427 West 12^th Street

Kansas City, Missouri 64105-1804

 

 

MIDSOUTH RAIL UNION 401(k)
RETIREMENT SAVINGS PLAN

Table of Contents

		Page
Report of Independent Registered Public Accounting Firm			1
Financial Statements:
Statements of Net Assets Available for Benefits as of December 31, 2005 and 2004			2
Statements of Changes in Net Assets Available for Benefits for the Years Ended December 31, 2005 and 2004			3
Notes to Financial Statements			4
Supplemental Schedules:
Schedule H, line 4i—Schedule of Assets (Held at End of Year) as of December 31, 2005			8
Schedule H, line 4a—Schedule of Delinquent Participant Contributions			9
Signatures			10
Exhibits:
Exhibit 23 — Consent of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

The Participants and Plan Administrator
MidSouth Rail Union 401(k) Retirement Savings Plan:

We have audited the accompanying statements of net assets available for benefits of the MidSouth Rail Union 401(k) Retirement Savings Plan (the Plan) as of December 31, 2005 and 2004, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan’s management. Our responsibility is to an express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 2005 and 2004, and the changes in net assets available for benefits for the years then ended in conformity with U.S. generally accepted accounting principles.

Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule of assets (held at end of year) and schedule of delinquent participant contributions are presented for the purpose of additional analysis and are not a required part of the basic financial statements, but are supplementary information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. These supplemental schedules are the responsibility of the Plan’s management. The supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.

/s/ KPMG LLP

Kansas City, Missouri
June 28, 2006

MIDSOUTH RAIL UNION 401(k)
RETIREMENT SAVINGS PLAN

Statements of Net Assets Available for Benefits

December 31, 2005 and 2004

		2005				2004
Assets:
Cash		$	15,260				11,534
Investments, at fair value:
Common stock of Kansas City Southern			207,997				78,509
Common collective trust			1,049,302				1,010,861
Mutual funds			2,400,030				2,144,778
Total investments			3,657,329				3,234,148
Other receivable			21,732				53
Total assets			3,694,321				3,245,735
Liabilities:
Investment trades payable			28,625				11,490
Net assets available for benefits		$	3,665,696				3,234,245

See accompanying notes to financial statements.

MIDSOUTH RAIL UNION 401(k)
RETIREMENT SAVINGS PLAN

Statements of Changes in Net Assets Available for Benefits

Years ended December 31, 2005 and 2004

		2005				2004
Additions:
Investment income:
Interest and dividends		$	169,597				89,557
Net appreciation in fair value of investments			62,084				198,325
Total investment income			231,681				287,882
Contributions:
Participant contributions			342,278				269,239
Company contributions			86,152				66,168
Total contributions			428,430				335,407
Total additions			660,111				623,289
Deductions:
Benefits paid			(228,660	)			(103,003	)
Increase in net assets available for benefits			431,451				520,286
Net assets available for benefits:
Beginning of year			3,234,245				2,713,959
End of year		$	3,665,696				3,234,245

See accompanying notes to financial statements.

MIDSOUTH RAIL UNION 401(k)
RETIREMENT SAVINGS PLAN

Notes to Financial Statements

December 31, 2005 and 2004

(1)		Description of the Plan
		The following description of the Midsouth Rail Union 401(k) Retirement Savings Plan (the “Plan”) is provided for general information purposes only. More complete information regarding the Plan’s provisions may be found in the plan document.

	(a)		General
			The Plan is a participant-directed, defined contribution plan subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). The Plan covers all full-time employees of the Company who are members of one of the following collective bargaining units with the former MidSouth Rail Corporation: Brotherhood of Locomotive Engineers, Brotherhood of Maintenance of Way Employees, Brotherhood of Railway Carmen, Brotherhood of Railroad Signalmen, International Association of Machinists and Aerospace Workers, International Brotherhood of Electrical Workers, Transportation Communications International Union, or United Transportation Union. Plan entry dates are the first day of each calendar quarter.
			A participant that ends his or her membership in any of the above collective bargaining units is no longer eligible to receive Company contributions. However, such participant will continue to receive credit for vesting under the provisions of the Plan and continues to share fully in trust fund allocations, as set forth in the Plan. Upon rejoining any of the above collective bargaining units, such participant is then immediately eligible to participate in all future Company contributions, as set forth in the Plan.
	(b)		Plan Administration
			The Plan is administered by the Compensation and Organization Committee which is appointed by the board of directors of the Kansas City Southern Railway Company (the “Company”). The Plan’s trustee Nationwide Trust Company (the “Trustee”), is responsible for the custody and management of the Plan’s Assets.
	(c)		Contributions
			Each year, participants may contribute a portion of their annual eligible compensation, as defined in the Plan, not to exceed a specified dollar amount as determined by the Internal Revenue Code (IRC). The Company matches 100% of the first $500 of participant salary deferral contributions. Upon enrollment in the Plan, a participant may direct their contributions and Company matching contributions into any of the various funds offered by the Plan. Effective July 1, 2002, the Plan added Kansas City Southern (NYSE:KCS) common stock as an investment option.
	(d)		Vesting
			Participants are immediately vested in their salary deferral contributions plus actual earnings thereon.

