FILED PURSUANT TO RULE 424(B)(3)
                                                     REGISTRATION NO. 333-107573

PROSPECTUS

                                400,000 Shares of
                              KANSAS CITY SOUTHERN
   4.25% REDEEMABLE CUMULATIVE CONVERTIBLE PERPETUAL PREFERRED STOCK, SERIES C
                     (LIQUIDATION PREFERENCE $500 PER SHARE)
                                       AND
          13,389,120 SHARES OF COMMON STOCK (PAR VALUE $0.01 PER SHARE)
                         ISSUABLE UPON CONVERSION OF THE
      REDEEMABLE CUMULATIVE CONVERTIBLE PERPETUAL PREFERRED STOCK, SERIES C

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

     This  prospectus  relates  to  the  offering  for  resale  of  Kansas  City
Southern's 4.25% Redeemable  Cumulative  Convertible  Perpetual Preferred Stock,
Series C (liquidation preference $500 per share), or "Series C Preferred Stock,"
and the shares of our common stock (including  attached preferred stock purchase
rights)  issuable upon conversion of the Series C Preferred  Stock. The Series C
Preferred  Stock was offered to  qualified  institutional  buyers in reliance on
Rule 144A in  transactions  exempt  from the  registration  requirements  of the
Securities  Act of 1933,  through the initial  purchasers,  Morgan Stanley & Co.
Incorporated  and Deutsche Bank  Securities Inc. This prospectus will be used by
selling  securityholders  to resell their shares of Series C Preferred Stock and
shares of our common stock issuable upon  conversion of their Series C Preferred
Stock.   We  will  not   receive  any   proceeds   from  sales  by  the  selling
securityholders.

                 CONVERTIBILITY OF THE SERIES C PREFERRED STOCK

     Holders may convert their Series C Preferred  Stock into 33.4728  shares of
our common stock only under  certain  circumstances  related to: (i) the trading
price of our common  stock;  (ii) a credit rating  downgrade;  (iii) the trading
price per share of the Series C Preferred Stock; (iv) redemption of the Series C
Preferred Stock; and (v) the occurrence of certain corporate  transactions.  The
conversion rate may be adjusted upon the occurrence of certain events.  There is
no  established  trading  market for the Series C Preferred  Stock and we do not
intend to list the Series C Preferred Stock on any national securities exchange.
Our common stock is listed and traded on the New York Stock  Exchange  under the
symbol  "KSU." On November 11, 2003,  the closing sale price of our common stock
was $13.54.

              REDEMPTION OR REPURCHASE OF SERIES C PREFERRED STOCK

     Subject to certain  conditions,  on or after May 20, 2008, we will have the
option to redeem  some or all of the  shares  of Series C  Preferred  Stock at a
redemption  price of 100% of the liquidation  preference,  plus  accumulated and
unpaid dividends,  including special dividends,  if any, to the redemption date.
Under certain circumstances, we may be required to purchase shares of the Series
C  Preferred  Stock at the option of the holder at a price  equal to 100% of the
liquidation  preference  plus any accumulated  and unpaid  dividends,  including
special dividends, if any, to, but excluding, the purchase date.

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

     INVESTING IN OUR SERIES C PREFERRED STOCK OR COMMON STOCK INVOLVESS  RISKS.
PLEASE READ CAREFULLY THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 12.

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

     NEITHER THE  SECURITIES AND EXCHANGE  COMMISSION  NOR ANY STATE  SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS  IS TRUTHFUL OR  COMPLETE.  ANY  REPRESENTATION  TO THE CONTRARY IS A
CRRIMINAL OFFENSE.


                THE DATE OF THIS PROSEPCTUS IS NOVEMBER 12, 2003





     You  should  rely only on the  information  contained  or  incorporated  by
reference in this prospectus.  We have not authorized anyone to provide you with
different  information.  You should not assume that the information contained in
this  prospectus  is accurate as of any date other than the date on the front of
this prospectus.

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
About this Prospectus...................................................       i
Prospectus Summary......................................................       1
Risk Factors............................................................      12
Use of Proceeds.........................................................      35
Business ...............................................................      35
Description of the Acquisition..........................................      37
Description of the Series C Preferred Stock.............................      52
Description of KCS Capital Stock........................................      68
Description of Class A Convertible Common Stock.........................      72
Certain United States Federal Tax Considerations........................      76
Selling Securityholders.................................................      79
Plan of Distribution....................................................      83
Financial Statements of Grupo TFM.......................................      85
Pro Forma Financial Information.........................................      86
Legal Matters...........................................................      97
Experts  ...............................................................      97
Where You Can Find More Information.....................................      97
Forward-Looking Statements..............................................      98

                              ABOUT THIS PROSPECTUS

     This prospectus is part of a registration  statement that we filed with the
Securities and Exchange  Commission,  or SEC,  utilizing a "shelf"  registration
process or continuous offering process.  Under this shelf registration  process,
the  selling  securityholders  may,  from  time to  time,  sell  the  securities
described in this prospectus in one or more offerings.  This prospectus provides
you with a general  description  of the  securities  which may be offered by the
selling  securityholders.  Each time a selling  securityholder sells securities,
the selling  securityholder is required to provide you with this prospectus and,
in certain cases, a prospectus  supplement containing specific information about
the selling  securityholder and the terms of the securities being offered.  That
prospectus  supplement  may include  additional  risk  factors or other  special
considerations  applicable to those  securities.  Any prospectus  supplement may
also add,  update,  or change  information in this  prospectus.  If there is any
inconsistency  between the  information  in this  prospectus  and any prospectus
supplement,  you should rely on the information in that  prospectus  supplement.
You should read both this prospectus and any prospectus supplement together with
additional information described under "Where You Can Find More Information."

     UNLESS WE HAVE INDICATED OTHERWISE,  REFERENCES IN THIS PROSPECTUS TO "KCS"
MEAN KANSAS CITY SOUTHERN (FORMERLY KANSAS CITY SOUTHERN  INDUSTRIES,  INC.) AND
REFERENCES TO THE  "COMPANY,"  "WE," "US," "OUR," AND SIMILAR TERMS REFER TO KCS
AND OUR CONSOLIDATED SUBSIDIARIES,  EXCLUDING THE DISCONTINUED OPERATIONS OF ITS
FORMER FINANCIAL SERVICES BUSINESS STILWELL FINANCIAL,  INC. (NOW KNOWN AS JANUS
CAPITAL GROUP INC. ("JANUS")). UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES
IN THIS PROSPECTUS TO "KCSR" MEAN THE KANSAS CITY SOUTHERN RAILWAY COMPANY,  THE
PRINCIPAL  SUBSIDIARY OF KCS, AND INCLUDES FOR ALL PERIODS PRESENTED THE GATEWAY
WESTERN RAILWAY COMPANY,  WHICH WAS MERGED INTO KCSR EFFECTIVE  OCTOBER 1, 2001.
REFERENCES TO "TFM" AND "TEX-MEX"  MEAN TFM, S.A. de C.V. AND THE  TEXAS-MEXICAN
RAILWAY COMPANY, RESPECTIVELY,  AFFILIATES OF KCS. REFERENCES TO "GRUPO TFM" AND
"MEXRAIL"  MEAN GRUPO  TRANSPORTACION  FERROVIARIA  MEXICANA,  S.A. DE C.V.  AND
MEXRAIL,  INC.,   RESPECTIVELY,   THE  PARENT  COMPANIES  OF  TFM  AND  TEX-MEX,
RESPECTIVELY.  REFERENCES  TO "GRUPO TMM" MEAN GRUPO TMM,  S.A.  (THE  SURVIVING
ENTITY IN A MERGER OF  TRANSPORTACION  MARITIMA  MEXICANA,  S.A. DE C.V. AND THE
FORMER  GRUPO  SERVIA,  S.A.  DE C.V.  AND WHICH,  AFTER A  REORGANIZATION  THAT
ELIMINATED THE VARIABLE PORTION OF GRUPO TMM, S.A. DE C.V. CAPITAL STOCK, BECAME
A FIXED CAPITAL  CORPORATION  WITH THE NAME GRUPO TMM, S.A.),  CURRENTLY A JOINT
VENTURE  PARTNER AND THE LARGEST  SHAREHOLDER  OF GRUPO TFM.  REFERENCES TO "TMM
HOLDINGS" AND " MULTIMODAL" MEAN TMM HOLDINGS,  S.A. DE C.V. AND TMM MULTIMODAL,
S.A. DE C.V., RESPECTIVELY,  SUBSIDIARIES OF GRUPO TMM. REFERENCES TO "KARA SUB"
MEAN KARA SUB,  INC., A  WHOLLY-OWNED  SUBSIDIARY OF KCS.  REFERENCES TO "NAFTA"
MEAN THE NORTH AMERICAN FREE TRADE AGREEMENT.





                               PROSPECTUS SUMMARY

     This summary may not contain all the  information  that may be important to
you. You should read this entire  prospectus  and the documents to which we have
referred you before making an investment decision. You should carefully consider
the information set forth under "Risk Factors." In addition,  certain statements
include forward-looking information which involves risks and uncertainties.  See
"Forward-Looking Statements."

                                   OUR COMPANY

We,  along with our  subsidiaries  and  affiliates,  own and  operate a uniquely
positioned  North  American  rail network  strategically  focused on the growing
north/south freight corridor that connects key commercial and industrial markets
in the central  United  States  with major  industrial  cities in Mexico.  KCS's
principal  subsidiary,  KCSR, which was founded in 1887, is one of seven Class I
railroads in the United States  (railroads with annual revenues of at least $250
million, as indexed for inflation).  Our rail network (KCSR, TFM and Tex-Mex) is
comprised of approximately 6,000 miles of main and branch lines. We have further
expanded our rail network through marketing alliances and strategic alliances.

     Our expanded network includes:

     o    KCSR,  which  operates  approximately  3,100  miles of main and branch
          lines running on a north/south axis from Kansas City,  Missouri to the
          Gulf of Mexico and on an east/west axis from Meridian,  Mississippi to
          Dallas,  Texas (our "Meridian  Speedway") and from Kansas City to East
          St. Louis, Illinois and Springfield, Illinois;

     o    our affiliates,  TFM, which operates approximately 2,650 miles of main
          and branch lines running from the U.S./Mexico border at Laredo,  Texas
          to Mexico City and serves most of Mexico's principal industrial cities
          and three of its major shipping ports,  and Tex-Mex,  which operates a
          160-mile rail line extending from Laredo to Corpus Christi, Texas;

     o    a marketing  agreement with Norfolk Southern Railway Company ("Norfolk
          Southern") that allows us to gain  incremental  traffic volume between
          the  southeast  and  the  southwest  United  States  and  a  marketing
          agreement with I&M Rail Link, now known as IC&E, that provides us with
          access to  Minneapolis  and  Chicago and to  originations  of corn and
          other grain in Iowa, Minnesota and Illinois;

     o    a strategic alliance with Canadian National Railway Company ("CN") and
          Illinois  Central  Corporation  ("IC," and together with CN, "CN/IC"),
          through   which  we  have  created  a   contiguous   rail  network  of
          approximately 25,000 miles of main and branch lines connecting Canada,
          the United States and Mexico;

     o    a joint  marketing  alliance,  entered  into in  April  2002  with The
          Burlington  Northern and Santa Fe Railway  Company  ("BNSF")  aimed at
          promoting  cooperation,  revenue  growth and  extending  market reach,
          principally to enhance chemical,  grain and forest product traffic for
          both railroads in the United States and Canada. The marketing alliance
          is also expected to improve  operating  efficiencies for both carriers
          in key  market  areas,  as well as  provide  customers  with  expanded
          service options; and

     o    our affiliate,  the Panama Canal Railway Company ("PCRC"), which holds
          the concession to operate the Panama Canal Railway, a 47-mile railroad
          located  adjacent  to  the  Panama  Canal.   This  railroad  has  been
          reconstructed  for the purpose of  performing  freight  and  passenger




          operations.  Its  wholly-owned  subsidiary,  Panarail  Tourism Company
          ("PTC"),  operates a commuter  and tourist  railway  service  over the
          lines of the Panama Canal Railway.

COMPANY INFORMATION

     KCS is  incorporated  in  Delaware.  Our  principal  executive  offices are
located at 427 West 12th Street,  Kansas City,  Missouri  64105.  Our  telephone
number is 816-983-1303.

                              PROPOSED ACQUISITION

     GENERAL

     Since 1997,  pursuant to a joint venture  agreement,  and other agreements,
entered into by KCS and Grupo TMM, subsidiaries of KCS and Grupo TMM have owned,
along with Mexican governmental  agencies,  interests in Grupo TFM, which is the
owner of 80% of the voting  stock of TFM. TFM holds the  concession  to operate,
and operates,  a major rail system in Mexico,  formerly  known as the "Northeast
Rail Lines".  In 1995,  KCS acquired from Grupo TMM 49% of the stock of Mexrail,
owner of 100% of the voting  stock of Tex-Mex.  Mexrail  also owns the  northern
half of the international  railway bridge at Laredo,  Texas.  Tex-Mex operates a
160 mile rail line from Laredo to Corpus Christi, Texas, which connects with the
KCSR through trackage rights over the Union Pacific Railroad between  Robbstown,
Texas and  Beaumont,  Texas.  In  March,  2002,  KCS and  Grupo  TMM sold  their
interests in Mexrail to TFM, with KCS receiving  approximately $31.4 million for
its 49%  interest in  Mexrail.  The  structure  of this  ownership  prior to the
execution  of the  Acquisition  Agreement  (defined  below)  (with  intermediate
subsidiaries,  other than KCSR,  eliminated),  including  imputed ownership from
TFM's ownership of 24.6% of Grupo TFM, appears in the following diagram:


     [Organizational  chart type diagram appears here showing ownership of Grupo
     TFM by KCS (46.6%, indirectly through its 100% ownership of KCSR) and Grupo
     TMM  (48.5%)(including in both cases imputed ownership from TFM's ownership
     of 24.6% of Grupo TFM), Grupo TFM's ownership of 80% of TFM (with the other
     20% held by the Mexican Government), TFM's ownership of 100% of Mexrail and
     Mexrail's ownership of 100%of Tex-Mex]



     On April 20, 2003,  KCS and Grupo TMM entered into separate  agreements for
the acquisition by KCS of control of TFM and Mexrail.  On May 9, 2003,  pursuant
to the terms of a stock purchase agreement for KCS to acquire control of Mexrail
(the "Stock  Purchase  Agreement"),  KCS  acquired  from Grupo TMM  (through its
subsidiary,  TFM) 51% of the shares of Mexrail for approximately  $32.7 million.
KCS deposited the Mexrail shares into a voting trust pending resolution of KCS's



application to the Surface  Transportation  Board ("STB")  seeking  authority to
exercise  common control over Tex-Mex and KCS's other rail  companies,  KCSR and
the Gateway Eastern Railway Company ("Gateway Eastern"). See "Description of the
Acquisition--Summary  of the Acquisition  Agreement and Related  Agreements" and
"Description of the Acquisition--Regulatory  Matters." On September 30, 2003, in
accordance  with the terms of the Stock Purchase  Agreement,  TFM reacquired the
51% interest in Mexrail from KCS at the purchase price paid to TFM by KCS in May
2003.  Upon the  repurchase of these Mexrail  shares by TFM, the Stock  Purchase
Agreement automatically terminated. See "--Recent Developments," "Description of
the    Acquisition--Recent    Developments,"    and    "Description    of    the
Acquisition--Summary  of the Acquisition  Agreement and Related  Agreements--The
Stock Purchase Agreement."

     Pursuant  to the  agreement  for the  acquisition  of  control  of TFM (the
"Acquisition")  entered  into on April 20,  2003 by KCS with Grupo TMM and other
parties (the "Acquisition  Agreement"),  KCS will acquire all of the interest of
Grupo TMM (held by its subsidiary,  Multimodal) in Grupo TFM for $200 million in
cash and  18,000,000  shares of a new class of common  securities  of KCS, to be
designated  "Class A Convertible  Common  Stock." Grupo TFM owns an 80% economic
interest  in TFM and all of the shares of stock with full  voting  rights of TFM
(the "TFM Voting Stock"). KCS has the right to elect to pay up to $80 million of
the cash portion of the purchase  price by delivering up to 6,400,000  shares of
KCS Class A Convertible  Common Stock or KCS common stock. KCS and Grupo TMM are
in dispute over Grupo TMM's attempt to terminate the Acquisition Agreement.  See
"--Recent Developments," "Description of the Acquisition--Recent Developments."

     The following diagram  illustrates the ownership structure resulting if the
acquisition of TFM is completed (eliminating intermediate subsidiaries)



     [Organizational  chart type diagram  appears here showing  ownership by KCS
     (to be renamed  "NAFTA  Rail") of 100% of Grupo TFM,  as well as KCS's 100%
     ownership of KCSR); Grupo TFM's ownership of 80% of TFM (with the other 20%
     held by the Mexican  Government and footnoted  with the  information in (1)
     below),  TFM's ownership of 100% of Mexrail and Mexrail's ownership of 100%
     of Tex-Mex]





(1) Limited Voting.  Mexican government has certain "put" rights discussed under
"Risk  Factors--KCS  Risk  Factors--Risks  Related  to Our  Business--We  may be
required  to  make  additional  investments  in  TFM"  and  "Description  of the
Acquisition--Summary     of    the    Acquisition    Agreement    and    Related
Agreements--Agreement  of  Assignment  and  Assumption  of  Rights,  Duties  and
Obligations."

     In addition,  provided the Acquisition has occurred and neither KCS nor any
of its subsidiaries has purchased TFM shares held by the Mexican government upon
exercise of the Mexican  government's  right to compel  purchase of those shares
(referred  to as the  "Put"),  KCS  will be  obligated  to pay to  Grupo  TMM an
additional  amount (referred to as the "VAT Contingency  Payment") of up to $180
million in cash in the event that a pending  Value Added Tax claim  (referred to
as the "VAT  Claim")  against  the  Mexican  government  by TFM is  successfully
resolved and the amount  received is greater than the purchase price of the Put.
See "Description of the  Acquisition--Summary  of the Acquisition  Agreement and
Related Agreements--The  Acquisition  Agreement--VAT  Contingency Payment." Upon
completion of the Acquisition,  KCS will assume Grupo TMM's  obligations to make
any payment  upon the  exercise by the  Mexican  government  of the Put and will
indemnify  Grupo  TMM  and  its  affiliates,   and  their  respective  officers,
directors,  employees  and  shareholders,  against  obligations  or  liabilities
relating  thereto.   See  "Description  of  the   Acquisition--Summary   of  the
Acquisition  Agreement  and  Related  Agreements--Agreement  of  Assignment  and
Assumption of Rights, Duties and Obligations."

     In  connection  with the  Acquisition,  KCS will  enter  into a  consulting
agreement with a consulting  company  organized by Jose Serrano Segovia pursuant
to which it will  provide  consulting  services  to KCS in  connection  with the
portion  of the  business  of KCS in  Mexico  for a period  of three  years.  As
consideration  for the services,  the consulting  company will receive an annual
fee of $600,000 per year and a grant of 2,100,000  shares of restricted stock of
KCS.  The  restricted  stock will vest over a period of time  subject to certain
conditions.  The consulting  agreement may be extended for an additional year at
the option of KCS, upon delivery of an additional  525,000  shares of restricted
stock. See "Description of the Acquisition--Summary of the Acquisition Agreement
and Related Agreements--Consulting Agreement."

     The  obligations  of KCS and  Grupo TMM to  complete  the  Acquisition  are
subject to a number of conditions.  See "Description of the Acquisition--Summary
of  the   Acquisition   Agreement   and  Related   Agreements--The   Acquisition
Agreement--Conditions to Obligations to Complete the Acquisition."

     RECENT DEVELOPMENTS

     DISPUTE OVER ACQUISITION AGREEMENT

     On August 18, 2003, Grupo TMM shareholders purportedly voted not to approve
the sale of Grupo TMM's interests in Grupo TFM to KCS. On August 23, 2003, Grupo
TMM sent a notice  to KCS  claiming  to  terminate  the  Acquisition  Agreement,
because  the Grupo  TMM  shareholders  had  failed to  approve  the  Acquisition
Agreement.

     On August 27, 2003,  KCS  announced  that it had  received  notice from the
Mexican  Foreign  Investment  Commission of its decision to close the proceeding
with respect to KCS's  application  to acquire  control of Grupo TFM and,  thus,
TFM,  without  prejudice to refile in the event the dispute is resolved  between
KCS and Grupo TMM over whether the Acquisition Agreement remains in effect.

     On August 29, 2003,  KCS delivered to Grupo TMM a formal notice of dispute,
referred to as the Notice of Dispute,  pursuant  to the  Acquisition  Agreement.
This initiated a 60-day negotiation  period between the parties.  If the parties
are unable to resolve the  disputes  within that period of time,  KCS intends to
initiate a binding  arbitration in accordance  with the terms of the Acquisition
Agreement.  In  addition,  on August  29,  2003,  KCS filed a  complaint  in the



Delaware  Chancery  Court  alleging that Grupo TMM had breached the  Acquisition
Agreement and seeking a final order requiring Grupo TMM not to sell Grupo TFM or
take other actions outside of the ordinary course of business, so as to preserve
the assets and business of TFM while the parties  follow the dispute  resolution
procedures provided for in the Acquisition Agreement.  The Notice of Dispute and
complaint  point out that the  Acquisition  Agreement  does not  provide  that a
negative  shareholder vote by Grupo TMM shareholders is a basis for termination,
and KCS maintains that the  Acquisition  Agreement is still valid and remains in
effect until December 31, 2004.

     On September 2, 2003,  KCS filed in the Delaware Court of Chancery a motion
for a preliminary  injunction to preserve the parties' positions while KCS seeks
to resolve its dispute  over Grupo TMM's  attempt to terminate  the  Acquisition
Agreement.  KCS asked for an expedited  hearing on its motion for a  preliminary
injunction.

     On September 15, 2003, KCS confirmed that  negotations  with Grupo TMM have
begun  under  the  dispute  resolution  process  contained  in  the  Acquisition
Agreement for Grupo TMM's interest in Grupo TFM. One meeting was held to discuss
negotiations, but no further meetings have been held.

     On October 22, 2003, KCS announced that Chancellor  William B. Chandler III
of the Delaware  Court of Chancery  has, in a ruling from the bench,  stated his
intention to grant KCS' motion seeking a preliminary  injunction to preserve the
parties' positions pending resolution of KCS' dispute with Grupo TMM.

     REPURCHASE OF MEXRAIL SHARES BY TFM

     On August 29, 2003,  KCS received a demand for TFM to  repurchase  from KCS
shares of Mexrail sold to KCS in May 2003. On September 23, 2003, the STB issued
a  decision  finding  no need to  rule  on the  transfer  back to TFM of the 51%
interest in Mexrail that KCS acquired on May 9, 2003. The effect of the decision
was to allow TFM to reaquire the shares in  accordance  with the Stock  Purchase
Agreement and KCS has abided by that agreement. The repurchase of Mexrail by TFM
on September 30, 2003  returned  100%  ownership of Mexrail to TFM and the Stock
Purchase Agreement automatically terminated.  The repurchase price was the price
KCS paid TFM in May.

     NOTICE OF TERMINATION OF JOINT VENTURE AGREEMENT

     In  addition,  KCS  acknowledged  receipt  from  Grupo  TMM of a notice  to
terminate a joint venture  agreement  between the parties  entered into in 1995.
Pursuant to such notice,  the joint venture agreement will terminate on December
1, 2003. The joint venture  agreement  provides that upon its  termination,  the
joint venture  shall be liquidated  and any assets held in the name of the joint
venture shall be distributed  proportionally  to KCS and Grupo TMM. There are no
significant  assets  held by the  joint  venture  and KCS  does not  expect  the
termination of the joint venture  agreement to have a material adverse effect on
KCS.

     STB REVIEW STATUS

     On  September  23,  2003,  the STB entered an order  asking all  interested
parties to file comments by September 30, 2003  addressing  whether "in light of
recent developments" the STB should continue with the procedural schedule, which
called  for a  decision  on the  merits to be issued by  October  17,  2003.  On
September  30,  2003,  KCS  filed  comments  with  the STB  suggesting  that STB
precedent  establishes  that  the STB  has  sufficient  jurisdiction  to rule on
control  applications even where closing on the underlying  transaction has been
put in doubt. In the  alternative,  KCS argued that the matter should be held in
abeyance, rather than dismissed,  until the arbitration is completed. On October
8, 2003, the STB issued an order  suspending the procedural  schedule  pending a
resolution  of the  uncertainties  that now  surround  KCS's  efforts to acquire
control  of  Tex-Mex,  and  requiring  KCS  to  file  status  reports  regarding
developments in its efforts to acquire control of TFM and Tex-Mex.




                                  THE OFFERING

     On May 5, 2003,  we completed a private  offering of the Series C Preferred
Stock.  We  entered  into a  registration  rights  agreement  with  the  initial
purchasers  in the private  offering in which we agreed,  for the benefit of the
holders of the Series C Preferred  Stock, to file a registration  statement with
the SEC by August 3, 2003 with  respect to  resales  of the  Series C  Preferred
Stock and common  stock  issued  upon the  conversion  of the Series C Preferred
Stock.  We also agreed to use our best  efforts to cause the shelf  registration
statement to be declared  effective under the Securities Act of 1933 by November
1, 2003 and to keep the shelf registration statement effective until the earlier
of (i) the sale to the public  pursuant  to Rule 144 (or any  similar  provision
then in force,  but not Rule 144A) under the Securities Act or the  registration
statement of which this prospectus forms a part of all the securities registered
thereunder,  and (ii) the  expiration of the holding  period  applicable to such
securities  held by persons that are not our affiliates  under Rule 144(k) under
the Securities Act or any successor provision, subject to permitted exceptions.

Securities offered............. 400,000 shares of Series C Preferred Stock.

Liquidation preference......... $500 per share of Series C Preferred Stock.

Dividends...................... Holders of Series C Preferred Stock are entitled
                                to receive,  when, as and if,  declared by our
                                board of directors,  out of funds legally
                                available  therefor, cash dividends  at the rate
                                of 4.25% per annumn payable quarterly in arrears
                                on February 15, May 15, August 15 and November
                                15 of each year, commencing August 15, 2003.
                                Dividends on the Series C Preferred Stock will
                                be cumulative from the date of initial issuance.
                                Accumulated but unpaid dividends cumulate
                                dividends at the annual rate of 4.25%.

                                We will also pay  "special  dividends" if we
                                fail to comply with  certain  obligations under
                                the registration  rights agreement discussed
                                above.

                                For so long as the Series C Preferred Stock
                                remains outstanding, (1) we will not declare,
                                pay or set apart funds for the payment of any
                                dividend or other distribution with respect to
                                any junior stock or parity stock and (2) neither
                                we, nor any of or subsidiaries will, subject to
                                certain exceptions, redeem, purchase or
                                otherwise acquire for consideration junior stock
                                or parity stock through a sinking fund or
                                otherwise, in each case unless we have paid or
                                set apart funds for the payment of all
                                accumulated and unpaid dividends, including
                                special dividends, if any, with respect to the
                                shares of Series C Preferred Stock and any
                                parity stock for all preceding dividend periods.
                                See "Description of the Series Preferred Stock--
                                Dividends."

Conversion..................... A holder may convert its Series C Preferred
                                Stock into a number of shares of our common
                                stock equal to the conversion rate only under
                                the following circumstances:

                                o   in any fiscal quarter commencing after June
                                    30, 2003 if the closing sale price of our
                                    common stock for at least 20 trading days in



                                    a period of 30 consecutive trading days
                                    ending on the last trading day of the
                                    preceding fiscal quarter is more than 110%
                                    of the initial conversion price (initially
                                    110% of $14.9375, or $16.4313);

`                               o   after the earlier of (1) the date the Series
                                    C Preferred Stock is assigned a credit
                                    rating by both Standard & Poor's Rating
                                    Services, a division of The McGraw-Hill
                                    Companies, Inc. and its successors ("S&P")
                                    and Moody's Investor Services and its
                                    successors ("Moody's") and (2) May 31, 2003,
                                    during any period in which the credit rating
                                    assigned to the Series C Preferred Stock by
                                    S&P is below CCC, or the credit rating
                                    assigned to the Series C Preferred Stock by
                                    Moody's is below Caa3, or no rating is
                                    assigned to the Series C Preferred Stock by
                                    either S&P or Moody's or any rating is
                                    suspended or withdrawn by either S&P or
                                    Moody's;

                                o   during the five business day period after
                                    any five consecutive trading day period in
                                    which the trading price per share of Series
                                    C Preferred Stock for each day of that
                                    period was less than 98% of the product of
                                    the closing sale price of our common stock
                                    and the conversion rate on each such day;

                                o   if the Series C Preferred Stock has been
                                    called for redemption; or

                                o   upon the occurrence of certain corporate
                                    transactions described under "Description of
                                    the Series C Preferred Stock--Conversion
                                    Rights--Conversion Upon Occurrence of
                                    Certain Corporate Transactions."


                                For each share of Series C Preferred Stock
                                surrendered for conversion, a holder will
                                receive 33.4728 shares of our common stock. This
                                represents an initial conversion price of
                                $14.9375 per share of common stock.  The
                                conversion rate may be adjusted for certain
                                reasons, but will not be adjusted for
                                accumulated and unpaid dividends or special
                                dividends, if any. Upon conversion, holders will
                                not receive any cash payment representing
                                accumulated dividends, if any. Instead,
                                accumulated dividends, if any, will be deemed
                                paid by the common stock received by holders on
                                conversion.

Optional redemption.............We may not redeem any shares of Series C
                                Preferred Stock at any time before May 20, 2008.
                                On or after May 20, 2008, we may redeem some or
                                all of the Series C Preferred Stock at a
                                redemption price equal to 100% of the
                                liquidation preference, plus accumulated but
                                unpaid dividends, including special dividends,
                                if any, to the redemption date, but only if the
                                closing sale price of our common stock for 20
                                trading days within a period of 30 consecutive
                                trading days ending on the trading day before
                                the date we give the redemption notice exceeds
                                135% of the conversion price of the Series C
                                Preferred Stock, subject to adjustment in a
                                number of circumstances as described under
                                "Description of the Series C Preferred Stock--
                                Adjustments to the Conversion Rate."  We may
                                choose to pay the redemption price in cash,
                                common stock, or a combination of cash and
                                common stock.  If we elect to pay all or a
                                portion of the redemption price in shares of
                                common stock, the common stock will be valued at
                                a discount of 2.5% below the average of the
                                closing sale prices for the five trading days
                                ending on the third trading day prior to the
                                redemption date.  The terms of our debt
                                instruments and/or bank facilities currently
                                restrict our ability to redeem shares of Series
                                C Preferred Stock for cash.

                                If full cumulative dividends on the Series C
                                Preferred Stock have not been paid, the Series C
                                Preferred Stock may not be redeemed and we may
                                not purchase or acquire any shares of Series C
                                Preferred Stock otherwise than pursuant to a
                                purchase or exchange offer made on the same
                                terms to all holders of Series C Preferred
                                Stock.

                                The Series C Preferred Stock is not subject to
                                any mandatory redemption or sinking fund
                                provision.

Fundamental change............. If we become subject to a fundamental change,
                                each holder of shares of Series C Preferred
                                Stock will have the right to require us to
                                purchase any or all of its shares at a purchase
                                price equal to 100% of the liquidation
                                preference, plus accumulated and unpaid
                                dividends, including special dividends, if any,
                                to the date of purchase. We may choose to pay
                                the purchase price in cash, common stock, or a
                                combination of cash and common stock. If we
                                elect to pay all or a portion of the purchase
                                price in shares of common stock, the common
                                stock will be valued at a discount of 2.5% below
                                the average of the closing sale prices for the
                                five trading days ending on the third trading
                                day prior to the purchase date. Our ability to
                                purchase all or a portion of Series C Preferred
                                Stock for cash is subject to our obligation to
                                repay or repurchase any outstanding debt
                                required to be repaid or repurchased in
                                connection with a fundamental change and to any
                                contractual restrictions then contained in our
                                debt. If, following a fundamental change, we are
                                prohibited from paying the purchase price of the
                                Series C Preferred Stock in cash under the terms
                                of our debt instruments, but are not prohibited
                                under applicable law from paying such purchase
                                price in shares of our common stock, we will pay
                                the purchase price of the Series C Preferred
                                Stock in shares of our common stock.

Voting rights.................. Holders of Series C Preferred Stock do not have
                                any voting rights except as set forth below, as
                                specifically provided for in our restated
                                certificate of incorporation or as otherwise
                                from time to time required by law. Whenever (1)
                                dividends on the Series C Preferred Stock or any
                                other class or series of stock ranking on a
                                parity with the Series C Preferred Stock with
                                respect to the payment of dividends are in
                                arrears for dividend periods, whether or not
                                consecutive, containing in the aggregate a
                                number of days equivalent to six calendar
                                quarters, or (2) we fail to pay the redemption
                                price on the date shares of Series C Preferred
                                Stock are called for redemption or the purchase
                                price on the purchase date for shares of Series
                                C Preferred Stock following a fundamental
                                change, then, in each case, the holders of
                                Series C Preferred Stock (voting separately as a
                                class with all other series of Series C
                                Preferred Stock upon which like voting rights
                                have been conferred and are exercisable) will be
                                entitled to vote for the election of two of the
                                authorized number of our directors at the next
                                annual meeting of stockholders and at each
                                subsequent meeting until all dividends
                                accumulated on the Series C Preferred Stock have
                                been fully paid or set apart for payment. The
                                term of office of all directors elected by the
                                holders of Series C Preferred Stock will
                                terminate immediately upon the termination of
                                the rights of the holder of Series C Preferred
                                Stock to vote for directors. Holders of shares
                                of Series C Preferred Stock will have one vote
                                for each share of Series C Preferred Stock held.

Ranking........................ The Series C Preferred Stock are, with respect
                                to dividend rights and rights upon liquidation,
                                winding up or dissolution:

                                o   junior to all our existing and future debt
                                    obligations;

                                o   junior to our $25 par value preferred stock
                                    and each other class or series of our
                                    capital stock other than (a) our common
                                    stock and any other class or series of our
                                    capital stock the terms of which provide
                                    that such class or series will rank junior
                                    to the Series C Preferred Stock and (b) any
                                    other class or series of our capital stock
                                    the terms of which provide that such class
                                    or series will rank on a parity with the
                                    Series C Preferred Stock;

                                o   on a parity with any other class or series
                                    of our capital stock the terms of which
                                    provide that such class or series will rank
                                    on a parity with the Series C Preferred
                                    Stock;

                                o   senior to our common stock and any other
                                    class or series of our capital stock the
                                    terms of which provide that such class or
                                    series will rank junior to the Series C
                                    Preferred Stock; and

                                o   effectively junior to all of our
                                    subsidiaries' (i) existing and future
                                    liabilities and (ii) capital stock held by
                                    others.


Trading........................ We do not intend to list the Series C Preferred
                                Stock on any national securities exchange.
NYSE symbol for our
common stock................... Our common stock is traded on the New York Stock
                                Exchange under the symbol "KSU."

     On September 24, 2003, KCS announced that its Board of Directors declared a
cash dividend of $5.3125 per share on its outstanding  Series C Preferred Stock.
The dividend will be payable on November 17, 2003, to  stockholders of record at
the close of business on November 3, 2003.






       RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS

     For purposes of determining the ratio of earnings to combined fixed charges
and  preferred  dividends,  earnings  are  defined  as (i) the sum of (a) pretax
income from continuing  operations before  adjustment for minority  interests in
consolidated  subsidiaries  or income or loss from equity  investees,  (b) fixed
charges,  (c) amortization of capitalized  interest,  (d) distributed  income of
equity  investees,  and (e) our share of pretax  losses of equity  investees for
which charges arising from  guarantees are included in fixed charges,  less (ii)
the  sum  of  (x)  interest   capitalized,   (y)  preference  security  dividend
requirements  of  consolidated  subsidiaries,  and (z) the minority  interest in
pretax  income of  subsidiaries  that have not  incurred  fixed  charges.  Fixed
charges  consist  of  interest  (whether  expensed  or  capitalized),  amortized
premiums,  discounts  and  capitalized  expenses  related to  indebtedness,  and
estimate of the interest within rental expense, and preference security dividend
requirements of consolidated subsidiaries. Preference security dividend consists
of the  amount of pretax  earnings  that is  required  to pay the  dividends  on
outstanding preference securities.



                                                                                         
                                                            SIX
                                                           MONTHS
                                                           ENDED
                                                          JUNE 30,              YEAR ENDED DECEMBER 31,
                                                          -------      -------------------------------------------
                                                            2003        2002     2001     2000    1999     1998
                                                            ----        ----     ----     ----    ----     ----
Ratio of earnings to combined fixed charges and
   preferred dividends                                      0.95        1.28     1.07     1.03    1.15     1.91



The ratio of earnings to fixed  charges for June 30, 2003 would have been 1:1 if
a deficiency of $1.7 million was eliminated.

                                  RISK FACTORS

     An  investment  in the Series C Preferred  Stock or the  underlying  common
stock involves certain risks that a potential investor should carefully evaluate
prior to  making  an  investment  in the  Series C  Preferred  Stock.  See "Risk
Factors."










                                  RISK FACTORS

KCS RISK FACTORS
----------------

RISKS RELATED TO THE SERIES C PREFERRED STOCK
--------------------------------------------

THE SERIES C PREFERRED  STOCK RANKS JUNIOR TO ALL OF OUR  LIABILITIES AND TO OUR
$25 PAR VALUE PREFERRED STOCK.

     The Series C Preferred  Stock ranks junior to all of our  liabilities.  The
Series C Preferred  Stock also ranks junior to our $25 par value preferred stock
("Preferred Stock"). In the event of our bankruptcy,  liquidation or winding-up,
our assets will be available to pay obligations on the Series C Preferred Stock,
including  the purchase of your shares of the Series C Preferred  Stock for cash
upon a change in control,  only after all our indebtedness and other liabilities
and our  Preferred  Stock have been paid.  In  addition,  the Series C Preferred
Stock will effectively rank junior to all existing and future liabilities of our
subsidiaries  and any  capital  stock of our  subsidiaries  held by others.  The
rights  of  holders  of the  Series  C  Preferred  Stock to  participate  in the
distribution of assets of our subsidiaries  will rank junior to the prior claims
of that  subsidiary's  creditors and any other equity  holders.  As of March 31,
2003,  we had total  consolidated  liabilities  of  approximately  $1.3 billion.
Consequently,  if we are forced to liquidate our assets to pay our creditors, we
may not have sufficient assets remaining to pay amounts due on any or all of the
Series C Preferred Stock then  outstanding.  We and our  subsidiaries  may incur
substantial  amounts of  additional  debt and other  obligations  that will rank
senior to the Series C Preferred Stock.

WE MAY NOT BE ABLE TO PAY THE PURCHASE  PRICE OF THE SERIES C PREFRRED  STOCK IN
CASH UPON A FUNDAMENTAL CHANGE. WE ALSO COULD BE PREVENTED FROM PAYING DIVIDENDS
ON SHARES OF THE SERIES C PREFERRED STOCK.

     In the event of a fundamental  change you will have the right to require us
to purchase all your shares of Series C Preferred Stock. We may pay the purchase
price in cash, shares of our common stock, or a combination thereof. However, we
may not have sufficient cash to purchase your shares of Series C Preferred Stock
upon a fundamental  change or may in certain  circumstances  either be forced to
pay the purchase price in shares of our common stock or may be unable to pay the
purchase  price in cash or may be legally  prohibited  from paying the  purchase
price in shares of our common stock.

     Under the terms of our current  debt  instruments  we are  prohibited  from
paying the purchase price of the Series C Preferred  Stock in cash.  Even if the
terms  of the  instruments  governing  our  indebtedness  allow  us to pay  cash
dividends  and to redeem and purchase the Series C Preferred  Stock in cash,  we
can only make such payments from legally  available  funds, as determined by our
board of directors, and such funds may not be available to pay cash dividends to
you or to redeem or purchase your shares of Series C Preferred Stock.

     In addition,  because we are a holding company, our ability to purchase the
Series C Preferred  Stock for cash or to pay dividends on the Series C Preferred
Stock may be limited by  restrictions  on our  ability to obtain  funds for such
repurchase through dividends from our subsidiaries.

YOU MAY BE UNABLE TO CONVERT THE SERIES C PREFERRED  STOCK INTO OUR COMMON STOCK
AND, IF YOU ARE ABLE AND DO CONVERT, YOU WILL EXPERIENCE IMMEDIATE DILUTION.

     You may convert  your shares of Series C Preferred  Stock into common stock
only if (1) the closing sale price of our common stock  reaches,  or the trading
price of the Series C Preferred Stock falls below, specified thresholds, (2) the
Series C  Preferred  Stock is called for  redemption,  (3)  specified  corporate
transactions  have occurred or (4) upon certain credit  downgrade  events.  Your
inability  to convert  the Series C  Preferred  Stock may  adversely  affect its
value.

     If you  convert  your  shares of Series C  Preferred  Stock into  shares of
common  stock,  you will  experience  immediate  dilution  because the per share



conversion price of the Series C Preferred Stock immediately after this offering
will be higher  than the net  tangible  book value per share of the  outstanding
common  stock.  In addition,  you will also  experience  dilution when and if we
issue  additional  shares of common  stock,  which we may be  required  to issue
pursuant to the Acquisition or related  ancillary  agreements or otherwise issue
pursuant  to  options,  warrants,  our stock  option  plan or other  employee or
director compensation plans.

THE PRICE OF OUR COMMON STOCK,  AND  THEREFORE OF THE SERIES C PREFERRED  STOCK,
MAY FLUCTUATE  SIGNIFICANTLY,  WHICH MAY MAKE IT DIFFICULT FOR YOU TO RESELL THE
SERIES C PREFERRED STOCK, OR COMMON STOCK ISSUABLE UPON CONVERSION OF THE SERIES
C PREFERRED STOCK, WHEN YOU WANT OR AT PRICES YOU FIND ATTRACTIVE.

