Note Cancellation And Restructuring Agreement

NOTE CANCELLATION AND RESTRUCTURING AGREEMENT


THIS NOTE CANCELLATION AND RESTRUCTURING AGREEMENT (this "Agreement"), made and entered into as of the 20th day of June, 1996 by and among MK Rail Corporation, a Delaware corporation ("MK Rail"), Morrison Knudsen Corporation, an Ohio corporation ("MKO"), and Morrison Knudsen Corporation, a Delaware corporation ("MKC").


W I T N E S S E T H:


WHEREAS, MKO owns approximately sixty-three percent (63%) of the issued and outstanding Common Stock of MK Rail; WHEREAS, MKC owns all of the outstanding Common Stock of MKO;


WHEREAS, pursuant to a Global Settlement Agreement (the "Global Settlement Agreement") dated as of June 15, 1995 between MKO and MKC (collectively, "MK") and MK Rail, MKO and MK Rail entered into a Note Agreement dated as of June 26, 1995 (the "Note Agreement") under which MK Rail issued a Note to MKO dated June 26, 1995 in the original principal amount of $52,200,000 (the "Note");


WHEREAS, the Note is subordinate to MK Rail's current credit facilities with its senior lenders as well as any replacement financing thereof (the "Senior Debt") pursuant to and in accordance with the Note Agreement and, in connection with its current credit facilities, pursuant to the Loan and Security Agreement (the "BABC Loan Agreement") dated as of August 31, 1995 between MK Rail and its subsidiaries and BankAmerica Business Credit, Inc. ("BABC"), as agent for the financial institutions named therein, as amended, and a related Subordination Agreement (the "Subordination Agreement") among MKC, BABC, as agent, and MK Rail;


WHEREAS, MK Rail has not made any cash payment under the Note due to restrictions contained in the BABC Loan Agreement and the Subordination Agreement;


WHEREAS, as a result of certain adjustments, as of the date hereof the principal amount of the Note is $52,094,568.


WHEREAS, as of May 24, 1996, interest in the amount of $4,120,101 had accrued on the Note and such interest plus all interest accrued on the Note since said date has not been paid;


WHEREAS, MK is presently planning to implement a recapitalization of MK (the "Recapitalization") pursuant to a Plan of Reorganization (the "Plan") to be filed with the United


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States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), a draft of which plan (the "Draft Plan") dated June 10, 1996 has been delivered to MK Rail;


WHEREAS, pursuant to the Plan, among other things, it is contemplated that the Common Stock of MK Rail presently held by MKO will be distributed to certain holders of debt obligations of MKO and to a liquidating trust to be established as a part of the Plan;


WHEREAS, MK has requested that MK Rail make certain amendments to the Rights Agreement between MK Rail and Chemical Mellon Shareholder Services, L.L.C. (the "Rights Agent") dated as of January 19, 1996, as amended (the "Rights Plan"), to facilitate the obtaining by MK of the acceptances required to confirm the Plan;


WHEREAS, in connection with the Recapitalization and to facilitate the obtaining by MK of the acceptances needed to confirm the Plan, MK has requested that certain registration rights be granted MKO that are assignable to the parties that receive common stock of MK Rail as a part of the Plan;


WHEREAS, MK Rail is willing to grant such registration rights and to make the requested amendments to the Rights Plan in consideration for the agreement of MKO to certain corporate governance provisions that are binding on its transferees and in consideration for the agreement of MK to cancel the Note in full pursuant and subject to the terms and conditions set forth in this Agreement;


NOW, THEREFORE, in consideration of the premises and of the covenants and agreements set forth below, the parties hereto, intending to be legally bound, covenant and agree as follows:


1. Concurrent Actions. Concurrently with the execution and delivery hereof, the following have occurred:


1.1 Stockholders Agreement. MK Rail and MKO have executed and delivered a Stockholders Agreement (the "Stockholders Agreement") in the form attached hereto as Exhibit A.


1.2 Rights Amendment. MK has received a copy of a Second Amendment to Rights Agreement (the "Rights Plan Amendment") in the form attached hereto as Exhibit B executed by MK Rail and the Rights Agent.


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2. Conditions to Effectiveness and Actions Relating Thereto.