(Continued)

MIDSOUTH RAIL UNION 401(k)
RETIREMENT SAVINGS PLAN

Notes to Financial Statements

December 31, 2005 and 2004

Company contributions vest according to the following schedule:

Years of		Percent
service		vested
One year			20	%
Two years			40	%
Three years			60	%
Four years			80	%
Five years			100	%

	(e)		Payment of Benefits
			Distributions generally will be made in the event of retirement, death, disability, resignation, or dismissal. A participant’s normal retirement age is 65. The Plan also provides for distribution at age 591/2. Distributions after termination of employment will be made in a lump-sum payment. Balances not exceeding $1,000 will be paid out within one calendar year of termination of employment. Balances exceeding $1,000 will be paid upon the distribution date elected by the participant, but no later than April 1 following the calendar year in which the participant attains the age of 701/2.
			On retirement, death, disability, or termination of service, a participant (or participant’s beneficiary in the event of death) may elect to receive a lump-sum distribution equal to the participant’s vested account balance. In addition, hardship distributions are permitted if certain criteria are met.
	(f)		Participant Accounts
			Each participant’s account is credited with the participant’s contribution, the Company’s matching contribution, and an allocation of Plan earnings, net of investment expenses. Allocations are based on participant earnings or account balances, as set forth in the plan agreement. The benefit to which a participant is entitled is that which can be provided from the participant’s account.

(2)

Summary of Significant Accounting Policies

	(a)		Basis of Accounting and Use of Estimates
			The accompanying financial statements are prepared on the accrual basis of accounting. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires the Plan’s management to use estimates and assumptions that affect the accompanying financial statements and disclosures. Actual results could differ from these estimates.
	(b)		Income Recognition
			Interest income is recorded as earned on the accrual basis. Dividend income is recorded on the ex-dividend date.

(Continued)

MIDSOUTH RAIL UNION 401(k)
RETIREMENT SAVINGS PLAN

Notes to Financial Statements

December 31, 2005 and 2004

	(c)		Investments Valuation
			Investments in mutual funds and common stocks are stated at fair value as determined by quoted market prices, which represent the net asset value of shares held by the plan at year end. The assets held in a common collective trust (Invesco Stable Value Fund) are valued at contract value, which approximates fair value, as determined by the AMVESCAP National Trust Company.
	(d)		Net Appreciation (Depreciation) in fair value of Investments
			Net realized and unrealized appreciation (depreciation) is recorded in the accompanying statement of changes in net assets available for benefits as net appreciation in fair value of investments.
			Brokerage fees are added to the acquisition costs of assets purchased and subtracted from the proceeds of assets sold.
	(e)		Administrative Expenses
			Investment expenses are paid by the Plan as long as Plan assets are sufficient to provide for such expenses. Administrative expenses of the Plan are paid by the Company.
	(f)		Forfeitures
			Nonvested amounts forfeited by employees are allocated to the other participants as a part of and in the same manner as the Company contribution for the Plan year in which the forfeiture occurs. Allocated forfeitures were $118 and $1,145 for the Plan years ended December 31, 2005 and 2004, respectively.