     The price of our  common  stock on the New York Stock  Exchange  constantly
changes.  We expect that the market price of our common  stock will  continue to
fluctuate.  Because the Series C Preferred Stock is convertible  into our common
stock,  volatility or depressed prices for our common stock could have a similar
effect on the trading  price of the Series C Preferred  Stock.  Holders who have
received  common  stock  upon  conversion  will also be  subject  to the risk of
volatility and depressed prices.

     Our stock price can fluctuate as a result of a variety of factors,  many of
which are beyond our control. These factors include:

     o    quarterly variations in our operating results;

     o    operating  results  that vary  from the  expectations  of  management,
          securities analysts and investors;

     o    changes  in  expectations  as to  our  future  financial  performance,
          including financial estimates by securities analysts and investors;

     o    developments generally affecting our industry;

     o    announcements  by us or  our  competitors  of  significant  contracts,
          acquisitions, joint marketing relationships, joint ventures or capital
          commitments;

     o    announcements  by third parties of  significant  claims or proceedings
          against us;

     o    our dividend policy;

     o    future sales of our equity or equity-linked securities;

     o    our dispute with Grupo TMM over Grupo TMM's  attempt to terminate  the
          Acquisition Agreement; and

     o    general domestic and international economic conditions.

     In addition, the stock market in general has experienced extreme volatility
that has often been  unrelated  to the  operating  performance  of a  particular
company.  These broad market  fluctuations may adversely affect the market price
of our common stock.

THE TRADING PRICE FOR THE SERIES C PREFERRED STOCK WILL BE DIRECTLY  AFFECTED BY
THE TRADING PRICES FOR OUR COMMON STOCK, WHICH IS IMPOSSIBLE TO PREDICT.

     The price of our common  stock could be  affected by possible  sales of our
common  stock  by  investors  who view the  Series C  Preferred  Stock as a more
attractive  means of equity  participation  in KCS and by hedging  or  arbitrage
activity that may develop  involving the common stock.  The arbitrage  could, in
turn, affect the trading prices of the Series C Preferred Stock.






OUR RIGHTS AGREEMENT AND AMENDED CHARTER DOCUMENTS MAY MAKE IT HARDER FOR OTHERS
TO  OBTAIN  CONTROL  OF US EVEN  IF  SOME  STOCKHOLDERS  MIGHT  CONSIDER  SUCH A
DEVELOPMENT FAVORABLE, WHICH MAY ADVERSELIY AFFECT OUR STOCK PRICE.

     Our rights agreement and provisions of our amended and restated certificate
of incorporation and our by-laws may delay, inhibit or prevent someone from
gaining control of us through a tender offer, business combination, proxy
contest or some other method even if some of our stockholders might believe a
change in control is desirable.

ISSUANCE OF CLASS A CONVERTIBLE COMMON STOCK AND COMMON STOCK IN CONNECTION WITH
THE ACQUISITION COULD CAUSE THE PRICE OF OUR COMMON STOCK TO FALL.

     Under the terms of the Acquisition Agreement, KCS, at its option, may elect
to pay up to $80 million of the $200  million cash  consideration  for the Grupo
TFM  shares  by  delivering  a  number  of  shares  of  common  stock or Class A
Convertible  Common Stock  determined  by dividing the amount that KCS elects to
pay other than in cash by $12.50. Assuming KCS elects to pay $80 million in this
manner,  KCS would deliver  6,400,000  shares.  In addition,  shares of KARA Sub
purchased  by  Multimodal   during  the  course  of  the  Acquisition  shall  be
automatically converted into 18,000,000 shares of our Class A Convertible Common
Stock upon the successful completion of the Acquisition. The Class A Convertible
Common Stock will be convertible  into an equal number of shares of common stock
at any time, upon the option of holders, and mandatorily, upon the occurrence of
certain conditions.

     In  connection  with the  Acquisition,  KCS will  enter  into a  consulting
agreement  pursuant to which 2,100,000 shares of restricted common stock will be
granted to the consulting firm. The restricted common stock,  subject to certain
performance conditions under the consulting agreement, will vest over the course
of three years following the date the Acquisition is consummated. If KCS, in its
sole  discretion,  chooses to extend the consulting  agreement at the end of its
three-year term, an additional 525,000 shares of restricted common stock will be
granted and will immediately vest.

     KCS will,  pursuant to a  registration  rights  agreement,  be obligated to
register  the  shares of common  stock  issued  upon  conversion  of the Class A
Convertible  Common Stock,  pursuant to the Acquisition  Agreement to the extent
that KCS elects to pay a portion of the cash consideration  through the issuance
of shares of common stock,  pursuant to the consulting  agreement,  or otherwise
acquired by Grupo TMM, TMM Holdings,  Multimodal, certain Grupo TMM stockholders
or any of their respective affiliates upon the exercise of pre-emptive rights in
compliance with the Stockholders' Agreement.

     We cannot predict whether any actual or potential  increase in availability
of our common stock for sale as a result of these  transactions  will  adversely
affect the market price of our common stock.

OUR ABILITY TO PAY DIVIDENDS  MAY BE LIMITED,  AND WE DO NOT  ANTICIPATE  PAYING
CASH DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.

     We are  restricted  in our ability to pay  dividends  to the holders of our
common stock by the terms of our  outstanding  Series C Preferred  Stock and our
credit  facilities  and senior  notes.  In the  future,  we may agree to further
restrictions  on our ability to pay  dividends.  In  addition,  to maintain  our
credit ratings, we may be limited in our ability to pay dividends so that we can
maintain an  appropriate  level of debt.  During the first quarter of 2000,  our
board of directors  suspended our common stock  dividends.  We do not anticipate
making any cash dividend payments to our common stockholders for the foreseeable
future.






SUBSTANTIAL  SALES OF OUR COMMON STOCK COULD  ADVERSELY  AFFECT OUR STOCK PRICE.
SALES OF  SUBSTANTIAL  AMOUNTS OF OUR COMMON  STOCK IN THE PUBLIC  MARKET  COULD
ADVERSELY AFFECT THE PREVAILING MARKET PRICE OF OUR COMMON STOCK.

     Commencing July 29, 2003, an additional 5,384,883 shares beneficially owned
by our  executive  officers  and  directors  became  freely  tradeable  upon the
expiration of  agreements  not to sell such shares,  subject to compliance  with
Rule 144 under the Securities Act of 1933. In addition,  as of June 30, 2003, we
had 1,188,020  remaining  shares of common stock reserved for issuance under our
stock option plan. Sales of common stock by stockholders  upon expiration of the
lock-up agreements, exercise of their options, or the perception that such sales
could occur, may adversely affect the market price of our common stock.

WE HAVE PROVISIONS IN OUR CHARTER, BYLAWS AND RIGHTS AGREEMENT THAT COULD DETER,
DELAY OR PREVENT A THIRD PARTY FROM  ACQUIRING US AND THAT COULD  DEPRIVE YOU OF
AN OPPORTUNITY TO OBTAIN A TAKEOVER PREMIUM FOR SHARES OF OUR COMMON STOCK.

     We have  provisions  in our  charter  and bylaws  that may delay or prevent
unsolicited  takeover bids from third parties.  These provisions may deprive our
stockholders of an opportunity to sell their shares at a premium over prevailing
market prices. For example, our restated  certificate of incorporation  provides
for a classified board of directors. It further provides that the vote of 70% of
the shares  entitled to vote in the  election of  directors is required to amend
our restated certificate of incorporation to increase the number of directors to
more than  eighteen,  abolish  cumulative  voting for  directors and abolish the
classification  of the  board.  The same  vote  requirement  is  imposed  by our
restated certificate of incorporation on certain transactions involving mergers,
consolidations, sales or leases of assets with or to certain owners of more than
5% of our outstanding  stock entitled to vote in the election of directors.  Our
bylaws provide that a stockholder must provide us with advance written notice of
its intent to  nominate a director  or raise a matter at an annual  meeting.  In
addition,  we have adopted a rights agreement which under certain  circumstances
would significantly impair the ability of third parties to acquire control of us
without prior approval of our board of directors.


RISKS RELATED TO OUR BUSINESS
-----------------------------

WE MAY BE REQUIRED TO MAKE ADDITIONAL INVESTMENTS IN TFM.

     The  Mexican  government  has the  right  to sell its 20%  interest  in TFM
through a public  offering on October  31,  2003 (or prior to October 31,  2003,
with the consent of Grupo TFM). If, on October 31, 2003, the Mexican  government
has not sold all of its capital stock in TFM, Grupo TFM is obligated to purchase
the  capital  stock at the initial  share price paid by Grupo TFM plus  interest
computed at the Mexican Base Rate,  published  by Banco de Mexico.  In the event
that Grupo TFM does not purchase the Mexican  government's  20% interest in TFM,
Grupo TMM,  and we, or either of us alone,  will be  obligated  to purchase  the
Mexican government's remaining interest in TFM. If the Acquisition is completed,
we will be solely  responsible  for  purchasing  the  Mexican  government's  20%
interest in TFM. If we had been  required to purchase  this  interest as of June
30, 2003, the total purchase price would have been approximately  $490.9 million
and as of that date, based on publicly  available  financial  information  about
Grupo TMM, Grupo TMM did not appear to have the financial  resources to complete
its share of the  purchase.  Grupo TMM  disclosed  in its Form 20-F for the year
ended  December  31,  2002,  that it did  not at the  time  of the  filing  have
sufficient resources to acquire the Mexican government's interest if required to
do so.






WE ARE VULNERABLE TO INCREASES IN FUEL COSTS AND DECREASES IN FUEL SUPPLIES. ANY
SIGNIFICANT INCREASE IN THE COST OF FUEL, OR SEVERE DISRUPTION OF FUEL SUPPLIES,
WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,  RESULTS OF OEPRATIONS AND
FINANCIAL CONDITION.

     We incur  substantial  fuel costs in our  railroad  operations.  During the
three-year period ended December 31, 2002,  locomotive fuel expenses represented
an average of 8.7% of KCSR's total operating  costs.  Fuel costs are affected by
traffic  levels,  efficiency of operations and equipment,  and petroleum  market
conditions.  The supply and cost of fuel is subject to market  conditions and is
influenced by numerous  factors beyond our control,  including  general economic
conditions,  world markets, government programs and regulations and competition.
Fuel  represented  7.7% of total  KCSR  operating  costs in 2002.  We attempt to
minimize  the  effects  of fuel  price  fluctuations  through  forward  purchase
contracts and hedging  agreements,  but cannot guarantee that those arrangements
will be  beneficial  to us. Any  significant  increase in the cost of fuel could
have a  material  adverse  effect on our  business,  results of  operations  and
financial condition.  During the first quarter of 2003, average fuel prices were
43% higher than in the first quarter of 2002. Our  operations,  as well as those
of our competitors,  could also be affected by any limitation in the fuel supply
or by any imposition of mandatory  allocation or rationing  regulations.  In the
event of a severe  disruption of fuel supplies  resulting from supply shortages,
political unrest,  war or otherwise,  the operations of rail and truck carriers,
including us, could be adversely affected.

ONE OF OUR  COAL  CUSTOMERS  ACCOUNTS  FOR  APPROXIMATELY  11%  OF  KCS'S  TOTAL
REVENUES.


     Our largest coal customer,  Southwestern Electric Power Company ("SWEPCO"),
a  subsidiary  of  American   Electric  Power  Company,   Inc.,   accounted  for
approximately  64% of our coal  revenues  and  approximately  11% of KCS's total
revenues for the year ended  December 31, 2002. The loss of all or a significant
part of  SWEPCO's  business,  or a  service  outage  at one or both of  SWEPCO's
facilities  that we serve,  could  materially  adversely  affect  our  financial
condition and results of operations.

WE ARE SUBJECT TO EXTENSIVE RAILROAD INDUSTRY REGULATION AND RELY UPON UNIONIZED
LABOR.

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

     Approximately  84% of KCSR  employees are covered under various  collective
bargaining agreements.  Periodically,  the collective bargaining agreements with
the various unions become eligible for  re-negotiation.  In 1996, national labor
contracts  governing  KCSR  were  negotiated  with all  major  railroad  unions,
including the United Transportation Union ("UTU"), the Brotherhood of Locomotive
Engineers,  the Transportation  Communications  International Union ("TCU"), the
Brotherhood  of  Maintenance of Way Employees  ("BMWE"),  and the  International
Association  of Machinists  and Aerospace  Workers.  In August 2002, a new labor
contract was reached with the UTU. The provisions of this agreement  include the
use of remote  control  locomotives  in and  around  terminals  and  retroactive
application of wage  increases back to July 1, 2002.  Also, a new labor contract
has been  reached with the TCU which was signed on January 23, 2003. A new labor
contract was reached with the BMWE effective May 31, 2001.  Formal  negotiations
to enter into new  agreements are in progress with the other unions and the 1996
labor contracts will remain in effect until new agreements are reached. The wage
increase  elements of these new  agreements  may have  retroactive  application.
Management has reached new agreements with all but one of the unions relating to
the former Gateway  Western.  Gateway Western was merged into KCSR on October 1,
2001.  Similarly,  management has reached new agreements with all but one of the
unions relating to the former MidSouth Railroad ("MidSouth") employees (MidSouth
was merged  into KCSR on January 1,  1994).  Discussions  with these  unions are
ongoing.  The  provisions  of the various  labor  agreements  generally  include
periodic general wage increases,  lump-sum  payments to workers and greater work



rule flexibility,  among other  provisions.  Management does not expect that the
negotiations  or the resulting  labor  agreements will have a material impact on
our consolidated results of operations, financial condition or cash flows.

     We may be  subject  to work  stoppages  in the  future as a result of labor
disputes and may be subject to terms and  conditions  in amended or future labor
agreements  that  could  have  a  material  adverse  affect  on our  results  of
operations,  financial  position  and  cash  flows.  Railroads  continue  to  be
restricted by certain  remaining  restrictive work rules, and are thus prevented
from achieving optimum productivity with existing technology and systems.

UTILITY INDUSTRY DEREGULATION MAY REDUCE OUR COAL FREIGHT REVENUES OR MARGINS.

     Historically,  coal has been an important commodity handled by us. In 2002,
coal revenues  comprised  approximately  18.1% of KCSR's total carload revenues,
all of which result from deliveries to utility  customers.  The utility industry
is  undergoing a process of  deregulation  which will likely cause  utilities to
become  more  competitive  and thus more  aggressive  in  negotiating  with coal
transportation companies to reduce costs. This could create downward pressure on
utility   coal   transportation   rates  and  increase   service   requirements.
Additionally,  there can be no assurance  that  negotiated  coal  transportation
rates  will  remain at  current  levels in the  future.  Continuing  competitive
pressures,  lower coal  transportation  rates and declining margins could have a
material  adverse  effect on our  business,  financial  condition and results of
operations.

     Utilities will also have greater flexibility in selling electricity to, and
buying  electricity  from,  other regional  markets.  This could have a material
adverse  effect  on our  utility  customers  if such  customers  are not able to
compete  effectively  with new utility  companies  that enter  their  respective
markets.  As a result,  the pattern of coal shipments in a particular market may
shift to an alternative utility company that does not use us to deliver its coal
requirements.  While  we are  working  to  help  our  utility  customers  remain
competitive  in  this  evolving  environment,  changes  in the  pattern  of coal
movements  could  have a  material  adverse  impact on our  business,  financial
condition and results of operations.

IF THE PROPOSED  MERGER OF TWO MEXICAN TRUNK LINE RAILROADS IS  CONSUMMATED,  IT
COULD HAVE A MATERIAL  ADVERSE  EFFECT ON THE VALUE OF OUR  INVESTMENT  IN GRUPO
TFM.

     Grupo Carso,  S.A. de C.V. and Grupo Mexico,  S.A. de C.V.  announced their
intention  to merge the  Mexican  main line  railroads,  Ferrosur,  S.A. de C.V.
("Ferrosur") and Ferrocarril Mexicano,  S.A. de C.V. ("Ferromex").  Ferrosur and
Ferromex  are  two  of  the  three  main  line  railroads  created  out  of  the
privatization of the Mexican National Railway System. Our affiliate, TFM, is the
third.  Approval  of the  proposed  merger  was  denied by the  Mexican  Federal
Competition  Commission,  as  was  Ferrosur-Ferromex's   motion  to  reconsider.
Ferromex has filed an appeal  (amparo) from the decision of the Mexican  Federal
Competition  Commission's  decision  that is still  pending  before the  courts.
Should the decision of the Mexican Federal Competition Commission be reversed on
grounds  that allow the proposed  merger to go forward,  and should the proposed
merger be consummated,  it could have a material  adverse effect on the value of
our investment in Grupo TFM.

WE MAY BE ADVERSELY  AFFECTED BY CHANGES IN GENERAL  ECONOMIC,  WEATHER OR OTHER
CONDITIONS.

     Our  operations  may be  adversely  affected  by  changes  in the  economic
conditions of the industries  and geographic  areas that produce and consume the
freight  that we  transport.  The  relative  strength  or weakness of the United
States  economy as well as various  international  and regional  economies  also
affects the businesses served by us. Grupo TFM, Panama Canal Railway Company and
Panarail  Tourism Company are more directly  affected by their  respective local
economy.  Historically,  a stronger economy has resulted in improved results for
our rail  transportation  operations.  Conversely,  when the economy has slowed,
results have been less  favorable.  Our  revenues may be affected by  prevailing
economic  conditions and, if an economic slowdown or recession occurs in our key
markets, the volume of rail shipments is likely to be reduced. Additionally, our
operations may be affected by adverse weather conditions.  A weak harvest in the
Midwest,  for  example,  may  substantially  reduce  the volume of  business  we



traditionally handle for our agricultural products customers. Additionally, many
of the goods and commodities we carry experience cyclical demand. Our results of
operations  can be  expected  to reflect  this  cyclical  demand  because of the
significant fixed costs inherent in railroad operations. Our operations may also
be affected by natural  disasters or terrorist acts.  Significant  reductions in
our volume of rail shipments due to economic,  weather or other conditions could
have a material adverse effect on our business,  financial condition and results
of operations.

OUR OPERATING  RESULTS AND FINANCIAL  CONDITION  WILL DEPEND ON EXECUTION OF OUR
BUSINESS  STRATEGY.  IF WE  FAIL  TO  EXECUTE  OUR  BUSINESS  STRATEGY,  IT  MAY
NEGATIVELY IMPACT OUR FINANCIAL CONDITION.

     Our operating results and financial  condition will depend in large measure
on our ability to  successfully  execute our  business  strategy.  Our  business
strategy  includes  capitalizing on NAFTA trade to generate traffic and increase
revenues, exploiting our domestic opportunities,  establishing new and expanding
existing strategic  alliances and marketing  agreements,  and providing superior
customer  service.  Successful  implementation  of this strategy depends on many
factors, including factors beyond our control. There can be no assurance that we
will be able to implement  our strategy on a timely basis or at all or that,  if
implemented, such strategy will achieve the desired results.

WE  COMPETE  AGAINST  OTHER  RAILROADS,   TRUCK  CARRIERS  AND  OTHER  MODES  OF
TRANSPORTATION.

     If we are unable to compete successfully,  it could have a material adverse
effect on our business, financial condition and results of operations.

     Our rail operations compete against other railroads, many of which are much
larger and have  significantly  greater  financial and other  resources than us.
Since 1994, there has been significant  consolidation among major North American
rail carriers.  As a result of this consolidation,  the railroad industry is now
dominated by a few "mega-carriers." We believe that our revenues were negatively
affected  by the  merger of  Burlington  Northern,  Inc.  and  Santa Fe  Pacific
Corporation  in 1995 (forming  BNSF),  the merger of the Union Pacific  Railroad
Company ("UP") with the Chicago and North Western Transportation Company in 1995
and the merger of the UP and the  Southern  Pacific  Rail  Corporation  in 1996,
which led to diversions of rail traffic away from our lines.  We also regard the
larger  western   railroads  (BNSF  and  UP),  in  particular,   as  significant
competitors  to our  operations  and  prospects  because  of  their  substantial
resources.

     Truck  carriers  have  eroded  the  railroad   industry's  share  of  total
transportation  revenues.  Changing regulations,  subsidized highway improvement
programs and favorable labor regulations have improved the competitive  position
of trucks in the United States as an alternative mode of surface  transportation
for many commodities.  In the United States,  the trucking industry generally is
more cost and transit-time  competitive than railroads for short-haul distances.
We are also subject to competition from barge lines and other maritime shipping.
Mississippi and Missouri River barge traffic,  among others,  compete with us in
the  transportation  of bulk  commodities  such as grains,  steel and  petroleum
products.

     Increased  competition has resulted in downward  pressure on freight rates.
Competition with other railroads and other modes of  transportation is generally
based on the rates charged,  the quality and reliability of the service provided
and the quality of the carrier's equipment for certain  commodities.  Continuing
competitive pressures and declining margins could have a material adverse effect
on our business, financial condition and results of operations.

OUR  BUSINESS  STRATEGY,  OPERATIONS  AND  GROWTH  RELY  SIGNIFICANTLY  ON JOINT
VENTURES AND OTHER STRATEGIC ALLIANCES.

     Operation  of our  integrated  rail  network  and our plans for  growth and
expansion rely  significantly  on joint ventures and other strategic  alliances.
Unless the  Acquisition  is  consummated,  we will  continue to hold an indirect
interest in two strategically  significant  railroad companies,  Tex-Mex through
TFM  and  TFM  through  our  minority  interest  in  Grupo  TFM.  As a  minority



shareholder,  we are not in a position  to  control  operations,  strategies  or
financial   decisions   without  the  concurrence  of  Grupo  TMM,  the  largest
shareholder in Grupo TFM. In addition, conflicts have arisen in the past and may
arise in the future  between our business  objectives and those of Grupo TMM. We
are  currently in a dispute with Grupo TMM over Grupo TMM's attempt to terminate
the Acquisition  Agreement.  We cannot assure that this dispute will be resolved
in our favor.  If the Acquisition is not  consummated,  resolution of any future
conflicts  in our favor  may be  difficult  or  impossible  given  our  minority
ownership position.  We do maintain  supermajority rights, which provide us with
the ability to block  certain  actions  proposed by Grupo TMM at Grupo TFM.  Our
ownership   interests  in  these   companies  are  subject  to  restrictions  on
disposition.  KCS received  notice from Grupo TMM to  terminate a joint  venture
agreement  between the parties  entered  into in 1995.  Pursuant to such notice,
that joint  venture  agreement  will  terminate on December 1, 2003.  This joint
venture agreement provides that upon its termination, the joint venture shall be
liquidated  and any  assets  held in the  name of the  joint  venture  shall  be
distributed proportionally to KCS and Grupo TMM. There are no significant assets
held by the joint venture and KCS does not expect the  termination  of the joint
venture agreement to have a material adverse effect on KCS.

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

OUR  SUCCESS  WILL  DEPEND  UPON OUR  ABILITY  TO RETAIN AND  ATTRACT  QUALIFIED
MANAGEMENT PERSONNEL.

     Our  operations  and the continued  execution of our business  strategy are
dependent  upon  the  continued   employment  of  our  senior  management  team.
Recruiting,   motivating   and   retaining   qualified   management   personnel,
particularly  those with  expertise in the railroad  industry,  are vital to our
operations and ultimate success. There is substantial  competition for qualified
management  personnel  and  there  can be no  assurance  that we will be able to
attract or retain qualified personnel.  The loss of key personnel or the failure
to hire qualified  personnel could materially  adversely affect our business and
financial results.

OUR MEXICAN INVESTMENT SUBJECTS US TO POLITICAL AND ECONOMIC RISKS.

     As of December 31,  2002,  we had  invested  approximately  $300 million in
Grupo TFM. If the Acquisition is  consummated,  our investment in Mexico will be
materially  increased.  Our investment in Mexico involves a number of risks. The
Mexican government exercises  significant influence over the Mexican economy and
its actions could have a significant  impact on TFM. Our Mexican  investment may
also  be  adversely  affected  by  currency  fluctuations,   price  instability,
inflation, interest rates, regulations,  taxation, cultural differences,  social
instability,   labor   disputes  and  other   political,   social  and  economic
developments  in or affecting  Mexico.  Moreover,  TFM's  commercial  success is
heavily  dependent  on  expected  increases  in  U.S.-Mexico  trade  and will be
strongly influenced by the effect of NAFTA on such trade. Downturns in either of
the U.S. or Mexican  economies or in trade  between the United States and Mexico
would be likely to adversely  impact TFM's  business,  financial  condition  and
results  of  operations.  There  can be no  assurances  that the  various  risks



associated  with  operating  in  Mexico  can  be  effectively  and  economically
mitigated by TFM.  Additionally,  no  assurances  can be given that the value of
these investments will not become impaired.

     TFM holds the  concession  to operate  Mexico's  Northeast  Rail Lines (the
"Concession")  for  50  years,  beginning  in  1997,  and,  subject  to  certain
conditions, has a 50-year extension option. The Concession is subject to certain
mandatory trackage rights and is only exclusive for 30 years. Additionally,  the
Mexican  government may revoke  exclusivity after 20 years if it determines that
there is  insufficient  competition and may terminate the Concession as a result
of  certain  conditions  or  events,  including  (1) TFM's  failure  to meet its
operating  and  financial  obligations  with  regard  to  the  Concession  under
applicable Mexican law, (2) a statutory  appropriation by the Mexican government
for reasons of public  interest and (3)  liquidation or bankruptcy of TFM. TFM's
assets and its rights under the Concession may also be seized temporarily by the
Mexican government. Revocation or termination of the Concession would materially
adversely  affect TFM's operations and its ability to make payments on its debt.
Further,  even  though TFM would be  entitled  to  compensation  for a statutory
appropriation or temporary seizure,  any such compensation might be insufficient
to cover TFM's losses.  The loss of the Concession  would  materially  adversely
impact TFM's business,  financial  condition and results of operations which, in
turn,  would  materially  adversely  impact  the  value  of  and  return  on our
investment  in Grupo TFM and our  ability to market our U.S.  operations  on the
basis of our access to Mexican locations. Currently, Grupo TFM is limited in the
amount  of  dividends  it may pay  because  of debt  covenants.  An  absence  of
dividends from Grupo TFM will, or limited  dividends may,  negatively impact our
ability to obtain a current cash return on our investment in Grupo TFM.

     Under the Concession,  TFM is obligated to grant and is entitled to receive
certain  trackage  rights.  The  compensation for use of the trackage rights has
been under discussion since the granting of the Concession.  As TFM and Ferromex
were  unable to reach an  agreement  concerning  compensation,  the  Ministry of
Communications  and  Transports,  or  "Ministry of  Transportation,"  issued its
ruling on March 13, 2002 setting the  compensation to be paid by each of TFM and
Ferromex  for use of the  mandatory  trackage  rights.  On April 15,  2002,  the
Ministry of Transportation  rejected TFM's petition seeking  reconsideration  of
its trackage rights decision.  TFM has appealed to an administrative  court both
the   Ministry  of   Transportation's   rejection   of  its   petition   seeking
reconsideration  and the  Ministry of  Transportation's  underlying  decision on
trackage  rights  compensation.  TFM also requested and obtained a suspension of
the effectiveness of the Ministry of Transportation's  ruling pending resolution
of its appeal. An adverse trackage rights compensation decision could negatively
impact our investment in Grupo TFM.

OUR PANAMANIAN INVESTMENT SUBJECTS US TO POLITICAL AND ECONOMIC RISKS.

     We  have  entered  into  a  joint  venture  with  Mi-Jack  Products,   Inc.
("Mi-Jack"--a  private U.S.  company located in Illinois),  through which we own
50% of the common stock of the Panama Canal Railway Company ("PCRC"), which owns
all of the common stock of Panarail Tourism Company ("PTC").  As of December 31,
2002,  we had invested  approximately  $19.9  million in the PCRC,  comprised of
$12.9 million in equity and $7.0 million in subordinated  loans. PCRC operates a
railroad between Panama City and Colon, Panama, while PTC operates a tourist and
commuter railway service in conjunction with and over the lines of the PCRC. Our
investment in PCRC has risks  associated  with  operating in Panama,  including,
among others,  cultural  differences,  varying  labor and  operating  practices,
political risk and differences between the U.S. and Panamanian economies.  There
can be no assurances  that the risks  associated with operating in Panama can be
effectively and economically mitigated by PCRC. Additionally,  no assurances can
be given  that the value of our  investment  in PCRC will not  become  impaired.
Further, KCS is a guarantor to the International Finance Corporation ("IFC") for
up to $5.6 million of deferred principal payments on behalf of PCRC and, if PCRC
terminates the concession  contract  without the consent of the IFC, a guarantor
for up to 50% of the  outstanding  senior loans of PCRC. The senior loans had an
outstanding  balance of approximately  $45 million at December 31, 2002. KCSR is
also a guarantor  for up to $2.1  million of equipment  loans from  Transamerica
Corporation.



WE ARE SUBJECT TO REGULATION BY FEDERAL,  STATE AND LOCAL  REGULATORY  AGENCIES.
OUR FAILURE TO COMPLY WITH VARIOUS FEDERAL,  STATE AND LOCAL  REGULATIONS  COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,  FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

     In addition to safety,  health and other  regulations,  generally  our U.S.
rail subsidiaries, like other rail common carriers, are subject to regulation by
the Surface  Transportation  Board,  the Federal  Railroad  Administration,  the
Occupational   Safety   and  Health   Administration,   state   departments   of
transportation  and  other  state  and  local  regulatory  agencies.  Government
regulation  of  the  railroad  industry  is a  significant  determinant  of  the
competitiveness and profitability of railroads.  While deregulation of rates and
services in the United States has  substantially  increased the  flexibility  of
railroads to respond to market  forces,  the  deregulated  environment  has also
resulted in highly  competitive rates.  Material  noncompliance by us with these
various regulatory requirements or changes in regulation of the industry through
legislative,  administrative,  judicial  or other  action  could have a material
adverse effect on our business,  financial  condition and results of operations,
including   limitations  on  our  operating  activities  until  compliance  with
applicable requirements is completed.

ENVIRONMENTAL   LIABILITIES  COULD  REQUIRE  US  TO  INCUR  MATERIAL  COSTS  AND
TEMPORARILY SUSPEND ANY OPERATIONS THAT ARE FOUND TO VIOLATE ENVIRONMENTAL LAWS.

     Our  operations  are  subject  to  extensive   federal,   state  and  local
environmental laws and regulations concerning,  among other things, emissions to
the  air,   discharges  to  waters,   waste  management,   hazardous   substance
transportation,  handling and storage,  decommissioning  of underground  storage
tanks and soil and groundwater contamination. Those laws and regulations can (1)
impose substantial fines and criminal  sanctions for violations,  (2) require us
to upgrade equipment or make operational changes to limit pollution emissions or
decrease  the  likelihood  of  accidental  hazardous  substance  releases or (3)
temporarily  prohibit us from conducting  operations if those operations violate
applicable requirements.  We incur, and expect to continue to incur, significant
environmental  compliance costs,  including,  in particular,  costs necessary to
maintain  compliance  with  requirements  governing  our chemical and  hazardous
material  shipping   operations,   our  refueling   operations  and  our  repair
facilities.

     Many of our  current  and  former  properties  are or have  been  used  for
industrial purposes,  including, for example,  hazardous material storage, waste
disposal and treatment,  foundry operations,  drum  reconditioning  services and
chemical  treatment  of wood  products.  Accordingly,  we also  are  subject  to
potentially  material  liabilities  relating to the investigation and cleanup of
contaminated  properties,  and to claims  alleging  personal  injury or property
damage as the result of exposures to, or releases of, hazardous substances. Such
liabilities could relate to properties that we owned or operated in the past, as
well as any of our currently owned or operated properties. Such liabilities also
could relate to third-party sites to which we or our predecessors sent waste for
treatment or disposal,  or which otherwise were affected by our operations.  For
example,  we are  conducting  investigation  and cleanup  activities  at several
properties which we own or which we or our predecessors owned or operated in the
past. We also are investigating and remediating  several  third-party sites that
were affected by spills from our rail car operations and have been identified as
a potentially  responsible party at several third-party  disposal sites to which
we sent waste and other  materials in the past. In addition,  we are a defendant
in a class action lawsuit alleging  personal injuries and property damage from a
chemical rail car explosion in 1995.

     Although  we  have  recorded   liabilities   for  estimated   environmental
remediation and other  environmental  costs,  actual expenditures or liabilities
could exceed  estimated  amounts and could have a material adverse effect on our
consolidated  results  of  operations  or  financial  position.   New  laws  and
regulations, stricter enforcement of existing requirements, new spills, releases
or violations or the discovery of previously unknown contamination could require
us to incur  costs or become  the basis for new or  increased  liabilities  that
could have a material  adverse effect on our business,  results of operations or
financial condition.






WE MAY SUFFER A CATASTROPHE,  COLLISION,  PROPERTY LOSS, SERVICE INTERRUPTION OR
TERRORIST ACT.

     The  operation  of  any  railroad  carries  with  it an  inherent  risk  of
catastrophe,  collision and property  loss.  In the course of train  operations,
service   interruptions,   derailments,   spills,   explosions,   leaks,   other
environmental events, cargo loss or damage and business  interruption  resulting
from adverse  weather  conditions or natural  phenomena  could result in loss of
revenues,  increased liabilities or increased costs.  Significant  environmental
mishaps can cause serious bodily injury,  death and extensive  property  damage,
particularly  when such accidents occur in heavily  populated areas. We maintain
insurance (including  self-insurance)  consistent with industry practice against
accident-related risks involved in the operation of our business. However, there
can be no assurance that such insurance would be sufficient to cover the cost of
damages suffered by us or damages to others or that such insurance will continue
to be  available at  commercially  reasonable  rates.  Moreover,  our  insurance
coverage for events  occurring  prior to 1996 did not extend to punitive  damage
awards,   which  are  increasingly  being  levied  in  civil  cases  related  to
environmental accidents.

     While  we  maintain  terrorism  coverage  under  certain  of our  liability
insurance  policies,  we do not maintain such coverage under our property damage
insurance  policies  and  do  not  otherwise  maintain  insurance  coverage  for
terrorist acts. Recently, the U.S. Department of Transportation issued a warning
about possible  terrorist  attacks on rail and transit systems in the U.S. There
can be no assurance that any accident,  natural  disaster or terrorist act would
not cause a significant  interruption in our operations or materially  adversely
affect our business, financial condition and results of operations.

WE MAY BE UNABLE TO COMPLETE THE ACQUISITION.

     On August 18, 2003, Grupo TMM shareholders purportedly voted not to approve
the sale of Grupo TMM's interests in Grupo TFM to KCS. On August 23, 2003, Grupo
TMM sent a notice  to KCS  claiming  to  terminate  the  Acquisition  Agreement,
because  the Grupo  TMM  shareholders  had  failed to  approve  the  Acquisition
Agreement.  On August 29, 2003,  KCS delivered to Grupo TMM a Notice of Dispute,
which initiated a 60-day negotiation period between the parties.  If the parties
are unable to resolve the  disputes  within that period of time,  KCS intends to
initiate  binding  arbitration in accordance  with the terms of the  Acquisition
Agreement. In addition on August 29, 2003, KCS filed a complaint in the Delaware
Chancery Court alleging that Grupo TMM had breached the  Acquisition  Agreement.
The Notice of Dispute and  complaint  point out that the  Acquisition  Agreement
does not provide that a negative shareholder vote by Grupo TMM shareholders is a
basis for termination, and KCS maintains that the Acquisition Agreement is still
valid and remains in effect until  December 31, 2004. On September 2, 2003,  KCS
filed in the Delaware Court of Chancery a motion for  preliminary  injunction to
preserve  the  parties'  positions  while KCS seeks to resolve its dispute  over
Grupo TMM's attempt to terminate the Acquisition Agreement. KCS has asked for an
expedited hearing on its motion for a preliminary injunction. However, there can
be no assurance  that the parties will resolve  their  disputes  relating to the
Acquisition  Agreement,  or that the  arbitrators or the courts will resolve the
disputes, in favor of KCS.

     Even if disputes  relating to the  Acquisition  Agreement  are  resolved in
favor of KCS,  the  consummation  of the  Acquisition  is subject to a number of
conditions, including among others, that Grupo TMM obtain consent of the holders
of its  outstanding  2003 notes and 2006 notes.  Grupo TMM has  disclosed in its
Form 20-F for the fiscal year ended December 31, 2002 that it sought consents in
connection  with its recent  exchange offers but was not successful in obtaining
such  consents.  There can be no assurance that Grupo TMM will be able to obtain
such consents or that the other conditions to the Acquisition will be satisfied.
If the Acquisition is not consummated,  the value of our investment in Grupo TFM
may become impaired.

     As of June 30, 2003, KCS has recorded deferred costs of approximately  $4.6
million  related  to  the   transaction,   which  have  been  reflected  in  our
consolidated balance sheet pending completion of the Acquisition. We expect that
we will incur and defer additional  costs related to the Acquisition.  If we are
unable to complete the Acquisition, these deferred costs would be reflected as a
charge to earnings in our  consolidated  income statement in the period in which
such determination is made.



TFM RISK FACTORS
----------------

TFM'S SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT ITS FINANCIAL POSITION AND
ITS ABILITY TO MEET ITS OBLIGATIONS UNDER ITS DEBT SECURITIES AND TO OPERATE ITS
BUSINESS.


     TFM  has  a  significant  amount  of  debt  and  significant  debt  service
obligations.  As of December 31, 2002, TFM had total outstanding indebtedness of
$1,023.1  million,   consisting  of  senior  unsecured  indebtedness  under  its
outstanding  notes and debentures,  obligations under capital leases and its new
bank facilities (its commercial  paper program and its term loan facility).  TFM
has no secured  indebtedness.  Under U.S. GAAP, TFM's  shareholders'  equity was
$1,133.9 million as of December 31, 2002, resulting in a debt to equity ratio of
92.2%.  In  addition,  TFM may incur  more  debt,  subject  to the  restrictions
contained in the  indentures  governing the existing  notes and the  outstanding
notes and the credit  agreements  governing its new commercial paper program and
term loan facility.

     TFM's  substantial  indebtedness  could  interfere  with its ability to pay
interest and principal on its debt and may have important  consequences  for its
operations and capital expenditure requirements, including the following:

     o    TFM will have to dedicate a substantial  portion of its cash flow from
          operations to the payment of principal,  premium,  if any, or interest
          on its debt, which will reduce funds available for other purposes;

     o    TFM may not be able to fund capital expenditures,  working capital and
          other corporate requirements;

     o    TFM may not be able to obtain additional financing, or to obtain it at
          acceptable rates;

     o    TFM'sability to adjust to changing market  conditions and to withstand
          competitive  pressures  could be limited,  and it may be vulnerable to
          additional risk if there is a downturn in general economic  conditions
          or its business;

     o    TFM may be exposed to risks in exchange rate fluctuations, because any
          devaluation   of  the   peso   would   cause   the   cost   of   TFM's
          dollar-denominated debt to increase; and

     o    TFM may be at a competitive  disadvantage  compared to its competitors
          that have less debt and greater  operating and  financing  flexibility
          than it does.

     In  addition,  the notes issued under TFM's new  commercial  paper  program
generally have maturities of less than 180 days, so it must either repay them or
refinance them by issuing and selling new  commercial  paper notes on an ongoing
basis.  TFM's commercial paper program  terminates on September 17, 2004 (unless
extended), so it must either repay, replace,  refinance or extend the program at
that time. TFM may be unable to refinance its commercial paper program or it may
not have  sufficient  cash to repay this debt when it becomes due.  These events
could result in a default under the respective indentures governing the existing
notes  and the  outstanding  notes  as well as the  agreements  governing  TFM's
commercial paper program.

FAILURE TO COMPLY  WITH  RESTRICTIVE  COVENANTS  IN TFM'S  EXISTING  CONTRACTUAL
ARRANGEMENTS COULD ACCELERATE ITS REPAYMENT OBLIGATIONS UNDER ITS DEBT.

     The  indentures  relating  to  TFM's  outstanding  notes,  and  the  credit
agreements  relating to TFM's bank  facilities,  contain a number of restrictive
covenants,  and any additional financing arrangements it enters into may contain
additional restrictive  covenants.  The credit agreements relating to TFM's bank
facilities  contain  covenants that are more restrictive than those contained in
the  indentures  relating  to the  existing  notes  and the  outstanding  notes,
including  certain financial  covenants which require TFM to maintain  specified



financial ratios.  Any breach of these covenants could result in a default under
the indentures and the credit  agreements.  These covenants restrict or prohibit
many actions, including TFM's ability to:

     o    incur debt;

     o    create or suffer to exist liens;

     o    make prepayments of particular debt;

     o    pay dividends;

     o    make investments;

     o    engage in transactions with stockholders and affiliates;

     o    sell assets; and

     o    engage   in   mergers   and   consolidations   or  in   sale-leaseback
          transactions.

     If TFM fails to comply with these restrictive covenants,  its obligation to
repay  the  existing  notes  and the  exchange  notes or its  other  debt may be
accelerated.  In addition,  a default under these  covenants  could affect TFM's
ability to refinance its commercial paper program.

TFM MAY BE UNABLE TO GENERATE SUFFICIENT CASH TO SERVICE OR REFINANCE ITS DEBT.

     TFM's ability to satisfy its obligations  under its debt in the future will
depend upon its future  performance,  including its ability to increase revenues
significantly and control expenses.  TFM's future operating  performance depends
upon prevailing  economic,  financial,  business and competitive  conditions and
other factors, many of which are beyond TFM's control.

     We cannot assure you that TFM's business will generate sufficient cash flow
from operations,  that currently  anticipated revenues and operating performance
will be realized or that future  borrowings  will be available to TFM in amounts
sufficient to pay its debt or to fund its other liquidity needs.

