-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jl0ZlhXFPY26wnfOy8D9sGXbv3kvIttb+Z80W4aGA5IABMSJOZXzzfSXIYo4CH4g FpvwLccjFg6TyeOjuohYKg== 0000919563-96-000018.txt : 19961108 0000919563-96-000018.hdr.sgml : 19961108 ACCESSION NUMBER: 0000919563-96-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961107 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MK RAIL CORP CENTRAL INDEX KEY: 0000919563 STANDARD INDUSTRIAL CLASSIFICATION: RAILROAD EQUIPMENT [3743] IRS NUMBER: 820461010 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23802 FILM NUMBER: 96656044 BUSINESS ADDRESS: STREET 1: 1200 REEDSDALE ST CITY: PITTSBURGH STATE: PA ZIP: 15233 BUSINESS PHONE: 4122372250 MAIL ADDRESS: STREET 1: 1200 REEDSDALE STREET CITY: PITTSBURGH STATE: PA ZIP: 15233 10-Q 1 QUARTERLY REPORT ON FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ------------ Commission file number 0-23802 MK RAIL CORPORATION ------------------- (Exact name of registrant as specified in its charter) Delaware 82-0461010 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1200 Reedsdale Street, Pittsburgh, PA 15233 - ------------------------------------- ----- (Address of principal executive offices) (Zip Code) (412) 237-2250 -------------- (Registrant's telephone number, including area code) 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_____ 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 November 7, 1996 ----- ------------------------------- Common stock, $.01 par value 17,562,793 1 MK RAIL CORPORATION Quarterly Report on Form 10-Q for the Three and Nine Months Ended September 30, 1996 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements PAGE Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1995 and 1996 3 Consolidated Balance Sheets at December 31, 1995 and September 30, 1996 4 Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 1995 and 1996 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities 21 Item 3. Defaults upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 22 Signature 23 2 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MK RAIL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (Thousands of dollars except share data) (Unaudited) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 1995 1996 1995 1996 ---- ---- ---- ---- Sales ............................ $ 57,189 $ 69,046 $ 196,262 $ 205,282 Cost of sales .................... (46,242) (56,291) (165,641) (165,894) ------- ------- -------- -------- Gross profit ..................... 10,947 12,755 30,621 39,388 General and administrative expense (11,277) (8,278) (33,658) (24,106) Unusual items .................... (125) -- (2,974) -- ------- ------- -------- -------- Operating income (loss) .......... (455) 4,477 (6,011) 15,282 Interest income .................. 316 418 614 1,661 Interest expense ................. (2,633) (1,345) (6,427) (6,992) Other income ..................... -- 13 -- 1,461 Gain on sale of assets ........... -- 465 -- 465 Foreign exchange gain (loss) ..... (352) 118 (1,052) 172 ------- ------- -------- -------- Income (loss) before income taxes (3,124) 4,146 (12,876) 12,049 Income tax benefit (expense) ..... (88) (1,558) 1,775 (4,440) ------- ------- -------- -------- Net income (loss) ................ $ (3,212) $ 2,588 $ (11,101) $ 7,609 ========= ========= ========= ========= Weighted average shares outstanding 17,153,547 17,562,793 17,150,512 17,562,79 Earnings (loss) per share $ (.19) $ .15 $ (.65) $ .43 Dividends per share - - .04 -
The accompanying notes are an integral part of the financial statements. 3
MK RAIL CORPORATION CONSOLIDATED BALANCE SHEETS At December 31, 1995 and September 30, 1996 (Thousands of dollars except share data) (Unaudited) December 31, September 30, ASSETS 1995 1996 ------------ ------------ Current Assets: Cash and cash equivalents $ 5,696 $ 1,753 Receivables from customers: Billed, net of allowance for doubtful accounts of $531 and $416, respectively 29,684 34,055 Unbilled 3,922 1,362 Inventories 99,459 90,991 Deferred income taxes 1,082 1,063 Assets held for sale -- 369 Other current assets 2,903 4,088 ------------ ------------ Total current assets 142,746 133,681 Locomotive lease fleet, net 14,840 4,151 Property, plant and equipment: Land 1,193 1,193 Buildings and improvements 46,405 47,250 Machinery and equipment 37,160 39,807 ------------ ------------ Property, plant and equipment - cost 84,758 88,250 Less - Accumulated depreciation (38,011) (43,456) ------------ ------------ Property, plant and equipment - net 46,747 44,794 Underbillings 10,328 15,600 Deferred income taxes 27,530 18,347 Goodwill and other intangibles 27,789 25,377 Other 10,968 10,672 ------------ ------------ Total assets $ 280,948 $ 252,622 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 978 $ 3,461 Current portion of note payable to Morrison Knudsen 10,440 -- Accounts payable: Trade 18,509 20,281 Morrison Knudsen 2,348 -- Accrued expenses and other current liabilities 33,271 35,521 Income taxes payable 249 315 Revolving credit agreement 59,847 31,576 Advances from customers -- 11,864 ------------ ------------ Total current liabilities 125,642 103,018 Long-term debt 7,198 20,893 Note payable to Morrison Knudsen 41,655 -- Commitments and contingencies 9,299 8,910 Other 1,602 1,692 ------------ ------------ Total liabilities 185,396 134,513 ------------ ------------ Redeemable Preferred Stock, par value $.10 per share, authorized 10,000,000 shares, redemption price $100 per share; issued 10,000 shares Class A, at December 31, l995, issued 10,000 shares Class B at September 30, 1996 1,025 1,037 ------------ ------------ Stockholders' Equity: Common Stock, par value $.01 per share, authorized 55,000,000 shares; issued 17,562,793 shares 176 176 Additional paid-in capital 186,681 201,578 Deficit (87,107) (79,510) Cumulative translation adjustments, net of tax (5,105) (5,105) Deferred compensation (118) (67) ------------ ------------ Total stockholders' equity 94,527 117,072 ------------ ------------ Total liabilities and stockholders' equity $ 280,948 $ 252,622 ============ ============
The accompanying notes are an integral part of the financial statements. 4
MK RAIL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (Thousands of dollars) (Unaudited) ---------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ---------------------- 1995 1996 1995 1996 ---------- ---------- ---------- --------- Operating Activities Net income (loss) $ (3,212) $ 2,588 $ (11,101) $ 7,609 ---------- ---------- ---------- --------- Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation 2,109 2,084 6,457 5,369 Amortization 927 833 2,750 2,540 Gain on sale of assets -- (465) -- (465) Receivables from customers 6,639 1,721 8,765 (3,641) Inventories 1,472 1,884 (12,503) 6,575 Underbillings (3,478) (258) (6,373) (5,272) Accounts payable and accrued expenses (9,791) 4,153 (14,373) 4,899 Advances from customers -- (5,807) -- 11,864 Other, net (114) 595 (3,771) 3,803 ---------- ---------- ---------- --------- Net cash (used in) provided by operating activities (5,448) 7,328 (30,149) 33,281 ---------- ---------- ---------- --------- Investing Activities Additions to property, plant and equipment (2,224) (2,053) (6,747) (3,366) Proceeds from (additions to) locomotive lease fleet, net (4,454) 15 (5,363) 10,071 Proceeds from sale of assets -- 3,762 -- 3,762 Other, net 575 (357) 1,597 386 ---------- ---------- ---------- --------- Net cash (used in) provided by investing activities (6,103) 1,367 (10,513) 10,853 ---------- ---------- ---------- --------- Decrease (increase) in intangibles 212 (130) -- (350) Dividends paid -- -- (1,372) -- Payments of long-term debt (394) (301) (551) (352) Change in payable to Morrison Knudsen -- (35,634) 11,733 (35,634) Net borrowings (repayments) under credit agreements 9,240 25,308 19,105 (11,741) ---------- ---------- ---------- --------- Net cash (used in) provided by financing activities 9,058 (10,757) 28,915 (48,077) Effect of exchange rates on cash 941 -- 410 -- ---------- ---------- ---------- --------- Net decrease in cash and cash equivalents (1,552) (2,062) (11,337) (3,943) Cash and cash equivalents at beginning of period 2,674 3,815 12,459 5,696 ---------- ---------- ---------- --------- Cash and cash equivalents at end of period $ 1,122 $ 1,753 $ 1,122 $ 1,753 ========== ========= ========== ========= Supplemental Disclosures of Cash Flow Information Interest paid $ 2,170 $ 716 $ 4,110 $ 989 Income taxes paid, net 31 121 204 182 Reduction of payable to Morrison Knudsen: Payable to Morrison Knudsen -- 18,800 29,500 18,800 Paid-in capital -- (14,900) (18,600) (14,900) Deferred taxes (3,900) (10,900) (3,900) Issuance of equity securities to settle obligation: Preferred stock -- -- (1,000) -- Common Stock -- -- (5) -- Paid-in capital -- -- (2,995) -- Commitments and contingencies -- -- 4,000 --
