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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the fiscal year ended December 31, 1997, or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
and Exchange Act of 1934
For the transition period from ______ to ______
Commission file number 0-23802
MOTIVEPOWER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 82-0461010
- ---------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1200 Reedsdale Street, Pittsburgh, PA 15233
- ------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (412) 237-2250
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class
- ----------------------------
Common stock, $.01 par value
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
The aggregate market value of the voting stock held by nonaffiliates of the
registrant at March 2, 1998 was: $483,610,666
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 2, 1998
- ---------------------------- ----------------------------
Common stock, $.01 par value 17,786,343
DOCUMENTS INCORPORATED BY REFERENCE:
Certain sections or portions of, the Annual Report to Shareholders for the year
ended December 31, 1997, described in Part I and Part III hereof, is
incorporated by reference, and certain sections or portions of the registrant's
proxy statement for the annual meeting of stockholders to be held on April 29,
1998, described in Part III hereof, are incorporated by reference in this
report.
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MOTIVEPOWER INDUSTRIES, INC.
Index to
Annual Report on Form 10-K
For The Year Ended December 31, 1997
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters To A Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6. Selected Consolidated Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 8. Consolidated Financial Statements and Supplementary Data 10
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 10
PART III
Item 10. Directors and Executive Officers of the Registrant 10
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners and Management 10
Item 13. Certain Relationships and Related Transactions 11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 11
Signatures 17
</TABLE>
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PART I
Unless otherwise indicated or the context otherwise requires, the terms
"Company" and "MotivePower" refer to MotivePower Industries, Inc. and its
subsidiaries.
ITEM 1. BUSINESS
THE COMPANY
The Company is a leader in the manufacturing and distribution of products for
rail and other power-related industries, and also provides a variety of related
contract services. On April 26, 1994, the Company, then a wholly-owned
subsidiary of Morrison Knudsen, commenced an initial public offering of 6
million shares of its Common Stock at an offering price of $16 a share which
decreased Morrison Knudsen's interest in the Company to 65%. Effective as of
September 11, 1996, as part of its bankruptcy plan, Morrison Knudsen distributed
all of its ownership in the Company to its creditors and certain of its then
current stockholders. Morrison Knudsen is no longer a stockholder in the
Company. In January 1997, the Company changed its name from MK Rail Corporation
to MotivePower Industries, Inc., and in August 1997 its stock was listed on the
New York Stock Exchange under the symbol "MPO." The Company provides products
and services to freight and passenger railroads, including every Class I
Railroad in North America, commuter rail and transit authorities, original
equipment manufacturers and other customers internationally. The Company has
headquarters in Pittsburgh, Pa., and 2,351 employees at December 31, 1997 at
strategically located facilities in the United States and Mexico.
FORWARD-LOOKING STATEMENTS
Statements in this Form 10-K regarding the Company's efforts to maximize
stockholder value or its efforts to improve operations by increasing
productivity or efficiency are forward-looking statements. The Company's actual
results could differ materially from the results suggested in any
forward-looking statements. Factors that could cause or contribute to these
material differences include, but are not limited to, the following: a general
decline in the NAFTA economy, which could cause a decrease in rail traffic;
continued consolidation by U.S. railroads, which could cause them to reduce
purchases of goods and services; changes in the Mexican government's railroad
privatization program; a strengthening of the U.S. dollar in targeted foreign
markets; the Company's ability to timely and efficiently complete current and
future expansion and productivity enhancement projects, and implement related
productivity improvement plans; and the Company's ability to maintain current
favorable relations with its labor unions. In making these forward-looking
statements, the Company assumes no obligation to update them or advise of
changes in the assumptions on which they were based.
BUSINESS STRATEGY
The Company's business strategy is to grow and continue to strengthen its core
businesses, including manufacturing and distributing engineered locomotive
components and parts; providing locomotive fleet maintenance; overhauling and
remanufacturing locomotives; and manufacturing environmentally friendly
switcher, commuter and mid-range, DC and AC traction, diesel-electric and
liquefied natural gas locomotives up to 4,000 horsepower. The Company is looking
to expand further into other niche power, marine and industrial markets by
growing the existing business in these markets and by modifying certain existing
products to fit new applications.
The Company has outlined a six-part strategy to carry out its growth plan:
1. Capitalize on the railroads' desire to outsource non-transportation functions
such as maintenance and repair projects by continuing to improve quality and by
reducing product cycle times; 2. Continue to grow its Mexican operations by
expanding current capabilities and by pursuing new opportunities created by the
Mexican government's railroad privatization program; 3. Expand sales of
components in targeted non-NAFTA markets, such as South America, the Middle East
and the Pacific Rim; 4. Expand sales of similar components into non-rail
markets; 5. Acquire companies that provide products or services that complement
the Company's current capabilities either geographically or technically, or that
expand the Company's current product line; and 6. Develop alliances and joint
ventures with other major rail industry suppliers.
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As market conditions, technological developments or other factors change,
the Company will modify its strategy accordingly.
INDUSTRY CONDITIONS AND TRENDS
The Company's operating results are strongly influenced by general economic
conditions and the financial conditions and level of activity of the global
railroad industry. In 1997, favorable conditions generally prevailed in the
NAFTA economy. As a result, U.S. railroads carried a record 1.37 trillion
revenue ton-miles, the main indicator of activity in the industry, up 1 percent
from the prior year. Although there can be no assurance that these conditions
will continue, indications in early 1998 remained favorable as railroad traffic
continued to grow from 1997 levels.
The Company's business is primarily providing parts, components and
services engineered for locomotives, mainly for the more profitable aftermarket.
Currently, the active locomotive fleet in the NAFTA market is about 30,000
units, about equally divided between heavy-haul freight, commuter locomotives
and lower-horsepower, short-haul and terminal locomotives. The Company estimates
that approximately 40% of the locomotive fleet is older than 20 years and is
under 4000 horsepower. Purchases of new heavy-haul locomotives have been at
historical highs in recent years as railroads have been seeking to modernize
their fleets, but the Company believes production capacity for new units is
limited to current levels of about 1,000 per year. As a result, demand for
overhauling of older locomotives and for aftermarket parts has been high as
railroads work equipment harder and look to maximize the efficiency,
availability and productivity of their existing fleets to meet the increased
need for locomotive power. Historically, the components and parts, maintenance
and overhaul segments of the railroad industry, while still subject to the
impact of rail traffic fluctuations, have been more stable and less cyclical
than the new and remanufactured locomotive capital goods segments. The Company
operates in a highly competitive environment, and there can be no assurance that
increased rail traffic or other economically favorable industry conditions will
benefit the Company.
Since the deregulation of the U.S. railroad industry in 1980, freight
railroads have reduced their equipment base and consolidated operations to
reduce operating costs and improve their competitive position compared to
trucking companies, which compete with the railroad industry. Since 1992, the
total locomotive fleet has been growing and getting older, and market share has
been taken from the trucking industry. The supplier base has been consolidating,
and the Company as a primary consolidator and acquirer, believes it is the
largest locomotive equipment supplier of its type and class in the world.
Railroads have been consolidating and merging, hoping to achieve additional
operating and financial efficiencies that will allow them to compete more
effectively with other modes of transportation. Management believes these
consolidations offer the Company opportunities to increase business with the
surviving railroads as these railroads seek operating efficiencies through such
means as outsourcing locomotive fleet maintenance and components repair. This is
a forward-looking statement, and there can be no assurances that continued
consolidation will not adversely impact the Company through concentration of
bargaining power over prices or rationalization of locomotive fleet sizes.
DESCRIPTION OF BUSINESS OPERATIONS
The Company operates principally through two business units, the Components
Group and the Locomotive Group.
COMPONENTS GROUP
The Components Group manufactures and distributes primarily aftermarket, or
replacement, new and remanufactured components and parts for freight and
passenger railroads, including every Class I Railroad in North America,
metropolitan transit and commuter rail authorities, original equipment
manufacturers and other customers internationally. MotivePower provides most
aftermarket components for locomotives manufactured by the Electro-Motive
Division of General Motors Corporation ("EMD") and certain components for
locomotives made by the GE Transportation Systems unit of General Electric
Company ("GE"). MotivePower believes it is the leading independent supplier in
North America of aftermarket locomotive components such as traction motors,
generators, alternators, turbochargers, cooling systems, gearing and overhauled
diesel engines.
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Demand for components is influenced by rail traffic activity. As traffic
increases, the railroads seek to maximize locomotive availability and capacity,
which can increase the frequency of necessary repairs and maintenance. This
business is highly competitive, as the Company faces competition from EMD, GE
and numerous smaller, independent manufacturers and distributors. EMD and GE
accounted for virtually 100% of the new high-horsepower locomotives delivered in
the United States in the past five years and, as original equipment
manufacturers, are the principal suppliers of original parts for their
locomotives.
LOCOMOTIVE GROUP
The Locomotive Group provides fleet maintenance, overhauling and
remanufacturing, and manufacturing of environmentally friendly switcher,
commuter and mid-range, DC and AC traction, diesel-electric and liquefied
natural gas locomotives up to 4,000 horsepower. The Company's fleet maintenance
business unit provides locomotive maintenance under long-term contracts. These
contracts generally cover normal, expected maintenance costs but also allow the
Company to bill additional amounts to cover extraordinary maintenance. The
Company believes it accounts for virtually 100% of the production of low to
mid-range up to 4,000 horsepower locomotives produced in NAFTA.
Demand for fleet maintenance services is driven by the railroads' focus on
cost reduction and productivity improvements as the industry has consolidated
over recent decades, and as railroads consider outsourcing non-transportation
functions. While most railroads have their own mechanical and maintenance
facilities, some achieve cost savings and productivity improvements by
outsourcing the work to an independent servicer. In this business segment, the
Company competes against GE, EMD and the captive in-house repair shops of
certain railroads. When possible, the Company supplies its own component parts,
at market prices, for use in overhaul and maintenance under these contracts. In
this manner, the locomotive fleet maintenance contracts provide additional
opportunities for sales of component parts.
There are approximately 6,000 low-horsepower locomotives operating in
switcher/short-haul service in the United States and Canada, with an average age
of 30 years. Demand for new low-horsepower locomotives has been minimal since
the early 1980s because the railroads have focused instead on modernizing,
rationalizing and downsizing their higher-horsepower freight locomotive fleets.
In addition, older freight locomotives are sometimes used as switchers. As a
result of this low level of demand, the Company believes it is the only
manufacturer of new lower-horsepower locomotives. In 1996, the Company sold 32
switchers to two terminal railroads in Houston. In 1997, it manufactured 3 units
for a demonstrator program and allowed potential customers to "test drive" these
state-of-the-art locomotives. These demonstrators have received favorable
reviews from potential customers, but, to date, the Company has not sold any
additional low-horsepower units. The Company does, however, have a number of
proposals outstanding, but there can be no assurance that it will be successful.
On March 3, 1998, the Company and the Electro-Motive Division of General
Motors formed a strategic alliance to design, manufacture, and market
low-horsepower, switching and branchline locomotives in the United States,
Canada and Mexico. MotivePower Industries is the third-largest manufacturer of
locomotives in NAFTA. Under a marketing and supply agreement, Boise Locomotive,
a subsidiary of the Company, will be the exclusive manufacturer of
Electro-Motive's private band, 1,500- and 2,000-horsepower locomotives for the
NAFTA market.
The Company has been providing overhauling and remanufacturing services to
the railroad industry since 1972, and management believes the Company is the
largest, independent remanufacturer of locomotives in North America. In this
business segment, the Company faces competition from VMV, AMF Canada, GEC
Alsthom Mexico, numerous smaller regional remanufacturers, the captive in-house
shops of Class I railroads, and from GE and EMD. Most large railroads have
in-house capacity to overhaul locomotives but not to remanufacture and
substantially upgrade them.
Typically, a locomotive overhaul includes replacement of various engine and
electrical rotating equipment. The cost can vary greatly depending on the number
and type of options included. Remanufacturing is a more extensive process
involving the disassembly, redesign from the frame up and reassembly of a
locomotive with upgraded equipment to substantially as-new condition.
The Company's overhauling and remanufacturing businesses have been driven
by the aging of the rail industry's locomotive fleet and the historical cost
advantages compared to purchasing new
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locomotives. Between 1970 and 1980, the U.S. industry purchased approximately
12,000 new locomotives, compared to approximately 9,000 since then. As a result,
the average age of the fleet has increased, with nearly 75% of the fleet at
least 10 years old. The typical maintenance cycle calls for a locomotive to be
overhauled after approximately seven years, remanufactured after 15 years and
replaced after 20 to 25 years if it has not been remanufactured.
PRODUCT DEVELOPMENT
In response to new regulations released by the U.S. Environmental Protection
Agency (the "EPA"), the Company has established a new, focused business unit to
explore opportunities that will be created by these new EPA guidelines. Under
the regulations, locomotives will be required to meet reduced nitrous oxide
emission standards, beginning in the year 2001. The standards will be phased in
over several years and may encourage the railroads to overhaul locomotives
before the year 2001 so that those locomotives will qualify under the current,
less-stringent regulations. No assurance can be provided, however, that these
new regulations will have a favorable impact on the Company's results of
operations.
The Company is also involved in the Iron Highway project, a proposed
new system for intermodal transportation. In 1995, the Company manufactured four
Iron Highway trainsets for CSX Intermodal ("CSXI"), a unit of CSX Corporation,
and CP Rail. CP Rail has placed its Iron Highway units in revenue-service
testing, while CSXI has postponed testing of its two units due to its parent
company's acquisition of Conrail and resulting capital constraints. The Company
currently receives no revenues and incurs no costs for the Iron Highway project.
There is no certainty that CP Rail will proceed with the Iron Highway beyond the
testing phase, or that CSXI will resume testing.
BACKLOG
The Company defines backlog as future sales commitments which constitute a
binding agreement between the Company and the customer. Examples include signed
contracts and purchase orders. The Company is the preferred supplier of certain
components to certain customers, having received notice of the customers'
estimate of anticipated purchases. Because these notices are not binding
commitments, the Company does not include these amounts in backlog calculations.
At December 31, 1997 these anticipated purchases totaled $61 million.
The Company's multi-year locomotive fleet maintenance contracts account for
the majority of the Locomotive group backlog. Multi-year fleet maintenance
contracts are expected to continue to produce additional components and parts
sales.
The backlog as of December 31, 1997 and December 31, 1996 and the expected
year of recognition is as follows:
As of December 31, 1997 (Amounts in 000's)
<TABLE>
<CAPTION>
1998 OTHER YEARS ORDER BACKLOG
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<S> <C> <C> <C>
Components $ 36,135 $ -- $ 36,135
Locomotive $136,772 $364,948 $501,720
--------
Total $537,855
========
</TABLE>
As of December 31, 1996 (Amounts in 000's)
<TABLE>
<CAPTION>
1997 OTHER YEARS ORDER BACKLOG
---- ----------- -------------
<S> <C> <C> <C>
Components $ 28,431 $ -- $ 28,431
Locomotive $102,038 $395,650 $497,688
--------
Total $526,119
========
</TABLE>
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EMPLOYEES
At December 31, 1997, MotivePower had 2,351 employees versus 2,108 in 1996. This
included 265 salaried employees and 1,449 hourly employees in the United States,
and 162 salaried employees and 475 hourly employees in Mexico. Of the hourly
employees in the United States, 360 at Boise Locomotive Company ("Boise
Locomotive") are represented by the International Union of Operating Engineers
("Operating Engineers"), and 605 at Motor Coils Manufacturing Co. ("Motor
Coils") are represented by the International Union of Electronic, Electrical,
Salaried, Machine and Furniture Workers ("Electrical Workers"). The collective
bargaining agreement with the Operating Engineers expires in June 2000 and the
three collective bargaining agreements with the Electrical Workers, covering
Motor Coils' employees in Braddock and Emporium, Pennsylvania, and St. Louis,
Missouri, expire in August 1998, October 1998 and June 2000, respectively. The
Company considers its relations with its employees and union representation to
be good but cannot, however, assure that contract negotiations will be favorable
to the Company.
ENVIRONMENTAL MATTERS
Information regarding environmental matters is set forth on pages 38 through 40
of the Annual Report to Shareholders for the year ended December 31, 1997, and
such information is incorporated herein by reference.
MAJOR CUSTOMERS
Information regarding major customers is set forth on page 42 of the Annual
Report to Shareholders for the year ended December 31, 1997, and such
information is incorporated herein by reference.
On March 2, 1998, MPI Noreste S.A. de C.V. ("MPI de Mexico"), a subsidiary
of the Company, signed a new, 17-year contract in Mexico, valued at $419
million. The new agreement replaces a previous contract that had six years and
approximately $177 million in revenues remaining.
Under the new contract with Transportation Ferroviaria Mexicana ("TFM"),
MPI de Mexico will overhaul and maintain 319 locomotives at its San Luis Potosi
Facility in the Northeast region of Mexico. A joint venture of Transportacion
Maritima Mexicana S.A. de C.V. and Kansas City Southern Industries Inc., TFM was
awarded a 50-year concession to operate the Northeast region of the National
Railways of Mexico as part of the Mexican government's program to privatize the
rail system.
FOREIGN AND DOMESTIC OPERATIONS
Information regarding foreign and domestic operations is set forth on page 42 of
the Annual Report to Shareholders for the year ended December 31, 1997 and such
information is incorporated herein by reference.
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ITEM 2. PROPERTIES
The Company's headquarters are located in Pittsburgh, Pennsylvania and its
manufacturing facilities are located in the United States and Mexico. The
Company considers that its properties are generally in good condition, are
well-maintained, and are generally suitable and adequate to carry on its
business except as noted below. The principal facilities of the Company and its
subsidiaries or operating units are as follows:
<TABLE>
<CAPTION>
Square Owned/
Location Footage Leased Use
- -------- ------- ------ ---
<S> <C> <C> <C>
MOTIVEPOWER INDUSTRIES, INC.
Pittsburgh, Pennsylvania 8,400 Leased Corporate Headquarters
BOISE LOCOMOTIVE CO.
Pittsburgh, Pennsylvania 5,000 Leased Office
Mountaintop, Pennsylvania(1) 204,000 Owned Manufacturing
Boise, Idaho 210,000 Owned Manufacturing
Boise, Idaho 66,900 Owned Manufacturing
Helper, Utah(2) -- Leased Maintenance Shop
Barstow, California(2) -- Leased Maintenance Shop
Houston, Texas(2) -- Leased Maintenance Shop
ENGINE SYSTEMS CO.
Latham, New York 60,000 Owned Manufacturing/Office
MICROPHOR CO.
Willits, California 66,700 Owned Manufacturing/Office
MPI NORESTE, S.A. DE C.V.
San Luis Potosi, Mexico 1,235,700 Leased Manufacturing/Office
San Luis Potosi, Mexico(6) 90,000 Owned Manufacturing
Acambaro, Mexico 132,300 Leased Manufacturing
Mexico City, Mexico 3,700 Leased Office
MOTOR COILS MFG. CO.
Pittsburgh, Pennsylvania(4) 63,000 Leased Office
Pittsburgh, Pennsylvania(4) 57,000 Leased Warehouse
Pittsburgh, Pennsylvania 59,600 Leased Manufacturing
Braddock, Pennsylvania 127,000 Owned Manufacturing/Office
Emporium, Pennsylvania 41,300 Owned Manufacturing
St. Louis, Missouri 62,000 Owned Manufacturing
POWER PARTS CO.
Elk Grove Village, Illinois(3) 150,700 Leased Distribution/Office
Alsip, Illinois 42,600 Owned Manufacturing/Office
Gilman, Illinois 31,800 Leased Manufacturing
TOUCHSTONE CO.
Jackson, Tennessee(5) 88,000 Leased Manufacturing
Jackson, Tennessee(5) 77,200 Leased Warehouse
Jackson, Tennessee(5) 2,600 Leased Warehouse
Jackson, Tennessee(5) 1,500 Leased Office
Jackson, Tennessee(6) 140,000 Owned Manufacturing/Office
</TABLE>
(1) The Company closed this facility in the second quarter of 1996 and is
marketing the facility for sale.
(2) Represents unspecified portions of maintenance facilities owned by the
railroads for which the Company provides locomotive fleet maintenance
services. These facilities have been made available to the Company to
perform these services for nominal consideration.
(3) The Company subleases 59,500 sq. ft. of space to a subtenant whose sublease
expires in July, 1998. The Company will not extend the sublease and plans
to utilize the space at the expiration of the sublease.
(4) The Company's Motor Coils subsidiary has commenced a civil action against
M & T Partners and its sole general partners, the former President and
Chief Executive Officer and Executive Vice President of the Company,
seeking rescission of this 15-year leasing agreement and damages arising
from the former officers' breaches of fiduciary duty while in their
capacity with the Company.
(5) The Company is constructing a new 140,000 square foot facility and will
vacate in 1998 all but 16,000 square feet of leased floor space.
(6) Under construction.
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ITEM 3. LEGAL PROCEEDINGS
Information required under Item 3. Legal Proceedings is set forth on pages 40
and 41 of the Annual Report to Shareholders for the year ended December 31, 1997
and such information is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MotivePower's Common Stock traded on the Nasdaq National Market Tier of the
Nasdaq Stock Market under the symbol "MOPO" from April 1994 through August 15,
1997. On August 18, 1997 the Company's common stock began trading on the New
York Stock Exchange ("NYSE") under the symbol "MPO". As of March 2, 1998, the
approximate number of holders of record of its Common Stock was 3,520.
The high and low sales prices for the Company's Common Stock, as reported
in the NYSE/ Nasdaq Stock Market Summary of Activity reports in 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- ---------------
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $11.38 $ 7.75 $4.50 $2.88
Second Quarter 16.13 10.75 6.75 3.38
Third Quarter 27.25 15.25 6.63 5.00
Fourth Quarter 28.88 19.75 8.00 5.88
</TABLE>
The Board did not declare dividends for 1997 or 1996. On January 27, 1998,
the Company entered into a new credit facility which does not restrict the
Company's ability to pay dividends so long as, after giving effect to the
payment of dividends, the Company remains in compliance with the financial
covenants and other terms and conditions of borrowing under its credit
agreements. The Board reviews its dividend policy regularly.
At the close of business on March 2, 1998, the Company's Common Stock was
trading at $27.19 per share.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Information required under Item 6. Selected Consolidated Financial Data is set
forth on page 16 of the Annual Report to Shareholders for the year ended
December 31, 1997 and such information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Information required under Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations is set forth on pages 17 through
22 of the Annual Report to Shareholders for the year ended December 31, 1997 and
such information is incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
In the Annual Report to Shareholders for the year ended December 31, 1997, the
consolidated financial statements and notes to the consolidated financial
statements are set forth on pages 23 through 43. Such consolidated financial
statements and related notes are incorporated herein by reference.
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the Company is set
forth under the captions "Election of Directors" and "Information Concerning
Executive Officers" in the Company's proxy statement related to the 1998 annual
meeting of stockholders (the "Proxy Statement") and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is set forth under the caption "Compensation"
in the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is set forth under the caption "Security
Ownership" in the Proxy Statement and is incorporated herein by reference.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS A PART OF THIS REPORT:
(1) and (2) Reference is made to the separate index to the Company's
Consolidated Financial Statements and Financial Statement Schedules as set forth
on page 14 hereof.
(3) The following Exhibits are included as a part of this Annual Report on
Form 10-K or are incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT DESCRIPTION
- ----------- --------------------
<S> <C>
3.01(19) Form of Amended and Restated Certificate Of Incorporation of the Company
3.02(18) Form of Amended and Restated By-Laws of the Company
3.05(9) Certificate of Designations of Series C Junior Participating Preferred Stock
4.01(9) Rights Agreement, dated as of January 19, 1996, between the Company and
Chemical Mellon Shareholder Services, L.L.C.
4.02(9) Form of Right Certificate
4.03(11) Amendment to Rights Agreement dated as of April 5, 1996 between the Company and Chase
Mellon Shareholder Services, L.L.C. (Formerly Chemical Mellon Shareholder Services, L.L.C.)
4.04(13) Second Amendment to Rights Agreement dated as of June 20, 1996 between the
Company and Chase Mellon Shareholder Services, L.L.C.
