1 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. 1

2 MOTIVEPOWER INDUSTRIES, INC. Index to Annual Report on Form 10-K For The Year Ended December 31, 1997 <TABLE> <CAPTION> PAGE ---- <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> 2

3 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. 3

4 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. 4

5 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 5

6 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 ---- ----------- ------------- <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> 6

7 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. 7

8 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. 8

9 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. 9

10 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. 10

11 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> 11

12 <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

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

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

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

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

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

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

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.

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

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

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.

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

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:

1 Exhibit 10.31 MotivePower Industries, Inc. DEFERRED COMPENSATION PLAN Originally Effective April 23, 1994 As Amended and Restated Effective as of ________ __, 1997

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

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

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

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.

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 2

7 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 3

8 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 4

9 (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 5

10 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 6

11 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. 7

12 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 8

13 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. 9

14 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 10

15 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 11

16 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 12

17 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 13

18 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, 14

19 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. 15

20 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 16

21 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. 17

22 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

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

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

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

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

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

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

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

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

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

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

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.

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.

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
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          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>

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

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

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.

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.

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.

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

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

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.

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.

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.

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.

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.

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.

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.

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

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>

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.

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.

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.

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>

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>

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.

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

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

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")

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.

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.

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>