MK RAIL CORPORATION
1200 Reedsdale Street
Pittsburgh, Pennsylvania 15233
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held on October 30, 1996
As a stockholder of MK RAIL CORPORATION (the "Company"), you
are invited to be present, or represented by proxy, at the Annual Meeting of
Stockholders, to be held at the Doubletree Hotel Pittsburgh, 1000 Penn Avenue,
Pittsburgh, Pennsylvania on October 30, 1996 at 11:00 a.m., Pittsburgh time, for
the following purposes:
1. To elect John C. Pope and Nicholas J. Stanley to the Board of
Directors of the Company, each for terms of three (3) years expiring
in 1999. See "Proposal No. 1 -- Election of Directors" in the Proxy
Statement.
2. To amend the Company's Certificate of Incorporation to permit
vacancies on the Board or newly created directorships to be filled at
meetings of the stockholders called by the Board. See "Proposal No. 2
-- Amendment to the Company's Certificate of Incorporation" in the
Proxy Statement.
3. To amend the Company's Stock Incentive Plan to increase the maximum
number of shares which may be issued under such Plan by one million
shares. See "Proposal No. 3 -- Amendment to Stock Incentive Plan" in
the Proxy Statement.
4. To amend the Company's Stock Option Plan for Non-Employee Directors to
(i) provide for annual stock option awards to the Company's
non-employee directors and (ii) increase the maximum number of shares
which may be issued under such Plan by 50,000 shares. See "Proposal
No. 4 -- Amendment to Stock Option Plan for Non-Employee Directors" in
the Proxy Statement.
5. To ratify the appointment of Deloitte & Touche LLP as the Company's
independent certified public accountants for the fiscal year ending
December 31, 1996. See "Proposal No. 5 -- Selection of Auditors" in
the Proxy Statement.
6. To transact such other business as may properly be brought before the
meeting or any adjournment thereof.
Stockholders of record at the close of business on September
10, 1996 are entitled to vote at the Annual Meeting of Stockholders and all
adjournments thereof. Since a majority of the outstanding shares of the
Company's Common Stock must be represented at the meeting in order to constitute
a quorum, all stockholders are urged either to attend the meeting or to be
represented by proxy.
If you do not expect to attend the meeting in person, please
sign, date and return the accompanying proxy in the enclosed reply envelope.
Your vote is important regardless of the number of shares you own. If you later
find that you can be present and you desire to vote in person or, for any other
reason, desire to revoke your proxy, you may do so at any time before the
voting.
By Order of the Board of Directors
Michael A. Weiss, Secretary
September 10, 1996
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TABLE OF CONTENTS
Page
----
Proposal No. 1 -- Election of Directors....................... 2
Information Concerning Directors and Nominees................. 2
Proposal No. 2 -- Amendment to the Company's Certificate
of Incorporation.......................... 5
Proposal No. 3 -- Amendment to Stock Incentive Plan........... 7
Proposal No. 4 -- Amendment to Stock Option Plan for
Non-Employee Directors.................... 11
Proposal No. 5 -- Selection of Auditors....................... 12
Information Concerning Executive Officers..................... 13
Compensation.................................................. 14
Security Ownership............................................ 24
Certain Relationships and Related Transactions................ 25
Stockholders' Proposals....................................... 30
General and Other Matters..................................... 30
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MK RAIL CORPORATION
1200 Reedsdale Street
Pittsburgh, Pennsylvania 15233
ANNUAL MEETING OF STOCKHOLDERS
October 30, 1996
PROXY STATEMENT
This Proxy Statement and the Notice of Annual Meeting and Form
of Proxy accompanying this Proxy Statement, which will be mailed on or about
September 27, 1996, are furnished in connection with the solicitation by the
Board of Directors of MK Rail Corporation ("MK Rail" or the "Company") of
proxies to be voted at the annual meeting of stockholders to be held at the
Doubletree Hotel Pittsburgh, 1000 Penn Avenue, Pittsburgh, Pennsylvania on
October 30, 1996 at 11:00 a.m., Pittsburgh time, and any adjournments thereof.
Stockholders of record at the close of business on September
10, 1996 (the "record date") will be entitled to one vote at the meeting or by
proxy for each share then held. On the record date, there were 17,562,793 shares
of Common Stock of MK Rail outstanding. All shares represented by proxy will be
voted in accordance with the instructions, if any, given in such proxy. A
stockholder may abstain from voting or may withhold authority to vote for the
nominees by marking the appropriate box on the accompanying proxy card, or may
withhold authority to vote for an individual nominee by drawing a line through
such nominee's name in the appropriate place on the accompanying proxy card.
UNLESS INSTRUCTIONS TO THE CONTRARY ARE GIVEN, EACH PROPERLY EXECUTED PROXY WILL
BE VOTED, AS SPECIFIED BELOW, TO (i) ELECT JOHN C. POPE AND NICHOLAS J. STANLEY
AS DIRECTORS, (ii) APPROVE THE AMENDMENT OF THE COMPANY'S CERTIFICATE OF
INCORPORATION, (iii) APPROVE THE AMENDMENT OF THE COMPANY'S STOCK INCENTIVE
PLAN, (iv) APPROVE THE AMENDMENT OF THE STOCK OPTION PLAN FOR NON-EMPLOYEE
DIRECTORS, AND (v) RATIFY THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE
COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS.
All proxies may be revoked and execution of the accompanying
proxy will not affect a stockholder's right to revoke it by giving written
notice of revocation to the Secretary at any time before the proxy is voted or
by the mailing of a later-dated proxy. Any stockholder attending the meeting in
person may vote his or her shares even though he or she has executed and mailed
a proxy. A majority of all of the issued and outstanding shares of the Company's
Common Stock is required to be present in person or by proxy to constitute a
quorum. Directors are elected by a plurality. The favorable vote of the holders
of a majority of the shares of Common Stock represented in person or by proxy at
the meeting is required to approve or adopt the proposals presented to the
meeting and to ratify the appointment of Deloitte & Touche LLP.
This Proxy Statement is being solicited by the Board of
Directors of MK Rail. The expense of making this solicitation is being paid by
the Company and consists of the preparing, assembling and mailing of the Notice
of Annual Meeting, Proxy Statement and Proxy, tabulating returns of proxies, and
charges and expenses of brokerage houses and other custodians, nominees or
fiduciaries for forwarding documents to stockholders. In addition to
solicitation by mail, officers and regular employees of the Company may solicit
proxies by telephone, telegram or in person without additional compensation
therefor.
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PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
Election of Directors
Two directors are to be elected at the annual meeting each for
terms of three (3) years expiring in 1999. The Board of Directors has nominated
Nicholas J. Stanley and John C. Pope for election as directors. See "Information
Concerning Directors and Nominees" for a description of the business experience
of and other information concerning the nominees.
To be eligible for election as a director, persons nominated
by any stockholder must be nominated in accordance with procedures set forth in
the By-laws. Those procedures require that written notice of the nomination be
given to the Secretary of the Company at least 60 days prior to the meeting at
which the election is to be held, or, if the meeting is not announced at least
75 days in advance, not later than the 10th business day following the
announcement of the meeting. The By-laws further require that the stockholder's
notice include certain information concerning the nominee as would be required
to be included in the Proxy Statement. The Chairman may decline to acknowledge a
nomination not made in compliance with the requirements of the By-laws.
Unless you indicate to the contrary, the persons named in the
accompanying proxy will vote it for the election of the nominees named above.
If, for any reason, a nominee should be unable to serve as a director at the
time of the meeting, which is not expected to occur, the persons designated
herein as proxies may not vote for the election of any other person not named
herein as a nominee for election to the Board of Directors. See "Information
Concerning Directors and Nominees."
Recommendation
The Board of Directors recommends a vote "FOR" the election of
each of the nominees. Proxies solicited by the Board of Directors will be voted
in favor of this proposal unless a contrary vote or authority withheld is
specified.
INFORMATION CONCERNING DIRECTORS AND NOMINEES
Directors and Nominees
The Company's Certificate of Incorporation and By-laws provide
that the directors of the Company are to be classified into three classes, with
the directors in each class serving for three-year terms and until their
successors are elected, except that the initial terms of the initial directors
of the Company expired or will expire at the 1995, 1996 or 1997 annual meeting
of the stockholders of the Company, depending upon the particular class in which
each such director is placed. The By-laws of the Company require from three to
15 directors as fixed by the Board. The Board has currently been fixed at seven
members. The terms of the persons currently serving on the Board expire at the
annual meeting of stockholders for the years indicated: John C. Pope and
Nicholas J. Stanley (1996); Gilbert E. Carmichael and Michael A. Wolf (1997);
and Lee B. Foster II, Robert S. Miller, Jr. and James P. Miscoll (1998). As more
fully described below, Mr. Miller has announced his resignation from the Board
effective September 11, 1996.
Certain directors hold or have held positions with Morrison
Knudsen Corporation ("Morrison Knudsen"), an affiliate of the Company, which
owns approximately 63.5% of the Company's Common Stock. Morrison Knudsen is
engaged in wide-ranging businesses in the construction, environmental,
industrial, mining and transportation industries. Mr. Miller has served as the
Chairman of Morrison Knudsen and as its representative on the Company's Board
since April 1995. On June 25, 1996, Morrison Knudsen Corporation, a Delaware
corporation ("MKC"), filed with the United States Bankruptcy Court for the
District of Delaware a voluntary petition for relief pursuant to Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code"). MKC owns all of the
stock of Morrison Knudsen. On August 26, 1996, the Bankruptcy Court approved the
Plan of Reorganization submitted as a part of MKC's bankruptcy filing (the "MKC
Plan of Reorganization"). Under the MKC Plan of Reorganization, Morrison Knudsen
will distribute all 11,149,000 shares of the outstanding Common Stock of the
Company held by it to certain creditors and, in certain circumstances, to those
of its existing stockholders who purchase a portion of the rights of its
creditors. Accordingly, on September 11, 1996, the anticipated effective date of
the MKC Plan of Reorganization, Robert S. Miller, Jr. will resign as a Vice
Chairman and director of the Company. In order to satisfy the requirements of
the Stockholders Agreement described below in "Proposal No. 2 -- Amendment to
Company's Certificate of Incorporation -- Background," the vacancy on the Board
created by Mr. Miller's resignation will be filled by the Company's Board of
Directors with an outside director when a suitable candidate has been
identified.
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Under the terms of the Stockholders Agreement, the Common
Stock of the Company held by Morrison Knudsen is subject to voting provisions,
which generally will be in effect for a period of approximately two years, that
require that until the stock is sold in certain transactions, it must be voted
in favor of the Company's nominees to its Board of Directors, a majority of
which, under the Stockholders Agreement, are to consist of outside directors.
Under the Stockholders Agreement, "outside directors" are directors who (i) are
not and have not been employed by Morrison Knudsen or the Company or their
respective subsidiaries in an executive capacity within the immediately prior
five years; (ii) are not (and are not affiliated with a company or a firm that
is) a significant advisor or consultant to the Company or its subsidiaries;
(iii) are not affiliated with a significant customer or supplier of the Company
or its subsidiaries; (iv) do not have significant personal services contract(s)
with the Company or its subsidiaries; (v) are not affiliated with a tax-exempt
entity that receives significant contributions from the Company or its
subsidiaries; and (vi) are not spouses, parents, siblings, or children of any
person described by items (i) through (v). In order to satisfy the requirements
of the Stockholders Agreement, the vacancy on the Board created by Mr. Miller's
resignation will be filled by the Board with an outside director.
Set forth below is information concerning each director and
nominee for director of the Company, including his business experience during
the past five years, his positions with the Company and certain directorships
held by him. There are no family relationships among directors, nor, except as
herein described, are there any arrangements or understandings between any
director and another person pursuant to which he was selected as a director or
nominee.
Nominees for Terms Expiring in 1999
John C. Pope, age 47, has served as the Company's Chairman
since January 1, 1996, having previously served as a Director of the Company
since April 1995. Mr. Pope also serves as a Director Emeritus of UAL Corporation
(commercial airline holding company) and United Airlines, Inc. (commercial
airline), as a Director of Federal-Mogul Corporation (automotive parts) and as a
Director of Wallace Computer Services, Inc. (business forms). Mr. Pope has held
various positions with UAL Corporation and United Airlines, Inc., including
President and Chief Operating Officer (1992 to 1994) and Director (1988 to
1994), Vice Chairman (1989 to 1992), Executive Vice President of Marketing and
Planning and Chief Financial Officer (1989 to 1990) and Executive Vice President
of Finance and Chief Financial Officer (1988-1989) . Prior thereto, Mr. Pope
served as Chief Financial Officer of AMR Corporation (commercial airline holding
company) and American Airlines, Inc. (commercial airline).
Nicholas J. Stanley, age 32, has served as a Director of the
Company since April 1994. Mr. Stanley has served as the President of Stanley
Investment & Management (international barter and counter trade programs) since
1990, as the President and Chief Executive Officer of Fine Arts Graphics, Inc.
(stationery printing) since 1994, and as a Principal of the Titan Group (real
estate investment) since 1990. Mr. Stanley also serves as honorary Consul to the
Kingdom of Thailand.