4.05(19) Third Amendment to Rights Agreement dated as of August 22, 1998 between the Company and Chase
Mellon Shareholder Services L.L.C.
10.16(2) Form of MotivePower Industries , Inc. Stock Incentive Plan
10.18(6) Lease between M & T Partners and Motor Coils Manufacturing Co., dated July 16, 1991, and Amendment
dated January 30, 1995
10.19(1) Lease between Pittsburgh Flatroll Company and Motor Coils Manufacturing Company, dated
March 1, 1991
10.20(6) Lease between MotivePower Industries, Inc. and SCI North Carolina Limited Partnership dated
May 17, 1995
10.21(6) Lease between MotivePower Industries, Inc. and M & T Partners effective April 1, 1994
10.31(19) Amended and Restated MotivePower Industries, Inc. Deferred Compensation Plan
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
10.44(10) Employment Agreement between Company and John C. Pope dated as of December 29, 1995
10.53(17) Note Cancellation and Restructuring Agreement dated as of June 20, 1996, by and among
MK Rail Corporation, Morrisson Knudsen Corporation, a Delaware corporation, and Morrison
Knudsen Corporation, an Ohio Corporation
10.54(17) Stockholders Agreement dated as of June 20, 1996 between MK Rail Corporation and Morrison
Knudsen Corporation
10.55(17) Agreement for the Purchase and sale of Assets dated June 27, 1996 by and among
MK Rail Corporation, Alert Manufacturing & Supply Co. and All-State Industrial Rubber Co., Inc.
10.56(15) Closing Agreement dated July 29, 1996 among the Company, Alert Manufacturing & Supply Co.
and All-State Industrial Rubber Co., Inc.
10.57(16) Asset Purchase Agreement dated October 15, 1996 among Power Parts Sign Company and RI-DEL MFG. INC.
10.60(18) Form of Employment Agreement and Exhibits thereto, dated July 1, 1996 between
MotivePower Industries, Inc. and Michael A. Wolf
10.63(19) Amended Employment Agreement between the Company and John C. Pope dated as of December 9, 1997
10.64(19) Amended Employment Agreement between the Company and Michael A. Wolf dated as of February 9, 1997
21.01(19) Subsidiaries of the Company
23.01(19) Independent Auditors' Consent
27.01(19) Article 5 Financial Data Schedule for the Year Ended December 31, 1997
99.01(2) Form of MotivePower Industries, Inc. Executive Incentive Plan
99.02(2) Form of MotivePower Industries, Inc. Stock Option Plan for Non-Employee Directors
99.03(19) Certain sections or portions of the Annual Report to Shareholders for the year ended December 31, 1997
</TABLE>
----------
1. Incorporated by reference to the Company's Registration
Statement on Form S-1 filed with the Commission on February 24,
1994.
2. Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed with the Commission on
March 29, 1994.
3. Not utilized.
4. Not utilized.
5. Not utilized
6. Incorporated by reference to the Company's Annual Report on Form
10-K for the Year ended December 31, 1994.
7. Not utilized.
8. Not utilized.
9. Incorporated by reference to the Company's Report on Form 8-K filed
with the Commission on January 31, 1996.
10. Incorporated by reference to the Company's Annual Report on Form
10-K for the Year ended December 31, 1995.
11. Incorporated by reference to the Company's Amendment No. 1 on Form
8-A/A filed with the Commission on April 25, 1996.
12. Not utilized.
13. Incorporated by reference to the Company's Amendment No. 2 on Form
8-A/A filed with the Commission on July 3, 1996.
14. Not utilized.
15. Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the Quarter ended June 30, 1996.
16. Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the Quarter ended September 30, 1996.
17. Incorporated by reference to the Company's Current Report on Form
8-K filed with the Commission on July 3, 1996.
12
<PAGE> 13
18. Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
19. Filed herewith.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1997.
13
<PAGE> 14
MOTIVEPOWER INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE(S) IN
ANNUAL REPORT*
--------------
<S> <C>
The following documents are filed as part of this report:
(1) Consolidated Financial Statements:
Consolidated Statements of Operations for each of the years in the
three year period ended December 31, 1997 23
Consolidated Balance Sheets at December 31, 1997, and 1996 24
Consolidated Statements of Cash Flows for each of the years in the
three year period ended December 31, 1997 25-26
Consolidated Statements of Changes in Stockholders' Equity for
each of the years in the three year period ended December 31, 1997 27
Notes to Consolidated Financial Statements 28-43
Independent Auditor's Report 22
* Incorporated by reference from the indicated pages of the
MotivePower Industries, Inc. 1997 Annual Report to Shareholders
(2) Financial Statement Schedules:
Independent Auditors' Report on Financial Statement Schedule 15
For each of the years in the three year period ended December 31, 1997
Schedule II - Valuation and Qualifying Accounts 16
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
14
<PAGE> 15
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
MotivePower Industries, Inc.:
We have audited the consolidated financial statements of MotivePower Industries,
Inc. and subsidiaries as of December 31, 1997 and 1996, and for each of the
three years in the period ended December 31, 1997, and have issued our report
thereon dated February 4, 1998; such financial statements and report are
included in your 1997 Annual Report to Stockholders and are incorporated herein
by reference in this Form 10-K. Our audits also included the consolidated
financial statement schedule of MotivePower Industries, Inc., listed in Item 14.
This consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
February 4, 1998
15
<PAGE> 16
Schedule II
MOTIVEPOWER INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions -
Balance at Additions - Charged to
beginning Charged to other Balance at
of costs and accounts end of
period expenses - describe Deductions period
------ -------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Loss reserves $12,121 $ 1,027 $ -- $ (1,295) $11,853
Warranty and overhaul reserves 7,053 4,188 -- (2,619) 8,622
Inventory reserves 3,546 1,771 -- (3,155) 2,162
Allowance for doubtful accounts 284 374 -- (264) 394
Valuation allowance - taxes 19,278 -- -- (2,074) 17,204
Environmental reserves 4,078 18 -- -- 4,096
YEAR ENDED DECEMBER 31, 1996
Loss reserves $15,176 $ 2,841 $ $ (5,896) $12,121
Warranty and overhaul reserves 4,402 5,450 -- (2,799) 7,053
Inventory reserves 13,028 4,072 -- (13,554) 3,546
Allowance for doubtful accounts 531 97 -- (344) 284
Valuation allowance - taxes 22,375 -- -- (3,097) 19,278
Environmental reserves 4,060 18 -- -- 4,078
YEAR ENDED DECEMBER 31, 1995
Loss reserves $14,903 $10,458 $ $(10,185) $15,176
Warranty and overhaul reserves 5,434 6,370 -- (7,402) 4,402
Inventory reserves 865 12,263 -- (100) 13,028
Allowance for doubtful accounts 205 450 -- (124) 531
Valuation allowance - taxes 20,219 2,156 -- -- 22,375
Environmental reserves 2,653 1,451 -- (44) 4,060
</TABLE>
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MotivePower Industries, Inc.
By: /s/ Michael A. Wolf
--------------------------------------------------
Michael A. Wolf
President and Chief Executive Officer and Director
(Principal Executive Officer)
March 13, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ John C. Pope Chairman and Director March 13, 1998
- -----------------------------------
John C. Pope
/s/ William F. Fabrizio Senior Vice President March 13, 1998
- ----------------------------------- and Chief Financial Officer
William F. Fabrizio (Principal Financial Officer)
/s/ William D. Grab Vice President, Controller and March 13, 1998
- ----------------------------------- Principal Accounting Officer
William D. Grab
/s/ Gilbert E. Carmichael Vice Chairman and Director March 13, 1998
- -----------------------------------
Gilbert E. Carmichael
/s/ Ernesto Fernandez Hurtado Director March 13, 1998
- -----------------------------------
Ernesto Fernandez Hurtado
/s/ Lee B. Foster II Director March 13, 1998
- -----------------------------------
Lee B. Foster II
/s/ James P. Misco II Director March 13, 1998
- -----------------------------------
James P. Misco II
/s/ Nicholas J. Stanley Director March 13, 1998
- ------------------------------------
Nicholas J. Stanley
</TABLE>
17
<PAGE> 1
EXHIBIT A EXHIBIT 3.01
RESTATED
CERTIFICATE OF INCORPORATION
OF
MOTIVEPOWER INDUSTRIES, INC.
(PURSUANT TO SECTION 245 OF THE DELAWARE GENERAL CORPORATION LAW)
MotivePower Industries, Inc., originally incorporated as MK Rail
Corporation on April 7, 1993 (the "Company"), hereby restates its Certificate of
Incorporation. The Board of Directors of the Company adopted a resolution
restating the Certificate of Incorporation on February 10, 1998 in accordance
with the provisions of Section 245 of the Delaware General Corporation Law (the
"DGCL"). This Restated Certificate of Incorporation only restates and integrates
and does not further amend the provisions of the Company's Certificate of
Incorporation as heretofore amended or supplemented, and there is no discrepancy
between those provisions and the provisions of this Restated Certificate of
Incorporation. This Restated Certificate of Incorporation does not rescind or
eliminate any prior Certificates of Designation filed by the Company pursuant to
Section 151(g) of the DGCL, which shall continue to be in full force and effect.
FIRST: The name of the Company is MotivePower Industries, Inc.
SECOND: The address of the registered office of the Corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle, Delaware 19801. The name of the registered
agent at such address is The Corporation Trust Company.
THIRD: The purpose of the Company is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
FOURTH: Section 1. Authorized Capital Stock. The Company is authorized
to issue two classes of capital stock, designated Common Stock and Preferred
Stock. The total number of shares of capital stock that the Company is
authorized to issue is Sixty-Five Million (65,000,000) shares, consisting of
Fifty-Five Million (55,000,000) shares of Common Stock, par value $0.01 per
share, and Ten Million (10,000,000) shares of Preferred Stock, par value $0.01
per share.
Section 2. Preferred Stock. The Preferred Stock may be issued in one or
more series. The Board of Directors of the Company ("Board") is hereby
authorized to issue the shares of Preferred Stock in such series and to fix from
time to time before issuance the number of shares to be included in any such
series and the designation, relative powers, preferences, and rights and
qualifications, limitations, or restrictions
<PAGE> 2
of all shares of such series. The authority of the Board with respect to each
such series will include, without limiting the generality of the foregoing, the
determination of any or all of the following:
(a) the number of shares of any series and the designation to
distinguish the shares of such series from the shares of all other
series;
(b) the voting powers, if any, and whether such voting powers
are full or limited in such series;
(c) the redemption provisions, if any, applicable to such
series, including the redemption price or prices to be paid;
(d) whether dividends, if any, will be cumulative or
noncumulative, the dividend rate of such series, and the dates and
preferences of dividends on such series;
(e) the rights of such series upon the voluntary or
involuntary dissolution of, or upon any distribution of the assets of,
the Company;
(f) the provisions, if any, pursuant to which the shares of
such series are convertible into, or exchangeable for, shares of any
other class or classes or of any other series of the same or any other
class or classes of stock, or any other security, of the Company or any
other corporation or other entity, and the price or prices or the rates
of exchange applicable thereto;
(g) the right, if any, to subscribe for or to purchase any
securities of the Company or any other corporation or other entity;
(h) the provisions, if any, of a sinking fund applicable to
such series; and
(i) any other relative, participating, optional, or other
special powers, preferences, rights, qualifications, limitations, or
restrictions thereof;
all as may be determined from time to time by the Board and stated in the
resolution or resolutions providing for the issuance of such Preferred Stock
(collectively, a "Preferred Stock Designation").
Section 3. Common Stock. Except as may otherwise be provided in a
Preferred Stock Designation, the holders of Common Stock will be entitled to one
vote on each matter submitted to a vote at a meeting of stockholders for each
share of Common Stock held of record by such holder as of the record date for
such meeting.
<PAGE> 3
FIFTH. The Board may make, amend, and repeal the By-Laws of the
Company. Any By-Law made by the Board under the powers conferred hereby may be
amended or repealed by the Board (except as specified in any such By-Law so made
or amended) or by the stockholders in the manner provided in the By-Laws of the
Company. Notwithstanding the foregoing and anything contained in this
Certificate of Incorporation to the contrary, By-Laws 1, 3, 8, 10, 11, 12, 13,
32, 33 and 38 may not be amended or repealed by the stockholders, and no
provision inconsistent therewith may be adopted by the stockholders, without the
affirmative vote of the holders of at least 66-2/3% of the Voting Stock, voting
together as a single class. The Company may in its By-Laws confer powers upon
the Board in addition to the foregoing and in addition to the powers and
authorities expressly conferred upon the Board by applicable law. For the
purposes of this Certificate of Incorporation, "Voting Stock" means stock of the
Company of any class or series entitled to vote generally in the election of
Directors. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at least
66-2/3% of the Voting Stock, voting together as a single class, is required to
amend or repeat or to adopt any provision inconsistent with, this Article Fifth.
SIXTH. Subject to the rights of the holders of any series of Preferred
Stock:
(a) any action required or permitted to be taken by the
stockholders of the Company must be effected at a duly called annual or
special meeting of stockholders of the Company and may not be effected
by any consent in writing of such stockholders; and
(b) special meetings of stockholders of the Company may be
called only by (i) the Chairman of the Board ("Chairman"), (ii) the
Secretary of the Company ("Secretary") within 10 calendar days after
receipt of the written request of a majority of the total number of
Directors that the Company would have if there were no vacancies
("Whole Board"), and (iii) as provided in By-Law 3.
At any annual meeting or special meeting of stockholders of the Company, only
such business will be, conducted or considered as has been brought before such
meeting in the manner provided in the By-Laws of the Company. Notwithstanding
anything contained in this Certificate of Incorporation to the contrary, the
affirmative vote of at least 66-2/3% of the Voting Stock, voting together as a
single class, will be required to amend or repeal, or adopt any provision
inconsistent with, this Article Sixth.
SEVENTH. Section 1. Number, Election, and Terms of Directors. 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, the number of the Directors of the Company will not be less than
three (3) nor more than fifteen (15) and will be fixed from time to time in the
manner described in the By-Laws of the
<PAGE> 4
Company. The Directors, other than those who may be elected by the holders of
any series of Preferred Stock, will be classified with respect to the time for
which they severally hold office into three classes, as nearly equal in number
as possible, designated Class I, Class II and Class III. The Directors first
appointed to Class I will hold office for a term expiring at the annual meeting
of stockholders to be held in 1994; the Directors first appointed to Class II
will hold office for a term expiring at the annual meeting of stockholders to be
held in 1995; and the Directors first appointed to Class III will hold office
for a term expiring at the annual meeting of stockholders to be held in 1996,
with the members of each class to hold office until their successors are elected
and qualified. At each succeeding annual meeting of the stockholders of the
Company, the successors of the class of Directors whose terms expire at that
meeting will be elected by plurality vote of all votes cast at such meeting to
hold office for a term expiring at the annual meeting of stockholders held in
the third year following the year of their election. 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,
Directors may be elected by the stockholders only at an annual meeting of
stockholders. Election of Directors of the Company need not be by written ballot
unless requested by the Chairman or by the holders of a majority of the Voting
Stock present in person or represented by proxy at a meeting of the stockholders
at which Directors are to be elected.
Section 2. Nomination of Director Candidates. Advance notice of
stockholder nominations for the election of Directors must be given in the
manner provided in the By-Laws of the Company.
Section 3. Newly Created Directorship and Vacancies. 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 a 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, 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.
Any Director elected in accordance with the preceding sentence will hold office
for the remainder of the full term of the class of Directors in which the new
directorship was created or the vacancy occurred and until such Director's
successor has been elected and qualified. No decrease in the number of Directors
constituting the Board may shorten the term of any incumbent Director.
Section 4. Removal. 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, any Director may be removed from
office by the
<PAGE> 5
stockholders only for cause and only in the manner provided in this Section 4.
At any annual meeting or special meeting of the stockholders, the notice of
which states that the removal of a Director or Directors is among the purposes
of the meeting, the affirmative of the holders of at least 66-2/3% of the Voting
Stock, voting together as a single class, may remove such Director or Directors
for cause.
Section 5. Amendment, Repeal, Etc. Notwithstanding anything contained
in this Certificate of Incorporation to the contrary, the affirmative vote of at
least 66-2/3% of the Voting Stock, voting together as a single class, will be
required to amend or repeal, or adopt any provision inconsistent with, this
Article Seventh.
EIGHTH. To the full extent permitted by the DGCL or any other
applicable law currently or hereafter in effect, no Director of the Company will
be personally liable to the Company or its stockholders for or with respect to
any acts or omissions in the performance of his or her duties as a Director of
the Company. Any repeat or modification of this Article Eighth will not
adversely affect any right or protection of a Director of the Company exiting
prior to such repeal or modification.
NINTH. Each person who is or was or had agreed to become a Director or
officer of the Company, and each such person who is or was serving or who had
agreed to serve at the request of the Board or an officer of the Company as an
employee or agent of the Company or as a director, officer, employee, or agent
of another corporation, partnership, joint venture, trust or other entity,
whether for profit or not for profit (including the heirs, executors,
administrators, or estate of such person), will be indemnified by the Company to
the full extent permitted by the DGCL or any other applicable law as currently
or hereafter in effect and will be entitled to advancement of expenses in
connection therewith. The right of indemnification and of advancement of
expenses provided in this Article Ninth (a) will not be exclusive of any other
rights to which any Person seeking indemnification may otherwise be entitled,
including without limitation pursuant to any contract approved by a majority of
the Whole Board (whether or not the Directors approving such contract are or are
to be parties to such contract or similar contracts), and (b) will be applicable
to matters otherwise within its scope whether or not such matters arose or arise
before or after the adoption of this Article Ninth. Without limiting the
generality of the foregoing, the Company may adopt By-Laws, or enter into one or
more agreements with any Person, which provide for indemnification and/or
advancement of expenses greater or different than that provided in this Article
Ninth or the DGCL. Any amendment or repeal of, or adoption of any provision
inconsistent with, this Article Ninth will not adversely affect any right or
protection arising hereunder, or arising out of facts occurring, prior to such
amendment, repeat or adoption and no amendment, repeal, or adoption, will affect
the legality, validity, or enforceability of any contract entered into or right
granted prior to the effective date of such amendment, repeal, or adoption.
<PAGE> 6
IN WITNESS WHEREOF, the Company has caused this Certificate to be
signed by Michael A. Wolf, its President and Chief Executive Officer and
attested by Jeannette Fisher-Garber, its Secretary, this 10th day of February,
1998.
MOTIVEPOWER INDUSTRIES, INC.
BY:_____________________________________
Michael A. Wolf
President and Chief Executive Officer
ATTEST:
- ----------------------------------
Jeannette Fisher-Garber, Secretary
<PAGE> 1
Exhibit 4.05
MOTIVEPOWER INDUSTRIES, INC.
FOURTH AMENDMENT
DATED AS OF AUGUST 22, 1997
TO RIGHTS AGREEMENT DATED AS OF JANUARY 19, 1996
AND AMENDED AS OF APRIL 5, 1996, JUNE 20, 1996 AND JULY 25, 1996
AMENDMENT dated as of August 22, 1997 to the Rights Agreement (the "Rights
Agreement") dated as of January 19, 1996 and Amended as of April 5, 1996, June
29, 1996 and July 25, 1996 between MotivePower Industries, Inc., formerly MK
Rail Corporation, a Delaware corporation (the "Company"), and Chemical Mellon
Shareholder Services, L.L.C. (the "Rights Agent").
Pursuant to resolutions adopted by the Board of Directors of the Company on
August 22, 1997 and the authority vested in the Board of Directors of the
Company by Section 27 of the Rights Agreement, the Rights Agreement is hereby
amended as follows:
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights,
Subsection (a)(i) is hereby deleted and replaced in its entirety as follows:
(a)(i) the close of business on August 22, 2007 (the "Final Expiration
Date")
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights,
Subsection (b) is hereby deleted and replaced in its entirety as follows:
(b) Effective as of August 22, 1997 Purchase Price for each one
one-hundredth of Preferred Share purchasable pursuant to the exercise of a
Right shall be $80.00, and shall be subject to adjustment from time to time
as provided in Section 11 or 13 hereof and shall be payable in lawful money
of the United States of America in accordance with paragraph (c) below.
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly
executed and attested, all as of the day and year first above written.
MOTIVEPOWER INDUSTRIES, INC.
(formerly MK Rail Corporation)
Attest:
By: By:
---------------------------- ---------------------------
Jeannette Fisher-Garber John C. Pope
Secretary Chairman
CHEMICAL MELLON SHAREHOLDER
SERVICES, L.L.C. now known as ChaseMellon
Shareholder Services, L.L.C.
Attest:
By: By:
---------------------------- ---------------------------
Name: Name:
Title: Title:
<PAGE> 1
Exhibit 10.31
MotivePower Industries, Inc.
DEFERRED COMPENSATION PLAN
Originally Effective April 23, 1994 As
Amended and Restated Effective as of ________ __, 1997
<PAGE> 2
TABLE OF CONTENTS
PAGE
ARTICLE I PURPOSE AND BACKGROUND 1
ARTICLE II DEFINITIONS 1
2.1 Account 1
2.2 Administrative Committee 1
2.3 Beneficiary 2
2.4 Cause 2
2.5 Code 2
2.6 Compensation 2
2.7 Compensation Committee 3
2.8 Deferral Commitment 3
2.9 Deferral Period 3
2.10 Determination Date 3
2.11 Earnings Indices 3
2.12 Elective Deferred Compensation 3
2.13 Employer 3
2.14 ERISA 3
2.15 Financial Hardship 3
2.16 Participant 4
2.17 Participation Agreement 4
2.18 Plan Benefit 4
2.19 Rate of Return 4
2.20 SARs 4
ARTICLE III PARTICIPATION AND DEFERRAL COMMITMENTS 4
3.1 Eligibility and Participation 4
3.2 Form of Deferral 5
3.3 Limitations on Deferral Commitments 6
3.4 Modification of Deferral Commitment 6
<PAGE> 3
TABLE OF CONTENTS
(Continued)
PAGE
ARTICLE IV DEFERRED COMPENSATION ACCOUNTS 6
4.1 Accounts 6
4.2 Elective Deferred Compensation 6
4.3 Allocation of Deferred
Compensation 7
4.4 Makeup Contributions 8
4.5 Employer Discretionary Contributions 8
4.6 Rate of Return 9
4.7 Determination of Accounts 9
4.8 Vesting of Accounts 9
4.9 Statement of Accounts 9
ARTICLE V PLAN BENEFITS 10
5.1 Distributions Prior to Termination
of Employment 10
5.2 Distributions Following Termination
of Employment 10
5.3 Form of Benefit Payment Following
Termination of Employment 11
5.4 Commencement of Deferral Payment 11
5.5 Timing of Election 12
5.6 Death Benefit 12
5.7 Accelerated Distribution 12
5.8 Withholding for Taxes 12
5.9 Valuation and Settlement 13
5.10 Payment to Guardian 13
ARTICLE VI BENEFICIARY DESIGNATION 13
6.1 Beneficiary Designation 13
6.2 Changing Beneficiary 13
6.3 Community Property 14
6.4 No Beneficiary Designation 14
<PAGE> 4
TABLE OF CONTENTS
(Continued)
PAGE
ARTICLE VII ADMINISTRATION 15
7.1 Administrative Committee; Duties 15
7.2 Agents 15
7.3 Binding Effect of Decisions 15
7.4 Indemnity of Administrative Committee 16
ARTICLE VIII CLAIMS PROCEDURE 16
8.1 Claim 16
8.2 Review of Claim 16
8.3 Notice of Denial of Claim 16
8.4 Reconsideration of Denied Claim 17
8.5 Employer to Supply Information 18
ARTICLE IX AMENDMENT AND TERMINATION OF PLAN 18
9.1 Amendment 18
9.2 Employer's Right to Terminate 18
ARTICLE X MISCELLANEOUS 19
10.1 Unfunded Plan 19
10.2 Unsecured General Creditor 19
10.3 Trust Fund 20
10.4 Nonassignability 20
10.5 Not a Contract of Employment 20
10.6 Protective Provisions 20
10.7 Governing Law 20
10.8 Validity 20
10.9 Notice 21
10.10 Successors 21
<PAGE> 5
MotivePower Industries, Inc.