(3)		Investments
		Investments, which exceeded 5 percent of the net assets available for benefits at December 31, 2005 and 2004, were as follows:

		2005				2004
Invesco Stable Value, 1,049,302 and 1,010,861 units, respectively		$	1,049,302				1,010,861
Allianz Funds OCC Renaissance Admin, 9,074 and 0 units, respectively			196,823				—
Franklin Balance Sheet Investment Fund—Class A, 4,597 and 4,210 units, respectively			283,796				245,249
Growth Fund of America, 7,254 and 5,800 units, respectively			223,862				158,816
Kansas City Southern common stock, 8,514 and 4,428 units, respectively			207,997				78,508
PIMCO Renaissance, 0 and 9,314 units, respectively			—				250,073
PIMCO Total Return Administrative Shares, 42,110 and 41,731 units, respectively			442,153				445,273
Washington Mutual Investors, 6,528 and 5,601 units, respectively			201,336				172,403

(Continued)

Schedule 1

MIDSOUTH RAIL UNION 401(k)

RETIREMENT SAVINGS PLAN

Schedule H, line 4i — Schedule of Assets (Held at End of Year)

December 31, 2005

During 2005 and 2004, the Plan’s investments (including gains and losses on investments bought and sold, as well as held during the year) appreciated in value by $62,084 and $198,325, respectively, as follows:

		2005				2004
Kansas City Southern common stock		$	40,601				15,737
Mutual funds			21,483				182,588
		$	62,084				198,325

(4)		Portfolio Risk
		The Plan provides for investments in various securities that, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statements of net assets available for benefits.
(5)		Tax Status
		The Plan received a favorable determination letter from the Internal Revenue Service, dated March 7, 2003, indicating that it is qualified under Section 401(a) of the Internal Revenue Code (the Code), and therefore, the related trust is exempt from tax under Section 501(a) of the Code. The determination letter is applicable for amendments executed through April 1, 2002. The tax determination letter has not been updated for the latest plan amendments occurring after April 1, 2002. However, the plan administrator believes that the Plan is designed and is being operated in compliance with the applicable requirements of the IRC. Therefore, the plan administrator believes that the Plan was qualified and the related trust was tax-exempt for the years ended December 31, 2005 and 2004.
		The Company is not aware of any activity or transactions that may adversely affect the qualified status of the Plan.
(6)		Plan Termination
		Although it has expressed no intention to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. Upon termination of the Plan, the participants shall receive amounts equal to their respective account balances.
(7)		Prohibited Transaction
		During 2005, the Company failed to remit to the Plan’s trustee certain employee and employer contributions totaling approximately $100.00 within the period prescribed by the Department of Labor regulations. The delays in remitting the contributions to the trustee were due to administrative errors, and the Company will make contributions to the affected participant’s account to compensate in aggregate the approximate lost income due to the delays.

Schedule 1

MIDSOUTH RAIL UNION 401(k)
RETIREMENT SAVINGS PLAN

Schedule H, line 4i—Schedule of Assets (Held at End of Year)

December 31, 2005

Identity		Description		Fair value
Common Stock
*Kansas City Southern common stock		8,514.00 shares, with a fair value of $24.43 per share			207,997
Money Markets
Invesco Stable Value		1,049,301.90 shares, with a fair value of $1.00 per share			1,049,302
Mutual Funds
AIM Small Cap Growth Fund		2,028.876 shares, with a fair value of $27.51 per share			55,814
Allianz Fund OCC Renaissance Admin		9,074.373 shares, with a fair value of $21.69 per share			196,823
American Balanced		6,826.523 shares, with a fair value of $17.82 per share			121,649
American Century Real Estate/Advisor		4,275.173 shares, with a fair value of $25.49 per share			108,974
EuroPacific Growth		4,266.885 shares, with a fair value of $41.10 per share			175,369
Franklin Balance Sheet Investment A		4,597.373 shares, with a fair value of $61.73 per share			283,796
Growth Fund of America		7,254.105 shares, with a fair value of $30.86 per share			223,862
ING International Value Fund		8,513.922 shares, with a fair value of $17.88 per share			152,229
Janus Fund		6,321.158 shares, with a fair value of $25.53 per share			161,379
Janus Twenty Fund		774.964 shares, with a fair value of $48.92 per share			37,911
MFS Value Fund		7,468.681 shares, with a fair value of $23.15 per share			172,900
PIMCO Total Return Admin Shares		42,109.842 shares, with a fair value of $10.50 per share			442,153
Scudder Equity 500 Index		470.752 shares, with a fair value of $139.85 per share			65,835
Washington Mutual Investors		6,528.399 shares, with a fair value of $30.84 per share			201,336
Total investments				$	3,657,329

See accompanying report of independent registered public accounting firm.

Schedule 2

MIDSOUTH RAIL UNION 401(k)
RETIREMENT SAVINGS PLAN

Schedule H, line 4a—Schedule of Delinquent Participant Contributions

December 31, 2005

See accompanying report of independent registered public accounting firm.

9