs as an extraordinary
item.

Dividends Suspended for KCSI Common Stock. During first quarter 2000,
KCSI's Board of Directors announced that, based upon a review of KCSI's
dividend policy in conjunction with the KCS Credit Facilities and in light of
the anticipated Spin-off, it decided to suspend common stock dividends of KCSI
under KCSI's then-existing structure. This action complies with the terms and
covenants of the KCS Credit Facilities. It is not anticipated that KCSI will
make any cash dividend payments to its common stockholders for the foreseeable
future.

Expiration of the Capital Call Related to TFM. In conjunction with the
financing of TFM in 1997, we entered into a Capital Contribution Agreement
with Grupo TFM, TMM and the financing institutions of TFM. This agreement
extended for a three-year period through June 30, 2000 and outlined the terms
whereby we could be responsible for approximately $74 million of a capital
call if certain performance benchmarks outlined in the agreement were not met
by TFM. In accordance with its terms, the agreement has terminated.

New Compensation Program. In connection with the Spin-off, we adopted a new
compensation program (the "Compensation Program") under which (1) certain
senior management employees were granted performance based KCSI stock options
and (2) all management employees and those directors of KCSI who are not our
employees (the "Outside Directors") became eligible to purchase a specified
number of KCSI restricted shares and were granted a specified number of KCSI
stock options for each restricted share purchased.

The performance stock options have an exercise price of $5.75 per share,
which was the mean trading price of KCSI common stock on the New York Stock
Exchange (the "NYSE") on July 13, 2000. These options expire at the end of 10
years, subject to certain early termination events. These options will vest
and become exercisable in equal installments as KCSI's stock price achieves
thresholds (and maintains those thresholds for 20 consecutive trading days)
that reflect incremental 15% compounded increases from the stock price on the
date of grant. One third of these options become exercisable upon meeting each
threshold. Three years from the date of grant, options not then exercisable
become exercisable and then expire thirty days thereafter. Vesting will
accelerate in the event of death or disability or a KCSI board-approved change
in control of KCSI.

The price of the restricted shares, and the exercise price of the stock
options granted in connection with the purchase of restricted shares, are
based on the mean trading price of KCSI common stock on the NYSE on the date
the employee or Outside Director purchased restricted shares under the
Compensation Program. Each eligible employee and Outside Director was allowed
to purchase the restricted shares offered under the Compensation Program on
one date out of a selection of dates offered. With respect to management
employees, the number of shares available for purchase and the number of
options granted in connection with shares purchased were based on the
compensation level of the employees. Each Outside Director was granted the
right to purchase up to 3,000 restricted shares of KCSI, with two KCSI stock
options granted in connection with each restricted share purchased. Shares
purchased are restricted from sale and the options are not exercisable for a
period of three years for senior management and the Outside Directors and two
years for other management employees. KCSI provided senior management and the
Outside Directors with the option of using a sixty-day interest-bearing (6.49%
per annum) full recourse note to purchase these restricted shares. KCSI
granted loans to senior management of approximately $1.8 million related to
these restricted stock purchases. Loans of approximately $51,750 were granted
to Outside Directors. All of these loans were paid in full by September 11,
2000.

Management employees purchased 475,597 shares of KCSI restricted stock
under the Compensation Program and 910,697 stock options were granted in
connection with the purchase of those restricted shares. Outside Directors
purchased a total of 9,000 shares of KCSI restricted stock under the
Compensation Program and 18,000 KCSI stock options were granted in connection
with the purchase of those shares.

Burlington Northern Santa Fe Railway and Canadian National Railway Merger.
In December 1999, BNSF and CN announced their intention to combine the two
railroad companies. In March 2000, however, this combination was delayed when
the STB issued a 15-month moratorium on railroad mergers until the STB can
adopt new rules governing merger activities. In July 2000 the STB's moratorium
was upheld by the United States Court of Appeals for the District of Columbia.
Subsequent to the court's decision, BNSF and CN announced the termination of
their proposed merger.

KCSR Lease of 50 New Locomotives. During 1999, we reached an agreement with
General Electric ("GE") to purchase 50 new GE 4400 AC Locomotives. This
agreement was assigned to Southern Capital and KCSR leased the 50 new
locomotives from Southern Capital. Delivery of these locomotives was completed
in December 1999. See "Business--Properties and Equipment--KCSR/Gateway
Western's Combined Fleet."

Norfolk Southern Haulage and Marketing Agreement. In May 2000, KCSR and
Norfolk Southern entered into an agreement under which KCSR provides haulage
services for intermodal traffic between Meridian and Dallas and receives fees
for such services from Norfolk Southern. Under this agreement Norfolk Southern
may quote rates and enter into transportation service contracts with shippers
and receivers covering this haulage traffic. See "Business--Rail Network--
Expanded Network--Marketing Agreements with Norfolk Southern."

Intermodal facility at the former Richards-Gebaur Airbase. During 1999,
KCSR entered into a fifty-year lease with the City of Kansas City, Missouri to
establish the Kansas City International Freight Terminal, an automotive and
intermodal facility at the former Richards-Gebaur Airbase, which is located
adjacent to KCSR's main rail line. The Federal Aviation Administration ("FAA")
has officially approved the closure of the existing airport, and improvements
have commenced. Through an agreement with Mazda through the Ford Motor Company
Claycomo manufacturing facility located in Kansas City, KCSR developed an
automotive distribution facility at the Richards-Gebaur facility. This
automotive facility became operational in April 2000 for the movement of Mazda
vehicles. Intermodal and expanded automotive operations at the facility are
expected to be in service in 2001.

We expect that the new facility will provide additional capacity as well as
a strategic opportunity to serve as an international trade facility. We plan
for this facility to serve as a U.S. customs pre-clearance

processing facility for freight moving along the NAFTA corridor. We expect
this to alleviate some of the congestion at the borders, resulting in more
fluid service to our customers, as well as customers throughout the rail
industry.

KCSR expects to spend approximately $20 million for site improvements and
infrastructure at this facility. KCSR expects to fund these improvements using
operating cash flows and existing credit lines. Lease payments are expected to
range between $400,000 and $700,000 per year and will be adjusted for
inflation based on agreed-upon formulas. We believe that with the addition of
this facility, KCSR is positioned to increase its automotive and intermodal
revenue base by attracting additional NAFTA traffic.

Results of Operations

The following table details our income statement components for the years
ended December 31, 1997, 1998 and 1999 and the nine-month periods ended
September 30, 1999 and 2000.

Nine Months
Ended
Year Ended December September 30,
31, (unaudited)
----------------------- ----------------------
1997 1998 1999 1999 2000
------- ------ ------ ------ --------------
Restated (/2/)
(dollars in millions)

Revenues
KCSR/Gateway Western general
commodities (Merchandise
traffic):
Chemical and petroleum.... $ 137.5 $143.5 $132.7 $100.8 $ 96.3
Paper and forest.......... 107.3 110.3 105.0 78.4 80.4
Agricultural and mineral.. 118.6 128.5 121.6 93.5 92.5
------- ------ ------ ------ ------
Total general
commodities............ 363.4 382.3 359.3 272.7 269.2
Intermodal and automotive. 43.5 48.1 60.6 43.0 47.0
Coal...................... 102.9 117.9 117.4 86.5 82.3
------- ------ ------ ------ ------
Carload revenues............ 509.8 548.3 537.3 402.2 398.5
Other rail-related
revenues................. 50.7 48.5 49.1 35.9 32.3
------- ------ ------ ------ ------
Total KCSR/Gateway
Western revenues....... 560.5 596.8 586.4 438.1 430.8
Other subsidiary
revenues............... 12.7 16.7 15.0 11.6 6.6
------- ------ ------ ------ ------
Total consolidated
revenues............. 573.2 613.5 601.4 449.7 437.4
Costs and expenses............ 424.0 438.6 480.4 348.0 344.1
Depreciation and amortization. 62.1 56.7 56.9 43.0 42.4
Restructuring, asset
impairment and other charges. 178.0 -- -- -- --
------- ------ ------ ------ ------
Operating income (loss)..... (90.9) 118.2 64.1 58.7 50.9
Equity in net earnings
(losses) of unconsolidated
affiliates................... (9.7) (2.9) 5.2 8.3 22.1
Interest expense.............. (53.3) (59.6) (57.4) (43.3) (54.2)
Other, net.................... 3.2 9.4 5.3 3.2 4.8
------- ------ ------ ------ ------
Income (loss) from
continuing operations
before income taxes........ (150.7) 65.1 17.2 26.9 23.6
Income tax expense (benefit).. (18.6) 27.1 7.0 9.5 1.8
------- ------ ------ ------ ------
Income (loss) from
continuing operations...... $(132.1) $ 38.0 $ 10.2 $ 17.4 $ 21.8(/1/)
======= ====== ====== ====== ======

For a discussion of the markets served by KCSR/Gateway Western, see
"Business--Markets Served."

Costs and Expenses

The following table summarizes combined KCSR/Gateway Western operating
expenses:

Nine Months
Ended
Year Ended December September 30,
31, (unaudited)
-------------------- ---------------
1997 1998 1999 1999 2000
------ ------ ------ ------ --------
Restated
(dollars in millions)

Salaries, wages and benefits.............. $189.6 $184.8 $199.7 $147.5 $144.9
Fuel...................................... 36.7 33.5 34.2 24.4 35.3
Material and supplies..................... 32.6 36.3 35.1 26.5 23.6
Car hire.................................. 5.7 12.5 22.4 16.4 11.1
Purchased services........................ 41.5 44.6 51.7 35.8 35.9
Casualties and insurance.................. 24.3 29.1 30.6 21.3 24.5
Operating leases.......................... 58.1 53.9 50.4 38.3 42.5
Depreciation and amortization............. 56.8 52.9 52.3 39.5 39.4
Restructuring, asset impairment and other
charges.................................. 163.8 -- -- -- --
Other..................................... 26.0 25.9 37.1 23.1 18.2
------ ------ ------ ------ ------
Total................................. $635.1 $473.5 $513.5 $372.8 $375.4
====== ====== ====== ====== ======

Nine Months Ended September 30, 2000 Compared with the Nine Months Ended
September 30, 1999

Income from Continuing Operations. We reported income from continuing
operations of $21.8 million for the nine months ended September 30, 2000
compared with $17.4 million for the nine months ended September 30, 1999. This
$4.4 million increase resulted primarily from a $14.0 million year to date
increase in equity earnings of Grupo TFM, partially offset by a decline in
U.S. operating income of $7.8 million and an increase in interest expense of
$10.9 million. Also contributing to the income improvement was a decline in
income tax expense of $7.7 million due to certain third quarter 2000 non-
taxable items, as well as a lower effective tax rate related to our equity
earnings from Grupo TFM.

Revenues. Revenues totaled $437.4 million for the first nine months of 2000
versus $449.7 million in the comparable period in 1999. This $12.3 million, or
2.7%, decrease resulted from lower combined KCSR/Gateway Western revenues of
approximately $7.3 million, as well as lower revenues at several smaller
transportation companies due to demand driven declines. Combined KCSR/Gateway
Western revenues decreased primarily due to competitive pricing pressures and
demand driven traffic declines in coal and chemical and petroleum products,
partially offset by increased paper and forest product and automotive traffic.

Operating Expenses. Operating expenses decreased $4.5 million period to
period in spite of diesel fuel costs, which rose $10.9 million, or 45%, in the
first nine months of 2000 compared to the same period in 1999. Included in
operating expenses is $4.2 million related to the judgment in the Duncan case
discussed in "--Recent Developments". Operational efficiencies at KCSR and
Gateway Western led to decreases in salaries and wages, car hire,
materials/supplies and other expense. Also contributing to the decline in
operating expenses was a $3.0 million revision to the estimate of the
allowance for doubtful accounts based on collection of approximately $1.8
million of a receivable from an affiliate and agreement for payment on the
remaining amount. These declines were offset by higher fuel costs and higher
lease expense associated with 50 new locomotives leased in fourth quarter
1999.

Interest Expense. Interest expense for the nine months ended September 30,
2000 increased $10.9 million, or 25%, from the prior year period. This
increase was due to higher interest rates and amortization of debt issuance
costs associated with the debt re-capitalization in January 2000 partially
offset by lower overall debt balances.

Unconsolidated Affiliates. We recorded equity earnings of $22.1 million
from unconsolidated affiliates for the nine months ended September 30, 2000
compared to $8.3 million for the nine months ended September 30, 1999. The
increase is attributed primarily to equity earnings from Grupo TFM, reflecting
continued operating improvements and the tax impact of inflation and
fluctuations in the valuation of the peso versus the U.S. dollar. Grupo TFM's
operating ratio improved to 74.1% for the nine months ended September 30, 2000
versus 76.0% for the comparable 1999 period as revenues increased
approximately 24% year over year.

Combined KCSR/Gateway Western Operating Results. The following provides a
comparative analysis of the revenue and expense components of KCSR/Gateway
Western for the nine months ended September 30, 2000 versus the nine months
ended September 30, 1999:

Revenues

Combined KCSR/Gateway Western revenues decreased approximately $7.3 million
period to period as declines in coal, chemical and petroleum, agriculture and
minerals and haulage revenues were offset by increases in paper and forest
products and intermodal and automotive revenues.

Coal. Coal revenues declined $4.2 million, or 4.9%, for the nine months
ended September 30, 2000 compared with the nine months ended September 30,
1999. Lower unit coal revenues were attributable to an approximate 10% decline
in tons delivered coupled with a decline in revenue per carload due to changes
in length of haul. Partially offsetting these traffic declines was the easing
of the congestion which affected coal revenues during the nine months ended
September 30, 1999. Coal accounted for 20.7% and 21.5% of total carload
revenues for the nine months ended September 30, 2000 and 1999, respectively.

Chemical and Petroleum. For the nine months ended September 30, 2000,
chemical and petroleum product revenues decreased $4.5 million, or 4.5%,
compared with the same 1999 period. This decrease results primarily from soda
ash revenues, which declined due to a new dedicated soda ash terminal opening
on UP's rail line, which diverted soda ash movements from KCSR to UP. We
expect soda ash revenues to remain weak during the remainder of 2000 and into
2001. Chemical and petroleum products accounted for 24.2% of total carload
revenues for the nine months ended September 30, 2000 versus 25.1% for the
nine months ended September 30, 1999.

Paper and Forest. Paper and forest product revenues increased $2.0 million,
or 2.6%, period to period as a result of an increased demand for paper/pulp
products and lumber products. This increased demand results from the expansion
of several paper mills that are directly served by KCSR. Paper and forest
products accounted for 20.2% and 19.5% of total carload revenues for the nine
months ended September 30, 2000 and 1999, respectively.

Agricultural and Mineral. Agricultural and mineral product revenues
decreased $1.0 million, or 1.1%, for the nine months ended September 30, 2000
compared with the nine months ended September 30, 1999. This decline resulted
primarily from lower export grain revenues due to competitive pricing
pressures and weakness in the export market and military/other revenues due to
a National Guard move in second quarter 1999 from Camp Shelby, Mississippi to
Fort Irving, California. These declines were partially offset by higher
metal/scrap revenues relating to an increase in domestic oil exploration,
which uses steel, one of the products we transport, in its process.
Agricultural and mineral products accounted for 23.2% of total carload
revenues for each of the nine months ended September 30, 2000 and 1999.

Intermodal and Automotive. Intermodal and automotive revenues increased
$4.0 million, or 9.3%, for the nine months ended September 30, 2000 compared
to the nine months ended September 30, 1999. This improvement is comprised
primarily of an increase in automotive revenues, which more

than doubled period to period, partially offset by a decline in intermodal
revenues. Automotive revenues have increased due, in part, to our higher
traffic levels for the movement of automobile parts originating in the upper
midwest of the United States and terminating in Mexico. Also contributing to
the increase in automotive revenues was additional traffic handled by Gateway
Western from Mexico, Missouri to Kansas City. Intermodal revenues were
affected by the fourth quarter 1999 closure of two intermodal facilities that
were not meeting expectations and were not profitable. These closures resulted
in a loss of revenues, but also have improved operating efficiency and
profitability of this business sector. During the second quarter of 2000, we
entered into a marketing agreement with Norfolk Southern whereby we have
agreed to perform haulage services for Norfolk Southern from Meridian to
Dallas for an agreed upon haulage fee. Currently there are two trains
operating per day with the expectation that this will increase in the future.
A portion of this haulage traffic has replaced previous carload intermodal
traffic and some of the traffic is incremental to us. A portion of the decline
in intermodal revenues results from the Norfolk Southern haulage traffic that
replaced existing intermodal revenues as KCSR is now receiving a smaller per
unit haulage fee than the share of revenue it received as part of the
intermodal movement. This traffic, however, is more profitable to KCSR as
certain costs such as fuel and car hire are borne by Norfolk Southern. In the
long term intermodal revenues are expected to increase as a result of this
haulage agreement. We expect that both intermodal and automotive revenues will
increase in 2001, primarily related to the relationships with Norfolk Southern
and CN/IC. Intermodal and automotive revenues accounted for 11.8% and 10.7% of
total carload revenues for the nine months ended September 30, 2000 and 1999,
respectively.

Costs and Expenses

For the nine months ended September 30, 2000, KCSR/Gateway Western
operating costs increased $2.6 million from the same nine-month period in
1999. Declines in salaries and wages, materials and supplies and car hire
expense, arising primarily from improved operations and the easing of
congestion, were offset by casualties expense related to the Duncan case,
higher fuel costs, as well as higher locomotive lease and maintenance costs.

Salaries, Wages and Benefits. Salaries, wages and benefits expense for the
nine months ended September 30, 2000 decreased $2.6 million versus the
comparable 1999 period. Wage increases to certain classes of union employees
were offset by reduced employee counts, lower overall overtime costs, and the
use of fewer relief crews. Improvements in operating efficiencies during the
first nine months of 2000, as well as the absence of congestion-related issues
that existed during third quarter 1999 contributed to the decline in overtime
and relief crew costs.

Fuel. For the nine months ended September 30, 2000, fuel expense increased
$7.2 million, or 44.7%, compared to the nine months ended September 30, 1999.
An increase in the average fuel price per gallon of approximately 64% was
offset by a decrease in fuel usage of approximately 12%. While higher market
prices have significantly impacted overall fuel costs, improved fuel
efficiency was achieved as a result of the lease of the 50 new fuel-efficient
locomotives by KCSR in late 1999 and an aggressive fuel conservation plan
which began in mid-1999. Fuel costs represented approximately 9.5% of total
operating expenses compared to 6.5% in 1999.

Purchased Services. For the nine months ended September 30, 2000, purchased
services expense remained relatively flat compared to the same prior year
period. Increased purchase services expense as a result of maintenance
contracts for the 50 new leased locomotives was offset by a decline in other
purchased services (partially related to Y2K computer efforts in 1999).

Car Hire. For the nine months ended September 30, 2000, car hire expense
declined $5.3 million, or 32.3%, compared to the same nine-month period in
1999. This improvement was driven by improved operations and the easing of
congestion. During 1999, KCSR/Gateway Western experienced significant
congestion-related issues.

Casualties and Insurance. For the nine months ended September 30, 2000,
casualties and insurance expense increased $3.2 million compared with the nine
months ended September 30, 1999, reflecting $4.2 million in non-recurring
costs related to the Duncan case and higher personal injury-related costs
partially offset by lower derailment costs.

Operating Leases. For the nine months ended September 30, 2000, operating
lease expense increased $4.2 million, or 11.0%, compared to the nine months
ended September 30, 1999 primarily as a result of the 50 new GE 4400 AC
locomotives leased during fourth quarter 1999.

Depreciation and Amortization. Depreciation and amortization expense was
$39.4 million for the nine months ended September 30, 2000 compared to $39.5
million for the nine months ended September 30, 1999 due to property
acquisitions offset by property retirements and lower STB approved
depreciation rates.

Operating Income and Operating Ratio. KCSR/Gateway Western operating income
for the nine months ended September 30, 2000 decreased $9.9 million, or 15.2%,
to $55.4 million, resulting from a $7.3 million decrease in revenues and a
$2.6 million increase in operating expenses. Excluding the $4.2 million of
casualty costs related to the Duncan case, operating expenses for the nine
months ended September 30, 2000 would have been lower than comparable 1999.
These factors also resulted in a combined KCSR/Gateway Western operating ratio
of 86.9% for the first nine months of 2000 compared to 84.9% for the same 1999
period.

Year Ended December 31, 1999 Compared with the Year Ended December 31, 1998

Income from Continuing Operations. For the year ended December 31, 1999,
income from continuing operations decreased $27.8 million (73.2%) compared to
the year ended December 31, 1998, primarily as a result of lower revenues,
higher operating expenses and a decline in other, net.

Revenues. Revenues declined $12.1 million, or 2.0%, for the year ended
December 31, 1999 versus 1998. Combined KCSR/Gateway Western revenues
decreased 1.7% primarily due to declines in chemical and petroleum, paper and
forest and agricultural and mineral revenues, partially offset by increased
intermodal and automotive revenues. Other transportation businesses also
reported lower revenues due to volume-related declines.

Operating Expenses. Operating expenses increased approximately 8.5%
primarily due to higher congestion-related costs at KCSR.

Interest Expense and Other, net. For the year ended December 31, 1999
interest expense decreased $2.2 million, or 3.7%, to $57.4 million from the
prior year due to a slight decrease in average debt balances resulting from
net repayments. See "Description of KCS Credit Facilities and Other
Indebtedness." Other, net declined $4.1 million for the year ended December
31, 1999 relating primarily to a 1998 receipt of interest ($2.8 million)
related to a tax refund.

Income Tax Expense. Income tax expense decreased $20.1 million for the year
ended December 31, 1999 compared to 1998, primarily because of the decline in
income from continuing operations before income taxes of $47.9 million
(73.6%). The effective tax rate for 1999 was 40.7% compared to 41.5% in 1998.

Unconsolidated Affiliates. For the year ended December 31, 1999, we
recorded equity in net earnings of $5.2 million from unconsolidated affiliates
versus equity in net losses of $2.9 million in 1998, an increase of $8.1
million. This increase relates primarily to improvements in equity earnings of
Grupo TFM and Mexrail. Also contributing was an increase in 1999 equity
earnings from Southern Capital related mostly to the gain on the sale of its
non-rail related loan portfolio in 1999.

Grupo TFM contributed equity earnings of $1.5 million to our income from
continuing operations in 1999 compared to equity losses of $3.2 million in
1998. Exclusive of deferred income tax effects,

Grupo TFM's contribution to our income from continuing operations (after
giving effect to the impact of associated KCSI interest expense) increased
$19.4 million, indicative of substantially improved operations and continued
growth. This increase was partially offset by a $16 million increase in our
proportionate share of Grupo TFM's deferred tax expense in 1999 versus 1998.
Higher Grupo TFM earnings resulted from a 21.6% increase in revenues and 56.3%
increase in operating income partially offset by an increase in deferred tax
expense. Reflecting this growth in revenues, operating expenses increased
approximately $50.1 million during 1999; however, the operating ratio declined
5.0 percentage points to 77.2% from 82.2%, displaying Grupo TFM management's
continued emphasis on operating efficiency and cost control. Volume-related
increases in car hire expense and operating leases were partially offset by an
8% decline in salaries and wages. Grupo TFM ultimately expects an operating
ratio under 70% through a combination of increasing revenues and cost
containment. Results of our investment in Grupo TFM are reported using U.S.
generally accepted accounting principles ("U.S. GAAP"). Because we are
required to report equity in Grupo TFM under U.S. GAAP and Grupo TFM reports
under International Accounting Standards, differences in deferred income tax
calculations occur. The deferred income tax calculations are significantly
impacted by fluctuations in the relative value of the Mexican peso versus the
U.S. dollar and the rate of Mexican inflation, and can result in significant
variances in the amount of equity earnings (losses) we report.

In 1999, Mexrail contributed equity earnings of $0.7 million compared to
equity losses of $2.0 million in 1998, an improvement of $2.7 million. Mexrail
revenues increased 3.8% while operating expenses declined approximately 7.5%.
The decrease in operating expenses resulted primarily from a reorganization of
certain business practices whereby the operations were assumed by TFM. This
change in the operations of Mexrail resulted in certain efficiencies and a
reduction in related costs.

Combined KCSR/Gateway Western Operating Results. The following provides a
comparative analysis of the revenue and expense components of KCSR/Gateway
Western for the year ended December 31, 1999 compared to the year ended
December 31, 1998.

Revenues

KCSR/Gateway Western 1999 revenues decreased $10.4 million as compared to
1998, resulting primarily from a decline in chemical and petroleum, paper and
forest and agricultural and mineral traffic, partially offset by an increase
in intermodal and automotive traffic. General commodity carloads decreased
3.2%, resulting in a $23.0 million decline in general commodity revenues,
while intermodal units shipped increased 20.4% leading to a $4.8 million
increase in related revenues. Automotive revenues increased $7.7 million year
to year.

Coal. During the year ended December 31, 1999, KCSR experienced a slight
decline in coal revenues primarily because of (i) a decrease in demand
compared with 1998--a year in which KCSR reported record coal revenues, and
(ii) slower delivery times due to congestion arising from track maintenance
work on the north-south corridor. During the fourth quarter, however, coal
revenues improved, mostly offsetting the declines during the first nine months
of 1999 and resulting in year end 1999 coal revenues only slightly lower than
the 1998 record levels. The improvement noted during the fourth quarter
resulted from increased demand, as well as from faster delivery times arising
from the completion of the track maintenance work in September 1999, which led
to an easing of congestion and increased capacity. Coal accounted for 21.8% of
carload revenues during 1999 compared with 21.5% for 1998.

Chemicals and Petroleum. During 1999, chemical and petroleum revenues
declined $10.8 million, or 7.5%, compared with 1998, primarily as a result of
significant declines in miscellaneous chemical and soda ash revenues.
Miscellaneous chemical revenues declined $4.1 million due, in part, to the
expiration in late 1998 of the emergency service order in the Houston area
related to the UP/SP merger congestion, as well as a continuing decline in
demand because of domestic and international chemical market conditions and
competitive pricing pressures. Soda ash revenues fell 37% year to

year because of a decrease in export shipments due to a competitive
disadvantage to another carrier. Also contributing to the decline were lower
plastic and petroleum revenues, which were impacted by competitive market
pricing and lower demand. Chemical and petroleum products accounted for 24.7%
of total 1999 carload revenues compared with 26.2% for 1998.

Paper and Forest. For the year ended December 31, 1999, paper and forest
product revenues decreased $5.3 million, or 4.8%, compared with 1998. An
overall weakness in the paper, lumber and related chemical markets led to
volume declines in pulp/paper, scrap paper, and pulpwood, logs and chips.
Paper and forest traffic comprised 19.6% of carload revenues during 1999
compared to 20.1% in 1998.

Agricultural and Mineral. Agricultural and mineral product revenues for
1999 decreased $6.9 million, or 5.4%, compared to 1998. Metal product revenues
declined $5.8 million or 28.7% in 1999 compared to 1998, driven primarily by
lower demand within the domestic oil production market and lower demand for
oil exploration drill pipe. Revenue declines in export grain, food and related
products, non-metallic ores and stone, clay and glass products were partially
offset by an increase in domestic grain revenues. Declines in export grain
resulted primarily from competitive pricing and changes in length of haul.
Declines in food products, non-metallic ores and stone, clay and glass
products were primarily attributable to demand-related volume declines, and
changes in traffic mix and length of haul. Improvements in domestic grain
revenues were driven by higher corn shipments to meet the demands of the feed
mills located on KCSR's rail lines; however, during fourth quarter 1999,
domestic grain revenues declined approximately $1 million compared to fourth
quarter 1998 because of a loss of market share due to a rail line build-in by
UP to a feed mill serviced by KCSR. Agricultural and mineral products
accounted for 22.6% of carload revenues in 1999 compared with 23.4% in 1998.

Intermodal and Automotive. Intermodal and automotive revenues for 1999
increased $12.5 million, or 26.0%, compared to 1998 revenues primarily due to
a $7.7 million increase in automotive revenue in 1999. The increase in
automotive traffic is due to the CN/IC strategic alliance on KCSR and Norfolk
Southern traffic forwarded to Gateway Western. Additionally, intermodal units
shipped increased approximately 20.4% year over year, partially offset by a
decrease in revenue per unit shipped. All of the 1999 intermodal revenue
growth is attributable to container shipments, which have a lower rate per
unit shipped than trailers. As a result revenues per intermodal unit shipped
have declined. Container movements, however, have more favorable profit
margins due to their lower inherent cost structure compared to trailers.
Approximately $2.5 million of the intermodal growth was related to CN/IC
alliance traffic. Intermodal and automotive revenues accounted for 11.3% of
carload revenues in 1999 compared with 8.8% in 1998.

Costs and Expenses

For the year ended December 31, 1999, KCSR/Gateway Western's costs and
expenses increased $40.0 million (8.4%) versus comparable 1998, primarily as a
result of increases in salaries, wages and related fringe benefits, fuel
costs, car hire, and purchased services, partially offset by a decrease in
operating leases and material and supplies expense. A significant portion of
the cost and expenses increase ($12.1 million) was comprised of unusual costs
and expenses recorded during fourth quarter 1999 relating to employee
separations, labor and personal injury related costs, write-off of costs
associated with the Geismar project and costs associated with the closure of
an intermodal facility. The remainder of the increase resulted primarily from
system congestion and capacity issues arising from track maintenance on the
north-south corridor, which began in second quarter 1999 and was completed at
the end of the third quarter 1999. Also contributing to capacity and
congestion problems was the implementation of a new dispatching system,
turnover in certain experienced operations management positions, unreliable
and insufficient locomotive power, congestion arising from eastern rail
carriers, and several significant derailments.

Salaries, Wages and Benefits. Salaries, wages and benefits expense for the
year ended December 31, 1999 increased $14.9 million versus comparable 1998,
an increase of 8.1%. This increase includes $3.0 million resulting from
certain unusual costs and expenses including employee separations and union
labor-related issues. The remaining increase was primarily attributable to the
congestion and capacity issues, which resulted in the need for additional
crews as well as overtime hours.

Fuel. For the year ended December 31, 1999, fuel expense increased
approximately $0.7 million, or 2.1%, compared to 1998, as a result of a 1.0%
increase in fuel usage coupled with a 1.0% increase in the average fuel price
per gallon. In 1999, fuel costs represented approximately 6.7% of total
operating expenses compared to 7.1% in 1998.

Purchased Services. For the year ended December 31, 1999, purchased
services expense increased $7.1 million, or 15.9%, compared to the year ended
December 31, 1998, primarily as a result of short-term locomotive needs
(rents, maintenance) arising from the congestion and capacity problems
discussed above.

Car Hire. For the year ended December 31, 1999, expenses for car hire
payable, net of receivables, increased $9.9 million over 1998. A portion of
the increase in car hire expense was attributable to congestion-related
issues, resulting in higher payables to other railroads because more foreign
cars were on KCSR's system for a longer period. This congestion also affected
car hire receivables as fewer KCSR cars and trailers were being utilized by
other railroads. The remaining increase in car hire expense resulted from a
change in equipment utilization. Similar to 1998, for certain equipment, KCSR
continued its transition to utilization leases from fixed leases. The cost of
utilization leases are based upon usage or utilization of the asset whereas
fixed leases are reflected as costs regardless of usage. Costs for utilization
leases are recorded as car hire expense, whereas fixed lease costs are
recorded as operating lease expense. Additionally, as certain fixed leases
expire, KCSR is electing to use more foreign cars rather than renew the
leases. A portion of the increase in car hire costs was offset by a decrease
in related operating lease expenses as a result of these changes in equipment
utilization.

Casualties and Insurance. For the year ended December 31, 1999, casualties
and insurance expense increased $1.5 million compared with the year ended
December 31, 1998. This increase reflects higher derailment related expenses
when compared to 1998, while overall personal injury-related costs were
essentially flat with the prior year. During first quarter 1999 Gateway
Western experienced a $1.4 million derailment, which is unusually large given
Gateway Western's prior operating history.

Operating Leases. For the year ended December 31, 1999, operating lease
expense decreased $3.5 million, or 6.5% compared to the year ended December
31, 1998, as a result of a change in equipment utilization as discussed above
regarding car hire expense.

Depreciation and Amortization. Depreciation and amortization expense in
1999 declined slightly (1%) compared to 1998. This slight decline results from
the retirement of certain operating equipment. As these assets fully
depreciate and are retired, they are being replaced, as necessary, with
equipment under operating leases. This decline was partially offset by
increased depreciation from property additions.

Operating Income and Operating Ratio. Operating income for the year ended
December 31, 1999 decreased $50.4 million (40.9%) to $72.9 million. This
decline in operating income resulted from a 1.7% decline in revenues coupled
with a 8.5% increase in operating expenses. Exclusive of $12.1 million of
unusual operating costs and expenses, operating income declined $38.3 million,
resulting in an operating ratio of 85.2% for the year ended December 31, 1999
compared to 79.2% for 1998.

Although the operating ratio for 1999 was disappointing, our objective, on a
long-term basis, is to maintain the operating ratio below 80%, despite the
substantial use of lease financing for locomotives and rolling stock.

Year Ended December 31, 1998 Compared with the Year Ended December 31, 1997

Income from Continuing Operations. Income from continuing operations
increased $170.1 million to $38.0 million for the year ended December 31,
1998, primarily due to the 1997 restructuring, asset impairment and other
charges described below.

Revenues. The increase in 1998 revenues, which grew $40.3 million, or 7.0%,
resulted primarily from a 6.5% increase in revenues at KCSR/Gateway Western.

Operating Expenses. Operating expenses decreased $168.8 million during the
year ended December 31, 1998 compared with the year ended December 31, 1997,
primarily as a result of the 1997 restructuring, asset impairment and other
charges discussed below. Exclusive of these charges, operating expenses
increased $9.2 million year to year primarily as a result of revenue related
volume increases partially offset by effective cost controls.

1997 Restructuring, Asset Impairment and Other Charges. In connection with
KCSI's review of its accounts in accordance with established accounting
policies for the year ended December 31, 1997, as well as a change in KCSI's
methodology for evaluating the recoverability of goodwill during 1997 (as set
forth in Note 2 to the consolidated financial statements), $178.0 million of
restructuring, asset impairment and other charges were recorded during fourth
quarter 1997. After consideration of related tax effects, our charges reduced
our income from continuing operations by $141.9 million. The charges included:

. A $91.3 million impairment of goodwill associated with KCSR's 1993
acquisition of MidSouth Corporation ("MidSouth"). In response to the
changing competitive and business environment in the rail industry, in
1997 we revised our accounting methodology for evaluating the
recoverability of intangibles from a business unit approach to analyzing
each of our significant investment components. Based on this analysis,
the remaining purchase price in excess of fair value of the MidSouth
assets acquired was not recoverable.

. A $38.5 million charge representing a write-down of long-lived assets
held for disposal. Certain branch lines on the MidSouth route and certain
non-operating real estate were designated for sale. During 1998, one of
the branch lines was sold for a pretax gain (after giving effect to the
write-off) of approximately $2.9 million. In the first quarter of 2000,
the other branch line was sold for a minimal pretax gain. A potential
buyer has been identified for the non-operating real estate and we are
currently negotiating this transaction.

. Approximately $27.1 million in liabilities related to the termination of
the union productivity fund and employee separations. The union
productivity fund was established in connection with prior collective
bargaining agreements that required KCSR to pay employees when reduced
crew levels were used. The termination of this fund resulted in a
reduction of salaries and wages expense for the year ended December 31,
1998 of approximately $4.8 million. During 1998, approximately $23.1
million in cash payments made to employees as a result of the termination
of the fund reduced this liability and approximately $2.5 million of the
liability was reduced based primarily on changes in the estimate of
claims made relating to the union productivity fund. During 1999,
approximately $1.1 million of cash payments were made relating to the
union productivity fund and employee separations, leaving a liability of
approximately $0.4 million at December 31, 1999.

. A $9.2 million impairment of long-lived assets at Global Terminaling
Services, Inc. (now known as PABTEX, L.P.), our indirect wholly-owned
subsidiary, as a result of continued operating losses and a decline in
its customer base.

. Approximately $11.9 million of other charges related to leases, contracts
and other costs. Based on a review of our assets and liabilities, certain
charges were recorded to reflect recoverability and/or obligation as of
December 31, 1997. During 1999 and 1998, approximately $2.2 and
$6.6 million, respectively, in cash payments were made leaving
approximately $1.8 million accrued at December 31, 1999.

Interest Expense and Other, net. Interest expense for the year ended
December 31, 1998 increased $6.3 million, or 11.8%, to $59.6 million. This
increase resulted from the inclusion of a full year's interest associated with
the debt related to our investment in Grupo TFM, partially offset by a
decrease in average debt balances due to net repayments and a slight decrease
in interest rates relating to the lines of credit. Additionally during 1997,
interest of $7.4 million was capitalized as part of the investment in Grupo
TFM until operations commenced (June 23, 1997). Other, net increased $6.2
million to $9.4 million for the year ended December 31, 1998. Included in this
increase is a gain of $2.8 million of interest related to a tax refund in
1998.

Income Tax Expense. Income taxes increased $45.7 million from a 1997
benefit of $18.6 million to a $27.1 million expense for the year ended
December 31, 1998. This fluctuation resulted primarily because of the
restructuring, asset impairment and other charges in 1997. Exclusive of the
effect of these charges, income tax expense from year to year increased by
$9.6 million, or 54.8%, primarily due to higher operating income in 1998.

Unconsolidated Affiliates. For the year ended December 31, 1998, we
recorded equity in net losses of $2.9 million from unconsolidated affiliates
compared to equity in net losses of $9.7 million in 1997. The majority of this
improvement related to the operations of Grupo TFM. In 1998, equity in net
losses for our investment in Grupo TFM were $3.2 million compared to equity in
net losses of $12.9 million in 1997 (for the period from June 23, 1997 to
December 31, 1997). This improvement was primarily attributable to higher
revenues and operating income at Grupo TFM, coupled with a higher tax benefit
associated with the devaluation of the peso (on a U.S. GAAP accounting basis)
and one-time impact of the write-off of a $10 million bridge loan fee in 1997.
For the year ended December 31, 1998, Grupo TFM revenues improved to $431.3
million from $205.8 million for the initial period of operations (June 23,
1997--December 31, 1997) with average monthly revenues increasing
approximately 8%. In addition, during 1998 Grupo TFM management was able to
successfully implement cost reduction strategies while continuing to increase
revenues, thus improving operating income. Most notably, salaries and wages
declined due to headcount reductions while locomotive fuel expense decreased
due to favorable fuel prices. Evidence of these improvements was reflected in
TFM's 1998 operating ratio, which improved to 82.2% from approximately 94% for
1997.

Equity in net losses from Mexrail was $2.0 million in 1998 compared with
equity in net earnings of $0.9 million in 1997. Tex-Mex revenues increased
during the first three quarters of 1998 as a result of an emergency service
order imposed by the STB in the Houston, Texas area relating to 1997 and 1998
UP service issues; however, expenses associated with accommodating the
increase in traffic and congestion-related problems of the UP system offset
this revenue growth.

Combined KCSR/Gateway Western Operating Results. The following provides a
comparative analysis of the revenue and expense components of KCSR/Gateway
Western operating companies for the year ended December 31, 1998 compared to
the year ended December 31, 1997.

Revenues

KCSR/Gateway Western revenues for 1998 were $596.8 million, a $36.3 million
increase over 1997 as a result of higher revenues in all major commodity
groups. Coal revenues in 1998 increased $15.0 million, or 14.6%, compared to
1997 while intermodal and automotive revenues were 10.6% higher. General
commodities were led by an increase of $9.9 million or 8.3% in agricultural
and mineral

products revenues. A portion of the increased revenues relate to traffic with
Mexico, which increased approximately 118% during 1998, resulting in an
additional $10 million of revenue. Also, increased carloads resulting from the
CN/IC alliance contributed to the higher revenues.

Coal. Coal movements generated $117.9 million of revenue during 1998, a
14.6% increase over 1997. This 1998 increase resulted from higher unit coal
traffic (increase in carloads of 15%) arising from several factors. First, in
1998, unseasonably warm weather resulted in a higher demand for electric power
in certain regions served by the KCSR and several utility customers requested
more coal to handle this increased demand. Additionally, in order to replenish
inventory levels depleted from this excess demand, several locations increased
their coal shipments. Second, during 1997, unit coal revenues were negatively
affected by unplanned outages (primarily during first and second quarters) at
several utilities served by KCSR, and first quarter weather problems which
affected carriers and the mines originating the coal. During 1998, the level
of unplanned outages declined and, thus, more unit coal trains were delivered
to customers. Additionally, although KCSR experienced certain weather-related
slow-downs due to flooding during fourth quarter 1998, it did not
significantly impact coal revenues. Third, 1998 results reflected a full year
of revenues for a utility customer not served by KCSR until after the first
quarter of 1997. Coal accounted for 21.5% of carload revenues during 1998
compared with 20.2% for 1997.

Chemicals and Petroleum. Chemical and petroleum revenues increased $6.0
million to $143.5 million in 1998 compared to 1997. Increases in miscellaneous
chemicals and soda ash carloads, coupled with higher revenues per carload for
plastic and petroleum products, were offset by lower carloads for plastics,
petroleum products and petroleum coke. The higher revenues per carload for
plastics and petroleum products resulted from a combination of rate increases
and length of hauls, while the increased miscellaneous chemical and soda ash
carloads arose from the strength of these markets in 1998. Shipments of
plastic products decreased as a result of our reduced emphasis on low margin
business, while petroleum and petroleum coke carload declines were a result of
economic turmoil overseas (primarily Asia) affecting the export market.
Chemical and petroleum products accounted for 26.2% of total 1998 carload
revenues compared with 27.0% for 1997.

Paper and Forest. Paper and forest product revenues increased $3.0 million
to $110.3 million for 1998, primarily as a result of increased carloads and
revenues per carload for pulp, paper and lumber products, offset by a
reduction in pulpwood chip shipments. Improved lumber shipments in 1998
resulted from the strong home building and remodeling market, while pulp/paper
increases were primarily a result of paper mill expansions for several
customers served by KCSR. Although paper and forest revenues increased for
1998, fourth quarter carloads and revenues decreased compared with fourth
quarter of 1997. Paper and forest traffic comprised 20.1% of carload revenues
during 1998 compared to 21.0% in 1997.

Agricultural and Mineral. Agricultural and mineral product revenues for the
year ended December 31, 1998 were $128.5 million, an increase of $9.9 million,
or 8.3%, compared to 1997. Increased carloads for most agricultural and
mineral products, including domestic and export grain, food, nonmetallic ores,
cement, glass and stone contributed to the increase. Higher revenues per
carload, most notably in export grain and food products, were partially offset
by a reduction in revenues per carload from domestic grain movements. Changes
in revenues per carload were primarily due to mix of traffic and changes in
the length of haul. A portion of the volume increase was attributable to
increased traffic flow with Mexico. Agricultural and mineral products
comprised 23.4% of carload revenues in 1998 compared with 23.3% in 1997.

Intermodal and Automotive. During 1998, revenues increased $4.6 million, or
10.6%, over 1997 primarily as a result of higher intermodal unit shipments of
approximately 15% year over year, offset partially by a decrease in revenue
per unit. Almost all of the 15% intermodal volume growth related to
containers. As discussed above, container shipments have a lower rate per unit
shipped than trailers

and, as a result revenues per unit shipped declined. In addition, automotive
traffic was initiated in 1998 and resulted in approximately $1.3 million of
revenues. Intermodal and automotive revenues accounted for 8.8% of carload
revenues in 1998 compared with 8.5% in 1997.

Costs and Expenses

For the year ended December 31, 1998, KCSR/Gateway Western's costs and
expenses increased $2.2 million over comparable 1997 (exclusive of 1997
restructuring, asset impairment and other charges). Increases reported in
materials and supplies, car hire, purchased services, and casualties and
insurance, were largely offset by decreased salaries, wages and benefits, fuel
costs and depreciation and amortization. Fuel costs decreased due to lower
fuel prices partially offset by higher usage.

Salaries, Wages and Benefits. For the year ended December 31, 1998,
salaries, wages and benefits expense decreased $4.8 million compared to 1997,
mostly because of the termination of a union productivity fund in December
1997, resulting in the elimination of pay relating to reduced crews.

Fuel. KCSR/Gateway Western locomotive fuel usage represented 7.1% of total
operating expenses in 1998. In 1998, fuel costs declined $3.2 million, or
8.7%, arising from a 15% decrease in average fuel cost per gallon (primarily
due to market driven factors) partially offset by an increase in fuel usage of
9%. See "--Other--Financial Instruments and Purchase Commitments" for further
information.

Purchased Services. Purchased services expenses were approximately $3.1
million higher in 1998 compared to 1997, primarily due to short-term
locomotive requirements.

Car Hire. Expenses for car hire payable, net of receivables increased $6.8
million for the year ended December 31, 1998 compared to 1997. This increase
in net expense resulted from a change in equipment utilization as discussed
above (i.e. switch from fixed leases to utilization leases; use of more
foreign cars versus renewal of lease), increased carloads, track congestion
(primarily weather-related in third and fourth quarter) and decreased amounts
of car hire receivable, primarily due to the easing of the UP congestion
prevalent in 1997.

Casualties and Insurance. Casualties and insurance expense increased $4.8
million in 1998, or 19.8%, over 1997, primarily as a result of an increase in
derailment related costs experienced during the latter half of 1998, as well
as an increase in personal injury related expenses.

Operating Leases. Operating lease costs declined $4.2 million or 7.2% in
1998 compared to 1997 as a result of a change in equipment utilization as
discussed above regarding car hire expense.

Depreciation and Amortization. For the year ended December 31, 1998,
KCSR/Gateway Western depreciation and amortization expense declined $3.9
million, or 6.9%, to $52.9 million. This decline resulted primarily from the
reduction of amortization and depreciation expense of approximately $5.6
million associated with the impairment of goodwill, as well as certain branch
lines held for sale, recorded during December 1997, the effect of which was
not realized until 1998. This decline was partially offset by increased
depreciation from property additions.

Operating Income and Operating Ratio. Exclusive of 1997 restructuring,
asset impairment and other charges, KCSR/Gateway Western's operating income
increased $34.1 million, or 38.2%, to $123.3 million in 1998 from $89.2
million in 1997. This improved operating income, which was driven by increased
revenues and the containment of operating expenses, resulted in a combined
KCSR/Gateway Western 1998 operating ratio of 79.2% compared with 83.0% in 1997
(exclusive of restructuring, asset impairment and other charges).

Liquidity and Capital Resources

Summary cash flow data is as follows:

Nine Months
Year Ended December Ended
31, September 30,
----------------------- --------------
1997 1998 1999 1999 2000
------- ------ ------ ------ ------
(dollars in millions)

Cash flows provided by (used for):
Operating activities................ $ 185.4 $141.6 $178.0 $165.4 $ 52.3
Investing activities................ (364.7) (61.5) (97.2) (54.1) (74.5)
Financing activities................ 184.1 (79.4) (74.5) (48.5) 40.5
------- ------ ------ ------ ------
Net increase in cash and equivalents.. 4.8 0.7 6.3 62.8 18.3
Cash and equivalents at beginning of
period............................... 0.1 4.9 5.6 5.6 11.9
------- ------ ------ ------ ------
Cash and equivalents at end of period. $ 4.9 $ 5.6 $ 11.9 $ 68.4 $ 30.2
======= ====== ====== ====== ======

During the year ended December 31, 1999, our consolidated cash position
increased $6.3 million from December 31, 1998, resulting primarily from income
from continuing operations and changes in working capital balances, partially
offset by property acquisitions and net debt repayments. During the nine
months ended September 30, 2000, our consolidated cash position increased
$18.3 million from December 31, 1999. This increase resulted primarily from
income from continuing operations, proceeds from the issuance of long-term
debt and the issuance of common stock under employee stock plans, partially
offset by changes in working capital balances, property acquisitions and debt
issuance costs.

Operating Cash Flows. Our cash flow from operations has historically been
positive and sufficient to fund operations, KCSR/Gateway Western roadway
capital improvements, other capital improvements and debt service. External
sources of cash (principally bank debt, public debt and sales of investments)
have typically been used to fund acquisitions, new investments, and equipment
additions.

The following table summarizes consolidated operating cash flow
information. Certain reclassifications have been made to prior year
information to conform to current year presentation.

Nine Months
Ended September
Year Ended December 31, 30,
------------------------- ----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(dollars in millions)

Cash inflows (outflows):
Net income (loss)............... $ (14.1) $ 190.2 $ 323.3 $ 232.0 $ 376.9
Income from discontinued
operations..................... (118.0) (152.2) (313.1) (214.6) (363.8)
Depreciation and amortization... 62.1 56.7 56.9 43.0 42.4
Equity in undistributed
(earnings) losses.............. 9.7 7.9 (5.2) (8.3) (22.1)
Restructuring, asset impairment
and other charges.............. 178.0 -- -- -- --
Deferred income taxes........... (11.9) 35.5 9.8 19.7 23.4
Transfer from Stilwell.......... 40.5 4.2 56.6 56.6 --
Gains on sales of assets........ (1.9) (6.5) (0.7) (0.4) (3.4)
Extraordinary items, net of tax. -- -- -- -- 7.5
Tax benefit realized upon
exercise of stock options...... 6.3 12.2 6.4 6.3 9.0
Change in working capital items. 39.7 (8.6) 49.7 34.1 (24.6)
Other........................... (5.0) 2.2 (5.7) (3.0) 7.0
------- ------- ------- ------- -------
Net operating cash flow....... $ 185.4 $ 141.6 $ 178.0 $ 165.4 $ 52.3
======= ======= ======= ======= =======

Net operating cash inflows were $165.4 million and $52.3 million for the
nine-month periods ended September 30, 1999 and 2000, respectively. This
$113.1 million decline in operating cash flows was mostly attributable to the
1999 receipt of a $56.6 million transfer from Stilwell. Also contributing to
the decline was the payment during 2000 of certain accounts payable and
accrued liabilities, including accrued interest of approximately $11.4 million
related to our indebtedness, as well as the decline in the contribution of
domestic operations to income from continuing operations. Net operating cash
inflows for the year ended December 31, 1999 were $178.0 million compared to
net operating cash inflows of $141.6 million in the same 1998 period. This
$36.4 million improvement in 1999 operating cash flow was chiefly attributable
to an increase in the transfer from Stilwell somewhat offset by lower 1999
income from continuing operations and lower deferred taxes. Also contributing
was an increase in current liabilities resulting from infrastructure growth
and a 1998 payment of approximately $23 million related to the KCSR union
productivity fund termination.

Operating cash inflows in 1998 decreased by approximately $43.8 million
from 1997. This decrease was largely attributable to a decline in the Stilwell
transfer coupled with the timing of working capital items offset by higher
income from continuing operations (approximately $28.2 million exclusive of
1997 restructuring, asset impairment and other charges) and deferred tax
expense (due to benefits recorded in 1997 in connection with restructuring,
asset impairment and other charges). The increase was partially offset by the
first quarter 1998 KCSR payment with respect to the productivity fund
liability, lower interest payable as a result of reduced indebtedness during
1998 and declines in contract allowances and prepaid freight charges due other
railroads.

Investing Cash Flows. Net investing cash outflows were $54.1 million and
$74.5 million during the nine months ended September 30, 1999 and 2000,
respectively. This difference results primarily from higher year to date 2000
property acquisitions and higher investments in affiliates, partially offset
by an increase in funds received from property dispositions. Additionally,
during the nine months ended September 30, 1999, Stilwell repaid $16.6 million
of intercompany debt to us. Net investing cash outflows were $97.2 million for
the year ended December 31, 1999 compared to $61.5 million of net investing
cash outflows during 1998. This $35.7 million difference for 1999 compared to
1998 results primarily from higher capital expenditures.

Net investing cash outflows were $61.5 million during 1998 versus $364.7
million in 1997. This $303.2 million difference in cash outflows results
mostly from a decrease in funds used for investments in affiliates ($298
million invested in Grupo TFM in 1997).

Cash was used for property acquisitions of $76.8, $69.9, and $106.2 million
for the years ended December 31, 1997, 1998 and 1999 and $35.2 and $54.5 for
the six-month periods ended June 30, 1999 and 2000, respectively. Cash was
(used for) provided by investments in and loans with affiliates of ($295.9),
($0.7) and $12.7 million for the years ended December 31, 1997, 1998 and 1999
and $15.3 and ($3.8) million for the nine month periods ended September 30,
1999 and 2000, respectively.

Generally, operating cash flows and borrowings under lines of credit have
been used to finance property acquisitions and investments in and loans with
affiliates.

Financing Cash Flows. Financing cash flows were as follows:

. Borrowings of $339.5 million, $151.7 million and $21.8 million for the
years ended December 31, 1997, 1998 and 1999 and $21.8 million and
$1,017.0 million for the nine months ended September 30, 1999 and 2000,
respectively. Proceeds during the first nine months of 2000 were used for
refinancing of debt in January 2000 and September 2000. Proceeds from the
issuance of debt in 1999 were used for stock repurchases. During 1998,
proceeds from borrowings under existing lines of credit were used to
repay $100 million of 5.75% Notes which were due on July 1, 1998. Other
1998 borrowings were used to fund the KCSR union productivity fund
termination ($23 million), and to provide for working capital needs ($5
million). Debt proceeds in 1997 were used to fund the $298 million Grupo
TFM capital contribution.

. Repayment of indebtedness in the amounts of $110.1 million, $232.0
million and $97.5 million in 1997, 1998 and 1999, respectively, and $66.7
million and $969.6 million for the nine-month periods ended September 30,
1999 and 2000, respectively. Repayment of indebtedness is generally
funded through operating cash flows. In 1998, however, repayment of the
$100 million of notes due as described above were funded under then-
existing lines of credit. Repayments in 1999 were partially funded
through a transfer from Stilwell, while 2000 repayments also include the
refinancing of KCSI debt in January 2000.

. Payment of debt issuance costs of $4.2 million in 1999 and $17.6 million
for the nine months ended September 30, 2000.

. Repurchases of KCSI common stock during 1997 ($50.2 million) and 1999
($24.6 million), which were funded with borrowings under existing lines
of credit (as noted above) and internally generated cash flows.

. Proceeds from stock plans of KCSI of $20.3 million, $17.9 million and
$37.0 million in 1997, 1998 and 1999, respectively and $32.2 million and
$17.8 million for the nine-month periods ended September 30, 1999 and
2000, respectively.

. Payment of cash dividends by KCSI of $15.2 million, $17.8 million and
$17.6 million in 1997, 1998 and 1999, respectively and $17.8 million and
$4.8 million for the nine-month periods ended September 30, 1999 and
2000, respectively.

Capital Structure

Capital Requirements. Capital improvements for KCSR/Gateway Western roadway
track structure have historically been funded with cash flows from operations.
We have traditionally used Equipment Trust Certificates for major purchases of
locomotives and rolling stock, while using internally generated cash flows or
leasing for other equipment. Through our Southern Capital joint venture, we
have the ability to finance railroad equipment, and therefore, have
increasingly used lease-financing alternatives for our locomotives and rolling
stock. Southern Capital was used to finance the lease of the 50 new GE 4400 AC
locomotives in November 1999. These locomotives are being financed by KCSR
under operating leases with Southern Capital.

Capital programs are primarily financed through internally generated cash
flows. These internally generated cash flows were used to finance capital
expenditures (property acquisitions) in 1997 ($76.8 million), 1998 ($69.9
million), 1999 ($106.2 million) and for the first nine months of 2000 ($79.0
million). Internally generated cash flows and borrowings under existing lines
of credit are expected to be used to fund our capital programs for 2000 and
2001, currently estimated at approximately $100 million and $78 million,
respectively, which include the following major items: maintenance of way;
maintenance of equipment; transportation; information technology;
administrative; marketing; and development of the Richards-Gebaur intermodal
yard. In general, we estimate that approximately two-thirds of our capital
expenditures are maintenance related.

KCSR Maintenance. KCSR, like all railroads, is required to maintain its own
property infrastructure. Portions of roadway and equipment maintenance costs
are capitalized and other portions expensed (as components of material and
supplies, purchased services and others), as appropriate. Maintenance and
capital improvement programs are in conformity with the FRA's track standards
and are accounted for in accordance with applicable regulatory accounting
rules. Management expects to continue to fund roadway and equipment
maintenance expenditures with internally generated cash flows. Maintenance
expenses (exclusive of amounts capitalized) for way and

structure (roadbed, rail, ties, bridges, etc.) and equipment (locomotives and
rail cars) for the three years ended December 31, 1999, as a percentage of
KCSR revenues are as follows:

KCSR Maintenance Expenses
-----------------------------------
Way and Structure Equipment
----------------- -----------------
Percent of Percent of
Amount Revenue Amount Revenue
------ ---------- ------ ----------
(dollars in millions)

1997*.................................. $45.3 8.8% $41.9 8.1%
1998................................... 39.9 7.3% 45.2 8.2%
1999................................... 36.7 6.7% 48.2 8.8%

- --------
*Excludes restructuring, asset impairment and other charges.

Credit Agreements. In January 2000, in conjunction with the re-
capitalization of KCSI's debt structure, we entered into new credit
agreements. See "Description of KCS Credit Facilities and Other Indebtedness."

Overall Liquidity. We believe, based upon current expectations, our
operating cash flows and available financing resources are sufficient to fund
working capital and other requirements through 2001.

We have financing available through our revolving line of credit with a
maximum borrowing amount of $100 million (on January 2, 2001 the line of
credit was reduced from $150 million to $100 million). As of September 30,
2000, $145 million was available under this revolving line of credit. As a
result of such reduction, $95 million is currently available under this
revolving line of credit. Our credit agreements contain, among other
provisions, various financial covenants. We were in compliance with these
various provisions, including the financial covenants, as of September 30,
2000. Because of certain financial covenants contained in the credit
agreements, however, maximum utilization of our available lines of credit may
be restricted.

We also filed a Universal Shelf Registration Statement in September 1993,
as amended in April 1996, for the offering of up to $500 million in aggregate
amount of securities. The SEC declared that registration statement effective
on April 22, 1996; however, no securities have been issued. We have not
engaged an underwriter for these securities and have no current plans to issue
securities under that registration statement. Subject to any restrictions
under the KCS Credit Facilities, we expect that any net proceeds from the sale
of securities under that registration statement would be added to our general
funds and used principally for general corporate purposes, including working
capital, capital expenditures and acquisitions of or investments in businesses
and assets.

We have a current liability of $14.2 million relating to the judgment from
the Supreme Court of Louisiana in the Duncan case as discussed in "--Recent
Developments." We are currently considering the options of satisfying the
judgment or seeking relief in the Supreme Court of the United States. Through
our available cash balances and credit facilities along with $7.0 million in
insurance coverage related to this liability, we believe we have the necessary
liquidity to meet this obligation.

In connection with our debt restructuring in January 2000 (see "Description
of KCS Credit Facilities and Other Indebtedness") we entered into senior
secured credit facilities providing financing of up to $750 million, including
a $200 million term loan due January 11, 2001 that was repaid with the
proceeds from the private offering of the Outstanding Notes. The Outstanding
Notes bear a fixed annual interest rate of 9.5% and are due on October 1,
2008.

In January 2000, KCSI borrowed $125 million under a $200 million 364-day
senior unsecured competitive advance/revolving credit facility to retire other
debt obligations. Stilwell assumed this credit facility and repaid the $125
million in March 2000. Upon such assumption, KCSI was released from all
obligations, and Stilwell became the sole obligor, under this credit facility.
Our indebtedness decreased as a result of the assumption of this indebtedness
by Stilwell.

As discussed below in "Business--Significant Investments--Grupo TFM," TMM
and we, or either TMM or we, could be required to purchase the Mexican
government's interest in TFM. However, this provision is not exercisable prior
to October 31, 2003. Also, on or prior to July 31, 2002, the Mexican
government's interest in Grupo TFM may be called by TMM, an affiliate of TMM,
and us, exercisable at the original amount (in U.S. dollars) paid by the
Mexican government plus interest based on one-year U.S. Treasury securities.

As discussed previously, in preparation for the Spin-off, KCSI completed a
re-capitalization of its debt structure in January 2000. As part of the re-
capitalization, we refinanced our public debt and revolving credit facilities.
We believe that the new capital structure provides the necessary liquidity to
meet anticipated operating, capital and debt service requirements and other
commitments for the remainder of 2000 and 2001.

Assuming the Spin-off had occurred as of December 31, 1999, our ratio of
debt to total capitalization was 51.7% at September 30, 2000 compared to 61.9%
at December 31, 1999.

We anticipate that our ratio of debt to total capitalization will remain
flat through 2001.

Other

Significant Customer

SWEPCO is our only customer which accounted for more than 10% of revenues
during the years ended December 31, 1997, 1998 and 1999 and the nine months
ended September 30, 1999 and 2000, respectively. Revenues related to SWEPCO
during these periods were $67.0 million, $78.0 million, $75.9 million, $59.2
million and $59.4 million, respectively.

Financial Instruments and Purchase Commitments

Fuel costs are affected by traffic levels, efficiency of operations and
equipment, and petroleum market conditions. Controlling fuel expenses is a
concern of management, and expense savings remains a top priority. To that
end, from time to time KCSR enters into forward diesel fuel purchase
commitments and hedge transactions (fuel swaps or caps) as a means of fixing
future fuel prices. Hedge transactions are correlated to market benchmarks and
hedge positions are monitored to ensure that they will not exceed actual fuel
requirements in any period. There were no fuel swap or cap transactions during
1997 and minimal purchase commitments were negotiated for 1997. However, at
the end of 1997, KCSR had purchase commitments for approximately 27% of
expected 1998 diesel fuel usage, as well as fuel swaps for approximately 37%
of expected 1998 usage. As a result of actual fuel prices remaining below both
the purchase commitment price and the swap price during 1998, KCSR's fuel
expense was approximately $4.0 million higher. The purchase commitments
resulted in a higher cost of approximately $1.7 million, while KCSR made
payments of approximately $2.3 million related to the 1998 fuel swap
transactions. At December 31, 1998, KCSR had purchase commitments and fuel
swap transactions for approximately 32% and 16%, respectively, of expected
1999 diesel fuel usage. In 1999, KCSR saved approximately $0.6 million as a
result of these purchase commitments. The fuel swap transactions resulted in
higher fuel expense of approximately $1 million.

At December 31, 1999, KCSR had no outstanding purchase commitments and had
entered into two diesel fuel cap transactions for a total of six million
gallons (approximately 10% of expected 2000 usage) at a cap price of $0.60 per
gallon. These hedging instruments expired on June 30, 2000 and March 31, 2000.
We received approximately $0.8 million during the nine months ended September
30, 2000 related to these diesel fuel cap transactions and recorded the
proceeds as a reduction of diesel fuel expenses. Currently, KCSR has
outstanding purchase commitments for approximately 12.6% of budgeted gallons
of fuel for 2001 at an average price of $0.71 per gallon. There are currently
no diesel fuel cap transactions.

Additionally, in accordance with the provision of the KCS Credit Facilities
requiring KCSR to manage its interest rate risk through hedging activity, in
first quarter 2000 KCSR entered into five separate interest rate cap
agreements for an aggregate notional amount of $200 million expiring on
various dates in 2002. The interest rate caps are linked to LIBOR. A total of
$100 million of the aggregate notional amount provides a cap on KCSR's
interest rate of 7.25% plus the applicable spread, while a total of $100
million limits the interest rate to 7% plus the applicable spread.
Counterparties to the interest rate cap agreements are major financial
institutions who also participate in the KCS Credit Facilities. We believe
that the risk of credit loss from counterparty non-performance is remote.

These transactions are intended to mitigate the impact of rising fuel
prices and interest rates and are recorded using hedge accounting policies as
set forth in the notes to the consolidated financial statements. In general,
KCSR enters into transactions such as those discussed above in limited
situations based on management's assessment of current market conditions and
perceived risks. Historically, KCSR has engaged in a limited number of such
transactions and their impact has been insignificant. However, we intend to
respond to evolving business and market conditions in order to manage risks
and exposures associated with our various operations, and in doing so, may
enter into transactions similar to those discussed above.

Foreign Exchange Matters

In connection with our investment in Grupo TFM (Mexico), matters arise with
respect to financial accounting and reporting for foreign currency
transactions and for translating foreign currency financial statements into
U.S. dollars. We follow the requirements outlined in Statement of Financial
Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS 52"), and
related authoritative guidance.

The purchase price paid by Grupo TFM for 80% of the common stock of TFM was
fixed in Mexican pesos; accordingly, we were exposed to fluctuations in the
U.S. dollar/Mexican peso exchange rate. In the event that the proceeds from
the various financing arrangements did not provide funds sufficient for Grupo
TFM to complete the purchase of TFM, we may have been required to make
additional capital contributions to Grupo TFM. Accordingly, in order to hedge
a portion of our exposure to fluctuations in the value of the Mexican peso
versus the U.S. dollar, we entered into two separate forward contracts to
purchase Mexican pesos--$98 million in February 1997 and $100 million in March
1997. In April 1997, we realized a $3.8 million pretax gain in connection with
these contracts. This gain was deferred and has been accounted for as a
component of our investment in Grupo TFM. These contracts were intended to
hedge only a portion of our exposure related to the final installment of the
purchase price and not any other transactions or balances.

Prior to January 1, 1999, Mexico's economy was classified as "highly
inflationary" as defined in SFAS 52. Accordingly, under the highly
inflationary accounting guidance in SFAS 52, the U.S. dollar was used as Grupo
TFM's functional currency, and any gains or losses from translating Grupo
TFM's financial statements into U.S. dollars were included in the
determination of its income (loss) from continuing operations. Equity earnings
(losses) from Grupo TFM included in our results of operations reflected our
share of such translation gains and losses.

Effective January 1, 1999, the SEC staff declared that Mexico should no
longer be considered a highly inflationary economy. Accordingly, we performed
an analysis under the guidance of SFAS 52 to determine whether the U.S. dollar
or the Mexican peso should be used as the functional currency for financial
accounting and reporting purposes for periods subsequent to December 31, 1998.
Based on the results of the analysis, we believe the U.S. dollar to be the
appropriate functional currency for our investment in Grupo TFM; therefore,
the financial accounting and reporting of the operating results of Grupo TFM
will remain consistent with prior periods.

Because we are required to report our equity in Grupo TFM earnings under
U.S. GAAP and Grupo TFM reports under International Accounting Standards,
fluctuations in deferred income tax calculations occur. The deferred income
tax calculations are significantly impacted by fluctuations in the relative
value of the Mexican peso versus the U.S. dollar and the rate of Mexican
inflation, and can result in significant variances in the amount of equity
earnings (losses) we report.

We continue to evaluate existing alternatives with respect to utilizing
foreign currency instruments to hedge our U.S. dollar investment in Grupo TFM
as market conditions change or exchange rates fluctuate. At each of the
periods ended September 30, 1999 and 2000 as well as December 31, 1998 and
1999, we had no outstanding foreign currency hedging instruments.

Litigation

We are involved as plaintiff or defendant in various legal actions arising
in the normal course of business. While the ultimate outcome of our various
legal proceedings cannot be predicted with certainty, we believe, after
consulting with legal counsel, that our litigation reserves are adequate and
that, except as disclosed in "Business--Legal Matters," these legal actions
currently are not material to our consolidated results of operations,
financial position or cash flows. For a further discussion of legal
proceedings, see "Business--Legal Matters."

Inflation

Inflation has not had a significant impact on our operations in the past
three years. Recent increases in fuel prices, however, have impacted our
operating results during 2000. During the three- year period ended December
31, 1999, locomotive fuel expenses represented an average of 7.2% of
KCSR/Gateway Western's combined total operating costs (exclusive of 1997
restructuring, asset impairment and other charges) compared to 9.4% of total
KCSR/Gateway Western operating costs in the first nine months of 2000.
Generally accepted accounting principles require the use of historical costs.
Replacement cost and related depreciation expense of our property would be
substantially higher than the historical costs reported. Any increase in
expenses from these fixed costs, coupled with variable cost increases due to
significant inflation, would be difficult to recover through price increases
given the competitive environments of our principal subsidiaries. See "--
Foreign Exchange Matters" above with respect to inflation in Mexico.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We utilize various financial instruments that entail certain inherent
market risks. These instruments have not been entered into for trading
purposes. The following information, together with information included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 12 to our consolidated financial statements in this
prospectus, describe the key aspects of certain financial instruments which
have market risk to us.

Interest Rate Sensitivity

Our floating-rate indebtedness totaled $278 million and $405 million at
December 31, 1999 and September 30, 2000 respectively. The KCS Credit
Facilities, comprised of different tranches and types of indebtedness, accrue
interest based on target interest indexes (e.g., LIBOR, federal funds rate,
etc.) plus an applicable spread, as set forth in the respective agreement. Due
to the high percentage of variable rate debt associated with the restructuring
of our debt, we are more sensitive to fluctuations in interest rates than in
recent years.

A hypothetical 100 basis points increase in each of the respective target
interest indexes would result in additional interest expense of approximately
$4 million on an annualized basis for the floating-rate instruments
outstanding as of September 30, 2000. Assuming the $750 million KCS Credit
Facilities had been entered into on January 1, 1999 and the full amount of
these facilities were borrowed on that date and remained outstanding
throughout the year, a 100 basis points increase in interest rates would have
resulted in additional interest expense of approximately $7 million in 1999.

Based upon the borrowing rates available to KCSI and its subsidiaries for
indebtedness with similar terms and average maturities the fair value of long-
term debt after consideration of the January 11, 2000 transaction was
approximately $689 million at September 30, 2000 and $766 million at December
31, 1999. The fair value of long-term debt was $867 million at December 31,
1998.