DEFERRED COMPENSATION PLAN
ARTICLE I
PURPOSE AND BACKGROUND
The purpose of this Deferred Compensation Plan (the "Plan") is to
provide current tax planning opportunities as well as supplemental funds for the
retirement or death of employees of MotivePower Industries, Inc. ("Company") and
its subsidiaries and affiliated corporations and business entities. The Plan
shall be in addition to existing deferred compensation plans and arrangements
maintained by the Company. It is intended that the Plan will aid in retaining
and attracting employees of exceptional ability by providing them with these
benefits. The Plan was originally adopted effective as of April 23, 1994
("Effective Date") and has been amended and restated in the form of this
document effective as of ___________ __, 1997.
References are to the Plan unless otherwise indicated.
ARTICLE II
DEFINITIONS
For the purposes of the Plan, the following terms have the meanings
indicated, unless the context clearly indicates otherwise:
2.1 ACCOUNT. "Account" means the Account as maintained by the Employer
in accordance with Article IV with respect to any Compensation deferred pursuant
to the Plan. A Participant's Account shall be utilized solely as a device for
the determination and measurement of the amounts to be paid to the Participant
pursuant to the Plan. Separate subaccounts shall be maintained to properly
reflect the Participant's balance and earnings thereon. A Participant's Account
shall not constitute or be treated as a trust fund of any kind.
2.2 ADMINISTRATIVE COMMITTEE. "Administrative Committee" means the
committee appointed to administer the Plan as provided by Section 7.2.
<PAGE> 6
2.3 BENEFICIARY. "Beneficiary" means the person, persons or entity
entitled under Article VI to receive any Plan Benefits payable after a
Participant's death.
2.4 CAUSE. "Cause" means a Participant's:
(i) Conviction of any criminal violation involving dishonesty,
fraud or breach of trust;
(ii) Willful engagement in any misconduct in the performance
of duties that materially injures the Employer, monetarily or
otherwise;
(iii) Performance of any act which, if known to any customers,
clients or stockholders of any entity included in those comprising the
Employer would materially and adversely affect the Employer's business;
or
(iv) Willful and substantial nonperformance of assigned duties
(other than that resulting from the Participant's incapacity due to
physical or mental illness) which has continued after the Board of
Directors of an entity included in those comprising the Employer and
which employs the Participant has given written notice of the
nonperformance to Participant, which notice specifically identifies the
manner in which the Board of Directors believes that the Participant
has not substantially performed duties and which indicates the Board of
Directors' intention to terminate Participant's employment because of
the nonperformance. For purposes of clauses (ii) and (iv) of this
Section, no act or omission on the Participant's part shall be deemed
"willful" if committed or omitted in good faith and with a reasonable
belief that the action was in the best interest of the Employer.
2.5 CODE. "Code" means the Internal Revenue Code of 1986, as amended.
2.6 COMPENSATION. "Compensation" means the salary and bonuses payable
to a Participant during the calendar year and considered to be "wages" for
purposes of federal income tax withholding, increased by amounts deferred under
the Plan, salary reduction contributions under Code Section 401(k), or any other
deferral arrangements. For purposes of the Plan, the term "bonus" includes the
amount of the Company's financial obligation arising from a Participant's
exercise of SARs. Compensation does not include expense reimbursements, any form
of noncash
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Compensation or benefits, group life insurance premiums, or any other payments
or benefits other than salary and bonuses as described above.
2.7 COMPENSATION COMMITTEE. "Compensation Committee" means the
Compensation Committee of the Company's Board of Directors.
2.8 DEFERRAL COMMITMENT. "Deferral Commitment" means an election to
defer Compensation made by a Participant pursuant to Article III and for which a
Participation Agreement has been submitted by the Participant to the
Administrative Committee.
2.9 DEFERRAL PERIOD. "Deferral Period" means the period over which a
Participant has elected to defer a portion of the Participant's Compensation.
Each calendar year shall be a separate Deferral Period, provided that the
Deferral Period may be modified pursuant to Section 3.4.
2.10 DETERMINATION DATE. "Determination Date" means the last day of
each calender month.
2.11 EARNINGS INDICES. "Earnings Indices" means the portfolios and
funds selected from time to time by the Administrative Committee and among which
a Participant may direct the investment of the Participant's Account (except for
any portion attributable to basic employer makeup contributions under Section
4.4(a) and except as may be restricted for any portion attributable to any
employer discretionary contribution under Section 4.5) for purposes of
calculating the Rate of Return.
2.12 ELECTIVE DEFERRED COMPENSATION. "Elective Deferred Compensation"
means the amount of Compensation that a Participant elects to defer pursuant to
a Deferral Commitment.
2.13 EMPLOYER. "Employer" means MotivePower Industries, Inc., any
successor to the business thereof, and any affiliated or subsidiary corporations
designated by the Compensation Committee.
2.14 ERISA. "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
2.15 FINANCIAL HARDSHIP. "Financial Hardship" means an unanticipated
emergency that is caused by an event beyond the control of the Participant that
would result in severe financial
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hardship if an early withdrawal from the Plan were not permitted and to be
determined by the Administrative Committee on the basis of information supplied
by the Participant.
2.16 PARTICIPANT. "Participant" means any individual who is
participating or has participated in this Plan as provided in Article III.
2.17 PARTICIPATION AGREEMENT. "Participation Agreement" means the
agreement submitted by a Participant to the Administrative Committee prior to
the beginning of a Deferral Period, with respect to a Deferral Commitment made
for that Deferral Period.
2.18 PLAN BENEFIT. "Plan Benefit" means the benefit payable to a
Participant as calculated in Article V.
2.19 RATE OF RETURN. "Rate of Return" means the amount credited to a
Participant's Account under Section 4.7 to be determined by the Administrative
Committee based upon the net performance of the Earnings Indices selected by the
Participant as to any amount attributable to Elective Deferred Compensation and
employer matching makeup contributions, of the Company's stock fund as to any
amount attributable to basic employer makeup contributions under Section 4.4(a),
and in accordance with the investment rights and limitations specified in a
special Participation Agreement for any employer discretionary contribution
under Section 4.5.
2.20 SARs. "SARs" means stock appreciation rights provided by the
Employer to a Participant.
ARTICLE III
PARTICIPATION AND DEFERRAL COMMITMENTS
3.1 ELIGIBILITY AND PARTICIPATION.
(a) ELIGIBILITY. An employee of the Employer shall be eligible
to defer Compensation into this Plan if:
(i) The employee's base rate of pay exceeds one hundred
thousand dollars ($100,000) on September 1 of the prior calendar year;
or
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(ii) The employee is selected by the Administrative Committee
and the employee is either a highly compensated employee or a member of
a select group of management of the Employer; or
(iii) The employee's Compensation exceeds the limit in Code
Section 401(a)(17).
(b) PARTICIPATION. All employees with Compensation in excess of the
Code Section 401(a)(17) limit and any eligible employee who elects to defer
Compensation under the Plan or who has an Account balance under the Plan shall
be a Participant in the Plan. An eligible employee may elect to participate in
the Plan with respect to any Deferral Period by submitting a Participation
Agreement to the Administrative Committee by November 30 of the calendar year
immediately preceding the Deferral Period. With respect to amounts earned
commencing January 1 of any calendar year, the Administrative Committee, at its
sole discretion, may allow an eligible employee to submit a Participation
Agreement to the Administrative Committee by December 31 of the immediately
preceding calendar year.
(c) PART-YEAR PARTICIPATION. In the event that an employee first
becomes eligible, or again becomes eligible following a period of suspended
eligibility, to defer Compensation during a calendar year, a Participation
Agreement must be submitted to the Administrative Committee no later than thirty
(30) days following notification to the employee of eligibility to defer, and
the Participation Agreement shall be effective only with regard to Compensation
earned or payable following the submission of the Participation Agreement to the
Administrative Committee.
3.2 FORM OF DEFERRAL. A Participant may elect Deferral Commitments in
the Participation Agreement as follows:
(a) SALARY DEFERRAL COMMITMENT. A salary Deferral Commitment
shall apply to the salary Compensation payable by the Employer to the
Participant during the Deferral Period. The amount to be deferred shall
be stated as a percentage or dollar amount.
(b) BONUS DEFERRAL COMMITMENT. A bonus Deferral Commitment
shall apply to the bonus Compensation payable by the Employer to the
Participant during the Deferral Period. If the bonus is cash payable
upon the exercise of SARs, the Deferral Commitment
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shall apply to SARs that are exercised during the Deferral Period. The
amount to be deferred shall be stated as a percentage or dollar amount.
3.3 LIMITATIONS ON DEFERRAL COMMITMENTS. The following limitations
shall apply to Deferral Commitments:
a) MINIMUM. The minimum salary deferral amount shall be one
hundred dollars ($100) for each pay period. There shall be no minimum
deferral amount for bonus Compensation in a bonus Deferral Commitment.
(b) MAXIMUM. The maximum deferral amount shall be fifty
percent (50%) of salary Compensation in a salary Deferral Commitment
and one hundred percent (100%) of bonus Compensation in a bonus
Deferral Commitment.
(c) CHANGES IN MINIMUM OR MAXIMUM. The Administrative
Committee may change the minimum or maximum deferral amounts from time
to time by giving written notice to all Participants. No such change
may affect a Deferral Commitment made prior to the Administrative
Committee's action.
3.4 Modification of Deferral Commitment. A Deferral commitment shall be
irrevocable except that the Administrative Committee may permit a Participant to
reduce the amount to be deferred, or waive the remainder of the Deferral
Commitment upon a finding that the Participant has suffered a Financial
Hardship.
ARTICLE IV
DEFERRED COMPENSATION ACCOUNTS
4.1 ACCOUNTS. For record keeping purposes only, an Account shall be
maintained for each Participant. Separate subaccounts shall be maintained to the
extent necessary to properly reflect the Participant's election of Earnings
Indices, basic employer makeup contributions and total vested or nonvested
Account balance.
4.2 ELECTIVE DEFERRED COMPENSATION. A Participant's Elective Deferred
Compensation shall be credited to the Participant's Account as the corresponding
nondeferred portion of the
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Compensation becomes or would have become payable. Any withholding of taxes or
other amounts with respect to deferred Compensation which is required by
federal, state, or local law shall be withheld from the Participant's
nondeferred Compensation to the maximum extent possible with any excess being
withheld from the Participant's Account.
4.3 ALLOCATION OF DEFERRED COMPENSATION. Each Participant shall direct
the allocation of the Participant's Account attributable to Elective Deferred
Compensation and employer matching makeup contributions among the Earning
Indices selected from time to time by the Administrative Committee. For any
period and Account portion for which the Administrative Committee designates the
Company's stock as a component of the Earning Indices, an allocation to the
Company's stock account will be subject to Section 4.3(b).
(a) A Participant's initial allocation shall be made in a
Participation Agreement. If a Participant has not made an allocation
election, the Participant's Account shall be allocated to a money
market or equivalent component of the Earnings Indices. A Participant
may change an allocation among Earning Indices on the first day of each
month, provided the Participant gives notice to the Administrative
Committee of the change at least twenty (20) days before the beginning
of the month.
(b) Except for basic employer makeup contributions, an
allocation to the Company's stock account will not become effective
until the Company could reasonably make an equivalent actual investment
in the Company's stock without any material disruption of the market
for its stock. This restriction applies whether or not the Company
actually causes an investment to be made in its stock upon an
allocation election to the Company's stock account. If the period of
time between when an allocation election would otherwise have become
effective without application of this Section 4.3(b) and the actual
effective date after application of this Section 4.3(b) exceeds thirty
(30) days, the portion of the Participant's Account which is to be
invested in the Company's stock account will be deemed to have been
allocated to a money market or equivalent component of the Earnings
Indices for that period. Determinations under this Section 4.3(b) shall
be made by the Administrative Committee. An allocation to the Company's
stock account resulting from a basic employer makeup contribution shall
be effective as provided in Section 4.4.
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4.4 MAKEUP CONTRIBUTIONS.
(a) A Participant shall receive a basic employer makeup
contribution equal to the lesser of (i) two percent (2%) of the
Participant's Compensation or (ii) a lesser percentage of the
Participant's Compensation as is provided from time to time for basic
employer contributions under the Company's 401(k) plan, less, in either
case, the basic employer contribution to the Company's 401(k) plan
required to be allocated and invested in the Company's stock for the
benefit of the Participant. This basic employer makeup contribution
shall be credited to the Company's stock account and the Participant
shall have no right to elect an investment alternative at any time with
respect to any basic employer makeup contribution or related earnings.
Participants are not required to defer any amounts into the Plan in
order to receive a basic employer makeup contribution under this
subsection.
(b) If a Participant defers compensation into the Company's
401(k) plan an amount equal to the limit as set forth in Code
Section 402(g), the Participant shall receive an additional employer
matching makeup contribution equal to fifty percent (50%) of the first
six percent (6%) of Compensation deferred into the Company's 401(k)
plan and this Plan, less the amount of the employer matching
contribution made by the Employer to the Company's 401(k) Plan for the
benefit of the Participant. This employer matching makeup contribution
shall be allocated as elected by the Participant.
The total amount of Employer contributions to a Participant under this
section and under the Company's 401(k) plan for any year may never exceed five
percent (5%) of Compensation. All employer makeup contributions under this
section shall be credited to the Participant's account no later than forty-five
(45) days after the end of the calendar year they would have been credited to
the Company's 401(k) plan if not for the limitations contained in the Code.
4.5 EMPLOYER DISCRETIONARY CONTRIBUTIONS. Employer may make
discretionary contributions to the Participant's Account. Discretionary
contributions shall be credited at times and in amounts as the
CompensationCommittee in its sole discretion shall determine. The amount of the
discretionary contributions shall be evidenced in a special Participation
Agreement approved
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by the Administrative Committee. The special Participation Agreement shall
include any rights and limitations on investment alternatives applicable to any
employer discretionary contribution.
4.6 RATE OF RETURN. The Accounts shall be credited monthly with the
Rate of Return specified in Section 2.19.
4.7 DETERMINATION OF ACCOUNTS. Each Participant's Account as of each
Determination Date shall consist of the balance of the Participant's Account as
of the immediately preceding Determination Date, plus the Participant's Elective
Deferred Compensation credited, any basic employer makeup contributions
credited, any employer matching makeup contributions credited, any employer
discretionary contributions credited and the applicable Rate of Return, minus
the amount of any distributions made, since the immediately preceding
Determination Date.
4.8 VESTING OF ACCOUNTS. Each Participant shall be vested in the
amounts credited to that Participant's Account and earnings thereon as follows:
(a) AMOUNTS DEFERRED. A Participant shall be one hundred
percent (100%) vested at all times in any Elective Deferred
Compensation elected to be deferred under this Plan and Rate of Return
thereon.
(b) EMPLOYER MAKEUP CONTRIBUTIONS. Employer basic makeup
contributions and employer matching makeup contributions to the
Participant's account, and Rate of Return thereon, shall be vested to
the same extent that those types of contributions vest under the
Company's 401(k) plan. All Employer makeup contributions to this Plan
shall be forfeited if the Participant is terminated for Cause.
(c) EMPLOYER DISCRETIONARY CONTRIBUTIONS. Employer
Discretionary Contributions and Rate of Return thereon shall be vested
as set forth in the special Participation Agreement.
4.9 STATEMENT OF ACCOUNTS. The Administrative Committee shall submit to
each Participant, within one hundred twenty (120) days after the close of each
calendar year, or at another time as determined by the Administrative Committee,
a statement setting forth the balance to the credit of the Participant's
Account.
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ARTICLE V
PLAN BENEFITS
5.1 DISTRIBUTIONS PRIOR TO TERMINATION OF EMPLOYMENT. A Participant's
Account may be distributed to the Participant prior to termination of employment
with the Employer as follows:
(a) IN-SERVICE WITHDRAWALS. A Participant may elect in a
Participation Agreement to withdraw all or any portion of the Elective
Deferred Compensation amount deferred by that Participation Agreement
as of a date specified in the election. The date shall not be sooner
than seven (7) years after the date the Deferral Period commences. The
amount withdrawn shall not exceed the amount of Compensation deferred,
without earnings and shall not include any employer basic or matching
makeup contribution. The election shall be made at the time the
Deferral Commitment is made and shall be irrevocable.
(b) HARDSHIP WITHDRAWALS. Upon a finding that a Participant
has suffered a Financial Hardship, the Administrative Committee may, in
its sole discretion, make dis tributions from the Participant's
Account. The amount of the withdrawal shall be limited to the amount
reasonably necessary to meet the Participant's needs resulting from the
Financial Hardship. If payment is made due to Financial Hardship under
the Plan, the Participant's deferrals under the Plan shall cease for a
twelve (12) month period. Any resumption of the Participant's deferrals
under the Plan after that twelve (12) month period shall be made only
at the election of the Participant in accordance with Article III
herein.
(c) FORM OF PAYMENT AND TIME. Any distribution pursuant to
Section 5.1(a) or 5.1(b) shall be payable in a lump sum. The
distribution shall be paid in the case of an inservice withdrawal, as
provided in the Participation Agreement, and in case of a Financial
Hardship, within thirty (30) days after the Administrative Committee
approves the Financial Hardship.
5.2 DISTRIBUTIONS FOLLOWING TERMINATION OF EMPLOYMENT. Upon a
Participant's termination of employment with the Employer for any reason (which
termination shall be for a
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period of at least five (5) days) the Employer shall pay to the Participant or,
in the case of death, the Participant's Beneficiary, benefits equal to the
vested balance in the Participant's Account.
5.3 FORM OF BENEFIT PAYMENT FOLLOWING TERMINATION OF EMPLOYMENT.
(a) Subject to Section 5.3(b), benefits shall be paid in the
form selected by the Participant in the Participation Agreement at the
time of the Deferral Commitment. Options include:
(i) A lump sum payment.
(ii) Equal annual installments of the Account and
Rate of Return amortized over a period of five (5), ten (10),
or fifteen (15) years. The Account shall be initially
amortized with an assumed Rate of Return of seven percent (7%)
unless the Participant selects, and the Administrative
Committee approves, an alternative assumed Rate of Return. The
Account shall be reamortized annually based upon the actual
Rate of Return for the Account for the immediately preceding
twelve (12) months.
(b) SMALL ACCOUNT(S). Notwithstanding Section 5.3(a), if a
Participant's Account is less than fifty thousand dollars ($50,000) on
the date of termination, the benefit shall be paid in a lump sum.
5.4 COMMENCEMENT OF DEFERRAL PAYMENT.
(a) Subject to Section 5.4(b), benefits that are payable upon
a Participant's termination of employment with the Employer shall
commence as elected by the Participant in a Participation Agreement.
Options are:
(i) Payments to commence as soon as practical after
termination, but in no case more than sixty (60) days after
termination.
(ii) Payment to commence as soon as practical in the
calendar year following termination, but in no case more than
ninety (90) days after the beginning of the calendar year.
(iii) Payments to commence as soon as practical in
the calendar year following the later of the Participant's
termination or obtainment of an age selected by the
Participant, which shall not exceed age sixty-five (65). If a
Participant has
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selected this option and has an account balance of less than
fifty thousand dollars ($50,000) at termination, the benefit
shall commence as if the Participant had sel ected payment
under Section 5.4(a)(ii) above.
(b) Notwithstanding Section 5.4(a), a Participant who is a
"covered employee" as defined in Code Section 162(m)(3) shall receive
the first benefit payment as if the Participant had elected payment
under Section 5.4(a)(ii), unless the Participant elects payment under
Section 5.4(a)(iii) and the commencement date is after the date payable
under Section 5.4(a)(ii).
5.5 TIMING OF ELECTION. As long as the election is made and filed with
the Administrative Committee at least twelve (12) full months prior to
termination of employment, a Participant may elect to change the form of benefit
payment (see Section 5.3) or the timing of benefit commencement (see Section
5.4). In no case may a Participant change an election in the twelve (12) months
preceding termination of employment.
5.6 DEATH BENEFIT. Upon the death of a Participant, the Employer shall
pay to the Participant's Beneficiary an amount equal to the remaining unpaid
balance of the Participant's Ac count in a lump sum.
5.7 ACCELERATED DISTRIBUTION. Notwithstanding any other provision of
the Plan, at any time a Participant shall be entitled to receive, upon written
request to the Administrative Committee, a lump sum distribution equal to ninety
percent (90%) of the vested Account balance as of the Determination Date
immediately preceding the date on which the Administrative Committee receives
the written request. The remaining balance shall be forfeited by the Par
ticipant. The amount payable under this section shall be paid in a lump sum
within thirty (30) days following the receipt of the notice by the
Administrative Committee from the Participant. If a Participant receives a
distribution under this Section, the Participant's Deferral Commitments for the
remaining portion of that calendar year shall be revoked and the Participant
shall not be permitted to make Deferral Commitments for a period of one (1) year
from the date of distribution.
5.8 WITHHOLDING FOR TAXES. To the extent required by the law in effect
at the time payments are made, the Employer shall withhold from the payments
made hereunder any taxes
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required to be withheld by the federal or any state or local government,
including any amount which the Employer determines is reasonably necessary to
pay any generation-skipping transfer tax which is or may become due. A
Beneficiary, however, may elect not to have withholding of federal income tax
pursuant to Code Section 3405(a)(2), or any successor provision thereto.
5.9 VALUATION AND SETTLEMENT. The amount of a lump sum payment and the
initial amount of installments shall be based on the value of the Participant's
Account on the Determination Date immediately preceding the payment or
commencement of installment payments.
5.10 PAYMENT TO GUARDIAN. The Administrative Committee may direct
payment to the duly appointed guardian, conservator, or other similar legal
representative of a Participant or Beneficiary to whom payment is due. In the
absence of a legal representative, the Administrative Committee may, in it sole
and absolute discretion, make payment to a person having the care and custody of
a minor, incompetent or person incapable of handling the disposition of property
upon proof satisfactory to the Administrative Committee of incompetency,
minority, or incapacity. The distribution shall completely discharge the
Administrative Committee from all liability with respect to the benefit.
ARTICLE VI
BENEFICIARY DESIGNATION
6.1 BENEFICIARY DESIGNATION. Subject to Section 6.3, each Participant
shall have the right, at any time, to designate one (1) or more persons or an
entity as Beneficiary (both primary as well as secondary) to whom benefits under
this Plan shall be paid in the event of Participant's death prior to complete
distribution of the Participant's Account. Each Beneficiary designation shall be
in a written form prescribed by the Administrative Committee and shall be
effective only when filed with the Administrative Committee during the
Participant's lifetime.
6.2 CHANGING BENEFICIARY. Subject to Section 6.3, any Beneficiary
designation may be changed by a Participant without the consent of the
previously named Beneficiary by the filing of
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a new designation with the Administrative Committee. The filing of a new
designation shall cancel all designations previously filed.
6.3 COMMUNITY PROPERTY. If the Participant resides in a community
property state, the following rules shall apply:
(a) If the Participant is married, the Participant's
designation of a Beneficiary other than the Participant's spouse shall
not be effective unless the spouse executes a written consent that
acknowledges the effect of the designation, or it is established the
consent cannot be obtained because the spouse cannot be located.
(b) If the Participant is married, the Participant's
Beneficiary designation may be changed by a Participant with the
consent of the Participant's spouse as provided for in Section 6.3(a)
by the filing of a new designation with the Administrative Committee.
(c) If the Participant's marital status changes after the
Participant has designated a Beneficiary, the following shall apply:
(i) If the Participant is married at the time of
death but was unmarried when the designation was made, the
designation shall be void unless the spouse has consented to
it in the manner prescribed in Section 6.3(a).
(ii) If the Participant is unmarried at the time of
death but was married when the designation was made:
a) The designation shall, be void if the
spouse was named as Beneficiary.
b) The designation shall remain valid if a
nonspouse Beneficiary was named.
(iii) If the Participant was married when
the designation was made and is married to a
different spouse at death, the designation shall be
void unless the new spouse has consented to it in the
manner prescribed above.
6.4 NO BENEFICIARY DESIGNATION. If any Participant fails to designate a
Beneficiary in the manner provided above, if the designation is void, or if the
Beneficiary designated by a Participant dies before the Participant or before
complete distribution of the Participant's benefits,
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the Participant's Beneficiary shall be the person in the first of the following
classes in which there is a survivor:
(a) The Participant's spouse;
(b) The Participant's children in equal shares, except that if
any of the children predeceases the Participant but leaves issue
surviving, then the issue shall take by right of representation the
share the parent would have taken if living;
(c) The Participant's estate.
