Memo To Tuck Wilson 122007

PH 503-784-1178 or 503-827-4903 [email protected]

Memo To:

Tuck Wilson

From:

Conrad Myers

CC:

David Levant

Date:

12/20/2007

Re:

Colorado Rail Manufacturing (CRM)

Cash Flow Model for CRM through June 2008 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: •

No material engineering or manufacturing difficulties on any of CRM’s projects

•

Vendor accounts payable brought current during the next month

•

New order down payment in March from Ft Worth, TX (providing about $2.4 million of working capital to CRM between March and June 08)

•

The Alaska Railroad contract (ARRC) continues on schedule and with unabated funding, critical because ARRC in the model provides $3.7 million of projected billings or around $1.8 million of contribution to CRM’s overhead and other costs during the period through February 08.

•

Grand Luxe, CRM’s affiliate rail tour operating company receives a total of $600k of cash flow support from CRM during December 07 and January 08 and then during the period February of 2008 through April 2008 repays CRM $1.4 million. For a net cash inflow to CRM of $800K

•

CRM implements a Reduction in Force on January 1, 2008 which has a cost saving impact of about $250k per month.

•

CRM satisfies its obligations for interest, principal installments and loan fees, a total of $4.2 million through July 08 ($3.7 million through June)

•

There is no new equity injection to the company *

•

No adverse action by creditors

•

The South Florida (single double deck car) contract is completed.

* 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.

The Receivership Variant If during the course of the monitoring agreement because of budget variances, misapplication of funds by CRM or “material adverse changes”, the Monitoring agreement converts to a receivership there would be an additional several hundred thousand dollars of costs. “Hilco Doesn’t agree” Case If Hilco’s fees and principal or a portion thereof became, as a result of Hilco’s bargaining resistance , a cost of proceeding, or, there was no agreement and TriMet had to move the court for a receivership appointment the cost would increase to $8 million or more. Current Cash Risk/Time of the Essence As of the present we find CRM unable to make its payroll next week without payment of around $400k of invoices scheduled to be paid by TriMet. There is substantial risk that due to a day or two delay in funding by Hilco on the credit line or other unforseen circumstance it could be unable to timely or fully fund its payroll with substantial ramifications to its labor force. It’s paper thin liquidity means it will make no progress in reducing its delinquent accounts payable until the monitoring agreement is in place. CRM’s delinquent accounts payable represent the most significant risk to the timely completion of the contract because: •

Vendors (some of whom have a relatively minor contribution to the overall project in terms of cost) who have delinquent unpaid bills on the TriMet or other jobs will continue to regard CRM’s needs as inferior to their other customers, and, in some cases will withhold delivery until their account is paid in full.

•

Unpaid vendors may commence litigation or an involuntary bankruptcy petition, this is a particular risk amongst the unpaid temporary labor vendors (who collectively have delinquent payables of over $300,000K)

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