Commodity Price Sensitivity

KCSR has a program to hedge against fluctuations in the price of its diesel
fuel purchases. This program is primarily completed using various swap or cap
transactions. These transactions are typically based on the price of heating
oil #2, which we believe to produce a high correlation to the price of diesel
fuel. These transactions are generally settled monthly in cash with the
counterparty.

Additionally, from time to time, KCSR enters into forward purchase
commitments for diesel fuel as a means of securing volumes at competitive
prices. These contracts normally require KCSR to purchase defined quantities
of diesel fuel at prices established at the origination of the contract.

At December 31, 1999, we held fuel inventories for use in normal
operations. These inventories were not material to our overall financial
position.

See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Other--Financial Instruments and Purchase Commitments."

Foreign Exchange Sensitivity

We own an approximate 37% interest in Grupo TFM, incorporated in Mexico. In
connection with this investment, matters arise with respect to financial
accounting and reporting for foreign currency transactions and for translating
foreign currency financial statements into U.S. dollars. Therefore, we have
exposure to fluctuations in the value of the Mexican peso.

While not currently utilizing foreign currency instruments to hedge our
U.S. dollar investment in Grupo TFM, we continue to evaluate existing
alternatives as market conditions and exchange rates fluctuate.

RAILROAD INDUSTRY

Industry Overview

U.S. railroad companies are categorized by the STB into three types: Class
I, Class II (Regional) and Class III (Local). There are currently eight Class
I railroads in the United States, which can be further divided geographically
by eastern or western classification. The eastern railroads are CSX, Grand
Trunk Western (owned by CN), IC (owned by CN) and Norfolk Southern. The
western railroads include BNSF, KCSR, Soo Line Railroad Company (owned by CP)
and UP.

1999 Industry Highlights:

Number of Miles Freight Revenue
Railroad Classification Railroads Operated Employees ($ thousands)
- ----------------------- --------- -------- --------- ---------------

Class I (/1/)...................... 9 120,986 177,557 $32,680,081
Regional........................... 36 21,250 11,372 1,764,646
Local.............................. 510 28,422 12,454 1,448,508
--- ------- ------- -----------
Total.......................... 555 170,658 201,383 $35,893,235
=== ======= ======= ===========

- --------
(1) There are currently eight Class I railroads in the United States due to
the acquisition of the assets of Conrail by CSX and Norfolk Southern.

Class I railroads generated total operating revenues of $32.7 billion in
1999. Revenues are derived generally from the shipment of products under
negotiated contracts between suppliers and shippers and, to a lesser extent,
published tariff rates. The shipment of coal is the primary source of Class I
U.S. railroad revenues. The AAR estimates that in 1999, coal accounted for
43.7% of total Class I U.S. railroad volume in terms of tons originated and
21.8% of total Class I U.S. railroad carload revenues. The next largest
commodity source was chemicals and allied products, which the AAR estimates in
1999 accounted for 8.9% of total Class I U.S. railroad volume in terms of tons
originated and 13.0% of total Class I U.S. railroad carload revenues. The AAR
estimates that intermodal traffic accounted for 15 to 20% of total Class I
U.S. railroad carload revenues in 1999.

In 1999, Class I railroads accounted for approximately 71% of total U.S.
railroad mileage operated, approximately 88% of total U.S. railroad employees
and approximately 91% of total U.S. railroad freight revenue. In 1999, Class I
railroads had an estimated 40.3% share of the total U.S. intercity freight
traffic in terms of ton-miles and an estimated 25.3% of the total U.S.
intercity freight traffic in terms of tons carried. In terms of revenue,
railroads accounted for an estimated 10%, trucks accounted for an estimated
81%, and domestic air accounted for an estimated 5% of the U.S. intercity
commercial freight transportation market. Preliminary figures for 1999
indicate the following distribution of intercity freight traffic by
transportation mode:

Distribution of Intercity Freight Traffic in Terms of Ton-Miles:

Year Railroads Trucks Water Oil Pipelines Air
---- --------- ------ ----- ------------- ----

1994............................... 39.1% 27.8% 14.6% 18.1% 0.4%
1995............................... 40.4 27.0 14.6 17.6 0.4
1996r.............................. 40.6 27.6 13.8 17.6 0.4
1997............................... 40.2 28.2 13.8 17.5 0.4
1998r.............................. 40.2 28.6 13.6 17.3 0.4
1999p.............................. 40.3 29.4 13.1 16.8 0.4

- --------
r-revised; p-preliminary
Sources: Association of American Railroads

Distribution of Intercity Freight-Ton Miles--1999 (preliminary)

[Logo Graph appears here]

Sources: Association of American Railroads

Industry Trends

Since 1994, there has been significant consolidation among major North
American rail carriers, including the 1995 merger of Burlington Northern, Inc.
with Santa Fe Pacific Corporation, the 1995 merger of the UP with the Chicago
and North Western Transportation Company and the 1996 merger of UP with SP.
Further, CSX and Norfolk Southern purchased the assets of Conrail in 1998 and
CN acquired the IC in 1999. As a result of this consolidation, the industry is
now dominated by a few "mega-carriers."

In late 1999, a merger was announced between BNSF and CN. After this
announcement, the STB imposed a 15-month moratorium on Class I railroad merger
activity while it reviews and rewrites the rules applicable to railroad
consolidation. In July 2000 the STB's moratorium was upheld by the United
States Court of Appeals for the District of Columbia. Subsequent to the
court's decision, BNSF and CN announced the termination of their proposed
merger. The moratorium, and more directly the new rules, will likely have a
substantial effect on future railroad merger activity.

Number of
Class I
Year Railroads
---- ---------

1940............................................................. 134
1960............................................................. 109
1980............................................................. 36
1990............................................................. 14
1995............................................................. 11
1998............................................................. 9
1999............................................................. 9
2000............................................................. 8

The STB and Regulation

The STB, an independent body administratively housed within the Department
of Transportation, is responsible for the economic regulation of railroads
within the United States. The STB's mission is to ensure that competitive,
efficient and safe transportation services are provided to meet the needs of
shippers, receivers and consumers.

The STB was created by an Act of Congress known as the ICC Termination Act
of 1995 ("ICCTA"). Passage of the ICCTA represented a further step in the
process of streamlining and

reforming the Federal economic regulatory oversight of the railroad, trucking
and bus industries that was initiated in the late 1970's and early 1980's. The
STB is authorized to have three members, each with a five-year term of office.
The STB Chairman is designated by the President from among the STB's members.

The STB adjudicates disputes and regulates interstate surface
transportation. Railway transportation matters under the STB's jurisdiction in
general include railroad rate and service issues, rail restructuring
transactions (mergers, line sales, line construction and line abandonments)
and railroad labor matters.

The U.S. railroad industry was significantly deregulated with the passage
of The Staggers Rail Act of 1980 (the "Staggers Act"). In enacting the
Staggers Act, Congress recognized that railroads faced intense competition
from trucks and other modes for most freight traffic and that prevailing
regulation prevented them from earning adequate revenues and competing
effectively. Through the Staggers Act, a new regulatory scheme allowing
railroads to establish their own routes, tailor their rates to market
conditions and differentiate rates on the basis of demand was put in place.
The basic principle of the Staggers Act was that reasonable rail rates should
be a function of supply and demand. The Staggers Act, among others things:

. allows railroads to price competing routes and services differently to
reflect relative demand;

. allows railroads to enter into confidential rate and service contracts
with shippers; and

. abolishes collective rate making except among railroads participating in
a joint-line movement.

If it is determined that a railroad is not facing enough competition to
hold down prices, then the STB has the authority to investigate the actions of
the railroad.

The Staggers Act has had a positive effect on the U.S. rail industry. Lower
rail rates brought about by the Staggers Act (down 57% in inflation-adjusted
terms from 1981 to 1998) have resulted in significant cost savings for
shippers and their customers. After decades of steady decline, the rail market
share of inter-city freight ton-miles bottomed out at 35.2% in 1978 and has
trended slowly upward since then, reaching 40.6% in 1996 before falling
slightly in 1997 and 1998.

Labor Relations

Labor relations in the U.S. railroad industry are subject to extensive
governmental regulation under the RLA. Under the RLA, national labor
agreements are renegotiated when they become open for modification, but their
terms remain in effect until new agreements are reached. Typically, neither
management nor labor employees are permitted to take economic action until
extended procedures are exhausted. Existing national union contracts with the
railroads expired at the end of 1999. Included in the contracts was a
provision for wages to increase automatically in the year following the
contract expiration. As a result, Moody's Investors Service predicts that it
is unlikely for meaningful negotiations to commence on rail labor contracts
until nearly the end of 2000. In 1998 labor costs accounted for 34.7% of rail
expenses.

Railroad industry personnel are covered by the RRA instead of the Social
Security Act. Employer contributions under the RRA are currently substantially
higher than those under the Social Security Act and may rise further because
of the increasing proportion of retired employees receiving benefits relative
to the number of working employees. The RRA requires up to a 23.75%
contribution by railroad employers on eligible wages, while the Social
Security and Medicare Acts only require a 7.65% employer contribution on
similar wage bases. Railroad industry personnel are also covered by FELA
rather than by state workers' compensation systems. FELA is a fault-based
system, with compensation for injuries settled by negotiation and litigation,
which can be expensive and time-consuming. By contrast, most other industries
are covered by state-administered no-fault plans with standard compensation
schedules.

BUSINESS

The Company

We own one of eight Class I railroads in the United States and, along with
our subsidiaries and joint ventures, own and operate a rail network comprised
of approximately 6,000 miles of main and branch lines that link key commercial
and industrial markets in the United States and Mexico. Through our strategic
alliance with CN/IC, we have created a contiguous rail network of
approximately 25,000 miles of main and branch lines connecting Canada, the
United States and Mexico. We believe that, as a result of the strategic
position of our railway, we are poised to continue to benefit from the growing
north/south trade between the United States, Mexico and Canada promoted by the
implementation of NAFTA. We offer services to companies in a wide range of
markets including the coal, chemicals and petroleum, paper and forest,
agricultural and mineral, and intermodal and automotive markets. For the
twelve months ended September 30, 2000, we generated total revenues of $589.1
million, $56.3 million of operating income and EBITDA (as defined on page 16)
of $132.2 million. EBITDA as presented excludes our equity in net earnings of
unconsolidated affiliates of $19.0 million for the twelve months ended
September 30, 2000 and unusual costs of $12.7 million in the fourth quarter of
1999.

Our principal subsidiary, KCSR, founded in 1887, operates a rail network of
approximately 2,800 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 to Dallas. In addition to KCSR, our operations include Gateway
Western, a wholly-owned subsidiary, an approximate 37% interest in Grupo TFM,
and a 49% interest in Mexrail, which wholly owns Tex-Mex. In addition, Mexrail
owns the northern half of the rail bridge at Laredo which spans the Rio Grande
River into Mexico. TFM operates the southern half of the bridge. Gateway
Western, a regional rail carrier, operates approximately 400 route miles of
main and branch lines running from East St. Louis to Kansas City. Grupo TFM
owns 80% of TFM, which operates a railroad of approximately 2,700 miles of
main and branch lines running from the U.S./Mexican border at Laredo to Mexico
City and serves three of the four major ports in Mexico. Tex-Mex operates
approximately 150 miles of main and branch lines between Laredo and the port
city of Corpus Christi. We also own 50% of the common stock of the Panama
Canal Railway Company, which holds the concession to operate a 47-mile
railroad located adjacent to the Panama Canal. That railroad is currently
being reconstructed and is expected to resume operations in 2001.

Our expanded rail network interconnects with all other Class I railroads
and provides customers with an effective alternative to other railroad routes,
giving direct access to Mexico and the southwestern United States through less
congested interchange hubs. Eastern railroads and their customers can bypass
the congested gateways at Chicago, St. Louis, Memphis and New Orleans by
interchanging with us at Meridian, Jackson and East St. Louis. Other railroads
can also interconnect with us at our other gateways at Kansas City,
Birmingham, Shreveport, Dallas, New Orleans, Beaumont and Laredo. Our rail
network links directly to major trading centers in northern Mexico through TFM
at Laredo, where more than 50% of all rail and truck traffic between the two
countries crosses the border.

Our network is further expanded through marketing agreements with Norfolk
Southern and I&M Rail Link. Our marketing agreements with Norfolk Southern
allow us to capitalize on our east/west Meridian Speedway, which runs from
Meridian to Dallas, to gain incremental traffic volume between the southeast
and the southwest. Our marketing agreement with I&M Rail Link provides us with
access to Minneapolis and Chicago and to originations of corn and other grain
in Iowa, Minnesota and Illinois.

Rail Network

Owned Network

KCSR owns and operates 2,756 miles of main and branch lines and 1,179 miles
of other tracks in a nine-state region that includes Missouri, Kansas,
Arkansas, Oklahoma, Mississippi, Alabama,

Tennessee, Louisiana and Texas. KCSR has the shortest north/south rail route
between Kansas City and several key ports along the Gulf of Mexico in
Louisiana, Mississippi and Texas and an east/west rail route between Meridian
and Dallas. This geographic reach enables us to service a customer base that
includes electric generating utilities and a wide range of companies in the
chemical and petroleum, agricultural and mineral, paper and forest, and
automotive and intermodal markets.

Gateway Western owns and operates 402 miles of main and branch lines
linking Kansas City with East St. Louis and Springfield, Illinois. In
addition, Gateway Western has limited haulage rights between Springfield and
Chicago that allow Gateway Western to move traffic that originates or
terminates on its rail lines. Gateway Western provides us with access to East
St. Louis, and allows us to avoid the more congested and costly St. Louis
terminal.

Significant Investments

Mexrail

In 1995 we invested approximately $23 million to acquire a 49% economic
interest in Mexrail, which owns 100% of Tex-Mex and certain other assets. Tex-
Mex and TFM operate the international rail traffic bridge at Laredo spanning
the Rio Grande River. TMM, the largest shareholder of TFM through Grupo TFM,
owns the remaining 51% of Mexrail. The bridge at Laredo is the most
significant entry point for rail traffic between Mexico and the United States.
Tex-Mex also operates a 157-mile rail line extending from Laredo to Corpus
Christi and has 99-year trackage rights granted pursuant to a 1996 STB
decision totaling approximately 360 miles between Corpus Christi and Beaumont,
where Tex-Mex connects with KCSR. The Mexrail investment provides us with a
vital link between our U.S. operations through KCSR and our Mexican operations
through TFM.

In early 1999, Tex-Mex completed Phase II of a new rail yard in Laredo.
Phase I of the project was completed in December 1998 and included four tracks
comprising approximately 6.5 miles. Phase II of the project consisted of two
new intermodal tracks totaling approximately 2.8 miles. Although groundwork
for an additional ten tracks has been completed, construction on those ten
tracks has not yet begun. Capacity of the Laredo yard is currently
approximately 800 freight cars and, upon completion of all tracks, is expected
to be approximately 2,000 freight cars.

On November 16, 1999, KCSR and Tex Mex entered into a Memorandum of
Understanding (the "MOU") with UP wherein UP agreed to sell to Tex Mex a line
of railroad extending 84.5 miles between Rosenberg, Texas and Victoria, Texas
and to grant Tex Mex trackage rights over short segments of track at each end
of this line for purposes of ingress and egress. The MOU provided that the
purchase price for the line would be determined through arbitration. That
arbitration set a purchase price of $9.2 million. The line acquisition also
required the prior approval or exemption of the transaction by the STB. By its
Order entered on December 8, 2000, the STB granted Tex Mex's Petition for
Exemption and exempted the transaction from this prior approval requirement.
On January 5, 2001, Tex Mex advised UP by letter of its intent to close the
transaction. The MOU requires that the purchase be closed within sixty (60)
days after the date of this notice letter, or on or before March 6, 2001.

Grupo TFM

In 1997 we invested $298 million to obtain a 36.9% interest in Grupo TFM.
TMM and a TMM affiliate own 38.5% of Grupo TFM and the Mexican government owns
24.6% of Grupo TFM. Grupo TFM owns 80% of the common stock of TFM. The
remaining 20% of TFM was retained by the Mexican government. TFM is both a
strategic and financial investment for us. Strategically our investment in TFM
promotes the NAFTA growth strategy whereby we, along with strategic partners
in our expanded rail network, can provide transportation services between the
heart of Mexico's industrial base, the U.S. and Canada. TFM seeks to establish
its railroad as the primary inland freight transporter linking

Mexico with the U.S. and Canadian markets along the NAFTA corridor. TFM's
strategy is to provide reliable customer service, capitalize on foreign trade
growth and convert truck tonnage to rail.

Under the Concession, TFM operates the Northeast Rail Lines, which are
located along a strategically significant corridor between Mexico and the
U.S., and have as their core routes a key portion of the shortest, most direct
rail passageway between Mexico City and the southern, midwestern and eastern
United States. These rail lines are the only rail lines which serve Nuevo
Laredo, the largest rail freight exchange point between the United States and
Mexico. TFM's rail lines connect the most populated and industrialized regions
of Mexico with Mexico's principal U.S. border railway gateway at Laredo. In
addition, this rail system serves three of Mexico's four primary seaports at
Veracruz and Tampico on the Gulf of Mexico and Lazaro Cardenas on the Pacific
Ocean. TFM serves 15 Mexican states and Mexico City, which together
represented approximately 69% of the country's population and accounted for
approximately 70% of its estimated gross domestic product in 1997. The Laredo
gateway is the most important interchange point for rail freight between the
United States and Mexico. In 1999, approximately 55% of all rail traffic,
based on revenue, between the two nations crossed the border at Laredo. As a
result, we believe TFM's routes are integral to Mexico's foreign trade.

This route structure enables us to benefit from growing trade resulting
from the increasing integration of the North American economy through NAFTA.
Trade between Mexico and the United States has grown significantly from 1993
through 1999. Through Tex-Mex and KCSR, as well as through interchanges with
other major U.S. railroads, TFM provides its customers with access to an
extensive network through which they may distribute their products throughout
North America and overseas.

Financially, we believe TFM has significant railroad growth potential.
TFM's operating strategy has been to increase productivity and maximize
operating efficiencies. With Mexico's economic progress, growth of NAFTA trade
between Mexico, the United States and Canada, and superior customer focused
rail service, we believe the growth potential of TFM is significant. We
believe TFM has been a successful privatization of a previously government
operated rail network.

Since TFM commenced operations in June 1997 it has made significant
progress, which is reflected in its financial results. In 1999, TFM increased
revenues by 22% from 1998, while increasing EBITDA by 30.0% over the same
period. The increase in EBITDA is attributable to a significant improvement in
operating ratio. TFM has substantially lowered its operating ratio to 77.2%
for 1999 from 82.2% in 1998 and 93.9% for the first six months following
commencement of its operations in June 1997. TFM further lowered its operating
ratio to 72.4% for the first nine months of 2000. This operating ratio
achievement is significant given that the weighted average operating ratio for
the eight major North American or "Class I" railroads was approximately 84%
for 1999. Based upon the relatively low labor costs prevailing in Mexico
coupled with revenue growth opportunities, we believe that TFM has the
potential to achieve additional operating ratio improvements.

Under the Concession, TFM operates 2,661 miles of main and branch lines and
an additional 838 miles of sidings, spur tracks and main line under trackage
rights. TFM has the right to operate the rail lines, but does not own the
land, roadway or associated structures. Approximately 91% of the main line
operated by TFM consists of continuously welded rail. As of December 31, 1999,
TFM owned 416 locomotives, owned or leased from affiliates 6,522 freight cars
and leased from non-affiliates 98 locomotives and 4,960 freight cars.

Panama Canal Railway Company

The Panama Canal Railway is a north-south railroad traversing the Panama
isthmus between the Pacific and Atlantic Oceans. Its origins date back to the
late 1800's and the railway serves as a

complement to the Panama Canal shipping channel. The railroad is currently
under reconstruction and is expected to be completed by mid-2001 with
commercial operations to begin immediately thereafter. We believe the prime
potential and opportunity of the Panama Canal Railway will be in the movement
of traffic between the ports of Balboa and Colon for shipping customers
repositioning of containers. We have had significant interest from both
shipping companies and port terminal operators. In addition, there has been
interest in passenger traffic for both commuter and pleasure/tourist travel.
While only 47 miles long, we believe the Panama Canal Railway provides us with
a unique opportunity to participate in transoceanic shipments as a complement
to the existing Canal traffic.

In January 1998, the Republic of Panama awarded the Panama Canal Railway
Company, a joint venture between us and Mi-Jack, the concession to reconstruct
and operate the Panama Canal Railway. As of September 30, 2000, we have
invested approximately $9.5 million toward the reconstruction of the existing
47-mile railway which runs parallel to the Panama Canal and, upon
reconstruction, will provide international shippers with a railway
transportation medium to complement the Panama Canal. In November 1999, the
Panama Canal Railway Company completed the financing arrangements for this
project with the International Finance Corporation ("IFC"), a member of the
World Bank Group.

Expanded Network

Through our strategic alliance with CN/IC and marketing agreements with
Norfolk Southern and the I&M Rail Link we have expanded our domestic
geographic reach beyond that covered by our owned network.

Strategic Alliance with Canadian National and Illinois Central.

In 1998 KCSR, CN and IC announced a 15-year strategic alliance aimed at
coordinating the marketing, operations and investment elements of north-south
rail freight transportation. The strategic alliance did not require STB
approval and was effective immediately. This alliance connects Canadian
markets, the major midwest U.S. markets of Detroit, Chicago, Kansas City and
St. Louis and the key southern markets of Memphis, Dallas and Houston. It also
provides U.S. and Canadian shippers with access to Mexico's rail system
through our connections with Tex-Mex and TFM.

In addition to providing access to key north-south international and
domestic U.S. traffic corridors, our alliance with CN/IC is intended to
increase business primarily in the automotive and intermodal markets and also
in the chemical and petroleum and paper and forest products markets. This
alliance has provided opportunities for revenue growth and positioned us as a
key provider of rail service for NAFTA trade.

Under a separate agreement, KCSR and CN formed a management group made up
of representatives from both railroads to develop plans for the construction
of new facilities to support business development, including investments in
automotive, intermodal and transload facilities at Memphis, Dallas, Kansas
City and Chicago. This agreement also granted KCSR certain trackage and
haulage rights and granted CN and IC certain haulage rights. Under the terms
of this agreement, and through action taken by the STB, in October 2000 we
gained access to six additional chemical customers in the Geismar, Louisiana
industrial area through haulage rights.

Marketing Agreements with Norfolk Southern.

In December 1997 we entered into a three-year marketing agreement with
Norfolk Southern and Tex-Mex which allows us to increase our traffic volume
along our east-west corridor between Meridian and Dallas by using interchange
points with Norfolk Southern. This agreement provides Norfolk Southern run-
through service with access to Dallas and the Mexican border at Laredo while
avoiding

the congested rail gateways of Memphis and New Orleans. This agreement will be
automatically renewed for additional three-year terms unless written notice of
termination is given at least 90 days prior to the expiration of the then-
current term.

In May 2000 we entered into an agreement with Norfolk Southern under which
we will provide haulage services for intermodal traffic between Meridian and
Dallas and receive fees for those services from Norfolk Southern. Under this
agreement Norfolk Southern may quote rates and enter into transportation
service contracts with shippers and receivers covering this haulage traffic.
Unless renewed by Norfolk Southern, this agreement terminates on December 31,
2003.

This new marketing agreement with Norfolk Southern provides us with
additional sources of intermodal business. The current arrangement envisions
approximately two trains per day running both east and west between our
connection with the Norfolk Southern at Meridian and our BNSF connection at
Dallas. The structure of the agreement provides for lower gross revenue to
KCSR but improved operating income, since as a haulage arrangement fuel and
car hire expenses are the responsibility of Norfolk Southern not KCSR. We
believe this business has additional growth potential as Norfolk Southern
seeks to shift its traffic to southern gateways to increase its length of
haul.

Marketing Agreement with I&M Rail Link.

In May 1997 we entered into a marketing agreement with I&M Rail Link which
provides us with access to Minneapolis and Chicago and to originations of corn
and other grain in Iowa, Minnesota and Illinois. Through this marketing
agreement, we receive and originate shipments of grain products for delivery
to 35 poultry industry feed mills on our network. Grain is currently our
largest export product to Mexico. This agreement is terminable upon 90 days
notice.

Haulage Rights.

As a result of the 1988 acquisition of the Missouri-Kansas-Texas Railroad
by UP, we were granted (1) haulage rights between Council Bluffs, Iowa, Omaha
and Lincoln, Nebraska and Atchison and Topeka, Kansas on the one hand and
Kansas City, Missouri on the other hand, and (2) a joint rate agreement for
our grain traffic between Beaumont, Texas on the one hand and Houston and
Galveston, Texas on the other hand. We have the right to convert these haulage
rights to trackage rights. Our haulage rights require UP to move our traffic
in UP trains; trackage rights would allow us to operate our trains over UP
tracks. Our rights have a term of 199 years.

Markets Served

The following summarizes combined KCSR/Gateway Western revenue and carload
statistics by commodity category:

Carloads and Intermodal
Revenues Units
------------------------------ ---------------------------
Nine Nine
Year Ended Months Year Ended Months
December 31, Ended December 31, Ended
-------------------- September ----------------- September
1997 1998 1999 30, 2000 1997 1998 1999 30, 2000
------ ------ ------ --------- ----- ----- ----- ---------
(dollars in millions) (in thousands)

General Commodities:
Chemical and
petroleum............ $137.5 $143.5 $132.7 $ 96.3 168.5 172.2 165.5 117.5
Paper and forest...... 107.3 110.3 105.0 80.4 177.3 175.3 167.8 121.9
Agricultural and
mineral.............. 118.6 128.5 121.6 92.5 165.5 179.0 176.1 127.3
------ ------ ------ ------ ----- ----- ----- -----
Total general
commodities........ 363.4 382.3 359.3 269.2 511.3 526.5 509.4 366.7
Intermodal and
automotive........... 43.5 48.1 60.6 47.0 163.3 187.1 233.9 194.7
Coal.................. 102.9 117.9 117.4 82.3 178.3 205.3 200.8 143.8
------ ------ ------ ------ ----- ----- ----- -----
Carload revenues and
total carloads and
intermodal units... 509.8 548.3 537.3 398.5 852.9 918.9 944.1 705.2
Other rail-related
revenues............. 50.7 48.5 49.1 32.3 -- -- -- --
------ ------ ------ ------ ----- ----- ----- -----
Total............. $560.5 $596.8 $586.4 $430.8 852.9 918.9 944.1 705.2
====== ====== ====== ====== ===== ===== ===== =====

Coal

Coal has historically been one of our most stable sources of revenues and
is the largest single commodity handled by KCSR. In 1999, coal revenues
represented 20.0% of KCSR/Gateway Western combined total revenues.
Substantially all of our coal customers are under long term contracts. Our
coal contracts have an average term of approximately five years. Our most
significant customer is SWEPCO, which we serve under contract until 2006. We
deliver coal to nine electric generating plants, including SWEPCO facilities
in Flint Creek, Arkansas and Welsh, Texas, Kansas City Power and Light plants
in Kansas City and Amsterdam, Missouri, an Empire District Electric Company
plant near Pittsburg, Kansas and an Entergy Gulf States plant in Mossville,
Louisiana. SWEPCO and Entergy Gulf States together comprised approximately 80%
of KCSR/Gateway Western's total coal revenues in 1999. The coal we transport
originates in the Powder River Basin in Wyoming and is transferred to our rail
lines at Kansas City. We also transport coal as an intermediate carrier for a
Western Farmers Electric Cooperative plant from Kansas City to Dequeen,
Arkansas, where it interchanges with a short-line carrier for delivery to the
plant, and deliver lignite to an electric generating plant at Monticello,
Texas. In the fourth quarter of 1999, we began serving as a bridge carrier for
coal deliveries to a Texas Utilities electric generating plant in Martin Lake,
Texas.

Chemicals and Petroleum

Chemical and petroleum products accounted for approximately 22.6% of
KCSR/Gateway Western combined total revenues in 1999. We transport chemical
and petroleum products via tank and hopper cars primarily to markets in the
southeast and northeast United States through interchange with other rail
carriers. We expect certain products revenues within this commodity group to
improve in the future as a result of our access, which began on October 1,
2000 under our agreement with CN, to additional chemical customers in the
Geismar, Louisiana industrial corridor, which is one of the largest
concentrations of chemical suppliers in the world.

Paper and Forest

Paper and forest products accounted for approximately 17.9% of KCSR/Gateway
Western combined total revenues in 1999. Our rail lines run through the heart
of the southeastern U.S. timber-producing region. We believe that trees from
this region tend to grow faster and that forest products made from them are
generally less expensive than those from other regions. As a result, southern
yellow pine products from the southeast are increasingly being used at the
expense of western producers who have experienced capacity reductions because
of public policy considerations. We serve eleven paper mills directly and six
others indirectly through short-line connections. Our customers include
International Paper Company, Georgia Pacific Corporation and Riverwood
International. Primary traffic includes pulp and paper, lumber, panel products
(plywood and oriented strand board), engineered wood products, pulpwood,
woodchips and raw fiber used in the production of paper, pulp and paperboard.

Agricultural and Mineral

Agricultural and mineral products accounted for approximately 20.8% of
KCSR/Gateway Western combined total revenues in 1999. Agricultural products
consist of domestic and export grain, food and related products. Shipper
demand for agricultural products is affected by competition among sources of
grain and grain products as well as price fluctuations in international
markets for key commodities. In our domestic grain business, we receive and
originate shipments of grain and grain products for delivery to feed mills
serving the poultry industry. Through our marketing agreement with I&M Rail
Link, we have access to sources of corn and other grain in Iowa and other
Midwestern states. We currently serve 35 feed mills along our rail lines
throughout Arkansas, Oklahoma, Texas, Louisiana, Mississippi and Alabama.
Export grain shipments include primarily wheat, soybean and corn transported
over our own rail lines to the Gulf of Mexico for international destinations
and to Mexico via Laredo. Over the long term, we expect our grain shipments to
increase as a result of our strategic investments in Tex-Mex and TFM given
Mexico's reliance on grain imports. Food and related products consist mainly
of soybean meal, grain meal, oils and canned goods, sugar and beer. Our
mineral shipments consist of a variety of products including metal, scrap and
slab steel, waste, military equipment, ores, clay, stone and cement. These
products are transported to customers for numerous uses. Slab steel products
are used primarily in the oil industry for the manufacture of drill pipe.
Military equipment is shipped to and from several military bases on our rail
lines, and stone products are used in highway construction.

Intermodal and Automotive

Intermodal products accounted for approximately 10.3% of KCSR/Gateway
Western combined total revenues in 1999. The intermodal freight business
consists of hauling freight containers or truck trailers by a combination of
water, rail and motor carriers, with rail carriers serving as the link between
the other modes of transportation. Our intermodal business has grown
significantly over the last seven years with intermodal units increasing from
61,748 in 1993 to 221,816 in 1999 and intermodal revenues increasing from $17
million to $51 million during the same period. Through our dedicated
intermodal train service between Meridian and Dallas, we compete directly with
truck carriers along the Interstate 20 corridor.

The intermodal business is highly price and service driven as the trucking
industry maintains certain competitive advantages over the rail industry.
Trucks are not obligated to provide or maintain rights of way and do not have
to pay real estate taxes on their routes. In prior years, the trucking
industry diverted a substantial amount of freight from railroads as truck
operators' efficiency over long distances increased. In response to these
competitive pressures, railroad industry managements sought avenues to improve
the competitiveness of rail traffic and forged numerous alliances with truck
companies in order to move more traffic by rail and provide faster, safer and
more efficient service to their customers. We have entered into agreements
with several trucking companies for train service between Dallas and Meridian.

As KCSR/Gateway Western's intermodal revenues increased rapidly, margins on
certain intermodal business declined. In 1999 we addressed the declining
margins by increasing certain intermodal rates effective September 1, 1999 and
by closing two underperforming intermodal facilities at Salisaw, Oklahoma and
Port Arthur, Texas on our north/south route. We expect these actions to
improve the profitability and operating efficiency of our intermodal business
segment.

Our strategic alliance with CN/IC and our marketing agreements with Norfolk
Southern should enable us to further capitalize on the growth potential of
intermodal freight revenues, particularly for traffic moving between points in
the upper midwest and Canada to Kansas City, Dallas and Mexico. Furthermore,
we are in the process of transforming the former Richards-Gebaur Airbase in
Kansas City to a U.S. customs pre-clearance processing facility, the Kansas
City International Freight Terminal, which we expect to handle and process
large volumes of domestic and international intermodal freight. Upon
completion, we expect this facility to provide additional opportunities for
intermodal revenue growth. Through an agreement with Mazda through the Ford
Motor Company Claycomo manufacturing facility located in Kansas City, KCSR
developed an automotive distribution facility at the Richards-Gebaur facility.
This facility became operational in April 2000 for the movement of Mazda
vehicles. Full intermodal and automotive operations at the facility are
expected to be complete in 2001 and will provide KCSR with additional capacity
in Kansas City.

Vehicle parts moving into Mexico from the northern sections of the United
States and finished vehicles moving from Mexico into the United States provide
opportunities for our expanded network. CN/IC, Norfolk Southern and TFM have a
significant number of automotive production facilities on their rail lines.
Our rail network essentially serves as the connecting bridge carrier for these
movements of automotive parts and finished vehicles.

Other

Other non-general commodities revenues include a variety of miscellaneous
services provided to customers and interconnecting carriers and accounted for
approximately 8.4% of total combined KCSR/Gateway Western revenues in 1999.
Major items in this category include railcar switching services, demurrage
(car retention penalties) and drayage (local truck transportation services).
Also included in this category are haulage services we perform for the benefit
of BNSF under an agreement which continues through 2004 and includes minimum
volume commitments.

Sales and Marketing

We employ a total of 16 sales and 26 marketing professionals on a full-time
basis. Our marketing staff is organized by product category, while our sales
staff is generally organized by geographic region. Transportation needs vary
depending upon the type of customer and its specific market. Consequently, our
sales and marketing staffs are composed of professionals who are knowledgeable
about the particular markets and customers they cover. Our sales and marketing
professionals work together to maintain existing relationships as well as
ascertain opportunities for incremental business with additional customers in
a given market. Our sales and marketing professionals market our services
through customer visits, direct customer contacts, telemarketing, trade shows
and industry meetings. In addition, our marketing force focuses on conducting
market and competitive research to identify new business and strategic
opportunities. Our rates, service design changes, equipment supply and traffic
scheduling are generally communicated by our sales and marketing forces and
depend upon the customer, specific market and specific geographic route. Our
sales staff uses competitive market information and detailed knowledge about
our customers to tailor services to the specific needs of our customers. Our
sales and marketing staffs are compensated through both salaries and stock
option and stock-ownership programs. We believe that this method of
compensation focuses our sales and marketing professionals on establishing and
maintaining profitable long-term customer relationships.

In connection with our strategic alliance with CN/IC, we are undertaking
coordinated sales and marketing efforts to attract new customers in the United
States and Canada. Our alliance allows our and CN/IC's salesmen to quote
single through rates from origin to destination along our expanded network,
including through rates to specific destinations in Mexico. We coordinate
similar programs related to steel and other shipments with TFM to maximize
asset utilization.

Customer Service

Most of our customer services are centralized in our Customer Service
Center ("CSC") in Shreveport. Shippers can contact our CSC 24 hours a day,
seven days a week to receive prompt responses to a range of shipping
inquiries. CSC performance is measured by internally generated service
standards. For example, over 90% of all incoming calls to the CSC are answered
within the first three rings. Our CSC is staffed with 120 clerks and 12
managers who have expertise in the transportation of specific commodities. Our
representatives interact closely with our other employees to provide fast
solutions to customer needs and requests. In addition, our dedicated problem
resolution team communicates to our field managers specific problems on behalf
of customers for immediate resolution, while our proactive monitoring team
consistently monitors system traffic and communicates this information to
customers.

Our CSC can help our customers check the status of shipments traveling on
any of KCSR, Tex-Mex, TFM or Gateway Western. We use electronic data
interchange ("EDI") and now receive approximately 70% of all bills of lading
from customers electronically. Inquiries regarding invoices and bills of
lading are directed to our customer service specialists, revenue accounting
staff or credit and collections personnel depending on the issue in question.
Our customers can use the Internet to track shipments through our website. In
conjunction with other rail carriers we are working to develop web portals
which include nationwide tracking and tracing of shipments, bills of lading,
electronic billing and payment, shipment priority, capacity management and car
ordering through an industry initiative called steelroads.com.

Systems and Technology

Management Control System Project

In April 1997 we entered into an agreement with International Business
Machines Corporation ("IBM") to jointly develop a management control system
("MCS") which includes the following elements:

. a new waybill system;

. a new transportation system;

. a work queue management infrastructure;

. a service scheduling system;

. enhanced revenue and car accounting systems; and

. EDI interfaces to the new systems.

We implemented our MCS on Gateway Western in the first quarter of 2000 and
plan to begin implementation on KCSR in the first quarter of 2001. Under our
agreement with IBM, we along with IBM intend to market our MCS to other
railroads and we may receive royalties from any sales of our MCS.

We expect our MCS to provide more accurate and timely information on
terminal dwell time, car velocity through terminals and priority of switching
to meet schedules. We believe that our MCS will provide better analytical
tools for us to make decisions based on more extensive statistics. A data

warehouse will provide the foundation of an improved decision support
infrastructure. By making decisions based upon that information, we intend to
improve our utilization of both locomotives and rolling stock and thereby
reduce cycle times and costs. With the implementation of service scheduling,
we also expect our MCS to provide improved customer service through improved
advanced planning, real-time decision support and improved measurements. By
designing all new business processes around workflow technology, we intend to
more effectively follow key operating statistics to measure productivity and
improve performance across our entire operations.

We also expect our MCS to improve clerical and information technology group
efficiencies. We believe that information technology and other support groups
will be able to reduce maintenance costs, increase their flexibility to
respond to new requests and improve productivity. By using a layered design
approach, we expect to be able to extend our MCS to new technologies as they
become available. Our MCS can be modified to connect customers with our
applications via the Internet and will be constructed to support multiple
railroads, permit modifications to accommodate the local language requirements
of the area and operate across multiple time zones.

Train Dispatching System

KCSR is currently operating on two types of train dispatching systems,
Direct Train Control ("DTC") and Centralized Traffic Control ("CTC"). DTC uses
direct radio communication between dispatchers and engineers to coordinate
train movement. DTC is used on approximately 68% of KCSR's track, including
the track from Shreveport to Meridian and Shreveport to New Orleans. CTC
controls switches and signals in the field from the dispatcher's desk top via
microwave link. CTC is used on approximately 32% of KCSR's track, including
the track from Kansas City to Beaumont and Shreveport to Dallas. CTC is
normally utilized on heavy traffic areas with single main line or heavy
traffic areas with multiple routes. Each dispatcher currently has his assigned
territory displayed on high resolution monitors driven by a mini-mainframe in
Shreveport with a remote station in Beaumont. KCSR has implemented a new
dispatching computer system expected to enhance the overall efficiency of
train movements on the railroad system.

Properties and Equipment

KCSR/Gateway Western's Combined Fleet

As of
December 31, 1999
------------------
Leased Owned
--------- --------

Locomotives
Road Units................................................. 324 126
Switch Units............................................... 59 10
Other...................................................... -- 8
--------- --------
Total Locomotives........................................ 383 144
========= ========
Rolling Stock
Box Cars................................................... 6,298 2,012
Hopper Cars................................................ 2,434 1,475
Flat Cars (Intermodal & Others)............................ 1,554 679
Gondolas................................................... 845 78
Auto Rack.................................................. 201 --
Tank Cars.................................................. 33 55
--------- --------
Total Rolling Stock...................................... 11,365 4,299
========= ========

As of December 31, 1999, KCSR's fleet consisted of 495 diesel locomotives,
of which 120 were owned, 335 were leased from affiliates and 40 were leased
from non-affiliates. Approximately 50 of KCSR's older, less efficient
locomotives are not currently in use and certain of these may be sold or
leased to third parties. KCSR leased 50 new General Electric 4400 AC
locomotives from Southern Capital during the fourth quarter of 1999. In 2000,
operating lease expense increased by approximately $7.3 million due to these
new leases. As of December 31, 1999, KCSR's fleet of rolling stock consisted
of 15,337 freight cars, of which 4,164 were owned, 3,181 were leased from
affiliates and 7,992 were leased from non-affiliates. All of the locomotives
and rolling stock leased from affiliates are leased through Southern Capital,
a 50-50 joint venture with GATX Capital Corporation formed in October 1996.
Some of our owned equipment is subject to liens created under conditional
sales agreements, equipment trust certificates and leases in connection with
the original purchase or lease of such equipment.

Certain KCSR property statistics follow:

1997 1998 1999
------- ------- -------

Route miles--main and branch line............... 2,845 2,756 2,756
Total track miles............................... 4,036 3,931 3,935
Miles of welded rail in service................. 2,030 2,031 2,032
Main line welded rail (% of total).............. 63% 64% 64%
Cross ties replaced............................. 332,440 255,591 275,384

Average Age (in years):
Wood ties in service............................ 15.1 15.8 16.0
Rail in main and branch line.................... 26.0 25.5 26.5
Road locomotives................................ 22.1 23.3 21.7
All locomotives................................. 22.8 23.9 22.5

In support of our transportation operations, we own and operate repair
shops, depots and office buildings along our right-of-way. A major facility,
the Deramus Yard, is located in Shreveport, Louisiana and includes a general
office building, locomotive repair shop, car repair shops, customer service
center, material warehouses and fueling facilities totaling approximately
227,000 square feet. We also own a 107,800 square foot facility in Pittsburg,
Kansas that previously was used as a diesel locomotive repair facility. This
facility was closed during 1999. We also own freight and truck maintenance
buildings in Dallas totaling approximately 125,200 square feet. Our executive
offices are located in an eight-story office building in Kansas City which is
leased from one of our subsidiaries. We also own a 21,000 square foot freight
car repair shop in Kansas City and approximately 15,000 square feet of office
space in Baton Rouge, Louisiana.

We own five intermodal facilities located in Dallas, Kansas City,
Shreveport, New Orleans, and Jackson, Mississippi which are operated by third
party contractors. We are currently in the process of constructing an
automotive and intermodal facility at the former Richards-Gebaur Airbase in
Kansas City, Missouri. For further discussion See "--Markets Served--
Intermodal and Automotive."

We own 8.3% of Kansas City Terminal Railway Company, which owns and
operates approximately 80 miles of track and operates an additional eight
miles of track under trackage rights in greater Kansas City, Missouri. We also
lease for operating purposes certain short sections of track owned by various
other railroad companies and jointly own certain other facilities with these
railroads.

We own 1,025 acres of property located on the waterfront in the Port
Arthur, Texas area, which includes 22,000 linear feet of deep-water frontage
and three docks. Port Arthur is an uncongested port with direct access to the
Gulf of Mexico. Approximately 75% of this property is available for
development. Through wholly owned subsidiaries we operate a 12,000 square foot
railroad wood tie treating plant in Vivian, Louisiana under an industrial
revenue bond lease arrangement with an option to purchase, own a 70 acre coal
and petroleum coke bulk handling facility in Port Arthur, Texas and

own and operate a microwave system, which extends essentially along our right-
of-way from Kansas City to Dallas, Beaumont, Port Arthur and New Orleans. Our
other subsidiaries own approximately 8,000 acres of land at various points
adjacent to our right-of-way, a 354,000 square foot warehouse at Shreveport
and several former railway buildings which are now being rented to non-
affiliated companies, primarily as warehouse space. We own 80% of Wyandotte
Garage Corporation, which owns a 1,147 space parking facility adjacent to our
executive offices in downtown Kansas City that is used by our employees, our
affiliates and the general public. We are in negotiations for the lease of new
office space in downtown Kansas City for our principal executive offices.

Competition

Our rail operations compete against other railroads, many of which are much
larger and have significantly greater financial and other resources than us.
Since 1994, there has been significant consolidation among major North
American rail carriers, including the 1995 merger of BNSF, the 1995 merger of
UP/CNW and the 1996 merger of UP with SP. Further, CSX and Norfolk Southern
purchased the assets of Conrail in 1998 and CN acquired the IC in June 1999.
As a result of this consolidation, the industry is now dominated by a few
"mega-carriers". We believe that our revenues were negatively affected by the
UP/SP and BN/SF mergers, which both led to diversions of rail traffic away
from our lines. We also believe that our revenues have been negatively
impacted by the congestion resulting from the Norfolk Southern and CSX
takeover of Conrail. We regard the larger western railroads, in particular, as
significant competitors to our operations and prospects because of their
substantial resources. The ongoing impact of these mergers is uncertain. We
believe, however, that because of our investments and strategic alliances, we
are positioned to attract additional rail traffic through our "NAFTA Railway."

In late 1999, a merger was announced between BNSF and CN. Subsequent to
this announcement, the STB imposed a 15-month moratorium on Class I railroad
merger activities, while it reviews and rewrites the rules applicable to
railroad consolidation. In July 2000 the STB's moratorium was upheld by the
United States Court of Appeals for the District of Columbia. The moratorium,
and more directly the new rules, will likely have a substantial effect on
future railroad merger activity. Subsequent to the court's decision, BNSF and
CN announced the termination of their proposed merger.

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. Standard & Poor's Research Services
estimates that fuel expense accounts for approximately 7% of railroads' total
expenses compared to 14% of truckload carriers' total expenses. Intermodal
traffic and certain other traffic face highly price sensitive competition,
particularly from motor carriers. In the United States, the truck industry
frequently is more cost and transit-time competitive than railroads,
particularly for distances of less than 300 miles. We are subject to
competition from motor carriers, barge lines and other maritime shipping,
which compete with us across certain routes in our operating area. Mississippi
and Missouri River barge traffic, among others, compete with KCSR in the
transportation of bulk commodities such as grains, steel and petroleum
products. However, rail carriers, including KCSR, have placed an emphasis on
competing in the intermodal marketplace, working together to provide end-to-
end transportation of products.

While deregulation of freight rates has enhanced the ability of railroads
to compete with each other and with alternative modes of transportation, this
increased competition has resulted in downward pressure on freight rates.
Competition with other railroads and other modes of transportation is
generally based on the rates charged, the quality and reliability of the
service provided and the quality of the carrier's equipment for certain
commodities.

Employees and Labor Relations

At December 31, 1999, we had approximately 2,900 employees. Approximately
83% of KCSR and 88% of Gateway Western employees, respectively, are covered
under various collective bargaining agreements.

In 1996 national labor contracts governing KCSR were negotiated with all
major railroad unions, including the United Transportation Union, the
Brotherhood of Locomotive Engineers, the Transportation Communications
International Union, the Brotherhood of Maintenance of Way Employees and the
International Association of Machinists and Aerospace Workers. Although these
labor contracts expired on December 31, 1999, formal negotiations to enter
into new agreements are in progress and the 1996 labor contracts will remain
in effect until new agreements are reached. 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.
We do not expect that those negotiations or the resulting labor agreements
will have a material impact on our consolidated results of operations,
financial condition or cash flows.

We acquired MidSouth in 1993. Labor agreements related to former MidSouth
employees covered by collective bargaining agreements reopened for
negotiations in 1996. These agreements entail eighteen separate groups of
employees and are not included in the national labor contracts. We have
reached new agreements with all but one of these unions. While discussions
with this one union are ongoing, we do not anticipate that those discussions
or the resulting labor agreement will have a material impact on our
consolidated results of operations, financial condition or cash flows.

Most Gateway Western employees are covered by collective bargaining
agreements that extended through December 1999. Negotiations on those
agreements began in late 1999, and those agreements will remain in effect
until new agreements are reached. We do not anticipate that those negotiations
or the resulting labor agreements will have a material impact on our
consolidated results of operations, financial condition or cash flows.

Insurance

KCSI maintains multiple insurance programs for its various subsidiaries
including rail liability and property, general liability, marine terminal
operators liability, directors and officers coverage, workers compensation
coverage and various specialized coverages for specific entities as needed.
Coverage for KCSR is by far the most significant part of the KCSI program. It
includes, liability coverage up to $250 million subject to a $3 million
deductible and certain aggregate limitations and property coverage up to $200
million subject to a $2 million deductible and certain aggregate limitations.
We believe that our insurance program is in line with industry norms and
provides adequate coverage for potential losses.

Joint Venture Arrangements

Mexrail

The share purchase agreement dated as of October 5, 1995 between us and TMM
which governs our investment in Mexrail provides, among other things, that we
have a right of first refusal if (1) TMM decides to sell all or a portion of
its Mexrail common stock, (2) TMM votes its Mexrail common stock in favor of a
merger or consolidation involving Mexrail or Tex-Mex or any plan to sell all
or substantially all of the assets of Mexrail or Tex-Mex or (3) Mexrail
decides to sell all or a portion of its Tex-Mex common stock. The share
purchase agreement also gives us the right to appoint two of Mexrail's five
directors and four of Tex-Mex's nine directors.

Grupo TFM

In December 1995, we entered into a joint venture agreement with TMM. The
purposes of the joint venture were, among others, to provide for the formation
of Grupo TFM, to provide for our participation in the upcoming privatization
of the Mexican national railway system through Grupo TFM, and to promote the
movement of rail traffic over Tex-Mex, TFM and KCSR. The term of the joint
venture agreement was automatically renewed for a term of three years on
December 1, 2000 and will automatically renew for additional terms of three
years each unless either TMM or we give notice of termination at least 90 days
prior to the end of the then-current term. The joint venture agreement may
also terminate under certain circumstances prior to the end of a term,
including upon a change of control or bankruptcy of either TMM or us or a
material default by TMM or us. Upon termination of the agreement, any joint
venture assets which are not held in our or TMM's name will be distributed
proportionally to TMM and us. The joint venture does not have any material
assets and we believe that a termination of the joint venture agreement would
not have a material adverse effect on us or our interests in Mexrail or Grupo
TFM.

The Grupo TFM by-laws and the shareholders agreement dated May 1997,
between us, Caymex Transportation, Inc., Grupo Servia, TMM and TMM Multimodal,
S.A. de C.V. which governs our investment in Grupo TFM (1) restrict each of
the parties to the shareholders agreement from directly or indirectly
transferring any interest in Grupo TFM or TFM to a competitor of the parties,
Grupo TFM or TFM without the prior written consent of each of the parties, (2)
prohibit any transfer of shares of Grupo TFM to any person other than an
affiliate without the prior consent of Grupo TFM's board of directors and (3)
provide that KCSI, Grupo Servia and 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 or another party to the shareholders agreement without
the consent of the other parties to the shareholders agreement. The Grupo TFM
by-laws grant the shareholders of Grupo TFM a right of first refusal to
acquire shares to be transferred by any other shareholder in proportion to the
number of shares held by each non-transferring shareholder, although holders
of preferred shares or shares with special or limited rights are only entitled
to acquire those shares and not ordinary shares. The shareholders agreement
requires that the boards of directors of Grupo TFM and TFM be constituted to
reflect the parties' relative ownership of the ordinary voting common stock of
Grupo TFM.

TFM holds the Concession to operate Mexico's Northeast Rail Lines for the
50 years beginning in June 1997 and, subject to certain conditions, has an
option to extend the Concession for an additional 50 years. The Concession is
subject to certain mandatory trackage rights and is 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.

In January 1997, Grupo TFM paid approximately $565 million to the Mexican
government as approximately 40% of the purchase price for 80% of TFM. Grupo
TFM funded this initial installment of the TFM purchase price with capital
contributions from TMM and KCSI. KCSI contributed approximately $298 million
to Grupo TFM, of which approximately $277 million was used by Grupo TFM as
part of the initial installment payment. KCSI financed this contribution using
borrowings under then-existing lines of credit.

In June 1997, Grupo TFM paid approximately $835 million to the Mexican
government as the remaining portion of the purchase price for 80% of TFM.
Grupo TFM funded this payment with a significant portion of the funds obtained
from: (1) senior secured term credit facilities ($325 million); (2) senior
notes and senior discount debentures ($400 million); (3) proceeds from the
sale of 24.6% of

Grupo TFM to the Mexican government (approximately $199 million based on the
then effective U.S. dollar/Mexican peso exchange rate); and (4) additional
capital contributions from TMM and KCSI (approximately $1.4 million from each
partner). Additionally, Grupo TFM entered into a $150 million revolving credit
facility for general working capital purposes. The Mexican government's
interest in Grupo TFM is in the form of limited voting right shares. KCSI, TMM
and an affiliate of TMM, Grupo Servia, S.A. de C.V. ("Grupo Servia"), have a
call option for the Mexican government's interest in Grupo TFM which is
exercisable, prior to July 31, 2002, at the original amount (in U.S. dollars)
paid by the Mexican government plus interest based on one-year U.S. Treasury
securities. In addition, after the expiration of that call option, KCSI, TMM
and Grupo Servia have a right of first refusal to purchase the Mexican
government's interest in Grupo TFM if the Mexican government wishes to sell
that interest to a third party which is not a governmental entity. On or after
October 31, 2003 the Mexican government has the option to sell its 20%
interest in TFM through a public offering or to Grupo TFM at the initial share
price paid by Grupo TFM plus interest. In the event that Grupo TFM does not
purchase the Mexican government's 20% interest in TFM, the government may
require TMM and KCSI, or either TMM or KCSI, to purchase its interest. KCSI
and TMM have cross indemnities in the event the Mexican government requires
only one of them to purchase its interest. The cross indemnities allow the
party required to purchase the Mexican government's interest to require the
other party to purchase its pro rata portion of such interest. However, if
KCSI were required to purchase the Mexican government's interest in TFM and
TMM could not meet its obligations under the cross-indemnity, then KCSI would
be obligated to pay the total purchase price for the Mexican government's
interest. If we and TMM, or either us or TMM alone, had been required to
purchase the Mexican goverment's 20% interest in TFM as of September 30, 2000,
the total purchase price would have been approximately $472.2 million. TMM and
KCSI are currently in negotiations with the Mexican government that may lead
to a purchase of the Mexican government's interest in TFM at a discount from
the current option price. During the third quarter of 2000, Grupo TFM
accomplished a refinancing of approximately $285 million of its senior secured
credit facility through the issuance of a U.S. Commercial Paper Program backed
by a letter of credit. This refinancing provides the ability for Grupo TFM to
pay limited dividends.

Panama Canal Railway Company

The financing for this project is comprised of a $5 million investment from
the IFC and senior loans through the IFC in an aggregate amount of up to $45
million. The investment of $5 million from the IFC is comprised of non-voting
preferred shares which pay a 10% cumulative dividend. The preferred shares may
be redeemed at the IFC's option any year after 2008 at the lower of (1) a net
cumulative internal rate of return of 30% or (2) eight times earnings before
interest, income taxes, depreciation and amortization for the two years
preceding the redemption that is proportionate to the IFC's percentage
ownership in Panama Canal Railway Company. Under the terms of the concession,
we are, under certain limited conditions, a guarantor for up to $15 million of
cash deficiencies associated with the reconstruction project and, if Panama
Canal Railway Company terminates the concession contract without the IFC's
consent, a guarantor for up to 50% of the outstanding senior loans. We expect
the total cost of the reconstruction project to be $75 million and do not
expect our equity commitment to exceed $16.5 million (excluding the guarantees
described above).

Southern Capital

In 1996, we and GATX Capital Corporation ("GATX") formed a 50-50 joint
venture--Southern Capital--to perform certain leasing and financing
activities. Southern Capital's operations are the acquisition of locomotives
and rolling stock and the leasing thereof to KCSR and other rail entities.
Concurrent with the formation of this joint venture, KCSR entered into
operating leases with Southern Capital for substantially all the locomotives
and rolling stock which KCSR contributed or sold to Southern Capital at the
time of formation of the joint venture. GATX contributed cash in the joint
venture transaction formation. In addition, Southern Capital formerly managed
a portfolio of non-rail loan portfolio assets primarily in the amusement
entertainment, construction and trucking industries

which it sold in April 1999 to Textron Financial Corporation, thereby leaving
only the rail equipment related assets leased to KCSR.

The purpose for the formation of Southern Capital is to partner a Class I
railroad in KCSR with an industry leader in the rail equipment financing in
GATX. Southern Capital provides us with access to attractive equipment
financing alternatives.

Legal Matters

We are involved as plaintiff or defendant in various legal actions arising
in the normal course of business. While the ultimate outcome of our various
legal proceedings cannot be predicted with certainty, we believe, after
consulting with legal counsel, that our litigation reserves are adequate and
that, except as disclosed below, these legal actions currently are not
material to our consolidated results of operations, financial position or cash
flows. The following outlines two significant ongoing cases:

Duncan Case

In 1998, a jury in Beauregard Parish, Louisiana returned a verdict against
KCSR in the amount of $16.3 million. This case arose from a railroad crossing
accident that occurred at Oretta, Louisiana on September 11, 1994, in which
three individuals were injured. Of the three, one was injured fatally, one was
rendered quadriplegic and the third suffered less serious injuries.

We had previously recorded a liability of approximately $3.0 million for
this case. Although we believe we have meritorious defenses and will continue
to seek relief from the judgment, we believe, based on the Supreme Court of
Louisiana's decision, that it is prudent to record an additional liability of
$11.2 million and a receivable in the amount of $7.0 million representing the
amount of the insurance coverage. This resulted in recording $4.2 million of
net operating expense in the accompanying consolidated financial statements
for the period ended September 30, 2000.

Bogalusa Cases

In July 1996, KCSR was named as one of twenty-seven defendants in various
lawsuits in Louisiana and Mississippi arising from the explosion of a rail car
loaded with chemicals in Bogalusa, Louisiana in October 1995. The explosion
released nitrogen dioxide and oxides of nitrogen into the atmosphere over
parts of Bogalusa and the surrounding area and caused evacuations and
injuries. Approximately 25,000 residents of Louisiana and Mississippi have
asserted claims to recover damages allegedly caused by exposure to the
released chemicals.

We neither owned nor leased the rail car or the rails on which it was
located at the time of the explosion in Bogalusa. We did, however, move the
rail car from Jackson to Vicksburg, Mississippi, where it was loaded with
chemicals, and back to Jackson, where the car was tendered to the IC. The
explosion occurred more than 15 days after we last transported the rail car.
The car was loaded in excess of its standard weight, but under its capacity,
when we transported it to interchange with the IC.

The trial of a group of twenty plaintiffs in the Mississippi lawsuits
arising from the chemical release resulted in a jury verdict and judgment in
our favor in June 1999. The jury found that we were not negligent and that the
plaintiffs had failed to prove that they were damaged. The trial of the
Louisiana class action is scheduled to commence on June 11, 2001. The trial of
a second group of Mississippi plaintiffs is scheduled for January 2002.

We believe that our exposure to liability in these cases is remote. If we
were to be found liable for punitive damages in these cases, such a judgment
could have a material adverse effect on our results of operations, financial
position and cash flows.

Houston Cases

In August 2000, KCSR and certain of its affiliates were added as defendants
in lawsuits pending in Jefferson and Harris Counties, Texas. These lawsuits
allege damage to approximately 3,000 plaintiffs as a result of an alleged
toxic chemical release from a tank car in Houston, Texas on August 21, 1998.
Litigation involving the shipper and the delivering carrier has been pending
for some time, but KCSR, which handled the car during the course of its
transport, was not previously a defendant. On information currently available,
we believe our exposure to damages in these cases to be immaterial.

Jaroslawicz Class Action

On October 3, 2000, a lawsuit was filed in the New York State Supreme Court
purporting to be a class action on behalf of our preferred shareholders, and
naming us, our Board of Directors and Stilwell Financial Inc. as defendants.
This lawsuit seeks a declaration that the Spin-off was a defacto liquidation
of us, alleges violation of directors' fiduciary duties to the preferred
shareholders and also seeks a declaration that the preferred shareholders are
entitled to receive the par value of their shares and other relief. We filed a
motion to dismiss with prejudice in the New York State Supreme Court on
December 22, 2000, but have not received a ruling on this motion. We believe
the suit to be groundless and will defend the matter vigorously.

Other

We are defendants in a number of personal injury actions, brought primarily
by former employees and third-party contractors, involving alleged exposure to
asbestos in connection with our historical locomotive maintenance operations.
In addition, we also are subject to claims alleging hearing loss as a result
of alleged elevated noise levels in connection with our current and former
operations. We are aggressively defending these matters and have established
liability reserves which we believe are adequate to cover our expected costs.
Nevertheless, due to the inherent unpredictability of litigation, we could
incur substantial related costs above our reserved amounts.

Environmental Matters

Our operations are subject to extensive federal, state and local
environmental laws and regulations concerning, among other things, air
emissions, water discharges, waste management, hazardous substance
transportation, handling and storage, decommissioning of underground storage
tanks, and soil and groundwater contamination. The major environmental laws to
which we are subject

include, among others, the Federal Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA," also known as "Superfund"), the
Toxic Substances Control Act, the Federal Water Pollution Control Act, and the
Hazardous Materials Transportation Act. CERCLA can impose joint and several
liability for cleanup and investigation costs, without regard to fault or the
legality of the original conduct, on current and predecessor owners and
operators of a site, as well as those who generate, or arrange for the
disposal of, hazardous substances. We do not believe that compliance with
environmental law will impair our competitive capability or result in any
material additional capital expenditures, operating or maintenance costs. As
part of serving the petroleum and chemicals industry, KCSR transports
hazardous materials and has a Shreveport, Louisiana-based hazardous materials
emergency team available to handle environmental issues that might occur in
the transport of such materials. Additionally, we perform ongoing review and
evaluation of the various environmental issues that arise in our operations,
and, as necessary, take actions to limit our exposure to potential liability.

Because we transport and generate large quantities of hazardous substances,
and due to the fact that many of our current and former properties are or have
been used for industrial purposes, we 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 exposures to, or release of, hazardous substances. Although we are
responsible for investigating and remediating contamination at several
locations, and have been identified as a potentially responsible party at
several third party locations to which we may have sent waste in the past,
based on currently available information, we do not expect any related
liabilities, individually or collectively, to have a material impact on our
results of operations, financial position or cash flows. In the event that we
become subject to more stringent cleanup requirements at these sites, we
discover new or more widespread contamination or we become subject to related
personal or property damage claims, however, we could incur material costs in
connection with these sites.

We are responsible for investigating and remediating contamination at
several locations which we formerly leased to industrial tenants. For example,
in North Baton Rouge, Louisiana, we are solely responsible for investigating
and remediating soil and groundwater contamination at two contiguous
properties which we leased to third parties. We are seeking recovery against
one of these tenants, Western Petrochemicals, Inc., which remains at the site.
The second tenant, Export Drum, Inc., is bankrupt. We have established
reserves that we believe are adequate to address the costs we expect to incur
at this site.

Similarly, in Port Arthur, Texas, we are responsible for investigating,
remediating and closing property that we formerly leased to a company that
reconditioned drum storage containers. We sued the former tenant and other
parties for a portion of the cleanup costs, and received approximately
$326,000 in a mediated settlement. We have established reserves that we
believe are adequate to address additional costs we expect to incur at this
site.

In connection with another similar property, a portion of which we own and
formerly leased to a tenant that conducted wood preservative treatment
operations, the Louisiana Department of Environmental Quality sought recovery
against us in a matter captioned Louisiana Department of Environmental
Quality, Docket No. IAS 88-0001-A. This action was resolved in our favor, and
the operator of the plant, Joslyn Manufacturing Company ("Joslyn"), is
required to indemnify us for any costs relating to contamination it caused at
the site pursuant to our former lease agreements. Due to ongoing
investigations at the site, including an EPA investigation pursuant to CERCLA,
either the EPA or the state may seek additional cleanup and seek recovery of
additional related costs. In addition, if the site is added to the EPA's
National Priority List, KCSR, as the property owner, would likely be named a
potentially responsible party in any future EPA or related action. We believe
that Joslyn's indemnity obligation to us would cover that eventuality.
However, in the event that Joslyn should become bankrupt or otherwise fail to
satisfy its indemnification obligations, we could incur substantial costs at
this site.

In 1996, the Louisiana Department of Transportation ("LDOT") sued KCSR and
a number of other defendants in Louisiana state court to recover cleanup costs
incurred by LDOT while constructing Interstate Highway 49 at Shreveport,
Louisiana (Louisiana Department of Transportation v. The Kansas City Southern
Railway Company, et al., Case No. 417190-B in the First Judicial District
Court, Caddo Parish, Louisiana). The cleanup was associated with an old oil
refinery site, operated by the other named defendants. KCSR's main line was
adjacent to that site, and KCSR was included in the suit because LDOT claims
that a 1966 derailment on the adjacent track released hazardous substances
onto the site. Based on a number of factors, including primarily the fact that
the site appears to have been primarily affected by refinery operations which
pre-dated the derailment, we believe that our exposure at this site is
limited.

In another proceeding, Louisiana Department of Environmental Quality,
Docket No. IE-0-91-0001, KCSR was named as a party in the alleged
contamination of Capitol Lake in Baton Rouge, Louisiana. During 1994, the list
of potentially responsible parties was significantly expanded to include the
State of Louisiana, and the City and Parish of Baton Rouge, among others.
Studies commissioned by KCSR indicate that contaminants contained in the lake
were not generated by KCSR. Management and counsel do not believe this
proceeding will have a material effect on us.

We also are subject to potential liability in connection with a foundry
site in Alexandria, Louisiana that we once owned through a former subsidiary
and leased to a foundry operator. That operator, Ruston Foundry, is still
operating at the site and, we believe, is required to indemnify us for
environmental liabilities pursuant to our former lease agreement. The site is
on the CERCLA National Priorities List, and potential cleanup costs are
substantial. We do not possess sufficient information to precisely assess our
exposure, although, based on our experience with such matters, the existence
of other potential defendants, and Ruston Foundry's indemnification
obligations, we do not expect costs associated with this site to materially
affect us.

In addition to these matters, the Mississippi Department of Environmental
Quality ("MDEQ") initiated a demand on all railroads operating in Mississippi
to clean up their refueling facilities and investigate any soil and
groundwater impacts resulting from past refueling activities. KCSR has six
facilities located in Mississippi. KCSR has developed a plan, together with
the State of Mississippi, that we believe will satisfy the MDEQ's initiative.
Estimated costs to complete the studies and expected remediation have been
provided for in our consolidated financial statements and are not expected to
have a material impact on our consolidated results of operations or financial
position.

The Illinois Environmental Protection Agency ("IEPA") has sued Gateway
Western for alleged violations of state environmental laws relating to the
1997 spill of 18,000 gallons of methyl isobutyl carbinol from a tank car in
Gateway Western's East St. Louis yard. Remediation continues and progress is
reported to the IEPA on a quarterly basis and will continue until IEPA clean-
up standards have been achieved. Remediation is expected to be complete in
2000 and estimated costs have been provided for in our consolidated financial
statements. The parties reached a tentative negotiated settlement of the
lawsuit in November 1998, which provides that Gateway Western pay a penalty
and further, that it fund a Supplemental Environmental Project in St. Claire
County, Illinois. The cleanup costs and the settlement of the lawsuit are not
expected to have a material impact on our consolidated results of operations,
financial position or cash flows.

Finally, we are investigating and remediating contamination associated with
historical roundhouse and fueling operations at Gateway Western yards located
in East St. Louis, Illinois, Venice, Illinois, Kansas City, Missouri and
Mexico, Missouri. Also, in connection with a program begun in 1993 to remove
all underground storage tanks from Gateway Western properties, we are
conducting investigation and cleanup activities at several sites. We do not
expect costs relating to these activities to materially affect us.

We have established accruals that we believe are adequate with respect to
remediation and restoration costs that may be required to comply with existing
environmental laws and regulations in connection with various environmental
issues. At December 31, 1999, these accruals were not material. Although these
costs cannot be predicted with certainty, we believe that the ultimate outcome
of identified matters will not have a material adverse effect on our
consolidated results of operations, financial condition or cash flows.

MANAGEMENT

Directors and Executive Officers

The following table sets forth certain information concerning each of the
directors and executive officers of KCSI:

Name Age Position
---- --- --------

Michael R. Haverty 56 Chairman of the Board, President and Chief
Executive Officer
Executive Vice President and Chief Operating
Gerald K. Davies 56 Officer
Robert H. Berry 56 Senior Vice President and Chief Financial Officer
Richard P. Bruening 61 Senior Vice President, General Counsel and
Corporate Secretary
Warren K. Erdman 42 Vice President--Corporate Affairs
Thomas G. King 44 Vice President and Treasurer
Louis G. Van Horn 42 Vice President and Comptroller
A. Edward Allinson 66 Director
Michael G. Fitt 69 Director
James R. Jones 61 Director
Landon H. Rowland 63 Director
Byron G. Thompson 68 Director

The directors of KCSR are Michael R. Haverty, Gerald K. Davies, Robert H.
Berry, Richard P. Bruening and Albert W. Rees.

Michael R. Haverty has served as the President and Chief Executive Officer
of KCSI since July 12, 2000 and as a director since May 1995. Mr. Haverty has
served as Chairman of the Board of KCSI since January 1, 2001. Mr. Haverty
served as Executive Vice President of KCSI from May 1995 until July 12, 2000.
He has been President and Chief Executive Officer of KCSR since May 1995.
Mr. Haverty has served as Chairman of the Board of KCSR since November 1999.
He also serves as the President and a director of Mexrail and as a director
and Co-Chairman of the Board of Directors of the Panama Canal Railway Company.
Mr. Haverty is also a director and Chairman of the Executive Committee of the
Board of Directors of Grupo TFM, an affiliate of KCSI. He previously served as
Chairman and Chief Executive Officer of Haverty Corp., a transportation
investment business from 1993 to May 1995, acted as an independent executive
transportation adviser from 1991 to 1993 and was President and Chief Operating
Officer of The Atchison, Topeka and Santa Fe Railway Company from 1989 to
1991. Mr. Haverty is also a director of Midwest Grain Products, Inc. of
Atchison, Kansas.