Current Directors with Terms Expiring in 1997
Gilbert E. Carmichael, age 68, has served as a Vice Chairman
of the Company since January 1996, and as a Director since April 1994. He served
as Vice Chairman of the Board from April 1994 until March 1995 and as the
Company's Chairman from March 1995 until January 1, 1996. Mr. Carmichael also
served as Senior Vice President of Morrison Knudsen from 1993 until March 1995.
Prior to joining Morrison Knudsen, Mr. Carmichael served as Administrator of the
Federal Railroad Administration (1989 to 1993). Mr. Carmichael currently serves
on the board of directors of Great Southern National Bank (banking).
Michael A. Wolf, age 53, has served as the President and Chief
Executive Officer of the Company since July 1996 and as a Director since August
1996. Prior thereto, he served as President and Chief Executive Officer of
Pandrol Jackson, Inc. (railroad equipment) from 1994 to June 1996, as President
and Chief Operating Officer of Hobart Brothers Company (welding and laser
manufacturing) from 1992 to 1994, and as the Executive Vice President of Case
Corporation (agricultural equipment) from 1988 to 1992. In addition, from 1972
to 1988, Mr. Wolf held various management positions with increasing
responsibility, including as Executive Vice President, at Firestone/Bridgestone,
Inc.
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Current Directors with Terms Expiring in 1998
Lee B. Foster II, age 49, has served as a Director of the
Company since August 1996. Mr. Foster has held various positions with L. B.
Foster Company (railroad and construction products) since 1973, including as
President and Chief Executive Officer since 1990.
Robert S. Miller, Jr., age 54, has served as a Vice Chairman
of the Company since April 1995. Mr. Miller has also served as the Chairman of
Morrison Knudsen since April 1995. Prior thereto, he served in various
capacities from 1981 to 1992 at Chrysler Corporation (automobile manufacturing),
including as Chief Financial Officer and as Vice Chairman. From April 1992 to
February 1993, Mr. Miller served as a senior partner in James D. Wolfensohn Inc.
(investment banking). He also serves on the boards of directors of Coleman
Corporation (outdoor gear), Symantec (computer software), Pope & Talbot (forest
products), Fluke Corporation (electronic test measurement equipment) and
Federal-Mogul Corporation (automotive parts). Mr. Miller has announced his
resignation from the Board effective September 11, 1996.
James P. Miscoll, age 61, has served as a Director of the
Company since September 1994. Mr. Miscoll held various positions with Bank of
America from 1962 until his retirement in 1992, including Vice Chairman (1984 to
1992), Executive Officer, Southern California (1985 to 1992), member of the
Management Committee (1982 to 1992) and other executive management positions for
the bank in New York City, Asia and Europe. Mr. Miscoll currently serves on the
boards of directors of Coast Federal Financial, Inc. (financial institution),
California Higher Education Loan Authority, Rykoff-Sexton, Inc. (foodstuffs
company), Ad Astra Company (mining and contracting) and American International
Group, Inc. (insurance and finance).
Meetings of the Board of Directors
In 1995, the Board of Directors of the Company conducted 22
meetings. Each director of the Company attended at least 75% of the meetings. In
addition, the Board of Directors transacted business on three other occasions by
unanimous written consent during 1995.
Committees
Four committees of the Board have been established: the
Executive and Finance Committee, the Select Committee, the Compensation
Committee and the Audit Review Committee.
The Executive and Finance Committee has all authority,
consistent with the Delaware General Corporation Law, as may be granted to it by
the Board. Accordingly, the Executive and Finance Committee may have and may
exercise all the powers and authority of the Board in the oversight of the
management of the business and affairs of the Company, except that the Executive
and Finance Committee will not have the power (except to the extent authorized
by a resolution of the Board) to amend the Company's Certificate of
Incorporation or By-laws, to fix the designations, preferences, and other terms
of any preferred stock of the Company, to adopt an agreement of merger or
consolidation, to authorize the issuance of stock, to declare a dividend or to
recommend to the stockholders of the Company the sale, lease or exchange of all
or substantially all of the Company's property and assets, a dissolution of the
Company or a revocation of such a dissolution. John C. Pope, Michael A. Wolf and
Gilbert E. Carmichael currently serve as the Executive and Finance Committee.
Mr. Pope is the Chairman of this Committee. The Executive and Finance Committee
met two times in 1995 and on one occasion transacted business by unanimous
written consent.
Following the March 1995 announcement by Morrison Knudsen of
its intention to sell its interest in the Company, the Board of Directors of the
Company created a special committee of its then independent directors, the
Select Committee, charged with responsibility for addressing all matters
concerning the relationship between the Company and Morrison Knudsen, Morrison
Knudsen's proposal to sell its shares of the Company and any other potential
disposition of or extraordinary transaction respecting the Company. James P.
Miscoll, Nicholas J. Stanley and John C. Pope currently serve as the Select
Committee. Mr. Stanley is the Chairman of this Committee. The Select Committee
met 21 times in 1995. The Select Committee has been inactive since the Committee
determined in December 1995 that it was in the best interests of the Company to
terminate its efforts to solicit bids for the purchase of the Company in order
to focus on continuing operations, cost efficiencies and debt reduction as a
means to enhance stockholder value.
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The Audit Review Committee has responsibility for reviewing
the professional services to be provided by the Company's independent auditors,
the scope of the audit by the Company's independent auditors, the annual
financial statements of the Company, the Company's system of internal accounting
controls and such other matters with respect to the accounting, auditing and
financial reporting practices and procedures of the Company as it may find
appropriate or as may be brought to its attention. James P. Miscoll and Nicholas
J. Stanley currently serve as the Audit Review Committee. Mr. Miscoll is the
Chairman of this Committee. The Audit Review Committee met three times in 1995.
The Compensation Committee has responsibility for reviewing
executive salaries, administering the bonus, incentive compensation and stock
option plans of the Company, and approving the salaries and other benefits of
the executive officers of the Company. In addition, the Compensation Committee
consults with the Company's management regarding pension and other benefit
plans, and compensation policies and practices of the Company. Two of the
Company's independent directors, Nicholas J. Stanley and James P. Miscoll,
currently serve as the Compensation Committee. Mr. Stanley is the Chairman of
this Committee. The Compensation Committee met six times in 1995.
PROPOSAL NO. 2 -- AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
Background
On June 25, 1996, MKC filed with the United States Bankruptcy
Court for the District of Delaware a voluntary petition for relief pursuant to
Chapter 11 of the Bankruptcy Code. MKC owns all of the stock of Morrison
Knudsen. Morrison Knudsen holds 11,149,000 shares of the outstanding Common
Stock of the Company (representing approximately 63.5% of the Company's
outstanding Common Stock). On August 26, 1996, the Bankruptcy Court approved the
MKC Plan of Reorganization. On September 11, 1996, the MKC Plan of
Reorganization is anticipated to become effective, and, as contemplated therein,
MKC is to be merged into Washington Construction Inc. Under the MKC Plan of
Reorganization, Morrison Knudsen will distribute all 11,149,000 shares of the
outstanding Common Stock of the Company held by it to certain of its creditors
and, in certain circumstances, to those of its existing stockholders who
purchase a portion of the rights of its creditors. This distribution of the
Company's Common Stock is expected to occur in October 1996.
In anticipation of the bankruptcy filing, on June 20, 1996,
the Company and Morrison Knudsen entered into a Stockholders Agreement.
Concurrently, the Company entered into an agreement whereby MKC and Morrison
Knudsen agreed to sell to the Company, for $34.6 million, the intercompany note
from the Company to Morrison Knudsen having an outstanding balance, including
accrued interest, of $57.3 million. The Company repurchased this note on
September 10, 1996. Under the Stockholders Agreement, which was amended by an
amendment dated as of July 25, 1996, the Company agreed to provide registration
rights to persons receiving stock of the Company as a part of the Plan of
Reorganization of MKC and under which Morrison Knudsen agreed that the stock
would be subject to certain standstill and voting provisions for a specified
period. The standstill provisions generally prohibit the solicitation of
proxies, initiation or inducement of tender offers, and other efforts to
influence or control the management or policies of the Company. The voting
provisions generally require that the stock will be voted in favor of the
Company's nominees to its Board (which is to consist of at least seven members,
of which a majority are to be outside directors).
In general, the period during which the standstill and voting
provisions are in effect will end on the earlier of the date two years after the
date (the "Distribution Date") Morrison Knudsen distributes the stock in
accordance with the MKC Plan of Reorganization, or the date on which Registrable
Securities represent less than 15% of the Company's outstanding shares of common
stock; provided, that if a Stockholders Meeting is required to be held (as
described below), the time period during which the voting provisions are in
effect will expire on the date of the meeting, if earlier than the second
anniversary of the Distribution Date, and the time period during which the
standstill provisions are in effect will expire 90 days before the meeting. The
term "Registrable Securities" is generally defined to mean the stock of the
Company held by Morrison Knudsen or its transferees, other than transferees
receiving the stock in a registered public offering or in "ordinary trading
transactions" within the meaning of Section 1145(b)(1) of the Bankruptcy Code.
Stock of the Company that is distributed as part of the MKC
Plan of Reorganization will be subject to transfer restrictions under which
transferees must agree to be bound by the provisions of the Stockholders
Agreement, other than transferees receiving the stock in registered public
offerings or in "ordinary trading transactions" within the meaning of Section
1145(b)(1) of the U.S. Bankruptcy Code, in each case so long as the transferor
does not know the specific identity of the transferee prior to the transfer and
the transferee is not assigned any rights under the Stockholders Agreement. The
Company has agreed to file a registration statement to register for resale the
shares distributed to the persons receiving stock of the Company as a part of
the MKC Plan of Reorganization. The Company expects to file this registration
statement with the Securities and Exchange Commission (the "Commission") in
September 1996 and to diligently seek to have the Commission declare the
registration statement effective. However, the Company cannot offer any
assurances as to when, or if, the Commission will declare the registration
statement effective. Purchasers of the Company's shares from persons who sell
such shares pursuant to an effective registration statement or in ordinary
trading transactions will not be subject to the standstill provisions (so long
as the seller of the shares does not know the specific identity of the purchaser
prior to the sale and the transferee is not assigned any rights under the
Stockholders Agreement).
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Reason for the Proposed Amendment to Company's Certificate of Incorporation
Regarding Directorships
The Stockholders Agreement also provides that not more than
120 days nor less than 90 days prior to the second anniversary of the
Distribution Date, the holders of stock of the Company subject to the standstill
and voting provisions can, at their option, request in writing (an "Election
Request") that the Company hold a meeting of stockholders (a "Stockholders
Meeting"), which meeting, if effectively requested, is to be held as closely as
practicable to the second anniversary of the Distribution Date. At the meeting,
assuming the proposed amendment to the Company's Amended and Restated
Certificate of Incorporation is adopted and approved, the stockholders of the
Company are to be entitled to vote to fill vacancies and/or newly created
positions on the Board of Directors of the Company, which vacancies and/or newly
created positions, when filled, will constitute a majority of the Company's
Board of Directors. In general, an Election Request will not be effective unless
it has been executed by holders of Registrable Securities constituting at least
15% of the outstanding common stock of the Company.
Section 3 of the Seventh Article of the Amended and Restated
Certificate of Incorporation of the Company as in effect provides that subject
to the rights, if any, of the holders of any series of Preferred Stock to elect
additional directors, under circumstances specified in a Preferred Stock
Designation, newly created directorships resulting from an increase in the
number of directors and any vacancies on the Board will be filled solely by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the Board, or by a sole remaining director. The
Board of the Company will be unable to hold a Stockholders Meeting in accordance
with an Election Request unless Section 3 of the Seventh Article is amended in
accordance with the proposal. As presently in effect, that Section gives
exclusive authority to fill vacancies and newly created directorships to the
Board and does not give the Board the ability to delegate that authority to the
stockholders.
Accordingly, in the Stockholders Agreement it was agreed that
the Board of Directors of the Company would propose to the stockholders of the
Company, and recommend approval of, an amendment to the Company's Amended and
Restated Certificate of Incorporation that would permit vacancies on the Board
or newly created directorships to be filled, at the sole option of the Board, by
the stockholders of the Company at a meeting of the stockholders called by the
Board. Neither the proposed amendment nor the holding of a Special Stockholders
Meeting will eliminate the classification of the Board of the Company, and the
nomination procedures ordinarily in effect for stockholders meetings at which
directors are elected will be in effect with respect to any Stockholders Meeting
that is held.
The Board of Directors determined, in approving the
Stockholders Agreement and in approving the proposed amendment to the Company's
Amended and Restated Certificate of Incorporation and directing that it be
submitted to the stockholders of the Company, that the amendment is in the best
interests of the stockholders of the Company. In addition to effectuating the
intent and agreements made in the Stockholders Agreement, it will give the
Board, at its option, the flexibility to permit stockholders to fill vacancies
and/or newly created directorships, which is not an option available to the
Board of Directors.
Proposed Amendment to Certificate of Incorporation
The Board is proposing that the first sentence of Section 3 of
the Seventh Article of the Amended and Restated Certificate of Incorporation of
the Company be amended in its entirety to read as follows:
Subject to the rights, if any, of the holders of any series of
Preferred Stock to elect additional directors under
circumstances specified in a Preferred Stock Designation,
newly created directorships resulting from any increase in the
number of Directors and any vacancies on the Board resulting
from death, resignation, disqualification, removal or other
cause, will be filled solely by the affirmative vote of the
majority of the remaining Directors then in office, even
though less than a quorum of the Board, or by a sole remaining
Director; provided, however, that at the sole option of the
Board, effected by resolution of the Board of Directors, one
or more such vacancies or newly created directorships may be
filled by the stockholders at a meeting of the stockholders
called by the Board of Directors.