The accompanying notes are an integral part of thefinancial statements. 5 MK RAIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Basis of Presentation The accompanying consolidated financial statements include the accounts of MK Rail Corporation (the "Company") and its majority-owned subsidiaries. The Company was formed in April 1993 as a wholly-owned subsidiary of Morrison Knudsen Corporation ("Morrison Knudsen"). The Company acquired certain assets of the Rail Systems Group of Morrison Knudsen, including the Locomotive Division, which have been included in the financial statements for all periods presented on a pooling-of-interests basis. On April 26, 1994, the Company commenced an initial public offering ("IPO") of 6,000,000 shares of its common stock at an offering price of $16 a share which decreased Morrison Knudsen's interest in the Company to 65%. Such interest was reduced to 63% as a result of a litigation settlement. Effective as of September 11, 1996 as part of its bankruptcy plan, Morrison Knudsen distributed its 63% ownership in the Company to its creditors and certain of its current stockholders. As such, Morrison Knudsen is no longer a stockholder in the Company. The Company designs, manufactures and distributes engineered locomotive component parts; provides locomotive fleet maintenance; and overhauls, remanufactures and manufactures locomotives. The Company recognizes revenues on locomotive 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 periodically, 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. Revenues recognized on long-term maintenance contracts are based upon a percentage of the expected gross margin. Under the terms of the maintenance contracts, significant costs are incurred in the early years (for locomotive overhauls and fleet normalization), while payments from the customers remain relatively constant throughout the life of the contract. By using a percentage of the expected gross margin to recognize revenues under the maintenance contracts, appropriate consideration is given to the risks associated with the contracts. Costs and estimated earnings in excess of billings ("Underbillings") on contracts in progress are recorded on the consolidated balance sheet and are classified as current or non-current based upon the expected timing of their realization or liquidation. Remanufactured 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 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 of $4.4 million and $6.3 million at December 31, 1995 and September 30, 1996, respectively, are included in accrued expenses and other current liabilities in the consolidated balance sheets. In March 1995, Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" ("SFAS 121") was issued. SFAS 121 is effective for fiscal years beginning after December 15, 1995. The Company adopted SFAS 121 as of January 1, 1996. The adoption of SFAS 121 had no impact on the financial condition of the Company. 6 In October 1995, Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") was issued. SFAS 123 is effective for transactions entered into in fiscal years that begin after December 15, 1995. The Company adopted SFAS 123 as of January 1, 1996. As permitted by SFAS 123 the Company will continue to apply APB Opinion 25 and related Interpretations in accounting for its plans. 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. The interim consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain financial information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 1995 included on Form 10-K. The unaudited consolidated financial statements included herein reflect all adjustments consisting of normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations and cash flows for the interim period. The results of operations for the nine months ended September 30, 1996 are not necessarily indicative of the results to be expected for the full year. The consolidated statements of operations have been re-formatted to include a gross profit caption. In addition, general and administrative expense now reflects total costs of corporate, sudsidiaries and divisions. In previous reporting, general and administrative expense represented only corporate expenses, with subsidiary and division general and administrative expenses included in cost of sales. All periods shown reflect this re-formatting change. The interim consolidated financial statements for the nine months ended September 30, 1995 have been restated for certain accounting adjustments. 2. Divestitures Power Parts Sign Company On October 25, 1996, the Company sold substantially all of the assets of the Company's Power Parts Sign Company subsidiary to RI-DEL MFG. INC. ("RI-DEL") for $1.3 million subject to certain post-closing adjustments and the assumption by RI-DEL of certain trade payables of Power Parts Sign Company. The assets of Power Parts Sign Company, net of applicable liabilities, have been reclassified as assets held for sale in the consolidated balance sheet at September 30, 1996. Alert Manufacturing and Supply Co. On July 26, 1996, the Company sold substantially all of the assets of the Company's Alert Manufacturing and Supply Co. ("Alert") to All-State Industrial Rubber Co., Inc. ("All-State") for a purchase price of $3.9 million after closing adjustments and subject to certain post-closing adjustments, and the assumption by All-State of trade payables of Alert in an amount not to exceed $750,000. 7 Morrison Knudsen of Australia Limited On July 6, 1995, the Company completed the sale of Morrison Knudsen Corporation of Australia Limited ("MKA"), its Australian operations. Under the terms of the agreement with Morrison Knudsen dated September 15, 1995, the Company (i) transferred to MKA certain locomotive assets, (ii) assigned all of the common stock of MKA to Morrison Knudsen, (iii) discharged all of MKA's indebtedness to the Company and (iv) granted to MKA an exclusive three-year distributorship for the Company's products in Australia, New Zealand and Malaysia, subject to the satisfaction of certain volume requirements. In consideration, the Company received a nominal cash payment and $3 million in liquidation value of MKA's redeemable preferred stock bearing a 9% cumulative dividend. Due to the business uncertainties associated with MKA, the Company has valued this stock at zero. 3. Inventories Inventories consist of the following: (Unaudited) December 31, September 30, 1995 1996 ---- ---- (In thousands) Raw materials $74,251 $58,933 Work in progress 14,279 19,826 Finished goods 10,929 12,232 ------ ------ $99,459 $90,991 ======= ======= Approximately $37.4 million and $36.9 million of total inventories at December 31, 1995 and September 30, 1996, respectively, were valued on the LIFO cost method. The excess current replacement cost of these inventories over the stated LIFO value was $3.6 million and $3.8 million at December 31, l995 and September 30, 1996, respectively. Two of the Company's domestic subsidiaries value inventory on the LIFO basis. 4. Indebtedness On September 30, 1994, the Company and several of its domestic subsidiaries entered into a $50 million Revolving Credit and Letter of Credit Facility and Receivables Purchase Agreement (the "Facility") with a domestic bank. Amounts due under the Facility were repaid and the Facility was terminated on August 31, 1995. On August 31, 1995, the Company and its domestic subsidiaries entered into a $75 million Loan and Security Agreement with BankAmerica Business Credit ("BABC"). On September 10, 1996, the Company and its domestic subsidiaries entered into the Amended and Restated Loan and Security Agreement (the "Loan Agreement") with BABC. Under the Loan Agreement, the Company has available $67 million in revolving loans and has entered into an $8 million term loan. Principal outstanding under the revolving loan is due August 31, 1999. Principal outstanding under the term loan is payable in 35 monthly installments of $133,333 commencing October 1, 1996, with the remaining balance due August 31, 1999. In addition to the monthly installments under the term loan, the Company may be required to make additional payments based on 50% of the Company's excess cash flow, as defined in the Loan Agreement, or out of the proceeds from the sale of certain assets. Outstanding borrowings are subject to interest, payable monthly, at the bank's Base Rate (8.25% at September 30, 1996), as defined in the Loan 8 Agreement, plus a Base Rate Margin of 1.5%. Upon meeting certain financial ratios as defined in the Loan Agreement, the Company may elect to lower its Base Rate Margin or convert outstanding borrowings, in amounts not less than $5 million, and in increments of $1 million in excess thereof, into LIBOR Rate Loans. The LIBOR Rate Loans bear interest at LIBOR plus a LIBOR Margin of 3.0% with interest due in periods ranging from one to six months. The LIBOR Margin can be adjusted downward based on the Company meeting certain financial ratios. The Company pays a monthly fee of .25% per annum on the unused portion of the loan amount. Available advances under the Loan Agreement are based on the amount of eligible accounts receivable, inventory and certain other assets. Borrowings under the facility are secured by substantially all of the domestic inventory, accounts receivable, property, plant and equipment, and certain other assets of the Company and its domestic subsidiaries. Interest is not paid in cash but added to the balance outstanding. The balance outstanding, including the term loan, at December 31, 1995 and September 30, 1996 was $59.8 million and $39.6 million, respectively. In November 1995, the Financial Accounting Standards Board Emerging Issues Task Force reached a consensus on issue number 95-22 "Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include both a Subjective Acceleration Clause and a Lock-Box Arrangement" ("EITF 95-22"). In accordance with EITF 95-22 the Company has classified the balance of the revolving loans due under the Loan Agreement as current. At December 31, 1995 and September 30, 1996, the Company had $3.1 million and $16.4 million, respectively, of unused borrowing capacity under the Loan Agreement. The Loan Agreement provides for a maximum of $10 million of letters of credit, of which approximately $3.4 million and $4.2 million was outstanding at December 31, 1995 and September 30, 1996, respectively. The Company pays a monthly fee of 1.5% per annum on the undrawn amount of outstanding letters of credit. The loan agreement provides certain restrictive covenants, including attaining a minimum consolidated tangible net worth, fixed charge coverage, limitations on capital expenditures, restrictions on the payment of dividends and other financial covenants. On July 6, 1995, the Company's Mexican subsidiary, MK Gain S.A. de C.V. ("MK Gain"), entered into a $30 million Loan Agreement (the "Agreement") with Bancomer, S.A. ("Bancomer"), a Mexican bank. Under this 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. Each advance under the Agreement is subject to interest at the Funding Rate (5.6875% to 6.375% at September 30, 1996), as defined in the Agreement plus 2.5%. 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 an Exposure Fee equal to 4.14% of each advance under the Agreement. Advances under the Agreement are being drawn over a period of up to 36 months as documents evidencing MK Gain's receipt of U.S. exports are presented to the satisfaction of Bancomer, CIBC and Eximbank. 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. Additionally, MK Gain may be required to pay a semi-annual Success Fee equal to 5.56% of Net After-Tax Cash Flow, as defined in the Agreement (no Success Fee was due or had been paid as of September 30, 1996). The Agreement provides for a prepayment penalty under certain circumstances. The balance outstanding at December 31, 1995 and September 30, 1996 was $6 million and $14.5 million, respectively. Maturities under the Agreement are as follows: 1996 - $1,453,000; 1997 to 2000 -$2,906,000; 2001 - $1,453,000. 