Gerald K. Davies has served as Executive Vice President and Chief Operating
Officer of KCSI since July 18, 2000. Mr. Davies joined KCSR in January 1999 as
the Executive Vice President and Chief Operating Officer. Mr. Davies has
served as a director of KCSR since November 1999. Prior to joining KCSR, Mr.
Davies served as the Executive Vice President of Marketing with Canadian
National Railway from 1993 through 1998. Mr. Davies held senior management
positions with Burlington Northern Railway from 1976 to 1984 and 1991 to 1993,
respectively, and with CSX Transportation from 1984 to 1991.

Robert H. Berry has served as Senior Vice President and Chief Financial
Officer of KCSI since July 18, 2000. Mr. Berry has served as Senior Vice
President and Chief Financial Officer of KCSR since June 1997 and as a
director of KCSR since November 1999. Mr. Berry is also a director of Grupo
TFM. Prior to joining KCSR, Mr. Berry was employed by Northern Telecom for 21
years in various senior financial positions, including Vice President--Finance
of NorTel Communications Systems, Inc. from 1995 to 1997 and Vice President--
Finance for Bell Atlantic Meridian Systems from 1993 to 1995. Mr. Berry is a
Certified Public Accountant.

Richard P. Bruening has served as Vice President, General Counsel and
Corporate Secretary of KCSI since July 1995. Mr. Bruening's title of Vice
President was changed to Senior Vice President on July 18, 2000. From May 1982
to July 1995, he served as Vice President and General Counsel of KCSI. Mr.
Bruening has also served as Senior Vice President, General Counsel and
Corporate Secretary of KCSR since July 1995 and as a director of KCSR since
September 1987.

Warren K. Erdman has served as Vice President--Corporate Affairs of KCSI
since April 15, 1997 and as Vice President--Corporate Affairs of KCSR since
May 1997. Prior to joining KCSI, Mr. Erdman served as Chief of Staff to United
States Senator Kit Bond of Missouri from 1987 to 1997.

Thomas G. King has served as Vice President and Treasurer of KCSI since
July 18, 2000 and as Vice President and Treasurer of KCSR since November 1999.
Mr. King has also served as Vice President and Treasurer of KCS Transportation
Company since May 1997. Mr. King has served as Vice President and Treasurer of
Gateway Western since November 1999. Mr. King served as Treasurer of Gateway
Western from May 1997 to October 1999, and as Vice President and Chief
Financial Officer from December 1989 to May 1997. Mr. King is a Certified
Public Accountant.

Louis G. Van Horn has served as Vice President and Comptroller of KCSI
since May 1996. He has also served as Vice President and Comptroller of KCSR
since 1995. He was Comptroller of KCSI from September 1992 to May 1996. From
January 1992 to September 1992, he served as Assistant Comptroller of KCSI.
Mr. Van Horn is a Certified Public Accountant.

A. Edward Allinson has been a director of KCSI since 1990. He has served as
the Chief Executive Officer and Chairman of the Board of EquiServe LP
("EquiServe") since January 1, 2000. EquiServe provides stock transfer and
related services to publicly listed corporations. Prior to joining EquiServe,
Mr. Allinson was an Executive Vice President of State Street Bank and Trust
Company, Chairman of the Board of Directors of Boston Financial Data Services,
Inc. ("BFDS"), and Executive Vice President of State Street Corporation from
March 1990 through December 1999. BFDS provides full service share owner
accounting and recordkeeping services to mutual funds, selected services to
certain retirement plans and certain securities transfer services. DST
Systems, Inc. owns 50% of BFDS. Mr. Allinson is also a director of DST
Systems, Inc.

Michael G. Fitt has been a director of KCSI since 1986. Prior to
retirement, he was Chairman and Chief Executive Officer of Employers
Reinsurance Corporation of Overland Park, Kansas, from 1980 through 1992 and
President of that company from 1979 through 1991. Employers Reinsurance
Corporation, a subsidiary of General Electric Capital Services, Inc., is a
reinsurance company. Mr. Fitt is also a director of DST Systems, Inc.

James R. Jones has been a director of KCSI since November, 1997. He is
Special Counsel to the firm of Manatt, Phelps & Phillips. He is also Chairman
of Globe Ranger Corp. Mr. Jones was President of Warnaco Inc. International
Division from 1997 through 1998; U.S. Ambassador to Mexico from 1993 through
1997 and Chairman and Chief Executive Officer of the American Stock Exchange
from 1989 through 1993. Mr. Jones served as a member of the U.S. Congress
representing Oklahoma for 14 years. He was White House Special Assistant and
Appointments Secretary to President Lyndon Johnson. Mr. Jones is also a
director of Anheuser-Busch, Grupo Modelo S.A. de C.V., San Luis Corporacion,
TV Azteca, and Keyspan Energy Corporation.

Landon H. Rowland has been a director of KCSI since 1983 and served as
Chairman of the Board of KCSI from 1997 through December 31, 2000. Mr. Rowland
served as President of KCSI from July 1983 to July 12, 2000 and as Chief
Executive Officer from January 1987 to July 12, 2000. Mr. Rowland is also a
director of Grupo TFM, an affiliate of KCSI, and TMM, the largest shareholder
in each of Mexrail and Grupo TFM. Mr. Rowland is Chairman of the Board of
Directors of Stilwell Financial Inc.

Byron G. Thompson has been a director of KCSI since August 17, 2000. Mr.
Thompson has served as Chairman of the Board of Country Club Bank, n.a.,
Kansas City since February 1985. Prior to that time, Mr. Thompson served as
Vice Chairman of Investment Banking at United Missouri Bank of Kansas City and
as a member of the Board of United Missouri Bancshares, Inc.

Albert W. Rees has served as a director of KCSR since May 1996. He has also
served as Senior Vice President--International Operations of KCSR since
January 1999. From June 1995 to January 1999, Mr. Rees served as Senior Vice
President--Operations of KCSR. Prior to joining KCSR, Mr. Rees was with The
Atchison, Topeka and Santa Fe Railway Company, serving as Vice President--
Quality Management from June 1991 to June 1995 and as Vice President--
Operations from June 1989 through May 1991. Mr. Rees also serves as a director
and chairman of the executive committee of each of the Kansas City Terminal
Railway Company and Tex-Mex.

Compensation of Directors

Directors who are our officers or employees do not receive any fees or
other compensation for their services as directors. Outside Directors are not
paid any retainers for Board or committee membership. The Outside Directors
are paid $4,000 for each Board meeting attended in person or $2,000 for
telephone meetings. The Outside Directors are also paid $2,000 for each
committee meeting attended in person or $1,000 for telephone meetings. The
Chair of a committee receives an additional $500 for each committee meeting.
The Outside Directors may also be granted awards, including among others,
options to buy shares of KCSI common stock, pursuant to the 1991 Amended and
Restated Stock Option and Performance Award Plan, as determined by the
Committee (as defined in such plan). In addition, in connection with the Spin-
off, Outside Directors were granted rights to purchase KCSI restricted shares
and were granted options to purchase two shares of KCSI common stock for each
restricted share purchased. See "--New Compensation Program."

Directors of KCSI are permitted to defer receipt of directors' fees under
an unfunded directors' deferred fee plan adopted by the Board of Directors,
and either to receive interest on such fees until they have been paid to them
or, in lieu of receiving interest, to have earnings on their deferred fees
determined pursuant to a formula based on the performance of certain mutual
funds advised by Janus Capital Corporation. The rate of interest to be paid
under the deferred fee plan is set at the prime rate of a certain national
bank less one percent. Distributions under the plan are allowed in certain
instances as approved by the Board of Directors. The deferred fee plan also
allows the directors to elect to receive deferred amounts in installments
payable over several years.

Compensation Committee Interlocks and Insider Participation

All compensation decisions during the year ended December 31, 2000 for each
of the Chief Executive Officer and the four other most highly compensated
executive officers of KCSI were made by the Compensation and Organization
Committee (the "Compensation Committee") of the Board of Directors of KCSI.
During the year ended December 31, 2000, the Compensation Committee was
comprised of A. Edward Allinson, James E. Barnes (Chairman) and Morton I.
Sosland until June 14, 2000. From June 14, 2000 until July 17, 2000, the
Compensation Committee was comprised of Mr. Allinson, Mr. Barnes (Chairman)
and Michael G. Fitt. Since July 17, 2000, the Compensation Committee has been
comprised of Mr. Allinson, Mr. Fitt and James R. Jones (Chairman). Mr. Jones
acts as Special Counsel to the law firm of Manatt, Phelps & Phillips and
receives a salary from such law firm for his services as Special Counsel.
During 1999 and 2000, KCSI retained Manatt, Phelps & Phillips to provide legal
services in connection with its transportation operations in Mexico. See
"Certain Relationships and Related Transactions."

Executive Compensation

The following Summary Compensation Table sets forth information about
compensation earned in the fiscal years ended December 31, 2000, 1999 and 1998
by the Chief Executive Officer of KCSI and the four other most highly
compensated executive officers of KCSI (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

Long-Term
Annual Compensation Compensation Awards
----------------------- ---------------------
Securities
Other Restricted Underlying All
Annual Stock Options/ Other
Name and Principal Salary Bonus Compen- Awards SARs Compen-
Position Year ($) ($) sation ($)(/1/) (#)(/2/) sation
- ------------------ ---- ------- ------- ------- ---------- ---------- -------

Michael R. Haverty...... 2000 608,652 -- -- $49,500 1,189,366 14,852(/3/)
Chairman of the Board, 1999 608,652 -- -- -- 2,032 18,952
President and 1998 500,204 -- -- -- 44,130 16,000
Chief Executive Officer
Gerald K. Davies........ 2000 300,000 -- -- $19,250 462,595 14,852(/4/)
Executive Vice 1999 300,000 -- -- -- 25,000 18,952
President and Chief 1998 N/A N/A -- -- N/A N/A
Operating Officer
Robert H. Berry......... 2000 235,008 -- -- $12,000 288,409 14,852(/5/)
Senior Vice President 1999 235,008 -- -- -- 572 18,952
and Chief Financial 1998 206,208 -- -- -- 10,199 18,952
Officer
Richard P. Bruening..... 2000 208,008 -- -- $ 8,000 192,332 14,852(/6/)
Senior Vice President, 1999 208,008 -- -- -- 470 18,952
General Counsel and 1998 186,000 283,503 -- -- 10,075 18,784
Corporate Secretary
Louis G. Van Horn....... 2000 158,004 -- -- $ 5,500 132,113 14,353(/7/)
Vice President and 1999 158,004 -- -- -- 124 18,453
Comptroller 1998 140,400 -- -- -- 4,402 18,236

- --------
(1) The number and value of the aggregate restricted stock holdings of each of
the Named Executive Officers at the end of fiscal year 2000 are as
follows: Mr. Haverty--99,000 shares with a value of $433,620; Mr. Davies--
38,500 shares with a value of $168,630; Mr. Berry--24,000 shares with a
value of $105,120; Mr. Bruening--16,000 shares with a value of $70,080;
Mr. Van Horn--11,000 shares with a value of $48,180. The value of these
restricted shares is based on the closing market price of KCSI common
stock on December 29, 2000. Dividends will only be paid on the restricted
stock when, as and if declared and paid on KCSI common stock.
(2) Option grant information is provided on a post-reverse stock split basis.
(3) All other compensation for Mr. Haverty for 2000 is comprised of: (a) a
contribution to his account under the KCSI ESOP of $6,800; (b) a
contribution to his account under KCSI's 401(k) plan of $5,100; and (c)
premiums on group term life insurance of $2,160, accidental death and
dismemberment insurance of $240 and long-term disability insurance of
$552.
(4) All other compensation for Mr. Davies for 2000 is comprised of: (a) a
contribution to his account under the KCSI ESOP of $6,800; (b) a
contribution to his account under KCSI's 401(k) plan of $5,100; and (c)
premiums on group term life insurance of $2,160, accidental death and
dismemberment insurance of $240 and long-term disability insurance of
$552.
(5) All other compensation for Mr. Berry for 2000 is comprised of: (a) a
contribution to his account under the KCSI ESOP of $6,800; (b) a
contribution to his account under KCSI's 401(k) plan of $5,100; and (c)
premiums on group term life insurance of $2,160, accidental death and
dismemberment insurance of $240 and long-term disability insurance of
$552.
(6) All other compensation for Mr. Bruening for 2000 is comprised of: (a) a
contribution to his account under the KCSI ESOP of $6,800; (b) a
contribution to his account under KCSI's 401(k) plan of $5,100; and (c)
premiums on group term life insurance of $2,160, accidental death and
dismemberment insurance of $240 and long-term disability insurance of
$552.
(7) All other compensation for Mr. Van Horn for 2000 is comprised of: (a) a
contribution to his account under the KCSI ESOP of $6,800; (b) a
contribution to his account under KCSI's 401(k) plan of $5,100; and (c)
premiums on group term life insurance of $1,711, accidental death and
dismemberment insurance of $190 and long-term disability insurance of
$552.

The following table sets forth certain information with respect to stock
options to purchase shares of KCSI common stock, par value $0.01 per share,
granted to each of the Named Executive Officers during the fiscal year ended
December 31, 2000. No options to purchase shares of KCSR common stock were
granted to the Named Executive Officers during the fiscal year ended December
31, 2000. In connection with the Spin-off, the Named Executive Officers were
granted options to purchase KCSI common stock pursuant to a new compensation
program adopted by KCSI. See "--New Compensation Program." The table reflects
the adjustments made in connection with the Spin-off and the reverse stock
split of KCSI common stock on July 12, 2000.

Potential Realizable
Value
at Assumed Annual
Rates of Stock Price
Appreciation
for Option
Individual Grants Term(/3/)
-------------------------------------------------------- ----------------------
Percent
Number of of Total
Securities Options/SARs Exercise
Underlying Granted to Or Base
Options/SARs Employees in Price ($Per Expiration
Name Granted (#) Fiscal 2000(/1/) Share)(/2/) Date 5% 10%
- ---- ------------ ------------ ----------- ---------- ---------- -----------

Michael R. Haverty...... 1,366(/4/) * $5.1637 02/28/2010 $ 3,980 $ 9,850
1,188,000(/7/) 20.4% $ 5.75 07/12/2010 $4,070,287 $10,191,612
Gerald K. Davies........ 595(/5/) * $5.1637 02/28/2010 $ 1,734 $ 4,290
462,000(/7/) 7.9% $ 5.75 07/12/2010 $1,582,889 $ 3,963,405
Robert H. Berry......... 409(/6/) * $5.1637 02/28/2010 $ 1,192 $ 2,949
288,000(/7/) 4.9% $ 5.75 07/12/2010 $ 986,736 $ 2,470,694
Richard P. Bruening..... 332(/4/) * $5.1637 02/28/2010 $ 967 $ 2,394
192,000(/7/) 3.3% $ 5.75 07/12/2010 $ 657,824 $ 1,647,129
Louis G. Van Horn....... 113(/4/) * $5.1637 02/28/2010 $ 329 $ 815
132,000(/7/) 2.3% $ 5.75 07/12/2010 $ 452,254 $ 1,132,401

KCSI Options/SAR Grants in Last Fiscal Year

- --------
* Less than one percent of the total options granted.
(1) Total options granted in 2000 to eligible employees of KCSI and its
subsidiaries covered a total of 5,836,423 shares of KCSI common stock.
(2) Average of the high and low prices of the KCSI common stock on the date of
grant as reported on the New York Stock Exchange.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the SEC and do not represent our estimate or
projection of future prices of KCSI's common stock prices. The actual
value realized may be greater or less than the potential realizable values
set forth in the table.
(4) The options were granted on March 1, 2000 under KCSI's 1991 Amended and
Restated Stock Option and Performance Award Plan (the "1991 Plan") in
connection with KCSI's Executive Plan and were immediately exercisable.
Participants in KCSI's Executive Plan may elect cash or non-qualified
stock options with an estimated value (using the Black-Scholes valuation
model) equal to 125 percent of the annual cash benefit. Limited stock
appreciation rights ("LSARs") were granted in tandem with these options.
All of the LSARs are automatically exercised upon a change in control that
is not approved by the incumbent board of KCSI (as such terms are defined
in the 1991 Plan). All the options expire at the end of ten years, subject
to earlier termination as provided in the option agreement. The options
are subject to voluntary tax withholding rights.
(5) The options were granted under the 1991 Plan in connection with KCSI's
Executive Plan. These options were granted on March 1, 2000. Options for
149 shares become exercisable on June 23, 2001. Options for 149 shares
become exercisable on June 23, 2002. Options for 297 shares become
exercisable on June 23, 2003. LSARs were granted in tandem with these
options. All of the LSARs are automatically exercised upon a change in
control that is not approved by the incumbent board of KCSI (as such terms
are defined in the 1991 Plan). All the options expire at the end of ten
years, subject to earlier termination as provided in the option agreement.
The options are subject to voluntary tax withholding rights.
(6) The options were granted under the 1991 Plan in connection with KCSI's
Executive Plan. These options were granted on March 1, 2000. Options for
102 shares were immediately exercisable. Options for 102 shares became
exercisable on

June 23, 2000. Options for 205 shares become exercisable on June 23, 2001.
LSARs were granted in tandem with these options. All of the LSARs are
automatically exercised upon a change in control that is not approved by the
incumbent board of KCSI (as such terms are defined in the 1991 Plan). All
the options expire at the end of ten years, subject to earlier termination
as provided in the option agreement. The options are subject to voluntary
tax withholding rights.
(7) These options were granted in relation to the new compensation program
adopted by KCSI. See "--New Compensation Program."

The following table sets forth information regarding the shares of KCSI
common stock received upon exercise of options by the Named Executive Officers
in 2000, the aggregate dollar value realized upon exercise and the value of
unexercised options to purchase KCSI common stock held by the Named Executive
Officers as of December 31, 2000.

KCSI Aggregated Option/SAR Exercises
In Last Fiscal Year and Year-End Option/SAR Values(/1/)

Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options/
Acquired Value Options/SARs at FY-End SARs at FY-End ($)(/2/)
Upon Realized ------------------------- -------------------------
Name Exercised ($)(/3/) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------- ---------- ----------- ------------- ----------- -------------

Michael R. Haverty...... 490,029(/3/) $2,197,233(/3/) 0 1,188,000 $ 0 $5,013,360
Gerald K. Davies........ 25,000 $ 68,693 0 462,595 $ 0 $1,952,498
Robert H. Berry......... 120,000 $ 515,980 340 288,840 $ 1,960 $1,220,956
Richard P. Bruening..... N/A N/A 144,377 192,000 $1,297,310 $ 810,239
Louis G. Van Horn....... N/A N/A 51,390 132,000 $ 455,816 $ 557,041

- -------
(1) All information is provided on a post-reverse stock split basis.
(2) The dollar values in this column are calculated by multiplying (a) the
difference between the fair market value of the shares of KCSI common
stock underlying the options on December 29, 2000 and the exercise price
of the options by (b) the number of options held at year-end.
(3) The dollar values in this column are calculated by multiplying (a) the
difference between the fair market value of the shares of KCSI common
stock underlying the options on the date of exercise and the exercise
price of the options by (b) the number of options exercised.
(4) Includes options for 18,000 shares held by Mr. Haverty's children's trusts
with a value of $85,671 on the date of exercise.

In connection with the Spin-off and as part of an equitable adjustment of
KCSI non-qualified stock options previously granted and outstanding as of June
28, 2000 (the record date for the Spin-off), holders of such options received
separately exercisable options to purchase Stilwell common stock ("Stilwell
options") in the proportion of two Stilwell options for each KCSI non-
qualified stock option held.

The following table sets forth information with respect to Stilwell options
granted to each of the Named Executive Officers during the fiscal year ended
December 31, 2000 in connection with the Spin-off.

Stilwell Options/SAR Grants in Last Fiscal Year

Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term(/3/)
---------------------------------------------------------- -----------------------------------
Number of Percent of Total
Securities Options/SARs
Underlying Granted to KCSI Exercise Or Base
Options/SARs Employees in Price Expiration
Name Granted (#) Fiscal 2000(/1/) ($Per Share)(/2/) Date 0% 5% 10%
---- ------------ ---------------- ----------------- ---------- ----------- ----------- -----------

Michael R. Haverty...... 528,000 3.2% $ 6.1847 05/14/2005 $20,626,478 $28,376,595 $33,143,430
900,000 5.4% $ 7.4256 11/05/2005 $34,041,960 $45,091,046 $58,406,785
270,000 1.6% $ 6.9716 01/24/2006 $10,335,168 $13,710,638 $17,794,074
176,518 1.1% $20.4911 11/16/2008 $ 4,370,392 $ 8,138,066 $13,374,684
8,126 * $21.3084 01/25/2009 $ 194,549 $ 370,111 $ 615,049
5,462 * $39.7716 02/28/2010 $ 29,923 $ 169,380 $ 375,067

Gerald K. Davies........ 100,000 * $23.1244 12/31/2009 $ 2,212,560 $ 4,707,320 $ 8,357,273
2,374 * $39.7716 02/28/2010 $ 13,006 $ 73,619 $ 163,019

Robert H. Berry......... 440,000 2.6% $10.3212 06/29/2007 $15,368,672 $22,798,873 $32,452,026
40,790 * $20.4911 11/16/2008 $ 1,009,916 $ 1,880,554 $ 3,090,639
2,282 * $21.3084 01/25/2009 $ 54,635 $ 103,937 $ 172,722
1,634 * $39.7716 02/28/2010 $ 8,952 $ 50,671 $ 112,204

Richard P. Bruening..... 36,000 * $ 2.9309 03/31/2002 $ 1,523,488 $ 1,625,929 $ 1,729,597
48,000 * $ 3.6573 12/11/2001 $ 1,996,450 $ 2,105,050 $ 2,213,650
48,000 * $ 4.5452 01/27/2003 $ 1,953,830 $ 2,185,825 $ 2,430,066
24,000 * $ 7.9099 03/30/2004 $ 896,162 $ 1,082,772 $ 1,290,484
18,000 * $ 5.4381 01/18/2005 $ 716,614 $ 892,144 $ 1,094,624
360,000 2.2% $ 7.4256 11/05/2005 $13,616,784 $18,036,419 $23,362,714
40,300 * $20.4911 11/16/2008 $ 997,784 $ 1,857,964 $ 3,053,512
1,880 * $21.3084 01/25/2009 $ 45,010 $ 85,627 $ 142,295
1,326 * $39.7716 02/28/2010 $ 7,264 $ 41,120 $ 91,054

Louis G. Van Horn....... 4,000 * $ 4.5452 01/27/2003 $ 162,819 $ 182,152 $ 202,505
24,000 * $ 7.1532 01/26/2004 $ 914,323 $ 1,090,421 $ 1,284,853
9,000 * $ 5.4381 01/18/2005 $ 358,307 $ 446,072 $ 547,312
150,000 * $ 7.4256 11/05/2005 $ 5,673,660 $ 7,515,174 $ 9,734,464
17,606 * $20.4911 11/16/2008 $ 435,905 $ 811,695 $ 1,333,998
496 * $21.3084 01/25/2009 $ 11,875 $ 22,591 $ 37,542
450 * $39.7716 02/28/2010 $ 2,465 $ 13,955 $ 30,901

- --------
* Less than one percent of the total options granted to KCSI employees.
(1) Total options granted in 2000 to eligible employees of KCSI and its post
Spin-off subsidiaries covered a total of 16,662,762 shares of Stilwell
common stock.
(2) Average of the high and low prices of the KCSI common stock on the date of
grant of the related option for KCSI common stock as reported on the New
York Stock Exchange adjusted for the spin-off of Stilwell Financial Inc.
All of the Stilwell options were granted on July 12, 2000. The closing
market price of Stilwell common stock on that date was $45.25.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the SEC and do not represent our estimate or
projection of future prices of Stilwell's common stock prices. The actual
value realized may be greater or less than the potential realizable values
set forth in the table. The values in these columns were calculated based
on a market price for Stilwell shares of $45.25 on July 12, 2000, the date
of grant of the Stilwell options.

The following table sets forth information regarding the shares of Stilwell
common stock received upon exercise of Stilwell options by the Named Executive
Officers in 2000, the aggregate dollar value realized upon exercise and the
value of unexercised options to purchase Stilwell common stock held by the
Named Executive Officers as of December 31, 2000.

Stilwell Aggregated Option/SAR Exercises
In Last Fiscal Year and Year-End Option/SAR Values

Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options/
Acquired Value Options/SARs at FY-End SARs at FY-End ($)(/1/)
Upon Realized ------------------------- -------------------------
Name Exercised ($)(/2/) Exercisable Unexercisable Exercisable Unexercisable
---- --------- ----------- ----------- ------------- ----------- -------------

Michael R. Haverty...... 522,000(/3/) $20,963,050(/3/) 1,438,106 0 $44,965,176 $ 0
Gerald K. Davies........ 50,000 $ 1,186,030 50,000 2,374 $ 861,030 $ 1,362
Robert H. Berry......... 400,000 $14,477,970 81,352 3,354 $ 2,005,286 $49,885
Richard P. Bruening..... 374,000 $15,737,174 203,506 0 $ 6,103,765 $ 0
Louis G. Van Horn....... 28,000 $ 1,199,642 177,552 0 $ 5,611,319 $ 0

- --------
(1) The dollar values in this column are calculated by multiplying (a) the
difference between the fair market value of the shares of Stilwell common
stock underlying the options on December 29, 2000 and the exercise price
of the options by (b) the number of options held at year-end.
(2) The dollar values in this column are calculated by multiplying (a) the
difference between the fair market value of the shares of Stilwell common
stock underlying the options on the date of exercise and the exercise
price of the options by (b) the number of options exercised.
(3) Includes options for 72,000 shares held by Mr. Haverty's children's trusts
with a value of $2,891,455 on the date of exercise.

Employment Agreements With Named Executive Officers

KCSI and KCSR entered into an Amended and Restated Employment Agreement
with Mr. Haverty and an Employment Agreement with Mr. Davies, each effective
January 1, 1999. KCSI and KCSL (which was merged into KCSI effective as of
December 31, 2000) entered into Amended and Restated Employment Agreements,
effective January 1, 1999, with each of Messrs. Berry, Bruening and Van Horn.
Mr. Haverty's employment agreement provides for his continued employment as
President and Chief Executive Officer of KCSR. KCSI also agreed to continue to
cause Mr. Haverty to be elected and retained as Director of KCSR and to use
its best efforts to enable Mr. Haverty to continue to be elected as a director
of KCSI. Mr. Davies employment agreement provides for his employment as
Executive Vice President and Chief Operating Officer of KCSR. Mr. Berry's
employment agreement provides for his continued employment as Senior Vice
President and Chief Financial Officer of KCSR. Mr. Bruening's employment
agreement provides for his continued employment as Senior Vice President and
General Counsel of KCSI. Mr. Van Horn's employment agreement provides for his
continued employment as Vice President and Comptroller of KCSR and KCSI. Each
of these employment agreements is subject to termination under certain
circumstances.

Pursuant to their respective employment agreements, the Named Executive
Officers receive as compensation for their services annual base salaries at
the rates approved by the KCSI Compensation Committee, which for 1999 were set
at $600,000 for Mr. Haverty, $300,000 for Mr. Davies, $235,008 for Mr. Berry,
$208,008 for Mr. Bruening and $158,004 for Mr. Van Horn. Those salaries may
not be reduced except as agreed to by the parties or as part of a general
salary reduction by KCSR applicable to all officers of KCSR, with respect to
Messrs. Haverty and Davies, and by KCSI applicable to all officers of KCSI,
with respect to Messrs. Berry, Bruening and Van Horn. Mr. Haverty and Mr.
Davies were not entitled to participate in any KCSI or KCSR incentive
compensation plans for 1999, but were eligible to participate in other benefit
plans or programs generally available to executive employees of KCSR. Messrs.
Berry, Bruening and Van Horn were not entitled to participate in any KCSI
incentive

compensation plans for 1999, but were eligible to participate in other benefit
plans or programs generally available to executive employees of KCSI. Each of
the employment agreements provides that the value of the respective Named
Executive Officer's annual compensation is fixed at a percentage of base
salary for purposes of cash compensation based benefit plans as follows:
167.67% for Mr. Haverty; 175% for each of Messrs. Davies, Berry and Bruening,
and 145% for Mr. Van Horn.

In the event of termination without cause by KCSR or KCSI, as applicable,
each of the Named Executive Officers would be entitled to twelve months of
severance pay at an annual rate equal to his base salary and for reimbursement
for the costs of continuing or obtaining comparable health and life insurance
benefits unless such benefits are provided by another employer. In the year in
which termination occurs, each of the Named Executive Officers would remain
eligible to receive benefits under the KCSI Incentive Compensation Plan, if
any, and the KCSI Executive Plan. After termination, none of the Named
Executive Officers would be entitled to accrue or receive benefits under any
other employee benefit plan, although they would be entitled to participate in
the KCSI 401(k) and Profit Sharing Plan and the KCSI Employee Stock Ownership
Plan in the year of termination if they were to meet the requirements for
participation in the year of termination. In addition, Mr. Davies' employment
agreement provides that if he terminates his employment agreement within 90
days after Mr. Haverty has discontinued all association with KCSR and KCSI or
within 90 days after there is any significant reduction in his
responsibilities for KCSR, he shall be entitled to the payments and benefits
described above as if terminated by KCSR other than for cause. As part of his
employment agreement, each Named Executive Officer has agreed not to use or
disclose any trade secret of KCSR or KCSI, as applicable (as defined in his
employment agreement), after any termination of his employment and shall,
immediately upon termination of employment, return to KCSR or KCSI, as
applicable, any trade secrets in his possession which exist in tangible form.

If there were a change in control of KCSI (as defined in a Named Executive
Officer's employment agreement) during the term of that agreement, that Named
Executive Officer's employment, executive capacity, salary and benefits would
be continued for a three-year period at levels in effect on the control change
date (as defined in his employment agreement). During that three-year period,
salary would be paid at a rate not less than twelve times the highest monthly
base salary paid or payable to the Named Executive Officer in the twelve
months immediately prior to the change in control. During that three-year
period, the Named Executive Officer also would be eligible to participate in
all benefit plans made generally available to executives of his level or to
the employees of KCSR or KCSI, as applicable, generally, would be eligible to
participate in any KCSI incentive compensation plan and would be entitled to
immediately exercise all outstanding stock options and receive a lump-sum cash
payment equal to the difference between the fair market value of the shares of
common stock underlying the non-vested options and the exercise price of such
options. If the amounts payable during that three-year period were
discretionary, the benefits continued would not be less than the average
annual amount for the three years prior to the change in control and incentive
compensation would not be less than 75% of the maximum amount which could have
been paid to the Named Executive Officer under the terms of the incentive
compensation plan. With respect to unfunded employer obligations under benefit
plans, the Named Executive Officer would be entitled to a discounted cash
payment of amounts to which he would be entitled. Each Named Executive
Officer's employment may be terminated after the control change date, but if
termination were other than "for cause" (as defined in his employment
agreement), he would be entitled to payment of his base salary through
termination plus a discounted cash severance payment equal to a percentage
(167.67% for Mr. Haverty and 175% for each of Messrs. Davies, Berry and
Bruening, and 180% for Mr. Van Horn ) of three times his annual base salary
for each of Messrs. Haverty, Davies, Berry and Bruening, and two times his
annual base salary for Mr. Van Horn, continuation or payment of benefits for a
three-year period at levels in effect on the control change date and certain
health, prescription and dental benefits until attainment of age 60, and
certain health and prescription benefits for the remainder of his life unless
such benefits are otherwise provided by a subsequent employer. Each Named
Executive Officer

is also permitted to resign after a change in control upon "good reason" (as
defined in his employment agreement) and advance written notice, and to
receive the same payments and benefits as if his employment had been
terminated. Each Named Executive Officer's employment agreement also provides
for payments to him necessary to relieve him of certain adverse federal income
tax consequences if amounts received under the agreement were determined to
involve "parachute payments" under Section 4999 of the Internal Revenue Code.

New Compensation Program

In connection with the Spin-off, we adopted the Compensation Program for
management employees and Outside Directors which became effective upon the
Spin-off. Under the Compensation Program, the base salaries of the Named
Executive Officers are frozen at the rates in effect for 1999 through December
31, 2001 and the Named Executive Officers will not participate in any KCSI
incentive compensation plan during that period. In addition, the Named
Executive Officers will not receive grants of stock-based or other long-term
incentive compensation through December 31, 2001, except for the special grant
of stock options described below in connection with the Spin-off. Under the
Compensation Program, on July 13, 2000 the Named Executive Officers and
certain other senior management employees were granted performance stock
options, became eligible to purchase a specified number of restricted shares
of KCSI common stock, and were granted a specified number of options for each
of the restricted shares purchased.

The performance stock options have an exercise price of $5.75 which is the
mean price of KCSI common stock trading on the NYSE on July 13, 2000. The
options will expire at the end of ten years, subject to earlier termination in
the event of termination of employment, disability, retirement, death, or
failure to achieve the stock price thresholds within three years. The options
will vest and become exercisable in equal installments as KCSI's stock price
achieves thresholds (and maintains those thresholds for 20 consecutive trading
days) that reflect incremental 15% compounded increases from the stock price
on the date of grant. One third of these options becomes exercisable upon
meeting each threshold. Three years from the date of grant, options not then
exercisable become exercisable and then expire thirty days thereafter. Vesting
will accelerate in the event of a board-approved change in control of KCSI,
death or disability. The number of performance stock options to purchase
shares of KCSI common stock granted to the Named Executive Officers were as
follows: 990,000 to Mr. Haverty; 385,000 to Mr. Davies; 240,000 to Mr. Berry;
160,000 to Mr. Bruening and 110,000 to Mr. Van Horn.

Under the management investment component of the Compensation Program, all
management employees and Outside Directors were granted rights to purchase a
specified number of restricted shares of KCSI common stock and were granted a
specified number of options in connection with each restricted share
purchased. The number of shares available and the number of options granted in
connection with shares purchased was based on the compensation level of the
employee. The number of shares available for purchase and purchased by each
Outside Director was 3,000, with two options granted in connection with each
share purchased. Each Named Executive Officer purchased the full amount of
restricted shares offered to him under the Compensation Program, at a price of
$5.75 per share as follows: Mr. Haverty 99,000 shares; Mr. Davies 38,500
shares; Mr. Berry 24,000 shares; Mr. Bruening 16,000 shares and Mr. Van Horn
11,000 shares. Each Outside Director purchased 3000 shares of KCSI restricted
stock at a price of $5.75 per share. Shares purchased pursuant to these rights
were deposited with KCSI and are restricted from sale or transfer for a period
of three years. Such restriction will be lifted upon termination of a Named
Executive Officer's or Outside Director's affiliation with KCSI. For each
restricted share purchased, a Named Executive Officer or Outside Director, as
applicable, received options for two shares of KCSI common stock with an
exercise price equal to $5.75. Any management investment rights not exercised
at the time of the Spin-off were forfeited. If a Named Executive Officer or
Outside Director voluntarily resigns or is terminated prior to the end of the
restriction period, the matching options will be forfeited. The matching
options become

exercisable three years after the date of grant. Vesting of the matching
options will accelerate in the event of a board-approved change in control of
KCSI, death, disability or retirement. The options expire at the end of ten
years, subject to earlier termination as provided in the option agreements.
KCSI provided 60-day loans to certain of the Named Executive Officers and the
Outside Directors in connection with the purchase of the restricted shares.
The Named Executive Officers and Outside Directors taking those loans were
required to sign recourse promissory notes and pledge the shares for repayment
of the loans. All of these loans have been repaid in full. See "Certain
Relationships and Related Transactions."

Indemnification Agreements

KCSI has entered into indemnification agreements with its officers and
directors. Those agreements are intended to supplement our officer and
director liability insurance and provide the officers and directors with
specific contractual assurance that the protection provided by our bylaws will
continue to be available regardless of, among other things, an amendment to
the bylaws or a change in management or control of KCSI. The indemnification
agreements provide for prompt indemnification "to the fullest extent permitted
by law" and for the prompt advancement of expenses, including attorney's 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, KCSI's determinations of indemnity are made by a committee of
disinterested directors unless a change in control of KCSI 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.

Change in Control Arrangements

KCSI has established a series of trusts that are intended to secure the
rights of its officers, directors, employees, former employees and others (the
"Beneficiaries") under various contracts, benefit plans, agreements,
arrangements and commitments. The function of each trust is to receive
contributions from KCSI and, in the event that KCSI fails to honor certain
obligations to a Beneficiary following a change in control of KCSI (as defined
by the trust), distribute to the Beneficiary amounts accumulated in the
Beneficiary's trust account sufficient to discharge KCSI's obligations as such
amounts become due and payable. Most of the trusts require KCSI to be solvent
as a condition to making distributions. Certain trusts allow distributions
upon approval by KCSI's Board of Directors prior to a change in control.
Trusts have been instituted in connection with employment continuation
commitments under employment agreements, the KCSI Executive Plan, the KCSI
Directors' Deferred Fee Plan, KCSI's indemnification agreements, KCSI's stock
option plans, and KCSI's charitable contribution commitments and certain other
agreements, commitments and arrangements. The trusts are revocable until a
change in control of KCSI and will terminate automatically if no such change
in control occurs prior to December 31, 2001.

KCSR has established similar trusts in connection with its employment
continuation commitments under employment agreements and incentive
compensation arrangements and certain other agreements, commitments and
arrangements. KCSR also established a similar trust in connection with its
participation in the KCSI Executive Plan. Distributions under the KCSR trusts
are tied to failures by KCSI and KCSR to honor their obligations to their
respective beneficiaries following a change in control of KCSI.

Compensation Plans and Arrangements

KCSI and its subsidiaries maintain compensation plans for certain of their
officers and employees. Certain of those plans have vesting provisions under
which the plan participants do not have the right to receive all of the plan
benefits allocated to their accounts until certain conditions have been
satisfied. Described below are the portions of those plans in which the
accounts of officers named in the Summary Compensation Table become vested as
a result of (1) their retirement from or termination of employment with us or
(2) a change in control of KCSI, where the value of the unvested portion of
the account was more than $100,000 on December 31, 1999.

The KCSI Employee Stock Ownership Plan and Trust Agreement

The KCSI Employee Stock Ownership Plan and Trust Agreement (the "ESOP") is
designed to be a qualified employee stock ownership plan under the Internal
Revenue Code of 1986, as amended (the "Code"), for purposes of investing in
shares of KCSI common stock and, as of January 1, 2001, a qualified stock
bonus plan with respect to the remainder of the ESOP not invested in KCSI
common stock. In connection with the Spin-off, participants' ESOP accounts
received two shares of Stilwell common stock for each share of KCSI common
stock held. With respect to the Stilwell shares, a participant may: (1) keep
the Stilwell shares in the participant's account; (2) dispose of the Stilwell
shares and reinvest the proceeds in one or more of the diversified investment
funds that are available under the ESOP; (3) dispose of the Stilwell shares
and reinvest the proceeds in KCSI common stock; or (4) select any combination
of the foregoing. Allocations of shares of KCSI common stock, if any, to
participant accounts in the ESOP for any plan year are based upon each
participant's proportionate share of the total eligible compensation paid
during the plan year to all participants in the ESOP, subject to Code-
prescribed maximum allocation limitations. As of the date of this prospectus,
all shares held by the ESOP have been allocated to participant's accounts.
Forfeitures are similarly allocated. For this purpose, compensation includes
only compensation received during the period the individual was actually a
participant in the ESOP.

A participant with less than five years of service is not vested in the
ESOP's contributions, forfeitures and earnings. However, a participant becomes
100% vested upon completion of five years of service. In addition, a
participant becomes 100% vested at his or her retirement at age 65, death or
disability or upon a change in control of KCSI (as defined in the ESOP).
Distributions of benefits under the ESOP may be made in connection with a
participant's death, disability, retirement or other termination of
employment. A participant in the ESOP has the right to select whether payment
of his or her benefit will take the form of cash, whole shares of KCSI common
stock or a combination thereof. Also, to the extent a participant's account
holds Stilwell shares, a participant may elect payment in the form of Stilwell
shares. In the event no election is made, the payment shall be made in KCSI
common stock to the extent a participant's account holds KCSI common stock and
cash to the extent cash or other non-KCSI common stock investments are held. A
participant may further opt to receive payment in a lump sum, installments or
a combination thereof.

1991 Amended and Restated Stock Option and Performance Award Plan

Under the provisions of the 1991 Plan and subject to the terms of the
pertinent award agreement, the retirement, death or disability (as such terms
are defined in the 1991 Plan) may accelerate the exercisability of an award as
follows. Upon the death or disability of a grantee of an award under the 1991
Plan, the unexercisable options become exercisable and the grantee (or his or
her personal representative or transferee under a will or the laws of descent
and distribution) may exercise such options up to the earlier of the
expiration of the option term or 12 months. Upon the retirement of a grantee
of an award under the 1991 Plan, the unexercisable options become exercisable
and the grantee (or his or her personal representative or transferee under a
will or the laws of descent and

distribution) may exercise such options up to the earlier of the expiration of
the option term or five years from the date of retirement. Upon a change of
control of KCSI (as defined in the 1991 Plan), the unexercisable options
become immediately exercisable. LSAR's are granted in tandem with options. All
of the LSAR's are automatically exercised upon a change in control that is not
approved by the incumbent board of KCSI (as such terms are defined in the 1991
Plan).

KCSI 401(k) and Profit Sharing Plan

The KCSI 401(k) and Profit Sharing Plan is a qualified defined contribution
plan. KCSI originally established the KCSI 401(k) Plan effective as of January
1, 1996 and the KCSI Profit Sharing Plan as of January 1, 1990. Effective as
of January 1, 2001, the Profit Sharing Plan was merged with the 401(k) Plan,
which was renamed the KCSI 401(k) and Profit Sharing Plan (the "Plan"). Upon
the merger of the plans, participant accounts in the Profit Sharing Plan were
transferred to the Plan.

Eligible employees of KCSI and other participating subsidiaries of KCSI
(the "Employer") may elect to make pre-tax contributions, called 401(k)
contributions, to the Plan up to 10% of compensation and subject to certain
limits under the Internal Revenue Code of 1986, as amended (the "Code"). The
Employer will make matching contributions to the Plan equal to 100% of a
participant's 401(k) contributions and up to a maximum of 3% of a
participant's compensation. Matching contributions vest at the rate of 25% at
three years of service, 50% at four years of service and 100% at five years of
service. A participant becomes 100% vested upon retirement at age 65, death or
disability or upon a change in control of KCSI (as defined in the Plan). The
Employer may, in its discretion, make special contributions on behalf of
participants to satisfy certain nondiscrimination requirements imposed by the
Code, which are 100% vested.

The Employer may also make, in its discretion, annual profit sharing
contributions in an amount not to exceed the maximum allowable deduction for
federal income tax purposes and certain limits under the Code. Only employees
who have met certain standards as to hours of service are eligible to receive
profit sharing contributions. No minimum contribution is required. Each
eligible participant, subject to maximum allocation limitations under the
Code, is allocated the same percentage of the total contribution as the
participant's compensation bears to the total compensation of all
participants. Prior to January 1, 2001, a participant's profit sharing
contributions vested at the rate of 25% at three years of service, 50% at four
years of service and 100% at five years of service. As of January 1, 2001,
profit sharing contributions, including a participant's account in the Profit
Sharing Plan transferred to the Plan, are 100% vested.

Participants may direct the investment of their accounts under the Plan by
selecting from one or more of the diversified investment funds that are
available under the Plan, including a fund consisting of KCSI common stock.
Distribution of benefits under the Plan will be made in connection with a
participant's death, disability, retirement or other termination of
employment. A participant may elect whether payment of his or her benefits
will be in a lump sum, in installments, or in a combination thereof.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transactions with Affiliates

Prior to the Spin-off KCSI and Stilwell entered into various agreements for
the purpose of governing certain of the limited ongoing relationships between
KCSI and Stilwell during a transitional period after the Spin-off, including:

. the Intercompany Agreement dated as of August 16, 1999, as amended April
28, 2000, relating to, among other things, the assignment of certain
agreements, stock options for employees and directors of KCSI and
Stilwell, various employment matters, pending litigation, indemnification
and certain transition services;

. the Contribution Agreement dated July 7, 1999, as amended April 28, 2000,
relating to, among other things, the transfer of certain assets from KCSI
to Stilwell and the assumption of certain of KCSI's liabilities by
Stilwell; and

. the Tax Disaffiliation Agreement dated as of August 1999, relating to
certain tax matters.

Certain Business Relationships

During 1999 and 2000, KCSI retained the law firm of Manatt, Phelps &
Phillips to provide legal services in connection with its transportation
operations in Mexico. On September 29, 2000, KCSI and Manatt, Phelps &
Phillips entered into an agreement commencing October 1, 2000 and ending
October 31, 2002, under which Manatt, Phelps & Phillips and James R. Jones
agreed to provide KCSI with advice and assistance with reference to issues and
transactions in Mexico and other international venues. In consideration of the
services provided, KCSI agreed to pay Manatt, Phelps & Phillips the sum of
$10,000 per month. Mr. Jones, a director of KCSI, acts as Special Counsel to
Manatt, Phelps & Phillips and receives a salary from such law firm for his
services as Special Counsel. The fees paid by KCSI to Manatt, Phelps &
Phillips did not exceed 5% of that firm's gross revenues for its last full
fiscal year.

Transactions with Management

KCSI provided loans to certain of its executive officers and Outside
Directors in connection with the purchase of the restricted shares discussed
under "Management--New Compensation Program." KCSI provided such loans to the
following executive officers of KCSI in the principal amounts indicated: Mr.
Haverty, $569,250; Mr. Davies, $221,375; Mr. Berry, $138,000; Mr. Van Horn,
$63,250 and Mr. King, $63,250. KCSI provided a loan in the amount of $17,250
to each of Messrs. Allinson, Fitt and Jones, the Outside Directors of KCSI.
The loans were a sixty (60) day bridge loan bearing an annual interest rate of
6.49% (or .01778% per day). The loans could be repaid at any time prior to the
original sixty-day term. The interest cost to the employee or Outside Director
was calculated based on the number of days the loan was outstanding. Interest
was due and payable when the loan principal was repaid. The executive officers
and Outside Directors taking those loans were required to sign recourse
promissory notes and pledge the shares for repayment of the loans. All of the
loans have been repaid in full.

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

As of the date of this prospectus, KCSI, the only person known by KCSR to
own beneficially more than 5% of the outstanding shares of common stock of
KCSR, and whose principal executive offices are located at 114 West 11th
Street, Kansas City, Missouri 64105, owns beneficially and of record 9,840,000
shares of common stock and 57 shares of preferred stock of KCSR, representing
100% of the shares of common stock and 100% of the shares of preferred stock
of KCSR outstanding. None of the directors or executive officers of KCSR own
beneficially any shares of the common stock of KCSR.

Ownership of KCSI Common Stock by Management

The following table sets forth information with respect to the beneficial
ownership of KCSI common stock as of December 31, 2000 by (1) directors of
KCSI, (2) directors of KCSR, (3) each of the Named Executive Officers, and (3)
all of KCSI's directors and executive officers as a group. The table reflects
the one-for-two reverse stock split of KCSI common stock completed on July 12,
2000.

Security Ownership of Certain
Beneficial Owners and Management

Shares of KCSI
Common Stock
Beneficially
Owned(/2/)
------------------------------
Name and Address(/1/) Number Percentage
--------------------- --------- ----------

A. Edward Allinson ........................ 51,233 *
Director
Robert H. Berry(/5/)....................... 159,136(/3/) *
Senior Vice President and Chief Financial
Officer
Richard P. Bruening(/5/)................... 188,469(/3/)(/4/) *
Senior Vice President, General Counsel and
Corporate Secretary
Gerald K. Davies(/5/)...................... 63,578(/3/) *
Executive Vice President
Michael G. Fitt............................ 54,800(/4/) *
Director
Michael R. Haverty(/5/).................... 1,292,026(/3/)(/4/) 2.22%
Chairman of the Board, President and Chief
Executive Officer
James R. Jones............................. 12,650 *
Director
Albert W. Rees(/5/)........................ 180,401(/3/) *
KCSR Senior Vice President--International
Operations
Landon H. Rowland.......................... 855,606(/3/) 1.47%
Director
Byron G. Thompson.......................... 10,000 *
Director
Louis G. Van Horn.......................... 71,420(/3/) *
Vice President and Comptroller
Directors and executive officers of KCSI as 2,845,858(/3/) 4.87%
a group (12 persons)......................

- --------
* Less than one percent of the outstanding shares of KCSI common stock.
(1) The address for each of the above individuals is 114 West 11th Street,
Kansas City, Missouri 64105.
(2) Percentage ownership is based on the number of shares outstanding as of
December 31, 2000 plus any Additional Shares (as defined below). The
holders may disclaim beneficial ownership of shares included under certain
circumstances. Except

as noted, the holders have sole voting and dispositive power over the
shares. Under applicable law, shares that may be
acquired upon the exercise of options or other convertible securities that
are exercisable on December 31, 2000 or will become exercisable within 60
days of that date (the "Additional Shares") are considered beneficially
owned. The Additional Shares included in the amounts shown above are as
follows: Mr. Allinson, 35,200; Mr. Berry, 340; Mr. Bruening, 144,377; Mr.
Jones, 6,000; Mr. Van Horn, 51,390 and other executive officers, 67,133.
(3) Under applicable law, shares that are held indirectly are also considered
beneficially owned. The shares included in the amounts shown above are as
follows: Mr. Rowland owns 240 shares through KCSI's 401(k) and Profit
Sharing Plan; Mr. Haverty owns 25,805 shares through the KCSI ESOP; Mr.
Davies owns 78 shares through the KCSI ESOP; Mr. Berry owns 9,646 shares
through the KCSI ESOP; Mr. Bruening owns 16,233 shares through the KCSI
ESOP; Mr. Van Horn owns 8,381 shares through the KCSI ESOP; Mr. Rees owns
1,752 shares through the KCSI ESOP and all KCSI directors and executive
officers as a group own indirectly 68,470 shares.
(4) Directors and executive officers may also be deemed to own beneficially
shares held in other capacities as follows: Mr. Haverty, 412 shares held
by his children, as to which he disclaims beneficial ownership; Mr.
Bruening, 5,911 shares held by his wife, as to which he disclaims
beneficial ownership; Mr. Fitt, 12,800 shares held in trust.
(5) Also directors of KCSR.

DESCRIPTION OF KCS CREDIT FACILITIES AND OTHER INDEBTEDNESS

KCS Credit Facilities

In preparation for the Spin-off, KCSI re-capitalized its debt structure in
January 2000 through a bond tender and other debt repayment and entered into
new senior credit facilities. On December 6, 1999, KCSI commenced offers to
purchase and consent solicitations with respect to any and all of KCSI's
outstanding 7.875% Notes due July 1, 2002, 6.625% Notes due March 1, 2005,
8.8% Debentures due July 1, 2022, and 7% Debentures due December 15, 2025
(collectively "Debt Securities" or "notes and debentures").

Approximately $398.4 million of the $400 million outstanding Debt
Securities were validly tendered and accepted by KCSI. Total consideration
paid for the repurchase of these outstanding notes and debentures was $401.2
million. Funding for the repurchase of these Debt Securities and for the
repayment of $264 million of borrowings under then existing revolving credit
facilities was obtained from a combination of new credit facilities, the KCS
Credit Facilities and an additional credit facility assumed by Stilwell, each
of which was entered into on January 11, 2000.

We have entered into the KCS Credit Facilities with a group of lenders (the
"Lenders") and The Chase Manhattan Bank, as Administrative Agent and
Collateral Agent. The KCS Credit Facilities were provided by a syndicate of
banks and other financial institutions led by The Chase Manhattan Bank, as
administrative agent, collateral agent, issuing bank and swingline lender and
The Bank of Nova Scotia, as syndication agent. KCSR is the borrower under the
KCS Credit Facilities, which provide senior secured financing of up to $750
million, consisting of a $150 million tranche A term loan facility, which
matures on December 30, 2005, a $250 million tranche B term loan facility,
which matures on December 29, 2006, a $200 million tranche X term loan
facility, which was due on January 11, 2001 prior to its repayment from the
proceeds of the offering of Outstanding Notes and a $150 million revolving
credit facility, which was reduced to $100 million on January 2, 2001. The
commitments under the revolving credit facility will terminate and all
outstanding revolving loans will be due and payable on January 11, 2006.
Letters of credit are also available under the revolving credit facility up to
a limit of $15 million.

Each remaining loan under the KCS Credit Facilities bears interest at a
rate equal to the selected rate (the London interbank offered rate ("LIBOR")
or, at KCSR's option, the alternate base rate (as defined in the KCS Credit
Facilities)) plus an applicable margin. The applicable margin is determined by
the type of loan and KCSI's leverage ratio (defined as KCSI's total debt to
consolidated earnings before interest, taxes, depreciation and amortization
excluding the equity earnings of unconsolidated affiliates for the prior four
fiscal quarters). Based on KCSI's leverage ratio at September 30, 2000, the
tranche A term loan maturing in 2005 and all loans under the revolving credit
facility have an applicable margin of 2.50% per annum for LIBOR priced loans
and 1.50% per annum for alternate base rate priced loans. The tranche B term
loan maturing in 2006, as of September 30, 2000, has an applicable margin of
2.75% per annum for LIBOR priced loans and 1.75% per annum for alternate base
rate priced loans.

On January 11, 2000, KCSR borrowed the full amount of the term facilities
and used the proceeds to repurchase the Debt Securities, retire other debt
obligations and pay related fees and expenses. No funds were initially
borrowed under the revolving credit facility. Proceeds of future borrowings
under the revolving credit facility may be used for working capital and for
other general corporate purposes. The letters of credit under the revolving
credit facility are to be used for general corporate purposes.

In addition to paying interest on outstanding principal under the KCS
Credit Facilities, KCSR is required to pay a commitment fee to the Lenders
under the revolving credit facility in respect of the unutilized commitments
thereunder at a rate equal to .50% per annum. Additionally, a fee equal to a
per annum rate equal to 0.25% plus the applicable margin for LIBOR priced
revolving loans will be paid on any letter of credit issued under the KCS
Credit Facilities.

The term loans are subject to a mandatory prepayment with, among other
things:

. 100% of the net proceeds of (1) certain asset sales or other dispositions
of property, (2) the sale or issuance of certain indebtedness (including
the Notes) or equity securities and (3) certain insurance recoveries

. 75% of excess cash flow (as defined in the KCS Credit Facilities) if the
tranche X term loans have not been paid in full prior to the end of such
fiscal year or 50% of excess cash flow if the tranche X term loans have
been paid in full prior to the end of such fiscal year.

We may voluntarily repay outstanding loans under the KCS Credit Facilities
without penalty.

The obligations under the KCS Credit Facilities and the related documents
are secured by a first priority lien upon substantially all of our real and
personal property, and a pledge of substantially all the common stock of KCSR
and certain of KCSI's other subsidiaries. Our obligations under the KCS Credit
Facilities are guaranteed by KCSI and certain of KCSI's other subsidiaries.
KCSL, which was a Note Guarantor on the Outstanding Notes, was merged into
KCSI effective December 31, 2000.

The tranche A facility and the tranche B facility will amortize each year
in quarterly amounts in the following approximate aggregate principal amounts
for each year set forth below.

Year Tranche A Facility Tranche B Facility
---- ------------------ ------------------

2001................................. $ 20,000,000 $ 2,500,000
2002................................. $ 30,000,000 $ 2,500,000
2003................................. $ 30,000,000 $ 2,500,000
2004................................. $ 30,000,000 $ 2,500,000
2005................................. $ 40,000,000 $ 2,500,000
2006................................. n/a $237,500,000
------------ ------------
Total............................ $150,000,000 $250,000,000
============ ============

Principal amounts outstanding under the revolving credit facility will be
due and payable in full at maturity, January 11, 2006.

The KCS Credit Facilities contain a number of covenants that, among other
things, restrict our ability to:

. incur additional indebtedness,

. incur additional liens,

. enter into sale and leaseback transactions,

. engage in certain transactions with affiliates,

. enter into other agreements that restrict our ability to incur liens or
pay dividends,

. make investments, loans, advances, guarantees or acquisitions,

. make certain restricted payments and dividends,

. repay other certain indebtedness, or

. make capital expenditures.

In addition, under the KCS Credit Facilities, KCSI is required to comply with
specified financial ratios and tests, including minimum interest expense
coverage and leverage ratios. The KCS Credit Facilities also contains certain
customary events of default.

In accordance with a provision in the KCS Credit Facilities requiring KCSR
to manage its interest rate risk through hedging activity, in first quarter
2000 KCSR entered into five separate interest rate

cap agreements for an aggregate notional amount of $200 million expiring on
various dates in 2002. The interest rate caps are linked to LIBOR. A total of
$100 million of the aggregate notional amount provides a cap on KCSR's
interest rate of 7.25% plus the applicable spread, while a total of $100
million limits the interest rate to 7% plus the applicable spread.
Counterparties to the interest rate cap agreements are major financial
institutions who also participate in the KCS Credit Facilities. Credit loss
from counterparty non-performance is not anticipated.

Other Indebtedness

KCSR has purchased rolling stock under conditional sales agreements,
equipment trust certificates and capitalized lease obligations. The equipment
has been pledged as collateral for the related indebtedness. We lease
transportation equipment, as well as office and other operating facilities
under various capital and operating leases. Our indebtedness with respect to
equipment trust certificates, conditional sales agreements and capital leases
totaled approximately $68.6 million at December 31, 1999.

Minimum annual payments and present value thereof under existing capital
leases, other debt maturities and minimum and annual rental commitments under
noncancellable operating leases as of December 31, 1999 (assuming the January
11, 2000 recapitalization of our debt structure had been completed, and the
$400 million term loans under the KCS Credit Facilities were outstanding after
repayment of the $200 million tranche X term loan facility) are as follows:

Capital Leases Operating Leases
------------------------- -----------------------
Minimum Net
Lease Less Present Other Total Third
Payments Interest Value Debt Debt Affiliates Party Total
-------- -------- ------- ------ ------ ---------- ----- ------
(dollars in millions)

2000........... $0.7 $0.3 $0.4 $ 10.5 $ 10.9 $ 34.3 $23.6 $ 57.9
2001........... 0.8 0.3 0.5 12.3 12.8 34.3 14.2 48.5
2002........... 0.7 0.2 0.5 112.3 112.8 34.3 10.2 44.5
2003........... 0.8 0.2 0.6 15.8 16.4 34.3 6.9 41.2
2004........... 0.6 0.1 0.5 12.3 12.8 31.3 3.0 34.3
Later Years.... 1.7 0.3 1.4 517.4 518.8 215.0 20.6 235.6
---- ---- ---- ------ ------ ------ ----- ------
Total...... $5.3 $1.4 $3.9 $680.6 $684.5 $383.5 $78.5 $462.0
==== ==== ==== ====== ====== ====== ===== ======

100

THE EXCHANGE OFFER

General

We hereby offer to exchange the Exchange Notes, which have been registered
under the Securities Act, for a like principal amount of our original
unregistered Outstanding Notes. The exchange offer is subject to the terms and
conditions set forth in this prospectus.

Following the consummation of the exchange offer, holders of the
Outstanding Notes who were eligible to participate in the exchange offer but
who did not tender its Outstanding Notes may not have any further registration
rights and the Outstanding Notes will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity of the market for the
Outstanding Notes could be adversely affected.

Background, Purpose and Effect of the Exchange Offer

We originally sold the Outstanding Notes on September 27, 2000 to the
Initial Purchasers. The Initial Purchasers subsequently resold the Outstanding
Notes to (1) qualified institutional buyers pursuant to Rule 144A under the
Securities Act and (2) qualified buyers outside the United States in reliance
upon Regulation S under the Securities Act.

As a condition to that sale to the Initial Purchasers, we entered into an
exchange and registration rights agreement with the Initial Purchasers.
Pursuant to that agreement, we agreed to:

(1) file with the Commission on or prior to January 25, 2001, a
registration statement on an appropriate form under the Securities Act,
relating to a registered exchange offer for the Outstanding Notes under the
Securities Act; and

(2) use our reasonable best efforts to cause the exchange offer
registration statement to be declared effective under the Securities Act on
or prior to March 26, 2001.

As soon as practicable after the effectiveness of the exchange offer
registration statement, we agreed to offer to the holders of the restricted
securities who are not prohibited by any law or policy of the Commission from
participating in the exchange offer the opportunity to exchange their
securities for the Exchange Notes, which will be identical in all material
respects to the Outstanding Notes (except that the Exchange Notes will not
contain transfer restrictions) and that would be registered under the
Securities Act. We agreed to keep the exchange offer open for not less than 30
days (or longer, if required by applicable law) after the date on which notice
of the exchange offer is mailed to holders of the Notes.

In addition, we agreed to file with the Commission a shelf registration
statement to cover resales of restricted securities by those holders who
satisfy certain conditions relating to the provisions of information in
connection with the shelf registration statement, if:

(1) because of any change in law or applicable interpretations thereof
by the Staff of the Commission, the Issuer is not permitted to effect the
exchange offer as contemplated hereby;

(2) any Outstanding Notes validly tendered pursuant to the exchange
offer are not exchanged for Exchange Notes on or prior to April 25, 2001;

(3) any Initial Purchaser so requests with respect to Outstanding Notes
not eligible to be exchanged for Exchange Notes in the exchange offer and
held by it following the consummation of the exchange offer;

(4) any applicable law or interpretations do not permit any holder of
Outstanding Notes to participate in the exchange offer;

101

(5) any holder of Outstanding Notes that participates in the exchange
offer does not receive freely transferable Exchange Notes in exchange for
tendered Outstanding Notes; or

(6) the Issuer so elects.

We agreed to use our reasonable best efforts to have the exchange offer
registration statement or, if applicable, the shelf registration statement
declared effective by the Commission as promptly as practicable after the
filing thereof. Unless the exchange offer would not be permitted by a policy
of the Commission, we have agreed to commence the exchange offer and use our
reasonable best efforts to consummate the exchange offer as promptly as
practicable, but in any event prior to 210 days after the issue date. If
applicable, we will use our reasonable best efforts to keep the shelf
registration statement effective for a period of two years after the issue
date or, if earlier, until all the restricted securities covered by the shelf
registration statement have been sold.

We will be obligated to pay liquidated damages to each holder of restricted
securities during the period of one or more of the registration defaults
outlined below if:

(1) the applicable registration statement is not filed with the
Commission on or prior to January 25, 2001;

(2) the exchange offer registration statement or the shelf registration
statement, as the case may be, is not declared effective on or prior to
March 26, 2001;

(3) the exchange offer is not consummated on or prior to 210 days after
the issue date; or

(4) the shelf registration statement is filed and declared effective
within 180 days after the issue date but shall thereafter cease to be
effective (at any time that we are obligated to maintain the effectiveness
thereof) without being succeeded within 60 days by an additional
registration statement filed and declared effective

(each such event referred to in clauses (1) through (4), a "registration
default"). The amount of the liquidated damages will be equal to $0.192 per
week per $1,000 principal amount of the Outstanding Notes constituting
restricted securities held by such holder until the applicable registration
statement is filed, the exchange offer registration statement is declared
effective and the exchange offer is consummated or the Shelf Registration
Statement is declared effective or again becomes effective, as the case may
be. All accrued liquidated damages shall be paid to holders in the same manner
as interest payments on the Notes on semi-annual payment dates which
correspond to interest payment dates for the Notes. Following the cure of all
registration defaults, the accrual of liquidated damages will cease.

Each holder of Outstanding Notes that wishes to exchange Outstanding Notes
for transferable Exchange Notes in the exchange offer will be required to make
the following representations:

(1) any Exchange Notes will be acquired in the ordinary course of its
business;

(2) the holder (other than a broker-dealer referred to in the next
sentence) is not engaged in, and does not intend to engage in, the
distribution of the Exchange Notes;

(3) such holder has no arrangement or undertaking with any person to
participate in the distribution of the Exchange Notes; and

(4) neither the holder nor any such other person is our "affiliate"
within the meaning of Rule 405 under the Securities Act, or if it is an
affiliate, that it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable; and

As indicated above, each participating broker-dealer that receives an Exchange
Note for its own account in exchange for Outstanding Notes that were acquired
as a result of market-making activities

102

or other trading activities must acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale
of such Exchange Notes. For a description of the procedures for resales by
participating broker-dealers, see "Plan of Distribution."

Resale of the Exchange Notes

Based on interpretations by the Staff of the Commission set forth in no-
action letters issued to unrelated third parties, we believe that a holder or
other person who receives Exchange Notes will be allowed to resell the
Exchange Notes to the public without further registration under the Securities
Act and without delivering to the purchasers of the Exchange Notes a
prospectus provided that exchanging holder:

. acquired the Outstanding Notes in the ordinary course of its business;

. is not participating, does not intend to participate, and has no
arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes; and

. is not an affiliate of ours within the meaning of Rule 405 under the
Securities Act.

If any holder acquires Exchange Notes in the exchange offer for the purpose of
distributing or participating in a distribution of the Exchange Notes, the
holder cannot rely on the position of the Staff of the Commission expressed in
the no-action letters or any similar interpretive letters, and must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale transaction, unless an exemption from
registration is otherwise available.

This prospectus may be used for an offer to resell, for the resale or for
other retransfer of Exchange Notes only as specifically set forth in this
prospectus. With regard to broker-dealers, only broker-dealers that acquired
the Outstanding Notes as a result of market-making activities or other trading
activities may participate in the exchange offer. Each broker-dealer that
receives Exchange Notes for its own account in exchange for Outstanding Notes,
where such Outstanding Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. See "Plan of Distribution."

Terms of the Exchange Offer

Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any and all Outstanding Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the expiration date of the exchange offer. We will issue $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal amount of
Outstanding Notes accepted in the exchange offer. Holders may tender some or
all of their Outstanding Notes pursuant to the exchange offer. However,
Outstanding Notes may be tendered only in integral multiples of $1,000.

The form and terms of the Exchange Notes will be substantially identical to
the form and terms of the Outstanding Notes except the Exchange Notes will be
registered under the Securities Act, will not bear legends restricting their
transfer and will not provide for any liquidated damages upon our failure to
fulfill our obligations under the exchange and registration rights agreement
to file, and cause to be effective, a registration statement. The Exchange
Notes will evidence the same debt as the Outstanding Notes. The Exchange Notes
will be issued under and entitled to the benefits of the same Indenture that
authorized the issuance of the Outstanding Notes. Consequently, both series
will be treated as a single class of debt securities under that Indenture.

The exchange offer is not conditioned upon any minimum or maximum aggregate
principal amount of Outstanding Notes being tendered for exchange.

103

As of the date of this prospectus, $200,000,000 aggregate principal amount
of the Outstanding Notes were outstanding. This prospectus and the letter of
transmittal are being sent to all registered holders of Outstanding Notes.
There will be no fixed record date for determining registered holders of
Outstanding Notes entitled to participate in the exchange offer.

Holders of Outstanding Notes do not have any appraisal or dissenters'
rights under the General and Business Corporation Law of Missouri, or in the
Indenture, in connection with the exchange offer. We intend to conduct the
exchange offer in accordance with the provisions of the exchange and
registration rights agreement, the applicable requirements of the Securities
Act and the Securities Exchange Act of 1934 and the rules and regulations of
the Commission thereunder. Outstanding Notes that are not tendered for
exchange in the exchange offer will remain outstanding and continue to accrue
interest and will be entitled to the rights and benefits such holders have
under the Indenture relating to the Outstanding Notes.

We will be deemed to have accepted for exchange validly tendered
Outstanding Notes when, as and if we have given oral or written notice of the
acceptance to the exchange agent. The exchange agent will act as agent for the
tendering holders for the purpose of receiving the Exchange Notes from us and
delivering Exchange Notes to such holders. Subject to the terms of the
exchange and registration rights agreement, we expressly reserve the right to
amend or terminate the exchange offer, and not to accept for exchange any
Outstanding Notes not previously accepted for exchange, upon the occurrence of
any of the conditions specified below under the caption "--Certain Conditions
to the Exchange Offer."

If any tendered Outstanding Notes are not accepted for exchange because of
an invalid tender, the occurrence of specified other events set forth in this
prospectus or otherwise, the certificates for any unaccepted Outstanding Notes
will be returned, without expense, to the tendering holder thereof as promptly
as practicable after the expiration date of the exchange offer.

Holders who tender Outstanding Notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the letter of transmittal, transfer taxes with respect to the exchange of
Outstanding Notes pursuant to the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the exchange offer. It is important that you read the section labeled "--
Fees and Expenses" below for more details regarding fees and expenses incurred
in the exchange offer.

Expiration Date; Extensions; Amendments

The term "expiration date" will mean 5:00 p.m., New York City time, on
, 2001, unless we, in our sole discretion, extend the exchange
offer, in which case the term "expiration date" will mean the latest date and
time to which the exchange offer is extended.

In order to extend the exchange offer, we will notify the exchange agent of
any extension by oral or written notice. We will notify, in writing or by
public announcement, the registered holders of Outstanding Notes of the
extension no later than 9:00 a.m., New York City time, on the next business
day after the previously scheduled expiration date.