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Recommendation
The Board of Directors recommends that the stockholders vote
"FOR" the proposal. Proxies solicited by the Board of Directors will be voted in
favor of this proposal unless a contrary vote or abstention is specified.
PROPOSAL NO. 3 -- AMENDMENT TO STOCK INCENTIVE PLAN
Background Information
In March 1994, the Board of Directors of the Company approved
a proposed Stock Incentive Plan of the Company effective April 1, 1994 (the
"Plan" or the "Stock Incentive Plan") which authorizes the grant of awards in
the forms of options to purchase Common Stock, stock appreciation rights
("SARs"), and restricted stock to officers, key employees of the Company and its
affiliates and other key individuals (including non-employees). On March 29,
1994, Morrison Knudsen, as the sole stockholder of the Company, approved the
Plan.
Proposed Amendment
In August 1996, the Board has approved an amendment to the
Plan, subject to stockholder approval, to increase the maximum number of shares
which may be issued under such Plan by one million shares. The Board believes
that the additional shares are needed to attract and retain talented management
personnel. See the "New Plan Benefits Table," below, for information concerning
the proposed issuance of options to existing management personnel if the
stockholders approve the proposed Plan amendment.
Participation in the Plan
Set forth below is a table which provides certain information
concerning option awards which may be made to John C. Pope, Chairman of the
Board, and Michael A. Wolf, the President and Chief Executive Officer, of the
Company, if the proposed amendment to the Plan is approved by the stockholders.
Under the terms of a stock appreciation rights agreement
entered into between the Company and Mr. Pope, if the stockholders approve the
increase in the number of shares which may be awarded under the Plan, the
Company currently intends (with Mr. Pope's concurrence), within 60 days after
such approval, to (i) issue to Mr. Pope options to purchase 110,000 shares of
Common Stock for an exercise price equal to the closing price of the Common
Stock as reported on Nasdaq on the first trading day ended following the
approval, and (ii) cap the price of certain stock appreciation rights previously
granted to Mr. Pope with respect to 110,000 shares of the Company's Common Stock
(see "Compensation--Executive Compensation--Employment Agreements") at the
exercise price of any such new options granted.
Similarly, under the terms of a stock appreciation rights
agreement entered into between the Company and Mr. Wolf, if the stockholders
approve the increase in the number of shares which may be awarded under the
Plan, the Company may, within 60 days after such approval, (i) issue to Mr. Wolf
options to purchase 400,000 shares of Common Stock for an exercise price equal
to the closing price of the Common Stock as reported on Nasdaq on the first
trading day ended following the approval, and (ii) cap the price of certain
stock appreciation rights previously granted to Mr. Wolf with respect to 400,000
shares of the Company's Common Stock (see "Compensation--Executive
Compensation--Employment Agreements") at the exercise price of any such new
options granted.
The Company has made no determination to issue options under
the Plan to Mr. Pope or Mr. Wolf on the terms described above or otherwise, or
to issue options under the Plan to any other persons by reason of the adoption
of the proposed amendment increasing the number of authorized shares under the
Plan. However, the Compensation Committee (the "Committee") has discretion under
the Plan to issue such number of options to such of the officers, key employees,
agents or consultants of the Company who occupy responsible managerial or
professional positions or who have the capability of making substantial
contributions to the success of the Company as the Committee determines.
Accordingly, the options shown in the "New Plan Benefits" table should not be
regarded by stockholders as the only options that can or will be issued under
the Plan should it be approved and adopted by the stockholders.
7
<PAGE>
NEW PLAN BENEFITS TABLE
MK Rail Long-Term Stock Investment Plan
Name Dollar Values Number of Units
- ---- ------------- ---------------
John C. Pope Not determinable 110,000
Michael A. Wolf Not determinable 400,000
Summary of the Plan
Purpose. The purpose of the Plan is to promote the long-term interests
of the Company and its stockholders by providing officers, key employees of the
Company and its affiliates and other key individuals (including non-employees)
with an additional incentive to promote the financial success of the Company and
its affiliates. The Plan authorizes the granting of awards ("Awards") to
participants in the following forms: (i) options ("Options") to purchase shares
of the Company's $.01 par value Common Stock, (ii) stock appreciation rights
("SARs") and (iii) restricted stock ("Restricted Stock") awards.
Eligibility. Except as modified below, the class of persons eligible to
receive Awards under the Plan are those officers and other key employees of the
Company or its affiliates and those non-employees of the Company or its
affiliates as designated by the Committee from time to time, but in no case will
any member of the Committee be eligible to receive any Award under the Plan.
Administration. The Plan is administered by the Compensation Committee
of the Board of Directors of the Company or such other committee as shall
consist of two or more members of the Board of Directors of the Company who are
"disinterested persons," as such term is defined in Rule 16b-3 promulgated under
Section 16 of the Exchange Act or any successor provision. The Committee has
full authority and power to: (i) construe and interpret the provisions of the
Plan and make rules and regulations for the administration of the Plan not
inconsistent with the Plan; (ii) decide all questions of eligibility for Plan
participation and for the grant of Awards; (iii) adopt forms of agreements and
other documents consistent with the Plan; (iv) engage agents to perform legal,
accounting and other such professional services as it may deem proper for
administering the Plan; and (v) take such other actions as may be reasonably
required or appropriate to administer the Plan or to carry out the Committee
activities contemplated by other sections of the Plan.
Shares Subject to Plan. The Common Stock with respect to which Awards
may be made under the Plan may be either authorized and unissued shares or
issued shares heretofore or hereafter reacquired and held as treasury shares.
The aggregate fair market value (determined on the date an option is granted) of
Common Stock subject to incentive stock options in any calendar year cannot
exceed $100,000. The number of shares subject to the Plan is currently 1.5
million. The proposal being considered by the stockholders would increase the
number of shares which may be issued by one million.
Options and SARs. The Committee is authorized to grant to participants
Options, which may be incentive stock options ("ISOs") or nonqualified stock
options ("NSOs"), and SARS, which may be granted alone or in connection with and
exercisable, in whole or in part, in lieu of an Option. Options and SARs under
the Plan will be granted subject to, among other things, the following terms and
conditions:
The exercise price per share of Common Stock under an Option or SAR
will be determined by the Committee, but may not be less than the Fair Market
Value as of the date of grant. For purposes of the Plan, the term "Fair Market
Value" means, as applied to a specific date, the mean between the highest and
lowest quoted selling price of a share of Common Stock on the NASDAQ National
Market System on such date, or if there are no reported sales on such date, on
the last preceding date on which sales were reported.
A participant will have no rights as a stockholder with respect to any
Common Stock issuable on exercise of any Option or SAR until the date of the
issuance of a stock certificate to the participant for such Common Stock. No
adjustment will be made for dividends or distributions or other rights for which
the record date is prior to the date such stock certificate is issued, except as
provided in the anti-dilution provisions of the Plan.
Incentive Stock Options. The terms of any incentive stock options
("ISOs"), which are stock options intended to meet the requirements of Section
422 of the Code, granted under the Plan must comply with the above terms
governing Options as modified by the following additional rules:
8
<PAGE>
(a) The Option must be expressly designated as an ISO by the
Committee and in the Award agreement;
(b) No ISO will be granted more than 10 years from the Effective Date
of the Plan and no ISO will be exercisable more than 10 years
from the date such ISO is granted;
(c) The exercise price of any ISO will not be less than the Fair
Market Value per share of Common Stock on the date such ISO is
granted;
(d) No ISO will be granted to any individual who at the time such ISO
is granted, owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company or
any affiliate unless the exercise price of such ISO is at least
110% of the Fair Market Value per share of Common Stock at the
date of grant and such ISO is not exercisable after the
expiration of five years from the date such ISO is granted;
(e) The aggregate Fair Market Value (determined as of the time any
ISO is granted) of any Company stock with respect to which any
ISOs granted to a participant are exercisable for the first time
by such participant during any calendar year (under the Plan and
all other stock option plans of the Company and any of its
affiliates and any predecessor of any such corporations) shall
not exceed $100,000 as required under Section 422(d)(7) of the
Code. (To the extent the $100,000 limit is exceeded, the $100,000
in Options, measured as described above, granted earliest in time
will be treated as ISOs);
(f) No ISO will be granted to an individual who is not an employee of
the Company, or its affiliates at the time such ISO is granted;
and
(g) Any other terms and conditions as may be required in order that
the ISO qualifies as an "incentive stock option" under Section
422 of the Code or successor provision.
Stock Appreciation Rights. A stock appreciation right ("SAR") will,
upon its exercise, entitle the participant to receive a number of shares of
Common Stock or cash or combination thereof, as the Committee in its discretion
shall determine, the aggregate value of which (i.e., the sum of the amount of
cash and/or Fair Market Value of such Common Stock on date of exercise) shall
equal the amount by which the Fair Market Value per share of Common Stock on the
date of such exercise exceeds the exercise price of such SAR, multiplied by the
number of shares of Common Stock with respect of which the SAR shall have been
exercised.
Restricted Stock Awards. The Committee has authority and discretion,
except as expressed limited by the Plan, to grant Awards of Restricted Stock and
to provide the terms and conditions (which need not be identical among
participants) thereof. Awards of Restricted Stock will be evidenced by written
agreements in such form as the Committee from time to time shall approve.
Subject to the applicable restrictions the participant of an Award of
Restricted Stock pursuant to the Plan will have all the rights as a stockholder
with respect to the shares of Common Stock covered by the Award including, but
not limited to, the right to vote such shares, the right to receive cash or
stock dividends with respect thereto and the right to participate in any
subdivision or consolidation of shares or other capital adjustment, or the
payment of a stock dividend or other increase or decrease in such shares,
effected without receipt of consideration by the Company. In the event the
participant receives additional shares of Common Stock pursuant to any of the
foregoing events, the shares acquired will be subject to the same terms,
conditions and restrictions as if such additional shares were received at the
date of the original Award.
Restrictions on Transfers. No Option or SAR nor any right of interest
of a participant under the Plan in any instrument evidencing any Option or SAR
under the Plan may be assigned, encumbered, or transferred, except, in the event
of the death of a participant, by will or the laws of descent and distribution.
Amendment and Termination. The Board of Directors may amend the Plan
from time to time in its sole discretion; provided, however, that no such
amendment may, without the approval of the stockholders of the Company if such
approval is required by the laws of the State of Delaware or Section 422 of the
Code or Rule 16b-3 under the Exchange Act: (a) change the class of persons
eligible to receive Awards or otherwise materially modify the requirements as to
eligibility for participation in the Plan; (b) increase the aggregate number of
shares of Common Stock with respect to which Awards may be made under the Plan;
(c) materially increase the benefits accruing to participants under the Plan; or
(d) remove the administration of the Plan from the Committee or render any
member
9
<PAGE>
of the Committee eligible to receive an Award under the Plan while serving
thereon. No amendment may impair the rights of any participant under any
outstanding Award without the participant's consent. The Board of Directors may
suspend or terminate the Plan at any time. Upon termination of the Plan, no
additional Awards will be granted, but the terms of the Plan will continue in
full force and effect with respect to outstanding and unexercised Awards.
Subject to the terms and conditions and the limitations of the Plan,
the Committee may in the exercise of its sole discretion modify, extend or renew
the terms of outstanding Awards granted under the Plan, or accept the surrender
of outstanding Awards (to the extent not theretofore exercised) and authorize
the granting of new Awards in substitution therefor (to the extent not
theretofore exercised). The Committee may accelerate the time at which any
Option or SAR is exercisable, subject to compliance with the requirements of
Rule 16b-3 (or successor provision) under the Exchange Act. No modification of
an Award may, without the consent of the participant, impair any rights or
obligations under any outstanding Award.
The Plan terminates on March 29, 2004, and no new Options may be issued
after this date; however, then unexpired Options will continue to be exercisable
in accordance with their terms.
Recommendation
The Board of Directors recommends that the stockholders vote "FOR" the
proposal. Proxies solicited by the Board of Directors will be voted in favor of
this proposal unless a contrary vote or abstention is specified.
PROPOSAL NO. 4 -- AMENDMENT TO STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
Background Information
In March 1994, the Board of Directors of the Company approved a
proposed Stock Option Plan for Non-Employee Directors effective April 1, 1994
(the "Non-Employee Director Plan"), which authorizes the grant of options to
those members of the Board who are not employees of the Company to purchase
Common Stock of the Company. Morrison Knudsen, then the sole stockholder of the
Company, approved the Non-Employee Director Plan on March 29, 1994.
Proposed Amendment
In August 1996, the Board of Directors approved an amendment to the
Non-Employee Director Plan, subject to stockholder approval, (i) to grant
Options without further Board action, on January 2 of each year, up to and
including January 2, 2004, to each non-employee director of the Company to
purchase 1,500 shares of the Company's Common Stock for the fair market value of
such Common Stock as of the date of the grant and (ii) to increase by 50,000
shares the maximum number of shares which may be issued under such Non-Employee
Director Plan. Fair market value means, as applied to a specific date, the mean
between the highest and lowest quoted selling price of a share of Common Stock
on the Nasdaq National Market System on such date, or if there are no reported
sales on such date, on the last preceding date on which sales were reported.
