Confidential Memo To Dlevant 112507

Confidential Memorandum Attorney Privileged

Date: November 25, 2007 To: David B. Levant From: Conrad Myers. Re: Colorado Railcar Manufacturing –Findings, Visit to Ft Lupton, CO 11/19-11/20/07 The preliminary statement of work – Summary Findings: 1. Investigate the systems at Colorado Railcar Manufacturing that track receipt of funds and allocation of funds to various accounts, for purposes of prosecuting TriMet's contract. • CRM does not segregate funds received from its various customers into separate “buckets” . CRM does not use “fund” accounting (as a government entity or non-profit would) and, other than prudence would dictate, it isn’t required to. • CRM uses the cash it has in-hand/credit line availibility for its highest cash priorities as and when it has that availability. 2. Determine the history of TriMet's disbursement of funds to CRM and CRM's application of these funds. • No detail work performed yet on this by Myers & Co. • The costs incurred by CRM on the job are broadly proportional to the funds so far advanced by TriMet. • TriMet staff have been reviewing the detail of funding requests to supporting invoices and PO’s, but that doesn’t mean that the vendor was actually paid. • There are currently @ $750K to $950K of unpaid vendor parts and services related to the TriMet contract in accounts payable, in addition there are $340k of unpaid bills from contract labor providers. 3. Determine CRM’s cash flow to determine its capacity to survive as an ongoing business for the duration of the contract (7-8 months). • CRM cannot survive as an ongoing business without a near-term re-capitalization of several millions of dollars and forebearance by Hilco . • CRM will not survive beyond the end of the year without appropriate emergency action being taken in concert by its key customers, lender and owners 4. Understand the HiIco financing as it affects the contract, and the other business of CRM as it affects the contract.

CRM and its affiliate Grand Luxe Rail (GLR) owe Hilco @ $21.7 million, the loans are cross defaulted and cross collateralized. • The Hilco debt includes $12 million of term debt for which interest and amortization payments of @$350k per month are set to commence Dec. 1st. • GLR is in as bad/worse financial condition than CRM. • Alaska Rail - $12 million contract, barely started but $3.4 million collected so far (about $1 million prepaid for components) • Southern Florida – One car remaining, costs to finish about equal to revenue remaining, work proceeding very slowly 5. Verify the relationship between total funds paid by TriMet, amount of work complete, and balance remaining. • Limited detail work performed on this so far on this by Myers & Co. • Cost-to-complete information is CRM-provided, labor/time estimates not tested / no bill of material to check to. • Per CRM data adding our contingency estimates, the budgeted remaining parts to be paid for plus labor/overhead and other costs to complete, (@$7.6 million) are less than the unpaid remainder of the contract (@$8.6 million), so it seems to make money for CRM • BUT – the TriMet contract cannot be looked at in a vacuum. •

What is CRM’s plan / what is it doing about its situation?/ Management Attitude o CRM is relying on an order to come in from Vermont (Rail) for $21 million and a $2.5 million initial deposit on that order to solve its cash problem at the end of December. We were told that this order is supposed to be let by Weds Nov 28. BUT if CRM cannot secure a performance bond the order won’t be consummated by Vermont. o CRM/GLR are also in discussion with what John Thompson referred to as a “stretch senior lender” to replace Hilco. On Monday 19th Thompson and Ramer at first indicated that with $34 million more in orders expected by Thanksgiving (consisting of Vermont and a $13 million order from “LeMasif” A Quebec

customer) that this stretch senior lender would be ready to move forward. o On Tuesday 20th Thompson told us that no decision would be made by the Quebec customer until February and that the putative lender/investor was “Hunting Dog Capital” o Hunting Dog appears to be a new company whose largest deal to date is $4.5 million o CRM doesn’t appear to have a plan B o According to John Thompson , this is the 4th of 5th time that CRM or its antecedent companies (back to 1987) have been in a situation of severe distress. There is a distinct “we’ve been though this before” type bravado, (a dangerous attitude). o According to Thompson, Tom Rader thinks he can hold on to both CRM and GLR (which is his personal toy). What is the effect of Mod 5? o Provided Hilco recognize the Mod 5 proforma invoice as an eligible receivable, Mod 5 will provide the means for the remainder of the purchased components for TriMet order to be prepaid. o It doesn’t provide the needed cash flow to fund overheads and labor through completion. o Mod 5’s benefit is temporary Grand Luxe (GLR) Impact: o Thompson’s cash flow plan calls for GLR’s payrolls ($200k per month payroll) and GLR’s payables to be funded by advances on Hilco Credit line, which are based on the TriMet/Alaska receivables. Therefore, by definition, funds from CRM custmers, principally TriMet, are proposed to be used to support non CRM activities. o GLR currently has no revenue. It owes $3 million of trade payables for the completed 2007 season and its Hilco credit line is maxed out at $3 million. o It is a reasonable presumption that unpaid/slow-paid 2007 vendors will want prepayment for the 2008 season, thus increasing the cash pressure on GLR. o $400,000 of deferred maintenance repairs to the GLR train set needs to be performed. Also a seven figure advertisizing campaign needs to be commenced to achieve sales targets in 08. o Actual cash flow from GLR doesn’t commence until January and that’s deposits on future rail tours, (Thompson claims its $4 or $500,000 per week)

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CRM’s cash flow plan proposes to use those customer deposits to pay operating expense and prior season payables. Such use of deposits might be illegal under the laws of California and some other states where customers reside/are marketed to and where travel/tour deposits are required to be placed in escrow

What is Hilco’s position? / what can be expected of Hilco? o Current amounts due Hilco are: Term Loan GLR Term Loan CRM Supplemental Loan (Aug 07) CRM Revolver GLR Credit Line

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$ Millions 5 7 4 2.3 3 21.3

Hilco’s collateral position (exclusive of CRM) is estimated to be as follows: Grand Lux Train (say) Tom Ramer's Home (say) Ft Lupton land & Buildings (2nd TD)

$ Millions 8 5 2.5 15.5

Therefore, Hilco cannot afford to disregard the value of CRM. It needs the value of the CRM enterprise to be maintained through continuing operations in order to be able to exit this credit without substantial loss. o In August, Hilco advanced $4 million at 15% and for 20% warrants in CRM and 7.5% in GLR. o Hilco recently funded the CRM payroll based “on faith”, when they were told that a payment from TriMet was in transit. o But Hilco told Thompson recently that no additional funds would be extended unless Hilco had a controlling interest in the company. o Conclusion, it would be a very negative result for Hilco if a) TriMet ceased funding /moved its project elsewhere, b) CRM ran out of funds and suspended operations o Hilco will provide some continued funding. o Its probably not all Hilco’s money but private equity dollars at their disposal in an “opportunities” fund. o

Other Risks? o CRM has approximately $3million of unpaid payables, (including payables in respect of the TriMet project. Many of these small vendors are frustrated and (despite Thompson’s assurance that

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“they know we’ve always paid them in the past” ) will start to squeeze for payment. The result will be increasing COD’s / disappearance of trade credit. Prominent among CRM’s payables are the amounts it owes temporary labor agencies. Over 20% of the workers in the plant last week were temporaries. The ability to pay for this labor will have substantial impact on CRM’s ability to get the work done.