9 The Agreement contains certain covenants, including a requirement that MK Gain maintain specified cash flow-to-debt service and debt-to-equity ratios. Additionally, the repayment of $13.7 million of amounts due to the Company from MK Gain is restricted by a subordination agreement. If MK Gain maintains specified operating and financial ratios, the subordination agreement permits payments of interest and principal on the intercompany debt concurrently with payments to Bancomer under the Agreement. In connection with the Agreement, MK Gain entered into an Irrevocable Investment, Administration and Payment Trust Agreement ("Trust Agreement") with a Mexican multiple banking institution ("Trustee"). Pursuant to the Trust Agreement, all moneys received from the Mexican National Railway contract are to be deposited into the Trust. The Trustee is required to maintain a Reserve Fund within the Trust with an average balance equal to the greater of 10% of the outstanding loan balance under the Agreement, or the aggregate of all amounts of principal and interest due and payable within 150 days following the date on which the balance of the Reserve Fund is determined, multiplied by 1.5. On a monthly basis, funds held in the Trust will be disbursed by the Trustee to pay required debt service, taxes and any fees or expenses due to the Trustee or other third parties. Once required payments have been made, any remaining amounts in excess of the Reserve Fund requirements are returned to MK Gain. 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, 1995 and September 30, 1996. At December 31, 1995 and September 30, 1996, a domestic subsidiary of the Company had debt obligations in the amount of $2.2 million and $1.8 million, respectively. These obligations consist primarily of Industrial Revenue Bonds ("IRB") for the construction of manufacturing buildings and acquisition of equipment in the amount of $1.6 million in 1995 and $1.9 million in 1994, and bear interest at rates ranging from 4.5% to 10%. Maturities under these obligations are as follows: 1996 - $26,500; 1997 - $410,800; 1998 - $443,800; 1999 - $477,400; 2000 - $470,500. Total maturities under long-term obligations are as follows: 1996 - $1,879,500; 1997 - $4,916,800; 1998 - $4,949,800; 1999 - $7,783,400; 2000 - $3,376,500; 2001 - $1,453,000. 5. Related Party Transactions As of December 31, 1995 and September 30, 1996, the Company's indebtedness to Morrison Knudsen was $54.4 million and zero, respectively. On June 15, 1995, the Company and Morrison Knudsen entered into an agreement under which the Company's amount of indebtedness was reduced by $29.5 million (from $81.7 million as of May 31, 1995 to $52.2 million). The $52.2 million original balance of the indebtedness was evidenced by an unsecured promissory note, due May 31, 2000, bearing interest at the prime rate. 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 $57.3 million. This repurchase was effected pursuant to a Note Cancellation and Restructuring Agreement dated June 20, 1996 by and among the Company and Morrison Knudsen, as amended as of July 25, 1996 (the "Note Cancellation Agreement"). The effect of this transaction was an increase to Paid in Capital of $14.9 million, a decrease in the Deferred Tax asset of $3.9 million and a reduction in amounts due to Morrison Knudsen of $57.3 million. 10 The Company leases facilities from certain former directors and officers of the Company. Lease payments, including utilities, totaled $705,000 and $825,000 for the nine months ended September 30, 1995 and 1996, respectively. The Company incurred $2.8 million and $1.6 million of legal fees and expenses for the nine months ended September 30, 1995 and 1996, respectively, from a firm in which an officer of the Company is a shareholder. This individual ceased to be an officer of the Company on October 1, 1996. 6. Redeemable Preferred Stock In October 1994, the Company and certain of its current and former officers and directors, the managing underwriters for the Company's April 1994 initial public offering of common stock, Morrison Knudsen and certain of its current and former officers and directors were named as defendants in two complaints (the "Class Action Suits") filed in the United States District Court for the District of Idaho, which suits were settled in March 1996. The approved settlement agreements for the Class Action Suits provided for, inter alia, the Company, at its election, to either contribute $1 million in cash to the plaintiffs or issue $1 million in redemption value of a new Class A Preferred Stock. In September 1995, pending its decision as to this election and court approval of the settlement terms of the Class Action Suits, the Company deposited 10,000 shares of Class A Preferred Stock into a joint settlement account. Under certain circumstances, the Company was permitted to substitute a like number of shares of a new Class B Preferred Stock (having rights and preferences identical to those of the Class A Preferred Stock) for the Class A Preferred Stock. Effective as of May 15, 1996, the Company elected to contribute $1 million in cash to the plaintiffs. To effectuate this election, as previously contemplated, the Company issued 10,000 shares of Class B Preferred Stock to The Fidelity & Casualty Company of New York in consideration of $1 million, which was in turn paid to the plaintiffs to satisfy the Company's obligations to settle the Class Action Suits, and all of the previously issued shares of Class A Preferred Stock were simultaneously canceled. The Class B Preferred Stock earns dividends at the rate per annum of $10 per share. Dividends accrue from the date of issuance whether or not declared, and are cumulative. The Board has no obligation to declare dividends on the Class B Preferred Stock. The Class B Preferred Stock has a liquidation value of $100 per share plus all dividends accrued and unpaid (whether or not declared). The Class B Preferred Stock is subject to redemption at the Company's option at any time and must be redeemed on the earliest of September 1, 1999, the occurrence of certain specified extraordinary transactions involving the Company or its capital stock, or 18 months after the occurrence of certain other specified extraordinary transactions. In any case, the redemption price is equal to $100 per share plus all dividends accrued and unpaid on each share (whether or not declared) through the redemption date. Except as otherwise provided by law, the holders of the Class B Preferred Stock have no voting rights. As a result of the issuance of the Class B Preferred Stock, the Board cannot declare or pay dividends in respect of the Company's Common Stock if any deficiency exists in the payment of cumulated dividends (whether or not declared) in respect of the Class B Preferred Stock. In October 1996, the Company announced its intention to retire the $1 million of Class B Preferred Stock, including accumulated dividends. The retirement will be funded primarily out of the proceeds from the sale of the Company's Power Parts Sign Company subsidiary. 7. 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. 11 Environmental: The Company is subject to a RCRA Part B Post Closure Permit (the "Permit") issued by the Environmental Protection Agency and the Idaho Department of Health and Welfare, Division of Environmental Quality relating to the monitoring and treatment of groundwater contamination on, and adjacent to, the Company's Boise Locomotive facility. In compliance with the Permit, the Company has drilled wells onsite to retrieve and treat contaminated groundwater, and onsite and offsite to monitor the amount of hazardous constituents. The Company has estimated the expected aggregate undiscounted costs to be incurred over the next 25 years, adjusted for inflation at 3% per annum, to be $5.1 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 September 30, 1996, using a discount rate of 6.5%, was $2.1 million based on the Permit's Corrective Action Plan, and $1.9 million for contingent additional Permit compliance requirements related to off-site groundwater contamination. The estimated outlays for each of the five succeeding years from 1996 to 2000 are: $245,000, $253,000, $260,000, $268,000 and $317,000. The Company was in compliance with the Permit at December 31, 1995 and September 30, 1996. 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") 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 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 assert that the Company, which was not formed by Morrison Knudsen until 1993, is fully responsible for the acts of Morrison Knudsen as a transferee of its assets and as the successor in interest of Morrison Knudsen's locomotive business, including the business previously conducted by TMS. Moreover, plaintiffs claim that the Company is fully responsible for the acts of Morrison Knudsen under the "instrumentality rule," and that the Company aided and abetted Morrison Knudsen in its actions set forth in the complaint. However, the actions complained of occurred before the Company was formed. Furthermore, the Company did not assume such liabilities of Morrison Knudsen pursuant to any agreement between the Company and Morrison Knudsen. A motion to dismiss was filed in April 1996 on behalf of all defendants to the Pilarczyk Lawsuit. Counsel to the Company has advised that such counsel believes the causes of action in the Pilarczyk Lawsuit relating to the Company are without merit and the Company expects that it will be successful on this motion, even if the suit is not dismissed as to all defendants. If the Company is successful, the Company intends to make appropriate requests to the court to seek to require the plaintiff to pay the Company's legal fees and costs. In June 1995, the Company was named as defendant in a complaint filed with the Idaho Human Rights Commission (the "Idaho Commission") and the Equal Employment Opportunity Commission by a female employee on behalf of herself and other women employed by the Company alleging discrimination based on sex in violation of Title VII of the Civil Rights Act of 1964, Title 57 of Chapter 59 of the Idaho Code and the Federal Equal Pay Act. The complaint asserts that the Company failed to pay women equally with males holding similar and comparable positions and that the Company failed to promote women equally with males who have equal or less qualifications. In December 1995, the plaintiff amended the complaint to include allegations of retaliatory discharge. In June 1996, the Idaho Commission announced that it had found no probable cause to believe that discrimination had occurred as alleged in the original complaint. The Idaho Commission continues to investigate the plaintiff's allegations of retaliatory discharge as alleged in the amended complaint. Management of the Company believes that the claims in the original and amended complaints are without merit and plans to vigorously defend its position. 