ARTICLE VII
ADMINISTRATION
7.1 ADMINISTRATIVE COMMITTEE; DUTIES. This Plan shall be administered
by the Administrative Committee. The Administrative Committee shall consist of
at least three (3) individuals appointed by the Compensation Committee or the
Company's Chief Executive Officer. Subject to Section 9.1, the Administrative
Committee shall have the authority to amend (but not terminate) the Plan,
interpret and enforce all appropriate rules and regulations for the
administration of the Plan and decide or resolve any and all questions,
including interpretations of the Plan, as may arise in the administration. A
majority vote of the Administrative Committee members shall control any
decision. Members of the Administrative Committee may be Participants under this
Plan.
7.2 AGENTS. The Administrative Committee may, from time to time, employ
agents and delegate to them administrative duties as it sees fit, and may from
time to time consult with counsel who may be counsel to the Company.
7.3 BINDING EFFECT OF DECISIONS. The decision or action of the
Administrative Committee with respect to any question arising out of or in
connection, with the administration, interpretation and application of the Plan
and the rules and regulations promulgated hereunder shall be final, conclusive
and, binding upon all persons having any interest in the Plan.
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7.4 INDEMNITY OF ADMINISTRATIVE COMMITTEE. The Company shall indemnify
and hold harmless the members of the Administrative Committee against any and
all claims, loss, damage, expense or liability arising from any action or
failure to act with respect to this Plan an account of the person's service on
the Administrative Committee, except in the case of gross negligence or willful
misconduct.
ARTICLE VIII
CLAIMS PROCEDURE
8.1 CLAIM. The Administrative Committee shall establish rules and
procedures to be followed by Participants and Beneficiaries in (a) filing claims
for benefits, and (b) for furnishing and verifying proofs necessary to establish
the right to benefits in accordance with the Plan, consistent with the remainder
of this Article. The rules and procedures shall require that claims and proofs
be made in writing and directed to the Administrative Committee.
8.2 REVIEW OF CLAIM. The Administrative Committee shall review all
claims for benefits. Upon receipt by the Administrative Committee of a claim, it
shall determine all facts which are necessary to determine the right, if any, of
the claimant to benefits under the provisions of the Plan and the amount thereof
as herein provided within ninety (90) days of receipt of a claim. If prior to
the expiration of the initial ninety (90) day period, the Administrative
Committee determines additional time is needed to come to a determination on the
claim, the Administrative Committee shall provide written notice to the
Participant, Beneficiary or other claimant of the need for the extension, not to
exceed a total of one hundred eighty (180) days from the date the appli cation
was received.
8.3 NOTICE OF DENIAL OF CLAIM. In the event that any Participant,
Beneficiary or other claimant claims to be entitled to a benefit under the Plan,
and the Administrative Committee determines that the claim should be denied in
whole or in part, the Administrative Committee shall, in writing, notify the
claimant that the claim has been denied, in whole or in part, setting forth the
specific reasons for the denial. The notification shall be written in a manner
reasonably
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expected to be understood by the claimant and shall refer to the specific
sections of the Plan relied on, shall describe any additional material or
information necessary for the claimant to perfect the claim and an explanation
of why the material or information is necessary, and where appropriate, shall
include an explanation of how the claimant can obtain reconsideration of the
denial.
8.4 RECONSIDERATION OF DENIED CLAIM.
(a) Within sixty (60) days after receipt of the notice of the
denial of a claim, the claimant or duly authorized representative may
request, by mailing or delivery of a written notice to the
Administrative Committee, a reconsideration by the Administrative
Committee of the decision denying the claim. If the claimant or duly
authorized representative fails to request a reconsideration within the
sixty (60) day period, it shall be conclusively determined for all
purposes of the Plan that the denial of the claim by the Administrative
Committee is correct. If the claimant or duly authorized representative
requests a reconsideration within the sixty (60) day period, the
claimant or dully authorized representative shall have thirty (30) days
after filing a request for reconsideration to submit additional written
material in support of the claim, review pertinent documents, and
submit issues and comments in writing.
(b) After the reconsideration request, the Administrative
Committee shall determine within sixty (60) days of receipt of the
claimant's request for reconsideration whether the denial of the claim
was correct and shall notify the claimant in writing of its
determination. The written notice of decision shall be in writing and
shall include specific reasons for the decision, written in a manner
calculated to be understood by the claimant, as well as specific
references to the pertinent Plan provisions on which the decision is
based. In the event of special circumstances determined by the
Administrative Committee, the time for the Administrative Committee to
make a decision may be extended by an additional sixty (60) days upon
written notice to the claimant prior to the commencement of the
extension.
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8.5 EMPLOYER TO SUPPLY INFORMATION. To enable the Administrative
Committee to perform its functions, the Employer shall supply full and timely
information to the Administrative Committee of all matters relating to the
retirement, death or other cause for termination of employment of all
Participants, and the other pertinent facts as the Administrative Committee may
require.
ARTICLE IX
AMENDMENT AND TERMINATION OF PLAN
9.1 AMENDMENT. The Administrative Committee may at any time amend the
Plan by written instrument, notice of which is given to all Participants and to
any Beneficiaries to whom a benefit is due, subject to the following:
(a) PRESERVATION OF ACCOUNT BALANCE. No amendment shall reduce
the amount accrued in any Account to the date the notice of the
amendment is given.
(b) CHANGES IN EARNINGS RATE. No amendment shall reduce the
Rate of Return to be credited after the date of the amendment to the
amount already accrued in any Account and any Deferred Compensation
credited to the Account under Deferral Commitments already in effect on
that date.
9.2 EMPLOYER'S RIGHT TO TERMINATE. The Compensation Committee may at
any time partially or completely terminate the Plan if, in its judgment, the
tax, accounting or other effects of the continuance of the Plan, or potential
payments thereunder would not be in the best interests of the Employer.
(a) PARTIAL TERMINATION. The Compensation Committee may
partially terminate the Plan by instructing the Administrative
Committee not to accept any additional Deferral Commitments. If a
partial termination occurs, the Plan shall continue to operate and be
effective with regard to Deferral Commitments entered into prior to the
effective date of the partial termination.
18
<PAGE> 23
(b) COMPLETE TERMINATION. The Compensation Committee may
completely terminate the Plan by instructing the Administrative
Committee not to accept any additional Deferral Commitments, and by
terminating all ongoing Deferral Commitments. If a complete termination
occurs, the Plan shall cease to operate and the Employer shall pay out
each Account. Payment shall be made in substantially equal annual
installments over the following period, based on the Account balance:
Account Balance Payout Period
--------------- -------------
Less than $100,000 Lump Sum
$100,000 but less than $500,000 3 Years
More than $500,000 5 Years
Payments shall commence within sixty (60) days after the Compensation
Committee terminates the Plan and the unpaid Account balance shall continue to
be credited with the applicable Rate of Return.
ARTICLE X
MISCELLANEOUS
10.1 UNFUNDED PLAN. The Plan is an unfunded plan maintained primarily
to provide deferred compensation benefits for a "select group of management or
highly-compensated employees" within the meaning of Sections 201, 301 and 401 of
ERISA , and therefore is exempt from the provisions of Parts 2, 3 and 4 of Title
I of ERISA.
10.2 UNSECURED GENERAL CREDITOR. Participants and Beneficiaries shall
be unsecured general creditors, with no secured or preferential right to any
assets of the Employer or any other party for payment of benefits under the
Plan. Any life insurance policies, annuity contracts or other property purchased
by the Employer in connection with the Plan shall remain its general, unpledged
and unrestricted assets. The Employer's obligation under the Plan shall be an
unfunded and unsecured promise to pay money in the future.
19
<PAGE> 24
10.3 TRUST FUND. At its discretion, the Employer may establish one (1)
or more trusts, with any trustees as the Administrative Committee may approve,
for the purpose of providing for the payment of benefits owed under the Plan.
Although any such trust shall be irrevocable, its assets shall be held for
payment of all the Company's general creditors in the event of insolvency or
bankruptcy. To the extent any benefits provided under the Plan are paid from a
trust, the Employer shall have no further obligation to pay them. If not paid
from a trust, the benefits shall remain the obligation of the Employer.
10.4 NONASSIGNABILITY. Neither a Participant nor any other person shall
have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage
or otherwise encumber, transfer, hypothecate or convey in advance of actual
receipt the amounts, if any, payable hereunder, or any part thereof, which are,
and all rights to which are, expressly declared to be unassignable and
nontransferable. No part of the amounts payable shall, prior to actual payment,
be subject to seizure or sequestration for the payment of any debts, judgments,
alimony or separate maintenance owed by a Participant or any other person, nor
be transferable by operation of law in the event of a Participant's or any other
person's bankruptcy or insolvency.
10.5 NOT A CONTRACT OF EMPLOYMENT. This Plan shall not constitute a
contract of employment between the Employer and the Participant. Nothing in this
Plan shall give a Participant the right to be retained in the service of the
Employer or to interfere with the right of the Employer to discipline or
discharge a Participant at any time.
10.6 PROTECTIVE PROVISIONS. A Participant will cooperate with the
Employer by furnishing any and all information requested by Employer in order to
facilitate the payment of benefits hereunder, and by taking any physical
examinations as the Employer may deem necessary and taking other action as may
be requested by the Employer.
10.7 Governing Law. The provisions of this Plan shall. be construed and
interpreted according to the laws of the Commonwealth of Pennsylvania, except as
that law is preempted ERISA or by other federal law.
10.8 Validity. In case any provision of the Plan shall be held illegal
or invalid for any reason, the illegality or invalidity shall not affect the
remaining parts hereof, but the Plan shall be construed and enforced as if the
illegal and invalid provision had never been inserted herein.
20
<PAGE> 25
10.9 NOTICE. Any notice required or permitted under the Plan shall be
sufficient if in writing and hand delivered or sent by registered or certified
mail. The notice shall be deemed as given as of the date of delivery or, if
delivery is made by mail, as of the date shown on the postmark on the receipt
for registration or certification. Mailed notice to the Administrative Committee
shall be directed to the Company's address. Mailed notice to a Participant or
Beneficiary shall be directed to the individuals last known address in the
Employer's records.
10.10 SUCCESSORS. The provisions of the Plan shall bind and inure to
the benefit of the Employer and its successors and assigns. The term successors
as used herein shall include any corporate or other business entity which shall,
whether by merger, consolidation, purchase or otherwise, acquire all or
substantially all of the business and assets of the Employer, and successors of
any such corporation or other business entity.
MotivePower Industries, Inc.
By:
-------------------------------------
President and Chief Executive Officer
Dated:
----------------------------------
21
<PAGE> 1
Exhibit 10.63
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
WHEREAS, MotivePower Industries, Inc., (previously named MK Rail
Corporation), a Delaware corporation (the "Corporation") and John C. Pope (the
"Chairman") have entered into an Employment Agreement dated as of December 29,
1995 (the "Agreement"); and
WHEREAS, the Corporation and the Chairman mutually desire to amend the
Agreement to modify the obligations of the Corporation in the event of a Change
in Control;
NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration, the parties hereby agree to amend the
Agreement in the following respects:
FIRST: Subparagraph (c) of Paragraph 4 of the Agreement is hereby deleted
in its entirety and the following new Subparagraph (c) of Paragraph 4 is
substituted therefor:
"4 (c) Secretarial Assistance. The Chairman will be entitled to the
services of a secretary in the Chicago, Illinois area acceptable to him.
The secretary shall provide services to the Chairman for a maximum 25 hours
a week with her current salary to be increased to reflect the increase in
her number of hours under the provisions of the First Amendment. The
Chairman's secretary shall be an employee of the Corporation and as such
shall be entitled to receive all benefits available to employees of the
Corporation, including, but not limited to, regular increases in her
compensation, health, life and retirement benefits"
SECOND; Clause (1) of Subparagraph 4 (e) of the Agreement is hereby deleted
in its entirety and the following new Clause (1) of Subparagraph 4 (e) is
subtitled therefor:
(1) 50,000 shares of common stock restricted as to their ability to be sold
(the "Restricted Stock"). Unless otherwise expressly provided in this
Agreement, the restrictions shall lapse: on 25,000 shares on January 1,
1997, so long as the Chairman is still in the employ of the Corporation on
that date; and on the remaining 25,000 shares on January 1,2007, so long as
the Chairman is still in the employ of the Corporation on that date, or if
earlier, upon the Chairman's termination of employment with the Corporation
other than for Cause. On each of those respective dates or as soon as
thereafter reasonably practicable, all legends will be removed and fully
registered and freely transferable stock certificates for the shares for
which the restrictions have lapsed shall be issued to the Chairman. The
grant of the Restricted Stock shall be made under the
<PAGE> 2
Corporation's Stock Incentive Plan ("Stock Incentive Plan"), a copy of
which has been provided to the Chairman.
THIRD: Paragraphs 7 and 8 of the Agreement are hereby deleted in their
entirety and the following new Paragraphs 7 and 8 are substituted therefor:
"7. Termination In the Event of a Change of Control.
(a) The Chairman may terminate his employment hereunder at any time within
ninety (90) days of a Change of Control by giving written notice to the
Corporation, in which event he shall be entitled, in lieu of any further salary
and bonus payments, to the following amounts:
(i) a lump sum payment equal to two times the sum of (A) the
Chairman's annual Base Salary, at the rate in effect, immediately preceding his
termination or immediately preceding the Change of Control, whichever is
greater, and (B) the amount of the Chairman's annual bonus compensation received
either for the year prior to his termination of employment or the year prior to
the Change of Control or the amount of the Chairman's Target Bonus for such
years, whichever of these four possible amounts is greatest; and
(ii) for a period of two years after the Chairman's employment is
terminated, the Corporation at its expense shall provide Chairman with health
insurance substantially similar to that provided to the Chairman during his
employment, shall provide Chairman with a secretary and shall reimburse him for
reasonable computer support, telephone, postage and other out-of-pocket expenses
incurred by Chairman in connection with the operation of his office in the
Chicago, Illinois area. The Chairman's secretary shall provide services to the
Chairman for a maximum of 25 hours a week and shall be someone who is acceptable
to the Chairman. The Chairman's secretary shall be an employee of the
Corporation during this period and as such shall be entitled to receive all
benefits available to employees of the Corporation, including, but not limited
to, health, life and retirement benefits.
(b) The restriction on all shares of Restricted Stock shall lapse
immediately prior to a Change of Control and all stock options for shares of the
Corporation and any SARs referred to in paragraph 4 (e) (2) shall vest
immediately prior to the Change of Control.
(c) Notwithstanding any other provision of this Agreement, in the event
that any payment or benefit received or to be received by the Chairman in
connection with a Change of Control or the termination of his employment
(whether pursuant to the terms of this Agreement or any other plan, arrangement
or agreement with the Corporation, any person whose actions result in a Change
of Control or any person affiliated with the Corporation or the person) (all
such payments and benefits being hereinafter referred to as "Total Payments")
is subject (in whole or in part) to the excise tax (the Excise Tax") imposed
under Section 4999 of the Internal Revenue Code of 1986, as amended (the
2
<PAGE> 3
"Code") or any similar tax imposed by any successor provisions of the income
tax laws, then the Corporation will reimburse the Chairman in an amount equal
to the "Tax Gross-Up Amount" (as defined below). The Tax Gross-Up Amount means
an amount equal to the sum of the Excise Tax, any other similar tax and the
amount of any other additional tax, including any additional income tax,
arising as a result of any payment pursuant to this paragraph 7(c), which sum
may be due and payable by the Chairman or withheld by the Corporation in
connection with the provisions of this paragraph 7(c) (collectively the "Total
Taxes") so that the Chairman receives actual payments or benefits, after
payment or withholding, in an amount no less than that which would have been
received by him if no obligation for Total Taxes had arisen.
(d) If the Chairman's employment is terminated by the Corporation, or any
successor thereto following a Change of Control, then such termination will be
treated as if the Chairman had otherwise elected to terminate his employment
and given notice thereof to the Corporation pursuant to this Paragraph 7.
8. Change of Control. "Change of Control" shall mean the occurrence of
any of the following events:
(a) The Corporation is merged, consolidated or reorganized into or with
another corporation or other entity, and as a result of such merger,
consolidation or reorganization less than a majority of the combined voting
power of the then-outstanding securities of such corporation or entity
immediately after such transaction is held in the aggregate by the holders of
Voting Stock (as defined in paragraph (e) below) immediately prior to such
transaction;
(b) The Corporation sells or otherwise transfers all or substantially all
of its assets to another corporation or other entity and, as a result of such
sale or transfer, less than a majority of the combined voting power of the
then-outstanding securities of such other corporation or entity immediately
after such sale or transfer is held in the aggregate by the holders of Voting
Stock immediately prior to such sale or transfer;
(c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any
successor schedule, form or report or item therein), each as promulgated
pursuant to the Exchange Act (as defined in paragraph (e) below), disclosing
that any Person (as defined in paragraph (e) below), other than an Existing
Stockholder (as defined in paragraph (e) below, has become the beneficial owner
(as the term "beneficial owner" is defined under Rule 13d-3 or any successor
rule or regulation promulgated under the Exchange Act) of securities
representing 25% or more of the combined voting power of the Voting Stock;
(d) If, during any period of two consecutive years, individuals who at
the beginning of any such period constitute the Board of Directors of the
Corporation cease for any reason to constitute at least two-thirds (2/3rds)
thereof; provided, however, that for purposes of this paragraph (d) each
Director of the Corporation who is first elected, or first nominated for
election by the Corporation's stockholders, by a vote of at least a
<PAGE> 4
majority of the Directors of the Corporation (or a committee of the Board) then
still in office who were Directors of the Corporation at the beginning of any
such period shall be deemed to have been a Director of the Corporation at the
beginning of such period.
(e) For purposes of this Paragraph 8, the terms used herein shall have
the following meanings:
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(ii) "Existing Stockholder" shall mean any Person who is the
beneficial owner (as the term "beneficial owner is defined under Rule 13d-3 or
any successor rule or regulation promulgated under the Exchange Act) of
securities representing 25% or more of the combined voting power of the Voting
Stock as of the date hereof.
(iii) "Person" means any "person" as used in Section 13(d)(3) or
Section 14(d)(2) of the Exchange Act.
(iv) "Voting Stock" means stock of the Corporation of any class or
series entitled to vote generally in the election of Directors."
FOURTH: In all other respects the Agreement is hereby affirmed and
ratified.
Agreed to this 9 day of December, 1997.
MOTIVEPOWER INDUSTRIES, INC.
BY: /s/ Scott Walshman
----------------------
Its: Vice President H. R. & Administration
/s/ John C. Pope
------------------
<PAGE> 1
Exhibit 10.64
FIRST AMENDMENT
EMPLOYMENT AGREEMENT -
MICHAEL A. WOLF, PRESIDENT/CEO; OFFICER; DIRECTOR
FEBRUARY 9, 1998
WHEREAS, MotivePower Industries, Inc. (previously named MK Rail
Corporation), a Delaware Corporation (the "Corporation" or "Company"), and
Michael A. Wolf (the "President/CEO") have entered into an Employment Agreement
dated July 1, 1996 (the "Agreement"); and
WHEREAS, the Corporation and the President/CEO mutually desire to amend
the Agreement to modify the obligation of the Corporation in the event of a
Change of Control;
NOW, THEREFORE, in consideration of the mutual promises contained
herein and other good and valuable consideration, the parties hereby agree to
amend the Agreement in the following respects:
First: Clause 3.2 "Lump Sum Signing Bonus" is hereby deleted in
its entirety since the July 1, 1997 date has been
satisfied.
Second: Clause 3.4, paragraphs (a) and (b) are hereby partially
deleted and replaced with schedule incentive for
acceleration of stock options and lapsing of restrictions
providing certain defined EPS results are obtained. Such
grants shall be made under the Corporation's Stock
Incentive Plan, a copy of which has been provided to the
President/CEO.
Third: Clause 5.2, paragraphs (c) and (e) are hereby deleted in
their entirety and replaced with (c) will continue for a
period of two years substantially similar to that provided
during employment.
Fourth: Clause 5.3 (1) of the Agreement shall include "pooling" of
equities or any other action with the intent of merger.
Fifth: Clauses 5.3(3), 5.3(5), and 5.3(b)(3) are hereby deleted
as a result of the events having occurred in total and no
longer applies to the Agreement.
Sixth: Add Clause 5.3(c)(3) as follows:
The President/CEO may unilaterally terminate his
employment hereunder at any time within ninety (90)
days of a Change of Control by giving written notice
to the Corporation in which event he shall be
entitled, in lieu of
1
<PAGE> 2
any further salary and bonus payments, to the following
amounts: (i) a lump sum payment equal to two times the sum
of (a) the President/CEO's annual base salary, at the rate
in effect immediately preceding his termination or
immediately preceding the Change in Control, whichever is
greater, and (b) the amount of the President/CEO's annual
bonus compensation inclusive of any and all discretionary
awards received either for the year prior to his
termination of employment or the year prior to the Change
of Control or the amount of the President/CEO's Max.
Target Bonus for such years, whichever of the four
possible amounts is greater and where or not compensated
in cash and/or stock awards.
Seventh: Add Clause 5.3(c)(4) as follows:
The restrictions on all shares of Restricted Stock
shall lapse immediately prior to a Change in Control
and all stock options for shares of the Corporation
and any SARS referred to in the Agreement shall vest
immediately prior to the Change in Control.
Eighth: Add Clause 5.3(c)(5) as follows:
Notwithstanding any other provision of this
Agreement, in the event that any payment or benefit
received or to be received by the President/CEO in
connection with Change of Control or the Termination
of his Employment (whether pursuant to the terms of
this Agreement or any other plan, arrangement or
agreement with the Corporation, any person whose
actions result in a Change of Control or any person
affiliated with the Corporation or the person.)(all
such payments and benefits being hereinafter
referred to as the "Total Payments") is subject (in
whole or in part) to the excise tax (the "Excise
Tax") imposed under Section 4999 of the I.R.S. Code
of 1986 as amended (the "Code") or any similar tax
imposed by any successor provisions of the income
tax laws, then the Corporation will reimburse the
President/CEO in an amount equal to the "Tax
Gross-up Amount" as defined below. The Tax Gross-up
amount is equal to the sum of the Excise Tax, any
other similar tax and the amount of any other
additional tax, including any additional Federal,
State or Local income tax arising as a result of any
payment in cash, cash equivalents or stock, which
sum may be due and payable by the President/CEO,
Spouse, Estate or withheld by the Corporation in
connection with the provisions set herein
(collectively the "Total Taxes") so that the
President/CEO, spouse or estate receives actual
payments or benefits after payment or withholding in
an amount no less than that which would have been
received if no obligation for Total Taxes had
arisen.
2
<PAGE> 3
Ninth: Add Clause 5.3(c)(6) as follows:
If the President/CEO's employment is terminated by
the Corporation, or any successor thereto following
a Change of Control, then such termination will be
treated as if the President/CEO had otherwise
elected to terminate his employment and given notice
thereof to the Corporation pursuant to this
provision.
MotivePower Industries, Inc.
By: /s/ MOTIVEPOWER
---------------------------------
Date: 2/11/98
-------------------------------
Michael A. Wolf
By: /s/ Michael A. Wolf
---------------------------------
Date: 2/11/98
-------------------------------
3
<PAGE> 4
FIRST AMENDMENT - SCHEDULE CLAUSE 3.4
EMPLOYMENT AGREEMENT - MICHAEL A. WOLF
(STOCK OPTIONS AND RESTRICTED STOCK EXERCISING)
PURPOSE: To have the Board of Directors recognize superior performance
since time of employment and to provide an added time-based
incentive to enhance and increase Company's earnings
performance over the next two years.
WHAT: The original 7/1/96 agreement envisioned a 5 year time frame to
maximize shareholder value supported by an approved BDP
(Business Development Plan) strategy. By accelerating by one
year the time of the awarded stock options' exercise dates for
240,000 common shares consisting of 120,000 July 1, 1999 and
120,000 July 1, 2000, and the 100,000 common stock restricted
as to their ability to be sold by providing for the
restrictions to lapse at the close of business on June 30, 1999
for 50,000 shares and June 30, 2000 or 50,000 shares
respectively.