     If  TFM's  cash  flow  from  operations  is  insufficient  to  satisfy  its
obligations,  it may take  specific  actions,  including  delaying  or  reducing
capital  expenditures,  attempting  to  refinance  its  debt at or  prior to its
maturity  or, in the  absence of such  refinancing,  attempting  to sell  assets
quickly in order to make up for any  shortfall in payments  under  circumstances
that might not be favorable to getting the best price for the assets, or seeking
additional  equity  capital.  TFM's ability to refinance its debt and take other
actions will depend on, among other things, its financial condition at the time,
the  restrictions  in the  instruments  governing  its debt and  other  factors,
including market conditions, beyond TFM's control. TFM may be unable to take any
of these actions on satisfactory  terms or in a timely manner.  Further,  any of
these actions may not be  sufficient to allow TFM to meet its debt  obligations.
In addition,  TFM's debt agreements and, upon  consummation of the  Acquisition,
our debt agreements,  will limit TFM's ability to take certain of these actions.
TFM's failure to  successfully  undertake any of these actions or to earn enough
revenues to pay its debts, or significant  increases in the peso cost to service
its  dollar-denominated  debt,  could  materially  and  adversely  affect  TFM's
business or operations.

TFM'S  BUSINESS IS CAPITAL  INTENSIVE  AND IT MUST MAKE  SIGNIFICANT  ADDITIONAL
CAPITAL EXPENDITURES; FAILURE TO MAKE SUCH ADDITIONAL CAPITAL EXPENDITURES COULD
RESULT IN THE REVOCATION OF TFM'S CONCESSION.

     TFM's  business  is capital  intensive  and  requires  substantial  ongoing
expenditures  for, among other things,  improvements to roadway,  structures and
technology,  acquisitions, leases and repair of equipment and maintenance of its
rail system.  TFM's failure to make necessary capital  expenditures could impair



its ability to accommodate  increases in traffic volumes or service its existing
customers.  In addition,  TFM's railroad  Concession from the Mexican government
requires  it to make  investments  and  undertake  capital  projects,  including
capital  projects  described in a business  plan filed every five years with the
Mexican  government.  TFM may defer  capital  expenditures  with  respect to its
five-year  business plan with the permission of the Secretaria de Comunicaciones
y  Transportes  (Ministry  of  Communications  and  Transports  or  "Ministry of
Transportation").  However,  the Ministry of Transportation might not grant this
permission,  and TFM's  failure to comply with its  commitments  in its business
plan could result in the Mexican government revoking the Concession.

     In 2000,  2001 and 2002,  TFM made capital  expenditures  of $66.9 million,
$85.2 million and $89.4 million,  which represented 9.6%, 11.8% and 12.5% of its
transportation  revenues for each of those years,  respectively.  These  capital
expenditures  include the expenses  TFM expects to incur for the  rehabilitation
and  improvement  of its  secondary  rail  lines  and  the  construction  of new
intermodal terminals near the manufacturing plants of its automotive  customers.
TFM has funded, and expects to continue to fund, capital expenditures with funds
from operating cash flows and vendor financing.  TFM may not be able to generate
sufficient  cash  flows  from its  operations  or obtain  sufficient  funds from
external sources to fund its capital expenditure requirements.  Also, additional
financing may not be available to TFM. If financing is available,  it may not be
obtainable on terms  acceptable to TFM and within the  limitations  contained in
the indentures and other agreements  relating to TFM's debt. If TFM is unable to
complete its planned capital improvements projects, TFM's ability to accommodate
increases  in its  traffic  volumes or service  its  existing  customers  may be
limited or impaired, and the Mexican government could revoke TFM's Concession.

SIGNIFICANT  COMPETITION  FROM  TRUCKS AND OTHER  RAILROADS,  AS WELL AS LIMITED
COMPETITION  FROM THE SHIPPING  INDUSTRY,  COULD  ADVERSELY  AFFECT TFM'S FUTURE
FINANCIAL PERFORMANCE.


     TFM faces  significant  competition  from trucks and other rail carriers as
well  as  limited   competition  from  the  shipping  industry  in  its  freight
operations. The trucking industry is TFM's primary competition. In the past, the
trucking  industry  has  significantly  eroded the  railroad's  market  share of
Mexico's total  overland  freight  transportation.  In some  circumstances,  the
trucking  industry can provide  effective rate and service  competition  because
trucking  requires  substantially  smaller  capital  investments and maintenance
expenditures, and allows for more frequent and flexible scheduling.

     NAFTA called for Mexican trucks to have unrestricted  access to highways in
the U.S.  border states by 1995 and full access to all U.S.  highways by January
2000. In February 2001, a NAFTA  tribunal  ruled in an  arbitration  between the
United  States and Mexico that the United  States must allow  Mexican  trucks to
cross the border and operate on U.S.  highways.  However,  the United States has
not followed the timetable  because of concerns over  Mexico's  trucking  safety
standards.  On March 14, 2002,  as part of its agreement  under NAFTA,  the U.S.
Department of Transportation  issued safety rules that allow Mexican truckers to
apply for operating  authority to transport goods beyond the 20-mile  commercial
zones along the U.S.-Mexico border.  These safety rules require Mexican carriers
seeking to operate in the United  States to pass,  among  other  things,  safety
inspections,  obtain valid insurance with a U.S.  registered  insurance company,
conduct  alcohol and drug  testing for drivers and obtain a U.S.  Department  of
Transportation identification number. Mexican commercial vehicles with authority
to operate  beyond the  commercial  zones will be  permitted to enter the United
States only at  commercial  border  crossings  and only when a  certified  motor
carrier safety inspector is on duty. Given these recent developments,  we cannot
assure you that truck  transport  between  Mexico and the United States will not
increase  substantially  in the future.  Such an  increase  could  affect  TFM's
ability to continue  converting  traffic to rail from truck transport because it
may  result  in an  expansion  of the  availability,  or an  improvement  of the
quality,  of the  trucking  services  offered in Mexico.  Since a key element of
TFM's  business  strategy  is to  recapture  market  share lost to the  trucking
industry,  its  inability  to  successfully  convert  traffic to rail from truck
transport  would  materially   impair  its  ability  to  achieve  its  strategic
objectives. There can be no assurance that TFM will have the ability to continue
to convert  traffic  from truck to rail  transport  or that TFM will  retain the
customers  that it has  already  converted.  For  example,  in 2000  TFM  lost a
significant  amount of the  business it derived from a major  customer,  as this
customer increased the use of trucks in its product distribution network.



     In addition to trucks,  TFM faces significant  competition in some industry
segments  from other  railroads,  in  particular  Ferromex,  which  operates the
Pacific-North Rail Lines. In particular,  TFM has experienced,  and continues to
experience,  competition  from  Ferromex with respect to the transport of grain,
minerals  and steel  products.  The rail lines  operated  by  Ferromex  run from
Guadalajara and Mexico City to four U.S. border crossings west of Laredo, Texas,
providing a potential  alternative  to TFM's routes for the transport of freight
from those cities to the U.S.  border.  Ferromex  directly  competes with TFM in
some areas of its service territory,  including Tampico, Saltillo, Monterrey and
Mexico City.  Also in direct  competition  for traffic to and from  southeastern
Mexico is Ferrosur, which operates the Southeast Rail Lines. Ferrosur, like TFM,
serves Mexico City, Puebla and Veracruz.

     Ferromex and Ferrosur are privately  owned  companies that may have greater
financial  resources than TFM. Among other things,  this advantage may give them
greater ability to reduce freight prices.  Price reductions by competitors would
make TFM's freight services less competitive,  and we cannot assure you that TFM
would be able to match these rate reductions.  For example, TFM has experienced,
and  continues to  experience,  aggressive  price  competition  from Ferromex in
freight rates for agricultural products which has adversely affected its results
of operations.  TFM's ability to respond to  competitive  measures by decreasing
its prices without  adversely  affecting its gross margins and operating results
will depend on, among other things, TFM's ability to reduce its operating costs.
TFM's  failure to respond  to  competitive  pressures,  and  particularly  price
competition,  in a timely  manner  would have a material  adverse  effect on its
results of operations.

     Under TFM's  Concession,  TFM must grant to  Ferromex  the right to operate
over a north-south portion of our rail lines between Ramos Arizpe near Monterrey
and the city of  Queretaro  that  constitutes  over 600  kilometers  of its main
track.  Using these  trackage  rights,  Ferromex may be able to compete with TFM
over its rail lines for traffic between Mexico City and the United States. TFM's
Concession  also  requires  it to grant  rights to use  certain  portions of its
tracks to Ferrosur and the "belt  railroad"  operated in the greater Mexico City
area by the  Ferrocarril y Terminal del Valle de Mexico,  S.A. de C.V.  ("Mexico
City Railroad and  Terminal"),  thereby  providing  Ferrosur with more efficient
access  to  certain  Mexico  City  industries.  As a result  of  having to grant
trackage rights to other railroads,  TFM must incur additional maintenance costs
and also lose the flexibility of using its tracks at all times.

     Ferromex  and Ferrosur  announced  that they agreed to the  acquisition  of
Ferrosur by Ferromex.  TFM filed a notice with the Mexican  Federal  Competition
Commission  objecting to the proposed  acquisition on the grounds that it limits
competition.  Approval of the proposed  merger was denied by the Mexican Federal
Competition  Commission,  as  was  Ferrosur-Ferromex's   motion  to  reconsider.
Ferromex has filed an appeal  (amparo) from the decision of the Mexican  Federal
Competition  Commission's  decision  that is still  pending  before the  courts.
Should the decision of the Mexican Federal Competition Commission be reversed on
grounds  that allow the proposed  merger to go forward,  and should the proposed
merger be  consummated,  the resulting  railroad  would operate the largest rail
system in Mexico,  and we cannot  assure you that this would not have a material
adverse effect on TFM's  operations,  particularly on the revenues  generated by
its route between Mexico City and the port of Veracruz.

     In addition,  in recent  years,  there has been  significant  consolidation
among major North American rail carriers.  The resulting  merged railroads could
attempt to use their size and pricing power to block other railroads'  access to
efficient  gateways  and  routing  options  that are  currently  and  have  been
historically available. We cannot assure you that further consolidation will not
have an adverse effect on TFM.

     TFM also faces limited  competition from the shipping industry with respect
to some  products,  including  chemicals  transported by barges and vessels from
Gulf of Mexico ports in Texas and Louisiana.






THE RATES FOR  TRACKAGE  RIGHTS SET BY THE  MINISTRY OF  TRANSPORTATION  MAY NOT
ADEQUATELY COMPENSATE TFM.

     Pursuant  to  TFM's  Concession,  it is  required  to grant  rights  to use
portions of its tracks to Ferromex,  Ferrosur  and the Mexico City  Railroad and
Terminal.  Applicable law stipulates that Ferromex, Ferrosur and the Mexico City
Railroad  and  Terminal  are  required to grant to TFM rights to use portions of
their tracks.

     TFM's  Concession  classifies  trackage rights as short trackage rights and
long-distance  trackage rights.  Although all of these trackage rights have been
granted  under TFM's  Concession,  no railroad has actually  operated  under the
long-distance  trackage  rights because the means of setting rates for usage and
other  related  terms  of  usage  have  not  been  agreed  upon.  Under  the Ley
Reglamentaria  del Servicio  Ferroviario  (Law Regulating  Railroad  Services or
"Mexican railroad services law and regulations"),  the rates that TFM may charge
for rights to use its tracks must be agreed upon in writing  between TFM and the
party to which  those  rights  are  granted.  However,  if TFM  cannot  reach an
agreement on rates with rail  carriers  entitled to trackage  rights on its rail
lines,  the  Ministry  of  Transportation  is  entitled  to set the rates  using
criteria including:

     o    the costs of  infrastructure  maintenance and traffic control relating
          to the portion of TFM's lines to be used by the other rail operator;

     o    the increment in costs due to interference with TFM's operations;

     o    the  amortized  capital  investments,   including  the  value  of  the
          Concession, directly related to the affected lines; and

     o    a  reasonable   profit  calculated  with  reference  to  international
          railroad standards and reflecting investment conditions in Mexico.

     TFM and Ferromex have not been able to agree upon the rates each of them is
required  to pay the other for  interline  services  and  haulage  and  trackage
rights.  Therefore,  in  accordance  with its rights under the Mexican  railroad
services law and regulations,  in February 2001, TFM initiated an administrative
proceeding  requesting  a  determination  of  such  rates  by  the  Ministry  of
Transportation.

     In September 2001, Ferromex filed a legal claim against TFM relating to the
payments  that TFM and Ferromex are required to make to each other for interline
services and trackage and haulage  rights.  TFM has  indicated it believes  that
this legal claim is without merit, and that the payments for interline  services
and  trackage  and haulage  rights owed to TFM by Ferromex  exceed the amount of
payments that Ferromex claims TFM owes to Ferromex for such services and rights.
Accordingly,  TFM has indicated it believes that the outcome of this legal claim
will not have a material  adverse  effect on the financial  condition of TFM. On
September  25, 2002,  the third civil court of Mexico City rendered its judgment
in TFM's  favor.  Ferromex  has appealed  the  judgment,  and we cannot  predict
whether TFM will ultimately prevail.

     In connection with the Ferromex claim,  Ferromex temporarily  prevented TFM
from using  certain  short  trackage  rights which TFM has over a portion of its
route running from Celaya to Silao,  which is the site of a General Motors plant
from where TFM  transports  finished  vehicles  to the border  crossing at Nuevo
Laredo.  Ferromex  was  subsequently  ordered by the court to resume  giving TFM
access, and in October 2001, TFM filed a counterclaim  against Ferromex relating
to these actions.

     In March 2002, the Ministry of Transportation issued its ruling in response
to TFM's request,  establishing  a rate to be charged for trackage  rights using
the criteria set forth in the Mexican railroad services law and regulations. TFM
is  appealing  the ruling on the grounds  that it fails to  establish  rates for
interline service and because TFM disagrees with the methodology  applied to the
criteria in  calculating  the trackage  rights  rates.  TFM also  requested  and
obtained a suspension of the  effectiveness of the ruling pending  resolution of
its appeal.



     We cannot predict  whether TFM will  ultimately  prevail in this proceeding
and  whether the rates TFM is  ultimately  allowed to charge will be adequate to
compensate  TFM.  TFM  has  indicated  it  believes  that,  even  if  the  rates
established  in the ruling go into effect and TFM and  Ferromex  begin using the
long-distance  trackage rights over each other's rail line, this will not have a
material  adverse  effect on TFM's  results of  operations.  However,  we cannot
guarantee that TFM's competitors' usage of its rail lines will not result in TFM
losing business or that its losses will be offset by revenues generated from the
payments for the rights to use its tracks. The occurrence of any of these events
could have a material adverse effect on TFM's results of operations.  A separate
ruling was issued confirming TFM's right to the Celaya-Silao stretch of Ferromex
track.

RECENT TERRORIST ACTIVITIES AND GEOPOLITICAL EVENTS AND THEIR CONSEQUENCES COULD
ADVERSELY AFFECT TFM'S OPERATIONS.

     As a result of the terrorist  attacks in the United States on September 11,
2001,  and the recent war involving,  among others,  the United States and Iraq,
there  has  been  increased  short-term  market  volatility,  and  there  may be
long-term effects on U.S. and world economies and markets.

     Terrorist  attacks may negatively  affect TFM's  operations.  The continued
threat of terrorism  within the United  States and abroad and the  potential for
military action and heightened  security measures in response to such threat may
cause  significant  disruption  to  commerce  throughout  the  world,  including
restrictions on cross-border transport and trade. In addition, related political
events may cause a lengthy period of uncertainty that may adversely affect TFM's
business.  There can be no assurance that there will not be further  large-scale
terrorist  attacks.  Political and economic  instability in other regions of the
world,  including  the  United  States  and  Canada,  may also  result and could
negatively  impact TFM's  operations.  The  consequences  of  terrorism  and the
responses thereto are  unpredictable,  and could have an adverse effect on TFM's
operations.

DOWNTURNS IN GLOBAL ECONOMIC  CONDITIONS,  IN THE U.S.  ECONOMY,  IN U.S.-MEXICO
TRADE OR IN CERTAIN CYCLICAL  INDUSTRIES IN WHICH TFM'S CUSTOMERS  OPERATE COULD
ADVERSELY AFFECT ITS BUSINESS AND RESULTS OF OPERATIONS.

     TFM believes  that  traffic that crosses the U.S.  border on its rail lines
generates the majority of its freight revenue. As a result, the level and timing
of TFM's business  activity is, and will continue to be, strongly  influenced by
the level of U.S.-Mexican trade and the effects of NAFTA or other  international
trade agreements on such trade. Downturns in global economic conditions,  in the
U.S. or Mexican  economy or in trade  between the United  States and Mexico will
likely have adverse effects on TFM's business and results of operations. Mexican
exports to the United States of manufactured  goods,  beer, metals and minerals,
automobiles,  chemical and  petrochemical  products and other products,  many of
which  TFM  transports,  are an  important  element  of  U.S.-Mexico  trade.  In
addition,  a  significant  portion of TFM's  business  consists of imports  into
Mexico from the United  States.  The level of TFM's  business  activity  depends
heavily  on  the  U.S.  and  Mexican   economies   and  markets,   the  relative
competitiveness  of Mexican and U.S. products at any given time and existing and
new tariffs or other barriers to trade. For example,  the recent downturn in the
U.S.  economy  has had an  adverse  effect  on  TFM's  revenues  in all  product
categories,  particularly  in  the  automotive  and  industrial  segments.  This
downturn may continue and could worsen, thereby having a material adverse effect
on TFM's  results  of  operations  and its  ability  to meet  its  debt  service
obligations as described above.

     Some of TFM's customers operate in industries that experience  cyclicality,
including the oil and gas, automotive and agricultural  sectors. Any downturn in
these  sectors due to the effects of  cyclicality,  or  otherwise,  could have a
material adverse effect on TFM's operating  results.  Also, some of the products
TFM  transports  have had a historical  pattern of price  cyclicality  which has
typically been  influenced by the general  economic  environment and by industry
capacity and demand.  For example,  global steel and  petrochemical  prices have
decreased  in the past.  We cannot  assure you that  prices and demand for these
products will not decline in the future,  adversely  affecting those  industries
and, in turn, TFM's financial results.

     Fluctuations in the  peso-dollar  exchange rate could lead to shifts in the
types and  volumes of Mexican  imports and  exports.  Although a decrease in the
level of exports of some of the  commodities  that TFM  transports to the United



States may be offset by a  subsequent  increase in imports of other  commodities
TFM hauls into Mexico and vice versa, any offsetting increase might not occur on
a timely basis, if at all. Future developments in U.S.-Mexico trade beyond TFM's
control may result in a reduction of freight volumes or in an unfavorable  shift
in the mix of products and commodities it transports.

POTENTIAL LABOR DISRUPTIONS COULD ADVERSELY AFFECT TFM'S FINANCIAL CONDITION AND
ITS ABILITY TO MEET ITS OBLIGATIONS UNDER ITS DEBT.

     Approximately 73% of TFM's employees are covered by a labor agreement.  The
compensation  terms of the labor  agreement are subject to  renegotiation  on an
annual basis and all other terms are  renegotiated  every two years. TFM may not
be able to negotiate these provisions  favorably under its labor agreement,  and
strikes,  boycotts or other disruptions could occur. These potential disruptions
could have a material adverse effect on TFM's financial condition and results of
operations and on its ability to meet its payment obligations under its debt.

THE  MEXICAN  GOVERNMENT  MAY REVOKE OR  RESTRICT  TFM'S  ABILITY TO EXPLOIT ITS
CONCESSION UNDER A NUMBER OF CIRCUMSTANCES.

     Under the Concession and Mexican law, TFM may freely set its rates for rail
freight services unless the Mexican Antitrust  Commission  determines that there
is no effective  competition,  taking into account  alternative  rail routes and
modes of  transportation.  If the Mexican Antitrust  Commission  determines that
there  is a lack  of  competition  in  the  railroad  system,  the  Ministry  of
Transportation  will  establish  the basis for TFM's rates.  TFM's rates must be
registered and applied in accordance with the Mexican railroad  services law and
regulations. In applying its rates, TFM must not make cross-subsidies, engage in
tied sales or engage in other discriminatory pricing tactics. TFM is required to
provide railroad  services to all users on a fair and  non-discriminatory  basis
and in accordance with the efficiency and safety standards approved periodically
by the Ministry of Transportation. In the event that TFM collects from customers
rates higher than the registered  rates,  it must reimburse those customers with
interest.  Since the Mexican government only recently  privatized  Mexico's rail
system  and opened the rail  industry  to  competition,  the  Mexican  Antitrust
Commission has not considered the issue of, or published guidelines  concerning,
what  constitutes  a lack of  competition.  It is therefore  unclear  under what
circumstances the Mexican Antitrust  Commission would deem a lack of competition
to exist. If the Ministry of Transportation does intervene and sets tariffs, the
rates it sets may be too low to allow TFM to operate profitably.

     The Mexican  government  may terminate the  Concession as a result of TFM's
surrender of its rights under the Concession, or for reasons of public interest,
by revocation or upon TFM's  liquidation or bankruptcy.  The Mexican  government
may also temporarily seize TFM's assets and its rights under the Concession. The
Mexican  railroad  services  law and  regulations  provide  that the Ministry of
Transportation  may revoke  the  Concession  upon the  occurrence  of  specified
events, some of which will trigger automatic revocation.

     Revocation  or  termination  of  the  Concession  would  prevent  TFM  from
operating its railroad and would  materially  adversely  affect TFM's operations
and its ability to make payments on its debt.  In the event that the  Concession
is revoked by the Ministry of Transportation,  TFM will receive no compensation,
and its rail lines and all other fixtures covered by the Concession,  as well as
all improvements  made by it, will revert to the Mexican  government.  All other
property not covered by the Concession,  including movable railroad property TFM
purchased from the Mexican  government,  as well as all locomotives and railcars
it otherwise  acquired,  will remain TFM's property.  However,  TFM's ability to
sell this  property will be  restricted,  and the Mexican  government  will have
certain rights to purchase or lease such property from TFM.

     The  Ministry of  Transportation  has agreed  that,  except with respect to
those  events  which  constitute   grounds  for  automatic   revocation  of  the
Concession,  it will notify those creditors  which provided  financing for Grupo
TFM's  acquisition  of its equity  interest in TFM in 1997 and are identified by
TFM  and  Grupo  TFM to the  Ministry  of  Transportation  of all  events  which
constitute  grounds  for  revocation  of the  Concession  and  will  allow  such



creditors,  with the Ministry of  Transportation's  prior written  consent,  the
opportunity to nominate a party to assume the Concession.  The Concession  would
be automatically  revoked in the case of: TFM's unjustified  interruption of the
operation  of its rail lines;  TFM's  assignment  of or creation of liens on the
Concession without the Ministry of Transportation's  approval; and TFM's failure
to maintain  insurance coverage required under the Mexican railroad services law
and  regulations.  In addition,  if the  Concession is terminated by revocation,
permanent  seizure of its rail lines,  or upon the  liquidation or bankruptcy of
TFM,  then  profits  received  by the  Mexican  government  or by a third  party
concessionaire  from the  operation  and  exploitation  of our rail lines  shall
continue to be committed to repay  creditors that provided  financing to TFM for
work  projects  directly  related to the  rendering  of  railroad  services  and
performed on the rail lines.

     If the Mexican  government  terminates the Concession for reasons of public
interest,  public  domain assets used in the operation of TFM's rail lines would
be  owned,  controlled  and  managed  by the  Mexican  government.  The  Mexican
government may also temporarily  seize TFM's rail lines and TFM's assets used in
connection  with  its  operations  of its rail  lines  in the case of a  natural
disaster,  war,  significant  public  disturbances,  or  imminent  danger to the
domestic peace or economy.  In such events,  the Ministry of Transportation  may
restrict TFM's ability to exploit the Concession fully for such time and in such
manner  as  the   Ministry  of   Transportation   deems   necessary   under  the
circumstances.

     Mexican law requires that the Mexican government pay TFM compensation if it
effects a  statutory  appropriation  for  reasons of the public  interest.  With
respect to a temporary  seizure due to any cause other than  international  war,
the Mexican  railroad  services  law and  regulations  provide  that the Mexican
government  will  indemnify  an affected  concessionaire  for an amount equal to
damages  caused and losses  suffered.  These  payments may not be  sufficient to
compensate TFM for our losses and may not be timely made.

TRAFFIC  CONGESTION  OR  SIMILAR  PROBLEMS  EXPERIENCED  IN THE U.S.  OR MEXICAN
RAILROAD SYSTEM MAY ADVERSELY AFFECT TFM'S OPERATIONS.

     Traffic  congestion  experienced in the U.S.  railroad system may result in
overall traffic congestion which would impact the ability to move traffic to and
from Mexico and adversely affect TFM's  operations.  This system  congestion may
result also in certain equipment shortages.  Any similar congestion  experienced
by  railroads  in Mexico  could have an  adverse  effect on TFM's  business  and
results of operations.  In addition, the rapid growth of cross-border traffic in
recent years has  contributed to congestion on the  international  bridge at the
Laredo  border  gateway  which is expected to continue in the near future.  This
could adversely affect TFM's business.

CONFLICTS MAY ARISE INVOLVING TFM'S STRATEGIC PARTNERS.

     TFM is a  subsidiary  of  Grupo  TFM,  which  holds  80.0%  of its  equity,
representing  100.0% of its  shares  with  unrestricted  voting  rights.  If the
Acquisition  is not  consummated,  Grupo TMM and KCS are  expected to remain the
principal  shareholders of Grupo TFM. As a result of their indirect ownership of
TFM's  capital  stock,  Grupo TMM and KCS are able to direct TFM's  policies and
operations and elect all but one of TFM's directors.  Although Grupo TMM holds a
majority  voting  interest in Grupo TFM, the bylaws of Grupo TFM and TFM require
that  decisions  on  certain  material  matters  require  the  approval  of  the
representatives of both of Grupo TMM and KCS.

     Differences  of views between TFM's  strategic  partners have arisen in the
past and may  arise in the  future.  Such  differences  may  result  in  delayed
decisions  or in failures  to agree upon major  matters  which  could  adversely
affect TFM's operations and business. Grupo TMM and KCS are currently in dispute
over Grupo TMM's attempt to terminate the  Acquisition  Agreement.  In addition,
KCS received from Grupo TMM a notice to terminate  the joint  venture  agreement
between the parties  entered into in 1995.  Pursuant to such  notice,  the joint
venture agreement will terminate on December 1, 2003.

     In addition,  although the trucking and specialized  shipping operations of
Grupo  TMM are  generally  complementary  to,  and not  competitive  with  TFM's
operations,  it is possible that they will compete with TFM's operations.  Also,



KCS or Grupo TMM may at times be required to negotiate  with TFM with respect to
the allocation of revenues generated by shipments both over TFM's rail lines and
by KCSR.  Conflicts of interest with or between these  strategic  partners could
have a material adverse effect on TFM's ability to operate successfully.

     Both Grupo TMM and KCS periodically  re-evaluate  their businesses and make
changes,  including  acquisitions  or  divestitures,  which  they  believe to be
consistent with their corporate objectives.  In 2000, KCS spun off its financial
asset  management and related  operations  through a distribution  of the common
stock of its former  subsidiary,  Stilwell  Financial  Inc.  (now known as Janus
Capital  Group  Inc.).  As  a  result,   KCS  currently  engages  only  in  rail
transportation  activities.  Grupo TMM sold its container  shipping  business in
December  1999  and  certain  other  operations  in 2000.  Based on  information
included in Grupo TMM's Form 20-F for the fiscal year ended  December  31, 2002,
on May 13, 2003,  Grupo TMM  completed the sale of its 51% interest in TMM Ports
and Terminals to an affiliate of its former partner in the division, Stevedoring
Services of America.  Included in the sale were the  operations  at the ports of
Manzanillo,  Cozumel,  Veracruz and Progreso.  We cannot assure you that, if the
Acquisition  is not  consummated,  Grupo TMM will  continue to retain any of its
joint venture  interests or continue to own or control any of its  subsidiaries,
including its interest in Grupo TFM, or that KCS will continue to own KCSR,  its
other  subsidiaries  or its  interest  in Grupo TFM.  A change in the  corporate
structure of TFM's strategic partners may also adversely affect its operations.

TFM'S  BUSINESS  STRATEGY,  OPERATIONS  AND GROWTH RELY  SIGNIFICANTLY  ON THIRD
PARTIES.

     TFM's  operations  are  dependent  on  interchange  agreements  that it has
negotiated  with major U.S.  railroads  in the north,  Ferromex  in the west and
Ferrosur in the south of Mexico.  TFM also has trackage  rights  agreements with
Ferrosur and a terminal  operations  agreement with the Mexico City Railroad and
Terminal and it is negotiating and expects to have a trackage  rights  agreement
with Ferromex. In addition,  TFM and each of the concessionaires of Ferromex and
Ferrosur has a 25.0%  interest in the Mexico City Railroad and  Terminal.  These
agreements enable TFM to exchange traffic and utilize trackage which is not part
of its rail system,  extending our network and  providing it with  strategically
important  rail links to the United  States and to areas of Mexico  that it does
not  directly  serve.  TFM's  ability  to provide  comprehensive  service to its
customers will depend in part on its ability to maintain these  agreements  with
other railroads and third parties. TFM's failure to enter into these agreements,
or the termination of these  agreements,  could  adversely  affect its business,
financial  condition  and  results  of  operations.  The other  parties to these
agreements may not faithfully  execute their  obligations under their agreements
or arrangements with TFM, and may become TFM's  competitors.  The failure of any
of these parties to fulfill its obligations to TFM could adversely  affect TFM's
financial condition and results of operations.  In addition, TFM may not be able
to  coordinate  its  interchange  and  switching  activities  with  these  other
concessionaires and railroads in an efficient manner.  Inefficient  coordination
of our  interchange  and  switching  activities  would  negatively  impact TFM's
operating results.

IF  TFM'S  PRIMARY  FUEL  SUPPLY  CONTRACT  IS  TERMINATED,  OR IF  FUEL  PRICES
SUBSTANTIALLY INCREASE, TFM'S OPERATIONS COULD BE ADVERSELY AFFECTED.

     Nearly all of the locomotives TFM operates are diesel-powered, and its fuel
expenses are significant.  TFM currently meets, and expects to continue to meet,
its fuel requirements almost exclusively through purchases at market prices from
Petroleos  Mexicanos (Mexican Petroleum or "PEMEX"),  a government-owned  entity
exclusively  responsible for the distribution and sale of diesel fuel in Mexico.
TFM is party to a fuel supply contract with PEMEX of indefinite duration. Either
party may terminate  the contract  upon 30 days' written  notice to the other at
any time. If the fuel contract  terminates  and TFM is unable to acquire  diesel
fuel from  alternative  sources on acceptable  terms,  TFM's operations could be
materially adversely affected.  In addition,  instability in the Middle East may
result in an increase in fuel  prices.  Since TFM's fuel  expense  represents  a
significant  portion of its  operating  expenses,  significant  increases in the
price of diesel  fuel  could have a material  adverse  effect on its  results of
operations.  TFM experienced  increases of 61.3%, 21.6% and 17.9% in its average
price of fuel per gallon in 2000, 1999 and 1998, respectively, which resulted in
increases in its fuel  expense for each of these  periods.  In 2001,  TFM's fuel



costs decreased by 8.7% from 2000. In 2002,  TFM's fuel costs decreased by 15.5%
from 2001. The price of diesel fuel has increased  significantly  recently which
could have an adverse effect on TFM's future results of operations.

TFM FACES POSSIBLE CATASTROPHIC LOSS AND LIABILITY.

     The  operation  of  any  railroad  carries  with  it an  inherent  risk  of
catastrophe,  mechanical failure,  collision and property loss. In the course of
TFM's operation,  spills or other environmental  mishaps,  cargo loss or damage,
business interruption due to political developments,  as well as labor disputes,
strikes and adverse  weather  conditions,  could  result in a loss of  revenues,
liabilities  or  increased  costs.  Collisions,  environmental  mishaps or other
accidents can cause serious bodily injury,  death and extensive property damage,
particularly when such accidents occur in heavily populated areas. Additionally,
TFM's operations may be affected from time to time by natural  disasters such as
earthquakes,  volcanoes,  hurricanes or other storms.  The occurrence of a major
natural  disaster,  especially in the Mexico City area, which is the site of the
Mexico City  Railroad and Terminal and  significant  portions of TFM's  customer
base, could have a material adverse effect on TFM's operations. TFM has acquired
insurance that is consistent with industry practice against the accident-related
risks involved in the conduct of its business and business  interruption  due to
natural disaster.  However, this insurance is subject to a number of limitations
on coverage, depending on the nature of the risk insured against. This insurance
may not be  sufficient  to cover  TFM's  damages or damages to others,  and this
insurance  may not continue to be available at  commercially  reasonable  rates.
Even with insurance, if any catastrophic interruption of service occurs, TFM may
not be able to restore service without a significant interruption to operations.

TFM FACES POTENTIAL ENVIRONMENTAL LIABILITY.

     TFM's  operations are subject to general Mexican federal and state laws and
regulations  relating to the  protection of the  environment.  The  Procuraduria
Federal  de  Proteccion  al  Ambiente   (Attorney   General  for   Environmental
Protection)  is  empowered  to  bring  administrative   proceedings  and  impose
corrective  actions  and  economic  sanctions  against  companies  that  violate
environmental   laws,  and  temporarily  or  permanently   close   non-complying
facilities.  The Secretaria del Medio Ambiente y Recursos Naturales (Ministry of
the Environment  and Natural  Resources) and other  ministries have  promulgated
compliance standards for, among other things, water discharge, water supply, air
emissions,  noise pollution,  hazardous substances  transportation and handling,
and hazardous and solid waste generation.

TFM is responsible for the costs of environmental compliance associated with its
ongoing operations.  Pursuant to TFM's Concession,  Ferrocarriles  Nacionales de
Mexico, S.A. de C.V. ("FNM") is responsible for any environmental  damage caused
before the commencement of TFM's operations, and both the Mexican government and
FNM will indemnify TFM for any environmental liability relating to soil, subsoil
or groundwater  contamination arising from acts or omissions attributable to FNM
that  occurred  before Grupo TFM's  acquisition  of TFM's shares.  However,  the
Mexican  government is not obligated to compensate  TFM for any expenses that it
incurs in complying with any amended  environmental laws or regulations relating
to our ongoing operations or activities that impose higher regulatory  standards
than those in effect on the date the Concession was granted.  TFM cannot predict
the  effect,  if  any,  that  the  adoption  of  additional  or  more  stringent
environmental laws and regulations would have on our results of operations, cash
flows or financial condition. TFM may also incur other environmental liabilities
with respect to U.S.  environmental  laws in  connection  with its  ownership of
Mexrail.  The  U.S.  Comprehensive  Environmental  Response,   Compensation  and
Liability  Act  ("CERCLA"  or  "Superfund")  and  similar  state laws  (known as
Superfund  laws) impose  liability for the cost of remedial or removal  actions,
natural  resources  damages and related  costs at certain  sites  identified  as
posing a threat to the  environment  or public  health.  CERCLA  imposes  strict
liability on the owners and operators of facilities in which hazardous waste and
other hazardous  substances are deposited or from which they are released or are
likely to be released into the  environment.  Liability may be imposed,  without
regard to fault or the legality of the activity,  on certain classes of persons,
including  the current  and  certain  prior  owners or  operators  of a site and
persons that  arranged  for the  disposal or treatment of hazardous  substances.



Liability  is  imposed  on  a  joint  and  several  basis.  In  addition,  other
potentially responsible parties,  adjacent landowners or other third parties may
initiate cost recovery actions or toxic tort litigation against sites subject to
CERCLA or similar state laws.

TFM COULD BE SUBJECT TO THIRD PARTY CLAIMS OR LEGAL ACTIONS AS A CONSEQUENCE  OF
THE NEW RULING  ISSUED BY THE MEXICAN  FISCAL COURT IN  CONNECTION  WITH THE VAT
REFUND.

     On July 9, 2003, TFM was formally  notified by the Mexican  appellate court
of its June 11,  2003  judgment  which  granted  TFM  constitutional  protection
against the ruling of the Mexican Fiscal Court issued on December 6, 2002, which
had denied TFM the right to receive  the Value  Added Tax  ("VAT")  refund.  The
Mexican  appellate  court's  judgment ordered the Mexican Fiscal Court to vacate
its December 6, 2002  resolution,  and to issue a new  resolution  following the
guidelines of the Mexican  appellate  court's  judgment.  The Mexican  appellate
court found that the VAT refund  certificate  had not been delivered to TFM, and
confirmed the Mexican  Fiscal  Court's  determination  that TFM has the right to
receive the VAT refund certificate.  The Mexican appellate court's ruling states
that  the  Mexican  Treasury's  decision  denying  delivery  of the  VAT  refund
certificate to TFM violated the law, and it instructs that the VAT reimbursement
certificate  be issued  to TFM on the terms  established  by  Article  22 of the
Mexican  Federal Fiscal Code in effect at that time. As a result of this ruling,
the case was remanded to the Mexican Fiscal Court. On August 14, 2003, Grupo TMM
announced  that in a public  session  held August 13, the Mexican  Fiscal  Court
issued a  resolution  regarding  TFM's VAT Claim  (defined  below)  vacating its
previous  resolution  of December 6, 2002,  and, in strict  compliance  with the
ruling issued on June 11, 2003 by the Mexican appellate court, resolved that TFM
had proved its case, and that a "ficta denial"  occurred,  declaring such denial
null and void as ordered by the  Mexican  appellate  court.  On October 3, 2003,
Grupo TMM announced  that the Tax Attorney of the Mexican  Government  has filed
for a review of the ruling. We cannot at this point in time be certain as to the
amount or timing of any VAT refund recovery. In addition, a third party claim or
legal action could be brought  against TFM as a  consequence  of this new ruling
issued by the Mexican Fiscal Court.  Although TFM has indicated that it believes
it would  have  sufficient  legal  defenses  should  such an  action or claim be
brought  against TFM,  there can be no assurance  that TFM would prevail in such
action or claim. If TFM does not prevail in any such action or claim, this could
adversely affect TFM's financial condition and results of operations.

FACTORS RELATED TO MEXICO
-------------------------

MEXICAN REGULATORY, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH EMERGING MARKET
ECONOMIES  COULD  ADVERSELY  AFFECT  TFM'S  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS.

     The  Mexican   government  has   exercised,   and  continues  to  exercise,
significant   influence   over  the  Mexican   economy.   Accordingly,   Mexican
governmental  actions  concerning the economy and state-owned  enterprises could
have a significant  impact on Mexican private sector entities in general and TFM
in particular,  as well as on market  conditions,  prices and returns on Mexican
securities,  including TFM's outstanding  notes and debentures.  TFM's financial
condition, results of operations and prospects and, consequently,  the price for
its  outstanding  notes  and  debentures,  may  also  be  affected  by  currency
fluctuations,   inflation,   interest  rates,   regulation,   taxation,   social
instability  and  other  political,  social  and  economic  developments  in  or
affecting Mexico.

     The national  elections  held on July 2, 2000 ended 71 years of rule by the
Institutional Revolutionary Party ("PRI") with the election of President Vicente
Fox Quesada,  a member of the National  Action Party ("PAN") and resulted in the
increased  representation  of opposition  parties in the Mexican Congress and in
mayoral  and  gubernatorial  positions.  Although  there  have  not yet been any
material adverse repercussions resulting from this political change,  multiparty
rule is still relatively new in Mexico and could result in economic or political
conditions  that could  materially  and adversely  affect TFM's  operations.  We
cannot predict the impact that this political landscape will have on the Mexican
economy.

     Securities of companies in emerging market  countries tend to be influenced
by economic and market conditions in other emerging market  countries.  Emerging
market countries have recently been experiencing  significant economic downturns



and market  volatility.  These events have had an adverse effect on the economic
conditions and securities markets of other emerging market countries,  including
Mexico.

     The Mexican  economy in the past has suffered  balance of payment  deficits
and  shortages in foreign  exchange  reserves.  There are  currently no exchange
controls in Mexico; however, Mexico has imposed foreign exchange controls in the
past. Pursuant to the provisions of NAFTA, if Mexico experiences serious balance
of payment  difficulties or the threat thereof in the future,  Mexico would have
the right to impose foreign  exchange  controls on  investments  made in Mexico,
including those made by U.S. and Canadian  investors.  Any restrictive  exchange
control  policy could  adversely  affect TFM's  ability to obtain  dollars or to
convert  pesos into  dollars  for  purposes  of making  payments  of  principal,
premium,  if any, and interests due on its  indebtedness,  to the extent that it
may have to effect those conversions.  This could have a material adverse effect
on TFM's business and financial condition.

     In addition, the value of the peso relative to the dollar has been volatile
in the past.  Greater than 50% of TFM's revenues for the year ended December 31,
2002 were  denominated in U.S.  Dollars.  After a five-year period of controlled
devaluation  of the peso,  on December  19,  1994 the value of the peso  dropped
sharply as a result of pressure against the currency.  This decline, among other
factors,  precipitated  an economic  crisis in Mexico that continued for several
years.  In 2002,  the peso  depreciated  12.8%  against the  dollar.  Any future
devaluations  in the peso and currency  instability  could make it difficult for
TFM to  purchase  dollars  and to service  its  dollar-denominated  obligations.
Further,  any  additional  devaluation  of the peso would cause the peso cost of
TFM's dollar-denominated debt to increase. Furthermore, currency instability may
affect the balance of trade between the United States and Mexico.

     Mexico also has a history of high levels of inflation,  and may  experience
inflation  in the future.  During most of the 1980s and during the mid- and late
1990s, Mexico experienced periods of high levels of inflation.  The annual rates
of  inflation,  as measured by changes in the Mexican  National  Consumer  Price
Index,  for the years from 1997  through  2002 as  provided  by Banco de Mexico,
Mexico's central bank, were:

         1997 .............................................. 15.7%

         1998 .............................................. 18.6%

         1999 .............................................. 12.3%

         2000 .............................................. 9.0%

         2001 .............................................. 4.4%

         2002 .............................................. 5.7%

     A substantial  increase in the Mexican inflation rate would have the effect
of increasing TFM's costs including salaries,  some purchased services and other
costs  denominated  in pesos,  which could  adversely  affect  TFM's  results of
operations and financial condition. High levels of inflation may also affect the
balance  of trade  between  the  United  States  and  Mexico,  which  could also
adversely affect TFM's results of operations.