12 On April 16, 1996, the Company filed suit in the United States District Court for the Central District of California, Western Division, against Samyoung (America), Inc. and Samyoung Machinery Industrial Co. (collectively, "Samyoung") alleging, inter alia, that Samyoung had delivered to the Company defective diesel engine assembly liners in breach of a contract between the Company and Samyoung. The Company claims to have suffered damages in excess of $1 million as a result of the alleged breach. Samyoung has denied that the liners were defective and has filed a counterclaim against the Company seeking recovery of $300,000 alleged to be due under the contract, plus interest, fees and costs, and damages in excess of $10 million for trade libel and interference with prospective economic relationships as a result of the Company allegedly making false disparaging statements concerning the liners to rail customers and others. The Company believes that Samyoung's claims are without merit. The Company intends to vigorously prosecute its own claims and defend against Samyoung's counterclaims. In October 1996, the Company received a subpoena to produce documents related to the investigation of the Securities and Exchange Commission (the "Commission") pursuant to an order captioned "In the Matter of Morrison Knudsen Corporation". The documents requested relate principally to activities of the Company during the period in which it was owned or controlled by Morrison Knudsen, including prior to the public offering of the Company's securities in April 1994, and meetings of the Company's Board and committees of the Board through June 1995. The Company intends to cooperate fully with the Commission in its investigation of Morrison Knudsen. In the ordinary course of its business, the Company is involved in litigation relating to its operations and products, which may include allegations as to safety and design, and labor and employment matters. Management of the Company believes that the outcome of lawsuits of this type currently pending will not have a material adverse effect on the consolidated operations or financial condition of the Company. 8. Stock Option Plans The Company has established two stock option plans. In the MK Rail Corporation Stock Incentive Plan (the "Incentive Plan"), a maximum of 1.5 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 affiliates are eligible to receive awards. The exercise price, term and other conditions applicable to each award are determined by the Compensation Committee at the time of the grant of each award and may vary with each award granted. Awards, which are made at not less than current market prices at date of grant, 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. In the MK Rail Corporation Stock Option Plan for Non-Employee Directors (the "Non-Employee Directors Plan") a maximum of 100,000 shares may be granted. The price per share of the options shall be equal to 50% of the fair market value of the stock on the grant date. 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. Details of stock options are as follows:
Non- Employee Incentive Option Price Directors Plan Range per Options Options Share ------- ------- ----- Low High --- ---- December 31, 1995, outstanding 36,000 1,235,000 $ 4.44 $ 16.00 Granted 12,000 372,500 $ 0.00 $ 3.81 Canceled (12,000) (337,500) $ 4.44 $ 16.00 ------- -------- -------- --------- September 30, 1996, outstanding 36,000 1,270,000 $ 0.00 $ 16.00 ======= ========= ======== =========
The Company applies APB Opinion 25 and related Interpretations in accounting for its plans. The compensation cost that has been charged against income for those plans was $432,100 and $44,700 for the nine-month periods ended September 30, 1996 and 1995, respectively. Compensation cost for the Company's plans based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123 is immaterial. At the October 30,1996 Annual Meeting of Stockholders, the Incentive Plan was ammended to increase the maximum number of shares which may be issued by 1 million shares. The Non-Employee Directors Plan was amended to increase the maximum number of shares which may be issued by 50,000 shares. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL The Company designs, manufactures and distributes engineered locomotive component parts; provides locomotive fleet maintenance; and overhauls, remanufactures and manufactures locomotives. The Company operates principally through two business units, the Components Group and the Locomotive Group. In 1996, the Company initiated a restructuring plan designed to return the Company to profitability by cutting costs and reducing debt, in part by selling non-essential assets. Accordingly, through the first nine months of 1996 the Company has reduced its general and administrative expenses by approximately 28% and reduced corporate debt by 53%, primarily through the sale of non-core assets, the repurchase of debt at a discount, and by generating cash from operations. The Company has recorded net income of $7.6 million, or 43 cents per share, through the first nine months of the year. Although the Company's restructuring plan has been successful to date, there can be no assurance that the Company's future results will be similar to its results in the first nine months of the year. The following factors could have a negative impact on the Company's results of operations: a decrease in rail traffic, a reduction in railroads' capital and maintenance spending plans for their locomotive fleets, increased competition in the locomotive or locomotive components segments, the currency fluctuations in Mexico, technological developments that render existing industry technology obsolete, the privatization of the Mexican National Railways, consolidation in the U.S. Railroad industry, the Company's inability to maintain profit margins on existing contracts, adverse general economic conditions, or changes in laws or regulations affecting the industry. RESULTS OF OPERATIONS Consolidated Operations Net sales increased 21% to $69 million in the third quarter of 1996 from $57.2 million in the third quarter of 1995. The increase is primarily due to a 63% increase in sales in the Locomotive Group as a result of the sale of switcher locomotives under contract. Net sales increased 5% to $205.3 million in the first nine months of 1996 from $196.3 million in the first nine months of 1995. The increase is attributed to the increased sales in the Locomotive Group resulting from the sale of switcher locomotives, partially offset by the completion of a large remanufacturing contract in the Locomotive Group in the first quarter of 1995. Cost of sales as a percentage of sales was 81.5% for the third quarter of 1996 compared to 80.9% for the third quarter of 1995, resulting in gross profit margins of 18.5% and 19.1%, respectively. The decrease in gross profit margin is primarily attributed to the sale of non-core assets and the write down of slow-moving inventory at one of the Company's subsidiaries. Cost of sales as a percentage of sales was 80.8% for the first nine months of 1996 compared to 84.4% for the first nine months of 1995, resulting in gross profit margins of 19.2% and 15.6%, respectively. The increase in gross profit margin is primarily the result of the disposition of the Company's Australian operations, which had a $4.5 million loss in the first nine months of 1995, and improved operating results at the Boise Locomotive facility and in the Components Group through cost reductions in accordance with the Company's restructuring plan. General and administrative expenses for the third quarter of 1996 decreased 27% to $8.3 million from $11.3 million in the third quarter of 1995. General and administrative expenses for the first nine months of 1996 decreased 28% to $24.1 million from $33.7 million in the first nine months of 1995. 14 The decreases are primarily attributed to costs reductions realized as a result of the Company's restructuring plan and to the elimination of $3.2 million of costs incurred in the first nine months of 1995 associated with the decision of Morrison Knudsen to sell its ownership in the Company. Interest income for the third quarter of 1996 increased $102,000 to $418,000 compared to the third quarter of 1995. Interest income for the first nine months of 1996 increased $1 million to $1.7 million compared to the first nine months of 1995. These increases are primarily the result of interest received on funds invested at MK Gain. Interest expense for the third quarter of 1996 decreased $1.3 million to $1.3 million compared to the third quarter of 1995. This decrease is attributed to the buy back of the note payable to Morrison Knudsen which occurred during the quarter. Interest expense for the first nine months of 1996 increased $565,000 to $7 million compared to the first nine months of 1995. This increase is the result of increased borrowings under financing established for MK Gain, certain project financing at the Boise Locomotive facility, and increased interest expense on the Morrison Knudsen note payable through the date of repurchase. Other income totaling $1.5 million for the first nine months of 1996 is the result of funds received through the Company's previously restructured investments in Argentina. The gain on the sale of assets is the result of net sale proceeds in excess of net assets sold associated with the sale of Alert. A foreign exchange gain of $118,000 was realized in the third quarter of 1996 compared to a foreign exchange loss of $352,000 in the third quarter of 1995. A foreign exchange gain of $172,000 was realized