We reserve the right, in our sole discretion,

. to delay accepting for exchange any Outstanding Notes;

. to extend the exchange offer or to terminate the exchange offer and to
refuse to accept Outstanding Notes not previously accepted if any of the
conditions set forth below under "--Certain Conditions to the Exchange
Offer" have not been satisfied, by giving oral or written notice of any
delay, extension or termination to the exchange agent; or

. subject to the terms of the exchange and registration rights agreement,
to amend the terms of the exchange offer in any manner.

104

Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice or public
announcement thereof to the registered holders of Outstanding Notes. If we
amend the exchange offer in a manner that we determine to constitute a
material change, we will promptly disclose such amendment in a manner
reasonably calculated to inform the holders of Outstanding Notes of such
amendment.

Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of the exchange offer, we shall have no obligation to publish, advertise or
otherwise communicate any such public announcement, other than by issuing a
timely press release to a financial news service.

Certain Conditions to the Exchange Offer

Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange any Exchange Notes for, any
Outstanding Notes, and may terminate or amend the exchange offer as provided
in this prospectus before accepting any Outstanding Notes for exchange, if in
our reasonable judgment:

. the Exchange Notes to be received will not be tradable by the holder
without restriction under the Securities Act or the Securities Exchange
Act of 1934 and without material restrictions under the blue sky or
securities laws of substantially all of the states of the United States;

. the exchange offer, or the making of any exchange by a holder of
Outstanding Notes, would violate applicable law or any applicable
interpretation of the staff of the Commission; or

. any action or proceeding has been instituted or threatened in any court
or by or before any governmental agency with respect to the exchange
offer that, in our judgment, would reasonably be expected to impair our
ability to proceed with the exchange offer.

In addition, we will not be obligated to accept for exchange the
Outstanding Notes of any holder that has not made:

. the representations described under "--Background, Purpose and Effect of
the Exchange Offer" and "--Procedures for Tendering"; and

. such other representations as may be reasonably necessary under
applicable Commission rules, regulations or interpretations to make
available to us an appropriate form for registration of the Exchange
Notes under the Securities Act.

We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. Consequently, we
may delay acceptance of any Outstanding Notes by giving oral or written notice
of such extension to the registered holders of the Outstanding Notes. During
any such extensions, all Outstanding Notes previously tendered will remain
subject to the exchange offer, and we may accept them for exchange unless they
have been previously withdrawn. We will return any Outstanding Notes that we
do not accept for exchange for any reason without expense to their tendering
holder as promptly as practicable after the expiration or termination of the
exchange offer.

We expressly reserve the right to amend or terminate the exchange offer,
and to reject for exchange any Outstanding Notes not previously accepted for
exchange, upon the occurrence of any of the conditions of the exchange offer
specified above. We will give oral or written notice or public announcement of
any extension, amendment, non-acceptance or termination to the registered
holders of the Outstanding Notes as promptly as practicable. In the case of
any extension, such oral or written notice or public announcement will be
issued no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.

105

These conditions are for our sole benefit and we may assert them regardless
of the circumstances that may give rise to them or waive them in whole or in
part at any or at various times in our sole discretion. If we fail at any time
to exercise any of the foregoing rights, that failure will not constitute a
waiver of such right. Each such right will be deemed an ongoing right that we
may assert at any time or at various times.

In addition, we will not accept for exchange any Outstanding Notes
tendered, and will not issue Exchange Notes in exchange for any such
Outstanding Notes, if at such time any stop order is threatened or in effect
with respect to the registration statement of which this prospectus
constitutes a part or the qualification of the Indenture under the Trust
Indenture Act of 1939.

Procedures for Tendering

Only a holder of Outstanding Notes may tender such Outstanding Notes in the
exchange offer. To tender in the exchange offer, a holder must: (i) complete,
sign and date the letter of transmittal, or a facsimile of the letter of
transmittal; have the signature on the letter of transmittal guaranteed if the
letter of transmittal so requires; and mail or deliver such letter of
transmittal or facsimile to the exchange agent prior to the expiration date;
and (ii) comply with the procedures established by DTC's Automated Tender
Offer Program described below.

In addition, either:

. the exchange agent must receive Outstanding Notes along with the letter
of transmittal; or

. the exchange agent must receive, prior to the expiration date, a timely
confirmation of book-entry transfer of such Outstanding Notes into the
exchange agent's account at DTC according to the procedures for book-
entry transfer described below or a properly transmitted agent's message;
or

. the holder must comply with the guaranteed delivery procedures described
below.

To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at the
address set forth below under "--Exchange Agent" prior to the expiration date.

The tender by a holder that is not withdrawn prior to the expiration date
will constitute an agreement between such holder and us in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal.

The method of delivery of Outstanding Notes, the letter of transmittal and
all other required documents to the exchange agent is at the holder's election
and risk. Rather than mail these items, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. Holders should not send the letter of transmittal or Outstanding Notes
to the Issuer. Holders may request their respective brokers, dealers,
commercial banks, trust companies or other nominees to effect the above
transactions for them.

Any beneficial owner whose Outstanding Notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact the registered holder promptly and instruct it
to tender on the owner's behalf. If such beneficial owner wishes to tender on
its own behalf, it must, prior to completing and executing the letter of
transmittal and delivering its Outstanding Notes, either:

. make appropriate arrangements to register ownership of the Outstanding
Notes in such owner's name; or

106

. obtain a properly completed bond power from the registered holder of
Outstanding Notes.

The transfer of registered ownership may take considerable time and may not
be completed prior to the expiration date.

Signatures on a letter of transmittal or a notice of withdrawal described
below must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or another "eligible institution" within the meaning of Rule
17Ad-15 under the Securities Exchange Act of 1934, unless the Outstanding Note
tendered pursuant thereto is tendered:

. by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal; or

. for the account of an eligible institution.

If the letter of transmittal is signed by a person other than the
registered holder of any Outstanding Notes listed on the Outstanding Notes,
such Outstanding Notes must be endorsed or accompanied by a properly completed
bond power. The bond power must be signed by the registered holder as the
registered holder's name appears on the Outstanding Notes and an eligible
institution must guarantee the signature on the bond power.

If the letter of transmittal or any Outstanding Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing. Unless waived by us,
they should also submit evidence satisfactory to us of their authority to
deliver the letter of transmittal.

The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's Automated Tender Offer
Program to tender. Participants in the program may, instead of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, transmit their acceptance of the exchange offer
electronically. They may do so by causing DTC to transfer the Outstanding
Notes to the exchange agent in accordance with its procedures for transfer.
DTC will then send an agent's message to the exchange agent. The term "agent's
message" means a message transmitted by DTC, received by the exchange agent
and forming part of the book-entry confirmation, to the effect that:

. DTC has received an express acknowledgement from a participant in its
Automated Tender Offer Program that is tendering Outstanding Notes that
are the subject of such book-entry confirmation;

. such participant has received and agrees to be bound by the terms of the
letter of transmittal (or, in the case of an agent's message relating to
guaranteed delivery, that such participant has received and agrees to be
bound by the applicable notice of guaranteed delivery); and

. the agreement may be enforced against such participant.

We will determine in our sole discretion all questions as to the validity,
form, eligibility (including time of receipt), acceptance of tendered
Outstanding Notes and withdrawal of tendered Outstanding Notes. Our
determination will be final and binding. We reserve the absolute right to
reject any Outstanding Notes not properly tendered or any Outstanding Notes
the acceptance of which would, in the opinion of our counsel, be unlawful. We
also reserve the right to waive any defects, irregularities or conditions of
tender as to particular Outstanding Notes. Our interpretation of the terms and
conditions of the exchange offer (including the instructions in the letter of
transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of

107

Outstanding Notes must be cured within such time as we shall determine.
Although we intend to notify holders of defects or irregularities with respect
to tenders of Outstanding Notes, neither we, the exchange agent nor any other
person will incur any liability for failure to give such notification. Tenders
of Outstanding Notes will not be deemed made until such defects or
irregularities have been cured or waived. Any Outstanding Notes received by
the exchange agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned to the
tendering holder by the exchange agent without cost to the tendering holder,
unless otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.

In all cases, we will issue Exchange Notes for Outstanding Notes that we
have accepted for exchange under the exchange offer only after the exchange
agent timely receives:

. Outstanding Notes or a timely book-entry confirmation of such Outstanding
Notes into the exchange agent's account at DTC; and

. a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message.

By signing the letter of transmittal or transmitting the agent's message,
each tendering holder of Outstanding Notes will represent to us that, among
other things:

. any Exchange Notes that the holder receives will be acquired in the
ordinary course of its business;

. the holder has no arrangement or understanding with any person or entity
to participate in the distribution of the Exchange Notes;

. if the holder is not a broker-dealer, that it is not engaged in and does
not intend to engage in the distribution of the Exchange Notes;

. if the holder is a broker-dealer that will receive Exchange Notes for its
own account in exchange for Outstanding Notes that were acquired as a
result of market-making activities, that it will deliver a prospectus, as
required by law, in connection with any resale of such Exchange Notes;
and

. the holder is not an "affiliate," as defined in Rule 405 of the
Securities Act, of ours or, if the holder is an affiliate, it will comply
with any applicable registration and prospectus delivery requirements of
the Securities Act.

Book-Entry Transfer

The exchange agent will make a request to establish an account with respect
to the Outstanding Notes at DTC for purposes of the exchange offer promptly
after the date of this prospectus; and any financial institution participant
in DTC's system may make book-entry delivery of Outstanding Notes by causing
DTC to transfer such Outstanding Notes into the exchange agent's account at
DTC in accordance with DTC's procedures for transfer. Holders of Outstanding
Notes who are unable to deliver confirmation of the book-entry tender of their
Outstanding Notes into the exchange agent's account at DTC or all other
documents of transmittal to the exchange agent on or prior to the expiration
date must tender their Outstanding Notes according to the guaranteed delivery
procedures described below.

Guaranteed Delivery Procedures

Holders wishing to tender their Outstanding Notes but whose Outstanding
Notes are not immediately available or who cannot deliver their Outstanding
Notes, the letter of transmittal or any

108

other required documents to the exchange agent or comply with the applicable
procedures under DTC's Automated Tender Offer Program prior to the expiration
date may tender if:

. the tender is made through an eligible institution;

. on or prior to the expiration date, the exchange agent receives from such
eligible institution either a properly completed and duly executed notice
of guaranteed delivery (by facsimile transmission, mail or hand delivery)
or a properly transmitted agent's message and notice of guaranteed
delivery:

. setting forth the name and address of the holder, the registered
number(s) of such Outstanding Notes and the principal amount of
Outstanding Notes tendered;

. stating that the tender is being made thereby; and

. guaranteeing that, within three (3) New York Stock Exchange trading
days after the expiration date, the letter of transmittal (or
facsimile thereof) together with the Outstanding Notes or a book-
entry confirmation, and any other documents required by the letter of
transmittal will be deposited by the eligible institution with the
exchange agent; and

. the exchange agent receives such properly completed and executed letter
of transmittal (or facsimile thereof), as well as all tendered
Outstanding Notes in proper form for transfer or a book-entry
confirmation, and all other documents required by the letter of
transmittal, within three (3) New York Stock Exchange trading days after
the expiration date.

Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above.

Withdrawal of Tenders

Except as otherwise provided in this prospectus, tenders of Outstanding
Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the expiration date.

For a withdrawal to be effective:

. the exchange agent must receive a written notice (which may be by
telegram, telex, facsimile transmission or letter) of withdrawal at one
of the addresses set forth below under "--Exchange Agent" prior to 5:00
p.m., New York City time, on the expiration date; or

. holders must comply with the appropriate procedures of DTC's Automated
Tender Offer Program system.

Any such notice of withdrawal must:

. specify the name of the person who tendered the Outstanding Notes to be
withdrawn;

. identify the Outstanding Notes to be withdrawn (including the principal
amount of such Outstanding Notes); and

. where certificates for Outstanding Notes have been transmitted, specify
the name in which such Outstanding Notes were registered, if different
from that of the withdrawing holder.

If certificates for Outstanding Notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of such
certificates, the withdrawing holder must also submit:

. the serial numbers of the particular certificates to be withdrawn; and

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. a signed notice of withdrawal with signatures guaranteed by an eligible
institution unless such holder is an eligible institution.

If Outstanding Notes have been tendered pursuant to the procedure for book-
entry transfer described above, any notice of withdrawal must specify the name
and number of the account at DTC to be credited with the withdrawn Outstanding
Notes and otherwise comply with the procedures of such facility. We will
determine all questions as to the validity, form and eligibility (including
the time of receipt) of such notices, and our determination shall be final and
binding on all parties. We will deem any Outstanding Notes so withdrawn not to
have validly tendered for exchange for purposes of the exchange offer. Any
Outstanding Notes that have been tendered for exchange but that are not
exchanged for any reason will be returned to their holder without cost to the
holder (or, in the case of Outstanding Notes tendered by book-entry transfer
into the exchange agent's account at DTC according to the procedures described
above, such Outstanding Notes will be credited to an account maintained with
DTC for Outstanding Notes) as soon as practicable after withdrawal, rejection
of tender or termination of the exchange offer. Properly withdrawn Outstanding
Notes may be retendered by following one of the procedures described under "--
Procedures for Tendering" above at any time on or prior to the expiration
date.

Exchange Agent

The Bank of New York has been appointed as exchange agent for the exchange
offer. You should direct questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for the notice of guaranteed delivery to the exchange agent addressed
as follows:

For Overnight Delivery, Delivery by Hand
or Delivery by Registered or Certified Mail:

The Bank of New York
101 Barclay Street
Reorganization Dept. 7 East
New York, NY 10286
Attn: [ ]

By Facsimile Transmission
(for eligible institutions only):

(212) 815-6339

Confirm facsimile by telephone only:

(212) 815-5920

Delivery of the letter of transmittal to an address other than as set forth
above or transmission via facsimile other than as set forth above does not
constitute a valid delivery of such letter of transmittal.

Fees and Expenses

We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitations by
telegraph, telephone or in person by our officers and regular employees and
those of our affiliates.

We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We will,

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however, pay the exchange agent reasonable and customary fees for its services
and will reimburse it for its related reasonable out-of-pocket expenses.

We will pay the cash expenses to be incurred in connection with the
exchange offer. Such expenses include SEC registration fees, fees and expenses
of the exchange agent and trustee, accounting and legal fees and printing
costs, and related fees and expenses.

Transfer Taxes

We will pay all transfer taxes, if any, applicable to the exchange of
Outstanding Notes under the exchange offer. The tendering holder, however,
will be required to pay any transfer taxes (whether imposed on the registered
holder or any other person) if:

. certificates representing Outstanding Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
Outstanding Notes tendered;

. tendered Outstanding Notes are registered in the name of any person other
than the person signing the letter of transmittal; or

. a transfer tax is imposed for any reason other than the exchange of
Outstanding Notes under the exchange offer.

If satisfactory evidence of payment of such taxes is not submitted with the
letter of transmittal, the amount of such transfer taxes will be billed to
that tendering holder.

Holders who tender their Outstanding Notes for exchange will not be
required to pay any transfer taxes. However, holders who instruct us to
register Exchange Notes in the name of, or request that Outstanding Notes not
tendered or not accepted in the exchange offer be returned to, a person other
than the registered tendering holder will be required to pay any applicable
transfer tax.

Accounting Treatment

We will record the Exchange Notes in our accounting records at the same
carrying value as the Outstanding Notes, as reflected in our accounting
records on the date of exchange. Accordingly, we will not recognize any gain
or loss for accounting purposes as a result of the exchange offer. We will
record the expenses of the exchange offer as incurred.

Consequences of Failure to Exchange

Holders of Outstanding Notes who do not exchange their Outstanding Notes
for Exchange Notes under the exchange offer will remain subject to the
restrictions on transfer applicable to the Outstanding Notes:

. as set forth in the legend printed on the Outstanding Notes as a
consequence of the issuance of the Outstanding Notes pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws;
and

. otherwise as set forth in the offering memorandum distributed in
connection with the private offering of the Outstanding Notes.

In general, you may not offer or sell the Outstanding Notes unless they are
registered under the Securities Act, or if the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
Except as required by the exchange and registration rights agreement, we do
not intend to register resales of the Outstanding Notes under the Securities
Act. Based on interpretations

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of the Commission staff, Exchange Notes issued pursuant to the exchange offer
may be offered for resale, resold or otherwise transferred by their holders
(other than any such holder that is our "affiliate" within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the
holders acquired the Exchange Notes in the ordinary course of the holders'
business and the holders have no arrangement or understanding with respect to
the distribution of the Exchange Notes to be acquired in the exchange offer.
Any holder who tenders in the exchange offer for the purpose of participating
in a distribution of the Exchange Notes:

. could not rely on the applicable interpretations of the Commission; and

. must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.

Other

Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decision on what action to take.

We may in the future seek to acquire untendered Outstanding Notes in the
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. We have no present plans to acquire any Outstanding Notes
that are not tendered in the exchange offer or to file a registration
statement to permit resales of any untendered Outstanding Notes.

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DESCRIPTION OF THE NOTES

Definitions of certain terms used in this Description of the Notes may be
found under the heading "Certain Definitions." For purposes of this section,
(i) the term "Issuer" refers only to The Kansas City Southern Railway Company
and not any of its subsidiaries and (ii) the term "Parent" refers only to
Kansas City Southern Industries, Inc., the parent company of the Issuer, and
not to any of its subsidiaries. The Parent and certain of its existing
subsidiaries will guarantee the Notes. Each company that guarantees the Notes
is referred to in this section as a "Note Guarantor." Each such guarantee is
termed a "Note Guarantee."

We issued the Outstanding Notes and will issue the Exchange Notes under an
Indenture, dated as of September 27, 2000 (the "Indenture"), among the Issuer,
the Note Guarantors and The Bank of New York, as Trustee (the "Trustee"), a
copy of which has been filed as an exhibit to the registration statement of
which this prospectus is a part. The Indenture contains provisions which
define your rights under the Notes. In addition, the Indenture governs the
obligations of the Issuer and of each Note Guarantor under the Notes. The
terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the TIA.

On September 27, 2000, we issued $200,000,000 aggregate principal amount of
Outstanding Notes. The terms of the Exchange Notes are identical in all
material respects to the Outstanding Notes, except the Exchange Notes will not
contain transfer restrictions and holders of Exchange Notes will no longer
have any registration rights or be entitled to any liquidated damages. The
Trustee will authenticate and deliver Exchange Notes for original issue only
in exchange for a like principal amount of Outstanding Notes. Any Outstanding
Notes that remain outstanding after the consummation of the exchange offer,
together with the Exchange Notes, will be treated as a single class of
securities under the Indenture. Accordingly, all references in this section to
specified percentages in aggregate principal amount of the outstanding
Exchange Notes shall be deemed to mean, at any time after the exchange offer
is consummated, such percentage in aggregate principal amount of the
Outstanding Notes and Exchange Notes then outstanding.

The following description is meant to be only a summary of certain
provisions of the Indenture. It does not restate the terms of the Indenture in
their entirety. We urge that you carefully read the Indenture as it, and not
this description, governs your rights as Holders.

The Indenture provides for the issuance of up to $100.0 million aggregate
principal amount of additional Notes having identical terms and conditions to
the Notes (the "Additional Notes"), subject to compliance with the covenants
contained in the Indenture. Any Additional Notes will be part of the same
issue as the Notes and will vote on all matters with the Notes. For purposes
of this "Description of the Notes" section, reference to the Notes does not
include Additional Notes.

Overview of the Notes and the Note Guarantees

The Outstanding Notes are, and the Exchange Notes will be:

. general unsecured obligations of the Issuer;

. ranked equally in right of payment with all existing and future Senior
Indebtedness of the Issuer;

. senior in right of payment to all future Subordinated Obligations of the
Issuer;

. effectively subordinated to all Secured Indebtedness of the Parent and
its Subsidiaries to the extent of the value of the assets securing such
Indebtedness; and

. effectively subordinated to all liabilities (including Trade Payables)
and Preferred Stock of each Subsidiary of the Parent (other than the
Issuer) that is not a Note Guarantor.

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The Note Guarantees:

The Outstanding Notes are, and the Exchange Notes will be, guaranteed by
the Parent and certain of its existing subsidiaries. The Note Guarantors other
than the Parent are:

Gateway Eastern Railway Company;
Gateway Western Railway Company;
SIS Bulk Holding, Inc.;
PABTEX GP, LLC;
PABTEX, L.P.;
KCS Transportation Company;
Mid-South Microwave, Inc.;
Rice-Carden Corporation;
Southern Development Company;
Southern Industrial Services, Inc.; and
Trans-Serve, Inc.

Kansas City Southern Lines, Inc. ("KCSL"), which was a Note Guarantor on
the Outstanding Notes, was merged into the Parent effective December 31, 2000.

The Note Guarantee of each Note Guarantor:

. will be a general unsecured obligation of such Note Guarantor;

. will rank equally in right of payment with all existing and future Senior
Indebtedness of such Note Guarantor;

. will be senior in right of payment to all future Subordinated Obligations
of such Note Guarantor; and

. will be effectively subordinated to all Secured Indebtedness of the
Parent and its Subsidiaries to the extent of the value of the assets
securing such Indebtedness.

Initially, the Outstanding Notes and the Exchange Notes will not be
guaranteed by Caymex Transportation Inc., SCC Holdings Inc., The Kansas City
Northern Railway Company, Veals, Inc. and any Subsidiaries of the Parent that
do not Guarantee the Bank Indebtedness. Caymex Transportation, Inc. is a
holding company that indirectly owns our investments in Grupo TFM and TFM
(through Nafta Rail S.A. de C.V.) and the Panama Canal Railway Company. SCC
Holdings, Inc. is a holding company that owns our investment in Southern
Capital LLC. The Kansas City Northern Railway Company and Veals, Inc. are
inactive and do not hold any material assets. As of and for the nine months
ended September 30, 2000, after eliminating intercompany activity, the
Subsidiaries of the Parent, other than the Issuer and those Subsidiaries that
are Note Guarantors, would have had approximately $18.6 million of total
liabilities (including trade payables), would have had approximately 18% of
the Parent's consolidated assets and would have generated approximately 1% of
the Parent's consolidated revenues and 1% of its EBITDA.

Principal, Maturity and Interest

We issued the Outstanding Notes in an aggregate principal amount of $200
million. The Outstanding Notes and the Exchange Notes will mature on October
1, 2008. The Outstanding Notes are, and the Exchange Notes will be, in fully
registered form, without coupons, in denominations of $1,000 and any integral
multiple of $1,000.

Each Note bears interest at a rate of 9 1/2% per annum beginning on October
1, 2000 or from the most recent date to which interest has been paid or
provided for. We will pay interest semiannually to Holders of record at the
close of business on the March 15 or September 15 immediately preceding the
interest payment date on April 1 and October 1 of each year. We will begin
paying interest to Holders on April 1, 2001. We will pay interest on overdue
principal at 1% per annum in excess of such rate, and we will pay interest on
overdue installments of interest at such higher rate to the extent lawful.

114

Each Exchange Note will bear interest from its issuance date. The holders
of Outstanding Notes that are accepted for exchange will receive, in cash,
accrued interest on those Outstanding Notes to, but not including, the
issuance date of the Exchange Notes. This interest will be paid with the first
interest payment on the Exchange Notes, except that if the exchange offer is
not completed on or before April 1, 2001, holders of Outstanding Notes will
receive the first interest payment due on the Outstanding Notes on April 1,
2001. Interest on the Outstanding Notes accepted for exchange will cease to
accrue upon issuance of the Exchange Notes. Consequently, Holders who exchange
their Outstanding Notes for Exchange Notes will the receive the same interest
payment that they would have received had they not accepted the exchange
offer.

Paying Agent and Registrar

We will pay the principal of, premium, if any, interest and liquidated
damages, if any, on the Notes at any office of ours or any agency designated
by us which is located in the Borough of Manhattan, The City of New York. We
have initially designated the corporate trust office of the Trustee to act as
the agent of the Issuer in such matters. The location of the corporate trust
office is 101 Barclay Street, Floor 21 West, New York, New York 10286. We,
however, reserve the right to pay interest to Holders by check mailed directly
to Holders at their registered addresses.

Holders may exchange or transfer their Notes at the same location given in
the preceding paragraph. No service charge will be made for any registration
of transfer or exchange of Notes. We, however, may require Holders to pay any
transfer tax or other similar governmental charge payable in connection with
any such transfer or exchange.

Optional Redemption

Except as set forth in this paragraph, we may not redeem the Notes. Prior
to October 1, 2003, we may, on one or more occasions, redeem up to a maximum
of 35% of the original aggregate principal amount of the Notes with the Net
Cash Proceeds of one or more Equity Offerings (1) by the Issuer or (2) by the
Parent to the extent the Net Cash Proceeds thereof are contributed to the
Issuer or used to purchase Capital Stock (other than Disqualified Stock) of
the Issuer from the Issuer, at a redemption price equal to 109 1/2% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages thereon, if any, to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date); provided, however, that after giving effect
to any such redemption:

(1) at least 65% of the original aggregate principal amount of the Notes
remains outstanding; and

(2) any such redemption must be made within 60 days of such Equity
Offering and must be made in accordance with certain procedures set forth
in the Indenture.

Selection

If we partially redeem Notes, the Trustee will select the Notes to be
redeemed on a pro rata basis, by lot or by such other method as the Trustee in
its sole discretion shall deem to be fair and appropriate, although no Note of
$1,000 in original principal amount or less will be redeemed in part. If we
redeem any Note in part only, the notice of redemption relating to such Note
shall state the portion of the principal amount thereof to be redeemed. A new
Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancelation of the original
Note. On and after the redemption date, interest will cease to accrue on Notes
or portions thereof called for redemption so long as we have deposited with
the Paying Agent funds sufficient to pay the principal of, plus accrued and
unpaid interest and liquidated damages thereon, if any, the Notes to be
redeemed.

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Ranking

The Outstanding Notes are, and the Exchange Notes will be, unsecured Senior
Indebtedness of the Issuer, will rank equally in right of payment with all
existing and future Senior Indebtedness of the Issuer and will be senior in
right of payment to all future Subordinated Obligations of the Issuer. The
Outstanding Notes are, and the Exchange Notes also will be, effectively
subordinated to all Secured Indebtedness of the Parent and its Subsidiaries
(including the Issuer) to the extent of the value of the assets securing such
Secured Indebtedness.

The Note Guarantees will be unsecured Senior Indebtedness of the applicable
Note Guarantor, will rank equally in right of payment with all existing and
future Senior Indebtedness of such Note Guarantor and will be senior in right
of payment to all future Subordinated Obligations of such Note Guarantor. The
Note Guarantees also will be effectively subordinated to all Secured
Indebtedness of the Parent and its Subsidiaries to the extent of the value of
the assets securing such Secured Indebtedness. Although the Indenture will
limit the Incurrence of Indebtedness by and the issuance of preferred stock of
certain of our subsidiaries, such limitation is subject to a number of
significant qualifications.

The Parent currently conducts all of its operations through its
Subsidiaries, and the Issuer currently conducts a portion of its operations
through its Subsidiaries. To the extent the Subsidiaries of the Parent (other
than the Issuer) are not Note Guarantors, creditors of such Subsidiaries,
including trade creditors, and preferred stockholders, if any, of such
Subsidiaries generally will have priority with respect to the assets and
earnings of such Subsidiaries over the claims of the Holders. The Notes,
therefore, will be effectively subordinated to the claims of creditors,
including trade creditors, and preferred stockholders, if any, of Subsidiaries
of the Parent (other than the Issuer) that are not Note Guarantors.

As of September 30, 2000, there was outstanding:

(1) $669.0 million of Senior Indebtedness of the Issuer, of which $469.0
million was Secured Indebtedness (exclusive of unused commitments under the
Credit Agreement);

(2) $11.0 million of Senior Indebtedness of the Note Guarantors
(exclusive of guarantees of Indebtedness under the Credit Agreement), $9.4
million of which was Secured Indebtedness;

(3) $5.4 million of Senior Indebtedness of Subsidiaries of the Parent
(other than the Issuer) that are not Note Guarantors; and

(4) no Indebtedness of the Issuer or the Note Guarantors subordinate or
junior in right of payment to the Notes or the Note Guarantees.

Although the Indenture limits the Incurrence of Indebtedness by the Parent,
the Issuer and the other Restricted Subsidiaries and the issuance of Preferred
Stock by the Restricted Subsidiaries, such limitation is subject to a number
of significant qualifications. The Parent and its Subsidiaries may be able to
Incur substantial amounts of Indebtedness in certain circumstances. Such
Indebtedness may be Senior Indebtedness. See "Certain Covenants--Limitation on
Indebtedness" below.

"Senior Indebtedness" of the Issuer or any Note Guarantor means the
principal of, premium (if any) and accrued and unpaid interest on (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization of the Issuer or any Note Guarantor, regardless of whether or
not a claim for post-filing interest is allowed in such proceedings), and fees
and other amounts owing in respect of, Bank Indebtedness and all other
Indebtedness of the Issuer or any Note Guarantor, as applicable, whether
outstanding on the Closing Date or thereafter Incurred, unless in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding it is provided that such obligations are subordinated in right of
payment to the Notes or such Note Guarantor's Note Guarantee, as applicable;
provided, however, that Senior Indebtedness of the Issuer or any Note
Guarantor shall not include:

(1) any obligation of the Issuer to the Parent or any other Subsidiary
of the Parent or any obligation of such Note Guarantor to the Parent or any
other Subsidiary of the Parent;

116

(2) any liability for Federal, state, local or other taxes owed or owing
by the Issuer or such Note Guarantor, as applicable;

(3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities);

(4) any Indebtedness or obligation of the Issuer or such Note Guarantor,
as applicable (and any accrued and unpaid interest in respect thereof),
that by its terms is subordinate or junior in any respect to any other
Indebtedness or obligation of the Issuer or such Note Guarantor, as
applicable, including any Subordinated Obligations of the Issuer or such
Note Guarantor, as applicable;

(5) any obligations with respect to any Capital Stock; or

(6) any Indebtedness Incurred in violation of the Indenture.

Note Guarantees

The Parent and each of its Subsidiaries that Guarantees the Bank
Indebtedness on the Closing Date (other than Caymex Transportation, Inc., SCC
Holdings, Inc., The Kansas City Northern Railway Company and Veals, Inc., and
other than KCSL which was merged into the Parent effective December 31, 2000),
and certain future subsidiaries of the Parent (as described below), as primary
obligors and not merely as sureties, will jointly and severally irrevocably
and unconditionally Guarantee on an unsecured senior basis the performance and
full and punctual payment when due, whether at Stated Maturity, by
acceleration or otherwise, of all obligations of the Issuer under the
Indenture (including obligations to the Trustee) and the Notes, whether for
payment of principal of or interest on or liquidated damages in respect of the
Notes, expenses, indemnification or otherwise (all such obligations guaranteed
by such Note Guarantors being herein called the "Guaranteed Obligations").
Such Note Guarantors will agree to pay, in addition to the amount stated
above, any and all costs and expenses (including reasonable counsel fees and
expenses) incurred by the Trustee or the Holders in enforcing any rights under
the Note Guarantees. Each Note Guarantee will be limited in amount to an
amount not to exceed the maximum amount that can be Guaranteed by the
applicable Note Guarantor without rendering the Note Guarantee, as it relates
to such Note Guarantor, voidable under applicable law relating to fraudulent
conveyance or fraudulent transfer or similar laws affecting the rights of
creditors generally. The Parent will cause (i) at any time that any Bank
Indebtedness is outstanding, each Subsidiary of the Parent (other than the
Issuer, Caymex Transportation, Inc., SCC Holdings, Inc., The Kansas City
Northern Railway Company and Veals, Inc.) that enters into a Guarantee of any
Bank Indebtedness and (ii) at any time that no Bank Indebtedness is
outstanding, each Subsidiary of the Parent (other than the Issuer, The Kansas
City Northern Railway Company and Veals, Inc.) that enters into a Guarantee of
any obligations of the Parent or any of its domestic Subsidiaries, to execute
and deliver to the Trustee a supplemental indenture pursuant to which such
Subsidiary will Guarantee payment of the Notes. See "Certain Covenants--Future
Note Guarantors" below.

Each Note Guarantee is a continuing guarantee and shall (a) remain in full
force and effect until payment in full of all the Guaranteed Obligations, (b)
be binding upon each Note Guarantor and its successors and (c) inure to the
benefit of, and be enforceable by, the Trustee, the Holders and their
successors, transferees and assigns. Notwithstanding the foregoing, the Note
Guarantee of a Note Guarantor will be released and terminated (1) upon the
sale (including by means of a merger) of all of the Capital Stock of such Note
Guarantor made in compliance with the terms of the Indenture and (2) upon any
release and termination of the Guarantee by such Note Guarantor of the Bank
Indebtedness (other than by reason of repayment and satisfaction of all of the
Bank Indebtedness).

Change of Control

Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder will have the right to require the Issuer to purchase
all or any part of such Holder's Notes at a purchase

117

price in cash equal to 101% of the principal amount thereof plus accrued and
unpaid interest and liquidated damages, if any, to the date of purchase
(subject to the right of Holders of record on the relevant record date to
receive interest and liquidated damages, if any, due on the relevant interest
payment date); provided, however, that notwithstanding the occurrence of a
Change of Control, the Issuer shall not be obligated to purchase the Notes
pursuant to this section in the event that it has exercised its right to
redeem all the Notes under the terms of the section titled "Optional
Redemption:"

(1) at any time, less than 75% of the members of the board of directors
of the Parent shall be (A) individuals who were members of such board on
September 21, 2000 or (B) individuals whose election, or nomination for
election by the Parent's stockholders, was approved by a vote of at least
75% of the members of the board of directors of the Parent then still in
office who were members of such board on September 21, 2000 (or whose
election or nomination has been approved as provided in this clause (B));

(2) at any time, any person, or any two or more persons acting as a
partnership, limited partnership, syndicate or other group for the purpose
of acquiring, holding or disposing of Voting Stock of the Parent, shall
become, according to public announcement or filing, the "beneficial owner"
(as defined in Rule 13d-3 issued under the Exchange Act), directly or
indirectly, of securities of the Parent representing 30% or more
(calculated in accordance with such Rule 13d-3) of the combined voting
power of the Parent's then outstanding Voting Stock;

(3) any Person other than the Parent shall acquire ownership, directly
or indirectly, beneficially or of record of more than 30% of the Voting
Stock of the Issuer; or

(4) the merger or consolidation of the Parent or the Issuer with or into
another Person or the merger of another Person with or into the Parent or
the Issuer, or the sale of all or substantially all the assets of the
Parent or the Issuer to another Person, and, in the case of any such merger
or consolidation, the securities of the Parent or the Issuer that are
outstanding immediately prior to such transaction and which represent 100%
of the aggregate voting power of the Voting Stock of the Parent or the
Issuer are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
surviving Person or transferee that represent immediately after such
transaction, at least a majority of the aggregate voting power of the
Voting Stock of the surviving Person or transferee.

Within 30 days following any Change of Control, the Issuer shall mail a
notice to each Holder with a copy to the Trustee (the "Change of Control
Offer") stating:

(1) that a Change of Control has occurred and that such Holder has the
right to require the Issuer to purchase all or a portion of such Holder's
Notes at a purchase price in cash equal to 101% of the principal amount
thereof, plus accrued and unpaid interest and liquidated damages, if any,
to the date of purchase (subject to the right of Holders of record on the
relevant record date to receive interest and liquidated damages, if any, on
the relevant interest payment date);

(2) the circumstances and relevant facts and financial information
regarding such Change of Control;

(3) the purchase date (which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed); and

(4) the instructions determined by the Issuer, consistent with this
covenant, that a Holder must follow in order to have its Notes purchased.

The Issuer will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance

118

with the requirements set forth in the Indenture applicable to a Change of
Control Offer made by the Issuer and purchases all Notes validly tendered and
not withdrawn under such Change of Control Offer.

The Issuer will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the purchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Issuer will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this covenant by virtue thereof.

The Change of Control purchase feature is a result of negotiations between
the Issuer and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that we would decide to do so in the future. Subject to the limitations
discussed below, we could, in the future, enter into certain transactions,
including acquisitions, refinancings or recapitalizations, that would not
constitute a Change of Control under the Indenture, but that could increase
the amount of indebtedness outstanding at such time or otherwise affect our
capital structure or credit ratings. Restrictions on our ability to Incur
additional Indebtedness are contained in the covenants described under
"Certain Covenants--Limitation on Indebtedness," "--Limitations on Liens" and
"--Limitation on Sale/Leaseback Transactions." Such restrictions can only be
waived with the consent of the Holders of a majority in principal amount of
the Notes then outstanding. Except for the limitations contained in such
covenants, however, the Indenture will not contain any covenants or provisions
that may afford Holders protection in the event of a highly leveraged
transaction.

The occurrence of certain of the events which would constitute a Change of
Control would constitute a default under the Credit Agreement. Future Senior
Indebtedness of the Parent and its Subsidiaries may contain prohibitions of
certain events which would constitute a Change of Control or require such
Senior Indebtedness to be repurchased or repaid upon a Change of Control.
Moreover, the exercise by the Holders of their right to require the Issuer to
purchase the Notes could cause a default under such Senior Indebtedness, even
if the Change of Control itself does not, due to the financial effect of such
repurchase on the Parent and its Subsidiaries. Finally, the Issuer's ability
to pay cash to the Holders upon a purchase may be limited by the Issuer's then
existing financial resources. There can be no assurance that sufficient funds
will be available when necessary to make any required purchases. The
provisions under the Indenture relative to the Issuer's obligation to make an
offer to purchase the Notes as a result of a Change of Control may be waived
or modified with the written consent of the Holders of a majority in principal
amount of the Notes.

The definition of Change of Control includes a phrase relating to the sale,
lease or transfer of "all or substantially all" the assets of the Parent or
the Issuer. Although there is a developing body of case law interpreting the
phrase "substantially all," there is no precise established definition of the
phrase under applicable law. Accordingly, the ability of a Holder of Notes to
require the Issuer to repurchase such notes as a result of a sale, lease or
transfer of less than all of the assets of the Parent or the Issuer to another
Person or group may be uncertain.

Certain Covenants

The Indenture contains covenants including, among others, those described
below.

Covenant Suspension. During any period of time that:

(a) the Notes have an Investment Grade Rating from both the Rating
Agencies and

(b) no Default or Event of Default has occurred and is continuing under
the Indenture,

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the Parent and the Restricted Subsidiaries will not be subject to the
following provisions of the Indenture:

. ""--Limitation on Indebtedness,"

. ""--Limitation on Restricted Payments,"

. ""--Limitation on Restrictions on Distributions from Restricted
Subsidiaries,"

. ""--Limitation on Sales of Assets and Capital Stock,"

. ""--Limitation on Transactions with Affiliates" and

. ""--Limitation on Lines of Business"

(collectively, the "Suspended Covenants"). In the event that the Parent and
the Restricted Subsidiaries are not subject to the Suspended Covenants for any
period of time as a result of the preceding sentence and, subsequently, one or
both of the Rating Agencies withdraws its ratings or downgrades the ratings
assigned to the Notes below the required Investment Grade Ratings or a Default
or Event of Default (other than as a result of any breach of the Suspended
Covenants) occurs and is continuing, then the Parent and the Restricted
Subsidiaries will thereafter again be subject to the Suspended Covenants and
compliance with the Suspended Covenants with respect to Restricted Payments
made after the time of such withdrawal, downgrade, Default or Event of Default
will be calculated in accordance with the terms of the covenant described
below under "--Limitation on Restricted Payments" as though, for purposes of
determining whether new Restricted Payments can be made after such time, such
covenant had been in effect during the entire period of time from the date the
Notes are issued.

Limitation on Indebtedness. (a) The Parent will not, and will not permit
any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness;
provided, however, that the Parent or any Restricted Subsidiary that is a Note
Guarantor may Incur Indebtedness if on the date of such Incurrence and after
giving effect thereto the Consolidated Coverage Ratio would be greater than
2.0:1.

(b) Notwithstanding the foregoing paragraph (a), the Parent and the
Restricted Subsidiaries may Incur the following Indebtedness:

(1) Bank Indebtedness Incurred pursuant to the Credit Agreement in an
aggregate principal amount not to exceed (A) in the case of any such Bank
Indebtedness that consists of term borrowings, $400.0 million less the
aggregate amount of all (i) prepayments of principal applied to permanently
reduce any such Indebtedness, (ii) scheduled repayments of principal of,
and reductions of commitments for, any such Indebtedness and (iii)
Attributable Debt in respect of Designated Sale/Leaseback Transactions and
(B) in the case of any such Bank Indebtedness that consists of borrowings
under a revolving credit facility, $150.0 million;

(2) Indebtedness of the Parent owed to and held by any Wholly Owned
Subsidiary or Indebtedness of a Restricted Subsidiary owed to and held by
the Parent or any Wholly Owned Subsidiary; provided, however, that (A) any
subsequent issuance or transfer of any Capital Stock or any other event
that results in any such Wholly Owned Subsidiary ceasing to be a Wholly
Owned Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Parent or a Wholly Owned Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the issuer
thereof, (B) if the Issuer is the obligor on such Indebtedness, such
Indebtedness is expressly subordinated to the prior payment in full in cash
of all obligations with respect to the Notes and (C) if a Note Guarantor is
the obligor on such Indebtedness and such Indebtedness is owed to and held
by a Wholly Owned Subsidiary that is not a Note Guarantor, such
Indebtedness is expressly subordinated to the prior payment in full in cash
of all obligations of such Note Guarantor with respect to its Note
Guarantee;

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(3) Indebtedness (A) represented by the Notes and the Note Guarantees,
(B) outstanding on the Closing Date (other than the Indebtedness described
in clauses (1) and (2) above), (C) consisting of Refinancing Indebtedness
Incurred in respect of any Indebtedness described in this clause (3)
(including Indebtedness that is Refinancing Indebtedness) or the foregoing
paragraph (a) and (D) consisting of Guarantees of any Indebtedness
permitted under clauses (1) and (2) of this paragraph (b);

(4) (A) Indebtedness of a Restricted Subsidiary Incurred and outstanding
on or prior to the date on which such Restricted Subsidiary was acquired by
the Parent (other than Indebtedness Incurred in contemplation of, in
connection with, as consideration in, or to provide all or any portion of
the funds or credit support utilized to consummate, the transaction or
series of related transactions pursuant to which such Restricted Subsidiary
became a Subsidiary of or was otherwise acquired by the Parent); provided,
however, that on the date that such Restricted Subsidiary is acquired by
the Parent, the Parent would have been able to Incur $1.00 of additional
Indebtedness pursuant to the foregoing paragraph (a) after giving effect to
the Incurrence of such Indebtedness pursuant to this clause (4) and (B)
Refinancing Indebtedness Incurred by a Restricted Subsidiary in respect of
Indebtedness Incurred by such Restricted Subsidiary pursuant to this clause
(4);

(5) Indebtedness (A) in respect of performance bonds, bankers'
acceptances, letters of credit and surety or appeal bonds provided by the
Parent and the Restricted Subsidiaries in the ordinary course of their
business, and (B) under Interest Rate Agreements entered into for bona fide
hedging purposes of the Parent in the ordinary course of business;
provided, however, that such Interest Rate Agreements do not increase the
Indebtedness of the Parent outstanding at any time other than as a result
of fluctuations in interest rates or by reason of fees, indemnities and
compensation payable thereunder;

(6) Purchase Money Indebtedness and Capitalized Lease Obligations (in an
aggregate principal amount not in excess of 5% of Consolidated Net Tangible
Assets at any time outstanding);

(7) Attributable Debt in respect of Designated Sale/Leaseback
Transactions in an aggregate principal amount not to exceed $400.0 million;
or

(8) Indebtedness (other than Indebtedness permitted to be Incurred
pursuant to the foregoing paragraph (a) or any other clause of this
paragraph (b)) in an aggregate principal amount on the date of Incurrence
that, when added to all other Indebtedness Incurred pursuant to this clause
(8) and then outstanding, will not exceed $25.0 million.

(c) Notwithstanding the foregoing, the Issuer or any Note Guarantor may not
Incur any Indebtedness pursuant to paragraph (b) above if the proceeds thereof
are used, directly or indirectly, to repay, prepay, redeem, defease, retire,
refund or refinance any Subordinated Obligations unless such Indebtedness will
be subordinated to the Notes or such Note Guarantor's Note Guarantee, as
applicable, to at least the same extent as such Subordinated Obligations.

(d) Notwithstanding any other provision of this covenant, the maximum
amount of Indebtedness that the Parent or any Restricted Subsidiary may Incur
pursuant to this covenant shall not be deemed to be exceeded solely as a
result of fluctuations in the exchange rates of currencies. For purposes of
determining the outstanding principal amount of any particular Indebtedness
Incurred pursuant to this covenant:

(1) Indebtedness Incurred pursuant to the Credit Agreement prior to or
on the Closing Date shall be treated as Incurred pursuant to clause (1) of
paragraph (b) above,

(2) Indebtedness permitted by this covenant need not be permitted
solely by reference to one provision permitting such Indebtedness but may
be permitted in part by one such provision and in part by one or more other
provisions of this covenant permitting such Indebtedness, and

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(3) in the event that Indebtedness meets the criteria of more than one
of the types of Indebtedness described in this covenant, the Parent, in its
sole discretion, shall classify such Indebtedness and only be required to
include the amount of such Indebtedness in one of such clauses.

Limitation on Restricted Payments. (a) The Parent will not, and will not
permit any Restricted Subsidiary, directly or indirectly, to:

(1) declare or pay any dividend, make any distribution on or in respect
of its Capital Stock or make any similar payment (including any payment in
connection with any merger or consolidation involving the Parent, or any
Subsidiary of the Parent) to the direct or indirect holders of its Capital
Stock, except (x) dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and (y) dividends or distributions
payable to the Parent or a Restricted Subsidiary (and, if such Restricted
Subsidiary has shareholders other than the Parent or other Restricted
Subsidiaries, to its other shareholders on a pro rata basis),

(2) purchase, repurchase, redeem, retire or otherwise acquire for value
any Capital Stock of the Parent or any Restricted Subsidiary held by
Persons other than the Parent or a Restricted Subsidiary,

(3) purchase, repurchase, redeem, retire, defease or otherwise acquire
for value, prior to scheduled maturity, scheduled repayment or scheduled
sinking fund payment any Subordinated Obligations (other than the purchase,
repurchase redemption, retirement, defeasance or other acquisition for
value of Subordinated Obligations acquired in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in each
case due within one year of the date of acquisition),

(4) make any Investment (other than a Permitted Investment) in any
Person, (any such dividend, distribution, payment, purchase, redemption,
repurchase, defeasance, retirement, or other acquisition or Investment
being herein referred to as a "Restricted Payment") if at the time the
Parent or such Restricted Subsidiary makes such Restricted Payment:

(A) a Default will have occurred and be continuing (or would result
therefrom);

(B) the Parent could not Incur at least $1.00 of additional
Indebtedness under paragraph (a) of the covenant described under "--
Limitation on Indebtedness;" or

(C) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in cash, to
be determined in good faith by the Board of Directors, whose
determination will be conclusive and evidenced by a resolution of the
Board of Directors) declared or made subsequent to the Closing Date
would exceed the sum, without duplication, of:

(i) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal
quarter immediately following the fiscal quarter during which the
Closing Date occurs to the end of the most recent fiscal quarter
ending at least 45 days prior to the date of such Restricted Payment
(or, in case such Consolidated Net Income will be a deficit, minus
100% of such deficit);

(ii) the aggregate Net Cash Proceeds received by the Parent or
the Issuer from the issue or sale of its Capital Stock (other than
Disqualified Stock or in respect of Excluded Contributions)
subsequent to the Closing Date (other than an issuance or sale to
(x) a Subsidiary of the Parent or (y) an employee stock ownership
plan or other trust established by the Parent or any of its
Subsidiaries);

(iii) the amount by which Indebtedness of the Parent or the
Restricted Subsidiaries is reduced on the Parent's balance sheet
upon the conversion or exchange (other than by a Subsidiary of the
Parent) subsequent to the Closing Date of any Indebtedness of

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the Parent or the Restricted Subsidiaries issued after the Closing
Date which is convertible or exchangeable for Capital Stock (other
than Disqualified Stock) of the Parent (less the amount of any cash
or the Fair Market Value of other property distributed by the Parent
or any Restricted Subsidiary upon such conversion or exchange);

(iv) the amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from (x) payments of dividends,
repayments of the principal of loans or advances or other transfers
of assets to the Parent or any Restricted Subsidiary from
Unrestricted Subsidiaries or (y) the redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of "Investment") not to exceed, in the
case of any Unrestricted Subsidiary, the amount of Investments
previously made by the Parent or any Restricted Subsidiary in such
Unrestricted Subsidiary, which amount was included in the
calculation of the amount of Restricted Payments; and

(v) $20.0 million.

(b) The provisions of the foregoing paragraph (a) will not prohibit:

(1) any purchase, repurchase, redemption, retirement or other
acquisition for value of Capital Stock of the Parent made by exchange for,
or out of the proceeds of the substantially concurrent sale of, Capital
Stock of the Parent (other than Disqualified Stock and other than Capital
Stock issued or sold to a Subsidiary of the Parent or an employee stock
ownership plan or other trust established by the Parent or any of its
Subsidiaries); provided, however, that:

(A) such purchase, repurchase, redemption, retirement or other
acquisition for value will be excluded in the calculation of the amount
of Restricted Payments, and

(B) the Net Cash Proceeds from such sale applied in the manner set
forth in this clause (1) will be excluded from the calculation of
amounts under clause (4)(C)(ii) of paragraph (a) above;

(2) any prepayment, repayment, purchase, repurchase, redemption,
retirement, defeasance or other acquisition for value of Subordinated
Obligations of the Parent made by exchange for, or out of the proceeds of
the substantially concurrent sale of, Indebtedness of the Parent that is
permitted to be Incurred pursuant to paragraph (b) of the covenant
described under "--Limitation on Indebtedness;" provided, however, that
such prepayment, repayment, purchase, repurchase, redemption, retirement,
defeasance or other acquisition for value will be excluded in the
calculation of the amount of Restricted Payments;

(3) any prepayment, repayment, purchase, repurchase, redemption,
retirement, defeasance or other acquisition for value of Subordinated
Obligations from Net Available Cash to the extent permitted by the covenant
described under "--Limitation on Sales of Assets and Capital Stock";
provided, however, that such prepayment, repayment, purchase, repurchase,
redemption, retirement, defeasance or other acquisition for value will be
excluded in the calculation of the amount of Restricted Payments;

(4) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividends would have complied with this
covenant; provided, however, that such dividends will be included in the
calculation of the amount of Restricted Payments;

(5) dividends paid by the Parent with respect to the 242,170 outstanding
shares of its preferred stock, par value $25.00 per share, paying
noncumulative dividends of $1.00 per share in amounts each year which do
not exceed $242,170 (the amount paid with respect to such preferred stock
in the year ended December 31, 1999); provided, however, that such
dividends will be included in the calculation of the amount of Restricted
Payments;

(6) Investments that are made with Excluded Contributions; provided,
however, that such Investments will be excluded in the calculation of the
amount of Restricted Payments; or

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(7) any purchase, repurchase, redemption, retirement or other
acquisition for value of shares of, or options to purchase shares of,
common stock of the Parent or any of its Subsidiaries from employees,
former employees, directors or former directors of the Parent or any of its
Subsidiaries (or permitted transferees of such employees, former employees,
directors or former directors), pursuant to the terms of agreements
(including employment agreements) or plans (or amendments thereto) approved
by the Board of Directors under which such individuals purchase or sell or
are granted the option to purchase or sell, shares of such common stock;
provided, however, that the aggregate amount of such purchases,
repurchases, redemptions, retirements and other acquisitions for value will
not exceed $3.0 million in any calendar year; provided further, however,
that such purchases, repurchases, redemptions, retirements and other
acquisitions for value shall be excluded in the calculation of the amount
of Restricted Payments.

Limitation on Restrictions on Distributions from Restricted Subsidiaries.
The Parent will not, and will not permit any Restricted Subsidiary to, create
or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to:

(1) pay dividends or make any other distributions on its Capital Stock
or pay any Indebtedness or other obligations owed to the Parent or any
Restricted Subsidiary;

(2) make any loans or advances to the Parent or any Restricted
Subsidiary; or

(3) transfer any of its property or assets to the Parent or any
Restricted Subsidiary, except:

(A) any encumbrance or restriction pursuant to applicable law or an
agreement in effect at or entered into on the Closing Date;

(B) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by such Restricted Subsidiary prior to the date on which such
Restricted Subsidiary was acquired by the Parent (other than
Indebtedness Incurred as consideration in, in contemplation of, or to
provide all or any portion of the funds or credit support utilized to
consummate the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Restricted Subsidiary or was
otherwise acquired by the Parent) and outstanding on such date;

(C) any encumbrance or restriction pursuant to an agreement effecting
a Refinancing of Indebtedness Incurred pursuant to an agreement referred
to in clause (A) or (B) of this covenant or this clause (C) or contained
in any amendment to an agreement referred to in clause (A) or (B) of
this covenant or this clause (C); provided, however, that the
encumbrances and restrictions contained in any such Refinancing
agreement or amendment are no less favorable to the Holders than the
encumbrances and restrictions contained in such predecessor agreements;

(D) in the case of clause (3), any encumbrance or restriction

(i) that restricts in a customary manner the subletting,
assignment or transfer of any property or asset that is subject to a
lease, license or similar contract, or

(ii) contained in security agreements securing Indebtedness of a
Restricted Subsidiary to the extent such encumbrance or restriction
restricts the transfer of the property subject to such security
agreements; and

(E) with respect to a Restricted Subsidiary, any restriction imposed
pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition.

Limitation on Sales of Assets and Capital Stock. (a) The Parent will not,
and will not permit any Restricted Subsidiary to, make any Asset Disposition
unless:

(1) the Parent or such Restricted Subsidiary receives consideration
(including by way of relief from, or by any other Person assuming sole
responsibility for, any liabilities, contingent or

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otherwise) at the time of such Asset Disposition at least equal to the Fair
Market Value of the shares and assets subject to such Asset Disposition,

(2) at least 75% of the consideration thereof received by the Parent or
such Restricted Subsidiary is in the form of cash, and

(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Parent (or such Restricted Subsidiary, as the
case may be)

(A) first, to the extent the Parent elects (or is required by the
terms of any Indebtedness), to prepay, repay, purchase, repurchase,
redeem, retire, defease or otherwise acquire for value Bank
Indebtedness of the Parent or a Note Guarantor within 60 days after the
later of the date of such Asset Disposition or the receipt of such Net
Available Cash;

(B) second, to the extent of the balance of Net Available Cash
after application in accordance with clause (A), to the extent the
Parent or such Restricted Subsidiary elects, to reinvest in Additional
Assets (including by means of an Investment in Additional Assets by a
Restricted Subsidiary with Net Available Cash received by the Parent or
another Restricted Subsidiary) within 180 days from the later of such
Asset Disposition or the receipt of such Net Available Cash;

(C) third, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B), to make an
Offer (as defined in paragraph (b) of this covenant below) to purchase
Notes pursuant to and subject to the conditions set forth in paragraph
(b) of this covenant; provided, however, that if the Parent or the
Issuer elects (or is required by the terms of any other Senior
Indebtedness), such Offer may be made ratably to purchase the Notes and
other Senior Indebtedness of the Parent, the Issuer or any Note
Guarantor, and

(D) fourth, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A), (B) and (C), for any
general corporate purpose permitted by the terms of the Indenture;

provided, however that in connection with any prepayment, repayment,
purchase, repurchase, redemption, retirement, defeasance or other
acquisition for value of Indebtedness pursuant to clause (A) or (C) above,
the Parent or such Restricted Subsidiary will retire such Indebtedness and
will cause the related loan commitment (if any) to be permanently reduced
in an amount equal to the principal amount so prepaid, repaid, purchased,
repurchased, redeemed, retired, defeased or otherwise acquired for value.

Notwithstanding the foregoing provisions of this covenant, the Parent and
the Restricted Subsidiaries will not be required to apply any Net Available
Cash in accordance with this covenant except to the extent that the aggregate
Net Available Cash from all Asset Dispositions that is not applied in
accordance with this covenant exceeds $20.0 million.

For the purposes of this covenant, the following are deemed to be cash:

. the assumption of Indebtedness of the Parent or any Restricted Subsidiary
(other than any Preferred Stock, including Disqualified Stock,
constituting Indebtedness) and the release of the Parent or such
Restricted Subsidiary from all liability on such Indebtedness in
connection with such Asset Disposition, and

. securities received by the Parent or any Restricted Subsidiary from the
transferee that are promptly converted by the Parent or such Restricted
Subsidiary into cash.

(b) In the event of an Asset Disposition that requires the purchase of
Notes pursuant to clause (a)(3)(C) of this covenant, the Parent or the Issuer
will be required (i) to purchase Notes tendered pursuant to an offer by the
Issuer for the Notes (the "Offer") at a purchase price of 100% of their

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principal amount plus accrued and unpaid interest and liquidated damages
thereon, if any, to the date of purchase (subject to the right of Holders of
record on the relevant date to receive interest due on the relevant interest
payment date) in accordance with the procedures (including prorating in the
event of oversubscription), set forth in the Indenture and (ii) to purchase
other Senior Indebtedness of the Parent, the Issuer or any Note Guarantor on
the terms and to the extent contemplated thereby (provided that in no event
shall the Parent or the Issuer offer to purchase such other Senior
Indebtedness at a purchase price in excess of 100% of its principal amount,
plus accrued and unpaid interest thereon. If the aggregate purchase price of
Notes (and other Senior Indebtedness) tendered pursuant to the Offer is less
than the Net Available Cash allotted to the purchase of the Notes (and other
Senior Indebtedness), the Parent or the Issuer will apply the remaining Net
Available Cash in accordance with clause (a)(3)(D) of this covenant. The
Parent and the Issuer will not be required to make an Offer for Notes (and
other Senior Indebtedness) pursuant to this covenant if the Net Available Cash
available therefor (after application of the proceeds as provided in clauses
(a)(3)(A) and (B)) is less than $20.0 million in the aggregate for all Asset
Dispositions after the Closing Date.

(c) The Parent and the Issuer will comply, to the extent applicable, with
the requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Notes pursuant to
this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Parent and the
Issuer will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under this covenant by
virtue thereof.

Limitation on Transactions with Affiliates. (a) The Parent will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter
into or conduct any transaction or series of related transactions (including
the purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of the Parent (an "Affiliate Transaction") unless
such transaction is on terms:

(1) that are no less favorable to the Parent or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the
time of such transaction in arm's-length dealings with a Person who is not
such an Affiliate,

(2) that, in the event such Affiliate Transaction involves an aggregate
amount in excess of $5.0 million,

(A) are set forth in writing, and

(B) have been approved by a majority of the members of the Board of
Directors having no personal stake in such Affiliate Transaction and,

(3) that, in the event such Affiliate Transaction involves an amount in
excess of $20.0 million, have been determined by a nationally recognized
appraisal or investment banking firm to be fair, from a financial
standpoint, to the Parent and its Restricted Subsidiaries.

(b) The provisions of the foregoing paragraph (a) will not prohibit:

(1) any Restricted Payment permitted to be paid pursuant to the covenant
described under "Limitation on Restricted Payments,"

(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the Board
of Directors,

(3) the grant of stock options or similar rights to employees and
directors of the Parent pursuant to plans approved by the Board of
Directors,

(4) loans or advances to employees in the ordinary course of business in
accordance with past practices of the Parent, but in any event not to
exceed $2.0 million in the aggregate outstanding at any one time,

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(5) Stock Purchase Loans, but in any event not to exceed $3.0 million in
the aggregate outstanding at any one time,

(6) the payment of reasonable fees to directors of the Parent and its
Subsidiaries who are not employees of the Parent or its Subsidiaries, or

(7) any transaction between the Parent and a Wholly Owned Subsidiary or
between Wholly Owned Subsidiaries.

Limitation on Liens. The Parent will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its property or assets (including
Capital Stock of a Restricted Subsidiary), whether owned at the Closing Date
or thereafter acquired, other than Permitted Liens, without effectively
providing that the Notes shall be secured equally and ratably with (or prior
to) the obligations so secured for so long as such obligations are so secured;
provided, however, that the Parent may Incur other Liens to secure
Indebtedness as long as the amount of outstanding Indebtedness secured by
Liens Incurred pursuant to this proviso does not exceed 5% of Consolidated Net
Tangible Assets, as determined based on the consolidated balance sheet of the
Parent as of the end of the most recent fiscal quarter ending at least 45 days
prior thereto.

SEC Reports. The Parent will (a) file with the SEC and provide the Trustee
for delivery to the Holders and prospective Holders (upon request) within 15
days after it files them with the SEC a copy of its annual report and the
information, documents and other reports that are specified in Sections 13 and
15(d) of the Exchange Act and (b) furnish to the Trustee for delivery to the
Holders, promptly upon their becoming available, a copy of its annual report
to shareholders and any other information provided by it to its public
shareholders generally. In addition, following an underwritten primary public
offering of common stock of the Issuer pursuant to an effective registration
statement under the Securities Act, the Parent shall furnish to the Trustee
for delivery to the Holders, promptly upon their becoming available, copies of
the annual report to shareholders and any other information provided by the
Issuer, to its public shareholders generally. The Parent also will comply with
the other provisions of Section 314(a) of the TIA.

Future Note Guarantors. The Parent will cause (i) at any time that any Bank
Indebtedness is outstanding, each Subsidiary of the Parent (other than the
Issuer, Caymex Transportation, Inc., SCC Holdings, Inc., The Kansas City
Northern Railway Company and Veals, Inc.) that enters into a Guarantee of any
Bank Indebtedness and (ii) at any time that no Bank Indebtedness is
outstanding, each Subsidiary of the Parent (other than the Issuer, The Kansas
City Northern Railway Company and Veals, Inc.) that enters into a Guarantee of
any obligations of the Parent or any of its domestic Subsidiaries, to execute
and deliver to the Trustee a supplemental indenture in the form set forth in
the Indenture pursuant to which such Subsidiary will Guarantee payment of the
Notes. Each Note Guarantee will be limited to an amount not to exceed the
maximum amount that can be Guaranteed by that Note Guarantor without rendering
the Note Guarantee, as it relates to such Note Guarantor, voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.

Limitation on Lines of Business. The Parent will not, and will not permit
any Restricted Subsidiary to, engage in any business other than a Permitted
Business. At any time that it is not Guaranteeing payment of the Notes (which
shall be effected by executing and delivering to the Trustee a supplemental
indenture in the form set forth in the Indenture), (1) Caymex Transportation,
Inc. will not engage in any business or activity other than the ownership of
the Capital Stock of foreign subsidiaries and activities incidental thereto,
(2) SCC Holdings, Inc. will not engage in any business or activity other than
the ownership of the Capital Stock of Southern Capital LLC and activities
incidental thereto, (3) TransFin Insurance Ltd. will not engage in any
business or activity other than the insurance business and activities
incidental thereto, and (4) The Kansas City Northern Railway Company and
Veals, Inc. will not conduct any material business or activity.

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Limitation on Sale/Leaseback Transactions. The Parent will not, and will
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless:

(1) the Parent or such Restricted Subsidiary would be entitled to:

(A) Incur Indebtedness in an amount equal to the Attributable Debt
with respect to such Sale/Leaseback Transaction pursuant to the
covenant described under "Limitation on Indebtedness" and

(B) create a Lien on such property securing such Attributable Debt
without equally and ratably securing the Notes pursuant to the covenant
described under "Limitation on Liens,"

(2) the net proceeds received by the Parent or such Restricted
Subsidiary in connection with such Sale/Leaseback Transaction are at least
equal to the Fair Market Value of such property and

(3) the transfer of such property is permitted by, and the Parent
applies the proceeds of such transaction in compliance with, the covenant
described under "Limitation on Sale of Assets and Capital Stock."

Merger and Consolidation

The Issuer will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:

(1) the resulting, surviving or transferee Person (the "Successor
Company") will be a corporation organized and existing under the laws of
the United States of America, any State thereof or the District of Columbia
and the Successor Company (if not the Issuer) will expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Issuer under the
Notes and the Indenture;

(2) immediately after giving effect to such transaction (and treating
any Indebtedness which becomes an obligation of the Successor Company, the
Parent or any Restricted Subsidiary as a result of such transaction as
having been Incurred by the Successor Company, the Parent or such
Restricted Subsidiary at the time of such transaction), no Default shall
have occurred and be continuing;

(3) immediately after giving effect to such transaction, the Parent
would be able to Incur an additional $1.00 of Indebtedness under paragraph
(a) of the covenant described under "Limitation on Indebtedness;"

(4) immediately after giving effect to such transaction, the Successor
Company will have Consolidated Net Worth in an amount which is not less
than the Consolidated Net Worth of the Parent immediately prior to such
transaction;

(5) the Issuer shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture; and

(6) the Issuer shall have delivered to the Trustee an Opinion of Counsel
to the effect that the Holders will not recognize income, gain or loss for
Federal income tax purposes as a result of such transaction and will be
subject to Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such transaction had not
occurred.

The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of the Issuer under the Indenture, but the
predecessor Issuer in the case of a conveyance, transfer or lease of all or
substantially all its assets will not be released from the obligation to pay
the principal of and interest on the Notes.

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In addition, none of the Note Guarantors will consolidate with or merge
with or into, or convey, transfer or lease all or substantially all of its
assets to any Person unless:

(1) the resulting, surviving or transferee Person (the "Successor
Guarantor") will be a corporation organized and existing under the laws of
the jurisdiction under which such Note Guarantor was organized and existing
or the laws of the United States of America, any State thereof or the
District of Columbia, and such Person (if not such Note Guarantor) will
expressly assume, by a supplemental indenture, executed and delivered to
the Trustee, in form satisfactory to the Trustee, all the obligations of
such Note Guarantor under its Note Guarantee;

(2) immediately after giving effect to such transaction (and treating
any Indebtedness which becomes an obligation of the Successor Guarantor or
any Restricted Subsidiary as a result of such transaction as having been
Incurred by the Successor Guarantor or such Restricted Subsidiary at the
time of such transaction), no Default shall have occurred and be
continuing;

(3) immediately after giving effect to such transaction, the Parent or
the Successor Guarantor, as applicable, would be able to Incur an
additional $1.00 of Indebtedness under paragraph (a) of the covenant
described under "Limitation on Indebtedness";

(4) immediately after giving effect to such transaction, the Parent and
the Restricted Subsidiaries will have Consolidated Net Worth in an amount
which is not less than the Consolidated Net Worth of the Parent and the
Restricted Subsidiaries immediately prior to such transaction;

(5) the Parent shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture; and

(6) the Parent shall have delivered to the Trustee an Opinion of Counsel
to the effect that the Holders will not recognize income, gain or loss for
Federal income tax purposes as a result of such transaction and will be
subject to Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such transaction had not
occurred.

Notwithstanding the foregoing:

(A) any Restricted Subsidiary may consolidate with, merge into or
transfer all or part of its properties and assets to the Issuer or any
Note Guarantor;

(B) the Parent or the Issuer may merge with an Affiliate
incorporated solely for the purpose of reincorporating the Parent or
the Issuer, as the case may be, in another jurisdiction to realize tax
or other benefits; and

KCSL was merged into the Parent effective December 31, 2000.

Defaults

Each of the following is an Event of Default:

(1) a default in any payment of interest on any Note when due and
payable or in any payment of liquidated damages continued for 30 days,

(2) a default in the payment of principal of any Note when due and
payable at its Stated Maturity, upon required redemption or repurchase,
upon declaration or otherwise,

(3) the failure by the Parent or any Subsidiary to comply with its
obligations under the covenant described under "Merger and Consolidation"
above,

(4) the failure by the Parent or any Subsidiary to comply for 30 days
after notice with any of its obligations under the covenants described
under "Change of Control" or "Certain Covenants" above (in each case, other
than a failure to purchase Notes),

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(5) the failure by the Parent or any Subsidiary to comply for 60 days
after notice with its other agreements contained in the Notes or the
Indenture,

(6) the failure by the Parent or any Subsidiary to pay any Indebtedness
within any applicable grace period after final maturity or the acceleration
of any such Indebtedness by the holders thereof because of a default if the
total amount of such Indebtedness unpaid or accelerated exceeds $10.0
million or its foreign currency equivalent (the "cross acceleration
provision") and such failure continues for 10 days after receipt of the
notice specified in the Indenture,

(7) certain events of bankruptcy, insolvency or reorganization of the
Parent, the Issuer or a Significant Subsidiary (the "bankruptcy
provisions"),

(8) the rendering of any judgment or decree for the payment of money in
excess of $10.0 million or its foreign currency equivalent against the
Parent or a Subsidiary if:

(A) an enforcement proceeding thereon is commenced by any creditor or

(B) such judgment or decree remains outstanding for a period of 60
days following such judgment and is not discharged, waived or stayed
(the "judgment default provision") or

(9) any Note Guarantee ceases to be in full force and effect (except as
contemplated by the terms thereof) or any Note Guarantor or Person acting
by or on behalf of such Note Guarantor denies or disaffirms such Note
Guarantor's obligations under the Indenture or any Note Guarantee and such
Default continues for 10 days after receipt of the notice specified in the
Indenture.

The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court
or any order, rule or regulation of any administrative or governmental body.

However, a default under clauses (4), (5) or (6) will not constitute an
Event of Default until the Trustee notifies the Issuer or the Holders of at
least 25% in principal amount of the outstanding Notes notify the Issuer and
the Trustee of the default and the Issuer or the Note Guarantor, as applicable,
does not cure such default within the time specified in clauses (4), (5) or (6)
hereof after receipt of such notice.