     Mexican political events may also affect significantly TFM's operations and
the  performance  of Mexican  securities,  including its  outstanding  notes and
debentures.  In  addition,  a change in  economic  policy  could have a material
adverse effect on TFM's business, financial condition,  prospects and results of
operation.

     We are unable to predict whether any future political or economic events in
Mexico could impact the Mexican transportation regulatory environment.







                                 USE OF PROCEEDS

     We will not  receive  any of the  proceeds  from  the sale of the  Series C
Preferred Stock or the common stock contemplated by this prospectus. Please read
"Selling  Securityholders" for a list of the persons receiving proceeds from the
sale of the Series C Preferred Stock or the underlying common stock.

                                    BUSINESS

     We, along with our subsidiaries and affiliates,  own and operate a uniquely
positioned  North  American  rail network  strategically  focused on the growing
north/south freight corridor that connects key commercial and industrial markets
in the  central  United  States  with major  industrial  cities in  Mexico.  Our
principal  subsidiary,  KCSR, which was founded in 1887, is one of seven Class I
railroads  in the United  States.  Our rail network  (KCSR,  TFM and Tex-Mex) is
comprised  of  approximately  6,000  miles of main and branch  lines.  Through a
strategic  alliance with Canadian  National  Railway Company ("CN") and Illinois
Central  Corporation ("IC") (together  "CN/IC"),  we have access to a contiguous
rail network of  approximately  25,000 miles of main and branch lines connecting
Canada, the United States and Mexico.  Management  believes that, as a result of
the strategic position of our rail network, we are poised to continue to benefit
from the growing north/south trade between the United States,  Mexico and Canada
promoted by NAFTA.

     Our  rail  network  interconnects  with all  other  Class I  railroads  and
provides shippers with an effective alternative to other railroad routes, giving
direct  access to Mexico and the  southeastern  and  southwestern  United States
through less congested interchange hubs.

     Our rail network links directly to major trading  centers in Mexico through
Tex-Mex and TFM. TFM operates a railroad that runs from the  U.S./Mexico  border
at Laredo, Texas to Mexico City and serves most of Mexico's principal industrial
cities and three of its major shipping  ports. On May 9, 2003, KCS acquired from
TFM for cash 51% of the  shares of  Mexrail,  which  owns 100% of  Tex-Mex,  and
deposited the Mexrail shares into an irrevocable voting trust pending resolution
of KCS's  application  to the STB seeking  authority to exercise  common control
over Tex-Mex and KCS's other rail companies,  KCSR and Gateway Eastern. However,
on September 30, 2003,  KCS returned its 51% interest in Mexrail to TFM. TFM now
owns 100% of  Mexrail.  Tex-Mex  operates  between  Laredo  and the port city of
Corpus  Christi,  Texas and with trackage  rights  connects to KCSR at Beaumont,
Texas. TFM, through its Concession with the Mexican government, has the right to
control and operate the  southern  half of the  rail-bridge  at Laredo and,  TFM
indirectly  through its  ownership  of Mexrail,  owns the  northern  half of the
rail-bridge  at Laredo,  which  spans the Rio Grande  River  between  the United
States and Mexico. Our principal  international gateway is at Laredo, where more
than 50% of all rail and truck  traffic  between  the  United  States and Mexico
crosses the border.

     Our rail network is further  expanded  through our strategic  alliance with
CN/IC and marketing  agreements with Norfolk Southern Railway Company  ("Norfolk
Southern"),  The Burlington  Northern and Santa Fe Railway Company  ("BNSF") and
the Iowa,  Chicago & Eastern  Railroad  Corporation  ("IC&E" - formerly I&M Rail
Link, LLC). The CN/IC alliance  connects  Canadian markets with major midwestern
and  southern  markets  in the United  States as well as with  major  markets in
Mexico through KCSR's  connections  with Tex-Mex and TFM.  Marketing  agreements
with  Norfolk  Southern  allow us to  capitalize  on our  east/west  route  from
Meridian, Mississippi to Dallas, Texas ("Meridian Speedway") to gain incremental
traffic volume between the southeast and the southwest.  The marketing  alliance
with BNSF was developed to promote cooperation, revenue growth and extend market
reach for both railroads in the United States and Canada. It is also designed to
improve  operating  efficiencies  for both KCSR and BNSF in key market areas, as
well as provide  customers  with  expanded  service  options.  KCSR's  marketing
agreement with IC&E provides access to Minneapolis, Minnesota and Chicago and to
originations of corn and other grain in Iowa, Minnesota and Illinois.



     We also owns 50% of the common  stock (or a 42% equity  interest)  of PCRC,
which holds the concession to operate a 47-mile coast-to-coast  railroad located
adjacent to the Panama Canal. The railroad handles containers in freight service
across the isthmus.  Panarail,  a wholly owned  subsidiary  of PCRC,  operates a
commuter and tourist railway service over the lines of the Panama Canal Railway.
Passenger service commenced during the third quarter of 2001 and freight service
started during the fourth quarter of 2001.

     Additional  information  concerning us is included in our reports and other
documents  incorporated by reference in this prospectus.  Please read "Where You
Can Find More Information."






                         DESCRIPTION OF THE ACQUISITION

OVERVIEW

     On April 20, 2003,  KCS entered into the  Acquisition  Agreement with Grupo
TMM under which KCS ultimately would acquire control of TFM through the purchase
of shares of common stock of Grupo TFM. Grupo TFM holds an 80% economic interest
in TFM and all of the TFM Voting Stock.  The remaining 20% economic  interest in
TFM is owned by the Mexican government in the form of shares with limited voting
rights.  KCS currently owns a 46.6% economic  interest in Grupo TFM and 49.0% of
the shares of common  stock of Grupo TFM  entitled  to full  voting  rights.  On
February 27, 2002, KCS, Grupo TMM, and certain of Grupo TMM's affiliates entered
into a stock purchase  agreement with TFM to sell to TFM all of the common stock
of Mexrail.  The sale closed on March 27,  2002 and KCS  received  approximately
$31.4 million for its 49% interest in Mexrail. On May 9, 2003, KCS acquired from
TFM for $32.7  million in cash 51% of the shares of Mexrail,  which owns 100% of
Tex-Mex. KCS deposited the Mexrail shares into a voting trust pending resolution
of KCS's  application  to the STB seeking  authority to exercise  common control
over Tex-Mex and KCS's other rail companies,  KCSR and Gateway Eastern. However,
on  September  30,  2003,  in  accordance  with the terms of the Stock  Purchase
Agreement,  TFM repurchased from KCS the 51% interest in Mexrail acquired by KCS
in May  2003.  Upon  this  repurchase  by  TFM,  the  Stock  Purchase  Agreement
automatically  terminated.  The  repurchase  price was the price paid by KCS for
these shares in May 2003.  According to the terms of the  Acquisition  Agreement
and certain related agreements (described in detail below), KCS will issue:

     o    18,000,000  shares of Class A  Convertible  Common Stock to Multimodal
          upon the closing of the Acquisition;

     o    at KCS's option, up to 6,400,000 shares of Class A Convertible  Common
          Stock  or  Common  Stock  in lieu of a  portion  of the  $200  million
          consideration  to be paid in cash at the  closing  of the  Acquisition
          Agreement; and

     o    up to 2,625,000  shares of  restricted  Common  Stock  pursuant to the
          Consulting Agreement.

The securities to be issued in connection with the Acquisition  represent in the
aggregate  more than 20% of the  issued  and  outstanding  shares of KCS  Common
Stock.

SUMMARY OF THE ACQUISITION AGREEMENT AND RELATED AGREEMENTS

     The  following  summary  of the terms  and  provisions  of the  Acquisition
Agreement,  First  Amendment  to  Rights  Agreement,   Stockholders'  Agreement,
Registration  Rights  Agreement,  Consulting  Agreement,  Marketing and Services
Agreement,  Agreement  of  Assignment  and  Assumption  of  Rights,  Duties  and
Obligations  and Stock  Purchase  Agreement  is  qualified  in its  entirety  by
reference  to  each of  those  documents,  each of  which  are  exhibits  to the
registration  statement of which this  prospectus  forms a part. You should read
these agreements  carefully for more details regarding the provisions  described
below and for other provisions that may be important to you.

THE ACQUISITION AGREEMENT

     Upon the terms and subject to the conditions of the Acquisition  Agreement,
dated April 20, 2003,  by and among KCS,  KARA Sub,  Grupo TMM, TMM Holdings and
Multimodal, KCS would acquire all of the interest of Multimodal in Grupo TFM for
consideration to Multimodal of $200 million and 18 million shares of KCS Class A
Convertible  Common Stock.  The Acquisition will be accomplished in three steps,
the Stock  Purchase,  the Subsidiary  Investment and the Merger  described below
(and  together  comprising  the  Acquisition),  all occurring  sequentially  and
virtually simultaneously as follows:



     (1) THE STOCK  PURCHASE.  KARA Sub will purchase from  Multimodal all Grupo
     TFM shares held by  Multimodal,  consisting  of 25,500 shares of Series "A"
     fixed  capital  stock of Grupo  TFM and  3,842,901  shares  of  Series  "A"
     variable  capital stock of Grupo TFM. The purchase price to be paid by KARA
     Sub to  Multimodal  at the closing for the purchase of the Grupo TFM shares
     is: (i) $200  million  (up to $80  million  of which may be paid,  at KCS's
     option,  in shares of KCS Common  Stock or KCS Class A  Convertible  Common
     Stock);  and  (ii)  a  subordinated  promissory  note  of  KARA  Sub in the
     principal  amount of $25 million.  KCS will provide KARA Sub with the funds
     and securities to make these payments.

     (2) THE SUBSIDIARY  INVESTMENT.  Immediately  following the Stock Purchase,
     Multimodal will purchase 10% of the issued and  outstanding  shares of KARA
     Sub common stock, in  consideration  for delivery by Multimodal to KARA Sub
     of the KARA Sub subordinated promissory note.

     (3) THE MERGER.  KARA Sub will then be merged into KCS in  accordance  with
     the Delaware  Corporation  Law. The Merger will be  consummated by filing a
     certificate  of merger with the Delaware  Secretary of State in  accordance
     with the  Delaware  Corporation  Law. At such time,  the shares of KARA Sub
     held by  Multimodal  will be converted  into and  exchanged  for 18 million
     shares of KCS Class A Convertible  Common Stock. As a result of the Merger,
     the  separate  corporate  existence  of KARA  Sub will  cease  and KCS will
     continue  as  the  surviving  corporation.   Subject  to  approval  by  KCS
     stockholders,  upon the date and time of the filing of the  Certificate  of
     Merger,  KCS will change its name to "NAFTA Rail" and the capital  stock of
     KCS (including the KCS common stock,  the $25 par value preferred stock and
     the Series C Preferred Stock) will continue to be issued and outstanding as
     the  capital  stock of NAFTA  Rail  without  further  action by any  holder
     thereof.  Subject  to  listing  approval  by the New  York  Stock  Exchange
     ("NYSE"),  the NAFTA Rail Common  Stock and $25 par value  preferred  stock
     will trade on the NYSE.

     The closing of the Acquisition is dependent upon the closing of each of the
Stock Purchase,  the Subsidiary Investment and the Merger. If the Acquisition is
consummated,  two new directors, Jose Serrano Segovia, Chairman of Grupo TMM and
Javier Segovia  Serrano,  President of Grupo TMM, will be appointed to the NAFTA
Rail Board of Directors to serve until the first Annual Meeting of  Stockholders
of NAFTA Rail following  consummation of the Acquisition.  At that meeting, Jose
Serrano Segovia will be nominated for election to the class of directors serving
until the annual meeting of stockholders in 2006 and Javier Segovia Serrano will
be nominated  for election to the class of  directors  serving  until the annual
meeting of stockholders in 2005.

     KCS and Grupo TMM are  currently in a dispute  over Grupo TMM's  attempt to
terminate the Acquisition Agreement.  For a discussion of recent developments in
connection with the Acquisition, see "--Recent Developments" below.

CONDITIONS TO OBLIGATIONS TO COMPLETE THE ACQUISITION

     The  obligations  of KCS and  Grupo TMM to  complete  the  Acquisition  are
subject to a number of conditions, including, among others:

     o    KCS must have obtained  approval of KCS stockholders of the amendments
          to KCS's  restated  certificate of  incorporation  and the issuance of
          Class A Convertible Common Stock and common stock;

     o    All consents, waivers,  authorizations and approvals required from all
          governmental  authorities to consummate the Acquisition must have been
          obtained  and  remain   effective  as  of  the  closing  date  of  the
          Acquisition Agreement;

     o    The common  stock to be issued must have been  approved for listing by
          the NYSE;



     o    Each of the  Ancillary  Agreements  must have been duly  executed  and
          delivered  by or on behalf of KCS and each of Grupo TMM,  TMM Holdings
          and Multimodal, as the case may be;

     o    Grupo  TMM  must  have  received  consents  from  the  holders  of its
          outstanding Notes due 2003 and Notes due 2006; and

     o    There must not be any  insolvency  or  bankruptcy  proceeding  pending
          against Multimodal, TMM Holdings or TFM that has been pending for more
          than 60 days,  and certain  material  adverse  effects  shall not have
          occurred.

TERMINATION

     The  Acquisition  Agreement may be  terminated  prior to the closing of the
Acquisition as follows:

     o    By written consent of KCS and Grupo TMM;

     o    By  KCS  or  Grupo  TMM if any  order  of any  governmental  authority
          permanently prohibiting the consummation of the Acquisition has become
          final  and   non-appealable   or  if  any  of  the  approvals  of  any
          governmental authority to perform the transactions contemplated by the
          Acquisition  Agreement  imposes  any  condition  or  requirement,  the
          satisfaction of which is reasonably  likely to have a material adverse
          effect on either KCS or Grupo TMM;

     o    By  KCS  if  any  conditions  to the  obligations  of  KCS  under  the
          Acquisition  Agreement  becomes  incapable of  fulfillment  through no
          fault of KCS and is not waived by KCS;

     o    By  Grupo  TMM if any  condition  to the  obligations  of  Grupo  TMM,
          Multimodal and TMM Holdings  (collectively,  the "Sellers")  under the
          Acquisition  Agreement  becomes  incapable of  fulfillment  through no
          fault of Sellers and is not waived by Grupo TMM;

     o    By KCS if Grupo TMM has  experienced a change of control,  or by Grupo
          TMM if KCS has experienced a change of control; and

     o    By KCS or Grupo TMM if the closing of the  Acquisition  does not occur
          on or prior to December 31, 2004 (the "Termination  Date");  provided,
          however,  that the  Termination  Date may be extended by KCS and Grupo
          TMM by written agreement.

     A termination  fee of $18 million is payable in the event of termination of
the Acquisition  Agreement due to (i) a change of control of either KCS or Grupo
TMM, in which case the party  experiencing  the change of control  shall pay the
termination fee to the other party,  or (ii) the failure of the  stockholders of
KCS or of Grupo TMM to approve the  Acquisition if at or prior to the meeting of
such stockholders to approve the Acquisition,  the Board of Directors of KCS, in
the case of the KCS  stockholders'  meeting,  or the Board of Directors of Grupo
TMM, in the case of the Grupo TMM stockholders' meeting, has failed to recommend
or has withdrawn and not reinstated its recommendation of the Acquisition,  then
the party whose  stockholders  shall not have approved the Acquisition shall pay
the termination fee to the other party.

REQUIRED REGULATORY AND OTHER CONSENTS, APPROVALS AND FILINGS

     Certain regulatory approvals and filings and other consents are required in
connection with the closing of the Acquisition. These include, among others:

     o    Prior  approval  of the  Mexican  Foreign  Investments  Commission  of
          control of Grupo TFM by a non-Mexican entity;



     o    Clearance  by the Mexican  Antitrust  Commission  of  anti-competitive
          concerns;

     o    Notice to the Mexican Ministry of Communications and Transportation;

     o    Filing with NYSE for listing of common stock issuable upon  conversion
          of Class A Convertible Common Stock;

     o    Grupo TMM noteholder consents;

     o    Notice filing under the Hart-Scott-Rodino  Antitrust  Improvements Act
          of 1976 ("HSR")  filing and  clearance of  investment by Multimodal in
          KCS; and

     o    KCS stockholder  approval of amendments to its restated certificate of
          incorporation and issuance of KCS equity.

KCS has  obtained an  amendment  to its Amended and  Restated  Credit  Agreement
allowing:

     o    KCS (NAFTA Rail) investment in further equity interests of Grupo TFM;

     o    KCS (NAFTA Rail)  investment in equity  interests  representing 51% of
          Mexrail's issued and outstanding capital stock;

     o    Use of KCS cash to acquire Mexrail.

     For a discussion  of the filings made and the status of such  filings,  see
"--Regulatory Matters" below.

VAT CONTINGENCY PAYMENT

     The VAT Claim,  which has been  pending in the Mexican  courts  since 1997,
arose out of the Mexican  Treasury's  delivery of a VAT credit  certificate to a
Mexican  governmental  agency  rather than to TFM. On September  25,  2002,  the
Mexican  appellate  court  issued a  judgment  in favor of TFM on the VAT Claim,
vacating a prior  judgment of the Mexican Fiscal Court and remanding the case to
the Fiscal Court with specific  instructions to enter a new decision  consistent
with the guidance provided by the Mexican appellate court's ruling.  The Mexican
appellate court's ruling required the fiscal authorities to issue the VAT credit
certificate  only in the name of TFM. On December 6, 2002,  the upper chamber of
the Fiscal  Court  issued a ruling  denying  TFM's right to receive a VAT refund
from the Mexican  Federal  Government.  On January 8, 2003,  TFM was  officially
notified of the new judgment of the Fiscal Court and on January 29, 2003,  filed
the appropriate  appeal.  On June 11, 2003, the Mexican appellate court issued a
judgment in favor of TFM against the ruling of the Fiscal  Court.  The  judgment
granted TFM  constitutional  protection  against the ruling of the Fiscal  Court
issued on December 6, 2002  denying  TFM's right to receive the VAT refund.  The
judgment  ordered the Fiscal Court to vacate its December 6, 2002 resolution and
to issue a new  resolution  following the  guidelines  of the Mexican  appellate
court's  judgment.  The  Mexican  appellate  court  found  that  the VAT  refund
certificate  had not been  delivered to TFM, and  confirmed  the Fiscal  Court's
determination that TFM has the right to receive the VAT refund certificate.  The
Mexican  appellate  court's ruling states that the Treasury's  decision  denying
delivery of the VAT refund certificate to TFM violated the law, and it instructs
that the VAT reimbursement certificate be issued to TFM on the terms established
by Article 22 of the Federal  Fiscal Code in effect at that time. As a result of
the  Mexican  appellate  court's  ruling,  the case was  remanded to the Mexican
Fiscal Court.  On August 14, 2003,  Grupo TMM announced that in a public session
held August 13, the Mexican Fiscal Court issued a resolution regarding TFM's VAT
Claim  vacating  its  previous  resolution  of December 6, 2002,  and, in strict
compliance  with the ruling  issued on June 11,  2003 by the  Mexican  appellate
court,  resolved  that TFM has  proved  its  case,  and  that a  "ficta  denial"
occurred,  declaring  such  denial  null  and  void as  ordered  by the  Mexican
appellate  court. On October 3, 2003,  Grupo TMM announced that the Tax Attorney



of the Mexican  Government  has filed for a review of the  ruling.  We cannot at
this  point in time be  certain  as to the  amount or  timing of any VAT  refund
recovery.

     Provided  the  Acquisition  has  occurred  and  neither  KCS nor any of its
subsidiaries has purchased the TFM "Class III" shares  (representing  20% of the
capital stock of TFM) currently held by the Mexican  government upon exercise by
the Mexican  government of its Put to compel  purchase of the shares of TFM held
by it,  as  compensation  for  Grupo  TMM's  services  in  obtaining  the  final
settlement or resolution of TFM's VAT Claim against the Mexican Treasury for the
refund of a VAT payment in the original principal amount of 2,111,111,790 pesos,
KCS will make or cause TFM to make the VAT  Contingency  Payment to Grupo TMM as
set forth below,  following the date of final  resolution of the VAT Claim,  and
the receipt by TFM or its  designee of shares or cash  compensation  received by
TFM or its  designee  from the  Mexican  government  on the VAT Claim  (the "VAT
Payment").  The VAT Payment  must  consist of at least (i) all of the TFM "Class
III" shares  currently held by the Mexican  government or (ii) a cash payment or
other  property  acceptable  to the  parties  which has a fair value equal to or
greater than the Put Purchase Price (as defined in the Acquisition Agreement) as
calculated on the date the VAT Payment is received.  In such event, KCS will, at
its option,  pay or cause TFM to pay to Grupo TMM (iii) $100  million  within 90
days  thereafter or (iv) $50 million within 90 days thereafter and an additional
$55  million  within 365 days  thereafter.  If the VAT  Payment  exceeds the Put
Purchase  Price as calculated on the date the VAT Payment is received,  KCS will
pay or cause TFM to pay to Grupo TMM  within 90 days after the VAT  Payment  and
final  resolution of the VAT Claim the first $25 million  received above the Put
Purchase Price, and 15% of any additional amount received above the Put Purchase
Price  beyond  the  first  $25  million,  not to  exceed  $50  million.  The VAT
Contingency Payment shall be made after reducing the value of the VAT Payment by
the amount of all expenses  incurred by or on behalf of TFM in  effecting  final
resolution of the VAT Claim and receipt of the VAT Payment.

THIRD PARTY MATTERS

     Until the filing of the  Certificate of Merger for the Merger,  neither KCS
nor Sellers can seek or entertain  other  offers with  respect to  acquisitions,
mergers or business  combinations of KCS or KCSR, and TMM Holdings,  Multimodal,
Grupo TFM or any of their respective  subsidiaries,  respectively.  In addition,
Grupo  TMM will not enter  into any  agreement  concerning  any  acquisition  or
purchase of a controlling equity interest in Grupo TMM by any competitor.  These
limitations  are  subject to the  fiduciary  duties of the  respective  Board of
Directors of KCS and Grupo TMM.

INDEMNIFICATION

     The representations and warranties of the Sellers and KCS survive for three
to five years.  The Sellers have jointly and severally  agreed to indemnify KCS,
the surviving  corporation and each of their subsidiaries,  and their respective
officers,   directors,    employees,   members,    stockholders,    agents   and
representatives  harmless  from and against all  losses,  damages,  liabilities,
claims, demands, obligations,  deficiencies,  payments, judgments,  settlements,
costs and expenses of any nature whatsoever ("Losses") resulting from or arising
out of any inaccuracy or misrepresentation  in, or breach of, any representation
or warranty of Sellers in  connection  with the  Acquisition  Agreement,  or any
breach or  nonfulfillment  of any covenant or agreement of any of the Sellers in
connection with the  Acquisition  Agreement,  or any claims,  causes of actions,
rights asserted or demands made by any third parties arising from or relating to
any  of  the  foregoing.  The  Sellers'  indemnification   obligations  for  any
inaccuracy or misrepresentation in, or breach of, any representation or warranty
regarding Grupo TFM or its subsidiaries is limited to 51% of Losses  aggregating
$5 million or more.  This limitation is not applicable to any Losses arising out
of or  resulting  from any action or  omission  on the part of any Seller or its
affiliate that involved a crime, fraud, willful misconduct or gross negligence.

     KCS has agreed to indemnify  the Sellers,  each of their  subsidiaries  and
each of their respective officers, directors,  employees, members, stockholders,
agents and representatives from and against all Losses resulting from or arising
out of any inaccuracy or misrepresentation  in, or breach of, any representation
or warranty of KCS in connection with the Acquisition  Agreement,  or any breach



or  nonfulfillment  of any covenant of KCS in  connection  with the  Acquisition
Agreement,  or any claims, causes of actions, rights asserted or demands made by
any third  parties  arising  from or  relating  to any of the  foregoing.  KCS's
indemnification  obligations  are limited to Losses  aggregating  $10 million or
more.  This  limitation  is not  applicable  to  any  Losses  arising  out of or
resulting  from any action or omission on the part of KCS or its affiliate  that
involved a crime, fraud, willful misconduct or gross negligence.

     Additionally,  KCS's Restated Certificate of Incorporation and Bylaws would
be amended to reflect the agreements contained in the Acquisition  Agreement and
certain  Ancillary  Agreements.  A number of Ancillary  Agreements have been, or
will be prior to the  closing  of the  Acquisition,  entered  into to carry  out
certain  objectives of the Acquisition  Agreement and the  Acquisition.  Each of
these Ancillary Agreements is described below.

FIRST AMENDMENT TO RIGHTS AGREEMENT

     In connection with the Acquisition, KCS and Harris Trust & Savings Bank, as
Rights Agent will enter into a First Amendment to Rights  Agreement (the "Rights
Agreement") dated as of September 19, 1995. The Rights Agreement will be amended
to prevent any TMM Holder from  becoming an Acquiring  Person (as defined in the
Rights Agreement), which would otherwise cause a Triggering Event (as defined in
the Rights  Agreement) as a result of the  Acquisition.  Accordingly,  the First
Amendment  to Rights  Agreement  will amend  Section  1(a),  the  definition  of
Acquiring  Person,  to provide  that no person or affiliate of such person shall
become an  "Acquiring  Person"  as a result  of the  acquisition  of  beneficial
ownership  of (i) shares of Class A  Convertible  Common  Stock,  (ii) shares of
Common  Stock  issued or issuable  upon  conversion  of the Class A  Convertible
Common  Stock,  (iii) any shares of Common Stock or Class A  Convertible  Common
Stock acquired  pursuant to Section 1.2 of the Acquisition  Agreement,  (iv) any
shares of Common Stock or Class A Convertible  Common Stock acquired pursuant to
the Consulting Agreement,  and (v) shares of Common Stock or Class A Convertible
Common Stock acquired in compliance with the Stockholders' Agreement,  including
upon exercise of pre-emptive rights as provided therein.

     The definition of  "Substantial  Block" found at Section 1(z) of the Rights
Agreement will also be amended to lower the threshold  beneficial ownership that
constitutes  a  "Triggering  Event"  from 20% to 15% (and from 15% to 13% in the
event the  Acquiring  Person is  declared  by the  Board of  Directors  to be an
Adverse Person (as defined in the Rights Agreement)).

     In  order to  conform  to the  foregoing  amendments,  subsection  (iii) of
Section 3(e) regarding  Restrictions on transfer of Rights to Acquiring  Persons
shall be deleted and amended to provide  that no Right (as defined in the Rights
Agreement)  shall be transferable  or transferred  other than as permitted under
Section 1(a) of the Rights Agreement, as amended, to any person who, as a result
of such transfer, would beneficially own 15% or more of the Rights.

     Finally,  Section 7(e) of the Rights Agreement will be amended to correct a
clerical error.

STOCKHOLDERS' AGREEMENT

     KCS,  Grupo TMM, TMM Holdings,  Multimodal  and the Principal  Stockholders
plan to enter into a Stockholders'  Agreement,  which shall set forth the rights
and duties of the  parties  thereto  arising out or and in  connection  with the
Acquisition Agreement and the transactions contemplated thereby.

STANDSTILL PROVISIONS

     For a period of seven years from the date of the  Stockholders'  Agreement,
Grupo TMM,  TMM  Holdings,  Multimodal  and each of the  Principal  Stockholders
agrees  that,  unless  specifically  invited in writing to do so by the Board of



Directors, such Person (as defined in the Stockholders' Agreement) will not, and
will cause each of its affiliates not to, among other things:

     o    acquire or agree to acquire  aggregate  beneficial  ownership  of more
          than  20%  of  the  Total  Voting  Power  of KCS  (as  defined  in the
          Stockholders' Agreement);

     o    initiate  or  propose  any  matter  for   submission   to  a  vote  of
          stockholders  of KCS or  participate  in the  making  of,  or  solicit
          stockholders for the approval of, any stockholder proposal;

     o    grant any proxy with  respect to any Voting  Securities  to any Person
          not approved in writing by KCS;

     o    except through its  representatives  on the Board of Directors (or any
          committee  thereof) of KCS,  otherwise  act,  alone or in concert with
          others,  to seek to  control or  influence  the  management,  Board of
          Directors or policies of KCS.

     The  standstill  provisions  terminate  upon the earliest to occur of (i) a
Change of Control of KCS (as defined in the  Stockholders'  Agreement),  or (ii)
the first date the TMM Holders  beneficially  own in the aggregate less than 15%
of the outstanding Voting Securities of KCS for at least 30 consecutive days.

TRANSFER RESTRICTIONS

     The TMM  Holders  may not  sell,  assign,  transfer,  pledge,  hypothecate,
otherwise  subject to any lien,  grant an option  with  respect to or  otherwise
dispose of any  interest in (or enter into an agreement  or  understanding  with
respect to the foregoing) any Voting  Securities  beneficially  owned by them (a
"Disposition")  except  in  accordance  with  the  terms  of  the  Stockholders'
Agreement.  For a  period  of five  years  from  the  date of the  Stockholders'
Agreement, the TMM Holders may not effect a Disposition:

     o    to a Competitor (as defined in the Stockholders' Agreement);

     o    to an Affiliate unless such Affiliate agrees in writing to be bound by
          the terms of the  Stockholders'  Agreement  and provided  that the TMM
          Holders  shall  remain  responsible,  jointly and  severally,  for any
          breaches of the Stockholders' Agreement by such Affiliate;

     o    that in the aggregate  represents 5% or more of the outstanding Voting
          Securities  to any Person  other than an 13G Filer (as  defined in the
          Stockholders' Agreement),  and no disposition shall be made to any 13G
          Filer  unless  such 13G Filer  would  continue  to be eligible to file
          reports pursuant to Section 13G under the Exchange Act with respect to
          the Voting Securities after giving effect to the proposed  acquisition
          and KCS has  been  provided  the  right  (but not the  obligation)  to
          purchase such Voting Securities;

     o    to any Person that would,  together with such  person's  Affiliates or
          Associates  (as  defined  in the  Stockholders'  Agreement)  and after
          giving  effect  to  the   acquisition   of  such  Voting   Securities,
          beneficially  own or have the right to acquire 15% of the Total Voting
          Power; and

     o    of any  capital  stock or Voting  Securities  or control of any Person
          that, directly or indirectly,  beneficially owns any Voting Securities
          of KCS to a Competitor.

     Subject to the provisions contained in the Stockholders'  Agreement,  a TMM
Holder may pledge or  hypothecate  as  security  for any  indebtedness  or other
obligations  any or all  Voting  Securities  beneficially  owned by such  Person
provided that KCS shall have a right to purchase the pledged  Voting  Securities
upon the  occurrence  of a  Foreclosure  Event (as defined in the  Stockholders'
Agreement).

     The TMM Holders may  participate  in a tender or exchange  offer made by an
unaffiliated third party, provided the TMM Holders did not solicit the tender or
exchange offer and (i) the same  consideration  is offered to all holders of the



securities  tendered in the tender offer;  (ii) the transaction is approved by a
majority of other KCS  stockholders;  (iii) the tender or exchange  offer is not
conditioned  on financing;  and (iv) the TMM Holders do not tender,  or publicly
disclose their intention to tender,  prior to the last day before  expiration of
the offer.

     The  transfer  restrictions   contained  in  the  Stockholders'   Agreement
terminate  upon the earliest to occur of (i) a Change of Control of KCS, or (ii)
the first date the TMM Holders  beneficially  own in the aggregate less than 15%
of the outstanding Voting Securities of KCS for at least 30 consecutive days.

PRE-EMPTIVE RIGHTS

     TMM  Holders  have  the  right to  purchase  additional  shares  of Class A
Convertible Common Stock to maintain their percentage ownership in the event KCS
authorizes  the issuance or sale of any shares of Common Stock or any securities
containing  options  or rights to  acquire  shares of Common  Stock,  except for
issuances of Common Stock  (including  for this purpose,  options,  warrants and
other securities convertible into or exercisable for Common Stock) issued:

     o    to  KCS's  employees,  directors,   consultants,  agents,  independent
          contractors or other service  providers in connection  with a Plan (as
          defined in the Stockholders' Agreement) existing as of the date of the
          Stockholders'  Agreement or a Plan  approved by the Board of Directors
          and adopted by KCS after the date of the Stockholders' Agreement;

     o    upon the conversion of Class A Convertible Common Stock;

     o    upon  the  exercise  of  any   options,   warrants,   convertible   or
          exchangeable securities which are outstanding as of the date hereof;

     o    in  connection  with  the   acquisition  (by  merger,   consolidation,
          acquisition of assets or equity  interests or otherwise) of the equity
          interests or assets of another Person; or

     o    in the event KCS issues additional equity in lieu of up to $80 million
          in cash at Closing.

CORPORATE GOVERNANCE

     The  Stockholders'  Agreement  provides  for the Board of  Directors  to be
comprised  of  eleven  directors,  to be  selected  as  follows:  (i) the  chief
executive  officer of KCS and another  person  selected by him; (ii) two persons
elected by the holders of the Class A Convertible  Common Stock  (reduced to one
in the event the TMM Holders' ownership falls below 75% of the Voting Securities
initially  acquired  pursuant to the Merger and reduced to zero in the event the
TMM  Holders'  ownership  falls  below 40% of the  Voting  Securities  initially
acquired  pursuant  to  the  Merger);  and  (iii)  seven  independent  directors
designated by the chief  executive  officer of KCS. The Nominating  Committee of
the Board of Directors will consist of three Independent Directors designated by
the chief executive  officer of KCS. The Compensation  Committee will consist of
three Independent Directors designated by the chief executive officer of KCS and
one Independent Director designated by the chief executive officer of Grupo TMM.
The Executive Committee will consist of three Directors  designated by the chief
executive  officer of KCS and one  Director  designated  by the chief  executive
officer of Grupo TMM.

     Each TMM Holder shall vote all of the Voting Securities  beneficially owned
by such Person and entitled to vote in the election of  directors:  (i) in favor
of all nominees of the  Nominating  Committee;  and (ii) against any proposal to
remove any director  nominated by the  Nominating  Committee  and elected to the
Board of Directors.

     The  TMM  Holders'  rights  and  duties  under  the  corporate   governance
provisions of the Stockholders'  Agreement  terminate upon the earliest to occur
of (i) the first date the TMM Holders beneficially own in the aggregate at least
40% of the outstanding  Voting  Securities  initially  acquired  pursuant to the
Merger, or (ii) a Change of Control of Grupo TMM or any of the TMM Holders.



TERMINATION

     Subject to specific  termination  provisions contained in the Stockholders'
Agreement,  the entire Agreement (with a few exceptions) terminates when the TMM
Holders  ownership falls below 40% of the Voting Securities  initially  acquired
pursuant to the Merger,  or in the event the Class A nominees are not elected to
the KCS Board of Directors (except for good cause).

REGISTRATION RIGHTS AGREEMENT

     The Registration Rights Agreement to be entered into by KCS, Grupo TMM, TMM
Holdings,  Multimodal  and certain  principal  stockholders  of Grupo TMM,  will
provide Grupo TMM, TMM Holdings,  Multimodal,  such  principal  stockholders  of
Grupo TMM, and any Permitted  Transferee (as defined in the Registration  Rights
Agreement) who acquires shares of Class A Convertible  Common Stock or shares of
Registrable  Stock (as defined in the Registration  Rights Agreement) and agrees
to be bound by the terms and  conditions of the  Registration  Rights  Agreement
(collectively,  the "Holders") with certain  registration rights with respect to
the shares of KCS Common Stock (i) issuable  upon  conversion of the KCS Class A
Convertible  Common Stock, (ii) issued in lieu of cash at closing,  (iii) issued
pursuant to the Consulting Agreement and (iv) acquired on pre-emptive exercises.

REQUIRED AND INCIDENTAL REGISTRATIONS

     Beginning on the 180th day following the  consummation of the  Acquisition,
the  Holders  shall have the right to  request,  and KCS shall use  commercially
reasonable efforts to effect, six demand registrations.  In the event KCS issues
additional  equity in lieu of up to $80 million in cash at Closing,  the Holders
shall be entitled to one additional  shelf  registration.  Holders shall also be
entitled to unlimited incidental, or "piggy-back," registrations.  KCS can delay
filing registrations upon the occurrence of certain events, including situations
in which KCS is not eligible to use Form S-3 to effect such  registration  or in
the event that KCS furnishes to the Holders a resolution adopted by the Board of
Directors  to the  effect  that in the good  faith  judgment  of KCS it would be
seriously detrimental for a registration statement to be filed at that time.

     In the event  the  managing  underwriters  of a public  offering  furnish a
written  opinion  that the amount of  securities  to be  included in an offering
exceed the maximum amount which can be marketed without materially and adversely
affecting  such  offering,  then the Holders,  KCS and all other  holders of KCS
securities having the right to include such securities in the registration shall
be  subject to  certain  underwriting  cut-backs.  Holders  are also  subject to
certain market standoff  provisions  during the ten days prior to and up to, but
not exceeding,  90 days following the effective date of a registration statement
to the same extent that KCS or its  officers  or  directors  are subject to such
market standoff provisions.

REGISTRATION EXPENSES

     With  respect to the first four  demand  registrations  and any  incidental
registrations,   KCS  shall  pay  all  registration   expenses,   including  all
registration,  qualification and filing fees,  printing  expenses,  escrow fees,
fees and  disbursements or counsel for KCS and blue sky fees and expenses.  With
respect to demand  registrations  effected  beyond the first  four,  the Holders
whose  shares  are  included  in  the  applicable  registration  shall  pay  all
registration expenses.

CONSULTING AGREEMENT

     KCS and the consulting firm controlled by Jose Serrano Segovia ("Consulting
Firm") plan to enter into a  Consulting  Agreement,  which calls for  Consulting
Firm to provide  certain  consulting  services to the KCS Board of Directors and
Chief  Executive  Officer  relating to the Mexican portion of KCS's rail network
operations,  including  its  customers  and  suppliers,  regulatory  matters and



regarding  the Mexican  railroad  industry in general.  Jose Serrano  Segovia is
required under the terms of the Consulting  Agreement to be personally  involved
in the provision of services by the Consulting Firm. Jose Serrano Segovia is the
current  Chairman  of the Board of  Directors  of Grupo TMM and  certain  of its
subsidiaries,  including  TFM and  Grupo  TFM and  will  become a  director  and
Vice-Chairman of KCS.

TERM

     The  Consulting  Agreement has an initial term of three years  beginning on
the closing date of the Acquisition  Agreement.  KCS has the option of extending
the term of the Consulting  Agreement for an additional  year. In the event of a
Change of Control  (as defined in the  Consulting  Agreement),  Consulting  Firm
agrees to continue its  engagement  with KCS for a period equal to the longer of
(i) one year from the date of such Change of Control;  or (ii) the  remainder of
the term and KCS  agrees  to  continue  to engage  Consulting  Firm  during  the
remainder of the term.

     Notwithstanding  the initial three-year term, the Consulting  Agreement and
Consulting  Firm's  engagement shall terminate  automatically  upon the death or
disability of Jose Serrano  Segovia or  dissolution  or bankruptcy of Consulting
Firm.  Consulting  Firm may  terminate the  Consulting  Agreement at any time by
giving  at least 30 days'  advance  written  notice  to KCS or in the event of a
material  breach,  and failure to cure the same, by KCS.  Additionally,  KCS may
terminate the Consulting  Agreement and Consulting  Firm's engagement for cause,
or other  than  for  cause,  subject  to  certain  conditions  specified  in the
Consulting Agreement.

COMPENSATION

     Under the Consulting  Agreement,  KCS will pay to Consulting Firm an annual
fee of $600,000. In addition, KCS will grant to Consulting Firm 2,100,000 shares
of KCS restricted  Common Stock (the  "Consulting  Firm Stock"),  subject to the
following vesting provisions:

     o    525,000 shares shall become vested with ten days after TFM enters into
          a renegotiated  or extended  labor  agreement with the El Sindicato de
          Trabajadores Ferrocarrileros de la Republica Mexicana;

     o    250,000  shares shall become  vested on each of the first,  second and
          third anniversary dates of the Consulting Agreement;

     o    125,000  shares shall become vested in the event KCS or any subsidiary
          receives  the  Certificate  of  Devolution  of Taxes  (Certificado  de
          Devolucion  de  Impuestos)  issued  by the  Treasury  of  the  Mexican
          Federation  (Tesoreria de la  Federacion) in the term of Article 22 of
          the  Tax  Code  of  the  Mexican   Federation  (Codigo  Fiscal  de  la
          Federacion); and

     o    700,000  shares shall become vested in the event KCS or any subsidiary
          receives the shares or cash compensation  from the Mexican  government
          as a result of TFM's claim against the Mexican Treasury for the refund
          of a value  added tax  payment.  See  Section  6(i) of the  Consulting
          Agreement  attached to this proxy  statement as Appendix F and Section
          7.13 of the Acquisition  Agreement attached to this proxy statement as
          Appendix B.

As a condition to the vesting of Consulting Firm Stock on the first,  second and
third anniversary  dates,  KCS's Board of Directors shall review the compliance,
good faith  performance and existence of triggering  events that would terminate
the  Agreement.  If the  Board  determines  that  the  Consulting  Firm  has not
satisfied the requisite standard during any one-year period, the Consulting Firm
Stock subject to vesting at such one-year period shall be forfeited.



     If KCS extends the initial term of the Consulting Agreement, KCS will grant
to Consulting  Firm on the first day of the extended term an additional  525,000
shares of KCS restricted Common Stock which will vest immediately upon issuance.

TRANSFER RESTRICTIONS

     Consulting Firm may not sell, transfer, assign, pledge or otherwise dispose
of (whether with or without  consideration  and whether voluntary or involuntary
or by  operation of law) any  interest in any shares of  Consulting  Firm Stock,
except in accordance with the terms of the  Stockholders'  Agreement  (described
above).