in the first nine months of 1996 compared to a foreign exchange loss of $1.1 million in the first nine months of 1995. The changes are a direct result of fluctuations in the valuation of the Mexican peso. Income tax expense for the third quarter of 1996 was $1.6 million compared to income tax expense of $88,000 in the third quarter of 1995. Income tax expense for the first nine months of 1996 was $4.4 million compared to an income tax benefit of $1.8 million in the first nine months of 1995. The changes are a direct result of the increase in pre-tax income. Components Group For the three months ended September 30, 1996, the Components Group's gross sales decreased by 2% to $36 million and operating income decreased 5% to $3.4 million compared to the three months ended September 30, 1995. The decrease in sales is primarily attributed to the sale of Alert, which contributed $533,000 in sales in the third quarter of 1996 compared to $2.7 million in sales in the third quarter of 1995. The decrease in operating income is primarily attributed to $513,000 incurred to write down slow-moving inventory at Motor Coils. For the nine months ended September 30, 1996, the Components Group gross sales decreased 3% to $120.5 million and operating income increased 16% to $14.7 million compared to the nine months ended September 30, 1995. The decrease in sales is primarily attributed to the sale of Alert which contributed $5.7 million in sales in the first nine months of 1996 compared to $8.5 million in sales in the first nine months of 1995. The increase in operating income is primarily the result of the continued decrease in general and administrative expenses through the Company's restructuring plan. 15 Locomotive Group For the three months ended September 30, 1996, the Locomotive Group's gross sales increased 63% to $41.4 million and operating income increased 1,078% from a loss of $365,000 to income of $3.6 million when compared to the three months ended September 30, 1995. For the nine months ended September 30, 1996 the Locomotive Group's gross sales increased 12% to $104.1 million and operating income increased 234% from a loss of $6.3 million to income of $8.4 million compared to the nine months ended September 30, 1995. The increases in gross sales during both periods are attributed to increased locomotive overhauls and the sale of switcher locomotives. The increase in operating income during both periods is attributed to improvements in gross profit margins at the Boise Locomotive facility resulting from the increased sales volume, and cost reductions realized through the Company's restructuring plan. In addition, the Company's Australian operations, which were disposed of in July 1995, had sales of $1.8 million and an operating loss of $4.5 million in the first nine months of 1995. FINANCIAL CONDITION AND LIQUIDITY As part of its restructuring plan, the Company took actions to improve its liquidity and further reduce debt, including the reduction of overhead expense, the sale of non-essential assets and the closing and planned sale of its Mountaintop, Pa., locomotive facility. In addition, the Company has improved its operating results. The Company's management believes that its financing is adequate to support its normal operations and capital spending requirements. The following table summarizes the net changes in cash flows: Nine Months Ended September 30, ------------- 1995 1996 -------- -------- (In thousands) Net cash provided by (used in): Operating activities $(30,149) $ 33,281 Investing activities (10,513) 10,853 Financing activities 28,915 (48,077) Effect of exchange rates on cash 410 -- -------- -------- Net decrease in cash and cash equivalents $(11,337) $ (3,943) -------- -------- Cash and cash equivalents at end of period $ 1,122 $ 1,753 ======== ======== Net cash provided by operating activities totaled $33.3 million for the first nine months of 1996 compared to net cash used in operations of $30.1 million for the first nine months of 1995. The net cash provided by operations was primarily the result of the Company's net income of $7.6 million, an increase in accounts receivable of $3.6 million, an increase in underbillings of $5.3 million, advances from customers of $11.9 million, a decrease in inventories of $6.6 million and an increase in accounts payable and accrued expenses of $4.9 million. The Company had depreciation and amortization expense of $7.9 million during the first nine months of 1996. Net cash provided by investing activities totaled $10.9 million for the first nine months of 1996 compared to net cash used in investing activities of $10.5 million for the first nine months of 1995. The net cash provided by investing activities is principally the result of the sale of the locomotive lease fleet. Net cash used in financing activities totaled $48.1 million for the first nine months of 1996 compared to net cash provided by financing activities of $28.9 million for the first nine months of 1995. 16 In the first nine months of 1996, the Company had net repayments of credit agreements and amounts due Morrison Knudsen of $47.7 million as a result of proceeds received from the sale of non-core assets, advances received from project financing, cash transfers from MK Gain and the improved operating performance of the Company. 17 PART II. OTHER INFORMATION ITEM 1. 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") 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 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 assert that the Company, which was not formed by Morrison Knudsen until 1993, is fully responsible for the acts of Morrison Knudsen as a transferee of its assets and as the successor in interest of Morrison Knudsen's locomotive business, including the business previously conducted by TMS. Moreover, plaintiffs claim that the Company is fully responsible for the acts of Morrison Knudsen under the "instrumentality rule," and that the Company aided and abetted Morrison Knudsen in its actions set forth in the complaint. However, the actions complained of occurred before the Company was formed. Furthermore, the Company did not assume such liabilities of Morrison Knudsen pursuant to any agreement between the Company and Morrison Knudsen. A motion to dismiss was filed in April 1996 on behalf of all defendants to the Pilarczyk Lawsuit. Counsel to the Company has advised that such counsel believes the causes of action in the Pilarczyk Lawsuit relating to the Company are without merit and the Company expects that it will be successful on this motion, even if the suit is not dismissed as to all defendants. If the Company is successful, the Company intends to make appropriate requests to the court to seek to require the plaintiff to pay the Company's legal fees and costs. In June 1995, the Company was named as defendant in a complaint filed with the Idaho Human Rights Commission (the "Idaho Commission") and the Equal Employment Opportunity Commission by a female employee on behalf of herself and other women employed by the Company alleging discrimination based on sex in violation of Title VII of the Civil Rights Act of 1964, Title 57 of Chapter 59 of the Idaho Code and the Federal Equal Pay Act. The complaint asserts that the Company failed to pay women equally with males holding similar and comparable positions and that the Company failed to promote women equally with males who have equal or less qualifications. In December 1995, the plaintiff amended the complaint to include allegations of retaliatory discharge. In June 1996, the Idaho Commission announced that it had found no probable cause to believe that discrimination had occurred as alleged in the original complaint. The Idaho Commission continues to investigate the plaintiff's allegations of retaliatory discharge as alleged in the amended complaint. Management of the Company believes that the claims in the original and amended complaints are without merit and plans to vigorously defend its position. On April 16, 1996, the Company filed suit in the United States District Court for the Central District of California, Western Division, against Samyoung (America), Inc. and Samyoung Machinery Industrial Co. (collectively, "Samyoung") alleging, inter alia, that Samyoung had delivered to the Company defective diesel engine assembly liners in breach of a contract between the Company and Samyoung. The Company claims to have suffered damages in excess of $1 million as a result of the alleged breach. Samyoung has denied that the liners were defective and has filed a counterclaim against the Company seeking recovery of $300,000 alleged to be due under the contract, plus interest, fees and costs, and damages in excess of $10 million for trade libel and interference with prospective economic relationships as a result of the Company allegedly making false disparaging statements concerning the liners to rail customers and others. The Company believes that Samyoung's claims are without merit. The 18 Company intends to vigorously prosecute its own claims and defend against Samyoung's counterclaims. In October 1996, the Company received a subpoena to produce documents related to the investigation of the Securities and Exchange Commission (the "Commission") pursuant to an order captioned "In the Matter of Morrison Knudsen Corporation." The documents requested relate principally to activities of the Company during the period in which it was owned or controlled by Morrison Knudsen, including prior to the public offering of the Company's securities in April 1994, and meetings of the Company's Board and committees of the Board through June 1995. The Company intends to cooperate fully with the Commission in its investigation of Morrison Knudsen. In the ordinary course of its business, the Company is involved in litigation relating to its operations and products, which may include allegations as to safety and design, and labor and employment matters. Management of the Company believes that the outcome of lawsuits of this type currently pending will not have a material adverse effect on the consolidated operations or financial condition of the Company. . 