Summary of the Non-Employee Director Plan
Purpose. The purpose of the Non-Employee Director Plan is to
encourage the highest level of performance from those members of the Board who
are not employees of the Company by granting such directors Options to purchase
the Company's Common Stock. Ownership of such Common Stock provides non-employee
directors with a proprietary interest in the Company's success and increases
their identification with the interest of the Company's stockholders.
Eligibility. Each non-employee director is an eligible
participant in the Non-Employee Director Plan.
Administration. The Executive and Finance Committee of the
Board interprets and administers the Non-Employee Director Plan. The
interpretation and construction by this Committee of any provision of the Plan
10
<PAGE>
is final and binding upon all persons interested in the Plan. No member of this
Committee is liable for any action taken or determination made in good faith
with respect to the Non-Employee Director Plan.
Shares Subject To The Non-Employee Director Plan. The shares
of Common Stock issued upon exercise of an Option will be from authorized but
unissued Common Stock or from any outstanding Common Stock which has been
reacquired by the Company. In the event that an Option terminates for any reason
without having been exercised in full, the unpurchased shares of Common Stock
subject to that Option will again be available for grant under the Non-Employee
Director Plan. The number of shares subject to the Non-Employee Director Plan is
currently 100,000. The proposal being considered by the stockholders would
increase the number of shares which may be issued by 50,000.
Grant Of Option. Under the Non-Employee Director Plan, each
current non-employee director is granted an Option to purchase 12,000 shares of
Common Stock (the "Initial Option") upon his initial election to the Board.
Under the proposal being considered by the stockholders, each non-employee
director would also receive annually an Option to purchase 1,500 shares of
Common Stock on January 2 of each year (the "Annual Option").
Price Per Share. The exercise price for shares covered by the
Initial Option is equal to 50% of the fair market value of the Common Stock on
the date of grant. The exercise price for shares covered by the Annual Option is
equal to 100% of the fair market value of such Common Stock as the date of the
grant.
Term And Exercise of Option. All Initial Options and Annual
Options granted under the Non-Employee Director Plan vest over a three-year
period in annual increments of one-third (1/3rd) on each anniversary of the date
of the grant; provided, however, that if a participant ceases to be a
non-employee director for any reason (other than termination of directorship for
"cause"), all vested Options then held by such participant will be exercisable
thereafter for a period of three years. In addition, in such circumstances, all
unvested Options will terminate 30 days after such person ceases to be a
non-employee director. If a participant's directorship is terminated for cause,
all vested Options then held by such participant will be exercisable thereafter
for a period of 30 days and all unvested Options will automatically terminate on
the date of termination as a director.
Term Of Plan. The Non-Employee Director Plan terminates on
March 29, 2004, and no new options may be issued after this date; however, then
unexpired Options will continue to be exercisable in accordance with their
terms.
Recommendation
The Board of Directors recommends that the stockholders vote "FOR" the
proposal. Proxies solicited by the Board of Directors will be voted in favor of
this proposal unless a contrary vote or abstention is specified.
PROPOSAL NO. 5 -- SELECTION OF AUDITORS
The Proposal
The Board of Directors appointed Deloitte & Touche LLP, independent
public accountants, to audit the financial statements of the Company and its
wholly owned subsidiaries for the fiscal year ending December 31, 1996. This
appointment is being presented to stockholders for ratification. Deloitte &
Touche LLP audited the Company's financial statements for the year ended
December 31, 1995.
A representative of Deloitte & Touche is expected to attend the meeting
and will be afforded an opportunity to make a statement if he or she desires to
do so. This representative is also expected to be available to respond to
appropriate questions.
Recommendation
The Board of Directors recommends that the stockholders vote "FOR" the
proposal. Proxies solicited by the Board of Directors will be voted in favor of
this proposal unless a contrary vote or abstention is specified.
11
<PAGE>
INFORMATION CONCERNING EXECUTIVE OFFICERS
Information Concerning Executive Officers
Set forth below is information concerning each executive officer and
certain key employees of the Company, including his business experience during
the past five years, his positions with the Company and certain directorships
held by him. Certain officers hold or have held positions with Morrison Knudsen.
Officers are appointed annually by the Board of Directors of the Company and
serve, at the pleasure of the Board, until the appointment of their successors.
There are no family relationships among the officers, nor, except as hereinafter
described, are there any arrangements or understandings between any officer and
another person pursuant to which he was appointed to office.
Name Age Position
Executive Officers
John C. Pope ........... 47 Chairman of the Board
Gilbert E. Carmichael .. 68 Vice Chairman of the Board
Robert S. Miller, Jr ... 54 Vice Chairman of the Board
Michael A. Wolf ........ 53 President, Chief Executive Officer and Director
William D. Grab ........ 40 Vice President, Controller and Principal
Accounting Officer
Thomas P. Lyons ........ 33 Treasurer
Michael A. Weiss ....... 48 Secretary
Other Key Employees
Richard J. Clark ....... 63 President, Clark Industries, Inc.
Joseph S. Crawford, Jr . 51 President, Locomotive Operations
David M. Cullen ........ 53 Executive Vice President, Power Parts Company
James E. Lindsay ....... 42 President, MK Engine Systems Company, Inc.
Theodore E. Nelson ..... 43 President, Touchstone, Inc.
Scott E. Wahlstrom ..... 33 Vice President of Human Resources and
Administration
Timothy R. Wesley ...... 34 Vice President of Investor and Public Relations
J. Lynn Young .......... 58 President, Motor Coils
Executive Officers.
Michael A. Wolf. See "Information Concerning Directors and Nominees"
for a description of Mr. Wolf's relevant business experience.
John C. Pope. See "Information Concerning Directors and Nominees" for a
description of Mr. Pope's relevant business experience.
Gilbert E. Carmichael. See "Information Concerning Directors and
Nominees" for a description of Mr. Carmichael's relevant business experience.
Robert S. Miller, Jr. See "Information Concerning Directors and
Nominees" for a description of Mr. Miller's relevant business experience. Mr.
Miller has announced his resignation as the Company's Vice Chairman effective
September 11, 1996.
William D. Grab has served as Vice President, Controller and Principal
Accounting Officer since April 1995, having previously held various accounting
positions with the Company's Motor Coils subsidiary from 1980 to April 1995.
Thomas P. Lyons has served as Treasurer of the Company since August
1996, having previously served as the Company's Project Finance Manager from
September 1994 to July 1996 and its Senior Financial Analyst from June 1994 to
September 1994. From 1993 to June 1994, Mr. Lyons served as a Project Finance
Analyst for Morrison Knudsen. Prior to 1993, Mr. Lyons attended business
graduate school and college.
Michael A. Weiss has served as Secretary of the Company since March
1995. He has also served as Secretary and General Counsel of Rouge Steel Company
(integrated steel manufacturing) since 1989. Mr. Weiss is a director and a
shareholder of the Pittsburgh, Pennsylvania law firm of Doepken Keevican & Weiss
Professional Corporation ("DK&W") engaged in the practice of law. He has been a
shareholder of DK&W since 1988.
12
<PAGE>
Other Key Employees.
Richard J. Clark has served as the President of the Company's Clark
Industries, Inc. subsidiary and its predecessors since its founding in 1976.
Joseph S. Crawford, Jr. has served as President of the Locomotive Group
since December 1995. Prior thereto, he served as the Company's Executive Vice
President, Locomotive Operations (September 1994 to December 1995) and as Senior
Vice President, Operations and Maintenance of the Company (May 1994 to September
1994). From 1988 to May 1994, Mr. Crawford served as Senior Vice President and
General Manager of New Jersey Transit Rail Corporation (transit and rail
operations).
David M. Cullen has served as Executive Vice President of the Company's
Power Parts subsidiary since May 1994. From 1983 to 1994, Mr. Cullen served as
Division Manager of Gates Corporation (rubber and plastic products).
James E. Lindsay has served as President, MK Engine Systems Company
Inc. since August 1996. He had previously served as a Senior Vice President of
the Company (1994 to August 1996) and as Senior Vice President Marketing of MK
Engine Systems Company, Inc.'s division in Simi Valley, California (formerly
Arrowsmith) (1989 to 1994).
Theodore E. Nelson has served as President, Touchstone, Inc. since
August 1996. He had previously served as a Senior Vice President of the Company
(1994 to 1996). Mr. Nelson joined Touchstone, Inc. in 1976 and has served as
President and a Director of Touchstone, Inc. since 1982. Touchstone, Inc. a
manufacturer of locomotive cooling systems, was acquired by the Company in 1994.
Scott E. Wahlstrom has served as Vice President of Human Resources of
the Company since August 1996. Prior thereto, he served as the Company's
Corporate Director -- Human Resources (August 1995 to August 1996) and as its
Corporate Manager -- Human Resources (1994 to August 1995). He previously served
as Manager of International Compensation at Morrison Knudsen from 1992 to 1994.
In addition, from 1991 to 1992, Mr. Wahlstrom served as Senior Analyst at Walt
Disney Company (entertainment).
Timothy R. Wesley has served as Vice President of Investor and Public
Relations of the Company since August 1996. Prior thereto, he served as the
Company's Director, Investor and Public Relations from February 1995 to August
1996. Previously, Mr. Wesley served as Director, Investor and Public Relations
(1993 to February 1995) and as Public Relations Manager (1992 to 1993) at
Michael Baker Corporation (engineering and construction). In addition, Mr.
Wesley served as Marketing Communications Supervisor at Westinghouse Credit
Corporation (financial services) from 1988 to 1992.
J. Lynn Young has served as the President of the Company's Motor Coils
subsidiary since August 1996, having previously served as its Executive Vice
President from 1986 to August 1996.
13
<PAGE>
COMPENSATION
Director Compensation
The Company pays each director who is not a full-time employee of the
Company or Morrison Knudsen, effective July 1, 1996, $12,000 per year for his
services as a director of the Company. In addition, each director is entitled to
receive $1,000 for each meeting of the Board or Select Committee attended by
such director, and $500 for each other Committee meeting attended by a director
who is not a Committee Chairman. Each Committee Chairman receives $1,000 for
each Committee meeting attended by such Chairman. All directors are reimbursed
for their out-of-pocket expenses incurred in connection with attendance at
meetings of, and other activities relating to serving on, the Board or any Board
Committee.
Each member of the Select Committee also received $25,000 for his
services as a member of this Committee. In addition, John C. Pope, a member of
the Select Committee served as the Company's principal negotiator in connection
with the Company's solicitation of offers to purchase the Company. As
consideration for these additional services, Mr. Pope received compensation of
$165,000 (based on a per diem rate of $5,000), plus reimbursement of expenses.
In addition, the Company adopted a Stock Option Plan for Non-Employee
Directors to encourage the highest level of performance for members of the Board
of Directors who are not employees of either the Company or Morrison Knudsen, by
providing such directors with a proprietary interest in the financial success of
the Company. See "Proposal No. 4 -- Amendment to Stock Option Plan for
Non-Employee Directors" of a description of the terms of this Plan. The
Company's non-employee directors, Nicholas J. Stanley, James P. Miscoll and Lee
B. Foster II, received and continue to hold options to purchase 12,000 shares of
the Company's Common Stock at exercise prices of $7.9375, $4.75 and $2.8438,
respectively.
Executive Compensation
Cash Compensation. The following table describes the compensation paid
by the Company or its subsidiaries to (i) all individuals serving as the
Company's Chief Executive Officer for the Company's fiscal year ending as of
December 31, 1995; (ii) the four most highly compensated executive officers of
the Company (other than persons serving as Chief Executive Officer) who were
serving as executive officers at December 31, 1995; and (iii) up to two
additional individuals for whom disclosure would have been provided pursuant to
(ii) but for the fact that the individual was not serving as an executive
officer of the Company at December 31, 1995 (collectively, the "Named
Executives").
14
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
--------------------------------- ----------------------- -------
Other Annual Restricted All Other
Compensa- Stock Options/ LTIP Comp-
Name and Position Salary Bonus tion Award(s) SARs Payouts ensation
- ----------------- ------ ----- ------------ -------- ------------ ------- ------------
Year ($) ($) ($) ($) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William J. Agee,
formerly Chairman and .... 1995 0 0 0 0 0 0 0
CEO ...................... 1994 0 0 0 0 300,000(1) 0 0
Michael J. Farrell,
formerly President and ... 1995 305,128 300,000(6) 1,636(3) 0 0 0 2,322(7)
CEO ...................... 1994 275,000(2) 0 1,728(3) 0 200,000(4) 0 0
Thomas J. Reinecke,
formerly Executive Vice .. 1995 235,542 225,000(6) 1,082(3) 0 0 0 3,331(7)
President ................ 1994 216,666(2) 0 1,193(3) 0 150,000(4) 0 0
Joseph G. Fearon,
formerly Executive ....... 1995 201,038 100,000(6) 0 0 30,000(9) 0 1,401(7)
Vice Pesident ............ 1994 205,919 0 51,183(8) 0 60,000(10) 0 5,700
Joseph S. Crawford,
Jr., President ........... 1995 200,858 200,000(6) 0 0 50,000(9) 0 764(7)
Locomotive Group ......... 1994 126,087 0 0 0 100,000(10) 0 280(7)
J. Jeremy T
Whatmough, formerly
Executive Vice
President, Purchasing .... 1995 151,657 75,000(6) 0 0 30,000 0 1,512(7)
and Logistics ............ 1994 17,308 0 14,245(11) 0 60,000 0 162(7)
- ----------------
<FN>
1 Under the terms of his employment agreement with the Company, Mr. Agee
was not entitled to receive any compensation from the Company other
than an option to purchase 300,000 shares of the Company's Common
Stock. The options to purchase 300,000 shares were terminated
following the termination of Mr. Agee's employment with the Company in
February 1995.