MARKETING AND SERVICES AGREEMENT

     The  Marketing  and  Services  Agreement  to be  entered  into by Grupo TMM
(together with its subsidiaries and affiliates),  TFM and KCS (together with its
subsidiaries  and  affiliates),  provides  for the parties to enter into various
most favored  nations  provisions,  requiring,  among other  things,  (i) KCS to
provide certain  services to Grupo TMM on terms which are no less favorable than
the terms provided to third or fourth party logistics companies; (ii) that Grupo
TMM shall have the right to be the  exclusive  provider of  Road-Railer  freight
services  over TFM's rail system within  Mexico;  (iii) Grupo TMM shall have the
right,  but not the  obligation,  to operate KCS's  intermodal  terminals to the
extent  that KCS  determines  to utilize a third  party to operate  such  within
Mexico,  the terms of such operations  subject to mutual  agreement of Grupo TMM
and KCS;  and (iv) that  Grupo  TMM  shall  have the right to make a bid for the
provision of certain specified transportation related services normally provided
by Grupo TMM or its affiliates, if TFM determines to have such services provided
by  any  unaffiliated   third  party  in  Mexico  or  the  United  States.   The
relationships among KCS and Grupo TMM shall be those of independent  contractors
and  neither  KCS nor  Grupo TMM  shall be or  represent  itself to be an agent,
employee or joint venturer of the other. Neither KCS nor Grupo TMM shall have or
represent  itself to have any power or authority to act for,  bind or commit the
other party.

     The initial term of the Marketing and Services Agreement is five years from
the  Effective  Date (as  defined  in the  Acquisition  Agreement),  subject  to
automatic renewal for periods of one year unless terminated by Grupo TMM or KCS.
Notwithstanding  the  foregoing,  the  Marketing  and Services  Agreement  shall
terminate  automatically  in the event that (i) TMM  Logistics,  a subsidiary of
Grupo TMM, files any voluntary  proceeding  under any bankruptcy laws, or if TMM
Logistics has filed against it any involuntary  proceeding  under any bankruptcy
law which is not  dismissed or stayed within 30 days or (ii) a change of control
of Grupo TMM  occurs  and the  party  effecting  such  change  of  control  is a
Competitor (as defined in the Marketing and Services Agreement).

AGREEMENT OF ASSIGNMENT AND ASSUMPTION OF RIGHTS, DUTIES AND OBLIGATIONS.

     This agreement is to be entered into by and among Grupo TMM, KCS, and Grupo
TFM (a form of which is attached as Exhibit C to the Acquisition Agreement),  by
which Grupo TMM will assign and transfer to KCS, and KCS will accept and assume,
all of Grupo TMM's rights,  duties and obligations  with respect to the purchase
of the Put Shares (defined below) under the Put Agreement  described  below. KCS
shall have the right to designate  another  party to be the purchaser of the Put
Shares,  however, no such designation shall relieve KCS of its obligation to pay
the  purchase  price  for such  Put  Shares  or to  indemnify  Grupo  TMM or its
Affiliates.

     According to the terms of the original  share  purchase  agreement  for the
Northeast  Rail lines and an  Agreement,  dated  June 9, 1997,  by and among the
Federal Government of the Mexican States, Grupo TFM, Grupo TMM and KCS (the "Put
Agreement"),  the Mexican  government  has the right to sell its 20% interest in
TFM through a public offering on October 31, 2003 (or prior to October 31, 2003,
with the consent of Grupo TFM). If, on October 31, 2003, the Mexican  government
has not sold all of its capital stock in TFM,  Grupo TFM is obligated  under the
Put  Agreement  following  receipt  of notice  from the  Mexican  government  to
purchase the Mexican government's 20% interest in TFM (the "Put Shares"). In the
event  that Grupo TFM does not  purchase  the Put  Shares  within the  sixty-day



period following notification by the Mexican government, and the Acquisition has
not  been  consummated,  then  Grupo  TMM and KCS,  are  jointly  and  severally
obligated to purchase the Mexican government's remaining interest in TFM. Should
the Mexican  government  cause Grupo TMM to purchase any of the Put Shares,  KCS
would be obligated to purchase such shares from Grupo TMM.

THE STOCK PURCHASE AGREEMENT

     Pursuant to the terms and conditions of the Stock Purchase Agreement, dated
as of April 20, 2003, by and among KCS,  Grupo TMM and TFM, on May 9, 2003,  KCS
purchased  from TFM 51% of the  outstanding  shares of Mexrail,  a  wholly-owned
subsidiary of TFM, for  $32,680,000.  TFM had the right to repurchase all of the
shares of Mexrail  capital  stock  acquired by KCS at any time for the  purchase
price paid by KCS, subject to any STB orders or directions. TFM made a demand in
August  2003 to  repurchase  from KCS the shares of  Mexrail  sold to KCS in May
2003. On September 23, 2003,  the STB issued a decision  finding no need to rule
on the transfer  back to TFM of the 51% interest in Mexrail that KCS acquired on
May 9, 2003.  The effect of the STB decision  was to allow TFM to reacquire  the
shares in accordance with the Stock Purchase  Agreement.  On September 30, 2003,
TFM  repurchased  the  Mexrail  shares from KCS at the price KCS paid TFM in May
2003,  and TFM now owns 100% of Mexrail.  Under the terms of the Stock  Purchase
Agreement,  upon this  repurchase,  the Stock Purchase  Agreement  automatically
terminated. However, the Stock Purchase Agreement provided that in the event TFM
reacquired  the  Mexrail  shares  from KCS,  the  parties to the Stock  Purchase
Agreement  intended  the terms and  conditions  of a  February  27,  2002  stock
purchase  agreement under which TFM acquired the Mexrail  shares,  the Grupo TFM
bylaws and the  shareholders  agreement dated May 1997 to become again valid and
fully enforceable against the parties to such agreements.

     On February 27, 2002, KCS, Grupo TMM, and certain of Grupo TMM's affiliates
entered  into a  stock  purchase  agreement  with  TFM to sell to TFM all of the
common  stock of Mexrail.  Under this stock  purchase  agreement,  KCS  retained
rights to prevent further sale or transfer of the stock or significant assets of
Mexrail and Tex-Mex and the right to continue to  participate  in the  corporate
governance  of Mexrail and  Tex-Mex,  which will remain  U.S.  corporations  and
subject to KCS's super majority rights contained in Grupo TFM's bylaws.

     The  shareholders  agreement  dated May 1997  between KCS and Grupo TMM and
certain affiliates,  which governed KCS's investment in Grupo TFM (1) restricted
each of the parties to the  shareholders  agreement  from directly or indirectly
transferring  any interest in Grupo TFM or TFM to a  competitor  of Grupo TFM or
TFM without the prior written  consent of each of the parties,  and (2) provided
that KCS and Grupo TMM may not transfer control of any subsidiary holding all or
any portion of shares of Grupo TFM to a third party,  other than an affiliate of
the transferring party or another party to the shareholders  agreement,  without
the consent of the other parties to the shareholders agreement. The shareholders
agreement  required  that  the  boards  of  directors  of  Grupo  TFM and TFM be
constituted to reflect the parties'  relative  ownership of the ordinary  voting
common stock of Grupo TFM.

REGULATORY MATTERS

     As  discussed  in  "--Summary  of the  Acquisition  Agreement  and  Related
Agreements--The   Acquisition  Agreement"  and  "--Summary  of  the  Acquisition
Agreement and Related  Agreements--The  Stock Purchase Agreement" above, certain
regulatory  approvals and filings are required in connection with the closing of
the Acquisition. The following actions have occurred to date:

     o    KCS's  solicitation  for  permission as a foreign  investor to control
          TFM,  through Grupo TFM, was filed with the Mexican  National  Foreign
          Investments  Commission  on April 25, 2003.  On August 27,  2003,  KCS
          announced that it received  notice from the Mexican  National  Foreign
          Investments  Commission  of that  Commission's  decision  to close the
          proceeding  with respect to KCS's  application  to acquire  control of
          Grupo TFM and, through Grupo TFM, of TFM, without  prejudice to refile



          in the event the  dispute is  resolved  between KCS and Grupo TMM over
          whether the  Acquisition  Agreement  remains in effect.  See "--Recent
          Developments";

     o    KCS's  Notification  with respect to the  acquisition of the Grupo TFM
          shares  from  Multimodal  was  filed  with  the  Mexican   Competition
          Commission on April 21, 2003.  KCS has received  formal written notice
          that the Mexican  Competition  Commission  has  approved  the proposed
          consolidation,   without  conditions.   On  September  26,  2003,  KCS
          announced this approval was extended for an additional 180 days;

     o    TFM  formerly   notified   the   Secretary   of   Communications   and
          Transportation of the proposed transactions on May 2, 2003;

     o    On December 26, 2002,  Grupo TMM announced the  commencement of public
          offers for the  exchange of its 91/2% Notes due 2003 (the "2003 Notes)
          and its 10 1/4%  Notes due 2006 (the "2006  Notes")  for new bonds and
          solicitations of consents from the holders of these notes to eliminate
          substantially  all  of the  restrictive  covenants  of the  indentures
          governing the 2003 Notes and the 2006 Notes. When it failed to receive
          a sufficiently high positive response,  Grupo TMM announced amendments
          of the exchange offers and consent  solicitations on February 18, 2003
          and again on April 24, 2003. On May 16, 2003,  Grupo TMM announced the
          expiration of the exchange offers and consent  solicitations  and that
          the  conditions  to the  exchange  offers  were not  satisfied  at the
          expiration date. In its Form 20-F filed on June 30, 2003,  referred to
          as its Form 20-F,  Grupo TMM disclosed that it did not make payment of
          the principal amount of the 2003 Notes, which matured on May 15, 2003,
          or accrued interest on the due date. Grupo TMM further stated that, as
          a result, it is in default under the terms of the 2003 Notes, and such
          default  resulted  in a  cross-default  under its 2006 Notes and under
          certain other  obligations of Grupo TMM and its  subsidiaries.  On May
          29, 2003,  Grupo TMM announced that it had initiated  discussions with
          holders of the 2003 Notes and 2006 Notes and their  representatives to
          encourage the  formation of an informal  committee to engage Grupo TMM
          in negotiations  over the terms of a consensual  restructuring  of the
          2003 Notes and the 2006 Notes.  On June 16, 2003,  Grupo TMM announced
          the  formation  of an informal  committee of holders of the 2003 Notes
          and the 2006 Notes.  In an Information  Statement filed on Form 6-K on
          August 6, 2003,  Grupo TMM disclosed that in order to restructure  its
          debt, the management of Grupo TMM has initiated  negotiations with the
          informal  committee.  Grupo  TMM  has  not  made  any  further  public
          statements  concerning  the  progress  of its  negotiations  with this
          informal committee;

     o    KCS filed with the STB on May 13, 2003 a Railroad Control Application,
          seeking  permission  to exercise  common  control  over KCSR,  Gateway
          Eastern and  Tex-Mex.  On June 9, 2003,  the STB issued its  decision,
          effective  June 13,  2003,  finding that the  transaction  proposed in
          KCS's  application  is a "minor  transaction"  under 49 CFR 1180.2(c),
          although KCS was required to supplement  its  application as discussed
          in  the  decision,  to  address  some  of  the  implication  of  KCS's
          acquisition  of control of TFM. KCS filed the  supplement  on June 23,
          2003, as required by the decision.  The STB also outlined a procedural
          schedule for  consideration  of KCS's  application to exercise  common
          control over KCSR,  Gateway Eastern and Tex-Mex.  The STB decision set
          October 17, 2003 as the date by which it will issue its final decision
          on the merits of the  application.  On  September  23,  2003,  the STB
          entered an order  asking all  interested  parties to file  comments by
          September   30,   2003   addressing   whether   "in  light  of  recent
          developments"  the STB should  continue with the procedural  schedule,
          which  calls for a decision  on the merits to be issued by October 17,
          2003.  On  September  30,  2003,  KCS  filed  comments  with  the  STB
          suggesting that STB precedent  establishes that the STB has sufficient
          jurisdiction to rule on control applications even where closing on the
          underlying transaction has been put in doubt. In the alternative,  KCS
          argued  that  the  matter  should  be held in  abeyance,  rather  than
          dismissed, until the arbitration is completed. On October 8, 2003, the
          STB  issued an order  suspending  the  procedural  schedule  pending a
          resolution  of the  uncertainties  that now surround  KCS's efforts to
          acquire  control of Tex-Mex,  and requiring KCS to file status reports
          regarding  developments  in its efforts to acquire  control of TFM and
          Tex-Mex;



     o    KCS filed its  Hart-Scott-Rodino  notification on May 19, 2003.  Grupo
          TMM filed its HSR notification on July 1, 2003. Under the HSR process,
          the United  States  Department  of Justice  ("DOJ")  has 30 days after
          notice is filed to issue a second request asking for various documents
          and information from the HSR parties. The waiting period under the HSR
          officially  expired on July 31, 2003,  with no request for  additional
          information from the DOJ.

RECENT DEVELOPMENTS

     DISPUTE OVER ACQUISITION AGREEMENT

     On August  18,  2003,  Grupo TMM  announced  that at its  General  Ordinary
Shareholders  meeting  that day,  the  shareholders  did not approve the sale of
Grupo TMM's interest in Grupo TFM to KCS. Grupo TMM further  announced that as a
result of the stockholder vote, Grupo TMM's Board of Directors  intended to meet
to review Grupo TMM's  options and that Grupo TMM was  proceeding  to inform the
authorities at the Ministry of Communications and Transportaction,  the Ministry
of  Finance,  other  relevant  authorities  and  stakeholders  at Grupo  TMM and
subsidiaries of the Grupo TMM shareholders'  decision. On August 23, 2003, Grupo
TMM sent a notice  to KCS  claiming  to  terminate  the  Acquisition  Agreement,
because  the Grupo  TMM  shareholders  had  failed to  approve  the  Acquisition
Agreement.

     On August  29,  2003,  KCS  delivered  to Grupo TMM the  Notice of  Dispute
pursuant to the  Acquisition  Agreement.  This  initiated  a 60-day  negotiation
period  between the  parties.  If the parties are unable to resolve the disputes
within that period of time,  KCS  intends to initiate a binding  arbitration  in
accordance with the terms of the Acquisition  Agreement.  In addition, on August
29, 2003,  KCS filed a complaint in the Delaware  Chancery  Court  alleging that
Grupo TMM had  breached  the  Acquisition  Agreement  and  seeking a final order
requiring  Grupo TMM not to sell Grupo TFM or take other actions  outside of the
ordinary  course of  business,  so as to preserve the assets and business of TFM
while the parties follow the dispute resolution  procedures  provided for in the
Acquisition  Agreement.  The Notice of Dispute and complaint  point out that the
Acquisition Agreement does not provide that a negative shareholder vote by Grupo
TMM  shareholders  is a basis  for  termination,  and  KCS  maintains  that  the
Acquisition  Agreement is still valid and remains in effect  until  December 31,
2004.

     On September 2, 2003,  KCS filed in the Delaware Court of Chancery a motion
for a preliminary  injunction to preserve the parties' positions while KCS seeks
to resolve its dispute  over Grupo TMM's  attempt to terminate  the  Acquisition
Agreement.  KCS asked for an expedited  hearing on its motion for a  preliminary
injunction.

     On September 15, 2003, KCS confirmed that  negotations  with Grupo TMM have
begun  under  the  dispute  resolution  process  contained  in  the  Acquisition
Agreement for Grupo TMM's interest in Grupo TFM. One meeting was held to discuss
negotiations, but no further meetings have been held.

     On October 22, 2003, KCS accounced that Chancellor  William B. Chandler III
of the Delaware  Court of Chancery  has, in a ruling from the bench,  stated his
intention to grant KCS' motion seeking a preliminary  injunction to preserve the
parties' positions pending resolution of KCS' dispute with Grupo TMM.

     REPURCHASE OF MEXRAIL SHARES BY TFM

     On August 29, 2003,  KCS received a demand for TFM to  repurchase  from KCS
shares of Mexrail sold to KCS in May 2003. On September 23, 2003, the STB issued
a  decision  finding  no need to  rule  on the  transfer  back to TFM of the 51%
interest in Mexrail that KCS acquired on May 9, 2003. The effect of the decision
was to allow TFM to reaquire the shares in  accordance  with the Stock  Purchase
Agreement and KCS has abided by that agreement. The repurchase of Mexrail by TFM
on September 30, 2003  returned  100%  ownership of Mexrail to TFM and the Stock
Purchase Agreement automatically terminated.  The repurchase price was the price
KCS paid TFM in May.






     NOTICE OF TERMINATION OF JOINT VENTURE AGREEMENT

     In  addition,  KCS  acknowledged  receipt  from  Grupo  TMM of a notice  to
terminate a joint venture  agreement  between the parties  entered into in 1995.
Pursuant to such notice,  the joint venture agreement will terminate on December
1, 2003.






                   DESCRIPTION OF THE SERIES C PREFERRED STOCK

     The  following is a summary of certain  provisions  of the  certificate  of
designations for our 4.25% Redeemable Cumulative Convertible Perpetual Preferred
Stock,  Series C, which we refer to as the "Series C Preferred Stock." A copy of
the certificate of  designations  and the form of Series C Preferred Stock share
certificate  are  available  upon request from us at the address set forth under
"Where You Can Find More Information." The following summary of the terms of the
Series C Preferred  Stock does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the  certificate of
designations,  including the  definitions  of terms used in the  certificate  of
designations. Wherever particular provisions or defined terms of the certificate
of  designations  or form of Series C Preferred  Stock are  referred  to,  these
provisions or defined terms are  incorporated by reference in this prospectus by
reference.  We urge you to read the certificate of designations  because it, and
not this  description,  defines  your  rights  as a holder of shares of Series C
Preferred  Stock.  As used in this  section,  the terms the "KCS," "us," "we" or
"our" refer to Kansas City Southern and not any of its subsidiaries.

GENERAL

     Under our restated certificate of incorporation,  our board of directors is
authorized,  without further stockholder action, to issue up to 2,000,000 shares
of New Series Preferred Stock, par value $1.00 per share, in one or more series,
with such voting powers or without  voting powers,  and with such  designations,
preferences and relative,  participating,  optional or other special rights, and
qualifications,  limitations  or  restrictions,  as  shall  be set  forth in the
resolutions  providing therefor. We have 450,000 shares of authorized New Series
Preferred Stock which are  undesignated.  Of the 2,000,000  shares of New Series
Preferred Stock, (1) 150,000 shares are designated as New Series Preferred Stock
Series A, of which no shares are currently outstanding, (2) 1,000,000 shares are
designated  as Series B  Convertible  Preferred  Stock,  of which no shares  are
currently  outstanding  and  (3)  400,000  shares  of are  designated  as  4.25%
Redeemable Cumulative  Convertible Perpetual Preferred Stock, Series C, of which
400,000  shares are  currently  outstanding.  We also have  outstanding  242,170
shares of Preferred Stock out of 840,000 authorized shares.

     The  holders  of the  shares  of  Series C  Preferred  Stock  will  have no
preemptive  rights or  preferential  rights to purchase or subscribe  for stock,
obligations, warrants or any other of our securities.

RANKING

     The Series C Preferred  Stock,  with  respect to  dividend  rights and upon
liquidation, winding up and dissolution, ranks:

     o    junior to all our existing and future debt obligations;

     o    junior to "senior stock," which is our Preferred Stock, and each class
          or series of our capital stock other than (a) our common stock and any
          other class or series of our capital  stock the terms of which provide
          that such class or series  will rank  junior to the Series C Preferred
          Stock and (b) any other class or series of our capital stock the terms
          of which  provide that such class or series will rank on a parity with
          the Series C Preferred Stock;

     o    on a parity with "parity stock," which is (a) our New Series Preferred
          Stock, Series A, (b) our Series B Convertible  Preferred Stock and (c)
          any other  class or series of our  capital  stock that has terms which
          provide  that  such  class or series  will  rank on a parity  with the
          Series C Preferred Stock;

     o    senior to "junior  stock," which is our common stock and each class or
          series of our  capital  stock that has terms which  provide  that such
          class or series will rank junior to the Series C Preferred Stock; and

     o    effectively junior to all of our subsidiaries' (i) existing and future
          liabilities and (ii) capital stock held by others.



The term "senior stock" includes warrants,  rights, calls or options exercisable
for or convertible into that type of stock.

DIVIDENDS

     Holders of the shares of Series C Preferred  Stock are entitled to receive,
when,  as and if  declared  by our  board of  directors,  out of  funds  legally
available for payment,  cumulative cash dividends on each  outstanding  share of
Series  C  Preferred  Stock  at the  annual  rate of  4.25%  of the  liquidation
preference  per share.  The dividend rate is initially  equivalent to $21.25 per
share  annually.  The right of holders of the shares of Series C Preferred Stock
to receive  dividend  payments is subject to the rights of any holders of shares
of senior stock and parity stock.

     Dividends  are payable  quarterly in arrears on February 15, May 15, August
15 and November 15 of each year,  beginning on August 15, 2003.  If any of those
dates  is not a  business  day,  then  dividends  will be  payable  on the  next
succeeding  business day. Dividends will accumulate from the most recent date as
to which  dividends will have been paid or, if no dividends have been paid, from
the date of original  issuance of the Series C Preferred  Stock.  Dividends  are
payable to holders of record as they appear in our stock records at the close of
business  on  February  1, May 1,  August 1 and  November 1 of each year or on a
record  date  that may be fixed by our board of  directors  and that will be not
more  than 60 days  nor  fewer  than 10 days  before  the  applicable  quarterly
dividend payment date. Dividends will be cumulative from each quarterly dividend
payment date,  whether or not we have funds legally available for the payment of
those dividends.

     Dividends  payable on the shares of Series C Preferred Stock for any period
shorter than a full quarterly  period will be computed on the basis of a 360-day
year  consisting  of twelve 30-day  months.  Dividends on the shares of Series C
Preferred Stock,  including special dividends,  if any, will be payable in cash.
Accumulated  unpaid dividends cumulate dividends at the annual rate of 4.25% and
are payable in the manner provided above.

     For so long as the Series C Preferred Stock is outstanding, (1) we will not
declare,  pay or set  apart  funds  for the  payment  of any  dividend  or other
distribution  with  respect to any junior  stock or parity stock and (2) neither
we, nor any of our subsidiaries,  will redeem, purchase or otherwise acquire for
consideration  junior stock or parity stock through a sinking fund or otherwise,
unless we have paid or set apart  funds for the payment of all  accumulated  and
unpaid  dividends,  including  special  dividends,  if any,  with respect to the
shares of the Series C Preferred  Stock and any parity  stock for all  preceding
dividend  periods.  As an  exception  to clause  (2), we will be able to redeem,
purchase or  otherwise  acquire for  consideration  parity  stock  pursuant to a
purchase  or  exchange  offer made on the same terms to all  holders of Series C
Preferred Stock and such parity stock.

     Holders of the Series C Preferred  Stock will not have any right to receive
dividends  that we may  declare  on our  common  stock.  The  right  to  receive
dividends declared on our common stock will be realized only after conversion of
such  holder's  shares of Series C  Preferred  Stock  into  shares of our common
stock.

CONVERSION RIGHTS

GENERAL

     Each share of Series C Preferred  Stock will be convertible at any time and
from  time to time,  on or after the  occurrence  of the  conversion  triggering
events  described  below  at the  option  of the  holder,  into  fully  paid and
nonassessable shares of our common stock at a conversion rate of 33.4728 shares,
subject to  adjustments  as described  under  "--Adjustments  to the  Conversion
Rate."

     A holder of shares of the Series C  Preferred  Stock may convert any or all
of those shares by surrendering  to us at our principal  office or at the office
of the transfer  agent,  as may be  designated  by our board of  directors,  the
certificate  or  certificates  for those shares of the Series C Preferred  Stock
accompanied by a written notice stating that the holder elects to convert all or



a specified  whole  number of those  shares in  accordance  with the  provisions
described  in this  prospectus  and  specifying  the name or names in which  the
holder wishes the certificate or  certificates  for shares of common stock to be
issued.  In case the  notice  specifies  a name or names  other than that of the
holder,  the notice will be accompanied by payment of all transfer taxes payable
upon the  issuance of shares of common  stock in that name or names.  Other than
those taxes,  we will pay any  documentary,  stamp or similar  issue or transfer
taxes that may be payable in respect of any  issuance  or  delivery of shares of
common  stock upon  conversion  of shares of the Series C  Preferred  Stock.  As
promptly as practicable  after the surrender of that certificate or certificates
and the  receipt of the notice  relating  to the  conversion  and payment of all
required  transfer taxes, if any, or the  demonstration to our satisfaction that
those  taxes  have been  paid,  we will  deliver  or cause to be  delivered  (a)
certificates   representing  the  number  of  validly  issued,  fully  paid  and
nonassessable  full  shares  of our  common  stock to which the  holder,  or the
holder's  transferee,  of shares of the Series C Preferred Stock being converted
will be  entitled  and (b) if less  than the full  number  of shares of Series C
Preferred  Stock  evidenced by the  surrendered  certificate or  certificates is
being  converted,  a new  certificate or  certificates,  of like tenor,  for the
number of shares evidenced by the surrendered  certificate or certificates  less
the number of shares being  converted.  This  conversion  will be deemed to have
been  made at the close of  business  on the date of giving  the  notice  and of
surrendering the certificate or certificates representing the shares of Series C
Preferred  Stock to be converted so that the rights of the holder  thereof as to
the shares being  converted will cease except for the right to receive shares of
common stock, and the person entitled to receive the shares of common stock will
be treated for all purposes as having  become the record  holder of those shares
of common stock at that time.

     In lieu of the  foregoing  procedures,  if the Series C Preferred  Stock is
held in global form, you must comply with The Depository  Trust Company  ("DTC")
procedures to convert your beneficial  interest in respect of Series C Preferred
Stock evidenced by a global share of Series C Preferred Stock.

     If a holder  of shares of Series C  Preferred  Stock  exercises  conversion
rights,  upon delivery of the shares for conversion,  those shares will cease to
cumulate  dividends as of the end of the day  immediately  preceding the date of
conversion.  Holders of shares of Series C  Preferred  Stock who  convert  their
shares into our common  stock will not be entitled  to, nor will the  conversion
rate be adjusted for, any accumulated and unpaid dividends.  Accordingly, shares
of  Series C  Preferred  Stock  surrendered  for  conversion  after the close of
business on any record date for the payment of dividends declared and before the
opening of business on the dividend  payment  date  relating to that record date
must be  accompanied  by a payment  in cash of an amount  equal to the  dividend
payable in respect of those shares for the  dividend  period in which the shares
are  converted.  A holder of shares of Series C  Preferred  Stock on a  dividend
payment  record date who converts such shares into shares of our common stock on
the corresponding dividend payment date will be entitled to receive the dividend
payable on such  shares of Series C  Preferred  Stock on such  dividend  payment
date, and the converting  holder need not include  payment of the amount of such
dividend upon surrender of shares of Series C Preferred Stock for conversion.

     Notwithstanding  the foregoing,  if shares of Series C Preferred  Stock are
converted  during the  period  between  the close of  business  on any  dividend
payment  record date and the opening of business on the  corresponding  dividend
payment  date,  and we have called  such shares of Series C Preferred  Stock for
redemption during such period or we have specified a fundamental change purchase
date during such period,  the holder who tenders such shares for conversion will
receive the dividend  payable on such dividend payment date and need not include
payment  of the amount of such  dividend  upon  surrender  of shares of Series C
Preferred Stock for conversion.

     In case any  shares of Series C  Preferred  Stock are to be  redeemed,  the
right to convert those shares of the Series C Preferred  Stock will terminate at
5:00 p.m.,  New York City time,  on the business day  immediately  preceding the
date fixed for  redemption  unless we default in the  payment of the  redemption
price of those shares.

     In  connection  with the  conversion  of any  shares of Series C  Preferred
Stock,  no fractional  shares of common stock will be issued,  but we will pay a
cash adjustment in respect of any fractional  interest in an amount equal to the
fractional interest multiplied by the closing sale price of our common stock (as
defined  below  under   "--Conversion   Rights--Events   Triggering   Conversion
Rights--Conversion  Rights Based on Trading  Price of Our Common  Stock") on the



date the shares of Series C Preferred Stock are  surrendered for conversion.  If
more  than one  share of  Series  C  Preferred  Stock  will be  surrendered  for
conversion  by the same  holder at the same time,  the number of full  shares of
common  stock  issuable on  conversion  of those  shares will be computed on the
basis of the total number of shares of Series C Preferred Stock so surrendered.

     We will at all times  reserve  and keep  available,  free  from  preemptive
rights, for issuance upon the conversion of shares of Series C Preferred Stock a
number of our authorized but unissued shares of common stock that will from time
to time be sufficient  to permit the  conversion  of all  outstanding  shares of
Series C Preferred Stock.

     Before the delivery of any securities  that we will be obligated to deliver
upon  conversion  of the  Series C  Preferred  Stock,  we will  comply  with all
applicable  federal and state laws and  regulations  that  require  action to be
taken by us. All shares of common stock  delivered upon conversion of the Series
C Preferred Stock will upon delivery be duly and validly issued,  fully paid and
nonassessable,  free of all liens and charges and not subject to any  preemptive
rights.

EVENTS TRIGGERING CONVERSION RIGHTS

     A holder's  right to convert  its shares of Series C  Preferred  Stock will
arise only upon the occurrence of the events specified in this section.

     CONVERSION  RIGHTS BASED ON TRADING PRICE OF OUR COMMON  STOCK.  Commencing
after June 30, 2003, a holder may surrender  shares of Series C Preferred  Stock
for  conversion  into shares of our common stock in any fiscal quarter (and only
during  such fiscal  quarter),  if, as of the last day of the  preceding  fiscal
quarter, the closing sale price of our common stock for at least 20 trading days
in a period of 30  consecutive  trading  days ending on the last  trading day of
such preceding fiscal quarter is more than 110% of the "conversion  price" as of
the last day of such preceding fiscal quarter.  The "conversion price" as of any
day will equal the  liquidation  preference  divided by the  conversion  rate in
effect on such date.

     "Trading  day" means a day during  which  trading in  securities  generally
occurs on the New York Stock  Exchange  or, if our common stock is not listed on
the New York  Stock  Exchange,  on the  principal  other  national  or  regional
securities  exchange on which our common  stock is then listed or, if our common
stock is not  listed on a  national  or  regional  securities  exchange,  on the
National Association of Securities Dealers Automated Quotation System ("Nasdaq")
or, if our common stock is not quoted on Nasdaq,  on the principal  other market
on which our common stock is then traded.

     The "closing  sale price" of our common stock on any date means the closing
sale price per share (or if no closing  sale price is  reported,  the average of
the closing bid and ask prices or, if more than one in either case,  the average
of the average  closing bid and the average  closing ask prices) on such date as
reported on the principal United States securities  exchange on which our common
stock is  traded  or,  if our  common  stock is not  listed  on a United  States
national  or  regional  securities  exchange,  as  reported  by Nasdaq or by the
National Quotation Bureau Incorporated.  In the absence of such a quotation,  we
will determine the closing sale price on the basis we consider appropriate.

     CONVERSION  RIGHTS UPON CREDIT RATING  DOWNGRADE.  After the earlier of (a)
the date the Series C Preferred  Stock is  assigned a credit  rating by both S&P
and Moody's and (b) May 31, 2003, during a period in which (1) the credit rating
assigned  to the Series C  Preferred  Stock by S&P is below CCC,  (2) the credit
rating  assigned  to the Series C  Preferred  Stock by Moody's is below Caa3 (3)
either S&P or Moody's does not assign a credit  rating to the Series C Preferred
Stock,  or (4) any rating is  suspended  or  withdrawn by either S&P or Moody's,
holders may also surrender  Series C Preferred  Stock for conversion into shares
of our common stock.

     CONVERSION  UPON  SATISFACTION  OF TRADING  PRICE  CONDITION.  Holders  may
surrender their shares of Series C Preferred Stock for conversion into shares of
our common stock during the five business day period after any five consecutive



trading-day  period in which the trading  price of the Series C Preferred  Stock
for each day of that five trading-day period was less than 98% of the product of
the closing sale price of our common stock and the conversion  rate in effect on
each such day.

     The  "trading  price"  of the  Series  C  Preferred  Stock  on any  date of
determination  means the average of the secondary market bid quotations obtained
by us or a calculation  agent for 50,000  shares of Series C Preferred  Stock at
approximately  3:30 p.m.,  New York City time, on such  determination  date from
three  independent  nationally  recognized  securities  dealers  that  we  or  a
calculation agent selects; provided that if three such bids cannot reasonably be
obtained by us or a calculation agent, but two such bids are obtained,  then the
average of the two bids shall be used,  and if only one such bid can  reasonably
be obtained by us or the calculation agent, that one bid shall be used. If we or
a calculation  agent cannot reasonably obtain at least one bid for 50,000 shares
of Series C Preferred Stock from a nationally  recognized  securities dealer, or
in our  reasonable  judgment,  the  bid  quotations  are not  indicative  of the
secondary market value of the Series C Preferred  Stock,  then the trading price
per share of Series C Preferred  Stock will be deemed to be less than 98% of the
product of the closing sale price of our common stock and the conversion rate.

     CONVERSION  RIGHTS UPON NOTICE OF  REDEMPTION.  A holder may  surrender for
conversion  any or all shares of Series C Preferred  Stock that have been called
for  redemption  at any time  prior to 5:00  p.m.,  New York City  time,  on the
business day immediately preceding the date of redemption,  even if the Series C
Preferred Stock is not otherwise convertible at that time.

     CONVERSION RIGHTS UPON OCCURRENCE OF CERTAIN CORPORATE TRANSACTIONS.  If we
are party to a consolidation, merger or binding share exchange pursuant to which
shares of our common stock would be  converted  into cash,  securities  or other
property,  a holder  may  surrender  shares  of  Series C  Preferred  Stock  for
conversion  into shares of our common  stock at any time from and after the date
that is 15 days prior to the anticipated effective date of the transaction until
15 days after the actual date of such  transaction  and, at the effective  time,
the right to  convert  shares of Series C  Preferred  Stock  into  shares of our
common  stock will be changed  into a right to convert  such  Series C Preferred
Stock into the kind and amount of cash,  securities  or other  property of us or
another  person that the holder would have  received if the holder had converted
the holder's Series C Preferred Stock immediately  prior to the transaction.  If
such transaction also constitutes a fundamental  change, the holder will be able
to require us to purchase all or a portion of such  holder's  Series C Preferred
Stock as described under "--Fundamental Change Requires Us to Purchase Shares of
Series C Preferred Stock at the Option of the Holder."

     If we elect to:

     o    distribute  to all  holders of our  common  stock  rights or  warrants
          entitling them to purchase,  for a period  expiring  within 45 days of
          the record date for such  distribution,  our common stock at less than
          the average  closing sale price for the 10 trading days  preceding the
          declaration date for such distribution; or

     o    distribute  to all holders of our common  stock,  cash,  assets,  debt
          securities or rights to purchase our  securities,  which  distribution
          has a per share value  exceeding  5% of the closing  sale price of our
          common stock on the day immediately preceding the declaration date for
          such distribution;

we must  notify  you at least 20 days  prior  to the  ex-dividend  date for such
distribution.  Once we have given such notice,  you may surrender your shares of
Series C  Preferred  Stock for  conversion  at any time until the earlier of the
close of business on the business day immediately preceding the ex-dividend date
or any  announcement  by us that  such  distribution  will  not take  place.  No
adjustment to the conversion rate or your ability to convert will be made if you
will otherwise participate in the distribution without conversion.

     Upon  determination  that Series C Preferred  Stock  holders are or will be
entitled to convert  their  Series C  Preferred  Stock into shares of our common
stock in accordance with any of the foregoing provisions,  we will issue a press
release and publish such information on our website on the World Wide Web.



ADJUSTMENTS TO THE CONVERSION RATE

     The  conversion  rate is subject to adjustment  from time to time if any of
the following events occur:

     o    dividends or  distributions  on shares of our common stock  payable in
          shares of our common stock;

     o    subdivisions,  combinations or certain  reclassifications of shares of
          our common stock;

     o    distributions  to all holders of shares of our common  stock of rights
          or warrants  entitling them to purchase,  for a period expiring within
          45 days of the record date for such distribution,  our common stock at
          less than the  average  closing  sale  price for the 10  trading  days
          preceding the declaration date for such distribution;

     o    distributions  to all holders of shares of our common  stock of shares
          of our capital stock,  evidences of indebtedness or assets,  including
          securities but excluding:

          o    rights or warrants specified above;

          o    dividends or distributions specified above; and

          o    cash distributions.

          In the event that we make a distribution  to all holders of our common
          stock consisting of capital stock of, or similar equity interest in, a
          subsidiary or other business unit of ours, the conversion rate will be
          adjusted  based on the market value of the  securities so  distributed
          relative to the market value of our common  stock,  in each case based
          on the  average  closing  sale prices of those  securities  for the 10
          trading days  commencing  on and including the fifth trading day after
          the date on which "ex-dividend trading" commences for such dividend or
          distribution  on the New York Stock Exchange or such other national or
          regional exchange or market on which the securities are then listed or
          quoted.

     o    distributions  to all  holders of shares of our common  stock of cash,
          excluding  any  dividend  or   distribution  in  connection  with  our
          liquidation,  dissolution  or  winding  up,  to the  extent  that  the
          aggregate cash dividends per share of common stock in any twelve month
          period exceeds the greater of:

          o    the  annualized  amount  per  share of  common  stock of the next
               preceding  quarterly  cash  dividend  on the common  stock to the
               extent that the preceding  quarterly  dividend did not require an
               adjustment of the  conversion  rate  pursuant to this clause,  as
               adjusted to reflect  subdivisions  or  combinations of the common
               stock; and

          o    5% of the average of the closing  sale price of the common  stock
               during the ten trading days immediately  prior to the declaration
               date of the dividend.

          If an  adjustment is required to be made under this clause as a result
          of a distribution that is a quarterly  dividend,  the adjustment would
          be based upon the amount by which the distribution  exceeds the amount
          of the quarterly  cash dividend  permitted to be excluded  pursuant to
          this clause. If an adjustment is required to be made under this clause
          as a result of a distribution  that is not a quarterly  dividend,  the
          adjustment would be based upon the full amount of the distribution;

     o    we or one of our  subsidiaries  makes a payment in respect of a tender
          offer or  exchange  offer for our common  stock to the extent that the
          cash and value of any other consideration  included in the payment per
          share of common  stock  exceeds  the  closing  sale price per share of
          common stock on the trading day next succeeding the last date on which



          tenders or exchanges  may be made  pursuant to such tender or exchange
          offer; and

     o    someone  other than us or one of our  subsidiaries  makes a payment in
          respect  of a tender  offer or  exchange  offer  in  which,  as of the
          closing date of the offer,  our board of directors is not recommending
          rejection of the offer. The adjustment referred to in this clause will
          only be made if:

          o    the  tender  offer  or  exchange  offer  is  for an  amount  that
               increases  the  offeror's  ownership of common stock to more than
               25% of the total shares of common stock outstanding; and

          o    the cash and value of any  other  consideration  included  in the
               payment per share of common stock  exceeds the closing sale price
               per share of common stock on the business day next succeeding the
               last date on which  tenders or exchanges  may be made pursuant to
               the tender or exchange offer.

          However,  the adjustment referred to in this clause will generally not
          be made if as of the  closing of the  offer,  the  offering  documents
          disclose  a  plan  or  an  intention  to  cause  us  to  engage  in  a
          consolidation or merger or a sale of all or  substantially  all of our
          assets.

     We have adopted a Rights  Agreement dated  September 19, 1995,  pursuant to
which certain rights were issued with respect to our shares of common stock. You
will receive,  upon conversion of your Series C Preferred  Stock, in addition to
the common stock, the rights under the rights agreement or any other rights plan
then in effect unless, prior to conversion, the rights have expired,  terminated
or been  redeemed or unless the rights have  separated  from the common stock at
the time of conversion,  in which case the  conversion  rate will be adjusted at
the time of  separation  as if we had  distributed  to all holders of our common
stock,  shares of our capital  stock,  evidences  of  indebtedness  or assets as
described  under the fourth bullet point above,  subject to  readjustment in the
event of the expiration, termination or redemption of such rights.

     In the event of:

     o    any reclassification of our common stock;

     o    a consolidation, merger or combination involving us; or

     o    a  sale  or  conveyance  to  another   person  or  entity  of  all  or
          substantially all of our property and assets;

in which holders of our common stock would be entitled to receive  stock,  other
securities,  other  property,  assets  or cash  for  their  common  stock,  upon
conversion of your Series C Preferred  Stock you will be entitled to receive the
same type of  consideration  that you would have been entitled to receive if you
had  converted  the Series C Preferred  Stock into our common stock  immediately
prior to any of these events.

     The proposed  Acquisition and transactions  described under "Description of
the  Acquisitions"  including the Merger,  and the renaming of KCS to NAFTA Rail
are not, as  proposed,  expected to trigger any  adjustments  to the  conversion
rate.

     You may in certain  situations  be deemed to have  received a  distribution
subject to United  States  federal  income tax as a dividend in the event of any
taxable  distribution to holders of common stock or in certain other  situations
requiring a conversion rate  adjustment.  See "Certain United States Federal Tax
Considerations."

     We may,  from time to time,  increase the  conversion  rate if our board of
directors  has made a  determination  that  this  increase  would be in our best
interests. Any such determination by our board will be conclusive.  In addition,
we may increase the conversion rate if our board of directors deems it advisable
to avoid or diminish  any income tax to holders of common stock  resulting  from
any stock or  rights  distribution.  See  "Certain  United  States  Federal  Tax
Considerations."



     We will not be required to make an adjustment in the conversion rate unless
the  adjustment  would require a change of at least 1% in the  conversion  rate.
However,  we will carry  forward  any  adjustments  that are less than 1% of the
conversion rate.  Except as described above in this section,  we will not adjust
the  conversion  rate for any  issuance of our common  stock or  convertible  or
exchangeable securities or rights to purchase our common stock or convertible or
exchangeable securities.