19 ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits: 10.1 Asset Purchase Agreement dated October 15, 1996 among Power Parts Sign Company and RI-DEL MFG. INC. Reports on Form 8-K During the quarter ended September 30, 1996, the Company filed with the Commission a Current Report on Form 8-K dated July 3, 1996 which described the Note Cancellation Agreement, the Stockholders Agreement, the Second Amendment to the Rights Plan and the Sale of Alert Manufacturing. On September 10, 1996 the Company filed with the Commission a Current Report on Form 8-K which described the Note Cancellation Agreement , the Stockholders Agreement, the resignation of a director of the Company, the Amendment of the Loan Agreement and the record date for the annual meeting of Stockholders. No financial statements were required to be included in such Current Reports on Form 8-K. 21 SIGNATURE Pursuant to the requirements 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. MK RAIL CORPORATION By:________________________ William D. Grab Vice President, Controller and Principal Accounting Officer Date: November 7, 1996 22 EX-10.4 2 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT THIS AGREEMENT is effective as of October 15, 1996 among Power Parts Sign Company, a wholly owned Subsidiary of M. K. Rail Corporation ("Seller"), and RI-DEL MFG. INC.(Buyer). WITNESSETH: WHEREAS, Seller is engaged in the business of distributing and selling signs, decals and specialty cans to the railroad, and other products under the trade name and style Power Parts Sign Company (the "Business"); WHEREAS, Seller desires to sell to Buyer substantially all the assets of the Business, as more particularly described below, and Buyer desires to purchase such assets, all upon the terms and subject to the conditions of this Agreement. NOW THEREFORE, the parties agree as follows: Section 1. Sale and Purchase of Assets. Seller will sell and transfer or cause to be sold and transfer to Buyer, and Buyer will purchase, free and clear of any and all liabilities, security interests, liens, pledges, encumbrances, liabilities, claims, equities and conditions of any nature and kind whatsoever (other than the liabilities explicitly assumed by Buyer as provided in Section 2 of this Agreement), the following assets relating to the Business (the "Assets"): (a) All Good Accounts Receivable (hereinafter defined) outstanding at the time of Closing (hereinafter defined) as described in Exhibit "B"; (b) all Good Inventory (hereinafter defined) as described in schedule "B"; (c) All rights, title and interest of Seller in any contracts, purchase orders, and agreements described on Exhibit A which are being assigned to Buyer (the "Contracts"); (d) all of the miscellaneous equipment, fixtures, computers, software and furniture described on the schedule of assets attached as Exhibit B hereto; (e) all customer, sales, and credit records relating to the Business; (f) the Non-Competition Agreement of Seller relating to the Business; (g) the common law rights to the trade names "Power Parts Sign Company" and any trademarks or intellectual property rights relating to the Business; (h) all prepaid expenses and deposits relating to the business by Seller with others. Notwithstanding the foregoing enumeration of assets, it is the purpose and intent of Buyer and Seller that Buyer is acquiring and the Seller is selling (and that the term "Assets" includes) any and all other assets, property, rights and interests of Seller relating to the business whether or not above enumerated, described or alluded to, that are used or usable by Seller in the conduct of business, except cash, bank accounts, certificates of deposit, securities and other intangible assets which do not have a direct bearing upon the operation of the Business. Section 2. Liabilities Assumed by Buyer. At the Closing, Buyer shall assume and agree to pay in accordance with their terms the accounts payable of Seller relating to the business specifically identified on Exhibit C hereto ("Good Accounts Payable"), but only to the extent set forth on such exhibit. Seller shall remain solely responsible for all other liabilities. Buyer shall receive a credit for accounts payable against the Purchase price. Section 3. Determination, Payment of the Allocation of Purchase Price. (a) Purchase Price: The Purchase Price for the Assets is $1,300,000.00 (One Million Three Hundred Thousand Dollars) less the Good Accounts Payable assumed by Buyer at Closing. (b) Adjustments to Purchase Price: The amount of the Purchase Price shall be adjusted upward or downward as a result of (i) any change in value (as measured by the values on the December 30, 1995 financial statements versus the value at Closing) in the Good Inventory, Good Accounts Receivable, Good Accounts Payable, and the proration of taxes and fees as set forth in Section 15 hereof. Adjustments shall be determined as described herein approximately one week prior to the Closing; however, in the event the adjustments cannot be determined as of that point time, the adjustments for purposes of the Closing shall be predicted upon the most current financial statement but in no event earlier than the financial statements of December 31, 1995. In addition, adjustments shall be made for business activity during the period after the inventories are conducted and prior to Closing. The parties shall determine a financial adjustment as to the date of the Closing once the adjustment numbers have been determined as hereinafter provided. The Estimated Purchase Price for the assets of the Company shall be One Million Three Hundred Thousand Dollars, including the assumption of the Closing Trade Payables. The Final Purchase Price shall be computed by adding to the Estimated Purchase Price an amount (which is the sum of (w) the Total Closing Assets Offered for Sale, minus (x) the Total Assets Offered for Sale as of 12/31/95, plus (y) the Trade Payable Balance at 12/31/95, minus (z) the Closing Trade Payable Balance. The Adjustment provided in this Section 2 may be positive or negative. (c) Allocation of Purchase Price: The Purchase Price for the Assets shall be allocated as follows: The Closing allocations will be amended and finalized during the 60 day period hereinafter referenced upon the preparation and completion of the Closing numbers pursuant to Sections 4,5,6,7 and 15. (d) Payment of Purchase Price: The Purchase Price shall be paid in cash in the following manner: (i) The first installment in the amount of $100,000 was delivered to Seller on September 12, 1996 the form of Buyer's wire transfer (the "Deposit") in connection with Buyer's acceptance of the Letter of Intent dated September 11, 1996. The Deposit shall be returned by Seller to Buyer only in the event of the occurrence of any of the following: (1) if Seller is unwilling to accept a price offered by Buyer which is at or above the sum of $1,300,000.00, (2) if Seller is willing to accept a price offered by Buyer at or above the sum of $1,300,000.00 but the parties cannot agree on the terms of this Agreement; or (3) the parties agree on the terms of this Agreement but Seller does not complete the acquisition through no fault of Buyer's. In all other instances the Deposit shall be retained by Seller if the acquisition is not completed. (ii) The second installment in the amount of the balance of the Purchase Price less $200,000.00 (the Holdback (hereinafter defined))shall be paid in cash at the Closing; and (iii) At least $200,000.00 of the Purchase Price (the "Holdback") shall be retained for a period of no more than 60 days from the Closing for purposes of facilitating the resolution of the following post Closing matters: a. The adjustments to the Purchase Price detailed in Sections 5,6,and 15; b. The finalization of the Closing allocations as detailed in Section 3(c); and c. The set off provisions in Section 18(c). Upon the resolution of the final monetary issues, the balance of the Holdback plus all accrued interest shall be released to Seller. Section 4. Inventory. A physical inventory shall be taken approximately one (1) week prior to Closing. The inventory purchased by Buyer shall consist of all inventory owned by Seller which is in salable condition, not more than (3) years old, which is in the manufacturer's or supplier's original carton, undamaged, and is listed in the manufacturer's or supplier's current catalog ("Good Inventory"). Inventory shall be priced at Seller's cost unless the parties otherwise agree in writing with respect to specific items. That portion of the Purchase Price allocated to inventory, as set forth above, will be adjusted at Closing based upon the physical inventory. The results thereof shall be represented in exhibit "B". Section 5. Accounts Receivable. An audit of Accounts Receivable shall be taken approximately one (1) week prior to Closing. The Accounts Receivable purchased by Buyer shall consist of all "Good Accounts Receivable", which are defined as collectible receivable not over ninety (90) days old. That portion of the Purchase Price allocated to Accounts Receivable, as set forth above, will be adjusted at Closing based upon the audit. The results thereof shall be represented in exhibit "B". Section 6. Accounts Payable. An audit of accounts payable shall be taken approximately one (1) week prior to Closing. Good Accounts Payable shall be listed on Exhibit C. That portion of the Purchase Price allocated to Good Accounts Payable, as set forth above, will be adjusted at Closing upon the audit. Section 7. Tradenames, Trademarks, and Intellectual Property. At Closing Seller shall assign to Buyer by written instruments all of its right, title, and interest in the trade name "Power Parts Sign Company" and "PPSC" and to any other trademarks or intellectual property rights relating to the Business. Seller shall also deliver such consents and other documents as Buyer may reasonably request to permit use by Buyer of such Tradename(s) or trademark(s). Section 8. Closing. The Closing hereunder (the "Closing") will be held at 10:30 a.m. local time at a mutually satisfactory location in Chicago, IL on October 25, 1996. In no event shall the Closing occur after October 30, 1996 unless the parties otherwise agree. Section 9. Deliveries at Closing. (a) Seller will deliver to Buyer at the Closing: (i) an assignment of Seller's trade names and any other intellectual property rights of Seller; (ii) a bill of sale and assignment to Buyer of good and marketable title to the Assets; (iii) such other instruments which are necessary or advisable to convey to Buyer good and marketable