If an Event of Default (other than an Event of Default relating to certain
events of bankruptcy, insolvency or reorganization of the Parent or the Issuer)
occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the outstanding Notes by notice to the Issuer, may declare
the principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest will be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Parent or the Issuer occurs,
the principal of and interest on all the Notes will become immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holders. Under certain circumstances, the Holders of a majority in principal
amount of the outstanding Notes may rescind any such acceleration with respect
to the Notes and its consequences.

Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee indemnity or security satisfactory to the Trustee
in its reasonable discretion against any loss, liability or expense. Except to
enforce the right to receive payment of principal, premium (if any) or interest
when due, no Holder may pursue any remedy with respect to the Indenture or the
Notes unless:

(1) such Holder has previously given the Trustee notice that an Event of
Default is continuing,

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(2) Holders of at least 25% in principal amount of the outstanding Notes
have requested the Trustee in writing to pursue the remedy,

(3) such Holders have offered the Trustee security or indemnity
satisfactory to it in its reasonable discretion against any loss, liability
or expense,

(4) the Trustee has not complied with such request within 60 days after
the receipt of the request and the offer of security or indemnity and

(5) the Holders of a majority in principal amount of the outstanding
Notes have not given the Trustee a direction inconsistent with such request
within such 60-day period.

Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Notes will be given the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or of exercising any trust or power conferred on the Trustee. The
Trustee, however, may refuse to follow any direction that conflicts with law
or the Indenture or that the Trustee determines is unduly prejudicial to the
rights of any other Holder or that would involve the Trustee in personal
liability. Prior to taking any action under the Indenture, the Trustee will be
entitled to indemnification satisfactory to it in its sole discretion against
all losses and expenses caused by taking or not taking such action.

If a Default occurs and is continuing and is known to the Trustee, the
Trustee must mail to each Holder notice of the Default within the earlier of
90 days after it occurs or 30 days after it is known to a Trust Officer or
written notice of it is received by the Trustee. Except in the case of a
Default in the payment of principal of, premium (if any) or interest on any
Note (including payments pursuant to the redemption provisions of such Note),
the Trustee may withhold notice if and so long as a committee of its Trust
Officers in good faith determines that withholding notice is in the interests
of the Holders. In addition, the Issuer will be required to deliver to the
Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred
during the previous year. The Issuer will also be required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Events of Default, their status and what
action the Issuer is taking or proposes to take in respect thereof.

Amendments and Waivers

Subject to certain exceptions, the Indenture or the Notes may be amended
with the written consent of the Holders of a majority in principal amount of
the Notes then outstanding and any past default or compliance with any
provisions may be waived with the consent of the Holders of a majority in
principal amount of the Notes then outstanding. However, without the consent
of each Holder of an outstanding Note affected, no amendment may, among other
things:

(1) reduce the amount of Notes whose Holders must consent to an
amendment,

(2) reduce the rate of or extend the time for payment of interest or any
liquidated damages on any Note,

(3) reduce the principal of or extend the Stated Maturity of any Note,

(4) reduce the premium payable upon the redemption of any Note or change
the time at which any Note may be redeemed as described under "Optional
Redemption" above,

(5) make any Note payable in money other than that stated in the Note,

(6) impair the right of any Holder to receive payment of principal of,
and interest or any liquidated damages on, such Holder's Notes on or after
the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such Holder's Notes,

(7) make any change in the amendment provisions which require each
Holder's consent or in the waiver provisions, or

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(8) modify the Note Guarantees in any manner adverse to the Holders.

Without the consent of any Holder, the Issuer, the Note Guarantors and the
Trustee may amend the Indenture to:

. cure any ambiguity, omission, defect or inconsistency,

. provide for the assumption by a successor corporation of the obligations
of the Issuer or a Note Guarantor under the Indenture,

. provide for uncertificated Notes in addition to or in place of
certificated Notes (provided, however, that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or
in a manner such that the uncertificated Notes are described in Section
163(f)(2)(B) of the Code),

. add additional Guarantees with respect to the Notes,

. secure the Notes,

. add to the covenants of the Parent and the Restricted Subsidiaries for
the benefit of the Holders or to surrender any right or power conferred
upon the Parent or the Issuer,

. make any change that does not adversely affect the rights of any Holder,
subject to the provisions of the Indenture,

. provide for the issuance of the Exchange Notes or

. comply with any requirement of the SEC in connection with the
qualification of the Indenture under the TIA.

The consent of the Holders will not be necessary to approve the particular
form of any proposed amendment. It will be sufficient if such consent approves
the substance of the proposed amendment.

After an amendment becomes effective, the Issuer is required to mail to
Holders a notice briefly describing such amendment. However, the failure to
give such notice to all Holders, or any defect therein, will not impair or
affect the validity of the amendment.

Transfer and Exchange

Subject to compliance with the restrictions on transfer and exchange set
forth in the Indenture, a Holder will be able to transfer or exchange Notes.
Upon any transfer or exchange, the registrar and the Trustee may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and the Issuer may require a Holder to pay any taxes required by law
or permitted by the Indenture. The Issuer will not be required to transfer or
exchange any Note selected for redemption or to transfer or exchange any Note
for a period of 15 days prior to the mailing of a notice of redemption of
Notes. The Notes will be issued in registered form and the Holder will be
treated as the owner of such Note for all purposes.

Defeasance

The Parent and the Issuer may at any time terminate all their obligations
under the Notes and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations
to register the transfer or exchange of the Notes, to replace mutilated,
destroyed, lost or stolen Notes and to maintain a registrar and paying agent
in respect of the Notes.

In addition, the Parent and the Issuer may at any time terminate:

(1) its obligations under the covenants described under "Certain
Covenants,"

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(2) the operation of the cross acceleration provision, the bankruptcy
provisions with respect to Significant Subsidiaries and the judgment
default provision described under "Defaults" above and the limitations
contained in clauses (3) and (4) under the first paragraph and clause (3)
under the third paragraph of "Merger and Consolidation" above ("covenant
defeasance").

In the event that the Parent and the Issuer exercise their legal defeasance
option or their covenant defeasance option, each Note Guarantor will be
released from all of its obligations with respect to its Note Guarantee.

The Parent and the Issuer may exercise their legal defeasance option
notwithstanding their prior exercise of their covenant defeasance option. If
the Parent and the Issuer exercise their legal defeasance option, payment of
the Notes may not be accelerated because of an Event of Default with respect
thereto. If the Parent and the Issuer exercise their covenant defeasance
option, payment of the Notes may not be accelerated because of an Event of
Default specified in clause (4), (6) or (7) (with respect only to Significant
Subsidiaries), (8) (with respect only to Significant Subsidiaries) under
"Defaults" above or because of the failure of the Issuer to comply with clause
(3) or (4) under the first paragraph and clauses (3) and (4) under the third
paragraph of "Merger and Consolidation" above.

In order to exercise either defeasance option, the Parent and the Issuer
must irrevocably deposit in trust (the "defeasance trust") with the Trustee
money in an amount sufficient or U.S. Government Obligations, the principal of
and interest on which will be sufficient, or a combination thereof sufficient,
to pay the principal of, premium (if any) and interest on, and liquidated
damages, if any, in respect of the Notes to redemption or maturity, as the
case may be, and must comply with certain other conditions, including delivery
to the Trustee of an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for Federal income tax purposes as a result of
such deposit and defeasance and will be subject to Federal income tax on the
same amounts and in the same manner and at the same times as would have been
the case if such deposit and defeasance had not occurred (and, in the case of
legal defeasance only, such Opinion of Counsel must be based on a ruling of
the Internal Revenue Service or other change in applicable Federal income tax
law).

Concerning the Trustee

The Bank of New York is the Trustee under the Indenture and has been
appointed by the Parent as Registrar and Paying Agent with regard to the
Notes.

Governing Law

The Indenture and the Outstanding Notes are governed by, and the Exchange
Notes will be governed by, and construed in accordance with, the laws of the
State of New York without giving effect to applicable principles of conflicts
of law to the extent that the application of the law of another jurisdiction
would be required thereby.

Certain Definitions

"Additional Assets" means:

(1) any property or assets (other than Indebtedness and Capital Stock)
to be used by the Parent or a Restricted Subsidiary in a Permitted
Business;

(2) the Capital Stock of a Person that becomes a Restricted Subsidiary
as a result of the acquisition of such Capital Stock by the Parent or
another Restricted Subsidiary; or

(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary; provided, however, that:

any such Restricted Subsidiary described in clauses (2) or (3) above is
primarily engaged in a Permitted Business.

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"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing. For purposes of the provisions described under "--Certain
Covenants--Limitation on Transactions with Affiliates" and "--Certain
Covenants--Limitation on Sales of Assets and Capital Stock" only, "Affiliate"
shall also mean any beneficial owner of shares representing 5% or more of the
total voting power of the Voting Stock (on a fully diluted basis) of the
Parent or the Issuer or of rights or warrants to purchase such Voting Stock
(whether or not currently exercisable) and any Person who would be an
Affiliate of any such beneficial owner pursuant to the first sentence hereof.

"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Parent
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation, or similar transaction (each referred to for the purposes of
this definition as a "disposition"), of:

(1) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares or shares required by applicable law to be
held by a Person other than the Parent or a Restricted Subsidiary),

(2) all or substantially all the assets of any division or line of
business of the Parent or any Restricted Subsidiary or

(3) any other assets of the Parent or any Restricted Subsidiary outside
of the ordinary course of business of the Parent or such Restricted
Subsidiary

other than, in the case of (1), (2) and (3) above,

(A) disposition by a Restricted Subsidiary to the Parent or by the
Parent or a Restricted Subsidiary to a Wholly Owned Subsidiary,

(B) for purposes of the provisions described under "Certain
Covenants--Limitation on Sales of Assets and Capital Stock" only, a
disposition subject to the covenant described under "Certain
Covenants--Limitation on Restricted Payments",

(D) any exchange of like property pursuant to Section 1031 of the
Code for use in a Permitted Business,

(E) the disposition by (i) the Parent of any or all of its shares of
Capital Stock of Wyandotte Garage Corporation, (ii) Wyandotte Garage
Corporation of any or all of its assets, (iii) the Issuer of any or all
of the shares of Capital Stock of Southern Development Company and (iv)
Southern Development Company of any or all of its assets, but only to
the extent that the Net Cash Proceeds or Net Available Cash (treating
such dispositions referred to in clauses (i) - (iv) as Asset
Dispositions for purposes of the definition of "Net Available Cash")
from such dispositions are used to make leasehold improvements with a
cost not exceeding $5.0 million in the aggregate for all such
dispositions at the Parent's new leased headquarters offices no later
than one year after the applicable disposition, and

(F) a Grupo TFM Disposition to the extent that the Net Cash Proceeds
of such Grupo TFM Disposition are used to make a Grupo TFM Investment
or to prepay, repay, purchase, repurchase, redeem, retire, defease or
otherwise acquire for value Bank Indebtedness of the Parent or a Note
Guarantor, in each case within one year after such Grupo TFM
Disposition.

"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/Leaseback Transaction (including any period for which such lease has
been extended).

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"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing:

(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment
of such Indebtedness or scheduled redemption or similar payment with
respect to such Preferred Stock multiplied by the amount of such payment by

(2) the sum of all such payments.

"Bank Indebtedness" means any and all amounts payable under or in respect
of the Credit Agreement (other than the $200 million term loan due January 11,
2001 that was repaid with the proceeds of the Outstanding Notes) and any
Refinancing Indebtedness with respect thereto, as amended from time to time,
including principal, premium (if any), interest (including interest accruing
on or after the filing of any petition in bankruptcy or for reorganization
relating to the Issuer whether or not a claim for post-filing interest is
allowed in such proceedings), fees, charges, expenses, reimbursement
obligations, guarantees and all other amounts payable thereunder or in respect
thereof. It is understood and agreed that Refinancing Indebtedness in respect
of the Credit Agreement may be Incurred from time to time after termination of
the Credit Agreement.

"Board of Directors" means the Board of Directors of the Parent or any
committee thereof duly authorized to act on behalf of the Board of Directors
of the Parent.

"Business Day" means each day which is not a Legal Holiday.

"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.

"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented
by such obligation shall be the capitalized amount of such obligation
determined in accordance with GAAP; and the Stated Maturity thereof shall be
the date of the last payment of rent or any other amount due under such lease
prior to the first date upon which such lease may be prepaid by the lessee
without payment of a penalty.

"Closing Date" means the date of the Indenture.

"Code" means the Internal Revenue Code of 1986, as amended.

"Consolidated Coverage Ratio" as of any date of determination means the
ratio of:

(1) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date
of such determination to

(2) Consolidated Interest Expense for such four fiscal quarters;

provided, however, that:

(A) if the Parent or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period (other than
Indebtedness under a revolving credit facility) that remains
outstanding on such date of determination or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio is an
Incurrence of Indebtedness, EBITDA and Consolidated Interest Expense
for such period shall be calculated after giving effect on a pro forma
basis to such Indebtedness as if such Indebtedness had been Incurred on
the first day of such period and the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with
the proceeds of such new Indebtedness as if such discharge had occurred
on the first day of such period,

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(B) if the Parent or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness (other
than Indebtedness under a revolving credit facility) since the
beginning of such period or if any Indebtedness is to be repaid,
repurchased, defeased or otherwise discharged on the date of the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio, EBITDA and Consolidated Interest Expense for such
period shall be calculated on a pro forma basis as if such discharge
had occurred on the first day of such period and as if the Parent or
such Restricted Subsidiary has not earned the interest income actually
earned during such period in respect of cash or Temporary Cash
Investments used to repay, repurchase, defease or otherwise discharge
such Indebtedness,

(C) if since the beginning of such period the Parent or any
Restricted Subsidiary shall have made any Asset Disposition, the EBITDA
for such period shall be reduced by an amount equal to the EBITDA (if
positive) directly attributable to the assets that are the subject of
such Asset Disposition for such period or increased by an amount equal
to the EBITDA (if negative) directly attributable thereto for such
period and Consolidated Interest Expense for such period shall be
reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Indebtedness of the Parent or any
Restricted Subsidiary repaid, repurchased, defeased or otherwise
discharged with respect to the Parent and its continuing Restricted
Subsidiaries in connection with such Asset Disposition for such period
(or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to
the Indebtedness of such Restricted Subsidiary to the extent the Parent
and its continuing Restricted Subsidiaries are no longer liable for
such Indebtedness after such sale),

(D) if since the beginning of such period the Parent or any
Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any Person that becomes a
Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction
causing a calculation to be made hereunder, which constitutes all or
substantially all of an operating unit of a business, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any
Indebtedness) as if such Investment or acquisition occurred on the
first day of such period, and

(E) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into
the Parent or any Restricted Subsidiary since the beginning of such
period) shall have made any Asset Disposition or any Investment or
acquisition of assets that would have required an adjustment pursuant
to clause (C) or (D) above if made by the Parent or a Restricted
Subsidiary during such period, EBITDA and Consolidated Interest Expense
for such period shall be calculated after giving pro forma effect
thereto as if such Asset Disposition, Investment or acquisition of
assets occurred on the first day of such period.

For purposes of this definition, whenever pro forma effect is to be given
to an acquisition of assets or other Investment, the amount of income or
earnings relating thereto and the amount of Consolidated Interest Expense
associated with any Indebtedness Incurred in connection therewith, the pro
forma calculations shall be determined in good faith by a responsible
financial or accounting Officer of the Parent and shall comply with the
requirements of Rule 11-02 of Regulation S-X promulgated by the SEC.

If any Indebtedness bears a floating rate of interest and is being given
pro forma effect, the interest expense on such Indebtedness shall be
calculated as if the rate in effect on the date of determination had been the
applicable rate for the entire period (taking into account any Interest Rate
Agreement applicable to such Indebtedness if such Interest Rate Agreement has
a remaining term as at the date of determination in excess of 12 months).

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For purposes of making the computation referred to above, interest on any
Indebtedness under a revolving credit facility computed on a pro forma basis
shall be computed based upon the average daily balance of such Indebtedness
during the applicable period.

"Consolidated Current Liabilities" as of the date of determination means
the aggregate amount of liabilities of the Parent and its consolidated
Restricted Subsidiaries which may properly be classified as current
liabilities (including taxes accrued as estimated), on a Consolidated basis,
after eliminating:

(1) all intercompany items between the Parent and any Restricted
Subsidiary and

(2) all current maturities of long-term Indebtedness, all as determined
in accordance with GAAP consistently applied.

"Consolidated Interest Expense" means, for any period, the total interest
expense of the Parent and its Consolidated Restricted Subsidiaries, plus, to
the extent Incurred by the Parent and its Consolidated Restricted Subsidiaries
in such period but not included in such interest expense, without duplication:

(1) interest expense attributable to Capitalized Lease Obligations and
the interest expense attributable to leases constituting part of a
Sale/Leaseback Transaction,

(2) amortization of debt discount and debt issuance costs,

(3) capitalized interest,

(4) noncash interest expense,

(5) commissions, discounts and other fees and charges attributable to
letters of credit and bankers' acceptance financing,

(6) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by the Parent or any Restricted
Subsidiary,

(7) net costs associated with Hedging Obligations (including
amortization of fees),

(8) dividends in respect of all Disqualified Stock of the Parent or the
Issuer and all Preferred Stock of any of the Subsidiaries of the Parent
(other than the Issuer), to the extent held by Persons other than the
Parent or a Wholly Owned Subsidiary,

(9) interest Incurred in connection with investments in discontinued
operations and

(10) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan or
trust to pay interest or fees to any Person (other than the Parent) in
connection with Indebtedness Incurred by such plan or trust.

"Consolidated Net Income" means, for any period, the net income of the
Parent and its Consolidated Subsidiaries for such period; provided, however,
that there shall not be included in such Consolidated Net Income:

(1) subject to the limitations contained in clause (2) below, any net
income of any Person (other than the Parent) if such Person is not a
Restricted Subsidiary, except that:

(A) subject to the limitations contained in clause (5) below, the
Parent's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income up to the aggregate
amount of cash actually distributed by such Person during such period
to the Parent or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution
made to a Restricted Subsidiary, to the limitations contained in clause
(4) below) and

(B) the Parent's equity in a net loss of any such Person for such
period shall be included in determining such Consolidated Net Income;

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(2) all net income and net loss attributable to each Foreign Equity
Investment shall be excluded from Consolidated Net Income and, in lieu
thereof, the amount determined as follows shall be included in Consolidated
Net Income:

(A) the Parent's equity in the pretax net income and pretax net loss
attributable to each Foreign Equity Investment shall be determined in
the aggregate (so that pretax net losses offset corresponding amounts
of pretax net income);

(B) if the amount determined pursuant to subclause (A) is positive,
it shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Persons during
such period to the Parent or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution made to a Restricted Subsidiary, to the limitations
contained in clause (4) below); and

(C) if the amount determined pursuant to subclause (A) is negative,
such loss shall be included in determining such Consolidated Net
Income;

(3) any net income (or loss) of any Person acquired by the Parent or a
Subsidiary of the Parent in a pooling of interests transaction for any
period prior to the date of such acquisition;

(4) any net income (or loss) of any Restricted Subsidiary other than the
Issuer if such Restricted Subsidiary is subject to restrictions, directly
or indirectly, on the payment of dividends or the making of distributions
by such Restricted Subsidiary, directly or indirectly, except that:

(A) subject to the limitations contained in clause (5) below, the
Parent's equity in the net income of any such Restricted Subsidiary for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Restricted
Subsidiary during such period to the Parent or another Restricted
Subsidiary as a dividend or other distribution (subject, in the case of
a dividend or other distribution made to another Restricted Subsidiary,
to the limitation contained in this clause) and

(B) the Parent's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;

(5) any gain (but not loss) realized upon the sale or other disposition
of any asset of the Parent or its Consolidated Subsidiaries (including
pursuant to any Sale/Leaseback Transaction) that is not sold or otherwise
disposed of in the ordinary course of business and any gain (but not loss)
realized upon the sale or other disposition of any Capital Stock of any
Person;

(6) any extraordinary gain or loss;

(7) the cumulative effect of a change in accounting principles; and

(8) for periods prior to July 12, 2000, any net income attributable to
Stilwell Financial Inc., a Delaware corporation, and its subsidiaries.

Notwithstanding the foregoing, for the purpose of the covenant described
under "Certain Covenants--Limitation on Restricted Payments" only, there shall
be excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to the
Parent or a Restricted Subsidiary to the extent such dividends, repayments or
transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(4)(C)(iv) thereof.

"Consolidated Net Tangible Assets" as of any date of determination, means
the total amount of assets (less accumulated depreciation and amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a consolidated balance sheet
of the Parent and its Consolidated Restricted Subsidiaries, determined on a

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Consolidated basis in accordance with GAAP, and after giving effect to
purchase accounting and after deducting therefrom Consolidated Current
Liabilities and, to the extent otherwise included, the amounts of:

(1) minority interests in consolidated Subsidiaries held by Persons
other than the Parent or a Restricted Subsidiary;

(2) excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the Board of Directors;

(3) any revaluation or other write-up in book value of assets subsequent
to the Closing Date as a result of a change in the method of valuation in
accordance with GAAP consistently applied;

(4) unamortized debt discount and expenses and other unamortized
deferred charges, goodwill, patents, trademarks, service marks, trade
names, copyrights, licenses, organization or developmental expenses and
other intangible items;

(5) treasury stock;

(6) cash set apart and held in a sinking or other analogous fund
established for the purpose of redemption or other retirement of Capital
Stock to the extent such obligation is not reflected in Consolidated
Current Liabilities; and

(7) Investments in and assets of Unrestricted Subsidiaries.

"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Parent and its Restricted Subsidiaries, determined on a
Consolidated basis, as of the end of the most recent fiscal quarter of the
Parent ending at least 45 days prior to the taking of any action for the
purpose of which the determination is being made, as

(1) the par or stated value of all outstanding Capital Stock of the
Parent plus

(2) paid-in capital or capital surplus relating to such Capital Stock
plus

(3) any retained earnings or earned surplus less

(A) any accumulated deficit and

(B) any amounts attributable to Disqualified Stock.

"Consolidation" means the consolidation of the amounts of each of the
Restricted Subsidiaries with those of the Parent in accordance with GAAP
consistently applied; provided, however, that "Consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary, but the interest
of the Parent or any Restricted Subsidiary in an Unrestricted Subsidiary will
be accounted for as an investment. The term "Consolidated" has a correlative
meaning.

"Credit Agreement" means the Credit Agreement dated as of January 11, 2000,
as amended, restated, supplemented, waived, replaced (whether or not upon
termination, and whether with the original lenders or otherwise), refinanced,
restructured or otherwise modified from time to time, among the Parent, the
Issuer, the lenders party thereto, The Chase Manhattan Bank, as Administrative
Agent, Collateral Agent, Issuing Bank and Swingline Lender, The Bank of Nova
Scotia, as Syndication Agent, and Fleet National Bank, as Documentation Agent
(except to the extent that any such amendment, restatement, supplement,
waiver, replacement, refinancing, restructuring or other modification thereto
would be prohibited by the terms of the Indenture, unless otherwise agreed to
by the Holders of at least a majority in aggregate principal amount of Notes
at the time outstanding).

"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.

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"Designated Sale/Leaseback Transaction" means any Sale/Leaseback
Transaction that at the time of determination (a) has been designated a
Designated Sale/Leaseback Transaction by the Board of Directors by promptly
filing with the Trustee a copy of the resolution of the Board of Directors
giving effect to such designation and (b) has not been removed as a Designated
Sale/Leaseback Transaction by the Board of Directors by promptly filing with
the Trustee a copy of the resolution of the Board of Directors giving effect
to such removal.

"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable or exercisable) or upon the
happening of any event:

(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise,

(2) is convertible or exchangeable for Indebtedness or Disqualified
Stock (excluding Capital Stock convertible or exchangeable solely at the
option of the Parent or a Restricted Subsidiary; provided, however, that
any such conversion or exchange shall be deemed an Incurrence of
Indebtedness or Disqualified Stock, as applicable) or

(3) is redeemable at the option of the holder thereof, in whole or in
part,

in the case of each of clauses (1), (2) and (3), on or prior to the first
anniversary of the Stated Maturity of the Notes; provided, however, that any
Capital Stock that would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require such Person to repurchase
or redeem such Capital Stock upon the occurrence of an "asset sale" or "change
of control" occurring prior to the first anniversary of the Stated Maturity of
the Notes shall not constitute Disqualified Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are not more
favorable to the holders of such Capital Stock than the provisions of the
covenants described under "Change of Control" and "Limitation on Sale of
Assets and Capital Stock."

"EBITDA" for any period means the Consolidated Net Income for such period,
plus, without duplication, the following to the extent deducted in calculating
such Consolidated Net Income:

(1) income tax expense of the Parent and its Consolidated Restricted
Subsidiaries,

(2) Consolidated Interest Expense,

(3) depreciation expense of the Parent and its Consolidated Restricted
Subsidiaries and

(4) amortization expense of the Parent and its Consolidated Restricted
Subsidiaries (excluding amortization expense attributable to a prepaid cash
item that was paid in a prior period)

in each case for such period; provided, however, that (a) for any period
including any fiscal quarter or portion thereof prior to the Spin-off, EBITDA
shall for all purposes be determined on a pro forma basis as if the Spin-off
had occurred at the beginning of such period and (b) there shall be excluded
in determining EBITDA for any period including the date of the Spin-off the
net effect of the aggregate amount of costs attributable to the Spin-off, not
exceeding $3 million.

Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, and the depreciation and amortization and noncash charges of, a
Restricted Subsidiary of the Parent shall be added to Consolidated Net Income
to compute EBITDA only to the extent (and in the same proportion) that the net
income of such Restricted Subsidiary was included in calculating Consolidated
Net Income and only if a corresponding amount would be permitted at the date
of determination to be dividended to the Parent by such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to such Restricted
Subsidiary or its stockholders.

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"Equity Offering" means an underwritten primary public offering of common
stock of the Parent or the Issuer pursuant to an effective registration
statement under the Securities Act or a bona fide private placement of the
common stock of the Parent or the Issuer on arm's length terms to unaffiliated
third parties.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Excluded Contributions" means net cash proceeds received by the Parent or
the Issuer from the issue or sale of its Capital Stock (other than
Disqualified Stock) subsequent to the Closing Date (other than an issuance or
sale to (x) a Subsidiary of the Parent or (y) an employee stock ownership plan
or other trust established by the Parent or any of its Subsidiaries), in each
case designated as Excluded Contributions pursuant to an Officers' Certificate
executed on the date such Capital Stock is issued or sold which are excluded
from the calculation set forth in clause (a)(4)(C) under "--Certain
Covenants--Limitation on Restricted Payments."

"Fair Market Value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for
cash, between a willing seller and a willing and able buyer, neither of whom
is under undue pressure or compulsion to complete the transaction.

"Foreign Equity Investment" means any investment in Mexrail, Tex-Mex, TFM,
Grupo TFM or Panama Canal Railway Company or their successors for which the
equity method of accounting is used.

"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including those set forth in:

(1) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants,

(2) statements and pronouncements of the Financial Accounting Standards
Board,

(3) such other statements by such other entities as approved by a
significant segment of the accounting profession, and

(4) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.

All ratios and computations based on GAAP contained in the Indenture shall
be computed in conformity with GAAP.

"Grupo TFM Disposition" means any sale, transfer or other disposition for
cash (or series of related sales, transfers or dispositions) by Caymex
Transportation, Inc. or Nafta Rail S.A. de C.V. of any shares of Capital Stock
of Nafta Rail S.A. de C.V., Grupo TFM, TFM or any combination thereof, in each
case on arm's length terms to unaffiliated third parties.

"Grupo TFM Investment" means (1) any purchase or acquisition by Nafta Rail
S.A. de C.V. of any shares of Capital Stock of Grupo TFM or TFM from the
government of Mexico or an instrumentality thereof or (2) any capital
contribution made to Grupo TFM, TFM or both to fund the purchase by it or
them, as applicable, of shares of Capital Stock of Grupo TFM, TFM or both from
the government of Mexico or an instrumentality thereof, in each case made with
the proceeds of a Grupo TFM Disposition.

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"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of
any other Person and any obligation, direct or indirect, contingent or
otherwise, of such Person:

(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-
pay, or to maintain financial statement conditions or otherwise) or

(2) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness or other obligation of the payment thereof or
to protect such obligee against loss in respect thereof (in whole or in
part);

provided, however, that the term "Guarantee" shall not include endorsements
for collection or deposit in the ordinary course of business. The term
"Guarantee" used as a verb has a corresponding meaning. The term "Guarantor"
shall mean any Person Guaranteeing any obligation.

"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement.

"Holder" means the Person in whose name a Note is registered on the
Registrar's books.

"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by
such Person at the time it becomes a Subsidiary. The term "Incurrence" when
used as a noun shall have a correlative meaning. The accretion of principal of
a non-interest bearing or other discount security shall not be deemed the
Incurrence of Indebtedness.

"Indebtedness" means, with respect to any Person on any date of
determination, without duplication:

(1) the principal of and premium (if any) in respect of indebtedness of
such Person for borrowed money;

(2) the principal of and premium (if any) in respect of obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments;

(3) all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations with respect
thereto);

(4) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables), which
purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion
of such services;

(5) all Capitalized Lease Obligations and all Attributable Debt of such
Person;

(6) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Subsidiary of such Person that is not a Note Guarantor,
any Preferred Stock (but excluding, in each case, any accrued dividends);

(7) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of Indebtedness of such Person shall be
the lesser of:

(A) the Fair Market Value of such asset at such date of
determination and

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(B) the amount of such Indebtedness of such other Persons;

(8) Hedging Obligations of such Person; and

(9) all obligations of the type referred to in clauses (i) through
(viii) of other Persons and all dividends of other Persons for the payment
of which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee.

The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date.

"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate
option agreement, interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate hedge agreement or other similar
agreement or arrangement to which such Person is party or of which it is a
beneficiary.

"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extension of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or
other similar instruments issued by such Person. For purposes of the
definition of "Unrestricted Subsidiary" and the covenant described under
"Certain Covenants--Limitation on Restricted Payments:"

(1) "Investment" shall include the portion (proportionate to the
Parent's equity interest in such Subsidiary) of the Fair Market Value of
the net assets of any Subsidiary of the Parent at the time that such
Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted Subsidiary,
the Parent shall be deemed to continue to have a permanent "Investment" in
an Unrestricted Subsidiary in an amount (if positive) equal to:

(A) the Parent's "Investment" in such Subsidiary at the time of such
redesignation less

(B) the portion (proportionate to the Parent's equity interest in
such Subsidiary) of the Fair Market Value of the net assets of such
Subsidiary at the time of such redesignation; and

(2) any property transferred to or from an Unrestricted Subsidiary shall
be valued at its Fair Market Value at the time of such transfer.

"Investment Grade Rating" means a rating equal to or higher than Baa3 (or
the equivalent) by Moody's Investors Service, Inc. or BBB- (or the equivalent)
by Standard & Poor's Ratings Group, Inc.

"Legal Holiday" means a Saturday, Sunday or other day on which banking
institutions are not required by law or regulation to be open in the State of
New York.

"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).

"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise and proceeds from
the sale or other disposition of any securities received as consideration, but
only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to the

143

properties or assets that are the subject of such Asset Disposition or
received in any other noncash form) therefrom, in each case net of:

(1) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be paid or accrued as a liability under GAAP, as a
consequence of such Asset Disposition,

(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien
upon or other security agreement of any kind with respect to such assets,
or which must by its terms, or in order to obtain a necessary consent to
such Asset Disposition, or by applicable law be repaid out of the proceeds
from such Asset Disposition,

(3) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition and

(4) appropriate amounts to be provided by the seller as a reserve, in
accordance with GAAP, against any liabilities associated with the property
or other assets disposed of in such Asset Disposition and retained by the
Parent or any Restricted Subsidiary after such Asset Disposition.

"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.

"Note Guarantee" means each Guarantee of the obligations with respect to
the Notes issued by a Person pursuant to the terms of the Indenture.

"Note Guarantor" means any Person that has issued a Note Guarantee.

"Officer" means the Chairman of the Board, the Chief Executive Officer, the
Chief Financial Officer, the President, any Vice President, the Treasurer or
the Secretary of the Parent. "Officer" of a Note Guarantor has a correlative
meaning.

"Officers' Certificate" means a certificate signed by two Officers.

"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Parent, a Note Guarantor or the Trustee.

"Permitted Business" means any business engaged in by the Parent or any
Restricted Subsidiary on the Closing Date and any Related Business.

"Permitted Investment" means an Investment by the Parent or any Restricted
Subsidiary in:

(1) the Parent, a Restricted Subsidiary or a Person that will, upon the
making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a
Permitted Business;

(2) another Person if as a result of such Investment such other Person
is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Parent or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Permitted
Business;

(3) Temporary Cash Investments;

(4) receivables owing to the Parent or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade

144

terms; provided, however, that such trade terms may include such
concessionary trade terms as the Parent or any such Restricted Subsidiary
deems reasonable under the circumstances;

(5) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of
business;

(6) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Parent or such Restricted
Subsidiary and not exceeding $2.0 million in the aggregate outstanding at
any one time;

(7) Stock Purchase Loans not exceeding $3.0 million in the aggregate
outstanding at any one time;

(8) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Parent or any
Restricted Subsidiary or in satisfaction of judgments;

(9) any Person to the extent such Investment represents the noncash
portion of the consideration received for an Asset Disposition that was
made pursuant to and in compliance with the covenant described under
"Certain Covenants--Limitation on Sale of Assets and Capital Stock";

(10) The Texas Mexican Railway Company or any other domestic railway
company that owns railways that are contiguous with those owned by the
Issuer in the form of Guarantees for the benefit of, or capital
contributions or loans to, or sale/leaseback transactions with, The Texas
Mexican Railway Company or such other domestic railway company; provided,
however, that the aggregate amount of such capital contributions, loans and
guaranteed Indebtedness and sale/leaseback transactions shall not exceed
$25.0 million;

(11) at any time after January 1, 2001, any company that is engaged in
the same line of business as the Issuer or a related line of business in
the form of Guarantees for the benefit of, or capital contributions or
loans to, or sale/leaseback transactions with, such company; provided,
however, that the aggregate amount of such capital contributions, loans and
guaranteed Indebtedness and sale/leaseback transactions shall not exceed
$25.0 million;

(12) Grupo TFM Investments; or

(13) the Panama Canal Railway Company; provided, however, that the
aggregate amount of all such Investments made after the Closing Date shall
not exceed $10.0 million.

"Permitted Liens" means, with respect to any Person:

(1) Liens to secure Indebtedness permitted pursuant to clause (b)(1) and
(b)(7) of the covenant described under "Certain Covenants--Limitation on
Indebtedness;"

(2) Liens for taxes, assessments or governmental charges or levies on
such Person's property if the same shall not at the time be delinquent or
thereafter can be paid without penalty or are being contested in good faith
and by appropriate proceedings;

(3) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens and other similar Liens arising in the ordinary course of
business that secure payment of obligations (A) which are being contested
in good faith by appropriate proceedings or (B) for which such Person or
any of its Subsidiaries, as applicable, has posted a bond supported only by
cash;

(4) Liens arising out of pledges or deposits under worker's compensation
laws, unemployment insurance, laws providing for old age pensions or other
social security or retirement benefits, or similar legislation or good
faith deposits in connection with bids, tenders, contracts (other than for
the payment of Indebtedness) or leases to which such Person is a party, or
deposits to secure public or statutory obligations of such Person or
deposits of cash or United States government

145

bonds to secure surety or appeal bonds to which such Person is a party, or
deposits as security for contested taxes or import duties or for the
payment of rent, in each case Incurred in the ordinary course of business;

(5) utility easements, building restrictions and such other encumbrances
or charges against real property and defects and irregularities in the
title thereto or facts an accurate survey of the property would show and
landlords' and lessors' liens under leases to which such Person or any of
its Subsidiaries is a party, none of which in any material way affect the
marketability of the same or interfere with the use thereof in the ordinary
course of the business of such Person or its Subsidiaries;

(6) Liens existing on the Closing Date;

(7) any Lien on any property or asset prior to the acquisition thereof
by such Person or any of its Subsidiaries or existing on any property or
asset of any other Person that becomes a Subsidiary of such Person after
the Closing Date prior to the time such other Person becomes a Subsidiary
of such Person; provided, however, that (A) such Lien is not created,
Incurred or assumed in contemplation of or in connection with such
acquisition or such other Person becoming a Subsidiary of such Person, as
the case may be, (B) such Lien shall not apply to any other property or
assets of such Person or its Subsidiaries and (c) such Lien shall secure
only those obligations which it secures on the date of such acquisition or
the date such other Person becomes a Subsidiary of such Person, as the case
may be;

(8) Liens on fixed or capital assets acquired, constructed or improved
by such Person or any of its Subsidiaries; provided, however, that (A) such
Liens secure Indebtedness permitted pursuant to clause (b)(6) of the
covenant described under "Certain Covenants--Limitation on Indebtedness,"
(B) such Liens and the Indebtedness secured thereby are Incurred prior to
or within 90 days after such acquisition or the completion of such
construction or improvement, (C) the Indebtedness secured thereby does not
exceed the cost of acquiring, constructing or improving such fixed or
capital assets and (D) such Liens shall not apply to any other property or
assets of such Person or any of its Subsidiaries;

(9) judgment Liens in respect of judgments that do not constitute an
Event of Default pursuant to clause (8) under "Defaults;"

(10) Liens securing Indebtedness or other obligations of a Subsidiary of
such Person owing to such Person or a Wholly Owned Subsidiary of such
Person;

(11) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of
credit do not constitute Indebtedness;

(12) Liens securing obligations under Interest Rate Agreements so long
as such obligations relate to Indebtedness that is, and is permitted under
the Indenture to be, secured by a Lien on the same property securing such
obligations; and

(13) Liens to secure any Refinancing (or successive Refinancings) as a
whole, or in part, of any Indebtedness secured by any Lien referred to in
the foregoing clauses (6), (7) and (8); provided, however, that:

(A) such new Lien shall be limited to all or part of the same
property that secured the original Lien (plus improvements to or on
such property) and

(B) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of:

(i) the outstanding principal amount or, if greater, committed
amount of the Indebtedness secured by Liens described under clauses
(6), (7) or (8) at the time the original Lien became a Permitted
Lien under the Indenture and

146

(ii) an amount necessary to pay any fees and expenses, including
premiums, related to such Refinancings.

"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.

"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) that is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over
shares of Capital Stock of any other class of such Person.

"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.

"Purchase Money Indebtedness" means Indebtedness:

(1) consisting of the deferred purchase price of an asset, conditional
sale obligations, obligations under any title retention agreement and other
purchase money obligations, in each case where the maturity of such
Indebtedness does not exceed the anticipated useful life of the asset being
financed, and

(2) Incurred to finance the acquisition by the Parent or a Restricted
Subsidiary of such asset, including additions and improvements;

provided, however, that such Indebtedness is incurred within 180 days after
the acquisition by the Parent or such Restricted Subsidiary of such asset.

"Rating Agency" means Standard & Poor's Ratings Group, Inc. and Moody's
Investors Service, Inc. or if Standard & Poor's Ratings Group, Inc. or Moody's
Investors Service, Inc. or both shall not make a rating on the Notes publicly
available, a nationally recognized statistical rating agency or agencies, as
the case may be, selected by the Parent (as certified by the Board of
Directors) which shall be substituted for Standard & Poor's Ratings Group,
Inc. or Moody's Investors Service, Inc. or both, as the case may be.

"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.

"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any
defeasance or discharge mechanism) any Indebtedness of the Parent or any
Restricted Subsidiary existing on the Closing Date or Incurred in compliance
with the Indenture (including Indebtedness of the Parent that Refinances
Refinancing Indebtedness); provided, however, that:

(1) the Refinancing Indebtedness has a Stated Maturity no earlier than
the Stated Maturity of the Indebtedness being Refinanced,

(2) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced,

(3) such Refinancing Indebtedness is Incurred in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue
price) that is equal to or less than the aggregate principal amount (or if
issued with original issue discount, the aggregate accreted value) then
outstanding of the Indebtedness being Refinanced and

147

(4) if the Indebtedness being Refinanced is subordinated in right of
payment to the Notes, such Refinancing Indebtedness is subordinated in
right of payment to the Notes at least to the same extent as the
Indebtedness being Refinanced;

provided further, however, that Refinancing Indebtedness shall not include:

(A) Indebtedness of a Restricted Subsidiary that Refinances
Indebtedness of the Issuer or

(B) Indebtedness of the Parent or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.

"Related Business" means any business related, ancillary or complementary
to the businesses of the Parent and the Restricted Subsidiaries on the Closing
Date.

"Representative" means the trustee, agent or representative (if any) for an
issue of Senior Indebtedness.

"Restricted Subsidiary" means the Issuer and any other Subsidiary of the
Parent other than an Unrestricted Subsidiary.

"Sale/Leaseback Transaction" means an arrangement entered into after the
date of the Indenture relating to property now owned or hereafter acquired by
the Parent or a Restricted Subsidiary whereby the Parent or a Restricted
Subsidiary transfers such property to a Person and the Parent or such
Restricted Subsidiary leases it from such Person, other than leases between
the Parent and a Wholly Owned Subsidiary or between Wholly Owned Subsidiaries.

"SEC" means the Securities and Exchange Commission.

"Secured Indebtedness" means any Indebtedness of the Issuer secured by a
Lien. "Secured Indebtedness" of a Note Guarantor has a correlative meaning.

"Significant Subsidiary" means any Restricted Subsidiary other than the
Issuer that would be a "Significant Subsidiary" of the Parent within the
meaning of Rule 1-02 under Regulation S-X promulgated by the SEC.

"Spin-off" means the distribution by the Parent of all the issued and
outstanding common stock of Stilwell Financial Inc., a Delaware corporation,
to the shareholders of the Parent on July 12, 2000 as described in the Form 10
filed by Stilwell Financial Inc. with the SEC which became effective on June
15, 2000.

"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the repurchase
of such security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).

"Stock Purchase Loans" means loans or advances made by the Parent or any
Restricted Subsidiary in the ordinary course of business to employees for the
purpose of purchasing restricted shares of common stock of the Parent.

"Subordinated Obligation" means any Indebtedness of the Issuer (whether
outstanding on the Closing Date or thereafter Incurred) that is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
"Subordinated Obligation" of a Note Guarantor has a correlative meaning.

148

"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by:

(1) such Person,

(2) such Person and one or more Subsidiaries of such Person or

(3) one or more Subsidiaries of such Person.

"Temporary Cash Investments" means any of the following:

(1) any investment in direct obligations of the United States of America
or any agency thereof or obligations Guaranteed by the United States of
America or any agency thereof,

(2) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company that is organized under the laws
of the United States of America, any state thereof or any foreign country
recognized by the United States of America having capital, surplus and
undivided profits aggregating in excess of $250,000,000 (or the foreign
currency equivalent thereof) and whose long-term debt is rated "A" (or such
similar equivalent rating) or higher by at least one nationally recognized
statistical rating organization (as defined in Rule 436 under the
Securities Act),

(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2) above,

(4) investments in commercial paper, maturing not more than 270 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of the Parent) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Service, a division of The McGraw-Hill Companies, Inc. ("S&P"), and

(5) investments in securities with maturities of six months or less from
the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or "A" by Moody's Investors Service, Inc.

"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-77bbbb)
as in effect on the Closing Date.

"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.

"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.

"Trust Officer" means any officer within the corporate trust department of
the Trustee, including any vice president, assistant vice president, assistant
secretary, assistant treasurer, trust officer or any other officer of the
Trustee who customarily performs functions similar to those performed by the
persons who at the time shall be such officers, respectively, or to whom any
corporate trust matter is referred because of such person's knowledge of and
familiarity with the particular subject and who shall have direct
responsibility for the administration of the Indenture.

149

"Unrestricted Subsidiary" means:

(1) any Subsidiary of the Parent that at the time of determination shall
be designated an Unrestricted Subsidiary by the Board of Directors in the
manner provided below and

(2) any Subsidiary of an Unrestricted Subsidiary.

The Board of Directors may designate any Subsidiary of the Parent
(including any newly acquired or newly formed Subsidiary of the Parent but
excluding the Issuer) to be an Unrestricted Subsidiary unless such Subsidiary
or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or owns
or holds any Lien on any property of, the Parent or any other Subsidiary of
the Parent that is not a Subsidiary of the Subsidiary to be so designated;
provided, however, that either:

(A) the Subsidiary to be so designated has total Consolidated assets of
$1,000 or less or

(B) if such Subsidiary has Consolidated assets greater than $1,000, then
such designation would be permitted under the covenant entitled "Limitation
on Restricted Payments."

The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation:

(x) the Parent could Incur $1.00 of additional Indebtedness under
paragraph (a) of the covenant described under "--Certain Covenants--
Limitation on Indebtedness" and

(y) no Default shall have occurred and be continuing.

Any such designation of a Subsidiary as a Restricted Subsidiary or
Unrestricted Subsidiary by the Board of Directors shall be evidenced to the
Trustee by promptly filing with the Trustee a copy of the resolution of the
Board of Directors giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.

"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable or redeemable at the issuer's option.

"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding
and normally entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof.

"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Parent all
the Capital Stock of which (other than directors' qualifying shares) is owned
by the Parent or another Wholly Owned Subsidiary.

150

EXCHANGE AND REGISTRATION RIGHTS AGREEMENT

The Issuer, the Initial Purchasers and the Guarantors entered into the
exchange and registration rights agreement on September 27, 2000. Pursuant to
the exchange and registration rights agreement, the Issuer and the Guarantors
agreed to (i) file with the Commission on or prior to 120 days after the date
of issuance of the Outstanding Notes a registration statement on Form S-1 or
Form S-4, if the use of such form is then available relating to a registered
exchange offer for the Notes under the Securities Act and (ii) use their
reasonable best efforts to cause the exchange offer registration statement to
be declared effective under the Securities Act within 180 days after the date
of issuance of the Outstanding Notes. As soon as practicable after the
effectiveness of the exchange offer registration statement, the Issuer will
offer to the holders of transfer restricted securities (as defined below) who
are not prohibited by any law or policy of the Commission from participating
in the exchange offer the opportunity to exchange their transfer restricted
securities for an issue of a second series of notes that are identical in all
material respects to the Outstanding Notes (except that the Exchange Notes
will not contain terms with respect to transfer restrictions) and that would
be registered under the Securities Act. The Issuer and the Guarantors will
keep the exchange offer open for not less than 30 days (or longer, if required
by applicable law) after the date on which notice of the exchange offer is
mailed to the holders of the Outstanding Notes.

If (i) because of any change in law or applicable interpretations thereof
by the staff of the Commission, the Issuer is not permitted to effect the
exchange offer as contemplated hereby, (ii) any Outstanding Notes validly
tendered pursuant to the exchange offer are not exchanged for Exchange Notes
within 210 days after the Issue Date, (iii) any Initial Purchaser so requests
with respect to Outstanding Notes not eligible to be exchanged for Exchange
Notes in the exchange offer and held by it following the consummation of the
exchange offer, (iv) any applicable law or interpretations do not permit any
holder of Outstanding Notes to participate in the exchange offer, (v) any
holder of Notes that participates in the exchange offer does not receive
freely transferable Exchange Notes in exchange for tendered Outstanding Notes,
or (vi) the Issuer so elects, then the Issuer and the Guarantors will file
with the Commission a shelf registration statement to cover resales of
transfer restricted securities by such holders who satisfy certain conditions
relating to the provision of information in connection with the shelf
registration statement. For purposes of the foregoing, "transfer restricted
securities" means each Outstanding Note until (i) the date on which such
Outstanding Note has been exchanged for a freely transferable Exchange Note in
the exchange offer; (ii) the date on which such Outstanding Note has been
effectively registered under the Securities Act and disposed of in accordance
with the shelf registration statement or (iii) the date on which such
Outstanding Note is distributed to the public pursuant to Rule 144 under the
Securities Act or is saleable pursuant to Rule 144(k) under the Securities
Act.

The Issuer and the Guarantors will use their reasonable best efforts to
have the exchange offer registration statement of which this prospectus forms
a part or, if applicable, the shelf registration statement declared effective
by the Commission as promptly as practicable after the filing thereof. Unless
the exchange offer would not be permitted by a policy of the Commission, the
Issuer will commence the exchange offer and will use its reasonable best
efforts to consummate the exchange offer as promptly as practicable, but in
any event on or prior to 210 days after the date of issuance of the
Outstanding Notes. If applicable, the Issuer and the Guarantors will use their
reasonable best efforts to keep the shelf registration statement effective for
a period of two years after the date of issuance of the Outstanding Notes or,
if earlier, until all the transfer restricted securities covered by the shelf
registration statement have been sold.

If (i) the exchange offer registration statement or the shelf registration
statement, as the case may be, is not declared effective within 180 days after
the date of issuance of the Outstanding Notes; (ii) the exchange offer is not
consummated on or prior to 210 days after the date of issuance of the
Outstanding Notes or (iii) the shelf registration statement is filed and
declared effective within 180 days

151

after the date of issuance of the Outstanding Notes but shall thereafter cease
to be effective (at any time that the Issuer and the Guarantors are obligated
to maintain the effectiveness thereof) without being succeeded within 60 days
by an additional registration statement filed and declared effective (each
such event referred to in clauses (i) through (iii), a "registration
default"), the Issuer and the Guarantors will be obligated to pay liquidated
damages to each holder of transfer restricted securities (but not in respect
of any transfer restricted securities for any period after such securities
cease to be transfer restricted securities pursuant to clause (iii) of the
definition thereof set forth above), during the period of one or more such
registration defaults, in an amount equal to $0.192 per week per $1,000
principal amount of the Outstanding Notes constituting transfer restricted
securities held by such holder until the applicable registration statement is
filed, the exchange offer registration statement is declared effective and the
exchange offer is consummated or the shelf registration statement is declared
effective or again becomes effective, as the case may be. All accrued
liquidated damages shall be paid to holders in the same manner as interest
payments on the Outstanding Notes on semi-annual payment dates which
correspond to interest payment dates for the Outstanding Notes. Following the
cure of all registration defaults, the accrual of liquidated damages will
cease.

The exchange and registration rights agreement also provides that the
Issuer and the Guarantors (i) shall make available for a period of 180 days
after the consummation of the exchange offer a prospectus meeting the
requirements of the Securities Act to any broker-dealer for use in connection
with any resale of any such Exchange Notes and (ii) shall pay all expenses
incident to the exchange offer (including the expense of one counsel to the
holders of the Notes) and will jointly and severally indemnify certain holders
of the Notes (including any broker-dealer) against certain liabilities,
including liabilities under the Securities Act. A broker-dealer which delivers
such a prospectus to purchasers in connection with such resales will be
subject to certain of the civil liability provisions under the Securities Act
and will be bound by the provisions of the exchange and registration rights
agreement (including certain indemnification rights and obligations).

The foregoing description of the exchange and registration rights agreement
is a summary only, does not purport to be complete and is qualified in its
entirety by reference to all provisions of the exchange and registration
rights agreement, a copy of which is filed as an exhibit to the registration
statement of which this prospectus is a part.

152

BOOK-ENTRY; DELIVERY AND FORM

The Exchange Notes will initially be represented by one or more permanent
global notes in definitive, fully registered book-entry form, without interest
coupons that will be deposited with, or on behalf of, DTC and registered in
the name of DTC or its nominee, on behalf of the acquirers of Exchange Notes
represented thereby for credit to the respective accounts of the acquirers, or
to such other accounts as they may direct, at DTC. See "The Exchange Offer--
Book Entry Transfer."

Except as set forth below, the global notes may be transferred, in whole
and not in part, solely to another nominee of DTC or to a successor of DTC or
its nominee. Beneficial interests in the global notes may not be exchanged for
notes in physical, certificated form except in the limited circumstances
described below.

All interests in the global notes may be subject to the procedures and
requirements of DTC.

Certain Book-Entry Procedures for the Global Notes

The descriptions of the operations and procedures of DTC set forth below
are provided solely as a matter of convenience. These operations and
procedures are solely within the control of DTC and are subject to change by
DTC from time to time. We will take no responsibility for these operations or
procedures, and investors are urged to contact DTC or its participants
directly to discuss these matters.

DTC has advised the Issuer that it is

. a limited purpose trust company organized under the laws of the State of
New York,

. a "banking organization" within the meaning of the New York Banking Law,

. a member of the Federal Reserve System,

. a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended, and

. a "clearing agency" registered pursuant to Section 17A of the Exchange
Act.

DTC was created to hold securities for its participants and facilitates the
clearance and settlement of securities transactions between participants
through electronic book-entry changes to the accounts of its participants,
thereby eliminating the need for physical transfer and delivery of
certificates. DTC's participants include securities brokers and dealers, banks
and trust companies, clearing corporations and certain other organizations.
Indirect access to DTC's system is also available to other entities such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Investors who are not participants may beneficially own securities held by or
on behalf of DTC only through participants or indirect participants.

The Issuer expects that pursuant to procedures established by DTC ownership
of the Exchange Notes will be shown on, and the transfer of ownership thereof
will be effected only through, records maintained by DTC (with respect to the
interests of participants) and the records of participants and the indirect
participants (with respect to the interests of persons other than
participants).

The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the Exchange Notes
represented by a global note to such persons may be limited. In addition,
because DTC can act only on behalf of its participants, who in turn act on
behalf of persons who hold interests through participants, the ability of a
person having an interest in Exchange Notes represented by a

153

global note to pledge or transfer such interest to persons or entities that do
not participate in DTC's system, or to otherwise take actions in respect of
such interest, may be affected by the lack of a physical definitive security
in respect of such interest.

So long as DTC or its nominee is the registered owner of a global note, DTC
or such nominee, as the case may be, will be considered the sole owner or
holder of the Notes represented by the global note for all purposes under the
Indenture. Except as provided below, owners of beneficial interests in a
global note

. will not be entitled to have Exchange Notes represented by such global
note registered in their names,

. will not receive or be entitled to receive physical delivery of
certificated Exchange Notes, and

. will not be considered the owners or holders thereof under the Indenture
for any purpose, including with respect to the giving of any direction,
instruction or approval to the Trustee thereunder.

Accordingly, each holder owning a beneficial interest in a global note must
rely on the procedures of DTC and, if such holder is not a participant or an
indirect participant, on the procedures of the participant through which such
holder owns its interest, to exercise any rights of a holder of Notes under
the Indenture or such global note. The Issuer understands that under existing
industry practice, in the event that the Issuer requests any action of holders
of Notes, or a holder that is an owner of a beneficial interest in a global
note desires to take any action that DTC, as the holder of such global note,
is entitled to take, DTC would authorize the participants to take such action
and the participants would authorize holders owning through such participants
to take such action or would otherwise act upon the instruction of such
holders. Neither the Issuer nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on
account of Notes by DTC, or for maintaining, supervising or reviewing any
records of DTC relating to such Exchange Notes.

Payments with respect to the principal of, and premium, if any, and
interest on, any Exchange Notes represented by a global note registered in the
name of DTC or its nominee on the applicable record date will be payable by
the Trustee to or at the direction of DTC or its nominee in its capacity as
the registered holder of the global note representing the Exchange Notes under
the Indenture. Under the terms of the Indenture, the Issuer and the Trustee
may treat the persons in whose names the Exchange Notes, including the global
notes, are registered as the owners thereof for the purpose of receiving
payment thereon and for any and all other purposes whatsoever. Accordingly,
neither the Issuer nor the Trustee has or will have any responsibility or
liability for the payment of such amounts to owners of beneficial interests in
a global note (including principal, premium, if any, liquidated damages, if
any, and interest). Payments by the participants and the indirect participants
to the owners of beneficial interests in a global note will be governed by
standing instructions and customary industry practice and will be the
responsibility of the participants or the indirect participants and DTC.

Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds.

Certificated Notes

. the Issuer notifies the Trustee in writing that DTC is no longer willing
or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and a successor depositary is not
appointed within 90 days of such notice or cessation,

. the Issuer, at its option, notifies the Trustee in writing that it elects
to cause the issuance of Notes in definitive form under the Indenture or

154

. upon the occurrence of certain other events as provided in the Indenture,
then, upon surrender by DTC of the global notes, certificated notes will
be issued to each person that DTC identifies as the beneficial owner of
the Notes represented by the global notes. Upon any such issuance, the
Trustee is required to register such certificated notes in the name of
such person or persons (or the nominee of any thereof) and cause the same
to be delivered thereto.

Neither the Issuer nor the Trustee shall be liable for any delay by DTC or
any participant or indirect participant in identifying the beneficial owners
of the related Notes and each such person may conclusively rely on, and shall
be protected in relying on, instructions from DTC for all purposes.

155

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of material United States federal income tax
consequences of the exchange of Outstanding Notes for Exchange Notes pursuant
to the exchange offer, but does not address any other aspects of United States
federal income tax consequences to holders of Outstanding Notes or Exchange
Notes.

This summary is based on provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), existing and proposed Treasury regulations
promulgated thereunder (the "Treasury Regulations") and administrative and
judicial interpretations thereof, all as of the date hereof and all of which
are subject to change, possibly on a retroactive basis.

This summary applies only to U.S. Holders (as defined below) that exchange
Outstanding Notes for Exchange Notes in the exchange offer and who hold the
Outstanding Notes as capital assets. It does not address the tax consequences
to taxpayers who are subject to special rules (such as financial institutions,
tax-exempt organizations and insurance companies).

As used herein, the term "U.S. Holder" means a beneficial owner of a Note
that is, for U.S. federal income tax purposes, (a) a citizen or resident of
the United States, (b) a corporation created or organized in the United States
or under the laws of the United States or of any state of the United States,
(c) an estate whose income is includable in gross income for U.S. federal
income tax purposes regardless of its source or (d) a trust if (i) a court
within the United States is able to exercise primary supervision over the
administration of the trust and (ii) at least one U.S. person has authority to
control all substantial decisions of the trust.

Persons considering the exchange of Outstanding Notes for Exchange Notes
should consult their own tax advisors concerning the United States federal
income tax consequences in light of their particular situations as well as any
consequences arising under the laws of any other taxing jurisdiction.

Exchange of an Outstanding Note for an Exchange Note pursuant to the Exchange
Offer

The exchange by any holder of an Outstanding Note for an Exchange Note
should not constitute a taxable exchange for United States federal income tax
purposes. Consequently, no gain or loss should be recognized by holders that
exchange Outstanding Notes for Exchange Notes pursuant to the exchange offer.
For purposes of determining gain or loss upon the subsequent sale or exchange
of Exchange Notes, a holder's tax basis in an Exchange Note should be the same
as the holder's tax basis in the Outstanding Note exchanged therefor. Holders
should be considered to have held the Exchange Notes from the time of their
acquisition of the Outstanding Notes.

156

PLAN OF DISTRIBUTION

Each broker-dealer that receives Exchange Notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received
in exchange for Outstanding Notes where such Outstanding Notes were acquired
as a result of market-making activities or other trading activities. We have
agreed that for a period of 180 days after the expiration date, we will make
this prospectus, as amended or supplemented, available to any broker-dealer
for use in connection with any such resale. In addition, until [ ], 2001,
all dealers effecting transactions in the Exchange Notes may be required to
deliver a prospectus.

We will not receive any proceeds from any sales of the Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the exchange offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.

For a period of 180 days after the expiration date we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests such documents in the letter of
transmittal. We have agreed to pay all expenses incident to the exchange offer
(including the expenses of one counsel for the holders of the Notes) other
than commissions or concessions of any broker-dealers and will indemnify the
holders of the Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.

LEGAL MATTERS

The validity of the Exchange Notes offered hereby and the Note Guarantees
will be passed upon for us by Sonnenschein Nath & Rosenthal, Kansas City,
Missouri.

EXPERTS

The consolidated financial statements of Kansas City Southern Industries,
Inc. and subsidiaries as of December 31, 1999 and 1998 and for each of the
three years in the period ended December 31, 1999 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.

157

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----

Kansas City Southern Industries, Inc. and Subsidiaries:

Report of Independent Accountants......................................... F-2

Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1999 and (unaudited) for the nine months ended
September 30, 1999 and 2000.............................................. F-3

Consolidated Balance Sheets as of December 31, 1998 and 1999 and
(unaudited) as of September 30, 2000..................................... F-4

Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1999 and (unaudited) for the nine months ended
September 30, 1999 and 2000.............................................. F-5

Consolidated Statements of Changes in Stockholders' Equity for each of the
three years in the period ended December 31, 1999 and (unaudited) for the
nine months ended September 30, 2000..................................... F-6

Notes to Consolidated Financial Statements................................ F-7

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Kansas City Southern Industries, Inc.

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of Kansas City Southern Industries, Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

As discussed in Note 2 to the consolidated financial statements, effective
December 31, 1997 the Company changed its method of evaluating the
recoverability of goodwill. We concur with the change in accounting.

/s/ PricewaterhouseCoopers LLP
[LOGO APPEARS HERE]

Kansas City, Missouri
September 7, 2000, except for Notes 15 and 17 for which the date is January
24, 2001.

F-2

KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Dollars in millions, except per share data

For the nine
months ended
For the year ended September 30,
December 31, (Unaudited)
------------------------- -----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- --------
Restated

Revenues......................... $ 573.2 $ 613.5 $ 601.4 $ 449.7 $ 437.4
Costs and expenses............... 424.0 438.6 480.4 348.0 344.1
Depreciation and amortization.... 62.1 56.7 56.9 43.0 42.4
Restructuring, asset impairment
and other charges............... 178.0 -- -- -- --
------- ------- ------- ------- -------
Operating income (loss).......... (90.9) 118.2 64.1 58.7 50.9
Equity in net earnings (losses)
of unconsolidated affiliates:
Grupo Transportacion
Ferroviaria Mexicana, S.A. de
C.V........................... (12.9) (3.2) 1.5 4.8 18.8
Other.......................... 3.2 0.3 3.7 3.5 3.3
Interest expense................. (53.3) (59.6) (57.4) (43.3) (54.2)
Other, net....................... 3.2 9.4 5.3 3.2 4.8
------- ------- ------- ------- -------
Income (loss) from continuing
operations before income taxes.. (150.7) 65.1 17.2 26.9 23.6
Income tax provision (benefit)... (18.6) 27.1 7.0 9.5 1.8
------- ------- ------- ------- -------
Income (loss) from continuing
operations...................... (132.1) 38.0 10.2 17.4 21.8
Income from discontinued
operations, net of income taxes
($87.0, $103.7, $216.1, $142.5,
$233.3, respectively)........... 118.0 152.2 313.1 214.6 363.8
------- ------- ------- ------- -------
Income (loss) before
extraordinary item.............. (14.1) 190.2 323.3 232.0 385.6
Extraordinary item, net of income
taxes
Debt retirement costs--KCSI.... -- -- -- -- (7.0)
Debt retirement costs--Grupo
TFM........................... -- -- -- -- (1.7)
------- ------- ------- ------- -------
Net income (loss)................ $ (14.1) $ 190.2 $ 323.3 $ 232.0 $ 376.9
======= ======= ======= ======= =======
Per Share Data (i):
Basic earnings (loss) per share:
Continuing operations.......... $ (2.46) $ 0.69 $ 0.18 $ 0.31 $ 0.38
Discontinued operations........ 2.19 2.78 5.68 3.90 6.46
------- ------- ------- ------- -------
Basic earnings (loss) per
share before extraordinary
item........................ $ (0.27) $ 3.47 $ 5.86 $ 4.21 $ 6.84
Extraordinary item............. -- -- -- -- (0.15)
------- ------- ------- ------- -------
Total...................... $ (0.27) $ 3.47 $ 5.86 $ 4.21 $ 6.69
======= ======= ======= ======= =======
Diluted earnings (loss) per
share:
Continuing operations.......... $ (2.46) $ 0.67 $ 0.17 $ 0.30 $ 0.37
Discontinued operations........ 2.19 2.65 5.40 3.71 6.17
------- ------- ------- ------- -------
Diluted earnings (loss) per
share before extraordinary
item........................ $ (0.27) $ 3.32 $ 5.57 $ 4.01 $ 6.54
Extraordinary item............. -- -- -- -- (0.15)
------- ------- ------- ------- -------
Total...................... $ (0.27) $ 3.32 $ 5.57 $ 4.01 $ 6.39
======= ======= ======= ======= =======
Weighted average common shares
outstanding (in thousands):
Basic........................ 53,801 54,610 55,142 55,102 56,353
Dilutive potential common
shares...................... -- 1,920 1,883 1,887 1,751
------- ------- ------- ------- -------
Diluted...................... 53,801 56,530 57,025 56,989 58,104
======= ======= ======= ======= =======
Dividends per share
Preferred.................... $ 1.00 $ 1.00 $ 1.00 $ 0.75 $ 0.75
Common....................... $ 0.30 $ 0.32 $ 0.32 $ 0.24 $ --

- -------
(i) On July 12, 2000, KCSI completed a reverse stock split of its common shares
whereby every two shares of KCSI Common stock was converted into one share
of KCSI Common stock. The per share data herein reflects this reverse stock
split for all periods presented.

See accompanying notes to consolidated financial statements

F-3

KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
Dollars in millions, except share amounts

December 31,
-----------------
1998 1999 September 30, 2000
-------- -------- ------------------
Restated
(Unaudited)
ASSETS

Current Assets:
Cash and equivalents.................... $ 5.6 $ 11.9 $ 30.2
Accounts receivable, net................ 131.8 132.2 119.8
Inventories............................. 47.0 40.5 34.2
Other current assets.................... 25.8 23.9 27.8
-------- -------- --------
Total current assets.................. 210.2 208.5 212.0
Investments held for operating purposes... 327.9 337.1 361.1
Properties, net........................... 1,229.3 1,277.4 1,311.3
Intangibles and other assets, net......... 29.4 34.4 42.6
Net Assets of Discontinued Operations .... 540.2 814.6 --
-------- -------- --------
Total assets.......................... $2,337.0 $2,672.0 $1,927.0
======== ======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Debt due within one year................ $ 10.7 $ 10.9 $ 13.7
Accounts and wages payable.............. 64.1 74.8 36.3
Accrued liabilities..................... 133.7 168.5 165.3
-------- -------- --------
Total current liabilities............. 208.5 254.2 215.3
-------- -------- --------
Other Liabilities:
Long-term debt.......................... 825.6 750.0 671.7
Deferred income taxes................... 285.2 297.4 320.2
Other deferred credits.................. 86.5 87.3 80.3
-------- -------- --------
Total other liabilities............... 1,197.3 1,134.7 1,072.2
-------- -------- --------

Commitments and Contingencies............. -- -- --

Stockholders' Equity:
$25 par, 4% noncumulative, Preferred
stock.................................. 6.1 6.1 6.1
$.01 par, Common stock.................. 1.1 1.1 0.6
Retained earnings....................... 849.1 1,167.0 632.8
Accumulated other comprehensive income.. 74.9 108.9 --
-------- -------- --------
Total stockholders' equity............ 931.2 1,283.1 639.5
-------- -------- --------
Total liabilities and stockholders'
equity............................... $2,337.0 $2,672.0 $1,927.0
======== ======== ========

See accompanying notes to consolidated financial statements.

F-4

KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in millions

For the nine
For the year ended months ended
December 31, September 30,
------------------------- ----------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(Unaudited)

CASH FLOWS PROVIDED BY (USED FOR):
Operating Activities:
Net income (loss)............... $ (14.1) $ 190.2 $ 323.3 $ 232.0 $ 376.9
Adjustments to reconcile net
income (loss) to net cash from
continuing operations:
Income from discontinued
operations................... (118.0) (152.2) (313.1) (214.6) (363.8)
Depreciation and amortization. 62.1 56.7 56.9 43.0 42.4
Deferred income taxes......... (11.9) 35.5 9.8 19.7 23.4
Equity in earnings of
unconsolidated affiliates.... 9.7 2.9 (5.2) (8.3) (22.1)
Distributions from
unconsolidated affiliates.... -- 5.0 -- -- --
Dividend from Stilwell
Financial Inc................ 40.5 4.2 56.6 56.6 --
Tax benefit realized upon
exercise of stock options.... 6.3 12.2 6.4 6.3 9.0
Extraordinary item, net of
tax.......................... -- -- -- -- 7.5
Restructuring, asset
impairment and other charges. 178.0 -- -- -- --
Changes in working capital
items:
Accounts receivable........... (13.9) (8.5) (0.4) 3.4 12.4
Inventories................... 2.5 (8.6) 6.5 2.4 6.3
Other current assets.......... 4.3 (2.9) (2.1) 5.3 2.3
Accounts and wages payable.... (14.4) 4.6 4.5 (7.9) (32.9)
Accrued liabilities........... 61.2 6.8 41.2 30.9 (12.7)
Other, net...................... (6.9) (4.3) (6.4) (3.4) 3.6
------- ------- ------- ------- -------
Net........................... 185.4 141.6 178.0 165.4 52.3
------- ------- ------- ------- -------
Investing Activities:
Property acquisitions........... (76.8) (69.9) (106.2) (65.6) (79.0)
Proceeds from disposal of
property....................... 7.3 8.4 2.8 0.9 6.6
Investments in and loans with
affiliates..................... (295.9) (0.7) 12.7 15.3 (3.8)
Other, net...................... 0.7 0.7 (6.5) (4.7) 1.7
------- ------- ------- ------- -------
Net........................... (364.7) (61.5) (97.2) (54.1) (74.5)
------- ------- ------- ------- -------
Financing Activities:
Proceeds from issuance of long-
term debt...................... 339.5 151.7 21.8 21.8 1,017.0
Repayment of long-term debt..... (110.1) (232.0) (97.5) (66.7) (969.6)
Debt issuance costs............. -- -- (4.2) -- (17.6)
Proceeds from stock plans....... 20.3 17.9 37.0 32.2 17.8
Stock repurchased............... (50.2) -- (24.6) (24.6) --
Cash dividends paid............. (15.2) (17.8) (17.6) (17.8) (4.8)
Other, net...................... (0.2) 0.8 10.6 6.6 (2.3)
------- ------- ------- ------- -------
Net........................... 184.1 (79.4) (74.5) (48.5) 40.5
------- ------- ------- ------- -------
Cash and Equivalents:
Net increase.................... 4.8 0.7 6.3 62.8 18.3
At beginning of year............ 0.1 4.9 5.6 5.6 11.9
------- ------- ------- ------- -------
At end of year.................. $ 4.9 $ 5.6 $ 11.9 $ 68.4 $ 30.2
======= ======= ======= ======= =======

See accompanying notes to consolidated financial statements.