2 Includes compensation paid by the Company's Motor Coils subsidiary to
Mr. Farrell and Mr. Reinecke.
3 This amount represents imputed income for the use of a Company car.
4 These options were granted under the Company's Stock Incentive Plan.
In April 1995, Mr. Farrell and Mr. Reinecke returned to the Company
the options awarded to them and these options were canceled in May
1995.
5 The options shown are options to purchase the Company's Common Stock
at an exercise price of $10.13 per share. These options were granted
under the Company's Stock Incentive Plan. They have become exercisable
with respect to 25% of the shares and will become exercisable with
respect to the balance of the shares in equal increments on November
29, 1996, 1997 and 1998, unless earlier terminated. These options
terminate on November 29, 2004, subject to earlier termination upon
cessation of an officer's employment with the Company.
15
<PAGE>
6 The amount shown in this column represents a bonus pursuant to a
retention program adopted by the Company in an effort to maintain the
then current management team in the face of uncertainties created by
its efforts during 1995 to sell the Company.
7 The amount shown in this column represents the payment of insurance
premiums for term life insurance.
8 The amount shown in this column includes $5,799 as reimbursement for
temporary living and housing expenses in Australia, a $37,115
reimbursement for Australian taxes paid by Mr. Fearon and an $8,269
reimbursement for miscellaneous moving expenses.
9 The options shown are options to purchase the Company's Common Stock
at an exercise price of $8 per share. These options were granted under
the Company's Stock Incentive Plan. They will become exercisable with
respect to 25% of the shares on October 5, 1996 and with respect to
the balance of the shares in equal increments on October 5, 1997, 1998
and 1999, unless earlier terminated. These options terminate on
October 5, 2005, subject to earlier termination upon cessation of an
officer's employment with the Company. In April 1996, Messrs. Crawford
and Whatmough agreed to exchange the options granted to them in 1995
for a like number of new options at an exercise price of $8 per share
(subject to adjustment as described below). The new options will
become exercisable with respect to 25% of the shares on each of March
31, 1997, 1998, 1999 and 2000, unless earlier terminated. Based upon
the pre-tax income level of the Company for fiscal year 1996 and the
Company's ability to meet certain targeted performance standards, the
exercise price may be adjusted downward to as low as $5 per share.
These options terminate on March 31, 2006, subject to earlier
termination upon cessation of an officer's employment with the
Company.
10 One-half of the options shown for Mr. Crawford for 1994 and all of the
options shown for Mr. Fearon for 1994 represent options to purchase
shares of the Company's Common Stock at an exercise price equal to the
initial public offering price of the Company's Common Stock, $16 per
share. These options were granted under the Company's Stock Incentive
Plan. They became exercisable with respect to 75% of the shares and
will become exercisable with respect to the balance of the shares on
July 20, 1997, unless earlier terminated. These options terminate on
April 26, 2004, subject to earlier termination upon cessation of an
officer's employment with the Company.
The remaining options shown for Mr. Crawford for 1994 represent
options to purchase 50,000 shares of the Company's Common Stock at an
exercise price equal to $10.13 per share. These options were granted
under the Company's Stock Incentive Plan. They have become exercisable
with respect to 25% of the shares and will become exercisable with
respect to the balance of the shares in equal increments on November
29, 1996, 1997 and 1998, unless earlier terminated. These options
terminate on November 29, 2004, subject to earlier termination upon
cessation of an officer's employment with the Company.
11 This amount includes $11,800 paid by the Company to Mr. Whatmough as
consulting fees and $2,445 for reimbursement of moving expenses.
</FN>
</TABLE>
Options Awards. The following table sets forth information concerning
options to purchase the Company's Common Stock or stock appreciation rights
("SARs") with respect to the Company's Common Stock granted to Named Executives
in 1995.
16
<PAGE>
<TABLE>
<CAPTION>
Option/SAR Grants in Fiscal Year 1995
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term(2)
- ------------------------------------------------------------------------------------------------- ----------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Option/SARs Employees or Base Price Expiration
Name Granted (#)(1) in Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---- -------------- -------------- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
William J. Agee -- -- -- -- -- --
Michael J. Farrell -- -- -- -- -- --
Thomas J. Reinecke -- -- -- -- -- --
Joseph G. Fearon (3) 30,000 5.6% $ 8.00 10/5/05 150,935 382,498
Joseph S. Crawford, Jr.(4) 50,000 9.4% $ 8.00 10/5/05 251,558 637,497
J. Jeremy T. Whatmough (4,5) 30,000 5.6% $ 8.00 10/5/05 150,935 382,498
<FN>
1 The options shown are options granted to purchase the Company's Common
Stock at an exercise price of $8 per share. These options were granted
under the Company's Stock Incentive Plan. The options vest with
respect to 25% of the shares on each of October 5, 1996, 1997, 1998
and 1999, and terminate on October 5, 2005, subject to earlier
termination upon cessation of an officer's employment with the Company
(as is the case with certain former officers (see notes 3 and 5
below)).
2 The potential realizable value shown is calculated based upon
appreciation of the Common Stock issuable under options, calculated
over the full term of the options assuming 5% and 10% annual
appreciation in the value of the Company's Common Stock from the date
of grant, net of the exercise price of the options.
3 Mr. Fearon ceased to be employed by the Company on August 29, 1996
and, accordingly, this option terminates on November 27, 1996. Mr.
Fearon will not realize any value from the options he holds unless he
exercises such options prior to such date.
4 On April 4, 1996, the Board granted new options to Mr. Crawford and
Mr. Whatmough and certain other directors, executive officers and key
employees in exchange for the cancellation of their existing options.
The new options have an exercise price of $8 per share (subject to
adjustment as described below). The new options will become
exercisable with respect to 25% of the shares on each of March 31,
1997, 1998, 1999 and 2000, unless earlier terminated. Based upon the
pre-tax income level of the Company for fiscal year 1996 and the
Company's ability to meet certain targeted performance standards, the
exercise price may be adjusted downward to as low as $5 per share.
These options terminate on March 31, 2006, subject to earlier
termination upon cessation of an officer's employment with the
Company.
5 Mr. Whatmough resigned from his position on August 2, 1996 and,
accordingly, this option terminates on October 31, 1996. Mr. Whatmough
will not realize any value from the options he holds unless he
exercises such options prior to such date.
</FN>
</TABLE>
Option Values. The following table sets forth information concerning
the aggregate number and values of options held by Named Executives. None of the
Named Executives exercised any options in 1995.
17
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Fiscal Year 1995
and FY-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
Fiscal Year End (#) Fiscal Year End ($)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) (#) Unexercisable(1) Unexercisable
- ---- --------------- --- ---------------- -------------
<S> <C> <C> <C> <C>
William J. Agee 0 0 0/0 0/0
Michael J. Farrell 0 0 0/0 0/0
Thomas J. Reinecke 0 0 0/0 0/0
Joseph G. Fearon 0 0 30,000/60,000 0/0
Joseph S. Crawford, Jr 0 0 37,500/112,500 0/0
J. Jeremy T. Whatmough 0 0 15,000/75,000 0/0
---
<FN>
1 This information is presented as of December 31, 1995. See Notes 1 and
3 to the "Option/SAR Grants in Fiscal Year 1995" table and the notes
to the "Summary Compensation Table" above for a description of the
terms of the options listed in this table and certain options
subsequently issued in exchange for such options.
</FN>
</TABLE>
Employment Agreements. Effective as of December 29, 1995, the Company
entered into an employment agreement with John C. Pope for a term of two years
commencing January 1, 1996, subject to automatic one-year extensions (unless
notice of termination is given), under which Mr. Pope agreed to serve as
Chairman of the Board of the Company. Under the terms of his employment
agreement, Mr. Pope will be expected to devote on average no more than three
days per week to the business and affairs of the Company. The agreement provides
for payment to Mr. Pope of an annual base salary of $350,000. The agreement also
provides for a restricted stock award to him under the Company's Stock Incentive
Plan of 50,000 shares of the Company's Common Stock, with the sale restrictions
to lapse on 25,000 of the shares on January 1, 1997, and to lapse on the
remaining 25,000 shares on January 1, 1998, or, as to all shares, upon the
earlier occurrence of a change in control of the Company. In addition, Mr. Pope
received stock appreciation rights ("SARs") in respect of 300,000 shares of the
Company's Common Stock (190,000 shares of which were awarded under the Company's
Stock Incentive Plan, and the balance outside of such Plan). The SARs respecting
150,000 shares will become exercisable on December 29, 1996, with the SARs as to
the remaining 150,000 shares to become exercisable on December 29, 1997, subject
to earlier vesting if the Company terminates Mr. Pope's employment other than
for cause.
Effective as of July 1, 1996, the Company entered into an employment
agreement with Michael A. Wolf for a period of 24 months, subject to automatic
extensions for periods of 24 months through July 1, 2001 (unless notice of
termination is given), under which Mr. Wolf has agreed to serve as President and
Chief Executive Officer of the Company. The agreement provides for payment to
Mr. Wolf of a base salary of $375,000 per annum. Mr. Wolf received a single
payment of $100,000 upon execution of the agreement, which Mr. Wolf is obligated
to repay to the Company if he voluntary terminates his employment before July 1,
1997. The agreement also provides for a restricted stock award to him under the
Company's Stock Incentive Plan of 100,000 shares of the Company's Common Stock,
with the sale restrictions to lapse as to all shares at the close of business on
June 30, 2001, so long as Mr. Wolf is still in the employ of the Company or upon
the earlier occurrence of a change of control of the Company. In addition, Mr.
Wolf received SARs in respect of 400,000 shares of the Company's Common Stock.
Due to the insufficiency of stock available under the Stock Incentive Plan, such
SARs were issued pursuant to a stock appreciation rights agreement between the
Company and Mr. Wolf. Under certain circumstances as described under "Proposal
No. 3 -- Amendment to Stock Incentive Plan -- Participation in the Plan," the
Company may issue a like number of options under the Stock Incentive Plan and
cap the price of these SARs.
The agreement further provides that if the Company terminates Mr.
Wolf's employment in connection with a "change of control" or other than for
cause, Mr. Wolf is entitled to (i) the continuation of his salary for the
remainder of the term or a single payment in an amount equal to the present
value of such salary continuation payments; (ii) retention of any rights with
respect to the SARs and Plan options; (iii) immediate vesting in the grant of
100,000 shares of the Company's common stock; (iv) continuing benefits for 12
months or until Mr. Wolf finds
18
<PAGE>
new employment; and (v) a relocation fee in the amount of $50,000 less $10,000
for each full year of employment with the Company. The agreement also contains a
non-competition provision which generally restricts Mr. Wolf from competing with
the Company for two years following the termination of his employment from the
Company.
The Company entered into an employment agreement with Michael J.
Farrell in March 1994 for a term of five years, subject to successive one-year
extensions, under which he agreed to serve as President and Chief Operating
Officer of the Company. No adjustment to the terms of this agreement was made by
reason of Mr. Farrell's promotion to Chief Executive Officer in February 1995.
Under the terms of his employment agreement, Mr. Farrell received an annual base
salary of $300,000, and became entitled to participate in any long-term cash
incentive programs adopted by the Company. Mr. Farrell resigned as President and
Chief Executive Officer of the Company effective April 3, 1996 and all rights
and benefits under his Employment Agreement terminated as of that date. The
Company and Mr. Farrell entered into a Consulting Agreement effective April 4,
1996 pursuant to which the Company engaged Mr. Farrell as a consultant on an "as
called" basis through July 3, 1996. Mr. Farrell was paid aggregate consulting
fees of $150,000 under the Consulting Agreement. In addition, Mr. Farrell
received a retention payment of $300,000 on May 1, 1996, pursuant to the
retention program adopted by the Company.
In October 1991, the Company's Motor Coils subsidiary entered into an
employment agreement with Thomas J. Reinecke for a term of five years, under
which he has agreed to serve as an executive officer of Motor Coils. Under the
terms of such employment agreement, Mr. Reinecke's annual base salary was fixed
at $200,000 (subsequently increased to $225,000), and he became eligible to
receive an annual bonus based on Motor Coils' performance. Mr. Reinecke resigned
as Executive Vice President of the Company effective March 31, 1996 and all
rights and benefits under his employment agreement terminated as of that date.
The Company and Mr. Reinecke entered into a Consulting Agreement effective April
1, 1996 pursuant to which the Company engaged Mr. Reinecke as a consultant as an
"as called" basis through June 30, 1996. Mr. Reinecke was paid aggregate
consulting fees of $86,250 under the Consulting Agreement. In addition, Mr.
Reinecke received a retention payment of $225,000 on May 1, 1996, pursuant to
the retention program adopted by the Company.