title to the Assets; (iv) all required consents to the assignment of any contracts and agreements which are included in the Assets and any other consents; (v) a certification by the Seller, dated as of Closing, to the effect that here has been no material adverse change in the condition of the business; that the representations and warranties of Seller made in or pursuant to this Agreement are true and correct in all material respects; and that Seller has performed and satisfied all of its respective covenants and agreements to be performed by it pursuant to this Agreement at or prior to the Closing; (vi) an executed Non-Competition Agreement between Buyer and Power Parts Sign Company. (vii) resolutions of the Board of Directors and shareholders of Seller authorizing Seller to enter into this Agreement and perform all obligations hereunder; (viii) a duly executed power of attorney from Seller authorizing Buyer to endorse with the name of Seller any checks or other instruments received from Seller's customers; related to the Business; (ix) stop letter from the Illinois Department of Revenue and the Illinois Employment Security Division which release Buyer from any tax liability of Seller; and (x) a Certificate containing a list of the documents provided by Seller to Buyer pursuant to Section 12(b) hereof. (xi) a consent of seller's ultimate corporate shareholder, M. K. Rail Corporation, To this termination (b) Buyer at Closing will: (i) pay the second payment of the Purchase Price by wire transfer; (ii) deliver to Seller resolutions of the Board of Directors of Buyer authorizing Buyer to enter into the Agreement and perform all obligations hereunder; (iii) deliver to Seller a certificate, dated as of the Closing, to the effect that the representations and warranties of Buyer made in or pursuant to this Agreement are true and correct in all material respects and that Buyer has performed and satisfied all its covenants and agreements to be performed by it pursuant to this Agreement at or before the Closing; and Section 12. Representations and Warranties by Seller. Seller represents and warrants to Buyer at follows: (a) Seller is a corporation duly organized, validly existing an in good standing under the laws of the State of Illinois and is duly qualified to transact business in the State of Illinois. (b) Seller has the authority to enter into and perform its obligations under this Agreement, and there are no approvals, permits, authorizations or consents to this Agreement required under any judgment, order, writ, injuction, decree, ordinance, law, rule, regulation resolution or other instrument. Seller has supplied Buyer with copies of all required approvals, permits, authorizations and consents required for it to validly execute, deliver and perform this Agreement under each mortgage, indenture, note, contract, lease, instrument, agreement, judgment, decree, order license, permit and franchise to which Seller is a part or is bound, or under which the consummation of the transactions contemplated hereby could cause a default; and there is not term or provision of the foregoing which adversely affects the Business or the Assets. This Agreement is a valid and binding agreement of Seller and is enforceable against Seller in accordance with its terms and conditions. (c) Seller has delivered to Buyer statements of profit and loss for the 1995 fiscal year of the Business, together with balance sheets for the Business as at the final day of each such fiscal year. All financial statements referred to above are correct and complete and fairly present the financial condition, assets and liabilities of the Business as at their respective dates, the results of its operations for such periods, and have (except as indicated in the compilation thereof) been prepared in accordance with generally accepted accounting principles consistently maintained since the beginning of the periods above mentioned. Except for liabilities reflected in the financial statements, to Seller's knowledge, Seller has no other liabilities, whether absolute or contingent, that are material to the Business. (d) Except as may be caused by the announcement of the proposed sale and purchase of the Assets as contemplated by this Agreement, since December 31, 1995, there has not been: (i) any change in the financial or other condition, assets, liabilities or operation of the Business, except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse; (ii) any damage, destruction or loss (whether or not covered by insurance) materially adversely affecting the Business, or the Assets; (iii) any material change in the accounting policies of the Business or any write up of the book value of any of the Assets. (e) Exhibits A through E present a true and complete description of all agreements, equipment and other operating assets of Seller which are useful or necessary in the conduct of the Business as it has been conducted in the past. (f) Seller has good and marketable title to all the Assets, including those reflected in Seller's balance sheet (except as since disposed of in the ordinary course of business), subject to no mortgage, pledge, lien, restriction, claim, liability, encumbrance or security interest, except for encumbrances disclosed on such balance sheet. (g) All of Seller's Good Accounts Receivable have been incurred and are collectible in the ordinary course of business. There are no refunds, reimbursements, discounts or other adjustments payable by Seller and there are no deposits held by Seller which may in the future become due to Seller's customers except as disclosed in writing to Seller by Buyer in a Exhibit D to this Agreement. There are no defenses, rights or setoffs, assignments, pledges, liens, encumbrances, claims, equities or conditions enforceable by third parties with respect to Seller's Good Accounts Receivable. (h) Seller has no distribution agreements or contracts for future purchase of goods or rendition of services other than the agreement entered into with Buyer for these products. (i) Except as disclosed by Seller to Buyer, there is no judgment, action, litigation, proceeding or investigation pending or, to the knowledge of Seller threatened, before any court or governmental agency with respect to Seller or affecting any of the Assets, whether or not fully covered by insurance. (j) Seller has made no agreement or taken no action which may cause anyone to become entitle to a commission as a result of the transaction contemplated by this Agreement. (k) Seller is in compliance with all laws, regulations, orders, judgments, decrees or other mandates of any court or other agency or tribunal applicable to the Business. (l) Seller has timely paid and will timely pay all federal and state taxes of any kind that are shown or will be shown on all returns, reports or statements filed or to be filed ("Returns") and the Returns correctly reflect or will correctly reflect the facts regarding the income, Business and Assets of Seller. Section 13. Further Assurance. After the Closing, Seller will execute and deliver such further instruments of conveyance and transfer and take such other action as Buyer may reasonable request to transfer effectively the Assets to Buyer and will assist Buyer in the collection and reduction to possession of such property. Section 14. Representations and Warranties by Buyer. Buyer represents and warrants to Seller that: (a) Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Illinois and is duly qualified to transact business in the State of Illinois. (b) Buyer has not made any agreement or taken any action that may cause anyone to become entitle to a commission as a result of the transactions contemplated by this Agreement. (c) This agreement constitutes a binding enforceable obligation of Buyer, enforceable against Buyer in accordance with its terms. No consent or authorization by others is required to enable Buyer to carry out the transactions contemplated by this Agreement. Section 15. Taxes and Fees. (a) Seller shall be responsible for real and personal property taxes, general and special assessments, and other municipal charges, fuel, water, sewer, electrical and other utility charges that are attributable to the Assets prior to the Closing. Buyer shall be responsible for such taxes and other charges requiring apportionment which shall be prorated on the basis of the calendar or fiscal year covered thereby, on a mutually acceptable equitable basis. If Seller shall have paid any taxes or other charges for which Buyer is responsible, or if Buyer shall pay any taxes or their charges for which Seller is responsible, appropriate adjustment will be made at or as promptly as practicable after the Closing. (b) Personal property taxes for 1996 shall be prorated as of Closing, based on the most recent tax statements received by the Seller. Seller shall provide satisfactory evidence at Closing that all personal property taxes due prior to Closing have been paid in full. (c) Except as otherwise specifically provided herein, each party will pay all costs and expenses, including without limitation its legal and accounting fees, of its negotiation, performance of, and compliance with the terms and conditions of this Agreement. Section 16. Access, Information and Documents. (a) Prior to the Closing, Seller will give Buyer and Buyer's representative reasonable access during normal business hours to all documents and records relating to the Business or the Assets and will furnish to Buyer all such documents and records which Buyer may reasonably request. (b) As part of the transfer of Assets, Seller will transfer such of its books, documents and records (the "Documents") (or copies thereof) relating to the Business as Buyer shall request. The Documents so transferred to Buyer shall be preserved by Buyer for Seller's tax returns, governmental filings, or other specified purposes. Buyer shall retain the Documents for six (6) years after Closing and will provide to Seller reasonable access to the Documents during such time period. Section 17. Conduct of Business Pending the Closing. Pending the Closing, the Business will be conducted only in the ordinary course and in substantially the same manner as a heretofore conducted. Seller will use its best efforts to preserve its organization intact, to keep available to Buyer the services of Seller's employees (if