F-5

KANSAS CITY SOUTHERN INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars in millions, except share amounts

$1 Par $.01 Accumulated
$25 Par Series B Par other Shares
Preferred Preferred Common Retained comprehensive held in
stock stock stock earnings income trust Total
--------- --------- ------ -------- ------------- ------- --------

Balance at December 31,
1996................... $6.1 $1.0 $0.4 $ 883.3 $ 24.9 $(200.0) $ 715.7
Comprehensive income:
Net loss............... (14.1)
Net unrealized gain on
investments........... 25.9
Comprehensive income.... 11.8
Dividends............... (16.0) (16.0)
Stock repurchased....... (50.2) (50.2)
3-for-1 stock split..... 0.7 (0.7) --
Stock plan shares issued
from treasury.......... 3.1 3.1
Stock issued in
acquisition............ 10.1 10.1
Options exercised and
stock subscribed....... 23.8 23.8
---- ---- ---- ------- ------ ------- --------
Balance at December 31,
1997................... 6.1 1.0 1.1 839.3 50.8 (200.0) 698.3
Comprehensive income:
Net income............. 190.2
Net unrealized gain on
investments........... 24.3
Less: Reclassification
adjustment
for gains included in
net income........... (0.2)
Comprehensive income.... 214.3
Dividends............... (17.7) (17.7)
Stock plan shares issued
from treasury.......... 3.0 3.0
Stock issued in
acquisition............ 3.2 3.2
Options exercised and
stock subscribed....... 30.1 30.1
Termination of shares
held in trust.......... (1.0) (199.0) 200.0 --
---- ---- ---- ------- ------ ------- --------
Balance at December 31,
1998................... 6.1 -- 1.1 849.1 74.9 -- 931.2
Comprehensive income:
Net income............. 323.3
Net unrealized gain on
investments........... 39.3
Less: Reclassification
adjustment for gains
included in net
income............... (4.4)
Foreign currency
translation
adjustment............ (0.9)
Comprehensive income.... 357.3
Dividends............... (17.9) (17.9)
Stock repurchased....... (24.6) (24.6)
Options exercised and
stock subscribed....... 37.1 37.1
---- ---- ---- ------- ------ ------- --------
Balance at December 31,
1999................... 6.1 -- 1.1 1,167.0 108.9 -- 1,283.1
Comprehensive income:
Net income............. 376.9
Net unrealized gain on
investments........... 5.9
Less: Reclassification
adjustment for gains
included in net
income............... (1.1)
Foreign currency
translation
adjustment............ (2.6)
Comprehensive income.... 355.9
Spin-off of Stilwell
Financial Inc.......... (954.1) (111.1) (1,065.2)
1-for-2 reverse stock
split.................. (0.5) 0.5
Dividends............... (0.2) (0.2)
Stock plan shares issued
from treasury.......... 6.3 6.3
Options exercised and
stock subscribed....... 36.4 36.4
---- ---- ---- ------- ------ ------- --------
Balance at September 30,
2000 (unaudited)....... $6.1 $-- $0.6 $ 632.8 $ -- $ -- $ 639.5
==== ==== ==== ======= ====== ======= ========

See accompanying notes to consolidated financial statements.

F-6

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Description of the Business

Kansas City Southern Industries, Inc. ("Company" or "KCSI"), a Delaware
Corporation organized in 1962, is a diversified holding company with principal
operations in rail transportation and financial services. On July 12, 2000
KCSI completed its spin-off of Stilwell Financial Inc. ("Stilwell"), the
Company's wholly-owned financial services subsidiary. Subsequent to the spin-
off of Stilwell, KCSI's principal operations are rail transportation.

Spin-off of Stilwell and related events

On June 14, 2000 KCSI's Board of Directors approved the spin-off of
Stilwell. As of the date of the spin-off, Stilwell was comprised of Janus
Capital Corporation, an approximate 81.5% owned subsidiary; Berger LLC, an
approximate 88% owned subsidiary; Nelson Money Managers Plc, an 80% owned
subsidiary; DST Systems, Inc., an equity investment in which Stilwell holds an
approximate 32% interest; and miscellaneous other financial services
subsidiaries and equity investments.

On July 12, 2000, KCSI completed its spin-off of Stilwell through a special
dividend of Stilwell common stock distributed to KCSI common stockholders of
record on June 28, 2000 ("Spin-off"). The Spin-off occurred after the close of
business of the New York Stock Exchange on July 12, 2000, and each KCSI
stockholder received two shares of the common stock of Stilwell for every one
share of KCSI Common stock owned on the record date. The total number of
Stilwell shares distributed was 222,999,786.

As previously disclosed, on July 9, 1999, KCSI received a tax ruling from
the Internal Revenue Service ("IRS") which states that for United States
federal income tax purposes the Spin-off qualifies as a tax-free distribution
under Section 355 of the Internal Revenue Code of 1986, as amended.
Additionally, in February 2000, the Company received a favorable supplementary
tax ruling from the IRS to the effect that the assumption of $125 million of
KCSI indebtedness by Stilwell (in connection with the Company's re-
capitalization of its debt structure as discussed in Note 16) would have no
effect on the previously issued tax ruling.

Also on July 12, 2000, KCSI completed a reverse stock split whereby every
two shares of KCSI Common stock was converted into one share of KCSI Common
stock. All periods presented in the accompanying consolidated condensed
financial statements reflect this one-for-two reverse stock split, which had
previously been approved by KCSI common stockholders.

As a result of the Spin-off, the accompanying consolidated financial
statements for the nine months ended September 30, 2000 reflect the results of
operations and cash flows of Stilwell as discontinued operations through the
date of the Spin-off (July 12, 2000). Effective with the Spin-off, the net
assets of Stilwell have been removed from the consolidated balance sheet. The
accompanying consolidated financial statements as of December 31, 1998 and
1999, for the years ended December 31, 1997, 1998, and 1999 and for the nine
months ended September 30, 1999 reflect the financial position, results of
operations and cash flows of Stilwell as discontinued operations. See Note 3.

Nature of transportation operations. The Company is the holding company for
all of the subsidiaries comprising the transportation operations. KCSI's
principal subsidiaries and affiliates include:

. The Kansas City Southern Railway Company ("KCSR"), a wholly-owned
subsidiary of KCSI;

. Gateway Western Railway Company ("Gateway Western"), a wholly-owned
subsidiary of KCSR;

F-7

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

. Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), an
approximate 37% owned unconsolidated affiliate of KCSR. Grupo TFM owns
80% of the common stock of TFM, S.A. de C.V. ("TFM");

. Mexrail, Inc. ("Mexrail"), a 49% owned unconsolidated affiliate of KCSR.
Mexrail wholly owns The Texas Mexican Railway Company ("Tex-Mex");

. Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
unconsolidated affiliate of KCSR; and

. Panama Canal Railway Company ("PCRC"), an unconsolidated affiliate of
which we own 50% of the common stock.

KCSI, along with its principal subsidiaries and joint ventures, owns and
operates a rail network of approximately 6,000 miles of main and branch lines
that link key commercial and industrial markets in the United States and
Mexico. A strategic alliance with the Canadian National Railway Company ("CN")
and Illinois Central Corporation ("IC") (collectively "CN/IC") and other
marketing agreements have expanded its reach to comprise a contiguous rail
network of approximately 25,000 miles of main and branch lines connecting
Canada, the United States and Mexico.

KCSI's rail network connects shippers in the midwestern and eastern regions
of the United States and Canada, including shippers utilizing Chicago and
Kansas City--the two largest rail centers in the United States--with the
largest industrial centers of Canada and Mexico, including Toronto, Edmonton,
Mexico City and Monterrey. KCSI's rail system, through its core network,
strategic alliances and marketing partnerships, interconnects with all Class I
railroads in North America.

A summary of the Company's principal subsidiaries and affiliates is as
follows:

Consolidated Rail Operations

The Kansas City Southern Railway Company. KCSR operates a Class I Common
Carrier railroad system in the United States, on a North-South axis from the
Midwest to the Gulf of Mexico and on an East-West axis from Meridian,
Mississippi to Dallas, Texas. KCSR, which traces its origins to 1887, offers
the shortest route between Kansas City and major port cities along the Gulf of
Mexico in Louisiana, Mississippi and Texas. KCSR's customer base includes
electric generating utilities and a wide range of companies in the chemical
and petroleum industries, agricultural and mineral industries, paper and
forest product industries, and intermodal and automotive product industries,
among others. KCSR, in conjunction with the Norfolk Southern Corporation
("Norfolk Southern"), operates the most direct rail route (referred to as the
"Meridian Speedway"), between the Atlanta, Georgia and Dallas, Texas rail
gateways for rail traffic moving between the southeast and southwest regions
of the United States. The "Meridian Speedway" also provides eastern shippers
and other U.S. and Canadian railroads with an efficient connection to Mexican
markets.

Gateway Western Railway Company. Gateway Western, a wholly-owned subsidiary
of KCSR, operates a regional common carrier system which links Kansas City
with East St. Louis and Springfield, Illinois (with limited haulage rights
between Springfield and Chicago, Illinois). Gateway Western provides key
interchanges with the majority of other Class I railroads and like KCSR,
serves customers in a wide range of industries.

KCSR and Gateway Western revenues and net income are dependent on providing
reliable service to customers at competitive rates, the general economic
conditions in the geographic region served and the ability to effectively
compete against alternative modes of surface transportation, such

F-8

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

as over-the-road truck transportation. The ability of KCSR and Gateway Western
to construct and maintain the roadway in order to provide safe and efficient
transportation service is important to the ongoing viability as a rail
carrier. Additionally, the containment of costs and expenses is important to
maintaining a competitive market position, particularly with respect to
employee costs as approximately 84% of KCSR and Gateway Western combined
employees are covered under various collective bargaining agreements.

Southwestern Electric Power Company ("SWEPCO") is the Company's only
customer which accounted for more than 10% of revenues during the years ended
December 31, 1997, 1998 and 1999 and the nine months ended September 30, 1999
and 2000, respectively. Revenues related to SWEPCO during these periods were
$67.0, $78.0, $75.9, $59.2 and $59.4 million, respectively.

KCSR and Gateway Western operations are subject to the regulatory
jurisdiction of the Surface Transportation Board ("STB") within the Department
of Transportation, various state regulatory agencies, and the Occupational
Safety and Health Administration ("OSHA"). The STB has jurisdiction over
interstate rates, routes, service, issuance of guarantee of securities,
extension or abandonment of rail lines, and consolidation, merger or
acquisition of control of rail common carriers. States regulate some aspects
of rail operations with respect to health and safety and, in some instances,
intrastate freight rates. OSHA has jurisdiction over certain health and safety
features of railroad operations.

Unconsolidated Affiliates

Grupo TFM. Grupo TFM was formed in June 1996 to participate in the
privatization of the Mexican railroad system. In December 1996, the Mexican
Government awarded Grupo TFM the right to acquire an 80% interest
(representing 100% of the unrestricted voting rights) in TFM for approximately
11.072 billion Mexican pesos (approximately $1.4 billion based on the U.S.
dollar/Mexican peso exchange rate on the award date). TFM holds a 50-year
concession (with the option of a 50-year extension subject to certain
conditions) to operate approximately 2,600 miles of track which directly link
Mexico City and Monterrey (as well as Guadalajara through trackage rights)
with the ports of Lazaro Cardenas, Veracruz and Tampico and the Mexican/United
States border crossings of Nuevo Laredo-Laredo, Texas and Matamoros-
Brownsville, Texas. TFM's route network provides the shortest connection to
the major industrial and population areas of Mexico from midwestern and
eastern points in the United States. TFM interchanges traffic with Tex-Mex and
the Union Pacific Railroad ("UP") at Laredo, Texas.

On June 23, 1997, Grupo TFM completed the acquisition of its 80% interest
in TFM and began to record TFM's results of operations under the equity method
of accounting. Due to the fact that Grupo TFM's acquisition of TFM was not
completed until June 23, 1997, the accompanying financial statements do not
reflect any equity in earnings (losses) related to the Company's ownership
interest until June 23, 1997. The Company accounts for its investment in Grupo
TFM using the equity method of accounting. As of September 30, 2000, the
Company owned 36.9% of Grupo TFM.

Mexrail, Inc. In November 1995, the Company purchased a 49% interest in
Mexrail, which owns 100% of Tex-Mex. Tex-Mex and TFM operate the international
rail traffic bridge at Laredo spanning the Rio Grande River. This bridge is a
significant entry point for rail traffic between Mexico and the United States.
Tex-Mex also is comprised of a 521-mile rail network between Laredo and
Beaumont, Texas (including 157 owned miles from Laredo to Corpus Christi,
Texas and 364 miles, via trackage rights, from Corpus Christi to Houston and
Beaumont, Texas). Tex-Mex connects with KCSR via trackage rights at Beaumont,
Texas, with TFM at Laredo, Texas (the single largest rail freight transfer
point between the United States and Mexico), as well as with other Class I
railroads at various locations. The Company accounts for its investment in
Mexrail using the equity method of accounting.

F-9

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Through Grupo TFM and Mexrail, both operated in partnership with
Transportacion Maritima Mexicana, S.A. de C.V. ("TMM"), the Company has
established a prominent position in the Mexican transportation market.

Southern Capital Corporation, LLC. In October 1996, the Company and GATX
Capital Corporation ("GATX") completed the transactions for the formation and
financing of a joint venture--Southern Capital--to perform certain leasing and
financing activities. Southern Capital's principal operations are the
acquisition of locomotives and rolling stock and the leasing thereof to the
Company and other rail entities. The Company holds a 50% interest in Southern
Capital, which it accounts for using the equity method of accounting.

Other operations. The Company operates various entities in support of or as
an adjunct to its principal rail subsidiaries/investments including: a
petroleum coke bulk transfer facility, a captive insurance company, a cross
tie and timber treating facility, a parking garage and various pieces of real
estate adjacent to KCSR's right of way.

Note 2. Significant Accounting Policies

Basis of presentation. Use of the term Company as described in these Notes
to Consolidated Financial Statements means Kansas City Southern Industries,
Inc. and all of its consolidated subsidiary companies. Significant accounting
and reporting policies are described below. Certain prior year amounts have
been reclassified to conform to the current year presentation.

As a result of the Spin-off, the accompanying consolidated financial
statements for each of the periods presented reflect the financial position,
results of operations and cash flows of Stilwell as discontinued operations.

Principles of Consolidation. The accompanying consolidated financial
statements are presented using the accrual basis of accounting and generally
include the Company and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

The equity method of accounting is used for all entities in which the
Company or its subsidiaries have significant influence, but not more than 50%
voting interest; the cost method of accounting is generally used for
investments of less than 20% voting interest.

Interim financial information (unaudited). The interim financial statements
as of September 30, 2000 and for the nine months ended September 30, 1999 and
2000 are unaudited. These unaudited interim financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited interim financial
statements contain all adjustments (consisting of normal interim closing
procedures) necessary to present fairly the financial position of the Company
and its subsidiaries as of September 30, 2000 and for the nine months ended
September 30, 1999 and 2000. The results of operations and

F-10

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

cash flows for the nine months ended September 30, 2000 are not necessarily
indicative of the results that can be expected for the entire fiscal year
ending December 31, 2000.

Use of estimates. The accounting and financial reporting policies of the
Company conform with accounting principles generally accepted in the United
States ("U.S. GAAP"). The preparation of financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Revenue Recognition. The Company recognizes freight revenue based upon the
percentage of completion of a commodity movement. Other revenues, in general,
are recognized when the product is shipped, as services are performed or
contractual obligations fulfilled.

Cash Equivalents. Short-term liquid investments with an initial maturity of
generally three months or less are considered cash equivalents.

Inventories. Materials and supplies inventories are valued at average cost.

Properties and depreciation. Properties are stated at cost. Additions and
renewals constituting a unit of property are capitalized and all properties
are depreciated over the estimated remaining life of such assets. Ordinary
maintenance and repairs are charged to expense as incurred.

The cost of transportation equipment and road property normally retired,
less salvage value, is charged to accumulated depreciation. The cost of
industrial and other property retired and the cost of transportation property
abnormally retired, together with accumulated depreciation thereon, are
eliminated from the property accounts and the related gains or losses are
reflected in earnings.

Depreciation is computed using composite straight-line rates for financial
statement purposes. The STB approves the depreciation rates used by KCSR. KCSR
evaluates depreciation rates for properties and equipment and implements
approved rates. Periodic revisions of rates have not had a material effect on
operating results. Depreciation for other consolidated subsidiaries is
computed based on the asset value in excess of estimated salvage value using
the straight-line method over the estimated useful lives of the assets.
Accelerated depreciation is used for income tax purposes. The ranges of annual
depreciation rates for financial statement purposes are:

Road and structures................................................ 1%-20%
Rolling stock and equipment........................................ 1%-24%
Other equipment.................................................... 1%-33%
Capitalized leases................................................. 3%-20%

Long-lived assets. In accordance with Statement of Financial Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of ("SFAS 121"), the Company periodically evaluates the
recoverability of its operating properties. The measurement of possible
impairment is based primarily on the ability to recover the carrying value of
the asset from expected future operating cash flows of the assets on a
discounted basis. See Note 4 with respect to certain KCSR assets held for
disposal and certain other impaired assets.

Intangible assets. Intangible assets principally represent the excess of
cost over the fair value of net underlying assets of acquired companies using
purchase accounting and are amortized using the straight-line method over
periods ranging from 5 to 40 years.

F-11

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

On a periodic basis, the Company reviews the recoverability of goodwill by
comparing the carrying value of the recoverability of goodwill to its fair
value. In response to changes in the competitive and business environment in
the rail industry, the Company revised its methodology for evaluating goodwill
recoverability effective December 31, 1997. The change in this method of
measurement relates to the level at which assets are grouped from the business
unit level to the investment component level. At the same time, there were
changes in the estimates of future cash flows used to measure goodwill
recoverability. The effect of the change in method of applying the accounting
principle is inseparable from the changes in estimate. Accordingly, the
combined effects have been reported in the accompanying consolidated financial
statements as a change in estimate. The Company believes that the revised
methodology represents a preferable method of accounting because it more
closely links the fair value estimates to the asset whose recoverability is
being evaluated.

As a result of the changes discussed above, the Company determined that the
aggregate carrying value of the goodwill and other intangible assets
associated with the 1993 MidSouth Corporation ("MidSouth") purchase exceeded
their fair value. Accordingly, the Company recorded an impairment loss of
$91.3 million in the fourth quarter of 1997. Due to the fact that the change
in accounting is inseparable from the change in estimates, the pro forma
effects of retroactive application cannot be determined.

Computer Software Costs. Costs incurred in conjunction with the purchase or
development of computer software for internal use are accounted for in
accordance with American Institute of Certified Public Accountant's Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"), which was adopted by the Company in
1998. Costs incurred in the preliminary project stage, as well as training and
maintenance costs, are expensed as incurred. Direct and indirect costs
associated with the application development stage of internal use software are
capitalized until such time that the software is substantially complete and
ready for its intended use. Capitalized costs are amortized on a straight-line
basis over the useful life of the software.

Derivative Financial Instruments. In 1997, the Company entered into foreign
currency contracts in order to reduce the impact of fluctuations in the value
of the Mexican peso on its investment in Grupo TFM. These contracts were
intended to hedge only a portion of the Company's exposure related to the
final installment of the purchase price and not any other transactions or
balances. The Company follows the requirements outlined in Statement of
Financial Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS
52"), and related authoritative guidance. Accordingly, gains and losses
related to hedges of the Company's investment in Grupo TFM were deferred and
recognized as adjustments to the carrying amount of the investment when the
hedged transaction occurred.

Any gains and losses qualifying as hedges of existing assets or liabilities
are included in the carrying amounts of those assets or liabilities and are
ultimately recognized in income as part of those carrying amounts. Any gains
or losses on derivative contracts that do not qualify as hedges are recognized
currently as other income. Gains and losses on hedges are reflected in
operating activities in the statement of cash flows.

See Note 12 for additional information with respect to derivative financial
instruments and purchase commitments.

Fair Value of Financial Instruments. Statement of Financial Accounting
Standard No. 107 "Disclosures About Fair Value of Financial Instruments" ("FAS
107") requires an entity to disclose the

F-12

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

fair value of its financial instruments. The Company's financial instruments
include cash and cash equivalents, accounts receivable, lease and contract
receivables and accounts payable and long-term debt. In accordance with FAS
107, lease financing and contracts that are accounted for under Statement of
Financial Accounting Standards No. 13 "Accounting for Leases," are excluded
from fair value presentation.

The carrying value of the Company's cash equivalents approximates its fair
market value due to the short-term nature of these investments. Carrying value
is assumed to approximate fair value for all financial instruments with six
months or less to re-pricing or maturity and for financial instruments with
variable interest rates. The Company approximates the fair value of long-term
debt based upon borrowing rates available at the reporting date for
indebtedness with similar terms and average maturities.

Income Taxes. Deferred income tax effects of transactions reported in
different periods for financial reporting and income tax return purposes are
recorded under the liability method of accounting for income taxes. This
method gives consideration to the future tax consequences of the deferred
income tax items and immediately recognizes changes in income tax laws upon
enactment. Deferred income tax expense is generally the result of changes in
the deferred tax assets and liabilities.

Treasury Stock. The excess of par over cost of the Preferred shares held in
Treasury is credited to capital surplus. Common shares held in Treasury are
accounted for as if they were retired and the excess of cost over par value of
such shares is charged to capital surplus, if available, then to retained
earnings.

Stock Plans. Proceeds received from the exercise of stock options or
subscriptions are credited to the appropriate capital accounts in the year
they are exercised.

The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") in October 1995. This statement allows companies to
continue under the approach set forth in Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees" ("APB 25"), for recognizing
stock-based compensation expense in the financial statements, but encourages
companies to adopt the fair value method of accounting for employee stock
options. The Company has elected to retain its accounting approach under APB
25, and has presented the applicable pro forma disclosures in Note 10 to the
consolidated financial statements pursuant to the requirements of SFAS 123.

All shares held in the Employee Stock Ownership Plan ("ESOP") are treated
as outstanding for purposes of computing the Company's earnings per share. See
additional information on the ESOP in Note 11.

Earnings Per Share. The Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share" ("SFAS 128") in 1997. The statement
specifies the computation, presentation and disclosure requirements for
earnings per share. The statement requires the computation of earnings per
share under two methods: "basic" and "diluted." Basic earnings per share is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed giving effect to all dilutive potential common
shares that were outstanding during the period (i.e., the denominator

F-13

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

used in the basic calculation is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential
shares had been issued). SFAS 128 requires the Company to present basic and
diluted per share amounts for income (loss) from continuing operations and for
net income (loss) on the face of the statements of operations.

The effect of stock options to employees represent the only difference
between the weighted average shares used for the basic computation compared to
the diluted computation. The total incremental shares from assumed conversion
of stock options included in the computation of diluted earnings per share
were 1,920,167 and 1,883,286 for the years ended December 31, 1998 and 1999,
respectively, and 1,886,757 and 1,750,801 for the nine months ended September
30, 1999 and 2000 respectively. Because of the net loss in 1997, all options
were anti-dilutive for the year ended December 31, 1997. The weighted average
of options to purchase 137,170 and 44,438 shares in 1998 and 1999,
respectively, were excluded from the diluted earnings per share computation
because the exercise prices were greater than the respective average market
price of the common shares. For the nine-month periods ended September 30,
1999 and 2000, options to purchase 40,834 and 24,276 shares of KCSI Common
stock were excluded from the respective computation of diluted earnings per
share because the exercise prices exceeded the average market prices of the
common shares.

The only adjustments that currently affect the numerator of the Company's
diluted earnings per share computation include preferred dividends and
potentially dilutive securities at certain subsidiaries and affiliates.
Adjustments related to potentially dilutive securities totaled $0.6, $2.3 and
$4.8 million for the years ended December 31, 1997, 1998 and 1999,
respectively and $3.1 and $5.4 million for the nine months ended September 30,
1999 and 2000, respectively. These adjustments relate to securities at certain
Stilwell subsidiaries and affiliates and affect the diluted earnings per share
from discontinued operations computation in the applicable periods presented.
Preferred dividends are the only adjustments that affect the numerator of the
diluted earnings per share from continuing operations computation. Adjustments
related to preferred dividends were not material for the periods presented.

Stockholders' Equity. Information regarding the Company's capital stock at
December 31, 1998 and 1999 follows:

Shares Shares
Authorized Issued
----------- ----------

$25 Par, 4% noncumulative, Preferred stock......... 840,000 649,736
$1 Par, Preferred stock............................ 2,000,000 None
$1 Par, Series A, Preferred stock.................. 150,000 None
$1 Par, Series B convertible, Preferred stock...... 1,000,000 None
$.01 Par, Common stock............................. 400,000,000 73,369,116

In 1997, there were 1,000,000 shares issued of $1 Par, Series B
convertible, Preferred stock ("Series B Preferred stock") and 145,206,576
shares issued of $.01 Par, Common stock. Other 1997 shares authorized and
issued were the same as those in 1998 and 1999.

On July 29, 1997, the Company's Board of Directors authorized a 3-for-1
split in the Company's Common stock effected in the form of a stock dividend.
The Company's stockholders approved a one-for-two reverse stock split at a
special stockholders' meeting held on July 15, 1998. On July 12, 2000, KCSI
completed a reverse stock split whereby every two shares of KCSI Common stock
were converted into one share of KCSI Common stock. All share and per share
data reflect these splits. See Note 1.

F-14

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Shares outstanding are as follows at December 31, (in thousands):

1997 1998 1999
------ ------ ------

$25 Par, 4% noncumulative, Preferred stock........... 242 242 242
$.01 Par, Common stock............................... 54,042 54,908 55,287

Employee Plan Funding Trust. The Company's Series B Preferred stock, issued
in 1993, had a $200 per share liquidation preference and was convertible to
Common stock at a ratio of six to one. Effective September 30, 1998, the
Company terminated the Employee Plan Funding Trust ("EPFT" or "Trust"), which
was established as a grantor trust for the purpose of holding these shares of
Series B Preferred stock for the benefit of various KCSI employee benefit
plans.

In accordance with the Agreement to terminate the EPFT, the Company
received 872,362 shares of Series B Preferred stock in full repayment of the
indebtedness from the Trust ($178.7 million plus accrued interest). In
addition, the remaining 127,638 shares of Series B Preferred stock were
converted into KCSI Common stock, resulting in the issuance to the EPFT of
765,828 shares of such Common stock. This Common stock was then transferred to
KCSI and the Company has set these shares aside for use in connection with the
KCSI Stock Option and Performance Award Plan, as amended and restated
effective July 15, 1998. As a result of the termination of the Trust, the
Series B Preferred stock is no longer issued or outstanding and the converted
Common stock has been included in the shares issued above.

Postretirement benefits. The Company provides certain medical, life and
other postretirement benefits to certain retirees. The costs of such benefits
are expensed over the estimated period of employment in accordance with
Statement of Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions".

Environmental liabilities. The Company records liabilities for remediation
and restoration costs related to past activities when the Company's obligation
is probable and the costs can be reasonably estimated. Costs of ongoing
compliance activities to current operations are expensed as incurred. As of
December 31, 1997, 1998 and 1999, liabilities for environmental remediation
are not material.

Changes of Interest in Subsidiaries and Equity Investees. A change of the
Company's interest in a subsidiary or equity investee resulting from the sale
of the subsidiary's or equity investee's stock is generally recorded as a gain
or loss in the Company's net income in the period that the change of interest
occurs. If an issuance of stock by the subsidiary or affiliate is from
treasury shares on which gains have been previously recognized, however, KCSI
will record the gain directly to its equity and not include the gain in net
income. A change of interest in a subsidiary or equity investee resulting from
a subsidiary's or equity investee's purchase of its stock increases the
Company's ownership percentage of the subsidiary or equity investee. The
Company records this type of transaction under the purchase method of
accounting, whereby any excess of fair market value over the net tangible and
identifiable intangible assets is recorded as goodwill.

Stock-based Compensation. The Company accounts for stock options granted to
employees and non-employee directors using the intrinsic value method as
prescribed by APB 25. In October 1995, the FASB issued SFAS 123, which permits
companies to use either the APB 25 intrinsic value method or the fair value
method as prescribed by SFAS 123. The Company applies the APB 25 method and
discloses pro forma net income in the notes to the financial statements, as if
it had adopted the SFAS 123 fair value method for grants after December 31,
1994. See Note 10 for pro forma disclosure assuming that the Company would
have had higher compensation cost as a result of accounting for existing stock
options held by employees under SFAS 123.

F-15

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an Interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 was issued to clarify the application of
APB 25 with respect to, among other issues: i) the definition of employee; ii)
the criteria for determining whether a plan qualifies as a non-compensatory
plan; iii) the accounting consequences of modifications to the terms of a
previous fixed stock option grant; and iv) the accounting for an exchange of
stock compensation awards in a business combination. FIN 44 also addresses the
treatment of stock options in the case of spin-off transactions and other
equity restructuring. The adoption of FIN 44 during the third quarter of 2000
did not have a material impact on the Company's results of operations,
financial position or cash flows. Additionally, the provisions of FIN 44
relating to spin-off transactions are consistent with those of the Emerging
Issues Task Force of the Financial Accounting Standards Board ("EITF") in its
Issue No. 90-9, "Changes to Fixed Employee Stock Option Plans as a Result of
Equity Restructuring" ("EITF 90-9"), and, therefore, FIN 44 did not result in
any changes in the Company's accounting for stock transactions relating to the
Spin-off. See Note 1.

Statement of Financial Accounting Standards No. 130. Effective January 1,
1998, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"), which
establishes standards for reporting and disclosure of comprehensive income and
its components in the financial statements. Prior year information has been
included pursuant to SFAS 130. The Company's other comprehensive income
consists primarily of its proportionate share of unrealized gains and losses
relating to investments held by certain subsidiaries and affiliates of
Stilwell (discontinued operations) as "available-for-sale" securities as
defined by Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). The Company
records its proportionate share of any unrealized gains or losses related to
these investments, net of deferred income taxes, in stockholders' equity as
accumulated other comprehensive income. The unrealized gain related to these
investments increased $25.9, $24.3 and $39.3 million, net of deferred income
taxes for the years ended December 31, 1997, 1998 and 1999, respectively. For
the nine months ended September 30, 1999 and 2000, the Company recorded its
proportionate share of the gain in market value of these investments of $4.5
and $5.9 million, respectively, net of deferred taxes. Subsequent to the Spin-
off, the Company does not expect to hold investments that are accounted for as
"available-for-sale" securities.

New Accounting Pronouncement. The following accounting pronouncement is not
effective as of September 30, 2000.

Statement of Financial Accounting Standards No. 133. In June 1998, the FASB
issued Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
establishes accounting and reporting standards for derivative financial
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities measured at fair value. Initially,
the effective date of SFAS 133 was for all fiscal quarters for fiscal years
beginning after June 15, 1999; however, in June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137 "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133--an amendment of FASB Statement No. 133", which deferred the
effective date of SFAS 133 for one year. SFAS 133 will be effective for all
quarters beginning in the Company's fiscal year ended December 31, 2001. The
Company has reviewed the provisions of SFAS 133 and based on derivatives
outstanding as of September 30, 2000, does not expect implementation to have a
material impact on the Company's results of operations, financial position or
cash flows.

F-16

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 3. Acquisitions and Dispositions

Spin-off of Stilwell.

On July 12, 2000, KCSI completed the Spin-off. See Note 1.

Summarized financial information of the discontinued Stilwell businesses is
as follows (dollars in millions):

For the year ended
December 31,
-----------------------
1/1/99- 1/1/00-
1997 1998 1999 9/30/99 7/12/00
------ ------ -------- ------- --------
(Unaudited)

Revenues.............................. $485.1 $670.8 $1,212.3 $826.7 $1,187.9
Operating expenses.................... 285.9 390.2 694.0 481.2 646.2
------ ------ -------- ------ --------
Operating income...................... 199.2 280.6 518.3 345.5 541.7
Equity in earnings of unconsolidated
affiliates........................... 24.9 25.8 46.7 34.1 37.0
Reduction in ownership of DST......... -- (29.7) -- -- --
Gain on litigation settlement......... -- -- -- -- 44.2
Gain on sale of Janus common stock.... -- -- -- -- 15.1
Other, net............................ 5.8 12.6 21.5 16.1 18.6
------ ------ -------- ------ --------
Pretax income......................... 229.9 289.3 586.5 395.7 656.6
Income tax provision.................. 87.0 103.7 216.1 142.5 233.3
Minority interest in consolidated
earnings............................. 24.9 33.4 57.3 38.6 59.5
------ ------ -------- ------ --------
Income from discontinued operations,
net of taxes......................... $118.0 $152.2 $ 313.1 $214.6 $ 363.8
====== ====== ======== ====== ========

December 31,
---------------
1998 1999
------ --------

Current assets........................................... $259.3 $ 525.0
Total assets............................................. 822.9 1,231.5
Current liabilities...................................... 71.1 162.5
Total liabilities........................................ 248.4 359.6
Minority interest........................................ 34.3 57.3
Net assets of discontinued operations.................... 540.2 814.6

The following discusses certain agreements between KCSI and certain Janus
stockholders. Subsequent to the Spin-off, these agreements and related
provisions apply to Stilwell through assignment or through the agreement of
Stilwell to meet KCSI's obligations under the agreements.

A stock purchase agreement with Thomas H. Bailey, the Chairman, President
and Chief Executive Officer of Janus Capital Corporation ("Janus"), and
another Janus stockholder (the "Janus Stock Purchase Agreement") and certain
restriction agreements with other Janus minority stockholders contain, among
other provisions, mandatory put rights whereby under certain circumstances,
Stilwell would be required to purchase the minority interests of such Janus
minority stockholders at a fair market value purchase price equal to fifteen
times the net after-tax earnings of Janus over the period indicated in the
relevant agreement or in some circumstances as determined by an independent
appraisal. Under the Janus Stock Purchase Agreement, termination of
Mr. Bailey's employment could require a purchase and sale of the Janus common
stock held by him. If other minority holders

F-17

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

terminated their employment, some or all of their shares also could be subject
to mandatory purchase and sale provisions. Certain other minority holders who
continue their employment also could exercise puts. The Janus Stock Purchase
Agreement, and certain stock purchase agreements and restriction agreements
with other minority stockholders that have not been assigned to Stilwell, also
contain provisions whereby upon the occurrence of a Change in Ownership (as
defined in such agreements) of KCSI (or Stilwell with respect to the Janus
Stock Purchase Agreement), KCSI may be required to purchase such holders'
Janus stock. The fair market value price for such purchase would be equal to
fifteen times the net after-tax earnings of Janus over the period indicated in
the relevant agreement or in some circumstances as determined by Janus' Stock
Option Committee or as determined by an independent appraisal.

The Janus Stock Purchase Agreement has been assigned to Stilwell and
Stilwell has assumed and agreed to discharge KCSI's obligations under that
agreement. However, KCSI is obligated as a guarantor of Stilwell's obligations
under that agreement. With respect to other restriction agreements not
assigned to Stilwell, Stilwell has agreed to perform all of KCSI's obligations
under these agreements and KCSI has agreed to transfer all of its benefits and
assets under these agreements to Stilwell. In addition, Stilwell has agreed to
indemnify KCSI for any and all losses incurred with respect to the Janus Stock
Purchase Agreement and all other Janus minority stockholder agreements.
However, if Stilwell were unable to meet its obligations with respect to these
agreements, KCSI would be obligated to make the payments under these
agreements.

If all of the mandatory purchase and sale provisions and all the puts under
all Janus minority stockholder agreements had been implemented as of December
31, 1999, and Stilwell had been obligated to purchase such shares, Stilwell
would have been required to pay approximately $447 million at December 31,
1998, approximately $789 million as of December 31, 1999, and approximately
$821 million (unaudited) as of September 30, 2000 (of which KCSI could have
been ultimately responsible for approximately $640 million (unaudited) at
September 30, 2000, in the event Stilwell was unable to meet its obligations).
In the future these amounts may be higher or lower depending on Janus'
earnings, fair market value and the timing of the exercise. Payment for the
purchase of the respective minority interests is to be made under the Janus
Stock Purchase Agreement within 120 days after receiving notification of
exercise of the put rights. Under the restriction agreements with certain
other Janus minority stockholders, payment for the purchase of the respective
minority interests is to be made 30 days after the later to occur of (i)
receiving notification of exercise of the put rights or (ii) determination of
the purchase price through the independent appraisal process.

If Stilwell had been required to purchase the holders' Janus common stock
after a Change in Ownership as of December 31, 1999 and September 30, 2000,
the purchase price would have been approximately $899 million and $1,512
million (unaudited) respectively (of which KCSI could have been ultimately
responsible for approximately $1,230 million (unaudited) at September 30,
2000, in the event Stilwell was unable to meet its obligations).

The Janus Stock Purchase Agreement, as amended, provides that so long as Mr.
Bailey is a holder of at least 5% of the common stock of Janus and continues
to be employed as President or Chairman of the Board of Janus (or, if he does
not serve as President, James P. Craig, III serves as President and Chief
Executive Officer or Co-Chief Executive Officer with Mr. Bailey), Mr. Bailey
shall continue to establish and implement policy with respect to the
investment advisory and portfolio management activity of Janus. The agreement
also provides that, in furtherance of such objective, so long as both the
ownership threshold and officer status conditions described above are
satisfied Stilwell will vote its shares of Janus common stock to elect
directors of Janus, at least the majority of

F-18

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

whom are selected by Mr. Bailey, subject to Stilwell's approval, which
approval may not be unreasonably withheld. The agreement further provides that
any change in management philosophy, style or approach with respect to
investment advisory and portfolio management policies of Janus shall be
mutually agreed upon by Stilwell and Mr. Bailey.

On September 25, 2000, Mr. Craig left Janus to manage money for a new
charitable foundation established by Mr. Craig and his wife. Mr. Craig had
previously been identified as the successor to Mr. Bailey in the event that
Mr. Bailey left Janus. Stilwell has disclosed that although no formal
succession plan has yet been adopted, Stilwell believes that there are several
officers at Janus who would be capable of succeeding Mr. Bailey should the
need for that arise.

KCSI does not believe Mr. Bailey's rights under the Janus Stock Purchase
Agreement are "substantive," within the meaning of Issue No. 96-16 of the
EITF, because Stilwell can terminate those rights at any time by removing Mr.
Bailey as an officer of Janus. KCSI also believes that the removal of Mr.
Bailey would not result in significant harm to Stilwell based on the factors
discussed below. Colorado law provides that removal of an officer of a
Colorado corporation may be done directly by its stockholders if the
corporation's bylaws so provide. While Janus' bylaws contain no such provision
currently, Stilwell has the ability to cause Janus to amend its bylaws to
include such a provision. Under Colorado law, Stilwell could take such action
at an annual meeting of stockholders or make a demand for a special meeting of
stockholders. Janus is required to hold a special stockholders' meeting upon
demand from a holder of more than 10% of its common stock and to give notice
of the meeting to all stockholders. If notice of the meeting is not given
within 30 days of such a demand, the District Court is empowered to summarily
order the holding of the meeting. As the holder of more than 80% of the common
stock of Janus, Stilwell has the requisite votes to compel a meeting and to
obtain approval of the required actions at such a meeting.

KCSI has concluded, supported by an opinion of legal counsel rendered to
Stilwell, that Stilwell could carry out the above steps to remove Mr. Bailey
without breaching the Janus Stock Purchase Agreement and that if Mr. Bailey
were to challenge his removal by instituting litigation, his sole remedy would
be for damages and not injunctive relief and that Stilwell would likely
prevail in that litigation.

Although Stilwell has the ability to remove Mr. Bailey, it has no present
plan or intention to do so, as he is one of the persons regarded as most
responsible for the success of Janus. The consequences of any removal of Mr.
Bailey would depend upon the timing and circumstances of such removal. Mr.
Bailey could be required to sell, and Stilwell could be required to purchase,
his Janus common stock, unless he were terminated for cause. Certain other
Janus minority stockholders would also be able, and, if they terminated
employment, required, to sell to Stilwell their shares of Janus common stock.
The amounts that Stilwell, or if Stilwell were unable to meet its obligations
to purchase such shares, KCSI, would be required to pay in the event of such
purchase and sale transactions could be material. As of December 31, 1999,
such removal would have also resulted in acceleration of the vesting of a
portion of the shares of restricted Janus common stock held by other minority
stockholders having an approximate aggregate value of $16.3 million.

There may also be other consequences of removal that cannot be presently
identified or quantified. For example, Mr. Bailey's removal could result in
the loss of other valuable employees or clients of Janus. The likelihood of
occurrence and the effects of any such employee or client departures cannot be
predicted and may depend on the reasons for and circumstances of Mr. Bailey's
removal. However, KCSI believes that Janus would be able in such a situation
to retain or attract talented employees because: (i) of Janus' prominence;
(ii) Janus' compensation scale is at the upper

F-19

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

end of its peer group; (iii) some or all of Mr. Bailey's repurchased Janus
stock could be then available for sale or grants to other employees; and (iv)
many key Janus employees must continue to be employed at Janus to become
vested in currently unvested restricted stock valued in the aggregate (after
considering additional vesting that would occur upon the termination of Mr.
Bailey) at approximately $36 million as of December 31, 1999. In addition,
notwithstanding any removal of Mr. Bailey, Stilwell would expect to continue
its practice of encouraging autonomy by its subsidiaries and their boards of
directors so that management of Janus would continue to have responsibility
for Janus' day-to-day operations and investment advisory and portfolio
management policies and, because it would continue that autonomy, KCSI would
expect many current Janus employees to remain with Janus.

With respect to clients, Janus' investment advisory contracts with its
clients are terminable upon 60 days' notice and in the event of a change in
control of Janus. Because of his rights under the Janus Stock Purchase
Agreement, Mr. Bailey's departure, whether by removal, resignation or death,
might be regarded as such a change in control. However, in view of Janus'
investment record, KCSI has concluded it is reasonable to expect that in such
an event most of Janus' clients would renew their investment advisory
contracts. This conclusion is reached because (i) Janus relies on a team
approach to investment management and development of investment expertise,
(ii) Mr. Bailey has not served as a portfolio manager for any Janus fund for
several years and (iii) Janus should be able to continue to attract talented
portfolio managers. It is reasonable to expect that Janus' clients' reaction
will depend on the circumstances, including, for example, how much of the
Janus team remains in place and what investment advisory alternatives are
available.

The Janus Stock Purchase Agreement and other agreements provide for rights
of first refusal on the part of Janus minority stockholders, Janus, Stilwell
and KCSI, with respect to certain sales of Janus stock. These agreements also
require Stilwell or KCSI to purchase the shares of Janus minority stockholders
in certain circumstances. In addition, in the event of a Change in Ownership
of Stilwell, as defined in the Janus Stock Purchase Agreement, Stilwell may be
required to sell its stock of Janus to the stockholders who are parties to
such agreement or to purchase such holders' Janus stock. In the event Mr.
Bailey was terminated for any reason within one year following a Change in
Ownership, he would be entitled to a severance payment, amounting, at December
31, 1999, to approximately $2 million. Purchase and sales transactions under
these agreements are to be made based upon a multiple of the net earnings of
Janus and/or other fair market value determinations, as defined therein.

Grupo TFM. In June 1996, the Company and TMM formed Grupo TFM to
participate in the privatization of the Mexican rail industry. On December 6,
1996, Grupo TFM, TMM and the Company announced that the Mexican Government
("Government") had awarded to Grupo TFM the right to purchase 80% of the
common stock of TFM for approximately 11.072 billion Mexican pesos
(approximately $1.4 billion based on the U.S. dollar/Mexican peso exchange
rate on the award date). TFM holds the concession to operate Mexico's
"Northeast Rail Lines" for 50 years, with the option of a 50-year extension
(subject to certain conditions).

TFM is a strategically important rail link to Mexico and the North American
Free Trade Agreement ("NAFTA") corridor. TFM's rail lines are estimated to
transport approximately 40% of Mexico's rail cargo and are located next to
primary north/south truck routes. They directly link Mexico City and
Monterrey, as well as Guadalajara (through trackage rights), with the ports of
Lazaro Cardenas, Veracruz, Tampico, and the cities of Matamoros and Nuevo
Laredo. Nuevo Laredo is a primary transportation gateway between Mexico and
the United States. TFM connects in Laredo, Texas to the UP and Tex-Mex. Tex-
Mex links with KCSR at Beaumont, Texas through trackage rights. With the

F-20

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

KCSR and Tex-Mex interchange at Beaumont, and through KCSR's connections with
major rail carriers at various other points, the Company has developed a NAFTA
rail system to participate in the economic integration of the North American
marketplace.

On January 31, 1997, Grupo TFM paid the first installment of the purchase
price (approximately $565 million based on the U.S. dollar/Mexican peso
exchange rate) to the Government, representing approximately 40% of the
purchase price. Grupo TFM funded the initial installment of the TFM purchase
price through capital contributions from TMM and the Company. The Company
contributed approximately $298 million to Grupo TFM, of which approximately
$277 million was used by Grupo TFM as part of the initial installment payment.
The Company financed this contribution using borrowings under then-existing
lines of credit.

On June 23, 1997, Grupo TFM completed the purchase of 80% of TFM through
the payment of the remaining $835 million to the Government. This payment was
funded by Grupo TFM using a significant portion of the funds obtained from:
(i) senior secured term credit facilities ($325 million); (ii) senior notes
and senior discount debentures ($400 million); (iii) proceeds from the sale of
24.6% of Grupo TFM to the Government (approximately $199 million based on the
U.S. dollar/Mexican peso exchange rate on June 23, 1997); and (iv) additional
capital contributions from TMM and the Company (approximately $1.4 million
from each partner). Additionally, Grupo TFM entered into a $150 million
revolving credit facility for general working capital purposes. The
Government's interest in Grupo TFM is in the form of limited voting right
shares, and the purchase agreement includes a call option for TMM and the
Company, which is exercisable at the original amount (in U.S. dollars) paid by
the Government plus interest based on one-year U.S. Treasury securities.

On or after October 31, 2003, the Mexican government has the option to sell
its 20% interest in TFM (1) through a public offering or (2) to Grupo TFM at
the initial share price paid by Grupo TFM plus interest computed at the
Mexican Base Rate (the Unidades de Inversion ("UDI") published by Banco de
Mexico). In the event that Grupo TFM does not purchase the Mexican
government's 20% interest in TFM, the Mexican government may require the
Company and TMM, or either the Company or TMM alone, to purchase its interest.
The Company and TMM have cross indemnities in the event the Mexican government
requires only the Company or TMM to purchase its interest. The cross
indemnities allow the party required to purchase the Mexican government's
interest to require the other party to purchase its pro rata portion of such
interest. However, if the Company were required to purchase the Mexican
government's interest in TFM and TMM could not meet its obligations under the
cross-indemnity, then the Company would be obligated to pay the total purchase
price for the Mexican government's interest.

In first quarter 1997, the Company entered into two separate forward
contracts--$98 million in February 1997 and $100 million in March 1997--to
purchase Mexican pesos in order to hedge against a portion of the Company's
exposure to fluctuations in the value of the Mexican peso versus the U.S.
dollar. In April 1997, the Company realized a $3.8 million pretax gain in
connection with these contracts. This gain was deferred, and has been
accounted for as a component of the Company's investment in Grupo TFM. These
contracts were intended to hedge only a portion of the Company's exposure
related to the final installment of the purchase price and not any other
transactions or balances.

The Company's investment in Grupo TFM was approximately $286.5 and $303.3
million at December 31, 1999 and September 30, 2000, respectively. The
Company's interest in Grupo TFM is 36.9% (with TMM and a TMM affiliate owning
38.5% and the Government owning the remaining 24.6%).

F-21

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Gateway Western Railway Company. In May 1997, the STB approved the
Company's acquisition of Gateway Western, a regional rail carrier with
operations from Kansas City, Missouri to East St. Louis and Springfield,
Illinois and haulage rights between Springfield and Chicago, from the Southern
Pacific Rail Corporation. Prior to the STB approval--from acquisition in
December 1996 through May 1997--the Company's investment in Gateway Western
was treated as a majority-owned unconsolidated subsidiary accounted for under
the equity method. Upon approval from the STB, the assets, liabilities,
revenues and expenses were included in the Company's consolidated financial
statements. The consideration paid for Gateway Western (including various
acquisition costs and liabilities) was approximately $12.2 million, which
exceeded the fair value of the underlying net assets by approximately $12.1
million. The resulting intangible is being amortized over a period of 40
years.

Under a prior agreement with The Atchison, Topeka & Santa Fe Railway
Company, Burlington Northern Santa Fe Corporation has the option of purchasing
the assets of Gateway Western (based on a fixed formula in the agreement)
through 2004.

Panama Canal Railway Company. In January 1998, the Republic of Panama
awarded KCSR and its joint venture partner, Mi-Jack Products, Inc., the
concession to reconstruct and operate the PCRC. The 47-mile railroad runs
parallel to the Panama Canal and, upon reconstruction, will provide
international shippers with an important complement to the Panama Canal. In
November 1999, PCRC completed the financing arrangements for this project with
the International Finance Corporation ("IFC"), a member of the World Bank
Group. The financing is comprised of a $5 million investment from the IFC and
senior loans with IFC in the aggregate amounts of up to $45 million. The
investment of $5 million from the IFC is comprised of non-voting preferred
shares, paying a 10% cumulative dividend. The preferred shares may be redeemed
at the option of IFC any year after 2008 at the lower of i) a net cumulative
internal rate of return of 30%, or ii) eight-times the average of two
consecutive years of EBITDA (earnings before interest, taxes, depreciation and
amortization, determined in accordance with International Accounting
Standards) calculated in proportion to the IFC's percentage ownership in PCRC.
Under certain limited conditions, the Company is a guarantor for up to $15
million of cash deficiencies associated with project completion. Additionally,
if the Company or its partner terminate the concession contract without the
consent of the IFC, the Company is a guarantor for up to 50% of the
outstanding senior loans. The total cost of the reconstruction project is
estimated to be $75 million with an equity commitment from KCSR not to exceed
$16.5 million. Reconstruction of PCRC's right-of-way is expected to be
complete in mid-2001 with commercial operations to begin immediately
thereafter.

Note 4. Restructuring, Asset Impairment and Other Charges

As discussed in Note 2, in response to changes in the competitive and
business environment in the rail industry, the Company revised its methodology
for evaluating goodwill recoverability effective December 31, 1997. As a
result of this revised methodology (as well as certain changes in estimate),
the Company determined that the aggregate carrying value of the goodwill and
other intangible assets associated with the 1993 MidSouth purchase exceeded
their fair value (measured by reference to the net present value of future
cash flows). Accordingly, the Company recorded an impairment loss of $91.3
million in 1997.

During the fourth quarter of 1997, management committed to dispose, as soon
as practicable, certain under-performing branch lines acquired in connection
with the 1993 MidSouth purchase, as well as certain of the Company's non-
operating real estate. Accordingly, in accordance with SFAS 121, the Company
recognized losses aggregating $38.5 million which represented the excess of
carrying

F-22

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

value over fair value less cost to sell. Results of operations related to
these assets included in the accompanying consolidated financial statements
cannot be separately identified. During 1998, one of the branch lines was sold
for a pretax gain of approximately $2.9 million. In first quarter 2000, the
other branch line was sold for a minimal pretax gain. A potential buyer has
been identified for the non-operating real estate and management is currently
negotiating this transaction.

In accordance with SFAS 121, the Company periodically evaluates the
recoverability of its operating properties. As a result of continuing
operating losses and a further decline in the customer base of the Company's
bulk coke handling facility, the Company determined that the long-lived assets
related thereto may not be fully recoverable. Accordingly, the Company
recognized an impairment loss of $9.2 million in 1997 representing the excess
of carrying value over fair value.

Additionally, in 1997 the Company recorded expenses aggregating $39.0
million related to restructuring and other costs. This amount included
approximately $27.1 million related to the termination of a union productivity
fund (which required KCSR to pay certain employees when reduced crew levels
were used) and employee separations, as well as $11.9 million of other costs
related to charges and accruals for leases, contracts, and other costs. During
1998, approximately $29.7 million of cash payments were made and approximately
$2.5 million of the accruals were reduced based primarily on changes in the
estimate of claims made relating to the union productivity fund. During 1999,
approximately $3.3 million of cash payments were made reducing the accrual to
approximately $2.2 million at December 31, 1999.

Note 5. Supplemental Cash Flow Disclosures

Supplemental disclosures of cash flow information are as follows (dollars
in millions):

For the year
ended December
31,
-----------------
1997 1998 1999
----- ----- -----

Cash payments:
Interest (includes $13.7, $7.9 and $1.5, respectively,
related to Stilwell)...................................... $64.5 $74.2 $47.0
Income taxes (includes $64.5, $83.1 and $142.9,
respectively, related to Stilwell)........................ 65.3 83.2 143.3

Non-cash Investing and Financing Activities

During 1997 and 1998, the Company issued 122,775 and 113,589 shares of KCSI
Common stock, respectively, under various offerings of the Employee Stock
Purchase Plan ("ESPP"). These shares, totaling a purchase price of $3.1 and
$3.0 million in 1997 and 1998, respectively, were subscribed and paid for
through employee payroll deductions in years preceding the issuance of stock.
The Company did not initiate an offering of KCSI Common stock under the ESPP
during 1999.

In connection with the Eleventh Offering of the ESPP (initiated in 1998),
the Company received approximately $6.3 million from employee payroll
deductions in 1999 for the purchase of KCSI common stock. This stock (91,559
shares) was issued to employees in January 2000.

During 1997, 1998 and 1999, the Company's Board of Directors declared a
quarterly dividend totaling approximately $4.5, $4.4, and $4.6 million,
respectively, payable in January of the following year. The dividend
declaration reduced retained earnings and established a liability at the end
of each respective year. No cash outlay occurred until the subsequent year.
During first quarter 2000, the

F-23

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company's Board of Directors announced that, based upon a review of the
Company's dividend policy in conjunction with the KCS Credit Facilities
discussed in Note 16 and in light of the anticipated Spin-off, it decided to
suspend common stock dividends of KCSI under the then-existing structure of
the Company. This action complies with the terms and covenants of the KCS
Credit Facilities. It is not anticipated, however, that KCSI will make any
cash dividend payments to its common stockholders for the foreseeable future.

In January 2000, KCSI borrowed $125 million under a $200 million 364-day
senior unsecured competitive advance/revolving credit facility (the "Stilwell
Credit Facility") to retire debt obligations as discussed in Note 16. Stilwell
assumed this credit facility and repaid the $125 million in March 2000. Upon
such assumption, KCSI was released from all obligations, and Stilwell became
the sole obligor, under the Stilwell Credit Facility. The Company's
indebtedness decreased as a result of the assumption of this indebtedness by
Stilwell.

Note 6. Investments

Investments held for operating purposes, which include investments in
unconsolidated affiliates, are as follows (dollars in millions):

Carrying Value
---------------------------
Percentage December 31,
Ownership ------------- September 30,
Company Name December 31, 1999 1998 1999 2000
------------ ----------------- ------ ------ -------------

Grupo TFM...................... 36.9% $285.1 $286.5 $303.3
Southern Capital............... 50% 24.6 28.1 29.2
Mexrail........................ 49% 13.0 13.7 14.7
Other.......................... Various 5.2 8.8 13.9
------ ------ ------
Total........................ $327.9 $337.1 $361.1
====== ====== ======

Grupo TFM. In June 1996, the Company and TMM formed Grupo TFM to
participate in the privatization of the Mexican rail industry. On December 6,
1996, Grupo TFM, TMM and the Company announced that the Mexican Government had
awarded to Grupo TFM the right to purchase 80% of the common stock of TFM for
approximately 11.072 billion Mexican pesos (approximately $1.4 billion based
on the U.S. dollar/Mexican peso exchange rate on the award date). TFM holds
the concession to operate Mexico's "Northeast Rail Lines" for 50 years, with
the option of a 50-year extension (subject to certain conditions).

TFM is a strategically important rail link to Mexico and the NAFTA
corridor. TFM's rail lines are estimated to transport approximately 40% of
Mexico's rail cargo and are located next to primary north/south truck routes.
They directly link Mexico City and Monterrey, as well as Guadalajara (through
trackage rights), with the ports of Lazaro Cardenas, Veracruz, Tampico, and
the cities of Matamoros and Nuevo Laredo. Nuevo Laredo is a primary
transportation gateway between Mexico and the United States. TFM connects in
Laredo, Texas to the UP and Tex-Mex. Tex-Mex links with KCSR at Beaumont,
Texas through trackage rights. With the KCSR and Tex-Mex interchange at
Beaumont, and through KCSR's connections with major rail carriers at various
other points, the Company has developed a NAFTA rail system to participate in
the economic integration of the North American marketplace.

The Company and its subsidiary, KCSR, paid certain expenses on behalf of
Grupo TFM during 1997. In addition, the Company has a management services
agreement with Grupo TFM to provide

F-24

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

certain consulting and management services. At December 31, 1999, $3.0 million
is reflected as an account receivable in the Company's consolidated balance
sheet.

Southern Capital. In 1996, the Company and GATX completed the transaction
for the formation and financing of a joint venture, Southern Capital, to
perform certain leasing and financing activities. Concurrent with the
formation of this joint venture, the Company entered into operating leases
with Southern Capital for substantially all the locomotives and rolling stock
contributed or sold to Southern Capital at rental rates which management
believes reflect market conditions. KCSR paid Southern Capital $23.5, $25.1
and $27.0 million under these operating leases in 1997, 1998 and 1999,
respectively. In connection with the formation of Southern Capital, the
Company received cash that exceeded the net book value of assets contributed
to the joint venture by approximately $44.1 million. Accordingly, this excess
fair value over book value is being recognized as a reduction in lease rental
expense over the terms of the leases (approximately $4.9, $4.4 and $5.6
million in 1997, 1998 and 1999, respectively).

Additionally, prior to the sale of the loan portfolio (discussed below),
the Company entered into agreements with Southern Capital to manage the loan
portfolio assets held by Southern Capital, as well as to perform general
administrative and accounting functions for the joint venture. Payments under
these agreements were approximately $1.7, $1.7 and $0.5 million in 1997, 1998
and 1999, respectively. GATX also entered into an agreement to manage the rail
portfolio assets, as well as to perform certain general and administrative
services.

In April 1999, Southern Capital sold its loan portfolio assets (comprised
primarily of finance receivables in the amusement and other non-rail
transportation industries) to Textron Financial Corporation. The purchase
price for these assets approximated $52.8 million resulting in a gain of
approximately $2.7 million. The proceeds from the sale were used to reduce
outstanding indebtedness of the joint venture as mandated by its loan
agreement.

Other. Other investments are comprised primarily of PCRC. The Company's
investment in PCRC was $0.9, $4.5 and $9.5 million at December 31, 1998, 1999
and September 30, 2000, respectively. See Note 3.

F-25

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Financial Information. Combined financial information of all unconsolidated
affiliates that the Company and its subsidiaries account for under the equity
method follows. Amounts shown for Grupo TFM are reflected on an U.S. GAAP
basis (dollars in millions):

December 31, 1997
------------------------------------------
Grupo Southern
TFM Capital Mexrail Other Total
-------- -------- ------- ----- --------

Operating results:
Revenues.......................... $ 205.8 $ 30.9 $ 32.6 $ 0.3 $ 269.6
-------- ------ ------ ----- --------
Costs and expenses................ $ 190.5 $ 26.7 $ 33.7 $ 0.1 $ 251.0
-------- ------ ------ ----- --------
Net income (loss)................. $ (36.5) $ 4.2 $ 0.3 $ 0.1 $ (31.9)
-------- ------ ------ ----- --------

December 31, 1998
------------------------------------------
Grupo Southern
TFM Capital Mexrail Other Total
-------- -------- ------- ----- --------

Investment in unconsolidated
affiliates......................... $ 285.1 $ 24.6 $ 13.0 $ 0.8 $ 323.5
Equity in net assets of
unconsolidated affiliates.......... 281.7 24.6 13.2 3.0 322.5
Dividends and distributions received
from unconsolidated affiliates..... -- 5.0 -- -- 5.0

Financial Condition:
Current assets.................... $ 109.9 $ 1.6 $ 23.3 $ 1.6 $ 136.4
Non-current assets................ 1,974.7 228.6 47.3 6.0 2,256.6
-------- ------ ------ ----- --------
Assets.......................... $2,084.6 $230.2 $ 70.6 $ 7.6 $2,393.0
======== ====== ====== ===== ========
Current liabilities............... $ 233.9 $ 0.1 $ 25.1 $ 0.1 $ 259.2
Non-current liabilities........... 745.0 180.9 18.5 1.0 945.4
Minority interest................. 342.4 -- -- -- 342.4
Equity of stockholders and
partners......................... 763.3 49.2 27.0 6.5 846.0
-------- ------ ------ ----- --------
Liabilities and equity.......... $2,084.6 $230.2 $ 70.6 $ 7.6 $2,393.0
======== ====== ====== ===== ========
Operating results:
Revenues.......................... $ 431.3 $ 31.1 $ 48.2 $ 0.8 $ 511.4
-------- ------ ------ ----- --------
Costs and expenses................ $ 354.7 $ 27.1 $ 52.2 $ 0.4 $ 434.4
-------- ------ ------ ----- --------
Net income........................ $ (7.3) $ 4.0 $ (2.4) $ 0.3 $ (5.4)
-------- ------ ------ ----- --------

December 31, 1999
------------------------------------------
Grupo Southern
TFM Capital Mexrail Other Total
-------- -------- ------- ----- --------

Investment in unconsolidated
affiliates......................... $ 286.5 $ 28.1 $ 13.7 $ 4.5 $ 332.8
Equity in net assets of
unconsolidated affiliates.......... 283.2 28.1 14.0 4.1 329.4

Financial Condition:
Current assets.................... $ 134.4 $ 0.1 $ 23.1 $ 5.4 $ 163.0
Non-current assets................ 1,905.7 274.5 43.6 12.3 2,236.1
-------- ------ ------ ----- --------
Assets.......................... $2,040.1 $274.6 $ 66.7 $17.7 $2,399.1
======== ====== ====== ===== ========
Current liabilities............... $ 255.9 $ -- $ 32.7 $ 1.7 $ 290.3
Non-current liabilities........... 672.9 218.4 5.5 5.8 902.6
Minority interest................. 343.9 -- -- -- 343.9
Equity of stockholders and
partners......................... 767.4 56.2 28.5 10.2 862.3
-------- ------ ------ ----- --------
Liabilities and equity.......... $2,040.1 $274.6 $ 66.7 $17.7 $2,399.1
======== ====== ====== ===== ========
Operating results:
Revenues.......................... $ 524.5 $ 26.0 $ 50.0 $ 0.9 $ 601.4
-------- ------ ------ ----- --------
Costs and expenses................ $ 404.8 $ 22.3 $ 48.3 $ 0.8 $ 476.2
-------- ------ ------ ----- --------
Net income........................ $ 4.1 $ 7.0 $ 1.6 $ 0.1 $ 12.8
-------- ------ ------ ----- --------

F-26

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Generally, the difference between the carrying amount of the Company's
investment in unconsolidated affiliates and the underlying equity in net
assets is attributable to certain equity investments whose carrying amounts
have been reduced to zero, and report a net deficit. With respect to the
Company's investment in Grupo TFM, the effects of foreign currency
transactions and capitalized interest prior to June 23, 1997, which are not
recorded on the investee's books, also result in these differences.

The deferred income tax calculations for Grupo TFM are significantly
impacted by fluctuations in the relative value of the Mexican peso versus the
U.S. dollar and the rate of Mexican inflation, and can result in significant
variances in the amount of equity earnings (losses) reported by the Company.

Note 7. Other Balance Sheet Captions

Accounts Receivable. Accounts receivable include the following allowances
(dollars in millions):

December 31,
-------------- September 30,
1998 1999 2000
------ ------ -------------
(Unaudited)

Accounts receivable............................ $137.6 $140.2 $124.0
Allowance for doubtful accounts................ (5.8) (8.0) (4.2)
------ ------ ------
Accounts receivable, net....................... $131.8 $132.2 $119.8
====== ====== ======
Doubtful accounts expense...................... $ 0.9 $ 1.7 $ (1.7)
------ ------ ------

Other Current Assets. Other current assets include the following items
(dollars in millions):

December
31,
----------- September 30,
1998 1999 2000
----- ----- -------------
(Unaudited)

Deferred income taxes.............................. $14.7 $ 8.7 $ 8.0
Receivable related to Duncan case (See Note 17).... -- -- 7.0
Prepaid expenses................................... 2.2 2.5 1.3
Other.............................................. 8.9 12.7 11.5
----- ----- -----
Total............................................ $25.8 $23.9 $27.8
===== ===== =====

Properties. Properties and related accumulated depreciation and
amortization are summarized below (dollars in millions):

December 31,
-----------------
1998 1999
-------- --------

Properties, at cost
Road properties......................................... $1,321.1 $1,367.9
Equipment............................................... 283.1 279.8
Equipment under capital leases.......................... 6.7 6.7
Other................................................... 55.2 54.5
-------- --------
Total................................................... 1,666.1 1,708.9
Accumulated depreciation and amortization................. 535.0 578.0
-------- --------
Total................................................... 1,131.1 1,130.9
Construction in progress.................................. 98.2 146.5
-------- --------
Net Properties.......................................... $1,229.3 $1,277.4
======== ========

F-27

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Accrued Liabilities. Accrued liabilities include the following items
(dollars in millions):

December 31,
-------------- September 30,
1998 1999 2000
------ ------ -------------
(Unaudited)

Claims reserves.................................. $ 34.8 $ 35.7 $ 38.3
Prepaid freight charges due other railroads...... 30.4 25.1 28.3
Accrual for Duncan case liability (See Note 17).. -- -- 14.2
Car hire per diem................................ 12.1 13.5 12.6
Vacation accrual................................. 7.9 8.0 8.5
Other non-income related taxes................... 3.9 6.2 10.7
Federal income taxes payable (receivable).......... (7.2) 4.8 1.4
Interest payable................................. 1.3 12.5 3.6
Other............................................ 50.5 62.7 47.7
------ ------ ------
Total.......................................... $133.7 $168.5 $165.3
====== ====== ======

Note 8. Long-Term Debt

Indebtedness Outstanding. Long-term debt and pertinent provisions follow
(dollars in millions):

December 31,
-------------- September 30,
1998 1999 2000
------ ------ -------------
(Unaudited)

KCSI
Competitive Advance & Revolving Credit
Facilities.................................... $315.0 $250.0 $ --
Rates: Below Prime
Notes and Debentures, due July 2002 to December
2025.......................................... 400.0 400.0 1.6
Rates: 6.625% to 8.80%
Unamortized discount.......................... (2.4) (2.1) --
KCSR
Revolving Credit Facility, through January
2006, variable interest rate.................. -- -- 5.0
Term Loans, variable interest rates 9.12% to
9.37% due December 2005 to December 2006...... -- -- 400.0
Senior Notes, 9.5% interest rate, due October
1, 2008....................................... -- -- 200.0
Equipment Trust Certificates 8.56% to 9.68% due
serially to December 15, 2006................. 74.4 64.7 60.3
Capital Lease Obligations, 7.15% to 9.00%, due
serially to September 30, 2009................ 4.4 3.9 3.7
Gateway Western
Revolving Credit Facility, variable interest
rate (5.52% and 7.31% at December 31, 1998 and
1999, respectively)........................... 28.0 28.0 --
Term Loans with State of Illinois, 3% to 5%,
due serially to 2017.......................... 6.1 5.8 5.4
Other
Industrial Revenue Bond........................ 5.0 5.0 4.0
Mortgage Note.................................. 5.8 5.6 5.4
------ ------ ------
Total........................................ 836.3 760.9 685.4
Less: debt due within one year................. 10.7 10.9 13.7
------ ------ ------
Long-term debt............................... $825.6 $750.0 $671.7
====== ====== ======

F-28

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Re-capitalization of the Company's Debt Structure. In preparation for the
Spin-off, the Company re-capitalized its debt structure in January 2000
through the tender of its outstanding Notes and Debentures (as defined below)
and the repayment of other credit facilities. Funding for the repurchase of
the Notes and Debentures and for the repayment of borrowings under existing
revolving credit facilities was obtained through two new credit facilities.
See Note 16.