The Company entered into an employment agreement with Joseph G. Fearon
in October 1995 for a term which expires on November 8, 1998. Under the terms of
his employment agreement, Mr. Fearon's annual base salary was set at $200,000
and he received a bonus equivalent to six months' base salary pursuant to a
retention program adopted by the Company. Mr. Fearon ceased to be employed by
the Company on August 29, 1996. The Company and Mr. Fearon are currently
discussing severance terms.
The Company has entered into severance agreements with J. Jeremy T.
Whatmough and Joseph S. Crawford, Jr. which provide for continuation of their
salaries for a period of one year in the event of their termination in certain
circumstances. Mr. Whatmough resigned from the Company effective August 2, 1996
and, in addition to the payment of his annual salary of $150,000 through August
2, 1997 under the severance agreement, Mr. Whatmough also received a $15,000
relocation payment from the Company.
The Company may also enter into employment agreements with other
executive officers of the Company from time to time.
Retention Program. In an effort to maintain the then current management
team in the face of uncertainties created by a prospective sale of the Company,
the Company adopted retention programs for executives and certain staff members.
Under the executive retention program, executives who remained with the Company
for six months after the adoption of the retention program in April 1995
received bonuses of from 50% to 100% of their annual salaries in November 1995.
In October 1995, the Company extended this program for an additional six months
so that executives who remained with the Company for six additional months,
until May 1996, received another bonus of from 50% to 100% of their annual
salaries. In addition to retention bonuses, if the executives are terminated
without cause within 24 months after a change of control of the Company, they
are entitled to receive severance payments equal to 100% to 200% of their annual
salaries. The staff retention program was similarly structured with lower
bonuses and severance payments.
Executive Incentive Plan. The Company established an Executive
Incentive Plan ("Executive Incentive Plan"), under which key officers and
employees of the Company may earn cash bonuses. The terms of the Executive
Incentive Plan are described under "Compensation -- Report of the Compensation
Committee."
Long-Term Incentive Plan. The Company has adopted two long-term
incentive plans in which certain Named Executives and other executive officers
and key employees of the Company are eligible to participate. The terms of these
incentive plans are described under "Compensation -- Report of the Compensation
Committee."
19
<PAGE>
Stock Incentive Plan. The Company has adopted a Stock Incentive Plan
pursuant to which awards of incentive stock options, non-qualified stock
options, stock appreciation rights, restricted stock awards, performance share
awards, phantom stock units and similar awards may be made to officers and key
employees. The terms of this plan are described under "Compensation -- Report of
the Compensation Committee."
Compensation Committee Interlocks and Insider Participation
During 1995, Nicholas J. Stanley and James P. Miscoll served as the
Compensation Committee. There are no interlocking relationships, as defined in
the regulations of the Securities and Exchange Commission, involving either of
these individuals.
Report of the Compensation Committee
The Compensation Committee has responsibility for reviewing executive
salaries, administering the bonus, incentive compensation and stock option plans
of the Company, and approving the salaries and other benefits of the executive
officers of the Company. In addition, the Compensation Committee consults with
the Company's management regarding pension and other benefit plans, and
compensation policies and practices of the Company.
Philosophy. The Company's policies on executive compensation are
designed to (i) provide compensation to employees at such levels as will enable
the Company to attract and retain employees of the highest caliber, (ii)
compensate employees in a manner best calculated to recognize individual, group
and Company performances, and (iii) seek to align the interests of the employees
with the interests of the Company's stockholders.
Components of Executive Officer Compensation. Executive officer
compensation includes salary, benefits and incentive bonuses in the form of
awards of stock, stock options and stock appreciation rights, and cash bonuses
under certain incentive or performance plans. Salary determinations are based
upon various subjective factors such as the executive's responsibilities,
position, qualifications, individual performance and experience. In no such case
did the Compensation Committee undertake a formal survey or analysis of
compensation paid by other companies.
Through bonuses and the incentive plans described below, the Company
seeks to reward its executives for the Company's performance. In addition,
certain executives are or, during 1995, were entitled to compensation, including
incentive compensation, pursuant to the terms of their employment agreements.
See "Compensation -- Executive Compensation -- Employment Agreements." The
Company has also established a retention program for its executives as described
under "Compensation -- Executive Compensation -- Retention Program."
Long-Term Incentive Plan. The Company has adopted two long-term
incentive plans in which certain Named Executives and other executive officers
and key employees of the Company are eligible to participate: the Long-Term
Performance Compensation Benefit Plan ("Three-Year Plan") and the MK Rail
Long-Term Incentive Plan ("Five-Year Plan").
The Three-Year Plan is designed to compare Total Shareholder Return (as
defined in the applicable plan) at the end of an initial period (April 1, 1994
to December 31, 1996) and each rolling three-year period thereafter against
Total Shareholder Return for each of four other competitors. In the event of a
change in control of the Company, each active participant would be entitled to
receive a pro rata portion of the benefit payable under the plan for any pending
performance period (based on 30-day average closing prices as of the month
immediately preceding the month in which the change in control occurs) as soon
as practicable following such change in control. Joseph S. Crawford, Jr.
participates in the Three-Year Plan.
The Five-Year Plan measures annually over a five-year period (January
1, 1994 to December 31, 1998) the Company's after-tax net income as a percentage
of its average total capital ("Return on Total Capital"). An award pool is
created each year in the amount by which the Company's cumulative net income
exceeds (or falls below) a Return on Total Capital at a rate to be determined by
the Board of Directors. To the extent that the Company's Return on Total Capital
falls below the goal in any given year, the award pool is calculated as a
negative number. A participant shares in the annual pool (which may be positive
or negative for a given year) based on sharing percentages established by the
Compensation Committee. Both positive and negative annual performance is accrued
throughout the five-year period. The "cumulative" five-year award, if any, will
be adjusted at the end of the performance period if the compound annual growth
rate in the Company's stock price exceeds certain targets. Michael J. Farrell
formerly participated in the Five-Year Plan.
No awards were made to or accrued for the benefit of any participant
under either the Three-Year Plan or the Five-Year Plan in 1995.
20
<PAGE>
Executive Incentive Plan. The Company established an Executive
Incentive Plan ("Executive Incentive Plan"), under which key officers and
employees of the Company may earn cash bonuses. Participants in the Executive
Incentive Plan are selected by the Compensation Committee based on their level
of responsibility, salary and past and prospective contributions to the business
and growth of the Company. Under the Executive Incentive Plan, cash awards may
be made to individuals from an award fund established annually by the Company.
The amount of the award fund is based on criteria established by the
Compensation Committee. The criteria may be described in terms of Company-wide
objectives, such as net income, return on capital and cash flow, or such other
or similar objectives which are related to performance of a subsidiary
corporation, division, department or function within the Company.
The amount of the award fund for any year may not in any event exceed
9.55% of the Company's net profit after taxes for such year. Each participant
potentially may receive an award from the award fund up to a specified
percentage of the participant's base salary, which percentage generally ranges
from 20% to 50% depending on the participant's organizational duties. The
Compensation Committee may modify individual awards but in no event may the
Compensation Committee increase by more than 50% the award otherwise payable.
Awards are subject to forfeiture if a participant's employment terminates prior
to receipt of the award unless termination is due to retirement, death,
permanent disability or, after a change in control of the Company, by the
Company for Cause (as defined in the Executive Incentive Plan) or by the
participant without Good Reason (as defined in the Executive Incentive Plan).
No bonuses were awarded under the Executive Incentive Plan in 1995.
Stock Incentive Plan. The Company adopted a Stock Incentive Plan
("Stock Incentive Plan"), pursuant to which awards of incentive stock options,
non-qualified stock options, stock appreciation rights, restricted stock awards,
performance share awards, phantom stock units and similar awards may be made to
officers and key employees, and thereby provide additional incentives for such
persons to devote themselves to the maximum extent practicable to the business
of the Company. The Stock Incentive Plan is also intended to aid in attracting
persons of outstanding ability to enter and remain in the employ of the Company.
A total of 1.5 million shares of Common Stock have been reserved for issuance of
stock options and restricted stock awards under the Stock Incentive Plan. The
Company has proposed amending the Stock Incentive Plan to increase the number of
shares issuable under the Stock Incentive Plan by one million shares of Common
Stock. See "Proposal No. 3--Amendment to Stock Incentive Plan."
The Stock Incentive Plan is administered by the Compensation Committee,
no voting member of which may be an employee of the Company or eligible to
receive awards under the Stock Incentive Plan. Options awarded pursuant to the
Stock Incentive Plan are subject to vesting requirements established and
ratified by the Compensation Committee. The Compensation Committee establishes
the exercise price of all options granted under the Stock Incentive Plan, which
generally will not be less than the market price of the Company's Common Stock
subject to the option at the date of grant or the average market price of the
Company's Common Stock over a period preceding or following the date of grant,
as specified in the option.
During 1995, grants were awarded to specific officers and key employees
based on: (i) the salary ranges applicable to such officers and employees at the
time of the award, and (ii) various subjective factors such as the executive's
responsibilities, individual performance and anticipated contribution to the
Company's performance. The Compensation Committee neither undertook a formal
survey or analysis of options awarded by other companies nor established
numerical targets or goals in determining these option awards.
Awards granted under the Stock Incentive Plan are subject to
acceleration in the event of a change in control of the Company and in certain
other events as determined by the Compensation Committee, including retirement
after age 65, death or disability. Pursuant to the Stock Incentive Plan, the
Compensation Committee will review and may revise from time to time any of the
vesting or other requirements as they apply to eligible participants.
Compensation of the Chief Executive Officer. Michael J. Farrell served
as the Chairman and Chief Executive Officer of the Company during 1995 and until
his resignation effective April 3, 1996. Mr. Farrell's executive compensation
was determined based upon his employment agreement with the Company. The
Compensation Committee further authorized a retention payment in the amount of
$300,000 on May 1, 1996 under the Company's executive retention program (see
"--Executive Compensation--Retention Program"). During 1995, the Compensation
Committee's compensation policies with respect to Mr. Farrell were based on
various subjective factors such as Mr. Farrell's responsibilities as President
and Chief Executive Officer, his performance and his contribution to the
Company's performance. The Compensation Committee neither undertook a formal
survey or analysis of compensation paid by other companies nor established
numerical targets or goals in determining his compensation.
21
<PAGE>
Deductibility of Compensation. The Internal Revenue Service, under
Section 162(m) of the Internal Revenue Code, will generally deny the deduction
of compensation paid to certain executives to the extent such compensation
exceeds $1 million, subject to an exception for compensation that meets certain
"performance-based" requirements. Whether the Section 162(m) limitation with
respect to an executive will be exceeded and whether the Company's deductions
for compensation paid in excess of the $1 million cap will be denied will depend
upon the resolution of various factual and legal issues that cannot be resolved
at this time. As to options granted under the Stock Incentive Plan, the Company
intends to endeavor to comply with the rules governing the Section 162(m)
limitation so that compensation attributable to such options will not be subject
to limitation under such rules. As to other compensation, while it is not
expected that compensation to executives of the Company will exceed the Section
162(m) limitation in the foreseeable future (and no officer of the Company
received compensation in 1994 which resulted under Section 162(m) in the
non-deductibility of such compensation to the Company), various relevant
considerations will be reviewed from time to time, taking into account the
interests of the Company and its stockholders, in determining whether to
endeavor to cause such compensation to be exempt from the Section 162(m)
limitation.
Submission of Report. This report is submitted by the members of the
Compensation Committee, Nicholas J. Stanley and James P. Miscoll.
Performance Information
Set forth in the table below is a comparison of the total stockholder
return (annual change in share price plus dividends paid, assuming reinvestment
of dividends when paid) assuming an investment of $100 on the starting date for
the period shown for the Company, the Dow Jones Equity Market Index (a broad
equity market index which includes the stock of companies traded on the Nasdaq
National Market System) and the Dow Jones Transportation Equipment Index (an
index including manufacturers of locomotive component parts). The return shown
in the table is based on the percentage change from April 26, 1994 (the date of
the Company's commencement of its initial public offering) to December 31, 1994
and June 30, 1996.
MK Rail Corporation Investment Date
$ 100.00 April 26, 1994
$ 60.80 December 31, 1994
$ 24.18 December 31, 1995
$ 38.05 June 30, 1996
Dow Jones Equity
Market Index Investment Date
$ 100.00 April 26, 1994
$ 103.21 December 31, 1994
$ 142.60 December 31, 1995
$ 157.94 June 30, 1996
Dow Jones Transportation Equipment Index
Investment Date
$ 100.00 April 26, 1994
$ 92.11 December 31, 1994
$ 90.96 December 31, 1995
$ 100.29 June 30, 1996
22
<PAGE>
SECURITY OWNERSHIP
As of September 10, 1996, there were 17,562,793 shares of the Company's
Common Stock issued and outstanding. The following table sets forth the number
and percentage of the Company's Common Stock known by management of the Company
to be beneficially owned as of September 10, 1996 by (i) all stockholders who
own 5% or more of the Company's Common Stock, (ii) all directors of the Company,
(iii) each current or former executive officer included in the Summary
Compensation Table and (iv) all directors and executive officers of the Company
as a group. Unless stated otherwise, each person so named exercises sole voting
and investment power as to the shares of Common Stock so indicated.
