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conradmyers@myers-co.com
Memo
To: Tuck Wilson
From: Conrad Myers
CC: David Levant
Date: 12/20/2007
Re: Colorado Rail Manufacturing (CRM)
Summary
My colleague Tim Donovan and I worked with John Thompson, CFO of CRM both before and during
the TriMet group’s latest visit to CRM’s Ft Lupton CO facility this week. The remarks contained in this
memo are a synthesis of the cumulative observations and projection work that we have conducted
since the beginning of our engagement. The purpose of the Cash Flow Model was to determine
whether CRM would have the “cash flow” (ie could it survive financially?) during the time that it is
expected to take to complete the TriMet DMU contract (through July 08). We also sought to determine
the amount of CRM’s cash shortfall during this period so that we could develop some parameters of
the damage mitigation that might be required from TriMet and its other customers in order to secure
delivery of their respective cars.
It is my opinion that it is highly probable, (so as to be a near certainty) that CRM will not be able to get
to successfully deliver TriMet’s project without both; 1) a substantial “front end loading” of the remaining
payments due under the contract, (in other words TriMet will need to substantially prepay contract
installments ahead of the dates when such progress installments would normally be due) , and 2)
“damage mitigation” payments, in order to sustain CRM’s operation sufficient to facilitate completion
and delivery.
1
The Best (but unlikely) Case:
There was consensus reached between our firm and John Thompson that, based upon certain key
assumptions, that in a best case scenario the minimum amount of damage mitigation payments that
will be needed by CRM would be in the range of $1.5 to $2 million. In this case the existing bond would
suffice to cover damage mitigation payments. The key operative assumptions leading to this result
being:
* Although management/ownership of CRM are energetically trying to raise new equity for their
undercapitalized company they are caught in a vicious circle. They cannot attract new capital without
showing that they have successfully garnered substantial incremental customer contracts, they cannot
win these contracts without showing financial ability to perform or a bond.
Likely Case 1
In this case certain unrealistic assumptions of the Best Case model (based on my judgment and
experience) are expunged but there is an assumption of economically rational behavior by Hilco and
cooperativeness by the other customers. The damage mitigation payments that will be needed would
be in the range of $4.5 to $5.0 million, which would be shared by TriMet and ARRC under an
equitable arrangement to be determined (ideally based prorata on remaining costs to be incurred).
• Grand Luxe can’t repay CRM until later in the summer or possibly never
• Fort Worth decides to delay its order because of CRM’s financial condition\
• ARRC agrees to join with TriMet in the Monitoring agreement arrangement or something
substantially similar and shares in the necessary damage mitigation payments
• Hilco agrees to the terms of the monitoring agreement affording them payment of their interest
during the period through July 08 but not the principal amortization or fees they are due.
• There are, say, $500k in overruns due to engineering and manufacturing problems on the
DMU’s.
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Likely Case (but Less desireable) #2
In this case Hilco remains rational and continues to accept just its interest payment but ARRC doesn’t
particpate. The damage mitigation payments incurred by TriMet, the one remaining customer
,(assumes South Florida is complete or won’t assist) would be in the range of $6.0 to $6.5 million.
• ARRC freezes its contract or cannot decide what to do. The result is that CRM loses the
benefit of $2.6 million of “contribution” to overhead from ARRC.
• CRM cuts its overhead by an additional $100 to $150k per month.
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