OPTIONAL REDEMPTION

     We may not  redeem any shares of Series C  Preferred  Stock  before May 20,
2008.  On or after May 20,  2008,  we will have the option to redeem some or all
the  shares of Series C  Preferred  Stock at a  redemption  price of 100% of the
liquidation preference, plus accumulated and unpaid dividends, including special
dividends, if any, to the redemption date, but only if the closing sale price of
our common stock for 20 trading days within a period of 30  consecutive  trading
days  ending on the trading  day before the date we give the  redemption  notice
exceeds  135% of the  conversion  price in  effect  on each  such  day.  If full
cumulative  dividends  on the Series C Preferred  Stock have not been paid,  the
Series C Preferred  Stock may not be redeemed and we may not purchase or acquire
any shares of Series C Preferred  Stock otherwise than pursuant to a purchase or
exchange offer made on the same terms to all holders of Series C Preferred Stock
and any parity stock.

     We may  elect  to pay the  redemption  price in cash,  common  stock,  or a
combination  of cash and common  stock.  The number of shares of common  stock a
holder will  receive  will equal the  relevant  amount of the  redemption  price
divided by 97.5% of the average of the closing  sale prices of our common  stock
for the  five  trading  days  ending  on the  third  trading  day  prior  to the
redemption date. However, we may not pay the purchase price in common stock or a
combination of common stock and cash unless we satisfy certain  conditions prior
to  the  redemption  date  as  provided  in  the  certificate  of  designations,
including:

     o    registration  of the  shares of our  common  stock to be  issued  upon
          redemption under the Securities Act and the Exchange Act, if required;

     o    qualification  of the  shares of our  common  stock to be issued  upon
          redemption under  applicable  state securities laws, if necessary,  or
          the availability of an exemption therefrom; and

     o    listing of our common  stock on a United  States  national  securities
          exchange or quotation  thereof in an inter-dealer  quotation system of
          any registered United States national securities association.

     In the event of an optional  redemption,  we will send a written  notice by
first  class mail to each  holder of record of the Series C  Preferred  Stock at
such holder's registered address,  not fewer than 30 nor more than 90 days prior
to the  redemption  date,  stating,  among other things,  whether the redemption
price  will be  paid  in  cash or  common  stock,  or a  combination  and,  if a
combination,  specifying  the  portions  payable  in cash and common  stock.  In
addition, we will (i) publish such information once in a daily newspaper printed
in the English language and of general  circulation in the Borough of Manhattan,
City of New York, (ii) issue a press release  containing such  information,  and
(iii) publish such information on our website on the World Wide Web.

     Because  the  average  closing  sale  price  of our  common  stock  will be
determined  prior to the redemption  date,  holders of Series C Preferred  Stock
bear the market  risk that our common  stock will  decline in value  between the
date the average  closing sale price is calculated and the  redemption  date. In
addition, because the number of shares of our common stock that you will receive
upon any redemption for shares is based on the average  closing sale price for a
5 trading day period,  the market  value of those  shares on the date of receipt
may be less than the value of those  shares  based on the average  closing  sale
price.

     If we give notice of  redemption,  then, by 12:00 p.m., New York City time,
on the  redemption  date, to the extent funds are legally  available,  we shall,
with respect to:



     o    shares  of  Series  C  Preferred  Stock  held by DTC or its  nominees,
          deposit or cause to be deposited,  irrevocably with DTC cash or common
          stock  sufficient  to pay the  redemption  price  and  will  give  DTC
          irrevocable  instructions and authority to pay the redemption price to
          holders of such shares of Series C Preferred Stock; and

     o    shares of Series C Preferred Stock held in certificated  form, deposit
          or cause to be deposited,  irrevocably with the transfer agent cash or
          common stock  sufficient to pay the redemption price and will give the
          transfer  agent  irrevocable  instructions  and  authority  to pay the
          redemption price to holders of such shares of Series C Preferred Stock
          upon surrender of their certificates evidencing their shares of Series
          C Preferred Stock.

     If on the  redemption  date DTC and the transfer  agent hold cash or common
stock  sufficient  to pay the  redemption  price  for the  shares  of  Series  C
Preferred  Stock  delivered for  redemption in accordance  with the terms of the
certificate of designations,  dividends will cease to accumulate on those shares
of Series C Preferred  Stock called for  redemption and all rights of holders of
such shares will terminate except for the right to receive the redemption price.

     Payment of the redemption  price for the shares of Series C Preferred Stock
is conditioned upon book-entry  transfer of or physical delivery of certificates
representing the Series C Preferred Stock, together with necessary endorsements,
to the transfer  agent,  or to the transfer  agent's account at DTC, at any time
after delivery of the redemption notice. Payment of the redemption price for the
Series C Preferred Stock will be made (i) if book-entry  transfer of or physical
delivery of the Series C Preferred  Stock has been made by or on the  redemption
date, on the  redemption  date,  or (ii) if  book-entry  transfer of or physical
delivery of the Series C  Preferred  Stock has not been made by or on such date,
at the time of  book-entry  transfer  of or  physical  delivery  of the Series C
Preferred Stock.

     If the  redemption  date falls  after a dividend  payment  record  date and
before the  related  dividend  payment  date,  holders of the shares of Series C
Preferred  Stock at the close of business on that dividend  payment  record date
will be  entitled  to  receive  the  dividend  payable  on those  shares  on the
corresponding  dividend  payment  date.  The  redemption  price  payable on such
redemption  date will  include  only the  liquidation  preference,  but will not
include  any  amount in  respect  of  dividends  declared  and  payable  on such
corresponding dividend payment date.

     In the case of any partial redemption,  we will select the shares of Series
C Preferred Stock to be redeemed on a pro rata basis, by lot or any other method
that we, in our discretion, deem fair and appropriate.

     Our restated  certificate of incorporation  provides that we may not redeem
the  Series C  Preferred  Stock  if,  (i) as of the date of the  mailing  of the
redemption  notice,  such redemption would, if such date were the date fixed for
redemption,  reduce our net assets  remaining after such redemption  below twice
the  aggregate  amount  payable  upon  voluntary  or  involuntary   liquidation,
dissolution  or winding up or (ii) we have not paid or set apart for payment all
accumulated  dividends for the current and prior dividend  periods in respect of
shares which have a right to cumulative dividends.

FUNDAMENTAL CHANGE REQUIRES US TO PURCHASE SHARES OF SERIES C PREFERRED STOCK AT
THE OPTION OF THE HOLDER

     In the event of a  fundamental  change,  you will have the  right,  at your
option,  subject to the terms and conditions of the certificate of designations,
to require us to purchase any or all of your shares of Series C Preferred Stock.
We will  purchase  the Series C Preferred  Stock at a price equal to 100% of the
liquidation  preference of the Series C Preferred Stock to be purchased plus any
accumulated and unpaid dividends,  including special dividends,  if any, to, but
excluding,  the fundamental change purchase date, unless such fundamental change
purchase  date falls  after a record  date and on or prior to the  corresponding
dividend  payment  date,  in  which  case (i) we will  pay the  full  amount  of
accumulated and unpaid  dividends  payable on such dividend payment date only to
the holder of record at the close of business on the  corresponding  record date
and (ii) the purchase price payable on the fundamental change purchase date will



include  only the  liquidation  preference,  but will not  include any amount in
respect of dividends declared and payable on such corresponding payment date. We
will be required to purchase the Series C Preferred Stock as of the date that is
not less than 20 nor more than 35  business  days after the  occurrence  of such
fundamental change, which we refer to as a fundamental change purchase date.

     We will pay the  purchase  price of the Series C  Preferred  Stock,  at our
option, in cash, in shares of our common stock or any combination  thereof.  The
number of shares of common  stock a holder will  receive will equal the purchase
price  divided by 97.5% of the average  closing sale prices for the five trading
days ending on the third trading day prior to the  fundamental  change  purchase
date.  However,  we may not pay the purchase  price in common  stock,  unless we
satisfy  certain  conditions  prior to the  fundamental  change purchase date as
provided in the certificate of designations including:

     o    registration  of  the  shares  of  the  applicable   common  stock  or
          securities to be issued upon  repurchase  under the Securities Act and
          the Exchange Act, if required;

     o    qualification  of  the  shares  of  common  stock  to be  issued  upon
          repurchase under  applicable  state securities laws, if necessary,  or
          the availability of an exemption therefrom; and

     o    listing  of the  shares of common  stock on a United  States  national
          securities exchange or quotation thereof in an inter-dealer  quotation
          system  of  any   registered   United   States   national   securities
          association.

     If we pay the purchase price in shares of common stock,  we will notify you
of such payment in our notice  regarding  the  fundamental  change.  Because the
average  closing sale price of our common stock will be determined  prior to the
fundamental  change purchase date,  holders of Series C Preferred Stock bear the
market  risk that our common  stock will  decline in value  between the date the
average  closing sale price is  calculated  and the purchase  date. In addition,
because the number of shares of our common  stock that you will receive is based
on the average  closing  sale price for a five  trading  day period,  the market
value of those shares on the date of receipt may be less than the value of those
shares based on the average closing sale price.

     A "fundamental  change" is any transaction or event (whether by means of an
exchange offer, liquidation,  tender offer, consolidation,  merger, combination,
reclassification, recapitalization or otherwise) in connection with which all or
substantially all of our common stock is exchanged for, converted into, acquired
for or constitutes solely the right to receive consideration which is not all or
substantially all common stock that:

     o    is listed on, or  immediately  after the  transaction or event will be
          listed on, a United States national securities exchange, or

     o    is approved,  or  immediately  after the  transaction or event will be
          approved,  for quotation on the Nasdaq  National Market or any similar
          United  States  system of automated  dissemination  of  quotations  of
          securities prices.

     Within 15 business days after the  occurrence of a fundamental  change,  we
are  obligated  to mail to all  holders  of  Series C  Preferred  Stock at their
addresses  shown in the register of the registrar  and to  beneficial  owners as
required by applicable law (and issue a press release and publish on our website
on the World Wide Web) a notice regarding the fundamental change, stating, among
other things:

     o    the events causing a fundamental change;

     o    the date of such fundamental change;

     o    the last date on which the purchase right may be exercised;

     o    the  fundamental  change purchase price and whether that price will be
          paid  in  cash  or  shares  of  our  common  stock  or  any  specified
          combination thereof;



     o    the fundamental change purchase date;

     o    the name and address of the paying agent and the conversion agent;

     o    the conversion rate and any adjustments to the conversion rate;

     o    that the Series C Preferred  Stock with respect to which a fundamental
          change purchase notice is given by the holder may be converted only if
          the   fundamental   change  purchase  notice  has  been  withdrawn  in
          accordance with the terms of the Series C Preferred Stock; and

     o    the procedures that holders must follow to exercise these rights.

     To exercise this right,  you must deliver a written  notice to the transfer
agent prior to the close of business on the business day immediately  before the
fundamental   change  purchase  date.  The  required   purchase  notice  upon  a
fundamental change must state:

     o    if  certificated  shares of Series C Preferred Stock have been issued,
          the Series C Preferred  Stock  certificate  numbers,  or if not,  such
          information as may be required under applicable DTC procedures;

     o    the number of preferred shares to be purchased; and

     o    that we are to purchase such Series C Preferred  Stock pursuant to the
          applicable  provisions of the Series C Preferred Stock and certificate
          of designations.

     You may withdraw any fundamental change purchase notice by a written notice
of withdrawal  delivered to the transfer agent prior to the close of business on
the business day before the  fundamental  change  purchase  date.  The notice of
withdrawal must state:

     o    the number of the withdrawn shares of Series C Preferred Stock;

     o    if  certificated  shares of Series C Preferred Stock have been issued,
          the Series C Preferred  Stock  certificate  numbers,  or if not,  such
          information as may be required under applicable DTC procedures; and

     o    the number,  if any, of shares of Series C Preferred Stock that remain
          subject to your fundamental change purchase notice.

     A holder must  either  effect  book-entry  transfer or deliver the Series C
Preferred Stock to be purchased,  together with necessary  endorsements,  to the
office of the transfer agent after delivery of the  fundamental  change purchase
notice to receive  payment of the fundamental  change  purchase price.  You will
receive payment in cash or shares of common stock,  as applicable,  on the later
of the fundamental  change  purchase date or the time of book-entry  transfer or
the delivery of the Series C Preferred  Stock. If the transfer agent holds money
or securities  sufficient to pay the  fundamental  change  purchase price of the
Series C Preferred  Stock on the business day following the  fundamental  change
purchase date, then, immediately after the fundamental change purchase date:

     o    the shares of Series C Preferred Stock will cease to be outstanding;

     o    dividends will cease to accrue; and

     o    all other rights of the holder will terminate.

     This will be the case  whether or not  book-entry  transfer of the Series C
Preferred  Stock  is made or  whether  or not the  Series C  Preferred  Stock is
delivered to the transfer agent.



     The fundamental change purchase feature of the Series C Preferred Stock may
in certain  circumstances  make more  difficult or discourage a takeover of KCS.
The  fundamental  change  purchase  feature,  however,  is not the result of our
knowledge of any specific effort:

     o    to accumulate shares of common stock;

     o    to  obtain  control  of  KCS  by  means  of a  merger,  tender  offer,
          solicitation or otherwise; or

     o    by management to adopt a series of anti-takeover provisions.

     Instead, the terms of the fundamental change purchase feature resulted from
negotiations between the Initial Purchasers and us.

     We could, in the future, enter into certain transactions, including certain
recapitalizations,  that would not constitute a fundamental  change with respect
to the fundamental  change purchase  feature of the Series C Preferred Stock but
that  would  increase  the  amount  of our  (or our  subsidiaries')  outstanding
indebtedness.

     Our  ability  to  purchase  shares of  Series C  Preferred  Stock  upon the
occurrence of a fundamental change is subject to important limitations.  Because
we are a holding  company,  our ability to purchase the Series C Preferred Stock
for cash may be limited by  restrictions on our ability to obtain funds for such
repurchase  through  dividends from our  subsidiaries  and the terms of our then
existing borrowing agreements. If a fundamental change were to occur, we may not
have  sufficient  legally  available funds to pay the purchase price in cash for
all tendered shares of Series C Preferred Stock. Any future credit agreements or
other agreements relating to our indebtedness may contain provisions prohibiting
the purchase of the Series C Preferred  Stock under  certain  circumstances,  or
expressly  prohibit  our  purchase  of  the  Series  C  Preferred  Stock  upon a
fundamental change or may provide that a fundamental change constitutes an event
of default under that agreement.  If a fundamental  change occurs at a time when
we are prohibited from  purchasing  shares of Series C Preferred Stock for cash,
we could seek the  consent of our  lenders to  purchase  the Series C  Preferred
Stock or attempt to refinance this debt. If we do not obtain  consent,  we would
not be permitted to purchase the Series C Preferred  Stock,  except as described
below.

     If,  following a  fundamental  change,  we are  prohibited  from paying the
purchase  price of the Series C  Preferred  Stock in cash under the terms of our
credit agreements or other agreements relating to our indebtedness,  we will, if
permitted  under those  agreements  and under  applicable  law, elect to pay the
purchase price of the Series C Preferred Stock in shares of our common stock or,
in the case of a merger in which we are not the  surviving  corporation,  common
stock of the surviving corporation or its direct or indirect parent corporation.


VOTING RIGHTS

     Unless otherwise determined by our board of directors, holders of shares of
Series C Preferred  Stock will not have any voting  rights  except as  described
below, as provided in our restated certificate of incorporation, or as otherwise
required  from time to time by law.  Whenever  (1)  dividends  on any  shares of
Series C  Preferred  Stock or any other  class or series of stock  ranking  on a
parity  with the  Series C  Preferred  Stock  with  respect  to the  payment  of
dividends shall be in arrears for dividend periods,  whether or not consecutive,
containing in the aggregate a number of days equivalent to six calendar quarters
or (2) we fail to pay the  redemption  price  on the  date  shares  of  Series C
Preferred  Stock are called for redemption or the purchase price on the purchase
date for shares of Series C  Preferred  Stock  following a  fundamental  change,
then,  in each case,  the holders of shares of Series C Preferred  Stock (voting
separately as a class with all other series of other  preferred  stock on parity
with the  Series C  Preferred  Stock upon which  like  voting  rights  have been
conferred and are exercisable)  will be entitled to vote for the election of two
of the  authorized  number  of our  directors  at the  next  annual  meeting  of
stockholders and each subsequent meeting until all dividends  accumulated on the
Series C Preferred Stock have been fully paid or set aside for payment. The term
of office of all  directors  elected by the holders of Series C Preferred  Stock
will terminate  immediately  upon the termination of the right of the holders of



Series C  Preferred  Stock to vote for  directors.  Each holder of shares of the
Series C Preferred Stock will have one vote for each share of Series C Preferred
Stock held.

     So long as any shares of the Series C Preferred  Stock remain  outstanding,
we will not,  without the consent of the holders of at least  two-thirds  of the
shares of Series C Preferred Stock outstanding at the time, voting separately as
a class with all other series of Series C Preferred Stock upon which like voting
rights  have  been  conferred  and are  exercisable  (1) issue or  increase  the
authorized  amount  of any  class or  series  of  stock  ranking  senior  to the
outstanding  Series C Preferred Stock as to dividends or upon liquidation or (2)
amend,  alter or repeal provisions of our restated  certificate of incorporation
or of the resolutions  contained in the certificate of designations,  whether by
merger,  consolidation or otherwise,  so as to amend, alter or affect any power,
preference or special right of the  outstanding  Series C Preferred Stock or the
holders thereof without the affirmative  vote of not less than two-thirds of the
issued and outstanding  Series C Preferred Stock;  provided,  however,  that any
increase in the amount of the  authorized  common stock or  authorized  Series C
Preferred  Stock or the creation and issuance of other series of common stock or
Series C  Preferred  Stock  ranking  on a parity  with or junior to the Series C
Preferred  Stock as to  dividends  and upon  liquidation  will not be  deemed to
materially and adversely affect such powers, preference or special rights.

LIQUIDATION PREFERENCE

     Upon any voluntary or involuntary liquidation, dissolution or winding up of
our company resulting in a distribution of assets to the holders of any class or
series of our capital stock,  each holder of shares of Series C Preferred  Stock
will be entitled to payment out of our assets  available for  distribution of an
amount equal to the liquidation preference per share of Series C Preferred Stock
held by that holder, plus all accumulated and unpaid dividends,  on those shares
to  the  date  of  that  liquidation,   dissolution,   winding  up,  before  any
distribution is made on any junior stock,  including our common stock, but after
any  distributions on any of our indebtedness or senior stock.  After payment in
full of the liquidation  preference and all accumulated and unpaid  dividends to
which holders of shares of Series C Preferred  Stock are entitled,  holders will
not be entitled to any further  participation in any distribution of our assets.
If, upon any voluntary or involuntary liquidation,  dissolution or winding up of
our  company,  the amounts  payable with respect to shares of Series C Preferred
Stock and all other  parity  stock  are not paid in full,  holders  of shares of
Series C Preferred  Stock and holders of the parity stock will share equally and
ratably in any  distribution  of our  assets in  proportion  to the  liquidation
preference and all accumulated and unpaid dividends to which each such holder is
entitled.

     Neither the voluntary  sale,  conveyance,  exchange or transfer,  for cash,
shares of stock, securities or other consideration,  of all or substantially all
of our property or assets nor the  consolidation,  merger or amalgamation of our
company  with  or  into  any  corporation  or  the   consolidation,   merger  or
amalgamation of any corporation  with or into our company will be deemed to be a
voluntary or involuntary liquidation, dissolution or winding up of our company.

     We are not  required  to set  aside any funds to  protect  the  liquidation
preference of the shares of Series C Preferred  Stock,  although the liquidation
preference will be substantially in excess of the par value of the shares of the
Series C Preferred Stock.

TRANSFER AGENT

     The transfer agent, registrar, dividend disbursing agent, calculation agent
and redemption agent for the Series C Preferred Stock is UMB Bank, N.A.

BOOK-ENTRY SYSTEM

     The  Series  C  Preferred  Stock  has been  issued  in the form of a global
security  held  in  book-entry  form.  DTC's  nominee,  Cede & Co.  is the  sole
registered  holder  of the  Series  C  Preferred  Stock.  Owners  of  beneficial
interests in the Series C Preferred  Stock  represented  by the global  security
will hold their interests  pursuant to the procedures and practices of DTC. As a
result,  beneficial  interests  in any such  securities  will be shown  on,  and
transfers  will be effected  only  through,  records  maintained  by DTC and its
direct and indirect  participants and any such interest may not be exchanged for
certificated securities,  except in limited circumstances.  Owners of beneficial
interests must exercise any rights in respect of their interests,  including any
right to  convert  or  require  repurchase  of their  interests  in the Series C



Preferred  Stock,  in  accordance  with the  procedures  and  practices  of DTC.
Beneficial  owners  will not be holders  and will not be  entitled to any rights
provided  to the  holders  of the  Series C  Preferred  Stock  under the  global
security or the certificate of  designations.  Our company and any of our agents
may treat DTC as the sole holder and registered owner of the global securities.

     DTC has  advised us as  follows:  DTC is a  limited-purpose  trust  company
organized  under the New York Banking Law, a "banking  organization"  within the
meaning  of the New  York  Uniform  Commercial  Code,  and a  "clearing  agency"
registered  pursuant to the  provisions  of Section 17A of the Exchange Act. DTC
facilitates  the  settlement  of  transactions  among its  participants  through
electronic   computerized   book-entry   changes  in   participants'   accounts,
eliminating  the need for physical  movement of securities  certificates.  DTC's
participants  include  securities  brokers and dealers,  banks, trust companies,
clearing corporations and certain other organizations.  DTC is owned by a number
of its participants and by the New York Stock Exchange, Inc., the American Stock
Exchange LLC, and the National Association of Securities Dealers, Inc. Access to
DTC's  book-entry  system is also available to others,  such as banks,  brokers,
dealers  and  trust  companies  that  clear  through  or  maintain  a  custodial
relationship with a participant, either directly or indirectly.

EXCHANGE OF GLOBAL SECURITIES

     The Series C Preferred Stock,  represented by the global security,  will be
exchangeable for certificated securities with the same terms only if:

     o    DTC is unwilling or unable to continue as  depositary or if DTC ceases
          to be a  clearing  agency  registered  under  the  Exchange  Act and a
          successor depositary is not appointed by us within 90 days; or

     o    we decide to  discontinue  use of the  system of  book-entry  transfer
          through DTC (or any successor depositary).

REGISTRATION RIGHTS

     This summary of certain  provisions of the  registration  rights  agreement
does not  purport to be  complete  and is subject  to, and is  qualified  in its
entirety  by  reference  to,  all  the  provisions  of the  registration  rights
agreement,  a copy of which we will  make  available  upon  written  request  as
described under "Where You Can Find More Information."

     We have agreed under the registration rights agreement, at our expense, for
the benefit of the holders, to file with the SEC a shelf registration  statement
covering  resale of the  Series C  Preferred  Stock and the shares of our common
stock  issuable  upon  conversion  of the Series C Preferred  Stock by August 3,
2003.  We have  agreed to use our best  efforts to cause the shelf  registration
statement  to  become  effective  by  November  1,  2003,  and to keep the shelf
registration  statement  effective until the earlier of (i) the sale pursuant to
Rule 144 under the Securities Act or the shelf registration statement of all the
securities registered thereunder,  and (ii) the expiration of the holding period
applicable to such  securities  held by persons that are not  affiliates of ours
under Rule 144(k) under the Securities Act or any successor  provision,  subject
to permitted exceptions.

     We may  suspend  the  use of the  prospectus  under  certain  circumstances
relating to pending  corporate  developments,  public  filings  with the SEC and
similar events. Any suspension period shall not:

     o    exceed 30 days in any three-month period; or

     o    exceed an aggregate of 90 days for all periods in any 12-month period.

     We will pay  predetermined  liquidated  damages as described  herein in the
form of "special dividends" to holders of transfer restricted Series C Preferred
Stock and in the form of  "liquidated  damages  payments" to holders of transfer
restricted common stock issued upon conversion of such Series C Preferred Stock,
if a shelf  registration  statement is not timely  declared  effective or if the
prospectus is unavailable  for the periods in excess of those  permitted  above.
Such special  dividends or liquidated  damages  payments shall  accumulate until
such failure to file or become effective or unavailability is cured:



     o    on the Series C  Preferred  Stock at an annual rate equal 0.50% of the
          aggregate liquidation preference of Series C Preferred Stock; and

     o    on the common stock that has been issued on conversion of the Series C
          Preferred  Stock,  at an annual rate equal to 0.50% of an amount equal
          to the conversion price.

     So long as the failure to become effective or unavailability  continues, we
will pay special dividends or make liquidated  damages payments,  as applicable,
in cash on each  dividend  payment date for the Series C Preferred  Stock to the
holder of record of such transfer  restricted Series C Preferred Stock or common
stock on the record date immediately  preceding the applicable  dividend payment
date. When such  registration  default is cured,  accumulated and unpaid special
dividends  or  liquidated  damages  payments  will be paid in cash to the record
holder as of the date of such cure.

     A holder who sells  Series C Preferred  Stock or shares of our common stock
issued upon  conversion  of the Series C Preferred  Stock  pursuant to the shelf
registration statement generally will be required to:

     o    be named as a selling securityholder in the related prospectus;

     o    deliver a prospectus to purchasers; and

     o    be bound by certain  provisions of the  registration  rights agreement
          that are applicable to such holder,  including certain indemnification
          provisions,  and will be subject to certain civil liability provisions
          under the Securities Act.

     Under the registration rights agreement we will:

     o    pay all of our expenses of the shelf registration statement;

     o    provide copies of such  prospectus to each holder that has notified us
          of its acquisition of Series C Preferred Stock or shares of our common
          stock issued upon conversion of the Series C Preferred Stock;

     o    notify  each such  holder when the shelf  registration  statement  has
          become effective; and

     o    take certain other  actions as are required to permit,  subject to the
          foregoing,  unrestricted  resales of the Series C Preferred  Stock and
          the shares of our common stock issued upon  conversion of the Series C
          Preferred Stock.

     We have agreed in the  registration  rights agreement to give notice to all
holders of the filing and effectiveness of the shelf  registration  statement by
release made to Reuters Economic  Services and Bloomberg  Business News or other
reasonable   means  of   distribution.   A   notice   and   questionnaire   (the
"questionnaire")  must be  completed  and  delivered  by a holder to us at least
three  business  days prior to any intended  distribution  of Series C Preferred
Stock or shares of our common stock  issuable  upon  conversion  of the Series C
Preferred  Stock  pursuant  to the shelf  registration  statement.  Holders  are
required to complete and deliver the  questionnaire  at least ten business  days
prior to the  effectiveness of the shelf  registration  statement in order to be
named as a selling  security  holder in the  related  prospectus  at the time of
effectiveness.  Upon  receipt  of a  completed  questionnaire  after  that time,
together with such other information as we may reasonably request from a holder,
we  will,  within  five  business  days,  file  such  amendments  to  the  shelf
registration  statement or supplements to a related  prospectus as are necessary
to permit such  holder to deliver  such  prospectus  to  purchasers  of Series C
Preferred  Stock or shares of our common stock  issuable upon  conversion of the
Series  C  Preferred  Stock,  subject  to our  right to  suspend  the use of the
prospectus as described  above. We will pay the special  dividends or liquidated
damages payments  described above to the holder if we fail to make the filing in
the time required or, if such filing is a post-effective  amendment to the shelf
registration  statement  required to be declared  effective under the Securities
Act, if such amendment is not declared  effective  within 45 days of the filing.
Any holder that does not  complete and deliver a  questionnaire  or provide such
other  information  will  not be  named  as a  selling  security  holder  in the
prospectus  and  therefore  will not be permitted to sell the Series C Preferred
Stock or shares of our common stock  issuable  upon  conversion  of the Series C
Preferred Stock pursuant to the shelf registration statement.






                        DESCRIPTION OF KCS CAPITAL STOCK

     The description of our capital stock set forth below is not complete and is
qualified by reference to our restated  certificate of incorporation  (including
the  certificate of designations  for the Series C Preferred  Stock) and bylaws.
Copies of our restated  certificate of incorporation  (including the certificate
of designations  for the Series C Preferred Stock) and bylaws are available from
us upon request.  These documents have also been filed with the SEC. Please read
"Where You Can Find More Information."

AUTHORIZED CAPITAL STOCK

     Under our restated certificate of incorporation, KCS is authorized to issue
(i) 400,000,000  shares of common stock, par value $0.01 per share, (ii) 840,000
shares of Preferred Stock, par value $25.00 per share, and (ii) 2,000,000 shares
of New Series  Preferred  Stock,  par value  $1.00 per share,  of which  150,000
shares  are  designated  as New  Series  Preferred  Stock,  Series A  ("Series A
Preferred  Stock"),  1,000,000  shares are  designated  as Series B  Convertible
Preferred  Stock ("Series B Preferred  Stock") and 400,000 shares are designated
as 4.25% Redeemable Cumulative  Convertible Perpetual Preferred Stock, Series C.
As of July  30,  2003,  61,687,877  shares  of  common  stock  were  issued  and
outstanding (excluding 11,681,239 treasury shares),  242,170 shares of Preferred
Stock were issued and  outstanding,  400,000 shares of Series C Preferred  Stock
were issued and  outstanding,  and no other shares of New Series Preferred Stock
were outstanding. In connection with the Acquisition, upon obtaining stockholder
approval,  KCS intends to amend its restated  certificate of  incorporation  to,
among other things,  authorize  the issuance of the Class A  Convertible  Common
Stock.  See  "Description  of the Class A  Convertible  Common  Stock." No other
classes of capital stock are  authorized  under KCS's  restated  certificate  of
incorporation.  The issued and  outstanding  shares of common  stock,  Preferred
Stock and Series C Preferred Stock are duly  authorized,  validly issued,  fully
paid and non-assessable.  Our common stock and Preferred Stock are listed on the
New York Stock Exchange.

COMMON STOCK

     Holders of common stock are entitled to receive  dividends  when, as and if
declared by the board of  directors  out of funds  legally  available  therefor,
provided that, if any shares of New Series  Preferred  Stock or Preferred  Stock
are outstanding, no dividends or other distributions may be made with respect to
the common  stock  unless full  required  dividends  on the shares of New Series
Preferred  Stock and  Preferred  Stock  have been  paid,  including  accumulated
dividends in the case of any series of New Series  Preferred Stock designated to
receive cumulative dividends.

     Holders of common  stock are entitled to one vote per share  multiplied  by
the number of directors to be elected in an election of directors,  which may be
cast  cumulatively,  and to one vote per share on any other matter,  voting as a
single class.  In certain  instances,  holders of New Series  Preferred Stock or
Preferred Stock may have special class voting rights. Holders of Preferred Stock
are entitled to one vote per share  multiplied  by the number of directors to be
elected in an election of directors, which may be cast cumulatively,  and to one
vote per share on other  matters.  Holders of  Preferred  Stock vote as a single
class with the  holders of common  stock and any series of New Series  Preferred
Stock having voting rights;  however,  whenever  dividends are in arrears on the
Preferred Stock for six quarters,  the holders of Preferred Stock have the right
to vote as a class to elect  two  directors  at the  next  annual  stockholders'
meeting at which  directors are elected and have such right until dividends have
been paid on the Preferred Stock for four consecutive quarters.  The vote of the
holders of two-thirds of Preferred  Stock voting together as a class is required
for any amendment to KCS's  restated  certificate of  incorporation  which would
materially  and  adversely  alter or change the powers,  preferences  or special
rights of such stock. See  "Description of the Series C Preferred  Stock--Voting
Rights"  for a  discussion  of the  voting  rights of  holders  of the  Series C
Preferred Stock.

     In the event of the voluntary or  involuntary  dissolution,  liquidation or
winding up of KCS,  holders of common  stock are  entitled  to receive pro rata,
after  satisfaction in full of the prior rights of creditors  (including holders



of KCS's  indebtedness)  and holders of New Series Preferred Stock and Preferred
Stock, all the remaining assets of KCS available for distribution.  The issuance
of additional shares of New Series Preferred Stock or Preferred Stock may result
in a dilution of the voting power and relative  equity  interests of the holders
of common  stock and would  subject the common  stock to the prior  dividend and
liquidation rights of the New Series Preferred Stock and Preferred Stock issued.
The common stock is not redeemable and has no preemptive rights.

PREFERRED STOCK

     We have 840,000  shares of  authorized  Preferred  Stock,  of which 242,170
shares are issued and  outstanding.  Holders of Preferred  Stock are entitled to
receive,  in the discretion of our board of directors,  noncumulative  dividends
declared by our board of directors of up to $1 per share per year,  and no more,
before dividends may be declared or paid with respect to our common stock or any
series of New Series Preferred Stock.

     Holders of Preferred Stock are entitled to one vote per share multiplied by
the number of directors to be elected in an election of directors,  which may be
cast  cumulatively,  and to one vote per  share on  other  matters.  Holders  of
Preferred  Stock vote as a single class with the holders of our common stock and
any series of New Series Preferred Stock having voting rights. However, whenever
dividends are in arrears on the Preferred Stock for six quarters, the holders of
Preferred  Stock have the right to vote as a class to elect two directors at the
next annual  stockholders'  meeting at which directors are elected and have such
right until dividends have been paid on the Preferred Stock for four consecutive
quarters.  The vote of the  holders of  two-thirds  of  Preferred  Stock  voting
together as a class is required for any amendment to our restated certificate of
incorporation  which would  materially and adversely alter or change the powers,
preferences or special rights of the Preferred Stock.

     In the event of our voluntary or  involuntary  dissolution,  liquidation or
winding up,  holders of Preferred  Stock are entitled to receive  payment in the
amount of the par value of their  Preferred  Stock and any  declared  and unpaid
dividends  before any payment is made upon the New Series Preferred Stock or our
common stock.  The Preferred Stock is not redeemable by us and has no preemptive
rights.

NEW SERIES PREFERRED STOCK

     Under our restated certificate of incorporation,  our board of directors is
authorized without further  stockholder  action, to issue up to 2,000,000 shares
of New Series  Preferred  Stock in one or more series,  with such  designations,
powers, preferences,  rights,  qualifications,  limitations or restrictions,  as
shall be set  forth in a  certificate  of  designations  filed  pursuant  to the
Delaware  Corporation Law, subject to the powers,  preferences and rights of the
Preferred Stock.

     If any series of New Series Preferred Stock entitles the holders thereof to
dividends, such dividends may be paid following the payment or setting apart for
payment of dividends on the Preferred  Stock and prior to the payment or setting
apart for payment of dividends on our common stock. If specified,  dividends may
be cumulative. In the event of a liquidation,  dissolution or winding up of KCS,
holders of each  series of New Series  Preferred  Stock are  subordinate  to the
holders of Preferred Stock, but have preference and priority over the holders of
our common  stock,  for  payments  of amounts as set forth in a  certificate  of
designations.  The New Series Preferred Stock has no preemptive  rights. We have
450,000 shares of authorized New Series Preferred Stock which are undesignated.

     SERIES A PREFERRED STOCK

     Our board of directors established the Series A Preferred Stock, consisting
of 150,000 shares,  for issuance  pursuant to our Stockholder  Rights  Agreement
(the  "Rights  Agreement").  No  shares of Series A  Preferred  Stock  have been
issued. See "--Anti-Takeover Provisions--Rights Agreement" below.



     The shares of Series A Preferred  Stock  purchasable  upon  exercise of the
Rights  will  have a  cumulative  quarterly  dividend  rate set by our  board of
directors or equal to 1,000 times the dividend  declared on our common stock for
such quarter.  Each share will have the voting rights of one vote on all matters
voted at a meeting  of the  stockholders  for each  1/1,000th  share of Series A
Preferred  Stock  held  by  such  stockholder.  In  the  event  of  any  merger,
consolidation  or other  transaction  in which our common shares are  exchanged,
each share of Series A  Preferred  Stock will be  entitled  to receive an amount
equal to 1,000 times the amount to be received per common share. In the event of
a  liquidation,  the  holders of Series A  Preferred  Stock will be  entitled to
receive  $1,000  per  share or an  amount  per  share  equal to 1,000  times the
aggregate amount to be distributed per share to holders of our common stock. The
shares will not be redeemable. The vote of holders of a majority of the Series A
Preferred Stock,  voting together as a class, will be required for any amendment
to the our restated  certificate  of  incorporation  that would  materially  and
adversely  alter or change the  powers,  preferences  or special  rights of such
shares.

     SERIES B PREFERRED STOCK

     In 1993, our board of directors  authorized the establishment of the Series
B Preferred Stock,  consisting of 1,000,000 shares,  for issuance to the trustee
of a grantor  trust formed by us entitled  "Employee  Plan  Funding  Trust" (the
"Trust") for the purpose of holding  shares of Series B Preferred  Stock for the
benefit of various KCS employee  benefit  plans,  including  the Employee  Stock
Ownership Plan,  stock option plans and Employee Stock Purchase Plan. On October
1, 1993, we sold 1,000,000  shares of Series B Preferred  Stock to the Trust for
$200 million with funds borrowed from us, secured by a pledge of the securities.
The  Trust  was  administered  by an  independent  bank  trustee.  The  Series B
Preferred  Stock  could only be held by the trustee of the Trust or on behalf of
any employee  benefit plan  designated as a beneficiary of the Trust.  Effective
September 30, 1998, we terminated the Trust. In accordance with the Agreement to
terminate the Trust,  we received  872,362 shares of Series B Preferred Stock in
full repayment of the  indebtedness  from the Trust. In addition,  the remaining
127,638  shares of Series B Preferred  Stock were  converted by the Trustee into
our common stock,  at the rate of 6 to 1, resulting in the issuance to the Trust
of 765,828 shares of our common stock.  The Trustee then transferred this common
stock to us and we have set these  shares aside for use in  connection  with the
KCS 1991  Amended and  Restated  Stock  Option and  Performance  Award Plan,  as
amended and restated effective November 7, 2002. No shares of Series B Preferred
Stock remain outstanding.

     SERIES C PREFERRED STOCK

     For a detailed discussion of the Series C Preferred Stock, see "Description
of the Series C Preferred Stock."

ANTI-TAKEOVER PROVISIONS

     CLASSIFIED BOARD OF DIRECTORS

     Our  restated  certificate  of  incorporation  provides  that our  board of
directors  will be  divided  into  three  classes  as nearly  equal in number as
possible.  Each class of  directors  serves  for a term of three  years and such
terms  commence in three  consecutive  years so that one class of  directors  is
elected at the annual stockholders'  meeting each year. Our restated certificate
of  incorporation  also provides that the vote of 70% of the shares  entitled to
vote in the election of directors is required to amend the restated  certificate
of  incorporation  to increase the number of  directors  to more than  eighteen,
abolish  cumulative  voting for directors and abolish the  classification of the
board.  The same vote  requirement  is imposed by our  restated  certificate  of
incorporation on certain transactions involving mergers,  consolidations,  sales
or leases of assets having a fair market value of $2 million or more, with or to
certain  owners of more than 5% of our stock entitled to vote in the election of
directors,   unless  our  board  of  directors  has  approved  a  memorandum  of
understanding with any such owner prior to its becoming such a 5% holder.  These
provisions  could have the effect of delaying,  deferring or preventing a change
in control of KCS.



     RIGHTS AGREEMENT

     To implement the Rights Agreement,  in 1995 our board of directors declared
and made a dividend  distribution of one Series A Preferred Stock purchase right
("Right") for each  outstanding  share of our common stock.  Each Right entitles
the  registered  holder  to  purchase  from us  1/1,000  of a share of  Series A
Preferred Stock, or in some circumstances,  common stock, other securities, cash
or other  assets,  as the case may be, at a price of $210 per share,  subject to
adjustment.

     The Rights,  which are automatically  attached to our common stock, are not
exercisable or transferable apart from our common stock until the tenth calendar
day following the earlier to occur of (unless extended by our board of directors
and subject to the earlier redemption or expiration of the Rights):

     o    the date of a public  announcement  that an acquiring person acquired,
          or obtained the right to acquire,  beneficial ownership of 20% or more
          of the outstanding shares of our common stock (or 15% in the case that
          such person is considered an "adverse person"); or

     o    the  commencement  or  announcement  of an  intention to make a tender
          offer or  exchange  offer that  would  result in an  acquiring  person
          beneficially  owning  20% or more of such  outstanding  shares  of our
          common  stock (or 15% in the case that such  person is  considered  an
          "adverse person").

Until  exercised,  the  Rights  will  have no rights  as a  stockholder  of KCS,
including,  without  limitation,  the  right to vote or  receive  dividends.  In
connection with certain  business  combinations  resulting in the acquisition of
KCS or dispositions or more than 50% of our assets or earnings power, each Right
shall  thereafter  have the right to receive,  upon the exercise of the Right at
the then  current  exercise  price of the  Right,  that  number of shares of the
highest priority voting  securities of the acquiring  company (or certain of its
affiliates)  that at the time of such  transaction  would have a market value of
two times the  exercise  price of the Right.  The Rights  expire on October  12,
2005, unless earlier redeemed by us.

     At any time prior to the tenth  calendar day after the first date after the
public announcement that an acquiring person has acquired  beneficial  ownership
of 20% (or 15% in some  instances)  or  more of the  outstanding  shares  of our
common stock, we may redeem the Rights in whole,  but not in part, at a price of
$0.005  per  Right.  In  addition,  our right of  redemption  may be  reinstated
following an  inadvertent  trigger of the Rights (as  determined by our board of
directors) if an acquiring  person  reduces its  beneficial  ownership to 10% or
less of the outstanding shares of our common stock in a transaction or series of
transactions not involving us.

     Under  certain  circumstances,  the Rights  Agreement  could  significantly
impair the  ability of third  parties  to  acquire  control of us without  prior
approval of our board of directors.





               DESCRIPTION OF THE CLASS A CONVERTIBLE COMMON STOCK

     Shares of Class A Convertible Common Stock are to be issued pursuant to the
Acquisition  Agreement and the  transactions  contemplated  thereby.  Additional
shares  of Class A  Convertible  Common  Stock  may be  issued  pursuant  to the
Consulting  Agreement.  The Class A  Convertible  Common Stock and the shares of
common stock  issuable upon  conversion of the Class A Convertible  Common Stock
will be subject  to the rights and  obligations  contained  in the  amended  and
restated  certificate  of  incorporation,  to be filed  upon  occurrence  of the
Merger, and the Stockholders' Agreement.