MEASURE: The measurement will be in consideration of the actual earnings
per share achieved of $1.45/sh. Dec. 31, 1998 on the basic
common shares outstanding of 17,644,000 for 1998 and/or 1999
combined:
<TABLE>
<CAPTION>
------------------------------------------
Years E.P.S. % Increase
<S> <C> <C> <C>
-------------------------------------------------------------
Actual 1995 (2.34) N.M.
-------------------------------------------------------------
Actual 1996 $ .66 N.M.
-------------------------------------------------------------
Actual 1997 $1.16 77%
-------------------------------------------------------------
Original B.D.P. 1998 $1.25 15%
-------------------------------------------------------------
Base Incentive 1998 $1.45 25%
-------------------------------------------------------------
Base Incentive 1999 $1.95 35%
-------------------------------------------------------------
Combined Years 1998 & 1999 $3.40 30%
-------------------------------------------------------------
</TABLE>
In the event that $1.45 is not attained in 1998 but the total
of 1998 and 1999 combined results does total $3.40 or greater,
then the acceleration will be effected accordingly for both the
remaining unexercisable stock options and the restricted stock
to July 1, 2000.
<PAGE> 1
EXHIBIT 21.01
MOTIVEPOWER INDUSTRIES
CORPORATE LEGAL ENTITIES
SUBSIDIARIES AND AFFILIATES
MotivePower Industries Inc.
MotivePower Investments Limited
Touchstone Company
Motor Coils Manufacturing Company
Microphor Company
MotivePower Foreign Sales Corporation
Boise Locomotive Company
MotivePower Industries de Mexico*
MPI Sureste, S.A. de C.V.
MPI Noreste, S.A. de C.V.
MPI Pacifo-Norte, S.A. de C.V.
MPI Commercial, S.A. de C.V.
Engine Systems Company, Inc.
Power Parts Company
Ontario Transit Ltd.
Trenes De Buenos Aires S.A.
* The Mexican operations are in the process of forming the organization
structure reflected above.
<PAGE> 1
Exhibit 23.01
Independent Auditors' Consent
We consent to the incorporation by reference in Registration Statement Nos.
33-77860, 33-70802 and 33-70804 of MotivePower Industries, Inc. on Form S-8 of
our reports dated February 4, 1998, appearing in and incorporated by reference
in this Annual Report on Form 10-K of MotivePower Industries, Inc. for the year
ended December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 16,897
<SECURITIES> 0
<RECEIVABLES> 35,432
<ALLOWANCES> 394
<INVENTORY> 81,448
<CURRENT-ASSETS> 144,337
<PP&E> 102,365
<DEPRECIATION> 49,942
<TOTAL-ASSETS> 283,102
<CURRENT-LIABILITIES> 82,556
<BONDS> 34,782
0
0
<COMMON> 178
<OTHER-SE> 144,370
<TOTAL-LIABILITY-AND-EQUITY> 283,102
<SALES> 305,930
<TOTAL-REVENUES> 305,930
<CGS> 233,588
<TOTAL-COSTS> 233,588
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,163
<INCOME-PRETAX> 31,989
<INCOME-TAX> 11,713
<INCOME-CONTINUING> 20,276
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,276
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.11
</TABLE>
<PAGE> 1
Exhibit 99.03
16 MotivePower Industries, Inc.
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND INDUSTRY DATA
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Results of Operations (000s)
Net sales(1) .......................... $305,930 $277,321 $236,822 $302,434 $218,160 $129,507
Gross profit (loss) ................... 72,342 56,847 (5,167) (5,478) 13,770 8,391
Operating income (loss) ............... 34,618 24,232 (51,113) (49,977) 6,661 4,900
Net income (loss) ..................... 20,276 11,509 (40,414) (42,793) 3,632 1,790
EBITDA(2) ............................. 44,585 36,715 1,057 871 11,760 9,255
Balance Sheet (000s)
Total assets .......................... $283,102 $234,044 $280,948 $311,297 $181,930 $130,226
Debt .................................. 50,507 49,592 120,118 108,176 29,332 18,399
Stockholders' equity .................. 144,548 120,980 94,527 114,124 100,061 68,863
Per Diluted Share
Net income (loss)(3) .................. $ 1.11 $ 0.66 $ (2.34) $ (2.47) $ 0.21 n.a.
EBITDA(2) ............................. 2.45 2.09 0.06 0.05 0.72 n.a.
Cash dividends ........................ 0.00 0.00 0.04 3.31(4) n.a. n.a.
Year-end book value(5) ................ 8.14 6.89 5.47 6.65 6.15 n.a.
Year-end shares outstanding (000s) .... 17,749 17,563 17,563 17,149 16,260 n.a.
Adjusted weighted average common
shares outstanding (000s) ........... 18,209 17,566 17,269 16,853 16,260 n.a.
Cash Flows (000s)
Net cash provided by (used in)
operating activities................. $ 37,288 $ 43,368 $(21,743) $(85,141) $ 2,553 $1,696
Net cash provided by (used in)
investing activities................. (24,308) 12,407 (15,408) (36,941) (21,775) (4,593)
Net cash provided by (used in)
financing activities................. (1,319) (56,235) 30,388 120,463 24,378 6,241
Company
Market capitalization (000s)(6) ....... $412,664 $137,218 $66,959 $182,208 n.a. n.a.
Employees at year-end(7) .............. 2,351 2,108 2,205 2,976 -- --
Sales per employee(7) ................. 130,128 131,556 107,402 101,624 -- --
Industry(8)
Revenue ton-miles (000,000s) .......... 1,368,000 1,355,975 1,305,688 1,200,701 1,109,309 1,066,781
Locomotives in service(9) ............. 19,800 19,269 18,812 18,505 18,161 18,004
New locomotives delivered ............. 950 761 928 821 504 323
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
n.a. = not applicable
(1) From continuing operations
(2) Operating income, excluding Unusual Items, plus Depreciation and
Amortization
(3) Figures for 1994 and 1993 are supplemental pro forma amounts
(4) Includes a special dividend of $3.19 per share to Morrison Knudsen
(5) Stockholders' equity divided by adjusted weighted average common shares
outstanding
(6) Year-end shares outstanding multiplied by year-end closing stock
price
(7) Figures are unavailable prior to 1994
(8) Source: American Association of Railroads. Figures for 1997 are estimates
(9) Figures are for U.S. Class I railroads only. Figures do not include an
estimated 5,000 units in service in Canada and Mexico, and on short-line
and regional railroads
<PAGE> 2
17 MotivePower Industries, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW
In 1997, MotivePower Industries had record net income of $20.3 million, and a
record $1.11 earnings per diluted share, on net sales of $305.9 million.
Excluding net sales from operations that were divested in 1996, the Company's
net sales increased 10 percent in 1997. During the year, the Company achieved a
significant increase in gross margin, to 23.6 percent from 19.5 percent in the
prior year. The Company achieved this improvement through a favorable product
mix, cost reductions and productivity gains.
In addition, the Company had significantly lower interest expense due
to lower borrowing costs. At year-end, the Company had net debt (total debt less
cash and cash equivalents) of $33.6 million, compared to $44.4 million at the
end of the prior year.
The Company's operating groups had higher sales and operating income
than the prior year with and without sales from divested operations. The
Components Group had significantly higher international sales, while the
Locomotive Group had higher sales in Mexico, which offset lower switcher
locomotive sales in the United States. Both groups achieved record operating
income due to a favorable product mix, higher international sales and
productivity gains.
BUSINESS STRATEGY
MotivePower's business strategy is to grow and continue to strengthen its core
businesses, including manufacturing and distributing engineered locomotive
components and parts; providing locomotive fleet maintenance; overhauling and
remanufacturing locomotives; and manufacturing environmentally friendly
switcher, commuter and mid-range, DC and AC traction, diesel-electric and
liquefied natural gas locomotives up to 4,000 horsepower. The Company is looking
to expand further into other niche power, marine and industrial markets by
growing the existing business in these markets and by modifying certain existing
products to fit new applications.
The Company has outlined a six-part strategy to carry out its growth
plan: 1. Capitalize on the railroads' desire to outsource non-transportation
functions such as maintenance and repair projects by continuing to improve
quality and by reducing product cycle times; 2. Continue to grow its Mexican
operations by expanding current capabilities and by pursuing new opportunities
created by the Mexican government's railroad privatization program; 3. Expand
sales of components in targeted non-NAFTA markets, such as South America, the
Middle East and the Pacific Rim; 4. Expand sales of similar components into
non-rail markets; 5. Acquire companies that provide products or services that
complement the Company's current capabilities either geographically or
technically, or that expand the Company's current product line; and 6. Develop
alliances and joint ventures with other major rail industry suppliers.
As market conditions, technological developments or other factors
change, the Company will modify its strategy accordingly.
RESULTS OF OPERATIONS
The following table sets forth the percentage of sales represented by certain
items in the Company's Consolidated Statements of Operations for the years
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996 1995
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales (76.4) (79.8) (86.5)
Unusual items -- (0.7) (15.5)
- -----------------------------------------------------------------
Gross profit (loss) 23.6 19.5 (2.0)
Selling, general and
administrative expenses (12.3) (11.2) (17.4)
- -----------------------------------------------------------------
Operating income (loss) 11.3 8.3 (19.4)
Investment income 0.2 0.7 0.4
Interest expense (1.7) (3.1) (3.6)
Other income - Argentina 0.7 0.5 --
Gain on sale of assets -- 0.5 --
Foreign exchange (loss) gain (0.1) 0.1 (0.2)
- -----------------------------------------------------------------
Income (loss) before
income taxes 10.4 7.0 (22.8)
Income tax (expense) benefit (3.8) (2.6) 7.5
- -----------------------------------------------------------------
Income (loss) before
extraordinary item 6.6 4.4 (15.3)
Extraordinary loss on
extinguishment of debt -- (0.4) --
- -----------------------------------------------------------------
Net income (loss) 6.6% 4.0% (15.3)%
=================================================================
</TABLE>
CONSOLIDATED OPERATIONS
1997 COMPARED TO 1996
Net sales increased 5% to $305.9 million in 1997 from $291.4 million in 1996.
Excluding net sales from divested operations of $14 million in 1996, net sales
increased 10%. The increase between periods, excluding net sales from divested
operations, is attributed to increased domestic and international net sales in
the Components Group, including $1.2 million of net sales from acquisitions in
the fourth quarter of 1997.
Cost of sales (exclusive of Unusual Items) was $233.6 million in 1997
compared to $232.4 million in 1996. As a percentage of net sales, cost of sales
decreased to 76.4% in 1997 compared to 79.8% in 1996, resulting in gross profit
margins of 23.6% and 19.5%, respectively. The improvement in gross profit is the
result of the
<PAGE> 3
18 MotivePower Industries, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
increased sales volume, particularly the international portion, a favorable
product mix, and continuing cost reductions and productivity improvements.
Included in cost of sales is a $2.2 million charge recorded in the fourth
quarter of 1997 for a warranty provision.
Selling, general and administrative expenses increased 16% to $37.7
million in 1997 from $32.6 million in 1996. The increase is attributed to
variable costs incurred for incentive related programs ($4.1 million) and stock
option and stock appreciation programs ($2.9 million). These cost increases were
partially offset by fixed cost reductions at the operating entities and
reductions in corporate overhead.
Investment income decreased 62% to $761,000 in 1997 from $2 million in
1996. The decrease is primarily attributed to lower investment income on secured
notes receivable from the sale of the Company's former Argentina investments and
decreased funds in Mexico available for investment.
Interest expense decreased 44% to $5.2 million in 1997 from $9.1
million in 1996. The decrease is the result of the elimination of interest
expense on the Morrison Knudsen debt which was paid off in September 1996 and a
reduction in domestic interest expense as a result of lower borrowing costs,
strong operating results and working capital management. These decreases were
partially offset by increased interest expense at MPI de Mexico as a result of
increased borrowings to support contractual capital improvements and locomotive
overhauls, and expansion plans.
Other income - Argentina increased 28% to $2 million in 1997 from $1.6
million in 1996. For both years, this income represents funds received on the
unsecured portion of the Company's restructured Argentina investments. Due to
the financial uncertainties of the debtors, the Company recognizes income only
when cash is received. There is no assurance that the Company will receive such
payments in the future.
There were no gains on the sale of assets in 1997 compared to $1.5
million in 1996. In 1996, the Company sold Alert Manufacturing and Supply Co.
("Alert"), and Power Parts Sign Co. ("Sign"), recording gains on the sales of
$700,000 and $783,000, respectively.
In 1997, the Company recorded a foreign exchange loss of $230,000
compared to a foreign exchange gain of $169,000 in 1996. The respective loss and
gain is the result of fluctuations in the Mexican peso and the net peso exposure
at MPI de Mexico.
A $1.1 million extraordinary loss on extinguishment of debt in 1996,
net of deferred tax benefit of $687,000, was the result of the Company's
restructuring of its domestic credit facility. No such charge was incurred in
1997.
The Company recorded income tax expense of $11.7 million in 1997 versus
$7.7 million in 1996. As a percentage of pre-tax income, income tax expense was
36.6% in 1997 compared to 38% in 1996. The decrease in income tax expense as a
percentage of pre-tax income in 1997 is primarily the result of the formation
and utilization of a Foreign Sales Corporation ("FSC") and a favorable change to
a tax valuation reserve. At December 31, 1997, the Company had a consolidated
United States federal net operating loss carryforward of approximately $30.2
million, expiring in 2010, and MPI de Mexico had a net operating loss
carryforward of approximately $30.3 million, expiring in various amounts through
2007.
1996 COMPARED TO 1995
Net sales increased 10% to $291.4 million in 1996 from $263.7 million in 1995.
The increase was primarily due to increased net sales in the Locomotive Group
which completed a $34 million contract to deliver switcher locomotives in
December 1996. The Components Group had lower net sales in 1996 versus 1995
principally as a result of the sale of non-core businesses during the year.
Cost of sales (exclusive of Unusual Items) was $232.4 million in 1996
compared to $228 million in 1995. As a percentage of net sales, cost of sales
decreased to 79.8% in 1996 compared to 86.5% in 1995, and gross profit margins
were 19.5% and (2%), respectively. The improvement in gross profit was the
result of cost reductions and improved productivity in the operating groups and
increased profitability at the higher sales volume due to the benefits of
operating leverage.
Charges for Unusual Items were $2.1 million in 1996 compared to $40.8
million in 1995. The charges in 1996 were incurred due to the impairment of
certain assets, facility rationalization and the restructuring of lease
commitments. The charges in 1995 related to the Company's exit from the
high-horsepower locomotive business, the impairment of the Mountaintop facility
and the locomotive lease fleet, the disposition of the Company's Australian
operations and other charges.
Selling, general and administrative expenses decreased 29% to $32.6
million in 1996 from $45.9 million in 1995. The decrease resulted from the
elimination of $4.5 million in costs incurred in 1995 during the attempt to sell
the Company, cost reductions at the operating entities and reductions in
corporate overhead, including legal expenses and staff reductions.
Investment income increased 108% to $2 million in
1996 from $951,000 in 1995. The 1996 amount included $947,000 of interest income
on the notes receivable from the Company's Argentina investment and $1 million
in interest on funds invested by MPI de Mexico.
<PAGE> 4
19 MotivePower Industries, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Interest expense decreased 5% to $9.1 million in 1996 from $9.6 million
in 1995. The decrease was the result of a decrease of $1.6 million in interest
expense on the amount owed to Morrison Knudsen which was paid off in September
1996, and a decrease of $1 million in interest expense on the amount owed on the
Company's domestic credit facility which was paid down $30 million in 1996,
partially offset by an increase in interest expense on the Company's Mexican
credit facility and customer advances at Boise Locomotive.
Other income - Argentina of $1.6 million in 1996 represents funds
received on the unsecured portion of the Company's restructured Argentina
investments.
Gain on sale of assets of $1.5 million in 1996 was the result of a gain
on the sale of Alert of $700,000 and a gain on the sale of Sign of $783,000.
Both companies were sold in the second half of 1996.
The foreign exchange gain in 1996 was $169,000 compared to a foreign
exchange loss of $544,000 in 1995. The respective gain and loss was the result
of fluctuations in the Mexican peso and the net peso exposure at MPI de Mexico.
A $1.1 million extraordinary loss on extinguishment of debt in 1996,
net of deferred tax benefit of $687,000, was the result of the Company's
restructuring of its domestic credit facility. The gross charge included $1
million paid to bank syndication partners for the break-up of the existing
facility and the write-off of $751,000 of unamortized fees related to that
facility.
The Company recorded income tax expense of $7.7 million in 1996 versus
a benefit of $19.9 million in 1995. The 1995 benefit was a result of the
Company's net loss during the year. At December 31, 1996, the Company had a
consolidated United States federal net operating loss carryforward of
approximately $37 million, expiring in various amounts through 2010 and MPI de
Mexico had a net operating loss carryforward of approximately $23 million,
expiring in various amounts through 2007.
COMPONENTS GROUP
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $160,960 $144,649 $146,356
Less: divested operations -- (7,054) (12,870)
- -------------------------------------------------------------------
Adjusted net sales $160,960 $137,595 $133,486
- -------------------------------------------------------------------
Percentage increase 17%
- -------------------------------------------------------------------
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------
Operating Income $25,258 $17,812 $ 15,744
Less: divested operations -- (142) (1,100)
- -------------------------------------------------------------------
Adjusted operating income $25,258 $17,670 $ 14,644
- -------------------------------------------------------------------
Percentage increase 43%
- -------------------------------------------------------------------
</TABLE>
1997 COMPARED TO 1996
In 1997, adjusted net sales for the Components Group increased 17% due to
increased international and domestic sales at Motor Coils, and increased
domestic sales at Engine Systems and Power Parts. In addition, the acquisition
of Jomar and Microphor in December 1997 added $1.2 million in net sales.
Adjusted operating income increased 43% due to higher margin international sales
at Motor Coils, the general increased sales volume, and continued cost
reductions and productivity improvements. Operating income included a $2.2
million charge recorded in the fourth quarter for the estimated warranty
replacement of piston liners produced by the Company's Clark Industries
subsidiary. The charge included the cost of inventory on hand, in addition to
the cost to replace product currently in the hands of customers. The provision
was the result of defective castings provided by an outside supplier.
1996 COMPARED TO 1995
In 1996, adjusted net sales for the Components Group increased 3%. Adjusted
operating income increased 21% due to cost-cutting and productivity
improvements.
LOCOMOTIVE GROUP
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $144,970 $146,758 $117,362
Less: divested operations -- (6,931) (14,026)
- -------------------------------------------------------------------
Adjusted net sales $144,970 $139,827 $103,336
- -------------------------------------------------------------------
Percentage increase 4%
- -------------------------------------------------------------------
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------
Operating Income (loss) $23,530 $16,728 $ (6,155)
Less: divested operations -- (1,487) (18,997)
- -------------------------------------------------------------------
Adjusted operating income $23,530 $15,241 $ 12,842
- -------------------------------------------------------------------
Percentage increase 54%
- -------------------------------------------------------------------
</TABLE>
1997 COMPARED TO 1996
In 1997, adjusted net sales for the Locomotive Group increased 4%. Lower net
sales at Boise Locomotive due to a decrease in sales of new switcher locomotives
were offset by a net sales increase at MPI de Mexico as a result of additional
third party work, and maintenance and overhaul work on additional locomotives
received during the year. Adjusted operating income increased 54%, principally
the result of higher margins at MPI de Mexico, and at Boise Locomotive as a
result of cost reductions and a favorable product mix.
<PAGE> 5
20 MotivePower Industries, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
1996 COMPARED TO 1995
In 1996, adjusted net sales increased by 35%. The increase was due to a 38%
increase in net sales at Boise Locomotive, primarily the result of the
completion of contracts for 32 switcher locomotives which were manufactured
during the year. MPI de Mexico had an 11% increase in net sales under its
contract to provide locomotive operations and maintenance. Adjusted operating
income increased 19% due to the increase in net sales, costs reductions and
improved productivity.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The table below highlights the debt and cash position of the Company at December
31.
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Domestic Revolver $ 5,000 $22,431
Domestic Term Loans 17,999 9,130
MPI de Mexico Credit Facility 27,508 18,031
- ----------------------------------------------------------
Total Debt $50,507 $49,592
==========================================================
Cash and Cash Equivalents $16,897 $ 5,236
==========================================================
Net Debt $33,610 $44,356
==========================================================
</TABLE>
During 1997 the Company had capital expenditures of $15 million, of
which $7.1 million was incurred by MPI de Mexico in accordance with contractual
obligations, $1.9 million was incurred by Touchstone for the start-up of
construction of its new manufacturing facility, $2.5 million was incurred by
Motor Coils principally for expansion and $2 million was incurred by Engine
Systems for automation technology. The Company anticipates that capital spending
in 1998 will approximate $28 million, consisting of the following projects, most
of which are designed to increase productivity and efficiency:
<TABLE>
<CAPTION>
(In thousands) 1998
- ----------------------------------------------------------
<S> <C>
Expansion of Production Facilities $15,600
Equipment Upgrades 4,800
Information Systems 2,100
Maintenance 5,500
- ----------------------------------------------------------
Total $28,000
==========================================================
</TABLE>
The phase in of the 1998 capital expenditures will have an impact on
the results of operations of the Company for the year. In addition, in the first
half of 1998, the Company will incur costs to relocate equipment from Motor
Coils to MPI de Mexico to establish Motor Coils as a qualified producer of
certain locomotive components, and will also incur costs at Touchstone to move
equipment from the existing facility to the new manufacturing facility currently
under construction. The Company expects to incur costs of approximately $1.4
million in connection with these relocation projects. The Company's ability to
complete these projects in a timely and efficient manner could have an effect on
the Company's results of operations, particularly in the first half of 1998.
The Company anticipates that 1999 capital spending will approximate $20
million, consisting of further facility expansion of $14 million, and
information systems and maintenance capital spending of $6 million. Funding for
1998 and 1999 capital spending will be provided from operations and the use of
the Company's credit facilities. This is a forward looking statement, and actual
capital expenditures could vary based on the availability of capital, interest
rate increases, market conditions, site availability, and the operating results
of the Company.
During 1997, the Company acquired Jomar and Microphor as part of its
acquisition strategy. As part of its continuing growth strategy, the Company
expects to pursue additional acquisition candidates in 1998 which could have a
material effect on the utilization and availability of the Company's credit
facilities.
On January 27, 1998 the Company closed on two new revolving credit
facilities with ABN AMRO Bank N.V. and Mellon Bank NA totaling $200 million. The
new credit lines consist of a $100 million five-year revolving loan, and a
364-day $100 million revolving loan which the Company may renew annually with
the approval of the lenders. Under the new facilities, the Company may issue up
to $35 million in letters of credit. Proceeds of the new facilities were used to
repay the Company's outstanding balance under its previous domestic loans, and
will be used for general corporate purposes. ABN AMRO Bank N.V. has fully
underwritten the new facilities, however, it is expected that ABN AMRO Bank N.V.
will sell participations in the facilities to a syndicate of banks.
The Company will record a one-time, non-cash charge of approximately
$500,000, net of tax in the first quarter of 1998 to write off unamortized costs
incurred previously under the Company's prior domestic credit facility.
<PAGE> 6
21 MotivePower Industries, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
The following table summarizes the net changes in cash flows for the
years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash provided by (used in)
Operating activities $ 37,288 $ 43,368 $(21,743)
Investing activities (24,308) 12,407 (15,408)
Financing activities (1,319) (56,235) 30,388
- ---------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents $ 11,661 $ (460) $ (6,763)
===========================================================================
Cash and cash equivalents
at year end $ 16,897 $ 5,236 $ 5,696
===========================================================================
</TABLE>
Net cash provided by operations in 1997 was $37.3 million primarily the
result of the Company's net income of $20.3 million, $10 million of non-cash
charges for depreciation and amortization, and $6.5 million in deferred income
taxes. Increases in receivables (commensurate with the sales increase) and
underbillings (the result of the percentage of completion revenue recognition
method at MPI de Mexico) were offset by the Company's ability to extend its
terms on accounts payable. In addition, the primary increases in accrued
expenses and other current liabilities include $3.3 million for incentive
related payouts tied to the 1997 operating performance and $2.2 million for the
Clark piston liner reserve.