Amount and
Name and Address of Nature of Beneficial
Beneficial Owner Ownership(1) Percent of Class
- ------------------------- ----------------------------- ------------------------
Morrison Knudsen(2) 11,149,000 63.5%
The Crabbe Huson
Special Fund, Inc.(3) 1,706,800 9.7%
John C. Pope(4) 60,000 *
Gilbert E. Carmichael(5) 35,934 *
Robert S. Miller, Jr. 0 0%
Michael A. Wolf(6) 231,000 1.3%
James P. Miscoll(7) 10,000 *
Nicholas J. Stanley(8) 8,000 *
Lee B. Foster II 0 0%
Joseph S. Crawford(9) 51,212 *
Joseph G. Fearon(10) 53,534 *
J. Jeremy T. Whatmough(11) 15,403 *
Michael J. Farrell(12) 493 *
Thomas J. Reinecke(13) 25,470 *
William J. Agee 0 0%
All Directors & Executive
Officers as a Group(14) 353,393 2.0%
- ----------
* Indicates that the percentage of shares beneficially owned does not exceed 1%
of the class.
1 For purposes of this table, shares are considered "beneficially" owned
if the person directly or indirectly has the sole or shared power to
vote or direct the voting of the securities or the sole or shared
power to dispose of or direct the disposition of the securities. A
person is also considered to beneficially own shares that such person
has the right to acquire within 60 days, and options exercisable
within such period are referred to herein as "currently exercisable."
2 The address of Morrison Knudsen is P.O. Box 73, Boise, Idaho, 83729.
These shares are owned of record by Morrison Knudsen.
3 The address of the Crabbe Huson Special Fund, Inc. is Suite 1400, 121
S.W. Morrison Street, Portland, Oregon 97204.
4 The shares beneficially owned by Mr. Pope consist of 60,000 shares
owned of record by him.
5 The shares beneficially owned by Mr. Carmichael consist of 3,142
shares owned of record by him and 32,792 shares issuable to him upon
the exercise of a currently exercisable option awarded to him under
the Company's Stock Incentive Plan at exercise prices of $5.38 to $16
per share, which options expires April 26, 2004.
23
<PAGE>
6 The shares beneficially owned by Mr. Wolf consist of 100,000 shares
owned of record by him; 50,000 shares held in a personal revocable
trust; 5,000 shares held in an IRA account; and 76,000 shares owned by
record by his wife.
7 The shares beneficially owned by Mr. Miscoll consist of 8,000 shares
issuable to him upon the exercise of an option awarded to him under
the Company's Stock Option Plan for Non-Employee Directors at an
exercise price of $4.75 per share, which option is exercisable, and
expires November 10, 2004, and 2,000 shares owned of record by the
James P. Miscoll and Ingeburg W. Miscoll Trust, James P. and Ingeburg
W. Miscoll, trustees, under which Mr. Miscoll, as trustee, shares
voting and investment power with one other trustee.
8 The shares beneficially owned by Mr. Stanley consist entirely of
shares issuable to him upon the exercise of a currently exercisable
option awarded to him under the Company's Stock Option Plan for
Non-Employee Directors at an exercise price of $7.94 per share. This
option expires April 28, 2004.
9 The shares beneficially owned by Mr. Crawford consist of 1,212 shares
owned of record by him and 12,500 shares issuable to him upon the
exercise of a currently exercisable option at an exercise price of
$10.13 per share, which option expires November 29, 2004 and 37,500
shares issuable to him upon the exercise of a currently exercisable
option at an exercise price of $16 per share, which option expires
April 24, 2004.
10 The shares beneficially owned by Mr. Fearon consist of 1,034 shares
owned of record by him, 45,000 shares issuable to him upon the
exercise of a currently exercisable option awarded to him under the
Company's Stock Incentive Plan at an exercise price of $16 per share,
which option expires November 27, 1996, and 7,500 shares issuable to
him upon the exercise of a currently exercisable option awarded to him
under the Company's Stock Incentive Plan at an exercise price of $8
per share, which option expires November 27, 1996.
11 The shares beneficially owned by Mr. Whatmough consist of 403 shares
owned of record by him and 15,000 shares issuable to him upon the
exercise of a currently exercisable option awarded to him under the
Company's Stock Incentive Plan at an exercise price of $10.125, which
option expires October 31, 1996.
12 The shares beneficially owned by Mr. Farrell consist of 493 shares
owned of record by him.
13 The shares beneficially owned by Mr. Reinecke consist of 25,470 shares
owned of record by him.
14 The shares beneficially owned by all directors and executive officers
as a group include shares owned of record as well as shares issuable
to the beneficial owners upon the exercise of options awarded under
either the Company's Stock Incentive Plan or the Company's Stock
Option Plan for Non-Employee Directors, which options are exercisable
currently or within 60 days. Persons who were not serving as directors
or executive officers as of September 10, 1996 are not included in
this group.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transfer of the Business by Morrison Knudsen to MK Rail
The design, manufacture and distribution of locomotive component parts,
the provision of locomotive fleet maintenance services and the manufacture and
remanufacture of locomotives currently carried on by the Company (individually
and collectively, the "Business") previously had been conducted through various
divisions and subsidiaries of Morrison Knudsen. In April 1994, Morrison Knudsen
and MK Rail entered into a Transfer Agreement ("Transfer Agreement") pursuant to
which MK Rail became the successor to the Business. In particular, MK Rail
succeeded to (i) all of the assets of Morrison Knudsen principally related to
the Business and (ii) all liabilities and obligations (of any nature or type
whatsoever and whether arising prior to or after the date of transfer) relating
to, arising out of or resulting from the conduct of the Business or the use,
ownership or operation of any of the assets associated therewith, including, but
not limited to: (a) all liabilities and obligations which are set forth,
reflected, disclosed or reserved for on the balance sheet of the Company (or if
not so reflected (as a result of the nature of such liability or otherwise),
could be reflected in accordance with applicable accounting standards at any
time prior to or after the date of any such balance sheet); (b) all liabilities
and obligations which relate to, arise out of or result from any contract,
lease, agreement, permit or other understanding, arrangement or obligation
relating to, arising out of or resulting from the Business; (c) all warranty,
performance or similar obligations (whether arising under contract, implied by
law or otherwise) relating to products or services of the Business; (d) all
liabilities and obligations under
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litigation pending at the time of the transfer or any future claim, suit or
arbitration relating to, arising out of or resulting from the conduct of the
Business or the use, ownership or operation of the assets associated therewith;
and (e) the liabilities and obligations assumed by or agreed to be performed by
MK Rail pursuant to certain other agreements entered into with Morrison Knudsen
in connection with the Transfer Agreement, as described below (collectively, the
"Assumed Liabilities").
The Transfer Agreement further provides that MK Rail will indemnify,
defend and hold harmless Morrison Knudsen and its directors, officers, employees
and agents from and against any and all losses, liabilities, damages, costs or
expenses (including reasonable attorneys' fees and costs) relating to, arising
out of or resulting from (i) any of the Assumed Liabilities, and (ii) the breach
of any representation, warranty, covenant or agreement of the Company contained
in the Transfer Agreement or in certain related agreements, as described below.
Simultaneously with the transfer of the assets, Morrison Knudsen and
the Company entered into an Environmental Liability Transfer Agreement pursuant
to which the Company, without in any way limiting its obligations under the
Transfer Agreement, assumed all environmental liabilities and obligations (of
any nature or type whatsoever and whether arising prior to, on or after the date
of transfer) relating to, arising out of or resulting from the conduct of the
Business or the use, ownership or operation of the assets associated therewith,
including the costs of complying with a Post Closure Permit issued by the Idaho
Department of Health and Welfare, Division of Environmental Quality and the
Environmental Protection Agency, relating to the discharge of hazardous waste
from the Company's Boise Locomotive Plant. The Environmental Liability Transfer
Agreement provides that the Company will indemnify and hold Morrison Knudsen
harmless from and against any and all costs, losses or other damages associated
with the environmental liabilities assumed by MK Rail.
As a further part of this transfer, Morrison Knudsen and the Company
entered into an Employee Transfer and Benefits Agreement ("Employee Transfer
Agreement"), under which active employees employed in the Business continue to
participate in one or more benefit plans and programs of Morrison Knudsen, and
Morrison Knudsen charges the Company for all direct costs and expenses
associated with such continued participation. Upon the sale of its Common Stock
in April 1994, the Company was further required to offer to employ, at no less
than the current salary, wage rates, grade levels and plant locations, all
active employees currently employed by the Business. The Company assumed the
collective bargaining agreement with Local No. 370 of the International Union of
Operating Engineers with respect to the Boise Locomotive Plant. As part of the
Employee Transfer Agreement, the Company further agreed to indemnify and hold
Morrison Knudsen harmless from and against any and all costs, charges and
liabilities (of any nature or type whatsoever and whether arising prior to, on
or after the date of transfer) with respect to any transferred employee,
including matters arising under employee benefit plans, wage and hour laws,
workers' compensation and similar statutes, accrued vacation and severance
liability, and sexual harassment and anti-discrimination laws, excluding,
however, Morrison Knudsen's obligations under certain stock options and
restricted stock awards granted to executive employees.
Agreements with Morrison Knudsen
On June 15, 1995, in order to settle their good faith dispute regarding
the intercompany account and the various transactions related thereto, the
Company and Morrison Knudsen entered into a Global Settlement Agreement (the
"Global Settlement Agreement") under which the Company's net intercompany
account has been reduced by $29.5 million (from $81.7 million immediately prior
to settlement to $52.2 million). This obligation was evidenced by an unsecured
promissory note bearing interest at the prime rate and payable in annual
installments equal to the lesser of (i) $10.4 million or (ii) such amount as the
Company is permitted to pay under any of its credit facilities with
institutional lenders, payable on the last business day of each March (or as
soon thereafter as is permitted under any such credit facility) until fully
paid.
The Company has also agreed pursuant to the Global Settlement Agreement
that, if Morrison Knudsen sold all of its interest in the Company to an
unaffiliated purchaser, such purchaser would be entitled to designate a
proportionate share of the Company's Board of Directors equal to the percentage
purchased with designees that are acceptable to the Board of Directors. Each of
the parties further agreed to fully release the other and all successors,
predecessors, subsidiaries, stockholders, affiliates, control persons and
present and former directors, officers, employees and agents in respect of all
claims which have arisen or hereafter arise respecting the parties, excepting
certain individuals and certain matters involving future breaches of existing
agreements, and, in the case
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of the Company's obligations to Morrison Knudsen, also excepting, among other
things, the Company's obligations to indemnify Morrison Knudsen under the
Transfer Agreement or other agreements and certain other existing obligations of
the Company to Morrison Knudsen under the Registration Rights Agreement
(discussed below), the Tax Agreement (discussed below), the Environmental
Liability Transfer Agreement and the Employee Transfer Agreement.
Amounts in the intercompany account related to various items, including
advances made to the Company by Morrison Knudsen for working capital
requirements, capital equipment and research and development, and charges for
goods and services provided by Morrison Knudsen to the Company, net of
repayments made by the Company for goods and services provided to Morrison
Knudsen by the Company.
On September 10, 1996, the Company repurchased for $34.6 million all of
the debt of the Company owed to Morrison Knudsen Corporation. The amount of the
debt outstanding as of the date of repurchase, including accrued interest, was
$57.3 million. This repurchase was effected pursuant to a Note Cancellation and
Restructuring Agreement dated June 20, 1996 by and amoung the Company and
Morrison Knudsen, as amended as of July 25, 1996.
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Locomotive Remanufacturing Agreement
In connection with the Company's contract with Southern Pacific Lines
("Southern Pacific") for the delivery of 133 remanufactured locomotives, the
Company entered into an agreement with Morrison Knudsen pursuant to which
Morrison Knudsen's Hornell, New York plant supplied 42 of the remanufactured
locomotives during 1994 and the first quarter of 1995. In October 1994, the
Company and Morrison Knudsen entered into an agreement whereby Morrison Knudsen
agreed to indemnify the Company for its then estimated losses of $3.8 million
for the 91 locomotives which had been or were to be remanufactured by the
Company under this contract. The Company ultimately sustained additional losses
of $8.2 million in fulfilling its obligations under this contract.
Covenant Not To Compete
The Transfer Agreement contains a covenant not to compete ("Covenant
Not To Compete"), pursuant to which Morrison Knudsen has agreed, subject to
certain exceptions, not to engage in the Business for a period of 10 years
anywhere in the world. Morrison Knudsen is not precluded by the Covenant Not To
Compete from (a) continuing all activities currently conducted by Morrison
Knudsen and its affiliates which are not included in the Business, (b) producing
42 of the 133 remanufactured locomotives under the remanufacturing agreement
with Southern Pacific, (c) owning any equity securities of MK Rail, (d) owning
less than 5% of the outstanding equity securities of any person that derives
more than 10% of its total revenues or gross profit from the conduct of the
Business, (e) owning any equity securities of any person that derives less than
10% of its total revenues or gross profit from the conduct of the Business, (f)
making any acquisition of any person that is engaged in the Business, if
Morrison Knudsen will hold separate the affected part of the acquired person and
will dispose of such affected part to an independent third party within a
reasonable period of time (not to exceed two years), and (g) performing its
obligations under any of the agreements between MK Rail and Morrison Knudsen.