2.1 Conditions to Effectiveness. This Agreement and the Stockholders Agreement shall not be in force or effect until the following conditions have been satisfied (at which time they shall, automatically and without necessity of any further action by MK, MK Rail or any other person or entity, be in full force and effect):


(a) MK Rail has received a written consent or written consents (the "MK Creditor Consent") in form and substance reasonably satisfactory to MK Rail containing language substantially similar to the language set forth in Exhibit C hereto executed by the MK Requisite Creditors (as defined herein) whereby the MK Requisite Creditors consent to the execution and delivery by MKC and MKO of this Agreement and the Stockholders Agreement and to the consummation of the transactions contemplated hereby and thereby and undertake to support said transactions. For purposes hereof, the term "MK Requisite Creditors" shall mean the following creditors of MK: (a) creditors in each of the classes of creditors referenced as Classes MK-3, MK-6, MKO-3, MKO-6, S-3 and S-6 in the Draft Plan that constitute a majority in number and that hold at least two-thirds (2/3) in amount of the claims of each such class voting to accept or reject the Draft Plan and (b) the Majority Lenders, as defined in the Amended and Restated Override Agreement dated on October 10, 1995 among MKC, MKO, the Banks and Other Financial Institutions Named Therein, Mellon Bank, N.A., as agent for said banks and financial institutions and Bank of America National Trust and Savings Association, as Metra Agent (the "Override Agreement").


(b) Consent of BABC. MKC and MKO shall have received a written consent in form and substance reasonably satisfactory to MKC and MKO (the "BABC Consent") executed by BABC, acting as agent for MK Rail's secured lenders, whereby MK Rail's secured lenders consent to the execution and delivery of this Agreement and the Stockholders Agreement and to the consummation of the transactions contemplated hereby and thereby.


(c) MKO shall have presented or caused to be presented to MK Rail the certificate or certificates evidencing the shares of Common Stock of MK Rail owned by MKO and a legend shall have been placed thereon in accordance with the Stockholders Agreement.


2.2 Best Efforts to Obtain Consents. Each party agrees to use its best efforts to obtain the consents required to satisfy the conditions set forth in Section 2.1 hereof as promptly as practicable.


3. Motion to Bankruptcy Court. MK shall, within ten (10) days after filing its initial petition in the Bankruptcy Court, submit to the Bankruptcy Court a motion (the "Motion") in form and substance approved in writing by MK Rail, (which approval shall not be unreasonably withheld) requesting an order of the Bankruptcy Court in form and substance approved in writing by MK Rail assuming this Agreement and the Stockholders Agreement and approving the transactions contemplated hereby and thereby (the "Bankruptcy Court Approval"), and shall use


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its best efforts to obtain such order as promptly as practicable thereafter. Among other things, the Bankruptcy Court Approval shall approve an escrow arrangement in form and substance satisfactory to MKO and MK Rail as contemplated by Section 5.2 hereof.


4. Cancellation of Note. Subject to the terms and conditions contained herein, the Note, including all principal thereof and interest accrued thereon, shall be canceled and retired in full. The aggregate amount that must be paid to so cancel and retire the Note in full (the "Cancellation Amount") shall be Thirty-Four Million Five Hundred Thousand Dollars ($34,500,000). The Cancellation Amount shall be paid in two installments as set forth herein.


5. First Closing of Note Cancellation.


5.1 Reduction Payment. On the First Closing Date (as defined herein), MK Rail shall make a payment (the "Reduction Payment") in immediately available funds in the amount of Six Million Nine Hundred Thousand Dollars ($6,900,000) plus interest accrued on said amount from the date hereof until the First Closing Date, calculated at a rate per annum equal to the rate of interest (the "Prime Rate") announced from time to time by PNC Bank, National Association as its Prime Rate (which rate shall automatically change with and as of the date of each announced change thereof).


5.2 Manner of Payment. If on the First Closing Date the Distribution Condition (as defined herein) has been satisfied or waived by MK Rail, the Reduction Payment shall be paid to or upon the order of MKO. If on the First Closing Date, the Distribution Condition has not been satisfied or waived by MK Rail, MK Rail shall pay the amount of the Reduction Payment to an escrow agent reasonably satisfactory to MK Rail and MKO to be held in escrow for the benefit of MKO and MK Rail in accordance with an escrow arrangement (the "Escrow Arrangement") approved as a part of the Bankruptcy Court Approval under which arrangement the amount held in escrow, including interest accrued thereon, shall not be subject to any right of offset, claim, demand, cause of action or other right any other party may have thereto, and under which arrangement (a) the amount of the Reduction Payment, together with all interest accrued thereon while it is held in escrow, will be disbursed to MKO upon satisfaction of the Distribution Condition or waiver thereof by MK Rail and (b) said amount, including all interest accrued thereon, will be disbursed to MK Rail if this Agreement is terminated in accordance with its terms prior to the time the Distribution Condition is satisfied or so waived, in which case there shall be no Debt Reduction (as defined in Section 5.4 below).