Net cash used in investing activities in 1997 was $24.3 million
consisting primarily of $15 million in capital expenditures, and $11.3 million
for the acquisitions of Jomar and Microphor. Of the $15 million in capital
expenditures, $7.1 million was incurred by MPI de Mexico in accordance with
contractual obligations, with the balance of expenditures for facility expansion
and productivity improvements at other subsidiaries. The acquisitions of Jomar
and Microphor in December 1997 are part of the Company's strategic plan to
complement, broaden and strengthen the existing component manufacturing
businesses. Offsetting the expenditures for capital additions and the
acquisitions was $1.8 million from the sale of assets, principally the sale of
the Touchstone production facilities which are being replaced with a new
manufacturing facility.
Net cash used in financing activities in 1997 was $1.3 million
consisting of an increase in intangibles of $2.1 million, an increase in
restricted cash of $2.6 million, long-term debt payments of $8.7 million, offset
by short-term borrowings of $9.6 million and $2.4 million related to the
exercise of stock options. The increase in intangibles is the result of the
closing of the previous domestic credit facility in February 1997 ($900,000),
the cost of the new credit facility with ABN AMRO ($500,000), and continuing
costs associated with the Mexican credit facility ($700,000). The increase in
restricted cash relates to the Mexican credit facility, and the required
increase in on-hand cash as the debt levels and repayment requirements increase.
The payments of long-term debt and the borrowings under credit agreements
reflect the activity during the year for both acquisitions and daily working
capital management. Proceeds from the exercise of stock options is the cash
received by the Company as options were exercised during the year.
CURRENCY RISKS
MPI de Mexico is the primary source of foreign currency risks for the Company.
At December 31, 1997, MPI de Mexico provided locomotive fleet maintenance and
overhauls for 319 locomotives in Mexico. For its services, MPI de Mexico
receives a fee paid in Mexican pesos. As currency exchange or inflation rates
fluctuate, the fee is adjusted based on an escalation clause in the contract. To
the extent that net peso assets exceed net peso liabilities, MPI de Mexico is
exposed to a currency risk.
In July 1997, the Company began using a foreign exchange forward
contract to hedge the risk of changes in foreign currency exchange rates
associated with certain assets and obligations denominated in Mexican pesos
("MXP"). Changes in market value of the forward contract are recognized in
income when the effects of related changes in the price of the hedged item are
recognized. At December 31, 1997 the Company held a contract for 20 million MXP
(which expired on January 8, 1998, and was subsequently renewed for an
additional 90-day period) and the estimated fair value of the foreign exchange
forward contract was $8,000 more than the contract value. There were no foreign
exchange forward contracts entered into during 1996 or 1995.
The Company does not speculate or use derivatives in any of its
investment decisions. The Company will continue to monitor its exposure to
foreign currency risks and may adjust its strategy in the future.
INFORMATION TECHNOLOGY
The Company is currently engaged in a multi-year project to upgrade and improve
its information systems. The project includes hardware and software upgrades,
training, implementation, and hiring of staff to manage the systems going
forward. The Company expects
<PAGE> 7
22 MotivePower Industries, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
that the project will improve working capital through improved material
management and production planning and control, in addition to cost reductions
for communications and other related expenses. As part of the project, the
Company will be installing software that is Year 2000 compliant and is
coordinating with its customers and suppliers throughout NAFTA. The Company does
not expect the costs associated with Year 2000 compliance to be significant at
December 31, 1997. The Company estimates that the total cost of the project will
be approximately $7.2 million, of which $2.6 million was spent in 1997 for both
capitalized and expensed items.
INFLATION AND PRICING
General price inflation in the United States has been moderate during the
three-year period ended December 31, 1997, and its effects have been more than
offset by productivity and efficiency gains. Some of the Company's labor
contracts contain negotiated wage and benefit increases, and others contain
cost-of-living adjustment clauses which would cause the Company's costs to
automatically increase if inflation were to become significant. Because of the
highly competitive nature of the Company's business and its long-term contract
terms and conditions, it is possible that the Company may be unable to pass on
significant inflationary effects to the Company's customers in the form of
higher prices, and it is unlikely that the Company can increase margins through
price increases. The Company's strategy for reducing the possible adverse
effects of higher inflation is to continue to adopt methods to increase
productivity and reduce manufacturing costs, and to bundle a variety of its
goods and services to customers.
STOCK OWNERSHIP
Stock ownership guidelines for the Company's officers, directors and key
managers were established in March 1997. The guidelines set minimum levels of
stock ownership as a multiple of annual salaries to encourage management
ownership of 10% or more of the Company's stock within five years to demonstrate
an owner/management commitment to increase long-term stockholder value.
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
We have audited the consolidated financial statements of MotivePower Industries,
Inc. and subsidiaries listed in the accompanying index. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of MotivePower Industries, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
February 4, 1998
<PAGE> 8
23 MotivePower Industries, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
(In thousands except share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ............................................... $ 305,930 $ 291,407 $ 263,718
Cost of sales ........................................... (233,588) (232,434) (228,047)
Unusual items ........................................... -- (2,126) (40,838)
-------------------------------------------
Gross profit (loss) ..................................... 72,342 56,847 (5,167)
Selling, general and administrative expenses ............ (37,724) (32,615) (45,946)
-------------------------------------------
Operating income (loss) ................................. 34,618 24,232 (51,113)
Investment income ....................................... 761 1,981 951
Interest expense ........................................ (5,163) (9,143) (9,602)
Other income - Argentina ................................ 2,003 1,565 --
Gain on sale of assets .................................. -- 1,483 --
Foreign exchange (loss) gain ............................ (230) 169 (544)
-------------------------------------------
Income (loss) before income taxes ....................... 31,989 20,287 (60,308)
Income tax (expense) benefit ............................ (11,713) (7,714) 19,894
-------------------------------------------
Income (loss) before extraordinary item ................. 20,276 12,573 (40,414)
Extraordinary loss on extinguishment of debt,
net of income tax benefit of $687 ..................... -- (1,064) --
-------------------------------------------
Net income (loss) ....................................... $ 20,276 $ 11,509 $ (40,414)
===========================================
EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item ............... $ 1.15 $ .72 $ (2.34)
Extraordinary item .................................... -- (.06) --
-------------------------------------------
Net income (loss) ..................................... $ 1.15 $ .66 $ (2.34)
===========================================
Adjusted weighted average common shares outstanding ... 17,693,768 17,562,793 17,255,953
EARNINGS (LOSS) PER COMMON SHARE -- ASSUMING DILUTION:
Income (loss) before extraordinary item .............. $ 1.11 $ .72 ($ 2.34)
Extraordinary item ................................... -- (.06) --
-------------------------------------------
Net income (loss) .................................... $ 1.11 $ .66 ($ 2.34)
===========================================
Adjusted weighted average common shares outstanding .. 18,209,293 17,566,494 17,268,684
Dividends per share: .................................... $ -- $ -- $ .04
======================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 9
24 MotivePower Industries, Inc.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------
(In thousands except share data) 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ......................................................... $ 16,897 $ 5,236
Receivables from customers:
Billed, net of allowance for doubtful accounts of $394 and $284,
respectively............................................................. 34,588 25,754
Unbilled ..................................................................... 450 468
Inventories ....................................................................... 81,448 78,438
Deferred income taxes ............................................................. 7,596 4,635
Other ............................................................................. 3,358 2,638
---------------------
Total current assets .................................................... 144,337 117,169
Locomotive lease fleet, net ....................................................... 1,468 2,083
Property, plant and equipment:
Land ......................................................................... 1,153 1,737
Buildings and improvements ................................................... 36,350 32,679
Machinery and equipment ...................................................... 64,862 53,211
---------------------
Property, plant and equipment -- cost ........................................ 102,365 87,627
Less accumulated depreciation ................................................ (49,942) (43,644)
---------------------
Property, plant and equipment -- net .............................................. 52,423 43,983
Underbillings - MPI de Mexico ..................................................... 32,298 19,561
Deferred income taxes ............................................................. 7,724 15,348
Goodwill and other intangibles .................................................... 27,362 24,637
Other ............................................................................. 17,490 11,263
---------------------
Total assets ............................................................ $283,102 $234,044
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt ................................................. $ 10,725 $ 11,626
Accounts payable - trade .......................................................... 30,340 13,470
Accrued expenses and other current liabilities .................................... 36,065 27,662
Income taxes payable .............................................................. -- 1,957
Revolving credit agreement borrowings ............................................. 5,000 22,431
Advances from customers ........................................................... 426 --
---------------------
Total current liabilities ............................................... 82,556 77,146
Long-term debt .................................................................... 34,782 15,535
Commitments and contingencies ..................................................... 15,552 18,394
Other ............................................................................. 5,664 1,989
---------------------
Total liabilities ....................................................... 138,554 113,064
---------------------
Stockholders' Equity:
Common Stock, par value $.01 per share, authorized 55,000,000 shares;
issued and outstanding 17,749,093 shares at December 31, 1997
and 17,562,793 shares at December 31, 1996 .............................. 178 176
Additional paid-in capital ................................................... 205,609 201,661
Deficit ...................................................................... (55,353) (75,629)
Cumulative translation adjustments, net of tax ............................... (5,105) (5,105)
Deferred compensation ........................................................ (781) (123)
---------------------
Total stockholders' equity .............................................. 144,548 120,980
---------------------
Total liabilities and stockholders' equity ........................................ $283,102 $234,044
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 10
25 MotivePower Industries, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) ............................................. $ 20,276 $ 11,509 $(40,414)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation ............................................. 6,634 6,950 8,209
Amortization ............................................. 3,333 3,407 3,123
Extraordinary loss on extinguishment of debt (net of tax) -- 1,064 --
Gain on sale of assets ................................... -- (1,483) --
Deferred income taxes .................................... 6,486 5,402 (20,341)
Unusual items ............................................ -- 2,126 40,838
Other, net ............................................... 1,144 83 194
Changes in operating assets and liabilities net of effects
from 1997 purchases of Jomar and Microphor, and
1996 sale of Alert and Sign:
Receivables from customers ............................. (6,048) 5,787 13,090
Inventories ............................................ (85) 19,088 (4,823)
Other current assets ................................... (578) (2,919) 93
Underbillings - MPI de Mexico .......................... (12,737) (9,233) (12,252)
Accounts payable - trade ............................... 16,219 (4,162) (9,866)
Accrued expenses and other current liabilities ......... 7,081 (5,054) (2,241)
Income taxes payable ................................... (2,021) 1,708 (74)
Advances from customers ................................ 426 -- --
Commitments and contingencies .......................... (2,842) 9,095 2,721
--------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ........... 37,288 43,368 (21,743)
--------------------------------
Investing Activities
Additions to property, plant and equipment .................... (15,001) (4,063) (8,565)
Proceeds from (additions to) locomotive lease fleet ........... -- 10,071 (6,389)
Proceeds from sale of assets .................................. 1,815 4,838 --
Payment for purchase of Jomar ................................. (8,158) -- --
Payment for purchase of Microphor, net of cash acquired ....... (3,120) -- --
Other, net .................................................... 156 1,561 (454)
--------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ........... (24,308) 12,407 (15,408)
--------------------------------
Financing Activities
Repayment of preferred stock .................................. -- (1,056) --
Increase in intangibles ....................................... (2,093) (1,228) (2,688)
Increase in restricted cash ................................... (2,550) (2,043) (601)
Payments of long-term debt .................................... (8,653) (2,461) (475)
Net borrowings (repayments) under credit agreements ........... 9,568 (16,970) 27,667
Change in payable to Morrison Knudsen ......................... -- (32,477) 11,628
Proceeds from exercise of stock options including
tax-related benefit ...................................... 2,409 -- --
Funding of MKA operations prior to disposition ................ -- -- (3,771)
Dividends paid ................................................ -- -- (1,372)
--------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ........... (1,319) (56,235) 30,388
--------------------------------
Net increase (decrease) in cash and cash equivalents .......... 11,661 (460) (6,763)
Cash and cash equivalents at beginning of year ................ 5,236 5,696 12,459
--------------------------------
Cash and cash equivalents at end of year ...................... $ 16,897 $ 5,236 $ 5,696
========================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 11
26 MotivePower Industries, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Interest paid ........................................................ $3,311 $ 1,126 $ 3,244
Income taxes paid (refunded) ......................................... 7,811 (169) 610
Noncash Investing and Financing Activities:
Reduction of payable to Morrison Knudsen:
Payable to Morrison Knudsen ...................................... -- 18,816 29,500
Additional paid-in capital ....................................... -- (14,902) (18,600)
Deferred income taxes ............................................ -- (3,914) (10,900)
Deferred compensation ................................................ 1,541 78 54
Issuance of equity securities to settle obligation:
Preferred stock (repurchase) ..................................... -- -- (1,000)
Common stock ..................................................... -- -- (5)
Additional paid-in capital ....................................... -- -- (2,995)
Commitments and contingencies .................................... -- -- (4,000)
Jomar acquisition:
Fair value of assets acquired .................................... 9,351 -- --
Liabilities assumed .............................................. (1,193) -- --
--------------------------------
Cash paid ..................................................... 8,158 -- --
--------------------------------
Microphor acquisition:
Fair value of assets acquired ................................... 4,935 -- --
Liabilities assumed ............................................. (1,115) -- --
--------------------------------
Cash paid .................................................... 3,820 -- --
Less: cash acquired ............................................. 700 -- --
--------------------------------
Net cash paid ................................................ $3,120 -- --
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 12
27 MotivePower Industries, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Retained Cumulative
Common Paid-In Earnings Translation Deferred
(In thousands) Stock Capital (Deficit) Adjustments Compensation
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1994 ................ $171 $165,032 ($45,982) ($4,969) ($128)
- -------------------------------------------------------------------------------------------------------------------------------
Net loss ................................. -- -- (40,414) -- --
Dividends ................................ -- -- (686) -- --
Sale of MKA, impact on
cumulative translation adjustment .. -- -- -- (136) --
Issuance of equity securities to
settle litigation .................. 5 2,995 -- -- --
Capital contribution, reduction
of payable to Morrison
Knudsen, net of deferred
taxes of $10,900 ................... -- 18,600 -- -- --
Accretion of preferred stock ............. -- -- (25) -- --
Compensatory stock options granted ....... -- 54 -- -- (54)
Compensation expense ..................... -- -- -- -- 64
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 ................ $176 $186,681 $(87,107) $(5,105) $(118)
- -------------------------------------------------------------------------------------------------------------------------------
Net income ............................... -- -- 11,509 -- --
Capital contribution, reduction of payable
to Morrison Knudsen, net of deferred
taxes of $3,914 .................... -- 14,902 -- -- --
Accretion of preferred stock ............. -- -- (31) -- --
Compensatory stock options granted ....... -- 78 -- -- (78)
Compensation expense ..................... -- -- -- -- 73
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 ................ $176 $201,661 $(75,629) $(5,105) $(123)
- -------------------------------------------------------------------------------------------------------------------------------
Net income ............................... -- -- 20,276 -- --
Compensatory stock options granted ....... -- 1,541 -- -- (1,541)
Compensation expense ..................... -- -- -- -- 883
Stock options exercised, including
tax-related benefit of $215 ........ 2 2,407 -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 ................ $178 $205,609 $(55,353) $(5,105) $(781)
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 13
28 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION, OPERATIONS AND BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of MotivePower
Industries, Inc. and its subsidiaries (collectively, the "Company").
On April 26, 1994, the Company, then a wholly-owned subsidiary of
Morrison Knudsen, commenced an initial public offering of 6 million shares of
its Common Stock at an offering price of $16 a share which decreased Morrison
Knudsen's interest in the Company to 65%. Effective as of September 11, 1996, as
part of its bankruptcy plan, Morrison Knudsen distributed all of its ownership
in the Company to its creditors and certain of its then current stockholders.
Morrison Knudsen is no longer a stockholder in the Company.
The Company is a leader in the manufacturing of products for rail and
other power-related industries. Through its subsidiaries, the Company
manufactures and distributes engineered locomotive components and parts;
provides locomotive fleet maintenance; overhauls and remanufactures locomotives;
manufactures environmentally friendly switcher, commuter and mid-range DC and AC
traction, diesel-electric and liquefied natural gas locomotives up to 4,000
horsepower; and manufactures components for power, marine and industrial
markets. The Company's primary customers are freight and passenger railroads,
including every Class I railroad in North America.
SUBSIDIARIES (WHOLLY OWNED):
LOCOMOTIVE GROUP:
Boise Locomotive Company ("Boise Locomotive"), formed in 1972, performs
locomotive remanufacturing, overhauling and manufacturing, and locomotive fleet
maintenance as its principal business.
MPI Noreste S.A. de CV ("MPI de Mexico"), a Mexican variable stock corporation
formed in 1994, performs locomotive fleet maintenance and overhauls.
MotivePower Foreign Sales Corporation ("MPFSC"), formed in 1997, is a Barbados
corporation whose purpose is to take advantage of allowable U.S. tax benefits
regarding export sales and expenses.
COMPONENTS GROUP:
Motor Coils Manufacturing Company ("Motor Coils"), acquired in 1991, is a
remanufacturer of locomotive traction motors, and a manufacturer of rotating
electrical components and gearing.
Power Parts Company ("Power Parts"), acquired in 1992, is a supplier of new and
replacement engine and nonengine parts for locomotives, and inventory management
services.
Clark Industries Company ("Clark"), acquired in 1993, is a manufacturer of
cylinder heads, pistons and liner assemblies. Clark was merged into Power Parts
as of January 1, 1998.
Engine Systems Company, Inc. ("Engine Systems"), formed in 1994, remanufactures
turbochargers for locomotive, industrial and marine engines.
Touchstone Company ("Touchstone"), acquired in 1994, manufactures,
remanufactures and distributes locomotive radiators, oil coolers, brake
adjusters and other industrial heat exchangers.
Microphor Inc. ("Microphor"), acquired in 1997, is a manufacturer of
self-contained sanitation and waste retention systems, primarily for the rail
and marine industries.
MotivePower Investments Limited ("MPIL"), formed in 1997, is a Delaware holding
company which holds the investment in Touchstone, Motor Coils and Microphor.
AFFILIATES:
Trenes de Buenos Aires S.A. ("TBA"), a 19%-owned affiliate which operates a
concession contract to operate the Mitre and Sarmiento railway passenger lines
in Buenos Aires is accounted for by the cost method and has no book value.
On July 6, 1995, the Company sold its interest in Morrison Knudsen of
Australia, Ltd. ("MKA") to Morrison Knudsen. In consideration, the Company
received a nominal cash payment and MKA's redeemable preferred stock bearing a
9% cumulative dividend. The Company sold the preferred stock to Morrison Knudsen
in December 1997 for a nominal cash payment to utilize a $3.1 million capital
tax loss of which $1.2 million was recognized in the fourth quarter of 1997.
On October 25, 1996, the Company sold substantially all of the assets
of the Company's Power Parts Sign Co. ("Sign") for $1.3 million plus the
assumption of certain trade payables. In addition, on July 26, 1996, the Company
sold substantially all of the assets of the Company's Alert Manufacturing and
Supply Co. ("Alert") for $3.9 million plus the assumption of trade payables of
$750,000. The Company recorded gains of $783,000 and $700,000 on the sale of the
assets of Sign and Alert, respectively.
<PAGE> 14
29 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its subsidiaries. Sales between the Company and its
subsidiaries are billed at prices consistent with sales to third parties and are
eliminated in consolidation. Investments in affiliates in which the Company's
ownership is less than 20% are accounted for using the cost method.
REVENUE RECOGNITION: The Company recognizes revenues on locomotive
remanufacturing and manufacturing contracts on the percentage of
completion-units delivered method, and on component part sales when product is
shipped to the customer. Contract revenues and cost estimates are reviewed and
revised quarterly and adjustments are reflected in the accounting period when
known. Provisions are made currently for estimated losses on uncompleted
contracts. Unbilled accounts receivable represent shipments for which invoices
have not been processed.
Revenue recognized on the MPI de Mexico long-term maintenance contract
is based upon a percentage of the expected gross margin. Under the terms of the
maintenance contract, significant costs are incurred in the early years
(locomotive overhauls and fleet normalization), while payments from the customer
remain relatively constant throughout the life of the contract. By using a
percentage of the expected gross margin to recognize revenue under the
maintenance contract appropriate consideration is given to the risks associated
with the contract. Costs and estimated earnings in excess of billings
("Underbillings") and billings in excess of costs and estimated earnings
("Overbillings") on the contract in progress are recorded on the balance sheet
and are classified as current or non-current based upon the expected timing of
their realization or liquidation.
Remanufactured and overhauled locomotives are warranted for a period
from one to three years, and component parts are warranted for a period from one
to four years. Additionally, the Company provides an overhaul reserve on owned
locomotives. Estimated costs for product warranty are recognized at the time the
products are sold. Overhaul reserves are recorded on a straight-line basis over
the period of time from acquisition of the locomotive to the estimated date of
the related overhaul. Warranty and overhaul reserves are included in accrued
expenses and other current liabilities in the consolidated balance sheet.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. On an ongoing basis, management reviews its estimates based on
currently available information. Changes in facts and circumstances may result
in revised estimates.
CASH EQUIVALENTS: Cash equivalents consist of investments in highly liquid debt
securities having an original maturity of three months or less. Such securities
are considered to be held to maturity.
INVENTORIES: Inventories are stated at the lower of cost or market. Locomotive
inventories under long-term contracts consist of actual direct material, labor
and manufacturing overhead and are allocated to individual units based on the
estimated average production costs of units to be produced under a contract.
Locomotive inventories under contract were $8.7 million and $3.5 million at
December 31, 1997 and 1996, respectively. Component part inventories are valued
at purchase cost using the last-in first-out (LIFO) method or average production
cost.
MARKET, CONCENTRATIONS AND CREDIT RISKS: Financial instruments which potentially
subject the Company to concentrations of credit risk consist of cash equivalents
and accounts receivable. The Company, by its policy, limits the amount of credit
exposure to any one financial institution and places its investments with
financial institutions that the Company believes are financially sound.
The Company provides its products and services to the Class I Railroads
in North America, metropolitan transit and commuter rail authorities, Amtrak,
original equipment manufacturers, short lines and other customers
internationally. A relatively small number of customers have represented a
significant percentage of the Company's revenues for the three-year period ended
December 31, 1997. Collectively, the Company's top five customers accounted for
66%, 63%, and 62% of sales in the years ended December 1997, 1996 and 1995,
respectively. The Company performs ongoing credit evaluations of its customers'
accounts and historically has not incurred any significant credit-related
losses.
<PAGE> 15
30 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company's Boise Locomotive and Motor Coils subsidiaries have union
labor contracts expiring at various times through June 2000. The Company
considers the renegotiation of these contracts under terms and conditions
consistent with market conditions for similar U.S. based labor forces to be an
important factor in the maintenance of operations.
FOREIGN EXCHANGE FORWARD CONTRACTS: Foreign exchange forward contracts are legal
agreements between two parties to purchase and sell a foreign currency, for a
price specified at the contract date, with delivery and settlement in the
future. The Company uses such contracts to hedge the risk of changes in foreign
currency exchange rates associated with certain assets and obligations
denominated in the Mexican peso ("MXP"). Changes in market value of the forward
contracts are recognized in income when the effects of related changes in the
price of the hedged item are recognized. As of December 31, 1997, the Company
held a contract of 20 million MXP (which expired on January 8, 1998, and was
subsequently renewed for an additional 90-day period) and the estimated fair
value of the foreign exchange forward contract was approximately $8,000 more
than the contract value. There were no foreign exchange forward contracts
entered into during 1996 or 1995.
LOCOMOTIVE LEASE FLEET: Equipment on operating leases includes the Company's
locomotive lease fleet. The locomotives are depreciated on a straight-line basis
over their estimated useful lives of five to 15 years. Cost and accumulated
depreciation at December 31, 1997 were $2.9 million and $1.4 million,
respectively. Cost and accumulated depreciation at December 31, 1996 were $3.6
million and $1.5 million, respectively.