Intellectual Property Agreements
As part of the Transfer Agreement, Morrison Knudsen assigned to the
Company four U.S. patents and three patent applications relating to certain
locomotive-related inventions. In addition, the parties entered into a Service
Mark and Trademark License Agreement pursuant to which Morrison Knudsen granted
to MK Rail an exclusive, royalty-free license to use "Morrison Knudsen," "MK"
and the "MK" logo as a trademark for railway locomotives and related component
parts and as a service mark for the manufacture, remanufacture and repair of
locomotives and related component parts.
Registration Rights Agreement
In connection with the initial public offering by the Company of its
Common Stock in April 1994, the Company entered into a Registration Rights
Agreement ("Registration Rights Agreement") with Morrison Knudsen designed to
enable Morrison Knudsen to effect the registration of shares of Common Stock
held by Morrison Knudsen. The Registration Rights Agreement contemplated that
(subject to the agreement of Morrison Knudsen not to sell any shares of Common
Stock for a period of 180 days after the date of the stock offering) Morrison
Knudsen may (i) require the Company to take actions necessary to permit Morrison
Knudsen to sell the shares of Common Stock held by Morrison Knudsen (but not
more often than once each year) and (ii) include shares held by it in any
registration, subject to certain exceptions, to be effected by the Company.
Other than fees of Morrison Knudsen's counsel and applicable filing fees and
underwriting discounts, MK Rail is obligated to pay all fees and expenses in
connection with any registration effected under the Registration Rights
Agreement.
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Sale of Australian Operations
Due to a decline in business activities in Australia and a lack of
future business prospects, the Board examined its alternatives with respect to
its Morrison Knudsen Corporation of Australia Limited subsidiary ("MKA") and
other Australian operations. On June 15, 1995, the Company entered into an
agreement with Morrison Knudsen for the sale by the Company of all of its
Australian operations. Under the terms of this agreement, in July 1995, the
Company (i) transferred to MKA the locomotive cores and other locomotive assets
located in Australia which were owned by the Company, (ii) assigned all of the
common stock of MKA to Morrison Knudsen, (iii) discharged all of MKA's
indebtedness to the Company, and (iv) granted to MKA an exclusive three-year
distributorship for the Company's products in Australia, New Zealand and
Malaysia, subject to satisfaction of certain sales volume requirements. The
Company received a nominal cash payment and $3 million in liquidation value of
MKA's redeemable preferred stock bearing a 9% cumulative dividend. Due to the
business uncertainties associated with MKA, the Company has valued this stock at
zero.
Tax Agreement
In February 1994, the Company entered into a Tax Matters Agreement
("Tax Agreement") with Morrison Knudsen which generally provides that Morrison
Knudsen shall be responsible for, shall indemnify and hold the Company harmless
in respect of, and shall be entitled to any refunds with respect to, all income
taxes (including any interest and penalties) of the Company for which Morrison
Knudsen and the Company have filed a consolidated tax return for any taxable
period ending on or prior to the consummation of the initial public offering of
the Company's Common Stock in April 1994, with the exception of any such income
taxes (but not interest or penalties) of the Company which are attributable to
increases in the Company's taxable income arising out of adjustments to items of
the Company's income, deductions, gains, losses or credits in any such period
for which an offsetting adjustment will be available to the Company in a period
ending after the consummation of the stock offering. Further, within one year
after the consummation of the offering, the Company was required to pay to
Morrison Knudsen (or Morrison Knudsen was required to pay to the Company) the
amount by which net consolidated income taxes paid by or charged to the Company
plus the amount of tax benefit received by Morrison Knudsen from the use of any
losses or credits of the Company for taxable periods ending on or prior to the
offering, as reduced by payments previously made through the intercompany
account, is less than (or exceeds) the amount of income taxes for which the
Company would have been liable during such periods if it had determined its
liability for such taxes on a stand-alone basis.
Stockholder Rights Plan
Effective as of January 19, 1996, the Board of Directors of the Company
adopted a Stockholder Rights Plan and declared that a dividend of one share
purchase right ("Right") be distributed on each outstanding share of the
Company's Common Stock to stockholders of record as of the close of business on
January 30, 1996. The complete terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") dated as of January 19, 1996 between the
Company and Chase Mellon Shareholder Services, L.L.C., formerly known as
Chemical Mellon Shareholder Services, L.L.C. Each Right entitles the registered
holder to purchase from the Company one-hundredth of a share of Series C Junior
Participating Preferred Stock, par value $0.01 per share ("Preferred Stock"),
or, in certain circumstances, shares of Common Stock, other securities, and/or
cash or other property, at a purchase price of $16.00 per share of Preferred
Stock (or, when applicable, Common Stock, securities, cash, and/or other
property), subject to adjustment.
On April 5, 1996, the Company entered into an Amendment to the Rights
Agreement (the "First Amendment"). The First Amendment provides that certain
creditors of Morrison Knudsen Corporation ("Morrison Knudsen") will not be
deemed to be affiliates or associates of each other or of Morrison Knudsen (and
thus will not be treated as having common ownership of the Company's common
stock for purposes of calculating beneficial ownership under the Rights
Agreement) solely by reason of any negotiations among such creditors and/or
Morrison Knudsen in connection with a restructuring or reorganization of
Morrison Knudsen. The First Amendment also confers upon the Company's Board of
Directors exclusive authority to interpret and administer the Rights Agreement
and to make all determinations deemed necessary or advisable for its
administration, including a determination to redeem or not redeem the Rights, to
exchange or not exchange the Rights or to supplement or amend the Rights
Agreement.
On June 20, 1996, the Company entered into a Second Amendment to the
Rights Agreement (the "Second Amendment"). As a result of the Second Amendment,
the Rights will be exercisable and will trade separately from the Company's
common stock if a person or a group of persons becomes the beneficial owner of
15 percent or more
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of the Company's common stock (rather than 10 percent or more, as was previously
provided), or if a person commences a tender offer or exchange offer, the
consummation of which would result in such person being the beneficial owner of
15 percent or more of the common stock (rather than 10 percent or more, as was
previously provided). The Second Amendment also provides that a merger of
Morrison Knudsen will not constitute a "change of control event" as defined in
the Rights Agreement, provided certain conditions are satisfied, including
prompt distribution of the Company's common stock. In addition, the Second
Amendment permits the solicitation of votes and the voting with respect to the
plan of reorganization of Morrison Knudsen and the execution of the Note
Cancellation Agreement and the Stockholders Agreement.
Policy Respecting Affiliate Transactions
In 1994, the Company's Board of Directors adopted a policy for the
Company that provides that the Company will not enter into a transaction with an
affiliate unless the terms of such transaction are no less favorable to the
Company than those that would have been obtained in a comparable transaction by
the Company with an unaffiliated person.
Certain Acquisition Arrangements with Executive Officers and Former Executive
Officers
Michael J. Farrell (formerly President, Chief Executive Officer and
Director of the Company), Thomas J. Reinecke (formerly Executive Vice President
of the Company) and Theodore E. Nelson (President of Touchstone, Inc. and
formerly Senior Vice President of the Company) each are subject to 10-year
non-competition agreements entered into in connection with Morrison Knudsen's
acquisition of Motor Coils in 1991 (with respect to Messrs. Farrell and
Reinecke) and of Touchstone in 1994 (with respect to Mr. Nelson). Messrs.
Farrell and Reinecke are to receive a total of $1.25 million each from Motor
Coils under their agreements, $750,000 of which remains to be paid to each of
them over the next five years in consideration of their non-competition
covenants. Under his agreement, Mr. Nelson has received a restricted stock award
of $1 million worth of Morrison Knudsen Common Stock in consideration of his
non-competition covenant, which vests 10% each year for 10 years. As part of the
transfers provided in the Transfer Agreement, Morrison Knudsen has assigned to
MK Rail all of its right, title and interest in these agreements, including the
benefit of the non-competition covenants. The obligation to make the foregoing
cash payments to Messrs. Farrell and Reinecke and to release the restricted
stock from escrow to Mr. Nelson, however, will remain with Motor Coils and
Morrison Knudsen, respectively.
Leases with Certain Former Executive Officers
The Company leases 21,772 square feet of office space at 1200 Reedsdale
Street, Pittsburgh, Pennsylvania for use as its corporate headquarters from M &
T Partners, a general partnership of which Michael J. Farrell (formerly
President, Chief Executive Officer and Director of the Company) and Thomas J.
Reinecke (formerly Executive Vice President of the Company) are the sole general
partners. The lease is on a month-to-month basis subject to extension to a
10-year term at the option of the Company under certain circumstances. The lease
provides for monthly rental payments of $13,322.
The Company's Motor Coils subsidiary leases 61,777 square feet of
office space and 57,000 square feet of warehouse space at 1200 Reedsdale Street,
Pittsburgh, Pennsylvania from M & T Partners pursuant to a lease having a
15-year term expiring in July 2006. The lease provides for monthly rental
payments of $17,555 for the office space and $10,688 for the warehouse space. In
addition, Motor Coils leases 71,950 square feet of warehouse/manufacturing space
at 31st Street in Pittsburgh, Pennsylvania from Pittsburgh Flatroll Company
pursuant to a month-to-month lease. The lease provides for monthly rental
payments of $11,992. Pittsburgh Flatroll Company is wholly-owned by Michael J.
Farrell and Thomas J. Reinecke.
Management believes that the rentals under these leases are not in
excess of market rates, and that the month-to-month term of the office lease,
with the right at the election of the Company to convert to a 10-year term, is
favorable to the Company.
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Legal Services
Michael A. Weiss, who was appointed Secretary of the Company in March
1995, is a shareholder of DK&W, general counsel to the Company. DK&W receives
fees for rendering legal services to the Company at its standard rates. In 1995,
DK&W billed the Company $3.6 million for fees and expenses.
STOCKHOLDERS' PROPOSALS
To be considered for inclusion in the Company's Proxy Statement for the
1996 Annual Meeting of Stockholders, stockholder proposals must be sent to the
Company (directed to the attention of Vice President of Investor and Public
Relations) at 1200 Reedsdale Street, Pittsburgh, Pennsylvania 15233, for receipt
not later than March 1, 1997.
GENERAL AND OTHER MATTERS
Management knows of no matters, other than those referred to in this
Proxy Statement, which will be presented to the meeting. However, if any other
matters properly come before the meeting or any adjournment, the persons named
in the accompanying proxy will vote it in accordance with their best judgment on
such matters.
The Company will bear the expense of preparing, printing and mailing
this Proxy Statement, as well as the cost of any required solicitation. In
addition to the solicitation of proxies by use of the mails, the Company may use
regular employees, without additional compensation, to request, by telephone or
otherwise, attendance or proxies previously solicited.
Upon written request to the Company (directed to the attention of Vice
President of Investor and Public Relations at 1200 Reedsdale Street, Pittsburgh,
Pennsylvania 15233) by any stockholder whose proxy is solicited hereby, the
Company will furnish a copy of its Annual Report on Form 10-K for the year ended
December 31, 1995 as filed with the Securities and Exchange Commission, together
with financial statements and schedules thereto, without charge to the
stockholder requesting the same.
By the Order of the Board of Directors
Michael A. Weiss, Secretary
Pittsburgh, Pennsylvania
September 10, 1996
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MK Rail Corporation
Annual Meeting of Stockholders, October 30, 1996
The undersigned hereby appoints William D. Grab and Michael A. Weiss, and each
with full power to act without the other, as proxies, with full power of
substitution, for and in the name of the undersigned to vote and act with
respect to all shares of common stock of MK Rail Corporation (the "Company")
standing in the name of the undersigned on September 10, 1996, or with respect
to which the undersigned is entitled to vote and act, at the Annual Meeting of
Stockholders of the Company to be held October 30, 1996 and at any and all
adjournments thereof, with all the powers the undersigned would possess if
personally present, and particularly, but without limiting the generality of the
foregoing, the matters described on the reverse side of this Proxy. All shares
represented by proxy will be voted in accordance with the instructions, if any,
given in such proxy. A stockholder may abstain from voting on any proposal or
may withhold authority to vote for any nominee(s) by so indicating on the
reverse side.
THIS PROXY SOLICITED ON BEHALF OF BOARD OF DIRECTORS
<PAGE>
The votes represented by this proxy will be voted as marked by you. However, if
you execute and return the proxy unmarked, such votes will be voted FOR all of
the proposals. Please mark each box with an "x".
The Board of Directors Recommends a Vote "For" all proposals.
1. Election of Directors: (John C. Pope and Nicholas J.
Stanley have been nominated)
FOR Withheld Withheld for the following
for all following (write the
nominee's name in the
space below)
|_| |_| __________________________________
2. Amend Certificate of Incorporation
FOR Against Abstain
|_| |_| |_|
3. Amend Stock Incentive Plan
FOR Against Abstain
|_| |_| |_|
4. Amend Stock Option Plan for
Non-Employee Directors
FOR Against Abstain
|_| |_| |_|
5. Ratify appointment of Deloitte & Touche LLP
as independent certified public accountants
FOR Against Abstain
|_| |_| |_|
6. In their discretion, proxies shall be authorized to vote
upon such other matters as may properly be brought
before the meeting or any adjournment thereof
PLEASE SIGN, DATE, AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
When shares are held as joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee or guardian, please give full title
as such. If a corporation, please sign in full corporate name by president or
other authorized officer. If a partnership, please sign in the partnership name
by authorized person.
Dated:_______________________________
_____________________________________
Signature:
_____________________________________
Signature if held jointly
<PAGE>