     All capitalized  terms used in this "Description of the Class A Convertible
Common  Stock"  section and not  otherwise  defined  shall have the meanings set
forth in the  Stockholders'  Agreement  and  form of the  amended  and  restated
certificate of incorporation attached as Exhibit A to the Acquisition Agreement.

DIVIDEND RIGHTS

     When and as dividends or other distributions are declared,  whether payable
in cash,  in  property  or in shares of our  stock,  the  holders of the Class A
Convertible  Common Stock and common  stock shall be entitled to share  equally,
share for share, in such dividends or other  distributions as if all such shares
were of a single class.

TERMS OF CONVERSION

     The Class A  Convertible  Common  Stock will be  convertible  into an equal
number of shares of common  stock at any time,  upon the option of holders,  and
mandatorily,  upon the  occurrence  of  certain  conditions.  Shares  of Class A
Convertible Common Stock shall be converted automatically, without any action on
the part of any Person,  into an equal number of shares of common stock upon the
occurrence  of the  following  events:  (i) a Transfer  by any TMM Holder of any
shares of Class A Convertible Common Stock to a Person other than Grupo TMM, TMM
Holdings,  Multimodal,  or the  stockholders of Grupo TMM who will have executed
the Stockholders' Agreement ("Grupo TMM Principal Stockholders")  (collectively,
the  "TMM  Holders"),  or an  entity  which  is an  Affiliate  of any of the TMM
Holders; (ii) on the first day on which the TMM Holders, in the aggregate, cease
to  beneficially  own, in the aggregate,  at least 40% of the Voting  Securities
initially  acquired by  Multimodal  pursuant to the Merger  contemplated  by the
Acquisition  Agreement;  (iii) a Change of Control  of KCS;  or (iv) a Change of
Control of such TMM  Holder,  if after such Change of Control a  Competitor  has
Beneficial  Ownership  of more than a majority of the Total Voting Power of such
TMM Holder.

     In  order to  facilitate  optional  conversions  and  transfers  of Class A
Convertible  Common Stock (and, except for Transfers to Affiliates in accordance
with the  Stockholders'  Agreement,  the  conversion  of such shares into common
stock),  any TMM Holder  shall,  at its option,  deliver  written  notice of the
proposed  conversion or transfer,  together with the certificate or certificates
representing  such shares to be  converted  and/or  transferred,  to  Conversion
Agent.  Following  any  automatic  conversion,  the  share or  shares of Class A
Convertible   Common   Stock  so  converted   shall  cease  to  be   outstanding
(notwithstanding  the fact that the holder or holders  may not have  surrendered
the certificate or  certificates  representing  such Class A Convertible  Common
Stock for  conversion),  and such  certificate or certificates  shall thereafter
represent  solely the right to receive a certificate or certificates  for common
stock  issuable  upon  conversion  of the Class A  Convertible  Common  Stock so
converted,  upon surrender of such certificate or certificates to the Conversion
Agent.

VOTING RIGHTS

     Each holder of Class A  Convertible  Common  Stock shall be entitled to one
vote for each share of such stock held by such holder. Each outstanding share of
Class A  Convertible  Common  Stock  shall be entitled to vote on each matter on
which our stockholders shall be entitled to vote.  However,  with respect to the
election of directors other than the Class A Directors  (described  below),  the
Class A Convertible Common Stock shall be voted in favor of nominees recommended



by our board of directors who were nominated in compliance with Article V of the
Stockholders' Agreement.

     Voting separately as a class, the holders of the Class A Convertible Common
Stock shall have the right to elect Class A Director(s) as follows: (i) from and
after the effectiveness of the amended and restated certificate of incorporation
until such time as the TMM Holders cease to beneficially own in the aggregate at
least 75% of the Voting  Securities  initially  acquired  by MM  pursuant to the
Merger contemplated by the Acquisition  Agreement (80% if a Change of Control of
TMM or any TMM  Holder  shall  have  occurred),  two  members  of our  board  of
directors will be elected by the holders of the Class A Convertible Common Stock
voting  as a  separate  class;  (ii) at such  time as the TMM  Holders  cease to
beneficially  own in the  aggregate  at  least  75%  of  the  Voting  Securities
initially acquired by MM pursuant to the Merger  contemplated by the Acquisition
Agreement  (80% if a Change  of  Control  of TMM or any TMM  Holder  shall  have
occurred) and provided that such TMM Holders continue to beneficially own in the
aggregate  at  least  40% of the  Voting  Securities  initially  acquired  by MM
pursuant to the Merger contemplated by the Acquisition Agreement,  the number of
directors  which the holders of Class A Convertible  Common Stock have the right
to elect voting as a separate class will be decreased from two to one; and (iii)
at such time as the TMM Holders  cease to  beneficially  own in the aggregate at
least 40% of the Voting  Securities  initially  acquired  by MM  pursuant to the
Merger  contemplated by the Acquisition  Agreement,  the right of the holders of
Class A Convertible  Common Stock voting as a separate class to elect any member
of our board of directors shall terminate.  Notwithstanding  any of the above to
the  contrary,  if a Change of Control of Grupo TMM or any TMM Holder shall have
occurred and the acquiror is a  Competitor,  the right of the holders of Class A
Convertible  Common Stock voting as a separate  class to elect any  member(s) of
our board of directors shall immediately terminate.

LIQUIDATION RIGHTS

     In the event of any voluntary or  involuntary  liquidation,  dissolution or
winding up of the  affairs of KCS,  holders  of the Class A  Convertible  Common
Stock and common  stock  shall be  entitled to share  ratably  according  to the
number of shares held by them, in all of our assets  available for  distribution
to our stockholders.

PREEMPTION RIGHTS

     The  holders of Class A  Convertible  Common  Stock  shall have  preemptive
rights to acquire  additional shares of Class A Convertible  Common Stock in the
event we  authorize  the  issuance or sale of any shares of common  stock or any
securities  containing  options or rights to acquire any shares of common  stock
(other than as a dividend on the outstanding common stock).  Notwithstanding the
foregoing,  the  holders  of  Class  A  Convertible  Common  Stock  do not  have
preemptive  rights with respect to issuances of common stock (including for this
purpose,  options,  warrants and other securities into or exercisable for common
stock) issued: (i) to our employees, directors, consultants, agents, independent
contractors or other service providers in connection with a Plan existing on the
date hereof or a Plan approved by our board of directors and adopted by us after
the date hereof;  (ii) upon the conversion of Class A Convertible  Common Stock;
(iii) upon the exercise of any options,  warrants,  or  exchangeable  securities
which are  outstanding  as of the  effective  date of the amended  and  restated
certificate of  incorporation;  or (iv) in connection  with the  acquisition (by
merger,  consolidation,  acquisition of assets or equity interests or otherwise)
of the equity interests or assets of another Person.

     We shall first  notify  then-existing  TMM  Holders of Class A  Convertible
Common Stock of any proposed  transaction  triggering  preemptive  rights of the
Class A Convertible  Common Stock and offer to sell to each such Person a number
of shares of Class A  Convertible  Common  Stock (or,  as  applicable,  options,
warrants or other securities into or exercisable for Class A Convertible  Common
Stock) determined according to the formula specified in the amended and restated
certificate  of  incorporation.  To the extent that any TMM Holder elects not to
participate in such preemptive rights,  each of the other TMM Holders shall have
a pro rata  right  to  purchase  at the same  price  and on the same  terms  and
conditions the Voting Securities which such non-participating TMM Holder had the
right but elected not to purchase.



     The  preemptive  rights of the TMM  Holders of Class A  Convertible  Common
Stock  shall  immediately  and  irrevocably  terminate  on the date that the TMM
Holders  do not  beneficially  own in the  aggregate  at least 40% of the Voting
Securities   initially  acquired  by  Multimodal  pursuant  to  the  Acquisition
Agreement.

TRANSFER RESTRICTIONS

     For a period of five years from and after the  effectiveness of the amended
and restated  certificate of incorporation,  the TMM Holders shall not, directly
or indirectly,  alone or in concert with others, sell, assign, transfer, pledge,
hypothecate,  otherwise subject to any lien, grant any option with respect to or
otherwise   dispose  of  any   interest  in  (or  enter  into  an  agreement  or
understanding   with  respect  to  the  foregoing)  any  Voting   Securities  (a
"Disposition") to a Competitor.  Disposition  pursuant to a Public Offering or a
Rule 144  Transaction  will not be deemed to  violate  this  prohibition  if the
selling TMM Holder(s) follow appropriate and reasonable  procedures  designed to
prevent the sale of such Voting Securities to any Competitor. After the earliest
of (i) five years following the date of the amended and restated  certificate of
incorporation,  or (ii) the first date on which the TMM Holders beneficially own
in the aggregate,  directly or indirectly and alone or as part of a Group,  less
than 15% of the outstanding  Voting  Securities of KCS, a TMM Holder may propose
to sell Voting Securities to a Competitor; provided we shall have the right (but
not the  obligation)  to  purchase,  in  whole  but  not in  part,  such  Voting
Securities at a per share cash purchase price equal to the purchase price in the
agreement  between the selling TMM Holder and a Competitor.  This purchase right
shall be assignable, in whole or in part, by us to any other Person, but no such
assignment  shall relieve us of our obligation to assure payment of the purchase
price for any Voting Securities as to which a notice of election to exercise the
Right of First Refusal is made by us or any such assignee.

     For a period of five years from and after the  effectiveness of the amended
and restated  certificate  of  incorporation,  each of the TMM Holders shall not
effect a Disposition of Voting  Securities to any Affiliate of either Grupo TMM,
TMM  Holdings  or  Multimodal  or any  Affiliate  of  any  Grupo  TMM  Principal
Stockholders unless such Affiliate agrees in writing to be bound by the terms of
the Stockholders' Agreement.  The TMM Holders shall remain responsible,  jointly
and severally, for any breaches of the Stockholders' Agreement by such Affiliate
(provided that any TMM Holder which is a Grupo TMM Principal  Stockholder  shall
be  severally  responsible  only for  breaches by an  Affiliate of the Grupo TMM
Principal  Stockholder to which such Grupo TMM Principal  Stockholder  effects a
Distribution).

     Subject to the foregoing transfer restrictions, TMM Holders may sell any or
all Voting  Securities  beneficially  owned by such Person provided that: (i) no
Disposition  that in the  aggregate  represents  5% or  more of the  outstanding
Voting  Securities  shall  be made to any  Person  other  than a  Person  who is
eligible to file  reports  pursuant to Rule 13d-1 under the Exchange Act (a "13G
Filer"),  unless such Person would not be so eligible with respect to the Voting
Securities  acquired from the  Disposition;  and (ii) no  Disposition  of Voting
Securities that in the aggregate represents 5% or more of the outstanding Voting
Securities  shall be made to any 13G  Filer  unless  (a) such  13G  Filer  would
continue  to be  eligible  to file  reports  pursuant  to Section  13G under the
Exchange Act with respect to the Voting  Securities  after giving  effect to the
proposed  acquisition of such Voting Securities;  and (b) the selling TMM Holder
shall have  delivered a written notice to us advising us of the number of Voting
Securities the seller  desires to sell and the terms,  including  price,  of the
proposed  transaction  and  we  have  been  provided  the  right  (but  not  the
obligation) to purchase,  in whole or in part,  such Voting  Securities at a per
share  cash  purchase  price  equal  to  the  purchase  price  in  the  proposed
transaction.

     Notwithstanding  any provision of the amended and restated  certificate  of
incorporation  to the contrary,  no  Disposition  shall be made to any Person or
Group that would,  together with such Person's  Affiliates  and  Associates  and
after giving effect to the acquisition of such Voting  Securities,  beneficially
own or have the right to acquire more than 15% of the Total Voting Power of KCS.



     TMM Holders shall be permitted to make a Disposition,  notwithstanding  any
contrary provision in the amended and restated certificate of incorporation,  in
connection with any tender or exchange offer made by an unaffiliated third party
to acquire KCS common stock so long as certain conditions are satisfied.

     The transfer  restrictions  imposed by the amended and restated certificate
of incorporation  (with the exception of our right of first refusal in the event
a TMM Holder  intends to sell shares of Class A  Convertible  Common  Stock to a
Competitor,  which shall survive indefinitely) shall immediately and irrevocably
terminate upon the earlier of the first date the TMM Holders beneficially own in
the aggregate less than 15% of the outstanding  Voting  Securities of KCS for at
least 30 consecutive days, or the occurrence of a Change of Control of KCS.

PLEDGES

     Subject to the transfer restrictions  contained in the amended and restated
certificate of incorporation, a TMM Holder may pledge or hypothecate as security
for  any  indebtedness  or  other  obligations  any  or  all  Voting  Securities
beneficially owned by such Person; provided that such TMM Holder obtains written
consent  from the pledgee that upon the  occurrence  of an event which gives the
pledgee the right to foreclose on the pledged  Voting  Securities  ("Foreclosure
Event")  such  pledgee  shall  provide  to us  prompt  written  notice  of  such
Foreclosure  Event and  provide us the right to  purchase,  in whole or in part,
such Voting  Securities at a price  determined in accordance with such provision
of the amended and restated  certificate of  incorporation.  This purchase right
shall be assignable, in whole or in part, by us to any other Person, but no such
assignment  shall relieve us of our obligation to assure payment of the purchase
price for any Voting  Securities  as to which we have  delivered  such a written
notice.






                CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS

     The  following is a  discussion  of the material  U.S.  federal  income tax
consequences  of  purchasing,  owning and  disposing  of our Series C  Preferred
Stock,  but it does not purport to be a comprehensive  description of all of the
tax  considerations  that may be  relevant to a decision to acquire our Series C
Preferred Stock.  The discussion  applies to you only if you are a United States
holder (as defined below) and only if you hold our Series C Preferred Stock as a
capital  asset for federal  income tax  purposes.  It does not  address  special
classes of holders, such as:

     o    certain financial institutions;

     o    insurance companies;

     o    dealers and traders in securities or foreign currencies;

     o    persons holding Series C Preferred Stock as part of a short sale, wash
          sale, straddle or conversion transaction;

     o    persons whose functional currency for U.S. federal income tax purposes
          is not the U.S. dollar;

     o    partnerships  or other entities  classified as  partnerships  for U.S.

     o    federal income tax purposes; or

     o    tax-exempt organizations.

     This  discussion is based on the Internal  Revenue Code of 1986, as amended
(the "Code"), final, temporary and proposed Treasury regulations, administrative
pronouncements  and  judicial  decisions  all  as  currently  in  effect.  These
authorities  are subject to change,  possibly  on a  retroactive  basis.  Please
consult your own tax advisers  concerning  the U.S.  federal,  state,  local and
foreign tax  consequences  of purchasing,  owning and disposing of shares of our
Series C Preferred Stock in your particular circumstances.

     As used herein, the term "United States Holder" means a beneficial owner of
a share of Series C Preferred  Stock that is, for United States  federal  income
tax purposes:

     o    a citizen or resident of the United States;

     o    a  corporation,  or other  entity  taxable as a  corporation  for U.S.
          federal income tax purposes, created or organized in or under the laws
          of the United States or of any political subdivision thereof; or

     o    an estate or trust the  income of which is  subject  to United  States
          federal income taxation regardless of its source.

     The term "United States holder" also includes  certain former  citizens and
residents of the United States.

     TAXATION OF DISTRIBUTIONS

     Distributions  paid on our  Series C  Preferred  Stock  will be  treated as
dividends  taxable to you as  ordinary  income to the  extent of our  current or
accumulated  earnings and profits (as determined  under U.S.  federal income tax
principles).  Distributions in excess of our current or accumulated earnings and
profits  will be treated  first as a tax free return of capital to the extent of
the your  basis in our  Series  C  Preferred  Stock  and then as  capital  gain.
Distributions  on our Series C Preferred  Stock will be taxable when received by
you.

     Distributions  taxable as  dividends  received by corporate  United  States
Holders will be eligible for the 70% dividends  received  deduction,  subject to
various  limitations.  The  benefits of the  dividends  received  deduction to a
corporate United States Holder may, in effect,  be reduced or eliminated by many
exceptions and restrictions,  including  restrictions  relating to the corporate
United States Holder's taxable income,  holding period of our Series C Preferred
Stock, debt financing and the so-called  "extraordinary  dividend"  provision of
Section 1059 of the Code.  The dividends  received  deduction is not a deduction
for purposes of the computation of the adjusted current earnings for alternative
minimum tax purposes.



     CCONSTRUCTIVE DIVIDENDS

     Any increase to the  conversion  rate of our Series C Preferred  Stock may,
depending  on the  circumstances,  be deemed to be a  distribution  to you.  Any
deemed distribution will be taxed in the same manner as an actual  distribution.
See "Taxation of Distributions" above.

     CONVERSION INTO COMMON STOCK

     Your  conversion of our Series C Preferred Stock into our common stock will
not be a taxable event,  except that the receipt of cash in lieu of a fractional
share of our common stock will result in capital  gain or loss  (measured by the
difference  between the cash received in lieu of the  fractional  share and your
tax basis in the fractional share).

     Your tax basis in common stock  received upon a conversion of your Series C
Preferred  Stock will be the same as your basis in your Series C Preferred Stock
at the time of conversion, reduced by any basis allocated to a fractional share.
Your  holding  period for the common  stock  received  will include your holding
period for your converted Series C Preferred Stock.

     REDEMPTION FOR CASH

     You will generally recognize capital gain or loss on the redemption of your
Series C Preferred Stock for cash,  provided that the redemption  meets at least
one of the  following  requirements  as  determined  under  federal  income  tax
principles:

     O    the redemption is not essentially equivalent to a dividend;

     o    the redemption  results in a complete  termination of your interest in
          our stock (preferred and common); or

     o    the redemption is substantially disproportionate with respect to you.

     In  determining  whether  any of the  above  requirements  applies,  shares
considered  to be owned by you by reason of  certain  attribution  rules must be
taken into account. A redemption is not essentially  equivalent to a dividend if
the  redemption  results  in  a  "meaningful  reduction"  in  the  shareholder's
proportionate interest in the corporation. It may be more difficult for a person
who owns,  actually or constructively by operation of the attribution rules, any
of our common  stock to satisfy  any of the above  requirements,  including  the
requirement that there be a meaningful  reduction in the holder's  proportionate
interest in us.

     If the  redemption  satisfies any of the above  requirements,  such capital
gain or loss will be equal to the difference between the amount of cash received
by you and your tax basis in your redeemed Series C Preferred Stock. The capital
gain or loss will be long-term if the holding  period for our Series C Preferred
Stock is more than one year.

     If the redemption does not satisfy any of the above requirements,  then the
entire  amount  received  (without  offset  for your tax basis in your  Series C
Preferred Stock redeemed) will be treated as a distribution taxable as described
in  "Taxation  of  Distributions"  above.  In such case,  your tax basis in your
redeemed Series C Preferred Stock will be allocated to your remaining  stock, if
any. Prospective  investors should consult their own tax advisors as to the U.S.
federal income tax consequences of a redemption of our Series C Preferred Stock.

     REDEMPTION SOLELY FOR COMMON STOCK

     You will not  recognize  gain or loss on our  redemption  of your  Series C
Preferred  Stock  solely for our common  stock  (except  that you may  recognize
ordinary  income to the extent that a portion of our common stock is  determined



to  constitute  a payment in respect of  dividends  in arrears on your  Series C
Preferred Stock).  The tax basis of the common stock received will equal the tax
basis of the Series C Preferred Stock  redeemed,  and the holding period for the
common stock  received will include the holding period of the Series C Preferred
Stock redeemed  (except that the portion,  if any, of common stock received that
constitutes  a payment in respect of  dividends in arrears will have a tax basis
equal to its fair market value at the time of the  redemption  and a new holding
period commencing on the day following the redemption).

     REDEMPTION FOR A COMBINATION OF CASH AND COMMON STOCK

     Upon a redemption of our Series C Preferred Stock for a combination of cash
and our common stock, you will recognize gain, but not loss, equal to the lesser
of (i) the excess of the fair  market  value of our  common  stock plus the cash
received in  redemption  of our Series C Preferred  Stock over your adjusted tax
basis in your  Series C  Preferred  Stock  redeemed  and (ii) the amount of cash
received in the redemption. Notwithstanding the previous sentence, any shares of
common stock that are determined to constitute a payment in respect of dividends
in arrears on our Series C Preferred  Stock will be taxable as ordinary  income.
Except as described  below,  the gain  recognized upon such a redemption will be
capital  gain and will be  long-term  if the  holding  period for your  Series C
Preferred  Stock redeemed is more than one year. Your basis for our common stock
received  will equal your basis in your Series C Preferred  Stock  redeemed plus
any gain  recognized  and minus the cash  received.  Your holding period for the
common stock will include  your holding  period in the Series C Preferred  Stock
redeemed.

     If the redemption has the effect of the  distribution  of a dividend,  then
the gain recognized upon the redemption, as determined above, will be treated as
a dividend taxable as ordinary income to the extent of your ratable share of our
earnings and profits. The remainder of the gain will be capital gain and will be
long-term if the holding  period for your Series C Preferred  Stock  redeemed is
more  than one year.  For  purposes  of  determining  whether  your gain will be
treated as a dividend,  stock (including our common stock) owned by you actually
and constructively through attribution rules, will be taken into account.

     OTHER SALES AND DISPOSITIONS

     Except as set forth  above,  gain or loss you  realize on the sale or other
disposition  of shares of our Series C Preferred  Stock will be capital  gain or
loss, and will be long-term capital gain or loss if you held the shares for more
than one year.  The amount of your gain or loss will be equal to the  difference
between your tax basis in the shares of our Series C Preferred Stock disposed of
and the amount realized on the disposition.

     INFORMATION REPORTING AND BACKUP WITHHOLDING

     Payment of dividends and sales or redemption  proceeds that are made within
the  United  States or through  certain  U.S.-related  financial  intermediaries
generally are subject to information  reporting and to backup withholding unless
(i) you are a  corporation  or other exempt  recipient  or (ii),  in the case of
backup  withholding,  you provide a correct taxpayer  identification  number and
certify that no loss of exemption from backup withholding has occurred.

     The amount of any backup  withholding from a payment to you will be allowed
as a credit  against your U.S.  federal income tax liability and may entitle you
to a refund, provided that the required information is furnished to the Internal
Revenue Service.






                             SELLING SECURITYHOLDERS

     The Series C Preferred  Stock,  and any shares of our common  stock  issued
upon  conversion  of the  Series C  Preferred  Stock,  are being  offered by the
selling securityholders listed in the table below. We issued and sold the Series
C  Preferred  Stock in a private  placement  to the initial  purchasers,  Morgan
Stanley & Co.  Incorporated  and  Deutsche  Bank  Securities  Inc.  The  selling
securityholders  purchased  their  Series C  Preferred  Stock  from the  initial
purchasers or from subsequent  holders in transactions  exempt from registration
under the Securities Act.

     This  prospectus  covers sales,  by the named selling  securityholders,  of
Series C Preferred  Stock and shares of common stock issued upon any  conversion
of the Series C Preferred Stock by the selling  securityholder.  This prospectus
will not cover  subsequent sales of our common stock received upon conversion of
Series C Preferred Stock purchased from a selling  securityholder  named in this
prospectus.

     No offer or sale  under  this  prospectus  may be made by a  securityholder
unless  that  holder  is  listed in the table  below,  in a  supplement  to this
prospectus  or in an amendment to the related  registration  statement  that has
become  effective.  We will  supplement  or amend  this  prospectus  to  include
additional  selling  securityholders  upon  request  and upon  provision  of all
required  information  to us,  subject to the terms of the  Registration  Rights
Agreement, dated as of May 5, 2003 between KCS and the initial purchasers.

     The  following  table sets forth  certain  information,  as of November 11,
2003,  about the amount of Series C Preferred Stock  beneficially  owned by each
selling  security  holder and the number of shares of common stock issuable upon
conversion of the Series C Preferred Stock that may be offered from time to time
pursuant to this prospectus.

     The percentage of Series C Preferred Stock outstanding  beneficially  owned
by each selling security holder is based on 400,000 shares of Series C Preferred
Stock  outstanding.  The  number of shares of common  stock  owned  prior to the
offering does not include shares of common stock issuable upon conversion of the
Series C  Preferred  Stock.  The number of shares of common  stock  shown in the
table below assumes conversion of all shares of Series C Preferred Stock held by
such holder at the initial conversion rate of 33.4728 shares of common stock per
share of Series C Preferred Stock. This conversion rate is subject to adjustment
as described under "Description of the Series C Preferred  Stock--Adjustments to
the Conversion Rate." Accordingly, the number of shares of common stock issuable
upon  conversion  of the Series C Preferred  Stock may increase or decrease from
time to time.  Under the certificate of designations  for the Series C Preferred
Stock,  fractional  shares  will not be issued upon  conversion  of the Series C
Preferred Stock. Cash will be paid instead of fractional shares, if any.

     The following table has been prepared based upon the information  furnished
to us by the selling security holders.  The selling security holders  identified
below may have sold,  transferred or otherwise  disposed of some or all of their
Series  C  Preferred  Stock  since  the  date on which  the  information  in the
preceding table is presented in  transactions  exempt from or not subject to the
registration  requirements of the Securities Act of 1933. Information concerning
the selling security holders may change from time to time and, if necessary,  we
will supplement this  prospectus  accordingly.  We cannot give an estimate as to
the amount of Series C Preferred  Stock or common stock issuable upon conversion
thereof that will be held by the selling  security  holders upon the termination
of this offering  because the selling  security holders may offer some or all of
their  Series C  Preferred  Stock  or  common  stock  pursuant  to the  offering
contemplated by this prospectus. See "Plan of Distribution."

     Except as otherwise  disclosed  in  footnotes  to the table  below,  to our
knowledge, other than their ownership of the securities described below, none of
the selling  security  holders has, or has had within the past three years,  any
position,  office  or  other  material  relationship  with  us  or  any  of  our
predecessors or affiliates.







                                                                                                

                                         NUMBER OF
                                         SHARES OF
                                          SERIES C
                                         PREFERRED                       NUMBER OF      NUMBER OF
                                           STOCK       PERCENTAGE OF     SHARES OF      SHARES OF
                                        BENEFICIALLY     SERIES C          COMMON        COMMON
                                           OWNED         PREFERRED      STOCK OWNED    STOCK THAT    PERCENTAGE OF
                                         THAT MAY          STOCK        PRIOR TO THE     MAY BE       COMMON STOCK
                 NAME                     BE SOLD       OUTSTANDING     OFFERING(1)      SOLD(2)     OUTSTANDING(3)
                 ----                   ------------   -------------    -------------  -----------   ---------------
Alexandra Global Master Fund LTD               1,500                *               0       50,209                 *
Allstate Insurance Company                     2,000                *          16,300       66,945                 *
Alpine Associates                             10,540            2.64%               0      352,803                 *
Alpine Partners, L.P.                          1,360                *               0       45,523                 *
B.G.I. Global Investors                          200                *               0        6,694                 *
Bank Austria Cayman Islands, LTD               2,000                *               0       66,945                 *
BNP Paribas Equity Strategies, SNC             2,065                *          19,211       69,121                 *
BP Amoco PLC Master Trust                      2,026                *               0       67,815                 *
Clinton Multistrategy Master Fund,
Ltd.                                           4,250            1.06%               0      142,259                 *
Clinton Riverside Convertible
Portfolio Limited                              4,500            1.13%               0      150,627                 *
Context Convertible Arbitrage Fund,
L.P.                                           3,340                *               0      111,799                 *
CooperNeff Convertible Strategies
(Cayman) Master Fund, L.P.                     2,160                *               0       72,301                 *
CQS Convertible & Quantitative
Strategies Master Fund Limited                50,500           12.63%               0    1,690,376             2.66%
CSFB Convertible & Quantitative
Strategies Master Fund Limited                50,500           12.63%               0    1,690,376             2.66%
DBAG London                                    5,000            1.25%               0      167,364                 *
Forest Fulcrum Fund LP                         3,000                *               0      100,418                 *
Grace Convertible Arbitrage Fund, Ltd.         4,800            1.20%               0      160,669                 *
Guggenheim Portfolio Co. XV, LLC               1,500                *               0       50,209                 *
Hotel Union & Hotel Industry of
Hawaii Pension Plan                              732                *               0       24,502                 *
Hourglass Master Fund, Ltd.                    2,975                *               0       99,581                 *
Jefferies & Company Inc.                          18                *               0          602                 *
KD Convertible Arbitrage Fund L.P.             3,660                *               0      122,510                 *
LLT Limited                                      700                *               0       23,430                 *
Lyxor/Convertible Arbitrage Fund, Ltd.           140                *               0        4,686                 *
Lyxor Master Fund Ref.: Silverado                450                *               0       15,062                 *
McMahan Securities Co. L.P.                      350                *               0       11,715                 *
Morgan Stanley & Co. Incorporated(4)          31,239            7.81%          70,922    1,045,656             1.77%
Morgan Stanley Dean Witter
Convertible Securities Trust                   3,000                *               0      100,418                 *
Newport Alternative Income Fund                1,140                *               0       38,158                 *
OIP Limited                                    2,730                *               0       91,380                 *
Pacific Life Insurance Company                   250                *               0        8,368                 *
Pendragon Guinevere Fund L.L.C.                8,051            2.01%               0      269,489                 *
Pendragon Convertible Fund Limited             5,699            1.42%               0      190,761                 *
Polaris Vega Fund L.P.                         2,150                *               0       71,966                 *
Putnam Convertible Income - Growth
Trust                                         15,000            3.75%               0      502,092                 *
RCG Latitude Master Fund, LTD                  4,250            1.06%               0      142,259                 *
RCG Multi Strategy Master Fund, LTD            3,000                *               0      100,418                 *
Radcliffe SPC, Ltd. for and on behalf
of the Class A Convertible Crossover
Segregated Portfolio                          12,500            3.13%               0      418,410                 *
RAM Trading LTD                                2,500                *               0       83,682                 *
Ramius Master Fund, LTD                        7,250            1.81%               0      242,677                 *
Silverado Arbitrage Trading, LTD                 550                *               0       18,410                 *





                                         NUMBER OF
                                         SHARES OF
                                          SERIES C
                                         PREFERRED                       NUMBER OF      NUMBER OF
                                           STOCK       PERCENTAGE OF     SHARES OF      SHARES OF
                                        BENEFICIALLY     SERIES C          COMMON        COMMON
                                           OWNED         PREFERRED      STOCK OWNED    STOCK THAT    PERCENTAGE OF
                                         THAT MAY          STOCK        PRIOR TO THE     MAY BE       COMMON STOCK
                 NAME                     BE SOLD       OUTSTANDING     OFFERING(1)      SOLD(2)     OUTSTANDING(3)
                 ----                   ------------   -------------    -------------  -----------   ---------------
Silverback Master, LTD                        34,100            8.53%               0    1,141,422             1.81%
Silvercreek II Limited                         3,230                *               0      108,117                 *
Silvercreek Limited Partnership                6,900            1.73%               0      230,962                 *
Singlehedge U.S. Convertible
Arbitrage Fund                                   340                *               0       11,380                 *
Sphinx Convertible Arb Fund SPC                  711                *               0       23,799                 *
SSI Blended Market Neutral L.P.                1,025                *               0       34,309                 *
SSI Hedged Convertible Market Neutral
L.P.                                           1,117                *               0       37,389                 *
Sturgeon Limited                                 295                *               0        9,874                 *
Sunrise Partners Limited Partnership           5,250            1.31%               0      175,732                 *
TQA Master Plus Fund, Ltd.                     5,000            1.25%               0      167,364                 *
UBS A6 London Branch                          24,500            6.13%               0      820,083             1.31%
UBS O'Connor LLC F/B/O O'Connor
Global Convertible Portfolio                     500                *               0       16,736                 *
Viacom Inc. Pension Plan Master Trust             66                *               0        2,209                 *
Wachovia Bank National Association             6,000            1.50%               0      200,836                 *
Xavex Convertible Arbitrage #5                 1,000                *               0       33,472                 *
ZCM Asset Holding Co., Inc.                      525                *               0       17,573                 *
Zurich Institutional Benchmark Master
Fund Ltd.                                      4,305            1.08%               0      144,100                 *
All other beneficial owners(5)(6)             17,551            4.39%               0      587,481                 *

TOTAL(7)                                     371,990           93.00%         106,433   12,451,547            16.88%




*    Less than one percent.

(1)  Does not include  shares of common stock  issuable  upon  conversion of the
     Series C Preferred Stock.
(2)  Consists of shares of common stock issuable upon conversion of the Series C
     Preferred  Stock,  assuming a conversion  rate of 33.4728  shares of common
     stock for each share of Series C Preferred Stock and a cash payment in lieu
     of any  fractional  share  interest.  The  conversion  rate is  subject  to
     adjustment  as  described  under  "Description  of the  Series C  Preferred
     Stock--Adjustments  to the  Conversion  Rate."  Accordingly,  the number of
     shares of common stock  issuable upon  conversion of the Series C Preferred
     Stock may increase or decrease from time to time. Numbers have been rounded
     down to whole numbers due to fact that fractional shares will not be issued
     upon conversion of the Series C Preferred  Stock. The "total" for number of
     shares of common  stock  that may be sold is based on the  conversion  rate
     applied to the total shares of Series C Preferred  Stock  remaining  unsold
     under the registration statement.
(3)  Calculated based on Rule 13d-3(d)(1)  under the Securities  Exchange Act of
     1934, as amended,  using 61,858,375  shares of common stock  outstanding on
     September 30, 2003. In calculating  this amount,  we treated as outstanding
     the number of shares of common stock issuable upon conversion of the Series
     C Preferred Stock by the applicable holder.  However, we did not assume the
     conversion of any other holder's Series C Preferred Stock.
(4)  Morgan  Stanley  Senior  Funding,  Inc.  was a lender  under  KCS's  credit
     facility.  In addition,  during the past three years,  Morgan Stanley & Co.
     Incorporated  and/or its affiliates have performed  financial  advisory and
     investment banking services for KCS. Morgan Stanley & Co., Incorporated was
     an initial  purchaser of 80% of the Series C Preferred Stock in the private
     placement of these securities.
(5)  We  will  identify   additional  selling  security  holders,   if  any,  by
     post-effective amendment before they offer or sell their securities.
(6)  Assumes that the unnamed  holders of Series C Preferred Stock or any future
     transferees,  pledgees or donees of or from any such unnamed  holder do not
     beneficially own any common stock other than the common stock issuable upon
     conversion of the Series C Preferred Stock at the initial conversion rate.
(7)  Does not include 28,010 shares of Series C Preferred  Stock sold by selling
     security  holders which shares are  convertible  into 937,570 shares of KCS
     common stock,  assuming a conversion rate of 33.4728 shares of common stock
     for each share of Series C  Preferred  Stock and a cash  payment in lieu of
     any fractional share interest.






                              PLAN OF DISTRIBUTION

     The Series C Preferred  Stock and the common stock are being  registered to
permit public secondary  trading of these securities by the holders thereof from
time to time after the date of this  prospectus.  We have  agreed,  among  other
things,  to bear all expenses  (other than  underwriting  discounts  and selling
commissions)  in connection  with the  registration  and sale of the  securities
covered by this prospectus.

     We will not receive any of the  proceeds  from the  offering by the selling
securityholders  of Series C Preferred  Stock or the common stock into which the
Series C Preferred  Stock is  convertible.  We have been  advised by the selling
securityholders  that the selling  securityholders  may sell all or a portion of
the Series C Preferred  Stock and common  stock  beneficially  owned by them and
offered  hereby from time to time on any  exchange on which the  securities  are
listed  on terms  to be  determined  at the  times of such  sales.  The  selling
securityholders  may also make  private  sales  directly  or through a broker or
brokers. Alternatively, any of the selling securityholders may from time to time
offer the Series C Preferred  Stock or the common  stock  beneficially  owned by
them through  underwriters,  dealers or agents, who may receive  compensation in
the form of underwriting discounts,  commissions or concessions from the selling
securityholders  and the  purchasers  of the  Series C  Preferred  Stock and the
common  stock for whom  they may act as agent.  The  aggregate  proceeds  to the
selling  securityholders from the sale of the Series C Preferred Stock or common
stock  offering  by them  hereby  will be the  purchase  price of such  Series C
Preferred Stock or common stock less discounts and commissions, if any.

     The Series C Preferred Stock and common stock may be sold from time to time
in one or more transactions at fixed offering prices,  which may be changed,  or
at varying prices determined at the time of sale or at negotiated prices.  These
prices will be  determined  by the holders of such  securities  or by  agreement
between  these  holders and  underwriters  or dealers  who may  receive  fees or
commissions in connection therewith.

         These transactions may include block transactions or crosses. Crosses
are transactions in which the same broker acts as an agent on both sides of the
trade. These transactions may be effected (i) on any national securities
exchange or quotation service on which the Series C Preferred Stock or common
stock may be listed or quoted at the time of sale, (ii) in the over-the-counter
market, (iii) in transactions otherwise than on such exchanges or services or in
the over-the-counter market, (iv) through the writing of options (including the
issuance by the selling securityholder of derivative securities), whether the
options or such other derivative securities are listed on an options or other
exchange or otherwise, (v) through the settlement of short sales, or (vi) any
combination of the foregoing.

     In connection  with the sales of the Series C Preferred Stock or our common
stock  or  otherwise,   the  selling   securityholder  may  enter  into  hedging
transactions with  broker-dealers  or others,  which may in turn engage in short
sales of the  Series C  Preferred  Stock or our  common  stock in the  course of
hedging the  positions  they assume.  The selling  securityholder  may also sell
Series  C  Preferred  Stock or our  common  stock  short  and  deliver  Series C
Preferred  Stock or our common  stock to close out short  positions,  or loan or
pledge Series C Preferred Stock or our common stock to  broker-dealers or others
that in turn may sell such securities. The selling securityholder may enter into
option or other transactions with broker-dealers or other financial institutions
that require the delivery to the  broker-dealer or other financial  institutions
of the Series C Preferred Stock or the common stock,  which the broker-dealer or
other financial institution may resell pursuant to the prospectus, or enter into
transactions in which a broker-dealer  makes purchases as a principal for resale
for its  own  account  or  though  other  types  of  transactions.  The  selling
securityholder  may  pledge or grant a security  interest  in some or all of the
Series C  Preferred  Stock or our common  stock  issued upon  conversion  of the
Series C Preferred  Stock owned by it and if it defaults in the  performance  of
its secured obligations,  the pledgees or secured parties may offer and sell the
Series C Preferred  Stock or our common stock from time to time pursuant to this
prospectus.  The selling  securityholder  also may transfer and donate  Series C



Preferred  Stock or shares of our common stock  issuable upon  conversion of the
Series C Preferred Stock in other  circumstances  in which case the transferees,
donees,   pledgees  or  other   successors  in  interest  will  be  the  selling
securityholder  for purposes of the prospectus.  The selling  securityholder may
sell short our common stock and may deliver this  prospectus in connection  with
such  short  sales  and  use the  shares  of our  common  stock  covered  by the
prospectus to cover such short sales. In addition,  any Series C Preferred Stock
or shares of our common stock covered by this  prospectus  that qualify for sale
pursuant  to  Rule  144,  Rule  144A  or  any  other  available  exemption  from
registration  under the  Securities Act may be sold under Rule 144, Rule 144A or
such other available exemption.

     At the time a particular  offering of Series C Preferred Stock or shares of
our common stock  issuable upon  conversion  of the Series C Preferred  Stock is
made, a prospectus supplement,  if required,  will be distributed which will set
forth the  aggregate  amount of Series C Preferred  Stock or number of shares of
our common stock being offered and the terms of the offering, including the name
or names of any  underwriters,  dealers,  brokers  or  agents,  if any,  and any
discounts, commissions or concessions allowed or reallowed to be paid to brokers
or dealers.

     Our  outstanding  common  stock is listed for trading on the New York Stock
     Exchange.

     The  Series  C  Preferred  Stock  was  issued  and  sold on May 5,  2003 in
transactions exempt from the registration  requirements of the Securities Act to
persons  reasonably   believed  by  the  Initial  Purchasers  to  be  "qualified
institutional  buyers" (as defined in Rule 144A under the  Securities  Act).  We
have agreed to indemnify each selling  securityholder  and each person,  if any,
who controls any selling securityholder (within the meaning of either Section 15
of the  Securities  Act or Section 20 of the  Exchange  Act),  and each  selling
securityholder has agreed to indemnify us, our directors,  our officers who sign
the  registration  statement  of  which  this  prospectus  forms a part and each
person,  if any, who controls us (within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange  Act),  each  underwriter  and each
person who controls any underwriter within the meaning of the Securities Act (in
the case of an  underwritten  offering)  and each other  selling  securityholder
against certain liabilities arising under the Securities Act.

     Selling  securityholders and any underwriters,  dealers,  brokers or agents
who  participate  in the  distribution  of the Series C  Preferred  Stock or our
common  stock may be deemed  to be  "underwriters"  within  the  meaning  of the
Securities  Act and any profits on the sale of the Series C Preferred  Stock and
our common stock by them and any discounts,  commissions or concessions received
by any such  underwriters,  dealers,  brokers  or  agents  may be  deemed  to be
underwriting discounts and commissions under the Securities Act.

     The selling  securityholders  and any other  person  participating  in such
distribution  will be subject to  applicable  provisions of the Exchange Act and
the rules and regulations thereunder,  including, without limitation, Regulation
M which may limit the timing of  purchases  and sales of the Series C  Preferred
Stock and our common  stock by the  selling  securityholders  and any other such
person.  Furthermore,  Regulation  M under the  Exchange  Act may  restrict  the
ability of any person engaged in a distribution  of the Series C Preferred Stock
and our common stock being  distributed for a period of up to five business days
prior to the commencement of such distribution.  All of the foregoing may affect
the  marketability  of the Series C Preferred Stock and our common stock and the
ability  of any  person or entity to  engage in  market-making  activities  with
respect to the Series C Preferred Stock and our common stock.