PROPERTY, PLANT AND EQUIPMENT: Buildings and improvements and machinery and
equipment are recorded at cost and depreciated on the straight-line method over
periods from three to 30 years. The cost and accumulated depreciation associated
with property and equipment that is disposed of are removed from the accounts,
and gains or losses from such disposals are included in income. Leasehold
improvements are capitalized and amortized on the straight-line method over the
terms of the related leases. Included in buildings and improvements is the
Company's Mountaintop facility which is an asset held for sale. The book value
of the asset was $1.9 million at December 31, 1997 and 1996. Expenditures for
repairs and maintenance are charged to expense as incurred.
GOODWILL AND OTHER INTANGIBLES: Goodwill and other intangibles consist of the
following:
Goodwill -- Cost in excess of tangible assets of businesses acquired in
purchase transactions is amortized on the straight-line method over 15-40
years from the date of acquisition. The unamortized cost of goodwill was
$20.2 million at December 31, 1997 and $17.8 million at December 31, 1996.
Covenants Not To Compete -- These agreements are recorded at cost and
amortized on the straight-line method over the terms of the agreements.
Terms of the agreements range from three to 10 years. The unamortized cost
was $4.2 million at December 31, 1997 and $4.5 million at December 31,
1996.
Loan Origination Fees -- These fees are associated with the origination of
the Company's debt. The fees are recorded at cost and amortized on the
straight-line method over the terms of the respective loan agreements. The
unamortized cost was $2.9 million at December 31, 1997 and $2.1 million at
December 31, 1996.
Patent Costs -- Patent costs related to proprietary technology have been
deferred and are amortized on the straight-line method over three years.
The unamortized cost was $2,400 at December 31, 1997 and $217,000 at
December 31, 1996.
Accumulated amortization at December 31, 1997 and 1996 was $12 million
and $8.7 million, respectively. The Company evaluates the realization of
intangible assets on a quarterly basis and adjusts, if necessary, the carrying
value or useful life accordingly.
RESEARCH AND DEVELOPMENT: Research and development costs are expensed as
incurred and include research and development expenses for new product
development and costs to improve existing products.
FOREIGN CURRENCY TRANSLATION: During 1995, due to changes in the sourcing of
component parts to U.S. suppliers at MPI de Mexico and the U.S.
dollar-denominated financing secured by MPI de Mexico, it was determined that
MPI de Mexico's functional currency was the U.S. dollar and not the Mexican
peso. As a result, MPI de Mexico remeasures monetary assets and liabilities at
year-end exchange rates and inventory, property and nonmonetary assets and
liabilities at historical rates. Income and expense accounts
<PAGE> 16
31 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
are remeasured at the average rates in effect during the year, except that
depreciation, amortization and cost of sales are remeasured at historical rates.
Adjustments resulting from the remeasurement are included in the results of
operations as they occur. Gains and losses resulting from foreign currency
transactions are included in income based upon the provisions of Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation."
MPI de Mexico has a contract that provides for escalation adjustments
to the base contract based upon, among other things, changes in the exchange
rate. Such escalation adjustments are included in revenues when realized.
INCOME TAXES: The provision for income taxes includes federal, state and local,
and foreign income taxes currently payable and those deferred or prepaid because
of temporary differences between the financial statement and tax bases of assets
and liabilities. The carrying amounts of deferred tax assets and liabilities are
determined based on differences between the financial statement amounts and the
tax bases of assets and liabilities using the enacted tax rates in effect in the
years in which the differences are expected to reverse.
STOCK-BASED COMPENSATION: In October 1995, Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), was
issued. The Company adopted SFAS 123 on January 1, 1996, and as permitted by
that standard the Company retained the recognition provisions of Accounting
Principles Board Opinion Number 25 ("APB25"). Adoption of SFAS 123 did not have
an impact on the Company's financial position or results of operations.
ENVIRONMENTAL REMEDIATION LIABILITIES: In October 1996, the American Institute
of Certified Public Accountants issued Statement of Position 96-1,
"Environmental Remediation Liabilities" ("SOP 96-1"). The Company adopted SOP
96-1 on January 1, 1997. Adoption of SOP 96-1 did not have an impact on the
Company's financial position or results of operations.
EARNINGS PER SHARE: In February 1997, Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"), was issued. SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier adoption was not permitted. The
adoption of SFAS 128 is reflected in Note 17 to the consolidated financial
statements.
COMPREHENSIVE INCOME: In June 1997, Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), was issued. SFAS 130 is
effective for financial statements issued for periods beginning after December
15, 1997. The adoption of SFAS 130 will have no impact on the Company's
financial position or results of operations.
SEGMENT INFORMATION: In June 1997, Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), was issued. SFAS 131 is effective for financial statements issued
for periods beginning after December 15, 1997. The adoption of SFAS 131 will
have no impact on the Company's financial position or results of operations.
RECLASSIFICATIONS: Certain reclassifications have been made to the 1996 and 1995
consolidated financial statements to conform to the current year presentation.
3. UNUSUAL ITEMS
The Company incurred charges for Unusual Items in 1996 and 1995 which consisted
of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------
<S> <C> <C> <C>
Provisions for impaired
assets and lease losses $-- $2,126 $ --
High-horsepower locomotive
manufacturing and
technology -- -- 20,273
Mountaintop facility
writedown -- -- 9,570
Locomotive lease fleet
impairment -- -- 7,064
Provision for loss on
disposition of
Australian operations -- -- 2,849
Contract losses -- -- 500
Legal and finance
(primarily attributable
to stockholder
litigation), Other -- -- 582
- ---------------------------------------------------------
Total $-- $2,126 $40,838
=========================================================
</TABLE>
<PAGE> 17
32 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
As a continuation of the Company's restructuring plan, charges were incurred due
to the impairment of certain assets, facility rationalization and the
restructuring of lease commitments.
YEAR ENDED DECEMBER 31, 1995
As part of the Company's restructuring plan, charges were incurred principally
due to the Company's exit from the high-horsepower locomotive manufacturing
business, the writedown of the Mountaintop production facility, the impairment
of the locomotive lease fleet and the disposition of the Company's Australian
operations.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------
(In thousands) 1997 1996
- -----------------------------------------------------
<S> <C> <C>
Cores $ 7,477 $12,632
Raw materials 35,421 38,067
Work in process 21,396 13,912
Finished goods 17,154 13,827
- -----------------------------------------------------
Total inventories $81,448 $78,438
=====================================================
</TABLE>
Approximately $30.7 million and $34 million of total inventories at
December 31, 1997 and 1996, respectively, were valued on the LIFO cost method,
and the excess of current replacement cost of these inventories over the stated
LIFO value was $1.2 million and $902,000 at December 31, 1997 and December 31,
1996, respectively. Two of the Company's domestic subsidiaries value inventory
on the LIFO basis. The Company defines cores as inventory designated for unit
exchange programs.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------
(In thousands) 1997 1996
- -----------------------------------------------------
<S> <C> <C>
Accrued payroll and benefits $13,125 $ 8,075
Warranty and overhaul accruals 8,622 7,053
Reserve for future losses 1,760 2,085
Other accrued liabilities 12,558 10,449
- -----------------------------------------------------
Total $36,065 $27,662
=====================================================
</TABLE>
6. UNDERBILLINGS - MPI DE MEXICO
During 1994, MPI de Mexico entered into a long-term contract to provide
maintenance and other locomotive services. Details relative to cumulative costs
incurred and revenues recognized are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
(In thousands) 1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Costs incurred $148,433 $101,566
Estimated earnings 17,633 7,152
- ----------------------------------------------------------
166,066 108,718
Less billings to date (133,768) (89,157)
- ----------------------------------------------------------
Underbillings $ 32,298 $ 19,561
==========================================================
</TABLE>
7. INDEBTEDNESS
In August 1995, the Company and its subsidiaries entered into a $75 million loan
agreement (the "Loan Agreement") with BankAmerica Business Credit ("BABC").
The Loan Agreement was modified several times during 1995 and 1996 to
revise covenants, provide for term borrowings, and various other provisions and,
on September 10, 1996, was amended and renamed the Amended and Restated Loan and
Security Agreement (the "Restated Agreement"). On December 31, 1996, the
Restated Agreement was modified to effect reductions in rates on borrowings,
reinstate the Company's ability to convert borrowings to LIBOR-based rather than
base-rate loans, and to provide for a September 30, 1997 termination date for
the Restated Agreement at which time all outstanding principal and interest
would become due. In connection with the modifications to the Restated
Agreement, the Company repaid amounts owed certain participating lenders who
were no longer lenders under the Restated Agreement, as modified, and paid early
termination fees to those lenders. The early termination fees and a
proportionate unamortized portion of previously incurred deferred debt issuance
costs were expensed as an extraordinary item of $1.1 million, net of tax in the
1996 statement of operations.
On February 27, 1997, the Company and a syndicate of lenders led by
Bank of America NT and SA entered into a Second Amended and Restated Credit
Agreement to replace the Company's Restated Agreement with BABC. The facility
consisted of a $20 million amortizing term loan and a $55 million revolving
credit line including a $15 million letter of credit subfacility. The entire $75
million facility was for a term of four years and was collateralized by
substantially all of the domestic assets of the Company.
<PAGE> 18
33 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On May 23, 1997, the Company entered into Amendment No. 1 to the Second
Amended and Restated Credit Agreement ("Amendment No. 1"). The amendment
increased the limit on the issuance of performance bonds from $10 million to $30
million, increased the limit on the issuance of letters of credit in support of
performance bonds from $2.5 million to $10 million and increased the limit on
the aggregate amount of letters of credit from $15 million to $20 million.
Amendment No. 1 provided for a maximum of $20 million of letters of
credit, of which approximately $4.6 million were outstanding at December 31,
1997. The Company paid a monthly fee of .5% per annum on the undrawn amount of
outstanding letters of credit.
At December 31, 1997 and 1996 balances outstanding under the Second
Amended and Restated Credit Agreement were $23 million and $29.8 million,
respectively, and unused borrowing capacity at those dates was $45.3 million and
$22.8 million, respectively. The effective interest rate on domestic amounts
borrowed at December 31, 1997 and 1996 was 6.47% and 8.61%, respectively.
On January 27, 1998 the Company closed on two new revolving credit
facilities with ABN AMRO Bank N.V. and Mellon Bank NA totaling $200 million. The
new credit lines consist of a $100 million five-year revolving loan, and a
364-day $100 million revolving loan which the Company may renew annually with
the approval of the lenders. Under the new facilities, the Company may issue up
to $35 million in letters of credit. Proceeds of the new facilities were used to
repay the Company's outstanding balance under its previous domestic loans, and
will be used for general corporate purposes. ABN AMRO Bank N.V. has fully
underwritten the new facilities, however, it is expected that the ABN AMRO Bank,
N.V. will sell participations in the facilities to a syndicate of banks.
In contrast with the Company's prior domestic credit facilities, the
new lines are not secured by any pledge of the Company's accounts receivable,
inventory or real property. Interest rate spreads charged under the new facility
will reprice at the end of each fiscal quarter based on the ratio of the
Company's quarter-ending debt to trailing 12-month cash flow. Both base rate and
LIBOR borrowings are available, at the Company's discretion. Interest rate
spreads over LIBOR range from 0.45% to 1.0%.
The new credit agreement contains three financial covenants under
which the Company must observe a minimum balance in tangible net worth, a
minimum fixed charges coverage ratio, and a maximum ratio of debt to trailing
12-month cash flow. So long as these financial covenants are not violated, the
Company has substantial freedom to effect acquisitions, undertake investments up
to $50 million in Mexican projects, repurchase stock or pay dividends.
The Company will record a one-time, non-cash charge of approximately
$500,000, net of tax in the first quarter of 1998 to write off unamortized costs
incurred previously under the Company's Second Amended and Restated Credit
Agreement.
On July 6, 1995, MPI de Mexico entered into a $30 million loan
agreement (the "Agreement") with Bancomer, S.A. ("Bancomer"), a Mexican bank.
Under the Agreement, Bancomer will advance up to $30 million to finance 85% of
the purchase price of U.S.-manufactured locomotive parts and components exported
to Mexico for use in the overhaul of locomotives in connection with the Mexican
National Railway contract. Debt drawn under this facility bore interest at 8.8%
and 8.4%, respectively at December 31, 1997 and 1996. The Canadian Imperial Bank
of Commerce ("CIBC") has agreed to fund Bancomer in connection with this
transaction. The Export-Import Bank of the United States ("Eximbank") has issued
a credit guarantee which covers repayment risk between Bancomer and CIBC. Upon
funding, Eximbank receives, from MPI de Mexico, an Exposure Fee equal to 4.14%
of each advance under the Agreement.
On December 16, 1996, MPI de Mexico and Bancomer amended the Agreement.
The amendment is intended to provide MPI de Mexico with greater financial
flexibility by way of, among other modifications, an increase in the maximum
permitted monthly disbursement from $1.1 million to $1.5 million, an increase in
the maximum amount of principal that MPI de Mexico is permitted to have
outstanding under this facility from $23.5 million to $27.1 million, a change in
the calculation of the success fee payable to Bancomer from 5.56% of net
after-tax cash flow without limitation to a series of 11 fixed semi-annual
payments of $75,000 each, and an initial payment of $90,000 which was made in
December 1996. The amendment did not modify the interest rate or term of the
facility.
On December 16, 1996, MPI de Mexico entered into an additional credit
agreement with Bancomer which will provide up to $3.5 million in U.S. dollar
financing, non-recourse to MotivePower, to support MPI de Mexico's investments
in property, plant and equipment.
Principal and interest payments on each advance are to be made in 10
semi-annual installments due on May 15 and November 15 of each year with
interest payments beginning May 15, 1996 and principal payments beginning
November 15, 1996. The Agreement provides for a prepayment penalty under certain
circumstances.
<PAGE> 19
34 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Bancomer Agreements contain certain covenants, including a
requirement that MPI de Mexico maintain specified cash-flow-to-debt-service and
debt-to-equity ratios. Additionally, the return to the Company of $13.7 million
of the initial equity investment from MPI de Mexico is restricted by a
subordination agreement.
In connection with the Agreement, MPI de Mexico entered into a trust
agreement ("Trust Agreement") with a Mexican multiple banking institution
("Trustee"). The Trust Agreement provides that all monies received from the
Mexican National Railway contract are to be deposited into a trust. The Trustee
is required to maintain specified balances in a reserve fund established for
debt service. Once required debt service and other payments have been made, any
remaining amounts in excess of the reserve fund requirements are to be returned
to MPI de Mexico. Amounts held in trust at the balance sheet date are classified
as restricted cash and have been included in other non-current assets in the
accompanying consolidated balance sheets at December 31, 1997 and 1996.
The combined balances outstanding under both the Second Amended and
Restated Credit Agreement and the Bancomer Agreements at December 31, 1997 and
1996 were $50.5 million and $49.6 million, respectively. Maturities are as
follows: 1998 - $15,725,000; 1999 - $11,350,000; 2000 - $13,663,000; 2001 -
$7,565,000; 2002 - $2,204,000.
8. REDEEMABLE PREFERRED STOCK
In September 1995, the Company deposited 10,000 shares of Preferred Stock into a
joint settlement account in connection with the settlement of certain class
action suits. On December 6, 1996, the Company exercised its option to redeem
all of the outstanding shares of Preferred Stock at a price of $1.1 million
including accrued dividends.
9. STOCK OPTION PLANS
The Company has established two stock option plans which are described below.
The Company applies APB 25 and related Interpretations in accounting for its
plans.
The compensation cost that has been charged against income was $2.7
million, $775,000 and $63,000 for 1997, 1996, and 1995, respectively. Had
compensation cost for the Company's plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the method
of SFAS 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31,
--------------------------------
(In thousands) 1997 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) As reported $20,276 $11,509 $(40,414)
Pro forma $19,444 $11,104 $(40,414)
Earnings (loss)
per diluted share As reported $ 1.11 $ .66 $ (2.34)
Pro forma $ 1.07 $ .63 $ (2.34)
=====================================================================
</TABLE>
The following weighted-average assumptions were used to estimate the
fair value of each option grant on the grant date using the Black-Scholes
option-pricing model in 1997, 1996 and 1995, respectively; dividend yield of
zero percent for all years; expected volatility of 65%, 72% and 69%; risk free
interest rates of 6.26%, 6.5% and 6.0%; and expected lives of 10 years for
all plans.
In the MotivePower Industries, Inc. Stock Incentive Plan (the
"Incentive Plan"), a maximum of 2.5 million shares may be issued upon the
exercise of stock options granted or through limited stock appreciation rights.
Officers and other key employees of the Company or its subsidiaries are eligible
to receive awards. The exercise price, term and other conditions applicable to
each award are determined by the Compensation Committee of the Board of
Directors at the time of the grant of each award and may vary with each award
granted. Awards are generally made at not less than current market prices at
date of grant, and have been granted to executives and directors under the
Incentive Plan in the form of stock options. Options granted generally vest
either over a five-year period, 20% on each anniversary date following the
grant, or a four-year period 25% on each anniversary date following the grant.
All unexercised options expire 10 years from the date of grant, subject to
acceleration in certain cases.
Restricted stock awards for a total of 125,000 shares of the Company's
Common Stock have been granted to certain key management employees. The weighted
average grant date fair value of restricted stock was $5.36 per share. Sale
restrictions on the restricted stock lapse between January 1, 1997 and January
1, 2007. The Company recorded expense of $193,000, $155,000 and $0 for 1997,
1996, and 1995, respectively, related to the restricted stock.
<PAGE> 20
35 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In the MotivePower Industries, Inc. Stock Option Plan for Non-Employee
Directors (the "Non-Employee Directors Plan"), a maximum of 150,000 shares may
be granted. Under the Non-Employee Directors Plan, each non-employee director is
entitled to receive initial options to purchase shares of the Company's common
stock upon their election to the Board at an exercise price equal to 50% of the
market price of the common stock based on the date awarded. In addition to the
initial grant date, each director is awarded an annual stock option award on
January 2, at an exercise price equal to the fair market value of such common
stock as of the date of the grant. All options granted shall vest over a
three-year period, one-third on each anniversary date. Unearned compensation,
representing the difference between the fair market value at the grant date and
the exercise price is charged to income over the vesting period.
A summary of the status of the Company's two stock option plans as of
December 31, 1997 and 1996 and the changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,740,500 $ 7.08 1,271,000 $ 5.26 1,476,250 $14.91
Granted 548,000 12.87 1,261,500 4.96 532,000 7.72
Exercised (211,300) 9.93 -- -- -- --
Surrendered/Canceled (91,250) 8.56 (792,000) 10.59 (737,250) 15.82
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,985,950 $ 7.94 1,740,500 $ 7.08 1,271,000 $ 5.26
=============================================================================================================================
Options exercisable at year end 773,825 457,396 313,292
Weighted average fair value of
options granted during the year $10.18 $3.98 $ 6.20
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.75 to $16.00 254,000 6.5 $14.20 236,500 $14.41
$3.81 to $10.72 395,000 7.6 9.59 367,500 10.03
$2.84 to $7.75 828,950 8.3 5.44 169,825 5.28
$7.94 to $25.16 508,000 9.4 13.04 -- --
- ----------------------------------------------------------------------------------------------------------
1,985,950 773,825
==========================================================================================================
</TABLE>
<PAGE> 21
36 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. TAXES ON INCOME
The Company and its domestic subsidiaries file a consolidated federal income tax
return and certain combined or separate state income tax returns. MPI de Mexico
files an income tax return in Mexico.
The components of income tax (expense) benefit are as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal:
Current $ (3,862) $(1,687) $ --
Deferred (1,166) (4,235) 16,957
- ------------------------------------------------------------------
(5,028) (5,922) 16,957
- ------------------------------------------------------------------
State and Local:
Current (1,365) (625) (447)
Deferred (384) 345 3,172
- ------------------------------------------------------------------
(1,749) (280) 2,725
- ------------------------------------------------------------------
Foreign:
Current -- -- --
Deferred (4,936) (1,512) 212
- ------------------------------------------------------------------
(4,936) (1,512) 212
- ------------------------------------------------------------------
Income tax (expense) benefit $(11,713) $(7,714) $19,894
==================================================================
</TABLE>
Income (loss) before income taxes for the Company's foreign and
domestic operations were as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $21,084 $14,116 $(57,167)
Foreign 10,905 6,171 (3,141)
- -------------------------------------------------------------------
Total $31,989 $20,287 $(60,308)
===================================================================
</TABLE>
The provision for income taxes differs from tax calculated by applying
the U.S. federal statutory income tax rate to income (loss) before income taxes
due to the following:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal statutory tax rate 35.0% 35.0% 35.0%
State income tax effect,
net of federal benefit 3.6 4.2 2.0
Differences between U.S.
Federal statutory and
foreign tax rates 5.7 -- (1.5)
Valuation allowance (6.4) (8.7) (3.6)
Other, net (1.3) 7.5 1.0
- -------------------------------------------------------------------
36.6% 38.0% 32.9%
===================================================================
</TABLE>
Deferred income taxes result from temporary differences in the
financial bases and tax bases of assets and liabilities. The types of
differences that give rise to significant portions of deferred income tax assets
and liabilities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses and reserves $ 11,078 $ 14,859
Inventory reserves, capitalized costs 1,046 342
Plant and equipment, intangibles 3,912 3,246
Employee benefit/compensation
accruals 2,952 2,250
Allowance for doubtful accounts 164 112
Net operating loss carryforwards 22,395 21,758
Other -- 525
- ------------------------------------------------------------------------------
Deferred tax assets 41,547 43,092
Valuation allowance (17,204) (19,278)
- ------------------------------------------------------------------------------
Net deferred tax asset 24,343 23,814
Deferred tax liabilities:
Underbillings (7,978) (3,293)
Prepaid insurance (1,045) (538)
- -----------------------------------------------------------------------------
Total deferred tax liabilities (9,023) (3,831)
- -----------------------------------------------------------------------------
Deferred income taxes, net $ 15,320 $ 19,983
=============================================================================
</TABLE>
As discussed in Note 12, on September 10, 1996, the Company repurchased
for $34.6 million all of the debt plus accrued interest owed to Morrison
Knudsen, which totaled $56.6 million. This settlement decreased the net deferred
tax asset by $3.9 million at December 31, 1996.
A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The company
has established a valuation allowance for certain net operating loss
carryforwards and for losses anticipated to produce no tax benefit. Although
realization of the net deferred tax asset is not assured, management believes
that it is more likely than not that the net deferred tax asset will be
realized.
The Company's net operating loss carryforward for the year ended
December 31, 1997 is $60.5 million. The Company does not forecast losing any of
its NOLs due to expiration. The net operating losses expire in various amounts,
as follows:
<TABLE>
<CAPTION>
(In thousands) U.S. Mexico Total
- --------------------------------------------------------------
<S> <C> <C> <C>
2004 -- $ 9,802 $ 9,802
2005 -- 16,957 16,957
2007 -- 3,489 3,489
2010 $30,240 -- 30,240
- --------------------------------------------------------------
Total $30,240 $30,248 $60,488
==============================================================
</TABLE>
<PAGE> 22
37 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. BENEFIT PLANS
RETIREMENT: Beginning in May 1994, the Company established a defined
contribution, 401(k) savings plan to replace the former Morrison Knudsen plan.
In January 1996, the Company suspended Company contributions to the 401(k)
savings plan. On July 1, 1997 the Company reinstated those contributions equal
to 2% of an eligible employee's gross salary in the form of Company stock. In
addition, beginning January 1, 1998 the Company will match 50% of an eligible
employee's contributions into the 401(k) savings plan to a maximum total of 3%
per an eligible employee's gross wages. The Company match will be in the form of
Company stock. The Company's contributions were $357,000, $71,000 and $752,000
for 1997, 1996 and 1995, respectively.
The Company participates in multiemployer pension, and health and
welfare plans. The plans are defined contribution plans and provide benefits for
craft employees covered under collective bargaining agreements at Boise
Locomotive and Motor Coils. Costs under the plans amounted to $3.1 million, $2.1
million and $2.3 million for 1997, 1996 and 1995, respectively.
The Company adopted two long-term incentive plans for selected
employees in 1994. The plans provide deferred compensation based upon total
shareholder return or return on total capital. No compensation expense was
recognized in connection with these plans in 1997, 1996 or 1995.