5.3 Distribution Condition. For purposes of this Agreement:


(a) The term "Distribution Condition" shall mean satisfaction of any one of the following conditions:


(i) The Bankruptcy Court Approval shall have been entered and
shall be a Final Order (as defined herein); or


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(ii) The first business day both (A) that is at least ten (10)
days after entry of an order by the Bankruptcy Court which
has not been stayed or set aside confirming a Plan that
contains in all substantial respects the provisions (the
"Mandatory Plan Provisions") set forth in Exhibit D hereto
and that does not contain any provisions that are
inconsistent with the terms hereof, the Stockholders
Agreement or the Mandatory Plan Provisions (a "Conforming
Plan") and (B) upon which all other conditions to the
Effective Date of the Conforming Plan, other than those
relating to the transactions contemplated hereby, have been
satisfied or waived.


(b) The Distribution Condition may be waived by MK Rail in its sole discretion by a written notice or by payment of the Final Installment (as defined herein) to MKO.


(c) The term "Final Order" shall mean an order of the Bankruptcy Court which has not been reversed, stayed, modified or amended, and as to which the time to appeal or seek certiorari has expired, and with respect to which no appeal or petition for certiorari has been timely taken, or as to which any appeal that has been taken or any petition for certiorari that has been or may be filed has been dismissed or resolved by the highest court to which the order was appealed or from which certiorari was sought.


5.4 Effect of Disbursement of Reduction Payment to MKC. After the Reduction Payment is paid to MKO either directly by MK Rail or pursuant to the Escrow Arrangement, it shall constitute the first installment of the Cancellation Amount and shall, with no further action on the part of any party, be applied to cancel Seven Million Six Hundred Sixty Thousand Dollars ($7,660,000) of the principal amount of the Note, together with all interest accrued on said principal amount (the "Debt Reduction").


6. First Closing Date. The closing of the Debt Reduction (the "First Closing") shall occur at the corporate headquarters of MK Rail at 10:00 a.m. local time on earliest of the following dates (the "First Closing Date"): (a) the first business day to occur after ten (10) days have elapsed following the issuance of the Bankruptcy Court Approval, (b) the date the Distribution Condition is satisfied or waived by MK Rail, or (c) such other day as is designated by MK Rail by at least three business days advance written notice to MKO; provided, however, that in any such case, the obligation of MK Rail to close the Debt Reduction shall be conditioned on satisfaction or waiver by MK Rail on the First Closing Date of all of the MK Rail First Closing Conditions (as defined herein) and the obligations of MKO to close the Debt Reduction shall be conditioned upon satisfaction or waiver on said date of the MKO First Closing Conditions (as defined herein).


7. Second Closing of Note Cancellation. On the Second Closing Date (as defined herein), MK Rail shall pay to or upon the order of MKO the sum of Twenty Seven Million Six Hundred Thousand Dollars ($27,600,000)


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in immediately available funds (the "Final Installment"), representing the second and final installment of the Cancellation Amount, which shall fully satisfy all obligations of MK Rail under the Note, and MKO shall deliver the Note marked canceled to MK Rail (the "Note Cancellation"). In addition, in the event the Second Closing has not occurred on or before September 30, 1996 and such failure to close has not been caused by the default of MKC or MKO of any of their material obligations hereunder, MK Rail shall also pay to or upon the order of MKO, with the Final Installment, interest accrued on the amount of the Final Installment from September 30, 1996 through the date of payment, calculated at a per annum rate equal to the Prime Rate from time to time announced during said period. Upon such payment of the Final Installment, plus interest accrued thereon, if any, all obligations of the parties under the Note and the Note Agreement shall terminate and be of no further force or effect.


8. Second Closing Date. The closing of the Note Cancellation (the "Second Closing") shall occur at the corporate headquarters of MK Rail at 10:00 a.m. local time on the later of (a) the dat ...