requested), and to preserve for the benefit of Buyer the goodwill of Seller's suppliers (if requested). Seller will not: (a) enter into any contract or commitment the performance of which may extend beyond the Closing, except those made in the ordinary course of business the terms of which are consistent with its past practice and reasonable in light of current conditions; (b) create any mortgage, pledge, lien or other encumbrance on any of its assets related to the "Business". Section 18. Indemnification. (a) Representations and Warranties. Seller will indemnify and hold harmless Buyer, and Buyer will indemnify and hold harmless Seller, against any damage resulting from any misrepresentation, breach of warranty or non-fulfillment of any covenant or agreement contained in this Agreement or in any exhibit, statement or certificate furnished or to be furnished in connection with the transactions contemplated hereby, including reasonable attorney' s fees. (b) Liabilities. Except with respect to the liabilities of Seller that have been expressly assumed by Buyer pursuant to Section 2 hereof, Seller will indemnify and hold harmless Buyer from any claims against Buyer and any liabilities of Buyer to third parties for liabilities of Seller, including, without limitation, all federal and state taxes, judgments, expenses and reasonable attorney's fees. Buyer will indemnify and hold harmless Seller from any claims made against Seller after the Closing on account of any liabilities of Seller assumed by Buyer pursuant to Section 2 hereof; and Buyer will indemnify and hold harmless Seller from any claims and liabilities incurred by Seller in connection with the operation of the business after Closing, including, without limitation, all judgments, expenses and reasonable attorney's fees. (c) Set-Off. In addition to other legal rights and remedies which Buyer may have, Buyer shall have the right to enforce its benefits under the indemnification obligations of Seller by reducing the Holdback in the amount of any claims or liabilities of Seller which are asserted against and paid by Buyer. All adjustments must be made within 60 days from Closing. The Seller shall receive an assignment and/or maintain a subrogation right with respect to all receivable and other assets not accepted by Buyer or otherwise set-off pursuant to the provisions hereof or the Holdback provisions contained in Section 3(b). Section 19. Conditions Precedent to Buyer's Obligations. The obligations of Buyer under this Agreement are subject to the fulfillment prior to or at Closing of the following conditions: (a) The representations and warranties contained in this Agreement or in any certificate, schedule or exhibit furnished or delivered to Buyer by Seller pursuant to this Agreement shall be true and correct in all material respects as of the Closing; (b) Seller and Buyer shall have performed all their respective agreements and complied with all conditions required by this Agreement to be performed or complied with prior to or at the Closing; (c) Seller shall have delivered to Buyer all the certificates, instruments and documents required by this Agreement to be delivered by it at or prior to the Closing; (d) The form and substance of all certificates and instruments delivered to Buyer under this Agreement shall be reasonably satisfactory to Buyer and its counsel; (e) All governmental authorities having jurisdiction, to the extent required by law, shall have consented to or approved the consummation of the transactions contemplated by this Agreement; (f) No party to this Agreement shall be a party to, or be threatened with, any action or preceding relating to any transaction contemplated by this Agreement, which in the opinion of Buyer or Seller would prevent, impair or make unlawful the carrying out of this Agreement or would materially affect the purpose of this Agreement in Buyer's or Seller's view; (g) Non-Competition Agreement between Seller and Buyer in a form which shall be reasonably satisfactory to Seller and Buyer; and (h) Execution of a Commission Sales Agreement between Buyer and Seller. Section 20. Conditions Precedent to Seller's Obligations. The obligations of Seller under this Agreement are subject to the fulfillment prior to or at Closing of the following conditions: (a) The representations and warranties contained in the Agreement or in any certificate, schedule or exhibit furnished or delivered to Seller by Buyer pursuant to this Agreement shall be true and correct in all material respects as of the Closing; (b) Buyer shall have performed all of its respective agreements and complied with all conditions required by this Agreement to be performed or complied with prior to or at the Closing; (c) Buyer shall have delivered to buyer all the certificates, instruments and documents required by this Agreement to be delivered by it at or prior to the Closing; (d) The form and substance of all certificates and instruments delivered to Buyer under this Agreement shall be reasonably satisfactory to Seller and its counsel; (e) All governmental authorities having jurisdiction, to the extent required by law, shall have consented to or approved the consummation of the transactions contemplated by this Agreement; (f) No party of this Agreement shall be a party to or be threatened with, any action or preceding relating to any transaction contemplated by this Agreement, which in the opinion of Seller would prevent, impair or make unlawful the carrying out of the Agreement or would materially affect the purposed of this Agreement Seller's sole view; and (g) Execution of a Commission Sales Agreement between Buyer and Seller. Section 21. Employment. Buyer has notified Seller that Buyer intends to hire certain employees of Seller. These employees may notify Buyer in writing of their intent to continue in Buyer's employ after the sale. Section 22. Non-Competition Agreement. The terms and conditions of MK Rail Corp. non-competition obligations which are made in partial consideration of Buyer's purchase of the Business are set forth in a Non-Competition Agreement to be executed between MK Rail Corp. and Buyer at Closing. Section 23. Governing Law and Forum Selection. This Agreement es executed in, and it shall be governed and interpreted in accordance with the laws of the state of Illinois. The parties agree and represent that the state and federal district courts located within the state of Illinois are the sole appropriate forum for any or all disputes or causes of action which directly or indirectly arise out of the terms of and obligations imposed by this Agreement. Section 24. Successors and Assigns. This Agreement will be binding upon, and it shall inure to the benefit of, the respective personal representatives, heirs, successors and assigns of the parties hereto. Section 25. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered or if mailed by first-class mail with postage prepaid: (a) If to Seller, to: M.K. Rail Corp. c/o Jeannette Fisher-Garber VP General Counsel 1200 Reedsdale Street Pittsburgh, PA 15233 (b) If to Buyer, to: Ri-Del Mfg. Inc. c/o James A. Ranoha VP General Counsel 1754 W. Walnut Street Chicago, Il 60612 26. Confidentiality. (a) During the pendency of this Agreement and thereafter if this transaction is not closed, Buyer shall keep all documents and information pertaining to the Business confidential and shall not disclose or use such information for any purpose other than the implementation of the provisions of this Agreement. All documents and materials obtained from Seller shall be promptly returned by Buyer in event the sale is not closed. Section 27. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become a binding agreement when one or more counterparts have been signed by each of the parties and delivered to the other parties. Section 28. Singular, Plural. In this Agreement, where applicable, references to the singular shall include the plural and references to the plural shall include the singular. Section 29. Headings. The headings in this Agreement are included for convenience of reference only, and shall not affect the construction or interpretation of any of its provisions. Section 30. Entire Agreement; Modifications. This Agreement (including, without limitation, the exhibits and schedules hereto) constitutes the entire agreement of the parties with respect to the subject matter hereof, all prior and contemporaneous oral and written discussions and agreements of the parties with respect thereto being merged herein and superseded hereby. This Agreement may be amended only by written instrument executed by all the parties hereto. Section 31. Drafting of the Agreement. Seller and Buyer represent and agree that all parties assisted in the drafting of this Agreement, that all parties were represented in the drafting by competent legal counsel and the Agreement shall not be construed against any party as the drafter of the Agreement. Section 32. Severability. If any clause or portion of this Agreement, or any covenant or restriction against competition set forth herein is determined or declared void, unenforceable, excessive, or unreasonable by court of law, (i) such clause, portion, covenant or restriction shall be deemed modified to the extent necessary to make it enforceable and (ii) all remaining parts of the Agreement shall be enforceable to the full extent found valid and/or reasonable by any court of law. IN WITNESS WHEREOF, the parties have duly executed this Agreement this _____day of _________1996. Attest: _______________________ By:________________________________ Secretary Power Part Sign Company (a wholly owned Subsidiary of M. K. Rail Corporation) "Seller" Ri-Del Manufacturing. Attest: ____________________ By:________________________________ Secretary Ri-Del Mfg. Inc. "Buyer" Printed:_____________________________ Titled:______________________________ EX-27 3 ARTICLE 5 FIN.DATA SCHEDULE FOR 3RD QTR.10-Q
5 This schedule contains summary financial information extracted from consolidated financial statements for the period ended Sept. 30, 1996 and is qualified in its entirety by reference to such financial statements 1000 9-mos Dec-31-1996 Sep-30-1996 1753 0 35417 416 90991 133681 94053 45108 252622 103018 0 1037 0 176 116896 252622 205282 205282 165894 165894 0 0 6992 12049 4440 7609 0 0 0 7609 0.43 0.43
-----END PRIVACY-ENHANCED MESSAGE-----