HEALTH CARE: Certain health care benefits are provided for employees who retired
prior to July 1, 1993. Employees who have retired, or will retire, thereafter
must pay the full cost of post-retirement health care benefits. Retirees who
retired before July 1, 1990 pay no contributions for coverage while those who
retired after July 1, 1990 and before July 1, 1993 make monthly contributions
equal to 1% of their final annual pay.
Net post-retirement health care cost includes the following components:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest cost on accumulated
post-retirement benefit
obligation $114 $122 $138
Net amortization and deferral 5 25 20
- --------------------------------------------------------------------------------
Net post-retirement health
care cost $119 $147 $158
================================================================================
</TABLE>
The plans' funded status was as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value
of benefit obligation:
Retirees $(1,269) $(1,578) $(1,800)
Unrecognized net (gain) loss (97) 266 505
- --------------------------------------------------------------------------------
Accrued post-retirement
health care obligation $(1,366) $(1,312) $(1,295)
================================================================================
</TABLE>
Assumptions used for the Company's retiree health care plans as of
December 31 include:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate for determining
benefit obligations 7.25% 7.5% 7.0%
Discount rate for interest cost 7.5% 7.0% 8.5%
================================================================================
</TABLE>
The annual rate increase in the per capita cost of health care benefits
is assumed to be 9% in 1998, decreasing to 8% in 1999 and then grading down .5%
per year to 4.5% in 2006 and thereafter, over the projected payout period of the
benefits. A 1% increase in the health care cost trend rate would increase
accumulated post-retirement benefit obligation as of December 31, 1997 by
$108,000 and the aggregate of the service and interest cost components for the
year then ended by $10,000.
12. RELATED PARTY TRANSACTIONS
The Company leases certain facilities from former directors and officers of the
Company. Lease payments, including utilities, to these individuals totaled
$999,000, $1.1 million and $986,000 for the years ended December 31, 1997, 1996
and 1995, respectively.
The Company incurred $829,000, $1.9 million and $3.6 million of legal
fees and expenses from a firm in which a former officer of the Company is a
shareholder, for the years ended December 31, 1997, 1996 and 1995, respectively.
On September 10, 1996, the Company repurchased for $34.6 million all of
the debt of the Company owed to Morrison Knudsen. The amount of the debt
outstanding as of the date of repurchase, including accrued interest, was $56.6
million. The effect of this transaction was an increase to additional paid-in
capital of $14.9 million, a decrease in the net deferred tax asset of $3.9
million and a reduction in amounts due to Morrison Knudsen of $56.6 million.
<PAGE> 23
38 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13. COMMITMENTS AND CONTINGENCIES
The Company has commitments and performance guarantees arising from locomotive
remanufacturing contracts and maintenance agreements, and warranties from the
sale of new locomotives, remanufactured locomotives and locomotive components.
The Company has commitments to purchase machinery and equipment of $4.5 million
at December 31, 1997. At December 31, 1996 there were no significant purchase
commitments related to machinery and equipment.
ENVIRONMENTAL: The Company is subject to federal, state, local and foreign
environmental laws and regulations concerning the discharge, storage, handling
and disposal of hazardous or toxic substances and petroleum products
(collectively referred to as "waste"). Examples of regulated activities are the
disposal of lubricating oil, the discharge of water used to clean parts and to
cool machines, the maintenance of underground storage tanks and the release of
particulate emissions produced by Company operations. For some activities the
Company must obtain permits.
Violation of environmental laws or regulations could subject the
Company and its management to civil and criminal penalties and other
liabilities. In addition, third parties may make claims for personal injuries
and property damage associated with releases of waste. A current or prior owner
or operator of property may be required to investigate and clean up waste
releases and may be liable to governmental entities or some other third party
for their investigation and remediation costs in connection with the
contamination. The Company arranges for the disposal or treatment of waste at
disposal or treatment facilities owned by third parties. The Company could be
liable for the costs of removing or remediating a release of waste at such
facilities.
Because it owns and operates property, the Company may have
responsibility and liability even if it does not know of or cause the presence
of contaminants. Liability is often joint and several and is generally not
limited. The cost to investigate, remediate and remove waste may be substantial
and may even exceed the value of the property or the aggregate assets of the
owner or operator. The Company may have difficulty selling or renting
contaminated property or borrowing against such property. The government
sometimes creates liens against property for damages and costs it incurs in
connection with contamination. The Company has potential liabilities associated
with its and its predecessor's past waste disposal activities, including
disposal activities at plants currently being operated by the Company.
BOISE, IDAHO
Heavy equipment repair and locomotive remanufacturing commenced at Boise
Locomotive in 1972. At the time, solvents were used in the process of cleaning
parts and equipment as part of the repair/remanufacturing process at the
facility. Wastewater generated from the equipment cleaning process containing
solvents was discharged during the process to in-ground wastewater separation
basins that were connected to buried drain fields. This wastewater treatment
system was in place until 1984. In 1985, the Company's predecessor received
notices from the Idaho Department of Health and Welfare, Division of
Environmental Quality and the United States Environmental Protection Agency,
indicating that it was in violation of state and federal environmental laws with
respect to this treatment system at Boise Locomotive. Related regulatory
requirements led to the closure of the buried drain fields and a buried trench
that was used for disposal of waste material. Further requirements led to the
issuance in 1991 of a Resource Conservation and Recovery Act Part B Post Closure
Permit (the "Permit"), which is the formal permit pursuant to which a detailed
corrective action plan is specified for groundwater cleanup and for protection
of the public and environment following the "closure" or termination of the
releases which created the problem. In compliance with the Permit, approximately
57 wells have been drilled on the Boise Locomotive property and on adjacent
property to monitor, collect, and treat contaminated shallow groundwater, to
monitor any movement of the contaminated plume, and to monitor the deeper
groundwater systems at the facility. The Company has estimated the expected
aggregate undiscounted costs to be incurred over the next 24 years, adjusted for
inflation at 3% per annum, to be $4.8 million, based on the Permit's corrective
action plan, and $4.4 million for contingent additional Permit compliance
requirements related to off-site groundwater contamination. The discounted
liability at December 31, 1997, using a discount rate of 6.5%, was $2.1 million
based on the Permit's corrective action plan, and $2.1 million for contingent
additional Permit compliance requirements related to off-site groundwater
contamination. The estimated outlays for each of the five succeeding years from
1998 to 2002 are: $260,000, $268,000, $317,000, $285,000 and $293,000. The
Company was in compliance with the Permit at December 31, 1997. In addition,
Boise Locomotive would be liable for any damages resulting from hazardous
substances migrating
<PAGE> 24
39 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
from the facility to deeper groundwater systems, including the regional aquifer
system which serves most of the domestic and industrial users of groundwater in
the area (which includes and extends beyond Boise). Three private off-site wells
are known to have been impacted by shallow groundwater contamination. Two of
these wells were used for residential domestic purposes, and the third well is
used for supply to a pond and landscape watering for a residential subdivision.
Boise Locomotive has entered into agreements whereby the residential domestic
use of the wells was stopped and domestic water is now being provided via a
public water supply hook-up. Physical abandonment of these wells is expected in
1998. In the event of contamination of the regional aquifer, Boise Locomotive
would be required, among other things, to provide potable water to affected
users and to install a treatment system to clean up the polluted water, and
could incur other liabilities, the combined cost of which cannot be estimated,
but would be expected to be material in amount. The regional aquifer system,
however, occurs at a depth which is approximately 200 feet below the shallow
contaminated groundwater that is currently being remediated. While management
believes there is no evidence that the regional aquifer system is currently
threatened by releases of contaminants from Boise Locomotive, no assurance can
be given in this regard.
An additional estimated amount of $45,000 may be incurred in 1998 to
implement an Institutional Control Program by the Idaho Department of Water
Resources related to the shallow contaminated water. An annual administration
and enforcement fee of approximately $25,000 may also be incurred beginning in
1998.
MEXICO
Through its MPI de Mexico subsidiary, the Company has operational responsibility
for facilities in Acambaro and San Luis Potosi in Mexico, pursuant to a contract
with the Mexican National Railway. Under the contract, MPI de Mexico is
responsible for performing certain work related to environmental protection at
the facilities, such as waste water treatment, storm water control, tank repair,
and spill prevention and control. The costs of this work are either to be
directly reimbursed to MPI de Mexico by the Mexican National Railway or
recoverable through fees payable under the contract, which has been structured
to account for such cost. No assurance can be given, however, that the Mexican
National Railway will not dispute any submissions for reimbursement or that the
fee structure under the contract will, in fact, cover costs. MPI de Mexico's
operations are subject to Mexican environmental laws and regulations. It has
obtained, or is in the process of obtaining, environmental permits, licenses and
approvals required for its operations.
WILLITS, CALIFORNIA
The Company acquired Microphor in 1997. During past operations, solvents were
used in the manufacturing process at the facility. Inadvertent releases of these
solvents resulted in contamination of shallow groundwater at the facility. The
authoritative governing agency, Regional Water Quality Control Board - Region 1
(RWQCB) of the California Environmental Protection Agency has issued a no
further action letter in regards to groundwater contamination on one parcel of
the property, which relieves Microphor of any further corrective action or
remediation of the contaminated shallow groundwater on that parcel. Another
relatively small plume of groundwater contamination is located in the extreme
southwest corner of a second parcel of the Microphor property in the vicinity of
the machine shop. Microphor is currently operating an interceptor trench and
treatment facility below this plume. The RWQCB of the California Environmental
Protection Agency has approved this action as an interim measure. RWQCB will
probably require a feasibility assessment of alternative corrective measures to
further remediate this groundwater contamination. It is expected that additional
remedial method(s) may be implemented and would probably mitigate this condition
within five years. The seller of Microphor is responsible for implementing this
action and additional remediation. The cost of implementing additional
remediation is estimated at about $125,000.
Although the Company is responsible to the RWQCB in regard to any
environmental obligations or liabilities at the site, the seller of the
Microphor property agreed to indemnify the Company against any environmental
liabilities associated with the site that occurred prior to its acquisition by
the Company. Management believes that this indemnification arrangement is
enforceable for the benefit of the Company. The indemnification does not alter
the Company's potential liability to third parties (other than seller) or
governmental agencies but creates contractual obligation on the part of seller
for such liabilities. The Company has withheld $150,000 of proceeds due to the
seller as security against this environmental obligation.
MOUNTAINTOP, PENNSYLVANIA
The Comprehensive Environmental Response, Compensation and Liability Act (also
known as "CERCLA" or "Superfund") is a federal law regarding abandoned hazardous
waste sites which imposes joint and several liability, without regard to fault
or the legality
<PAGE> 25
40 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
of the original act, on certain classes of persons, including those who
contribute to the release of a "hazardous substance" into the environment.
Foster Wheeler Energy Corporation ("FWEC") is named as a potentially responsible
party with respect to the Company's Mountaintop, Pennsylvania plant, which has
been listed by the EPA in its data base of potential hazardous waste sites, the
Comprehensive Environmental Response, Compensation and Liability Information
System ("CERCLIS"). FWEC, the seller of the Mountaintop property to the
Company's predecessor in 1989, agreed to indemnify the Company's predecessor
against any liabilities associated with this Superfund site. Management believes
that this indemnification arrangement is enforceable for the benefit of the
Company and, although such obligation is unsecured and therefore structurally
subordinate to secured indebtedness of FWEC, that FWEC has the financial
resources to honor its obligations under this indemnification arrangement. This
indemnification does not alter the Company's potential liability to third
parties (other than FWEC) or governmental agencies under CERCLA but creates
contractual obligations on the part of FWEC for such liabilities.
RICHLAND TOWNSHIP, PENNSYLVANIA
Motor Coils owns a 5-acre vacant parcel of property in Richland Township,
Pennsylvania. The property is comprised of wooded and open field areas and is
situated in a sparsely populated residential/mixed use area. This property has
been subject to unauthorized dumping by unknown parties. Based on visual
inspections and non-intrusive studies conducted by third party consultants, the
material present at the property appears to be limited to small amounts of
household trash and non-hazardous debris and moderate amounts of crushed slag or
foundry sand. Motor Coils has removed the non-hazardous debris and some of the
trash but has not yet evaluated the need nor estimated the cost to remove and
properly dispose the remaining materials. The Company does not believe that the
removal and disposal will have a material adverse impact on the Company's
financial position or results of operations.
The Company believes that its planned expenditures are adequate to meet
its known environmental obligations and liabilities, including those under the
Permit, and under CERCLA and similar legislation. The Company's knowledge of its
environmental obligations and liabilities is, for the majority of its
facilities, based on assessments and due diligence conducted by its
predecessor's personnel and Phase I and/or Phase II environmental assessments
conducted by third-party consultants. No assurance can be given, however, that
stricter interpretation and enforcement of existing environmental laws or
regulations, the adoption of new laws or regulations, the discovery of currently
unknown waste or contamination for which the Company may be liable, the
inability of the Company to enforce the indemnification with respect to the
Mountaintop plant or the continued spread of the hazardous waste plume through
off-site groundwater near Boise Locomotive will not result in significantly
higher environmental costs to the Company.
Environmental laws and regulations are subject to change at any time.
Compliance with current or future laws and regulations could potentially
necessitate significant capital outlays by the Company, affect the economics of
a given project or cause material changes or delays in intended activities.
LEASES: The Company leases office and manufacturing facilities under operating
leases with terms ranging from one to 15 years, excluding renewal options.
The Company has also financed its locomotive lease fleet with operating
leases arising from sale and leaseback transactions. The Company has sold
remanufactured locomotives to various financial institutions and leased them
back under operating leases with terms from five to 20 years.
Total net rental expense (income) charged (or credited) to operations
in 1997, 1996 and 1995 was $2.8 million, $(799,000), and $(504,000),
respectively. Certain of the Company's equipment rental obligations under
operating leases pertain to locomotives which are subleased to customers under
both short-term and long-term agreements. The above amounts are shown net of
sublease rentals of $7.2 million, $8.7 million, and $7.8 million for the years
1997, 1996 and 1995, respectively. Future minimum rental payments under
operating leases with remaining noncancelable terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
(In thousands) Real Sublease
Year Estate Equipment Rentals Total
- ----------------------------------------------------------------
<C> <C> <C> <C> <C>
1998 $1,449 $ 7,890 $ (5,761) $ 3,578
1999 1,294 5,434 (2,941) 3,787
2000 1,294 4,387 (2,941) 2,740
2001 1,294 4,611 (2,628) 3,277
2002 1,303 4,564 (2,190) 3,677
2003 and after $3,910 $28,383 $(11,589) $20,704
</TABLE>
LEGAL PROCEEDINGS: In December 1995, Morrison Knudsen, the Company and certain
of Morrison Knudsen's directors and officers were named as defendants in a
complaint (the "Pilarczyk Lawsuit")
<PAGE> 26
41 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
filed in the United States District Court for the Northern District of New York
by plaintiffs who were principals in and/or held substantial stock in TMS, Inc.
("TMS"), a New York corporation acquired by Morrison Knudsen on December 30,
1992. The complaint, which sought not less than five million dollars in damages,
alleges among other things, violations of Section 10(b), Rule 10b-5 and Section
20(a) of the Securities Exchange Act of 1934, breach of contract, unjust
enrichment, negligent misrepresentation and common law fraud during Morrison
Knudsen's acquisition of TMS in 1992. Plaintiffs asserted that the Company,
which was not formed by Morrison Knudsen until 1993, is fully responsible for
the acts of Morrison Knudsen. However, the actions complained of occurred before
the Company was formed and the Company did not assume such liabilities of
Morrison Knudsen. A motion to dismiss, filed in April 1996 on behalf of all
defendants to the Pilarczyk Lawsuit, was granted on May 19, 1997. On June 10,
1997 plaintiffs appealed the dismissal in the U.S. District Court, Northern
District of New York. The Company believes the causes of action in the Pilarczyk
Lawsuit relating to the Company are without merit.
The Company is engaged in a commercial dispute with a former supplier,
Samyoung Machinery Industrial Co. and Samyoung (America), Inc. (collectively,
"Samyoung"). The Company filed suit on April 16, 1996 alleging delivery of
defective product and seeking damages in excess of $1 million. Samyoung denies
that the product was defective and countersued to recover $300,000 under the
contract, and $10 million for trade libel and interference with prospective
economic relationships as a result of the Company allegedly making false
disparaging statements concerning the diesel engine cylinder liners to potential
Samyoung customers. The Company believes that Samyoung's claims are without
merit, and, to date, no evidence supporting Samyoung's counterclaims has come to
light through the discovery being conducted by the parties. The Company intends
to vigorously prosecute its own claims and defend against Samyoung's
counterclaims. The Company has tendered the counterclaims to its liability
insurers, which have been provided a partial defense subject to a reservation of
rights.
The Company's Motor Coils subsidiary leases 63,000 square feet of
office space and 57,000 square feet of warehouse space at 1200 Reedsdale Street,
Pittsburgh, Pennsylvania, pursuant to a 15-year lease expiring in July, 2006.
This space is leased from M & T Partners, a general partnership of which the
former President and Chief Executive Officer and Executive Vice President of the
Company, respectively, are the sole general partners. The lease transaction
initiated by these officers while in their capacity with the Company on behalf
of their general partnership, M & T Partners, is unfavorable to Motor Coils for
the following, though not necessarily only, reasons: the leased square footage
was and is far too expansive for the present, reasonably prospective, or even
long-term needs of Motor Coils; the base rent for the leased premises,
considering that the lease is a triple-net lease, was and is well above market
rates; a significant percentage of the warehouse space is not suitable for the
storage of heavy industrial equipment, an integral part of the business of Motor
Coils; and the leased premises require substantial remedial measures. The
Company's Motor Coils subsidiary has commenced a civil action against M & T
Partners and its sole general partners, seeking rescission of the 15-year lease
agreement and seeking damages arising from breaches of fiduciary duty and
failures to disclose material facts germane to this self-interested transaction.
Additionally, the Company is actively seeking to sublet the leased premises. The
parties have engaged in preliminary discussion to settle this matter. The action
was commenced in the Court of Common Pleas of Allegheny County, Pennsylvania,
Civil Division, GD 97-018873, on November 19, 1997.
The Company is involved in legal proceedings incident to the normal
conduct of its business, including contract claims and employee matters.
Although the outcome of any pending legal proceeding cannot be predicted with
certainty, management believes that such legal proceedings, are adequately
provided for in the consolidated financial statements and that the proceedings
individually and in the aggregate, will not have a material adverse effect on
the consolidated operations or financial condition of the Company.
<PAGE> 27
42 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
A summary of the Company's net sales and operating income for the years ended
December 31, 1997, 1996 and 1995 and the identifiable assets employed at the end
of such years by geographic area is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales
United States $254,859 $253,026 $234,300
Mexico 65,177 51,196 46,032
Australia -- -- 1,830
United States sales
to other
geographic areas (14,106) (12,815) (18,444)
- --------------------------------------------------------------------------
Net sales
to customers $305,930 $291,407 $263,718
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Income
United States $23,140 $19,051 $(48,319)
Mexico 11,478 5,181 1,691
Australia -- -- (4,485)
- --------------------------------------------------------------------------
Operating Income
(loss) $34,618 $24,232 $(51,113)
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
(In thousands) 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
Identifiable assets
United States $207,873 $181,131
Mexico 75,229 52,913
- --------------------------------------------------------------------------
Total identifiable assets $283,102 $234,044
==========================================================================
</TABLE>
The following table shows the annual percentage of the Company's sales
to customers who accounted for 10% or more of the Company's sales for the three
years ended December 31, 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
- ----------------------------------------------------------
<S> <C> <C> <C>
Mexican National Railway 20% 14% 14%
Burlington Northern Santa Fe 19% 19% 18%
Union Pacific 13% 16% 21%
==========================================================
</TABLE>
The Mexican National Railway has the right, exercisable at any time, to
rescind its contract with the Company. While it is not presently determinable
what effect, if any, this would have, if the contract is rescinded, the Company
has the right to collect a termination payment intended to provide for the
recovery of the Company's investment. In addition, in connection with the
privatization of the Mexican National Railway, the Company is in the process of
negotiating a new contract with Transportation Ferroviaria Mexicana, the
successful bidder for the region currently under contract with the Company.
15. FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined by the
Company, using available market information and appropriate valuation
methodologies. Although considerable judgment is necessarily required in
interpreting market data to develop estimates of fair value, due to the small
notional amount of outstanding letters of credit, in the estimation of the
Company's management, the fair values of the Company's financial instruments are
not materially different from their carrying values on the Company's financial
statements. In management's estimation, based on the variable interest rates
applicable to outstanding long-term debt, the fair value of the long-term debt
is not materially different from its carrying value.
16. ACQUISITIONS
On November 28, 1997, the Company acquired certain assets and liabilities of
Jomar, an Illinois based manufacturer of locomotive brake rigging and other
related components for consideration of $8.8 million. The acquisition has been
accounted for by the purchase method and, accordingly, the results of operations
of Jomar have been included in the Company's consolidated financial statements
from the date of acquisition. The $3.8 million excess of the purchase price over
the fair value of the net identifiable assets acquired has been recorded as
goodwill and is being amortized on a straight-line basis over 40 years.
On December 2, 1997, the Company acquired all the outstanding shares of
Microphor, a California based manufacturer of self-contained sanitation and
waste retention systems for the rail, marine, and commercial industries, for
consideration of $4.3 million. The acquisition has been accounted for by the
purchase method and, accordingly, the results of operations of Microphor have
been included in the Company's consolidated financial statements from the date
of acquisition. The $500,000 excess of the purchase price over the fair value of
the net tangible assets acquired has been recorded as a covenant not to compete
and is being amortized on a straight-line basis over 3 years.
Proforma results of operations have not been presented as the effects
of these acquisitions were not significant to the Company's fourth quarter 1997
and year-to-date consolidated financial statements.
<PAGE> 28
43 MotivePower Industries, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
17. EARNINGS PER SHARE
In 1997, the Company adopted the provisions of SFAS 128. The following table
reflects the earnings per share calculations for the three years ended December
31, 1997. Antidilutive securities for the three years ended December 31, 1997
were 50,000, 1,632,000 and 1,182,000, respectively.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
(In thousands, except per share and share data) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings (loss) per common share:
Net income (loss) $20,276 $11,509 $(40,414)
Weighted average common shares outstanding 17,668,768 17,562,793 17,255,953
Contingently issuable shares 25,000 -- --
- ----------------------------------------------------------------------------------------------------------------
Adjusted weighted average common shares outstanding 17,693,768 17,562,793 17,255,953
Earnings (loss) per common share 1.15 .66 (2.34)
Earnings (loss) per common share -- assuming dilution:
Net income (loss) $20,276 $11,509 $(40,414)
Adjusted weighted average common shares outstanding 17,693,768 17,562,793 17,255,953
Effect of dilutive securities:
Stock options and restricted stock 515,525 3,801 12,731
- ----------------------------------------------------------------------------------------------------------------
Adjusted weighted average common shares outstanding 18,209,293 17,566,494 17,268,684
Earnings (loss) per common share -- assuming dilution $ 1.11 $ .66 $ (2.34)
================================================================================================================
</TABLE>
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following information summarizes the Company's quarterly financial results.
<TABLE>
<CAPTION>
Quarter
----------------------------------------------------------------------------------
(In thousands,
except per share data) First Second Third Fourth Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Net sales $69,658 $73,813 $73,849 $88,610 $305,930
Unusual items -- -- -- -- --
Gross profit 15,825 19,315 17,499 19,703 72,342
Net income 3,477 5,409 5,377 6,013 20,276
Earnings per common share .20 .31 .30 .34 1.15
Earnings per common share --
assuming dilution .20 .30 .29 .32 1.11
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Net sales $69,655 $66,581 $69,046 $86,125 $291,407
Unusual items -- -- -- (2,126) (2,126)
Gross profit 13,786 12,885 12,716 17,460 56,847
Income before extraordinary
item 2,584 2,437 2,588 4,964 12,573
Extraordinary item -- -- -- (1,064) (1,064)
Net income 2,584 2,437 2,588 3,900 11,509
Earnings per common share before
extraordinary item .15 .14 .15 .28 .72
Earnings per common share .15 .14 .15 .22 .66
Earnings per common share --
assuming dilution .15 .14 .15 .22 .66
================================================================================================================
</TABLE>