KCSI Credit Agreements. The Company's lines of credit at December 31, 1999
were as follows (dollars in millions):

Facility
Lines of Credit Fee Total Unused
--------------- ----------- ------ ------

KCSI............................................ .07 to .25% $540.0 $290.0
KCSR............................................ .1875% 20.0 20.0
Gateway Western................................. .1875% 40.0 12.0
------ ------
Total......................................... $600.0 $322.0
====== ======

At December 31, 1999, the Company had financing available through its
various lines of credit with a maximum borrowing amount of $600 million (which
included $55 million of uncommitted facilities and $100 million established
for the sole use of Stilwell). The Company had borrowings of $278 million
under its various lines of credit at December 31, 1999, leaving $322 million
available for use, subject to any limitations within existing financial
covenants. Among other provisions, the agreements limit subsidiary
indebtedness and sale of assets, and require certain coverage ratios to be
maintained. As of December 31, 1999, the Company was in compliance with all
covenants of these agreements. These lines of credit were refinanced as part
of the Company's re-capitalization discussed in Note 16 and are therefore, no
longer available.

Public Debt Transactions. As discussed in Note 16, in January 2000, the
Company re-capitalized its debt structure through the tender of its
outstanding Notes and Debentures. Following completion of this transaction,
approximately $1.6 million of the Company's public debt remains outstanding.

Public indebtedness of the Company at December 31, 1999 included: $100
million of 7.875% Notes due 2002; $100 million of 6.625% Notes due in 2005;
$100 million of 8.8% Debentures due 2022; and $100 million of 7% Debentures
due 2025. The various Notes are not redeemable prior to their respective
maturities. The 8.8% Debentures are redeemable on or after July 1, 2002 at a
premium of 104.04%, which declines to par on or after July 1, 2012. The 7%
Debentures are redeemable at the option of the Company, at any time, in whole
or in part, at a redemption price equal to the greater of (a) 100% of the
principal amount of such Debentures or (b) the sum of the present values of
the remaining scheduled payments of principal and interest thereon discounted
to the date of redemption on a semiannual basis at the Treasury Rate (as
defined in the Debentures agreement) plus 20 basis points, and in each case
accrued interest thereon to the date of redemption. During 1998, $100 million
of 5.75% Notes, which matured on July 1, 1998, were repaid using borrowings
under then-existing lines of credit.

These various debt transactions were issued at a total discount of $4.1
million. The discount was being amortized over the respective debt maturities
on a straight-line basis, which was not materially different from the interest
method. Deferred debt issue costs incurred in connection with these various

F-29

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

transactions (totaling approximately $4.8 million) were also being amortized
on a straight-line basis over the respective debt maturities. As a result of
the re-capitalization of the Company's debt in January 2000, the remaining
discount and deferred debt issue costs were eliminated.

KCSR Indebtedness. KCSR has purchased rolling stock under conditional sales
agreements, equipment trust certificates and capitalized lease obligations.
The Company has rolling stock with an original purchase price of $150.2
million (net book value at December 31, 1999 of $95.6 million) which has been
pledged as collateral for such related indebtedness.

Other Indebtedness. The Industrial Revenue Bond accrues interest at 7.13%
and matures on May 1, 2004. Principal payments are due in annual installments
beginning May 1, 2000. Payments of principal and interest are collateralized
by a subsidiary of the Company's cross tie plant assets and are guaranteed by
KCSI.

The Mortgage Note matures in 2012 and accrues interest at 7.89%. The
Mortgage Note is secured by a first lien on the Company's garage facility.

Other Agreements, Guarantees, Provisions and Restrictions. The Company has
debt agreements containing restrictions on subsidiary indebtedness, advances
and transfers of assets, and sale and leaseback transactions, as well as
requiring compliance with various financial covenants. At December 31, 1999,
the Company was in compliance with the provisions and restrictions of these
agreements. Because of certain financial covenants contained in the credit
agreements, however, maximum utilization of the Company's available lines of
credit may be restricted. See Note 16 for a discussion of certain covenants
and restrictions relating to the new credit facilities, including a
restriction on the payment of cash dividends to common stockholders.

Leases and Debt Maturities. The Company and its subsidiaries lease
transportation equipment, as well as office and other operating facilities
under various capital and operating leases. Rental expenses under operating
leases were approximately $51, $53 and $53 million for the years 1997, 1998
and 1999, respectively.

Minimum annual payments and present value thereof under existing capital
leases, other debt maturities, and minimum annual rental commitments under
noncancellable operating leases as of December 31, 1999 were as follows
(dollars in millions):

Capital Leases Operating Leases
------------------------- -----------------------------
Minimum Net
Lease Less Present Other Total
Payments Interest Value Debt Debt Affiliates Third Party Total
-------- -------- ------- ------ ------ ---------- ----------- ------

2000.................... $0.7 $0.3 $0.4 $ 10.5 $ 10.9 $ 34.3 $23.6 $ 57.9
2001.................... 0.8 0.3 0.5 12.3 12.8 34.3 14.2 48.5
2002.................... 0.7 0.2 0.5 112.3 112.8 34.3 10.2 44.5
2003.................... 0.8 0.2 0.6 15.8 16.4 34.3 6.9 41.2
2004.................... 0.6 0.1 0.5 12.3 12.8 31.3 3.0 34.3
Later years............. 1.7 0.3 1.4 593.8 595.2 215.0 20.6 235.6
---- ---- ---- ------ ------ ------ ----- ------
Total................. $5.3 $1.4 $3.9 $757.0 $760.9 $383.5 $78.5 $462.0
==== ==== ==== ====== ====== ====== ===== ======

See Note 16 for a discussion of the recapitalization of the Company's debt
structure.

Fair Value of Long-Term Debt. Based upon the borrowing rates available to
the Company and its subsidiaries for indebtedness with similar terms and
average maturities, the fair value of long-term debt (after consideration of
the January 11, 2000 transaction) was $766 million at December 31, 1999. The
fair value of long-term debt was $867 million at December 31, 1998.

F-30

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 9. Income Taxes

Under the liability method of accounting for income taxes specified by
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," the provision for income tax expense is the sum of income taxes
currently payable and deferred income taxes. Currently payable income taxes
represents the amounts expected to be reported on the Company's income tax
return, and deferred tax expense or benefit represents the change in deferred
taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities as measured by the enacted tax rates that will be in effect when
these differences reverse.

Tax Expense. Income tax provision (benefit) attributable to continuing
operations consists of the following components (dollars in millions):

For the year ended
December 31,
--------------------
1997 1998 1999
------ ----- -----

Current
Federal............................................. $ (6.0) $(8.5) $(3.4)
State and local..................................... (0.7) 0.1 0.6
------ ----- -----
Total current..................................... (6.7) (8.4) (2.8)
------ ----- -----
Deferred
Federal............................................. (10.1) 30.7 9.4
State and local..................................... (1.8) 4.8 0.4
------ ----- -----
Total deferred.................................... (11.9) 35.5 9.8
------ ----- -----
Total income tax provision (benefit).............. $(18.6) $27.1 $ 7.0
====== ===== =====

The federal and state deferred tax liabilities (assets) are as follows
(dollars in millions):

December 31,
--------------
1998 1999
------ ------

Liabilities:
Depreciation............................................... $312.7 $333.3
Other, net................................................. 1.4 (1.4)
------ ------
Gross deferred tax liabilities........................... 314.1 331.9
------ ------
Assets:
NOL and AMT credit carryovers.............................. (6.6) (2.3)
Book reserves not currently deductible for tax............. (25.6) (33.2)
Deferred compensation and other employee benefits.......... (1.6) (0.8)
Vacation accrual........................................... (2.6) (2.9)
Other, net................................................. (7.2) (4.0)
------ ------
Gross deferred tax assets................................ (43.6) (43.2)
------ ------
Net deferred tax liability................................... $270.5 $288.7
====== ======

Based upon the Company's history of operating income and its expectations
for the future, management has determined that operating income of the Company
will, more likely than not, be sufficient to recognize fully the gross
deferred tax assets set forth above.

F-31

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Tax Rates. Differences between the Company's effective income tax rates
applicable to continuing operations and the U.S. federal income tax statutory
rates of 35% are as follows (dollars in millions):

For the year ended
December 31,
--------------------
1997 1998 1999
------ ----- -----

Income tax provision (benefit) using the statutory rate
in effect............................................... $(52.7) $22.8 $ 5.6
Tax effect of:
Earnings of equity investees........................... 0.3 0.5 (0.2)
Goodwill impairment (see Note 4)....................... 35.0 -- --
Other, net............................................. 1.3 (1.1) 0.6
------ ----- -----
Federal income tax provision (benefit)................... (16.1) 22.2 6.0
State and local income tax provision (benefit)........... (2.5) 4.9 1.0
------ ----- -----
Total.................................................... $(18.6) $27.1 $ 7.0
------ ----- -----
Effective tax rate....................................... 12.3% 41.5% 40.7%
------ ----- -----

Tax Carryovers. At December 31, 1998, the Company had $4.0 million of
alternative minimum tax credit carryover generated by MidSouth and Gateway
Western prior to acquisition by the Company. This credit was utilized
completely for the year ended December 31, 1999 resulting in no carryover to
future years.

The amount of federal NOL carryover generated by MidSouth and Gateway
Western prior to acquisition was $67.8 million. The Company utilized
approximately $0.7, $25.0, and $4.5 million of these NOL's in 1997, 1998 and
1999, respectively. $31.9 million of the NOL carryover was utilized in pre-
1997 years leaving approximately $5.7 million of carryover available at
December 31, 1999, with expiration dates beginning in the year 2008. The
remaining NOL is attributed to the Gateway Western. The use of preacquisition
net operating losses and tax credit carryovers is subject to limitations
imposed by the Internal Revenue Code. The Company does not anticipate that
these limitations will affect utilization of the carryovers prior to their
expiration.

Tax Examinations. The IRS is currently in the process of examining the
consolidated federal income tax returns for the years 1993 through 1996. For
years prior to 1990, the statute of limitations has closed. In addition, other
taxing authorities are currently examining the years 1990 through 1998 and
have proposed additional tax assessments for which the Company believes it has
recorded adequate reserves.

Since most of these asserted tax deficiencies represent temporary
differences, subsequent payments of taxes will not require additional charges
to income tax expense. In addition, accruals have been made for interest (net
of tax benefit) for estimated settlement of the proposed tax assessments.
Thus, management believes that final settlement of these matters will not have
a material adverse effect on the Company's consolidated results of operations
or financial condition.

Note 10. Stockholders' Equity

(Note: Information in Note 10 reflects the one-for-two reverse stock split
effected July 12, 2000, but does not reflect the impact of the adjustments to
stock options resulting from the Spin-off).

Pro Forma Fair Value Information for Stock-Based Compensation Plans. Under
FAS 123, companies must either record compensation expense based on the
estimated grant date fair value of stock options granted or disclose the
impact on net income as if they had adopted the fair value

F-32

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

method (for grants subsequent to December 31, 1994). If KCSL had measured
compensation cost for the KCSI stock options granted to its employees and
shares subscribed by its employees under the KCSI employee stock purchase
plan, under the fair value based method prescribed by FAS 123, net income and
earnings per share would have been as follows:

For the year ended
December 31,
---------------------
1997 1998 1999
------ ------ ------

Net income (loss) (dollars in millions):
As reported......................................... $(14.1) $190.2 $323.3
Pro Forma........................................... (21.1) 179.0 318.0
Earnings (loss) per Basic share:
As reported......................................... $(0.26) $ 3.48 $ 5.86
Pro Forma........................................... (0.40) 3.28 5.76
Earnings (loss) per Diluted share:
As reported......................................... $(0.26) $ 3.32 $ 5.58
Pro Forma........................................... (0.40) 3.16 5.48

Stock Option Plans. During 1998, various existing Employee Stock Option
Plans were combined and amended as the Kansas City Southern Industries, Inc.
1991 Amended and Restated Stock Option and Performance Award Plan (as amended
and restated effective July 15, 1998). The Plan provides for the granting of
options to purchase up to 13.0 million shares of the Company's Common stock by
officers and other designated employees. Such options have been granted at
100% of the average market price of the Company's stock on the date of grant
and generally may not be exercised sooner than one year or longer than ten
years following the date of the grant, except that options outstanding with
limited rights ("LRs") or limited stock appreciation rights ("LSARs"), become
immediately exercisable upon certain defined circumstances constituting a
change in control of the Company. The Plans include provisions for stock
appreciation rights, LRs and LSARs. All outstanding options include LRs,
except for options granted to non-employee Directors.

For purposes of computing the pro forma effects of option grants under the
fair value accounting method prescribed by SFAS 123, the fair value of each
option grant is estimated on the date of grant using a version of the Black-
Scholes option pricing model. The following assumptions were used for the
various grants depending on the date of grant, nature of vesting and term of
option:

1997 1998 1999
-------------- -------------- --------------

Dividend Yield.................. .47% to .82% .34% to .56% .25% to .36%
Expected Volatility............. 24% to 31% 30% to 42% 42% to 43%
Risk-free Interest Rate......... 5.73% to 6.57% 4.74% to 5.64% 4.67% to 5.75%
Expected Life................... 3 years 3 years 3 years

F-33

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

A summary of the status of the Company's stock option plans as of December
31, 1997, 1998 and 1999, and changes during the years then ended, is presented
below.

1997 1998 1999
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- --------- --------- ---------

Outstanding at January
1...................... 5,192,075 $21.66 4,946,291 $24.24 4,713,971 $30.70
Exercised............... (937,320) 20.66 (800,415) 26.14 (636,482) 31.82
Canceled/Expired........ (200,817) 30.80 (20,467) 43.50 (42,266) 85.78
Granted................. 892,353 37.02 588,562 79.24 245,358 99.46
--------- --------- ---------
Outstanding at December
31..................... 4,946,291 24.24 4,713,971 30.70 4,280,581 33.94
========= ========= =========
Exercisable at December
31..................... 4,014,238 4,111,391 3,834,393
Weighted-Average Fair
Value of options
granted during the
year................... $ 9.44 $24.62 $33.28

The following table summarizes the information about stock options
outstanding at December 31, 1999:

OUTSTANDING EXERCISABLE
------------------------------------------- ------------------------
Weighted- Weighted-
Range of Number Weighted-Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/99 Contractual Life Price at 12/31/99 Price
- -------- ----------- ---------------- --------- ----------- ---------

$ 4- 20 1,358,854 2.0 years $ 9.70 1,358,854 $ 9.70
20- 30 426,835 5.9 26.06 426,835 26.06
30- 40 1,530,636 6.3 31.38 1,527,936 31.38
40- 60 344,334 9.3 47.92 344,334 47.92
60- 80 437 8.4 62.64 437 62.64
80-100 541,735 9.9 86.96 175,997 85.12
100-120 77,750 10.0 119.70 -- --
--------- ---------
4-120 4,280,581 5.6 33.94 3,834,393 27.06
========= =========

Shares available for future grants at December 31, 1999 aggregated
4,429,887.

Effect of Spin-off on Existing Stock Options

FIN 44 and EITF 90-9 address the issues surrounding fixed stock option
plans resulting from an equity restructuring, including spin-offs. This
guidance indicates that changes to fixed stock option grants made to restore
the option holder's economic position as a result of a spin-off do not result
in additional compensation expense if certain criteria are met as follows: i)
aggregate intrinsic value (difference between the market value per share and
exercise price) of the options immediately after the change is not greater
than the aggregate intrinsic value of the options immediately before the
change; ii) the ratio of the exercise price per option to the market value per
share is not reduced; and iii) the vesting provisions and option period of the
original option grant remain the same.

As part of the Spin-off, generally holders of an option to purchase one
share of KCSI Common stock received options to purchase two shares of Stilwell
common stock. The option exercise price for the KCSI and Stilwell stock
options was prorated based on the market value for KCSI Common stock

F-34

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and Stilwell common stock on the date of the Spin-off. This change in the
exercise price for KCSI as a result of the Spin-off has not been reflected in
these financial statements.

The changes made to the Company's fixed stock option grants as a result of
the Spin-off resulted in the option holder having the same economic position
both before and after the Spin-off. In accordance with the provisions of FIN
44 and EITF 90-9, the Company, therefore, did not record additional
compensation expense.

Stock Purchase Plan. The ESPP, established in 1977, provides to
substantially all full-time employees of the Company, certain subsidiaries and
certain other affiliated entities, the right to subscribe to an aggregate of
22.8 million shares of Common stock. The purchase price for shares under any
stock offering is to be 85% of the average market price on either the exercise
date or the offering date, whichever is lower, but in no event less than the
par value of the shares. At December 31, 1999, there were approximately 5.8
million shares available for future offerings.

The following table summarizes activity related to the various ESPP
offerings:

Date Shares Shares Date
Initiated Subscribed Price Issued Issued
--------- ---------- ------ ------- ---------

Eleventh Offering................. 1998 106,913 $71.94 94,149 1999/2000
Tenth Offering.................... 1996 125,540 26.70 116,567 1997/1998
Ninth Offering.................... 1995 145,706 25.46 123,865 1996/1997

For purposes of computing the pro forma effects of employees' purchase
rights under the fair value accounting method prescribed by SFAS 123, the fair
value of the Eleventh Offering under the ESPP is estimated on the date of
grant using a version of the Black-Scholes option pricing model. The following
weighted-average assumptions were used: i) dividend yield of .95%; ii)
expected volatility of 42%; iii) risk-free interest rate of 4.63%; and iv)
expected life of one year. The weighted-average fair value of purchase rights
granted under the Eleventh Offering of the ESPP was $21.52. There were no
offerings in 1997 or 1999.

Forward Stock Purchase Contract. During 1995, the Company entered into a
forward stock purchase contract ("the contract") as a means of securing a
potentially favorable price for the repurchase of three million shares of its
Common stock in connection with the stock repurchase program authorized by the
Company's Board of Directors on April 24, 1995. During 1997, the Company
purchased 1.2 million shares under this arrangement at an aggregate price of
$39 million (including transaction premium). During 1998 and 1999, no shares
were purchased under this arrangement. The contract contained provisions which
allowed the Company to elect a net cash or net share settlement in lieu of
physical settlement of the shares; however, all shares were physically
settled. The transaction was recorded in the consolidated financial statements
upon settlement of the contract in accordance with the accounting policies
described in Note 2.

Employee Plan Funding Trust ("EPFT" or "Trust"). Effective September 30,
1998, the Company terminated the EPFT, which was established by KCSI as a
grantor trust for the purpose of holding shares of Series B Preferred stock
for the benefit of various KCSI employee benefit plans, including the ESOP,
Stock Option Plans and ESPP (collectively, "Benefit Plans"). The EPFT was
administered by an independent bank trustee ("Trustee") and included in the
Company's consolidated financial statements.

F-35

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In accordance with the Agreement to terminate the EPFT, the Company
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 KCSI Common stock,
at the rate of 6 to 1, resulting in the issuance to the EPFT of 765,828 shares
of such Common stock. The Trustee then transferred this Common stock to KCSI
and the Company has set these shares aside for use in connection with the KCSI
Stock Option and Performance Award Plan, as amended and restated effective
July 15, 1998. Following the foregoing transactions, the EPFT was terminated.
The impact of the termination of the EPFT on the Company's consolidated
condensed financial statements was a reclassification among the components of
the stockholder's equity accounts, with no change in the consolidated assets
and liabilities of the Company.

Treasury Stock. Shares of Common stock in Treasury at December 31, 1997
totaled 18,561,098 compared with 18,461,663 at December 31, 1998 and
18,082,201 at December 31, 1999. The Company issued shares of Common stock
from Treasury--1,015,581 in 1997, 831,675 in 1998 and 609,462 in 1999--to fund
the exercise of options and subscriptions under various employee stock option
and purchase plans. In 1998, approximately 33,500 shares were issued in
conjunction with the acquisition of a subsidiary of Stilwell. Treasury stock
previously acquired had been accounted for as if retired. The 765,828 shares
received in connection with the termination of the EPFT were added to Treasury
stock during 1998. The Company purchased shares as follows: 1,431,992 in 1997
and 230,000 in 1999. Shares purchased during 1998 were not material.

Note 11. Profit Sharing and Other Postretirement Benefits

The Company maintains various plans for the benefit of its employees as
described below. The Company's employee benefit expense for these plans
aggregated $3.2, $3.4 and $4.2 million in 1997, 1998 and 1999, respectively.

Profit Sharing. Qualified profit sharing plans are maintained for most
employees not included in collective bargaining agreements. Contributions for
the Company and its subsidiaries are made at the discretion of the Boards of
Directors in amounts not to exceed the maximum allowable for federal income
tax purposes.

401(k) Plan. The Company's 401(k) plan permits participants to make
contributions by salary reduction pursuant to section 401(k) of the Internal
Revenue Code. The Company matches contributions up to a maximum of 3% of
compensation.

Employee Stock Ownership Plan. KCSI established the ESOP for employees not
covered by collective bargaining agreements. KCSI contributions to the ESOP
are based on a percentage (determined by the Compensation Committee of the
Board of Directors) of wages earned by eligible employees.

Other Postretirement Benefits. The Company adopted Statement of Financial
Accounting Standards No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions" ("SFAS 106"), effective January 1, 1993. The
Company and several of its subsidiaries provide certain medical, life and
other postretirement benefits other than pensions to its retiree. With the
exception of the Gateway Western plans, which are discussed below, the medical
and life plans are available to employees not covered under collective
bargaining arrangements, who have attained age 60 and rendered ten years of
service. Individuals employed as of December 31, 1992 were excluded from a

F-36

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

specific service requirement. The medical plan is contributory and provides
benefits for retirees, their covered dependents and beneficiaries. Benefit
expense begins to accrue at age 40. The medical plan was amended effective
January 1, 1993 to provide for annual adjustment of retiree contributions, and
also contains, depending on the plan coverage selected, certain deductibles,
co-payments, coinsurance and coordination with Medicare. The life insurance
plan is non-contributory and covers retirees only. The Company's policy, in
most cases, is to fund benefits payable under these plans as the obligations
become due. However, certain plan assets (e.g., money market funds) do exist
with respect to life insurance benefits.

During 1998, the Company adopted Statement of Financial Accounting
Standards No. 132 "Employers' Disclosure about Pensions and Other
Postretirement Benefits--an amendment of FASB Statements No. 87, 88, and 106"
("SFAS 132") and prior year information has been included pursuant to SFAS
132. SFAS 132 establishes standardized disclosure requirements for pension and
other postretirement benefit plans, requires additional information on changes
in the benefit obligations and fair values of plan assets, and eliminates
certain disclosures that are no longer considered useful. The standard does
not change the measurement or recognition of pension or postretirement benefit
plans.

Reconciliation of the accumulated postretirement benefit obligation, change
in plan assets and funded status, respectively, at December 31 follows
(dollars in millions):

1997 1998 1999
----- ----- -----

Accumulated postretirement benefit obligation at
beginning of year.................................... $13.9 $13.5 $13.2
Service cost.......................................... 0.6 0.4 0.4
Interest cost......................................... 1.1 0.9 0.9
Amortization of transition obligation................. 0.1 -- --
Actuarial and other (gain) loss....................... (0.9) (0.5) 1.2
Benefits paid (i)..................................... (1.3) (1.1) (1.1)
----- ----- -----
Accumulated postretirement benefit obligation at end
of year.............................................. 13.5 13.2 14.6
----- ----- -----
Fair value of plan assets at beginning of year........ 1.3 1.3 1.4
Actual return on plan assets.......................... 0.1 0.2 0.1
Benefits paid (i)..................................... (0.1) (0.1) (0.2)
----- ----- -----
Fair value of plan assets at end of year.............. 1.3 1.4 1.3
----- ----- -----
Funded status and accrued benefit cost................ $12.2 $11.8 $13.3
===== ===== =====

- --------
(i) Benefits paid for the reconciliation of accumulated postretirement benefit
obligation include both medical and life insurance benefits, whereas
benefits paid for the fair value of plan assets reconciliation include
only life insurance benefits. Plan assets relate only to the life
insurance benefits. Medical benefits are funded as obligations become due.

Net periodic postretirement benefit cost included the following components
(dollars in millions):

For the years
ended December
31,
-------------------
1997 1998 1999
----- ----- -----

Service cost............................................... $ 0.6 $ 0.4 $ 0.4
Interest cost.............................................. 1.1 0.9 0.9
Amortization of unrecognized transition obligation......... 0.1 -- --
Expected return on plan assets............................. (0.1) (0.1) (0.1)
----- ----- -----
Net periodic postretirement benefit cost................... $ 1.7 $ 1.2 $ 1.2
===== ===== =====

F-37

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company's health care costs, excluding Gateway Western and certain
former employees of MidSouth, are limited to the increase in the Consumer
Price Index ("CPI") with a maximum annual increase of 5%. Accordingly, health
care costs in excess of the CPI limit will be borne by the plan participants,
and therefore assumptions regarding health care cost trend rates are not
applicable.

The following assumptions were used to determine the postretirement
obligations and costs for the years ended December 31:

1997 1998 1999
---- ---- ----

Annual increase in the CPI................................. 3.00% 2.50% 3.00%
Expected rate of return on life insurance plan assets...... 6.50 6.50 6.50
Discount rate.............................................. 7.25 6.75 8.00
Salary increase............................................ 4.00 4.00 4.00

Gateway Western's benefit plans are slightly different from those of the
Company and other subsidiaries. Gateway Western provides contributory health,
dental and life insurance benefits to substantially all of its active and
retired employees, including those covered by collective bargaining
agreements. Effective January 1, 1998, existing Gateway Western management
employees converted to the Company's benefit plans. In 1999, the assumed
annual rate of increase in health care costs for the non-management Gateway
Western employees choosing a preferred provider organization was 7.5% and 6.5%
for those choosing the health maintenance organization option, decreasing over
two years to 6.5% and 5.5%, respectively, to remain level thereafter. For
certain former employees of MidSouth, the assumed annual rate of an increase
in health care costs is 12% currently, decreasing over six years to 6% to
remain level thereafter. The health care cost trend rate assumption has an
effect on Gateway Western amounts represented, as well as certain former
employees of MidSouth. An increase or decrease in the assumed health care cost
trend rates by one percent in 1997, 1998 and 1999 would not have a significant
impact on the accumulated postretirement benefit obligation. The effect of
this change on the aggregate of the service and interest cost components of
the net periodic postretirement benefit is not significant.

Note 12. Commitments and Contingencies

Litigation. In the opinion of management, claims or lawsuits incidental to
the business of the Company and its subsidiaries have been adequately provided
for in the consolidated financial statements.

Duncan Case. In 1998, a jury in Beauregard Parish, Louisiana returned a
verdict against KCSR in the amount of $16.3 million. The state case arose from
a railroad crossing accident that occurred at Oretta, Louisiana on September
11, 1994, in which three individuals were injured. Of the three, one was
injured fatally, one was rendered quadriplegic and the third suffered less
serious injuries.

On November 3, 1999, the Third Circuit Court of Appeals in Louisiana
affirmed the judgment. Review is now being sought in the Louisiana Supreme
Court. On March 24, 2000, the Louisiana Supreme Court granted KCSR's
Application for a Writ of Review regarding this case. Independent trial
counsel has expressed confidence to KCSR management that the Louisiana Supreme
Court will set

F-38

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

aside the district court and court of appeals judgments in this case. KCSR
management believes it has meritorious defenses and that it will ultimately
prevail in appeal to the Louisiana Supreme Court. If the verdict were to
stand, however, the judgment and interest are in excess of the $10 million
insurance coverage for this case and could have an adverse effect on the
Company's consolidated results of operations, financial position and cash
flows. (See Note 17.)

Bogalusa Cases. In July 1996, KCSR was named as one of twenty-seven
defendants in various lawsuits in Louisiana and Mississippi arising from the
explosion of a rail car loaded with chemicals in Bogalusa, Louisiana on
October 23, 1995. As a result of the explosion, nitrogen dioxide and oxides of
nitrogen were released into the atmosphere over parts of that town and the
surrounding area causing evacuations and injuries. Approximately 25,000
residents of Louisiana and Mississippi have asserted claims to recover damages
allegedly caused by exposure to the chemicals.

KCSR neither owned nor leased the rail car or the rails on which it was
located at the time of the explosion in Bogalusa. KCSR did, however, move the
rail car from Jackson to Vicksburg, Mississippi, where it was loaded with
chemicals, and back to Jackson where the car was tendered to the IC. The
explosion occurred more than 15 days after the Company last transported the
rail car. The car was loaded in excess of its standard weight, but under the
car's capacity, when it was transported by the Company to interchange with the
IC.

The trial of a group of twenty plaintiffs in the Mississippi lawsuits
arising from the chemical release resulted in a jury verdict and judgment in
favor of KCSR in June 1999. The jury found that KCSR was not negligent and
that the plaintiffs had failed to prove that they were damaged. The trial of
the Louisiana class action is scheduled to commence on June 11, 2001. The
trial of a second group of Mississippi plaintiffs is scheduled for January
2002.

KCSR believes that its exposure to liability in these cases is remote. If
KCSR were to be found liable for punitive damages in these cases, such a
judgment could have a material adverse effect on the Company's results of
operations, financial position and cash flows.

Houston Cases. In August 2000, KCSR and certain of its affiliates were
added as defendants in lawsuits pending in Jefferson and Harris Counties,
Texas. These lawsuits allege damage to approximately 3,000 plaintiffs as a
result of an alleged toxic chemical release from a tank car in Houston, Texas
on August 21, 1998. Litigation involving the shipper and the delivering
carrier has been pending for some time, but KCSR, which handled the car during
the course of its transport, was not previously a defendant. On information
currently available, the Company believes that the likelihood of its being
exposed to material damages in these cases is remote.

Diesel Fuel Commitments and Hedging Activities. From time to time, KCSR
enters into forward purchase commitments and hedge transactions (fuel swaps or
caps) for diesel fuel as a means of securing volumes and reducing overall
cost. Forward purchase commitment contracts normally require KCSR to purchase
certain quantities of diesel fuel at defined prices established at the
origination of the contract. Hedge transactions are correlated to market
benchmarks and hedge positions are monitored to ensure that they will not
exceed actual fuel requirements in any period.

There were no fuel swap or cap transactions during 1997 and minimal
purchase commitments were negotiated for 1997. However, at the end of 1997,
the Company had purchase commitments for approximately 27% of expected 1998
diesel fuel usage, as well as fuel swaps for approximately 37% of expected
1998 usage. As a result of actual fuel prices remaining below both the
purchase

F-39

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

commitment price and the swap price during 1998, the Company's fuel expense
was approximately $4.0 million higher. The purchase commitments resulted in a
higher cost of approximately $1.7 million, while the Company made payments of
approximately $2.3 million related to the 1998 fuel swap transactions. At
December 31, 1998, the Company had purchase commitments and fuel swap
transactions for approximately 32% and 16%, respectively, of expected 1999
diesel fuel usage. In 1999, KCSR saved approximately $0.6 million as a result
of these purchase commitments. The fuel swap transactions resulted in higher
fuel expense of approximately $1 million.

At the end of 1999, the Company had no outstanding purchase commitments. At
December 31, 1999, the Company had entered into two diesel fuel cap
transactions for a total of six million gallons (approximately 10% of expected
2000 usage) at a cap price of $0.60 per gallon. These hedging instruments
expired on March 31, 2000 and June 30, 2000. The Company received
approximately $0.8 million in conjunction with these fuel cap transactions and
recorded these cash receipts as a reduction of fuel expense during 2000.

Foreign Exchange Matters. As discussed in Note 2, in connection with the
Company's investment in Grupo TFM, a Mexican company, the Company follows the
requirements outlined in SFAS 52 (and related authoritative guidance) with
respect to financial accounting and reporting for foreign currency
transactions and for translating foreign currency financial statements from
the entity's functional currency into U.S. dollars.

The purchase price paid by Grupo TFM for 80% of the common stock of TFM was
fixed in Mexican pesos; accordingly, the U.S. dollar equivalent fluctuated as
the U.S. dollar/Mexican peso exchange rate changed. The Company's capital
contribution (approximately $298 million U.S.) to Grupo TFM in connection with
the initial installment of the TFM purchase price was made based on the U.S.
dollar/Mexican peso exchange rate on January 31, 1997.

Grupo TFM paid the remaining 60% of the purchase price in Mexican pesos on
June 23, 1997. As discussed above, the final installment was funded using
proceeds from Grupo TFM debt financing and the sale of 24.6% of Grupo TFM to
the Mexican Government. In the event that the proceeds from these arrangements
would not have provided funds sufficient for Grupo TFM to make the final
installment of the purchase price, the Company may have been required to make
additional capital contributions. Accordingly, in order to hedge a portion of
the Company's exposure to fluctuations in the value of the Mexican peso versus
the U.S. dollar, the Company entered into two separate forward contracts to
purchase Mexican pesos--$98 million in February 1997 and $100 million in March
1997. In April 1997, the Company realized a $3.8 million pretax gain in
connection with these contracts. This gain was deferred until the final
installment of the TFM purchase price was made in June 1997, at which time, it
was accounted for as a component of the Company's investment in Grupo TFM.
These contracts were intended to hedge only a portion of the Company's
exposure related to the final installment of the purchase price and not any
other transactions or balances.

During 1997 and 1998, Mexico's economy was classified as "highly
inflationary" as defined in SFAS 52. Accordingly, under the highly
inflationary accounting guidance in SFAS 52, the U.S. dollar was used as Grupo
TFM's functional currency, and any gains or losses from translating Grupo
TFM's financial statements into U.S. dollars were included in the
determination of its net income (loss). Equity earnings (losses) from Grupo
TFM included in the Company's results of operations reflected the Company's
share of such translation gains and losses.

Effective January 1, 1999, the SEC staff declared that Mexico should no
longer be considered a highly inflationary economy. Accordingly, the Company
performed an analysis under the guidance of SFAS 52 to determine whether the
U.S. dollar or the Mexican peso should be used as the functional

F-40

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

currency for financial accounting and reporting purposes for periods
subsequent to December 31, 1998. Based on the results of the analysis,
management believes the U.S. dollar to be the appropriate functional currency
for the Company's investment in Grupo TFM; therefore, the financial accounting
and reporting of the operating results of Grupo TFM will remain consistent
with prior periods.

The Company continues to evaluate existing alternatives with respect to
utilizing foreign currency instruments to hedge its U.S. dollar investment in
Grupo TFM as market conditions change or exchange rates fluctuate. At December
31, 1999, the Company had no outstanding foreign currency hedging instruments.

Environmental Liabilities. The Company's transportation operations are
subject to extensive regulation under environmental protection laws and its
land holdings have been used for transportation purposes or leased to third
parties for commercial and industrial purposes. The Company records
liabilities for remediation and restoration costs related to past activities
when the Company's obligation is probable and the costs can be reasonably
estimated. Costs of ongoing compliance activities to current operations are
expensed as incurred.

The Company's recorded liabilities for these issues represent its best
estimates (on an undiscounted basis) of remediation and restoration costs that
may be required to comply with present laws and regulations. At December 31,
1997, 1998 and 1999 these recorded liabilities were not material. Although
these costs cannot be predicted with certainty, management believes that the
ultimate outcome of identified matters will not have a material adverse effect
on the Company's consolidated results of operations or financial condition.

Intermodal and Automotive Facility at the Former Richards-Gebaur Airbase.
In conjunction with the construction of an intermodal and automotive facility
at the former Richards-Gebaur airbase in Kansas City, Missouri, KCSR expects
to spend approximately $20 million for site improvements and infrastructure.
Additionally, KCSR has negotiated a lease arrangement with the City of Kansas
City, Missouri for a period of fifty years. Lease payments are expected to
range between $400,000 and $700,000 per year and will be adjusted for
inflation based on agreed-upon formulas.

Note 13. Control

Subsidiaries and Affiliates. The Company is party to certain agreements
with TMM covering the Grupo TFM and Mexrail ventures, which contain "change of
control" provisions, provisions intended to preserve Company's and TMM's
proportionate ownership of the ventures, and super majority provisions with
respect to voting on certain significant transactions. Such agreements also
provide a right of first refusal in the event that either party initiates a
divestiture of its equity interest in Grupo TFM or Mexrail. Under certain
circumstances, such agreements could affect the Company's ownership percentage
and rights in these equity affiliates.

F-41

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Employees. The Company and certain of its subsidiaries have entered into
agreements with employees whereby, upon defined circumstances constituting a
change in control of the Company or subsidiary, certain stock options become
exercisable, certain benefit entitlements are automatically funded and such
employees are entitled to specified cash payments upon termination of
employment.

Assets. The Company and certain of its subsidiaries have established trusts
to provide for the funding of corporate commitments and entitlements of
officers, directors, employees and others in the event of a specified change
in control of the Company or subsidiary. Assets held in such trusts at
December 31, 1999 were not material. Depending upon the circumstances at the
time of any such change in control, the most significant factor of which would
be the highest price paid for KCSI common stock by a party seeking to control
the Company, funding of the Company's trusts could be very substantial.

Debt. Certain loan agreements and debt instruments entered into or
guaranteed by the Company and its subsidiaries provide for default in the
event of a specified change in control of the Company or particular
subsidiaries of the Company.

Stockholder Rights Plan. On September 19, 1995, the Board of Directors of
the Company declared a dividend distribution of one Right for each outstanding
share of the Company's common stock, $.01 par value per share (the "Common
stock"), to the stockholders of record on October 12, 1995. Each Right
entitles the registered holder to purchase from the Company 1/1,000th of a
share of Series A Preferred Stock (the "Preferred Stock") or in some
circumstances, Common stock, other securities, cash or other assets as the
case may be, at a price of $210 per share, subject to adjustment.

The Rights, which are automatically attached to the Common stock, are not
exercisable or transferable apart from the Common stock until the tenth
calendar day following the earlier to occur of (unless extended by the Board
of Directors and subject to the earlier redemption or expiration of the
Rights): (i) the date of a public announcement that an acquiring person
acquired, or obtained the right to acquire, beneficial ownership of 20 percent
or more of the outstanding shares of the Common stock of the Company (or 15
percent in the case that such person is considered an "adverse person"), or
(ii) the commencement or announcement of an intention to make a tender offer
or exchange offer that would result in an acquiring person beneficially owning
20 percent or more of such outstanding shares of Common stock of the Company
(or 15 percent in the case that such person is considered an "adverse
person"). Until exercised, the Right will have no rights as a stockholder of
the Company, including, without limitation, the right to vote or to receive
dividends. In connection with certain business combinations resulting in the
acquisition of the Company or dispositions of more than 50% of Company assets
or earnings power, each Right shall thereafter have the right to receive, upon
the exercise thereof at the then current exercise price of the Right, that
number of shares of the highest priority voting securities of the acquiring
company (or certain of its affiliates) that at the time of such transaction
would have a market value of two times the exercise price of the Right. The
Rights expire on October 12, 2005, unless earlier redeemed by the Company as
described below.

At any time prior to the tenth calendar day after the first date after the
public announcement that an acquiring person has acquired beneficial ownership
of 20 percent (or 15 percent in some instances) or more of the outstanding
shares of the Common stock of the Company, the Company may redeem the Rights
in whole, but not in part, at a price of $0.005 per Right. In addition, the
Company's right of redemption may be reinstated following an inadvertent
trigger of the Rights (as determined by the Board) if an acquiring person
reduces its beneficial ownership to 10 percent or less of the outstanding
shares of Common stock of the Company in a transaction or series of
transactions not involving the Company.

F-42

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Series A Preferred shares purchasable upon exercise of the Rights will
have a cumulative quarterly dividend rate set by the Board of Directors or
equal to 1,000 times the dividend declared on the Common stock for such
quarter. Each share will have the voting rights of one vote on all matters
voted at a meeting of the stockholders for each 1/1,000th share of preferred
stock held by such stockholder. In the event of any merger, consolidation or
other transaction in which the common shares are exchanged, each Series A
Preferred share will be entitled to receive an amount equal to 1,000 times the
amount to be received per common share. In the event of a liquidation, the
holders of Series A Preferred shares will be entitled to receive $1,000 per
share or an amount per share equal to 1,000 times the aggregate amount to be
distributed per share to holders of Common stock. The shares will not be
redeemable. The vote of holders of a majority of the Series A Preferred
shares, voting together as a class, will be required for any amendment to the
Company's Certificate of Incorporation that would materially and adversely
alter or change the powers, preferences or special rights of such shares.

F-43

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 14. Quarterly Financial Data (Unaudited)
The quarterly information presented herein for the first quarter of 2000,
1999 and 1998 differs from that presented in the Company's Form 10-Q filings
for the applicable quarter as a result of the classification of Stilwell as a
discontinued operation and the reverse stock split.

Restatement of Financial Statements. The Company has restated its
consolidated balance sheet as of September 30, 2000 to present the $14.2
million liability and $7.0 million receivable associated with the Duncan case
(see Note 17) as current. These amounts had previously been classified as
long-term. Additionally, the Company has restated its consolidated statements
of operations for the three and nine months ended September 30, 2000 to
present the $4.2 million attributed to interest in the Duncan Case judgment in
"Cost and Expenses". This amount had previously been classified as "Interest
Expense". These revisions had no impact on income from continuing operations,
net income, earnings per share or on total shareholders' equity as previously
reported.

(dollars in millions, except per share amounts):

2000
-------------------------
Third Second First
Quarter Quarter Quarter
-------- ------- -------
Restated

Revenues............................................. $144.1 $144.4 $148.9
Costs and expenses................................... 115.8 111.7 116.6
Depreciation and amortization........................ 13.8 14.3 14.3
------ ------ ------
Operating income.................................... 14.5 18.4 18.0
Equity in net earnings (losses) of unconsolidated
affiliates:
Grupo TFM........................................... 2.6 8.0 8.2
Other............................................... 1.5 1.2 0.6
Interest expense..................................... (18.3) (18.4) (17.5)
Other, net........................................... 1.2 0.9 2.7
------ ------ ------
Income from continuing operations before income
taxes............................................... 1.5 10.1 12.0
Income taxes......................................... (1.1) 1.3 1.6
------ ------ ------
Income from continuing operations.................... 2.6 8.8 10.4
Income from discontinued operations, net of income
taxes............................................... 23.4 151.7 188.7
------ ------ ------
Income before extraordinary item..................... 26.0 160.5 199.1
Extraordinary items, net of income taxes
Debt retirement costs--KCSI......................... (1.1) -- (5.9)
Debt retirement costs--Grupo TFM.................... (1.7) -- --
------ ------ ------
Net income........................................... 23.2 160.5 193.2
====== ====== ======
Basic Earnings per Common share
Continuing operations............................... $ 0.05 $ 0.16 $ 0.18
Discontinued operations............................. 0.40 2.72 3.40
------ ------ ------
Basic Earnings per Common share before extraordinary
item............................................... 0.45 2.88 3.58
Extraordinary item, net of income taxes............. (0.05) -- (0.10)
------ ------ ------
Total Basic Earnings per Common share............... $ 0.40 $ 2.88 $ 3.48
====== ====== ======
Diluted Earnings per Common share
Continuing operations............................... $ 0.05 $ 0.15 $ 0.18
Discontinued operations............................. 0.39 2.59 3.24
------ ------ ------
Diluted Earnings per Common share before
extraordinary item................................. 0.44 2.74 3.42
Extraordinary item, net of income taxes............. (0.05) -- (0.10)
------ ------ ------
Total Diluted Earnings per Common share............. $ 0.39 $ 2.74 $ 3.32
====== ====== ======
Dividends per share:
Preferred........................................... $ .25 $ .25 $ .25
Common.............................................. $ -- $ -- $ --
Stock Price Ranges:
Preferred--High..................................... $20.00 $19.50 $16.00
- --Low................................................ 18.63 14.75 14.25
Common--High........................................ 9.88 8.00 5.90
- --Low................................................ 5.13 3.70 4.02

F-44

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(dollars in millions, except per share amounts):

1999
--------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- -------- -------- --------

Revenues............................... $ 151.7 $ 149.1 $ 148.7 $ 151.9
Costs and expenses..................... 132.4 120.2 114.6 113.2
Depreciation and amortization.......... 13.9 14.3 14.4 14.3
-------- -------- -------- --------
Operating income..................... 5.4 14.6 19.7 24.4
Equity in net earnings (losses) of
unconsolidated affiliates:
Grupo TFM............................ (3.3) 3.8 0.5 0.5
Other................................ 0.2 1.3 1.6 0.6
Interest expense....................... (14.1) (14.7) (14.6) (14.0)
Other, net............................. 2.1 1.3 1.0 0.9
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes...... (9.7) 6.3 8.2 12.4
Income tax provision (benefit)......... (2.5) 1.7 3.0 4.8
-------- -------- -------- --------
Income (loss) from continuing
operations.......................... (7.2) 4.6 5.2 7.6
Income from discontinued operations,
net of income taxes................. 98.5 82.7 70.9 61.0
-------- -------- -------- --------
Net Income........................... $ 91.3 $ 87.3 $ 76.1 $ 68.6
======== ======== ======== ========
Per Share Data: (i)
Basic earnings (loss) per share
Continuing operations............... (0.13) 0.08 0.09 0.14
Discontinued operations............. 1.78 1.50 1.29 1.11
-------- -------- -------- --------
Total Basic earnings per share....... $ 1.65 $ 1.58 $ 1.38 $ 1.25
======== ======== ======== ========
Diluted earnings (loss) per share
Continuing operations............... (0.13) 0.08 0.09 0.13
Discontinued operations............. 1.78 1.43 1.22 1.06
-------- -------- -------- --------
Total Diluted earnings per share
(ii)................................ $ 1.65 $ 1.51 $ 1.31 $ 1.19
======== ======== ======== ========
Dividends per share:
Preferred............................ $ .25 $ .25 $ .25 $ .25
Common............................... $ .08 $ .08 $ .08 $ .08
Stock Price Ranges:
Preferred--High...................... $ 16.000 $ 16.250 $ 16.500 $ 16.250
--Low................................ 14.000 13.500 13.750 14.875
Common--High......................... 150.000 131.876 132.876 114.750
--Low................................ 75.000 86.626 100.500 86.626

- --------
(i) On July 12, 2000, KCSI completed a reverse stock split of its common
shares whereby every two shares of KCSI Common stock was converted into
one share of KCSI Common stock. The Per Share Data herein reflects this
reverse stock split for all periods presented.
(ii) The accumulation of 1999's four quarters for Diluted earnings (loss) per
share does not total the Diluted earnings per share for the year ended
December 31, 1999 due to share repurchases and the anti-dilutive nature
of options in the fourth quarter 1999 calculation.

F-45

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 14. Quarterly Financial Data (Unaudited)

(dollars in millions, except per share amounts):

1998
----------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------

Revenues................................... $ 151.1 $ 157.0 $ 152.9 $ 152.5
Costs and expenses......................... 108.9 114.5 108.7 106.5
Depreciation and amortization.............. 14.2 14.1 14.4 14.0
------- ------- ------- -------
Operating income......................... 28.0 28.4 29.8 32.0
Equity in net earnings (losses) of
unconsolidated
affiliates:
Grupo TFM................................ 0.2 1.8 (2.1) (3.1)
Other.................................... (0.3) 0.3 0.2 0.1
Interest expense........................... (14.3) (15.3) (15.0) (15.0)
Other, net................................. (0.7) 3.0 3.9 3.2
------- ------- ------- -------
Income from continuing operations before
income taxes............................ 12.9 18.2 16.8 17.2
Income tax provision....................... 5.1 6.6 7.4 8.0
------- ------- ------- -------
Income from continuing operations........ 7.8 11.6 9.4 9.2
Income from discontinued operations, net
of income taxes......................... 22.3 43.6 49.3 37.0
------- ------- ------- -------
Net Income............................... $ 30.1 $ 55.2 $ 58.7 $ 46.2
======= ======= ======= =======
Per Share Data: (i)
Basic earnings (loss) per share
Continuing operations................... 0.14 0.21 0.17 0.17
Discontinued operations................. 0.41 0.79 0.90 0.68
------- ------- ------- -------
Total Basic earnings per share........... $ 0.55 $ 1.00 $ 1.07 $ 0.85
======= ======= ======= =======
Diluted earnings (loss) per share
Continuing operations................... 0.14 0.20 0.17 0.16
Discontinued operations................. 0.37 0.77 0.85 0.66
------- ------- ------- -------
Total Diluted earnings per share......... $ 0.51 $ 0.97 $ 1.02 $ 0.82
======= ======= ======= =======
Dividends per share:
Preferred................................ $ .25 $ .25 $ .25 $ .25
Common................................... $ .08 $ .08 $ .08 $ .08
Stock Price Ranges:
Preferred--High.......................... $17.000 $17.750 $18.000 $18.000
--Low.................................... 14.000 15.250 16.000 16.625
Common--High............................. 99.126 114.876 99.626 92.000
--Low.................................... 46.000 58.000 79.250 52.500

F-46

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 15. Condensed Consolidating Financial Information

As discussed in Note 17, in September 2000 KCSR issued $200 million 9 1/2%
senior notes due 2008. These notes are unsecured obligations of KCSR, however,
they are also jointly and severally and fully and unconditionally guaranteed
on an unsecured senior basis by KCSI and certain of the subsidiaries (all of
which are wholly-owned) within the KCSI consolidated group. KCSI is currently
in the process of registering exchange notes with substantially identical
terms and the associated guarantees with the US Securities and Exchange
Commission (the SEC).

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

Condensed Consolidating Statements of Operations

September 30, 2000 (unaudited) (dollars in millions)
-----------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
------ ---------- ------------ ------------ ------------- ------------

Revenues................ $ -- $400.5 $46.1 $ 6.2 $ (15.4) $437.4
Costs and expenses...... 0.6 349.1 46.4 5.8 (15.4) 386.5
------ ------ ----- ------ ------- ------
Operating income
(loss)................ (0.6) 51.4 (0.3) 0.4 -- 50.9
Equity in net earnings
(losses) of
unconsolidated
affiliates and
subsidiaries........... 22.0 20.7 25.1 19.8 (65.5) 22.1
Interest expense........ (2.0) (53.5) (4.0) (1.0) 6.3 (54.2)
Other, net.............. 2.5 6.7 1.2 -- (5.6) 4.8
------ ------ ----- ------ ------- ------
Income (loss) from
continuing operations
before income taxes... 21.9 25.3 22.0 19.2 (64.8) 23.6
Income tax provision
(benefit).............. 0.1 1.4 (0.8) 1.1 -- 1.8
------ ------ ----- ------ ------- ------
Income (loss) from
continuing operations.. 21.8 23.9 22.8 18.1 (64.8) 21.8
Income (loss) from
discontinued
operations............. 363.8 -- -- 363.8 (363.8) 363.8
------ ------ ----- ------ ------- ------
Income (loss) before
extraordinary items.... 385.6 23.9 22.8 381.9 (428.6) 385.6
Extraordinary items, net
of income taxes........ (8.7) (1.1) (1.7) (1.7) 4.5 (8.7)
------ ------ ----- ------ ------- ------
Net income (loss)....... $376.9 $ 22.8 $21.1 $380.2 $(424.1) $376.9
====== ====== ===== ====== ======= ======

F-47

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

September 30, 1999 (unaudited) (dollars in millions)
-----------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
------ ---------- ------------ ------------ ------------- ------------

Revenues................ $ -- $408.5 $55.3 $ 8.1 $ (22.2) $449.7
Costs and expenses...... -- 342.8 61.6 8.8 (22.2) 391.0
------ ------ ----- ------ ------- ------
Operating income
(loss)................ -- 65.7 (6.3) (0.7) -- 58.7
Equity in net earnings
(losses) of
unconsolidated
affiliates and
subsidiaries........... 17.4 0.2 27.5 5.3 (42.1) 8.3
Interest expense........ (34.7) (26.5) (4.1) (13.7) 35.7 (43.3)
Other, net.............. 34.7 2.4 1.5 0.3 (35.7) 3.2
------ ------ ----- ------ ------- ------
Income (loss) from
continuing operations
before income taxes... 17.4 41.8 18.6 (8.8) (42.1) 26.9
Income tax provision
(benefit).............. -- 17.1 (3.1) (4.5) -- 9.5
------ ------ ----- ------ ------- ------
Income (loss) from
continuing operations.. 17.4 24.7 21.7 (4.3) (42.1) 17.4
Income (loss) from
discontinued
operations............. 214.6 -- -- 214.6 (214.6) 214.6
------ ------ ----- ------ ------- ------
Income (loss) before
extraordinary items.... 232.0 24.7 21.7 210.3 (256.7) 232.0
Extraordinary items, net
of income taxes........ -- -- -- -- -- --
------ ------ ----- ------ ------- ------
Net income (loss)....... $232.0 $ 24.7 $21.7 $210.3 $(256.7) $232.0
====== ====== ===== ====== ======= ======

December 31, 1999 (dollars in millions)
-----------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
------ ---------- ------------ ------------ ------------- ------------

Revenues................ $ -- $544.9 $73.4 $ 10.3 $ (27.2) $601.4
Costs and expenses...... 0.9 474.3 78.7 10.6 (27.2) 537.3
------ ------ ----- ------ ------- ------
Operating income
(loss)............... (0.9) 70.6 (5.3) (0.3) -- 64.1
Equity in net earnings
(losses) of
unconsolidated
affiliates and
subsidiaries........... 10.0 (5.0) 26.2 2.0 (28.0) 5.2
Interest expense........ (46.5) (35.2) (5.1) (19.3) 48.7 (57.4)
Other, net.............. 48.4 3.4 2.1 0.1 (48.7) 5.3
------ ------ ----- ------ ------- ------
Income (loss) from
continuing operations
before income taxes.. 11.0 33.8 17.9 (17.5) (28.0) 17.2
Income tax provision
(benefit).............. 0.8 15.8 (3.0) (6.6) -- 7.0
------ ------ ----- ------ ------- ------
Income (loss) from
continuing operations.. 10.2 18.0 20.9 (10.9) (28.0) 10.2
Income (loss) from
discontinued
operations............. 313.1 -- -- 313.1 (313.1) 313.1
------ ------ ----- ------ ------- ------
Income (loss) before
extraordinary items.... 323.3 18.0 20.9 302.2 (341.1) 323.3
Extraordinary items, net
of income taxes........ -- -- -- -- -- --
------ ------ ----- ------ ------- ------
Net income (loss)....... $323.3 $ 18.0 $20.9 $302.2 $(341.1) $323.3
====== ====== ===== ====== ======= ======

F-48

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998 (dollars in millions)
------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
------- ---------- ------------ ------------ ------------- ------------

Revenues................ $ -- $ 549.9 $ 87.4 $ 11.1 $ (34.9) $ 613.5
Costs and expenses...... -- 436.1 83.1 11.0 (34.9) 495.3
------- -------- -------- ------ ------- -------
Operating income
(loss)............... -- 113.8 4.3 0.1 -- 118.2
Equity in net earnings
(losses) of
unconsolidated
affiliates and
subsidiaries........... 41.3 (5.5) 55.7 (2.9) (91.5) (2.9)
Interest expense........ (53.6) (37.7) (2.9) (19.0) 53.6 (59.6)
Other, net.............. 50.3 3.6 1.9 3.9 (50.3) 9.4
------- -------- -------- ------ ------- -------
Income (loss) from
continuing operations
before income taxes.. 38.0 74.2 59.0 (17.9) (88.2) 65.1
Income tax provision
(benefit).............. -- 31.8 1.4 (6.1) -- 27.1
------- -------- -------- ------ ------- -------
Income (loss) from
continuing operations.. 38.0 42.4 57.6 (11.8) (88.2) 38.0
Income (loss) from
discontinued
operations............. 152.2 -- -- 152.2 (152.2) 152.2
------- -------- -------- ------ ------- -------
Income (loss) before
extraordinary items.... 190.2 42.4 57.6 140.4 (240.4) 190.2
Extraordinary items, net
of income taxes........ -- -- -- -- -- --
------- -------- -------- ------ ------- -------
Net income (loss)....... $ 190.2 $ 42.4 $ 57.6 $140.4 $(240.4) $ 190.2
======= ======== ======== ====== ======= =======

December 31, 1997 (dollars in millions)
------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
------- ---------- ------------ ------------ ------------- ------------

Revenues................ $ 3.2 $ 516.1 $ 78.0 $ 9.6 $ (33.7) $ 573.2
Costs and expenses...... 5.3 599.3 82.0 7.8 (30.3) 664.1
------- -------- -------- ------ ------- -------
Operating income
(loss)............... (2.1) (83.2) (4.0) 1.8 (3.4) (90.9)
Equity in net earnings
(losses) of
unconsolidated
affiliates and
subsidiaries........... (134.9) (11.3) (110.6) (12.6) 259.7 (9.7)
Interest expense........ (19.0) (39.7) (3.2) (9.7) 18.3 (53.3)
Other, net.............. 21.7 2.6 0.4 0.2 (21.7) 3.2
------- -------- -------- ------ ------- -------
Income (loss) from
continuing operations
before income taxes.. (134.3) (131.6) (117.4) (20.3) 252.9 (150.7)
Income tax provision
(benefit).............. (2.2) (10.6) (2.1) (3.7) -- (18.6)
------- -------- -------- ------ ------- -------
Income (loss) from
continuing operations.. (132.1) (121.0) (115.3) (16.6) 252.9 (132.1)
Income (loss) from
discontinued
operations............. 118.0 -- -- 118.0 (118.0) 118.0
------- -------- -------- ------ ------- -------
Income (loss) before
extraordinary items.... (14.1) (121.0) (115.3) 101.4 134.9 (14.1)
Extraordinary items, net
of income taxes........ -- -- -- -- -- --
------- -------- -------- ------ ------- -------
Net income (loss)....... $ (14.1) $ (121.0) $ (115.3) $101.4 $ 134.9 $ (14.1)
======= ======== ======== ====== ======= =======

F-49

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Condensed Consolidating Balance Sheets

September 30, 2000 (unaudited) (dollars in millions)
------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
-------- ---------- ------------ ------------ ------------- ------------

ASSETS:
Current assets........ $ 19.0 $ 178.1 $ 36.5 $ 9.7 $ (31.3) $ 212.0
Investments held for
operating purposes
and investments in
subsidiaries......... 654.0 437.6 661.5 345.5 (1,737.5) 361.1
Properties, net....... -- 1,214.6 94.4 2.3 -- 1,311.3
Intangibles and other
assets............... -- 30.7 14.6 0.2 (2.9) 42.6
Net assets of
discontinued
operations........... -- -- -- -- -- --
-------- -------- ------ -------- --------- --------
Total assets......... $ 673.0 $1,861.0 $807.0 $ 357.7 $(1,771.7) $1,927.0
======== ======== ====== ======== ========= ========
LIABILITIES AND EQUITY:
Current liabilities... $ 8.0 $ 194.7 $ 31.3 $ 12.6 $ (31.3) $ 215.3
Long-term debt........ 1.6 657.1 7.9 5.1 -- 671.7
Payable to affiliates. 3.6 -- 32.7 -- (36.3) --
Deferred income taxes. 13.0 293.3 13.7 3.1 (2.9) 320.2
Other Liabilities..... 7.3 61.9 11.1 -- -- 80.3
Stockholders equity... 639.5 654.0 710.3 336.9 (1,701.2) 639.5
-------- -------- ------ -------- --------- --------
Total Liabilities and
Equity.............. $ 673.0 $1,861.0 $807.0 $ 357.7 $(1,771.7) $1,927.0
======== ======== ====== ======== ========= ========

December 31, 1999 (dollars in millions)
------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
-------- ---------- ------------ ------------ ------------- ------------

ASSETS:
Current assets........ $ 9.4 $ 165.6 $ 30.8 $ 19.4 $ (16.7) $ 208.5
Investments held for
operating purposes
and investments in
subsidiaries......... 1,138.2 55.7 442.6 290.4 (1,589.8) 337.1
Properties, net....... -- 1,180.6 94.2 2.6 -- 1,277.4
Intangibles and other
assets............... 6.6 14.1 16.1 0.2 (2.6) 34.4
Net assets of
discontinued
operations........... 814.6 -- -- 814.6 (814.6) 814.6
-------- -------- ------ -------- --------- --------
Total assets......... $1,968.8 $1,416.0 $583.7 $1,127.2 $(2,423.7) $2,672.0
======== ======== ====== ======== ========= ========
LIABILITIES AND EQUITY:
Current liabilities... $ 26.5 $ 202.7 $ 30.0 $ 11.7 $ (16.7) $ 254.2
Long-term debt........ 647.8 58.6 38.3 5.3 -- 750.0
Payable to affiliates. 3.9 394.2 35.6 335.7 (769.4) --
Deferred income taxes. 4.2 280.9 13.3 1.6 (2.6) 297.4
Other Liabilities..... 3.3 71.8 12.2 -- -- 87.3
Stockholders equity... 1,283.1 407.8 454.3 772.9 (1,635.0) 1,283.1
-------- -------- ------ -------- --------- --------
Total Liabilities and
Equity.............. $1,968.8 $1,416.0 $583.7 $1,127.2 $(2,423.7) $2,672.0
======== ======== ====== ======== ========= ========

F-50

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1998 (dollars in millions)
------------------------------------------------------------------------
Non-
Subsidiary Guarantor Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
-------- ---------- ------------ ------------ ------------- ------------

ASSETS:
Current assets........ $ 1.7 $ 173.7 $ 35.2 $ 12.4 $ (12.8) $ 210.2
Investments held for
operating purposes
and investments in
subsidiaries ........ 1,118.5 76.0 378.5 307.4 (1,552.5) 327.9
Properties, net....... -- 1,124.0 91.1 14.2 -- 1,229.3
Intangibles and other
assets............... 2.9 13.6 18.9 1.5 (7.5) 29.4
Net assets of
discontinued
operations........... 540.2 -- -- 540.2 (540.2) 540.2
-------- -------- ------ ------ --------- --------
Total assets........ $1,663.3 $1,387.3 $523.7 $875.7 $(2,113.0) $2,337.0
======== ======== ====== ====== ========= ========
LIABILITIES AND EQUITY:
Current liabilities... $ 12.2 $ 189.9 $ 28.8 $ 9.7 $ (32.1) $ 208.5
Long-term debt........ 712.5 68.6 38.8 5.7 -- 825.6
Payable to affiliates. 3.8 403.6 (0.5) 318.8 (725.7) --
Deferred income taxes. -- 265.2 15.7 8.9 (4.6) 285.2
Other Liabilities..... 3.5 70.0 13.4 3.0 (3.4) 86.5
Stockholders equity... 931.3 390.0 427.5 529.6 (1,347.2) 931.2
-------- -------- ------ ------ --------- --------
Total Liabilities
and Equity......... $1,663.3 $1,387.3 $523.7 $875.7 $(2,113.0) $2,337.0
======== ======== ====== ====== ========= ========

Condensed Consolidating Statements of Cash Flows

September 30, 2000 (unaudited) (dollars in millions)
-------------------------------------------------------------------------
Subsidiary Guarantor Non-Guarantor Consolidating Consolidated
Parent Issuer Subsidiaries Subsidiaries Adjustments KCSI
------- ---------- ------------ ------------- ------------- ------------

Net cash flows provided
by (used for) operating
activities:............ $ (11.8) $ 57.8 $10.6 $13.4 $ (17.7) $ 52.3
------- ------ ----- ----- ------- -------
Investing activities:
Property acquisitions.. -- (74.7) (4.3) -- -- (79.0)
Investments in and
loans to affiliates... (32.3) -- -- (4.4) 32.9 (3.8)
Repayment of loans to
affiliates............ 544.8 -- -- -- (544.8) --
Other, net............. -- 2.5 1.9 -- 3.9 8.3
------- ------ ----- ----- ------- -------
Net.................. 512.5 (72.2) (2.4) (4.4) (508.0) (74.5)
------- ------ ----- ----- ------- -------
Financing activities:
Proceeds from issuance
of long-term debt..... 125.0 892.0 -- -- -- 1,017.0
Repayment of long-term
debt.................. (648.4) (291.6) (29.4) (0.2) -- (969.6)
Proceeds from loans
from affiliates....... -- 46.2 31.6 -- (77.8) --
Repayment of loans
from affiliates....... -- (577.6) -- -- 577.6 --
Debt issuance costs.... -- (17.6) -- -- -- (17.6)
Proceeds from stock
plans................. 17.8 -- -- -- -- 17.8
Stock repurchased...... -- -- -- -- -- --
Cash dividends paid.... (4.8) (15.3) (4.8) (8.8) 28.9 (4.8)
Other, net............. 4.4 (2.7) (1.3) -- (2.7) (2.3)
------- ------ ----- ----- ------- -------
Net.................. (506.0) 33.4 (3.9) (9.0) 526.0 40.5
------- ------ ----- ----- ------- -------
Cash and equivalents:...
Net increase
(decrease)............ (5.3) 19.0 4.3 0.3 -- 18.3
At beginning of
period................ 5.5 4.2 1.9 0.3 -- 11.9
------- ------ ----- ----- ------- -------
At end of period....... $ 0.2 $ 23.2 $ 6.2 $ 0.6 $ -- $ 30.2
======= ====== ===== ===== ======= =======

F-51

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Net cash flows provided
by (used for) operating
activities: $ 49.3 $112.2 $ 4.2 $(2.6) $ 2.3 $165.4
------ ------ ------ ----- ------ ------
Investing activities:
Property acquisitions.. -- (57.9) (7.7) -- -- (65.6)
Investments in and
loans to affiliates... (0.3) -- (1.3) -- 0.3 (1.3)
Repayment of loans to
affiliates............ 62.7 -- -- -- (46.1) 16.6
Other, net............. -- (1.3) (0.3) -- (2.2) (3.8)
------ ------ ------ ----- ------ ------
Net.................. 62.4 (59.2) (9.3) -- (48.0) (54.1)
------ ------ ------ ----- ------ ------
Financing activities:
Proceeds from issuance
of long-term debt..... 21.8 -- -- -- -- 21.8
Repayment of long-term
debt.................. (62.1) (4.5) (0.1) -- -- (66.7)
Proceeds from loans
from affiliates....... -- -- 5.9 -- (5.9) --
Repayment of loans
from affiliates....... -- (46.1) -- (0.2) 46.3 --
Debt issuance costs.... -- -- -- -- -- --
Proceeds from stock
plans................. 32.2 -- -- -- -- 32.2
Stock repurchased...... (24.6) -- -- -- -- (24.6)
Cash dividends paid.... (17.8) -- -- -- -- (17.8)
Other, net............. (5.2) 2.5 -- -- 9.3 6.6
------ ------ ------ ----- ------ ------
Net.................. (55.7) (48.1) 5.8 (0.2) 49.7 (48.5)
------ ------ ------ ----- ------ ------
Cash and equivalents:...
Net increase
(decrease)............ 56.0 4.9 0.7 (2.8) 4.0 62.8
At beginning of year... -- 3.4 2.7 3.5 (4.0) 5.6
------ ------ ------ ----- ------ ------
At end of period....... $ 56.0 $ 8.3 $ 3.4 $ 0.7 $ (0.0) $ 68.4
====== ====== ====== ===== ====== ======

Net cash flows provided
by (used for) operating
activities: $ 21.7 $137.1 $ 3.6 $ 0.6 $ 15.0 $178.0
------ ------ ------ ----- ------ ------
Investing activities:
Property acquisitions.. -- (97.8) (8.4) -- -- (106.2)
Investments in and
loans to affiliates... (3.9) 0.1 (3.6) -- 3.5 (3.9)
Repayment of loans to
affiliates............ 55.6 -- -- -- (39.0) 16.6
Other, net............. 0.1 2.0 0.5 0.1 (6.4) (3.7)
------ ------ ------ ----- ------ ------
Net.................. 51.8 (95.7) (11.5) 0.1 (41.9) (97.2)
------ ------ ------ ----- ------ ------
Financing activities:
Proceeds from issuance
of long-term debt..... 21.8 -- -- -- -- 21.8
Repayment of long-term
debt.................. (86.8) (10.2) (0.3) (0.2) -- (97.5)
Proceeds from loans
from affiliates....... -- -- 8.9 -- (8.9) --
Repayment of loans
from affiliates....... -- (37.1) -- (1.9) 39.0 --
Debt issuance costs.... (4.2) -- -- -- -- (4.2)
Proceeds from stock
plans................. 37.0 -- -- -- -- 37.0
Stock repurchased...... (24.6) -- -- -- -- (24.6)
Cash dividends paid.... (17.6) -- -- -- -- (17.6)
Other, net............. 6.4 6.7 (1.5) (1.8) 0.8 10.6
------ ------ ------ ----- ------ ------
Net.................. (68.0) (40.6) 7.1 (3.9) 30.9 (74.5)
------ ------ ------ ----- ------ ------
Cash and equivalents:...
Net increase
(decrease)............ 5.5 0.8 (0.8) (3.2) 4.0 6.3
At beginning of year... -- 3.4 2.7 3.5 (4.0) 5.6
------ ------ ------ ----- ------ ------
At end of year......... $ 5.5 $ 4.2 $ 1.9 $ 0.3 $ (0.0) $ 11.9
====== ====== ====== ===== ====== ======

F-52

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Net cash flows provided
by (used for) operating
activities:............ $ 23.4 $ 86.0 $ 34.8 $ 8.5 $(11.1) $ 141.6
------- ------ ------ ------- ------ -------
Investing activities:
Property acquisitions.. -- (64.3) (5.4) (0.2) -- (69.9)
Investments in and
loans to affiliates... -- -- (0.7) -- -- (0.7)
Repayment of loans to
affiliates............ 41.0 -- -- -- (41.0) --
Other, net............. 0.6 6.6 1.0 0.9 -- 9.1
------- ------ ------ ------- ------ -------
Net.................. 41.6 (57.7) (5.1) 0.7 (41.0) (61.5)
------- ------ ------ ------- ------ -------
Financing activities:
Proceeds from issuance
of long-term debt..... 146.7 5.0 -- -- -- 151.7
Repayment of long-term
debt.................. (213.5) (15.2) (3.1) (0.2) -- (232.0)
Proceeds from loans
from affiliates....... -- 13.0 -- -- (13.0) --
Repayment of loans
from affiliates....... -- (37.6) (13.6) (9.5) 60.7 --
Debt issuance costs.... -- -- -- -- -- --
Proceeds from stock
plans................. 17.9 -- -- -- -- 17.9
Stock repurchased...... -- -- -- -- -- --
Cash dividends paid.... (17.8) -- (22.5) -- 22.5 (17.8)
Other, net............. 1.7 8.9 (0.7) -- (9.1) 0.8
------- ------ ------ ------- ------ -------
Net.................. (65.0) (25.9) (39.9) (9.7) 61.1 (79.4)
------- ------ ------ ------- ------ -------
Cash and equivalents:
Net increase
(decrease)............ -- 2.4 (10.2) (0.5) 9.0 0.7
At beginning of year... -- 1.0 12.9 4.0 (13.0) 4.9
------- ------ ------ ------- ------ -------
At end of year......... $ -- $ 3.4 $ 2.7 $ 3.5 $ (4.0) $ 5.6
======= ====== ====== ======= ====== =======

Net cash flows provided
by (used for) operating
activities:............ $ 44.7 $132.2 $ 21.2 $ (4.5) $ (8.2) $ 185.4
------- ------ ------ ------- ------ -------
Investing activities:
Property acquisitions.. -- (67.0) (9.8) -- -- (76.8)
Investments in and
loans to affiliates... (295.9) -- -- (291.8) 291.8 (295.9)
Repayment of loans to
affiliates............ 61.8 -- -- -- (61.8) --
Other, net............. (2.1) 10.7 (0.3) (0.4) 0.1 8.0
------- ------ ------ ------- ------ -------
Net.................. (236.2) (56.3) (10.1) (292.2) 230.1 (364.7)
------- ------ ------ ------- ------ -------
Financing activities:
Proceeds from issuance
of long-term debt..... 339.5 -- -- -- -- 339.5
Repayment of long-term
debt.................. (98.3) (7.2) (4.6) -- -- (110.1)
Proceeds from loans
from affiliates....... -- -- -- 300.2 (300.2) --
Repayment of loans
from affiliates....... -- (61.8) -- -- 61.8 --
Debt issuance costs.... -- -- -- -- -- --
Proceeds from stock
plans................. 20.3 -- -- -- -- 20.3
Stock repurchased...... (50.2) -- -- -- -- (50.2)
Cash dividends paid.... (15.2) -- -- -- -- (15.2)
Other, net............. (7.4) (6.1) (0.5) (0.7) 14.5 (0.2)
------- ------ ------ ------- ------ -------
Net.................. 188.7 (75.1) (5.1) 299.5 (223.9) 184.1
------- ------ ------ ------- ------ -------
Cash and equivalents:
Net increase
(decrease)............ (2.8) 0.8 6.0 2.8 (2.0) 4.8
At beginning of year... 2.8 0.2 6.9 1.2 (11.0) 0.1
------- ------ ------ ------- ------ -------
At end of year......... $ 0.0 $ 1.0 $ 12.9 $ 4.0 $(13.0) $ 4.9
======= ====== ====== ======= ====== =======

F-53

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

As of September 30, 2000, KCSL (a holding company for the Company's
subsidiaries including KCSR) was a guarantor of KCSR's $200 million 9 1/2%
senior notes due 2008. The accompanying condensed consolidating financial
information reflects the balances and amounts associated with KCSL in the
"guarantor subsidiaries" columns for all periods presented. Effective December
31, 2000, KCSL was merged with and into KCSI (the KCSL/KCSI merger) at which
time KCSL ceased to be a guarantor and all of the assets and liabilities of
KCSL were transferred to KCSI at carrying value. KCSI is also a guarantor of
the $200 million notes referred to above.