     We will use our best  efforts to keep the  registration  statement of which
this  prospectus is a part  effective  until the earliest of (i) the sale to the
public  pursuant to Rule 144 (or any similar  provision  then in force,  but not
Rule 144A) under the Securities Act or the registration  statement of which this
prospectus forms a part of all the securities  registered  thereunder,  and (ii)
the  expiration  of the holding  period  applicable to such  securities  held by
persons that are not our  affiliates  under Rule 144(k) under the Securities Act
or any successor provision, subject to permitted exceptions.






                        FINANCIAL STATEMENTS OF GRUPO TFM

     The combined and  consolidated  financial  statements for Grupo TFM for the
year ended December 31, 2000 and as of and for the years ended December 31, 2001
and 2002 and the notes thereto are  incorporated  herein by reference to Exhibit
99.3 to our annual report on Form 10-K for the year ended December 31, 2002.







                         PRO FORMA FINANCIAL INFORMATION

In  April  2003,  KCS  completed  the sale of  400,000  shares  of its  Series C
Preferred  Stock,  resulting in net proceeds of  approximately  $193.2  million.
Annual preferred stock dividends related to these shares are approximately  $8.5
million,  which will be reflected as a reduction of net earnings in  determining
earnings  available  to common  stockholders  and  earnings per share in periods
following the sale of the Series C Preferred Stock. Additionally,  to the extent
that the assumed  conversion  of these shares into  13,389,121  shares of common
stock would have a dilutive  impact on earnings  per share,  such shares will be
included in the computation of diluted earnings per share in future periods.

In April 2003,  KCS and Grupo TMM announced a series of  transactions  that were
approved by both  respective  boards of  directors,  that would,  following  KCS
shareholder  approval and satisfaction of other conditions,  place KCSR, Tex-Mex
and TFM under the common  control of a single  transportation  holding  company,
NAFTA Rail.  Grupo TFM holds an 80% interest in TFM,  which held a 100% interest
in Mexrail. Mexrail wholly-owns Tex-Mex.

Under the terms of the agreement, Multimodal, a subsidiary of TMM, would receive
18 million shares of NAFTA Rail  representing  approximately 22% (20% voting, 2%
subject to voting  restrictions) of NAFTA Rail outstanding  shares, $200 million
in cash and a  potential  incentive  payment of between  $100  million  and $180
million based upon the resolution of certain future  contingencies.  See Note 17
of the  Notes to Pro  Forma  Condensed  Consolidated  Financial  Statements  for
further information.

On August 23, 2003,  Grupo TMM sent a notice to KCS  claiming to  terminate  the
Acquisition  Agreement  because  Grupo TMM  shareholders  failed to approve  the
Acquisition Agreement.  Accordingly,  while KCS intends to pursue all reasonable
legal means available to it in enforcing the Acquisition Agreement, no assurance
can be given  that KCS will be able to  consummate  the  Acquisition.  See "Risk
Factors--KCS  Risk  Factors--Risks  Related to Our Business--We may be unable to
complete the Acquisition."

Notwithstanding this uncertainty, the following pro forma condensed consolidated
financial  statements are presented to illustrate the impact of the  Acquisition
on the KCS's  historical  financial  statements  and  reflect  the effect of the
various   transactions   necessary  to  consummate  the  agreements  as  if  the
transaction had occurred on January 1, 2002 for income statement  purposes as of
and for the year ended  December 31, 2002 and the six months ended June 30, 2003
and as of June 30, 2003 for balance sheet  purposes.  The  historical  financial
statements  of Grupo TFM are  prepared  under the  principles  of  International
Accounting Standards ("IAS") and include a reconciliation between U.S. Generally
Accepted  Accounting  Principles  ("US GAAP") and IAS. The Grupo TFM  historical
financial  information  included  in these pro  forma  financial  statements  is
reflected under US GAAP and therefore no reconciliation of financial information
between US GAAP and IAS is required for these purposes.








                                                                                                       

                              KANSAS CITY SOUTHERN
                 PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
                               AS OF JUNE 30, 2003
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)                                            PRO FORMA
                                                                                         ADJUSTMENTS
                                                       KCS          GRUPO TFM            -----------                   PRO
                                                   HISTORICAL       HISTORICAL     DEBIT             CREDIT           FORMA
                                                   ----------       ----------     -----             ------           -----

ASSETS:
Current Assets:
  Cash and cash equivalents                           $  191.9       $  17.2                           $200.0 (4)        $ 9.1
  Accounts receivable, net                               116.8         195.8                              4.0 (11)       308.6
  Inventories                                             35.6          18.5                                              54.1
  Other current assets                                    31.9           7.1                                              39.0
                                                   ------------   -----------    -----------        ----------      -----------
TOTAL CURRENT ASSETS                                     376.2         238.6            -               204.0            410.8
                                                   ------------   -----------    -----------        ----------      -----------

Investments                                              460.8           8.0                            417.2             51.6
Concession rights and related assets                        -        1,195.6           45.5 (2,7,10)      6.3 (2,3)    1,234.8
Properties, net                                        1,344.3         647.7                                           1,992.0
Goodwill                                                  10.6            -                                               10.6
Deferred income taxes and employees
   statutory profit sharing                                 -          180.9                                             180.9
Other assets                                              24.6          33.8                                              58.4
                                                   ------------   -----------    -----------        ----------      -----------
TOTAL ASSETS                                          $2,216.5      $2,304.6        $  45.5            $627.5         $3,939.1
                                                   ============   ===========    ===========        ==========      ===========

LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
  Debt due within one year                             $  10.0       $  36.9                                           $  46.9
  Accounts and wages payable and accrued
     liabilities                                         177.6         153.7           36.7 (1,11)                       294.6
                                                   ------------   -----------    -----------        ----------      -----------
TOTAL CURRENT LIABILITIES                                187.6         190.6           36.7                -             341.5
                                                   ------------   -----------    -----------        ----------      -----------

OTHER LIABILITIES:
  Long-term debt                                         570.1         929.4                                           1,499.5
  Deferred income taxes                                  396.6            -                              15.0 (10)       411.6
  Other deferred credits                                  97.3          37.8            6.3 (3)                          128.8
                                                   ------------   -----------    -----------        ----------      -----------
TOTAL OTHER LIABILITIES                                1,064.0         967.2            6.3              15.0          2,039.9
                                                   ------------   -----------    -----------        ----------      -----------

MINORITY INTEREST                                           -          350.7             -               39.4 (16)       390.1
                                                   ------------   -----------    -----------        ----------      -----------

STOCKHOLDERS' EQUITY
  Preferred stock                                          6.1            -              -                 -               6.1
  Redeemable cumulative convertible
    perpetual preferred stock                              0.4            -              -                 -               0.4
  Common / capital stock                                   0.6         807.0          807.0 (5)            -               0.6
  New issue, non-voting common, $. 01 par                   -             -              -                0.2 (6)          0.2
  Treasury shares and effect on purchase of
    subsidiary shares                                       -         (222.0)            -              222.0 (5)           -
  Retained earnings                                      959.3         211.1          211.1 (5)            -  (6)        959.3
  Capital surplus                                           -             -              -              202.5 (6)        202.5
  Accumulated other comprehensive loss                   (1.5)            -                                               (1.5)
                                                   ------------   -----------    -----------        ----------      -----------
Total stockholders' equity                               964.9         796.1        1,018.1             424.7          1,167.6
                                                   ------------   -----------    -----------        ----------      -----------

                                                   ------------   -----------    -----------        ----------      -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY            $2,216.5      $2,304.6       $1,061.1            $479.1         $3,939.1
                                                   ============   ===========    ===========        ==========      ===========


See notes to proforma condensed consolidated financial statements.








                                                                                                         
                              KANSAS CITY SOUTHERN
                PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
                     FOR THE SIX MONTHS ENDED JUNE 30, 2003
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)
                                                                                               PRO FORMA
                                                                                              ADJUSTMENTS
                                                                 KCS        GRUPO TFM         -----------               PRO
                                                              HISTORICAL   HISTORICAL    DEBIT          CREDIT         FORMA
                                                              ----------   ----------    -----          ------         -----

REVENUES                                                        $286.5       $345.1                                     $ 631.6

Costs and expenses                                               233.6        238.0          1.7 (14)                     473.3
Depreciation and amortization                                     31.9         42.5          0.6 (15)                      75.0
                                                             ----------   ----------    ---------      ----------   ------------
OPERATING INCOME                                                  21.0         64.6          2.3           -               83.3

Equity in net earnings of unconsolidated affiliates:
    Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V.        4.6          -            4.6  (8)                       -
    Other                                                         (0.1)         -                                         (0.1)
Interest expense                                                 (23.2)      (55.6)                                      (78.8)
Other income (expense)                                             2.8       (10.1)                                       (7.3)
                                                             ----------   ----------    ---------      ----------   ------------
Income (loss) before income taxes, minority and accounting         5.1        (1.1)          6.9           -              (2.9)
    change
Income tax provision (benefit)                                     0.9       (14.1)         (1.1) (10)     -             (14.3)
inority interest                                                    -         (2.7)          0.5  (16)                    (3.2)
                                                             ----------   ----------    ---------      ----------   ------------

INCOME BEFORE ACCOUNTING CHANGE                                    4.2         10.3          6.3           -                8.2
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX                 8.9          -             -            -                8.9
                                                             ----------   ----------    ---------      ----------   ------------

NET INCOME                                                        13.1         10.3          6.3           -               17.1
PREFERRED STOCK DIVIDENDS                                          1.4                       2.9  (12)                      4.3
                                                             ----------   ----------    ---------      ----------   ------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS                     $ 11.7       $ 10.3       $  9.2          $-            $  12.8
                                                             ----------   ----------    ---------      ----------   ------------

BASIC EARNINGS PER COMMON SHARE:
  INCOME BEFORE ACCOUNTING CHANGE                               $ 0.05                                                  $  0.05
                                                             ==========                                             ============
  NET INCOME                                                    $ 0.19                                                  $  0.16 (12)
                                                             ==========                                             ============

Basic Weighted Average Common shares outstanding (IN THOUS)     61,525                                                   79,525 (13)
                                                             ----------                                             ------------

DILUTED EARNINGS PER COMMON SHARE:
  INCOME BEFORE ACCOUNTING CHANGE                            $    0.05                                                  $  0.05
                                                             ==========                                             ============
  NET INCOME                                                 $    0.19                                                  $  0.16 (12)
                                                             ==========                                             ============

Diluted Weighted Average Common shares outstanding (IN          62,922                                                   80,922 (13)
    THOUS)
                                                             ----------                                             ------------


See notes to proforma condensed consolidated financial statements.







                              KANSAS CITY SOUTHERN
                PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
                      FOR THE YEAR ENDED DECEMBER 31, 2002
                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)


                                                                                                        
                                                                                               PRO FORMA
                                                                                              ADJUSTMENTS
                                                                 KCS        GRUPO TFM         -----------               PRO
                                                              HISTORICAL   HISTORICAL     DEBIT          CREDIT        FORMA
                                                              ----------   ----------     -----          ------        -----

REVENUES                                                        $566.2       $712.1                                    $1,278.3

Costs and expenses                                               456.8        457.6           3.4 (14)                    917.8
Depreciation and amortization                                     61.4         83.0           1.2 (15)                    145.6
                                                             ----------   ----------    ----------      ---------    -----------
OPERATING INCOME                                                  48.0        171.5           4.6          -              214.9

Equity in net earnings (losses) of unconsolidated affiliates:
    Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V.       45.8           -           45.8 (8)                        -
    Other                                                         (2.4)          -                                        (2.4)
Gain on sale of Mexrail, Inc.                                      4.4           -            4.4 (9)                       -
Interest expense                                                 (45.0)       (95.8)                                     (140.8)
Debt retirement costs                                             (4.3)          -                                         (4.3)
Other income (expense)                                            17.6        (29.8)                                      (12.2)
                                                             ----------   ----------    ----------      ---------    -----------
Income before income taxes                                        64.1         45.9          54.8          -               55.2
Income tax provision (benefit)                                     6.9        (91.5)         (3.0) (10)    -              (87.6)
                                                             ----------   ----------    ----------      ---------    -----------

INCOME BEFORE MINORITY INTEREST                                   57.2        137.4          51.8          -              142.8
MINORITY INTEREST                                                   -         (27.3)         17.0 (16)                    (44.3)
                                                             ----------   ----------    ----------      ---------    -----------

NET INCOME                                                        57.2        110.1          68.8                          98.5
PREFERRED STOCK DIVIDENDS                                          0.2                        8.5 (12)                      8.7
                                                             ----------   ----------    ----------      ---------    -----------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS                     $ 57.0       $110.1        $ 77.3         $-            $  89.8
                                                             ----------   ----------    ----------      ---------    -----------

BASIC EARNINGS PER COMMON SHARE                                 $ 0.94                                                  $  1.15 (12)
                                                             ==========                                              ===========

Basic Weighted Average Common shares outstanding (IN THOUS)     60,336                                                   78,336 (13)
                                                             ----------                                              -----------


DILUTED EARNINGS PER COMMON SHARE                               $ 0.91                                                  $  1.05 (12)
                                                             ==========                                              ===========

Diluted Weighted Average Common shares outstanding (IN
    THOUS)                                                      62,138                                                   93,527 (13)
                                                             ----------                                              -----------






See notes to proforma condensed consolidated financial statements.






                              KANSAS CITY SOUTHERN
                              --------------------
         NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
         --------------------------------------------------------------


Note 1: Removal of the Equity Investment in Grupo TFM & Mexrail
---------------------------------------------------------------

Pursuant to the  Acquisition  Agreement,  Kansas City Southern (the "Company" or
"KCS") would acquire a controlling interest in Grupo Transportacion  Ferroviaria
Mexicana,  S.A. de C.V.  ("Grupo TFM"),  resulting in the full  consolidation of
Grupo TFM's balance sheet into NAFTA Rail,  successor to KCS.  Accordingly,  the
equity  investment  as of June 30, 2003  reflected  on the  Company's  condensed
consolidated balance sheet would be eliminated.

On May 9, 2003,  the  Company  closed on its 51%  investment  in  Mexrail,  Inc.
("Mexrail") for a total of $32.7 million. The Mexrail shares have been placed in
a voting trust while awaiting the approval of the Surface  Transportation  Board
("STB").  Since the acquisition of the  controlling  interest in Mexrail has not
been approved and Grupo TFM holds a right of  repurchase,  the Company and Grupo
TFM consider this  investment in Mexrail as  temporary.  Accordingly,  Grupo TFM
continues to  consolidate  the balance  sheet and  operating  results of Mexrail
pending  approval of the  transaction.  The pro forma balance sheet  reflects an
elimination  adjustment  to remove the  Company's  $32.7  million  investment in
Mexrail  against the current  liability  recorded on the balance  sheet of Grupo
TFM.

Note 2: Creation of Identifiable Intangible Assets
--------------------------------------------------

Additional  identifiable  intangibles  or goodwill may result from the Grupo TFM
acquisition.  The current  value of the  consideration  to obtain a  controlling
interest  in Grupo TFM  exceeds the  current  book value of the  underlying  net
assets of  approximately  $16.7  million,  which is reflected  on the  condensed
consolidated  pro forma balance sheet as an addition to concession  assets.  The
Company has not completed a fair value appraisal or any associated allocation of
excess  purchase price to the fair value of tangible  assets as of this date. At
the time those  processes are  completed,  the  allocation of the purchase price
could change and may include certain  identifiable  intangibles  assets, such as
customer  contracts,  customer  relationships  or similar items. For purposes of
these pro forma  financial  statements the Company has assumed the difference in
value would be assigned to concession assets.


Note 3: Recognition of the Deferred Gain on the sale of Mexrail
---------------------------------------------------------------

On April 1, 2002,  the Company sold its 49% interest in Mexrail to TFM,  S.A. de
C.V.  ("TFM") for $31.4  million  resulting in a pre-tax  gain of $4.4  million,
which was  reported in the  Company's  Consolidated  Statement of Income for the
year ended  December 31,  2002.  In addition,  the  transaction  resulted in the
recognition of a deferred gain, of which $6.3 million remained unamortized as of
June 30, 2003.  Assuming the transaction  contemplated  had occurred on June 30,
2003, the remaining unamortized gain on the April 2002 Mexrail transaction would
be eliminated  from the Company's  long-term  liabilities  and reflected with an
offsetting adjustment to concession assets as part of the transaction.  Also see
notes 2 and 9.

Note 4: Transaction Financing
-----------------------------

As described above, part of the transaction  consideration includes a payment of
$200  million.  This  payment may be made by the  Company,  at its option,  in a
combination of additional common stock issuance to TMM and cash. For purposes of
these pro forma  financial  statements  the Company has assumed  that the entire
payment  of $200  million  will be made in cash  with a  combination  of the net



proceeds  of the  sale of  4.25%  Redeemable  Cumulative  Convertible  Perpetual
Preferred Stock ("Convertible Preferred Stock") of approximately $193.0 million,
completed in April 2003, and $7.0 million of the Company's  available  cash. The
pro forma  financial  statements  presented  herein  reflect the effect of these
transactions. Also see note 6.

The Convertible  Preferred Stock is redeemable at the option of a holder only in
the event of a  "fundamental  change",  which is defined as "any  transaction or
event  (whether  by means  of an  exchange  offer,  liquidation,  tender  offer,
consolidation,  merger,  combination,   reclassification,   recapitalization  or
otherwise) in connection  with which all or  substantially  all of the Company's
Common stock is  exchanged  for,  converted  into,  acquired for or  constitutes
solely the right to receive  common stock that is not listed on a United  States
national  securities  exchange or approved for quotation on the Nasdaq  National
Market or similar system. The practical effect of this provision is to limit the
Company's  ability to  eliminate a holder's  ability to convert the  Convertible
Preferred Stock into common shares of publicly traded security  through a merger
or  consolidation  transaction.   In  no  other  circumstances  is  the  Company
potentially  obligated  to  redeem  the  Convertible  Preferred  Stock for cash.
Accordingly,  since the  Company  is in a  position  to  control a  "fundamental
change" the  Convertible  Preferred  Stock is  classified  as  permanent  equity
capital.

Note 5: Elimination of Grupo TFM Stockholders' Equity
-----------------------------------------------------

As a result of NAFTA Rail  obtaining a  controlling  interest in Grupo TFM,  its
assets and liabilities would be consolidated with NAFTA Rail. Accordingly, Grupo
TFM's  stockholders'  equity  amounts would be  eliminated in the  consolidation
process.

Note 6: Issuance of New Securities
----------------------------------

As noted  above,  TMM would  receive as  consideration  for the  transaction  18
million shares of NAFTA Rail. This pro forma adjustment reflects the addition to
stockholders'  equity  of a total of $202.7  million  of  equity  based  upon 18
million  common  shares as part of the initial  agreement  and  assuming a stock
price of $11.26 per share.  The assumed stock price was derived by averaging the
closing price of the Company's common stock five days before and five days after
the  announcement of the transaction on April 21, 2003. The total  allocation of
the new capital is $0.2 million,  which is comprised of 18 million shares of new
non-voting  common stock with a par value of $.01 per share and $202.5  million,
which is reflected as capital surplus representing the value of the stock issued
in excess of par.

In April  2003,  the  Company  issued  400,000  shares of $1.00 par value  4.25%
Convertible  Preferred Stock resulting in net proceeds of  approximately  $193.0
million  (net  of fees of  approximately  $7.0  million).  This  transaction  is
reflected in the accompanying  Company historical  consolidated balance sheet as
of June 30,  2003 as new capital of $0.4  million and capital  surplus of $192.6
million.

Holders of the Convertible Preferred Stock are entitled to receive any dividends
declared by the  Company's  board of  directors  at the rate of 4.25% per annum,
payable  quarterly in arrears on February 15, May 15,  August 15 and November 15
of each year,  commencing August 15, 2003. The dividends are cumulative from the
date of initial issuance and accumulated but unpaid dividends cumulate dividends
at the annual rate of 4.25%.  In  addition,  the Company  will also pay "special
dividends" if it fails to comply with certain  obligations  under a registration
rights  agreement.  A holder may convert its  Convertible  Preferred  Stock into
shares of the Company's Common Stock only under certain circumstances,  relating
to: (i) the trading  price of the Company's  Common Stock;  (ii) a credit rating
downgrade; (iii) the trading price per share of the Convertible Preferred Stock;
(iv) redemption of the Convertible  Preferred  Stock;  and (v) the occurrence of
certain corporate transactions.

The  conversion  rate may be adjusted  upon the  occurrence  of certain  events.
Subject to certain  conditions,  on or after May 20, 2008, the Company will have



the option to redeem some or all of the shares of Convertible Preferred Stock at
a redemption price of 100% of the liquidation  preference,  plus accumulated and
unpaid dividends, if any, to the redemption date. In the event of a "fundamental
change,"  the Company may be  required  to  purchase  shares of the  Convertible
Preferred  Stock at the  option of the  holder  at a price  equal to 100% of the
liquidation  preference  plus any accumulated  and unpaid  dividends,  including
special dividends, if any, to, but excluding, the purchase date.

The Company may elect to pay the  purchase  price in cash,  Common  Stock,  or a
combination  of cash and Common  Stock.  If the  Company  elects to pay all or a
portion of the purchase  price in shares of Common Stock,  the Common Stock will
be  valued  at a  specified  discount.  The  Company  agreed  to file  with  the
Securities and Exchange  Commission a shelf registration  statement with respect
to the resale of the  Convertible  Preferred Stock and the Common Stock issuable
upon  conversion  of the  Convertible  Preferred  Stock  and to keep  the  shelf
registration  statement  effective for a specified  period of time. In addition,
the  Company  will be required  to pay to holders of the  Convertible  Preferred
Stock liquidated  damages in the form of special dividends or liquidated damages
payments,  as  applicable,  if the  Company  fails to register  the  Convertible
Preferred Stock and the Common Stock issuable upon conversion of the Convertible
Preferred  Stock  within,  and to keep  such  registration  statement  effective
during, the specified time periods.

Note 7: Elimination of Equity Basis Difference in Grupo TFM
-----------------------------------------------------------

The calculation of the Company's net equity in Grupo TFM's underlying net assets
utilizing the Company's current ownership  percentage of approximately  46.6% as
compared  to the  amount  recorded  as an  investment  as of  June  30,  2003 of
approximately  $384.5  million  results in a basis  difference of  approximately
$13.8  million.  This  difference  in basis results from a number of factors the
most significant of which is the changing  ownership interest in Grupo TFM which
produced a difference  in  investment  basis that occurred when TFM acquired the
Mexican  Government's  24.6%  interest  in Grupo TFM  during  2002.  This  basis
difference would have been amortized over time, however, due to the contemplated
transaction wherein the Company will obtain a controlling interest in Grupo TFM,
the  remaining  basis   difference  will  be  recognized  at  the  date  of  the
transaction.  The pro forma financial  statements as stated herein recognize the
elimination of this basis difference as an addition to concession  assets on the
condensed consolidated balance sheet. See Note 2.

Note 8: Elimination of Equity Earnings from Grupo TFM
-----------------------------------------------------

Assuming the contemplated  transaction would have been consummated on January 1,
2002 or January  1, 2003 as  applicable,  the  Company  would have  consolidated
earnings of Grupo TFM and accordingly, the equity in earnings of Grupo TFM would
be eliminated.

Note 9: Elimination of the Gain on the Sale of Mexrail
------------------------------------------------------

In April 2002, the Company sold to Grupo TFM its 49% interest in Mexrail for
$31.4 million. Assuming the contemplated transaction would have occurred as of
January 1, 2002, the sale of Mexrail to Grupo TFM would not have occurred and
accordingly, the associated gain would not have been recorded. The income
statement as of and for the year ended December 31, 2002 for Grupo TFM has been
adjusted to reflect Mexrail as a consolidated subsidiary effective January 1,
2002.

Note 10: Provision for Income Taxes / Deferred Income Taxes
-----------------------------------------------------------

The pro forma condensed  consolidated  income statement  reflects the income tax
impacts of the pro forma adjustments utilizing an income tax rate of 38.25%, but




excluding  any  consideration  of the equity  earnings  of Grupo TFM,  since the
Company has not previously provided a tax provision on these amounts.

In addition, the recognition of additional identifiable intangible assets in the
form  of  concession  assets  creates  an  additional   deferred  tax  liability
associated with those assets. The pro forma condensed consolidated balance sheet
as of June 30, 2003 recognizes the deferred tax liability of approximately $15.0
million using the tax rate noted above.

Note 11: Consolidation Eliminations
-----------------------------------

These pro forma  adjustments  reflect the  elimination of  intercompany  amounts
between the Company,  Grupo TFM and Mexrail,  assuming the three  entities  were
consolidated for financial reporting purposes.

Note 12: Computation of Earnings per Share
------------------------------------------

Basic  earnings  per  share  for  the  purposes  of  the  pro  forma   condensed
consolidated  income statement reflect pro forma  consolidated net income,  less
dividends on the  Company's $25 par preferred  stock of  approximately  $242,000
annually,  less dividends on the Company's $1.00 par Convertible Preferred Stock
of  approximately  $8.5  million  annually,  divided  by  the  weighted  average
outstanding shares as described in note 13 below.

Diluted  earnings  per share  for the  purposes  of the pro  forma  consolidated
condensed  income  statement  reflect pro forma  consolidated  net income,  less
dividends on the  Company's $25 par preferred  stock of  approximately  $242,000
annually,  divided  by  the  weighted  average  diluted  outstanding  shares  as
described in note 13 below.

The assumed  conversion of the Company's $1.00 par  Convertible  Preferred Stock
(convertible into 13,389,121 common shares) would have been anti-dilutive to the
pro forma  diluted  earnings  per  share  computations  in each of the  periods.
Accordingly,  conversion of preferred  shares into common shares was not assumed
and these shares were not included in the pro forma  diluted  earnings per share
computations.  Total  preferred  dividends,  however,  were  subtracted from net
income in the computation of the pro forma diluted earnings per share.

Note 13: Weighted Average Shares Outstanding
--------------------------------------------

The weighted  average basic shares  outstanding  are  calculated  beginning with
Company  historical  average  basic  shares of  (60,336,000  for the year  ended
December 31, 2002 and 61,525,000  for the six months ended June 30, 2003),  plus
18,000,000 assumed shares to be issued as described in the note 6 above.

The weighted  average diluted shares  outstanding are calculated  beginning with
Company  historical  average  diluted shares of  (62,138,000  for the year ended
December  31, 2002 and  62,922,000  for the six months ended June 30, 2003) plus
18,000,000  assumed  shares to be issued as described  in the note 6 above,  but
excluding  the  13,389,121  shares  assuming full  conversion of the  redeemable
cumulative  convertible  perpetual  preferred  stock  into  common  utilizing  a
conversion  rate of 33.4728 for each share of preferred to common.  As stated in
Note 12  above,  the  inclusion  of the  13,389,121  shares  would  have  had an
anti-dilutive  effect on the  computations  of pro forma  dilutive  earnings per
share.







Note 14: Consulting Agreement
-----------------------------

In  connection  with the  transaction,  the  Company  intends  to  enter  into a
consulting  agreement with a consulting firm  ("Consultant")  controlled by Jose
Serrano  Segovia  with an  initial  term of three  years.  In  consideration  of
services  provided,  Consultant  will  receive an annual fee of $0.6  million in
cash,  plus up to 2.1 million shares of restricted  common stock of the Company.
The  restricted  stock vests  based upon the  achievement  of certain  events as
defined  in the  consulting  agreement  and or  ratably  over  the  term  of the
agreement  in  certain  circumstances.  The  pro  forma  condensed  consolidated
financial statements herein reflect the effect of these transactions as follows.
The restricted  stock will be accounted for as  compensation  expense based upon
the assumed  fair market value at date of vesting and expensed in the period the
stock vests.

The annual fee is reflected as additional  operating  costs and expenses of $0.6
million for the year ended December 31, 2002 and $0.3 million for the six months
ended June 30, 2003. An initial 750,000 shares of restricted  stock vest ratably
over the term of the  agreement.  For  purposes of the pro forma  statements  of
income the Company has assumed a calculated  value of stock based upon the stock
price  of  $11.26  as  noted  above.   The  resulting  amount  is  reflected  as
compensation  expense and  amortized on a straight  line basis over three years.
The additional  compensation  expense is approximately $2.8 million for the year
ended December 31, 2002 and approximately  $1.4 million for the six months ended
June 30, 2003. The Company recognizes that the prospective  accounting for these
shares will result in variable  accounting  treatment and the resulting  expense
will be dependent  upon the  Company's  stock price at the actual time the stock
vests. Since the Company cannot predict the future price of the Company's stock,
the pro forma adjustments assume the stock price as noted above.

The consulting  agreement  provides for additional  vesting of restricted  stock
totaling 1,350,000 shares, in increments of 525,000,  125,000 and 700,000 shares
depending on the  achievement of certain  events  ("contingent  shares").  These
events  include the  completion of an agreement with TFM labor unions and events
related to the VAT tax issue.  While the Company  cannot  predict  the  ultimate
timing of  achievement  of these  events and thus pro forma their  effect on the
adjusted financial  statements,  the Company would intend to record compensation
expense at the time and in the quarter or annual  period in which  these  shares
vest,  at then  fair  value as  determined  by the  Company's  stock  price.  No
adjustments for these contingent  shares has been made in the attached pro forma
financial statements due to the uncertainty of their realization and vesting.

The calculated  value of the  restricted  stock is  approximately  $15.2 million
based upon the stock price of $11.26 as noted  above.  The actual  impact to the
Company's financial statements related to the restricted stock is dependant upon
the price of the  Company's  stock at the time the  restricted  stock  vests and
which the Company  cannot  predict.  A $1.00 per share change,  either higher or
lower, in the Company's stock price at the time the restricted stock vests could
result in higher or lower  compensation  expense of approximately  $1.4 million,
assuming all 1.35 million shares vested at the same time.

Note 15: Amortization of Identifiable Intangibles - Concession Assets
----------------------------------------------------------------------

The  transactions  as described  above  result in a net  addition to  concession
assets of approximately  $24.2 million plus $15.0 million of deferred income tax
impact  described  in Note 10  above.  For  purposes  of the  pro  forma  income
statements  presented  herein,  this  balance is  amortized  over the  remaining
amortizable  life  of  the  concession  assets  of 33  years.  This  results  in
additional amortization expense of approximately $1.2 million for the year ended
December 31, 2002 and  approximately  $0.6 million for the six months ended June
30, 2003.





Note 16: Minority Interest
--------------------------

As previously reported,  TFM repurchased the Mexican Government's 24.6% interest
in Grupo TFM in June 2002.  Since the purchase of the Mexican  Government  24.6%
interest  was  completed  by Grupo  TFM's  subsidiary  TFM and the fact that the
Mexican  Government  also continues to maintain a 20% minority  interest in TFM,
the Mexican  Government  retained an indirect 4.9448% minority interest in Grupo
TFM through its  ownership of TFM. The pro forma  adjusting  entries to minority
interest reflect the continuing  indirect minority ownership in Grupo TFM by the
Mexican  Government  for the  periods  indicated.  For the pro  forma  condensed
consolidated  balance sheet as of June 30, 2003 an  additional  $39.4 million of
minority  interest was added to the pro forma balances  representing  4.9448% of
Grupo  TFM's  net  assets.  For  the pro  forma  condensed  consolidated  income
statements,  the amount of  minority  interest in Grupo TFM's US GAAP net income
was computed for the periods presented  resulting in approximately $17.0 million
for the year ended  December  31, 2002 and $0.5 million for the six months ended
June 30, 2003.

Note 17: VAT Related Matters
----------------------------

The impact of any  settlement  of the VAT  dispute  between  TFM and the Mexican
Government on the Company's  consolidated financial statements will be dependent
upon the timing and amount of any such settlement.

It is expected  that the value of any  consideration  received  from the Mexican
Government  from the settlement of the VAT dispute will be recorded as income by
TFM and Grupo TFM,  net of  related  income  taxes.  If a binding  agreement  is
reached before the consummation of the Acquisition, the Company would record its
proportionate  share of any such gain  through  its equity in  earnings of Grupo
TFM,  based  upon  its  existing  ownership  of  46.6%.  If the  Acquisition  is
subsequently consummated, the proceeds from any settlement received and retained
by TFM,  including  the impacts of any  additional  consideration  as may become
payable as  discussed  below,  would  impact  the  Company's  allocation  of the
purchase price to assets  acquired and  liabilities  assumed,  likely  impacting
amounts otherwise  allocable to long-lived  assets,  including  intangibles,  as
presented herein.

If the VAT dispute were settled  following the  consummation of the Acquisition,
the  Company  would  record in income its  proportionate  share of any such gain
through its  consolidation of the operating results of Grupo TFM, based upon its
pre-acquisition   ownership   interest  of  46.6%.   The  portion  of  any  gain
attributable  to  the  acquired  interest  of  TMM  would  likely  constitute  a
pre-acquisition  contingency and not impact the Company's operating results, but
rather would be  considered in the  allocation  of the purchase  price to assets
acquired and liabilities assumed, likely reducing amounts otherwise allocable to
long-lived assets, including intangibles, as presented herein.

Pursuant  to the terms of the  Acquisition,  if the  value of the  consideration
received by TFM in connection with the settlement of the VAT dispute exceeds the
amount  payable  pursuant  to the Put  Agreement  in place  between  the Mexican
Government,  Grupo TFM, TMM and the Company,  whereby the Mexican Government may
put its  ownership  in TFM to the  other  parties,  additional  amounts  will be
payable by the Company or TFM to TMM,  depending  on the amount of such  excess.
Such  payment  would range from $100 million to $180  million.  Any such payment
would constitute additional  consideration for the purchase of TMM's interest in
Grupo TFM and as such would likely  increase  amounts  allocable  to  long-lived
assets, including intangibles, as presented herein.

Note 18: Consideration of  the Mexican Government's Put Rights Regarding its 20%
--------------------------------------------------------------------------------
Minority Interest in TFM
------------------------


The  provisions  of the "Put  Agreement"  obligate  Grupo TFM or the  Company to
purchase the Mexican  Government's  20% minority  interest in TFM under  certain





conditions.  As disclosed in the Company's Form 10-K for the year ended December
31,  2002 and its most  recently  filed Form 10-Q for the period  ended June 30,
2003, the total estimated  purchase price of the Mexican  Government's  minority
interest was  approximately  $485 million and $490  million,  respectively.  The
calculation of the purchase price is dependent upon inflationary  factors of the
Mexican economy and foreign exchange rate factors,  which the Registrant can not
predict.  While  the  Company  along  with  Grupo  TFM are  currently  exploring
financing  alternatives,  the  source  and  cost  any  such  financing  for this
obligation  is not  reasonably  determinable  at this  time.  In  addition,  the
acquisition of the Mexican Government's  interest and funding of this obligation
could be affected by the outcome and  settlement  of TFM's VAT dispute  with the
Mexican Government.

Due to the  uncertainties  noted above,  the  accompanying  pro forma  financial
statements do not reflect the impact of the acquisition of additional  shares of
TFM which could arise under the Put Agreement. If, following the consummation of
the acquisition of Grupo TFM shares from TMM, the Company acquires the remaining
shares of TFM held by the Mexican Government pursuant to the Put Agreement,  the
accompanying  pro forma  financial  statements  would be  generally  impacted as
follows.  The excess of the purchase  price over the carrying  value of minority
interest  would be allocated to the assets and  liabilities  of Grupo TFM, based
upon their fair  values,  with the likely  impact  being an increase to recorded
amounts for  long-lived  assets,  including  intangibles,  as presented  herein.
Additionally, the minority interest in earnings of Grupo TFM would be eliminated
from the pro forma income  statement,  offset by the costs of any debt financing
incurred  to  finance  the  purchase  and  any  increases  in   depreciation  or
amortization expense relating the application of purchase accounting.

Note 19: Subsequent Events
--------------------------

     KCS and TMM are in dispute over TMM's  attempt to terminate  the  agreement
entered into on April 20, 2003 by KCS and TMM and other  parties under which KCS
would acquire  control of TFM. On August 29, 2003,  KCS received a demand by TFM
to  repurchase  from KCS shares of Mexrail sold to KCS in May 2003. On September
23, 2003, the STB issued a decision finding no need to rule on the transfer back
to TFM of the 51%  interest  in Mexrail  that KCS  acquired  on May 9, 2003.  On
September 30, 2003, TFM repurchased the Mexrail shares from KCS at the price KCS
paid TFM in May 2003.  If this  transaction  had occurred on June 30, 2003,  the
Company  would have reduced its  investment  balance and  increased its cash and
equivalents by approximately $32.7 million.






                                  LEGAL MATTERS

     The  validity  of the  issuance  of the  Series C  Preferred  Stock and the
validity of the common stock issuable upon  conversion of the Series C Preferred
Stock  and tax  matters  have been  passed  upon for us by  Sonnenschein  Nath &
Rosenthal LLP, Kansas City, Missouri.

                                     EXPERTS

     Our  consolidated  financial  statements  as of and  for  the  years  ended
December 31, 2002 and 2001,  incorporated in this prospectus by reference to our
annual  report on Form 10-K for the year ended  December 31, 2002,  have been so
incorporated  in  reliance on the report of KPMG LLP,  independent  accountants,
given and on the authority of said firm as experts in auditing and accounting.

     The  consolidated  financial  statements  of  Kansas  City  Southern  as of
December  31,  2000  and for  the  year  ended  December  31,  2000,  which  are
incorporated  in this  prospectus by reference to the annual report on Form 10-K
for the year ended  December 31, 2002,  have been have been so  incorporated  in
reliance on the report of  PricewaterhouseCoopers  LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.

     The  combined and  consolidated  financial  statements  of Grupo TFM, as of
December  31, 2002 and 2001 and for each of the three years ended  December  31,
2002,  which are  incorporated  in this  prospectus  by  reference to our annual
report  on Form  10-K  for the  year  ended  December  31,  2002,  have  been so
incorporated  in  reliance  on  the  report  of  PricewaterhouseCoopers,   S.C.,
independent  accountants,  given on the  authority  of said firm as  experts  in
auditing and accounting.

                       WHERE YOU CAN FIND MORE INFORMATION

     We file annual,  quarterly and current reports and other  information  with
the SEC.  You may  inspect  and  copy  such  material  at the  public  reference
facilities  maintained by the SEC at 450 Fifth Street,  N.W.,  Washington,  D.C.
20549.  Please call the SEC at 1-800-SEC-0330 for more information on the public
reference  room.  You can also  find our SEC  filings  at the SEC's  website  at
www.sec.gov  and on our website at  www.kcsi.com.  Information  contained on our
website is not part of this prospectus.

     In  addition,  our  reports  and  other  information  concerning  us can be
inspected at the New York Stock  Exchange,  20 Broad Street,  New York, New York
10005, where our common stock is listed.

     The following  documents we filed with the SEC pursuant to the Exchange Act
are incorporated herein by reference:

     o    Our annual report on Form 10-K for the fiscal year ended  December 31,
          2002;

     o    Our  quarterly  reports on Form 10-Q for the quarters  ended March 31,
          2003 and June 30, 2003; and

     o    Our  current  reports  on Form 8-K filed on March 19,  2003,  April 7,
          2003,  April 22, 2003, May 1, 2003 (regarding  intent to sell Series C
          Preferred Stock in private offering),  May 5, 2003, and July 14, 2003,
          the  information  filed under Item 5 and Exhibit  99.1 of the Form 8-K
          filed August 1, 2003,  current  reports on Form 8-K filed on August 5,
          2003, August 19, 2003, and October 23, 2003.





     All documents  subsequently filed by us pursuant to Sections 13(a),  13(c),
14 or 15(d) of the Exchange Act (excluding any information furnished pursuant to
Item 9 or Item 12 on any current report on Form 8-K),  prior to the  termination
of the  offering,  shall be deemed to be  incorporated  by  reference  into this
prospectus and to be a part hereof from the date of the filing of such document.
In addition,  all documents filed by us pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act (excluding any information  furnished pursuant to Item
9 or Item 12 on any  current  report on Form 8-K) after the date of the  initial
registration  statement and prior to effectiveness of the registration statement
shall be deemed to be incorporated by reference into this prospectus and to be a
part  hereof  from  the  date of the  filing  of such  document.  Any  statement
contained in a document  incorporated by reference  herein shall be deemed to be
modified or superseded for all purposes to the extent that a statement contained
in this prospectus,  or in any other  subsequently  filed document which is also
incorporated or deemed to be  incorporated by reference,  modifies or supersedes
such  statement.  Any statement so modified or  superseded  shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.

     We will provide  without  charge to each person to whom this  prospectus is
delivered,  upon written or oral  request of such  person,  a copy of any or all
documents incorporated by reference in this prospectus. Requests for such copies
should be directed to Kansas  City  Southern,  P.O.  Box  219335,  Kansas  City,
Missouri  64121-9335  (or if by United  Parcel  Service  or some  other  form of
express  delivery  to 427  West  12th  Street,  Kansas  City,  Missouri  64105),
Attention: Corporate Secretary's Office, or if by telephone at (816) 983-1538.

                           FORWARD-LOOKING STATEMENTS

     This  prospectus  and the  documents  incorporated  in this  prospectus  by
reference may contain  forward-looking  statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. You can typically
identify  forward-looking  statements by the use of words such as "may," "will,"
"could," "project," "believe,"  "anticipate,"  "expect," "estimate," "continue,"
"potential,"  "plan," "forecasts," and similar terms. These statements represent
our  intentions,  plans,  expectations  and  beliefs  and are  subject to risks,
uncertainties  and other factors.  Many of these factors are outside our control
and could cause actual results to differ  materially  from such  forward-looking
statements.  These  factors  include,  among  others,  those  identified in this
prospectus under "Risk Factors."

     There may be other  factors  that may cause our  actual  results  to differ
materially from the forward-looking  statements.  Other factors include, but are
not  limited to,  changes in  management  strategies,  objectives  and  business
approaches,  changes in lines of business,  material litigation involving us and
changes in the  political,  regulatory  or economic  environments  in the United
States,  Mexico,  Panama  and  other  countries  where we or our  unconsolidated
affiliates  currently  operate or may operate in the  future.  We  undertake  no
obligation to publicly update or revise any forward-looking statements,  whether
as a result of new information, future events or otherwise.