The balances and amounts for KCSL which are included in the "guarantor
subsidiaries" column above are summarized below (in millions):

December 31,
------------- September 30,
1988 1999 2000
------ ------ -------------

Assets.............................................. $383.5 $439.6 $663.8
====== ====== ======
Liabilities......................................... $ 6.4 $ 38.5 $ 9.9
Stockholders Equity................................. 377.1 401.1 653.9
------ ------ ------
Total Liabilities and Stockholders Equity......... $383.5 $439.6 $663.8
====== ====== ======

For the
nine months
ended
For the years ended September
December 31, 30,
-------------------- -----------
1997 1998 1999 1999 2000
------- ----- ----- ----- -----

Revenues...................................... $ -- $ -- $ -- $ -- $ --
Expenses...................................... $ 3.6 $11.0 $11.8 $ 9.4 $ 7.0
Equity earnings (losses) from unconsolidated
subsidiaries and affiliates.................. $(110.9) $55.4 $26.2 $27.4 $23.3
Net income (loss)........................... $(113.2) $48.9 $18.3 $20.7 $18.7

KCSL's balances and amounts are primarily comprised of investments in
subsidiaries, equity in the earnings (losses) of those subsidiaries and other
intercompany activity which are eliminated in the consolidation process. Due
to the fact that KCSL (prior to the KCSL/KCSI merger) was wholly-owned by
KCSI, the KCSL/KCSI merger will not have an impact on the "parent" column
stockholders equity or net income (loss). Additionally, the KCSL/KCSI merger
will have no impact on the "issuer" or "non-guarantor subsidiaries" columns
nor on the KCSI consolidated financial statements.

Note 16. Subsequent Events

Debt Refinancing

. During the third quarter of 2000, Grupo TFM accomplished a refinancing of
approximately $285 million of its Senior Secured Credit Facility through the
issuance of a U.S. Commercial Paper ("USCP") program backed by a letter of
credit. The USCP is a 2-year program for up to a face value of $310 million.
The average discount rate for the first issuance was 6.54%. This refinancing
provides the ability for Grupo TFM to pay dividends to both the Company and
Transportacion Maritima Mexicana, S.A. de C.V. ("TMM").

As a result of this refinancing, Grupo TFM recorded approximately $9.2
million in pretax extraordinary debt retirement costs. During the third
quarter of 2000, KCSI reported $1.7 million (net of income taxes of $0.1
million) as its proportionate share of these costs as an extraordinary
item.

F-54

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

. In preparation for the Spin-off, KCSI re-capitalized its debt structure in
January 2000 through a series of transactions as follows:

Bond Tender and Other Debt Repayment. On December 6, 1999, KCSI commenced
offers to purchase and consent solicitations with respect to any and all of
its outstanding 7.875% Notes due July 1, 2002, 6.625% Notes due March 1, 2005,
8.8% Debentures due July 1, 2022, and 7% Debentures due December 15, 2025
(collectively "Debt Securities" or "notes and debentures").

Approximately $398.4 million of the $400 million outstanding Debt
Securities were validly tendered and accepted by KCSI. Total consideration
paid for the repurchase of these outstanding notes and debentures was $401.2
million. Funding for the repurchase of these Debt Securities and for the
repayment of $264 million of borrowings under then-existing revolving credit
facilities was obtained from new credit facilities (the "KCS Credit
Facilities" and the Stilwell Credit Facility), each of which was entered into
on January 11, 2000. These credit facilities, as described further below,
provide for total commitments of $950 million.

In first quarter 2000, the Company reported an extraordinary loss on the
extinguishment of the Company's notes and debentures of approximately $5.9
million (net of income taxes of approximately $3.2 million).

KCS Credit Facilities. The KCS Credit Facilities provide for a total
commitment of $750 million, comprised of three separate term loans totaling
$600 million and a revolving credit facility available until January 11, 2006
("KCS Revolver"). The term loans are comprised of the following: $200 million
which was due January 11, 2001 prior to its refinancing (see discussion
above); $150 million due December 30, 2005 and $250 million due December 30,
2006. The availability under the KCS Revolver is $150 million and will be
reduced to $100 million on January 2, 2001. Letters of credit are also
available under the KCS Revolver up to a limit of $15 million. Borrowings
under the KCS Credit Facilities are secured by substantially all KCSI's
assets.

On January 11, 2000, KCSR borrowed the full amount ($600 million) of the
term loans and used the proceeds to repurchase the Debt Securities, retire
other debt obligations and pay related fees and expenses. No funds were
initially borrowed under the KCS Revolver. Proceeds of future borrowings under
the KCS Revolver are to be used for working capital and for other general
corporate purposes. The letters of credit under the KCS Revolver may be used
for general corporate purposes.

The KCS Credit Facilities require the payment to the banks of a commitment
fee of 0.50% per annum on the average daily, unused amount of the KCS
Revolver. Additionally a fee equal to a per

F-55

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

annum rate equal to 0.25% plus the applicable margin for LIBOR priced
revolving loans will be paid on any letter of credit issued under the KCS
Credit Facilities. The KCS Credit Facilities contain certain covenants, among
others, as follows: i) restricts the payment of cash dividends to common
stockholders; ii) limits annual capital expenditures; iii) requires hedging
instruments with respect to at least 50% of the outstanding balances of each
of the term loans maturing in 2005 and 2006 to mitigate interest rate risk
associated with the variable rate debt; and iv) provides leverage ratio and
interest coverage ratio requirements typical of this type of debt instrument.
Additionally, these term loans are subject to a mandatory prepayment with,
among other things: i) 100% of the net proceeds of certain asset sales or
other dispositions of property, the sale or issuance of certain indebtedness
or equity securities and certain insurance recoveries; ii) 75% of the excess
cash flow (as defined in the KCS Credit Facilities) if the term loan maturing
in 2001 has not been paid in full prior to the end of 2000 or 50% of the
excess cash flow if it has been paid in full prior to the end of 2000. These
covenants, along with other provisions could restrict maximum utilization of
the facility.

Issue costs relating to the KCS Credit Facility of approximately $17.6
million were deferred and are being amortized on a straight-line basis (the
difference between the straight-line method and interest method of
amortization is not material) over the respective term of the loans. In
conjunction with the third quarter 2000 refinancing of the $200 million term
loan previously due January 11, 2001, approximately $1.8 million of these
deferred costs were immediately recognized. After consideration of normal
amortization and this $1.8 million write-off, the remaining balance of these
deferred costs was approximately $11.8 million at September 30, 2000.

In accordance with the provision requiring the Company to manage its
interest rate risk through hedging activity, the Company has entered into five
interest rate cap agreements for an aggregate notional amount of $200 million
expiring on various dates in 2002. The interest rate caps are linked to LIBOR.
$100 million of the notional amount provides a cap on the Company's interest
rate of 7.25% plus the applicable spread, while $100 million limits the
interest rate to 7% plus the applicable spread. Counterparties to the interest
rate cap agreements are major financial institutions who also participate in
the KCS Credit Facilities. Credit loss from counterparty non-performance is
not anticipated.

Stilwell Credit Facility. On January 11, 2000, KCSI also entered into a new
$200 million 364-day senior unsecured competitive advance/revolving credit
facility. KCSI borrowed $125 million under this facility and used the proceeds
to retire debt obligations as discussed above. Stilwell assumed this credit
facility, including the $125 million borrowed thereunder, and upon such
assumption, KCSI was released from all obligations thereunder. Stilwell repaid
the $125 million in March 2000. The Company no longer has any borrowing
capacity under this credit facility.

New Compensation Program. In connection with the Spin-off, KCSI adopted a
new compensation program (the "Compensation Program") under which (1) certain
senior management employees were granted performance based KCSI stock options
and (2) all management employees and those directors of KCSI who are not our
employees (the "Outside Directors") became eligible to purchase a specified
number of KCSI restricted shares and were granted a specified number of KCSI
stock options for each restricted share purchased.

The performance stock options have an exercise price of $5.75 per share,
which was the mean trading price of KCSI Common stock on the New York Stock
Exchange (the "NYSE") on July 13, 2000. These options expire at the end of 10
years, subject to certain early termination events. These options will vest
and become exercisable in equal installments as KCSI's stock price achieves
certain thresholds. One third of these options become exercisable upon meeting
each threshold. Three years

F-56

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

from the date of grant, options not then exercisable become exercisable and
then expire thirty days thereafter. Vesting will accelerate in the event of a
KCSI board-approved change in control of KCSI, death or disability.

The purchase price of the restricted shares, and the exercise price of the
stock options granted in connection with the purchase of restricted shares, is
based on the mean trading price of KCSI Common stock on the NYSE on the date
the employee or Outside Director purchased restricted shares under the
Compensation Program. Each eligible employee and Outside Director was allowed
to purchase the restricted shares offered under the Compensation Program on
one date out of a selection of dates offered. With respect to management
employees, the number of shares available for purchase and the number of
options granted in connection with shares purchased were based on the
compensation level of the employees. Each Outside Director was granted the
right to purchase up to 3,000 restricted shares of KCSI, with two KCSI stock
options granted in connection with each restricted share purchased. Shares
purchased are restricted from sale and the options are not exercisable for a
period of three years for senior management and the Outside Directors and two
years for other management employees. KCSI provided senior management and the
Outside Directors with the option of using a sixty-day interest-bearing full
recourse note to purchase these restricted shares. These loans accrued
interest at 6.49% and were all paid in full by September 11, 2000.

Dividends Suspended for KCSI Common Stock. During the first quarter of
2000, the Company's Board of Directors announced that, based upon a review of
the Company's dividend policy in conjunction with the KCS Credit Facilities
discussed above and in light of the anticipated Spin-off, it decided to
suspend Common stock dividends of KCSI under the then-existing structure of
the Company. This complies with the terms and covenants of the KCS Credit
Facilities. It is not anticipated that KCSI will make any cash dividend
payments to its common stockholders for the foreseeable future.

Cash Flow Presentation of Income Tax Benefit Realized upon Exercise of
Nonqualified Stock Options. In July 2000, the EITF released Issue No. 00-15,
"Classification in the Statement of Cash Flows of the Income Tax Benefit
Realized by a Company upon Employee Exercise of a Nonqualified Stock Option"
("EITF 00-15"). Companies receive an income tax deduction for the difference
between the exercise price and the market price of a nonqualified stock option
upon exercise by the employee. There is diversity in practice as some
companies classify this tax benefit as an operating cash flow in the statement
of cash flows, while other companies classify it as a financing activity. KCSI
has historically classified this tax benefit as a financing activity in the
statement of cash flows. The consensus reached by EITF 00-15 indicates that
the income tax benefit realized upon employee exercise of nonqualified stock
options should be classified in the operating section of the statement of cash
flows. This consensus was effective for quarters ending after July 20, 2000
and comparative cash flow statements must be restated. The Company has adopted
the provisions of EITF 00-15 which resulted in a reclassification of related
cash flows provided by financing activities to cash flows provided by
operating activities for each period presented.

F-57

KANSAS CITY SOUTHERN INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 17. Litigation and Debt Refinancing Updates

Duncan Case. On November 3, 1999, the Third Circuit Court of Appeals in
Louisiana affirmed the judgment. Subsequently KCSR sought and obtained review
of the case in the Supreme Court of Louisiana. On October 30, 2000 the Supreme
Court of Louisiana entered its order affirming in part and reversing in part
the judgment. The net effect of the Louisiana Supreme Court action was to
reduce the allocation of negligence to KCSR and reduce the judgment, with
interest, against KCSR from approximately $28 million to approximately $14.2
million (approximately $9.7 million of damages and $4.5 million of interest),
which is in excess of KCSR's insurance coverage of $10 million for this case.
KCSR filed an application for rehearing in the Supreme Court of Louisiana
which was denied on January 5, 2001. KCSR then sought a stay of judgment in
the Louisiana court. The Louisiana court denied the stay application on
January 12, 2001. KCSR is currently evaluating its options of settling this
case or seeking relief in the United States Supreme Court.

The Company had previously recorded a liability of approximately $3.0
million for this case. Although management believes the Company has
meritorious defenses and will continue to seek relief from the judgment,
management believes, based on the Supreme Court of Louisiana's decision, that
it is prudent to record an additional liability of $11.2 million and a
receivable in the amount of $7.0 million representing the amount of the
insurance coverage. This resulted in recording $4.2 million of net operating
expense in the accompanying consolidated financial statements for the period
ended September 30, 2000.

Jaroslawicz Class Action. On October 3, 2000, a lawsuit was filed in the
New York state Supreme Court purporting to be a class action on behalf of our
preferred shareholders, and naming us, our Board of Directors and Stilwell
Financial Inc. as defendants. This lawsuit seeks a declaration that the Spin-
off was a defacto liquidation of us, alleges violation of directors' fiduciary
duties to the preferred shareholders and also seeks a declaration that the
preferred shareholders are entitled to receive the par value of their shares
and other relief. The Company filed a motion to dismiss with prejudice in the
New York State Supreme Court on December 22, 2000, but has not received a
ruling on this motion. The Company and its counsel believe the suit to be
groundless and will defend the matter vigorously.

Debt Refinancing. During the third quarter of 2000, the Company completed a
$200 million private offering of debt securities through its wholly owned
subsidiary, The Kansas City Southern Railway Company ("KCSR"). The offering,
completed pursuant to Rule 144A under the Securities Act of 1933 in the United
States and Regulation S outside the United States, consisted of 8-year Senior
Unsecured Notes. The Notes bear a fixed annual interest rate of 9.5% and are
due on October 1, 2008. These Notes contain certain covenants typical of this
type of debt instrument. Net proceeds from the offering of $196.5 million were
used to refinance existing bank term debt, which was scheduled to mature on
January 11, 2001 (see Note 16). Costs related to the issuance of these notes
of approximately $4.1 million were deferred and are being amortized over the
eight-year term of the Notes.

In connection with this refinancing, the Company reported an extraordinary
loss on the extinguishment of the bank term debt due January 11, 2001. The
extraordinary loss was $1.1 million (net of income taxes of $0.7 million).

F-58

$200,000,000
[KCS LOGO].....................................................................

The Kansas City Southern Railway Company

Offer to Exchange All Outstanding
9 1/2% Senior Notes Due 2008
For 9 1/2% Senior Notes Due 2008,
Which Have Been Registered Under
the Securities Act of 1933

- -------------------------------------------------------------------------------

We have not authorized anyone to give you any information or to make any
representations as to matters not stated in this prospectus. If you are given
any information or representations about these matters that is not discussed
in this prospectus, you must not rely on that information. This prospectus is
not an offer to sell or a solicitation of an offer to buy securities anywhere
or to anyone where or to whom we are not permitted to offer or sell securities
under applicable law. The delivery of this prospectus does not, under any
circumstances, mean that there has not been a change in our affairs since the
date of this prospectus. It also does not mean that the information in this
prospectus is correct after this date.

- -------------------------------------------------------------------------------

Until , 2001 (90 days after the date of this prospectus),
all dealers effecting transactions in the Exchange Notes, whether or not
participating in this exchange offer, may be required to deliver a prospectus.

- -------------------------------------------------------------------------------

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20. Indemnification of Directors and Officers

Registrants Incorporated or Organized Under Delaware Law

KCSI, SIS Bulk Holding, Inc., PABTEX, L.P., KCS Transportation Company,
Mid-South Microwave, Inc., Southern Industrial Services, Inc. and Trans-Serve,
Inc. are each incorporated or organized under the laws of the State of
Delaware. Section 145 of the General Corporation Law of the State of Delaware
(the "Delaware Statute") provides that a Delaware corporation may indemnify
any persons who are, or are threatened to be made, parties to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding"), other than an action by or
in the right of such corporation, by reason of the fact that such person is or
was an officer, director, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise (an "indemnified capacity"). The
indemnity may include expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding, provided such person acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the corporation's best interests and, with respect to any criminal action
or proceeding, had no reasonable cause to believe that his conduct was
illegal. Similar provisions apply to actions brought by or in the right of the
corporation, except that no indemnification shall be made without judicial
approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director has actually
and reasonably incurred. Section 145 of the Delaware Statute further
authorizes a corporation to purchase and maintain insurance on behalf of any
indemnified person against any liability asserted against him and incurred by
him in any indemnified capacity, or arising out of his status as such,
regardless of whether the corporation would otherwise have the power to
indemnify him under the Delaware Statute.

Section 17-108 of the Delaware Revised Uniform Limited Partnership Act
provides that, subject to such standards and restrictions as may be set forth
in the partnership agreement, a limited partnership has the power to indemnify
any partner or other person from and against any and all claims and demands
whatsoever.

The bylaws of KCSI provide that each person who, at any time is, or shall
have been, a director, officer, employee or agent of the KCSI, 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 KCSI, or served at the request of KCSI 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 and the bylaws of KCS Transportation
Company provide that the directors and officers of the corporation shall be
indemnified to the maximum extent permitted by law and that expenses incurred
by a director or officer in defending a civil or criminal action, suit or
proceeding shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of the director or officer to repay such amount if it is
ultimately determined that the director or officer is not entitled to be
indemnified by the corporation as authorized by the Delaware Statute. The
certificate of incorporation of KCS Transportation Company also provides that
the corporation may maintain insurance, at its expense, to

II-1

protect itself and any person serving in an indemnified capacity against such
expense, liability or loss, whether or not the corporation would have the
power to indemnify such person against such expense, liability or loss under
the Delaware Statute.

The bylaws of Mid-South Microwave, Inc. provide that it has the power to
indemnify to the full extent authorized by law any person made or threatened
to be made a party to any action, suit or proceeding, whether criminal, civil,
administrative or investigative, by reason of the fact that he, his testator
or intestate is or was a director, officer or employee of the corporation or
any predecessor of the corporation or serves or served any other enterprise as
director, officer or employee at the request of the corporation or any
predecessor of the corporation.

The certificate of incorporation and bylaws of Southern Industrial
Services, Inc. provide that each person who, at any time is, or shall have
been, a director, officer, employee or agent of the corporation, and who was
or is a party, or is threatened to be made a party, to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is, or was, a
director, officer, employee or agent of the corporation, or served at the
request of the corporation as a director, officer, employee, trustee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
shall be indemnified against expense (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him
in connection with any such action, suit or proceeding to the full extent
provided under Section 145 of the Delaware Statute. The certificate of
incorporation provides that the right to indemnification is a contractual
right and includes the right to be paid by the corporation for expenses
incurred in defending any such proceeding in advance of its final disposition
upon delivery to the corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it is determined
ultimately that such director or officer is not entitled to be indemnified.

The certificate of incorporation of SIS Bulk Holding, Inc. provides that
the corporation shall, to the fullest extent permitted by law, indemnify any
and all officers and directors of the corporation, and may, to the fullest
extent permitted by law or to such lesser extent as is determined in the
discretion of the corporation's Board of Directors, indemnify and advance
expenses to any and all other persons whom it shall have power to indemnify,
from and against all expenses, liabilities or other matters arising out of
their status as such or their acts, omissions or services rendered in such
capacities. The certificate of incorporation further provides that the
corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against him and incurred by him in
such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability.

The certificate of incorporation of each of KCSI, KCS Transportation
Company, Southern Industrial Services, Inc. and SIS Bulk Holding, Inc.
provides that to the fullest extent permitted by the Delaware Statute and any
amendments thereto, no director of the corporation shall be liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director.

The Agreement of Limited Partnership (the "Partnership Agreement") of
PABTEX, L.P. provides that the partnership, its receiver or its trustee shall
indemnify and pay all judgments and claims against the general partner and its
representatives relating to any liability or damage incurred by reason of any
act performed or omitted to be performed by the general partner and its
representatives in connection with the business of the partnership, including
attorneys' fees incurred by the general partner and its representatives in
connection with the defense of any action based on any such act or omission,
which attorneys' fees may be paid as incurred, including all liabilities under
federal and state securities laws (including the Securities Act) as permitted
by law. The Partnership Agreement further provides that in

II-2

the event of any action by the limited partner against the general partner
and/or its representatives, including a partnership derivative suit, the
partnership shall indemnify and pay all expenses of the general partner and
its representatives, including attorneys' fees incurred in the defense of such
action, if the general partner and its representatives are successful in such
action. In addition, the Partnership Agreement provides that the partnership
shall indemnify and pay all expenses, costs or liabilities of the general
partner and its representatives who for the benefit of the partnership makes
any deposit, acquires any option, or makes any other similar payment or
assumes any obligation in connection with any property proposed to be acquired
by the partnership and who suffers any financial loss as the result of such
action. Notwithstanding the above indemnification provisions, under the
Partnership Agreement, neither the general partner nor any of its
representatives is indemnified from any liability for fraud, bad faith,
willful misconduct or gross negligence.

In addition, KCSI 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 KCSI. 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, KCSI's determinations of indemnity are made by a
committee of disinterested directors unless a change in control of KCSI has
occurred, in which case the determination is made by special independent
counsel. The indemnification agreements also provide a mechanism to seek court
relief if indemnification or expense advances are denied or not received
within specified periods. Indemnification and advancement of expenses would
also be provided in connection with court proceedings initiated to determine
rights under the indemnification agreements and certain other matters.

Registrants Incorporated Under Missouri Law

KCSR, Rice-Carden Corporation and Southern Development Company are each
incorporated under the laws of the State of Missouri. Section 351.355 of the
General and Business Corporation Law of Missouri (the "Missouri Statute")
provides that a Missouri corporation may indemnify any person who was or is a
party or is threatened to be made a party to any proceeding, other than an
action by or in the right of the corporation, by reason of the fact that he is
or was serving in an indemnified capacity against expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such proceeding if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. Similar provisions apply to actions brought by or in the right of
the corporation, except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person has been found liable for
negligence or misconduct in the performance of his duty to the corporation
unless and only to the extent that the court in which the action or suit was
brought determines upon application that, despite the finding of liability and
in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper. Where an officer or director is successful on the merits or otherwise
in defense of any proceeding referred to above, the corporation must indemnify
him against the expenses which he has actually and reasonably incurred.

The Missouri Statute further provides that its provisions concerning
indemnification are not exclusive of any other rights to which a person
seeking indemnification may be entitled under a

II-3

corporation's articles of incorporation or bylaws or any agreement, vote of
shareholders or disinterested directors or otherwise. In addition, the
Missouri Statute authorizes a corporation to purchase and maintain insurance
on behalf of any person who is or was serving in an indemnified capacity
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, regardless of whether the
corporation would otherwise have the power to indemnify him under the Missouri
Statute.

The Articles of Incorporation of KCSR, as amended, provide that the
corporation shall indemnify each of its directors and officers to the full
extent permitted by the Missouri Statute and, in addition, shall indemnify
each of them against all expenses (including without limitation all attorneys'
fees, judgments, fines and amounts paid in settlement) incurred by any of them
in connection with any claim (including without limitation any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative and whether or not by or in the right of the
corporation) by reason of the fact that they are or were serving the
corporation or at the request of the corporation in any of the capacities
referred to in the Missouri Statute or arising out of their status in any such
capacity, provided that the corporation shall not indemnify any person from or
on account of such person's conduct which was finally adjudged to have been
knowingly fraudulent, deliberately dishonest or willful misconduct. Such
Articles of Incorporation further provide that the corporation may, as it
deems appropriate and as may be permitted by the Missouri Statute, indemnify
any other person referred to in the Missouri Statute against any such expenses
incurred by him in connection with any such claim by reason of the fact that
they are or were serving the corporation or at the request of the corporation
in any of such capacities or arising out of their status in any such capacity.
In addition, such Articles of Incorporation authorize the corporation to give
or supplement any of the above indemnifications by by-law, agreement or
otherwise and fund them by insurance to the extent it deems appropriate and
provides that such indemnification of officers and directors will survive
elimination or modification of such Articles with respect to any such expenses
incurred in connection with claims arising out of the acts or omissions
occurring prior to such elimination or modification and persons to whom such
indemnification is given shall be entitled to rely upon such indemnification
as a contract with the corporation.

The by-laws of KCSR provide that each person who at any time is, or shall
have been, a director, officer, employee or agent of the corporation, and is
threatened to be or is made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is, or was, serving in such
capacity, or served at the request of the corporation in such capacity of
another corporation, partnership, joint venture, trust or other enterprise,
shall be indemnified against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him
in connection with any such action, suit or proceeding to the full extent
provided under the Missouri Statute.

Registrants Incorporated Under Illinois Law

Gateway Eastern Railway Company and Gateway Western Railway Company are
each incorporated under the laws of the State of Illinois. Section 8.75 of
Illinois' Business Corporation Act of 1983 (the "Illinois Statute") provides
that an Illinois corporation may indemnify any person who was or is a party or
is threatened to be made a party to any proceeding, other than an action by or
in the right of the corporation, by reason of the fact that he or she is or
was serving in an indemnified capacity against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such proceeding if such person
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. Similar provisions apply to actions brought by or in the
right of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter

II-4

as to which such person has been found liable to the corporation, unless, and
only to the extent that the court in which the action or suit was brought
determines upon application that, despite the finding of liability and in view
of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court shall deem proper. Where
an officer, director, employee or agent is successful on the merits or
otherwise in defense of any proceeding referred to above, the corporation must
indemnify such person against the expenses actually and reasonably incurred by
such person.

The Illinois Statute further provides that its provisions concerning
indemnification are not exclusive of any other rights to which a person
seeking indemnification may be entitled under any bylaw, agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in his
or her official capacity and as to action in another capacity while holding
such office. In addition, the Illinois Statute authorizes a corporation to
purchase and maintain insurance on behalf of any person who is or was serving
in an indemnified capacity against any liability asserted against such person
and incurred by such person in any such capacity, or arising out of his or her
status as such, regardless of whether the corporation would otherwise have the
power to indemnify such person under the Illinois Statute.

The Amended and Restated By-laws of Gateway Western Railway Company and the
By-laws of Gateway Eastern Railway Company each provide that the corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement reasonably incurred by him in connection with the action,
suit or proceeding, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. Such By-laws contain similar
provisions with respect to actions brought by or in the right of the
corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person has been found liable for
negligence or misconduct in the performance of his duty to the corporation,
except to the extent the court in which the action or suit was brought
determines upon application that, despite the finding of liability but in view
of all the circumstances of the case, that person is fairly and reasonably
entitled to indemnity for those expenses which the court determines proper.
Such By-laws also provide that to the extent an officer, director, employee or
agent is successful on the merits or otherwise in defense of any proceeding
referred to above, the corporation must indemnify him against the expenses
actually and reasonably incurred by him, and to the extent such person is not
successful in such defense, he may be indemnified against expenses (including
attorneys' fees) reasonably incurred by him in connection with the action,
suit or proceeding, if authorized by (a) the board of directors by a majority
vote of a quorum consisting of directors who were not party to the action,
suit or proceeding, or (b) if that quorum is not obtainable, or, even if
obtainable, if a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (c) by the shareholders. In addition,
such By-laws provide for advancement of expenses prior to the final
disposition of the action, suit or proceeding, as authorized by the board of
directors in a specific case, upon receipt of an undertaking by or on behalf
of the director, officer employee or agent to repay the amount, unless it is
ultimately determined that he is entitled to indemnification by the
corporation as authorized by such By-laws. Such By-laws further provide that
the indemnification provided for in such By-laws is not exclusive of any other
rights to which a person seeking indemnification may be entitled under any
bylaw, agreement, vote of shareholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action
in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director,

II-5

officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of that person. Such By-laws also provide that
the corporation may purchase and maintain insurance on behalf of any person
who is or was serving in an indemnified capacity against any liability
asserted against such person and incurred by such person in any such capacity,
or arising out of his or her status as such, regardless of whether the
corporation would otherwise have the power to indemnify such person under such
By-laws.

Registrants Organized Under Texas Law

Pabtex GP, LLC is organized under the laws of the State of Texas. Section
2.20 of the Texas Limited Liability Company Act ("TLLCA") provides that,
subject to such standards and restrictions, if any, as are set forth in its
articles of organization or in its regulations, a limited liability company
has the power to indemnify managers, officers and other persons and purchase
and maintain liability insurance for such persons. Section 2.01 of the TLLCA
provides in pertinent part that each limited liability company shall have the
power provided for a corporation under the Texas Business Corporation Act
("TBCA").

The TBCA provides that a corporation may indemnify a person who was, or is
threatened to be made a named defendant or respondent in a proceeding because
the person is or was a director only if it is determined in the manner set
forth in the statute that the person conducted himself in good faith;
reasonably believed, in the case of conduct in his official capacity as a
director of the corporation, that his conduct was in the corporation's best
interests, and in all other cases, that his conduct was at least not opposed
to the corporation's best interests; and in the case of any criminal
proceeding, had no reasonable cause to believe his conduct was unlawful. Under
the TBCA, except as described below, a director may not be indemnified in
respect of a proceeding in which the person is found liable on the basis that
he improperly received personal benefit or in which the person is found liable
to the corporation. A person may be indemnified under the TBCA against
judgments, penalties (including excise and similar taxes), fines, settlements,
and reasonable expenses actually incurred by the person in connection with the
proceeding; but if the person is found liable to the corporation or is found
liable on the basis that personal benefit was improperly derived by the
person, the indemnification is limited to reasonable expenses actually
incurred by the person in connection with the proceeding and shall not be made
in respect of any proceeding in which the person shall have been found liable
for willful or intentional misconduct in the performance of his duty to the
corporation. The TBCA further provides that a corporation shall indemnify a
director or officer against reasonable expenses incurred by him in connection
with a proceeding in which he is named a defendant or respondent because he is
or was a director or officer if he has been wholly successful, on the merits
or otherwise, in the defense of the proceeding. A corporation may pay or
reimburse reasonable expenses incurred by a director in advance of the final
disposition of a proceeding and without the determination of indemnification
or authorization of indemnification required by the statute if the corporation
receives a written affirmation by the director of his good faith belief that
he has met the standard of conduct necessary for indemnification under the
TBCA and a written undertaking by or on behalf of the director to repay the
amount advanced if it is ultimately determined that he has not met the
standard or that indemnification of such person against such expenses is
prohibited by the TBCA. A provision in the corporation's articles of
organization, bylaws, a resolution of shareholders or directors, or an
agreement that makes mandatory the advancement of such expenses is deemed to
constitute authorization of the advancement of such expenses. A corporation
may indemnify and advance expenses to an officer, employee or agent of the
corporation, or to persons who are or were serving at the request of the
corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another foreign or domestic
corporation, employee benefit plan, other enterprise, or other entity, to the
same extent that it may indemnify and advance expenses to directors, and to
such further extent, consistent with law, as may be provided by its articles
of incorporation, bylaws, general or specific action of its board of
directors, or contract or as permitted or required by common law. In

II-6

addition, under the TBCA, a corporation may purchase and maintain insurance or
another arrangement on behalf of any such any person serving in any such
indemnified capacity against any liability asserted against him and incurred
by him in such a capacity or arising out of his status as such a person,
whether or not the corporation would have the power to indemnify him against
that liability under the TBCA., however, if the insurance or other arrangement
is with a person or entity that is not regularly engaged in the business of
providing insurance coverage, the insurance or arrangement may provide for
payment of a liability with respect to which the corporation would not have
the power to indemnify the person only if including coverage for the
additional liability has been approved by the shareholders of the corporation.
The TBCA further provides that the articles of incorporation of a corporation
may restrict the circumstances under which the corporation is required or
permitted to indemnify a person under certain sections of the TBCA.

The Articles of Organization of PABTEX GP, LLC provide that the company
shall indemnify any person who was, is, or is threatened to be made a named
defendant or respondent in a proceeding because the person (i) is or was a
member or officer of the company or (ii) while a member or officer of the
company, is or was serving at the request of the company as a director,
manager, officer, partner, venturer, proprietor, trustee, employee, agent or
similar functionary of another foreign or domestic corporation, partnership,
joint venture, sole proprietorship, trust, employee benefit plan, or other
enterprise, to the fullest extent that a limited liability company may grant
indemnification to a member under the TLLCA and the TBCA. Such Articles
further provide that such right is a contract right and runs to the benefit of
any member or officer who is elected and accepts the position of member or
officer of the company or elects to continue to serve as a member or officer
of the company while the Article covering indemnification is in effect. Such
right includes the right to be paid or reimbursed by the company for expenses
incurred in defending any such proceeding in advance of its final disposition
to the maximum extent permitted under the TLLCA and the TBCA. If a claim for
indemnification or advancement of expenses is not paid in full by the company
within 90 days after a written claim has been received by the company, the
claimant may at any time thereafter bring suit against the company to recover
the unpaid amount of the claim, and if successful in whole or in part, the
claimant is entitled to be paid also the expenses of prosecuting such claim.
Under such Articles, the company may additionally indemnify any person covered
by the grant of mandatory indemnification set forth above to such further
extent as is permitted by law and may indemnify any other person to the
fullest extent permitted by law. To the extent permitted by then applicable
law, the grant of mandatory indemnification to any person as set forth above
extends to proceedings involving the negligence of such person. As used in
such Articles and in the TBCA, the term "proceeding" is defined as any
threatened, pending or completed action, suit or proceeding, whether civil or
criminal, administrative, arbitrative or investigative, any appeal in such an
action, suit or proceeding, and any inquiry or investigation that could lead
to such an action, suit or proceeding.

The Regulations of PABTEX GP, LLC provide that, subject to the limitations
and conditions described below, each person who was or is made a party or is
threatened to be made a party to or is involved in any threatened, pending, or
completed action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative, or any appeal in such an action, suit or
proceeding, by reason of the fact that such person is or was a member of the
company or while such member of the company is or was serving at the request
of the company as a member, manager, director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary of another foreign
or domestic limited liability company, corporation, partnership, joint
venture, sole proprietorship, trust, employee benefit plan, or other
enterprise shall be indemnified by the company to the fullest extent permitted
by the TLLCA against judgments, penalties (including excise and similar taxes
and punitive damages), fines, settlements and reasonable expenses (including
attorneys' fees) actually incurred by such person in connection with such
action, suit or proceeding. The Regulations further provide that such
indemnification rights are contract rights and it is expressly acknowledged
that the indemnification provided in the Regulations could involve
indemnification for negligence or under theories of strict liabilities.

II-7

The Regulations further provide that the company shall indemnify and
advance expenses to an officer of the company to the extent required to do so
by the TLLCA or other applicable law. The company, by adoption of a resolution
of the member, may indemnify and advance expenses to an officer, employee or
agent of the company to the same extent and subject to the same conditions
under which it may indemnify and advance expenses to the member, and may
indemnify and advance expenses to persons who are or were serving at the
request of the company as a member, manager, director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of
another foreign or domestic limited liability company, corporation,
partnership, joint venture, sole proprietorship, trust, employee benefit plan,
or other enterprise against any liability asserted against such person and
incurred by such person in such a capacity arising out of its status as such a
person to the same extent that the company may indemnify and advance expenses
to the member.

Item 21. Exhibits and Financial Statement Schedules

(a) Exhibits

Exhibit No. Description
----------- -----------

1.1 Purchase Agreement

3.1 Restated Certificate of Incorporation of Kansas City Southern
Industries, Inc.("KCSI"), as amended

3.2 By-Laws of Kansas City Southern Industries, Inc. , as amended
and restated September 17, 1998, is attached hereto as Exhibit
3.2

3.3 Articles of Association of The Kansas City Southern Railway
Company (a Missouri corporation)

3.4 Bylaws of The Kansas City Southern Railway Company

3.5 Articles of Incorporation of Gateway Eastern Railway Company
(an Illinois corporation)

3.6 By-laws of Gateway Eastern Railway Company

3.7 Amended and Restated Articles of Amendment and Third Amended
and Restated Articles of Incorporation of Gateway Western
Railway Company (an Illinois corporation)

3.8 Amended and Restated By-laws of Gateway Western Railway
Company

3.9 Certificate of Incorporation of KCS Transportation Company

3.10 Bylaws of KCS Transportation Company

3.11 Certificate of Incorporation of Mid-South Microwave, Inc., as
corrected

3.12 By-laws of Mid-South Microwave, Inc.

3.13 Articles of Incorporation of Rice-Carden Corporation (a
Missouri corporation)

3.14 By-laws of Rice-Carden Corporation

3.15 Articles of Incorporation of Southern Development Company (a
Missouri corporation)

3.16 By-laws of Southern Development Company

3.17 Certificate of Incorporation of Southern Industrial Services,
Inc., as amended

3.18 Bylaws of Southern Industrial Services, Inc.

II-8

Exhibit No. Description
----------- -----------

3.19 Certificate of Incorporation of Trans-Serve, Inc.

3.20 By-laws of Trans-Serve, Inc.

3.21 Certificate of Incorporation of SIS Bulk Holding, Inc.

3.22 Bylaws of SIS Bulk Holding, Inc.

3.23 Certificate of Conversion of Global Terminaling Services, Inc.
into PABTEX, L.P.

3.24 Certificate of Limited Partnership of PABTEX, L.P.

3.25 Agreement of Limited Partnership of PABTEX, L.P.

3.26 Articles of Organization of PABTEX GP, LLC

3.27 Regulations of PABTEX GP, LLC

4.1 Indenture, dated as of September 27, 2000, among the Issuer,
the Note Guarantors party thereto and The Bank of New York, as
trustee

4.2 Form of Exchange Note (included as Exhibit B to Exhibit 4.1)

4.3 Exchange and Registration Rights Agreement, dated as of
September 27, 2000, among the Issuer, the Note Guarantors
party thereto and the Initial Purchasers

4.4 The Indenture, dated July 1, 1992 between Kansas City Southern
Industries, Inc. and The Chase Manhattan Bank (the "1992
Indenture"), which is attached as Exhibit 4 to KCSI's Shelf
Registration of $300 million of Debt Securities on Form S-3
filed June 19, 1992 (Commission File No. 33-47198) and as
Exhibit 4(a) to the Company's Form S-3 filed March 29, 1993
(Commission File No. 33-60192) registering $200 million of
Debt Securities, is hereby incorporated by reference as
Exhibit 4.4

4.4.1 Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 7.875% Notes Due July 1, 2002
issued pursuant to the 1992 Indenture, which is attached as
Exhibit 4.5.1 to KCSI's Form 10-K for the fiscal year ended
December 31, 1999 (Commission File No. 1-4717), is hereby
incorporated by reference as Exhibit 4.4.1

4.4.2 Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 6.625% Notes Due March 1, 2005
issued pursuant to the 1992 Indenture, which is attached as
Exhibit 4.5.2 to KCSI's Form 10-K for the fiscal year ended
December 31, 1999 (Commission File No. 1-4717), is hereby
incorporated by reference as Exhibit 4.4.2

4.4.3 Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 8.8% Debentures Due July 1, 2022
issued pursuant to the 1992 Indenture, which is attached as
Exhibit 4.5.3 to KCSI's Form 10-K for the fiscal year ended
December 31, 1999 (Commission File No. 1-4717), is hereby
incorporated by reference as Exhibit 4.4.3

4.4.4 Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 7% Debentures Due December 15,
2025 issued pursuant to the 1992 Indenture, which is attached
as Exhibit 4.5.4 to KCSI's Form 10-K for the fiscal year ended
December 31, 1999 (Commission File No. 1-4717), is hereby
incorporated by reference as Exhibit 4.4.4

4.5 Exhibit 99 to KCSI's Form 8-A dated October 24, 1995
(Commission File No.
1-4717), which is the Stockholder Rights Agreement by and
between KCSI and Harris Trust and Savings Bank dated as of
September 19, 1995, is hereby incorporated by reference as
Exhibit 4.5

II-9

Exhibit No. Description
----------- -----------

5.1* Opinion of Sonnenschein Nath & Rosenthal regarding the
validity of the securities offered hereby

8.1* Opinion of Sonnenschein Nath & Rosenthal regarding federal
income tax consequences

10.1 Exhibit I to KCSI's Form 10-K for the fiscal year ended
December 31, 1987 (Commission File No. 1-4717), The Director
Indemnification Agreement, is hereby incorporated by reference
as Exhibit 10.1

10.2 Exhibit B to KCSI's Definitive Proxy Statement for 1987 Annual
Stockholder Meeting dated April 6, 1987, The Director
Indemnification Agreement, is hereby incorporated by reference
as Exhibit 10.2

10.3 The 1992 Indenture, which is incorporated by reference as
Exhibit 4.4 hereto, is hereby incorporated by reference as
Exhibit 10.3

10.3.1 Supplemental Indenture dated December 17, 1999 to the 1992
Indenture between the Company and The Chase Manhattan Bank
with respect to the 7.875% Notes Due July 1, 2002 issued
pursuant to the 1992 Indenture, which is incorporated by
reference as Exhibit 4.4.1 hereto, is hereby incorporated by
reference as Exhibit 10.3.1

10.3.2 Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 6.625% Notes Due March 1, 2005
issued pursuant to the 1992 Indenture, which is incorporated
by reference as Exhibit 4.4.2 hereto, is hereby incorporated
by reference as Exhibit 10.3.2

10.3.3 Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 8.8% Debentures Due July 1, 2022
issued pursuant to the 1992 Indenture, which is incorporated
by reference as Exhibit 4.4.3 hereto, is hereby incorporated
by reference as Exhibit 10.3.3

10.3.4 Supplemental Indenture dated December 17, 1999 to the 1992
Indenture with respect to the 7% Debentures Due December 15,
2025 issued pursuant to the 1992 Indenture, which is
incorporated by reference as Exhibit 4.4.4 hereto, is hereby
incorporated by reference as Exhibit 10.3.4

10.4 Exhibit H to KCSI's Form 10-K for the fiscal year ended
December 31, 1987 (Commission File No. 1-4717), The Officer
Indemnification Agreement, is hereby incorporated by reference
as Exhibit 10.4

10.5 Exhibit 10.1 to KCSI's Form 10-Q for the period ended March
31, 1997 (Commission File No. 1-4717), The Kansas City
Southern Railway Company Directors' Deferred Fee Plan as
adopted August 20, 1982 and the amendment thereto effective
March 19, 1997 to such plan, is hereby incorporated by
reference as Exhibit 10.5

10.6 Exhibit 10.4 to KCSI's Form 10-K for the fiscal year ended
December 31, 1990 (Commission File No. 1-4717), Description of
KCSI's 1991 incentive compensation plan, is hereby
incorporated by reference as Exhibit 10.6

10.7 Exhibit 10.1 to KCSI's Form 10-Q for the quarterly period
ended June 30, 1997 (Commission File No. 1-4717), Five-Year
Competitive Advance and Revolving Credit Facility Agreement
dated May 2, 1997, by and between KCSI and the lenders named
therein, is hereby incorporated by reference as Exhibit 10.7

II-10

Exhibit No. Description
----------- -----------

10.8 Tax Disaffiliation Agreement, dated October 23, 1995, by and
between KCSI and DST Systems, Inc., is attached hereto as
Exhibit 10.8

10.9 Exhibit 4.8 to KCSI's Form S-8 filed on December 14, 2000,
Kansas City Southern Industries, Inc. 401(k) and Profit
Sharing Plan, is hereby incorporated by reference as Exhibit
10.9

10.10 Assignment, Consent and Acceptance Agreement, dated August 10,
1999, by and between DST Systems, Inc., KCSI and Stilwell
Financial, Inc., is attached hereto as Exhibit 10.10

10.11 Exhibit 10.18 to KCSI's Form 10-K for the year ended December
31, 1996 (Commission File No. 1-4717), Directors Deferred Fee
Plan, adopted August 20, 1982, amended and restated February
1, 1997, is hereby incorporated by reference as Exhibit 10.11

10.12 Exhibit 10.1 to KCSI's Form 10-Q for the quarterly period
ended June 30, 1999 (Commission File No. 1-4717), Kansas City
Southern Industries, Inc. 1991 Amended and Restated Stock
Option and Performance Award Plan, as amended and restated
effective as of May 6, 1999, is hereby incorporated by
reference as Exhibit 10.12

10.13 Exhibit 10.15 to KCSI's Form 10-K for the year ended December
31, 1998 (Commission File No. 1-4717), Employment Agreement,
as amended and restated January 1, 1999, by and between Kansas
City Southern Industries, Inc., The Kansas City Southern
Railway Company and Michael R. Haverty, is hereby incorporated
by reference as Exhibit 10.13

10.14 Employment Agreement, dated January 1, 1999, by and between
The Kansas City Southern Railway Company, Kansas City Southern
Industries, Inc. and Gerald K. Davies is attached hereto as
Exhibit 10.14.

10.15 Employment Agreement, as amended and restated January 1, 1999,
by and between Kansas City Southern Lines, Inc., Kansas City
Southern Industries, Inc. and Robert H. Berry is attached
hereto as Exhibit 10.15

10.16 Employment Agreement, as amended and restated January 1, 1999,
by and between Kansas City Southern Lines, Inc., Kansas City
Southern Industries, Inc. and Richard P. Bruening is attached
hereto as Exhibit 10.16

10.17 Employment Agreement, as amended and restated January 1, 1999,
by and between Kansas City Southern Lines, Inc., Kansas City
Southern Industries, Inc. and Louis G. Van Horn is attached
hereto as Exhibit 10.17

10.18 Exhibit 10.18 to KCSI's Form 10-K for the year ended December
31, 1998 (Commission File No. 1-4717), Kansas City Southern
Industries, Inc. Executive Plan, as amended and restated
effective November 17, 1998, is hereby incorporated by
reference as Exhibit 10.18

10.19 Exhibit 10.19 to KCSI's Form 10-K/A for the year ended
December 31, 1998 (Commission File No. 1-4717), Stock Purchase
Agreement, dated April 13, 1984, by and among Kansas City
Southern Industries, Inc., Thomas H. Bailey, William C.
Mangus, Bernard E. Niedermeyer III, Michael Stolper, and Jack
R. Thompson is hereby incorporated by reference as Exhibit
10.19

10.19.1 Exhibit 10.19.1 to KCSI's Form 10-K/A for the year ended
December 31, 1998 (Commission File No. 1-4717), Amendment to
Stock Purchase Agreement, dated January 4, 1985, by and among
Kansas City Southern Industries, Inc., Thomas H. Bailey,
Bernard E. Niedermeyer III, Michael Stolper, and Jack R.
Thompson is hereby incorporated by reference as Exhibit
10.19.1

II-11

Exhibit No. Description
----------- -----------

10.19.2 Exhibit 10.19.2 to KCSI's Form 10-K/A for the year ended
December 31, 1998 (Commission File No. 1-4717), Second
Amendment to Stock Purchase Agreement, dated March 18, 1988,
by and among Kansas City Southern Industries, Inc., Thomas H.
Bailey, Michael Stolper, and Jack R. Thompson is hereby
incorporated by reference as Exhibit 10.19.2

10.19.3 Exhibit 10.19.3 to KCSI's Form 10-K/A for the year ended
December 31, 1998 (Commission File No. 1-4717), Third
Amendment to Stock Purchase Agreement, dated February 5, 1990,
by and among Kansas City Southern Industries, Inc., Thomas H.
Bailey, Michael Stolper, and Jack R. Thompson is hereby
incorporated by reference as Exhibit 10.19.3

10.19.4 Exhibit 10.19.4 to KCSI's Form 10-K/A for the year ended
December 31, 1998 (Commission File No. 1-4717), Fourth
Amendment to Stock Purchase Agreement, dated January 1, 1991,
by and among Kansas City Southern Industries, Inc., Thomas H.
Bailey, Michael Stolper, and Jack R. Thompson is hereby
incorporated by reference as Exhibit 10.19.4

10.19.5 Exhibit 10.19.5 to KCSI's Form 10-K/A for the year ended
December 31, 1998 (Commission File No. 1-4717), Assignment and
Assumption Agreement and Fifth Amendment to Stock Purchase
Agreement, dated November 19, 1999, by and among Kansas City
Southern Industries, Inc., Stilwell Financial, Inc., Thomas H.
Bailey and Michael Stolper is hereby incorporated by reference
as Exhibit 10.19.5

10.20 Exhibit 10.19 to KCSI's Form 10-K for the year ended December
31, 1999 (Commission File No. 1-4717), Credit Agreement dated
as of January 11, 2000 among Kansas City Southern Industries,
Inc., The Kansas City Southern Railway Company and the lenders
named therein, is hereby incorporated by reference as Exhibit
10.20

10.21 Exhibit 10.20 to KCSI's Form 10-K for the year ended December
31, 1999, 364-day Competitive Advance and Revolving Credit
Facility Agreement dated as of January 11, 2000 among Kansas
City Southern Industries, Inc. and the lenders named therein,
is hereby incorporated by reference as Exhibit 10.21

10.22 Exhibit 10.21 to KCSI's Form 10-K for the year ended December
31, 1999, Assignment, Assumption and Amendment Agreement dated
as of January 11, 2000, among Kansas City Southern Industries,
Inc., Stilwell Financial, Inc. and The Chase Manhattan Bank,
as agent for the lenders named in the 364-day Competitive
Advance and Revolving Credit Facility Agreement, which is
incorporated by reference as Exhibit 10.21, is hereby
incorporated by reference as Exhibit 10.22

10.23 Intercompany Agreement, dated as of August 16, 1999, between
Kansas City Southern Industries, Inc. and Stilwell Financial
Inc. is attached hereto as Exhibit 10.23

10.24 Tax Disaffiliation Agreement, dated as of August 16, 1999,
between Kansas City Southern Industries, Inc. and Stilwell
Financial Inc. is attached hereto as Exhibit 10.24

12.1 Statement re: computation of ratios

21.1 Subsidiaries of the Registrants

23.1 Consent of PricewaterhouseCoopers LLP

23.2* Consent of Sonnenschein Nath & Rosenthal (included in Exhibits
5.1 and 8.1)

II-12

Exhibit No. Description
----------- -----------

24.1 Powers of Attorney (included on the signature pages)

25.1 Statement of Eligibility of Trustee on Form T-1 under the
Trust Indenture Act of 1939 of The Bank of New York

99.1 Form of Letter of Transmittal

99.2 Form of Notice of Guaranteed Delivery

99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees

99.4 Form of Letter to Clients

--------
*To be filed by amendment

(b) Financial Statement Schedules

No financial statement schedules are required to be filed herewith
pursuant to this Item.

Item 22. Undertakings

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrants pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrants of expenses incurred or paid by a director, officer or
controlling person of the registrants in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrants
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The undersigned registrants hereby undertake:

1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(b) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;

(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.

2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

II-13

3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the exchange offer.

The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequently to the effective date of the registration statement through
the date of responding to the request.

The undersigned registrants hereby undertake to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.

II-14

SIGNATURES

Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Kansas City, state of
Missouri, on January 24, 2001.

Kansas City Southern Industries,
Inc.

/s/ M. R. Haverty
By: _________________________________
Michael R. Haverty
Chairman of the Board of
Directors; President and Chief
Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael R. Haverty, Gerald K. Davies, Robert H.
Berry and Richard P. Bruening, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any or all amendments (including post-effective
amendments) to this registration statement and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in fact and agents or any of them, or
their, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on January 24, 2001 by the following
persons in the capacities indicated.

Signature Title
--------- -----

/s/ M. R. Haverty Chairman of the Board of Directors;
___________________________________________ President and Chief Executive Officer
Michael R. Haverty

/s/ Robert H. Berry Senior Vice President and Chief Financial
___________________________________________ Officer
Robert H. Berry

/s/ Louis Van Horn Vice President and Comptroller
___________________________________________
Louis G. Van Horn

/s/ Landon Rowland Director
___________________________________________
Landon H. Rowland

Director
___________________________________________
A. Edward Allinson

II-15

Signature Title
--------- -----

/s/ Michael G. Fitt Director
___________________________________________
Michael G. Fitt

/s/ James R. Jones Director
___________________________________________
James R. Jones

/s/ Byron G. Thompson Director
___________________________________________
Byron G. Thompson

II-16

SIGNATURES

The Kansas City Southern Railway
Company

/s/ M. R. Haverty
By:
__________________________________
Michael R. Haverty
Chairman of the Board of
Directors; President and Chief
Executive Officer

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed January 24, 2001 by the following
persons in the capacities indicated.

Signature Title
--------- -----

/s/ M. R. Haverty Chairman of the Board of Directors;
___________________________________________ President and Chief Executive Officer
Michael R. Haverty

/s/ Robert H. Berry Senior Vice President and Chief Financial
___________________________________________ Officer; Director
Robert H. Berry

/s/ Louis Van Horn Vice President and Comptroller
___________________________________________
Louis G. Van Horn

/s/ Gerald K. Davies Director
___________________________________________
Gerald K. Davies

/s/ Richard Bruening Director
___________________________________________
Richard P. Bruening

/s/ Albert W. Rees Director
___________________________________________
Albert W. Rees

II-17

SIGNATURES

Gateway Eastern Railway Company

/s/ M. R. Haverty
By: _________________________________
Michael R. Haverty
Chairman of the Board and
Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael R. Haverty, Gerald K. Davies, Richard
P. Bruening and Thomas G. King, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any or all amendments (including post-effective
amendments) to this registration statement and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or
their, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on January 24, 2001 by the following
persons in the capacities indicated.

Signature Title
--------- -----

/s/ M. R. Haverty Chairman of the Board and Chief Executive
___________________________________________ Officer
Michael R. Haverty

/s/ Gerald K. Davies President and General Manager; Director
___________________________________________
Gerald K. Davies

/s/ Thomas G. King Vice President and Treasurer
___________________________________________ (Principal Financial Officer
Thomas G. King and Accounting Officer)

/s/ Albert W. Rees Director
___________________________________________
Albert W. Rees

II-18

SIGNATURES

Gateway Western Railway Company

/s/ Gerald K. Davies
By:
__________________________________
Gerald K. Davies
President and General Manager

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael R. Haverty, Gerald K. Davies, Richard
P. Bruening, and Thomas G. King, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any or all amendments (including post-effective
amendments) to this registration statement and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or
their, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on January 24, 2001 by the following
persons in the capacities indicated.

Signature Title
--------- -----

/s/ M. R. Haverty Chairman of the Board and Chief Executive
___________________________________________ Officer
Michael R. Haverty

/s/ Gerald K. Davies President and General Manager; Director
___________________________________________
Gerald K. Davies

/s/ Thomas G. King Vice President and Treasurer
___________________________________________ (Principal Financial Officer and
Thomas G. King Accounting Officer)

/s/ Albert W. Rees Director
___________________________________________
Albert W. Rees

II-19

SIGNATURES

SIS Bulk Holding, Inc.

/s/ Michael R. Haverty
By: _________________________________
Michael R. Haverty
President

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael R. Haverty, Robert H. Berry, Richard P.
Bruening, and each of them, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any or
all amendments (including post-effective amendments) to this registration
statement and any subsequent registration statement filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their, or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on January 24, 2001 by the following
persons in the capacities indicated.

Signature Title
--------- -----

/s/ Michael R. Haverty President; Director
___________________________________________
Michael R. Haverty

/s/ Robert H. Berry Vice President and Treasurer
___________________________________________ (Principal Financial Officer)
Robert H. Berry

/s/ Louis G. Van Horn Vice President and Controller
___________________________________________
Louis G. Van Horn

/s/ Gerald K. Davies Director
___________________________________________
Gerald K. Davies

/s/ Richard P. Bruening Director
___________________________________________
Richard P. Bruening

II-20

SIGNATURES

KCS Transportation Company

/s/ M. R. Haverty
By: _________________________________
Michael R. Haverty
President and
Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael R. Haverty, Gerald K. Davies, Richard
P. Bruening and Thomas G. King and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any or all amendments (including post-effective
amendments) to this registration statement and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or
their, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on January 24, 2001 by the following
persons in the capacities indicated.

Signature Title
--------- -----

/s/ M. R. Haverty President and Chief Executive Officer;
___________________________________________ Director
Michael R. Haverty

/s/ Thomas G. King Vice President and Treasurer
___________________________________________ (Principal Financial Officer and
Thomas G. King Accounting Officer)
Director
___________________________________________
Edmund J. Boyce, Jr.

/s/ Gerald K. Davies Director
___________________________________________
Gerald K. Davies

II-21

SIGNATURES

Mid-South Microwave, Inc.

/s/ M. R. Haverty
By: _________________________________
Michael R. Haverty
President

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael R. Haverty, Robert H. Berry and Richard
P. Bruening, and each of them, his or her true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him or her
and in his or her name, place and stead, in any and all capacities, to sign
any or all amendments (including post-effective amendments) to this
registration statement and any subsequent registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their, or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on January 24, 2001 by the following
persons in the capacities indicated.

Signature Title
--------- -----

/s/ M. R. Haverty President; Director
___________________________________________
Michael R. Haverty

/s/ Robert H. Berry Vice President and Treasurer, Director
___________________________________________ (Principal Financial Officer and
Robert H. Berry Accounting Officer)

/s/ Richard P. Bruening Director
___________________________________________
Richard P. Bruening

/s/ Louis Van Horn Director
___________________________________________
Louis G. Van Horn

II-22

SIGNATURES

Rice-Carden Corporation

/s/ M. R. Haverty
By:
__________________________________
Michael R. Haverty
President

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on January 24, 2001 by the following
persons in the capacities indicated.

Signature Title
--------- -----

/s/ M. R. Haverty President; Director
___________________________________________
Michael R. Haverty

/s/ Robert H. Berry Vice President and Treasurer; Director
___________________________________________ (Principal Financial Officer)
Robert H. Berry

/s/Louis Van Horn Vice President and Controller; Director
___________________________________________
Louis G. Van Horn

/s/ Richard Bruening Director
___________________________________________
Richard P. Bruening

II-23

SIGNATURES

Southern Development Company

/s/ M. R. Haverty
By: _________________________________
Michael R. Haverty
President

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on January 24, 2001 by the following
persons in the capacities indicated.

Signature Title
--------- -----

/s/ M. R. Haverty President; Director
___________________________________________
Michael R. Haverty

/s/ Robert H. Berry Vice President and Treasurer; Director
___________________________________________ (Principal Financial Officer)
Robert H. Berry

/s/ Louis Van Horn Vice President and Comptroller; Director
___________________________________________
Louis G. Van Horn

/s/ Richard Bruening Director
___________________________________________
Richard P. Bruening

II-24

SIGNATURES

Southern Industrial Services, Inc.

/s/ M. R. Haverty
By: _________________________________
Michael R. Haverty
President

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael R. Haverty, Robert H. Berry and Richard
P. Bruening, and each of them, his or her true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him or her
and in his or her name, place and stead, in any and all capacities, to sign
any or all amendments (including post-effective amendments) to this
registration statement and any subsequent registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in fact and agents or any of them, or their, or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on January 24, 2001 by the following
persons in the capacities indicated.

Signature Title
--------- -----

/s/ M. R. Haverty President; Director
___________________________________________
Michael R. Haverty

/s/ Robert H. Berry Vice President and Treasurer; Director
___________________________________________ (Principal Financial Officer and
Robert H. Berry Accounting Officer)

/s/ Richard P. Bruening Director
___________________________________________
Richard P. Bruening

II-25

SIGNATURES

Trans-Serve, Inc.

/s/ Albert W. Rees
By: _________________________________
Albert W. Rees
President

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Albert W. Rees, Robert H. Berry and Richard P.
Bruening, and each of them, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any or
all amendments (including post-effective amendments) to this registration
statement and any subsequent registration statement filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their, or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on January 24, 2001 by the following
persons in the capacities indicated.

Signature Title
--------- -----

/s/ Albert W. Rees President; Director
___________________________________________
Albert W. Rees

/s/ Robert H. Berry Vice President and Treasurer; Director
___________________________________________ (Principal Financial Officer)
Robert H. Berry

/s/ Louis Van Horn Vice President and Controller
___________________________________________
Louis G. Van Horn

/s/ Richard P. Bruening Director
___________________________________________
Richard P. Bruening

II-26

SIGNATURES

Pabtex GP, LLC

By: Southern Industrial Services,
Inc., its
sole member

/s/ Michael R. Haverty
By: _____________________________
Michael R. Haverty
President

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on January 24, 2001 by the following
persons in the capacities indicated.

Signature Title
--------- -----

/s/ Michael R. Haverty President and Director of Southern
______________________________________ Industrial Services, Inc.
Michael R. Haverty

/s/ Robert H. Berry Vice President and Treasurer and Director
______________________________________ of Southern Industrial Services, Inc.
Robert H. Berry

/s/ Richard P. Bruening Director of Southern Industrial Services,
______________________________________ Inc.
Richard P. Bruening

II-27

SIGNATURES

Pabtex , L.P.

By: Pabtex GP, LLC, its General Partner

By: Southern Industrial Services,
Inc.,
the sole member of Pabtex GP,
LLC

/s/ Michael R. Haverty
By: _____________________________
Michael R. Haverty
President

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on January 24, 2001 by the following
persons in the capacities indicated.

Signature Title
--------- -----

/s/ Michael R. Haverty President and Director of Southern
___________________________________________ Industrial Services, Inc.
Michael R. Haverty

/s/ Robert H. Berry Vice President and Treasurer and Director
___________________________________________ of Southern Industrial Services, Inc.
Robert H. Berry

/s/ Richard P. Bruening Director of Southern Industrial Services,
___________________________________________ Inc.
Richard P. Bruening

II-28

EXHIBIT INDEX

Exhibit No. Description
----------- -----------

1.1 Purchase Agreement

3.1 Restated Certificate of Incorporation of Kansas City Southern
Industries, Inc.("KCSI"), as amended

3.2 By-Laws of Kansas City Southern Industries, Inc. , as amended
and restated September 17, 1998, is attached hereto as Exhibit
3.2.

3.3 Articles of Association of The Kansas City Southern Railway
Company (a Missouri corporation)

3.4 Bylaws of The Kansas City Southern Railway Company

3.5 Articles of Incorporation of Gateway Eastern Railway Company
(an Illinois corporation)

3.6 By-laws of Gateway Eastern Railway Company

3.7 Amended and Restated Articles of Amendment and Third Amended
and Restated Articles of Incorporation of Gateway Western
Railway Company (an Illinois corporation)

3.8 Amended and Restated By-laws of Gateway Western Railway
Company

3.9 Certificate of Incorporation of KCS Transportation Company

3.10 Bylaws of KCS Transportation Company

3.11 Certificate of Incorporation of Mid-South Microwave, Inc., as
corrected

3.12 By-laws of Mid-South Microwave, Inc.

3.13 Articles of Incorporation of Rice-Carden Corporation (a
Missouri corporation)

3.14 By-laws of Rice-Carden Corporation

3.15 Articles of Incorporation of Southern Development Company (a
Missouri corporation)

3.16 By-laws of Southern Development Company

3.17 Certificate of Incorporation of Southern Industrial Services,
Inc., as amended

3.18 Bylaws of Southern Industrial Services, Inc.

3.19 Certificate of Incorporation of Trans-Serve, Inc.

3.20 By-laws of Trans-Serve, Inc.

3.21 Certificate of Incorporation of SIS Bulk Holding, Inc.

3.22 Bylaws of SIS Bulk Holding, Inc.

3.23 Certificate of Conversion of Global Terminaling Services, Inc.
into PABTEX, L.P.

3.24 Certificate of Limited Partnership of PABTEX, L.P.

3.25 Agreement of Limited Partnership of PABTEX, L.P.

3.26 Articles of Organization of PABTEX GP, LLC

3.27 Regulations of PABTEX GP, LLC

4.1 Indenture, dated as of September 27, 2000, among the Issuer,
the Note Guarantors party thereto and The Bank of New York, as
trustee

Exhibit No. Description
----------- -----------

4.2 Form of Exchange Note (included as Exhibit B to Exhibit 4.1)

4.3 Exchange and Registration Rights Agreement, dated as of
September 27, 2000, among the Issuer, the Note Guarantors
party thereto and the Initial Purchasers

5.1* Opinion of Sonnenschein Nath & Rosenthal regarding the
validity of the securities offered hereby

8.1* Opinion of Sonnenschein Nath & Rosenthal regarding federal
income tax consequences

10.3 The 1992 Indenture, which is incorporated by reference as
Exhibit 4.4 hereto, is hereby incorporated by reference as
Exhibit 10.3

Exhibit No. Description
----------- -----------

10.4 Exhibit H to KCSI's Form 10-K for the fiscal year ended
December 31, 1987 (Commission File No. 1-4717), The Officer
Indemnification Agreement, is hereby incorporated by reference
as Exhibit 10.4

10.8 Tax Disaffiliation Agreement, dated October 23, 1995, by and
between KCSI and DST Systems, Inc., is attached hereto as
Exhibit 10.8

10.9 Exhibit 4.8 to KCSI's Form S-8 filed on December 14, 2000,
Kansas City Southern Industries, Inc. 401(k) and Profit
Sharing Plan, is hereby incorporated by reference as Exhibit
10.9

10.10 Assignment, Consent and Acceptance Agreement, dated August 10,
1999, by and between DST Systems, Inc., KCSI and Stilwell
Financial, Inc., is attached hereto as Exhibit 10.10

Exhibit No. Description
----------- -----------

10.23 Intercompany Agreement, dated as of August 16, 1999, between
Kansas City Southern Industries, Inc. and Stilwell Financial
Inc. is attached hereto as Exhibit 10.23

10.24 Tax Disaffiliation Agreement, dated as of August 16, 1999,
between Kansas City Southern Industries, Inc. and Stilwell
Financial Inc. is attached hereto as Exhibit 10.24

12.1 Statement re: computation of ratios

21.1 Subsidiaries of the Registrants

23.1 Consent of PricewaterhouseCoopers LLP

23.2* Consent of Sonnenschein Nath & Rosenthal (included in Exhibits
5.1 and 8.1)

24.1 Powers of Attorney (included on the signature pages)

25.1 Statement of Eligibility of Trustee on Form T-1 under the
Trust Indenture Act of 1939 of The Bank of New York

99.1 Form of Letter of Transmittal

99.2 Form of Notice of Guaranteed Delivery

99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees

99.4 Form of Letter to Clients

- --------
*To be filed by amendment